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Filed Pursuant to Rule 424(b)(1)
Registration File No.: 333-47881
PROSPECTUS
JUNE 2, 1998 3,250,000 SHARES
[ULTIMATE SOFTWARE 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. See
"Underwriting" for information relating to the factors considered in
determining the initial public offering price. The Common Stock has been
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.
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PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share ......... $ 10.00 $ 0.70 $ 9.30
Total(3) .......... $32,500,000 $2,275,000 $30,225,000
</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 $37,375,000, $2,616,250, $33,280,050 and $1,478,700,
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 June 5, 1998.
DONALDSON, LUFKIN & JENRETTE VOLPE BROWN WHELAN & COMPANY
SECURITIES CORPORATION
<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.
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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.
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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
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<S> <C>
Common Stock offered by the Company ....................... 3,250,000
Common Stock to be outstanding after the Offering ......... 15,870,715 (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
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(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."
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SUMMARY CONSOLIDATED FINANCIAL DATA(1)
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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
======== ========= =========
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THREE MONTHS ENDED
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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
======== ======== ======== ======= ========
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AS OF MARCH 31, 1998
------------------------------
PRO FORMA
PRO FORMA(4) AS ADJUSTED(5)
(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents .............. $ 658 $27,820
Working capital (deficit) .............. (9,483) 19,857
Total assets ........................... 12,096 39,258
Long-term borrowings ................... 574 574
Stockholders' equity (deficit) ......... (8,688) 20,652
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(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 the initial public offering price of
$10.00 per share, after deducting underwriting discounts and commissions
and estimated Offering expenses payable by the Company and the
application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
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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
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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
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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
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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 $8.73
from the 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 was 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. 15,870,715 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 12,620,715 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
12,067,667 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)
369,237 shares will be available for immediate sale in the public market on the
date of this Prospectus, (ii) 62,969 shares will be eligible for sale on June
17, 1998, (iii) 311,956 shares will be eligible for sale 90 days after the date
of this Prospectus, (iv) 10,643,497 shares will be eligible for sale 180 days
after the date of this Prospectus and (v) 1,233,056 shares will be eligible for
sale under Rule 144 upon the expiration of the applicable one-year holding
periods.
Promptly 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 $29,340,000 ($32,395,050 if the Underwriters' over-allotment option is
exercised in full), at the offering price of $10.00 per share after deducting
the underwriting discounts and commissions and estimated 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 the initial public offering
price of $10.00 per share and after deducting underwriting discounts and
commissions and estimated 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, 12,620,715
pro forma and 15,870,715 pro forma as adjusted shares issued and
outstanding (1) ..................................................... 126 159
Additional paid-in capital ............................................. 35,643 64,950
Accumulated deficit .................................................... (44,457) (44,457)
--------- ---------
Total stockholders' equity (deficit) .................................. (8,688) 20,652
--------- ---------
Total capitalization ................................................. $ (8,114) $ 21,226
========= =========
</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 the initial
public offering price of $10.00 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 $20.2 million, or $1.27 per share of Common Stock. This
represents an immediate increase in pro forma net tangible book value of $2.03
per share to existing stockholders and an immediate dilution of $8.73 per share
to new stockholders. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per share ................................ $ 10.00
Pro forma net tangible deficit per share before the Offering .......... $ (0.76)
Increase per share attributable to new investors ...................... 2.03
Pro forma net tangible book value per share after the Offering ......... 1.27
--------
Dilution per share to new investors .................................... $ 8.73
========
</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
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders ......... 12,620,715 79.5% $32,795,853 50.2% $ 2.60
New stockholders .............. 3,250,000 20.5 32,500,000 49.8 10.00
---------- ----- ----------- -----
Total ........................ 15,870,715 100.0% $62,295,853 100.0%
========== ===== =========== =====
</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>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31,(1) MARCH 31(1)
------------------------------------------------------------ -----------------------------
1993 1994 1995 1996 1997 1997 1998
(IN THOUSANDS, EXCEPT PER
(IN THOUSANDS, EXCEPT PER SHARE DATA) SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License ........................... $ 537 $ 796 $ 1,929 $ 4,273 $ 7,232 $ 818 $ 3,123
Service ........................... 303 325 1,344 4,253 9,081 1,958 4,075
Other ............................. 296 1,051 454 786 1,279 254 373
------- -------- -------- --------- --------- --------- ------------
Total revenues ................... 1,136 2,172 3,727 9,312 17,592 3,030 7,571
------- -------- -------- --------- --------- --------- ------------
Cost of revenues:
License ........................... -- -- -- -- 195 -- 204
Service ........................... 103 299 1,794 5,388 8,539 1,961 3,444
Other ............................. 7 13 40 458 835 184 299
------- -------- -------- --------- --------- --------- ------------
Total cost of revenues ........... 110 312 1,834 5,846 9,569 2,145 3,947
------- -------- -------- --------- --------- --------- ------------
Operating expenses:
Sales and marketing ............... 257 798 2,645 10,451 13,656 3,395 3,814
Research and development 629 914 2,591 3,360 4,837 883 1,419
General and administrative 506 1,683 1,268 3,007 4,148 1,021 916
Amortization of
acquired intangibles ............. -- -- 39 6,932 1,442 284 191
------- -------- -------- --------- --------- --------- ------------
Total operating expenses 1,392 3,395 6,543 23,750 24,083 5,583 6,340
------- -------- -------- --------- --------- --------- ------------
Operating loss ................... (366) (1,535) (4,650) (20,284) (16,060) (4,698) (2,716)
Compensation related
to modification of escrow
agreement (3) ..................... -- -- -- -- -- -- (4,184)
Interest expense ................... (46) (33) (94) (179) (206) (58) (38)
Interest and other income .......... -- 3 13 77 250 26 9
------- -------- -------- --------- --------- --------- ------------
Net loss ......................... $ (412) $ (1,565) $ (4,731) $ (20,386) $ (16,016) $ (4,730) (6,929)
======= ======== ======== ========= ========= ========= ============
Net loss per share--basic and
diluted (2) ....................... $ (0.06) $ (0.24) $ (0.71) $ (2.30) $ (1.37) $ (0.46) $ (0.55)
======= ======== ======== ========= ========= ========= ============
Weighted average number of
shares outstanding--basic
and diluted (2) ................... 6,660 6,660 6,660 8,854 11,710 10,330 12,621
======= ======== ======== ========= ========= ========= ============
AS OF DECEMBER 31, AS OF MARCH 31, 1998
------------------------------------------------------------ ------------------------------
PRO
FORMA
PRO AS
1993 1994 1995 1996 1997 FORMA(4) ADJUSTED(5)
----------- ------------
BALANCE SHEET DATA:
Cash and cash equivalents ......... $ 244 $ 208 $ 421 $ 1,420 $ 3,270 $ 658 $ 27,820
Working capital (deficit) ......... 628 562 (1,341) (4,231) (6,220) (9,483) 19,857
Total assets ...................... 754 1,507 2,736 7,990 12,439 12,096 39,258
Long-term borrowings .............. 236 174 324 217 54 574 574
Stockholders' equity
(deficit) ........................ 474 564 (924) (2,442) (5,508) (8,688) 20,652
</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 the initial public offering price of
$10.00 per share, after deducting underwriting discounts and commissions
and estimated 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>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED 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>
QUARTERS ENDED
------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1997 1998
(IN THOUSANDS)
<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>
QUARTERS ENDED
-------------------------------------------------------------------
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
33
<PAGE>
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:
34
<PAGE>
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 Novell Netware, Microsoft NT
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
<PAGE>
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
<PAGE>
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.
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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.
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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
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<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
-------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING ALL OTHER
NAME AND POSITION SALARY BONUS OPTIONS COMPENSATION (1)
<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>
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.
51
<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".
52
<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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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 BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY 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 12,620,715 shares
outstanding prior to this Offering and 15,870,715 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.
54
<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.
55
<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 12,620,715 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 15,870,715 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,
56
<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,
57
<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
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<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.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Offering, the Company will have an aggregate
of 15,870,715 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 12,620,715 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)
369,237 shares will be available for immediate sale in the public market on the
date of this Prospectus, (ii) 62,969 shares will be eligible for sale on June
17, 1998, (iii) 311,956 shares will be eligible for sale 90 days after the date
of this Prospectus, (iv) 10,643,497 shares will be eligible for sale 180 days
after the date of this Prospectus and (v) 1,233,056 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
(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
61
<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 12,067,667 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."
62
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
June 1, 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 .......... 1,560,000
Volpe Brown Whelan & Company, LLC ............................ 1,040,000
BancAmerica Robertson Stephens ............................... 50,000
Cowen & Company .............................................. 50,000
Deutsche Bank Securities, Inc. ............................... 50,000
Furman Selz LLC .............................................. 50,000
Hambrech & Quist LLC ......................................... 50,000
Morgan Stanley & Co. Incorporated ............................ 50,000
Prudential Securities Incorporated ........................... 50,000
Smith Barney Inc. ............................................ 50,000
William Blair & Company, L.L.C. .............................. 25,000
Crowell, Weedon & Co. ........................................ 25,000
Fahnestock & Co. Inc. ........................................ 25,000
Kaufman Bros., L.P. .......................................... 25,000
Parker/Hunter Incorporated ................................... 25,000
Pennsylvania Merchant Group .................................. 25,000
Raymond James & Associates, Inc. ............................. 25,000
Sands Brothers & Co., Ltd. ................................... 25,000
Soundview Financial Group, Inc. .............................. 25,000
C.E. Unterberg, Towbin ....................................... 25,000
---------
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 $0.42 per share.
The Underwriters may allow, and such dealers may re-allow, to certain other
dealers a concession not in excess of $0.10 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.
63
<PAGE>
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 (or in the case of certain of such
stockholders 90 days) after the date of this Prospectus without the prior
written consent of DLJ. In addition, during such 180 day 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 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.
64
<PAGE>
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.
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
</TABLE>
F-1
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
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 12,620,715 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 B COMMON
PREFERRED STOCK PREFERRED STOCK CLASS A COMMON 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 YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ..................................... $ (4,731,111) $ (20,385,629) $ (16,016,956)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization .............. 245,204 7,316,413 2,087,017
Provision for doubtful accounts ............ 24,000 241,000 443,702
Issuance of equity instruments for
consulting services ....................... 123,125 285,054 --
Non-cash equity transactions of
1998 poolings ............................. 10,655 33,549 8,163
Compensation related to
modification of escrow
agreement ................................. -- -- --
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable ....................... (660,647) (1,930,475) (3,424,256)
Prepaid commissions ....................... -- (228,713) (101,368)
Other prepaid expenses .................... 58,041 (118,757) (346,077)
Other assets .............................. -- (6,649) (127,850)
Accounts payable .......................... 117,114 485,586 860,243
Accrued expenses .......................... 127,654 1,936,479 1,898,041
Deferred revenue and customer
deposits ................................. 730,584 2,356,908 6,671,793
Other long-term liabilities ............... -- -- 57,700
------------ ------------- -------------
Net cash used in operating activities ......... (3,955,381) (10,015,234) (7,989,848)
------------ ------------- -------------
Cash flows from investing activities:
Capital expenditures ......................... (189,598) (154,796) (1,433,927)
Amounts (paid to) received from
affiliate and shareholder .................. (199,100) 221,100 25,000
Net (issuance) repayments of notes
receivable ................................. -- (45,382) (49,452)
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)
------------ ------------- -------------
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH
31,
---------------------------------
1997 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss ..................................... $ (4,730,539) $ (6,929,470)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization .............. 399,943 442,594
Provision for doubtful accounts ............ -- 155,086
Issuance of equity instruments for
consulting services ....................... -- --
Non-cash equity transactions of
1998 poolings ............................. 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 ....................... 109,917 (1,708,219)
Prepaid commissions ....................... (255,121) 225,000
Other prepaid expenses .................... 171,157 (364,694)
Other assets .............................. (8,152) (677,678)
Accounts payable .......................... (203,458) 373,500
Accrued expenses .......................... (1,265,466) 87,585
Deferred revenue and customer
deposits ................................. 2,794,773 (222,091)
Other long-term liabilities ............... -- 3,696
------------ ------------
Net cash used in operating activities ......... (2,965,808) (4,431,340)
------------ ------------
Cash flows from investing activities:
Capital expenditures ......................... (321,084) (59,787)
Amounts (paid to) received from
affiliate and shareholder .................. -- --
Net (issuance) repayments of notes
receivable ................................. 6,849 38,376
Due from distributor ......................... -- --
Cash used in acquisitions .................... -- --
------------ ------------
Net cash provided by (used in)
investing activities ......................... (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>
AS OF DECEMBER 31, AS OF MARCH 31,
ESTIMATED ----------------------------- ----------------
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>
<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 1,233,056 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 MARCH
YEARS ENDED DECEMBER 31, 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 DEFICIT 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>
<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>
AS OF
DECEMBER 31, 1995
<S> <C>
ASSETS
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
$1.00 PAR VALUE $.01 PAR VALUE ADDITIONAL TOTAL
-------------------- ------------------ PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIT
<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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 ....................................... 65
Additional Information ........................ 65
Index to Consolidated Financial
Statements ................................. F-1
</TABLE>
UNTIL JUNE 27, 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 LOGO]
COMMON STOCK
----------------------------------------
PROSPECTUS
----------------------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
VOLPE BROWN WHELAN
& COMPANY
