<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 29, 1998
REGISTRATION NO. 333-47881
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE ULTIMATE SOFTWARE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 7372 65-0694077
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
3111 STIRLING ROAD
FT. LAUDERDALE, FLORIDA 33312
(954) 266-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SCOTT SCHERR
THE ULTIMATE SOFTWARE GROUP, INC.
3111 STIRLING ROAD
FT. LAUDERDALE, FLORIDA 33312
(954) 266-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
PLEASE ADDRESS A COPY OF ALL COMMUNICATIONS TO:
<TABLE>
<CAPTION>
<S> <C>
JAMES A. FITZPATRICK, JR. ELLEN B. CORENSWET
DEWEY BALLANTINE LLP BABAK YAGHMAIE
1301 AVENUE OF THE AMERICAS BROBECK, PHLEGER & HARRISON LLP
NEW YORK, NEW YORK 10019 1633 BROADWAY, 47TH FLOOR
(212) 259-8000 NEW YORK, NEW YORK 10019
(212) 581-1600
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION DATED MAY 29, 1998
PROSPECTUS
, 1998
3,250,000 SHARES
[ULTIMATE SOFTWARE GROUP LOGO]
THE ULTIMATE SOFTWARE GROUP, INC.
COMMON STOCK
All of the 3,250,000 shares (the "Shares") of common stock, par value
$0.01 per share (the "Common Stock"), of The Ultimate Software Group, Inc., a
Delaware corporation (the "Company"), offered hereby (the "Offering") are
being issued and sold by the Company.
Prior to the Offering, there has been no public market for the Shares. It
is currently anticipated that the initial offering price will be between
$11.00 and $13.00 per share. See "Underwriting" for information relating to
the factors considered in determining the initial public offering price.
The Company has applied to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "ULTI."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8 FOR INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share ..... $ $ $
Total(3) ...... $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the
Underwriters.
(2) Before deducting expenses estimated at $885,000 payable by the
Company.
(3) The Company and certain stockholders of the Company have granted to
the Underwriters a 30-day option to purchase up to an aggregate of
487,500 additional shares at the Price to the Public less
Underwriting Discounts and Commissions, solely to cover
over-allotments, if any. If such option is exercised in full, the
total Price to the Public, Underwriting Discounts and Commissions,
Proceeds to the Company and Proceeds to such stockholders will be $
, $ , $ and $ , respectively. See "Underwriting."
The Shares are being offered by the several Underwriters when, as, and if
delivered to and accepted by the Underwriters and subject to various prior
conditions, including their right to reject orders in whole or in part. It is
expected that delivery of the Shares will be made in New York, New York on or
about , 1998.
DONALDSON, LUFKIN & JENRETTE VOLPE BROWN WHELAN & COMPANY
SECURITIES CORPORATION
<PAGE>
[DESCRIPTION OF INSIDE COVER]:
Frontal view of a woman's face with two circular lenses over eyes and
the words "focus" horizontally placed over the lips, accompanied by the
following text placed horizontally on the lower right side of page: "US Group
is focused solely on HRMS/payroll software. We design, market, implement and
support technologically advanced, cross-industry HRMS/payroll solutions for
middle-market organizations."
[DESCRIPTION OF INSIDE COVER FOLD-OUT]:
Circular Human Resource Executive medal centrally placed on page with the
words "Top Ten Products" set forth in circular fashion within medal, separated
by three equally placed stars in between and the words "Winner Human Resource
Executive 1997" placed horizontally within medal in consecutive horizontal
order. The words "Winner's Circle" are set forth horizontally beneath the medal
within a rectangle. The following text is placed below the rectangle: "US Group
has joined Human Resource Executive Magazine's Winner's Circle. In December
1997, Human Resource Executive, a leading human resource industry publication,
selected UltiPro for Windows as the only HRMS/payroll software product to be
included as one of its Top Ten HR Products of the Year."
[DESCRIPTION OF INSIDE FRONT COVER FOLD-OUT]:
The words "UltiPro (Register Trademark) for Windows" are placed
horizontally across the top of the page, below which is a schematic
consisting of four separate sets of building blocks representing the
product's design architecture, consisting of the application, tools, framework
and foundation layers, each captioned as "Application Layer", "Tools Layer",
"Application Framework Layer" and "Foundation Layer", respectively, vertically
down the page. Each caption is connected by a horizontal line to a logo-like
building block representing the various components within each layer. Beginning
from the top of the page: (1) the "Application Layer" caption is connected to a
logo-like building block consisting of eight rectangles captioned "Human
Resources", "Benefits Administration", "Payroll", "Recruitment and Staffing"
(with an asterisks), "Employee Self-Service" (with an asterisks), "Interface
Template", "Position Management" (with an asterisks) and "Training
Administration" (with an asterisks). Below the building block is placed an
asterisks followed by the words: "currently under development"; (2) the "Tools
Layer" caption is connected to a logo-like building block consisting of seven
rectangles captioned "Customization Toolkit", "Adhoc Reports System; Standard
Reports System", "Update Manager", "Conversion Tools"; "General Data
Export Engine" and "General Data Import Engine", (3) the "Application
Framework Layer" caption is connected to a logo-like building block
consisting of four rectangles captioned "Application Framework", "Data
Dictionary", "Security Subsystem" and "Ultimate Class Library" and (4) the
"Foundation Layer" caption is connected to a logo-like building block
consisting of three rectangles captioned "Lotus Domino", "Microsoft SQL
Server" and "Borland Delphi/C++". Immediately below the schematic, on the
left side of the page, the following words are placed: "The Ultimate
HRMS/Payroll Solution", which is underlined, below which is placed
"Feature Rich, Built-In Functionality", below which is placed "Rapid
Implementation and System Update Effeciency", below which is placed
"Reduced Total Cost of Ownership", below which is placed "Integration and
Leveraging of Leading Technologies", below which is placed "Ease of Use
and Navigation", below which is placed "Comprehensive Professional Services
and Industry-Specific Expertise", below which is placed "Employee Self-
Service Capability". On the right lower corner is placed the logo of the
Company.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
This Prospectus may include forward-looking statements which reflect the
Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to uncertainties
and other factors that could cause actual results to differ materially from
such statements. These uncertainties and other factors include, but are not
limited to, those discussed in "Risk Factors" and elsewhere in this
Prospectus. The words "believe," "expect," "anticipate," "project," and
similar expressions identify forward-looking statements. These
forward-looking statements speak only as of their dates. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.
ULTIPRO(Registered Trademark), US Group(Registered Trademark) (design) and
Ultipro Tax Forms(Registered Trademark) and its related design are registered
trademarks of the Company in the United States. US Group and Intersourcing
are trademarks of the Company and are the subject of pending trademark and
service mark applications in the United States. This Prospectus also includes
names, trademarks, service marks and registered trademarks and service marks
of companies other than the Company.
3
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus. The Common Stock offered hereby
involves a high degree of risk. See "Risk Factors" beginning on page 8.
Unless otherwise indicated, all information in this Prospectus (i) assumes no
exercise of the Underwriters' over-allotment option, (ii) assumes the
conversion of all outstanding shares of Series A Convertible Preferred Stock
and Series B Convertible Preferred Stock into shares of Common Stock, (iii)
assumes the conversion of all outstanding shares of Class A Common Stock,
Class B Common Stock and Class C Common Stock into shares of Common Stock,
(iv) reflects the issuance of shares of Common Stock to the five former
third-party resellers of the Company's products, the businesses of which were
acquired in February and March 1998 (the "Acquired Resellers"), and (v)
assumes a 10.119-for-1 split of the Company's Common Stock to be effected
immediately prior to the consummation of the Offering. References to the
Company's "fiscal" year mean the twelve months ended on December 31.
References to the "Company" shall be deemed to include the Partnership (as
defined), as appropriate.
THE COMPANY
The Ultimate Software Group, Inc. designs, markets, implements and
supports technologically advanced, cross-industry human resource management
and payroll ("HRMS/payroll") software solutions. The Company's solutions are
marketed primarily to middle-market organizations with 300 to 15,000
employees, but are scaleable to address the needs of much larger
organizations. The Company's products automate an organization's HRMS/payroll
functions and are enabling tools in the cost-efficient management of the
employee life cycle, from inception of employment through retirement. As part
of its comprehensive HRMS/payroll solution, the Company provides high quality
implementation, training and ongoing support services to its customers.
In June 1997, the Company introduced its most recent product, UltiPro for
Windows, a feature-rich, completely integrated HRMS/payroll solution with
embedded Internet technology, employee self-service capability and Cognos
Corporation's business intelligence tools for data analysis and generation of
custom reports. The Company believes that UltiPro for Windows is the first
32-bit, object-oriented HRMS/payroll software solution which takes advantage
of Microsoft SQL Server and Microsoft NT technologies. The Company believes
that UltiPro for Windows provides middle-market organizations with a highly
functional, cost-effective software solution that can accomodate emerging
technologies and provides significant advantages over other HRMS/payroll
software products, including greater scalability and transaction throughput,
reduced total cost of ownership and ease of implementation, customization and
use. In December 1997, Human Resource Executive, a leading human resource
industry publication, selected UltiPro for Windows as the only HRMS/payroll
software product to be included as one of its Top Ten HR Products of the
Year.
Because human resource management and payroll processing are core
functions that require a significant allocation of resources, the
HRMS/payroll functions have increasingly become mission-critical within many
organizations. Traditionally, many organizations have utilized third-party
outsourcing vendors in an attempt to address the increasingly high costs
associated with the management of HRMS/payroll functions. However,
outsourcing can be an inflexible and expensive alternative, particularly for
middle-market organizations, because organizations give up control over
critical processes, which can result in greater inefficiency and insufficient
data for decision-making. As an alternative to outsourcing, many
organizations have historically automated their HRMS/payroll functions by
developing in-house legacy systems to address their needs. However, because
of the use of proprietary programming languages and operating and database
management systems, such in-house HRMS/payroll systems are typically
cumbersome, time consuming to operate, incompatible with other information
systems and expensive to implement, customize, update and support.
5
<PAGE>
With the advent of client/server technologies as an alternative to
in-house legacy systems and the greater availability of affordable computing
solutions, many middle-market organizations are increasingly seeking to
automate and streamline the mission-critical processes associated with
HRMS/payroll functions. However, first-generation client/server solutions
lack certain critical performance criteria and sophisticated security
features, are difficult to implement and have a high cost of ownership. In
addition, first-generation client/server HRMS/payroll software is typically
an add-on module with limited functionality in enterprise-wide, or Enterprise
Resource Planning ("ERP'), systems. In recent years, a new generation of
object-oriented, component-based client/server technologies has emerged,
which addresses many of the limitations of first-generation client/server
systems and facilitates integration with newer technologies and the Internet.
According to International Data Corporation ("IDC"), a market research
company, the United States market for HRMS/payroll software licenses totaled
$1.1 billion in 1996 and is projected to grow to $2.9 billion by the year
2001. IDC further estimates that the worldwide market for HRMS/payroll
software licenses will experience approximately the same rate of growth,
moving from $1.6 billion in 1996 to $4.2 billion by 2001. The Company
believes that the market for HRMS/payroll-related services is of equal or
greater size than the market for HRMS/payroll software licenses and has
similar growth characteristics.
The Company reaches its customer base and target market through its direct
sales force and a network of national, regional and local strategic partners.
As of March 31, 1998, the Company had licensed its earlier DOS-based product,
ULTIPRO for LAN, to approximately 750 organizations and its UltiPro for
Windows solution to approximately 105 organizations. The Company's customers
operate in a wide variety of industries, including manufacturing, food
services, retail, healthcare, technology, finance, insurance, real estate,
transportation, communications, services and sports. The Company's customers
include: Bill Heard Enterprises, Inc., Callaway Gardens Resort, Inc.,
Discovery Zone, Inc., Duro Bag Manufacturing Company, First American
Corporation, The Florida Marlins Baseball Club, Ingram Entertainment, Inc.,
The Krystal Company, National Realty Trust (Coldwell Banker), Telemundo
Group, Inc., United States Filter Corporation and Winn Dixie Stores, Inc.
The Company's objective is to be the leading provider of HRMS/payroll
software solutions. The Company intends to achieve this objective by (i)
extending its technology leadership by continuing to invest in research and
development; (ii) leveraging its existing and new strategic alliances with
leading software vendors in order to access a larger potential customer base
and to leverage their technical and marketing expertise; (iii) integrating
its products with other leading software applications in order to effectively
address an organization's enterprise-wide management needs; (iv) expanding
and leveraging its network of implementation partners to further increase its
market penetration and to enable more rapid implementation of its products;
(v) expanding the functionality of its existing and future products; and (vi)
leveraging its existing client base as clients migrate from DOS to
client/server environments.
The Company is a Delaware corporation formed in April 1996 to assume the
business and operations of The Ultimate Software Group, Ltd. (the
"Partnership"), a limited partnership founded in 1990. The Company's
headquarters are located at 3111 Stirling Road, Ft. Lauderdale, Florida 33312
and its telephone number is (954) 266-1000.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company ................... 3,250,000
Common Stock to be outstanding after the Offering .... 15,870,709 (1)
Use of Proceeds ....................................... Repayment of certain indebtedness in the
approximate amount of $3.6 million, working
capital and other general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol ................ ULTI
</TABLE>
(1) Excludes (i) 1,846,130 shares subject to options outstanding as of the
date hereof and (ii) 3,213,370 additional shares reserved for issuance
pursuant to options available for grant under the Company's Nonqualified
Stock Option Plan. See "Management -- Stock Option Plan."
6
<PAGE>
Summary Consolidated Financial Data(1)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues ................................ $ 3,727 $ 9,312 $ 17,592
Gross profit ............................ 1,893 3,466 8,023
Operating loss .......................... (4,650) (20,284) (16,060)
Net loss ................................ $(4,731) $(20,386) $(16,016)
========== =========== ===========
Basic and diluted net loss per share(2) $ (0.71) $ (2.30) $ (1.37)
========== =========== ===========
Basic and diluted weighted average
shares outstanding(2)................... 6,660 8,854 11,710
========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1997 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
License .............................. $ 818 $ 792 $ 709 $ 4,913 $ 3,123
Service .............................. 1,958 1,652 1,900 3,571 4,075
Other ................................ 254 267 290 468 373
----------- ---------- ----------- ---------- -----------
Total revenues....................... 3,030 2,711 2,899 8,952 7,571
Gross profit .......................... 885 682 586 5,870 3,624
Operating loss ........................ (4,698) (5,178) (5,356) (828) (2,716)
Compensation related to modification
of escrow agreement(3)................ -- -- -- -- (4,184)
Net loss .............................. $(4,730) $(5,204) $(5,320) $ (762) $(6,929)
=========== ========== =========== ========== ===========
Basic and diluted net loss per
share(2).............................. $ (0.46) $ (0.46) $ (0.42) $ (0.06) $ (0.55)
=========== ========== =========== ========== ===========
Basic and diluted weighted average
shares outstanding(2)................. 10,330 11,264 12,599 12,621 12,621
=========== ========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------------
PRO FORMA
PRO FORMA(4) AS ADJUSTED(5)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .... $ 658 $33,865
Working capital (deficit) .... (9,483) 25,902
Total assets .................. 12,096 45,303
Long-term borrowings .......... 574 574
Stockholders' equity (deficit) (8,688) 26,697
</TABLE>
(1) Consolidated financial data gives retroactive effect to the
acquisitions of the Acquired Resellers, which were accounted for
under the poolings-of-interest method of accounting, as if the
Company and the Acquired Resellers had operated as one entity during
the periods presented. See the Consolidated Financial Statements and
the related Notes thereto included elsewhere in this Prospectus.
(2) See Note 2 of the Notes to Consolidated Financial Statements for
information regarding the computation of net loss per share.
(3) See Note 15 of the Notes to Consolidated Financial Statements.
(4) Pro forma to give effect to (i) the conversion of all outstanding
shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock into shares of Common Stock and (ii) the
conversion of all outstanding shares of Class A Common Stock, Class B
Common Stock and Class C Common Stock into shares of Common Stock.
See Note 15 of the Notes to Consolidated Financial Statements.
(5) Pro forma as adjusted to give effect to the sale of 3,250,000 shares
of Common Stock offered hereby at an assumed initial public offering
price of $12.00 per share, after deducting estimated underwriting
discounts and commissions and Offering expenses payable by the
Company and the application of the estimated net proceeds therefrom.
See "Use of Proceeds" and "Capitalization."
7
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the
shares of Common Stock offered hereby. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those contained in the
forward-looking statements. Factors that may cause such differences include,
but are not limited to, those discussed below as well as those discussed
elsewhere in this Prospectus.
Limited Operating History; Accumulated Deficit; Net Losses. The Company
began operations in 1990 as The Ultimate Software Group, Ltd. and released
its first proprietary product in 1993. Until 1997, substantially all of the
Company's revenues were attributable to the licensing of its DOS-based
HRMS/payroll software product, ULTIPRO for LAN, and the provision of related
consulting, training, installation and support services. The Company's most
recent product, UltiPro for Windows, was introduced in June 1997 and has a
limited history of customer acceptance and use. Accordingly, the Company has
only a limited operating history upon which an evaluation of the Company and
its prospects can be based. The Company's prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in their early stage of development, particularly companies in new
and rapidly evolving markets. To address these risks, the Company must, among
other things, respond to competitive developments, continue to attract,
retain and motivate qualified management and other employees, continue to
upgrade its technologies and commercialize products and services that
incorporate such technologies and achieve market acceptance for its products
and services. There can be no assurance that the Company will be successful
in addressing such risks. The Company had an accumulated deficit of $37.1
million and $44.5 million at December 31, 1997 and March 31, 1998,
respectively. The Company incurred net losses of $20.4 million, $16.0 million
and $6.9 million during the years ended December 31, 1996 and 1997 and the
three months ended March 31, 1998, respectively. The Company has increased
its expense levels to support anticipated growth in demand for its
HRMS/payroll products, including the hiring of additional research and
development, professional services, sales and marketing, and administrative
personnel. As a result, the Company is dependent upon increasing revenues and
profit margins to achieve profitability. If the Company's sales and profit
margins do not increase to support the higher levels of operating expenses,
the Company's business, operating results and financial condition would be
materially adversely affected. There can be no assurance that the Company
will ever achieve profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Significant Fluctuations in Quarterly Operating Results; Seasonality. The
Company's revenues and operating results have varied substantially in the
past and are likely to vary substantially in the future due to a variety of
factors, including (i) demand for its products, (ii) the length of the sales
cycle for the Company's software products, which is typically two to six
months, (iii) the fact that a significant portion of the Company's revenues
in any given quarter may be recognized in the last month, weeks or even days
of the quarter, (iv) variations in the length of the implementation process
of the Company's products, (v) the mix of license and service revenues, (vi)
the timing of the introduction of new products or product enhancements by the
Company and its competitors, (vii) the timing and success of sales and
marketing programs, (viii) changes in customer budgets, (ix) the timing and
extent of product development programs and (x) seasonality of technology
purchases by customers and general economic conditions. The Company's expense
levels are based, in significant part, on its expectations as to future
revenues and are largely fixed in the short term. As a result, the Company
may be unable to adjust spending in a timely manner to compensate for any
unexpected shortfall in revenues. Accordingly, any significant shortfall of
revenues in relation to the Company's expectations would have an immediate
and material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company has increased, and plans to
continue to increase its operating expenses to expand its research and
development, professional services, sales and marketing, and administrative
organizations. The timing of such expansion and the rate at which new
personnel become productive could cause material fluctuations in quarterly
and annual results of operations. The Company has experienced, and may
experience in the future, significant seasonality in its business, and the
Company's business, operating results and financial condition may be affected
by such trends in the future. Revenues have historically increased at higher
8
<PAGE>
rates in the fourth quarter of the year and at lower rates in the next
succeeding quarter, which the Company believes is due to a number of factors,
including the Company's quota-based compensation arrangements, typical of
those used in software companies, and year-end budgetary pressures on the
Company's customers. The Company believes that this seasonal trend will
continue for the foreseeable future. Due to all of the foregoing factors,
period-to-period comparisons of the revenues and operating results of the
Company are not necessarily meaningful and such comparisons cannot be relied
upon as indicators of future performance. There also can be no assurance that
the Company will be able to sustain the rates of revenue growth that it has
experienced in the past, or that the Company will be able to improve its
operating results. In addition, the Company's operating results in future
periods may be below the expectations of securities analysts and investors.
In that event, the market price of the Common Stock would likely be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Product Concentration; New Product. Until 1997, substantially all of the
Company's revenues were derived from its ULTIPRO for LAN product and related
services. The Company has shifted its focus from a product based on DOS and
local area network ("LAN") technologies, ULTIPRO for LAN, to a product based
on Windows and client/server technologies, UltiPro for Windows. As a result
of this shift and the decrease in general market demand for DOS-based
products, the Company's revenues from its ULTIPRO for LAN product have been
declining and are expected to decline for the foreseeable future. There can
be no assurance that the decline in revenues from sales of ULTIPRO for LAN
will not have a material adverse effect on the Company's business, operating
results and financial condition. While the Company still derives revenues
from the support, service and limited sales of the ULTIPRO for LAN product
line, its UltiPro for Windows product and related services are expected to
account for substantially all of the Company's revenues for the foreseeable
future. In the year ended December 31, 1997 and the three months ended March
31, 1998, UltiPro for Windows license and service revenues accounted for $5.2
million, or 29.4%, and $5.2 million, or 69.1%, of the Company's total
revenues, respectively. However, to date, the Company has had only limited
experience with customer acceptance and use, as well as in implementing,
UltiPro for Windows. Accordingly, the Company's future success will depend on
maintaining and increasing acceptance of UltiPro for Windows and related
services and its ability to successfully implement the product. There can be
no assurance that UltiPro for Windows will gain broad market acceptance or
that the Company will be able to successfully implement UltiPro for Windows
in a timely manner. Any factors adversely affecting the demand for UltiPro
for Windows would have a material adverse effect on the Company's business,
operating results and financial condition. See "Management Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Products."
Uncertainties Relating to Acquisition of Acquired Resellers. In February
and March 1998, the Company acquired the businesses of the Acquired
Resellers. In each of the years ended December 31, 1996 and 1997 and the
three months ended March 31, 1998, the Acquired Resellers accounted for $2.7
million, or 28.9%, and $3.5 million, or 19.6%, and $1.6 million, or 21.5%,
respectively, of the Company's total revenues. The success of the
acquisitions will depend on a number of factors, including the Company's
ability to integrate the businesses and operations of the Acquired Resellers
with those of the Company, to retain certain key personnel of the Acquired
Resellers, and to preserve and expand the businesses and operations of the
Acquired Resellers. There can be no assurance that the Company will be able
to successfully integrate and operate the businesses of the Acquired
Resellers or that it will not experience losses as a result of the
acquisitions. Failure to achieve the anticipated benefits of the acquisitions
or to successfully integrate the operations of the Acquired Resellers could
have a material adverse effect upon the business, operating results and
financial condition of the Company.
Management of Growth. The Company has experienced a period of rapid
growth. For example, the number of the Company's employees has increased from
75 as of December 31, 1995 to 281 as of March 31, 1998. The growth of the
Company's business and expansion of its customer base has placed, and is
expected to continue to place, a significant strain on the Company's
management and operations. The Company expects to continue to increase its
research and development, professional services, sales and marketing and
administrative operations. Accordingly, the Company's future operating
results will
9
<PAGE>
depend on the ability of its management and other key employees to continue
to implement and improve its systems for operations, financial control and
information management and to recruit, train, manage and retain its employee
base. There can be no assurance that the Company will be able to manage or
continue to manage its recent or any future growth successfully, and any
inability to do so would have a material adverse effect on the Company's
business, operating results and financial condition.
Risks Associated with Sales Channels. The Company sells its products and
services primarily through a direct sales force. The Company's ability to
achieve significant revenue growth in the future will depend, in part, on its
success in recruiting, training and retaining sufficient direct sales
personnel. The Company also markets its products and services through a
network of national, local and regional strategic partners, and is attempting
to establish more of such relationships. Historically, a significant portion
of the Company's revenues have been derived from sale of the Company's
products by certain third-party resellers. By March 1998, the Company had
acquired the businesses of all of its third-party resellers in order to gain
greater control over its distribution channel. There can be no assurance that
the Company's shift to a direct distribution channel will be successful. The
Company's ability to achieve significant revenue growth in the future will
depend, in large part, upon the success of its direct sales force, its
ability to establish and maintain relationships with strategic partners and
its ability to adapt its sales channels to address the evolving markets for
its products. Failure to do so could have a material adverse effect on the
Company's business, operating results and financial condition. See
"--Uncertainties Relating to Acquisition of Acquired Resellers," "Business --
Strategy" and "--Sales and Marketing."
Rapid Technological Change; Dependence on New Products. The market for the
Company's products is characterized by rapid technological advancements,
changes in customer requirements, frequent new product introductions and
enhancements and changing industry standards. The life cycles of the
Company's products are difficult to estimate and the Company's current market
position could be undermined by rapid technological changes and the
introduction of new products and enhancements by new or existing competitors.
The Company's growth and future success will depend, in part, upon its
ability to enhance its current products and introduce new products in order
to keep pace with products offered by the Company's competitors, adapt to
technological advancements and changing industry standards and expand the
functionality of its products to address the increasingly sophisticated
requirements of its customers. There can be no assurance that the Company
will have sufficient resources to make the necessary investments or that it
will not experience difficulties that could delay or prevent the successful
development, introduction or marketing of new products or enhancements. In
addition, there can be no assurance that such products or enhancements will
meet the requirements of the marketplace or achieve market acceptance or that
the Company's existing and potential customers will migrate to client/server
environments at the rate expected by the Company. Any failure by the Company
to anticipate or respond adequately to technological advancements, customer
requirements and changing industry standards, or any significant delays in
the development, introduction or availability of new products or
enhancements, could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Product
Development."
Competition. The Company's future success will depend significantly upon
its ability to increase its share of its target market, to maintain and
increase its renewal revenues from existing customers and to sell additional
products, product enhancements, maintenance and support agreements and
training and consulting services to existing and new customers. The
HRMS/payroll market is intensely competitive. The Company has a variety of
competitors, including (i) a number of companies, such as Cyborg Systems,
Inc., Genesys Software Systems, Inc., Lawson Software, Inc., Oracle
Corporation, PDS Software, Inc., PeopleSoft, Inc. and SAP America, Inc. which
offer HRMS/payroll software products for use on mainframes and/or
client/server systems; (ii) large service bureaus, such as Automatic Data
Processing, Inc. ("ADP") and Ceridian Corporation; and (iii) the internal
payroll/human resources departments of potential customers which use
custom-written software. The Company believes that existing competitors and
new market entrants will attempt to develop in-house systems that will
compete with the Company's products. Many of the Company's current and
potential competitors have significantly greater financial, technical,
marketing and other resources than the Company. As a result, they may be able
to respond more quickly to new or emerging technologies and to changes in
customer requirements, or to devote
10
<PAGE>
greater resources to the development, promotion and sale of their products
than can the Company. There can be no assurance that the Company will be able
to compete successfully against current or future competitors or that
competitive pressures will not materially adversely affect the Company's
business, operating results and financial condition. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability
of their products to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
There can be no assurance that competitors will not develop products that are
superior to the Company's products or achieve greater market acceptance. See
"Business -- Industry Overview" and "--Competition."
Protection of Intellectual Property; Risks of Infringement. The Company's
success is dependent in part on its ability to protect its proprietary
rights. The Company licenses its products in object code form only, although
it has source code escrow arrangements when required by customers. The
Company relies on a combination of copyright, trademark and trade secret
laws, as well as confidentiality agreements and licensing arrangements, to
establish and protect its proprietary rights. The Company does not have any
patents or patent applications pending, and existing copyright, trademark and
trade secret laws afford only limited protection. Accordingly, there can be
no assurance that the Company will be able to protect its proprietary rights
against unauthorized third party copying or use, which could materially
adversely affect the Company's business, operating results and financial
condition. Despite the Company's efforts to protect its proprietary rights,
attempts may be made by unauthorized parties to copy or reverse engineer
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Moreover, there can be no assurance that
others will not develop products that perform comparably to the Company's
proprietary products. Policing the unauthorized use of the Company's products
is difficult. Litigation may be necessary in the future to enforce the
Company's intellectual property rights, to protect the Company's trademarks,
copyrights or trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on
the Company's business, operating results and financial condition.
As is common in the software industry, the Company from time to time may
become aware of third-party claims of infringement by the Company's
operations or products of third-party proprietary rights. While the Company
is not currently aware of any such claim, the Company's software products may
increasingly be subject to such claims as the number of products and
competitors in the Company's industry grows and the functionality of products
overlaps and as the issuance of software patents becomes increasingly common.
Any such claims, with or without merit, can be time consuming and expensive
to defend, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty agreements, if required, may
not be available on terms acceptable to the Company, or at all, which could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Business -- Intellectual Property Rights."
Reliance on Microsoft Corporation and Other Third-Party Technologies. The
Company's software products are designed primarily to operate with Microsoft
Corporation ("Microsoft") technologies and the Company's strategy requires
that its products and technology be compatible with new developments in
Microsoft technology. Although the Company believes that Microsoft
technologies are currently widely utilized by businesses of all sizes, there
can be no assurance that businesses will continue to adopt such technologies
as anticipated, will migrate from older Microsoft technologies (such as DOS
or earlier versions of Windows) to newer Microsoft technologies or will not
adopt alternative technologies that are incompatible with the Company's
products. If businesses do not migrate from older technologies and adopt the
Microsoft technologies with which the Company's products are compatible, the
Company's business, operating results and financial condition could be
materially and adversely affected. In addition, the Company's products
utilize certain software licensed to it by other third-party software
developers. Although the Company believes that there are alternatives for
these products, any significant interruption in the availability of such
third-party software could have a material adverse impact on the Company's
sales unless and until the Company can replace the functionality provided by
these products. Moreover,
11
<PAGE>
the Company is to a certain extent dependent upon such third parties'
abilities to enhance their current products, to develop new products on a
timely and cost-effective basis and to respond to emerging industry standards
and other technological changes. There can be no assurance that the Company
would be able to replace the functionality provided by the third-party
software currently offered in conjunction with the Company's products in the
event that such software becomes obsolete or incompatible with future
versions of the Company's products or is otherwise not adequately maintained
or updated. The absence of or any significant delay in the replacement of
that functionality could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business -- The
Ultimate Solution" and "--Strategy."
Timely Release of Periodic Updates to Reflect Tax Law and Other Regulatory
Changes. The Company's products are affected by changes in laws and
regulations and generally must be updated annually or periodically to
maintain their accuracy and competitiveness. There can be no assurance that
the Company will be able to release these annual or periodic updates on a
timely basis in the future. Failure to do so could have a material adverse
effect on market acceptance of the Company's products, which could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, significant changes in tax laws and
regulations or other regulatory provisions applicable to the Company's
products could require the Company to make a significant investment in
product modifications, which could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business
- -- Products" and "--Product Development."
Product Errors; Product Liability. Software products such as those offered
by the Company frequently contain undetected errors or failures when first
introduced or as new versions are released. Testing of the Company's products
is particularly challenging because it is difficult to simulate the wide
variety of computing environments in which the Company's customers may deploy
these products. Despite extensive testing, the Company from time to time has
discovered defects or errors in its products. There can be no assurance that
such defects, errors or difficulties will not cause delays in product
introductions and shipments, result in increased costs and diversion of
development resources, require design modifications or decrease market
acceptance or customer satisfaction with the Company's products. In addition,
there can be no assurance that, despite testing by the Company and by current
and potential customers, errors will not be found after commencement of
commercial shipments, resulting in loss of or delay in market acceptance,
which could have a material adverse effect upon the Company's business,
operating results and financial condition. The Company has included security
features in its products that are intended to protect the privacy and
integrity of customer data. Despite the existence of these security features,
the Company's software products may be vulnerable to break-ins and similar
disruptive problems. Addressing these evolving security issues may require
significant expenditures of capital and resources by the Company, which may
have a material adverse effect on the Company's business, operating results
and financial condition.
Although the Company has not experienced any material product liability
claims to date, the sale and support of software products and the performance
of related services by the Company entails the risk of such claims. The
Company's products are used by customers in connection with the preparation
and filing of tax returns and other regulatory reports. If any of the
Company's products contain errors that produce inaccurate results upon which
users rely, or cause users to misfile or fail to file required information,
the Company could be subject to liability claims from users which could, in
turn, materially adversely affect the Company's business, operating results
and financial condition. The Company's license agreements with its customers
typically contain provisions intended to limit the Company's exposure to such
claims, but such provisions may not be effective in limiting the Company's
exposure. There can be no assurance that the contractual limitations used by
the Company will be enforceable or will provide the Company with adequate
protection against product liability claims in certain jurisdictions. A
successful claim for product or service liability brought against the Company
could result in substantial cost to the Company and divert management's
attention from the Company's operation, which could have a material adverse
effect upon the Company's business, operating results and financial
condition.
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields need to accept four digit
12
<PAGE>
entries to distinguish 21st century dates from 20th century dates. As a
result, computer systems and/or software used by many companies may need to
be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. The Company believes that the purchasing
patterns of customers and potential customers may be affected by Year 2000
issues. Many companies are expending significant resources to correct or
patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software
products such as those offered by the Company. Many potential customers may
also choose to defer purchasing Year 2000 compliant products until they
believe it is absolutely necessary, thus resulting in potentially stalled
market sales within the industry. Conversely, Year 2000 issues may cause
other companies to accelerate purchases, thereby causing an increase in
short-term demand and a consequent decrease in long-term demand for software
products. Additionally, Year 2000 issues could cause a significant number of
companies, including current Company customers, to reevaluate their current
financial accounting system needs, and, as a result consider switching to
other systems or suppliers. Any of the foregoing could result in a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Dependence on Key Personnel. The Company's success depends to a
significant extent upon a limited number of members of senior management and
other key employees, including Scott Scherr, the Company's Chairman of the
Board, President and Chief Executive Officer, and Alan Goldstein, M.D., the
Company's Executive Vice President and Chief Technology Officer and a
director of the Company. The Company does not have employment contracts with
any of its key personnel other than certain non-competition and
confidentiality agreements entered into with Mr. Scherr and Dr. Goldstein.
The Company maintains key man life insurance for Scott Scherr in the amount
of $2.0 million. The loss of the service of one or more key managers or other
employees could have a material adverse effect upon the Company's business,
operating results and financial condition. See "Management."
Control by Principal Stockholders, Officers and Directors. Upon completion
of the Offering, the present directors, executive officers and principal
stockholders of the Company will beneficially own in the aggregate
approximately 35.2% of the outstanding Common Stock (34.4% if the
Underwriters' over-allotment option is exercised in full). These directors,
officers and stockholders will be able to substantially influence the
business and affairs of the Company, including the election of individuals to
the Company's Board of Directors, and to otherwise affect the outcome of
certain actions that require stockholder approval, including the adoption of
amendments to the Company's Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation"), and certain mergers, sales of assets
and other business acquisitions or dispositions. This concentration of
ownership may have the effect of delaying or preventing a change in control
of the Company, which could limit the price that investors might be willing
to pay in the future for shares of the Common Stock. See "Management" and
"Principal Stockholders."
Dilution. Investors participating in the Offering will incur immediate and
substantial dilution of pro forma net tangible book value per share of $10.35
from the assumed initial public offering price. To the extent outstanding
options to purchase the Company's Common Stock are exercised, there will be
further dilution to investors participating in this Offering. There can be no
assurance that the Company will not require additional funds to support its
working capital requirements or for other purposes, in which case the Company
may seek to raise such additional funds through public or private equity
financing or from other sources. There can be no assurance that such
additional financing will be available or that, if available, such financing
will be obtained on terms favorable to the Company and would not result in
additional dilution of the Company's stockholders. See "Dilution."
Broad Discretion in Allocation of Net Proceeds. The principal purposes of
the Offering are to increase the Company's equity capital, to create a public
market for the Common Stock, to increase the visibility of the Company in the
marketplace and to facilitate future access by the Company to public equity
markets. The Company expects to use the net proceeds from the Offering for
general corporate purposes, including the funding of working capital, and
repayment of certain of the Company's indebtedness. Although the Company has
no plans, commitments or agreements with respect to any
13
<PAGE>
material acquisitions as of the date of this Prospectus, the Company may seek
acquisitions of businesses, products or technologies that are complementary
to those of the Company, and a portion of the net proceeds may be used for
such acquisitions. Accordingly, the Company will have significant flexibility
in applying the net proceeds of the Offering. See "Use of Proceeds."
No Prior Public Market; Possible Volatility of Stock Price. Prior to the
Offering, there has been no public market for the Common Stock and there is
no assurance that an active trading market will develop or be sustained after
the Offering. The initial public offering price will be determined through
negotiations among the Company and the representatives of the Underwriters
and may not be indicative of the market price of the Common Stock after the
Offering. The trading price of the Common Stock is likely to be highly
volatile and may be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products or new contracts by the Company or
its competitors, developments with respect to patents, copyrights or
proprietary rights, conditions and trends in the software industry, changes
in financial estimates by securities analysts, general market conditions and
other factors. In addition, the public equity markets have from time to time
experienced significant price and volume fluctuations that have particularly
affected the market prices for the stock of technology companies. These broad
market fluctuations, as well as shortfalls in sales or earnings as compared
with securities analysts' expectations, changes in such analysts'
recommendations or projections and general economic and market conditions,
may materially and adversely affect the market price of the Common Stock. See
"Underwriting."
Shares Eligible for Future Sale. Sales of significant amounts of Common
Stock in the public market after the Offering or the perception that such
sales will occur could adversely affect the market price of the Common Stock
or the future ability of the Company to raise capital through an offering of
its equity securities. 15,870,709 shares of Common Stock will be
outstanding upon completion of the Offering. The 3,250,000 shares offered
hereby will be eligible for immediate sale in the public market without
restriction unless the shares are purchased by "affiliates" of the Company
within the meaning of Rule 144 of the Securities Act of 1933, as amended (the
"Securities Act").
The remaining 12,620,709 shares of Common Stock held by existing
stockholders upon completion of the Offering will be "restricted securities" as
that term is defined in Rule 144 under the Securities Act. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under the Securities Act. Directors,
officers and certain stockholders of the Company holding an aggregate of
11,900,025 shares of Common Stock have agreed that they will not sell, directly
or indirectly, any Common Stock without the prior consent of Donaldson, Lufkin
& Jenrette Securities Corporation for a period of either 90 or 180 days from
the date of this Prospectus (the "Lock-up Agreements"). Subject to these
Lock-up Agreements and the provisions of Rule 144, additional shares will be
available for sale in the public market (subject in the case of shares held by
affiliates in compliance with certain volume restrictions) as follows: (i)
449,074 shares will be available for immediate sale in the public market on
the date of this Prospectus, (ii) 146,428 shares will be eligible for sale on
June 17, 1998, (iii) 186,910 shares will be eligible for sale 90 days after
the date of this Prospectus, (iv) 10,605,236 shares will be eligible for sale
180 days after the date of this Prospectus and (v) 1,233,061 shares will be
eligible for sale under Rule 144 upon the expiration of the applicable
one-year holding periods.
After the date of this Prospectus, the Company intends to file a
Registration Statement on Form S-8 under the Securities Act to register all
shares of Common Stock issuable under the Company's Nonqualified Stock Option
Plan. Such registration statement will become effective immediately upon
filing, and shares covered by that Registration Statement will thereupon be
eligible for sale in the public markets, subject to Rule 144 limitations
applicable to affiliates. The Company is unable to predict the effect that
sales made under Rule 144, or otherwise, may have on the then prevailing
market price of the Common Stock. The holders of approximately 8,227,807
shares of Common Stock are entitled to certain incidental and demand
registration rights with respect to such shares. By exercising their
registration rights, such holders could cause a large number of shares to be
registered and sold in the public market. Sales pursuant to Rule 144 or other
exemptions from registration, or pursuant to registration rights, may have an
adverse effect on the market price for the Common Stock and could impair the
Company's ability to raise capital through offerings of its equity
securities. See "Shares Eligible for Future Sale."
14
<PAGE>
Anti-Takeover Effect of Certain Certificate of Incorporation, By-Law and
Statutory Provisions; Possible Issuance of Preferred Stock. The Company's
Certificate of Incorporation and Amended and Restated By-Laws (the
"By-Laws"), as well as Delaware corporate law, contain certain provisions
that could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control
of the Company. The Company has adopted certain amendments to its Certificate
of Incorporation and By-Laws, to be effective immediately prior to the
consummation of the Offering, which will, among other things, (i) divide the
Company's Board of Directors into three classes, which will serve for
staggered three-year terms, (ii) provide that a special meeting of the
stockholders may only be called by the Chairman of the Board or the President
or by the Secretary at the request in writing of a majority of the members of
the Board of Directors and (iii) eliminate the ability of the stockholders to
take any action without a meeting. The By-Laws also establish certain advance
notice procedures for nomination of candidates for election as directors and
for stockholder proposals to be considered at stockholders' meetings. These
provisions could limit the price that certain investors might be willing to
pay in the future for shares of the Company's Common Stock.
In addition, the Company intends to enter into a Rights Agreement (the
"Rights Agreement") promptly following the consummation of the Offering
pursuant to which a preferred stock purchase right (collectively, the
"Rights") will be attached to each share of Common Stock and will become
exercisable under certain specified circumstances involving the acquisition
of or tender offer for 15% or more of the issued and outstanding shares of
Common Stock. The issuance of the Rights will have certain anti-takeover
effects by causing substantial dilution to a person or group that attempts to
acquire the Company on terms not approved by the Company's Board of
Directors. See "Description of Capital Stock -- Preferred Stock" and
"--Anti-Takeover Effects of Certain Provisions of Delaware Law and the
Certificate of Incorporation and By-Laws."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,250,000 shares of
Common Stock offered by the Company pursuant to the Offering are estimated to
be $35,385,000 ($39,101,280 if the Underwriters' over-allotment option is
exercised in full), at an assumed offering price of $12.00 per share after
deducting the estimated underwriting discounts and commissions and Offering
expenses payable by the Company. The principal purposes of the Offering are
to increase the Company's equity capital, to create a public market for the
Common Stock, to increase the visibility of the Company in the marketplace
and to facilitate future access by the Company to public equity markets. The
Company expects to use the net proceeds from the Offering for the repayment
of certain indebtedness in the approximate amount of $3.6 million and general
corporate purposes, including working capital. The Company may also use a
portion of the net proceeds to fund acquisitions of complementary businesses,
products or technologies. Although the Company may periodically review
potential acquisition opportunities, there are no current agreements with
respect to any such transactions. Pending such uses, the Company intends to
invest the net proceeds from the Offering in short-term, investment-grade,
interest-bearing securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Liquidity and Capital
Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company currently intends to retain future earnings to fund the
development and growth of its business. The payment of dividends in the
future, if any, will be at the discretion of the Board of Directors.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 (i) on a pro forma basis to give effect to (a) the conversion
of all outstanding shares of Series A Convertible Preferred Stock and Series
B Convertible Preferred Stock into shares of Common Stock, (b) the conversion
of all outstanding shares of Class A Common Stock, Class B Common Stock and
Class C Common Stock into shares of Common Stock, (c) the amendment to the
Company's Certificate of Incorporation adopted by the Company's Board of
Directors and stockholders increasing the number of authorized shares of
Preferred Stock and Common Stock of the Company and (d) a 10.119-for-1 split
of the Company's Common Stock to be effected immediately prior to the
consummation of the Offering, and (ii) pro forma as adjusted to give effect
to the sale of 3,250,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $12.00 per share and after deducting
estimated underwriting discounts and commissions and Offering expenses
payable by the Company. This information should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Long-term borrowings................................................... $ 574 $ 574
----------- -------------
Stockholders' equity:
Preferred Stock, $0.01 par value, 2,500,000 shares authorized, no
shares outstanding .................................................. -- --
Common Stock, $0.01 par value, 50,000,000 shares authorized,
12,620,709 pro forma and 15,870,709 pro forma as adjusted shares
issued and outstanding (1) .......................................... 126 159
Additional paid-in capital ............................................ 35,643 70,995
Accumulated deficit ................................................... (44,457) (44,457)
----------- -------------
Total stockholders' equity (deficit) ................................. (8,688) 26,697
----------- -------------
Total capitalization ................................................ $ (8,114) $ 27,271
=========== =============
</TABLE>
(1) Excludes (i) 1,846,130 shares subject to options outstanding as of the
date hereof and (ii) 3,213,370 additional shares reserved for issuance
pursuant to options available for grant under the Company's
Nonqualified Stock Option Plan. See "Management--Stock Option Plan."
17
<PAGE>
DILUTION
As of March 31, 1998, the pro forma net tangible book value (deficit) of
the Company was ($9,566,000) or $(0.76) per share of Common Stock. Pro forma
net tangible book value per share is equal to the Company's pro forma total
tangible assets less pro forma total liabilities, divided by the total number
of shares of Common Stock outstanding. After giving effect to the sale by the
Company of the 3,250,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $12.00 per share, and after deducting the
underwriting discounts and commissions and estimated offering expenses
payable by the Company, the pro forma net tangible book value of the Company
as of March 31, 1998 would have been $26.3 million, or $1.65 per share of
Common Stock. This represents an immediate increase in pro forma net tangible
book value of $2.41 per share to existing stockholders and an immediate
dilution of $10.35 per share to new stockholders. The following table
illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share ............... $12.00
Pro forma net tangible deficit per share before the Offering $(0.76)
Increase per share attributable to new investors ............ 2.41
Pro forma net tangible book value per share after the Offering 1.65
--------- --------
Dilution per share to new investors ........................... $10.35
========= ========
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
the difference between the existing stockholders and new stockholders with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid to the Company and the average price paid per
share by existing stockholders and by new stockholders:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
----------------------- ------------------------ PER SHARE
NUMBER PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C>
Existing stockholders 12,620,709 79.5% $32,795,853 45.7% $ 2.60
New stockholders ...... 3,250,000 20.5 39,000,000 54.3 12.00
------------ --------- ------------- --------- ---------------
Total................. 15,870,709 100.0% $71,795,853 100.0%
============ ========= ============= =========
</TABLE>
The foregoing tables and calculations assume no exercise of outstanding
options. There were 1,846,130 shares subject to options outstanding as of the
date hereof and 3,213,370 additional shares reserved for issuance pursuant to
options available for grant under the Company's Nonqualified Stock Option
Plan. See "Management--Stock Option Plan."
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to and should be read in conjunction with "Management's Discussion
and Analysis of Financial Conditions and Results of Operations" and the
Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus. The Statement of Operations Data presented
below for each of the years in the three year period ended December 31, 1997
and the Balance Sheet Data as of December 31, 1996 and 1997 have been derived
from the Company's Financial Statements included elsewhere in this Prospectus
which have been audited by Arthur Andersen LLP whose report with respect
thereto appears elsewhere in this Prospectus. The Balance Sheet Data as of
December 31, 1995 has been derived from audited financial statements not
included herein. The Balance Sheet Data as of December 31, 1993 and 1994 and
as of March 31, 1998 and the Statement of Operations Data for the years ended
December 31, 1993 and 1994 and for each of the three months ended March 31,
1997 and 1998 have been derived from the unaudited financial statements of
the Company. In the opinion of management, the unaudited financial statements
include all adjustments (consisting only of normal and recurring adjustments)
necessary for a fair presentation of its financial position and the results
of operations for such periods. The selected financial data for the three
months ended March 31, 1998 are not necessarily indicative of the results to
be expected for the year ending December 31, 1998 or any other future period.
The financial data reflects the results of the Company and the Acquired
Resellers (The Ultimate Software Group of the Carolinas, Inc., The Ultimate
Software Group of Virginia, Inc., Ultimate Investors Group, Inc., Ultimate
Software Group of New York/New England G.P. and The Ultimate Software Group
of Northern California, Inc.), as if the Company and the Acquired Resellers
had operated as one entity during the periods presented. These acquisitions
were accounted for under the poolings-of-interest method of accounting. See
the Consolidated Financial Statements and the related Notes thereto included
elsewhere in the Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,(1)
----------------------------------------------------------
1993 1994 1995 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License .................... $ 537 $ 796 $ 1,929 $ 4,273 $ 7,232
Service .................... 303 325 1,344 4,253 9,081
Other ...................... 296 1,051 454 786 1,279
--------- ---------- ---------- ----------- -----------
Total revenues ............ 1,136 2,172 3,727 9,312 17,592
--------- ---------- ---------- ----------- -----------
Cost of revenues:
License .................... -- -- -- -- 195
Service .................... 103 299 1,794 5,388 8,539
Other ...................... 7 13 40 458 835
--------- ---------- ---------- ----------- -----------
Total cost of revenues ... 110 312 1,834 5,846 9,569
--------- ---------- ---------- ----------- -----------
Operating expenses:
Sales and marketing ........ 257 798 2,645 10,451 13,656
Research and development ... 629 914 2,591 3,360 4,837
General and administrative . 506 1,683 1,268 3,007 4,148
Amortization of
acquired intangibles ...... -- -- 39 6,932 1,442
--------- ---------- ---------- ----------- -----------
Total operating expenses .. 1,392 3,395 6,543 23,750 24,083
--------- ---------- ---------- ----------- -----------
Operating loss ............ (366) (1,535) (4,650) (20,284) (16,060)
Compensation related
to modification of escrow
agreement (3)............... -- -- -- -- --
Interest expense ............ (46) (33) (94) (179) (206)
Interest and other income .. -- 3 13 77 250
--------- ---------- ---------- ----------- -----------
Net loss .................. $ (412) $(1,565) $(4,731) $(20,386) $(16,016)
========= ========== ========== =========== ===========
Net loss per share--basic
and
diluted (2)................. $(0.06) $ (0.24) $ (0.71) $ (2.30) $ (1.37)
========= ========== ========== =========== ===========
Weighted average number of
shares outstanding--basic
and diluted (2)............. 6,660 6,660 6,660 8,854 11,710
========= ========== ========== =========== ===========
AS OF DECEMBER 31,
----------------------------------------------------------
1993 1994 1995 1996 1997
BALANCE SHEET DATA:
Cash and cash equivalents .. $ 244 $ 208 $ 421 $ 1,420 $ 3,270
Working capital (deficit) . 628 562 (1,341) (4,231) (6,220)
Total assets ............... 754 1,507 2,736 7,990 12,439
Long-term borrowings ....... 236 174 324 217 54
Stockholders' equity
(deficit) ................. 474 564 (924) (2,442) (5,508)
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31(1)
-------------------------
1997 1998
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License .................... $ 818 $ 3,123
Service .................... 1,958 4,075
Other ...................... 254 373
---------- -------------
Total revenues ............ 3,030 7,571
---------- -------------
Cost of revenues:
License .................... -- 204
Service .................... 1,961 3,444
Other ...................... 184 299
---------- -------------
Total cost of revenues ... 2,145 3,947
---------- -------------
Operating expenses:
Sales and marketing ........ 3,395 3,814
Research and development ... 883 1,419
General and administrative . 1,021 916
Amortization of
acquired intangibles ...... 284 191
---------- -------------
Total operating expenses .. 5,583 6,340
---------- -------------
Operating loss ............ (4,698) (2,716)
Compensation related
to modification of escrow
agreement (3)............... -- (4,184)
Interest expense ............ (58) (38)
Interest and other income .. 26 9
---------- -------------
Net loss .................. $(4,730) (6,929)
========== =============
Net loss per share--basic
and
diluted (2)................. $ (0.46) $ (0.55)
========== =============
Weighted average number of
shares outstanding--basic
and diluted (2)............. 10,330 12,621
========== =============
As of March 31, 1998
-------------------------
Pro Forma
Pro As
Forma(4) Adjusted(5)
---------- -------------
BALANCE SHEET DATA:
Cash and cash equivalents .. $ 658 $33,865
Working capital (deficit) . (9,483) 25,902
Total assets ............... 12,096 45,303
Long-term borrowings ....... 574 574
Stockholders' equity
(deficit) ................. (8,688) 26,697
</TABLE>
(1) Consolidated financial data gives retroactive effect to the
acquisitions of the Acquired Resellers, which was accounted for under
the poolings-of-interest method of accounting, as if the Company and
the Acquired Resellers had operated as one entity during the periods
presented. See the Consolidated Financial Statements and the related
Notes thereto included elsewhere in this Prospectus.
(2) See Note 2 of the Notes to Consolidated Financial Statements for
information regarding the computation of net loss per share.
(3) See Note 15 of the Notes to Consolidated Financial Statements.
(4) Pro forma to give effect to (i) the conversion of all outstanding
shares of Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock into shares of Common Stock and (ii) the conversion of
all outstanding shares of Class A Common Stock, Class B Common Stock
and Class C Common Stock into shares of Common Stock. See Note 15 of
the Notes to Consolidated Financial Statements.
(5) Pro forma as adjusted to give effect to the sale of 3,250,000 shares of
Common Stock offered hereby at an assumed initial public offering price
of $12.00 per share, after deducting estimated underwriting discounts
and commissions and Offering expenses payable by the Company and the
application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from
those contained in the forward-looking statements. Factors that may cause
such differences include, but are not limited to, those discussed below as
well as those discussed elsewhere in this Prospectus.
OVERVIEW
The Company designs, markets, implements and supports technologically
advanced, cross-industry HRMS/payroll software solutions. The Company's
solutions are marketed primarily to middle-market organizations, with 300 to
15,000 employees, but are scaleable to address the needs of much larger
organizations. The Company's core product, UltiPro for Windows, automates an
organization's HRMS/ payroll function and is an enabling tool in the
cost-efficient management of the employee life cycle, from inception of
employment through retirement. As part of its comprehensive HRMS/payroll
solution, the Company provides high quality implementation, training and
ongoing support services to its customers. The Company has customers in a
wide variety of industries, including: manufacturing, food services, retail,
healthcare, technology, finance, insurance, real estate, transportation,
communications, services and sports.
The Company was originally organized in August 1990 as The Ultimate
Software Group, Ltd., a Florida limited partnership (the "Partnership"). The
Company was incorporated in April 1996, at the direction of the Partnership,
for the purpose of acquiring and operating the existing business of the
Partnership. The Company began as a reseller of private label PC-based
payroll software products targeted to organizations with under 200 employees.
In early 1992, the Company began to develop a new product that would offer
greater flexibility, more features, more applications and the ability to
handle the needs of larger organizations. In July 1993, the Company launched
its first proprietary product, ULTIPRO for LAN, a DOS-based software solution
for local area network personal computers. In 1996, in anticipation of the
general market shift to Windows and client/server applications, the Company
began developing a client/server HRMS/payroll software solution. In June
1997, the Company launched UltiPro for Windows, its 32-bit, object-oriented
HRMS/payroll solution for middle-market organizations. As a result, in 1996
and 1997, significant investments were made in research and development,
sales and marketing and professional services to develop, sell and support
the Company's client/server solution. Since the release of UltiPro for
Windows, the principal source of the Company's license revenues has shifted
from its DOS-based product to its client/server product. UltiPro for Windows
has higher license fees, service fees and gross margins than the Company's
DOS-based product. While the Company continues to support its DOS-based
product, it no longer actively markets this product.
Prior to 1995, the Company sold its products solely through a network of
third-party resellers ("Resellers"). In exchange for certain fees, the
Resellers were granted exclusive rights to sell the Company's products in
certain geographic areas. In mid-1995, in order to gain greater control over
its distribution channels, the Company shifted its distribution strategy from
its network of Resellers to a direct sales force. As a result, in 1995, the
Company acquired the businesses of three Resellers and in April 1996,
acquired the businesses of nine additional Resellers. These acquisitions were
accounted for under the purchase method of accounting and resulted in the
Company recording approximately $8.8 million of goodwill. In February and
March 1998, the Company acquired the businesses of the Acquired Resellers,
which were the only remaining Resellers. These acquisitions were accounted
for under the poolings-of-interest method of accounting. In the years ended
December 31, 1996 and 1997 and the three months ended March 31, 1998, the
Acquired Resellers accounted for $2.7 million, or 28.9%, and $3.5 million, or
19.6%, and $1.6 million, or 21.5%, respectively, of the Company's total
revenues.
The Company's revenues are derived from two principal sources: software
licenses ("license revenues") and fees for maintenance, implementation,
training and consulting services (collectively, "service revenues"). License
revenues include (i) revenues from noncancellable software license agreements
entered into between the Company and its customers with respect to its
products and (ii) in 1995 and part of 1996, revenues from noncancellable
software license agreements entered into between the Company and its
Resellers. License revenues are generally recognized upon the delivery of the
related software product when all significant contractual obligations have
been satisfied. Until such delivery, the
20
<PAGE>
Company records amounts received when contracts are signed as customer
deposits. As of March 31, 1998, the Company had licensed its DOS-based product,
ULTIPRO for LAN, to approximately 750 organizations and its client/server
solution, UltiPro for Windows, to approximately 105 organizations.
Service revenues are recognized as services are performed and delivered.
Included in service revenues are maintenance fees for maintaining, supporting
and providing periodic updates, which are recognized ratably over the service
period, generally one year. Upon delivery of the software, amounts included
in the contract relating to unperformed service revenues are recorded as
deferred revenue. All of the Company's customers that purchased software
during 1996 and 1997 purchased maintenance and support contracts. During the
years ended December 31, 1996 and 1997, average annual renewal rates for
existing maintenance and support customers exceeded 95%. Maintenance and
support contracts are generally priced as a percentage of the initial license
fee for the underlying products.
The Company employs a multi-channel sales and marketing strategy utilizing
a direct sales organization, strategic marketing alliances, and a network of
national, regional and local implementation partners. Sales through direct
channels generally have higher gross margins than sales through indirect
channels, although these higher margins may be offset, in whole or in part,
by higher sales and marketing expenses.
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, the Company has evaluated the establishment of technological
feasibility of its products during the development phase. The time period
during which costs could be capitalized from the point of reaching
technological feasibility until the time of general product release is very
short, and, consequently, the amounts that could be capitalized are not
material to the Company's financial position or operating results.
RESULTS OF OPERATIONS
The following table sets forth the Statement of Operations Data of the
Company, expressed as a percentage of total revenues, as applicable, for the
periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-----------------------------------------------------
1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License ............................... 51.8% 45.9% 41.1% 27.0% 41.3%
Service ............................... 36.0 45.7 51.6 64.6 53.8
Other ................................. 12.2 8.4 7.3 8.4 4.9
---------- ---------- --------- ---------- --------
Total revenues ....................... 100.0 100.0 100.0 100.0 100.0
---------- ---------- --------- ---------- --------
Cost of revenues:
License ............................... -- -- 1.2 -- 2.7
Service ............................... 48.1 57.9 48.5 64.7 45.5
Other ................................. 1.1 4.9 4.7 6.1 4.0
---------- ---------- --------- ---------- --------
Total cost of revenues ............... 49.2 62.8 54.4 70.8 52.2
---------- ---------- --------- ---------- --------
Operating expenses:
Sales and marketing ................... 71.0 112.2 77.6 112.0 50.4
Research and development .............. 69.5 36.1 27.5 29.1 18.7
General and administrative ............ 34.1 32.3 23.6 33.7 12.1
Amortization of acquired intangibles . 1.0 74.4 8.2 9.4 2.5
---------- ---------- --------- ---------- --------
Total operating expenses ............. 175.6 255.0 136.9 184.2 83.7
---------- ---------- --------- ---------- --------
Operating loss ....................... (124.8) (217.8) (91.3) (155.0) (35.9)
Compensation related to modification of
escrow agreement...................... -- -- -- -- (55.2)
Interest expense ....................... (2.5) (1.9) (1.1) (1.9) (0.5)
Interest and other income .............. 0.4 0.8 1.4 0.8 0.1
---------- ---------- --------- ---------- --------
Net loss ............................. (126.9)% (218.9)% (91.0)% (156.1)% (91.5)%
========== ========== ========= ========== ========
</TABLE>
21
<PAGE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenues. Total revenues, consisting of license revenues, service revenues
and other revenues, increased 149.9% from $3.0 million for the three months
ended March 31, 1997 to $7.6 million for the three months ended March 31,
1998.
License revenues increased 282.0% from $0.8 million for the three months
ended March 31, 1997 to $3.1 million for the three months ended March 31,
1998. This increase was primarily attributable to the introduction and sale
of UltiPro for Windows, which has significantly higher license fees than
ULTIPRO for LAN. UltiPro for Windows accounted for 92.6% of license revenues
for the three months ended March 31, 1998.
Service revenues increased 108.1% from $2.0 million for the three months
ended March 31, 1997 to $4.1 million for the three months ended March 31,
1998. The increase in service revenues was primarily attributable to an
increase in services related to the implementation of UltiPro for Windows.
UltiPro for Windows has significantly higher service revenue per
implementation than ULTIPRO for LAN. In addition, maintenance revenues
increased as a result of an increase in the installed base of UltiPro for
Windows and, to a lesser extent, ULTIPRO for LAN customers.
Other revenues consist of revenues generated primarily from sales of
payroll-related forms. Other revenues increased 46.7% from $0.3 million for
the three months ended March 31, 1997 to $0.4 million for the three months
ended March 31, 1998. The increase in other revenues was primarily
attributable to an increase in the Company's installed base of customers.
Cost of revenues. The cost of revenues consists of cost of license
revenues, cost of service revenues and cost of other revenues. Cost of
license revenues consists of fees payable to a third party for software
products distributed by the Company. Cost of service revenues consists of
costs to provide consulting, implementation, maintenance, technical support
and training to the Company's customers and the cost of providing periodic
updates. Cost of other revenues consists of costs related to sales of
payroll-related forms.
Cost of license revenues increased from zero for the three months ended
March 31, 1997 to $0.2 million for the three months ended March 31, 1998.
This increase was primarily attributable to fees payable to a third party for
software products distributed by the Company, which commenced with the launch
of UltiPro for Windows.
Cost of service revenues increased by 75.6% from $2.0 million for the
three months ended March 31, 1997 to $3.4 million for the three months ended
March 31, 1998. This increase was primarily attributable to hiring of
additional implementation services personnel, as well as costs associated
with the utilization of third-party implementation partners. Cost of service
revenues decreased as a percentage of service revenues from 100.2% to 84.5%
for the three months ended March 31, 1997 and 1998, respectively. This
decrease was primarily due to an increase in service revenues.
Cost of other revenues increased by 62.2% from $0.2 million for the three
months ended March 31, 1997 to $0.3 million for the three months ended March
31, 1998. This increase was primarily attributable to an increase in the
Company's installed base of customers. Cost of other revenues increased as a
percentage of other revenues from 72.6% to 80.2% for the three months ended
March 31, 1997 and 1998, respectively. This increase was a result of
increased product costs.
Sales and marketing. Sales and marketing expenses consist primarily of
salaries, sales commissions, travel and promotional expenses, and facility
and communication costs for direct sales offices. Sales and marketing
expenses increased by 12.4% from $3.4 million for the three months ended
March 31, 1997 to $3.8 million for the three months ended March 31, 1998.
This increase was primarily attributable to higher costs associated with an
increase in sales and marketing personnel, including salary and commission
expenses, and increased marketing activities relating to the introduction of
UltiPro for Windows. Sales and marketing expenses as a percentage of total
revenues decreased from 112.0% to 50.4% for the three months ended March 31,
1997 and 1998, respectively. This decrease was primarily due to an increase
in total revenues.
22
<PAGE>
Research and development. Research and development expenses primarily
consist of software development personnel costs. Research and development
expenses increased by 60.7% from $0.9 million for the three months ended
March 31, 1997 to $1.4 million for the three months ended March 31, 1998.
This increase was primarily attributable to the hiring of additional
programmers and engineers for the development and enhancement of UltiPro for
Windows and for the development of new HRMS/payroll related modules. Research
and development expenses as a percentage of total revenues decreased from
29.1% to 18.7% for the three months ended March 31, 1997 and 1998,
respectively. This decrease was primarily due to an increase in total
revenues.
General and administrative. General and administrative expenses consist
primarily of salaries of executive, administrative and financial personnel,
as well as provisions for doubtful accounts and outside professional fees.
General and administrative expenses decreased by 10.3% from $1.0 million for
the three months ended March 31, 1997 to $0.9 million for the three months
ended March 31, 1998. This decrease was primarily attributable to a reduction
in overhead. General and administrative expenses as a percentage of total
revenues decreased from 33.7% to 12.1% for the three months ended March 31,
1997 and 1998, respectively. This decrease was due to an increase in total
revenues.
Amortization of acquired intangibles. Amortization of acquired intangibles
consists of goodwill amortization associated with the acquisition of nine
Resellers in April 1996. Goodwill amortization decreased 32.6% from $0.3
million for the three months ended March 31, 1997 to $0.2 million for the
three months ended March 31, 1998.
Compensation related to modification of escrow agreement. Compensation
expense is related to the modification of an escrow agreement, pursuant to
which certain shares of the Company's Class B Common Stock were placed in
escrow (the "Class B Escrow Agreement"). In March 1998, the Class B Escrow
Agreement was modified to provide for the release of all of the shares of
Class B Common Stock held in escrow upon the execution of a firm underwriting
agreement for the Company's capital stock on or before July 1, 1998.
Accordingly, $4.2 million of compensation expense was recorded as of the date
of modification, representing the number of shares of stock released to
directors, officers and employees of the Company multiplied by the difference
between the fair market value of the Class B Common Stock on the date of
modification and the price paid by the holders of the shares.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues. Total revenues increased 88.9% from $9.3 million for the year
ended December 31, 1996 to $17.6 million for the year ended December 31,
1997.
License revenues increased 69.2% from $4.3 million for the year ended
December 31, 1996 to $7.2 million for the year ended December 31, 1997. This
increase was primarily attributable to the introduction and sale of UltiPro
for Windows, which has significantly higher license fees than ULTIPRO for
LAN. The increase in UltiPro for Windows license revenues was offset, in
part, by a decrease in license revenues attributable to ULTIPRO for LAN
resulting from a decrease in the sales and marketing of the Company's
DOS-based product. UltiPro for Windows accounted for 58.6% of license
revenues for the year ended December 31, 1997.
Service revenues increased 113.5% from $4.3 million for the year ended
December 31, 1996 to $9.1 million for the year ended December 31, 1997. The
increase in service revenues was primarily attributable to services related
to the implementation of UltiPro for Windows and increased implementations of
the Company's ULTIPRO for LAN product licensed in the fiscal year ended
December 31, 1996. UltiPro for Windows has significantly higher service
revenue per implementation than ULTIPRO for LAN. In addition, maintenance
revenues increased as a result of an increase in the installed base of
UltiPro for Windows and ULTIPRO for LAN customers.
Other revenues increased 62.8% from $0.8 million for the year ended
December 31, 1996 to $1.3 million for the year ended December 31, 1997. The
increase in other revenues was primarily attributable to an increase in the
Company's installed base of customers.
23
<PAGE>
Cost of revenues. Cost of license revenues increased from zero for the
year ended December 31, 1996 to $0.2 million for the year ended December 31,
1997. The increase was primarily attributable to fees payable to a third
party for software products distributed by the Company, which commenced with
the launch of UltiPro for Windows.
Cost of service revenues increased by 58.5% from $5.4 million for the year
ended December 31, 1996 to $8.5 million for the year ended December 31, 1997.
This increase was primarily attributable to hiring of additional
implementation services personnel, as well as costs associated with the
utilization of third-party implementation partners. Cost of service revenues
decreased as a percentage of service revenues from 126.7% to 94.0% for the
years ended December 31, 1996 and 1997, respectively. This decrease was
primarily due to an increase in service revenues.
Cost of other revenues increased by 82.3% from $0.5 million for the year
ended December 31, 1996 to $0.8 million for the year ended December 31, 1997.
This increase was primarily attributable to an increase in the Company's
installed base of customers. Cost of other revenues increased as a percentage
of other revenues from 58.2% to 65.2% for the years ended December 31, 1996
and December 31, 1997. This increase was a result of increased product costs.
Sales and marketing. Sales and marketing expenses increased by 30.7% from
$10.5 million for the year ended December 31, 1996 to $13.7 million for the
year ended December 31, 1997. This increase was primarily attributable to
higher costs associated with an increase in sales and marketing personnel,
including salary and commission expenses, and increased marketing activities
relating to the introduction of UltiPro for Windows. Sales and marketing
expenses as a percentage of total revenues decreased from 112.2% to 77.6% for
the years ended December 31, 1996 and 1997, respectively. This decrease was
primarily due to an increase in total revenues.
Research and development. Research and development expenses increased by
44.0% from $3.4 million for the year ended December 31, 1996 to $4.8 million
for the year ended December 31, 1997. This increase was primarily
attributable to the hiring of additional programmers and engineers for the
development and enhancement of UltiPro for Windows and for the development of
new HRMS/payroll related modules. Research and development expenses as a
percentage of total revenues decreased from 36.1% to 27.5% for the years
ended December 31, 1996 and 1997, respectively. This decrease was primarily
due to an increase in total revenues.
General and administrative. General and administrative expenses increased
by 38.0% from $3.0 million for the year ended December 31, 1996 to $4.1
million for the year ended December 31, 1997. This increase was due to an
increase in the provision for doubtful accounts directly related to the
increase in the Company's customer base, an increase in personnel and
overhead necessary to manage and support the growth of the Company and an
increase in professional fees due to the increased use of professional
service providers. General and administrative expenses as a percentage of
total revenues decreased from 32.3% to 23.6%, for the years ended December
31, 1996 and 1997, respectively. This decrease was due to an increase in
total revenues.
Amortization of acquired intangibles. Goodwill amortization decreased
79.2% from $6.9 million for the year ended December 31, 1996 to $1.4 million
for the year ended December 31, 1997. Such decrease was attributable to the
Company's recording of additional amortization of $0.3 million in 1997
compared to additional amortization of $5.1 million as a result of the
operating results and projected future cash flows of the nine Resellers
acquired in 1996 indicating an impairment of the related intangibles
acquired. Such change was made in accordance with the provisions of SFAS 121,
Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed Of. The Company had amortized $8.4 million of goodwill as of
December 31, 1997. See "--Comparison of Fiscal Years Ended December 31, 1996
and 1995--Amortization of acquired intangibles." Goodwill in the amount of
$0.6 million remained on the balance sheet as of December 31, 1997, and will
be amortized over the subsequent ten months.
Provision for income taxes (benefit). No provision or benefit for federal,
state or foreign income taxes was made for the years ended December 31, 1996
or December 31, 1997 due to the operating losses incurred in the respective
periods. The Company has reported only tax losses to date and consequently
24
<PAGE>
has approximately $21.5 million of net operating loss carryforwards, which
expire at various times through the year 2012, available to offset future
taxable income. The timing of attaining profitability may result in the
expiration of net operating loss carryforwards before utilization.
Additionally, utilization of such net operating losses may be limited as a
result of cumulative ownership changes in the Company's equity instruments.
The Company's deferred tax assets at December 31, 1997 were $10.0 million,
consisting primarily of net operating loss carryforwards. The Company's
benefit of deferred tax assets has been fully reserved as of December 31,
1997 as the realization of deferred taxes is dependent on future events and
earnings, if any, the timing and extent of which are uncertain.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues. Total revenues increased 149.9% from $3.7 million for the year
ended December 31, 1995 to $9.3 million for the year ended December 31, 1996.
License revenues increased 121.5% from $1.9 million for the year ended
December 31, 1995 to $4.3 million for the year ended December 31, 1996. This
increase was primarily due to an increase in demand for and sales of the
Company's ULTIPRO for LAN product.
Service revenues increased 216.4% from $1.3 million for the year ended
December 31, 1995 to $4.3 million for the year ended December 31, 1996. This
increase was primarily attributable to services related to increased
implementations of the Company's ULTIPRO for LAN product and an increase in
the Company's installed base of customers.
Other revenues consist of revenues generated from sales of payroll-related
forms and fees received in connection with the grant by the Company of
exclusive rights to sell the Company's products in certain geographic areas.
Other revenues increased by 73.3% from $0.5 million for the year ended
December 31, 1995 to $0.8 million for the year ended December 31, 1996. The
increase in other revenues was primarily attributable to an increase in the
Company's installed base of customers.
Cost of revenues. There was no cost of license revenues for the years
ended December 31, 1995 and December 31, 1996.
Cost of service revenues increased by 200.3% from $1.8 million for the
year ended December 31, 1995 to $5.4 million for the year ended December 31,
1996. This increase was primarily attributable to hiring of additional
implementation services personnel. Cost of service revenues decreased as a
percentage of service revenues from 133.5% to 126.7% on a pro forma basis for
the years ended December 31, 1995 and 1996. This decrease was due to an
increase in service revenues.
Cost of other revenues increased from $40,000 for the year ended December
31, 1995 to $0.5 million for the year ended December 31, 1996. Cost of other
revenues increased as a percentage of other revenues from 8.7% to 58.2%. This
increase was due to an increase in product costs.
Sales and marketing. Sales and marketing expenses increased by 295.1%
from $2.6 million for the year ended December 31, 1995 to $10.5 million for
the year ended December 31, 1996. This increase was primarily attributable to
an increase in the Company's direct sales force, an increase in the number of
sales offices in 1996, an increase in commission expenses and increased
marketing activities. Sales and marketing expenses as a percentage of total
revenues increased 71.0% to 112.2% for the years ended December 31, 1995 and
1996, respectively. This increase was primarily due to a greater increase
sales and marketing expenses in relation to the increase in total revenues.
Research and development. Research and development expenses increased by
29.7% from $2.6 million for the year ended December 31, 1995 to $3.4 million
for the year ended December 31, 1996. This increase was primarily
attributable to the hiring of additional programmers and engineers for the
development of UltiPro for Windows and for continued enhancements to ULTIPRO
for LAN. Research and development expenses as a percentage of total revenues
decreased from 69.5% to 36.1% for the years ended December 31, 1995 and 1996,
respectively. This decrease was due to an increase in total revenues.
General and administrative. General and administrative expenses increased
by 137.0% from $1.3 million for the year ended December 31, 1995 to $3.0
million for the year ended December 31, 1996.
25
<PAGE>
This increase was primarily due to an increase in the provision for doubtful
accounts directly related to the increase in the customer base, an increase
in personnel and overhead necessary to manage and support the growth of the
Company, and an increase in professional fees due to the increased use of
professional service providers. General and administrative expenses as a
percentage of total revenues decreased from 34.0% to 32.3% for the years
ended December 31, 1995 and 1996, respectively. This decrease was due to an
increase in total revenues.
Amortization of acquired intangibles. Goodwill amortization increased from
$39,000 for the year ended December 31, 1995 to $6.9 million for the year
ended December 31, 1996. The Company incurred goodwill as a result of the
acquisition of nine Resellers in April 1996. In accordance with the
provisions of SFAS 121, Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed Of, as of December 31, 1996, the
Company determined based on the operating results, as well as projected
future cash flows, of the nine Resellers that an impairment of acquired
intangibles had occurred. At the time of the acquisitions of the nine
Resellers, the Company anticipated that the migration of the acquired
DOS-based customer base to a PC-based Windows product, which was then under
development, would provide the Company with additional revenues over the next
twelve to eighteen months. In addition, the Company believed that the sales
personnel it was acquiring would generate additional revenues for the
Company. However, after the acquisition of the nine Resellers, the Company
abandoned the development of the PC-based Windows product in the fall of 1996
because of certain technological limitations, and began development of a
client/server product. Consequently, the Company revised its revenue
expectations from the acquisition of the nine Resellers' installed base of
customers. In addition, due to the complexity associated with selling a more
sophisticated and higher priced client/server product, the Company revised
its revenue expectations from the acquired sales personnel. Accordingly, the
Company charged $5.1 million to amortization to reduce acquired intangibles
to their estimated realizable value.
Provision for income taxes (benefit). No provision or benefit for federal,
state or foreign income taxes was made for the year ended December 31, 1996
due to operating losses incurred in the periods. As of December 31, 1996, the
Company had reported only tax losses to date and consequently had
approximately $8.6 million of net operating loss carryforwards, which expire
at various times through the year 2011, available to offset future taxable
income. The timing of attaining profitability may result in the expiration of
net operating loss carryforwards before utilization. Additionally,
utilization of such net operating losses may be limited as a result of
cumulative ownership changes in the Company's equity instruments. The
Company's deferred tax assets at December 31, 1996 were $4.5 million,
consisting primarily of net operating loss carryforwards. The Company's
benefit of deferred tax assets has been fully reserved as of December 31,
1996 as the realization of deferred taxes is dependent on future events and
earnings, if any, the timing and extent of which are uncertain. No provision
or benefit for federal, state or foreign income taxes was made for the year
ended December 31, 1995 and for the period ended April 1996 because the
Company operated as a partnership during those periods and, accordingly, the
partners were taxed individually on their share of partnership earnings.
26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly results of
operations for each of the quarters in the years ended December 31, 1996 and
1997 and for the three months ended March 31, 1998. In management's opinion,
this unaudited information has been prepared on the same basis as the audited
consolidated financial statements and includes all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of
the information for the quarters presented, when read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto, included
elsewhere in this Prospectus. The Company believes that quarter-to-quarter
comparisons of its financial results are not necessarily meaningful and
should not be relied upon as an indication of future performance.
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
License ........... $ 778 $ 682 $ 933 $ 1,880
Service ........... 549 694 1,191 1,819
Other ............. 119 219 183 265
---------- ---------- ----------- ----------
Total revenues .. 1,446 1,595 2,307 3,964
---------- ---------- ----------- ----------
Cost of revenues:
License ........... -- -- -- --
Service ........... 626 1,286 1,653 1,823
Other ............. 50 105 93 210
---------- ---------- ----------- ----------
Total cost of
revenues ........ 676 1,391 1,746 2,033
---------- ---------- ----------- ----------
Operating expenses:
Sales and
marketing ......... 884 2,582 3,278 3,707
Research and
development ...... 603 846 954 957
General and
administrative .. 306 878 865 958
Amortization of
acquired
intangibles ...... 21 470 695 5,746
---------- ---------- ----------- ----------
Total operating
expenses ....... 1,814 4,776 5,792 11,368
---------- ---------- ----------- ----------
Operating loss .. (1,044) (4,572) (5,231) (9,437)
Compensation
related to
modification of
escrow agreement . -- -- -- --
Interest expense .. (41) (35) (22) (81)
Interest and other
income ............ 2 27 19 29
---------- ---------- ----------- ----------
Net loss ......... $(1,083) $(4,580) $(5,234) $(9,489)
========== ========== =========== ==========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1997 1998
<S> <C> <C> <C> <C> <C>
Revenues:
License ........... $ 818 $ 792 $ 709 $4,913 $ 3,123
Service ........... 1,958 1,652 1,900 3,571 4,075
Other ............. 254 267 290 468 373
---------- ---------- ----------- ---------- ----------
Total revenues .. 3,030 2,711 2,899 8,952 7,571
---------- ---------- ----------- ---------- ----------
Cost of revenues:
License ........... -- -- -- 195 204
Service ........... 1,961 1,877 2,139 2,562 3,444
Other ............. 184 152 174 325 299
---------- ---------- ----------- ---------- ----------
Total cost of
revenues ........ 2,145 2,029 2,313 3,082 3,947
---------- ---------- ----------- ---------- ----------
Operating expenses:
Sales and
marketing ......... 3,395 3,413 3,345 3,503 3,814
Research and
development ...... 883 1,152 1,342 1,460 1,419
General and
administrative .. 1,021 858 818 1,451 916
Amortization of
acquired
intangibles ...... 284 437 437 284 191
---------- ---------- ----------- ---------- ----------
Total operating
expenses ....... 5,583 5,860 5,942 6,698 6,340
---------- ---------- ----------- ---------- ----------
Operating loss .. (4,698) (5,178) (5,356) (828) (2,716)
Compensation
related to
modification of
escrow agreement . -- -- -- -- (4,184)
Interest expense .. (58) (64) (50) (34) (38)
Interest and other
income ............ 26 38 86 100 9
---------- ---------- ----------- ---------- ----------
Net loss ......... $(4,730) $(5,204) $(5,320) $ (762) $(6,929)
========== ========== =========== ========== ==========
</TABLE>
27
<PAGE>
The following table sets forth unaudited quarterly results of operations
as a percentage of total revenues, as applicable, for each of the quarters in
the years ended December 31, 1996 and 1997 and for the three months ended
March 31, 1998.
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
<S> <C> <C> <C> <C>
Revenues:
License ........... 53.8% 42.8% 40.5% 47.4%
Service ........... 38.0 43.5 51.6 45.9
Other ............. 8.2 13.7 7.9 6.7
---------- ---------- ----------- ----------
Total revenues .. 100.0 100.0 100.0 100.0
---------- ---------- ----------- ----------
Cost of revenues:
License ........... -- -- -- --
Service ........... 43.3 80.6 71.7 46.0
Other ............. 3.5 6.6 4.0 5.3
---------- ---------- ----------- ----------
Total cost of
revenues ........ 46.8 87.2 75.7 51.3
---------- ---------- ----------- ----------
Operating expenses:
Sales and
marketing ......... 61.1 162.0 142.1 93.6
Research and
development ....... 41.7 53.0 41.3 24.1
General and
administrative .. 21.2 55.0 37.5 24.1
Amortization of
acquired
intangibles ..... 1.5 29.5 30.1 144.9
---------- ---------- ----------- ----------
Total operating
expenses ....... 125.5 299.5 251.0 286.7
---------- ---------- ----------- ----------
Operating loss .. (72.3) (286.7) (226.7) (238.0)
Compensation
related to
modification of
escrow agreement . -- -- -- --
Interest expense .. (2.8) (2.2) (1.0) (2.0)
Interest and other
income ............ 0.1 1.7 0.8 0.7
---------- ---------- ----------- ----------
Net loss ......... (75.0)% (287.2)% (226.9)% (239.3)%
========== ========== =========== ==========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1997 1998
<S> <C> <C> <C> <C> <C>
Revenues:
License ........... 27.0% 29.2% 24.5% 54.9% 41.3%
Service ........... 64.6 60.9 65.5 39.9 53.8
Other ............. 8.4 9.9 10.0 5.2 4.9
---------- ---------- ----------- ---------- ----------
Total revenues .. 100.0 100.0 100.0 100.0 100.0
---------- ---------- ----------- ---------- ----------
Cost of revenues:
License ........... -- -- -- 2.2 2.7
Service ........... 64.7 69.2 73.8 28.6 45.5
Other ............. 6.1 5.6 6.0 3.6 4.0
---------- ---------- ----------- ---------- ----------
Total cost of
revenues ........ 70.8 74.8 79.8 34.4 52.2
---------- ---------- ----------- ---------- ----------
Operating expenses:
Sales and
marketing ......... 112.0 125.9 115.4 39.1 50.4
Research and
development ....... 29.1 42.5 46.3 16.3 18.7
General and
administrative .. 33.7 31.6 28.2 16.2 12.1
Amortization of
acquired
intangibles ..... 9.4 16.2 15.1 3.2 2.5
---------- ---------- ----------- ---------- ----------
Total operating
expenses ....... 184.2 216.2 205.0 74.8 83.7
---------- ---------- ----------- ---------- ----------
Operating loss .. (155.0) (191.0) (184.8) (9.2) (35.9)
Compensation
related to
modification of
escrow agreement . -- -- -- -- (55.2)
Interest expense .. (1.9) (2.4) (1.7) (0.4) (0.5)
Interest and other
income ............ 0.8 1.4 3.0 1.1 0.1
---------- ---------- ----------- ---------- ----------
Net loss ......... (156.1)% (192.0)% (183.5)% (8.5)% (91.5)%
========== ========== =========== ========== ==========
</TABLE>
The Company has experienced, and may experience in the future, significant
seasonality in its business, and the Company's business, operating results
and financial condition may be affected by such trends in the future.
Revenues have historically increased at higher rates in the fourth quarter of
the year and at lower rates in the next succeeding quarter, which the Company
believes is due to a number of factors, including the Company's quota-based
compensation arrangements, typical of those used in software companies, and
year-end budgetary pressures on the Company's customers. The Company believes
that this seasonal trend may continue for the foreseeable future.
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter
to quarter in the future. Specifically, the Company experienced a significant
increase in license revenues in the quarter ended December 31, 1997 compared
to the previously ended quarter. The Company believes that this increase was
primarily due to (i) the
28
<PAGE>
introduction and sale of UltiPro for Windows which has a significantly higher
license fee than ULTIPRO for LAN and (ii) the recognition of license revenues
in the quarter ended December 31, 1997 for products licensed during the
previous periods for which significant vendor obligations remained and were
subsequently satisfied in the quarter ended December 31, 1997. Such
fluctuations may result in volatility in the price of the Company's Common
Stock. In the future, the Company's operating results may fluctuate as a
result of a number of factors, including increased expenses, timing of
product releases, increased competition, variations in the mix of revenues,
announcements of new products by the Company or its competitors and capital
spending patterns of the Company's customers. The Company establishes its
expenditure levels based upon its expectations as to future revenues, and, if
revenue levels are below expectations, expenses can be disproportionately
high. As a result, a drop in near term demand for the Company's products
could significantly affect both revenues and profits in any quarter. As a
result of these factors, there can be no assurance that the Company will be
able to establish or, if established, maintain profitability on a quarterly
basis.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations primarily through
the sale of private equity securities and, to a lesser extent, equipment
financing and borrowing arrangements.
As of March 31, 1998, the Company had $658,000 in cash and cash
equivalents. The Company's working capital deficit at March 31, 1998 was $9.5
million. Excluding customer deposits and deferred revenue of $9.6 million,
the Company would have had a working capital balance of $117,000 at March 31,
1998.
The Company's operating activities used $4.0 million, $10.0 million and
$8.0 million for the years ended December 31, 1995, 1996 and 1997,
respectively, and $4.4 million for the three months ended March 31, 1998,
principally for sales and marketing and research and development. Investing
activities, consisting of capital expenditures (primarily computer equipment)
provided (used) $36,000, ($0.6 million), ($1.5 million) and ($21,000) for the
years ended December 31, 1995, 1996 and 1997, and for the three months ended
March 31, 1998, respectively. At March 31, 1998, the Company had no material
commitments for capital expenditures. Financing activities generated $4.1
million, $11.7 million and $11.3 million for the years ended December 31,
1995, 1996 and 1997, respectively, and $1.8 million for the three months
ended March 31, 1998. Such cash was primarily attributable to proceeds from
private placements of the Company's stock and from borrowings.
The Company has a working capital revolving line of credit with a bank,
which is secured by the Company's accounts receivable and bears interest at a
rate equal to LIBOR plus 4.875% per annum. The amount available under this
facility is limited to the lesser of 80% of the Company's eligible accounts
receivable, as defined, or $4.0 million. The line of credit was increased to
the lesser of 80% of the Company's eligible accounts receivable, as defined,
or $6.0 million for the period beginning April 23, 1998 and ending September
30, 1998. The facility will expire on October 30, 1998. At March 31, 1998,
$2.2 million was outstanding under this line of credit.
The Company believes that cash and cash equivalents, net proceeds from the
Offering, cash from operations, and available borrowings under the line of
credit will be sufficient to fund its operations for at least the next twelve
months.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards Number 128, Earnings per Share
("SFAS 128"), which changes the method of calculating earnings per share.
SFAS 128 requires the presentation of "basic" earnings per share and
"diluted" earnings per share on the face of the income statement. Basic
earnings per share is computed by dividing the net income available to common
shareholders by the weighted average shares of outstanding common stock. The
calculation of diluted earnings per share is similar to basic earnings per
share except that the denominator includes dilutive common stock equivalents
such as stock options and warrants. The statement is effective for financial
statements for periods ending after December 15, 1997 and has been adopted by
the Company in the quarter ended December 31, 1997.
29
<PAGE>
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountings issued Statement of
Position 97-2, Software Revenue Recognition ("SOP 97-2"). SOP 97-2 requires
companies to defer revenue and profit recognition if four required criteria
of a sale are not met. In addition, SOP 97-2 requires that revenue be
allocated to multiple element arrangements. SOP 97-2 is effective for all
transactions entered into in fiscal years beginning after December 15, 1997.
The Company has adopted the provisions of SOP 97-2 effective December 31,
1997 and such adoption did not have a material impact on the Company's
business, operating results or financial condition.
In June 1997, the FASB issued Statements of Financial Accounting Standards
Number 130, Comprehensive Income ("SFAS 130"), and Number 131, Disclosures
about Segments of an Enterprise ("SFAS 131"). The Company is required to
adopt these statements in 1998. SFAS 130 establishes standards for reporting
comprehensive income and SFAS 131 establishes standards for reporting
information about operating segments. Management does not believe that the
adoption of SFAS 130 and 131 will have a significant impact on the Company's
financial statements or related disclosures.
THE YEAR 2000 ISSUE
The Company does not believe that it has material exposure to the Year
2000 issue with respect to its own information systems since its existing
systems correctly define the year 2000. Although the Company believes that
the information systems of its major vendors (insofar as they relate to the
Company's business) comply with Year 2000 requirements, there can be no
assurance that the Year 2000 issue will not affect the information systems of
the Company's major vendors as they relate to the Company's business, or that
any such impact of a major vendor's information system would not have a
material adverse effect on the Company.
30
<PAGE>
BUSINESS
The Company designs, markets, implements and supports technologically
advanced, cross-industry human resource management and payroll software
solutions. The Company's solutions are marketed primarily to middle-market
organizations having 300 to 15,000 employees, but are scaleable to address
the needs of much larger organizations. The Company's products automate an
organization's HRMS/payroll function and are enabling tools in the
cost-efficient management of the employee life cycle, from inception of
employment through retirement. The Company believes its most recent product,
UltiPro for Windows, introduced in June 1997, is the first 32-bit,
object-oriented HRMS/payroll software solution which takes advantage of
Microsoft SQL Server and Microsoft NT technologies. The Company believes that
UltiPro for Windows' distributed, object-oriented architecture provides
significant advantages over other HRMS/payroll software products, including
greater scalability and transaction throughput, reduced total cost of
ownership and ease of implementation, customization and use. UltiPro for
Windows is designed to support new technologies as they emerge, including the
Internet and corporate intranets, and to be readily integrated with other
applications. As part of its comprehensive HRMS/payroll solution, the Company
provides high quality implementation, training and ongoing support services
to its customers. In December 1997, Human Resource Executive, a leading human
resource industry publication, selected UltiPro for Windows as the only
HRMS/payroll software product to be included as one of the Top Ten HR
Products of the Year.
The Company reaches its customer base and target market through its direct
sales force and a network of national, regional and local strategic partners.
As of March 31, 1998, the Company had licensed its earlier DOS-based product,
ULTIPRO for LAN, to approximately 750 organizations and its UltiPro for
Windows solution to approximately 105 organizations. The Company's customers
operate in a wide variety of industries, including manufacturing, food
services, retail, healthcare, technology, finance, insurance, real estate,
transportation, communications, services and sports. The Company's customers
include: Bill Heard Enterprises, Inc., Callaway Gardens Resorts, Inc.,
Discovery Zone, Inc., Duro Bag Manufacturing Company, First American
Corporation, The Florida Marlins Baseball Club, Ingram Entertainment, Inc.,
The Krystal Company, National Realty Trust (Coldwell Banker), Telemundo
Group, Inc., United States Filter Corporation and Winn Dixie Stores, Inc.
INDUSTRY OVERVIEW
Increased competitive pressures and rapidly changing market conditions are
continually challenging organizations of all sizes to enhance profitability
by improving operating efficiencies and implementing better cost controls.
Because human resource management and payroll processing are core functions
that require a significant allocation of resources, the HRMS/payroll
functions have increasingly become mission-critical within many
organizations. As the work force has become more mobile and geographically
dispersed, management of HRMS/payroll functions has increased in complexity
and requires greater flexibility, accuracy, accountability and security
controls. In addition, multiple tax jurisdictions, intricate corporate
structures and the variety of benefit plans afforded to employees further
compound the complexity of HRMS/payroll functions. As a result, managing
administrative details such as tracking employee benefits, updating employee
files and incorporating payroll taxes can become increasingly burdensome,
leading to inefficiencies, inaccuracies and higher costs. Effective
management of HRMS/ payroll functions requires highly specialized expertise
and the ability to remain abreast of frequently changing regulatory
requirements such as federal, state and local tax withholding regulations,
equal employment opportunity laws and other government regulations, including
the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), the
Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and the
Occupational Safety and Health Act of 1970 ("OSHA"). More recently,
organizations have actively sought to improve employee morale and retention
by empowering their employees through the provision of electronic access to
human resource benefits and payroll information.
Traditionally, many organizations have utilized third-party outsourcing
vendors in an attempt to address the increasingly high costs associated with
the management of HRMS/payroll functions. According to Business
Communications Company, Inc., a market research company, the market for
third-party HRMS/payroll outsourcing was approximately $9.8 billion in 1996.
In theory, the advantage of
31
<PAGE>
outsourcing lies in the belief that an organization can focus on its core
competencies and rely upon a third-party vendor to stay abreast of frequently
changing regulatory requirements and to manage HRMS/payroll functions cost
effectively. In practice, however, outsourcing can be an inflexible and
expensive alternative, particularly for middle-market organizations, because
the organization gives up control over critical processes, such as scheduling
pay cycles and reporting, which can result in greater inefficiency and
insufficient data for decision-making. Furthermore, certain features and
functional requirements, such as timely printing of off-cycle checks to
correct errors or meet unexpected demand, are limited due to the
technological restraints and generic nature of the outsourcing process.
Moreover, use of third-party outsourcing vendors for payroll processing
limits an organization's ability to achieve operational efficiencies by
integrating the information common to both human resources management and
payroll processing. Without such integration, organizations are required to
enter information twice, thereby increasing the likelihood of mistakes and
the costs associated with maintaining duplicate records. For example, when
changes are made to an employee's benefit plans in a human resource system,
the changes are not automatically translated into corresponding adjustments
in the payroll processing system.
As an alternative to outsourcing, many organizations have historically
automated their HRMS/ payroll functions by developing in-house legacy systems
to address their needs. However, because of the use of proprietary
programming languages to write legacy applications, such in-house
HRMS/payroll systems are typically cumbersome, time consuming to operate and
expensive to implement, customize, update and support. Additionally, many
legacy systems use proprietary operating and database management systems,
thereby reducing compatibility with other information systems used within an
organization. As a result, these legacy systems have certain utility
constraints, particularly for middle-market organizations that usually do not
have sufficient information technology resources necessary to operate, manage
and enhance such systems. Moreover, the failure of many legacy systems to
comply with Year 2000 requirements has further exacerbated the limitations of
such systems and has caused organizations to seek alternative solutions.
With the advent of client/server technology as an alternative to in-house
legacy systems and the greater availability of affordable computing
solutions, many middle-market organizations are increasingly seeking to
automate and streamline the mission-critical processes associated with
HRMS/payroll functions. According to International Data Corporation ("IDC"),
a market research company, the United States market for HRMS/payroll software
licenses totaled $1.1 billion in 1996 and is projected to grow to $2.9
billion by the year 2001, representing a compound annual growth rate of
21.4%. IDC further estimates that the worldwide market for HRMS/payroll
software licenses will experience the same rate of growth, moving from $1.6
billion in 1996 to $4.2 billion by 2001. The Company believes that the market
for HRMS/payroll-related services is of equal or greater size than the market
for HRMS/payroll software licenses and has similar growth characteristics.
First-generation client/server technologies have provided organizations
with greater flexibility to address their HRMS/payroll needs by combining the
ease of use and data accessibility of personal computers with the high volume
processing and data storage capabilities of minicomputers and mainframe
legacy systems. However, these first-generation client/server solutions lack
certain critical performance criteria and sophisticated security features,
are difficult to implement and have a high cost of ownership because they
have less built-in functionality than mainframe systems, are typically
written in proprietary programming languages and cannot be readily integrated
with the Internet and other emerging technologies. To date, many HRMS/payroll
software vendors have simply ported traditional functionality to a
first-generation client/server environment by preserving their core legacy
system and underlying proprietary code and adapting only what is required to
allow the application to operate in a client/server environment. In addition,
vendors of first-generation client/server HRMS/payroll software typically
provide enterprise-wide, or Enterprise Resource Planning ("ERP"), systems
which seek to address an organization's financial, supply chain management,
manufacturing and HRMS needs. However, HRMS is typically an add-on module
with limited functionality in ERP systems. Furthermore, ERP systems have been
designed primarily to meet the requirements of very large organizations and
may not be particularly suitable for middle-market organizations. As a
result, these first-generation client/ server and ERP systems are often
plagued with many of the inconveniences of legacy systems, such as higher
costs, lengthy implementation cycles and difficulties associated with
customization.
32
<PAGE>
In recent years, a new generation of object-oriented, component-based
client/server technologies has emerged. Object-oriented methodologies address
many of the limitations of first-generation client/server systems and
facilitate integration with newer technologies and the Internet.
Object-oriented, component-based programming enables more rapid creation,
customization and implementation because the software is built from libraries
of pre-programmed, reusable components called "objects." The virtue of using
a large portion of pre-tested code is that quality is improved and fewer
programmers are required in the process, resulting in significant savings on
development costs. Moreover, when a system update occurs, the customer does
not overwrite or lose the customization that was created, resulting in a
system that is much faster and easier to update. With advancements in
client/server technology and new system architectures, processing can occur
on two, three or more tiers. Distributing various processes to multiple
servers, or tiers, enhances the system's speed, scalability, flexibility and
maintainability.
Middle-market organizations are increasingly seeking more cost-effective
software solutions that (i) provide them greater control over their
HRMS/payroll functions, (ii) deliver the broad functionality necessary to
streamline and effectively manage the complex and administratively burdensome
HRMS/ payroll functions, (iii) take advantage of the latest object-oriented
client/server technologies that enable organizations to better utilize the
Internet and other emerging technologies, (iv) are easy to implement,
customize, update and use and can scale to accommodate an organization's
growth, (v) empower their general employee populations by providing them with
electronic access to human resource, benefits and payroll information and
(vi) are reinforced by extensive service and support capabilities.
THE ULTIMATE SOLUTION
The Company is focused on providing complete HRMS/payroll solutions to
middle-market organizations. The Company's award-winning HRMS/payroll product
provides middle-market organizations with a highly functional, cost-effective
software solution that can be rapidly implemented and is designed to be easy
to learn and use, leverage emerging technologies and scale to accommodate an
organization's growth. The Company's core product, UltiPro for Windows, is an
enabling tool in the cost-efficient management of the employee life cycle,
from inception of employment through retirement. UltiPro for Windows is a
feature-rich, completely integrated HRMS/payroll solution with embedded
Internet technology, employee self-service capability and business
intelligence tools of Cognos Corporation ("Cognos") for data analysis and
generation of custom reports. As part of its comprehensive HRMS/ payroll
solution, the Company provides high quality implementation, training and
ongoing support through an extensive service and support network.
The Company's solution is designed to offer the following benefits to its
customers:
Feature-Rich, Built-in Functionality. UltiPro for Windows is a
feature-rich, completely integrated human resources, benefits administration
and payroll software solution that enables organizations to minimize the time
invested in burdensome HRMS/payroll administrative activities and facilitate
strategic decision-making capabilities. UltiPro for Windows' robust built-in
functionality provides users with many features that would otherwise require
extensive customization or changes to source code including: sophisticated
security controls, federal and state human resource regulatory compliance
capability, safety tracking, benefit program management, and payroll tax
tables for federal, state and thousands of local jurisdictions. In addition,
UltiPro for Windows includes specific features designed to address problems
faced by multiple-company organizations. For example, when an employee
transfers from one company to another or works concurrently for multiple
companies within an organization, UltiPro for Windows enables the
organization to consolidate an employee's pay from all companies to ensure
tax withholding limits are properly recognized and to generate a single W-2
reflecting the employee's aggregate income from all companies within the
organization.
Rapid Implementation and System Update Efficiency. The Company has
designed UltiPro for Windows to minimize the time and effort required for
implementation, customization and updating by incorporating into its product
hundreds of built-in rules, options and complex calculation methods. The
Company's standardized implementation methodology, experienced implementation
staff, and customer training further facilitate rapid implementation. In
addition, UltiPro for Windows' object-oriented technology improves
efficiencies by enabling faster system updates. When users load system
updates, they
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do not overwrite their customizations because the system stores custom changes
as sub-classed objects or data that reside "outside" the core program, thus
avoiding the time-consuming process of rewriting custom changes.
Reduced Total Cost of Ownership. The Company believes its software
solution provides significant cost saving opportunities for its customers.
The Company believes that its feature-rich solution is competitively priced
for middle-market organizations and significantly reduces the traditionally
high implementation and customization costs associated with legacy and
first-generation client/server systems. By using the Company's software
solution, a customer may reduce the administrative and information technology
support costs associated with an organization's HRMS/payroll functions. Since
data for employee benefits and payroll calculations are maintained in a
series of shared tables, UltiPro for Windows helps to reduce administrative
costs by facilitating accurate information processing and reporting and
reduces discrepancies, errors and the need for time-consuming adjustments. In
addition, administrative costs can be reduced by providing an organization
with greater access to information and control over reporting.
Integration and Leveraging of Leading Technologies. The Company has
consistently focused on identifying leading technologies and integrating them
into its products. UltiPro for Windows incorporates and leverages leading
technologies, such as Microsoft SQL Server, Microsoft NT Server, Borland's
Delphi ("Delphi"), Lotus Domino, Java and ActiveX, to greatly enhance speed,
convenience, dependability, ease of use and extensibility. For example,
UltiPro for Windows is based on Delphi's object-oriented programming which
enables more rapid product development, customization and implementation. In
addition, UltiPro for Windows employs Internet-and intranet-enabled
technologies to facilitate employees' access to human resource, payroll and
benefits information and to remotely complete and update forms and
information. This functionality addresses the growing demand for employee
empowerment.
Ease of Use and Navigation. The Company designs its products to be
user-friendly and to simplify the complexities of managing employees and
complying with government regulations in the HRMS/ payroll area. UltiPro for
Windows is designed to enable users to find information quickly and easily.
The Company has developed a user interface called the Employee Explorer that
allows access to all employee information in one common area. The graphical
user interface of UltiPro for Windows is designed to allow a user to access
any part of the system quickly and efficiently.
Comprehensive Professional Services and Industry-Specific Expertise. The
Company provides high quality implementation, training and ongoing product
and customer support services. The Company employs 86 people in professional
services, which includes implementation, product support, technical support
and training departments. Substantially all of the Company's product support
associates have been designated as Certified Payroll Professionals ("CPP") by
the American Payroll Association. Moreover, the Company's executives and
managers have an average of over 10 years of experience in HRMS/payroll as
well as 15 years in the software industry. This experience provides the
Company with insights into trends in the HRMS/payroll area and provides the
Company with the ability to better address its customers' HRMS/payroll needs.
In addition, the Company employs a dedicated tax research team to track
changes in the tax rules of more than 4,500 separate taxing jurisdictions and
changes in other employee-related regulations.
Employee Self-Service Capability. The Internet-enabled and security
features of UltiPro for Windows are designed to allow an organization's
employees to access employee human resource, payroll and benefits information
and to remotely complete and update forms and information. The Employee
Self-Service feature in UltiPro for Windows, which is scheduled for release
in the third quarter of 1998, will help to address the growing demand for
employee empowerment. In addition, by providing an additional means to
communicate with its employees, employee self-service is designed to help to
reduce an organization's administrative burden and resources to disseminate
information to its employees.
STRATEGY
The Company's objective is to be the leading provider of HRMS/payroll
software solutions. Key components of the Company's strategy include:
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Extend Technology Leadership. The Company intends to continue to expend
significant resources to further identify, utilize and take advantage of
emerging technologies in order to maintain and extend its leadership position
as a provider of technologically advanced HRMS/payroll solutions. The Company
believes that by developing UltiPro for Windows as the first HRMS/payroll
solution to use object-oriented, component-based technology in combination
with Microsoft SQL Server operating on the Microsoft NT platform, as well as
Internet-enabled technologies, the Company maintains a competitive advantage
over other HRMS/payroll vendors. The Company seeks to identify and utilize
new technologies to further enhance UltiPro for Windows' functionality and
performance. In addition, the Company intends to continue to support new and
emerging industry standards to ensure that its products continue to readily
integrate with such technologies. The Company maintains technical
relationships with many leading vendors, including Borland International
Inc., Citrix Systems, Inc., Cognos, Lotus Development Corporation ("Lotus")
and Microsoft. These relationships provide the Company with access to new and
emerging technologies as well as products under development.
Leverage Strategic Alliances. The Company intends to expand its existing,
and develop new, strategic marketing relationships with leading software
vendors. The Company believes that these relationships will provide it with
access to a larger potential customer base and will enable the Company to
leverage their technical and marketing expertise. The Company has strategic
relationships with Microsoft and Lotus that involve coordinated public
relations and marketing opportunities as well as planned trade show
activities specifically targeted to the HRMS/payroll industry. In addition,
the Company has technical and marketing relationships with Cognos, Citrix
Systems, Inc., FlexiInternational Software, Inc., Great Plains Software,
Inc., National Bond & Trust Company Inc., Network Specialists, Inc., Paradigm
Software Technologies, Inc., Platinum Software Corporation, ProBusiness
Services, Inc., Simplex Time Recorder Co., SunGard Recovery Services, Inc.
and Systems Tax Service, Inc.
Integrate with Other Leading Software Applications. The Company intends to
continue to design application interfaces which integrate UltiPro for Windows
with other leading software applications. By having the ability to interface
with other business software applications such as financial or accounting
software solutions, UltiPro for Windows is designed to extend an
organization's technology enterprise and allow an organization to effectively
address its enterprise-wide management needs. For example, the Company has
built interfaces into UltiPro for Windows for exporting payroll information
to Platinum Software Corporation's Platinum SQL General Ledger and for
exchanging information with WinSTAR, the pay data entry system from the
Time/Data Division of Simplex Time Recorder Co. The Company is currently
designing interfaces for FlexiInternational Software, Inc.'s FlexiFinancials
and Great Plains Software, Inc.'s Dynamics C/S+.
Expand and Leverage Implementation Partners. The Company seeks to
continually expand its network of implementation partners. The Company
believes that the use of implementation partners will further increase its
market penetration, complement its direct distribution channel and enable
more rapid implementation of its products. The Company expends significant
resources on training its implementation partners. The Company has formal
implementation partnership agreements with national, regional and local
information technology consulting firms which specialize in human resource
management, including CDG & Associates Inc., Cornerstone Solutions, Inc., HC
Associates International, Inc., Insight Technology Partners, Inc., Soft Link,
Inc. and The Consulting Team, Inc.
Expand Product Functionality. The Company seeks to continually expand the
functionality of its software and is currently developing modules for
recruitment and staffing, position management and training administration
that will integrate with UltiPro for Windows. The Company also intends to
develop solutions to help multinational, U.S.-based companies with employees
who live abroad. In addition, the Company plans to offer a Canadian version
of its product. These solutions will include features such as international
dates and address fields, and support for Eurodollar and Eurodollar exchange
rate conversion.
Leverage Existing Customer Base. The Company seeks to enhance its market
position by targeting sales of UltiPro for Windows to its existing DOS
customer base. This existing base of approximately 750 organizations
represents a significant potential market for future sales of the Company's
products as such customers migrate from DOS to Windows environments and from
individual or networked personal computers to client/server environments.
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TECHNOLOGY
The Company seeks to provide its clients with optimum performance, rich
functionality, scalability and easy access to information through the use of
leading technologies such as Delphi and C++ Builder as the development
environment and Microsoft SQL Server as the database operating on the
Microsoft NT platform. The Company has developed UltiPro for Windows to
include the following key technological features:
Object-oriented Programming. Delphi is an object-oriented, visual,
integrated database application development environment for Windows 95 and
Windows NT. Delphi delivers a combination of an optimizing native code
compiler, a visual component library with source code and database
connectivity. Object-oriented programming features code reusability and
visual form/object inheritance, which decrease the time and cost of
developing and fully implementing a new system. With object-oriented
programming, system updates do not overwrite prior customizations to the
system because custom changes are sub-classed objects that reside "outside"
the core program.
32-bit Compiled Code and Distributed Architecture. Delphi is a 32-bit
code compiler, which results in more stable applications that are
significantly faster than interpreted applications and provides greater
memory access than compilers built on a 16-bit compiler. The Company has
designed certain aspects of its system using a multi-tiered client/server
architecture in order to enhance the system's speed, flexibility, scalability
and maintainability. When an application's logic resides only on a client, a
user's ability to process high volume data transactions is limited. When the
logic resides only on a server, the user's interactive capabilities are
reduced. The Company's use of distributed architecture is intended to
overcome such limitations.
Application Framework. The Company has developed a proprietary
data-driven, object-oriented application framework that enhances the
development, usability, maintainability and extensibility of its
applications. The major areas of the system such as company setup, code
setup, employee setup, pay data entry and reporting have been developed using
the Company's application framework to enhance usability. The extension of
the system's functionality is enhanced due to the use of the framework with
its driver tables and object-class library.
Business Intelligence Tools. In addition to an extensive library of
standard reports that offer flexibility and ease of use, the Company extends
what users can do with employee data by embedding leading business
intelligence tools from Cognos in UltiPro for Windows. In addition to
offering sophisticated data query and report authoring, these tools enable
users to apply online analytical processing ("OLAP") to multidimensional data
cubes, allowing users to explore data on employees graphically and
statistically from diverse angles. The Company maintains a link between
Cognos' report catalog and UltiPro for Windows' data dictionary, eliminating
the necessity for users to create and maintain ad hoc reporting catalogs.
Internet and Intranet Integration. The Company supports emerging
technologies such as those associated with the Internet and corporate
intranets to increase access to and usability of its applications. The
Company's Internet-enabled applications, such as employee self-service, are
integrated with UltiPro for Windows' database and use Lotus Domino Server,
Java, Java script, HTML and COM/ActiveX.
PRODUCTS
The Company's software products include UltiPro for Windows, a
client/server software product, and ULTIPRO for LAN, a DOS-based product,
both of which automate and manage HRMS/payroll functions.
ULTIPRO FOR WINDOWS
UltiPro for Windows, released in June 1997, is a fully integrated,
technologically advanced HRMS/payroll software product that offers
comprehensive functionality to middle-market organizations. In December 1997,
Human Resource Executive, a leading human resource industry publication,
selected UltiPro for Windows as the only HRMS/payroll software product to be
included as one of its Top Ten HR Products of the Year. UltiPro for Windows
includes the following modules:
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Human Resources. UltiPro for Windows is designed to streamline and manage
the human resource function within an organization. In addition to enabling
organizations to comply with regulatory requirements, UltiPro for Windows
generates, manages and stores information that satisfies a broad range of
internal and external reporting requirements. Examples of information and
processes handled by the system are employee performance, job and salary
history; COBRA and HIPAA administration; OSHA incident and safety; career
development; wellness programs; company-issued property; dependent,
beneficiary and emergency contact details; and history of previous
employment. The system uses help features, or "wizards", to guide human
resource administrators through multi-step processes such as recording new
hire information, employee job changes and employee terminations. Wizards
provide "To Do" lists, sequentially presented data-entry windows, validation
of data and summaries of changed information. The system also includes
effective dated record handling and detailed audit trails.
Benefits Administration. UltiPro for Windows provides a comprehensive,
automated means of administering all types of health and welfare plans,
employee loans, qualified and non-qualified deferred compensation, and fund
allocations. The Company has developed a one-table design that maintains
deductions and benefit plans in one common set of tables. One table stores
together rules for coverage; premium and employer match computations;
eligibility and participation determination; and taxation, wage accumulation
and withholding requirements for payroll. UltiPro for Windows also delivers
rules-based benefits administration functionality, combining the benefit and
payroll deduction tables, to help improve accuracy and scheduling
convenience. Tracking of dependent and beneficiary information is
comprehensive and can be associated with benefit plans as necessary. In
addition, complete historical information is available in summary and detail
views for a quick response to benefit inquiries and ease in benefit plan
research.
Payroll. UltiPro for Windows incorporates a comprehensive tax management
system to handle federal, state and local tax computations, including
multi-state taxing rules and reciprocity. In addition, the system is
delivered with complex wage calculations such as shift premiums, piecework
and make-up pay, average pay rates for overtime calculations and
garnishments/disposable pay. It also includes convenience features enabling
users to generate off-cycle checks, create direct deposit files, perform
automatic check reconciliation, and track the progress of payroll processing
steps online.
Interface Templates. UltiPro for Windows incorporates built-in interfaces
and an engine that facilitate importing and exporting data with a number of
third-party software systems, including time clocks, point-of-sale systems
and job costing systems. Organizations can link to their banks, 401(k)
provider, tax filing service and unemployment cost management services. The
UltiPro for Windows' development tools give the user the ability to interface
the Company's software with many leading applications running on a variety of
platforms.
Reporting. UltiPro for Windows provides a library of over 100 standard
reports including basic company and employee listings, employee forms,
analytical reports, notifications and upcoming events, reconciliation and
audit reports and date-or event-driven historical reports. UltiPro for
Windows includes true point-in-time reporting, giving users access to
historical information whenever they need it. In addition to many standard
reports, UltiPro for Windows includes other tools such as Cognos' business
intelligence tools for data analysis and generation of custom reports.
Employee Self-Service. UltiPro for Windows takes advantage of emerging
technologies that not only reduce the administrative workload of the
HRMS/payroll department but also provide greater access to HRMS/payroll
information to employees within an organization. Employee Self-Service is an
Internet-enabled module which is expected to be released in the third
quarter of 1998 and will be fully integrated with UltiPro for Windows. Based
upon user-established security rules, employees will be able to access
authorized database information from remote locations with an Internet
connection. UltiPro for Windows' Internet/intranet application will provide:
(i) employees with access to data, thereby decreasing HRMS/payroll staff
requirements to service employees; (ii) employees with the ability to change
their own data or make a change request subject to approval, again decreasing
demands made on HRMS/ payroll staff; (iii) an additional means for the
Company and its HRMS/payroll staff to communicate with employees; and (iv) a
low-maintenance and cost-effective method for data entry (new hires,
terminations,
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payroll data) and inquiry at multiple or remote locations. More specifically,
using UltiPro for Windows, employees will have the ability to enroll in
benefit plans and view benefit statement information and complete and file
leave of absence and vacation requests.
ULTIPRO for LAN
The Company introduced ULTIPRO for LAN in July 1993 as its first
proprietary software product. ULTIPRO for LAN is a DOS-based product that is
a fully integrated human resource management, benefits administration and
payroll processing system with a number of the same features as UltiPro for
Windows. While the Company continues to support ULTIPRO for LAN, it no longer
actively markets this DOS-based product.
The following table contains selected information pertaining to the
Company's client/server product, UltiPro for Windows, and the Company's
DOS-based product, ULTIPRO for LAN:
<TABLE>
<CAPTION>
ULTIPRO FOR WINDOWS ULTIPRO FOR LAN
<S> <C> <C>
FIRST RELEASE: June 1997 July 1993
CURRENT VERSION/
RELEASE DATE: 1.5/December 1997 3.5/December 1997
PRIMARY DATABASE: Microsoft SQL Server Microsoft FoxPro
SOURCE CODE LANGUAGE: Borland Delphi, C++ Microsoft FoxPro
NETWORKS: TCP/IP & NetBios (Microsoft NT Novell Netware, Microsoft NT
4.0 compatible) Server
CLIENT PROFILE: Companies with 300-15,000 Companies with 100-5,000
employees employees
PRICE RANGE*: $75,000--$1,000,000 and up $25,000--$100,000 and up
*Pricing represents license fees based upon several variables, including number of sites,
employees, concurrent users and options selected. Pricing excludes related service and
maintenance fees.
</TABLE>
PRODUCT DEVELOPMENT
The Company continually invests significant resources in product
development in order to take advantage of emerging technologies and to
further broaden its products' functionality and performance. The Company
employs an iterative, rapid application development ("RAD") process. New
product specifications are primarily developed by product managers with input
from professional services employees and clients. Feature teams, which
include product managers, programmer analysts, as well as employees from the
quality assurance, tax research and documentation departments, jointly review
specifications, products in development, test plans and documentation.
Published programming standards and guidelines, code "walkthroughs" and more
formal code reviews are used in an attempt to deliver more error-free code in
a shorter period of time. The Company believes that this iterative,
multi-disciplinary, team-based approach results in application development
that is more responsive to client needs than products developed using other
available approaches. The Company believes that software product development
is most effectively and efficiently accomplished by small development teams
focused on specific areas. The Company provides on-going technical training
and state-of-the-art equipment to its research and development staff.
The Company is currently focused on enhancing UltiPro for Windows through
development of the following fully integrated modules, each of which is
expected to be released in the second half of 1998:
Recruitment and Staffing. The Recruitment and Staffing module is designed
to assist organizations in coordinating the management of open positions and
applicants, tracking and evaluating costs associated with recruiting, and
handling government compliance issues.
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Position Management. The Position Management module is designed to provide
organizations with strategic tools for the generation of reports necessary
for managing and planning positions. In addition to tracking the numbers and
types of positions within an organization, it is designed to address the
sophisticated needs of larger organizations for projecting future staffing
requirements, budgeting, comparisons of actual versus budgeted figures,
salary planning, projection of training needs, and assistance with succession
planning.
Training Administration. The Training Administration module is designed to
assist organizations in planning training events and classes, managing
facilities and trainers, handling registrations for training, and tracking
training results. Additionally, it will support the management of financial
and budgeting activities related to training, projections for future training
needs, and succession or replacement planning activities.
There can be no assurance that the Company will successfully complete the
development of one or more of these modules or that they will be successfully
completed in a timely manner.
Since inception, the Company has invested a substantial amount of its
resources in research and development. During the fiscal years ended December
31, 1995, 1996 and 1997 and the three months ended March 31, 1998, research
and development expenses aggregated approximately $2.6 million, $3.4 million
and $4.8 million and $1.4 million, respectively.
PROFESSIONAL SERVICES
The Company believes that offering quality professional services provides
it with a significant opportunity to differentiate itself in the marketplace
and is critical to the Company's comprehensive solution. The Company provides
its customers professional services in three areas: implementation, training,
and customer support and maintenance.
Implementation. The Company's implementation services provide its
customers with a standardized methodology and assistance in implementing the
Company's HRMS/payroll solutions. The Company believes that its
implementation services ensure its customers' early success with its products
and assist customers in their ongoing efforts to enhance their existing
systems and manage upgrades. In addition, these services strengthen the
relationship with customers and add to the Company's industry-specific
knowledge base for use in future implementation and product development
efforts. The Company's implementation process is handled either by the
Company's implementation team or in partnership with third-party consultants.
In each case, the project team includes an HRMS/payroll consultant from the
Company, representatives from the client organization and a variety of
experts from the Company and/or the Company's implementation partners. The
Company has established a training program that provides the Company's
associates and its implementation partners standardized instruction on
UltiPro for Windows, including techniques for systems planning and design,
customer-specific configuring of application modules, conversion from
existing systems and interfacing with other software applications. The
Company's implementation group consists of HRMS/payroll consultants, database
administrators and technology consultants. Implementation services are
typically billed on a time and materials basis.
Training. The Company provides its customers with the opportunity to
participate in formal training programs. The Company believes that this
training increases customers' ability to use the full functionality of the
product, thereby maximizing the value of customers' investment. Courses are
designed to give attendees practical, hands-on experience with the Company's
products. Trainees learn such basics as how to enter new employee
information, set up benefit plans and generate standard reports, as well as
more complex processes such as defining company rules, customizing the system
and creating custom reports. The Company maintains four training facilities
in Atlanta, Georgia; Seal Beach, California; Chicago, Illinois; and East
Rutherford, New Jersey. In certain instances, the Company conducts on-site
training at customer facilities.
Customer Support and Maintenance. The Company offers comprehensive
technical support and maintenance services, which have historically been
purchased by all of its customers. These services include software updates
that reflect tax and other legislative changes; telephone support 24 hours a
day, 7 days a week; unlimited access to the Company's employee tax center on
the World Wide Web; and periodic newsletters. In addition, the Company uses
Symantec Corporation's PC Anywhere software for remote accessibility to the
customer's system in order to perform quick diagnostics and provide on-line
assistance. In the final quarter of each year, the Company conducts seminars
for customers and distributes documentation on how to handle year-end closing
activities effectively. To monitor, evaluate and
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continually enhance its support process, the Company uses advanced technology
tools and sends surveys to its customers to obtain their opinions and
suggestions. The Company's use of AT&T Corporation's TRACK IT software
expedites call handling and its use of Magic Solutions Inc.'s SupportMagic
SQL provides Statistical Information Reporting on call history.
CUSTOMERS
As of March 31, 1998, the Company had licensed its UltiPro for Windows
solution to approximately 105 customers and its ULTIPRO for LAN solution to
approximately 750 customers. No customer accounted for more than 10% of total
revenues in fiscal year 1997 or in the three months ended March 31, 1998. The
Company's customers operate in a wide variety of industries, including
manufacturing, food services, retail, healthcare, technology, finance,
insurance, real estate, transportation, communications, services and sports.
The following is a representative list of the Company's customers as of March
31, 1998:
MANUFACTURING
Duro Bag Manufacturing
Company
Globe Manufacturing, Inc.
Great American Cookie Co.
Halstead Metal Products, Inc.
MCD International Inc.
Packerland Packing Company, Inc.
PMC, Inc.
Stevens Graphics, Inc.
United States Filter
Corporation
Volvo GM Heavy Truck
Corporation
Wright Industries, Inc.
HEALTHCARE
Community Hospital of
Monterey Peninsula
Disabilities Services of the
Southwest
Florida Community Cancer
Group Health Associates
Medassist OP
National Vision Associates, Ltd.
Sunrise Assisted Living
University Physicians Group
FINANCE/INSURANCE/REAL ESTATE
First American Corporation
GMAC Mortgage, Inc.
J.C. Bradford & Company LLC
Michigan Mutual Insurance Co.
National Realty Trust
Northwest Savings Bank
Republic National Bank
The Midland Life Insurance Co.
Trammel Crow Residential
United Companies Financial
Corporation
FOOD SERVICES/RETAIL
AT Williams Oil
Benihana Corporation
Bentley's Luggage
Bill Heard Enterprises, Inc.
Carolina Restaurant Group
Hooters of America
Reliable Stores, Inc.
Spaghetti Warehouse Inc. &
Subsidiaries
The Krystal Company
The Portillo Restaurant Group
Winn Dixie Stores, Inc.
TECHNOLOGY
FFV Aerotech, Inc.
Global Technical Services, Inc.
Ingram Entertainment, Inc.
SARCOM, Inc.
The National Research Group
TPS Technologies
Tracer Research
TRANSPORTATION &
COMMUNICATIONS
Airport Group International Inc.
America West Airlines Inc.
Armellini Trucking Corporation
Benton Express Co.
Communications & Power
Industries
Drug Transport Inc.
Lin Television
Telemundo Television Network
World Maintenance Service
SPORTS
Arizona Diamondbacks
Chicago White Sox
Colorado Rockies Baseball
Montreal Expos
New York Giants
New York Jets Football Club
New York Yankees
Philadelphia Phillies
The Phoenix Suns
ProPlayer Stadium
Texas Rangers Baseball
The Florida Marlins Baseball
Club
The Florida Panthers
SERVICES
Boston Ballet
Buena Vista Hotel
Callaway Gardens Resorts
Discovery Zone
Hotel Intercontinental
Hudson Hotels Corp.
Mark Hopkins Intercontinental
Omni Hotels Management
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CUSTOMER CASE STUDIES
The following examples illustrate the selection of the Company's products
by several of the Company's customers and the types of needs addressed by
those products:
The Krystal Company
The Krystal Company ("Krystal"), one of the oldest fast food restaurant
chains in the United States, owns and operates 245 restaurants in six states.
In total, the Chattanooga, Tennessee-based organization has approximately
8,700 associates and more than $250 million in revenues.
Previously, Krystal used a commercial payroll application that ran on a
mainframe. The software was not Year 2000 compliant, and Krystal needed more
in-depth human resources functionality. In addition to processing payroll,
Krystal's payroll department was responsible for maintaining human resource
records, but the data stored was limited and not easily accessible for human
resource planning and decision making. Krystal required faster payroll
processing, more flexible reporting capabilities and fewer custom programs
and interfaces.
UltiPro for Windows was installed and implemented at Krystal in 15 weeks.
The Company's solution has provided Krystal with comprehensive and enhanced
human resource and payroll functionality. UltiPro for Windows' speed and
performance has meant faster payroll processing and easier access to
sophisticated reporting tools. UltiPro for Windows' integration with
Krystal's financial system, Great Plains' Dynamics C/S+, provides Krystal an
efficient enterprise-wide client/server solution on Microsoft SQL Server/NT.
United States Filter Corporation
United States Filter Corporation ("U.S. Filter"), one of the world's
largest global water treatment companies, provides industrial, commercial
water and wastewater treatment systems and services. With corporate offices
in Palm Desert, California, U.S. Filter serves its customers through a
worldwide network of over 600 sales and service facilities in 33 countries.
U.S. Filter has over 17,000 employees and expects to add more employees with
its recent agreement to acquire Culligan Water Technologies, Inc. U.S. Filter
has acquired numerous companies over the last year and a half, which has
increased the complexity of its HRMS/payroll functions.
U.S. Filter has been using a service bureau system for payroll processing
and a manual system for handling its human resources functions. With these
two systems, human resource and payroll data are not integrated, and U.S.
Filter does not have the control it desires for processing or analyzing
critical employee data.
U.S. Filter selected UltiPro for Windows to gain control over employee
data and to integrate employee management processes. UltiPro for Windows will
provide U.S. Filter with comprehensive human resource and benefits management
functionality and business intelligence tools. With the system's Microsoft
SQL Server and Windows NT environment, U.S. Filter will have the ability to
integrate HRMS/payroll with its other business applications and to scale the
system to expand with the company's growth. The Company is currently in the
process of implementing its solution for U.S. Filter.
First American Corporation
First American Corporation ("First American") is a bank-holding company
with assets of $10.6 billion, 4,200 employees and 169 bank offices in
Tennessee, Virginia and Kentucky. First American has been using a mainframe
system to process payroll and maintain its human resources information. Using
that system, First American does not have the flexibility or the ability to
readily access data that it requires. To generate reports, users need to
schedule a request with the Information Technology department. Reports are
delivered on a monthly cycle and are not readily available on an ad hoc
basis. In addition, users often have to import the data into a spreadsheet
application and manipulate it further to provide meaningful information.
First American has found this process to be increasingly cumbersome and
inefficient.
41
<PAGE>
After a detailed evaluation of several products offered by other vendors,
including ERPs, First American selected UltiPro for Windows as its
HRMS/payroll solution and PeopleSoft's Financials for its financial
accounting solution. UltiPro for Windows' built-in functionality and ease of
use will allow First American users to generate customized point-in-time
reports and to analyze the data from a number of different perspectives. Upon
its release, UltiPro for Windows' employee self-service module is expected to
meet First American's objective to move from a paper-intensive HRMS/payroll
organization to a paperless model. This online system will offer First
American employees the convenience of immediate access to personal and
company information. The Company is currently in the process of implementing
its solution for First American.
The Florida Marlins Baseball Club and ProPlayer Stadium
The 1997 World Champion Florida Marlins Baseball Club (the "Florida
Marlins") has 360 employees. Miami-based ProPlayer Stadium, owner and
operator of the baseball and entertainment arena in which the Florida Marlins
play, has 100 full-time and 300 to 500 part-time employees, depending upon
the stadium event. HRMS/payroll functions are handled centrally for the two
organizations.
The Florida Marlins and ProPlayer Stadium previously used a third-party
outsourcing service to handle its payroll. The system lacked the flexibility
needed to handle the payroll requirements typical of sports teams. For
example, many states including Illinois, Maryland, Minnesota and New York
require professional athletes to pay taxes to that state when they play
there. The third-party system was unable to calculate and print payroll
withholding taxes for multiple states in one paycheck. Because of this, the
Florida Marlins had to establish a new company for each state where the ball
team played to withhold the proper taxes. In addition, the Florida Marlins
and ProPlayer Stadium were required to pay for and maintain two separate
systems because the third-party software was unable to handle
multiple-company organizations. These two issues resulted in a complicated
payroll process that was inflexible, expensive and time consuming to run.
The Florida Marlins and ProPlayer Stadium report that payroll is running
more efficiently because of the flexibility and depth of functionality
provided by the ULTIPRO for LAN solution. The system's multiple-company
capability has enabled the Florida Marlins and ProPlayer Stadium to use one
centralized system to run payroll. ULTIPRO for LAN has also allowed the
Florida Marlins to withhold taxes from many states in one paycheck, which
eliminates the need to issue more than one paycheck to an employee. In
addition, ULTIPRO for LAN has allowed the Florida Marlins to cut off-cycle
paychecks on demand, make last minute changes to payroll as needed and
integrate human resource and benefits information with payroll.
Ingram Entertainment, Inc.
Ingram Entertainment, Inc. ("Ingram") distributes home entertainment
products such as videotapes, audio-books and CD-ROMs. Currently, the company
has offices in 22 locations nationwide and employs 945 associates.
Previously, Ingram processed its payroll with commercially available software
running on a mainframe-based system. The company found that supporting a
mainframe-based HRMS/payroll system was costly and time-consuming. The system
required extensive information technology resources to maintain, update and
customize. In addition, it was difficult for associates to access and
generate data for required reports. To increase efficiencies, Ingram
determined that it needed a cost-effective solution that more tightly
integrated human resources and payroll.
The Company's ULTIPRO for LAN solution now used by Ingram offers complete
integration of payroll, human resources and benefits and provides more
built-in functionality than its mainframe-based counterpart. According to
Ingram, payroll check processing costs have been reduced by 20% and time for
processing has been reduced by half a day per week. Ingram users also have
immediate access to essential data and can generate standard and ad hoc
reports without relying on its information technology department for support.
42
<PAGE>
SALES AND MARKETING
The Company markets and sells its products and services through its direct
sales force, marketing group and a network of strategic partners. The Company
had a staff of 89 associates as of March 31, 1998 and maintained 26 sales
offices located in major metropolitan areas throughout the United States,
including its headquarters in Ft. Lauderdale, Florida.
Direct Sales. The Company's direct sales force includes business
development directors and managers who have defined territories and conduct
lead-generation activities within given parameters. The sales cycle begins
with a sales lead generated through a corporate marketing vehicle or a
territory-based activity. Whether the lead is a telephone request, fax, email
or request for proposals ("RFPs"), the lead is qualified and entered into a
lead-tracking system. When the lead is received on the local level, prospect
information is entered via the Internet into an electronic system resident at
headquarters. When headquarters receives the lead, the information is
recorded and forwarded to the business development manager in the prospect's
region of the country. Business development managers rely on face-to-face
meetings with prospects to build relationships. In one or more on-site
visits, business development managers work with application and technical
consultants to analyze prospective client needs, demonstrate the Company's
product and, when required, respond to an RFP. The sale is finalized after
clients complete their internal sign-off procedures and terms of the contract
are negotiated and signed. While the length of sales cycles varies from
client to client, the sales cycle typically requires two to six months for
UltiPro for Windows.
The terms of the Company's sales contract typically include a license, an
annual maintenance agreement, per day training rates and hourly charges for
implementation services. The contract does not typically provide for
cancellation of software purchases. Typical payment terms include a deposit
at the time the contract is signed and additional payments upon the delivery
of the product and the occurrence of other specified events such as the
implementation of the software. Payment for implementation and training
services under the contract are typically made as such services are provided.
Marketing. The Company supports its sales force with a comprehensive
marketing program that includes public relations, advertising, direct mail,
trade shows, seminars and Web site maintenance. Working closely with the
direct sales force, customers and strategic partners, the marketing team
defines positioning strategies and develops a well-defined plan for
implementing these strategies. Marketing services include market surveys and
research, overall campaign management, creative development, production
control, lead generation and tracking, results analysis, and communications
with field offices, customers and strategic partners.
Strategic Partners. The Company has established a number of formal and
informal marketing relationships with industry-specific vendors and
consulting firms. The Company has a strategic partnership with Microsoft
Corporation that involves coordinated public relations and marketing
opportunities as well as trade show activities specifically targeted to the
HRMS industry. In addition, the Company has relationships with Cognos, Citrix
Systems, Inc., FlexiInternational Software, Inc., Great Plains Software,
Inc., Lotus Development Corporation, National Bond & Trust Company Inc.,
Network Specialists, Inc., Paradigm Software Technologies, Platinum Software
Corporation, ProBusiness Services, Inc., Simplex Time Recorder Co., SunGard
Recovery Services, Inc. and Systems Tax Service. These relationships include
joint marketing activities such as joint press releases, direct mail
programs, seminars, on-site product demonstrations, reciprocal web site links
and referral programs. The Company believes that these activities expand the
opportunity for sales of the Company's products.
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent in part on its ability to protect its
proprietary technology. The Company licenses its products in object code form
only, although it has source code escrow arrangements when required by
customers. The Company relies on a combination of copyright, trademark and
trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect its proprietary rights. The Company
does not have any patents or patent applications pending, and existing
copyright, trademark and trade secret laws afford only limited protection.
Accordingly, there can be no
43
<PAGE>
assurance that the Company will be able to protect its proprietary rights
against unauthorized third-party copying or use, which could materially
adversely affect the Company's business, operating results and financial
condition.
Despite the Company's efforts to protect its proprietary rights, attempts
may be made to copy or reverse engineer aspects of the Company's products or
to obtain and use information that the Company regards as proprietary.
Moreover, there can be no assurance that others will not develop products
that perform comparably to the Company's proprietary products. Policing the
unauthorized use of the Company's products is difficult. Litigation may be
necessary in the future to enforce the Company's intellectual property
rights, to protect the Company's trademarks, copyrights or trade secrets or
to determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, operating
results and financial condition.
As is common in the software industry, the Company from time to time may
become aware of third party claims of infringement by the Company's products
of third-party proprietary rights. While the Company is not currently subject
to any such claim, the Company's software products may increasingly be
subject to such claims as the number of products and competitors in the
Company's industry segments grows and the functionality of products overlaps
and as the issuance of software patents becomes increasingly common. Any such
claim, with or without merit, could result in significant litigation costs
and require the Company to enter into royalty and licensing agreements, which
could have a material adverse effect on the Company's business, operating
results and financial condition. Such royalty and licensing agreements, if
required, may not be available on terms acceptable by the Company or at all.
COMPETITION
The market for the Company's products is highly competitive. The Company's
products compete primarily on the basis of technology, delivered
functionality and price/performance. The Company believes that its products
generally compete effectively with respect to these factors.
The Company's competitors include (i) a number of companies, such as
Cyborg Systems, Inc., Genesys Software Systems, Inc., Lawson Software, Inc.,
Oracle Corporation, PDS Software, Inc., PeopleSoft, Inc. and SAP America,
Inc. which offer HRMS/payroll software products for use on mainframes and/or
client/server systems; (ii) large service bureaus, such as ADP and Ceridian
Corporation; and (iii) the internal payroll/human resources departments of
potential customers which use custom-written software. Many of the Company's
competitors or potential competitors have significantly greater financial,
technical and marketing resources than the Company. As a result, they may be
able to respond more quickly to new or emerging technologies and to changes
in customer requirements, or to devote greater resources to the development,
promotion and sale of their products than can the Company. In addition,
current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase
the ability of their products to address the needs of the Company's
prospective customers.
FACILITIES
The Company's principal administrative, engineering, support and marketing
facilities total approximately 15,000 square feet and are located in a single
building in Fort Lauderdale, Florida. The Company leases these premises under
a lease which expires on December 31, 1998. The Company intends to move, in
the first calendar quarter of 1999, into new and larger facilities currently
being constructed in Weston, Florida. The Company is currently negotiating to
lease approximately 40,000 square feet in these facilities. In addition, the
Company leases office space for its sales operations in Albany, Atlanta,
Baltimore, Boston, Buffalo, Chicago, Cincinnati, Cleveland, Columbus (Ohio),
Dallas, Denver, Detroit, East Rutherford (New Jersey), Fort Lauderdale,
Houston, Jackson (Mississippi), Nashville, New York City, Philadelphia,
Phoenix, Pittsburgh, San Francisco, Seal Beach (California), Seattle and
Tampa.
44
<PAGE>
EMPLOYEES
As of March 31, 1998, the Company employed 281 persons, including 89 in
sales and marketing, 94 in professional services, 80 in research and
development and 18 in finance and administration. The Company believes that
its relations with employees are good. However, competition for qualified
personnel in the Company's industry is intense and the management of the
Company believes that its future success will depend in part on its continued
ability to attract, hire and retain qualified personnel.
LEGAL PROCEEDINGS
From time-to-time, the Company is involved in litigation relating to
claims arising out of its operation in the normal course of business. As of
the date of this Prospectus, the Company is not a party to any legal
proceeding the adverse outcome of which, individually or in the aggregate,
could reasonably be expected to have a material adverse effect on the
Company's business, operating results and financial condition.
45
<PAGE>
MANAGEMENT
The directors, executive officers and other key employees of the Company,
and their ages as of March 31, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
<S> <C> <C>
Scott Scherr (1) ........... 46 Chairman of the Board of Directors,
President and Chief Executive Officer
Alan Goldstein, M.D. (1) .. 47 Executive Vice President, Chief Technology
Officer and Director
Mitchell K. Dauerman ....... 41 Executive Vice President, Chief Financial
Officer and Treasurer
James Alu .................. 53 Chief Operating Officer and Vice President
Vivian Maza ................ 36 Vice President--People and Secretary
Sarah H. Bodman ............ 30 Vice President--Finance
Paul Gonzalez .............. 46 Vice President--Implementation Partners
Dale T. Baker .............. 48 Vice President--Strategic Alliances
H. Stephen Smith ........... 48 Vice President/General Manager for East
Region
Steven J. Oakley ........... 39 Vice President/General Manager for West
Region
Ofer Nemirovsky (1)(2) .... 39 Director
LeRoy A. Vander Putten (3) 63 Director
Marc D. Scherr (1) ......... 40 Director
Rick Wilber (3) ............ 51 Director
Robert A. Yanover (2) ..... 61 Director
</TABLE>
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
Scott Scherr has served as President and a director of the Company since
its inception in April 1996 and has been Chairman of the Board of Directors
and Chief Executive Officer of the Company since September 1996. Mr. Scherr
founded the Partnership in April 1990 and has served as President of its
general partner from the inception of the Partnership until its dissolution
in March 1998. From 1979 until 1990, he held various positions at ADP, a
payroll services company, where his titles included Vice President of
Operations and Sales Executive. Prior to joining ADP, Mr. Scherr ran
Management Statistics, Inc., a data processing service bureau founded by his
father, Reuben Scherr, in 1959. He is the brother of Marc D. Scherr, a
director of the Company.
Alan Goldstein, M.D., FACS has served as a director of the Company since
its inception in April 1996 and as Executive Vice President and Chief
Technology Officer since September 1996. From April 1996 through September
1996, he served as Vice President and Treasurer of the Company. From January
1994 until February 1998, Dr. Goldstein served as Vice President of the
general partner of the Partnership. In 1989, Dr. Goldstein founded Strategic
Image Systems, Inc., which produced and developed software applications and
tools. From 1985 to 1986, Dr. Goldstein served as Vice President of
Information Systems for Loren Industries, Inc., a jewelry casting
manufacturer. From 1985 to 1987, Dr. Goldstein served as Director of Surgical
Services at Kings County Hospital in New York. In 1985, as a trauma surgeon
engaged in research and medical education, Dr. Goldstein developed a software
application for use in hospitals to aid in patient management, quality
assurance and physician education.
Mitchell K. Dauerman has served as Executive Vice President of the Company
since April 1998 and as Chief Financial Officer and Treasurer of the Company
since September 1996. From 1979 to 1988, Mr. Dauerman held various positions
with KPMG Peat Marwick, a global accounting and consulting firm. From 1988 to
1996, he served as a Partner in the firm.
46
<PAGE>
James Alu has served as Chief Operating Officer since January 1998 and
Vice President of the Company since September 1996. Prior to that, Mr. Alu
served as Vice President of the general partner of the Partnership from July
1993 until April 1996. From 1988 until 1993, Mr. Alu served as Area Sales
Vice President for the northeastern United States for ADP's Dealer Services
Group. From 1986 to 1988, he was Vice President of Sales for the National
Accounts Division of ADP.
Vivian Maza has served as Vice President -- People for the Company since
January 1998 and as Secretary of the Company since September 1996. Prior to
that, Ms. Maza had served as the Office Manager of the Company from its
organization in April 1996 and of the Partnership from its inception in 1990
until April 1996. Ms. Maza is an HR Generalist and holds a Professional in
Human Resources (PHR) certification from the Society for Human Resource
Management (SHRM) association. From 1985 to 1990, Ms. Maza was a systems
analyst for the Wholesale Division of ADP.
Sarah H. Bodman has served as Vice President -- Finance for the Company
since September 1996. From 1995 to 1996, Ms. Bodman was a Vice President at
J.P. Morgan Capital Corporation. From 1993 to 1995, Ms. Bodman attended
Harvard Business School where she earned a Masters in Business
Administration. From 1990 until 1993, she worked for J.P. Morgan & Co.,
Incorporated where her responsibilities ranged from derivatives marketing to
mergers and acquisitions.
Paul Gonzalez has served as Vice President -- Implementation Partners for
the Company since April 1997. He served as Vice President of the Company from
April 1996 to September 1996 when he was elected Vice President of Support
Services. Prior to that, he had served as a Vice President of the general
partner of the Partnership from 1994 until April 1996 and as Secretary from
1990 until 1994. From 1980 to 1990, Mr. Gonzalez held various management
positions at ADP where his titles included National Product Manager for ADP's
Wholesale Distribution Division and Branch Manager for the southeast region.
Dale T. Baker has served as Vice President -- Strategic Alliances for the
Company since September 1996. From April 1996 through September 1996, he
served as Vice President of the Company. Prior to that, he had served as a
Vice President of the general partner of the Partnership from 1993 until
April 1996. From 1990 to 1993, Mr. Baker was a Branch Manager for Cap Gemini
America, an information services consulting firm. From 1979 to 1989, Mr.
Baker held various management positions in accounting services, payroll and
national accounts at ADP.
H. Stephen Smith has served as Vice President/General Manager for the East
Region of the Company since September 1996. Prior to joining the Company in
1996, Mr. Smith spent 20 years at ADP, where his most recent title was
Division Vice President for the development and management of strategic
alliances.
Steven J. Oakley has served as Vice President/General Manager for the West
Region of the Company since January 1997. From 1989 to 1996, Mr. Oakley was
National Accounts Division Vice President for ADP. Prior to that, he worked
for Bank of America's Business Services Division from 1985 until 1989. He is
a former NCAA Baseball Academic All American.
Ofer Nemirovsky has served as a director of the Company since June 1997.
Mr. Nemirovsky has been a Managing Director of HarbourVest Partners, LLC
since January 1997. HarbourVest Partners, LLC was formed by the management
team of Hancock Venture Partners, Inc. ("HVP"), where Mr. Nemirovsky had
served in various capacities since 1986. Prior to joining HVP, Mr. Nemirovsky
held various computer sales and marketing positions at Hewlett-Packard
Company, a measurement, computation and communications company. He is
currently a director of OneWave, Inc., an Internet software and services
company, as well as several privately-held companies.
LeRoy A. Vander Putten has served as a director of the Company since
October 1997. From January 1988 until May 1997, Mr. Vander Putten was
Chairman and Chief Executive Officer of Executive Risk, Inc., a specialty
insurance holding company ("ERI"). Since May 1997, Mr. Vander Putten has been
engaged as a consultant to ERI. From August 1982 to January 1988, Mr. Vander
Putten served as Vice President and Deputy Treasurer of The Aetna Life and
Casualty Company, an insurance company.
47
<PAGE>
Marc D. Scherr has been a director of the Company since its inception in
April 1996. Currently, he is also a director of Gerschel & Co., Inc., a
private investment firm. In December 1995, Mr. Scherr co-founded Residential
Company of America, Ltd. ("RCA"), a real estate firm, and has since served as
President of its general partner. Mr. Scherr also served as Vice President of
RCA's general partner from its inception in August 1993 until December 1995.
From 1990 to 1992, Mr. Scherr was a real estate pension fund advisor at
Aldrich, Eastman & Waltch. Previously, he was a partner in the Boston law
firm of Fine & Ambrogne. Mr. Scherr is the brother of Scott Scherr, Chairman
of the Board of Directors, President and Chief Executive Officer of the
Company.
Rick Wilber has served as a director of the Company since October 1997.
Mr. Wilber was a co-founder of Champs Sports Shops and served as its
President from 1974 to 1984. He served on the Board of Directors of Royce
Laboratories, a pharmaceutical concern, from 1990 until April 1997, when the
company was sold to Watson Pharmaceuticals, Inc., a pharmaceutical concern.
Mr. Wilber currently owns and operates a number of Hallmark Card stores.
Robert A. Yanover has served as a director of the Company since January
1997. Mr. Yanover founded Computer Leasing Corporation of Michigan, a private
leasing company, in 1975 and has served as its President since that time. Mr.
Yanover also founded Lason, Inc., a corporation specializing in the imaging
business, and has served as Chairman of the Board since its inception in
1987.
Prior to the consummation of Offering, the Board of Directors will be
divided into three classes, each of whose members will serve for a staggered
three-year term. Upon the expiration of the term of a class of directors,
directors in such class will be elected for three-year terms at the annual
meeting of stockholders in the year in which such term expires. See
"Description of Capital Stock -- Anti-Takeover Effects of Certain Provisions
of Delaware Law and the Certificate of Incorporation and By-Laws."
Each officer serves at the discretion of the Board of Directors and holds
office until his or her successor is elected and qualified or until his or
her earlier resignation or removal.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Executive Committee composed of Messrs.
Scott Scherr (Chairman), Nemirovsky, Marc Scherr and Dr. Goldstein, which has
the authority to exercise (except as provided by law or as may have been
specifically reserved by or for the Board of Directors) all the powers and
authority of the Board of Directors in the management of the Business and
affairs of the Company between regular meetings of the Board of Directors and
while the Board of Directors is not in session. The Board of Directors has
also appointed a Compensation Committee composed of Messrs. Vander Putten and
Wilber, which establishes the compensation of officers of the Company and
oversees the Company's stock option plan and such other benefits plans as the
Company may from time to time maintain. The Company also has an Audit
Committee composed of Messrs. Nemirovsky and Yanover, which reviews the
Company's financial condition with officers and employees of the Company, as
well as the Company's independent auditors, and reports to the Board of
Directors concerning such reviews.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee of the Board of
Directors are Messrs. LeRoy A. Vander Putten and Rick Wilber. No executive
officer of the Company has served as a member of the compensation committee
of any other entity whose executive officers served as a member of the
Compensation Committee of the Board of Directors of the Company.
48
<PAGE>
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth all compensation paid
or accrued for the fiscal year ended December 31, 1997 for the Company's
Chief Executive Officer and its two other executive officers (collectively,
the "Named Executive Officers") for services rendered to the Company in all
capacities during such fiscal year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
--------------
SECURITIES ALL OTHER
ANNUAL COMPENSATION UNDERLYING COMPENSATION
------------------- OPTIONS (1)
NAME AND POSITION SALARY BONUS
<S> <C> <C> <C> <C>
Scott Scherr................... $200,000 $-- 316,725 $2,084
Chairman of the Board,
President and Chief Executive
Officer
Alan Goldstein, M.D............ 200,000 -- 244,880 2,375
Executive Vice President and
Chief Technology Officer
Mitchell K. Dauerman........... 200,000 -- 86,012 2,375
Executive Vice President, Chief
Financial Officer and Treasurer
</TABLE>
(1) Consists of contributions by the Company to the Company's 401(k) Plan
on behalf of the Named Executive Officers indicated.
OPTION GRANTS
The following table summarizes options granted during the year ended
December 31, 1997 to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT
NUMBER OF ASSUMED ANNUAL RATES OF
SECURITIES % OF STOCK PRICE APPRECIATION
UNDERLYING TOTAL EXERCISE FOR OPTION TERM (2)
OPTIONS OPTIONS OR BASE EXPIRATION --------------------------
NAME GRANTED (1) GRANTED PRICE DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Scott Scherr ......... 316,725 34.3% $7.21 10/23/07 $1,437,956 $3,644,638
Alan Goldstein, M.D. 244,880 26.5 7.21 10/23/07 1,111,775 2,817,899
Mitchell K. Dauerman 86,012 9.3 7.21 10/23/07 390,499 989,758
</TABLE>
(1) These options have been granted pursuant to the Company's
Nonqualified Stock Option Plan, and 25% vested immediately upon the
date of grant and an additional 25% shall vest on each of the first,
second and third anniversaries of the date of grant.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The 5%
and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and
do not represent the Company's estimate or projection of the
Company's future Common Stock prices. These amounts represent certain
assumed rates of appreciation in the value of the Company's Common
Stock from the fair market value on the date of grant. Actual gains,
if any, on stock option exercises are dependent on the future
performance of the Common Stock and overall stock market conditions.
The amounts reflected in the table may not necessarily be achieved.
49
<PAGE>
The following table shows the number of shares covered by both exercisable
and unexercisable stock options held by the Named Executive Officers as of
the fiscal year ended on December 31, 1997, and the values for exercisable
and unexercisable options. No options were exercised during such fiscal year
by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND OPTION VALUES AT FISCAL YEAR-END
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997 (1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C>
Scott Scherr ......... 79,181 237,544 $ -- $--
Alan Goldstein, M.D. 61,220 183,660 -- --
Mitchell K. Dauerman 95,149 64,509 151,382 --
</TABLE>
(1) Options are in-the-money if the market value of the shares covered
thereby is greater than the option exercise price. This calculation is
based on the fair market value at December 31, 1997 of $7.21 per share,
less the exercise price.
STOCK OPTION PLAN
The Company's Nonqualified Stock Option Plan (the "Plan") was adopted in
April 1996. Under the Plan, options to purchase shares of Common Stock may be
granted to employees and directors of the Company upon approval of the
Compensation Committee of the Board of Directors. As of March 31, 1998,
options to purchase 5,059,500 shares were authorized for issuance under the
Plan, of which 1,808,437 options to purchase shares were outstanding with a
weighted average exercise price of $6.34 per share. Other than with respect
to options granted as compensation to non-employee Directors, the option
price for each share of stock subject to any option granted under the Plan
will be equal to the fair market value of such share on the date on which the
option is granted, or such other amount as may be determined by the
Compensation Committee of the Board of Directors. The option price for shares
purchased through the exercise of an option is payable in cash, in shares of
stock, or in any combination thereof, as determined by the Compensation
Committee. In the event of a change in control (as defined in the Plan) in
which shares are converted into other property, outstanding options will
become fully vested, will be terminated and the option holder will receive a
cash payment equal to the value of his or her option. All options cease to be
exercisable upon the tenth anniversary of the date of grant.
DIRECTOR COMPENSATION
As compensation for serving on the Board of Directors, following the
consummation of the Offering each director who is not employed by the Company
shall receive a quarterly retainer of $5,000, payable exclusively in the form
of options to purchase Common Stock under the Plan. Such options are
exercisable at a 70% discount to the grant date market value of the Common
Stock, with the total discount on all options granted for a calendar quarter
equaling the retainer fees earned by the non-employee directors for such
quarter. All directors are reimbursed for expenses incurred in connection
with their attendance at Board of Directors and committee meetings.
In addition, in November 1997, prior to the adoption of the current
compensation structure for the directors, each of Messrs. Marc Scherr, Wilber
and Yanover were granted fully-vested options to purchase 25,298 shares of
Common Stock under the Plan at an exercise price of $7.21 per share, in
consideration for having served as directors of the Company.
LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers
a corporation to indemnify its officers and directors and to purchase
insurance with respect to liability arising out of their capability or status
as directors and officers, provided that this provision shall not eliminate
or limit the liability of a director: (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for liability under Section 174 of the DGCL,
or (iv) for a transaction
50
<PAGE>
pursuant to which the director received an improper personal benefit. None of
the foregoing, however, alters a director's liability under the federal
securities laws or affects the availability of equitable remedies, such as an
injunction or rescission, for breach of fiduciary duty. The DGCL provides
further that the indemnification permitted thereunder shall not be deemed
exclusive of any other rights to which the directors and officers may be
entitled under the corporation's by-laws, any agreement, a vote of
stockholders or otherwise. The Company's Certificate of Incorporation
contains a provision eliminating the personal liability of directors to the
maximum extent permitted by law and requires the Company to indemnify its
officers and directors to the fullest extent permitted by the DGCL.
CERTAIN TRANSACTIONS
In June 1992, the Partnership entered into a Software Development
Agreement with Strategic Image Systems, Inc. ("Strategic"), a corporation
controlled by Dr. Goldstein, the Executive Vice President, Chief Technology
Officer and a director and stockholder of the Company, which provided for the
payment of royalties by the Partnership to Strategic on sales of software
developed by Strategic for the Partnership. At the time the parties entered
into this Agreement, Dr. Goldstein was not an employee, officer or partner of
the Partnership and the parties were not otherwise affiliated. In connection
with the Agreement, in 1993 the Partnership granted a 10% limited partnership
interest in the Partnership to Strategic. In January 1995, the Partnership
agreed to pay $650,000 and granted a 12% limited partnership interest in the
Partnership to Strategic, in exchange for the contribution by Strategic to
the Partnership of all rights under the Software Development Agreement,
thereby terminating the Partnership's obligation to make royalty payments
thereunder. Also in 1995, the Partnership paid approximately $61,000 to
employees of Strategic for commissions on sales of the Partnership's products
to Resellers. In 1995 and 1996, the Partnership purchased and subleased
computer equipment from Strategic for cash payments totaling $86,000 in 1995
and $139,000 in 1996.
In June 1995, the Partnership acquired the business of The Ultimate
Software Group of New York, Inc. ("USGNY"), a Reseller of the Company's
products, in exchange for a 3.86% limited partnership interest in the
Partnership valued at approximately $772,000 at that time. Mr. Marc Scherr, a
director and stockholder of the Company and the brother of Mr. Scott Scherr,
the Company's Chairman of the Board of Directors, President and Chief
Executive Officer, was a director and officer of USGNY and a holder of
approximately 12% of its outstanding common stock. In addition, Reuben
Scherr, the father of Messrs. Marc and Scott Scherr, was a stockholder of
USGNY.
In 1995, Mr. Marc Scherr and Rick Wilber, each a director and stockholder
of the Company, loaned $50,000 and $300,000, respectively, to the Partnership
at an interest rate of 1% per month. In May 1996, Mr. Marc Scherr agreed to
the cancellation of his loan in exchange for the issuance of 957.854 shares
of Series A Convertible Preferred Stock of the Company (which will convert
into 9,693 shares of Common Stock) valued at $50,000 based on the then
current price of $52.20 per share. Also, in May 1996, Mr. Wilber was repaid
$50,000 plus accrued interest in cash and agreed to the cancellation of the
remaining $250,000 of his loans in exchange for the issuance of 4,789.272
shares of Series A Convertible Preferred Stock of the Company (which will
convert into 48,463 shares of Common Stock) valued at $250,000 based on the
then current price of $52.20 per share.
In the second and third calendar quarters of 1996, a series of
transactions were consummated primarily to alter the Company's structure from
a partnership to a corporation. At the time of these transactions, the
Company and the Partnership were under common control and certain directors
and officers of the Company were partners in the Partnership. These
transactions included the following:
Acquisition of Strategic. The Company acquired all of the outstanding
capital stock of Strategic from its shareholders, consisting of Dr. Goldstein
and members of his immediate family, in exchange for 97,826.059 shares of
Class B Common Stock of the Company (which were converted into 989,902 shares
of Common Stock), valued at approximately $5,106,520 based on the then
current value of $52.20 per share. Of such 97,826.059 shares of Class B
Common Stock, 40,448.741 shares (which were converted into 409,301 shares of
Common Stock) were issued to Dr. Goldstein having a value of approximately
$2,111,424 based on the then current value of $52.20 per share. At that time,
Strategic was the owner of the intellectual property rights underlying the
Company's products and an 18.2% limited partnership interest in the
Partnership.
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<PAGE>
Acquisition of GP. The Company acquired all of the outstanding capital
stock of The Ultimate Software Group, Inc. ("GP"), a Florida corporation
controlled by Mr. Scott Scherr, from its shareholders (together with the
shareholders of Strategic, the "Participating Stockholders"), including Mr.
Scott Scherr, members of his immediate family and certain other officers of
the Company, in exchange for 174,331.938 shares of Class B Common Stock of
the Company (which converted into 1,764,065 shares of Common Stock), valued
at approximately $9,100,127 based on the then current value of $52.20 per
share. Of such 174,331.938 shares of Class B Common Stock, 71,476.798 shares
(which were converted into 723,274 shares of Common Stock) were issued to Mr.
Scott Scherr having a value of approximately $3,731,089 based on the then
current value of $52.20 per share. At that time, GP owned a 32.5% limited
partnership in interest in the Partnership.
Transfer of Operations. The business and operations of the Partnership
were transferred and conveyed to the Company in exchange for the issuance by
the Company of 236,300 shares of Class A Common Stock (167,553 shares of
which were cancelled pursuant to certain escrow arrangements described below
and the remaining shares of which converted into 1,030,398 shares of Common
Stock) and 536,269 shares of Class B Common Stock (which were converted into
5,426,506 shares of Common Stock) and payment of $660,550 in cash. 272,157 of
such shares of Class B Common Stock (which were convertible into 2,753,956
shares of Common Stock) were beneficially owned by the Company as a result of
its acquisition of GP and Strategic and were cancelled upon the dissolution
of the Partnership in March 1998.
Class A Escrow. The Company entered into an escrow agreement with the
Partnership pursuant to which all 236,300 shares of the Class A Common Stock
issued to the Partnership were placed in escrow (the "Class A Escrow"). Under
the terms of such escrow agreement, following the occurrence of certain
specified events, a portion of the shares held in the Class A Escrow would be
released to the Partnership and the remaining shares would be cancelled. The
calculation of the number of shares to be released was to be based on the
performance of certain assets transferred by the Partnership to the Company.
In March 1998, 68,747 of the shares of Class A Common Stock (which were
converted into 1,030,398 shares of Common Stock) held in the Class A Escrow
were released to the Partnership and the remaining 167,553 shares of Class A
Common Stock held in the Class A Escrow were surrendered to the Company and
cancelled in accordance with the escrow agreement.
Class B Escrow. The Company entered into an escrow agreement with the
Partnership and the Participating Stockholders pursuant to which 230,700
shares of the Class B Common Stock (which were converted into 2,334,453
shares of Common Stock) issued to the Partnership and the Participating
Stockholders were placed in escrow (the "Class B Escrow"). Under the terms of
such escrow agreement, following the occurrence of certain specified events,
all of the shares held in the Class B Escrow would be released to the
Partnership and the Participating Stockholders, unless the value of the
shares of Series A Convertible Preferred Stock issued to J.P. Morgan
Investment Corporation and Sixty Wall Street SBIC Fund, L.P. (collectively,
"Morgan") did not meet certain threshold levels at the time of such events,
in which case all of such shares held in the Class B Escrow would be
cancelled. Pursuant to an amendment to such escrow agreement, all of the
shares of Class B Common Stock held in the Class B Escrow will be released to
the Partnership (or its successors) and the Participating Stockholders upon
the execution of a firm underwriting agreement for the Offering on or before
July 1, 1998.
In April 1996, the Company sold a total of 95,787 shares of Series A
Convertible Preferred Stock (which will convert into 969,269 shares of Common
Stock) at a price of $52.20 per share to Morgan at an aggregate purchase
price of approximately $5.0 million. In connection with the sale, the Company
entered into a Series A Convertible Preferred Stock Purchase Agreement (the
"Morgan Purchase Agreement") and a shareholders rights agreement, pursuant to
which Morgan was granted certain consent, preemptive and registration rights.
In addition, the holders of Series A Convertible Preferred Stock, voting
separately as a class, were granted the right to elect a director of the
Company (the "Series A Director"). Morgan, by virtue of its ownership of a
majority of the issued and outstanding shares of Series A Convertible
Preferred Stock, has the power to elect the Series A Director. There is
currently no Series A Director. Prior to the consummation of the Offering,
all shares of Series A Convertible Preferred Stock will be converted into
shares of Common Stock. See "Shares Eligible for Future Sale -- Registration
Rights".
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<PAGE>
In April 1996, the Company issued to Mr. Marc Scherr and Patrick A.
Gerschel fully-vested options to purchase an aggregate of 323,130 shares of
Common Stock at an exercise price of $5.16 per share, 240,488 of which are
currently held by Mr. Marc Scherr, as consideration for consulting services
performed for the Company in connection with the development of the Company's
strategic business and financial plans. Mr. Gerschel is the principal
shareholder of Gerschel & Co., Inc., of which Mr. Marc Scherr is a director.
Mr. Gerschel is a stockholder of the Company and previously was a stockholder
of USGNY. In 1995, Mr. Gerschel loaned an aggregate of $250,000 to the
Partnership at an interest rate of 1% per month. In 1996, Mr. Gerschel and
members of his immediate family loaned an aggregate of $750,000 to the
Partnership at an interest rate of 1% per month. In May 1996, Mr. Gerschel
and such members of his immediate family agreed to the cancellation of all
such loans in exchange for the issuance of an aggregate of 19,157.088 shares
of Series A Convertible Preferred Stock of the Company (which will convert
into 193,851 shares of Common Stock) valued at $1,000,000 based on the then
current price of $52.20 per share.
In May 1996, Robert A. Yanover, a director of the Company, purchased 4,000
shares of the Company's Series A Convertible Preferred Stock (which will
convert into 40,476 shares of Common Stock), and in December, 1996, Mr.
Yanover purchased 4,000 shares of the Company's Series B Convertible
Preferred Stock (which will convert into 40,476 shares of Common Stock), in
each case, at a purchase price of $52.20 per share.
In May 1996, Michael Feinberg, a holder of more than 5% of the outstanding
capital stock of the Company, and his wife purchased an aggregate of
approximately 28,736 shares of the Company's Series A Convertible Preferred
Stock (which will convert into 290,780 shares of Common Stock) at a purchase
price of $52.20 per share. In December 1996 and April 1997, Mr. Feinberg
purchased 28,736 and 19,157 shares, respectively, of the Company's Series B
Convertible Preferred Stock (which will convert into an aggregate of 484,629
shares of Common Stock), in each case, at a purchase price of $52.20 per
share. At the time of these purchases, Mr. Feinberg was a limited partner in
the Partnership.
Upon commencement of his employment with the Company in September 1996,
Mitchell K. Dauerman, Executive Vice President, Chief Financial Officer and
Treasurer of the Company, was granted fully-vested options to purchase 73,646
shares of Common Stock of the Company at an exercise price of $5.16 per
share.
In June 1997, the Company sold a total of 153,257 shares of Series B
Convertible Preferred Stock (which will convert into 1,550,808 shares of
Common Stock) at a price of $52.20 per share to HarbourVest Venture Partners
V -- Direct Fund L.P. ("HarbourVest") for an aggregate purchase price of
approximately $8.0 million. In connection with such sale, the Company entered
into a Series B Convertible Preferred Stock Purchase Agreement (the
"HarbourVest Purchase Agreement") and a shareholders rights agreement,
pursuant to which HarbourVest was granted certain consent, preemptive and
registration rights. In addition, the holders of Series B Convertible
Preferred Stock, voting separately as a class, were granted the right to
elect a director of the Company (the "Series B Director"). HarbourVest, by
virtue of its ownership of a majority of the issued and outstanding shares of
Series B Convertible Preferred Stock, has the power to elect the Series B
Director. In June 1997, Mr. Nemirovsky, a Managing Director of HarbourVest,
was elected as the Series B Director. Prior to the consummation of the
Offering, all shares of Series B Convertible Preferred Stock will be
converted into shares of Common Stock. See "Shares Eligible for Future Sale
- -- Registration Rights."
In September 1997, LeRoy A. Vander Putten, a director of the Company,
purchased 2,000 shares of the Company's Series B Convertible Preferred Stock
(which will convert into 20,238 shares of Common Stock) at a purchase price
of $52.20 per share.
In November 1997, each of Messrs. Marc Scherr, Wilber and Yanover were
granted fully-vested options to purchase up to 25,298 shares of Common Stock
under the Plan at an exercise price of $7.21 per share, in consideration for
having served as directors of the Company.
The Company intends to move, in the first calendar quarter of 1999, into
new and larger facilities currently being constructed in Weston, Florida. The
Company is currently negotiating on an arms-length basis to lease
approximately 40,000 square feet in these facilities. The owner of these
facilities is a limited partnership of which Mr. Marc Scherr, a director of
the Company, is a limited partner. Mr. Marc Scherr is also an officer of the
general partner of such limited partnership. The execution of a lease on this
property by the Company will require the approval of a majority of
disinterested members of the Board of Directors of the Company.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of March 31,
1998, after giving effect to the conversion into Common Stock of the Class A
Common Stock, Class B Common Stock and Class C Common Stock and the Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock, by: (i)
each person who is known by the Company to own beneficially more than 5% of
the outstanding shares of the Common Stock, (ii) each of the Company's Named
Executive Officers, (iii) each director of the Company and (iv) all directors
and executive officers of the Company as a group. The address of each of the
officers and directors of the Company is c/o The Ultimate Software Group,
Inc., 3111 Stirling Road, Ft. Lauderdale, Florida 33312.
<TABLE>
<CAPTION>
PERCENTAGE
OF OUTSTANDING
SHARES(2)
NUMBER OF SHARES ----------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
<S> <C> <C> <C>
HarbourVest Partners V--Direct Fund L.P.(3) ... 1,550,808 12.3% 9.8%
1 Financial Center, 44th Fl.
Boston, MA 02111
J.P. Morgan Investment Corporation(4) ......... 969,269 7.7 6.1
60 Wall Street
New York, NY 10260
Michael Feinberg(5)............................ 1,046,740 8.3 6.6
3980 N. 32 Terrace
Hollywood, FL 33312
Scott Scherr(6)................................ 627,288 4.9 3.9
Alan Goldstein, M.D.(7)........................ 470,520 3.7 3.0
Mitchell K. Dauerman(8)........................ 99,035 * *
Ofer Nemirovsky(3) ............................ 1,550,808 12.3 9.8
Marc D. Scherr(9).............................. 302,612 2.3 1.9
LeRoy A. Vander Putten......................... 20,238 * *
Rick Wilber(10)................................ 348,110 2.8 2.2
Robert A. Yanover(11).......................... 160,517 1.3 1.0
All directors and executive officers as a group 3,579,128 28.2 22.5
(8 persons)(12)...............................
</TABLE>
* Indicates beneficial ownership of less than 1.0% of the outstanding
Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and includes voting or
investment power with respect to securities. Shares of Common Stock
issuable upon the exercise of stock options or exercisable within 60
days hereof are deemed outstanding and to be beneficially owned by
the person holding such option for purposes of computing such
person's percentage ownership, but are not deemed outstanding for the
purpose of computing the percentage ownership of any other person.
Except for shares held jointly with a person's spouse or subject to
applicable community property laws, or as indicated in the footnotes
to this table, each stockholder identified in the table possesses the
sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by such stockholder.
(2) Applicable percentage of ownership is based on 12,620,806 shares
outstanding prior to this Offering and 15,870,806 shares to be
outstanding upon the consummation of the Offering.
(3) Mr. Nemirovsky, a director of the Company, is a Managing Director of
HarbourVest Partners, L.L.C. which is the Managing Director of the
HVP V-Direct Associates, L.L.C. which in turn is the General Partner
of HarbourVest Partners V -- Direct Fund L.P. Mr. Nemirovsky
disclaims beneficial ownership of the shares held by HarbourVest
Partners V -- Direct Fund L.P., except to the extent of his pecuniary
interest therein.
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<PAGE>
(4) Represents 901,421 shares of Common Stock held by J.P. Morgan
Investment Corporation and 67,848 shares of Common Stock held by
Sixty Wall Street SBIC Fund, L.P., which is an affiliate of J.P.
Morgan Investment Corporation.
(5) Represents 949,815 shares of Common Stock and 96,925 shares of Common
Stock owned by Ann Feinberg, his spouse.
(6) Represents 431,738 shares of Common Stock, 116,369 shares of Common
Stock held by the Scott Scherr Living Trust, of which Mr. Scott
Scherr is the trustee, and exercisable options to purchase 79,181
shares of Common Stock. Mr. Scott Scherr disclaims beneficial
ownership of the shares owned by the Scott Scherr Living Trust.
(7) Represents 339,985 shares of Common Stock, 69,315 shares of Common
Stock held by the Alan S. Goldstein Irrevocable Trust, of which Mr.
Goldstein's wife Cheryl A. Zickler is the trustee, and exercisable
options to purchase 61,220 shares of Common Stock. Mr. Goldstein
disclaims beneficial ownership of the shares owned by the Alan S.
Goldstein Irrevocable Trust.
(8) Represents 3,886 shares of Common Stock held by certain trusts
established for the benefit of Mr. Dauerman's children, and
exercisable options to purchase 95,149 shares of Common Stock. Mr.
Dauerman disclaims beneficial ownership of the shares owned by the
trusts established for the benefit of his children.
(9) Represents 23,259 shares of Common Stock, 13,567 shares of Common
Stock held by certain trusts established for the benefit of Mr. Marc
Scherr's children, and exercisable options to purchase 265,786 shares
of Common Stock. Mr. Marc Scherr disclaims beneficial ownership of
the shares owned by the trusts established for the benefit of his
children.
(10) Represents 322,812 shares of Common Stock and exercisable options to
purchase 25,298 shares of Common Stock.
(11) Represents 135,219 shares of Common Stock held by Yanover Associates,
the general partner of which Mr. Yanover is the President, and
exercisable options to purchase 25,298 shares of Common Stock.
(12) Represents an aggregate of 3,027,196 shares of Common Stock and
exercisable options to purchase an aggregate of 551,932 shares of
Common Stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the consummation of the Offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, $0.01 par value
per share, and 2,500,000 authorized shares of preferred stock, $0.01 par
value per share ("Preferred Stock"). Options to purchase 1,846,130 shares
have been granted under the Plan ranging from $5.16 per share to $11.96 per
share.
COMMON STOCK
As of March 31, 1998, there were 12,620,806 shares of Common Stock
outstanding and held of record by 173 stockholders, assuming the conversion
of all shares of the Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock. Based upon the number of shares outstanding as
of that date and after giving effect to the issuance of the 3,250,000 shares
of Common Stock offered hereby, there will be 15,870,806 shares of Common
Stock outstanding upon the closing of this Offering. The outstanding shares
of Common Stock are, and the shares offered by the Company in this Offering
will be, when issued and paid for, fully paid and nonassessable.
The holders of Common Stock will possess exclusive voting rights in the
Company, except to the extent that the Board of Directors shall have
designated voting power with respect to any Preferred Stock issued. Each
holder of Common Stock is entitled, on each matter submitted for a vote of
holders of Common Stock, to one vote for each share of such stock registered
in such holder's name on the books of the Company. Except as otherwise
required by law and subject to the rights of any holders of Preferred Stock,
the presence in person or by proxy of the holders of record of a majority of
the shares entitled to vote at a meeting of stockholders constitutes a quorum
for the transaction of business at that meeting. Actions requiring approval
of stockholders will generally require approval by a majority vote at a
meeting at which a quorum is present, except that at each stockholder meeting
for the election of directors, provided a quorum is present, directors will
be elected by a plurality of votes validly cast in the election. Stockholders
will not have any right to cumulate votes in the election of directors.
Subject to the rights of any holders of Preferred Stock, each holder of
Common Stock is entitled to receive dividends out of funds legally available
therefor when, as, and if, declared by the Board of Directors. Dividends may
be paid in cash, property or shares of the Company's capital stock. In the
event of liquidation, dissolution or winding-up of the Company, the holders
of the Common Stock will be entitled to share ratably in the distribution of
all assets of the Company remaining after payment of all of the Company's
debts and liabilities and of all sums to which holders of any Preferred Stock
may be entitled. Holders of the Common Stock will not generally be entitled
to preemptive rights with respect to any shares of capital stock which may be
issued by the Company.
PREFERRED STOCK
Upon the consummation of the Offering, no shares of Preferred Stock will
be issued or outstanding. The Preferred Stock may be issued by the Board of
Directors in one or more series and may have such voting rights, if any,
designations, preferences and relative, participating, optional and other
special rights, and such qualifications, limitations and restrictions, as the
Board of Directors (or a duly authorized committee thereof) may fix by
resolution or resolutions. Moreover, the Board of Directors may issue such
Preferred Stock, from time to time, in transactions without the approval of
the stockholders of the Company, and the preferences, designations, voting
and other rights of any such shares of Preferred Stock may materially limit
or qualify the rights of the outstanding shares of Common Stock. See " --
Anti-Takeover Effects of Certain Provisions of Delaware Law and the
Certificate of Incorporation and the By-Laws."
The holders of Preferred Stock issued by the Company may be given the
right to vote for the election of directors generally or to elect a specified
number or percentage of the members of the Board of Directors. The number of
directors that may be elected by the holders of any class or series of
Preferred Stock having the right to elect directors may be in addition to the
number of directors fixed by or pursuant to the Certificate of Incorporation.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer,
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<PAGE>
proxy contest, merger or otherwise, and thereby to protect the continuity of
the Company's management. The issuance of shares of Preferred Stock pursuant
to the authority of the Board of Directors described above may adversely
affect the rights of the holders of Common Stock. For example, Preferred
Stock issued by the Company may rank prior to the Common Stock as to dividend
rights, liquidation preference or both, may have full or limited voting
rights and may be convertible into shares of Common Stock. Accordingly, the
issuance of shares of Preferred Stock may discourage bids for the Common
Stock at a premium or may otherwise adversely affect the market price of the
Common Stock.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND THE
CERTIFICATE OF INCORPORATION AND BY-LAWS
Interested Stockholder Restrictions. Section 203 of the DGCL prohibits an
"interested stockholder" of a Delaware corporation from engaging in certain
business combinations with the corporation, including mergers or
consolidations or acquisitions of additional shares of the corporation, for a
period of three years following the time that the stockholder becomes an
"interested stockholder." An "interested stockholder" is defined to include
persons owning directly or indirectly 15% or more of the outstanding voting
stock of a corporation. The prohibitions under Section 203 are not applicable
in certain circumstances, including those in which (i) the business
combination or the transaction which results in the stockholder becoming an
"interested stockholder" is approved by the corporation's board of directors
prior to the time the stockholder becomes an "interested stockholder," (ii)
the "interested stockholder" upon consummation of such transaction owns at
least 85% of the voting stock of the corporation outstanding prior to such
transaction or (iii) the corporation has elected not to be governed by such
prohibitions.
Issuance of Common and Preferred Stock. The Company believes that its
ability to issue the authorized but unissued shares of Common Stock and
shares of Preferred Stock without stockholder consent will provide the
Company with the flexibility necessary to meet its future needs without
experiencing the time delay of having to seek stockholder approval. The
unissued shares of Common Stock and Preferred Stock will be issuable from
time to time for any corporate purpose, including, without limitation, stock
splits, stock dividends, employee benefit and compensation plans,
acquisitions and public or private sales for cash as a means of raising
capital. It is possible that the Board of Directors might use its authority
(subject to the restrictions referred to above) to issue Common Stock or
Preferred Stock in a way which could deter or impede the completion of a
tender offer or other attempt to gain control of the Company which the Board
of Directors does not approve. The Company does not have any predetermined
plans or commitments to use its authority to effect any such issuance, but
reserves the right to take any action in the future which the Board of
Directors deems to be in the best interests of the stockholders and the
Company under the circumstances.
It is not possible to state the actual effect of any issuance of Preferred
Stock upon the rights of holders of Common Stock because the Board of
Directors has not determined an issuance price or prices, terms or the rights
of the holders of Preferred Stock. However, such effects might include: (i)
restrictions on Common Stock dividends if Preferred Stock dividends have not
been paid; (ii) dilution of the voting power and equity interest of existing
holders of Common Stock to the extent that any Preferred Stock series has
voting rights or would acquire voting rights upon the occurrence of certain
events (such as the failure to pay dividends for a specified period) or that
any Preferred Stock series is convertible into Common Stock; and (iii)
current holders of Common Stock not being entitled to share in the Company's
assets upon liquidation, dissolution or winding-up until satisfaction of any
liquidation preferences granted to any series of Preferred Stock.
Board of Directors. On April 15, 1998, the stockholders of the Company
approved an amendment of the Certificate of Incorporation, effective
immediately prior to the consummation of the Offering, to provide that the
Board of Directors will consist of not less than five (5) nor more than
eleven (11) directors (subject to the rights of the holders of any series of
Preferred Stock), with the exact number to be determined from time to time by
the affirmative vote of a majority of the entire Board of Directors. Pursuant
to the Certificate of Incorporation and the By-Laws, effective immediately
prior to the consummation of the Offering, the Board of Directors of the
Company will be divided into three classes,
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<PAGE>
each of whose members will serve for a staggered three-year term. The Board
will consist of two (2) Class I Directors (Messrs. Yanover and Vander
Putten), two (2) Class II Directors (Messrs. Marc Scherr and Wilber) and
three (3) Class III Directors (Messrs. Scott Scherr and Nemirovsky and Dr.
Goldstein). At each annual meeting of stockholders, a class of directors will
be elected for a three-year term to succeed the directors of the same class
whose terms are then expiring. The terms of the Class I Directors, Class II
Directors and Class III Directors expire upon the election and qualification
of successor directors at the annual meeting of stockholders held during the
calendar years 1999, 2000 and 2001, respectively. At any meeting of the Board
of Directors, a majority of the entire Board of Directors will constitute a
quorum for the transaction of business, and, subject to certain exceptions,
at any meeting at which a quorum is present the affirmative vote of a
majority of the directors present will constitute an act of the Board of
Directors. Subject to the rights of holders of any series of Preferred Stock,
any newly created directorship and any other vacancy occurring on the Board
of Directors may be filled by a majority of the directors then in office
(regardless of whether such majority constitutes a quorum of directors) or by
a sole remaining director.
Pursuant to the Certificate of Incorporation, no director may be removed
from office except for cause and only by the affirmative vote of the holders
of a majority of the combined voting power of all outstanding shares of stock
then entitled to vote generally in the election of directors, voting as a
single class.
Stockholder Action. The Certificate of Incorporation requires that,
following the consummation of the Offering, any action required or permitted
to be taken by the stockholders may only be effected at a duly called annual
or special meeting.
Limitation on Call of Special Meetings of Stockholders. Under the DGCL,
special meetings of stockholders may be called by the Board of Directors or
by such other persons as may be authorized by the Certificate of
Incorporation or the By-Laws. The Certificate of Incorporation and By-Laws
provide that special meetings may be called by the Chairman of the Board or
the President or by the Secretary at the request in writing of a majority of
the members of the Board of Directors. Except as otherwise required by law or
the Certificate of Incorporation, no business may be transacted at any
special meeting of stockholders other than the items of business stated in
the notice of such meeting.
Amendment of the Certificate of Incorporation and By-Laws. The DGCL
provides generally that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporation's
certificate of incorporation, unless a corporation's certificate of
incorporation requires a greater percentage. The Certificate of Incorporation
of the Company provides that any amendment relating to the following matters
requires the affirmative vote of the holders of at least 66 2/3% of the
voting power of the shares entitled to vote at an election of directors: (i)
the size of the Board of Directors; (ii) division of the Board of Directors
into classes; (iii) the filling of vacancies on the Board of Directors; (iv)
the basis for removal of directors; and (v) limitations on annual or special
meetings. Pursuant to the DGCL, the stockholders may amend a provision of the
By-Laws by the affirmative vote of the holders of a majority of the shares
entitled to vote. The Certificate of Incorporation requires the affirmative
vote of at least 66 2/3% of the shares entitled to vote at an election of
directors to amend the provision of the By-Laws concerning the filling of
vacancies on the Board of Directors. In addition, the Certificate of
Incorporation grants the Board of Directors the authority to amend the
By-Laws by the affirmative vote of at least 66 2/3% of the entire Board of
Directors.
Advance Notice Requirements. The By-Laws establish advance notice
procedures with regard to (i) the nomination, other than by or at the
direction of the Board of Directors, of candidates for election to the Board
of Directors (the "Nomination Provision") and (ii) certain business to be
brought by a stockholder before an annual meeting of stockholders (the
"Business Provision").
The Nomination Provision, by requiring advance notice of nominations by
stockholders, affords the Board of Directors a meaningful opportunity to
consider the qualifications of the proposed nominees and, to the extent
deemed necessary or desirable by the Board of Directors, to inform
stockholders about such qualifications.
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<PAGE>
The Business Provision, by requiring advance notice of business proposed
by a stockholder to be brought before an annual meeting, provides a more
orderly procedure for conducting annual meetings of stockholders and provides
the Board of Directors with a meaningful opportunity prior to the meeting to
inform stockholders, to the extent deemed necessary or desirable by the Board
of Directors, of any business proposed to be conducted at such meeting,
together with any recommendation of the Board of Directors. The Business
Provision does not affect the right of stockholders to make stockholder
proposals for inclusion in proxy statements for the Company's annual meetings
of stockholders pursuant to the rules of the Securities and Exchange
Commission.
Although these By-Laws provisions do not give the Board of Directors any
power to approve or disapprove of stockholder nominations for the election of
directors or of any other business desired by stockholders to be conducted at
an annual meeting of stockholders if the proper procedures are followed,
these By-Laws provisions may have the effect of precluding a nomination or
precluding the conduct of business at a particular annual meeting, and may
make it difficult for a third party to conduct a solicitation of proxies to
elect its own slate of directors or otherwise attempt to obtain control of
the Company, even if such a solicitation or attempt might be beneficial to
the Company and its stockholders.
Preferred Share Purchase Rights. In April 1998, the Board of Directors
approved in principle the adoption of a Rights Agreement and the Company
intends to adopt such Rights Agreement following the consummation of the
Offering. Pursuant to the proposed Rights Agreement, one Preferred Stock
purchase right will be attached to each share of Common Stock. The Rights
will be transferable only with Common Stock, until they become exercisable at
an exercise price to be determined by the Board of Directors prior to the
time the Company enters into the Rights Agreement.
Generally, the Rights will become exercisable only if a person or group
(other than certain affiliates of the Company) acquires 15% or more of the
issued and outstanding shares of Common Stock or announces a tender offer,
the consummation of which would result in ownership by a person or group of
15% or more of the issued and outstanding shares of Common Stock. Each Right
will entitle the holder, until the tenth anniversary of the Rights Agreement,
to buy one one-hundredth of a share of Preferred Stock, at an as of yet
undetermined exercise price.
Under the proposed Rights Agreement, if a person or group (other than
certain affiliates of the Company) acquires 15% or more of the issued and
outstanding shares of Common Stock or if the Company is the surviving
corporation in a merger, each Right will entitle its holder (other than such
person or members of such group) to purchase, at the Right's then current
exercise price, shares of Common Stock having a market value of twice the
Right's exercise price. If the Company is acquired in a merger or other
business combination transaction, other than a merger which follows an offer
which the Continuing Directors (as defined in the Rights Agreement) determine
to be fair and in the best interests of the shareholders, each right will
entitle its holder to purchase, at the Right's then current exercise price, a
number of the acquiring company's common shares having a then current market
value of twice the Right's exercise price.
Pursuant to the proposed Rights Agreement, following the acquisition by a
person or group of beneficial ownership of 15% or more of the Common Stock,
the Board of Directors of the Company will be entitled to exchange the Rights
(other than Rights owned by such person or group), in whole or in part, at an
exchange ratio of one share of Common Stock per Right. Prior to ten days
after the acquisition by a person or group of beneficial ownership of 15% or
more of the Common Stock, the Rights will be redeemable in whole, not in
part, for one cent per Right.
The issuance of the Rights to purchase shares of Preferred Stock will have
certain anti-takeover effects. The Rights will cause substantial dilution to
a person or group that attempts to acquire the Company on terms not approved
by the Board of Directors. The Rights should not interfere with any merger or
other business combination approved by the Board of Directors prior to ten
days after the time that a person or group has acquired beneficial ownership
of 15% or more of the Common Stock, as the rights will be redeemable by the
Company prior to such time.
LIMITATIONS ON DIRECTOR LIABILITY
The Certificate of Incorporation contains a provision that is designed to
limit the directors' liability to the extent permitted by the DGCL and any
amendments thereto. Specifically, directors will not be held
59
<PAGE>
liable to the Company or its stockholders for an act or omission in such
capacity as a director, except for liability as a result of (i) any breach of
the director's duty of loyalty to the Company or its stockholders, (ii) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) liability under Section 174 of the Delaware
General Corporation Law, or (iv) a transaction pursuant to which the director
received an improper personal benefit. The principal effect of the limitation
on liability provision is that a stockholder is unable to prosecute an action
for monetary damages against a director of the Company unless the stockholder
can demonstrate one of the specified bases for liability. This provision,
however, does not eliminate or limit director liability arising in connection
with causes of action brought under the federal securities laws. The
Certificate of Incorporation does not eliminate its directors' duty of care.
The inclusion of this provision in the Certificate of Incorporation may,
however, discourage or deter stockholders or management from bringing a
lawsuit against directors for a breach of their fiduciary duties, even though
such an action, if successful, might otherwise have benefited the Company and
its stockholders. This provision should not affect the availability of
equitable remedies such as injunction or rescission based upon a director's
breach of the duty of care.
The By-Laws provide that the Company is generally required to indemnify
its directors and officers for all judgments, fines, settlements, legal fees
and other expenses incurred in connection with pending or threatened legal
proceedings because of the officer's or director's position with the Company
or another entity that the officer or director serves at the Company's
request, subject to certain conditions, and to advance funds to its officers
and directors to enable them to defend against such proceedings. To receive
indemnification, the officer or director must have been successful in the
legal proceeding or acted in good faith and in what was reasonably believed
to be a lawful manner in the Company's best interest.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Boston
Equiserve L.P.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Offering, the Company will have an aggregate
of 15,870,709 shares of Common Stock outstanding, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options to
purchase Common Stock. The 3,250,000 shares sold in the Offering are freely
tradable without restriction or further registration under the Securities Act,
except that any shares held by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act ("Rule 144"), may generally be
sold only in compliance with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 12,620,709 shares of Common Stock are deemed "restricted
securities" as defined under Rule 144. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under the Securities Act. Subject to the lock-up agreements
described below and the provisions of Rule 144, additional shares will be
available for sale in the public market (subject in the case of shares held by
affiliates to compliance with certain volume restrictions) as follows: (i)
449,074 shares will be available for immediate sale in the public market on the
date of this Prospectus, (ii) 146,428 shares will be eligible for sale on
June 17, 1998, (iii) 186,910 shares will be eligible for sale 90 days after
the date of this Prospectus, (iv) 10,605,236 shares will be eligible for
sale 180 days after the date of this Prospectus and (v) 1,233,061 shares will
be eligible for sale under Rule 144 upon the expiration of the applicable
one-year holding periods.
In general, under Rule 144, a person (or persons whose shares are
aggregated) including an affiliate, who has beneficially owned shares for at
least one year is entitled to sell, within any three-month period commencing 90
days after the date of this Prospectus, a number of shares that does not exceed
the greater of (i) one percent of the then outstanding shares of Common Stock
(approximately 158,707 shares immediately after the Offering) or (ii) the
average weekly trading volume in the Common Stock during the four calendar
weeks preceding the date on which notice of such sale is filed, subject to
certain restrictions. In addition, a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale and
who has beneficially owned the shares proposed to be sold for at least two
years would be entitled to sell such shares under Rule 144(k) without regard to
the volume limitations described above. To the extent that shares were acquired
from an affiliate of the Company, such affiliates' holding period for the
purpose of effecting a sale under Rule 144 commences on the date of transfer
from the affiliate.
An employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or
contract is entitled to rely on the resale provisions of Rule 701 under the
Securities Act, which permits non-affiliates to sell their Rule 701 shares
without having to comply with the public information, holding period, volume
limitation or notice provisions of Rule144 and permits affiliates to sell
their Rule 701 shares without having to comply with Rule 144's holding period
restrictions, in each case commencing 90 days after the date of this
Prospectus.
OPTIONS
Following the Offering, the Company intends to file a Registration
Statement on Form S-8 under the Securities Act to register all shares of
Common Stock subject to the Plan which do not qualify for exemption from the
registration requirements of the Securities Act. Such Registration Statement
will become effective upon filing. Shares covered by this Registration
Statement will be eligible for sale in the public market after the effective
date of such Registration Statement, subject to the Lock-up Agreements, if
applicable.
REGISTRATION RIGHTS
Pursuant to a Shareholders Rights Agreement (the "Shareholders Rights
Agreement") dated June 6, 1997 among the Company and certain persons and
entities (the "Rightsholders"), including Scott Scherr, Alan Goldstein,
Morgan and HarbourVest, such Rightsholders will be entitled following the
Offering to
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<PAGE>
certain rights with respect to the registration under the Securities Act of a
total of approximately 8,227,807 shares of Common Stock (the "Registrable
Stock"). The Shareholders Rights Agreement generally provides that, in the
event the Company proposes to register any of its securities under the
Securities Act, the Rightsholders shall be entitled to include their
Registrable Stock in such Registration, subject to the right of the managing
underwriter of any underwritten offering to limit for marketing reasons the
number of shares of Registrable Stock included in such "piggyback"
registration.
At any time following six months after the effective date of the Offering,
each of Morgan, HarbourVest or Rightsholders holding more than 25% of the
shares subject to the Shareholders Rights Agreement may require the Company
to prepare and file a registration statement under the Securities Act with
respect to their shares of Registrable Stock. The Company need effect no more
than two such demand registrations for each of Morgan and HarbourVest and two
demand registrations for the other Rightsholders. The Company is not required
to file a demand registration statement within six months after the effective
date of any other demand registration statement filed by the Company.
In addition, the Acquired Resellers whose businesses were acquired in
1998, were granted certain piggyback registration rights with respect to the
shares issued in connection with the acquisition of their businesses. Such
registration rights, with respect to each Acquired Reseller, expire on the
first anniversary of the date of the acquisition of such Acquired Reseller's
business.
EFFECT OF SALES OF SHARES
Prior to the Offering, there has been no public market for the Common
Stock, and no precise prediction can be made as to the effect, if any, that
market sales of shares of Common Stock or the availability of shares of
Common Stock for sale will have on the market price of the Common Stock
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock in the public market could adversely affect prevailing market
prices and could impair the Company's future ability to raise capital through
the sale of its equity securities.
LOCK-UP AGREEMENTS
All directors and officers and certain stockholders of the Company
(holding an aggregate of 11,900,025 shares of Common Stock) have agreed that
they will not, without the prior written consent of the representatives of
the Underwriters and subject to certain exceptions, sell or otherwise dispose
of any shares of Common Stock or options to acquire shares of Common Stock
during either a 90-day or 180-day period following the date of this Prospectus.
See "Underwriting."
The Company has agreed not to sell or otherwise dispose of any shares of
Common Stock during the 180-day period following the date of the Prospectus,
except the Company may issue, and grant options to purchase, shares of Common
Stock under the Plan. In addition, the Company may issue shares of Common
Stock in connection with any acquisition of another company if the terms of
such issuance provide that such Common Stock shall not be resold prior to the
expiration of the 180-day period referenced in the preceding sentence. See
"Risk Factors -- Shares Eligible for Future Sale."
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
June , 1998 (the "Underwriting Agreement"), the Underwriters named below,
who are represented by Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") and Volpe Brown Whelan & Company, LLC (the "Representatives"), have
severally agreed to purchase from the Company the respective number of shares
of Common Stock set forth opposite their names below.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- -------------------------------------------------------- --------------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation ....
Volpe Brown Whelan & Company, LLC .......................
--------------------
Total ................................................. 3,250,000
====================
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal
matters and to certain other conditions. The Underwriters are obligated to
purchase and accept delivery of all the shares of Common Stock offered hereby
(other than those shares covered by the over-allotment option described
below) if any are purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including
the Underwriters) at such price less a concession not in excess of $
per share. The Underwriters may allow, and such dealers may re-allow, to
certain other dealers a concession not in excess of $ per share. After
the initial offering of the Common Stock, the public offering price and other
selling terms may be changed by the Representatives at any time without
notice. The Underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
The Company and certain stockholders of the Company (the "Selling
Stockholders") have granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase, from time to time, in
whole or in part, up to an aggregate of 487,500 additional shares of Common
Stock at the initial public offering price less underwriting discounts and
commissions. The Underwriters may exercise such option solely to cover
overallotments, if any, made in connection with the Offering. To the extent
that the Underwriters exercise such option, each Underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such Underwriter's percentage underwriting
commitment as indicated in the preceding table.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Each of the Company, its executive officers and directors and certain
stockholders of the Company (including the Selling Stockholders) has agreed,
subject to certain exceptions, not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common
Stock or (ii) enter into any swap or other arrangement that transfers all or
a portion of the economic consequences associated with the ownership of any
Common Stock (regardless of whether any of the transactions described in
clause (i) or (ii) is to be settled by the delivery of Common Stock, or such
other securities, in cash or otherwise) for a period of 180 days after the
date of this Prospectus without the prior written consent of DLJ. In
addition, during such period, the Company has also agreed not to file any
registration statement with respect to, and each of its executive officers,
directors and certain stockholders
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<PAGE>
of the Company (including the Selling Stockholders) has agreed not to make
any demand for, or exercise any right with respect to, the registration of
any shares of Common Stock or any securities convertible into or exercisable
or exchangeable for Common Stock without DLJ's prior written consent.
Prior to the Offering, there has been no established trading market for
the Common Stock. The initial public offering price for the shares of Common
Stock offered hereby will be determined by negotiation among the Company and
the Representatives. The factors to be considered in determining the initial
public offering price include the history of and the prospects for the
industry in which the Company competes, the past and present operations of
the Company, the historical results of operations of the Company, the
prospects for future earnings of the Company, the recent market prices of
securities of generally comparable companies and the general condition of the
securities markets at the time of the Offering.
Other than in the United States, no action has been taken by the Company,
the Selling Stockholders or the Underwriters that would permit a public
offering of the shares of Common Stock offered hereby in any jurisdiction
where action for that purpose is required. The shares of Common Stock offered
hereby may not be offered or sold, directly or indirectly, nor may this
Prospectus or any other offering material or advertisements in connection
with the offer and sale of any such shares of Common Stock be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of such jurisdiction.
Persons into whose possession this Prospectus comes are advised to inform
themselves about and to observe any restrictions relating to the Offering and
the distribution of this Prospectus. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any shares of Common Stock
offered hereby in any jurisdiction in which such an offer or a solicitation
is unlawful.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. The Underwriters may bid for and
purchase shares of Common Stock in the open market to cover such syndicate
short position or to stabilize the price of the Common Stock. In addition,
the underwriting syndicate may reclaim selling concessions from syndicate
members and selected dealers if they repurchase previously distributed Common
Stock in syndicate covering transactions, in stabilizing transactions or
otherwise. These activities may stabilize or maintain the market price of the
Common Stock above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities
at any time.
LEGAL MATTERS
The validity of the shares of the Common Stock offered hereby will be
passed upon for the Company by Dewey Ballantine LLP, New York, New York.
Certain legal matters relating to the sale of the Common Stock offered hereby
will be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP,
New York, New York.
EXPERTS
The financial statements of the Company included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
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ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (including all amendments
thereto, the "Registration Statement") under the Securities Act with respect
to the Common Stock offered hereby. As permitted by the rules and regulations
of the Commission, this Prospectus omits certain information contained in the
Registration Statement. For further information with respect to the Company
and the Common Stock offered hereby, reference is hereby made to the
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any
agreement or other document filed as an exhibit to the Registration Statement
are not necessarily complete, and in each instance reference is made to the
copy of such agreement filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part
thereof may be obtained from such office upon payment of the prescribed fees.
The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's Web site
is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by an independent accounting firm and
will make available copies of quarterly reports containing unaudited
financial information for the first three quarters of each fiscal year.
65
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
REGISTRANT
The Ultimate Software Group, Inc. and Subsidiaries
Report of Independent Certified Public Accountants ................................... F-3
Consolidated Balance Sheets--December 31, 1996 and 1997 and March 31, 1998
(unaudited) ......................................................................... F-4
Consolidated Statements of Operations--For the years ended December 31, 1995, 1996
and 1997 and for the three months ended March 31, 1997 and 1998 (unaudited) ........ F-6
Consolidated Statements of Stockholders' Deficit--For the years ended December 31,
1995, 1996 and 1997 and for the three months ended March 31, 1998 (unaudited) ....... F-7
Consolidated Statements of Cash Flows--For the years ended December 31, 1995, 1996
and 1997 and for the three months ended March 31, 1997 and 1998 (unaudited) ........ F-8
Notes to Consolidated Financial Statements ........................................... F-10
BUSINESSES ACQUIRED IN 1996
Torrence & Associates, Inc. d/b/a The Ultimate Software Group
Report of Independent Certified Public Accountants ................................... F-26
Balance Sheet--December 31, 1995 ..................................................... F-27
Statement of Operations--For the year ended December 31, 1995 ........................ F-28
Statement of Shareholders' Deficit--For the year ended December 31, 1995 ............ F-29
Statement of Cash Flows--For the year ended December 31, 1995 ........................ F-30
Notes to Financial Statements ........................................................ F-31
The Ultimate Software Group of Georgia, Inc.
Report of Independent Certified Public Accountants ................................... F-34
Balance Sheet--December 31, 1995 ..................................................... F-35
Statement of Operations--For the year ended December 31, 1995 ........................ F-36
Statement of Shareholders' Deficit--For the year ended December 31, 1995 ............. F-37
Statement of Cash Flows--For the year ended December 31, 1995 ........................ F-38
Notes to Financial Statements ........................................................ F-39
The Ultimate Software Group Midwest, Ltd.
Report of Independent Certified Public Accountants ................................... F-42
Balance Sheet--December 31, 1995 ..................................................... F-43
Statement of Operations--For the year ended December 31, 1995 ........................ F-44
Statement of Partner's Deficit--For the year ended December 31, 1995 ................ F-45
Statement of Cash Flows--For the year ended December 31, 1995 ........................ F-46
Notes to Financial Statements ........................................................ F-47
The Ultimate Software Group of the Delaware Valley, Ltd.
Report of Independent Certified Public Accountants ................................... F-50
Balance Sheet--December 31, 1995 ..................................................... F-51
Statement of Operations--For the year ended December 31, 1995 ........................ F-52
Statement of Shareholders' Deficit--For the year ended December 31, 1995 ............ F-53
Statement of Cash Flows--For the year ended December 31, 1995 ........................ F-54
Notes to Financial Statements ........................................................ F-55
F-1
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
PAGE
BUSINESSES ACQUIRED IN 1998
The Ultimate Software Group of the Carolinas, Inc. and The Ultimate Software Group
of Virginia, Inc.
Report of Independent Certified Public Accountants ................................... F-57
Combined Balance Sheets--December 31, 1996 and 1997 .................................. F-58
Combined Statements of Operations--For the years ended December 31, 1995,
1996 and 1997 ....................................................................... F-59
Combined Statements of Shareholders' Deficit--For the years ended December 31, 1995,
1996 and 1997........................................................................ F-60
Combined Statements of Cash Flows--For the years ended December 31, 1995,
1996 and 1997 ....................................................................... F-61
Notes to Combined Financial Statements ............................................... F-62
The Ultimate Software Group of New York and New England, G.P.
Report of Independent Certified Public Accountants ................................... F-65
Balance Sheets--December 31, 1996 and 1997 ........................................... F-66
Statements of Operations--For the years ended December 31, 1995, 1996 and 1997 ...... F-67
Statements of Partners' Deficit--For the years ended December 31, 1995,
1996 and 1997 ....................................................................... F-68
Statements of Cash Flows--For the years ended December 31, 1995, 1996 and 1997 ...... F-69
Notes to Financial Statements ........................................................ F-70
Ultimate Investors Group, Inc. and Subsidiary
Report of Independent Certified Public Accountants.................................... F-73
Consolidated Balance Sheets--December 31, 1996 and 1997............................... F-74
Consolidated Statements of Operations--For the years ended December 31, 1995,
1996 and 1997........................................................................ F-75
Consolidated Statements of Shareholders' Deficit--For the years ended December 31,
1995, 1996 and 1997.................................................................. F-76
Consolidated Statements of Cash Flows--For the years ended December 31, 1995,
1996 and 1997........................................................................ F-77
Notes to Consolidated Financial Statements............................................ F-78
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Ultimate Software Group, Inc.:
We have audited the accompanying consolidated balance sheets of The
Ultimate Software Group, Inc. (a Delaware corporation and formerly The
Ultimate Software Group, Ltd., a Florida limited partnership) and
subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' deficit and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Ultimate Software
Group, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
January 20, 1998 (except with respect to the
matters discussed in Note 10 and 15, as to which
the date is April 30, 1998).
F-3
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
--------------------------- ----------------------------
1996 1997 1998 1998
PRO FORMA
(UNAUDITED--
(UNAUDITED) NOTE 15)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 1,420,220 $ 3,269,964 $ 657,942 $ 657,942
Accounts receivable, net ......................... 2,946,141 5,926,695 7,479,828 7,479,828
Due from stockholder ............................. 25,000 -- -- --
Prepaid commissions .............................. 228,713 330,081 105,081 105,081
Other prepaid expenses ........................... 236,845 324,250 716,167 716,167
------------ ------------- ------------- -------------
Total current assets ............................ 4,856,919 9,850,990 8,959,018 8,959,018
------------ ------------- ------------- -------------
Property and equipment, net ....................... 934,053 1,702,807 1,830,032 1,830,032
Acquired intangibles, net of accumulated
amortization of $6,971,226, $8,413,552 and
$8,604,619 (unaudited), respectively .............. 2,079,222 638,319 447,252 447,252
Other assets....................................... 119,357 247,207 859,286 859,286
------------ ------------- ------------- -------------
Total assets .................................... $ 7,989,551 $12,439,323 $12,095,588 $12,095,588
------------ ------------- ------------- -------------
LIABILITIES AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ................................. $ 852,037 $ 1,712,280 $ 2,085,780 $ 2,085,780
Accrued expenses ................................. 2,400,496 4,223,537 4,311,122 4,311,122
Customer deposits ................................ 527,122 2,866,247 1,066,250 1,066,250
Deferred revenue--current ........................ 3,201,593 6,897,890 8,533,853 8,533,853
Notes payable .................................... 273,142 -- -- --
Borrowings under line of credit agreement ....... 1,617,625 209,091 2,177,824 2,177,824
Current portion of capital lease obligations .... 215,481 162,286 267,259 267,259
------------ ------------- ------------- -------------
Total current liabilities ....................... 9,087,496 16,071,331 18,442,088 18,442,088
Capital lease obligations, net of current portion 216,514 54,228 574,035 574,035
Deferred revenue--long-term ....................... 1,079,851 1,716,222 1,658,165 1,658,165
Other long-term liabilities ....................... 47,497 105,197 108,893 108,893
------------ ------------- ------------- -------------
Total liabilities ............................... 10,431,358 17,946,978 20,783,181 20,783,181
------------ ------------- ------------- -------------
Commitments and contingencies (Notes 10 and 11)
</TABLE>
F-4
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------------ ------------------------------
1996 1997 1998 1998
PRO FORMA
(UNAUDITED--
(UNAUDITED) NOTE 15)
<S> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' DEFICIT--(CONTINUED)
Stockholders' deficit:
Preferred Stock, $.01 par value, 616,854, 501,914
and 501,914 shares authorized in 1996, 1997 and
1998, no shares issued or outstanding; pro forma
2,500,000 shares authorized, no shares
outstanding ..................................... $ -- $ -- $ -- $ --
Series A Convertible Preferred Stock, $.01 par
value, 191,573 shares authorized, issued and
outstanding in 1996, 1997 and 1998, convertible
into 1,938,527 shares of Common Stock ........... 1,916 1,916 1,916 --
Series B Convertible Preferred Stock, $.01 par
value, 191,573, 306,513 and 306,513 shares
authorized, 32,736, 295,672 and 295,672 shares
issued and outstanding in 1996, 1997 and 1998,
convertible into 2,991,905 shares of Common
Stock ........................................... 327 2,957 2,957 --
Common Stock, $.01 par value, 50,000,000 shares
authorized, no shares issued or outstanding in
1996, 1997 and 1998; pro forma 12,620,709 shares
issued and outstanding .......................... -- -- -- 126,207
Class A Common Stock, $.01 par value, 236,300
shares authorized, 236,300, 236,300 and 68,747
issued and outstanding in 1996, 1997 and 1998,
convertible into 1,030,398 shares of Common
Stock ........................................... 2,363 2,363 687 --
Class B Common Stock, $.01 par value, 1,200,000,
1,600,000 and 1,600,000 shares authorized in
1996, 1997 and 1998, 658,125 shares issued and
outstanding in 1996, 1997 and 1998, convertible
into 6,659,567 shares of Common Stock ........... 6,582 6,582 6,582 --
Class C Common Stock, $.01 par value, 200,000
shares authorized, 0, 50 and 50 shares issued
and outstanding in 1996, 1997 and 1998,
convertible into 409 shares of Common Stock .... -- -- -- --
Additional paid-in capital ....................... 18,062,552 31,572,365 35,757,392 35,643,325
Accumulated deficit .............................. (20,515,547) (37,093,838) (44,457,127) (44,457,127)
-------------- -------------- -------------- --------------
Total stockholders' deficit ..................... (2,441,807) (5,507,655) (8,687,593) (8,687,593)
-------------- -------------- -------------- --------------
Total liabilities and stockholders' deficit .... $ 7,989,551 $ 12,439,323 $ 12,095,588 $ 12,095,588
============== ============== ============== ==============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-5
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------------------------------------
1995 1996 1997 1997 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License ....................... $ 1,929,293 $ 4,273,434 $ 7,231,820 $ 817,510 $ 3,122,813
Service ....................... 1,344,163 4,252,527 9,080,733 1,958,240 4,074,668
Other ......................... 453,501 785,930 1,279,496 254,222 373,061
-------------- --------------- --------------- -------------- --------------
Total revenues ............... 3,726,957 9,311,891 17,592,049 3,029,972 7,570,542
-------------- --------------- --------------- -------------- --------------
Cost of revenues:
License ....................... -- -- 195,243 -- 204,413
Service ....................... 1,794,489 5,388,165 8,539,325 1,961,434 3,443,933
Other ......................... 39,610 457,778 834,388 184,468 299,127
-------------- --------------- --------------- -------------- --------------
Total cost of revenues ...... 1,834,099 5,845,943 9,568,956 2,145,902 3,947,473
-------------- --------------- --------------- -------------- --------------
Operating expenses:
Sales and marketing ........... 2,645,422 10,451,276 13,656,139 3,394,675 3,814,134
Research and development ..... 2,590,715 3,359,878 4,837,131 883,134 1,419,001
General and administrative ... 1,268,525 3,006,451 4,148,365 1,020,807 915,786
Amortization of acquired
intangibles .................. 38,889 6,932,337 1,442,326 283,530 191,069
-------------- --------------- --------------- -------------- --------------
Total operating expenses .... 6,543,551 23,749,942 24,083,961 5,582,146 6,339,990
-------------- --------------- --------------- -------------- --------------
Operating loss ............... (4,650,693) (20,283,994) (16,060,868) (4,698,076) (2,716,921)
Compensation related to
modification of escrow
agreement (Note 15) ........... -- -- -- -- (4,183,351)
Interest expense ............... (93,596) (178,520) (206,094) (58,148) (38,187)
Interest and other income ..... 13,178 76,885 250,006 25,685 8,989
-------------- --------------- --------------- -------------- --------------
Net loss ..................... $(4,731,111) $(20,385,629) $(16,016,956) $(4,730,539) $(6,929,470)
============== =============== =============== ============== ==============
Net loss per share--basic and
diluted........................ $ (0.71) $ (2.30) $ (1.37) $ (0.46) $ (0.55)
============== =============== =============== ============== ==============
Weighted average shares
outstanding--basic and
diluted........................ 6,659,567 8,853,930 11,710,216 10,329,891 12,620,806
============== =============== =============== ============== ==============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE CLASS A COMMON CLASS B COMMON
PREFERRED STOCK PREFERRED STOCK STOCK STOCK
--------------- --------------- ------------------ ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994,
before restatement for the
1998 poolings ................. -- $ -- -- $ -- -- $ -- -- $ --
1998 pooling transactions (Note
15) ........................... -- -- -- -- -- -- 121,856 1,219
------- ------ ------- ------ --------- ------- ------- ------
Balance, December 31, 1994,
restated for the 1998 pooling
transactions .................. -- -- -- -- -- -- 121,856 1,219
Partnership interest issued for
acquisitions .................. -- -- -- -- -- -- -- --
Partnership interest issued for
consulting services ........... -- -- -- -- -- -- -- --
Contributions .................. -- -- -- -- -- -- -- --
Equity transactions of 1998
pooling transactions .......... -- -- -- -- -- -- -- --
Net loss ....................... -- -- -- -- -- -- -- --
------- ------ ------- ------ --------- ------- ------- ------
Balance, December 31, 1995 .... -- -- -- -- -- -- 121,856 1,219
Contributions .................. -- -- -- -- -- -- -- --
Net loss prior to the transfer
of the Partnership to the
Company ....................... -- -- -- -- -- -- -- --
Issuance of stock in connection
with the Transactions (Note
10) ........................... 191,573 1,916 -- -- 236,300 2,363 536,269 5,363
Net proceeds from issuances of
Series B Convertible Preferred
Stock ......................... -- -- 32,736 327 -- -- -- --
Non-cash issuance of options to
purchase Common Stock for
consulting services ........... -- -- -- -- -- -- -- --
Equity transactions of 1998
pooling transactions .......... -- -- -- -- -- -- -- --
Net loss ....................... -- -- -- -- -- -- -- --
------- ------ ------- ------ --------- ------- ------- ------
Balance, December 31, 1996 .... 191,573 1,916 32,736 327 236,300 2,363 658,125 6,582
Net proceeds from issuances of
Series B Convertible Preferred
Stock ......................... -- -- 262,936 2,630 -- -- -- --
Equity transactions of 1998
pooling transactions .......... -- -- -- -- -- -- -- --
Net loss ....................... -- -- -- -- -- -- -- --
------- ------ ------- ------ --------- ------- ------- ------
Balance, December 31, 1997 .... 191,573 1,916 295,672 2,957 236,300 2,363 658,125 6,582
Net loss (unaudited) ........... -- -- -- -- -- -- -- --
Compensation related to
modification of escrow
agreement (unaudited) ......... -- -- -- -- -- -- -- --
Equity transactions of 1998
pooling transactions
(unaudited).................... -- -- -- -- -- -- -- --
Cancellation of shares related
to release of escrow........... -- -- -- -- (167,553) (1,676) -- --
Balance, March 31, 1998
(unaudited) ................... 191,573 $1,916 295,672 $2,957 68,747 $ 687 658,125 $6,582
======= ====== ======= ====== ========= ======= ======= ======
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
GENERAL LIMITED PAID-IN ACCUMULATED STOCKHOLDERS'
PARTNER PARTNERS CAPITAL DEFICIT DEFICIT
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994,
before restatement for the
1998 poolings ................. $ (935,536) $ 1,382,698 $ -- $ -- $ 447,162
1998 pooling transactions (Note
15) ........................... -- -- 847,256 (731,413) 117,062
----------- ----------- ----------- ------------- -------------
Balance, December 31, 1994,
restated for the 1998 pooling
transactions .................. (935,536) 1,382,698 847,256 (731,413) 564,224
Partnership interest issued for
acquisitions .................. -- 250,000 -- -- 250,000
Partnership interest issued for
consulting services ........... -- 123,125 -- -- 123,125
Contributions .................. -- 2,154,376 -- -- 2,154,376
Equity transactions of 1998
pooling transactions .......... -- -- 815,655 (100,000) 715,655
Net loss ....................... (2,762,488) (1,183,924) -- (784,699) (4,731,111)
----------- ----------- ----------- ------------- -------------
Balance, December 31, 1995 .... (3,698,024) 2,726,275 1,662,911 (1,616,112) (923,731)
Contributions .................. -- 1,070,000 -- -- 1,070,000
Net loss prior to the transfer
of the Partnership to the
Company ....................... (1,115,936) (478,258) -- -- (1,594,194)
Issuance of stock in connection
with the Transactions (Note
10) ........................... 4,813,960 (3,318,017) 14,185,845 -- 15,691,430
Net proceeds from issuances of
Series B Convertible Preferred
Stock ......................... -- -- 1,633,473 -- 1,633,800
Non-cash issuance of options to
purchase Common Stock for
consulting services ........... -- -- 285,054 -- 285,054
Equity transactions of 1998
pooling transactions .......... -- -- 295,269 (108,000) 187,269
Net loss ....................... -- -- -- (18,791,435) (18,791,435)
----------- ----------- ----------- ------------- -------------
Balance, December 31, 1996 .... -- -- 18,062,552 (20,515,547) (2,441,807)
Net proceeds from issuances of
Series B Convertible Preferred
Stock ......................... -- -- 13,476,563 -- 13,479,193
Equity transactions of 1998
pooling transactions .......... -- -- 33,250 (561,335) (528,085)
Net loss ....................... -- -- -- (16,016,956) (16,016,956)
----------- ----------- ----------- ------------- -------------
Balance, December 31, 1997 .... -- -- 31,572,365 (37,093,838) (5,507,655)
Net loss (unaudited) ........... -- -- -- (6,929,470) (6,929,470)
Compensation related to
modification of escrow
agreement (unaudited) ......... -- -- 4,183,351 -- 4,183,351
Equity transactions of 1998
pooling transactions
(unaudited).................... -- -- -- (433,819) (433,819)
Cancellation of shares related
to release of escrow........... -- -- 1,676 -- --
Balance, March 31, 1998
(unaudited) ................... $ -- $ -- $35,757,392 $(44,457,127) $ (8,687,593)
=========== =========== =========== ============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-7
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------------------------
1995 1996 1997 1997 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................. $(4,731,111) $(20,385,629) $(16,016,956) $(4,730,539) $(6,929,470)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization ...... 245,204 7,316,413 2,087,017 399,943 442,594
Provision for doubtful accounts .... 24,000 241,000 443,702 -- 155,086
Issuance of equity instruments for
consulting services ................ 123,125 285,054 -- -- --
Non-cash equity transactions of 1998
poolings ........................... 10,655 33,549 8,163 21,138 --
Compensation related to modification
of escrow agreement ................ -- -- -- -- 4,183,351
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable ................ (660,647) (1,930,475) (3,424,256) 109,917 (1,708,219)
Prepaid commissions ................ -- (228,713) (101,368) (255,121) 225,000
Other prepaid expenses ............. 58,041 (118,757) (346,077) 171,157 (364,694)
Other assets ....................... -- (6,649) (127,850) (8,152) (677,678)
Accounts payable ................... 117,114 485,586 860,243 (203,458) 373,500
Accrued expenses ................... 127,654 1,936,479 1,898,041 (1,265,466) 87,585
Deferred revenue and customer
deposits .......................... 730,584 2,356,908 6,671,793 2,794,773 (222,091)
Other long-term liabilities......... -- -- 57,700 -- 3,696
-------------- --------------- --------------- -------------- --------------
Net cash used in operating activities (3,955,381) (10,015,234) (7,989,848) (2,965,808) (4,431,340)
-------------- --------------- --------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures ................. (189,598) (154,796) (1,433,927) (321,084) (59,787)
Amounts (paid to) received from
affiliate and shareholder ........... (199,100) 221,100 25,000 -- --
Net (issuance) repayments of notes
receivable .......................... -- (45,382) (49,452) 6,849 38,376
Due from distributor ................. 425,000 -- -- -- --
Cash used in acquisitions ............ -- (660,555) -- -- --
-------------- --------------- --------------- -------------- --------------
Net cash provided by (used in)
investing activities ................. 36,302 (639,633) (1,458,379) (314,235) (21,411)
-------------- --------------- --------------- -------------- --------------
</TABLE>
F-8
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------------------
1995 1996 1997 1997 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net borrowings under line of credit
agreements .......................... $ 511,289 $ 926,335 $(1,408,534) $ (815,903) $ 1,968,733
Net proceeds from notes
payable-related parties ............. 424,843 594,658 -- -- --
Due to affiliate ..................... 450,000 (450,000) -- -- --
Borrowings (payments) on notes
payable ............................. -- 23,142 (273,142) 18,367 --
Net proceeds from capital lease
obligations ......................... -- -- -- -- 381,095
Payments on capital lease obligations (113,349) (161,819) (215,481) (53,642) (75,280)
Contributions to partners' capital .. 2,154,376 1,070,000 -- -- --
Net proceeds from issuances of
Convertible Preferred Stock ......... -- 9,423,331 13,479,193 3,435,118 --
Equity transactions of 1998 poolings . 705,000 228,720 (284,065) 75,000 (433,819)
----------- ------------ -------------- ------------ -------------
Net cash provided by financing
activities ........................... 4,132,159 11,654,367 11,297,971 2,658,940 1,840,729
----------- ------------ -------------- ------------ -------------
Net increase (decrease) in cash and
cash equivalents ..................... 213,080 999,500 1,849,744 (621,103) (2,612,022)
Cash and cash equivalents, beginning
of year .............................. 207,640 420,720 1,420,220 1,420,220 3,269,964
----------- ------------ -------------- ------------ -------------
Cash and cash equivalents, end of
year.................................. $ 420,720 $ 1,420,220 $ 3,269,964 $ 799,117 $ 657,942
=========== ============ ============== ============ =============
Supplemental disclosure of cash flow
information:
Cash paid for interest ................ $ 88,324 $ 152,166 $ 150,247 $ 23,147 $ 36,358
=========== ============ ============== ============ =============
Supplemental disclosure of non-cash
financing activities:
</TABLE>
The Company entered into capital lease obligations to acquire new equipment
totaling $408,127, $206,739, $0 and $318,965 (unaudited) in 1995, 1996,
1997 and the three months ended March 31, 1998, respectively.
In 1996, the Company issued Class A Common Stock and Class B Common Stock in
connection with the transactions discussed in Note 10.
In 1996, the Company issued 24,904 shares of Series A Convertible Preferred
Stock (convertible into 252,004 shares of Common Stock) as payment for
certain obligations to related parties (see Note 10).
In 1996, the Company issued 8,534 shares of Series A Convertible Preferred
Stock (convertible into 86,356 shares of Common Stock) valued at $445,500
to certain former limited partners for limited partnership interests in the
Partnership (see Note 10).
In 1996, $75,000 of accrued but unpaid dividends were declared by one of the
1998 Acquired Resellers.
In 1998, the Company acquired five third-party resellers in transactions
accounted under the poolings-of-interest accounting method (see Note 15).
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-9
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group, Inc. (the "Company") or, prior to the
transactions consummated in April 1996 as further discussed below, The
Ultimate Software Group, Ltd. (the "Partnership"), designs, markets,
implements and supports technologically advanced, cross-industry human
resource management and payroll software solutions, marketed primarily to
middle-market organizations with 300 to 15,000 employees. The Company reaches
its customer base and target market through its direct sales force and a
network of national, regional and local strategic partners.
In April 1996, the Company completed a series of transactions (the
"Transactions") whereby the businesses of certain third-party resellers of
the Company's products were purchased by the Partnership, and the business
and operations of the Partnership, along with the acquired businesses, were
transferred and conveyed to the Company in exchange for certain shares of
Class A and Class B Common Stock of the Company. The acquisitions were
accounted for under the purchase method of accounting. See Note 12. The
Company issued shares of its Class B Common Stock in exchange for all of the
issued and outstanding shares of the capital stock of the Partnership's
general partner, The Ultimate Software Group, Inc., a Florida corporation
("GP"), and for all of the issued and outstanding shares of the capital stock
of Strategic Image Systems, Inc. ("Strategic"), a limited partner of the
Partnership. Such exchange was accounted for on a historical cost basis as GP
and Strategic were related to the Partnership. As a result of the
Transactions, GP and Strategic became wholly-owned subsidiaries of the
Company. For a more detailed description of the Transactions, see Note 10.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Intercompany accounts and transactions have been
eliminated in consolidation.
In February and March 1998, the Company acquired the businesses of five
third-party resellers of the Company's products (the "Acquired Resellers") in
exchange for an aggregate of 121,856 shares of the Company's Class B Common
Stock, (convertible into 1,233,061 shares of Common Stock). The Company is
accounting for these transactions using the pooling-of-interest method of
accounting and therefore the accounts of the Acquired Resellers have been
included retroactively in the consolidated financial statements as if the
companies had operated as one entity since inception. See Note 15.
Interim Financial Data
In the opinion of the management of the Company, the accompanying
unaudited consolidated financial statements contain all adjustments
(consisting of only normal and recurring adjustments) necessary to present
fairly the financial position of the Company as of March 31, 1998, and the
results of operations and cash flows for the three months ended March 31,
1997 and 1998. The results of operations and cash flows for the three months
ended March 31, 1998 are not necessarily indicative of the results of
operations or cash flows which may be reported for the remainder of 1998, or
for any subsequent period.
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. The accompanying
consolidated balance sheets include $1,013,657, $1,548,479 and $39,878
(unaudited) in interest-bearing accounts as of December 31, 1996 and 1997 and
March 31, 1998, respectively.
Accounts Receivable
Accounts receivable are principally from end-users of the Company's
products. The Company performs periodic credit evaluations of its customers
and has recorded allowances for estimated losses.
F-10
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A rollforward of allowances is as follows:
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------
1995 1996 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance, beginning of year ...... $ -- $ 24,000 $ 215,000 $533,827
Provision for doubtful accounts 24,000 241,000 443,702 155,086
Write-offs ...................... -- (50,000) (124,875) (76,493)
--------- ---------- ----------- --------------
Balance, end of year ............. $24,000 $215,000 $ 533,827 $612,420
========= ========== =========== ==============
</TABLE>
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repairs
are charged to expense when incurred; betterments are capitalized. Upon the
sale or retirement of assets, the cost, accumulated depreciation and
amortization are removed from the accounts and any gain or loss is
recognized.
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered. The principal components of deferred revenue were as
follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
-------------------------- ---------------
1996 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
License revenues $1,226,727 $3,069,603 $ 5,754,589
Service revenues 3,054,717 5,544,509 4,437,429
------------ ------------ ---------------
$4,281,444 $8,614,112 $10,192,018
============ ============ ===============
</TABLE>
As of December 31, 1996 and 1997 and March 31, 1998, $1,079,851,
$1,716,222 and $1,658,165 (unaudited), respectively, of deferred revenue will
be recognized in periods after the year ending December 31, 1997 and 1998.
Associated deferred costs, primarily relating to commissions, amounted to
$228,713, $330,081 and $105,081 (unaudited) at December 31, 1996 and 1997 and
March 31, 1998, respectively. Commission expense is recognized in the period
the related revenue is recognized.
Revenue Recognition
The Company licenses software under noncancelable license agreements and
provides services including maintenance, implementation, training and
consulting services. In accordance with the provision of SOP 97-2, license
revenues are generally recognized when a noncancelable license agreement has
been signed, the product has been delivered, no significant vendor
obligations remain and collection of the related receivable is considered
probable. Revenues from maintenance agreements for maintaining, supporting
and providing periodic updates are recognized ratably over the maintenance
period, which in most instances is one year. Revenues for training and
consulting services are recognized as services are performed.
F-11
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prior to 1996, the Company entered into 18 exclusive reseller agreements
with third parties, which provided each such party with exclusive
distribution rights to sell the Company's products in a specified territory.
In consideration, the Company received an up-front nonrefundable fee, which
ranged from $25,000 to $300,000. Such fees were recognized as revenues, at
the time an agreement was executed. In 1995 and 1996, the Company bought
back, or otherwise reacquired, the distribution rights of 13 of its
resellers. As of December 31, 1996 and 1997, the Company had five third-party
resellers, the businesses of which were subsequently acquired. See Notes 10
and 15.
The Company also generates revenues relating to the sale of
payroll-related forms. Such revenues are recognized as the product is shipped
or as the services are rendered.
Until 1997, substantially all of the Company's revenues were derived from
its ULTIPRO for LAN product and related services. The Company has shifted its
focus from a product based on DOS and local area network (LAN) technologies,
ULTIPRO for LAN, to a product based on Windows and client/server
technologies, UltiPro for Windows. As a result of this shift and the decrease
in general market demand for DOS-based products, the Company's revenues from
its ULTIPRO for LAN product have been declining and are expected to decline
for the foreseeable future. There can be no assurance that the decline in
revenues from sales of ULTIPRO for LAN will not have a material adverse
effect on the Company's business, operating results and financial condition.
While the Company still derives revenues from the support, service and
limited sales of the ULTIPRO for LAN product line, its UltiPro for Windows
product and related support and services are expected to account for
substantially all of the Company's revenues for the foreseeable future.
However, to date, the Company has had only limited experience with customer
acceptance and use, as well as in implementing UltiPro for Windows.
Accordingly, the Company's future success will depend on maintaining and
increasing acceptance of UltiPro for Windows and related services and its
ability to successfully implement the product. There can be no assurance that
UltiPro for Windows will gain broad market acceptance or that the Company
will be able to successfully implement UltiPro for Windows in a timely
manner. Any factors adversely affecting the demand for UltiPro for Windows
would have a material adverse effect on the Company's business, operating
results and financial condition. The Company operates in a highly competitive
industry characterized by rapidly changing technology which could adversely
affect the Company's revenues and the related operating results.
Cost of Revenues
The cost of revenues consists of cost of license revenues, cost of service
revenues and cost of other revenues. Cost of license revenues consists of
fees payable to a third party for software products distributed by the
Company. Cost of service revenues consists of costs to provide consulting,
implementation, maintenance, technical support and training to the Company's
customers and the cost of providing periodic updates. Cost of other revenues
consist of costs related to sales of payroll-related forms.
Income Taxes
Income taxes were not provided for, or payable, by the Partnership.
Partners were taxed individually on their share of Partnership earnings.
Subsequent to the Transactions discussed in Note 10, the Company is subject
to corporate Federal and state income taxes. The Company accounts for income
taxes under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, Accounting for Income Taxes. SFAS 109 provides for a
liability approach under which deferred income taxes are provided based upon
enacted tax laws and rates applicable to the periods in which the taxes
become payable.
Acquired Intangibles
Acquired intangibles are being amortized on a straight-line basis over 30
months, the estimated useful life of such acquired assets (primarily
consisting of customer lists and personnel). In accordance
F-12
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
with SFAS No. 121, Accounting for the Impairment Of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, the Company continually evaluates
whether later events and circumstances have occurred that indicate the
remaining acquired intangibles may warrant revision or may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the related business'
undiscounted cash flows from operations over the remaining life of the cost
in excess of net assets of acquired businesses, in measuring whether such
cost is recoverable. Operating results as well as projected future cash flows
relating to the resellers acquired during 1996 indicated an impairment in
acquired intangibles as of December 31, 1996 and 1997. Accordingly, the
Company charged $5,050,308 and $308,206 to amortization of acquired
intangibles in 1996 and 1997, respectively, to reduce acquired intangibles to
their estimated realizable value.
Software Development Costs
SFAS No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed, requires capitalization of certain software
development costs subsequent to the establishment of technological
feasibility. Based on the Company's product development process,
technological feasibility is established upon completion of a working model.
Costs incurred by the Company between the achievement of technological
feasibility of the Company's products and the point at which the product is
ready for general release have historically substantially coincided, and, as
a result, software development costs required to be capitalized have been
immaterial.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments, consisting of cash and cash
equivalents, accounts receivable, due from stockholder, accounts payable and
borrowings approximate fair value due to their short-term nature.
Accounting for Stock Options
In October 1995, SFAS No. 123, Accounting for Stock-Based Compensation,
was issued and is effective for the year ending December 31, 1996. As
permitted by SFAS No. 123, the Company has continued to account for employee
stock options in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and has included the pro forma
disclosures required by SFAS No. 123 for the years ending December 31, 1996
and 1997 at Note 9.
SFAS No. 123 also applies to transactions in which equity instruments are
issued to acquire goods or services from nonemployees. Those transactions
must be accounted for based on the fair value of the consideration received
or the fair value of the instruments issued, whichever is more reliably
measurable. Accordingly, the Company has valued the issuance of such options
to nonemployees to purchase Common Stock using the Black-Scholes option
pricing model. See Note 10.
Per Share Amounts
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings Per Share. This statement simplifies the standards for
computing and presenting earnings per
F-13
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
share ("EPS") and makes them comparable to international EPS standards. SFAS
128 replaces the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the face
of the income statement for all entities with complex capital structures.
SFAS 128 became effective for financial statements issued for periods ending
after December 31, 1997 and requires restatement of all prior periods
presented. Basic EPS is calculated by dividing income available to common
stockholders by the weighted average number of shares of Common Stock
outstanding during each period. Diluted EPS includes the potential impact of
convertible securities and dilutive common stock equivalents using the
treasury stock method of accounting.
Basic and diluted loss per share for all periods presented include the
impact of the subsequent conversion of shares of Preferred and Common Stock
outstanding as described in Note 15, effected for the stock split discussed
in Note 15. Other common stock equivalents have not been included in the
computation of diluted loss per share as their impact is antidilutive.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, which is required to be adopted in fiscal 1998. This statement
establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. This
statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in financial statements and (b) display
the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of
statements of financial position. Comprehensive income is defined as the
change in equity during the financial reporting period of a business
enterprise resulting from non-owner sources.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information, which is required to be adopted in
fiscal 1998. This statement requires that a public business enterprise report
financial and descriptive information about its reportable operating segments
including, among other things, a measure of segment profit or loss, certain
specific revenue and expense items, and segment assets.
The Company has not yet determined the impact on its financial statement
presentation as a result of adopting SFAS Nos. 130 and 131.
3. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
-------------------------- ---------------
1996 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
Payroll ........................................ $ 488,521 $ 603,245 $ 149,149
Bonuses ........................................ 1,343,097 1,778,000 2,033,097
Other items individually representing less than
5% of total current liabilities ............... 568,878 1,842,292 2,128,876
------------ ------------ ---------------
$2,400,496 $4,223,537 $4,311,122
============ ============ ===============
</TABLE>
F-14
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED AS OF DECEMBER 31, AS OF MARCH 31,
USEFUL LIFE --------------------------------------------
1996 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C>
Equipment ........................................ 3 years $1,472,297 $ 2,846,718 $ 3,021,591
Furniture, fixtures and improvements ............. 5 years 185,573 244,355 420,757
------------ ------------- ---------------
1,657,870 3,091,073 3,442,348
Less--accumulated depreciation and amortization . (723,817) (1,388,266) (1,612,316)
------------ ------------- ---------------
$ 934,053 $ 1,702,807 $ 1,830,032
============ ============= ===============
</TABLE>
Included in property and equipment is equipment acquired under capital
leases as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------ ---------------
1996 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
Equipment ....................... $ 672,122 $ 672,122 $1,372,870
Less--accumulated amortization . (309,526) (527,628) (599,029)
----------- ----------- ---------------
$ 362,596 $ 144,494 $ 773,841
=========== =========== ===============
</TABLE>
Depreciation and amortization expense on property and equipment totaled
$156,318, $373,488, $653,010 and $117,836 (unaudited) and $251,527
(unaudited) for the years ended December 31, 1995, 1996 and 1997, and for the
three months ended March 31, 1997 and 1998, respectively.
5. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under noncancellable agreements which
are accounted for as capital leases and expire at various dates through 1999.
Interest rates on these leases range from 7.5% to 17.9%. The annual
maturities of the capital lease obligations are as follows as of December 31,
1997:
<TABLE>
<CAPTION>
<S> <C>
1998 ................................................. $180,903
1999 ................................................. 58,059
----------
238,962
Less--amount representing interest ................... (22,448)
----------
Lease obligations reflected as current ($162,286) and
non-current ($54,228) ............................... $216,514
==========
</TABLE>
6. LINE OF CREDIT AGREEMENTS
In September 1996, the Company entered into a line of credit with a bank
for the lesser of $4,000,000 or 80% of eligible receivables, as defined. The
line of credit was increased to the lesser of 80% of the eligible receivables
(as defined) or $6.0 million for the period beginning April 23, 1998 and
ending September 30, 1998. The line of credit bears interest at LIBOR plus
4.875% per annum (10.875% and 10.563% (unaudited) at December 31, 1997 and
March 31, 1998, respectively), but not less than 8.000% per annum in any
month. Interest on the line of credit is payable monthly. As of December 31,
1996, $1,487,784 was outstanding under the line. Such amount was repaid in
1997 with proceeds from the sale of the Company's Series B Convertible
Preferred Stock. As of March 31, 1998, $2,177,824 (unaudited) was outstanding
under the line. The line of credit matures on October 30, 1998, and will
automatically renew for successive one-year terms, unless either party elects
to terminate the agreement. The line of credit is collateralized by
substantially all of the Company's assets.
F-15
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Through August 1996, the Company had two revolving credit agreements with
a bank which permitted total borrowings of up to $600,000. As of December 31,
1995, $590,567 was outstanding under the previous lines. Such amount was
repaid with proceeds from the sale of the Company's Series A Convertible
Preferred Stock and the related revolving credit agreements were terminated.
The Company had a $200,000 line of credit with a bank which bore interest
at prime plus 1.0% (9.5% at December 31, 1997), payable quarterly through
maturity. The line matured in January 1998 and was collateralized by the
accounts receivable of a subsidiary of the Company. Amounts outstanding under
the line of credit were $129,841 and $109,091 as of December 31, 1996 and
1997, respectively.
The Company has $130,000 available under a line of credit agreement with a
bank. The line of credit bears interest at an annual rate of 9% and is
renewable annually. Amounts outstanding under the line of credit were zero
and $100,000 as of December 31, 1996 and 1997, respectively. The outstanding
balance was repaid subsequent to December 31, 1997.
7. NOTES PAYABLE
Notes payable at December 31, 1996 includes a note to an unrelated party
in the amount of $250,000 which bore interest at 10%, payable annually
beginning in April 1997. The note was assumed by the Company in connection
with the 1996 acquisitions discussed in Note 12 and was repaid in 1997 with
the proceeds from the sale of the Company's Series B Convertible Preferred
Stock. Also included is a note to a bank which bears interest at prime plus
1.5% (9.75% at December 31, 1996), payable monthly through maturity. The note
was collateralized by substantially all of the Companies' assets and was
repaid during 1997.
Note payable at December 31, 1996 also includes a note to a bank in the
amount of $23,142 which bears interest at prime plus 1.5% (9.75% at December
31, 1996), payable monthly through maturity. The note was repaid during 1997.
8. INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses. At December 31, 1997, the Company
has approximately $21,500,000 of net operating loss carryforwards for federal
income tax reporting purposes available to offset future taxable income. The
carryforwards expire through 2012. Utilization of such net operating losses
may be limited as a result of cumulative ownership changes in the Company's
equity instruments.
The components of the net deferred tax assets included in the accompanying
consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------
1996 1997
<S> <C> <C>
Net operating losses .................. $ 3,400,000 $ 8,400,000
Deferred revenue ...................... 542,000 741,000
Accruals not currently deductible .... 524,000 693,000
Allowance for doubtful accounts ...... 69,000 170,000
Tax basis in property over book basis 56,000 114,000
Deferred commissions .................. (89,000) (117,000)
Valuation allowance ................... (4,502,000) (10,001,000)
------------- --------------
Net deferred income tax assets ....... $ -- $ --
============= ==============
</TABLE>
The Company has provided a full valuation allowance on the deferred tax
assets as realization of such amounts is not considered more likely than not.
The Company reviews the valuation allowance requirement periodically and
makes adjustments as warranted.
F-16
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
No pro forma adjustments to reflect income tax benefits have been included
in the accompanying statements as it is management's belief that realization
of such amounts do not meet the criteria required by generally accepted
accounting principles.
9. STOCK OPTIONS
In 1996, the Company adopted The Ultimate Software Group, Inc.
Nonqualified Stock Option Plan (the "Plan") under which the Company is
authorized to issue options to purchase a total of 5,059,500 shares of the
Company's Common Stock to directors, officers and employees of, and equity
investors in, the Company. Under the Plan, options to purchase shares of
Common Stock may be granted at prices equal to the market value of shares of
the Company's Common Stock as of the date of grant, or at such other amount
as may be determined by the committee appointed to administer the Plan (the
"Committee"). Options become exercisable on the 30-month anniversary of a
participant's date of hire, unless otherwise prescribed by the Committee. The
maximum term of the options is 10 years.
A summary of the Company's Plan as of December 31, 1996 and 1997 and as of
March 31, 1998 and changes during the periods then ended, is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
Outstanding at December 31, 1995 ................. -- $ --
Granted ......................................... 769,135 5.16
Exercised ....................................... -- --
Forfeited ....................................... (1,012) 5.16
----------- --------------
Outstanding at December 31, 1996 ................. 768,123 5.16
Granted ......................................... 1,000,010 7.12
Exercised ....................................... (506) 5.16
Forfeited ....................................... (18,892) 5.16
----------- --------------
Outstanding at December 31, 1997 ................. 1,748,735 6.27
Granted (unaudited) ............................. 62,232 8.53
Exercised (unaudited) ........................... -- --
Forfeited (unaudited) ........................... (2,530) 5.16
----------- --------------
Outstanding at March 31, 1998 (unaudited) ....... 1,808,437 6.34
=========== ==============
Options exercisable at December 31, 1997 ........ 977,495 5.78
=========== ==============
Options exercisable at March 31, 1998 (unaudited) 1,008,039 5.81
=========== ==============
</TABLE>
At December 31, 1997, the weighted average contractual life of options
outstanding was 105 months. The summary presented above assumes the
conversion of each option to purchase a share of Class C Common Stock of the
Company into an option to purchase 10.119 shares of Common Stock. See Note
15.
F-17
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro forma information is required by SFAS No. 123 for options issued to
employees and has been determined as if the Company had accounted for its
stock-based compensation plan under the fair value method. The fair value of
each option granted was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants: risk-free interest rates of 6.35%-6.7%, dividend
yield of 0%, expected volatility of .01% in 1996 and 65% in 1997 and expected
life of 3-6 years. The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
1996 1997
<S> <C> <C>
Net loss:
As reported ............. $(20,385,629) $(16,016,956)
Pro forma................ (20,853,333) (17,385,185)
Basic and Diluted per share:
As reported ............. $ (2.30) $ (1.37)
Pro forma ............... (2.36) (1.48)
</TABLE>
The Company has also issued options to purchase shares of its Common Stock
to non-employees for consulting services. See Note 10.
10. STOCKHOLDERS' EQUITY
The Transactions
The Company was formed in April 1996 in connection with the consummation
of a series of transactions during the second and third calendar quarters of
1996, including the following: (i) the businesses owned by nine third-party
resellers of the Partnership's products (the "Participating Resellers") were
acquired by the Partnership in consideration for the issuance by the
Partnership to such Participating Resellers of special limited partnership
interests in the Partnership, (ii) the shareholders of GP and Strategic (the
"Participating Stockholders") assigned and transferred their shares in GP and
Strategic to the Company in exchange for the issuance by the Company of an
aggregate of 272,157 shares of Class B Common Stock (convertible into
2,753,957 shares of Common Stock), (iii) the business and operations of the
Partnership were transferred and conveyed to the Company in exchange for the
issuance by the Company of 236,300 shares of Class A Common Stock (following
cancellation of shares pursuant to operation of the Class A Escrow Agreement,
convertible into 1,030,398 shares of Common Stock) and 536,269 shares of
Class B Common Stock (convertible into 5,426,506 shares of Common Stock),
272,157 of such shares of Class B Common Stock (convertible into 2,753,956
shares of Common Stock) were beneficially owned by the Company as a result of
its acquisition of GP and Strategic, and payment of $660,555 in cash, (iv)
the Company entered into escrow agreements with the Partnership and the
Participating Stockholders, respectively, obligating the Partnership to
surrender shares of Class A and Class B Common Stock and the Participating
Stockholders and the Partnership to surrender certain shares of Class B
Common Stock to the Company for cancellation under certain circumstances as
provided therein, (v) J.P. Morgan Investment Corporation ("Morgan") and
others invested $10,000,000 in 191,573 newly issued shares of the Company's
Series A Convertible Preferred Stock (convertible into 1,938,527 shares of
Common Stock) (including approximately $1,300,000 for 24,904 shares
(convertible into 252,004 shares of Common Stock) representing cancellation
of indebtedness of the Company and $445,500 for 8,534 shares (convertible
into 86,356 shares of Common Stock) representing limited partnership interest
conversions). All shares of Series A Convertible Preferred Stock were issued
at $52.20 per share.
The acquisitions of the Participating Resellers were accounted for under
the purchase method of accounting and are more fully described in Note 12.
The exchange of the Participating Stockholders'
F-18
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
interest for shares of the Company was accounted for on a historical cost
basis as the exchange was between common controlling interests. GP and the
Company were under common control at the time of the exchange.
Description of Capital Stock
Series A and Series B Convertible Preferred Stock
The Series A Convertible Preferred Stock, with respect to dividend rights
and rights on liquidation, dissolution and winding up, ranks senior to all
classes of the Company's Common Stock, pari passu with the Series B
Convertible Preferred Stock, and pari passu with, or senior to, all other
series or classes of preferred stock. When, as and if the Board of Directors
of the Company declares a dividend on any Common Stock, each holder of the
Series A and Series B Convertible Preferred Stock will be entitled to
receive, out of funds legally available therefor, dividends in an amount per
share equal to the amount of dividends so declared and payable upon the
number of shares of Class B Common Stock (or, if applicable, Common Stock)
into which the shares of Series A or Series B Convertible Preferred Stock are
then convertible.
In the event of a liquidation, before any payment is made to the holders
of any class of Common Stock or any other securities ranking junior to the
Series A and Series B Convertible Preferred Stock, the holders of the Series
A and Series B Convertible Preferred Stock will be entitled to be paid an
amount in cash equal to the greater of (i) $52.20 per share or (ii) the
amount which each holder of Series A and Series B Convertible Preferred Stock
would have been entitled to receive had it converted all its shares of Series
A and Series B Convertible Preferred Stock into Class B Common Stock, plus,
in each case, any accrued and unpaid dividends to the date payment is made to
the holders of the Series A and Series B Convertible Preferred Stock.
The holders of the Series A and Series B Convertible Preferred Stock are
entitled, for each share of Series A and Series B Convertible Preferred Stock
held of record, to one vote for each share of Class B Common Stock into which
such shares of Series A and Series B Convertible Preferred Stock could have
been converted, on all matters submitted to a vote of the stockholders. The
holders of Series A and Series B Convertible Preferred Stock have no
cumulative voting rights.
Each holder of Series A and Series B Convertible Preferred Stock has the
right, at the holder's option, to convert any or all such holder's shares of
Series A and Series B Convertible Preferred Stock into shares of Class B
Common Stock (or into shares of Common Stock, if the Class B Common Stock
shall have been converted into Common Stock) at an initial conversion ratio
of one share of Class B Common Stock (or such number of shares of Common
Stock into which each share of Class B Common Stock shall have been
converted, if the Class B Common Stock shall have been converted into Common
Stock) for one share of Series A or Series B Convertible Preferred Stock.
The shares of the Series A and Series B Convertible Preferred Stock are
subject to mandatory conversion into shares of Class B Common Stock (or into
shares of Common Stock, if the Class B Common Stock shall have been converted
into Common Stock), at the same initial conversion ratio, upon the written
consent of the holders of a majority of the outstanding shares of Series A
and Series B Convertible Preferred Stock, if the Board of Directors of the
Company declares a mandatory conversion following the occurrence of a Release
Event. A Release Event is generally defined as (i) the execution of a firm
underwriting agreement for an initial public offering of the Company's Common
Stock, (ii) an acquisition by a third party of a controlling interest in, or
more than 50% of the assets of, the Company, (iii) a material acquisition or
business combination involving the Company that the GP determines should
result in a liquidation or dissolution of the Partnership, (iv) the
conversion by a majority in interest of the Series A Convertible Preferred
Stock into the Company's Common Stock, if the GP determines that such
conversion should result in a liquidation or dissolution of the Partnership
or (v) March 31, 2001.
F-19
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Class A, Class B and Class C Common Stock
The holders of Class A Common Stock and Class B Common Stock are entitled
to one vote per share. Additionally, each holder of Class A Common Stock is
entitled to receive the Class A Percentage, as defined, of the aggregate
amount of dividends declared on any date by the Board of Directors of the
Company on the Class A Common Stock, the Class B Common Stock or the Series A
Convertible Preferred Stock. Class A Common Stock is convertible into the
Company's Common Stock in accordance with a prescribed formula and each share
of Class B Common Stock is convertible into 10.119 shares of the Company's
Common Stock. See Note 15.
The holders of Class B Common Stock are entitled to receive ratably an
amount of such dividends as may be declared on any date by the Board of
Directors of the Company less the portion of such dividend amount to which
the then outstanding shares of Class A Common Stock and Series A Convertible
Preferred Stock are entitled.
The amount available for distribution to holders of Class A Common Stock
upon liquidation will be net of payments to creditors and payments to the
holders of the Series A and Series B Convertible Preferred Stock and any
other Preferred Stock that may be at the time outstanding.
Class C Common Stock is generally reserved for issuance in the event of
stock option exercises. The holders of Class C Common Stock will be entitled
to one vote per share for each share held of record on all matters submitted
to a vote of the stockholders. Additionally, each holder of Class C Common
Stock will be entitled to receive the same amount of dividends and
liquidation proceeds to which a share of Class B Common Stock would be
entitled (determined as if no reduction has occurred in the number of
outstanding shares of Class A or Class B Common Stock pursuant to the
operations of the escrow agreements discussed below).
The shares of the Class A, Class B and Class C Common Stock are subject to
mandatory conversion into shares of Common Stock if the Board of Directors of
the Company declares a mandatory conversion following the occurrence of a
Release Event. On April 3, 1998, the Board of Directors declared a Release
Event pursuant to which all of the outstanding shares of Class A, Class B and
Class C Common Stock was converted into Common Stock.
Common Stock
Shares of Common Stock will be issued only upon the conversion of shares
of the other classes of Common or Preferred Stock and no shares of Common
Stock have been or will be issued prior to any such conversion.
The holders of Common Stock will be entitled to one vote per share for
each share held of record on all matters submitted to a vote of the
stockholders.
Escrow Agreements
All of the 236,300 shares of Class A Common Stock issued in connection
with the Transactions were placed in escrow pursuant to an escrow agreement
between the Partnership and the Company (the "Class A Escrow Agreement") to
be held until the occurrence of a Release Event. Upon the occurrence of a
Release Event, the Class A Escrow Agreement required the Partnership to be
held to return to the Company for cancellation any shares of Class A Common
Stock that the Partnership was not entitled to retain under a formula that
generally measures (i) the revenues of the Participating Resellers during a
recent 12 month period preceding the Release Event, against (ii) the total
revenues of the Company in the same 12 month period. In March 1998, 68,747 of
the shares of Class A Common Stock (which were converted into 1,030,398
shares of Common Stock) held in the Class A Escrow were released to the
Partnership and the remaining 167,553 shares of Class A Common Stock held in
the Class A Escrow were surrendered to the Company and cancelled. See Note
15.
F-20
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
230,700 shares of the Class B Common Stock (convertible into 2,334,453
shares of Common Stock), issued in connection with the Transactions are being
held in escrow pursuant to an escrow agreement among the Company, the
Partnership and the Participating Stockholders (the "Class B Escrow
Agreement") until the occurrence of a Release Event. Of such 230,700 shares
of Class B Common Stock, 77,665 (convertible into 785,892 shares of Common
Stock) were beneficially owned by the Company as a result of its acquisition
of GP and Strategic. Upon a Release Event, the Partnership will surrender the
escrowed shares of Class B Common Stock to the Company for cancellation in
the event that, as of the date of such Release Event, the value of the 95,787
shares of Series A Convertible Preferred Stock (convertible into 969,269
shares of Common Stock) issued to Morgan does not meet certain threshold
levels (ranging upward from $10,000,000 in the 12 months ending March 31,
1997 to $37,000,000 in the 12 months ending March 31, 2001). See Note 15.
Other Equity Transactions
During 1995, the Partnership issued certain limited partnership interests
to two individuals, one of whom was at the time a limited partner, in
connection with consulting services. The limited partnership interests were
valued at $123,125, and the related expense is included in general and
administrative expenses in the accompanying consolidated statement of
operations for the year ended December 31, 1995.
In 1996, the Company granted to non-employees options to purchase 323,130
shares of the Company's Common Stock for $5.16 per share in exchange for
consulting services. Such options are currently exercisable and were valued
on the date of grant using the Black-Scholes option pricing model.
Assumptions used in valuing such options are discussed in Note 9. The related
expense amounted to $285,054 and is included in general and administrative
expenses in the accompanying consolidated statement of operations for the
year ended December 31, 1996.
In December 1996, the Company sold 32,736 shares of Series B Convertible
Preferred Stock (convertible into 331,256 shares of Common Stock) at $52.20
per share. Net proceeds from such sales were $1,633,800. In 1997, the Company
sold 262,934 additional shares of Series B Convertible Preferred Stock
(convertible into 2,660,649 shares of Common Stock) at $52.20 per share. Net
proceeds from such sales were $13,479,193.
11. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases corporate office space and certain equipment under
noncancelable operating lease agreements expiring at various dates. Total
rent expense under these agreements was $303,801, $1,139,110, $1,143,256,
$427,836 (unaudited) and $502,818 (unaudited) for the years ended December
31, 1995, 1996 and 1997 and for the three months ended March 31, 1997 and
1998, respectively. Future minimum annual rental commitments related to these
leases are as follows at December 31, 1997:
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
1998 ... $1,656,108
1999 ... 844,309
2000 ... 492,181
2001 ... 397,577
2002 ... 5,347
------------
$3,395,522
============
</TABLE>
F-21
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Consulting Agreements
The Company is subject to a series of consulting agreements with certain
third parties to assist in locating and designing future corporate office
space as well as to assist the Company in connection with capital
requirements needed to fund continued growth. Monthly payments under these
agreements of approximately $6,500 are due through the date on which the
Company has a change in controlling ownership or has a public offering of its
Common Stock.
Guarantees
The Company has guaranteed debt owed by a Participating Reseller. The debt
amounts to $175,000 at December 31, 1996, 1997 and March 31, 1998,
respectively.
Product Liability
Software products such as those offered by the Company frequently contain
undetected errors or failures when first introduced or as new versions are
released. Testing of the Company's products is particularly challenging
because it is difficult to simulate the wide variety of computing
environments in which the Company's customers may deploy these products.
Despite extensive testing, the Company from time to time has discovered
defects or errors in products. There can be no assurance that such defects,
errors or difficulties will not cause delays in product introductions and
shipments, result in increased costs and diversion of development resources,
require design modifications or decrease market acceptance or customer
satisfaction with the Company's products. In addition, there can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not be found after commencement of commercial
shipments, resulting in loss of or delay in market acceptance, which could
have a material adverse effect upon the Company's business, operating results
and financial condition.
Litigation
From time-to-time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently a party to any legal proceeding the adverse outcome
of which, individually or in the aggregate, could reasonably be expected to
have a material adverse effect on the Company's business, operating results
and financial condition.
12. PARTNERSHIP ACQUISITIONS
In 1995, the Partnership acquired the businesses of two third-party
resellers in exchange for a 1.25% interest in the Partnership. In connection
with these transactions, acquired intangibles were recorded as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase price, 1.25% interest in the
Partnership...................................... $250,000
Fair value of net assets acquired ............... --
----------
Acquired intangibles, primarily customer lists
and workforce ................................... $250,000
==========
</TABLE>
In June 1995, the Partnership acquired the business of another third-party
reseller. The controlling stockholders of the reseller were related to the
controlling shareholder of GP. The purchase price was a 3.86% limited
partnership interest in the Partnership and was recorded at the carryover
basis of the net assets transferred as the transactions occurred between
related parties.
Effective April 25, 1996, the Partnership acquired the businesses of the
Participating Resellers for special limited partnership interests in the
Partnership, the assumption of certain obligations and $660,555
F-22
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in cash. The acquisitions were accounted for under the purchase accounting
method. The purchase price, together with the net liabilities assumed, was
recorded as intangible assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase price ................................ $7,337,574
Net liabilities assumed ....................... 1,462,874
------------
Acquired intangibles, primarily customer lists
and personnel ................................ $8,800,448
============
</TABLE>
During 1996, subsequent to the Transactions, and during the year ended
December 31, 1997, the Company paid the former owners of the Participating
Resellers fees totaling approximately $130,000 and $213,000, respectively, in
accordance with an agreement entered into as part of the Transactions. Such
fees are included in general and administrative expenses in the accompanying
consolidated statements of operations. In accordance with the agreement,
monthly payments aggregating approximately $14,000 will continue until the
Company completes an initial public offering of its Common Stock.
13. RELATED PARTY TRANSACTIONS
Due from stockholder in the amount of $25,000 consists of
noninterest-bearing loan to a stockholder which was due on demand. This loan
was repaid in full in 1997.
The Partnership purchased substantially all of the assets of Strategic,
amounting to approximately $86,000 and $139,000 (through the date of the
Transactions) in 1995 and 1996, respectively. Also during 1995, the
Partnership paid approximately $61,000 to Strategic's employees for
commissions on sales to resellers. Effective January 1, 1995, the Partnership
terminated its royalty agreement with Strategic, which previously provided
for payments equal to 20% of gross collected sales revenues and 10% of
collected maintenance revenues, for payments in the aggregate amount of
$650,000 and a 12% limited partnership interest in the Partnership. At
December 31, 1995, $450,000 of the termination fee was outstanding. Such
amount was paid in 1996. The termination fee is reflected in general and
administrative expenses in the accompanying consolidated statement of
operations for the year ended December 31, 1995.
During 1995, the Partnership paid certain limited partners approximately
$57,000 in commissions as a result of the execution of reseller agreements.
In 1995 and 1996, the Partnership issued promissory notes to related
parties in the aggregate amount of $600,000 and $1,300,000, respectively,
which bore interest at 12%. The obligations of the Partnership under such
notes were assumed by the Company in connection with the Transactions and
were cancelled in May 1996 in consideration of the issuance of approximately
24,904 shares of Series A Convertible Preferred Stock (convertible into
252,004 shares of Common Stock) to the holders thereof.
14. EMPLOYEE BENEFIT PLAN
The Company provides retirement benefits for eligible employees, as
defined, through a defined contribution benefit plan that is qualified under
Section 401(k) of the Internal Revenue Code (the "Plan"). Contributions to
the Plan are made at the sole discretion of the Company and amounted to
$32,987, $55,851, $230,861, $65,967 (unaudited) and $82,717 (unaudited) for
the years ended December 31, 1995, 1996 and 1997 and for the three months
ended March 31, 1997 and 1998, respectively.
15. SUBSEQUENT EVENTS
Acquisition of Resellers
In February and March 1998, the Company acquired the businesses of five
third-party resellers of the Company's products (the "Acquired Resellers") in
exchange for an aggregate of 121,856 shares of the Company's Class B Common
Stock (convertible into 1,233,061 shares of Common Stock). Prior to these
F-23
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
acquisitions, the Company and its stockholders had no ownership interest in
the five Acquired Resellers and the financial and operating policies of the
Acquired Resellers were not controlled by the Company. The acquisition of
such Acquired Resellers was accounted for under the poolings-of-interest
method of accounting.
The following information details the results of operations of the Company
and the Acquired Resellers for periods before the poolings-of-interests
combinations were consummated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------------------------
1995 1996 1997 1997 1998
-------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues:
The Company............ $ 2,473,802 $ 6,620,960 $ 14,136,575 $ 2,386,789 $ 5,943,542
Acquired Resellers ... 1,253,155 2,690,931 3,455,474 643,183 1,627,000
-------------- --------------- --------------- -------------- --------------
$ 3,726,957 $ 9,311,891 $ 17,592,049 $ 3,029,972 $ 7,570,542
============== =============== =============== ============== ==============
Net income (loss)
The Company............ $(3,946,412) $(19,996,651) $(15,490,898) $(4,272,034) $(7,504,470)
Acquired Resellers ... (784,699) (388,978) (526,058) (458,505) 575,000
-------------- --------------- --------------- -------------- --------------
$(4,731,111) $(20,385,629) $(16,016,956) $(4,730,539) $(6,929,470)
============== =============== =============== ============== ==============
Net income (loss) per
share-basic and
diluted
The Company............ $ (0.73) $ (2.62) $ (1.48) $ (0.47) $ (0.66)
Acquired Resellers ... 0.02 0.32 0.11 0.01 0.11
-------------- --------------- --------------- -------------- --------------
$ (0.71) $ (2.30) $ (1.37) $ (0.46) $ (0.55)
============== =============== =============== ============== ==============
</TABLE>
Modification to Escrow Agreement
In March 1998, the Class B Escrow Agreement was modified to provide that
all of the shares of Class B Common Stock held in escrow will be released
upon the execution of a firm underwriting agreement for the initial public
offering of the Company's capital stock on or before July 1, 1998.
Accordingly, approximately $4.2 million of compensation expense was recorded
as of the date of modification, representing 60,429 shares of Class B Common
Stock of the Company (convertible into 611,477 shares of Common Stock)
released to directors, officers and employees of the Company, multiplied by
the difference between the fair market value of the Class B Common Stock on
the date of the modification and the price paid by the holders of the shares.
Release Event
In March 1998, a Release Event occurred when the businesses of the five
Acquired Resellers were acquired by the Company and the GP determined that
such acquisitions should result in the liquidation of the Partnership.
Following the occurrence of such Release Event, the following events
occurred: (i) the Board of Directors declared a mandatory conversion of the
outstanding shares of the Company's Class A, Class B and Class C Common Stock
and such shares were converted into shares of Common Stock of the Company;
(ii) 68,747 of the shares of Class A Common Stock (convertible into 1,030,398
shares of Common Stock) held in escrow pursuant to the Class A Escrow
Agreement were released to the Partnership and the remaining shares held in
escrow pursuant to the Class A Escrow Agreement were returned to the Company
for cancellation; and (iii) the Partnership was dissolved and liquidated and
all of the shares of Common Stock held by the Partnership were distributed to
its partners, including the distribution of shares (convertible into
1,030,398 shares of Common Stock) to the Participating Resellers. No
modification of the original recorded purchase price of the Participating
Resellers was required.
F-24
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Initial Public Offering
In March 1998, the Company filed a Registration Statement with the
Securities and Exchange Commission in connection with the initial public
offering of its Common Stock. In connection with this offering, the Company
will declare a 10.119-for-1 split of its Common Stock. Such split has been
retroactively reflected in the accompanying financial statements.
Pro Forma Balance Sheet
The accompanying pro forma balance sheet at March 31, 1998 assumes the
effects of the following transactions: (i) the conversion of all of the
issued and outstanding shares of the Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock into shares of Common Stock, (ii) the
conversion of all of the issued and outstanding shares of Class A, Class B
and Class C Common Stock into shares of Common Stock which occurred on April
3, 1998, (iii) the liquidation of the Partnership and the resulting
cancellation of certain shares of Common Stock and (iv) the termination of
the Class A Escrow Agreement and resulting cancellation of certain shares of
Common Stock.
F-25
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Torrence & Associates, Inc.:
We have audited the accompanying balance sheet of Torrence & Associates,
Inc. d/b/a The Ultimate Software Group (an Illinois corporation) as of
December 31, 1995, and the related statements of operations, shareholders'
deficit and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Torrence & Associates,
Inc. d/b/a The Ultimate Software Group as of December 31, 1995, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
October 15, 1996.
F-26
<PAGE>
TORRENCE & ASSOCIATES, INC.
D/B/A THE ULTIMATE SOFTWARE GROUP
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 13,726
Accounts receivable ........................................................... 38,811
Other ......................................................................... 29,873
-----------------
Total current assets ........................................................ 82,410
Property and equipment, net .................................................... 58,043
Other assets ................................................................... 67,485
-----------------
Total assets ................................................................ $ 207,938
=================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accrued expenses .............................................................. $ 81,423
Deferred revenue .............................................................. 108,657
Current portion of capital lease obligations .................................. 10,647
-----------------
Total current liabilities ................................................... 200,727
Notes payable to related parties ............................................... 661,000
Capital lease obligations, net of current portion .............................. 20,716
-----------------
Total liabilities ........................................................... 882,443
-----------------
Commitments and contingencies (Notes 5 and 7)
Shareholders' deficit:
Common Stock, $.08 par value, 25,000 shares authorized, 12,563 shares issued
and outstanding .............................................................. 1,005
Additional paid-in capital .................................................... 232,683
Accumulated deficit ........................................................... (908,193)
-----------------
Total shareholders' deficit ................................................. (674,505)
-----------------
Total liabilities and shareholders' deficit ................................. $ 207,938
=================
</TABLE>
The accompanying notes to financial statements are an integral part of this
balance sheet.
F-27
<PAGE>
TORRENCE & ASSOCIATES, INC.
D/B/A THE ULTIMATE SOFTWARE GROUP
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
<S> <C>
Revenues .................. $ 153,741
Operating expenses:
Cost of revenues ......... 64,909
Sales and marketing ..... 310,224
General and
administrative........... 643,165
------------------
Total operating
expenses............... 1,018,298
------------------
Operating loss.......... (864,557)
Interest expense .......... (43,636)
------------------
Net loss................ $ (908,193)
==================
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-28
<PAGE>
TORRENCE & ASSOCIATES, INC.
D/B/A THE ULTIMATE SOFTWARE GROUP
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT CAPITAL DEFECIT DEFICIT
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 -- $ -- $ -- $ -- $ --
Sale of common stock ..... 12,563 1,005 232,683 -- 233,688
Net loss .................. -- -- -- (908,193) (908,193)
-------- -------- ------------ ------------- ---------------
Balance, December 31, 1995 12,563 $1,005 $232,683 $(908,193) $(674,505)
======== ======== ============ ============= ===============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-29
<PAGE>
TORRENCE & ASSOCIATES, INC.
D/B/A THE ULTIMATE SOFTWARE GROUP
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
<S> <C>
Cash flows from operating activities:
Net loss ................................................................. $(908,193)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ........................................... 253,089
Gain on disposal of fixed assets ........................................ (626)
Changes in operating assets and liabilities:
Accounts receivable .................................................... (38,811)
Other assets............................................................ (339,067)
Accrued expenses........................................................ 81,423
Deferred revenue........................................................ 108,657
------------------
Net cash used in operating activities...................................... (843,528)
------------------
Cash flows from investing activities:
Capital expenditures...................................................... (31,685)
------------------
Cash flows from financing activities:
Net proceeds from notes payable to related parties........................ 661,000
Payments of capital lease obligations..................................... (5,749)
Proceeds from sale of common stock........................................ 233,688
------------------
Net cash provided by financing activities.................................. 888,939
------------------
Net increase in cash and cash equivalents.................................. 13,726
Cash and cash equivalents, beginning of year............................... --
------------------
Cash and cash equivalents, end of year..................................... $ 13,726
==================
Supplemental disclosure of cash flow information:
Cash paid for interest.................................................... $ 43,635
==================
Supplemental disclosure of non-cash financing activities:
The Company entered into capital lease obligations to acquire new
equipment totaling $37,113 in 1995.
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-30
<PAGE>
TORRENCE & ASSOCIATES, INC.
D/B/A THE ULTIMATE SOFTWARE GROUP
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Torrence & Associates, Inc. d/b/a The Ultimate Software Group (the
"Company") is a third-party reseller of The Ultimate Software Group, Inc.'s
human resource management and payroll software solutions. Substantially all
of the products are developed and sold to the Company by The Ultimate
Software Group, Inc. ("USG", formerly The Ultimate Software Group, Ltd.)
which, subsequent to December 31, 1995, acquired the business, operations and
certain assets and liabilities of the Company (see Note 9). The Company began
operations on December 29, 1994 and markets its products in the States of
Illinois, Iowa, Minnesota, Missouri and Wisconsin.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. There were no cash
equivalents at December 31, 1995.
Accounts Receivable
Accounts receivable are principally from end-users of the Company's
products. The Company performs periodic credit evaluations of its customers
and has determined that an allowance for estimated losses was not required at
December 31, 1995.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repairs
are charged to expense when incurred; betterments are capitalized. Upon the
sale or retirement of assets, the cost, accumulated depreciation and
amortization are removed from the accounts and any gain or loss is
recognized.
Other Assets
Other assets includes a fee of $300,000, net of accumulated amortization
of $241,708, paid to USG under an exclusive reseller agreement (the
"Agreement"). The Agreement allowed the Company to exclusively market USG's
products in Illinois, Iowa, Minnesota, Missouri and Wisconsin. As a result of
the sale of the Company's operations and certain of its assets and
liabilities to USG in April 1996 (see Note 9), the carrying value reflects
the estimated useful life of this asset through the date of the acquisition.
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered. Associated deferred costs, primarily relating to the cost
of the products for licensing contracts purchased from USG, amounted to
approximately $26,000 at December 31, 1995 and are included in other current
assets.
Revenue Recognition
The Company licenses software under noncancellable license agreements and
provides services including maintenance, implementation, training and
consulting services. License revenues are generally recognized when a
noncancellable license agreement has been signed, the product has been
delivered, no significant vendor obligations remain and collection of the
related receivable is considered probable. Revenues from maintenance
agreements for maintaining, supporting and providing periodic updates are
F-31
<PAGE>
TORRENCE & ASSOCIATES, INC.
D/B/A THE ULTIMATE SOFTWARE GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
recognized ratably over the maintenance period, which in most instances is
one year. Revenues for training and consulting services are recognized as
services are performed.
Cost of Revenues
Cost of revenues consists of direct product costs and the costs of
providing consulting, implementation, maintenance, technical support and
training to the Company's customers.
Income Taxes
The Company has elected S Corporation status with the Internal Revenue
Service. Accordingly, net income (loss) and the related differences that
arise in the recording of income and expense items for financial reporting
and income tax reporting purposes are included in the individual income tax
returns of the shareholders and no income taxes are included in the
accompanying financial statements.
Because of the Company's net loss position, had the Company been a C
Corporation, subject to tax at the corporate level, no tax benefit would have
been recorded.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments, consisting of cash and cash
equivalents, accounts receivable and notes payable approximate fair value.
3. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
<S> <C>
Accrued compensation $58,079
Due to USG ........... 21,347
Other ................ 1,997
-----------------
$81,423
=================
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED AS OF
USEFUL LIFE DECEMBER 31, 1995
<S> <C> <C>
Equipment ............................ 3 years $ 64,655
Furniture, fixtures and improvements 5 years 4,144
-----------------
68,799
Less--accumulated depreciation and
amortization......................... (10,756)
-----------------
$ 58,043
=================
</TABLE>
Included in property and equipment is equipment acquired under capital
leases amounting to $37,112, less accumulated amortization of $5,434. The
leases are being amortized over their useful lives ranging from 3-4 years.
F-32
<PAGE>
TORRENCE & ASSOCIATES, INC.
D/B/A THE ULTIMATE SOFTWARE GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under noncancellable agreements,
which are accounted for as capital leases and expire at various dates through
January 1999. Interest rates on these leases are 10.8%. The annual maturities
of capital lease obligations are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 .................................................................... $14,073
1997 .................................................................... 14,073
1998 .................................................................... 7,873
---------
36,019
Less--amount representing interest ...................................... (4,656)
---------
Lease obligations reflected as current ($10,647) and noncurrent
($20,716)............................................................... $31,363
=========
</TABLE>
6. NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consists of two-year, 10% interest
bearing notes due to the President of the Company. The maturities of the
notes range from January 1, 1997 to October 20, 1997.
7. COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain equipment under noncancellable
operating lease agreements expiring at various dates. Total rent expense
under these agreements was $15,967. Future minimum annual rental commitments
related to these leases are $41,000 in 1996, $43,000 in 1997 and $14,000 in
1998.
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Company's financial position or results of operations.
8. EMPLOYEE BENEFIT PLAN
The Company provides retirement benefits for eligible employees, as
defined, through a defined contribution benefit plan (the "Plan") that is
qualified under Section 401(k) of the Internal Revenue Code. Employees must
provide at least one month of service and may contribute up to 15% of their
salary. The Company makes discretionary contributions to the Plan in which
employees vest after three years of service.
9. SUBSEQUENT EVENT
Effective April 25, 1996, the Company sold its operations and certain
assets and liabilities to USG. As a result, the results of operations of the
Company subsequent to that date are included with that of USG.
F-33
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
The Ultimate Software Group of Georgia, Inc.:
We have audited the accompanying balance sheet of The Ultimate Software
Group of Georgia, Inc. (a Georgia corporation) as of December 31, 1995, and
the related statements of operations, shareholders' deficit and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Ultimate Software
Group of Georgia, Inc. as of December 31, 1995, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
November 7, 1997.
F-34
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 2,423
Accounts receivable .................................................. 62,233
-----------------
Total current assets ............................................... 64,656
Property and equipment, net ........................................... 28,243
Other assets........................................................... 7,707
-----------------
Total assets........................................................ $ 100,606
=================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable ..................................................... $ 7,518
Accrued expenses ..................................................... 55,119
Deferred revenue ..................................................... 20,400
-----------------
Total current liabilities .......................................... 83,037
Notest payable to related parties ..................................... 246,000
-----------------
Total liabilities................................................... 329,037
-----------------
Commitments and contingencies (Note 7)
Shareholders' deficit:
Common Stock, $.10 par value, 1,000,000 shares authorized, 4,236
shares issued and outstanding ....................................... 424
Additional paid-in capital............................................ 119,076
Accumulated deficit................................................... (347,931)
-----------------
Total shareholders' deficit......................................... (228,431)
-----------------
Total liabilities and shareholders' deficit......................... $ 100,606
=================
</TABLE>
The accompanying notes to financial statements are an integral part of this
balance sheet.
F-35
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
<S> <C>
Revenues.................... $ 568,037
Operating expenses:
Cost of revenues .......... 141,793
Sales and marketing ....... 36,609
General and administrative 472,051
------------------
Total operating expenses 650,453
------------------
Operating loss .......... (82,416)
Interest expense ........... (35,500)
------------------
Net loss ................ $(117,916)
==================
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-36
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ...... 3,800 $380 $ 94,120 $(230,015) $(135,515)
Shares issued with notes payable 187 19 (19) -- --
Shares issued for services ..... 250 25 49,975 -- 50,000
Purchase and retirement of
treasury shares ................ -- -- (25,000) -- (25,000)
Net loss ........................ (117,916) (117,916)
-------- -------- ------------ ------------- ---------------
Balance, December 31, 1995 ...... 4,237 $424 $119,076 $(347,931) $(228,431)
======== ======== ============ ============= ===============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-37
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
<S> <C>
Cash flows from operating activities:
Net loss ................................................................. $(117,916)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ........................................... 94,276
Issuance of equity instruments for services ............................. 50,000
Changes in operating assets and liabilities:
Accounts receivable .................................................... (38,363)
Accounts payable ....................................................... (3,032)
Accrued expenses ....................................................... 54,997
Deferred revenue ....................................................... 20,400
------------------
Net cash provided by operating activities ................................. 60,362
------------------
Cash flows from investing activities:
Capital expenditures...................................................... (12,597)
------------------
Cash flows from financing activities:
Net payments of notes payable to related parties ......................... (37,000)
Purchase of treasury shares .............................................. (25,000)
------------------
Net cash used in financing activities ..................................... (62,000)
------------------
Net decrease in cash and cash equivalents.................................. (14,235)
Cash and cash equivalents, beginning of year .............................. 16,658
------------------
Cash and cash equivalents, end of year .................................... $ 2,423
==================
Supplemental disclosure of cash flow information:
Cash paid for interest ................................................... $ 29,500
==================
Supplemental disclosure of non-cash financing information:
In 1995, the Company issued 250 shares of Common Stock valued at $50,000
to certain employees for services performed.
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-38
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group of Georgia, Inc. (the "Company") is a
third-party reseller of The Ultimate Software Group, Inc.'s human resource
management and payroll software solutions. Substantially all the products are
developed and sold to the Company by The Ultimate Software Group, Inc.
("USG", formerly The Ultimate Software Group, Ltd.) which, subsequent to
December 31, 1995, acquired the business, operations and certain assets and
liabilities of the Company (see Note 8). The Company markets its products in
the State of Georgia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. There were no cash
equivalents at December 31, 1995.
Accounts Receivable
Accounts receivable are principally from end-users of the Company's
products. The Company performs periodic credit evaluations of its customers
and has determined that an allowance for estimated losses was not required at
December 31, 1995.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repairs
are charged to expense when incurred; betterments are capitalized. Upon the
sale or retirement of assets, the cost, accumulated depreciation and
amortization are removed from the accounts and any gain or loss is
recognized.
Other Assets
Other assets includes a fee of $100,000, net of accumulated amortization
of $92,793, paid to USG under an exclusive reseller agreement (the
"Agreement"). The Agreement allowed the Company to exclusively market USG's
products in Georgia. As a result of the sale of the Company's operations and
certain of its assets and liabilities to USG in April 1996 (see Note 8), the
carrying value reflects the estimated useful life of this asset through the
date of the acquisition.
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered.
Revenue Recognition
The Company licenses software under noncancellable license agreements and
provides services including maintenance, implementation, training and
consulting services. License revenues are generally recognized when a
noncancellable license agreement has been signed, the product has been
delivered, no significant vendor obligations remain and collection of the
related receivable is considered probable. Revenues from maintenance
agreements for maintaining, supporting and providing periodic updates are
recognized ratably over the maintenance period, which in most instances is
one year. Revenues for training and consulting services are recognized as
services are performed.
F-39
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Cost of Revenues
Cost of revenues consists of direct product costs and the costs of
providing consulting, implementation, maintenance, technical support and
training to the Company's customers.
Income Taxes
The Company has elected S Corporation status with the Internal Revenue
Service. Accordingly, net income (loss) and the related differences that
arise in the recording of income and expense items for financial reporting
and income tax reporting purposes are included in the individual income tax
returns of the shareholders and no income taxes are included in the
accompanying financial statements.
Because of the Company's net loss position, had the Company been a C
Corporation, subject to tax at the corporate level, no tax benefit would have
been recorded.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments, consisting of cash and cash
equivalents and accounts receivable approximate fair value due to their
short-term nature.
3. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
<S> <C>
Accrued compensation $53,982
Other ................ 1,137
-----------------
$55,119
=================
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED AS OF
USEFUL LIFE DECEMBER 31, 1995
<S> <C> <C>
Equipment ....................................... 3 years $ 44,719
Furniture, fixtures and improvements ............ 5 years 8,798
-----------------
53,517
Less -accumulated depreciation and amortization . (25,274)
-----------------
$ 28,243
=================
</TABLE>
F-40
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. NOTES PAYABLE TO SHAREHOLDERS
Notes payable to shareholders consists of the following unsecured amounts:
<TABLE>
<CAPTION>
<S> <C>
Due to shareholder, interest payable monthly at 12%, due February 1,
1998.................................................................... $ 46,000
Due to shareholder, interest payable monthly at 12%, due May 1, 1997 ... 50,000
Due to shareholder, interest payable monthly at 12%, due $50,000 on May
1, 1997, $50,000 on July 1, 1997 and $50,000 on February 1, 1998 ...... 150,000
---------
$246,000
=========
</TABLE>
6. EQUITY TRANSACTIONS
In 1995, the Company issued 187 shares of Common Stock to a shareholder in
connection with a borrowing. The borrowing is reflected in notes payable to
shareholders at December 31, 1995. No value was assigned to the stock that
was issued as it was issued to a related party.
In 1995, the Company issued 250 shares of Common Stock to an employee for
services performed. The fair value of this transaction was $50,000, based
upon prior sales of the Company's Common Stock.
In 1994, the Company became obligated to pay $25,000 to two shareholders
for the purchase of 250 treasury shares. The balance due of $25,000 was paid
to the shareholders in 1995.
7. COMMITMENTS AND CONTINGENCIES
The Company leases office space under a noncancellable operating lease
agreement expiring in December 1996. Total rent expense under this agreement
was $13,748. The future minimum annual rental commitment related to this
lease is approximately $14,000 in 1996.
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Company's financial position or results of operations.
8. SUBSEQUENT EVENT
Effective April 25, 1996, the Company sold its operations and certain
assets and liabilities to USG. As a result, the results of operations of the
Company subsequent to that date are included with that of USG.
F-41
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
The Ultimate Software Group Midwest, Ltd.:
We have audited the accompanying balance sheet of The Ultimate Software
Group Midwest, Ltd. (an Ohio Limited Partnership) as of December 31, 1995,
and the related statements of operations, partners' deficit and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Ultimate Software
Group Midwest, Ltd. as of December 31, 1995, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
January 30, 1998.
F-42
<PAGE>
THE ULTIMATE SOFTWARE GROUP MIDWEST, LTD.
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents ........................ $ 66,498
Accounts receivable, net ......................... 113,727
Prepaid expenses ................................. 4,400
-----------
Total current assets ............................ 184,625
Property and equipment, net ....................... 35,979
Investment in USG ................................. 100,709
Other assets ...................................... 70,717
-----------
Total assets .................................... $ 392,030
===========
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable ................................. $ 454,379
Accrued expenses ................................. 191,823
Deferred revenue ................................. 192,262
Current portion of capital lease obligations .... 15,158
Due to related parties ........................... 85,704
-----------
Total current liabilities ....................... 939,326
Capital lease obligations, net of current portion 10,148
-----------
Total liabilities ............................... 949,474
Commitments and contingencies (Note 7)
Total partners' deficit ......................... (557,444)
-----------
Total liabilities and partners' deficit ........ $ 392,030
===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
balance sheet.
F-43
<PAGE>
THE ULTIMATE SOFTWARE GROUP MIDWEST, LTD.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
<S> <C>
Revenues.................... $ 441,579
Operating expenses:
Cost of revenues .......... 263,219
Sales and marketing ....... 380,019
General and administrative 1,017,815
------------------
Total operating expenses 1,661,053
------------------
Operating loss............ (1,219,474)
Interest expense ........... (6,356)
Interest income ............ 2,807
------------------
Net loss ................. $(1,223,023)
==================
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-44
<PAGE>
THE ULTIMATE SOFTWARE GROUP MIDWEST, LTD.
STATEMENT OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
TOTAL
GENERAL LIMITED PARTNERS'
PARTNER PARTNERS DEFICIT
<S> <C> <C> <C>
December 31, 1994 $ 111,739 $ 353,840 $ 465,579
Contributions ... -- 200,000 200,000
Net loss ......... (330,216) (892,807) (1,223,023)
------------ ------------ -------------
December 31, 1995 $(218,477) $(338,967) $ (557,444)
============ ============ =============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-45
<PAGE>
THE ULTIMATE SOFTWARE GROUP MIDWEST, LTD.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
<S> <C>
Cash flows from operating activities:
Net loss ................................................................. $(1,223,023)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ........................................... 130,570
Provision for doubtful accounts.......................................... 54,287
Change in operating assets and liabilities:
Accounts receivable .................................................... (29,651)
Prepaid expenses ....................................................... 14,970
Other assets ........................................................... (39,973)
Accounts payable ....................................................... 445,758
Accrued expenses ....................................................... 72,605
Deferred revenue ....................................................... 192,262
------------------
Net cash used in operating activities ..................................... (382,195)
------------------
Cash flows from investing activities:
Capital expenditures ..................................................... (2,532)
Repayment of note receivable ............................................. 126,667
------------------
Net cash provided by investment activities ................................ 124,135
------------------
Cash flows from financing activities:
Proceeds from due to related parties ..................................... 85,704
Payments on capital lease obligations .................................... (8,762)
Partners' capital contributions .......................................... 200,000
------------------
Net cash provided by financing activities ................................. 276,942
------------------
Net increase in cash and cash equivalents ................................. 18,882
Cash and cash equivalents, beginning of year .............................. 47,616
------------------
Cash and cash equivalents, end of year .................................... $ 66,498
==================
Supplemental disclosure of cash flow information:
Cash paid for interest ................................................... $ 6,356
==================
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-46
<PAGE>
THE ULTIMATE SOFTWARE GROUP MIDWEST, LTD.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group Midwest, Ltd. (the "Partnership") is a
third-party reseller of The Ultimate Software Group Inc.'s human resource
management and payroll software solutions. Substantially all of the products
are developed and sold to the Partnership by The Ultimate Software Group,
Inc. ("USG" formerly, The Ultimate Software Group, Ltd.) which, subsequent to
December 31, 1995, acquired the business, operations and certain assets and
liabilities of the Partnership (see Note 8). The Partnership markets its
products in the States of Kentucky, Michigan, Ohio, Pennsylvania and West
Virginia.
The partners share in income and loss and have ownership percentages as
follows:
<TABLE>
<CAPTION>
OWNERSHIP SHARE OF INCOME
PERCENTAGE AND LOSS
<S> <C> <C>
General partner ...... 27% 27%
Limited partners .... 73 73
-------------- -------------------
100% 100%
============== ===================
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. There were no cash
equivalents at December 31, 1995.
Accounts Receivable
Accounts receivable are principally from end-users of the Partnership's
products. The Partnership performs periodic credit evaluations of its
customers and has determined the allowance for estimated losses to be $54,287
at December 31, 1995.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repairs
are charged to expense when incurred; betterments are capitalized. Upon the
sale or retirement of assets, the cost, accumulated depreciation and
amortization are removed from the accounts and any gain or loss is
recognized.
Investment in USG
Investment in USG represents the partnership's purchase of a 0.69%
interest in USG for cash prior to 1995. Such investment is accounted for at
cost.
Other Assets
Other assets includes a fee of $237,005, net of accumulated amortization
of $212,921 paid to USG under an exclusive reseller agreement (the
"Agreement"). The Agreement allowed the Partnership to exclusively market
USG's products in Kentucky, Michigan, Ohio, West Virginia and Western
Pennsylvania. As a result of the sale of the Partnership's operations and
certain of its assets and liabilities to USG in April 1996 (see Note 8), the
Partnership has reflected the estimated useful life of this asset through the
date of the acquisition.
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered.
F-47
<PAGE>
THE ULTIMATE SOFTWARE GROUP MIDWEST, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
The Partnership licenses software under noncancellable license agreements
and provides services including maintenance, implementation, training and
consulting services. License revenues are generally recognized when a
noncancellable license agreement has been signed, the product has been
delivered, no significant vendor obligations remain and collection of the
related receivable is considered probable. Revenues from maintenance
agreements for maintaining, supporting and providing periodic updates are
recognized ratably over the maintenance period, which in most instances is
one year. Revenues for training and consulting services are recognized as
services are performed.
Cost of Revenues
Cost of revenues consists of direct product costs and the costs of
providing consulting, implementation, maintenance, technical support and
training to the Partnership's customers.
Income Taxes
The Partnership is organized as a limited Partnership. Accordingly, income
taxes were not provided for or payable by the Partnership. Partners were
taxed individually based on their share of partnership earnings (losses).
Because of the Partnership's net loss position, had the Partnership been a
C Corporation, subject to tax at the corporate level, no tax benefit would
have been recorded.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Partnership's financial instruments, consisting of cash and cash
equivalents and accounts receivable approximate fair value due to their
short-term nature.
3. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
<S> <C>
Accrued compensation and related payroll expenses $101,815
Management fees ................................... 60,000
Other ............................................. 30,008
-----------------
$191,823
=================
</TABLE>
F-48
<PAGE>
THE ULTIMATE SOFTWARE GROUP MIDWEST, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED AS OF
USEFUL LIFE DECEMBER 31, 1995
<S> <C> <C>
Equipment ........................................ 3 years $64,597
Furniture, fixtures and improvements ............. 5 years 1,343
-----------------
65,940
Less -accumulated depreciation and amortization . 29,961
-----------------
$35,979
=================
</TABLE>
Included in property and equipment is equipment acquired under capital
leases amounting to $35,647, less accumulated amortization of $10,878.
5. CAPITAL LEASE OBLIGATIONS
The Partnership leases certain equipment under noncancellable agreements
which are accounted for as capital leases and expire at various dates through
1998. The annual maturities of the capital lease obligations are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 .................................................................... $15,158
1997 .................................................................... 9,026
1998 .................................................................... 1,122
---------
Lease obligations reflected as current ($15,158) and noncurrent
($10,148)............................................................... $25,306
=========
</TABLE>
6. DUE TO RELATED PARTIES
Due to related parties represents noninterest-bearing amounts that are due
on demand.
7. COMMITMENTS AND CONTINGENCIES
The Partnership leases office space and certain equipment under
noncancelable operating lease agreements expiring at various dates. Total
rent expense under these agreements was $102,383. Future minimum annual
rental commitments related to these leases are $27,284 through 1996.
From time to time, the Partnership may be involved in litigation relating
to claims arising out of its operations in the normal course of business. The
Partnership is not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Partnership's financial position or results of
operations.
8. SUBSEQUENT EVENT
Effective April 25, 1996, the Partnership sold its operations and certain
assets and liabilities to USG. As a result, the results of operations of the
Partnership subsequent to that date are included with that of USG.
F-49
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
The Ultimate Software Group of
the Delaware Valley, Ltd.:
We have audited the accompanying balance sheet of The Ultimate Software
Group of the Delaware Valley, Ltd. (a Delaware corporation) as of December
31, 1995, and the related statements of operations, shareholders' deficit and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Ultimate Software
Group of the Delaware Valley, Ltd. as of December 31, 1995, and the results
of its operations and its cash flows for the year then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
April 14, 1998.
F-50
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE DELAWARE VALLEY, LTD.
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 390
Accounts receivable ............................................................ 46,325
Prepaid expenses ............................................................... 23,445
-----------------
Total current assets ......................................................... 70,160
Property and equipment, net ..................................................... 4,537
Other assets .................................................................... 42,582
-----------------
Total assets ................................................................. $ 117,279
=================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable ............................................................... $ 16,300
Accrued expenses ............................................................... 3,751
Deferred revenue ............................................................... 54,100
-----------------
Total current liabilities .................................................... 74,151
Note payable to shareholders .................................................... 100,000
-----------------
Total liabilities ............................................................ 174,151
-----------------
Commitments and contingencies (Note 5)
Shareholders' deficit:
Common stock, $.01 par value, 1,000,000 shares authorized, 100,000 shares
issued and outstanding ........................................................ 1,000
Additional paid-in capital ..................................................... 249,000
Accumulated deficit ............................................................ (306,872)
-----------------
Total shareholders' deficit .................................................. (56,872)
-----------------
Total liabilities and shareholders' deficit .................................. $ 117,279
=================
</TABLE>
The accompanying notes to financial statements are an integral part of this
balance sheet.
F-51
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE DELAWARE VALLEY, LTD.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
<S> <C>
Revenues..................... $ 165,450
Operating expenses:
Cost of revenues ........... 121,252
Sales and marketing ........ 91,553
General and administrative 248,771
------------------
Total operating expenses 461,576
------------------
Operating loss ........... (296,126)
Interest expense ............ (10,746)
------------------
Net loss ................. $(306,872)
==================
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-52
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE DELAWARE VALLEY, LTD.
STATEMENT OF SHAREHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 -- $ -- $ -- $ -- $ --
Sale of common stock ..... 100,000 1,000 249,000 -- 250,000
Net loss .................. -- -- -- (306,872) (306,872)
--------- -------- ------------ ------------- ---------------
Balance, December 31, 1995 100,000 $1,000 $249,000 $(306,872) $ (56,872)
========= ======== ============ ============= ===============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-53
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE DELAWARE VALLEY, LTD.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
<S> <C>
Cash flows from operating activities:
Net loss .................................................................. $(306,872)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ............................................ 163,604
Changes in operating assets and liabilities:
Accounts receivable ..................................................... (46,325)
Prepaid expenses ........................................................ (23,445)
Other assets ............................................................ (205,082)
Accounts payable ........................................................ 16,300
Accrued expenses ........................................................ 3,751
Deferred revenue ........................................................ 54,100
------------------
Net cash used in operating activities ...................................... (343,969)
------------------
Cash flows from investing activities:
Capital expenditures....................................................... (5,641)
------------------
Cash flows from financing activities:
Proceeds from note payable to shareholder ................................. 100,000
Proceeds from sale of common stock ........................................ 250,000
------------------
Net cash provided by financing activities .................................. 350,000
------------------
Net increase in cash and cash equivalents .................................. 390
Cash and cash equivalents, beginning of year ............................... --
------------------
Cash and cash equivalents, end of year ..................................... $ 390
==================
Supplemental disclosure of cash flow information:
Cash paid for interest .................................................... $ 10,981
==================
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-54
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE DELAWARE VALLEY, LTD.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group of the Delaware Valley, Ltd. (the "Company")
is a third-party reseller of the Ultimate Software Group, Inc.'s ("USG",
formerly The Ultimate Software Group, Ltd.) human resource management and
payroll software solutions. Substantially all the products are developed and
sold to the Company by USG which, subsequent to December 31, 1995, acquired
the business, operations and certain assets and liabilities of the Company
(see Note 6). The Company markets its products in the State of Pennsylvania.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. There were no cash
equivalents at December 31, 1995.
Accounts Receivable
Accounts receivable are from end-users of the Company's products. The
Company performs periodic credit evaluations of its customers and has
determined that an allowance for estimated losses was not required at
December 31, 1995.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repairs
are charged to expense when incurred; betterments are capitalized. Upon the
sale or retirement of assets, the cost, accumulated depreciation and
amortization are removed from the accounts and any gain or loss is
recognized.
Other Assets
Other assets includes a fee of $200,000, net of accumulated amortization
of $162,500, paid to USG under an exclusive reseller agreement (the
"Agreement"). The Agreement allows the Company to exclusively market USG's
products in Pennsylvania. As a result of the sale of the Company's operations
and certain of its assets and liabilities to USG in April 1996 (see Note 6),
the carrying value reflects the estimated useful life of this asset through
the date of the acquisition.
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered. Associated deferred costs, primarily relating to the cost
of the products for licensing contracts purchased from USG, amounted to
approximately $23,445 at December 31, 1995 and are included in prepaid
expenses.
Revenue Recognition
The Company licenses software under noncancellable license agreements and
provides services including maintenance, implementation, training and
consulting services. License revenue are generally recognized when a
noncancellable license agreement has been signed, the product has been
delivered, no significant vendor obligations remain and the collection of the
related receivable is deemed probable.
F-55
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE DELAWARE VALLEY, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Revenue from maintenance agreements for maintaining, supporting and providing
periodic upgrades are recognized ratably over the maintenance period, which
in most instances is one year. Revenues for training and consulting services
are recognized as services are performed.
Cost of Revenues
Cost of revenues consists of direct product costs and the costs of
providing consulting, implementation, maintenance, technical support and
training to the Company's customers.
Income Taxes
The Company has elected S Corporation status with the Internal Revenue
Service. Accordingly, net income (loss) and the related differences that
arise in the recording of income and expense items for financial reporting
and income tax reporting purposes are included in the individual income tax
returns of the shareholders and no income taxes are included in the
accompanying financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments, consisting of cash and cash
equivalents and accounts receivable and notes payable approximate fair value.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of computer equipment of $5,642, less
accumulated depreciation of $1,105. These assets are being depreciated over
their estimated useful lives of five years.
4. NOTE PAYABLE TO SHAREHOLDER
Note payable to shareholder represents an unsecured, 12% interest-bearing
note due to the President of the Company. Principal payments are due in equal
monthly installments of $2,778 over three years beginning February 1, 1996.
5. COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain equipment under noncancellable
operating lease agreements expiring at various dates. Total rent expense
under these agreements was $27,204. The future minimum annual rental
commitments related to these leases are approximately $11,100 in 1996, $6,900
in 1997 and $1,100 in 1998.
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Company's financial position or results of operations.
6. SUBSEQUENT EVENT
Effective April 25, 1996, the Company sold its operations and certain
assets and liabilities to USG. As a result, the results of operations of the
Company subsequent to that date are included with that of USG.
F-56
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of The Ultimate Software
Group of the Carolinas, Inc. and The Ultimate Software
Group of Virginia, Inc.:
We have audited the accompanying combined balance sheets of The Ultimate
Software Group of The Carolinas, Inc. (a North Carolina corporation) and The
Ultimate Software Group of Virginia, Inc. (a Virginia corporation)
(collectively, the "Companies") as of December 31, 1996 and 1997 and the
related combined statements of operations, shareholders' deficit and cash
flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of The
Ultimate Software Group of The Carolinas, Inc. and The Ultimate Software
Group of Virginia, Inc. as of December 31, 1996 and 1997 and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
January 20, 1998 (except with respect
to the matter discussed in Note 9, as
to which the date is February 25, 1998).
F-57
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1996 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 51,151 $ 32,651
Accounts receivable..................................... 136,819 271,929
Other current assets.................................... 29,666 97,890
----------- -----------
Total current assets.................................. 217,636 402,470
Equipment, net........................................... 17,555 18,963
Other assets............................................. 11,498 1,640
----------- -----------
Total assets.......................................... $ 246,689 $ 423,073
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accrued expenses........................................ $ 13,885 $ 46,671
Deferred revenue........................................ 110,337 579,390
Borrowings under line of credit agreement............... 129,841 109,091
Note payable............................................ 23,142 --
----------- -----------
Total current liabilities............................. 277,205 735,152
----------- -----------
Commitments and contingencies (Note 8)
Shareholders' deficit:
Common Stock -Carolinas, $1.00 par value, 100,000
shares authorized, 1,000 shares issued and outstanding 1,000 1,000
Common Stock -Virginia, $.01 par value, 10,000 shares
authorized, 5,150 shares issued and outstanding ...... 52 52
Additional paid-in capital ............................. 136,548 136,548
Accumulated deficit .................................... (168,116) (449,679)
----------- -----------
Total shareholders' deficit .......................... (30,516) (312,079)
----------- -----------
Total liabilities and shareholders' deficit ......... $ 246,689 $ 423,073
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
combined balance sheets.
F-58
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Revenues ................... $474,283 $648,067 $ 859,173
Operating expenses:
Cost of revenues .......... 181,150 289,665 325,388
Sales and marketing ....... 138,815 196,102 567,850
General and administrative 122,301 182,848 236,849
---------- ----------- -----------
Total operating expenses 442,266 668,615 1,130,087
---------- ----------- -----------
Operating income (loss) . 32,017 (20,548) (270,914)
Other expense, net ......... (5,600) (16,642) (10,649)
---------- ----------- -----------
Net income (loss) ........ $ 26,417 $(37,190) $ (281,563)
========== =========== ===========
</TABLE>
The accompanying notes to combined financial statements are an integral part
of these statements.
F-59
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
CAROLINAS VIRGINIA
------------------ ------------------
COMMON STOCK COMMON STOCK ADDITIONAL TOTAL
$1.00 PAR VALUE $.01 PAR VALUE PAID-IN ACCUMULATED SHAREHOLDERS'
------------------ ------------------ CAPITAL DEFICIT DEFICIT
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 . 1,000 $1,000 5,150 $52 $126,548 $(157,343) $ (29,743)
Net income ................. -- -- -- -- -- 26,417 26,417
-------- -------- -------- -------- ------------ ------------- ---------------
Balance, December 31, 1995 . 1,000 1,000 5,150 52 126,548 (130,926) (3,326)
Contribution of shares to
fund issuance of stock to
employees for services ... (10) (10) -- -- 10 -- --
Noncash issuance of stock
to employees for services 10 10 -- -- 9,990 -- 10,000
Net loss ................... -- -- -- -- -- (37,190) (37,190)
-------- -------- -------- -------- ------------ ------------- ---------------
Balance, December 31, 1996 . 1,000 1,000 5,150 52 136,548 (168,116) (30,516)
Net loss ................... -- -- -- -- -- (281,563) (281,563)
-------- -------- -------- -------- ------------ ------------- ---------------
Balance, December 31, 1997 . 1,000 $1,000 5,150 $52 $136,548 $(449,679) $(312,079)
======== ======== ======== ======== ============ ============= ===============
</TABLE>
The accompanying notes to combined financial statements are an integral part
of these statements.
F-60
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................... $ 26,417 $(37,190) $(281,563)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ..................... 15,365 17,477 15,558
Issuance of equity instruments for services ...... -- 10,000 --
Changes in operating assets and liabilities:
Accounts receivable .............................. (50,184) (54,193) (135,110)
Other current assets ............................. (17,993) (11,673) (68,224)
Accrued expenses ................................. (2,591) (5,407) 32,786
Deferred revenue ................................. (12,125) 102,962 469,053
---------- ----------- ------------
Net cash provided by (used in) operating activities . (41,111) 21,976 32,500
---------- ----------- ------------
Cash flows from investing activities:
Capital expenditures ................................ (13,804) (7,635) (7,108)
---------- ----------- ------------
Cash flows from financing activities:
Borrowings under line of credit agreement .......... 85,000 50,016 --
Payments under line of credit agreement ............. (14,277) (20,898) (20,750)
Borrowings under note payable ....................... -- 24,936 --
Payments under note payable ......................... -- (1,794) (23,142)
Payments on amounts due to related party ............ -- (40,500) --
---------- ----------- ------------
Net cash provided by (used in) financing activities . 70,723 11,760 (43,892)
---------- ----------- ------------
Net increase (decrease) in cash and cash equivalents 15,808 26,101 (18,500)
Cash and cash equivalents, beginning of year ........ 9,242 25,050 51,151
---------- ----------- ------------
Cash and cash equivalents, end of year ............... $ 25,050 $ 51,151 $ 32,651
========== =========== ============
Supplemental disclosure of cash flow information:
Cash paid for interest .............................. $ 5,600 $ 16,642 $ 12,046
========== =========== ============
</TABLE>
The accompanying notes to combined financial statements are an integral part
of these statements.
F-61
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group of the Carolinas, Inc. and the Ultimate
Software Group of Virginia, Inc. (collectively, the "Companies") is a
third-party reseller of The Ultimate Group Software, Inc.'s human resource
management and payroll software solutions. Substantially all of the
Companies' products are developed and sold to the Companies by The Ultimate
Software Group, Inc. ("USG", formerly The Ultimate Software Group, Ltd.). The
Companies market their products in the states of North Carolina, South
Carolina and Virginia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Combination
The combined financial statements include the accounts of The Ultimate
Software Group of the Carolinas, Inc. and The Ultimate Software Group of
Virginia, Inc. who have the same shareholders. Intercompany accounts and
transactions have been eliminated in combination.
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. There were no cash
equivalents at December 31, 1996 and 1997.
Accounts Receivable
Accounts receivable are principally from end-users of the Companies'
products. The Companies perform periodic credit evaluations of their
customers and determined that an allowance for estimated losses was not
required at December 31, 1996 and 1997.
Equipment
Equipment is stated at cost less accumulated depreciation and
amortization. Equipment is depreciated using the straight-line method over
the estimated useful lives of the assets. Maintenance and repairs are charged
to expense when incurred; betterments are capitalized. Upon the sale or
retirement of assets, the cost, accumulated depreciation and amortization are
removed from the accounts and any gain or loss is recognized.
Other Assets
Other assets includes a fee of $50,000, net of accumulated amortization of
$42,058 in 1996 and $47,534 in 1997 paid to USG under an exclusive reseller
agreement (the "Agreement"). The Agreement allowed the Companies to
exclusively market USG's products in North Carolina, South Carolina and
Virginia. Such asset is being amortized over its estimated period of benefit
of approximately 5 years.
In accordance with SFAS No. 121, Accounting for the Impairment Of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Companies
continually evaluate whether later events and circumstances have occurred
that indicate the remaining acquired intangibles may warrant revision or may
not be recoverable. When factors indicate that intangibles should be
evaluated for possible impairment, the Companies use an estimate of the
related business' undiscounted cash flows from operations in measuring
whether such cost is recoverable.
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered.
F-62
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Associated deferred costs, primarily relating to the cost of the products
for licensing contracts, amounted to approximately $21,000 and $97,000 at
December 31, 1996 and 1997, respectively, and are included in other assets in
the accompanying combined balance sheets.
Revenue Recognition
The Company licenses software under noncancellable license agreements and
provides services including maintenance, implementation, training and
consulting services. License revenues are generally recognized when a
noncancellable license agreement has been signed, the product has been
delivered, no significant vendor obligations remain and collection of the
related receivable is considered probable. Revenues from maintenance
agreements for maintaining, supporting and providing periodic updates are
recognized ratably over the maintenance period, which in most instances is
one year. Revenues for training and consulting services are recognized as
services are performed.
Cost of Revenues
Cost of revenues consists of direct product costs and the costs of
providing consulting, implementation, maintenance, technical support and
training to the Company's customers.
Income Taxes
The Companies have elected S Corporation status with the Internal Revenue
Service. Accordingly, net income (loss) and the related differences that
arise in the recording of income and expense items for financial reporting
and income tax reporting purposes are included in the individual income tax
returns of the shareholders and no income taxes are included in the
accompanying combined financial statements.
Because of the Companies' net loss position, had the Companies been a C
Corporations, subject to tax at the corporate level, no tax benefit would
have been recorded.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Companies' financial instruments, consisting of cash and cash
equivalents, accounts receivable, borrowings under line of credit
requirements, notes payable and due to related party approximate fair value
due to their short-term nature.
3. EQUIPMENT
Equipment consists of computer equipment of $39,339 in 1996 and $46,448 in
1997, less accumulated depreciation of $21,784 in 1996 and $27,485 in 1997.
These assets are depreciated over their estimated useful life of three years.
4. NOTE PAYABLE
Note payable at December 31, 1996 consists of a note to a bank which bears
interest at prime plus 1.5% (9.75% at December 31, 1996), payable monthly
through maturity. The note was collateralized by substantially all of the
Companies' assets and was repaid during 1997.
F-63
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. LINE OF CREDIT
In June 1995, the Companies entered into a $200,000 line of credit with a
bank which bears interest at prime plus 1.0% (9.5% at December 31, 1997),
payable quarterly through maturity. The line was renewed in December 1996 and
matures in January 1998. The line is collateralized by the Companies'
accounts receivable, as well as certain shares of common stock of the
Companies.
6. EQUITY TRANSACTIONS
In 1996, the Companies issued 10 shares of Common Stock to employees for
services performed. The shares are valued at $10,000 based on their estimated
fair value at the date of issuance and related expense is included in general
and administrative expense in the accompanying combined statement of
operations for the year ended December 31, 1996.
7. DUE TO RELATED PARTY
Due to related party consists of noninterest-bearing loans that are due on
demand.
8. COMMITMENTS AND CONTINGENCIES
The Companies lease office space under a noncancellable operating lease
agreement expiring in December 1998. Total rent expense under this agreement
was $12,578, $14,720 and $17,186 in 1995, 1996 and 1997. The future minimum
annual rental commitment related to this lease is approximately $12,000 in
1998.
From time to time, the Companies may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Companies are not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Companies' financial position or results of operations.
9. SUBSEQUENT EVENT
On February 25, 1998, the Companies exchanged substantially all of their
net assets for 30,677 shares of Class B Common Stock of USG in a transaction
to be accounted for under the poolings-of-interest method of accounting .
F-64
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
The Ultimate Software Group of New York
and New England, G.P.:
We have audited the accompanying balance sheets of The Ultimate Software
Group of New York and New England, G.P. (a New York general partnership) as
of December 31, 1996 and 1997 and the related statements of operations,
partners' deficit and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Ultimate Software
Group of New York and New England, G.P. as of December 31, 1996 and 1997 and
the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
January 15, 1998 (except with respect
to the matter discussed in Note 7, as
to which the date is February 24, 1998).
F-65
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1996 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................ $321,366 $ 563,795
Accounts receivable, net ................. 72,142 196,642
Prepaid expenses and other current assets 66,776 153,890
---------- -----------
Total current assets ................... 460,284 914,327
Property and equipment, net ............... 46,472 45,000
Other assets .............................. 142,268 32,601
---------- -----------
Total assets ........................... $649,024 $ 991,928
========== ===========
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable ......................... $ 47,714 $ 88,565
Accrued expenses ......................... 75,604 182,091
Deferred revenue ......................... 481,198 932,654
Customer deposits ........................ 113,008 137,127
---------- -----------
Total current liabilities .............. 717,524 1,340,437
Commitments and contingencies (Note 6)
Total partners' deficit ................ (68,500) (348,509)
---------- -----------
Total liabilities and partners' deficit $649,024 $ 991,928
========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-66
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Revenues.................... $ 883,656 $1,281,534 $1,776,030
Operating expenses:
Cost of revenues .......... 416,887 589,635 767,955
Sales and marketing ....... 683,192 515,015 673,327
General and administrative 182,530 348,200 467,142
------------ ------------ ------------
Total operating expenses 1,282,609 1,452,850 1,908,424
------------ ------------ ------------
Operating loss ........... (398,953) (171,316) (132,394)
Other income ............... 858 6,111 13,483
------------ ------------ ------------
Net loss ................. $ (398,095) $ (165,205) $ (118,911)
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-67
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
STATEMENTS OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
THE TOTAL
NEW COUNTRY WEDGEWOOD PARTNERS'
DEVELOPMENT, INC. MCNEARY, INC. GROUP, INC. DEFICIT
<S> <C> <C> <C> <C>
Balance, December 31, 1994 .. $ 157,425 $ 52,475 $ 209,900 $ 419,800
Sale of partnership
interest................... (127,875) 127,875 -- --
Partners' contributions .... 56,250 18,750 -- 75,000
Net loss.................... (149,286) (49,762) (199,047) (398,095)
----------------- --------------- ------------- -------------
Balance, December 31, 1995 .. (63,486) 149,338 10,853 96,705
Net loss.................... (61,952) (20,651) (82,602) (165,205)
----------------- --------------- ------------- -------------
Balance, December 31, 1996 .. (125,438) 128,687 (71,749) (68,500)
Net loss.................... (44,592) (14,863) (59,456) (118,911)
Partners' distributions .... (60,184) (20,183) (80,731) (161,098)
----------------- --------------- ------------- -------------
Balance, December 31, 1997 .. $(230,214) $ 93,641 $ (211,936) $ (348,509)
================= =============== ============= =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-68
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $(398,095) $(165,205) $(118,911)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization ........................ 130,005 129,929 126,991
Changes in operating assets and liabilities:
Accounts receivable ................................. (93,881) 70,549 (124,500)
Prepaid expenses and other current assets .......... 8,106 (40,783) (87,114)
Other assets ........................................ (7,200) (701) 3,000
Accounts payable .................................... 30,092 12,296 40,851
Accrued expenses .................................... 8,446 40,824 106,487
Deferred revenue .................................... 219,713 261,485 451,456
Customer deposits ................................... 50,449 (57,900) 24,119
------------ ------------ ------------
Net cash provided by (used in) operating activities .... (52,365) 250,494 422,379
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures ................................... (26,183) (15,087) (18,852)
------------ ------------ ------------
Cash flows from financing activities:
Contributions .......................................... 75,000 -- --
Distributions .......................................... -- -- (161,098)
------------ ------------ ------------
Net cash provided by (used in) financing activities .... 75,000 -- (161,098)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ... (3,548) 235,407 242,429
Cash and cash equivalents, beginning of year ........... 89,507 85,959 321,366
------------ ------------ ------------
Cash and cash equivalents, end of year .................. $ 85,959 $ 321,366 $ 563,795
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-69
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group of New York and New England, G.P. (the
"Partnership") is a third-party reseller of The Ultimate Software Group,
Inc.'s human resource management and payroll software solutions.
Substantially all of the products are developed and sold to the Partnership
by The Ultimate Software Group, Inc. ("USG", formerly The Ultimate Software
Group, Ltd.). The Partnership markets its products in the states of
Connecticut, Maine, Massachusetts, New Hampshire, New York, Rhode Island and
Vermont.
The general partners share in income and loss and have ownership
percentages as follows:
<TABLE>
<CAPTION>
OWNERSHIP SHARE OF INCOME
PERCENTAGE AND LOSS
<S> <C> <C>
New County Development, Inc. 37.5% 37.5%
McNeary, Inc. ................ 12.5 12.5
The Wedgewood Group, Inc. ... 50.0 50.0
------------ ---------------
100.0% 100.0%
============ ===============
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. There were no cash
equivalents at December 31, 1996 and 1997.
Accounts Receivable
Accounts receivable are principally from end-users of the Partnership's
products. The Partnership performs periodic credit evaluations of its
customers and has determined the allowance for estimated losses to be $10,000
at December 31, 1996 and 1997, respectively.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repairs
are charged to expense when incurred; betterments are capitalized. Upon the
sale or retirement of assets, the cost, accumulated depreciation and
amortization are removed from the accounts and any gain or loss is
recognized.
Other Assets
Other assets includes a fee of $400,000, net of accumulated amortization
of $266,666 and $373,333 in 1996 and 1997, respectively, paid to USG under an
exclusive reseller agreement (the "Agreement"). The Agreement allowed the
Partnership to exclusively market USG's products in Connecticut, Maine,
Massachusetts, New Hampshire, New York (except New York City and Long
Island), Rhode Island and Vermont. Such asset is being amortized over its
estimated period of benefit of approximately 5 years.
In accordance with SFAS No. 121, Accounting for the Impairment Of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the
Partnership continually evaluates whether later events and circumstances have
occurred that indicate the remaining acquired intangibles may warrant
revision or may not be recoverable. When factors indicate that intangibles
should be evaluated for possible impairment, the Partnership uses an estimate
of the related business' undiscounted cash flows from operations in measuring
whether such cost is recoverable.
F-70
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered.
Associated deferred costs, primarily relating to the cost of the products
for licensing such contracts, amounted to approximately $63,000 and $149,000
at December 31, 1996 and 1997, respectively, and are included in other assets
in the accompanying combined balance sheets.
Revenue Recognition
The Company licenses software under noncancellable license agreements and
provides services including maintenance, implementation, training and
consulting services. License revenues are generally recognized when a
noncancellable license agreement has been signed, the product has been
delivered, no significant vendor obligations remain and collection of the
related receivable is considered probable. Revenues from maintenance
agreements for maintaining, supporting and providing periodic updates are
recognized ratably over the maintenance period, which in most instances is
one year. Revenues for training and consulting services are recognized as
services are performed.
Cost of Revenues
Cost of revenues consists of direct product costs and the costs of
providing consulting, implementation, maintenance, technical support and
training to the Partnership's customers.
Income Taxes
The Partnership is organized as a general partnership. Accordingly, net
income (loss) and the related differences that arise in the recording of
income and expense items for financial reporting and income tax reporting
purposes are included in the individual income tax returns of the partners
and no income taxes are included in the accompanying financial statements.
Because of the Partnership's net loss position, had the Partnership been a
C Corporation, subject to tax at the corporate level, no tax benefit would
have been recorded.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Partnership's financial instruments, consisting of cash and cash
equivalents, accounts receivable and customer deposits approximate fair value
due to their short-term nature.
F-71
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------
1996 1997
<S> <C> <C>
Accrued payroll $75,604 $ 82,091
Accrued legal . -- 85,000
Other .......... -- 15,000
--------- ----------
$75,604 $182,091
========= ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
ESTIMATED --------------------
USEFUL LIFE 1996 1997
<S> <C> <C> <C>
Equipment ........................................ 5 years $ 79,000 $ 97,852
Furniture, fixtures and improvements ............. 5-10 years 23,996 23,996
--------- ---------
102,996 121,848
Less--accumulated depreciation and amortization . 56,524 76,848
--------- ---------
$ 46,472 $ 45,000
========= =========
</TABLE>
5. RELATED PARTY TRANSACTIONS
The Partnership paid the Wedgewood Group, Inc., a general partner,
management fees of $228,000 in 1995, 1996 and 1997.
6. COMMITMENTS AND CONTINGENCIES
The Partnership leases office space under a noncancellable operating lease
agreement expiring in August 1998. The Partnership also leases various office
equipment under noncancellable operating lease agreements expiring from
January 1999 to December 1999. Total rent expense under these agreements was
$26,271, $36,365 and $40,689 in 1995, 1996 and 1997, respectively. The future
minimum annual rental commitment related to these leases is approximately
$25,386 and $5,721 in 1998 and 1999, respectively as of December 31, 1997.
From time to time, the Partnership may be involved in litigation relating
to claims arising out of its operations in the normal course of business. The
Partnership is not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Partnership's financial position or results of
operations.
7. SUBSEQUENT EVENT
On February 24, 1998, the Partnership transferred its net assets into a
newly formed corporation and exchanged 100% of the outstanding shares of the
newly formed entity for 40,265 shares of Class B Common Stock of USG in a
transaction to be accounted for under the poolings-of-interest method of
accounting.
F-72
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Ultimate Investors Group, Inc.:
We have audited the accompanying consolidated balance sheets of Ultimate
Investors Group, Inc. (a Texas corporation) and subsidiary as of December 31,
1996 and 1997, and the related consolidated statements of operations,
shareholders' deficit and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Ultimate
Investors Group, Inc. and subsidiary as of December 31, 1996 and 1997, and
the results of their operations and their cash flows for the each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
February 2, 1998 (except with respect to
the matter discussed in Note 9, as to
which the date is March 4, 1998).
F-73
<PAGE>
ULTIMATE INVESTORS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1996 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 29,453 $ 466,505
Accounts receivable, net ................................ 497,566 768,764
Notes receivable ........................................ 34,722 51,954
Other current assets .................................... 73,384 71,782
----------- ------------
Total current assets .................................. 635,125 1,359,005
Equipment, net............................................ 13,240 4,938
Other assets:
Notes receivable ........................................ 33,379 65,599
Other assets ............................................ 61,655 23,259
----------- ------------
Total other assets .................................... 95,034 88,858
----------- ------------
Total assets........................................... $ 743,399 $1,452,801
=========== ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable......................................... $ 75,752 $ 137,027
Accrued expenses ........................................ 141,586 145,413
Deferred revenue ........................................ 410,171 1,079,549
Line of credit .......................................... -- 100,000
----------- ------------
Total current liabilities ............................. 627,509 1,461,989
----------- ------------
Minority interest ........................................ 47,497 105,197
----------- ------------
Commitments and contingencies (Note 8)
Shareholders' deficit:
Common Stock, $.01 par value, 1,000,000 shares
authorized, 407,875 and 415,150 issued in 1996 and 1997 4,079 4,152
Subscriptions receivable ................................ (15,942) (8,155)
Additional paid-in capital .............................. 435,363 460,753
Accumulated deficit ..................................... (353,107) (569,135)
Less-Treasury Stock, 3,825 shares at cost ............... (2,000) (2,000)
----------- ------------
Total shareholders' equity (deficit) .................. 68,393 (114,385)
----------- ------------
Total liabilities and shareholders' deficit ........... $ 743,399 $1,452,801
=========== ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-74
<PAGE>
ULTIMATE INVESTORS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Revenues ................... $ 558,914 $1,149,274 $1,448,379
Operating expenses:
Cost of revenues .......... 427,037 636,680 778,571
Sales and marketing ....... 182,210 382,801 451,139
General and administrative 54,983 110,070 398,138
------------ ------------ ------------
Total operating expenses 664,230 1,129,551 1,627,848
------------ ------------ ------------
Operating income (loss) . (105,316) 19,723 (179,469)
Other income (expense) .... 4,824 (97) 36,495
------------ ------------ ------------
Net income (loss) ........ $(100,492) $ 19,626 $ (142,974)
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-75
<PAGE>
ULTIMATE INVESTORS GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
------------------- TREASURY SUBSCRIPTIONS
SHARES AMOUNT STOCK RECEIVABLE
<S> <C> <C> <C> <C>
Balance, December 31, 1994 388,825 $3,888 $ -- $(17,000)
Stock issued to employees
for services ............. 3,825 38 -- --
Sale of common stock ..... 7,650 77 -- (14,275)
Purchase of treasury stock -- -- (2,000) --
Compensation expense on
stock options granted ... -- -- -- --
Repayment of stock
subscription receivable . -- -- -- 17,000
Distributions ............. -- -- -- --
Net loss .................. -- -- -- --
--------- -------- ---------- ---------------
Balance, December 31, 1995 400,300 4,003 (2,000) (14,275)
Compensation expense on
stock options vested .... -- -- -- --
Stock issued to employees
for services ............. 3,750 38 -- --
Sale of stock ............. 3,825 38 -- (7,787)
Repayment of stock
subscription receivable . -- -- -- 6,120
Distributions ............. -- -- -- --
Net income ................ -- -- -- --
--------- -------- ---------- ---------------
Balance, December 31, 1996 407,875 4,079 (2,000) (15,942)
Stock issued to employees
for services ............. 7,275 73 -- --
Repayment of stock
subscription receivable . -- -- -- 7,787
Distributions ............. -- -- -- --
Net loss .................. -- -- -- --
--------- -------- ---------- ---------------
Balance, December 31, 1997 415,150 $4,152 $(2,000) $ (8,155)
========= ======== ========== ===============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
UNEARNED PAID-IN ACCUMULATED SHAREHOLDERS'
COMPENSATION CAPITAL DEFICIT DEFICIT
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ -- $358,612 $ (69,741) $ 275,759
Stock issued to employees
for services ............. -- 2,962 -- 3,000
Sale of common stock ..... -- 26,698 -- 12,500
Purchase of treasury stock -- -- -- (2,000)
Compensation expense on
stock options granted ... (10,327) 20,655 -- 10,328
Repayment of stock
subscription receivable . -- -- -- 17,000
Distributions ............. -- -- (94,500) (94,500)
Net loss .................. -- -- (100,492) (100,492)
-------------- ------------ ------------- ---------------
Balance, December 31, 1995 (10,327) 408,927 (264,733) 121,595
Compensation expense on
stock options vested .... 10,327 -- -- 10,327
Stock issued to employees
for services ............. -- 13,087 -- 13,125
Sale of stock ............. -- 13,349 -- 5,600
Repayment of stock
subscription receivable . -- -- -- 6,120
Distributions ............. -- -- (108,000) (108,000)
Net income ................ -- -- 19,626 19,626
-------------- ------------ ------------- ---------------
Balance, December 31, 1996 -- 435,363 (353,107) 68,393
Stock issued to employees
for services ............. -- 25,390 -- 25,463
Repayment of stock
subscription receivable . -- -- -- 7,787
Distributions ............. -- -- (73,054) (73,054)
Net loss .................. -- -- (142,974) (142,974)
-------------- ------------ ------------- ---------------
Balance, December 31, 1997 $ -- $460,753 $(569,135) $(114,385)
============== ============ ============= ===============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-76
<PAGE>
ULTIMATE INVESTORS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................... $(100,492) $ 19,626 $(142,974)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ..................... 51,148 53,300 54,290
Minority interest ................................. (2,673) 97 (17,300)
Compensation expense associated with stock option
grants ........................................... 10,328 10,327 --
Issuance of common stock for services ............. 3,000 13,125 25,463
Changes in operating assets and liabilities:
Accounts receivable .............................. (183,856) (265,490) (271,198)
Other current assets ............................. (53,152) (19,000) 1,602
Other long-term assets ........................... -- (4,045) (1,600)
Accounts payable ................................. 3,348 53,409 61,275
Accrued expenses ................................. 33,882 32,704 78,827
Deferred revenue ................................. 155,693 221,210 669,378
------------ ----------- ------------
Net cash provided by (used in) operating activities . (82,774) 115,263 457,763
------------ ----------- ------------
Cash flows from investing activities:
Capital expenditures ................................ (12,943) (2,430) (5,992)
Advance to related party ............................ (100) (7,500) --
Repayment of shareholder loan ....................... 6,000 -- --
Issuance of notes receivable ........................ -- (45,382) (66,104)
Repayment of notes receivable ....................... -- -- 16,652
------------ ----------- ------------
Net cash used in investing activities ................ (7,043) (55,312) (55,444)
------------ ----------- ------------
Cash flows from financing activities:
Proceeds from line of credit ........................ $ -- $ -- $ 180,000
Repayment of line of credit ......................... -- -- (80,000)
Distributions ....................................... (94,500) (33,000) (148,054)
Purchase of treasury shares ......................... (2,000) -- --
Sale of common stock ................................ 12,500 5,600 --
Repayment of stock subscriptions .................... 17,000 6,120 7,787
Advances to (repayments from) related party ........ 15,000 (15,000) --
Minority interest contributions ..................... 47,000 -- 75,000
------------ ----------- ------------
Net cash provided by (used in) financing activities . (5,000) (36,280) 34,733
------------ ----------- ------------
Net increase (decrease) in cash and cash equivalents (94,817) 23,671 437,052
Cash and cash equivalents, beginning of year ........ 100,599 5,782 29,453
------------ ----------- ------------
Cash and cash equivalents, end of year ............... $ 5,782 $ 29,453 $ 466,505
============ =========== ============
Supplemental disclosure of cash flow information:
Cash paid for interest .............................. $ -- $ -- $ 1,644
============ =========== ============
</TABLE>
The acompanying notes to consolidated financial statements are an integral
part of these statements.
F-77
<PAGE>
ULTIMATE INVESTORS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Ultimate Investors Group, Inc. (the "Company") is a third-party reseller
of the The Ultimate Software Group, Inc.'s human resource management and
payroll software solutions. Substantially all of the products are developed
and sold to the Company by The Ultimate Software Group, Inc. ("USG", formerly
The Ultimate Software Group, Ltd.). The Company markets its products in the
State of Texas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its 92.5%-owned subsidiary, Ultimate Software Group of North Texas, Ltd.
Intercompany accounts and transactions have been eliminated in consolidation.
Minority interest has been reflected.
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. There were no cash
equivalents at December 31, 1996 and 1997.
Accounts Receivable
Accounts receivable are principally from end-users of the Company's
products. The Company performs periodic credit evaluations of its customers
and has determined that an allowance for estimated losses of $5,000 and
$65,024 was required at December 31, 1996 and 1997, respectively.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repairs
are charged to expense when incurred; betterments are capitalized. Upon the
sale or retirement of assets, the cost, accumulated depreciation and
amortization are removed from the accounts and any gain or loss is
recognized.
Other Assets
Other assets includes a fee of $150,000, net of accumulated amortization
of $99,990 and $139,986 in 1996 and 1997, respectively, paid to USG under an
exclusive reseller agreement (the "Agreement"). The Agreement allows the
Company to exclusively market USG's products in Dallas and North Texas. Such
asset is being amortized over its estimated period of benefit of
approximately 5 years.
In accordance with SFAS No. 121, Accounting for the Impairment Of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company
continually evaluates whether later events and circumstances have occurred
that indicate the remaining acquired intangibles may warrant revision or may
not be recoverable. When factors indicate that intangibles should be
evaluated for possible impairment, the Company uses an estimate of the
related business' undiscounted cash flows from operations in measuring
whether such cost is recoverable.
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered.
F-78
<PAGE>
ULTIMATE INVESTORS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Associated deferred costs, primarily relating to the cost of the products
for licensing contracts, amounted to approximately $67,000 and $60,000 at
December 31, 1996 and 1997, respectively, and are included in other assets in
the accompanying combined balance sheets.
Revenue Recognition
The Company licenses software under noncancellable license agreements and
provides services including maintenance, implementation, maintenance,
training and consulting services. License revenues are generally recognized
when a noncancellable license agreement has been signed, the product has been
delivered, no significant vendor obligations remain and collection of the
related receivable is considered probable. Revenues from maintenance
agreements for maintaining, supporting and providing periodic updates are
recognized ratably over the maintenance period, which in most instances is
one year. Revenues for training and consulting services are recognized as
services are performed.
Cost of Revenues
Cost of revenues consists of direct product costs and the costs of
providing consulting, implementation, maintenance, technical support and
training to the Company's customers.
Income Taxes
The Company has elected S Corporation status with the Internal Revenue
Service. Accordingly, net income and the related differences that arise in
the recording of income and expense items for financial reporting and income
tax reporting purposes are included in the individual income tax returns of
the shareholders and no income taxes are included in the accompanying
financial statements.
Because of the Company's net loss position, had the Company been a C
Corporation, subject to tax at the corporate level, no tax benefit would have
been recorded.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments, consisting of cash and cash
equivalents, accounts receivable and customer deposits approximate fair value
due to their short-term nature.
3. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------
1996 1997
<S> <C> <C>
Distributions to shareholders $ 75,000 $ --
Professional fees ............. -- 130,000
Other ......................... 66,586 15,413
---------- ---------
$141,586 $145,413
========== =========
</TABLE>
F-79
<PAGE>
ULTIMATE INVESTORS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. NOTES RECEIVABLE
Notes receivable represents amounts due for trade receivables which have
been documented in the form of a note and bear interest at rates ranging from
9 to 12%.
5. EQUIPMENT
Equipment consists of assets amounting to $40,434 in 1996 and $46,426 in
1997, less accumulated depreciation of $27,194 in 1996 and $41,488 in 1997.
These assets are being depreciated over their estimated useful lives of three
years.
6. LINE OF CREDIT
The Company has $130,000 available under a line of credit agreement with a
bank. The line of credit bears interest at an annual rate of 9%. The line of
credit renews annually. Amounts outstanding under the line of credit were
zero and $100,000 as of December 31, 1996 and 1997, respectively. The
outstanding balance was repaid subsequent to year end.
7. EQUITY TRANSACTIONS
In 1995, the Company issued 3,825 shares of Common Stock to an employee
for services rendered. The fair value of this transaction was $3,000, based
upon prior sales of the Company's Common Stock. The Company also granted to
an employee options to purchase 7,650 shares of its Common Stock in exchange
for services rendered. Such options were valued on the date of grant based
upon prior sales of the Company's Common Stock. The options vested at 50% per
year. The related compensation expense is included in sales and marketing
expenses in the accompanying 1995 and 1996 consolidated statements of
operations. The options were exercised by the employee in January 1998.
Also, in 1995, the Company sold 7,650 shares of Common Stock for $26,775,
for which the Company received $12,500 in cash and a note for the balance of
$14,275. The balance due on the note is reflected in the consolidated
statements of shareholders' deficit as a stock subscription receivable at
December 31, 1995.
In 1996, an employee purchased 3,825 shares of the Company's Common Stock
for $13,387. A portion of the employee's 1996 sales bonus was applied to the
purchase price and a note was received for the balance of $7,787, which is
reflected in the consolidated statements of shareholders' deficit as a stock
subscription receivable at December 31, 1996.
In 1996, the Company granted 11,025 shares of Common Stock to an employee
for services rendered, of which 3,750 shares were issued at December 31,
1996. The related compensation expense is included in general and
administrative expenses in the accompanying 1996 consolidated statement of
operations. The remaining 7,275 shares were issued in 1997.
8. COMMITMENTS AND CONTINGENCIES
The Company leases office space under a noncancellable operating lease
agreement expiring in September 2001. Total rent expense under this agreement
was $24,009, $61,414 and $56,628 in 1995, 1996 and 1997, respectively. The
future minimum annual rental commitment related to this lease is
approximately $212,000 through 2001.
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Company's financial position or results of operations.
F-80
<PAGE>
ULTIMATE INVESTORS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. SUBSEQUENT EVENT
On March 4, 1998, the Company exchanged substantially all of its assets
and liabilities for 38,000 shares of Class B Common Stock of USG in a
transaction to be accounted for under the poolings-of-interest method of
accounting.
F-81
<PAGE>
[DESCRIPTION OF INSIDE BACK COVER]
Full-length side view of man in suit and tie running across page with arms
stretched out in running motion. Placed horizontally between the man's legs is
the word "Speed." At the bottom of the page, beneath the full-length view of
the man are placed the words: "Leading technologies translate into increased
speed: faster processing times, faster accessing of data, faster implementation
and faster system updates." Followed by another paragraph: "US Group leverages
leading technologies in UltiPro for Windows -- a 32 bit, object-oriented
HRMS/payroll solution designed to take advantage of Microsoft SQL Server and
Microsoft NT."
<PAGE>
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary ....................... 5
Risk Factors ............................. 8
Use of Proceeds .......................... 16
Dividend Policy .......................... 16
Capitalization ........................... 17
Dilution ................................. 18
Selected Consolidated Financial Data .... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .............................. 20
Business ................................. 31
Management ............................... 46
Certain Transactions ..................... 51
Principal Stockholders ................... 54
Description of Capital Stock ............. 56
Shares Eligible for Future Sale .......... 61
Underwriting ............................. 63
Legal Matters ............................ 64
Experts .................................. 64
Additional Information ................... 65
Index to Consolidated Financial
Statements .............................. F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN AD DITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3,250,000 SHARES
[ULTIMATE SOFTWARE GROUP LOGO]
COMMON STOCK
PROSPECTUS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
VOLPE BROWN WHELAN
& COMPANY
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
offering of the Registrant's common stock, $0.01 par value per share (the
"Common Stock"), pursuant to this Registration Statement that will be paid
fully by the Registrant. All amounts shown are estimates, except the
Securities and Exchange Commission registration fee, the NASD filing fee and
the NASDAQ National Market listing fees.
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee $14,333
NASD filing fee ..................................... 5,359
NASDAQ listing fee .................................. 60,000
"Blue Sky" fees and expenses ........................ 15,000
Printing, engraving and postage expenses ............ 250,000
Accounting fees and expenses ........................ 150,000
Legal fees and expenses ............................. 350,000
Transfer agent fees and expenses .................... 5,000
Miscellaneous ....................................... 35,308
- ---------
Total ............................................. 885,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of The Ultimate Software Group, Inc. (the
"Company") provides for indemnification, to the fullest extent permitted by
law, of any person who was or is a director, officer, employee or agent of
the Company or was serving in such capacity at another entity at the
Company's request (each, an "Indemnified Person"), and is a party to, or is
threatened to be made a party to, any threatened, pending or completed
action, suit or proceeding, whether derivative or not. Indemnification
continues as to an Indemnified Person who has ceased to be a director,
officer, employee or agent and inures to the benefit of the heirs, executors
and administrators of an Indemnified Person. The indemnification provisions
in the Certificate of Incorporation are non-exclusive and allow the Company
to indemnify by agreement or vote of stockholders or disinterested directors.
Any indemnification is subject to applicable law requiring a case-by-case
determination that indemnification is appropriate.
The Certificate of Incorporation permits the Company to, and the Company
intends to, purchase liability insurance on behalf of any such person against
any liability which may be asserted.
The Certificate of Incorporation also authorizes, to the fullest extent
allowed by law, indemnification for expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement, as well as the advancement
of expenses to an Indemnified Person.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since the Company's formation in April 1996, the Company has issued the
following securities that were not registered under the Securities Act of
1933, as amended (the "Act"). Except where noted, (i) all issuances were made
in transactions exempt from the registration requirements pursuant to Section
4(2) of the Act or Regulation D promulgated thereunder ("Regulation D")
relative to sales by an issuer not involving a public offering and (ii) all
information presented assumes a 10.119-for-1 split of the Company's Common
Stock, par value $0.01 per share (the "Common Stock").
In April 1996, The Ultimate Software Group, Ltd. (the "Partnership")
transferred and conveyed its then existing business and operations to the
Company pursuant to an Asset Contribution Agreement between the Partnership
and the Company. In such transfer, the Company acquired substantially all of
the assets of the Partnership, and assumed certain specified liabilities
related to the business and assets so transferred. In consideration for the
transfer, the Company issued to the Partnership 236,300 shares of the
II-1
<PAGE>
Company's Class A Common Stock, par value $0.01 per share (the "Class A
Common Stock"), and 536,269 shares of the Company's Class B Common Stock, par
value $0.01 per share (the "Class B Common Stock") (which were converted into
2,334,453 shares of Common Stock), and paid $500,000 in cash to the
Partnership.
On April 25 1996, J.P. Morgan Investment Corporation ("Morgan") and Sixty
Wall Street SBIC Fund, L.P. (an affiliate of Morgan), purchased an aggregate
of 95,787 newly issued shares of Series A Convertible Preferred Stock, par
value $0.01 per share (the "Series A Convertible Preferred Stock") (which
will convert into 696,269 shares of Common Stock), from the Company, for an
aggregate cash purchase price of $5,000,000.
On April 25 1996, pursuant to the Company's Nonqualified Stock Option Plan
(the "Plan"), the Company granted to Patrick A. Gerschel and Marc D. Scherr,
options to purchase up to an aggregate of 323,130 shares of Common Stock, par
value $0.01 per share. These grants were made pursuant to the exemption from
registration provided by Rule 701 of the Rules and Regulations promulgated
under the Act.
Between April 1996 and December 31, 1997, the Company granted to certain
of its officers, directors and employees options to purchase up to an
aggregate of 1,748,832 shares of its Common Stock and options to purchase 409
of such shares was exercised for $5.16 per share in cash. These grants were
made pursuant to the exemption from registration contained in Section 3(b) of
the Securities Act and Rule 701 promulgated thereunder relative to sales
pursuant to certain compensatory benefits plans.
On April 26, 1996, the Company issued an aggregate of 272,157 shares of
Class B Common Stock (which were converted into 2,753,967 shares of Common
Stock) to the shareholders of The Ultimate Software Group, Inc., a Florida
corporation ("GP"), and Strategic Image Systems, Inc., a Florida corportion
("Strategic"), in exchange for the assignment and transfer by such
shareholders to the Company of all of the outstanding capital stock of GP and
Strategic.
On May 24, 1996, the Company sold 95,786 shares of Series A Convertible
Preferred Stock (which will convert into 969,258 shares of Common Stock) to
certain investors, for an aggregate of $5,000,000 in cash, forgiveness of
debt and other consideration.
From December 1996 through September, 1997, the Company sold 295,650
shares of newly issued Series B Convertible Preferred Stock, par value $0.01
per share (which will convert into 2,991,682 shares of Common Stock), to
certain investors (including 153,257 shares (which will convert into
1,550,808 shares of Common Stock) to HarbourVest Partners V -- Direct Fund,
L.P.) for an aggregate amount of $15,432,930 in cash.
In February and March 1998, the Company issued a total of 121,856 shares
of Class B Common Stock (which were converted into 1,233,061 shares of Common
Stock) in connection with the acquisition of the businesses of five
third-party resellers of the Company's products.
Unless otherwise indicated, all sales referred to in this Item 15 were to
purchasers with whom the Company has no affiliation, except in certain
instances when such purchasers were already stockholders of the Company. No
underwriters were involved in connection with the sales referred to in this
Item 15.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
NUMBER DESCRIPTION
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation.*
3.2 Certificate of Amendment of Certificate of Incorporation.*
3.3 Bylaws.*
3.4 Form of Certificate of Incorporation to be in effect immediately prior
to the consummation of the Offering.**
3.5 Form of Bylaws to be in effect immediately prior to the consummation
of the Offering.*
4.1 Form of Certificate for the Common Stock, par value $0.01 per share.**
5.1 Opinion of Dewey Ballantine LLP.**
10.1 Shareholders Rights Agreement, dated June 6, 1997 among the Company
and certain stockholders named therein.*
10.2 Asset Purchase Agreement, dated February 2, 1998, among The Ultimate
Software Group of Virginia, Inc., the Company and certain principals
named therein.*
10.3 Asset Purchase Agreement, dated February 2, 1998, among the Company,
The Ultimate Software Group of the Carolinas, Inc. and certain
principals named therein.*
10.4 Asset Acquisition Agreement, dated February 20, 1998, among the
Company, The Ultimate Software Group of Northern California, Inc. and
certain principals named therein.*
10.5 Asset Purchase Agreement dated March 4, 1998, among the Company,
Ultimate Investors Group, Inc. and certain principals named therein.*
10.6 Agreement and Plan of Merger dated February 24, 1998, among the
Company, ULD Holding Corp., Ultimate Software Group of New York and
New England, G.P. and certain principals named therein.*
10.7 Nonqualified Stock Option Plan.*
10.8 Lease Agreement, between the Company, as successor to The Ultimate
Software Group, Ltd., and Gary A. Poliakoff as Trustee for Emerald
Lake Trust, dated November 16, 1993 and extensions thereof.*
21.1 Subsidiaries of the registrant.*
23.1 Consent of Arthur Andersen LLP.**
23.2 Consent of Dewey Ballantine LLP (included in Exhibit 5.1).**
24.1 Powers of Attorney (included on signature page hereto).*
27.1 Financial Data Schedule.*
- ------------
*Previously filed.
**Filed herewith.
(b) FINANCIAL STATEMENT SCHEDULES.
None.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of
II-3
<PAGE>
the Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of the
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement
certificates in such denominations, and registered in such names, as required
by the underwriters to permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
1. For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Ft. Lauderdale, State of Florida, on May 29, 1998.
THE ULTIMATE SOFTWARE GROUP, INC.
By: /s/ Scott Scherr
-------------------------------
Scott Scherr
President, Chief Executive
Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to the Registration Statement has been signed below on
May 29, 1998 by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Scott Scherr President, Chief Executive Officer
- ---------------------------- and Director
Scott Scherr
* Executive Vice President, Chief Financial
- ---------------------------- Officer (Principal Financial Officer and
Mitchell K. Dauerman Principal Accounting Officer) and Treasurer
* Executive Vice President, Chief
- ---------------------------- Technology Officer and Director
Alan S. Goldstein
* Director
- ----------------------------
Marc D. Scherr
* Director
- ----------------------------
Ofer Nemirovsky
* Director
- ----------------------------
LeRoy A. Vander Putten
* Director
- ----------------------------
Rick Wilber
* Director
- ----------------------------
Robert A. Yanover
*By /s/ Scott Scherr
-----------------------
(Scott Scherr
Attorney-in-Fact)
</TABLE>
II-5
<PAGE>
EXHIBIT 3.4
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
THE ULTIMATE SOFTWARE GROUP, INC.
(Original Certificate of
Incorporation filed
on April 15, 1996)
This Amended and Restated Certificate of Incorporation, which restates and
amends the Third Amended and Restated Certificate of Incorporation of The
Ultimate Software Group, Inc. (the "Corporation") filed with the Secretary of
State of the State of Delaware on June 6, 1997, was duly adopted by action of
the Board of Directors of the Corporation and approved by a vote of a majority
of the outstanding stock entitled to vote thereon at a meeting of the
stockholders in accordance with the provisions of Sections 242 and 245 of the
General Corporation Law of the State of Delaware.
FIRST: The name of the corporation is The Ultimate Software Group, Inc.
SECOND: The address of the Corporation's registered office in the state of
Delaware is Corporation Trust Center, 1209 Orange Street, in the city of
Wilmington, County of New Castle. The name of the Corporation's registered
agent at such address is The Corporation Trust Company.
THIRD: The nature of the business of the Corporation and its purpose is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
FOURTH: The authorized capital stock of the Corporation shall consist of
(i) 2,500,000 shares of Preferred Stock, par value $0.01 per share (the
"Preferred Stock"), and (ii) 50,000,000 shares of Common Stock, $0.01 par value
per share (the "Common Stock").
The Preferred Stock shall consist of one or more series of Preferred Stock
which shall have the powers, terms, conditions, designations, preferences and
privileges, the relative, participating, optional and other special rights, and
the qualifications, limitations and restrictions, if any, as provided herein.
A. SERIES OF PREFERRED STOCK
The Board of Directors (or a duly authorized committee thereof) is hereby
expressly authorized to provide for, designate and issue, out of the authorized
but unissued shares of Preferred Stock, one or more series of Preferred Stock.
Before any
<PAGE>
shares of any such series are issued, the Board of Directors (or a duly
authorized committee thereof) shall fix, and is hereby expressly empowered to
fix, as to the shares of any such series:
(a) the designation of such series, the number of shares to constitute
such series and the stated value thereof, if different from the par value
thereof;
(b) whether the shares of such series shall have voting rights or powers,
in addition to any voting rights required by law and, if so, the terms of such
voting rights or powers, which may be full or limited;
(c) the dividends, if any, payable on such series, whether any such
dividends shall be cumulative and, if so, from what dates, the conditions and
dates upon which such dividends shall be payable, the preferences or relation
which such dividends shall bear to the dividends payable on any shares of stock
of any other class or any other series of this class;
(d) whether the shares of such series shall be subject to redemption by
the Corporation and, if so, the times, prices and other conditions of such
redemption;
(e) the amount or amounts payable upon shares of such series upon, and the
rights of the holders of such series in, the voluntary or involuntary
liquidation, or upon any distribution of the assets, of the Corporation;
(f) whether the shares of such series shall be subject to the operation of
a retirement or sinking fund and, if so, the extent to which and manner in
which any such retirement or sinking fund shall be applied to the purchase or
redemption of the shares of such series for retirement or other corporate
purposes and the terms and provisions relative to the operation thereof;
(g) whether the shares of such series shall be convertible into or
exchangeable for shares of stock of any other class or any other series of this
class or any other securities and, if so, the price or prices or the rate or
rates of conversion or exchange and the method, if any, of adjusting the same,
and any other terms and conditions of conversion or exchange;
(h) the limitations and restrictions, if any, to be effective while any
shares of such series are outstanding upon the payment of dividends or the
making of other distributions on, and upon the purchase, redemption or other
acquisition by the Corporation of, the Common Stock or shares of stock of any
other class or any other series of this class;
(i) the conditions or restrictions, if any, to be effective while any
shares of such series are outstanding upon the creation of indebtedness of the
Corporation or upon the issue of any additional stock, including additional
shares of such series or of any other series of this class or of any other
class; and
2
<PAGE>
(j) any other powers, designations, preferences and relative,
participating, optional or other special rights, and any qualifications,
limitations, or restrictions thereof.
The powers, designations, preferences and relative, participating,
optional or other special rights of each series of Preferred Stock, and the
qualifications, limitations or restrictions thereof, if any, may differ from
those of any and all other series at any time outstanding. The Board of
Directors is hereby expressly authorized from time to time to increase (but not
above the total number of authorized shares of Preferred Stock) or decrease
(but not below the number of shares thereof then outstanding) the number of
shares of Preferred Stock designated to any one or more series of Preferred
Stock pursuant to this Section A of this Paragraph Fourth.
B. COMMON STOCK
All shares of Common Stock will be identical and will entitle the holders
thereof to the same rights and privileges.
I. Stock Split
Upon the filing in the Office of the Secretary of State of Delaware of
this Amended and Restated Certificate of Incorporation, each issued and
outstanding share of Common Stock shall thereby and thereupon be split into
10.119 shares of validly issued, fully paid nonassessable shares of Common
Stock. Each party at that time holding of record any issued and outstanding
shares of Common Stock shall receive upon surrender of the stock certificate
representing such shares to the Corporation's authorized agent a stock
certificate or certificates to evidence and represent the number of shares of
Common Stock to which said stockholder is entitled after the split.
II. Dividends
When, as and if dividends are declared thereon, whether payable in cash,
property or securities of the Corporation, the holders of Common Stock will be
entitled to share equally in and receive, in accordance with the number of
shares of Common Stock held by each such holder, such dividends. Dividends
payable under this Section B.I shall be paid to the holders of record of the
outstanding Common Stock as their names shall appear on the stock register of
the Corporation on the record date fixed by the Board of Directors in advance
of declaration and payment of each dividend. Any Common Stock issued as a
dividend pursuant to this Section B.I shall, when so issued, be duly
authorized, validly issued, fully paid and non-assessable, and free of all
liens and charges.
Notwithstanding anything contained herein to the contrary, no dividends on
Common Stock shall be declared by the Corporation's Board of Directors or paid
or set apart for payment by the Corporation at any time that such declaration,
payment, or setting apart is prohibited by applicable law.
3
<PAGE>
III. Voting Rights
Each holder of the Common Stock shall be entitled to one vote for each
share of Common Stock held on all matters submitted to a vote of the
stockholders.
IV. Other Rights
Except for and subject to those rights expressly granted to the holders of
Preferred Stock, or as otherwise provided herein, and except as may be provided
by the laws of the State of Delaware, the holders of Common Stock shall have
exclusively all other rights of stockholders, including, without limitation,
(a) the right to receive dividends, when, as and if declared by the Board of
Directors, out of assets lawfully available therefor, and (b) in the event of
any distribution of assets upon a liquidation or otherwise, the right to
receive ratably and equally with all other holders of Common Stock all of the
assets and funds of the Corporation remaining after the payment to the holders
of the Preferred Stock, of the specific amounts which they are entitled to
receive upon such liquidation.
FIFTH: A. Board of Directors. Subject to the rights of the holders of the
Preferred Stock, the number which shall constitute the Board of Directors of
the Corporation shall be no greater than eleven (11) and no less than five (5),
as determined by the Board of Directors from time to time. The Board of
Directors shall be classified, with respect to the time for which the directors
severally hold office, into three classes, as nearly equal in number as
possible, in the manner specified in the By-laws of the Corporation, one class
to hold office initially for a term expiring at the annual meeting of
stockholders to be held in 1999, another class to hold office initially for a
term expiring at the annual meeting of stockholders to be held in 2000, and
another class to hold office initially for a term expiring at the annual
meeting of stockholders to be held in 2001, with the members of each class to
hold office until their successors are duly elected and qualified. At each
annual meeting of the stockholders of the Corporation, the successors to the
class of directors whose term expires at that meeting shall be elected to hold
office for a term expiring at the annual meeting of stockholders held in the
third year following the year of their election. Any vacancy on the Board of
Directors that results from an increase in the number of directors may be
filled by a majority of the Board of Directors then in office, provided that a
quorum is present, and any other vacancy occurring in the Board of Directors
may be filled by a majority of the Board of Directors then in office, even if
less than a quorum, or a sole remaining director. Any director elected to fill
a vacancy not resulting from an increase in the number of directors shall have
the same remaining term as that of his or her predecessor.
B. Removal of Directors Solely for Cause. No director may be removed from
office except for cause and only by the affirmative vote of the holders of a
majority of the combined voting power of all outstanding shares of stock then
entitled to vote generally in the election of directors, voting as a single
class. Notwithstanding the foregoing, directors who shall have been elected by
the holders of a series or class of Preferred Stock, voting separately as a
class, shall be removed only pursuant to the provisions establishing the rights
of such series or class to elect such directors.
4
<PAGE>
The election of directors need not be by ballot unless the By-laws of the
Corporation so provide.
SIXTH: The following provisions are inserted for the management of the
business and for the conduct of the affairs of the Corporation, and in
furtherance and, except as specifically set forth in this Paragraph, not in
limitation of the powers of the Corporation and of its directors and
stockholders conferred by statute:
(1) Subject to the provisions of Article Eleventh hereof, the Board of
Directors shall have power without (except as provided by applicable law) the
assent or vote of the stockholders to make, alter, amend, change, add to or
repeal the By-laws of the Corporation; to authorize and cause to be executed
mortgages and liens upon all or any part of the property of the Corporation; to
determine the use and disposition of any surplus or net profits; to fix the
times for the declaration and payment of dividends; and to set apart out of any
of the funds of the Corporation available for dividends a reserve or reserves
for any proper purpose and to abolish any such reserve.
(2) In addition to the powers and authorities hereinbefore or by statute
expressly conferred upon them, the Board of Directors is hereby empowered to
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation; subject, nevertheless, to the provisions of the laws
of the State of Delaware, this Amended and Restated Certificate of
Incorporation and the Corporation's By-laws, as in effect from time to time.
SEVENTH: The books and records of the Corporation may be kept (subject to
any mandatory requirement of law) outside the State of Delaware at such place
or places as may be designated from time to time by the Board of Directors or
by the By-laws of the Corporation.
EIGHTH: No director shall be liable to the Corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that the foregoing does not eliminate or limit any liability that may
exist with respect to (1) a breach of the director's duty of loyalty to the
Corporation or its stockholders, (2) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3)
liability under Section 174 of the Delaware General Corporation Law or (4) a
transaction from which the director derived an improper personal benefit, it
being the intention of the foregoing provision to eliminate the liability of
the Corporation's directors to the Corporation or its stockholders to the
fullest extent permitted by Section 102(b)(7) of the Delaware General
Corporation Law, as in effect on the date hereof and as such Section may be
amended after the date hereof to the extent such amendment permits such
liability to be further eliminated or limited. The Corporation shall indemnify
to the fullest extent permitted by Section 145 of the Delaware General
Corporation Law (as in effect on the date hereof and as such Section may be
amended after the date hereof) each person that such Section grants the
Corporation the power to indemnify. No amendment, modification or repeal of
this Paragraph Eighth shall adversely affect any right or protection of a
director that exists at the time of such amendment, modification or repeal.
5
<PAGE>
NINTH: The Corporation reserves the right to amend or repeal any provision
contained in this Amended and Restated Certificate of Incorporation in the
manner now or hereafter prescribed by the laws of the State of Delaware, and
all rights herein conferred upon stockholders or directors are granted subject
to this reservation.
TENTH: Following the consummation of an initial public offering of Common
Stock or any transaction or event as a result of which any Common Stock is
listed on a national securities exchange or registered under Section 12 of the
Securities Exchange Act of 1934, as amended, any action required or permitted
to be taken by the stockholders of the Corporation must be affected at a duly
called annual or special meeting of stockholders of the Corporation, and the
ability of the stockholders to consent in writing to the taking of any action
is hereby specifically denied except as fixed pursuant to the provisions of
Section A of Paragraph FOURTH hereof relating to the rights of the holders of
Preferred Stock. Except as otherwise required by law, special meetings of
stockholders of the Corporation may be called only by (i) the Chairman of the
Board or the President of the Corporation and (ii) shall be called by the
Secretary of the Corporation at the request in writing of a majority of the
members of the Board of Directors.
ELEVENTH: In furtherance and not in limitation of the powers conferred
upon it by the laws of the State of Delaware, the Board of Directors shall have
the power to adopt, alter, amend, terminate or repeal the Corporation's
By-laws. The affirmative vote of at least 66-2/3% of the entire Board of
Directors shall be required to adopt, alter, amend, terminate or repeal the
Corporation's By-laws.
TWELFTH: The provisions of Paragraphs Fifth, Tenth, Eleventh and Twelfth
hereof and Section 2.11 of the Corporation's By-laws may only be altered,
amended, terminated or repealed, or a provision adopted that is inconsistent
with the purpose and intent of the provisions of such Paragraphs or Article, as
the case may be, by the affirmative vote of the holders of at least 66-2/3% of
the voting power of the shares entitled to vote at an election of directors.
6
<PAGE>
IN WITNESS WHEREOF, The Ultimate Software Group, Inc. has caused this
Amended and Restated Certificate of Incorporation to be signed by its President
and attested to by its Secretary and caused the corporate seal of the
Corporation to be hereunto affixed this day of , 1998.
------------------------------
Name: Scott Scherr
Title: President and
Chief Executive Officer
7
<PAGE>
US GROUP (Registered Mark)
THE ULTIMATE SOFTWARE GROUP, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
----------------
| SHARES |
| |
| |
| |
| |
| |
----------------
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 90385D 10 7
THIS CERTIFICATE IS TRANSFERABLE
IN BOSTON, MA OR NEW YORK, NY
THIS IS TO CERTIFY THAT
IS THE OWNER OF
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF THE PAR VALUE OF
$.01 EACH OF
- ------------------------THE ULTIMATE SOFTWARE GROUP, INC.----------------------
(hereinafter call the "Corporation") transferable on the books of the
Corporation by said owner in person or by duly authorized attorney, upon
surrender of this certificate properly endorsed. This certificate and the
shares represented hereby are issued and shall be held subject to all the
provisions of the Certificate of Incorporation and the By-Laws of the
Corporation and all amendments thereto, and the holder hereof, by acceptance
of this certificate, consents to and agrees to be bound by all of said
provisions. This certificate is not valid unless countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ Mitchell K. Dauerman THE ULTIMATE SOFTWARE GROUP INC. /S/ Scott Scherr
- ------------------------ CORPORATE SEAL ------------------
Mitchell K. Dauerman 1996 Scott Scherr
Treasurer DELAWARE President
COUNTERSIGNED AND REGISTERED:
BANKBOSTON, N.A.
TRANSFER AGENT AND REGISTRAR
BY
- -----------------
AUTHORIZED SIGNATURE
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants in common
UNIF GIFT MIN ACT -- ........................Custodian.......................
(Cust) (Minor)
under Uniform Gifts to Minors
Act ....................................................
(State)
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
---------------------------------------
| |
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- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------ shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
--------------------------------------------
- ---------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
----------------------------
----------------------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
- ---------------------------------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF DEWEY BALLANTINE LLP]
May 28, 1998
The Ultimate Software Group, Inc.
3111 Stirling Road
Suite 308
Ft. Lauderdale, FL 33312
Ladies and Gentlemen:
We refer to the Registration Statement on Form S-1
(Registration No. 333-47881) (the "Registration Statement"), filed by The
Ultimate Software Group, Inc., a Delaware corporation (the "Company"), with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended (the "Act"), for purposes of registering under the Act up to 3,737,500
shares of common stock, par value $0.01 per share (the "Common Stock"), of the
Company, including (1) 3,250,000 shares to be sold by the Company and an
additional 333,000 shares that are subject to sale by the Company pursuant to
the underwriters' over-allotment option (together, the "Company Shares") and
(2) 154,500 shares that are subject to sale by certain selling stockholders
pursuant to the underwriters' over-allotment option (the "Selling Stockholder
Shares").
We have examined and are familiar with originals or copies,
certified or otherwise identified to our satisfaction, of the Registration
Statement, such corporate records of the Company, certificates of officers of
the Company and of public officials and such other documents as we have deemed
appropriate as a basis for the opinions expressed below. In such examination,
we have assumed the authenticity of all documents presented to us as originals,
the conformity to the originals of all documents presented to us as copies, and
the authenticity of the originals of such latter documents.
Based upon and subject to the foregoing, we are of the
opinion that:
1. The Company Shares have been duly authorized and, upon issuance and
delivery against payment therefor in accordance with the Underwriting Agreement
filed as Exhibit 1.1 to the Registration Statement, will be validly issued,
fully paid and nonassessable.
<PAGE>
The Ultimate Software Group, Inc.
May 28, 1998
Page 2
2. The Selling Stockholder Shares have been duly authorized and
validly issued and are fully paid and nonassessable.
Our opinion set forth herein is limited in all cases to
matters arising under the General Corporation Law of the State of Delaware. We
consent to the use of this opinion as an Exhibit to the Registration Statement
and to the reference to our firm under the caption "Legal Matters" in the
prospectus that is a part of the Registration Statement. In giving such
consent, we do not thereby concede that we are within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations of the Commission thereunder.
Very truly yours,
DEWEY BALLANTINE LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use
of our reports and to all references to our firm included in or made a part
of this Registration Statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
May 29, 1998.
