<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 1, 2000
REGISTRATION NO. 333-31754
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 6
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
EXULT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8742 33-0831076
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
4 PARK PLAZA, SUITE 1000
IRVINE, CALIFORNIA 92614
(949) 250-8002
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
BRIAN W. COPPLE
VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
EXULT, INC.
4 PARK PLAZA, SUITE 1000
IRVINE, CALIFORNIA 92614
(949) 250-8002
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
Bruce R. Hallett, Esq. Edward Sonnenschein, Jr., Esq.
Ellen S. Bancroft, Esq. Mark E. Brubaker, Esq.
Elizabeth T. Hall, Esq. Latham & Watkins
Christine P. Le, Esq. 633 W. Fifth Street, Suite 4000
Brobeck, Phleger & Harrison LLP Los Angeles, CA 90071
38 Technology Drive (213) 891-8100
Irvine, California 92618
(949) 790-6300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION,
PRELIMINARY PROSPECTUS DATED JUNE 1, 2000
PROSPECTUS
6,000,000 SHARES
[EXULT LOGO]
COMMON STOCK
----------------------
This is Exult, Inc.'s initial public offering of common stock. We are
offering 6,000,000 shares. The U.S. underwriters are offering 5,100,000 shares
in the U.S. and Canada and the international managers are offering 900,000
shares outside the U.S. and Canada.
We expect the initial public offering price to be between $10 and $12 per
share. Currently, no public market exists for our stock. After pricing of the
offering, we expect that the shares will be quoted on the Nasdaq National Market
under the symbol "EXLT."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price.............................. $ $
Underwriting discount.............................. $ $
Proceeds, before expenses, to Exult................ $ $
</TABLE>
The U.S. underwriters may also purchase up to an additional 765,000
shares at the public offering price, less the underwriting discount, within 30
days from the date of this prospectus to cover over-allotments. The
international managers may similarly purchase up to an additional 135,000 shares
at the public offering price, less the underwriting discount.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares will be ready for delivery on or about , 2000.
----------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
ROBERTSON STEPHENS
SALOMON SMITH BARNEY
----------------------
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 3
[INSIDE COVER ART]
[EXULT LOGO]
OVERVIEW OF EXULT SERVICES
Our eHR solution will provide up to eighteen process management services that
address the five major categories of HR processes.
We plan to provide a comprehensive solution by
managing HR functions in all of these processes,
as well as third-party vendors.
<TABLE>
<CAPTION>
GLOBAL HR CATEGORIES PROCESS MANAGEMENT SERVICES
<S> <C>
ORGANIZATION AND PEOPLE - Organization Development
DEVELOPMENT - Training
- Employee Development
- Performance Management
- Policy and Legal Compliance
TOTAL COMPENSATION - Compensation
- Benefits
- Payroll
WORKFORCE SERVICES - HR Strategy
- Labor Relations and Employee
Relations
- Third-Party Vendor Sourcing
and Management
- Employee Communications
EMPLOYEE DATA MANAGEMENT - Employee Data and Records
Management
- HR Information Technology and
Information Services
- Employee and Manager
Self-Service -- myHR
WORKFORCE PLANNING - Recruiting, Resourcing and
Staffing
- Expatriate Administration
- Domestic Relocation
</TABLE>
OUR BUSINESS EXULT INTENDS TO OFFER A COMPREHENSIVE, INTEGRATED,
PROCESS MANAGEMENT SERVICE DESIGNED TO MANAGE HUMAN
RESOURCES DEPARTMENTS FOR LARGE, MULTINATIONAL
CORPORATIONS.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 8
Information Regarding Forward-Looking Statements and
Industry Data............................................. 17
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Capitalization.............................................. 19
Dilution.................................................... 20
Selected Consolidated Financial Data........................ 21
Selected Unaudited Pro Forma Condensed Combined Financial
Information............................................... 23
Selected Unaudited Pro Forma Condensed Combined Statement of
Operations Information.................................... 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Business.................................................... 33
Management.................................................. 44
Certain Transactions........................................ 57
Principal Stockholders...................................... 59
Description of Capital Stock................................ 62
Shares Eligible for Future Sale............................. 65
Underwriting................................................ 67
Legal Matters............................................... 71
Experts..................................................... 71
Where You Can Find More Information......................... 71
Index to Consolidated Financial Statements.................. F-1
</TABLE>
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3
<PAGE> 5
PROSPECTUS SUMMARY
This summary may not contain all the information that may be important to
you. You should read the entire prospectus, including the consolidated financial
statements and related notes, before making an investment decision.
EXULT, INC.
OUR COMPANY
Exult is the first company to offer comprehensive management of human
resources departments for Global 500 corporations. We call our service "eHR(SM)"
because we will use our software, state-of-the-art information technology
capabilities, and Internet or web-enabled communications to transform our
clients' HR departments into proactive, global, knowledge-based organizations
focused on strategy and policy rather than transactions and administration. A
key component of our eHR solution is "myHR(SM)," our web-based system for
linking our clients and their employees together. myHR will act as a portal
through which our clients' employees, managers and annuitants can access their
HR information systems, and as a browser that can navigate through those systems
to find information and process transactions. myHR is designed to eliminate the
numerous organizational, transactional and communication barriers that exist in
large corporations, provide comprehensive data, information and decision
support, and facilitate our clients' business processes and interactive
communication 24 hours a day, seven days a week, regardless of business unit or
location. Our eHR solution also leverages resources and achieves economies of
scale through our HR best practices expertise, expert HR process consulting and
research capabilities, and shared client service centers, which handle our
clients' HR transaction, production and call center requirements. Our objective
is to become the leading provider of comprehensive HR process management
solutions that enable large, multinational corporations to reduce their HR costs
and increase the productivity of their human capital.
In December 1999, we entered into a multi-year arrangement with BP Amoco
p.l.c. to create a comprehensive eHR services organization and provide a broad
range of human resources management services to BP Amoco and its affiliates. BP
Amoco is the nineteenth largest company in the Global 500, as compiled by
Fortune Magazine's Global 500 List for the Year 2000, and currently operates in
more than 40 countries. We are responsible for managing BP Amoco's human
resources operations in the United Kingdom and the United States, which
represents approximately 70% of BP Amoco's more than 80,000 employees and an
equal or greater number of annuitants. Our relationship with BP Amoco
contemplates extending the arrangement beyond the U.K. and the U.S. to unite BP
Amoco's worldwide operations under one global integrated eHR solution. We
believe our arrangement with BP Amoco represents the largest human resources
process management contract ever signed.
OUR MARKET OPPORTUNITY
Many large corporations have begun to outsource discrete, non-core
functions of their operations, such as payroll and benefits administration, in
order to address many of the problems found in traditional human resources
departments. According to Dataquest, a division of the GartnerGroup, the
worldwide HR outsourcing market is projected to grow from approximately $26.2
billion in 1999 to approximately $76.4 billion in 2004. We believe the market
for comprehensive HR outsourcing, which we are targeting, is newly emerging and
the fastest growing segment of the worldwide HR outsourcing market. Dataquest
estimates the market for integrated, multi-process HR outsourcing will grow from
over $900 million in 1999 to more than $12 billion by 2003 in the United States
alone.
The Internet makes our comprehensive service delivery model possible by
facilitating interactive communications among large groups of individuals in
multiple geographic locations. The Hunter Group estimates that by using the
functionality of the Internet to move HR delivery to a largely self-service
mode, organizations can achieve annual HR cost reductions of approximately 25%
to 30%. To date, however, HR organizations have not fully utilized the Internet
because they have not broadly implemented any mechanism for effectively
centralizing and organizing the large amount of information and electronic
4
<PAGE> 6
transmissions within the HR organization. Accordingly, the Internet's use in HR
departments has been largely limited to one-on-one e-mail communications or
process-specific internal networks.
OUR STRATEGY
We believe that our eHR solution, together with our comprehensive
consulting services, will enable us to assume broad responsibility for
management of our clients' human resources people, processes, technologies and
third-party vendors, and to deliver our clients increased human capital
productivity at reduced cost. The following are the key elements of our
strategy:
- Leverage technology and the Internet for enhanced HR performance;
- Establish myHR as an integral tool in the workplace;
- Establish long-term client relationships;
- Utilize and leverage shared resources across our client base;
- Provide expert consulting services;
- Attract and retain leading HR talent;
- Facilitate strategic decision making; and
- Focus on Global 500 corporations.
We were incorporated in Delaware as BPO-US, Inc. in October 1998. In August
1999, we changed our name to Exult, Inc. Our executive offices are located at 4
Park Plaza, Suite 1000, Irvine, California 92614, and our telephone number is
(949) 250-8002.
5
<PAGE> 7
THE OFFERING
Common stock offered by Exult....... 6,000,000 shares
Shares to be outstanding after this
offering............................ 84,529,981 shares
Use of proceeds..................... For working capital and other general
corporate purposes, including the
creation of new and expansion of
existing client service centers, our
technology infrastructure and our sales
and marketing capabilities, for
acquisitions of complementary
businesses, technologies and strategic
relationships, and for the repayment of
outstanding indebtedness. See "Use of
Proceeds."
Risk factors........................ See "Risk Factors" and other
information included in this prospectus
for a discussion of factors you should
carefully consider before deciding to
invest in shares of the common stock.
Proposed Nasdaq National Market
symbol.............................. EXLT
The number of shares of common stock outstanding after this offering is
based on 78,529,981 shares outstanding as of March 31, 2000, and does not
include 12,663,160 shares of common stock issuable upon the exercise of options
outstanding as of May 30, 2000 at a weighted average exercise price of $2.94 per
share, or 968,195 shares of common stock issuable upon the exercise of warrants
outstanding as of May 30, 2000 at a weighted average exercise price of $1.27 per
share. We plan to grant options to purchase an aggregate of approximately
670,000 shares of common stock to our officers, directors and employees on the
date of this Prospectus, with an exercise price equal to the initial public
offering price.
---------------------
Unless otherwise indicated, all information in this prospectus gives effect
to the five-for-one stock split of our common stock effected in February 2000
and:
- assumes that the initial public offering price will be $11 per share;
- assumes that the underwriters will not exercise their over-allotment
option and no other person will exercise any other outstanding options or
warrants;
- gives effect to the exercise of warrants to purchase an aggregate of
667,844 shares of Series C preferred stock and 3,339,220 shares of common
stock;
- gives effect to the conversion of all outstanding shares of preferred
stock into an aggregate of 65,484,786 shares of our common stock at the
closing of this offering at a rate of 900 shares of common stock for each
share of Series A preferred stock; five shares of common stock for each
share of Series B and Series C preferred stock; and one share of common
stock for each share of Series D preferred stock. The purchase prices
paid for our preferred stock, which form the basis for the "conversion
price" or rate at which the preferred stock converts into common stock,
are as follows: $.044 per share for the Series A preferred stock, $1.084
per share for the Series B preferred stock, $2.056 per share for the
Series C preferred stock and $8.714 per share for the Series D preferred
stock. No further payments will be made in connection with conversion of
the preferred stock.
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<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The summary consolidated financial information below should be read
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements and the related notes
included elsewhere in this prospectus. The pro forma combined consolidated
statement of operations data for the year ended December 31, 1999 shows our pro
forma results of operations to reflect our acquisition of certain assets of Gunn
Partners, Inc., as if such acquisition had occurred on January 1, 1999, the
issuance of 385,805 shares of Series C preferred stock and 6,885,480 shares of
Series D preferred stock, the exercise of warrants to purchase an aggregate of
3,339,220 shares of common stock and 667,844 shares of Series C preferred stock,
the conversion of all outstanding preferred stock into 65,484,786 shares of
common stock, and the exercise of options to purchase 271,675 shares of common
stock. The pro forma consolidated statement of operations data for the three
months ended March 31, 2000 shows our pro forma results of operations to reflect
the subsequent exercise of warrants to purchase an aggregate of 3,339,220 shares
of common stock and 667,844 shares of Series C preferred stock and the
conversion of all outstanding preferred stock into 65,484,786 shares of common
stock upon completion of the offering.
<TABLE>
<CAPTION>
OCTOBER 29,
1998 PRO FORMA PRO FORMA
(INCEPTION) COMBINED THREE MONTHS ENDED THREE MONTHS
TO YEAR ENDED YEAR ENDED MARCH 31, ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------------- MARCH 31,
1998 1999 1999 1999 2000 2000
------------ ------------ ------------ ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue....................... $ -- $ 4,857 $ 15,245 $ -- $ 5,577 $ 5,577
Gross profit (loss)........... -- 359 7,075 -- (173) (173)
Loss from operations.......... (187) (15,475) (19,370) (516) (11,694) (11,694)
Net loss...................... (184) (15,212) (19,090) (510) (10,902) (10,902)
Net loss per share:
Basic and diluted........... $(140.48) $ (2.20) $ (0.25) $(56.66) $ (1.16) $ (0.14)
Weighted average number of
common shares outstanding:
Basic and diluted........... 1,307 6,906,334 75,998,174 9,000 9,434,300 78,258,306
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 2000
---------------------------------------
DECEMBER 31, PRO FORMA
1999 ACTUAL PRO FORMA AS ADJUSTED
------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and investments.............. $39,199 $ 93,702 $106,138 $166,218
Working capital..................................... 31,957 83,121 95,557 155,637
Total assets........................................ 58,767 119,197 131,633 191,713
Long-term obligations, net of current portion....... 4,304 4,289 4,289 4,289
Convertible preferred stock......................... 58,768 122,734 -- --
Total stockholders' equity.......................... 46,110 99,748 112,184 172,264
</TABLE>
Please refer to note 2 and note 10 of notes to our consolidated financial
statements for information regarding the method used to compute our basic and
diluted net loss per share and our basic and diluted weighted average shares
outstanding. Our pro forma consolidated balance sheet data give effect to the
same transactions as described above for the pro forma combined consolidated
statement of operations data for the three months ended March 31, 2000. Our pro
forma as adjusted consolidated balance sheet data also give effect to the
receipt and application of the estimated net proceeds from the sale of the
6,000,000 shares offered by this prospectus. For more information regarding our
use of the proceeds from this offering, see "Use of Proceeds."
7
<PAGE> 9
RISK FACTORS
You should consider carefully the following risks before you decide to buy
our common stock. Additional risks and uncertainties not presently known to us
or that we currently believe are not important may also impair our business
operations. If any of the following risks actually occurs, our business,
financial condition or results of operations could be materially adversely
affected, the value of our common stock could decline, and you could lose all or
part of your investment.
OUR COMPANY AND ITS PROSPECTS ARE DIFFICULT TO EVALUATE BECAUSE WE HAVE AN
EXTREMELY LIMITED OPERATING HISTORY AND OUR BUSINESS MODEL IS UNPROVEN.
We entered into our first process management contract in December 1999. We
have only three clients and we are still at an early stage of implementing all
three of our process management contracts. As such, our business model is
unproven. Our success depends on our ability to develop and implement a high
quality, cost-effective services offering, produce satisfactory results for our
clients and attract new clients. We have not been in operation long enough to
judge whether we can accomplish these objectives, or whether our clients will
perceive our services as beneficial. Accordingly, our revenue and income
potential and future operating results are uncertain.
WE OPERATE IN A NEW AND EVOLVING MARKET WITH UNCERTAIN PROSPECTS FOR GROWTH.
Our growth depends on the willingness of businesses to outsource management
of their human resources functions, and our ability to market our services
effectively. Our business model is based on managing most or all of our clients'
HR processes. The market for this service is new and subject to substantial
uncertainty. Some potential clients might not recognize the benefits of our eHR
process management solution, or decide that the human resources function is too
important to entrust to a third party. Potential clients and their employees may
also resist transitioning HR functions to an Internet-based service. We cannot
assure you that the market for our services will develop, that our services will
be adopted, or that our clients will use these Internet-based services in the
degree or manner that we expect. If we are unable to react quickly to changes in
the market, if the market fails to develop, or develops more slowly than
expected, or if our services do not achieve market acceptance, then we are
unlikely to become or remain profitable.
OUR SUCCESS DEPENDS UPON THE SUCCESSFUL COMPLETION OF OUR CONTRACT WITH BP AMOCO
AND OTHER EARLY CONTRACTS.
BP Amoco is the first client for which we are offering a comprehensive eHR
solution, and we anticipate revenue from this contract will represent a majority
of our future revenue for at least the next year and possibly in future periods.
This contract is still at a very early stage and our service offering is not yet
fully developed. As such, we believe our ability to secure future clients and
revenues will be largely dependent upon our ability to manage and administer BP
Amoco's HR processes effectively and efficiently, and achieve the contracted
service levels and cost savings. BP Amoco can terminate the arrangement for
material breach or significant and repeated performance failures. In addition,
from December 2002, BP Amoco may terminate the arrangement with 12 months
advance notice together with, for any termination occurring between December
2002 and December 2004, termination payments designed to defray our costs and
give us a specified return on our investment in the contract. If BP Amoco were
to substantially reduce or stop using our services, our reputation and future
revenues would be seriously impaired. We expect to face similar risks with other
significant clients until our business model and service offering are firmly
established.
Although our arrangement with BP Amoco contemplates that we manage their HR
processes worldwide, and we have a first right to provide human resources
management services to BP Amoco in each country in which they have operations,
our current contract covers only the United Kingdom and the United States. BP
Amoco is not obligated to add additional countries and we must demonstrate our
ability to meet their service needs and provide specified cost savings in other
countries to expand the
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arrangement. We have no experience operating in foreign countries and we might
not be able to manage the HR needs of BP Amoco or potential future clients on a
global basis.
OUR EHR SOLUTION DEPENDS ON MYHR, WHICH IS AT AN EARLY STAGE OF DEVELOPMENT.
We expect our clients' employees to access our web-enabled eHR solution
through myHR, our human resources portal. myHR is still at an early stage of
development and has not yet been fully implemented. The system is complex and
the first release of myHR, with limited features, was only recently implemented
for BP Amoco in the second quarter of 2000. We expect to add greater
functionality in subsequent releases. Application of myHR to BP Amoco and other
clients requires integration of many independent programs and complex functions,
and we will need to continue to revise and adapt the program. If we fail to
develop myHR in accordance with the specifications and delivery milestones
agreed upon by us and BP Amoco or other clients, or if we are unable to achieve
the functionality we expect, our ability to deliver our services and achieve our
business objectives in general could be seriously impeded.
CAPACITY CONSTRAINTS AND THE LENGTH OF OUR NEW CLIENT SALES AND INTEGRATION
CYCLES WILL LIMIT OUR REVENUE GROWTH.
We expect most of our revenue growth to come from new client engagements.
However, because we are a new company and are still creating the components of
our service offering, we plan to limit the number of additional client
engagements we accept over the near term. This strategy may negatively affect
our revenue growth until we have developed our solution to the point that it can
be extended more rapidly across a greater number of clients.
Our client contracts involve significant commitments and cannot be made
without a lengthy, mutual due diligence process during which we identify the
potential client's service needs and costs, and our ability to meet those needs
and provide specified cost savings. We must devote significant management time
and other resources to each due diligence process over a period of four to six
months or more, and we can conduct at most only a few of these due diligence
undertakings at one time. This lengthy diligence process limits our revenue
growth. For example, we recently invested significant time in some potential
client relationships that have not yet resulted in contracts. It is possible
that these or any other potential client due diligence process could result in a
decision by us or the potential client not to enter into a contract after we
have made significant investments in time and resources. Although in the past
our clients have committed to reimburse us for our due diligence costs if we do
not reach a contract, we may not recover these costs in the future.
After a new client contract is signed, we convert the client's HR processes
to our systems and infrastructure in stages. This transition period can take up
to a year or more and may involve unanticipated difficulties and delays. Our
pricing model involves guaranteed reductions in the client's HR costs, and we
cannot realize the full efficiencies of providing services to the client through
our infrastructure until this transition is complete. Therefore, any increase in
our earnings that could be expected from our BP Amoco agreements or any new
contract will be delayed for at least several months after the contract is
signed, and it could take a significant amount of time for our BP Amoco
agreements or any new contract to contribute significantly to profits or cash
flow. The transition of BP Amoco's HR processes to our systems and
infrastructure is not scheduled to be complete until February 2001, and could be
delayed. We attempt to negotiate long-term contracts in order to give us time to
complete the transition and earn a profit, but if implementation of our service
model is delayed, or if we do not meet our service commitments under any
particular contract and the client terminates our engagement early as a result,
we might experience no return on our substantial investment of time and
resources in that client.
WE EXPECT TO CONTINUE TO INCUR SIGNIFICANT NET OPERATING LOSSES AND WE MAY NEED
TO RAISE ADDITIONAL CAPITAL. EITHER COULD ADVERSELY AFFECT THE VALUE OF YOUR
INVESTMENT.
Starting up our company and building our infrastructure is expensive. Since
our formation, we have not had a profitable quarter. We incurred a net loss
$10.9 million for the three months ended March 31,
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<PAGE> 11
2000 and a net loss of $15.2 million for the year ended December 31, 1999. For
the year ended December 31, 1999, we used cash of $7.6 million in operating
activities and $9.6 million in investing activities. We expect to continue to
make significant and increasing investments in the development of our eHR
solution, client service centers, and web technologies, the expansion of our
sales and marketing and service capabilities and the procurement of additional
contracts. We expect at least $12.0 to $15.0 million of these expenses to be
capitalized in each of 2000 and 2001 and amortized over three to five years.
This significant depreciation and amortization expense will reduce future
profitability. We may also need cash to make acquisitions and develop new
service offerings and technologies. As a result, we will need to generate
significant revenues to achieve profitability. We expect to incur net losses in
2000 and 2001, and we cannot assure you that we will ever operate profitably, or
that we can sustain or increase profitability on a quarterly or annual basis in
the future.
Because we do not expect our operating income to cover our cash needs for
some time, we may need to raise additional funds through public or private debt
or equity financings. Any additional capital raised through the sale of equity
may dilute your ownership interest. We cannot assure you that we will be able to
raise additional funds on favorable terms, or at all. If we are unable to obtain
additional funds, we may be unable to fund our operations.
WE MAY NOT BE ABLE TO ACHIEVE THE COST SAVINGS WE HAVE PROMISED OUR CLIENTS,
WHICH COULD AFFECT OUR ABILITY TO BECOME OR REMAIN PROFITABLE.
We provide our services for fixed fees that are generally equal to or less
than our clients' historical costs to provide for themselves the services we
contract to deliver. As a result, our profitability will depend on our ability
to provide services cost-effectively. Achieving the efficiency we need depends
upon our ability to develop our eHR solution into a standardized management
system that can be operated from our client services centers and extended to
multiple clients with only minimal client-specific adaptation and modification.
The actual cost reductions we are able to achieve will vary by client for a
variety of reasons, including the scope of services we agree to provide, the
existing state of our clients' HR department and processes, and our ability to
standardize, centralize, and simplify their processes, notwithstanding the
complexity of their existing systems and potential resistance by some parts of
the client organization to change. If we miscalculate the resources or time we
need to perform under any of our contracts, the costs of providing our services
could exceed the fees we receive from our clients, and we would lose money. Our
contracts also generally contain certain minimum service level or cost savings
requirements that we must meet. If we are not able to meet these requirements,
we may be obligated to issue credits to our clients against future payments to
us. If we breach a contract in a material way or repeatedly fail to perform, our
client can terminate the contract.
OUR GROWTH STRATEGY WILL FAIL IF WE ARE UNABLE TO HIRE, ASSIMILATE AND RETAIN
LARGE NUMBERS OF NEW EMPLOYEES, OPEN NEW CLIENT SERVICE CENTERS, ASSIMILATE OUR
CLIENTS' PERSONNEL AND SYSTEMS, AND EXPAND OUR OWN SYSTEMS AND CONTROLS.
To become profitable, we must extend our service model across many client
organizations. Our ability to gain critical mass in the size and breadth of our
operations and to manage rapid growth will be key to achieving economies of
scale. Our ability to achieve rapid growth depends upon the following essential
elements:
- We must be able to hire, train and retain large numbers of human
resources specialists, web and Internet technologists and programmers,
business development and process management specialists and technical and
customer support personnel. The market for these personnel is competitive
and we have had difficulty finding enough people with the skills and
experience to meet all of our hiring needs, including in information
technology and business development. We may not be able to retain all of
our senior executives and other key personnel. Even if we can attract and
retain such employees the cost of doing so may adversely affect our
operating margins.
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<PAGE> 12
- We currently have only one operational client service center near Houston
in The Woodlands, Texas and we plan to begin full-scale operations at a
second center in Glasgow, Scotland by mid to late 2000. These centers are
designed to handle our existing client demands, but we must open new
client service centers in new geographic locations to handle any
significant growth in our business. We must devote substantial financial
and management resources to launch and operate these centers
successfully, and we may not select appropriate locations for these
centers, open them in time to meet our client service commitments, or
manage them profitably.
- As we assume the responsibility for the existing HR departments of our
clients, we must be able to assimilate HR personnel from these clients
and integrate disparate systems, procedures, controls and
infrastructures.
- We will need to improve our financial and management controls, reporting
systems and operating systems to accommodate growth. If we do not manage
growth effectively, our ability to perform our existing contracts
successfully may be jeopardized, our ability to handle new clients and
contracts will be limited, and our reputation may be harmed.
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR
STOCK PRICE TO FLUCTUATE.
Our quarterly operating results have varied in the past and are likely to
vary significantly in the future. It is possible that in some future quarter or
quarters our operating results will be below the expectations of public market
analysts or investors. If so, the market price of our common stock may decline
significantly. Factors that may cause our results to fluctuate include:
- the growth of the market for our HR services and our ability to obtain
new client contracts;
- our ability to execute on client contracts;
- the length of the sales and integration cycle for our new clients;
- cancellations or reductions in the scope of our contracts;
- our ability to develop and implement additional service offerings and
technologies;
- delays in building client service centers;
- the introduction of comprehensive HR services by our competitors;
- changes in our pricing policies or those of our competitors;
- our ability to manage costs, including personnel costs and support
services costs; and
- the timing and cost of anticipated openings or expansions of new client
service centers.
DAMAGES, SERVICE INTERRUPTIONS OR FAILURES AT EITHER OF OUR CLIENT SERVICE
CENTERS OR IN OUR COMPUTER AND TELECOMMUNICATIONS SYSTEMS COULD ADVERSELY AFFECT
OUR BUSINESS, RESULTS OF OPERATIONS AND REPUTATION.
Our business could be interrupted by damage to our client service center,
computer and telecommunications equipment and software systems from fire, power
loss, hardware or software malfunctions, penetration by computer hackers,
computer viruses, natural disasters and other causes. Our clients' businesses
may be harmed by any system or equipment failure we experience. In either event,
our relationship with our clients may be adversely affected, we may lose
clients, our ability to attract new clients may be adversely affected and we
could be exposed to liability. At present, we have only one operational client
service center in The Woodlands, Texas and another center under development in
Glasgow, Scotland. We cannot be certain when future client service centers will
be completed, or whether we will be able to route calls and other operations
from one center to another in the event service is disrupted at any one
facility. In addition, in the event of widespread damage or failures at our
facilities, we cannot guarantee that the disaster recovery plans we have in
place will protect our business.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS.
Our business strategy requires us to expand internationally as we broaden
the geographic scope of services we deliver to BP Amoco from its U.S. operations
to its foreign operations and as we take on
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<PAGE> 13
additional large, multinational clients. For example, we expect to begin
full-scale operations at a new client service center in Glasgow, Scotland in mid
to late 2000. We will face risks in doing business abroad that include the
following:
- changing regulatory requirements;
- legal uncertainty regarding foreign laws, tariffs and other trade
barriers;
- political instability;
- international currency issues, including fluctuations in currency
exchange rates and the proposed conversion to the euro by countries in
the European Union;
- cultural differences;
- designing and operating web sites in numerous foreign languages; and
- differing technology standards and Internet regulations that may affect
access to and operation of our web sites and our clients' web sites.
WE DEPEND ON A LIMITED NUMBER OF KEY PERSONNEL WHO HAVE RECENTLY JOINED OUR
COMPANY AND WHO WE MAY NOT BE ABLE TO RETAIN.
All of our senior management, including our President and Chief Executive
Officer, Chief Financial Officer and Chief Operating Officer, joined Exult in
late 1998 and 1999. Due to the competitive nature of our industry, we may not be
able to retain all of our senior managers. If one or more members of our senior
management team were unable or unwilling to continue in their present positions,
such persons would be difficult to replace and our business could be harmed.
A BREACH OF OUR SECURITY MEASURES FOR TRANSMISSIONS OVER THE INTERNET COULD
REDUCE DEMAND FOR OUR SERVICES.
Our business involves the use of public networks to transmit and store
extremely confidential information about our clients and their employees, such
as compensation, medical information and social security numbers. We may be
required to expend significant capital and other resources to address security
breaches. Security breaches could disrupt our operations, damage our reputation
and expose us to litigation and possible liability. We cannot assure you that
our security measures will adequately protect us against security breaches.
THE MARKET FOR OUR SERVICES AND OUR REVENUE GROWTH DEPENDS ON OUR ABILITY TO USE
THE INTERNET AS A MEANS OF DELIVERING HUMAN RESOURCES SERVICES.
We rely on the Internet as a key mechanism for delivering our services to
our clients and achieving efficiencies in our service model. Our target clients
may not be receptive to human resources services delivered over the Internet
because of concerns over transaction security, user privacy, the reliability and
quality of Internet service and other reasons. In addition, the Internet has
experienced, and is expected to continue to experience, significant growth in
the number of users and volume of traffic. As a result, its performance and
reliability may decline. In addition, web sites and proprietary online services
have experienced interruptions in their service as a result of outages and other
delays occurring throughout their infrastructure. If these outages or delays
frequently occur in the future, Internet usage as a medium for the exchange of
information could grow more slowly or decline and the Internet might not
adequately support our eHR service model. If we cannot use the Internet
effectively to deliver our services, our revenue growth and results of
operations will be impaired.
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<PAGE> 14
OUR OPERATING RESULTS COULD BE IMPAIRED IF WE BECOME SUBJECT TO BURDENSOME
GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES CONCERNING THE INTERNET.
Due to the increasing popularity and use of the Internet, it is possible
that a number of laws and regulations may be adopted with respect to the
Internet, relating to:
- user privacy;
- pricing, usage fees and taxes;
- content;
- distribution; and
- characteristics and quality of products and services.
The adoption of any additional laws or regulations may decrease the
popularity or impede the expansion of the Internet and could seriously harm our
business. A decline in the popularity and growth of the Internet could decrease
demand for our services. Moreover, the applicability of existing laws to the
Internet is uncertain with regard to many important issues, including property
ownership, intellectual property, export of encryption technology, libel and
personal privacy. The application of laws and regulations from jurisdictions
whose laws do not currently apply to our business, or the application of
existing laws and regulations to the Internet and other online services, could
also harm our business.
WE RELY HEAVILY ON OUR COMPUTING AND COMMUNICATIONS INFRASTRUCTURE, AND THE
FAILURE TO KEEP PACE WITH CHANGING TECHNOLOGIES COULD DISRUPT THE OPERATION AND
GROWTH OF OUR BUSINESS AND RESULT IN THE LOSS OF CLIENTS.
Our success depends on our sophisticated computer, Internet and
telecommunications systems. We have invested significantly in our technological
infrastructure and anticipate that it will be necessary to continue to do so in
the future to remain competitive. These technologies are evolving rapidly and
are characterized by short product life cycles, which require us to anticipate
technological changes or developments. Our success in delivering services
cost-effectively and creating processes that are consistent with HR best
practices for our clients depends, in part, on our ability to adapt our
processes to incorporate new and improved software applications. We currently
use software programs in most of our HR processes. Our inability to anticipate
and respond quickly and cost-effectively to changing software and communications
technologies and devices could make our existing service offerings
non-competitive and may cause us to lose market share. For example, if the
Internet is rendered obsolete or less important by faster, more efficient
technologies, we must be prepared to offer better alternatives or risk losing
current and potential clients. Keeping our technology current will require
substantial time and expense, and even then we may fail to adapt our business to
technological developments. If we fail to adapt to technological developments,
our clients may experience service implementation delays or our services may not
be comprehensive or in conformance with HR best practices.
WE RELY ON THIRD PARTY VENDORS FOR SOFTWARE AND SPECIALIZED HUMAN RESOURCES
FUNCTIONS. IF THEIR PRODUCTS AND SERVICES ARE NOT AVAILABLE OR ARE INADEQUATE,
OUR BUSINESS COULD BE SERIOUSLY HARMED.
Our HR processes incorporate and rely on software owned by third parties
that we license directly or use through existing license arrangements between
our clients and the vendor. If these vendors change or cancel a product we are
using or if these agreements are terminated or not renewed, we might have to
delay or discontinue services until equivalent technology could be found,
licensed and installed.
We depend on third parties to provide a number of specialized human
resources services for our clients, such as benefits administration and
relocation services. Under the terms of our outsourcing service contracts, we
agree to manage these third party vendors and remain fully accountable for their
costs and services. If these third party vendors are not willing to provide
these services to us at competitive rates and we are unable to provide these
services ourselves or find suitable substitute providers when necessary, our
operating results could be seriously harmed because we may not be able to adjust
our fixed-fee contracts with our clients to offset an increase in the cost of
these specialized services to us. If our clients are not
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<PAGE> 15
satisfied with the services provided by these third parties, and these services
relate to a key performance indicator in a client contract, we may be required
to pay penalties to our clients for failure to meet minimum service level
requirements and our failure to achieve the key performance indicator could
result in the termination of our contract and our business would be seriously
harmed.
THE MARKETS WE SERVE ARE HIGHLY COMPETITIVE AND OUR COMPETITORS MAY HAVE MUCH
GREATER RESOURCES TO COMMIT TO GROWTH, NEW TECHNOLOGY OR MARKETING.
Our current and potential competitors include in-house HR departments of
large, multinational corporations, as well as other third parties that provide
discrete HR and IT functions, including consulting firms, information technology
outsourcers, and transaction processors such as payroll or benefits
administrators. It is possible that these third party vendors could persuade
potential clients not to rely upon one company to undertake such a comprehensive
process. In addition, we expect that the predicted growth of the HR outsourcing
market will attract other consulting firms or transaction providers to try to
assume responsibility for broad integration of HR processes.
Several of our competitors have substantially greater financial, technical
and marketing resources, larger customer bases, greater name recognition and
more established relationships with their customers and key product and service
suppliers than we do. Our competitors may be able to:
- develop and expand their delivery infrastructure and service offerings
more quickly;
- adapt better to new or emerging technologies and changing client needs;
- take advantage of acquisitions and other opportunities more readily;
- devote greater resources to the marketing and sale of their services; and
- adopt more aggressive pricing policies.
Some of our competitors may also be able to provide clients with additional
benefits at lower overall costs. In addition, we believe it is likely that there
will be future consolidation in our market, which could increase competition in
ways that may adversely affect our business, results of operations and financial
condition.
WE MAY UNDERTAKE ADDITIONAL ACQUISITIONS WHICH MAY LIMIT OUR ABILITY TO MANAGE
AND MAINTAIN OUR BUSINESS, MAY RESULT IN ADVERSE ACCOUNTING TREATMENT AND MAY BE
DIFFICULT TO INTEGRATE INTO OUR BUSINESS.
During the fourth quarter of 1999, we acquired certain assets of Gunn
Partners and Pactiv Corporation. We plan to pursue additional acquisitions in
the future, but we cannot provide any assurance that we will be able to complete
any acquisitions, or that any acquisitions we may complete will enhance our
business. Our prior and future acquisitions could subject us to a number of
risks, including:
- diversion of management's attention;
- amortization of substantial goodwill, adversely affecting our reported
results of operations;
- inability to retain the management, key personnel and other employees of
the acquired business;
- inability to establish uniform standards, controls, procedures and
policies;
- inability to retain the acquired company's customers;
- exposure to legal claims for activities of the acquired business prior to
acquisition; and
- inability to integrate the acquired company and its employees into our
organization effectively.
Client satisfaction or performance problems with an acquired business also could
affect our reputation as a whole. In addition, any acquired business could
significantly underperform relative to our expectations.
OUR BUSINESS AND SERVICES ARE SUBJECT TO RISKS RELATED TO THE YEAR 2000 PROBLEM.
Many existing computer systems and software products are coded to accept
only two digit entries in the date code filed and cannot distinguish 21st
century dates from 20th century dates. If these systems have not been properly
corrected, there could be system failures or miscalculations causing disruptions
of
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<PAGE> 16
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in normal business activities. As a
result, many companies' software and computer systems may need to be upgraded or
replaced to become Year 2000 compliant. In addition, despite the fact that many
computer systems are currently processing 21st century dates correctly, these
companies, including us, could experience latent Year 2000 problems.
We use and depend on third party equipment and software that may not be
Year 2000 compliant. If Year 2000 issues prevent our clients or their employees
from accessing myHR through the Internet, or if such issues disrupt
communication at our client service centers, our business and operations will
suffer. Any failure of our third party equipment, software or services to
operate properly could require us to incur unanticipated expenses which could
seriously harm our business and operating results. Our failure to make our web
sites, network infrastructure and transaction processing systems Year 2000
compliant could result in:
- disruption in our ability to deliver reliable, comprehensive HR services;
- increase in our allocation of resources to address Year 2000 problems
without additional revenues; and
- litigation costs relating to losses suffered by our customers due to Year
2000 problems.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY OR FACE A CLAIM OF
INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE MAY LOSE OUR
INTELLECTUAL PROPERTY RIGHTS AND BE LIABLE FOR SIGNIFICANT DAMAGES.
We may not be able to detect or deter unauthorized use of our intellectual
property. If third parties infringe or misappropriate our trade secrets,
copyrights, trademarks, service marks, trade names or other proprietary
information, our business could be seriously harmed. In addition, although we
believe that our proprietary rights do not infringe the intellectual property
rights of others, other parties may assert that we violated their intellectual
property rights. These claims, even if not true, could result in significant
legal and other costs and may be a distraction to management. In addition,
protection of intellectual property in many foreign countries is weaker and less
reliable than in the United States, so if our business expands into foreign
countries, risks associated with protecting our intellectual property will
increase.
OUR EXECUTIVE OFFICERS, DIRECTORS AND THEIR AFFILIATES WILL OWN 75.2% OF OUR
STOCK AFTER THIS OFFERING AND CAN CONTROL ALL MATTERS REQUIRING STOCKHOLDER
APPROVAL; THEIR INTERESTS MAY BE DIFFERENT FROM AND CONFLICT WITH YOURS.
After this offering, our executive officers, directors and their respective
affiliates will beneficially own approximately 75.2% of our outstanding common
stock. As a result, these stockholders, acting together, will have the ability
to control matters requiring stockholder approval, including the election of
directors and mergers, consolidations and sales of all or substantially all of
our assets. These stockholders may have interests that differ from yours and
they may approve actions that you vote against or reject actions that you have
voted to approve. In addition, this concentration of ownership may also have the
effect of preventing or discouraging or deferring a change in control of Exult,
which, in turn, could depress the market price of our common stock.
OUR MANAGEMENT HAS BROAD DISCRETION OVER USE OF PROCEEDS FROM THIS OFFERING AND
MAY USE THE PROCEEDS IN WAYS WITH WHICH YOU DO NOT AGREE.
We estimate the net proceeds of this offering to be approximately $60.1
million after deducting the underwriting discount and estimated offering
expenses. Our management will retain broad discretion to allocate the proceeds
of this offering and the failure of management to apply these funds effectively
could materially harm our results of operations.
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<PAGE> 17
AN ACTIVE PUBLIC MARKET FOR OUR COMMON STOCK MAY NOT DEVELOP OR BE SUSTAINED,
AND THE MARKET PRICE OF OUR COMMON STOCK MAY FALL BELOW THE INITIAL PUBLIC
OFFERING PRICE.
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering, and the market price might fall below the initial
public offering price. The initial public offering price may bear no
relationship to, and may be higher than, the price at which our common stock
will trade upon completion of this offering. The initial public offering price
will be determined by negotiations between us and the representatives of the
underwriters based on factors that may not be indicative of future performance.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE, WHICH MAY MAKE US A TARGET OF
SECURITIES CLASS ACTION LITIGATION.
Following this offering, the price at which our common stock will trade is
likely to be highly volatile and may fluctuate substantially. The market prices
for stocks of Internet-related and technology companies, particularly following
an initial public offering, may increase to levels that bear no relationship to
the operating performance of those companies. Such market prices may not be
sustainable. In addition, the stock market has from time to time experienced
significant price and volume fluctuations that have affected the market prices
for the securities of technology and Internet-related companies. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation was often brought against the
company. Many technology-related companies have been subject to this type of
litigation. Securities litigation could result in substantial costs and divert
our management's attention and resources.
SUBSTANTIAL SALES OF OUR COMMON STOCK BY OUR EXISTING INVESTORS FOLLOWING THIS
OFFERING COULD CAUSE OUR STOCK PRICE TO DECLINE.
Approximately 78,529,981 shares owned by officers, directors and existing
stockholders will be subject to lock-up agreements with the underwriters, which
will expire 180 days after the effective date of this offering. Unisys
Corporation, our strategic business partner for technology infrastructure
hosting, who plans to purchase up to 450,000 shares in this offering, has also
agreed to this underwriter lock-up agreement. When these lock-up agreements
expire, owners of the shares previously subject to the lock-up may choose to
sell some or all of their shares on the public market. Sales of large numbers of
shares in the same time period could cause the market price for our common stock
to decline significantly. These sales also might make it more difficult for us
to sell securities in the future at a time and at a price that we deem
appropriate. For a description of the shares of our common stock of our common
stock that are available for future sale, see "Shares Eligible for Future Sale."
OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD DETER A TAKEOVER EFFORT, WHICH
COULD INHIBIT YOUR ABILITY TO RECEIVE AN ACQUISITION PREMIUM FOR YOUR SHARES.
Provisions of our certificate of incorporation and bylaws, including those
that provide for a classified board of directors, authorized but unissued shares
of common and preferred stock and notice requirements for stockholder meetings,
and Delaware law regarding the ability to conduct specific types of mergers
within specified time periods, could make it more difficult for a third party to
acquire us, even if doing so would provide our stockholders with a premium to
the market price of their common stock. A classified board of directors may
inhibit acquisitions in general, and a tender offer not endorsed by our board in
particular, since only one-third of our directors are reelected annually,
thereby requiring two annual meetings before a majority of our directors could
be replaced. The authorization of undesignated preferred stock gives our board
the ability to issue preferred stock with voting or other rights or preferences
that could impede the success of any attempt to change control of the company.
If a change in control or change in management is delayed or prevented, the
market price of our common stock could decline.
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<PAGE> 18
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This prospectus contains forward-looking statements that are based on our
current expectations, assumptions, estimates and projections about us and our
industry. When used in this prospectus, the words "may," "will," "should,"
"predict," "continue," "plans," "expects," "anticipates," "estimates," "intends"
and similar expressions are intended to identify forward looking statements.
These statements include, but are not limited to, statements under the captions
"Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere in this
prospectus concerning, among other things, our goals and strategies, the
anticipated scope and result of our business operations, and our ability to:
- successfully implement a comprehensive eHR solution for BP Amoco and
potential future clients;
- complete development of myHR;
- obtain other comprehensive process management contracts;
- expand our centers of expertise;
- establish new client service centers in Glasgow, Scotland and in future
locations;
- increase revenue, control expenditures and recognize economies of scale;
and
- expand our sales and marketing capabilities and our technology and
general operating infrastructure.
These forward-looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from those projected. The
cautionary statements made in this prospectus should be read as being applicable
to all related forward-looking statements wherever they appear in this
prospectus. These statements are only predictions. We cannot guarantee future
results, levels of activity, performance or achievements. We assume no
obligation to publicly update or revise these forward-looking statements for any
reason, or to update the reasons actual results could differ materially from
those anticipated in these forward-looking statements, even if new information
becomes available in the future.
This prospectus contains estimates of market size and growth related to the
human resources business process outsourcing market, the use of the Internet,
the Global 500 and other industry data. These estimates have been included in
studies published by Dataquest, a division of GartnerGroup, International Data
Corporation, The Hunter Group and Fortune Magazine. These estimates contain
certain assumptions regarding current and future events, trends and activities.
Although we believe that these estimates are generally indicative of the matters
reflected in those studies, these estimates are inherently imprecise, and we
caution you to read these estimates in conjunction with the rest of the
disclosure in this prospectus, particularly the "Risk Factors" section.
------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT, AND THE UNDERWRITERS HAVE NOT, AUTHORIZED ANY OTHER PERSON TO PROVIDE
YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU DIFFERENT OR INCONSISTENT
INFORMATION, YOU SHOULD NOT RELY ON IT. WE ARE NOT, AND THE UNDERWRITERS ARE
NOT, MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE
OFFER OR SALE IS NOT PERMITTED.
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USE OF PROCEEDS
The net proceeds from the sale of the 6,000,000 shares of common stock sold
by us in this offering will be approximately $60.1 million, or approximately
$69.3 million if the underwriters' over-allotment option is exercised in full,
based on an assumed initial public offering price of $11 per share, after
deducting underwriting discounts and commissions and estimated offering expenses
payable by us.
The principal purposes of this offering are to obtain additional capital,
to increase our financial flexibility and to create a public market for our
common stock. We presently intend to use a portion of the net proceeds of this
offering for the following purposes:
- The creation of new and expansion of existing client service centers,
including capital expenditures for equipment and leasehold improvements;
- the expansion of our technology infrastructure;
- the repayment of indebtedness related to our acquisition of Gunn Partners
in November 1999 (approximately $9.1 million was outstanding at March 31,
2000); and
- the expansion of our sales and marketing capabilities, principally
related to additional personnel and increased promotional activities.
We also plan to use an unspecified portion of the net proceeds of this
offering to acquire or invest in complementary businesses, services or
technologies. Our acquisitions may include certain facilities or other assets
from our clients as we assume their HR processes. From time to time, in the
ordinary course of business, we evaluate potential acquisitions of these
businesses, assets, services or technologies. We are not currently negotiating
any material probable acquisitions. Prior to the commencement of this offering,
we conducted preliminary discussions with various third parties about potential
business transactions including acquisitions. We stopped acquisition
negotiations when we decided to pursue this offering. We do not have any
commitment to effect any acquisition, and we do not consider any of the
acquisitions we previously discussed to be probable because, among other
reasons, we have not agreed upon any of the essential terms of any acquisition,
including price, and we have not yet submitted such acquisition to our Board of
Directors for approval. After this offering, we expect to consider various
potential acquisitions, which may include companies we previously considered, as
well as other companies with which we have not had prior contact. However, we
cannot provide any assurance that we will be able to complete any acquisitions,
or that any acquisitions we may complete will enhance our business.
We have no specific plans at this time for use of the remaining proceeds
and expect to use these proceeds for working capital and general corporate
purposes. Our management will have broad discretion concerning the allocation
and use of a significant portion of the net proceeds of this offering. Pending
the use of the net proceeds of this offering, we intend to invest these proceeds
in short-term, investment grade, interest bearing securities.
The foregoing represents our best estimate of the allocation of the net
proceeds from the sale of the common stock offered by this prospectus based upon
the current state of our business operations, our current plans for expansion
and the current economic and industry conditions. The net proceeds are subject
to reallocation among the categories stated above. The amount or timing of our
actual expenditures will depend on numerous factors, including our
profitability, the availability of alternative financing, our business
development activities and competition.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to finance the growth and
development of our business. Therefore, we do not anticipate that we will
declare or pay any cash dividends on our common stock in the foreseeable future.
Any future determination to pay cash dividends will be at the discretion of our
Board of Directors and will be dependent upon our financial condition, results
of operations, capital requirements, restrictions under any existing
indebtedness and other factors the Board of Directors deems relevant.
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CAPITALIZATION
The following table indicates our cash and cash equivalents and
capitalization as of March 31, 2000:
- on an actual basis;
- on a pro forma basis to reflect the subsequent exercise of warrants to
purchase an aggregate of 3,339,220 shares of common stock and 667,844
shares of Series C preferred stock, and the conversion of all outstanding
preferred stock into 65,484,786 shares of common stock upon the closing
of this offering;
- on a pro forma as adjusted basis to reflect the foregoing exercises and
conversions, as well as the issuance of 6,000,000 shares of common stock
in this offering at an assumed public offering price of $11 per share,
after deducting underwriting discounts and commissions and estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and investments.................. $ 93,702 $ 106,138 $ 166,218
========= ========= =========
Long-term obligations, net of current portion........... $ 4,289 $ 4,289 $ 4,289
Stockholders' equity:
Convertible preferred stock, $.0001 par value;
15,000,000 shares authorized; 13,462,497 shares
issued and outstanding, actual; no shares issued
and outstanding, pro forma and pro forma as
adjusted........................................... 122,734 -- --
Common stock, $.0001 par value; 500,000,000 shares
authorized; 9,705,975 shares issued and
outstanding, actual; 78,529,981 shares issued and
outstanding, proforma; 84,529,981 shares issued and
outstanding, proforma as adjusted.................. 1 8 8
Additional paid-in capital............................ 6,962 142,125 202,205
Deferred compensation................................. (3,652) (3,652) (3,652)
Accumulated deficit................................... (26,297) (26,297) (26,297)
--------- --------- ---------
Total stockholders' equity......................... 99,748 112,184 172,264
--------- --------- ---------
Total capitalization.......................... $ 104,037 $ 116,473 $ 176,553
========= ========= =========
</TABLE>
These share amounts exclude 12,663,160 shares of common stock issuable upon
the exercise of stock options outstanding as of May 30, 2000 at a weighted
average exercise price of $2.94 per share and 968,195 shares of common stock
issuable upon exercise of warrants outstanding as of May 30, 2000 at a weighted
average exercise price of $1.27 per share. For additional information regarding
our capital structure, see "Management -- Stock Options," "Description of
Capital Stock" and note 7 and note 8 of notes to consolidated financial
statements.
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DILUTION
The pro forma net tangible book value of Exult, Inc. as of March 31, 2000
was approximately $116.4 million, or $1.32 per share of common stock. Pro forma
net tangible book value per share represents the amount of our pro forma total
tangible assets less pro forma total liabilities divided by the pro forma number
of shares of common stock outstanding as of March 31, 2000, after giving effect
to the subsequent exercise of warrants to purchase an aggregate of 667,844
shares of Series C preferred stock and 4,307,415 shares of common stock, the
exercise of options to purchase an aggregate of 8,819,700 shares of common stock
which are exercisable within 60 days of March 31, 2000, and the conversion of
all outstanding shares of preferred stock into an aggregate of 65,484,786 shares
of common stock at the closing of this offering. After giving effect to our sale
of the 6,000,000 shares of common stock offered by this prospectus at an initial
public offering price of $11.00 per share and the receipt and application of
those net proceeds, our pro forma net tangible book value as of March 31, 2000
would have been $176.5 million, or $1.87 per share of common stock. This
represents an immediate increase in pro forma net tangible book value of $0.55
per share to existing stockholders and an immediate dilution in pro forma net
tangible book value of $9.13 per share to investors purchasing common stock in
this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share as of March
31, 2000............................................... $ 1.32
Increase per share attributable to new investors.......... 0.55
------
Pro forma net tangible book value per share after this
offering.................................................. 1.87
------
Dilution per share to new investors......................... $ 9.13
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 2000,
the difference between the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by existing
stockholders and by new investors, assuming an initial public offering price of
$11.00 per share and before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 78,529,981 83.3% $142,132,708 63.2% $ 1.81
Warrants and options
exercisable within 60
days........................ 9,787,895 10.4 16,769,919 7.5 1.71
New investors................. 6,000,000 6.3 66,000,000 29.3 11.00
---------- ----- ------------ -----
Total.................... 94,317,876 100.0% $224,902,627 100.0%
========== ===== ============ =====
</TABLE>
The foregoing tables and calculations assume the exercise of warrants to
purchase 968,195 shares of common stock and options to purchase 8,819,700 shares
of common stock, at a weighted average exercise price of $1.27 and $1.76,
respectively, which will become exercisable within 60 days of March 31, 2000.
The foregoing tables assume no exercise of the underwriters' over-allotment
option or any other options which are not exercisable within 60 days of March
31, 2000.
20
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for the year
ended December 31, 1998 and 1999 has been derived from our consolidated
financial statements and related notes audited by Arthur Andersen LLP,
independent public accountants, included elsewhere in this prospectus. The
following selected financial data for Gunn Partners as of December 31, 1997 and
1998, and for the years ended December 31, 1997 and 1998, and for the period
from January 1, 1999 to November 22, 1999, the date we acquired Gunn Partners,
has been derived from the audited financial statements of Gunn Partners included
elsewhere in this prospectus, which were audited by Vitale, Caturano and
Company, P.C., Gunn Partners' independent public accountants. The selected
financial data for Gunn Partners as of December 31, 1996 and for the years ended
December 31, 1995 and 1996 has been derived from Gunn Partners' unaudited
financial statements included elsewhere in this prospectus. These unaudited
financial statements have been prepared on substantially the same basis as the
audited consolidated financial statements and, in the opinion of our management,
include all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the financial condition as of and the results of
operations for these periods. The financial statements for Gunn Partners,
previously an S corporation, reflect a pro forma adjustment for income taxes
that would have been paid if the Company had been a C corporation. The
adjustments are $0, $0, $0, $6,193 and $4,342 for the years ended December 31,
1995, 1996, 1997 and 1998, and for the period ended November 22, 1999,
respectively. The historical results are not necessarily indicative of future
results. The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
OCTOBER 29,
1998
(INCEPTION) THREE MONTHS ENDED
TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ----------------------
1998 1999 1999 2000
------------ ------------ -------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ -- $ 4,857 $ -- $ 5,577
Cost of revenue............................................. -- 4,498 -- 5,750
-------- ---------- -------- ----------
Gross profit................................................ -- 359 -- (173)
Expenses:
Product development....................................... -- 368 -- 804
Selling, general and administrative....................... 187 15,466 516 10,717
-------- ---------- -------- ----------
Total expenses.......................................... 187 15,834 516 11,521
-------- ---------- -------- ----------
Loss from operations........................................ (187) (15,475) (516) (11,694)
Interest income, net........................................ 3 263 6 792
-------- ---------- -------- ----------
Net loss.................................................... $ (184) $ (15,212) $ (510) $ (10,902)
======== ========== ======== ==========
Net loss per share:
Basic and diluted......................................... $(140.48) $ (2.20) $ (56.66) $ (1.16)
======== ========== ======== ==========
Weighted average number of common shares outstanding:
Basic and diluted......................................... 1,307 6,906,334 9,000 9,434,300
======== ========== ======== ==========
Pro forma net loss per share:
Basic and diluted......................................... $ (0.20) $ (0.14)
========== ==========
Pro forma weighted average number of common shares
outstanding:
Basic and diluted......................................... 75,998,174 78,258,306
========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1998 1999 2000
----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and investments...................... $ 851 $39,199 $ 93,702
Working capital............................................. 813 31,957 83,121
Total assets................................................ 854 58,767 119,197
Long term obligations, net of current portion............... -- 4,304 4,289
Convertible preferred stock................................. 1,000 58,768 122,734
Total stockholders' equity.................................. 816 46,110 99,748
</TABLE>
Please refer to note 2 and note 10 of notes to consolidated financial
statements for information regarding the method used to compute our basic and
diluted net loss per share.
21
<PAGE> 23
GUNN PARTNERS, INC.
<TABLE>
<CAPTION>
JANUARY 1,
YEARS ENDED DECEMBER 31, 1999 TO
----------------------------------------------------- NOVEMBER 22,
(IN THOUSANDS) 1999 (DATE OF
1995 1996 1997 1998 ACQUISITION)
----------- ----------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
PRO FORMA CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenue........................ $7,961 $7,867 $8,783 $13,168 $10,388
Cost of revenue.................... 3,147 3,135 4,213 4,197 3,672
------ ------ ------ ------- -------
Gross profit....................... 4,814 4,732 4,570 8,971 6,716
Selling, general and administrative
expenses......................... 4,887 4,716 4,571 8,958 6,708
Income (loss) from operations...... (73) 16 (1) 13 8
Interest (expense) income, net..... (12) (3) 1 22 17
------ ------ ------ ------- -------
Net (loss) income.................. $ (85) $ 13 $ -- $ 35 $ 25
====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash............................................ $ 201 $ 187 $ 444
Working capital................................. 732 1,095 1,082
Total assets.................................... 1,674 2,222 2,251
Long-term obligations, net of current portion... 874 1,253 1,190
Total shareholders' equity...................... 26 26 26
</TABLE>
22
<PAGE> 24
SELECTED UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The selected unaudited pro forma condensed combined financial information
is based upon, and should be read in conjunction with, the historical financial
statements of Exult and Gunn Partners and the respective notes to such financial
statements. The pro forma information is based upon the tentative allocations of
purchase price for the acquisition of certain assets of Gunn Partners and may
not be indicative of the results that would have been reported had such events
actually occurred on the dates specified, nor is it indicative of the Company's
future results. The final allocation of purchase price is not expected to differ
materially from the tentative allocation or to have a material impact on results
of operations or financial position. Purchase accounting is based upon
preliminary asset valuations, which are subject to change. Furthermore,
post-closing adjustments, if any, are not expected to have a material impact on
results of operations or financial position.
The selected unaudited pro forma condensed combined statements of
operations data for the year ended December 31, 1999 is presented as if the
following transactions had completed as of January 1, 1999: our acquisition of
the business of certain assets of Gunn Partners, the issuance of 385,805 shares
of Series C preferred stock and 6,885,480 shares of Series D preferred stock,
the exercise of warrants to purchase an aggregate of 3,339,220 shares of common
stock and 667,844 shares of Series C preferred stock, the conversion of all
outstanding preferred stock into 65,484,786 shares of common stock, and the
exercise of options to purchase 271,675 shares of common stock.
23
<PAGE> 25
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------
GUNN PARTNERS PRO FORMA PRO FORMA
EXULT, INC. INC.(A) ADJUSTMENTS COMBINED
----------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue................................... $ 4,857 $10,388 $ -- $ 15,245
Cost of revenue........................... 4,498 3,672 -- 8,170
-------- ------- ------- ----------
Gross profit.............................. 359 6,716 -- 7,075
-------- ------- ------- ----------
Total operating expense................... 15,834 6,708 3,903(b) 26,445
-------- ------- ------- ----------
(Loss) income from operations........ (15,475) 8 (3,903) (19,370)
-------- ------- ------- ----------
Interest income, net...................... 263 17 -- 280
-------- ------- ------- ----------
Net (loss) income.................... $(15,212) $ 25 $(3,903) $ (19,090)
======== ======= ======= ==========
Net loss per common share:
Basic and diluted....................... $ (0.25)
Weighted average common shares
outstanding:
Basic and diluted(c).................... 75,998,174
</TABLE>
-------------------------
(a) We acquired the business of Gunn Partners on November 22, 1999 for
approximately $14.0 million and accounted for this acquisition under the
purchase method of accounting. The results of operations of Gunn Partners
will be included in our consolidated results commencing upon the date of
acquisition. This presentation shows the pro forma effects of the operations
of Gunn Partners as if the acquisition occurred on January 1, 1999. The
results of operations for Exult from October 29, 1998 (Inception) through
December 31, 1998 are immaterial to the operating results of Gunn Partners
for the year ended December 31, 1998.
(b) Represents the amortization of $3.9 million that would have been recorded on
intangible assets for the period from January 1, 1999 through November 22,
1999, the date of acquisition. Intangibles are amortized on a straight-line
basis over a period of one to five years. No other significant fair value
purchase price adjustments were recorded in conjunction with the acquisition
of certain assets of Gunn Partners.
(c) Reflects the acquisition of certain assets of Gunn Partners, the issuance of
385,805 shares of Series C preferred stock and 6,885,480 shares of Series D
preferred stock, the exercise of warrants to purchase an aggregate of
3,339,220 shares of common stock and 667,844 shares of Series C preferred
stock, the conversion of all outstanding preferred stock into 65,484,786
shares of common stock, and the exercise of options to purchase 271,675
shares of common stock.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our selected consolidated
financial data and the consolidated financial statements and related notes
included elsewhere in this prospectus.
OVERVIEW
We design, implement and manage comprehensive web-enabled human resources
processes for Global 500 corporations, generally through long-term contracts. We
believe no other company currently assumes broad management responsibility for
processes throughout the entire HR function. By providing a comprehensive eHR
solution, we believe we can increase human capital productivity and lower our
clients' overall HR costs.
We commenced operations in October 1998 as BPO-US, Inc. and changed our
name to Exult, Inc. in August 1999. From our inception through May 1999, we had
no sales and our activities primarily related to the pursuit of our initial
contracts and the development of the infrastructure to support comprehensive eHR
process management. We began development of our web-enabled interface, myHR, in
August 1999 and deployed the first release of myHR with limited features for BP
Amoco in the second quarter of 2000, with greater functionality to be added in
subsequent releases.
In June 1999, we entered into a letter of intent with BP Amoco which led to
the signing of multi-year contracts for web-enabled HR process management
services in December 1999. In addition, commencing in June 1999 we recognized
revenue for certain work we performed for BP Amoco before our contracts were
signed. The contracts consist of a Framework Agreement and operational contracts
for the United States and United Kingdom. The Framework Agreement provides the
overall governance and methodology for our services on a worldwide basis. Under
the contracts for the United States and United Kingdom, we will manage BP
Amoco's basic HR processes in those countries, which represent approximately 70%
of BP Amoco's employees and annuitants. Through a mutually agreed upon schedule
and procedure, we will migrate the HR processes we have agreed to manage to our
client service centers and begin to implement HR best practices. During the
first 14 months of the contract, the billing to BP Amoco and our revenue will
equal BP Amoco's cost of providing for itself the service we have agreed to
provide. During the 14 month transition period, we expect that our cost of
providing the service, managing the migration and implementing change will
exceed the revenue. After the initial transition period, we are obligated to
provide our services to BP Amoco in the U.K. and the U.S. for fixed amounts that
are generally equal to or less than BP Amoco's historical costs incurred in
connection with the services that we are assuming. After we have achieved a
negotiated minimum return from provision of our services, we are required to
share further savings with BP Amoco in a negotiated gain sharing arrangement
that is intended to motivate us and BP Amoco to maximize efficiency in the
provision of our services. If savings in excess of the gain sharing threshold
are achieved, our revenue would be reduced by the amount of gain sharing due our
client. However, our gross profit measured in dollars and as a percentage of
revenue would increase. There are no assurances that savings can be achieved to
this magnitude and we may experience fluctuations in our revenue and gross
profit resulting from the use of estimates of gain sharing that differ from
actual results. Although gain sharing is an important component of the BP Amoco
contract and may be duplicated in future contracts to encourage efficiencies, we
do not expect that gain sharing and associated adjustments to revenue will have
a material impact on our results in any given period because it is not
applicable to all sources of revenue and cost, and cost reductions are often
implemented and realized over extended periods. If we are unable to successfully
manage the process and reduce the costs, we could be subjected to further
losses.
In November 1999, we purchased the business of Gunn Partners, Inc., a
provider of research, benchmarking and consulting services for the measurement
and improvement of HR, and accounting and finance processing for Global 500
corporations. The purchase price for this acquisition was $5.0 million in
25
<PAGE> 27
cash and $10.0 million in debt. Gunn Partners was formed in 1991 and currently
operates as our wholly-owned consulting unit. In connection with this
transaction we hired approximately 35 of their employees.
Effective January 1, 2000, we entered into two service agreements with
Pactiv Corporation and Tenneco Automotive Inc. to provide information technology
and other finance support services for three years which are subject to certain
renewal provisions. In addition to these agreements we purchased certain assets
on December 20, 1999, including equipment and licenses for an aggregate purchase
price of approximately $3.5 million. This transaction provided us with a leased
client service center in The Woodlands, Texas and the ability to hire
approximately 70 employees. We plan to use this client service center to service
these two clients as well as BP Amoco. We are also in the process of developing
another client service center in Glasgow, Scotland to support the BP Amoco
contracts.
We expect our primary source of revenue for the near future to be the fees
we earn for providing our eHR process management services under long-term
contracts. We recognize revenue under these contracts as the services are
rendered. A secondary source of revenue is the benchmarking studies and other
consulting services performed by Gunn Partners. We recognize revenue for these
benchmarking services either at the time the study is completed and the report
is delivered, or over the period in which services are performed as information
or feedback is provided to the client. As part of our eHR solution, we will also
manage our clients' relationships with third party vendors. In most cases, we
expect to become responsible for the vendor contracts and we will include in
revenue all charges that we collect from our clients. We will pay the costs of
these services to the third party vendors, and such costs will be included in
our cost of revenues. Revenue from consulting and related services is net of
reimbursable expenses.
To date, we have typically generated leads for potential eHR process
management clients through our management, existing consulting relationships,
board of directors, third party consultants, contact with key executives at
companies within the Global 500 or direct communication from such companies
after reading articles, press releases or visiting our web site. After initial
discussions with and qualification of the potential client, we typically enter
into a letter of intent with the client which establishes a framework for due
diligence and contract negotiations. Our letter of intent may provide for
reimbursement of some or all of our direct and indirect costs incurred during
this process if a contract is not signed. To the extent such costs are
guaranteed by the letter of intent, reimbursements of costs will be included in
revenue. To the extent reimbursements are not guaranteed, such amounts will be
expensed as incurred and will be included in revenue once invoiced and
collection is reasonably assured.
We incurred a net loss in 1999 and expect to incur net losses in 2000, 2001
and potentially in future years. In the next two years, we anticipate making
large expenditures to build additional client service centers, to expand our
sales and marketing capabilities, to fund the development and expansion of our
technology and general operating infrastructures. In addition, we recorded
aggregate deferred compensation for common stock and stock options issued of
approximately $3.6 million and $793,000 for the year ended December 31, 1999 and
for the period ended March 31, 2000, respectively. These amounts will be
amortized to expense using the straight-line method over the vesting period of
approximately forty-eight months. To the extent that revenue does not increase
at a rate commensurate with our increasing costs and expenditures, our future
operating results and liquidity could be materially and adversely affected.
26
<PAGE> 28
RESULTS OF OPERATIONS
In view of the rapidly evolving nature of our business and our limited
operating history, we believe that period to period comparisons of our operating
results, including our revenue, gross profit and expenses as a percentage of
revenue, should not be relied upon as an indication of our future performance.
The following table sets forth statement of operations data expressed as a
percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
<S> <C> <C>
Revenue................................................... 100.0% 100.0%
Cost of revenue........................................... 92.6 103.1
------ ------
Gross profit.............................................. 7.4 (3.1)
Expenses:
Product development..................................... 7.6 14.4
Selling, general and administrative..................... 318.4 192.2
------ ------
Total expenses....................................... 326.0 206.6
------ ------
Loss from operations...................................... (318.6) (209.7)
Interest income, net...................................... 5.4 14.2
------ ------
Net loss.................................................. (313.2)% (195.5)%
====== ======
</TABLE>
Our primary activities in the first quarter of 1999 and the period Exult
existed in 1998 were organization and planning. During this time, we generated
no revenue and only minimal interest income. We hired a few employees and
incurred associated selling, general and administrative expenditures.
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
At March 31, 1999, we had only five employees and had not generated any
revenue. Selling, general and administrative expense for the three months ended
March 31, 1999 was $516,000, which consisted primarily of the salary and
benefits of the employees, legal, accounting and other consulting fees, and
facility costs. Due to the early stage of our business during the three months
ended March 31, 1999, our operating results for this period do not bear
significant relationship to our operating results for the three months ended
March 31, 2000.
Revenue
Revenue for the three months ended March 31, 2000 was $5.6 million, which
primarily consisted of approximately $2.5 million of contract revenue derived
from our three process management clients. The balance of our revenue primarily
consisted of consulting revenue generated from various clients through our Gunn
Partners business unit, which was acquired on November 22, 1999.
Cost of Revenue
Cost of revenue consists primarily of expenses associated with the third
party vendors whom we manage for our clients, salaries, bonuses and benefits of
employees directly involved in providing our services, computer and
communications equipment costs and services and facilities. Our cost of revenue
for the three months ended March 31, 2000 was $5.8 million and our gross margin
for the same period was a negative 3.1%. We expect gross profit to continue to
be negative for at least the rest of 2000 as we expand capacity and continue to
build our infrastructure.
Product Development Expense
Product development expense consists primarily of third party costs,
salaries, bonuses and benefits of employees directly associated with the
development of myHR and our Internet software and capabilities,
27
<PAGE> 29
and the performance of research and benchmarking of HR best practices that are
not part of a specific engagement. Product development expense for the three
months ended March 31, 2000 was approximately $804,000 or 14.4% as a percentage
of revenue. We expect to continue to substantially increase our spending for
product development throughout 2000 and plan to continue to spend at least the
same dollar amount in future years. We did not capitalize any expenditures for
either development or research and benchmarking. We cannot assure you that our
product development efforts will provide us with the desired results or will be
economically feasible.
Selling, General and Administrative Expense
Selling, general and administrative expense generally consists of salary,
bonuses and benefits for employees engaged in marketing, promoting and selling
our services, and for management and administrative personnel. Selling, general
and administrative expense also includes third party consulting and marketing
expenditures, as well as facilities and office expenditures, legal, accounting
and recruiting fees and depreciation and amortization expense. Selling, general
and administrative expense for the three months ended March 31, 2000 was $10.7
million or 192.2% as a percentage of revenue. We anticipate that selling,
general and administrative expense in 2000 will increase in absolute dollars as
we hire additional administrative and sales and marketing personnel, engage
additional consultants and expand our facilities to support our growing
infrastructure.
Depreciation and amortization included in selling, general and
administrative expense was approximately $1.7 million for the three months ended
March 31, 2000. This amount included amortization of intangibles associated with
the acquisition of certain assets of Gunn Partners which was approximately $1.1
million. Depreciation and amortization also included the amortization of
deferred compensation of approximately $275,000.
Interest Income, Net
Interest income, net for the three months ended March 31, 2000 was
approximately $792,000, which consisted primarily of interest income of
approximately $996,000 generated from short-term investments raised from private
equity placements, which was offset in part by interest expense of approximately
$204,000 associated with debt incurred in 1999 in connection with our purchase
of the business of Gunn Partners and capitalized leases. Although we currently
have cash in excess of our immediate requirements, we expect that our
significant negative cash flow will reduce our cash balances and associated
interest income.
Income Taxes
We incurred losses in the quarter, resulting in federal and state net
operating loss carryforwards which begin to expire in 2018 and 2006,
respectively.
Net Loss
The foregoing resulted in a net loss for the quarter ended March 31, 2000
of $10.9 million. We expect to continue to incur net losses for at least the
years 2000 and 2001.
YEAR ENDED DECEMBER 31, 1999
Revenue
Revenue for the year ended December 31, 1999 was $4.9 million, which
primarily consisted of approximately $4.1 million billed to our first eHR
process management client, BP Amoco, for work performed before we entered into a
long-term contract with this client in December 1999. The balance of our revenue
primarily consisted of consulting revenue generated from various clients.
28
<PAGE> 30
Cost of Revenue
Our cost of revenue for the year ended December 31, 1999 was $4.5 million
and our gross margin for the same period was 7.4%. We expect gross profit for at
least the next twelve months to be negative as we expand capacity and build our
infrastructure. We expect to incur a net loss in 2001 and may have negative
gross profit for that period depending upon our rate of growth and commensurate
expenditures.
Product Development Expense
Product development expense for the year ended December 31, 1999 was
approximately $368,000 or 7.6% as a percentage of revenue. We did not capitalize
any costs in 1999 for internally developed software for research and
benchmarking.
Selling, General and Administrative Expense
For the year ended December 31, 1999, selling, general and administrative
expense was $15.5 million or 318.4% as a percentage of revenue. This amount
included a one time charge of approximately $3.3 million related to the issuance
of preferred and common stock warrants to BP Amoco. Selling, general and
administrative expense in 1999 also included a charge of approximately $1.2
million in connection with the cost of common stock warrants issued in exchange
for consulting and recruiting services.
Depreciation and amortization included in selling, general and
administrative expense was approximately $943,000. This amount included
amortization of intangibles associated with the acquisition of certain assets of
Gunn Partners was approximately $357,000. Also included was the amortization of
deferred compensation of approximately $479,000.
Interest Income, Net
Interest income, net for the year ended December 31, 1999 was approximately
$263,000, which consisted primarily of interest income of approximately $334,000
generated from short-term investments raised from private equity placements,
offset in part by interest expense of approximately $71,000 associated with Gunn
Partners acquisition debt and capitalized leases.
Income Taxes
We incurred losses in 1999, resulting in federal and state net operating
loss carryforwards which expire beginning in 2018 and 2006, respectively.
Net Loss
The foregoing resulted in a net loss for the year ended December 31, 1999
of $15.2 million. We expect to continue to incur net losses for at least the
years 2000 and 2001.
YEAR ENDED DECEMBER 31, 1998
We were formed in October 1998, and did not enter into our first process
management contract until December 1999. During 1998, we hired our Chief
Executive Officer and one other employee. Selling, general and administrative
expense for 1998 consisted primarily of the salary and benefits for these two
employees. Due to the early stage of our company during the year ended December
31, 1998, our operating results for this period do not bear any significant
relationship to our operating results for the year ended December 31, 1999.
29
<PAGE> 31
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly results of operations, in
dollar amounts and as a percentage of revenue, for the last six quarters. This
information has been derived from our unaudited consolidated financial
statements and has been prepared by us on a basis consistent with our audited
consolidated financial statements and includes all adjustments, consisting only
of normal recurring adjustments, which management considers necessary for a fair
presentation of the information for the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1998 1999 1999 1999 1999 2000
------------ --------- ----------- ------------- ------------ -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.......................... $ -- $ -- $ 213 $ 2,031 $ 2,613 $ 5,577
Cost of revenue.................. -- -- 213 2,031 2,254 5,750
----- ----- --------- -------- ------- --------
Gross profit..................... -- -- -- -- 359 (173)
Expenses:
Product development............ -- -- 54 106 208 804
Selling, general and
administrative............... 187 516 2,616 3,639 8,695 10,717
----- ----- --------- -------- ------- --------
Total expenses............... 187 516 2,670 3,745 8,903 11,521
----- ----- --------- -------- ------- --------
Loss from operations............. (187) (516) (2,670) (3,745) (8,544) (11,694)
Interest income, net............. 3 6 61 67 129 792
----- ----- --------- -------- ------- --------
Net loss......................... $(184) $(510) $ (2,609) $ (3,678) $(8,415) $(10,902)
===== ===== ========= ======== ======= ========
AS A PERCENTAGE OF REVENUE:
Revenue.......................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue.................. 100.0 100.0 86.2 103.1
--------- -------- ------- --------
Gross profit..................... -- -- 13.8 (3.1)
Expenses:
Product development............ 25.3 5.2 8.0 14.4
Selling, general and
administrative............... 1,228.2 179.2 332.7 192.2
--------- -------- ------- --------
Total expenses............... 1,253.5 184.4 340.7 206.6
--------- -------- ------- --------
Loss from operations............. (1,253.5) (184.4) (326.9) (209.7)
Interest income, net............. 28.6 3.3 4.9 14.2
--------- -------- ------- --------
Net loss......................... (1,224.9)% (181.1)% (322.0)% (195.5)%
========= ======== ======= ========
</TABLE>
In the quarter ended March 31, 2000, we earned approximately $2.5 million
from our three process management clients and the remainder primarily from
consulting services rendered to various clients. In the quarter ended December
31, 1999, we acquired the business of Gunn Partners, signed a multi-year
contract with BP Amoco and entered into two three-year service agreements with
Pactiv Corporation and Tenneco Automotive. In addition to these agreements, we
purchased certain assets for an aggregate purchase price of approximately $3.5
million. In the quarter ended December 31, 1999, we recorded approximately $2.6
million of revenue, primarily for pre-contract work performed for BP Amoco and
consulting services rendered to various clients by Gunn Partners. Selling,
general and administrative expense in the fourth quarter of 1999 included a
charge in the amount of approximately $3.3 million, related to the issuance of
preferred and common stock warrants issued to BP Amoco.
Our quarterly operating results have fluctuated in the past and may
continue to fluctuate in the future based on a number of factors, not all of
which are in our control. These factors include our ability to complete the
development of our web-enabled process management solution, to recruit personnel
to support our current business and related infrastructure and to expand our
sales and marketing capabilities. Accordingly, our results of operations for any
future quarter or quarters are not necessarily indicative of our historical
results. See "Risk Factors -- Our quarterly revenues and operating results are
volatile and may cause our stock price to fluctuate."
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<PAGE> 32
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in October 1998, we have financed our operations
primarily with equity contributions including private placements of
approximately $1.0 million in 1998, $55.1 million in 1999, and $64.0 million in
2000, and to a lesser extent, by cash generated from operations. Net cash used
in operating activities was $7.6 million in the year ended December 31, 1999 and
$11.2 million for the three months ended March 31, 2000. Operating cash was used
primarily for sales and marketing activities, third party consulting fees in
support of our pursuit of business and the development of corporate
infrastructure. Cash used in investing activities was $9.6 million in 1999 and
$3.6 million in the three months ended March 31, 2000. Approximately $4.4
million in 1999 and $3.6 million in the three months ended March 31, 2000, first
quarter of 2000 was spent to purchase computer and related equipment and office
furnishings. Included in 1999 was $3.5 million spent to purchase assets used
internally by a client and now used to support that client as well as other
clients. In 1999, we also spent $5.0 million in cash and incurred $10.0 million
of debt in connection with our acquisition of most of the assets of Gunn
Partners. The aggregate purchase price was allocated to costs incurred in
connection with assembling a work force, Gunn Partners' client list, the name
"Gunn Partners", the non-compete covenant, the research database and an
immaterial amount of equipment which were assigned lives ranging from one to
five years. We expect to generate negative operating cash flow for the
foreseeable future as we continue to incur losses from operations. We expect to
increase our investments in property and equipment to support the expansion and
renovation of our existing client service center, the development of our client
service center in Glasgow, Scotland and the expansion and renovation of our
other facilities, and to purchase related computer and other equipment necessary
to support our client contracts and growth. We expect to spend at least $12.0 to
15.0 million in 2000 and again in 2001 on capital expenditures, which will be
amortized over three to five years. In addition, we expect to spend at least
$4.0 million to $6.0 million in both years for research and development, which
we believe will not qualify for capitalization and amortization. From time to
time, in the ordinary course of business, we evaluate potential acquisitions of
related businesses, assets, services or technologies. At this time, however, we
are not negotiating any material probable acquisitions. See "Use of Proceeds."
We believe that the net proceeds from this offering and cash on hand will
be sufficient to satisfy our working capital requirements for at least the next
12 months. We are unable to predict whether the net proceeds from this offering
and cash on hand will be adequate to satisfy our working capital requirements
beyond 12 months after the offering because our capital needs will vary
depending upon future market conditions and business opportunities, among other
factors, and we are not certain when or if we will be able to achieve profitable
operations and positive cash flow. If we need additional funds, we will seek to
raise them from equity or debt financing. Regardless of whether additional funds
are actually required, we may seek to raise funds from equity or debt financing.
We may not be able raise additional funds on acceptable terms, if at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 requires all costs
related to the development of internal use software other than those incurred
during the application development stage to be expensed as incurred. Costs
incurred during the application development stage are required to be capitalized
and amortized over the estimated useful life of the software. We adopted SOP
98-1 on January 1, 1999. The adoption of SOP 98-1 did not have a material effect
on our consolidated financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of
Start-Up Activities. We adopted SOP 98-5 on January 1, 1999, which requires
costs of start-up activities and organization costs to be expensed as incurred.
The adoption of SOP 98-5 did not have a material effect on our consolidated
financial position or results of operations.
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<PAGE> 33
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income (loss) depending on whether a
derivative is designed as part of a hedge transaction and, if so, the type of
hedge transaction involved. We do not expect that adoption of SFAS No. 133 will
have a material impact on its consolidated financial position or results of
operations as we do not currently hold any derivative financial instruments.
GUNN PARTNERS
Since its founding in 1991, Gunn Partners has provided business process
improvement consulting services primarily to Global 500 corporations in North
America and Europe. In November 1999, we purchased the business of Gunn Partners
and hired most of its employees. The operating results of Gunn Partners for the
years ended December 31, 1997 and 1998 and the first 11 months of 1999 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1,
DECEMBER 31, 1999 THROUGH
----------------- NOVEMBER 22,
1997 1998 1999
------ ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenue........................................ $8,783 $13,168 $10,388
Expenses........................................... 8,784 13,155 10,380
------ ------- -------
Profit (loss) from operations...................... (1) 13 8
Interest income, net............................... 1 22 17
------ ------- -------
Net income......................................... $ -- $ 35 $ 25
====== ======= =======
</TABLE>
Revenue is derived primarily from providing consulting services generally
under short-term engagements and secondarily from selling research studies and
conducting workshops and seminars. Revenue is recognized when the services are
rendered. Reimbursed expenses are not included in revenue. In the year ended
December 31, 1998 net revenue was approximately $13.2 million, which represented
an increase of approximately $4.4 million or 49.9% over the prior year. Net
revenue decreased $2.8 million to $10.4 million for the period ended November
22, 1999 as compared to the prior full year.
Expenses consist primarily of salary and benefits of consulting, research
and support personnel, unreimbursed travel expenses and third parties hired to
assist in consulting and research projects. Expenses of approximately $13.2
million in the year ended December 31, 1998 increased by approximately $4.4
million or 49.7% over the prior year primarily from the increase in staffing to
support the expansion of the business and higher compensation per individual
consultant. Expenses decreased $2.8 million to $10.4 million for the period
ended November 22, 1999, as compared to the prior year.
Gunn Partners operated as an S corporation and did not incur federal income
taxes because profits, if any, were either paid to the employee owners as
compensation or distributed to the owners. State income tax expense historically
has been immaterial.
Our current and future business operations are not comparable to the
operations of Gunn Partners.
We purchased the business and hired most of the employees of Gunn Partners
primarily for the skills of their consultants and researchers, access to client
base and use of the research database. Although we will continue to offer
consulting and research services, it is not the primary focus of our business
and we expect that it will become a declining percentage of total revenue.
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<PAGE> 34
BUSINESS
OVERVIEW
Exult is the first company to offer comprehensive management of human
resources departments for Global 500 corporations. We call our service "eHR"
because we will use our software, state-of-the-art information technology
capabilities, and Internet or web-enabled communications to transform our
clients' HR departments into proactive, global, knowledge-based organizations
focused on strategy and policy rather than transactions and administration. A
key component of our eHR solution is "myHR," our web-based system for linking
our clients and their employees together. myHR will act as a portal through
which our clients' employees, managers and annuitants can access their HR
information systems, and as a browser that can navigate through those systems to
find information and process transactions. myHR is designed to eliminate the
numerous organizational, transactional and communication barriers that exist in
large corporations, provide comprehensive data, information and decision
support, and facilitate our clients' business processes and interactive
communication 24 hours a day, seven days a week, regardless of business unit or
location. Our eHR solution also leverages resources and achieves economies of
scale through our HR best practices expertise, expert HR process consulting and
research capabilities, and shared client service centers, which handle our
clients' HR transaction, production and call center requirements. Our objective
is to become the leading provider of comprehensive HR process management
solutions that enable large, multinational corporations to reduce their HR costs
and increase the productivity of their human capital.
INDUSTRY BACKGROUND
THE CURRENT STATE OF HUMAN RESOURCES DEPARTMENTS IN THE GLOBAL
500. Traditional human resources departments within large, multinational
corporations often struggle with the challenges of managing HR processes across
many departments spanning multiple countries. According to the Global 500 List
for the Year 2000 published by Fortune Magazine, Global 500 corporations
employed more than 37 million people in 1999, an increase of 19% compared to
1998. An employee base of this magnitude presents logistical complexities, and
the human resources function in a typical Global 500 corporation is complicated
by multiple human resources groups for different business units within the
corporation and the lack of central information repositories and coordinated
communications infrastructures. As a result, the HR processes of large,
multinational corporations often are redundant and inefficient. In addition, the
large number of third party vendors used by a human resources department to
handle discrete functions makes management of the process challenging. By
necessity, HR departments predominantly have focused on administrative functions
and typically have neither the time nor the resources to devote to strategic
planning. At the same time, many of these HR departments are facing a dramatic
reduction in resources, and cost cutting efforts primarily have focused on
reducing staff, rather than reengineering service delivery.
THE EMERGENCE OF HR PROCESS OUTSOURCING. Many large corporations have begun
to outsource discrete, non-core functions of their operations, such as payroll
and benefits administration, in order to address the problems found in
traditional human resources departments. According to Dataquest, the worldwide
HR outsourcing market is projected to grow from approximately $26.2 billion in
1999 to approximately $76.4 billion in 2004. However, the market for
comprehensive HR outsourcing is relatively new. Dataquest estimates the market
for integrated, multi-process HR outsourcing will grow from over $900 million in
1999 to more than $12 billion by 2003 in the U.S. alone. Outsourcing a large
portion of the HR organization of a large multinational corporation can be
extremely difficult due to the size of the organization and the multiplicity of
divisions and third party vendors. Also, in order to manage an entire HR
organization effectively, the provider must have significant expertise in
analyzing, providing and managing HR best practices. HR best practices refer to
those HR policies, procedures, operations and technologies that yield superior
performance as measured by productivity, cost, quality and service metrics.
EXPANSION OF THE INTERNET. The Internet makes our comprehensive service
delivery model possible by facilitating interactive communications among large
groups of individuals in multiple geographic locations. The Hunter Group
estimates that by using the functionality of the Internet to move HR delivery to
a
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<PAGE> 35
largely self-service mode, organizations can achieve annual HR cost reductions
of approximately 25% to 30%. To date, however, HR organizations have not fully
utilized the Internet because they have not broadly implemented any mechanism
for effectively centralizing and organizing the large amount of information and
electronic transmissions generated by processes within the HR organization.
Accordingly, the Internet's use in HR departments has been largely limited to
one-on-one e-mail communications or process-specific internal networks.
OUR STRATEGY
We believe that our eHR solution, together with our comprehensive
consulting services, will enable us to assume broad responsibility for
management of our clients' human resources people, processes, technologies and
third party vendors, and to deliver our clients increased human capital
productivity at reduced cost. The following are the key elements of our
strategy:
- LEVERAGE TECHNOLOGY AND THE INTERNET FOR ENHANCED HR PERFORMANCE. Using
the Internet, emerging technologies and myHR, we are designing and
building an integrated eHR infrastructure to connect all of the various
people, processes, technologies and third party vendors involved in an HR
organization and to provide a comprehensive central repository of company
and employee data that our clients will be able to easily access,
evaluate and use in order to further their strategic business objectives.
We plan to use our eHR infrastructure to implement, measure, monitor and
consistently apply best practices throughout clients' HR operations.
Employee access to this infrastructure through the myHR portal should
enhance communication and efficiency throughout our clients' global
organization.
- ESTABLISH MYHR AS AN INTEGRAL TOOL IN THE WORKPLACE. We expect myHR to
become the workplace home page for our clients' employees. Through this
portal, employees will be able to access personnel information, employee
productivity tools, and the Internet and communicate freely with other
people throughout the organization. myHR will enable employees to perform
both HR and non-HR tasks and will encourage employees to become more
self-sufficient in handling many day-to-day HR functions, ranging from
changing benefits coverage online to staffing a project. In addition,
employers will be able to customize myHR to disseminate company
information to their employees to foster a specific corporate culture,
track company performance and promote long-term goals within the company.
- ESTABLISH LONG-TERM CLIENT RELATIONSHIPS. We pursue long-term contracts
with our clients to manage their HR processes and implement HR best
practices by successfully reengineering and redesigning our clients' HR
departments and incorporating them into our infrastructure. We believe
contracts of multi-year duration allow a more complete transformation of
our clients' HR organizations which further demonstrates our mutual
commitment and shared goals. The long-term nature of our contracts helps
us to provide greater visibility of future revenue streams and better
information for determining future investment decisions.
- UTILIZE AND LEVERAGE SHARED RESOURCES ACROSS OUR CLIENT BASE. Through our
shared client service centers, we plan to share personnel and
technological, physical and third party resources across our client base.
Each service center facility will handle multiple clients and utilize
automated processes and technology to provide efficient client service
and achieve economies of scale. Our centers of expertise, which consist
of a team of HR experts spanning a broad spectrum of HR disciplines,
provide our experts, analysts, consultants, service representatives,
operators and other HR personnel a breadth of knowledge and experience
that will aid in the development and dissemination of HR best practices.
We anticipate that our centers of expertise will also refine our
processes based on experience gained with multiple clients and
incorporate evolving best practices into our eHR solution so that our
clients receive the benefit of the best and most current thinking across
all HR processes and systems. In addition, we believe our HR expertise
and experience with the multitude of third party vendors providing
discrete human resources services will allow us to identify and include
in our processes those third party vendors who offer the greatest value
as measured by
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<PAGE> 36
performance and cost. We plan to leverage our shared service centers,
centers of expertise, and centralized vendor management to deliver
improved service levels and cost savings.
- PROVIDE EXPERT CONSULTING SERVICES. Through our Gunn Partners unit, we
offer expertise in the provision of consulting and research services to
major corporations in many aspects of human resources processes and
management. Gunn Partners generates revenue through its own consulting
and research activities, provides strategic assistance in structuring our
client relationships, assists in cross-marketing, and provides us with a
service offering for potential clients that are not yet ready for our
full eHR solution.
- ATTRACT AND RETAIN LEADING HR TALENT. We historically have been
successful in recruiting leading HR experts to our company because HR is
our core business and not merely a support function. In recognition of
our unique position in the industry, we have also attracted renowned
theorists and practitioners within the fields of HR and information
technology to serve on our Exult Advisory Council. We offer employees and
advisors access to state-of-the-art HR technologies and resources,
cutting edge projects and processes, and enhanced career opportunities.
We are committed to hiring the highest quality HR and technical personnel
in order to implement HR best practices.
- FACILITATE STRATEGIC DECISION MAKING. Our eHR solution seeks to automate
many aspects of the HR process in order to relieve our clients' HR
personnel from the tedious and often purely administrative and
transactional aspects of the HR function. In addition to managing the HR
process, we provide our clients with enhanced information and analytical
tools and access on an ongoing basis to leading consultants and
strategists. This model enables our clients' personnel to function as
business strategists, working to maximize workforce effectiveness.
- FOCUS ON GLOBAL 500 CORPORATIONS. Global 500 corporations generally have
operations spread across multiple business units and spanning a multitude
of countries. We believe the magnitude and complexity of these
corporations and their resulting HR needs make them ideal candidates for
our comprehensive, web-enabled eHR process management solution.
THE EHR SOLUTION
We believe that our eHR solution simplifies and standardizes our clients'
HR practices and procedures, and delivers improved management information and
employee communications at significant cost savings. Transition and
transformation of clients' HR management functions to eHR involves several
stages of strategic consultation and analysis, web-enablement and management of
shared resources.
STRATEGIC CONSULTATION AND ANALYSIS
To enhance efficiencies and implement HR best practices, we will perform a
thorough assessment of our clients' HR processes and identify those processes
that need to be redesigned or eliminated altogether, as well as those processes
that are currently working well. Through our consulting and research unit, Gunn
Partners, we have conducted comparative studies to analyze the HR administration
and payroll practices of more than 150 companies, many of which are Global 500
corporations. We also intend to use data from third parties such as the Saratoga
Institute, McKinsey & Company and the Corporate Leadership Council in order to
ensure the accuracy and objectivity of our information and analysis. From our
internal studies and the data provided by third party specialist firms, we have
created a large database from which we can benchmark the performance of our
clients' current operations and set specific targets for service quality
improvement and cost reduction. By comparing the various processes implemented
by many large, multinational corporations, we believe we have identified those
practices that yield the greatest value by providing superior performance at a
reasonable cost. We collaborate with our clients to design and redesign HR
processes to increase their productivity, service and quality, while reducing
overall HR costs. We then rely on our transition and change management
specialists to manage the transformation of our clients' existing systems to our
operational infrastructure.
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<PAGE> 37
WEB-ENABLEMENT AND MYHR
By applying the Internet, emerging technologies and myHR to HR processes,
we plan to enhance the relationship and communications between an employer and
its employees, and help manage the vast amount of data generated and transferred
in Global 500 HR departments. Our eHR solution will integrate state-of-the-art
technology and various software applications and business processes from the
client's own internal information and communications systems to compile and
centralize a wealth of HR information. Our browser interface, myHR, will enable
our clients and their employees to access that information easily and
efficiently and to use that information in new ways. We expect myHR to become
the employee's workplace home page and the personal portal for the direct
management of work experiences. Through this portal, employees will be able to
access personnel information, employee productivity tools and the Internet, and
communicate freely with other people throughout the organization. myHR will
enable employees to perform both HR and other work-related tasks and will
encourage employees to become more self-sufficient in handling many day-to-day
HR functions, ranging from changing benefits online to staffing a project. The
myHR home page will be customized for the specific employer and can be further
personalized by the employee in order to enhance its functionality.
When an employee first logs on to his or her computer, a myHR screen will
appear. From this screen, the employee will be able to access a variety of
HR-related information 24 hours a day, seven days a week from the office or
home. For example, the employee will have secure access to his or her personnel
information kept by the company, such as pay, benefits and individual
performance evaluations. In addition, the employee will be able to accomplish
many HR tasks online, such as adding a dependent to a health plan or changing an
insurance beneficiary without filling out any paperwork or needlessly involving
HR intermediaries. If the employee needs personalized assistance or has
questions, the employee can access an HR representative online by linking to an
interactive "chat box" from the myHR home page, or by phone or fax. The employee
also will be able to use myHR to access more general HR information and
resources, such as internal job postings, training and relocation and
repatriation policies and procedures. Finally, myHR will be designed to link
seamlessly to other non-HR functions and databases within the company, such as
e-mail, budgets and sales surveys, and the employee's own personal information,
such as "to do" lists, contact information and his or her calendar, as well as
external resources via the Internet. We believe myHR has the potential to
transform the employee's perception of the HR function, create new bonds between
employer and employee, and promote employee self-service to manage many aspects
of an employee's professional and personal lives.
From the employer's perspective, we believe myHR will further the strategic
goals and tactical needs of the company, aid in the development, application and
dissemination of HR best practices and promote efficiencies within HR and
throughout the company, thereby reducing costs and improving employee
productivity. We believe myHR will make the process of HR administration
substantially more efficient by removing the need for intermediaries in many
daily HR functions. In addition, we believe employers will have a greater
assurance that the data collected through myHR will be reliable and consistent
because it is entered directly by the employee, automatically confirmed by a
rules-based editing system and reviewed by the employee during subsequent
sessions. We believe myHR also will help employers and their managers deploy
human resources more efficiently and effectively by giving them real-time
information about the company's human capital. For example, managers will be
able to use myHR to staff projects by researching an employee database with
skill levels, availability and other pertinent information. myHR will also help
standardize the employer's practices and policies throughout the company and
across business divisions and geographic locations. Finally, myHR will serve as
the vehicle by which employers will be able to disseminate company information,
such as announcements targeting a particular segment of employees, and employees
will be able to access general information about the company, such as stock
performance and news bulletins. We expect this feature will facilitate the
employer's creation and dissemination of a specific corporate culture.
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<PAGE> 38
MANAGEMENT OF SHARED RESOURCES
Once we have identified the appropriate HR practices and processes for our
clients, we will supervise the implementation of our comprehensive eHR solution,
which includes capitalizing on our shared resources. These shared resources
include our client service centers, centers of expertise, third party vendors,
and systems and applications. By leveraging shared resources, we plan to
facilitate the delivery of HR best practices while achieving economies of scale,
which we believe will enable us to deliver improved HR services at a reduced
cost.
- CLIENT SERVICE CENTERS. We plan to manage our clients' transaction,
production and call center requirements from our client service centers.
These centers will serve multiple clients and are responsible for all
administrative and transactional HR activities. They will contain
customer service representatives, production operations staff for
functions such as payroll processing, benefits administration, training
administration, and IT support and maintenance. These client service
centers will also contain systems and technology, such as call/case
management systems, imaging and workflow, and HR application software and
databases. Employees will be able to communicate with the client service
centers online through myHR or by phone or fax. We currently operate one
client service center near Houston, Texas and are in the process of
establishing another client service center in Glasgow, Scotland. We
expect to add additional client service centers as our business grows and
we anticipate that these client service centers will allow us to realize
economies of scale and scope by leveraging the functionality, staff and
technology of centralized processes and services across many business
units for multiple clients. We also expect to be able to realize
additional efficiencies by locating these centers in areas that have
competitive labor and real estate costs and offer access to a large pool
of qualified employees.
- CENTERS OF EXPERTISE. Our HR centers of expertise consist of individuals
with in-depth expertise in specific HR processes. As a group, their role
is to continuously understand and address the needs of our clients and
their employees, and to introduce improved HR processes and procedures,
in each of the five major categories of HR processes. This group
currently consists of a small number of individuals and is expected to
expand significantly. These individuals will work from a variety of
locations throughout the world, including the client service centers,
client sites and home offices. These individuals will be linked together
and accessible to clients through the Internet and myHR and also by more
conventional modes of communication. These subject matter experts will be
responsible for analyzing trends, conducting benchmarking and best
practices assessments, developing appropriate metrics for HR service
delivery, designing and developing HR programs, policies and services,
and ensuring the web enablement of all of our products. Through our
centers of expertise, we plan to leverage our HR expertise and knowledge
of industry best practices in each specific HR function across multiple
lines of business and across multiple clients. In addition, our experts
within this group regularly will monitor each HR function using HR
industry metrics and employee cost benchmarks to ensure that best
practices are continually being applied and improved.
- THIRD PARTY VENDORS. As part of our eHR solution, we consider whether
certain discrete HR services, such as pension management and relocation
administration, can be more effectively and efficiently handled by third
party vendors. If the client is already outsourcing services, we evaluate
the providers they currently are using and recommend changes as
necessary. At the time we become responsible for a client's HR
organization, we will assume and administer the third party contracts and
manage the relationships with these third party vendors. We will
continuously evaluate the level of service being provided by the third
parties and change vendors or provide the service directly as
appropriate. We believe our familiarity and experience with HR best
practices and with the market for third party HR vendors puts us in a
unique position to be able to evaluate whether the services being
provided by a third party meet the needs of a given client and comply
with HR best practices. In addition, we believe we will be able to
negotiate better service levels and greater cost savings on behalf of our
clients for the delivery of these services than an individual client
would be able to attain on its own because of the large volume of
business we expect to manage.
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<PAGE> 39
- SYSTEMS AND APPLICATIONS. We will manage the existing human resources
information technology systems and applications on behalf of our clients
until they can be migrated to a combination of our client service centers
and subcontracted IT infrastructure hosting centers. We plan to manage
all of the essential back-end systems, such as HR application management,
in order to provide full service accountability and control. Application
server management and hosting will be provided by our IT infrastructure
partners and backed-up by their sophisticated disaster backup and
recovery systems.
SERVICES
Our eHR solution will provide a full spectrum of web-enabled process
management services that address and streamline the five major categories of HR
processes. We plan to manage HR functions and third party vendors in all of
these processes to provide a comprehensive solution.
<TABLE>
<S> <C>
-----------------------------------------------------------------------------------
GLOBAL HR CATEGORIES PROCESS MANAGEMENT SERVICES
-----------------------------------------------------------------------------------
Organization and - Organization Development
People Development - Training
- Employee Development
- Performance Management
- Policy and Legal Compliance
-----------------------------------------------------------------------------------
Total Compensation - Compensation
- Benefits
- Payroll
-----------------------------------------------------------------------------------
Workforce Services - HR Strategy
- Labor Relations and Employee Relations
- Third Party Vendor Sourcing and Management
- Employee Communications
-----------------------------------------------------------------------------------
Employee Data Management - Employee Data and Records Management
- HR Information Technology and Information Services
- Employee and Manager Self Service -- myHR
-----------------------------------------------------------------------------------
Workforce Planning - Recruiting, Resourcing and Staffing
- Expatriate Administration
- Domestic Relocation
-----------------------------------------------------------------------------------
</TABLE>
ORGANIZATION AND PEOPLE DEVELOPMENT. We seek to develop and implement
organizational strategies and process improvement initiatives. We will develop
models to establish performance goals for the organization and provide the tools
needed to assess employee or group performance against those goals. We will
develop training strategies, assess training needs, develop courses and related
materials, coordinate logistics, and deliver training and post-training
assessments and follow-up. We also intend to review and address compliance with
HR-related legal requirements such as equal employment opportunities, as well as
many aspects of governmental reporting requirements.
TOTAL COMPENSATION. We seek to provide a broad range of services, including
the design, development, administration and communication of compensation and
benefits programs. We will provide timely and accurate processing of our
clients' payroll, and manage their deferred compensation, stock options,
long-term performance, defined benefit and health and welfare plans and other
benefit programs.
WORKFORCE SERVICES. We will assist our clients in developing and
implementing their long-term HR strategy with frequent input concerning HR best
practices from our consulting unit and our centers of
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expertise. We help our clients in their efforts to promote and maintain
effective relationships with all of their employees. We work with our clients to
retain a productive and committed workforce.
EMPLOYEE DATA MANAGEMENT. Our integrated, web-enabled technology will allow
us to capture, track, modify and report large amounts of employee-related data.
We plan to develop human resources information system strategies and policies
and manage our clients' technical infrastructure, including maintenance of
organization codes, administration of position management and employee
indicative data.
WORKFORCE PLANNING. We plan to establish resources and workforce strategies
that help effectively deploy and measure human capital. We will develop
candidate pools, assess and select candidates, and manage recruiting and other
staffing functions. We will establish and administer expatriate and domestic
relocation policies and programs, address and manage the special needs of the
expatriate and domestic relocation populations, and handle the repatriation of
employees.
GUNN PARTNERS ACQUISITION
In November 1999, we acquired the business of Gunn Partners, Inc., a
business process improvement consulting and research company with operations in
the United States and Europe. Gunn Partners has been consulting with
corporations in the Global 500 since 1991 on administrative staff functions,
such as human resources and finance and accounting, as well as procurement,
information technology, customer service, real estate and facilities, and
environmental health and safety. Gunn Partners now operates as our consulting
unit, assisting our clients in the benchmarking, baselining, design, transition
and transformation of HR and affinity processes, while continuing to provide its
full range of services to its existing clients. During the last two years, Gunn
Partners provided consulting services to some of the largest companies in the
Global 500, including Bank of America, British Telecom, General Motors,
Hewlett-Packard, Lockheed Martin, Pfizer, Royal Dutch Shell, and Xerox. We plan
to have Gunn Partners continue to refine and implement HR best practices and to
develop prospects for our comprehensive eHR solution.
The research arm of Gunn Partners has completed more than 30 major research
studies in staff functions such as human resources, finance and procurement.
These studies span fifteen major administrative processes, such as payroll,
benefits, compensation, billing and accounts payable. Gunn Partners' research
organization currently has over 200 clients, which includes recognized industry
practice leaders and Global 500 corporations from a broad cross-section of
industries. These collaborative research studies typically last for five to
eight months and use a number of tools and techniques, including qualitative and
quantitative benchmarking, studies of current business practices, and customer
service surveys, as well as site visits and face-to-face working sessions with
practice leaders. Gunn Partners has also conducted over 50 best practices events
where Global 500 administrative leaders discuss and outline best practice
solutions to important challenges facing their own organizations through
conferences, workshops, forums and study missions. Over 800 organizations have
attended these events over the past seven years.
MAJOR CLIENTS
BP AMOCO. In December 1999, we entered into a seven year Framework
Agreement with BP Amoco p.l.c., a leading international energy and
petrochemicals company, to create a comprehensive eHR services organization and
provide a broad range of human resources management services to BP Amoco and its
affiliates. BP Amoco currently operates in more than 40 countries and has more
than 80,000 employees and an equal or greater number of annuitants.
Our initial contracts under the Framework Agreement cover BP Amoco
employees in the United Kingdom and the United States, representing
approximately 70% of their total employees and annuitants. We have worked with
BP Amoco to identify 18 separate processes involved in BP Amoco's HR
organization: training, organization development, HR strategy, labor relations,
compliance, expatriate relocation and administration, information services,
benefits, compensation, employee relations, vendor administration, payroll,
employee development, recruiting, severance, performance management, domestic
relocation, and information technology. Each of these processes is divided into
component tasks or
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functions and responsibility for each is allocated either to BP Amoco or to us.
In general, we will be responsible for systems design and implementation,
routine employee communications, data gathering, processing and retrieval,
management reporting, vendor management, and overall administration of related
HR functions. BP Amoco will remain responsible for strategic planning, policy
decisions, employee relations, legal compliance, and professional resources.
Some BP Amoco employees involved in providing the HR services will become our
employees. BP Amoco will pay severance costs for BP Amoco employees whose
employment terminates as a result of the transition of BP Amoco's HR management
processes to our service model.
We are currently in a transition period during which we are converting BP
Amoco's HR management processes in the U.K. and U.S. to our systems and
infrastructure step by step according to a detailed transition plan. Among other
things, this requires us to integrate IT systems, compile and transfer data,
hire or retain additional personnel to handle the workload and make arrangements
to assign or administer BP Amoco's contracts with third parties providing
discrete services that constitute a part of our integrated service offering. We
expect this transition period to last until approximately February 2001.
After the initial transition period, we are obligated to provide our
services to BP Amoco in the U.K. and the U.S. for fixed fees that are generally
equal to or less than BP Amoco's historical costs incurred in connection with
the services that we are assuming. After we have achieved a negotiated minimum
return from provision of our services, we are required to share further savings
with BP Amoco in a negotiated gain-sharing arrangement that is intended to
motivate us and BP Amoco to maximize efficiency in the provision of our
services.
The Framework Agreement contemplates extending the arrangement beyond the
U.K. and the U.S. to unite all of BP Amoco's worldwide operations under one
global integrated eHR solution. Under the Framework Agreement, we have a right
to provide human resources management services for each country in the world, in
addition to the U.S. and the U.K., in which BP Amoco determines by December 2001
to obtain (or extend existing) human resources management services. BP Amoco is
not obligated to add additional countries and we must demonstrate our ability to
meet their service needs and provide specified cost savings in other countries
to expand the arrangement. Adding a country to the arrangement involves advance
notification from BP Amoco followed by a detailed due diligence process through
which we will work with BP Amoco to identify their HR service needs and costs in
that country, and our ability to meet those needs and provide specified cost
savings in that country. If our mutual due diligence procedures indicate that we
can provide adequate levels of service and achieve specified cost savings for BP
Amoco in a particular country, we will enter into a supplemental agreement with
the affiliate for that country for an expected term of five years, subject to
consent from the relevant BP Amoco affiliate. We expect additional country
agreements to involve the same kinds of transition and pricing arrangements as
the U.K. and U.S. Country Agreements, although we anticipate completing
additional country transitions more quickly based on our initial experiences in
the U.K. and the U.S.
The Framework Agreement will run for seven years and the U.K., U.S. and
other Country Agreements will run for a minimum of five years, subject to BP
Amoco's right to terminate in the event of our insolvency or material breach or
performance failure, or if we are taken over by an entity that is a competitor
of BP Amoco or that is financially weaker than we are, or that, through control
of Exult, could adversely affect BP Amoco's reputation. In addition, from
December 2002, BP Amoco may terminate the Framework Agreement or the U.S. or
U.K. or any other Country Agreement upon giving us 12 months' advance notice and
by making termination payments designed to defray our costs and give us a
specified return on our investment in the contract for the remaining term of the
agreement but not to exceed two years. After December 2004, BP Amoco may
terminate a Country Agreement at any time upon 12 months' advance notice without
the obligation to make such termination payments. Termination of the Framework
Agreement causes termination of the U.S. and U.K. agreements and any other
Country Agreements that are in effect at that time. We expect to rely upon BP
Amoco for the majority of our revenue for at least the next year and possibly in
future periods. If BP Amoco were to substantially reduce or stop the use of our
services, our reputation and future revenues would be seriously impaired. Short
of terminating an entire Country Agreement, BP Amoco may also terminate our
rights to provide particular
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services in a country if we are unable to meet performance standards for those
services in that country. All BP Amoco agreements terminate in December 2006 if
not renewed by mutual agreement. Any termination involves a winding-down period
during which we continue to be paid for providing services while transferring
back to BP Amoco or to a new service provider the HR processes for which we have
been responsible. Additional country agreements will contain similar termination
provisions.
PACTIV CORPORATION. In January 2000, we entered into a three year agreement
with Pactiv Corporation, a leading provider of advanced packaging solutions
formerly known as Tenneco Packaging. Pactiv operates approximately 85 facilities
in approximately 17 countries around the world. Under this agreement, we will
assume complete management and accountability for Pactiv's North American
payroll and accounts payable processes. As part of this agreement, we recently
acquired substantially all of the assets of Pactiv's 71,000 square-foot,
state-of-the-art client service center near Houston in The Woodlands, Texas. We
plan to use this client service center to provide HR and affinity process
management services to Pactiv, Tenneco, BP Amoco and other future clients.
TENNECO AUTOMOTIVE. In January 2000, we entered into a three year agreement
with Tenneco Automotive, a large international manufacturer of ride management
control and exhaust systems and products with approximately 23,000 employees
worldwide. Under this agreement, we will provide human resources/payroll, and
related finance and accounting process outsourcing services and will assume
complete management and accountability for Tenneco's North American payroll and
accounts payable processes.
SALES AND MARKETING
Our sales and marketing team targets senior executives of Global 500
corporations. As of April 30, 2000, our sales group consisted of nine
professionals, and our marketing group consisted of seven professionals. We
employ a team approach to business development whereby our sales team
identifies, qualifies and prioritizes prospects, manages the due diligence
process and negotiates the commercial agreements necessary to deliver leading HR
solutions. Working with colleagues in our centers of expertise, IT delivery,
client services centers, strategy and other functional areas, our business
development team functions as the overall project manager in crafting our eHR
solution on behalf of our clients. Due to the strategic nature of our
engagements, we typically interface with the senior business and technical
management personnel of our current and potential clients. Our marketing efforts
are focused on creating awareness of the comprehensive nature of our eHR
solution, establishing Exult as the leader in this new market and building the
Exult brand. We use a broad mix of programs to accomplish these goals, including
market research, brochures, information pieces published for industry forums,
written articles published for industry trade press, public relations
activities, marketing programs, advertising, seminars, speaking engagements and
web site marketing. The goal of these activities is to promote Exult as the
leading provider of comprehensive eHR, and to publicize the advantages of
adopting our integrated eHR solution.
COMPETITION
We believe our primary competitors are large human resource departments
within Global 500 corporations because these departments have strong, existing
relationships with the senior executives of our target clients. To a lesser
extent, we believe we are in competition with third party vendors who typically
only address discrete HR processes. These third party vendors include:
- the consulting divisions of the Big Five accounting firms;
- companies that provide a select transactional service, such as payroll
processing or benefits administration; and
- other consulting companies that provide consulting for individual
projects, such as HR strategy, executive recruiting and executive
compensation.
We currently use many of these leading third party vendors in our
comprehensive eHR solution, and expect to continue to use these vendors to
provide certain technologies and HR services for our clients.
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We do not believe any competitor currently assumes responsibility for all of the
human resources processes within a Global 500 HR department.
INTELLECTUAL PROPERTY
We regard the protection of our trademarks, service marks, copyrights,
trade secrets and other intellectual property rights as critical to our future
success. We rely on various intellectual property laws and contractual
restrictions to protect our proprietary rights in products and services. We
currently have pending service mark applications in the United States for the
marks EXULT, E-F&A, MYHR, "PROCESS EXCELLENCE, PROVEN RESULTS," and our logo. We
have also filed service mark applications for these marks in Australia, Canada,
Europe, and Switzerland. We cannot guarantee that we will be able to secure
registrations of our marks domestically or in any foreign country. Our inability
to register and protect marks could require us to stop using them or to share
them with others, which could cause confusion in the marketplace and harm our
business.
In addition, we currently hold various Internet domain names, including
"www.exult.net." The acquisition and maintenance of domain names generally is
regulated by Internet regulatory bodies. The regulation of domain names in the
United States and in foreign countries is subject to change. Governing bodies
may establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. As a result, we
may be unable to acquire or maintain relevant domain names in all countries in
which we conduct business or into which we choose to expand. Furthermore, the
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights continues to evolve. Therefore, we may
be unable to prevent third parties from acquiring domain names that are similar
to, infringe upon or otherwise decrease the value of our intellectual property
and other proprietary rights.
We also rely on technologies that we license from third parties. These
licenses may not continue to be available to us on commercially reasonable terms
in the future, if at all. As a result, we may be required to obtain substitute
technology of lower quality or at greater cost, which could materially adversely
affect our business, results of operations and financial condition.
As is common with technology companies, from time to time, third parties
may assert patent, copyright, trademark and other intellectual property rights
to our intellectual property or proprietary information or technologies. Any
claims asserting that our products, services, intellectual property, or
proprietary information infringe or may infringe proprietary rights of third
parties could require significant defense expenditures and, if determined
adversely to us, could seriously harm our business, results of operation and
financial condition.
EMPLOYEES
As of April 30, 2000, we employed 231 people, including 38 in service
development, 121 in operations and delivery, 16 in sales and marketing, 30 in
consulting and research and 26 in general and administrative. All employees
other than two are employed on a full time basis. We believe that we maintain
good relations with our employees.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this prospectus, we are not a party to any material legal proceedings.
FACILITIES
Our corporate headquarters are located in approximately 19,000 square feet
of office space in Irvine, California under a three year lease that expires in
June 2002. Our lease agreement for this facility requires monthly base rental
payments of approximately $77,000. We anticipate that we will need additional
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headquarters space before the end of that lease. We also currently lease
approximately 71,000 square feet of office space for our shared service center
in The Woodlands, Texas under a lease that expires in April 2006, and
approximately 31,000 square feet of office space for our shared service center
in Glasgow, Scotland under a lease that expires in March 2010. Under the Glasgow
lease the landlord or we may terminate the lease in March 2005 with 12 months'
prior notice. Our monthly base rental payment is approximately $36,000 for our
Texas facility and $73,000 for our Scotland facility. We also lease office space
for our consultants in Georgia, Massachusetts, New York, United Kingdom and
Switzerland.
The Texas service center is designed to house 350 personnel engaged
principally in call center, payroll, and other support activities necessary to
meet our service commitments to our current clients. We are currently building
out the infrastructure of our Glasgow facility, and when it is operational in
mid to late 2000, it will have capacity to house approximately 200 personnel
engaged principally in call center, payroll, and other support activities. These
centers are designed to handle our existing client demands and will accommodate
some incremental growth in our client base, but we expect to open new client
service centers in new geographic locations to handle any significant growth in
our business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides information with respect to our executive
officers, key employees and directors as of May 5, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
James C. Madden, V........................ 38 Chief Executive Officer, President and
Chairman of the Board
Stephen M. Unterberger.................... 42 Executive Vice President
Kevin M. Campbell......................... 40 Operations President
Douglas L. Shurtleff...................... 53 Chief Financial Officer, Executive Vice
President and Treasurer
Peter Ackerson............................ 53 Vice President, Client Service Centers
Brian W. Copple........................... 39 Vice President, General Counsel and
Secretary
Scott J. Figge............................ 40 Vice President, Business Development
Robert W. Gunn............................ 52 Vice President, Executive Client Lead
Mark B. Hodges............................ 36 Vice President, Strategy and Marketing
Alan Little............................... 52 Executive Director, Global Client
Relationships
Barbara A. Coull-Williams................. 47 Vice President, HR Business Processes
Peter Work................................ 41 Chief Technology Officer
Rebecca L. Work........................... 45 Chief Information Officer
J. Michael Cline(1)....................... 40 Director
Steven A. Denning......................... 51 Director
Mark F. Dzialga........................... 35 Director
Michael A. Miles(2)....................... 60 Director
Thomas J. Neff(1)......................... 62 Director
John R. Oltman(2)......................... 55 Director
A. Michael Spence(1)(2)................... 56 Director
</TABLE>
---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
JAMES C. MADDEN, V has been our Chief Executive Officer and President since
November 1998 and our Chairman since February 2000. Mr. Madden served as the
Corporate Chief Financial Officer at MCI Systemhouse, the outsourcing unit of
MCI, from June 1997 to November 1998. From June 1995 to June 1997, Mr. Madden
served as the President of the U.S. and Latin American Divisions, and from
January 1994 to June 1995, he was the General Manager of MCI Systemhouse's
Pacific Region. He first joined MCI Systemhouse in 1993 as Vice President and
Managing Director of the Los Angeles office. Prior to joining MCI Systemhouse,
Mr. Madden was a Principal at Booz-Allen & Hamilton from 1991 to 1993. Mr.
Madden began his career with Andersen Consulting, where he created and led
Andersen's first outsourcing practice on the west coast. Mr. Madden received his
B.B.A. degree in Finance and B.A. degree in Geology from Southern Methodist
University.
STEPHEN M. UNTERBERGER has been our Executive Vice President since February
1999 and served as our Chief Operating Officer from February 1999 to May 2000.
Prior to joining Exult, Mr. Unterberger served as the Vice President and
Operating Executive of the U.S. Division of MCI Systemhouse from December 1997
to February 1999, and as its Vice President, Western Region from September 1996
to December 1997. From January 1994 to September 1996, Mr. Unterberger managed
large consulting and outsourcing engagements for MCI Systemhouse. From September
1988 to January 1994, Mr. Unterberger served with Price Waterhouse in its
information technology management consulting practice. Mr. Unterberger has a
B.A. degree in Economics from the University of Pennsylvania.
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KEVIN M. CAMPBELL joined Exult as Operations President on May 30, 2000.
Before joining Exult, Mr. Campbell was a partner with Ernst & Young, LLP from
August 1999 to May 2000, and was Director of the Products Market for its Global
Operate practice for business process and information technology outsourcing.
Before joining Ernst & Young, Mr. Campbell was with Andersen Consulting for 17
years, including nine years as a partner. At Andersen, he served at different
times as the Global Managing Partner for business process management for the
Resources Market Unit; America's managing partner for business process
management for the manufacturing industry; and partner in charge of the
northeast region's electronics and high-tech market. Mr. Campbell has a B.S.
degree in Management from Boston College.
DOUGLAS L. SHURTLEFF has been our Chief Financial Officer and Executive
Vice President since joining Exult in September 1999. From March 1999 to
September 1999, Mr. Shurtleff was Chief Financial Officer for National Water &
Power, Inc., a business process outsourcing provider of utility billing services
to the multi-family apartment industry. From June 1995 to February 1999, Mr.
Shurtleff was Senior Vice President and Chief Financial Officer of USCS
International, a publicly traded, business outsourcing provider of software and
billing services to communications and other large transaction-based businesses.
From January 1990 to June 1995, he served as the Vice President of Finance and
Administration for Infonet Services Corporation, a provider of public
international data communications. Mr. Shurtleff was instrumental in and oversaw
the spin-off of Infonet from Computer Sciences Corporation, where he served as
the Group Vice President for Finance and Administration from October 1984 to
January 1990. Mr. Shurtleff is a certified public accountant and has an M.B.A.
degree and a B.S. degree in Accounting from the University of Southern
California.
PETER ACKERSON has been our Vice President, Client Service Centers since
joining Exult in September 1999. Prior to joining Exult, Mr. Ackerson served as
the Director of Human Resources Services for Sears, Roebuck and Co. from 1967 to
1999. During his 30 year career in human resources, strategic planning and
administration, Mr. Ackerson has acquired significant knowledge of both
strategic and transactional sides of human resources. He is certified as a
Senior Professional in Human Resources by the Human Resources Certification
Institute. Mr. Ackerson attended the University of Virginia.
BRIAN W. COPPLE has served as our Vice President, General Counsel and
Secretary since February 2000. Prior to joining Exult, Mr. Copple served as a
Senior Vice President and the General Counsel for EPS Solutions Corporation, a
provider of outsourced executive search, performance learning and financial
services from February 1999 to February 2000. From January 1988 to February
1999, Mr. Copple practiced corporate and securities law with Gibson, Dunn &
Crutcher LLP, including as a partner for three years. Mr. Copple has a J.D.
degree and an M.B.A. degree from the University of California, Los Angeles and
an A.B. degree in Political Science from Stanford University.
SCOTT J. FIGGE has been our Vice President, Business Development since
April 1999. Prior to joining Exult, Scott was the Vice President responsible for
U.S. IT outsourcing business development for MCI's outsourcing unit from 1998 to
1999. From 1993 to 1998, he served in various management positions with MCI,
including its Vice President of U.S. Strategic National Accounts, Vice President
of Western Region Client Delivery and Sales and Managing Director responsible
for client delivery and business development. Prior to 1993, Mr. Figge held key
leadership roles at EDS, IBM Corporation and Russell Reynolds Associates. Mr.
Figge has a B.A. degree in Economics from the University of California at Los
Angeles and has an M.B.A. degree in Finance from Northwestern University's
Kellogg School of Management.
ROBERT W. GUNN founded Gunn Partners in 1991 and has served as our Vice
President, Executive Client Lead since we acquired Gunn Partners in 1999. Prior
to founding Gunn Partners, Mr. Gunn served as a partner at A. T. Kearney from
1981 to 1991 and launched Kearney's Administrative Practice in 1987. From 1978
to 1981, Mr. Gunn served as a consultant with William E. Hill. Mr. Gunn received
an M.B.A. degree from the Wharton School of Management at the University of
Pennsylvania and his A.B. degree in Political Science from Williams College.
MARK B. HODGES has been our Vice President, Strategy and Marketing since
July 1999. Prior to joining Exult, Mr. Hodges served as the Vice President and
Worldwide Director of Dataquest's IT
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Services Vendor Group, where he authored the first market research report on the
business process outsourcing market in 1989. From 1988 to 1998, Mr. Hodges was
the Chief Operating Officer for G2R, Inc., a market research and consulting firm
which he co-founded. Mr. Hodges has a B.A. degree in Political Science and
Economics from the University of California, Berkeley.
ALAN LITTLE has served as our Executive Director, Global Client
Relationships since January 2000. Prior to joining Exult, Mr. Little was a
partner with PricewaterhouseCoopers from 1988 to December 1999, where he was
responsible for the human resources consulting business, the organization and
change management practice and, starting in 1996, HR outsourcing. From 1973 to
1988, Mr. Little was a worldwide partner at Hay Management Consultants, where he
served as Chief Executive for Organization and Management Development Business
for the New Zealand Board, the Asia-Pacific Board and the European Board. Mr.
Little received a first class honors degree in Psychology from the University of
Sheffield, England.
BARBARA A. COULL-WILLIAMS has been our Vice President, HR Business
Processes since joining Exult in May 1999. Prior to joining Exult, Ms. Williams
served as the Vice President, Human Resources of Pacific Gas and Electric
Company from 1993 to 1995 and from 1997 to 1999, and as its Vice President of
Division Operations from 1995 to 1997. Barbara has served on many boards for
community business development, community services and the arts. Her latest
board membership was with the National Red Cross of the San Francisco Bay area.
Ms. Williams has a B.A. degree in Psychology from Skidmore College and an M.S.
degree from Cornell University's School of Industrial and Labor Relations.
PETER WORK has been our Chief Technology Officer since April 1999. Prior to
joining Exult, Mr. Work served as the Director of Strategic Technology for the
Consumer Products Division of The Walt Disney Company. From 1986 to 1994, Mr.
Work served in various positions with Price Waterhouse, most recently as a
Senior Manager. Prior to that, Mr. Work was employed by Ramboll & Hanemann, a
leading consulting company in Denmark. Mr. Work is the spouse of Rebecca Work,
our Chief Information Officer. Mr. Work has a B.S. degree in Electrical
Engineering from the Technical University of Denmark, a Master's degree in
Operations Science from Princeton University and the Technical University of
Denmark, and a Bachelor of Commerce degree in Human Resources and Strategic
Planning from Copenhagen Business School.
REBECCA L. WORK has served as our Chief Information Officer since joining
Exult in 1999. Prior to joining Exult, Ms. Work served as the head of Delivery
Management for the U.S. Division of MCI Systemhouse from 1994 to 1999. Ms. Work
is the spouse of Peter Work, our Chief Technology Officer and has a B.S. degree
in Management Information Systems from Colorado State University.
J. MICHAEL CLINE has been a Director of Exult since 1998 and our Chairman
of the Board until February 2000. Since December 1, 1999, Mr. Cline has been the
Managing Partner of Accretive Technology Partners, a private investment company
focused in business process outsourcing and business to business e-commerce.
From 1989 to 1999, Mr. Cline served as a Managing Member of General Atlantic
Partners, LLC, a private equity investment firm focused exclusively on Internet
and information technology investments on a global basis. From 1986 to 1989, Mr.
Cline helped found AMC, a software company which was later sold to Legent
Corporation. Prior to AMC, Mr. Cline was an associate at McKinsey & Company. Mr.
Cline received an M.B.A. degree from Harvard Business School and a B.S. degree
from Cornell University. Mr. Cline currently serves as a director of Manugistics
Group, Inc., Brio Technology, Inc. and FirePond, Inc., as well as a number of
private technology companies. Mr. Cline is also a Trustee of the Wildlife
Conservation Society.
STEVEN A. DENNING has been a Director of Exult since November 1998 and is
currently the Executive Managing Member of General Atlantic Partners, LLC, a
private equity investment firm focused exclusively on Internet and information
technology investments on a global basis, and has been with General Atlantic
since 1980. He received an M.B.A. degree from Stanford Graduate School of
Business, an M.S. degree from the Naval Graduate School in Monterey, California
and a B.S. from the Georgia Institute of Technology. Mr. Denning is a director
of Eclipsys Corporation, GT Interactive Software Corp. and several private
information technology companies.
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MARK F. DZIALGA has been a Director of Exult since February 2000 and is
currently a managing member of General Atlantic Partners, LLC. Mr. Dzialga has
been with General Atlantic Partners, LLC since July 1998 and was the co-head of
the Merger Technology Group at Goldman, Sachs & Co. from 1990 to 1998. Mr.
Dzialga received an M.B.A. degree from the Columbia University School of
Business and a B.S. in Accounting from Canisius College. Mr. Dzialga is a
director of several private information technology companies.
MICHAEL A. MILES has been a Director of Exult since December, 1999. He is
the former Chairman of the Board and Chief Executive Officer of Philip Morris
Companies Inc., having served in that position from September 1991 to July 1994.
Prior to assuming that position, Mr. Miles was Vice Chairman and a member of the
Board of Directors of Philip Morris Companies Inc. and Chairman and Chief
Executive Officer of Kraft General Foods, Inc., positions he held from December
1989. Mr. Miles is also a Special Limited Partner in the investment firm of
Forstmann Little & Co. and is the non-executive chairman of Community Health
Systems, a hospital management company owned by Forstmann Little & Co. He is
also a member of the boards of directors of Dell Computer Corporation, Morgan
Stanley Dean Witter, Sears, Roebuck and Co., Time Warner Inc., The Allstate
Corporation and Interpublic Group of Companies, Inc.
THOMAS J. NEFF has been a Director of Exult since May 2000. Mr. Neff has
been the Chairman of Spencer Stuart, U.S. since October 1996, and has been
employed with Spencer Stuart since 1976, including as President from 1979 until
October 1996. Before joining Spencer Stuart, he was a principal with Booz, Allen
& Hamilton, Inc. from 1974 to 1976, served as President of Hospital Data
Sciences, Inc. from 1969 to 1974, and held a senior marketing position with TWA
from 1966 to 1969. Mr. Neff received his M.B.A. degree from Lehigh University
and a B.S. in Industrial Engineering from Lafayette College. He is a director of
ACE Limited, the Lord Abbett Mutual Funds and myjobsearch.com.
JOHN R. OLTMAN has been a Director of Exult since July 1999 and has served
as the President of JRO Consulting Inc. since 1995, in which role he serves as
director, advisor and investor in leading technology companies and investment
firms. Mr. Oltman also currently serves as the Vice-Chairman of Lante
Corporation and Chairman of XOR, Inc. and Evolve Software, Inc. Mr. Oltman also
serves as a director for Alysis Technologies, Inc., InaCom Corp. and Premier
Systems Integrators, Inc. From February 1996 through August 1997, Mr. Oltman
served as Chairman and senior member of the Executive Committee of TSW
International, a global leader in asset care software and services. From July
1991 to November 1995, Mr. Oltman served as the Chairman and Chief Executive
Officer of SHL Systemhouse, a large provider of client/server systems
integration and technology outsourcing. Before joining SHL Systemhouse, Mr.
Oltman was managing partner for Andersen Consulting's Chicago Consulting Group.
From 1967 to 1970, Mr. Oltman was a member of the technical staff at Bell
Laboratories. Mr. Oltman received a B.S. degree from the University of Illinois
in 1967 and an M.B.A. degree from Northwestern University's Kellogg School of
Management in 1970.
A. MICHAEL SPENCE has been a Director of Exult since July 1999 and served
as the Dean of the Graduate School of Business at Stanford University from July
1990 to August 1999. From 1975 to 1990, Mr. Spence served as a Professor of
Economics and Business Administration at Harvard University. In 1983, he was
named Chairman of the Economics Department and George Gund Professor of
Economics and Business Administration. Mr. Spence was awarded the John Kenneth
Galbraith Prize for excellence in teaching and the John Bates Clark Medal for a
"significant contribution to economic thought and knowledge." From 1984 to 1990,
Mr. Spence served as the Dean of the Faculty of Arts and Sciences at Harvard
University. From 1973 to 1975, Mr. Spence served as an Associate Professor of
Economics at Stanford University. Mr. Spence has a B.A. degree from Princeton
University, a B.S. degree and an M.A. degree from Oxford University and a Ph.D.
in Economics from Harvard University. Mr. Spence currently serves on the Board
of Directors of Siebel Systems, Inc., General Mills, Inc., Nike, Inc., Torstar
and eGain Communications Corporation.
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EXULT ADVISORY COUNCIL
We formed the Exult Advisory Council in order to gain exposure to new ideas
and market developments, including new standards for HR best practices,
recommendations on the efficacy of new service offerings and service delivery
approaches, outside review and oversight of client quality assurance programs, a
better understanding of market requirements, and increased exposure in the
marketplace. The council includes:
- Naomi Bloom, Managing Partner of Bloom & Wallace, a consulting company
focused on HR information technology and HR management systems;
- Row Henson, Vice President, Human Resources Management Systems for
PeopleSoft USA, Inc., a software provider of HR management systems;
- Dave Ulrich, Professor of Business at the University of Michigan;
- Jac Fitz-enz, Ph.D., Chairman and founder of the Saratoga Institute, an
HR research and benchmarking firm;
- John T. Phippen, former Chief Information Officer for Mattel, Inc.;
- Sharron D. Garrett, Senior Vice President and Chief Information Officer
for The Walt Disney Company, Inc.;
- William J. Pade, Director of the high technology group of McKinsey &
Company, a management consulting firm;
- Robert W. Gunn, Vice President, Executive Client Lead for Exult and
founder of Gunn Partners; and
- Patrick F. McNally, former Partner and Regional Managing Director,
Andersen Consulting.
We also intend to have one representative from each of our clients sit on
this committee. We believe that the Exult Advisory Council will help ensure our
alignment with the leaders in the HR field and our development of HR best
practices.
CLASSIFIED BOARD OF DIRECTORS
Our board of directors is divided into three classes of directors serving
staggered three-year terms, with approximately one-third of the board of
directors elected each year. The term of our Class 1 directors, Messrs. Dzialga,
Neff and Miles, will expire at our 2001 annual meeting of stockholders and at
each third annual stockholders' meeting thereafter; the term of our Class 2
directors, Messrs. Oltman and Spence, will expire at our 2002 annual meeting of
stockholders and at each third annual stockholders' meeting thereafter; and the
term of our Class 3 directors, Messrs. Cline, Denning and Madden, will expire at
our 2003 annual meeting of stockholders and at each third annual stockholders'
meeting thereafter. Directors may be removed only for cause, and the board of
directors may fill vacancies or increase the size of the Board of Directors.
These provisions deter stockholders from removing incumbent directors and
filling these vacancies with their own nominees and make it difficult even for
stockholders voting a majority of our shares to change control of the board of
directors in less than two years.
COMMITTEES OF THE BOARD
The board of directors has an audit committee and a compensation committee.
The audit committee consists of Messrs. Miles, Oltman and Spence. The audit
committee recommends the appointment of our independent public accountants,
reviews the scope of the annual audit and other services provided by our
auditors, and reviews our auditors' report on our financial statements. The
audit committee also reviews our internal accounting controls and our accounting
and financial policies in general.
The compensation committee consists of Messrs. Cline, Neff and Spence. The
compensation committee reviews and makes recommendations to the board of
directors on matters relating to employee compensation and benefit plans and
reviews and approves salaries, benefits, bonuses and equity incentives
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<PAGE> 50
for all executive officers. The compensation committee also administers our
equity incentive and stock option plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Before January 2000, we did not have a compensation committee and all
decisions regarding executive compensation were made by our board of directors.
During the last fiscal year, Mr. Madden participated in deliberations of our
board of directors concerning executive officer compensation. No interlocking
relationship exists between any of our executive officers or any member of our
compensation committee and any member of any other company's board of directors
or compensation committee.
DIRECTOR COMPENSATION
Our directors receive no cash remuneration for serving on the board of
directors or any board committee. However, directors may be reimbursed for
reasonable expenses incurred by them in attending board and committee meetings.
Our directors have in the past received various option grants and opportunities
to purchase shares of our common stock. In addition, each of our directors will
receive an option to purchase up to 25,000 shares of common stock upon our sale
of stock in this offering, with the exception of Mr. Cline who will receive an
option to purchase up to 50,000 shares of common stock at such time. The
exercise price for these options will be equal to the initial public offering
price. After the closing of this offering, new non-employee directors will upon
appointment receive an initial option to purchase up to 25,000 shares of common
stock at an exercise price equal to the fair market value of the common stock on
the date of grant. In addition, on the date of each annual stockholders' meeting
each non-employee director who has served as a director for at least 180 days
and is to continue as a non-employee director following that meeting will
receive an option to purchase up to 10,000 shares of common stock at an exercise
price equal to the fair market value of the common stock on the date of grant.
The options to be granted to current directors in connection with this offering
and the initial and annual options to be granted to non-employee directors in
the future will vest with respect to 25% of the underlying shares on the first
anniversary of the date of grant, and with respect to the balance of the
underlying shares in 36 equal monthly installments thereafter. See "-- Stock
Option/ Equity Incentive Plans."
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
James C. Madden entered into an employment agreement with us in October
1999 to serve as our Chief Executive Officer. Under this agreement, Mr. Madden's
base salary is $450,000 per year, and he is eligible to receive annual bonuses
of up to 50% of his base salary, based upon our financial performance as
determined by our board of directors. If we terminate Mr. Madden's employment
for any reason, other than for cause as defined in the agreement, Mr. Madden
will be entitled to receive vesting of his stock options and one year's annual
salary and bonus. In addition, if within 18 months following a change of control
of Exult, Mr. Madden's level of responsibility is reduced below his current
level and duties, his salary or bonus target is reduced, or his primary location
of work is greater than 50 miles from Newport Beach, California, then he will be
entitled to terminate his employment and receive vesting of his stock options
and one year's salary and bonus.
Stephen M. Unterberger entered into an employment agreement with us in
October 1999 to serve as our Vice President and Chief Operating Officer. Under
this agreement, Mr. Unterberger's base salary is $400,000 per year and he is
eligible to receive annual bonuses of up to 50% of his base salary, based upon
our financial performance as determined by our board of directors and Chief
Executive Officer. If we terminate Mr. Unterberger's employment for any reason,
other than for cause as defined in the agreement, Mr. Unterberger will be
entitled to receive vesting of his stock options and one year's annual salary
and bonus. In addition, if within 18 months following a change of control of
Exult, Mr. Unterberger's level of responsibility is reduced below his current
level and duties, or his salary or bonus target is reduced, or his primary
location of work is greater than 50 miles from Irvine, California, then he will
be entitled to terminate his employment and receive vesting of his stock options
and one year's salary and bonus.
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<PAGE> 51
Barbara A. Coull-Williams entered into an employment agreement with us in
August 1999 to serve as our Vice President, Human Resource Processes. Ms.
Coull-Williams' base salary is $215,000 per year and she is eligible to receive
annual bonuses of up to $107,500, based upon our financial performance as
determined by our board of directors and Chief Executive Officer, and her
achievement of specified management goals. If we terminate Ms. Coull-Williams'
employment for any reason other than for cause as defined in the agreement, Ms.
Coull-Williams will have the right to receive severance benefits in accordance
with our Executive Severance Plan, as described below.
Scott J. Figge entered into an employment agreement with us in October 1999
to serve as our Vice President, Business Development. Mr. Figge's base salary is
$230,000 per year and he is eligible to receive annual bonuses of up to $140,000
based upon our financial performance as determined by our board of directors and
Chief Executive Officer. If we terminate Mr. Figge's employment for any reason,
other than for cause as defined in the agreement, Mr. Figge will be entitled to
receive vesting of his stock options and the greater of his annual salary or
severance benefits payable under our Executive Severance Plan, as described
below.
Rebecca L. Work entered into an employment agreement with us in August 1999
to serve as our Vice President and Chief Information Officer. Ms. Work's base
salary is $190,000 per year and she is eligible to receive annual bonuses of up
to $95,000 based upon our financial performance as determined by our board of
directors and Chief Executive Officer, and her achievement of specified
management goals. If we terminate Ms. Work's employment for any reason other
than for cause as defined in the agreement, Ms. Work will have the right to
receive severance benefits in accordance with our Executive Severance Plan, as
described below.
Our Executive Severance Plan provides benefits to covered persons whose
employment is involuntarily terminated by us for reasons other than cause, as
defined in such plan. The benefits payable range from four weeks to 12 months of
salary, depending on a number of factors including the individual's years of
service with Exult.
Pursuant and subject to the terms and conditions of our stock option plans,
we have granted and will grant to our named executive officers stock options
that will vest over time. We also provide our named executive officers with
health and related benefits that are generally made available to our other
executives. All named executive officers are at will employees and each of their
employment agreements can be terminated at any time by either party.
EXECUTIVE COMPENSATION
The following table summarizes the compensation earned by and paid to our
Chief Executive Officer and our four most highly compensated executive officers
other than the CEO for the year ended December 31, 1999. We provide our officers
with non-cash group life and health benefits generally available to all salaried
employees. These benefits are not included in the table below due to applicable
Securities and Exchange Commission rules. No named executive officer received
personal benefits or
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perquisites that exceeded the lesser of $50,000 or 10% of the officer's total
annual salary and bonus for 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------
AWARDS
ANNUAL COMPENSATION ----------------
------------------------------------ SHARES OF COMMON
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION(1) OPTIONS(#) COMPENSATION
-------- ------- --------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
James C. Madden.................... $504,808 $22,893 $17,206 885,600 $11,161(2)
Chief Executive Officer,
President and Chairman of the
Board
Stephen M. Unterberger............. 323,918 22,989 19,916 2,578,325 16,221(3)
Executive Vice President
Barbara A. Coull-Williams.......... 135,739 39,540 88,956 124,000 97,052(4)
Vice President, HR Business
Processes
Scott J. Figge..................... 156,385 63,502 5,771 794,585 --
Vice President, Business
Development
Rebecca L. Work.................... 132,985 30,133 6,253 147,510 3,262
Chief Information Officer
</TABLE>
-------------------------
(1) Represents amounts reimbursed for the payment of taxes.
(2) Includes life insurance premiums paid by Exult for the named executive
officer.
(3) Includes $9,167 for life insurance premiums paid by Exult and $7,054 for
relocation expenses.
(4) Includes $97,052 for relocation expenses.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information regarding stock options granted to
the named executive officers during 1999. We have not granted any stock
appreciation rights. Each option listed in the table below was granted under the
1999 plan.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS MARKET ASSUMED ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE PRICE ON PRICE APPRECIATION FOR OPTION TERM
OPTIONS EMPLOYEES PRICE PER GRANT EXPIRATION -----------------------------------
NAME GRANTED IN 1999 SHARE DATE DATE 0% 5% 10%
---- ---------- ---------- --------- -------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James C. Madden......... 318,450 3.1% $1.73 $1.73 12/07/04 $ -- $346,470 $ 878,022
567,150 5.6 1.57 1.57 12/07/09 -- 559,984 1,419,109
Stephen M.
Unterberger........... 2,343,930 23.1 0.11 0.11 05/25/09 -- 162,149 410,918
234,395 2.3 1.57 1.57 12/07/09 -- 231,433 586,497
Barbara A.
Coull-Williams........ 117,195 1.2 0.33 0.65 06/09/09 37,502 85,410 158,909
6,805 0.1 0.65 0.65 09/22/09 -- 2,782 7,050
Scott J. Figge.......... 585,985 5.8 0.33 0.65 06/09/09 187,515 427,055 794,556
208,600 2.1 1.57 1.57 12/07/09 -- 205,964 521,954
Rebecca L. Work......... 140,635 1.4 0.33 0.65 06/09/09 45,003 102,492 190,692
6,875 0.1 0.65 0.65 09/22/09 -- 2,810 7,122
</TABLE>
Potential realizable values are net of exercise price, but before the
payment of taxes associated with exercise and represent hypothetical gains that
could be achieved for the respective options if exercised at the end of the
option term. The 0%, 5% and 10% assumed annual rates of compounded stock price
appreciation from the fair market value on the date of grant are mandated by
rules of the Securities and Exchange Commission and do not represent our
estimate or projection of our future common stock prices. Actual gains, if any,
on stock option exercises are dependent on the future performance of our common
stock and overall stock market conditions.
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<PAGE> 53
YEAR-END OPTION HOLDINGS
The following table provides aggregated stock option information for the
named executive officers for the year ended December 31, 1999. There was no
public trading market for our common stock as of December 31, 1999. Accordingly,
we have calculated these values on the basis of the assumed initial public
offering price of $11 per share, less the applicable exercise price per share,
multiplied by the number of shares underlying the options. No officers exercised
any options during 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR END OPTION HOLDINGS
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS(#) IN-THE-MONEY OPTIONS
-------------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
James C. Madden................... 630,840 254,760 $ 7,841,341 $ 3,166,667
Stephen M. Unterberger............ 1,013,280 1,565,045 13,946,921 21,523,797
Barbara A. Coull-Williams......... 124,000 -- 1,692,902 --
Scott J. Figge.................... 353,185 441,400 4,770,453 5,832,860
Rebecca L. Work................... 147,510 -- 2,014,262 --
</TABLE>
Except to the extent exercisability is limited by the tax requirements
pertaining to incentive stock options, all of the options in the foregoing table
are immediately exercisable, but are subject to our right to repurchase the
shares at their exercise price if the named executive officer ceases to be
employed by us. This repurchase right lapses with respect to 25% of the shares
on the first anniversary of the date of grant and with respect to the remaining
75% of the shares in equal monthly installments over the following 36 months.
The option shares included in the "unexercisable" columns above option shares
are subject to this repurchase right.
STOCK OPTION/EQUITY INCENTIVE PLANS
1999 PLANS
In May 1999, we adopted our basic 1999 Stock Option/Stock Issuance Plan for
awards to directors, officers, employees and consultants. In November 1999 we
adopted our 1999 Special Executive Stock Option Plan for grants of stock options
to officers and other highly compensated employees. As of May 30, 2000, options
to purchase an aggregate of 9,597,165 shares were outstanding and 762,615 shares
were available for future option grants under the basic 1999 plan, and options
to purchase an aggregate of 3,065,995 shares were outstanding and no further
shares were available for option grants under the special 1999 plan. Beginning
with the effective date of this offering, we will grant stock options under the
2000 Equity Incentive Plan described below, and the available share reserve
under the basic 1999 plan will be transferred to the 2000 plan. To the extent we
cancel, terminate or repurchase any unvested shares of common stock issued under
either 1999 plan, these shares will become available for future issuance under
the 2000 plan.
Options issued under the 1999 plans are either incentive stock options
within the meaning of Section 422 of the Internal Revenue Code, which permits
the deferral of taxable income related to the exercise of these options, or
nonqualified options which are not entitled to this deferral. All options under
the 1999 plans were granted with an exercise price equal to the fair market
value of the common stock on the grant date, and have a term of ten years from
the grant date, except that incentive stock options granted to a holder of more
than 10% of our stock have an exercise price of 110% of the fair market value on
the grant date, and a term of five years from the grant date.
Options outstanding under the 1999 plans generally vest with respect to 25%
of the underlying shares on the first anniversary of the date of grant. Options
issued to officers, directors and some key employees vest with respect to the
balance of the underlying shares in 36 equal monthly installments following the
first anniversary of the date of grant. Other options vest with respect to the
balance of the underlying
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<PAGE> 54
shares in three equal annual installments on the second, third and fourth
anniversaries of the date of grant, respectively.
Options issued under the 1999 plans generally may be exercised before
vesting, but unvested shares may be repurchased by us, at the option exercise
price paid per share, in the event of the termination of the optionee's services
with us before vesting in those shares.
2000 EQUITY INCENTIVE PLAN
The 2000 Equity Incentive Plan is the successor program to our 1999 Stock
Option/Stock Issuance Plan and our 1999 Special Executive Stock Option Plan. Our
2000 Equity Incentive Plan has been approved by our board of directors and
stockholders and is effective May 31, 2000. All outstanding options under our
1999 Stock Option/Stock Issuance Plan and 1999 Special Executive Stock Option
Plan will be transferred to the 2000 Equity Incentive Plan for the purposes of
determining option shares subject to outstanding options and shares available
for additional option grants. Except as otherwise noted, the transferred options
have substantially the same terms as described below for discretionary options
granted under our 2000 plan.
Under the 2000 plan, 20,000,000 shares of our common stock have been
authorized for issuance. This share reserve consists of approximately 12.7
million shares subject to outstanding awards granted under the 1999 plans and
transferred to the 2000 plan, approximately 750,000 shares authorized for
issuance under the 1999 Stock Option/Stock Issuance Plan but not issued or
subject to outstanding awards, and approximately 6.5 million additional shares.
The share reserve under our 2000 plan will automatically increase on the first
trading day in January of each year, beginning with calendar year 2001, by an
amount equal to 5% of the total number of shares of our common stock outstanding
on the last trading day in December in the prior year, but in no event will any
such annual increase exceed 6,000,000 shares. In addition, no participant in our
2000 plan may be granted stock options, separately exercisable stock
appreciation rights and direct stock issuances for more than 1,000,000 shares of
common stock per calendar year.
Our 2000 plan permits various types of equity-based awards, including:
- discretionary stock options granted to eligible individuals to purchase
shares of our common stock;
- stock issued to eligible individuals either through the purchase of such
shares, or as compensation tied to the attainment of performance
milestones or the completion of a specified period of service;
- stock options automatically granted to non-employee directors at
specified times at an exercise price equal to the fair market value of
those shares on the grant date;
- optional exchange by non-employee board members of any cash retainer fees
that Exult may pay to directors in the future for common stock at fair
market value on the date the fee would have been paid; and
- stock appreciation rights or phantom stock payments giving recipients the
right to receive cash payments measured by increases in the value of our
common stock.
The individuals eligible to participate in our 2000 plan include our
officers and other employees, our board members and any consultants we hire.
The 2000 plan is administered by our board of directors or its compensation
committee, which we refer to as the plan administrator. This plan administrator
determines which eligible individuals receive option grants or other awards, the
time or times when the awards are to be made, the number of shares subject to
each award, the exercise price or other amount payable in connection with the
award, the status of any granted option as either an incentive stock option or a
non-statutory stock option under the federal tax laws, the vesting schedule to
be in effect for the award and the maximum term for which any award is to remain
outstanding. However, the plan administrator does not exercise discretion with
respect to the terms of non-employee directors' automatic option grants, which
are fixed by the 2000 plan. Furthermore,
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<PAGE> 55
discretion over awards made under the 2000 plan to persons who are subject to
Section 16 of the Securities Exchange Act of 1934 is exercised by a special
option committee consisting of two or more non-employee directors who meet the
criteria set forth in the SEC's rules under Section 16.
The exercise price for any options and the issue price for shares granted
pursuant to the plan may be paid in cash or in vested shares of our common stock
held long enough to avoid a charge to our earnings for financial reporting
purposes and valued at fair market value on the exercise date. Options may also
be exercised through a same-day sale program through which proceeds from sale of
underlying shares are applied to pay the exercise price. In addition, the plan
administrator may allow participants to borrow the exercise price for options or
issue price for shares and to satisfy any associated withholding taxes by
borrowing from Exult or delivering vested shares of common stock. The plan
administrator may also permit options to be exercised on a net-issuance basis
through which we retain enough of the shares issuable upon exercise, valued at
fair market value on the date of exercise, to cover the aggregate exercise price
and any associated withholding taxes.
The plan administrator will have the authority to cancel outstanding
options (other than non-employee directors' automatic options), in return for
the grant of new options for the same or a different number of option shares
with an exercise price per share based upon the fair market value of our common
stock on the new grant date.
Any stock appreciation rights issued in connection with stock options
granted under the 2000 plan will provide the holders with the election to
surrender their outstanding options for a payment from us equal to the fair
market value of the shares subject to the surrendered options less the exercise
price payable for those shares. Stock appreciation rights not tied to option
grants may be granted under the 2000 plan. Upon exercise, the recipient will
receive a distribution equal to the appreciation of the fair market price over
the base price. We may make the payment for any stock appreciation rights in
cash or in shares of our common stock. Outstanding options under the 1999 plans
do not have any stock appreciation rights.
If we are acquired or sell substantially all of our assets, each
outstanding option and other award under the 2000 plan, as well as the options
transferred from the 1999 plans (but not including non-employee directors'
automatic options, which will be handled as described below) will automatically
accelerate, and all unvested shares will immediately become vested and
exercisable unless the successor corporation assumes the options or replaces
them with a comparable option or cash incentive program. Also, any outstanding
repurchase rights will automatically terminate and these shares will become
fully vested, except to the extent our repurchase rights with respect to those
shares are assigned to the successor corporation or otherwise prohibited at the
time the option was granted or the repurchase right was created. Vesting under
options issued to some officers and key employees, and related repurchase rights
for options exercised before vesting, will automatically accelerate in the event
of the termination of the optionee's services or material diminution in terms of
employment within a designated period, not to exceed 18 months, following a
transaction in which those options are assumed or continued in effect.
The plan administrator may accelerate or extend awards, including
structuring options and repurchase rights to vest in their entirety if we are
acquired in a merger or asset sale, or if more than 30% of our outstanding
shares are acquired in a tender offer, or if there is a change in the majority
of our board through one or more contested elections for board membership. The
plan administrator may also structure outstanding or newly granted options to
vest in their entirety if we are acquired and the optionee's service with us or
the acquiring entity is terminated after the acquisition. The vesting of any
other awards may be accelerated upon similar terms and conditions.
Under the non-employee directors' automatic option grant program, each
individual who first becomes a non-employee board member at any time after the
effective date of this offering will receive an option to purchase up to grant
25,000 shares of common stock on the date such individual joins the board. In
addition, on the date of each annual stockholders meeting each non-employee
board member who is to continue to serve as a non-employee board member will
automatically receive an option to purchase up to 10,000 shares of common stock.
Each automatic grant will have an exercise price per share equal to the fair
market value per share of our common stock on the grant date and will have a
term of ten years,
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<PAGE> 56
subject to earlier termination following the optionee's cessation of board
service. The option will be immediately exercisable for all of the option
shares; however, we may repurchase, at the exercise price paid per share, any
shares purchased under the option which are not vested at the time of the
optionee's cessation of board service. The shares subject to each automatic
grant and initial grant will vest with respect to 25% of the underlying shares
on the first anniversary of the grant date, and with respect to the balance of
the underlying shares in 36 equal monthly installments thereafter. The shares
subject to each outstanding non-employee directors' automatic option will
immediately vest in full if we are acquired in a merger or asset sale, or if
other specified changes in control or ownership occur, and in connection with
those events the recipient ceases to be a director for any reason other than
voluntary resignation from the board, which will continue in place following
such transaction. Under such circumstances the recipient may surrender his
non-employee director's options and receive a cash payment equal to the
difference between fair market value and the exercise price for each vested
option share.
If we begin paying retainer fees to directors and the plan administrator
activates the director fee program, each non-employee board member may elect to
exchange any cash retainer fee for that number of shares of common stock
determined by dividing the amount of the fee exchanged by the fair market value
per share of our common stock on the date the fee is otherwise payable.
The board may amend or modify the 2000 plan and any provisions of the 1999
plans at any time, subject to any required stockholder approval. The 2000 plan
will terminate on May 31, 2010.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our board of directors and stockholders have approved our 2000 Employee
Stock Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code. This plan is administered through a series of successive
quarterly purchase periods beginning July 1, 2000. US employees who are
scheduled to work more than 20 hours per week or more than five calendar months
per year may elect to participate by contributing to the plan a portion, not in
excess of 10%, of their after-tax pay for each pay period during the quarter. We
will retain their accumulated contributions until the end of each quarter and
then apply them to the purchase of shares of our common stock. The purchase
price will be the lesser of the fair market value of the common stock on the
first day of the quarter or the fair market value of the common stock on the
last day of the quarter, minus a 15% discount. Participants may not transfer
shares purchased under the plan for at least 180 days after the purchase date.
Each participant's quarterly purchases are capped at $6,250 worth of stock. The
plan will continue to be in effect for a term of 20 years. The plan
administrator may at any time terminate or amend the plan, except as
specifically prohibited by law.
If we are acquired by merger or asset sale, all outstanding purchase rights
will automatically be exercised immediately prior to the effective date of the
acquisition. The purchase price will be the lesser of the fair market value per
share of common stock on the first day of the quarter in which such acquisition
occurs or the fair market value per share of common stock immediately prior to
such acquisition, minus a 15% discount.
We also plan to implement stock purchase plans for our employees who live
in other countries. The terms of these additional plans will be as close as
practicable to the US plan, subject to compliance with local legal requirements.
The total number of shares available for purchase under the US plan and any
other stock purchase plans we may implement for our employees who reside in
other countries will be 2,000,000.
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LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation provides that our directors will not be
personally liable to us or our stockholders for monetary damages for any breach
of fiduciary duty as directors, provided that this provision does not eliminate
the liability of the directors for the following:
- breach of the director's duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct, or a knowing violation of law;
- payment of dividends or approval of stock repurchases or redemptions that
are prohibited by Delaware law; and
- any transaction from which the director derived an improper personal
benefit.
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors, officers, employees and agents against expenses
incurred in connection with legal actions arising from their service to the
corporation if they acted in good faith and in a manner they reasonably believed
to be in or not opposed to the best interest of the corporation and, with
respect to any criminal action or proceeding had no reasonable cause to believe
their conduct was unlawful. Our bylaws require us to indemnify our directors and
officers to the greatest extent permitted under Delaware law, and we have
entered into indemnification agreements with our directors and our executive
officers to the same effect. We also maintain directors' and officers' liability
insurance.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted, and we are not aware of any threatened litigation or
proceeding which may result in a claim for indemnification.
The Securities and Exchange Commission is of the opinion that
indemnification of directors, officers and persons controlling Exult for
violations of the Securities Act is against public policy as expressed in the
Securities Act and is therefore unenforceable.
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<PAGE> 58
CERTAIN TRANSACTIONS
Since our formation in October 1998, there has not been, nor is there any
proposed, transaction in which we were or will be a party in which the amount
involved exceeded or will exceed $60,000 and in which any director, nominee for
election as a director, executive officer, holder of more than 5% of any class
of our voting securities, or any member of the immediate family or any of the
foregoing persons had or will have a direct or indirect material interest, other
than the compensation agreements and other agreements and transactions which are
described in "Management" and the transactions described below.
GENERAL ATLANTIC PARTNERS
In November 1998, we sold an aggregate of 25,000 shares of our Series A
preferred stock at a purchase price of $40.00 per share to investors affiliated
with General Atlantic Partners. In April 1999, we sold an aggregate of 1,660,517
shares of our Series B preferred stock at a purchase price of $5.42 per share to
investors affiliated with General Atlantic Partners. Between October 1999 and
December 1999, we sold an aggregate of 4,377,432 shares of our Series C
preferred stock at a purchase price of $10.28 per share to investors affiliated
with General Atlantic Partners. In November 1998, we sold 9,000 shares of our
common stock for an aggregate price of $1.00 to GAP Coinvestment Partners, LP.
Steven A. Denning, a director of Exult, is the Executive Managing Member of
General Atlantic Partners, LLC. Mark Dzialga, a director of Exult, is a member
in General Atlantic Partners, LLC. The entities affiliated with General Atlantic
Partners consist of GAP Coinvestment Partners, L.P., General Atlantic Partners
54, L.P., General Atlantic Partners 57, L.P., GAP Coinvestment Partners II, L.P.
and General Atlantic Partners 60, L.P. Upon conversion of the convertible
preferred stock at the closing of this offering, General Atlantic Partners and
its affiliates will hold an aggregate of 52,698,745 shares of our common stock.
FOUNDER'S STOCK
In April 1999, we sold 8,856,000 shares of our common stock for an
aggregate purchase price of $39,361 to James Madden, our Chief Executive
Officer, President and Chairman of the Board. At the time of the sale, 922,500
of the shares were vested and the remaining 7,933,500 were unvested. The
unvested shares vest at the rate of 184,500 shares per month as long as Mr.
Madden remains employed by Exult. If Mr. Madden resigns his employment
voluntarily or if we terminate his employment with cause, we have the right to
repurchase any or all of the shares that have not vested at that time at a price
of $.004 per share. If we terminate Mr. Madden's employment without cause, we
have the right to repurchase up to half of the shares that have not vested at
that time. General Atlantic Partners, LLC will have a right to purchase any
unvested shares that we have a right to purchase but do not purchase upon
termination of Mr. Madden's employment. As of March 31, 2000, 5,904,000 of Mr.
Madden's shares remained unvested. All of the shares will have vested as of
December 1, 2002 if Mr. Madden remains employed with us until that time.
BP INTERNATIONAL LIMITED
We have entered into agreements to provide human resources management
services to BP International Limited and two of its affiliates. We estimate the
total amount payable to us for the expected duration of these agreements will be
approximately $600 million, although the actual amount will vary based upon a
number of factors, including failure to extend our services as broadly through
the client's organization as we expect, and our client's right to terminate the
agreements for convenience beginning in 2002, or at any time for our material
breach of significant and repeated performance failures. The actual amount we
receive under these agreements may be significantly less than we expect. The
agreements are described in "Business -- Major Clients -- BP Amoco."
In December 1999, we granted BP International Limited warrants to purchase
up to 3,339,220 shares of our common stock at an exercise price of $1.57 per
share, and warrants to purchase up to 667,844 shares of our Series C preferred
stock, convertible into an aggregate of 3,339,220 shares of our common stock, at
an initial exercise price of $10.28 per share, increasing daily at an annual
rate of 12%,
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<PAGE> 59
compounded daily, following the date of issuance of the warrant. BP Amoco
exercised these warrants effective in April 2000 for an aggregate exercise price
of $12,435,255 and we issued the shares of Series C preferred stock and common
stock underlying these warrants in May 2000. In February 2000, we sold 385,805
shares of our Series C preferred stock at a price of $10.28 per share to BP
International Limited pursuant to pre-emptive rights granted to BP
International, and these shares will convert into 1,929,025 shares of common
stock upon completion of this offering.
ACQUISITION OF GUNN PARTNERS, INC.
In November 1999, we acquired certain assets from Gunn Partners, Inc. for
an aggregate amount to be paid of $15.0 million in cash, payable in three
installments of $5.0 million. The first installment was paid at the closing
date. The final two installments, which remained outstanding at March 1, 2000,
are payable in November 2000 and 2001. Robert Gunn, our current Vice President,
Executive Client Lead, is a shareholder of Gunn Partners, and will receive
approximately $4.0 million of the total proceeds from this acquisition.
EXECUTIVE LOAN
Kevin M. Campbell commenced employment as our Operations President on May
30, 2000. In connection with his employment, we have agreed to loan him a
maximum of approximately $1,167,000. Mr. Campbell has borrowed $268,000 as of
the date of this prospectus, and is entitled to borrow approximately $167,000
upon sale of his previous residence. The remaining $732,000 becomes available in
17 consecutive monthly installments through November 1, 2001. Mr. Campbell may
draw available amounts from time to time as long as he remains employed.
Outstanding draws bear interest at the applicable federal rate, but payment of
interest is deferred pending forgiveness or repayment of the loan principal. Mr.
Campbell's obligation to repay the loan principal, and interest accrued thereon,
will be forgiven in four increments, each equal to approximately one-fourth of
the maximum potential loan amount, as of January 1, 2002, January 1, 2003,
January 1, 2004 and January 1, 2005, if Mr. Campbell remains employed at that
time. If we terminate Mr. Campbell's employment without cause, all amounts
borrowed by Mr. Campbell, and accrued interest thereon, will be forgiven. In the
event Mr. Campbell's employment is terminated for any other reason, all amounts
borrowed and not yet forgiven will become payable upon our demand.
OTHER RELATED PARTY TRANSACTIONS
We have entered into an indemnification agreement with each of our
executive officers and directors containing provisions that require us, among
other things, to indemnify them against certain liabilities that may arise by
reason of their status or service as officers or directors, and to advance
expenses incurred as a result of any proceeding against them as to which they
could be indemnified, if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of Exult and
its stockholders. See "Management -- Limitation of Liability and
Indemnification."
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been otherwise obtained from
unaffiliated third parties. All future transactions, including loans, if any,
between us and our officers, directors and principle stockholders and their
affiliates and any transactions between us and any entity with which our
officers, directors or principal stockholders are affiliated will be approved by
a majority of the board of directors, including a majority of the independent
and disinterested directors.
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<PAGE> 60
PRINCIPAL STOCKHOLDERS
The following table indicates information as of May 5, 2000 regarding the
ownership of our common stock by:
- each person who is known by us to beneficially own more than 850,000
shares of our common stock;
- each named executive officer;
- each of our directors; and
- all of our directors and executive officers as a group.
The number of shares of common stock beneficially owned and the percentage
of shares beneficially owned are based on 78,529,981 shares of common stock
deemed outstanding as of May 5, 2000, giving effect to the conversion of all of
our preferred stock into common stock upon consummation of this offering, and
84,529,981 shares of common stock outstanding upon consummation of this
offering. Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. Shares subject to options
that are exercisable currently or within 60 days following May 5, 2000 are
deemed to be outstanding and beneficially owned by the optionee for the purpose
of computing share and percentage ownership of that optionee, but are not deemed
to be outstanding for the purpose of computing the percentage ownership of any
other person. Except as indicated in the footnotes to this table, and as
affected by applicable community property laws, all persons listed have sole and
voting investment power for all shares shown as beneficially owned by them.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES
NUMBER OF BENEFICIALLY OWNED
SHARES --------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) OWNED OFFERING OFFERING
---------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Steven A. Denning(2)....................................... 52,708,745 67.1% 62.4%
Mark Dzialga(2)............................................ 52,708,745 67.1 62.4
General Atlantic Partners and its affiliates(2)............ 52,698,745 67.1 62.4
James C. Madden, V(3)...................................... 9,562,988 12.1 11.2
BP International Limited................................... 8,607,465 10.1 9.4
DB Capital Investors, L.P.(4).............................. 2,295,160 2.9 2.7
Goldman, Sachs & Co. and its affiliates(5)................. 2,295,160 2.9 2.7
Stephen M. Unterberger(6).................................. 1,950,001 2.4 2.3
Mellon Ventures II, L.P.(7)................................ 1,147,580 1.5 1.4
Henry L. Hillman, Elsie Hilliard Hillman and C.G.
Grefenstette, Trustees of the Henry L. Hillman Trust
U/A/T dated November 18, 1985(8)......................... 918,064 1.2 1.1
52nd Street Associates(9).................................. 874,240 1.1 1.0
Scott J. Figge(6).......................................... 647,343 * *
John R. Oltman(10)......................................... 200,150 * *
Thomas J. Neff(11)......................................... 175,000 * *
Rebecca L. Work(6)......................................... 157,905 * *
Barbara A. Coull-Williams(6)............................... 124,000 * *
A. Michael Spence(12)...................................... 127,195 * *
Michael A. Miles(12)....................................... 127,195 * *
J. Michael Cline(6)........................................ 10,000 * *
All officers and directors as a group (18 persons)(13)..... 67,862,065 80.6% 75.2%
</TABLE>
-------------------------
* Less than one percent
(1) The address for each of the officers and directors is 4 Park Plaza, Suite
1000, Irvine, California. The address for General Atlantic Partners and its
affiliates is 3 Pickwick Plaza, Greenwich, Connecticut
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<PAGE> 61
06830. The address for BP International Limited is Britannic House, One Finsbury
Circus, London England EC2M 7BA. The address for the Henry Hillman Trust is 2000
Grant Building, Pittsburgh, Pennsylvania 15219.
(2) Includes 52,698,745 shares held by the following General Atlantic
partnerships: 4,191,300 shares held by GAP Coinvestment Partners, L.P.;
25,186,335 shares held by General Atlantic Partners 54, L.P.; 6,025,715
shares held by General Atlantic Partners 57, L.P.; 5,606,030 shares held by
GAP Coinvestment Partners II, L.P. and 11,689,365 shares held by General
Atlantic Partners 60, L.P. Also includes for each of Messrs. Dzialga and
Denning, options to purchase 10,000 shares of common stock which are
exercisable within 60 days of May 5, 2000. Each of Messrs. Denning and
Dzialga are directors of Exult. Mr. Denning is the Executive Managing
Member of General Atlantic Partners, LLC and the managing general partner
of certain of the other foregoing General Atlantic partnerships. Mr.
Dzialga is a managing member of General Atlantic Partners, LLC and is a
general partner of certain of the foregoing General Atlantic partnerships.
Each of Messrs. Dzialga and Denning disclaim beneficial ownership of the
shares held by the General Atlantic partnerships, except to the extent of
their primary interest therein. Does not include options to purchase up to
25,000 shares of common stock being granted to each of Messrs. Denning and
Dzialga in connection with this offering.
(3) Includes 706,988 shares issuable upon exercise of options that are
exercisable within 60 days of May 5, 2000.
(4) These shares are beneficially owned by Deutsche Bank AG, the parent
corporation of DB Capital Partners, Inc., which is the general partner of
DB Capital Investors, L.P.
(5) Includes 1,650,474 shares held by GS Capital Partners III, L.P.; 453,735
shares held by GS Capital Partners III Offshore, L.P.; 76,194 shares held
by Goldman, Sachs & Co. Verwaltungs GmbH; and 114,757 shares held by Stone
Street Fund 2000, L.L.C.
(6) Consists solely of shares issuable upon exercise of options that are
exercisable within 60 days of May 5, 2000. Does not include options to
purchase up to 50,000 shares of common stock being granted to Mr. Cline in
connection with this offering. Also does not include up to 50,000 shares
that Accretive Technology Partners may purchase in this offering. Mr. Cline
is the Managing Partner of Accretive Technology Partners.
(7) These shares are beneficially owned by MVMA, Inc., a Delaware corporation,
the general partner of MVMA II, L.P., a Delaware limited partnership, which
is the general partner of Mellon Ventures II, L.P.
(8) Includes 344,275 shares held of record by Wilmington Securities, Inc.
("WSI"). WSI is a private investment company and is an indirect,
wholly-owned subsidiary of The Hillman Company ("THC"), a firm engaged in
diversified investments and operations, which is controlled by a trust for
the benefit of Henry L. Hillman (the "HLH Trust"). The trustees of the HLH
Trust are Henry L. Hillman, Elsie Hillard Hillman and C. G. Grefenstette
(the "HLH Trustees"). The HLH Trustees share voting and investment power
with respect to the shares held of record by WSI and may be deemed to be
the beneficial owners of such shares. Also includes 573,789 shares held of
record by the HLH Trust. Does not include an aggregate of 229,516 shares
owned by four irrevocable trusts for the benefit of members of the Hillman
family (the "Family Trusts"), as to which shares the HLH Trustees (other
than Mr. Grefenstette) disclaim beneficial ownership. C. G. Grefenstette
and Thomas G. Bigley are trustees of the Family Trusts and share voting and
investment power over the assets of the Family Trusts.
(9) These shares are beneficially owned by McKinsey & Company, Inc., the parent
corporation of 52nd Street Associates.
(10) Includes (a) 190,150 shares held by JRO Consulting, Inc., which is
affiliated with Mr. Oltman and (b) 10,000 shares issuable upon exercise of
options held by JRO Consulting, Inc. that are exercisable within 60 days of
May 5, 2000. Does not include up to 10,000 shares that Mr. Oltman or his
designees may purchase at the initial public offering price in the reserved
share program or options to purchase up to 25,000 shares of common stock
being granted to Mr. Oltman in connection with this offering.
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<PAGE> 62
(11) Consists solely of shares issuable upon exercise of options that are
exercisable within 60 days of May 5, 2000. Does not include up to 10,000
shares that Mr. Neff or his designees may purchase at the initial public
offering price in the reserved share program or options to purchase up to
25,000 shares being granted to Mr. Neff in connection with this offering.
(12) Includes 10,000 shares issuable upon exercise of options that are
exercisable within 60 days of May 5, 2000. Does not include up to 10,000
shares that each of Mr. Spence and Mr. Miles, or their designees, may
purchase at the initial public offering price in the reserved share program
or options to purchase up to 10,000 shares of common stock being granted to
each of Messrs. Spence and Miles.
(13) Includes 4,919,748 shares issuable upon exercise of options that are
exercisable within 60 days of May 5, 2000. Does not include up to an
aggregate of 40,000 shares that Messrs. Oltman, Neff, Spence and Miles may
purchase at the initial public offering price in the reserved share program
or the 50,000 shares that Accretive Technology Partners may purchase in
this offering. Also excludes options to purchase up to 5,200 shares being
granted to each of our officers in connection with this offering, and
excludes options to be granted to each of our directors to purchase an
aggregate of 10,000 shares in connection with this offering (other than Mr.
Cline who will receive an option to purchase 50,000 shares of common stock
in connection with this offering).
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<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
The following description of our securities and provisions of our
certificate of incorporation and bylaws is only a summary. You should also refer
to the copies of our certificate and bylaws which have been filed with the
Securities and Exchange Commission as exhibits to our registration statement, of
which this prospectus forms a part.
Our authorized capital stock consists of 500,000,000 shares of common
stock, par value $0.0001, and 15,000,000 shares of preferred stock, par value
$0.0001.
COMMON STOCK
At March 31, 2000, and giving effect to the conversion of all outstanding
shares of our preferred stock into common stock in connection with this
offering, 78,529,981 shares of common stock were outstanding and held of record
by approximately 25 holders. Holders of our common stock are entitled to one
vote per share for each share held of record on all matters submitted to a vote
of common stockholders. Holders of common stock do not have cumulative voting
rights. Our board of directors is divided into three classes of directors
serving staggered three-year terms, with approximately one-third of the
directors elected each year. Holders of shares representing a majority of the
voting power of common stock can elect all of the directors eligible for
election at any meeting of stockholders. The holders of the remaining shares
will not be able to elect any directors. The shares of common stock offered by
this prospectus, when issued, will be fully paid and non-assessable and will not
be subject to any redemption or sinking fund provisions. Holders of common stock
do not have any preemptive, subscription or conversion rights.
Holders of our common stock are entitled to receive dividends declared by
the board of directors out of legally available funds, subject to the rights of
preferred stockholders. Since our inception, we have not declared or paid any
cash dividends on our common stock. We presently intend to retain future
earnings, if any, for use in the operation and expansion of our business. We do
not anticipate paying cash dividends in the foreseeable future. See "Dividend
Policy." In the event of our liquidation, dissolution or winding up, common
stockholders are entitled to share ratably in all assets legally available for
distribution after payment of all debts and other liabilities, and subject to
the prior rights of any holders of outstanding shares of preferred stock.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of our
convertible preferred stock will convert into an aggregate of 65,484,786 shares
of our common stock. Thereafter, the board of directors is authorized to issue
from time to time, without further vote or action by the stockholders, up to an
aggregate of 15,000,000 shares of preferred stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each of these series, including the
dividend rights, dividend rates, conversion rights, voting rights, term of
redemption, including sinking fund provisions, redemption price or prices,
liquidation preferences and the number of shares constituting any series or
designations of a series. We currently have no present plans to issue any shares
of preferred stock, but we believe that the ability to issue preferred stock
without the expense and delay of a special stockholders' meeting will provide us
with increased flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs that might arise. The board
of directors could issue preferred stock having voting dividend and liquidation
rights superior to those of the common stock, which could adversely affect the
voting power of the holders of common stock, including the loss of voting
control to others, and delay, defer or prevent a change in control of Exult
without further action by the stockholders. This could discourage an acquisition
attempt or other transaction which stockholders might believe to be in their
best interests or in which they might receive a premium for their stock over the
then market price of the stock.
ANTI-TAKEOVER PROVISIONS
The provisions of our certificate of incorporation, bylaws and Delaware law
described below may make it more difficult for third parties to acquire control
of Exult, deprive stockholders of the opportunity to
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<PAGE> 64
realize a premium on the shares of common stock owned by them, and adversely
affect the prevailing market price of our stock. Nevertheless, we believe these
provisions are beneficial because they may:
- encourage persons seeking to acquire control of Exult to consult first
with the board of directors to negotiate the terms of any proposed
business combination or offer, and enhance the ability of the board of
directors to negotiate appropriate terms on behalf of stockholders;
- reduce our vulnerability to an unsolicited proposal for a takeover that
does not contemplate the acquisition of all of our outstanding shares or
that is otherwise unfair to our stockholders; and
- discourage unfair tactics that may be used in proxy fights.
DELAWARE ANTI-TAKEOVER LAW. We are subject to Section 203 of the Delaware
General Corporation Law. Subject to exceptions, Section 203 prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years from the date of
the transaction in which the person became an interested stockholder, unless the
interested stockholder attained this status with the approval of the Board of
Directors or unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock. This statute could prohibit or delay the
accomplishment of mergers or other takeover or change in control in attempts
with respect to us and, accordingly, may discourage attempts to acquire us.
BOARD CLASSIFICATION. Under our bylaws, our board of directors is divided
into three classes of directors serving staggered three-year terms, with
approximately one-third of the directors elected each year. This prevents
majority stockholders or persons holding proxies to vote a majority of our
shares from changing control of our board of directors in fewer than two annual
stockholder meetings.
FILLING BOARD VACANCIES AND REMOVAL OF DIRECTORS. Subject to the rights of
the holders of any outstanding series of preferred stock, our bylaws permit
directors but not stockholders to fill board vacancies, including newly created
directorships. Under our bylaws and Delaware law, while the board is classified
directors may be removed by stockholders only for cause. Furthermore, our
certificate of incorporation requires the affirmative vote of holders of
two-thirds of the outstanding shares of voting stock to remove a director. These
provisions could prevent a stockholder from obtaining majority representation on
the board by enlarging the board of directors and filling the new directorships
with its own nominees, and from influencing a change-in-control of Exult through
board representation.
STOCKHOLDER MEETINGS AND VOTING. Our certificate of incorporation prohibits
stockholder action by written consent without a meeting. Our bylaws provide that
only the board of directors, the Chairman of the Board, the Chief Executive
Officer, or the Secretary acting on request of the Chairman or Chief Executive
Officer may call special meetings of stockholders. Stockholders may not call
special meetings. At regular meetings of stockholders, stockholders may make
proposals and nominate directors only if they have complied with the advance
notice requirements set forth in our bylaws. These provisions could make it more
difficult for stockholders to change the existing board and management or to
initiate other actions that are opposed by the board of directors, such as
elimination of defensive strategies that have been adopted by the board of
directors to address unsolicited takeover bids.
SUPERMAJORITY VOTE REQUIREMENT. The board may amend our bylaws, but
stockholders may not change the provisions of our certificate of incorporation
and bylaws described above without a two-thirds vote. These voting requirements
give the board substantial flexibility, but make it more difficult for
stockholders to control or influence Exult by amending the certificate of
incorporation or bylaws and may enable minority stockholders to prevent such
amendments. Following the completion of this offering, our present directors and
executive officers and their respective affiliates will beneficially own more
than two-thirds of our common stock. As a result, these stockholders will have
veto power with respect to stockholder actions or approvals for the foreseeable
future.
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WARRANTS
In June 1999, we issued two warrants to a consultant to purchase 691,880
shares of our common stock at an exercise price of $1.084 per share and 182,390
shares of our common stock at an exercise price of $2.056 per share. These
warrants may be exercised at any time and expire on the earlier of December 31,
2009 and 365 days after the close of our initial public offering.
In September 1999, we issued warrants to two executive search firms to
purchase 46,155 shares of our common stock at an exercise price of $0.65 per
share and 47,770 shares of our common stock at an exercise price of $1.57 per
share. Twenty-five percent of the warrant shares vest quarterly from the
respective date of each warrant over a one year period. The holder of each
warrant may exercise the warrant shares that have vested at any time up to
September 22, 2009.
REGISTRATION RIGHTS
After this offering, holders of 77,047,690 shares of common stock will have
registration rights with respect to their shares. Subject to conditions, these
holders can require us to register all or part of their shares. In addition,
these holders may require us to include their shares in future registration
statements that we file. Upon sale pursuant to such registration, these shares
will be freely tradable in the public market without restriction.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is U.S. Stock
Transfer Corporation.
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<PAGE> 66
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 84,529,981 shares of common
stock outstanding assuming no exercise of options after March 31, 2000. Of this
amount, the 6,000,000 shares offered by this prospectus will be available for
immediate sale in the public market as of the date of this prospectus. Following
the expiration of 180-day lockup agreements with the representatives of the
underwriters or Exult, 43,944,640 additional shares will be available for sale
in the public market, subject in some cases to compliance with the volume and
other limitations of Rule 144.
<TABLE>
<CAPTION>
APPROXIMATE NUMBER
DAYS AFTER THE OF SHARES ELIGIBLE
DATE OF THIS PROSPECTUS FOR FUTURE SALE COMMENT
----------------------- ------------------ -------------------------------------
<S> <C> <C>
Upon effectiveness................... 6,000,000 Freely tradable shares sold in this
offering
180 days............................. 43,944,640 Lock-up released; shares saleable
under Rule 144, 144(k) or 701
Over 180 days........................ 30,157,340 Restricted securities held for less
than one year
</TABLE>
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of:
- 1% of the then outstanding shares of common stock; or
- the average weekly trading volume during the four calendar weeks
preceding the sale.
A person who is not deemed to have been an affiliate of ours at any time during
the 90 days immediately preceding the sale and who has beneficially owned his or
her shares for at least two years is entitled to sell his or her shares under
Rule 144(k) without regard to the volume limitations described above. Persons
deemed to be affiliates are always subject to the volume limitations, even after
the applicable holding periods have been satisfied.
We are unable to estimate the number of shares that will be sold under Rule
144 because this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Prior to the offering,
there has been no public market for the common stock, and there can be no
assurance that a significant public market for the common stock will develop or
be sustained after the offering. Any future sale of substantial amounts of the
common stock in the open market may adversely affect the market price of the
common stock offered by this prospectus.
Exult, its directors, executive officers, significant stockholders and a
purchaser of up to five percent of the shares in the offering have agreed that
they will not sell any common stock without the prior written consent of Merrill
Lynch for a period of 180 days from the date of this prospectus, except that we
may, without consent, grant options and sell shares under our stock plans and
issue shares in connection with acquisitions and strategic transactions.
Any employee or consultant who purchased his or her shares under a written
compensatory plan or contract is entitled to rely on the resale provisions of
Rule 701, which permits nonaffiliates to sell their Rule 701 shares without
having to comply with the public information, holding period, volume limitation
or notice provisions of Rule 144 and permits affiliates to sell their Rule 701
shares without having to comply with the Rule 144 holding period restrictions,
in each case commencing 90 days after the date of this prospectus. As of March
31, 2000, the holders of vested options to purchase approximately 659,424 shares
of common stock will be eligible to exercise their options and sell their shares
upon the expiration of the 180-day lockup period, subject to the vesting of
those options.
We intend to file registration statements on Form S-8 under the Securities
Act as soon as practicable to register all shares of common stock reserved for
issuance under our 1999 Stock Option/Stock Issuance Plan, our 1999 Special
Executive Stock Option Plan, our 2000 Employee Stock Purchase Plan and our 2000
Equity Incentive Plan. This registration will permit the resale of these shares
by nonaffiliates in the
65
<PAGE> 67
public market without restriction under the Securities Act, upon completion of
the lock-up period described above. Shares registered under the Form S-8
registration statement held by affiliates will be subject to Rule 144 volume
limitations. See "Management -- Executive Compensation" and "-- Stock
Option/Equity Incentive Plans."
In addition, holders of 77,047,690 shares of common stock have registration
rights with respect to their shares. Registration of these securities would
enable these shares to be freely tradable without restriction under the
Securities Act. See "Risk Factors -- Substantial sales of our common stock by
our existing investors following this offering could cause our stock price to
decline."
66
<PAGE> 68
UNDERWRITING
We intend to offer the shares in the U.S. and Canada through the U.S.
underwriters and elsewhere through the international managers. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc., FleetBoston
Robertson Stephens Inc. and Salomon Smith Barney Inc. are acting as U.S.
representatives of the U.S. underwriters named below. Subject to the terms and
conditions described in a U.S. purchase agreement among us and the U.S.
underwriters, and concurrently with the sale of 900,000 shares to the
international managers, we have agreed to sell to the U.S. underwriters, and the
U.S. underwriters severally have agreed to purchase from us, the number of
shares listed opposite their names below.
<TABLE>
<CAPTION>
NUMBER
OF SHARES
U.S. UNDERWRITERS ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Bear, Stearns & Co. Inc.....................................
FleetBoston Robertson Stephens Inc..........................
Salomon Smith Barney Inc....................................
---------
Total.......................................... 5,100,000
=========
</TABLE>
We have also entered into an international purchase agreement with the
international managers for sale of the shares outside the U.S. and Canada for
whom Merrill Lynch International, Bear, Stearns International Limited,
FleetBoston Robertson Stephens International Limited, and Salomon Brothers
International Limited are acting as lead managers. Subject to the terms and
conditions in the international purchase agreement, and concurrently with the
sale of 5,100,000 shares to the U.S. underwriters pursuant to the U.S. purchase
agreement, we have agreed to sell to the international managers, and the
international managers severally have agreed to purchase 900,000 shares from us.
The initial public offering price per share and the total underwriting discount
per share are identical under the U.S. purchase agreement and the international
purchase agreement.
The U.S. underwriters and the international managers have agreed to
purchase all of the shares sold under the U.S. and international purchase
agreements if any of these shares are purchased. If an underwriter defaults, the
U.S. and international purchase agreements provide that the purchase commitments
of the nondefaulting underwriters may be increased or the purchase agreements
may be terminated. The closings for the sale of shares to be purchased by the
U.S. underwriters and the international managers are conditioned on one another.
Generally, we have agreed to indemnify each underwriter against liability
arising out of any untrue statement contained in the registration statement, any
preliminary prospectus or the final prospectus, or the omission of a material
fact required to be stated in the registration statement or such prospectus
necessary to make the statements in the registration statement or such
prospectus not misleading. In addition, we have agreed to indemnify each
underwriter against liability arising out of our violations of laws or
regulations of foreign jurisdictions where reserved shares have been offered.
The underwriters have agreed to indemnify us against liability with respect to
untrue statements or omissions, or alleged untrue statements or omissions, made
in the registration statement, any preliminary prospectus or the final
prospectus in reliance upon and in conformity with written information furnished
to us by that underwriter through Merrill Lynch expressly for use in the
registration statement, such preliminary prospectus or the prospectus. For more
detailed information on the terms of indemnification contained in the purchase
agreement, please see Exhibit 1.1 to the registration statement.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
67
<PAGE> 69
COMMISSIONS AND DISCOUNTS
The U.S. representatives have advised us that the U.S. underwriters propose
initially to offer the shares to the public at the initial public price on the
cover page of this prospectus and to dealers at that price less a concession not
in excess of $ per share. The U.S. underwriters may allow, and the dealers
may reallow, a discount not in excess of $ per share to other dealers. After
the initial public offering, the public offering price, concession and discount
may be changed.
The following table shows the public offering price, underwriting discount
and proceeds before expenses to us. The information assumes either no exercise
or full exercise by the U.S. underwriters and the international managers of
their over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.......................... $ $ $
Underwriting discount.......................... $ $ $
Proceeds, before expenses, to Exult ........... $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount, are
estimated at $ and are payable by us.
OVER-ALLOTMENT OPTION
We have granted options to the U.S. underwriters to purchase up to 765,000
additional shares at the public offering price less the underwriting discount.
The U.S. underwriters may exercise these options for 30 days from the date of
this prospectus solely to cover any over-allotments. If the U.S. underwriters
exercise these options, each will be obligated, subject to conditions contained
in the purchase agreements, to purchase a number of additional shares
proportionate to that U.S. underwriter's initial amount reflected in the above
table.
We have also granted options to the international managers, exercisable for
30 days from the date of this prospectus, to purchase up to 135,000 additional
shares to cover any over-allotments on terms similar to those granted to the
U.S. underwriters.
INTERSYNDICATE AGREEMENT
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the intersyndicate agreement, the U.S. underwriters and the international
managers may sell shares to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the intersyndicate agreement, the U.S. underwriters and any dealer to whom
they sell shares will not offer to sell or sell shares to persons who are
non-U.S. or non-Canadian persons or to persons they believe intend to resell to
persons who are non-U.S. or non-Canadian persons, except in the case of
transactions under the intersyndicate agreement. Similarly, the international
managers and any dealer to whom they sell shares will not offer to sell or sell
shares to U.S. persons or Canadian persons or to persons they believe intend to
resell to U.S. or Canadian persons, except in the case of transactions under the
intersyndicate agreement.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 10% of the shares offered by this prospectus for
sale to some of our directors, officers, employees, distributors, dealers,
business associates and related persons. If these persons purchase reserved
shares, this will reduce the number of shares available for sale to the general
public. Any reserved shares that are not orally confirmed for purchase within
one day of the pricing of this offering will be offered by the underwriters to
the general public on the same terms as the other shares offered by this
prospectus.
68
<PAGE> 70
NO SALES OF SIMILAR SECURITIES
We, our executive officers, directors, substantially all existing
stockholders and a purchaser of up to 5% of the shares in this offering have
agreed, with exceptions described below, not to sell or transfer any common
stock for 180 days after the date of this prospectus without first obtaining the
written consent of Merrill Lynch. Specifically, we and these other individuals
have agreed not to directly or indirectly:
- offer, pledge, sell or contract to sell any common stock,
- sell any option or contract to purchase any common stock,
- purchase any option or contract to sell any common stock,
- grant any option, right or warrant for the sale of any common stock,
- lend or otherwise dispose of or transfer any common stock,
- request or demand that we file a registration statement related to the
common stock, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common stock. It also
applies to common stock owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition. Exceptions to the lock-up are permitted for issuances by
Exult of shares relating to options, warrants, employee benefits plans,
acquisitions and strategic transactions, and for transfers by holders to Exult
or for estate planning purposes. Merrill Lynch may also consider releasing
certain persons from the lockup restrictions due to financial hardship or a
similar reason, Merrill Lynch does not anticipate such a release, nor is any
such release currently contemplated.
QUOTATION ON THE NASDAQ NATIONAL MARKET
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations among
us, the U.S. representatives and lead managers. In addition to prevailing market
conditions, the factors to be considered in determining the initial public
offering price are:
- the valuation multiples of public traded companies that the U.S.
representatives and the lead managers believe to be comparable to us,
- our financial information,
- the history of, and the prospects for, our company and the industry in
which we compete,
- an assessment of our management, its past and present operations, and the
prospects for, and timing of, our future revenues,
- the present state of our development, and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares in the
aggregate to accounts over which they exercise discretionary authority.
The shares have been approved for quotation on the Nasdaq National Market
under the symbol "EXLT."
69
<PAGE> 71
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
common stock. However, the U.S. representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the U.S. representatives may reduce that short
position by exercising all or part of the over-allotment option described above.
Purchases of the common stock to stabilize its price or to reduce a short
position may cause the price of the common stock to be higher than it might be
in the absence of such purchases.
The U.S. representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriter's short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction of magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the U.S.
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
ELECTRONIC DISTRIBUTION
Neither the Company nor the Underwriters will rely on third party providers
to comply with the prospectus delivery requirements. All purchasers will receive
a printed version of the final prospectus.
Merrill Lynch will be facilitating Internet distribution for this offering
to certain of its Internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its online brokerage customers.
An electronic prospectus is available on the website maintained by Merrill
Lynch. Other than the prospectus in electronic format, the information on the
Merrill Lynch website relating to this offering is not a part of this
prospectus.
E*OFFERING Corp., one of the underwriters, will allocate for distribution
by E*TRADE Securities, Inc. a portion of the shares that E*OFFERING is
underwriting in this offering. Copies of the prospectus in electronic format
will be made available on Internet websites maintained by E*OFFERING Corp. and
E*TRADE Securities, Inc. Customers of E*TRADE Securities, Inc. who complete and
pass an online eligibility profile may place conditional offers to purchase
shares in this offering through E*TRADE's Internet website.
70
<PAGE> 72
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by this
prospectus will be passed upon for us by Brobeck, Phleger & Harrison LLP,
Irvine, California. As of March 31, 2000, Brobeck, Phleger & Harrison LLP and
certain entities or individuals affiliated with Brobeck, Phleger & Harrison LLP
beneficially owned 35,852 shares of Series B Preferred Stock and 19,456 shares
of Series C Preferred Stock, which shares will convert upon consummation of this
offering into an aggregate of 276,540 shares of common stock. Legal matters
relating to the sale of common stock in this offering will be passed upon for
the underwriters by Latham & Watkins, Los Angeles, California.
EXPERTS
The consolidated balance sheets of Exult, Inc. as of December 31, 1998 and
1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for the period from October 29, 1998 (Inception) to
December 31, 1998, and for the year ended December 31, 1999 included in this
prospectus and elsewhere in the registration statement, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving such reports.
The balance sheets of Gunn Partners, Inc. as of December 31, 1997 and 1998
and November 22, 1999, and the related statements of operations, retained
earnings and cash flows for the years ended December 31, 1997 and 1998 and the
period ended November 22, 1999 included in this prospectus and elsewhere in the
registration statement, have been audited by Vitale, Caturano and Company, P.C.,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving such reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission under the Securities Act with respect to the common stock
offered by this prospectus. This prospectus does not contain all of the
information in the registration statement and its exhibits and schedules. For
further information with respect to us and our common stock, please see the
registration statement and the exhibits and schedules filed with the
registration statement. Statements contained in this prospectus concerning the
contents of any contract or other document referred to are not necessarily
complete. Please refer to the copies of these contracts or other documents filed
as an exhibit to the registration statement. Each of these statements is
qualified in all respects by this reference. The registration statement,
including its exhibits and schedules, may be inspected without charge at the
principal office of the Commission in Washington, D.C. Copies of all or any part
of the registration statement may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. These copies may also be inspected and copied
at the Commission's Regional Offices located at:
- Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511; and
- 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of this material may be obtained at prescribed rates by mail from
the public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the Securities and Exchange Commission
maintains an Internet site at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding registrants,
including us, that file electronically.
71
<PAGE> 73
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
FINANCIAL STATEMENTS OF GUNN PARTNERS, INC.
Independent Auditor's Report................................ F-21
Balance Sheets.............................................. F-22
Statements of Income........................................ F-23
Statements of Retained Earnings............................. F-24
Statements of Cash Flows.................................... F-25
Notes to Financial Statements............................... F-26
Unaudited Statements of Income (Loss)....................... F-30
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Basis of Presentation....................................... PF-1
Unaudited Pro Forma Condensed Combined Statement of
Operations................................................ PF-2
</TABLE>
F-1
<PAGE> 74
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EXULT, INC.:
We have audited the accompanying consolidated balance sheets of EXULT, INC.
and subsidiaries (a Delaware corporation) as of December 31, 1998 and 1999, and
the related statements of operations, stockholders' equity and cash flows for
the period from October 29, 1998 (Inception) to December 31, 1998, and for the
year ended December 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of EXULT, INC. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for the period from October 29, 1998 (Inception)
to December 31, 1998, and for the year ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Orange County, California
March 3, 2000
F-2
<PAGE> 75
EXULT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
------------------------- MARCH 31, MARCH 31,
1998 1999 2000 2000
--------- ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
(NOTE 7)
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents................... $ 850,965 $ 39,199,053 $ 88,701,505
Investments................................. -- -- 5,000,000
Accounts receivable......................... -- 824,399 3,432,097
Prepaid expenses and other current assets... -- 287,132 1,147,080
--------- ------------ ------------
Total Current Assets................. 850,965 40,310,584 98,280,682
--------- ------------ ------------
Property and equipment, net................... -- 4,439,882 7,656,016
Intangibles, net.............................. -- 13,603,134 12,541,022
Other assets.................................. 3,425 413,631 719,210
--------- ------------ ------------
Total Assets......................... $ 854,390 $ 58,767,231 $119,196,930
========= ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................ $ 3,892 $ 1,453,593 $ 1,684,306
Accrued liabilities......................... 34,102 2,269,815 8,843,892
Current portion of long-term obligations.... -- 4,629,987 4,631,503
--------- ------------ ------------
Total Current Liabilities 37,994 8,353,395 15,159,701
--------- ------------ ------------
Long-Term Obligations, net of current
portion..................................... -- 4,304,219 4,289,084
Commitments and Contingencies
Stockholders' Equity:
Convertible preferred stock, $0.0001 par
value;
Authorized -- 15,000,000 shares; Issued
and outstanding -- 25,000 at December
31, 1998, 6,191,212 at December 31,
1999, 13,462,497 at March 31, 2000
(unaudited) and 0 pro forma (unaudited),
including additional paid-in capital.... 999,999 58,768,079 122,734,269 $ --
Common stock, $0.0001 par value;
Authorized -- 500,000,000 shares; Issued
and outstanding -- 9,000 at December 31,
1998, 9,434,300 at December 31, 1999,
9,705,975 at March 31, 2000 (unaudited)
and 78,529,981 pro forma (unaudited).... 1 943 970 7,852
Additional paid-in capital................ -- 5,970,616 6,962,214 142,124,856
Subscriptions receivable.................... -- (100,001) -- --
Deferred compensation....................... (3,134,172) (3,651,805) (3,651,805)
Accumulated deficit......................... (183,604) (15,395,848) (26,297,503) (26,297,503)
--------- ------------ ------------ ------------
Total Stockholders' Equity........... 816,396 46,109,617 99,748,145 112,183,400
--------- ------------ ------------ ------------
Total Liabilities and Stockholders'
Equity............................. $ 854,390 $ 58,767,231 $119,196,930
========= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 76
EXULT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
OCTOBER 29,
1998
(INCEPTION) THREE MONTHS ENDED
TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ------------------------
1998 1999 1999 2000
------------ ------------ --------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue.................................. $ -- $ 4,857,190 $ -- $ 5,577,277
Cost of revenue.......................... -- 4,498,384 -- 5,750,321
--------- ------------ --------- ------------
Gross profit............................. -- 358,806 -- (173,044)
--------- ------------ --------- ------------
Expenses:
Product development.................... -- 368,012 -- 803,912
Selling, general and administrative.... 187,249 15,466,533 515,538 10,716,872
--------- ------------ --------- ------------
Total expenses...................... 187,249 15,834,545 515,538 11,520,784
--------- ------------ --------- ------------
Loss from operations..................... (187,249) (15,475,739) (515,538) (11,693,828)
Interest income, net................... 3,645 263,495 5,572 792,173
--------- ------------ --------- ------------
Net loss................................. $(183,604) $(15,212,244) $(509,966) $(10,901,655)
========= ============ ========= ============
Net loss per common share:
Basic and diluted...................... $ (140.48) $ (2.20) $ (56.66) $ (1.16)
Weighted average number of common shares
outstanding:
Basic and diluted...................... 1,307 6,906,334 9,000 9,434,300
Pro forma (note 7):
Net loss per common share:
Basic and diluted (unaudited).......... $ (0.20) $ (0.14)
Weighted average number of common shares
outstanding:
Basic and diluted (unaudited).......... 75,998,174 78,258,306
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 77
EXULT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------------- --------------------------------------------
ADDITIONAL
PREFERRED PAID-IN DEFERRED
SHARES STOCK SHARES PAR CAPITAL COMPENSATION
---------- ------------ --------- ---- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCEPTION, October 29, 1998
Issuance of common stock for cash............. -- $ -- 9,000 $ 1 $ -- $ --
Issuance of Series A convertible preferred
stock for cash.............................. 25,000 999,999 -- -- -- --
Net loss...................................... -- -- -- -- -- --
---------- ------------ --------- ---- ---------- -----------
BALANCE, December 31, 1998...................... 25,000 999,999 9,000 1 -- --
Issuance of preferred stock:
Series B.................................... 1,696,369 9,194,320 -- -- -- --
Series C.................................... 4,469,843 45,950,001 -- -- -- --
Issuance of common stock for cash............. -- -- 8,856,000 885 38,476 --
Issuance of common stock for services and
subscription................................ -- -- 306,750 31 199,970 --
Common stock issued upon exercise of stock
options..................................... -- -- 262,550 26 196,539 --
Issuance of Series C preferred stock and
common stock warrants for service
contract.................................... -- 2,623,759 -- -- 692,821 --
Issuance of common stock warrants for
services.................................... -- -- -- -- 1,230,000 --
Deferred compensation related to the issuance
of common stock............................. -- -- -- -- 1,387,342 (1,387,342)
Deferred compensation related to stock options
granted..................................... -- -- -- -- 2,225,468 (2,225,468)
Amortization of deferred compensation......... -- -- -- -- -- 478,638
Net loss...................................... -- -- -- -- -- --
---------- ------------ --------- ---- ---------- -----------
BALANCE, December 31, 1999...................... 6,191,212 58,768,079 9,434,300 943 5,970,616 (3,134,172)
Common stock issued upon exercise of stock
options..................................... -- -- 271,675 27 198,598 --
Issuance of preferred stock:
Series C.................................... 385,805 3,966,117 -- -- -- --
Series D.................................... 6,885,480 60,000,073 -- -- -- --
Payment of subscription receivable............ -- -- -- -- -- --
Deferred compensation related to stock options
granted..................................... -- -- -- -- 793,000 (793,000)
Amortization of deferred compensation......... -- -- -- -- -- 275,367
Net loss...................................... -- -- -- -- -- --
---------- ------------ --------- ---- ---------- -----------
BALANCE, March 31, 2000 (unaudited)............. 13,462,497 $122,734,269 9,705,975 $970 $6,962,214 $(3,651,805)
========== ============ ========= ==== ========== ===========
<CAPTION>
TOTAL
ACCUMULATED SUBSCRIPTIONS STOCKHOLDERS'
DEFICIT RECEIVABLE EQUITY
------------ ------------- -------------
<S> <C> <C> <C>
INCEPTION, October 29, 1998
Issuance of common stock for cash............. $ -- $ -- $ 1
Issuance of Series A convertible preferred
stock for cash.............................. -- -- 999,999
Net loss...................................... (183,604) -- (183,604)
------------ ------------ ------------
BALANCE, December 31, 1998...................... (183,604) -- 816,396
Issuance of preferred stock:
Series B.................................... -- -- 9,194,320
Series C.................................... -- -- 45,950,001
Issuance of common stock for cash............. -- -- 39,361
Issuance of common stock for services and
subscription................................ -- (100,001) 100,000
Common stock issued upon exercise of stock
options..................................... -- -- 196,565
Issuance of Series C preferred stock and
common stock warrants for service
contract.................................... -- -- 3,316,580
Issuance of common stock warrants for
services.................................... -- -- 1,230,000
Deferred compensation related to the issuance
of common stock............................. -- -- --
Deferred compensation related to stock options
granted..................................... -- -- --
Amortization of deferred compensation......... -- -- 478,638
Net loss...................................... (15,212,244) -- (15,212,244)
------------ ------------ ------------
BALANCE, December 31, 1999...................... (15,395,848) (100,001) 46,109,617
Common stock issued upon exercise of stock
options..................................... -- -- 198,625
Issuance of preferred stock:
Series C.................................... -- -- 3,966,117
Series D.................................... -- -- 60,000,073
Payment of subscription receivable............ -- 100,001 100,001
Deferred compensation related to stock options
granted..................................... -- -- --
Amortization of deferred compensation......... -- -- 275,367
Net loss...................................... (10,901,655) -- (10,901,655)
------------ ------------ ------------
BALANCE, March 31, 2000 (unaudited)............. $(26,297,503) $ -- $ 99,748,145
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 78
EXULT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
OCTOBER 29,
1998 THREE MONTHS ENDED
(INCEPTION) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ------------------------
1998 1999 1999 2000
--------------- ------------ --------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (183,604) $(15,212,244) $(509,966) $(10,901,655)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization........................... -- 942,752 598 1,687,469
Charge for warrants..................................... -- 4,546,580 -- --
Changes in operating assets and liabilities --
Investments............................................. -- -- -- (5,000,000)
Accounts receivable..................................... -- (824,399) -- (2,607,698)
Prepaid expenses and other current assets............... -- (287,132) (15,945) (859,948)
Other assets............................................ (3,425) (410,206) (500) (305,579)
Accounts payable........................................ 3,892 1,449,701 127,536 230,713
Accrued liabilities..................................... 34,102 2,235,713 (508) 6,574,077
---------- ------------ --------- ------------
Net cash used in operating activities............... (149,035) (7,559,235) (398,785) (11,182,621)
---------- ------------ --------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ -- (4,363,267) (10,766) (3,566,124)
Cash paid in acquisition of intangible assets............. -- (5,209,657) -- --
---------- ------------ --------- ------------
Net cash used in investing activities............... -- (9,572,924) (10,766) (3,566,124)
---------- ------------ --------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock................. 999,999 55,144,321 -- 63,966,190
Proceeds from issuance of common stock.................... 1 139,361 -- --
Payment of subscription receivable........................ -- -- -- 100,001
Exercise of stock options................................. -- 196,565 -- 198,625
Payments on capital lease obligation...................... -- -- -- (13,619)
---------- ------------ --------- ------------
Net cash provided by financing activities........... 1,000,000 55,480,247 -- 64,251,197
---------- ------------ --------- ------------
Net increase in cash and cash equivalents................... 850,965 38,348,088 (409,551) 49,502,452
Cash and cash equivalents, beginning of period.............. -- 850,965 850,965 39,199,053
---------- ------------ --------- ------------
Cash and cash equivalents, end of period.................... $ 850,965 $ 39,199,053 $ 441,414 $ 88,701,505
========== ============ ========= ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................ $ -- $ 4,615 $ -- $ 6,234
========== ============ ========= ============
Income taxes............................................ $ -- $ 800 $ -- $ 453
========== ============ ========= ============
SUMMARY OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued on subscriptions...................... $ -- $ 100,001 $ -- $ --
========== ============ ========= ============
Preferred and common stock warrants issued in connection
with a service contract................................. $ -- $ 3,316,580 $ -- $ --
========== ============ ========= ============
Common stock warrants issued for services................. $ -- $ 1,230,000 $ -- $ --
========== ============ ========= ============
Acquisition of equipment through capital lease............ $ -- $ 138,650 $ -- $ --
========== ============ ========= ============
DETAILS OF ACQUISITION:
November 1999 -- Acquired intangibles and fixed assets of
Gunn Partners, Inc.
The following table outlines those assets and intangibles
acquired and cash paid:
Fair value of assets and intangibles acquired........... $ -- $ 14,005,213 $ -- $ --
Less: Present value of note issued...................... -- (8,795,556) -- --
---------- ------------ --------- ------------
Cash paid in acquisition of intangible assets........... $ -- $ 5,209,657 $ -- $ --
========== ============ ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 79
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DATA AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS
Organization
Exult, Inc. and subsidiaries ("Exult" or the "Company") designs,
implements, and manages comprehensive web-enabled human resources processes,
generally under long-term contracts. In addition, the Company provides research
and consulting services for measuring and improving the efficiency of human
capital productivity and human resource, finance and accounting processes.
Exult (formerly BPO-US, Inc.) was incorporated in the State of Delaware on
October 29, 1998. The Company began marketing its services in 1999. In August
1999, the Company changed its name to Exult, Inc.
In November 1999, the Company formed two subsidiaries. Exult, Ltd. was
formed in the United Kingdom to establish operations in that country. Exult
Equity Partners, Inc. was formed for the purpose of acquiring most of the assets
of Gunn Partners, Inc., a consulting and research firm specializing in human
resources and accounting process measurement and improvement.
In December 1999, the Company entered into multi-year agreements with three
companies to provide services commencing in January 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RISK FACTORS
Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingencies at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from estimated amounts.
Cash Equivalents
The Company considers all highly liquid temporary cash investments with an
initial maturity of three months or less to be cash equivalents. In the year
presented the carrying amount of cash equivalents approximates fair value
because of the short maturity period of these investments.
Investments
As of March 31, 2000, the Company had approximately $5,000,000 invested in
certificates of deposit which bear interest at 5.87 percent and mature on
January 4, 2001.
Accounts Receivable
As of March 31, 2000, approximately $1,778,000 of unbilled receivables was
included in accounts receivable. Unbilled receivables consists of net amounts
earned in the course of providing services to clients which have not been billed
due to the timing in which the Company prepares, records and sends bills to its
clients.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization of
property and equipment are recorded using the double declining balance method
over the estimated useful life of the assets. When
F-7
<PAGE> 80
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DATA AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
assets are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed and any gain or loss is reflected in the results of
operations.
Maintenance, repairs and minor renewals are charged directly to expense as
incurred. Significant additions and improvements to property and equipment are
capitalized.
Software Development
In accordance with Statement of Position ("SOP") 98-1, Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use, the Company
expenses all costs associated with the development or purchase of internal use
software other than those incurred during the application development stage.
Costs related to application development are capitalized and amortized over the
estimated useful life of the software, which ranges from three to five years.
The Company adopted SOP 98-1 on January 1, 1999. Prior to 1999, the Company did
not engage in the development of software. Expenditures subsequent to January 1,
1999, have been in connection with the conceptual formulation, design and
testing of various alternatives and have been expensed as incurred as they
pertain to research and development activity.
Intangibles, Net
Intangible assets consist of the portion of the purchase price of
businesses acquired in excess of the fair value of identifiable net tangible
assets acquired. Amortization is computed using the straight-line method over
the estimated useful lives of the assets.
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, the Company assesses the recoverability of its
long-lived assets on an annual basis or whenever adverse events or changes in
circumstances of business climate indicate that expected undiscounted future
cash flows related to such long-lived assets may not be sufficient to support
the net book value of such assets. If undiscounted cash flows are not sufficient
to support the recorded assets, an impairment is recognized to reduce the
carrying value of the long-lived assets to the estimated fair value. Cash flow
projections, although subject to a degree of uncertainty, are based on trends of
historical performance and management's estimate of future performance, giving
consideration to existing and anticipated competitive and economic conditions.
Additionally, in conjunction with the review for impairment, the remaining
estimated lives of certain of the Company's long-lived assets are assessed. As
of December 31, 1999 and March 31, 2000, the Company has not recognized any
impairment of long-lived assets.
Revenue Recognition
The Company recognizes revenue at the time services are performed, either
on a fee-for-service or per diem basis. Fee-for-service contracts are generally
structured so that the Company receives a fee that is no greater than the
client's historical cost of operating the functions assumed by the Company.
After the Company has achieved a negotiated minimum cost reduction, the Company
is required to share further savings with its clients in a negotiated gain
sharing arrangement. The amount of savings to be shared with clients is
determined on a periodic basis in accordance with the terms of the applicable
contracts. In cases where the Company anticipates that, based upon the amount of
costs incurred and estimated future costs to be incurred, amounts will be due to
clients, revenue is recorded net of such amounts. For per diem contracts,
revenue is recognized based on contracted billing rates times actual hours
worked.
F-8
<PAGE> 81
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DATA AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
In the course of acquiring new clients, the Company performs significant
due diligence work. In certain cases, the Company may receive a guarantee that
its clients will pay or reimburse the Company for work performed in the due
diligence phase whether or not a contract is consummated. The Company records
these amounts as revenue and the corresponding direct costs as costs of revenue
or due diligence costs are incurred.
Concentration and Other Outsourcing Risk Factors
During the year ended December 31, 1999, approximately 84 percent of the
Company's revenue was generated from its largest client. The Company currently
has only three process management clients. If the largest client were to
substantially reduce or stop using the Company's services, future revenues would
be seriously impaired. The Company's largest client is the first client for whom
the Company is assuming responsibility for management of functions in all of the
human resource processes. This contract is still at a very early stage. As such,
management believes that the Company's ability to secure future clients and
revenues will be largely dependent upon managing and administering this client's
human resource processes effectively and efficiently, and achieving service
levels and cost savings specified in the contract. Although this contract is not
scheduled to expire until December 2004, the client may terminate the contract
prior to that date for significant nonperformance by the Company; for any reason
after December 2002, with twelve months prior written notice; or in the event
there is a change in control of the Company, as defined.
During the three months ended March 31, 2000, two of the Company's clients
accounted for approximately 19 percent and 20 percent of the Company's revenue.
The Company has and plans to continue to enter into fixed-price or
relatively fixed priced process management contracts. These contracts typically
are structured so that the Company receives fixed amounts that are generally
equal to or less than the client's historical costs incurred in connection with
the services the Company is assuming. After the Company has achieved a
negotiated minimum cost reduction, the Company is required to share further
savings with its clients in a negotiated gain sharing arrangement. If the
Company miscalculates the resources or time needed to perform under these
contracts or is not able to perform human resource management more cost
effectively than its clients, the costs of providing services could exceed the
fixed amount the Company would receive. If that occurs, the Company would lose
money on the contract. The contracts also contain certain minimum service level
requirements that must be met. The Company currently depends on third parties to
provide a number of specialized human resource services to the clients, such as
recruiting and relocation services. If the Company and its third-party vendors
are not able to meet these requirements, the clients can assess penalties
against the Company in accordance with the terms of the contracts. The
assessment of any penalties could adversely affect future operating results.
Income Taxes
The Company recognizes deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rules and laws that are expected to be in effect
when the differences are expected to be recovered. Under the Tax Reform Act of
1986, the benefits from net operating losses carried forward may be impaired or
limited in certain circumstances. In addition, a valuation allowance has been
provided for deferred tax assets when it is more likely than not that all or
some portion of the deferred tax asset will not be realized.
F-9
<PAGE> 82
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DATA AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
Loss Per Share
Basic earnings per share is computed using the weighted-average number of
common stock outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common stock and common stock
equivalent shares outstanding during the period. Common stock equivalent shares
are excluded from the computation as their effect is antidilutive.
Comprehensive Income (Loss)
As of October 29, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for the reporting and display
of comprehensive income (loss) and its components in the financial statements.
Components of comprehensive income (loss) include amounts that, under SFAS No.
130, are included in comprehensive income (loss) but are excluded from net
income (loss). There were no significant differences between the Company's net
loss and comprehensive loss.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees, and related
interpretations, in accounting for employee stock options rather than the
alternative fair value accounting allowed by SFAS No. 123, Accounting for Stock
Based Compensation. APB No. 25 provides that compensation expense relative to
the Company's employee stock options is measured based on the intrinsic value of
stock options granted. Companies that continue to follow APB No. 25 are required
to provide pro forma disclosure of the impact of applying the fair value method
of SFAS No. 123. This method recognizes the fair value of stock options granted
at the date of grant in earnings over the vesting period of the options.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiary is the local
currency. Assets and liabilities of subsidiaries with international operations
are translated into U.S. dollars at year-end exchange rates, and revenues and
expenses are translated at average exchange rates prevailing as they occur.
Translation adjustments, if material, are included in accumulated other
comprehensive income (loss), a separate component of stockholders' equity.
Transaction gains and losses arising from transactions denominated in a currency
other than the functional currency of the entity involved, which are immaterial,
are included in the consolidated statements of operations. The Company has not
entered into any foreign currency exchange contracts or other derivative
financial instruments.
Segment Information
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. Management has determined that the Company
operates in only one business segment.
Unaudited Interim Financial Information
The accompanying financial information for the three months ended March 31,
1999 and 2000, is unaudited. In the opinion of management, this information has
been prepared on substantially the same basis as the annual consolidated
financial statements and contains all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position and
results of operations as of such dates and for such periods.
F-10
<PAGE> 83
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DATA AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
Recent Accounting Pronouncements
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of
Start-Up Activities. SOP 98-5 was adopted by the Company on January 1, 1999, and
requires costs of start-up activities and organization costs to be expensed as
incurred. Adoption did not have a material effect on the Company's consolidated
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 as
amended by SFAS No. 137, is effective for fiscal years beginning after June 15,
2000. SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income (loss)
depending on whether a derivative is designed as part of a hedge transaction
and, if so, the type of hedge transaction involved. The Company does not expect
that adoption of SFAS No. 133 will have a material impact on its consolidated
financial position or results of operations as the Company does not currently
hold any derivative financial instruments.
On December 3, 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition, to provide
guidance on the recognition, presentation and disclosure of revenue in financial
statements. While SAB No. 101 provides a framework by which to recognize revenue
in the financial statements, the Company believes that adherence to this SAB
will not have a material impact on the Company's financial statements.
3. BUSINESS ACQUISITION
On November 22, 1999, the Company entered into an agreement to purchase all
the assets and business, except for cash, accounts receivable, and unbilled
work-in-progress of Gunn Partners Inc. ("Gunn"), for an aggregate purchase price
of approximately $14,000,000. The purchase price was allocated to various
intangible intellectual properties and fixed assets.
The unaudited pro forma combined consolidated financial information, as
though the acquisition had occurred on January 1, 1999, would have resulted in
operating results as follows (amounts in thousands except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Revenue..................................................... $ 15,245
Net loss.................................................... $(19,090)
Basic and diluted weighted average net loss per common
share..................................................... $ (0.25)
</TABLE>
The pro forma net loss includes $4,260,000 in amortization of purchased
intangibles for the year ended December 31, 1999. This unaudited pro forma
combined consolidated financial information is presented for illustrative
purposes only and is not necessarily indicative of the consolidated results of
operations in future periods or the results that would have actually been
realized.
F-11
<PAGE> 84
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DATA AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
4. DETAIL OF SELECTED BALANCE SHEET ACCOUNTS
Accounts Receivable
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
Billed................................................... $824,399 $1,654,236
Unbilled................................................. -- 1,777,861
-------- ----------
$824,399 $3,432,097
======== ==========
</TABLE>
Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
USEFUL LIFE 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures....................... 5 years $1,598,854 $1,715,540
Computers and equipment...................... 3 to 5 years 1,541,957 3,316,016
Leasehold improvements....................... Lease term 988,291 1,014,617
Construction-in-progress..................... 417,602 2,066,654
---------- ----------
4,546,704 8,112,827
Less: Accumulated depreciation and
amortization............................... (106,822) (456,811)
---------- ----------
Property and equipment, net.................. $4,439,882 $7,656,016
========== ==========
</TABLE>
Accrued Liabilities
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1998 1999 2000
------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued employee compensation benefits and
related costs.................................. $ -- $1,173,912 $3,516,546
Accrued professional services.................... -- 500,673 2,380,150
Other accrued liabilities........................ 34,102 595,230 2,947,196
------- ---------- ----------
Accrued liabilities.............................. $34,102 $2,269,815 $8,843,892
======= ========== ==========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Lease Obligations
The Company leases space in the building it uses as its main office under
noncancellable operating lease agreements, which expire between July 1, 2002 and
May 10, 2003. On December 20, 1999, the Company purchased certain assets of
Pactive Corporation, including equipment and licenses for an aggregate purchase
price of approximately $3,500,000. As part of the asset purchase, several single
person office leases with varying expiration dates were assumed by the Company.
The Company assumed a building lease in Houston in association with the Pactiv
asset purchase, housing processing and shared
F-12
<PAGE> 85
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DATA AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
service center staff. A furniture and equipment leasing facility was contracted
in November 1999 and is accounted for as a capitalized lease.
Future minimum rental commitments under leases, including those leases
entered into subsequent to December 31, 1999, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASES
-------- -----------
<S> <C> <C>
2000........................................................ $ 59,562 $ 2,726,282
2001........................................................ 59,562 3,003,137
2002........................................................ 49,635 2,849,580
2003........................................................ -- 2,084,184
2004........................................................ -- 1,830,460
Thereafter.................................................. -- 1,344,990
-------- -----------
Future minimum lease payments............................... 168,759 $13,838,633
===========
Less: Interest portion...................................... 30,109
--------
Present value of minimum lease payments..................... 138,650
Less: Current portion....................................... 42,831
--------
$ 95,819
========
</TABLE>
Capital lease amounts are shown in current and long-term obligations in the
accompanying consolidated balance sheets. Rental expense for the periods ended
December 31, 1998 and 1999, and March 31, 2000, were $6,165, $272,099, and
$440,486, respectively.
Service Agreement
On December 7, 1999, the Company entered into a seven-year Framework
Agreement with BP Amoco p.l.c. ("BP Amoco") to create a comprehensive human
resource services organization and provide a broad range of human resources
management services to BP Amoco and its affiliates. On the same date, the
Company entered into two five-year contracts under the Framework Agreement, a
U.S. Country Agreement and a United Kingdom Country Agreement. Under these
country agreements, the Company will assume management of BP Amoco's human
resources operations in the United States and the United Kingdom. In addition,
the Company has the right to provide human resources management services in
other countries in which BP Amoco desires to obtain such services, if the
Company can demonstrate its ability to meet their service needs and provide
specified cost savings.
The terms of the Framework Agreement require the Company to maintain a
letter of credit against certain contingencies for the first four years of the
contract. The Company provided an irrevocable two-year letter of credit from a
financial institution in the amount of $5,000,000. The Company achieved net
equity of $75,000,000 in February 2000, resulting in the elimination of its
obligation to provide letters of credit as previously required by the BP Amoco
agreement.
Effective January 1, 2000, the Company entered into two service agreements
with Pactiv Corporation and Tenneco Automotive Inc. to provide information
technology and other finance support services for three years which are subject
to certain renewal provisions.
Employment Agreements
The Company entered into employment agreements with key management
personnel. These agreements provide for a defined level of compensation and
additional compensation in the form of
F-13
<PAGE> 86
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DATA AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
bonuses based on performance. The agreements also provide for severance benefits
in the event of termination without cause or a change in control, as defined by
the consolidation or merger of the Company in which fifty percent of the
outstanding shares of the Company's stock are exchanged for cash, securities or
other property.
Bonus Plan
The Company has an annual incentive plan program (the "Incentive Plan") for
key management personnel. The Incentive Plan provides bonuses based upon the
achievement of various targets, both financial and non-financial as well as the
participants' contributions to the Company. The Company expensed approximately
$1,041,000 and $1,527,000 under the Incentive Plan in the year ended 1999 and
the period ended March 31, 2000, respectively, approximately $597,000 and
$2,044,000 of which was included in accrued liabilities as of December 31, 1999
and March 31, 2000, respectively.
6. NOTE PAYABLE
In connection with the Company's purchase of Gunn's assets, the Company
issued a note payable in the amount of $10,000,000. This note is due in two
equal installments of $5,000,000 to be paid in November 2000 and November 2001.
As the note is non-interest bearing, the Company has imputed interest at 9
percent annually.
7. STOCKHOLDERS' EQUITY
Preferred Stock
The Company was originally authorized to issue 50,000 shares of preferred
stock at $0.01 par value per share. On November 25, 1998, the Company filed a
Certificate of the Powers, Designations, Preferences and Rights of the series A
convertible preferred stock, par value $0.01 per share, designating 25,000
shares of the Company's preferred stock as series A convertible preferred stock.
On April 27, 1999, December 20, 1999, and February 9, 2000, the Company amended
and restated its certificate of incorporation to authorize the issuance of
5,000,000, 15,000,000, and 15,000,000 shares of preferred stock, respectively,
at $0.0001 par value per share. At December 31, 1999, 25,000 shares were
designated as series A convertible preferred stock, 1,696,369 shares as series B
convertible preferred stock, and 5,500,000 shares as series C convertible
preferred stock. As of December 31, 1999, the Company had 7,778,631 shares of
authorized but unissued preferred stock which remain undesignated. On February
9, 2000, the third amended and restated Certificate of Incorporation designated
7,650,533 shares as series D convertible preferred stock.
In the event of liquidation, the series A, series B, series C and series D
preferred stock rank senior to all classes of common stock and each other class
or series of capital stock created hereafter. The series A, series B, series C
and series D preferred stock have certain liquidation preferences as defined in
the February 9, 2000 Certificate of Incorporation as amended and restated.
Common Stock
The Company was originally authorized to issue 300,000 shares of common
stock at $0.01 par value per share. On April 27, 1999, December 20, 1999, and
February 9, 2000, the Company amended and restated its certificate of
incorporation to authorize the issuance of 25,000,000, 40,000,000, and
500,000,000 shares of common stock, respectively, at $0.0001 par value per
share.
F-14
<PAGE> 87
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DATA AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
Certain preferred stockholders and common stockholders have registration
rights associated with their stock.
Capital Transactions
On November 9, 1998, the Company issued 9,000 shares of common stock, par
value $0.0001 for total consideration of $1.
On November 25, 1998, the Company issued 25,000 shares of series A
convertible preferred stock in a private placement with institutional investors
for total consideration of approximately $1,000,000. Each share of series A
convertible preferred stock is convertible into 900 shares of common stock.
On April 1, 1999, the Company issued 8,856,000 shares of common stock, par
value of $0.0001 per share, to a key employee for total consideration of
approximately $39,000. The Company estimated the fair value as of November 1998,
when his employment and the stock purchase was negotiated, based on recent cash
sales to third parties, adjusting the valuation for differences in rights
associated with each class of stock. Of the 8,856,000 shares, 922,500 shares
were immediately vested with the balance vesting in 43 equal monthly
installments. If the holder's employment terminates for cause or voluntarily no
further shares vest. If the holder's employment terminates for any reason other
than cause, including death or disability, 50 percent of all unvested shares
will vest. Following termination of employment, the Company has the right to
repurchase any or all unvested shares at their original purchase price.
Subsequent to the lapse of the Company's repurchase right, the series A
institutional investors have a right to purchase the remaining unvested shares.
On April 27, 1999, the Company issued 1,696,369 shares of series B
convertible preferred stock in a private placement with institutional investors
for total consideration of approximately $9,194,000. Each share of series B
convertible preferred stock is convertible into five shares of common stock. The
Company has reserved 8,481,845 shares of common stock for the conversion. If at
any time within 24 months the Company enters into a customer contract or
consummates an acquisition, then the Company shall have the right to require the
institutional investor to provide additional capital to the Company on one or
more occasions in denominations of $10 million up to an additional equity
capital not to exceed $40 million. This call right shall be exercisable by the
Company by delivering written notice of the exercise to the investor.
On June 6, 1999, the Company issued 306,750 shares of common stock to a
consultant in connection with services rendered valued at approximately $100,000
and for a subscription receivable of $100,001. The subscription receivable was
paid in the first quarter of 2000.
On July 29, 1999, and on October 12, 1999, the Company issued 70,320 and
46,875 shares of common stock, respectively, to a director for the exercise of
non-statutory stock options for total consideration of $45,708 and $30,469,
respectively. The shares are subject to repurchase under the terms of the 1999
Stock Option/Stock Issuance Plan.
On October 22, 1999, the Company issued 1,478,600 shares of series C
convertible preferred stock in a private placement with institutional investors
for total consideration of approximately $15,200,000. Each share of series C
convertible preferred stock is convertible into five shares of common stock. The
Company has reserved 7,393,000 shares of common stock for the conversion.
On November 17, 1999 the Company issued 58,364, upon conversion the
equivalent of 291,820, shares of series C convertible preferred stock in a
private placement with institutional investors for total consideration of
approximately $600,000. Each share of series C convertible preferred stock is
convertible
F-15
<PAGE> 88
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DATA AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
into five shares of common stock. The Company has reserved 291,820 shares of
common stock for the conversion.
On December 15, 1999, the Company issued 117,195 shares of common stock to
a director for the exercise of non-statutory stock options for total
consideration of $76,177. The shares are subject to repurchase under the terms
of the 1999 Stock Option/Stock Issuance Plan.
On December 21, 1999, the Company issued 28,160 shares of common stock to
an officer for the exercise of non-statutory stock options for total
consideration of $44,211. The shares are subject to repurchase under the terms
of the 1999 Stock Option/Stock Issuance Plan.
On December 22, 1999 the Company issued 2,932,879, upon conversion the
equivalent of 14,664,395 common shares of series C convertible preferred stock
in a private placement with institutional investors for total consideration of
approximately $30,150,000. Each share of series C convertible preferred stock is
convertible into five shares of common stock. The Company has reserved
14,664,395 shares of common stock for the conversion. Pursuant to this
agreement, the call facility included in the April 27, 1999 stock purchase
agreement was terminated in its entirety.
On February 7, 2000, BP Amoco, subject to the terms of a stockholders
agreement which contains certain preemptive and anti-dilution provisions,
exercised its right to purchase 385,805 shares of series C preferred stock for
total consideration of approximately $3,966,000.
On February 10, 2000 the Company issued 6,885,480 shares of series D
convertible preferred stock in a private placement with institutional investors
for total consideration of approximately $60,000,000. Each share of series D
convertible preferred stock is convertible into one share of common stock.
Stock Split
On April 26, 1999, the Board of Directors declared a 180-for-1 stock split
on all common stock and preferred stock then outstanding. Further, on January
31, 2000, the Board of Directors declared a 5-for-1 split on all common stock
then outstanding. All common share and per share data have been retroactively
restated to give effect to these splits.
Common Stock and Stock Option Deferred Compensation
The Company recorded aggregate deferred compensation for common stock and
stock options issued of approximately $3,134,000 and $3,652,000 for the year
ended December 31, 1999, and for the period ended March 31, 2000, respectively.
The amounts recorded represent the difference between the grant price and the
deemed fair value of the Company's common stock at the date of grant. Deferred
common stock and stock option compensation is amortized to expense using the
straight-line method over the 48-month vesting period.
Unaudited Pro Forma Stockholders' Equity and Loss Per Share
Concurrent with the consummation of an initial public offering of the
Company's common stock as defined in the Company's certificate of incorporation,
all existing series A, series B, series C, and series D preferred stock will
automatically convert into common stock at the rate of 900 shares of common
stock for each share of series A preferred stock, five shares of common stock
for each share of series B and series C preferred stock, and one share of common
stock for each share of series D preferred stock.
The unaudited pro forma stockholders' equity at December 31, 1999, and the
unaudited pro forma net loss per share and weighted average number of common
shares outstanding for the year ended
F-16
<PAGE> 89
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DATA AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
December 31, 1999, reflects the Gunn acquisition, the issuance of 385,805 shares
of series C preferred stock and 6,885,480 shares of series D preferred stock,
the exercise of warrants to purchase an aggregate of 3,339,220 shares of common
stock and 667,844 shares of series C preferred stock, the conversion of all
outstanding preferred stock into 65,484,785 shares of common stock, and the
exercise of options to purchase 271,675 shares of common stock.
The unaudited pro forma stockholders' equity at March 31, 2000, and the
unaudited pro forma net loss per share and weighted average number of common
shares outstanding for the period ended March 31, 2000, reflects the exercise of
warrants to purchase an aggregate of 3,339,220 shares of common stock and
667,844 shares of series C preferred stock and the conversion of all outstanding
preferred stock into 65,484,786 shares of common stock.
8. STOCK OPTIONS AND WARRANTS
1999 Stock Option/Stock Issuance Plan
In May 1999, the Company adopted the 1999 Stock Option/Stock Issuance Plan
(the "Plan"). The Plan is comprised of two separate equity programs: (i) the
Discretionary Option Grant Program, under which eligible persons may, at the
discretion of the Plan administrator, be granted options to purchase shares of
common stock, and (ii) the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan administrator, be issued shares of common
stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered to the Company. Under the terms of the Plan, the
maximum aggregate number and type of shares available pursuant to stock grants
and exercise of stock options under the Plan is 10,934,005 shares of common
stock. Upon the expiration, termination for any reason, or cancellation of
unexercised non-qualified or incentive stock options, the shares of common stock
subject thereto will again be available for issuance under the terms of the
Plan. Upon any change in the outstanding common stock without the Company's
receipt of consideration, appropriate adjustments shall be made to the maximum
number and/or class of securities issuable and the number and/or class of
securities and the exercise price per share in effect under each outstanding
option.
Eligible participants in the Plan are employees, non-employee members of
the board of directors of the Company, non-employee members of the board of
directors of any parent or subsidiary, and consultants and other advisors who
provide services to the Company, or any parent or subsidiary. The Plan is
administered by the compensation committee of the Company's board of directors.
The options may be issued as "Incentive Stock Options" (as defined by the
Internal Revenue Code of 1986) or as nonqualified options. Options under the
Plan are granted at prices not less than 85 percent of the fair market value at
the date of option grant and can become exercisable in installments ranging up
to 10 years from the date of grant. If the optionee is a 10 percent stockholder,
the exercise price shall not be less than 110 percent of the fair market value
at the date of option grant. As of December 31, 1999 the non-qualified stock
options and incentive stock options are immediately exercisable by the optionee.
Upon exercise, and subject to Internal Revenue Service limitations for incentive
stock options, the option shares are initially unvested and subject to
repurchase by the Company upon termination of employment or services, at the
option exercise price per share. The optionee shall acquire a vested interest
in, and the Company's repurchase right shall lapse with respect to, 25 percent
of the optionee's shares upon completion of one year of service from the date of
grant, and the remainder vest either on an annual basis or on a monthly basis
over the 36-month period measured from the first anniversary of the grant date.
At December 31, 1999, there were 262,550 shares subject to repurchase.
F-17
<PAGE> 90
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DATA AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
1999 Special Executive Stock Option Plan
On November 19, 1999, the Company adopted the Special Executive Stock
Option Plan (the "Executive Plan"). Participation in the Executive Plan is
limited to officers and other highly compensated employees. As of March 31,
2000, options to purchase 3,065,995 common shares were outstanding under this
plan. No additional options may be granted under this plan.
The Executive Plan provides that the exercise price for all options must be
at least 85% of the fair market of the option shares at the time of the option
grant. Furthermore, no option may have a term in excess of ten years, and each
option will be subject to early termination following the optionee's cessation
of services with the Company.
The Executive Plan also provides that the exercise price for the shares of
common stock subject to option grants may be paid in cash or in shares of common
stock valued at fair market value on the exercise date. Options vest over a
period determined by the Company's board of directors.
The following is a summary of transactions relating to the above plans:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, 1999 MARCH 31, 2000
----------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ---------------- ---------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Options outstanding at beginning of
period................................. -- $ -- 10,145,360 $0.932
Granted................................ 10,407,910 0.927 1,444,155 7.197
Exercised.............................. (262,550) 0.748 (271,675) 0.720
Canceled............................... -- -- (140,080) 1.457
---------- ----------
Options outstanding at end of the
period................................. 10,145,360 $0.932 11,177,760 $1.740
========== ==========
Options exercisable at end of period..... 5,809,270 $0.943 8,819,700 $1.762
</TABLE>
The following table shows pro forma net loss as if the fair value method
had been used to account for stock-based compensation expense:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
Net loss, as reported........................... $(15,212,244) $(10,901,655)
Pro forma adjustment............................ (242,939) (551,477)
------------ ------------
Pro forma net loss.............................. $(15,455,183) $(11,453,132)
============ ============
</TABLE>
The following outlines the significant assumptions used to calculate the
fair value information presented utilizing the Black-Scholes approach with
ratable amortization as of December 31, 1999:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 5.63% to 6.18%
Expected life............................................... 4.00
Expected volatility......................................... 77.70%
Expected dividends.......................................... --
Weighted average fair value of options granted.............. $0.928
</TABLE>
At December 31, 1999, and at March 31, 2000, the Company has reserved
14,000,000 shares of common stock for issuance under the Plan.
F-18
<PAGE> 91
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DATA AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
Warrants
In June 1999, the Company became obligated to issue warrants exercisable
for 691,880 and 182,390 shares of common stock at an exercise price of
approximately $1.08 and $2.06 per share as consideration for consulting services
performed. In connection therewith, the Company recorded expenses of $750,000
and $375,000, respectively, which was deemed to be the fair market value of the
services performed.
In September 1999, the Company became obligated to issue warrants
exercisable for 47,770 and 46,155 shares of common stock at an exercise price of
approximately $1.57 and $0.65 per share as consideration for consulting services
performed. In connection therewith, the Company recorded expenses of $75,000 and
$30,000, respectively, which was deemed to be the fair market value of the
services performed.
On December 7, 1999, the Company issued a common stock warrant and a series
C preferred warrant to BP Amoco. The common stock warrant has a five-year term
and is exercisable for 3,339,220 shares of common stock at an exercise price of
$1.57 per share. The series C preferred warrant has a one year term and is
exercisable for 667,844, the equivalent of 3,339,220 common, shares at an
exercise price of $10.28 which increases at an annual rate of 12 percent
compounded daily over the term of the warrant. The value of these warrants is
approximately $3,317,000 and was expensed. The value of these warrants was
determined using the Black-Scholes options pricing model with the following
assumptions: risk free interest rate of 5.82%; expected life of 5 years;
weighted average volatility of 77.70% and weighted average dividend yield of
0.00%.
9. INCOME TAXES
The Company did not record a tax provision at December 31, 1998 and 1999,
and March 31, 2000, as it had incurred only operating losses as of these dates.
The components of the Company's net deferred income tax assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
<S> <C> <C>
Net operating loss carryforwards.......................... $ 4,826,143 $ 7,167,134
Gross deferred tax assets................................. 1,107,062 2,486,028
----------- -----------
5,933,205 9,653,162
Less: Valuation allowance................................. (5,933,205) (9,653,162)
----------- -----------
Net deferred tax assets................................. $ -- $ --
=========== ===========
</TABLE>
A full valuation allowance is provided because of the uncertainty of
realizing the deferred tax assets.
At December 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $4,826,143, expiring in years 2018 and 2006,
respectively. At March 31, 2000, the Company had federal and state net operating
loss carryforwards of approximately $7,167,134, expiring in years 2018 and 2006,
respectively. The realization of future tax benefits from utilization of the net
operating loss carryforwards may be subject to certain limitations as a result
of ownership changes that have occurred and may occur in the future.
F-19
<PAGE> 92
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DATA AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
10. LOSS PER SHARE
The following is the calculation for net loss per share:
<TABLE>
<CAPTION>
OCTOBER 29,
1998 THREE MONTHS
(INCEPTION) TO YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1999 2000
-------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Basic:
Net loss................................ $(183,604) $(15,212,244) $(10,901,655)
--------- ------------ ------------
Weighted average common shares.......... 1,307 6,906,334 9,434,300
--------- ------------ ------------
Net loss per common share............... $ (140.48) $ (2.20) $ (1.16)
========= ============ ============
Diluted:
Net loss................................ $(183,604) $(15,212,244) $(10,901,655)
Weighted average common shares.......... 1,307 6,906,334 9,434,300
Stock options adjustment................ -- -- --
Convertible preferred stock............. -- -- --
--------- ------------ ------------
Average common shares outstanding....... 1,307 6,906,334 9,434,300
--------- ------------ ------------
Net loss per common share............... $ (140.48) $ (2.20) $ (1.16)
========= ============ ============
</TABLE>
At December 31, 1998 and 1999, and March 31, 2000, respectively,
outstanding options to purchase 0, 10,145,360, and 11,177,760 shares of common
stock, warrants to purchase common stock or to purchase preferred stock
convertible into common stock of 0, 7,646,635, and 7,646,635 shares of common
stock, as well as preferred shares convertible into 22,500,000, 53,331,060, and
62,145,566 shares of common stock were not included in the computation of
diluted earnings per share as the effect would be antidilutive.
11. SUBSEQUENT EVENTS (UNAUDITED)
In April 2000, the Company announced its intention to adopt the 2000
Employee Stock Purchase Plan (the "2000 Stock Purchase Plan"). Under the 2000
Stock Purchase Plan, employees may elect to participate by contributing to the
plan or portion, not in excess of 10 percent, of their after-tax pay for each
pay period during the quarter. The stock purchase price will be the lesser of
the fair market value of the common stock on the first day of the quarter or the
fair market value of the common stock on the last day of the quarter, minus a 15
percent discount. The total number of shares available for purchase under the
2000 Stock Purchase Plan may not exceed 2,000,000 shares. The Company
anticipates that the 2000 Stock Purchase Plan will be adopted by the board of
directors and stockholders in May 2000.
In April 2000, the Company announced its intention to adopt the 2000 Equity
Incentive Plan. This plan is intended to be the successor program to the
existing 1999 plans. The 2000 Equity Incentive Plan provides various equity
incentive programs, including discretionary option grants for employees and
consultants and automatic option grants for non-employee directors. The initial
number of shares available under the 2000 Equity Incentive Plan is 20,000,000
shares which includes shares subject to outstanding options or available for
grant under the 1999 plan. The Company anticipates that the 2000 Equity
Incentive Plan will be adopted by the board of directors and stockholders in May
2000.
Subsequent to March 31, 2000, warrants to purchase an aggregate of 667,844
shares of Series C preferred stock and 3,339,200 shares of common stock were
exercised.
During the period ended March 31, 2000, employees of the Company exercised
their stock options to purchase 271,675 shares of common stock for total
consideration of approximately $199,000.
F-20
<PAGE> 93
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Gunn Partners, Inc.
Boston, Massachusetts
We have audited the accompanying balance sheets of Gunn Partners, Inc. as
of December 31, 1997 and 1998 and as of November 22, 1999, and the related
statements of income, retained earnings, and cash flows for the years ended
December 31, 1997 and 1998 and for the period from January 1, 1999 through
November 22, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gunn Partners, Inc., as of
December 31, 1997 and 1998, and as of November 22, 1999, the results of its
operations and its cash flows for the years ended December 31, 1997 and 1998 and
for the period from January 1, 1999 through November 22, 1999, the period
January 1, 1999 through November 22, 1999, and the years ended December 31, 1998
and 1997 in conformity with generally accepted accounting principles.
/s/ VITALE, CATURANO AND COMPANY, P.C.
March 16, 2000
Boston, Massachusetts
F-21
<PAGE> 94
GUNN PARTNERS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------- NOVEMBER 22,
1996 1997 1998 1999
----------- ---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash............................................. $ 200,931 $ 187,202 $ 444,021 $ 794,751
Accounts receivable, net of allowance for
doubtful accounts of $75,000 in 1996
(unaudited), 1997, 1998 and November 22,
1999........................................... 1,260,672 1,810,213 1,670,185 2,275,280
Work-in-process.................................. -- -- -- --
Due from employees............................... 44,156 40,644 2,900 16,900
---------- ---------- ---------- ----------
Total current assets...................... 1,505,759 2,038,059 2,117,106 3,086,931
---------- ---------- ---------- ----------
Property and equipment, at cost:
Computer equipment............................... 214,524 225,983 218,480 188,811
Computer software................................ 46,850 66,592 78,016 79,042
Furniture and fixtures........................... 22,631 22,631 22,418 23,750
---------- ---------- ---------- ----------
284,005 315,206 318,914 291,603
Less -- accumulated depreciation................. 127,884 144,085 194,705 166,107
---------- ---------- ---------- ----------
Net property and equipment................ 156,121 171,121 124,209 125,496
---------- ---------- ---------- ----------
Other assets:
Organization costs, net of accumulated
amortization of $1,425 in 1996 (unaudited)..... 75 -- --
Deposits......................................... 12,238 12,709 9,743 15,759
---------- ---------- ---------- ----------
Total other assets........................ 12,313 12,709 9,743 15,759
---------- ---------- ---------- ----------
$1,674,193 $2,221,889 $2,251,058 $3,228,186
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 217,759 $ 222,213 $ 291,802 $ 580,044
Accrued and withheld liabilities................. 83,548 256,630 166,262 371,387
Accrued retirement plan contribution............. 472,515 294,312 577,401 537,601
Advances from shareholder........................ -- 170,000 -- --
---------- ---------- ---------- ----------
Total current liabilities................. 773,822 943,155 1,035,465 1,489,032
---------- ---------- ---------- ----------
Noncurrent liabilities:
Deferred compensation payable.................... 874,471 1,252,834 1,189,693 1,713,254
---------- ---------- ---------- ----------
Total noncurrent liabilities.............. 874,471 1,252,834 1,189,693 1,713,254
---------- ---------- ---------- ----------
Shareholders' equity:
Common stock, $.01 par value, 3,000 shares
authorized, 900 shares issued, 600 shares
outstanding.................................... 9 9 9 9
Additional paid-in capital....................... 39,991 39,991 39,991 39,991
Retained earnings................................ -- -- -- --
---------- ---------- ---------- ----------
40,000 40,000 40,000 40,000
Less -- 300 shares of treasury stock, at cost.... 14,100 14,100 14,100 14,100
---------- ---------- ---------- ----------
Total shareholders' equity................ 25,900 25,900 25,900 25,900
---------- ---------- ---------- ----------
$1,674,193 $2,221,889 $2,251,058 $3,228,186
========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-22
<PAGE> 95
GUNN PARTNERS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
JANUARY 1,
1999
YEARS ENDED DECEMBER 31, THROUGH
-------------------------- NOVEMBER 22,
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net Revenue....................................... $ 8,783,365 $13,167,608 $10,388,296
Cost of revenue................................... 4,213,129 4,196,555 3,671,841
----------- ----------- -----------
Gross Profit............................ 4,570,236 8,971,053 6,716,455
General and administrative expenses............... 4,570,833 8,952,462 6,704,566
----------- ----------- -----------
Income (loss) from operations........... (597) 18,591 11,889
----------- ----------- -----------
Other income (expense):
Interest income................................. 3,277 31,352 17,059
Interest expense................................ (2,680) (8,657) --
----------- ----------- -----------
597 22,695 17,059
----------- ----------- -----------
Net income.............................. $ -- $ 41,286 $ 28,948
=========== =========== ===========
Proforma adjustment to reflect C Corporation
income taxes
Income before income taxes...................... $ -- $ 41,286 $ 28,948
Proforma C Corporation income taxes............. -- 6,193 4,342
----------- ----------- -----------
Proforma net income..................... $ -- $ 35,093 $ 24,606
=========== =========== ===========
Net income per common share:
Basic and diluted................................. $ -- $ 58.49 $ 41.01
=========== =========== ===========
Weighted average common shares outstanding:
Basic and diluted................................. 600 600 600
=========== =========== ===========
</TABLE>
See accompanying notes.
F-23
<PAGE> 96
GUNN PARTNERS, INC.
STATEMENTS OF RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 1,
DECEMBER 31, 1999 THROUGH
------------------ NOVEMBER 22,
1997 1998 1999
-------- ------- ------------
<S> <C> <C> <C>
Retained earnings, beginning of period...................... $ -- $ -- $ --
Net income.................................................. -- 41,286 28,948
Shareholder distributions................................... -- (41,286) (28,948)
-------- ------- --------
Retained earnings, end of period............................ $ -- $ -- $ --
======== ======= ========
</TABLE>
See accompanying notes.
F-24
<PAGE> 97
GUNN PARTNERS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 1, 1999
YEARS ENDED DECEMBER 31, THROUGH
------------------------ NOVEMBER 22,
1997 1998 1999
---------- ---------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ -- $ 41,286 $ 28,948
Adjustment to reconcile net income to cash
provided by (used in) operating activities
Depreciation and amortization.................. 82,465 79,856 39,076
Loss on disposal of equipment.................. 27,692 9,169 19,651
--------- --------- ---------
Cash provided by operating activities before
changes in assets and liabilities.............. 110,157 130,311 87,675
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable.......................... (549,541) 140,028 (605,095)
Deposits..................................... (471) 2,966 (6,016)
Increase (decrease) in:
Accounts payable............................. 4,454 69,589 288,242
Accrued and withheld liabilities............. 173,082 (90,368) 205,125
Accrued retirement plan contribution......... (178,203) 283,089 (39,800)
Deferred compensation payable................ 378,363 (63,141) 523,561
--------- --------- ---------
Net cash provided by (used in) operating
activities................................ (62,159) 472,474 453,692
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of equipment................... -- 2,000 --
Acquisition of property and equipment............. (125,082) (44,113) (60,014)
Collections on advances to employees.............. 3,512 37,744 --
Advances to employees............................. -- -- (14,000)
--------- --------- ---------
Net cash used in investing activities..... (121,570) (4,369) (74,014)
--------- --------- ---------
Cash flows from financing activities:
Advances from shareholder......................... 170,000 -- --
Payment of shareholder loan....................... -- (170,000) --
Shareholder distributions......................... -- (41,286) (28,948)
--------- --------- ---------
Net cash provided by (used in) financing
activities.............................. 170,000 (211,286) (28,948)
--------- --------- ---------
Net increase (decrease) in cash..................... (13,729) 256,819 350,730
Cash, beginning of period........................... 200,931 187,202 444,021
--------- --------- ---------
Cash, end of period................................. $ 187,202 $ 444,021 $ 794,751
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest....................................... $ 2,680 $ 8,657 $ --
========= ========= =========
</TABLE>
See accompanying notes.
F-25
<PAGE> 98
GUNN PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company is a consulting and research firm specializing in human
resources and accounting process measurement and improvement. The Company has a
client base located primarily in North America and Europe. The Company grants
credit to its customers and consequently, the Company's ability to collect is
affected by fluctuations in the economy of each country in which the Company
conducts business.
Basis of Presentation
These financial statements reflect the Company's financial position,
results of operations, and cash flows as of December 31, 1997 and 1998, and
November 22, 1999, and for the years ended December 31, 1997 and 1998, and for
the period ended November 22, 1999, but prior to the sale of the Company's
operating assets as described in Note 7.
Revenue Recognition
Revenue, net of reimbursable expenses, is recognized in the period in which
the services are provided and are billable.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
Accounts Receivable
An allowance for doubtful accounts is provided based upon management's
estimated amount of uncollectible accounts receivable. As of December 31, 1997
and 1998, and November 22, 1999, the allowance for doubtful accounts was
$75,000.
Work-in-Process
Work-in-process represents revenues for services which are not yet
billable. Work-in-process is fully reserved since management is uncertain of the
amount that is billable in the future. Fully reserved work-in-process as of
December 31, 1997 and 1998, and November 22, 1999, invoiced in the subsequent
period was approximately $0, $200,000 and $70,000, respectively.
Property and Equipment
The Company records property and equipment at cost and depreciates the
assets using accelerated and straight-line methods over the estimated useful
lives as follows:
<TABLE>
<S> <C>
Computer equipment.......................................... 5 years
Computer software........................................... 3 years
Furniture and fixtures...................................... 5-10 years
</TABLE>
Expenditures for maintenance, repairs and minor renewals are charged to
operations as incurred, and expenditures for betterments and major renewals are
charged to the property and equipment accounts.
Foreign Currency Transactions
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than U.S. dollars are included in
the results of operations as incurred.
F-26
<PAGE> 99
GUNN PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Income Taxes
The Company, with the consent of its shareholders, elected to be taxed
under the provisions of Subchapter S of the Internal Revenue Code. Under these
provisions, the Company does not pay federal income taxes. Instead, the
shareholders are liable for individual federal income taxes on the Company's
taxable income. For state income tax purposes, the Company is liable for state
corporate income taxes. The state income tax expense for the years ended
December 31, 1997 and 1998, and for the period from January 1, 1999 through
November 22, 1999, were immaterial.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," which requires companies with complex
capital structures or common stock equivalents to present both basic and diluted
earnings per share ("EPS") on the face of the statement of income. Basic EPS is
calculated as income available to common stockholders divided by the weighted
average number of common shares outstanding during the period. Diluted EPS is
calculated using the "if converted" method for convertible securities and the
treasury stock method for options and warrants as previously prescribed by
Accounting Principles Board Opinion No. 15, "Earnings Per Share."
Fair Value of Financial Instruments
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments,"
requires the disclosure of the fair value of financial instruments, including
assets and liabilities recognized in the balance sheet. Cash accounts
receivable, due from employees, deposits, accounts payable, and accrued
liabilities are reflected in the financial statements at cost, which
approximates fair value because of the short-term maturity of those instruments.
Comprehensive Income
The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income, as defined, includes all changes in equity during a period of non-owner
sources. The Company's comprehensive net income has not varied from the
Company's reported net income by a material amount.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
As issued, SFAS No. 133 is effective for all fiscal years beginning after June
15, 1999, with earlier application encouraged. In May 1999, the FASB delayed the
effective date of SFAS No. 133 for one year, to fiscal years beginning after
June 15, 2000. The Company does not currently nor does it intend in the future
to use derivative instruments and therefore does not expect that the adoption of
SFAS No. 133 will have any impact on its financial position or results of
operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
F-27
<PAGE> 100
GUNN PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts, which, at times,
may exceed federally insured limits. The Company has not experienced any losses
in such accounts. The Company believes it is not exposed to any significant
credit risk on cash and cash equivalents.
2. RETIREMENT PLANS
The Company has a defined contribution profit sharing 401(k) plan and a
defined contribution money purchase pension plan covering substantially all of
its employees. Profit sharing contributions to the plan are determined annually
by the Board of Directors subject to certain limitations. The money purchase
pension plan provides for contributions equal to 5% of qualifying compensation.
For the years ended December 31, 1997 and 1998, and for the period from January
1, 1999 through November 22, 1999, total employer contributions under these
retirement plans were $294,312, $585,051, and $537,601, respectively.
3. ADVANCES FROM SHAREHOLDER
During the year ended December 31, 1997, a shareholder advanced the Company
$170,000 which was payable on demand with interest at the prime rate plus 2%.
During the year ended December 31, 1998, the advances from shareholder were
repaid in full.
4. DEFERRED COMPENSATION
During the year ended December 31, 1992, the Company entered into an
unfunded, nonqualified deferred compensation agreement with several key
employees. Under the agreement, the Company is required to maintain a deferred
compensation account for each participant. Such amounts are payable upon the
death, permanent disability, or the termination of employment of a participant,
as well as the dissolution or liquidation of the corporation. Under the plan,
increases and decreases in deferred compensation are based on changes in the net
book value of the Company determined annually. For the years ended December 31,
1997 and 1998, and for the period from January 1, 1999, through November 22,
1999, deferred compensation was increased (reduced) by $378,364, $(63,141), and
$523,561, respectively.
5. CONTINGENCIES AND COMMITMENTS
The Company leases facilities, under operating lease agreements, in several
locations throughout the United States and Europe. In addition, the Company
leases certain equipment under operating lease agreements. At November 22, 1999,
prior to the acquisition for the Company by Exult, Inc., the future minimum
lease payments for the years ending December 31 are as follows:
<TABLE>
<S> <C>
2000........................................................ $230,000
2001........................................................ 131,000
2002........................................................ 41,000
2003........................................................ 13,000
--------
$415,000
========
</TABLE>
F-28
<PAGE> 101
GUNN PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. ACCRUED AND WITHHELD LIABILITIES
Accrued and withheld liabilities at December 31, 1997 and 1998, and
November 22, 1999, consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- NOVEMBER 22,
1997 1998 1999
-------- -------- ------------
<S> <C> <C> <C>
Accrued payroll and withholdings..................... $256,630 $127,337 $358,747
Other................................................ -- 38,925 12,640
-------- -------- --------
Total accrued and withheld liabilities............... $256,630 $166,262 $371,387
======== ======== ========
</TABLE>
7. SUBSEQUENT EVENTS
On November 22, 1999, the Company sold substantially all of its operating
assets to Exult, Inc. The Company continues in existence to collect its accounts
receivable and pay its accounts payable outstanding on the date of closing.
Effective November 23, 1999, the Company no longer provided substantial services
to clients and is winding up its affairs.
F-29
<PAGE> 102
GUNN PARTNERS, INC.
UNAUDITED STATEMENTS OF INCOME (LOSS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996
---------- ----------
<S> <C> <C>
Net revenue................................................. $7,961,303 $7,867,161
Cost of revenue............................................. 3,147,585 3,135,039
---------- ----------
Gross profit...................................... 4,813,718 4,732,122
General and administrative expenses......................... 4,887,136 4,715,762
---------- ----------
Income (loss) from operations..................... (73,418) 16,360
---------- ----------
Other income (expense):
Interest income........................................... 6,343 4,002
Interest expense.......................................... (18,509) (6,862)
---------- ----------
(12,166) (2,860)
---------- ----------
Net income (loss) $ (85,584) $ 13,500
========== ==========
</TABLE>
F-30
<PAGE> 103
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
In the opinion of our management, all adjustments necessary to fairly
present this pro forma information have been made. The Unaudited Pro Forma
Condensed Combined Financial Statements are based upon, and should be read in
conjunction with, the historical financial statements of Exult and Gunn
(collectively, the "Company"), and the respective notes to such financial
statements presented elsewhere in this Prospectus. The pro forma information is
based upon the tentative allocations of purchase price for the acquisition of
Gunn and may not be indicative of the results that would have been reported had
such events actually occurred on the dates specified, nor is it indicative of
the Company's future results. The final allocation of purchase price is not
expected to differ materially from the tentative allocation or to have a
material impact on results of operations or financial position. Purchase
accounting is based upon preliminary asset valuations, which are subject to
change. Furthermore, post-closing adjustments, if any, are not expected to have
a material impact on results of operations or financial position.
The Unaudited Pro Forma Condensed Combined Financial Statements of
Operations for the year ended December 31, 1999, is presented as if Exult had
completed as of January 1, 1999, the acquisition of Gunn, the issuance of
385,805 shares of Series C preferred stock and 6,885,480 shares of Series D
preferred stock, the exercise of warrants to purchase an aggregate of 3,339,220
shares of common stock and 667,844 shares of Series C preferred stock, the
conversion of all outstanding preferred stock into 65,484,786 shares of common
stock, and the exercise of options to purchase 271,675 shares of common stock.
PF-1
<PAGE> 104
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------
GUNN PARTNERS PRO FORMA PRO FORMA
EXULT, INC. INC.(A) ADJUSTMENTS COMBINED
----------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue................................... $ 4,857 $10,388 $ -- $ 15,245
Cost of revenue........................... 4,498 3,672 -- 8,170
-------- ------- ------- ----------
Gross profit.............................. 359 6,716 -- 7,075
-------- ------- ------- ----------
Expenses:
Product development..................... 368 -- -- 368
Selling, general and administrative..... 15,466 6,708 3,903(b) 26,077
-------- ------- ------- ----------
Total expenses....................... 15,834 6,708 3,903 26,445
-------- ------- ------- ----------
Loss from operations................. (15,475) 8 (3,903) (19,370)
-------- ------- ------- ----------
Interest income, net...................... 263 17 -- 280
-------- ------- ------- ----------
Net loss............................. $(15,212) $ 25 $(3,903) $ (19,090)
======== ======= ======= ==========
Net loss per common share:
Basic and diluted....................... $ (0.25)
Weighted average common shares
outstanding:
Basic and diluted(c).................... 75,998,174
</TABLE>
-------------------------
(a) Gunn was acquired by Exult on November 22, 1999, in a purchase-type
transaction for approximately $14.0 million. The results of operations of
Gunn will be included in the Company's consolidated results commencing upon
the date of acquisition. This presentation shows the pro forma effects of
the operations of Gunn as if the acquisition occurred on January 1, 1999.
The results of operations for Exult from October 29, 1998, (Inception)
through December 31, 1998, are immaterial to the operating results of Gunn
for the year ended December 31, 1998.
(b) Represents the amortization of $3.9 million that would have been recorded on
intangible assets for the period from January 1, 1999 through November 22,
1999, the date of acquisition. Intangibles are amortized on a straight-line
basis over a period of one to five years. No other significant fair value
purchase price adjustments were recorded in conjunction with the acquisition
of Gunn.
(c) Reflects the acquisition of Gunn, the issuance of 385,805 shares of Series C
preferred stock and 6,885,480 shares of Series D preferred stock, the
exercise of warrants to purchase an aggregate of 3,339,220 shares of common
stock and 667,844 shares of Series C preferred stock, the conversion of all
outstanding preferred stock into 65,484,786 shares of common stock, and the
exercise of options to purchase 271,675 shares of common stock.
PF-2
<PAGE> 105
[Cover Art]
[EXULT LOGO]
PROCESS EXCELLENCE, PROVEN RESULTS
<PAGE> 106
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
THROUGH AND INCLUDING , 2000 (THE 25TH DAY AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
6,000,000 SHARES
[EXULT LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
ROBERTSON STEPHENS
SALOMON SMITH BARNEY
, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 107
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION,
PRELIMINARY PROSPECTUS DATED JUNE 1, 2000
PROSPECTUS
6,000,000 SHARES
[EXULT LOGO]
COMMON STOCK
----------------------
This is Exult, Inc.'s initial public offering of common stock. We are
offering 6,000,000 shares. The international managers are offering 900,000
shares outside the U.S. and Canada and the U.S. underwriters are offering
5,100,000 shares in the U.S. and Canada.
We expect the initial public offering price to be between $10 and $12 per
share. Currently, no public market exists for our stock. After pricing of the
offering, we expect that the shares will be quoted on the Nasdaq National Market
under the symbol "EXLT."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price........................ $ $
Underwriting discount........................ $ $
Proceeds, before expenses, to Exult.......... $ $
</TABLE>
The international managers may also purchase up to an additional 135,000
shares at the public offering price, less the underwriting discount, within 30
days from the date of this prospectus to cover over-allotments. The U.S.
underwriters may similarly purchase up to an additional 765,000 shares at the
public offering price, less the underwriting discount.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares will be ready for delivery on or about , 2000.
----------------------
MERRILL LYNCH INTERNATIONAL
BEAR, STEARNS INTERNATIONAL LIMITED
ROBERTSON STEPHENS INTERNATIONAL
SALOMON SMITH BARNEY INTERNATIONAL
----------------------
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 108
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
6,000,000 SHARES
[EXULT LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH INTERNATIONAL
BEAR, STEARNS INTERNATIONAL LIMITED
ROBERTSON STEPHENS INTERNATIONAL
SALOMON SMITH BARNEY INTERNATIONAL
, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 109
UNDERWRITING
We intend to offer the shares outside the U.S. and Canada through the
international managers and in the U.S. and Canada through the U.S. underwriters.
Merrill Lynch International, Bear, Stearns International Limited, FleetBoston
Robertson International Limited and Salomon Brothers International Limited are
acting as lead managers for the international managers named below. Subject to
the terms and conditions described in an international purchase agreement among
us and the international managers, and concurrently with the sale of 5,100,000
shares to the U.S. underwriters, we have agreed to sell to the international
managers, and the international managers severally have agreed to purchase from
us, the number of shares listed opposite their names below.
<TABLE>
<CAPTION>
NUMBER
OF
SHARES
INTERNATIONAL MANAGERS ------
<S> <C>
Merrill Lynch International.................................
Bear, Stearns International Limited.........................
FleetBoston Robertson Stephens International Limited........
Salomon Brothers International Limited......................
-------
Total.......................................... 900,000
=======
</TABLE>
We have also entered into a U.S. purchase agreement with the U.S.
underwriters for sale of the shares in the U.S. and Canada for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc.,
FleetBoston Robertson Stephens Inc. and Salomon Smith Barney Inc. are acting as
U.S. representatives. Subject to the terms and conditions in the U.S. purchase
agreement, and concurrently with the sale of 900,000 shares to the international
managers pursuant to the international purchase agreement, we have agreed to
sell to the U.S. underwriters, and the U.S. underwriters severally have agreed
to purchase 5,100,000 shares from us. The initial public offering price per
share and the total underwriting discount per share are identical under the
international purchase agreement and the U.S. purchase agreement.
The international managers and the U.S. underwriters have agreed to
purchase all of the shares sold under the international and U.S. purchase
agreements if any of these shares are purchased. If an underwriter defaults, the
U.S. and international purchase agreements provide that the purchase commitments
of the nondefaulting underwriters may be increased or the purchase agreements
may be terminated. The closings for the sale of shares to be purchased by the
international managers and the U.S. underwriters are conditioned on one another.
Generally, we have agreed to indemnify each underwriter against liability
arising out of any untrue statement contained in the registration statement, any
preliminary prospectus or the final prospectus, or the omission of a material
fact required to be stated in the registration statement or such prospectus
necessary to make the statements in the registration statement or such
prospectus not misleading. In addition, we have agreed to indemnify each
underwriter against liability arising out of our violations of laws or
regulations of foreign jurisdictions where reserved shares have been offered.
The underwriters have agreed to indemnify us against liability with respect to
untrue statements or omissions, or alleged untrue statements or omissions, made
in the registration statement, any preliminary prospectus or the final
prospectus in reliance upon and in conformity with written information furnished
to us by that underwriter through Merrill Lynch expressly for use in the
registration statement, such preliminary prospectus or the prospectus. For more
detailed information on the terms of indemnification contained in the purchase
agreement, please see Exhibit 1.1 to the registration statement.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
67
<PAGE> 110
COMMISSIONS AND DISCOUNTS
The lead managers have advised us that the international managers propose
initially to offer the shares to the public at the initial public offering price
listed on the cover page of this prospectus, and to dealers at that price less a
concession not in excess of $ per share. The international managers may
allow, and the dealers may reallow, a discount not in excess of $ per
share to other dealers. After the initial public offering, the public offering
price, concession and discount may be changed.
The following table shows the public offering price, underwriting discount
and proceeds before expenses to Exult. The information assumes either no
exercise or full exercise by the international managers and the U.S.
underwriters of their over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.......................... $ $ $
Underwriting discount.......................... $ $ $
Proceeds, before expenses, to Exult............ $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount, are
estimated at $ and are payable by us.
OVER-ALLOTMENT OPTION
We have granted options to the international managers to purchase up to
135,000 additional shares at the public offering price less the underwriting
discount. The international managers may exercise these options for 30 days from
the date of this prospectus solely to cover any over-allotments. If the
international managers exercise these options, each international manager will
be obligated, subject to conditions contained in the purchase agreements, to
purchase a number of additional shares proportionate to that international
manager's initial amount reflected in the above table.
We have also granted options to the U.S. underwriters, exercisable for 30
days from the date of this prospectus, to purchase up to 765,000 additional
shares to cover any over-allotments on terms similar to those granted to the
international managers.
INTERSYNDICATE AGREEMENT
The international managers and the U.S. underwriters have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the intersyndicate agreement, the international managers and the U.S.
underwriters may sell shares to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the intersyndicate agreement, the international managers and any dealer to
whom they sell shares will not offer to sell or sell shares to U.S. or Canadian
persons or to persons they believe intend to resell to U.S. or Canadian persons,
except in the case of transactions under the intersyndicate agreement.
Similarly, the U.S. underwriters and any dealer to whom they sell shares will
not offer to sell or sell shares to persons who are non-U.S. or non-Canadian
persons or to persons they believe intend to resell to persons who are non-U.S.
or non-Canadian persons, except in the case of transactions under the
intersyndicate agreement.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 10% of the shares offered by this prospectus for
sale to some of our directors, officers, employees, distributors, dealers,
business associates and related persons. If these persons purchase reserved
shares, this will reduce the number of shares available for sale to the general
public. Any reserved shares that are not orally confirmed for purchase within
one day of the pricing of the offering will be offered by the underwriters to
the general public on the same terms as the other shares offered by this
prospectus.
NO SALES OF SIMILAR SECURITIES
We and our executive officers, directors, substantially all existing
stockholders and a purchaser of up to 5% of the shares in this offering have
agreed, with exceptions described below, including for issuance of shares
relating to options, warranties, employee benefits plans, acquisitions and
strategic transactions, not to
68
<PAGE> 111
sell or transfer any common stock for 180 days after the date of this prospectus
without first obtaining the written consent of Merrill Lynch. Specifically, we
and these other individuals have agreed not to directly or indirectly
- offer, pledge, sell, or contract to sell any common stock,
- sell any option or contract to purchase any common stock,
- purchase any option or contract to sell any common stock,
- grant any option, right or warrant for the sale of any common stock,
- lend or otherwise dispose of or transfer any common stock,
- request or demand that we file a registration statement related to the
common stock, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common stock. It also
applies to common stock owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition. Exceptions to the lock-up are permitted for issuances by
Exult of shares relating to options, warrants, employee benefit plans,
acquisitions and strategic transactions, and for transfers by holders to Exult
or for estate planning purposes. Merrill Lynch may also consider releasing
certain persons from the lockup restrictions due to financial hardship or a
similar reason, Merrill Lynch does not anticipate such a release nor is any such
release currently contemplated.
QUOTATION ON THE NASDAQ NATIONAL MARKET
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations among
us and the U.S. representatives and lead managers. In addition to prevailing
market conditions, the factors to be considered in determining the initial
public offering price are
- the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us,
- our financial information,
- the history of, and the prospects for, our company and the industry in
which we compete,
- an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues,
- the present state of our development, and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares in the
aggregate to accounts over which they exercise discretionary authority.
The shares have been approved for quotation on the Nasdaq National Market
under the symbol "EXLT."
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
common stock. However, the U.S. representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the U.S. representatives may reduce
69
<PAGE> 112
that short position by purchasing shares in the open market. The U.S.
representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described above. Purchases of the common stock
to stabilize its price or to reduce a short position may cause the price of the
common stock to be higher than it might be in the absence of such purchases.
The U.S. representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriter's short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the U.S.
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
ELECTRONIC DISTRIBUTION
Neither the Company nor the Underwriters will rely on third party providers
to comply with the prospectus delivery requirements. All purchasers will receive
a printed version of the final prospectus.
Merrill Lynch will be facilitating Internet distribution for this offering
to certain of its Internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its online brokerage customers.
An electronic prospectus is available on the website maintained by Merrill
Lynch. Other than the prospectus in electronic format, the information on the
Merrill Lynch website relating to this offering is not a part of this
prospectus.
UK SELLING RESTRICTIONS
Each international manager has agreed that
- it has not offered or sold and will not offer or sell any shares of
common stock to persons in the United Kingdom, except to persons whose
ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which do not constitute an
offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995;
- it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the common stock in, from or otherwise involving the United
Kingdom; and
- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the
issuance of common stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 as amended by the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1997 or
is a person to whom such document may otherwise lawfully be issued or
passed on.
NO PUBLIC OFFERING OUTSIDE THE UNITED STATES
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of common
stock, or the possession, circulation or distribution of this prospectus or any
other material relating to our company or shares of our common stock in any
jurisdiction where action for that purpose is required. Accordingly, the shares
of our common stock may not be offered or sold, directly or indirectly, and
neither this prospectus nor any other offering material or advertisements in
connection with the shares of common stock may be distributed or published, in
or from any country or jurisdiction except in compliance with any applicable
rules and regulations of any such country or jurisdiction.
70
<PAGE> 113
Purchasers of the shares offered by this prospectus may be required to pay
stamp taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the offering price on the cover page of this
prospectus.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by this
prospectus will be passed upon for us by Brobeck, Phleger & Harrison LLP,
Irvine, California. As of March 31, 2000, Brobeck, Phleger & Harrison LLP and
certain entities or individuals affiliated with Brobeck, Phleger & Harrison LLP
beneficially owned 35,852 shares of Series B Preferred Stock and 19,456 shares
of Series C Preferred Stock, which shares will convert upon consummation of this
offering into an aggregate of 276,540 shares of common stock. Legal matters
relating to the sale of common stock in this offering will be passed upon for
the underwriters by Latham & Watkins, Los Angeles, California.
EXPERTS
The consolidated balance sheets of Exult, Inc. as of December 31, 1998 and
1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for the period from October 29, 1998 (Inception) to
December 31, 1998, and for the year ended December 31, 1999 included in this
prospectus and elsewhere in the registration statement, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving such reports.
The balance sheets of Gunn Partners, Inc. as of December 31, 1997 and 1998
and November 22, 1999, and the related statements of operations, retained
earnings and cash flows for the years ended December 31, 1997 and 1998 and the
period ended November 22, 1999 included in this prospectus and elsewhere in the
registration statement, have been audited by Vitale, Caturano and Company, P.C.,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving such reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission under the Securities Act with respect to the common stock
offered by this prospectus. This prospectus does not contain all of the
information in the registration statement and its exhibits and schedules. For
further information with respect to us and our common stock, please see the
registration statement and the exhibits and schedules filed with the
registration statement. Statements contained in this prospectus concerning the
contents of any contract or other document referred to are not necessarily
complete. Please refer to the copies of these contracts or other documents filed
as an exhibit to the registration statement. Each of these statements is
qualified in all respects by this reference. The registration statement,
including its exhibits and schedules, may be inspected without charge at the
principal office of the Commission in Washington, D.C. Copies of all or any part
of the registration statement may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. These copies may also be inspected and copied
at the Commission's Regional Offices located at:
- Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511; and
- 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of this material may be obtained at prescribed rates by mail from
the public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the Securities and Exchange Commission
maintains an Internet site at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding registrants,
including us, that file electronically.
71
<PAGE> 114
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the SEC and NASD registration fees. All of the expenses below will be
paid by us.
<TABLE>
<CAPTION>
ITEM
----
<S> <C>
SEC Registration fee........................................ $ 40,986
NASD filing fee............................................. 16,025
Nasdaq National Market listing fee.......................... 95,000
Blue sky fees and expenses.................................. 10,000
Printing and engraving expenses............................. 250,000
Legal fees and expenses..................................... 450,000
Accounting fees and expenses................................ 300,000
Transfer Agent and Registrar fees........................... 10,000
Miscellaneous............................................... 127,989
----------
Total..................................................... $1,300,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, we may indemnify
our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). Our bylaws (Exhibit 3.4 to this registration statement)
require us to indemnify our directors and officers to the fullest extent
permitted by law and require us to advance litigation expenses upon our receipt
of an undertaking by the director or officer to repay such advances if it is
ultimately determined that the director or officer is not entitled to
indemnification. Our bylaws further provide that rights conferred under such
bylaws do not exclude any other right such persons may have or acquire under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
Our certificate of incorporation (Exhibit 3.2 to this registration
statement) provides that, pursuant to Delaware law, our directors shall not be
liable for monetary damages for breach of the directors' fiduciary duty of care
to us and our stockholders. This provision in the certificate of incorporation
does not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to us or our
stockholders, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemption's that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
In addition, we have entered into agreements to indemnify our directors and
certain of our officers in addition to the indemnification provided for in our
bylaws. These agreements will, among other things, indemnify our directors and
some of our officers for certain expenses (including attorneys fees), judgments,
fines and settlement amounts incurred by such person in any action or
proceeding, including any action by or in our right, on account of services by
that person as a director or officer of Exult or as a director or officer of any
of our subsidiaries, or as a director or officer of any other company or
enterprise that the person provides services to at our request. We intend to
obtain directors' and officers' liability insurance in connection with this
offering.
II-1
<PAGE> 115
The purchase agreement (Exhibit 1.1 to this registration statement)
provides for indemnification by the underwriters of us and our officers and
directors, and by us of the underwriters, for certain liabilities arising under
the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of all sales of our securities since our
formation in October 1998. None of these sales was registered under the
Securities Act of 1933, as amended.
(1) On November 11, 1998, we issued 9,000 shares of common stock to
GAP Coinvestment Partners, L.P. for $1.
(2) On November 25, 1998, we sold an aggregate of 25,000 shares of
Series A Preferred Stock to General Atlantic Partners 54, L.P. and GAP
Coinvestment Partners, L.P. for an aggregate purchase price of $1,000,000.
Each share of Series A Preferred Stock will be converted into 900 shares of
common stock upon the closing of this offering, giving effect to our stock
splits effective April 26, 1999 and February 9, 2000.
(3) On April 1, 1999, we sold 8,856,000 shares of common stock to
James C. Madden for $39,360.
(4) On April 27, 1999, we sold an aggregate of 1,696,369 shares of
Series B Preferred Stock to General Atlantic Partners 54, L.P., GAP
Coinvestment Partners II, L.P. and Brobeck, Phleger & Harrison LLP for an
aggregate purchase price of $9,194,319. Each share of Series B Preferred
Stock will convert into five shares of common stock upon the closing of
this offering, giving effect to our stock split effective February 9, 2000.
(5) On June 6, 1999, we sold 306,750 shares of common stock to Ramsey
Beirne Investment Pool II, Inc. for $100,001 in cash and services valued at
$100,000.
(6) On September 22, 1999, we issued a warrant to McKinsey & Company,
Inc. to purchase 691,880 shares of common stock at an exercise price of
$1.084 per share and a warrant to purchase 182,390 shares of common stock
at an exercise price of $2.056 per share.
(7) On September 22, 1999, we issued a warrant to SpencerStuart to
purchase 47,770 shares of common stock at an exercise price of $1.57 per
share. We also issued another warrant to BridgeGate, LLC to purchase 46,155
shares of common stock at an exercise price of $0.65 per share.
(8) On October 22, 1999, we sold an aggregate of 1,478,600 shares of
Series C Preferred Stock to GAP Coinvestment Partners II, L.P., General
Atlantic Partners 57, L.P., Brobeck, Phleger & Harrison LLP and Bruce R.
Hallet for an aggregate purchase price of $15,200,000. Each share of Series
C Preferred Stock will be converted into five shares of common stock upon
the closing of this offering, giving effect to our stock split effective
February 9, 2000.
(9) On November 12, 1999, we sold an aggregate of 58,364 shares of
Series C Preferred Stock to William Pade and New Millennium Capital
Partners, LLC for an aggregate purchase price of $599,982. Each share of
Series C Preferred Stock will be converted into five shares of common stock
upon the closing of this offering.
(10) On December 7, 1999, we issued a warrant to BP International
Limited to purchase 3,339,220 shares of common stock at an exercise price
of $1.57 per share.
(11) On December 7, 1999, we issued a warrant to BP International
Limited to purchase 667,844 shares of Series C Preferred Stock at an
initial exercise price of $10.28 per share increasing daily at an annual
rate of 12%, compounded daily, following the date of issuance of the
warrant. Each share of Series C Preferred Stock will be converted into five
shares of common stock upon the closing of this offering. BP Amoco
exercised these warrants and the warrants referred to in item 10 above
effective on April 28, 2000 for an aggregate exercise price of $12,435,255.
II-2
<PAGE> 116
(12) On December 23, 1999, we sold an aggregate of 2,932,879 shares of
Series C Preferred Stock to General Atlantic Partners 60, L.P., GAP
Coinvestment Partners II, L.P. and JRO Consulting, Inc. for an aggregate
purchase price of $30,149,995. Each share of Series C Preferred Stock will
be converted into five shares of common stock upon the closing of this
offering.
(13) On February 7, 2000, we sold 385,805 shares of Series C Preferred
Stock to BP International Limited for $3,966,075. Each share of Series C
Preferred Stock will be converted into five shares of common stock upon the
closing of this offering.
(14) On February 10, 2000, we sold an aggregate of 6,885,480 shares of
Series D Preferred Stock to 12 accredited investors for an aggregate
purchase price of approximately $60,000,000. Each share of Series D
Preferred Stock will be converted into one share of common stock upon the
closing of this offering.
(15) On April 15, 2000, we sold 46,155 shares of common stock to
Bridge LLC for an aggregate purchase price of $30,000 upon exercise of a
warrant.
(16) Since August 1999, we issued an aggregate of 310,180 shares of
common stock to J. Michael Spence, JRO Consulting, Inc., Douglas Shurtleff
and Scott Figge for an aggregate purchase price of $221,662.30 upon the
exercise of stock options.
(17) Since May 1999, we have granted stock options to purchase an
aggregate of 9,597,165 shares of common stock under individual stock option
agreements and the 1999 Stock Option/Stock Issuance Plan to eligible
officers, directors, consultants and employees as described in the
prospectus.
(18) Since November 1999, we have granted stock options to purchase an
aggregate of 3,065,995 shares of common stock under individual stock option
agreements and the 1999 Special Executive Option Plan to eligible officers
and other highly compensated employees as described in the prospectus.
The offer and sale of securities in the above transactions did not involve
any public offering and were exempt from registration under the Securities Act
by virtue of Section 4(2) or Rule 701 thereof, or Regulation D. Appropriate
legends are affixed to the stock certificates issued in such transactions.
Similar legends were imposed in connection with any subsequent sales of any such
securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1** Form of Purchase Agreement.
2.1** Asset Purchase Agreement by and among Exult, Inc., Gunn
Partners Inc., the shareholders of Gunn Partners, Inc. and
Michael Gibson dated as of November 22, 1999.
2.2** Asset Purchase Agreement dated as of December 20, 1999 among
Pactiv Corporation, Pactiv Business Services, Inc. and
Exult, Inc.
3.1.1** Third Amended and Restated Certificate of Incorporation of
Exult, Inc.
3.1.2** Certificate of Amendment of Third Amended and Restated
Certificate of Incorporation of Exult, Inc.
3.1.3** Form of Fourth Amended and Restated Certificate of
Incorporation of Exult, Inc.
3.2** Amended and Restated Bylaws of Exult, Inc.
4.1 See Exhibits 3.1 and 3.2 for provisions of the Exult, Inc.'s
Certificate of Incorporation and Bylaws defining the rights
of holders of Exult, Inc.'s common stock.
4.2** Specimen common stock certificate.
</TABLE>
II-3
<PAGE> 117
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
5.1** Form of Opinion of Brobeck, Phleger and Harrison LLP.
10.1.1** Registrant's 1999 Stock Option/Stock Issuance Plan.
10.1.2** Form of Notice of Grant of Stock Option.
10.1.3** Form of Stock Option Agreement.
10.1.4** Form of Addendum to Stock Option Agreement.
10.1.5** Form of Stock Purchase Agreement.
10.1.6** Form of Addendum to Stock Purchase Agreement.
10.1.7** Form of Stock Issuance Agreement.
10.1.8** Form of Addendum to Stock Issuance Agreement.
10.2.1** Registrant's 1999 Special Executive Stock Option/Stock
Issuance Plan.
10.2.2** Form of Notice of Grant of Stock Option.
10.2.3** Form of Stock Option Agreement.
10.2.4** Form of Addendum to Stock Option Agreement.
10.2.5** Form of Stock Purchase Agreement.
10.2.6** Form of Addendum to Stock Purchase Agreement.
10.2.7** Form of Stock Issuance Agreement.
10.2.8** Form of Addendum to Stock Issuance Agreement.
10.3** Form of Directors' and Officers' Indemnification Agreement.
10.4** Founder Stock Purchase Agreement by and among BPO-US, Inc.,
James Madden and General Atlantic Partners, LLC dated April
1, 1999.
10.5.1** Amended and Restated Registration Rights Agreement among
Exult, Inc. and the Stockholders identified therein dated
December 23, 1999.
10.5.2** Amendment No. 1 to Amended and Restated Registration Rights
Agreement among Exult and the Stockholders identified
therein dated February 10, 2000.
10.6.1** Office Space Lease between The Irvine Company and BPO-US,
Inc. dated June 28, 1999.
10.6.2** First Amendment to Office Space Lease between The Irvine
Company and Exult, Inc. dated February 29, 2000.
10.7.1** Lease Agreement Venture Technology Center VI Building, The
Woodlands, Montgomery County, Texas between The Woodlands
Corporation and Tenneco Business Services Inc. dated August
15, 1995.
10.7.2** Assignment and Assumption of Lease between Pactiv Business
Services Inc. (formerly known as Tenneco Business Services
Inc.) and Exult, Inc. dated January 1, 2000.
10.8+** Framework Agreement dated December 7, 1999 by and between
the Company and BP Amoco p.l.c.
10.9+** US Country Agreement dated December 7, 1999 by and between
the Company and BP America, Inc.
10.10+** UK Country Agreement dated December 7, 1999 by and between
Exult Limited and BP International Limited.
10.11.1** Executive Employment Agreement dated October 1, 1999 by and
between Exult, Inc. and James C. Madden.
10.11.2** Memorandum dated February 29, 2000 regarding compensation.
</TABLE>
II-4
<PAGE> 118
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.12.1** Executive Employment Agreement dated October 1, 1999 by and
between Exult, Inc. and Stephen M. Unterberger.
10.12.2** Memorandum dated February 29, 2000 regarding compensation.
10.13** Executive Employment Agreement dated August 25, 1999 by and
between Exult, Inc. and Barbara A. Coull-Williams.
10.14** Executive Employment Agreement dated October 1, 1999 by and
between Exult, Inc. and Scott J. Figge.
10.15** Executive Employment Agreement dated August 25, 1999 by and
between Exult, Inc. and Rebecca L. Work.
10.16** Registrant's 2000 Employee Stock Purchase Plan.
10.17** Lease among Scottish Mutual Assurance plc and Exult Limited
and Exult, Inc.
10.18** Registrant's 2000 Stock Incentive Plan.
10.19.1** Executive Employment Agreement dated May 30, 2000 by and
between Exult, Inc. and Kevin Campbell.
10.19.2** Loan Agreement dated May 30, 2000 by and between Exult, Inc.
and Kevin Campbell.
21.1** Subsidiaries of Exult, Inc.
23.1** Form of Consent of Brobeck, Phleger & Harrison LLP (Included
in Exhibit 5.1 hereto).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Vitale, Caturano and Company, P.C.
24.1** Power of Attorney (Included on signature pages hereto).
27.1** Financial Data Schedule.
</TABLE>
---------------
** Previously filed.
+ Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
II-5
<PAGE> 119
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of Exult
pursuant to the foregoing provisions, or otherwise, Exult has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Exult of expenses incurred or paid by a
director, officer or controlling person of Exult in the successful defense of
any action, suit, or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, Exult
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus as filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by Exult pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and this offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 120
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Exult, Inc. has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Irvine, State of California, on the 1st day of June, 2000.
EXULT, INC.
By: /s/ DOUGLAS SHURTLEFF
------------------------------------
Executive Vice President, Treasurer
and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
* Chief Executive Officer, President June 1, 2000
----------------------------------------------------- and Chairman of the Board
James C. Madden, V (principal executive officer)
/s/ DOUGLAS L. SHURTLEFF Executive Vice President, June 1, 2000
----------------------------------------------------- Treasurer and Chief Financial
Douglas L. Shurtleff Officer (principal financial
officer)
* Director June 1, 2000
-----------------------------------------------------
J. Michael Cline
* Director June 1, 2000
-----------------------------------------------------
Steven A. Denning
* Director June 1, 2000
-----------------------------------------------------
A. Michael Spence
* Director June 1, 2000
-----------------------------------------------------
John R. Oltman
* Director June 1, 2000
-----------------------------------------------------
Michael A. Miles
* Director June 1, 2000
-----------------------------------------------------
Mark Dzialga
</TABLE>
*By: /s/ DOUGLAS L. SHURTLEFF
------------------------------
Douglas L. Shurtleff
(Attorney-in-fact)
II-7
<PAGE> 121
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1** Form of Purchase Agreement.
2.1** Asset Purchase Agreement by and among Exult, Inc., Gunn
Partners Inc., the shareholders of Gunn Partners, Inc. and
Michael Gibson dated as of November 22, 1999.
2.2** Asset Purchase Agreement dated as of December 20, 1999 among
Pactiv Corporation, Pactiv Business Services, Inc. and
Exult, Inc.
3.1.1** Third Amended and Restated Certificate of Incorporation of
Exult, Inc.
3.1.2** Certificate of Amendment of Third Amended and Restated
Certificate of Incorporation of Exult, Inc.
3.1.3** Form of Fourth Amended and Restated Certificate of
Incorporation of Exult, Inc.
3.2** Amended and Restated Bylaws of Exult, Inc.
4.1 See Exhibits 3.1 and 3.2 for provisions of the Exult, Inc.'s
Certificate of Incorporation and Bylaws defining the rights
of holders of Exult, Inc.'s common stock.
4.2** Specimen common stock certificate.
5.1** Form of Opinion of Brobeck, Phleger and Harrison LLP.
10.1.1** Registrant's 1999 Stock Option/Stock Issuance Plan.
10.1.2** Form of Notice of Grant of Stock Option.
10.1.3** Form of Stock Option Agreement.
10.1.4** Form of Addendum to Stock Option Agreement.
10.1.5** Form of Stock Purchase Agreement.
10.1.6** Form of Addendum to Stock Purchase Agreement.
10.1.7** Form of Stock Issuance Agreement.
10.1.8** Form of Addendum to Stock Issuance Agreement.
10.2.1** Registrant's 1999 Special Executive Stock Option/Stock
Issuance Plan.
10.2.2** Form of Notice of Grant of Stock Option.
10.2.3** Form of Stock Option Agreement.
10.2.4** Form of Addendum to Stock Option Agreement.
10.2.5** Form of Stock Purchase Agreement.
10.2.6** Form of Addendum to Stock Purchase Agreement.
10.2.7** Form of Stock Issuance Agreement.
10.2.8** Form of Addendum to Stock Issuance Agreement.
10.3** Form of Directors' and Officers' Indemnification Agreement.
10.4** Founder Stock Purchase Agreement by and among BPO-US, Inc.,
James Madden and General Atlantic Partners, LLC dated April
1, 1999.
10.5.1** Amended and Restated Registration Rights Agreement among
Exult, Inc. and the Stockholders identified therein dated
December 23, 1999.
10.5.2** Amendment No. 1 to Amended and Restated Registration Rights
Agreement among Exult and the Stockholders identified
therein dated February 10, 2000.
10.6.1** Office Space Lease between The Irvine Company and BPO-US,
Inc. dated June 28, 1999.
</TABLE>
<PAGE> 122
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.6.2** First Amendment to Office Space Lease between The Irvine
Company and Exult, Inc. dated February 29, 2000.
10.7.1** Lease Agreement Venture Technology Center VI Building, The
Woodlands, Montgomery County, Texas between The Woodlands
Corporation and Tenneco Business Services Inc. dated August
15, 1995.
10.7.2** Assignment and Assumption of Lease between Pactiv Business
Services Inc. (formerly known as Tenneco Business Services
Inc.) and Exult, Inc. dated January 1, 2000.
10.8+** Framework Agreement dated December 7, 1999 by and between
the Company and BP Amoco p.l.c.
10.9+** US Country Agreement dated December 7, 1999 by and between
the Company and BP America, Inc.
10.10+** UK Country Agreement dated December 7, 1999 by and between
Exult Limited and BP International Limited.
10.11.1** Executive Employment Agreement dated October 1, 1999 by and
between Exult, Inc. and James C. Madden.
10.11.2** Memorandum dated February 29, 2000 regarding compensation.
10.12.1** Executive Employment Agreement dated October 1, 1999 by and
between Exult, Inc. and Stephen M. Unterberger.
10.12.2** Memorandum dated February 29, 2000 regarding compensation.
10.13** Executive Employment Agreement dated August 25, 1999 by and
between Exult, Inc. and Barbara A. Coull-Williams.
10.14** Executive Employment Agreement dated October 1, 1999 by and
between Exult, Inc. and Scott J. Figge.
10.15** Executive Employment Agreement dated August 25, 1999 by and
between Exult, Inc. and Rebecca L. Work.
10.16** Registrant's 2000 Employee Stock Purchase Plan.
10.17** Lease among Scottish Mutual Assurance plc and Exult Limited
and Exult, Inc.
10.18** Registrant's 2000 Stock Incentive Plan.
10.19.1** Executive Employment Agreement dated May 30, 2000 by and
between Exult, Inc. and Kevin Campbell.
10.19.2** Loan Agreement dated May 30, 2000 by and between Exult, Inc.
and Kevin Campbell.
21.1** Subsidiaries of Exult, Inc.
23.1** Form of Consent of Brobeck, Phleger & Harrison LLP (Included
in Exhibit 5.1 hereto).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Vitale, Caturano and Company, P.C.
24.1** Power of Attorney (Included on signature pages hereto).
27.1** Financial Data Schedule.
</TABLE>
---------------
** Previously filed.
+ Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
