<PAGE>
As filed with the Securities and Exchange Commission on May 19, 2000
Registration No. 333-31534
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
TRINET GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
California (prior to
reincorporation) 7389 94-3081033
Delaware (following
reincorporation) (Primary Standard Industrial (I.R.S. Employer
(State or other jurisdiction of Classification Code Number) Identification No.)
incorporation or organization)
</TABLE>
101 Callan Avenue
San Leandro, CA 94577
(510) 352-5000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Martin Babinec
Chief Executive Officer
TriNet Group, Inc.
101 Callan Avenue
San Leandro, CA 94577
(510) 352-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
<TABLE>
<S> <C>
Christopher A. Westover, Esq. Laura B. Hunter, Esq.
Jamie E. Chung, Esq. Lindsay C. Freeman, Esq.
Virginia C. Edwards, Esq. Jeanine M. Larrea, Esq.
Angelique C. Tremble, Esq. Shelley E. Wharton, Esq.
Jennifer J. Nam, Esq. Brobeck, Phleger & Harrison LLP
Cooley Godward llp One Market Plaza
One Maritime Plaza, 20th Floor San Francisco, CA 94105
San Francisco, CA 94111 (415) 442-0900
(415) 693-2000
</TABLE>
----------------
Approximate date of commencement of proposed sale to public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement number for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
----------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this Prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This Prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 19, 2000
[TriNet Logo]
5,800,000 Shares
Common Stock
TriNet Group, Inc. is offering 3,900,000 shares of its common stock and a
stockholder of TriNet, Select Holdings Inc., is selling an additional 1,900,000
shares. This is our initial public offering and no public market currently
exists for our shares. We have applied to have our common stock approved for
quotation on the Nasdaq National Market under the symbol "TRNE." We estimate
that the initial public offering price will be between $12.00 and $14.00 per
share.
-----------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 8.
-----------
<TABLE>
<CAPTION>
Per
Share Total
------ -----------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to TriNet.......................................... $ $
Proceeds to the Selling Stockholder......................... $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
Certain other selling stockholders have granted the underwriters a 30-day
option to purchase up to an additional 870,000 shares of our common stock to
cover over-allotments. FleetBoston Robertson Stephens Inc. expects to deliver
the shares of common stock to purchasers on , 2000.
-----------
Robertson Stephens
Dain Rauscher Wessels
Robert W. Baird & Co.
The date of this prospectus is , 2000
<PAGE>
[Description of inside front cover graphics: Art to be depicted on the
inside front cover shows graphics explaining TriNet's business structure, plus
explanatory text.]
[Banner running across top of page contains the text: "Payroll Benefits
401(k) Remittance Reporting HR Knowledge" Text is repeated all the way across
the page.]
[TriNet logo with the caption: We use an integrated technology platform to
deliver payroll, benefits and human resource support to fast-growth technology
companies.]
[Pictorial description of TriNet's business structure.
The first graphic depicts stick figures with the caption: Customer Employees
The stick figures are following another stick figure with the caption: Customer
Management Team
The previous graphic connects to the next graphic depicting two paths. The
first path includes a picture of a computer with the caption: Internet-
Delivered. The other path depicts a stick figure walking toward TriNet with the
caption: Personal Contact
The previous graphic connects to the next graphic which is a picture of a
building with the caption: TriNet
From the building extends three paths. The first path leads to a platform of
four structures with the caption: TriNet's Integrated Technology Platform The
four central processing units are marked: Benefits, 401(k) Remittance, Payroll,
Human Resources. The path continues to another platform with the caption: Back
Office Processing On the platform are three stick figures captioned: Benefits,
401(k) Remittance, Payroll. The path continues to a final platform of four
buildings with the caption: Multi Vendor Consolidation The four buildings are
captioned: Health Companies, IRS, Investment Managers, Banks.
The second path from the TriNet building leads to a platform with a building
and the caption: Human Resources Knowledge The path continues to connect with
the platform from the first path labeled: TriNet's Integrated Technology
Platform
The third path from the TriNet building leads to a platform with a building
and the caption: Recruiting]
<PAGE>
[Descriptions centered below graphics with the following captions:
Delivery Choices
Customer chooses how to access our services.
Integrated Technology Platform
Payroll, benefits and human resource data reside in single database platform
accessible to our customers and vendors.
Human Resource Knowledge
Knowledge of human resource issues for fast growth technology companies is
enhanced by access to payroll, benefits and human resource data.
Recruiting
Recruitment services are enabled through management relationship with
customers and access to relevant human resource information.
Back Office Processing and Third Party Payments
Consolidation of multiple vendor relationships to a single information
system provides efficient back office processing and enables third party
payments.
[Banner running across bottom of page contains the text: "Payroll Taxes
Direct Deposit Management Reporting Payroll Remittance Online Benefits
Enrollment Flexible Spending Accounts Cobra Government Reporting Online
Employee Records HIPPA Online Employee Handbook"]
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock. In this prospectus, references
to "TriNet," "we," "us" and "our" refer to TriNet Group, Inc.
Until , all dealers that buy, sell or trade our common stock, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 8
Forward-Looking Statements............................................... 21
Use of Proceeds.......................................................... 22
Dividend Policy.......................................................... 22
Capitalization........................................................... 23
Dilution................................................................. 24
Selected Financial Data.................................................. 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 26
Business................................................................. 35
Management............................................................... 56
Relationships with Third Parties and Related Transactions................ 67
Principal and Selling Stockholders....................................... 68
Description of Capital Stock............................................. 70
Shares Eligible for Future Sale.......................................... 74
Underwriting............................................................. 76
Legal Matters............................................................ 78
Experts.................................................................. 78
Where You Can Find Additional Information................................ 79
Index to Financial Statements............................................ F-1
</TABLE>
----------------
The "TriNet" name and logo and the names of our products and services
mentioned in this prospectus are our trademarks, registered trademarks, service
marks or registered service marks. Other service marks, trademarks and trade
names referred to in this prospectus are the property of their respective
owners.
3
<PAGE>
SUMMARY
You should read this summary together with the entire prospectus, especially
"Risk Factors" and the financial statements and related notes, before deciding
to invest in shares of our common stock. Unless otherwise indicated, the
information contained in this prospectus assumes the underwriters do not
exercise their over-allotment option and gives effect to the conversion of all
outstanding shares of our preferred stock into common stock, which will occur
before the closing of this offering.
We are one of the leading providers of business process outsourcing, which
is the third-party management of business functions customarily managed
internally, of payroll, benefits and human resource support and technology to
fast-growth technology companies in North America. For more than 10 years, we
have been integrating and delivering the functions of outsourced payroll,
benefits and human resource support to a single information systems platform.
As of January 31, 2000, we were serving over 375 customers who collectively
employ more than 10,000 people. In 1995 we introduced Internet-based benefits
and human resource support functions and in 2000, we introduced Internet-based
payroll functions. We continue to develop and implement new web-accessible
features within our delivery of payroll, benefits and human resource support.
We specialize in providing service to fast growth technology companies who
have outside equity investors such as venture capital, institutional financing
or the public market. As of January 31, 2000, approximately 93% of our
customers have outside equity financing and our experience has been that such
financing contributes to rapid growth in our customers' headcount as they are
not dependent upon raising their own sales volume to support an increase in
their own employee headcount. Over the last four years, the rate of employee
headcount growth at existing customers, which does not include the addition of
new customers, is in excess of 36% per year.
We currently offer the following four services:
. Our Venture Employer Services targets emerging growth companies of less
than 200 employees to provide an integrated service including payroll,
benefits and human resource management and support under a shared
employer relationship in which we aggregate our customers' employees into
a single employer group and act as the employer of record for payroll,
selected benefit plans and some employer compliance requirements. This is
our largest and most mature service, in use by 370 of our customers as of
January 31, 2000 and accounting for 84% of our service revenue for the
year ended December 31, 1999.
. Our Enterprise Employer Services targets middle market companies of
greater than 200 employees to provide an integrated transaction
processing service including payroll, benefits and human resource support
through a common information systems platform with our Venture Employer
Services.
. Venture Talent provides recruitment services primarily to our Venture
Employer Services customers.
. Venture Management Resources provides human resource consulting services
to customers requiring compensation consulting, change management,
organizational development and other human resource related consulting
services.
We serve as an exchange between our customers and a variety of benefit plan
and financial service providers. As an exchange, we aggregate buyers into a
consolidated group to generate sufficient economies of scale for us to obtain
discounted rates with providers of benefit plans and financial services. Our
purchase of benefit plans and delivery of related administration provide an
incentive for customers to purchase our other services. In addition, our
aggregation of many
4
<PAGE>
companies into a single employer group generates economies of efficiencies in
the procurement, setup and on-going maintenance of vendor relationships
involving a wide range of payroll, benefits and human resource processes.
Our systems and services allow our customers to focus on their respective
core business functions by outsourcing their human resource technology or
entire human resource functions to us without losing real-time access to
critical data. With an integrated technology platform, back-office processing
and a wide breadth of service offerings, we help to alleviate administrative
burdens commonly encountered by firms which must coordinate transactions
between multiple human resource vendors.
According to Dataquest, the human resource outsourcing industry is forecast
to grow from $13.9 billion in 1999 to $37.7 billion in 2003, representing a
compound annual growth rate of 28%. The Dataquest report illustrates that
payroll, benefits and human resource processes have become increasingly
complex, cumbersome, expensive and highly inefficient and that, as a result,
companies are increasingly turning to business process outsourcing to address
these needs that were formerly handled in-house.
The data and transaction intensive nature of payroll, benefits and human
resource functions combine to form a complex undertaking for a company that
wishes to integrate all related processes to a single technology platform. The
processes necessary to implement such a platform consist of two basic
components, commonly referred to as the "front-end" and "back-end" processes.
The front-end includes processes that collect, update, effect and communicate
changes in employee data. The back-end involves high volume processing to
receive, store and transact routine and repetitive functions involving payroll,
benefits and human resources.
With the widespread implementation of intranets and the adoption of the
Internet as a business communications platform, organizations can now automate
enterprise-wide and interorganizational human resource transactions. The
availability of this technology creates a market opportunity for Internet-based
business process outsourcing of payroll, benefits and human resources.
Currently, there are mature outsourcing providers for selected back-office
processes and an emerging number of web-based front-end providers. We believe
our approach delivers one of the first end-to-end business-to-business e-
commerce services through integration of a web-based front-end process enabling
self-directed transactions, with back-end processes that include electronic
interfaces to our service providers. Our services offer the following key
benefits:
. provide integrated services delivered on the Internet that allow
customers to focus on their core business;
. provide human resource services tailored to fast-growth technology
companies' employees;
. provide easily scalable and integrated services; and
. provide customers with economies of scale and efficiencies.
We were incorporated in California in 1988 under the name TriNet Employer
Group, Inc. We plan to change our name to TriNet Group, Inc. in connection with
our reincorporation in Delaware. Information in this prospectus gives effect to
issuance and sale of 150,263 shares of our Series F preferred stock in March
2000 and our reincorporation in Delaware and a 7-for-4 stock split, both of
which will occur before the closing of this offering. Our principal executive
offices are located at 101 Callan Avenue, San Leandro, California 94577, and
our telephone number is (510) 352-5000. Our web site address is www.trinet.com.
The information on our web site is not part of this prospectus.
5
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by TriNet.................... 3,900,000 shares
Common stock offered by Select Holdings Inc. ..... 1,900,000 shares
Common stock to be outstanding after the
offering.......................................... 16,794,847 shares
Use of proceeds................................... For general corporate
purposes, including working
capital, sales and
marketing expenditures,
development of new products
and services and possible
acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol............ TRNE
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the total number of shares outstanding as of March 31, 2000. This
excludes:
. 1,478,505 shares of common stock issuable upon exercise of outstanding
options at a weighted average exercise price of $6.68; and
. 991,010 shares reserved for future issuance under our employee benefit
plans.
6
<PAGE>
Summary Financial Data
(in thousands, except per share data)
The following table is a summary of the financial data for our business. You
should read this information together with our financial statements and the
related notes appearing at the end of this prospectus and the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
--------------------------------------- ----------------------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------ ------- ------- ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Results of Operations:
Service revenues (net of
direct costs billed of
$79,077, $117,026,
$241,917, $386,221,
$712,945, $132,912, and
$241,384,
respectively).......... $2,515 $3,139 $7,749 $12,443 $19,127 $4,160 $ 6,646
Research and development
expense................ 180 194 488 719 2,353 363 1,828
Other operating
expenses............... 2,801 3,075 6,273 9,975 16,580 3,438 6,708
------ ------ ------ ------- ------- ------ -------
Operating income
(loss)................. (466) (130) 988 1,749 194 359 (1,890)
Net income (loss)....... (465) (157) 760 982 (103) (156) (1,276)
Net income (loss)
available to common
stockholders........... (466) (217) (347) 455 (133) (162) (1,284)
Basic net income (loss)
per common share....... $(0.08) $(0.04) $(0.06) $ 0.04 $ (0.01) $(0.01) $ (0.11)
Basic weighted average
shares outstanding..... 5,705 5,815 6,299 11,030 11,096 11,070 11,204
Diluted net income
(loss) per common
share.................. $(0.08) $(0.04) $(0.06) $ 0.04 $ (0.01) $(0.01) $ (0.11)
Diluted weighted average
shares outstanding..... 5,705 5,815 6,299 11,539 11,096 11,070 11,204
</TABLE>
The pro forma as adjusted balance sheet data give effect to:
. the conversion of all outstanding shares of our preferred stock into
1,211,991 shares of common stock before the closing of this offering; and
. the sale of 3,900,000 shares of common stock offered by us at an assumed
initial public offering price of $13.00 per share and our receipt of the
net proceeds from the sale of those shares, after deducting estimated
underwriting discounts and commissions and offering expenses payable by
us.
<TABLE>
<CAPTION>
March 31, 2000
-------------------
Pro Forma
Actual As Adjusted
------- -----------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................... $18,781 $64,732
Working capital............................................. 441 46,392
Total assets................................................ 43,672 89,623
Long-term obligations....................................... 740 740
Redeemable convertible preferred stock...................... 500 --
Total stockholders' equity.................................. 7,853 54,304
</TABLE>
See Note 6 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing per share data.
7
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and other information in this prospectus, including
our financial statements and the related notes, before making a decision to buy
our common stock. If any of the events or circumstances described in the
following risks actually occurs, our business, operating results or financial
condition would likely suffer. In that case, the trading price of our common
stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business
Fluctuations in our quarterly operating results may cause our stock price to
decline.
It is likely that our quarterly operating results in one or more quarters
may be below the expectations of investors, and as a result the price of our
common stock could decline. Our expenses primarily consist of rent, labor
costs, training costs, insurance and research and development and are based in
part on our expectations of future revenues, which may vary significantly.
These expenses include long-term obligations, such as rent, and other
obligations that would require varying amounts of lead time to change. If we do
not achieve expected revenue targets, we may be unable to adjust our spending
quickly enough to offset any revenue shortfall, which could harm our operating
results. Factors that may cause our quarterly operating results to fluctuate
include:
. the number and size of new customers initiating service;
. the decision of one or more customers to delay implementation or cancel
ongoing services;
. our ability 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;
. expenses incurred for geographic and service expansion;
. a reduction in the number of employees of our customers; and
. acquisitions of our customers by other companies.
Further, our customer agreements generally do not include penalties for
cancellation. As a result, any decision by a customer to cancel our services
may cause significant variations in operating results in a particular quarter
and could result in losses for that quarter.
We have recently experienced net losses, we expect continuing losses and we may
never achieve profitability.
We incurred net losses of approximately $103,000 for the year ended December
31, 1999 and have an accumulated deficit of approximately $725,000 as of
December 31, 1999. We may be unable to achieve or maintain revenues or
profitability. We expect to continue to incur operational expenses in
connection with our business as we continue to:
. develop new product offerings, such as mining and offering portions of
our data online;
. expand our sales and marketing efforts to target larger, more-established
middle-market companies, which are companies with 200 to 5,000 employees;
and
. otherwise grow our business.
8
<PAGE>
We may also incur expenses in connection with acquisitions or other strategic
relationships. As a result of these expenses, we will need to generate
quarterly revenue increases to achieve and maintain profitability. We expect
that we will incur net losses for the foreseeable future.
If we fail to effectively expand our sales and marketing efforts in order to
penetrate the middle market, our business strategy and revenue goals may not be
met.
As many of our earlier stage customers grow, they no longer need to
aggregate their employees with us in order to achieve economies of scale. To
address our maturing customer base and target larger, more established middle-
market companies, in January 1999, we initially launched Enterprise Employer
Services. For the year ended December 31, 1999, revenues from our Enterprise
Employer Services accounted for approximately 3% of our total revenues. To
date, we have six middle-market customers, and our business strategy and
revenue goals depend on growing this customer base. We intend to increase our
sales and marketing expenditures to penetrate the middle market. However, we
have little experience marketing to middle-market companies, and we may find
that we are unable to achieve our Enterprise Employer Services' goals or that
achieving these goals requires significant unanticipated expenditures in sales
and marketing which would have a negative effect on the continued growth of our
business and implementation of our business strategy.
The lengthy sales cycle for Enterprise Employer Services products and services,
which varies from a few weeks to several months, may cause us to incur
substantial expenses and expend management time without generating
corresponding revenues, which would affect our cash flow.
A prospective customer's decision whether or not to implement our Enterprise
Employer Services products and services requires us to dedicate a substantial
amount of time, expense and other resources. The Enterprise Employer Services
sales cycle varies in length from a few weeks to several months. Because our
Enterprise Employer Services products and services were recently introduced, we
are still developing our sales processes and we cannot accurately forecast the
actual time or costs that we expect to be expended in making a sale. For the
companies that we presently service through Enterprise Employer Services, the
sales cycle was an average of 90 days from first proposal to signed service
agreement. If at the end of a sales effort a prospective customer does not
purchase our products or services, we may have incurred substantial expenses
and expended management time that cannot be recovered and that will not
generate corresponding revenues. As a result, our cash flow and our ability to
fund expenditures incurred during the sales cycle may be impaired.
We have grown rapidly, we expect to continue to grow rapidly and we must
continue to grow and effectively manage and support this growth in order for
our business strategy to succeed.
We have grown rapidly in a relatively short period of time. The number of
our full-time employees increased to 233 as of January 31, 2000 from 156 as of
January 31, 1999. We expanded into a total of seven geographic locations as of
January 31, 2000 from six as of the prior year. We will need to continue to
grow in all areas of operation in order to execute our business strategy. Since
1995, we have expanded in response to significant customer growth and industry
trends in favor of using outsourced business solutions. Managing and sustaining
our growth has placed, and will continue to place, significant demands on our
management as well as on our administrative, operational and financial systems
and controls. If we are unable to manage our growth effectively, we may be
unable to devote the necessary management and revenue resources to accomplish
continued
9
<PAGE>
growth of our business and implementation of our business strategy. If we are
unable to continue to grow our ability to compete successfully, our industry
position and cash flows will be adversely affected.
Adverse changes in our relationships with key vendors could impair the quality
of our products and services.
Our success depends in part on our ability to forge and maintain
arrangements and relationships with vendors who are key to our operations
because they supply us with essential components of our software architecture.
A substantial portion of the software that is integrated into our products and
services and on which we depend for our products and services to function as
intended is licensed from these key vendors, including PeopleSoft, Inc. and
Concur Technologies, Inc. If we are unable to maintain these relationships, or
if we are required to make significant changes in the terms and conditions of
these arrangements, we may need to seek replacement vendors or change our
software architecture to address licensing revisions with current vendors,
either of which could impair the quality and availability of our products and
services. In addition, we cannot guarantee that our key vendors will continue
to support their technology. Financial or other difficulties experienced by
these vendors may adversely affect the technologies incorporated into our
products and services. If these technologies become unavailable, we may be
unable to find suitable alternatives.
We also rely on third parties such as Hewlett-Packard Company, Sun
Microsystems, Inc. and Cisco Systems, Inc. to supply servers, routers,
firewalls, encryption technology and other key components of our
telecommunications and network infrastructure. Some of the key components of
our systems and network are available only from sole or limited sources in the
quantities and quality we require. If any of these vendors fail to provide
necessary products or services in a timely fashion or at an acceptable cost,
our telecommunications capacity could be disrupted and our network
infrastructure could be compromised, either of which could prevent us from
maintaining our standard of service.
Key vendors may choose to compete with or enter into arrangements competitive
to us, which could cause us to lose market share.
Our agreements with our key vendors are non-exclusive. These vendors may
choose to compete with us directly or enter into strategic relationships with
our competitors. These relationships could take the form of strategic
investments or marketing or other contractual arrangements. Our competitors may
also license and use the same technology in competition with us. Any use of our
key vendors' technology in competition with us could improve our competitors'
market position and cause us to lose market share.
Any failure in our systems could reduce the quality of our business services,
which could harm our reputation and the success of our business and expose us
to liability.
Our business systems rely on the complex integration of numerous hardware
and software subsystems to manage the transactions involved in acquiring the
customer relationship through the processing of employee, payroll and benefits
data. Any delay or failure in our systems, such as obstructions in our ability
to communicate electronically with customers, employees or vendors, or in our
ability to process data, could harm our reputation and the success of our
business. We have from time to time experienced operational errors in these
systems, which have caused errors in employee data, paychecks and benefits
processing. The efficient operation of our systems is essential to
10
<PAGE>
customer acceptance of our products and services. If we are unable to meet
customer demands or service expectations, we may lose existing customers and we
may be unable to forge and maintain new customer relationships. In addition,
errors in our products and services, such as the erroneous denial of healthcare
benefits or delays in making payroll, could expose our customers to liability
claims from their improperly serviced employees for which we are contractually
obligated to provide indemnification. Operational "bugs" may arise from one or
more factors, including electro-mechanical equipment failures, computer server
or systems failures, network outages, software errors or defects, vendor
performance problems and power failures. We expect bugs to continue to occur
from time to time, any of which could cause our business to suffer.
Our operations are dependent on each of our data centers being able to
successfully provide back-up processing capability if we are unable to protect
our computer and network systems against damage from a major catastrophe such
as an earthquake or other natural disaster, fire, power loss, security breach,
telecommunications failure or similar event. The precautions that we have taken
to protect ourselves against these types of events may prove to be inadequate.
If we suffer damage to our data or operations center, experience a
telecommunications failure or experience a security breach, our operations
could be seriously interrupted. Any interruption or other loss may not be
covered by our insurance and could harm our reputation.
In addition, we depend on the efficient operation of Internet and network
connections among our systems, customers, benefit plans, plan administrators,
financial institutions and regulatory entities. These connections in turn are
based on the efficient operation of data exchange tools, web browsers, Internet
service providers and Internet backbone service providers. Any disruption in
Internet access provided by third parties could harm our business.
If our systems were to fail for any of these reasons during payroll
processing, preventing the proper payment of employees, or the proper remission
of payroll taxes, we could be liable for wage payment delay penalties and
payroll tax penalties. Any inaccuracies in the processing of health insurance
benefits could result in our being liable for lapses in insurance.
Additionally, systems or data center failures could cause customers to invoke
our "satisfaction guarantee," requiring the refund of administrative fees.
We must keep pace with rapid technological change in order to succeed.
Our business depends upon the use of software, hardware, networking and
Internet technologies that are continually and rapidly upgraded in response to
technological advances, competitive pressures and consumer expectations. To
succeed, we will need to effectively integrate these new technologies as they
become available to improve our products and services commensurate with
customer requirements. In particular, we rely on enterprise software
applications licensed from third parties that are upgraded from time to time,
such as People Soft HRIS that provides the basis for our human resource
information system platform supporting payroll, benefits and human resource
functions. We depend on these enterprise software applications as they provide
essential components of our software architecture. Any difficulties in adapting
applications upgrades to our systems could harm our performance or delay or
prevent the successful development, introduction or marketing of new products
and services. New products or upgrades may not be released according to
schedule, or may contain defects when released. Difficulties in integrating new
technologies could result in adverse publicity, loss of sales, delay in market
acceptance of our products or services, or customer claims against us, any of
which could harm our business. We could also incur substantial costs in
modifying our services or infrastructure to adapt to these changes. In
addition, we could lose market share if our competitors develop technologically
superior products and services.
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Our executive officers and key technical employees are critical to our business
and they may not remain with us in the future.
Our future success will depend to a significant extent on the continued
services of our executive officers, specifically Martin Babinec and Steve
Carlson, and those of our technical employees who are skilled in transactional
technology, database and networking, specifically, our Internet applications
lead developer, PeopleSoft project manager and PeopleSoft database developer.
The loss of services of any of our executive officers and key technical
employees could cause us to incur increased operating expenses and divert other
senior management time in seeking replacements. The loss of their services
could also harm our reputation as our customers could become concerned about
our future operations.
We must continually attract and retain highly skilled personnel or we will be
unable to execute our business strategy.
Our future success also will depend on our ability to attract, hire, train
and retain highly skilled technical, sales and marketing and support personnel,
particularly with expertise in outsourced solutions and the technology
platforms that we deploy today and will deploy in the future. Qualified
personnel are in great demand throughout the Internet and business process
outsourcing industries. Our failure to attract and retain the appropriate
personnel may limit the rate at which we can expand our business, including
developing new products and services and attracting new customers.
Acquisitions could result in dilution, operating difficulties and other harmful
consequences.
We may, from time to time, pursue acquisitions that could provide new, or
enhance existing, products or services, additional industry expertise, a
broader customer base or an expanded geographic presence. We may pay for
acquisitions by issuing additional common stock and this would dilute our
stockholders. We may also use significant amounts of cash or incur debt or
amortization expenses associated with goodwill and other intangible assets, any
one of which could harm our business. In addition, acquisitions involve
numerous risks, including:
. difficulties in assimilating the operations, technologies, products and
personnel of the acquired company;
. diversion of management's attention from other business concerns;
. entering markets in which we have no prior experience and may not
succeed; and
. potential loss of key employees of the acquired company.
We have only completed one previous acquisition (which occurred in November
1996) and therefore have limited experience in managing these risks. There are
currently no active negotiations, commitments or agreements with respect to any
such acquisition.
Current and potential competitors could decrease our market share and harm our
business.
Our industry is intensely competitive, evolving rapidly and subject to
technological change. Increased competition in the business process outsourcing
industry could result in price reductions, reduced gross margins or loss of
market share, any of which could decrease our revenues and harm our reputation.
We expect competition to intensify in the future in each of the following
principal competitive factors in this market:
. human capital expertise;
. data integration and transfer technology;
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. service integration technology;
. customer service and support; and
. product and service fees.
We currently compete and face potential competition for customers with a
number of companies, including the following:
. human resource and information systems departments of companies that
perform their own administration of benefits, payroll and human
resources;
. payroll, benefits and business process outsourcers with high-volume
transaction and administrative capabilities, such as Automatic Data
Processing, Inc., ProBusiness Services, Inc. and other third-party
administrators;
. benefits exchanges, such as eBenefits and SmartBenefits, who provide
benefits administration services over the Internet to companies who
otherwise maintain their own benefit plans; and
. application service providers, such as Corio, Inc., Employease Inc. and
Usinternetworking, Inc., who allow customers to perform human resources
data processing over their systems.
As the market evolves, we expect increased competition from new market
entrants. Some of our current and future competitors are significantly larger,
have greater name recognition and have greater financial, marketing and other
resources than we do. We may be unable to compete successfully against current
and future competitors.
Our business and reputation may be harmed if we or our competitors are unable
to protect customer and employee privacy.
Our information systems and Internet communications may be vulnerable to
physical break-ins, attacks by computer vandals or similar intrusions. A third
party may attempt to breach our security and gain access to confidential
customer, employee, benefit plan or payroll information, or our own
confidential information. We may be liable to our customers for any breach in
our security and any breach could harm our business and reputation. In
addition, we operate in an emerging market and any breach in the security of
one of our competitors could impair consumer confidence in the security of all
market offerings, including ours. We rely on encryption technology licenses
from third parties. We may be required to expend significant capital and other
resources to license additional encryption technology and other technologies to
protect against security breaches or to alleviate problems caused by any
security breach.
Our products and services are targeted at early stage and middle-market
companies, which may be more volatile than well-established companies. As a
result, we may experience greater customer turnover than if we targeted more
mature companies.
Our products and services are targeted at early stage and middle-market
companies, which may be more likely to be acquired or to cease operations than
other companies. As a result, our customer base may be more volatile than the
customer bases of companies that have greater emphasis on more established
companies. Although we require various forms of security from these companies
and initially evaluate the credit worthiness of customers who do not provide
such security, we do not monitor the ongoing viability, credit worthiness or
financial performance of our customers. From 1995 through 1999, our year-end
customer retention rate has averaged approximately 85% per year. If we
experience greater than expected customer turnover, either because our
customers are acquired or cease operations or for any other reason, our
business could be harmed.
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We must establish and maintain strategic relationships to increase revenue
growth.
We believe that our future revenue growth depends in part on the successful
forging and maintenance of strategic relationships that can add additional
value to our customer offering. We would like to contract with portal and other
service providers such as banks and travel agencies to offer online services
targeted to our customers. As of April 30, 2000, we have established five of
these relationships, including one with an on-line provider of financial
advice, two with insurance carriers and brokers, one with an on-line book
dealer and one with an on-line travel service to provide products and services
to our customers. Failure to maintain existing or establish new relationships
such as our existing ones may slow our revenue growth.
Our business plan may not succeed if there is a downswing in the technology
market.
We target fast growth technology companies and many of these companies fund
their operations through investments from venture capital firms. Any downswing
in the technology market impeding the flow of venture capital funding to these
companies could restrict their ability to pay for our services and cause us to
lose them as customers. Our business plan will not succeed if we lose a
significant number of fast growth technology companies that we cannot replace
due to adverse market conditions.
Through Venture Employer Services we may be subject to liability for customer
and employee activities.
Our Venture Employer Services offering delivers services through a shared
employer arrangement. For the year ended December 31, 1999, revenues from our
Venture Employer Services accounted for approximately 84% of our service
revenues. A number of legal issues remain unresolved with respect to these
arrangements, including uncertainties concerning the ultimate liability for
violations of employment and discrimination laws. The Venture Employer Services
customer service agreement establishes the contractual division of
responsibilities between us and our customers for various matters arising out
of the employment relationship, including compliance with and liability under
various laws and regulations. We may be subject to liability for violations of
these or other laws and regulations despite these contractual provisions, even
if we do not participate in such violations. We have been named as a co-
defendant in four employment practices liability lawsuits against our Venture
Employer Services customers of which three were dismissed. We expect to
continue to be named as a co-defendant in future employment practices lawsuits.
Generally, federal and state laws that apply to the employer-employee
relationship do not specifically address the obligations and responsibilities
of shared employers like us. If these or other federal or state laws are
ultimately applied to our customer relationships in a manner adverse to us, our
business could be harmed. In addition, Venture Employer Services employees may
be deemed our agents by legal authorities, which would subject us to liability
for their violations.
Although the Venture Employer Services customer service agreement provides
that the customer indemnifies us for any liability attributable to the conduct
and activities of the customer or its employees, we may be unable to collect on
a contractual indemnification claim and thus may be responsible for satisfying
these liabilities. In addition, although we carry insurance that is intended to
cover us in the event of an agency finding or an adverse determination with
respect to our liability for the conduct of our customers' employees, our
insurers may deny coverage for the full amount of our submitted claims, and any
claims submissions could result in cost increases in our insurance premiums.
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Implementation of new or changes in existing government regulations relating to
labor, tax or employment matters or the conduct of business over the Internet
could significantly affect the cost of our operations.
Our operations are governed by numerous federal, state and local laws
relating to labor, tax and employment matters. However, most jurisdictions do
not specifically regulate the provision of outsourced human resources in a
shared employer relationship. If federal, state or local jurisdictions were to
change their regulatory framework related to outsourced human resources, or if
additional jurisdictions implemented laws governing our industry that were
materially different from existing laws, we could be required to make
significant changes in our methods of doing business which could increase our
cost of operations.
In addition, state regulatory authorities generally require licenses for
companies that do business in their states as insurance agents or third party
administrators. Third-party administrators generally handle health or
retirement plan funding and claim processing. Insurance and third-party
administrator regulation covers a host of activities, including sales,
underwriting, rating, claims payments and record keeping by companies and
agents. If regulatory authorities were to determine that the nature of our
business requires that we be licensed as an insurance agent or as a third-party
administrator, we would need to hire additional personnel to manage regulatory
compliance and become obligated to pay annual regulatory fees, both of which
could cost us as much as $500,000 annually.
Further, we are subject to the same federal, state and local laws as other
companies conducting business on the Internet. Today there are relatively few
laws specifically directed towards online services. However, due to the
increasing popularity and use of the Internet and online services, many laws
relating to the Internet are being debated at the state and federal levels, and
it is possible that laws and regulations will be adopted with respect to the
Internet or online services. Applicability to the Internet of existing laws
governing the payroll, benefits and human resource fields is uncertain. As a
result, the impact of current or future laws and regulations related to the
Internet on our business cannot be assessed.
In addition, we plan to mine and offer, for an additional fee, portions of
the data we have collected in the course of providing Venture Employer Services
and Enterprise Employer Services. However, several states have proposed
legislation that would limit the uses of personal user information gathered
online or require online services to establish privacy policies. The Federal
Trade Commission also has recently settled proceedings regarding the manner in
which personal information is collected from users and provided to third
parties. Changes to existing laws or the passage of new laws intended to
address these privacy issues could directly affect our ability to execute our
strategy to mine and offer data.
We may be unable to increase service fees to our customers commensurate with
increases in premiums for insurance policies used by Venture Employer Services,
which could harm our financial condition.
A significant benefit offered by Venture Employer Services is maintaining
health and workers compensation insurance plans that cover customer worksite
employees. Any disruption in our relationship with the vendors who provide our
health and workers compensation insurance or any failure to maintain cost-
effective health and workers compensation plans could harm our business.
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Health insurance premiums, state unemployment taxes and workers compensation
rates for Venture Employer Services are in part determined by our claims
experience and comprise approximately 11% of our direct costs billed. Each of
these costs represents overhead items for Venture Employer Services. We employ
extensive risk management procedures in an attempt to control claims incidence
and ultimate cost. These measures include in-house staff, regular training,
partnerships with skilled brokers and like strategies. Should we experience a
large increase in claim activity, unemployment taxes, health insurance premiums
or workers compensation insurance rates may increase. We may be unable to or
delayed in incorporating these increases into service fees to customers. As a
result, these increases could have a material adverse effect on our financial
condition.
An increase in bad debt expenses could harm our financial condition.
The Venture Employer Services customer service agreement establishes a
shared employer relationship with worksite employees and obligates us to assume
payment of salaries, wages and related benefit costs and payroll taxes of these
employees. Under these service agreements, we are obligated to pay these
employees salaries and wages regardless of whether the customer company makes
timely payment to us of the associated service fee. We also must provide
benefit plans to these employees even if the costs we incur exceed the fees
paid by the customer company. We address this risk by requiring all customers
to execute electronic funds transfer authorizations in our favor and by
collecting payment for health insurance and payroll charges in advance of
disbursement to the employees and carriers. We also require various forms of
security from our customers or evaluate their credit worthiness. During the
period from January 1, 1994 through December 31, 1999, we have recorded
approximately $298,000 in bad debt expense on approximately $1.6 billion of
total payroll and insurance costs billed. In the event there are changes in the
business markets that adversely affect the financial condition of large numbers
of our customers at once, our protective measures may be insufficient and we
may incur substantial liability for worksite employee payroll and benefits
costs that would harm our financial condition.
If we are unable to protect our intellectual property, or if we infringe on the
intellectual property rights of others, our business may be harmed.
Our success depends in part on intellectual property rights to products and
services that we develop. We rely on a combination of contractual rights,
including non-disclosure agreements, trade secrets, copyrights and trademarks
to establish and protect our intellectual property rights in our names,
products, services and related technologies. Loss of intellectual property
protection, or the inability to secure intellectual property protection on any
of our names, confidential information, or technology could harm our business.
We currently have no registered patents or pending patent applications
covering any of our technology. We have received U.S. trademark registrations
for TriNet Employer Group, TriNet Employer Group, Inc. (and Design) and Venture
Talent. Our registrations may be unenforceable or ineffective in protecting our
marks. We also claim common law rights in the Triangle Logo, and the marks
TriNet, ePowered HR for Fast Companies, HR Passport, Passport Portal and
Digital Human Resources.
We typically enter into non-disclosure and confidentiality agreements with
our employees and consultants with access to sensitive information. These
agreements may be inadequate to protect our intellectual property rights or
prevent misappropriation of our technology. Products and services with features
similar to our products and services may be independently developed.
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<PAGE>
Although we believe that none of our intellectual property infringes on the
rights of others, third parties may nevertheless assert infringement claims
against us in the future. We may be required to modify our products, services,
internal systems, or technologies, or obtain a license to permit our continued
use of those rights. We may be unable to do so in a timely manner, or upon
reasonable terms and conditions. Failure to do so could harm our business. In
addition, future litigation over these matters could result in substantial
costs and resource diversion. Adverse determinations in any litigation or
proceedings of this type could subject us to significant liabilities to third
parties and could prevent us from using some of our products, services,
internal systems or technologies. Our name and marks may be unenforceable in
countries outside of the United States, which may adversely affect our ability
to use our name and marks outside of the United States.
We invest funds transferred to us by our customers for use in servicing their
business until needed for the applicable service. We are liable for any losses
ensuing from this investment activity, and our business could be harmed by
unexpected fluctuations in interest rates.
We invest funds transferred to us by customers, such as wage, benefits and
tax funds, until needed for the applicable service, such as remitting the
payroll tax funds to tax authorities when due. During 1999, revenue from these
investments was $650,000. We typically invest these funds in short-term
financial instruments such as overnight U.S. government direct and agency
obligations repurchase agreements, commercial paper rated A-1 and/or P-1 and
money market funds with an underlying credit quality of AA or better. These
investments are exposed to credit risks from the possible inability of the
borrowers to meet the terms of their obligations under the financial
instruments. We are liable for any losses on these investments. In addition,
interest income earned from investing these funds represents a portion of our
revenues. As a result, our business could be significantly impacted by interest
rate fluctuations.
There are no corporate bylaw or charter restrictions on this investment
activity. If we were to invest in lower quality investments, there would be a
corresponding increase in the risk of loss on these investments.
There are many risks associated with international operations.
Currently we have limited revenue in our Canadian operations. However, we
are actively engaged in growing our operations in Canada. Our operations in
Canada and in other potential international markets will subject us to a number
of risks, including:
. costs of customizing products and services for foreign countries;
. laws and business practices favoring local competition;
. dependence on local vendors;
. compliance with multiple, conflicting and changing governmental laws and
regulations;
. difficulties developing systems and procedures to handle differing tax
calculating, collecting and compliance requirements.
. longer sales cycles;
. greater difficulty in collecting accounts receivable;
. import and export restrictions and tariffs;
. difficulties staffing and managing foreign operations; and
. political and economic instability.
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In addition, laws in other countries provide for greater employer
liabilities, thus exposing our shared employer services to greater risks and
higher insurance costs. In Canada, for example, federal and provincial laws
specifically provide for certain types of remedies for wrongful terminations
that are more extensive than in the United States. To the extent that we expand
into other international markets, we believe we would be subject to similar
risks.
The success of our business strategy and our future revenue growth depends in
part on the development and growth of the Internet and e-commerce.
Rapid growth in the use of the Internet and the development of e-commerce is
a recent phenomenon. The use of our Internet-related services, which will
affect our future revenue growth, may not grow if Internet use in general does
not continue to grow. If our Internet-related services fail to grow, our
business strategy will not succeed. Internet acceptance and use may not
continue to develop at historical rates and a sufficiently broad base of
business customers may not adopt or continue to use the Internet as a medium of
commerce. Varying factors could inhibit future growth in Internet usage,
including:
. inadequate network infrastructure;
. security concerns;
. inconsistent quality of service; and
. unavailability of cost effective, high speed service.
Risks Related to Our Offering
Our stock price is likely to widely fluctuate.
We expect our stock price to be subject to wide fluctuations in response to
a variety of factors. These broad market and industry factors could harm the
market price of our common stock, regardless of our performance. These factors
include:
. actual or anticipated quarterly variations in our operating results;
. changes in expectations as to our future financial performances or
changes in financial estimates, if any, of securities analysts;
. announcements of new human resources products, services or technological
innovations;
. announcements relating to strategic relationships and transactions;
. customer relationship developments;
. regulatory changes;
. success of our operating strategy;
. competition;
. additions or changes in key personnel;
. sales of substantial amounts of our common stock or other securities on
the open market; and
. the operating and stock price performance of comparable companies.
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In addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the prices of many Internet and
e-commerce companies and which have often been unrelated to the operating
performance of these companies. These market fluctuations may cause a decline
in the market price of our common stock. In the past, following periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against that company. We may
become involved in this type of litigation in the future. Litigation is often
expensive and diverts management's attention and resources, which could harm
our business.
The allocation of proceeds from this offering may not yield significant returns
for our stockholders and may instead cause losses.
We have not yet allocated a substantial portion of the net proceeds of this
offering to specific uses. Management will have broad discretion to spend the
net proceeds of this in ways with which investors may not agree. Pending the
use of such proceeds for general corporate purposes and acquisitions, such
proceeds will be placed in short-term, interest-bearing, investment-grade debt
securities, certificates of deposit or direct or guaranteed obligations of the
United States. It is possible that the return on these investments will be less
than that which would be realized were we immediately to use these funds for
other purposes. Further, the failure of management to apply these funds
effectively could cause the company to lose money.
Sales of the 5,800,000 shares eligible for sale upon completion of this
offering and the up to 10,484,063 shares becoming eligible for sale beginning
180 days after the date of this prospectus could cause our stock price to
decline.
Sales of a substantial number of shares of our common stock in the public
market following this offering, or the perception that sales could occur, could
cause the market price of our common stock to decline. There will be 16,794,847
shares of our common stock outstanding immediately after this offering,
assuming that the underwriters do not exercise their over-allotment option and
no options are exercised. Of these shares, the following will be available for
sale in the public market as follows:
. 5,800,000 shares sold pursuant to this offering will be eligible for sale
upon completion of this offering;
. 10,484,063 shares will be eligible for sale upon the expiration of lock-
up agreements beginning 180 days after the date of this prospectus; and
. 510,784 of the remaining shares may be sold under Rule 144 or 144(k) once
they have been held for the required time.
The holders of all of these shares are subject to lock-up for 180 days after
the date of the final prospectus. Shares may be released from this lock-up at
any time without notice with the consent of FleetBoston Robertson Stephens Inc.
and us. This could cause our stock price to decline and may impair our ability
to raise capital in the future.
Our directors, executive officers and principal stockholders, if they act as a
group, will be able to control matters requiring stockholder approval.
After this offering, our eight directors and executive officers and our
stockholder that currently owns over 5% of our common stock, Select Holdings
Inc., will beneficially own approximately 65%
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of our outstanding common stock. These stockholders, if they vote together,
will be able to control matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. This
concentration of ownership may also delay or prevent a change in control of us.
You will incur immediate and substantial dilution in the net tangible book
value of the stock you purchase.
The initial public offering price is substantially higher than the net
tangible book value of $3.23 per share that our outstanding common stock will
have immediately after this offering at an assumed offering price of $13.00 per
share. Accordingly, if you purchase shares of our common stock at an assumed
offering price of $13.00 per share, you will incur immediate and substantial
dilution of $9.77 per share. If the holders of outstanding options exercise
those options, you will suffer further dilution. See "Dilution."
Our undesignated preferred stock may inhibit potential acquisition bids for us,
cause the market price for our common stock to fall and diminish the voting
rights of the holders of our common stock.
If our board of directors issues preferred stock, potential acquirors may
not make acquisition bids for us, our stock price may fall and the voting
rights of existing stockholders may diminish as a result. Our board of
directors has the authority to issue up to 5,000,000 shares of preferred stock
in one or more series. Our board of directors can fix the price, rights,
preferences, privileges and restrictions of the preferred stock without any
further vote or action by our stockholders. See "Description of Capital Stock--
Preferred Stock."
We have anti-takeover defenses and employment agreements that could delay or
prevent an acquisition of our company.
Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could delay, defer or prevent a change in control of
our company or our management, even if a change of control would be beneficial
to our stockholders. These provisions could also discourage proxy contests and
make it more difficult for our stockholders to elect directors and take other
corporate actions. As a result, these provisions could limit the price that
investors are willing to pay in the future for shares of our common stock.
These provisions:
. provide for a staggered board of directors, so that it would take three
successive annual meetings to replace all directors;
. prohibit stockholder action by written consent; and
. establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by stockholders at a meeting.
In addition, we have employment agreements with our executive officers that
may make it more difficult for a third party to acquire us. In the event of a
change of control, if any of our executive officers are involuntarily
terminated within six months of that change of control, the terminated
executive officer would be entitled to a lump sum payment of $2.0 million. In
addition, all stock options held by that executive officer would vest and he
would have the right to cause us to repurchase any TriNet common stock then
held by that executive officer at the prevailing market value plus 25%. Our
executive officers currently hold an aggregate of 4,135,189 shares of our
common stock and options for 587,873 shares of common stock.
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We may need to raise additional capital to continue to develop our business
objectives, and any failure to raise capital as needed may render us unable to
achieve our business objectives.
We believe that the net proceeds from this offering, together with our
current cash and cash generated from operations will be sufficient to meet our
anticipated cash requirements for working capital and capital expenditures for
the next 18 months. During or after this period, if cash generated by
operations is insufficient to satisfy our operating requirements, or if we
engage in acquisitions for which additional capital is required, we may need to
raise additional capital to continue to develop our business. Additional
financing may not be available on favorable terms or at all. If adequate funds
are not available or are not available on acceptable terms, we would be unable
to achieve one or more of our business objectives, including:
. continue to develop our business;
. take advantage of acquisition opportunities;
. develop or enhance our products and services;
. increase our revenues; or
. respond to competitive pressures.
FORWARD-LOOKING STATEMENTS
This prospectus, including the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" sections,
contains forward-looking statements that involve risks and uncertainties. The
statements relate to future events or our future financial performance. In many
cases, you can identify forward-looking statements by the use of words such as
may, will, should, expects, plans, anticipates, believes, estimates, predicts,
potential or continue, or the negative of these terms or other comparable
terminology. Our actual results could be materially different from those
anticipated in these forward-looking statements as a result of a number of
factors, including the risks we face described above and elsewhere in this
prospectus. Before you decide to invest in our common stock, you should be
aware that if any of the events described in the "Risk Factors" section and
elsewhere in this prospectus occur, they could have an adverse affect on our
business, financial condition and results of operations.
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USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of the
3,900,000 shares of common stock offered by us will be approximately $46.0
million. Our calculation of the net proceeds assumes an initial public offering
price of $13.00 per share and is net of the estimated underwriting discounts
and commissions and offering expenses payable by us. We will not receive any
proceeds from shares sold by the selling stockholder.
The principal reason for the offering is to provide sufficient working
capital to enable the investment in additional infrastructure, support the
development of new products and services, while taking advantage of acquisition
opportunities that would expand our service offering. The net proceeds of this
offering will be used for general corporate purposes, including working
capital, sales and marketing expenditures and development of new products and
services, and we may also use a portion of the net proceeds to acquire or
invest in complementary businesses, technologies, products or services,
although we have no present agreement or understanding with respect to any
material acquisition or investment. We anticipate using approximately 30% to
50% of the net offering proceeds for working capital purposes, approximately
20% for sales and marketing, approximately 20% for new products and services
and approximately 20% to 40% for acquisition of complementary businesses. We
have not determined the amount of net proceeds to be used specifically for each
of the foregoing purposes. Accordingly, our management will have broad
discretion to spend flexibly in applying most of the net proceeds of this
offering. Pending their use we intend to invest the net proceeds of this
offering in short-term, interest-bearing investment-grade debt securities,
certificates of deposit or direct or guaranteed obligations of the United
States.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain future earnings to finance the growth and
development of our business, and we do not expect to pay any cash dividends in
the foreseeable future.
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CAPITALIZATION
The following table presents our capitalization as of March 31, 2000:
. on an actual basis;
. on a pro forma basis to reflect the conversion of all outstanding
preferred shares into 1,211,991 shares of common stock, which will occur
before the closing of this offering; and
. on a pro forma as adjusted basis to reflect the pro forma adjustment and
our sale of 3,900,000 shares of common stock in this offering at an
assumed initial offering price of $13.00 per share and our receipt of the
net proceeds from the sale of those shares, after deducting estimated
underwriting discounts and commissions and offering expenses payable by
us.
<TABLE>
<CAPTION>
As of March 31, 2000
-----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
(in thousands, except share data)
<S> <C> <C> <C>
Long-term debt............................. $ -- $ -- $ --
Deferred income taxes...................... 740 740 740
Redeemable convertible preferred stock,
Series E, $40 stated value, 75,000 shares
authorized; 12,500 shares outstanding
(actual); no shares outstanding (pro forma
and pro forma, as adjusted)............... 500 -- --
Stockholders' equity:
Preferred stock, $0.0001 par value;
5,000,000 shares authorized; no shares
outstanding (actual, pro forma and pro
forma as adjusted)....................... -- -- --
Convertible preferred stock, Series F,
$26.62 stated value, 150,263 shares
authorized; 150,263 shares outstanding
(actual), no shares outstanding (pro
forma and pro forma, as adjusted)........ 3,977 -- --
Common stock, $0.0001 par value;
100,000,000 shares authorized; 11,682,856
shares outstanding (actual); 12,894,847
shares outstanding (pro forma); and
16,794,847 shares outstanding (pro forma
as adjusted)............................. 6,735 11,212 57,163
Deferred compensation..................... (850) (850) (850)
Accumulated deficit....................... (2,008) (2,008) (2,008)
Accumulated other comprehensive loss...... (1) (1) (1)
------ ------ -------
Total stockholders' equity............... 7,853 8,353 54,304
------ ------ -------
Total capitalization.................... $9,093 $9,093 $55,044
====== ====== =======
</TABLE>
The above information excludes as of March 31, 2000:
. 1,478,505 shares of common stock issuable upon exercise of outstanding
options at a weighted average exercise price of $6.68; and
. 991,010 shares reserved for future issuance under our employee benefit
plan.
23
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was $8.4 million,
or $0.65 per share of common stock. Pro forma net tangible book value per share
is determined by dividing the amount of pro forma tangible assets less total
liabilities, by the pro forma number of shares of common stock outstanding,
assuming the conversion of all outstanding shares of preferred stock into
common stock.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of common stock in
this offering and the pro forma net tangible book value per share of our common
stock immediately after this offering. After giving effect to our sale of
3,900,000 shares of common stock in this offering at an assumed initial public
offering price of $13.00 per share and after deducting estimated underwriting
discounts and commissions and offering expenses payable by us, our adjusted pro
forma net tangible book value as of March 31, 2000 would have been $54.3
million, or $3.23 per share. This amount represents an immediate increase in
pro forma net tangible book value of $2.58 per share to existing stockholders
and an immediate dilution of $9.77 per share to investors in this offering. The
following table illustrates this dilution of net tangible book value per share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price......................... $13.00
Pro forma net tangible book value per share as of March 31,
2000....................................................... $0.65
Increase per share attributable to new investors............ 2.58
-----
Pro forma as adjusted net tangible book value per share after
this offering................................................ 3.23
------
Dilution per share to new investors........................... $ 9.77
======
</TABLE>
The following table summarizes as of March 31, 2000, on the pro forma basis
discussed above, the number of shares of common stock purchased from us, the
total consideration paid to us and the average price per share paid by existing
stockholders and by the investors purchasing shares of common stock in this
offering, at an assumed initial public offering price of $13.00 per share,
before deducting estimated underwriting discounts and commissions and offering
expenses payable by us. Shares to be sold by the selling stockholder are
excluded from the shares purchased by the new investors and included in shares
purchased by the existing stockholders in this table.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 12,894,847 76.8% $ 7,825,000 13.4% $ 0.61
New investors.......... 3,900,000 23.2 50,700,000 86.6 13.00
---------- ----- ----------- -----
Total................ 16,794,847 100.0% $58,525,000 100.0%
========== ===== =========== =====
</TABLE>
Sales by the selling stockholder in this offering will have the following
effects:
. it will reduce the shares held by existing stockholders to 10,994,847
shares, or 65.5%, of the total shares outstanding after this offering;
and
. it will increase the shares held by new investors to 5,800,000, or 34.5%,
of the total shares outstanding after this offering.
The exercise of the underwriters' over-allotment in full will have the
following effects:
. it will reduce the shares held by existing stockholders to 10,124,847
shares, or 60.3%, of the total shares outstanding after this offering;
and
. it will increase the shares held by new investors to 6,670,000, or 39.7%,
of the total shares outstanding after this offering.
The above information excludes 1,478,505 shares of common stock issuable
upon the exercise of options outstanding as of March 31, 2000 at a weighted
average exercise price of $6.68 per share. If any of those options are
exercised, new investors will incur further dilution.
24
<PAGE>
SELECTED FINANCIAL DATA
The tables that follow present portions of our financial statements and are
not complete. You should read the selected financial data below in conjunction
with our financial statements and the related notes included elsewhere in this
prospectus and in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus. The following selected financial data as of December 31, 1998 and
1999 and for the years ended December 31, 1997, 1998 and 1999, have been
derived from, and are qualified by reference to, our audited financial
statements and notes thereto, which are included elsewhere in this prospectus.
The selected financial data as of December 31, 1995, 1996 and 1997 and for the
years ended December 31, 1995 and 1996 were derived from our audited financial
statements, which do not appear in this prospectus. The statement of operations
data for the three months ended March 31, 1999 and 2000 and the consolidated
balance sheet data as of March 31, 2000 are derived from, and are qualified by
reference to, our unaudited financial statements included elsewhere in the
prospectus. We prepared these unaudited financial statements on substantially
the same basis as the audited financial statements appearing elsewhere in this
prospectus. The unaudited financial statements include all normal recurring
adjustments we consider necessary for a fair presentation of our unaudited
financial statements. The results of operations for the three months ended
March 31, 2000 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 2000 or any other future period.
Historical results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
----------------------------------------- ---------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------- ------- ------- ------ -------
Results of Operations: (in thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Service revenues (net of
direct costs billed of
$79,077, $117,026,
$241,917, $386,221,
$712,945, $132,912, and
$241,384,
respectively).......... $2,515 $3,139 $ 7,749 $12,443 $19,127 $4,160 $ 6,646
Operating expenses:
Cost of providing
services.............. 1,586 1,687 4,120 6,379 10,102 2,093 3,470
Client acquisition
costs................. 521 635 1,078 1,102 2,541 474 1,324
General and
administrative........ 582 614 846 1,783 2,543 613 1,024
Research and
development........... 180 194 488 719 2,353 363 1,828
Depreciation........... 112 139 229 565 743 168 667
Stock-based
compensation.......... -- -- -- 146 651 90 223
------ ------ ------- ------- ------- ------ -------
Total operating
expenses.............. 2,981 3,269 6,761 10,694 18,933 3,801 8,536
------ ------ ------- ------- ------- ------ -------
Operating income
(loss)................. (466) (130) 988 1,749 194 359 (1,890)
Interest income
(expense), net......... (19) (26) 19 38 64 11 (22)
Foreign exchange gain
(loss)................. -- -- -- (26) 38 (22) (7)
(Provision) benefit for
income taxes........... 20 (1) (247) (779) (399) (504) 643
------ ------ ------- ------- ------- ------ -------
Net income (loss)....... $ (465) $ (157) $ 760 $ 982 $ (103) $ (156) $(1,276)
====== ====== ======= ======= ======= ====== =======
Net income (loss)
available to common
stockholders........... $ (466) $ (217) $ (347) $ 455 $ (133) $ (162) $(1,284)
Basic net income (loss)
per common share....... $(0.08) $(0.04) $ (0.06) $ 0.04 $ (0.01) $(0.01) $ (0.11)
Basic weighted average
shares outstanding..... 5,705 5,815 6,299 11,030 11,096 11,070 11,204
Diluted net income
(loss) per common
share.................. $(0.08) $(0.04) $ (0.06) $ 0.04 $ (0.01) $(0.01) $ (0.11)
Diluted weighted average
shares outstanding..... 5,705 5,815 6,299 11,539 11,096 11,070 11,204
Pro forma basic and
diluted net (loss) per
common share
(unaudited)............ $ (0.01) $ (0.10)
Pro forma basic and
diluted weighted
average shares
outstanding
(unaudited)............ 12,045 12,237
<CAPTION>
December 31,
-----------------------------------------
1995 1996 1997 1998 1999 March 31, 2000
------ ------ ------- ------- ------- --------------
Consolidated Balance
Sheet Data: (in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $2,470 $4,807 $ 7,927 $ 8,585 $16,777 $18,781
Working capital......... 550 418 251 1,005 113 441
Total assets............ 4,797 8,528 14,758 20,092 35,791 43,672
Long-term obligations... 176 66 -- 531 2,851 740
Redeemable convertible
preferred stock........ 959 1,455 -- 500 500 500
Total stockholders'
equity (deficit)....... (10) (411) 2,943 4,068 4,816 7,853
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the related notes and the other financial information appearing
elsewhere in this prospectus. In addition to historical information, the
following discussion and other parts of this prospectus contain forward-looking
information that involves risks and uncertainties. Our actual results could
differ materially from those anticipated by forward-looking information due to
factors discussed under "Risk Factors," "Business" and elsewhere in this
prospectus.
Overview
We provide Internet-delivered business process outsourcing of payroll,
benefits and human resource support and technology to fast growth technology
companies in North America. In 1990, we introduced Venture Employer Services
targeted to emerging fast-growth technology companies. In January 1999, we
initially launched Enterprise Employer Services, an integrated outsourced
payroll and benefits administration service for middle-market companies.
Our Venture Employer Services provides an integrated service including
payroll, benefits and human resource support under a shared employer
relationship, usually with customers with less than 200 employees. These
services are targeted to fast-growth emerging technology companies. For the
year ended December 31, 1999, revenues from Venture Employer Services accounted
for approximately 84.3% of our service revenues.
Our Enterprise Employer Services provides an integrated service including
payroll, benefits and human resource support designed for customers with
greater than 200 employees. There is no shared employer relationship under this
service offering. These services are also targeted to fast-growth technology
companies. For the year ended December 31, 1999, revenues from Enterprise
Employer Services accounted for approximately 2.7% of our service revenues.
Venture Talent provides recruitment services primarily to our Venture
Employer Services customers. In November 1996, in exchange for 108,300 shares
of our common stock, we acquired y/net, an outsourced staffing solutions firm,
which we developed into Venture Talent. These services are provided with a
combination of on-site and off-site recruiters as well as researchers providing
candidate screening and development. For the year ended December 31, 1999,
revenues from Venture Talent accounted for approximately 12.0% of our service
revenues.
Venture Management Resources provides human resource consulting services to
customers requiring compensation consulting, change management, organizational
development and other human resource related consulting services. For the year
ended December 31, 1999, revenues from Venture Management Resources accounted
for approximately 1.0% of our service revenues.
All of our service offerings use a combination of Internet-based services
and services provided under traditional methods.
Customers of Venture Employer Services enter into a customer service
agreement that establishes a shared employer relationship between us and the
customer. The agreement provides for an initial one-year term, subject to
cancellation on 30 days' notice by either us or the customer. Service revenues
earned under these agreements are reported net of direct costs billed, which
consist primarily of the gross payroll of each employee, the estimated costs of
employment related taxes and
26
<PAGE>
health and welfare benefit plan premiums. The most significant direct costs
associated with each Venture Employer Services customer service agreement are
the salaries and wages of employees, which are generally disbursed promptly
after the applicable customer payments are received. In addition to salaries
and wages, we remit federal and state taxes, health and welfare insurance
premiums, and pension plan contributions, which are also included in direct
costs billed. Our Venture Employer Services customer service agreement
obligates us to provide the benefits and services regardless of whether the
customer makes timely payments to us.
In order to address this risk, we require customers to execute electronic
funds transfer authorization agreements so we may collect funds one day in
advance of disbursing payroll to our customers' employees. These authorization
agreements do not guarantee that our customers have sufficient funds in their
accounts at the time of the required funds transfer.
Service revenues for Venture Employer Services and Enterprise Employer
Services primarily consist of a per employee fee billed coincident with each
payroll which includes all service fees for payroll, benefits and human
resource support services. These fees are dependent on the number of employees
processed and the range of services provided. Service revenue for Venture
Talent and Venture Management Resources include service fees that are based on
the range of services provided and billed when incurred.
Investment revenue is included in our service revenue and is earned during
the period between collecting customer funds and the payment of applicable
wages and the remittance of funds to the applicable taxing authorities as well
as other regulatory and insurance entities. We accumulate large short-term cash
balances between the time we collect invoices and remit payments to employees
for wages, federal and state taxing authorities as well as health and welfare
insurance providers. These timing differences allow for interest to be earned.
We invest these short-term cash balances in demand deposits and short-term
highly liquid investments. During 1999, investment revenue was $650,000.
Cost of providing services consists primarily of salaries and wages from our
payroll, benefits and human resource departments of our internal corporate
staff as well as the overhead relating to these functions. As we expand our
operations to service additional customers and employees, we expect these
expenses will continue to increase.
Client acquisition costs consist primarily of salaries and wages associated
with our sales force, marketing department and client implementation services.
Commissions paid to our internal sales force is classified under client
acquisition costs and are based on the number of customers sold and size of the
customer employee population. Implementation costs are classified as the costs
associated with acquiring customer data and installing these customers onto our
human resource information systems. Examples include setting up our information
systems to accommodate various health plan options and customer funding
strategies and the creation of various data tables to accommodate unique
customer payroll policies. In addition to these costs, costs relating to the
marketing programs supporting us are included within client acquisition costs.
We intend to pursue additional sales and marketing campaigns including
additional advertising in various trade publications targeted to potential
buyers of our service, sponsoring of corporate events and attendance of trade
shows in the technology community.
General and administrative expenses consist primarily of salaries and
related personnel expenses for executive, accounting and administrative
personnel, professional fees and other general corporate expenses. As we add
personnel and incur additional costs related to the growth of our business and
27
<PAGE>
assume the responsibilities and costs associated with becoming a public
company, we expect that general and administrative expenses will also
increase.
Research and development expenses consist primarily of salaries and related
personnel expenses, consultant fees relating to the design, development,
testing and enhancement of our back-end software and processes as well as
employee and management interfacing applications. We believe that continued
investment in research and development is critical to attaining our stated
objectives. We expect these expenses to increase in the future as we continue
to develop and enhance our service offerings.
In connection with the grant of options to employees to purchase 457,094
shares in 1999 and 192,540 shares in 1998, we recorded non-cash stock-based
compensation charges of approximately $1.4 million for the year ended December
31, 1999 and $503,000 for the year ended December 31, 1998, representing the
difference between the exercise price of these options and the fair value of
our common stock as of the date of grant. These amounts are being amortized
over the respective vesting periods of the options using a graded method. As
of December 31, 1999, the remaining deferred compensation was scheduled to be
amortized at the rate of $674,000 for the year ending December 31, 2000,
$279,000 for the year ending December 31, 2001, $106,000 for the year ending
December 31, 2002 and $14,000 for the year ending December 31, 2003. The
actual amount of stock-based compensation expense to be recognized in future
periods could decrease if options for which deferred compensation has been
recorded are terminated before they vest.
Our provision for income taxes exceeds the U.S. statutory rate of 34% and
is expected to continue to exceed the statutory rate primarily due to state
income taxes and the amortization of nondeductible stock-based compensation.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities used for financial
reporting purposes and the amounts used for income tax purposes. Significant
items resulting in deferred income taxes include software development costs,
depreciation and accrued expenses. Changes in these items are reflected in our
financial statements through our deferred income tax provision.
We believe that period-to-period comparisons of our operating results
should not be relied upon as indicative of future performance. We may not
succeed in addressing these risks and difficulties. Although we have
experienced revenue growth in the past, this growth may not continue.
28
<PAGE>
Results of Operations
The following table sets forth statement of operations data as a percentage
of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three
Months
Ended
Year Ended December 31, March 31,
--------------------------- -------------
1997 1998 1999 1999 2000
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Service revenues (net of direct
costs billed).................. 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
------- ------- ------- ----- -----
Operating expenses:
Cost of providing services..... 53.2 51.3 52.8 50.3 52.2
Client acquisition costs....... 13.9 8.8 13.3 11.4 19.9
General and administrative..... 10.9 14.3 13.3 14.7 15.4
Research and development....... 6.3 5.8 12.3 8.7 27.5
Depreciation................... 3.0 4.5 3.9 4.1 10.0
Stock-based compensation ...... -- 1.2 3.4 2.2 3.4
------- ------- ------- ----- -----
Total operating expenses...... 87.3 85.9 99.0 91.4 128.4
------- ------- ------- ----- -----
Operating income (loss)......... 12.7 14.1 1.0 8.6 (28.4)
Interest income (expense), net.. 0.2 0.3 0.3 0.3 (0.4)
Foreign exchange gain (loss).... -- (0.2) 0.2 (0.5) (0.1)
(Provision) benefit for income
taxes.......................... (3.1) (6.3) (2.0) (12.1) 9.7
------- ------- ------- ----- -----
Net income (loss)............... 9.8 % 7.9 % (0.5)% (3.7)% (19.2)%
======= ======= ======= ===== =====
</TABLE>
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31,
1999
Service Revenues. Our service revenues increased $2.4 million to $6.6
million for the three months ended March 31, 2000 from $4.2 million for the
three months ended March 31, 1999, representing an increase of 59.8%. The
increase was primarily due to the addition of 169 new customers, their
associated employees and existing customer employee growth.
Cost of Providing Services. Our cost of providing service increased $1.4
million to $3.5 million for the three months ended March 31, 2000 from $2.1
million for the three months ended March 31, 1999, representing an increase of
65.8%. The increase was primarily due to the addition of 60 personnel that were
hired in our payroll, benefits and human resources support functions relating
to providing services to our customers.
Client Acquisition Costs. Client acquisition costs increased $850,000 to
$1.3 million for the three months ended March 31, 2000 from $474,000 for the
three months ended March 31, 1999, representing an increase of 179.2%. The
increase primarily resulted from salaries and commissions associated with the
addition of 16 personnel as well as additional marketing expenditures during
the period.
General and Administrative Expense. General and administrative expense
increased $410,000 to $1.0 million for the three months ended March 31, 2000
from $613,000 for the three months ended March 31, 1999, representing an
increase of 66.9%. The increase primarily resulted from increased salaries and
an increase to the allowance for doubtful accounts of $255,000 and related
operational costs required to manage our growth and infrastructure to support
our public offering.
Research and Development Expense. Research and development expense increased
$1.5 million to $1.8 million for the three months ended March 31, 2000 from
$363,000 for the three months ended March 31, 1999, representing an increase of
404.2%. This increase in research and
29
<PAGE>
development expenses reflects eight additional personnel hired as well as
approximately 16 consultants that worked on our information system projects.
These personnel expenses were primarily related to the conversion and
implementation costs of our new payroll, benefits and human resource
information systems.
Depreciation Expense. Depreciation expense increased $499,000 to $667,000
for the three months ended March 31, 2000, from $168,000 for the three months
ended March 31, 1999, representing an increase of 297.0%. This was due to an
increase in capitalized information technology equipment and capitalized
licensed software as a result of additional development of front-end and back-
end software applications.
Net Loss. Net loss decreased $1.2 million to $1.3 million for the three
months ended March 31, 2000 from $155,000 for the three months ended March 31,
1999, representing a decrease of 722.9%. This is primarily due to an increase
in client acquisition costs, research and development, depreciation and stock-
based compensation expenses.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Service Revenues. Our service revenues increased $6.7 million to $19.1
million in 1999 from $12.4 million in 1998, representing an increase of 53.7%.
This increase was primarily due to adding 116 customers to our Venture Employer
Services, as well as adding four customers to our Enterprise Employer Services
and their associated employees. To a lesser extent, our service revenues
increased as a result of higher volumes of placement fees in Venture Talent and
consulting fees in our Venture Management Resources. Prior to 1999, we had no
service revenues from Enterprise Employer Services.
Cost of Providing Services. Our cost of providing services increased $3.7
million to $10.1 million in 1999 from $6.4 million in 1998, representing an
increase of 58.4%. The increase was primarily due to the additional 69
personnel that were hired in our payroll, benefits and human resources support
functions relating to providing services to our customers.
Client Acquisition Costs. Client acquisition costs increased by $1.4 million
to $2.5 million in 1999 from $1.1 million in 1998, representing an increase of
130.5%. The increase primarily resulted from salaries and commissions
associated with 13 new personnel added during the year and the opening of our
McLean, Virginia office in June 1999 and our Louisville, Colorado office in
November 1999.
General and Administrative Expense. General and administrative expense
increased by $761,000 to $2.5 million in 1999 from $1.8 million in 1998,
representing an increase of 42.7%. The increase primarily resulted from
salaries associated with eight additional personnel that were added and related
operational costs required to manage our growth.
Research and Development Expense. Research and development expense increased
$1.6 million to $2.4 million in 1999 from $719,000 in 1998, representing an
increase of 227.4%. The increase in research and development expenses reflects
eight additional personnel hired as well as approximately 12 consultants that
worked on our information system projects. These personnel expenses were
primarily related to the conversion and implementation costs of our new
payroll, benefits and human resource information systems.
Depreciation Expense. Depreciation expense increased $178,000 to $743,000 in
1999 from $565,000 in 1998, representing an increase of 31.5%. This is due to
an increase in capitalized information technology equipment and capitalized
licensed software as a result of additional development of front-end and back-
end software applications.
30
<PAGE>
Net Income (Loss). Net income (loss) decreased $1.1 million to a net loss of
$103,000 in 1999 from net income of $982,000 in 1998. This is primarily due to
increased client acquisition costs, research and development and stock-based
compensation expenses in 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Service Revenues. Our service revenues increased $4.7 million to $12.4 in
1998 from $7.7 million in 1997, representing an increase of 60.6%. This
increase was primarily due to adding 100 customers to our Venture Employer
Services.
Cost of Providing Services. Our cost of providing services increased $2.3
million to $6.4 million in 1998 from $4.1 million in 1997, representing an
increase of 54.8%.The increase was due to an additional 17 personnel that were
hired in our payroll, benefits and human resources support functions relating
to providing services to our customers.
Client Acquisition Costs. Client acquisition costs remained consistent
between 1998 and 1997 at approximately $1.1 million. The amount remained
constant as a result of no net increase in personnel costs during 1998 and
1997.
General and Administrative Expense. General and administrative expense
increased by $1.0 million to $1.8 million in 1998 from $846,000 in 1997,
representing an increase of 110.6%. The increase primarily resulted from
salaries associated with eight additional personnel that were added and related
operational costs required to manage our growth.
Research and Development Expense. Research and development expense increased
by $231,000 to $719,000 in 1998 from $488,000 in 1997, an increase of 47.1%.
The increase in research and development expenses reflects nine additional
personnel hired as well as approximately four consultants that worked on our
information system projects. These personnel expenses were primarily related to
the conversion and implementation costs of our new payroll, benefits and human
resource information systems.
Depreciation Expense. Depreciation expense increased $336,000 to $565,000 in
1998 from $229,000 in 1997, an increase of 147.1%. This was due to an increase
in capitalized information technology equipment and capitalized licensed
software as a result of additional development of front-end and back-end
software applications.
Net Income. Net income increased $222,000 to $982,000 in 1998 from $760,000
in 1997. This is primarily due to increased operating income of $761,000 offset
by increased provision for income taxes of $532,000.
31
<PAGE>
Quarterly Results of Operations
The following tables represent unaudited statement of operations data for
our most recent eight quarters. The first table contains revenue and expense
data expressed in dollars, while the second table contains the same data
expressed as a percentage of our revenue for the periods indicated. You should
read the following table in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this prospectus. We have
prepared this unaudited information on a basis consistent with the audited
consolidated financial statements contained in this prospectus and includes all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of our financial position and operating
results for the quarters presented.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1998 1998 1998 1999 1999 1999 1999 2000
-------- --------- -------- -------- -------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service revenues (net of
direct costs).......... $2,819 $3,321 $3,579 $4,160 $4,360 $4,779 $5,828 $ 6,646
Cost of providing
services............... 1,548 1,614 1,749 2,093 2,210 2,600 3,199 3,470
Client acquisition
costs.................. 267 243 315 474 574 562 931 1,324
General and
administrative ........ 418 438 494 613 565 577 788 1,024
Research and development
....................... 126 159 219 363 358 477 1,155 1,828
Depreciation ........... 139 141 149 168 180 188 207 667
Stock-based compensation
....................... 7 63 74 90 121 216 224 223
------ ------ ------ ------ ------ ------ ------ -------
Total operating
expenses.............. 2,505 2,658 3,000 3,801 4,008 4,620 6,504 8,536
------ ------ ------ ------ ------ ------ ------ -------
Operating income
(loss)................. 314 663 579 359 352 159 (676) (1,890)
Other income (expense):
Interest income, net... 9 12 8 11 12 13 28 (22)
Foreign exchange gain
(loss)................ (8) (10) -- (22) 15 2 43 (7)
------ ------ ------ ------ ------ ------ ------ -------
Income (loss) before
provision for income
taxes.................. 315 665 587 348 379 174 (605) (1,919)
(Provision) benefit for
income taxes........... (131) (297) (270) (504) (544) (267) 916 643
------ ------ ------ ------ ------ ------ ------ -------
Net income (loss)....... $ 184 $ 368 $ 317 $(156) $ (165) $ (93) $ 311 $(1,276)
====== ====== ====== ====== ====== ====== ====== =======
As a percentage of total
revenues:
Service revenues (net of
direct costs).......... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of providing
services............... 54.9 48.6 48.9 50.3 50.7 54.4 54.9 52.2
Client acquisition
costs.................. 9.5 7.3 8.8 11.4 13.2 11.8 16.0 19.9
General and
administrative ........ 14.9 13.2 13.8 14.7 12.9 12.1 13.5 15.4
Research and development
....................... 4.5 4.8 6.1 8.7 8.2 10.0 19.8 27.5
Depreciation ........... 4.9 4.2 4.1 4.1 4.1 3.9 3.6 10.0
Stock-based compensation
....................... 0.2 1.9 2.1 2.2 2.8 4.5 3.8 3.4
------ ------ ------ ------ ------ ------ ------ -------
Total operating
expenses.............. 88.9 80.0 83.8 91.4 91.9 96.7 111.6 128.4
------ ------ ------ ------ ------ ------ ------ -------
Operating income
(loss)................. 11.1 20.0 16.2 8.6 8.1 3.3 (11.6) (28.4)
Other income (expense):
Interest income, net... 0.3 0.4 0.2 0.3 0.3 0.3 0.5 (0.4)
Foreign exchange gain
(loss)................ (0.3) (0.4) 0.0 (0.5) 0.3 0.1 0.7 (0.1)
------ ------ ------ ------ ------ ------ ------ -------
Income (loss) before
provision for income
taxes.................. 11.1 20.0 16.4 8.4 8.7 3.7 (10.4) (28.9)
(Provision) benefit for
income taxes........... (4.6) (8.9) (7.5) (12.1) (12.5) (5.6) 15.7 9.7
------ ------ ------ ------ ------ ------ ------ -------
Net income (loss)....... 6.5 % 11.1 % 8.9 % (3.7)% (3.8)% (1.9)% 5.3 % (19.2)%
====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
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Liquidity and Capital Resources
Since our inception we have funded our operations primarily through private
sales of convertible preferred equity securities resulting in aggregate net
proceeds of $7.25 million and cash from operations. We have also funded our
operations through a debt agreement with Sanwa Bank California that provided us
with up to $4.0 million in financing. We had drawn down $2.4 million on this
line of credit as of December 31, 1999. As of March 31, 2000, we had retired
the balance of $2.8 million under the debt agreement with Sanwa Bank and the
agreement has terminated.
Net cash provided by operating activities for the first three months of 2000
was $1.1 million as a result of a net loss of $1.3 million offset by $2.4
million in adjustments to net cash provided by operating activities. Net cash
provided by operating activities for 1999 was $11.6 million as a result of a
net loss of $103,000 and an increase in accrued compensation and related
expenses of $10.7 million. Net cash provided by operating activities was $2.2
million in 1998 and $4.2 million in 1997. This decrease resulted from the
timing of payrolls at the end of the reporting periods and the associated
accruals.
Net cash from investing activities for the first three months of 2000 was
$791,000 as a result of purchases of computer equipment and the capitalization
of development costs relating to the migration of our back-office processing
systems to PeopleSoft platform. Net cash used in investing activities was $4.7
million for 1999 as a result of purchases of equipment and the capitalization
of development costs relating to the migration of our back-office processing
systems to our new PeopleSoft platform. Net cash used in investing activities
was $1.9 million in 1998 and $2.2 million in 1997 and was related to
investments in infrastructure for expansion of long-term operations, including
software development costs.
Net cash provided by financing activities for the first three months of 2000
was $1.7 million as a result of receiving $4.0 million from our Series F
financing and the retirement of $2.3 million in debt from our agreement with
Sanwa Bank California. Net cash provided by financing activities was
$1.4 million for 1999, primarily as a result of borrowing $1.2 million from
Sanwa Bank California. Net cash provided by financing activities was $427,000
during 1998 and $1.2 million during 1997, primarily due to the issuance of
$500,000 in preferred stock in 1998 as compared with $1.0 million in preferred
stock in 1997.
We expect to experience growth in our working capital needs for the
foreseeable future in order to execute our business plan. We anticipate that
operating activities as well as planned capital expenditures for items such as
leasehold improvements, computer equipment, web-based systems and furniture
will constitute a substantial use of our cash resources. In addition, we may
utilize cash resources to fund acquisitions or investments in complementary
businesses, technologies or products.
We believe that our current cash and cash equivalents and cash generated
from operations will be sufficient to meet our anticipated cash requirements
for working capital and capital expenditures for the next 12 months. We believe
that the net proceeds from this offering, together with our current cash and
cash equivalents and cash generated from operations will be sufficient to meet
our anticipated cash requirements for working capital and capital expenditures
for the next 18 months. This offering will allow us to accelerate development
of our systems and infrastructure, however, we are not relying on our ability
to raise capital in order to fund on-going services for our customers.
Accordingly, we do not currently anticipate a follow-on public offering in the
near term regardless of
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our share price. An increase in share price would not necessarily be
determinative of our need for additional capital. If our plans for development
of our systems and infrastructure including the acquisition of complementary
businesses or technologies require unanticipated additional funds or if we need
to respond to unanticipated requirements, we may need to raise additional
funds. We may be unable to obtain financing on terms acceptable to us, if at
all. If we sell additional equity securities, our stockholders' holdings would
be diluted.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," or FAS 133. FAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designed as
part of a hedge transaction, and, if so, the type of hedge transaction. In June
1999, the FASB issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," or FAS 137, which amends FAS 133 to
be effective for all fiscal quarters or all fiscal years beginning after June
15, 2000 or January 1, 2001 for us. We do not expect that adoption of FAS 137
will have a material impact on our reported results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin, or SAB, 101, "Revenue Recognition in Financial Statements"
and in March 2000 issued SAB 101A "Amendment: Revenue Recognition in Financial
Statements." SAB 101 and 101A are effective for us in the quarter ending June
30, 2000. We do not currently expect that adoption of SAB 101 will have a
material impact on our financial position or results of operations.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. We are subject to market risk from exposure to changes
in interest rates based on our investing and cash management activities. We use
overnight investments that may include U.S. government agency and other
corporate debt and securities. Accordingly, we believe there is currently
minimal exposure to interest rates.
Foreign Currency Exchange Rate Risk. To date, substantially all of our
service revenues have been denominated in U.S. dollars and generated primarily
from customers in the United States, and our exposure to foreign currency
exchange rates has been immaterial. We expect, however, that future service
revenues may also be derived from international operations where service
revenues may be denominated in currency of the applicable market. We do not
currently use or anticipate using financial hedging techniques to attempt to
minimize fluctuations in exchange rates.
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BUSINESS
Introduction
We have over 10 years of industry experience in providing business process
outsourcing of payroll, benefits and human resource support and technology to
fast-growth technology companies in North America. We believe that we offer one
of the first fully integrated Internet-based business process outsourcing
services for such transactions. We target "fast companies" that are
characterized by rapid headcount growth, outside equity financing and highly
skilled, technically savvy work forces. The complexities of managing rapid
growth make fast companies receptive to value-added outsourcing relationships.
We provide fast companies with access to highly functional benefits packages
and employee self-service offerings while alleviating time-consuming
administrative tasks associated with the implementation and maintenance of
these complex functions. Our systems and services allow our customers to focus
on their respective core business functions by outsourcing their human resource
technology or entire human resource functions to us without losing real-time
access to critical data.
Industry
Overview of Business Process Outsourcing for Payroll, Benefits and Human
Resources
According to a September 1999 report surveying companies with an minimum of
500 employees by Dataquest, an information technology market research and
consulting firm, the business process outsourcing industry for payroll
services, benefits administration, records management, recruiting and staffing,
hiring administration, and education and training is forecast to grow from
$13.9 billion in 1999 to $37.7 billion in 2003, representing a compound annual
growth rate of 28%. Dataquest estimates that integrated business process
outsourcing of payroll, benefits and human resource transactions represented
only 7%, or $1.0 billion, of such industry in 1999, but that this percentage
will grow rapidly to approximately 30%, or $12.1 billion, of such industry in
2003. The following factors are expected to drive growth: start-ups and other
rapid-growth companies, very large companies--Fortune 500--to whom the complete
outsourcing model is appealing; and the consolidation of outsourcing contracts
through aggressive cross-selling by dominant players. In addition, according to
Dataquest, benefits administration and payroll top the list of processes that
global top decision makers would like included in an integrated solution.
In an August 1998 PricewaterhouseCoopers study performed by Yankelovich
Partners, a marketing research firm, 42% of surveyed top senior executives
indicated a company-wide shift toward using business process outsourcing. The
study reported that the 10 business processes most likely to be outsourced to
external service providers are payroll, benefits management, real estate
management, tax compliance, claims administration, applications processing,
human resources, internal auditing, sourcing/procurement and
finance/accounting. The Yankelovich study reported that 90% of the top decision
makers selected a business process outsourcing service provider based on its
track record and business process specialization. The study surveyed a total of
304 companies, all of which had at least $1 billion in revenues or assets.
The Dataquest study attributes much of the growth in the market for business
process outsourcing of payroll, benefits and human resource processes has grown
significantly in part due to the difficulties of managing these activities
internally. Within a company, these processes are complex, cumbersome,
expensive and highly inefficient. We believe this is caused by a number of
factors, including:
. complex, voluminous and constantly changing government regulations
involving payroll, benefits and human resources;
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. substantial liability that employers face for non-compliance and
employee-initiated claims;
. the need for a verifiable audit trail to provide precision in payroll,
benefits and human resource transactions;
. the practice of employers in the United States operating in tight labor
markets to provide multiple benefit plan options allowing employees to
make choices that suit their individual needs;
. the dedication of technology resources to mission critical activities
involving product development and sales, causing human resource processes
to remain on largely inefficient platforms; and
. the expense associated with creating an integrated platform and quick
obsolescence of these platforms.
In addition, we believe that for many small and middle-market employers, the
functions of payroll, benefits and human resources are typically outsourced to
multiple vendors, which specialize in a specific category. The following vendor
relationships are typically established:
. payroll service provider;
. insurance broker for a variety of services from procurement to claims
administration;
. casualty insurance broker for workers compensation;
. insurance carriers and health plan providers;
. cafeteria plan administrator for claims, enrollments and records
involving flexible benefits;
. 401(k) securities advisor; and
. 401(k) plan administrator.
Growth in Applications Outsourcing
The data and transaction intensive nature of payroll, benefits and human
resource functions combine to form a complex undertaking for a company that
wishes to integrate the related processes listed above to a single information
system. Fortune 1000 companies may streamline and integrate aspects of related
business processes through implementing enterprise resource planning systems
such as PeopleSoft, SAP AG or Oracle Corporation. However, the long
implementation time and high cost of an enterprise resource planning system
preclude many middle-market companies, or companies with 200 to 5,000
employees, and most emerging growth companies, or companies with up to several
hundred employees, from pursuing this option. Recently, a number of companies,
known as application service providers began providing integrated enterprise
resource planning applications that are hosted by them and accessed by the
customer through the Internet. Growing prominence of the Internet as a platform
to host and distribute enterprise resource planning applications has
contributed to the Forrester Report's prediction that the applications
outsourcing industry will grow from $17 billion in 1997 to reach $21 billion by
2001.
Growth of Outside Equity Financed Technology Companies
The challenges and complexities of payroll, benefits and human resource
functions are heightened for companies characterized by high growth and intense
competition for qualified employees. These companies need processes that are
easily integrated and scalable and can offer
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them a competitive advantage in the tight labor market. One segment of these
companies is technology firms whose rapid growth is fueled by outside equity
investment such as venture capital, corporate partnerships or the public
market. As a result of the increasing availability of private and public
financing, the number of fast-growth technology companies has increased in the
recent past and continues to increase. According to PricewaterhouseCoopers, the
number of companies funded by venture capital for 1999 was 4,006 firms, a 41%
increase from 1998. PricewaterhouseCoopers also reported that the total amount
of venture capital invested rose from $14.2 billion in 1998 to $35.6 billion in
1999 of which $10.8 billion in 1998 and $32.4 billion in 1999 was invested in
technology companies. According to PricewaterhouseCoopers, the average deal
size for all venture capital investments increased from $5.2 million in 1998 to
$8.9 million in 1999.
Payroll, Benefits and Human Resource Processes
The payroll, benefits and human resource processes consist of two basic
components commonly referred to as the "front-end" and "back-end" processes.
The front-end includes processes and interfaces to collect, update, effect
and communicate changes in employee data, such as the processing of personal
and employment life event changes such as new hires, family members, salary,
address and termination, and require interactions between the employee, manager
or human resources administrator. Unless automated, these changes typically
involve a lengthy period of time for these parties to initiate, approve and
post changes to one or more information systems. While employees, managers and
administrators all require access to human resource information, the
confidential nature of this information requires adequate safeguards to prevent
unauthorized disclosure. Automation of front-end processes has historically
been difficult to achieve as access and approval must conform to, and evolve
with, a company's unique organizational structure. Front-end processes include:
. obtaining information about an employee's current status or historical
transactions involving payroll, benefits or human resources;
. accessing management reporting for company-wide or work unit information
appropriate to the manager's or administrator's position in the
organization;
. enrollment in, on-going communication related to, and changes to all
employee benefit plans offered in the organization;
. initiating and approving the full range of payroll, benefits and human
resource transactions including routine personal and employment life
event changes; and
. communicating customized company policy information and processes
involving payroll, benefits and human resources.
The back-end involves high volume information processing of functions that
are sufficiently standardized across all companies to permit specialized
systems to receive, store and transact routine and repetitive functions
involving payroll, benefits and human resources. Portions of the back-end
functions may be performed through a company's internal human resource
information system. For fast-growth technology companies, these functions are
more typically outsourced to specialized third party providers. Back-end
processes include:
. data storage of all historical transactions covering payroll, benefits
and human resource transactions;
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. calculation, withholding and electronic remittance of payroll taxes to
taxing authorities nationwide;
. calculation, deduction, and electronic remittance of payment transactions
with exchange partners such as benefit plan and financial service
providers; and
. exchange systems that transfer data involving eligibility, enrollment,
life event and related transactions to benefit plan and financial service
providers.
Limitations of Traditional Outsourcing Alternatives
Each service or benefit plan provider has its own information system and
separate reporting requirements for the employer to inform the provider of
routine personal and employment life event changes such as new hires, family
members, salary, address and termination. As the information systems of the
different service and benefit plan providers do not interface with each other,
an employer's in-house staff must coordinate the processing of each change with
all related vendors. In addition, the collection, storage and transmission of
this data to vendors remains a labor-intensive, paper-based and error-prone
process. If an employer fails to accurately update eligibility or financial
data in a timely fashion, an employee may be denied health care coverage or
receive an incorrect salary deposit. Errors increase administrative costs and
impair employee morale.
Limitations of Front-End Providers.
Except for organizations deploying an enterprise resource planning system
for payroll, benefits and human resources, the front-end processes for these
functions are accomplished in most companies through a combination of paper and
e-mail based processes, or direct contact between a manager or employee with
the company's human resources administrator. As a result of recent developments
in web-based technology, several front-end solutions are emerging in the
marketplace for payroll, benefits and human resources. However, front-end only
solutions are limited in their ability to provide access to all of the relevant
data desired by the customer as they are dependent upon back-end providers like
payroll processing firms and third party administrators to perform transactions
and store data. In addition, most front-end solution providers rely upon manual
and bridged data transfers between multiple and redundant software
applications, or entirely outsourced functional areas, which decrease the
flexibility and scalability of these solutions.
Limitations of Back-End Providers.
We believe that back-end providers such as payroll processing firms and
third party administrators are currently not significantly involved in
integrating the functions of payroll, benefits and human resources to a single
information system. We are unaware of any back-end providers that offer web-
based front-ends that extend to the employee and manager desktops for
initiation and approval of self-directed transactions involving payroll,
benefits and human resources. Because most back-end providers market their
services to companies across a broad spectrum of industries, we believe their
user populations do not yet have consistent Internet access to warrant the
significant investment required to develop and deploy a web-based front-end
that extends across the entire workforce of their customer companies. In
addition, the lack of integration and data warehousing restricts these back-end
providers' ability to increase operational efficiency and develop personalized
technology for targeted service deliveries in specific markets.
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Limitations of Application Service Providers.
While application service providers have evolved as a means for companies to
outsource the procurement, hosting, implementation and maintenance of
enterprise resource planning systems, we believe that application service
providers do not currently have the functional expertise to manage the
operation of technology related to the integration of the payroll, benefits and
human resource functions or to perform transaction processing.
Opportunity for Integrated Business-to-Business E-Commerce Services
With the widespread implementation of intranets and the adoption of the
Internet as a business communications platform in fast-growth technology
companies, such organizations can now automate enterprise-wide and
interorganizational human resource transactions. The availability of this
technology creates a significant market opportunity for Internet-based
business-to-business e-commerce services for payroll, benefits and human
resources.
Payroll, benefits and human resource transactions lend themselves to
Internet processing because these transactions are information-based and do not
require delivery of durable goods at the point of payment. However, payroll,
benefits and human resource functions involve confidential information, complex
and interrelated data elements, and ongoing data management between multiple
organizations, unlike other e-commerce opportunities such as making travel
reservations or purchasing merchandise.
Currently, there are mature providers of outsourcing services for selected
back-office processes involving payroll and benefits. There are an emerging
number of web-based front-end service providers that must interface with back-
end providers. We believe that a complete e-commerce service offering for
payroll, benefits and human resources can only exist if there is seamless
electronic integration of the front- and back-end processes on a single
information systems platform that integrates all of the relevant data, is
scalable for large volume transaction processing and is fully accessible via
the Internet by managers and employees.
TriNet Solution
We believe we offer one of the first fully integrated Internet-based
business process outsourced services for payroll, benefits and human resources.
Our services integrate a web-based front-end for self-directed transactions, or
transactions directly initiated by the employee through the Internet, with
back-end processes that include electronic interfaces to our service providers.
Our solution provides the following key benefits:
Provide advanced integrated services that allow customers to focus on their
core business. We have provided business process outsource of payroll benefits
and human resource support and technology since our inception in 1988 and have
grown our customer base to 58 companies in 1995 and over 375 companies in 1999.
Since 1995, when we first introduced the delivery of portions of our services
over the Internet, we have continuously enhanced our services to allow for
increased Internet-delivery capabilities. We have built systems and services to
offer in 1999 an end-to-end product offering that enables customers to
integrate payroll, benefits and human resources to a single technology
platform, as well as outsource related back-end transaction processing
functions. We are committed to providing our customers with the most advanced
applications and systems available. To allow our customers to avail themselves
of Internet technology for human resources, we provide a
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user-friendly, intranet or extranet-based system that links employees, managers
and administrators with an integrated network. By accessing our human resource
information systems infrastructure and using our enterprise level business
processes, customers can outsource major portions of their human resource needs
and focus on their own core business functions.
Provide human resource services tailored to fast-growth technology
companies' employees. We provide fast-growth technology companies with rapid
deployment of our products and services, with an average of two weeks from
engagement to implementation. Once implemented, our system streamlines the
payroll, benefits and human resource processes. In addition, employees of these
companies typically have desktop Internet access and can take full advantage of
our web-based front-end services to fulfill self-directed transactions.
Provide an easily scalable and integrated services. The business environment
created by outside equity financing of technology companies prompts a rapid and
continuous growth in employee headcount, creating a specialized need for
rapidly scalable and integrated human resource services. As of January 31,
2000, 93% of our customers had received venture capital or other outside equity
financing.
Outside equity financing is most typically provided to emerging companies
that do not have processes or established infrastructure to perform the
functions of payroll, benefits and human resources. As employee headcount
grows, a company's need for a sophisticated infrastructure increases. Our
customers have historically increased their head count on average by more than
36% each year. As these companies grow larger, they often expand employment to
more than one state and increase the variety of benefit plans offered. In
addition, the companies funded by outside sources are usually developing new
technology and therefore require employees who possess specialized skills that
are in short supply. To attract and retain these employees, these companies
usually offer a wide range of benefit plans. The demands created by the
payroll, benefits and human resource needs of these companies require
sophisticated resources to manage internal administration and compliance of
non-core functions. Our services are capable of handling many aspects of a
company's growing payroll, benefits and human resource needs from a company's
inception through its growth into the middle market.
Provide customers with economies of scale and efficiencies. Because we serve
as an exchange between our customers and more than 100 benefit plan and
financial service providers, we provide customers with economies of scale and
efficiencies in the procurement, set-up and on going maintenance of vendor
relationships involving the full range of payroll, benefits and human resource
functions. Our system takes advantage of an organization's existing investments
in information technologies by working with and connecting to multiple systems,
including the company's financial and internal reporting processes. Our
aggregation of customers serviced by our system permits us to offer to emerging
growth and middle-market companies services that are otherwise resource and
cost prohibitive to all but the largest companies. Our system provides
customers with an enterprise resource planning platform hosted on our servers.
This arrangement includes the benefits customers seek from application service
providers, with the additional benefit that the underlying transactions are
also performed by the same providers. The outsourcing of these integrated
business processors on a single platform is provided over the Internet for
accessibility and scale and shared by multiple customers for an efficient use
of resources.
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TriNet Strategy
Our objective is to be the leading provider of Internet-delivered business
process outsourcing of payroll, benefits and human resource support and related
technology to fast-growth technology companies worldwide. Key elements of our
strategy to achieve this objective are:
Continue to develop and improve our end-to-end e-commerce services for a
complete range of payroll, benefits and human resource transactions. Our
existing Internet-delivered front-end is being enhanced with applications
currently being implemented and others now in development. For example,
customers can currently view payroll, change tax exemptions, make and change
direct deposit decisions, make benefits funding decisions and select benefit
plans via the web. Advances, such as the processing of new hires via the web,
which is currently being beta-tested, will allow us to provide additional
value-added services to our customers, as well as increase internal operating
efficiencies and improve the scalability of our services to address the needs
of middle-market companies. We plan on mining and offering portions of our data
online for certain fees, as part of our web portal, to help organizations
obtain knowledge about fast-growth technology companies. Our web portal is
operational, but the data mining offering is currently in the proof-of-concept
phase. We plan on offering our data mining services in full compliance with
applicable privacy and confidentiality regulations. We plan to create multiple
layers of customer dependency by increasing the penetration of our
complementary products such as comprehensive recruitment solutions and
consulting services. In addition, we will continually enhance our services
through initiatives integral to our quality management program, which have been
certified by QMI, a not-for-profit international auditing company, as meeting
the ISO 9001 standard of the system of rating quality management and quality
assurance developed by the International Organization for Standardization.
Leverage our existing customer base for internal growth and referrals. A
common characteristic of technology firms whose growth is fueled by venture
capital and public financing is their rapid growth. Because a majority of our
services are provided on a fee per employee basis, our customers' growth
results in increased revenue opportunities for us. Because many of these fast-
growth technology companies have obtained their equity financing from many of
the same entities, through our relationships with our customers, we have been
able to build a network of referral sources. In addition, many of our customers
are venture capital firms and service providers who support these "fast
companies." We intend to aggressively pursue referral opportunities generated
by these customers as well as future strategic relationships with customers. As
we develop complementary products, we will take advantage of our cross-selling
opportunities to increase revenue growth from existing customer relationships.
Enhance TriNet brand recognition in the middle market. While we will
continue to preserve a leadership position in the market of fast-growth
technology companies with up to several hundred employees, our strategy
includes attaining a similar level of recognition and revenue generation among
middle-market fast-growth technology companies with 200 to 5,000 employees.
From 1995 through 1999, our year-end customer retention rate has averaged
approximately 85% per year. However, as many of our earlier stage customers
grow, they no longer need us to serve as the employer of record for many
functions in order to enjoy economies of efficiency and scale. To address our
maturing customer base, we have begun implementing a new product offering
targeted to the middle market. As of January 31, 2000, we had entered into
agreements with six middle-market customers. Our services offer middle-market
companies a scalable and integrated platform that they can use for payroll,
benefits and human resource functions.
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Pursue key strategic relationships and develop new product offerings to
further enhance our revenue streams, customer base and solutions. We intend to
pursue key strategic relationships, including partnerships, joint ventures and
acquisitions. These potential future strategic relationships could include
companies that provide additional business development opportunities and
service offerings of interest to our customers, including 401(k) plan
administration, asset management, stock option administration, electronic
banking and human resource consulting. We also intend to use our market
knowledge and experience to develop new products that will leverage the market
channels created by the deployment of our technology. Based on the nexus
between our business customers and individual employees to whom we provide
service, we plan to create a network effect that will build on the strengths of
both the business-to-business and business-to-consumer delivery models. For
example, by mining data, we will be able to help providers of web portals
deliver their marketing messages on a more targeted basis.
Expand geographically to new markets. We intend to pursue additional market
development activities in both new and developed markets, and evaluate other
geographic areas where there are demonstrated concentrations of firms fitting
our fast-growth technology company target profile in both emerging and middle
markets. We currently have sales offices in San Leandro, California, Irvine,
California, Louisville, Colorado, Cambridge, Massachusetts, McLean, Virginia,
and Seattle, Washington, six of the top 10 venture-funded geographical areas
cited by the PricewaterhouseCoopers' Quarterly Moneytree survey for the fourth
quarter of 1999. We opened three of these sales offices in the last six months
and we intend to open additional offices in key technology centers. As existing
customers request the services of foreign employees in other countries, we
anticipate targeting our resources and systems capabilities towards our goal of
becoming the first global provider of business process outsourcing for payroll,
benefits and human resources.
Products and Services
We provide Internet-delivered business process outsourcing services for
payroll, benefits and human resource support using an integrated information
systems platform that is supported by our back-office transaction processing
capabilities. For over a decade, our market focus has been devoted exclusively
to fast-growth technology companies that are characterized by rapid headcount
growth, outside equity financing and highly skilled, technically savvy work
forces. Our systems infrastructure and transaction processing are supplemented
by additional fee-based human resource management services in areas including
employer related risk management, recruitment, international employer services
and management consulting. The combination of our service modules permits
customers to engage us for services that would otherwise typically involve
additional staff and/or vendors to handle payroll, benefits, human resource
support, tax remittance, benefits reconciliation and management reporting.
Companies that seek to outsource these non-core business processes typically
need to engage multiple vendors, and still need to manage these vendor
relationships.
42
<PAGE>
Our decade-long focus on fast companies has facilitated the development of a
range of human resource products and services based on a single technology
platform. We have tailored each offering to meet the specialized needs of
companies fitting our customer profile.
[SINGLE TECHNOLOGY PLATFORM GRAPHIC APPEARS HERE]
SINGLE TECHNOLOGY PLATFORM WITH CUSTOMIZED SERVICE SUITE
TriNet's eBusiness Platform
. Payroll
. Benefits
. Call Center
. HR Information System
. HR Passport--Sell-directed
Web-based Transactions
<TABLE>
<S> <C>
Venture Employer Services Enterprise Employer Services
. Emerging companies . Middle market companies
. TriNet is employer of record . Customer is employer of record
TriNet payroll ID# Customer payroll ID#
TriNet benefit plans* Customer benefit plans
TriNet workers comp policy Customer workers comp policy
TriNet shares employer risk Customer keeps all employer risk
. TriNet provides scalable levels of . Customer builds own HR team
HR management
</TABLE>
* except for 401(k) and incentive stock option plans sponsored by customer
Venture Employer Services, our largest and most mature business unit, is
targeted to emerging fast-growth technology companies of up to several hundred
employees and leverages our eBusiness platform to integrate functions of
payroll, benefits and human resource support to a single information system. We
aggregate the employees of smaller fast-growth technology companies into a
single employer group with TriNet serving as employer of record for payroll
taxes, selected benefit plans and related employer compliance requirements.
This aggregation permits us to offer the customer economies of scale in
purchasing benefits, as well as economies of efficiency in the administration
of various employer requirements ranging from payroll tax deposits to workers
compensation and government reporting. Customers separately manage or outsource
the management of their 401(K) and stock option plans. Venture Employer
Services includes scalable levels of on-site human resource management support
so that complete human resources support is made available and priced
consistent with the customer's growth and, as our flagship business service,
represents the largest of our business units. Our Venture Employer Services
customer base increased from 58 companies as of January 31, 1995 to over 370
companies as of January 31, 2000, which represented approximately 84% of our
total serviced employees.
Enterprise Employer Services, targeted to middle-market fast-growth
technology companies with 200 to 5,000 employees, uses our technology platform
to integrate selected functions of payroll, benefits and human resource support
to a single information system that is accessible to managers and employees and
that has back-office processing capabilities. In January 1999, we initially
43
<PAGE>
launched Enterprise Employer Services to offer an upward migration path for
Venture Employer Service customers, particularly those growing to several
hundred or more employees. However, our continued development and deployment of
web technology has made the model attractive for any fast-growth technology
company that no longer needs to aggregate employees with us in order to enjoy
economies of efficiency and scale, but still values a Internet-delivered,
scalable and integrated offering. Our Enterprise Employer Services customer
base increased to six customers as of January 31, 2000, which represented
approximately 16% of our total serviced employees.
Venture Talent, launched in 1996, targeted to fast-growth technology
companies of up to several hundred employees, provides comprehensive and
integrated staffing and recruitment services such as automated, Internet-
delivered resume posting, screening and submission tools, on-site recruitment
staff, off-site research and candidate development and an Internet-delivered
applicant tracking system. By combining multiple candidate sources, including
resumes submitted directly to Venture Talent, web posting responses, resumes
from public online databases, such as Alta Vista and Yahoo!, and databases that
we pay for, employee referrals and candidates submitted by various recruitment
agency, with whom we share fees, this service enables customers to meet their
critical hiring needs faster than if they used any one of these sources
individually. The length and scope of engagements for Venture Talent vary based
upon customer need. Our Venture Talent customer base increased from 10
customers as of January 31, 1997 to 45 customers as of January 31, 2000.
Venture Management Resources, our consulting service which we initially
launched in 1998, is targeted to emerging and middle-market fast-growth
technology companies. Venture Management Resources is empowered with easy
access to our extensive database of information involving human resource
practices of fast-growth technology companies, including data derived from our
payroll, benefits and human resource transactions processed through our Venture
and Enterprise Employer Services. Using the knowledge and experience obtained
from a combination of data analysis and a decade long history of working with
management issues specific to fast-growth technology companies, Venture
Management Resources provides fee-for-service consulting and administrative
services involving pay and performance, training, policy development, employee
relations and pre-employment screenings. In addition, we provide consulting and
administrative services related to managing changes in an employee's employment
relationship, having employees in foreign countries and effectively
communicating with employees on matters from benefit plan changes to potential
acquisitions. The length and scope of engagements for Venture Management
Resources vary based upon customer need. Our Venture Management Resources
customer base consisted of consulting engagements by 29 customers in the 12
months ended January 31, 2000.
44
<PAGE>
The table below provides a list of representative functions offered by
Venture Employer Services or Enterprise Employer Services unless otherwise
noted.
Representative Functions Performed by TriNet's eBusiness Platform
<TABLE>
<CAPTION>
Payroll Benefits Human Resources
- ------------------------------------------------------------------------------
<S> <C> <C>
Calculation and End-to-end, online Government mandated
remittance of payroll enrollment for benefit reporting for all
taxes (F,B) plans (F,B) employers (B)
- ------------------------------------------------------------------------------
Calculation and Online access to benefit Online access to
withholding of all plan information (F) individual employee
benefit plan records (F)
deductions (F,B)
- ------------------------------------------------------------------------------
Direct deposit of Total administration of Online new hire processing
paychecks (F,B) flexible spending (F,B)
accounts (F,B)
- ------------------------------------------------------------------------------
Customized management Administration of Online access for human
reporting to reflect Consolidated Omnibus resource related guidance
customer's cost Budget Reconciliation Act for managers (2) (F)
center and (COBRA) and Health
organization Insurance Portability and
structure (F) Accounting Act (HIPAA) (B)
- ------------------------------------------------------------------------------
Remittance of Reconciliation of benefit Online access to employee
payments to all plan payments with all handbook and company
benefit plan and enrollment, change and policy (F)
financial service termination transactions
vendors (B) (B)
- ------------------------------------------------------------------------------
Employment Annual open enrollment Posting service for job
verifications communications and openings at client
involving employee administration (F) companies (1) (F)
income (B)
- ------------------------------------------------------------------------------
Wage garnishments and Liaison with benefit plan Online access to
related reporting (B) providers for employee information on products
service issues (F,B) and services where we have
negotiated volume
discounts (F)
</TABLE>
F=Front-endB=Back-end
(1) A function offered by Venture Talent.
(2) A function offered by Venture Management Resources.
Customers
We tailor our services to meet the specific needs of fast-growth technology
companies. As a leader in providing business process outsourcing to the fast-
growth technology company market niche, we have developed specialized
knowledge of the products and services important to these organizations.
We qualify customer prospects based on the following fast-growth technology
company profile:
. Fast headcount growth. The headcount growth rate is an important part of
our economic model as pricing of our core services for Venture and
Enterprise Employer Services is based on the number of employees we
service for the customer. Every time a customer adds a new
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<PAGE>
person to its total employee headcount in the ordinary course of business,
we compound our revenue stream because certain fees are based on the
number of employees serviced and there are no additional selling costs
related to such additions. Our historical average over the last five years
has shown a rate of "internal growth," net of new sales activity, to be in
excess of 3% per month.
. Outside equity financing. We seek customers that have received
substantial outside equity financing from professional investors.
Servicing outside equity-financed companies provides us with customers
who have low credit risk and the ability to meet aggressive hiring
targets, and allows us to leverage a growing network of referral sources
and business relationships with various venture capitalists and corporate
financiers. Currently, approximately 93% of our customers are financed by
outside equity investors such as venture capital, institutional financing
or the public market.
. Highly compensated, professional/technical workforce. Our customers'
employees averaged $89,000 per year in salary as of the quarter ended
December 31, 1999. A highly compensated workforce helps ensure our
customers have a consistent employee profile and can take advantage of
both our Internet-delivered services platform and full service suite,
including Venture Talent and Venture Management Resources. For Venture
Employer Services, we believe that consistency in the highly compensated
professional/technical workforce reduces our risk in managing aspects of
serving as employer of record, because such workforce typically results
in a lower number of claims relating to workers' compensation,
unemployment and disability.
Through Venture Employer Services, we have historically targeted emerging
fast-growth technology companies with up to several hundred employees. In
response to the maturing of these emerging fast-growth technology companies
into middle-market companies with 200 to 5,000 employees, we introduced
Enterprise Employer Services specifically to target these middle-market
companies.
As of January 31, 2000, our over 375 customers had employees in 47 U.S.
states, as well as Canada and the United Kingdom. We are also providing
expatriate payroll, benefit and human resources services to customers with
employees in Brazil, Germany, the Netherlands, Taiwan and the United Kingdom.
As of January 31, 2000, while approximately 57% of our customers were based in
Northern California/Silicon Valley area, our fastest growing regional offices
have been in the southeastern and southwestern United States. In the year
ended December 31, 1999, no customer contributed more than 5% to our service
revenues and our top five customers combined for a total of approximately 14%
of our service revenues.
Representative Customer Profiles
As we offer a wide range of services and serve companies from startups to
public companies, there are a variety of circumstances under which companies
become our customers. Companies profiled below were selected as representative
customers to illustrate different types of circumstances prompting companies
to request our services.
Entrust Technologies Inc.
Entrust Technologies Inc. provides products and services that allow
eBusinesses to manage trusted, secure electronic transactions and
communications over today's advanced networks, including the Internet,
extranets and intranets.
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Opportunity: Entrust was founded in 1997 as a corporate spin-off from Nortel
Networks. The founding team included a number of management and technical staff
who left their positions at Nortel to launch Entrust. As a new company with
defined expectations from an existing base of employees, Entrust sought to
establish a full corporate benefits and human resource system to transition
from Nortel.
Services: In July 1997, Entrust selected Venture Employer Services as a
platform to launch its payroll, benefits and human resource functions when the
company was formed. Entrust also received services under Venture Management
Resources to assist in their development of employee compensation programs. We
currently service the entire Entrust U.S.-based workforce of 90 employees as of
January 31, 2000 in eight states. We have also incorporated Entrust's patented
encryption technology into our technology platform to ensure confidentiality of
our customer and employee information for Internet-based transactions and
management reporting.
Interliant, Inc.
Interliant, Inc. is an application service provider, who provides website
and application hosting as well as consulting and related professional
services.
Opportunity: Interliant needed a cost-effective provider of human resource
outsourcing services that could support its acquisition growth strategy.
Acquisitions enable a company to grow rapidly but challenge a company's ability
to deliver consistent employee support to disparate and geographically diverse
entities. Interliant sought a unified human resource infrastructure that could
quickly support large employee increases.
Solution: We began working with Interliant on January 1, 2000 and rapidly
implemented our Enterprise Employer Services in each of 12 Interliant locations
in the United States with approximately 840 employees nationwide as of January
31, 2000. Interliant continues to grow via acquisitions, and enjoys integrated
multistate compliant service for all acquired units. We currently service
Interliant's locations in California, Florida, Maryland, Massachusetts, New
Jersey, New York, Texas and Virginia.
MobileForce Technologies, Inc.
MobileForce provides broadband operational support system solutions for the
cable, telecommunications and Internet provider industries. Its "Nvision"
software provides field service automation with wireless communications enabled
by an intuitive browser-based user interfaces.
Opportunity: MobileForce needed to tap the technology labor pool available
in the United States and Canada to further its technology and bringing its
product to market. To solve the compliance and employee equity challenges of
having employees dispersed in the United States and Canada, MobileForce sought
a single-source provider that could establish and maintain specialized payroll,
benefits and human resources processes required to service its employees in
multiple U.S. states and Canada.
Solution: We began our relationship with MobileForce in March 1998. We
provide MobileForce with scaleable human resources under our Venture Employer
Services as the company's employees have expanded to multiple locations in the
United States and Canada. As of January 31, 2000, MobileForce had 72 employees
in California, Colorado, Massachusetts, New Jersey, Texas and Canada.
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<PAGE>
Symbian, Inc.
Symbian owns, licenses, develops and supports software, user interfaces,
application frameworks and development tools for wireless information devices
such as communicators and smartphones. Headquartered in London, England,
Symbian has offices in Tokyo and Kanazawa, Japan; Ronneby, Sweden; Cambridge,
England and the San Francisco Bay Area. Symbian is owned by Ericsson, Inc.,
Matsushita Electric Industrial Co., Ltd., Motorola, Inc., Nokia Corp. and Psion
PLC.
Opportunity: Because Symbian was the product of a joint venture between
well-established corporations, we serve a workforce that, although belonging to
a "startup" company, had expectations of corporate-level payroll, benefits and
human resource support. Furthermore, Symbian was headquartered outside the
United States and consequently had little experience with employment issues and
potential liabilities in the United States. Because of this, the company sought
assistance in modifying its corporate structure and human capital management
for both competitive and compliance reasons.
Solution: Seeking to compete in a high-growth space, in December 1998
Symbian selected us as a single source provider by engaging our full suite of
services to aid its United States market penetration. As of January 31, 2000,
Symbian had nine employees in the United States. Venture Employer Services
addresses Symbian's human resource needs in the areas of payroll processing,
benefits administration, human resource information system support, risk
control and human resource management. Our Venture Management Resources group
helped Symbian develop United States compliant and labor market sensitive job
descriptions, compensation plans and corporate human resource policies and
practices. Symbian selected full-service staffing solutions from our Venture
Talent division and with its assistance has hired candidates for key positions
throughout the organization.
Webvan Group, Inc.
Webvan Group, Inc. is a full service online grocery and drug store with free
delivery for orders over $50. Orders can be placed 24 hours a day, seven days a
week, with delivery the same day or up to seven days later within a 30-minute
window specified by the user.
Opportunity: Founded in 1996, the company launched with a handful of
employees and a contract with us to handle all of its human resource needs.
Though small, Webvan needed a solution that would deliver employee support
services during its entire lifecycle. Webvan also needed a selection of
national, AAA-rated benefits plans to attract and retain employees, thereby
expediting its aggressive growth strategy.
Solution: In January 1997, Webvan selected Venture Employer Services to
support its long-term growth and national expansion. Headquartered in the Bay
Area in Foster City, California, Webvan reached a total of 343 corporate
employees during 1999 and became a publicly-traded company late in 1999. After
raising more than $375 million in its initial public offering, Webvan signed a
service agreement extending Venture Employer Services for an additional 12
months.
Marketing and Provider Relationships
We have entered into a number of strategic marketing and provider
relationships.
48
<PAGE>
Bessemer Venture Partners
Bessemer Venture Partners is a venture capital firm which through its funds,
Bessemer Ventures V L.P., Bessec Ventures V L.P. and BVE LLP, has made a $4.0
million equity investment in us. Bessemer is among the oldest venture capital
firms, and it invests about $200 million annually in a portfolio that includes
companies who are our customers. We are providing our Venture Employer Services
to a new company recently formed by Bessemer to capitalize and accelerate
business-to-business e-commerce ventures. We anticipate referrals to new
ventures capitalized by this new company.
Select Appointments (Holdings) PLC
Select Appointments (Holdings) PLC is a wholly owned subsidiary of Vedior
NV. Vedior NV is one of the world's largest publicly traded international
staffing and outsourced human resource firm. Because Select has made an equity
investment of $3.0 million in us, we are able to access companies that it owns
and companies in which Select has invested that are located in 28 countries.
Through our relationship with other companies in which Select has invested, we
have obtained local country management support and transaction processing as a
service to our customers who hire foreign employees in other countries.
SoftBank Venture Capital Incubator
SoftBank is one of the largest venture capital groups with more than $2
billion under management. We have been selected as the only business process
outsourcer for human resources to enjoy a provider relationship with SoftBank's
incubator unit and have the opportunity to be referred to each company that
flows through the incubator's portfolio.
Silicon Valley Bank
Silicon Valley Bank is a leading provider of financial services to emerging
growth outside equity financed technology companies. With a similar target
market profile, Silicon Valley Bank has an office in each geographic area of
the United States where we maintain a branch office. We enjoy a formal referral
relationship with Silicon Valley Bank where both parties share in business
development opportunities.
United HealthCare
Our largest health care insurance carrier vendor is United HealthCare, which
treats us as a national account. We have entered into Master Group Policies
with United HealthCare divisions in multiple states in order to provide health
insurance coverage to our customers' employees. The policies are for an initial
term of one year, with an automatic renewal for an additional 12 months unless
otherwise terminated. We may terminate with 45 days written notice and United
HealthCare may terminate with written notice six months prior to the renewal
date. Because of our relationship with United HealthCare, we are able to
structure an array of benefits offerings which reflects the preferences of our
fast-growth technology company target market. We supplement this offering with
our own fully staffed Benefits Department and Call Center, allowing us to
provide a sophisticated benefits service suite.
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<PAGE>
Sales and Marketing
We currently market and sell our service suite through a direct sales force
of 14 regional managers and three sales executives, supported by a sales
administration staff of three persons. In the fourth quarter 1999 and the first
quarter 2000, we expanded our sales force from seven to 14 sales professionals
for Venture Employer Services, with three sales executives focused on major
account sales for Enterprise Employer Services. Our sales offices are located
in six of the top 10 markets for investment of venture capital in the United
States according to PricewaterhouseCoopers' Quarterly Moneytree Survey for the
fourth quarter of 1999.
Our sales process has demonstrated increased efficiency at leveraging the
rapid pace of decision making in our target market of fast-growth technology
companies. In 1999, with almost the same number of sales professionals as the
prior year, we nearly doubled the number of new customers acquired. Our sales
professionals tap into a referral relationship and lead exchange program
comprised of venture capitalists and other advisors to our target market
decision makers.
We deploy sales personnel in technology centers and areas with high levels
of formal venture capital or private equity investment in accordance with our
target market of fast-growth technology companies. We employ a "pull" expansion
strategy in which we initially sell in a new area on a remote basis and, upon
reaching a target operating volume of customers, make an investment in opening
a new branch office to further leverage referral contacts from local customers,
venture capitalists and other business advisors. We recruit sales personnel
from outsourced human resource services, payroll services, insurance brokerage
and legal practices and focus on people who are trained in a customer-centered
consultative sales approach.
Most leads are generated for Venture Employer Services customers through the
tight knit referral community that incubates venture capital backed companies.
As of January 31, 2000, our customers had received financing from more than 200
venture capital firms, providing a network of relationships that we continue to
develop. With approximately 40 venture capital firms and their employees on our
payroll as of January 31, 2000, we are a larger employer of venture capital
professionals than any firm currently listed with the National Venture Capital
Association. We have steadily built these relationships, along with those of
other advisors in the venture-backed community, over time to produce an ongoing
flow of new business development opportunities in our target market of fast-
growth technology companies.
Our relationship-selling model and narrowly defined target market of fast-
growth technology companies enable a lean, but highly focused marketing effort.
In 1999 we had three marketing professionals. We recently added a marketing
vice president and are currently recruiting additional marketing staff.
Our limited marketing resources and a decade of experience in marketing to
fast-growth technology companies have allowed us to gain experience in
carefully pinpointing the customer decision makers we seek and how to attract
them. As a result, we intend to build our brand and attract new middle-market
customers through carefully targeted print and online advertising, direct
e-marketing, event sponsorship, public relations campaigns and an active public
web site with content of interest to fast-growth technology companies. We plan
to continue to pursue our target market through local and regional advertising
and technology and venture capital-related associations and events.
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<PAGE>
As we continue to extend our market focus from emerging to middle-market
companies, we plan to target our larger Venture Employer Services customers as
candidates for Enterprise Employer Services. With the deployment of significant
enhancements to our Internet-delivered services, our sales and marketing
efforts have expanded to include those middle-market firms that are not
necessarily customers of Venture Employer Services. Our inexperience in
marketing to this new segment, and the difference in the sales cycle from our
historical niche of emerging fast growth technology companies make it difficult
for us to predict the adoption rate by middle-market companies of Enterprise
Employer Services.
Systems and Technology
Systems. Our technology platform is a combination of licensed applications
from leading enterprise software companies and proprietary applications that
both integrate licensed applications and perform functions that are specific to
our business model and customer preferences. The following chart provides a
listing of licensed and proprietary systems and their state of implementation
as of January 31, 2000:
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<PAGE>
Product Chart And Technology Development
<TABLE>
<CAPTION>
Front/
Capability Purpose Status Platform Back-End
- ------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Enterprise Human resource In service-- Proprietary Back-end
Human information system corporate and licensed
Resource platform supporting payroll since software
Information international and 1998, all (PeopleSoft
System domestic payroll, Enterprise HRIS)
benefits and human customers since
resource functions 1999, Venture
customers
throughout 2000
- ------------------------------------------------------------------------------------
Enroll Now! Internet-delivered In service Proprietary Front-end
benefits information and
enrollment application
- ------------------------------------------------------------------------------------
TriNet VSales Online capture of In service Proprietary Front-end
(Venture proposal requests,
Sales) automated production of
proposal and contract
material
- ------------------------------------------------------------------------------------
TriNet CSLi Track all In service Proprietary Back-end
(Customer customer/employee
Service Log-- transactions for follow-
intranet) up, quality and
consistency of service
response and customer
service analysis
- ------------------------------------------------------------------------------------
Carrier Data On line transmission of In service-- Proprietary Back-end
Exchange enrollment data to expanding to
health plan providers new vendors
and insurance carriers throughout 2000
- ------------------------------------------------------------------------------------
Venture Data warehouse of fast- Portions in Proprietary Back-end
Company Data growth technology service for
company customer Venture
business information to Management
support Venture Resources
Management Resources consulting
consulting and strategic support,
portal relationships upgrading of
data mining
functionality
by Q3 2000 for
external
purposes
- ------------------------------------------------------------------------------------
Setup and Automated capture of Portions in Proprietary Front-end
Migration customer setup service, and licensed and
Wizards information and expanding software Back-end
conversion of data from functionality (NEON Convoy)
other human resource throughout 2000
platforms to reduce
transcription errors and
speed the new account
setup process
- ------------------------------------------------------------------------------------
Human Primary customer Selective Proprietary Front-end
Resource interaction portal-- customer and licensed
Passport includes a full suite of rollout Q1 2000 technology
self-directed human (Concur
resource transactions Technologies)
for managers and
employees and secure
access to view payroll,
human resource and
organizational
information online
- ------------------------------------------------------------------------------------
Report Mart Deliver all reports over Selective Proprietary Front-end
the web in a variety of customer and licensed
formats suitable for rollout Q1 2000 technology
interfacing to customer (Brio
systems, and with online Technology)
analytical processing,
or OLAP, capability
- ------------------------------------------------------------------------------------
Strong An electronic method of Selective Licensed Front-end
Security authentication available customer technology and
for all employees rollout Q2 2000 (Entrust Back-end
enabling paperless Technology)
employee transactions
- ------------------------------------------------------------------------------------
Intranet Link our services to Selective Proprietary Front-end
Portals customer intranet, customer and licensed
provide intranet service rollout in Q2 technology
to customer base 2000,
- ------------------------------------------------------------------------------------
Benefits Expert system for Call center use Proprietary Front-end
Knowledgebase answering inquiries in Q2 2000, web and licensed and
about benefit plan rules rollout in Q3 software Back-end
and coverage 2000 (Authoria)
</TABLE>
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<PAGE>
Technology Platform
We have effectively integrated the customer facing front-end of our Internet-
delivered services with back-end systems that seamlessly link our service
providers, suppliers and customers into our online operations. Through our
technology platform, we offer:
Integrated, Internet-based payroll, benefits and human resource
platform. Our human resource information system platform combines enterprise
class software applications and proprietary technology to deliver Internet-
delivered, integrated, end-to-end services that would be difficult for an
emerging or middle-market company to obtain on its own. Our back-end systems
link to our health insurance providers, our customers' 401(k) providers, and
tax and regulatory agencies to provide data interchange on customer initiated
transactions.
Scalable architecture. We developed our technology platform by selecting
highly scalable components such as Human Resource enterprise resource planning
solutions from PeopleSoft, systems from Sun Microsystems, Hewlett-Packard, and
Compaq Computer Corporation, database tools from Oracle, and web tools from
enterprise class providers such as Concur Technologies, Brio and Authoria. We
have negotiated software licensing agreements tailored to our business model,
deviating from traditional, enterprise-class models that are not based on
outsourcing.
System backup and disaster recovery. The major components of our network are
located in our corporate headquarters in San Leandro, California, our secondary
processing facility in Reno, Nevada, and at AboveNet Communication's Data
Center in San Jose, California. AboveNet provides Internet co-location
services, which provides the benefit of a redundant telecommunications
infrastructure and a data center for our web-based systems used by our
customers. Our other primary processing facilities have data replication,
backup power, fire retardation and offsite data storage providing redundant
business continuity.
Strong authentication and security. Confidentiality of information is of the
utmost importance in our technology architecture. Our web site has offered
transaction processing under Secure Socket Layer security since 1997, and moved
to Entrust SSL certification in 1999 to ward off browser authentication
problems caused by other expiring trust authorities. In 2000, we intend to
introduce an electronic method of authentication across our customer base to
provide the basis for paperless employer/employee transactions. Physical
security in the data centers is enhanced by restricted card access to the data
centers. Web security is managed through firewalls, encryption and access
controls.
Technology Agreements
In developing our products and services, we have contracted with some of the
leading technology providers to license to us and support the essential
applications that underlie our Internet-based platform.
Authoria. We have a licensing agreement with Authoria to license its
Authoria Benefits knowledgebase. This agreement allows for servicing a growing
employee base with a proportionally decreasing cost per employee in perpetuity.
Brio Technology. We have a perpetual agreement with Brio Technology under
which we license its enterprise information portal product, Brio Portal. This
agreement allows us to support our total customer base with a set number of
central processing units.
Concur Technologies. We have an agreement with Concur under which we license
its Concur eWorkplace human resource product suite. This five-year agreement
does not limit the number of employees accessing the system.
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<PAGE>
Entrust Technologies. We have an agreement with Entrust under which we
license its Entrust PKI products for our electronic method of authentication.
This agreement allows for servicing a growing employee base with a
proportionally decreasing cost per employee in perpetuity.
New Era of Networks, Inc. We have a perpetual licensing agreement with New
Era of Networks under which we license its Convoy software for moving data from
foreign systems into our PeopleSoft human resource information system database.
PeopleSoft. Our enterprise human resource information system and financial
applications are licensed from PeopleSoft.
Competition
The market for our solution is intensely competitive, evolving quickly and
subject to rapid technological change. Competitors vary in size, scope and
breadth of products and services offered. Many of our existing and potential
competitors have announced or introduced products and/or services that compete,
at least in part, with our solution. Some of our current and future competitors
may be significantly larger and have greater name recognition and financial,
marketing and other resources than we do. Increased competition is expected and
may result in reduced prices and service revenue on a per customer basis.
We believe the principal competitive factors in our market at this time are:
scalable data-integration and transfer technology, breadth and depth of
offering, critical-mass of installed reference customers, data warehousing for
personalization of technology, strategic relationship management, domain
expertise depth across all functional areas, sales professionalism and quality
customer support. We believe that we currently compete favorably with respect
to these factors.
We encounter competition with respect to different components of our
solution from in-house human resource and information systems departments,
payroll, benefits and business process outsourcers, third party administrators,
benefits exchanges, and application service providers. Our competitors most
typically have primary competency in a single function, such as benefits
procurement, payroll, human resource information systems or web delivery. Among
multi-function human resource outsourcers and application service providers, we
believe that we compete favorably based upon breadth and depth of offering,
scalable data-integration and transfer technology and data warehousing
capabilities. As other outsourcers attempt entry to the fast company market
niche, we have occasionally lost customers to competitors based on price or
other incentives that we were not willing to match.
As the market evolves, we expect increased competition from new market
entrants. It is possible that current and future competitors have or may form
cooperative alliances among themselves or with third parties that would have a
material and adverse effect on our ability to compete, service revenue and
operating margins. If we fail to compete in any one of the competitive areas,
we may lose existing and potential customers. Additionally, we may not be able
to maintain a competitive position against competitors with significantly
greater financial, marketing, service, support, technical and other resources
or with larger installed customer bases.
Intellectual Property
Our success depends significantly on our ability to protect our trademarks,
trade secrets and certain proprietary technology. To accomplish this, we rely
on a combination of copyrights, trademarks and trade secret laws and
contractual restrictions to protect our proprietary rights in
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products and services. We also require that our employees and consultants sign
confidentiality and nondisclosure agreements. We generally regulate access to
and distribution of our documentation and other proprietary information.
Despite these efforts, it may be possible for a third party to copy or
otherwise obtain and use our proprietary information without authorization or
to develop similar technology independently. We cannot be certain that we will
succeed in preventing the misappropriation of our trade name and trademarks.
Any steps we take to protect our intellectual property may be inadequate, time
consuming and expensive. In addition, the laws of some foreign countries do not
protect proprietary rights to as great an extent as the laws of the United
States.
We depend on technology that we license from third parties, including
software that is integrated with internally developed software. If we are
unable to continue to license any of this software on reasonable terms, we will
face delays in releases of our technology until suitable replacements can be
identified or developed. Should they occur, these delays may have a serious
adverse impact on our business.
We do not believe that our products infringe the intellectual property
rights of third parties. However, third parties may in the future assert
infringement claims against us, which may result in costly litigation or
require us to obtain a license to third-party intellectual property rights. We
cannot assure you that such licenses would be available on reasonable terms, or
at all, which could harm our business.
Employees
As of January 31, 2000, we had 233 full-time employees, including 37 in
information technology, 91 in operations, 31 in account management, 29 in
sales, marketing and new account set-up, 25 in consulting and 20 in
administration and executive management. We have never had a work stoppage and
none of our employees are represented under collective bargaining agreements.
We consider our relations with our employees to be good.
Facilities
We maintain two primary facilities. Our corporate headquarters are located
in the Bay Area in San Leandro, California under a lease that expires in
September 2002. This location includes approximately 33,000 square feet of
leased space in which our executive offices, corporate staff, data-processing
center, training facilities and all other corporate functions are housed. Our
other primary facility is located in Reno, Nevada under a lease that expires in
September 2004. This 12,500 square foot leased facility, which became
operational in December 1999 serves as an additional processing facility and
the backup recovery site in case the primary process facility is unable to
process transactions. We also lease six other facilities in Irvine, California;
Louisville, Colorado; Cambridge, Massachusetts; McLean, Virginia; Seattle,
Washington and Ontario, Canada that serve as local service offices for sales
and human resource personnel. We believe our existing facilities are adequate
for the purposes for which they are intended and that our headquarters have
sufficient additional capacity to accommodate our foreseeable expansion plan.
Legal Proceedings
We are not a party to any material pending legal proceedings other than
ordinary routine litigation incidental to our business that we believe would
not have a material adverse effect on our business.
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MANAGEMENT
Executive Officers, Directors and Key Employees
The following table sets forth certain information regarding our directors,
executive officers and certain other key employees as of February 15, 2000.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Executive Officers and
Directors
Martin Babinec(1)....... 44 President, Chief Executive Officer and Chairman of the Board
Douglas P. Devlin....... 38 Chief Financial Officer, Secretary, Treasurer and Director
Gregory L. Hammond...... 44 Vice President and General Counsel
Steven H. Carlson....... 46 Chief Information Officer
Craig A. McGannon....... 35 Divisional President, Venture Employer Services
Deisy G. Bach........... 42 Divisional President, Enterprise Employer Services
John K. Younger......... 37 Divisional President, Venture Talent
James P. Hanson,
C.P.A.(2)(3)........... 54 Director
H. Lynn Hazlett,
D.B.A.(2)(3)........... 63 Director
Anthony V. Martin(1).... 60 Director
T. Joe Willey,
Ph.D.(3)............... 62 Director
Key Employees
Marie-Jeanne Juilland... 39 Vice President, Marketing
Lyle E. DeWitt, C.P.A... 40 Vice President, Finance and Operations
Anthony F. Zuanich...... 31 Vice President, Sales
</TABLE>
- --------
(1) Member of the nominating committee
(2) Member of the compensation committee
(3) Member of the audit committee
Martin Babinec has served as our president, chief executive officer and
chairman of the board since founding TriNet in November 1988. From 1980 to
1988, Mr. Babinec's was a human resource generalist for Navy Exchanges. During
this period a majority of his assignments involved international labor
relations while residing in Europe and Asia. Mr. Babinec is a 1996 recipient of
Silicon Valley Service Entrepreneur of the Year award and serves in various
industry and entrepreneurial leadership capacities, including serving on the
board of advisors for the Kauffman Foundation's Center for Entrepreneurial
Leadership. Mr. Babinec holds a B.S. in business administration from
Shippensburg University and has earned the accreditation of senior professional
in human resources through the Human Resources Certification Institute.
Douglas P. Devlin has served as our chief financial officer since April 1993
on a full-time basis and prior to that on a part-time basis since 1989. Mr.
Devlin has served as secretary and director since November 1997 and treasurer
since April 1993. In 1988, Mr. Devlin founded and then managed until 1992
Integrated Health Care Technology Group, Inc., an International Business
Machines business partner providing advanced accounting systems. Mr. Devlin
holds a B.S. in business administration from California State University, Chico
and an M.B.A. in finance from Golden Gate University.
Gregory L. Hammond has served as our vice president and general counsel
since November 1997. Mr. Hammond manages our employer risk for both employee
relations and insurance purposes. Mr. Hammond joined us from Hammond &
Kazaglis, L.P.A., which he founded in 1989. From 1989 to 1996, Mr. Hammond
worked as our retained counsel. From 1987 to 1991, Mr. Hammond was
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general counsel to the National Association of Professional Employer
Organizations. Mr. Hammond holds a B.A. summa cum laude in history and
political science from Mercer University and a J.D. from the University of
Chicago School of Law.
Steven H. Carlson has served as our chief information officer since August
1998. From January 1997 to August 1998, Mr. Carlson served as our director,
information systems and from January 1995 to January 1997, Mr. Carlson served
as our vice president, information technology. In 1989, Mr. Carlson founded,
and then managed until 1995 CBI, Inc., a regional systems integration company.
Prior to this, Mr. Carlson held several management positions with General
Electric Information Services Company. Mr. Carlson holds a B.S. in computer
science from the University of California at Santa Cruz.
Craig A. McGannon has served as our divisional president, Venture Employer
Services since September 1998. From March 1998 to September 1998, Mr. McGannon
served as our vice president, sales. Mr. McGannon joined us in October 1997 as
regional manager in the Raleigh/Durham office. From October 1996 to October
1997, Mr. McGannon was the chief executive officer of ESG, an information
technology staffing company and from February 1995 to October 1996, Mr.
McGannon was the risk manager of The Byrnes Group, a staffing and human
resource outsourcing company. Mr. McGannon has also served as managing partner
of North American Claims Management, L.L.P., a U.K.-based reinsurance/legal
consulting firm from January 1992 to September 1999. Mr. McGannon holds a B.A.
in American studies from Providence College, a J.D. from Pace University and an
M.B.A. summa cum laude in marketing from the University of San Moritz.
Deisy G. Bach has served as our divisional president, Enterprise Employer
Services since November 1998. From November 1997 to November 1998, Ms. Bach
served as our vice president, product development. From July 1995 to November
1997, Ms. Bach served as our vice president, operations. Ms. Bach joined us in
1991 as our operations manager. From November 1988 to November 1991, Ms. Bach
was with the law firm Hallgrimson, McNichols, McCann & Inderbitzen, where she
was an administrator and managed operations, marketing, finance and human
resources. She is a member of the Society of Human Resources Management. Ms.
Bach holds a B.A in political science from Montclairy State University and is
an ABA-certified paralegal.
John K. Younger has served as our divisional president, Venture Talent since
November 1996 when we acquired y/net, an outsourced staffing solution firm
founded by Mr. Younger. Prior to that, Mr. Younger was president of Younger
Consulting, a recruitment optimization and automation firm, which Mr. Younger
founded in 1994. From January 1987 to May 1994, Mr. Younger was with Bank of
America, most recently as vice president of human resources. Mr. Younger is a
co-founder and director of the Northern California Technical Recruiter Network.
Mr. Younger holds a B.S. in mathematics and computer science from the
University of Notre Dame.
Marie-Jeanne Juilland has served as our vice president, marketing since
February 2000. From November 1999 to January 2000, Ms. Juilland served as our
interim vice president, marketing. In 1993, Ms. Juilland founded and then,
through January 2000, managed, the Juilland Group, a strategic marketing
organization that specialized in serving fast-growth technology companies. From
1991 to 1993, Ms. Juilland served as communications manager for Robert Half
International, a staffing and outsourced human resource company. From 1986 to
1991, Ms. Juilland served as west coast bureau chief for Venture magazine. Ms.
Juilland holds a B.A. in political science from Stanford University.
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Lyle E. DeWitt has served as our vice president, finance and operations
since September 1999. From June 1994 to September 1999, Mr. DeWitt served as
our controller. From April 1990 to June 1994, Mr. DeWitt was in public
accounting at Armanino, McKenna, LLP, a public accounting firm. Mr. DeWitt
holds a B.S. in business administration from the University of California,
Berkeley and is a certified public accountant.
Anthony F. Zuanich has served as our vice president, sales since April 1999.
From October 1997 to April 1999, Mr. Zuanich served as our director of sales
for the east coast. Mr. Zuanich joined us in December 1995 as a district sales
manager. From June 1992 to November 1995, Mr. Zuanich was regional sales
manager for ADP, a payroll processing outsourcing company. Mr. Zuanich holds a
B.A. in marketing from New Mexico State University.
James P. Hanson has served as our director since November 1990. Since 1987,
Mr. Hanson has been president of James P. Hanson Accountancy Corporation, a
provider of financial services to small businesses and individuals. Mr. Hanson
holds a B.S. magna cum laude in accounting from California State University,
Fresno and is a certified public accountant and registered investment advisor.
H. Lynn Hazlett has served as our director since February 1998. From
February 1997 to December 1998, Dr. Hazlett served as chief executive officer
and president of QRS Corporation, a publicly traded, e-commerce solutions
provider. From 1995 until February 1997, Dr. Hazlett served as a consultant to
QRS. From January 1994 to February 1997, Dr. Hazlett owned and operated Supply
Chain Associates, a retail supply chain consultancy firm. From 1989 to January
1995, Dr. Hazlett served as vice president, business systems at VF Corporation,
a global apparel manufacturer. Dr. Hazlett holds a B.S. in industrial
management from the Georgia Institute of Technology, an M.B.A. in financial
management and a D.B.A. from George Washington University.
Anthony V. Martin has served as our director since July 1995 as a result of
his position from 1992 to the present time as Chairman with Select Appointments
(Holdings) Ltd., a wholly owned subsidiary of Vedior NV, a beneficial
stockholder of TriNet, and Select's right to nominate a director under our
amended and restated certificate of incorporation, which right will terminate
upon the conversion of TriNet's preferred stock into common stock upon
completion of this offering. Since December 1999, Mr. Martin has also been
vice-chairman and member of the board of Vedior NV, a Netherlands based
staffing and outsourced human resource company. From 1985 to 1992, Mr. Martin
held various executive positions with Adia S.A. (now Adecco S.A.), a Swiss-
based recruitment company, most recently as director of its European division.
Mr. Martin holds certificates of education from the combined boards of Oxford
and Cambridge Universities and a postgraduate degree from the University of
Southern California, Los Angeles.
T. Joe Willey has served as our director since June 1994. From 1991 to 1994,
Dr. Willey founded and then served as the chief executive officer of Staffing
Services, Inc., an employer support services group. In June 1986, Dr. Willey
founded and currently serves as the president of The Aegis Group, a software
consulting and business development organization for the human resource
outsourcing industry. Dr. Willey holds a B.S. and an M.A. in biology from Walla
Walla College and a Ph.D. from the University of California, Berkeley.
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Board Composition
Upon the completion of this offering, we will have authorized six directors.
In accordance with the terms of our certificate of incorporation and bylaws,
each of which will become effective upon the completion of this offering, the
board of directors will be divided into three classes, Class I, Class II and
Class III, with each class serving staggered terms. Upon the completion of this
offering, the members of the classes will be divided as follows:
. Messrs. Babinec and Martin will be designated as Class I directors whose
initial term will expire at the annual meeting of stockholders to be held
in 2001;
. Messrs. Devlin and Hazlett will be designated as Class II directors whose
initial term will expire at the annual meeting of stockholders to be held
in 2002; and
. Messrs. Hanson and Willey will be designated as Class III directors whose
initial term will expire at the annual meeting of stockholders to be held
in 2003.
At each annual meeting of stockholders after the initial classification, the
successors to directors whose terms will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following the election or special meeting held in lieu thereof. At least three
of our directors must be independent of our management.
Board Committees
The audit committee of the board of directors consists of Messrs. Hanson,
Hazlett and Willey. The audit committee assists the board in fulfilling its
financial and accounting oversight responsibilities by reviewing the financial
information that will be provided to stockholders and others, the systems of
internal controls regarding finance, accounting, legal compliance and ethics
that management and the board have established, and our auditing, accounting
and financial reporting processes generally. All members of the audit committee
must be independent of our management.
The compensation committee of the board of directors consists of Messrs.
Hanson and Hazlett. The compensation committee makes recommendations to the
board of directors concerning salaries and incentive compensation for our
officers and employees and administers our employee benefit plans. At least two
members of the compensation committee must be independent of our management.
The nominating committee of the board of directors consists of Messrs.
Babinec and Martin. The nominating committee makes recommendations to the board
of directors regarding persons to be nominated for election to the board of
directors. At least one member of the nominating committee must be independent
of our management.
Director Compensation
Non-employee directors, except Anthony V. Martin, receive $5,000 in annual
compensation and are reimbursed for their reasonable expenses in attending
board meetings. All directors are eligible to participate in our 2000 Equity
Incentive Plan and employee directors will be eligible to participate in our
2000 Employee Stock Purchase Plan. Upon completion of this offering, each
current and future non-employee director will automatically be granted options
to purchase 2,500 shares of common stock, except for James P. Hanson and T. Joe
Willey, each of whom will be granted 3,000 shares of common stock. Following
each annual meeting of our stockholders, each non-employee director will be
granted an option to purchase 1,500 shares of common stock on that day. All
grants will vest immediately upon the date of grant.
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<PAGE>
In January 1999, Messrs. Hanson, Hazlett and Willey were each granted an
option to purchase 810 shares of common stock at a price of $4.13 per share. In
May 1999, Messrs. Hanson, Hazlett and Willey were each granted an option to
purchase 810 shares of common stock at a price of $4.13 per share. In June
1999, Messrs. Hanson, Hazlett and Willey were each granted an option to
purchase 644 shares of common stock at a price of $5.16 per share. In September
1999, Messrs. Hanson, Hazlett and Willey were each granted an option to
purchase 644 shares of common stock at a price of $5.16 per share. All grants
vested immediately upon the date of grant.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee of the board of directors
has at any time been one of our officers or employees. None of our executive
officers serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving on our board of
directors or compensation committee. The compensation committee of the board of
directors was formed in 1998, and currently consists of Messrs. Hanson and
Hazlett. Prior to the formation of the compensation committee, compensation
decisions were made and approved by our board of directors.
Executive Compensation
The following table presents the compensation earned by our chief executive
officer and our other four most highly compensated executive officers whose
salary and bonus for the year ended December 31, 1999 were in excess of
$100,000, referred to as the named executive officers. In accordance with the
rules of the Securities and Exchange Commission, the compensation described in
this table does not include medical, group life insurance or other benefits
received by the named executive officers that are available generally to all
our salaried employees and certain perquisites and other personal benefits
received by the named executive officers, which do not exceed the lesser of
$50,000 or 10% of any such officer's salary and bonus contained in the table.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation for Long-Term
Fiscal Year 1999 Compensation Awards
---------------- -------------------
Securities
Name and Principal Position Salary Bonus Underlying Options
- --------------------------- -------- ------- -------------------
<S> <C> <C> <C>
Martin Babinec........................... $155,718 $25,000 --
President, Chief Executive Officer and
Chairman of the Board
Douglas P. Devlin........................ $150,024 $25,000 26,250
Chief Financial Officer, Secretary,
Treasurer and Director
Gregory L. Hammond....................... $143,588 $39,525 43,750
Vice President and General Counsel
Craig A. McGannon........................ $149,790 $57,575 43,750
Divisional President, Venture Employer
Services
John K. Younger.......................... $122,283 $80,328 164,868
Divisional President, Venture Talent
</TABLE>
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Option Grants in 1999
The following table presents each grant of stock options made to each of the
named executive officers during the year ended December 31, 1999. These options
vest ratably over four years commencing on the first anniversary of the date of
grant and the exercise price per share of each option was equal to the fair
market value of the common stock on the date of grant, as determined by our
board of directors. In the year ended December 31, 1999, we granted to our
employees options to purchase a total of 457,094 shares of our common stock.
Potential realizable value is calculated assuming that the stock price on
the date of grant appreciates at the indicated rate compounded annually until
the option is exercised and sold on the last day of its term for the
appreciated stock price. The 5% and 10% assumed rates of appreciation are
required by the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of the future common stock price. Based on
an assumed initial offering price of $13.00 per share, the actual appreciation
exceeds these values.
Option Grants in 1999
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options Exercise Price Appreciation
Underlying Granted to or Base for Option Term
Options Employees Price Expiration ---------------------
Name Granted in Fiscal Year ($/Sh) Date 5% 10%
- ---- ---------- -------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Martin Babinec.......... -- -- -- -- -- --
Douglas P. Devlin....... 26,250 5.7% $5.16 06/21/04 393,941 669,200
Gregory L. Hammond...... 43,750 9.6% $5.16 06/21/04 656,568 1,115,333
Craig A. McGannon....... 43,750 9.6% $5.16 06/21/04 656,568 1,115,333
John K. Younger......... 147,368 32.2% $4.13 01/28/04 2,211,591 3,756,900
17,500 3.8% $5.16 06/21/04 262,627 446,133
</TABLE>
Option Exercises and Year End Option Values
The following table presents option exercises and the value realized from
those exercises during 1999, as well as unexercised options that were held at
the end of 1999 by each named executive officer. The value realized represents
the aggregate market value of the underlying securities on the exercise date,
as determined by the board of directors, minus the aggregate exercise price
paid for those shares. Also presented is the value of the in-the-money options,
which is based upon a value of $13.00 per share, the assumed initial public
offering price, minus the aggregate exercise price payable for those shares.
Aggregated Option Exercises in 1999 and FY-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at FY-End (#) at FY-End ($)
Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Martin Babinec.......... -- $ -- -- -- -- --
Douglas P. Devlin....... 10,500 37,320 47,557 52,717 618,241 601,846
Gregory L. Hammond...... 1,925 4,488 20,038 65,624 248,953 614,894
Craig A. McGannon....... -- -- 8,838 69,999 93,470 620,846
John K. Younger......... -- -- 230,229 124,226 2,311,400 1,123,030
</TABLE>
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Employment Agreements
A change of control is generally defined as a merger in which we are not the
surviving corporation or after which our stockholders do not own a majority of
the stock of the surviving corporation, or the acquisition of 40% or more of
our stock or a sale of all or substantially all of our assets.
In May 1999, we entered into an employment agreement with Martin Babinec to
serve as our chief executive officer at a base salary of $155,000 a year with a
discretionary bonus of $25,000. In the event of a change of control, if Mr.
Babinec is involuntarily terminated without cause or by constructive
termination within six months following the change of control, he is entitled
to a lump sum payment of $2.0 million. Further, all stock options granted to
Mr. Babinec will fully vest and he may compel us to repurchase any stock he
owns at the then prevailing market value plus 25%.
In May 1999, we entered into an employment agreement with Douglas P. Devlin
to serve as our chief financial officer at a base salary of $150,000 a year,
with a discretionary bonus of $25,000 and up to 26,250 incentive stock options
to purchase common stock subject to the vesting schedule, terms and conditions
of our 1990 Stock Option Plan. In the event of a change of control, if Mr.
Devlin is involuntarily terminated without cause or by constructive termination
within six months following the change of control, he is entitled to a lump sum
payment of $2.0 million. Further, all stock options granted to Mr. Devlin will
fully vest and he may compel us to repurchase any stock he owns at the then
prevailing market value plus 25%.
In May 1999, we entered into an employment agreement with Gregory L. Hammond
to serve as our vice president and general counsel at a base salary of $150,000
a year, with a discretionary bonus of $25,000 and up to 43,750 incentive stock
options to purchase common stock subject to the vesting schedule, terms and
conditions of our 1990 Stock Option Plan. In the event of a change of control,
if Mr. Hammond is involuntarily terminated without cause or by constructive
termination within six months following the change of control, he is entitled
to a lump sum payment of $2.0 million. Further, all stock options granted to
Mr. Hammond will fully vest and he may compel us to repurchase any stock he
owns at the then prevailing market value plus 25%.
In May 1999, we entered into an employment agreement with Craig A. McGannon
to serve as our divisional president, Venture Employer Services, at a base
salary of $150,000 a year, with a discretionary bonus of $25,000 and up to
43,750 incentive stock options to purchase common stock subject to the vesting
schedule, terms and conditions of our 1990 Stock Option Plan. In the event of a
change of control, if Mr. McGannon is involuntarily terminated without cause or
by constructive termination within six months following the change of control,
he is entitled to a lump sum payment of $2.0 million. Further, all stock
options granted to Mr. McGannon will fully vest and he may compel us to
repurchase any stock he owns at the then prevailing market value plus 25%.
In May 1999, we entered into an employment agreement with John K. Younger to
serve as our divisional president, Venture Talent, at a base salary of $132,000
a year. In the event of a change of control, if Mr. Younger is involuntarily
terminated without cause or by constructive termination within six months
following the change of control, all stock options granted to Mr. Younger will
fully vest and he may compel us to repurchase any stock he owns at the then
prevailing market value plus 25%.
Stock Option Plans
2000 Equity Incentive Plan. Our board of directors adopted the 2000 Equity
Incentive Plan and will seek stockholder approval prior to the effective date
of this offering. The 2000 Equity Incentive Plan is intended to replace and
supersede our 1990 Stock Option Plan.
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Share Reserve. We have reserved a total of 700,000 shares of our common
stock for issuance under the incentive plan. On each January 1, starting with
January 1, 2001 and continuing through and including January 1, 2009, the share
reserve automatically will be increased by a number of shares equal to the
least of:
. 4% of our then outstanding shares of common stock;
. 400,000 shares; or
. a lesser number determined by our board.
If the recipient of a stock award does not purchase the shares subject to
such stock award before the stock award expires or otherwise terminates, the
shares that are not purchased will again become available for issuance under
the incentive plan.
Administration. The board will administer the incentive plan unless it
delegates administration to a committee. The board will have the authority to
construe, interpret and amend the incentive plan. The board also will have the
authority to determine the recipients of stock awards under the incentive plan
and the terms of such stock awards, including the number of shares subject to
the stock awards, the vesting and/or exercisability schedule applicable to the
stock awards and the exercise price of the stock awards.
Eligibility and Types of Stock Awards. The board may grant incentive stock
options that qualify under Section 422 of the Internal Revenue Code to our
employees and to the employees of our affiliates. The board also may grant
nonstatutory stock options, stock bonuses and restricted stock purchase awards
to our employees, directors and consultants as well as to the employees,
directors and consultants of our affiliates.
Option Terms. The board may grant incentive stock options with an exercise
price of 100% or more of the fair market value of a share of our common stock
on the grant date and nonstatutory stock options with an exercise price as low
as 85% of the fair market value of a share on the grant date. Incentive stock
options granted to persons who, at the time of the grant, own or are deemed to
own stock possessing more than 10% of our total combined voting power or the
total combined voting power of one of our affiliates must have an exercise
price of at least 110% of the fair market value of the stock on the grant date
and a term of five or fewer years. For other options, the maximum term is 10
years. Generally, fair market value means the closing sales price (rounded up
where necessary to the nearest whole cent) for such shares (or the closing bid,
if no sales were reported) as quoted on the Nasdaq National Market on the
trading day prior to the relevant determination date, as reported in The Wall
Street Journal.
Automatic Grants. Upon the completion of this offering, each non-employee
director will automatically be granted an option to purchase 2,500 shares of
common stock. Any individual who becomes a non-employee director after this
offering will automatically receive this initial grant upon being elected to
the board of directors. Any person who is a non-employee director on the day
following each annual meeting of our stockholders will be granted an additional
option to purchase 1,500 shares of common stock on that day. Any director who
has not served as a non-employee director for the entire period since the
preceding annual meeting of stockholders will have his or her automatic
additional grant for that year reduced pro rata for each full quarter prior to
the date of grant during which that person did not serve as a non-employee
director.
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Vesting. Each non-employee director option will vest immediatley on the date
on which it is granted.
No employee may receive incentive stock options that exceed the $100,000 per
year fair market value limitation set forth in Section 422(d) of the Internal
Revenue Code. To determine whether the $100,000 per year limitation has been
exceeded, we will calculate the fair market value of the aggregate number of
shares under all incentive stock options granted to an employee that will
become exercisable for the first time during a calendar year. Under the
incentive plan, options covering stock in excess of the $100,000 limitation
will be automatically converted into nonstatutory stock options.
The board may provide for exercise periods of any length following an
optionholder's termination of service in individual options. Generally, options
will provide that they terminate three months after the optionholder's service
to us and our affiliates terminates. In the case of an optionholder's
disability or death, the exercise period generally is extended to 12 months or
18 months, respectively.
The board may provide for the transferability of nonstatutory stock options
but not incentive stock options. However, the optionholder may designate a
beneficiary to exercise either type of option following the optionholder's
death. If the optionholder does not designate a beneficiary, the optionholder's
rights will pass to his or her heirs by will or the laws of descent and
distribution.
Section 162(m) of the Internal Revenue Code denies a deduction to publicly-
held corporations for compensation paid to the corporation's chief executive
officer and its four highest compensated officers in a taxable year to the
extent that the compensation for each such officer exceeds $1,000,000. In order
to qualify options granted under the incentive plan for an exemption for
performance based compensation provided under Section 162(m), no employee may
be granted options under the incentive plan covering an aggregate of more than
230,000 shares in any calendar year.
Terms of Other Stock Awards. The board will determine the purchase price of
other stock awards, which may not be less than 85% of the fair market value of
our common stock on the grant date. However, the board may award stock bonuses
in consideration of past services without a cash purchase price. Shares that we
sell or award under the incentive plan may, but need not be, restricted and
subject to a repurchase option in our favor in accordance with a vesting
schedule that the board determines. The board, however, may accelerate the
vesting of such stock awards.
Corporate Transactions. Transactions not involving our receipt of
consideration, such as a merger, consolidation, reorganization, stock dividend,
or stock split, may change the class and number of shares subject to the equity
incentive plan and to outstanding stock awards. Following such a transaction,
the board will appropriately adjust the incentive plan (including the 162(m)
limitation) as to the class and the maximum number of shares subject to the
incentive plan. It also will adjust outstanding stock awards as to the class,
number of shares and price per share applicable to such awards.
If we dissolve or liquidate, then outstanding stock awards will terminate
immediately prior to such event. Upon certain change in control transactions,
the surviving corporation may assume all outstanding stock awards under the
incentive plan or substitute other awards therefor. If the surviving
corporation does not so assume or substitute, then the vesting and
exercisability of all stock awards held by persons who are then providing
services to us will accelerate, and all stock awards
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<PAGE>
outstanding under the incentive plan will terminate immediately prior to the
occurrence of the change in control.
Plan Termination. The incentive plan will terminate in 2010 unless the board
terminates it sooner.
1990 Stock Option Plan. Our stock option plan will terminate as of the
effective date of this offering. The termination of the stock option plan will
have no effect on the options that have been granted thereunder. However,
following the termination of the stock option plan, no new stock options may be
granted under it.
Corporate Transactions. Transactions not involving our receipt of
consideration, such as a merger, consolidation, reorganization, stock dividend,
or stock split, may change the class and number of shares subject to the stock
option plan and to outstanding options. Following such a transaction, the board
will appropriately adjust the stock option plan as to the class and the maximum
number of shares subject to the stock option plan. It also will adjust
outstanding options as to the class, number of shares and price per share
applicable to such options.
If we dissolve, then outstanding stock options will terminate prior to such
dissolution. In the event of a merger or consolidation as a result of which our
shares are converted into securities of another company or into other property,
then the outstanding stock options will be treated differently. In such
situations, the board may determine that the outstanding stock options will be
assumed by a surviving corporation and thereafter pertain to the stock or other
property of the surviving corporation. Alternatively, the board may determine
that the vesting and exercisability of the outstanding options shall accelerate
and such options shall terminate if not exercised prior to the effective date
of the merger or consolidation.
Stock Options Granted. As of March 31, 2000, we had issued 574,235 shares
upon the exercise of options under the stock option plan and options to
purchase 1,478,505 shares at a weighted average exercise price of $6.68 were
outstanding.
2000 Employee Stock Purchase Plan. Our board adopted the 2000 Employee Stock
Purchase Plan and will seek stockholder approval prior to the effective date of
the offering.
Share Reserve. We will authorize the issuance of 200,000 shares of our
common stock pursuant to purchase rights granted to eligible employees under
the purchase plan. On each January 1, starting with January 1, 2001 and
continuing through and including January 1, 2009, the share reserve will
automatically be increased by a number of shares equal to the least of:
. 1.5% of our then outstanding shares of common stock;
. 150,000 shares; or
. a lesser number determined by our board.
Eligibility. The purchase plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code.
The purchase plan provides a means by which eligible employees may purchase our
common stock through payroll deductions. We will implement the purchase plan by
offerings of purchase rights to eligible employees. Generally, all of our full-
time employees and full-time employees of our affiliates incorporated in the
United States may participate in offerings under the purchase plan. However, no
employee may participate in the
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<PAGE>
purchase plan if, immediately after we grant the employee a purchase right, the
employee has voting power over 5% or more of our outstanding capital stock.
General Terms of the Plan. Under the purchase plan, the board may specify
offerings of up to 27 months. Unless the board otherwise determines, common
stock will be purchased for accounts of participating employees at a price per
share equal to the lower of:
. 85% of the fair market value of a share on the first day of the offering;
or
. 85% of the fair market value of a share on the purchase date.
For the first offering, which will begin on the effective date of this
initial public offering, we will offer shares registered on a Form S-8
registration statement. The fair market value of the shares on the first date
of this initial public offering will be the price per share at which our shares
are first sold to the public as specified in the final prospectus with respect
to this initial public offering. Otherwise, fair market value generally means
the closing sales price (rounded up where necessary to the nearest whole cent)
for such shares (or the closing bid, if no sales were reported) as quoted on
the Nasdaq National Market on the trading day prior to the relevant
determination date, as reported in The Wall Street Journal.
The board may provide that employees who become eligible to participate
after the offering period begins nevertheless may enroll in the offering. These
employees will purchase our stock at the lower of 85% of the fair market value
of a share on the day they began participating in the purchase plan or 85% of
the fair market value of a share on the purchase date.
If authorized by the board, participating employees may authorize payroll
deductions of up to 15% of their base compensation for the purchase of stock
under the purchase plan. Generally employees may end their participation in the
offering at any time before a purchase period ends. Their participation ends
automatically on termination of their employment or loss of full-time status.
The board may grant eligible employees purchase rights under the purchase
plan only if the purchase rights, together with any other purchase rights
granted under other employee stock purchase plans established by us or by our
affiliates, if any, do not permit the employee's rights to purchase our stock
to accrue at a rate that exceeds $25,000 of fair market value of our stock for
each calendar year in which the purchase rights are outstanding.
Corporate Transactions. Upon a change in control, a surviving corporation
may assume outstanding purchase rights or substitute other purchase rights
therefor. If the surviving corporation does not assume or substitute the
purchase rights, the offering period will be shortened and our stock will be
purchased for the participants immediately before the change in control.
Description of 401(k) Plan. We maintain a retirement and deferred savings
plan for our U.S. employees. The retirement and deferred savings plan is
intended to qualify as a tax-qualified plan under Section 401 of the Internal
Revenue Code. The retirement and deferred savings plan provides that each
participant may contribute up to 25% of his or her pre-tax compensation (up to
a statutory limit, which is $10,500 in calendar year 2000). Under the plan,
each employee is fully vested in his or her deferred salary contributions.
Employee contributions are held and invested by the plan's trustee. The
retirement and deferred savings plan also permits us to make discretionary
contributions and matching contributions, subject to established limits and a
vesting schedule. To date, we have not made any discretionary contributions or
matching contributions to the retirement and deferred savings plan on behalf of
participating employees.
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RELATIONSHIPS WITH THIRD PARTIES AND RELATED TRANSACTIONS
Other than the transactions described below and in the "Management--
Employment Agreements" section, since January 1, 1997 there has not been nor is
there currently proposed any transaction or series of similar transaction to
which we were or will be a party:
. in which the amount involved exceeded or will exceed $60,000; and
. in which any director, executive officer, holder of more than 5% of our
common stock or any member of their immediate family had or will have a
direct or indirect material interest.
Preferred Stock Financings
From February 1997 to January 1998, we issued and sold an aggregate of
25,000 shares of Series E preferred stock for proceeds of approximately $1.0
million to Select Appointments North America Inc., or Select. Anthony Martin,
one of our directors, is chairman of the board of Select. In December 1997,
Select converted 62,500 shares of Series E preferred stock into 4,687,852
shares of common stock. The remaining 12,500 shares of Series E preferred stock
are currently convertible into 949,032 shares of common stock, valued at $18.6
million, based on an assumed initial public offering price of $13.00, at the
election of Select at any time or, in any event, upon the completion of this
offering. Select currently holds 3,396,029 shares of common stock and 12,500
shares of Series E preferred stock.
In consideration for Select's agreement in December 1997 to convert its
shares of Series E preferred stock into common stock, we entered into a letter
agreement with Select dated December 30, 1997 pursuant to which we agreed to
issue to Select one share of common stock for each additional security we
issued, subject to certain conditions. On February 24, 2000, we and Select
agreed to terminate this letter agreement and on February 29, 2000, we issued
to Select an aggregate of 380,198 shares of common stock, valued at $7.5
million, based on an assumed initial offering price of $13.00, in full
satisfaction of our obligations to Select under the letter agreement.
On March 2, 2000, we issued and sold an aggregate of 150,263 shares of
Series F preferred stock for proceeds of approximately $4.0 million to Bessemer
Venture Partners V L.P., Bessec Ventures V L.P. and BVE LLC, or Bessemer. The
shares of Series F preferred stock are convertible into 262,959 shares of
common stock.
Amended and Restated Investor's Rights Agreement
We and Select have entered into an amended and restated investor's rights
agreement, dated as of March 2, 2000, by and among TriNet, Select and Bessemer
pursuant to which Select and the other preferred stockholders will have
registration rights with respect to their shares of common stock following this
offering. Upon the completion of this offering, all shares of our outstanding
preferred stock will be automatically converted into common stock. See
"Description of Capital Stock--Registration Rights of Stockholders" for a
description of the terms of this rights agreement.
Employment Agreements
We have entered into employment agreements with Martin Babinec, Douglas P.
Devlin, Gregory L. Hammond, Craig A. McGannon and John K. Younger. See
"Management--Employment Agreements."
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to us with respect
to beneficial ownership of our common stock as of March 31, 2000 by:
. each stockholder known by us to be the beneficial owner of more than 5%
of our common stock;
. each of our directors;
. the named executive officers;
. all executive officers and directors as a group; and
. the selling stockholder.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission. All options exercisable within 60 days of March 31, 2000
are reported as currently exercisable. The shares issuable under these options
are treated as if outstanding for computing the percentage ownership of the
person holding these options but are not treated as if outstanding for the
purposes of computing the percentage ownership of any other person. Percentage
ownership is based on 12,894,847 shares of common stock outstanding as of March
31, 2000, assuming the conversion of all outstanding shares of preferred stock
into common stock, and 16,794,847 shares of common stock outstanding
immediately following the completion of this offering.
Except as otherwise indicated, the stockholders listed in the tables have
sole voting and investment powers over the common stock owned by them, subject
to community property laws where applicable. Unless otherwise specified, the
address of each of the individuals or entities named below is: c/o TriNet
Group, Inc., 101 Callan Avenue, San Leandro, California 94577.
<TABLE>
<CAPTION>
Shares Shares
Beneficially Owned Beneficially
Before the Number Owned After the
Offering of Shares Offering
------------------ Being -----------------
Number Percent Offered(1) Number Percent
---------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
5% Stockholders
Select Holdings Inc.(2)...... 6,892,081 53.5% 1,900,000 4,992,081 29.7%
Zigguart Grosvenor Road
St. Albans
Hertfordshire, AL13 HW
United Kingdom
Executive Officers and
Directors
Martin Babinec(3)............ 3,402,375 26.9 -- 3,402,375 20.6
Douglas P. Devlin(4)......... 578,982 4.5 -- 578,982 3.4
Gregory L. Hammond(5)........ 21,963 * -- 21,963 *
Craig A. McGannon(6)......... 8,838 * -- 8,838 *
John K. Younger(7)........... 332,584 2.5 -- 332,584 2.0
James P. Hanson(8)........... 371,511 2.9 -- 371,511 2.2
H. Lynn Hazlett.............. 5,459 * -- 5,459 *
Anthony V. Martin(9)......... 6,852,081 53.5 1,900,000 4,992,081 29.7
T. Joe Willey(10)............ 27,026 * -- 27,026 *
Directors and executive
officers as a group
(9 persons)(11)............. 11,700,819 88.9 1,900,000 9,800,819 57.4
</TABLE>
- --------
* Represents beneficial ownership at less than 1% of the outstanding shares of
our common stock.
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<PAGE>
(1) Certain other selling stockholders have granted the underwriters a 30-day
option to purchase up to an additional 870,000 shares.
(2) Includes 77,192 shares held by Ogier Trustee Limited, a fund established
for the benefit of employees of Select Appointments (Holdings) Ltd., the
parent company of Select Holdings Inc., or Select, and administered by a
trustee.
(3) Shares are held by Martin and Krista Babinec, Trustees of the Babinec
Family Trust dated 7/16/95.
(4) Includes 60,681 shares issuable upon exercise of options exercisable
within 60 days of March 31, 2000.
(5) Includes 20,038 shares issuable upon exercise of options exercisable
within 60 days of March 31, 2000.
(6) Includes 4,956 shares issuable upon exercise of options exercisable within
60 days of March 31, 2000.
(7) Includes 183,878 shares issuable upon exercise of options exercisable
within 60 days of March 31, 2000.
(8) Includes 339,224 shares held by James P. and Kristy L. Hanson, husband and
wife as community property and 32,287 shares held by James P. and Kristy
L. Hanson Accountancy Corporation Profit Sharing Plan #1.
(9) Includes 6,814,889 shares held by Select and 77,192 shares held by Ogier
Trustee Limited, a fund established for the benefit of Select employees
and administered by a trustee. Anthony V. Martin, one of our directors, is
chairman of the board of Select and disclaims beneficial ownership of
these shares.
(10) Includes 197 shares issuable upon exercise of options exercisable within
60 days of March 31, 2000.
(11) See footnotes (2) through (9) above, as applicable.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and material provisions of
our certificate of incorporation and bylaws, which will become effective upon
the completion of this offering, is a summary only and is qualified in its
entirety by the complete provisions of the certificate of incorporation and
bylaws, which have been filed as exhibits to the registration statement, of
which this prospectus is a part.
Upon completion of this offering and the filing of our amended and restated
certificate of incorporation, our authorized capital stock will consist of
100,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
preferred stock, $0.001 par value.
Common Stock
As of March 31, 2000, there were 12,894,847 shares of common stock
outstanding that were held of record by approximately 52 stockholders after
giving effect to the conversion of our preferred stock into common stock. There
will be 16,794,847 shares of common stock outstanding (assuming no exercise of
the outstanding options) after giving effect to the sale of the shares of
common stock offered by this prospectus.
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the board of directors may from time to time
determine. Each stockholder is entitled to one vote for each share of common
stock held on all matters submitted to a vote of stockholders. Holders of
common stock are not entitled to cumulative voting rights with respect to the
election of directors and, as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone. Upon a liquidation,
dissolution or winding-up of TriNet, the assets legally available for
distribution to stockholders are distributable ratably among the holders of the
common stock and any participating preferred stock outstanding at that time
after payment of liquidation preferences, if any, on any outstanding preferred
stock and payment of other claims of creditors. Each outstanding share of
common stock is, and all shares of common stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, the board of directors will have the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series, to establish from time to time
the number of shares to be included in each such series, to fix the rights,
preferences and privileges of the shares of each wholly unissued series and any
qualifications, limitations or restrictions thereon, and to increase or
decrease the number of shares of any such series (but not below the number of
shares of such series then outstanding). The board of directors may authorize
the issuance of preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of the common
stock. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could,
among other things, have the effect of delaying, deferring or preventing a
change in control of TriNet and may adversely affect the market price of the
common stock and the voting and other rights of the holders of common stock.
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<PAGE>
Registration Rights of Stockholders
Upon the earlier of July 30, 2001 or 12 months after this offering holders
of an aggregate of 262,959 shares of our common stock, and beginning 180 days
after this offering holders of an aggregate of 4,992,081 shares of our common
stock, will be entitled to register these shares under the Securities Act.
These rights are provided under the amended and restated investor's rights
agreement by and among us, Select Appointments North America Inc., Bessemer
Venture Partners V L.P., Bessec Ventures V L.P. and BVE LLC dated March 2,
2000. If we propose to register any of our securities under the Securities Act,
either for our own account or for the account of others, the holders of these
shares are entitled to notice of the registration and are entitled to include,
at our expense, their shares of common stock in the registration and any
related underwriting, provided, among other conditions, that the underwriters
may limit the number of shares to be included in the registration and in some
cases, including this offering, exclude these shares entirely. In addition, the
holders of these shares may require us at our expense to register their shares
on Form S-3 when this form becomes available.
Anti-Takeover Provisions of Delaware Law and Charter Provisions
We are subject to Section 203 of the Delaware General Corporation Law. In
general, the statute prohibits a publicly-held Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder unless:
. prior to that date, the board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers, and by employee stock plans in which
shares held subject to the plan will be tendered in a tender or exchange
offer; or
. on or subsequent to that date, the business combination is approved by
the board of directors and is authorized at an annual or special meeting
of stockholders, and not by written consent, by the affirmative vote of
at least two-thirds of the outstanding voting stock not owned by the
interested stockholder.
Section 203 defines "business combination" to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
. subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; and
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
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<PAGE>
A Delaware corporation may "opt out" of Section 203 with an express
provision in its original certificate of incorporation or an express provision
in its certificate or incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares. We
have not "opted out" of the provisions of the Section 203. The statute could
prohibit or delay mergers or other takeover or change-in-control attempts with
respect to us and, accordingly, may discourage attempts to acquire us.
Charter Provisions
Our certificate of incorporation requires that upon completion of this
public offering, any action required or permitted to be taken by our
stockholders must be effected at a duly called annual or special meeting of
stockholders and may not be effected by a consent in writing. Additionally, our
certificate of incorporation:
. eliminates cumulative voting in the election of directors;
. provides that the authorized number of directors may be changed only by
resolution of our board of directors; and
. authorizes our board of directors to issue blank check preferred stock to
increase the amount of outstanding shares.
Our bylaws provide that candidates for director may be nominated only by our
board of directors or by a stockholder who gives written notice to us no later
than 60 days prior nor earlier than 90 days prior to the first anniversary of
the last annual meeting of stockholders. Our board of directors currently
consists of six members divided into three classes with staggered terms. Our
board of directors may appoint new directors to fill vacancies or newly created
directorships. Our bylaws also limit who may call a special meeting of
stockholders.
Delaware law and these charter provisions may have the effect of deterring
hostile takeovers or delaying changes in control of our management, which could
depress the market price of our common stock.
Limitation of Liability and Indemnification
Our certificate of incorporation, which will become effective upon the
closing of this offering, contains provisions permitted under Delaware law
relating to the liability of directors. These provisions eliminate a director's
personal liability for monetary damages resulting from a breach of fiduciary
duty, except in circumstances involving wrongful acts, such as:
. any breach of the director's duty of loyalty;
. acts or omissions which involve a lack of good faith, intentional
misconduct or a knowing violation of the law;
. payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law; or
. any transaction from which the director derives an improper personal
benefit.
These provisions do not limit or eliminate our rights or any stockholder's
rights to seek non-monetary relief, such as an injunction or rescission, in the
event of a breach of director's fiduciary duty. These provisions will not alter
a director's liability under federal securities laws.
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<PAGE>
Our bylaws, which will become effective upon the closing of this offering,
require us to indemnify our directors and executive officers to the fullest
extent not prohibited by the Delaware law. We may limit the extent of such
indemnification by individual contracts with our directors and executive
officers. Further, we may decline to indemnify any director or executive
officer in connection with any proceeding initiated by such person or any
proceeding by such person against us or our directors, officers, employees or
other agents, unless indemnification is expressly required to be made by law or
the proceeding was authorized by our board of directors.
We intend to enter into indemnity agreements with each of our current
directors and certain of our executive officers to give such directors and
officers additional contractual assurances regarding the scope of the
indemnification set forth in our certificate of incorporation and bylaws and to
provide additional procedural protections. At present, there is no pending
litigation or proceeding involving any of our directors, officers or employees
for which indemnification is sought, nor are we aware of any threatened
litigation that may result in claims for indemnification.
We have the power to indemnify our other officers, employees and other
agents, as permitted by Delaware law, but we are not required to do so.
We plan to obtain directors' and officers' liability insurance.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Norwest Bank
Minnesota N.A.
73
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and a
significant public market for our common stock may not develop or be sustained
after this offering. As described below, none of the shares currently
outstanding will be available for sale immediately after this offering due to
certain contractual and securities law restrictions on resale. Sales of
substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding 16,794,847 shares
of common stock. Of these shares, all of the shares sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by our "affiliates," as that
term is defined in Rule 144 under the Securities Act. In general, affiliates
include officers, directors or 10% stockholders. The remaining 10,994,847
shares outstanding are "restricted securities" within the meaning of Rule 144.
These restricted securities may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144, 144(k)
or 701 promulgated under the Securities Act, which are summarized below. Sales
of the restricted securities in the public market, or the availability of these
shares for sale, could adversely affect the market price of our common stock.
All of our directors and officers and a majority of our stockholders and
option holders have entered into lock-up agreements in connection with this
offering generally providing that they will not offer, sell, contract to sell
or grant any option to purchase or otherwise dispose of our common stock or any
securities exercisable for or convertible into our common stock owned by them
for a period of 180 days after the date of this prospectus without the prior
written consent of FleetBoston Robertson Stephens Inc.
Taking into account these lock-up agreements, and assuming FleetBoston
Robertson Stephens Inc. does not release stockholders from their agreements,
the following shares will be eligible for sale in the public market at the
following times:
. 5,800,000 shares sold pursuant to this offering will be eligible for sale
upon completion of this offering;
. 10,484,063 shares will be eligible for sale upon the expiration of lock-
up agreements, beginning 180 days after the date of this prospectus; and
. 510,784 of the remaining shares may be sold under Rule 144 or 144(k) once
they have been held for the required time.
Additionally, of the shares that may be issued upon the exercise of options
outstanding as of March 31, 2000, approximately 1,273,820 shares will be vested
and eligible for sale 180 days after completion of this offering.
In general, under Rule 144 as currently in effect, after expiration of the
lock-up agreements, a person who has beneficially owned restricted securities
for at least one year would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
. one percent of the number of shares of common stock then outstanding,
which will equal approximately 167,948 shares immediately after this
offering; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
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<PAGE>
Sales under Rule 144 must comply with the requirements with respect to
manner of sale, notice and the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to
sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits our employees, officers and
directors or consultants who purchased shares under a written compensatory plan
or contract to resell these shares in reliance upon Rule 144 but without
compliance with specific restrictions. Commencing 90 days after the date of
this offering, Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirement and permits non-
affiliates to sell these shares in reliance on Rule 144 without complying with
the holding period, public information, volume limitation or notice provisions
of Rule 144.
Registration Rights. Upon the earlier of July 30, 2001 or twelve months
after this offering the holders of an aggregate of 262,959 shares of our common
stock, and beginning 180 days after this offering holders of an aggregate of
4,992,081 shares of our common stock, will be entitled to rights with respect
to the registration of their shares under the Securities Act. Registration of
their shares under the Securities Act would result in these shares becoming
freely tradable without restriction under the Securities Act, except for shares
purchased by affiliates, immediately upon the effectiveness of this
registration.
In addition, we intend to file, immediately after the effectiveness of this
offering, a registration statement on Form S-8 under the Securities Act
covering all shares of common stock reserved for issuance under our 2000 Equity
Incentive Plan and our 2000 Employee Stock Purchase Plan. Shares registered
under this registration statement would be available for sale in the open
market in the future, providing there is compliance with Rule 144 restrictions,
in the case of affiliates, and the contractual restrictions described above.
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<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Dain Rauscher Incorporated and Robert W.
Baird & Co. Incorporated, have agreed with us and a selling stockholder,
subject to conditions in the underwriting agreement, to purchase from us and
the selling stockholder the number of shares of common stock listed opposite
their names below. The underwriters are committed to purchase and pay for all
shares if any are purchased.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
FleetBoston Robertson Stephens Inc. ...............................
Dain Rauscher Incorporated.........................................
Robert W. Baird & Co. Incorporated.................................
---------
Total............................................................ 5,800,000
=========
</TABLE>
The representatives have advised us and our selling stockholders that the
underwriters propose to offer the shares of common stock to the public at the
public offering price on the cover page of this prospectus. The underwriters
may sell shares to dealers at that price less a concession of not in excess of
$ per share, of which $ may be reallowed to other dealers.
After this offering, the public offering price, concession and reallowance to
dealers may be reduced by the representatives, but any reduction will not
change the amount of proceeds to be received by us or the selling stockholder.
The common stock is offered by the underwriters on the terms discussed in this
prospectus, subject to receipt and acceptance by them, and subject to their
right to reject any order.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
No Public Market. Before this offering, there has been no public market for
our common stock. Consequently, the public offering price for the common stock
offered by this prospectus will be determined through negotiations among the
representatives and us. We anticipate the material factors to be considered in
these negotiations will be prevailing market conditions, our financial
information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential and the present state of our development.
Over-Allotment Option. Certain selling stockholders have granted the
underwriters an option, exercisable during the 30-day period after the date of
this prospectus, to purchase up to 870,000 additional shares of common stock
solely to cover any over-allotments, at the public offering price less the
underwriting discount on the cover page of this prospectus. If the underwriters
exercise their over-allotment option to purchase any of the additional 870,000
shares of common stock, they have agreed, subject to specified conditions, to
purchase approximately the same percentage of these additional shares as the
number of shares to be purchased by each of them bears to the total number of
shares of common stock in this offering. If purchased, these additional shares
will be sold by the underwriters on the same terms as those on which the shares
offered in this offering are being sold. Certain selling stockholders will be
obligated to sell shares to the underwriters to the extent the over-allotment
option is exercised.
76
<PAGE>
The following table summarizes the compensation to be paid to the
underwriters by us and our selling stockholder:
<TABLE>
<CAPTION>
Total
-------------------
Without With
Per Over- Over-
Share allotment allotment
----- --------- ---------
<S> <C> <C> <C>
Underwriting discounts and commissions payable by
us.............................................. $ $ $
Underwriting discounts and commissions payable by
the selling stockholders........................ $ $ $
</TABLE>
The underwriting fee will be an amount equal to the offering price per share
to the public of the common stock, less the amount paid by the underwriters to
us per share of common stock. The underwriters' compensation was determined
through arms' length negotiations between us and the representatives.
We estimate the expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will
be approximately $ .
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters, us and the selling stockholders against civil liabilities,
including liabilities under the Securities Act.
Lock-Up Agreements. Holders of 100% of our outstanding stock and all of our
officers and directors have signed lock up agreements with the underwriters.
Under these agreements, these parties have agreed, during the period of 180
days after the date of this prospectus and subject to various exceptions, not
to offer to sell, contract to sell, or transfer any shares of common stock they
own or later acquire, other than shares purchased in the public markets. These
agreements contain similar terms for options or warrants to purchase any shares
of common stock, or any securities convertible into or exchangeable for shares
of common stock. However, FleetBoston Robertson Stephens Inc. may, in its sole
discretion and at any time without notice, release any portion of the
securities subject to lock-up agreements. There are no existing agreements
between the representatives and any of our stockholders who have executed a
lock-up agreement providing consent to the sale of shares before the expiration
of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of FleetBoston Robertson Stephens Inc.,
consent to the disposition of any shares held by stockholders subject to lock-
up agreements before the expiration of the lock-up period, or issue, sell,
contract to sell, or dispose of, any shares of common stock, any options or
warrants to purchase any shares of common stock or any securities convertible
into, exercisable for or exchangeable for shares of common stock. However, the
following are examples of exceptions to this agreement:
. our sale of shares in this offering;
. the issuance of our common stock upon the exercise of outstanding options
or warrants; and
. the issuance of options under existing stock option and incentive plans,
provided that those options do not vest before the expiration of the
lock-up period.
Listing. We have applied to have the common stock approved for quotation on
the Nasdaq National Market under the symbol "TRNE."
77
<PAGE>
Stabilization. The representatives have advised us that, under Regulation M
of the Exchange Act, some persons participating in the offering may engage in
any of the following transactions:
. stabilizing bids, which are bids for the purchase of common stock on
behalf of the underwriters that are intended to fix or maintain the price
of the common stock;
. syndicate covering transactions, which are bids for the purchase of
common stock on behalf of the underwriters to reduce a short position
incurred by the underwriters in connection with the offering; a short
position results when an underwriter sells more shares than it has
committed to purchase; and
. penalty bids, which are arrangements that permit the representatives to
reclaim the selling concession otherwise accruing to an underwriter or
syndicate member in connection with the offering if the common stock
originally sold by the underwriter or syndicate member is purchased by
the representatives in a syndicate covering transaction, and has not been
effectively placed by this underwriter or syndicate member.
These transactions may be effected on the Nasdaq National Market and, if
commenced, may be discontinued at any time.
Directed Share Program. At our request, the underwriters have reserved up to
shares of common stock to be issued by us and offered for sale, at
the initial public offering price, to our directors, officers, employees and
business associates. The number of shares of common stock available for sale to
the general public will be reduced to the extent that these individuals
purchase all or a portion of these reserved shares. Any reserved shares which
are not purchased will be offered by the underwriters to the general public on
the same terms as the shares of common stock offered in this offering.
LEGAL MATTERS
The validity of the shares of common stock offered in this prospectus will
be passed upon for us by Cooley Godward LLP, San Francisco, California. Legal
matters related to the offering will be passed upon for the underwriters by
Brobeck, Phleger & Harrison LLP, Irvine, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1999, and 1998, and for each of the three
years in the period ended December 31, 1999, as set forth in their report. We
have included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
78
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act to offer shares of our common
stock. This prospectus is only a part of the registration statement and does
not contain all of the information included in the registration statement.
Further information about us and our common stock can be found in the
registration statement. The rules and regulations of the Securities and
Exchange Commission allow us to omit various information from the prospectus
that is included in the registration statement. Statements made in this
prospectus about the contents of any contract, agreement or other documents are
summaries. If we filed any of those documents as exhibits to the registration
statement, you may read the document itself for a complete description of its
terms.
The registration statement and the related exhibits and schedules filed by
us with the Securities and Exchange Commission can be inspected and copies
obtained at prescribed rates from the public reference facilities maintained by
the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549.
You may obtain information on the operation of the public reference room by
calling the Securities and Exchange Commission at 1-800-SEC-0330.
The Securities and Exchange Commission also maintains a website that
contains reports, proxy and information statements and other information about
registrants that file electronically with the Securities and Exchange
Commission, like us, at http://www.sec.gov.
After this offering, we will have to provide the information and reports
required by the Exchange Act and we will file periodic reports, proxy
statements and other information with the Securities and Exchange Commission.
79
<PAGE>
TriNet Group, Inc.
Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Audited Financial Statements
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
TriNet Group, Inc.
We have audited the accompanying consolidated balance sheets of TriNet
Group, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of TriNet Group, Inc. at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Walnut Creek, California
February 18, 2000, except for paragraph 2 of Note 4, as to which the date is
February 29, 2000 and for paragraph 5 of Note 5, as to
which the date is March 24, 2000
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon stockholder
approval of the stock split described in paragraph 5 of Note 5 to the financial
statements.
Walnut Creek, California
May 19, 2000
F-2
<PAGE>
TriNet Group, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
------------------------ March 31, March 31,
1998 1999 2000 2000
----------- ----------- ----------- -------------
Assets (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............. $ 8,584,563 $16,777,235 $18,780,809
Accounts receivable, net
of allowance for
doubtful accounts of
$7,157 in 1998, $100,000
in 1999 and $355,000 at
March 31, 2000.......... 1,676,753 3,637,345 1,313,865
Unbilled receivables..... 4,667,940 4,781,704 12,939,513
Refundable income tax
prepayments............. 390,817 1,376,802 380,051
Prepaid expenses......... 428,727 534,322 708,015
Deferred income taxes.... 147,400 322,500 620,600
Other current assets..... 100,845 308,216 276,570
----------- ----------- -----------
Total current assets... 15,997,045 27,738,124 35,019,423
Property and equipment,
net...................... 4,005,578 7,979,264 8,103,051
Other assets.............. 88,890 74,009 549,105
----------- ----------- -----------
$20,091,513 $35,791,397 $43,671,579
=========== =========== ===========
Liabilities and
Stockholders' Equity
Current liabilities:
Accounts payable......... $ 375,933 $ 733,769 $ 1,946,601
Subscriber prepayments... 6,002,250 6,942,570 9,937,191
Accrued compensation and
related expenses........ 8,614,294 19,359,530 22,694,735
Current portion of
borrowings under bank
financing arrangements.. -- 588,910 --
----------- ----------- -----------
Total current
liabilities........... 14,992,477 27,624,779 34,578,527
Borrowings under bank
financing arrangements... -- 1,766,728 --
Deferred income taxes..... 531,100 1,084,200 739,800
Commitments and
contingencies
Redeemable convertible
preferred stock:
Series E, $40 stated
value; 75,000 shares
authorized;
12,500 shares issued and
outstanding at December
31, 1998 and 1999 and
March 31, 2000, and none
pro forma (aggregate
liquidation preference
of $500,000)............ 500,000 500,000 500,000 $ --
Stockholders' equity:
Preferred stock, $0.0001
par value: authorized
1,000,000 shares:
Convertible preferred
stock, Series F, $26.62
stated value; 150,263
shares authorized:
150,263 shares issued
and outstanding at
March 31, 2000, and
none pro forma
(aggregate liquidation
preference of
$4,000,000)............ -- -- 3,977,380 --
Common stock, no stated
value; authorized:
50,000,000 shares;
issued and outstanding:
11,054,148 shares at
December 31, 1998,
11,174,413 shares at
December 31, 1999,
11,682,856 at March 31,
2000 and 12,894,847
shares, pro forma....... 5,026,754 6,619,545 6,735,256 11,212,636
Deferred compensation.... (356,542) (1,072,861) (849,731) (849,731)
Accumulated deficit...... (592,049) (725,182) (2,008,691) (2,008,691)
Accumulated other
comprehensive loss...... (10,227) (5,812) (962) (962)
----------- ----------- ----------- -----------
Total stockholders'
equity................ 4,067,936 4,815,690 7,853,252 $ 8,353,252
----------- ----------- ----------- ===========
$20,091,513 $35,791,397 $43,671,579
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
TriNet Group, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
------------------------------------ ------------------------
1997 1998 1999 1999 2000
---------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Service revenues (net of
direct costs billed and
incurred of
$241,917,033,
$386,220,552,
$712,944,848,
$132,911,630, and
$241,384,250,
respectively).......... $7,748,608 $12,442,924 $19,127,780 $4,159,992 $ 6,645,741
Operating expenses:
Cost of providing
services............. 4,119,822 6,378,814 10,101,829 2,093,115 3,470,102
Client acquisition
costs................ 1,077,607 1,102,352 2,541,173 474,056 1,323,565
General and
administrative....... 846,395 1,782,603 2,543,574 613,035 1,023,604
Research and
development.......... 488,475 718,692 2,353,295 362,574 1,828,069
Depreciation.......... 228,668 565,008 742,943 168,000 667,001
Stock-based
compensation......... -- 146,458 650,681 89,558 223,130
---------- ----------- ----------- ---------- -----------
Total operating
expenses........... 6,760,967 10,693,927 18,933,495 3,800,338 8,535,471
---------- ----------- ----------- ---------- -----------
Operating income
(loss)................. 987,641 1,748,997 194,285 359,654 (1,889,730)
Other income (expense):
Interest income....... 41,651 49,177 73,503 10,729 28,760
Interest expense...... (22,981) (10,760) (9,340) -- (50,209)
Foreign exchange gain
(loss)............... -- (25,584) 37,719 (21,585) (7,433)
---------- ----------- ----------- ---------- -----------
Income (loss) before
(provision) benefit for
income taxes........... 1,006,311 1,761,830 296,167 348,798 (1,918,612)
(Provision) benefit for
income taxes........... (246,800) (779,400) (399,300) (503,882) 642,500
---------- ----------- ----------- ---------- -----------
Net income (loss)....... $ 759,511 $ 982,430 $ (103,133) $ (155,084) $(1,276,112)
========== =========== =========== ========== ===========
Net income (loss)
available to common
stockholders........... $ (347,640) $ 454,978 $ (133,133) $ (162,481) $(1,283,509)
========== =========== =========== ========== ===========
Basic net income (loss)
per common share....... $ (0.06) $ 0.04 $ (0.01) $ (0.01) $ (0.11)
========== =========== =========== ========== ===========
Diluted net income
(loss) per common
share.................. $ (0.06) $ 0.04 $ (0.01) $ (0.01) $ (0.11)
========== =========== =========== ========== ===========
Shares used to compute
basic net income (loss)
per common share....... 6,299,060 11,030,392 11,095,625 11,070,295 11,204,420
========== =========== =========== ========== ===========
Shares used to compute
diluted net income
(loss) per common
share.................. 6,299,060 11,538,534 11,095,625 11,070,295 11,204,420
========== =========== =========== ========== ===========
Pro forma basic and
diluted net loss per
common share
(unaudited)............ $ (0.01) $ (0.10)
=========== ===========
Shares used to compute
pro forma basic and
diluted net loss per
common stock share
(unaudited)............ 12,044,657 12,237,252
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
TriNet Group, Inc.
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Common Stock Note Other
------------------ ---------------------- Receivable Deferred Accumulated Comprehensive
Shares Amount Shares Amount for Stock Compensation Deficit Loss Total
------- ---------- ---------- ---------- ---------- ------------ ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............. -- $ -- 6,294,932 $ 537,632 $(250,000) $ -- $ (699,387) $ -- $ (411,755)
Repurchase of
common stock.... -- -- (1,482) (3,876) -- -- -- -- (3,876)
Discount on
issuance of
preferred
stock........... -- -- -- 1,000,000 -- -- -- -- 1,000,000
Accretion of
preferred stock
discount........ -- -- -- -- -- -- (1,000,000) -- (1,000,000)
Payment of note
receivable...... -- -- -- -- 250,000 -- -- -- 250,000
Exercise of
stock options... -- -- 9,668 1,509 -- -- -- -- 1,509
Conversion of
redeemable
preferred shares
into common
stock........... -- -- 4,687,852 2,454,764 -- -- -- -- 2,454,764
Dividend
payable......... -- -- -- -- -- -- (107,151) -- (107,151)
Net income and
comprehensive
income.......... -- -- -- -- -- -- 759,511 -- 759,511
------- ---------- ---------- ---------- --------- ---------- ----------- -------- -----------
Balance at
December 31,
1997............. -- -- 10,990,970 3,990,029 -- -- (1,047,027) -- 2,943,002
Repurchase of
common stock.... -- -- (8,753) (9,309) -- -- -- -- (9,309)
Discount on
issuance of
redeemable
preferred
stock........... -- -- -- 500,000 -- -- -- -- 500,000
Accretion of
preferred stock
discount........ -- -- -- -- -- -- (500,000) -- (500,000)
Exercise of
stock options... -- -- 71,931 43,034 -- -- -- -- 43,034
Deferred
compensation
related to grant
of stock
options......... -- -- -- 503,000 -- (503,000) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 146,458 -- -- 146,458
Dividend
payable......... -- -- -- -- -- -- (27,452) -- (27,452)
Net income...... -- -- -- -- -- -- 982,430 -- 982,430
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- (10,227) (10,227)
-----------
Comprehensive
income.......... -- -- -- -- -- -- -- -- 972,203
------- ---------- ---------- ---------- --------- ---------- ----------- -------- -----------
Balance at
December 31,
1998............. -- -- 11,054,148 5,026,754 -- (356,542) (592,049) (10,227) 4,067,936
Repurchase of
common stock.... -- -- (2,598) (10,780) -- -- -- -- (10,780)
Exercise of
stock options... -- -- 122,863 196,367 -- -- -- -- 196,367
Deferred
compensation
related to grant
of stock
options......... -- -- -- 1,367,000 -- (1,367,000) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 650,681 -- -- 650,681
Income tax
benefit of stock
option
exercises....... -- -- -- 40,204 -- -- -- -- 40,204
Dividend
payable......... -- -- -- -- -- -- (30,000) -- (30,000)
Net loss........ -- -- -- -- -- -- (103,133) -- (103,133)
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- 4,415 4,415
-----------
Comprehensive
loss............ -- -- -- -- -- -- -- -- (98,718)
------- ---------- ---------- ---------- --------- ---------- ----------- -------- -----------
Balance at
December 31,
1999............. -- -- 11,174,413 6,619,545 -- (1,072,861) (725,182) (5,812) 4,815,690
Issuance of
Series F
convertible
preferred stock
at $26.62 per
share in March
2000 for cash,
net of issuance
costs of $22,621
(unaudited)..... 150,263 3,977,380 -- -- -- -- -- -- 3,977,380
Repurchase of
common stock
(unaudited)..... -- -- (903) (13,406) -- -- -- -- (13,406)
Exercise of
stock options
(unaudited)..... -- -- 129,148 129,117 -- -- -- -- 129,117
Amortization of
deferred
compensation
(unaudited)..... -- -- -- -- -- 223,130 -- -- 223,130
Issuance of
common stock to
Series E
preferred
stockholders in
satisfaction of
anti-dilution
agreement
(unaudited)..... -- -- 380,198 -- -- -- -- -- --
Dividend payable
(unaudited)..... -- -- -- -- -- -- (7,397) -- (7,397)
Net loss
(unaudited)..... -- -- -- -- -- -- (1,276,112) -- (1,276,112)
Foreign currency
translation
adjustment
(unaudited)..... -- -- -- -- -- -- -- 4,850 4,850
-----------
Comprehensive
loss
(unaudited)..... -- -- -- -- -- -- -- -- (1,271,262)
------- ---------- ---------- ---------- --------- ---------- ----------- -------- -----------
Balance at March
31, 2000
(unaudited)...... 150,263 $3,977,380 11,682,856 $6,735,256 $ -- $ (849,731) $(2,008,691) $ (962) $ 7,853,252
======= ========== ========== ========== ========= ========== =========== ======== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
TriNet Group, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
------------------------------------- ------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income (loss)....... $ 759,511 $ 982,430 $ (103,133) $ (155,084) $(1,276,112)
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Depreciation........... 228,668 565,008 742,943 168,000 667,001
Stock-based
compensation.......... -- 146,458 694,411 133,288 223,130
Provision for doubtful
accounts.............. 7,157 29,510 236,053 33,365 254,992
Deferred income taxes.. 210,900 359,600 378,000 477,002 (642,500)
Changes in assets and
liabilities:
Accounts receivable... (1,646,832) 95,086 (2,196,645) 159,602 2,068,488
Unbilled receivables.. 137,157 (2,644,067) (113,764) (4,804,660) (8,157,809)
Refundable income tax
prepayments.......... (108,739) (485,765) (945,781) 390,817 996,751
Prepaid expenses...... (232,991) (195,736) (105,595) 61,516 (173,693)
Other current assets.. 120,728 (20,498) (207,371) 891 31,646
Other noncurrent
assets............... -- (50,878) 14,881 -- (475,096)
Accounts payable...... 267,962 (163,233) 1,472,288 661,447 1,235,435
Subscriber
prepayments.......... 2,482,831 1,652,151 940,320 (1,206,437) 2,994,621
Accrued compensation
and related
expenses............. 1,935,959 1,887,516 10,745,236 10,330,879 3,335,205
----------- ----------- ----------- ----------- -----------
Net cash provided by
operating activities... 4,162,311 2,157,582 11,551,843 6,250,626 1,082,059
Investing activities
Purchase of property and
equipment.............. (2,230,084) (1,916,402) (4,716,629) (353,733) (790,788)
Financing activities
Borrowings/repayments
under bank financing
arrangements........... -- -- 1,238,638 -- (2,355,638)
Dividends paid on
preferred stock........ (60,000) (107,151) (27,452) (27,452) (30,000)
Repurchase of common
stock.................. (3,876) (9,309) (10,780) (10,780) (13,406)
Issuance of common
stock.................. 1,509 43,034 152,637 24,697 129,117
Issuance of preferred
stock.................. 1,000,000 500,000 -- -- 3,977,380
Payment of note
receivable............. 250,000 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities... 1,187,633 426,574 1,353,043 (13,535) 1,707,453
----------- ----------- ----------- ----------- -----------
Effect of exchange rate
changes on cash........ -- (10,227) 4,415 (380) 4,850
----------- ----------- ----------- ----------- -----------
Net increase in cash and
cash equivalents....... 3,119,860 657,527 8,192,672 5,882,978 2,003,574
Cash and cash
equivalents at
beginning of year...... 4,807,176 7,927,036 8,584,563 8,584,563 16,777,235
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
year................... $ 7,927,036 $ 8,584,563 $16,777,235 $14,467,541 $18,780,809
=========== =========== =========== =========== ===========
Supplemental disclosures
of cash flow
information
Interest paid........... $ 14,069 $ 10,760 $ 9,340 $ -- $ 50,209
=========== =========== =========== =========== ===========
Income taxes paid....... $ 178,466 $ 853,500 $ 1,239,475 $ 242,100 $ --
=========== =========== =========== =========== ===========
Supplemental schedule of
noncash financing
activities
Dividends declared but
not paid............... $ 107,151 $ 27,452 $ 30,000 $ 7,397 $ 7,397
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
TriNet Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
(Information as of March 31, 1999 and 2000 and for the three months ended March
31, 1999 and 2000 is unaudited)
1. Description of Business and Significant Accounting Policies
Description of Business
TriNet Group, Inc. (the "Company") is a provider of web-enabled business
process outsourcing of payroll, benefits and human resources support to
technology companies in North America. The Company's systems and services
enable customers to integrate human resources, benefits and payroll processes
to a single information systems platform, as well as outsource related
transaction processing functions to TriNet's consolidated back-office
operation.
Segment Reporting
The Company operates in one reportable segment under FASB Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("FAS
131"). The Company uses a centralized structure to deliver web-enabled business
process outsourcing of payroll, benefits and human resource transactions to its
customers. The Company's management has determined the operating segment based
upon how the business is managed and operated.
Principles of Consolidation
The consolidated financial statements include the accounts of TriNet Group,
Inc. and its wholly owned subsidiary. Intercompany accounts and transactions
have been eliminated.
Revenue Recognition
The Company's revenues consist primarily of service fees paid by its
customers in consideration for the Company's payroll, benefit and human
resource services including payment of the customer's direct payroll costs
including salaries, wages, employee benefits and payroll taxes. Service
revenues which are presented net of direct payroll costs incurred and billed,
are recognized in the period in which the Company performs payroll, benefit and
human resource services.
The Company accounts for service fees and the related direct payroll costs
using the accrual method. Under the terms of the Company's customer service
agreements, the Company is liable for the payment of salaries and wages,
employment taxes and benefit plan premiums in the event the customer defaults
on the payment of these obligations. As a result, earned but unpaid salaries
and wages of serviced employees are recorded as accrued compensation in the
period in which the salaries and wages are earned by the serviced employees.
Unbilled receivables from customers are recorded for earned but unpaid salaries
and wages of serviced employees plus the service fees earned for services
performed. Prior to the end of a customer's pay period, the Company invoices
the customer for the direct payroll costs of its serviced employees including
the Company's service fees. At the end of the customer's pay period or as
required, the Company then remits the salaries and wages and other direct
payroll costs to the serviced employees and other service providers. Unbilled
receivables at December 31, 1998 and 1999 and March 31, 2000 are net of
prepayments received prior to period end of $481,130, $1,651,534 and $433,000,
respectively. The Company also derives
F-7
<PAGE>
TriNet Group, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of March 31, 1999 and 2000 and for the three months ended March
31, 1999 and 2000 is unaudited)
1. Description of Business and Significant Accounting Policies (continued)
revenues from other services provided to its customers and this revenue is
recognized when the related services are performed.
The Company generally requires its payroll and benefits outsourcing
customers to pay no later than one day prior to the applicable payroll date via
electronic funds transfer. Interest earned on cash balances resulting from
timing differences between the collection of payments from customers and the
remittance of wages, taxes and payments to outside parties is included in
service revenues in the accompanying consolidated statements of operations.
Interest included in service revenues for the years ended December 31, 1997,
1998 and 1999 totaled $403,000, $490,000 and $650,000, respectively, and
$140,000 and $255,000 for the three months ended March 31, 1999 and 2000,
respectively.
Concentrations of Credit Risk
Financial instruments which subject the Company to concentrations of credit
risk include cash and cash equivalents and accounts receivable. The Company
maintains its cash in a domestic financial institution and performs periodic
evaluations of the relative credit standing of this institution.
The Company currently provides services primarily to early stage technology
companies in Northern California. Under the terms of its customer agreements,
the Company is required to pay its serviced employees' salaries and wages
regardless of whether the customer makes timely payment to the Company. The
Company provides an allowance for anticipated losses on accounts receivable.
The Company generally requires payment from its customers no later than one
day prior to the applicable payroll date. From certain of its customers, the
Company requires a performance assurance payment ("PAP") in an amount equal to
the total payroll and service fee for one average payroll period and such
amounts are recorded as subscriber prepayments in the accompanying consolidated
balance sheets. Should the PAP fall below the required amount, the customer is
required to pay an amount sufficient to establish the required PAP level. In
the event of a termination, the Company refunds remaining PAP amounts within 30
days, provided all obligations of the customer have been fulfilled.
Cash and Cash Equivalents
Cash and cash equivalents include bank demand deposits and short-term,
highly liquid investments. Investments with original maturity dates of three
months or less are considered cash equivalents. Since the Company generally
requires its customers to pay no later than one day prior to the applicable
payroll date, the Company's cash and cash equivalents can vary significantly
based on the timing of funds transferred by customers and the timing of funds
disbursed by the Company for applicable services.
Property and Equipment, net
Property and equipment are recorded at cost and depreciation is computed
using the straight-line method over the estimated useful lives of the assets,
generally three to seven years. Leasehold improvements are depreciated over the
shorter of the life of the asset or the remaining term of the
F-8
<PAGE>
TriNet Group, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of March 31, 1999 and 2000 and for the three months ended March
31, 1999 and 2000 is unaudited)
1. Description of Business and Significant Accounting Policies (continued)
lease. The cost of maintenance and repairs is expensed as incurred; renewals
and betterments are capitalized.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Software Development and Enhancements
Through the end of 1997, the Company expensed as incurred certain costs to
develop and enhance its internal computer programs and software. Expenditures
for vendor-provided software were capitalized and amortized using the straight-
line method over estimated useful lives ranging from 3 to 5 years. In March
1998, the Accounting Standards Executive Committee issued Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The SOP requires the capitalization of internal use
computer software costs if certain criteria are met, including all external
direct costs for materials and services and certain payroll and related fringe
benefit costs. The Company early-adopted SOP 98-1 as of January 1, 1998. As a
result, the Company capitalizes internal use software costs with an expected
useful life over one year and expenses amounts not meeting the criteria of SOP
98-1. Capitalized software costs are amortized on the straight line basis over
estimated useful lives ranging from 2 to 4 years.
Fair Value of Financial Instruments
The carrying value of accounts receivable, unbilled receivables, accounts
payable, subscriber prepayments and accrued compensation and related expenses
approximates fair value due to the short-term maturities of these assets and
liabilities. The carrying value of borrowings under bank financing arrangements
approximates fair value since the interest rate is variable and resets
frequently.
Advertising
All advertising costs are expensed as incurred. Advertising costs, which are
included in client acquisition costs, were approximately $130,000, $290,000 and
$610,000 for the years ended December 31, 1997, 1998 and 1999, respectively,
and $70,000 and $160,000 for the three months ended March 31, 1999 and 2000,
respectively.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"), which requires the use of the liability method in
accounting for income taxes. Under this method, deferred
F-9
<PAGE>
TriNet Group, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of March 31, 1999 and 2000 and for the three months ended March
31, 1999 and 2000 is unaudited)
1. Description of Business and Significant Accounting Policies (continued)
tax liabilities and assets are measured based upon differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes using enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
Stock-Based Compensation
The Company accounts for stock-based awards to employees under the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and has adopted the
disclosure-only alternative of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("FAS 123").
Translation of Foreign Currencies
All assets and liabilities that are denominated in foreign currencies are
translated into U.S. dollars at year-end exchange rates and all revenue and
expense accounts are translated using the average monthly exchange rates.
Translation adjustments are included in the Accumulated Other Comprehensive
Loss component of stockholders' equity.
Computation of Net Income (Loss) Per Common Share
The Company computes net income (loss) per common share based on Financial
Accounting Standards Board Statement No. 128, "Earnings Per Share" ("FAS 128").
In accordance with FAS 128, basic net income (loss) per common share is
calculated as net income (loss) available to common stockholders divided by the
weighted-average number of common shares outstanding. Diluted net income (loss)
per common share is computed using the weighted-average number of common shares
outstanding and dilutive common stock equivalents outstanding during the period
unless the effect of including such shares is anti-dilutive. Common equivalent
shares result from stock options (using the treasury stock method) and
convertible preferred stock (using the as-if-converted method).
Pro forma net income (loss) per common share has been computed as described
above and also gives effect, under Securities and Exchange Commission guidance,
to the conversion of preferred shares not included above that will
automatically convert to common shares upon completion of the Company's initial
public offering, using the if-converted method.
Interim Financial Information
The interim financial information at March 31, 1999 and 2000 and for the
three months ended March 31, 1999 and 2000 is unaudited but, in the opinion of
management, includes all adjustments, consisting only of normal recurring
adjustments, which the Company considers necessary for a fair presentation of
the financial position and results of operations for the interim periods. The
results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the full fiscal year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
F-10
<PAGE>
TriNet Group, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of March 31, 1999 and 2000 and for the three months ended March
31, 1999 and 2000 is unaudited)
1. Description of Business and Significant Accounting Policies (continued)
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designed as
part of a hedge transaction, and, if so, the type of hedge transaction.
In June 1999, the FASB issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133" ("FAS 137"), which
amends FAS 133 to be effective for all fiscal quarters or all fiscal years
beginning after June 15, 2000, or January 1, 2001 for the Company. Management
does not currently expect that adoption of FAS 137 will have a material impact
on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements"
and in March 2000 issued SAB 101A, "Amendment: Revenue Recognition in Financial
Statements." SAB 101 and 101A are effective for the Company in the quarter
ending June 30, 2000. Management does not currently expect that adoption of SAB
101 will have a material impact on the Company's financial position or results
of operations.
2. Property and Equipment, Net
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------ March 31,
1998 1999 2000
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Software............................ $ 2,266,960 $ 4,969,493 $ 5,196,056
Office equipment including data
processing equipment............... 1,729,900 2,977,038 3,415,181
Furniture, fixtures and equipment... 637,036 955,142 1,020,978
Leasehold improvements.............. 536,299 986,686 1,044,099
----------- ----------- -----------
5,170,195 9,888,359 10,676,314
Accumulated depreciation............ (1,164,617) (1,909,095) (2,573,263)
----------- ----------- -----------
$ 4,005,578 $ 7,979,264 $ 8,103,051
=========== =========== ===========
</TABLE>
3. Bank Financing Arrangements
In September 1999, the Company entered into a non-revolving line of credit
agreement with a bank to finance qualifying expenditures on computer systems
projects. Under the terms of this agreement, the Company may borrow up to
$4,000,000 through March 31, 2000. Interest accrues on outstanding borrowings
at either LIBOR plus 3.6% (10.1% at December 31, 1999) or the bank's reference
rate plus 1% (9.5% at December 31, 1999), and is payable monthly. Among other
F-11
<PAGE>
TriNet Group, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of March 31, 1999 and 2000 and for the three months ended March
31, 1999 and 2000 is unaudited)
3. Bank Financing Arrangements (continued)
rovisions, the agreement requires the Company to maintain certain net worth
levels and financial ratios. Borrowings under the agreement are secured by
substantially all of the Company's assets.
At December 31, 1999, the Company had incurred and included in accounts
payable $1,117,000 of costs eligible for financing under the agreement.
Subsequent to December 31, 1999, the Company financed these costs under the
agreement and accordingly has included such amounts in bank borrowings in the
accompanying balance sheet. On March 31, 2000, any outstanding borrowings were
to be converted to a note payable with a term of 36 months. At December 31,
1999, outstanding borrowings of $1,766,728 have been included in long term
liabilities since repayment was scheduled to occur after December 31, 2000. In
March 2000, the Company repaid all outstanding borrowings under the line of
credit agreement.
Outstanding borrowings at December 31, 1999 were due as follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000.......................................................... $ 588,910
2001.......................................................... 785,213
2002.......................................................... 785,213
2003.......................................................... 196,302
----------
2,355,638
Less: current portion............................................ 588,910
----------
Long-term portion................................................ $1,766,728
==========
</TABLE>
4. Redeemable Convertible Preferred Stock
Pursuant to terms specified in the Amended Series E Preferred Stock Purchase
Agreement (Preferred Stock Agreement) with an existing common stockholder and
upon meeting certain financial milestones, the Company issued to the common
stockholder, 25,000 shares of Series E redeemable convertible preferred stock
(Series E) at $40 per share in 1997 and 12,500 shares of Series E at $40 per
share in 1998. All shares of Series E covered under the Preferred Stock
Agreement were issued as of December 31, 1998.
Shares of Series E may, at the option of the holder, be converted at any
time into common stock at a conversion price of $0.57 per common share, subject
to adjustment based on anti-dilution provisions outlined in the Preferred Stock
Agreement (conversion price of $0.5268526 per common share at December 31,
1999). Upon issuance of Series E in 1997 and 1998, the aggregate fair value of
the common stock the holder would receive upon conversion exceeded the proceeds
to be received from conversion and such difference has been accounted for as a
discount on preferred stock in both 1997 and 1998. Since the Series E is
immediately convertible, the $1,000,000 and $500,000 discount related to the
1997 and 1998 issuance of Series E was accreted to retained earnings in 1997
and 1998, respectively. At December 31, 1997, all of the then outstanding
shares of Series E were converted into 4,687,852 shares of common stock. In
consideration for the December 1997 agreement to convert the Series E into
common stock, the Company entered into an agreement to
F-12
<PAGE>
TriNet Group, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of March 31, 1999 and 2000 and for the three months ended March
31, 1999 and 2000 is unaudited)
4. Redeemable Convertible Preferred Stock (continued)
issue the holder of Series E the right to receive one share of common stock for
each additional equity security issued by the Company, subject to certain
conditions. On February 29, 2000, the Company issued 380,198 shares of common
stock, which satisfies the agreement to maintain the Series E holder's
ownership percentage at the time of the Series E conversion.
Shares of Series E accrue a 6% cumulative dividend, payable annually.
Dividends of $107,151, $27,452 and $30,000 were accrued for the years ended
December 31, 1997, 1998, and 1999, respectively. Subsequent to September 30,
2000, Series E is subject to redemption at any time at the option of the holder
at the original issue price of $40 per share. In the event the Company is not
able to redeem the Series E in accordance with a request for redemption from
the holder, the dividend rate will increase from 6% to 12%. The holder of
Series E has no voting rights but has the right to elect one member to the
Company's Board of Directors.
The holder of Series E is entitled to receive the stated liquidation value
of $40 per share, plus accrued but unpaid dividends, in the event of any
liquidation, dissolution or winding up of the Company.
5. Stockholders' Equity
Pursuant to the July 1995 Shareholders Agreement, all existing common
stockholders have retained a right of first refusal, on a pro rata basis, to
purchase additional shares offered for sale by the Company. Issuances of shares
from a specified pool of shares reserved for the issuance of stock options are
excluded from this right.
Convertible Preferred Stock
On March 2, 2000, the Company issued 150,263 shares of Series F convertible
preferred stock (Series F) to an outside investor for $4.0 million. Shares of
Series F may, at the option of the holder, be converted at any time into common
stock at a conversion price of $15.21 per common share, subject to adjustment
based on anti-dilution provisions. Series F accrues a non-cumulative dividend
of $1.61 per share, payable annually, and the holder of Series F is entitled to
receive the stated liquidation preference of $26.62 per share plus declared but
unpaid dividends, in the event of any liquidation, dissolution or winding up of
the Company.
Proposed Public Offering of Common Stock
On December 21, 1999, the Board authorized the Company to proceed with an
initial public offering of its common stock. If the offering is consummated as
presently anticipated, all of the outstanding convertible preferred stock and
redeemable convertible preferred stock will automatically convert to common
stock. The unaudited pro forma stockholders' equity at March 31, 2000 gives
effect to the conversion of all outstanding shares of convertible preferred
stock and redeemable convertible preferred stock at that date into 1,211,991
shares of common stock upon the completion of the offering.
F-13
<PAGE>
TriNet Group, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of March 31, 1999 and 2000 and for the three months ended March
31, 1999 and 2000 is unaudited)
5. Stockholders' Equity (continued)
Upon completion of this offering and the filing of the amended and restated
certificate of incorporation, the Company's authorized capital stock will
consist of 100,000,000 shares of common stock, $0.001 par value, and 5,000,000
shares of preferred stock, $0.001 par value.
Stock Split
On March 24, 2000 the Board of Directors authorized, subject to
stockholders' approval, a seven to four stock split of the Company's issued and
outstanding common stock to be effective prior to the effectiveness of the
Company's initial public offering. The accompanying consolidated financial
statements have been retroactively restated to give effect to the stock split.
1990 Stock Option Plan
Pursuant to the Company's 1990 Stock Option Plan (the "Plan"), an aggregate
of 2,143,750 shares of common stock has been reserved for issuance upon the
exercise of options granted to qualified employees, directors, and consultants
of the Company. The Board of Directors, directly or through committees,
administers the Plan and establishes the terms of option grants. The exercise
price per share of all incentive stock options granted under the Plan must be
at least equal to the fair market value of the shares at the date of grant as
determined by the Board. The options generally vest at a rate of 25% after each
year and have a maximum term of five years.
F-14
<PAGE>
TriNet Group, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of March 31, 1999 and 2000 and for the three months ended March
31, 1999 and 2000 is unaudited)
5. Stockholders' Equity (continued)
Stock option activity under the Plan is summarized as follows:
<TABLE>
<CAPTION>
Outstanding options
-----------------------
Weighted
Options average
available Number of Price per exercise
for grant shares share price
--------- --------- ------------ --------
<S> <C> <C> <C> <C>
Balance at December 31, 1996... 1,191,229 711,896 $0.05-0.91 $ 0.66
Granted....................... (191,443) 191,443 1.94-2.83 2.38
Exercised..................... -- (9,668) 0.05-0.57 0.15
Cancelled..................... 4,463 (4,463) 0.57 0.57
--------- --------- ------------ ------
Balance at December 31, 1997... 1,004,249 889,208 $0.57-2.83 $ 1.03
Granted....................... (192,540) 192,540 2.11-3.33 3.10
Exercised..................... -- (71,931) 2.11-3.33 2.99
Cancelled..................... 106,063 (106,063) 0.57-3.33 1.33
--------- --------- ------------ ------
Balance at December 31, 1998... 917,772 903,754 $0.57-3.33 $ 1.30
Granted....................... (457,094) 457,094 4.13-14.70 4.90
Exercised..................... -- (122,863) 2.11-14.70 4.70
Cancelled..................... 31,688 (31,688) 0.57-14.70 2.41
--------- --------- ------------ ------
Balance at December 31, 1999... 492,366 1,206,297 $0.57-14.70 $ 2.75
Granted (unaudited)........... (416,975) 416,975 16.47 16.47
Exercised (unaudited)......... -- (129,148) 14.70-16.47 16.33
Cancelled (unaudited)......... 15,619 (15,619) 2.11-16.47 12.16
--------- --------- ------------ ------
Balance at March 31, 2000
(unaudited)................... 91,010 1,478,505 $0.57-16.47 $ 6.68
========= ========= ============ ======
</TABLE>
The weighted-average remaining contractual life of all outstanding options
at March 31, 2000 is 3.31 years.
For the years ended December 31, 1998 and 1999, the exercise price of all
options granted was less than the fair value of the common stock on the date of
grant and these options have weighted average exercise prices of $3.10 per
share and $4.90 per share, respectively. For the year ended December 31, 1997
and the three months ended March 31, 2000, the exercise price of all options
granted was equal to the fair value of the common stock on the date of grant
and the weighted average exercise price was $2.38 per share and $16.47 per
share, respectively.
F-15
<PAGE>
TriNet Group, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of March 31, 1999 and 2000 and for the three months ended March
31, 1999 and 2000 is unaudited)
5. Stockholders' Equity (continued)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------- ------------------------
Ranges
of Weighted average
exercise remaining Weighted average Weighted average
prices Shares contractual life exercise price Shares exercise price
-------- --------- ---------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$0.57 324,362 1.10 $0.57 233,587 $0.57
$0.91 131,250 1.77 0.91 103,725 0.91
$1.94-
2.18 105,087 2.55 2.01 72,918 2.02
$2.83-
3.33 199,760 3.24 3.09 73,833 3.06
$4.13 161,250 4.07 4.13 76,391 4.13
$5.16 278,918 4.49 5.16 -- --
$14.70 5,670 4.97 14.70 -- --
--------- ---- ----- ------- -----
$0.57-
14.70 1,206,297 2.85 $2.75 560,454 $1.63
========= ==== ===== ======= =====
</TABLE>
2000 Stock Incentive Plan
On March 24, 2000 the Board of Directors adopted, subject to stockholder
approval, the 2000 Stock Incentive Plan. The Company has reserved a total of
700,000 shares of common stock for issuance under the plan. On each January 1,
starting with January 1, 2001 and continuing through and including January 1,
2009, the share reserve automatically increases by a number of shares equal to
the least of 4% of outstanding common stock shares; 400,000 shares; or a lesser
number determined by the Board. The plan provides for the issuance of stock
options as well as stock awards. The 2000 Stock Incentive Plan is intended to
replace and supersede the Company's 1990 Stock Option Plan with no further
grants made under the 1990 Stock Option Plan, and all shares reserved if not
granted will become shares reserved under the 2000 Stock Incentive Plan.
2000 Employee Stock Purchase Plan
On March 24, 2000, the Board of Directors adopted, subject to stockholder
approval, the 2000 Employee Stock Purchase Plan to be effective upon completion
of the Company's initial public offering of its common stock. The Company has
reserved a total of 200,000 shares of common stock for issuance under the plan.
Shares Reserved for Future Issuance
The Company has reserved shares of common stock for future issuance as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1998 1999 March 31, 2000
--------- ------- --------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Redeemable convertible
preferred stock............... -- 875,000 949,032 949,032
Convertible preferred stock.... -- -- -- 262,959
Stock options outstanding...... 889,208 903,754 1,206,297 1,478,505
Stock options available for
grant......................... 1,004,249 917,772 492,366 91,010
</TABLE>
F-16
<PAGE>
TriNet Group, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of March 31, 1999 and 2000 and for the three months ended March
31, 1999 and 2000 is unaudited)
5. Stockholders' Equity (continued)
Deferred Compensation
The Company has recorded deferred stock compensation charges of $503,000,
$1,367,000, and $335,000 during the years ending December 31, 1998 and 1999 and
the three months ended March 31, 1999, respectively. These charges represent
the difference between the exercise price of the stock option and the fair
value of common stock as of the date of grant. These amounts are being
amortized by charges to operations, using the graded method, over the vesting
periods of the individual stock options, which are 4 years.
Pro Forma Disclosures of the Effect of Stock Based Compensation
Pro forma information regarding net income and net income per common share
is required by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123"), and has been determined as if the
Company had accounted for its employee stock options under the fair value
method of FAS 123. For purposes of pro forma disclosures, the estimated fair
value of the stock option is amortized to expense over the option's vesting
period. The fair value of these stock options was estimated at the date of
grant using the Black-Scholes option pricing valuation model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate........................ 6 % 6 % 6 %
Dividend yield................................. 0 % 0 % 0 %
Volatility factor.............................. 0.5 0.5 0.5
Expected option term life in years............. 5 5 5
</TABLE>
For the years ended December 31, 1998 and 1999, the exercise price of all
options granted was less than the fair value of the common stock on the date of
grant. For the year ended December 31, 1997, the exercise price of all options
granted was equal to the fair value of the common stock on the date of grant.
The weighted-average fair value of these options granted was $0.62, $0.81
and $2.43 for 1997, 1998 and 1999, respectively.
Option valuation models were developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
Option valuation models require the input of highly subjective assumptions,
including expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, subjective input assumptions can materially affect the fair value
estimate.
Had compensation costs for the Company's stock option plan been determined
using the fair value at the grant dates for awards under that plan consistent
with the method of FAS 123, the Company's historical net income (loss)
applicable to common shareholders and basic and diluted net
F-17
<PAGE>
TriNet Group, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of March 31, 1999 and 2000 and for the three months ended March
31, 1999 and 2000 is unaudited)
5. Stockholders' Equity (continued)
income (loss) per common share would have been decreased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1998 1999
--------- -------- ---------
<S> <C> <C> <C>
Net income (loss) applicable to common
shareholders:
As reported............................... $(347,640) $454,978 $(133,133)
Pro forma................................. $(389,408) $379,591 $(453,316)
Basic net income (loss) per common share:
As reported............................... $ (0.06) $ 0.04 $ (0.01)
Pro forma................................. $ (0.06) $ 0.03 $ (0.04)
Diluted net income (loss) per common share:
As reported............................... $ (0.06) $ 0.04 $ (0.01)
Pro forma................................. $ (0.06) $ 0.03 $ (0.04)
</TABLE>
The pro forma impact of options on the results for the years ended December
31, 1997, 1998, and 1999 is not representative of the effects on results for
future years, as future years will include the effects of additional years of
stock option grants.
F-18
<PAGE>
TriNet Group, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of March 31, 1999 and 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited)
6. Net Income (Loss) Per Common Share
The calculation of historical basic and diluted net income (loss) per
common share is as follows:
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
----------------------------------- -------------------------
1997 1998 1999 1999 2000
------------ ---------- ---------- ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Historical:
Numerator:
Net income (loss)...... $ 759,511 $ 982,430 $ (103,133) $ (155,084) $ (1,276,112)
Less: preferred stock
dividends and discount
accretion............. (1,107,151) (527,452) (30,000) (7,397) (7,397)
------------ ---------- ---------- ---------- ------------
Numerator for basic and
dilutive net income
(loss) per common
share--net income
available to common
stockholders.......... $ (347,640) $ 454,978 $ (133,133) $ (162,481) $ (1,283,509)
============ ========== ========== ========== ============
Denominator:
Denominator for basic
net income (loss) per
common share--
weighted-average
shares of common stock
outstanding........... 6,299,060 11,030,392 11,095,625 11,070,295 11,204,420
Effect of dilutive
securities:
Employee stock
options.............. -- 508,142 -- -- --
------------ ---------- ---------- ---------- ------------
Denominator for
dilutive net income
(loss) per common
share--adjusted
weighted-average
shares and assumed
conversions........... 6,299,060 11,538,534 11,095,625 11,070,295 11,204,420
============ ========== ========== ========== ============
Basic net income (loss)
per common share...... $ (0.06) $ 0.04 $ (0.01) $ (0.01) $ (0.11)
============ ========== ========== ========== ============
Diluted net income
(loss) per common
share................. $ (0.06) $ 0.04 $ (0.01) $ (0.01) $ (0.11)
============ ========== ========== ========== ============
</TABLE>
For the years ended December 31, 1997 and 1999 and the three months ended
March 31, 1999 and 2000, if the Company had reported net income per common
share, the calculation of historical diluted net income per common share would
have included approximately an additional 350,000, 577,000, 338,000 and
985,000 common equivalent shares, respectively, related to outstanding stock
options not included above (determined using the treasury stock method). In
addition, if the Company had reported net income for the year ended December
31, 1999 and the three months ended March 31, 1999, the calculation of
historical diluted net income per common share would have included
approximately an additional 1,433,000 common equivalent shares, related to the
conversion of preferred shares using the if-converted method. For the years
ended December 31, 1997 and 1998 and the three months ended March 31, 2000,
the effect of the convertible preferred stock is anti-dilutive.
F-19
<PAGE>
TriNet Group, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of March 31, 1999 and 2000 and for the three months ended March
31, 1999 and 2000 is unaudited)
6. Net Income (Loss) Per Common Share (continued)
For the year ended December 31, 1999 and for the three months ended
March 31, 2000, the calculation of pro forma basic and diluted net loss per
common share is as follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
----------------- ------------------
(unaudited)
<S> <C> <C>
Net loss............................... $ (103,133) $(1,276,112)
========== ===========
Weighted-average shares used in
computing basic net loss per common
share................................. 11,095,625 11,204,420
Adjustment to reflect the effect of the
assumed conversion of preferred stock
from beginning of year................ 949,032 1,032,832
---------- -----------
Weighted-average shares used in
computing pro forma basic and diluted
net loss per common share............. 12,044,657 12,237,252
========== ===========
Pro forma basic and dilutive net loss
per common share (unaudited).......... $ (0.01) $ (0.10)
========== ===========
</TABLE>
7. Income Taxes
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
---------------------------- -----------------------
1997 1998 1999 1999 2000
--------- -------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal................ $ 176,900 $331,200 $ 12,100 $ 15,270 $ --
State.................. 46,000 88,600 9,200 11,610 --
--------- -------- -------- -------- ---------
222,900 419,800 21,300 26,880 --
Deferred:
Federal................ 165,900 276,500 297,800 375,797 (527,800)
State.................. 45,000 83,100 80,200 101,205 (114,700)
--------- -------- -------- -------- ---------
210,900 359,600 378,000 477,002 (642,500)
--------- -------- -------- -------- ---------
433,800 779,400 399,300 503,882 (642,500)
Change in valuation
allowance.............. (187,000) -- -- -- --
--------- -------- -------- -------- ---------
$ 246,800 $779,400 $399,300 $503,882 $(642,500)
========= ======== ======== ======== =========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-20
<PAGE>
TriNet Group, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of March 31, 1999 and 2000 and for the three months ended March
31, 1999 and 2000 is unaudited)
7. Income Taxes (continued)
purposes. Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1998 and 1999 and March 31, 2000 are as follows:
<TABLE>
<CAPTION>
As of December 31, As of
---------------------- March 31,
1998 1999 2000
--------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Accrued expenses..................... $ 69,000 $ 256,300 $ 540,300
State income taxes................... 61,700 62,000 19,900
Net operating loss carryforwards..... -- -- 287,400
Other................................ 17,700 4,600 61,600
--------- ----------- -----------
148,400 322,900 909,200
Deferred tax liabilities:
Depreciation and amortization........ (127,500) (186,800) (206,000)
Software development costs........... (404,600) (897,800) (822,400)
--------- ----------- -----------
Total deferred tax liabilities........ (532,100) (1,084,600) (1,028,400)
--------- ----------- -----------
Net deferred tax liability............ $(383,700) $ (761,700) $ (119,200)
========= =========== ===========
Net current deferred tax assets....... $ 147,400 $ 322,500 $ 620,600
Net noncurrent deferred tax
liabilities.......................... (531,100) (1,084,200) (739,800)
--------- ----------- -----------
Net deferred tax liability............ $(383,700) $ (761,700) $ (119,200)
========= =========== ===========
</TABLE>
The reconciliation of income tax computed at the United States federal
statutory tax rates to the provision for income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended Three Months Ended
December 31, March 31,
----------------- -----------------------
1997 1998 1999 1999 2000
---- ---- ---- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Tax at U.S. statutory rate....... 34 % 34% 34% 34% (34)%
State income taxes, net federal
benefit......................... 6 6 20 24 (4)
Non-deductible stock-based
compensation.................... -- 3 75 80 5
Meals and entertainment.......... -- 1 4 4 --
Change in valuation allowance.... (18) -- -- -- --
Other............................ 2 -- 2 2 --
--- --- --- --- ---
24 % 44% 135% 144% (33)%
=== === === === ===
</TABLE>
At March 31, 2000, the Company has a net operating loss for federal income
tax purposes of approximately $748,000. Should the Company have a federal net
operating loss at December 31, 2000, the carryforward will expire in the year
2020. At March 31, 2000, the Company has a net operating loss for state income
tax purposes of approximately $369,000. Should the Company have a state net
operating loss at December 31, 2000, the carryforward will expire in the year
2005.
F-21
<PAGE>
TriNet Group, Inc.
Notes to Consolidated Financial Statements (continued)
(Information as of March 31, 1999 and 2000 and for the three months ended March
31, 1999 and 2000 is unaudited)
7. Income Taxes (continued)
Utilization of the Company's net operating loss may be subject to
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss before
utilization.
8. Commitments and Contingencies
Leases
The Company leases office facilities for its headquarters and other
facilities under noncancelable operating leases which require the Company to
pay certain maintenance and all insurance costs.
As of December 31, 1999, minimum payments under all noncancelable lease
agreements were as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
2000.......................................................... $ 731,000
2001.......................................................... 737,000
2002.......................................................... 623,000
2003.......................................................... 269,000
2004.......................................................... 206,000
----------
Total minimum lease payments..................................... $2,566,000
==========
</TABLE>
Rent expense for the years ended December 31, 1997, 1998, and 1999 was
$201,000, $374,000 and $591,000, respectively.
Contingencies
While currently the Company is not aware of any significant pending
litigation, the Company may from time to time become involved in various
litigation arising in the ordinary course of business and the resolution of
these matters could have a material effect on the Company's financial position
or results of operations.
Due to the nature of the Company's relationship with its serviced employees,
the Company could be subject to liability for federal and state law violations
even if the Company does not participate in such violations. While the
agreements with customers contain indemnification provisions related to the
conduct of the customers, the Company historically has not encountered
situations requiring enforcement of these indemnification provisions.
Beginning in 1998, the Company entered into a retroactively rated workers'
compensation premium arrangement with an insurance carrier. At the end of each
plan year, subject to minimum and maximum limits, the actual premium due is
adjusted according to the period's claims experience. The Company records
premium expense throughout the year based on projections from actual claims
experience. Actual workers' compensation premiums may differ from the estimates
recorded by the Company, and such differences could have a material effect on
the Company's financial position or results of operations in a particular
period.
F-22
<PAGE>
[Description of inside back cover graphics: Art to be depicted on the inside
back cover shows four graphics demonstrating the services available through HR
Passport.]
Title: TriNet's Fully Integrated Online Service Offering
[In the center of the page is a picture of the HR Passport website homepage.
The homepage contains the HR Passport logo and five links to: Myself, Payroll,
My Workplace, Searchers, Sign Off]
[To the left of the homepage are four boxes with arrows connecting the boxes
to the first four links.]
The first box is titled Myself and lists the following bullet points: Access
Numbers, Address, Emergency Contact, Name, Org Chart, Personal Data History,
Personal Profile, Personal ID, Password Change
The second box is titled Payroll and lists the following bullet points:
Check Advice Summary, Direct Deposit, Paid Time Off, Tax Withholding
The third box is titled My Workplace and lists the following bullet points:
Work Location, Work Profile, Work Inbox
The fourth box is titled Searchers and lists the following bullet points:
Find Persons by Name, Find Person by ID, Find Location, Find Organization.
[One graphic below the HR Passport homepage is a picture of the Payroll
webpage, with the title Paycheck Advice]
[Another graphic below the HR Passport homepage is a picture of the Verify
Your Current Selections webpage, with the title Enroll in Benefits]
[Another graphic below the HR Passport homepage is a picture of the My
Workplace webpage, with the title HR Transactions]
<PAGE>
TRINET LOGO
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses to be paid by TriNet
in connection with the sale of the shares of common stock being registered
hereby. All amounts are estimates except for the Securities and Exchange
Commission registration fee, the NASD filing fee and the Nasdaq National Market
filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 24,653
NASD filing fee.................................................. 6,250
Nasdaq National Market filing fee................................ 90,000
Accounting fees and expenses..................................... 400,000
Legal fees and expenses.......................................... 400,000
Printing and engraving expenses.................................. 170,000
Blue sky fees and expenses....................................... 10,000
Transfer agent and registrar fees and expenses................... 15,000
Miscellaneous.................................................... 84,097
----------
Total.......................................................... $1,200,000
==========
</TABLE>
ITEM 14. Indemnification of Directors and Officers.
Section 145 of Delaware General Corporation Law provides for the
indemnification of directors and officers. Our amended and restated certificate
of incorporation contains provisions permitted under Delaware law relating to
the liability of directors. These provisions eliminate a director's personal
liability for monetary damages resulting from a breach of fiduciary duty,
except in circumstances involving wrongful acts, such as:
. any breach of the director's duty of loyalty;
. acts or omissions which involve a lack of good faith, intentional
misconduct or a knowing violation of the law;
. any transaction from which the director derives an improper personal
benefit; and
. payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law.
These provisions do not limit or eliminate our rights or any stockholder's
rights to seek non-monetary relief, such as an injunction or rescission, in the
event of a breach of director's fiduciary duty. These provisions will not alter
a director's liability under federal securities laws.
Our bylaws require us to indemnify our directors and executive officers to
the fullest extent not prohibited by the Delaware law. We may limit the extent
of such indemnification by individual contracts with our directors and
executive officers. Further, we may decline to indemnify any director or
executive officer in connection with any proceeding initiated by such person or
any proceeding by such person against TriNet or its directors, officers,
employees or other agents, unless such indemnification is expressly required to
be made by law or the proceeding was authorized by our board of directors.
II-1
<PAGE>
We intend to enter into indemnity agreements with each of our current
directors and certain of our executive officers to give these directors and
officers additional contractual assurances regarding the scope of the
indemnification set forth in our certificate of incorporation and bylaws and to
provide additional procedural protections. At present, there is no pending
litigation or proceeding involving a director, officer or employee of TriNet
for which indemnification is sought, nor are we aware of any threatened
litigation that may result in claims for indemnification.
We have the power to indemnify our other officers, employees and other
agents, as permitted by Delaware law, but we are not required to do so.
TriNet plans to obtain directors' and officers' liability insurance.
ITEM 15. Recent Sales of Unregistered Securities
In the three fiscal years preceding the filing of this registration
statement, the Registrant has issued the following securities that were not
registered under the Securities Act:
(1) From January 1997 to March 31, 2000, TriNet has granted stock options
to purchase 1,258,052 shares of common stock, at a weighted average
exercise price of $6.68, to employees, consultants and directors
pursuant to its 1990 Stock Option Plan. Of these stock options, 157,833
have been cancelled, 333,610 shares have been exercised, 1,487 shares
of which have been repurchased and 1,478,505 shares remain outstanding.
(2) From February 1997 to January 1998, TriNet issued 25,000 shares of
Series E preferred stock to Select Holdings Inc., or Select, at $40.00
per share. In December 1997, 62,500 shares of Series E preferred stock
were converted into 4,687,852 shares of common stock. In consideration
for Select agreeing to elect such conversion, TriNet agreed to issue
additional shares of common stock to Select. In February 2000, in full
satisfaction of its agreement, TriNet issued to Select an aggregate of
380,198 shares of common stock. The remaining 12,500 shares of Series E
preferred stock are convertible into an aggregate of 949,032 shares of
common stock.
(3) In March 2000 prior to the filing of the Registration Statement, TriNet
issued an aggregate of 150,263 shares of Series F preferred stock to
Bessemar Venture Partners V L.P., Bessec Ventures V L.P. and BVE LLC at
$26.62 per share for an aggregate purchase price of $4,000,001.06.
These shares of Series F preferred stock are convertible into 262,959
shares of common stock.
No underwriters were involved in the foregoing sales of securities. Except
as noted, such sales were exempt under the Securities Act in reliance upon
Section 4(2) thereof relative to sales by an issuer not involving any public
offering, or, in the case of options to purchase common stock, Rule 701 under
the Securities Act. All of the foregoing securities are restricted securities
for purposes of the Securities Act.
ITEM 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.01* Form of Underwriting Agreement.
3.01** Amended and Restated Articles of Incorporation, as amended.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
3.02* Form of Amended and Restated Certificate of Incorporation to be in
effect upon the closing of the offering.
3.03** Bylaws.
3.04* Form of Amended and Restated Bylaws to be in effect upon the closing
of the offering.
4.01* Form of Specimen Stock Certificate.
5.01* Opinion of Cooley Godward llp.
10.01** 1990 Stock Option Plan.
10.02* 2000 Equity Incentive Plan.
10.03* 2000 Employee Stock Purchase Plan.
10.04** Lease Agreement dated July 22, 1999 between Registrant and KBK
Properties, Inc.
10.05** Lease Agreement dated July 9, 1999 between Registrant and Incline
Capital Group, LLC.
10.06** Credit Agreement dated September 21, 1999 between Registrant and
Sanwa Bank California.
10.07+** Volume License Agreement dated August 12, 1999 between Registrant and
Concur Technologies, Inc.
10.08+** Software License and Services Agreement dated September 24, 1997
between Registrant and PeopleSoft, Inc.
10.09+** Software License Agreement dated October 6, 1999 between Registrant
and Authoria, Inc.
10.10** Annual Support and Maintenance Agreement dated October 21, 1999
between Registrant and Authoria, Inc.
10.11+** Software License Agreement dated September 29, 1999 between
Registrant and Brio Technology, Inc.
10.12+** Consulting Services Agreement dated November 11, 1999 between
Registrant and Brio Technology, Inc.
10.13** Form of Steering Committee Employment Agreement.
10.14** Form of Executive Committee Employment Agreement.
10.15** Employment Agreement dated July 22, 1995 between Registrant and
Martin Babinec.
10.16** Amended and Restated Investor's Rights Agreement, dated March 2,
2000.
21.01** Subsidiaries of Registrant.
23.01** Consent of Cooley Godward llp. Reference is made to Exhibit 5.01.
23.02 Consent of Ernst & Young LLP, independent auditors.
24.01** Powers of Attorney.
27.01** Financial Data Schedule.
</TABLE>
- --------
+ Confidential Treatment Requested
* To be filed by amendment
** Previously filed
II-3
<PAGE>
(b) Consolidated Financial Statement Schedules:
Report of Ernst & Young LLP, Independent Auditors
Schedule II--Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted since they are
either not required, not applicable or the information is otherwise
included.
ITEM 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 3 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City and County of
San Francisco, State of California, on the 19th day of May, 2000.
TriNet Group, Inc.
/s/ Martin Babinec
By: _________________________________
Martin Babinec
Chief Executive Officer
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Martin Babinec President, Chief Executive May 19, 2000
______________________________________ Officer and Director
Martin Babinec (Principal Executive
Officer)
/s/ Douglas P. Devlin Chief Financial Officer and May 19, 2000
______________________________________ Director (Principal
Douglas P. Devlin Financial and Accounting
Officer)
* Director May 19, 2000
______________________________________
Anthony V. Martin
* Director May 19, 2000
______________________________________
H. Lynn Hazlett, Ph.D.
* Director May 19, 2000
______________________________________
T. Joe Willey, Ph.D.
* Director May 19, 2000
______________________________________
James P. Hanson
</TABLE>
/s/ Douglas P. Devlin
* By: _______________________________
Douglas P. Devlin
Attorney-in-fact
II-5
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the consolidated financial statements of TriNet Group, Inc.
as of December 31, 1999 and 1998 and for each of the three years in the period
ended December 31, 1999, and have issued our report thereon dated February 18,
2000, except for paragraph 2 of Note 4 as to which the date is February 29,
2000 and for paragraph 5 of Note 5 as to which the date is March 24, 2000
(included elsewhere in this Registration Statement). Our audits also included
the financial statement schedule listed in Item 16(b) of this Registration
Statement. 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
February 18, 2000
S-1
<PAGE>
SCHEDULE II
VALUATION & QUALIFYING ACCOUNTS
TRINET GROUP, INC.
(In Thousands)
<TABLE>
<CAPTION>
Balance
Balance at Additions at End
Beginning Charged to (a) of
Description of Period Expenses Deductions Period
- ------------------------------------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
(deducted from accounts receivable)
Year ended December 31, 1999........ $7,157 236,053 143,210 $100,000
Year ended December 31, 1998........ -- 29,510 22,353 7,157
Year ended December 31, 1997........ -- 7,157 7,157 --
</TABLE>
- --------
(a) Includes write-offs and reversals.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.01* Form of Underwriting Agreement.
3.01** Amended and Restated Articles of Incorporation, as amended.
3.02* Form of Amended and Restated Certificate of Incorporation to be in
effect upon the closing of the offering.
3.03** Bylaws.
3.04* Form of Amended and Restated Bylaws to be in effect upon the closing
of the offering.
4.01* Form of Specimen Stock Certificate.
5.01* Opinion of Cooley Godward llp.
10.01** 1990 Stock Option Plan.
10.02* 2000 Equity Incentive Plan.
10.03* 2000 Employee Stock Purchase Plan.
10.04** Lease Agreement dated July 22, 1999 between Registrant and KBK
Properties, Inc.
10.05** Lease Agreement dated July 9, 1999 between Registrant and Incline
Capital Group, LLC.
10.06** Credit Agreement dated September 21, 1999 between Registrant and
Sanwa Bank California.
10.07+** Volume License Agreement dated August 12, 1999 between Registrant and
Concur Technologies, Inc.
10.08+** Software License and Services Agreement dated September 24, 1997
between Registrant and PeopleSoft, Inc.
10.09+** Software License Agreement dated October 6, 1999 between Registrant
and Authoria, Inc.
10.10** Annual Support and Maintenance Agreement dated October 21, 1999
between Registrant and Authoria, Inc.
10.11+** Software License Agreement dated September 29, 1999 between
Registrant and Brio Technology, Inc.
10.12+** Consulting Services Agreement dated November 11, 1999 between
Registrant and Brio Technology, Inc.
10.13** Form of Steering Committee Employment Agreement.
10.14** Form of Executive Committee Employment Agreement.
10.15** Employment Agreement dated July 22, 1995 between Registrant and
Martin Babinec.
10.16** Amended and Restated Investor's Rights Agreement, dated March 2,
2000.
21.01** Subsidiaries of Registrant.
23.01** Consent of Cooley Godward llp. Reference is made to Exhibit 5.01.
23.02 Consent of Ernst & Young LLP, independent auditors.
24.01** Powers of Attorney.
27.01** Financial Data Schedule.
</TABLE>
- --------
+ Confidential Treatment Requested
* To be filed by amendment
** Previously filed
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 18, 2000, except for paragraph 2 of Note
4, as to which the date is February 29, 2000 and for paragraph 5 of Note 5, as
to which the date is March 24, 2000, in Amendment No. 3 to the Registration
Statement (Form S-1 No. 333-31534) and related Prospectus of TriNet Group, Inc.
for the registration of 5,800,000 shares of its common stock.
/s/ Ernst & Young LLP
Walnut Creek, California
May 19, 2000
- --------------------------------------------------------------------------------
The foregoing consent is the form that will be signed upon stockholder
approval of the stock split described in paragraph 5 of Note 5 to the financial
statements.
Walnut Creek, California
May 19, 2000
