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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 16, 2000
REGISTRATION NO. 333-31754
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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EXULT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<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 350
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 350
IRVINE, CALIFORNIA 92614
(949) 250-8002
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
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COPIES TO:
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
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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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 MARCH 16, 2000
PROSPECTUS
SHARES
EXULT, INC.
[LOGO]
COMMON STOCK
------------------------
This is Exult, Inc.'s initial public offering of common stock. We are
offering shares. The U.S. underwriters are offering shares
in the U.S. and Canada and the international managers are offering
shares outside the U.S. and Canada.
Currently, no public market exists for our stock. We expect the initial
public offering price to be between $ and $ per share. After the
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 7 OF THIS PROSPECTUS.
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<CAPTION>
PER SHARE TOTAL
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<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
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
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.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 3
Risk Factors................................................ 7
Information Regarding Forward-Looking Statements and
Industry Data............................................. 16
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 19
Selected Consolidated Financial Data........................ 20
Selected Unaudited Pro Forma Condensed Combined Financial
Information............................................... 22
Selected Unaudited Pro Forma Condensed Combined Statement of
Operations Information.................................... 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Business.................................................... 32
Management.................................................. 43
Certain Transactions........................................ 54
Principal Stockholders...................................... 56
Description of Capital Stock................................ 58
Shares Eligible for Future Sale............................. 61
Underwriting................................................ 63
Legal Matters............................................... 66
Experts..................................................... 66
Where You Can Find More Information......................... 67
Index to Consolidated Financial Statements.................. F-1
</TABLE>
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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. You should assume that the information appearing
in this prospectus is accurate as of the date on the front cover of this
prospectus only. Our business, financial condition, results of operations and
prospects may have changed since that date.
2
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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 eHR, a comprehensive, web-enabled
integrated service designed to manage the entire human resources department for
Global 500 corporations. Our objective is to transform these HR departments into
proactive, global, knowledge based organizations through long-term management
contracts. A key component of our eHR solution is myHR, a browser-based,
personalized web portal. We believe myHR will provide a comprehensive source of
data, information and decision support twenty four hours a day, seven days a
week for our clients' employees, managers and annuitants, irrespective of
business unit and location. myHR will interface with various software
applications and business processes over the client's intranets, extranets and
virtual private networks. With myHR we intend to eliminate the numerous
organizational, transactional and communication barriers that exist today
between the employer and employee, and create a dynamic communication exchange
among employees, employer, managers and their peers. We design, implement,
manage and support the web-based systems, processes and personnel for our
clients' entire HR function. In our client service centers, we manage all of our
clients' HR systems and processes, including transaction, production and call
center technologies. By providing one comprehensive solution that integrates all
of the people, processes, technologies and third party vendors, our strategy is
to implement and maintain HR best practices and realize economies of scale in
order to achieve both increased human capital productivity and lower costs for
our clients.
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. As
the nineteenth largest company in the Global 500, as compiled by Fortune
Magazine's Global 500 List for the Year 2000, BP Amoco 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 more than 70% of BP Amoco's more than 81,000 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 all of 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 U.S. alone.
The introduction and widespread use of the Internet has made our
comprehensive service delivery model possible. 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 cost reductions of approximately
25% to 30%. To date, however, HR organizations have not been able to realize the
power of the Internet because no mechanism currently exists to centralize or
organize the large amount of information and electronic 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
intranets.
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THE EXULT SOLUTION
We intend to leverage the power of the Internet with myHR in order to
facilitate communications throughout our clients' organizations, standardize our
clients' HR processes and promote access to the wealth of information embodied
in the human resources processes. Our client service centers will also provide
personalized support, enabling employees to access assistance and information
using a variety of methods. We believe that myHR, together with our
comprehensive consulting services and shared resources, will enable us to
develop, refine and implement HR best practices and realize economies of scale
in order to achieve both increased human capital productivity and lower costs
for our clients.
EXULT'S STRATEGY
Our objective is to become the leading provider of comprehensive HR
solutions for large, multinational corporations. 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;
- 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 350, Irvine, California 92614, and our telephone number is
(949) 250-8002.
4
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THE OFFERING
Common stock offered by Exult....... shares
Shares to be outstanding after this
offering............................ shares
Use of proceeds..................... For working capital and other general
corporate purposes, including the
expansion of our 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 78,526,140 shares outstanding as of March 1, 2000, and does not include
10,740,027 shares of common stock issuable upon the exercise of options
outstanding as of March 1, 2000 at a weighted average exercise price of $1.50
per share, or warrants outstanding as of March 1, 2000 to purchase a total of
968,195 shares of common stock at a weighted average exercise price of $1.27 per
share.
---------------------
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 $ per share;
- the holders of warrants to purchase an aggregate of 667,844 shares of
Series C preferred stock and 3,339,220 shares of common stock exercised
all of their warrants on March 1, 2000;
- all outstanding shares of convertible preferred stock will be converted
into an aggregate of 65,484,785 shares of our common stock upon the
closing of this offering; and
- the underwriters will not exercise their over-allotment option and no
other person will exercise any other outstanding options or warrants.
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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 as of January 1, 1999, to reflect our acquisition of
certain assets of Gunn Partners, Inc., 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
667,884 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 267,835 shares of common stock.
<TABLE>
<CAPTION>
OCTOBER 29, 1998 PRO FORMA COMBINED
(INCEPTION) TO YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- ----------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue.................................. $ -- $ 4,857 $ 15,245
Gross profit............................. -- 359 7,075
Loss from operations..................... (187) (15,276) (19,171)
Net loss................................. (184) (15,013) (18,891)
Net loss per share:
Basic and diluted...................... $(140.48) $ (2.17) $ (0.25)
Weighted average number of common shares
outstanding:
Basic and diluted...................... 1,307 6,906,334 75,998,174
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- ----------- -----------
(UNAUDITED) (UNAUDITED)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $39,199 $115,467
Working capital.......................................... 31,957 108,225
Total assets............................................. 58,767 135,035
Long-term obligations, net of current portion............ 4,304 4,304
Convertible preferred stock.............................. 58,768 --
Total stockholders' equity............................... 46,110 122,378
</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 calculations give effect to the issuance of our
convertible preferred stock, the exercise of options to purchase 267,835 shares
of common stock and the conversion of our convertible preferred stock into
common stock upon consummation of this offering. Our pro forma as adjusted
calculations give effect to the conversion of our convertible preferred stock
and the receipt and application of the estimated net proceeds from the sale of
the shares offered by this prospectus. For more information regarding our
use of the proceeds from this offering, see "Use of Proceeds."
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<PAGE> 8
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 may 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, 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 and produce satisfactory results for our 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 may 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. 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 arrangement. We have no experience operating in foreign
countries and we might not be able to manage BP Amoco's HR needs on a global
basis.
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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 implemented. The system is complex and we do
not expect to deploy the first release of myHR with limited features until the
second quarter of 2000, with greater functionality to be added in subsequent
releases. Application of myHR to BP Amoco and other clients will require
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, and 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 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. We attempt to negotiate long-term contracts in order that we may have 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 of
$15.0 million for the year ended December 31, 1999 and used cash of $7.6 million
in operating activities and $9.6 million in investing activities for the same
period. We expect to continue to make significant and increasing investments in
the development of our eHR solution, client service centers, and web
technologies, and the expansion of our sales and marketing capabilities and the
procurement of additional contracts. 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 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.
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As 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 in us. 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 the services we are assuming. 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 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 must open client service centers in new geographic locations to
accommodate new and existing clients. We currently have only one
operational client service center near Houston in The Woodlands, Texas
and we plan to open a second center in Glasgow, Scotland by mid to late
2000. 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.
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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.
IF OUR SINGLE CLIENT SERVICE CENTER IS DAMAGED OR EXPERIENCES A SYSTEMS OR
EQUIPMENT FAILURE OUR OPERATIONS AND OUR REPUTATION COULD BE ADVERSELY AFFECTED.
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, and 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 additional large, multinational
clients. For example, we expect to open 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
10
<PAGE> 12
- 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 us 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.
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
11
<PAGE> 13
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 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 entrust 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.
12
<PAGE> 14
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, which could subject us to a number of risks, including:
- diversions of management 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 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
13
<PAGE> 15
our web sites, network infrastructure and transaction processing systems Year
2000 compliant could result in:
- a disruption in our ability to deliver reliable, comprehensive HR
services;
- an increase in our allocation of resources to address Year 2000 problems
without additional revenue equal to this dedication of resources; and
- an increase in litigation costs relating to losses suffered by our
customers due to Year 2000 problems.
For more information on our Year 2000 issues, you should read the
discussion in the "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000 Compliance" section of this prospectus.
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 model 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 infringement claims against us 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 % OF OUR STOCK
AFTER THIS OFFERING AND CAN SIGNIFICANTLY INFLUENCE 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 % 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
$ 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.
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
14
<PAGE> 16
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 attentions and resources.
SUBSTANTIAL SALES OF OUR COMMON STOCK BY OUR EXISTING INVESTORS FOLLOWING THIS
OFFERING COULD CAUSE OUR STOCK PRICE TO DECLINE.
The market price of our common stock could decline after this offering as a
result of sales by our existing stockholders of their shares of common stock in
the market or the perception that these sales could occur. 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.
15
<PAGE> 17
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," "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 ability to successfully implement a comprehensive eHR solution for BP
Amoco;
- our ability to complete development of myHR;
- our ability to obtain other comprehensive process management contracts;
- our ability to expand our centers of expertise; and
- our ability to establish new client service centers in Glasgow, Scotland
and in future locations.
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.
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds from the sale of the shares of common stock sold
by us in this offering will be approximately $ million, or approximately
$ million if the underwriters' over-allotment option is exercised, based on
an assumed initial public offering price of $ per share, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us.
At this time, 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 general corporate purposes, including the creation
of new and expansion of existing client service centers and the expansion of our
technology infrastructure and our sales and marketing capabilities. We may also
use an unspecified portion of the net proceeds of this offering to acquire or
invest in complementary businesses, services or technologies and to repay
outstanding indebtedness. 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 expect to evaluate potential
acquisitions of these businesses, assets, services or technologies. At this
time, however, we do not have any present understandings, commitments or
agreements with respect to any material acquisition.
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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<PAGE> 19
CAPITALIZATION
The following table indicates our cash and cash equivalents and
capitalization as of December 31, 1999:
- on an actual basis;
- on a pro forma basis to reflect; 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 667,884 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 267,835 shares of
common stock in February 2000;
- on a pro forma as adjusted basis to reflect the foregoing issuances and
conversions, as well as the issuance of shares of common stock
in this offering at an assumed public offering price of $ per share,
after deducting underwriting discounts and commissions and estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------
(IN THOUSANDS)
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents................................. $ 39,199 $115,467 $
======== ======== ========
Long-term obligations, net of current portion............. $ 4,304 $ 4,304 $
Stockholders' equity:
Convertible preferred stock, $.0001 par value;
15,000,000 shares authorized; 6,191,212 shares issued
and outstanding, actual; no shares issued and
outstanding, pro forma and pro forma as adjusted..... 58,768 --
Common stock, $.0001 par value; 500,000,000 shares
authorized; 9,434,300 shares issued and outstanding,
actual; 78,526,140 shares issued and outstanding,
proforma; shares issued and outstanding,
proforma as adjusted................................. -- 8
Additional paid-in capital.............................. 3,616 138,644
Subscriptions receivable................................ (100) (100)
Deferred compensation................................... (978) (978)
Accumulated deficit..................................... (15,196) (15,196)
-------- -------- --------
Total stockholders' equity........................... 46,110 122,378
-------- -------- --------
Total capitalization............................ $ 50,414 $126,682 $
======== ======== ========
</TABLE>
These share amounts exclude 10,740,027 shares of common stock issuable upon
the exercise of stock options outstanding as of March 1, 2000 at a weighted
average exercise price of $1.50 per share and warrants outstanding as of March
1, 2000 to purchase a total of 968,195 shares of common stock 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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<PAGE> 20
DILUTION
The pro forma net tangible book value of as of December 31, 1999
was approximately $ million, or $ 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 December 31, 1999, after giving
effect to the sale of 6,885,480 shares of our Series D preferred stock and
385,805 shares of Series C preferred stock in February 2000, and the conversion
of all outstanding shares of convertible preferred stock into an aggregate of
65,484,785 shares of common stock upon completion of an initial public offering
with an initial public offering price of $ per share. Without taking into
account any other changes in pro forma net tangible book value other than to
give effect to our sale of the shares of common stock offered by this
prospectus and the receipt and application of those net proceeds, our pro forma
net tangible book value as of December 31, 1999 would have been $ million,
or $ per share of common stock. This represents an immediate increase in pro
forma net tangible book value of $ per share to existing stockholders and an
immediate dilution in pro forma net tangible book value of $ 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.............
Pro forma net tangible book value per share as of December
31, 1999...............................................
Increase per share attributable to new investors..........
--------
Pro forma net tangible book value per share after this
offering..................................................
--------
Dilution per share to new investors.........................
========
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1999, 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 $ 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........ % %
New investors................ $
---------- --- ------------- ---
Total................... 100% 100%
========== === ============= ===
</TABLE>
The foregoing table assumes no exercise of the underwriters' over-allotment
option or shares underlying outstanding options or warrants. As of March 1,
2000, options to purchase 10,740,027 shares of common stock were outstanding at
a weighted average exercise price of $1.50 per share and warrants to purchase
968,195 shares of common stock at a weighted average exercise price of $1.27 per
share were outstanding. To the extent that these options are exercised, new
investors will experience further dilution. For additional information regarding
our stock options, see note 9 of notes to consolidated financial statements.
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<PAGE> 21
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 auditors, included elsewhere in this prospectus. The following
selected financial data for Gunn Partners as of December 31, 1996, 1997, and
1998, and for the years ended December 31, 1995, 1996, 1997, and 1998, has been
derived from Gunn Partners, Inc.'s unaudited financial statements included
elsewhere in the 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 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) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------------ --------------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ -- $ 4,857
Cost of revenue............................................. -- 4,498
-------- ----------
Gross profit................................................ -- 359
Expenses:
Product development....................................... -- 368
Selling, general and administrative....................... 187 15,267
-------- ----------
Total expenses......................................... 187 15,635
-------- ----------
Loss from operations........................................ (187) (15,276)
Interest income, net........................................ 3 263
-------- ----------
Net loss.................................................... $ (184) $ (15,013)
======== ==========
Net loss per share:
Basic and diluted......................................... $(140.48) $ (2.17)
======== ==========
Weighted average number of common shares outstanding:
Basic and diluted......................................... 1,307 6,906,334
======== ==========
Pro forma net loss per share:
Basic and diluted......................................... $ (0.20)
==========
Pro forma weighted average number of common shares
outstanding:
Basic and diluted......................................... 75,998,174
==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1999
---------------- ------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 851 $ 39,199
Working capital............................................. 813 31,957
Total assets................................................ 854 58,767
Long term obligations, net of current portion............... -- 4,304
Convertible preferred stock................................. 1,000 58,768
Total stockholders' equity.................................. 816 46,110
</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.
20
<PAGE> 22
GUNN PARTNERS, INC.
<TABLE>
<CAPTION>
JANUARY 1,
1999 TO
YEARS ENDED DECEMBER 31, NOVEMBER 22,
----------------------------------------------------- 1999
(IN THOUSANDS) (DATE OF
1995 1996 1997 1998 ACQUISITION)
----------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
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
Expenses:
Selling, general and
administrative................ 4,887 4,716 4,571 8,958 6,708
------ ------ ------ ------- -------
Total 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>
21
<PAGE> 23
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 Exult
had completed as of January 1, 1999, 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 667,884 shares of
Series C preferred stock, the conversion of all outstanding convertible
preferred stock into 65,484,785 shares of common stock, and the exercise of
options to purchase 267,835 shares of common stock.
22
<PAGE> 24
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................... 15,635 6,708 3,903(b) 26,246
-------- ------- ------- ----------
(Loss) income from operations........ (15,276) 8 (3,903) (19,171)
-------- ------- ------- ----------
Interest income, net...................... 263 17 -- 280
-------- ------- ------- ----------
Net (loss) income.................... $(15,013) $ 25 $(3,903) $ (18,891)
======== ======= ======= ==========
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 certain assets of Gunn Partners on November 22, 1999 in a
purchase-type transaction for approximately $14.0 million. 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 667,884 shares of Series C preferred
stock, the conversion of all outstanding convertible preferred stock into
65,484,785 shares of common stock, and the exercise of options to purchase
267,835 shares of common stock.
23
<PAGE> 25
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 responsibility for all aspects of 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-based interface, myHR, in
August 1999 and expect to deploy the first release of myHR with limited features
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 processing services in
December 1999. In addition, commencing in June 1999 we recognized revenue for
certain work performed by us prior to our contract with BP Amoco. 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. The contracts for the United
States and United Kingdom specifically cover the roll out and operations in
these specific countries. In general, we will assume the basic HR processes in
the United States and United Kingdom as now performed by BP Amoco. Through a
mutually agreed upon schedule and procedure we will migrate to client service
centers and 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 this
processes. After 14 months our revenue related to certain HR processes will be
reduced by a predetermined percentage. During the 14 month period, we expect
that our cost of providing the service, managing the migration and implementing
change will exceed the revenue. If we are unable to successfully manage the
process and reduce the costs, we could be subjected to further losses, the
contracts provide for gain sharing in that if we and BP Amoco work together to
reduce our cost of operations, we would lower our billings for a portion of the
cost savings. Although this mechanism may reduce our revenue, it would increase
our margin measured as a percentage of revenue and in absolute dollars. Further,
it provides a real incentives for BP Amoco and us to work together to identify
and implement improvements.
In November 1999, we purchased some of the assets 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 for $5.0 million in cash and $10.0 million in debt. Gunn Partners
was formed in 1991 and currently operates as our wholly-owned consulting
subsidiary. 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 $3,500,000. 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 leasing
space in Glasgow, Scotland to support the BP Amoco contracts.
24
<PAGE> 26
We anticipate our primary source of revenue for the near future will be
derived from our eHR process management services, which are earned under
long-term contracts as the services are rendered. A secondary source of revenue
is the benchmarking studies and other consulting services performed by Gunn
Partners. We believe that these consulting services provide us with an in-depth
understanding of best practices in HR, accounting and finance processing. As
part of our eHR solution, we will manage our clients' relationships with third
party vendors. To the extent we take responsibility for managing a third party
vendor, we include in revenue all charges that we bill our clients for managing
that third party vendor. 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 detailed time line
for due diligence and contract negotiations. Our letter of intent may include
some or all reimbursement of our direct and indirect costs incurred during this
process if a contract is not signed. Such amounts are expensed as incurred
because of the uncertainty of collection and any reimbursements are 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
web-based infrastructure, as well as our general operating infrastructure. 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.
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>
YEAR ENDED
DECEMBER 31, 1999
-----------------
(UNAUDITED)
<S> <C>
Revenue..................................................... 100.0%
Cost of revenue............................................. 92.6
------
Gross profit................................................ 7.4
Expenses:
Product development....................................... 7.6
Selling, general and administrative....................... 314.3
------
Total expenses......................................... 321.9
------
Loss from operations........................................ (314.5)
Interest income, net........................................ 5.4
------
Net loss.................................................... (309.1)%
======
</TABLE>
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.
25
<PAGE> 27
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 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 through our Gunn
Partners subsidiary, which was formed on November 22, 1999.
Cost of Revenue
Cost of revenue consists primarily of the cost of third party vendors
managed by us, and salaries, bonuses and benefits of employees directly involved
in providing our services, computer and communications equipment costs and
services, as well as facility related expenses. 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.
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, and the
performance of research and benchmarking of HR best practices that are not part
of a specific engagement. Product development expense for the year ended
December 31, 1999 was approximately $368,000 or 7.6% as a percentage of revenue.
We expect to substantially increase our spending for product development in 2000
and plan to continue to spend at least the same dollar amount in future years.
We cannot assure you that our product development efforts will provide us with
the desired results or 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. For the year
ended December 31, 1999, selling, general and administrative expense was $15.3
million or 314.3% 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 $743,000. We anticipate that selling,
general and administrative expense in 2000 will increase in absolute dollars, as
we hire additional sales and marketing personnel, engage additional consultants
and add administrative personnel and facilities to support our expanding
infrastructure. 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 $279,000.
Depreciation and amortization will increase in 2000 as a result of a full year
of amortization of intangible assets and deferred compensation and a full year
of depreciation of fixed assets.
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
26
<PAGE> 28
raised from private equity placements, offset in part by interest expense of
approximately $71,000 associated with debt incurred in 1999 in connection with
our purchase of certain assets 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 1999 resulting in net operating loss carryforwards.
Net Loss
The foregoing resulted in a net loss for the year ended December 31, 1999
of $15.0 million. We expect to continue to incur losses for at least the next
twelve months.
27
<PAGE> 29
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 five 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,
1998 1999 1999 1999 1999
------------ ----------- ----------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................... $ -- $ -- $ 213 $ 2,031 $ 2,613
Cost of revenue................... -- -- 213 2,031 2,254
----- ----- --------- --------- -------
Gross profit...................... -- -- -- -- 359
Expenses:
Product development............. -- -- 54 106 208
Selling, general and
administrative............... 187 516 2,661 3,543 8,548
----- ----- --------- --------- -------
Total expenses............... 187 516 2,715 3,649 8,756
----- ----- --------- --------- -------
Loss from operations.............. (187) (516) (2,715) (3,649) (8,397)
Interest income, net.............. 3 6 62 67 129
----- ----- --------- --------- -------
Net loss.......................... $(184) $(510) $ (2,653) $ (3,582) $(8,268)
===== ===== ========= ========= =======
AS A PERCENTAGE OF REVENUE:
Revenue........................... 100.0% 100.0% 100.0%
Cost of revenue................... 100.0 100.0 86.2
--------- --------- -------
Gross profit...................... -- -- 13.8
Expenses:
Product development............. 25.4 5.2 8.0
Selling, general and
administrative............... 1,249.3 174.5 327.1
--------- --------- -------
Total expenses............... 1,274.7 179.7 335.1
--------- --------- -------
Loss from operations.............. (1,274.7) (179.7) (321.3)
Interest income, net.............. 29.1 3.3 4.9
--------- --------- -------
Net loss.......................... (1,245.6)% (176.4)% (316.4)%
========= ========= =======
</TABLE>
In the quarter ended December 31, 1999, we acquired some of the assets 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-based 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
28
<PAGE> 30
our historical results. See "Risk Factors -- Our future operating results may
fluctuate and cause the price of our common stock to decline."
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
$7.7 million since inception. 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
investment activities was $9.6 million in 1999, of which approximately $4.4
million was spent to purchase computer and related equipment and office
furnishings and $5.2 million was spent in connection with our acquisition of
Gunn Partners. 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
million in 2000 on capital expenditures and related projects. From time to time,
in the ordinary course of business, we expect to evaluate potential acquisitions
of related businesses, assets, services or technologies. At this time, however,
we do not have any present understandings, commitments, or agreements with
respect to any material acquisition.
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
twelve months. Even if additional funds are not 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.
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.
29
<PAGE> 31
YEAR 2000 COMPLIANCE
We have assessed the impact that the year 2000 problem may have on our
operations. We have identified the following three areas of our business that
may be affected:
Internal Infrastructure. We began implementing our internal systems
infrastructure to support our corporate operations in early 1999. Our initial
internal infrastructure was designed to be year 2000 compliant, and we did not
use any legacy systems that required year 2000 testing or remediation. In
general, we purchased and installed only those servers, workstations, software
packages and peripheral devices that were certified to be year 2000 compliant by
their manufacturer. In addition to our design precautions, we also conducted
year 2000 compliance testing throughout the fall of 1999. We performed the final
tests in mid-December 1999, and as of the date of this prospectus, we have not
experienced any year 2000 related failures or internal systems downtime as a
result of the century date change.
Client Delivery Infrastructure. We are continuing to build the systems
infrastructure for our eHR solution and client service centers. Similar to our
corporate infrastructure, we are designing and implementing our client delivery
systems using new systems, without any legacy systems that required remediation
or year 2000 testing. We plan to purchase and install only those servers,
networks, workstations, software packages and peripheral devices that were
certified to be year 2000 compliant by their manufacturer. Prior to using any
part of our client delivery infrastructure for a client, we intend to conduct
acceptance testing, which includes testing for year 2000 compliance. To date, we
have not begun supporting client operations on this infrastructure, and
accordingly, have no history upon which to assess the success or failure of
these efforts.
Client Contract Obligations. Our clients currently retain responsibility to
make their existing client applications systems, interfaces, data files and data
transmissions year 2000 compliant. Under our current process management
contracts, we are not bound contractually to remediate our clients' systems, nor
are we required to correct errors or deficiencies in our operations that are
caused by our clients' non-compliant systems. Nonetheless, we do include in our
due diligence exercises, and in our analysis of our clients' current systems and
operations an inspection of our clients' year 2000 systems compliance. While we
alert our clients if we detect an issue with year 2000 compliance, our clients
remain responsible for any year 2000 issues.
To date, we have not experienced any operational problems with respect to
year 2000 compliance issues. We currently do not have any contingency plans to
address this issue, but we do not believe the cost of any remedial action will
have a material adverse effect on our business or results of operations.
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 some of Gunn Partners' assets
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
------ ------- -------
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.
30
<PAGE> 32
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 is an S corporation and does not incur federal income taxes
because profits, if any, are either paid to employee owners as compensation or
distributed to the owners. State income tax expense has been immaterial.
Our current and future business operations are not comparable to the
operations of Gunn Partners.
We purchased some of the assets 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.
31
<PAGE> 33
BUSINESS
OVERVIEW
Exult is the first company to offer eHR, a comprehensive, web-enabled
integrated service designed to manage the entire human resources department for
Global 500 corporations. Our objective is to transform these HR departments into
proactive, global, knowledge based organizations through long-term management
contracts. A key component of our eHR solution is myHR, a browser-based,
personalized web portal. We believe myHR will provide a comprehensive source of
data, information and decision support twenty four hours a day, seven days a
week for our clients' employees, managers and annuitants, irrespective of
business unit and location. myHR will interface with various software
applications and business processes over the client's intranets, extranets and
virtual private networks. With myHR we intend to eliminate the numerous
organizational, transactional and communication barriers that exist today
between the employer and employee, and create a dynamic communication exchange
among employees, employer, managers and their peers. We design, implement,
manage and support the web-based systems, processes and personnel for our
clients' entire HR function. In our client service centers, we manage all of our
clients' HR systems and processes, including transaction, production and call
center technologies. By providing one comprehensive solution that integrates all
of the people, processes, technologies and third party vendors, our strategy is
to implement and maintain HR best practices and realize economies of scale in
order to achieve both increased human capital productivity and lower costs for
our clients.
INDUSTRY BACKGROUND
The Current State of Human Resources Departments in the Global
500. Traditional human resources departments within large, multinational
corporations tend to be inundated with the logistics 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. In addition to the logistical complexities presented by an employee base
of this magnitude, the human resources function in a typical Global 500
corporation is complicated by factors such as varying legal regulations from
country to country, a multitude of employee benefit plans, and mergers,
acquisitions and divestitures. In addition, Global 500 corporations may have
multiple human resources groups; one at the corporate level and additional human
resources departments for each separate business unit within the corporation.
These human resources groups typically do not have a central repository of
information, and often lack a coordinated communications infrastructure. 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, multiprocess 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, the number of divisions
and the number of third party vendors. Also, in order to effectively manage an
entire HR organization, 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.
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Expansion of the Internet. The widespread use of the Internet makes our
comprehensive service delivery model possible. International Data Corporation
estimates that the number of Internet users worldwide will grow from
approximately 196 million in 1999 to approximately 502 million in 2003. The
Internet provides a tremendous opportunity to facilitate two way communication
among a large group 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 cost
reductions of approximately 25% to 30%. To date, however, HR organizations have
not been able to realize the power of the Internet because no mechanism exists
to centralize or organize the large amount of information and electronic
transmissions generated by HR 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 intranets.
THE EXULT SOLUTION
Exult is the first company to offer eHR, a comprehensive, web-enabled
integrated service that is designed to manage the entire human resources
department for Global 500 corporations. We intend to leverage the power of the
Internet with our HR interface, myHR, in order to facilitate communication
throughout our clients' organizations and compile, organize and provide access
to the wealth of information embodied in the human resources process. In
addition, myHR 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. Our client service centers will also provide
personalized support, enabling employees to access assistance and information
using a variety of methods. We believe that our eHR solution, together with our
comprehensive consulting services and shared resources, will enable us to
develop, refine and implement HR best practices and realize economies of scale.
By assuming broad responsibility for management of our clients' existing human
resources people, processes, technologies and third party vendors, we plan to
deliver our clients increased human capital productivity at a reduced cost.
EXULT'S STRATEGY
Our objective is to become the leading provider of comprehensive HR
solutions for large, multinational corporations. The following are the key
elements of our strategy:
- Leverage Technology and the Internet for Enhanced HR Performance. Using
the Internet and emerging technologies, we plan to design and build an
integrated eHR infrastructure connecting all of the various people,
processes, technologies and third party vendors involved in an HR
organization. Through myHR, we seek to transform the workplace into a
dynamic environment characterized by shared learning between our clients
and their employees. We also seek to create 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. Finally, we plan to use our eHR infrastructure to
implement, measure, monitor and consistently apply HR best practices
throughout the organization.
- Establish myHR as an Integral Tool in the Workplace. Our eHR solution
contemplates that myHR will become the employee's home page from which he
or she will be able to access personnel information, employee
productivity tools, intra-company communications and the Internet, and
perform both HR and non-HR tasks. We believe myHR will enable the
exchange of information and ideas between and among employees, employer,
managers and their peers. 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. We create a partnership
with our clients that is designed to 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
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complete transformation of our clients' HR organizations which further
demonstrates our mutual commitment and shared goals. The long-term nature
of our contracts helps to provide greater visibility of future revenue
streams and better information for determining future investment
decisions.
- Utilize and Leverage Shared Resources. We plan to achieve economies of
scale and scope by sharing personnel, technological, physical and third
party resources across our client base. We have two primary shared
resources, our client service centers and our centers of expertise. Each
client service center will service multiple clients in order to achieve
economies through scale. We will leverage our knowledge through our
centers of expertise, which consist of a team of HR experts spanning a
broad spectrum of HR disciplines, by advising both our client service
center personnel and our clients. Working with multiple clients, both
internally and externally, will 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. 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 performance and cost. We plan to leverage the demand
created by multiple clients to deliver improved service levels and cost
savings.
- 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 field of HR 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 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 the 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.
EHR DELIVERY MODEL
We believe that our eHR delivery model simplifies and standardizes our
clients' HR practices and procedures, and delivers improved management
information and employee communications at significant cost savings. Our
transition and transformation process 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 subsidiary,
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
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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 that seek 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.
Web-Enablement and myHR
By applying the Internet 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. We will integrate state-of-the-art technology with our Internet
browser interface, myHR, to enable our clients and their employees to
centralize, easily access and efficiently use a wealth of HR information. myHR
will interface with various software applications and business processes from
the client's intranets, extranets and virtual private networks. Our eHR solution
contemplates that myHR will become the employee's home page from which he or she
will be able to access personnel information, employee productivity tools,
intra-company communications and the Internet, and perform both HR and non-HR
tasks. 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.
For the employee, myHR will be the personal portal for the direct
management of work experiences and career opportunities. 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 twenty four
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. However,
should the employee need personalized assistance or have questions, the employee
can access an HR representative either while 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
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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.
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 centers 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
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 support each of the five major categories of HR processes in order
to continuously understand and address the needs of our clients and their
employees, and to introduce improved HR processes and procedures. This
group is recently formed and currently consists of only a few
individuals; however, we expect to expand this group to a significant
number in the near term. These individuals will not necessarily be housed
together in a physical center, but rather will be located throughout the
world working from a variety of locations, 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 a
third party vendor. 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
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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 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.
- Systems and Applications. We will manage all of 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 our alliance partners' 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 accept full responsibility for all HR functions in these
processes and manage all third party vendors 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.
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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 the timely and accurate processing of a
client's payroll, and manage their deferred compensation, stock options,
long-term performance plans, defined benefit plans, 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 from our consulting
unit and individuals from our centers of expertise concerning HR best practices.
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,
as well as manage the 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.
ACQUISITION OF CERTAIN ASSETS OF GUNN PARTNERS
In November 1999, we acquired certain assets of Gunn Partners, Inc., a
business process improvement consulting 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 is our wholly-owned subsidiary that currently serves 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 benchmark tools, surveys 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
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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 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 approximately 14 months.
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 desires 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 subject to consent from the relevant BP
Amoco affiliate enter into a supplemental agreement with the affiliate for that
country, for an expected term of five years. 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 until December 2006,
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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. 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. Short of terminating an
entire Country Agreement, BP Amoco may also terminate our rights to provide
particular 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 currently operates 86 facilities in
18 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 24,000 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 March 1, 2000, our business development group consisted of
ten professionals, and our marketing group consisted of six professionals. We
employ a team selling approach, whereby our business development 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, 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 promote 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
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- 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. 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 not yet filed trademark or service mark applications anywhere outside of
the United States. 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 March 1, 2000, we employed 175 people, including 20 in service
development, 97 in operations and delivery, 12 in sales and marketing, 31 in
consulting and research and 15 in general and administrative. All employees
other than one 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.
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<PAGE> 43
FACILITIES
Our corporate headquarters are located in approximately 7,000 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 $17,900, which payment will increase to $18,600 for
the last year of the lease. We are currently renegotiating our existing lease to
relocate during the second quarter of 2000 to 19,000 square feet in the same
building. We also currently lease approximately 71,000 square feet of office
space in The Woodlands, Texas under a lease that expires in April 2006, as well
as office space for our consultants in Georgia, Massachusetts, New York, United
Kingdom and Switzerland.
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<PAGE> 44
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides information with respect to our executive
officers, key employees and directors as of March 1, 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 Chief Operating Officer and Executive Vice
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 Gunn............................... 52 Vice President, Executive Client Lead
Mark B. Hodges............................ 35 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(2)....................... 40 Director
Steven A. Denning(1)...................... 51 Director
Mark F. Dzialga(2)........................ 35 Director
Michael A. Miles(1)....................... 60 Director
John R. Oltman(2)......................... 54 Director
A. Michael Spence(1)...................... 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, Chief
Operating Officer and Secretary since February 1999. 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.
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
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<PAGE> 45
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, most recently as a partner. 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 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 Services Vendor Group, where he authored
the first market research report on the business process outsourcing market in
1989. From 1988 to 1989, 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
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<PAGE> 46
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.
MARK F. DZIALGA has been a Director of Exult since February, 2000 and is
currently a 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
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<PAGE> 47
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.
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.
EXULT ADVISORY COMMITTEE
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 committee is currently comprised of the following individuals:
- Naomi Bloom, Managing Partner of Bloom & Wallace
- Row Henson, Vice President, Human Resources Management Systems for
PeopleSoft USA, Inc.
- Dave Ulrich, Professor of Business at the University of Michigan
- Jac Fitz-enz, Ph.D., Chairman and founder of the Saratoga Institute
- 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
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<PAGE> 48
- 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 will be divided into three classes of directors
serving staggered three-year terms upon the closing of this offering. As a
result, approximately one-third of the board of directors will be elected each
year. These provisions, together with the provisions of our certificate of
incorporation, allow the Board of Directors to fill vacancies of or increase the
size of the Board of Directors, and may deter our stockholders from removing
incumbent directors and filling these vacancies with its own nominees to gain
control of the board of directors.
COMMITTEES OF THE BOARD
The board of directors has an audit committee and a compensation committee.
The audit committee consists of Messrs. Cline, Dzialga and Oltman. 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. Denning, Miles 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 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.
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 are eligible to receive options under our 1999 Stock Option/ Stock
Issuance Plan. See "-- 1999 Stock Option/ Stock Issuance Plan."
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, 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 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 one year's salary
and bonus.
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<PAGE> 49
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, 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 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 one year's salary
and bonus.
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, as determined by our board of directors and
Chief Executive Officer. 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. 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 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. 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.
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<PAGE> 50
EXECUTIVE COMPENSATION
The following table summarizes the compensation earned by, and paid to, our
Chief Executive Officer, our three other most highly compensated executive
officers 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 perquisites that exceeded the lesser of $50,000 or 10% of
his 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)
Chief Operating Officer and
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) Represents relocation costs paid to the named executive officer. Includes
life insurance premiums paid by Exult on behalf of the named executive
officer.
OPTION GRANTS IN LAST FISCAL YEAR
Each option listed in the table below was granted under, or has been
assumed under, the 1999 Stock Option/Stock Issuance Plan. All of such options
are granted under the 1999 plan. The following table indicates information
regarding options granted to the named executive officers during 1999. We have
not granted any stock appreciation rights.
<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>
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<PAGE> 51
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 are mandated by rules of the Securities and Exchange Commission and
do not represent our estimate or projection of our future common stock prices.
These amounts represent assumed rates of appreciation in the value of the common
stock from the fair market value on the date of grant. Actual gains, if any, on
stock option exercises are dependent on the future performance of our common
stock and overall stock market conditions. The amounts reflected in the table
may not necessarily be achieved.
YEAR-END OPTION HOLDINGS
The following table indicates aggregated 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 $ 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 $ $
Stephen M. Unterberger............... 1,013,280 1,565,040
Barbara A. Coull-Williams............ 124,000 --
Scott J. Figge....................... 353,185 95,350
Rebecca L. Work...................... 157,905 --
</TABLE>
Each option represents the right to purchase one share of common stock. 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 over a period of five years following the grant date of the option.
EMPLOYEE BENEFIT PLANS
1999 STOCK OPTION/STOCK ISSUANCE PLAN
In May 1999, we adopted the 1999 Stock Option/Stock Issuance Plan. The
Board of Directors and our stockholders approved the 1999 plan in May 1999. A
total of 10,934,005 shares of common stock have been authorized and reserved for
issuance under the 1999 plan. As of March 1, 2000, options to purchase an
aggregate of 8,390,407 shares were outstanding and 2,013,213 shares were
available for option grants. To the extent we cancel, terminate or repurchase
any unvested shares of common stock issued under the 1999 plan, these shares
will become available for future issuance under this plan.
The 1999 plan is divided into two separate components: (i) the
Discretionary Option Grant Program under which employees, non-employee members
of the Board and consultants may be granted options to purchase shares of common
stock; and (ii) the Stock Issuance Program under which eligible individuals may
purchase shares of common stock at a price not less than 85% of the fair market
value at the time of issuance, or be issued shares of common stock as a bonus
tied to the performance of services rendered. Both of these programs are
administered by the Board of Directors or one or more committees appointed by
the Board of Directors. The Board of Directors has complete discretion to
determine which eligible individuals will receive option grants or stock
issuances under those programs, determine the type, number, vesting requirements
and other features and conditions of awards under the 1999 plan, interpret this
plan and make all other decisions relating to the operation of the 1999 plan.
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<PAGE> 52
Options may be 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. Incentive stock options may only be granted to
employees and the term of an incentive stock option cannot exceed ten years,
except that the term of an incentive stock option granted to a holder of more
than 10% of our stock cannot exceed five years. The exercise price of incentive
stock options granted under the 1999 plan will in no event be less than 100% of
the fair market value of the common stock on the date of grant, except that an
incentive stock option granted to a holder of more than 10% of our stock will
have an exercise price of no less than 110% of the fair market value on the
grant date, and the exercise price for non-statutory stock options will be no
less than 85% of the fair market value of the common stock on the grant date.
The exercise price for the shares of common stock subject to the option grants
made under the 1999 plan may be paid in cash, check or in shares of common stock
valued at the fair market value on the exercise date. The option may also be
exercised through a cashless exercise method or delivery of a full recourse,
interest bearing promissory note.
Under the 1999 plan, any or all options outstanding under the Discretionary
Option Grant Program may be cancelled in return for the grant of new options
covering the same or a different number of shares of common stock with an
exercise price per share based on the fair market value of the common stock on
the new grant date.
In the event we are acquired by merger or sale of substantially all of our
assets, each outstanding option under the Discretionary Option Grant Program not
assumed by the successor corporation or otherwise continued in effect will
automatically accelerate, and all unvested shares will immediately become vested
and exercisable. 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 outstanding options will
automatically accelerate in the event of the termination of the optionee's
services within a designated period, not to exceed 18 months, following an
acquisition in which those options are assumed or continued in effect. Also,
outstanding repurchase rights will automatically lapse and cease to be
exercisable in the event the optionee or participant's service is terminated
within a designated period, not to exceed 18 months, following the effective
date of an acquisition in which those repurchase rights are assigned or
otherwise continued.
In some cases, a change in control of Exult by acquisition of beneficial
ownership of securities possessing more than 50% of the total combined voting
power of our outstanding securities will result in each outstanding option
accelerating and becoming vested. Also, any outstanding repurchase rights shall
automatically terminate and these unvested shares shall become fully vested.
The Board of Directors may amend or modify the 1999 plan at any time
subject to any required stockholder approval. The 1999 plan will terminate on
the earliest of (a) May 24, 2009, (b) the date on which all shares available for
issuance under the 1999 plan shall have been issued as fully vested shares, or
(c) the termination of all outstanding options in connection with a change in
control or ownership of Exult.
1999 SPECIAL EXECUTIVE STOCK OPTION PLAN
Our 1999 Special Executive Stock Option Plan was adopted by our board and
our stockholders on November 19, 1999. 3,065,995 shares of common stock have
been authorized for issuance under the special plan. As of March 1, 2000,
options for 2,349,620 shares of our common stock were outstanding under the
special plan, no options had been exercised, and 716,375 shares remained
available for future option grant. The individuals eligible to participate in
the special plan is limited to our officers and other highly compensated
employees.
The special plan is administered by our board of directors. The board in
its capacity as plan administrator has the discretionary authority to determine
which eligible individuals are to receive option grants under the special plan,
the time or times when such option grants are to be made, the number of
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<PAGE> 53
shares subject to each such grant, 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 option grant and the maximum
term for which any granted option is to remain outstanding.
The special plan includes the following features:
- The exercise price for each option must be at least 85% of the fair
market value of the option shares at the time of the option grant. No
option may have a term in excess of ten years, and each option will be
subject to earlier termination following the optionee's cessation of
service with us.
- The options may be structured as installment options which become
exercisable for vested shares over the optionee's period of service with
us. Alternatively, the options may be immediately exercisable for all the
option shares, but any shares purchased under such an option may be
repurchased by us, at the option exercise price paid per share, in the
event the optionee leaves our service before vesting in those shares.
- The exercise price for the shares of common stock subject to option
grants made under our special plan may be paid in cash or in shares of
common stock valued at fair market value on the exercise date. The option
may also be exercised through a same-day sale program without any cash
outlay by the optionee. In addition, the plan administrator may provide
financial assistance to one or more optionees in the exercise of their
outstanding options or the purchase of their unvested shares by allowing
such individuals to deliver a full-recourse, interest-bearing promissory
note in payment of the exercise price and any associated withholding
taxes incurred in connection with such exercise or purchase.
- The board has the authority to cancel outstanding options under the
discretionary option grant program 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.
- The board also has the authority to accelerate the vesting schedule in
effect for any shares purchased or purchasable under the granted option
and to extend the exercise period during which an option may be exercised
following the optionee's cessation of service with us.
- The special plan includes the following change in control provisions
which may result in the accelerated vesting of outstanding option grants:
- In the event that we are acquired by merger or asset sale, each
outstanding option which is not to be assumed by the successor
corporation will automatically accelerate in full, and all unvested
shares under the special plan will immediately vest, except to the
extent our repurchase rights with respect to those shares are to be
assigned to the successor corporation.
- The board will have complete discretion to structure one or more
options under the plan so those options will vest as to all the option
shares in the event those options are assumed in the acquisition but
the optionee's service with us or the acquiring entity is subsequently
terminated. The vesting of outstanding shares under the plan may be
accelerated upon similar terms and conditions.
- The board will also have the authority to grant options which will
immediately vest in the event we are acquired, whether or not those
options are assumed by the successor corporation.
- The board may amend or modify the special plan at any time, subject to
any required stockholder approval.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation provides that, except to the extent
prohibited by the Delaware General Corporation Law, our directors will not be
personally liable to us or our stockholders for monetary damages for any breach
of fiduciary duty as directors. Under the Delaware General Corporation Law, the
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<PAGE> 54
directors have a fiduciary duty to Exult which is not eliminated by this
provision of the certificate of incorporation and, in appropriate circumstances,
equitable remedies including injunctive or other forms of nonmonetary relief
will remain available. In addition, each director will continue to be subject to
liability under the Delaware law for:
- breach of the director's duty of loyalty;
- acts or omissions which are found by a court of competent jurisdiction to
be not in good faith or which involve intentional misconduct, or knowing
violations of law;
- actions leading to improper personal benefit to the director; and
- payment of dividends or approval of stock repurchases or redemptions that
are prohibited by Delaware law.
This provision also does not affect a director's responsibilities under any
other laws, including the federal securities laws or state or federal
environmental laws. We have obtained directors' and officers' liability
insurance.
Section 145 of the Delaware law empowers a corporation to indemnify its
directors and officers and to purchase insurance with respect to liability
arising out of their capacity or status as directors and officers, provided that
this provision shall not eliminate or limit the liability of a director:
- for any breach of the director's duty of loyalty to the corporation or
its stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- arising under Section 174 of the Delaware law; or
- for any transaction from which the director derived an improper personal
benefit.
The Delaware law provides further that the indemnification permitted
thereunder shall not be deemed exclusive of any other rights to which the
directors and officers may be entitled under the corporation's bylaws, any
agreement, a vote of stockholders or otherwise. The certificate of incorporation
provides that we indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding by reason of the fact that the person is or was a director or
officer, or is or was serving at our request as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses, judgements, fines and amounts paid in settlement
actually and reasonably incurred by the person in the action, suit or
proceeding.
We plan to enter into indemnification agreements with our directors and our
executive officers containing provisions that may require us, among other
things, to indemnify our directors and officers against liabilities that may
arise by reason of their status or service as directors or officers other than
liabilities arising from willful misconduct of a culpable nature, to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors and officers' liability
insurance if maintained for other directors or officers.
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. 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> 55
CERTAIN TRANSACTIONS
Since our formation in October 1998, there has not been, nor is there any
proposed transaction where 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., 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 $39,360 to James Madden, our Chief Executive
Officer, President and Chairman of the Board. As of March 1, 2000, we have the
right to repurchase up to 5,904,000 of these shares in the event Mr. Madden's
employment with us terminates. This right lapses as to 184,500 shares on the
first day of each month and will terminate on December 1, 2002. If we do not
elect to exercise our repurchase right following the termination of Mr. Madden's
employment with us, General Atlantic Partners, LLC will have a similar
repurchase right.
BP INTERNATIONAL LIMITED
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. In December 1999, we also granted BP International warrants to purchase
up to 667,844 shares of our Series C preferred stock at an exercise price of
$10.28 per share, which shares are convertible into an aggregate of 3,339,220
shares of our common stock upon consummation of this offering. The exercise
price of this warrant increases at the rate of 12 percent per annum, compounded
daily, following the date of issuance of the warrant. These warrants may be
exercised for cash or on a net exercise basis. Both warrants expire on the
earlier of December 7, 2000 or 45 days after the filing of this registration
statement of which this prospectus is a part. 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.
ACQUISITION OF GUNN PARTNERS, INC.
In November 1999, we acquired certain assets from Gunn Partners, Inc. for
an aggregate purchase price 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
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<PAGE> 56
shareholder of Gunn Partners, and will receive approximately $4.0 million of the
total proceeds from this acquisition.
OTHER RELATED PARTY TRANSACTIONS
We will enter into an indemnification agreement with each of our executive
officers and our directors containing provisions that may 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, other than
liabilities arising from willful misconduct of a culpable nature, and to advance
expenses incurred as a result of any proceeding against them as to which they
could be indemnified. 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 outside directors of the board of directors and will be on
terms no less favorable to us than could be obtained from unaffiliated third
parties.
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<PAGE> 57
PRINCIPAL STOCKHOLDERS
The following table indicates information as of March 1, 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 beneficially owned and the percentage of shares
beneficially owned are based on 78,526,140 shares of common stock deemed
outstanding as of March 1, 2000, assuming conversion of all of our preferred
stock into common stock which will occur upon consummation of this offering, and
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 March 1, 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%
Mark Dzialga(2)............................................. 52,708,745 67.1
General Atlantic Partners and its affiliates(2)............. 52,698,745 67.1
James C. Madden(3).......................................... 9,562,988 12.1
BP International Limited.................................... 8,607,465 10.1
DB Capital Investors, L.P. ................................. 2,295,160 2.9
Goldman, Sachs & Co. and its affiliates(4).................. 2,180,403 2.8
Stephen M. Unterberger(5)................................... 1,950,001 2.5
Mellon Ventures............................................. 1,147,580 1.5
McKinsey & Company, Inc..................................... 874,240 1.1
Scott J. Figge(5)........................................... 647,343 *
John R. Oltman(6)........................................... 200,150 *
Rebecca L. Work(5).......................................... 157,905 *
Barbara A. Coull-Williams(5)................................ 124,000 *
A. Michael Spence(7)........................................ 127,195 *
Michael A. Miles(7)......................................... 127,195 *
J. Michael Cline(5)......................................... 10,000 *
All officers and directors as a group (17 persons)(8)....... 66,867,833 80.3%
</TABLE>
- -------------------------
* Less than one percent
(1) The address for each of the officers and directors is 4 Park Plaza, Suite
350, Irvine, California. The address for General Atlantic Partners and its
affiliates is 3 Pickwick Plaza, Greenwich, Connecticut 06830. The address
for BP International Limited is Britannic House, One Finsbury Circus, London
England EC2M 7BA.
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<PAGE> 58
(2) Includes the following securities held by various General Atlantic
partnerships: (a) 25,000 shares of Series A preferred stock, which will be
converted into 22,500,000 shares of common stock upon consummation of the
offering; (b) 1,660,517 shares of Series B preferred stock, which will be
converted into 8,302,585 shares of common stock upon consummation of the
offering; (c) 4,377,432 shares of Series C preferred stock, which will
convert into 21,887,160 shares of common stock upon consummation of the
offering, and (d) 9,000 shares of common stock. In addition, for Messrs.
Dzialga and Denning, includes options to purchase 10,000 shares of common
stock which are exercisable within 60 days of March 1, 2000. Each of Messrs.
Denning and Dzialga are directors of Exult. Mr. Denning is the Executive
Managing Member of General Atlantic Partners, LLC, the general partner of
certain of the foregoing General Atlantic partnerships and the managing
general partner of certain of the other foregoing General Atlantic
partnerships. Mr. Dzialga is a member of General Atlantic Partners, LLC and
currently serves as a general partner of a number of General Atlantic
partnerships. Each of Messrs. Dzialga and Denning disclaim beneficial
ownership to the shares referred to in clauses (a), (b) and (c) above,
except to the extent of their primary interest therein.
(3) Includes 885,600 shares issuable upon exercise of options that are
exercisable within 60 days of March 1, 2000.
(4) Includes securities held by various Goldman, Sachs & Co. partnerships: (a)
1,650,474 shares of Series D preferred stock held by GS Capital Partners
III, L.P.; (b) 453,735 shares of Series D preferred stock held by GS Capital
Partners III Offshore, L.P.; and (c) Goldman, Sachs & Co. Verwaltungs GmbH.
Upon consummation of this offering, each share of Series D preferred stock
will convert into one share of common stock.
(5) Consists solely of shares issuable upon exercise of options that are
exercisable within 60 days of March 1, 2000.
(6) 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 that are exercisable within 60 days of March 1, 2000.
(7) Includes 10,000 shares issuable upon exercise of options that are
exercisable within 60 days of March 1, 2000.
(8) Includes 4,719,748 shares issuable upon exercise of options that are
exercisable within 60 days of March 1, 2000.
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<PAGE> 59
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.
Upon the closing of this offering, our authorized capital stock will
consist 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 1, 2000, 78,526,140 shares of common stock were deemed outstanding
and held of record by approximately 25 holders. Under the certificate of
incorporation and bylaws, holders of common stock do not have cumulative voting
rights. 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 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 and the terms of any existing or future agreements
between us and our lenders. 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 65,484,785 shares
of common stock. Thereafter, the board of directors is authorized to issue from
time to time 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 without further vote or action by the
stockholders. 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
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock, including the loss of
voting control to others, and may have the effect of delaying, deferring or
preventing 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 and bylaws described
below are intended to:
- enhance the likelihood of continuity and stability in the composition of
the Board and in the policies formulated by the Board;
- discourage transactions that may involve an actual or threatened change
in control of Exult;
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- discourage tactics that may be used in proxy fights;
- 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
- 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.
However, these provisions may make it more difficult to acquire control of
Exult, deprive stockholders of the opportunity to realize a premium on the
shares of common stock owned by them, and adversely affect the prevailing market
price of the stock.
Delaware Anti-Takeover Law. We are subject to the provisions of 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.
Filling Board Vacancies and Removal of Directors. Subject to the rights of
the holders of any outstanding series of preferred stock, the certificate of
incorporation permits directors but not stockholders to fill board vacancies,
including newly created directorships. This 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. The
certificate of incorporation also provides that directors may be removed by
stockholders only for cause and only by the affirmative vote of holders of
two-thirds of the outstanding shares of voting stock.
Special Stockholder Meetings. The certificate of incorporation will provide
that special meetings of the stockholders for any purpose or purposes, unless
required by law, may be called only by:
- a majority of the Board;
- the Chief Executive Officer or Secretary following a request in writing
of the CEO; or
- stockholders owning more than 50% of the voting power represented by all
of our issued and outstanding stock.
This limitation on the right of stockholders to call a special meeting 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.
Written Consent; Special Meetings of Stockholders. The certificate of
incorporation prohibits stockholder action by written consent without a meeting.
These provisions will make it more difficult for stockholders to take action
opposed by the board of directors.
Amendment of Provisions in the Certificate of Incorporation. The
certificate of incorporation generally requires the affirmative vote of the
holders of at least two-thirds of the voting power represented by all of our
outstanding stock to amend any provisions of the certificate of incorporation
concerning:
- the removal or appointment of directors;
- the authority of stockholders to act by written consent;
- the vote required to amend the certificate of incorporation;
- calling a special meeting of stockholders;
59
<PAGE> 61
- procedure and content of stockholder proposals concerning business to be
conducted at a meeting of stockholders; and
- director nominations by stockholders.
These voting requirements make it more difficult for stockholders to control
Exult by amending the certificate of incorporation 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 approximately % of our common stock. This
gives them veto power with respect to any stockholder action or approval
requiring either a two-thirds or simple majority vote.
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. This
warrant may be exercised at any time and expires 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 (25%) of the warrant shares vest quarterly from the
respective date of each warrant over a one (1) year period. The holder of each
warrant may exercise the warrant shares that have vested at any time up to
September 22, 2009.
In December 1999, we issued two warrants to BP International Limited. The
first warrant entitles BP International to purchase 3,339,220 shares of our
common stock at an exercise price of $1.57 per share. The second warrant
entitles BP International to purchase 667,844 shares of our Series C preferred
stock, which shares are convertible in 3,339,220 shares of our common stock. The
exercise price for the second warrant is $10.28 per share. This warrant will
lapse and terminate to the extent BP International does not exercise the warrant
within 45 days after the filing of this registration statement. Both warrants
are immediately exercisable and expire in December 2004.
REGISTRATION RIGHTS
After this offering, holders of 70,369,250 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 and may require us to register their shares on Form S-3.
Upon 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.
60
<PAGE> 62
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have shares of common
stock outstanding assuming no exercise of options after March 1, 1999. Of this
amount, the 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, 36,071,480 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.................. Freely tradable shares sold in this
offering
180 days............................ 36,071,480 Lock-up released; shares saleable
under Rule 144, 144(k) or 701
Over 180 days....................... 37,842,160 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 limitations described above. Persons deemed to
be affiliates must always sell under Rule 144, 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, since 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, stockholders with registration
rights and other stockholders and optionholders have agreed, under the purchase
agreement and other agreements 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.
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
2000, the holders of options to purchase approximately 530,385 shares of common
stock will be eligible to sell their shares upon the expiration of the 180-day
lockup period, subject to the vesting of those options.
We intend to file a registration statement on Form S-8 under the Securities
Act as soon as practicable after the completion of the offering to register
13,469,615 shares of common stock subject to outstanding stock options or
reserved for issuance under our 1999 Stock Option/Stock Issuance Plan. This
registration will permit the resale of these shares by nonaffiliates in the
public market without restriction under the
61
<PAGE> 63
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 "-- 1999 Stock Option/Stock Issuance Plan."
In addition, holders of 70,369,250 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. We also have given, or intend to give, registration rights to
our warrant holders with respect to 6,678,440 shares of common stock. See "Risk
Factors -- A large number of additional shares may be sold into the public
market in the near future. These sales could cause the market price of our
common stock to decline significantly, even if our business is doing well."
62
<PAGE> 64
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 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..........................................
=======
</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 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
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.
We have agreed to indemnify the U.S. underwriters and the international
managers against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments the U.S. underwriters and international
managers may be required to make in respect to those liabilities.
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.
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.
63
<PAGE> 65
The following table shows the public offering price, underwriting discount
and proceeds before expenses to. 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
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 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 5% 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.
64
<PAGE> 66
NO SALES OF SIMILAR SECURITIES
We, our executive officers, directors and all existing stockholders have
agreed with exceptions, 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.
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.
We expect the shares to be 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
65
<PAGE> 67
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
A prospectus in electronic format is being made available on a web site
maintained by Merrill Lynch. Other than the prospectus in electronic format, the
information on Merrill Lynch's web site is not a part of this prospectus or the
Registration Statement of which this prospectus is a part, has not been approved
and/or endorsed by Exult or any underwriter in its capacity as underwriter and
should not be relied upon by investors.
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 3, 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.
66
<PAGE> 68
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.
67
<PAGE> 69
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-19
Balance Sheets.............................................. F-20
Statements of Income........................................ F-21
Statements of Retained Earnings............................. F-22
Statements of Cash Flows.................................... F-23
Notes to Financial Statements............................... F-24
Independent Auditor's Report................................ F-28
Statements of Income (Loss)................................. F-29
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Basis of Presentation....................................... PF-1
Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1999........... PF-2
</TABLE>
F-1
<PAGE> 70
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> 71
EXULT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
------------------------- DECEMBER 31,
1998 1999 1999
--------- ------------ -------------
(UNAUDITED)
(NOTE 7)
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents........................ $ 850,965 $ 39,199,053
Accounts receivable.............................. -- 824,399
Prepaid expenses and other current assets........ -- 287,132
--------- ------------
Total current assets..................... 850,965 40,310,584
--------- ------------
Property and equipment, net........................ -- 4,439,882
Intangibles, net................................... -- 13,603,134
Other assets....................................... 3,425 413,631
--------- ------------
Total Assets............................. $ 854,390 $ 58,767,231
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................. $ 3,892 $ 1,453,593
Accrued liabilities.............................. 34,102 2,269,815
Current portion of long-term obligations......... -- 4,629,987
--------- ------------
37,994 8,353,395
--------- ------------
Long-Term Obligations, net of current portion...... -- 4,304,219
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 and 0 pro
forma (unaudited), including additional
paid-in capital............................. 999,999 58,768,079 $ --
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 and
78,526,140 pro forma (unaudited)............ 1 189 7,853
Additional paid-in capital.................... -- 3,615,560 138,644,585
Subscriptions receivable......................... -- (100,001) (100,001)
Deferred compensation......................... (977,756) (977,756)
Accumulated deficit.............................. (183,604) (15,196,454) (15,196,454)
--------- ------------ ------------
Total Stockholders' Equity............... 816,396 46,109,617 $122,378,227
--------- ------------ ------------
Total Liabilities and Stockholders'
equity................................. $ 854,390 $ 58,767,231
========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 72
EXULT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
OCTOBER 29,
1998
(INCEPTION)
TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Revenue..................................................... $ -- $ 4,857,190
Cost of revenue............................................. -- 4,498,384
--------- ------------
Gross profit................................................ -- 358,806
--------- ------------
Expenses:
Product development....................................... -- 368,012
Selling, general and administrative....................... 187,249 15,267,139
--------- ------------
Total expenses......................................... 187,249 15,635,151
--------- ------------
Loss from operations........................................ (187,249) (15,276,345)
Interest income, net...................................... 3,645 263,495
--------- ------------
Net loss.................................................... $(183,604) $(15,012,850)
========= ============
Net loss per common share:
Basic and diluted......................................... $ (140.48) $ (2.17)
Weighted average number of common shares outstanding:
Basic and diluted......................................... 1,307 6,906,334
Pro forma (note 7):
Net loss per common share:
Basic and diluted (unaudited).......................... $ (0.20)
Weighted average number of common shares outstanding:
Basic and diluted (unaudited).......................... 75,998,174
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 73
EXULT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE COMMON STOCK
PREFERRED STOCK --------------------------------------------
----------------------- ADDITIONAL
PREFERRED PAID-IN DEFERRED ACCUMULATED
SHARES STOCK SHARES PAR CAPITAL COMPENSATION DEFICIT
--------- ----------- --------- ---- ---------- ------------ ------------
<S> <C> <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......................... -- -- -- -- -- -- (183,604)
--------- ----------- --------- ---- ---------- --------- ------------
BALANCE, December 31, 1998......... 25,000 999,999 9,000 1 -- -- (183,604)
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........................... -- -- 8,856,000 177 39,184 -- --
Issuance of common stock warrants
for cash and subscription...... -- -- 306,750 6 199,995 -- --
Common stock issued upon exercise
of stock options............... -- -- 262,550 5 196,560 -- --
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... -- -- -- -- 921,000 (921,000) --
Deferred compensation related to
stock options granted.......... -- -- -- -- 336,000 (336,000) --
Amortization of deferred
compensation................... -- -- -- -- -- 279,244 --
Net loss......................... -- -- -- -- -- -- (15,012,850)
--------- ----------- --------- ---- ---------- --------- ------------
BALANCE, December 31, 1999......... 6,191,212 $58,768,079 9,434,300 $189 $3,615,560 $(977,756) $(15,196,454)
========= =========== ========= ==== ========== ========= ============
<CAPTION>
TOTAL
SUBSCRIPTIONS STOCKHOLDER'S
RECEIVABLE EQUITY
------------- -------------
<S> <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)
--------- -----------
BALANCE, December 31, 1998......... -- 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 warrants
for cash 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................... -- 279,244
Net loss......................... -- (15,012,850)
--------- -----------
BALANCE, December 31, 1999......... $(100,001) $46,109,617
========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 74
EXULT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
OCTOBER 29,
1998
(INCEPTION) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
--------------- ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss.................................................. $ (183,604) $(15,012,850)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... -- 743,358
Charge for warrants.................................... -- 4,546,580
Changes in operating assets and liabilities --
Accounts receivable.................................... -- (824,399)
Prepaid expenses and other current assets.............. -- (287,132)
Other assets........................................... (3,425) (410,206)
Accounts payable....................................... 3,892 1,449,701
Accrued liabilities.................................... 34,102 2,235,713
---------- ------------
Net cash used in operating activities.................. (149,035) (7,559,235)
---------- ------------
Cash Flows From Investing Activities:
Purchase of property and equipment........................ -- (4,363,267)
Cash paid in acquisition.................................. -- (5,209,657)
---------- ------------
Net cash used in investing activities............. -- (9,572,924)
---------- ------------
Cash Flows From Financing Activities:
Proceeds from issuance of preferred stock................. 999,999 55,144,321
Proceeds from issuance of common stock.................... 1 335,926
---------- ------------
Net cash provided by financing activities......... 1,000,000 55,480,247
---------- ------------
Net increase in cash and cash equivalents................... 850,965 38,348,088
Cash and cash equivalents, beginning of period.............. -- 850,965
---------- ------------
Cash and cash equivalents, end of period.................... $ 850,965 $ 39,199,053
========== ============
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest............................................... $ -- $ 4,615
========== ============
Income taxes........................................... $ -- $ 800
========== ============
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> 75
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 generally
accepted accounting principles 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.
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 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.
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.
Should the Company's cost of operating such functions be less than the client's
historical cost, fee for service contracts typically provide for the Company to
share the cost savings with clients at a predetermined ratio. The amount of
savings to be shared with clients is determined on a periodic basis in
accordance with the terms
F-7
<PAGE> 76
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 customers, revenue is recorded net of such amounts. For
per diem contracts, revenue is recognized based on contracted billing rates
times actual hours worked.
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 Risks Factors
As of 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 their first client for whom they are
assuming complete responsibility for all of the HR processes. This contract is
still at a very early stage. As such, management believes that their ability to
secure future clients and revenues will be largely dependent upon managing and
administering this clients HR processes effectively and efficiently, and
achieving service levels and cost savings specified in the contract. Although
this contract will not expire until December 2004, the customer 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.
The Company has and plans to continue to enter into fixed-price or
relatively fixed priced process management contracts. These contracts will
generally contain a pricing commitment that includes firm cost reductions. To
the extent they are not able to achieve the fixed cost reductions, the Company
will have to pay the clients the difference between the contractual cost savings
and their actual cost savings. If the Company miscalculates the resources or
time needed to perform under these contracts, the costs of providing services
could exceed the fixed fee 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. If they are not able to
meet these requirements, the clients can assess penalties against the Company in
accordance with the terms of our contracts. The assessment of any penalties
could adversely affect future operating results.
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 clients are not satisfied with the services provided
by these third parties, the Company may be required to pay penalties to the
clients for failure to meet minimum service level requirements in the contracts.
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-8
<PAGE> 77
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Loss Per Share
Basic earnings per share is computed using the weighted-average number of
common shares 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 Statement of Financial
Accounting Standards ("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 Statement for Financial Accounting
Standards ("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.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") 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. SOP
98-1 was adopted by the Company on January 1, 1999. Adoption did not have a
material effect on the Company's consolidated financial position or results of
operations.
F-9
<PAGE> 78
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
Bulletin 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, except for cash, accounts receivable, unbilled work-in-progress,
properties and business 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:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Revenue..................................................... $ 15,245
Net loss.................................................... $(18,891)
Basic and diluted weighted average net loss per common
share..................................................... $ (0.25)
</TABLE>
The pro forma net loss includes $3,903,000 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-10
<PAGE> 79
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DETAIL OF SELECTED BALANCE SHEET ACCOUNTS
Property and Equipment
Property and equipment consists of the following at December 31, 1999:
<TABLE>
<CAPTION>
USEFUL LIFE AMOUNT
------------ ----------
<S> <C> <C>
Furniture and fixtures...................................... 5 years $1,598,854
Computers and equipment..................................... 3 to 5 years 1,541,957
Leasehold improvements...................................... Lease term 988,291
Construction-in-progress.................................... 417,602
----------
4,546,704
Less: Accumulated depreciation and amortization............. (106,822)
----------
Property and equipment, net................................. $4,439,882
==========
</TABLE>
Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
------- ----------
<S> <C> <C>
Accrued employee compensation benefits and related costs.... $ -- $1,173,912
Accrued professional services............................... -- 500,673
Other accrued liabilities................................... 34,102 595,230
------- ----------
Accrued liabilities......................................... $34,102 $2,269,815
======= ==========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Lease Obligations
The Company leases the building it uses as its main office under a
noncancellable operating lease agreement, which expires on July 1, 2002. As part
of an asset purchase, several single person office leases with varying
expiration dates were assumed by the Company. The Company assumed a building
lease in Houston, housing processing and shared service center staff in
association with the Pactiv asset purchase. A furniture and equipment leasing
facility was contracted in November 1999 and is accounted for as a capitalized
lease.
As of December 31, 1999, future minimum rental commitments under leases are
as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASES
-------- ----------
<S> <C> <C>
2000........................................................ $ 59,562 $1,433,541
2001........................................................ 59,562 1,411,673
2002........................................................ 49,635 1,231,080
2003........................................................ -- 961,320
2004........................................................ -- 959,920
Thereafter.................................................. -- 1,199,900
-------- ----------
Future minimum lease payments............................... 168,759 $7,197,434
==========
Less: Interest portion...................................... 30,109
--------
Present value of minimum lease payments..................... 138,650
Less: Current portion....................................... 42,831
--------
$ 95,819
========
</TABLE>
F-11
<PAGE> 80
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, were $6,165 and $272,099, respectively.
Service Agreement
On December 7, 1999, the Company entered into a five-year service agreement
and two annual renewal options with BP Amoco p.l.c. ("BP Amoco") in which the
Company is entitled to the exclusive right to provide services and underlying
technology to the client on a worldwide base. Under the framework agreement,
five-year contracts and two annual renewal options were executed covering the
United States and the United Kingdom. The agreements provide for the Company to
implement and manage an intranet-based human resource process, which replaces
much of the clients' current processes.
The terms of the contract require the Company to maintain a letter of
credit against certain contingencies for the first four years of the contract.
The Company has provided an irrevocable two-year letter of credit from a
financial institution in the amount of $5,000,000. The Company will be obligated
to provide letters of credit in future years unless it achieves net equity of
$75 million.
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. In addition to these agreements the Company
purchased certain assets on December 20, 1999, including equipment and licenses
for an aggregate purchase price of approximately $3,500,000.
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 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 under the Incentive Plan in 1999, approximately $597,000 of which was
included in accrued liabilities as of December 31, 1999.
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%
annually.
F-12
<PAGE> 81
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, of which 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 preferred stock,
which remain undesignated.
In the event of liquidation, the series A, series B, series C, and series D
preferred stock rank equally and 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.
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, upon conversion the
equivalent of 22,500,000 common, shares of series A convertible preferred stock
in a private placement with institutional investors for total consideration of
approximately $1,000,000.
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 based upon an estimated fair value of approximately
$0.0044 per share. The Company estimated the fair value based on the recent cash
sales with third parties, adjusting the valuation for differences in rights
associated with each class of stock. In the event that the holder's employment
with the Company, terminates, for any reason, the Company and the series A
institutional investors shall have the right exercisable at any time within 30
days of termination, to purchase all or any portion of the unvested shares.
Subsequent to the lapse of the Company's repurchase right, the series A
institutional investors have a 30-day purchase right to the remaining unvested
shares. 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, any unvested shares are forfeited. If the
holder's employment terminates for any reason other than cause, including death
or disability, 50 percent of all unvested shares will vest.
On April 27, 1999, the Company issued 1,696,369, upon conversion the
equivalent of 8,481,845 common, shares of series B convertible preferred stock
in a private placement with institutional investors
F-13
<PAGE> 82
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
During 1998, the Company issued 306,750 common stock warrants to a
consultant for services rendered of approximately $100,000. On June 6, 1999, the
Company issued 306,750 shares of common stock for the exercise of these warrants
for a subscription receivable of $100,001.
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 stock
option plan.
On October 22, 1999, the Company issued 1,478,600, upon conversion the
equivalent of 7,393,000 common, 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 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 stock option 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 stock option 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.
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.
F-14
<PAGE> 83
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Common Stock and Stock Option Deferred Compensation
The Company recorded aggregate deferred compensation for common stock and
stock options issued of approximately $978,000 for the year ended December 31,
1999. 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 forty-eight 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 by the preferred stock purchase and warrant
agreements, the Company will cause the conversion of all existing series A,
series B, series C, and series D preferred stock, stock options exercised
subsequent to year end and certain warrants into common 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 December 31, 1999, 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 667,884 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 267,835 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. The Stock Option Grant Program
provides for the grant of non-qualified stock options and incentive stock
options. Under the terms of the Plan, the maximum number and type of shares as
to which options may be granted 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 will be
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, the option shares are initially unvested and subject to
repurchase by the Company at the option
F-15
<PAGE> 84
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
exercise price per share. The optionee shall acquire a vested interest in, and
the Company's repurchase right shall lapse, 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.
Subject to Internal Revenue Services limitations, options granted under the
1999 ISO Plan generally become exercisable immediately. Shares issued upon
exercise of options that are unvested are restricted and subject to repurchase
by the Company upon termination of employment or services, and such restrictions
lapse over the original vesting schedule. At December 31, 1999, there were
262,550 shares subject to repurchase.
1999 Special Executive Stock Option Plan
On November 19, 1999, the company adopted and approved the Special
Executive Stock Option Plan (the "Executive Plan"). Participation in the
Executive Plan is limited to officers and other highly compensated employees. A
reserve of 3,065,995 shares of the Company's common stock has been made for
issuances under the Executive 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 Plan also provides that the exercise price for the shares of common
stock subject to option grants made under our special plan 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 for
the period ended December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Options outstanding at beginning of period.................. -- $ --
Granted................................................... 10,407,910 0.927
Exercised................................................. 262,550 0.748
Canceled.................................................. -- --
---------- ------
Options outstanding at end of the period.................... 10,145,360 $0.932
========== ======
Options exercisable at end of period........................ 5,809,270 $0.932
</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 for the period
ended December 31, 1999:
<TABLE>
<S> <C>
Net loss, as reported....................................... $(15,012,850)
Pro forma adjustment........................................ (242,939)
------------
Pro forma net loss.......................................... $(15,255,789)
============
</TABLE>
F-16
<PAGE> 85
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, the Company has reserved for 14,000,000 shares of
common stock for issuance under the Plan.
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 related 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 related
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. These warrants are convertible into
the Company's common stock upon the consummation of an initial public offering.
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,
as it had incurred only operating losses as of these dates.
The components of the Company's net deferred income tax assets as of
December 31, 1999, are as follows:
<TABLE>
<S> <C>
Net operating loss carryforwards............................ $ 4,826,143
Gross deferred tax assets................................... 1,107,062
-----------
Less: Valuation allowance................................... (5,933,205)
-----------
Net deferred tax assets................................... $ --
===========
</TABLE>
A full valuation allowance is provided because of the uncertainty of
realizing the deferred tax assets.
F-17
<PAGE> 86
EXULT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. 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.
10. LOSS PER SHARE
The following is the calculation for net loss per share:
<TABLE>
<CAPTION>
OCTOBER 29,
1998
(INCEPTION)
TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Basic:
Net loss......................................... $(183,604) $(15,012,850)
--------- ------------
Weighted average common shares................... 1,307 6,906,334
--------- ------------
Net loss per common share........................ $ (140.48) $ (2.17)
========= ============
Diluted:
Net loss......................................... $(183,604) $(15,012,850)
Weighted average common shares................... 1,307 6,906,334
Stock options adjustment......................... -- --
Convertible preferred stock...................... -- --
--------- ------------
Average common shares outstanding................ 1,307 6,906,334
--------- ------------
Net loss per common share........................ $ (140.48) $ (2.17)
========= ============
</TABLE>
At December 31, 1998 and 1999, respectively, options to purchase 0 and
10,145,360 shares of common stock, warrants to purchase common stock or to
purchase preferred stock convertible into common stock of 0 and 7,646,635 shares
of common stock, as well as preferred shares convertible into 22,500,000 and
53,331,060 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)
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 9, 2000 the third amended and restated certificate of
incorporation designated the issuance of 7,650,533 shares as series D
convertible preferred stock. 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.
With this additional capital the Company's net equity exceeded $75 million
resulting in the elimination of its obligation to provide letters of credit as
previously required under the BP Amoco agreement.
Subsequent to year end two employees exercised their stock options to
purchase a total of 267,835 shares of the Company's common stock.
F-18
<PAGE> 87
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-19
<PAGE> 88
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-20
<PAGE> 89
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-21
<PAGE> 90
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-22
<PAGE> 91
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-23
<PAGE> 92
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-24
<PAGE> 93
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-25
<PAGE> 94
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-26
<PAGE> 95
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-27
<PAGE> 96
INDEPENDENT AUDITOR'S REPORT
BOARD OF DIRECTORS
GUNN PARTNERS, INC.
BOSTON, MASSACHUSETTS
We have compiled the accompanying statements of income (loss) of Gunn
Partners, Inc. for the years ended December 31, 1995 and 1996, in accordance
with the Statements on Standards for Accounting and Review Services issued by
the American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying statements of income (loss) and, accordingly, do not
express an opinion or any other form of assurance on them.
Management has elected to omit substantially all of the disclosures
required by generally accepted accounting principles. If the omitted disclosures
were included in the statements of income (loss), they might influence the
user's conclusions about the Company's results of operations. Accordingly, these
statements of income (loss) are not designed for those who are not informed
about such matters.
The Company, with consent of its shareholders, has elected under the
Internal Revenue Code to be an S Corporation. In lieu of corporation income
taxes, the shareholders of an S Corporation are taxed on their proportionate
share of the Company's taxable income. Therefore, no provision for federal and
state income taxes has been included in these statements of income (loss).
/s/ VITALE, CATURANO AND COMPANY, P.C.
March 16, 2000
Boston, Massachusetts
F-28
<PAGE> 97
GUNN PARTNERS, INC.
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-29
<PAGE> 98
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 667,884 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 267,835 shares of common stock.
PF-1
<PAGE> 99
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..... 15,267 6,708 3,903(b) 25,878
-------- ------- ------- ----------
Total expenses....................... 15,635 6,708 3,903 26,246
-------- ------- ------- ----------
Loss from operations................. (15,276) 8 (3,903) (19,171)
-------- ------- ------- ----------
Interest income, net...................... 263 17 -- 280
-------- ------- ------- ----------
Net loss............................. $(15,013) $ 25 $(3,903) $ (18,891)
======== ======= ======= ==========
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 our 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 667,884 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 267,835 shares of common stock.
PF-2
<PAGE> 100
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
SHARES
EXULT, INC.
[LOGO]
COMMON STOCK
-----------------
PROSPECTUS
-----------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
ROBERTSON STEPHENS
SALOMON SMITH BARNEY
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 101
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 MARCH 16, 2000
PROSPECTUS
SHARES
EXULT, INC.
[LOGO]
COMMON STOCK
------------------------
This is Exult, Inc.'s initial public offering of common stock. Exult is
offering shares. The international managers are offering
shares outside the U.S. and Canada and the U.S. underwriters are offering
shares in the U.S. and Canada.
We expect the initial public offering price to be between $ and
$ 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 7 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
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 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> 102
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
SHARES
EXULT, INC.
[LOGO]
COMMON STOCK
-----------------
PROSPECTUS
-----------------
MERRILL LYNCH INTERNATIONAL
BEAR, STEARNS INTERNATIONAL LIMITED
ROBERTSON STEPHENS INTERNATIONAL
SALOMON SMITH BARNEY INTERNATIONAL
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 103
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
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..........................................
======
</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 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 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.
We have agreed to indemnify the international managers and the U.S.
underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the international managers and
U.S. underwriters may be required to make in respect of those liabilities.
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.
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.
63
<PAGE> 104
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
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 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 5% 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 and directors and all existing stockholders
have agreed, with exceptions, 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,
64
<PAGE> 105
- 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.
QUOTATION ON THE NASDAQ NATIONAL MARKET
We expect the shares to be approved for quotation on the Nasdaq National
Market under the symbol "EXLT."
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.
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 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.
65
<PAGE> 106
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.
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.
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.
66
<PAGE> 107
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........................................ $ 52,800
NASD filing fee............................................. *
Nasdaq National Market listing fee.......................... *
Blue sky fees and expenses.................................. *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer Agent and Registrar fees........................... *
Miscellaneous............................................... *
--------
Total..................................................... $
========
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, we can 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, our certificate of incorporation provides that we shall
indemnify our directors and officers if such persons acted (1) in good faith,
(2) in a manner reasonably believed to be in or not opposed to our best
interests, and (3) with respect to any criminal action or proceeding, with
reasonable cause to believe such conduct was lawful. The certificate of
incorporation also 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-
II-1
<PAGE> 108
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, for 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 redemptions 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. The certificate of incorporation further
provides that we are authorized to indemnify our directors and officers to the
fullest extent permitted by law through the bylaws, agreement, vote of
stockholders or disinterested directors, or otherwise. We intend to obtain
directors' and officers' liability insurance in connection with this offering.
In addition, we have entered or, concurrently with this offering, will
enter, into agreements to indemnify our directors and certain of our officers in
addition to the indemnification provided for in the certificate of incorporation
and 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.
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 $100,000.
(6) On June 6, 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.
II-2
<PAGE> 109
(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 54, 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
exercise price of $10.28 per share. Each share of Series C Preferred Stock
will be converted into five shares of common stock upon the closing of this
offering.
(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) Since August 1999, we issued an aggregate of 262,500 shares of
common stock to J. Michael Spence, JRO Consulting, Inc. and Douglas
Shurtleff for an aggregate purchase price of $196,564.70 upon the exercise
of stock options.
(16) Since May 1999, we have granted stock options to purchase an
aggregate of 8,390,407 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.
(17) Since November 1999, we have granted stock options to purchase an
aggregate of 2,349,620 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.
II-3
<PAGE> 110
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 Underwriting 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.
3.1* 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* 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* Office Space Lease between The Irvine Company and BPO-US,
Inc. dated as of June 28, 1999.
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.
</TABLE>
II-4
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.7.2* Assignment and Assumption of Lease between Pactiv Business
Services Inc. (formerly known as Tenneco Business Services
Inc.) and Exult, Inc. dated as of January 1, 2000.
21.1** Subsidiaries of Exult, Inc.
23.1* 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>
- ---------------
* To be filed by amendment.
** Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Purchase Agreement certificates in such denominations
and registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
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-5
<PAGE> 112
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 16th day of March, 2000.
EXULT, INC.
By:
/s/ JAMES C. MADDEN, V
--------------------------------------
James C. Madden, V
Chief Executive Officer, President
and Chairman of the Board
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>
/s/ JAMES C. MADDEN, V Chief Executive Officer, March 16, 2000
- ----------------------------------------------------- President and Chairman of the
James C. Madden, V Board (principal executive
officer)
/s/ DOUGLAS L. SHURTLEFF Executive Vice President, March 16, 2000
- ----------------------------------------------------- Treasurer and Chief Financial
Douglas L. Shurtleff Officer (principal financial
officer)
* Director March 16, 2000
- -----------------------------------------------------
J. Michael Cline
* Director March 16, 2000
- -----------------------------------------------------
Steven A. Denning
* Director March 16, 2000
- -----------------------------------------------------
A. Michael Spence
* Director March 16, 2000
- -----------------------------------------------------
John R. Oltman
* Director March 16, 2000
- -----------------------------------------------------
Michael A. Miles
* Director March 16, 2000
- -----------------------------------------------------
Mark Dzialga
</TABLE>
*By: /s/ James C. Madden, V
------------------------------
James C. Madden, V
(Attorney-in-fact)
II-6
<PAGE> 113
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1* Form of Underwriting 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.
3.1* 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* 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* Office Space Lease between The Irvine Company and BPO-US,
Inc. dated as of June 28, 1999.
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.
</TABLE>
<PAGE> 114
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.7.2* Assignment and Assumption of Lease between Pactiv Business
Services Inc. (formerly known as Tenneco Business Services
Inc.) and Exult, Inc. dated as of January 1, 2000.
21.1** Subsidiaries of Exult, Inc.
23.1* 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>
- ---------------
* To be filed by amendment.
** Previously filed.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and all references to our Firm) included in this amendment to the registration
statement.
/s/ ARTHUR ANDERSEN LLP
- -------------------------------------
Arthur Andersen LLP
Orange County, California
March 16, 2000
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Exult, Inc.
As independent public accountants, we hereby consent to the use of our reports
(and all references to our Firm) included in this amendment to the registration
statement.
/s/ VITALE, CATURANO AND COMPANY, P.C.
March 16, 2000
Boston, Massachusetts
