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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-30035
EXULT, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0831076
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4 PARK PLAZA, SUITE 1000, IRVINE, CALIFORNIA 92614
(Address of Principal Executive Office, including Zip Code)
(949) 250-8002
(Registrant's Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing. (See definition of affiliate in Rule
12b-2 of the Exchange Act.)
Approximately $291,486,000, as of March 16, 2001.
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(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
91,169,528 as of March 16, 2001
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
Proxy Statement for the Annual Meeting of Stockholders to be held
Thursday, May 17, 2001; portions incorporated in Part III.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. BUSINESS (including Risk Factors beginning on page 11)..................... 1
Item 2. PROPERTIES................................................................. 19
Item 3. LEGAL PROCEEDINGS.......................................................... 20
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................ 20
Executive Officers of the Registrant....................................................... 20
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...... 22
Item 6. SELECTED FINANCIAL DATA.................................................... 23
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................................................... 24
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................. 30
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................ 30
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................................ 30
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................... 30
Item 11. EXECUTIVE COMPENSATION..................................................... 30
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 30
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 30
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........... 31
Information Regarding Forward Looking Statements and Industry Data......................... 34
SIGNATURES ........................................................................... 35
Financial Statements....................................................................... F-1
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PART I
ITEM 1. BUSINESS.
MISSION; OVERVIEW
Our mission is to provide comprehensive business process management solutions
that enable Global 500 corporations to increase the productivity of their human
capital, convert HR spending to a variable cost basis and reduce the overall
cost of HR management and administration. We do this through multiple delivery
vehicles:
- our Exult eHRSM solution including our myHRSM web-enabled
applications;
- shared client service centers; and
- best practices expertise and expert process consulting
capabilities.
These vehicles enable us to provide scalable, web-based service delivery
capabilities across many HR business processes. myHR includes our web-based
functional applications and browser system through which our clients' personnel
can access their HR information systems and navigate through those systems to
find information and process transactions. Our shared client service centers
handle our clients' HR transaction and contact center requirements from a
leveragable multi-client platform, and our best practices and process consulting
expertise enables us to improve efficiency and effectiveness through process
improvement. We deploy these capabilities to handle the transactional and
administrative elements of our clients' HR processes, freeing our clients' HR
departments to add value through focus on strategy and policy matters that are
important to their businesses.
INDUSTRY BACKGROUND
HUMAN RESOURCES DEPARTMENTS IN THE GLOBAL 500. 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, and a typical Global 500 company
has 30,000 or more employees in multiple locations and countries. An employee
base of this magnitude presents logistical complexities, and the human resources
functions of Global 500 corporations are often complicated by multiple human
resources groups for different business units and the lack of central
information repositories and coordinated communications infrastructures. As a
result, the HR processes of large, multinational corporations often are
redundant and inefficient. In addition, the large number of third-party vendors
used by a human resources department to handle discrete functions complicates HR
process management. By necessity, HR departments typically devote most of their
resources to administrative functions rather than strategic planning and
initiatives. At the same time, corporations that extend cost-cutting to their HR
departments often focus more on reducing staff than on reengineering service
delivery.
THE EMERGENCE OF HR PROCESS OUTSOURCING. Many large corporations outsource
discrete, non-core functions of their operations, such as payroll, tax filings
and benefits administration. According to Dataquest, the worldwide HR
outsourcing market opportunity is projected to grow from approximately $26.2
billion in 1999 to approximately $76.4 billion in 2004. However, the market
opportunity for comprehensive HR outsourcing is relatively new. Dataquest
estimates the market opportunity for integrated, multi-process HR outsourcing
will grow from over $900 million in 1999 to more than $12 billion by 2003 in the
US alone. Comprehensive HR process outsourcing for large multinational
corporations is difficult and requires a well-developed service delivery
infrastructure and significant expertise in analyzing, providing and managing HR
best practices across many divisions and third-party vendors. HR best practices
refer to those HR policies, procedures, operations and technologies that yield
superior performance as measured by productivity, cost, quality and customer
satisfactions metrics.
EXPANSION OF THE INTERNET. The Internet extends our comprehensive service
delivery model to facilitate interactive communications among large groups of
individuals in multiple geographic locations. The Hunter Group estimates that by
using the functionality of the Internet to move HR delivery to a largely
self-service mode, organizations can achieve annual HR cost reductions of
approximately 25% to 30%. To date, however, HR organizations have not fully
utilized the
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Internet and web-enabled processes and systems because they have not broadly
implemented any mechanism for effectively centralizing and organizing the large
amount of information and electronic transmissions generated by processes within
the HR organization. Accordingly, the Internet's use in HR departments has been
largely limited to one-on-one e-mail communications or process-specific internal
networks, often provided by third parties which do not integrate into a seamless
information source for the company or its employees.
OUR STRATEGY
Our Exult eHR solution enables us to assume broad responsibility for
management of our clients' human resources people, processes, technologies and
third-party vendors, and to deliver our clients increased human capital
productivity at reduced cost. The following are the key elements of our
strategy:
- FOCUS ON GLOBAL 500 CORPORATIONS. Global 500 corporations
generally have operations spread across multiple business units
and locations. We believe the magnitude and complexity of these
corporations and their resulting HR needs make them ideal
candidates for our comprehensive, web-enabled Exult eHR process
management solution.
- ESTABLISH LONG-TERM CLIENT RELATIONSHIPS. We pursue long-term
contracts to reengineer and manage our clients' HR processes. We
believe long-term contracts foster mutual commitment and shared
goals with our clients, and best enable us to transform client
HR processes to our infrastructure and best practices. The
long-term nature of our contracts also gives us greater
visibility of future revenue streams and better information for
determining future investment decisions.
- PROVIDE BROADLY INTEGRATED PROCESS MANAGEMENT SOLUTIONS. We have
designed a service offering that covers more than 25 specific
human resources and related processes in the areas of payroll
production, rewards, life events, advice & administration, and
finance & accounting. This enables us to offer clients a
comprehensive solution for integrated management of many or all
HR processes, which enhances the efficiency and effectiveness of
clients' HR operations.
- UTILIZE AND LEVERAGE SHARED RESOURCES ACROSS OUR CLIENT BASE. We
combine shared service centers, internal process capabilities,
and alliances with selected vendors into an integrated service
delivery infrastructure that enables us to deliver efficient,
large-scale HR process management solutions to multiple clients.
Our shared client service centers in Glasgow, Charlotte, and the
Houston and Los Angeles areas are designed to handle multiple
clients and utilize automated processes and technology to
provide efficient client service and achieve economies of scale.
We use our internal process capabilities, including payroll and
HR information systems, to deliver core processes efficiently.
We also utilize strategic relationships with world-class
third-party providers to make our integrated service offering
more comprehensive and efficient.
- USE OUR MYHR WEB-ENABLED SOLUTION SET FOR ENHANCED HR
PERFORMANCE. We use emerging technologies and our myHR systems
and applications to connect the people, processes, technologies
and third-party vendors involved in clients' HR organizations
and to provide a comprehensive central repository of company and
employee data. We help our clients implement database and
interconnectivity tools to easily access, evaluate and use HR
information to further their strategic business objectives. Our
myHR applications will operate behind secure Internet firewalls
and enable clients' personnel to access information and employee
productivity tools and communicate freely with other people
throughout the organization. myHR will enable employees to
perform both HR and non-HR tasks and will encourage employees to
become more self-sufficient in handling many day-to-day HR
functions, while enhancing communication and efficiency
throughout clients' global organizations.
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THE EXULT EHR SOLUTION
Our Exult eHR solution combines a broad process management services
offering, shared service center resources and service delivery, and strategic
consulting expertise to simplify and standardize our clients' HR practices and
procedures, and deliver improved management information and employee
communications at significant cost savings.
SERVICES
Our Exult eHR solution includes a broad spectrum of process management
services grouped into five major categories, as follows:
PAYROLL PRODUCTION
We manage clients' payroll processes and related production requirements
to reduce our clients' investment of internal resources in transaction
processing. Our payroll and production services include:
Payroll disbursements and reporting
Time and attendance administration
Wage attachments
Tax withholding and reporting
Banking interfaces
Related systems and data administration
REWARDS
We manage compensation and benefit programs to reduce our clients'
internal process and administration burdens. Our services in this area include:
Salary review planning
Compensation and bonus administration
Benefits enrollment and administration
Performance management
401(K) plan administration
Pension plan administration
LIFE EVENTS
We process and manage clients' workforce changes to help our clients
effectively develop and deploy their human capital. Our services in this area
include:
Recruiting and staffing functions
Training
Expatriation and repatriation
Domestic relocation
Severance
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ADVICE AND ADMINISTRATION
We manage our clients' HR information systems infrastructure through
integrated, web-enabled systems that enable us to capture, track, modify and
report large amounts of employee-related data. We use this data to help our
clients manage various HR functions, including:
HRIS reporting
Performance management
Policy and legal compliance
Organization development
Employee development
HR strategy
Labor relations and employee relations
Employee data and records management
FINANCE & ACCOUNTING
We manage accounts payable processes, including disbursements and
reconciliation. These services are intended to streamline clients' back office
transaction processing, and include:
Third party vendor payments
Travel and entertainment expense reimbursements
Payroll accounting
Benefits accounting
Accounts payable
Fixed asset accounting
SHARED RESOURCES AND SERVICE DELIVERY
We deliver our process management services through an infrastructure of
client service centers, web-enabled technology systems, functional applications,
and third-party service providers. Our model involves leveraging shared
resources to provide HR best practices while achieving economies of scale, which
we believe enables us to deliver improved HR services at a reduced cost.
CLIENT SERVICE CENTERS. We maintain three principal client service
centers, in Glasgow, Charlotte, and the Houston area, and we are operating a
fourth center in the Los Angeles area in connection with our contract with BP
Amoco p.l.c. and related entities (bp). These centers house the personnel and
systems we use to manage our clients' transaction, production and contact center
requirements, including customer service representatives and production
operations staff for functions such as payroll processing, benefits
administration, training administration, and IT support and maintenance. These
client service centers also contain systems and technology, such as contact/case
management systems, imaging and workflow, and HR application software and
databases. Our clients' employees can communicate with the client service
centers online through myHR or by phone, fax, or e-mail.
We designed and outfitted the Glasgow center ourselves. We selected
Glasgow because of its accessibility, educated English-speaking workforce,
relatively low cost of doing business, and EU membership. The center is 31,000
square feet and currently houses approximately 140 persons, with room for up to
approximately 250. The Glasgow center currently handles the processes we have
taken on for bp in the United Kingdom, as well as our own UK internal processing
requirements. We expect management of HR processes for bp in continental Europe
and other parts of the world outside North America also to be handled through
this center. In addition to bp, the Glasgow center can accommodate additional
client demands, and will play a significant role in service delivery to future
European clients.
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We acquired a center in the Woodlands, Texas, which is near Houston, at
the end of 1999. This center had been providing payroll and related services for
Tenneco Automotive and Pactiv Corporation, and we entered into agreements to
continue to provide those services to Tenneco and Pactiv when we acquired the
center. We have invested heavily in developing this center into a broad platform
from which we can deliver broad process management services. The center is
71,000 square feet and currently houses approximately 300 persons, with room for
up to approximately 370. This center currently provides services for bp in the
US, as well as Unisys, Tenneco and Pactiv, and also fulfills Exult's own US
internal processing requirements. This center can accommodate growth in our US
client base.
We acquired the Charlotte facility at the time we signed our process
management contract with Bank of America Corporation. This was a "brownfield"
facility that Bank of America had utilized to provide for itself some of the HR
process management services we have agreed to handle. We are adapting this
facility to our own systems. Our ability to retain key managers and operate the
center during conversion has contributed to our ability to transition Bank of
America's HR processes relatively quickly. The Charlotte center is approximately
96,000 square feet and currently houses approximately 320 persons, with room for
approximately 750 persons. Process management for Bank of America will occupy
approximately half of this center's capacity, leaving room for additional client
expansion.
The Los Angeles area center, located in Pasadena, operated as a full
employee information services facility for ARCO, which was acquired by bp in
1999. We are using this facility to manage payroll, benefits and HRIS functions
for the ARCO workforce under our bp contract, and may expand it into a
multiple-client platform in the future. This center currently houses
approximately 80 persons.
All of our client service centers except Glasgow were previously
operated by our clients, and therefore have an experienced workforce. All of
these centers are designed to give us efficiencies and economies of scale by
leveraging the functionality, staff and technology of centralized processes and
services across many business units for multiple clients. They also provide
important redundancies for service continuity purposes.
In the aggregate, we expect our current client demands to occupy
approximately half of our current centers' capacity. Therefore, while we plan to
continue to develop additional centers, in particular through facility and
workforce acquisitions from new "brownfield" clients, our existing service
centers can accommodate significant expansion of our client base from
"greenfield" client opportunities.
WEB ENABLED SYSTEMS, PRODUCTION APPLICATIONS AND MYHR.
In order to deliver comprehensive, integrated HR process management, we
have developed a service infrastructure that relies upon third-party vendors,
licensed components, and our own intellectual property.
Performance under our process management contracts requires
sophisticated information technology capabilities. All our clients utilize
database tools for their HR information systems, including such programs as
PeopleSoft, SAP, and some legacy systems. Some of these systems must be replaced
and others require substantial integration work. In most cases, significant
systems interface work is required to enable the client's systems to be
integrated and to communicate with our systems. We assist in these processes,
both directly and through vendors we supervise, so that the client's internal HR
information systems provide an adequate platform for integrated HR process
management.
Many of our process management capabilities are based upon third-party
software that we have selected as "best in class" and compatible with our
infrastructure. For example, we rely upon sophisticated tax and process
management software licensed from Deloitte & Touche LLP in provision of our
expatriate administration services, and we use an open web platform for
workforce planning, hiring and deployment licensed from Deploy Solutions in our
delivery of strategic resourcing management.
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In general, we 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 is generally provided by our
IT infrastructure partners, principally Unisys, and backed-up by their
sophisticated disaster backup and recovery systems.
Our Exult eHR solution integrates state-of-the-art technology and
various software applications and business processes from the client's own
internal information and communications systems to compile and centralize a
wealth of HR information. The Internet, emerging technologies and our myHR
browser interface enable our clients and their employees to access and use that
information.
THIRD-PARTY SERVICE PROVIDERS
Our Exult eHR solution incorporates the services of third-party vendors
in two important ways. First, our process management contracts may include as
"in scope" certain services being provided to the client by third parties. At
the time we become responsible for a client's HR organization, we generally
assume responsibility for administration of these vendors, either by novation of
their contracts to us or through management arrangements. Depending upon a
number of factors, including the type of services involved, terms of the
vendors' contracts, and client preferences, over time we may retain the vendor
as a service provider to the client within the scope of our contract and under
our management, replace the vendor with a new third-party provider under our
management, or take over provision of the services ourselves.
We believe our familiarity and experience with HR best practices and
with the market for third-party HR vendors enables us 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
provide improved service levels and greater cost savings on behalf of our
clients through negotiation and management of these third-party vendor
contracts.
In addition to management of third-party vendors who had preexisting
relationships with our clients, we also utilize selected third parties to
complement our integrated service offering with specialized HR services that can
be more effectively and efficiently handled by third-party vendors and
subcontractors than by our internal resources. The components of our solution
that we currently intend to "outsource" include pension management and some
elements of relocation administration. Over time, we may "outsource" additional
elements of our service offering, or bring some elements "in house," depending
upon the availability of appropriately skilled third parties in various areas,
competition, the development of our own capabilities, client demands,
acquisition opportunities, capital availability and requirements, and other
factors.
STRATEGIC CONSULTING EXPERTISE
In November 1999, we acquired the business of Gunn Partners, Inc., a
business process improvement consulting company with operations in the United
States and Europe. Gunn Partners has been consulting with Global 500
corporations since 1991 on administrative staff functions such as human
resources and finance and accounting, as well as procurement, information
technology, and customer service. Gunn Partners generates revenue through its
own consulting activities, provides strategic assistance in structuring our
client relationships, assists in cross-marketing, and provides us with a service
offering for potential clients that are not yet ready for our full eHR solution.
Gunn Partners has provided consulting services to some of the largest companies
in the Global 500; current client engagements include UBS Warburg, Diageo,
Pechiney, Siemens, Japan Tobacco, Gillette, Dow Corning, International Paper and
Knight Ridder.
BUSINESS PROCESS MANAGEMENT CLIENTS
BP
In December 1999, we entered into a seven-year Framework Agreement with
BP Amoco p.l.c. (NYSE: BP), 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 and its affiliates. bp
currently operates in more than 40
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countries and has more than 80,000 employees and an equal or greater number of
annuitants. The contracts with bp are expected to result in aggregate revenue to
Exult of approximately $600 million over the anticipated initial term if we
implement and perform according to our plans.
Our initial contracts under the Framework Agreement cover bp employees
in the United Kingdom and the United States, representing approximately 70% of
their total employees and annuitants. We have worked with bp to identify
separate processes involved in bp'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 or to us. In general, we
are 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
remains responsible for strategic planning, policy decisions, employee
relations, legal compliance, and professional resources.
As of the date of this report, we have successfully transitioned all of
bp's in-scope HR management processes in the UK and all core, direct processes
in the US to our systems and infrastructure. bp is requesting the expansion of
our services into additional countries where they operate, and we anticipate
that selected processes and countries will be transitioned during 2001 and 2002.
We continue to make arrangements to assume or administer bp's contracts with
third parties providing discrete services that constitute a part of our
integrated service offering.
We are obligated to provide our services to bp in the UK and the US for
fixed fees that are generally equal to or less than bp's historical costs
incurred in connection with the services that we are assuming. After we have
achieved a negotiated minimum return from provision of our services, we are
required to share further savings with bp in a negotiated gain-sharing
arrangement that is intended to motivate us and bp to maximize efficiency in the
provision of our services.
The Framework Agreement contemplates extending the arrangement beyond
the UK and the US to unite all of bp'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 US and the UK, in which bp determines by December 2001 to obtain
(or extend existing) human resources management services. bp is not obligated to
add additional countries and we must demonstrate our ability to meet their
service needs and provide specified cost savings in other countries to expand
the arrangement. If bp does add additional countries to our contract, we will
enter into a supplemental agreement 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 UK and US Country Agreements,
although we anticipate completing additional country transitions more quickly
based on our initial experiences in the UK and the US.
The Framework Agreement runs for seven years and the UK, US and other
Country Agreements runs for a minimum of five years, subject to bp'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 or that
is financially weaker than we are, or that, through control of Exult, could
adversely affect bp's reputation. In addition, starting in December 2002, bp may
terminate the Framework Agreement or the US or UK or any other Country Agreement
upon giving us 12 months' advance notice and by making termination payments
designed to defray our costs and give us a specified return on our investment in
the contract for the remaining term of the agreement but not to exceed two
years. After December 2004, bp 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 US
and UK agreements and any other Country Agreements that are in effect at that
time. We expect to rely upon bp for a significant portion of our revenue for the
foreseeable future. If bp were to substantially reduce or stop the use of our
services, our reputation and future revenues would be seriously impaired. Short
of terminating an entire Country Agreement, bp 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 agreements terminate in
December 2006 if not renewed by mutual agreement. Any termination involves a
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winding-down period during which we continue to be paid for providing services
while transferring back to bp or to a new service provider the HR processes for
which we have been responsible. Additional country agreements will contain
similar termination provisions.
BANK OF AMERICA CORPORATION
In November 2000, we entered into a ten-year Master Services Agreement
with Bank of America Corporation (NYSE: BAC) to provide human resources and
certain finance and accounting services. The agreement involves services
applicable to approximately 150,000 employees of Bank of America Corporation and
its affiliates, primarily in the US, and is expected to result in aggregate
revenue to Exult of approximately $1.1 billion over the ten-year term if we
implement and perform according to our plans.
Our contract with Bank of America covers the following processes:
benefits, payroll, employee data & records management, expatriate relocation and
administration, information technology & information services, policy & legal
compliance administration, accounts payable, travel & expense claim processing,
and asset accounting services. Each of these processes is divided into component
tasks or functions and responsibility for each is allocated either to Bank of
America or to us. In general we are responsible for systems and process design
and implementation, routine employee communications, data gathering, processing
and retrieval, management reporting, vendor management, transaction processing,
and overall administration of related HR functions. Bank of America remains
responsible for strategic planning, policy decisions, employee relations,
certain legal compliance, and transaction initiation and approval.
We are obligated to provide our services to Bank of America for fixed
fees that are generally equal to or less than the bank's historical costs
incurred in connection with the services that we are assuming. In addition, we
are obligated to share with the bank any savings we achieve through management
of third-party vendors providing services within the scope of the contract.
Our transition plans call for us to assume management of all in-scope
processes by the third quarter of 2001, and as of the date of this report, we
are on schedule. We are also making arrangements to assume or administer Bank of
America's contracts with third parties providing discrete services that
constitute a part of our integrated service offering.
Bank of America has the right to terminate the agreement in the event of
our insolvency or material breach or material repeated performance failure, upon
the change in control of our business. In addition, due to certain unique and
established relationships, Bank of America has the right to terminate the
agreement if our current CEO or our current Operations President ceases to be
employed by us (other than due to nonperformance, death or disability) within
one year after certain contract milestones are met. Bank of America may also
terminate the agreement for convenience upon 12 months advance notice. If Bank
of America terminates the agreement for convenience during years two through
seven of the contract term, or terminates the agreement for change in control,
they are obligated to make a specified termination payment to us. The amount of
the termination payment is designed to defray certain costs, not to approximate
our total revenue or profit under the agreement. Any termination involves a
winding-down period during which we would continue to be paid for providing
services while transferring back to Bank of America or to a new service provider
the processes for which we have been responsible. We expect to rely upon Bank of
America for a significant portion of our revenue for the foreseeable future. If
Bank of America were to substantially reduce or stop the use of our services,
our reputation and future revenues would be seriously impaired.
In connection with this agreement, we took over Bank of America's HR
processing center in Charlotte. This transaction took the form of transfer by
the bank to us of a paid-up lease on approximately 96,000 square feet of office
space and related assets in partial payment of indebtedness Bank of America had
incurred to us in connection with its earlier purchase from us of 5 million
shares of Exult Common Stock and three-year warrants to purchase an additional 5
million shares at $11 per share. We also hired approximately 600 people who had
previously been employed by the bank in roles now within the scope of our
responsibilities under the agreement.
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UNISYS CORPORATION
In August 2000, we entered into a seven-year Master Services Agreement
with Unisys Corporation (NYSE: UIS) to provide human resources processes and
vendor management services. In November 2000, this contract was expanded to
include training administration services. The agreement involves services
applicable to approximately 36,000 employees of Unisys Corporation and its
affiliates in the US, UK and other countries.
Our contract with Unisys covers compensation, benefits and payroll
processes; employee data management processes, including employee data & records
management and information technology & information services; workforce planning
processes, including resourcing, expatriate and domestic relocation &
administration, and severance; organization and people development processes,
including performance management, training and policy & legal compliance, as
well as organizational and people development; and workforce services processes,
including HR strategy and labor and employee relations. Each of these processes
is divided into component tasks or functions and responsibility for each is
allocated either to Unisys or to us. In general we are responsible for systems
and process design and implementation, routine employee communications, data
gathering, processing and retrieval, management reporting, vendor management,
transaction processing, and overall administration of related HR functions.
Unisys remains responsible for strategic planning, policy decisions, employee
relations, legal compliance, and transaction initiation and approval.
We are obligated to provide our services to Unisys for fixed fees that
are generally equal to or less than the historical costs Unisys incurred in
connection with the services that we are assuming. In addition, we are obligated
to share with Unisys any savings we achieve through management of third-party
vendors providing services within the scope of the contract.
Our transition plans call for completion of the transition of in-scope
processes to our systems and infrastructure by the end of the third quarter of
2001, and as of the date of this report, we are on schedule for completion by
this date. We are also making arrangements to assume or administer Unisys's
contracts with third parties providing discrete services that constitute a part
of our integrated service offering.
Unisys has the right to terminate the agreement in the event of our
insolvency or material breach or repeated material performance failure, or if a
designated competitor of Unisys obtains control of our business. Unisys may also
terminate the agreement for convenience upon making a specified termination
payment to us. The amount of the termination payment is designed to defray
certain costs, not to approximate our total revenue or profit under the
agreement. Any termination may involve a winding-down period during which we
would continue to be paid for providing services while transferring back to
Unisys or to a new service provider the processes for which we have been
responsible. Unisys also has the right to remove services from the contract by
"insourcing" or delegation to third parties, subject to payment to us of
contract minimums. We expect our contract with Unisys to provide significant
revenue to us for the foreseeable future and if Unisys were to substantially
reduce or stop the use of our services, our reputation and future revenues would
be seriously impaired.
PACTIV CORPORATION
In January 2000, we entered into a three-year agreement with Pactiv
Corporation (NYSE: PTV), a leading provider of advanced packaging solutions
formerly known as Tenneco Packaging. Pactiv operates approximately 85 facilities
in approximately 17 countries around the world. Under this agreement, we assumed
management and accountability for Pactiv's North American payroll, employee
expense reimbursement, and accounts payable processes.
TENNECO AUTOMOTIVE
In January 2000, we entered into a three-year agreement with Tenneco
Automotive (NYSE: TEN), a large international manufacturer of ride management
control and exhaust systems and products with approximately 23,000 employees
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worldwide. Under this agreement, we assumed management and accountability for
Tenneco's North American payroll, employee expense reimbursement, and accounts
payable processes.
SALES AND MARKETING
Clients make decisions about outsourcing HR at very high levels because
of the strategic nature and importance of their HR processes. Therefore, our
lead generation and sales efforts target senior executives of Global 500
corporations, largely through personal relationships and introductions. Due to
the strategic importance of these senior executive relationships, most of our
selling efforts have been conducted by members of our executive management team.
We have also maintained a small staff of dedicated sales professionals whose
primary role has been to assess our compatibility with potential clients and
negotiate and document our contracts. We employ a team approach to business
development, working with colleagues in our IT delivery, client services
centers, strategy and other functional areas to identify, qualify and prioritize
prospects, manage due diligence processes, negotiate contracts, and craft Exult
eHR solutions for our clients.
We have focused our marketing efforts on creating awareness of the
comprehensive nature of our Exult eHR solution and establishing Exult as the
leader in this new market primarily through market research, information pieces
and written articles published for industry trade press, public relations
activities, seminars, speaking engagements and relationships with industry
analysts. The goal of these activities is to promote Exult as the leading
provider of comprehensive eHR, and to publicize the advantages of integrated HR
process management. Lead generation has been pursued in a more targeted manner
through direct sales contacts.
COMPETITION
We believe our primary competitors are large human resource departments
within Global 500 corporations who may be averse to outsourcing. This is another
key reason why we focus our sales and client relationship efforts on senior
executives, including those in charge of HR. We also believe we are in
competition with third parties including:
- the consulting divisions of the Big Five accounting firms;
- companies that provide a selected transactional service, such as
benefits administration, and aspire to provide additional
services;
- other consulting companies that perform individual projects,
such as development of HR strategy and HR information systems;
and
- certain IT outsourcers that aspire to provide BPO services and
may seek to add selected HR offerings.
Historically, most of these vendors have focused upon discrete
processes, but many of them are now promoting integrated process management
offerings that may be viewed as competitive with ours. We do not believe any
competitor currently assumes responsibility for all of the human resources
processes within a Global 500 HR department to the same degree that we do, but
over time we expect competitors to develop broader service capabilities that
match ours.
EMPLOYEES
As of March 20, 2001, we employed 1,280 people, including approximately
775 in our client service centers, approximately 350 in information technology
and client transitions, approximately 50 in consulting and approximately 105 in
sales & marketing and general and administrative roles.
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RISK FACTORS
The following risks affect our business and the prospects for
investments in our Common Stock. Additional risks and uncertainties not
presently known to us or that we currently believe are not important may also
impair our business. Any of the following risks could adversely affect our
business, financial condition or results of operations.
WE HAVE A LIMITED OPERATING HISTORY AND UNPROVEN BUSINESS MODEL.
We entered into our first process management contract in December 1999.
We have five clients under contract for our HR business process management
services, and we are still implementing the largest three of our process
management contracts. While we are ahead of our planned rate of client
acquisition and overall transition, our business model is unproven. Our success
depends on our ability to develop and implement a high quality, cost-effective
services offering that is scalable across a broad client base, operate it
profitably, produce satisfactory results for our clients and attract new
clients. While we have met our development objectives to date and our current
clients have perceived our services as beneficial, we have not been in operation
long enough to judge whether we can accomplish these objectives. Accordingly,
our revenue and income potential and future operating results are uncertain.
OUR SUCCESS DEPENDS LARGELY UPON OUR CONTRACTS WITH BANK OF AMERICA, BP, UNISYS
AND OTHER EARLY CONTRACTS, WHICH MAY NOT YIELD THE RESULTS WE EXPECT.
Bank of America, bp and Unisys are the first clients for which we are
offering a comprehensive HR process management solution, and we anticipate
revenue from each of these contracts to represent a substantial portion of our
revenue through 2001 and possibly in future periods. These contracts are still
relatively new and our service offering is not yet fully implemented for these
clients. As such, we believe our ability to secure future clients and revenues
will be largely dependent upon our ability to perform and achieve the contracted
service levels and cost savings for these clients. Any of these contracts can be
terminated for material breach or significant and repeated performance failures,
or in certain instances for convenience upon required notice and payment of
specified early termination penalties that may not cover our termination costs
and are not intended to replace profits we might have earned. In addition, our
contracts generally permit our clients to impose financial penalties against us
for certain specified material performance failures. If any of these clients
were to substantially reduce or stop using our services, or if we experience
significant, repeated performance failures, 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 more
firmly established.
Although our arrangement with bp contemplates that we manage their HR
processes worldwide, and we have a first right to provide human resources
management services to bp in each country in which they have operations, our
current contract covers only the United Kingdom and the United States. bp is
requesting the expansion of our services into additional countries where they
operate, and we anticipate that selected processes and countries will be
included later in 2001 and 2002. However, this expansion of our performance
capabilities beyond the US and UK will require investment of additional
resources, will be executed in stages, and may be delayed.
OUR EHR SOLUTION IS EVOLVING AND REQUIRES ONGOING DEVELOPMENT.
We are still developing our service delivery infrastructure, and our
ability to continue to deliver and expand our broad process management solution
depends upon continued success in assembling and managing our own systems and
capabilities and third-party vendors into an integrated and efficient delivery
platform. Our clients use disparate information systems and operating methods,
and transitioning their processes to our operating platforms requires
significant technology and process integration, and we often must adapt or
develop new systems and processes to accommodate various clients. Clients'
employees may access and utilize our web-enabled eHR solution and systems
through interfaces that require significant development and integration of many
independent programs and complex functions, and requires ongoing revision and
adaptation. If we fail to develop a client's service delivery infrastructure in
accordance with the specifications and delivery milestones agreed upon, or if we
are unable to complete development of
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scalable systems and achieve the functionality we expect, our ability to deliver
our services and achieve our business objectives in general could be seriously
impeded.
WE MUST ANTICIPATE AND CONFORM TO THE NEW AND EVOLVING MARKET IN WHICH WE
OPERATE.
Our business model is based on integrated management of a variety of
client HR and finance processes. Based on client reaction to date, we believe
there is significant market demand for this service, but because the market is
new, our ability to satisfy that demand depends upon our ability to anticipate
market developments and maintain our market leadership position. If we are
unable to react quickly to changes in the market, if the market fails to develop
in the ways we expect, or if our services do not achieve additional market
acceptance, then we are unlikely to remain the market leader or become or remain
profitable.
CAPACITY CONSTRAINTS AND THE LENGTH OF OUR NEW CLIENT SALES AND INTEGRATION
CYCLES WILL LIMIT OUR REVENUE GROWTH.
We expect most of our future revenue growth in 2002 and beyond 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 due diligence process limits our revenue
growth, and we have invested significant time in some potential client
relationships that have not resulted in contracts. It is possible that any
potential client due diligence process could result in a decision by us or the
potential client not to enter into a contract after we have made significant
investments of time and resources.
After a new client contract is signed, we typically convert the client's
HR processes to our systems and infrastructure in stages. This transition period
can take from six months to over one year and may involve unanticipated
difficulties and delays. Our pricing model involves guaranteed reductions in the
client's controllable and direct HR costs upon transition completion, 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 agreements can be delayed for at
least several months after the contract is signed, and it could take a
significant amount of time for our agreements to contribute significantly to
profits or cash flow. The transition of HR processes under our existing
contracts with bp, Unisys, and Bank of America to our systems and infrastructure
is not scheduled to be complete until various times later in 2001, and could be
delayed. We attempt to negotiate long-term contracts in order to give us time to
complete the transition and earn a profit, but if implementation of our service
model is delayed, or if we do not meet our service commitments under any
particular contract and the client terminates our engagement early as a result,
we might experience no return on our substantial investment of time and
resources in that client.
WE EXPECT TO INCUR SIGNIFICANT NET OPERATING LOSSES AND WE MAY NEED TO RAISE
ADDITIONAL CAPITAL.
Developing our company is expensive. In addition, acquiring new client
contracts and transitioning them until they are fully implemented and reach
their revenue potential requires significant capital investment. Since our
formation, we have not had a profitable quarter. We incurred a net loss of $15.2
million for the year ended December 31, 1999 and a net loss $64.9 million,
exclusive of a non-cash warrant charge of $29.9 million, for the year ended
December 31, 2000. For the year ended December 31, 1999, we used cash of $7.6
million in operating activities and $9.6 million in investing activities. For
the year ended December 31, 2000, we used cash of $60.7 million in operating
activities and $23.8 million in investing activities. We expect to continue to
make significant investments in the development of our eHR solution, client
service centers, and service delivery technologies, the expansion of our sales,
transition and service capabilities and
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the procurement of additional contracts, as well as the acquisition of hardware,
software, furniture and fixtures needed to support these efforts. We invested
approximately $24 million in these items in 2000 and we expect to purchase as
much as an additional $25 million in 2001. These capitalized amounts are
amortized generally over three to five years, resulting in significant
depreciation and amortization expense that will reduce future profitability. Our
capital investments and commensurate amortization will increase if we are able
to take advantage of market opportunities and grow the Company faster than we
anticipate. We may also need cash to make acquisitions and develop new service
offerings and technologies. As a result, we expect to incur net losses in 2001,
and we will need to generate significant revenues to achieve profitability.
While we do not enter "loss leader" contracts, and although we estimate and
model each of our client contracts to be individually profitable, due to our
rapid growth, the expense of creating our company, and other factors described
herein, we cannot be certain that we will ever operate profitably, or that we
can sustain or increase profitability on a quarterly or annual basis in the
future.
Because we do not expect our operating income to cover our cash needs
for some time, and because we anticipate rapid growth, we may need to raise
additional funds through public or private debt or equity financings. We cannot
be certain that we will be able to raise additional funds on favorable terms, or
at all. If we are unable to obtain additional funds, we may be unable to fund
our operations.
WE MAY NOT BE ABLE TO ACHIEVE THE COST SAVINGS WE HAVE PROMISED OUR CLIENTS.
We provide our services for fixed fees that are generally equal to or
less than our clients' historical costs to provide for themselves the services
we contract to deliver. As a result, our profitability will depend on our
ability to provide services cost-effectively. Achieving the efficiency we need
depends upon our ability to develop our process operations and our Exult eHR
solution into a standardized management system that can be operated from our
client service centers and extended to multiple clients with limited
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
departments 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. We also have certain minimum
service level or cost savings requirements that we must meet for "controllable"
costs. If we are not able to meet these requirements, we may be obligated to
issue credits to our clients against future payments to us. If we breach a
contract in a material way or repeatedly fail to perform, our client can
terminate the contract. In addition, with notice and payment, our clients are
generally permitted to terminate their contracts with us for convenience before
the end of the scheduled term. The termination payments required are
substantially less than our revenue under the contracts, and may not cover our
termination costs or replace profits we may have earned.
TO SUCCEED WE MUST HIRE, ASSIMILATE AND RETAIN KEY MANAGEMENT PERSONNEL AND
LARGE NUMBERS OF NEW EMPLOYEES, OPEN NEW CLIENT SERVICE CENTERS, ASSIMILATE OUR
CLIENTS' PERSONNEL AND SYSTEMS, AND EXPAND OUR OWN SYSTEMS AND CONTROLS.
To achieve sustainable profitability, we must extend our service model
across many client organizations and gain critical mass in the size and breadth
of our operations. Our ability to achieve rapid growth depends upon the
following essential elements:
- Current markets for skilled employees are competitive, and we
must be able to hire, train and retain key management personnel
and large numbers of human resources specialists, web and
Internet technologists and programmers, business development and
process management specialists and technical and customer
support personnel.
- We currently operate three large-scale client service centers,
in Charlotte, Glasgow, and the Houston area. We also manage more
limited service center operations in the Los Angeles area. These
centers are designed to handle our
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existing client demands, but we must open new client service
centers in new geographic locations to handle significant
additional growth in our business. We must devote substantial
financial and management resources to launch and operate these
centers successfully, and we may not select appropriate
locations for these centers, open them in time to meet our
client service commitments, or manage them profitably.
- As we assume responsibility for the existing HR departments of
our clients, we must be able to assimilate HR personnel from
these clients and integrate disparate systems, procedures,
controls and infrastructures.
- We will need to improve our financial and management controls,
reporting systems and operating systems to accommodate growth.
If we do not manage growth effectively, our ability to perform
our existing contracts successfully may be jeopardized, our
ability to handle new clients and contracts will be limited, and
our reputation may be harmed.
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR
STOCK PRICE TO FLUCTUATE.
Our quarterly operating results have varied in the past and are likely
to vary significantly in the future. It is possible that in some future quarter
or quarters our operating results will be below the expectations of public
market analysts or investors. If so, the market price of our Common Stock may
decline significantly. Factors that may cause our results to fluctuate include:
- the growth of the market for our HR services and our ability to
obtain new client contracts;
- our ability to continue to execute successfully on client
contracts;
- the length of the sales and integration cycle for our new
clients;
- cancellations or reductions in the scope of our contracts;
- delays in transitioning various client processes to our
infrastructure;
- our ability to develop and implement additional service
offerings and technologies;
- the introduction of comprehensive HR services by new and
emerging 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
client service centers.
WE COULD EXPERIENCE DAMAGES, SERVICE INTERRUPTIONS OR FAILURES AT OUR CLIENT
SERVICE CENTERS OR IN OUR COMPUTER AND TELECOMMUNICATIONS SYSTEMS.
Our business could be interrupted by damage to or disruption of our
client service centers, computer and telecommunications equipment and software
systems from fire, power loss, hardware or software malfunctions, penetration by
computer hackers, computer viruses, natural disasters and other causes,
including "Year 2000" problems that could arise if our systems or third party
systems we rely upon fail to distinguish properly between 21st century dates and
20th century dates. Our clients' businesses may be harmed by any system or
equipment failure we experience. As a result of any of the foregoing, our
relationship with our clients may be adversely affected, we may lose clients,
our ability to attract new clients may be adversely affected and we could be
exposed to liability. We cannot be certain that we will be able to route calls
and other operations from an affected center to another in the event service is
disrupted. In addition, in the event of widespread damage or failures at our
facilities, we cannot guarantee that the disaster recovery plans we have in
place will protect our business.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS.
Our business strategy requires us to expand internationally as we
broaden the geographic scope of services we deliver to our clients from US and
UK operations to foreign operations and as we take on additional large,
multinational clients.
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We will face risks in doing business abroad that include the following:
- changing regulatory requirements;
- legal uncertainty regarding foreign laws, tariffs and other
trade barriers;
- political instability;
- international currency issues, including fluctuations in
currency exchange rates;
- cultural differences;
- designing and operating web sites and other service delivery
components in foreign languages; and
- differing technology standards and Internet regulations that may
affect access to and operation of our web sites and our clients'
web sites.
THE MARKET FOR OUR SERVICES AND OUR REVENUE GROWTH DEPENDS ON OUR ABILITY TO USE
THE INTERNET AS A MEANS OF DELIVERING HUMAN RESOURCES SERVICES.
We rely on the Internet as a key mechanism for delivering our services to our
clients and achieving efficiencies in our service model, and this reliance
exposes us to various risks.
- We use public networks to transmit and store extremely
confidential information about our clients and their employees,
such as compensation, medical information and social security
numbers. We may be required to expend significant capital and
other resources to address security breaches. We cannot be
certain that our security measures will be adequate and security
breaches could disrupt our operations, damage our reputation and
expose us to litigation and possible liability.
- Our target clients may not be receptive to human resources
services delivered over the Internet because of concerns over
transaction security, user privacy, the reliability and quality
of Internet service and other reasons. In addition, growth in
Internet traffic may cause performance and reliability to
decline. Interruptions in Internet service and infrastructure
delays could interfere with our ability to use the Internet to
support our Exult eHR service, which would impair our revenue
growth and results of operations.
- Laws and regulations may be adopted relating to Internet user
privacy, pricing, usage fees and taxes, content, distribution,
and characteristics and quality of products and services. This
could decrease the popularity or impede the expansion of the
Internet and decrease demand for our services. Moreover, the
applicability of existing laws to the Internet is uncertain with
regard to many important issues, including property ownership,
intellectual property, export of encryption technology, libel
and personal privacy. The application of laws and regulations
from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to
the Internet and other online services, could also harm our
business.
WE MUST KEEP OUR COMPUTING AND COMMUNICATIONS INFRASTRUCTURE ON PACE WITH
CHANGING TECHNOLOGIES.
Our success depends on our sophisticated computer, Internet and
telecommunications systems. We have invested significantly in our technological
infrastructure and anticipate that it will be necessary to continue to do so in
the future to remain competitive. These technologies are evolving rapidly and
are characterized by short product life cycles, which require us to anticipate
technological changes and developments. Our success in delivering services
cost-effectively and creating processes that are consistent with HR best
practices for our clients depends, in part, upon our ability to adapt our
processes to incorporate new and improved software applications, communications
systems and other technologies and devices. If we fail to adapt to technological
developments, our clients may experience service implementation delays or our
services may become non-competitive or obsolete.
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WE RELY ON THIRD-PARTY VENDORS FOR SOFTWARE AND SPECIALIZED FUNCTIONS, AND MUST
FIND WAYS OF MAKING THEIR SERVICES MORE COST-EFFECTIVE.
Our service delivery capability incorporates and relies on software
owned by third parties that we license directly or use through existing license
arrangements between our clients and the vendor. If these vendors change or
cancel a product we are using or if these agreements are terminated or not
renewed, we might have to delay or discontinue services until equivalent
technology can be found, licensed and installed.
A significant part of our revenue is attributable to services we provide
to our clients by utilizing third-party vendors to provide a number of
specialized services for our clients, such as benefits administration and
relocation services. We select some of these vendors and assume others from
relationships established by our clients before contracting with us. These
vendors may act as subcontractors to us or provide services directly to our
clients under our management; in either case we have responsibilities under our
client contracts for their costs and services. In many cases our cost of paying
these vendors is as high as our revenue attributable to their services, and the
profitability of our client contracts therefore depends in part upon our ability
to reduce these vendor costs through improved efficiencies and/or more favorable
pricing. We plan to achieve these efficiencies and cost reductions through
vendor management and consolidation, but this may involve delay as existing
contracts run their course and we attempt to renegotiate with or replace these
vendors. In addition, if any third-party vendors are not willing to provide
their services to us at competitive rates and we are unable to provide these
services ourselves or find suitable substitute providers when necessary, our
operating results could be seriously harmed because we may not be able to adjust
our fixed-fee contracts with our clients to offset an increase in the cost of
these specialized services. If our clients are not satisfied with the services
provided by these third parties, our clients may be entitled to recover
penalties or to terminate their agreements with us, which could seriously harm
our business.
THE MARKETS WE SERVE ARE HIGHLY COMPETITIVE AND OUR COMPETITORS MAY HAVE MUCH
GREATER RESOURCES TO COMMIT TO GROWTH, NEW TECHNOLOGY AND MARKETING.
Our current and potential competitors include in-house HR departments of
large, multinational corporations, as well as other third parties that provide
discrete or combined HR and IT functions, including consulting divisions of Big
Five accounting firms and other consulting firms, information technology
outsourcers, and transaction processors such as benefits administrators. In
addition, we expect that the predicted growth of the HR outsourcing market will
attract other consulting firms, transaction providers, and outsourcers and
motivate competitors to assume responsibility for broad integration of HR
processes.
Several of our competitors have substantially greater financial,
technical and marketing resources, larger customer bases, greater name
recognition and more established relationships with their customers and key
product and service suppliers than we do. Our competitors may be able to:
- develop and expand their delivery infrastructure and service
offerings more quickly;
- adapt better to new or emerging technologies and changing client
needs;
- take advantage of acquisitions and other opportunities more
readily;
- devote greater resources to the marketing and sale of their
services; and
- adopt more aggressive pricing policies.
Some of our competitors may also be able or willing to provide clients
with additional benefits at lower overall costs. In addition, we believe there
will be future consolidation in our market, which could increase competition in
ways that may be adverse to us.
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WE OPERATE IN A COMPLEX REGULATORY ENVIRONMENT, AND FAILURE TO COMPLY WITH
APPLICABLE LAWS AND REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Corporate human resources operations are subject to a number of laws and
regulations, including those applicable to payroll practices, benefits
administration, employment practices, and data privacy. Because our clients have
employees in states across the US and in various countries around the world, we
must perform our services in compliance with the legal and regulatory
requirements of multiple jurisdictions. Some of these laws and regulations may
be difficult to ascertain or interpret, may change, and may be inconsistent with
our business practices. Violation of laws and regulations could subject us to
fines and penalties, damage our reputation, constitute breach of our client
contracts, and impair our ability to do business in various jurisdictions or
according to our established processes.
The European Commission's Directive on Data Privacy limits transfer of
personal data outside the EU. In order to receive personal data about our
clients' European employees and fulfill our service commitments, we have elected
to comply with the Safe Harbor Principles established by the US Department of
Commerce, in collaboration with the European Commission, to provide "adequate
protection" for personal data about EU residents. Because we process HR data, we
are required by the Safe Harbor Principles to submit to the jurisdiction of the
European Union Data Protection Authorities (DPAs). Specifically, we must
cooperate with the DPAs in the investigation and resolution of complaints
brought under the Safe Harbor Principles by European citizens and comply with
any corrective advice and remedial or compensatory measures they dictate. In
addition, operation under the Safe Harbor Principles subjects us to the
jurisdiction of the Federal Trade Commission. If we fail to process personal
data in accordance with these principles, we could be subject to legal penalties
under the Federal Trade Commission Act and foreign privacy laws. We could also
lose our ability to move personal data from the EU to the United States, which
would significantly impair our ability to fulfill our contractual commitments to
our clients. We expect to have to comply with similar laws of other foreign
jurisdictions in which we do business in the future.
WE MAY UNDERTAKE ACQUISITIONS WHICH MAY LIMIT OUR ABILITY TO MANAGE AND MAINTAIN
OUR BUSINESS, MAY RESULT IN ADVERSE ACCOUNTING TREATMENT AND MAY BE DIFFICULT TO
INTEGRATE INTO OUR BUSINESS.
We expect to pursue acquisitions under appropriate circumstances. We
cannot provide any assurance that we will be able to complete any acquisitions,
or that any acquisitions we may complete will enhance our business. Any
acquisition we do complete could subject us to a number of risks, including:
- diversion of our management's attention;
- amortization of substantial goodwill and other intangible
assets, adversely affecting our reported results of operations;
- inability to integrate the acquired company and its employees
into our organization effectively, and to retain key personnel
of the acquired business;
- inability to retain the acquired company's customers; and
- exposure to legal claims for activities of the acquired business
prior to acquisition.
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.
WE MUST PROTECT OUR INTELLECTUAL PROPERTY AND AVOID INFRINGING INTELLECTUAL
PROPERTY OF OTHERS.
We may not be able to detect or deter unauthorized use of our
intellectual property. If third parties infringe or misappropriate our trade
secrets, copyrights, trademarks, service marks, trade names or proprietary
information, our
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business could be seriously harmed. In addition, although we believe that our
proprietary rights do not infringe the intellectual property rights of others,
other parties may assert that we have violated their intellectual property
rights. These claims, even if not true, could result in significant legal and
other costs and may be a distraction to management. In addition, protection of
intellectual property in many foreign countries is weaker and less reliable than
in the United States, so if our business expands into foreign countries, risks
associated with protecting our intellectual property will increase.
OUR EXECUTIVE OFFICERS, DIRECTORS AND THEIR AFFILIATES CONTROL THE COMPANY.
Our executive officers, directors and their respective affiliates
beneficially own approximately three-quarters of our outstanding Common Stock.
As a result, these stockholders, acting together, have the ability to control
matters requiring stockholder approval, including the election of directors and
mergers, consolidations and sales of all or substantially all of our assets.
These stockholders may have interests that differ from other investors and they
may approve actions that other investors vote against or reject actions that
other investors have voted to approve. In addition, this concentration of
ownership may also have the effect of preventing or discouraging or deferring a
change in control of Exult, which, in turn, could depress the market price of
our Common Stock.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE, AND WE COULD BE A TARGET OF
SECURITIES CLASS ACTION LITIGATION.
The price at which our Common Stock trades has fluctuated significantly
and is likely to continue to be highly volatile. We are a relatively new company
with no record of profits, and we utilize the internet and a technology
infrastructure to deliver our services. The market prices for other companies
with similar characteristics have at times increased to levels that bore no
relationship to their operating performance, and at other times have declined
dramatically, even without apparent changes in their business. In addition, the
stock market in general has from time to time experienced significant price and
volume fluctuations that have affected the market prices for companies like
ours. In the past, this kind of market price volatility has often resulted in
securities class action litigation against companies comparable to ours.
Securities litigation could result in substantial costs and divert our
management's attention and resources.
SUBSTANTIAL SALES OF OUR COMMON STOCK BY OUR EXISTING INVESTORS COULD CAUSE OUR
STOCK PRICE TO DECLINE.
Of our outstanding shares, only 6.3 million have been sold publicly by
the Company, and only small numbers of privately issued shares have subsequently
been sold in the public markets. The vast majority of our outstanding shares are
in the hands of their original purchasers. These investors may seek to sell
their shares, and sales of large numbers of shares in the same time period could
cause the market price for our Common Stock to decline significantly. These
sales also might make it more difficult for us to sell securities in the future
at a time and price that we deem appropriate.
OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD DETER A TAKEOVER EFFORT.
Provisions of our certificate of incorporation and bylaws, including
those that provide for a classified board of directors, authorized but unissued
shares of Common and Preferred Stock and notice requirements for stockholder
meetings, and Delaware law regarding the ability to conduct specific types of
mergers within specified time periods, could make it more difficult for a third
party to acquire us, even if doing so would provide our stockholders with a
premium to the market price of their Common Stock. A classified board of
directors may inhibit acquisitions in general, and a tender offer not endorsed
by our board in particular, since only one-third of our directors are reelected
annually, thereby requiring two annual meetings before a majority of our
directors could be replaced. The authorization of undesignated preferred stock
gives our board the ability to issue Preferred Stock with voting or other rights
or preferences that could impede the success of any attempt to change control of
the Company. If a change in control or change in management is delayed or
prevented, the market price of our Common Stock could decline.
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ITEM 2. PROPERTIES.
FACILITIES
Our corporate headquarters are located in approximately 29,000 square
feet of office space in Irvine, California under a lease that expires in April
2003. Our lease agreement for this facility requires monthly base rental
payments of approximately $80,000. Our European headquarters are located in
approximately 9,000 square feet of office space in London under a lease that
expires in June 2010 and provides for monthly base rental payments of
approximately GBP 36,000 per month. We also currently lease approximately 71,000
square feet of office space for our shared service center in The Woodlands,
Texas under a lease that expires in March 2006 and requires monthly base rental
payments of approximately $37,000; approximately 31,000 square feet of office
space for our shared service center in Glasgow, Scotland under a lease that
expires in March 2010 and requires quarterly base rental payments of
approximately GBP 132,000; and approximately 96,000 square feet of office space
for our shared service center in Charlotte, North Carolina under a lease that
expires in November 2010. Under the Glasgow lease the landlord or we may
terminate the lease in March 2005 with 12 months prior notice. We prepaid the
rent through 2010 under the Charlotte lease as part of the consideration for our
sale of stock to Bank of America Corporation. The center we operate in the Los
Angeles area is currently under lease to bp. We also lease office space for our
consultants in Georgia, Massachusetts, New York, the United Kingdom and
Switzerland. Finally, we have small numbers of employees providing various
services to Bank of America from office space in approximately 15 locations
throughout the US, which we occupy under prepaid site licenses from Bank of
America.
INTELLECTUAL PROPERTY
We regard the protection of our trademarks, service marks, copyrights,
trade secrets and other intellectual property rights as critical to our future
success. We rely on various intellectual property laws and contractual
restrictions to protect our proprietary rights in products and services. We
currently have pending service mark applications in the United States for the
marks EXULT, E-F&A, MYHR, "PROCESS EXCELLENCE, PROVEN RESULTS," and our logo. We
have also filed service mark applications for these marks in Australia, Canada,
Europe, and Switzerland. We cannot guarantee that we will be able to secure
registrations of our marks domestically or in any foreign country. Our inability
to register and protect marks could require us to stop using them or to share
them with others, which could cause confusion in the marketplace and harm our
business.
In addition, we currently hold various Internet domain names, including
www.exult.net and www.myHR.com. 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
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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.
ITEM 3. 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 report, we are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year covered by this report, either by
proxy solicitation or otherwise.
EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT EMPLOYEES OF THE REGISTRANT
Set forth below are the names, ages, positions and business backgrounds
of the Company's executive officers and certain significant employees.
JAMES C. MADDEN, V, 39, has been the Company's Chief Executive Officer
and President since November 1998 and the 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 US 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.
KEVIN M. CAMPBELL, 41, joined Exult as Operations President on May 30,
2000. Before joining Exult, Mr. Campbell was a partner with Ernst & Young, LLP
from August 1999 to May 2000, and was Director of the Products Market for its
Global Operate practice for business process and information technology
outsourcing. Before joining Ernst & Young, Mr. Campbell was with Andersen
Consulting for 17 years, including nine years as a partner. At Andersen
Consulting, he served at different times as the Global Managing Partner for
business process management for the Resources Market Unit; America's managing
partner for business process management for the manufacturing industry; and
partner in charge of the northeast region's electronics and high-tech market.
Mr. Campbell has a B.S. degree in Management from Boston College.
STEPHEN M. UNTERBERGER, 43, has been our Executive Vice President,
Development and Consulting since June 2000 and served as our Chief Operating
Officer from February 1999 to June 2000. Prior to joining Exult, Mr. Unterberger
served as the Vice President and Operating Executive of the US 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, 54, has been our Chief Financial Officer and
Executive Vice President since joining Exult in September 1999. From March 1999
to September 1999, Mr. Shurtleff was Chief Financial Officer for National Water
& Power, Inc., a business process outsourcing provider of utility billing
services to the multi-family apartment industry. From June 1995 to February
1999, Mr. Shurtleff was Senior Vice President and Chief Financial Officer of
USCS International, a publicly traded, business outsourcing provider of software
and billing services to communications and
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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.
DUNCAN N. THOMAS, 39, joined Exult in February 2001 as our Executive
Vice President, Corporate Development & Strategy. Prior to joining Exult, Mr.
Thomas was the Chief Executive Officer and President of Boats Depot, Inc., an
Internet distributor of marine products. From 1997 to 1999, Mr. Thomas served as
the Managing Partner of Acacia Capital Partners, LLC, a private investment firm.
Mr. Thomas was co-founder of the Los Angeles, California office of Bain & Co,
where he served as Team Leader from 1995 to 1997. From 1992 to 1995, Mr. Thomas
served as Senior Consultant at McKinsey & Co. Mr. Thomas has an M.B.A. degree
from the Johnson Graduate School of Management at Cornell University and a
Doctor of Veterinary Medicine degree from the University of Melbourne.
ROBERT W. GUNN, 53, founded Gunn Partners in 1991 and has served as our
Senior 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.
BRUCE W. FERGUSON, 46, joined the Company as our Senior Vice President,
Chief People Officer in June 2000. Prior to joining Exult, Mr. Ferguson served
as National Director of Recruiting for Ernst & Young LLP from 1998 to 2000 and
as National Director of Human Resources from 1995 to 1998. Mr. Ferguson served
as Director of Human Resources for Kenneth Leventhal & Company from 1990 to
1995. From 1978 to 1990, Mr. Ferguson served in various capacities at Arthur
Andersen & Co., including Director of Human Resources and Director of
Recruiting. Mr. Ferguson received his B.S. degree from the University of
Wisconsin.
BRIAN W. COPPLE, 40, has served as our Senior Vice President, General
Counsel and Secretary since February 2000. Prior to joining Exult, Mr. Copple
served as a Senior Vice President and the General Counsel for EPS Solutions
Corporation, a provider of outsourced executive search, performance learning and
financial services, from February 1999 to February 2000. From January 1988 to
February 1999, Mr. Copple practiced corporate and securities law with Gibson,
Dunn & Crutcher LLP, including as a partner for three years. Mr. Copple has a
J.D. degree and an M.B.A. degree from the University of California, Los Angeles
and an A.B. degree in Political Science from Stanford University.
RICHARD JONES, 49, joined the Company's UK subsidiary, Exult Ltd, in
September 2000 as its Senior Vice President of International Operations. Prior
to joining the Company, Mr. Jones served as Managing Partner, Business Process
Management, of the Resources Industries Global Market Unit of Andersen
Consulting from 1999 to 2000 and as the Chief Operations Officer of the United
Kingdom Outsourcing Business of Andersen Consulting from 1997 to 1999. From 1994
to 1997, Mr. Jones served in various roles, including Managing Director, Sales
and Marketing Director, Director of Commercial Business and Director of Finance
Services, for Digital Equipment Company. From 1973 to 1994, Mr. Jones held
various management positions at IBM. Mr. Jones received his degree in Pure
Mathematics from the University of Southampton in England.
PETER WORK, 42, has been our Chief Technology Officer since April 1999.
From 1999 until 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.
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REBECCA L. WORK, 46, 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 US 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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "EXLT". The following table sets forth for the quarters indicated the
high and low prices as reported by Nasdaq. The quotations reflect inter-dealer
prices, without retail markup, markdown or commissions, and may not represent
actual transactions. The Company completed its initial public offering in June
2000.
HIGH LOW
----- -----
QUARTER ENDED:
June 30, 2000 ........................ 11.56 9.69
September 30, 2000 ................... 19.00 7.00
December 31, 2000 .................... 17.88 8.38
At March 16, 2001, there were approximately 86 holders of record of the
Company's Common Stock. The Company estimates the number of beneficial holders
of its Common Stock to be in excess of 1,400.
In November 2000, the Company issued to an investor 5,000,000 of
unregistered shares of its Common Stock and three-year warrants to acquire an
additional 5,000,000 unregistered shares of its Common Stock with an exercise
price of $11.00 per share. The shares and warrants were valued at $84.9 million
based upon the $11.00 per share closing price of the Company's Common Stock on
the day before the transaction was consummated. The Company received $11.0
million in cash and $44.0 million in prepaid rent and intangible assets. The
shares and warrants were issued in a private placement pursuant to Section 4(2)
of the Securities Act of 1933, as amended.
Through March 16, 2001, the Company has never declared or paid any cash
dividends on shares of its 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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ITEM 6. SELECTED FINANCIAL DATA.
The Company commenced operations in October 1998. The following selected
consolidated financial data as of and for the period and years ended December
31, 1998, 1999 and 2000, has been derived from our audited consolidated
financial statements and related notes. 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 herein.
OCTOBER 31,
1998
(INCEPTION)
TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 2000
------------ ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue ........................................ $ -- $ 4,857 $ 66,661
Cost of revenue ................................ -- 4,498 93,195
--------- --------- ---------
Gross profit (loss) ............................ -- 359 (26,534)
Expenses:
Product development .......................... -- 368 6,674
Selling, general and administrative .......... 187 9,976 28,207
Depreciation and amortization ................ -- 943 8,811
Warrant charges .............................. -- 4,547 29,900
--------- --------- ---------
Total expenses ............................. 187 15,834 73,592
--------- --------- ---------
Loss from operations ........................... (187) (15,475) (100,126)
Interest income, net ........................... 3 263 5,306
--------- --------- ---------
Net loss ....................................... $ (184) $ (15,212) $ (94,820)
========= ========= =========
Net loss per share:
Basic and diluted (rounded) .................. $ (140.48) $ (2.20) $ (1.74)
========= ========= =========
Weighted average number of common shares
outstanding, basic and diluted ............... 1 6,906 54,491
========= ========= =========
DECEMBER 31,
-----------------------------------------
1998 1999 2000
------ ------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and investments ........... $ 851 $39,199 $ 99,890
Working capital .................................. 813 31,957 93,185
Total assets ..................................... 854 58,767 204,181
Long term obligations, net of current portion .... -- 4,304 152
Convertible preferred stock ...................... 1,000 58,768 --
Total stockholders' equity ....................... 816 46,110 171,429
Please refer to note 2 and note 9 of notes to consolidated financial statements
for information regarding the method used to compute our basic and diluted net
loss per share.
Concurrent with the consummation of the June 2000 initial public
offering of the Company's Common Stock, all outstanding shares of Series A,
Series B, Series C, and Series D Preferred Stock were automatically converted
into Common Stock at the rate of 900 shares of Common Stock for each share of
Series A Preferred Stock, five shares of Common Stock for each share of Series B
and Series C Preferred Stock, and one share of Common Stock for each share of
Series D Preferred Stock.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Our mission is to provide comprehensive business process management
solutions that enable Global 500 corporations to increase the productivity of
their human capital, convert HR spending to a variable cost basis and reduce the
overall cost of HR management and administration. We do this through multiple
delivery vehicles:
- our Exult eHR solution including our myHR web-enabled
applications;
- shared client service centers; and
- best practices expertise and expert process consulting
capabilities.
These vehicles enable us to provide scalable, web-based service delivery
capabilities across many HR business processes. myHR includes our web-based
functional applications and browser system through which our clients' personnel
can access their HR information systems and navigate through those systems to
find information and process transactions. Our shared client service centers
handle our clients' HR transaction and contact center requirements from a
leveragable multi-client platform, and our best practices and process consulting
expertise enables us to improve efficiency and effectiveness through process
improvement. We deploy these capabilities to handle the transactional and
administrative elements of our clients' HR processes, freeing our clients' HR
departments to add value through focus on strategy and policy matters that are
important to their businesses. In addition, we also manage certain finance and
administration processes, including disbursements and reconciliations, that have
historically been integrated with various HR functions at our clients. These
additional services are intended to streamline clients' back office transaction
processing. As of December 31, 2000, we have five HR business process management
clients, three of which also receive certain finance and administration process
management services from us.
Our Exult eHR solution incorporates the services of third-party vendors
in two important ways. First, our process management contracts may include as
"in scope" certain services being provided to the client by third parties. At
the time we become responsible for a client's HR organization, we generally
assume responsibility for administration of these vendors, either by novation of
their contracts to us or through management arrangements. Depending upon a
number of factors, including the type of services involved, terms of the
vendors' contract, and client preferences, over time we may retain the vendor as
a service provider to the client within the scope of our contract and under our
management, replace the vendor with a new third-party provider under our
management, or take over provision of the services ourselves. In addition to
management of third-party vendors who had preexisting relationships with our
clients, we also utilize selected third parties to complement our integrated
service offering with specialized HR services that can be more effectively and
efficiently handled by third-party vendors and subcontractors than by internal
resources.
We commenced operations in October 1998 as BPO-US, Inc. and changed our
name to Exult, Inc. in August 1999. From our inception through November 1999,
our activities primarily related to the pursuit of our initial contracts and the
development of the infrastructure to support comprehensive eHR process
management. In November 1999, we acquired the business of Gunn Partners, Inc., a
business process improvement consulting company with operations in the United
States and Europe. Gunn Partners has been consulting with Global 500
corporations since 1991 on administrative staff functions such as human
resources and finance and accounting, as well as procurement, information
technology, and customer service. Gunn Partners generates revenue through its
own consulting activities, provides strategic assistance in structuring our
client relationships, assists in cross-marketing, and provides us with a service
offering for potential clients that are not yet ready for our full eHR solution.
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In December 1999, we entered into a seven-year Framework Agreement 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 and its affiliates.
In January 2000, we entered into a three-year agreement with Pactiv Corporation,
formerly known as Tenneco Packaging, under which we assumed management and
accountability for Pactiv's North American payroll and accounts payable
processes. In January 2000, we entered into a three-year agreement with Tenneco
Automotive under which we assumed management and accountability for Tenneco's
North American payroll and accounts payable processes. In August 2000, we
entered into a seven-year Master Services Agreement with Unisys Corporation to
provide human resources processes and vendor management services. In November
2000, this contract was expanded to include training administration services. In
November 2000, we entered into a ten-year Master Services Agreement with Bank of
America Corporation to provide human resources and accounts payable services.
(See Part I. Item 1. Business. Business Process Management Clients for a more
detailed description of these business process management agreements.)
We expect our primary source of revenue for the near future to be the
fees we earn for providing our eHR process management services under long-term
contracts. We recognize revenue under these contracts as the services are
rendered. A secondary source of revenue is the consulting services performed by
Gunn Partners. We recognize revenue for these services over the period in which
services are performed as information or feedback is provided to the client. As
part of our eHR solution, we manage our clients' relationships with third party
vendors. In most cases, we expect to become responsible for the vendor contracts
and we will include in revenue all charges that we collect from our clients. We
will pay the costs of these services to the third-party vendors, and such costs
will be included in our cost of revenue. Revenue from consulting and related
services is net of reimbursable expenses.
To date, we have typically generated leads for potential eHR process
management clients through our management, existing consulting relationships,
board of directors, third-party consultants, contact with key executives at
companies within the Global 500 or direct communication from such companies
after reading articles, press releases or visiting our web site. After initial
discussions with and qualification of the potential client, we typically enter
into a letter of intent with the client which establishes a framework for due
diligence and contract negotiations. Our letter of intent may provide for
reimbursement of some or all of our direct and indirect costs incurred during
this process if a contract is not signed. To the extent such costs are
guaranteed by the letter of intent, reimbursements of costs will be included in
revenue. To the extent reimbursements are not guaranteed, such amounts will be
expensed as incurred and will be included in revenue once invoiced and
collection is reasonably assured.
We incurred a net loss in 1999 and 2000 and expect to incur a net loss
in 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, and to fund the development and expansion
of our technology and general operating infrastructures. To the extent that
revenue does not increase at a rate commensurate with our increasing costs and
expenditures, our future operating results and liquidity could be materially and
adversely affected.
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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 (loss) 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:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 2000
----------- -----------
Revenue ..................................... 100.0% 100.0%
Cost of revenue ............................. 92.6 139.8
------ ------
Gross profit (loss) ......................... 7.4 (39.8)
------ ------
Expenses:
Product development ....................... 7.6 10.0
Selling, general and administrative ....... 205.4 42.3
Depreciation and amortization ............. 19.4 13.2
Warrant charges ........................... 93.6 44.9
------ ------
Total expenses ......................... 326.0 110.4
------ ------
Loss from operations ........................ (318.6) (150.2)
Interest income, net ........................ 5.4 8.0
------ ------
Net loss .................................... (313.2)% (142.2)%
====== ======
Our primary activities in the first quarter of 1999 and the period Exult
existed in 1998 were organization and planning. During this time, we generated
no revenue and only minimal interest income. We hired a few employees and
incurred associated selling, general and administrative expenditures.
YEARS ENDED DECEMBER 31, 1999 AND 2000
Our primary activities during 1999 were organization, planning and
certain work performed for our first business process management client prior to
entering into the related long-term contract. We did not generate any
outsourcing process revenues from long-term contracts during 1999. At December
31, 1999, we had approximately 75 employees. As of December 31, 2000, we have
five business process management clients and approximately 634 employees. Due to
the early stage of our business during 1999, our operating results for this
period do not bear significant relationship to our operating results for the
year ended December 31, 2000.
REVENUE
Revenue for the years ended December 31, 1999 and 2000, was $4.9 million
and $66.7 million, respectively. The 1999 amount primarily consisted of
approximately $4.1 million billed to our first business process management
client, BP Amoco, for work performed before we entered into a long-term contract
with this client in December 1999. The balance of our 1999 revenue primarily
consisted of consulting revenue generated from various clients. The 2000 amount
consisted of $54.9 million of contract revenue derived from four business
process management clients and $11.8 million of consulting and related revenue
from various clients.
COST OF REVENUE
Our cost of revenue for the years ended December 31, 1999 and 2000, was
$4.5 million and $93.2 million, respectively, and our gross margin (loss) for
the same periods was 7.4 percent and (39.8) percent as a percentage of revenue,
respectively. Cost of revenue consists primarily of expenses associated with the
third-party vendors whom we manage for our clients, compensation and benefits of
employees directly involved in providing our services, computer and
communications equipment costs and services, and facilities. We expect to incur
a net loss in 2001 and may have negative gross profit for that period depending
upon our rate of growth and commensurate expenditures.
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PRODUCT DEVELOPMENT EXPENSE
Product development expense for the years ended December 31, 1999 and
2000, was $368,000, or 7.6 percent as a percentage of revenue, and $6.7 million,
or 10.0 percent as a percentage of revenue, respectively. Product development
expense consists primarily of third-party costs, salaries, bonuses and benefits
of employees directly associated with the development of our portal and Internet
software and capabilities, and the performance of research and benchmarking of
HR best practices that are not part of a specific engagement. We did not
capitalize any costs in 1999 for internally developed software for research and
benchmarking and in the 2000 period such capitalized amounts were immaterial. We
increased our overall spending for product development throughout 2000 and plan
to continue to spend at least the same dollar amount in future years. We cannot
be certain that our product development efforts will provide us with the desired
results or will be economically feasible.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
For the years ended December 31, 1999 and 2000, selling, general and
administrative expense was $10.0 million, or 205.4% as a percentage of revenue,
and $28.2 million, or 42.3% as a percentage of revenue, respectively. Selling,
general and administrative expense generally consists of salaries, bonuses and
benefits for employees engaged in marketing, promoting and selling our services,
and for management and administrative personnel. Selling, general and
administrative expense also includes third-party consulting and marketing
expenditures, as well as facilities and office costs, and legal, accounting and
recruiting fees and expenses.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense for the years ended December 31,
1999 and 2000, was $943,000 and $8.8 million,