<PAGE>
As filed with the Securities and Exchange Commission on November 1, 2000
Registration No. 333-31534
-------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 8
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)
Delaware (following 7389 95-3359658
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 38 Technology Drive
One Maritime Plaza, 20th Floor Irvine, CA 92618
San Francisco, CA 94111 (949) 790-6300
(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.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this Preliminary Prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+Preliminary Prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities, in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Prospectus
Subject to completion - November 1, 2000
[TriNet Logo]
TriNet Group, Inc.
3,900,000 Shares of Common Stock
------------
TriNet Group, Inc. is offering 3,100,000 shares of its common stock and the
majority stockholder of TriNet, Select Appointments North America Inc., is
selling an additional 800,000 shares.
This is our initial public offering and no public market currently exists for
our shares. Our common stock has been approved for listing on The Nasdaq Stock
Market's National Market under the symbol "TRNE." We estimate that the initial
public offering price will be between $12.00 and $14.00 per share.
This investment involves risks. See "Risk Factors" beginning on page 5.
<TABLE>
<CAPTION>
Per Share Total
---------- -----------
<S> <C> <C>
Public offering price................................... $ $
Underwriting discount...................................
Proceeds to TriNet Group, Inc...........................
Proceeds to the selling stockholder.....................
</TABLE>
We have granted the underwriters a 30-day option to purchase up to 585,000
additional shares of our common stock to cover over-allotments. The
underwriters expect to deliver the shares of common stock to purchasers on
, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
------------
Robert W. Baird & Co.
Jefferies & Company, Inc.
Legg Mason Wood Walker
Incorporated
, 2000
<PAGE>
[Description of inside front cover: TriNet logo with the words Payroll,
Benefits, Human Resources centered beneath the logo.]
[Description of graphics inside the gatefold: Art to be depicted on the
gatefold 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: 401(k) Remittance, Payroll, Benefits,
Human Resources The path continues to another platform with the caption: Back
Office Processing On the platform are three stick figures captioned: Benefits,
Payroll, 401(k) Remittance 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 access
Integrated Technology Platform
. Payroll information
. Benefits information
. Human resources information
Human Resource Knowledge
. Existing customer relationship
. Access to proprietary data
Recruiting
. Existing customer relationship
. Access to proprietary data
Back Office Processing and Vendor Consolidation
. Electronic billing
. Vendor payments
. Single interface
[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>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 5
Forward-Looking Statements............................................... 19
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Financial Data.................................................. 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 35
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management................................................................. 56
Relationships with Third Parties and Related Transactions.................. 67
Principal and Selling Stockholders......................................... 69
Description of Capital Stock............................................... 71
Shares Eligible for Future Sale............................................ 75
Underwriting............................................................... 77
Legal Matters.............................................................. 82
Experts.................................................................... 82
Where You Can Find Additional Information.................................. 83
Index to Financial Statements.............................................. F-1
</TABLE>
You should only rely 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. You should assume that the information in this prospectus is
accurate only as of the date of this prospectus.
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.
As used in the prospectus, the terms "we," "us," "our" and "TriNet" mean
TriNet Group, Inc., and the term "common stock" means our common stock, par
value $0.0001 per share.
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.
<PAGE>
SUMMARY
You should read the following summary together with the more detailed
information appearing elsewhere in this prospectus, including in our
consolidated financial statements and related notes. 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 and the additional issuance, before and not part of this offering, of an
estimated 157,429 shares of common stock to Bessemer Venture Partners V L.P.,
Bessec Ventures V L.P. and BVE LLC, collectively referred to as Bessemer. In
consideration for Bessemer's agreement to voluntarily convert its Series F
preferred stock into common stock upon the closing of this offering, which
conversion would occur automatically only upon an offering at a per share price
of at least $26.62, and to thereby relinquish its ongoing antidilution
protection, we agreed to issue to Bessemer that number of shares of common
stock equal to the difference between the number of shares of common stock its
Series F preferred stock will convert into and the number of shares of common
stock Bessemer would have received upon conversion had it purchased its Series
F preferred stock at the offering price.
TriNet Group, Inc.
TriNet is a provider 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. Our services
target technology companies in North America that have rapid headcount growth.
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 June 30, 2000, we were serving
539 customers who collectively employed more than 15,000 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 received outside equity financing from venture capital firms,
institutional investors or the public markets. As of June 30, 2000,
approximately 96.8% of our customers have received 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, has been in excess of
approximately 36% per year.
We currently provide the following four services:
. Our primary service offering, 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 service offering is in use by 533 of our customers as of June 30, 2000
and accounts for approximately 84% of our total service revenues for the
year ended December 31, 1999 and approximately 89% of our total service
revenues for the six months ended June 30, 2000.
. 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 offering. We
have two customers using this service as of September 30, 2000 and continue
to develop this service offering.
1
<PAGE>
. 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 companies into a single employer group generates
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 a September 1999 report by Dataquest, an information technology
market research and consulting firm, titled "Demand Analysis of Integrated
Multiprocess HR Outsourcing," 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 instead of performing them 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 provide the following key
benefits:
. integrated services delivered on the Internet that allow customers to focus
on their core business;
. human resource services tailored to fast-growth technology companies and
their employees;
. easily scalable and integrated services; and
. economies of scale and efficiencies.
2
<PAGE>
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
our reincorporation in Delaware which will occur before the closing of this
offering.
Our Offices
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 should not be
considered part of this prospectus.
The Offering
<TABLE>
<C> <S>
Common stock offered by TriNet.................. 3,100,000 shares
Common stock offered by Select Appointments
North America Inc. ............................. 800,000 shares
-----------------
Total common stock offered...................... 3,900,000 shares
=================
Common stock to be outstanding after the
offering........................................ 10,629,112 shares
Use of proceeds................................. For general corporate purposes, including
the integration of technology, the
development of new products and services,
working capital, sales and marketing
expenditures, the repayment of debt 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 June 30, 2000, giving
effect to the conversion of all outstanding shares of our preferred stock into
common stock and the additional issuance, before and not part of this offering,
of an estimated 157,429 shares of common stock to Bessemer. In consideration
for Bessemer's agreement to voluntarily convert its Series F preferred stock
into common stock upon the closing of this offering, which conversion would
occur automatically only upon an offering at a per share price of at least
$26.62, and to thereby relinquish its ongoing antidilution protection, we
agreed to issue to Bessemer that number of shares of common stock equal to the
difference between the number of shares of common stock its Series F preferred
stock will convert into and the number of shares of common stock Bessemer would
have received upon conversion had it purchased its Series F preferred stock at
the offering price. This number excludes:
. 843,930 shares of common stock issuable upon exercise of outstanding options
at a weighted average exercise price of $11.70; and
. 949,742 shares reserved for future issuance under our employee benefit
plans.
3
<PAGE>
Summary Financial 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>
Six Months
Years Ended December 31, Ended June 30,
--------------------------------------- ---------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------ ------- ------- ------ -------
(Unaudited)
(In thousands, except per share data)
<S> <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, $278,358, and
$542,658, respectively)................. $2,428 $2,967 $7,345 $11,953 $18,477 $8,247 $14,297
Interest revenues........................ 87 172 404 490 650 274 640
------ ------ ------ ------- ------- ------ -------
Total service revenues................... 2,515 3,139 7,749 12,443 19,127 8,521 14,937
------ ------ ------ ------- ------- ------ -------
Research and development expense......... 180 194 488 719 2,353 721 3,904
Other operating expenses................. 2,801 3,075 6,273 9,975 16,580 7,088 15,033
------ ------ ------ ------- ------- ------ -------
Operating income (loss).................. (466) (130) 988 1,749 194 712 (4,000)
Net income (loss)........................ (465) (157) 760 982 (103) (321) (2,982)
Net income (loss) available to common
stockholders............................ (466) (217) (347) 455 (133) (335) (2,997)
Basic net income (loss) per common
share................................... $(0.14) $(0.07) $(0.10) $ 0.07 $ (0.02) $(0.05) $ (0.47)
Basic weighted average shares
outstanding............................. 3,260 3,323 3,599 6,303 6,340 6,323 6,433
Diluted net income (loss) per common
share................................... $(0.14) $(0.07) $(0.10) $ 0.07 $ (0.02) $(0.05) $ (0.47)
Diluted weighted average shares
outstanding............................. 3,260 3,323 3,599 6,593 6,340 6,323 6,433
</TABLE>
The pro forma as adjusted balance sheet data give effect to:
. the conversion of all outstanding shares of our preferred stock into 692,567
shares of common stock before the closing of this offering;
. the additional issuance, before and not part of this offering, of an
estimated 157,429 shares of common stock to Bessemer. In consideration for
Bessemer's agreement to voluntarily convert its Series F preferred stock
into common stock upon the closing of this offering, which conversion would
occur automatically only upon an offering at a per share price of at least
$26.62, and to thereby relinquish its ongoing antidilution protection, we
agreed to issue to Bessemer that number of shares of common stock equal to
the difference between the number of shares of common stock its Series F
preferred stock will convert into and the number of shares of common stock
Bessemer would have received upon conversion had it purchased its Series F
preferred stock at the offering price; and
. the sale of 3,100,000 shares of common stock offered by us at an assumed
initial public offering price of $13.00 per share, 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
and the repayment of long-term debt to our principal stockholder.
<TABLE>
<CAPTION>
June 30, 2000
-------------------
Pro Forma
Actual As Adjusted
------- -----------
(Unaudited)
(In thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................... $ -- $34,354
Working capital............................................. 220 34,574
Total assets................................................ 47,471 81,825
Long-term obligations....................................... 2,212 287
Redeemable convertible preferred stock...................... 500 --
Total stockholders' equity.................................. 6,358 43,137
</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.
4
<PAGE>
RISK FACTORS
Before you invest in our common stock, you should consider that making such
an investment involves various risks. You should carefully consider these risk
factors as well as all of the other information contained or incorporated by
reference in this prospectus before you decide to purchase shares of our common
stock. You should also consider these risk factors when you read "forward-
looking" statements elsewhere in this prospectus. You can identify forward-
looking statements by terms such as "may," "hope," "will," "should," "expect,"
"plan," "anticipate," "intend," "believe," "estimate," "predict," "potential"
or "continue," the negative of these terms or other comparable terminology.
These forward-looking statements are only predictions. They are subject to a
number of risks and uncertainties, including the risks described in this
section and those described in "Forward-Looking Statements."
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 approximately $3.0 million for the six months ended June 30, 2000
and have an accumulated deficit of approximately $3.7 million as of June 30,
2000. We may be unable to achieve or maintain revenues or
5
<PAGE>
profitability. We expect to continue to incur operational losses in connection
with our business as we continue to:
. enhance our technology infrastructure;
. complete the development of the Enterprise Employer Services offering;
. expand our sales and marketing efforts to target larger, more-established
middle-market companies, which are companies with 200 to 5,000 employees;
. develop new product offerings, such as data mining and on-line access to
portions of our data; and
. otherwise grow our business.
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.
Year-end customer attrition in excess of our historical average could
materially harm our results of operations for the ensuing year.
As employees of our Venture Employer Services customers are paid under
TriNet's payroll and tax identification number, customers who cease using our
services at any time other than January 1, the start of a new payroll tax year,
generally incur additional employer payroll taxes. The amount of additional
taxes that must be paid by a customer ceasing to use our services on any day
other than December 31 is increased by our customers' rapid headcount growth
and high average salary per employee. To avoid payment of these additional
employer payroll taxes, customers who intend to cease doing business with us
often elect to do so effective as of December 31. As a result, at the end of
each calendar year we experience our largest concentration of customer
attrition. Over the period between 1995 and 1999, we lost an average of 15% of
our total serviced employee population on December 31 of each year. If we were
to experience customer attrition in excess of historical attrition rates, our
results of operations for the following calendar year may be materially harmed.
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 334 as of June 30, 2000 from 183 as of
June 30, 1999. We expanded into a total of nine geographic locations as of June
30, 2000 from six as of the prior year. We will need to continue to grow in all
areas of operation 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 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 our cash flows will be adversely affected.
6
<PAGE>
If we fail to effectively address the middle market, we may lose our maturing
customers and fail to attract new middle-market companies.
As many of our earlier stage Venture Employer Services 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, in January 1999, we
introduced Enterprise Employer Services. Revenues from our Enterprise Employer
Services accounted for approximately 3% of our total service revenues for the
year ended December 31, 1999 and 3% of our total service revenues for the six
months ended June 30, 2000. As of June 30, 2000, we had six middle-market
customers, which number we expect will be reduced to two as of September 30,
2000 primarily due to delays in developing system enhancements needed to
service these customers. We intend to continue developing this offering, but we
may experience further delays, which could cause us to lose maturing customers
and further inhibit our ability to retain existing customers and target new
middle-market customers.
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, institutional
investors or the public markets. Any downswing in the technology market
impeding the flow of funding from venture capital firms, institutions or the
public markets 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.
We rely on technology provided by third-party licensors.
Our success depends in part on our ability to forge and maintain
arrangements and relationships with third-party licensors 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 third-party licensors,
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 third-party licensors or change our software architecture to
address licensing revisions with current third-party licensors, either of which
could impair the quality and availability of our products and services. In
addition, we cannot guarantee that our key third-party licensors will continue
to support their technology. Financial or other difficulties experienced by
these third-party licensors may adversely affect the technologies incorporated
into our products and services. If these technologies become unavailable, we
may be unable to find suitable alternatives.
Adverse changes in our relationships with key vendors could impair the quality
of our products and services.
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,
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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 us 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 result in a degradation of our service offering,
the potential loss of customers and the impairment of our reputation. 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 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.
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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.
The lengthy sales cycle for Enterprise Employer Services products and services,
which we expect will vary 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.
We must dedicate a substantial amount of time, expense and other resources
to influence a prospective customer's decision whether or not to implement our
Enterprise Employer Services products and services. We expect that the
Enterprise Employer Services sales cycle will vary in length from a few weeks
to several months. Because our Enterprise Employer Services products and
services are in development and we currently have a limited number of
customers, we cannot accurately forecast the actual time or costs that we
expect to expend in making a sale. For the companies that we have serviced
under 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 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 are currently converting our customers
to a new human resource information system platform 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 integrating new technologies or 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.
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, our president,
chief executive officer and chairman, and Steven H.
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Carlson, our chief information officer, and those of our technical employees
who are skilled in transactional technology, databases and networking,
specifically, our 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 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 impair our financial results 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.,
Interliant, 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. In addition, some of our current or former customers may decide to
compete with us. For example, we anticipate that a former customer, Interliant,
Inc., may compete with us following its recent acquisition of a human resources
applications service provider. 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.
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. Revenues from our Venture Employer Services accounted for
approximately 84% of our total service revenues for the year ended December 31,
1999 and 89% of our total service revenues for the six months ended June 30,
2000. A number of legal issues remain unresolved with respect to these
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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.
We may be unable to collect on a contractual indemnification claim for any
liability attributable to the conduct and activities of the customer or its
employees and thus may be responsible for satisfying these liabilities. In
addition, our insurers may deny coverage for the full amount of our submitted
claims in the event of an agency finding or an adverse determination with
respect to our liability for the conduct of our customers' employees, and any
claims submissions could result in cost increases in our insurance premiums.
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 we
estimate 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
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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.
Workers compensation rates for Venture Employer Services are in part
determined by our claims experience and, as of June 30, 2000, comprise
approximately 12% of our total service revenues. 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 in our overhead cost for Venture
Employer Services 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. During the period from January 1, 1994 through
June 30, 2000, we have recorded approximately $883,000 in bad debt expense on
approximately $2.1 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,
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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.
Third parties may 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. Interest revenue from these
investments was $650,413 for the year ended December 31, 1999 and $640,235 for
the six months ended June 30, 2000. 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 or use of these funds. If we were to invest in lower quality
investments, there would be a corresponding increase in the risk of loss on
these investments.
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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 or changing products and services for foreign
countries, including the cost of providing employee handbooks and employee
benefit plans that comply with foreign laws for our employees in our
international operations;
. business practices may favor local competition;
. compliance with multiple, conflicting and changing governmental laws and
regulations that will require that we employ local experts to research
policies, laws and regulations affecting the human resource outsourcing
industry; and
. difficulties developing systems and procedures to handle differing tax
calculating, collecting and compliance requirements which reduce our ability
to generate sufficient economies of scale to obtain discounted rates with
providers of benefit plans and financial services.
In addition, laws in other countries sometimes provide for greater or
different 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 monetary and notice 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;
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. 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.
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 3,900,000 shares eligible for sale upon completion of this
offering and up to 6,583,108 shares becoming eligible for sale beginning 180
days after the date of this prospectus or earlier if certain contractual
obligations are released 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 10,640,537
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:
. 3,900,000 shares sold pursuant to this offering will be eligible for sale
upon completion of this offering;
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. 6,583,108 shares will be eligible for sale upon the expiration of lock-up
agreements beginning 180 days after the date of the final prospectus; and
. an estimated 157,429 shares will be eligible for sale beginning 365 days
after the date of the final prospectus.
Shares may be released from the lock-up agreements at any time without
notice with the consent of Robert W. Baird & Co. Incorporated. 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 ten directors and executive officers and our
stockholder that currently owns over 5% of our common stock, Select
Appointments North America Inc., will beneficially own approximately 55% 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 $4.06 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 $8.94 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
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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 common stock then held by
that executive officer at the prevailing market value plus 25%. Our executive
officers currently hold an aggregate of 2,317,153 shares of our common stock
and options for 156,647 shares of common stock.
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:
. continuing to develop our business;
. developing or enhancing our products and services;
. taking advantage of acquisition opportunities;
. increasing our revenues; or
. responding to competitive pressures.
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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", "hope", "will", "should", "expect", "plan", "anticipate", "believe",
"estimate", "predict", "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
effect on our business, financial condition and results of operations.
19
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of the
3,100,000 shares of common stock offered by us will be approximately $36.3
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, the integration of
technology, the development of new products and services, working capital,
sales and marketing expenditures and the repayment of debt. 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 $19.7 million of the net offering proceeds for
general corporate purposes, the integration of technology, the acquisition of
complementary businesses and working capital, approximately $7.3 million for
sales and marketing, approximately $7.3 million for the development of new
products and services and approximately $2.0 million for the retirement of debt
plus any accrued but unpaid interest. The repayment of this debt plus any
accrued but unpaid interest is due and payable on the earlier of (i) the
closing of our initial public offering or (ii) December 31, 2001, and carries
an interest rate that is the lesser of (i) the maximum rate permitted by law or
(ii) 2% over the prime rate as published by Fleet Bank, Boston until October
31, 2000 and 5% over the prime rate as published by Fleet Bank, Boston after
October 31, 2000. The repayment of debt is to our principal stockholder. The
amount of net proceeds to be used specifically for each of the foregoing
purposes are only estimates. Accordingly, our management will have broad
discretion 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.
20
<PAGE>
CAPITALIZATION
The following table presents our capitalization as of June 30, 2000:
. on an actual basis;
. on a pro forma basis to reflect the conversion of all outstanding preferred
shares into 692,567 shares of common stock, which will occur before the
closing of this offering;
. on a pro forma basis to reflect the additional issuance, before and not part
of this offering, of an estimated 157,429 shares of common stock to
Bessemer. In consideration for Bessemer's agreement to voluntarily convert
its Series F preferred stock into common stock upon the closing of this
offering, which conversion would occur automatically only upon an offering
at a per share price of at least $26.62, and to thereby relinquish its
ongoing antidilution protection, we agreed to issue to Bessemer that number
of shares of common stock equal to the difference between the number of
shares of common stock its Series F preferred stock will convert into and
the number of shares of common stock Bessemer would have received upon
conversion had it purchased its Series F preferred stock at the offering
price; and
. on a pro forma as adjusted basis to reflect the pro forma adjustment and our
sale of 3,100,000 shares of common stock in this offering at an assumed
initial offering price of $13.00 per share, 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, and the
repayment of long-term debt to our principal stockholder.
<TABLE>
<CAPTION>
As of June 30, 2000
-----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
(In thousands, except share data)
<S> <C> <C> <C>
Long-term debt............................. $ 1,925 $ 1,925 $ --
Deferred income taxes...................... 287 287 287
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)........ 3,974 -- --
Common stock, $0.0001 par value;
100,000,000 shares authorized; 6,679,116
shares outstanding (actual); 7,529,112
shares outstanding (pro forma); and
10,629,112 shares outstanding (pro forma
as adjusted)............................. 6,751 11,225 47,504
Deferred compensation..................... (648) (648) (648)
Accumulated deficit....................... (3,722) (3,722) (3,722)
Accumulated other comprehensive loss...... 3 3 3
------- ------- -------
Total stockholders' equity............... 6,358 6,858 43,137
------- ------- -------
Total capitalization.................... $ 9,070 $ 9,070 $43,424
======= ======= =======
</TABLE>
The above information excludes as of June 30, 2000:
. 843,930 shares of common stock issuable upon exercise of outstanding options
at a weighted average exercise price of $11.70; and
. 949,742 shares reserved for future issuance under our employee benefit plan.
21
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000 was $6.9 million,
or $0.91 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
3,100,000 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 June 30, 2000 would have been $43.1
million, or $4.06 per share. This amount represents an immediate increase in
pro forma net tangible book value of $3.15 per share to existing stockholders
and an immediate dilution of $8.94 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 June 30,
2000....................................................... $0.91
Increase per share attributable to new investors............ 3.15
-----
Pro forma as adjusted net tangible book value per share after
this offering................................................ 4.06
------
Dilution per share to new investors........................... $ 8.94
======
</TABLE>
The following table summarizes as of June 30, 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.. 7,529,112 70.8% $ 7,841,000 16.3% $ 1.04
New investors.......... 3,100,000 29.2 40,300,000 83.7 13.00
---------- ----- ----------- -----
Total................ 10,629,112 100.0% $48,141,000 100.0%
========== ===== =========== =====
</TABLE>
Sales by the selling stockholder in this offering will have the following
effects:
. it will reduce the shares held by existing stockholders to 6,729,112 shares,
or 63.3%, of the total shares outstanding after this offering; and
. it will increase the shares held by new investors to 3,900,000, or 36.7%, of
the total shares outstanding after this offering.
The exercise of the underwriters' over-allotment in full will have the
following effect:
. it will increase the shares held by new investors to 4,485,000, or 42.2%, of
the total shares outstanding after this offering.
The above information excludes 843,930 shares of common stock issuable upon
the exercise of options outstanding as of June 30, 2000 at a weighted average
exercise price of $11.70 per share. If options with exercise prices less than
the assumed initial public offering price of $13.00 per share are exercised,
new investors will incur further dilution.
22
<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 six months ended June 30, 1999 and 2000 and the consolidated
balance sheet data as of June 30, 2000 are derived from, and are qualified by
reference to, our unaudited financial statements included elsewhere in the
prospectus. The unaudited financial statements have been prepared on
substantially the same basis as the audited financial statements and include
all adjustments, consisting only of normal recurring adjustments, that we
consider necessary for a fair presentation of our financial position and
results of operations for the six months ended June 30, 1999 and 2000. The
results of operations for the six months ended June 30, 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>
Six Months
Year Ended December 31, Ended June 30,
---------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------ ------- ------- ------- -------
(Unaudited)
(In thousands, except per share data)
<S> <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, $278,358, and
$542,658, respectively)................. $2,428 $2,967 $7,345 $11,953 $18,477 $ 8,247 $14,297
Interest revenues........................ 87 172 404 490 650 274 640
------ ------ ------ ------- ------- ------- -------
Total service revenues................... 2,515 3,139 7,749 12,443 19,127 8,521 14,937
------ ------ ------ ------- ------- ------- -------
Operating expenses:
Cost of providing services (1).......... 1,586 1,687 4,120 6,379 10,102 4,303 7,449
Client acquisition costs (2)............ 521 635 1,078 1,102 2,541 1,048 3,093
General and administrative (3).......... 582 614 846 1,783 2,543 1,179 2,678
Research and development (4)............ 180 194 488 719 2,353 721 3,904
Depreciation............................ 112 139 229 565 743 348 1,389
Stock-based compensation................ -- -- -- 146 651 210 424
------ ------ ------ ------- ------- ------- -------
Total operating expenses............... 2,981 3,269 6,761 10,694 18,933 7,809 18,937
------ ------ ------ ------- ------- ------- -------
Operating income (loss).................. (466) (130) 988 1,749 194 712 (4,000)
Interest income (expense), net........... (19) (26) 19 38 64 22 (13)
Foreign exchange gain (loss)............. -- -- -- (26) 38 (7) (31)
(Provision) benefit for income taxes..... 20 (1) (247) (779) (399) (1,048) 1,062
------ ------ ------ ------- ------- ------- -------
Net income (loss)........................ $ (465) $ (157) $ 760 $ 982 $ (103) $ (321) $(2,982)
====== ====== ====== ======= ======= ======= =======
Net income (loss) available to common
stockholders............................ $ (466) $ (217) $ (347) $ 455 $ (133) $ (335) $(2,997)
Basic net income (loss) per common
share................................... $(0.14) $(0.07) $(0.10) $ 0.07 $ (0.02) $ (0.05) $ (0.47)
Basic weighted average shares
outstanding............................. 3,260 3,323 3,599 6,303 6,340 6,323 6,433
Diluted net income (loss) per common
share................................... $(0.14) $(0.07) $(0.10) $ 0.07 $ (0.02) $ (0.05) $ (0.47)
Diluted weighted average shares
outstanding............................. 3,260 3,323 3,599 6,593 6,340 6,323 6,433
Pro forma basic and diluted net (loss)
per common share (unaudited)............ $ (0.01) $ (0.42)
Pro forma basic and diluted weighted
average shares outstanding (unaudited).. 6,883 7,179
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of
--------------------------------------- June 30,
1995 1996 1997 1998 1999 2000
------ ------ ------- ------- ------- -----------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents..................... $ 532 $ 788 $ 1,209 $ 942 $ -- $ --
Working capital............................... 550 418 251 1,005 113 220
Total assets.................................. 4,797 8,528 14,758 20,092 36,372 47,471
Long-term obligations......................... 176 66 -- 531 2,851 2,212
Redeemable convertible preferred stock........ 959 1,455 -- 500 500 500
Total stockholders' equity (deficit).......... (10) (411) 2,943 4,068 4,816 6,358
</TABLE>
--------
(1) Excluding stock-based compensation of $40 and $276 for the years ended
December 31, 1998 and 1999, respectively, and $97 and $172 for the six
months ended June 30, 1999 and 2000, respectively.
(2) Excluding stock-based compensation of $22 and $52 for the years ended
December 31, 1998 and 1999, respectively, and $22 and $27 for the six
months ended June 30, 1999 and 2000, respectively.
(3) Excluding stock-based compensation of $72 and $287 for the years ended
December 31, 1998 and 1999, respectively, and $80 and $195 for the six
months ended June 30, 1999 and 2000, respectively.
(4) Excluding stock-based compensation of $12 and $36 for the years ended
December 31, 1998 and 1999, respectively, and $11 and $30 for the six
months ended June 30, 1999 and 2000, respectively.
24
<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 business process outsourcing of payroll, benefits and human
resource support and technology to fast-growth technology companies in North
America. In addition, we provide recruitment services and human resources
consulting services.
Our primary service offering, Venture Employer Services, provides an
integrated service including payroll, benefits and human resource support under
a shared employer relationship, usually with customers that have less than 200
employees. These services, which target fast-growth emerging technology
companies, were introduced in 1990. Revenues from Venture Employer Services
accounted for approximately 84.3% of our total service revenues for the year
ended December 31, 1999 and approximately 88.7% of our total service revenues
for the six months ended June 30, 2000.
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, which also target fast-growth technology
companies, were introduced in 1999. We continue to develop this service
offering. Revenues from Enterprise Employer Services accounted for
approximately 2.7% of our total service revenues for the year ended December
31, 1999 and approximately 3.4% of our total service revenues for the six
months ended June 30, 2000.
Venture Talent provides recruitment services primarily to our Venture
Employer Services customers. In November 1996, in exchange for 40,975 shares of
our common stock, valued at $66,000, we acquired the assets of y/net, an
outsourced staffing solutions firm, consisting primarily of employees and
customer lists, which we developed into Venture Talent, a new service offering.
These services are provided with a combination of on-site and off-site
recruiters as well as researchers providing candidate screening and
development. Revenues from Venture Talent accounted for approximately 12.0% of
our total service revenues for the year ended December 31, 1999 and
approximately 7.2% of our total service revenues for the six months ended June
30, 2000.
Venture Management Resources provides human resource consulting services to
customers requiring compensation consulting, change management, organizational
development and other human resource related consulting services. Revenues from
Venture Management Resources accounted for approximately 1.0% of our total
service revenues for the year ended December 31, 1999 and approximately 0.7% of
our total service revenues for the six months ended June 30, 2000.
All of our service offerings use a combination of Internet-based services
and services provided under traditional methods.
25
<PAGE>
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 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. Upon the initial
engagement, we also require various forms of security from our customers or
information to evaluate their credit worthiness. We are currently implementing
procedures to assess the credit worthiness of our customers on an ongoing
basis. These procedures 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, including the amount of onsite
human resource support requested. Service revenues for Venture Talent and
Venture Management Resources include service fees that are based on the range
of services provided, including the number of placements made, the amount of
onsite support requested and the nature of the consulting engagement, and are
billed when incurred.
Interest revenue is included in our total service revenues 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. The amount of time between when
funds are transferred to us and when we have to remit these funds varies from
immediately for certain wage and payroll tax obligations to several weeks for
certain benefit funds and to several months for certain unemployment insurance
and third-party goods and services. These timing differences allow for interest
to be earned. We invest these short-term cash balances, which are classified in
the accompanying balance sheets as payroll funds invested, in demand deposits
and short-term highly liquid investments. During the year ended December 31,
1999, our average monthly payroll funds invested balance was approximately
$12.5 million and interest revenue was $650,000. During the six months ended
June 30, 2000, our average monthly payroll funds invested balance was
approximately $23.3 million and interest revenue was $640,000.
Cost of providing services consists primarily of the salaries and wages for
our internal staff in our payroll, benefits and human resource departments, 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.
26
<PAGE>
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 are classified under client
acquisition costs and are based on the number of customers acquired 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 attending 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, including
license fees for key technology providers. As we add personnel and incur
additional costs related to the growth of our business and 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 and consultant fees relating to the design, development,
testing and enhancement of our back-end software and processes as well as
front-end 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.
Depreciation expense is related to the amortization of capitalized leasehold
improvements, computer equipment and software licensing fees. These costs are
amortized over their useful lives. As of the six months ended June 30, 2000, we
had paid an aggregate of approximately $43,000 in license fees, and as of the
year ended December 31, 1999, we had paid an aggregate of approximately
$909,000 in license fees. License fees are depreciated over a three-year
period. License fees paid to two of our key technology providers are based on
the number of employees for whom we provide services. We have perpetual
licensing agreements with all of our key technology providers, except for one
with whom we have an initial term of five years with automatic renewal from
year to year unless otherwise terminated. None of our licensing agreements with
key technology providers are exclusive.
In connection with the grant of options to employees to purchase 261,286
shares in 1999 and 110,165 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 deemed 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. During the six months ended June 30, 2000, we
granted options to employees to purchase 238,289 shares of common stock at an
exercise price of $28.82 per share. The exercise price of these options was at
least equal to the deemed value of the
27
<PAGE>
common stock on the date of grant and we did not record any additional stock-
based compensation related to these stock options.
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. At June 30,
2000, total deferred tax assets have been partially offset by a valuation
allowance due to the risks and uncertainties surrounding our ability to
generate future taxable income. The valuation allowance increased by $305,000
in the six months ended June 30, 2000.
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.
Results of Operations
The following table sets forth statement of operations data as a percentage
of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Six Months
Ended June
Year Ended December 31, 30,
----------------------------- -------------
1997 1998 1999 1999 2000
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Total 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 50.5 49.9
Client acquisition costs..... 13.9 8.8 13.3 12.3 20.7
General and administrative... 10.9 14.3 13.3 13.8 17.9
Research and development..... 6.3 5.8 12.3 8.5 26.1
Depreciation................. 3.0 4.5 3.9 4.1 9.3
Stock-based compensation .... -- 1.2 3.4 2.5 2.8
------- ------- ------- ----- -----
Total operating expenses.... 87.3 85.9 99.0 91.7 126.7
------- ------- ------- ----- -----
Operating income (loss)....... 12.7 14.1 1.0 8.3 (26.7)
Interest income (expense),
net.......................... 0.2 0.3 0.3 0.3 (0.1)
Foreign exchange gain (loss).. -- (0.2) 0.2 (0.1) (0.2)
(Provision) benefit for income
taxes........................ (3.1) (6.3) (2.0) (12.3) 7.0
------- ------- ------- ----- -----
Net income (loss)............. 9.8 % 7.9 % (0.5)% (3.8)% (20.0)%
======= ======= ======= ===== =====
</TABLE>
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Total Service Revenues. Our total service revenues increased $6.4 million to
$14.9 million for the six months ended June 30, 2000 from $8.5 million for the
six months ended June 30, 1999, representing an increase of 75.3%. The increase
was primarily due to the addition of 6,802 new serviced employees to our
Venture Employer Services.
Cost of Providing Services. Our cost of providing service increased $3.2
million to $7.5 million for the six months ended June 30, 2000 from $4.3
million for the six months ended June 30, 1999,
28
<PAGE>
representing an increase of 73.1%. The increase was primarily due to the
addition of 83 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 $2.1 million to
$3.1 million for the six months ended June 30, 2000 from $1.0 million for the
six months ended June 30, 1999, representing an increase of 195.1%. The
increase primarily resulted from salaries and commissions associated with the
addition of 29 personnel in sales and marketing as well as additional marketing
expenditures during the period.
General and Administrative Expense. General and administrative expense
increased $1.5 million to $2.7 million for the six months ended June 30, 2000
from $1.2 million for the six months ended June 30, 1999, representing an
increase of 127.1%. The increase primarily resulted from an increase in
salaries, an increase in the allowance for doubtful accounts of $623,000 and an
increase in related operational costs required to manage our growth and
infrastructure to support our public offering.
Research and Development Expense. Research and development expense increased
$3.2 million to $3.9 million for the six months ended June 30, 2000 from
$721,000 for the six months ended June 30, 1999, representing an increase of
441.5%. This increase in research and development expenses reflects eight
additional personnel hired as well as the cost of 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 $1.0 million to $1.4
million for the six months ended June 30, 2000, from $348,000 for the six
months ended June 30, 1999, representing an increase of 299.1%. 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 Loss. Net loss increased $2.7 million to $3.0 million for the six months
ended June 30, 2000 from $321,000 for the six months ended June 30, 1999,
representing an increase of 829.0%. 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
Total Service Revenues. Our total 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 the addition of 4,018 serviced
employees to our Venture Employer Services. 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.
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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 the addition of 13 new employees to our sales and marketing
department and costs related to 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 personnel that were added and additional
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 the cost of 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.
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
Total Service Revenues. Our total service revenues increased $4.7 million to
$12.4 million in 1998 from $7.7 million in 1997, representing an increase of
60.6%. This increase was primarily due to the addition of 1,768 serviced
employees to 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 primarily 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 $0.9 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 and additional operational
costs required to manage our growth.
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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.
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. The results of operations of any quarter
are not necessarily indicative of the results that may be expected for any
future period.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------
June
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, 30,
1998 1998 1999 1999 1999 1999 2000 2000
--------- -------- -------- -------- --------- -------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service revenues (net of direct
costs)............................ $3,192 $3,461 $4,020 $4,226 $4,634 $5,597 $ 6,391 $ 7,906
Interest revenues.................. 129 118 140 134 145 231 255 385
------ ------ ------ ------ ------ ------ ------- -------
Total service revenues............ 3,321 3,579 4,160 4,360 4,779 5,828 6,646 8,291
------ ------ ------ ------ ------ ------ ------- -------
Cost of providing services......... 1,614 1,749 2,093 2,210 2,600 3,199 3,470 3,979
Client acquisition costs........... 243 315 474 574 562 931 1,324 1,769
General and administrative ........ 438 494 613 565 577 788 1,024 1,654
Research and development .......... 159 219 363 358 477 1,155 1,828 2,076
Depreciation ...................... 141 149 168 180 188 207 667 722
Stock-based compensation .......... 63 74 90 121 216 224 223 201
------ ------ ------ ------ ------ ------ ------- -------
Total operating expenses.......... 2,658 3,000 3,801 4,008 4,620 6,504 8,536 10,401
------ ------ ------ ------ ------ ------ ------- -------
Operating income (loss)............ 663 579 359 352 159 (676) (1,890) (2,110)
Other income (expense):
Interest income, net.............. 12 8 11 12 13 28 (22) 9
Foreign exchange gain (loss)...... (10) -- (22) 15 2 43 (7) (24)
------ ------ ------ ------ ------ ------ ------- -------
Income (loss) before provision for
income taxes...................... 665 587 348 379 174 (605) (1,919) (2,125)
(Provision) benefit for income
taxes............................. (297) (270) (504) (544) (267) 916 643 419
------ ------ ------ ------ ------ ------ ------- -------
Net income (loss).................. $ 368 $ 317 $ (156) $ (165) $ (93) $ 311 $(1,276) $(1,706)
====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
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<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1998 1998 1999 1999 1999 1999 2000 2000
--------- -------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As a percentage of total service
revenues:
Total service revenues............ 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of providing services........ 48.6 48.9 50.3 50.7 54.4 54.9 52.2 48.0
Client acquisition costs.......... 7.3 8.8 11.4 13.2 11.8 16.0 19.9 21.3
General and administrative ....... 13.2 13.8 14.7 12.9 12.1 13.5 15.4 20.0
Research and development ......... 4.8 6.1 8.7 8.2 10.0 19.8 27.5 25.0
Depreciation ..................... 4.2 4.1 4.1 4.1 3.9 3.6 10.0 8.7
Stock-based compensation ......... 1.9 2.1 2.2 2.8 4.5 3.8 3.4 2.4
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses......... 80.0 83.8 91.4 91.9 96.7 111.6 128.4 125.4
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss)........... 20.0 16.2 8.6 8.1 3.3 (11.6) (28.4) (25.4)
Other income (expense):
Interest income, net............. 0.4 0.2 0.3 0.3 0.3 0.5 (0.4) 0.1
Foreign exchange gain (loss)..... (0.4) 0.0 (0.5) 0.3 0.1 0.7 (0.1) (0.3)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before provision for
income taxes..................... 20.0 16.4 8.4 8.7 3.7 (10.4) (28.9) (25.6)
(Provision) benefit for income
taxes............................ (8.9) (7.5) (12.1) (12.5) (5.6) 15.7 9.7 5.0
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)................. 11.1 % 8.9 % (3.7)% (3.8)% (1.9)% 5.3 % (19.2)% (20.6)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
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 used in operating activities for the first six months of 2000 was
$2.3 million as a result of a net loss of $3.0 million offset by $700,000 in
adjustments to net cash used in operating activities. Net cash provided by
operating activities for 1999 was $2.4 million as a result of a net loss of
$103,000 and $2.5 million in adjustments to net cash provided by operating
activities. Net cash provided by operating activities was $1.2 million in 1998
and $1.5 million in 1997. This decrease in 1998 resulted from the timing of
payrolls at the end of the reporting periods and the associated accruals.
Net cash used in investing activities for the first six months of 2000 was
$1.4 million 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 our human resource information 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 human resource
information platform including $962,000 relating to the capitalization of all
of our third party software licenses. Net cash used in investing activities was
$1.9 million in 1998, including $110,000 of third party software licensing
costs, and $2.2 million in 1997, including $585,000 in third party software
licensing costs related to investments in infrastructure for expansion of long-
term operations, including software development costs.
Net cash provided by financing activities for the first six months of 2000
was $3.6 million as a result of receiving $4.0 million from our Series F
financing and $1.9 million from the issuance of a note payable, partially
offset by the retirement of $2.3 million in debt from our agreement with Sanwa
Bank
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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.
In June 2000, we issued a promissory note for up to $2.0 million to Select
Appointments North America Inc. The terms of the note provided for draw downs
in increments of $500,000 until the earlier of (i) the closing of our initial
public offering or (ii) September 30, 2000 for a fee of 3% for the first draw
down, 3.5% for the second draw down, 4% for the third draw down and 4.5% for
the fourth draw down. In June 2000, we borrowed the full amount of the
promissory note. Interest on any outstanding principal from the applicable draw
down date accrues at the rate that is the lesser of (i) the maximum rate
permitted by law or (ii) 2% over the prime rate as published by Fleet Bank,
Boston until October 31, 2000 and 5% over the prime rate as published by Fleet
Bank, Boston after October 31, 2000. As of the date of this prospectus, the
interest rate was 11.5%. The principal and any accrued and unpaid interest on
the loan is due and payable on the earlier of (i) the closing of our initial
public offering or (ii) December 31, 2001.
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 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--
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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 June 2000 issued SAB 101B "Second Amendment: Revenue Recognition in
Financial Statements." SAB 101 and 101B are effective for us in the quarter
ending December 31, 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
technology companies in North America that have rapid headcount growth. 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 by Dataquest titled "Demand Analysis of
Integrated Multiprocess HR Outsourcing," which surveyed companies with a
minimum of 500 employees and revenues of at least $50.0 million, 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: the growth of start-ups, other rapid-
growth companies and 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 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
with payroll as the second most likely and benefits administration as the third
most likely. The Yankelovich study reported that 90% of the top senior
executives selected a business process outsourcing service provider based on
its track record and business process specialization. At a total of 304
companies, all of which had at least $1.0 billion in revenues or assets, the
study surveyed one of the executives in the following positions: Chief
Executive Officer, President, Chief Financial Officer, Chief Operating Officer,
Chief Information Officer and Chief Strategic Officer.
We believe that the trends affecting these larger companies are indicative
of the trends which have begun to impact small to mid-size fast-growth
technology companies and that the impact of these trends
35
<PAGE>
will accelerate as cost-effective, multi-functional e-commerce service
offerings are made available to these smaller companies.
The Dataquest report attributes much of the growth in the market for
business process outsourcing of payroll, benefits and human resource processes
to the difficulties of managing these activities internally. Within a company,
these processes are complex, cumbersome, expensive and highly inefficient.
Based upon our experience in the industry, we believe this is caused by a
number of factors, including:
. complex, voluminous and constantly changing government regulations involving
payroll, benefits and human resources;
. the 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, based upon our experience in the industry, 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 those offered by 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
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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. The 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 $17.0 billion in 1997 to reach $21.0
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 rapid headcount growth
and intense competition for qualified employees. These companies need processes
that are easily integrated and scalable and can offer them a competitive
advantage in the tight labor market. One segment of these companies is
technology firms whose rapid growth has been fueled by outside equity
investment from venture capital firms, institutional investors or the public
markets. As a result of the availability of private and public financing, the
number of fast-growth technology companies has increased in the recent past.
According to PricewaterhouseCoopers, the number of companies funded by venture
capital for the six month period ending June 30, 2000 was 2,846 firms, a 64%
increase over the same period in 1999. PricewaterhouseCoopers also reported
that the total amount of venture capital invested rose from $12 billion in the
six months ended June 30, 1999 to $36.7 billion during the same period in 2000,
of which $10.4 billion in the six months ended June 30, 1999 and $34.7 billion
during the same period in 2000 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, including 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 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;
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. 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;
. 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
Many companies use front-end processes such as a combination of paper and e-
mail based processes, or direct contact between a manager or employee with the
company's human resources administrator to administer payroll, benefits and
human resources. 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.
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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 large amount of data warehousing required
restricts these back-end providers' ability to increase operational efficiency
and develop personalized technology for targeted service deliveries in specific
markets.
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 related 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,
eliminates the need for manual or bridged data transfers, 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-
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directed transactions, or the input of personal and employment life event
changes directly 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:
. Advanced integrated services that allow customers to focus on their core
business. We have provided business process outsourcing of payroll benefits
and human resource support and technology since our inception in 1988 and
have grown our customer base from 58 companies in 1995 to over 530 companies
as of June 30, 2000. 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 that have been offered since 1999 to provide 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 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.
. Human resource services tailored to fast-growth technology companies and
their 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 and also streamlines the
addition of new employees. 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.
. Easily scalable and integrated services. The business environment created by
outside equity financing of technology companies prompts rapid and
continuous growth in employee headcount, creating a specialized need for
rapidly scalable and integrated human resource services. As of June 30,
2000, approximately 96.8% of our customers had received equity financing
from venture capital firms, institutional investors or the public market.
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.
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. Economies of scale and efficiencies for customers. 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
for human resource functions that is 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.
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 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 and accuracy of
our services to address the needs of middle-market companies. 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. We plan on mining and offering portions of our data
online for a fee, 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.
. 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 headcount 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,
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<PAGE>
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 other professional advisors 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.
. Build TriNet presence in the middle market through the development of
Enterprise Employer Services. While we will continue to preserve our
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. 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 been
developing a new product offering targeted to the middle market. We expect
to continue developing our Enterprise Employer Services' systems so that we
can offer middle-market companies a scalable and integrated platform they
can use for payroll, benefits and human resource functions.
. 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 into new geographic 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. Of the 17 venture-funded geographical regions cited by
the PricewaterhouseCoopers' Quarterly Moneytree survey for the second
quarter of 2000, we currently have sales offices in seven of the top 10
regions: San Leandro, California; Irvine, California; Louisville, Colorado;
Cambridge, Massachusetts; New York, New York; McLean, Virginia; and Seattle,
Washington. We opened four of these sales offices in the last nine months
and we intend to open additional offices in other 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.
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Products and Services
We provide 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.
Our decade-long focus on fast-growth technology 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
. Human Resource Information System
. Human Resource Passport--Self-
directed Web-based Transactions
<TABLE>
<S> <C>
Venture Employer Services, Enterprise Employer Services,
our primary service offering our developing service offering
. 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 Human
Human Resource management Resource team
</TABLE>
* except for 401(k) and incentive stock option plans sponsored by customer
43
<PAGE>
Venture Employer Services
Venture Employer Services, our primary service offering, 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 533
companies as of June 30, 2000, which represented approximately 88% of our total
serviced employees, and for the six months ended June 30, 2000, 89% of our
total service revenues.
Enterprise Employer Services
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. We continue to develop this
service offering to provide an upward migration path for Venture Employer
Service customers growing to several hundred or more employees. We believe our
continued development and deployment of web technology will make the model
attractive for fast-growth technology companies that no longer need to
aggregate employees with us in order to enjoy economies of scale, but still
values a Internet-delivered, scalable and integrated offering. Our Enterprise
Employer Services customer base consisted of six customers as of June 30, 2000,
which represented approximately 12% of our total serviced employees and, for
the six months ended June 30, 2000, 3% of our total service revenues. We expect
to have two Enterprise Employer Service customers as of September 30, 2000,
primarily due to delays in developing system enhancements needed to service
these customers.
Venture Talent
Venture Talent, launched in 1996, is targeted to fast-growth technology
companies of up to several hundred employees. Venture Talent 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 from databases that we pay for, employee referrals and candidates submitted
by various recruitment agencies, 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
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for Venture Talent vary based upon customer need. Our Venture Talent customer
base increased from 10 customers as of January 31, 1997 to 60 customers as of
June 30, 2000, which represented, for the six months ended June 30, 2000, 7% of
our total service revenues.
Venture Management Resources
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
Employer Services 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 for
31 customers in the 12 months ended June 30, 2000, and represented, for the six
months ended June 30, 2000, 1% of our total service revenues.
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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-end B=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. Because of our focus 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:
. Rapid headcount growth. The headcount growth rate is an important part of
our economic model as pricing of our core services for Venture Employer
Services 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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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 an ability to
meet aggressive hiring targets and allows us to leverage a growing network
of referral sources and business relationships with various venture
capitalists, corporate financiers and other professional advisors. As of
June 30, 2000, approximately 96.8% of our customers are financed by outside
equity investors such as venture capital firms, institutional investors or
the public markets.
. Highly compensated, professional/technical workforce. Our customers'
employees averaged $89,000 per year in salary as of the six months ended
June 30, 2000. A highly compensated workforce helps ensure that 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 are developing
Enterprise Employer Services specifically to target these middle-market
companies.
As of June 30, 2000, our over 530 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 June 30, 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 and the six months ended June 30, 2000, no customer
contributed more than 5% to our total service revenues and our top five
customers combined for a total of approximately 11% of our total service
revenues for the year ended December 31, 1999 and 7.0% of our total service
revenues for the six months ended June 30, 2000.
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.
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 interface.
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Opportunity: MobileForce needed to tap the technology labor pool available
in the United States and Canada to further its technology and bring its product
to market. To solve the compliance and employee equity challenges of having
employees dispersed throughout the United States and Canada, MobileForce sought
a single-source provider that could establish and maintain specialized payroll,
benefits and human resource processes required to service its employees in
multiple U.S. states and Canada.
Solution: We began our relationship with MobileForce in March 1998. We have
provided MobileForce with scalable 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 June 30, 2000, MobileForce had 115 employees in
California, Colorado, Massachusetts, New Jersey, Texas and Canada.
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, has expectations of corporate-level payroll, benefits and
human resource support. Furthermore, Symbian is headquartered outside the
United States and consequently has 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 June 30, 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 its business with a
handful of employees. 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
necessary for its aggressive growth strategy.
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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. As of June 30, 2000, Webvan had 418 corporate employees.
Sales and Marketing
We currently market and sell our service suite through a direct sales force
of 16 regional managers and three sales executives, supported by a sales
administration staff of three persons. In the fourth quarter 1999 through the
second quarter of 2000, we expanded our sales force from seven to 16 sales
professionals for Venture Employer Services, with one full-time sales executive
focused on educating large Venture Employer Services customers about Enterprise
Employer Services. Of the 17 regions cited, our sales offices are located in
seven of the top 10 regional markets for venture capital investment 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 professional advisors, such as
accountants and attorneys, 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 for Venture Employer Services customers are generated through the
tight-knit referral community that incubates venture capital backed companies.
As of June 30, 2000, our customers had received financing from 301 venture
capital firms and funds, providing a network of relationships that we continue
to develop. With approximately 62 venture capital firms and their employees on
our payroll as of June 30, 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.
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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 determining 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.
As we 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 will expand
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, makes it difficult for us to predict the
adoption rate by middle-market companies of Enterprise Employer Services.
Systems and Technology
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
September 15, 2000.
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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
and 2001
------------------------------------------------------------------------------------
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 Q4 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 technology
self-directed human 2000, full (Concur
resource transactions implementation Technologies)
for managers and during 2001
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 Q2 technology
interfacing to customer 2000, full (Brio
systems, and with online implementation Technology)
analytical processing, during 2001
or OLAP, capability
------------------------------------------------------------------------------------
Strong An electronic method of Selective Licensed Front-end
Security authentication available customer technology and
for all employees rollout during (Entrust Back-end
enabling paperless 2001 Technology)
employee transactions
------------------------------------------------------------------------------------
Intranet Link our services to Selective Proprietary Front-end
Portals customer intranet, customer and licensed
provide intranet service rollout during technology
to customer base 2001
------------------------------------------------------------------------------------
Benefits Expert system for Call center use Proprietary Front-end
Knowledgebase answering inquiries in Q4 2000, web and licensed and
about benefit plan rules rollout in 2001 software Back-end
and coverage (Authoria)
</TABLE>
51
<PAGE>
Technology Platform
We have effectively integrated the customer facing front-end of our
Internet-delivered services with back-end systems that 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 create
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. In January 1999, we began the process of
converting our Enterprise Employer Services customers to our new human
resource information system platform which is designed to provide expanded
features and functionality, including the ability to provide payroll and
benefits administration to customers with employees in Canada and increased
Internet-delivery capabilities. In January 2000, we began the process of
converting our Venture Employer Services customers to this platform and
expect to complete this process during 2001.
. 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.
. 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 provide 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 2001,
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. We rely on these
applications to provide our products and services.
. 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
52
<PAGE>
decreasing cost per employee in perpetuity. Our licensing agreement with
Authoria has an initial term of five years with automatic renewal from year
to year unless otherwise terminated.
. 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 agreement does not
limit the number of employees accessing the system. We may terminate our
agreement with Concur at any time.
. 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. Our license from PeopleSoft is a
perpetual, non-exclusive license.
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 the introduction of or have already 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 than us
and may 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. In addition, some of our current or former customers may decide to
compete with us. For example, we anticipate that a
53
<PAGE>
former customer, Interliant, Inc., may compete with us following its recent
acquisition of a human resources applications service provider. 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 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 June 30, 2000, we had 334 full-time employees, including 38 in
information technology, 150 in operations, 41 in account management, 48 in
sales, marketing and new account set-up, 36 in consulting and 21 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 38,000 square feet of
leased space in which our executive offices, corporate staff, data-processing
center,
54
<PAGE>
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 seven other facilities in Irvine,
California; Louisville, Colorado; Cambridge, Massachusetts; McLean, Virginia;
Seattle, Washington; New York, New York; 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.
We have entered into an agreement with Creekside Associates LLC for the
construction and lease of premises located in San Leandro, California. These
new premises will replace our current corporate headquarters in San Leandro and
will consist of approximately 146,800 square feet of usable space. The lease
for these new premises will expire 15 years after the lease commencement date,
which date is anticipated to be October 1, 2001.
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.
55
<PAGE>
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 September 15, 2000.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Executive Officers and Directors
Martin Babinec(1)................ 45 President, Chief Executive Officer and Chairman of the Board
Douglas P. Devlin................ 38 Chief Financial Officer, Secretary, Treasurer and Director
Gregory L. Hammond............... 45 Vice President and General Counsel
Steven H. Carlson................ 46 Chief Information Officer
Craig A. McGannon................ 36 Divisional President, Venture Employer Services
James P. Hanson, C.P.A.(2)(3).... 54 Director
H. Lynn Hazlett, D.B.A.(2)(3).... 64 Director
Anthony V. Martin(1)............. 61 Director
T. Joe Willey, Ph.D.(3).......... 62 Director
Key Employees
Marie-Jeanne Juilland............ 39 Vice President, Marketing
Lyle E. DeWitt, C.P.A............ 41 Vice President, Finance and Operations
Anthony F. Zuanich............... 32 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 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 general
counsel to the National Association of Professional Employer Organizations. Mr.
Hammond holds a B.A.
56
<PAGE>
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 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.
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.
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.
57
<PAGE>
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. From December 1999 to August 2000, Mr. Martin was
also vice-chairman of the board of Vedior NV, a Netherlands based staffing and
outsourced human resource company. Since August 2000, Mr. Martin has been
chairman of the board of Vedior NV. 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.
Board Composition
Upon the completion of this offering, we will have six authorized 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
58
<PAGE>
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 options to purchase 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.
In January 1999, Messrs. Hanson, Hazlett and Willey were each granted an
option to purchase 463 shares of common stock at a price of $7.22 per share. In
May 1999, Messrs. Hanson, Hazlett and Willey were each granted an option to
purchase 463 shares of common stock at a price of $7.22 per share. In June
1999, Messrs. Hanson, Hazlett and Willey were each granted an option to
purchase 368 shares of common stock at a price of $9.03 per share. In September
1999, Messrs. Hanson, Hazlett and Willey were each granted an option to
purchase 368 shares of common stock at a price of $9.03 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
59
<PAGE>
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 Long-Term
Compensation for Compensation Awards
Fiscal Year 1999 -------------------
---------------- 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 15,000
Chief Financial Officer, Secretary,
Treasurer and Director
Gregory L. Hammond....................... 143,588 39,525 25,000
Vice President and General Counsel
Craig A. McGannon........................ 149,790 57,575 25,000
Divisional President, Venture Employer
Services
John K. Younger(1)....................... 122,283 80,328 94,211
</TABLE>
--------
(1) Resigned position as Divisional President, Venture Talent effective October
4, 2000. See "Relationships with Third Parties and Related Transactions--
Investments."
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. The exercise price per share of each option was below the fair market
value of the common stock on the date of grant as determined for accounting
purposes. In the year ended December 31, 1999, we granted to our employees
options to purchase a total of 261,286 shares of our common stock. Subsequent
to December 31, 1999, Greg L. Hammond received stock options to purchase 12,000
shares, Craig A. McGannon received stock options to purchase 12,000 shares and
John K. Younger received stock options to purchase 8,000 shares.
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 0%, 5% and 10% assumed rates of appreciation are
required by
60
<PAGE>
the rules of the Securities and Exchange Commission and do not represent our
estimate or projection of the future common stock price.
Option Grants in 1999
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------- Fair
Number of % of Total Market Potential Realizable Value at Assumed
Securities Options Exercise Value Per Annual Rates of Stock Price
Underlying Granted to or Base Share on Appreciation for Option Term
Options Employees Price Expiration Date of ---------------------------------------
Name Granted in Fiscal Year ($/Sh) Date Grant 0% 5% 10%
---- ---------- -------------- -------- ---------- --------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Martin Babinec.......... -- -- -- -- -- -- -- --
Douglas P. Devlin....... 15,000 5.7% $9.03 06/21/04 $10.40 $ 80,550 $140,227 $212,420
Gregory L. Hammond...... 25,000 9.6 9.03 06/21/04 10.40 134,250 233,711 354,034
Craig A. McGannon....... 25,000 9.6 9.03 06/21/04 10.40 134,250 233,711 354,034
John K. Younger......... 84,211 32.2 7.22 01/28/04 10.80 301,475 552,748 856,721
10,000 3.8 9.03 06/21/04 10.40 53,700 93,485 141,613
</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....... 6,000 $37,380 27,175 30,125 $ 353,275 $308,225
Gregory L. Hammond...... 1,100 4,485 11,450 37,500 137,280 249,250
Craig A. McGannon....... -- -- 5,050 40,000 44,234 230,875
John K. Younger......... -- -- 131,562 71,038 1,028,483 431,083
</TABLE>
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%.
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<PAGE>
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 15,000 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 25,000 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
25,000 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 Steven H. Carlson
to serve as our vice president, information technology, at a base salary of
$150,000 a year, with a discretionary bonus of $25,000 and up to 15,000
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 in control, if Mr. Carlson 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. Carlson 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.
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;
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. 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.
Vesting. Each non-employee director option will vest immediately 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
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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 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.
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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 June 30, 2000, we had issued 331,328 shares
upon the exercise of options under the stock option plan and options to
purchase 843,930 shares at a weighted average exercise price of $11.70 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 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.
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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 additional 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 2,678,773 shares of
common stock. The remaining 12,500 shares of Series E preferred stock are
currently convertible into 542,304 shares of common stock, valued at $7.0
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 217,256 shares of common stock, valued at $2.8
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. The shares of Series F preferred stock are convertible into 150,263
shares of common stock. In consideration for Bessemer's agreement to
voluntarily convert its Series F preferred stock into common stock upon the
closing of our initial public offering, or IPO, which conversion would occur
automatically only upon an offering at a per share price of at least $26.62,
and to thereby relinquish ongoing antidilution protection, we signed an
agreement with Bessemer in October 2000 that requires us to issue to Bessemer
on the closing date of our IPO that number of shares of common stock equal to
$4.0 million divided by the initial public offering price, minus 150,263. For
example, assuming an initial public offering price of $13.00 per share, we
would issue to Bessemer 157,429 shares of common stock in addition to the
150,263 shares issued in the conversion.
In June 2000, we issued a promissory note for up to $2 million to Select.
The terms of the note provided for draw downs in increments of $500,000 until
the earlier of (i) the closing of our initial public offering or (ii) September
30, 2000 for a fee of 3% for the first draw down, 3.5% for the second draw
down, 4% for the third draw down and 4.5% for the fourth draw down. In June
2000, we borrowed the
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full amount of the promissory note. Interest on any outstanding principal from
the applicable drawn down date accrues at the rate that is the lesser of (i)
the maximum rate permitted by law or (ii) 2% over the prime rate as published
by Fleet Bank, Boston until October 31, 2000 and 5% over the prime rate as
published by Fleet Bank, Boston after October 31, 2000. The principal and any
accrued and unpaid interest on the loan is due and payable on the earlier of
(i) the closing of our initial public offering or (ii) December 31, 2001.
Select is the beneficial owner of more than 5% of our common stock. In
addition, Anthony Martin, one of our directors, is chairman of the board of
Select.
Investments
On August 18, 2000, we entered into an agreement with Accolo, Inc., a
software and online services company for the recruitment industry founded by
John K. Younger, our former Divisional President of Venture Talent, pursuant to
which we agreed to meet the payroll obligations of Accolo, not to exceed an
aggregate payment of $250,000, in exchange for shares of Series A Preferred
Stock priced at $1.00 per share. Through September 30, 2000, we paid $107,000
in payroll obligations for which we will receive 107,000 shares of Series A
Preferred Stock, or 1.8% of the outstanding capital stock of the company. In
addition, we will receive Accolo software at no cost for an initial one year
term beginning on the date Accolo receives its first paying client, provided
that we do not compete with Accolo. At the end of the initial year, the term is
renewable at a price to be negotiated. Accolo has also agreed to give us an
amount equal to 5% of revenues generated by clients that we have referred to
the company. Select has also invested $250,000 in Accolo in exchange for
250,000 shares of Series A Preferred Stock of Accolo, representing 4.2% of the
total outstanding capital stock of the company.
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 and Craig A. McGannon. See "Management--Employment
Agreements."
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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 September 15, 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 September 15,
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 7,540,537 shares of common stock outstanding as of
September 15, 2000, assuming the conversion of all outstanding shares of
preferred stock into common stock and the additional issuance, before and not
part of this offering, of an estimated 157,429 shares of common stock to
Bessemer and 10,640,537 shares of common stock outstanding immediately
following the completion of this offering. In consideration for Bessemer's
agreement to voluntarily convert its Series F preferred stock into common stock
upon the closing of this offering, which conversion would occur automatically
only upon an offering at a per share price of at least $26.62, and to thereby
relinquish its ongoing antidilution protection, we agreed to issue to Bessemer
that number of shares of common stock equal to the difference between the
number of shares of common stock its Series F preferred stock will convert into
and the number of shares of common stock Bessemer would have received upon
conversion had it purchased its Series F preferred stock at the offering price.
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 Beneficially
Owned Before the Number Owned After the
Offering of Shares Offering
----------------- Being -----------------
Number Percent Offered Number Percent
--------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
5% Stockholders
Select Appointments North
America Inc.(1)................ 3,938,333 52.2% 800,000 3,138,333 29.5%
60 Harvard Mill Square
Wakefield, MA 01880
Executive Officers and Directors
Martin Babinec(2)............... 1,978,500 26.2% -- 1,978,500 18.6%
Douglas P. Devlin(3)............ 336,722 4.4 -- 336,722 3.2
Gregory L. Hammond(4)........... 25,050 * -- 25,050 *
Steven H. Carlson(5)............ 117,228 1.5 -- 117,228 1.1
Craig A. McGannon(6)............ 16,300 * -- 16,300 *
John K. Younger(7).............. 211,292 2.8 -- 211,292 2.0
James P. Hanson(8).............. 212,294 2.8 -- 212,294 2.0
H. Lynn Hazlett................. 3,120 * -- 3,120 *
Anthony V. Martin(9)............ 3,938,333 52.2 800,000 3,138,333 29.5
T. Joe Willey(10)............... 15,444 * -- 15,444 *
Directors and executive officers
as a group (10 persons)(11).... 6,854,283 87.6% 800,000 6,054,283 55.4%
</TABLE>
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--------
* Represents beneficial ownership at less than 1% of the outstanding shares
of our common stock.
(1) Includes 44,110 shares held by Ogier Trustee Limited, a fund established
for the benefit of employees of Select Appointments (Holdings) Ltd., the
parent company of Select Appointments North America Inc., or Select, and
administered by a trustee. Select Appointments (Holdings) Ltd. is a wholly
owned subsidiary of Vedior NV, a publicly traded company in the
Netherlands. Anthony V. Martin, one of our directors, is chairman of the
board of Select Appointments (Holdings) Ltd. and chairman of the board of
Vedior NV. By virtue of his board positions, as described above, Mr.
Martin may be deemed to possess indirect beneficial ownership of the
common stock held by Select and Ogier Trustee Limited. Mr. Martin
disclaims beneficial ownership of these shares within the meaning of Rule
13d-3 under the Securities Exchange Act of 1934.
(2) Shares are held by Martin and Krista Babinec, Trustees of the Babinec
Family Trust dated 7/16/95. In February 2000, Messrs. Babinec and Devlin
signed an agreement with Select, or the Select Agreement, that obligates
them, in the event of any anti-dilution adjustment to Bessemer by us, to
transfer to Select that number of shares of our common stock held by them
equal to the anti-dilution adjustment, with 87.0% transferred by Mr.
Babinec and 13.0% transferred by Mr. Devlin. Assuming an initial public
offering price of $13.00 per share, we would issue to Bessemer 157,429
shares of common stock and Mr. Babinec would transfer to Select 136,963
shares of common stock on the closing date of our initial public offering,
which transfer would reduce his beneficial ownership after completion of
this offering to 1,841,537 shares of common stock, or 17.3%.
(3) Includes 36,800 shares issuable upon exercise of options exercisable
within 60 days of September 15, 2000. Assuming an initial public offering
price of $13.00 per share, we would issue to Bessemer 157,429 shares of
common stock and the Select Agreement would obligate Mr. Devlin to
transfer to Select 20,466 shares of common stock on the closing date of
our initial public offering, which transfer would reduce his beneficial
ownership after completion of this offering to 316,256 shares of common
stock, or 3.0%.
(4) Includes 23,950 shares issuable upon exercise of options exercisable
within 60 days of September 15, 2000.
(5) Includes 82,228 shares issuable upon exercise of options exercisable
within 60 days of September 15, 2000.
(6) Includes 13,669 shares issuable upon exercise of options exercisable
within 60 days of September 15, 2000.
(7) Includes 126,317 shares issuable upon exercise of options exercisable
within 60 days of September 15, 2000. Mr. Younger resigned his position as
Divisional President, Venture Talent effective October 4, 2000. See
"Relationships with Third Parties and Related Transactions--Investments."
(8) Includes 193,844 shares held by James P. and Kristy L. Hanson, husband and
wife as community property and 18,450 shares held by James P. and Kristy
L. Hanson Accountancy Corporation Profit Sharing Plan #1.
(9) Includes 3,894,223 shares held by Select and 44,110 shares held by Ogier
Trustee Limited, a fund established for the benefit of Select Appointments
(Holdings) Ltd. employees and administered by a trustee. Select
Appointments (Holdings) Ltd. is a wholly owned subsidiary of Vedior NV, a
publicly traded company in the Netherlands. Anthony V. Martin, one of our
directors, is chairman of the board of Select Appointments (Holdings) Ltd.
and chairman of the board of Vedior NV, a publicly traded company in the
Netherlands. By virtue of his board positions, as described above,
Mr. Martin may be deemed to possess indirect beneficial ownership of the
common stock held by Select and Ogier Trustee Limited. Mr. Martin
disclaims beneficial ownership of these shares within the meaning of
Rule 13d-3 under the Securities Exchange Act of 1934.
(10) Includes 113 shares issuable upon exercise of options exercisable within
60 days of September 15, 2000.
(11) See footnotes (2) through (11) above, as applicable.
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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, $0.0001 par value, and 5,000,000 shares of
preferred stock, $0.0001 par value.
Common Stock
As of September 15, 2000, there were 7,540,537 shares of common stock
outstanding that were held of record by approximately 65 stockholders after
giving effect to the conversion of our preferred stock into common stock and
the additional issuance, before and not part of this offering, of an estimated
157,429 shares of common stock to Bessemer. In consideration for Bessemer's
agreement to voluntarily convert its Series F preferred stock into common stock
upon the closing of this offering, which conversion would occur automatically
only upon an offering at a per share price of at least $26.62, and to thereby
relinquish its ongoing antidilution protection, we agreed to issue to Bessemer
that number of shares of common stock equal to the difference between the
number of shares of common stock its Series F preferred stock will convert into
and the number of shares of common stock Bessemer would have received upon
conversion had it purchased its Series F preferred stock at the offering price.
There will be 10,640,537 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
71
<PAGE>
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.
Registration Rights of Stockholders
Upon the earlier of July 30, 2001 or 12 months after this offering holders
of an aggregate of 307,692 shares of our common stock at an assumed initial
public offering price of $13.00 per share, and beginning 180 days after this
offering holders of an aggregate of 3,938,333 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. and Bessemer 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;
72
<PAGE>
. 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.
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.
73
<PAGE>
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.
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 Wells Fargo Bank
Minnesota N.A.
74
<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 10,640,537 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 6,740,537 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 Robert W. Baird & Co. Incorporated.
Taking into account these lock-up agreements, and assuming Robert W. Baird &
Co. Incorporated does not release stockholders from their agreements, the
following shares will be eligible for sale in the public market at the
following times:
. 3,900,000 shares sold pursuant to this offering will be eligible for sale
upon completion of this offering;
. 6,583,108 shares will be eligible for sale upon the expiration of lock-up
agreements, beginning 180 days after the date of this prospectus; and
. an estimated 157,429 shares will be eligible for sale beginning 365 days
after the date of this prospectus.
Additionally, of the shares that may be issued upon the exercise of options
outstanding as of September 15, 2000, approximately 517,735 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 104,831 shares immediately after this offering; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
75
<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 307,692 shares of our common stock at an assumed
initial public offering price of $13.00 per share, and beginning 180 days after
this offering holders of an aggregate of 3,938,333 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.
76
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives, Robert
W. Baird & Co. Incorporated, Jefferies & Company, Inc. and Legg Mason Wood
Walker, Incorporated have agreed with us and the majority stockholder of
TriNet, Select Appointments North America Inc. 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
Underwriters of Shares
------------ ---------
<S> <C>
Robert W. Baird & Co. Incorporated.................................
Jefferies & Company, Inc. .........................................
Legg Mason Wood Walker, Incorporated...............................
---------
Total............................................................ 3,900,000
=========
</TABLE>
The representatives have advised us and our selling stockholder 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
We have granted to the underwriters an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to 585,000 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 585,000 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
77
<PAGE>
in this offering are being sold. We will be obligated to sell shares to the
underwriters to the extent the over-allotment option is exercised.
The following table summarizes the compensation we will pay the
underwriters:
<TABLE>
<CAPTION>
Total
-------------------
Without With
Per Over- Over-
Share allotment allotment
----- --------- ---------
<S> <C> <C> <C>
Underwriting discounts and commissions payable
by us.......................................... $ $ $
</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 stockholder against civil liabilities,
including liabilities under the Securities Act.
Lock-Up Agreements
Holders of 98% 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, Robert W. Baird & Co. Incorporated 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 Robert W. Baird & Co. Incorporated,
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.
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<PAGE>
Listing
Our common stock has been approved for listing on The Nasdaq Stock Market's
National Market under the symbol "TRNE."
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 195,000 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.
79
<PAGE>
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.
80
<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.
81
<PAGE>
INDEX TO 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
F-2
<PAGE>
TRINET GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
December 31, Stockholders'
------------------------ June 30, Equity at
1998 1999 2000 June 30, 2000
----------- ----------- ----------- -------------
ASSETS (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 942,272 $ -- $ --
Payroll funds invested........................ 7,642,291 17,358,042 20,612,425
Accounts receivable, net of allowance for
doubtful accounts of $7,157 in 1998, $100,000
in 1999 and $723,000 at June 30, 2000........ 1,676,753 3,637,345 3,333,058
Unbilled receivables.......................... 4,667,940 4,781,704 11,693,573
Refundable income tax prepayments............. 390,817 1,376,802 376,172
Receivable from Trust......................... -- -- 655,324
Prepaid expenses.............................. 428,727 534,322 727,186
Deferred income taxes......................... 147,400 322,500 587,100
Other current assets.......................... 100,845 308,216 635,647
----------- ----------- -----------
Total current assets........................ 15,997,045 28,318,931 38,620,485
Property and equipment, net.................... 4,005,578 7,979,264 7,952,833
Other assets................................... 88,890 74,009 897,231
----------- ----------- -----------
$20,091,513 $36,372,204 $47,470,549
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft................................ $ -- $ 580,807 $ 135,731
Accounts payable.............................. 375,933 733,769 2,474,463
Subscriber prepayments........................ 6,002,250 6,942,570 13,848,396
Accrued compensation and related expenses..... 8,614,294 19,359,530 21,942,173
Current portion of borrowings under bank
financing arrangements....................... -- 588,910 --
----------- ----------- -----------
Total current liabilities................... 14,992,477 28,205,586 38,400,763
Borrowings under bank financing arrangements... -- 1,766,728 --
Note payable to stockholder.................... -- -- 1,924,999
Deferred income taxes.......................... 531,100 1,084,200 287,100
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
June 30, 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
June 30, 2000, and none pro forma (aggregate
liquidation preference of $4,000,000)....... -- -- 3,974,185 --
Common stock, no stated value; authorized:
50,000,000 shares; issued and outstanding:
6,316,675 shares at December 31, 1998,
6,385,394 shares at December 31, 1999,
6,679,116 shares at June 30, 2000 and
7,529,112 shares, pro forma.................. 5,026,754 6,619,545 6,750,679 11,224,864
Deferred compensation......................... (356,542) (1,072,861) (648,398) (648,398)
Accumulated deficit........................... (592,049) (725,182) (3,721,876) (3,721,876)
Accumulated other comprehensive loss.......... (10,227) (5,812) 3,097 3,097
----------- ----------- ----------- -----------
Total stockholders' equity.................. 4,067,936 4,815,690 6,357,687 $ 6,857,687
----------- ----------- ----------- ===========
$20,091,513 $36,372,204 $47,470,549
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
TRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------------------ -------------------------
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, $278,358,474, and $542,657,621,
respectively)................................. $7,345,251 $11,953,419 $18,477,367 $ 8,246,542 $ 14,296,972
Interest revenues.............................. 403,357 489,505 650,413 274,055 640,235
---------- ----------- ----------- ----------- ------------
Total service revenues...................... 7,748,608 12,442,924 19,127,780 8,520,597 14,937,207
---------- ----------- ----------- ----------- ------------
Operating expenses:
Cost of providing services (1)................ 4,119,822 6,378,814 10,101,829 4,303,490 7,449,200
Client acquisition costs (2).................. 1,077,607 1,102,352 2,541,173 1,047,892 3,092,783
General and administrative (3)................ 846,395 1,782,603 2,543,574 1,178,563 2,677,941
Research and development (4).................. 488,475 718,692 2,353,295 720,793 3,903,860
Depreciation.................................. 228,668 565,008 742,943 348,000 1,388,790
Stock-based compensation...................... -- 146,458 650,681 210,213 424,463
---------- ----------- ----------- ----------- ------------
Total operating expenses.................... 6,760,967 10,693,927 18,933,495 7,808,951 18,937,037
---------- ----------- ----------- ----------- ------------
Operating income (loss)........................ 987,641 1,748,997 194,285 711,646 (3,999,830)
Other income (expense):
Interest income............................... 41,651 49,177 73,503 24,565 41,231
Interest expense.............................. (22,981) (10,760) (9,340) (1,990) (53,763)
Foreign exchange gain (loss).................. -- (25,584) 37,719 (6,771) (31,238)
---------- ----------- ----------- ----------- ------------
Income (loss) before (provision) benefit for
income taxes.................................. 1,006,311 1,761,830 296,167 727,450 (4,043,600)
(Provision) benefit for income taxes........... (246,800) (779,400) (399,300) (1,048,000) 1,061,700
---------- ----------- ----------- ----------- ------------
Net income (loss).............................. $ 759,511 $ 982,430 $ (103,133) $ (320,550) $ (2,981,900)
========== =========== =========== =========== ============
Net income (loss) available to common
stockholders.................................. $ (347,640) $ 454,978 $ (133,133) $ (335,344) $ (2,996,694)
========== =========== =========== =========== ============
Basic net income (loss) per common share....... $ (0.10) $ 0.07 $ (0.02) $ (0.05) $ (0.47)
========== =========== =========== =========== ============
Diluted net income (loss) per common share..... $ (0.10) $ 0.07 $ (0.02) $ (0.05) $ (0.47)
========== =========== =========== =========== ============
Shares used to compute basic net income (loss)
per common share.............................. 3,598,767 6,303,081 6,340,357 6,322,620 6,432,502
========== =========== =========== =========== ============
Shares used to compute diluted net income
(loss) per common share....................... 3,598,767 6,593,448 6,340,357 6,322,620 6,432,502
========== =========== =========== =========== ============
Pro forma basic and diluted net loss per common
share (unaudited)............................. $ (0.01) $ (0.42)
=========== ============
Shares used to compute pro forma basic and
diluted net loss per common stock share
(unaudited)................................... 6,882,661 7,178,801
=========== ============
</TABLE>
--------
(1) Excluding stock-based compensation of $39,720 and $275,902 for the years
ended December 31, 1998 and 1999, respectively, and $97,184 and $171,648
for the six months ended June 30, 1999 and 2000, respectively.
(2) Excluding stock-based compensation of $22,372 and $52,160 for the years
ended December 31, 1998 and 1999, respectively, and $22,008 and $27,577 for
the six months ended June 30, 1999 and 2000, respectively.
(3) Excluding stock-based compensation of $72,670 and $286,700 for the years
ended December 31, 1998 and 1999, respectively, and $79,882 and $195,188
for the six months ended June 30, 1999 and 2000, respectively.
(4) Excluding stock-based compensation of $11,696 and $35,919 for the years
ended December 31, 1998 and 1999, respectively, and $11,139 and $30,050 for
the six months ended June 30, 1999 and 2000, respectively.
See accompanying notes.
F-4
<PAGE>
TRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<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............. -- $ -- 3,597,127 $ 537,632 $(250,000) $ -- $ (699,387) $ -- $ (411,755)
Repurchase of
common stock.... -- -- (850) (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... -- -- 5,525 1,509 -- -- -- -- 1,509
Conversion of
redeemable
preferred shares
into common
stock........... -- -- 2,678,773 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............. -- -- 6,280,575 3,990,029 -- -- (1,047,027) -- 2,943,002
Repurchase of
common stock.... -- -- (5,005) (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... -- -- 41,105 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............. -- -- 6,316,675 5,026,754 -- (356,542) (592,049) (10,227) 4,067,936
Repurchase of
common stock.... -- -- (1,493) (10,780) -- -- -- -- (10,780)
Exercise of
stock options... -- -- 70,212 196,367 -- -- -- -- 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............. -- -- 6,385,394 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 $25,816
(unaudited)..... 150,263 3,974,185 -- -- -- -- -- -- 3,974,185
Repurchase of
common stock
(unaudited)..... -- -- (520) (13,406) -- -- -- -- (13,406)
Exercise of
stock options
(unaudited)..... -- -- 76,986 144,540 -- -- -- -- 144,540
Amortization of
deferred
compensation
(unaudited)..... -- -- -- -- -- 424,463 -- -- 424,463
Issuance of
common stock to
Series E
preferred
stockholders in
satisfaction of
anti-dilution
agreement
(unaudited)..... -- -- 217,256 -- -- -- -- -- --
Dividend payable
(unaudited)..... -- -- -- -- -- -- (14,794) -- (14,794)
Net loss
(unaudited)..... -- -- -- -- -- -- (2,981,900) -- (2,981,900)
Foreign currency
translation
adjustment
(unaudited)..... -- -- -- -- -- -- -- 8,909 8,909
-----------
Comprehensive
loss
(unaudited)..... -- -- -- -- -- -- -- -- (2,972,991)
------- ---------- --------- ---------- --------- ----------- ----------- -------- -----------
Balance at June
30, 2000
(unaudited)...... 150,263 $3,974,185 6,679,116 $6,750,679 $ -- $ (648,398) $(3,721,876) $ 3,097 $ 6,357,687
======= ========== ========= ========== ========= =========== =========== ======== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
TRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ------------ -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income (loss)......................... $ 759,511 $ 982,430 $ (103,133) $ (320,550) $(2,981,900)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation............................. 228,668 565,008 742,943 348,000 1,388,790
Stock-based compensation................. -- 146,458 694,411 210,213 424,463
Provision for doubtful accounts.......... 7,157 29,510 236,053 52,786 622,759
Deferred income taxes.................... 210,900 359,600 378,000 1,026,702 (1,061,700)
Changes in assets and liabilities:
Payroll funds invested.................. (2,699,846) (923,869) (9,715,751) (12,115,152) (3,254,383)
Accounts receivable..................... (1,646,832) 95,086 (2,196,645) 1,623,967 (318,472)
Unbilled receivables.................... 137,157 (2,644,067) (113,764) (996,664) (6,911,869)
Refundable income tax prepayments....... (108,739) (485,765) (945,781) 390,817 1,000,630
Receivable from Trust................... -- -- -- -- (655,324)
Prepaid expenses........................ (232,991) (195,736) (105,595) 148,879 (192,864)
Other current assets.................... 120,728 (20,498) (207,371) (117,603) (327,431)
Other noncurrent assets................. -- (50,878) 14,881 (6,326) (823,222)
Bank overdraft.......................... -- -- 580,807 -- (445,076)
Accounts payable........................ 267,962 (163,233) 1,472,288 (193,960) 1,755,900
Subscriber prepayments.................. 2,482,831 1,652,151 940,320 (1,154,814) 6,905,826
Accrued compensation and related
expenses............................... 1,935,959 1,887,516 10,745,236 11,404,404 2,582,643
----------- ----------- ----------- ------------ -----------
Net cash provided by (used in) operating
activities............................... 1,462,465 1,233,713 2,416,899 300,699 (2,291,230)
Investing activities
Purchase of property and equipment........ (2,230,084) (1,916,402) (4,716,629) (931,893) (1,362,359)
Financing activities
Borrowings (repayments) under bank
financing arrangements................... -- -- 1,238,638 -- (2,355,638)
Issuance of note payable to stockholder... -- -- -- -- 1,924,999
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 82,718 144,540
Issuance of preferred stock............... 1,000,000 500,000 -- -- 3,974,185
Payment of note receivable................ 250,000 -- -- -- --
----------- ----------- ----------- ------------ -----------
Net cash provided by financing
activities............................... 1,187,633 426,574 1,353,043 44,486 3,644,680
----------- ----------- ----------- ------------ -----------
Effect of exchange rate changes on cash... -- (10,227) 4,415 686 8,909
----------- ----------- ----------- ------------ -----------
Net increase (decrease) in cash and cash
equivalents.............................. 420,014 (266,342) (942,272) (586,022) --
Cash and cash equivalents at beginning of
period................................... 788,600 1,208,614 942,272 942,272 --
----------- ----------- ----------- ------------ -----------
Cash and cash equivalents at end of
period................................... $ 1,208,614 $ 942,272 $ -- $ 356,250 $ --
=========== =========== =========== ============ ===========
Supplemental disclosures of cash flow
information
Interest paid............................. $ 14,069 $ 10,760 $ 9,340 $ 1,990 $ 53,763
=========== =========== =========== ============ ===========
Income taxes paid......................... $ 178,466 $ 853,500 $ 1,239,475 $ 574,250 $ 2,872
=========== =========== =========== ============ ===========
Supplemental schedule of noncash financing
activities
Dividends declared but not paid........... $ 107,151 $ 27,452 $ 30,000 $ 14,794 $ 14,794
=========== =========== =========== ============ ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Information as of June 30, 1999 and 2000 and for the six months ended June 30,
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 June 30, 2000
F-7
<PAGE>
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
(Information as of June 30, 1999 and 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
are net of prepayments received prior to period end of $481,130, $1,651,534 and
$1,917,462, respectively. The Company also derives 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. These funds are classified as payroll funds invested
in the accompanying balance sheets. 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
total service revenues in the accompanying consolidated statements of
operations as this interest income represents an integral part of the revenue
generated from the Company's services. Interest income generated from the
Company's cash and cash equivalents balances is included in other income in the
accompanying consolidated statements of operations as this interest income does
not result from the Company's operating activities.
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.
Payroll Funds Invested
In addition to subscriber prepayments, the Company requires its customers to
pay no later than one day prior to the applicable payroll date and these funds
are invested in bank demand deposits and other
F-8
<PAGE>
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
(Information as of June 30, 1999 and 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
short-term, highly liquid investments. The balance of these payroll funds
invested can vary significantly based on the timing of funds transferred by
customers and the timing of funds disbursed by the Company for applicable
services. The timing of disbursement of funds varies from one day for certain
payroll obligations to several months for certain third party 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 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-
F-9
<PAGE>
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
(Information as of June 30, 1999 and 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
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 $220,000 and $500,000 for the six months ended June 30, 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 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
F-10
<PAGE>
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
(Information as of June 30, 1999 and 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
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 June 30, 1999 and 2000 and for the six
months ended June 30, 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 six months ended June 30, 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.
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 June 2000 issued SAB 101B,
F-11
<PAGE>
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
(Information as of June 30, 1999 and 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
"Second Amendment: Revenue Recognition in Financial Statements." SAB 101 and
101B are effective for the Company in the quarter ending December 31, 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,
------------------------ June 30,
1998 1999 2000
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Software............................ $ 2,266,960 $ 4,969,493 $ 5,330,087
Office equipment including data
processing equipment............... 1,729,900 2,977,038 3,630,308
Furniture, fixtures and equipment... 637,036 955,142 1,144,287
Leasehold improvements.............. 536,299 986,686 1,142,676
----------- ----------- -----------
5,170,195 9,888,359 11,247,358
Accumulated depreciation............ (1,164,617) (1,909,095) (3,294,525)
----------- ----------- -----------
$ 4,005,578 $ 7,979,264 $ 7,952,833
=========== =========== ===========
</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
provisions, 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 on a long term basis under
the September 1999 line of credit agreement described above. 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.
F-12
<PAGE>
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
(Information as of June 30, 1999 and 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
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, an additional 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 $1.00 per common share, subject
to adjustment based on anti-dilution provisions outlined in the Preferred Stock
Agreement (conversion price of $0.921992 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 2,678,773 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 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 217,256 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
F-13
<PAGE>
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
(Information as of June 30, 1999 and 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
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.
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 June 30, 2000 gives
effect to the conversion of all outstanding shares of convertible preferred
stock and redeemable convertible preferred stock at that date into 692,567
shares of common stock upon the completion of the offering and the additional
issuance of an estimate of 157,429 shares of common stock to Bessemer Venture
Partners V L.P., Bessec Ventures V L.P. and BVE LLC upon the conversion of
their 150,263 shares of Series F preferred stock into 150,263 shares of common
stock before the closing of this offering, at an assumed initial offering price
of $13.00 per share. As described in Note 9, the actual number of common shares
to be issued upon the conversion of preferred stock is subject to adjustment
based upon the actual initial public offering price.
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, $0.0001 par value, and 5,000,000
shares of preferred stock, $0.0001 par value.
1990 Stock Option Plan
Pursuant to the Company's 1990 Stock Option Plan (the "Plan"), an aggregate
of 1,225,000 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)
DECEMBER 31, 1999
(Information as of June 30, 1999 and 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
Stock option activity under the Plan is summarized as follows:
<TABLE>
<CAPTION>
Outstanding options Weighted
Options ------------------------- average
available Number exercise
for grant of shares Price per share price
--------- --------- --------------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1996................ 680,450 407,050 $0.08-1.60 $ 1.15
Granted.................................... (109,398) 109,398 3.40-4.95 4.16
Exercised.................................. -- (5,525) 0.08-1.00 0.27
Cancelled.................................. 2,900 (2,900) 1.00 1.00
-------- ------- ------------ ------
Balance at December 31, 1997................ 573,952 508,023 $1.00-4.95 $ 1.81
Granted.................................... (110,165) 110,165 3.69-5.83 5.43
Exercised.................................. -- (41,105) 3.69-5.83 5.23
Cancelled.................................. 60,612 (60,612) 1.00-5.83 2.33
-------- ------- ------------ ------
Balance at December 31, 1998................ 524,399 516,471 $1.00-5.83 $ 2.27
Granted.................................... (261,286) 261,286 7.22-25.73 8.58
Exercised.................................. -- (70,212) 3.69-25.73 8.23
Cancelled.................................. 18,168 (18,168) 1.00-25.73 4.21
-------- ------- ------------ ------
Balance at December 31, 1999................ 281,281 689,377 $1.00-25.73 $ 4.82
Granted (unaudited)........................ (238,289) 238,289 28.82 28.82
Exercised (unaudited)...................... -- (76,986) 25.73-28.82 28.59
Cancelled (unaudited)...................... 6,750 (6,750) 3.69-28.82 25.16
-------- ------- ------------ ------
Balance at June 30, 2000 (unaudited)........ 49,742 843,930 $1.00-28.82 $11.70
======== ======= ============ ======
</TABLE>
The weighted-average remaining contractual life of all outstanding options
at June 30, 2000 is 3.07 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 $5.43 per
share and $8.58 per share, respectively. For the year ended December 31, 1997
and the six months ended June 30, 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 $4.16 per share and $28.82 per
share, respectively.
F-15
<PAGE>
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
(Information as of June 30, 1999 and 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
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>
$1.00 185,350 1.10 $ 1.00 133,476 $1.00
$1.60 75,000 1.77 1.60 59,270 1.60
$3.40-3.81 60,050 2.55 3.52 41,720 3.53
$4.95-5.83 114,137 3.24 5.40 42,222 5.35
$7.22 92,140 4.07 7.22 43,650 7.22
$9.03 159,400 4.49 9.03 -- --
$25.73 3,300 4.97 25.73 -- --
------- ---- ------ ------- -----
$1.00-25.73 689,377 2.85 $ 4.82 320,338 $2.86
======= ==== ====== ======= =====
</TABLE>
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 June 30, 2000
------- ------- ------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Redeemable convertible preferred
stock.............................. -- 500,000 542,304 542,304
Convertible preferred stock......... -- -- -- 307,692
Stock options outstanding........... 508,023 516,471 689,377 843,930
Stock options available for grant... 573,952 524,399 281,281 49,742
</TABLE>
Deferred Compensation
The Company has recorded deferred stock compensation charges of $503,000,
$1,367,000, and $1,169,000 during the years ending December 31, 1998 and 1999
and the six months ended June 30, 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
F-16
<PAGE>
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
(Information as of June 30, 1999 and 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
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 $1.09, $1.41
and $4.26 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
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............................... $ (0.10) $ 0.07 $ (0.02)
Pro forma................................. $ (0.11) $ 0.06 $ (0.07)
Diluted net income (loss) per common share:
As reported............................... $ (0.10) $ 0.07 $ (0.02)
Pro forma................................. $ (0.11) $ 0.06 $ (0.07)
</TABLE>
F-17
<PAGE>
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
(Information as of June 30, 1999 and 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
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.
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>
Six Months
Years Ended December 31, Ended June 30,
----------------------------------- ------------------------
1997 1998 1999 1999 2000
----------- ---------- ---------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Historical:
Numerator:
Net income (loss)................. $ 759,511 $ 982,430 $ (103,133) $ (320,550) $(2,981,900)
Less: preferred stock dividends
and discount accretion........... (1,107,151) (527,452) (30,000) (14,794) (14,794)
----------- ---------- ---------- ---------- -----------
Numerator for basic and dilutive
net income (loss) per common
share--net income available to
common stockholders.............. $ (347,640) $ 454,978 $ (133,133) $ (335,344) $(2,996,694)
=========== ========== ========== ========== ===========
Denominator:
Denominator for basic net income
(loss) per common share--
weighted-average shares of common
stock outstanding................ 3,598,767 6,303,081 6,340,357 6,322,620 6,432,502
Effect of dilutive securities:
Employee stock options........... -- 290,367 -- -- --
----------- ---------- ---------- ---------- -----------
Denominator for dilutive net
income (loss) per common share--
adjusted weighted-average shares
and assumed conversions.......... 3,598,767 6,593,448 6,340,357 6,322,620 6,432,502
=========== ========== ========== ========== ===========
Basic net income (loss) per common
share............................ $ (0.10) $ 0.07 $ (0.02) $ (0.05) $ (0.47)
=========== ========== ========== ========== ===========
Diluted net income (loss) per
common share..................... $ (0.10) $ 0.07 $ (0.02) $ (0.05) $ (0.47)
=========== ========== ========== ========== ===========
</TABLE>
For the years ended December 31, 1997 and 1999, and the six months ended
June 30, 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 200,000, 330,000, 215,000, and
530,000 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 six months ended June 30, 1999 and 2000, the calculation of
historical diluted net income per common share would have included an
additional 542,304, 542,304 and 746,299 common equivalent shares, respectively,
related to the conversion of preferred shares using the if-converted method.
For the years ended December 31, 1997 and 1998, the effect of the convertible
preferred stock is anti-dilutive.
F-18
<PAGE>
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
(Information as of June 30, 1999 and 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
For the year ended December 31, 1999 and for the six months ended June 30,
2000, the calculation of pro forma basic and diluted net loss per common share
is as follows:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1999 June 30, 2000
----------------- ----------------
(unaudited)
<S> <C> <C>
Net loss................................. $ (103,133) $(2,981,900)
========== ===========
Weighted-average shares used in computing
basic net loss per common share......... 6,340,357 6,432,502
Adjustment to reflect the effect of the
assumed conversion of preferred stock
from beginning of year or date of
issuance................................ 542,304 746,299
---------- -----------
Weighted-average shares used in computing
pro forma basic and diluted net loss per
common share............................ 6,882,661 7,178,801
========== ===========
Pro forma basic and dilutive net loss per
common share (unaudited)................ $ (0.01) $ (0.42)
========== ===========
</TABLE>
7. Income Taxes
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
---------------------------- -----------------------
1997 1998 1999 1999 2000
--------- -------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal................ $ 176,900 $331,200 $ 12,100 $ 31,800 $ --
State.................. 46,000 88,600 9,200 24,100 --
--------- -------- -------- ---------- -----------
222,900 419,800 21,300 55,900 --
Deferred:
Federal................ 165,900 276,500 297,800 781,600 (1,131,900)
State.................. 45,000 83,100 80,200 210,500 (234,800)
--------- -------- -------- ---------- -----------
210,900 359,600 378,000 992,100 (1,366,700)
--------- -------- -------- ---------- -----------
433,800 779,400 399,300 1,048,000 (1,366,700)
Change in valuation
allowance.............. (187,000) -- -- -- 305,000
--------- -------- -------- ---------- -----------
$ 246,800 $779,400 $399,300 $1,048,000 $(1,061,700)
========= ======== ======== ========== ===========
</TABLE>
F-19
<PAGE>
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
(Information as of June 30, 1999 and 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
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 purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31, 1998
and 1999 and June 30, 2000 are as follows:
<TABLE>
<CAPTION>
As of December 31,
---------------------- As of June 30,
1998 1999 2000
--------- ----------- --------------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Accrued expenses................... $ 69,000 $ 256,300 $ 676,700
State income taxes................. 61,700 62,000 (20,800)
Net operating loss carryforwards... -- -- 700,000
Other.............................. 17,700 4,600 92,000
--------- ----------- ----------
Total deferred tax assets........... 148,400 322,900 1,447,900
Valuation allowance................. -- -- (305,000)
--------- ----------- ----------
Net deferred tax assets............. 148,400 322,900 1,142,900
Deferred tax liabilities:
Depreciation and amortization...... (127,500) (186,800) (170,700)
Software development costs......... (404,600) (897,800) (672,200)
--------- ----------- ----------
Total deferred tax liabilities...... (532,100) (1,084,600) (842,900)
--------- ----------- ----------
Net deferred tax asset/(liability).. $(383,700) $ (761,700) $ 300,000
========= =========== ==========
Net current deferred tax assets..... $ 147,400 $ 322,500 $ 587,100
Net noncurrent deferred tax
liabilities........................ (531,100) (1,084,200) (287,100)
--------- ----------- ----------
Net deferred tax asset/(liability).. $(383,700) $ (761,700) $ 300,000
========= =========== ==========
</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 Six Months Ended
December 31, June 30,
----------------- -----------------------
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 4
Meals and entertainment.......... -- 1 4 4 --
Change in valuation allowance.... (18) -- -- -- 8
Other............................ 2 -- 2 2 --
--- --- --- --- ---
24 % 44% 135% 144% (26)%
=== === === === ===
</TABLE>
At June 30, 2000, the Company has a net operating loss for federal income
tax purposes of approximately $1.8 million. Should the Company have a federal
net operating loss at December 31,
F-20
<PAGE>
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
(Information as of June 30, 1999 and 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
2000, the carryforward will expire in the year 2020. At June 30, 2000, the
Company has a net operating loss for state income tax purposes of approximately
$900,000. Should the Company have a state net operating loss at December 31,
2000, the carryforward will expire in the year 2005.
Total deferred tax assets have been partially offset by a valuation
allowance due to the risks and uncertainties surrounding the Company's ability
to generate future taxable income. The valuation allowance increased by
$305,000 in the six months ended June 30, 2000.
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
F-21
<PAGE>
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
(Information as of June 30, 1999 and 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
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.
9. Events (unaudited) Subsequent to Dates of Independent Auditors' Report
Employee Benefit Insurance Trust
Effective June 20, 2000, the Company established the TriNet Employee Benefit
Insurance Trust ("Trust") to consolidate the administration of various health
and welfare benefit programs maintained on behalf of the Company's serviced and
corporate employees. Assets resulting from contributions made by the Company
and its employees to the health and welfare benefit plans are held and invested
by the Trust. The Trust disburses funds for health and welfare plan premiums as
well as for the costs to administer the health and welfare plans. As of June
30, 2000, the Company has incurred $655,324 in expenses related to the
administration of these health and welfare plans. Under the terms of the Trust,
the Company is to be reimbursed for these administrative expenses by the Trust.
The Company recorded such amounts as receivable from the Trust at June 30, 2000
and offset the related expenses incurred. Subsequent to June 30, 2000, all such
amounts were received by the Company from the Trust. Management believes that
all reimbursements received are in accordance with the terms of the Trust
although the reimbursement of such administrative expenses could be subject to
review and adjustment by the United States Department of Labor under the
guidelines of the Employee Retirement Income Security Act of 1974, as amended.
Note Payable to Stockholder
In June 2000, the Company issued a $2.0 million promissory note to an
existing stockholder for net cash proceeds of $1,924,999. Interest on the
outstanding principal accrues at the rate of 2% over the prime rate as
published by Fleet Bank, Boston until October 31, 2000 and 5% over the prime
rate as published by Fleet Bank, Boston after October 31, 2000. The principal
and any accrued and unpaid interest on the loan is due and payable on the
earlier of (i) the closing of the Company's initial public offering or (ii)
December 31, 2001.
F-22
<PAGE>
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
(Information as of June 30, 1999 and 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
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.
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 $26.62 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. In consideration for this investor's agreement to voluntarily
convert its Series F preferred stock into common stock upon the closing of the
initial public offering, which conversion would occur automatically only upon
an offering at a per share price of at least $26.62, and to thereby relinquish
ongoing antidilution protection, the Company signed an agreement with such
investor in October 2000 that requires the Company's issuance to such investor
on the closing date of the Company's IPO that number of shares of common stock
equal to $4.0 million divided by the initial public offering price, minus
150,263. If the initial public offering price is $13.00 per share, then upon
the closing of the initial public offering, the Series F investor will be
entitled to receive an additional 157,429 shares of common stock. If such
additional issuance of common stock occurs, current and prospective
stockholders will suffer additional dilution with a resulting increase in net
loss available to common stockholders of approximately $2.0 million as well as
an increase in the basic and diluted net loss per common share. The actual
number of common shares to be issued as well as the impact on the net loss
available to common stockholders will vary based upon the initial public
offering price.
F-23
<PAGE>
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
(Information as of June 30, 1999 and 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
Lease
On May 24, 2000, the Company entered into an agreement for the construction
and lease of a new headquarters facility. This lease has a 15-year term, is
currently anticipated to commence in October 2001 and has minimum annual rent
payments of approximately $4.0 million.
F-24
<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.
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.
II-1
<PAGE>
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 September 30, 2000, TriNet has granted stock
options to purchase 718,988 shares of common stock, at a weighted
average exercise price of $14.12, to employees, consultants and
directors pursuant to its 1990 Stock Option Plan. Of these stock
options, 88,030 have been cancelled, 205,253 shares have been
exercised, 850 shares have been repurchased and 832,505 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 2,678,773 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
217,256 shares of common stock. The remaining 12,500 shares of Series E
preferred stock are convertible into an aggregate of 542,304 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,
or Bessemer 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 150,263 shares of common stock. In order to obligate Bessemer to
convert its Series F preferred stock into common stock immediately
prior to the closing of TriNet's initial public offering, or IPO,
TriNet signed an agreement with Bessemer in October 2000 that requires
TriNet's issuance to Bessemer on the closing date of its IPO that
number of shares of common stock equal to $4.0 million divided by the
initial public offering price, minus 150,263. For example, assuming an
initial public offering price of $13.00 per share, TriNet would issue
to Bessemer 157,429 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 Certificate 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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
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.
10.17** Creekside Plaza Office Lease between Registrant and Creekside
Associates, LLC.
10.18** Promissory Note dated June 22, 2000 from Registrant to Select
Appointments North America Inc.
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
(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.
II-3
<PAGE>
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. 8 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 31st day of October, 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 October 31, 2000
______________________________________ Officer and Director (Principal
Martin Babinec Executive Officer)
/s/ Douglas P. Devlin Chief Financial Officer and October 31, 2000
_____________________________________ Director (Principal Financial
Douglas P. Devlin and Accounting Officer)
* Director October 31, 2000
_____________________________________
Anthony V. Martin
* Director October 31, 2000
_____________________________________
H. Lynn Hazlett, Ph.D.
* Director October 31, 2000
_____________________________________
T. Joe Willey, Ph.D.
* Director October 31, 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 (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 Certificate 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.
10.17** Creekside Plaza Office Lease between Registrant and Creekside
Associates, LLC.
10.18** Promissory Note dated June 22, 2000 from Registrant to Select
Appointments North America Inc.
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
