10-K


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-K
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     
Commission File Number: 001-36373
 
TRINET GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
 
95-3359658
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1100 San Leandro Blvd., Suite 400, San Leandro, CA
 
94577
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (510) 352-5000
 
Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.000025 Per Share; Common stock traded on the New York Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o    No  x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  o    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o (do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The New York Stock Exchange on June 30, 2015, was $1,055,737,584.
The number of shares of Registrant’s Common Stock outstanding as of March 28, 2016 was 70,711,536.
Portions of the Registrant’s Definitive Proxy Statement to be issued in connection with its Annual Meeting of Stockholders, scheduled to be held on May 26, 2016, are incorporated by reference into Part III of this Form 10-K.
 




TriNet, Inc.
Form 10-K - Annual Report
For the Fiscal Year End December 31, 2015
TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





Special Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are not guarantees of future performance, but are based on management’s expectations as of the date of this report and assumptions that are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from those in forward-looking statements. Important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included under Part I, Item 1A below. All information provided in this report is as of the date of this report and we undertake no duty to update this information except as required by law.



PART I
Item 1. Business
Business Overview
TriNet Group Inc., or TriNet or the Company, is a leading provider of comprehensive human resources, or HR, solutions for small to midsize businesses, or SMBs, under a co-employment model. Our HR solutions are designed to manage an increasingly complex set of HR regulations, costs, risks and responsibilities for our clients, allowing them to focus on operating and growing their core businesses. Our bundled HR solutions include offerings such as:
multi-state payroll processing and tax administration;
employee benefits programs, including health insurance and retirement plans;
workers compensation insurance and claims management;
federal, state and local labor, employment and benefit law compliance;
risk mitigation, including employment practices claims management;
expense and time management; and
human capital consulting.
Our proprietary, cloud-based HR software systems are used by our clients and their employees, whom we refer to as worksite employees, or WSEs, to efficiently store and manage their core HR-related information and conduct a variety of HR-related transactions anytime and anywhere.
In addition, our expert teams of in-house HR professionals also provide additional services upon request to support various stages of our clients' growth, including talent management, recruiting and training, performance management consulting or other consulting services (with an incremental charge for such services).
As of December 31, 2015, we served over 12,700 clients in all 50 states, the District of Columbia and Canada, co-employed more than 324,000 WSEs and had processed over $31 billion in payroll and payroll tax payments for clients on our systems in 2015. Our clients are distributed across a variety of industries, including technology, life sciences, not-for-profit, professional services, financial services, property management, retail, manufacturing, and hospitality. Our sales and marketing, client services and product development teams are increasingly focused on specific industry verticals. This verticalized approach gives us a deeper understanding of the HR needs facing SMBs in particular industries, which better enables us to provide HR solutions and services tailored to the specific needs of clients in these verticals. We conduct our business primarily in the United States, with more than 99% of our total revenues for each of 2015, 2014 and 2013 being attributable to WSEs in the U.S. and the remainder being attributable to WSEs in Canada.

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For 2015, 2014 and 2013, our total revenues were $2.7 billion, $2.2 billion and $1.6 billion respectively. Our total revenues consist of professional service revenues and insurance service revenues. For 2015 and 2014, 15% and 16% of our total revenues, respectively, consisted of professional service revenues, and 85% and 84% of our total revenues, respectively, consisted of insurance service revenues.
We recognize as professional service revenues the fees we earn for providing our clients with a comprehensive suite of HR professional services, but do not include amounts paid to us by clients as payroll that are paid out to WSEs or amounts withheld and remitted to authorities as taxes.
We recognize as insurance service revenues all insurance-related billings and administrative fees collected from clients and withheld from WSEs. We pay premiums to third-party insurance carriers for client and WSE insurance benefits and reimburse the insurance carriers and third-party administrators for claims payments made on our behalf within our insurance deductible layer, where applicable. These premiums and reimbursements are classified as insurance costs on our statements of operations.
To augment our financial information prepared in accordance with U.S. generally accepted accounting principles, or GAAP, we use internally a non-GAAP financial measure, Net Insurance Service Revenues, which consists of insurance service revenues less insurance costs. We also use a measure of total non-GAAP revenue, or Net Service Revenues, which is the sum of professional service revenues and Net Insurance Service Revenues. For 2015, 2014 and 2013, Net Service Revenues were $546.9 million, $507.2 million and $417.7 million, respectively. For 2015, 73% of our Net Service Revenues consisted of professional service revenues and 27% of our Net Service Revenues consisted of Net Insurance Service Revenues.
For 2015, 2014 and 2013, our net income was $31.7 million, $15.5 million and $13.1 million, respectively, and our Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization, or Adjusted EBITDA, was $151.3 million, $165.3 million and $136.0 million, respectively.
Our Services
Professional Services
We provide our clients with a comprehensive suite of HR professional services that we believe enable SMBs to effectively execute fundamental HR transactions and manage an increasingly complex set of HR regulations, costs, risks and responsibilities.
As part of our professional service offerings, we provide our clients with fundamental HR transactional capabilities, including multi-state payroll processing and tax administration, as well as a cloud-based system of record for all their HR transactions. Our online and mobile self-service tools enable our clients, for example, to manage effectively employee hiring and termination, administer changes to employee payroll, view real-time benefits data and create compensation reports. In addition, WSEs are able to access our system to manage their own payroll information, request paid time off (PTO) and view approval status real-time, view paystubs, PTO balances, W-2s and more. This HR functionality is a core component of our professional HR service offering.
We also leverage the collective insights and experience that we have gained over our 27-year operating history to help clients mitigate the many administrative, regulatory and practical risks associated with their responsibilities as employers.  We continuously monitor changes in the labor, employment and benefit regulatory environment and offer guidance and training to clients to assist them in avoiding or reducing liability and exposure.  Our professional HR services include access to HR templates, best practices, employee handbooks, disciplined process management guidelines, employee relations consultation, issue investigation, workplace employment posters, and compensation practice benchmarking data.  In addition, our clients are able to consult directly with our HR professionals through a variety of interaction models, ranging from call center support for basic questions to pooled specialized resources and dedicated HR professionals, depending upon the needs of the client and their WSEs.  Our HR teams also provide additional services upon request to support stages of our clients’ growth, including recruiting or other services (with an incremental charge for such services).
Insurance Services
We offer our clients and WSEs access to a broad range of TriNet-sponsored benefits and insurance programs that many of our clients may be unable to obtain for their WSEs on their own and that are compliant with state, local, and federal regulations. We believe access to our fully-insured, Affordable Care Act compliant group health insurance plans is one of the

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most important benefits we provide to our clients and WSEs. In addition, our insurance services offerings include plan design and administration, enrollment management, and WSE and client communications relating to our sponsored benefits and insurance programs. As described below, the principal components of our insurance services offerings are employee benefit plans, workers compensation insurance and employment practices liability insurance.
Employee Benefit Plans
We sponsor and administer a number of fully-insured, risk based employee benefit plans, including group health, dental, vision and life insurance as an employer plan sponsor under Section 3(5) of the Employee Retirement Income Security Act, or ERISA. We also offer other benefit programs to our clients and WSEs, including individual life insurance, a legal services plan, commuter benefits, home insurance, critical illness insurance, pet insurance and auto insurance. We provide group insurance coverage to our WSEs through a national network of carriers including Aetna, Blue Shield of California, Florida Blue, BlueCross BlueShield of North Carolina, Tufts, Kaiser Permanente, MetLife United Healthcare, EyeMed, Delta Dental and Vision Service Plan.
Approximately 38% of our 2015 group health insurance premiums were for fully insured policies with respect to which our carriers set the premiums and for which we were not responsible for any deductible, which are referred to as ‘guaranteed cost’ policies. The remaining 62% of our 2015 group health insurance premiums were for fully insured policies with respect to which we agree to pay additional amounts to our carriers for any claims paid within an agreed-upon deductible layer. Our agreements with our health insurance carriers with respect to these non-'guaranteed cost' policies typically include limits to our exposure for individual claims, which we refer to as ‘pooling’ limits, and limits to our maximum aggregate exposure for claims in a given policy year, which we refer to as ‘stop loss’ limits. We have experienced variability, and may experience variability in the future, in the amounts that we are required to pay our health insurance carriers for group health insurance expenses incurred by WSEs within our deductible layer under non-'guaranteed cost' policies, based on continually changing trends in the frequency and severity of claims. These historical trends may change, and other seasonal trends and variability may develop, which may make it more difficult for us to manage this aspect of our business.
Workers Compensation Insurance
We provide fully-insured workers compensation insurance coverage for our clients and WSEs through agreements that we negotiate with our third-party insurance providers. These agreements typically include a deductible layer that obligates us to reimburse our carriers up to $1 million per claim occurrence. We manage the risk that we assume in connection with these policies by being selective in the types of businesses that we take on as new clients, by monitoring claims data and the performance of our carriers and third-party claims management services and vendors and by providing risk management services for existing clients. These services include performing workplace assessment, safety consultation, accident investigation and other risk management services at our client locations to help prevent situations that could lead to claims and services to help remediate claims when they occur.
Employment Practices Liability Insurance
We provide employment practices liability insurance (EPLI) for our clients through agreements that we negotiate with our third-party EPLI insurance provider. These EPLI policies provide for a per-claim retention amount. For most of our clients, the retention amount is split between the client and TriNet, with the client paying its portion of the retention amount first. While we do not provide legal representation to our clients, our clients can benefit from the extensive experience of employment law specialists in our legal department who support our HR professionals in their efforts to assist clients in avoiding employment practices liability claims and in managing, processing and responding to such claims. For claims covered by the EPLI insurance, actual litigation defense is conducted by one of several outside employment law firms chosen by the EPLI carrier with whom we and our EPLI carriers have previously negotiated rates, established billing guidelines and invoice review processes and developed a case management protocol to efficiently and effectively defend such claims.
Seasonality and Insurance Variability
Our business is affected by cyclicality in business activity and WSE behavior. Historically, we have experienced our highest monthly addition of WSEs, as well as our highest monthly levels of client attrition, in the month of January, primarily because clients that change their payroll service providers tend to do so at the beginning of a calendar year. We also experience higher levels of client attrition in connection with renewals of the health insurance we sponsor for our WSEs, in the event that such renewals result in higher costs to our clients. We have also historically experienced higher insurance claim volumes in the second and third quarters of a fiscal year than in the first and fourth quarters of a fiscal year, as WSEs typically access their health care providers more often in the second and third quarters of a fiscal year, which has negatively impacted our insurance

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costs in these quarters. We have also experienced variability on a quarterly basis in the amount of our health and workers compensation insurance costs due to the number and severity of insurance claims being unpredictable. These historical trends may change, and other seasonal trends and variability may develop which would make it more difficult for us to manage our business.
Our Co-Employment Model
We operate under a co-employment model business model, under which employment-related responsibilities are contractually allocated between us and our clients, which affords us a close relationship with our clients and their WSEs. Each of our clients enters into a client service agreement with us that defines the suite of professional and insurance services and benefits to be provided by us, the fees payable to us, and the division of responsibilities between us and our client as co-employers. The division of responsibilities under our client service agreements is typically as follows:
TriNet Responsibilities
We assume responsibility for, and manage certain risks associated with:
remittance to WSEs of salaries, wages and certain other compensation, as reported and paid to us by the client, related tax reporting and remittance to tax authorities and processing of garnishment and wage deduction orders. Unlike a payroll service provider, we issue each WSE a payroll check drawn on our bank accounts;
maintenance of workers compensation insurance and workers compensation claims processing;
provision and administration of group health, welfare, and retirement benefits to WSEs, based on our clients’ elections, under TriNet-sponsored insurance plans;
compliance with applicable law for employee benefits offered to WSEs;
processing of unemployment claims; and
provision of certain HR policies, including an employee handbook describing the co-employment relationship.
Client Responsibilities
Our clients are responsible for employment-related responsibilities that we do not assume, including:
day-to-day management of their worksites and WSEs;
compliance with laws associated with the classification of employees as exempt or non-exempt, such as overtime pay and minimum wage law compliance;
accurate and timely reporting to TriNet of compensation and deduction information, including information relating to hours worked, rates of pay, salaries, wages and certain other compensation;
accurate and timely reporting to TriNet of information relating to workplace injuries, employee hires and termination, and certain other information relevant to TriNet’s services;
provision and administration of any employee benefits not provided by TriNet (e.g., equity incentive plans);
compliance with all laws and regulations applicable to the client’s workplace and business, including work eligibility laws, laws relating to workplace safety or the environment, laws relating to family and medical leave, laws pertaining to employee organizing efforts and collective bargaining and employee termination notice requirements;
payment of TriNet invoices which include wages to WSEs and applicable employment taxes and service fees; and
all other matters for which TriNet does not assume responsibility under the client service agreement, such as intellectual property ownership and protection and liability for products produced and/or services provided.
As a result of our co-employment relationship with each of our WSEs, we are liable for payment of salary, wages and certain other compensation to the WSEs as reported by the client and are responsible for providing specified employee benefits to such persons to the extent provided in each client service agreement and under federal and state law. In most instances, clients are required to remit payment prior to the applicable payroll date by wire transfer or automated clearinghouse transaction. Although we may become liable, as the employer for payroll purposes, to pay certain amounts for work previously performed, we are not obligated to continue to provide services to the client if payment has not been made. For the year ended December 31, 2015, our bad debt expense relating to such obligations was approximately $2.0 million.

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We also assume responsibility for payment and liability for the withholding and remittance of federal and state income and employment taxes with respect to salaries, wages and certain other compensation paid to WSEs, although we reserve the right to seek recourse against our clients for any liabilities arising out of their conduct. Except to the extent federal legislation and applicable state law otherwise provide, the client may be held ultimately liable for those obligations if we fail to remit taxes and the bonding security provided by the Employer Services Assurance Corporation (ESAC) is not sufficient to satisfy the obligation. We also secure insurance in the event that we fail to meet these obligations.
Our Technology Platform
We provide our clients and WSEs with fundamental HR transactional capabilities, as well as a cloud-based system of record for all their HR transactions. Our online and mobile self-service tools allow our clients and WSEs 24/7 access to their core HR information. On our systems, clients can effectively manage employee hiring and termination, administer employee payroll, view real-time benefits data and create compensation reports. WSEs can also manage their own payroll information, request paid time off (PTO) and view approval status real-time, enroll in benefits, and view paystubs, PTO balances, and W-2s, among other things. We also offer human capital management software offerings, including talent management and development, applicant tracking, expense management, and performance management. These modules can be either bundled into the product offering or purchased as add-ons for certain of our verticals. We have also made significant investments to integrate our software offerings with those of certain third-party technology and benefits services providers to allow clients and WSEs to access a unified view of all of their pertinent HR information.
By offering a proprietary, cloud-based HR system, our clients gain the efficiencies of an enterprise-level software solution without the significant cost of in-house installation or ongoing maintenance. Features include:
multi-tenant system enabling multiple clients and WSEs to share one version of our system while isolating each client’s and WSE’s data;
rule-based provisioning ensuring that all users are authenticated, authorized and validated before they can access our systems;
redundant processing centers to protect client data from loss;
integrated benefits and payroll processing for faster, more accurate data; and
flexible and extensible platform architecture.
From 2013 through 2015, we invested approximately $111.3 million in our technology systems. We plan to continue to invest to upgrade and improve our technology offerings, including enhancements of our solutions to address specific needs of clients in our key vertical markets, as we believe the continued improvement of our technology provides TriNet with the ability to drive operating efficiencies while improving our clients’ experience. We will leverage our existing online technology offerings to build additional products and features, including a full-service mobile platform, standard APIs for selected third party offerings, improved client experience for key processes, and retirement of legacy software systems from acquisitions and migration of clients to the primary TriNet software system.
Competition
We face significant competition on a national and regional level from a number of companies purporting to deliver a range of bundled services that are generally similar to the services we provide. The National Association of Professional Employer Organizations, or NAPEO, estimates that there are between 780 and 980 such entities currently operating in the United States. We are one of only five PEOs accredited by the Employer Services Assurance Corporation that offers services in all 50 states and believe that we are one of the largest PEOs in the industry. Our competitors include large PEOs such as the TotalSource unit of Automatic Data Processing, Inc. and Insperity, Inc., as well as specialized and smaller PEOs and similar service providers. If and to the extent that we and other companies providing these services are successful in growing our businesses, we anticipate that future competitors will enter this industry.

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In addition to competition from other professional employer organizations, we also face significant competition in the form of companies serving their HR needs in both traditional and non-traditional manners. These forms of competition include:
HR and information systems departments and personnel of companies that perform their own administration of employee benefits, payroll and HR;
providers of certain endpoint HR services, including payroll, employee benefits and business process outsourcers with high-volume transaction and administrative capabilities, such as Automatic Data Processing, Inc., Paychex, Inc. and other third-party administrators;
employee benefit exchanges that provide benefits administration services over the Internet to companies that otherwise maintain their own employee benefit plans; and
insurance brokers who allow third party HR systems to integrate with their platform.
We believe that our services are attractive to many SMBs in part because of the quality and breadth of our workers compensation, group health insurance and other employee benefits programs. We compete with insurance brokers and other providers of this coverage in this regard.
We believe the principal competitive factors in our market include the following:
level of client satisfaction;
ease of client setup and on-boarding;
breadth and depth of benefit plans;
vertical market expertise;
total cost of service;
brand awareness and reputation;
ability to innovate and respond to client needs rapidly;
online and mobile functionality; and
subject matter expertise.
We believe that we compete favorably on the basis of each of these factors.
Sales and Marketing
We sell our solutions primarily through our direct sales organization. We have aligned our sales organization by industry vertical with the goal of driving profitable market share in our targeted industries. This vertical approach deepens our network of relationships and gives us an understanding of the unique HR needs facing SMBs in those industries. As part of our vertical approach, we conduct industry-specific client marketing programs, including industry and geographic focus groups, to foster a sense of community through the sharing of best practices, while also collecting valuable information about the unique requirements of companies in particular industries. This knowledge then allows our sales team to work with our product development and client service teams to build bundled solutions of services that are tailored to the specific needs of clients in these industries.
The number of sales representatives in the field has grown substantially in recent years, through both internal hiring and through onboarding sales representatives from acquired businesses, from 80 sales representatives as of December 31, 2011 to 481 sales representatives as of December 31, 2015. In our direct sales organization, we recruit and seek to hire sales professionals who have experience in a specific industry vertical market, and with a background in selling business services such as accounting, HR or sales solutions. As of December 31, 2015, we had approximately 50 regional field sales offices.
Our sales team’s primary focus and goal is to win new accounts as opposed to mining our installed base of business for incremental revenue. In order to drive the most effective cost of acquisition for this new business, we continually fine-tune our lead generation and marketing efforts and our initiatives to attempt to drive higher productivity per sales representative.
Our marketing, inside sales, lead generation, and lead incubation efforts support the success of our direct sales representatives. We employ a broad range of vertically focused awareness and demand-generation marketing programs, including digital and print advertising, e-mail, direct mail and social media. We have an internal public relations team that works with an external agency to promote relevant content to target media outlets. We sponsor and participate in associations and events around the country and utilize these forums to target specific vertical and geographic markets. We also generate

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sales opportunities, and deepen our relationships within key industry verticals, through marketing alliances and other indirect channels, such as existing clients, certified public accountants, venture capital firms, incubators, insurance brokers, and other vertical market industry associations.
We drive sales representative productivity in a number of ways, including by improving the quality of leads generated by our marketing and inside sales teams, and through the development of a sales operations team that offloads sales process work. We believe our focus on specific verticals, and the expertise gained through this focus, makes our sales representatives increasingly relevant to their target audience. Recently, we have expanded our focus on various channel relationships and alliances that drive warm leads to our direct sales force. Finally, our sales representatives benefit from building strong relationships with prospects during the sales process, resulting in referrals to new prospects as well as direct support through providing reference calls in regards to our products and services.
Strategic Acquisitions
Historically, we have pursued strategic acquisitions to both expand our product capabilities and supplement our growth across geographies and certain industry verticals. Our acquisition targets have included other bundled HR providers as well as technology companies or technology product offerings to supplement or enhance our existing HR solutions. We intend to continue to pursue strategic acquisitions that will enable us to add new clients and WSEs, expand our presence in certain geographies or industry verticals and offer our clients and WSEs more comprehensive and attractive products and services.
Clients
We approach the market with a vertical, or industry-based, focus. Our clients span a variety of industries, including technology, life sciences, not-for-profit, professional services, financial services, property management, retail, manufacturing and hospitality. We have grown our number of clients from approximately 4,500 as of December 31, 2011 to over 12,700 clients as of December 31, 2015. We have also grown our number of WSEs from approximately 83,000 as of December 31, 2011 to approximately 324,000 in all 50 states, the District of Columbia and Canada as of December 31, 2015.
U.S. Legal and Regulatory Environment
The complex environment created by the numerous federal, state and local laws and regulations relating to labor and employment matters, benefit plans and income and employment taxes creates a significant demand for our HR solutions. Many of those laws and regulations also significantly affect how we are able to provide our HR solutions to our clients. Many of these laws, such as ERISA, were enacted before the development of the co-employment relationship and other non-traditional employment relationships, such as temporary employment and other employment-related outsourcing arrangements. Therefore, many of these laws do not specifically address the obligations and responsibilities of professional employer organizations utilizing a co-employment model like ours, creating uncertainty about their interpretation and application to our industry. In addition, other federal and state laws and regulations, such as the Affordable Care Act, are relatively new and administrative agencies and federal and state courts have only begun to interpret and apply these regulations to our industry. The development of additional regulations and interpretation of these laws and regulations can be expected over time.
We believe that our operations are currently in compliance in all material respects with applicable federal and state statutes and regulations. The sections discussed below summarize what we believe are the most important regulatory aspects of our business:
Employer Status
In order for clients and WSEs to receive the full benefit of our employee benefit plan offerings, it is important that we constitute the “employer” of the WSEs under the Internal Revenue Code of 1986, or the Code, and ERISA. The definitions of “employer” under both the Code and ERISA are not clear and are defined in part by complex multi-factor tests under common law. We believe that we qualify as an “employer” of our WSEs in the United States under both the Code and ERISA, and we implement processes to protect and preserve this status. With Congressional passage of the Small Business Efficiency Act in December 2014, the Code clarified the employer status of professional employer organizations, or PEOs, for federal tax purposes, for those PEOs who voluntarily become certified under this law. The IRS is expected to begin accepting applications for certification in July 2016 and we currently intend to apply for certification.
Tax Qualified Plans. In order to qualify for favorable tax treatment under the Code, certain employee benefit plans such as 401(k) retirement plans and cafeteria plans must be established and maintained by an employer for the exclusive benefit of its employees. Generally, an entity is an “employer” of certain workers for federal employment tax purposes if an employment

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relationship exists between the entity and the workers under the common law test of employment. The common law test of employment, as applied by the IRS, involves an examination of many factors to ascertain whether an employment relationship exists between a worker and a purported employer. Our 401(k) retirement plans are operated pursuant to guidance provided by the IRS for the operation of defined contribution plans maintained by co-employers that benefit WSEs. This guidance provides qualification standards for such plans. All of our 401(k) retirement plans have received favorable determination letters from the IRS confirming the qualified status of the plans. The IRS 401(k) guidance and qualification requirements are not applicable to the operation of our cafeteria plans.
ERISA Regulation. Employee pension and welfare benefit plans are also governed by ERISA. ERISA defines an “employer” as “any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan.” ERISA defines the term “employee” as “any individual employed by an employer.” The courts have held that the common law test of employment must be applied to determine whether an individual is an employee or an independent contractor under ERISA. However, in applying that test, control and supervision are less important for ERISA purposes when determining whether an employer has assumed responsibility for providing employee benefits. A definitive judicial interpretation of “employer” in the context of a professional employer organization has not been established, and the U.S. Department of Labor has issued guidance that certain entities in the HR outsourcing industry do not qualify as common law employers for ERISA purposes. If we were found not to be an employer for ERISA purposes, it could affect the manner in which we are able to provide employee benefits to our WSEs.
Affordable Care Act
The Affordable Care Act, or the Act, implemented sweeping health care reforms with staggered effective dates from 2010 through 2020, and many provisions in the Act require the issuance of additional guidance from the U.S. Department of Labor, the IRS, the U.S. Department of Health and Human Services and the states. The Act imposed a number of new mandates on the coverage required to be provided under health insurance plans beginning in 2010, with additional requirements staged in subsequent years. We believe that our group health insurance plans comply with existing mandates. However, the guidance issued to date by the IRS and the U.S. Department of Health and Human Services has not addressed, or in some instances is unclear, as to its application in the co-employer context. As a result, we are not yet able to predict all of the impacts to our business, and to our clients, resulting from the Act.
State Unemployment Taxes
State unemployment taxes are based on taxable wages and tax rates assigned by each state. The tax rates vary by state and are determined, in part, based on our prior years’ compensation and unemployment claims experience in each state. Certain rates are also determined, in part, by each client’s own compensation and unemployment claims experience. In addition, states have the ability under law to increase unemployment tax rates, including retroactively, to cover deficiencies in the unemployment tax funds. Due to the adverse U.S. economic conditions during recent years and the associated reductions in employment levels, the state unemployment tax funds have experienced a significant increase in the number of unemployment claims. Accordingly, state unemployment tax rates increased substantially over the past few years. Employers in certain states are also experiencing higher federal unemployment tax rates as a result of certain states not repaying their unemployment loans from the federal government in a timely manner. We have taken steps to mitigate the risk of fluctuations in state and federal unemployment tax rates, including reporting and remitting unemployment insurance taxes or contributions at the client level and/or under the client’s own account number in approximately 40 states, and we will continue to evaluate such reporting relationships in the future.
State Regulation of Co-Employers
Forty-two states have adopted provisions for licensing, registration, certification or recognition of co-employers, and others are considering such regulation. Such laws vary from state to state but generally provide for monitoring or ensuring the fiscal responsibility of professional employer organizations, and in some cases codify and clarify the co-employment relationship for unemployment, workers compensation and other purposes under state law. We believe we are in compliance in all material respects with the requirements in all 42 states. Regardless of whether a state has licensing, registration or certification requirements for co-employers, we must comply with a number of other state and local regulations that could impact our operations, such as state and local taxes, licensing and business regulations.
Intellectual Property
Our success depends in part on intellectual property rights to the services that we develop. We rely on a combination of contractual rights, including non-disclosure agreements, trade secrets, copyrights and trademarks, to establish and protect our

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intellectual property rights in our names, services, methodologies and related technologies. If we lose intellectual property protection or the ability to secure intellectual property protection on any of our names, confidential information or technology, this could harm our business. Our intellectual property rights may not prevent competitors from independently developing services and methodologies similar to ours, and the steps we take might be inadequate to deter infringement or misappropriation of our intellectual property by competitors, former employees or other third parties, any of which could harm our business. We currently have one pending U.S. patent application covering our technology. We own registered trademarks in the United States, Canada and the European Union that have various expiration dates unless renewed through customary processes. Our trademark registrations may be unenforceable or ineffective in protecting our trademarks. Our trademarks may be unenforceable in countries outside of the United States, which may adversely affect our ability to build our brand outside of the United States.
Although we believe that our conduct of our business does not infringe on the intellectual property rights of others, third parties may nevertheless assert infringement claims against us in the future. We may be required to modify our products, services, internal systems or technologies, or obtain a license to permit our continued use of those rights. We may be unable to do so in a timely manner, or upon reasonable terms and conditions, which 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 services, internal systems or technologies.
Corporate Employees
We refer to our employees, excluding employees that we co-employ on behalf of our clients, as our corporate employees. We had approximately 2,500 corporate employees as of December 31, 2015. None of our corporate employees is covered by a collective bargaining agreement.

Corporate and Other Available Information
We were incorporated in 1988 as TriNet Employer Group, Inc., a California corporation. We reincorporated as TriNet Merger Corporation, a Delaware corporation, in 2000 and during that year changed our name to TriNet Group, Inc. Our principal executive offices are located at 1100 San Leandro Blvd., Suite 400, San Leandro, CA 94577 and our telephone number is (510) 352-5000. Our website address is www.trinet.com. Information contained in or accessible through our website is not a part of this report.
On the Investor Relations page of our Internet website at http://www.trinet.com, we make available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Information contained in or accessible through our website is not incorporated into this report and is not a part of this report.

Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and all of the other information contained in this report, including the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes. Any of the following risks could materially and adversely affect our business, financial condition and results of operations and cause a decline in the trading price of our common stock, and you may lose some or all of your investment.
Risks Related to Our Business and Industry
Our co-employment relationship with our worksite employees exposes us to business risks.
Under our agreements with our clients, we are a co-employer of our WSEs and assume certain obligations, including the responsibility to pay salaries, wages and related payroll taxes of our WSEs, and to do so, to the extent required by law, regardless of whether our client timely remits payments to us. In addition, we provide benefits to our WSEs, even if the cost of providing such benefits is greater than fees received from our clients. Although our client agreements require clients to pay these amounts or indemnify us for failure to make such payments, we may not be able to effectively enforce or collect on these contractual obligations. Accordingly, our ultimate liability for payroll and benefits expenses for our WSEs could exceed the amounts we receive from our clients, which could have a material adverse effect on our financial condition or results of operations.

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Moreover, as a co-employer of our WSEs, there is a possibility that we may be subject to liability for violations of employment laws and other acts and omissions by our clients or WSEs, who may be deemed to be our agents, even if we do not participate in any such acts or violations. Such laws include, but are not limited to, laws relating to payment of wages, employment discrimination, labor relations and whistleblower protection. Although our client agreements establish the contractual division of responsibilities between us and our clients for various personnel management matters, including compliance with and liability under various governmental regulations, as well as providing for clients to indemnify us for any liability attributable to clients’ or their employees’ conduct, we may not be able to effectively enforce or collect on these contractual obligations, which could have a material adverse effect on our financial condition or results of operations.
We maintain employment practices liability insurance coverage (often including coverage for our clients) to manage our and our clients’ exposure for various WSE-related claims and are responsible (often together with our clients) for any deductible layer under such coverage. Furthermore, employment practices liability insurance generally excludes coverage for claims relating to compliance with laws associated with the classification of employees as exempt or non-exempt, such as overtime pay and minimum wage law compliance. We cannot assure you that our insurance will be sufficient in amount or scope to cover all claims that may be asserted against us and for which we are unable to obtain indemnification from our clients. If judgments or settlements or defense costs exceed our insurance coverage, it could harm our results of operations and financial condition. We cannot assure you that we will be able to obtain appropriate types and levels of insurance in the future, that we will be able to replace existing policies on acceptable terms, or at all, or that our insurers will be able to pay all claims that we may make under our policies, any of which could have a material adverse effect on our financial condition or results of operations.
Our business is subject to numerous state and federal laws, and uncertainty as to the application of these laws, or adverse applications of these laws, as well as changes in applicable laws, could adversely affect our business.
Our operations are governed by numerous federal, state and local laws relating to labor, tax, employee benefits, insurance and employment matters. However, many of these laws (such as ERISA and federal and state employment tax laws) do not specifically address the obligations and responsibilities of a professional employer organization providing outsourced HR services in a co-employment relationship, and the definition of employer under these laws is not uniform. In addition, many states have not addressed the co-employment relationship for purposes of compliance with applicable state laws governing the relationship between employers and employees and state insurance laws. We are not able to predict whether broader federal or state regulation governing our business and the co-employment relationship with our WSEs will be implemented, or if it is, how it will affect us, our clients or our WSEs. Any adverse application or interpretation (in courts, agencies or otherwise) of new or existing federal or state laws to the co-employment relationship with our clients and WSEs could have a material adverse effect on our financial condition and results of operations. If federal, state or local jurisdictions were to change their regulatory framework related to outsourced HR services, or introduce new laws governing our industry that were materially different from existing laws, those changes could reduce or eliminate the need for some of our services, or could require that we make significant changes in our methods of doing business, which could increase our cost of doing business. Changes in regulations could also affect the extent and type of employee benefits employers can or must provide employees, the amount and type of taxes employers and employees are required to pay or the time within which employers must remit taxes to the applicable authority. These changes could substantially decrease our revenues and substantially increase our cost of doing business and have a material adverse effect on our financial condition and results of operations.
Although some states do not explicitly regulate professional employer organizations, 42 states have passed laws that have licensing, certification or registration requirements applicable to professional employer organizations or recognize the professional employer organization model, and other states may implement such requirements in the future. Laws regulating professional employer organizations vary from state to state, but generally provide for oversight of the fiscal responsibility of professional employer organizations, and in some cases codify and clarify the co-employment relationship for processing unemployment claims, workers compensation and other purposes under state law. We may be required to spend significant time and resources to satisfy licensing requirements or other applicable regulations in some states, and we may not be able to satisfy these requirements or regulations in all states, which could prohibit us from doing business in such states, which could have a material adverse effect on our financial condition and results of operations.
If we are not recognized as an employer of worksite employees under federal and state regulations, or are deemed to be an insurance agent or third-party administrator, we and our clients could be adversely impacted.
In order for WSEs to receive the full benefit of our employee benefits plan offerings, it is important that we act and qualify as an employer of the WSEs for certain purposes under the Code and ERISA. In addition, our status as an employer is important for purposes of ERISA’s preemption of certain state laws. The definition of employer under various laws is not uniform, and under both the Code and ERISA, the term is defined in part by complex multi-factor tests. We believe that we

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qualify as an employer of our WSEs in the United States for the relevant purpose of both the Code and ERISA, and we implement processes to protect and preserve this status. With passage of the Small Business Efficiency Act in December 2014, the U.S. Congress clarified the employer status of professional employer organizations or PEOs for federal tax purposes under the Code for those PEOs who voluntarily become certified under this law. The IRS is expected to begin accepting applications for certification under the Code in July 2016 and we currently intend to apply for certification. However, the U.S. Department of Labor has issued guidance that certain entities in the HR outsourcing industry may not qualify as employers for ERISA purposes. If we were found not to be an employer under the Code or ERISA, it could affect the manner in which we are able to provide employee benefits to our WSEs and could have a material adverse effect on our financial condition and results 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, such as those that 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. We do not believe that our services constitute acting as an insurance agent or third-party administrator. If regulatory authorities in any state determine that the nature of our business requires that we be licensed as an insurance agent or as a third-party administrator, we may need to hire additional personnel to manage regulatory compliance and become obligated to pay annual regulatory fees, which could have a material adverse effect on our financial condition and results of operations.
We and our clients could be adversely impacted by health care reform.
The Affordable Care Act, or the ACA, proposes sweeping health care reforms with staggered effective dates from 2010 through 2020, and many provisions of the ACA require the issuance of additional guidance from the U.S. Departments of Labor and Health and Human Services, the IRS and the states. A number of key provisions of the ACA have begun to take effect over the past several years, including the establishment of state and federal insurance exchanges, insurance market reforms, “play or pay” penalties on applicable large employers and the imposition and assessment of excise taxes and reinsurance taxes on insurers and third-party administrators. Collectively, these items have the potential to significantly change the insurance marketplace for employers and how employers offer or provide insurance to employees.
As a co-employer of our clients’ WSEs, we assume or share certain employer-related responsibilities and legal risks and assist our clients in complying with many employment-related governmental regulations. Generally, the ACA and subsequently issued guidance by the IRS and the U.S. Department of Health and Human Services have not addressed, or in some instances are unclear, as to their application in the co-employment relationship. In future periods, the changes may result in increased costs to us and our clients and could affect our ability to attract and retain clients. Additionally, we may be limited or delayed in our ability to increase service fees to offset any associated potential increased costs resulting from compliance with the ACA. Furthermore, the uncertainty surrounding the terms and application of the ACA may delay or inhibit the decisions of potential clients to outsource their HR needs. Any of these developments may have a material adverse effect on our financial condition and results of operations.
Our inability to offer competitive health and/or workers compensation insurance rates could harm our business.
If we are unable to offer competitive health and/or workers compensation insurance rates to our clients, it could affect our ability to attract and retain clients, which would have a material adverse effect on our business. For example, where we offer our clients and their WSEs group health insurance policies with respect to which our carriers set the premiums and for which we are not responsible for any deductible, the rates set by our carriers on such policies may not be competitive. Further, for policies with respect to which we agree to pay additional amounts to our carriers for any claims that they pay within an agreed-upon deductible layer, we may not be able to control costs through the deductible layer in a way that would make our rates competitive. In addition, broad adoption of our services in certain geographies or industries may make it more difficult for us to obtain competitive health and/or workers compensation insurance rates due to concentration of clients within a particular geography or industry. The inability to offer competitive insurance rates, for the above reasons or any other, could have a material adverse effect on our financial condition and results of operations.
Unexpected changes in workers compensation and health insurance claims by worksite employees could harm our business.
We maintain health and workers compensation insurance covering our WSEs. Our insurance costs are impacted significantly by our WSEs’ health and workers compensation insurance claims experience. We establish reserves to provide for the estimated costs of reimbursing our workers compensation and health insurance carriers for paying claims within the deductible layer in accordance with their insurance policies. Estimating these reserves involves our consideration of a number

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of factors and requires significant judgment. If there is an unexpected increase in the severity or frequency of claims activity of our WSEs (including activity arising from any of a number of factors that affect claim activity levels, such as changes in general economic conditions, claims differing significantly from expectations for new and existing clients, proposed and enacted regulatory changes, and terrorism, disease outbreaks or other catastrophic events ), or if we subsequently receive updated information indicating insurance claims were higher than previously estimated and reported, our insurance costs could be higher in that period or subsequent periods as we adjust our reserves accordingly. We have also experienced variability in the amount of our insurance costs due to the number and severity of insurance claims being unpredictable. For example, in the three months ended June 30, 2015, we experienced a significant increase in the number of large medical claims, which resulted in a significant increase in insurance costs. In addition, we may be unable to increase our pricing to offset increases in insurance costs either in full or on a timely basis. Incorporating cost increases into what we charge our clients could also adversely impact our ability to attract and retain clients. The occurrence of any of the above could have a material adverse effect on our financial condition and results of operations.
Adverse changes in our relationships with key vendors, particularly our employee benefit carriers, could harm our business.
Our success depends in part on our ability to establish and maintain arrangements and relationships with vendors that supply us with essential components of our services. These service providers include insurance carriers to provide health and workers compensation insurance coverage for WSEs, as well as other vendors such as couriers used to deliver client payroll checks and banks used to electronically transfer funds from clients to their WSEs. Failure by these service providers, for any reason, to deliver their services in a timely manner could result in material interruptions to our operations, impact client relations, and result in significant penalties or other liabilities to us. If any of these vendors decide to terminate its relationship with us, particularly our employee benefit carriers, we may have difficulty obtaining replacement services at reasonable rates or on a timely basis, if at all. The loss of any one or more of our key vendors, or our inability to partner with certain vendors that are better-known or more desirable to our clients or potential clients, could have a material adverse effect on our financial condition and results of operations.
Security breaches could result in the improper disclosure of sensitive company, employee, client and WSE data, including personal information, exposing us to liability, which would cause our business and reputation to suffer.
Our ability to ensure secure electronic processing, maintenance and transmission of payroll, insurance and other sensitive employee, client and WSE information is critical to our operations. This information could include sensitive or confidential data, such as employees’ Social Security numbers, bank account numbers, retirement account information and medical information.
We rely on standard internet and other security systems to provide the security and authentication necessary to effect secure transmission of data. Despite our security measures, it is possible that our information technology and infrastructure may be vulnerable to cybersecurity threats, including attacks by hackers and other malfeasance. Third parties, including vendors that provide services for our operations, could also be a source of security risk to us in the event of a failure of their own security systems and infrastructure. Any such security breach could compromise our networks and result in the information stored or transmitted there to be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings leading to liability, including under laws that protect the privacy of personal information, disrupt our operations and the services we provide to our clients and WSEs, damage our reputation and cause a loss of confidence in our products and services, which could adversely affect our business, operations and competitive position. In the course of providing our services to our clients, we also rely on certain third-party service providers and products, such as insurance carriers, to process information related to our employees, clients and WSEs. Through contractual provisions, we take steps to require that our service providers protect sensitive information. However, we cannot provide assurances as to the security steps taken by such providers. Any security breach or other disruption of our third-party service providers that results in an inadvertent disclosure or loss of confidential information could adversely affect our reputation and our business.
Our quarterly results of operations may fluctuate as a result of numerous factors, many of which are outside of our control.
Our quarterly results of operations are likely to fluctuate, and our results in some quarters may be below the expectations of research analysts and our investors, which could cause the price of our common stock to decline. Some of our significant expenses, such as insurance costs for our WSEs, may require significant lead time to offset or reduce. If we do not achieve our expected revenues targets, we may be unable to adjust our costs quickly enough to offset any revenues shortfall, which could

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harm our results of operations. Some of the important factors that have and may cause our revenues, results of operations and cash flows to fluctuate from quarter to quarter include:
the number and severity of health and workers compensation insurance claims by WSEs and the timing of claims information provided by our insurance carriers;
the amount and timing of our insurance costs, operating expenses and capital expenditures;
the number of our new clients initiating service and the number of WSEs employed by each new client;
the loss of existing clients;
reduction in the number of WSEs employed by existing clients;
the timing of client payments and payment defaults by clients;
costs associated with our acquisitions of companies, assets and technologies;
payments or drawdowns on our credit facility, or any amendments to our obligations under our credit facility;
unanticipated expenses such as litigation or other dispute-related settlement payments;
expenses we incur for geographic and service expansion;
our regulatory compliance costs;
changes in our effective tax rate; and
the impact of new accounting pronouncements.
Many of the above factors are discussed in more detail elsewhere in this “Risk Factors” section and in the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Many of these factors are outside our control, and the variability and unpredictability of these factors have in the past and could in the future cause us to fail to meet our expectations for revenues or results of operations for a given period. In addition, the occurrence of one or more of these factors might cause our results of operations to vary widely, which could lead to negative impacts on our margins, short-term liquidity or ability to retain or attract key personnel, and could cause other unanticipated issues. Accordingly, we believe that quarter-to-quarter comparisons of our revenues, results of operations and cash flows may not be meaningful and should not be relied upon as an indication of our future performance.
Volatility in the financial and economic environment could harm our business.
Demand for our services is sensitive to changes in the level of overall economic activity in the markets in which we operate. During periods of weak economic conditions, employment levels tend to decrease, small business failures tend to increase and interest rates may become more volatile. Current or potential clients may also react to weak economic conditions or forecasted weak economic conditions by reducing their employee headcount or by lowering their wage, bonus or benefits levels, any of which would affect our revenues, and may affect our margins, because we may be unable to reduce our operating expenses sufficient to offset the drop in revenues. It is difficult for us to forecast future demand for our services due to the inherent difficulty in forecasting the direction, strength and length of economic cycles. These conditions may affect the willingness of our clients and potential clients to pay outside vendors for services like ours, and may impact their ability to pay their obligations to us on time, or at all. In addition, if businesses have difficulty obtaining credit, business growth and new business formation may be impaired, which could also harm our business. Even modest downturns in economic activity or the availability of credit on a regional or national level could have a material adverse effect on our financial condition or results of operations.
Most of our clients are concentrated in certain geographies and a relatively small number of industries, making us vulnerable to downturns in those geographies and industries.
Most of our clients are concentrated in certain geographies and operate in a relatively small number of industries, including the technology, life sciences, not-for-profit, professional services, financial services, real estate, retail, manufacturing, and hospitality industries. As a result, if any of those geographic regions or specific industries suffers a downturn, the portion of our business attributable to clients in that region or industry could be adversely affected, which could have a material adverse effect on our financial condition or results of operations.

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Our business and operations have experienced rapid growth in recent periods, and if we are unable to effectively manage this growth, our business and results of operations may suffer.
We have experienced rapid growth and have significantly expanded our operations in recent periods, which has placed a strain on our management and our administrative, operational and financial infrastructure. Managing this growth requires us to further refine our operational, financial and management controls and reporting systems and procedures.
Our ability to effectively manage any significant growth of our business will depend on a number of factors, including our ability to do the following:
effectively recruit, integrate, train and motivate new employees, while retaining our existing employees, maintaining the beneficial aspects of our corporate culture and effectively executing our business plan;
satisfy our existing clients and identify and acquire new clients;
enhance the breadth and quality of our services;
continue to improve our operational, financial and management controls; and
make sound business decisions in light of the scrutiny associated with operating as a public company.
These activities will require significant operating and capital expenditures and allocation of valuable management and employee resources, and we expect that our growth will continue to place significant demands on our management and on our operational and financial infrastructure.
Our future financial performance and our ability to execute on our business plan will depend, in part, on our ability to effectively manage any future growth. We cannot assure you that we will be able to do so in an efficient or timely manner, or at all. In particular, any failure to successfully implement systems enhancements and improvements will likely negatively impact our ability to manage our expected growth, ensure uninterrupted operation of key business systems and comply with the rules and regulations that are applicable to public companies. If we fail to manage our growth effectively, our costs and expenses may increase more than we expect them to, which in turn could harm our business, financial condition and results of operations.
We may not be able to sustain our profitability or revenue growth rate in the future.
While we have achieved profitability on an annual basis in each of the last four fiscal years, we have not consistently achieved profitability on a quarterly basis during that same period. Our operating expenses could increase substantially in the near term, particularly as we continue to invest in our sales and marketing organization, expand our operations and improve our infrastructure and enhance the breadth and quality of our services. If our revenues do not increase to offset these increases in our operating expenses, we may not be profitable in future periods.
Moreover, you should not consider our historical revenue growth rate to be indicative of our future performance. As we grow our business, our revenue growth rates may slow in future periods due to a number of reasons, which may include slowing demand for our services, increasing competition, a decrease in the growth of our overall market, our failure, for any reason, to continue to capitalize on growth opportunities, the maturation of our business or the decline in the number of SMBs in our target markets and verticals.
If our vertical sales strategy is unsuccessful or if our sales force is otherwise unable to sell our solutions at the rate that we anticipate, we may not be able to maintain our client base or grow our business, which could have a material adverse effect on our financial condition and results of operations.
We have aligned our business based on an industry vertical approach where our sales force, product development, and service teams are increasingly focused on specific business sectors. Our vertical approach gives us an understanding of the HR needs facing SMBs in those industries. This knowledge enables us to provide a bundled solution of services that is tailored to its specific needs of clients in these industries. If our vertical strategy is unsuccessful, our business may not grow at the rate that we anticipate, which could have a material adverse effect on our financial condition and results of operations.
In order to raise awareness of the benefits of our services and identify and acquire new clients, we have rapidly grown our direct sales force. Competition for skilled sales personnel is intense, and we cannot assure you that we will be successful in attracting, training and retaining qualified sales personnel, or that our newly hired sales personnel will function effectively, either individually or as a group. In addition, our newly hired sales personnel are typically not productive for up to a year following their hiring. This results in increased near-term costs to us relative to the sales contributions of these newly hired sales personnel. If we are unable to effectively train our sales force and benefit from greater productivity of our sales

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representatives, or if our sales force is otherwise unable to sell our solutions as we anticipate, our revenues likely will not increase at the rate that we anticipate, which could have a material adverse effect on our business, financial condition and results of operations.
Our industry is highly competitive, which may limit our ability to maintain or increase our market share or improve our results of operations.
We face significant competition on a national and regional level from a number of companies purporting to deliver a range of bundled services that are generally similar to the services we provide, including large professional employer organizations such as the TotalSource business unit of Automatic Data Processing, Inc. and Insperity, Inc., as well as specialized and small professional employer organization service providers. If and to the extent that we and other companies providing these services are successful, we anticipate that future competitors will enter this industry. Some of our current, and any future, competitors have or may have greater marketing and financial resources than we have, and may be better positioned than we are in certain markets. Increased competition in our industry could result in price reductions or loss of market share, any of which could harm our business. We expect that we will continue to experience competitive pricing pressure. If we cannot compete effectively, our market share, business, results of operations and financial condition may suffer.
In addition to competition from other professional employer organizations, we also face significant competition in the form of companies serving their HR needs in both traditional and non-traditional manners. These forms of competition include:
HR and information systems departments and personnel of companies that perform their own administration of employee benefits, payroll and HR;
providers of certain endpoint HR services, including payroll, employee benefits and business process outsourcers with high-volume transaction and administrative capabilities, such as Automatic Data Processing, Inc., Paychex, Inc. and other third-party administrators;
employee benefit exchanges that provide benefits administration services over the Internet to companies that otherwise maintain their own employee benefit plans; and
insurance brokers who allow third party HR systems to integrate with their platform.
We believe that our services are attractive to many SMBs in part because of our ability to provide workers compensation, health care and other benefits programs to them on a cost-effective basis. We compete with insurance brokers and other providers of this coverage in this regard, and our offerings must be priced competitively with those provided by these competitors in order for us to attract and retain our clients.
We may not be successful in convincing potential clients that the use of our services is a superior, cost-effective means of satisfying their HR obligations relative to the way in which they currently satisfy these obligations.
If we cannot compete effectively against other professional employer organizations or against the alternative means by which companies meet their HR obligations, or if we are unable to convince clients or potential clients of the advantages of our offerings, our market share and business may suffer, resulting in a material , adverse effect on our financial condition and results of operations.
Our failure to maintain or enhance our reputation or brand identity could harm our business.
We believe that maintaining and enhancing our reputation and the TriNet brand identity is critical to maintaining our relationships with our clients and vendors and our ability to attract new clients and vendors. We also believe that our reputation and brand identity will become more important as competition in our industry continues to develop. Our ability to maintain and enhance our reputation and brand identity will be affected by a number of factors, some of which are beyond our control, including:
the effectiveness of our marketing efforts;
our ability to attract and retain new sales personnel to expand our direct sales force;
our ability to retain our existing clients and attract new clients;
the quality and perceived value of our services;
our ability to successfully differentiate our services from those of our competitors;
actions of our competitors and other third parties;

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positive or negative publicity about us or our industry in general;
timeliness of our filings with the SEC,
interruptions, delays or attacks on our platform or mobile applications; and
litigation or regulatory developments.
Any brand promotion activities in which we engage may not be successful or yield increased revenues. Furthermore, negative publicity, whether or not justified, relating to events or activities attributed to us, our corporate employees, our WSEs, our vendors, other companies in our industry or others associated with any of these parties, may tarnish our reputation and reduce the value of our brand. Damage to our reputation and loss of brand identity may reduce demand for our services and harm our business, results of operations and financial condition. Moreover, any attempts to rebuild our reputation and restore the value of our brand may be costly and time-consuming, and any such efforts may not ultimately be successful.
We are subject to client attrition.
We regularly experience significant client attrition due to a variety of factors, including cost, client merger and acquisition activity, increases in administrative fees and insurance costs, client business failure, effects of competition and clients deciding to bring their HR administration in-house. Our standard client service agreement can be cancelled by us or by the client without penalty with 30 days’ prior written notice. Clients who intend to cease doing business with us often elect to do so effective as of the beginning of a calendar year. As a result, we have historically experienced our largest concentration of client attrition in the first quarter of each year. In addition, we experience higher levels of client attrition in connection with renewals of the health insurance we provide for WSEs in the event that such renewals result in increased premiums that we pass on to our clients. If we were to experience client attrition in excess of our projected annual attrition rate of approximately 20% of our installed WSE base, which occurred most recently in 2011, it could have a material adverse effect on our business, financial condition and results of operations.
Our acquisition strategy creates risks for our business.
We have completed numerous acquisitions of other businesses and technologies, and we expect that we will continue to grow through acquisitions of other businesses, assets or technologies. We may fail to identify attractive acquisition candidates or we may be unable to reach acceptable terms for future acquisitions. If we are unable to complete acquisitions in the future, our ability to grow our business will be impaired.
Acquisitions involve numerous other risks, including:
difficulties integrating the operations, systems, technologies, services and personnel of the acquired companies, including the migration of WSEs from an acquired company’s technology platform to ours;
challenges associated with establishing or maintaining internal controls, procedures and policies relating to the acquired systems and processes, including the potential for actual or perceived control weaknesses associated with or arising from the acquisitions and integration of acquired systems;
diversion of management’s attention from other business concerns;
over-valuation by us of acquired companies;
litigation resulting from activities of the acquired company, including claims from terminated employees, clients, former stockholders and other third parties;
insufficient revenues to offset increased expenses associated with the acquisitions and unanticipated liabilities of the acquired companies;
insufficient indemnification or security from the selling parties for legal liabilities that we may assume in connection with our acquisitions;
entering markets in which we have no prior experience and may not succeed;
risks associated with foreign acquisitions, such as communication and integration problems resulting from geographic dispersion and language and cultural differences, compliance with foreign laws and regulations and general economic or political conditions in other countries or regions;
potential loss of key employees of the acquired companies; and

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impairment of relationships with clients and employees of the acquired companies or our clients and employees as a result of the integration of acquired operations and new management personnel.
If we fail to integrate newly acquired businesses effectively, we might not achieve the growth, service enhancement or operational efficiency objectives of the acquisitions, and our business, results of operations and financial condition could be harmed.
We may pay for acquisitions by issuing additional shares of our common stock, which would dilute our stockholders, or by issuing debt, which could include terms that restrict our ability to operate our business or pursue other opportunities and subject us to meaningful debt service obligations. We may also use significant amounts of cash to complete acquisitions. To the extent that we complete acquisitions in the future, we likely will incur future depreciation and amortization expenses associated with the acquired assets. We may also record significant amounts of intangible assets, including goodwill, which could become impaired in the future. Any such impairment charges would adversely affect our results of operations.
We may have additional tax liabilities, which could harm our business, operating results, financial condition and prospects.
Significant judgments and estimates are required in determining our provision for income taxes and other tax liabilities. Our provision for income taxes, results of operations and cash flows may be impacted if any of our tax positions are challenged and successfully disputed by the tax authorities. In determining the adequacy of our tax provision, we assess the likelihood of adverse outcomes that could result if our tax positions were challenged by the IRS and other tax authorities. The tax authorities in the United States regularly examine our income and other tax returns. For example, in connection with an IRS examination of prior federal income tax returns filed by Gevity, a company we acquired in 2009, we received a technical advice memorandum from the IRS taking the position that a total of $10.1 million employment tax credits taken by Gevity, and an additional approximately $2.3 million taken by us after acquiring Gevity, should be reversed, which position we dispute. The ultimate outcome of these examinations and tax disputes cannot be predicted with certainty. Should the IRS or other tax authorities assess additional taxes as a result of these or other examinations, we may be required to record charges to operations that could have a material impact on our results of operations, financial position or cash flows.
We have a substantial amount of indebtedness, which could adversely affect our financial condition and our operating flexibility.
As of December 31, 2015, we had $499.6 million in outstanding indebtedness under our credit facility, all of which was secured indebtedness of our subsidiary, TriNet HR Corporation, guaranteed on a senior secured basis by us and certain of our subsidiaries. Our level of indebtedness and the limitations imposed on us by our credit facility could affect our business in various ways, including the following:
we will have to use a portion of our cash flows from operating activities for debt service rather than for other operational activities;
we may not be able to borrow additional funds or obtain additional financing for future working capital, acquisitions, capital expenditures or other corporate purposes, or may have to pay more for such financing;
some or all of the indebtedness under our current or future credit facilities bears interest at variable interest rates, making us more vulnerable to interest rate increases;
we could be less able to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions; and
we may be more vulnerable to general adverse economic and industry conditions as a result of our inability to reduce our debt service costs in response to reduced revenues.
Because borrowings under our credit facility bear interest at a variable rate, our interest expense could increase even though the amount borrowed remains the same, exacerbating these risks. Our ability to meet these expenses depends on our future business performance, which will be affected by various factors, including the risks described in this “Risk Factors” section. We are not able to control many of these factors, such as economic conditions in the markets where we operate and pressure from competitors. Our operations may provide insufficient cash to pay the principal and interest on our credit facility and to meet our other debt obligations. If so, we may be required to refinance all or part of our existing indebtedness or borrow additional funds, which we may not be able to do on terms that are acceptable to us, if at all. In addition, the terms of our existing or future debt agreements may restrict our ability to take some or all of these responsive actions. If we were unable to pay the principal and interest on our credit facility or meet our other debt obligations, the lenders under our credit facility could

19



terminate their commitments to extend further credit to us and accelerate a substantial part of our indebtedness. If that were to happen, we may not be able to repay all of the amounts that would become due under our indebtedness or refinance our debt. If we were unable to repay those amounts or refinance our debt, the lenders under our credit facility could proceed against the collateral granted to them to secure that indebtedness. If that were to happen, our results of operations and financial condition could be harmed and we might be forced to seek bankruptcy protection.
The terms of our credit facility may restrict our current and future operations, which would impair our ability to respond to changes in our business and to manage our business.
Our credit facility contains, and any future indebtedness of ours would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us, including restricting our ability to:
incur, assume or guarantee additional debt;
pay dividends or distributions or redeem or repurchase capital stock;
incur or assume liens;
make loans, investments and acquisitions;
engage in sales of assets and subsidiary stock;
enter into sale-leaseback transactions;
enter into certain transactions with affiliates;
complete dividends, loans or asset transfers from our subsidiaries;
enter into new lines of business;
prepay other indebtedness;
transfer all or substantially all of our assets or enter into merger or consolidation transactions with another person; and
make capital expenditures.
Under the credit facility, we are required to comply with a financial covenant that requires us and our subsidiaries to maintain a maximum leverage ratio so long as there is any indebtedness outstanding under the revolving credit facility (excluding letters of credit issued and outstanding of up to $15.0 million other than letters of credit that have been cash collateralized). Our ability to meet the leverage ratio can be affected by events beyond our control, and we may be unable to comply with it. Our failure to comply with this financial covenant or other restrictive covenants under our credit facility and other debt instruments could result in a default under our credit facility and/or other debt instruments, which in turn could result in the termination of the lenders’ commitments to extend further credit to us under our credit facility and acceleration of a substantial portion of our indebtedness then outstanding under our credit facility. If that were to happen, we may not be able to repay all of the amounts that would become due under our indebtedness or refinance our debt. If we were unable to repay those amounts or refinance our debt, the lenders under our credit facility could proceed against the collateral granted to them to secure that indebtedness. If that were to happen, our results of operations and financial condition could be harmed and we might be forced to seek bankruptcy protection.
If we fail to retain our key personnel or fail to attract additional skilled personnel, our business may suffer.
Our operations are dependent on the continued efforts of our officers and executive management and the performance and productivity of our regional managers and field personnel. Our ability to attract and retain business depends on the quality of our services and the relationships that we maintain with our clients. If we lose key personnel with significant experience in managing our business, this could impair our ability to deliver services effectively or profitably, could divert other senior management time in seeking replacements, and could adversely affect our reputation with our clients and potential clients. Some of our most important client relationships depend on the continued involvement of individual managers or sales personnel, and any loss of those individuals could jeopardize those relationships and in turn adversely affect our operating results.
Our future success will depend on our ability to attract, hire, train and retain highly skilled technical, sales and marketing and support personnel, particularly with expertise in outsourced solutions and the technology platforms that we deploy today and will deploy in the future. Our failure to attract and retain the appropriate personnel may limit the rate at which we can expand our business, including developing new services and attracting new clients, or otherwise have a material adverse effect on our financial condition or results of operations.

20



We have identified material weaknesses in our internal control over financial reporting that could, if not remediated, result in material misstatements in our financial statements.
In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2015, we have identified material weaknesses relating to our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. As described in Item 9A. Controls and Procedures, we have concluded that our internal control over financial reporting was not effective as of December 31, 2015 due to material weaknesses. Specifically, we identified material weaknesses relating to (i) ineffective information technology general controls, primarily with respect to computer operations, access controls and change management, (ii) ineffective control environment and risk assessment, (iii) ineffective management review controls and controls over system-generated reports, (iv) ineffective controls over payroll operations, (v) ineffective controls over health and workers compensation liabilities and related expenses, (vi) ineffective controls over validating accuracy of payroll tax liabilities, and (vii) ineffective authorization controls over procurement processes. However, giving full consideration to these weaknesses, and the additional analyses and other procedures we performed to ensure that our consolidated financial statements included in this Annual Report on Form 10-K were prepared in accordance with U.S. generally accepted accounting principles (GAAP), our management has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods disclosed in conformity with GAAP. While the material weaknesses described above create a reasonable possibility that an error in financial reporting may go undetected, after extensive review and the performance of additional analysis and other procedures, no material adjustments, restatement or other revisions to our previously issued financial statements were required.
As further described in Part II, Item 9A “Controls and Procedures” below, we are taking specific steps to remediate the material weaknesses that we identified; however, the material weaknesses will not be remediated until the necessary controls have been implemented and we have determined the controls to be operating effectively. Because the reliability of the internal control process requires repeatable execution, the successful remediation of these material weaknesses will require review and evidence of effectiveness prior to concluding that the controls are effective. In addition, we may need to take additional measures to address the material weaknesses or modify the remediation steps, and we cannot be certain that the measures we have taken, and expect to take, to improve our internal controls will be sufficient to address the issues identified, to ensure that our internal controls are effective or to ensure that the identified material weaknesses will not result in a material misstatement of our annual or interim consolidated financial statements. Implementing any appropriate changes to our internal controls may distract our officers and employees and require material cost to implement new process or modify our existing processes. Moreover, other material weaknesses or deficiencies may develop or be identified in the future. If we are unable to correct material weaknesses or deficiencies in internal controls in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission, will be adversely affected. This failure could negatively affect the market price and trading liquidity of our common stock, lead to delisting, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and generally materially and adversely impact our business and financial condition.
We are subject to legal proceedings that may result in adverse outcomes.
We are subject to claims, suits, government investigations, and proceedings arising from the ordinary course of our business, including actions with respect to intellectual property claims, privacy, data protection or law enforcement matters, tax matters, labor and employment claims, commercial claims, purported class action lawsuits, and other matters. For example, we are a party to a putative securities class action lawsuit filed by a purported stockholder of our company in the United States District Court for the Northern District of California. Such claims, suits, government investigations, and proceedings are inherently uncertain and their results cannot be predicted with certainty. Regardless of the outcome, such legal proceedings can have an adverse impact on us because of legal costs, diversion of management and other personnel, and other factors. In addition, it is possible that a resolution of one or more such proceedings could result in liability, penalties, or sanctions, as well as judgments, consent decrees, or orders preventing us from offering certain features, functionalities, products, or services, or requiring a change in our business practices, products or technologies, which could in the future materially and adversely affect our business, operating results, and financial condition. See Part I, Item 3, “Legal Proceedings” below for additional information about the legal proceedings we are currently involved in and future proceedings that we may face.
Our failure to timely file any periodic reports with the SEC may prevent us from complying with the NYSE rules and may make it more difficult for us to access the public markets to raise debt or equity capital.
Despite extensive efforts, we were unable to file our Annual Report on Form 10-K for the year ended December 31, 2015 within the time frame required by the SEC (including the extension permitted by Rule 12b-25 under the Exchange Act). 

21



As a result, we were not in full compliance with the NYSE Listed Company Manual, Section 802.01E, but have cured this deficiency upon filing our Annual Report. We are required to comply with the NYSE Listed Company Manual as a condition for our common stock to continue to be listed on the NYSE. If we are unable to comply with such conditions, then our shares of common stock are subject to delisting from the NYSE. Any delisting of our common stock from the NYSE could have a significant negative effect on the value and liquidity of our securities, may preclude us from using exemptions from certain state and federal securities regulations, and could adversely affect our ability to raise capital on terms acceptable to us or at all.
In addition, because we were unable to timely file our Annual Report, we will not be eligible to use a registration statement on Form S-3 to conduct public offerings of our securities until we have timely made our periodic filings with the SEC for a full year. Our inability to use Form S-3 during this time period may have a negative impact on our ability to access the public capital markets in a timely fashion because we would be required to file a long-form registration statement on Form S-1 and have it reviewed and declared effective by the SEC. This may limit our ability to access the public markets to raise debt or equity capital. Our limited ability to access the public markets could prevent us from pursuing transactions or implementing business strategies that we believe would be beneficial to our business.
Any failure in our business systems could reduce the quality of our business services, which could harm our reputation and expose us to liability.
Our business systems rely on the complex integration of numerous hardware and software subsystems to manage client transactions including the processing of employee, payroll and benefits data. These systems can be disrupted by, among other things, equipment failures, computer server or systems failures, network outages, malicious acts, software errors or defects, vendor performance problems and power failures. Any delay or failure in our systems that impairs our ability to communicate electronically with our clients, employees or vendors or our ability to store or process data could harm our reputation and our business. If we are unable to meet client demands or service expectations, we may lose existing clients and we may have difficulty attracting new clients. In addition, errors in our products and services, such as the erroneous denial of healthcare benefits or delays in making payroll, could expose our clients to liability claims from improperly serviced WSEs, for which we may be contractually obligated to provide indemnification.
We have disaster recovery, business continuity, and crisis management plans and procedures designed to protect our business against a multitude of events, including natural disasters, military or terrorist actions, power or communication failures, or similar events. Despite our preparations, our plans may not be successful in preventing the loss of client data, service interruptions, and disruptions to our operations, or damage to our important facilities. 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 centers, experience a telecommunications failure or experience a security breach, our operations could be interrupted. Any interruption or other loss may not be covered by our insurance and could harm our reputation.
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, as well as other contractual penalties. Any inaccuracies in the processing of health insurance benefits could result in our being liable for lapses in insurance. If any of our systems fails to operate properly or becomes disabled even for a brief period of time, we could suffer financial loss, a disruption of our businesses, liability to clients, regulatory intervention, or damage to our reputation.
We depend on licenses with third-party software in order to provide our services.
We license a substantial portion of the software on which we depend to provide services to our clients from third-party vendors. If we are unable to maintain these licenses, or if we are required to make significant changes in the terms and conditions of these licenses, we may need to seek replacement vendors or change our software architecture to address licensing revisions with our current vendors, either of which could increase our expenses and impair the quality of our services. In addition, we cannot assure you that our key vendors will continue to support their technology. Financial or other difficulties experienced by these vendors may adversely affect the technologies we incorporate into our products and services. If this software ceases to be available, we may be unable to find suitable alternatives on reasonable terms, or at all.
We must keep pace with rapid technological change in order to succeed.
Our business depends upon the use of software, hardware and networking technologies that must be frequently and rapidly upgraded in response to technological advances, competitive pressures and consumer expectations. To succeed, we will need to effectively develop or license and integrate these new technologies as they become available to improve our services commensurate with client requirements. In particular, we rely on enterprise software applications licensed from third parties that are upgraded from time to time such as PeopleSoft HR information systems and Oracle databases, which provide the basis

22



for our HR information system platform supporting payroll, benefits and other HR functions. Any difficulties we encounter in adapting applications upgrades to our systems could harm our performance or delay or prevent the successful development, introduction or marketing of new 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 services, or client 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.
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 the services that we develop. We rely on a combination of contractual rights, including non-disclosure agreements, trade secrets, copyrights and trademarks, to establish and protect our intellectual property rights in our names, services, methodologies and related technologies. If we lose intellectual property protection or the ability to secure intellectual property protection on any of our names, confidential information or technology, this could harm our business. Our intellectual property rights may not prevent competitors from independently developing services and methodologies similar to ours, and the steps we take might be inadequate to deter infringement or misappropriation of our intellectual property by competitors, former employees or other third parties, any of which could harm our business. We currently have one pending U.S. patent application covering our technology. We own registered trademarks in the United States, Canada and the European Union that have various expiration dates unless renewed through customary processes. Our trademark registrations may be unenforceable or ineffective in protecting our trademarks. Our trademarks may be unenforceable in countries outside of the United States, which may adversely affect our ability to build our brand outside of the United States.
Although we believe that our conduct of our business does not infringe on the intellectual property rights of others, third parties may nevertheless assert infringement claims against us in the future. We may be required to modify our products, services, internal systems or technologies, or obtain a license to permit our continued use of those rights. We may be unable to do so in a timely manner, or upon reasonable terms and conditions, which 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 services, internal systems or technologies.
Our use of open source software could subject us to possible litigation.
A portion of our technologies incorporates open source software, and we expect to continue to incorporate open source software into our platform in the future. Few of the licenses applicable to open source software have been interpreted by courts, and their application to the open source software integrated into our proprietary technology platform may be uncertain. If we fail to comply with these licenses, then pursuant to the terms of these licenses, we may be subject to certain requirements, including requirements that we make available the source code for our software that incorporates the open source software. We cannot assure you that we have not incorporated open source software in our software in a manner that is inconsistent with the terms of the applicable licenses or our current policies and procedures. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could incur significant legal expenses defending against such allegations. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources to change our technology platform.
Risks Related to Ownership of Our Common Stock
Our stock price may be volatile or may decline regardless of our operating performance, resulting in substantial losses for our stockholders.
The market price of our common stock has been, and is likely to continue to be, volatile for the foreseeable future. Since shares of our common stock were sold in our initial public offering in March 2014 at a price of $16.00 per share, the daily closing price of our common stock has ranged from $16.33 to $37.88 per share through December 31, 2015. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including the factors listed below and other factors described in this “Risk Factors” section:
actual or anticipated fluctuations in our results of operations;

23



any financial projections we provide to the public, any changes in these projections or our failure to meet these projections;
failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
ratings changes by any securities analysts who follow our company;
announcements by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;
changes in operating performance and stock market valuations of other business services companies generally, or those in our industry in particular;
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
changes in our board of directors or management;
sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;
lawsuits threatened or filed against us;
short sales, hedging and other derivative transactions involving our capital stock;
general economic conditions in the United States and abroad; and
other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many business services companies. Stock prices of many business services companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. Securities litigation could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, results of operations and financial condition.
Substantial future sales of shares of our common stock could cause the market price of our common stock to decline.
We may issue additional shares of common stock or securities convertible into shares of our common stock in one or more transactions and at prices and in a manner as we may determine from time to time. Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that such sales may have on the prevailing market price of our common stock.
As of December 31, 2015, there were 4,446,149 shares of common stock subject to outstanding options, 956,687 shares of common stock issuable upon settlement of restricted stock units and 173,286 shares of common stock issuable upon settlement of performance-based restricted stock units. We have registered all of the shares of common stock issuable upon exercise of these outstanding options and settlement of these outstanding restricted stock units, and upon exercise or settlement of any options or other equity incentives we may grant in the future, as well as the shares we have reserved for future issuance under our Employee Stock Purchase Plan, or ESPP, for public resale under the Securities Act of 1933, as amended. Accordingly, these shares are eligible for sale in the public market to the extent such options are exercised or such restricted stock units settle, or such shares are purchased pursuant to our ESPP, subject to compliance with applicable securities laws.
As of December 31, 2015, the holders of 20,091,312 shares of common stock have rights, subject to some conditions, to require us to file registration statements for the public resale of such shares or to include such shares in registration statements that we may file for TriNet or our stockholders.
The existing ownership of capital stock by our executive officers, directors and their affiliates has the effect of concentrating voting control with our executive officers, directors and their affiliates for the foreseeable future, which limits your ability to influence corporate matters.
As of December 31, 2015, funds affiliated with General Atlantic, our largest stockholder, beneficially own approximately 28.6% of our outstanding common stock, and all of our directors, officers and their affiliates, including the funds affiliated with General Atlantic, beneficially own, in the aggregate, approximately 40.8% of our outstanding common stock. As

24



a result, these stockholders will be able to determine substantially all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit the ability of other stockholders to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.
If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business, our market and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and bylaws include provisions that:
establish a classified board of directors so that not all members of our board of directors are elected at one time;
permit our board of directors to establish the number of directors;
provide that directors may only be removed “for cause”;
require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;
eliminate the ability of our stockholders to call special meetings of stockholders;
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
provide that our board of directors is expressly authorized to make, alter or repeal our bylaws; and
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for our stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any holder of at least 15% of our capital stock for a period of three years following the date on which the stockholder became a 15% stockholder.

Item 1B. Unresolved Staff Comments
None.

Item 2. Properties
We lease space for our corporate headquarters in San Leandro, California, approximately 50 regional sales offices in various states in the United States and our client service centers in Bradenton, Florida; Reno, Nevada; Fort Mill, South Carolina; Oklahoma City, Oklahoma and New York, New York. All of these leases expire at various times up through 2023.
We believe our current facilities are adequate for the purposes for which they are intended and provide for further expansion to accommodate our long-term growth and expansion goals. We believe that short-term leased facilities are readily available if needed to accommodate near-term needs if they arise. We will continue to evaluate the need for additional facilities

25



based on the extent of our product and service offerings, the rate of client growth, the geographic distribution of our client base and our long-term service delivery requirements.

Item 3. Legal Proceedings
Securities Class Action. On or about August 7, 2015, Howard Welgus, a purported stockholder of the Company, filed a putative securities class action lawsuit arising under the Securities and Exchange Act of 1934 in the United States District Court for the Northern District of California.  The case has not been certified as a class action, although it purports to be filed on behalf of purchasers of the Company’s common stock between May 5, 2014 and August 3, 2015, inclusive.  The name of the case is Welgus v. TriNet Group, Inc. et al., Case No. 3:15-cv-03625.  No stockholder other than Mr. Welgus submitted a motion for appointment as lead plaintiff to represent the putative class, and, on December 3, 2015, the Court appointed Mr. Welgus as lead plaintiff.  On February 1, 2016, Mr. Welgus filed an amended complaint.  The defendants named in the case are the Company and certain of its officers and directors, as well as General Atlantic, LLC, a significant shareholder, and formerly majority shareholder, of the Company.  The amended complaint generally alleges that the Company caused damage to stockholders of the Company by misrepresenting and/or failing to disclose facts generally pertaining to alleged trends affecting health insurance and workers compensation claims.  Under a stipulated briefing schedule approved by the Court, the Company intends to move to dismiss the amended complaint no later than April 11, 2016.  The Company believes that it has meritorious defenses against this action and intends to continue to defend itself vigorously against the allegations of Mr. Welgus.
Other Litigation. The Company is and, from time to time, has been and may in the future become involved in various litigation matters, legal proceedings and claims arising in the ordinary course of its business, including disputes with its clients or various class action, collective action, representative action and other proceedings arising from the nature of its co-employment relationship with its clients and WSEs in which the Company is named as a defendant. In addition, due to the nature of the Company’s co-employment relationship with its clients and WSEs, the Company could be subject to liability for federal and state law violations, even if the Company does not participate in such violations. While the Company’s agreements with its clients contain indemnification provisions related to the conduct of its clients, the Company may not be able to avail itself of such provisions in every instance.
While the outcome of the matters described above cannot be predicted with certainty, management currently does not believe that any such claims or proceedings or the above mentioned securities class action will have a materially adverse effect on the Company’s consolidated financial position, results of operations or cash flows. However, the unfavorable resolution of any particular matter or the Company’s reassessment of its exposure for any of the above matters based on additional information obtained in the future could have a material impact on the Company’s consolidated financial position, results of operations or cash flows. In addition, regardless of the outcome, the above matters, individually and in the aggregate, could have an adverse impact on the Company because of diversion of management resources and other factors.

Item 4. Mine Safety Disclosures
Not applicable.


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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders of Record
Our common stock has been listed on the New York Stock Exchange under the symbol “TNET” since March 27, 2014. Prior to that date, there was no public trading market for our common stock. The following table sets forth for the periods indicated the high and low sale prices per share of our common stock as reported on the New York Stock Exchange:
Year Ended December 31, 2015:
 
High
 
Low
First Quarter
 
$
37.88

 
$
30.04

Second Quarter
 
$
37.27

 
$
25.23

Third Quarter
 
$
26.88

 
$
16.33

Fourth Quarter
 
$
20.05

 
$
16.79

 
 
 
 
 
Year Ended December 31, 2014:
 
High
 
Low
First Quarter
 
$
23.44

 
$
17.28

Second Quarter
 
$
27.78

 
$
18.81

Third Quarter
 
$
29.96

 
$
21.79

Fourth Quarter
 
$
32.79

 
$
24.38


On March 29, 2016, the last reported sale price of our common stock on the New York Stock Exchange was $13.97 per share. As of March 29, 2016, we had 48 holders of record of our common stock per Computershare Trust Company N.A., our transfer agent. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividend Policy
Our board of directors has declared two special dividends since January 1, 2013. In August 2013, our board of directors declared a special dividend of $5.88 per common-equivalent share for holders of record of our preferred stock and $5.88 per share for holders of record of our common stock and restricted stock units, for a total of approximately $310.8 million. In December 2013, our board of directors declared a special dividend of $0.88 per common-equivalent share for holders of record of our preferred stock and $0.88 per share for holders of record of our common stock and restricted stock units, for a total amount of approximately $46.7 million. In each case, we determined to pay such dividends to our stockholders because our board of directors determined that such dividends were in our best interests and those of our stockholders, that we had sufficient surplus capital to pay such dividends and that we would be able to continue to fund our operations and service our indebtedness utilizing cash flows from operations after payment of such dividends.
Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.
In addition, our credit facility, as amended and restated in 2014, contains restrictions on our ability to declare and pay cash dividends on our capital stock. So long as no event of default has occurred and is continuing and no ECF Shortfall Amount (as defined in the credit agreement) exists, our credit facility permits cash dividends in amounts up to the sum of (a) specified dollar amounts under the facility, plus (b) so long as a specified leverage ratio under the credit facility is satisfied, the available Excess Cash Flow (as defined in the credit agreement and subject to certain adjustments). See Note 8 to our consolidated financial statements included elsewhere in this report.

27



Performance Graph
The following graph compares the cumulative return on the Company’s common stock since the initial public offering on March 27, 2014 with the cumulative return on the S&P 500 Index and a Peer Group Index.
COMPARISON OF 21 MONTH CUMULATIVE TOTAL RETURN
Among TriNet Group, Inc., the S&P 500 Index, and a Peer Group*

* The Peer Group Index consists of the following companies:
Automatic Data Processing, Inc.
Insperity, Inc.
Paychex, Inc.
Barrett Business Services, Inc.
Heartland Payment Systems, Inc.
Intuit, Inc.
This graph shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, regardless of any general incorporation language in such filing.

28



Issuer Purchases of Equity Securities
The following table provides information about our purchases of TriNet common stock during the quarter ended December 31, 2015:
Period
Total Number of
Shares Purchased
 
Average Price
Paid Per Share
 
Total Number of
Shares Purchased as Part of Publicly
Announced Plans (1)
 
Approximate Dollar Value
of Shares that May Yet be Purchased
Under the Plans (1)
October 1 - October 31, 2015

 

 

 
$
31,628,073

November 1 - November 30, 2015

 

 

 
$
31,628,073

December 1 - December 31, 2015

 

 

 
$
31,628,073

Total

 
 
 
 
 
 

(1)
In May 2014, our board of directors authorized a program to repurchase in the aggregate up to $15 million of our outstanding common stock. Our board of directors subsequently approved incremental increases to our ongoing stock repurchase program of $30 million in November 2014 and $50 million on June 29, 2015. In 2014 and 2015, we repurchased approximately $15 million and approximately $49.2 million, respectively, of our outstanding common stock. As of December 31, 2015 we had approximately $31.6 million remaining for repurchases under our stock repurchase program. Stock repurchases under the program are primarily intended to offset the dilutive effect of share-based employee incentive compensation.


29



Item 6. Selected Financial Data.
The following selected consolidated financial and other data should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as our audited consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K. We have derived the consolidated statement of operations data for the years ended December 31, 2015, 2014 and 2013 and the consolidated balance sheet data as of December 31, 2015 and 2014 from our audited consolidated financial statements that are included elsewhere in this report. We have derived the consolidated statement of operations data for the years ended December 31, 2012 and 2011 and consolidated balance sheet data as of December 31, 2013, 2012 and 2011 from our audited consolidated financial statements that are not included in this report. Our historical results are not necessarily indicative of the results to be expected in the future.
 
Year Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(in thousands, except share and per share data)
Consolidated Statement of Operations:
 
 
 
 
 
 
 
 
 
Professional service revenues
$
401,287

 
$
342,074

 
$
272,372

 
$
148,233

 
$
113,279

Insurance service revenues
2,258,001

 
1,851,457

 
1,371,903

 
870,828

 
727,111

Total revenues
2,659,288

 
2,193,531

 
1,644,275

 
1,019,061

 
840,390

Costs and operating expenses:
 
 
 
 
 
 
 
 
 
Insurance costs
2,112,376

 
1,686,315

 
1,226,585

 
750,025

 
651,094

Cost of providing services (exclusive of depreciation and amortization of intangible assets) (1)
150,694

 
134,256

 
106,661

 
63,563

 
59,388

Sales and marketing (1)
166,759

 
139,997

 
109,183

 
59,931

 
38,087

General and administrative (1)
69,626

 
53,926

 
52,455

 
37,879

 
31,421

Systems development and programming costs (1)
27,558

 
26,101

 
19,948

 
16,718

 
15,646

Amortization of intangible assets
39,346

 
52,302

 
51,369

 
17,441

 
12,388

Depreciation
14,612

 
13,843

 
11,737

 
11,676

 
9,201

Restructuring

 

 

 

 
2,358

Total costs and operating expenses
2,580,971

 
2,106,740

 
1,577,938

 
957,233

 
819,583

Operating income
78,317

 
86,791

 
66,337

 
61,828

 
20,807

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense and bank fees
(19,449
)
 
(54,193
)
 
(45,724
)
 
(9,709
)
 
(751
)
Other, net
1,142

 
478

 
471

 
57

 
127

Income before provision for income taxes
60,010

 
33,076

 
21,084

 
52,176

 
20,183

Provision for income taxes
28,315

 
17,579

 
7,937

 
20,344

 
5,421

Net income
$
31,695

 
$
15,497

 
$
13,147

 
$
31,832

 
$
14,762

Net income per share attributable to common stock:
 
 
 
 
 
 
 
 
 
Basic
$
0.45

 
$
0.24

 
$
0.26

 
$
0.66

 
$
0.32

Diluted
$
0.44

 
$
0.22

 
$
0.24

 
$
0.63

 
$
0.31

Weighted average common stock outstanding:
 
 
 
 
 
 
 
 
 
Basic
70,228,159

 
56,160,539

 
12,353,047

 
9,805,384

 
7,842,682

Diluted
72,618,069

 
59,566,773

 
15,731,807

 
12,476,091

 
10,103,979

(1)
Includes stock-based compensation expense as follows:
 
Year Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(in thousands)
Cost of providing services
$
4,244

 
$
2,658

 
$
1,193

 
$
516

 
$
438

Sales and marketing
4,490

 
2,755

 
1,284

 
500

 
637

General and administrative
7,501

 
4,517

 
3,220

 
3,144

 
3,590

Systems development and programming costs
1,688

 
1,030

 
416

 
200

 
160

Total stock-based compensation expense
$
17,923

 
$
10,960

 
$
6,113

 
$
4,360

 
$
4,825


30



 
Year Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(in thousands)
Other Financial Data:
 
 
 
 
 
 
 
 
 
Net Insurance Service Revenues (1)
$
145,625

 
$
165,142

 
$
145,318

 
$
120,803

 
$
76,017

Net Service Revenues (2)
$
546,912

 
$
507,216

 
$
417,690

 
$
269,036

 
$
189,296

Adjusted EBITDA (3)
$
151,340

 
$
165,319

 
$
136,027

 
$
95,362

 
$
47,348

Adjusted Net Income (4)
$
70,720

 
$
74,392

 
$
57,456

 
$
47,431

 
$
27,626


(1)
Net Insurance Service Revenues is a non-GAAP financial measure that we calculate as insurance service revenues less insurance costs. For more information about Net Insurance Service Revenues and a reconciliation of Net Insurance Service Revenues to insurance service revenues, the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Non-GAAP Financial Measures.”
(2)
Net Service Revenues is a non-GAAP financial measure that we calculate as the sum of professional service revenues and Net Insurance Service Revenues. For more information about Net Service Revenues and a reconciliation of Net Service Revenues to total revenues, the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Non-GAAP Financial Measures.”
(3)
Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income, excluding the effects of our income tax provision, interest expense, depreciation, amortization of intangible assets, stock-based compensation expense and, in 2014, certain costs related to a public offering of shares of our common stock. For more information about Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Non-GAAP Financial Measures.”
(4)
Adjusted Net Income is a non-GAAP financial measure that we calculate as net income, excluding the effects of our effective income tax rate, stock-based compensation, amortization of intangible assets, non-cash interest expense, debt prepayment premium and the income tax effect (at our effective tax rate) of these pre-tax adjustments and, in 2014, certain costs related to a public offering of our shares of common stock. For purposes of our non-GAAP financial presentation, as a result of a 2015 increase in New York City tax rates and an increase in blended state rates, we have adjusted the effective tax rate to 41.5% for the year ended December 31, 2015, from 39.5% for year ended December 31, 2014. For more information about Adjusted Net Income and a reconciliation of Adjusted Net Income to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Non-GAAP Financial Measures.”

 
Year Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(in thousands)
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
166,178

 
$
134,341

 
$
94,356

 
$
63,749

 
$
31,620

Working capital(1)
$
112,428

 
$
121,290

 
$
81,528

 
$
61,340

 
$
26,944

Total assets(1)
$
2,098,230

 
$
2,340,580

 
$
1,434,738

 
$
887,727

 
$
334,849

Notes payable and borrowings under capital leases
$
499,716

 
$
545,150

 
$
818,877

 
$
301,334

 
$
1,683

Total liabilities(1)
$
2,090,149

 
$
2,366,339

 
$
1,705,100

 
$
830,407

 
$
241,251

Convertible preferred stock
$

 
$

 
$
122,878

 
$
122,878

 
$
122,878

Total stockholders’ equity (deficit)
$
8,081

 
$
(25,759
)
 
$
(393,240
)
 
$
(65,558
)
 
$
(29,280
)
(1)    In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. We elected to early adopt and retrospectively apply the provisions of the amendment. Historical amounts above are conformed to the current presentation. See note 11 for further details.
Non-GAAP Financial Measures
We use Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income to provide an additional view of our operational performance. Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income are financial measures that are not prepared in accordance with GAAP. We define Net Insurance Service Revenues as insurance service revenues less insurance costs, which include the premiums we pay to insurance carriers for the health and workers compensation insurance coverage provided to our clients and WSEs and the reimbursements we pay to the insurance carriers and third-party administrators for claim payments made on our behalf within our insurance deductible layer, where applicable. We define Net Service Revenues as the sum of professional service revenues and Net Insurance Service Revenues. We define Adjusted EBITDA as net income, excluding the effects of our income tax provision, interest expense, depreciation, amortization of intangible assets, stock-based compensation expense and, in 2014, certain costs related to a public offering of our shares of common stock. We define Adjusted Net Income as net income, excluding the effects of our effective income tax rate, stock-based compensation, amortization of intangible assets, non-cash interest expense, debt prepayment premium, the income tax effect (at our effective tax rate) of these pre-tax adjustments and, in 2014, certain costs related to a public offering of our shares of common stock. For purposes of our non-GAAP financial presentation, as a result of a 2015 increase in New York City tax rates and an increase in blended state rates, we have adjusted the effective tax rate to 41.5% for

31



the year ended December 31, 2015, from 39.5% for year ended December 31, 2014. Each of these effective tax rates exclude income tax on non-deductible stock-based compensation and discrete items including the cumulative effect of state legislative changes. Non-cash interest expense represents amortization and write-off of our debt issuance costs.
We believe that the use of Net Insurance Service Revenues provides useful information as it presents a measure of revenues from our provision of insurance services to our clients less the costs associated with such insurance. We believe that Net Service Revenues provides a useful measure of total revenues for the two main components of our revenues calculated on a consistent basis. We believe that the use of Adjusted EBITDA and Adjusted Net Income provides additional period-to-period comparisons and analysis of trends in our business, as they exclude certain one-time and non-cash expenses. We believe that Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income are useful for our stockholders and board of directors by helping them to identify trends in our business and understand how our management evaluates our business. We use Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income to monitor and evaluate our operating results and trends on an ongoing basis and internally for operating, budgeting and financial planning purposes, in addition to allocating our resources to enhance the financial performance of our business and evaluating the effectiveness of our business strategies. We also use Net Service Revenues and Adjusted EBITDA in determining the incentive compensation for management.
Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income are not prepared in accordance with, and should not be considered in isolation of, or as an alternative to, measurements required by GAAP. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. As non-GAAP measures, Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. In particular:
Net Insurance Service Revenues and Net Service Revenues are reduced by the premiums that we pay to the insurance carriers and any reimbursements we pay to the insurance carriers and third-party administrators for claims payments made on our behalf within our insurance deductible layer, where applicable;
Adjusted EBITDA does not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our debt;
Adjusted EBITDA does not reflect the amounts we paid in taxes or other components of our tax provision;
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
Adjusted EBITDA and Adjusted Net Income do not reflect changes in, or cash requirements for, our working capital needs;
Adjusted EBITDA and Adjusted Net Income do not reflect the non-cash component of employee compensation;
Although depreciation and amortization of intangible assets are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and
Other companies in our industry may calculate these measures or similar measures differently than we do, limiting their usefulness as a comparative measure.
Because of these limitations, you should consider Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income alongside other financial performance measures, including total revenues, net income and our financial results presented in accordance with GAAP.
The table below sets forth a reconciliation of GAAP insurance service revenues to Net Insurance Service Revenues:
 
Year Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(in thousands)
Insurance service revenues
$
2,258,001

 
$
1,851,457

 
$
1,371,903

 
$
870,828

 
$
727,111

Less:  Insurance costs
2,112,376

 
1,686,315

 
1,226,585

 
750,025

 
651,094

Net Insurance Service Revenues
$
145,625

 
$
165,142

 
$
145,318

 
$
120,803

 
$
76,017


32



The table below sets forth a reconciliation of GAAP total revenues to Net Service Revenues:
 
Year Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(in thousands)
Total revenues
$
2,659,288

 
$
2,193,531

 
$
1,644,275

 
$
1,019,061

 
$
840,390

Less:  Insurance costs
2,112,376

 
1,686,315

 
1,226,585

 
750,025

 
651,094

Net Service Revenues
$
546,912

 
$
507,216

 
$
417,690

 
$
269,036

 
$
189,296


The table below sets forth a reconciliation of GAAP net income to Adjusted EBITDA:
 
Year Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(in thousands)
Net income
$
31,695

 
$
15,497

 
$
13,147

 
$
31,832

 
$
14,762

Provision for income taxes
28,315

 
17,579

 
7,937

 
20,344

 
5,421

Stock-based compensation
17,923

 
10,960

 
6,113

 
4,360

 
4,825

Interest expense and bank fees
19,449

 
54,193

 
45,724

 
9,709

 
751

Depreciation
14,612

 
13,843

 
11,737

 
11,676

 
9,201

Amortization of intangible assets
39,346

 
52,302

 
51,369

 
17,441

 
12,388

Secondary offering costs

 
945

 

 

 

Adjusted EBITDA
$
151,340

 
$
165,319

 
$
136,027

 
$
95,362

 
$
47,348


The table below sets forth a reconciliation of GAAP net income to Adjusted Net Income:
 
Year Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(in thousands)
Net income
$
31,695

 
$
15,497

 
$
13,147

 
$
31,832

 
$
14,762

Effective income tax rate adjustment
3,411

 
4,514

 

 

 

Stock-based compensation
17,923

 
10,960

 
6,113

 
4,360

 
4,825

Amortization of intangible assets
39,346

 
52,302

 
51,369

 
17,441

 
12,388

Non-cash interest expense
3,610

 
21,880

 
13,577

 
3,768

 
375

Debt prepayment premium

 
3,800

 

 

 

Secondary Offering Costs

 
945

 

 

 

Income tax impact of pre-tax adjustments
(25,265
)
 
(35,506
)
 
(26,750
)
 
(9,970
)
 
(4,724
)
Adjusted Net Income
$
70,720

 
$
74,392

 
$
57,456

 
$
47,431

 
$
27,626




33



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described in the section titled “Risk Factors” included under Part I, Item 1A above. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results or trends.
Overview
TriNet is a leading provider of comprehensive HR solutions for small to midsize businesses under a co-employment model. Our HR solutions are designed to manage an increasingly complex set of HR regulations, costs, risks, and responsibilities for our clients, allowing them to focus on operating and growing their core businesses. Our bundled HR solutions include multi-state payroll processing and tax administration, employee benefits programs (including health insurance and retirement plans), workers compensation insurance and claims management, federal, state and local labor, employment and benefit law compliance, risk mitigation, expense and time management, and other human capital consulting services. Our proprietary, cloud-based HR software systems are used by our clients and their WSEs to efficiently store and manage their core HR-related information and conduct a variety of HR-related transactions anytime and anywhere. In addition, our expert teams of in-house HR professionals also provide additional services upon request to support various stages of our clients’ growth, including talent management, recruiting and training, performance management consulting or other consulting services (with an incremental charge for such services).
As of December 31, 2015, we served over 12,700 clients in all 50 states, the District of Columbia and Canada, co-employed more than 324,000 WSEs, and had processed over $31 billion in payroll and payroll tax payments for our clients in 2015. Our clients are distributed across a variety of industries, including technology, life sciences, not-for-profit, professional services, financial services, property management, retail, manufacturing, and hospitality. Our sales and marketing, client services and product development teams are increasingly focused on specific industry verticals. This verticalized approach gives us a deeper understanding of the HR needs facing SMBs in particular industries, which better enables us to provide HR solutions and services tailored to the specific needs of clients in these verticals. We conduct our business primarily in the United States, with more than 99% of our total revenues for each of 2015, 2014 and 2013 being attributable to WSEs in the U.S. and the remainder being attributable to WSEs in Canada.
For 2015, 2014 and 2013, our total revenues were $2.7 billion, $2.2 billion, and $1.6 billion respectively. Our total revenues consist of professional service revenues and insurance service revenues. For 2015 and 2014, 15% and 16% of our total revenues, respectively, consisted of professional service revenues, and 85% and 84% of our total revenues, respectively, consisted of insurance service revenues. We recognize as professional service revenues the fees we earn for providing our clients with a comprehensive suite of HR professional services, but do not include amounts paid to us by clients as payroll that are paid out to WSEs or amounts withheld and remitted to authorities as taxes. We recognize as insurance service revenues all insurance-related billings and administrative fees collected from clients and withheld from WSEs. We pay premiums to third-party insurance carriers for client and WSE insurance benefits and reimburse the insurance carriers and third-party administrators for claims payments made on our behalf within our insurance deductible layer, where applicable. These premiums and reimbursements are classified as insurance costs on our statements of operations.
We sell our services primarily through our direct sales organization, which consists of sales representatives who focus on serving clients in specific industry vertical markets. For 2015, 2014 and 2013, our sales and marketing expenses were $166.8 million, $140.0 million and $109.2 million, respectively, or 6%, 6% and 7% of our total revenues and 30%, 28% and 26% of our Net Service Revenues, respectively.
We have made significant investments in our proprietary, cloud-based HR systems, including implementing client information and management software to provide our clients with enhanced features and functionality. For 2015, 2014 and 2013, our systems development and programming costs were $27.6 million, $26.1 million and $19.9 million, or 1%, 1% and 1% of our total revenues and 5%, 5% and 5% of our Net Service Revenues, respectively. We plan to continue to invest to upgrade and improve our technology offerings, including enhancements of our solutions to address specific needs of clients in our key vertical markets, as we believe the continued improvement of our technology provides TriNet with the ability to drive operating efficiencies while improving our clients’ experience. We will leverage our existing online technology offerings to build additional products and features, including a full-service mobile platform, standard APIs for selected third party offerings,

34



improved client experience for key processes, and retirement of legacy software systems from acquisitions and migration of clients to the primary TriNet software system.
Strategic Acquisitions
Historically, we have pursued strategic acquisitions to both expand our product capabilities and supplement our growth across geographies and certain industry verticals. Our acquisition targets have included other bundled HR providers as well as technology companies or technology product offerings to supplement or enhance our existing HR solutions. We intend to continue to pursue strategic acquisitions that will enable us to add new clients and WSEs, expand our presence in certain geographies or industry verticals and offer our clients and WSEs more comprehensive and attractive products and services.
Key Financial and Operating Metrics
We regularly review certain key financial and operating metrics to evaluate growth trends, measure our performance and make strategic decisions. These key financial and operating metrics may change over time. Our key financial and operating metrics at December 31, 2015, 2014 and 2013, were as follows:
 
Year Ended December 31,
Key Financial and Operating Metrics:
2015
 
2014
 
2013
Net Insurance Service Revenues (in thousands)
$
145,625

 
$
165,142

 
$
145,318

Net Service Revenues (in thousands)
$
546,912

 
$
507,216

 
$
417,690

Total WSEs
324,399

 
288,312

 
231,203

Total Sales Representatives
481

 
385

 
300

Net Insurance Service Revenues and Net Service Revenues
We define Net Insurance Service Revenues as insurance service revenues less insurance costs. We define Net Service Revenues as the sum of professional service revenues and Net Insurance Service Revenues. Our total revenues on a GAAP basis represent the total amount invoiced by us to our clients, net of direct pass-through costs such as payroll and payroll tax payments, for the services we provide to our clients. Our insurance costs include the premiums we pay to third-party insurance carriers for the insurance coverage provided to our clients and WSEs and the reimbursements we pay to the insurance carriers and third-party administrators for claims payments made on our behalf within our insurance deductible layer, where applicable. We act principally as the service provider to add value in the execution and procurement of these services to our clients. Historically, Net Insurance Service Revenues has served as the primary indicator of our ability to source, add value and offer benefit services to our clients and WSEs through third-party insurance carriers, and has been considered by management to be a key performance measure. Historically, Net Service Revenues has also served as a key performance measure as it provides a useful measure of total revenues for the two main components of our revenues calculated on a consistent basis. In addition, management believes measuring operating costs as a function of Net Service Revenues has historically provided a useful metric, as we believe it has enabled evaluation of the performance of our business.
Total WSEs
We define Total WSEs at the end of a given fiscal period as the total number of WSEs paid in the last calendar month of the fiscal period. Historically, comparing our Total WSEs at the end of a fiscal period to that of prior periods has served as an indicator of our success in growing our business, both organically and through the integration of acquired businesses, and retaining clients. Our Total WSEs paid in the last calendar month of the fiscal period has also historically been a leading indicator of our anticipated revenues for future fiscal periods.
Total Sales Representatives
Our direct sales force consists of sales representatives who focus on serving clients in specific industry vertical markets. We define Total Sales Representatives at the end of a given fiscal period as the total number of our direct sales force employees at that date. Historically, comparing our Total Sales Representatives at the end of a fiscal period to our Total Sales Representatives at the end of a prior fiscal period has served as an indicator of our success in growing our business. Our Total Sales Representatives at the end of recent fiscal periods has also historically been a key indicator of our ability to increase our revenues in the following fiscal periods.

35



Impact of Health Care Reform
The Affordable Care Act, or the Act, entails sweeping health care reforms with staggered effective dates from 2010 through 2020, and many provisions of the Act require the issuance of additional guidance from the U.S. Departments of Labor and Health and Human Services, the IRS and the states. A number of key provisions of the Act have begun to take effect over the past three years, including the establishment of state and federal insurance exchanges, insurance market reforms, “play or pay” penalties on applicable large employers and the imposition and assessment of excise taxes on the health insurance industry and reinsurance taxes on insurers and third-party administrators. Collectively, these items have the potential to significantly change the insurance marketplace for employers and how employers offer or provide insurance to employees.  We are not yet able to determine the full impact to our business, and to our clients, resulting from the Act.  In future periods, the Act may result in increased costs to us and our clients and could affect our ability to attract and retain clients.  Additionally, we may be limited or delayed in our ability to increase service fees to offset any associated potential increased costs resulting from compliance with the Act.  Furthermore, the uncertainty surrounding the terms and application of the Act may delay or inhibit the decisions of potential clients to outsource their HR needs.  As a result, these changes could have a negative impact on our operating results.
Seasonality and Insurance Variability
Our business is affected by cyclicality in business activity and WSE behavior. Historically, we have experienced our highest monthly addition of WSEs, as well as our highest monthly levels of client attrition, in the month of January, primarily because clients that change their payroll service providers tend to do so at the beginning of a calendar year. We also experience higher levels of client attrition in connection with renewals of the health insurance we sponsor for our WSEs, in the event that such renewals result in higher costs to our clients. We have also historically experienced higher insurance claim volumes in the second and third quarters of a fiscal year than in the first and fourth quarters of a fiscal year, as WSEs typically access their health care providers more often in the second and third quarters of a fiscal year, which has negatively impacted our insurance costs in these quarters. We have also experienced variability on a quarterly basis in the amount of our health and workers compensation insurance costs due to the number and severity of insurance claims being unpredictable. These historical trends may change, and other seasonal trends and variability may develop, which would make it more difficult for us to manage our business.

Basis of Presentation and Key Components of Our Results of Operations
Total Revenues
Our total revenues consist of professional service revenues and insurance service revenues. For 2015 and 2014, 15% and 16% of our total revenues, respectively, consisted of professional service revenues, and 85% and 84% of our total revenues, respectively, consisted of insurance service revenues.
We recognize as professional service revenues the fees we earn for providing our clients with a comprehensive suite of HR professional services, but do not include amounts paid to us by clients as payroll that are paid out to WSEs or amounts withheld and remitted to authorities as taxes. Our clients generally pay us these fees based on either a fixed fee per WSE per month or per transaction, or a percentage of the WSE’s payroll cost, pursuant to written services agreements that are generally cancelable by us or our clients upon 30 days’ prior written notice.
We recognize as insurance service revenues all insurance-related billings and administrative fees collected from clients and withheld from WSEs. We pay premiums to third-party insurance carriers for client and WSE insurance benefits and reimburse the insurance carriers and third-party administrators for claims payments made on our behalf within our insurance deductible layer, where applicable, as further described below in “Insurance Costs”. These premiums and reimbursements are classified as insurance costs on our statements of operations.
Insurance Costs
Insurance costs include the premiums we pay to third-party insurance carriers for insurance coverage provided to clients and WSEs and the reimbursements we pay to the insurance carriers and third-party administrators for claims payments made on our behalf within the insurance deductible layer for those plans that have such a deductible.
Our insurance costs are, in part, a function of the type and terms of agreements that we enter into with the third-party insurance carriers that provide TriNet-sponsored insurance plans for our clients and WSEs. Approximately 38% of our 2015

36



health insurance premiums were for fully-insured policies with respect to which our carriers set the premiums and for which we were not responsible for any deductible, which are referred to as ‘guaranteed cost’ policies. Our future premiums under these guaranteed cost policies will be influenced by the WSE claims activity in prior periods and rate increases by our insurance carriers. The remaining 62% of our 2015 group health insurance premiums, and all of our workers compensation insurance premiums, were for fully-insured policies with respect to which we agree to reimburse our carriers for any claims paid within our agreed-upon deductible layer. Under these policies, WSEs file claims with the carriers, which are responsible for paying the claims up to the maximum coverage under the policies. The carriers and third-party administrators then seek reimbursement from us for payments of claims made on our behalf up to our deductible per incident for workers compensation claims, or up to limits to our exposure for individual claims and limits to our maximum aggregate exposure for claims in a given policy year in accordance with the terms of the underlying health insurance policies. In no event are we liable to pay claims directly to WSEs. As we evaluate the claims experience for each fiscal period, we adjust, as we deem necessary, our workers compensation and health benefits reserves, and this in turn has a corresponding impact on our insurance costs. As a result, our insurance costs fluctuate from period to period depending on the number and severity of the claims incurred by our WSEs in that period and prior periods. We expect our insurance costs to continue to increase in absolute dollars on an annual basis for the foreseeable future due to expected growth in WSEs, which will likely mean an increase in the absolute number of claims, and an increase in the cost of claims due to inflation or other factors.
Cost of Providing Services
Cost of providing services consists primarily of costs incurred by us associated with direct client support, such as payroll and benefits processing, professional HR consultants, employee liability insurance and costs associated with assisting clients in managing, processing and responding to employment-related legal claims, benefits and risk management, postage and shipping expenses and consulting expenses. We expect our cost of providing services to continue to increase in absolute dollars on an annual basis for the foreseeable future due to expected growth in WSEs, although as we improve our systems and processes, we expect to gain efficiencies and we expect our cost of providing services as a percentage of total revenues to decline. In addition, our costs of providing services may fluctuate as a percentage of our total revenues from period to period depending on the timing of those expenses.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries, commissions and related variable compensation expenses, commission payments to partners and the cost of marketing programs. Marketing programs consist of advertising, lead generation, marketing events, corporate communications, brand building and product marketing activities, as well as various incentivized partnership and referral programs. We expect our sales and marketing expenses to increase in absolute dollars at a slower rate than in the past three years as we reduce our rate of growth in our direct sales force offset by increased investments to improve our sales productivity. In addition, our sales and marketing expenses may fluctuate as a percentage of our total revenues from period to period depending on the timing of those expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of compensation-related expenses, legal, accounting and other professional services fees and other general corporate expenses. We expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future due to increases in our legal and financial compliance costs in connection with being a newly public company. As we improve our systems, processes and internal controls we expect to gain efficiencies and expect our general and administrative costs as a percentage of total revenues to decline. In addition, these expenses may fluctuate as a percentage of our total revenues from period to period depending on the timing of those expenses.
Systems Development and Programming Costs
Systems development and programming costs consist primarily of compensation-related expenses for our employees and contractors dedicated to systems development and programming, as well as fees that we pay to third-party consulting firms. We expect our systems development and programming costs to continue to increase in absolute dollars for the foreseeable future as we continue to invest in and improve our technology platform. Over time, we expect our systems development and programming costs to remain relatively consistent as a percentage of our total revenues on an annual basis. In addition, our systems development and programming costs may fluctuate as a percentage of our total revenues from period to period depending on when we incur those costs.

37



Amortization of Intangible Assets
Amortization of intangible assets represents costs associated with an acquired company’s developed technologies, client lists, trade names and contractual agreements. We amortize these intangibles over their respective estimated useful lives using either the straight-line method or the accelerated method.
Depreciation
Depreciation consists primarily of amortization of the cost of software and furniture, fixtures and equipment.
Other Income (Expense)
Other income (expense) consists primarily of interest expense under our credit facility and capital leases, debt issuance cost amortization, and a prepayment premium.
Provision for Income Taxes
We are subject to taxation in the United States and Canada. We conduct our business primarily in the United States, and almost all of our clients are U.S. employers with a small percentage of Canadian employers. We also provide services with respect to certain of our U.S. clients’ employees in Canada. The percentage of our total revenues attributable to WSEs in Canada was less than 1% for each of 2015 and 2014. Our effective tax rate differs from the statutory rate primarily due to state taxes, tax credits, non-deductible charges, changes in uncertain tax positions, and other discrete items. We make estimates and judgments about our future taxable income based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially affected.
Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Changes in valuation allowances are reflected as a component of provision for income taxes.


38



Results of Operations
The following tables set forth our results of operations for the periods presented and as a percentage of our total revenues and Net Service Revenues for those periods. Period-to-period comparisons of our financial results are not necessarily indicative of financial results to be achieved in future periods. 
 
Year Ended December 31,
 
2015
 
2014
 
2013
 
(in thousands)
Consolidated Statement of Operations:
 
 
 
 
 
Professional service revenues
$
401,287

 
$
342,074

 
$
272,372

Insurance service revenues
2,258,001

 
1,851,457

 
1,371,903

Total revenues
2,659,288

 
2,193,531

 
1,644,275

Costs and operating expenses:
 
 
 
 
 
Insurance costs
2,112,376

 
1,686,315

 
1,226,585

Cost of providing services (exclusive of depreciation and
   amortization of intangible assets)
(1)
150,694

 
134,256

 
106,661

Sales and marketing (1)
166,759

 
139,997

 
109,183

General and administrative (1)
69,626

 
53,926

 
52,455

Systems development and programming costs (1)
27,558

 
26,101

 
19,948

Amortization of intangible assets
39,346

 
52,302

 
51,369

Depreciation
14,612

 
13,843

 
11,737

Total costs and operating expenses
2,580,971

 
2,106,740

 
1,577,938

Operating income
78,317

 
86,791

 
66,337

Other income (expense):
 
 
 
 
 
Interest expense and bank fees
(19,449
)
 
(54,193
)
 
(45,724
)
Other, net
1,142

 
478

 
471

Income before provision for income taxes
60,010

 
33,076

 
21,084

Provision for income taxes
28,315

 
17,579

 
7,937

Net income
$
31,695

 
$
15,497

 
$
13,147

(1)
Includes stock-based compensation expense as follows:

 
Year Ended December 31,
 
2015
 
2014
 
2013
 
(in thousands)
Cost of providing services
$
4,244

 
$
2,658

 
$
1,193

Sales and marketing
4,490

 
2,755

 
1,284

General and administrative
7,501

 
4,517

 
3,220

Systems development and programming costs
1,688

 
1,030

 
416

Total stock-based compensation expense
$
17,923

 
$
10,960

 
$
6,113



39



 
Year Ended December 31,
 
2015
 
2014
 
2013
Percentage of total revenues:
 
 
 
 
 
Professional service revenues
15
 %
 
16
 %
 
17
 %
Insurance service revenues
85
 %
 
84
 %
 
83
 %
Total revenues
100
 %
 
100
 %
 
100
 %
Costs and operating expenses:
 
 
 
 
 
Insurance costs
79
 %
 
77
 %
 
75
 %
Cost of providing services (exclusive of depreciation and amortization of intangible assets)
6
 %
 
6
 %
 
6
 %
Sales and marketing
6
 %
 
6
 %
 
7
 %
General and administrative
3
 %
 
2
 %
 
3
 %
Systems development and programming costs
1
 %
 
1
 %
 
1
 %
Amortization of intangible assets
1
 %
 
2
 %
 
3
 %
Depreciation
1
 %
 
1
 %
 
1
 %
Total costs and operating expenses
97
 %
 
96
 %
 
96
 %
Operating income
3
 %
 
4
 %
 
4
 %
Other income (expense):
 
 
 
 
 
Interest expense and bank fees
(1
)%
 
(2
)%
 
(3
)%
Other, net
0
 %
 
0
 %
 
0
 %
Income before provision for income taxes
2
 %
 
2
 %
 
1
 %
Provision for income taxes
1
 %
 
1
 %
 
0
 %
Net income
1
 %
 
1
 %
 
1
 %

 
 
Year Ended December 31,
 
2015
 
2014
 
2013
Percentage of Net Service Revenues:
 
 
 
 
 
Professional service revenues
73
 %
 
67
 %
 
65
 %
Net Insurance Service Revenues
27
 %
 
33
 %
 
35
 %
Net Service Revenues
100
 %
 
100
 %
 
100
 %
Other operating expenses:
 
 
 
 
 
Cost of providing services (exclusive of depreciation and amortization of intangible assets)
28
 %
 
26
 %
 
26
 %
Sales and marketing
30
 %
 
28
 %
 
26
 %
General and administrative
13
 %
 
11
 %
 
13
 %
Systems development and programming costs
5
 %
 
5
 %
 
5
 %
Amortization of intangible assets
7
 %
 
10
 %
 
12
 %
Depreciation
3
 %
 
3
 %
 
3
 %
Total other operating expenses
86
 %
 
83
 %
 
84
 %
Operating income
14
 %
 
17
 %
 
16
 %
Other income (expense):
 
 
 
 
 
Interest expense and bank fees
(4
)%
 
(11
)%
 
(11
)%
Other, net
0
 %
 
0
 %
 
0
 %
Income before provision for income taxes
11
 %
 
7
 %
 
5
 %
Provision for income taxes
5
 %
 
3
 %
 
2
 %
Net income
6
 %
 
3
 %
 
3
 %


40



Years Ended December 31, 2015, 2014 and 2013
Total Revenues and Key Operating Metrics

 
Year Ended
December 31,
 
Change
2015 vs. 2014
 
Change
2014 vs. 2013
 
2015
 
2014
 
2013
 
$
 
%
 
$
 
%
 
(in thousands, except percentages)
Professional service revenues
$
401,287

 
$
342,074

 
$
272,372

 
$
59,213

 
17
%
 
$
69,702

 
26
%
Insurance service revenues
2,258,001

 
1,851,457

 
1,371,903

 
406,544

 
22
%
 
479,554

 
35
%
Total revenues
$
2,659,288

 
$
2,193,531

 
$
1,644,275

 
$
465,757

 
21
%
 
$
549,256

 
33
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended
December 31,
 
Change
2015 vs. 2014
 
Change
2014 vs. 2013
 
2015
 
2014
 
2013
 
$
 
%
 
$
 
%
 
(in thousands, except percentages)
Key operating metrics:
 
 
 
 
 
 
 
 
 
 
 
 
 
Total WSEs
324,399

 
288,312

 
231,203

 
36,087

 
13
%
 
57,109

 
25
%
Total Sales Representatives
481

 
385

 
300

 
96

 
25
%
 
85

 
28
%
 
Total revenues for 2015 increased by $465.8 million, or 21%, compared to 2014. Professional service revenues and insurance service revenues represented 15% and 85%, respectively, of total revenues for 2015, compared to 16% and 84%, respectively, of total revenues for 2014
Professional service revenues increased by $59.2 million, or 17%, compared to 2014. The increase was mainly attributable to our increase in Total WSEs and an increase in WSEs from verticals with higher average revenue per WSE.
Insurance service revenues for 2015 increased by $406.5 million, or 22%, compared to 2014. The increase was primarily due to our increase in Total WSEs and an increase of 5% in average insurance service revenues per WSE.
Total WSEs at December 31, 2015 increased by approximately 36,000, or 13%, compared to Total WSEs at December 31, 2014, which was primarily driven by a net increase in total clients. Our Total Sales Representatives increased from 385 at December 31, 2014 to 481 at December 31, 2015, primarily due to our efforts to grow our sales force.
Total revenues for 2014 increased by $549.3 million, or 33%, compared to 2013. Professional service revenues and insurance service revenues represented 16% and 84%, respectively, of total revenues for 2014, compared to 17% and 83%, respectively, of total revenues for 2013.  The increase in total revenues was attributable to the significant growth of our Total WSEs and revenues from our acquisition of Ambrose Employer Group, LLC, or Ambrose, in the third quarter of 2013, as further described below.
Professional service revenues for 2014 increased $69.7 million, or 26%, compared to 2013. The increase was mainly attributable to our increase in Total WSEs and our acquisition of Ambrose in third quarter of 2013, which contributed $15.4 million of professional service revenues during the first half of 2014.
Insurance service revenues for 2014 increased by $479.6 million, or 35%, compared to 2013. The increase was primarily due to our increase in Total WSEs. Additionally, our acquisition of Ambrose contributed $130.4 million of insurance service revenues during the first half of 2014.
Total WSEs at December 31, 2014 increased by approximately 57,000, or 25%, compared to Total WSEs at December 31, 2013. Our Total Sales Representatives increased from 300 at December 31, 2013 to 385 at December 31, 2014.

41



Insurance Costs
 
 
Year Ended
December 31,
 
Change
2015 vs. 2014
 
Change
2014 vs. 2013
 
2015
 
2014
 
2013
 
$
 
%
 
$
 
%
 
(in thousands, except percentages)
Insurance costs
$
2,112,376

 
$
1,686,315

 
$
1,226,585

 
$
426,061

 
25
%
 
$
459,730

 
37
%
 
Insurance costs for 2015 increased $426.1 million, or 25%, compared to 2014. The increase resulted from an increase in Total WSEs, the volume and severity of medical claims being unexpectedly higher than our WSE growth, experience and available information would have suggested and, to a lesser extent, increased workers compensation costs per WSE.
Insurance costs for 2014 increased $459.7 million, or 37% compared to 2013, $118.6 million of which was due to our acquisition of Ambrose. The remaining increase resulted from an increase in Total WSEs other than those acquired from Ambrose and a 3% increase in average insurance costs per WSE other than those acquired from Ambrose.
Net Insurance Service Revenues and Net Service Revenues
 
 
Year Ended
December 31,
 
Change
2015 vs. 2014
 
Change
2014 vs. 2013
 
2015
 
2014
 
2013
 
$
 
%
 
$
 
%
 
(in thousands, except percentages)
Insurance service revenues
$
2,258,001

 
$
1,851,457

 
$
1,371,903

 
$
406,544

 
22
 %
 
$
479,554

 
35
%
Less:  Insurance costs
2,112,376

 
1,686,315

 
1,226,585

 
426,061

 
25
 %
 
459,730

 
37
%
Net Insurance Service Revenues
$
145,625

 
$
165,142

 
$
145,318

 
$
(19,517
)
 
(12
)%
 
$
19,824

 
14
%
 
 
Year Ended
December 31,
 
Change
2015 vs. 2014
 
Change
2014 vs. 2013
 
2015
 
2014
 
2013
 
$
 
%
 
$
 
%
 
(in thousands, except percentages)
Total revenues
$
2,659,288

 
$
2,193,531

 
$
1,644,275

 
$
465,757

 
21
%
 
$
549,256

 
33
%
Less:  Insurance costs
2,112,376

 
1,686,315

 
1,226,585

 
426,061

 
25
%
 
459,730

 
37
%
Net Service Revenues
$
546,912

 
$
507,216

 
$
417,690

 
$
39,696

 
8
%
 
$
89,526

 
21
%
 
Our Net Insurance Service Revenues for 2015 decreased by $19.5 million, or 12%, as compared to 2014. This decrease resulted from an increase in insurance costs due to the number and size of medical claims being unexpectedly higher than our growth in insurance revenues and unexpectedly higher than our WSE growth, experience and available information would have suggested, and, to a lesser extent, increased workers compensation costs per WSE, offset in part by the increases in our insurance service revenues.
For the reasons set forth above with respect to the increase in our total revenues, offset in part by the increase in our insurance costs, our Net Service Revenues for 2015 increased by $39.7 million, or 8%, as compared to 2014.
Also for the reasons set forth above with respect to total revenues, our Net Insurance Service Revenues for 2014 increased by $19.8 million, or 14%, as compared to 2013, and our Net Service Revenues for 2014 increased by $89.5 million, or 21%, as compared to 2013.

42



Other Operating Expenses
 
 
Year Ended
December 31,
 
Change
2015 vs. 2014
 
Change
2014 vs. 2013
 
2015
 
2014
 
2013
 
$
 
%
 
$
 
%
 
(in thousands, except percentages)
Cost of providing services
$
150,694

 
$
134,256

 
$
106,661

 
$
16,438

 
12
 %
 
$
27,595

 
26
%
Sales and marketing
166,759

 
139,997

 
109,183

 
26,762

 
19
 %
 
30,814

 
28
%
General and administrative
69,626

 
53,926

 
52,455

 
15,700

 
29
 %
 
1,471

 
3
%
Systems development and programming costs
27,558

 
26,101

 
19,948

 
1,457

 
6
 %
 
6,153

 
31
%
Amortization of intangible assets
39,346

 
52,302

 
51,369

 
(12,956
)
 
(25
)%
 
933

 
2
%
Depreciation
14,612

 
13,843

 
11,737

 
769

 
6
 %
 
2,106

 
18
%
Total operating expenses
$
468,595

 
$
420,425

 
$
351,353

 
$
48,170

 
11
 %
 
$
69,072

 
20
%

Cost of Providing Services
 
 
Year Ended
December 31,
 
Change
2015 vs. 2014
 
Change
2014 vs. 2013
 
2015
 
2014
 
2013
 
$
 
%
 
$
 
%
 
(in thousands, except percentages)
Compensation-related costs
$
110,658

 
$
97,423

 
$
75,941

 
$
13,235

 
14
%
 
$
21,482

 
28
%
Facilities
7,585

 
7,149

 
5,615

 
436

 
6
%
 
1,534

 
27
%
Information technology and
   communication
9,693

 
8,948

 
8,482

 
745

 
8
%
 
466

 
5
%
Other expenses
22,758

 
20,736

 
16,623

 
2,022

 
10
%
 
4,113

 
25
%
Total cost of providing services
$
150,694

 
$
134,256

 
$
106,661

 
$
16,438

 
12
%
 
$
27,595

 
26
%

Cost of providing services for 2015 increased by $16.4 million, or 12%, compared to 2014. The increase was primarily attributable to a $13.2 million increase in compensation-related costs due to increased headcount to support our growth, which includes a $1.6 million increase in stock-based compensation expense. Other expenses increased $2.0 million, or 10%, mainly in consulting costs incurred to enhance our product offering. Cost of providing services represented 6% of total revenues in each of the years ended December 31, 2015 and 2014. Cost of providing services increased to 28% of Net Service Revenues in 2015 from 26% in 2014.
Cost of providing services for 2014 increased by $27.6 million, or 26%, compared to 2013, primarily due to an increase in compensation-related costs. Compensation-related costs increased by $21.5 million, or 28%, due to increased headcount, including $4.0 million from our acquisition of Ambrose and a $1.5 million increase in stock-based compensation not related to Ambrose. Facilities-related costs increased by $1.5 million, or 27%, due to the growth of our business. Other expenses increased $4.1 million, or 25%, mainly due to increased consulting costs incurred to enhance our product offering. Cost of providing services as a percentage of total revenues and Net Service Revenues remained unchanged at 6% of total revenues and 26% of Net Service Revenues for the years ended December 31, 2014 and 2013.

43



Sales and Marketing
 
 
Year Ended
December 31,
 
Change
2015 vs. 2014
 
Change
2014 vs. 2013
 
2015
 
2014
 
2013
 
$
 
%
 
$
 
%
 
(in thousands, except percentages)
Compensation-related costs
$
113,718

 
$
96,903

 
$
73,901

 
$
16,815

 
17
%
 
$
23,002

 
31
%
Marketing and advertising
22,097

 
19,667

 
15,863

 
2,430

 
12
%
 
3,804

 
24
%
Facilities
4,511

 
3,832

 
3,155

 
679

 
18
%
 
677

 
21
%
Other expenses
26,433

 
19,595

 
16,264

 
6,838

 
35
%
 
3,331

 
20
%
Total sales and marketing
$
166,759

 
$
139,997

 
$
109,183

 
$
<