EXULT INC, 10-Q, 2000-11-13

EXULT INC
10-Q, 2000-11-13
MANAGEMENT CONSULTING SERVICES

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================================================================================

FORM 10-Q

----------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
-------------------------------------------------

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ____________

COMMISSION FILE NUMBER 0-30035
---------------------------------------------------------

EXULT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 8742 33-0831076
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NO.)
OF INCORPORATION CLASSIFICATION NUMBER)
OR ORGANIZATION)

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)

NOT APPLICABLE

(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

YES [X] NO [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding and each of the issuer's classes of
common stock, as of the latest practicable date.

CLASS OUTSTANDING AT OCTOBER 31, 2000
----- -------------------------------

COMMON STOCK 85,031,455

================================================================================

<PAGE> 2

PART I. FINANCIAL INFORMATION.

ITEM 1. FINANCIAL STATEMENTS.

EXULT, INC.

CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ....................... $ 39,199 $ 115,910
Investments ..................................... -- 5,000
Accounts receivable ............................. 802 17,661
Other receivables ............................... 22 2,286
Prepaid expenses and other current assets ....... 287 3,687
--------- ---------
Total Current Assets ..................... 40,310 144,544
Property and Equipment, net ....................... 4,440 20,591
Intangibles, net .................................. 13,603 10,599
Other Assets ...................................... 414 503
--------- ---------
Total Assets ............................. $ 58,767 $ 176,237
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable ................................ $ 1,453 $ 5,424
Accrued liabilities ............................. 2,270 23,448
Current portion of long-term obligations ........ 4,630 4,684
--------- ---------
Total Current Liabilities ................ 8,353 33,556
--------- ---------

Long-Term Obligations, net of current portion ..... 4,304 4,389
--------- ---------

Commitments and Contingencies

Stockholders' Equity:
Convertible preferred stock, $0.0001 par value;
Authorized -- 15,000 shares; Issued and
outstanding -- 6,191 at December 31, 1999
and 0 at September 30, 2000 (unaudited),
including additional paid-in capital ........ 58,768 --
Common stock, $0.0001 par value;
Authorized -- 500,000 shares; Issued and
outstanding -- 9,434 at December 31, 1999,
84,982 at September 30, 2000 (unaudited) .... 1 8
Additional paid-in capital ...................... 5,971 199,066
Subscription receivable ......................... (100) --
Deferred compensation ........................... (3,134) (3,042)
Accumulated deficit ............................. (15,396) (57,740)
--------- ---------
Total Stockholders' Equity ............... 46,110 138,292
--------- ---------
Total Liabilities and Stockholders' Equity $ 58,767 $ 176,237
========= =========
</TABLE>

The accompanying notes are an integral part of these consolidated
balance sheets.

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<PAGE> 3

EXULT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue ............................................. $ 2,031 $ 20,878 $ 2,244 $ 34,627
Cost of Revenue ..................................... 2,031 30,119 2,244 48,262
-------- -------- -------- --------

Gross Profit ........................................ -- (9,241) -- (13,635)
-------- -------- -------- --------

Expenses:
Product development ............................... 106 1,902 160 4,265
Selling, general and administrative ............... 3,419 5,650 6,466 22,278
Depreciation and amortization ..................... 220 2,322 305 5,885
-------- -------- -------- --------
Total expenses ................................. 3,745 9,874 6,931 32,428
-------- -------- -------- --------

Loss from Operations ................................ (3,745) (19,115) (6,931) (46,063)

Interest income, net .............................. 67 1,475 134 3,719
-------- -------- -------- --------

Net Loss ............................................ $ (3,678) $(17,640) $ (6,797) $(42,344)
======== ======== ======== ========

Net Loss per Common Share --

Basic and diluted ................................. $ (0.40) $ (0.21) $ (1.12) $ (0.98)
======== ======== ======== ========

Weighted Average Number of
Common Shares Outstanding --
Basic and diluted ............................... 9,221 84,932 6,093 43,295
======== ======== ======== ========

Pro Forma Net Loss per
Common Share (see Note 5) --
Basic and diluted ............................... $ (0.21) $ (0.55)
======== ========

Pro Forma Weighted Average Number of
Common Shares Outstanding (see Note 5) --
Basic and diluted ............................... 84,932 77,158
======== ========
</TABLE>

The accompanying notes are an integral part of these
consolidated financial statements.

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<PAGE> 4

EXULT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 2000
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................. $ (6,797) $ (42,344)
Adjustments to reconcile net loss to net cash
used in operating activities --
Depreciation and amortization ..................... 305 5,885
Charge for warrants and options ................... 1,230 79
Changes in operating assets and liabilities --
Investments ......................................... -- (5,000)
Receivables ......................................... (2,244) (19,123)
Prepaid expenses and other current assets ........... (17) (3,400)
Other assets ........................................ (127) (89)
Accounts payable .................................... 109 3,971
Accrued liabilities ................................. 2,059 21,178
--------- ---------
Net cash used in operating activities ........... (5,482) (38,843)
--------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................... (538) (17,942)
--------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock ......... 9,194 71,128
Net proceeds from issuance of common stock ............ 185 62,046
Payment of subscription receivable .................... -- 100
Exercise of stock options ............................. -- 289
Payments on capital lease obligation .................. -- (67)
--------- ---------
Net cash provided by financing activities ....... 9,379 133,496
--------- ---------

Net increase in cash and cash equivalents ............... 3,359 76,711
Cash and cash equivalents, beginning of period .......... 851 39,199
--------- ---------
Cash and cash equivalents, end of period ................ $ 4,210 $ 115,910
========= =========

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ............................................ $ -- $ 29
========= =========
Income taxes ........................................ $ -- $ 18
========= =========

SUMMARY OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Common stock issued on subscription ................. $ 100 $ --
========= =========
Common stock warrants and options issued for services $ 1,230 $ 79
========= =========
Acquisition of equipment through capital lease ...... $ -- $ 243
========= =========
</TABLE>

The accompanying notes are an integral part of these
consolidated financial statements.

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EXULT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited consolidated financial statements of Exult, Inc. and
subsidiaries ("Exult" or the "Company") have been prepared by Exult's management
and reflect all adjustments that, in the opinion of management, are necessary
for a fair presentation of the interim periods presented. The results of
operations for the three and nine months ended September 30, 2000 are not
necessarily indicative of the results to be expected for any subsequent periods
or for the entire year ending December 31, 2000. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted under the Securities and Exchange Commission's rules and regulations. A
consolidated statement of comprehensive loss has not been presented because the
components of comprehensive loss are not material.

These unaudited consolidated financial statements and notes included
herein should be read in conjunction with Exult's audited consolidated financial
statements and notes for the year ended December 31, 1999 which were included in
our Registration Statement on Form S-1 filed with the Securities and Exchange
Commission. Certain amounts in the 1999 financial statements have been
reclassified to conform with the 2000 presentation.

Segment Information and Concentration of Revenue/Credit Risk

Management has determined that the Company operates within a single
operating segment. For the three and nine months ended September 30, 2000, 79%
and 83%, respectively, of the Company's revenue has been derived from within the
United States with the balance being derived primarily from within the United
Kingdom.

During the three months ended September 30, 2000, one of the Company's
process management clients accounted for approximately 77% of the Company's
total revenue. No other client accounted for more than 10% of total revenue.
Three clients accounted for approximately 55%, 11% and 10%, respectively, of the
Company's total revenue during the nine months ended September 30, 2000. We
believe that the resulting concentration of credit risk in our receivables, with
respect to our limited client base, is substantially mitigated by our credit
evaluation process. To date, our bad debt write-offs have not been significant.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("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.

In December 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. SAB No. 101 provides a framework by which to recognize revenue in
the financial statements and the Company believes the adoption of SAB No. 101 in
the fourth quarter of this calendar year will not have a material impact on the
Company's financial statements.

2. BUSINESS ACQUISITION

In November 1999, the Company purchased all of the assets and business,
except for cash, accounts receivable, and unbilled work-in-progress, of Gunn
Partners Inc. ("Gunn"), for $5.0 million in cash and a note in the amount of
$10.0 million payable in two equal installments plus nominal interest in
November 2000 and 2001. The note was recorded net of imputed interest thereon.
The purchase price was allocated to various intangible intellectual properties
and fixed assets. Accordingly, the results of operations for the Gunn business
for the three and nine months ended September 30, 2000 have been included in
Exult's consolidated financial statements for the respective periods.

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3. STOCKHOLDERS' EQUITY

Capital Transactions

In February 2000, the Company issued 6,885,480 shares of Series D
Convertible Preferred Stock in a private placement with institutional investors
for net consideration of approximately $59,969,000. In addition, BP
International Limited, 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 net consideration of
approximately $3,966,000.

In April 2000, BP International Limited exercised certain warrants to
acquire 667,844 shares of Series C Convertible Preferred Stock and 3,339,220
shares of Common Stock for net consideration of approximately $7,193,000 and
$5,242,000, respectively.

In June 2000, Exult completed its initial public offering of its Common
Stock issuing 6,000,000 shares. In July 2000, Exult issued an additional 300,000
shares of Common Stock in connection with the underwriters' exercise of their
over-allotment option. The Company received net consideration after the
underwriting discount and offering costs of approximately $56,669,000 for the
issuance of the 6,300,000 shares. Concurrent with the consummation of the
initial public offering, all of the outstanding shares of the Company's
Preferred Stock were converted into 65,484,785 shares of Common Stock.

During the nine months ended September 30, 2000, warrants to purchase
46,155 shares of Common Stock were excercised for net consideration of
approximately $30,000.

In October 2000, Exult and Bank of America signed a non-binding
memorandum of understanding providing the framework for a broad business
relationship, including the provision of business process management services to
Bank of America by Exult. The business relationship and process management
services transaction are subject to ongoing negotiations and the memorandum
establishes a 60-day time period to reach a definitive agreement. In connection
with the memorandum of understanding, Bank of America agreed to acquire
5,000,000 units, each unit consisting of one share of our Common Stock and one
warrant to buy an additional share of our Common Stock. The warrants are
exercisable for three years at $11.00 per share. The purchase price for the
units was $55,000,000. In connection with the issuance of the warrants, the
Company expects to incur a charge of approximately $30 million, the estimated
fair market value of the warrants, during the quarter ending December 31, 2000.
The acquisition of the shares and the warrants is subject to certain regulatory
approvals.

Stock Option Deferred Compensation

The Company recorded additional aggregate deferred compensation for
stock options issued of approximately $0 and $793,000 for the three and nine
months ended September 30, 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 stock option compensation
is amortized to expense using the straight-line method over the 48-month vesting
period of the underlying stock options.

4. INCOME TAXES

The Company did not record a tax provision for the three and nine months
ended September 30, 1999 and 2000, as it had incurred only net operating losses
as of these dates. A full valuation allowance is provided against the tax
benefit generated by the net operating losses because of the uncertainty of
realizing the deferred tax assets associated therewith.

5. NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE

The net loss per share, basic and diluted, for the three and nine months
ended September 30, 1999 and 2000, was computed using the weighted average
number of shares of Common Stock outstanding during the respective periods. The
impact of all outstanding shares of Preferred Stock convertible into Common
Stock, warrants to purchase Common Stock or Preferred Stock convertible into
Common Stock, and stock options to purchase Common Stock were excluded from the
respective computations as their impact is antidilutive.

Concurrent with the consummation of the initial public offering of the
Company's Common Stock, all outstanding shares of Preferred Stock were converted
into Common Stock. The pro forma net loss per share and pro forma weighted
average number of common shares outstanding for the three and nine months ended
September 30, 2000 reflects conversion of the Preferred Stock into Common Stock
during the respective periods.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

Except for the historical information contained herein, the matters
discussed in this Quarterly Report on Form 10-Q are forward-looking statements
that are based on our current expectations, assumptions, estimates and
projections about us and our industry. These statements concern, among other
things, our goals and strategies, the anticipated scope and results of our
business operations, and our ability to:

- complete development of our web-based eHR solution and
successfully implement it for current and potential future
clients;

- obtain other comprehensive process management contracts;

- expand our centers of expertise;

- 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. Exult
has not yet proven its business model and must invest substantial resources to
build its service capabilities. It is not certain that eHR will perform as
anticipated or achieve market acceptance. The market in which Exult operates is
competitive and other service providers may be more effective at selling or
delivering human resources process management services. These and other risks
and uncertainties are described in this report under the heading "Risk Factors"
and in other filings made from time to time by Exult with the Securities and
Exchange Commission.

BUSINESS

OVERVIEW

Exult is the first company to offer comprehensive human resources ("HR")
business process management services for Global 500 corporations. We call our
service "eHR" because we use our expertise, information technology capabilities,
and web-enabled communications to manage human resources transactions and
administration for our clients enabling them to reduce their costs, dedicate
their HR department resources to strategy and policy matters, and facilitate
more efficient and productive work methods and information access throughout
their organizations. We believe no other company currently assumes broad
management responsibility for processes throughout the entire HR function.

We design, implement and manage comprehensive web-enabled human
resources processes. A key component of our eHR solution is myHR(SM), our
web-based system for linking our clients and their employees together. This
system 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. Our
eHR solution 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, HR process consulting 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.

OUR COMPANY

We commenced operations in October 1998. 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

In June 1999, we entered into a letter of intent with BP Amoco p.l.c.
("bp") 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 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

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for our services on a worldwide basis. Under the contracts for the United States
and United Kingdom, we will manage bp's basic HR processes in those countries,
which represent approximately 70% of bp's employees and annuitants. Through a
mutually agreed upon schedule and procedure, we are migrating the HR processes
we have agreed to manage to our client service centers and implementing HR best
practices. During the first 14 months of the contract, the billing to bp and our
revenue equals bp'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 in the U.K. and the U.S. for fixed amounts that are
generally equal to or less than bp'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 in a negotiated gain sharing arrangement that is intended to
motivate us and bp 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. 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 cash
plus a note in the amount of $10.0 million. 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 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
in December 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 Houston, Texas and the ability to hire approximately 70
employees. We are currently using this client service center to service these
two clients as well as bp. We are also developing our recently opened client
service center in Glasgow, Scotland to support the bp relationship.

In August 2000, we added our fourth outsourcing client, Unisys
Corporation, under a seven-year HR process and vendor management contract. This
client will be serviced from our Houston, Texas center.

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. As part of our eHR solution, we 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 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 revenue. A secondary source of
revenue is the consulting services performed by our consulting organization
consisting primarily of Gunn Partners. We recognize revenue for these consulting
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. 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, and to make strategic
acquisitions. 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.

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RISK FACTORS

The following risks affect our business and the prospects for
investments in 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. Any of the following risks could adversely
affect our business, financial condition or results of operations.

WE HAVE A LIMITED OPERATING HISTORY AND UNPROVEN BUSINESS MODEL.

We entered into our first process management contract in December 1999.
We have only four clients under contract for our HR business process management
services and we are still implementing the largest two 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 business model is based on managing most or all of our clients' HR
processes. The market for this service is new and our growth depends on the
willingness of businesses to outsource management of their human resources
functions. We are not certain 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 OUR CONTRACTS WITH BP, UNISYS AND OTHER EARLY
CONTRACTS.

bp is the first client for which we are offering a comprehensive eHR
solution, and we anticipate revenue from this contract to represent a majority
of our future revenue through 2000 and possibly in future periods. This contract
is still at an 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's HR processes
effectively and efficiently, and achieve the contracted service levels and cost
savings. bp can terminate the arrangement for material breach or significant and
repeated performance failures. In addition, from December 2002, bp 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 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. Our recently signed HR process
management contract with Unisys involves similar risks.

Although our arrangement with bp contemplates that we manage their HR
processes worldwide, and we have a first right to provide human resources
management services to bp in each country in which they have operations, our
current contracts cover only the United Kingdom and the United States. bp 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. We have no experience operating in foreign countries
and we might not be able to manage the HR needs of bp or potential future
clients on a global basis. Our contract with Unisys is also international in
scope and involves similar risks.

OUR EHR SOLUTION IS AT AN EARLY STAGE OF DEVELOPMENT.

We expect our clients' employees to access our web-enabled eHR solution
through our proprietary human resources portal. This portal is still being
developed and has not yet been fully implemented. Application of the portal to
bp 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 the portal in accordance with the specifications and
delivery milestones agreed upon by us and bp 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

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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 due diligence process limits our revenue
growth, and we have invested significant time in some potential client
relationships that have not resulted in contracts. It is possible that any
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 of time and resources.

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 or Unisys
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 and Unisys agreements or any new contract to contribute significantly to
profits or cash flow. The transition of bp's HR processes to our systems and
infrastructure is not scheduled to be complete until February 2001, and the
Unisys transition is not expected to be complete until the second half of 2001.
Either transition 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.

Starting up our company and building our infrastructure is expensive. In
addition, acquiring new client contracts and transitioning them until they are
fully implemented and reach their revenue potential requires significant capital
investment. Since our formation, we have not had a profitable quarter. We
incurred a net loss of $15.2 million for the year ended December 31, 1999 and a
net loss $42.3 million for the nine months ended September 30, 2000. For the
year ended December 31, 1999, we used cash of $7.6 million in operating
activities and $9.6 million in investing activities. In addition for the nine
months ended September 30, 2000, we used cash of $38.8 million in operating
activities and $17.9 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 $25 million to $30 million of these expenses to be
capitalized in 2000 and an additional $25 million in 2001. These capitalized
amounts are amortized over three to five years. This significant depreciation
and amortization expense will reduce future profitability. Our capital
investments and commensurate amortization will increase if we are able to take
advantage of market opportunities and grow the Company faster than we
anticipated. 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 be certain 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. We cannot be certain 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.

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 service 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. In addition, our clients are generally permitted to terminate their

10
<PAGE> 11

contracts with us for convenience before the end of the scheduled term. The
termination payments required are substantially less than our revenue under the
contracts, and may not cover our termination costs or replace profits we may
have earned.

TO SUCCEED WE MUST HIRE, ASSIMILATE AND RETAIN KEY MANAGEMENT PERSONNEL AND
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 and gain critical mass in the size and breadth of our
operations. Our ability to achieve rapid growth depends upon the following
essential elements:

- We must be able to hire, train and retain key management
personnel and 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 with
respect to 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.

- We currently have two operational client service centers, one in
Houston, Texas and the other in Glasgow, Scotland. 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;

- delays in transitioning various client processes to our
infrastructure;

- 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.

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<PAGE> 12

WE COULD EXPERIENCE DAMAGES, SERVICE INTERRUPTIONS OR FAILURES AT OUR CLIENT
SERVICE CENTERS OR IN OUR COMPUTER AND TELECOMMUNICATIONS SYSTEMS.

Our business could be interrupted by damage to our client service
centers, 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. We cannot be certain that we will be able
to route calls and other operations from an affected center to another in the
event service is disrupted. 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 and Unisys from U.S.
and U.K. operations to foreign operations and as we take on additional large,
multinational clients. 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;

- 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.

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, and this
reliance exposes us to various risks.

- We use 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. We cannot be
certain that our security measures will be adequate and security
breaches could disrupt our operations, damage our reputation and
expose us to litigation and possible liability.

- 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, growth in
Internet traffic may cause performance and reliability to
decline. Interruptions in Internet service and infrastructure
delays could interfere with our ability to use the Internet to
support our eHR service, which would impair our revenue growth
and results of operations.

- Laws and regulations may be adopted relating to Internet user
privacy, pricing, usage fees and taxes, content, distribution,
and characteristics and quality of products and services. This
could decrease the popularity or impede the expansion of the
Internet and 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.

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<PAGE> 13

WE MUST KEEP OUR COMPUTING AND COMMUNICATIONS INFRASTRUCTURE ON PACE WITH
CHANGING TECHNOLOGIES.

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, communications
systems and other technologies and devices. If we fail to adapt to technological
developments, our clients may experience service implementation delays or our
services may become non-competitive or obsolete.

WE RELY ON THIRD PARTY VENDORS FOR SOFTWARE AND SPECIALIZED HUMAN RESOURCES
FUNCTIONS.

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 can 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. We select some of these vendors and assume others from
relationships established by our clients before contracting with us. 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. The
profitability of our client contracts depends in part upon our ability to reduce
the costs of services provided by the vendors we have assumed, which may involve
delay as existing contracts run their course and we attempt to renegotiate with
or replace these vendors. In addition, if any third party vendors are not
willing to provide their 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 satisfied
with the services provided by these third parties, our clients may be entitled
to recover penalties or to terminate their agreements with us, which could
seriously harm our business.

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 or combined HR and IT functions, including consulting divisions of Big
Five accounting firms and other consulting firms, information technology
outsourcers, and transaction processors such as payroll or benefits
administrators. In addition, we expect that the predicted growth of the HR
outsourcing market will attract other consulting firms and transaction providers
and motivate competitors 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.

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<PAGE> 14

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.

We plan to pursue acquisitions, 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 and other intangible
assets, 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 field 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 operations. In addition, many computer systems that are currently processing
21st century dates correctly 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 our systems through the Internet, or if such issues disrupt
communication at our client service centers, our business and operations will
suffer. 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 our
systems-related costs, and result in claims by our clients.

WE MUST PROTECT OUR INTELLECTUAL PROPERTY AND AVOID INFRINGING INTELLECTUAL
PROPERTY OF OTHERS.

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 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 CONTROL THE COMPANY.

Our executive officers, directors and their respective affiliates
beneficially own approximately three-quarters of our outstanding Common Stock.
As a result, these stockholders, acting together, 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 other investors and they
may approve actions that other investors vote against or reject actions that
other investors 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.

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<PAGE> 15

OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE, WHICH MAY MAKE US A TARGET OF
SECURITIES CLASS ACTION LITIGATION.

The price at which our Common Stock trades 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 COULD CAUSE OUR
STOCK PRICE TO DECLINE.

Approximately 78 million of our outstanding shares were issued privately
before our initial public offering and have never been sold in the public
markets. Holders of these shares may seek to sell them. 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.

OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD DETER A TAKEOVER EFFORT.

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> 16

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.
In our discussion below, we have also included information about the three
months ended June 30, 2000 where such comparisons to this immediately preceding
period may be a useful supplement to the prior year period-to-period comparison.
The following table sets forth statement of operations data expressed as a
percentage of revenue for the periods indicated:

<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
1999 2000 1999 2000
------ ------- ------ ------
<S> <C> <C> <C> <C>
Revenue ............................. 100.0% 100.0% 100.0% 100.0%
Cost of revenue ..................... 100.0 144.3 100.0 139.4
------ ----- ------ ------
Gross profit ........................ -- (44.3) -- (39.4)
------ ----- ------ ------
Expenses:
Product development ............... 5.2 9.1 7.1 12.3
Selling, general and administrative 168.4 27.1 288.2 64.3
Depreciation and amortization ..... 10.8 11.1 13.6 17.0
------ ----- ------ ------
Total expenses ................. 184.4 47.3 308.9 93.6
------ ----- ------ ------
Loss from operations ................ (184.4) (91.6) (308.9) (133.0)
Interest income, net ................ 3.3 7.1 6.0 10.7
------ ----- ------ ------
Net loss ............................ (181.1)% (84.5)% (302.9)% (122.3)%
====== ===== ====== ======
</TABLE>

THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000

Our primary activities during the first nine months of 1999 were
organization, planning and certain work performed for our first process
management client prior to entering into the related long-term contract. We did
not generate any outsourcing process revenues from long-term contracts during
1999. At September 30, 1999, we had approximately 35 employees and for the three
months ended September 30, 1999, we generated approximately $2.0 million of
revenue in connection with certain work performed prior to the execution of our
first long-term contract. Cost of revenue for the three months ended September
30, 1999 was equal to revenue. Selling, general and administrative expense for
the three months ended September 30, 1999 was $3.4 million, which consisted
primarily of the salary and benefits of our employees and related recruiting
costs; legal, accounting and other consulting fees; and, facility costs.
Depreciation and amortization totaled $220,000 for this three-month period and
we had a $3.7 million loss from operations for the period. Due to the early
stage of our business during the three months ended September 30, 1999, our
operating results for this period do not bear significant relationship to our
operating results for the three months ended September 30, 2000.

Revenue

Revenue for the three months ended September 30, 2000 was $20.9 million,
which primarily consisted of $18.4 million of contract revenue derived from
three process management clients. The balance of our revenue primarily consisted
of revenue generated from various consulting clients. Revenue increased by
approximately $12.7 million, or 155%, over the three months ended June 30, 2000,
the immediately prior three-month period, primarily because of an increase in
revenue from our largest client, bp, resulting from continuing transition of
bp's HR processes to our management and systems.

Cost of Revenue

Our cost of revenue for the three months ended September 30, 2000 was
$30.1 million and our gross margin for the same period was a negative 44.3%.
Cost of revenue in the immediately prior three-month period was $12.4 million
resulting in a negative gross margin of 51.7% for that period. The increase in
the September period cost resulted from greater expenditures in support of
higher revenue, increased process transfer and transformation activities
primarily under the bp agreements, and under-utilization of increased capacity.
We expect gross profit to continue to be negative for at least the rest of 2000
and into 2001 as we add customers, expand capacity and continue to build our
infrastructure.

Product Development Expense

Product development expense for the three months ended September 30,
2000 was approximately $1.9 million, or 9.1% as a percentage of revenue. Product
development expenditures in the September 2000 period increased by approximately
$343,000, or

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<PAGE> 17

22%, over the immediately prior three-month period primarily because of
increased staffing. We expect to continue to increase our overall spending for
product development throughout 2000 and plan to continue to spend at least the
same dollar amount in future years. We cannot be certain 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 for the three months ended
September 30, 2000 was $5.7 million, or 27.1% as a percentage of revenue, a
decrease of $1.9 million, or 26%, over the amount in the immediately prior
three-month period. The decrease is primarily the result of shifting resources
to cost of revenue in support of contracts. 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 Expense

Depreciation and amortization expense was $2.3 million for the three
months ended September 30, 2000, an increase of $446,000 over the immediately
prior three-month period. The September 2000 and June 2000 amounts each include
$1.1 million of amortization of intangibles associated with the acquisition of
certain assets of Gunn Partners. Depreciation and amortization also includes the
amortization of deferred compensation of approximately $300,000 for each of the
September and June periods.

Interest Income, Net

Interest income, net for the three months ended September 30, 2000 was
essentially unchanged from the three-month period ended June 30, 2000, at
approximately $1.5 million. Exult generates interest income from short-term
investments using the available proceeds raised from private equity placements
completed in 1999 and early 2000 as well as the proceeds from the Company's June
2000 initial public offering. The Company's interest expense arises from debt
incurred in connection with our 1999 purchase of the business of Gunn Partners
and several 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. A full valuation allowance is provided against the tax benefit
generated by the net operating losses because of the uncertainty of realizing
the deferred tax assets associated therewith.

Net Loss

The foregoing resulted in a net loss for the quarter ended September 30,
2000 of $17.6 million, an increase of $3.8 million, or 28%, over the immediately
prior three-month period. We expect to continue to incur net losses for at least
the remainder of 2000 as well as 2001.

NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000

Our primary activities during the first nine months of 1999 were
organization, planning and certain work performed for our first process
management client prior to entering into the related long-term contract. We did
not generate any outsourcing process revenues from long-term contracts during
1999. At September 30, 1999, we had approximately 35 employees and for the nine
months ended September 30, 1999, we generated approximately $2.2 million of
revenue in connection with certain work performed prior to the execution of our
first long-term contract. Cost of revenue for the nine months ended September
30, 1999 was equal to revenue. Selling, general and administrative expense for
the nine months ended September 30, 1999 was $6.5 million, which consisted
primarily of the salary and benefits of our employees and related recruiting
costs; legal, accounting and other consulting fees; and, facility costs.
Depreciation and amortization totaled $305,000 for this nine-month period and we
had a $6.9 million loss from operations for the period. Due to the early stage
of our business during the nine months ended September 30, 1999, our operating
results for this period do not bear significant relationship to our operating
results for the nine months ended September 30, 2000.

Revenue

Revenue for the nine months ended September 30, 2000 was $34.6 million,
which consisted of $26.3 million of contract revenue derived from three process
management clients and $8.3 million of consulting and related revenue from
various clients.

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<PAGE> 18

Cost of Revenue

Cost of revenue consists primarily of expenses associated with the third
party vendors whom we manage for our clients, compensation 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 nine months ended September 30, 2000 was $48.3 million and our gross
margin for the same period was a negative 39.4%. We expect gross profit to
continue to be negative for at least the rest of 2000 and into 2001 as we add
customers, 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 our portal and Internet software and capabilities, and the
performance of research and benchmarking of HR best practices that are not part
of a specific engagement. Product development expense for the nine-month period
ended September 30, 2000 was approximately $4.3 million, or 12.3% as a
percentage of revenue. We did not capitalize any costs in 1999 for internally
developed software for research and benchmarking and in the 2000 period such
capitalized amounts were immaterial. We expect to continue to increase our
overall spending for product development throughout 2000 and plan to continue to
spend at least the same dollar amount in future years. We cannot be certain 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
salaries, 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 costs, and legal,
accounting and recruiting fees and expenses. For the nine months ended September
30, 2000, selling, general and administrative expense was $22.3 million, or
64.3% as a percentage of revenue.

Depreciation and Amortization Expense

Depreciation and amortization expense was $5.9 million for the nine
months ended September 30, 2000 and includes $3.2 million of intangibles
amortization associated with the November 1999 acquisition of certain assets of
Gunn Partners. Depreciation and amortization expense also includes amortization
of deferred compensation totaling $885,000 for the nine-month period.

Interest Income, Net

Interest income, net for the nine months ended September 30, 2000 was
$3.7 million. Exult generates interest income from short-term investments using
the available proceeds raised from private equity placements completed in 1999
and early 2000 as well as the proceeds from the Company's June 2000 initial
public offering. The Company's interest expense arises from debt incurred in
connection with our 1999 purchase of the business of Gunn Partners and several
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 a loss for nine months ended September 30, 2000, resulting
in federal and state net operating loss carryforwards which expire beginning in
2018 and 2006, respectively. A full valuation allowance is provided against the
tax benefit generated by the net operating losses because of the uncertainty of
realizing the deferred tax assets associated therewith.

Net Loss

The foregoing resulted in a net loss of $42.3 million for the nine
months ended September 30, 2000. We expect to continue to incur net losses for
at least the years 2000 and 2001.

18
<PAGE> 19

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 $76.4 million
during the first five months of 2000; the net proceeds from our initial public
offering of $56.7 million in June 2000; and, to a lesser extent, by cash
generated from our business.

Net cash used in operating activities was $7.6 million in the year ended
December 31, 1999 and $38.8 million for the nine months ended September 30,
2000. We obtained our first three process management contracts in December 1999
and January 2000 and began generating revenue therefrom during the first quarter
of 2000. We also completed our acquisition of Gunn Partners in November 1999.
Thus during 1999, 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. We made additional operating
cash expenditures of this nature during the first nine months of 2000. We also
expended operating cash during the 2000 period in support of revenue generated
by the process management contracts and the Gunn Partners business and to fund
the transfer and transformation costs associated with these new process
management contracts. Cash used in investing activities was $9.6 million in 1999
and $17.9 million in the nine months ended September 30, 2000. Approximately
$4.4 million in 1999 and $17.9 million in the nine months ended September 30,
2000, was spent to purchase computer and related equipment and office
furnishings and in addition in the 2000 period to construct and expand our
client service centers as well as our internal systems. Included in cash used in
investing activities 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 facilities, including our existing client service centers, and to purchase
related computer and other equipment necessary to support our client contracts
and growth. We expect to spend at least $25 to $30 million in 2000 and $25
million in 2001 on capital expenditures, which will be amortized over three to
five years. In addition, we expect to spend at least $6.0 million to $8.0
million in both years for product development. In addition, from time to time in
the ordinary course of business, we evaluate potential acquisitions of related
businesses, assets, services or technologies. Such acquisitions, if completed,
may require significant cash expenditures.

We believe that our 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 our cash on hand will be adequate to satisfy our working capital
requirements beyond 12 months 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

19
<PAGE> 20

PART II. OTHER INFORMATION.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

(c) On September 22, 2000, we sold 11,538 shares of Common Stock to
BridgeGate LLC for an aggregate purchase price of $7,500 upon exercise
of a warrant.

During the period from July 1, 2000 through September 30, 2000, we
issued an aggregate of 50,540 shares of Common Stock to two employees
for an aggregate purchase price of $78,851 upon the exercise of stock
options.

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.

(d) In June 2000, the Company completed its initial public offering of 6.0
million shares of its Common Stock at $10.00 per share. On July 6, 2000,
the underwriters exercised their overallotment option to purchase
300,000 additional shares at $10.00 per share. The net proceeds to the
Company from the sale of the 6.3 million shares after all underwriting
discounts and commissions and other expenses were $56,669,465. From June
1, 2000 to September 30, 2000, the Company used net offering proceeds as
follows: $5,786,000 for construction of plant, building facilities and
internal systems; $2,146,000 for purchase and installation of equipment
and certain software; and, $18,919,000 for working capital expenditures.
None of these payments were made to directors, officers, or owners of
10% or more of any class of the Company's equity securities or other
affiliates of the Company.

20
<PAGE> 21

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.

The following Exhibits are incorporated herein by reference.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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* Fourth Amended and Restated Certificate of Incorporation
of Exult, Inc.

3.2* Amended and Restated Bylaws of Exult, Inc.

10.20** Master Services Agreement by and between Exult, Inc. and
Unisys Corporation dated August 28, 2000

27.1 Financial Data Schedule.
</TABLE>

----------

* Previously filed with the Company's Registration Statement on Form S-1
Registration No. 333-31754, and incorporated herein by reference.

** Confidential treatment is being sought with respect to certain portions
of this agreement. Such portions have been omitted from this filing and
filed separately with the Securities and Exchange Commission.

(b) Reports on Form 8-K.

None.

21
<PAGE> 22

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, as amended,
the undersigned has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 9th day of November, 2000.

EXULT, INC.

By: /s/ JAMES C. MADDEN, V
---------------------------------------------
Chief Executive Officer, President, and
Chairman of the Board
(principal executive officer)

By: /s/ DOUGLAS L. SHURTLEFF
---------------------------------------------
Executive Vice President, Treasurer and
Chief Financial Officer
(principal financial officer)

22
<PAGE> 23

EXHIBIT INDEX

2.2* Asset Purchase Agreement dated as of December 20, 1999
among Pactiv Corporation, Pactiv Business Services, Inc.
and Exult, Inc.

3.1* Fourth Amended and Restated Certificate of Incorporation
of Exult, Inc.

3.2* Amended and Restated Bylaws of Exult, Inc.

10.20** Master Services Agreement by and between Exult, Inc. and
Unisys Corporation dated August 28, 2000

27.1 Financial Data Schedule.
</TABLE>

----------

* Previously filed with the Company's Registration Statement on Form S-1
Registration No. 333-31754, and incorporated herein by reference.