-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IEqnFpsOn96EAPESPPDrjLyCLa8S/Wepgk4YzuglrBHdMtWDr4xNOadauDVz2YVE LY0toGyLejqoemZ97FpnAg== /in/edgar/work/0001032210-00-001930/0001032210-00-001930.txt : 20000927 0001032210-00-001930.hdr.sgml : 20000927 ACCESSION NUMBER: 0001032210-00-001930 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20000922 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRINET GROUP INC CENTRAL INDEX KEY: 0000937098 STANDARD INDUSTRIAL CLASSIFICATION: [7389 ] IRS NUMBER: 943081033 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-31534 FILM NUMBER: 727549 BUSINESS ADDRESS: STREET 1: 101 CALLAN AVENUE STREET 2: 2ND FL CITY: SAN LEANDRO STATE: CA ZIP: 94577 BUSINESS PHONE: 5103525000 MAIL ADDRESS: STREET 1: 101 CALLAN AVE STREET 2: 2ND FL CITY: SAN LEANDRO STATE: CA ZIP: 94577 FORMER COMPANY: FORMER CONFORMED NAME: TRINET EMPLOYER GROUP INC DATE OF NAME CHANGE: 20000126 S-1/A 1 0001.txt AMENDMENT #5 TO FORM S-1 As filed with the Securities and Exchange Commission on September 22, 2000 Registration No. 333-31534 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 5 To FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 --------------- TRINET GROUP, INC. (Exact Name of Registrant as Specified in Its Charter) California (prior to reincorporation) 7389 94-3081033 Delaware (following reincorporation) (Primary Standard Industrial (I.R.S. Employer (State or other jurisdiction of Classification Code Number) Identification No.) incorporation or organization)
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: Christopher A. Westover, Esq. Laura B. Hunter, Esq. Jamie E. Chung, Esq. Lindsay C. Freeman, Esq. Virginia C. Edwards, Esq. Jeanine M. Larrea, Esq. Angelique C. Tremble, Esq. Shelley E. Wharton, Esq. Jennifer J. Nam, Esq. Brobeck, Phleger & Harrison LLP Cooley Godward llp One Market Plaza One Maritime Plaza, 20th Floor San Francisco, CA 94105 San Francisco, CA 94111 (415) 442-0900 (415) 693-2000
--------------- 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + + +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, DATED SEPTEMBER 22, 2000 [TriNet Logo] TriNet Group, Inc. 3,900,000 Shares 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. We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol "TRNE." We estimate that the initial public offering price will be between $12.00 and $14.00 per share. ------------ This investment involves risks. See "Risk Factors" beginning on page 5. ------------
Per Share Total ------ ----------- Public Offering Price....................................... $ $ Underwriting Discounts...................................... $ $ Proceeds to TriNet Group, Inc............................... $ $ Proceeds to the Selling Stockholder......................... $ $
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. The other selling stockholders identified in "Principal and Selling Stockholders" on page 70 have granted the underwriters a 30-day option to purchase up to an additional 585,000 shares of our common stock to cover over- allotments. expects to deliver the shares of common stock to purchasers on , 2000. ------------ Robert W. Baird & Co. The date of this prospectus is , 2000 [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] [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"] TABLE OF CONTENTS
Page ---- 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
Page ---- 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.............................................................. 79 Experts.................................................................... 79 Where You Can Find Additional Information.................................. 80 Index to Financial Statements.............................................. F-1
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. 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, which will occur before the closing of this offering. 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 to 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 employ 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, is in excess of 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 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. . 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 introduced this service to two customers in 1999 and continue to develop this service offering. . Venture Talent provides recruitment services primarily to our Venture Employer Services customers. 1 . 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; 2 . human resource services tailored to fast-growth technology companies' employees; . easily scalable and integrated services; and . customers with economies of scale and efficiencies. We were incorporated in California in 1988 under the name TriNet Employer Group, Inc. We plan to change our name to TriNet Group, Inc. in connection with our reincorporation in Delaware. Information in this prospectus gives effect to 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 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........................................ 10,471,683 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
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. This 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 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."
Six Months Years Ended December 31, Ended June 30, --------------------------------------- --------------- 1995 1996 1997 1998 1999 1999 2000 ------ ------ ------ ------- ------- ------ ------- (unaudited) (in thousands, except per share data) 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
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; 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.
June 30, 2000 ------------------- Pro Forma Actual As Adjusted ------- ----------- (in thousands) (unaudited) 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
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 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 profitability. We expect to continue to incur operational losses in connection with our business as we continue to: . implement 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 mining and offering portions of our data online; 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 1995 to 1999, we lost an average of 15% of our total serviced employee population on December 31. 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 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, institutions 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, 7 our telecommunications capacity could be disrupted and our network infrastructure could be compromised, either of which could prevent us from maintaining our standard of service. Key vendors may choose to compete with or enter into arrangements competitive to us, which could cause us to lose market share. Our agreements with our key vendors are non-exclusive. These vendors may choose to compete with us directly or enter into strategic relationships with our competitors. These relationships could take the form of strategic investments or marketing or other contractual arrangements. Our competitors may also license and use the same technology in competition with us. Any use of our key vendors' technology in competition with us could improve our competitors' market position and cause us to lose market share. Any failure in our systems could reduce the quality of our business services, which could harm our reputation and the success of our business and expose us to liability. Our business systems rely on the complex integration of numerous hardware and software subsystems to manage the transactions involved in acquiring the customer relationship through the processing of employee, payroll and benefits data. Any delay or failure in our systems, such as obstructions in our ability to communicate electronically with customers, employees or vendors, or in our ability to process data, could 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. 8 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. A prospective customer's decision whether or not to implement our Enterprise Employer Services products and services requires us to dedicate a substantial amount of time, expense and other resources. 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 presently service through Enterprise Employer Services, the sales cycle was an average of 90 days from first proposal to signed service agreement. If at the end of a sales effort a prospective customer does not purchase our products or services, we may have incurred substantial expenses and expended management time that cannot be recovered and that will not generate corresponding revenues. As a result, our cash flow and our ability to fund expenditures incurred during the sales cycle may be impaired. We 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. 9 Carlson, our chief information officer, and those of our technical employees who are skilled in transactional technology, database and networking, specifically, our Internet applications lead developer, PeopleSoft project manager and PeopleSoft database developer. The loss of services of any of our executive officers and key technical employees could cause us to incur increased operating expenses and divert other senior management time in seeking replacements. The loss of their services could also harm our reputation as our customers could become concerned about our future operations. We must continually attract and retain highly skilled personnel or we will be unable to execute our business strategy. Our future success also will depend on our ability to attract, hire, train and retain highly skilled technical, sales and marketing and support personnel, particularly with expertise in outsourced solutions and the technology platforms that we deploy today and will deploy in the future. Qualified personnel are in great demand throughout the Internet and business process outsourcing industries. Our failure to attract and retain the appropriate personnel may limit the rate at which we can expand our business, including developing new products and services and attracting new customers. Acquisitions could result in dilution, operating difficulties and other harmful consequences. We may, from time to time, pursue acquisitions that could provide new, or enhance existing, products or services, additional industry expertise, a broader customer base or an expanded geographic presence. We may pay for acquisitions by issuing additional common stock and this would dilute our stockholders. We may also use significant amounts of cash or incur debt or amortization expenses associated with goodwill and other intangible assets, any one of which could harm our business. In addition, acquisitions involve numerous risks, including: . difficulties in assimilating the operations, technologies, products and personnel of the acquired company; . diversion of management's attention from other business concerns; . entering markets in which we have no prior experience and may not succeed; and . potential loss of key employees of the acquired company. We have only completed one previous acquisition (which occurred in November 1996) and therefore have limited experience in managing these risks. There are currently no active negotiations, commitments or agreements with respect to any such acquisition. Current and potential competitors could decrease our market share and harm our business. Our industry is intensely competitive, evolving rapidly and subject to technological change. Increased competition in the business process outsourcing industry could result in price reductions, reduced gross margins or loss of market share, any of which could decrease our revenues and harm our reputation. We expect competition to intensify in the future in each of the following principal competitive factors in this market: . human capital expertise; . data integration and transfer technology; 10 . 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 be competing 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 11 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 12 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 into 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, 13 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 $650,000 for the year ended December 31, 1999 and $640,000 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. If we were to invest in lower quality investments, there would be a corresponding increase in the risk of loss on these investments. 14 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 favoring 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 reduces 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; 15 . 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 the 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 10,483,108 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; and 16 . 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. The holders of all of these shares are subject to lock-up for 180 days after the date of the final prospectus. Shares may be released from this lock-up at any time without notice with the consent of Robert W. Baird & Co. Incorporated and us. This could cause our stock price to decline and may impair our ability to raise capital in the future. Our directors, executive officers and principal stockholders, if they act as a group, will be able to control matters requiring stockholder approval. After this offering, our 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 56% 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 $4.12 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 $8.88 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 17 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 2,402,128 shares of our common stock and options for 283,077 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: . continue to develop our business; . develop or enhance our products and services; . take advantage of acquisition opportunities; . increase our revenues; or . respond to competitive pressures. 18 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 affect on our business, financial condition and results of operations. 19 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 $12.4 million to $19.8 million of the net offering proceeds for general corporate purposes, the integration of technology and working capital, approximately $7.3 million for sales and marketing, approximately $7.3 million for the development of new products and services, approximately $7.3 million to $14.5 million for acquisition of complementary businesses 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 greater 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. We have not determined the amount of net proceeds to be used specifically for each of the foregoing purposes. Accordingly, our management will have broad discretion to spend flexibly in applying most of the net proceeds of this offering. Pending their use we intend to invest the net proceeds of this offering in short-term, interest-bearing investment-grade debt securities, certificates of deposit or direct or guaranteed obligations of the United States. DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock. We currently intend to retain future earnings to finance the growth and development of our business, and we do not expect to pay any cash dividends in the foreseeable future. 20 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; 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.
As of June 30, 2000 ----------------------------------- Pro Forma Actual Pro Forma As Adjusted ----------- ----------- ----------- (unaudited) (unaudited) (unaudited) (in thousands, except share data) 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); 7,371,683 shares outstanding (pro forma); and 10,471,683 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 ======= ======= =======
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 DILUTION Our pro forma net tangible book value as of June 30, 2000 was $6.9 million, or $0.93 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 $4.12 per share. This amount represents an immediate increase in pro forma net tangible book value of $3.19 per share to existing stockholders and an immediate dilution of $8.88 per share to investors in this offering. The following table illustrates this dilution of net tangible book value per share: Assumed initial public offering price......................... $13.00 Pro forma net tangible book value per share as of June 30, 2000....................................................... $0.93 Increase per share attributable to new investors............ 3.19 ----- Pro forma as adjusted net tangible book value per share after this offering................................................ 4.12 ------ Dilution per share to new investors........................... $ 8.88 ======
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.
Shares Purchased Total Consideration ------------------ ------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- ------------- Existing stockholders.. 7,371,683 70.4% $ 7,841,000 16.3% $ 1.06 New investors.......... 3,100,000 29.6 40,300,000 83.7 13.00 ---------- ----- ----------- ----- Total................ 10,471,683 100.0% $48,141,000 100.0% ========== ===== =========== =====
Sales by the selling stockholder in this offering will have the following effects: . it will reduce the shares held by existing stockholders to 6,571,683 shares, or 62.8%, of the total shares outstanding after this offering; and . it will increase the shares held by new investors to 3,900,000, or 37.2%, of the total shares outstanding after this offering. The exercise of the underwriters' over-allotment in full will have the following effects: . it will reduce the shares held by existing stockholders to 5,986,683 shares, or 57.2%, of the total shares outstanding after this offering; and . it will increase the shares held by new investors to 4,485,000, or 42.8%, 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 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.
Six Months Year Ended December 31, Ended June 30, ---------------------------------------- ---------------- 1995 1996 1997 1998 1999 1999 2000 ------ ------ ------ ------- ------- ------- ------- (unaudited) (in thousands, except per share data) 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 7,074
23
December 31, --------------------------------------- June 30, 1995 1996 1997 1998 1999 2000 ------ ------ ------- ------- ------- ----------- (in thousands) (unaudited) 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
- -------- (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 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 to two customers in 1999 and 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 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 ongoing credit worthiness of our customers. This does 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 revenue 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 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 salaries and wages from our payroll, benefits and human resource departments of our internal corporate staff as well as the overhead relating to these functions. As we expand our operations to service additional customers and employees, we expect these expenses will continue to increase. 26 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 sold and size of the customer employee population. Implementation costs are classified as the costs associated with acquiring customer data and installing these customers onto our human resource information systems. Examples include setting up our information systems to accommodate various health plan options and customer funding strategies and the creation of various data tables to accommodate unique customer payroll policies. In addition to these costs, costs relating to the marketing programs supporting us are included within client acquisition costs. We intend to pursue additional sales and marketing campaigns including additional advertising in various trade publications targeted to potential buyers of our service, sponsoring of corporate events and 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. 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, consultant fees relating to the design, development, testing and enhancement of our back-end software and processes as well as employee and management interfacing applications. We believe that continued investment in research and development is critical to attaining our stated objectives. We expect these expenses to increase in the future as we continue to develop and enhance our service offerings. 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. 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 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 27 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:
Six Months Ended June Year Ended December 31, 30, --------------------------- ------------- 1997 1998 1999 1999 2000 ------- ------- ------- ----- ----- 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)% ======= ======= ======= ===== =====
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, 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. 28 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 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 increased salaries and an increase to the allowance for doubtful accounts of $623,000 and related operational costs required to manage our growth and infrastructure to support our public offering. Research and Development Expense. Research and development expense increased $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 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 adding 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. Client Acquisition Costs. Client acquisition costs increased by $1.4 million to $2.5 million in 1999 from $1.1 million in 1998, representing an increase of 130.5%. The increase primarily resulted from salaries and commissions associated with 13 new personnel added during the year and the opening of our McLean, Virginia office in June 1999 and our Louisville, Colorado office in November 1999. 29 General and Administrative Expense. General and administrative expense increased by $761,000 to $2.5 million in 1999 from $1.8 million in 1998, representing an increase of 42.7%. The increase primarily resulted from salaries associated with eight additional personnel that were added and related operational costs required to manage our growth. Research and Development Expense. Research and development expense increased $1.6 million to $2.4 million in 1999 from $719,000 in 1998, representing an increase of 227.4%. The increase in research and development expenses reflects eight additional personnel hired as well as approximately 12 consultants that worked on our information system projects. These personnel expenses were primarily related to the conversion and implementation costs of our new payroll, benefits and human resource information systems. Depreciation Expense. Depreciation expense increased $178,000 to $743,000 in 1999 from $565,000 in 1998, representing an increase of 31.5%. This is due to an increase in capitalized information technology equipment and capitalized licensed software as a result of additional development of front-end and back- end software applications. 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 adding 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 due to an additional 17 personnel that were hired in our payroll, benefits and human resources support functions relating to providing services to our customers. Client Acquisition Costs. Client acquisition costs remained consistent between 1998 and 1997 at approximately $1.1 million. The amount remained constant as a result of no net increase in personnel costs during 1998 and 1997. General and Administrative Expense. General and administrative expense increased by $1.0 million to $1.8 million in 1998 from $846,000 in 1997, representing an increase of 110.6%. The increase primarily resulted from salaries associated with eight additional personnel that were added and related operational costs required to manage our growth. Research and Development Expense. Research and development expense increased by $231,000 to $719,000 in 1998 from $488,000 in 1997, an increase of 47.1%. The increase in research and development expenses reflects nine additional personnel hired as well as approximately four consultants that worked on our information system projects. These personnel expenses were primarily related to the conversion and implementation costs of our new payroll, benefits and human resource information systems. 30 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.
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) 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) ====== ====== ====== ====== ====== ====== ======= =======
31
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 --------- -------- -------- -------- --------- -------- -------- --------- 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)% ===== ===== ===== ===== ===== ===== ===== =====
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 and was related to investments in infrastructure for expansion of long- term operations, including software development costs. Net cash provided by financing activities for the first 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 32 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 greater 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. 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-- 33 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. 34 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: start-ups and other rapid-growth companies, very large companies--Fortune 500--to whom the complete outsourcing model is appealing; and the consolidation of outsourcing contracts through aggressive cross-selling by dominant players. In 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 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; . 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 PeopleSoft, SAP AG or Oracle Corporation. However, the long implementation time and high cost of an enterprise resource planning system preclude many middle-market companies, or companies with 200 to 5,000 employees, and 36 most emerging growth companies, or companies with up to several hundred employees, from pursuing this option. Recently, a number of companies, known as application service providers began providing integrated enterprise resource planning applications that are hosted by them and accessed by the customer through the Internet. Growing prominence of the Internet as a platform to host and distribute enterprise resource planning applications has contributed to the Forrester Report's prediction that the applications outsourcing industry will grow from $17.0 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 such as venture capital, corporate partnerships or the public market. 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 43% increase over the same period in 1999. PricewaterhouseCoopers also reported that the total amount of venture capital invested rose from $11.9 billion in the six months ended June 30, 1999 to $36.6 billion during the same period in 2000, of which $10.4 billion in the six months ended June 30, 1999 and $34.6 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; 37 . 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. 38 Limitations of Back-End Providers We believe that back-end providers such as payroll processing firms and third party administrators are currently not significantly involved in integrating the functions of payroll, benefits and human resources to a single information system. We are unaware of any back-end providers that offer web- based front-ends that extend to the employee and manager desktops for initiation and approval of self-directed transactions involving payroll, benefits and human resources. Because most back-end providers market their services to companies across a broad spectrum of industries, we believe their user populations do not yet have consistent Internet access to warrant the significant investment required to develop and deploy a web-based front-end that extends across the entire workforce of their customer companies. In addition, the lack of integration and data warehousing restricts these back-end providers' ability to increase operational efficiency and develop personalized technology for targeted service deliveries in specific markets. Limitations of Application Service Providers While application service providers have evolved as a means for companies to outsource the procurement, hosting, implementation and maintenance of enterprise resource planning systems, we believe that application service providers do not currently have the functional expertise to manage the operation of technology related to the integration of the payroll, benefits and human resource functions or to perform transaction processing. Opportunity for Integrated Business-to-Business E-Commerce Services With the widespread implementation of intranets and the adoption of the Internet as a business communications platform in fast-growth technology companies, such organizations can now automate enterprise-wide and interorganizational human resource transactions. The availability of this technology creates a significant market opportunity for Internet-based business-to-business e-commerce services for payroll, benefits and human resources. Payroll, benefits and human resource transactions lend themselves to Internet processing because these transactions are information-based and do not require delivery of durable goods at the point of payment. However, payroll, benefits and human resource functions involve confidential information, complex and interrelated data elements, and ongoing data management between multiple organizations, unlike other e-commerce opportunities such as making travel reservations or purchasing merchandise. Currently, there are mature providers of outsourcing services for selected back-office processes involving payroll and benefits. There are an emerging number of web-based front-end service providers that must interface with back- end providers. We believe that a complete e-commerce service offering for payroll, benefits and human resources can only exist if there is seamless electronic integration of the front- and back-end processes on a single information systems platform that integrates all of the relevant data, 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- 39 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 were offered in 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. 40 . 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, 41 through our relationships with our customers, we have been able to build a network of referral sources. In addition, many of our customers are venture capital firms and service providers who support these "fast companies." We intend to aggressively pursue referral opportunities generated by these customers as well as future strategic relationships with customers. As we develop complementary products, we will take advantage of our cross-selling opportunities to increase revenue growth from existing customer relationships. . 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. 42 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 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
* except for 401(k) and incentive stock option plans sponsored by customer 43 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. In January 1999, we introduced Enterprise Employer Services to two customers. 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 databases that we pay for, employee referrals and candidates submitted by various recruitment agency, with whom we share fees, this service enables customers to meet their critical hiring needs faster than if they used any one of these sources individually. The length and scope of engagements 44 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 by 31 customers in the 12 months ended June 30, 2000, which represented, for the six months ended June 30, 2000, 1% of our total service revenues. 45 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
- ------------------------------------------------------------------------------ Payroll Benefits Human Resources - ------------------------------------------------------------------------------ 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) - ------------------------------------------------------------------------------
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 person 46 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, institutional financing or the public market. . 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 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 interfaces. 47 Opportunity: MobileForce needed to tap the technology labor pool available in the United States and Canada to further its technology and bringing its product to market. To solve the compliance and employee equity challenges of having employees dispersed in the United States and Canada, MobileForce sought a single-source provider that could establish and maintain specialized payroll, benefits and human resources processes required to service its employees in multiple U.S. states and Canada. Solution: We began our relationship with MobileForce in March 1998. We provide MobileForce with scaleable human resources under our Venture Employer Services as the company's employees have expanded to multiple locations in the United States and Canada. As of 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, had expectations of corporate-level payroll, benefits and human resource support. Furthermore, Symbian was headquartered outside the United States and consequently had little experience with employment issues and potential liabilities in the United States. Because of this, the company sought assistance in modifying its corporate structure and human capital management for both competitive and compliance reasons. Solution: Seeking to compete in a high-growth space, in December 1998 Symbian selected us as a single source provider by engaging our full suite of services to aid its United States market penetration. As of 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 with a handful of employees and a contract with us to handle all of its human resource needs. Though small, Webvan needed a solution that would deliver employee support services during its entire lifecycle. Webvan also needed a selection of national, AAA-rated benefits plans to attract and retain employees, thereby expediting its aggressive growth strategy. Solution: In January 1997, Webvan selected Venture Employer Services to support its long-term growth and national expansion. Headquartered in the Bay Area in Foster City, California, Webvan 48 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 investment of venture capital in the United States according to PricewaterhouseCoopers' Quarterly Moneytree Survey for the fourth quarter of 1999. Our sales process has demonstrated increased efficiency at leveraging the rapid pace of decision making in our target market of fast-growth technology companies. In 1999, with almost the same number of sales professionals as the prior year, we nearly doubled the number of new customers acquired. Our sales professionals tap into a referral relationship and lead exchange program comprised of venture capitalists and other 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 are generated for Venture Employer Services customers 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. Our limited marketing resources and a decade of experience in marketing to fast-growth technology companies have allowed us to gain experience in carefully pinpointing the customer decision makers we seek and how to attract them. As a result, we intend to build our brand and attract new middle-market 49 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 make it difficult for us to predict the adoption rate by middle-market companies of Enterprise Employer Services. Systems and Technology Systems. Our technology platform is a combination of licensed applications from leading enterprise software companies and proprietary applications that both integrate licensed applications and perform functions that are specific to our business model and customer preferences. The following chart provides a listing of licensed and proprietary systems and their state of implementation as of September 15, 2000. 50 Product Chart and Technology Development
Front/ Capability Purpose Status Platform Back-End - ------------------------------------------------------------------------------------ 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)
51 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. We have negotiated software licensing agreements tailored to our business model, deviating from traditional, enterprise-class models that are not based on outsourcing. . System backup and disaster recovery. The major components of our network are located in our corporate headquarters in San Leandro, California, our secondary processing facility in Reno, Nevada, and at AboveNet Communication's Data Center in San Jose, California. AboveNet provides Internet co-location services, which provides the benefit of a redundant telecommunications infrastructure and a data center for our web-based systems used by our customers. Our other primary processing facilities have data replication, backup power, fire retardation and offsite data storage providing redundant business continuity. . Strong authentication and security. Confidentiality of information is of the utmost importance in our technology architecture. Our web site has offered transaction processing under Secure Socket Layer security since 1997, and moved to Entrust SSL certification in 1999 to ward off browser authentication problems caused by other expiring trust authorities. In 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 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 or introduced products and/or services that compete, at least in part, with our solution. Some of our current and future competitors may be significantly larger and have greater name recognition and financial, marketing and other resources than we do. Increased competition is expected and may result in reduced prices and service revenue on a per customer basis. We believe the principal competitive factors in our market at this time are: scalable data-integration and transfer technology, breadth and depth of offering, critical-mass of installed reference customers, data warehousing for personalization of technology, strategic relationship management, domain expertise depth across all functional areas, sales professionalism and quality customer support. We believe that we currently compete favorably with respect to these factors. We encounter competition with respect to different components of our solution from in-house human resource and information systems departments, payroll, benefits and business process outsourcers, third party administrators, benefits exchanges, and application service providers. Our competitors most typically have primary competency in a single function, such as benefits procurement, payroll, human resource information systems or web delivery. Among multi-function human resource outsourcers and application service providers, we believe that we compete favorably based upon breadth and depth of offering, scalable data-integration and transfer technology and data warehousing capabilities. As other outsourcers attempt entry to the fast company market niche, we have occasionally lost customers to competitors based on price or other incentives that we were not willing to match. As the market evolves, we expect increased competition from new market entrants. It is possible that current and future competitors have or may form cooperative alliances among themselves or with third 53 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, 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, 54 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 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.
Name Age Position - ---- --- -------- 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............... 46 Vice President and General Counsel Steven H. Carlson................ 47 Chief Information Officer Craig A. McGannon................ 36 Divisional President, Venture Employer Services John K. Younger.................. 37 Divisional President, Venture Talent James P. Hanson, C.P.A.(2)(3).... 54 Director H. Lynn Hazlett, D.B.A.(2)(3).... 64 Director Anthony V. Martin(1)............. 60 Director T. Joe Willey, Ph.D.(3).......... 62 Director Key Employees Marie-Jeanne Juilland............ 39 Vice President, Marketing Lyle E. DeWitt, C.P.A............ 41 Vice President, Finance and Operations Anthony F. Zuanich............... 32 Vice President, Sales
- -------- (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 summa cum laude in history and political science from Mercer University and a J.D. from the University of Chicago School of Law. Steven H. Carlson has served as our chief information officer since August 1998. From January 1997 to August 1998, Mr. Carlson served as our director, information systems and from January 1995 to January 1997, Mr. Carlson served as our vice president, information technology. In 1989, Mr. Carlson founded, and then managed until 1995 CBI, Inc., a regional systems integration company. Prior to this, Mr. Carlson held several management positions with General Electric Information Services Company. Mr. Carlson holds a B.S. in computer science from the University of California at Santa Cruz. Craig A. McGannon has served as our divisional president, Venture Employer Services since September 1998. From March 1998 to September 1998, Mr. McGannon served as our vice president, sales. Mr. McGannon joined us in October 1997 as regional manager in the Raleigh/Durham office. From October 1996 to October 1997, Mr. McGannon was the chief executive officer of ESG, an information technology staffing company and from February 1995 to October 1996, Mr. McGannon was the risk manager of The Byrnes Group, a staffing and human resource outsourcing company. Mr. McGannon has also served as managing partner of North American Claims Management, L.L.P., a U.K.-based reinsurance/legal consulting firm from January 1992 to September 1999. Mr. McGannon holds a B.A. in American studies from Providence College, a J.D. from Pace University and an M.B.A. summa cum laude in marketing from the University of San Moritz. John K. Younger has served as our divisional president, Venture Talent since November 1996 when we acquired y/net, an outsourced staffing solution firm founded by Mr. Younger. Prior to that, Mr. Younger was president of Younger Consulting, a recruitment optimization and automation firm, which Mr. Younger founded in 1994. From January 1987 to May 1994, Mr. Younger was with Bank of America, most recently as vice president of human resources. Mr. Younger is a co-founder and director of the Northern California Technical Recruiter Network. Mr. Younger holds a B.S. in mathematics and computer science from the University of Notre Dame. Marie-Jeanne Juilland has served as our vice president, marketing since February 2000. From November 1999 to January 2000, Ms. Juilland served as our interim vice president, marketing. In 1993, Ms. Juilland founded and then, through January 2000, managed, the Juilland Group, a strategic marketing organization that specialized in serving fast-growth technology companies. From 1991 to 1993, Ms. Juilland served as communications manager for Robert Half International, a staffing and outsourced human resource company. From 1986 to 1991, Ms. Juilland served as west coast bureau chief for Venture magazine. Ms. Juilland holds a B.A. in political science from Stanford University. 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. 57 James P. Hanson has served as our director since November 1990. Since 1987, Mr. Hanson has been president of James P. Hanson Accountancy Corporation, a provider of financial services to small businesses and individuals. Mr. Hanson holds a B.S. magna cum laude in accounting from California State University, Fresno and is a certified public accountant and registered investment advisor. H. Lynn Hazlett has served as our director since February 1998. From February 1997 to December 1998, Dr. Hazlett served as chief executive officer and president of QRS Corporation, a publicly traded, e-commerce solutions provider. From 1995 until February 1997, Dr. Hazlett served as a consultant to QRS. From January 1994 to February 1997, Dr. Hazlett owned and operated Supply Chain Associates, a retail supply chain consultancy firm. From 1989 to January 1995, Dr. Hazlett served as vice president, business systems at VF Corporation, a global apparel manufacturer. Dr. Hazlett holds a B.S. in industrial management from the Georgia Institute of Technology, an M.B.A. in financial management and a D.B.A. from George Washington University. Anthony V. Martin has served as our director since July 1995 as a result of his position from 1992 to the present time as Chairman with Select Appointments (Holdings) Ltd., a wholly owned subsidiary of Vedior NV, a beneficial stockholder of TriNet, and Select's right to nominate a director under our amended and restated certificate of incorporation, which right will terminate upon the conversion of TriNet's preferred stock into common stock upon completion of this offering. 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 authorized six directors. In accordance with the terms of our certificate of incorporation and bylaws, each of which will become effective upon the completion of this offering, the board of directors will be divided into three classes, Class I, Class II and Class III, with each class serving staggered terms. Upon the completion of this offering, the members of the classes will be divided as follows: . Messrs. Babinec and Martin will be designated as Class I directors whose initial term will expire at the annual meeting of stockholders to be held in 2001; . Messrs. Devlin and Hazlett will be designated as Class II directors whose initial term will expire at the annual meeting of stockholders to be held in 2002; and . Messrs. Hanson and Willey will be designated as Class III directors whose initial term will expire at the annual meeting of stockholders to be held in 2003. 58 At each annual meeting of stockholders after the initial classification, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following the election or special meeting held in lieu thereof. At least three of our directors must be independent of our management. Board Committees The audit committee of the board of directors consists of Messrs. Hanson, Hazlett and Willey. The audit committee assists the board in fulfilling its financial and accounting oversight responsibilities by reviewing the financial information that will be provided to stockholders and others, the systems of internal controls regarding finance, accounting, legal compliance and ethics that management and the board have established, and our auditing, accounting and financial reporting processes generally. All members of the audit committee must be independent of our management. The compensation committee of the board of directors consists of Messrs. Hanson and Hazlett. The compensation committee makes recommendations to the board of directors concerning salaries and incentive compensation for our officers and employees and administers our employee benefit plans. At least two members of the compensation committee must be independent of our management. The nominating committee of the board of directors consists of Messrs. Babinec and Martin. The nominating committee makes recommendations to the board of directors regarding persons to be nominated for election to the board of directors. At least one member of the nominating committee must be independent of our management. Director Compensation Non-employee directors, except Anthony V. Martin, receive $5,000 in annual compensation and are reimbursed for their reasonable expenses in attending board meetings. All directors are eligible to participate in our 2000 Equity Incentive Plan and employee directors will be eligible to participate in our 2000 Employee Stock Purchase Plan. Upon completion of this offering, each current and future non-employee director will automatically be granted options to purchase 2,500 shares of common stock, except for James P. Hanson and T. Joe Willey, each of whom will be granted 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 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
Annual Compensation for Long-Term Fiscal Year 1999 Compensation Awards ---------------- ------------------- Securities Name and Principal Position Salary Bonus Underlying Options - --------------------------- -------- ------- ------------------- 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.......................... $122,283 $80,328 94,211
Option Grants in 1999 The following table presents each grant of stock options made to each of the named executive officers during the year ended December 31, 1999. Subsequent to December 31, 1999, Greg L. Hammond received stock options to purchase 12,000 shares, Craig A. McGannon received stock options to purchase 12,000 shares and John K. Younger received stock options to purchase 8,000 shares. These options vest ratably over four years commencing on the first anniversary of the date of grant and the exercise price per share of each option was equal to the fair market value of the common stock as determined by our board of directors on the date of grant. In the year ended December 31, 1999, we granted to our employees options to purchase a total of 261,286 shares of our common stock. Potential realizable value is calculated assuming that the stock price on the date of grant appreciates at the indicated rate compounded annually until the option is exercised and sold on the last day of its term for the appreciated stock price. The 0%, 5% and 10% assumed rates of appreciation are required by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of the future common stock price. The deemed value for the date of grant was determined after the date of grant solely for financial accounting purposes. 60 Option Grants in 1999
Individual Grants Potential Realizable --------------------------------------------- Value at Assumed Annual Number of % of Total Deemed Rates of Stock Price Securities Options Exercise Value Per Appreciation Underlying Granted to or Base Share for for Option Term Options Employees Price Expiration Date of ----------------------- Name Granted in Fiscal Year ($/Sh) Date Grant 0% 5% 10% - ---- ---------- -------------- -------- ---------- --------- ------- ------- ------- 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
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 $13.00 per share, the assumed initial public offering price, minus the aggregate exercise price payable for those shares. Aggregated Option Exercises in 1999 and FY-End Option Values
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Shares Options at FY-End (#) at FY-End ($) Acquired Value ------------------------- ------------------------- Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- -------- ----------- ------------- ----------- ------------- 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
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%. 61 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 John K. Younger to serve as our divisional president, Venture Talent, at a base salary of $132,000 a year. In the event of a change of control, if Mr. Younger is involuntarily terminated without cause or by constructive termination within six months following the change of control, all stock options granted to Mr. Younger will fully vest and he may compel us to repurchase any stock he owns at the then prevailing market value plus 25%. Stock Option Plans 2000 Equity Incentive Plan. Our board of directors adopted the 2000 Equity Incentive Plan and will seek stockholder approval prior to the effective date of this offering. The 2000 Equity Incentive Plan is intended to replace and supersede our 1990 Stock Option Plan. Share Reserve. We have reserved a total of 700,000 shares of our common stock for issuance under the incentive plan. On each January 1, starting with January 1, 2001 and continuing through and including January 1, 2009, the share reserve automatically will be increased by a number of shares equal to the least of: . 4% of our then outstanding shares of common stock; . 400,000 shares; or . a lesser number determined by our board. 62 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 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. 63 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. 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 64 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. 65 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. 66 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 Venture Partners V L.P., Bessec Ventures V L.P. and BVE LLC, or Bessemer. The shares of Series F preferred stock are convertible into 150,263 shares of common stock. In June 2000, we issued a promissory note for up to $2.0 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 1/2% for the second draw down, 4% for the third draw down and 4 1/2% 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 drawn down date accrues at the rate that is the greater 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. 67 Investments In August 2000, we invested approximately $125,000 with a commitment to invest a total of $250,000 in Accolo, Inc., a software and online services company for the recruitment industry founded by John K. Younger, our Divisional President of Venture Talent, in exchange for 250,000 shares of Series A Preferred Stock of Accolo, representing 4.2% 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 it 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 referred by TriNet. 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, Craig A. McGannon and John K. Younger. See "Management--Employment Agreements." 68 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 7,383,108 shares of common stock outstanding as of September 15, 2000, assuming the conversion of all outstanding shares of preferred stock into common stock, and 10,483,108 shares of common stock outstanding immediately following the completion of this offering. Except as otherwise indicated, the stockholders listed in the tables have sole voting and investment powers over the common stock owned by them, subject to community property laws where applicable. Unless otherwise specified, the address of each of the individuals or entities named below is: c/o TriNet Group, Inc., 101 Callan Avenue, San Leandro, California 94577.
Shares Shares Beneficially Beneficially Owned Before the Number Owned After the Offering of Shares Offering ----------------- Being ----------------- Number Percent Offered(1) Number Percent --------- ------- ---------- --------- ------- 5% Stockholders Select Appointments North America Inc.(2)............... 3,938,333 53.4% 800,000 3,138,333 29.9% 60 Harvard Mill Square Wakefield, MA 01880 Executive Officers and Directors Martin Babinec(3).............. 1,978,500 26.8 -- 1,978,500 18.9 Douglas P. Devlin(4)........... 336,722 4.5 -- 336,722 3.2 Gregory L. Hammond(5).......... 25,050 * -- 25,050 * Steven H. Carlson(6)........... 117,228 1.6 -- 117,228 1.1 Craig A. McGannon(7)........... 16,300 * -- 16,300 * John K. Younger(8)............. 211,292 2.8 -- 211,292 2.0 James P. Hanson(9)............. 212,294 2.9 -- 212,294 2.0 H. Lynn Hazlett................ 3,120 * -- 3,120 * Anthony V. Martin(10).......... 3,938,333 53.4 800,000 3,138,333 29.9 T. Joe Willey(11).............. 15,444 * -- 15,444 * Directors and executive officers as a group (10 persons)(12).............. 6,854,283 89.4 800,000 6,054,283 56.2
- -------- * Represents beneficial ownership at less than 1% of the outstanding shares of our common stock. 69 (1) Certain other selling stockholders have granted the underwriters a 30-day option to purchase up to an additional 585,000 shares. (2) 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. (3) Shares are held by Martin and Krista Babinec, Trustees of the Babinec Family Trust dated 7/16/95. (4) Includes 36,800 shares issuable upon exercise of options exercisable within 60 days of September 15, 2000. (5) Includes 23,950 shares issuable upon exercise of options exercisable within 60 days of September 15, 2000. (6) Includes 82,228 shares issuable upon exercise of options exercisable within 60 days of September 15, 2000. (7) Includes 13,669 shares issuable upon exercise of options exercisable within 60 days of September 15, 2000. (8) Includes 126,317 shares issuable upon exercise of options exercisable within 60 days of September 15, 2000. (9) 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. (10) 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. (11) Includes 113 shares issuable upon exercise of options exercisable within 60 days of September 15, 2000. (12) See footnotes (2) through (11) above, as applicable. 70 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 7,383,108 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. There will be 10,483,108 shares of common stock outstanding (assuming no exercise of the outstanding options) after giving effect to the sale of the shares of common stock offered by this prospectus. Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the board of directors may from time to time determine. Each stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Holders of common stock are not entitled to cumulative voting rights with respect to the election of directors and, as a consequence, minority stockholders will not be able to elect directors on the basis of their votes alone. Upon a liquidation, dissolution or winding-up of TriNet, the assets legally available for distribution to stockholders are distributable ratably among the holders of the common stock and any participating preferred stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding preferred stock and payment of other claims of creditors. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. Preferred Stock Upon the closing of this offering, the board of directors will have the authority, without further action by the stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding). The board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of TriNet and may adversely affect the market price of the common stock and the voting and other rights of the holders of common stock. 71 Registration Rights of Stockholders Upon the earlier of July 30, 2001 or 12 months after this offering holders of an aggregate of 150,263 shares of our common stock, 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., Bessemer Venture Partners V L.P., Bessec Ventures V L.P. and BVE LLC dated March 2, 2000. If we propose to register any of our securities under the Securities Act, either for our own account or for the account of others, the holders of these shares are entitled to notice of the registration and are entitled to include, at our expense, their shares of common stock in the registration and any related underwriting, provided, among other conditions, that the underwriters may limit the number of shares to be included in the registration and in some cases, including this offering, exclude these shares entirely. In addition, the holders of these shares may require us at our expense to register their shares on Form S-3 when this form becomes available. Anti-Takeover Provisions of Delaware Law and Charter Provisions We are subject to Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly-held Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder unless: . prior to that date, the board of directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; . upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding those shares owned by persons who are directors and also officers, and by employee stock plans in which shares held subject to the plan will be tendered in a tender or exchange offer; or . on or subsequent to that date, the business combination is approved by the board of directors and is authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock not owned by the interested stockholder. Section 203 defines "business combination" to include: . any merger or consolidation involving the corporation and the interested stockholder; . any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation; . subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; and . the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. 72 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. 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 73 . 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 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 10,483,108 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 6,583,108 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; and . 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. Additionally, of the shares that may be issued upon the exercise of options outstanding as of September 15, 2000, approximately 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 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 150,263 shares of our common stock, 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 UNDERWRITING The underwriters named below, acting through their representatives, Robert W. Baird & Co. 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.
Number Underwriters of Shares ------------ --------- Robert W. Baird & Co. Incorporated................................. --------- Total............................................................ 3,900,000 =========
The representatives have advised us and our selling stockholders that the underwriters propose to offer the shares of common stock to the public at the public offering price on the cover page of this prospectus. The underwriters may sell shares to dealers at that price less a concession of not in excess of $ per share, of which $ may be reallowed to other dealers. After this offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives, but any reduction will not change the amount of proceeds to be received by us or the selling stockholder. The common stock is offered by the underwriters on the terms discussed in this prospectus, subject to receipt and acceptance by them, and subject to their right to reject any order. The underwriters have advised us that they do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. No Public Market. Before this offering, there has been no public market for our common stock. Consequently, the public offering price for the common stock offered by this prospectus will be determined through negotiations among the representatives and us. We anticipate the material factors to be considered in these negotiations will be prevailing market conditions, our financial information, market valuations of other companies that we and the representatives believe to be comparable to us, estimates of our business potential and the present state of our development. Over-Allotment Option. The selling stockholders identified in "Principal and Selling Stockholders" on page have granted 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 in this offering are being sold. Certain selling stockholders will be obligated to sell shares to the underwriters to the extent the over-allotment option is exercised. 77 The following table summarizes the compensation to be paid to the underwriters by us and our selling stockholder:
Total ------------------- Without With Per Over- Over- Share allotment allotment ----- --------- --------- Underwriting discounts and commissions payable by us.............................................. $ $ $ Underwriting discounts and commissions payable by the selling stockholders........................ $ $ $
The underwriting fee will be an amount equal to the offering price per share to the public of the common stock, less the amount paid by the underwriters to us per share of common stock. The underwriters' compensation was determined through arms' length negotiations between us and the representatives. We estimate the expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $ . Indemnity. The underwriting agreement contains covenants of indemnity among the underwriters, us and the selling stockholders against civil liabilities, including liabilities under the Securities Act. Lock-Up Agreements. Holders of % 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. Listing. We have applied to have the common stock approved for quotation on the Nasdaq National Market under the symbol "TRNE." 78 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. 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. 79 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. 80 TRINET GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1999, 1998 and 1997 Contents
Page ---- 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
F-1 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 TRINET GROUP, INC. CONSOLIDATED BALANCE SHEETS
Pro Forma December 31, Stockholders' ------------------------ June 30, Equity at 1998 1999 2000 June 30, 2000 ----------- ----------- ----------- ------------- ASSETS (unaudited) (unaudited) 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 7,371,683 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 =========== =========== ===========
See accompanying notes. F-3 TRINET GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended Years Ended December 31, June 30, ------------------------------------ ------------------------- 1997 1998 1999 1999 2000 ---------- ----------- ----------- ----------- ------------ (unaudited) (unaudited) 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 7,074,428 =========== ============
- -------- (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 TRINET GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Preferred Stock Common Stock Note Other ------------------ --------------------- Receivable Deferred Accumulated Comprehensive Shares Amount Shares Amount for Stock Compensation Deficit Loss Total ------- ---------- --------- ---------- ---------- ------------ ----------- ------------- ----------- 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 ======= ========== ========= ========== ========= =========== =========== ======== ===========
See accompanying notes. F-5 TRINET GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended Years Ended December 31, June 30, ------------------------------------- ------------------------- 1997 1998 1999 1999 2000 ----------- ----------- ----------- ------------ ----------- (unaudited) 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 =========== =========== =========== ============ ===========
See accompanying notes. F-6 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 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 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 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 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 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:
December 31, ------------------------ June 30, 1998 1999 2000 ----------- ----------- ----------- (unaudited) 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 =========== =========== ===========
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 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:
Year ending December 31, ------------------------ 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 ==========
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 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. Upon completion of this offering and the filing of the amended and restated certificate of incorporation, the Company's authorized capital stock will consist of 100,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of preferred stock, $0.001 par value. 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 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:
Outstanding options --------------------- Weighted Options Number average available of Price per exercise for grant shares share price --------- ------- ------------ -------- 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 ======== ======= ============ ======
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 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:
Options outstanding Options exercisable ----------------------------------------- ------------------------ Ranges of Weighted average exercise remaining Weighted average Weighted average prices Shares contractual life exercise price Shares exercise price --------- ------- ---------------- ---------------- ------- ---------------- $1.00 185,350 1.10 $ 1.00 133,476 $1.00 $1.60 75,000 1.77 1.60 59,270 0.60 $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 ======= ==== ====== ======= =====
Shares Reserved for Future Issuance The Company has reserved shares of common stock for future issuance as follows:
December 31, ----------------------- 1997 1998 1999 June 30, 2000 ------- ------- ------- ------------- (unaudited) Redeemable convertible preferred stock.............................. -- 500,000 542,304 542,304 Convertible preferred stock......... -- -- -- 150,263 Stock options outstanding........... 508,023 516,471 689,377 843,930 Stock options available for grant... 573,952 524,399 281,281 49,742
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 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:
Year Ended December 31, --------------------------- 1997 1998 1999 ------- ------- ------- 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
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:
Year Ended December 31, ----------------------------- 1997 1998 1999 --------- -------- --------- 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)
F-17 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:
Six Months Years Ended December 31, Ended June 30, --------------------------------- ------------------------ 1997 1998 1999 1999 2000 ----------- --------- --------- ----------- ----------- (unaudited) (unaudited) 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) =========== ========= ========= ========== ===========
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 641,926 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 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:
Year Ended Six Months Ended December 31, 1999 June 30, 2000 ----------------- ---------------- (unaudited) 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................................ 542,304 641,926 --------- ----------- Weighted-average shares used in computing pro forma basic and diluted net loss per common share............................ 6,882,661 7,074,428 ========= =========== Pro forma basic and dilutive net loss per common share (unaudited)................ $ (0.01) $ (0.42) ========= ===========
7. Income Taxes The components of the provision (benefit) for income taxes are as follows:
Six Months Ended Years Ended December 31, June 30, ---------------------------- ----------------------- 1997 1998 1999 1999 2000 --------- -------- -------- ----------- ----------- (unaudited) (unaudited) 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) ========= ======== ======== ========== ===========
F-19 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:
As of December 31, ---------------------- As of June 30, 1998 1999 2000 --------- ----------- -------------- (unaudited) 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 ========= =========== ==========
The reconciliation of income tax computed at the United States federal statutory tax rates to the provision for income taxes is as follows:
Years Ended Six Months Ended December 31, June 30, ----------------- ----------------------- 1997 1998 1999 1999 2000 ---- ---- ---- ----------- ----------- (unaudited) (unaudited) 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)% === === === === ===
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 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:
Year Ending December 31, ------------------------ 2000.......................................................... $ 731,000 2001.......................................................... 737,000 2002.......................................................... 623,000 2003.......................................................... 269,000 2004.......................................................... 206,000 ---------- Total minimum lease payments..................................... $2,566,000 ==========
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 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 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. 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-23 [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] [TRINET LOGO] 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. 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 ==========
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 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 June 30, 2000, TriNet has granted stock options to purchase 719,138 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, 88,430 have been cancelled, 193,828 shares have been exercised, 850 shares of which have been repurchased and 843,930 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 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. 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:
Exhibit Number Exhibit Title ------- ------------- 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.
II-2
Exhibit Number Exhibit Title ------- ------------- 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.
- -------- + 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. 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. II-3 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 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment No. 5 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 22nd day of September, 2000. TriNet Group, Inc. /s/ Martin Babinec By: _________________________________ Martin Babinec Chief Executive Officer
Signature Title Date --------- ----- ---- /s/ Martin Babinec President, Chief Executive September 22, 2000 ______________________________________ Officer and Director (Principal Martin Babinec Executive Officer) /s/ Douglas P. Devlin Chief Financial Officer and September 22, 2000 ______________________________________ Director (Principal Financial Douglas P. Devlin and Accounting Officer) * Director September 22, 2000 ______________________________________ Anthony V. Martin * Director September 22, 2000 ______________________________________ H. Lynn Hazlett, Ph.D. * Director September 22, 2000 ______________________________________ T. Joe Willey, Ph.D. * Director September 22, 2000 ______________________________________ James P. Hanson
/s/ Douglas P. Devlin * By: ___________________________ Douglas P. Devlin Attorney-in-fact II-5 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 SCHEDULE II VALUATION & QUALIFYING ACCOUNTS TRINET GROUP, INC. (In Thousands)
Balance Balance at Additions at End Beginning Charged to (a) of Description of Period Expenses Deductions Period - ------------------------------------- ---------- ---------- ---------- -------- 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 --
- -------- (a) Includes write-offs and reversals. S-2 EXHIBIT INDEX
Exhibit Number Exhibit Title ------- ------------- 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.
- -------- + Confidential Treatment Requested * To be filed by amendment ** Previously filed EX-3.01 2 0002.txt AMENDED AND RESTATED CERTIFICATE OF INCORP. EXHIBIT 3.01 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF TRINET GROUP, INC. Martin Babinec and Douglas P. Devlin hereby certify that: One: They are the duly elected and acting President and Secretary, respectively, of TriNet Group, Inc., a Delaware corporation (the "Company" or the "Corporation"). Two: The original Certificate of Incorporation was filed with the Secretary of State of Delaware on January 26, 2000 under the name of TriNet Merger Corporation. Three: The Certificate of Incorporation of the Company is hereby amended and restated to read in its entirety as follows: I. The name of this corporation is TriNet Group, Inc. II. The address of the registered office of the corporation in the State of Delaware is 15 East North Street, City of Dover, County of Kent, and the name of the registered agent of the corporation in the State of Delaware at such address is the AmeriSearch Corporate Services Inc. III. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. IV. A. This Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is 51,000,000 shares, 50,000,000 shares of which shall be Common Stock (the "Common Stock") and 1,000,000 shares of which shall be Preferred Stock (the "Preferred Stock"). B. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, within the limitations and restrictions stated in these Restated Articles, to fix or alter the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price or prices, the liquidation preferences of any wholly unissued series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issue of shares of that 1. series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. C. 75,000 shares of the authorized shares of Preferred Stock are hereby designated "Series E Preferred Stock" (the "Series E Preferred"). 150,263 shares of the authorized shares of Preferred Stock are hereby designated "Series F Preferred Stock" (the "Series F Preferred" and, together with the "Series E Preferred," the "Preferred"). D. The rights, preferences, privileges, restrictions and other matters relating to the Series E Preferred and the Series F Preferred are as follows: 1. Dividend Rights. a. Holders of Series E Preferred, in preference to the holders of any other stock of the Company except the Series F Preferred ("Junior Stock"), shall be paid when and as declared by the Board of Directors, but only out of funds that are legally available therefor, cash dividends at the rate of six percent (6%) of the "Series E Original Issue Price" per annum on each outstanding share of Series E Preferred (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares). The Series E Original Issue Price of the Series E Preferred shall be $40.00. Such dividends shall be payable on March 31 of each year beginning on March 31, 1997, but only when and as declared by the Board of Directors and shall be cumulative beginning on January 1, 1996 whether or not declared. Accrued but unpaid dividends shall not bear interest. In the event that the Company does not redeem the Series E Preferred under Section 5 after receipt of a request for redemption from the holders of at least sixty-six and two-thirds percent (66 2/3%) of the then outstanding shares of Series E Preferred subsequent to September 30, 2000, then the dividend rate shall be increased from six percent (6%) to twelve percent (12%). b. Holders of Series F Preferred, in preference to the holders of any Junior Stock and the holders of the Series E Preferred, shall be paid when and as declared by the Board of Directors, but only out of funds that are legally available therefor, cash dividends at the rate of $1.61 per annum on each outstanding share of Series F Preferred (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares). The right to receive dividends on shares of Series F Preferred shall not be cumulative, and no right to such dividends shall accrue to holders of Series F Preferred by reason of the fact that dividends on said shares are not declared or paid in any year. c. So long as any shares of Series E Preferred and Series F Preferred shall be outstanding, no dividend, whether in cash or property, shall be paid or declared, nor shall any other distribution be made, on any Junior Stock, nor shall any shares of any Junior Stock of the Company be purchased, redeemed, or otherwise acquired for value by the Company (except for acquisitions of Common Stock by the Company pursuant to agreements which permit the Company to repurchase such shares upon termination of services to the Company or in exercise of any right of first refusal upon a proposed transfer) until all dividends (set forth in Sections 1(a) and 1(b) above) on the Series E Preferred and the Series F Preferred shall have been declared and 2. paid. The provisions of this Section 1(c) shall not, however, apply to (i) a dividend payable in Common Stock, or (ii) any repurchase of any outstanding securities of the Company that is approved by the Company's Board of Directors and at least one (1) director elected by holders of the shares of Series E Preferred. 2. Voting Rights. a. General Rights. Except as otherwise provided herein or as required by law, holders of Series E Preferred shall have no right to vote with respect to matters upon which the shareholders of the Company are entitled to vote. Except as otherwise provided herein or as required by law, holders of Series F Preferred shall have the number of votes equal to the number of shares of Common Stock into which each share of Series F Preferred could be converted at the record date for determination of the shareholders entitled to vote on such matters, or, if no such record date is established, at the date such vote is taken or any written consent of shareholders is solicited, such votes to be counted together with all other shares of stock of the Company having general voting power and not separately as a class. b. Separate Vote of Series E Preferred. For so long as any shares of Series E Preferred remain outstanding, in addition to any other vote or consent required herein or by law, the vote or written consent of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding Series E Preferred shall be necessary for effecting or validating the following actions: (i) Any amendment, alteration, or repeal of any provision of the Restated Articles or the Bylaws of the Company that alters or affects the voting powers, preferences, or other special rights or privileges, qualifications, limitations, or restrictions of the Series E Preferred; (ii) Any increase or decrease (other than by redemption or conversion) in the authorized number of shares of Common Stock or Preferred Stock, including shares of Series E Preferred and Series F Preferred; (iii) Any creation, whether by reclassification or otherwise, of any class of shares or series of equity securities of the Company ranking on a parity with or senior to the Series E Preferred in right of redemption, liquidation preference, voting or dividends; (iv) Any redemption, repurchase, payment of dividends or other distributions with respect to Junior Stock (except for acquisitions of Common Stock by the Company pursuant to agreements which permit the Company to repurchase such shares upon termination of services to the Company or in exercise of any right of first refusal upon a proposed transfer); (v) Any sale, lease, assignment, transfer or other conveyance of all or substantially all of the assets of the Company or any consolidation or merger involving the Company or any reclassification or other change of any stock, or any recapitalization, or any dissolution, liquidation or winding up, of the Company, or any other Acquisition (as defined in Section 3(c)), or any agreement or obligation so to do; 3. (vi) Any action that results in the payment or declaration of a dividend on any shares of Common Stock or Preferred Stock; (vii) Any increase or decrease in the authorized number of members of the Company's Board of Directors; or (viii) Any issuance of any equity security of the Company or any security convertible into any equity security of the Company or any right or option for the purchase of any equity security of the Company (other than the options and shares excluded from the definition of Additional Shares of Common Stock (as hereafter defined)). c. Separate Vote of Series F Preferred. For so long as any shares of Series F Preferred remain outstanding, in addition to any other vote or consent required herein or by law, the vote or written consent of the holders of at least a majority of the outstanding Series F Preferred shall be necessary for effecting or validating the following actions: (i) Any amendment, alteration, or repeal of any provision of the Restated Articles or the Bylaws of the Company that alters or affects the voting powers, preferences, or other special rights or privileges, qualifications, limitations, or restrictions of the Series F Preferred; (ii) Any increase or decrease (other than by redemption or conversion) in the authorized number of shares of Common Stock or Preferred Stock, including shares of Series E Preferred and Series F Preferred; (iii) Any creation, whether by reclassification or otherwise, of any class of shares or series of equity securities of the Company ranking senior to the Series F Preferred in right of redemption, liquidation preference, voting or dividends; or (iv) Any sale, lease, assignment, transfer or other conveyance of all or substantially all of the assets of the Company or any consolidation or merger involving the Company or any reclassification or other change of any stock, or any recapitalization, or any dissolution, liquidation or winding up, of the Company, or any other Acquisition (as defined in Section 3(c)), or any agreement or obligation so to do. d. Election of Board of Directors. So long as any shares of Series E Preferred remain outstanding, then the holders of Series E Preferred shall be entitled to elect one (1) member of the Board of Directors at each meeting or pursuant to each consent of the Company's shareholders for the election of directors, and to remove from office such director and to fill any vacancy caused by the resignation, death or removal of such director. 3. Liquidation Rights. a Upon any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of any other outstanding capital stock, (i) the holders of Series F Preferred shall be entitled to be paid out of the assets of the Company an amount per share of Series F Preferred equal to $26.62 (the "Series F Original Issue Price") plus all declared and unpaid dividends on 4. such shares of Series F Preferred (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) for each share of Series F Preferred held by them and (ii) the holders of Series E Preferred shall be entitled to be paid out of the assets of the Company an amount per share of Series E Preferred equal to the Series E Original Issue Price plus all accrued and unpaid, cumulated dividends, whether or not declared, on such shares of Series E Preferred (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) for each share of Series E Preferred held by them. If, upon any liquidation, distribution, or winding up, the assets of the Company shall be insufficient to make payment in full to all holders of Series F Preferred and Series E Preferred of the liquidation preferences set forth herein, then such assets shall be distributed among the holders of shares of Series F Preferred and Series E Preferred at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be respectively entitled. b. After the payment of the full liquidation preference of the Series F Preferred and the Series E Preferred as set forth in Section 3(a), the remaining assets of the Company legally available for distribution, if any, shall be distributed ratably to the holders of any Junior Stock. c. Upon the election by the holders of at least a majority of the then outstanding Series F Preferred and at least sixty-six and two-thirds percent (66 2/3%) of the then outstanding Series E Preferred, the following events shall be considered a liquidation under this Section 3: (i) any consolidation or merger of the Company with or into any other corporation or other entity or person, or any other corporate reorganization, in which the shareholders of the Company immediately prior to such consolidation, merger or reorganization, own less than 50% of the Company's voting power immediately after such consolidation, merger or reorganization, or any transaction or series of related transactions in which in excess of forty percent (40%) of the Company's voting power is transferred (an "Acquisition"); or (ii) a sale, lease or other disposition of all or substantially all of the assets of the Company (an "Asset Transfer"). 4. Conversion Rights. The holders of the Series E Preferred and the Series F Preferred shall have the following rights with respect to the conversion of the Series E Preferred and the Series F Preferred, respectively, into shares of Common Stock (the "Series E Conversion Rights" and the "Series F Conversion Rights"): a. Optional Conversion. Subject to and in compliance with the provisions of this Section 4, any shares of Series E Preferred and Series F Preferred may, at the option of the holder, be converted at any time into fully paid and nonassessable shares of Common Stock. The number of shares of Common Stock to which a holder of Series E Preferred shall be entitled upon conversion shall be the product obtained by multiplying the "Series E Conversion Rate" then in effect (determined as provided in Section 4(b)) by the 5. number of shares of Series E Preferred being converted. The number of shares of Common Stock to which a holder of Series F Preferred shall be entitled upon conversion shall be the product obtained by multiplying the "Series F Conversion Rate" then in effect (determined as provided in Section 4(b)) by the number of shares of Series F Preferred being converted. b. Series E Conversion Rate; Series F Conversion Rate. The conversion rate in effect at any time for conversion of the Series E Preferred (the "Series E Conversion Rate") shall be the quotient obtained by dividing the Series E Original Issue Price of the Series E Preferred by the "Series E Conversion Price," calculated as provided in Section 4(c). The conversion rate in effect at any time for conversion of the Series F Preferred (the "Series F Conversion Rate") shall be the quotient obtained by dividing the Series F Original Issue Price of the Series F Preferred by the "Series F Conversion Price," calculated as provided in Section 4(c). c. Conversion Price. The conversion price for the Series E Preferred shall initially be $9.45867287571 (the "Series E Conversion Price"). The conversion price for the Series F Preferred shall initially be $10.071594878 (the "Series F Conversion Price"). Such initial Series E Conversion Price and Series F Conversion Price shall be adjusted from time to time in accordance with this Section 4. All references to the Series E Conversion Price and the Series F Conversion Price herein shall mean the applicable conversion price as so adjusted. d. Mechanics of Conversion. Each holder of Series E Preferred or Series F Preferred who desires to convert the same into shares of Common Stock pursuant to this Section 4 shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or any transfer agent for the Preferred, and shall give written notice to the Company at such office that such holder elects to convert the same. Such notice shall state the number of shares of Series E Preferred or Series F Preferred being converted. Thereupon, the Company shall promptly issue and deliver at such office to such holder a certificate or certificates for the number of shares of Common Stock to which such holder is entitled and shall promptly pay in cash or, to the extent sufficient funds are not then legally available therefor, in Common Stock (at the Common Stock's fair market value determined by the Board of Directors in good faith as of the date of such conversion), with respect to the Series E Preferred, any accrued but unpaid cumulated dividends, whether or not declared, on the shares of Series E Preferred being converted and, with respect to the Series F Preferred, any declared but unpaid dividends on the shares of Series F Preferred being converted. Such conversion shall be deemed to have been made at the close of business on the date of such surrender of the certificates representing the shares of Series E Preferred or Series F Preferred to be converted, and the person entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date. e. Adjustment for Stock Splits and Combinations. As to the Series E Preferred, any reference herein to the "Original Issue Date" shall mean the date that the first share of Series E Preferred was issued, and as to the Series F Preferred, any reference herein to the "Original Issue Date" shall mean the date that the first share of Series F Preferred was issued. If the Company shall at any time or from time to time after the Original Issue Date effect a subdivision of the outstanding Common Stock, the Series E Conversion Price and the Series F Conversion Price in effect immediately before that subdivision shall be proportionately decreased. Conversely, if the Company shall at any time or from time to time after the Original 6. Issue Date combine the outstanding shares of Common Stock into a smaller number of shares, the Series E Conversion Price and the Series F Conversion Price in effect immediately before the combination shall be proportionately increased. Any adjustment under this Section 4(e) shall become effective at the close of business on the date the subdivision or combination becomes effective. f. Adjustment for Common Stock Dividends and Distributions. If the Company at any time or from time to time after the Original Issue Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, in each such event the Series E Conversion Price and the Series F Conversion Price that is then in effect shall be decreased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the applicable conversion price then in effect by a fraction (1) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Series E Conversion Price and the Series F Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Series E Conversion Price and the Series F Conversion Price shall be adjusted pursuant to this Section 4(f) to reflect the actual payment of such dividend or distribution. g. Adjustments for Other Dividends and Distributions. If the Company at any time or from time to time after the Original Issue Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Company other than shares of Common Stock, in each such event provision shall be made so that the holders of the Preferred outstanding on such record date shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of other securities of the Company which they would have received had their Preferred been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 4 with respect to the rights of the holders of the Preferred or with respect to such other securities by their terms. h. Adjustment for Reclassification, Exchange and Substitution. If at any time or from time to time after the Original Issue Date, the Common Stock issuable upon the conversion of the Preferred is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than an Acquisition or Asset Transfer as defined in Section 3(c) above or a subdivision or combination of shares or stock dividend or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 4), in any such event each holder of Preferred outstanding on the effective date of such event shall have the right thereafter to convert such stock into the kind and amount of stock and other securities and property receivable upon such recapitalization, 7. reclassification or other change by holders of the maximum number of shares of Common Stock into which such shares of Preferred could have been converted immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. i. Reorganizations, Mergers, Consolidations or Sales of Assets. If at any time or from time to time after the Original Issue Date, there is a capital reorganization of the Common Stock or a merger or a consolidation or a sale of assets involving the Company (other than an Acquisition or Asset Transfer as defined in Section 3(c) above or a recapitalization, subdivision, combination, reclassification, exchange or substitution of shares provided for elsewhere in this Section 4), as a part of such capital reorganization or merger or consolidation or sale of assets involving the Company, provision shall be made so that the holders of the Preferred outstanding on the effective date of such event shall thereafter be entitled to receive upon conversion of the Preferred the number of shares of stock or other securities or property of the Company to which a holder of the number of shares of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, subject to adjustment in respect of such stock or securities by the terms thereof. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of Preferred after the capital reorganization or merger or consolidation or sale of assets involving the Company to the end that the provisions of this Section 4 (including adjustment of the Series E Conversion Price and the Series F Conversion Price then in effect and the number of shares issuable upon conversion of the Preferred) shall be applicable after that event and be as nearly equivalent as practicable. j. Sale of Shares. (i) If at any time or from time to time after the Original Issue Date of the Series E Preferred and before the Original Issue Date of the Series F Preferred, the Company issues or sells, or is deemed by the express provisions of this subsection (j) to have issued or sold, Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock as provided in Section 4(f) above, and other than a subdivision or combination of shares of Common Stock as provided in Section 4(e) above, regardless of the price per share, then and in each such instance the then existing Series E Conversion Price shall be reduced, as of the opening of business on the date of such issue or sale, to a price equal to the product obtained by multiplying the existing Series E Preferred Conversion Price by the quotient obtained by dividing the number of shares of Common Stock deemed to be outstanding (as defined below) immediately prior to such issue or sale by the sum of the number of shares of Common Stock deemed to be outstanding (as defined below) immediately prior to such issue plus the number of Additional Shares of Common Stock. For the purposes of the preceding sentence, the number of shares of Common Stock deemed to be outstanding as of a given date shall be the sum of (A) the number of shares of Common Stock actually outstanding, (B) the number of shares of Common Stock into which the then outstanding shares of Preferred Stock other than the Series E Preferred could be converted if fully converted on the day immediately preceding the given date, and (C) the number of shares of Common Stock which could be obtained through the exercise or conversion of all other rights, options and convertible equity securities on the day immediately preceding the given date. 8. (ii) If at any time or from time to time after the Original Issue Date of the Series F Preferred, the Company issues or sells, or is deemed by the express provisions of this subsection (j) to have issued or sold, Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock as provided in Section 4(f) above, and other than a subdivision or combination of shares of Common Stock as provided in Section 4(e) above, at a price per share less than $18.50 (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares), then and in each such instance the then existing Series F Conversion Price shall be reduced, as of the opening of business on the date of such issue or sale, to a price equal to the product obtained by multiplying the existing Series F Preferred Conversion Price by the quotient obtained by dividing the number of shares of Common Stock deemed to be outstanding (as defined below) immediately prior to such issue or sale by the sum of the number of shares of Common Stock deemed to be outstanding (as defined below) immediately prior to such issue plus the number of Additional Shares of Common Stock. For the purposes of the preceding sentence, the number of shares of Common Stock deemed to be outstanding as of a given date shall be the sum of (A) the number of shares of Common Stock actually outstanding, (B) the number of shares of Common Stock into which the then outstanding shares of Preferred Stock could be converted if fully converted on the day immediately preceding the given date, (C) the number of shares of Common Stock which could be obtained through the exercise or conversion of all other rights, options and convertible equity securities on the day immediately preceding the given date and (D) the number of shares of Common Stock which the aggregate consideration received (as defined in (iv) below) by the Company for the total number of Additional Shares of Common Stock so issued would purchase at the Series F Conversion Price. If at any time or from time to time after the Original Issue Date of the Series F Preferred, the Company issues or sells, or is deemed by the express provisions of this subsection (j) to have issued or sold, Additional Shares of Common Stock, other than as a dividend or other distribution on any class of stock as provided in Section 4(f) above, and other than a subdivision or combination of shares of Common Stock as provided in Section 4(e) above, at a price per share at or between $18.50 and $26.62 (a "Dilution Price") (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares), then and in each such instance the then existing Series F Conversion Price shall be reduced, as of the opening of business on the date of such issue or sale, to a price equal to the Dilution Price; provided, however, that such adjustment shall be made only if such adjustment results in a Series F Conversion Price less than the Series F Conversion Price in effect immediately prior to the taking of such action. (iii) For the purpose of making any adjustment required under the above Section D.4(j)(ii), the consideration received by the Company for any issue or sale of securities shall (A) to the extent it consists of cash, be computed at the gross amount of cash received by the Company before deduction of any underwriting or similar commissions, compensation or concessions paid or allowed by the Company in connection with such issue or sale and before deduction of any expenses payable by the Company, (B) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board of Directors, and (C) if Additional Shares of Common Stock, Convertible Securities (as defined in subsection (j)(iv) below) or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with 9. other stock or securities or other assets of the Company for a consideration which covers both, be computed as the portion of the consideration so received that may be reasonably determined in good faith by the Board of Directors to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options (iv) For the purpose of the adjustment required under this Section 4(j), if the Company issues or sells any rights or options for the purchase of, or stock or other securities convertible into, Additional Shares of Common Stock (such convertible stock or securities being herein referred to as "Convertible Securities"), in each case the Company shall be deemed to have issued at the time of the issuance of such rights or options or Convertible Securities the maximum number of Additional Shares of Common Stock issuable upon exercise or conversion thereof. No further adjustment of the Series E Conversion Price or the Series F Conversion Price, as adjusted upon the issuance of such rights, options or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such rights or options or the conversion of any such Convertible Securities. If any such rights or options or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, the Series E Conversion Price and the Series F Conversion Price as adjusted upon the issuance of such rights, options or Convertible Securities shall be readjusted to the Series E Conversion Price and the Series F Conversion Price which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion of such Convertible Securities, provided that such readjustment shall not apply to prior conversions of Preferred. (v) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Company or deemed to be issued pursuant to this Section 4(j), whether or not subsequently reacquired or retired by the Company other than (1) shares of Common Stock issued upon conversion of the Preferred; (2) with respect to the Series E Preferred, up to Thirty Thousand (30,000) shares of Common Stock and/or options, warrants or other Common Stock purchase rights, and the Common Stock issued pursuant to such options, warrants or other rights (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like) issued after the Original Issue Date of the Series E Preferred to employees, officers or directors of the Company or any subsidiary pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board; (3) with respect to the Series F Preferred, up to Nine Hundred Sixty Five Thousand Thirty Three (965,033) shares of Common Stock and/or options, warrants or other Common Stock purchase rights, and the Common Stock issued pursuant to such options, warrants or other rights (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like) issued after the Original Issue Date of the Series F Preferred to employees, officers or directors of the Company or any subsidiary pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board; (4) with respect to the Series E Preferred, shares of Common Stock issued pursuant to the exercise of options, warrants or convertible securities outstanding as of the Original Issue Date of the Series E Preferred; and (4) with respect to the Series F Preferred, shares of Common Stock issued pursuant to the exercise of options, warrants or convertible securities outstanding as of the Original Issue Date of the Series F Preferred. 10. k. No Impairment. Except as provided for in Section 2(b) and (c) above, the Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company but will at all times in good faith assist in the carrying out of all the provisions of this Section and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Preferred against impairment. l. Certificate of Adjustment. In each instance of an adjustment or readjustment of the Series E Conversion Price or the Series F Conversion Price or the number of shares of Common Stock or other securities issuable upon conversion of any series of the Preferred, if such Preferred is then convertible pursuant to this Section 4, the Company, at its expense, shall compute such adjustment or readjustment in accordance with the provisions hereof and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first class mail, postage prepaid, to each registered holder of such Preferred at the holder's address as shown in the Company's books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (1) the Series E Conversion Price or the Series F Conversion Price, as applicable, at the time in effect, (2) the number of Additional Shares of Common Stock and (3) the type and amount, if any, of other property which at the time would be received upon conversion of such Preferred. m. Notices of Record Date. Upon (i) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or (ii) any Acquisition (as defined in Section 3(c)) or other capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company, any merger or consolidation of the Company with or into any other corporation, or any Asset Transfer (as defined in Section 3(c)), or any voluntary or involuntary dissolution, liquidation or winding up of the Company, the Company shall give notice to each holder of Preferred at least thirty (30) days prior to the record date specified therein specifying (1) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (2) the date on which any such Acquisition, reorganization, reclassification, transfer, consolidation, merger, Asset Transfer, dissolution, liquidation or winding up is expected to become effective, and (3) the date, if any, that is to be fixed as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such Acquisition, reorganization, reclassification, transfer, consolidation, merger, Asset Transfer, dissolution, liquidation or winding up. n. Automatic Conversion. (i) Each share of Series E Preferred shall automatically be converted into shares of Common Stock, based on the then-effective Series E Conversion Price, (A) at any time upon the affirmative election of the holders of at least a majority of the 11. outstanding shares of the Series E Preferred, or (B) immediately upon the closing of a firmly underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Company in which (i) the per share price of each existing share of Common Stock is valued at a minimum of $50.00 (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like), and (ii) the gross cash proceeds to the Company (before underwriting discounts, commissions and fees) are at least $20,000,000. Upon such automatic conversion, any accrued but unpaid cumulated dividends, whether or not declared, shall be paid in accordance with the provisions of Section 4(d). (ii) Each share of Series F Preferred shall automatically be converted into shares of Common Stock, based on the then-effective Series F Conversion Price, (A) at any time upon the affirmative election of the holders of at least a majority of the outstanding shares of the Series F Preferred, or (B) immediately upon the closing of a firmly underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Company in which (i) the per share price of each existing share of Common Stock is valued at a minimum of $26.62 (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like), and (ii) the gross cash proceeds to the Company (before underwriting discounts, commissions and fees) are at least $20,000,000. Upon such automatic conversion, any declared but unpaid dividends shall be paid in accordance with the provisions of Section 4(d). (iii) Upon the occurrence of the event specified in paragraph (i) or (ii) above, the outstanding shares of the applicable series of Preferred shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Company or its transfer agent; provided, however, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless the certificates evidencing such shares of Preferred are either delivered to the Company or its transfer agent as provided below, or the holder notifies the Company or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with such certificates. Upon the occurrence of such automatic conversion of the Preferred, the holders of the applicable series of Preferred shall surrender the certificates representing such shares at the office of the Company or any transfer agent for the Preferred. Thereupon, there shall be issued and delivered to such holder promptly at such office and in its name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Common Stock into which the shares of Preferred surrendered were convertible on the date on which such automatic conversion occurred, and, with respect to the Series E Preferred, any accrued but unpaid cumulated dividends, whether or not declared, shall be paid in accordance with the provisions of Section 4(d) and, with respect to the Series F Preferred, any declared but unpaid dividends shall be paid in accordance with the provisions of Section 4(d). o. Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of Preferred. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Preferred by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of 12. any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of any fractional share, the Company shall, in lieu of issuing any fractional share, pay cash equal to the product of such fraction multiplied by the Common Stock's fair market value (as determined by the Board) on the date of conversion. p. Reservation of Stock Issuable Upon Conversion. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Preferred. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. q. Notices. Any notice required by the provisions of this Section 4 shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with an internationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All notices shall be addressed to each holder of record at the address of such holder appearing on the books of the Company. r. Payment of Taxes. The Company will pay all taxes (other than taxes based upon income) and other governmental charges that may be imposed with respect to the issue or delivery of shares of Common Stock upon conversion of shares of Preferred, excluding any tax or other charge imposed in connection with any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of Preferred so converted were registered. 5. Redemption. a. The Company shall be obligated to redeem the Series E Preferred as follows: (i) At any time after September 30, 2000, the holders of at least sixty-six and two-thirds percent (66 2/3%) of the then outstanding shares of Series E Preferred, voting together as a separate class, may require the Company, to the extent it may lawfully do so, to redeem the Series E Preferred (beginning on the first calendar quarter commencing at least 30 days after such notice) (the "Redemption Date"). The Company shall effect such redemption on the Redemption Date by paying in cash in exchange for the shares of Series E Preferred to be redeemed a sum equal to the Original Issue Price per share of Series E Preferred (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like) plus accrued but unpaid cumulated dividends, whether or not declared, with respect to such shares. The total amount to be paid for the Series E Preferred is hereinafter referred to as the "Redemption Price." 13. (ii) At least thirty (30) days but no more than sixty (60) days prior to the Redemption Date, the Company shall send a notice (a "Redemption Notice") to all holders of Series E Preferred to be redeemed setting forth (a) the Redemption Price for the shares to be redeemed; and (b) the place at which such holders may obtain payment of the Redemption Price upon surrender of their share certificates. If the Company does not have sufficient funds legally available to redeem all shares to be redeemed at the Redemption Date then it shall redeem such shares pro rata (based on the portion of the aggregate Redemption Price payable to them) to the extent possible and shall redeem the remaining shares to be redeemed as soon as sufficient funds are legally available. b. On or after such Redemption Date, each holder of shares of Series E Preferred to be redeemed shall surrender such holder's certificates representing such shares to the Company in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by such certificates are redeemed, a new certificate shall be issued representing the unredeemed shares. From and after such Redemption Date, unless there shall have been a default in payment of the Redemption Price or the Company is unable to pay the Redemption Price due to not having sufficient legally available funds, all dividends on the shares of Series E Preferred to be redeemed shall cease to accrue and all rights of the holders of such shares as holders of Series E Preferred (except the right to receive the Redemption Price without interest upon surrender of their certificates), shall cease and terminate with respect to such shares, provided that in the event that shares of Series E Preferred are not redeemed due to a default in payment by the Company or because the Company does not have sufficient legally available funds, such shares of Series E Preferred shall remain outstanding and shall be entitled to all of the rights and preferences provided herein. c. In the event of a call for redemption of any shares of Series E Preferred, the Series E Conversion Rights (as defined in Section 4) for such Series E Preferred shall terminate as to the shares designed for redemption at the close of business on the second (2nd) day preceding the Redemption Date, unless default is made in payment of the Redemption Price. 6. No Reissuance of Series E Preferred. No share or shares of Series E Preferred acquired by the Company by reason of redemption, purchase, conversion or otherwise shall be reissued. 7. No Preemptive Rights. Shareholders shall have no preemptive rights except as granted by the Company pursuant to written agreements. 8. Status of Converted or Redeemed Stock. If any shares of Preferred are converted or redeemed pursuant to Section 4 or Section 5 above, then the shares so converted or redeemed shall resume the status of authorized but undesignated and unissued shares of Preferred Stock. V. 14. A. The authorized number of members of the Board of Directors of the Company shall be as set forth in the Bylaws of this Company. So long as any shares of Series E Preferred remain outstanding, one (1) director shall be elected by the holders of shares of Series E Preferred outstanding voting together as a separate class. The remaining directors shall be elected by the shares of Series F Preferred and Common Stock outstanding, voting together as a single class. In the case of any vacancy in the office of a director, the holders that previously elected a director to that office, at a duly held meeting or by written consent, may elect a successor to fill the vacancy. Any director may be removed either with or without cause by, and only by, the holders that elected that director at a duly held meeting or by unanimous written consent, and any vacancy thereby created may be filled by such holders in the same manner. The director previously elected by holders of shares of Series E Preferred shall continue as a director until the expiration of the term for which such director was elected and until a successor has been elected and qualified as if such director was elected by shares of Common Stock outstanding, except as otherwise provided in the Bylaws. B. In addition to any other vote or consent required herein or by law, the vote or written consent of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of Common Stock shall be necessary for effecting or validating any agreement by the Company or its shareholders regarding an Asset Transfer or Acquisition (each as defined in Article III.D.3(d)) VI. A. The liability of the directors for monetary damages shall be eliminated to the fullest extent under applicable law. B. Any repeal or modification of this Article VI shall be prospective and shall not affect the rights under this Article VI in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. VII. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph B. of this Article VII, and all rights conferred upon the stockholders herein are granted subject to this reservation. Four: This Amended and Restated Certificate of Incorporation has been duly approved by the Board of Directors of the Company, in accordance with Section 241 of the Delaware General Corporation Law. Five: This Amended and Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Sections 241 and 245 of the General Corporation Law of the State of Delaware by a majority vote of the Board of Directors of the Corporation. The Corporation has not yet received any payment for any of its stock. 15. In Witness Whereof, TriNet Group, Inc. has caused this Amended and Restated Certificate of Incorporation to be signed by the President and the Secretary in San Leandro, California on this 30th day of March, 2000. By: /s/ Martin Babinec ------------------------------- Martin Babinec, President By: /s/ Douglas P. Devlin ------------------------------- Douglas P. Devlin, Secretary 16. EX-3.02 3 0003.txt FORM OF AMENDED AND RESTATED CERT. OF INCOPR. Exhibit 3.02 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF TRINET GROUP, INC. TriNet Group, Inc., a corporation organized and existing under the laws of the state of Delaware (the "Corporation") hereby certifies that: 1. The name of the Corporation is TriNet Group, Inc. The Corporation was originally incorporated under the name TriNet Merger Corporation. 2. The date of filing of the Corporation's original Certificate of Incorporation was January 26, 2000. 3. The Amended and Restated Certificate of Incorporation of the Corporation as provided in Exhibit A hereto was duly adopted in accordance with the provisions of Section 242 and Section 245 of the General Corporation Law of the State of Delaware by the Board of Directors of the Corporation. 4. Pursuant to Section 245 of the Delaware General Corporation Law, approval of the stockholders of the Corporation has been obtained. 5. The Amended and Restated Certificate of Incorporation so adopted reads in full as set forth in Exhibit A attached hereto and is hereby incorporated by reference. In Witness Whereof, the undersigned has signed this certificate this ____ day of ___________, 2000, and hereby affirms and acknowledges under penalty of perjury that the filing of this Amended and Restated Certificate of Incorporation is the act and deed of TriNet Group, Inc. TriNet Group, Inc. By:_________________________________________ Martin Babinec Chief Executive Officer Attest: _______________________________ Douglas P. Devlin Secretary Exhibit A AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF TRINET GROUP, INC. I. Name The name of this Corporation is TriNet Group, Inc. II. Address The address of the registered office of the Corporation in the State of Delaware is 15 East North Street, City of Dover, County of Kent, and the name of the registered agent of the Corporation in the State of Delaware at such address is AmeriSearch Corporate Services, Inc. III. Purpose The purpose of this Corporation is to engage in any lawful act or activity for which a Corporation may be organized under the General Corporation Law of the State of Delaware. IV. Stock This Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is One Hundred and Five Million (105,000,000) shares. One Hundred Million (100,000,000) shares shall be Common Stock, each having a par value of $0.0001. Five Million (5,000,000) shares shall be Preferred Stock, each having a par value of $0.0001. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate (a "Preferred Stock Designation") pursuant to the Delaware General Corporation Law, to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions of any wholly unissued series of Preferred Stock, and to establish from time to time the number of shares constituting any such series or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares 1. of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. V. Management A. For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: 1. The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted by the Board of Directors. 2. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, and to any restrictions or limitations of applicable law, following the closing of the initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock to the public (the "Initial Public Offering"), the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the Closing of the Initial Public Offering, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the Closing of the Initial Public Offering, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Article, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. During such time or times that the Corporation is subject to Section 2115(b) of the California General Corporation Law, the Board of Directors or any individual director may be removed from office at any time without cause by the affirmative vote of the holders of at least a majority of the outstanding shares entitled to vote on such removal; provided, however, that unless the entire Board is removed, no individual director may be removed when the votes cast against such director's removal, or not consenting in writing to such removal, would be sufficient to elect that director if voted cumulatively at an election which the same total number of votes 2. were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of such director's most recent election were then being elected. 3. (a) Subject to the rights of the holders of any series of Preferred Stock, the Board of Directors or any individual director may be removed from office at any time (i) with cause by the affirmative vote of the holders of a majority of the voting power of all the then-outstanding shares of voting stock of the Corporation, entitled to vote at an election of directors (the "Voting Stock") or (ii) without cause by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all the then-outstanding shares of the Voting Stock. (b) Subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. 4. In the event that Section 2115(a) of the California General Corporation Law is applicable to this Corporation, then the following shall apply: (a) Every stockholder entitled to vote in any election of directors of this Corporation may cumulate such stockholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the stockholder's shares are otherwise entitled, or distribute the stockholder's votes on the same principle among as many candidates as such stockholder thinks fit; (b) No stockholder, however, may cumulate such stockholder's votes for one or more candidates unless (i) the names of such candidates have been properly placed in nomination, in accordance with the Bylaws of the Corporation, prior to the voting, (ii) the stockholder has given advance notice to the Corporation of the intention to cumulate votes pursuant to the Bylaws, and (iii) the stockholder has given proper notice to the other stockholders at the meeting, prior to voting, of such stockholder's intention to cumulate such stockholder's votes; and (c) If any stockholder has given proper notice, all stockholders may cumulate their votes for any candidates who have been properly placed in nomination. The candidates receiving the highest number of votes of the shares entitled to be voted for them up to the number of directors to be elected by such shares shall be declared elected. B. 1. Subject to Section 45 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds 3. percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock. The Board of Directors shall also have the power to adopt, amend, or repeal Bylaws. 2. The directors of the Corporation need not be elected by written ballot unless the Bylaws so provide. 3. No action shall be taken by the stockholders of the Corporation except at an annual or special meeting of stockholders called in accordance with the Bylaws and following the closing of the Initial Public Offering no action shall be taken by the stockholders by written consent. 4. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the Bylaws of the Corporation. VI. Liability of Directors A. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 174 of the Delaware General Corporation Law, or (4) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. B. Any repeal or modification of this Article VI shall be prospective and shall not affect the rights under this Article VI in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. VII. Amendment A. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph B. of this Article VII, and all rights conferred upon the stockholders herein are granted subject to this reservation. B. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the 4. then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal Articles V, VI and VII. 5. EX-3.04 4 0004.txt FORM OF AMENDED AND RESTATED BYLAWS Exhibit 3.04 AMENDED AND RESTATED BYLAWS OF TRINET GROUP, INC. (A DELAWARE CORPORATION) TABLE OF CONTENTS
Page ARTICLE I OFFICES.................................................................................... 1 Section 1. Registered Office.......................................................................... 1 Section 2. Other Offices.............................................................................. 1 ARTICLE II CORPORATE SEAL............................................................................. 1 Section 3. Corporate Seal............................................................................. 1 ARTICLE III.... STOCKHOLDERS' MEETINGS..................................................................... 1 Section 4. Place Of Meetings.......................................................................... 1 Section 5. Annual Meetings............................................................................ 1 Section 6. Special Meetings........................................................................... 3 Section 7. Notice Of Meetings......................................................................... 4 Section 8. Quorum..................................................................................... 5 Section 9. Adjournment And Notice Of Adjourned Meetings............................................... 5 Section 10. Voting Rights.............................................................................. 5 Section 11. Joint Owners Of Stock...................................................................... 6 Section 12. List Of Stockholders....................................................................... 6 Section 13. Action Without Meeting..................................................................... 6 Section 14. Organization............................................................................... 7 ARTICLE IV DIRECTORS.................................................................................. 7 Section 15. Number And Term Of Office.................................................................. 7 Section 16. Powers..................................................................................... 8 Section 17. Classes of Directors....................................................................... 8 Section 18. Vacancies.................................................................................. 8 Section 19. Resignation................................................................................ 9 Section 21. Meetings................................................................................... 9 Section 22. Quorum And Voting.......................................................................... 10 Section 23. Action Without Meeting..................................................................... 10 Section 24. Fees And Compensation...................................................................... 10 Section 25. Committees................................................................................. 11 Section 26. Organization............................................................................... 12
i.
Page ARTICLE V OFFICERS................................................................................... 12 Section 27. Officers Designated........................................................................ 12 Section 28. Tenure And Duties Of Officers.............................................................. 12 Section 29. Delegation Of Authority.................................................................... 14 Section 30. Resignations............................................................................... 14 Section 31. Removal.................................................................................... 14 ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION 14 Section 32. Execution Of Corporate Instruments......................................................... 14 Section 33. Voting Of Securities Owned By The Corporation.............................................. 14 ARTICLE VII SHARES OF STOCK............................................................................ 15 Section 34. Form And Execution Of Certificates......................................................... 15 Section 35. Lost Certificates.......................................................................... 15 Section 36. Transfers.................................................................................. 16 Section 37. Fixing Record Dates........................................................................ 16 Section 38. Registered Stockholders.................................................................... 17 ARTICLE VIII OTHER SECURITIES OF THE CORPORATION........................................................ 17 Section 39. Execution Of Other Securities.............................................................. 17 ARTICLE IX DIVIDENDS.................................................................................. 18 Section 40. Declaration Of Dividends................................................................... 18 Section 41. Dividend Reserve........................................................................... 18 ARTICLE X FISCAL YEAR................................................................................ 18 Section 42. Fiscal Year................................................................................ 18 ARTICLE XI INDEMNIFICATION............................................................................ 18 Section 43. Indemnification Of Directors, Executive Officers, Other Officers, Employees And Other Agents................................................................. 18 ARTICLE XII NOTICES.................................................................................... 21 Section 44. Notices.................................................................................... 21 ARTICLE XIII AMENDMENTS................................................................................. 23 Section 45. Amendments................................................................................. 23
ii.
Page ARTICLE XIV LOANS TO OFFICERS.......................................................................... 23 Section 46. Loans To Officers.......................................................................... 23
iii. AMENDED AND RESTATED BYLAWS OF TRINET GROUP, INC. (A DELAWARE CORPORATION) ARTICLE I OFFICES Section 1. Registered Office. The registered office of the corporation in the State of Delaware shall be in the City of Dover, County of Kent. (Del. Code Ann., tit. 8, (S) 131) Section 2. Other Offices. The corporation shall also have and maintain an office or principal place of business at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. (Del. Code Ann., tit. 8, (S) 122(8)) ARTICLE II CORPORATE SEAL Section 3. Corporate Seal. The corporate seal shall consist of a die bearing the name of the corporation and the inscription, "Corporate Seal- Delaware." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. (Del. Code Ann., tit. 8, (S) 122(3)) ARTICLE III STOCKHOLDERS' MEETINGS Section 4. Place Of Meetings. Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the office of the corporation required to be maintained pursuant to Section 2 hereof. (Del. Code Ann., tit. 8, (S) 211(a)) Section 5. Annual Meetings. (a) The annual meeting of the stockholders of the corporation, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders: (i) pursuant to the corporation's notice of meeting of stockholders; (ii) by or at the 1. direction of the Board of Directors; or (iii) by any stockholder of the corporation who was a stockholder of record at the time of giving of notice provided for in the following paragraph, who is entitled to vote at the meeting and who complied with the notice procedures set forth in Section 5. (Del. Code Ann., tit. 8, (S) 211(b)). (b) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of Section 5(a) of these Bylaws, (i) the stockholder must have given timely notice thereof in writing to the Secretary of the corporation, (ii) such other business must be a proper matter for stockholder action under the Delaware General Corporation Law ("DGCL"), (iii) if the stockholder, or the beneficial owner on whose behalf any such proposal or nomination is made, has provided the corporation with a Solicitation Notice (as defined in this Section 5(b)), such stockholder or beneficial owner must, in the case of a proposal, have delivered a proxy statement and form of proxy to holders of at least the percentage of the corporation's voting shares required under applicable law to carry any such proposal, or, in the case of a nomination or nominations, have delivered a proxy statement and form of proxy to holders of a percentage of the corporation's voting shares reasonably believed by such stockholder or beneficial owner to be sufficient to elect the nominee or nominees proposed to be nominated by such stockholder, and must, in either case, have included in such materials the Solicitation Notice, and (iv) if no Solicitation Notice relating thereto has been timely provided pursuant to this section, the stockholder or beneficial owner proposing such business or nomination must not have solicited a number of proxies sufficient to have required the delivery of such a Solicitation Notice under this Section 5. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the ninetieth (90/th/) day nor earlier than the close of business on the one hundred twentieth (120/th/) day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced more than thirty (30) days prior to or delayed by more than thirty (30) days after the anniversary of the preceding year's annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the one hundred twentieth (120/th/) day prior to such annual meeting and not later than the close of business on the later of the ninetieth (90/th/) day prior to such annual meeting or the tenth (10/th/) day following the day on which public announcement of the date of such meeting is first made. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth: (A) as to each person whom the stockholder proposed to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (B) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the corporation's books, 2. and of such beneficial owner, (ii) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner, and (iii) whether either such stockholder or beneficial owner intends to deliver a proxy statement and form of proxy to holders of, in the case of the proposal, at least the percentage of the corporation's voting shares required under applicable law to carry the proposal or, in the case of a nomination or nominations, a sufficient number of holders of the corporation's voting shares to elect such nominee or nominees (an affirmative statement of such intent, a "Solicitation Notice"). (c) Notwithstanding anything in the second sentence of Section 5(b) of these Bylaws to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the corporation at least one hundred (100) days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 5 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the tenth (10/th/) day following the day on which such public announcement is first made by the corporation. (d) Only such persons who are nominated in accordance with the procedures set forth in this Section 5 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 5. Except as otherwise provided by law, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made, or proposed, as the case may be, in accordance with the procedures set forth in these Bylaws and, if any proposed nomination or business is not in compliance with these Bylaws, to declare that such defective proposal or nomination shall not be presented for stockholder action at the meeting and shall be disregarded. (e) Notwithstanding the foregoing provisions of this Section 5, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholders' meeting, stockholders must provide notice as required by the regulations promulgated under the 1934 Act. Nothing in these Bylaws shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation proxy statement pursuant to Rule 14a-8 under the 1934 Act. (f) For purposes of this Section 5, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the 1934 Act. Section 6. Special Meetings. (a) Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total 3. number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption). (b) If a special meeting is properly called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board of Directors, the Chief Executive Officer, or the Secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The Board of Directors shall determine the time and place of such special meeting, which shall be held not less than thirty-five (35) nor more than one hundred twenty (120) days after the date of the receipt of the request. Upon determination of the time and place of the meeting, the officer receiving the request shall cause notice to be given to the stockholders entitled to vote, in accordance with the provisions of Section 7 of these Bylaws. If the notice is not given within one hundred (100) days after the receipt of the request, the person or persons properly requesting the meeting may set the time and place of the meeting and give the notice. Nothing contained in this paragraph (b) shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held. (c) Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the corporation's notice of meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the corporation who is a stockholder of record at the time of giving notice provided for in these Bylaws who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 6(c). In the event the corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the corporation's notice of meeting, if the stockholder's notice required by Section 5(b) of these Bylaws shall be delivered to the Secretary at the principal executive offices of the corporation not earlier than the close of business on the one hundred twentieth (120/th/) day prior to such special meeting and not later than the close of business on the later of the ninetieth (90/th/) day prior to such meeting or the tenth (10/th/) day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. Section 7. Notice Of Meetings. Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, date and hour and purpose or purposes of the meeting. Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be 4. bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. (Del. Code Ann., tit. 8, (S)(S) 222, 229) Section 8. Quorum. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by statute, the Certificate of Incorporation or these Bylaws, in all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders. Except as otherwise provided by statute, the Certificate of Incorporation or these Bylaws, directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Where a separate vote by a class or classes or series is required, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, a majority of the outstanding shares of such class or classes or series, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, the affirmative vote of the majority (plurality, in the case of the election of directors) of the votes cast by the holders of shares of such class or classes or series shall be the act of such class or classes or series. (Del. Code Ann., tit. 8, (S) 216) Section 9. Adjournment And Notice Of Adjourned Meetings. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares casting votes. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. (Del. Code Ann., tit. 8, (S) 222(c)) Section 10. Voting Rights. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 12 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote or execute consents shall have the right to do so either in person or by an agent or agents authorized by a proxy granted in accordance with Delaware law. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period. (Del. Code Ann., tit. 8, (S)(S) 211(e), 212(b)) 5. Section 11. Joint Owners Of Stock. If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the majority so voting binds all; (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the DGCL, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of subsection (c) shall be a majority or even- split in interest. (Del. Code Ann., tit. 8, (S) 217(b)) Section 12. List Of Stockholders. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of meeting during the whole time thereof and may be inspected by any stockholder who is present. (Del. Code Ann., tit. 8, (S) 219(a)) Section 13. Action Without Meeting. (a) Unless otherwise provided in the Certificate of Incorporation, any action required by statute to be taken at any annual or special meeting of the stockholders, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. (b) Every written consent shall bear the date of signature of each stockholder who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated consent delivered to the corporation in the manner herein required, written consents signed by a sufficient number of stockholders to take action are delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. (Del. Code Ann., tit. 8, (S) 228) (c) Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented 6. in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of stockholders to take action were delivered to the corporation as provided in Section 228 (c) of the DGCL. If the action which is consented to is such as would have required the filing of a certificate under any section of the DGCL if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written consent has been given in accordance with Section 228 of the DGCL. (d) Notwithstanding the foregoing, no such action by written consent may be taken following the closing of the initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock of the corporation (the "Initial Public Offering"). Section 14. Organization. (a) At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or, if the President is absent, a chairman of the meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. (b) The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure. ARTICLE IV DIRECTORS Section 15. Number And Term Of Office. The authorized number of directors of the corporation shall be fixed in accordance with the Certificate of Incorporation. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter 7. as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. (Del. Code Ann., tit. 8, (S)(S) 141(b), 211(b), (c)) Section 16. Powers. The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute or by the Certificate of Incorporation. (Del. Code Ann., tit. 8, (S) 141(a)) Section 17. Classes of Directors. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, following the closing of the Initial Public Offering, the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this section, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Section 18. Vacancies. (a) Unless otherwise provided in the Certificate of Incorporation, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this Section 18 in the case of the death, removal or resignation of any director. (Del. Code Ann., tit. 8, (S) 223(a), (b)) (b) If at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Delaware Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent (10%) of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the 8. directors chosen by the directors then in offices as aforesaid, which election shall be governed by Section 211 of the DGCL. (Del. Code Ann., tit. 8, (S) 223(c)). Section 19. Resignation. Any director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified. (Del. Code Ann., tit. 8, (S)(S) 141(b), 223(d)) Section 20. Removal. (a) Neither the Board of Directors nor any individual director may be removed without cause. (b) Subject to any limitation imposed by law, any individual director or directors may be removed with cause by the affirmative vote of a majority of the voting power of the corporation entitled to vote at an election of directors. Section 21. Meetings. (a) Annual Meetings. The annual meeting of the Board of Directors shall be held immediately before or after the annual meeting of stockholders and at the place where such meeting is held. No notice of an annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. (b) Regular Meetings. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may be held at any time or date and at any place within or without the State of Delaware which has been designated by the Board of Directors and publicized among all directors. No formal notice shall be required for regular meetings of the Board of Directors. (Del. Code Ann., tit. 8, (S) 141(g)) (c) Special Meetings. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board, the President or any two of the directors (Del. Code Ann., tit. 8, (S) 141(g)) (d) Telephone Meetings. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. (Del. Code Ann., tit. 8, (S) 141(I)) 9. (e) Notice of Meetings. Notice of the time and place of all special meetings of the Board of Directors shall be orally or in writing, by telephone, including a voice messaging system or other system or technology designed to record and communicate messages, facsimile, telegraph or telex, or by electronic mail or other electronic means, during normal business hours, at least twenty-four (24) hours before the date and time of the meeting, or sent in writing to each director by first class mail, charges prepaid, at least three (3) days before the date of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. (Del. Code Ann., tit. 8, (S) 229) (f) Waiver of Notice. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice. All such waivers shall be filed with the corporate records or made a part of the minutes of the meeting. (Del. Code Ann., tit. 8, (S) 229) Section 22. Quorum And Voting. (a) Unless the Certificate of Incorporation requires a greater number and except with respect to indemnification questions arising under Section 43 hereof, for which a quorum shall be one-third of the exact number of directors fixed from time to time in accordance with the Certificate of Incorporation, a quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time by the Board of Directors in accordance with the Certificate of Incorporation; provided, however, at any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. (Del. Code Ann., tit. 8, (S) 141(b)) (b) At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by the affirmative vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws. (Del. Code Ann., tit. 8, (S) 141(b)) Section 23. Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. (Del. Code Ann., tit. 8, (S) 141(f)) Section 24. Fees And Compensation. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed 10. to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor. (Del. Code Ann., tit. 8, (S) 141(h)) Section 25. Committees. (a) Executive Committee. The Board of Directors may appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and provided in the resolution of the Board of Directors shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the DGCL to be submitted to stockholders for approval, or (ii) adopting, amending or repealing any bylaw of the corporation. (Del. Code Ann., tit. 8, (S) 141(c)) (b) Other Committees. The Board of Directors may, from time to time, appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall any such committee have the powers denied to the Executive Committee in these Bylaws. (Del. Code Ann., tit. 8, (S) 141(c)) (c) Term. Each member of a committee of the Board of Directors shall serve a term on the committee coexistent with such member's term on the Board of Directors. The Board of Directors, subject to any requirements of any outstanding series of preferred Stock and the provisions of subsections (a) or (b) of this Bylaw, may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or voluntary resignation from the committee or from the Board of Directors. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (Del. Code Ann., tit. 8, (S)141(c)) (d) Meetings. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 25 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at any place which has been determined from time to time by such committee, and may be called by any director who is a member of such committee, upon 11. written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. (Del. Code Ann., tit. 8, (S)(S) 141(c), 229) Section 26. Organization. At every meeting of the directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President (if a director), or if the President is absent, the most senior Vice President (if a director), or, in the absence of any such person, a chairman of the meeting chosen by a majority of the directors present, shall preside over the meeting. The Secretary, or in his absence, any Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. ARTICLE V OFFICERS Section 27. Officers Designated. The officers of the corporation shall include, if and when designated by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President, one or more Vice Presidents, the Secretary, the Chief Financial Officer, the Treasurer and the Controller, all of whom shall be elected at the annual organizational meeting of the Board of Directors. The Board of Directors may also appoint one or more Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such other officers and agents with such powers and duties as it shall deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors. (Del. Code Ann., tit. 8, (S)(S) 122(5), 142(a), (b)) Section 28. Tenure And Duties Of Officers. (a) General. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. (Del. Code Ann., tit. 8, (S) 141(b), (e)) (b) Duties of Chairman of the Board of Directors. The Chairman of the Board of Directors, when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform other duties commonly 12. incident to his office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time. If there is no President, then the Chairman of the Board of Directors shall also serve as the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in paragraph (c) of this Section 28. (Del. Code Ann., tit. 8, (S) 142(a)) (c) Duties of President. The President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. Unless some other officer has been elected Chief Executive Officer of the corporation, the President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The President shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time. (Del. Code Ann., tit. 8, (S) 142(a)) (d) Duties of Vice Presidents. The Vice Presidents may assume and perform the duties of the President in the absence or disability of the President or whenever the office of President is vacant. The Vice Presidents shall perform other duties commonly incident to their office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (Del. Code Ann., tit. 8, (S) 142(a)) (e) Duties of Secretary. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties given him in these Bylaws and other duties commonly incident to his office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (Del. Code Ann., tit. 8, (S) 142(a)) (f) Duties of Chief Financial Officer. The Chief Financial Officer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct the Treasurer or any Assistant Treasurer, or the Controller or any Assistant Controller to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and each Controller and Assistant Controller shall perform other duties commonly incident to his office and shall also perform such 13. other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (Del. Code Ann., tit. 8, (S) 142(a)) Section 29. Delegation Of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof. Section 30. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors or to the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer. (Del. Code Ann., tit. 8, (S) 142(b)) Section 31. Removal. Any officer may be removed from office at any time, either with or without cause, by the affirmative vote of a majority of the directors in office at the time, or by the unanimous written consent of the directors in office at the time, or by any committee or superior officers upon whom such power of removal may have been conferred by the Board of Directors. ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION Section 32. Execution Of Corporate Instruments. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation. (Del. Code Ann., tit. 8, (S)(S) 103(a), 142(a), 158) All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do. Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. (Del. Code Ann., tit. 8, (S)(S) 103(a), 142(a), 158). Section 33. Voting Of Securities Owned By The Corporation. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such 14. authorization, by the Chairman of the Board of Directors, the Chief Executive Officer, the President, or any Vice President. (Del. Code Ann., tit. 8, (S) 123) ARTICLE VII SHARES OF STOCK Section 34. Form And Execution Of Certificates. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the powers, designations, preferences, and rights, and the limitations or restrictions of the shares authorized to be issued or shall, except as otherwise required by law, set forth on the face or back a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to this section or otherwise required by law or with respect to this section a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Except as otherwise expressly provided by law, the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical. (Del. Code Ann., tit. 8, (S) 158) Section 35. Lost Certificates. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to agree to indemnify the corporation in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. (Del. Code Ann., tit. 8, (S) 167) 15. Section 36. Transfers. (a) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares. (Del. Code Ann., tit. 8, (S) 201, tit. 6, (S) 8- 401(1)) (b) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the DGCL. (Del. Code Ann., tit. 8, (S) 160 (a)) Section 37. Fixing Record Dates. (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall, subject to applicable law, not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) Prior to the Initial Public Offering, in order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within ten (10) days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to 16. corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. (c) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. (Del. Code Ann., tit. 8, (S) 213) Section 38. Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. (Del. Code Ann., tit. 8, (S)(S) 213(a), 219) ARTICLE VIII OTHER SECURITIES OF THE CORPORATION Section 39. Execution Of Other Securities. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 34), may be signed by the Chairman of the Board of Directors, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. 17. ARTICLE IX DIVIDENDS Section 40. Declaration Of Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation and applicable law, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation and applicable law. (Del. Code Ann., tit. 8, (S)(S) 170, 173) Section 41. Dividend Reserve. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. (Del. Code Ann., tit. 8, (S) 171) ARTICLE X FISCAL YEAR Section 42. Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. ARTICLE XI INDEMNIFICATION Section 43. Indemnification Of Directors, Executive Officers, Other Officers, Employees And Other Agents. (a) Directors And Executive Officers. The corporation shall indemnify its directors and executive officers (for the purposes of this Article XI, "executive officers" shall have the meaning defined in Rule 3b-7 promulgated under the 1934 Act) to the fullest extent not prohibited by the DGCL or any other applicable law; provided, however, that the corporation may modify the extent of such indemnification by individual contracts with its directors and executive officers; and, provided, further, that the corporation shall not be required to indemnify any director or executive officer in connection with any proceeding (or part thereof) initiated by such person unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation, (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the DGCL or any other applicable law or (iv) such indemnification is required to be made under subsection (d). (b) Other Officers, Employees and Other Agents. The corporation shall have power to indemnify its other officers, employees and other agents as set forth in the DGCL 18. or any other applicable law. The Board of Directors shall have the power to delegate the determination of whether indemnification shall be given to any such person except executive officers to such officers or other persons as the Board of Directors shall determine. (c) Expenses. The corporation shall advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or executive officer, of the corporation, or is or was serving at the request of the corporation as a director or executive officer of another corporation, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefor, all expenses incurred by any director or executive officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under this Section 43 or otherwise. Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (e) of this Section 43, no advance shall be made by the corporation to an executive officer of the corporation (except by reason of the fact that such executive officer is or was a director of the corporation in which event this paragraph shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation. (d) Enforcement. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors and executive officers under this Bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director or executive officer. Any right to indemnification or advances granted by this Section 43 to a director or executive officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. In connection with any claim for indemnification, the corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the DGCL or any other applicable law for the corporation to indemnify the claimant for the amount claimed. In connection with any claim by an executive officer of the corporation (except in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such executive officer is or was a director of the corporation) for advances, the corporation shall be entitled to raise a defense as to any such action clear and convincing evidence that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation, or with respect to any criminal action or proceeding that such person acted without reasonable cause to believe that his conduct was 19. lawful. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the DGCL or any other applicable law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. In any suit brought by a director or executive officer to enforce a right to indemnification or to an advancement of expenses hereunder, the burden of proving that the director or executive officer is not entitled to be indemnified, or to such advancement of expenses, under this Section 43 or otherwise shall be on the corporation. (e) Non-Exclusivity of Rights. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any applicable statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the Delaware General Corporation Law, or by any other applicable law. (f) Survival of Rights. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) Insurance. To the fullest extent permitted by the DGCL or any other applicable law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Section 43. (h) Amendments. Any repeal or modification of this Section 43 shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. (i) Saving Clause. If this Bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director and executive officer to the full extent not prohibited by any applicable portion of this Section 43 that shall not have been invalidated, or by any other applicable law. If this Section 43 shall be invalid due to the application of the indemnification provisions of another jurisdiction, then the corporation shall indemnify each director and executive officer to the full extent under any other applicable law. (j) Certain Definitions. For the purposes of this Bylaw, the following definitions shall apply: 20. (1) The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. (2) The term "expenses" shall be broadly construed and shall include, without limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding. (3) The term the "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Section 43 with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (4) References to a "director," "executive officer," "officer," "employee," or "agent" of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as, respectively, a director, executive officer, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. (5) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Section 43. ARTICLE XII NOTICES Section 44. Notices. (a) Notice To Stockholders. Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, it shall be given in writing, timely and duly deposited in the United States mail, postage prepaid, and addressed to his last known post 21. office address as shown by the stock record of the corporation or its transfer agent. (Del. Code Ann., tit. 8, (S) 222) (b) Notice To Directors. Any notice required to be given to any director may be given by the method stated in subsection (a), or by overnight delivery service, facsimile, telex or telegram, except that such notice other than one which is delivered personally shall be sent to such address as such director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such director. (c) Affidavit Of Mailing. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, or director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall in the absence of fraud, be prima facie evidence of the facts therein contained. (Del. Code Ann., tit. 8, (S) 222) (d) Time Notices Deemed Given. All notices given by mail or by overnight delivery service, as above provided, shall be deemed to have been given as at the time of mailing, and all notices given by facsimile, telex or telegram shall be deemed to have been given as of the sending time recorded at time of transmission. (e) Methods of Notice. It shall not be necessary that the same method of giving notice be employed in respect of all directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. (f) Failure To Receive Notice. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such stockholder or such director to receive such notice. (g) Notice To Person With Whom Communication Is Unlawful. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the DGCL, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. (h) Notice To Person With Undeliverable Address. Whenever notice is required to be given, under any provision of law or the Certificate of Incorporation or Bylaws of the corporation, to any stockholder to whom (i) notice of two consecutive annual meetings, and 22. all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a twelve-month period, have been mailed addressed to such person at his address as shown on the records of the corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the corporation a written notice setting forth his then current address, the requirement that notice be given to such person shall be reinstated. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the DGCL, the certificate need not state that notice was not given to persons to whom notice was not required to be given pursuant to this paragraph. (Del. Code Ann, tit. 8, (S) 230) ARTICLE XIII AMENDMENTS Section 45. Amendments. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the voting stock of the corporation entitled to vote. The Board of Directors shall also have the power to adopt, amend, or repeal Bylaws. ARTICLE XIV LOANS TO OFFICERS Section 46. Loans To Officers. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a Director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in these Bylaws shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. (Del. Code Ann., tit. 8, (S)143) 23. EX-10.17 5 0005.txt CREEKSIDE PLAZA OFFICE LEASE EXHIBIT 10.17 CREEKSIDE PLAZA OFFICE LEASE Creekside Associates, LLC, A California Limited Liability Company As Landlord, And TriNet Employer Group, Inc. a California Corporation, as Tenant. CREEKSIDE PLAZA TriNet Employer Group, Inc. TABLE OF CONTENTS -----------------
Page ---- Article 1 Premises, Building, Project, Tenant Improvements and Common Areas, and the Adjacent Project ............................................................. 1 Article 2 Lease Term ........................................................................... 5 Article 3 Base Rent............................................................................. 6 Article 4 Base Rent Adjustments ................................................................ 7 Article 5 Use of Premises....................................................................... 7 Article 6 Services and Utilities ............................................................... 8 Article 7 Repairs............................................................................... 9 Article 8 Additions and Alterations............................................................. 10 Article 9 Covenant Against Liens................................................................ 11 Article 10 Insurance............................................................................. 12 Article 11 Damage and Destruction................................................................ 14 Article 12 Nonwaiver ............................................................................ 16 Article 13 Condemnation.......................................................................... 17 Article 14 Assignment and Subletting............................................................. 18 Article 15 Surrender of Premises; Removal of Trade Fixtures...................................... 20 Article 16 Holding Over.......................................................................... 21 Article 17 Estoppel Certificates................................................................. 21 Article 18 Subordination ........................................................................ 22 Article 19 Defaults: Remedies.................................................................... 22 Article 20 Attorneys' Fees....................................................................... 25 Article 21 Security Deposit ..................................................................... 25 Article 22 Signs ................................................................................ 26 Article 23 Compliance with Law................................................................... 26 Article 24 Late Charges ......................................................................... 27 Article 25 Landlord's Right to Cure Default; Payments By Tenant.................................. 27 Article 26 Entry by Landlord..................................................................... 28 Article 27 Tenant Parking ....................................................................... 28 Article 28 Miscellaneous Provisions.............................................................. 29 Exhibit A Site Plan, Exterior Elevations and Schematic Plans ................................... 1 Exhibit B Rules and Regulations................................................................. 1 Exhibit C Notice of Lease Term Dates............................................................ 1 Exhibit D General Maintenance Plan.............................................................. 1 Exhibit E Attornment and Nondisturbance Agreement .............................................. 1
i Summary of Basic Lease Information This Summary of Basic Lease Information (the "Summary") is hereby incorporated into and made a part of the attached Office Lease (this Summary and the Office Lease to be known collectively as the "Lease") which pertains to the multi- office project described in Section 6.1 below (the "Project"). Each reference in ----------- the Office Lease to any term of this Summary shall have the meaning as set forth in this Summary for such term. In the event of a conflict between the terms of this Summary and the Office Lease, the terms of the Office Lease shall prevail. Any initially capitalized terms used herein and not otherwise defined herein shall have the meaning as set forth in the Office Lease.
TERMS OF LEASE DESCRIPTION ----------- (References are to the Office Lease 1. Dates as of: TBD , TBD --------------- --- 2 Landlord: CREEKSIDE ASSOCIATES LLC, a California limited liability company 3 Address of Landlord 2656 Bridgeway, Suite 200 (Section 29.14): Sausalito, CA 94965 ------------- Attention: David Irmer With a copy to: T. Lawrence Jett 1815 Aston Avenue, Suite 106 Carlsbad, CA 92008 And to Richard W. Sweat, Esq. Post Kirby Noonan & Sweat LLP 600 West Broadway, Suite 1 100 San Diego, CA 92101 4. Tenant: TriNet Employer Group, Inc., a California corporation 5. Address of Tenant TriNet Employer Group, Inc. (Section 29.14): 101 Callan, San Leandro, CA 94577 ------------- Attention: Douglas P. Devlin (Prior to Lease Commencement Date) And Suite San Leandro, California Attention: (After Lease Commencement Date) 6. Premises (Article 1) . 6.1 Project: -----------
CREEKSIDE PLAZA ii TriNet Employer Group, Inc. As defined in Section 1.1 of the Lease 6.2 Buildings: Building A and Building C of Creekside Plaza, San Leandro, California 6.3 Premises: Building A is a four story building having approximately 100,350 square feet of gross building area and 96,974 square feet of usable/rentable space, all as shown in the exterior elevations and summary plans usable/rentable space, all as shown on the exterior elevations and summary plans attached hereto as Exhibit A. --------- 6.4 Tenant Improvements: Landlord will construct all Tenant Improvements agreed upon by Landlord and Tenant for Tenant's initial occupancy as described in Section 1.1.3. Landlord shall ------------- bear the cost of such Tenant Improvements up to $30.00 per usable/rentable square foot of space, which is $4,404,960.00 based upon the area of the Premises set forth in Section ------- 6.3 above. Tenant shall bear the cost of the --- Tenant Improvements in excess of that amount. 7. Term (Article 2). --------- 7.1 Lease Term: 15 years and a partial month so the term ends on the last day of a calendar month. 7.2 Lease Commencement Date: The earlier of (i) the date Tenant occupies all or a portion of the Premises (other than in connection with the construction of the same), and (ii) the date that the Premises are Ready for Occupancy, which is the date Landlord has substantially completed Landlord's work as described in Exhibit A, which includes --------- substantial completion of Buildings A and C, ground level parking and common area improvements providing access to such Buildings, which Lease Commencement Date is anticipated to be October 1, 2001. 7.3 Lease Expiration Date: The last day of the month in which the 15th anniversary of the Lease Commencement CREEKSIDE PLAZA iii TriNet Employer Group, Inc. Date occurs. 7.4 Option Two (2) Five (5) year options at same terms and conditions as the Lease. 8. Base Rent (Article 3): $2.25 per Sq. Ft., subject to reduction --------- pursuant to Article 3. Monthly Installment Lease Year Annual Base Rent of Base Rent ---------- ---------------- ------------ Year 1 Building A $2,618,298.00 $218,191.50 Year 1 Building C $1,346,166.00 $112,180.50 ------------- ----------- Assumes gross building area and $3,964,461.00 $330,372.00 ============= =========== usable/rentable square footage set forth in Section 6.3 above. 9. Base Rent Adjustments Annual increase in rent based on C.P.1. (Article 4). Increase not to exceed 5% in any given year. --------- 9.1 Base Year: The calendar year in which the Lease Commencement Date occurs. 10. Security Deposit Irrevocable Letter of Credit in the amount of (Article 21): $2,000,000 upon the Lease Commencement ---------- Date. Number of Parking Spaces 460 allocated parking spaces. (Article 27): ---------- 12. Brokers (Section 29.20): Kerry & Assoc. ------------- 151 Callan Avenue, Suite 202 San Leandro, CA 94577 13. Permitted Use General office use consistent with a first (Section 5): class office building project. --------- 14. Rules and Regulations Subject to Tenant's rights hereunder, Landlord may impose reasonable and nondiscriminatory rules and regulations for the use of the Common Areas by Landlord, Tenant and other tenants of the Project ("Rules and Regulations"). Landlord agrees to enforce such rules and regulations equally against all
CREEKSIDE PLAZA iv TriNet Employer Group, Inc. tenants, including Tenant. The Rules and Regulations in effect at the Lease Commencement Date are those attached hereto as Exhibit B. CREEKSIDE PLAZA v TriNet Employer Group, Inc. EXHIBITS A SITE PLAN, EXTERIOR ELEVATIONS AND SCHEMATIC PLANS B RULES AND REGULATIONS C NOTICE OF LEASE TERM DATES D GENERAL MAINTENANCE PLAN E ATTORNMENT AND NONDISTURBANCE AGREEMENT CREEKSIDE PLAZA vi TriNet Employer Group, Inc. INDEX OF MAJOR DEFINED TERMS
LOCATION OF DEFINITION DEFINED TERMS IN OFFICE LEASE --------------- Additional Rent............................................... Section 4 Base Rent..................................................... Article 3 Base Year..................................................... Section 4 Building...................................................... Article 1 Consumer Price Index.......................................... Section 4 Force Majeure................................................. Section 29.13 Holidays...................................................... Section 6.1.1 Lease Commencement Date....................................... Article 2 Lease Expiration Date......................................... Article 2 Lease Term.................................................... Article 2 Lease Year.................................................... Article 2 Notices....................................................... Section 29.14 Premises...................................................... Article 1 Rent.......................................................... Section 4 Security Deposit.............................................. Article 21 Successive Year............................................... Section 4 Transfer Notice............................................... Section 14.1 Transfer Premium.............................................. Section 14.3 Transferee.................................................... Section 14.1 Transfers..................................................... Section 14.1
CREEKSIDE PLAZA vii TriNet Employer Group,Inc. OFFICE LEASE This Office Lease, which includes the preceding Summary of Basic Lease Information (the "Summary'") attached hereto as pages (ii) through (viii) and incorporated herein by this reference (the Office Lease and Summary to be known sometimes collectively hereafter as the "Lease"). Dated as of the date set forth in Section 1 of the Summary, is made by and between "Landlord" and "Tenant" as those terms are defined in Sections 2 and 4 of the Summary, respectively. Article 1 Premises, Buildings, Project, Tenant Improvements and Common Areas, and the Adjacent Project 1.1 Premises Buildings, Tenant Improvements, Project and Common Areas. ----------------------------------------------------------------- 1.1.1 The Premises. Landlord hereby leases to Tenant and Tenant ------------ hereby leases from Landlord the premises set forth in Section 6.3 of the Summary ----------- (the "Premises"). The Site Plan, Exterior Elevations and Schematic Plans for the Premises are attached as Exhibit A hereto. The parties hereto agree that the --------- lease of the Premises is upon and subject to the terms, covenants and conditions herein set forth, and Tenant covenants as a material part of the consideration for this Lease to keep and perform each and all of such terms, covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of such performance. The Plans attached as Exhibit A shall not be --------- changed in any material way without Tenant's consent, which Tenant shall not unreasonably withhold. Exhibit A also shows the approximate location of Building --------- and the location of the "Common Areas," as that term is defined in Section 1.1.3 ------------- below. Except as specifically set forth in this Lease, Landlord shall not be obligated to provide or pay for any improvement work or services related to the improvement of the Premises. Tenant also acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty regarding the condition of the Premises, the Building or the Project or with respect to the suitability of any of the foregoing for the conduct of Tenant's business, except as specifically set forth in this Lease. Upon taking of possession of the Premises, Tenant shall determine whether the Premises at such time are in good and sanitary order, condition and repair. Tenant shall inform Landlord within forty-five (45) days of taking occupancy of its initial "punch list" of items needing repair. Failure to place a defect on the initial punch list shall not affect Landlord's obligations under Section 1.4 of this Lease. 1.1.2 The Building and The Project. The Premises are the two (2) ---------------------------- Buildings described in Section 6.2 of the Summary (collectively, the ----------- "Buildings"). Whenever the term "Buildings" is used, it refers to both Building A and Building C. The Buildings are part of an office project known as "Creekside." The term "Project," as used in this Lease, shall mean (i) the Buildings and the Common Areas relating to it. (ii) the land (which is improved with landscaping, Surface parking and or parking structure facilities and other improvements) upon which the Buildings and the Common Areas are located, (iii) the other office building located adjacent to the Buildings and the land upon which such adjacent office building is located, and (iv) at Landlord's discretion, any additional real property areas, land, buildings or other improvements added thereto outside of the Project. CREEKSIDE PLAZA ii TriNet Employer Group, Inc. 1.1.3 Tenant Improvements. Landlord will construct all Tenant ------------------- Improvements agreed upon by Landlord and Tenant for Tenant's initial occupancy, and Landlord will not unreasonably withhold its consent to Tenant-requested Tenant Improvements suitable for Tenant's use of the Building for its corporate headquarters. Landlord shall bear up to Thirty Dollars ($30.00) per usable/rentable square foot of the cost of Tenant Improvements, which totals Four Million Four Hundred Four Thousand Nine Hundred Sixty Dollars ($4,404,960.00) based upon the area of the Premises set forth in Section 6.3 of ----------- the Summary. Tenant shall bear all costs of Tenant Improvements in excess of that amount. Landlord is obligated to construct the shell of the Buildings, which includes the following which are not considered Tenant Improvements: a. The Structure of the Building shall be complete and water tight, including roofing, architectural sheet metal and complete finished exterior walls. b. Exterior walls shall have R-19 insulation in the wall and Sheetrock on the interior of the exterior wall taped and ready for paint. c. All site work for the Buildings shall be complete, including hardscape, landscape, paving, utilities and site lighting. d. Each floor of each Building shall have two (2) core restrooms, one men's and one women's, complete and finished, including all plumbing fixtures, toilet partitions, toilet accessories, ceramic tile floors, ceramic tile wainscot on wet walls to a height of six (6) feet, toilet exhaust system, sprinkler drops at the drywall ceiling and associated lighting and power receptacles. e. Two (2) hydraulic elevators per building serving all floors, complete with rated shafts, separate equipment room, sumps, ladders, grates and elevators with factory standard finishes. f. Two (2) exiting stairwells serving all floors in each building, complete with all rated partitions and doors, with the stairs to be of steel construction with concrete filled pans for treads. g. Each building shall have heating, ventilation and air conditioning units mounted on the roof with equipment appropriate to accommodate normal office use, with the shell to include vertical distribution of the supply and return ducting and all associated fire rated shafts. The shell does not include any portion of the distribution system on each floor, such as the individual floor loop piping systems. The shell does not include equipment for special cooling requirements for computer rooms or data centers. h. Electrical systems bringing power to each floor but not any portion of the distribution system on each floor. The shell will include the main switch gear for each Building installed with a house panel provided to accommodate site lighting, life-safety monitoring and landscape irrigation circuits. Power will be provided to all elevators, all heating, ventilation and air conditioning equipment. The shell includes a floor subpanel for each floor. CREEKSIDE PLAZA iii TriNet Employer Group, Inc. i. A fire sprinkler system for the entire shell with ceiling drops as required for other shell components such as restrooms, mechanical rooms, stairwells and shafts. All other drops and sprinkler system equipment are not included in the shell. j. Plumbing system to include roof drains and overflows, gas to rooftop, HVAC units, condensation piping for rooftop mechanical units, trunk sewer line under the slab on grade, all core restroom fixtures and related waste, vent and water piping, hot water heaters to provide warm water for restrooms, and drinking fountain and janitor sinks on each floor. The following are considered part of the Tenant Improvements (i) A third elevator in Building A (ii) Distribution systems for HVAC and electrical power on each floor. (iii) The cost of a generator in Building A and the systems to distribute the generated power are considered Tenant Improvements. Tenant Improvement plans shall be prepared by the Tenant by June 10, 2000, and approved by the Landlord on or before July 1, 2000. Tenant's share of Tenant Improvement costs shall be deposited with the construction lender prior to the construction of the Tenant Improvements. A copy of the as-built Tenant Improvement plan shall be attached to this Lease. 1.1.4 Common Areas. Tenant shall have the nonexclusive right to use ------------ in common with other tenants in the Project, and subject to the rules and regulations referred to in Article 5 of this Lease, those portions of the Project which are provided, from time to time, for use in common by Landlord, Tenant and any other tenants of the Project (such areas, together with such other portions of the Project designated by Landlord, in its discretion, including certain areas designated for the exclusive use of certain tenants, or to be shared by Landlord and certain tenants, are collectively referred to herein as the "Common Areas"). Subject to the terms of this Lease, the Landlord shall maintain the Common Areas in a first-class manner and in accordance with the General Maintenance Plan attached hereto as Exhibit E, but the exact manner --------- in which the tenants Common Areas are maintained and operated shall be determined by the Landlord, and the use thereof shall be subject to such reasonable rules, regulations and restrictions as Landlord may make from time to time pursuant to Article 5 below. If Tenant believes that Landlord is not --------- maintaining the Common Areas in a first-class manner, Tenant shall notify Landlord in writing if oral requests are not responded to in a timely manner. If Landlord fails, on three (3) occasions within any two (2) year period in its maintenance obligations, Tenant may require Landlord to employ a third party property manager to supervise maintenance of the Common Areas. Landlord reserves the right to close temporarily, make alterations or additions to, or change the location of elements of the Project and the Common Areas provided that changes to the Common Areas do not interfere in any material way with Tenant's access to and use of the Premises. Landlord specifically agrees that access to the parking portions of the Common Areas shall be controlled by gates activated by a card system or other system appropriate to ensure that, as much as possible, use of the parking area is restricted to persons employed by or having business with tenants in the Project. CREEKSIDE PLAZA iv TriNet Employer Group, Inc. Tenant, and Landlord agree to share equally the cost of security personnel for the Common Areas from 8:00 a.m. to 5:00 p.m. Monday through Friday, excluding holidays. The need to use such security personnel may be reviewed on the annual anniversary date of this Lease if requested by either party. 1.2 The Adjacent Project. The Project is located in the same city block -------------------- with, and is adjacent to, another office project known as the "Creekside Plaza." All reference in this Lease to the "Adjacent Project" shall be deemed to refer to the neighboring Creekside Plaza project. 1.3 Verification of Rentable Square Feet of Premises and Buildings. For -------------------------------------------------------------- purposes of this Lease, "rentable square feet" shall be calculated according to the Standard Method for Measuring Floor Area in Office Buildings, ANSI Z65.1 - 1996 ("BOMA"), provided that the rentable square footage of the Buildings and the Project shall include all of the gross building area except the mechanical equipment room on each floor and two (2) stairwells serving all floors of the Buildings. The lobby stairwell area for floors one and two of Building A is included in usable/rentable square footage. The rentable square feet of the Premises and the Buildings are subject to verification from time to time by Landlord's planner/designer and Tenant's planner/designer, and such verification shall be made in accordance with the provisions of this Article 1. All amounts, --------- percentages and figures appearing or referred to in this Lease based upon any incorrect rentable square footage (including, without limitation, the amount of the "Rent," as that term is defined in Section 4.1 of this Lease) shall be ----------- modified in accordance with such determination. If such determination is made, it will be confirmed in writing by Landlord to Tenant. 1.4 Landlord's Guarantee of Construction. Landlord guarantees all work ------------------------------------ performed in its construction of the Premises against defective workmanship and materials for a period of one (1) year from the date of substantial completion thereof and shall, at Landlord's sole cost and expense, repair and replace any such defective workmanship or material upon Tenant's written request. If any latent defects are found to exist at any time during the term hereof, Landlord shall correct the same at Landlord's cost. 1.5 Completion of Premises. Landlord agrees to commence grading on the ---------------------- Project on or before October 1, 2000, and agrees that the Premises will be ready for occupancy, including Tenant Improvements, by October 1, 2001. If the Premises is not ready for occupancy by December 31, 2001, Tenant shall have the right to terminate this Lease. By taking occupancy, Tenant waives that right. CREEKSIDE PLAZA v TriNet Employer Group, Inc. Article 2 Lease Term 2.1 Lease Term. The terms and provisions of this Lease shall be effective ---------- as of the date of this Lease. The term of this Lease (the "Lease Term") shall be as set forth in Section 7.1 of the Summary and shall commence on the date ----------- (the "Lease Commencement Date") set forth in Section 7.2 of the Summary, and ----------- shall terminate on the date (the "Lease Expiration Date") set forth in Section ------- 7.3 of the Summary, unless this Lease is sooner terminated as hereinafter - --- provided. As described in Section 7.4 of the Summary and in Section 2.2 below, ----------- ----------- the Tenant shall have the option to extend the Lease Term. For purposes of this Lease, the term "Lease Year" shall mean each consecutive twelve (12) month period during the Lease Term provided, however, that the first Lease Year shall commence on the Lease Commencement Date and end on the last day of the eleventh month thereafter and the second and each succeeding Lease Year shall commence on the first day of the next calendar month; and further provided that the last Lease Year shall end on the Lease Expiration Date. At any time during the Lease Term, Landlord may deliver to Tenant a notice in the form as set forth in Exhibit C, attached hereto, which Tenant shall execute and return to Landlord - ---------- within ten (10) days of receipt thereof. 2.2 Options to Extend Lease Term. Provided Tenant is not in default at the ---------------------------- time of each exercise, Tenant shall have two (2) options to extend the term of the Lease, each for a period of five (5) years, upon all of the terms and conditions herein stated. Landlord shall give written notice to Tenant no later than two hundred seventy (270) days prior to the end of the initial term and the then current term of the Lease that Tenant's option to extend will expire if not exercised and the date of expiration. Tenant shall provide written notice to Landlord no later than one hundred eighty (180) days prior to the expiration of the initial term or the then current term of the Lease of Tenant's option to extend the initial term or the then current term. 2.3 Option Term Rent. Minimum rent for the option periods (if such option ---------------- is exercised) shall be Fair Market Rent, determined in accordance with the following, except that in no event shall the Base Rent for the option term be less than the Base Rent in effect at the end of the immediately preceding portion of the Lease Term. At least ninety (90) days prior to the commencement date of the time period for which a determination of Fair Market Rent is required under the Lease, the parties shall meet and endeavor to agree upon the Fair Market Rent of the Premises as of the first day of the applicable period. In determining the Fair Market Rent for the Premises, the Premises shall be compared only to Class A office buildings of a similar quality and size in the same County. If, within forty-five (45) days, the parties cannot agree upon the Fair Market Rent for the Premises as of the first day of the applicable time period, the parties shall submit the matter to binding appraisal in accordance with the following procedure: Within sixty (60) days from the date of the first meeting between Landlord and Tenant, the parties shall either (1) jointly appoint an appraiser for this purpose, or (2) failing this joint action, separately designate a disinterested appraiser. The parties shall each pay one- half (1/2) of the fees and expenses of the jointly appointed appraiser: or, if the parties separately designate disinterested appraisers, the parties shall pay the fees and expenses of the appraiser appointed or designated by such party, and no person may be appointed as an appraiser unless he or she has at least five (5) years experience in appraising Class A office buildings in the same County and is a member of a recognized society of real estate appraisers. If the two (2) appraisers thus appointed cannot reach an agreement on the CREEKSIDE PLAZA vi TriNet Employer Group, Inc. Fair Market Rent within thirty (30) days after their appointment, the appraisers thus appointed shall appoint a third disinterested appraiser having like qualifications. If, within twenty (20) days after the third appraiser has been chosen, a majority of the appraisers cannot reach an agreement on the Fair Market Rent, then the average of the two (2) closest appraisals shall determine the Fair Market Rent. Each party shall pay one-half (1/2) of the fees and expenses of the third appraiser. In the event the parties have not agreed upon the Fair Market Rent of the Premises upon the commencement date of the applicable option period, then Tenant shall make a payment of Base Rent equal to the monthly installment required to be paid for the last month of the expired term each and every month until the Fair Market Rent has been determined. Upon such determination, the agreed upon Fair Market Rent shall be retroactive to the commencement date of the applicable Period. Tenant shall, within ten (10) days thereafter, make up any accumulated deficiency for all months of the applicable option period. From and after Fair Market Rent has been determined, Base Rent shall increase and be adjusted at the same rate as such adjustments were made during the initial term (i.e., annual CPI increases not to exceed five percent (5%)). Article 3 Base Rent Tenant shall pay, without notice or demand, to Landlord by electronic funds transfer to the bank account identified by Landlord, or in such other commercially reasonable manner as the parties may agree, base rent ("Base Rent") as set forth in Section 8 of the Summary, payable in equal monthly installments --------- as set forth in Section 8 of the Summary in advance on or before the first day --------- of each and every calendar month during the Lease Term, without any setoff or deduction whatsoever. However, as soon as practical after execution of this Lease, the parties shall obtain from the East Bay Municipal Water District and Pacific Gas & Electric the average estimated monthly cost of water, electricity and gas used at the Premises based upon the plans and specifications for the Premises, and the Base Rent shall be reduced by such amount. Further, the parties shall obtain three (3) estimates from reputable janitorial services of the cost of normal janitorial services to the Buildings, and the Base Rent shall be reduced by the average estimated monthly cost of such services. The Base Rent for the first full calendar month of the Lease Term, shall be paid at the Lease Commencement Date. If any Rent, payment date (including the Lease Commencement Date) falls on a day of a calendar month other than the first day of such calendar month or if any Rent payment is for a period which is shorter than one calendar month such as during the last month of the Lease Term, the Rent for any fractional calendar month shall accrue on a daily basis for the period from the date such payment is due to the end of such calendar month or to the end of the Lease Term at a rate per day which is equal to 1/365 of the Rent. All other payments or adjustments required to be made under the terms of this Lease that require proration on a time basis shall be prorated on the same basis. Article 4 Base Rent Adjustments The monthly rent, as specified in Article 3 above, shall be subject to increases per, Section 9.2 of the summary and further described in the following ----------- manner: CREEKSIDE PLAZA vii TriNet Employer Group, Inc. Consumer Price Index. Consumer price index adjustments ("the adjustment") ---------------------- shall be made at the commencement of the second year of lease term and every ------ successive year thereafter ("the adjustment date") as follows: - ---------- The basis for computing the adjustment shall be the U.S. Department of Labor, Bureau of Labor Statistic's Consumer Price Index for All Urban Consumers, all Items, 1982-84=100, for the San Francisco-Oakland area, ("Index"). The Index for the month immediately preceding the lease term commencement date shall be considered the "Beginning Index." If the Index for the month immediately preceding the adjustment date ("Comparison Index") is the greater than the Beginning Index, the Base Rent shall be increased by multiplying the Base Rent set forth in Article 3 by a fraction, the numerator of which is the Comparison Index and the denominator of which is the Beginning Index. Notwithstanding any subsequent decrease in the Index, the new Base Rent shall never be less than the rent for the month immediately preceding the adjustment date. On adjustment of the Base Rent Lessor shall notify Lessee by letter stating the new Base Rent. If the Index base year is changed so that it differs from 1982-84=100, the Index shall be converted in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics. If the Index is discontinued or revised during the term, such other government index or computation with which it is replaced shall be used in order to obtain substantially the same result as would be obtained if the index had not been discontinued or revised. Notwithstanding the above provision the increase in the Base Rent will not be more than five percent (5%) of the immediately preceding year's Base Rent. For example only; if the rent payable immediately preceding the adjustment date is $100 and the C.P.I. indexation is 1.04, then the maximum rent is $105 and the applicable rent is $104, the following year the figures will be 1.0816, $110.24 (max) respectively and $108.16 the applicable rent. Article 5 Use of Premises Tenant shall use the Premises solely for the "Permitted Use," as that term is defined in Section 13 of the Summary, and Tenant shall not use or permit the ---------- Premises to be used for any other purpose or purposes whatsoever without the prior written consent of Landlord, which shall not be unreasonably withheld or delayed. Landlord shall respond promptly to a request to change of use. Tenant further covenants and agrees that Tenant shall not use, or suffer or permit any person or persons to use, the Premises or any part thereof for any use or purpose contrary to the Rules and Regulations, or in violation of the laws of the United States of America, the State of California, or the ordinances, regulations or requirements of the local municipal or county governing body or other lawful authorities having jurisdiction over the Project. Tenant shall faithfully observe and comply with the Rules and Regulations set forth in Exhibit B attached hereto. Landlord shall not be responsible to Tenant for the - ---------- nonperformance of any of such Rules and Regulations by or otherwise with respect to the acts or omissions of any other tenants or occupants of the Project. Tenant shall comply with all recorded covenants, conditions, and restrictions now or hereafter affecting the Project. Tenant shall not use or allow another person or CREEKSIDE PLAZA viii TriNet Employer Group, Inc. entity to use any part of the Premises for the storage, use, treatment, manufacture or sale of hazardous materials or substances as defined pursuant to any applicable federal, state or local governmental or quasi-governmental law, code, ordinance, rule, or regulation. Landlord acknowledges, however, that Tenant will maintain products in the Premises which are incidental to the operation of its offices, such as photocopy supplies, secretarial supplies and limited janitorial supplies, which products contain chemicals which are categorized as hazardous materials. Landlord agrees that the use of such products in the Premises in compliance with all applicable laws and in the manner in which such products are designed to be used shall not be a violation by Tenant of this Article 5. --------- Article 6 Services and Utilities 6.1 Standard Tenant Services. Landlord shall provide the following ------------------------ services on all days during the Lease Term, unless otherwise stated below, and Tenant shall pay all charges for utilities in connection with the services. 6.1.1 Subject to all governmental rules, regulations and guidelines applicable thereto, Landlord shall provide heating and air conditioning facilities which Tenant may use at such hours as Tenant may select when necessary for normal comfort for normal office use in the Premises. 6.1.2 Landlord shall provide adequate electrical wiring and facilities for connection to Tenant's lighting fixtures and incidental use equipment. Tenant shall pay for all utilities used at the Buildings, and Landlord shall cause the utilities to be separately metered so they can be placed in Tenant's name. Tenant shall bear the cost of replacement of lamps, starters and ballasts for non-building standard lighting fixtures within the Premises. 6.1.3 Landlord shall provide facilities to bring city water to the regular Building outlets for drinking, lavatory and toilet purposes. All costs of water shall be paid by Tenant. 6.1.4 Landlord shall provide window washing services to the Buildings as least as often as provided to comparable first-class buildings in the vicinity of the Buildings, but in no event less than two (2) times per year. 6.1.5 Landlord shall provide two (2) elevators in the Buildings to be operated during such hours as Tenant shall select. Landlord shall pay the cost of servicing and repairing the elevators. 6.1.6 As part of the Tenant Improvements to be constructed by Landlord, the Buildings shall have an emergency, back-up power supply system that will assure the continuous supply of electrical power to the Buildings. The specifications for such system shall be supplied by Tenant and installed by Landlord at Tenant's expense as part of the Tenant Improvements. 6.2 Overstandard Tenant Use. If Tenant's use of the Buildings exceeds ----------------------- normal wear and tear, particularly with regard to utilities-providing facilities, such as electrical facilities, CREEKSIDE PLAZA ix TriNet Employer Group, Inc. heating and air conditioning, such that excessive wear and tear occurs, Tenant shall be responsible for the cost of remediating such excessive wear and tear. 6.3 Interruption of Use. Tenant agrees that Landlord shall not be liable ------------------- for damages, by abatement of Rent or otherwise, for failure to furnish or delay in furnishing any service (including telephone and telecommunication services), or for any diminution in the quality or quantity thereof, when such failure or delay or diminution is occasioned, in whole or in part, by repairs, replacements, or improvements, by any strike, lockout or other labor trouble, by inability to secure electricity, gas, water, or other fuel at the Project after reasonable effort to do so, by any accident or casualty whatsoever, by act or default of Tenant or other parties, or by any other cause beyond Landlord's reasonable control; and such failures or delays or diminution shall never be deemed to constitute an eviction or disturbance of Tenant's use and possession of the Premises or relieve Tenant from paying Rent or performing any of its obligations under this Lease. Furthermore, Landlord shall not be liable under any circumstances for a loss of, or injury to, property or for injury to, or interference with, Tenant's business, including, without limitation, loss of profits, however occurring, through or in connection with or incidental to a failure to furnish any of the services or utilities as set forth in this Article ------- 6. Landlord may comply with voluntary controls or guidelines promulgated by any - - governmental entity relating to the use or conservation of energy, water, gas, light or electricity or the reduction of automobile or other emissions without creating any liability of Landlord to Tenant under this Lease, provided that the Premises are not thereby rendered untenantable. If, however, Landlord defaults hereunder and fails to provide Tenant the quiet enjoyment of the Premises in any material way after a reasonable opportunity to cure the default, Tenant may terminate this Lease. Article 7 Repairs Landlord shall repair and maintain the structural portions of the Buildings, and the plumbing, heating, ventilating, airconditioning and electrical systems installed or fumished by Landlord and located within or outside the Premises, unless such maintenance and repairs are caused in part or in whole by the act, neglect, fault or omission of any duty by Tenant or the "Tenant Parties," as that term is defined in Section 10.1, below, in which event ------------ Tenant shall pay to Landlord, as Additional Rent, the reasonable cost of such maintenance and repairs. Tenant shall, at Tenant's own expense, pursuant to the terms of this Lease, including without limitation Article 8 hereof. keep the -------- Premises, including all improvements, fixtures and furnishings therein, in good order, repair and condition at all times during the Lease Term, reasonable wear and tear excepted. If either Landlord or Tenant fails in its obligations to make, or to commence making and diligently pursue, a repair under the terms of this Lease, after reasonable notice, assumed to be thirty (30) days in nonemergency situations, the other party may accomplish the repair at the expense of the party failing to make the repair, provided such expense is reasonable, and provided the party charged has had a fair opportunity to accomplish the repair. Landlord may, but shall not be required to, enter the Premises at all reasonable times to make such repairs, alterations, improvements and additions to the Premises or to the Project or to any equipment located in the Project as Landlord shall desire or deem necessary or as Landlord may be required to do by governmental or quasi-governmental authority or court order or decree. Tenant hereby waives and CREEKSIDE PLAZA x TriNet Employer Group, Inc. releases its right to make repairs at Landlord's expense under Sections 1941 and 1942 of the California Civil Code or under any similar law, statute, or ordinance now or hereafter in effect. Article 8 Additions and Alterations 8.1 Landlord's Consent to Alterations. Tenant may make any improvements, --------------------------------- alterations, additions or changes to the Premises (collectively, the "Alterations") consistent with general office use so long as such Alterations (i) have no effect on the exterior of the Buildings or its appearance, (ii) do not block windows, (iii) do not result in demising walls ending in the middle of windows, (iv) have no effect on the structural elements, and (v) will not cause excessive wear on Buildings systems, such as electrical, plumbing and HVAC systems, and no Landlord consent is required. All other Alterations require the prior written consent of Landlord, which consent shall not be unreasonably withheld. Landlord shall promptly respond to requests for its consent. Such Alterations shall (i) comply with all applicable laws, ordinances, rules and regulations; (ii) are compatible with the Project and its mechanical, electrical, heating, ventilating, air-conditioning, and life safety systems; (iii) are not visible from the exterior of the Buildings; and (iv) do not affect the structural portions of the Buildings. Tenant shall notify Landlord of all Alterations within thirty (30) days of completion and shall provide Landlord with a copy of any "as built" plans and a copy of the improvement plans submitted to a governmental agency for issuance of a permit. The construction of the initial improvements to the Premises shall be in accordance with the Tenant Improvement Plans, attached hereto as Exhibit D, and not the terms of this --------- Article 8. - --------- 8.2 Manner of Construction. Landlord may impose, as a condition of its ---------------------- consent to unique Alterations or repairs of the Premises the requirement that upon Landlord's request, Tenant shall, at Tenant's expense, remove such Alterations upon the expiration or any early termination of the Lease Term, and/or the requirement that Tenant utilize for such purposes only contractors, materials, mechanics and materialmen selected by Landlord. Landlord may also require Tenant, at the expiration or early termination of the Lease Term, to remove Tenant Improvements made without Landlord's consent. Tenant shall construct such Alterations and perform such repairs in conformance with any and all applicable rules and regulations of any federal, state, county or municipal code or ordinance and pursuant to a valid building permit, issued by the applicable governmental authorities. All work with respect to any Alterations must be done in a good and workmanlike manner and diligently prosecuted to completion to the end that the Premises shall at all times be a complete unit except during the period of work. In performing the work of any such Alterations, Tenant shall have the work performed in such manner as not to unreasonably obstruct access to the Buildings, the Project, or the Common Areas for any other tenant of the Project, and as not to unreasonably obstruct the business of Landlord or other tenants in the Buildings and/or the Project, or unreasonably interfere with the labor force working in the Project. Upon completion of any Alterations, Tenant agrees to cause a timely Notice of Completion to be recorded in the office of the County Recorder in accordance with the terms of Section 3093 of the Civil Code of the State of California or any successor statute. CREEKSIDE PLAZA xi TriNet Employer Group, Inc. 8.3 Payment for Improvements. Tenant shall promptly pay all contractors, ------------------------ subcontractors and materialmen supplying labor and materials to any work being done by Tenant at the Premises. 8.4 Construction Insurance. In the event that Tenant makes any Alterations ---------------------- Tenant agrees to carry "Builder's All Risk" insurance in an amount reasonably approved by Landlord covering the construction of such Alterations, and such other insurance as Landlord may require, it being understood and agreed that all of such Alterations shall be insured by Tenant pursuant to Article 10 of this ---------- Lease immediately upon completion thereof. 8.5 Landlord's Property. All Alterations, improvements, fixtures, signs ------------------- and/or equipment which may be installed or placed in or about the Premises by Tenant shall be and become the property of Landlord, except that Tenant may remove any Alterations, improvements, fixtures and/or equipment which Tenant can substantiate to Landlord have not been paid for with any tenant improvement allowance funds provided to Tenant by Landlord, provided Tenant repairs any damage to the Premises and the Buildings caused by such removal. If Tenant fails to complete such removal and/or to repair any damage caused by the removal of any Alterations as required herein, Landlord may do so and may charge the cost thereof to Tenant. Article 9 Covenant Against Liens Tenant has no authority or power to cause or permit any lien or encumbrance of any kind whatsoever, whether created by act of Tenant, operation of law or otherwise, to attach to or be placed upon the Project, the Buildings or the Premises, and any and all liens and encumbrances created by Tenant shall attach to Tenant's interest only. Landlord shall have the right at all times to post and keep posted on the Premises any notice which it deems necessary for protection from such liens. Tenant covenants and agrees not to suffer or permit any lien of mechanics or materialmen or others to be placed against the Project, the Buildings or the Premises with respect to work or services claimed to have been performed for or materials claimed to have been furnished to Tenant or the Premises, and, in case of any such lien attaching or notice of any lien, Tenant covenants and agrees to cause it to be immediately released and removed of record. Notwithstanding anything to the contrary set forth in this Lease, in the event that such lien is not released and removed on or before the date occurring ten (10) days after Landlord's written notice to Tenant, Landlord may immediately take all action necessary to release and remove the lien, without any duty to investigate the validity of it, unless Tenant has properly bonded against the lien as provided by law and has commenced legal action to contest, dispute or defend the claims of the lienholders or the validity of the liens and continues to prosecute such action to judgment. CREEKSIDE PLAZA xii TriNet Employer Group, Inc. Article 10 Insurance 10.1 Indemnification and Waiver. -------------------------- 10.1.1 Absent Landlord's gross negligence or willful misconduct, and to the extent not prohibited by law, Landlord, its partners, trustees, ancillary trustees and their respective officers, directors, shareholders, beneficiaries, agents, servants, employees, and independent contractors (collectively. the "Landlord Parties") shall not be liable for any damage either to person or property or resulting from the loss of use thereof, which damage is sustained by Tenant or by other persons claiming through Tenant. Tenant shall indemnify, defend, protect, and hold harmless Landlord Parties from loss, cost, damage, expense and liability (including without limitation court costs and reasonable attorneys' fees) incurred in connection with or arising from any cause related to Tenant's occupancy in, on or about the Premises or any acts, omissions or negligence of Tenant or of any person claiming through Tenant and its officers, agents, servants, employees, and independent contractors (collectively, the "Tenant Parties"), in, on or about the Project, regardless of whether the claim is made during, or after the expiration of the Lease Term, so long as the events giving rise to the claim occur during the Lease Term, provided that the terms of the foregoing indemnity shall not apply to the gross negligence or willful misconduct of Landlord or the Landlord Parties. Should Landlord be named as a defendant in any suit brought against Tenant in connection with the foregoing indemnity, Tenant shall defend Landlord with counsel reasonably acceptable to Landlord, provided Landlord's insurer allows such arrangement. Further, Tenant's agreement to indemnify Landlord pursuant to this Section 10.1 is not intended ------------ and shall not relieve any insurance carrier of its obligations under policies required to be carried by Tenant pursuant to the provision of this Lease, to the extent such policies cover the matters subject to Tenant's indemnification obligations; nor shall they supersede any inconsistent agreement of the parties set forth in any other provision of this Lease. The provisions of this Section ------- 10.1 shall survive the expiration or sooner termination of this Lease for a - ----- period of one (1) year with respect to any claims or liability occurring prior to such expiration or termination. 10.1.2 After Tenant's gross negligence or willful misconduct, Landlord shall, with counsel selected by Landlord's insurer, indemnify, defend and hold harmless Tenant Parties from and against all claims for damages to property outside the Premises to the extent that such claims are covered by insurance carried or required to be carried by Landlord pursuant to the terms of this Lease. In addition, Landlord shall, with counsel reasonably acceptable to Tenant, indemnify, defend and hold harmless Tenant Parties from and against all claims resulting from the gross negligence, omissions or willful misconduct of Landlord in connection with Landlord's activities in, on or about the Project or the Buildings. 10.2 Tenant's Compliance with Landlord's Fire and Casualty Insurance. The ---------------------------------------------------------------- coverage and amounts of insurance carried by Landlord in connection with the Project shall at a minimum be comparable to the coverage and amounts of insurance which are carried by reasonably prudent landlords of comparable buildings located in the vicinity of the Project. Tenant shall, at Tenant's expense, comply with all insurance company requirements pertaining to the Tenant's use of the Premises for general office purposes. If Tenant's conduct or use of the Premises causes any increase in the premium for any insurance at Tenant's expense, shall comply with all rules, orders, CREEKSIDE PLAZA xiii TriNet Employer Group, Inc. regulations or requirements of the American Insurance Association (formerly the National Board of Fire Underwriters) and with any similar body. 10.3 Tenant's Insurance. Tenant shall maintain the following coverages in ------------------ the following amounts. 10.3.1 Commercial General Liability Insurance covering the insured against claims of bodily injury, personal injury and property damage arising out of Tenant's operations, assumed liabilities or use of the Premises, including a Commercial General Liability endorsement covering the insuring provisions of this Lease and the performance by Tenant of the indemnity agreements set forth in Section 10.1 of this Lease, for limits of liability not less than: (i) Bodily ------------ Injury and Property Damage Liability - $3,000,000 for each occurrence and $3,000,000 annual aggregate, and (ii) Personal Injury Liability - $3,000,000 each occurrence and $3,000,000 annual aggregate. 10.3.2 Physical Damage Insurance covering (i) all office furniture, trade fixtures, office equipment, merchandise and all other items of Tenant's property on the Premises installed by, for, or at the expense of Tenant, (ii) the "Tenant Improvements," as that term is defined in the Tenant Improvement Plans, and (iii) all other improvements, alterations and additions to the Premises. Such insurance shall be written on an "all risks" of physical loss or damage basis, for the guaranteed replacement cost value new without deduction for depreciation of the covered items and in amounts that meet any co-insurance clauses of the policies of insurance and shall include a vandalism and malicious mischief endorsement, sprinkler leakage coverage and earthquake sprinkler leakage coverage. 10.3.3 Loss-of-income and extra-expense insurance in such amounts as will reimburse Tenant for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent tenants or attributable to prevention of access to the Premises or to the Project as a result of such perils. 10.3.4 Form of Policies. The minimum limits of policies of insurance ---------------- required of Tenant under this Lease shall in no event limit the liability of Tenant under this Lease. Such insurance shall (i) name Landlord, and any other party it so specifies by written notice, as an additional insured; (ii) specifically cover the liability assumed by Tenant under this Lease, including, but not limited to, Tenant's obligations under Section 10.1 of this Lease; (iii) ------------ be issued by an insurance company having a rating of not less than A-XII in Best's Insurance Guide or which is otherwise acceptable to Landlord and authorized to do business in the State of California; (iv) be primary insurance as to all claims thereunder and provide that any insurance carried by Landlord is excess and is noncontributing with any insurance requirement of Tenant; (v) provide that said insurance shall not be canceled or coverage changed unless thirty (30) days' prior written notice shall have been given to Landlord and any mortgagee of Landlord; and (vi) contain a crossliability endorsement or severability of interest clause acceptable to Landlord. Tenant shall delivery said policy or policies or certificates thereof to Landlord on or before the Lease Commencement Date and at least thirty (30) days prior before the expiration dates thereof. Policies of insurance provided for herein may be carried under blanket or umbrella policies which the insuring party has in force. CREEKSIDE PLAZA xiv TriNet Employer Group, Inc. 10.4 Subrogation. Landlord and Tenant agree to have their respective ----------- insurance companies issuing property damage insurance waive any rights of subrogation that such companies may have against Landlord or Tenant, as the case may be, so long as the insurance carried by Landlord and Tenant, respectively, is not invalidated thereby. As long as such waivers of subrogation are contained in their respective insurance policies, Landlord and Tenant hereby waive any right that either may have against the other on account of any loss or damage to their respective property to the extent such loss or damage is insurable under policies of insurance for tire and all risk coverage, theft, or other similar insurance. If either party fails to carry the amounts and types of insurance required to be carried by its pursuant to this Article 10, in addition to any ---------- remedies the other party may have under this Lease, such failure shall be deemed to be a covenant and agreement by such party to self-insure with respect to the type and amount of insurance which such party so failed to carry, with full waiver of subrogation with respect thereto 10.5 Earthquake Insurance. Landlord and Tenant agree to obtain earthquake -------------------- insurance covering their respective interest in the Buildings and the Tenant Improvements. Article 11 Damage and Destruction CREEKSIDE PLAZA xv TriNet Employer Group, Inc. 11.1 Repair of Damage to Premises by Landlord. Tenant shall promptly ---------------------------------------- notify Landlord of any damage to the Premises resulting from fire or any other casualty or any condition existing in the Premises as a result of a fire or other casualty that would give rise to the terms of this Article 11. If the ---------- Premises or any Common Areas of the Project serving or providing access to the Premises shall be damaged by fire or other casualty or be subject to a condition existing as a result of a fire or other casualty, Landlord shall promptly and diligently, subject to reasonable delays for insurance adjustment and permitting by the building department or other matters beyond Landlord's reasonable control, and subject to all other terms of this Article 11, restore the ---------- Buildings and such Common Areas to substantially the same condition as existed prior to the casualty, except for modifications required by zoning and building codes and other laws or by the holder of a mortgage on the Buildings or the Project. Notwithstanding any other provision of this Lease, upon the occurrence of any damage to the Premises, upon notice (the "Landlord Repair Notice") to Tenant from Landlord, Tenant shall assign to Landlord (or to any party designated by Landlord) all insurance proceeds payable to Tenant under Tenant's insurance required under Section 10.3 of this Lease covering Tenant Improvements ------------- that are fixtures, and Landlord shall repair any injury or damage to the Tenant Improvements installed in the Premises and shall return such Tenant Improvements installed in the Premises and shall return such Tenant Improvements to their original condition; provided that if the cost of repair of Tenant Improvements not originally constructed by Landlord exceeds the amount of insurance proceeds received by Landlord from Tenant's insurance carrier, assigned by Tenant, the cost of such repairs shall be paid by Tenant to Landlord prior to Landlord's repair of the damage. Landlord shall not be liable for any inconvenience or annoyance to Tenant or its visitors, or injury to Tenant's business resulting in any way from such damage or the repair thereof; provided however, that if such fire or other casualty shall have damage the Premises or Common Areas necessary to Tenant's occupancy, and if such damage is not the result of the negligence or willful misconduct of Tenant or Tenant's employees, contractors, licensees, or invitees, Landlord shall allow Tenant a proportionate abatement of Rent, during the time and to the extent the Premises are unfit for occupancy for the purposes permitted under this Lease, and not occupied by Tenant as a result thereof; provided, further, if the Premises is damaged such that the remaining portion thereof is not sufficient to allow Tenant to conduct its business operations from such remaining portion and Tenant does not conduct its business operations therefrom, and if such damage is not the result of the negligence or willful misconduct of Tenant or any of the Tenant Parties, Landlord shall allow Tenant a total abatement of Rent during the time and to the extent the Premises are unfit for occupancy for the purposes permitted under this Lease, and not occupied by Tenant as a result of the subject damage. Since Tenant is carrying business interruption insurance, and Landlord is carrying rental-replacement insurance, and both parties shall carry earthquake insurance covering their respective interests in the Premises, Landlord and Tenant shall cooperate, each with the other, to minimize the impact of the casualty upon the other party. Further, in the event that Tenant requests Landlord to construct modified Tenant Improvements in any rebuilding, Landlord may condition its consent to such modifications on confirmation by Landlord's architect (which confirmation Landlord shall pursue in good faith) that the modifications will not increase the scope of work or the time necessary to complete the Tenant Improvements and may further condition its consent to Tenant's agreement to pay any excess costs caused by such modifications. 11.2 Landlord and Tenant's Option to Terminate Lease. Notwithstanding ----------------------------------------------- the terms of Section 11.1 of this Lease, Landlord may elect not the rebuild ------------ and/or restore the Premises, the Buildings and/or the Project, and instead terminate this Lease by notifying Tenant in writing of CREEKSIDE PLAZA xvi TriNet Employer Group, Inc. such termination within sixty (60) days after the date of damage, such notice to include a termination date giving Tenant ninety (90) days to vacate the Premises, but Landlord may so elect only if the Buildings or the Project shall be damaged by fire or other casualty or cause or be subject to a condition existing as a result of such a fire or other casualty or cause, whether or not the Premises are affected, and one or more of the following conditions is present: (i) repairs cannot reasonably be completed within one hundred eighty (180) days of the date of damage (when such repairs are made without the payment of overtime or other premiums); (ii) the holder of any mortgage on the Buildings and/or the Project, or ground lessor with respect to the Project and/or the Buildings shall require that the insurance proceeds or any portion thereof be used to retire the mortgage debt: or (iii) the damage or condition arising as a result of such damage is not fully covered, except for deductible amounts, by Landlord's insurance policies; provided, however, that if Landlord does not elect to terminate this Lease pursuant to Landlord's termination right as provided above, and the repairs cannot be completed within two hundred ten (210) days after being commenced, Tenant may elect, no earlier than sixty (60) days after the date of the damage and not later than ninety (90) days after the date of such damage, to terminate this Lease by written notice to Landlord effective as of the date specified in the notice, which date shall not be less than thirty (30) days nor more than sixty (60) days after the date of the damage. Tenant may request that Landlord inform Tenant of Landlord's reasonable opinion of the date of completion of the repairs and Landlord shall respond to such request with five (5) business days. Tenant's obligation to pay rent terminates the date of vacation of the Premises. 11.3 Waiver of Statutory Provisions. The provisions of this Lease, ------------------------------ including this Article 1 1, constitute an express agreement between Landlord and ----------- Tenant with respect to any and all damage to, or destruction of, all or any part of the Premises, the Buildings, or the Project, and any statute or regulation of the State of California, including, without limitation, Sections 1932(2) and 1933(4) of the California Civil Code, with respect to any rights or obligations concerning damage or destruction in the absence of an express agreement between the parties, and any other statute or regulation, now or hereafter in affect, shall have no application to this Lease or any damage or destruction to all or any part of the Premises, the Buildings, or the Project. 11.4 Damage Near End of Term. In the event that the Premises or the ----------------------- Buildings are destroyed or damaged to any substantial extent during the last eighteen (18) months of the Lease Term and, in the reasonable judgment of Landlord, the damage or destruction to the Premises or the Buildings cannot be repaired by the date which is six (6) months prior to the Lease Expiration Date, then notwithstanding anything contained in this Article 11, either Landlord or ---------- Tenant shall have the option to terminate this Lease by giving written notice to the other party of the exercise of such option with thirty (30) days after such damage or destruction, in which event this Lease shall cease and terminate as of the date of such notice, Tenant shall pay the Base Rent and Additional Rent, properly apportioned up to such date of damage, and both parties hereto shall thereafter be freed and discharged of all further obligations hereunder, except as provided for in provisions of this Lease which by their terms survive the expiration or earlier termination of the Lease Term. However, if Tenant has the right to extend the term of this Lease by exercising an option to do so under Article 2, Tenant may exercise such option and avoid Landlord's right to terminate this Lease. Article 12 CREEKSIDE PLAZA xvii TriNet Employer Group, Inc. Nonwaiver No waiver of any provision of this Lease shall be implied by any failure of either party to enforce any remedy on account of the violation of such provision, even if such violation shall continue or be repeated subsequently, any waiver by a party of any provision of this Lease may only be in writing, and no express waiver shall affect any provision other than the one specified in such waiver and that one only for the time and in the manner specifically stated. No receipt of monies by a party after the termination of this Lease shall in any way alter the length of the Lease Term or of either party's right of possession hereunder or after the giving of any notice shall reinstate, continue or extend the Lease Term or affect any notice given to either party prior to the receipt of such monies. It is agreed that after the service of notice or the commencement of a suit or after final judgment for possession of the Premises, Landlord may receive and collect any Rent due, and the payment of said Rent shall not waive or affect said notice, suit or judgment. No payment by Tenant or receipt or acceptance by Landlord of a lessor amount than the correct Rent due shall be deemed to be other than a payment on account, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance, treat such partial payment as a default or pursue any other remedy provided in this Lease or at law. Further, it is agreed that Tenant may receive a payment from Landlord, and such payment shall not waive or otherwise affect Tenant's rights unless Tenant shall expressly so agree. Further, no endorsement or statement of any check or any letter accompanying any check or payment shall be deemed in a court and satisfaction, and Tenant may accept such check or payment without prejudice to Tenant's rights to recover the balance, treat such partial payment as a default or pursue any other remedy provided in this Lease or at law. Article 13 Condemnation If twenty-five percent (25%) or more of the Premises, the Buildings, or the Project shall be taken by power of eminent domain or condemned by any competent authority for any public or quasi-public use or purpose, or if Landlord shall grant a deed or other instrument in lieu of such taking by eminent domain or condemnation, Landlord shall have the option to terminate this Lease upon ninety (90) days' notice, provided such notice is given no later than one hundred eighty (180) days after the date of such taking, condemnation, reconfiguration, vacation, deed or other instrument. If any material portion of the Premises is taken, or if access to the Premises is substantially impaired, or parking areas allocated to Tenant are reduced by ten percent (10%) or more without comparable replacement parking, Tenant shall have the option to terminate this Lease upon ninety (90) days' notice, provided such notice is given no later than one hundred eighty (180) days after the date of such taking. Landlord shall be entitled to receive the entire award or payment in connection therewith, except that (i) Tenant shall be entitled to a portion of such award based upon the amount paid by Tenant for Tenant Improvements at the time of construction of the Buildings compared to the total amount paid by Landlord to acquire the Property and construct the Buildings and related common areas, and (ii) Tenant shall have the right to file any separate claim available to Tenant for any taking of Tenant's personal property and fixtures belonging to Tenant and removable by Tenant upon expiration of the Lease Term pursuant to the terms of this Lease, and for moving expenses, so long as such claim does not CREEKSIDE PLAZA xviii TriNet Employer Group, Inc. diminish the award available to Landlord, its ground lessor with respect to the Buildings and/or the Project or its mortgagee, and such claim is payable separately to Tenant. All Rent shall be apportioned as of the date of such termination, or the date of such taking, whichever shall first occur. If any part of the Premises shall be taken, and this Lease shall not be so terminated, the Rent shall be proportionately abated. Tenant hereby waives any and all rights it might otherwise have pursuant to Section 1265.1230 of the California Code of Civil Procedure. Article 14 Assignment and Subletting 14.1 Assignment by Tenant. Tenant may assign Tenant's interest in this -------------------- Lease to a third party so long as (i) Tenant remains fully liable and responsible for the obligations imposed by this Lease and (ii) Landlord consents to such assignment, with such consent not to be unreasonably withheld. If Tenant shall desire Landlord's consent to any assignment, Tenant shall notify Landlord in writing, which notice (the "Notice") shall include (i)the proposed effective date of the assignment, which shall not be less than thirty (30) days nor more than one hundred eighty ( 180) days after the date of delivery of the Notice, (ii) all of the terms of the proposed assignment and the consideration therefor, including a calculation of the "Transfer Premium," as that term is defined in Section 14.3, below, in connection with such assignment, the name and address of - ------------ the proposed assignee, and a copy of all existing and/or proposed documentation pertaining to the proposed assignee, including all existing operative documents to be executed to evidence such assignment or the agreements incidental or related to such assignment, (iv) current financial statements of the proposed assignee certified by an officer, partner or owner thereof, and any other information required by Landlord, which will enable Landlord to determine the financial responsibility, character, and reputation of the proposed assignee, nature of such assignee's business and proposed use of the Subject Space, (v) an executed estoppel certificate from Tenant in the form attached hereto as Exhibit ------- E, and (vi) such other information as Landlord may reasonably require. Any - - assignment made without Landlord's prior written consent shall, at Landlord's option, be null, void and of no effect, and shall, at Landlord's option, constitute a default by Tenant under Section 19.1.2 of this Lease. Whether or --------------- not Landlord shall grant consent, Tenant shall pay Landlord's reasonable review and processing fees, as well as any reasonable legal fees incurred by Landlord, within thirty (30) days after written request by Landlord. 14.2 Landlord's Consent. Landlord shall not unreasonably withhold its ------------------ consent to any proposed assignment of the Lease on the terms specified in the Notice. The parties hereby agree that it shall be deemed to be reasonable under this Lease and under any applicable law for Landlord to withhold consent to any proposed assignment where one or more of the following apply, without limitation as to other reasonable grounds for withholding consent: 14.2.1 The assignee is of a character or reputation or engaged in a business which is not consistent with the quality of the Project; 14.2.2 The assignee is either a governmental agency or instrumentality thereof (i) which is that of a foreign country, (ii) which is of a character or reputation, is engaged in a business, or is of, or is associated with, a political orientation or faction, which is inconsistent with the quality of the Project, or which would otherwise reasonably offend a landlord of a comparable CREEKSIDE PLAZA xix TriNet Employer Group, Inc. building located in the vicinity of the Project, (iii) which is capable of exercising the power of eminent domain or condemnation, or (iv) which would significantly increase the human traffic in the Premises, the Buildings, and/or the Project: 14.2.3 The assignee's intended use of the Premises is inconsistent with the Permitted Use; or 14.2.4 The assignee is not a party of reasonable financial worth and/or financial stability in light of the responsibilities involved under the Lease on the date consent is requested; Notwithstanding anything to the contrary in this Lease, if Tenant or any proposed assignee claims that Landlord has unreasonably withheld or delayed its consent under Section 14.2 or otherwise has breached or acted unreasonably under ------------- this Article 14, their sole remedies shall be declaratory judgment and an ---------- injunction for the relief sought without any monetary damages, and Tenant hereby waives any right at law or equity to terminate this Lease. 14.3 Assignment Premium. If Landlord consents to an assignment as a ------------------ condition thereto which the parties hereby agree is reasonable, Tenant shall pay to Landlord fifty percent (50%) of any "Transfer Premium," as that term is defined in this Section 14.3, received by Tenant from such assignee. "Transfer ------------ Premium" shall mean all rent, additional rent or other consideration payable by such assignee in excess of the Rent and Additional Rent payable by Tenant under this Lease, on a per rentable square foot basis if less than all of the Premises is transferred, after deducting the reasonable expenses incurred by Tenant for (i) any changes, alterations and improvements to the Premises in connection with the assignment, (ii) any brokerage commissions in connection with the assignment, and (iii) any costs to buy-out or takeover the previous lease of an assignee. "Transfer Premium" shall also include, but not be limited to, key money and bonus money paid by assignee to Tenant in connection with such assignment, and any payment in excess of fair market value for services rendered by Tenant to assignee or for assets, fixtures, inventory, equipment, or furniture transferred by Tenant to assignee in connection with such assignment. In the calculations of the Rent, the Rent paid during each annual period shall be computed after adjusting such rent to the actual effective rent to be paid, taking into consideration any and all leasehold concessions granted in connection therewith, including, but not limited to, any rent credit and tenant improvement allowance. For purposes of calculating any such effective rent, all such concessions shall be amortized on a straight-line basis over the relevant term. 14.4 Landlord's Option as to Subject Space. Notwithstanding anything to the ------------------------------------- contrary contained in this Article 14, Landlord shall have the option, by giving ---------- written notice to Tenant within thirty (30) days after receipt of any Transfer Notice which notifies Landlord that Tenant no longer occupies any portion of the Buildings. to (i) recapture the Premises, or (ii) take an assignment from Tenant. The Landlord shall have such rights only if Tenant no longer occupies a significant part of both Buildings A and C. Such recapture, or sublease or assignment notice shall cancel and terminate the Lease, or create a sublease or assignment, as the case may be, with respect to the Buildings as of the date stated in the Transfer Notice as the effective date of the proposed Transfer until the last day of the term of the Transfer as set forth in the Transfer Notice. In the event of a recapture by Landlord, if this Lease shall be canceled. CREEKSIDE PLAZA xx TriNet Employer Group, Inc. 14.5 Non-Transfers. Notwithstanding anything to the contrary contained in ------------- this Lease, neither (i) an assignment to a transferee of all or substantially all of the assets of Tenant, (ii) an assignment of the Premises to a transferee which is the resulting entity of a merger of consolidation of Tenant with another entity, nor (iii) an assignment or subletting of all or a portion of the Premises to an affiliate of Tenant (an entity which is controlled by, controls, or is under common control with, Tenant). shall be deemed a Transfer under Article 14 of this Lease, provided that Tenant notifies Landlord of any such - ----------- assignment or sublease and promptly supplies Landlord with any documents or information reasonably requested by Landlord regarding such transfer or transferee as set forth in items (i) through (iii) above, that such transferee or affiliate shall have a net worth at least equal to the net worth of Tenant immediately prior to such assignment. 14.6 Subleases. Tenant may sublease portions of the Buildings without --------- Landlord's consent provided the sublease and sublessee meet the criteria set forth in Section 14.2 hereof. Tenant shall supply to Landlord copies of all ------------- subleases entered into by Tenant with third parties. If Tenant subleases all or substantially all of the Premises, a sublease shall be considered an assignment subject to the requirements of Sections 14.1-14.3 of this Lease. ------------------- Article 15 Surrender of Premises; Removal of Trade Fixtures 15.1 Surrender of Premises. No act or thing done by Landlord or any agent --------------------- or employee of Landlord during the Lease Term shall be deemed to constitute an acceptance by Landlord of a surrender of the Premises unless such intent is specifically acknowledged in a writing signed by Landlord. The delivery of keys to the Premises to Landlord or and agent or employee of Landlord shall not constitute a surrender of the Premises or effect a termination of this Lease, whether or not the keys are thereafter retained by Landlord, and notwithstanding such delivery Tenant shall be entitled to the return of such keys at any reasonable time upon request until this Lease shall have been terminated. The voluntary or other surrender of this Lease by Tenant, whether accepted by Landlord or not, or a mutual termination hereof, shall not work a merger, and at the option of Landlord, exercised by written notice to all subtenants within ten (10) days from the surrender or termination shall operate as an assignment to Landlord of all subleases or subtenancies affecting the Premises. 15.2 Removal of Tenant Property by Tenant. All articles of personal ------------------------------------ property and all business and trade fixtures, machinery and equipment, furniture and movable partitions owned by Tenant or installed by Tenant at its expense in the Premises, which items are not a part of the Tenant Improvements installed in the Premises, shall remain the property of Tenant, and may be removed by Tenant at any time during the Lease Term as long as Tenant is not in default under this Lease with any applicable cure period having expired. Upon the expiration of the Lease Term, or upon any earlier termination of this Lease, Tenant shall, subject to the provisions of this Article 15, quit and surrender possession of the -------- Premises to Landlord in as good order and condition as when Tenant took possession and as thereafter improved by Landlord and/or Tenant. reasonable wear and tear and repairs which are specifically made the responsibility of Landlord hereunder excepted. Upon such expiration or termination, Tenant shall, without expense to Landlord, remove or cause to be removed from the Premises all debris and rubbish, and such items of furniture, equipment, free-standing cabinet work, and other articles of personal property owned by Tenant or CREEKSIDE PLAZA xxi TriNet Employer Group, Inc. installed or placed by Tenant at its expense in the Premises, and such similar articles of any other persons claiming under Tenant at its expense in the Premises, and such similar articles of any other persons claiming under Tenant at its expense in the Premises, and such similar articles of any other persons claiming under Tenant, as Landlord may require to be removed, and Tenant shall repair at its own expense all damage to the Premises and the Buildings resulting from such removal. Article 16 Holding Over If Tenant holds over after the expiration of the Lease Term hereof, with or without the express or implied consent of Landlord, such tenancy shall be from month-to-month only, and shall not constitute a renewal hereof or an extension for any further term. If the holding over is without Landlord's consent. Rent shall be payable at a monthly rate equal to one hundred twenty-five percent (125%) of the Rent applicable during the last rental period of the Lease Term under this Lease. Such month-to-month tenancy shall be subject to every other term, covenant and agreement contained herein. Nothing contained in this Article ------- 16 shall be construed as consent by Landlord to any holding over by Tenant, and - --- Landlord expressly reserves the right to require Tenant to surrender possession of the Premises to Landlord as provided in this Lease upon the expiration or other termination of this Lease. The provisions of this Article 16 shall not be ---------- deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law. Tenant acknowledges that if Tenant holds over without Landlord's consent, such holding over may compromise or otherwise affect Landlord's ability to enter into new leases with prospective tenants regarding the Premises. Therefore, if Tenant fails to surrender the Premises upon the termination or expiration of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all loss, costs (including reasonable attorneys' fees) and liability resulting from such failure, including, without limiting the generality of the foregoing, any claims made by any succeeding tenant founded upon such failure to surrender, and any losses suffered by Landlord, including lost profits, resulting from such failure to surrender. Article 17 Estoppel Certificates 17.1 Landlord's Right. Within ten (10) days following a request in writing ---------------- by Landlord, Tenant shall execute and deliver to Landlord an estoppel certificate, which shall be in commercially reasonable form, including such form as may be required by any prospective mortgagee or purchaser of the Buildings, the Project, or any portion thereof, indicating therein any exceptions thereto that may exist at that time, and shall also contain any other information reasonably requested by Landlord or Landlord's mortgagee or prospective mortgagee or purchasers. Tenant shall execute and deliver whatever other instruments may be reasonably required for such purposes. At any time during the Lease Term, Landlord may require tenant to provide Landlord with a current financial statement and financial statements of the two (2) years prior to the current financial statement year. Such statements shall be prepared in accordance with general accepted accounting principles and, if such is the normal practice of Tenant, shall be audited by an independent certified public accountant. CREEKSIDE PLAZA xxii TriNet Employer Group, Inc. 17.2 Tenant's Right. Within ten (10) days following a request in writing by -------------- Tenant, Landlord shall execute and deliver to Tenant an estoppel certificate containing any information reasonably requested by Tenant or Tenant's prospective tenant or purchaser. Landlord shall execute and deliver whatever other documents may be reasonably required for such purposes. Article 18 Subordination This Lease is subject and subordinate to the lien of any mortgages or trust deeds, now or hereafter in force against the Project and/or the Buildings, if any, and to all renewals, extensions, modifications, consolidations and replacements thereof, and to all advances made or hereafter to be made upon the security of such mortgages or trust deeds, unless the holders of such mortgages or trust deeds, require in writing that this Lease be superior thereto. In consideration of, and as a condition precedent to, Tenant's agreement to permit its interest pursuant to this Lease to be subordinated to the lien of any first trust deed, and to any renewals, extensions, modifications, consolidations and replacements thereof, Landlord shall deliver to Tenant a commercially reasonable nondisturbance agreement executed by the holder of such trust deed. Tenant covenants and agrees in the event any proceedings are brought for the foreclosure of any such mortgage, to attorn, without any deductions or set-offs other than those expressly authorized by this Lease, to the purchaser upon any such foreclosure sale if so requested to do so by such purchaser, and to recognize such purchaser as the lessor under this Lease. Tenant shall, within fifteen (15) days of request by Landlord, execute such further instruments or assurances as Landlord may reasonably deem necessary to evidence or confirm the subordination or superiority of this Lease to any such mortgages or trust deeds, including the Attornment and Nondisturbance Agreement attached hereto as Exhibit F. Further, this Lease shall be subject and subordinate to any future ground lease or underlying lease of the Project and/or the Buildings by Landlord to a third party. As a condition precedent to Tenant's agreement to permit its interest under this Lease to be subordinated to such future leases, Landlord shall deliver to Tenant a commercially reasonable nondisturbance agreement executed by the landlord under such leases confirming Tenant's right to remain in the Premises so long as Tenant performs its obligations under this Lease. Article 19 Defaults: Remedies 19.1 Defaults. The occurrence of any of the following shall constitute a -------- default of this Lease by Tenant: 19.1.1 Any failure by Tenant to pay any Rent or any other charge required to be paid under this Lease, or any part thereof, within ten (10) calendar days of notice that the same is overdue, which notice shall be in lieu of any notice required under California Code of Civil Procedure Section 1161 or any similar or successor law; or 19.1.2 Any failure by Tenant to observe or perform any other provision, covenant or condition of this Lease to be observed or performed by Tenant where such failure CREEKSIDE PLAZA xxiii TriNet Employer Group, Inc. continues for thirty (30) days after written notice thereof from Landlord to Tenant; provided however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1 161 or any similar or successor law; and provided further that if the nature of such default is such that the same cannot reasonably be cured within a thirty (30) day period, Tenant shall not be deemed to be in default if it diligently commences such cure within such period and thereafter diligently proceeds to rectify and cure said default, as soon as possible; or 19.1.3 To the extent permitted by law, a general assignment by Tenant or any guarantor of the Lease for the benefit of creditors, or the taking of any corporate action in furtherance of bankruptcy or dissolution whether or not there exists any proceeding under an insolvency or bankruptcy law, or the filing by or against Tenant or any guarantor of any proceeding under an insolvency or bankruptcy law, unless in the case of a proceeding filed against Tenant or any guarantor the same is dismissed within sixty (60) days, or the appointment of a trustee or receiver to take possession of all or substantially all of the assets of Tenant or any guarantor, unless possession is restored to Tenant or such guarantor within thirty (30) days, or any execution or other judicially authorized seizure of all or substantially all of Tenant's assets located upon the Premises or of Tenant's interest in this Lease, unless such seizure is discharged within thirty (30) days; or 19.1.4 Abandonment of the Premises by Tenant, provided however that Tenant may leave the Premises vacant so long as Tenant observes all the terms and conditions of this Lease. 19.2 Remedies Upon Default. Upon the occurrence of a default by Tenant, ----------------------- Landlord shall have, in addition to any other remedies available to Landlord at law or in equity, the option to pursue any one or more of the following remedies, each and all of which shall be cumulative and nonexclusive, without any notice or demand whatsoever. 19.2.1 Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises or any part thereof, without being liable for prosecution or any claim or damages therefor; and Landlord may recover from Tenant the following: a. The worth at the time of award of any unpaid rent which has been earned at the time of such termination; plus b. The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus c. The worth at the time of award of the amount by which the unpaid rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus CREEKSIDE PLAZA xxiv TriNet Employer Group, Inc. d. Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, specifically including but not limited to, brokerage commissions and advertising expenses incurred, expenses or remodeling the Premises or any portion thereof for a new tenant, whether for the same or a different use. and any special concessions made to obtain a new tenant; and e. At Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. The term "rent" as used in this Section 19.2 shall be deemed to be and to ------------- mean all sums of every nature required to be paid by Tenant pursuant to the terms of this Lease, whether to Landlord or to others. As used in Paragraphs 19.2.1(i) and (ii), above, the "worth at the time of award" shall be computed by allowing interest at the rate set forth in Article 25 of this Lease, but in no ----------- case greater than the maximum amount of such interest permitted by law. As used in Paragraph 19.2.1(iii) above, the "worth at the time of award" shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). 19.2.2 Landlord shall have the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's breach and abandonment and recover Rent as it becomes due, if lessee has the right to sublet or assign, subject only to reasonable limitations). Accordingly, if Landlord does not elect to terminate this Lease on account of any default by Tenant , Landlord may, from time to time, without terminating this Lease on account of any default by Tenant, Landlord may, from time to time, without terminating this Lease, enforce all of its rights and remedies under this Lease, including the right to recover all rent as it becomes due. 19.3 Subleases of Tenant. Whether or not Landlord elects to terminate this ------------------- Lease on account of any default by Tenant, as set forth in this Article 19, ---------- Landlord shall have the right to terminate any and all subleases, licenses, concessions or other consensual arrangements for possession entered into by Tenant and affecting the Premises or may, in Landlord's sole discretion, succeed to Tenant's interest in such subleases, licenses, concessions or arrangements. In the event of Landlord's election to succeed to Tenant's interest in any such subleases, licenses, concessions or arrangements, Tenant shall, as of the date of notice by Landlord of such election, have no further right to or interest in the rent or other consideration receivable thereunder. 19.4 Form of Payment After Default. Following the occurrence of a monetary ----------------------------- default by Tenant, Landlord shall have the right to require that any or all subsequent amounts paid by Tenant to Landlord hereunder, whether in the cure of the default in question or otherwise, be paid in the form of money order, cashier's or certified check drawn on an institution acceptable to Landlord, or by other means approved by Landlord, notwithstanding any prior practice of accepting payments in any different form. 19.5 Efforts to Relet. For the purposes of this Article 19, Tenant's right ---------------- ---------- to possession shall not be deemed to have been terminated by efforts of Landlord to relet the Premises, by its acts of maintenance or preservation with respect to the Premises, or by appointment of a receiver CREEKSIDE PLAZA xxv TriNet Employer Group, Inc. to protect Landlord's interests hereunder. The foregoing enumeration is not exhaustive, but merely illustrative of acts which may be performed by Landlord without terminating Tenant's right to possession. 19.6 Landlord's Default. If Landlord should be in default in the ------------------ performance of any of its obligations under this Lease, which default continues for a period of more than thirty (30) days after receipt of written notice from Tenant specifying such default, or if such default is of a nature to require more than thirty (30) days to remedy and continues beyond the time reasonably necessary to cure, Tenant may incur reasonable expenses necessary to perform the obligations of Landlord specified in such notice and be entitled to recover from Landlord such expenses within fifteen (15) days following receipt by Landlord of Tenant's demand therefor. Article 20 Attorneys' Fees If either party commences litigation against the other arising out of or in connection with this Lease, including but not limited to litigation, for the specific performance of this Lease, for damages for the breach hereof or otherwise for enforcement of any remedy hereunder, the parties hereto agree to and hereby do waive any right to a trial by jury and, in the event of any such commencement of litigation, the prevailing party shall be entitled to recover from the other party such costs and reasonable attorneys' fees as may have been incurred. The prevailing party shall be determined under Civil Code Section 1717(b)(1) or any successor statute. Article 21 Security Deposit CREEKSIDE PLAZA xxvi TriNet Employer Group, Inc. Upon the Lease Commencement Date, Tenant shall deposit with Landlord a security deposit (the "Security Deposit") in the amount set forth in Section 10 ---------- of the Summary. The Security Deposit shall be in cash or an irrevocable, unconditional letter of credit issued by a reputable bank in favor of Landlord. The Security Deposit shall be held by Landlord as security for the faithful performance by Tenant of all the term, covenants, and conditions of this Lease to be kept and performed by Tenant during the Lease Term. If Tenant defaults with respect to any provisions of this Lease, including, but not limited to, the provisions relating to the payment of Rent, Landlord may, but shall not be required to, use, apply or retain all or any part of the Security Deposit for the payment of any Rent or any other sum in default, or for the payment of any amount that Landlord may spend or become obligated to spend by reason of Tenant's default, or to compensate Landlord for any other loss or damage that Landlord may suffer by reason of Tenant's default. If any portion of the Security Deposit is so used or applied, Tenant shall, within five (5) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount, and Tenant's failure to do so shall be a default under this Lease. If Tenant shall fully and faithfully ------------------------------------ perform its obligations under this Lease, the Security Deposit, or any balance - ------------------------------------------------------ ----------------------- thereof, may be applied to the Rent due for the thirty-sixth (36/th/) month of - ------------------------------------------------------------------------------ the Lease Term, or if not so applied, shall be returned to Tenant, or at - ------------------------------------------------------------------------ Landlord's option, to the last assignee of Tenant's interest hereunder, within - ------------------------------------------------------------------------------ sixty (60) days following the expiration of the Lease Term. Tenant shall not be - -------------------------------------------------------------------------------- entitled to any interest on the Security Deposit. Tenant hereby waives the - ------------------------------------------------ provisions of Section 1950.7 of the California Civil Code, and all other provisions of law, now or hereafter in force, which provide that Landlord may claim from a security deposit only those sums reasonably necessary to remedy defaults in the payment of rent, to repair damage caused by Tenant or to clean the Premises, it being agreed that Landlord may, in addition, claim those sums reasonably necessary to compensate Landlord for any other loss or damage, foreseeable or unforeseeable, caused by the act or omission of Tenant or any officer, employee, agent or invitee of Tenant. Article 22 Signs 22.1 Signage Rights. Tenant and any subtenant or assignee shall have the -------------- right to place signs containing its name in such number and at such places on the Buildings as the City of San Leandro shall permit and as Landlord may consent to, with Landlord's consent not to be unreasonably withheld. All signs are to be in keeping with the quality, design and style of the Buildings and the Project. Interior signage is at Tenant's cost, and Landlord's consent is not required unless such signage is visible from the exterior. 22.2 Prohibited Signage and Other Items. Any signs, notices, logos, ---------------------------------- pictures, names or advertisements which are installed and that have not been individually approved by Landlord may be removed upon ten (10) days' notice by Landlord at the sole expense of Tenant. Tenant may not install any signs on the Common Areas of the Project. Any signs, window coverings, or blinds (even if the same are located behind the Landlord approved window coverings for the Buildings), or other items visible from the exterior of the Premises or the Buildings are subject to the prior written approval of Landlord. Article 23 CREEKSIDE PLAZA xxvii TriNet Employer Group, Inc. Compliance with Law Tenant shall not do anything or suffer anything to be done in or about the Premises or the Project which will in any way conflict with any law, statute, ordinance or other governmental rule, regulation or requirement now in force or which may hereafter be enacted or promulgated. Should any standard or regulation now or hereafter be imposed on the use of the Buildings, the Tenant Improvements or Alterations made by Tenant by a state, federal or local governmental body charged with the establishment, regulation and enforcement of occupational, health or safety standards for employers, employees, landlords or tenants, then Tenant agrees, at its sole cost and expense, to comply promptly with such standards or regulations as apply to the use of the Premises for general office purposes. Tenant shall be responsible, at its sole cost and expense, to make all alterations to the Premises as are required to comply with the governmental rules, regulations, requirements or standards described in this Article 23. The ---------- judgment of any court of competent jurisdiction or the admission of Tenant in any judicial action, regardless of whether Landlord is a party thereto, that Tenant has violated any of said governmental measures, shall be conclusive of that fact as between Landlord and Tenant. Article 24 Late Charges If any installment of Rent or any other sum due from Tenant shall not be received by Landlord or Landlord's designee within ten (10) days (or such lesser period as Landlord's first trust deed lender may require) after said amount is due, then Tenant shall pay to Landlord a late charge equal to five percent (5%) of the overdue amount, plus any attorneys' fees incurred by Landlord by reason of Tenant's failure to pay Rent and/or other charges when due hereunder. The late charge shall be deemed Additional Rent and the right to require it shall be in addition to all of Landlord's other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Landlord's remedies in any manner. In addition to the late charge described above, any Rent and other amounts owing hereunder (other than late charges) which are not paid on or before the date they are due shall thereafter bear interest until paid at a rate per annum equal to twelve percent (12%) per annum, provided that in no case shall such rate be higher than the highest rate permitted by applicable law. Article 25 Landlord's Right to Cure Default; Payments By Tenant 25.1 Landlord's Cure. All covenants and agreements to be kept or performed --------------- by Tenant under this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any reduction of Rent. If Tenant shall fail to perform any of its obligations under this Lease, within a reasonable time after such performance is required by the terms of this Lease, Landlord may, but shall not be obligated to, after reasonable prior notice to Tenant as required by this Lease, make any such payment or perform any such act on Tenant's part without waiving its right based upon any default of Tenant and without releasing Tenant from any obligations hereunder. CREEKSIDE PLAZA xxviii TriNet Employer Group, Inc. 25.2 Tenant's Reimbursement. Except as may be specifically provided to the ---------------------- contrary in this Lease, Tenant shall pay to Landlord, within fifteen (15) days after delivery by Landlord to Tenant of statements therefor: (i) sums equal to expenditures reasonably made and obligations incurred by Landlord in connection with the remedying by Landlord of Tenant's defaults pursuant to the provisions of Section 25.1; (ii) sums equal to all losses, costs, liabilities, damages and ------------ expenses referred to in Article 10 of this Lease; and (iii) sums equal to all ----------- expenditures made and obligations incurred by Landlord in collecting or attempting to collect the Rent or in enforcing or attempting to enforce any rights of Landlord under this Lease or pursuant to law, including, without limitation, all legal fees and other amounts so expended. Tenant's obligations under this Section 25.2 shall survive the expiration or sooner termination of ------------- the Lease Term. Article 26 Entry by Landlord Landlord reserves the right at all reasonable times and upon two (2) days' advance written notice (which may be by facsimile) to the Tenant to enter the Premises during normal business hours to (i) inspect them; (ii) show the Premises to prospective purchasers, mortgagees or ground or underlying lessors, or, during the last six (6) months of the Lease Term, prospective tenants; (iii) post notices of nonresponsibility; or (iv) alter, improve or repair the Premises, the Buildings, or the Project at any time if necessary to comply with current building codes or other applicable laws or for structural alterations, repairs, or improvements to the Buildings or the Project. Landlord recognizes that Tenant will have security systems in place and will give as much advance notice of the need to enter as is reasonably possible. Notwithstanding anything to the contrary contained in this Article 26, Landlord may enter the Premises at ---------- any time to (A) perform services required of Landlord; (B) take possession due to any breach of this Lease in the manner provided herein; and (C) perform any covenants of Tenant which Tenant fails to perform. Landlord may make any such entries without the abatement of Rent and may take such steps as required to accomplish the stated purposes; provided, however, that any such entry shall be accomplished as expeditiously as reasonably possible. Tenant hereby waives any claims for damages or for any injuries or inconvenience to or interference with Tenant's business, lost profits, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby. For each of the above purposes, Landlord shall at all times have a key with which to unlock all the doors in the Premises, excluding Tenant's vaults, safes and special security areas designated in advance by Tenant. In an emergency, Landlord shall have the right to use any means that Landlord may deem proper to open the doors in and to the Premises. Any entry into the Premises by Landlord in the manner hereinbefore described shall not be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an actual or constructive eviction of Tenant from any portion of the Premises. Notwithstanding anything to the contrary, Landlord shall, to the extent practicable, exercise its rights under this Article 26 at such times ----------- and in such manner as to minimize the impact upon Tenant's business in and occupancy of the Premises. If Landlord makes an emergency entry into the Premises but no authorized representative of Tenant is present, Landlord shall provide immediate telephone notice to Tenant and shall take reasonable steps to secure the Premises until a representative of Tenant arises at the Premises. CREEKSIDE PLAZA xxix TriNet Employer Group, Inc. Article 27 Tenant Parking 27.1 Parking Rights. Throughout the Lease term, Tenant shall have the -------------- exclusive use of 460 allocated parking spaces. The area of such allocated parking spaces is marked on the portion of Exhibit A showing parking for the --------- Such allocated parking is included in the Base Rent paid by Tenant, and no additional rent is payable by Tenant for parking or the gate or key systems used to regulate parking. In addition, Tenant shall have nonexclusive parking rights in all parking areas serving the Buildings. Landlord represents and warrants that the parking granted to Tenant under this Article 27 will be available to ---------- Tenant continuously for the Lease Term. Tenant shall have the right to use its parking twenty-four (24) hours per day, seven (7) days per week, including holidays. 27.2 Temporary Parking Rights. Upon execution of this Lease, Tenant may -------------------------- request the City of San Leandro to allow Tenant's use of the Project land for temporary parking for Tenant's employees. Landlord shall support such request. Landlord may provide for Tenant's use from time to time during construction areas of the Property for use as temporary parking but only if such does not hinder the efficient construction of the Buildings and the Common Areas. Landlord shall provide the parking area without charge, except Tenant shall pay for any costs associated with preparing such area for parking use that are incurred solely as a result of Tenant's use of the area for temporary parking. Article 28 Miscellaneous Provisions 28.1 Binding Effect. Each of the provisions of this Lease shall extend to -------------- and shall, as the case may require, bind or inure to the benefit not only of Landlord and of Tenant, but also of their respective successors or assigns, provided this clause shall not permit any assignment by Tenant contrary to the provisions of Article 14 of this Lease. ----------- 28.2 Intentionally left blank. 28.3 Modification of Lease. Landlord shall have ninety (90) days after --------------------- execution of this Lease to submit it to prospective mortgagees for the Buildings or the Projects and request such mortgagees to state the modification or modifications of this Lease, which modification or modifications will not cause an increased cost or expense to Tenant or in any other way materially and adversely change the rights and obligations of Tenant hereunder, then and in such event, Tenant agrees not to unreasonably withhold its consent to such modifications. Landlord shall pay Tenant's legal fees for the review of modifications requested by the mortgagee. A Memorandum of Lease shall be recorded containing, among other customary provisions, the names of the parties, a description of the Premises and the Lease Term, a summary of Tenant's right to purchase and Tenant's parking rights. Tenant agrees to execute such short form of Lease and to delivery the same to Landlord within ten (10) days following the request therefor. CREEKSIDE PLAZA xxx TriNet Employer Group, Inc. 28.4 Transfer of Landlord's Interest. Tenant acknowledges that Landlord has ------------------------------- the right to transfer all or any portion of its interest in the Project and/or the Buildings and in this Lease. Tenant agrees that in the event of a transfer of all of Landlords interest in the Project and a transfer of the Security Deposit to a bona fide purchaser similar in net worth to the Landlord or to other office building owners in the East Bay Area, Landlord shall automatically be released from all liability thereafter accruing under this Lease and Tenant agrees to look solely to such transferee for the performance of Landlord's obligations hereunder after the date of transfer. Tenant further acknowledges that Landlord may assign its interest in this Lease to a mortgage lender as additional security and agrees that such an assignment shall not release Landlord from its obligations hereunder and that Tenant shall continue to look to Landlord for the performance of its obligations hereunder. 28.5 Prohibition Against Recording. Except as provided in Section 28.3 of ----------------------------- ------------- this Lease, neither this Lease, nor any memorandum, affidavit or other writing with respect thereto, shall be recorded by Landlord or Tenant or by anyone acting through, under or on behalf of Landlord or Tenant, and the recording thereof in violation of this provision shall make this Lease null and void at the election of the nonrecording party. 28.6 Captions. The captions of Articles and Sections are for convenience -------- only and shall not be deemed to limit, construe, affect or alter the meaning of such Articles and Sections. 28.7 Relationship of Parties. Nothing contained in this Lease shall be ----------------------- deemed or construed by the parties hereto or by any third party to create the relationship or principal and agent, partnership, joint venturer or any association between Landlord and Tenant, it being expressly understood and agreed that neither the method of computation of Rent nor any act of the parties hereto shall be deemed to create any relationship between Landlord and Tenant other than the relationship of landlord and tenant. 28.8 Time of Essence. Time is of the essence of this Lease and each or its --------------- provisions. 28.9 Partial Invalidity. If any term, provision or condition contained in ------------------ this Lease shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, provision or condition to persons or circumstances other than those with respect to which it is invalid or unenforceable, shall not be affected thereby, and each and every other term, provision and condition of this Lease shall be valid and enforceable to the fullest extent possible permitted by law, unless an essential purpose of this Lease would be defeated by loss of the invalid or unenforceable provision. 28.10 Landlord Exculpation. It is expressly understood and agreed that -------------------- notwithstanding anything in this Lease to the contrary, and notwithstanding any applicable law to the contrary, the liability of Landlord and the Landlord Parties hereunder (including any successor landlord) and any recourse by Tenant against Landlord or the Landlord Parties shall be limited solely and exclusively to the interest of Landlord in the Buildings, and neither Landlord nor any of the Landlord Parties shall have any personal liability therefor, and Tenant hereby expressly waives and releases such personal liability on behalf of itself and all persons claiming by, through or under Tenant. CREEKSIDE PLAZA xxxi TriNet Employer Group, Inc. 28.11 Entire Agreement. It is understood and acknowledged that there are no ---------------- oral agreements between the parties hereto affecting this Lease and this Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between the parties hereto or displayed with respect to the subject matter thereof. This Lease, the exhibits and schedules attached hereto, and any side letter or separate agreement executed by Landlord and Tenant in connection with this Lease and dated of even date herewith contain all of the terms, covenants, conditions, warranties and agreements of the parties relating in any manner to the rental, use and occupancy of the Premises, shall be considered to be the only agreement between the parties hereto and their representatives and agents, and none of the terms, covenants, conditions or provisions of this Lease can be modified, deleted or added to except in writing signed by the parties hereto. 28.12 Intentionally left blank 28.13 Force Majeure. Any prevention, delay or stoppage due to strikes, ------------- lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes therefor, governmental actions, civil commotions, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform (collectively, the "Force Majeure"), except with respect to the obligations imposed with regard to Rent and other charges to be paid by Tenant pursuant to this Lease, and except as to Tenant's obligations under Articles 5 and 24 of this Lease notwithstanding anything to ----------------- the contrary contained in this Lease, shall excuse the performance of such party for a period equal to any such prevention, delay or stoppage and, therefore, if this Lease specifies a time period for performance of any obligation of either party, that time period shall be extended by the period of any delay in such party's performance caused by a Force Majeure. 28.14 Notices. All notices, demands, statements, approvals or ------- communications (collectively, "Notices") given or required to be given by either party to the other hereunder shall be in writing, shall be sent by United States certified or registered mail, postage prepaid, return receipt requested, or delivered personally (i) to Tenant at the appropriate address et forth in Section 5 of the Summary, or to such other place as Tenant may from time to time - --------- designate in a Notice to Landlord; or (ii) to Landlord at the addresses set forth in Section 3 of the Summary, or to such other firm or to such other place --------- as Landlord may from time to time designate in a Notice to Tenant. Any Notice will be deemed given on the date three (3) days from the date it is mailed as provided in this Section 29.14 or upon the date personal delivery is made or ------------- rejected. If Tenant is notified in writing of the identity and address of Landlord's mortgagee or ground or underlying lessor, Tenant shall give to such mortgagee or ground or underlying lessor written notice of any default by Landlord under the terms of this Lease by registered or certified mail, and such mortgagee or ground or underlying lessor shall have the right to cure such default within the same time given to Landlord to cure the default. 28.15 Intentionally left blank 28.16 Joint and Several. If there is more than one Tenant, the obligations ----------------- imposed upon Tenant under this Lease shall be joint and several. 28.17 Authority. If either party is a corporation, a partnership or other --------- entity, each individual executing this Lease on behalf of such party hereby represents and warrants that the CREEKSIDE PLAZA xxxii TriNet Employer Group, Inc. entity is a duly formed and existing entity qualified to do business in California and that such party has full right and authority to execute and deliver this Lease and that each person signing on behalf of such party is authorized to do so. 28.18 Governing Law. This Lease shall be construed and enforced in ------------- accordance with the laws of the State of California. 28.19 Submission of Lease. Intentionally left blank. ------------------- 28.20 Brokers. Landlord and Tenant hereby warrant to each other that they ------- have had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, excepting only the real estate brokers or agents specified in Section 12 of the Summary and Landlord's designated representative ---------- (the "Brokers"), and that they know of no other real estate broker or agent who is entitled to a commission in connection with this Lease. Landlord shall pay the brokerage commissions owing to the Brokers in connection with the transaction contemplated by this Lease pursuant to the terms of a separate written agreement between Landlord and the Brokers. Each party agrees to indemnify and defend the other party against and hold the other party harmless from any and all claims. demands, losses, liabilities, lawsuits, judgments, and costs and expenses (including without limitation reasonable attorneys' fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of the indemnifying party's dealings with any real estate broker or agent other than the Brokers. The terms of this Section 29.20 shall -------------- survive the expiration or earlier termination of the Lease Term. 28.21 Independent Covenants. This Lease shall be construed as though the --------------------- covenants herein between Landlord and Tenant are independent and not dependent and Tenant hereby expressly waives the benefit of any statute to the contrary and agrees that if Landlord fails to perform its obligations set forth herein, Tenant shall not be entitled to make any repairs or perform any acts hereunder at Landlord's expense or to any setoff of the Rent or other amounts owing hereunder against Landlord; provided, however, that the foregoing shall in now way impair the right of Tenant to commence a separate action against Landlord for any violation by Landlord of the provisions hereof so long as notice is first given to Landlord and any holder of a mortgage or deed of trust covering the Buildings, the Project, or any portion thereof, of whose address Tenant has theretofore been notified, and an opportunity is granted to Landlord and such holder to correct such violations as provided above. 28.22 Intentionally left blank. 28.23 Transportation Management. Tenant shall fully comply with all ------------------------- present or future compulsory programs imposed by any public authority intended to manage parking, transportation or traffic in and around the Project, the Buildings, and/or the Adjacent Project, and in connection therewith, Tenant shall take responsible action for the transportation planning and management of all employees located at the Premises by working directly with Landlord, any governmental transportation management organization or any other transportation- related committees or entities. Such programs may include. without limitation; (i) restrictions on the number of peak-hour vehicle trips generated by Tenant; (ii) encouragement of increased vehicle occupancy, (iii) implementation of an in-house or area ride-sharing program and an employee transportation CREEKSIDE PLAZA xxxiii TriNet Employer Group, Inc. coordinator; (iv) working with employees and any project, building or area-wide ride-sharing program manager; and (v) utilizing flexible work shifts for employees. 28.24 No Discrimination. Each party covenants by and for itself, its ----------------- heirs, executors, administrators and assigns, and all persons claiming under or through such party, and this Lease is made and accepted upon and subject to the following conditions: that there shall be no discrimination against or segregation of any person or group of persons, on account of race, color, creed, sex, religion, marital status, ancestry or national origin in the leasing, subleasing, transferring, use, or enjoyment of the Premises, nor shall either party, or any person claiming under or through such party, establish or permit such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy, of tenants, lessees, sublessees, subtenants or vendees in the Premises. 28.25 Intentionally left blank 28.26 Intentionally left blank. 28.27 Intentionally left blank. 28.28 Landlord's Representation and Warranties. Landlord hereby ---------------------------------------- represents and warrants that: 28.28.1 Landlord has full right and lawful authority to enter into and perform Landlord's obligations under the Lease; and, that Landlord has good and marketable title to the Project and to the Premises; 28.28.2 To the best knowledge of Landlord, there are no physical or legal conditions and/or impediments, laws, statutes, codes, rules or ordinances affecting the Project or the Premises that would now, or in the future, have the effect of impairing or prohibiting Tenant's intended use of the Premises. Such referenced conditions include, but are not limited to, rights of any other party to the use or occupancy of the Premises, enacted, pending or proposed condemnation proceedings, zoning ordinances and current or proposed plans to alter access to the Premises or the Project from surrounding public thoroughfare or private access ways; 28.28.3 Landlord represents and warrants that, to the best of its knowledge, there is no lien or encumbrance on the Project or the Premises (herein referred to as "Encumbrances") which contains any restriction on use, ingress or egress, or otherwise contains any provision that would restrict the intended use of the Premises by Tenant. Tenant shall have no liability for the violation of any term or condition of the Encumbrances or any of them or any default thereunder by Landlord or any owner, developer, other tenant, subtenant, occupant or permittee of the Project other than Tenant. 28.29 Hazardous Materials. Landlord hereby holds Tenant harmless from, ------------------- and indemnifies and agrees to defend Tenant against, all present and future claims, demands, suits, legal and administrative proceedings, from any and all liability for damages, losses, costs, liabilities, fees and expenses (including reasonable attorneys' fees), present and future, arising out of or in any way connected with any condition of environmental contamination on, about or CREEKSIDE PLAZA xxxiv TriNet Employer Group, Inc. beneath the Premises, or the existence of hazardous materials in any state on, about, or beneath the Premises caused by Landlord, a previous owner of the Project or a previous or the current owner of the land underlying the Project, or by a prior or another tenant to the Project. 28.30 Hazardous Materials. Landlord hereby represents and warrants that, ------------------- to the Landlord's actual knowledge, the Premises is not, and as of the date that Tenant takes possession of the Premises ("Possession Date"), will not be, in violation of any federal, state or local law, regulation or ordinance relating to industrial hygiene or which govern Hazardous Materials and/or environmental conditions in, on, under or about the Premises, including but not limited to air quality, and surface and subsurface soil and water conditions (individually and collectively, "Environmental Regulations"). Landlord further represents and warrants that as of the Possession Date, the Premises do not contain any Hazardous material, and Landlord's work in the Premises shall not incorporate into the Premises any material containing Hazardous Materials. Any and all work performed by Landlord on the Premises from and after the Possession Date shall be free of all Hazardous Materials and shall be in compliance with all Environmental Regulations. In the event that the presence of any Hazardous Material is detected on the Premises in violation of any Environmental Regulation (i) prior to the Possession Date, or (ii) at any time during the term hereof as a part of or as a result of work by Landlord on/in the Premises, then in such event Landlord shall contain, remove, detoxify and/or remediate such Hazardous Material in compliance with all applicable Environmental Regulations (the "remedial work"). All such remedial work shall be performed by Landlord at Landlord's expense. In the event that such remedial work shall be performed prior to Tenant opening for business, Tenant's obligation to open shall be delayed until such remedial work is completed. In the event that such remedial work is performed subsequent to Tenant opening for business, Tenant's obligation to pay Base Rent shall be abated in direct proportion to the extent Tenant is unable to conduct its business upon the Premises as a result of such remedial work being necessary or while such remedial work is being performed. Landlord hereby agrees to indemnify and hold harmless Tenant, its directors, officers, employees and agents (the "Tenant Indemnitees") from and against any and all liability, including without limitation, all costs of defense and the cost of any required or necessary remedial work and/or repair, claimed, threatened or asserted against any Tenant Indemnitee arising out of the use, generation, transportation, storage, release or disposal of Hazardous Materials (a "Release") on or about the Premises which Release is a result of Landlord's work in the Premises or which occurred prior to the Possession Date. 28.31 "Hazardous Materials" as used herein shall include asbestos, petroleum fuel and products, Polychlorinated biphenyls (PCBs) and substances or compounds containing PCBs, and hazardous, toxic and radioactive substances, materials or wastes which are or become regulated by any local governmental authority, the State of California or the United States Government, including but not limited to: 28.31.1 Any "hazardous substance" as that term is defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) (42 United States Code Sections 9601-9675); 28.31.2 "Hazardous waste" as that term is defined in the Resource Conservation and Recovery Act of 1976 (RCRA) (42 United States Code Sections 6901-6992k); and CREEKSIDE PLAZA xxxv TriNet Employer Group, Inc. 28.31.3 Any pollutant, contaminant or hazardous, dangerous or toxic chemical, material or substance, within the meaning of any other applicable federal, state or local law, regulation, ordinance or requirement (including consent decrees and administrative orders imposing liability or standards of conduct concerning any hazardous, dangerous or toxic waste, substance or material, now or hereafter in effect). 28.32 Right of First Refusal to Lease. In further consideration of the ------------------------------- rent, covenants and conditions to be paid, performed and observed by Tenant, Landlord hereby grants to Tenant a right of first refusal to lease unleased space in the Project as it becomes available, either as a result of the existence of vacant space in Building B or vacation of space in Building B by existing tenants (collectively, the "Additional Space"). In the event Landlord receives a bona fide offer from a third party to lease the Additional Space which is acceptable to Landlord, Landlord shall promptly notify Tenant in writing of the offer, including the amount of rent offered and other terms and conditions of the offer. Tenant shall have five (5) business days within which to notify Landlord in writing whether Tenant agrees to lease the additional space at the amount of rent and on the same terms and conditions as the third- party offer. In the event Tenant elects to lease the Additional Space, the lease of the Additional Space shall be subject to the same terms and conditions as the third-party offer, including but not limited to amount of rent, term and commencement date. In the event Tenant fails to give written notice of its election to lease the Additional Space within the time required under this Section 28.32, Landlord shall be free to accept the bona fide offer and lease - ------------- the Additional Space to the third-party offeror. If the third party lease is at net rent that is less than ninety-five percent (95%) of the net rent offered to Tenant, Landlord must reoffer the space to Tenant at the lower net rent, and Tenant must accept or reject such offer as soon as possible, but in any event within three (3) business days. If the Additional Space subsequently becomes available again during the Lease term, Tenant shall have the same right of first refusal granted herein within respect to a bona fide offer to lease the Additional Space by a subsequent third-party offeror. Further, if and when Landlord constructs Building B of the Project, Landlord may satisfy this right of first refusal to lease by notifying Tenant of the expected date of completion of the Building and the terms and conditions that Landlord intends to lease some or all of Building B. Tenant shall have thirty (30) days within which to express interest in and commence negotiations regarding leasing some or all of Building B. If negotiations between Landlord and Tenant do not result in the execution of a lease, Landlord shall have the right to pursue tenants for Building B and prelease the Building before or during construction without being required to once again present the opportunity to lease to Tenant. However, if any such lease or prelease is at net rent which is less than ninety-five percent (95%) of the net rent offered to Tenant, Landlord must reoffer the space to Tenant at the lower net rent, and Tenant must accept or reject such offer as soon as possible, but in any event within three (3) business days. 28.33 Tenant's Right of First Refusal to Purchase Building. ---------------------------------------------------- 28.33.1 Landlord agrees that Landlord shall not sell the Premises during the term of this Lease except subject to the Lease. Landlord further agrees it will not sell the Premises to any person until Landlord has given to Tenant notice in writing of its intent to sell, specifying the price and terms and the contemplated sale. Within ninety (90) days after Landlord gives Tenant written notice of Landlord's intent to sell, Tenant shall have the right to purchase the Premises at the same price and on the same terms and conditions set forth in Landlord's written notice of intent to sell, except that the initial deposit shall be one percent (1%) of the purchase price, and CREEKSIDE PLAZA xxxvi TriNet Employer Group, Inc. Tenant shall have sixty (60) days within which to elect not to purchase because it cannot obtain satisfactory financing. To exercise its option, Tenant must, within the same ninety (90) day period, deposit in escrow with any escrow company in San Leandro, California, all monies and instruments required by the terms of Landlord's notice of intent to sell to be paid or delivered to Landlord to open escrow and shall also give Landlord written notice of the deposit. Tenant must then complete the purchase on the terms set forth in the Notice. If Landlord fails to exercise the right in accordance with the provisions of this Section, Landlord may sell the Premises to any other person provided the price is not less than ninety-five percent (95%) of the price in the notice of intent. If Landlord later decides to accept a price which is less than ninety-five percent (95%) of the price set forth in the notice of intent, Landlord must again offer to sell to Tenant, but Tenant must accept or reject the offer in three (3) business days. 28.33.2 If at any time during the term of this Lease, Landlord receives from any third party a bona fide offer to purchase the Premises at a price and on terms acceptable to Landlord that is unsolicited and not part of Landlord's efforts to market the sale of the Premises as described in Section ------- 28.33.1 above, Landlord shall give written notice of the offer to Tenant. Within - ------- ten (10) days after Landlord gives written notice of the third-party offer, Tenant shall have the right to purchase the Premises at the same price and on the same terms and conditions set forth in the third-party offer. To exercise its right, Tenant must, within said ten (10) day period notify Landlord of the exercise of the option and of Tenant's binding agreement to proceed with the purchase. Tenant must deposit in escrow with any recognized escrow company in San Leandro, California, all monies and instruments required by the terms of the offer to be paid or delivered at the opening of the escrow for the purchase of the Premises, and thereafter Tenant shall pay all sums and take all actions in order to complete the purchase of the Premises on the terms and conditions set forth in Landlord's written notice. In the event Tenant fails to exercise the option to purchase in accordance with the provisions of this Section 28.33.2, --------------- Landlord may sell the Premises to the third party making the offer on the same terms and conditions set forth in that offer. If for any reason the Premises are not sold to the party making the offer, Landlord shall give Tenant the same right to purchase the Premises on receiving any subsequent unsolicited offer from a third party that is acceptable to Landlord. 28.33.3 The right of first refusal granted to Tenant shall exclude any transfer resulting from the death of David Irmer or T. Lawrence Jett, any transfer by Landlord to any entity which Landlord or the owners of Landlord hold a fifty-one percent (51%) or greater ownership interest. The right of first refusal shall also not apply in the event of a foreclosure, or a deed in lieu of foreclosure, or a sale of the leased Premises by a lender who has foreclosed. 28.33.4 Tenant may not assign the rights granted under this Article either separately or together with a transfer of Tenant's leasehold interest, and any purported assignment shall be null and void. 28.33.5 If the Premises is sold to a third party during the term of this Lease, then the provisions of this Article shall thereafter be of no further force or effect. IN WITNESS WHEREOF, Landlord and Tenant have caused their duly authorized representatives to execute this Lease as of the day and date first above written. CREEKSIDE PLAZA xxxvii TriNet Employer Group, Inc. LANDLORD TENANT: CREEKSIDE PARTNERS LLC, TRINET EMPLOYER GROUP, INC a California limited liability company a California corporation By: /s/ David Irmer By: /s/ Douglas P. Devlin --------------- --------------------- Its: Its: CFO ------------------------ ---- By: /s/ T. Lawrence Jett By: ________________________ ---------------------------- Its: Manager Its: ------- -------------------- CREEKSIDE PLAZA xxxviii TriNet Employer Group, Inc. Exhibit A Site Plan, Exterior Elevations and Schematic Plans Exhibit A-1 CREEKSIDE PLAZA TriNet Employer Group, Inc. Exhibit B Rules and Regulations Tenant shall faithfully observe and comply with the following Rules and Regulations. Landlord shall not be responsible to Tenant for the nonperformance of any of said Rules and Regulations by or otherwise with respect to the acts or omissions of any other tenants or occupants of the Project. 1 . Tenant shall not alter any lock or install any new or additional locks or bolts on any doors or windows of the Premises without obtaining Landlord's prior written consent. Tenant shall bear the cost of any lock changes or repairs required by Tenant. Two keys will be furnished by landlord for the Premises, and any additional keys required by Tenant must be obtained from Landlord at a reasonable cost to be established by Landlord. 2. All doors opening to public corridors shall be kept closed at all times except for normal ingress and egress to the Premises. 3. Landlord reserves the right to close and keep locked all entrance and exit doors of the Building during such hours as are customary for comparable buildings in the City of San Leandro. Tenant, its employees and agents must be sure that the doors to the Building are securely closed and locked when leaving the Premises if it is after the normal hours of business for the Building. Any tenant, its employees, agents or any other persons entering or leaving the Building at any time when it is so locked. Or any time when it is considered to be after normal business hours for the Building, may be required to sign the Building register. Access to the Building may be refused unless the person seeking access has proper identification or has a previously arranged pass for access to the Building. Landlord and his agents shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building or the Project of any person. In case of invasion, mob, riot, public excitement, or other commotion, Landlord reserves the right to prevent access to the Building or the Project during the continuance thereof by any means it deems appropriate for the safety and protection of life and property. 4. No furniture, freight or equipment of any kind shall be brought into the Building without prior notice to Landlord. All moving activity into or out of the Building shall be scheduled with Landlord and done only at such time and in such manner as Landlord designates. Landlord shall have the right to prescribe the weight, size and position of all safes and other heavy property brought into the Building and also the times and manner of moving the same in and out of the Building. Safes and other heavy objects shall, if considered necessary by Landlord, stand on supports of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such safe or property in any case. Any damage to any part of the Building, its contents, occupants or visitors by moving or maintaining any such safe or other property shall be the sole responsibility and expense of Tenant. 5. No furniture, packages, supplies, equipment or merchandise will be received in the Building or carried up or down in the elevators, except between such hours and in such specific elevator as shall be designated by Landlord. 6. The requirements of Tenant will be attended to only upon application at the management office for the Project or at such office location designated by Landlord. Employees of Landlord shall not perform any work or do anything outside their regular duties unless under special instructions from Landlord. 7. Tenant shall not disturb, solicit, or canvass any occupant of the Project and shall cooperate with Landlord and its agents of Landlord to prevent the same. 8. The toilet rooms, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed, and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees or agents, shall have caused it. 9. Tenant shall not overload the floor of the Premises, nor mark, drive nails or screws, or drill into the partitions, woodwork or plaster or in any way deface the Premises or any part thereof without Landlord's prior written consent. 10. Except for vending machines intended for the sole use of Tenant's employees and invitees, no vending machine or machines other than fractional horsepower office machines shall be installed, maintained or operated upon the Premises without the written consent of Landlord. 11. Tenant shall not use or keep in or on the Premises, the Building, or the Project any kerosene, gasoline, explosive material, corrosive material, material capable of emitting toxic fumes, or other inflammable or combustible fluid or material. Tenant shall provide material safety data sheets for any Hazardous Material used or kept on the Premises. 12. Tenant shall not without the prior written consent of Landlord use any method of heating or air conditioning other than that supplied by Landlord. 13. Tenant shall not use, keep or permit to be used or kept, any foul or noxious gas or substance in or on the Premises, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Project by reason of noise, odors, or vibrations, or interfere in any way with other tenants or those having business therein. 14. Tenant shall not bring into or keep within the Project, the Building or the Premises any animals, birds, or uninsured vehicles. Bicycles, motorcycles, and electric vehicles used for the handicapped are to be parked in designated areas. 15. No cooking shall be done or permitted on the Premises(except specific restaurant businesses approved by lessor), nor shall the Premises be used for the storage of merchandise, for lodging or for any improper, objectionable or immoral purposes. Notwithstanding the foregoing, Underwriters' laboratory- approved equipment and microwave ovens may be used in the Premises for heating food and brewing coffee, tea, hot chocolate and similar beverages for employees and visitors, provided that such use is in accordance with all applicable federal, state and city laws, codes, ordinances, rules and regulations. Exhibit B CREEKSIDE PLAZA ii TriNet Employer Group, Inc. 16. Landlord will approve where and how telephone and telegraph wires are to be introduced to the Premises. No boring or cutting for wires shall be allowed without the consent of Landlord. The location of telephone, call boxes and other office equipment affixed to the Premises shall be subject to the approval of Landlord. 17. Landlord reserves the right to exclude or expel from the Project any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of these Rules and Regulations. 18. Tenant, its employees and agents shall not loiter in or on the entrances, corridors, sidewalks, lobbies, halls, stairways, elevators, or any Common Areas of the Project for the purpose of smoking tobacco products (except in designated smoking areas) or for any other purpose, nor in any way obstruct such areas, and shall use them only as a means of ingress and egress for the Premises. 19. Tenant shall not waste electricity, water or air conditioning and agrees to cooperate fully with Landlord to ensure the most effective operation of the Building's heating and air conditioning system, and shall refrain from attempting to adjust any controls. Tenant shall participate in recycling programs undertaken by Landlord. 20. Tenant shall store all its trash and garbage within the interior of the Premises. No material shall be placed in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of trash in the vicinity of the Project without violation of any law or ordinance governing such disposal. All trash, garbage and refuse disposal shall be made only through entry-ways and elevators provided for such purposes at such times as Landlord shall designate. If the Premises is or becomes infested with vermin as a result of the use or any misuse or neglect of the Premises by Tenant, its agents, servants, employees, contractors, visitors or licensees, Tenant shall forthwith, at Tenant's expense, cause the Premises to be exterminated from time to time to the satisfaction of Landlord and shall employ such licensed exterminators as shall be approved in writing in advance by Landlord. 21. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 22. Tenant shall assume any and all responsibility for protecting the Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 23. No awnings or other projection shall be attached to the outside walls of the Building without the prior written consent of Landlord. No curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the Premises without the prior written consent of Landlord. Tenant shall be responsible for any damage to the window film on the exterior windows of the Premises and shall promptly repair any such damage at Tenant's sole cost and expense. Tenant shall keep its window coverings closed during any period of the day when the sun is shining directly on the windows of the Premises. Prior to leaving the Premises for the day, Tenant shall draw or lower window coverings and extinguish all Exhibit B CREEKSIDE PLAZA iii TriNet Employer Group, Inc. lights. All electrical ceiling fixtures hung in offices or spaces along the perimeter of the Building must be fluorescent and/or of a quality, type, design and bulb color approved by Landlord. 24. The sashes, sash doors, skylights, windows, and doors that reflect or admit light and air into the halls, passageways or other public places in the Building shall not be covered or obstructed by Tenant, nor shall any bottles, parcels or other articles be placed on the windowsills. 25. Tenant must comply with requests by Landlord concerning the informing of their employees of items of importance to Landlord. 26. Tenant shall not use in any space or in the public halls of the Building any hand trucks except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve. Tenant shall not bring any other vehicles of any kind into the Project. 27. Without the written consent of Landlord, Tenant shall not use the name of \the Building or the Project in connection with or in promoting or advertise the business of Tenant except as Tenant's address. 28. Tenant shall not purchase spring water, towels, janitorial or maintenance or other similar services from any company or persons not approved by Landlord. Landlord shall approve a sufficient number of sources of such services to provide Tenant with a reasonable selection, but only in such instances and to such extent as Landlord in its judgment shall consider consistent with the security and proper operation of the Project. 29. Tenant shall install and maintain, at Tenant's sole cost and expense, an adequate, visibly marked and properly operational fire extinguisher next to any duplicating or photocopying machines or similar heat producing equipment, which may or may not contain combustible material, in the Premises. Landlord reserves the right at any time to change or rescind any one or more of these Rules and Regulations, or to make such other and further reasonable Rules and Regulations as in Landlord's judgment may from time to time be necessary for the management. Safety, care and cleanliness of the Premises, Project and building, and for the preservation of good order therein, as well as for the convenience of other occupants and tenants therein. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant, nor prevent Landlord from thereafter enforcing any such Rules or Regulations against any or all tenants of the Project. Tenant shall be deemed to have read these Rules and Regulations and to have agreed to abide by them as a condition of its occupancy of the Premises. Exhibit B-4 CREEKSIDE PLAZA iv TriNet Employer Group, Inc. Exhibit C Notice of Lease Term Dates To: ________ Date To:_______ ________ ________ ________ Re: Office Lease dated ________,_____between _, a ("Landlord"), and _, a ("Tenant") concerning Suite ____ on floor (s) _____ of the building located at_, ,California. Gentlemen: In accordance with the Office Lease (the "Lease"), we wish to advise you and/or confirm as follows: 1. The Premises are Ready for Occupancy, and the Lease Term shall commence on or has commenced on _________ for a term of ______________ ending on _______________. 2. Rent commenced to accrue on_________, in the amount of, ______________. 3. If the Lease Commence Date is other than the first day of the month, the first billing will contain a pro rata adjustment. Each billing thereafter, with the exception of the final billing, shall be for the full amount of the monthly installment as provided for in the Lease. 4 Your rent checks should be payable to __________________ at _______. 5. The exact number of rentable square feet within the Premises is _______square feet. Exhibit C-1 CREEKSIDE PLAZA TriNet Employer Group, Inc. 6. Tenant's Share as adjusted based upon the exact number of rentable square feet within the Premises is _____%. LANDLORD: CREEKSIDE ASSOCIATES LLC ------------------------ a limited liability company By: /s/ David Irmer Its Agreed to and Accepted as Of 5-24-00 /s/ T. Lawrence Jett ------- Manager TENANT: TriNet Employer Group, Inc., a California Corporation By: __________________________ Its:________________________ Exhibit C-2 CREEKSIDE PLAZA TriNet Employer Group, Inc. Exhibit D General Maintenance Plan The following represents a general maintenance plan for the exterior of Building A and the Common Area grounds and parking area serving it. 1 Landlord shall maintain the leased premises in conformity with the maintenance standards herein defined: 1.1 The exterior of the Building shall be maintained in conformance and in compliance with the approved construction and architectural plans and design scheme and reasonable commercial development maintenance standards for similar projects, including but not limited to, painting and cleaning of all exterior surfaces and other exterior facades comprising all private and public improvements to the curb line. 1.2 Landscape maintenance shall include, but not be limited to, watering/irrigation, fertilization, mowing, edging, trimming of grass, tree and shrub pruning in order to keep a healthy and manicured appearance, replacement when required, and weed control in all planters, shrubs, lawns, ground cover or other planted areas. 1.3 Clean-up maintenance shall include, but not be limited to, the maintenance of all sidewalks, piazzas, fountains, paths, including the "Creekwalk," in a litter, trash, debris-free environment in and about the Building, the Common Area and the Parking Lot. Clearance of all areas shall be maintained prior to the end of the day on which the maintenance operations are performed to ensure that all garbage trash, landscape, clippings, leaves and all debris are properly disposed of by the maintenance crew. Public and private sidewalks, piazzas and meeting areas outside of the Building shall be kept in a clean, neat, safe, litter-free, odor-free, sanitary condition; maintenance includes steam cleaning of hardscape sidewalks and paved surfaces as is necessary to remove grime and grease and the removal of foodstuff from public seating areas in the Common Area, including the "Creekwalk." The designated Parking Lot shall be maintained free of litter trash and dirt. Grease and oil shall be removed on a regularly scheduled basis by way of sweeping, steam and water cleaning. The lighting system shall be maintained on a regular basis with burned out bulbs replaced and light standards painted and repaired as is required. The Parking Lot and the adjacent walkways shall be repaired or replaced when required due to damage or wear. 1.4 Any and all chemicals, unhealthy substances and pesticides used in the maintenance process shall be applied in strict accordance with all regulatory agency regulations governing the Property. 1.5 The Creekside Plaza Business Park and any other improvements undertaken on the Property shall be maintained in good condition and in accordance with the custom and practice generally applicable to comparable first-class office facilities located within Alameda County, California. Exhibit D CREEKSIDE PLAZA TriNet Employer Group, Inc. Exhibit E Attornment and Nondisturbance Agreement This Attornment and Nondisturbance Agreement (the "Agreement") is made and entered into as of the ____ day of, _____,______, by and among _________ ("Tenant"), CREEKSIDE Associates LLC, a California limited liability company (hereafter referred to as either "Landlord" or "Borrower"), and _______________ ("Lender"). RECITALS WHEREAS, Lender has made a loan (the "Loan") to Borrower evidenced by a note (the "Note") secured by a deed of trust (the "Deed of Trust"), constituting a first lien upon the land described therein and the improvements thereon (the "Property"); WHEREAS, Landlord and Tenant have entered into a certain lease dated, which lease provides for the direct payment of rents from Tenant to Landlord for the use and occupancy of Suite - in that building located at, _______________, San Leandro, California ("The Premises") by Tenant, as more fully set forth in - ----------------------- the lease (hereafter, the lease and all present and future amendments and modifications thereto, and extensions thereof, shall be referred to as the "Lease"); WHEREAS, Lender wishes to obtain from Tenant certain assurances that Tenant will attorn to the purchaser at a foreclosure sale in the event of a foreclosure or to the holder of the Note and Deed of Trust in the event of such holder's exercise of its rights under the Note and Deed of Trust; WHEREAS, Tenant wishes to obtain from Lender certain assurances that, so long as Tenant is not in default of Tenant's obligations to Landlord under the Lease, Tenant shall not be disturbed in its peaceful possession of the Premises as a result of actions taken by Lender pursuant to its rights under the Deed of Trust; and WHEREAS, Tenant and Lender are both willing to provide such assurances to each other upon and subject to the terms and conditions of this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the above, the mutual promises hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto mutually agree as follows: 1 . Attornment. Tenant hereby agrees that the Lease shall not terminate in ---------- the event of a foreclosure of the Deed of Trust, whether by judicial or nonjudicial or any other proceedings brought to enforce the Deed of Trust or by deed in lieu of foreclosure, and Tenant further agrees to attorn to and recognize Lender or the purchaser ("Purchaser") at such foreclosure sale, as Tenant's landlord for the balance of the term of the Lease, in accordance with the terms and provisions Exhibit E CREEKSIDE PLAZA TriNet Employer Group,Inc. thereof, but subject, nevertheless, to the provisions of this Agreement, which Agreement shall be controlling in the event of any conflict. 2. Estoppel. Landlord and Tenant hereby agree that the Lease is valid, -------- enforceable and in full force and effect, that as of the date hereof there are no defaults by Landlord or Tenant, that there are no setoffs or counterclaims by Tenant to the payment of rent due under the Lease, that all conditions to the effectiveness or continuing effectiveness of the Lease required to be satisfied as of the date hereof have been satisfied and that the Lease is a complete statement of the agreements of Tenant and Landlord with respect to the Premises. 3. Tenant's Representation and Warranties. Tenant hereby represents and -------------------------------------- warrants to Lender that the Lease and its rights thereunder are not subordinate to any lien or deed of trust other than the Deed of Trust and all renewals, modifications, consolidations, replacements and extensions thereof, and that it will not subordinate the Lease or its rights thereunder to any lien or deed of trust without the prior written consent of Lender. 4. Lender's Right Tenant and Landlord agree that, at the request of -------------- Lender, the rent payments due under the Lease shall be paid directly to Lender and any such payments to Lender shall be credited against the rent due under the Lease as if made to the Landlord. 5. Nondisturbance. So long as Tenant is not in default under the Lease -------------- beyond any notice and cure period expressly provided in the Lease, Lender agrees with Tenant that in the event the interest of Landlord is acquired by Lender, or Lender acquires title to the Property or comes into possession of said Property by reason of foreclosure or enforcement of the Deed of Trust or the Note, or by a conveyance in lieu thereof, or by any other means, Tenant's possession of the Premises and Tenant's rights, privileges and obligations under the Lease shall not be disturbed, diminished or interfered with by Lender or any party claiming through Lender during the term of the Lease, including any extensions thereof permitted to Tenant, and the Lease shall continue in full force and effect and shall not be terminated except in accordance with the terms of the Lease. Immediately upon the acquisition by Lender or Purchaser of possession or title to the Property by reason of foreclosure or enforcement of the Deed of Trust or the Note, or by a conveyance in lieu thereof, or as a result of any other means, Tenant agrees to be bound to Lender or Purchaser under all of the terms, covenants, and conditions of the Lease for the balance of the term thereof, including any extensions thereof permitted to Tenant, with the same force and effect as if Lender or Purchaser were the landlord under the Lease, and Tenant does hereby attorn to Lender or Purchaser as its landlord, said attornment to be effective and self-operative without the execution of any other instruments on the part of either party hereto. Lender further agrees that if it obtains possession or title to the Property during the Lease term, Lender shall be bound to Tenant under all of the terms, covenants, and conditions of the Lease and Tenant shall, from and after the occurrence of the events set forth above, have the same remedies that Tenant might have had under the Lease against Landlord; provided, however, that Lender or Purchaser shall not be: Exhibit E CREEKSIDE PLAZA ii TriNet Employer Group, Inc. a. liable to Tenant for damages for any act or omissions of Landlord or any prior landlord occurring prior to Lender or Purchaser obtaining possession or title to the Property: b. subject to any offsets, claims or defenses which Tenant might have against Landlord or against any prior landlord which arise prior to the date Lender or Purchaser obtains possession or title to the Property; c. bound by any rent or additional rent or deposit, rental security or any other sums which Tenant may have paid to Landlord or any other landlord; d. bound by any amendment or modification of the Lease made without Lender's prior written consent; or e. obligated or liable to Tenant with respect to the construction or completion of the initial improvements in the Premises for Tenant's use, enjoyment or occupancy or any payment or allowance in connection therewith. 6. Obligations of Succeeding Owner. Tenant hereby agrees that any entity ------------------------------- or person which at any time hereafter becomes the Landlord under the Lease, including, without limitation, Lender, as a result of Lender's exercise of its rights under the Deed of Trust, or a purchaser from Lender, shall be liable only for the performance of the obligations of the Landlord under the Lease which arise and accrue during the period of such entity's or person's ownership of the Property. 7. Notices. All notices or other written communications required or ------- permitted to be given pursuant to this Agreement shall be in writing, and shall be deemed to have been properly given (i) upon delivery, if delivered in person or by facsimile transmission with receipt acknowledged, (ii) one business day after having been deposited for overnight delivery with any reputable overnight courier service, or (iii) three business days after having been deposited in any post office or mail depository regularly maintained by the U.S. Postal Service and sent by registered or certified mail, postage paid, addressed as follows: If to Borrower:__________________________________________ ___________________________________ ___________________________________ Attn: _____________________________ And ___________________________________ ___________________________________ ___________________________________ Attn: _____________________________ Exhibit E CREEKSIDE PLAZA iii TriNet Employer Group, Inc. If to Tenant: ______________________________________ ______________________________________ ______________________________________ Attn: _______________________________ If to Lender: ______________________________________ ______________________________________ Attn: _______________________________ or addressed as such party may from time to time designate in a writing to the other parties hereto and delivered in accordance with the provisions of this Section 7. 8. Miscellaneous. This Agreement may not be amended or modified in any ------------- manner other than by agreement in writing, signed by the parties hereto or their respective successors in interest, and this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. The words "foreclosure" and "foreclosure sale" as used herein shall be deemed to include the acquisition of Landlord's estate in the Property by any power of sale contained in the Deed of Trust, or by voluntary deed, assignment or other conveyance or transfer of foreclosure. 9. Conflicts with Lease. This Agreement shall supersede, as between -------------------- Tenant and Lender, all of the terms and provisions of the Lease which are inconsistent with this Agreement but shall not affect any obligations or liabilities of Borrower, as landlord, under the Lease. 10. Governing Law Venue. This Agreement shall be construed in accordance ------------------- with the laws of the State of California and any litigation arising out of this Agreement shall be brought in the courts of the State of California and all parties hereto consent to the venue of such courts. 11. Effect of Agreement. Borrower joins in the execution and delivery of ------------------- this Agreement for the purpose of evidencing its consent to the terms and provisions hereof, and as between Borrower and Tenant, nothing herein contained shall be deemed to alter or modify the Lease. As between Lender and Borrower, nothing contained herein shall be deemed to alter or modify the terms and conditions of the Note, the Deed of Trust, or any other document or agreement regarding the Loan made by Lender to Borrower. 12. Attorneys' Fees. In the event that any party or parties hereto bring --------------- suit to enforce any of the provisions of this Agreement, all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party or parties shall be paid by the other party or parties. Exhibit E CREEKSIDE PLAZA iv TriNet Employer Group, Inc. IN WITNESS WHEREOF. the parties hereto have caused this Agreement to be properly executed by their duly authorized representatives as of the date first above written. TENANT: _____________________________________________ By: ______________________________________ Its:__________________________________ LANDLORD: CREEKSIDE ASSOCIATES LLC, a California limited liability company By: ______________________________________ Its:__________________________________ LENDER: _____________________________________________ By: ______________________________________ Its:__________________________________ Exhibit E CREEKSIDE PLAZA v TriNet Employer Group, Inc. EX-10.18 6 0006.txt PROMISSORY NOTE DATED JUNE 22, 2000 EXHIBIT 10.18 PROMISSORY NOTE US$2,000,000 June 22, 2000 San Leandro, California For Value Received, TriNet Employer Group, Inc. a California corporation ("Borrower"), hereby promises to pay to the order of Select Appointments North America Inc., a Delaware corporation ("Lender"), in lawful money of the United States of America and in immediately available funds, the principal sum of up to Two Million Dollars ($2,000,000) (the "Loan") together with accrued and unpaid interest thereon, each due and payable on the dates and in the manner set forth below. 1. Drawings. The Loan may be drawn down in increments of Five Hundred Thousand Dollars ($500,000) on any business day up to the earlier of (a) the closing of the initial public offering of common stock of Borrower (the "IPO Closing") or (b) September 30, 2000. Draw downs may be made by Borrower by written notice to Lender no later than three (3) days prior to each draw down date. The fees for each draw down shall be as follows: three percent (3%) for the first draw down; three and one-half percent (3 1/2%) for the second draw down; four percent (4%) for the third draw down; and four and one-half percent (4 1/2%) for the fourth draw down. The amount of each draw down shall be paid by wire transfer to Borrower net of the applicable draw down fee on the draw down date to the bank account specified in the notice. 2. Principal Repayment. The outstanding principal amount of the Loan together with accrued and unpaid interest thereon shall be due and payable on the earlier of (a) the IPO Closing or (b) December 31, 2001. 3. Interest Rate. Borrower further promises to pay interest on any outstanding principal amount of the Loan from the applicable drawn down date until payment in full, which interest shall be payable at the rate that is the lesser of (i) the maximum rate permitted by law or (ii) two percent (2%) over the prime rate as published by Fleet Bank, Boston, from time to time, per annum until October 31, 2000 and thereafter at the rate of five percent (5%) over the prime rate as published by Fleet Bank, Boston, from time to time, with any excess interest being applied to the principal. Interest on outstanding principal amounts shall be due and payable in arrears on October 31, 2000 and thereafter not later than the last day of each calendar month for the preceding month and shall be calculated on the basis of a 360-day year for the actual number of days elapsed. 4. Place of Payment. All amounts payable by Borrower hereunder shall be payable at the direction of Lender. 5. Application of Payments. Payment on this Note shall be applied first to accrued interest, and thereafter to the outstanding principal balance hereof. 6. Default. Each of the following events shall be an "Event of Default" hereunder: 1. (a) Borrower fails to pay timely any of the principal amount due under this Note on the date the same becomes due and payable or any accrued interest or other amounts due under this Note on the date the same becomes due and payable or within five (5) business days thereafter; (b) Borrower files any petition or action for relief under any bankruptcy, reorganization, insolvency or moratorium law or any other law for the relief of, or relating to, debtors, now or hereafter in effect, or makes any assignment for the benefit of creditors or takes any corporate action in furtherance of any of the foregoing; (c) An involuntary petition is filed against Borrower (unless such petition is dismissed or discharged within sixty (60) days) under any bankruptcy statute now or hereafter in effect, or a custodian, receiver, trustee, assignee for the benefit of creditors (or other similar official) is appointed to take possession, custody or control of any property of Borrower; or (d) Borrower grants a security interest, pledges its assets or files a lien after the date of this Note; provided that the foregoing shall exclude: (i) any security interest, pledge or lien (a "Lien") upon or in (A) any equipment acquired or held by Borrower or any of its subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment, or (B) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; (ii) Liens securing capital lease obligations on assets subject to such capital leases; (iii) Liens on equipment leased by Borrower pursuant to an operating lease in the ordinary course of business (including proceeds thereof and accessions thereto) incurred solely for the purpose of financing the lease of such equipment (including Liens arising from UCC financing statements regarding leases permitted by this Note). Upon the occurrence of an Event of Default hereunder, all unpaid principal, accrued interest and other amounts owing hereunder shall, at the option of Lender, and, in the case of an Event of Default pursuant to (b), (c) or (d) above, automatically, be immediately due, payable and collectible by Lender pursuant to applicable law and Borrower shall not be permitted to make any further drawings under this Note. 7. Waiver. Borrower waives presentment and demand for payment, notice of dishonor, protest and notice of protest of this Note, and shall pay all costs of collection when incurred, including, without limitation, reasonable attorneys' fees, costs and other expenses. The right to plead any and all statutes of limitations as a defense to any demands hereunder is hereby waived to the full extent permitted by law. 8. Governing Law. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of California, excluding conflict of laws principles that would cause the application of laws of any other jurisdiction. 2. 9. Successors and Assigns. This Note is not assignable by Borrower without the prior written consent of Lender except in the event that an entity acquires the capital stock of Borrower or substantially all of the assets of the Borrower, in which case the provisions of this Note shall inure to the benefit of and be binding on such entity and shall extend to any holder hereof. The rights and obligations of this Note shall be assignable by Lender to any affiliate of Lender. BORROWER TRINET EMPLOYER GROUP, INC. By: /s/ Douglas P. Devlin ---------------------------------- Printed Name: Douglas P. Devlin ------------------------ Title: Chief Financial Officer ------------------------------- 3. EX-23.02 7 0007.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 18, 2000, except for paragraph 2 of Note 4, as to which the date is February 29, 2000 in Amendment No. 5 to the Registration Statement (Form S-1 No. 333-31534) and related Prospectus of TriNet Group, Inc. for the registration of 3,900,000 shares of its common stock. /s/ Ernst & Young LLP Walnut Creek, California September 22, 2000 EX-27.01 8 0008.txt FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 0 0 15,749,631 (723,000) 0 38,620,485 11,247,358 (3,294,525) 47,470,549 38,400,763 0 500,000 3,974,185 6,750,679 (392,992) 47,470,549 14,296,972 14,937,207 7,449,200 7,449,200 10,865,078 622,759 53,763 (4,043,600) 1,061,700 (2,981,900) 0 0 0 (2,981,900) (0.47) (0.47)
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