<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1998
REGISTRATION NO. 333-47881
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
THE ULTIMATE SOFTWARE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 7372 65-0694077
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
3111 STIRLING ROAD
FT. LAUDERDALE, FLORIDA 33312
(954) 266-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------
SCOTT SCHERR
THE ULTIMATE SOFTWARE GROUP, INC.
3111 STIRLING ROAD
FT. LAUDERDALE, FLORIDA 33312
(954) 266-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
-------------------
PLEASE ADDRESS A COPY OF ALL COMMUNICATIONS TO:
JAMES A. FITZPATRICK, JR. ELLEN B. CORENSWET
DEWEY BALLANTINE LLP BABAK YAGHMAIE
1301 AVENUE OF THE AMERICAS BROBECK, PHLEGER & HARRISON LLP
NEW YORK, NEW YORK 10019 1633 BROADWAY, 47TH FLOOR
(212) 259-8000 NEW YORK, NEW YORK 10019
(212) 581-1600
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following. [ ]
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION DATED APRIL , 1998
PROSPECTUS
, 1998
3,250,000 SHARES
[US GROUP LOGO]
THE ULTIMATE SOFTWARE GROUP, INC.
COMMON STOCK
All of the 3,250,000 shares (the "Shares") of common stock, par value
$0.01 per share (the "Common Stock"), of The Ultimate Software Group, Inc., a
Delaware corporation (the "Company"), offered hereby (the "Offering") are
being issued and sold by the Company.
Prior to the Offering, there has been no public market for the Shares. It
is currently anticipated that the initial offering price will be between
$11.00 and $13.00 per share. See "Underwriting" for information relating to
the factors considered in determining the initial public offering price.
The Company has applied to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "ULTI."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6 FOR INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share ..... $ $ $
Total(3) ...... $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the
Underwriters.
(2) Before deducting expenses estimated at $885,000 payable by the
Company.
(3) The Company and certain stockholders of the Company have granted to
the Underwriters a 30-day option to purchase up to an aggregate of
487,500 additional shares at the Price to the Public less
Underwriting Discounts and Commissions, solely to cover
over-allotments, if any. If such option is exercised in full, the
total Price to the Public, Underwriting Discounts and Commissions,
Proceeds to the Company and Proceeds to such stockholders will be $
, $ , $ and $ , respectively. See "Underwriting."
The Shares are being offered by the several Underwriters when, as, and if
delivered to and accepted by the Underwriters and subject to various prior
conditions, including their right to reject orders in whole or in part. It is
expected that delivery of the Shares will be made in New York, New York on or
about , 1998.
DONALDSON, LUFKIN & JENRETTE VOLPE BROWN WHELAN & COMPANY
SECURITIES CORPORATION
<PAGE>
[DESCRIPTION OF INSIDE COVER]:
Frontal view of a woman's face with two circular lenses over eyes and
the words "focus" horizontally placed over the lips, accompanied by the
following text placed horizontally on the lower right side of page: "US Group
is focused solely on HRMS/payroll software. We design, market, implement and
support technologically advanced, cross-industry HRMS/payroll solutions for
middle-market organizations."
[DESCRIPTION OF INSIDE COVER FOLD-OUT]:
Circular Human Resource Executive medal centrally placed on page with the
words "Top Ten Products" set forth in circular fashion within medal, separated
by three equally placed stars in between and the words "Winner Human Resource
Executive 1997" placed horizontally within medal in consecutive horizontal
order. The words "Winner's Circle" are set forth horizontally beneath the medal
within a rectangle. The following text is placed below the rectangle: "US Group
has joined Human Resource Executive Magazine's Winner's Circle. In December
1997, Human Resource Executive, a leading human resource industry publication,
selected UltiPro for Windows as the only HRMS/payroll software product to be
included as one of its Top Ten HR Products of the Year."
[DESCRIPTION OF INSIDE FRONT COVER FOLD-OUT]:
The words "UltiPro (Register Trademark) for Windows" are placed
horizontally across the top of the page, below which is a schematic
consisting of four separate sets of building blocks representing the
product's design architecture, consisting of the application, tools, framework
and foundation layers, each captioned as "Application Layer", "Tools Layer",
"Application Framework Layer" and "Foundation Layer", respectively, vertically
down the page. Each caption is connected by a horizontal line to a logo-like
building block representing the various components within each layer. Beginning
from the top of the page: (1) the "Application Layer" caption is connected to a
logo-like building block consisting of eight rectangles captioned "Human
Resources", "Benefits Administration", "Payroll", "Recruitment and Staffing"
(with an asterisks), "Employee Self-Service" (with an asterisks), "Interface
Template", "Position Management" (with an asterisks) and "Training
Administration" (with an asterisks). Below the building block is placed an
asterisks followed by the words: "currently under development"; (2) the "Tools
Layer" caption is connected to a logo-like building block consisting of seven
rectangles captioned "Customization Toolkit", "Adhoc Reports System; Standard
Reports System", "Update Manager", "Conversion Tools"; "General Data
Export Engine" and "General Data Import Engine", (3) the "Application
Framework Layer" caption is connected to a logo-like building block
consisting of four rectangles captioned "Application Framework", "Data
Dictionary", "Security Subsystem" and "Ultimate Class Library" and (4) the
"Foundation Layer" caption is connected to a logo-like building block
consisting of three rectangles captioned "Lotus Domino", "Microsoft SQL
Server" and "Borland Delphi/C++". Immediately below the schematic, on the
left side of the page, the following words are placed: "The Ultimate
HRMS/Payroll Solution", which is underlined, below which is placed
"Feature Rich, Built-In Functionality", below which is placed "Rapid
Implementation and System Update Effeciency", below which is placed
"Reduced Total Cost of Ownership", below which is placed "Integration and
Leveraging of Leading Technologies", below which is placed "Ease of Use
and Navigation", below which is placed "Comprehensive Professional Services
and Industry-Specific Expertise", below which is placed "Employee Self-
Service Capability". On the right lower corner is placed the logo of the
Company.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
-----------------
This Prospectus may include forward-looking statements which reflect the
Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to uncertainties
and other factors that could cause actual results to differ materially from
such statements. These uncertainties and other factors include, but are not
limited to, those discussed in "Risk Factors" and elsewhere in this
Prospectus. The words "believe," "expect," "anticipate," "project," and
similar expressions identify forward-looking statements. These
forward-looking statements speak only as of their dates. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.
-----------------
ULTIPRO(Registered Trademark), US Group(Registered Trademark) (design) and
Ultipro Tax Forms(Registered Trademark) and its related design are registered
trademarks of the Company in the United States. US Group and Intersourcing
are trademarks of the Company and are the subject of pending trademark and
service mark applications in the United States. This Prospectus also includes
names, trademarks, service marks and registered trademarks and service marks
of companies other than the Company.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus. The Common Stock offered hereby
involves a high degree of risk. See "Risk Factors" beginning on page 6.
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.
3
<PAGE>
With the advent of client/server technologies as an alternative to
in-house legacy systems and the greater availability of affordable computing
solutions, many middle-market organizations are increasingly seeking to
automate and streamline the mission-critical processes associated with
HRMS/payroll functions. However, first-generation client/server solutions
lack certain critical performance criteria and sophisticated security
features, are difficult to implement and have a high cost of ownership. In
addition, first-generation client/server HRMS/payroll software is typically
an add-on module with limited functionality in enterprise-wide, or Enterprise
Resource Planning ("ERP'), systems. In recent years, a new generation of
object-oriented, component-based client/server technologies has emerged,
which addresses many of the limitations of first-generation client/server
systems and facilitates integration with newer technologies and the Internet.
According to International Data Corporation ("IDC"), a market research
company, the United States market for HRMS/payroll software licenses totaled
$1.1 billion in 1996 and is projected to grow to $2.9 billion by the year
2001. IDC further estimates that the worldwide market for HRMS/payroll
software licenses will experience approximately the same rate of growth,
moving from $1.6 billion in 1996 to $4.2 billion by 2001. The Company
believes that the market for HRMS/payroll-related services is of equal or
greater size than the market for HRMS/payroll software licenses and has
similar growth characteristics.
The Company reaches its customer base and target market through its direct
sales force and a network of national, regional and local strategic partners.
As of March 31, 1998, the Company had licensed its earlier DOS-based product,
ULTIPRO for LAN, to approximately 750 organizations and its UltiPro for
Windows solution to approximately 85 organizations. The Company's customers
operate in a wide variety of industries, including manufacturing, food
services, retail, healthcare, technology, finance, insurance, real estate,
transportation, communications, services and sports. The Company's customers
include: Bill Heard Enterprises, Inc., Callaway Gardens Resort, Inc.,
Discovery Zone, Inc., Duro Bag Manufacturing Company, First American
Corporation, The Florida Marlins Baseball Club, Ingram Entertainment, Inc.,
The Krystal Company, National Realty Trust (Coldwell Banker), Telemundo
Group, Inc., United States Filter Corporation and Winn Dixie Stores, Inc.
The Company's objective is to be the leading provider of HRMS/payroll
software solutions. The Company intends to achieve this objective by (i)
extending its technology leadership by continuing to invest in research and
development; (ii) leveraging its existing and new strategic alliances with
leading software vendors in order to access a larger potential customer base
and to leverage their technical and marketing expertise; (iii) integrating
its products with other leading software applications in order to effectively
address an organization's enterprise-wide management needs; (iv) expanding
and leveraging its network of implementation partners to further increase its
market penetration and to enable more rapid implementation of its products;
(v) expanding the functionality of its existing and future products; and (vi)
leveraging its existing client base as clients migrate from DOS to
client/server environments.
The Company is a Delaware corporation formed in April 1996 to assume the
business and operations of The Ultimate Software Group, Ltd. (the
"Partnership"), a limited partnership founded in 1990. The Company's
headquarters are located at 3111 Stirling Road, Ft. Lauderdale, Florida 33312
and its telephone number is (954) 266-1000.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company ................... 3,250,000
Common Stock to be outstanding after the Offering .... 15,870,806 (1)
Use of Proceeds ....................................... Working capital and other general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol ................ ULTI
</TABLE>
- ----------------
(1) Excludes (i) 1,837,782 shares subject to options outstanding as of the
date hereof and (ii) 3,221,718 additional shares reserved for issuance
pursuant to options available for grant under the Company's Nonqualified
Stock Option Plan. See "Management -- Stock Option Plan."
4
<PAGE>
Summary Consolidated Financial Data(1)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues ................................ $ 3,727 $ 9,312 $ 17,592
Gross profit ............................ 1,893 3,466 8,023
Operating loss .......................... (4,650) (20,284) (16,060)
Net loss ................................ $(4,731) $(20,386) $(16,016)
========== =========== ===========
Basic and diluted net loss per share(2) $ (0.71) $ (2.30) $ (1.37)
========== =========== ===========
Basic and diluted weighted average
shares outstanding(2)................... 6,660 8,854 11,710
========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1997 1998
(IN THOUSANDS)
<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.................. -- -- -- -- (4,184)
Net loss ............................. $(4,730) $(5,204) $(5,320) $ (762) $(6,929)
=========== ========== =========== ========== ===========
Basic and diluted net loss per
share(2)............................. $ (0.46) $ (0.42) $ (0.40) $ (0.06) $ (0.55)
=========== ========== =========== ========== ===========
Basic and diluted weighted average
shares outstanding(2)................ 10,330 12,529 13,293 13,315 12,621
=========== ========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------------
PRO FORMA
PRO FORMA(3) AS ADJUSTED(4)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .... $ 658 $36,043
Working capital (deficit) .... (9,483) 25,902
Total assets .................. 12,096 47,481
Long-term borrowings .......... 574 574
Stockholders' equity (deficit) (8,688) 26,697
</TABLE>
(1) Consolidated financial data gives retroactive effect to the
acquisitions of the Acquired Resellers, which were accounted for
under the poolings-of-interest method of accounting, as if the
Company and the Acquired Resellers had operated as one entity during
the periods presented. See the Consolidated Financial Statements and
the related Notes thereto included elsewhere in this Prospectus.
(2) See Note 2 of the Notes to Consolidated Financial Statements for
information regarding the computation of net loss per share.
(3) 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.
<PAGE>
(4) Pro forma as adjusted to give effect to the sale of 3,250,000 shares
of Common Stock offered hereby at an assumed initial public offering
price of $12.00 per share, after deducting estimated underwriting
discounts and commissions and Offering expenses payable by the
Company. See "Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the
shares of Common Stock offered hereby. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those contained in the
forward-looking statements. Factors that may cause such differences include,
but are not limited to, those discussed below as well as those discussed
elsewhere in this Prospectus.
Limited Operating History; Accumulated Deficit; Net Losses. The Company
began operations in 1990 as The Ultimate Software Group, Ltd. and released
its first proprietary product in 1993. Until 1997, substantially all of the
Company's revenues were attributable to the licensing of its DOS-based
HRMS/payroll software product, ULTIPRO for LAN, and the provision of related
consulting, training, installation and support services. The Company's most
recent product, UltiPro for Windows, was introduced in June 1997 and has a
limited history of customer acceptance and use. Accordingly, the Company has
only a limited operating history upon which an evaluation of the Company and
its prospects can be based. The Company's prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in their early stage of development, particularly companies in new
and rapidly evolving markets. To address these risks, the Company must, among
other things, respond to competitive developments, continue to attract,
retain and motivate qualified management and other employees, continue to
upgrade its technologies and commercialize products and services that
incorporate such technologies and achieve market acceptance for its products
and services. There can be no assurance that the Company will be successful
in addressing such risks. The Company had an accumulated deficit of $37.1
million and $44.5 million at December 31, 1997 and March 31, 1998,
respectively. The Company incurred net losses of $20.4 million, $16.0 million
and $6.9 million during the years ended December 31, 1996 and 1997 and the
three months ended March 31, 1998, respectively. The Company has increased
its expense levels to support anticipated growth in demand for its
HRMS/payroll products, including the hiring of additional research and
development, professional services, sales and marketing, and administrative
personnel. As a result, the Company is dependent upon increasing revenues and
profit margins to achieve profitability. If the Company's sales and profit
margins do not increase to support the higher levels of operating expenses,
the Company's business, operating results and financial condition would be
materially adversely affected. There can be no assurance that the Company
will ever achieve profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Significant Fluctuations in Quarterly Operating Results; Seasonality. The
Company's revenues and operating results have varied substantially in the
past and are likely to vary substantially in the future due to a variety of
factors, including (i) demand for its products, (ii) the length of the sales
cycle for the Company's software products, which is typically two to six
months, (iii) the fact that a significant portion of the Company's revenues
in any given quarter may be recognized in the last month, weeks or even days
of the quarter, (iv) variations in the length of the implementation process
of the Company's products, (v) the mix of license and service revenues, (vi)
the timing of the introduction of new products or product enhancements by the
Company and its competitors, (vii) the timing and success of sales and
marketing programs, (viii) changes in customer budgets, (ix) the timing and
extent of product development programs and (x) seasonality of technology
purchases by customers and general economic conditions. The Company's expense
levels are based, in significant part, on its expectations as to future
revenues and are largely fixed in the short term. As a result, the Company
may be unable to adjust spending in a timely manner to compensate for any
unexpected shortfall in revenues. Accordingly, any significant shortfall of
revenues in relation to the Company's expectations would have an immediate
and material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company has increased, and plans to
continue to increase its operating expenses to expand its research and
development, professional services, sales and marketing, and administrative
organizations. The timing of such expansion and the rate at which new
personnel become productive could cause material fluctuations in quarterly
and annual results of operations. The Company has experienced, and may
experience in the future, significant seasonality in its business, and the
Company's business, operating results and financial condition may be affected
by such trends in the future. Revenues have historically increased at higher
6
<PAGE>
rates in the fourth quarter of the year and at lower rates in the next
succeeding quarter, which the Company believes is due to a number of factors,
including the Company's quota-based compensation arrangements, typical of
those used in software companies, and year-end budgetary pressures on the
Company's customers. The Company believes that this seasonal trend will
continue for the foreseeable future. Due to all of the foregoing factors,
period-to-period comparisons of the revenues and operating results of the
Company are not necessarily meaningful and such comparisons cannot be relied
upon as indicators of future performance. There also can be no assurance that
the Company will be able to sustain the rates of revenue growth that it has
experienced in the past, or that the Company will be able to improve its
operating results. In addition, the Company's operating results in future
periods may be below the expectations of securities analysts and investors.
In that event, the market price of the Common Stock would likely be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Product Concentration; New Product. Until 1997, substantially all of the
Company's revenues were derived from its ULTIPRO for LAN product and related
services. The Company has shifted its focus from a product based on DOS and
local area network ("LAN") technologies, ULTIPRO for LAN, to a product based
on Windows and client/server technologies, UltiPro for Windows. As a result
of this shift and the decrease in general market demand for DOS-based
products, the Company's revenues from its ULTIPRO for LAN product have been
declining and are expected to decline for the foreseeable future. There can
be no assurance that the decline in revenues from sales of ULTIPRO for LAN
will not have a material adverse effect on the Company's business, operating
results and financial condition. While the Company still derives revenues
from the support, service and limited sales of the ULTIPRO for LAN product
line, its UltiPro for Windows product and related services are expected to
account for substantially all of the Company's revenues for the foreseeable
future. In the year ended December 31, 1997 and the three months ended March
31, 1998, UltiPro for Windows license and service revenues accounted for $5.2
million, or 29.4%, and $5.2 million, or 69.1%, of the Company's total
revenues, respectively. However, to date, the Company has had only limited
experience with customer acceptance and use, as well as in implementing,
UltiPro for Windows. Accordingly, the Company's future success will depend on
maintaining and increasing acceptance of UltiPro for Windows and related
services and its ability to successfully implement the product. There can be
no assurance that UltiPro for Windows will gain broad market acceptance or
that the Company will be able to successfully implement UltiPro for Windows
in a timely manner. Any factors adversely affecting the demand for UltiPro
for Windows would have a material adverse effect on the Company's business,
operating results and financial condition. See "Management Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Products."
Uncertainties Relating to Acquisition of Acquired Resellers. In February
and March 1998, the Company acquired the businesses of the Acquired
Resellers. In each of the years ended December 31, 1996 and 1997 and the
three months ended March 31, 1998, the Acquired Resellers accounted for $2.7
million, or 28.9%, and $3.5 million, or 19.6%, and $1.6 million, or 21.5%,
respectively, of the Company's total revenues. The success of the
acquisitions will depend on a number of factors, including the Company's
ability to integrate the businesses and operations of the Acquired Resellers
with those of the Company, to retain certain key personnel of the Acquired
Resellers, and to preserve and expand the businesses and operations of the
Acquired Resellers. There can be no assurance that the Company will be able
to successfully integrate and operate the businesses of the Acquired
Resellers or that it will not experience losses as a result of the
acquisitions. Failure to achieve the anticipated benefits of the acquisitions
or to successfully integrate the operations of the Acquired Resellers could
have a material adverse effect upon the business, operating results and
financial condition of the Company.
Management of Growth. The Company has experienced a period of rapid
growth. For example, the number of the Company's employees has increased from
75 as of December 31, 1995 to 281 as of March 31, 1998. The growth of the
Company's business and expansion of its customer base has placed, and is
expected to continue to place, a significant strain on the Company's
management and operations. The Company expects to continue to increase its
research and development, professional services, sales and marketing and
administrative operations. Accordingly, the Company's future operating
results will
7
<PAGE>
depend on the ability of its management and other key employees to continue
to implement and improve its systems for operations, financial control and
information management and to recruit, train, manage and retain its employee
base. There can be no assurance that the Company will be able to manage or
continue to manage its recent or any future growth successfully, and any
inability to do so would have a material adverse effect on the Company's
business, operating results and financial condition.
Risks Associated with Sales Channels. The Company sells its products and
services primarily through a direct sales force. The Company's ability to
achieve significant revenue growth in the future will depend, in part, on its
success in recruiting, training and retaining sufficient direct sales
personnel. The Company also markets its products and services through a
network of national, local and regional strategic partners, and is attempting
to establish more of such relationships. Historically, a significant portion
of the Company's revenues have been derived from sale of the Company's
products by certain third-party resellers. By March 1998, the Company had
acquired the businesses of all of its third-party resellers in order to gain
greater control over its distribution channel. There can be no assurance that
the Company's shift to a direct distribution channel will be successful. The
Company's ability to achieve significant revenue growth in the future will
depend, in large part, upon the success of its direct sales force, its
ability to establish and maintain relationships with strategic partners and
its ability to adapt its sales channels to address the evolving markets for
its products. Failure to do so could have a material adverse effect on the
Company's business, operating results and financial condition. See
"--Uncertainties Relating to Acquisition of Acquired Resellers," "Business --
Strategy" and "--Sales and Marketing."
Rapid Technological Change; Dependence on New Products. The market for the
Company's products is characterized by rapid technological advancements,
changes in customer requirements, frequent new product introductions and
enhancements and changing industry standards. The life cycles of the
Company's products are difficult to estimate and the Company's current market
position could be undermined by rapid technological changes and the
introduction of new products and enhancements by new or existing competitors.
The Company's growth and future success will depend, in part, upon its
ability to enhance its current products and introduce new products in order
to keep pace with products offered by the Company's competitors, adapt to
technological advancements and changing industry standards and expand the
functionality of its products to address the increasingly sophisticated
requirements of its customers. There can be no assurance that the Company
will have sufficient resources to make the necessary investments or that it
will not experience difficulties that could delay or prevent the successful
development, introduction or marketing of new products or enhancements. In
addition, there can be no assurance that such products or enhancements will
meet the requirements of the marketplace or achieve market acceptance or that
the Company's existing and potential customers will migrate to client/server
environments at the rate expected by the Company. Any failure by the Company
to anticipate or respond adequately to technological advancements, customer
requirements and changing industry standards, or any significant delays in
the development, introduction or availability of new products or
enhancements, could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Product
Development."
Competition. The Company's future success will depend significantly upon
its ability to increase its share of its target market, to maintain and
increase its renewal revenues from existing customers and to sell additional
products, product enhancements, maintenance and support agreements and
training and consulting services to existing and new customers. The
HRMS/payroll market is intensely competitive. The Company has a variety of
competitors, including (i) a number of companies, such as Cyborg Systems,
Inc., Genesys Software Systems, Inc., Lawson Software, Inc., Oracle
Corporation, PDS Software, Inc., PeopleSoft, Inc. and SAP America, Inc. which
offer HRMS/payroll software products for use on mainframes and/or
client/server systems; (ii) large service bureaus, such as Automatic Data
Processing, Inc. ("ADP") and Ceridian Corporation; and (iii) the internal
payroll/human resources departments of potential customers which use
custom-written software. The Company believes that existing competitors and
new market entrants will attempt to develop in-house systems that will
compete with the Company's products. Many of the Company's current and
potential competitors have significantly greater financial, technical,
marketing and other resources than the Company. As a result, they may be able
to respond more quickly to new or emerging technologies and to changes in
customer requirements, or to devote
8
<PAGE>
greater resources to the development, promotion and sale of their products
than can the Company. There can be no assurance that the Company will be able
to compete successfully against current or future competitors or that
competitive pressures will not materially adversely affect the Company's
business, operating results and financial condition. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability
of their products to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
There can be no assurance that competitors will not develop products that are
superior to the Company's products or achieve greater market acceptance. See
"Business -- Industry Overview" and "--Competition."
Protection of Intellectual Property; Risks of Infringement. The Company's
success is dependent in part on its ability to protect its proprietary
rights. The Company licenses its products in object code form only, although
it has source code escrow arrangements when required by customers. The
Company relies on a combination of copyright, trademark and trade secret
laws, as well as confidentiality agreements and licensing arrangements, to
establish and protect its proprietary rights. The Company does not have any
patents or patent applications pending, and existing copyright, trademark and
trade secret laws afford only limited protection. Accordingly, there can be
no assurance that the Company will be able to protect its proprietary rights
against unauthorized third party copying or use, which could materially
adversely affect the Company's business, operating results and financial
condition. Despite the Company's efforts to protect its proprietary rights,
attempts may be made by unauthorized parties to copy or reverse engineer
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Moreover, there can be no assurance that
others will not develop products that perform comparably to the Company's
proprietary products. Policing the unauthorized use of the Company's products
is difficult. Litigation may be necessary in the future to enforce the
Company's intellectual property rights, to protect the Company's trademarks,
copyrights or trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on
the Company's business, operating results and financial condition.
As is common in the software industry, the Company from time to time may
become aware of third-party claims of infringement by the Company's
operations or products of third-party proprietary rights. While the Company
is not currently aware of any such claim, the Company's software products may
increasingly be subject to such claims as the number of products and
competitors in the Company's industry grows and the functionality of products
overlaps and as the issuance of software patents becomes increasingly common.
Any such claims, with or without merit, can be time consuming and expensive
to defend, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty agreements, if required, may
not be available on terms acceptable to the Company, or at all, which could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Business -- Intellectual Property Rights."
Reliance on Microsoft Corporation and Other Third-Party Technologies. The
Company's software products are designed primarily to operate with Microsoft
Corporation ("Microsoft") technologies and the Company's strategy requires
that its products and technology be compatible with new developments in
Microsoft technology. Although the Company believes that Microsoft
technologies are currently widely utilized by businesses of all sizes, there
can be no assurance that businesses will continue to adopt such technologies
as anticipated, will migrate from older Microsoft technologies (such as DOS
or earlier versions of Windows) to newer Microsoft technologies or will 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,
9
<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
10
<PAGE>
entries to distinguish 21st century dates from 20th century dates. As a
result, computer systems and/or software used by many companies may need to
be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. The Company believes that the purchasing
patterns of customers and potential customers may be affected by Year 2000
issues. Many companies are expending significant resources to correct or
patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software
products such as those offered by the Company. Many potential customers may
also choose to defer purchasing Year 2000 compliant products until they
believe it is absolutely necessary, thus resulting in potentially stalled
market sales within the industry. Conversely, Year 2000 issues may cause
other companies to accelerate purchases, thereby causing an increase in
short-term demand and a consequent decrease in long-term demand for software
products. Additionally, Year 2000 issues could cause a significant number of
companies, including current Company customers, to reevaluate their current
financial accounting system needs, and, as a result consider switching to
other systems or suppliers. Any of the foregoing could result in a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Dependence on Key Personnel. The Company's success depends to a
significant extent upon a limited number of members of senior management and
other key employees, including Scott Scherr, the Company's Chairman of the
Board, President and Chief Executive Officer, and Alan Goldstein, M.D., the
Company's Executive Vice President and Chief Technology Officer and a
director of the Company. The Company does not have employment contracts with
any of its key personnel other than certain non-competition and
confidentiality agreements entered into with Mr. Scherr and Dr. Goldstein.
The Company maintains key man life insurance for Scott Scherr in the amount
of $2.0 million. The loss of the service of one or more key managers or other
employees could have a material adverse effect upon the Company's business,
operating results and financial condition. See "Management."
Control by Principal Stockholders, Officers and Directors. Upon completion
of the Offering, the present directors, executive officers and principal
stockholders of the Company will beneficially own in the aggregate
approximately 35.2% of the outstanding Common Stock (34.4% if the
Underwriters' over-allotment option is exercised in full). These directors,
officers and stockholders will be able to substantially influence the
business and affairs of the Company, including the election of individuals to
the Company's Board of Directors, and to otherwise affect the outcome of
certain actions that require stockholder approval, including the adoption of
amendments to the Company's Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation"), and certain mergers, sales of assets
and other business acquisitions or dispositions. This concentration of
ownership may have the effect of delaying or preventing a change in control
of the Company, which could limit the price that investors might be willing
to pay in the future for shares of the Common Stock. See "Management" and
"Principal Stockholders."
Dilution. Investors participating in the Offering will incur immediate and
substantial dilution of pro forma net tangible book value per share of $10.35
from the assumed initial public offering price. To the extent outstanding
options to purchase the Company's Common Stock are exercised, there will be
further dilution to investors participating in this Offering. There can be no
assurance that the Company will not require additional funds to support its
working capital requirements or for other purposes, in which case the Company
may seek to raise such additional funds through public or private equity
financing or from other sources. There can be no assurance that such
additional financing will be available or that, if available, such financing
will be obtained on terms favorable to the Company and would not result in
additional dilution of the Company's stockholders. See "Dilution."
Broad Discretion in Allocation of Net Proceeds. The principal purposes of
the Offering are to increase the Company's equity capital, to create a public
market for the Common Stock, to increase the visibility of the Company in the
marketplace and to facilitate future access by the Company to public equity
markets. The Company expects to use the net proceeds from the Offering for
general corporate purposes, including the funding of working capital.
Although the Company has no plans, commitments or agreements with respect to
any material acquisitions as of the date of this Prospectus, the Company may
11
<PAGE>
seek acquisitions of businesses, products or technologies that are
complementary to those of the Company, and a portion of the net proceeds may
be used for such acquisitions. Accordingly, the Company will have significant
flexibility in applying the net proceeds of the Offering. See "Use of
Proceeds."
No Prior Public Market; Possible Volatility of Stock Price. Prior to the
Offering, there has been no public market for the Common Stock and there is
no assurance that an active trading market will develop or be sustained after
the Offering. The initial public offering price will be determined through
negotiations among the Company and the representatives of the Underwriters
and may not be indicative of the market price of the Common Stock after the
Offering. The trading price of the Common Stock is likely to be highly
volatile and may be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products or new contracts by the Company or
its competitors, developments with respect to patents, copyrights or
proprietary rights, conditions and trends in the software industry, changes
in financial estimates by securities analysts, general market conditions and
other factors. In addition, the public equity markets have from time to time
experienced significant price and volume fluctuations that have particularly
affected the market prices for the stock of technology companies. These broad
market fluctuations, as well as shortfalls in sales or earnings as compared
with securities analysts' expectations, changes in such analysts'
recommendations or projections and general economic and market conditions,
may materially and adversely affect the market price of the Common Stock. See
"Underwriting."
Shares Eligible for Future Sale. Sales of significant amounts of Common
Stock in the public market after the Offering or the perception that such
sales will occur could adversely affect the market price of the Common Stock
or the future ability of the Company to raise capital through an offering of
its equity securities. Of the 15,870,806 shares of Common Stock to 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 12,620,806 shares of Common Stock held by existing
stockholders upon completion of the Offering will be "restricted securities"
as that term is defined in Rule 144 under the Securities Act. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under the Securities Act.
Directors, officers and certain stockholders of the Company holding an
aggregate of 11,249,956 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 180 days
from the date of this Prospectus (the "Lock-up Agreements"). Subject to these
Lock-up Agreements, 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) 3,250,000 shares will be
available for immediate sale in the public market on the date of this
Prospectus, (ii) 1,370,850 shares will be eligible for sale 90 days after the
date of this Prospectus, (iii) 10,016,895 shares will be eligible for sale
upon the expiration of lock-up agreements 180 days after the date of this
Prospectus and (iv) 1,233,061 shares will be eligible for sale under Rule 144
upon the expiration of the applicable one-year holding periods.
After the date of this Prospectus, the Company intends to file a
Registration Statement on Form S-8 under the Securities Act to register all
shares of Common Stock issuable under the Company's Nonqualified Stock Option
Plan. Such registration statement will become effective immediately upon
filing, and shares covered by that Registration Statement will thereupon be
eligible for sale in the public markets, subject to Rule 144 limitations
applicable to affiliates. The Company is unable to predict the effect that
sales made under Rule 144, or otherwise, may have on the then prevailing
market price of the Common Stock. The holders of approximately 8,227,807
shares of Common Stock are entitled to certain incidental and demand
registration rights with respect to such shares. By exercising their
registration rights, such holders could cause a large number of shares to be
registered and sold in the public market. Sales pursuant to Rule 144 or other
exemptions from registration, or pursuant to registration rights, may have an
adverse effect on the market price for the Common Stock and could impair the
Company's ability to raise capital through offerings of its equity
securities. See "Shares Eligible for Future Sale."
12
<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 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."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,250,000 shares of
Common Stock offered by the Company pursuant to the Offering are estimated to
be $35,385,000 ($39,175,500 if the Underwriters' over-allotment option is
exercised in full), at an assumed offering price of $12.00 per share after
deducting the estimated underwriting discounts and commissions and Offering
expenses payable by the Company. The principal purposes of the Offering are
to increase the Company's equity capital, to create a public market for the
Common Stock, to increase the visibility of the Company in the marketplace
and to facilitate future access by the Company to public equity markets. The
Company expects to use the net proceeds from the Offering for 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.
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.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 (i) on a pro forma basis to give effect to (a) the conversion
of all outstanding shares of Series A Convertible Preferred Stock and Series
B Convertible Preferred Stock into shares of Common Stock, (b) the conversion
of all outstanding shares of Class A Common Stock, Class B Common Stock and
Class C Common Stock into shares of Common Stock, (c) the amendment to the
Company's Certificate of Incorporation adopted by the Company's Board of
Directors and stockholders increasing the number of authorized shares of
Preferred Stock and Common Stock of the Company and (d) a 10.119-for-1-split
of the Company's Common Stock to be effected immediately prior to the
consummation of the Offering, and (ii) pro forma as adjusted to give effect
to the sale of 3,250,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $12.00 per share and after deducting
estimated underwriting discounts and commissions and Offering expenses
payable by the Company. This information should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Long-term borrowings................................................. $ 574 $ 574
----------- -------------
Stockholders' equity:
Preferred Stock, $0.01 par value, 2,500,000 shares authorized, no
shares outstanding ................................................ -- --
Common Stock, $0.01 par value, 50,000,000 shares authorized,
12,620,806 pro forma and 15,870,806 pro forma as adjusted shares
issued and outstanding (1) ........................................ 126 159
Additional paid-in capital .......................................... 35,643 70,995
Accumulated deficit ................................................. (44,457) (44,457)
----------- -------------
Total stockholders' equity (deficit) ............................... (8,688) 26,697
----------- -------------
Total capitalization .............................................. $ (8,114) $ 27,271
=========== =============
</TABLE>
(1) Excludes (i) 1,837,782 shares subject to options outstanding as of the
date hereof and (ii) 3,221,718 additional shares reserved for issuance
pursuant to options available for grant under the Company's
Nonqualified Stock Option Plan. See "Management--Stock Option Plan."
15
<PAGE>
DILUTION
As of March 31, 1998, the pro forma net tangible book value (deficit) of
the Company was ($9,566,000) or $(0.76) per share of Common Stock. Pro forma
net tangible book value per share is equal to the Company's pro forma total
tangible assets less pro forma total liabilities, divided by the total number
of shares of Common Stock outstanding. After giving effect to the sale by the
Company of the 3,250,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $12.00 per share, and after deducting the
underwriting discounts and commissions and estimated offering expenses
payable by the Company, the pro forma net tangible book value of the Company
as of March 31, 1998 would have been $26.3 million, or $1.65 per share of
Common Stock. This represents an immediate increase in pro forma net tangible
book value of $2.41 per share to existing stockholders and an immediate
dilution of $10.35 per share to new stockholders. The following table
illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share ............... $12.00
Pro forma net tangible deficit per share before the Offering $(0.76)
Increase per share attributable to new investors ............ 2.41
Pro forma net tangible book value per share after the Offering 1.65
--------- --------
Dilution per share to new investors ........................... $10.35
========= ========
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
the difference between the existing stockholders and new stockholders with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid to the Company and the average price paid per
share by existing stockholders and by new stockholders:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders 12,620,806 79.5% $32,795,853 45.7% $ 2.60
New stockholders ...... 3,250,000 20.5 39,000,000 54.3 12.00
------------ --------- ------------- ---------
Total................. 15,870,806 100.0% $71,795,853 100.0%
============ ========= ============= =========
</TABLE>
The foregoing tables and calculations assume no exercise of outstanding
options. There were 1,837,782 shares subject to options outstanding as of the
date hereof and 3,221,718 additional shares reserved for issuance pursuant to
options available for grant under the Company's Nonqualified Stock Option
Plan. See "Management--Stock Option Plan."
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to and should be read in conjunction with "Management's Discussion
and Analysis of Financial Conditions and Results of Operations" and the
Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus. The Statement of Operations Data presented
below for each of the years in the three year period ended December 31, 1997
and the Balance Sheet Data as of December 31, 1996 and 1997 have been derived
from the Company's Financial Statements included elsewhere in this Prospectus
which have been audited by Arthur Andersen LLP whose report with respect
thereto appears elsewhere in this Prospectus. The Balance Sheet Data as of
December 31, 1995 has been derived from audited financial statements not
included herein. The Balance Sheet Data as of December 31, 1993 and 1994 and
as of March 31, 1998 and the Statement of Operations Data for the years ended
December 31, 1993 and 1994 and for each of the three months ended March 31,
1997 and 1998 have been derived from the unaudited financial statements of
the Company. In the opinion of management, the unaudited financial statements
include all adjustments (consisting only of normal and recurring adjustments)
necessary for a fair presentation of its financial position and the results
of operations for such periods. The selected financial data for the three
months ended March 31, 1998 are not necessarily indicative of the results to
be expected for the year ending December 31, 1998 or any other future period.
The financial data reflects the results of the Company and the Acquired
Resellers (The Ultimate Software Group of the Carolinas, Inc., The Ultimate
Software Group of Virginia, Inc., Ultimate Investors Group, Inc., Ultimate
Software Group of New York/New England G.P. and The Ultimate Software Group
of Northern California, Inc.), as if the Company and the Acquired Resellers
had operated as one entity during the periods presented. These acquisitions
were accounted for under the poolings-of-interest method of accounting. See
the Consolidated Financial Statements and the related Notes thereto included
elsewhere in the Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,(1)
----------------------------------------------------------
1993 1994 1995 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License ................... $ 537 $ 796 $ 1,929 $ 4,273 $ 7,232
Service ................... 303 325 1,344 4,253 9,081
Other ..................... 296 1,051 454 786 1,279
--------- ---------- ---------- ----------- -----------
Total revenues ........... 1,136 2,172 3,727 9,312 17,592
--------- ---------- ---------- ----------- -----------
Cost of revenues:
License ................... -- -- -- -- 195
Service ................... 103 299 1,794 5,388 8,539
Other ..................... 7 13 40 458 835
--------- ---------- ---------- ----------- -----------
Total cost of revenues .. 110 312 1,834 5,846 9,569
--------- ---------- ---------- ----------- -----------
Operating expenses:
Sales and marketing ....... 257 798 2,645 10,451 13,656
Research and development .. 629 914 2,591 3,360 4,837
General and
administrative............ 506 1,683 1,268 3,007 4,148
Amortization of
acquired intangibles .... -- -- 39 6,932 1,442
--------- ---------- ---------- ----------- -----------
Total operating expenses . 1,392 3,395 6,543 23,750 24,083
--------- ---------- ---------- ----------- -----------
Operating loss ........... (366) (1,535) (4,650) (20,284) (16,060)
Compensation related
to modification of escrow
agreement.................. -- -- -- -- --
Interest expense ........... (46) (33) (94) (179) (206)
Interest and other income . -- 3 13 77 250
--------- ---------- ---------- ----------- -----------
Net loss ................. $ (412) $(1,565) $(4,731) $(20,386) $(16,016)
========= ========== ========== =========== ===========
Net loss per share--basic
and diluted (2)............ $(0.06) $ (0.24) $ (0.71) $ (2.30) $ (1.37)
========= ========== ========== =========== ===========
Weighted average number of
shares outstanding--basic
and diluted (2)........... 6,660 6,660 6,660 8,854 11,710
========= ========== ========== =========== ===========
As of December 31,
----------------------------------------------------------
1993 1994 1995 1996 1997
BALANCE SHEET DATA:
Cash and cash equivalents . $ 244 $ 208 $ 421 $ 1,420 $ 3,270
Working capital (deficit) 628 562 (1,341) (4,231) (6,220)
Total assets .............. 754 1,507 2,736 7,990 12,439
Long-term borrowings ..... 236 174 324 217 54
Stockholders' equity
(deficit) ................ 474 564 (924) (2,442) (5,508)
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31(1)
------------------------------
1997 1998
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License ................... $ 818 $3,123
Service ................... 1,958 4,075
Other ..................... 254 373
---------- -------------
Total revenues ........... 3,030 7,571
---------- -------------
Cost of revenues:
License ................... -- 204
Service ................... 1,961 3,444
Other ..................... 184 299
---------- -------------
Total cost of revenues .. 2,145 3,947
---------- -------------
Operating expenses:
Sales and marketing ....... 3,395 3,814
Research and development .. 883 1,419
General and
administrative............ 1,021 916
Amortization of
acquired intangibles .... 284 191
---------- -------------
Total operating expenses . 5,583 6,340
---------- -------------
Operating loss ........... (4,698) (2,716)
Compensation related
to modification of escrow
agreement.................. (4,184)
Interest expense ........... (58) (38)
Interest and other income . 26 9
---------- -------------
Net loss ................. $(4,730) (6,929)
========== =============
Net loss per share--basic
and diluted (2)........... $ (0.46) $ (0.55)
========== =============
Weighted average number of
shares outstanding--basic
and diluted (2)............ 10,330 12,621
========== =============
As of March 31, 1998
-------------------------
Pro As
Forma(3) Adjusted(4)
---------- -------------
BALANCE SHEET DATA:
Cash and cash equivalents . $ 658 36,043
Working capital (deficit) (9,483) 25,902
Total assets .............. 12,096 47,481
Long-term borrowings ..... 574 574
Stockholders' equity
(deficit) ................ (8,688) 26,697
</TABLE>
(1) Consolidated financial data gives retroactive effect to the
acquisitions of the Acquired Resellers, which was accounted for under
the poolings-of-interest method of accounting, as if the Company and
the Acquired Resellers had operated as one entity during the periods
presented. See the Consolidated Financial Statements and the related
Notes thereto included elsewhere in this Prospectus.
(2) See Note 2 of the Notes to Consolidated Financial Statements for
information regarding the computation of net loss per share.
(3) 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.
(4) Pro forma as adjusted to give effect to the sale of 3,250,000 shares of
Common Stock offered hereby at an assumed initial public offering price
of $12.00 per share, after deducting estimated underwriting discounts
and commissions and Offering expenses payable by the Company. See "Use
of Proceeds" and "Capitalization."
17
<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
18
<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 85
organizations.
Service revenues are recognized as services are performed and delivered.
Included in service revenues are maintenance fees for maintaining, supporting
and providing periodic updates, which are recognized ratably over the service
period, generally one year. Upon delivery of the software, amounts included
in the contract relating to unperformed service revenues are recorded as
deferred revenue. All of the Company's customers that purchased software
during 1996 and 1997 purchased maintenance and support contracts. During the
years ended December 31, 1996 and 1997, average annual renewal rates for
existing maintenance and support customers exceeded 95%. Maintenance and
support contracts are generally priced as a percentage of the initial license
fee for the underlying products.
The Company employs a multi-channel sales and marketing strategy utilizing
a direct sales organization, strategic marketing alliances, and a network of
national, regional and local implementation partners. Sales through direct
channels generally have higher gross margins than sales through indirect
channels, although these higher margins may be offset, in whole or in part,
by higher sales and marketing expenses.
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, the Company has evaluated the establishment of technological
feasibility of its products during the development phase. The time period
during which costs could be capitalized from the point of reaching
technological feasibility until the time of general product release is very
short, and, consequently, the amounts that could be capitalized are not
material to the Company's financial position or operating results.
RESULTS OF OPERATIONS
The following table sets forth the Statement of Operations Data of the
Company, expressed as a percentage of total revenues, as applicable, for the
periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------- --------------------
1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License .............................. 51.8% 45.9% 41.1% 27.0% 41.3%
Service .............................. 36.0 45.7 51.6 64.6 53.8
Other ................................ 12.2 8.4 7.3 8.4 4.9
------- ---------- --------- ---------- --------
Total revenues ...................... 100.0 100.0 100.0 100.0 100.0
------- ---------- --------- ---------- --------
Cost of revenues:
License .............................. -- -- 1.2 -- 2.7
Service .............................. 48.1 57.9 48.5 64.7 45.5
Other ................................ 1.1 4.9 4.7 6.1 4.0
------- ---------- --------- ---------- --------
Total cost of revenues .............. 49.2 62.8 54.4 70.8 52.2
------- ---------- --------- ---------- --------
Operating expenses:
Sales and marketing .................. 71.0 112.2 77.6 112.0 50.4
Research and development ............. 69.5 36.1 27.5 29.1 18.7
General and administrative ........... 34.1 32.3 23.6 33.7 12.1
Amortization of acquired intangibles 1.0 74.4 8.2 9.4 2.5
------- ---------- --------- ---------- --------
Total operating expenses ............ 175.6 255.0 136.9 184.2 83.7
------- ---------- --------- ---------- --------
Operating loss ...................... (124.8) (217.8) (91.3) (155.0) (35.9)
Compensation related to modification
of escrow agreement................... -- -- -- -- (55.2)
Interest expense ...................... (2.5) (1.9) (1.1) (1.9) (0.5)
Interest and other income ............. 0.4 0.8 1.4 0.8 0.1
------- ---------- --------- ---------- --------
Net loss ............................ (126.9)% (218.9)% (91.0)% (156.1)% (91.5)%
======= ========== ========= ========== ========
</TABLE>
19
<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.
20
<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% and 49.1% 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.
21
<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. 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
has approximately $21.5 million of net operating loss carryforwards, which
expire at various times through
22
<PAGE>
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. This increase was primarily due
to an increase in the provision for doubtful accounts directly related to
23
<PAGE>
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. 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.
24
<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
<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>
25
<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>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<PAGE>
<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
26
<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.
27
<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.
28
<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 85 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
29
<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.
30
<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 many features that would otherwise require
extensive customization or changes to source code including: sophisticated
security controls, federal and state human resource regulatory compliance
capability, safety tracking, benefit program management, and payroll tax
tables for federal, state and thousands of local jurisdictions. In addition,
UltiPro for Windows includes specific features designed to address problems
faced by multiple-company organizations. For example, when an employee
transfers from one company to another or works concurrently for multiple
companies within an organization, UltiPro for Windows enables the
organization to consolidate an employee's pay from all companies to ensure
tax withholding limits are properly recognized and to generate a single W-2
reflecting the employee's aggregate income from all companies within the
organization.
Rapid Implementation and System Update Efficiency. The Company has
designed UltiPro for Windows to minimize the time and effort required for
implementation, customization and updating by incorporating into its product
hundreds of built-in rules, options and complex calculation methods. The
Company's standardized implementation methodology, experienced implementation
staff, and customer training further facilitate rapid implementation. In
addition, UltiPro for Windows' object-oriented technology improves
efficiencies by enabling faster system updates. When users load system
updates, they
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do not overwrite their customizations because the system stores custom
changes as sub-classed objects or data that reside "outside" the core
program, thus avoiding the time-consuming process of rewriting custom
changes.
Reduced Total Cost of Ownership. The Company believes its software
solution provides significant cost saving opportunities for its customers.
The Company believes that its feature-rich solution is competitively priced
for middle-market organizations and significantly reduces the traditionally
high implementation and customization costs associated with legacy and
first-generation client/server systems. By using the Company's software
solution, a customer may reduce the administrative and information technology
support costs associated with an organization's HRMS/payroll functions. Since
data for employee benefits and payroll calculations are maintained in a
series of shared tables, UltiPro for Windows helps to reduce administrative
costs by facilitating accurate information processing and reporting and
reduces discrepancies, errors and the need for time-consuming adjustments. In
addition, administrative costs can be reduced by providing an organization
with greater access to information and control over reporting.
Integration and Leveraging of Leading Technologies. The Company has
consistently focused on identifying leading technologies and integrating them
into its products. UltiPro for Windows incorporates and leverages leading
technologies, such as Microsoft SQL Server, Microsoft NT Server, Borland's
Delphi ("Delphi"), Lotus Domino, Java and ActiveX, to greatly enhance speed,
convenience, dependability, ease of use and extensibility. For example,
UltiPro for Windows is based on Delphi's object-oriented programming which
enables more rapid product development, customization and implementation. In
addition, UltiPro for Windows employs Internet-and intranet-enabled
technologies to facilitate employees' access to human resource, payroll and
benefits information and to remotely complete and update forms and
information. This functionality addresses the growing demand for employee
empowerment.
Ease of Use and Navigation. The Company designs its products to be
user-friendly and to simplify the complexities of managing employees and
complying with government regulations in the HRMS/ payroll area. UltiPro for
Windows is designed to enable users to find information quickly and easily.
The Company has developed a user interface called the Employee Explorer that
allows access to all employee information in one common area. The graphical
user interface of UltiPro for Windows is designed to allow a user to access
any part of the system quickly and efficiently.
Comprehensive Professional Services and Industry-Specific Expertise. The
Company provides high quality implementation, training and ongoing product
and customer support services. The Company employs 86 people in professional
services, which includes implementation, product support, technical support
and training departments. Substantially all of the Company's product support
associates have been designated as Certified Payroll Professionals ("CPP") by
the American Payroll Association. Moreover, the Company's executives and
managers have an average of over 10 years of experience in HRMS/payroll as
well as 15 years in the software industry. This experience provides the
Company with insights into trends in the HRMS/payroll area and provides the
Company with the ability to better address its customers' HRMS/payroll needs.
In addition, the Company employs a dedicated tax research team to track
changes in the tax rules of more than 4,500 separate taxing jurisdictions and
changes in other employee-related regulations.
Employee Self-Service Capability. The Internet-enabled and security
features of UltiPro for Windows are designed to allow an organization's
employees to access employee human resource, payroll and benefits information
and to remotely complete and update forms and information. The Employee
Self-Service feature in UltiPro for Windows, which is scheduled for release
in the second quarter of 1998, will help to address the growing demand for
employee empowerment. In addition, by providing an additional means to
communicate with its employees, employee self-service is designed to help to
reduce an organization's administrative burden and resources to disseminate
information to its employees.
STRATEGY
The Company's objective is to be the leading provider of HRMS/payroll
software solutions. Key components of the Company's strategy include:
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Extend Technology Leadership. The Company intends to continue to expend
significant resources to further identify, utilize and take advantage of
emerging technologies in order to maintain and extend its leadership position
as a provider of technologically advanced HRMS/payroll solutions. The Company
believes that by developing UltiPro for Windows as the first HRMS/payroll
solution to use object-oriented, component-based technology in combination
with Microsoft SQL Server operating on the Microsoft NT platform, as well as
Internet-enabled technologies, the Company maintains a competitive advantage
over other HRMS/payroll vendors. The Company seeks to identify and utilize
new technologies to further enhance UltiPro for Windows' functionality and
performance. In addition, the Company intends to continue to support new and
emerging industry standards to ensure that its products continue to readily
integrate with such technologies. The Company maintains technical
relationships with many leading vendors, including Borland International
Inc., Citrix Systems, Inc., Cognos, Lotus Development Corporation ("Lotus")
and Microsoft. These relationships provide the Company with access to new and
emerging technologies as well as products under development.
Leverage Strategic Alliances. The Company intends to expand its existing,
and develop new, strategic marketing relationships with leading software
vendors. The Company believes that these relationships will provide it with
access to a larger potential customer base and will enable the Company to
leverage their technical and marketing expertise. The Company has strategic
relationships with Microsoft and Lotus that involve coordinated public
relations and marketing opportunities as well as planned trade show
activities specifically targeted to the HRMS/payroll industry. In addition,
the Company has technical and marketing relationships with Cognos, Citrix
Systems, Inc., FlexiInternational Software, Inc., Great Plains Software,
Inc., National Bond & Trust Company Inc., Network Specialists, Inc., Paradigm
Software Technologies, Inc., Platinum Software Corporation, ProBusiness
Services, Inc., Simplex Time Recorder Co., SunGard Recovery Services, Inc.
and Systems Tax Service, Inc.
Integrate with Other Leading Software Applications. The Company intends to
continue to design application interfaces which integrate UltiPro for Windows
with other leading software applications. By having the ability to interface
with other business software applications such as financial or accounting
software solutions, UltiPro for Windows is designed to extend an
organization's technology enterprise and allow an organization to effectively
address its enterprise-wide management needs. For example, the Company has
built interfaces into UltiPro for Windows for exporting payroll information
to Platinum Software Corporation's Platinum SQL General Ledger and for
exchanging information with WinSTAR, the pay data entry system from the
Time/Data Division of Simplex Time Recorder Co. The Company is currently
designing interfaces for FlexiInternational Software, Inc.'s FlexiFinancials
and Great Plains Software, Inc.'s Dynamics C/S+.
Expand and Leverage Implementation Partners. The Company seeks to
continually expand its network of implementation partners. The Company
believes that the use of implementation partners will further increase its
market penetration, complement its direct distribution channel and enable
more rapid implementation of its products. The Company expends significant
resources on training its implementation partners. The Company has formal
implementation partnership agreements with national, regional and local
information technology consulting firms which specialize in human resource
management, including CDG & Associates Inc., Cornerstone Solutions, Inc., HC
Associates International, Inc., Insight Technology Partners, Inc., Soft Link,
Inc. and The Consulting Team, Inc.
Expand Product Functionality. The Company seeks to continually expand the
functionality of its software and is currently developing modules for
recruitment and staffing, position management and training administration
that will integrate with UltiPro for Windows. The Company also intends to
develop solutions to help multinational, U.S.-based companies with employees
who live abroad. In addition, the Company plans to offer a Canadian version
of its product. These solutions will include features such as international
dates and address fields, and support for Eurodollar and Eurodollar exchange
rate conversion.
Leverage Existing Customer Base. The Company seeks to enhance its market
position by targeting sales of UltiPro for Windows to its existing DOS
customer base. This existing base of approximately 750 organizations
represents a significant potential market for future sales of the Company's
products as such customers migrate from DOS to Windows environments and from
individual or networked personal computers to client/server environments.
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TECHNOLOGY
The Company seeks to provide its clients with optimum performance, rich
functionality, scalability and easy access to information through the use of
leading technologies such as Delphi and C++ Builder as the development
environment and Microsoft SQL Server as the database operating on the
Microsoft NT platform. The Company has developed UltiPro for Windows to
include the following key technological features:
Object-oriented Programming. Delphi is an object-oriented, visual,
integrated database application development environment for Windows 95 and
Windows NT. Delphi delivers a combination of an optimizing native code
compiler, a visual component library with source code and database
connectivity. Object-oriented programming features code reusability and
visual form/object inheritance, which decrease the time and cost of
developing and fully implementing a new system. With object-oriented
programming, system updates do not overwrite prior customizations to the
system because custom changes are sub-classed objects that reside "outside"
the core program.
32-bit Compiled Code and Distributed Architecture. Delphi is a 32-bit
code compiler, which results in more stable applications that are
significantly faster than interpreted applications and provides greater
memory access than compilers built on a 16-bit compiler. The Company has
designed certain aspects of its system using a multi-tiered client/server
architecture in order to enhance the system's speed, flexibility, scalability
and maintainability. When an application's logic resides only on a client, a
user's ability to process high volume data transactions is limited. When the
logic resides only on a server, the user's interactive capabilities are
reduced. The Company's use of distributed architecture is intended to
overcome such limitations.
Application Framework. The Company has developed a proprietary
data-driven, object-oriented application framework that enhances the
development, usability, maintainability and extensibility of its
applications. The major areas of the system such as company setup, code
setup, employee setup, pay data entry and reporting have been developed using
the Company's application framework to enhance usability. The extension of
the system's functionality is enhanced due to the use of the framework with
its driver tables and object-class library.
Business Intelligence Tools. In addition to an extensive library of
standard reports that offer flexibility and ease of use, the Company extends
what users can do with employee data by embedding leading business
intelligence tools from Cognos in UltiPro for Windows. In addition to
offering sophisticated data query and report authoring, these tools enable
users to apply online analytical processing ("OLAP") to multidimensional data
cubes, allowing users to explore data on employees graphically and
statistically from diverse angles. The Company maintains a link between
Cognos' report catalog and UltiPro for Windows' data dictionary, eliminating
the necessity for users to create and maintain ad hoc reporting catalogs.
Internet and Intranet Integration. The Company supports emerging
technologies such as those associated with the Internet and corporate
intranets to increase access to and usability of its applications. The
Company's Internet-enabled applications, such as employee self-service, are
integrated with UltiPro for Windows database and use Lotus Domino Server,
Java, Java script, HTML and COM/ActiveX.
PRODUCTS
The Company's software products include UltiPro for Windows, a
client/server software product, and ULTIPRO for LAN, a DOS-based product,
both of which automate and manage HRMS/payroll functions.
ULTIPRO FOR WINDOWS
UltiPro for Windows, released in June 1997, is a fully integrated,
technologically advanced HRMS/payroll software product that offers
comprehensive functionality to middle-market organizations. In December 1997,
Human Resource Executive, a leading human resource industry publication,
selected UltiPro for Windows as the only HRMS/payroll software product to be
included as one of its Top Ten HR Products of the Year. UltiPro for Windows
includes the following modules:
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Human Resources. UltiPro for Windows is designed to streamline and manage
the human resource function within an organization. In addition to enabling
organizations to comply with regulatory requirements, UltiPro for Windows
generates, manages and stores information that satisfies a broad range of
internal and external reporting requirements. Examples of information and
processes handled by the system are employee performance, job and salary
history; COBRA and HIPAA administration; OSHA incident and safety; career
development; wellness programs; company-issued property; dependent,
beneficiary and emergency contact details; and history of previous
employment. The system uses help features, or "wizards", to guide human
resource administrators through multi-step processes such as recording new
hire information, employee job changes and employee terminations. Wizards
provide "To Do" lists, sequentially presented data-entry windows, validation
of data and summaries of changed information. The system also includes
effective dated record handling and detailed audit trails.
Benefits Administration. UltiPro for Windows provides a comprehensive,
automated means of administering all types of health and welfare plans,
employee loans, qualified and non-qualified deferred compensation, and fund
allocations. The Company has developed a one-table design that maintains
deductions and benefit plans in one common set of tables. One table stores
together rules for coverage; premium and employer match computations;
eligibility and participation determination; and taxation, wage accumulation
and withholding requirements for payroll. UltiPro for Windows also delivers
rules-based benefits administration functionality, combining the benefit and
payroll deduction tables, to help improve accuracy and scheduling
convenience. Tracking of dependent and beneficiary information is
comprehensive and can be associated with benefit plans as necessary. In
addition, complete historical information is available in summary and detail
views for a quick response to benefit inquiries and ease in benefit plan
research.
Payroll. UltiPro for Windows incorporates a comprehensive tax management
system to handle federal, state and local tax computations, including
multi-state taxing rules and reciprocity. In addition, the system is
delivered with complex wage calculations such as shift premiums, piecework
and make-up pay, average pay rates for overtime calculations and
garnishments/disposable pay. It also includes convenience features enabling
users to generate off-cycle checks, create direct deposit files, perform
automatic check reconciliation, and track the progress of payroll processing
steps online.
Interface Templates. UltiPro for Windows incorporates built-in interfaces
and an engine that facilitate importing and exporting data with a number of
third-party software systems, including time clocks, point-of-sale systems
and job costing systems. Organizations can link to their banks, 401(k)
provider, tax filing service and unemployment cost management services. The
UltiPro for Windows' development tools give the user the ability to interface
the Company's software with many leading applications running on a variety of
platforms.
Reporting. UltiPro for Windows provides a library of over 100 standard
reports including basic company and employee listings, employee forms,
analytical reports, notifications and upcoming events, reconciliation and
audit reports and date-or event-driven historical reports. UltiPro for
Windows includes true point-in-time reporting, giving users access to
historical information whenever they need it. In addition to many standard
reports, UltiPro for Windows includes other tools such as Cognos' business
intelligence tools for data analysis and generation of custom reports.
Employee Self-Service. UltiPro for Windows takes advantage of emerging
technologies that not only reduce the administrative workload of the
HRMS/payroll department but also provide greater access to HRMS/payroll
information to employees within an organization. Employee Self-Service is an
Internet-enabled module which is expected to be released in the second
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
TCP/IP & NetBios (Microsoft Novell Netware, Microsoft NT
NETWORKS: 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
</TABLE>
*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.
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 85 customers and its ULTIPRO for LAN solution to
approximately 750 customers. No customer accounted for more than 10% of total
revenues in fiscal year 1997 or in the three months ended March 31, 1998. The
Company's customers operate in a wide variety of industries, including
manufacturing, food services, retail, healthcare, technology, finance,
insurance, real estate, transportation, communications, services and sports.
The following is a representative list of the Company's customers as of March
31, 1998:
MANUFACTURING
Duro Bag Manufacturing
Company
Globe Manufacturing, Inc.
Great American Cookie Co.
Halstead Metal Products, Inc.
MCD International Inc.
Packerland Packing Company, Inc.
PMC, Inc.
Stevens Graphics, Inc.
United States Filter
Corporation
Volvo GM Heavy Truck
Corporation
Wright Industries, Inc.
HEALTHCARE
Community Hospital of
Monterey Peninsula
Disabilities Services of the
Southwest
Florida Community Cancer
Group Health Associates
Medassist OP
National Vision Associates, Ltd.
Sunrise Assisted Living
University Physicians Group
FINANCE/INSURANCE/REAL ESTATE
First American Corporation
GMAC Mortgage, Inc.
J.C. Bradford & Company LLC
Michigan Mutual Insurance Co.
National Realty Trust
Northwest Savings Bank
Republic National Bank
The Midland Life Insurance Co.
Trammel Crow Residential
United Companies Financial
Corporation
FOOD SERVICES/RETAIL
AT Williams Oil
Benihana Corporation
Bentley's Luggage
Bill Heard Enterprises, Inc.
Carolina Restaurant Group
Hooters of America
Reliable Stores, Inc.
Spaghetti Warehouse Inc. &
Subsidiaries
The Krystal Company
The Portillo Restaurant Group
Winn Dixie Stores, Inc.
TECHNOLOGY
FFV Aerotech, Inc.
Global Technical Services, Inc.
Ingram Entertainment, Inc.
SARCOM, Inc.
The National Research Group
TPS Technologies
Tracer Research
TRANSPORTATION &
COMMUNICATIONS
Airport Group International Inc.
America West Airlines Inc.
Armellini Trucking Corporation
Benton Express Co.
Communications & Power
Industries
Drug Transport Inc.
Lin Television
Telemundo Television Network
World Maintenance Service
SPORTS
Arizona Diamondbacks
Chicago White Sox
Colorado Rockies Baseball
Montreal Expos
New York Giants
New York Jets Football Club
New York Yankees
Philadelphia Phillies
The Phoenix Suns
ProPlayer Stadium
Texas Rangers Baseball
The Florida Marlins Baseball
Club
The Florida Panthers
SERVICES
Boston Ballet
Buena Vista Hotel
Callaway Gardens Resorts
Discovery Zone
Hotel Intercontinental
Hudson Hotels Corp.
Mark Hopkins Intercontinental
Omni Hotels Management
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CUSTOMER CASE STUDIES
The following examples illustrate the selection of the Company's products
by several of the Company's customers and the types of needs addressed by
those products:
The Krystal Company
The Krystal Company ("Krystal"), one of the oldest fast food restaurant
chains in the United States, owns and operates 245 restaurants in six states.
In total, the Chattanooga, Tennessee-based organization has approximately
8,700 associates and more than $250 million in revenues.
Previously, Krystal used a commercial payroll application that ran on a
mainframe. The software was not Year 2000 compliant, and Krystal needed more
in-depth human resourses 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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<PAGE>
SALES AND MARKETING
The Company markets and sells its products and services through its direct
sales force, marketing group and a network of strategic partners. The Company
had a staff of 89 associates as of March 31, 1998 and maintained 26 sales
offices located in major metropolitan areas throughout the United States,
including its headquarters in Ft. Lauderdale, Florida.
Direct Sales. The Company's direct sales force includes business
development directors and managers who have defined territories and conduct
lead-generation activities within given parameters. The sales cycle begins
with a sales lead generated through a corporate marketing vehicle or a
territory-based activity. Whether the lead is a telephone request, fax, email
or request for proposals ("RFPs"), the lead is qualified and entered into a
lead-tracking system. When the lead is received on the local level, prospect
information is entered via the Internet into an electronic system resident at
headquarters. When headquarters receives the lead, the information is
recorded and forwarded to the business development manager in the prospect's
region of the country. Business development managers rely on face-to-face
meetings with prospects to build relationships. In one or more on-site
visits, business development managers work with application and technical
consultants to analyze prospective client needs, demonstrate the Company's
product and, when required, respond to an RFP. The sale is finalized after
clients complete their internal sign-off procedures and terms of the contract
are negotiated and signed. While the length of sales cycles varies from
client to client, the sales cycle typically requires two to six months for
UltiPro for Windows.
The terms of the Company's sales contract typically include a license, an
annual maintenance agreement, per day training rates and hourly charges for
implementation services. The contract does not typically provide for
cancellation of software purchases. Typical payment terms include a deposit
at the time the contract is signed and additional payments upon the delivery
of the product and the occurrence of other specified events such as the
implementation of the software. Payment for implementation and training
services under the contract are typically made as such services are provided.
Marketing. The Company supports its sales force with a comprehensive
marketing program that includes public relations, advertising, direct mail,
trade shows, seminars and Web site maintenance. Working closely with the
direct sales force, customers and strategic partners, the marketing team
defines positioning strategies and develops a well-defined plan for
implementing these strategies. Marketing services include market surveys and
research, overall campaign management, creative development, production
control, lead generation and tracking, results analysis, and communications
with field offices, customers and strategic partners.
Strategic Partners. The Company has established a number of formal and
informal marketing relationships with industry-specific vendors and
consulting firms. The Company has a strategic partnership with Microsoft
Corporation that involves coordinated public relations and marketing
opportunities as well as trade show activities specifically targeted to the
HRMS industry. In addition, the Company has relationships with Cognos, Citrix
Systems, Inc., FlexiInternational Software, Inc., Great Plains Software,
Inc., Lotus Development Corporation, National Bond & Trust Company Inc.,
Network Specialists, Inc., Paradigm Software Technologies, Platinum Software
Corporation, ProBusiness Services, Inc., Simplex Time Recorder Co., SunGard
Recovery Services, Inc. and Systems Tax Service. These relationships include
joint marketing activities such as joint press releases, direct mail
programs, seminars, on-site product demonstrations, reciprocal web site links
and referral programs. The Company believes that these activities expand the
opportunity for sales of the Company's products.
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent in part on its ability to protect its
proprietary technology. The Company licenses its products in object code form
only, although it has source code escrow arrangements when required by
customers. The Company relies on a combination of copyright, trademark and
trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect its proprietary rights. The Company
does not have any patents or patent applications pending, and existing
copyright, trademark and trade secret laws afford only limited protection.
Accordingly, there can be no
41
<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.
42
<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. On
April 10, 1998, two of the nine Resellers whose businesses were acquired in
April 1996 filed a complaint against the Company and Scott Scherr,
individually, in the Court of Common Pleas, Franklin County, Ohio. The
claimants allege that they are entitled to a greater percentage equity
interest in the Company than is provided for pursuant to the express terms of
the agreements executed in connection with the sale of their respective
businesses to the Company. The claimants seek reformation of these agreements,
injunctive and declaratory relief and compensatory damages in excess of
$3.6 million. The Company believes it has meritorious defenses to, and intends
to vigorously defend against, the claims made in such complaint. Nonetheless,
the claims could be time-consuming and expensive to defend and could result
in a diversion of management's time. This litigation is in a very early stage
and the Company cannot accurately predict its outcome. Consequently, there can
be no assurance that these claims will not have 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--Overview." As of the date of this Prospectus, the Company is not a
party to any other 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.
43
<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.
44
<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.
45
<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.
46
<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
NUMBER OF AT 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.
47
<PAGE>
The following table shows the number of shares covered by both exercisable
and unexercisable stock options held by the Named Executive Officers as of
the fiscal year ended on December 31, 1997, and the values for exercisable
and unexercisable options. No options were exercised during such fiscal year
by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND OPTION VALUES AT FISCAL YEAR-END
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997 (1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C>
Scott Scherr ......... 79,181 237,544 $ -- $--
Alan Goldstein, M.D. 61,220 183,660 -- --
Mitchell K. Dauerman 95,149 64,509 151,382 --
</TABLE>
(1) Options are in-the-money if the market value of the shares covered
thereby is greater than the option exercise price. This calculation is
based on the fair market value at December 31, 1997 of $7.21 per share,
less the exercise price.
STOCK OPTION PLAN
The Company's Nonqualified Stock Option Plan (the "Plan") was adopted in
April 1996. Under the Plan, options to purchase shares of Common Stock may be
granted to employees and directors of the Company upon approval of the
Compensation Committee of the Board of Directors. As of March 31, 1998,
options to purchase 5,059,500 shares were authorized for issuance under the
Plan, of which 1,808,437 options to purchase shares were outstanding with a
weighted average exercise price of $6.34 per share. Other than with respect
to options granted as compensation to non-employee Directors, the option
price for each share of stock subject to any option granted under the Plan
will be equal to the fair market value of such share on the date on which the
option is granted, or such other amount as may be determined by the
Compensation Committee of the Board of Directors. The option price for shares
purchased through the exercise of an option is payable in cash, in shares of
stock, or in any combination thereof, as determined by the Compensation
Committee. In the event of a change in control (as defined in the Plan) in
which shares are converted into other property, outstanding options will
become fully vested, will be terminated and the option holder will receive a
cash payment equal to the value of his or her option. All options cease to be
exercisable upon the tenth anniversary of the date of grant.
DIRECTOR COMPENSATION
As compensation for serving on the Board of Directors, following the
consummation of the Offering each director who is not employed by the Company
shall receive a quarterly retainer of $5,000, payable exclusively in the form
of options to purchase Common Stock under the Plan. Such options are
exercisable at a 70% discount to the grant date market value of the Common
Stock, with the total discount on all options granted for a calendar quarter
equaling the retainer fees earned by the non-employee directors for such
quarter. All directors are reimbursed for expenses incurred in connection
with their attendance at Board of Directors and committee meetings.
In addition, in November 1997, prior to the adoption of the current
compensation structure for the directors, each of Messrs. Marc Scherr, Wilber
and Yanover were granted fully-vested options to purchase 25,298 shares of
Common Stock at an exercise price of $7.21 per share, in consideration for
services provided to the Company as directors.
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
48
<PAGE>
pursuant to which the director received an improper personal benefit. None of
the foregoing, however, alters a director's liability under the federal
securities laws or affects the availability of equitable remedies, such as an
injunction or rescission, for breach of fiduciary duty. The DGCL provides
further that the indemnification permitted thereunder shall not be deemed
exclusive of any other rights to which the directors and officers may be
entitled under the corporation's by-laws, any agreement, a vote of
stockholders or otherwise. The Company's Certificate of Incorporation
contains a provision eliminating the personal liability of directors to the
maximum extent permitted by law and requires the Company to indemnify its
officers and directors to the fullest extent permitted by the DGCL.
CERTAIN TRANSACTIONS
In June 1992, the Partnership entered into a Software Development
Agreement with Strategic Image Systems, Inc. ("Strategic"), a corporation
controlled by Dr. Goldstein, the Executive Vice President, Chief Technology
Officer and a director and stockholder of the Company, which provided for the
payment of royalties by the Partnership to Strategic on sales of software
developed by Strategic for the Partnership. At the time the parties entered
into this Agreement, Dr. Goldstein was not an employee, officer or partner of
the Partnership and the parties were not otherwise affiliated. In connection
with the Agreement, in 1993 the Partnership granted a 10% limited partnership
interest in the Partnership to Strategic. In January 1995, the Partnership
agreed to pay $650,000 and granted a 12% limited partnership interest in the
Partnership to Strategic, in exchange for the contribution by Strategic to
the Partnership of all rights under the Software Development Agreement,
thereby terminating the Partnership's obligation to make royalty payments
thereunder. Also in 1995, the Partnership paid approximately $61,000 to
employees of Strategic for commissions on sales of the Partnership's products
to Resellers. In 1995 and 1996, the Partnership purchased and subleased
computer equipment from Strategic for cash payments totaling $86,000 in 1995
and $139,000 in 1996.
In June 1995, the Partnership acquired the business of The Ultimate
Software Group of New York, Inc. ("USGNY"), a Reseller of the Company's
products, in exchange for a 3.86% limited partnership interest in the
Partnership valued at approximately $772,000 at that time. Mr. Marc Scherr, a
director and stockholder of the Company and the brother of Mr. Scott Scherr,
the Company's Chairman of the Board of Directors, President and Chief
Executive Officer, was a director and officer of USGNY and a holder of
approximately 12% of its outstanding common stock. In addition, Reuben
Scherr, the father of Messrs. Marc and Scott Scherr, was a stockholder of
USGNY.
In 1995, Mr. Marc Scherr and Rick Wilber, each a director and stockholder
of the Company, loaned $50,000 and $300,000, respectively, to the Partnership
at an interest rate of 1% per month. In May 1996, Mr. Marc Scherr agreed to
the cancellation of his loan in exchange for the issuance of 957.854 shares
of Series A Convertible Preferred Stock of the Company (which will convert
into 9,693 shares of Common Stock) valued at $50,000 based on the then
current price of $52.20 per share. Also, in May 1996, Mr. Wilber was repaid
$50,000 plus accrued interest in cash and agreed to the cancellation of the
remaining $250,000 of his loans in exchange for the issuance of 4,789.272
shares of Series A Convertible Preferred Stock of the Company (which will
convert into 48,463 shares of Common Stock) valued at $250,000 based on the
then current price of $52.20 per share.
In the second and third calendar quarters of 1996, a series of
transactions were consummated primarily to alter the Company's structure from
a partnership to a corporation. At the time of these transactions, the
Company and the Partnership were under common control and certain directors
and officers of the Company were partners in the Partnership. These
transactions included the following:
Acquisition of Strategic. The Company acquired all of the outstanding
capital stock of Strategic from its shareholders, consisting of Dr. Goldstein
and members of his immediate family, in exchange for 97,826.059 shares of
Class B Common Stock of the Company (which were converted into 989,902 shares
of Common Stock), valued at approximately $5,106,520 based on the then
current value of $52.20 per share. Of such 97,826.059 shares of Class B
Common Stock, 40,448.741 shares (which were converted into 409,301 shares of
Common Stock) were issued to Dr. Goldstein having a value of approximately
$2,111,424 based on the then current value of $52.20 per share. At that time,
Strategic was the owner of the intellectual property rights underlying the
Company's products and an 18.2% limited partnership interest in the
Partnership.
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Acquisition of GP. The Company acquired all of the outstanding capital
stock of The Ultimate Software Group, Inc. ("GP"), a Florida corporation
controlled by Mr. Scott Scherr, from its shareholders (together with the
shareholders of Strategic, the "Participating Stockholders"), including Mr.
Scott Scherr, members of his immediate family and certain other officers of
the Company, in exchange for 174,331.938 shares of Class B Common Stock of
the Company (which converted into 1,764,065 shares of Common Stock), valued
at approximately $9,100,127 based on the then current value of $52.20 per
share. Of such 174,331.938 shares of Class B Common Stock, 71,476.798 shares
(which were converted into 723,274 shares of Common Stock) were issued to Mr.
Scott Scherr having a value of approximately $3,731,089 based on the then
current value of $52.20 per share. At that time, GP owned a 32.5% limited
partnership in interest in the Partnership.
Transfer of Operations. The business and operations of the Partnership
were transferred and conveyed to the Company in exchange for the issuance by
the Company of 236,300 shares of Class A Common Stock (167,553 shares of
which were cancelled pursuant to certain escrow arrangements described below
and the remaining shares of which converted into 1,030,398 shares of Common
Stock) and 536,269 shares of Class B Common Stock (which were converted into
5,426,506 shares of Common Stock) and payment of $660,550 in cash. 272,157 of
such shares of Class B Common Stock (which were convertible into 2,753,956
shares of Common Stock) were beneficially owned by the Company as a result of
its acquisition of GP and Strategic and were cancelled upon the dissolution
of the Partnership in March 1998.
Class A Escrow. The Company entered into an escrow agreement with the
Partnership pursuant to which all 236,300 shares of the Class A Common Stock
issued to the Partnership were placed in escrow (the "Class A Escrow"). Under
the terms of such escrow agreement, following the occurrence of certain
specified events, a portion of the shares held in the Class A Escrow would be
released to the Partnership and the remaining shares would be cancelled. The
calculation of the number of shares to be released was to be based on the
performance of certain assets transferred by the Partnership to the Company.
In March 1998, 68,747 of the shares of Class A Common Stock (which were
converted into 1,030,398 shares of Common Stock) held in the Class A Escrow
were released to the Partnership and the remaining 167,553 shares of Class A
Common Stock held in the Class A Escrow were surrendered to the Company and
cancelled in accordance with the escrow agreement.
Class B Escrow. The Company entered into an escrow agreement with the
Partnership and the Participating Stockholders pursuant to which 230,700
shares of the Class B Common Stock (which were converted into 2,334,453
shares of Common Stock) issued to the Partnership and the Participating
Stockholders were placed in escrow (the "Class B Escrow"). Under the terms of
such escrow agreement, following the occurrence of certain specified events,
all of the shares held in the Class B Escrow would be released to the
Partnership and the Participating Stockholders, unless the value of the
shares of Series A Convertible Preferred Stock issued to J.P. Morgan
Investment Corporation and Sixty Wall Street SBIC Fund, L.P. (collectively,
"Morgan") did not meet certain threshold levels at the time of such events,
in which case all of such shares held in the Class B Escrow would be
cancelled. Pursuant to an amendment to such escrow agreement, all of the
shares of Class B Common Stock held in the Class B Escrow will be released to
the Partnership (or its successors) and the Participating Stockholders upon
the execution of a firm underwriting agreement for the Offering on or before
July 1, 1998.
In April 1996, the Company sold a total of 95,787 shares of Series A
Convertible Preferred Stock (which will convert into 969,269 shares of Common
Stock) at a price of $52.20 per share to Morgan at an aggregate purchase
price of approximately $5.0 million. In connection with the sale, the Company
entered into a Series A Convertible Preferred Stock Purchase Agreement (the
"Morgan Purchase Agreement") and a shareholders rights agreement, pursuant to
which Morgan was granted certain consent, preemptive and registration rights.
In addition, the holders of Series A Convertible Preferred Stock, voting
separately as a class, were granted the right to elect a director of the
Company (the "Series A Director"). Morgan, by virtue of its ownership of a
majority of the issued and outstanding shares of Series A Convertible
Preferred Stock, has the power to elect the Series A Director. There is
currently no Series A Director. Prior to the consummation of the Offering,
all shares of Series A Convertible Preferred Stock will be converted into
shares of Common Stock. See "Shares Eligible for Future Sale -- Registration
Rights".
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<PAGE>
In April 1996, the Company issued to Mr. Marc Scherr and Patrick A.
Gerschel fully-vested options to purchase an aggregate of 323,130 shares of
Common Stock at an exercise price of $5.16 per share, 240,488 of which are
currently held by Mr. Marc Scherr, as consideration for consulting services
performed for the Company in connection with the development of the Company's
strategic business and financial plans. Mr. Gerschel is the principal
shareholder of Gerschel & Co., Inc., of which Mr. Marc Scherr is a director.
Mr. Gerschel is a stockholder of the Company and previously was a stockholder
of USGNY. In 1995, Mr. Gerschel loaned an aggregate of $250,000 to the
Partnership at an interest rate of 1% per month. In 1996, Mr. Gerschel and
members of his immediate family loaned an aggregate of $750,000 to the
Partnership at an interest rate of 1% per month. In May 1996, Mr. Gerschel
and such members of his immediate family agreed to the cancellation of all
such loans in exchange for the issuance of an aggregate of 19,157.088 shares
of Series A Convertible Preferred Stock of the Company (which will convert
into 193,851 shares of Common Stock) valued at $1,000,000 based on the then
current price of $52.20 per share.
In May 1996, Robert A. Yanover, a director of the Company, purchased 4,000
shares of the Company's Series A Convertible Preferred Stock (which will
convert into 40,476 shares of Common Stock), and in December, 1996, Mr.
Yanover purchased 4,000 shares of the Company's Series B Convertible
Preferred Stock (which will convert into 40,476 shares of Common Stock), in
each case, at a purchase price of $52.20 per share.
In May 1996, Michael Feinberg, a holder of more than 5% of the outstanding
capital stock of the Company, and his wife purchased an aggregate of
approximately 28,736 shares of the Company's Series A Convertible Preferred
Stock (which will convert into 290,780 shares of Common Stock) at a purchase
price of $52.20 per share. In December 1996 and April 1997, Mr. Feinberg
purchased 28,736 and 19,157 shares, respectively, of the Company's Series B
Convertible Preferred Stock (which will convert into an aggregate of 484,629
shares of Common Stock), in each case, at a purchase price of $52.20 per
share. At the time of these purchases, Mr. Feinberg was a limited partner in
the Partnership.
Upon commencement of his employment with the Company in September 1996,
Mitchell K. Dauerman, Executive Vice President, Chief Financial Officer and
Treasurer of the Company, was granted fully-vested options to purchase 73,646
shares of Common Stock of the Company at an exercise price of $5.16 per
share.
In June 1997, the Company sold a total of 153,257 shares of Series B
Convertible Preferred Stock (which will convert into 1,550,808 shares of
Common Stock) at a price of $52.20 per share to HarbourVest Venture Partners
V -- Direct Fund L.P. ("HarbourVest") for an aggregate purchase price of
approximately $8.0 million. In connection with such sale, the Company entered
into a Series B Convertible Preferred Stock Purchase Agreement (the
"HarbourVest Purchase Agreement") and a shareholders rights agreement,
pursuant to which HarbourVest was granted certain consent, preemptive and
registration rights. In addition, the holders of Series B Convertible
Preferred Stock, voting separately as a class, were granted the right to
elect a director of the Company (the "Series B Director"). HarbourVest, by
virtue of its ownership of a majority of the issued and outstanding shares of
Series B Convertible Preferred Stock, has the power to elect the Series B
Director. In June 1997, Mr. Nemirovsky, a Managing Director of HarbourVest,
was elected as the Series B Director. Prior to the consummation of the
Offering, all shares of Series B Convertible Preferred Stock will be
converted into shares of Common Stock. See "Shares Eligible for Future Sale
- -- Registration Rights."
In September 1997, LeRoy A. Vander Putten, a director of the Company,
purchased 2,000 shares of the Company's Series B Convertible Preferred Stock
(which will convert into 20,238 shares of Common Stock) at a purchase price
of $52.20 per share.
In November 1997, each of Messrs. Marc Scherr, Wilber and Yanover were
granted fully-vested options to purchase up to 25,298 shares of Common Stock
at an exercise price of $7.21 per share, in consideration of services
provided to the Company as directors.
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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of March 31,
1998, after giving effect to the conversion into Common Stock of the Class A
Common Stock, Class B Common Stock and Class C Common Stock and the Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock, by: (i)
each person who is known by the Company to own beneficially more than 5% of
the outstanding shares of the Common Stock, (ii) each of the Company's Named
Executive Officers, (iii) each director of the Company and (iv) all directors
and executive officers of the Company as a group. The address of each of the
officers and directors of the Company is c/o The Ultimate Software Group,
Inc., 3111 Stirling Road, Ft. Lauderdale, Florida 33312.
<TABLE>
<CAPTION>
PERCENTAGE
OF OUTSTANDING
SHARES(2)
----------------------
NUMBER OF SHARES
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
<S> <C> <C> <C>
HarbourVest Partners V--Direct Fund L.P.(3) ... 1,550,808 12.3% 9.8%
1 Financial Center, 44th Fl.
Boston, MA 02111
J.P. Morgan Investment Corporation(4) ......... 969,269 7.7 6.1
60 Wall Street
New York, NY 10005
Michael Feinberg(5)............................ 1,046,740 8.3 6.6
3980 N. 32 Terrace
Hollywood, FL 33312
Scott Scherr(6)................................ 627,288 4.9 3.9
Alan Goldstein, M.D.(7)........................ 470,520 3.7 3.0
Mitchell K. Dauerman(8)........................ 99,035 * *
Ofer Nemirovsky(3) ............................ 1,550,808 12.3 9.8
Marc D. Scherr(9).............................. 302,612 2.3 1.9
LeRoy A. Vander Putten......................... 20,238 * *
Rick Wilber(10)................................ 348,110 2.8 2.2
Robert A. Yanover(11).......................... 160,517 1.3 1.0
All directors and executive officers as a group 3,579,128 28.2 22.5
(8 persons)(12)...............................
</TABLE>
* Indicates beneficial ownership of less than 1.0% of the outstanding
Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and includes voting or
investment power with respect to securities. Shares of Common Stock
issuable upon the exercise of stock options or exercisable within 60
days hereof are deemed outstanding and to be beneficially owned by
the person holding such option for purposes of computing such
person's percentage ownership, but are not deemed outstanding for the
purpose of computing the percentage ownership of any other person.
Except for shares held jointly with a person's spouse or subject to
applicable community property laws, or as indicated in the footnotes
to this table, each stockholder identified in the table possesses the
sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by such stockholder.
(2) Applicable percentage of ownership is based on 12,620,806 shares
outstanding prior to this Offering and 15,870,806 shares to be
outstanding upon the consummation of the Offering.
(3) Mr. Nemirovsky, a director of the Company, is a Managing Director of
HarbourVest Partners, L.L.C. which is the Managing Director of the
HVP V-Direct Associates, L.L.C. which in turn is the General Partner
of HarbourVest Partners V -- Direct Fund L.P. Mr. Nemirovsky
disclaims beneficial ownership of the shares held by HarbourVest
Partners V -- Direct Fund L.P., except to the extent of his pecuniary
interest therein.
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<PAGE>
(4) Represents 901,421 shares of Common Stock held by J.P. Morgan
Investment Corporation and 67,848 shares of Common Stock held by
Sixty Wall Street SBIC Corporation, which is an affiliate of J.P.
Morgan Investment Corporation.
(5) Represents 949,815 shares of Common Stock and 96,925 shares of Common
Stock owned by Ann Feinberg, his spouse.
(6) Represents 431,738 shares of Common Stock, 116,369 shares of Common
Stock held by the Scott Scherr Living Trust, of which Mr. Scott
Scherr is the trustee, and exercisable options to purchase 79,181
shares of Common Stock. Mr. Scott Scherr disclaims beneficial
ownership of the shares owned by the Scott Scherr Living Trust.
(7) Represents 339,985 shares of Common Stock, 69,315 shares of Common
Stock held by the Alan S. Goldstein Irrevocable Trust, of which Mr.
Goldstein's wife Cheryl A. Zickler is the trustee, and exercisable
options to purchase 61,220 shares of Common Stock. Mr. Goldstein
disclaims beneficial ownership of the shares owned by the Alan S.
Goldstein Irrevocable Trust.
(8) Represents 3,886 shares of Common Stock held by certain trusts
established for the benefit of Mr. Dauerman's children, and
exercisable options to purchase 95,149 shares of Common Stock. Mr.
Dauerman disclaims beneficial ownership of the shares owned by the
trusts established for the benefit of his children.
(9) Represents 23,259 shares of Common Stock, 13,567 shares of Common
Stock held by certain trusts established for the benefit of Mr. Marc
Scherr's children, and exercisable options to purchase 265,786 shares
of Common Stock. Mr. Marc Scherr disclaims beneficial ownership of
the shares owned by the trusts established for the benefit of his
children.
(10) Represents 322,812 shares of Common Stock and exercisable options to
purchase 25,298 shares of Common Stock.
(11) Represents 135,219 shares of Common Stock held by Yanover Associates,
the general partner of which Mr. Yanover is the President, and
exercisable options to purchase 25,298 shares of Common Stock.
(12) Represents an aggregate of 3,027,196 shares of Common Stock and
exercisable options to purchase an aggregate of 551,932 shares of
Common Stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the consummation of the Offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, $0.01 par value
per share, and 2,500,000 authorized shares of preferred stock, $0.01 par
value per share ("Preferred Stock"). Options to purchase 1,837,782 shares
have been granted under the Plan ranging from $5.16 per share to $11.96 per
share.
COMMON STOCK
As of March 31, 1998, there were 12,620,806 shares of Common Stock
outstanding and held of record by 173 stockholders, assuming the conversion
of all shares of the Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock. Based upon the number of shares outstanding as
of that date and after giving effect to the issuance of the 3,250,000 shares
of Common Stock offered hereby, there will be 15,870,806 shares of Common
Stock outstanding upon the closing of this Offering. The outstanding shares
of Common Stock are, and the shares offered by the Company in this Offering
will be, when issued and paid for, fully paid and nonassessable.
The holders of Common Stock will possess exclusive voting rights in the
Company, except to the extent that the Board of Directors shall have
designated voting power with respect to any Preferred Stock issued. Each
holder of Common Stock is entitled, on each matter submitted for a vote of
holders of Common Stock, to one vote for each share of such stock registered
in such holder's name on the books of the Company. Except as otherwise
required by law and subject to the rights of any holders of Preferred Stock,
the presence in person or by proxy of the holders of record of a majority of
the shares entitled to vote at a meeting of stockholders constitutes a quorum
for the transaction of business at that meeting. Actions requiring approval
of stockholders will generally require approval by a majority vote at a
meeting at which a quorum is present, except that at each stockholder meeting
for the election of directors, provided a quorum is present, directors will
be elected by a plurality of votes validly cast in the election. Stockholders
will not have any right to cumulate votes in the election of directors.
Subject to the rights of any holders of Preferred Stock, each holder of
Common Stock is entitled to receive dividends out of funds legally available
therefor when, as, and if, declared by the Board of Directors. Dividends may
be paid in cash, property or shares of the Company's capital stock. In the
event of liquidation, dissolution or winding-up of the Company, the holders
of the Common Stock will be entitled to share ratably in the distribution of
all assets of the Company remaining after payment of all of the Company's
debts and liabilities and of all sums to which holders of any Preferred Stock
may be entitled. Holders of the Common Stock will not generally be entitled
to preemptive rights with respect to any shares of capital stock which may be
issued by the Company.
PREFERRED STOCK
Upon the consummation of the Offering, no shares of Preferred Stock will
be issued or outstanding. The Preferred Stock may be issued by the Board of
Directors in one or more series and may have such voting rights, if any,
designations, preferences and relative, participating, optional and other
special rights, and such qualifications, limitations and restrictions, as the
Board of Directors (or a duly authorized committee thereof) may fix by
resolution or resolutions. Moreover, the Board of Directors may issue such
Preferred Stock, from time to time, in transactions without the approval of
the stockholders of the Company, and the preferences, designations, voting
and other rights of any such shares of Preferred Stock may materially limit
or qualify the rights of the outstanding shares of Common Stock. See " --
Anti-Takeover Effects of Certain Provisions of Delaware Law and the
Certificate of Incorporation and the By-Laws."
The holders of Preferred Stock issued by the Company may be given the
right to vote for the election of directors generally or to elect a specified
number or percentage of the members of the Board of Directors. The number of
directors that may be elected by the holders of any class or series of
Preferred Stock having the right to elect directors may be in addition to the
number of directors fixed by or pursuant to the Certificate of Incorporation.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer,
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<PAGE>
proxy contest, merger or otherwise, and thereby to protect the continuity of
the Company's management. The issuance of shares of Preferred Stock pursuant
to the authority of the Board of Directors described above may adversely
affect the rights of the holders of Common Stock. For example, Preferred
Stock issued by the Company may rank prior to the Common Stock as to dividend
rights, liquidation preference or both, may have full or limited voting
rights and may be convertible into shares of Common Stock. Accordingly, the
issuance of shares of Preferred Stock may discourage bids for the Common
Stock at a premium or may otherwise adversely affect the market price of the
Common Stock.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND THE
CERTIFICATE OF INCORPORATION AND BY-LAWS
Interested Stockholder Restrictions. Section 203 of the DGCL prohibits an
"interested stockholder" of a Delaware corporation from engaging in certain
business combinations with the corporation, including mergers or
consolidations or acquisitions of additional shares of the corporation, for a
period of three years following the time that the stockholder becomes an
"interested stockholder." An "interested stockholder" is defined to include
persons owning directly or indirectly 15% or more of the outstanding voting
stock of a corporation. The prohibitions under Section 203 are not applicable
in certain circumstances, including those in which (i) the business
combination or the transaction which results in the stockholder becoming an
"interested stockholder" is approved by the corporation's board of directors
prior to the time the stockholder becomes an "interested stockholder," (ii)
the "interested stockholder" upon consummation of such transaction owns at
least 85% of the voting stock of the corporation outstanding prior to such
transaction or (iii) the corporation has elected not to be governed by such
prohibitions.
Issuance of Common and Preferred Stock. The Company believes that its
ability to issue the authorized but unissued shares of Common Stock and
shares of Preferred Stock without stockholder consent will provide the
Company with the flexibility necessary to meet its future needs without
experiencing the time delay of having to seek stockholder approval. The
unissued shares of Common Stock and Preferred Stock will be issuable from
time to time for any corporate purpose, including, without limitation, stock
splits, stock dividends, employee benefit and compensation plans,
acquisitions and public or private sales for cash as a means of raising
capital. It is possible that the Board of Directors might use its authority
(subject to the restrictions referred to above) to issue Common Stock or
Preferred Stock in a way which could deter or impede the completion of a
tender offer or other attempt to gain control of the Company which the Board
of Directors does not approve. The Company does not have any predetermined
plans or commitments to use its authority to effect any such issuance, but
reserves the right to take any action in the future which the Board of
Directors deems to be in the best interests of the stockholders and the
Company under the circumstances.
It is not possible to state the actual effect of any issuance of Preferred
Stock upon the rights of holders of Common Stock because the Board of
Directors has not determined an issuance price or prices, terms or the rights
of the holders of Preferred Stock. However, such effects might include: (i)
restrictions on Common Stock dividends if Preferred Stock dividends have not
been paid; (ii) dilution of the voting power and equity interest of existing
holders of Common Stock to the extent that any Preferred Stock series has
voting rights or would acquire voting rights upon the occurrence of certain
events (such as the failure to pay dividends for a specified period) or that
any Preferred Stock series is convertible into Common Stock; and (iii)
current holders of Common Stock not being entitled to share in the Company's
assets upon liquidation, dissolution or winding-up until satisfaction of any
liquidation preferences granted to any series of Preferred Stock.
Board of Directors. On April 15, 1998, the stockholders of the Company
approved an amendment of the Certificate of Incorporation, effective
immediately prior to the consummation of the Offering, to provide that the
Board of Directors will consist of not less than five (5) nor more than
eleven (11) directors (subject to the rights of the holders of any series of
Preferred Stock), with the exact number to be determined from time to time by
the affirmative vote of a majority of the entire Board of Directors. Pursuant
to the Certificate of Incorporation and the By-Laws, effective immediately
prior to the consummation of the Offering, the Board of Directors of the
Company will be divided into three classes,
55
<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.
56
<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.
The issuance of the Rights to purchase shares of Preferred Stock pursuant
to the Rights Agreement 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 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 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.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Offering, the Company will have an aggregate
of 15,870,806 shares of Common Stock outstanding, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options to
purchase Common Stock. Of these shares, 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 12,620,806 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, 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) 3,250,000 shares will be
available for immediate sale in the public market on the date of this
Prospectus, (ii) 1,370,850 shares will be eligible for sale 90 days after the
date of this Prospectus, (iii) 10,016,895 shares will be eligible for sale
upon the expiration of the Lock-up Agreements 180 days after the date of this
Prospectus and (iv) 1,233,061 shares will be eligible for sale under Rule 144
upon the expiration of the applicable one-year holding periods.
In general, under Rule 144, a person (or persons whose shares are
aggregated) including an affiliate, who has beneficially owned shares for at
least one year is entitled to sell, within any three-month period commencing
90 days after the date of this Prospectus, a number of shares that does not
exceed the greater of (i) one percent of the then outstanding shares of
Common Stock (approximately 4,524,860 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
58
<PAGE>
certain rights with respect to the registration under the Securities Act of a
total of approximately 8,227,807 shares of Common Stock (the "Registrable
Stock"). The Shareholders Rights Agreement generally provides that, in the
event the Company proposes to register any of its securities under the
Securities Act, the Rightsholders shall be entitled to include their
Registrable Stock in such Registration, subject to the right of the managing
underwriter of any underwritten offering to limit for marketing reasons the
number of shares of Registrable Stock included in such "piggyback"
registration.
At any time following six months after the effective date of the Offering,
each of Morgan, HarbourVest or Rightsholders holding more than 25% of the
shares subject to the Shareholders Rights Agreement may require the Company
to prepare and file a registration statement under the Securities Act with
respect to their shares of Registrable Stock. The Company need effect no more
than two such demand registrations for each of Morgan and HarbourVest and two
demand registrations for the other Rightsholders. The Company is not required
to file a demand registration statement within six months after the effective
date of any other demand registration statement filed by the Company.
In addition, the Acquired Resellers whose businesses were acquired in
1998, were granted certain piggyback registration rights with respect to the
shares issued in connection with the acquisition of their businesses. Such
registration rights, with respect to each Acquired Reseller, expire on the
first anniversary of the date of the acquisition of such Acquired Reseller's
business.
EFFECT OF SALES OF SHARES
Prior to the Offering, there has been no public market for the Common
Stock, and no precise prediction can be made as to the effect, if any, that
market sales of shares of Common Stock or the availability of shares of
Common Stock for sale will have on the market price of the Common Stock
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock in the public market could adversely affect prevailing market
prices and could impair the Company's future ability to raise capital through
the sale of its equity securities.
LOCK-UP AGREEMENTS
All directors and officers and certain stockholders of the Company
(holding an aggregate of 11,249,956 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 the 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."
59
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
May , 1998 (the "Underwriting Agreement"), the Underwriters named below,
who are represented by Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") and Volpe Brown Whelan & Company, LLC (the "Representatives"), have
severally agreed to purchase from the Company the respective number of shares
of Common Stock set forth opposite their names below.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation ....
Volpe Brown Whelan & Company, LLC .......................
--------------------
Total ................................................. 3,250,000
====================
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal
matters and to certain other conditions. The Underwriters are obligated to
purchase and accept delivery of all the shares of Common Stock offered hereby
(other than those shares covered by the over-allotment option described
below) if any are purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including
the Underwriters) at such price less a concession not in excess of $
per share. The Underwriters may allow, and such dealers may re-allow, to
certain other dealers a concession not in excess of $ per share. After
the initial offering of the Common Stock, the public offering price and other
selling terms may be changed by the Representatives at any time without
notice. The Underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
The Company and certain stockholders of the Company (the "Selling
Stockholders") have granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase, from time to time, in
whole or in part, up to an aggregate of 487,500 additional shares of Common
Stock at the initial public offering price less underwriting discounts and
commissions. The Underwriters may exercise such option solely to cover
overallotments, if any, made in connection with the Offering. To the extent
that the Underwriters exercise such option, each Underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such Underwriter's percentage underwriting
commitment as indicated in the preceding table.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Each of the Company, its executive officers and directors and certain
stockholders of the Company (including the Selling Stockholders) has agreed,
subject to certain exceptions, not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common
Stock or (ii) enter into any swap or other arrangement that transfers all or
a portion of the economic consequences associated with the ownership of any
Common Stock (regardless of whether any of the transactions described in
clause (i) or (ii) is to be settled by the delivery of Common Stock, or such
other securities, in cash or otherwise) for a period of 180 days after the
date of this Prospectus without the prior written consent of DLJ. In
addition, during such period, the Company has also agreed not to file any
registration statement with respect to, and each of its executive officers,
directors and certain stockholders
60
<PAGE>
of the Company (including the Selling Stockholders) has agreed not to make
any demand for, or exercise any right with respect to, the registration of
any shares of Common Stock or any securities convertible into or exercisable
or exchangeable for Common Stock without DLJ's prior written consent.
Prior to the Offering, there has been no established trading market for
the Common Stock. The initial public offering price for the shares of Common
Stock offered hereby will be determined by negotiation among the Company and
the Representatives. The factors to be considered in determining the initial
public offering price include the history of and the prospects for the
industry in which the Company competes, the past and present operations of
the Company, the historical results of operations of the Company, the
prospects for future earnings of the Company, the recent market prices of
securities of generally comparable companies and the general condition of the
securities markets at the time of the Offering.
Other than in the United States, no action has been taken by the Company,
the Selling Stockholders or the Underwriters that would permit a public
offering of the shares of Common Stock offered hereby in any jurisdiction
where action for that purpose is required. The shares of Common Stock offered
hereby may not be offered or sold, directly or indirectly, nor may this
Prospectus or any other offering material or advertisements in connection
with the offer and sale of any such shares of Common Stock be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of such jurisdiction.
Persons into whose possession this Prospectus comes are advised to inform
themselves about and to observe any restrictions relating to the Offering and
the distribution of this Prospectus. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any shares of Common Stock
offered hereby in any jurisdiction in which such an offer or a solicitation
is unlawful.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. The Underwriters may bid for and
purchase shares of Common Stock in the open market to cover such syndicate
short position or to stabilize the price of the Common Stock. In addition,
the underwriting syndicate may reclaim selling concessions from syndicate
members and selected dealers if they repurchase previously distributed Common
Stock in syndicate covering transactions, in stabilizing transactions or
otherwise. These activities may stabilize or maintain the market price of the
Common Stock above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities
at any time.
LEGAL MATTERS
The validity of the shares of the Common Stock offered hereby will be
passed upon for the Company by Dewey Ballantine LLP, New York, New York.
Certain legal matters relating to the sale of the Common Stock offered hereby
will be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP,
New York, New York.
EXPERTS
The financial statements of the Company included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
61
<PAGE>
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.
62
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
REGISTRANT
The Ultimate Software Group, Inc. and Subsidiaries
Report of Independent Certified Public Accountants ................................... F-3
Consolidated Balance Sheets--December 31, 1996 and 1997 and March 31, 1998
(unaudited) ......................................................................... F-4
Consolidated Statements of Operations--For the years ended December 31, 1995, 1996
and 1997 and for the three months ended March 31, 1997 and 1998 (unaudited) ........ F-6
Consolidated Statements of Stockholders' Deficit--For the years ended December 31,
1995, 1996 and 1997 and for the three months ended March 31, 1998 (unaudited) ....... F-7
Consolidated Statements of Cash Flows--For the years ended December 31, 1995, 1996
and 1997 and for the three months ended March 31, 1997 and 1998 (unaudited) ........ F-8
Notes to Consolidated Financial Statements ........................................... F-10
BUSINESSES ACQUIRED IN 1996
Torrence & Associates, Inc. d/b/a The Ultimate Software Group
Report of Independent Certified Public Accountants ................................... F-26
Balance Sheet--December 31, 1995 ..................................................... F-27
Statement of Operations--For the year ended December 31, 1995 ........................ F-28
Statement of Shareholders' Deficit--For the year ended December 31, 1995 ............ F-29
Statement of Cash Flows--For the year ended December 31, 1995 ........................ F-30
Notes to Financial Statements ........................................................ F-31
The Ultimate Software Group of Georgia, Inc.
Report of Independent Certified Public Accountants ................................... F-34
Balance Sheet--December 31, 1995 ..................................................... F-35
Statement of Operations--For the year ended December 31, 1995 ........................ F-36
Statement of Shareholders' Deficit--For the year ended December 31, 1995 ............. F-37
Statement of Cash Flows--For the year ended December 31, 1995 ........................ F-38
Notes to Financial Statements ........................................................ F-39
The Ultimate Software Group Midwest, Ltd.
Report of Independent Certified Public Accountants ................................... F-42
Balance Sheet--December 31, 1995 ..................................................... F-43
Statement of Operations--For the year ended December 31, 1995 ........................ F-44
Statement of Partner's Deficit--For the year ended December 31, 1995 ................ F-45
Statement of Cash Flows--For the year ended December 31, 1995 ........................ F-46
Notes to Financial Statements ........................................................ F-47
The Ultimate Software Group of the Delaware Valley, Ltd.
Report of Independent Certified Public Accountants ................................... F-50
Balance Sheet--December 31, 1995 ..................................................... F-51
Statement of Operations--For the year ended December 31, 1995 ........................ F-52
Statement of Shareholders' Deficit--For the year ended December 31, 1995 ............ F-53
Statement of Cash Flows--For the year ended December 31, 1995 ........................ F-54
Notes to Financial Statements ........................................................ F-55
F-1
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
PAGE
BUSINESSES ACQUIRED IN 1998
The Ultimate Software Group of the Carolinas, Inc. and The Ultimate Software Group
of Virginia, Inc.
Report of Independent Certified Public Accountants ................................... F-57
Combined Balance Sheets--December 31, 1996 and 1997 .................................. F-58
Combined Statements of Operations--For the years ended December 31, 1995,
1996 and 1997 ....................................................................... F-59
Combined Statements of Shareholders' Deficit--For the years ended December 31, 1995,
1996 and 1997........................................................................ F-60
Combined Statements of Cash Flows--For the years ended December 31, 1995,
1996 and 1997 ....................................................................... F-61
Notes to Combined Financial Statements ............................................... F-62
The Ultimate Software Group of New York and New England, G.P.
Report of Independent Certified Public Accountants ................................... F-65
Balance Sheets--December 31, 1996 and 1997 ........................................... F-66
Statements of Operations--For the years ended December 31, 1995, 1996 and 1997 ...... F-67
Statements of Partners' Deficit--For the years ended December 31, 1995,
1996 and 1997 ....................................................................... F-68
Statements of Cash Flows--For the years ended December 31, 1995, 1996 and 1997 ...... F-69
Notes to Financial Statements ........................................................ F-70
Ultimate Investors Group, Inc. and Subsidiary
Report of Independent Certified Public Accountants.................................... F-73
Consolidated Balance Sheets--December 31, 1996 and 1997............................... F-74
Consolidated Statements of Operations--For the years ended December 31, 1995,
1996 and 1997........................................................................ F-75
Consolidated Statements of Shareholders' Deficit--For the years ended December 31,
1995, 1996 and 1997.................................................................. F-76
Consolidated Statements of Cash Flows--For the years ended December 31, 1995,
1996 and 1997........................................................................ F-77
Notes to Consolidated Financial Statements............................................ F-78
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Ultimate Software Group, Inc.:
We have audited the accompanying consolidated balance sheets of The
Ultimate Software Group, Inc. (a Delaware corporation and formerly The
Ultimate Software Group, Ltd., a Florida limited partnership) and
subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' deficit and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Ultimate Software
Group, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
January 20, 1998 (except with respect to the
matters discussed in Note 10 and 15, as to which
the date is April 10, 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>
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)
LIABILITIES AND
STOCKHOLDERS' DEFICIT--(CONTINUED)
<S> <C>
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 12,620,806 shares
issued and outstanding .......................... -- -- -- 126,208
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 35,643,324
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 12,620,679
============== =============== =============== ============== ==============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE CLASS A COMMON CLASS B COMMON
PREFERRED STOCK PREFERRED STOCK STOCK STOCK
--------------- --------------- ------------------ ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994,
before restatement for the
1998 poolings ................. -- $ -- -- $ -- -- $ -- -- $ --
1998 pooling transactions (Note
15) ........................... -- -- -- -- -- -- 121,856 1,219
------ ------- ------ --------- ------- ------- ------
Balance, December 31, 1994,
restated for the 1998 pooling
transactions .................. -- -- -- -- -- -- 121,856 1,219
Partnership interest issued for
acquisitions .................. -- -- -- -- -- -- -- --
Partnership interest issued for
consulting services ........... -- -- -- -- -- -- -- --
Contributions .................. -- -- -- -- -- -- -- --
Equity transactions of 1998
pooling transactions .......... -- -- -- -- -- -- -- --
Net loss ....................... -- -- -- -- -- -- -- --
------- ------ ------- ------ --------- ------- ------- ------
Balance, December 31, 1995 .... -- -- -- -- -- -- 121,856 1,219
Contributions .................. -- -- -- -- -- -- -- --
Net loss prior to the transfer
of the Partnership to the
Company ....................... -- -- -- -- -- -- -- --
Issuance of stock in connection
with the Transactions (Note
10) ........................... 191,573 1,916 -- -- 236,300 2,363 536,269 5,363
Net proceeds from issuances of
Series B Convertible Preferred
Stock ......................... -- -- 32,736 327 -- -- -- --
Non-cash issuance of options to
purchase Common Stock for
consulting services ........... -- -- -- -- -- -- -- --
Equity transactions of 1998
pooling transactions .......... -- -- -- -- -- -- -- --
Net loss ....................... -- -- -- -- -- -- -- --
------- ------ ------- ------ --------- ------- ------- ------
Balance, December 31, 1996 .... 191,573 1,916 32,736 327 236,300 2,363 658,125 6,582
Net proceeds from issuances of
Series B Convertible Preferred
Stock ......................... -- -- 262,936 2,630 -- -- -- --
Equity transactions of 1998
pooling transactions .......... -- -- -- -- -- -- -- --
Net loss ....................... -- -- -- -- -- -- -- --
------- ------ ------- ------ --------- ------- ------- ------
Balance, December 31, 1997 .... 191,573 1,916 295,672 2,957 236,300 2,363 658,125 6,582
Net loss (unaudited) ........... -- -- -- -- -- -- -- --
Compensation related to
modification of escrow
agreement (unaudited) ......... -- -- -- -- -- -- -- --
Equity transactions of 1998
pooling transactions
(unaudited).................... -- -- -- -- -- -- -- --
Cancellation of shares related
to release of escrow........... -- -- -- -- (167,553) (1,676) -- --
Balance, March 31, 1998
(unaudited) ................... 191,573 $1,916 295,672 $2,957 68,747 $ 687 658,125 $6,582
======= ====== ======= ====== ========= ======= ======= ======
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
GENERAL LIMITED PAID-IN ACCUMULATED STOCKHOLDERS'
PARTNER PARTNERS CAPITAL DEFICIT DEFICIT
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994,
before restatement for the
1998 poolings ................. $ (935,536) $ 1,382,698 $ -- $ -- $ 447,162
1998 pooling transactions (Note
15) ........................... -- -- 847,256 (731,413) 117,062
----------- ----------- ----------- ------------- -------------
Balance, December 31, 1994,
restated for the 1998 pooling
transactions .................. (935,536) 1,382,698 847,256 (731,413) 564,224
Partnership interest issued for
acquisitions .................. -- 250,000 -- -- 250,000
Partnership interest issued for
consulting services ........... -- 123,125 -- -- 123,125
Contributions .................. -- 2,154,376 -- -- 2,154,376
Equity transactions of 1998
pooling transactions .......... -- -- 815,655 (100,000) 715,655
Net loss ....................... (2,762,488) (1,183,924) -- (784,699) (4,731,111)
----------- ----------- ----------- ------------- -------------
Balance, December 31, 1995 .... (3,698,024) 2,726,275 1,662,911 (1,616,112) (923,731)
Contributions .................. -- 1,070,000 -- -- 1,070,000
Net loss prior to the transfer
of the Partnership to the
Company ....................... (1,115,936) (478,258) -- -- (1,594,194)
Issuance of stock in connection
with the Transactions (Note
10) ........................... 4,813,960 (3,318,017) 14,185,845 -- 15,691,430
Net proceeds from issuances of
Series B Convertible Preferred
Stock ......................... -- -- 1,633,473 -- 1,633,800
Non-cash issuance of options to
purchase Common Stock for
consulting services ........... -- -- 285,054 -- 285,054
Equity transactions of 1998
pooling transactions .......... -- -- 295,269 (108,000) 187,269
Net loss ....................... -- -- -- (18,791,435) (18,791,435)
----------- ----------- ----------- ------------- -------------
Balance, December 31, 1996 .... -- -- 18,062,552 (20,515,547) (2,441,807)
Net proceeds from issuances of
Series B Convertible Preferred
Stock ......................... -- -- 13,476,563 -- 13,479,193
Equity transactions of 1998
pooling transactions .......... -- -- 33,250 (561,335) (528,085)
Net loss ....................... -- -- -- (16,016,956) (16,016,956)
----------- ----------- ----------- ------------- -------------
Balance, December 31, 1997 .... -- -- 31,572,365 (37,093,838) (5,507,655)
Net loss (unaudited) ........... -- -- -- (6,929,470) (6,929,470)
Compensation related to
modification of escrow
agreement (unaudited) ......... -- -- 4,183,351 -- 4,183,351
Equity transactions of 1998
pooling transactions
(unaudited).................... -- -- -- (433,819) (433,819)
Cancellation of shares related
to release of escrow........... -- -- 1,676 -- --
Balance, March 31, 1998
(unaudited) ................... $ -- $ -- $35,757,392 $(44,457,127) $ (8,687,593)
=========== =========== =========== ============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-7
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------------------------
1995 1996 1997 1997 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................. $(4,731,111) $(20,385,629) $(16,016,956) $(4,730,539) $(6,929,470)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization ...... 245,204 7,316,413 2,087,017 399,943 442,594
Provision for doubtful accounts .... 24,000 241,000 443,702 -- 155,086
Issuance of equity instruments for
consulting services ................ 123,125 285,054 -- -- --
Non-cash equity transactions of 1998
poolings ........................... 10,655 33,549 8,163 21,138 --
Compensation related to modification
of escrow agreement ................ -- -- -- -- 4,183,351
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable ................ (660,647) (1,930,475) (3,424,256) 109,917 (1,708,219)
Prepaid commissions ................ -- (228,713) (101,368) (255,121) 225,000
Other prepaid expenses ............. 58,041 (118,757) (346,077) 171,157 (364,694)
Other assets ....................... -- (6,649) (127,850) (8,152) (677,678)
Accounts payable ................... 117,114 485,586 860,243 (203,458) 373,500
Accrued expenses ................... 127,654 1,936,479 1,898,041 (1,265,466) 87,585
Deferred revenue and customer
deposits .......................... 730,584 2,356,908 6,671,793 2,794,773 (222,091)
Other long-term liabilities......... -- -- 57,700 -- 3,696
-------------- --------------- --------------- -------------- --------------
Net cash used in operating activities (3,955,381) (10,015,234) (7,989,848) (2,965,808) (4,431,340)
-------------- --------------- --------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures ................. (189,598) (154,796) (1,433,927) (321,084) (59,787)
Amounts (paid to) received from
affiliate and shareholder ........... (199,100) 221,100 25,000 -- --
Net (issuance) repayments of notes
receivable .......................... -- (45,382) (49,452) 6,849 38,376
Due from distributor ................. 425,000 -- -- -- --
Cash used in acquisitions ............ -- (660,555) -- -- --
-------------- --------------- --------------- -------------- --------------
Net cash provided by (used in)
investing activities ................. 36,302 (639,633) (1,458,379) (314,235) (21,411)
-------------- --------------- --------------- -------------- --------------
</TABLE>
F-8
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- --------------------------------
1995 1996 1997 1997 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net borrowings under line of credit
agreements .......................... $ 511,289 $ 926,335 $(1,408,534) $ (815,903) $ 1,968,733
Net proceeds from notes
payable-related parties ............. 424,843 594,658 -- -- --
Due to affiliate ..................... 450,000 (450,000) -- -- --
Borrowings (payments) on notes
payable ............................. -- 23,142 (273,142) 18,367 --
Net proceeds from capital lease
obligations ......................... -- -- -- -- 381,095
Payments on capital lease obligations (113,349) (161,819) (215,481) (53,642) (75,280)
Contributions to partners' capital .. 2,154,376 1,070,000 -- -- --
Net proceeds from issuances of
Convertible Preferred Stock ......... -- 9,423,331 13,479,193 3,435,118 --
Equity transactions of 1998 poolings . 705,000 228,720 (284,065) 75,000 (433,819)
-------------- --------------- --------------- -------------- --------------
Net cash provided by financing
activities ........................... 4,132,159 11,654,367 11,297,971 2,658,940 1,840,729
-------------- --------------- --------------- -------------- --------------
Net increase (decrease) in cash and
cash equivalents ..................... 213,080 999,500 1,849,744 (621,103) (2,612,022)
Cash and cash equivalents, beginning
of year .............................. 207,640 420,720 1,420,220 1,420,220 3,269,964
-------------- --------------- --------------- -------------- --------------
Cash and cash equivalents, end of
year.................................. $ 420,720 $ 1,420,220 $ 3,269,964 $ 799,117 $ 657,942
============== =============== =============== ============== ==============
Supplemental disclosure of cash flow
information:
Cash paid for interest ................ $ 88,324 $ 152,166 $ 150,247 $ 23,147 $ 36,358
============== =============== =============== ============== ==============
Supplemental disclosure of non-cash
financing activities:
</TABLE>
The Company entered into capital lease obligations to acquire new equipment
totaling $408,127, $206,739, $0 and $318,965 (unaudited) in 1995, 1996,
1997 and the three months ended March 31, 1998, respectively.
In 1996, the Company issued Class A Common Stock and Class B Common Stock in
connection with the transactions discussed in Note 10.
In 1996, the Company issued 24,904 shares of Series A Convertible Preferred
Stock (convertible into 252,004 shares of Common Stock) as payment for
certain obligations to related parties (see Note 10).
In 1996, the Company issued 8,534 shares of Series A Convertible Preferred
Stock (convertible into 86,356 shares of Common Stock) valued at $445,500
to certain former limited partners for limited partnership interests in the
Partnership (see Note 10).
In 1996, $75,000 of accrued but unpaid dividends were declared by one of the
1998 Acquired Resellers.
In 1998, the Company acquired five third-party resellers in transactions
accounted under the poolings-of-interest accounting method (see Note 15).
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-9
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group, Inc. (the "Company") or, prior to the
transactions consummated in April 1996 as further discussed below, The
Ultimate Software Group, Ltd. (the "Partnership"), designs, markets,
implements and supports technologically advanced, cross-industry human
resource management and payroll software solutions, marketed primarily to
middle-market organizations with 300 to 15,000 employees. The Company reaches
its customer base and target market through its direct sales force and a
network of national, regional and local strategic partners.
In April 1996, the Company completed a series of transactions (the
"Transactions") whereby the businesses of certain third-party resellers of
the Company's products were purchased by the Partnership, and the business
and operations of the Partnership, along with the acquired businesses, were
transferred and conveyed to the Company in exchange for certain shares of
Class A and Class B Common Stock of the Company. The acquisitions were
accounted for under the purchase method of accounting. See Note 12. The
Company issued shares of its Class B Common Stock in exchange for all of the
issued and outstanding shares of the capital stock of the Partnership's
general partner, The Ultimate Software Group, Inc., a Florida corporation
("GP"), and for all of the issued and outstanding shares of the capital stock
of Strategic Image Systems, Inc. ("Strategic"), a limited partner of the
Partnership. Such exchange was accounted for on a historical cost basis as GP
and Strategic were related to the Partnership. As a result of the
Transactions, GP and Strategic became wholly-owned subsidiaries of the
Company. For a more detailed description of the Transactions, see Note 10.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Intercompany accounts and transactions have been
eliminated in consolidation.
In February and March 1998, the Company acquired the businesses of five
third-party resellers of the Company's products (the "Acquired Resellers") in
exchange for an aggregate of 121,856 shares of the Company's Class B Common
Stock, (convertible into 1,233,061 shares of Common Stock). The Company is
accounting for these transactions using the pooling-of-interest method of
accounting and therefore the accounts of the Acquired Resellers have been
included retroactively in the consolidated financial statements as if the
companies had operated as one entity since inception. See Note 15.
Interim Financial Data
In the opinion of the management of the Company, the accompanying
unaudited consolidated financial statements contain all adjustments
(consisting of only normal and recurring adjustments) necessary to present
fairly the financial position of the Company as of March 31, 1998, and the
results of operations and cash flows for the three months ended March 31,
1997 and 1998. The results of operations and cash flows for the three months
ended March 31, 1998 are not necessarily indicative of the results of
operations or cash flows which may be reported for the remainder of 1998, or
for any subsequent period.
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. The accompanying
consolidated balance sheets include $1,013,657, $1,548,479 and $39,878
(unaudited) in interest-bearing accounts as of December 31, 1996 and 1997 and
March 31, 1998, respectively.
Accounts Receivable
Accounts receivable are principally from end-users of the Company's
products. The Company performs periodic credit evaluations of its customers
and has recorded allowances for estimated losses.
F-10
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A rollforward of allowances is as follows:
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------
1995 1996 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance, beginning of year ...... $ -- $ 24,000 $ 215,000 $533,827
Provision for doubtful accounts.. 24,000 241,000 443,702 155,086
Write-offs ...................... -- (50,000) (124,875) (76,493)
--------- ---------- ----------- --------------
Balance, end of year ............. $24,000 $215,000 $ 533,827 $612,420
========= ========== =========== ==============
</TABLE>
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repairs
are charged to expense when incurred; betterments are capitalized. Upon the
sale or retirement of assets, the cost, accumulated depreciation and
amortization are removed from the accounts and any gain or loss is
recognized.
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered. The principal components of deferred revenue were as
follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
-------------------------- ---------------
1996 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
License revenues $1,226,727 $3,069,603 $ 5,754,589
Service revenues 3,054,717 5,544,509 4,437,429
------------ ------------ ---------------
$4,281,444 $8,614,112 $10,192,018
============ ============ ===============
</TABLE>
As of December 31, 1996 and 1997 and March 31, 1998, $1,079,851,
$1,716,222 and $1,658,165 (unaudited), respectively, of deferred revenue will
be recognized in periods after the year ending December 31, 1997 and 1998.
Associated deferred costs, primarily relating to commissions, amounted to
$228,713, $330,081 and $105,081 (unaudited) at December 31, 1996 and 1997 and
March 31, 1998, respectively. Commission expense is recognized in the period
the related revenue is recognized.
Revenue Recognition
The Company licenses software under noncancelable license agreements and
provides services including maintenance, implementation, training and
consulting services. In accordance with the provision of SOP 97-2, license
revenues are generally recognized when a noncancelable license agreement has
been signed, the product has been delivered, no significant vendor
obligations remain and collection of the related receivable is considered
probable. Revenues from maintenance agreements for maintaining, supporting
and providing periodic updates are recognized ratably over the maintenance
period, which in most instances is one year. Revenues for training and
consulting services are recognized as services are performed.
F-11
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prior to 1996, the Company entered into 18 exclusive reseller agreements
with third parties, which provided each such party with exclusive
distribution rights to sell the Company's products in a specified territory.
In consideration, the Company received an up-front nonrefundable fee, which
ranged from $25,000 to $300,000. Such fees were recognized as revenues, at
the time an agreement was executed. In 1995 and 1996, the Company bought
back, or otherwise reacquired, the distribution rights of 13 of its
resellers. As of December 31, 1996 and 1997, the Company had five third-party
resellers, the businesses of which were subsequently acquired. See Notes 10
and 15.
The Company also generates revenues relating to the sale of
payroll-related forms. Such revenues are recognized as the product is shipped
or as the services are rendered.
Until 1997, substantially all of the Company's revenues were derived from
its ULTIPRO for LAN product and related services. The Company has shifted its
focus from a product based on DOS and local area network (LAN) technologies,
ULTIPRO for LAN, to a product based on Windows and client/server
technologies, UltiPro for Windows. As a result of this shift and the decrease
in general market demand for DOS-based products, the Company's revenues from
its ULTIPRO for LAN product have been declining and are expected to decline
for the foreseeable future. There can be no assurance that the decline in
revenues from sales of ULTIPRO for LAN will not have a material adverse
effect on the Company's business, operating results and financial condition.
While the Company still derives revenues from the support, service and
limited sales of the ULTIPRO for LAN product line, its UltiPro for Windows
product and related support and services are expected to account for
substantially all of the Company's revenues for the foreseeable future.
However, to date, the Company has had only limited experience with customer
acceptance and use, as well as in implementing UltiPro for Windows.
Accordingly, the Company's future success will depend on maintaining and
increasing acceptance of UltiPro for Windows and related services and its
ability to successfully implement the product. There can be no assurance that
UltiPro for Windows will gain broad market acceptance or that the Company
will be able to successfully implement UltiPro for Windows in a timely
manner. Any factors adversely affecting the demand for UltiPro for Windows
would have a material adverse effect on the Company's business, operating
results and financial condition. The Company operates in a highly competitive
industry characterized by rapidly changing technology which could adversely
affect the Company's revenues and the related operating results.
Cost of Revenues
The cost of revenues consists of cost of license revenues, cost of service
revenues and cost of other revenues. Cost of license revenues consists of
fees payable to a third party for software products distributed by the
Company. Cost of service revenues consists of costs to provide consulting,
implementation, maintenance, technical support and training to the Company's
customers and the cost of providing periodic updates. Cost of other revenues
consist of costs related to sales of payroll-related forms.
Income Taxes
Income taxes were not provided for, or payable, by the Partnership.
Partners were taxed individually on their share of Partnership earnings.
Subsequent to the Transactions discussed in Note 10, the Company is subject
to corporate Federal and state income taxes. The Company accounts for income
taxes under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, Accounting for Income Taxes. SFAS 109 provides for a
liability approach under which deferred income taxes are provided based upon
enacted tax laws and rates applicable to the periods in which the taxes
become payable.
Acquired Intangibles
Acquired intangibles are being amortized on a straight-line basis over 30
months, the estimated useful life of such acquired assets (primarily
consisting of customer lists and personnel). In accordance
F-12
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
with SFAS No. 121, Accounting for the Impairment Of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, the Company continually evaluates
whether later events and circumstances have occurred that indicate the
remaining acquired intangibles may warrant revision or may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the related business'
undiscounted cash flows from operations over the remaining life of the cost
in excess of net assets of acquired businesses, in measuring whether such
cost is recoverable. Operating results as well as projected future cash flows
relating to the resellers acquired during 1996 indicated an impairment in
acquired intangibles as of December 31, 1996 and 1997. Accordingly, the
Company charged $5,050,308 and $308,206 to amortization of acquired
intangibles in 1996 and 1997, respectively, to reduce acquired intangibles to
their estimated realizable value.
Software Development Costs
SFAS No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed, requires capitalization of certain software
development costs subsequent to the establishment of technological
feasibility. Based on the Company's product development process,
technological feasibility is established upon completion of a working model.
Costs incurred by the Company between the achievement of technological
feasibility of the Company's products and the point at which the product is
ready for general release have historically substantially coincided, and, as
a result, software development costs required to be capitalized have been
immaterial.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments, consisting of cash and cash
equivalents, accounts receivable, due from stockholder, accounts payable and
borrowings approximate fair value due to their short-term nature.
Accounting for Stock Options
In October 1995, SFAS No. 123, Accounting for Stock-Based Compensation,
was issued and is effective for the year ending December 31, 1996. As
permitted by SFAS No. 123, the Company has continued to account for employee
stock options in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and has included the pro forma
disclosures required by SFAS No. 123 for the years ending December 31, 1996
and 1997 at Note 9.
SFAS No. 123 also applies to transactions in which equity instruments are
issued to acquire goods or services from nonemployees. Those transactions
must be accounted for based on the fair value of the consideration received
or the fair value of the instruments issued, whichever is more reliably
measurable. Accordingly, the Company has valued the issuance of such options
to nonemployees to purchase Common Stock using the Black-Scholes option
pricing model. See Note 10.
Per Share Amounts
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings Per Share. This statement simplifies the standards for
computing and presenting earnings per
F-13
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
share ("EPS") and makes them comparable to international EPS standards. SFAS
128 replaces the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the face
of the income statement for all entities with complex capital structures.
SFAS 128 became effective for financial statements issued for periods ending
after December 31, 1997 and requires restatement of all prior periods
presented. Basic EPS is calculated by dividing income available to common
stockholders by the weighted average number of shares of Common Stock
outstanding during each period. Diluted EPS includes the potential impact of
convertible securities and dilutive common stock equivalents using the
treasury stock method of accounting.
Basic and diluted loss per share for all periods presented include the
impact of the subsequent conversion of shares of Preferred and Common Stock
outstanding as described in Note 15, effected for the stock split discussed
in Note 15. Other common stock equivalents have not been included in the
computation of diluted loss per share as their impact is antidilutive.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, which is required to be adopted in fiscal 1998. This statement
establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. This
statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in financial statements and (b) display
the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of
statements of financial position. Comprehensive income is defined as the
change in equity during the financial reporting period of a business
enterprise resulting from non-owner sources.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information, which is required to be adopted in
fiscal 1998. This statement requires that a public business enterprise report
financial and descriptive information about its reportable operating segments
including, among other things, a measure of segment profit or loss, certain
specific revenue and expense items, and segment assets.
The Company has not yet determined the impact on its financial statement
presentation as a result of adopting SFAS Nos. 130 and 131.
3. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
-------------------------- ---------------
1996 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
Payroll ........................................ $ 488,521 $ 603,245 $ 149,149
Bonuses ........................................ 1,343,097 1,778,000 2,033,097
Other items individually representing less than
5% of total current liabilities ............... 568,878 1,842,292 2,128,876
------------ ------------ ---------------
$2,400,496 $4,223,537 $4,311,122
============ ============ ===============
</TABLE>
F-14
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
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 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 has 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 matures in January 1998 and is 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. See
Note 15.
12. PARTNERSHIP ACQUISITIONS
In 1995, the Partnership acquired the businesses of two third-party
resellers in exchange for a 1.25% interest in the Partnership. In connection
with these transactions, acquired intangibles were recorded as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase price, 1.25% interest in the
Partnership...................................... $250,000
Fair value of net assets acquired ................ --
----------
Acquired intangibles, primarily customer lists
and workforce ................................... $250,000
==========
</TABLE>
In June 1995, the Partnership acquired the business of another third-party
reseller. The controlling stockholders of the reseller were related to the
controlling shareholder of GP. The purchase price was a 3.86% limited
partnership interest in the Partnership and was recorded at the carryover
basis of the net assets transferred as the transactions occurred between
related parties.
Effective April 25, 1996, the Partnership acquired the businesses of the
Participating Resellers for special limited partnership interests in the
Partnership, the assumption of certain obligations and $660,555
F-22
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in cash. The acquisitions were accounted for under the purchase accounting
method. The purchase price, together with the net liabilities assumed, was
recorded as intangible assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase price ................................ $7,337,574
Net liabilities assumed ....................... 1,462,874
------------
Acquired intangibles, primarily customer lists
and personnel ................................ $8,800,448
============
</TABLE>
During 1996, subsequent to the Transactions, and during the year ended
December 31, 1997, the Company paid the former owners of the Participating
Resellers fees totaling approximately $130,000 and $213,000, respectively, in
accordance with an agreement entered into as part of the Transactions. Such
fees are included in general and administrative expenses in the accompanying
consolidated statements of operations. In accordance with the agreement,
monthly payments aggregating approximately $14,000 will continue until the
Company completes an initial public offering of its Common Stock.
13. RELATED PARTY TRANSACTIONS
Due from stockholder in the amount of $25,000 consists of
noninterest-bearing loan to a stockholder which was due on demand. This loan
was repaid in full in 1997.
The Partnership purchased substantially all of the assets of Strategic,
amounting to approximately $86,000 and $139,000 (through the date of the
Transactions) in 1995 and 1996, respectively. Also during 1995, the
Partnership paid approximately $61,000 to Strategic's employees for
commissions on sales to resellers. Effective January 1, 1995, the Partnership
terminated its royalty agreement with Strategic, which previously provided
for payments equal to 20% of gross collected sales revenues and 10% of
collected maintenance revenues, for payments in the aggregate amount of
$650,000 and a 12% limited partnership interest in the Partnership. At
December 31, 1995, $450,000 of the termination fee was outstanding. Such
amount was paid in 1996. The termination fee is reflected in general and
administrative expenses in the accompanying consolidated statement of
operations for the year ended December 31, 1995.
During 1995, the Partnership paid certain limited partners approximately
$57,000 in commissions as a result of the execution of reseller agreements.
In 1995 and 1996, the Partnership issued promissory notes to related
parties in the aggregate amount of $600,000 and $1,300,000, respectively,
which bore interest at 12%. The obligations of the Partnership under such
notes were assumed by the Company in connection with the Transactions and
were cancelled in May 1996 in consideration of the issuance of approximately
24,904 shares of Series A Convertible Preferred Stock (convertible into
252,004 shares of Common Stock) to the holders thereof.
14. EMPLOYEE BENEFIT PLAN
The Company provides retirement benefits for eligible employees, as
defined, through a defined contribution benefit plan that is qualified under
Section 401(k) of the Internal Revenue Code (the "Plan"). Contributions to
the Plan are made at the sole discretion of the Company and amounted to
$32,987, $55,851, $230,861, $65,967 (unaudited) and $82,717 (unaudited) for
the years ended December 31, 1995, 1996 and 1997 and for the three months
ended March 31, 1997 and 1998, respectively.
15. SUBSEQUENT EVENTS
Acquisition of Resellers
In February and March 1998, the Company acquired the businesses of five
third-party resellers of the Company's products (the "Acquired Resellers") in
exchange for an aggregate of 121,856 shares of the Company's Class B Common
Stock (convertible into 1,233,061 shares of Common Stock). Prior to these
F-23
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
acquisitions, the Company and its stockholders had no ownership interest in
the five Acquired Resellers and the financial and operating policies of the
Acquired Resellers were not controlled by the Company. The acquisition of
such Acquired Resellers was accounted for under the poolings-of-interest
method of accounting.
The following information details the results of operations of the Company
and the Acquired Resellers for periods before the poolings-of-interests
combinations were consummated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- ------------------------------
1995 1996 1997 1997 1998
-------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues:
The Company........... $ 2,473,802 $ 6,620,960 $ 14,136,575 $ 2,386,789 $ 5,943,542
Acquired Resellers .. 1,253,155 2,690,931 3,455,474 643,183 1,627,000
-------------- --------------- --------------- -------------- --------------
$ 3,726,957 $ 9,311,891 $ 17,592,049 $ 3,029,972 $ 7,570,542
============== =============== =============== ============== ==============
Net income (loss)
The Company........... $(3,946,412) $(19,996,651) $(15,490,898) $(4,272,034) $(7,504,470)
Acquired Resellers .. (784,699) (388,978) (526,058) (458,505) 575,000
-------------- --------------- --------------- -------------- --------------
$(4,731,111) $(20,385,629) $(16,016,956) $(4,730,539) $(6,929,470)
============== =============== =============== ============== ==============
Net income (loss) per
share-basic and
diluted
The Company........... $ (0.73) $ (2.62) $ (1.48) $ (0.47) $ (0.66)
Acquired Resellers .. 0.02 0.32 0.11 0.01 0.11
-------------- --------------- --------------- -------------- --------------
$ (0.71) $ (2.30) $ (1.37) $ (0.46) $ (0.55)
============== =============== =============== ============== ==============
</TABLE>
Modification to Escrow Agreement
In March 1998, the Class B Escrow Agreement was modified to provide that
all of the shares of Class B Common Stock held in escrow will be released
upon the execution of a firm underwriting agreement for the initial public
offering of the Company's capital stock on or before July 1, 1998.
Accordingly, approximately $4.2 million of compensation expense was recorded
as of the date of modification, representing 60,429 shares of Class B Common
Stock of the Company (convertible into 611,477 shares of Common Stock)
released to directors, officers and employees of the Company, multiplied by
the difference between the fair market value of the Class B Common Stock on
the date of the modification and the price paid by the holders of the shares.
Release Event
In March 1998, a Release Event occurred when the businesses of the five
Acquired Resellers were acquired by the Company and the GP determined that
such acquisitions should result in the liquidation of the Partnership.
Following the occurrence of such Release Event, the following events
occurred: (i) the Board of Directors declared a mandatory conversion of the
outstanding shares of the Company's Class A, Class B and Class C Common Stock
and such shares were converted into shares of Common Stock of the Company;
(ii) 68,747 of the shares of Class A Common Stock (convertible into 1,030,398
shares of Common Stock) held in escrow pursuant to the Class A Escrow
Agreement were released to the Partnership and the remaining shares held in
escrow pursuant to the Class A Escrow Agreement were returned to the Company
for cancellation; and (iii) the Partnership was dissolved and liquidated and
all of the shares of Common Stock held by the Partnership were distributed to
its partners, including the distribution of shares (convertible into
1,030,398 shares of Common Stock) to the Participating Resellers. No
modification of the original recorded purchase price of the Participating
Resellers was required.
F-24
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Initial Public Offering
In March 1998, the Company filed a Registration Statement with the
Securities and Exchange Commission in connection with the initial public
offering of its Common Stock. In connection with this offering, the Company
will declare a 10.119-for-1 split of its Common Stock. Such split has been
retroactively reflected in the accompanying financial statements.
Pro Forma Balance Sheet
The accompanying pro forma balance sheet at March 31, 1998 assumes the
effects of the following transactions: (i) the conversion of all of the
issued and outstanding shares of the Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock into shares of Common Stock, (ii) the
conversion of all of the issued and outstanding shares of Class A, Class B
and Class C Common Stock into shares of Common Stock which occurred on April
3, 1998, (iii) the liquidation of the Partnership and the resulting
cancellation of certain shares of Common Stock and (iv) the termination of
the Class A Escrow Agreement and resulting cancellation of certain shares of
Common Stock.
Litigation
On April 10, 1998, two of the nine Resellers whose businesses were
acquired in April 1996 filed a complaint against the Company and Scott
Scherr, individually, in the Court of Common Pleas, Franklin County, Ohio.
The claimants allege that they are entitled to a greater percentage equity
interest in the Company than is provided for pursuant to the express terms of
the agreements executed in connection with the sale of their respective
businesses to the Company. The claimants seek from the Company reformation of
these agreements, injunctive and declaratory relief and compensatory damages
in excess of $3.6 million. The Company believes it has meritorious defenses
to, and intends to, vigorously defend against the claims made in such
complaint. Nonetheless, the claims could be time-consuming and expensive to
defend and could result in a diversion of management's time. This litigation
is in a very early stage and the Company cannot accurately predict its
outcome. Consequently, there can be no assurance that these claims will not
have a material adverse effect on the Company's business, operating results
and financial condition.
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>
<CAPTION>
<S> <C>
1996 .................................................................... $14,073
1997 .................................................................... 14,073
1998 .................................................................... 7,873
---------
36,019
Less--amount representing interest ...................................... (4,656)
---------
Lease obligations reflected as current ($10,647) and noncurrent
($20,716)............................................................... $31,363
=========
</TABLE>
6. NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consists of two-year, 10% interest
bearing notes due to the President of the Company. The maturities of the
notes range from January 1, 1997 to October 20, 1997.
7. COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain equipment under noncancellable
operating lease agreements expiring at various dates. Total rent expense
under these agreements was $15,967. Future minimum annual rental commitments
related to these leases are $41,000 in 1996, $43,000 in 1997 and $14,000 in
1998.
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Company's financial position or results of operations.
8. EMPLOYEE BENEFIT PLAN
The Company provides retirement benefits for eligible employees, as
defined, through a defined contribution benefit plan (the "Plan") that is
qualified under Section 401(k) of the Internal Revenue Code. Employees must
provide at least one month of service and may contribute up to 15% of their
salary. The Company makes discretionary contributions to the Plan in which
employees vest after three years of service.
9. SUBSEQUENT EVENT
Effective April 25, 1996, the Company sold its operations and certain
assets and liabilities to USG. As a result, the results of operations of the
Company subsequent to that date are included with that of USG.
F-33
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
The Ultimate Software Group of Georgia, Inc.:
We have audited the accompanying balance sheet of The Ultimate Software
Group of Georgia, Inc. (a Georgia corporation) as of December 31, 1995, and
the related statements of operations, shareholders' deficit and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Ultimate Software
Group of Georgia, Inc. as of December 31, 1995, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
November 7, 1997.
F-34
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 2,423
Accounts receivable .................................................. 62,233
-----------------
Total current assets ............................................... 64,656
Property and equipment, net ........................................... 28,243
Other assets........................................................... 7,707
-----------------
Total assets........................................................ $ 100,606
=================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable ..................................................... $ 7,518
Accrued expenses ..................................................... 55,119
Deferred revenue ..................................................... 20,400
-----------------
Total current liabilities .......................................... 83,037
Notest payable to related parties ..................................... 246,000
-----------------
Total liabilities................................................... 329,037
-----------------
Commitments and contingencies (Note 7)
Shareholders' deficit:
Common Stock, $.10 par value, 1,000,000 shares authorized, 4,236
shares issued and outstanding ....................................... 424
Additional paid-in capital............................................ 119,076
Accumulated deficit................................................... (347,931)
-----------------
Total shareholders' deficit......................................... (228,431)
-----------------
Total liabilities and shareholders' deficit......................... $ 100,606
=================
</TABLE>
The accompanying notes to financial statements are an integral part of this
balance sheet.
F-35
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
<S> <C>
Revenues.................... $ 568,037
Operating expenses:
Cost of revenues .......... 141,793
Sales and marketing ....... 36,609
General and administrative 472,051
------------------
Total operating expenses 650,453
------------------
Operating loss .......... (82,416)
Interest expense ........... (35,500)
------------------
Net loss ................ $(117,916)
==================
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-36
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ...... 3,800 $380 $ 94,120 $(230,015) $(135,515)
Shares issued with notes payable 187 19 (19) -- --
Shares issued for services ..... 250 25 49,975 -- 50,000
Purchase and retirement of
treasury shares ................ -- -- (25,000) -- (25,000)
Net loss ........................ (117,916) (117,916)
-------- -------- ------------ ------------- ---------------
Balance, December 31, 1995 ...... 4,237 $424 $119,076 $(347,931) $(228,431)
======== ======== ============ ============= ===============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-37
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
<S> <C>
Cash flows from operating activities:
Net loss ................................................................. $(117,916)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ........................................... 94,276
Issuance of equity instruments for services ............................. 50,000
Changes in operating assets and liabilities:
Accounts receivable .................................................... (38,363)
Accounts payable ....................................................... (3,032)
Accrued expenses ....................................................... 54,997
Deferred revenue ....................................................... 20,400
------------------
Net cash provided by operating activities ................................. 60,362
------------------
Cash flows from investing activities:
Capital expenditures...................................................... (12,597)
------------------
Cash flows from financing activities:
Net payments of notes payable to related parties ......................... (37,000)
Purchase of treasury shares .............................................. (25,000)
------------------
Net cash used in financing activities ..................................... (62,000)
------------------
Net decrease in cash and cash equivalents.................................. (14,235)
Cash and cash equivalents, beginning of year .............................. 16,658
------------------
Cash and cash equivalents, end of year .................................... $ 2,423
==================
Supplemental disclosure of cash flow information:
Cash paid for interest ................................................... $ 29,500
==================
Supplemental disclosure of non-cash financing information:
In 1995, the Company issued 250 shares of Common Stock valued at $50,000
to certain employees for services performed.
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-38
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group of Georgia, Inc. (the "Company") is a
third-party reseller of The Ultimate Software Group, Inc.'s human resource
management and payroll software solutions. Substantially all the products are
developed and sold to the Company by The Ultimate Software Group, Inc.
("USG", formerly The Ultimate Software Group, Ltd.) which, subsequent to
December 31, 1995, acquired the business, operations and certain assets and
liabilities of the Company (see Note 8). The Company markets its products in
the State of Georgia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. There were no cash
equivalents at December 31, 1995.
Accounts Receivable
Accounts receivable are principally from end-users of the Company's
products. The Company performs periodic credit evaluations of its customers
and has determined that an allowance for estimated losses was not required at
December 31, 1995.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repairs
are charged to expense when incurred; betterments are capitalized. Upon the
sale or retirement of assets, the cost, accumulated depreciation and
amortization are removed from the accounts and any gain or loss is
recognized.
Other Assets
Other assets includes a fee of $100,000, net of accumulated amortization
of $92,793, paid to USG under an exclusive reseller agreement (the
"Agreement"). The Agreement allowed the Company to exclusively market USG's
products in Georgia. As a result of the sale of the Company's operations and
certain of its assets and liabilities to USG in April 1996 (see Note 8), the
carrying value reflects the estimated useful life of this asset through the
date of the acquisition.
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered.
Revenue Recognition
The Company licenses software under noncancellable license agreements and
provides services including maintenance, implementation, training and
consulting services. License revenues are generally recognized when a
noncancellable license agreement has been signed, the product has been
delivered, no significant vendor obligations remain and collection of the
related receivable is considered probable. Revenues from maintenance
agreements for maintaining, supporting and providing periodic updates are
recognized ratably over the maintenance period, which in most instances is
one year. Revenues for training and consulting services are recognized as
services are performed.
F-39
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Cost of Revenues
Cost of revenues consists of direct product costs and the costs of
providing consulting, implementation, maintenance, technical support and
training to the Company's customers.
Income Taxes
The Company has elected S Corporation status with the Internal Revenue
Service. Accordingly, net income (loss) and the related differences that
arise in the recording of income and expense items for financial reporting
and income tax reporting purposes are included in the individual income tax
returns of the shareholders and no income taxes are included in the
accompanying financial statements.
Because of the Company's net loss position, had the Company been a C
Corporation, subject to tax at the corporate level, no tax benefit would have
been recorded.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments, consisting of cash and cash
equivalents and accounts receivable approximate fair value due to their
short-term nature.
3. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
<S> <C>
Accrued compensation.. $53,982
Other ................ 1,137
-----------------
$55,119
=================
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED AS OF
USEFUL LIFE DECEMBER 31, 1995
<S> <C> <C>
Equipment ....................................... 3 years $ 44,719
Furniture, fixtures and improvements ............ 5 years 8,798
-----------------
53,517
Less-accumulated depreciation and amortization... (25,274)
-----------------
$ 28,243
=================
</TABLE>
F-40
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. NOTES PAYABLE TO SHAREHOLDERS
Notes payable to shareholders consists of the following unsecured amounts:
<TABLE>
<CAPTION>
<S> <C>
Due to shareholder, interest payable monthly at 12%, due February 1,
1998.................................................................... $ 46,000
Due to shareholder, interest payable monthly at 12%, due May 1, 1997 ... 50,000
Due to shareholder, interest payable monthly at 12%, due $50,000 on
May 1, 1997, $50,000 on July 1, 1997 and $50,000 on February 1, 1998 ... 150,000
---------
$246,000
=========
</TABLE>
6. EQUITY TRANSACTIONS
In 1995, the Company issued 187 shares of Common Stock to a shareholder in
connection with a borrowing. The borrowing is reflected in notes payable to
shareholders at December 31, 1995. No value was assigned to the stock that
was issued as it was issued to a related party.
In 1995, the Company issued 250 shares of Common Stock to an employee for
services performed. The fair value of this transaction was $50,000, based
upon prior sales of the Company's Common Stock.
In 1994, the Company became obligated to pay $25,000 to two shareholders
for the purchase of 250 treasury shares. The balance due of $25,000 was paid
to the shareholders in 1995.
7. COMMITMENTS AND CONTINGENCIES
The Company leases office space under a noncancellable operating lease
agreement expiring in December 1996. Total rent expense under this agreement
was $13,748. The future minimum annual rental commitment related to this
lease is approximately $14,000 in 1996.
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Company's financial position or results of operations.
8. SUBSEQUENT EVENT
Effective April 25, 1996, the Company sold its operations and certain
assets and liabilities to USG. As a result, the results of operations of the
Company subsequent to that date are included with that of USG.
F-41
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
The Ultimate Software Group Midwest, Ltd.:
We have audited the accompanying balance sheet of The Ultimate Software
Group Midwest, Ltd. (an Ohio Limited Partnership) as of December 31, 1995,
and the related statements of operations, partners' deficit and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Ultimate Software
Group Midwest, Ltd. as of December 31, 1995, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
January 30, 1998.
F-42
<PAGE>
THE ULTIMATE SOFTWARE GROUP MIDWEST, LTD.
BALANCE SHEET
<TABLE>
<CAPTION>
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>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED SHAREHOLDERS'
------------------- CAPITAL DEFICIT DEFICIT
SHARES AMOUNT
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 -- $ -- $ -- $ -- $ --
Sale of common stock ..... 100,000 1,000 249,000 -- 250,000
Net loss .................. -- -- -- (306,872) (306,872)
--------- -------- ------------ ------------- ---------------
Balance, December 31, 1995 100,000 $1,000 $249,000 $(306,872) $ (56,872)
========= ======== ============ ============= ===============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-53
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE DELAWARE VALLEY, LTD.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
<S> <C>
Cash flows from operating activities:
Net loss .................................................................. $(306,872)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ............................................ 163,604
Changes in operating assets and liabilities:
Accounts receivable ..................................................... (46,325)
Prepaid expenses ........................................................ (23,445)
Other assets ............................................................ (205,082)
Accounts payable ........................................................ 16,300
Accrued expenses ........................................................ 3,751
Deferred revenue ........................................................ 54,100
------------------
Net cash used in operating activities ...................................... (343,969)
------------------
Cash flows from investing activities:
Capital expenditures....................................................... (5,641)
------------------
Cash flows from financing activities:
Proceeds from note payable to shareholder ................................. 100,000
Proceeds from sale of common stock ........................................ 250,000
------------------
Net cash provided by financing activities .................................. 350,000
------------------
Net increase in cash and cash equivalents .................................. 390
Cash and cash equivalents, beginning of year ............................... --
------------------
Cash and cash equivalents, end of year ..................................... $ 390
==================
Supplemental disclosure of cash flow information:
Cash paid for interest .................................................... $ 10,981
==================
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-54
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE DELAWARE VALLEY, LTD.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group of the Delaware Valley, Ltd. (the "Company")
is a third-party reseller of the Ultimate Software Group, Inc.'s ("USG",
formerly The Ultimate Software Group, Ltd.) human resource management and
payroll software solutions. Substantially all the products are developed and
sold to the Company by USG which, subsequent to December 31, 1995, acquired
the business, operations and certain assets and liabilities of the Company
(see Note 6). The Company markets its products in the State of Pennsylvania.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. There were no cash
equivalents at December 31, 1995.
Accounts Receivable
Accounts receivable are from end-users of the Company's products. The
Company performs periodic credit evaluations of its customers and has
determined that an allowance for estimated losses was not required at
December 31, 1995.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repairs
are charged to expense when incurred; betterments are capitalized. Upon the
sale or retirement of assets, the cost, accumulated depreciation and
amortization are removed from the accounts and any gain or loss is
recognized.
Other Assets
Other assets includes a fee of $200,000, net of accumulated amortization
of $162,500, paid to USG under an exclusive reseller agreement (the
"Agreement"). The Agreement allows the Company to exclusively market USG's
products in Pennsylvania. As a result of the sale of the Company's operations
and certain of its assets and liabilities to USG in April 1996 (see Note 6),
the carrying value reflects the estimated useful life of this asset through
the date of the acquisition.
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered. Associated deferred costs, primarily relating to the cost
of the products for licensing contracts purchased from USG, amounted to
approximately $23,445 at December 31, 1995 and are included in prepaid
expenses.
Revenue Recognition
The Company licenses software under noncancellable license agreements and
provides services including maintenance, implementation, training and
consulting services. License revenue are generally recognized when a
noncancellable license agreement has been signed, the product has been
delivered, no significant vendor obligations remain and the collection of the
related receivable is deemed probable.
F-55
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE DELAWARE VALLEY, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Revenue from maintenance agreements for maintaining, supporting and providing
periodic upgrades are recognized ratably over the maintenance period, which
in most instances is one year. Revenues for training and consulting services
are recognized as services are performed.
Cost of Revenues
Cost of revenues consists of direct product costs and the costs of
providing consulting, implementation, maintenance, technical support and
training to the Company's customers.
Income Taxes
The Company has elected S Corporation status with the Internal Revenue
Service. Accordingly, net income (loss) and the related differences that
arise in the recording of income and expense items for financial reporting
and income tax reporting purposes are included in the individual income tax
returns of the shareholders and no income taxes are included in the
accompanying financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments, consisting of cash and cash
equivalents and accounts receivable and notes payable approximate fair value.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of computer equipment of $5,642, less
accumulated depreciation of $1,105. These assets are being depreciated over
their estimated useful lives of five years.
4. NOTE PAYABLE TO SHAREHOLDER
Note payable to shareholder represents an unsecured, 12% interest-bearing
note due to the President of the Company. Principal payments are due in equal
monthly installments of $2,778 over three years beginning February 1, 1996.
5. COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain equipment under noncancellable
operating lease agreements expiring at various dates. Total rent expense
under these agreements was $27,204. The future minimum annual rental
commitments related to these leases are approximately $11,100 in 1996, $6,900
in 1997 and $1,100 in 1998.
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Company's financial position or results of operations.
6. SUBSEQUENT EVENT
Effective April 25, 1996, the Company sold its operations and certain
assets and liabilities to USG. As a result, the results of operations of the
Company subsequent to that date are included with that of USG.
F-56
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of The Ultimate Software
Group of the Carolinas, Inc. and The Ultimate Software
Group of Virginia, Inc.:
We have audited the accompanying combined balance sheets of The Ultimate
Software Group of The Carolinas, Inc. (a North Carolina corporation) and The
Ultimate Software Group of Virginia, Inc. (a Virginia corporation)
(collectively, the "Companies") as of December 31, 1996 and 1997 and the
related combined statements of operations, shareholders' deficit and cash
flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of The
Ultimate Software Group of The Carolinas, Inc. and The Ultimate Software
Group of Virginia, Inc. as of December 31, 1996 and 1997 and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
January 20, 1998 (except with respect
to the matter discussed in Note 9, as
to which the date is February 25, 1998).
F-57
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1996 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 51,151 $ 32,651
Accounts receivable..................................... 136,819 271,929
Other current assets.................................... 29,666 97,890
----------- -----------
Total current assets.................................. 217,636 402,470
Equipment, net........................................... 17,555 18,963
Other assets............................................. 11,498 1,640
----------- -----------
Total assets.......................................... $ 246,689 $ 423,073
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accrued expenses........................................ $ 13,885 $ 46,671
Deferred revenue........................................ 110,337 579,390
Borrowings under line of credit agreement............... 129,841 109,091
Note payable............................................ 23,142 --
----------- -----------
Total current liabilities............................. 277,205 735,152
----------- -----------
Commitments and contingencies (Note 8)
Shareholders' deficit:
Common Stock -Carolinas, $1.00 par value, 100,000
shares authorized, 1,000 shares issued and outstanding 1,000 1,000
Common Stock -Virginia, $.01 par value, 10,000 shares
authorized, 5,150 shares issued and outstanding ...... 52 52
Additional paid-in capital ............................. 136,548 136,548
Accumulated deficit .................................... (168,116) (449,679)
----------- -----------
Total shareholders' deficit .......................... (30,516) (312,079)
----------- -----------
Total liabilities and shareholders' deficit ......... $ 246,689 $ 423,073
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
combined balance sheets.
F-58
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Revenues ................... $474,283 $648,067 $ 859,173
Operating expenses:
Cost of revenues .......... 181,150 289,665 325,388
Sales and marketing ....... 138,815 196,102 567,850
General and administrative 122,301 182,848 236,849
---------- ----------- -----------
Total operating expenses 442,266 668,615 1,130,087
---------- ----------- -----------
Operating income (loss) . 32,017 (20,548) (270,914)
Other expense, net ......... (5,600) (16,642) (10,649)
---------- ----------- -----------
Net income (loss) ........ $ 26,417 $(37,190) $ (281,563)
========== =========== ===========
</TABLE>
The accompanying notes to combined financial statements are an integral part
of these statements.
F-59
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
CAROLINAS VIRGINIA
------------------ ------------------
COMMON STOCK COMMON STOCK ADDITIONAL TOTAL
$1.00 PAR VALUE $.01 PAR VALUE PAID-IN ACCUMULATED SHAREHOLDERS'
------------------ ------------------ CAPITAL DEFICIT DEFICIT
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 . 1,000 $1,000 5,150 $52 $126,548 $(157,343) $ (29,743)
Net income ................. -- -- -- -- -- 26,417 26,417
-------- -------- -------- -------- ------------ ------------- ---------------
Balance, December 31, 1995 . 1,000 1,000 5,150 52 126,548 (130,926) (3,326)
Contribution of shares to
fund issuance of stock to
employees for services ... (10) (10) -- -- 10 -- --
Noncash issuance of stock
to employees for services 10 10 -- -- 9,990 -- 10,000
Net loss ................... -- -- -- -- -- (37,190) (37,190)
-------- -------- -------- -------- ------------ ------------- ---------------
Balance, December 31, 1996 . 1,000 1,000 5,150 52 136,548 (168,116) (30,516)
Net loss ................... -- -- -- -- -- (281,563) (281,563)
-------- -------- -------- -------- ------------ ------------- ---------------
Balance, December 31, 1997 . 1,000 $1,000 5,150 $52 $136,548 $(449,679) $(312,079)
======== ======== ======== ======== ============ ============= ===============
</TABLE>
The accompanying notes to combined financial statements are an integral part
of these statements.
F-60
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................... $ 26,417 $(37,190) $(281,563)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ..................... 15,365 17,477 15,558
Issuance of equity instruments for services ...... -- 10,000 --
Changes in operating assets and liabilities:
Accounts receivable .............................. (50,184) (54,193) (135,110)
Other current assets ............................. (17,993) (11,673) (68,224)
Accrued expenses ................................. (2,591) (5,407) 32,786
Deferred revenue ................................. (12,125) 102,962 469,053
---------- ----------- ------------
Net cash provided by (used in) operating activities . (41,111) 21,976 32,500
---------- ----------- ------------
Cash flows from investing activities:
Capital expenditures ................................ (13,804) (7,635) (7,108)
---------- ----------- ------------
Cash flows from financing activities:
Borrowings under line of credit agreement .......... 85,000 50,016 --
Payments under line of credit agreement ............. (14,277) (20,898) (20,750)
Borrowings under note payable ....................... -- 24,936 --
Payments under note payable ......................... -- (1,794) (23,142)
Payments on amounts due to related party ............ -- (40,500) --
---------- ----------- ------------
Net cash provided by (used in) financing activities . 70,723 11,760 (43,892)
---------- ----------- ------------
Net increase (decrease) in cash and cash equivalents 15,808 26,101 (18,500)
Cash and cash equivalents, beginning of year ........ 9,242 25,050 51,151
---------- ----------- ------------
Cash and cash equivalents, end of year ............... $ 25,050 $ 51,151 $ 32,651
========== =========== ============
Supplemental disclosure of cash flow information:
Cash paid for interest .............................. $ 5,600 $ 16,642 $ 12,046
========== =========== ============
</TABLE>
The accompanying notes to combined financial statements are an integral part
of these statements.
F-61
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group of the Carolinas, Inc. and the Ultimate
Software Group of Virginia, Inc. (collectively, the "Companies") is a
third-party reseller of The Ultimate Group Software, Inc.'s human resource
management and payroll software solutions. Substantially all of the
Companies' products are developed and sold to the Companies by The Ultimate
Software Group, Inc. ("USG", formerly The Ultimate Software Group, Ltd.). The
Companies market their products in the states of North Carolina, South
Carolina and Virginia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Combination
The combined financial statements include the accounts of The Ultimate
Software Group of the Carolinas, Inc. and The Ultimate Software Group of
Virginia, Inc. who have the same shareholders. Intercompany accounts and
transactions have been eliminated in combination.
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. There were no cash
equivalents at December 31, 1996 and 1997.
Accounts Receivable
Accounts receivable are principally from end-users of the Companies'
products. The Companies perform periodic credit evaluations of their
customers and determined that an allowance for estimated losses was not
required at December 31, 1996 and 1997.
Equipment
Equipment is stated at cost less accumulated depreciation and
amortization. Equipment is depreciated using the straight-line method over
the estimated useful lives of the assets. Maintenance and repairs are charged
to expense when incurred; betterments are capitalized. Upon the sale or
retirement of assets, the cost, accumulated depreciation and amortization are
removed from the accounts and any gain or loss is recognized.
Other Assets
Other assets includes a fee of $50,000, net of accumulated amortization of
$42,058 in 1996 and $47,534 in 1997 paid to USG under an exclusive reseller
agreement (the "Agreement"). The Agreement allowed the Companies to
exclusively market USG's products in North Carolina, South Carolina and
Virginia. Such asset is being amortized over its estimated period of benefit
of approximately 5 years.
In accordance with SFAS No. 121, Accounting for the Impairment Of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Companies
continually evaluate whether later events and circumstances have occurred
that indicate the remaining acquired intangibles may warrant revision or may
not be recoverable. When factors indicate that intangibles should be
evaluated for possible impairment, the Companies use an estimate of the
related business' undiscounted cash flows from operations in measuring
whether such cost is recoverable.
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered.
F-62
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Associated deferred costs, primarily relating to the cost of the products
for licensing contracts, amounted to approximately $21,000 and $97,000 at
December 31, 1996 and 1997, respectively, and are included in other assets in
the accompanying combined balance sheets.
Revenue Recognition
The Company licenses software under noncancellable license agreements and
provides services including maintenance, implementation, training and
consulting services. License revenues are generally recognized when a
noncancellable license agreement has been signed, the product has been
delivered, no significant vendor obligations remain and collection of the
related receivable is considered probable. Revenues from maintenance
agreements for maintaining, supporting and providing periodic updates are
recognized ratably over the maintenance period, which in most instances is
one year. Revenues for training and consulting services are recognized as
services are performed.
Cost of Revenues
Cost of revenues consists of direct product costs and the costs of
providing consulting, implementation, maintenance, technical support and
training to the Company's customers.
Income Taxes
The Companies have elected S Corporation status with the Internal Revenue
Service. Accordingly, net income (loss) and the related differences that
arise in the recording of income and expense items for financial reporting
and income tax reporting purposes are included in the individual income tax
returns of the shareholders and no income taxes are included in the
accompanying combined financial statements.
Because of the Companies' net loss position, had the Companies been a C
Corporations, subject to tax at the corporate level, no tax benefit would
have been recorded.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Companies' financial instruments, consisting of cash and cash
equivalents, accounts receivable, borrowings under line of credit
requirements, notes payable and due to related party approximate fair value
due to their short-term nature.
3. EQUIPMENT
Equipment consists of computer equipment of $39,339 in 1996 and $46,448 in
1997, less accumulated depreciation of $21,784 in 1996 and $27,485 in 1997.
These assets are depreciated over their estimated useful life of three years.
4. NOTE PAYABLE
Note payable at December 31, 1996 consists of a note to a bank which bears
interest at prime plus 1.5% (9.75% at December 31, 1996), payable monthly
through maturity. The note was collateralized by substantially all of the
Companies' assets and was repaid during 1997.
F-63
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. LINE OF CREDIT
In June 1995, the Companies entered into a $200,000 line of credit with a
bank which bears interest at prime plus 1.0% (9.5% at December 31, 1997),
payable quarterly through maturity. The line was renewed in December 1996 and
matures in January 1998. The line is collateralized by the Companies'
accounts receivable, as well as certain shares of common stock of the
Companies.
6. EQUITY TRANSACTIONS
In 1996, the Companies issued 10 shares of Common Stock to employees for
services performed. The shares are valued at $10,000 based on their estimated
fair value at the date of issuance and related expense is included in general
and administrative expense in the accompanying combined statement of
operations for the year ended December 31, 1996.
7. DUE TO RELATED PARTY
Due to related party consists of noninterest-bearing loans that are due on
demand.
8. COMMITMENTS AND CONTINGENCIES
The Companies lease office space under a noncancellable operating lease
agreement expiring in December 1998. Total rent expense under this agreement
was $12,578, $14,720 and $17,186 in 1995, 1996 and 1997. The future minimum
annual rental commitment related to this lease is approximately $12,000 in
1998.
From time to time, the Companies may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Companies are not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Companies' financial position or results of operations.
9. SUBSEQUENT EVENT
On February 25, 1998, the Companies exchanged substantially all of their
net assets for 30,677 shares of Class B Common Stock of USG in a transaction
to be accounted for under the poolings-of-interest method of accounting .
F-64
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
The Ultimate Software Group of New York
and New England, G.P.:
We have audited the accompanying balance sheets of The Ultimate Software
Group of New York and New England, G.P. (a New York general partnership) as
of December 31, 1996 and 1997 and the related statements of operations,
partners' deficit and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Ultimate Software
Group of New York and New England, G.P. as of December 31, 1996 and 1997 and
the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
January 15, 1998 (except with respect
to the matter discussed in Note 7, as
to which the date is February 24, 1998).
F-65
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1996 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................ $321,366 $ 563,795
Accounts receivable, net ................. 72,142 196,642
Prepaid expenses and other current assets 66,776 153,890
---------- -----------
Total current assets ................... 460,284 914,327
Property and equipment, net ............... 46,472 45,000
Other assets .............................. 142,268 32,601
---------- -----------
Total assets ........................... $649,024 $ 991,928
========== ===========
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable ......................... $ 47,714 $ 88,565
Accrued expenses ......................... 75,604 182,091
Deferred revenue ......................... 481,198 932,654
Customer deposits ........................ 113,008 137,127
---------- -----------
Total current liabilities .............. 717,524 1,340,437
Commitments and contingencies (Note 6)
Total partners' deficit ................ (68,500) (348,509)
---------- -----------
Total liabilities and partners' deficit $649,024 $ 991,928
========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-66
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Revenues.................... $ 883,656 $1,281,534 $1,776,030
Operating expenses:
Cost of revenues .......... 416,887 589,635 767,955
Sales and marketing ....... 683,192 515,015 673,327
General and administrative 182,530 348,200 467,142
------------ ------------ ------------
Total operating expenses 1,282,609 1,452,850 1,908,424
------------ ------------ ------------
Operating loss ........... (398,953) (171,316) (132,394)
Other income ............... 858 6,111 13,483
------------ ------------ ------------
Net loss ................. $ (398,095) $ (165,205) $ (118,911)
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-67
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
STATEMENTS OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
THE TOTAL
NEW COUNTRY WEDGEWOOD PARTNERS'
DEVELOPMENT, INC. MCNEARY, INC. GROUP, INC. DEFICIT
<S> <C> <C> <C> <C>
Balance, December 31, 1994 .. $ 157,425 $ 52,475 $ 209,900 $ 419,800
Sale of partnership
interest................... (127,875) 127,875 -- --
Partners' contributions .... 56,250 18,750 -- 75,000
Net loss.................... (149,286) (49,762) (199,047) (398,095)
----------------- --------------- ------------- -------------
Balance, December 31, 1995 .. (63,486) 149,338 10,853 96,705
Net loss.................... (61,952) (20,651) (82,602) (165,205)
----------------- --------------- ------------- -------------
Balance, December 31, 1996 .. (125,438) 128,687 (71,749) (68,500)
Net loss.................... (44,592) (14,863) (59,456) (118,911)
Partners' distributions .... (60,184) (20,183) (80,731) (161,098)
----------------- --------------- ------------- -------------
Balance, December 31, 1997 .. $(230,214) $ 93,641 $ (211,936) $ (348,509)
================= =============== ============= =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-68
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $(398,095) $(165,205) $(118,911)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization ........................ 130,005 129,929 126,991
Changes in operating assets and liabilities:
Accounts receivable ................................. (93,881) 70,549 (124,500)
Prepaid expenses and other current assets .......... 8,106 (40,783) (87,114)
Other assets ........................................ (7,200) (701) 3,000
Accounts payable .................................... 30,092 12,296 40,851
Accrued expenses .................................... 8,446 40,824 106,487
Deferred revenue .................................... 219,713 261,485 451,456
Customer deposits ................................... 50,449 (57,900) 24,119
------------ ------------ ------------
Net cash provided by (used in) operating activities .... (52,365) 250,494 422,379
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures ................................... (26,183) (15,087) (18,852)
------------ ------------ ------------
Cash flows from financing activities:
Contributions .......................................... 75,000 -- --
Distributions .......................................... -- -- (161,098)
------------ ------------ ------------
Net cash provided by (used in) financing activities .... 75,000 -- (161,098)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ... (3,548) 235,407 242,429
Cash and cash equivalents, beginning of year ........... 89,507 85,959 321,366
------------ ------------ ------------
Cash and cash equivalents, end of year .................. $ 85,959 $ 321,366 $ 563,795
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-69
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group of New York and New England, G.P. (the
"Partnership") is a third-party reseller of The Ultimate Software Group,
Inc.'s human resource management and payroll software solutions.
Substantially all of the products are developed and sold to the Partnership
by The Ultimate Software Group, Inc. ("USG", formerly The Ultimate Software
Group, Ltd.). The Partnership markets its products in the states of
Connecticut, Maine, Massachusetts, New Hampshire, New York, Rhode Island and
Vermont.
The general partners share in income and loss and have ownership
percentages as follows:
<TABLE>
<CAPTION>
OWNERSHIP SHARE OF INCOME
PERCENTAGE AND LOSS
<S> <C> <C>
New County Development, Inc... 37.5% 37.5%
McNeary, Inc. ................ 12.5 12.5
The Wedgewood Group, Inc. ... 50.0 50.0
------------ ---------------
100.0% 100.0%
============ ===============
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. There were no cash
equivalents at December 31, 1996 and 1997.
Accounts Receivable
Accounts receivable are principally from end-users of the Partnership's
products. The Partnership performs periodic credit evaluations of its
customers and has determined the allowance for estimated losses to be $10,000
at December 31, 1996 and 1997, respectively.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repairs
are charged to expense when incurred; betterments are capitalized. Upon the
sale or retirement of assets, the cost, accumulated depreciation and
amortization are removed from the accounts and any gain or loss is
recognized.
Other Assets
Other assets includes a fee of $400,000, net of accumulated amortization
of $266,666 and $373,333 in 1996 and 1997, respectively, paid to USG under an
exclusive reseller agreement (the "Agreement"). The Agreement allowed the
Partnership to exclusively market USG's products in Connecticut, Maine,
Massachusetts, New Hampshire, New York (except New York City and Long
Island), Rhode Island and Vermont. Such asset is being amortized over its
estimated period of benefit of approximately 5 years.
In accordance with SFAS No. 121, Accounting for the Impairment Of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the
Partnership continually evaluates whether later events and circumstances have
occurred that indicate the remaining acquired intangibles may warrant
revision or may not be recoverable. When factors indicate that intangibles
should be evaluated for possible impairment, the Partnership uses an estimate
of the related business' undiscounted cash flows from operations in measuring
whether such cost is recoverable.
F-70
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered.
Associated deferred costs, primarily relating to the cost of the products
for licensing such contracts, amounted to approximately $63,000 and $149,000
at December 31, 1996 and 1997, respectively, and are included in other assets
in the accompanying combined balance sheets.
Revenue Recognition
The Company licenses software under noncancellable license agreements and
provides services including maintenance, implementation, training and
consulting services. License revenues are generally recognized when a
noncancellable license agreement has been signed, the product has been
delivered, no significant vendor obligations remain and collection of the
related receivable is considered probable. Revenues from maintenance
agreements for maintaining, supporting and providing periodic updates are
recognized ratably over the maintenance period, which in most instances is
one year. Revenues for training and consulting services are recognized as
services are performed.
Cost of Revenues
Cost of revenues consists of direct product costs and the costs of
providing consulting, implementation, maintenance, technical support and
training to the Partnership's customers.
Income Taxes
The Partnership is organized as a general partnership. Accordingly, net
income (loss) and the related differences that arise in the recording of
income and expense items for financial reporting and income tax reporting
purposes are included in the individual income tax returns of the partners
and no income taxes are included in the accompanying financial statements.
Because of the Partnership's net loss position, had the Partnership been a
C Corporation, subject to tax at the corporate level, no tax benefit would
have been recorded.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Partnership's financial instruments, consisting of cash and cash
equivalents, accounts receivable and customer deposits approximate fair value
due to their short-term nature.
F-71
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------
1996 1997
<S> <C> <C>
Accrued payroll............................................... $75,604 $ 82,091
Accrued legal................................................. -- 85,000
Other ........................................................ -- 15,000
--------- ----------
$75,604 $182,091
========= ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE AS OF DECEMBER 31,
----------- ---------------------
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>
(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> <C>
Distributions to shareholders $ 75,000 $ --
Professional fees ............. -- 130,000
Other ......................... 66,586 15,413
---------- ---------
$141,586 $145,413
========== =========
</TABLE>
F-79
<PAGE>
ULTIMATE INVESTORS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. NOTES RECEIVABLE
Notes receivable represents amounts due for trade receivables which have
been documented in the form of a note and bear interest at rates ranging from
9 to 12%.
5. EQUIPMENT
Equipment consists of assets amounting to $40,434 in 1996 and $46,426 in
1997, less accumulated depreciation of $27,194 in 1996 and $41,488 in 1997.
These assets are being depreciated over their estimated useful lives of three
years.
6. LINE OF CREDIT
The Company has $130,000 available under a line of credit agreement with a
bank. The line of credit bears interest at an annual rate of 9%. The line of
credit renews annually. Amounts outstanding under the line of credit were
zero and $100,000 as of December 31, 1996 and 1997, respectively. The
outstanding balance was repaid subsequent to year end.
7. EQUITY TRANSACTIONS
In 1995, the Company issued 3,825 shares of Common Stock to an employee
for services rendered. The fair value of this transaction was $3,000, based
upon prior sales of the Company's Common Stock. The Company also granted to
an employee options to purchase 7,650 shares of its Common Stock in exchange
for services rendered. Such options were valued on the date of grant based
upon prior sales of the Company's Common Stock. The options vested at 50% per
year. The related compensation expense is included in sales and marketing
expenses in the accompanying 1995 and 1996 consolidated statements of
operations. The options were exercised by the employee in January 1998.
Also, in 1995, the Company sold 7,650 shares of Common Stock for $26,775,
for which the Company received $12,500 in cash and a note for the balance of
$14,275. The balance due on the note is reflected in the consolidated
statements of shareholders' deficit as a stock subscription receivable at
December 31, 1995.
In 1996, an employee purchased 3,825 shares of the Company's Common Stock
for $13,387. A portion of the employee's 1996 sales bonus was applied to the
purchase price and a note was received for the balance of $7,787, which is
reflected in the consolidated statements of shareholders' deficit as a stock
subscription receivable at December 31, 1996.
In 1996, the Company granted 11,025 shares of Common Stock to an employee
for services rendered, of which 3,750 shares were issued at December 31,
1996. The related compensation expense is included in general and
administrative expenses in the accompanying 1996 consolidated statement of
operations. The remaining 7,275 shares were issued in 1997.
8. COMMITMENTS AND CONTINGENCIES
The Company leases office space under a noncancellable operating lease
agreement expiring in September 2001. Total rent expense under this agreement
was $24,009, $61,414 and $56,628 in 1995, 1996 and 1997, respectively. The
future minimum annual rental commitment related to this lease is
approximately $212,000 through 2001.
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Company's financial position or results of operations.
F-80
<PAGE>
ULTIMATE INVESTORS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. SUBSEQUENT EVENT
On March 4, 1998, the Company exchanged substantially all of its assets
and liabilities for 38,000 shares of Class B Common Stock of USG in a
transaction to be accounted for under the poolings-of-interest method of
accounting.
F-81
<PAGE>
[DESCRIPTION OF INSIDE BACK COVER]
Full-length side view of man in suit and tie running across page with arms
stretched out in running motion. Placed horizontally between the man's legs is
the word "Speed." At the bottom of the page, beneath the full-length view of
the man are placed the words: "Leading technologies translate into increased
speed: faster processing times, faster accessing of data, faster implementation
and faster system updates." Followed by another paragraph: "US Group leverages
leading technologies in UltiPro for Windows -- a 32 bit, object-oriented
HRMS/payroll solution designed to take advantage of Microsoft SQL Server and
Microsoft NT."
<PAGE>
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary ....................... 3
Risk Factors ............................. 6
Use of Proceeds .......................... 14
Dividend Policy .......................... 14
Capitalization ........................... 15
Dilution ................................. 16
Selected Consolidated Financial Data .... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .............................. 18
Business ................................. 29
Management ............................... 44
Certain Transactions ..................... 49
Principal Stockholders ................... 52
Description of Capital Stock ............. 54
Shares Eligible for Future Sale .......... 58
Underwriting ............................. 60
Legal Matters ............................ 61
Experts .................................. 61
Additional Information ................... 62
Index to Consolidated Financial
Statements .............................. F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN AD DITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3,250,000 SHARES
[US GROUP LOGO]
COMMON STOCK
PROSPECTUS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
VOLPE BROWN WHELAN
& COMPANY
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
offering of the Registrant's common stock, $0.01 par value per share (the
"Common Stock"), pursuant to this Registration Statement that will be paid
fully by the Registrant. All amounts shown are estimates, except the
Securities and Exchange Commission registration fee, the NASD filing fee and
the NASDAQ National Market listing fees.
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee $14,333
NASD filing fee .................................... 5,359
NASDAQ listing fee .................................. 60,000
"Blue Sky" fees and expenses ........................ 15,000
Printing, engraving and postage expenses ............ 250,000
Accounting fees and expenses ........................ 150,000
Legal fees and expenses ............................. 350,000
Transfer agent fees and expenses .................... 5,000
Miscellaneous ....................................... 35,308
---------
Total ............................................. 885,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of The Ultimate Software Group, Inc. (the
"Company") provides for indemnification, to the fullest extent permitted by
law, of any person who was or is a director, officer, employee or agent of
the Company or was serving in such capacity at another entity at the
Company's request (each, an "Indemnified Person"), and is a party to, or is
threatened to be made a party to, any threatened, pending or completed
action, suit or proceeding, whether derivative or not. Indemnification
continues as to an Indemnified Person who has ceased to be a director,
officer, employee or agent and inures to the benefit of the heirs, executors
and administrators of an Indemnified Person. The indemnification provisions
in the Certificate of Incorporation are non-exclusive and allow the Company
to indemnify by agreement or vote of stockholders or disinterested directors.
Any indemnification is subject to applicable law requiring a case-by-case
determination that indemnification is appropriate.
The Certificate of Incorporation permits the Company to, and the Company
intends to, purchase liability insurance on behalf of any such person against
any liability which may be asserted.
The Certificate of Incorporation also authorizes, to the fullest extent
allowed by law, indemnification for expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement, as well as the advancement
of expenses to an Indemnified Person.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since the Company's formation in April 1996, the Company has issued the
following securities that were not registered under the Securities Act of
1933, as amended (the "Act"). Except where noted, all issuances were made in
transactions exempt from the registration requirements pursuant to Section
4(2) of the Act or Regulation D promulgated thereunder ("Regulation D")
relative to sales by an issuer not involving a public offering.
In April 1996, The Ultimate Software Group, Ltd. (the "Partnership")
transferred and conveyed its then existing business and operations to the
Company pursuant to an Asset Contribution Agreement between the Partnership
and the Company. In such transfer, the Company acquired substantially all of
the assets of the Partnership, and assumed certain specified liabilities
related to the business and assets so transferred. In consideration for the
transfer, the Company issued to the Partnership 236,300 shares of the
II-1
<PAGE>
Company's Class A Common Stock, par value $0.01 per share (the "Class A
Common Stock"), and 536,269 shares of the Company's Class B Common Stock, par
value $0.01 per share (the "Class B Common Stock"), and paid $500,000 in cash
to the Partnership.
On April 25 1996, J.P. Morgan Investment Corporation ("Morgan") and Sixty
Wall Street SBIC Fund, L.P. (an affiliate of Morgan), purchased an aggregate
of 95,787 newly issued shares of Series A Convertible Preferred Stock, par
value $0.01 per share (the "Series A Convertible Preferred Stock"), from the
Company, for an aggregate cash purchase price of $5,000,000.
On April 25 1996, pursuant to the Company's Nonqualified Stock Option Plan
(the "Plan"), the Company granted to Patrick A. Gerschel and Marc D. Scherr,
options to purchase up to an aggregate of 31,933 shares of Class C Common
Stock, par value $0.01 per share (the "Class C Common Stock"). These grants
were made pursuant to the exemption from registration provided by Rule 701 of
the Rules and Regulations promulgated under the Act.
Between April 1996 and December 31, 1997, the Company granted to certain
of its officers, directors and employees options to purchase up to an
aggregate of up to 171,561 shares of its Class C Common Stock and an option
to purchase 50 of such shares was exercised for $52.50 per share in cash.
These grants were made pursuant to the exemption from registration contained
in Section 3(b) of the Securities Act and Rule 701 promulgated thereunder
relative to sales pursuant to certain compensatory benefits plans.
On April 26, 1996, the Company issued an aggregate of 272,157 shares of
Class B Common Stock to the shareholders of The Ultimate Software Group,
Inc., a Florida corporation ("GP"), and Strategic Image Systems, Inc., a
Florida corportion ("Strategic"), in exchange for the assignment and transfer
by such shareholders to the Company of all of the outstanding capital stock
of GP and Strategic.
On May 24, 1996, the Company sold 95,786 shares of Series A Convertible
Preferred Stock to certain investors, for an aggregate of $5,000,000 in cash,
forgiveness of debt and other consideration.
From December 1996 through September, 1997, the Company sold 295,650
shares of newly issued Series B Convertible Preferred Stock, par value $0.01
per share, to certain investors (including 153,257 shares to HarbourVest
Partners V -- Direct Fund, L.P.) for an aggregate amount of $15,432,930 in
cash.
In February and March 1998, the Company issued a total of 121,856 shares
of Class B Common Stock in connection with the acquisition of the businesses
of five third-party resellers of the Company's products.
Unless otherwise indicated, all sales referred to in this Item 15 were to
purchasers with whom the Company has no affiliation, except in certain
instances when such purchasers were already stockholders of the Company. No
underwriters were involved in connection with the sales referred to in this
Item 15.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
<S> <C>
1.1 Form of Underwriting Agreement.**
3.1 Certificate of Incorporation.**
3.2 Certificate of Amendment of Certificate of Incorporation.**
3.3 Bylaws.**
3.4 Form of Certificate of Incorporation to be in effect immediately prior to the
consummation of the Offering.**
3.5 Form of Bylaws to be in effect immediately prior to the consummation of the
Offering.**
4.1 Form of Certificate for the Common Stock, par value $0.01 per share.+
5.1 Opinion of Dewey Ballantine LLP.+
10.1 Shareholders Rights Agreement, dated June 6, 1997 among the Company and certain
stockholders named therein.*
10.2 Asset Purchase Agreement, dated February 2, 1998, among The Ultimate Software Group
of Virginia, Inc., the Company and certain principals named therein.*
10.3 Asset Purchase Agreement, dated February 2, 1998, among the Company, The Ultimate
Software Group of the Carolinas, Inc. and certain principals named therein.*
10.4 Asset Acquisition Agreement, dated February 20, 1998, among the Company, The Ultimate
Software Group of Northern California, Inc. and certain principals named therein.*
10.5 Asset Purchase Agreement dated March 4, 1998, among the Company, Ultimate Investors
Group, Inc. and certain principals named therein.*
10.6 Agreement and Plan of Merger dated February 24, 1998, among the Company, ULD Holding
Corp., Ultimate Software Group of New York and New England, G.P. and certain
principals named therein.*
10.7 Nonqualified Stock Option Plan.**
10.8 Lease Agreement, between the Company, as successor to The Ultimate Software Group,
Ltd., and Gary A. Poliakoff as Trustee for Emerald Lake Trust, dated November 16,
1993 and extensions thereof.**
21.1 Subsidiaries of the registrant.**
23.1 Consent of Arthur Andersen LLP.**
23.2 Consent of Dewey Ballantine LLP (included in Exhibit 5.1).+
24.1 Powers of Attorney (included on signature page hereto).*
27.1 Financial Data Schedule.**
</TABLE>
- ------------
*Previously filed.
**Filed herewith.
+To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES.
None.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is,
II-3
<PAGE>
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion
of the counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement
certificates in such denominations, and registered in such names, as required
by the underwriters to permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
1. For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on April 23, 1998.
THE ULTIMATE SOFTWARE GROUP, INC.
By: /s/ Mitchell K. Dauerman
-------------------------------
Mitchell K. Dauerman,
Executive Vice President,
Chief Financial
Officer and Treasurer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below on April 23, 1998 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* President, Chief Executive Officer
- ----------------------------- and Director
Scott Scherr
/s/ Mitchell K. Dauerman Executive Vice President, Chief Financial
- ----------------------------- Officer and Treasurer
Mitchell K. Dauerman
* Executive Vice President, Chief
- ----------------------------- Technology Officer and Director
Alan S. Goldstein
* Director
- -----------------------------
Marc D. Scherr
* Director
- -----------------------------
Ofer Nemirovsky
* Director
- -----------------------------
LeRoy A. Vander Putten
* Director
- -----------------------------
Rick Wilber
* Director
- -----------------------------
Robert A. Yanover
*By /s/ Mitchell K. Dauerman
- ------------------------
(Mitchell K. Dauerman
Attorney-in-Fact)
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
1.1 Form of Underwriting Agreement.**
3.1 Certificate of Incorporation.**
3.2 Certificate of Amendment of Certificate of Incorporation.**
3.3 Bylaws.**
3.4 Form of Certificate of Incorporation to be in effect immediately prior to the
consummation of the Offering.**
3.5 Form of Bylaws to be in effect immediately prior to the consummation of the
Offering.**
4.1 Form of Certificate for the Common Stock, par value $0.01 per share.+
5.1 Opinion of Dewey Ballantine LLP.+
10.1 Shareholders Rights Agreement, dated June 6, 1997 among the Company and certain
stockholders named therein.*
10.2 Asset Purchase Agreement, dated February 2, 1998, among The Ultimate Software Group
of Virginia, Inc., the Company and certain principals named therein.*
10.3 Asset Purchase Agreement, dated February 2, 1998, among the Company, The Ultimate
Software Group of the Carolinas, Inc. and certain principals named therein.*
10.4 Asset Acquisition Agreement, dated February 20, 1998, among the Company, The Ultimate
Software Group of Northern California, Inc. and certain principals named therein.*
10.5 Asset Purchase Agreement dated March 4, 1998, among the Company, Ultimate Investors
Group, Inc. and certain principals named therein.*
10.6 Agreement and Plan of Merger dated February 24, 1998, among the Company, ULD Holding
Corp., Ultimate Software Group of New York and New England, G.P. and certain
principals named therein.*
10.7 Nonqualified Stock Option Plan.**
10.8 Lease Agreement, between the Company, as successor to The Ultimate Software Group,
Ltd., and Gary A. Poliakoff as Trustee for Emerald Lake Trust, dated November 16,
1993 and extensions thereof.**
21.1 Subsidiaries of the registrant.**
23.1 Consent of Arthur Andersen LLP.**
23.2 Consent of Dewey Ballantine LLP (included in Exhibit 5.1).+
24.1 Powers of Attorney (included on signature page hereto).*
27.1 Financial Data Schedule.**
</TABLE>
- ------------
*Previously filed.
**Filed herewith.
+To be filed by amendment.
<PAGE>
__________ Shares(1)
THE ULTIMATE SOFTWARE GROUP, INC.
Common Stock
UNDERWRITING AGREEMENT
__________, 1998
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
VOLPE BROWN WHELAN & CO., LLC
As representatives of the
several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
The Ultimate Software Group, Inc., a Delaware corporation (the
"COMPANY"), proposes to issue and sell ____________ shares of its common stock,
$.01 par value per share (the "FIRM SHARES"), to the several underwriters named
in Schedule I hereto (the "UNDERWRITERS"). The Company and certain stockholders
of the Company named in Schedule II hereto (the "SELLING STOCKHOLDERS")
severally propose to sell to the several Underwriters not more than an
additional _______ shares of common stock, $.01 par value per share (the
"ADDITIONAL SHARES"), of which _________ shares are to be issued and sold by
the Company and an aggregate of _________ shares are to be sold by the Selling
Stockholders in the respective amounts set forth opposite each such Selling
Stockholder's name in Schedule II hereto, if requested by the Underwriters as
provided in Section 2 hereof. The Firm Shares and the Additional Shares are
hereinafter referred to collectively as the "SHARES". The shares of common
stock of the Company to be outstanding after giving effect to the sales
contemplated hereby are hereinafter referred to as the "COMMON STOCK". The
Company and
- --------------
(1) Insert number of shares to be sold (not including green shoe).
<PAGE>
the Selling Stockholders are hereinafter sometimes referred to collectively as
the "SELLERS."
SECTION 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to
Rule 430A under the Act, is hereinafter referred to as the "REGISTRATION
STATEMENT"; and the prospectus in the form first used to confirm sales of
Shares is hereinafter referred to as the "PROSPECTUS". If the Company has filed
or is required pursuant to the terms hereof to file a registration statement
pursuant to Rule 462(b) under the Act registering additional shares of Common
Stock (a "RULE 462(B) REGISTRATION STATEMENT"), then, unless otherwise
specified, any reference herein to the term "Registration Statement" shall be
deemed to include such Rule 462(b) Registration Statement.
SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements. On
the basis of the representations and warranties contained in this Agreement,
and subject to its terms and conditions, the Company agrees to issue and sell,
and each Underwriter agrees, severally and not jointly, to purchase from the
Company at a price per Share of $______ (the "PURCHASE PRICE") the number of
Firm Shares set forth opposite the name of such Underwriter in Schedule I
hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell, and the Underwriters shall have the right to purchase, up to
_________ Additional Shares from the Company at the Purchase Price. On the
basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, each Selling Stockholder agrees, severally
and not jointly, to sell, and the Underwriters shall have the right to
purchase, severally and not jointly, up to _______ Additional Shares from such
Selling Stockholders at the Purchase Price. Additional Shares may be purchased
solely for the purpose of covering over-allotments made in connection with the
offering of the Firm Shares. The Underwriters may exercise their right to
purchase Additional Shares in whole or in part from time to time by giving
written notice thereof to the Company, the Attorneys and the Custodian (as
defined in Section 7(c) below) within 30 days after the date of this Agreement.
You shall give any such notice on behalf of the Underwriters and such notice
shall specify the aggregate number of Additional Shares to be purchased
pursuant to such exercise and the date for payment and delivery thereof, which
date shall be a business day (i) no earlier than two business days after such
notice has been given (and, in any event, no
2
<PAGE>
earlier than the Closing Date (as hereinafter defined)) and (ii) no later than
ten business days after such notice has been given. If any Additional Shares
are to be purchased, each Underwriter, severally and not jointly, agrees to
purchase from the Company and each Selling Stockholder the number of Additional
Shares (subject to such adjustments to eliminate fractional shares as you may
determine) which bears the same proportion to the total number of Additional
Shares to be purchased from the Company and the Selling Stockholders as the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I bears to the total number of Firm Shares. Notwithstanding anything
to the contrary set forth above, in the event that the Underwriters exercise
their right to purchase Additional Shares in part only, the Additional Shares
to be purchased shall be first allocated on a pro rata basis to the Selling
Stockholders and then to the Company.
Each Seller hereby agrees 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), except to the Underwriters pursuant to this Agreement, for
a period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding
the foregoing, during such period (i) the Company may grant stock options
pursuant to the Company's existing stock option plan; (ii) the Company may
issue shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof and (iii) the Selling
Stockholders may transfer shares of Common Stock, or any securities convertible
into or exercisable or exchangeable for Common Stock, pursuant to bona fide
gifts whereby the transferee agrees in writing to be bound by the restrictions
set forth above. The Company also agrees not to file any registration statement
with respect to any shares of Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock for a period of 180 days after
the date of the Prospectus without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation. In addition, each Selling Stockholder
agrees that, for a period of 180 days after the date of the Prospectus without
the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation, it will not 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. The Company
shall, prior to or concurrently with the execution of this Agreement, deliver
an agreement executed by (i) each Selling Stockholder, (ii) each of the
directors and officers of the Company and (iii) each stockholder listed on
Annex I hereto to the effect that such person will not, during the period
3
<PAGE>
commencing on the date such person signs such agreement and ending 180 days
after the date of the Prospectus, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation, (A) engage in any of the
transactions described in the first sentence of this paragraph or (B) 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.
SECTION 3. Terms of Public Offering. The Company is advised by you
that the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations
and registered in such names as Donaldson, Lufkin & Jenrette Securities
Corporation shall request no later than two business days prior to the Closing
Date or the applicable Option Closing Date (as defined below), as the case may
be. The Shares shall be delivered by or on behalf of the Sellers, with any
transfer taxes thereon duly paid by the respective Sellers, to Donaldson,
Lufkin & Jenrette Securities Corporation through the facilities of The
Depository Trust Company ("DTC"), for the respective accounts of the several
Underwriters, against payment to the Sellers of the Purchase Price therefore by
wire transfer of Federal or other funds immediately available in New York City.
The certificates representing the Shares shall be made available for inspection
not later than 9:30 A.M., New York City time, on the business day prior to the
Closing Date or the applicable Option Closing Date (as defined below), as the
case may be, at the office of DTC or its designated custodian (the "DESIGNATED
OFFICE"). The time and date of delivery and payment for the Firm Shares shall
be 9:00 A.M., New York City time, on ________, 1998 or such other time on the
same or such other date as Donaldson, Lufkin & Jenrette Securities Corporation
and the Company shall agree in writing. The time and date of delivery for the
Firm Shares are hereinafter referred to as the "CLOSING DATE". The time and
date of delivery and payment for any Additional Shares to be purchased by the
Underwriters shall be 9:00 A.M., New York City time, on the date specified in
the applicable exercise notice given by you pursuant to Section 2 or such other
time on the same or such other date as Donaldson, Lufkin & Jenrette Securities
Corporation and the Attorneys (as defined in Section 7(c) below) shall agree in
writing. The time and date of delivery for the Option Shares are hereinafter
referred to as an "OPTION CLOSING DATE".
The documents to be delivered on the Closing Date or any Option
Closing Date on behalf of the parties hereto pursuant to Section 9 of this
Agreement shall be delivered at the offices of Brobeck, Phleger & Harrison LLP,
1633 Broadway,
4
<PAGE>
New York, NY 10019 and the Shares shall be delivered at the Designated Office,
all on the Closing Date or such Option Closing Date, as the case may be.
SECTION 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of the
suspension of qualification of the Shares for offering or sale in any
jurisdiction, or the initiation of any proceeding for such purposes, (iii) when
any amendment to the Registration Statement becomes effective, (iv) if the
Company is required to file a Rule 462(b) Registration Statement after the
effectiveness of this Agreement, when the Rule 462(b) Registration Statement
has become effective and (v) of the happening of any event during the period
referred to in Section 5(d) below which makes any statement of a material fact
made in the Registration Statement or the Prospectus untrue or which requires
any additions to or changes in the Registration Statement or the Prospectus in
order to make the statements therein not misleading. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will use its best efforts to obtain the
withdrawal or lifting of such order at the earliest possible time.
(b) To furnish to you three (3) signed copies of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits, and to furnish to you and each Underwriter designated
by you such number of conformed copies of the Registration Statement as so
filed and of each amendment to it, without exhibits, as you may reasonably
request.
(c) To prepare the Prospectus, the form and substance of which shall
be satisfactory to you, and to file the Prospectus in such form with the
Commission within the applicable period specified in Rule 424(b) under the Act;
during the period specified in Section 5(d) below, not to file any further
amendment to the Registration Statement and not to make any amendment or
supplement to the Prospectus of which you shall not previously have been
advised or to which you shall reasonably object after being so advised; and,
during such period, to prepare and file with the Commission, promptly upon your
reasonable request, any amendment to the Registration Statement or amendment or
supplement to the Prospectus which may be necessary or advisable in connection
with the distribution of the Shares by you, and to use its best efforts to
cause any such amendment to the Registration Statement to become promptly
effective.
(d) To furnish as soon as practicable, on the first business day after
the date of this Agreement and from time to time thereafter for such period as
in the
5
<PAGE>
opinion of counsel for the Underwriters a prospectus is required by law to be
delivered in connection with sales by an Underwriter or a dealer, to furnish in
New York City to each Underwriter and any dealer as many copies of the
Prospectus (and of any amendment or supplement to the Prospectus) as such
Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not misleading,
or if, in the opinion of counsel for the Underwriters, it is necessary to amend
or supplement the Prospectus to comply with applicable law, forthwith to
prepare and file with the Commission an appropriate amendment or supplement to
the Prospectus so that the statements in the Prospectus, as so amended or
supplemented, will not in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with applicable
law, and to furnish to each Underwriter and to any dealer as many copies
thereof as such Underwriter or dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other
than as to matters and transactions relating to the Prospectus, the
Registration Statement, any preliminary prospectus or the offering or sale of
the Shares, in any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its stockholders as soon
as practicable an earnings statement covering the twelve-month period ending
__________, 1999(2) that shall satisfy the provisions of Section 11(a) of the
Act, and to advise you in writing when such statement has been so made
available.
- --------------
(2) Insert date one year after the end of the Company's fiscal quarter in
which the closing will occur.
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(h) During the period of three years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or all reports
or other communications furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the Company is
listed and such other publicly available information concerning the Company and
its subsidiaries as you may reasonably request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement,
including: (i) the fees, disbursements and expenses of the Company's counsel,
the Company's accountants and any Selling Stockholder's counsel (in addition to
the Company's counsel) in connection with the registration and delivery of the
Shares under the Act and all other fees and expenses in connection with the
preparation, printing, filing and distribution of the Registration Statement
(including financial statements and exhibits), any preliminary prospectus, the
Prospectus and all amendments and supplements to any of the foregoing,
including the mailing and delivering of copies thereof to the Underwriters and
dealers in the quantities specified herein, (ii) all costs and expenses related
to the transfer and delivery of the Shares to the Underwriters, including any
transfer or other taxes payable thereon, (iii) all costs of printing or
producing this Agreement and any other agreements or documents in connection
with the offering, purchase, sale or delivery of the Shares, (iv) all expenses
in connection with the registration or qualification of the Shares for offer
and sale under the securities or Blue Sky laws of the several states and all
costs of printing or producing any Preliminary and Supplemental Blue Sky
Memoranda in connection therewith (including the filing fees and fees and
disbursements of counsel for the Underwriters in connection with such
registration or qualification and memoranda relating thereto), (v) the filing
fees and disbursements of counsel for the Underwriters in connection with the
review and clearance of the offering of the Shares by the National Association
of Securities Dealers, Inc., (vi) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to
the Common Stock and all costs and expenses incidental to the listing of the
Shares on the Nasdaq National Market, (vii) the cost of printing certificates
representing the Shares, (viii) the costs and charges of any transfer agent,
registrar and/or depositary, and (ix) all other costs and expenses incident to
the performance of the obligations of the Company and the Selling Stockholders
hereunder for which provision is not otherwise made in this Section. The
provisions of this Section shall not supersede or otherwise affect any
agreement that the Company and the Selling Stockholders may otherwise have for
allocation of such expenses among themselves.
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(j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market and to maintain the listing of the Shares on the Nasdaq
National Market for a period of three years after the date of this Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so
covered in compliance with Rule 462(b) by 10:00 P.M., New York City time, on
the date of this Agreement and to pay to the Commission the filing fee for such
Rule 462(b) Registration Statement at the time of the filing thereof or to give
irrevocable instructions for the payment of such fee pursuant to Rule 111(b)
under the Act.
SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any
Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement); any Rule 462(b) Registration Statement filed
after the effectiveness of this Agreement will become effective no later than
10:00 P.M., New York City time, on the date of this Agreement; and no stop
order suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective (A) will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading and (B) will comply in all material respects with the Act and
(iv) the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements
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<PAGE>
therein, in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in this
paragraph do not apply to statements or omissions in the Registration Statement
or the Prospectus based upon information relating to any Underwriter furnished
to the Company in writing by such Underwriter through you expressly for use
therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or omissions
in any preliminary prospectus based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use therein.
(d) Each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation and has the corporate power and
authority to carry on its business as described in the Prospectus and to own,
lease and operate its properties, and each is duly qualified and is in good
standing as a foreign corporation authorized to do business in each
jurisdiction in which the nature of its business or its ownership or leasing of
property requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued
by the Company or any of its subsidiaries relating to or entitling any person
to purchase or otherwise to acquire any shares of the capital stock of the
Company or any of its subsidiaries, except as otherwise disclosed in the
Registration Statement.
(f) All the outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights; and the Shares have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor as provided by this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be subject to any
preemptive or similar rights.
(g) All of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
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<PAGE>
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature.
(h) The authorized capital stock of the Company conforms, in all
material respects, as to legal matters to the description thereof contained in
the Prospectus.
(i) Neither the Company nor any of its subsidiaries is (i) in
violation of its respective charter or by-laws or (ii) in default in the
performance of any obligation, agreement, covenant or condition contained in
any indenture, loan agreement, mortgage, lease or other agreement or
instrument, to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or their respective property is
bound, except for such violations or defaults which, singly or in the
aggregate, would not have a material adverse effect on the business, prospects,
financial condition or results of operation of the Company and its
subsidiaries, taken as a whole.
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as have been obtained under
the Act and the Exchange Act and as may be required under the securities or
Blue Sky laws of the various states), (ii) conflict with any of the terms or
provisions of the charter or by-laws of the Company or any of its subsidiaries,
(iii) constitute a breach of or a default under any indenture, loan agreement,
mortgage, lease or other agreement or instrument that is material to the
Company and its subsidiaries, taken as a whole, to which the Company or any of
its subsidiaries is a party or by which the Company or any of its subsidiaries
or their respective property is bound, except for such breaches or defaults
which, singly or in the aggregate, would not have a material adverse effect on
the business, prospects, financial condition or results of operation of the
Company and its subsidiaries, taken as a whole ,(iv) violate or conflict with
any applicable law or any rule, regulation, judgment, order or decree of any
court or any governmental body or agency having jurisdiction over the Company,
any of its subsidiaries or their respective property or (v) result in the
suspension, termination or revocation of any Authorization (as defined below)
of the Company or any of its subsidiaries or any other impairment of the rights
of the holder of any such Authorization, except for such suspensions,
terminations or revocations which, singly or in the aggregate, would not have a
material adverse effect on the business, financial condition or results of
operation of the Company and its subsidiaries, taken as a whole.
(k) There are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries is a party or to which any of their
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<PAGE>
respective property is subject, nor are any such proceedings threatened that
are required to be described in the Registration Statement or the Prospectus
and are not so described; nor are there any statutes, regulations, contracts or
other documents that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement that
are not so described or filed as required.
(l) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection
of human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), any provisions of
the Employee Retirement Income Security Act of 1974, as amended, or any
provisions of the Foreign Corrupt Practices Act, or the rules and regulations
promulgated thereunder, except for such violations which, singly or in the
aggregate, would not have a material adverse effect on the business, prospects,
financial condition or results of operation of the Company and its
subsidiaries, taken as a whole.
(m) Each of the Company and its subsidiaries has such permits,
licenses, consents, exemptions, franchises, authorizations and other approvals
(each, an "AUTHORIZATION") of, and has made all filings with and notices to,
all governmental or regulatory authorities and self-regulatory organizations
and all courts and other tribunals, including, without limitation, under any
applicable Environmental Laws, as are necessary to own, lease, license and
operate its respective properties and to conduct its business, except where the
failure to have any such Authorization or to make any such filing or notice
would not, singly or in the aggregate, have a material adverse effect on the
business, prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole. Each such Authorization is
valid and in full force and effect and each of the Company and its subsidiaries
is in compliance in all material respects with all the terms and conditions
thereof and with the rules and regulations of the authorities and governing
bodies having jurisdiction with respect thereto; and no event has occurred
(including, without limitation, the receipt of any notice from any authority or
governing body) which allows or, after notice or lapse of time or both, would
allow, revocation, suspension or termination of any such Authorization or
results or, after notice or lapse of time or both, would result in any other
impairment of the rights of the holder of any such Authorization; except where
such failure to be valid and in full force and effect or to be in compliance,
the occurrence of any such event or the presence of any such restriction would
not, singly or in the aggregate, have a material adverse effect on the
business, prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole.
(n) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for
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<PAGE>
clean-up, closure of properties or compliance with Environmental Laws or any
Authorization, any related constraints on operating activities and any
potential liabilities to third parties) which would, singly or in the
aggregate, have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries, taken
as a whole.
(o) This Agreement has been duly authorized, executed and delivered by
the Company.
(p) Arthur Andersen LLP are independent public accountants with
respect to the Company and its subsidiaries as required by the Act.
(q) The consolidated financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto),
together with related schedules and notes, present fairly the consolidated
financial position, results of operations and changes in financial position of
the Company and its subsidiaries on the basis stated therein at the respective
dates or for the respective periods to which they apply; such statements and
related schedules and notes have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved, except as disclosed therein; the supporting schedules, if any,
included in the Registration Statement present fairly in accordance with
generally accepted accounting principles the information required to be stated
therein; and the other financial and statistical information and data set forth
in the Registration Statement and the Prospectus (and any amendment or
supplement thereto) are, in all material respects, accurately presented and
prepared on a basis consistent with such financial statements and the books and
records of the Company.
(r) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be, an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
(s) Except as otherwise disclosed in the Registration Statement, there
are no contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of the
Company or to require the Company to include such securities with the Shares
registered pursuant to the Registration Statement.
(t) Since the respective dates as of which information is given in the
Prospectus, other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement),
(i) there has not occurred any material adverse change or any development
involving a prospective material adverse change in the condition, financial or
otherwise, or
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the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in
the capital stock or in the long-term debt of the Company or any of its
subsidiaries and (iii) neither the Company nor any of its subsidiaries has
incurred any material liability or obligation, direct or contingent.
(u) The Company has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida).
(v) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be deemed
to be a representation and warranty by the Company to the Underwriters as to
the matters covered thereby.
(w) The Company and its subsidiaries have good and marketable title in
fee simple to all real property and good and marketable title to all personal
property owned by them which is material to the business of the Company and its
subsidiaries, taken as a whole, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or such
as do not materially affect the value of such property and do not interfere
with the use made and proposed to be made of such property by the Company and
its subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries, taken as a whole, in each case
except as described in the Prospectus.
(x) The Company and its subsidiaries own, or possess valid and
enforceable licenses to, all patents, patent rights, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), trademarks,
service marks and trade names ("INTELLECTUAL PROPERTY") currently employed by
the Company and its subsidiaries in connection with the business now operated
by them , except where the failure to own or possess such Intellectual Property
would not, singly or in the aggregate, have a material adverse effect on the
business, prospects, financial condition or results of operation of the Company
and its subsidiaries, taken as a whole. Neither the Company, nor its
subsidiaries, has received any notice, nor are they aware of facts which would
form a reasonable basis for any such claim, that: (i) challenges the Company's
or its subsidiaries' rights in or to any Intellectual Property; (ii) challenges
the validity or scope of any Intellectual Property; (iii) any third party has
or will be able to establish any rights in the Intellectual Property, except
for the ownership rights of the owners of the Intellectual Property which is
licensed to the Company or the rights of parties to
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whom the Company has granted licenses of such Intellectual Property; (iv) the
Intellectual Property infringes or otherwise violates any patent, copyright,
trade secret, trademark or other proprietary right of any third party; or (v)
there is infringement of the Intellectual Property by any third party, which,
in the case of any such claim specified in clauses (i), (ii), (iii), (iv) or
(v) above, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect on the
business, prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole.
(y) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they are
engaged; and neither the Company nor any of its subsidiaries (i) has received
notice from any insurer or agent of such insurer that substantial capital
improvements or other material expenditures will have to be made in order to
continue such insurance or (ii) has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers at a cost that would not
have a material adverse effect on the business, prospects, financial conditions
or results of operations of the Company and its subsidiaries, taken as a whole.
(z) No relationship, direct or indirect, exists between or among the
Company or any of its subsidiaries on the one hand, and the directors,
officers, stockholders, customers or suppliers of the Company or any of its
subsidiaries on the other hand, which is required by the Act to be described in
the Registration Statement or the Prospectus which is not so described.
(aa) There is no (i) significant unfair labor practice complaint,
grievance or arbitration proceeding pending or, to the Company's best
knowledge, threatened against the Company or any of its subsidiaries before the
National Labor Relations Board or any state or local labor relations board,
(ii) strike, labor dispute, slowdown or stoppage pending or, to the Company's
best knowledge, threatened against the Company or any of its subsidiaries or
(iii) union representation question existing with respect to the employees of
the Company and its subsidiaries, except for such actions specified in clause
(i), (ii) or (iii) above, which, singly or in the aggregate, would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole. To
the best of the Company's knowledge, no collective bargaining organizing
activities are taking place with respect to the Company or any of its
subsidiaries.
(bb) The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to permit
preparation of
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financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(cc) All material tax returns required to be filed by the Company and
each of its subsidiaries in any jurisdiction have been filed, other than those
filings being contested in good faith, and all material taxes, including
withholding taxes, penalties and interest, assessments, fees and other charges
due pursuant to such returns or pursuant to any assessment received by the
Company or any of its subsidiaries have been paid, other than those being
contested in good faith and for which adequate reserves have been provided.
SECTION 7. Representations and Warranties of the Selling Stockholders.
Each Selling Stockholder, severally and not jointly, represents and
warrants to each Underwriter that:
(a) Such Selling Stockholder is the lawful owner of the Shares to be
sold by such Selling Stockholder pursuant to this Agreement and has, and on
each of the Closing Date and the Option Closing Date will have, good and clear
title to such Shares, free of all restrictions on transfer, liens,
encumbrances, security interests, equities and claims whatsoever.
(b) Such Selling Stockholder has, and on each of the Closing Date and
the Option Closing Date will have, full legal right, power and authority, and
all authorization and approval required by law, to enter into this Agreement,
the Custody Agreement signed by such Selling Stockholder and ___, as custodian
(the "CUSTODIAN"), relating to the deposit of the Shares to be sold by such
Selling Stockholder (the "CUSTODY AGREEMENT") and the Power of Attorney of such
Selling Stockholder appointing certain individuals as such Selling
Stockholder's attorneys-in-fact (the "ATTORNEYS") to the extent set forth
therein, relating to the transactions contemplated hereby and by the
Registration Statement and the Custody Agreement (the "POWER OF ATTORNEY") and
to sell, assign, transfer and deliver the Shares to be sold by such Selling
Stockholder in the manner provided herein and therein.
(c) This Agreement has been duly authorized, executed and delivered by
or on behalf of such Selling Stockholder.
(d) The Custody Agreement of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding agreement of such Selling Stockholder, enforceable in accordance
with its
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terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
or other laws of general application affecting the enforcement of creditors'
rights.
(e) The Power of Attorney of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding instrument of such Selling Stockholder, enforceable in accordance
with its terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting the enforcement of
creditors' rights, and, pursuant to such Power of Attorney, such Selling
Stockholder has, among other things, authorized the Attorneys, or any one of
them, to execute and deliver on such Selling Stockholder's behalf this
Agreement and any other document that they, or any one of them, may deem
necessary or desirable in connection with the transactions contemplated hereby
and thereby and to deliver the Shares to be sold by such Selling Stockholder
pursuant to this Agreement.
(f) Upon delivery of and payment for the Shares to be sold by such
Selling Stockholder pursuant to this Agreement, good and clear title to such
Shares will pass to the Underwriters, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever.
(g) The execution, delivery and performance of this Agreement and the
Custody Agreement and Power of Attorney of such Selling Stockholder by or on
behalf of such Selling Stockholder, the compliance by such Selling Stockholder
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not (i) require any consent,
approval, authorization or other order of, or qualification with, any court or
governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the organizational documents of such Selling Stockholder, if such Selling
Stockholder is not an individual, or any indenture, loan agreement, mortgage,
lease or other agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder or any property of such Selling
Stockholder is bound or (iii) violate or conflict with any applicable law or
any rule, regulation, judgment, order or decree of any court or any
governmental body or agency having jurisdiction over such Selling or any
property of such Selling Stockholder.
(h) Each certificate signed by or on behalf of such Selling
Stockholder and delivered to the Underwriters or counsel for the Underwriters
shall be deemed to be a representation and warranty by such Selling Stockholder
to the Underwriters as to the matters covered thereby.
SECTION 8. Indemnification. (a) The Company agrees to indemnify and
hold harmless each Underwriter, its directors, its officers and each person, if
any,
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who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), from and against any and all losses, claims, damages, liabilities and
judgments (including, without limitation, any legal or other expenses incurred
in connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished in writing to the Company by such
Underwriter through you expressly for use therein provided, however, that the
foregoing indemnity agreement with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter who failed to deliver a Prospectus
(as then amended or supplemented, provided by the Company to the several
Underwriters in the requisite quantity and on a timely basis to permit proper
delivery on or prior to the Closing Date) to the person asserting any losses,
claims, damages and liabilities and judgments caused by any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus, or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, if such material misstatement or omission or alleged
material misstatement or omission was cured in such Prospectus and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person.
(b) Each of the Selling Stockholders agrees, severally and not
jointly, to indemnify and hold harmless each Underwriter, its directors, its
officers and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages, liabilities and judgments
(including, without limitation, any legal or other expenses incurred in
connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, but only insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information
provided in writing by such Selling Stockholder for inclusion therein provided,
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however, that the foregoing indemnity agreement with respect to any preliminary
prospectus shall not inure to the benefit of any Underwriter who failed to
deliver a Prospectus (as then amended or supplemented, provided by the Company
to the several Underwriters in the requisite quantity and on a timely basis to
permit proper delivery on or prior to the Closing Date) to the person asserting
any losses, claims, damages, and liabilities and judgments caused by any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, if such material misstatement or omission or
alleged material misstatement or omission was cured in such Prospectus and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person. Notwithstanding the foregoing, the
aggregate liability of any Selling Stockholder pursuant to this Section 8(a)
shall be limited to an amount equal to the total proceeds (deducting
underwriting discounts and commissions) received by such Selling Stockholder
from the Underwriters for the sale of the Shares sold by such Selling
Stockholder hereunder.
(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each
Selling Stockholder and each person, if any, who controls such Selling
Stockholder within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the Sellers to
such Underwriter but only with reference to information relating to such
Underwriter furnished in writing to the Company by such Underwriter through you
expressly for use in the Registration Statement (or any amendment thereto), the
Prospectus (or any amendment or supplement thereto) or any preliminary
prospectus.
(d) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 8(a) and 8(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 8(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of the
indemnified party unless
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(i) the employment of such counsel shall have been specifically authorized in
writing by the indemnifying party, (ii) the indemnifying party shall have
failed to assume the defense of such action or employ counsel reasonably
satisfactory to the indemnified party or (iii) the named parties to any such
action (including any impleaded parties) include both the indemnified party and
the indemnifying party, and the indemnified party shall have been advised by
such counsel that there may be one or more legal defenses available to it which
are different from or additional to those available to the indemnifying party
(in which case the indemnifying party shall not have the right to assume the
defense of such action on behalf of the indemnified party). In any such case,
the indemnifying party shall not, in connection with any one action or separate
but substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for (i) the
fees and expenses of more than one separate firm of attorneys (in addition to
any local counsel) for all Underwriters, their officers and directors and all
persons, if any, who control any Underwriter within the meaning of either
Section 15 of the Act or Section 20 of the Exchange Act, (ii) the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) for the Company, its directors, its officers who sign the Registration
Statement and all persons, if any, who control the Company within the meaning
of either such Section and (iii) the fees and expenses of more than one
separate firm of attorneys (in addition to any local counsel) for all Selling
Stockholders and all persons, if any, who control any Selling Stockholder
within the meaning of either such Section, and all such fees and expenses shall
be reimbursed as they are incurred. In the case of any such separate firm for
the Underwriters, their officers and directors and such control persons of any
Underwriters, such firm shall be designated in writing by Donaldson, Lufkin &
Jenrette Securities Corporation. In the case of any such separate firm for the
Company and such directors, officers and control persons of the Company, such
firm shall be designated in writing by the Company. In the case of any such
separate firm for the Selling Stockholders and such control persons of any
Selling Stockholders, such firm shall be designated in writing by the
Attorneys. The indemnifying party shall indemnify and hold harmless the
indemnified party from and against any and all losses, claims, damages,
liabilities and judgments by reason of any settlement of any action (i)
effected with its written consent or (ii) effected without its written consent
if the settlement is entered into more than twenty business days after the
indemnifying party shall have received a request from the indemnified party for
reimbursement for the fees and expenses of counsel (in any case where such fees
and expenses are at the expense of the indemnifying party) and, prior to the
date of such settlement, the indemnifying party shall have failed to comply
with such reimbursement request. No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement or compromise
of, or consent to the entry of judgment with respect to, any pending or
threatened action in respect of which the indemnified party is or could have
been a party and indemnity or contribution may be or could have been sought
hereunder by the indemnified party, unless
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such settlement, compromise or judgment (i) includes an unconditional release
of the indemnified party from all liability on claims that are or could have
been the subject matter of such action and (ii) does not include a statement as
to or an admission of fault, culpability or a failure to act, by or on behalf
of the indemnified party.
(c) To the extent the indemnification provided for in this Section 8
is unavailable to an indemnified party or insufficient in respect of any
losses, claims, damages, liabilities or judgments referred to therein, then
each indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the
offering of the Shares or (ii) if the allocation provided by clause 8(d)(i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause 8(d)(i) above
but also the relative fault of the Sellers on the one hand and the Underwriters
on the other hand in connection with the statements or omissions which resulted
in such losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand shall be deemed
to be in the same proportion as the total net proceeds from the offering (after
deducting underwriting discounts and commissions, but before deducting
expenses) received by the Sellers, and the total underwriting discounts and
commissions received by the Underwriters, bear to the total price to the public
of the Shares, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Sellers on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Selling Stockholders on the one hand
or the Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, liabilities or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses incurred by such
indemnified party in connection with investigating or defending any matter,
including any action, that could have given rise to such losses, claims,
damages, liabilities or judgments. Notwithstanding the provisions
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of this Section 8, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this Section 8(d) are several in
proportion to the respective number of Shares purchased by each of the
Underwriters hereunder and not joint.
(d) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(e) Each Selling Stockholder hereby designates The Ultimate Software
Group, Inc., 3111 Stirling Road, Ft. Lauderdale, Florida 33312, as its
authorized agent, upon which process may be served in any action which may be
instituted in any state or federal court in the State of New York by any
Underwriter, any director or officer of any Underwriter or any person
controlling any Underwriter asserting a claim for indemnification or
contribution under or pursuant to this Section 8, and each Selling Stockholder
will accept the jurisdiction of such court in such action, and waives, to the
fullest extent permitted by applicable law, any defense based upon lack of
personal jurisdiction or venue. A copy of any such process shall be sent or
given to such Selling Stockholder, at the address for notices specified in
Section 12 hereof.
SECTION 9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this
Agreement are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same
force and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate dated
the Closing Date, signed by Scott Scherr and Mitchell K. Dauerman, in their
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capacities as the President and Chief Executive Officer and the Chief Financial
Officer of the Company, confirming the matters set forth in Sections 6(t), 9(a)
and 9(b) and that the Company has complied with all of the agreements and
satisfied all of the conditions herein contained and required to be complied
with or satisfied by the Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus, other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement),
(i) there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and its subsidiaries, taken
as a whole, (ii) there shall not have been any change or any development
involving a prospective change in the capital stock or in the long-term debt of
the Company or any of its subsidiaries and (iii) neither the Company nor any of
its subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 9(d)(i),
9(d)(ii) or 9(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(e) All the representations and warranties of each Selling Stockholder
contained in this Agreement shall be true and correct on the Closing Date with
the same force and effect as if made on and as of the Closing Date and you
shall have received on the Closing Date a certificate dated the Closing Date
from, or on behalf of, each Selling Stockholder to such effect and to the
effect that such Selling Stockholder has complied with all of the agreements
and satisfied all of the conditions herein contained and required to be
complied with or satisfied by such Selling Stockholder on or prior to the
Closing Date.
(f) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Dewey Ballantine LLP, counsel for the Company and the Selling Stockholders,
to the effect that:
(i) each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation and has the
corporate power and authority to carry on its business as described in
the Prospectus and to own, lease and operate its properties;
(ii) each of the Company and its subsidiaries is duly
qualified and is in good standing as a foreign corporation authorized
to do business in each jurisdiction in which the nature of its
business or its ownership or leasing of property requires such
qualification, except where the failure to
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be so qualified would not have a material adverse effect on
the business, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole;
(iii) all the outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully
paid, non-assessable and not subject to any preemptive or similar
rights under the Delaware General Corporation Law or the Company's
charter or by-laws;
(iv) the Shares to be issued and sold by the Company
hereunder have been duly authorized and, when issued and delivered to
the Underwriters against payment therefor as provided by this
Agreement, will be validly issued, fully paid and non-assessable, and
the issuance of such Shares will not be subject to any preemptive or
similar rights under the Delaware General Corporation Law or the
Company's charter or by-laws;
(v) all of the outstanding shares of capital stock of each
of the Company's subsidiaries have been duly authorized and validly
issued and are fully paid and non-assessable, and are owned by the
Company, directly or indirectly through one or more subsidiaries, free
and clear of any perfected security interest;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company and by or on behalf of each Selling
Stockholder;
(vii) the authorized capital stock of the Company conforms,
in all material respects, as to legal matters to the description
thereof contained in the Prospectus;
(viii) the Registration Statement has become effective under
the Act, no stop order suspending its effectiveness has been issued
and no proceedings for that purpose are, to the best of such counsel's
knowledge after due inquiry, pending before or contemplated by the
Commission;
(ix) the statements under the captions "Business -
Intellectual Property Rights", "Business - Legal Proceedings",
"Management - Stock Option Plan", "Management - Limitation of
Officer's and Director's Liability Indemnification Matters", "Certain
Transactions", "Description of Capital Stock", "Shares Eligible for
Future Sale", and "Underwriting" in the Prospectus and Items 14 and 15
of Part II of the Registration Statement, insofar as such statements
constitute a summary of the legal matters, documents or proceedings
referred to therein, fairly present the
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information called for with respect to such legal matters,
documents and proceedings;
(x) to such counsel's knowledge, neither the Company nor any
of its subsidiaries is in violation of its respective charter or
by-laws and, to the best of such counsel's knowledge after due
inquiry, neither the Company nor any of its subsidiaries is in default
in the performance of any obligation, agreement, covenant or condition
contained in any indenture, loan agreement, mortgage, lease or other
agreement or instrument that is made an exhibit to the Registration
Statement or known to such counsel;
(xi) the execution, delivery and performance of this
Agreement by the Company, the compliance by the Company with all the
provisions hereof and the consummation of the transactions
contemplated hereby will not (A) require any consent, approval,
authorization or other order of, or qualification with, any court or
governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (B) conflict with
or constitute a breach of any of the terms or provisions of, or a
default under, the charter or by-laws of the Company or any of its
subsidiaries or any indenture, loan agreement, mortgage, lease or
other agreement or instrument that is made an exhibit to the
Registration Statement or known to such counsel, (C) violate or
conflict with any applicable law or any rule, regulation, judgment,
order or decree of any court or any governmental body or agency having
jurisdiction over the Company, any of its subsidiaries or their
respective property known to such counsel or (D) result in the
suspension, termination or revocation of any material Authorization of
the Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such material Authorization;
(xii) such counsel does not know of any legal or
governmental proceedings pending to which the Company or any of its
subsidiaries is a party or to which any of their respective property
is subject, nor does such counsel know of any such proceeding
threatened, that are required to be described in the Registration
Statement or the Prospectus and are not so described, or of any
statutes, regulations, contracts or other documents that are required
to be described in the Registration Statement or the Prospectus or to
be filed as exhibits to the Registration Statement that are not so
described or filed as required;
(xiii) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be, an "investment
company" as such term is defined in the Investment Company Act of
1940, as amended;
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(xiv) to such counsel's knowledge, except as otherwise
disclosed in the Registration Statement, there are no contracts or
agreements between the Company and any person granting such person the
right to require the Company to file a registration statement under
the Act with respect to any securities of the Company or to require
the Company to include such securities with the Shares registered
pursuant to the Registration Statement;
(xv) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements
and other financial data included therein as to which no opinion need
be expressed) comply as to form with the Act;
(xvi) each Selling Stockholder is the record and beneficial
owner of the Shares to be sold by such Selling Stockholder pursuant to
this Agreement and has good and clear title to such Shares, free of
any perfected security interests;
(xvii) each Selling Stockholder has full legal right, power
and authority, and all authorization and approval required by law, to
enter into this Agreement and the Custody Agreement and the Power of
Attorney of such Selling Stockholder and to sell, assign, transfer and
deliver the Shares to be sold by such Selling Stockholder in the
manner provided herein and therein;
(xviii) the Custody Agreement of each Selling Stockholder
has been duly authorized, executed and delivered by such Selling
Stockholder and is a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium or other
laws of general application affecting the enforcement of creditors'
rights;
(xix) the Power of Attorney of each Selling Stockholder has
been duly authorized, executed and delivered by such Selling
Stockholder and is a valid and binding instrument of such Selling
Stockholder, enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium or other
laws of general application affecting the enforcement of creditors'
rights; and, pursuant to such Power of Attorney, such Selling
Stockholder has, among other things, authorized the Attorneys, or any
one of them, to execute and deliver on such Selling Stockholder's
behalf this Agreement and any other document they, or any one of them,
may deem necessary or desirable in connection with the transactions
contemplated hereby and thereby and to deliver the Shares to be sold
by such Selling Stockholder pursuant to this Agreement;
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(xx) assuming the Underwriters are bona fide purchasers (as
defined in the Uniform Commercial Code), upon delivery of and payment
for the Shares to be sold by each Selling Stockholder pursuant to this
Agreement, good and clear title to such Shares will pass to the
Underwriters, free of any adverse claim (as defined in the Uniform
Commercial Code); and
(xxi) the execution, delivery and performance of this
Agreement and the Custody Agreement and Power of Attorney of each
Selling Stockholder by such Selling Stockholder, the compliance by
such Selling Stockholder with all the provisions hereof and thereof
and the consummation of the transactions contemplated hereby and
thereby will not (A) require any consent, approval, authorization or
other order of, or qualification with, any court or governmental body
or agency (except such as may be required under the securities or Blue
Sky laws of the various states), (B) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
organizational documents of such Selling Stockholder, if such Selling
Stockholder is not an individual.
Such counsel shall also state in its opinion letter that such counsel
has no reason to believe that at the time the Registration Statement
became effective or on the date of this Agreement, the Registration
Statement and the prospectus included therein (except for the
financial statements and other financial data as to which such counsel
need not express any belief) contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading and such counsel has no reason to believe that the
Prospectus, as amended or supplemented, if applicable (except for the
financial statements and other financial data, as aforesaid) contains
any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
The opinion of Dewey Ballantine LLP described in Section 9(f) above
shall be rendered to you at the request of the Company and the Selling
Stockholders and shall so state therein.
(g) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Brobeck, Phleger & Harrison LLP, counsel for the Underwriters,
as to the matters referred to in Sections 9(f)(iv), 9(f)(vi) (but only with
respect to the Company) 9(f)(ix) (but only with respect to the statements under
the caption "Description of Capital Stock" and "Underwriting") and 9(f)(xvii).
In giving such opinions with respect to the matters covered by Section
9(f)(xvii), Dewey Ballantine LLP and Brobeck, Phleger & Harrison LLP may rely
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as to matters of fact on officers' certificates and representations of the
Company and the Selling Stockholders and may state that their opinion and
belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements thereto
and review and discussion of the contents thereof, but are without independent
check or verification except as specified. In giving the opinions with respect
to the matters covered by Sections 9(f)(xvi)-(xxi), Dewey Ballantine LLP may
rely upon opinion of counsel to the Selling Stockholders, which counsel shall
be reasonably satisfactory to the Underwriters.
(h) You shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as the case
may be, in form and substance satisfactory to you, from Arthur Andersen LLP,
independent public accountants, containing the information and statements of
the type ordinarily included in accountants' "comfort letters" to Underwriters
with respect to the financial statements and certain financial information
contained in the Registration Statement and the Prospectus.
(i) The Company shall have delivered to you the agreements specified
in Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(j) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(k) The Company and the Selling Stockholders shall not have failed on
or prior to the Closing Date to perform or comply with any of the agreements
herein contained and required to be performed or complied with by the Company
or the Selling Stockholders, as the case may be, on or prior to the Closing
Date.
(l) You shall have received on the Closing Date, a certificate of each
Selling Stockholder who is not a U.S. Person (as defined under applicable U.S.
federal tax legislation) to the effect that such Selling Stockholder is not a
U.S. Person, which certificate may be in the form of a properly completed and
executed United States Treasury Department Form W-8 (or other applicable form
or statement specified by Treasury Department regulations in lieu thereof).
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to
the good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
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SECTION 10. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the
Closing Date by you by written notice to the Sellers if any of the following
has occurred: (i) any outbreak or escalation of hostilities or other national
or international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market
the Shares on the terms and in the manner contemplated in the Prospectus, (ii)
the suspension or material limitation of trading in securities or other
instruments on the New York Stock Exchange, the American Stock Exchange, the
Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the Chicago
Board of Trade or the Nasdaq National Market or limitation on prices for
securities or other instruments on any such exchange or the Nasdaq National
Market, (iii) the suspension of trading of any securities of the Company on any
exchange or in the over-the-counter market, (iv) the enactment, publication,
decree or other promulgation of any federal or state statute, regulation, rule
or order of any court or other governmental authority which in your opinion
materially and adversely affects, or will materially and adversely affect, the
business, prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole, (v) the declaration of a
banking moratorium by either federal or New York State authorities or (vi) the
taking of any action by any federal, state or local government or agency in
respect of its monetary or fiscal affairs which in your opinion has a material
adverse effect on the financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not
more than one-tenth of the total number of Firm Shares or Additional Shares, as
the case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion
which the number of Firm Shares set forth opposite its name in Schedule I bears
to the total number of Firm Shares which all the non-defaulting Underwriters
have agreed to purchase, or in such other proportion as you may specify, to
purchase the Firm Shares or Additional Shares, as the case may be, which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
on such date; provided that in no event shall the number of Firm Shares or
Additional Shares, as the case may be, which any Underwriter has agreed to
purchase pursuant to Section 2 hereof be increased pursuant to this Section 10
by an amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent
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of such Underwriter. If on the Closing Date any Underwriter or Underwriters
shall fail or refuse to purchase Firm Shares and the aggregate number of Firm
Shares with respect to which such default occurs is more than one-tenth of the
aggregate number of Firm Shares to be purchased by all Underwriters and
arrangements satisfactory to you and the Company for purchase of such Firm
Shares are not made within 48 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter and
the Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. If, on an Option Closing
Date, any Underwriter or Underwriters shall fail or refuse to purchase
Additional Shares and the aggregate number of Additional Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Additional Shares to be purchased on such date, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
such Additional Shares or (ii) purchase not less than the number of Additional
Shares that such non-defaulting Underwriters would have been obligated to
purchase on such date in the absence of such default. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of any such Underwriter under this Agreement.
Section 11. Agreements of the Selling Stockholders. Each Selling
Stockholder agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes payable in
connection with the transfer of the Shares to be sold by such Selling
Stockholder to the Underwriters.
(b) To do and perform all things to be done and performed by such
Selling Stockholder under this Agreement prior to the Closing Date and to
satisfy all conditions precedent to the delivery of the Shares to be sold by
such Selling Stockholder pursuant to this Agreement.
SECTION 12. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to The
Ultimate Software Group, Inc., 3111 Stirling Road, Ft. Lauderdale, FL 33312,
(ii) if to the Selling Stockholders, to [NAME OF ATTORNEY-IN-FACT] c/o [ADDRESS
OF ATTORNEY-IN-FACT] and (iii) if to any Underwriter or to you, to you c/o
Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York,
New York 10172, Attention: Syndicate Department, or in any case to such other
address as the person to be notified may have requested in writing.
29
<PAGE>
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Selling Stockholders and
the several Underwriters set forth in or made pursuant to this Agreement shall
remain operative and in full force and effect, and will survive delivery of and
payment for the Shares, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of any Underwriter, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers or directors of the Company, any person controlling the
Company, any Selling Stockholder, or any person controlling such Selling
Stockholder, (ii) acceptance of the Shares and payment for them hereunder and
(iii) termination of this Agreement.
If for any reason the Shares are not delivered by or on behalf of any
Seller as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Sellers agree to reimburse the several
Underwriters for all reasonable out-of-pocket expenses (including the
reasonable fees and disbursements of counsel) incurred by them. Notwithstanding
any termination of this Agreement, the Company shall be liable for all expenses
which it has agreed to pay pursuant to Section 5(i) hereof. The Sellers also
agree, jointly and severally, to reimburse the several Underwriters, their
directors and officers and any persons controlling any of the Underwriters for
any and all fees and expenses (including, without limitation, the fees
disbursements of counsel) incurred by them in connection with enforcing their
rights hereunder (including, without limitation, pursuant to Section 8 hereof).
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the Selling
Stockholders, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, the Company's directors and the
Company's officers who sign the Registration Statement and their respective
successors and assigns, all as and to the extent provided in this Agreement,
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
30
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
THE ULTIMATE SOFTWARE GROUP, INC.
By:
--------------------------------
Scherr, President and Chief
Executive Officer
THE SELLING STOCKHOLDERS
NAMED IN SCHEDULE II
HERETO, ACTING
SEVERALLY
By:
--------------------------------
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
VOLPE BROWN WHELAN & CO., LLC
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By
--------------------------------
31
<PAGE>
SCHEDULE I
Number of Firm Shares
Underwriters to be Purchased
- ------------ ---------------
Donaldson, Lufkin & Jenrette Securities Corporation
Volpe Brown Whelan & Co., LLC
Total
<PAGE>
SCHEDULE II
Number of
Name of Additional Shares
Selling Stockholder Being Sold
- ------------------- ----------
[_______________]
<PAGE>
Total
Annex I
[Insert names of stockholders of the Company who will be
required to sign lock ups]
<PAGE>
THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
THE ULTIMATE SOFTWARE GROUP, INC.
(Original Certificate of
Incorporation filed
on April 15, 1996)
This Third Amended and Restated Certificate of Incorporation,
which restates and amends the Second Amended and Restated Certificate of
Incorporation of The Ultimate Software Group, Inc. (the "Corporation") filed
with the Secretary of State of the State of Delaware on December 20, 1996, was
duly adopted by action of the Board of Directors of the Corporation and by
written consent of the stockholders of the Corporation pursuant to the
provisions of Section 228 and 245 of the General Corporation Law of the State
of Delaware.
1. The name of the Corporation is The Ultimate Software Group, Inc.
2. The address of the Corporation's registered office in the state
of Delaware is Corporation Trust Center, 1209 Orange Street, in the city of
Wilmington, County of New Castle. The name of the Corporation's registered
agent at such address is The Corporation Trust Company.
3. The nature of the business and the purposes to be conducted and
promoted by the Corporation are to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law of the
State of Delaware.
4. (a) Authorization. The total number of shares that may be issued
by the Corporation is 6,036,300 shares, of which 236,300 shall have a par
value of $0.01 per share and shall be designated Class A Common Stock
("Class A Common"), 1,600,000 shall have a par value of $0.01 per share
and shall be designated Class B Common Stock ("Class B Common"), 200,000
shall have a par value of $0.01 per share and shall be designated Class C
Common Stock ("Class C Common," together with the Class A Common and Class
B Common, the "Class Common Stock"), 3,000,000 shall have a par value of
$0.01 per share and shall be designated Common Stock ("Common Stock,"
together with the Class Common Stock, the "Common Shares"), and 1,000,000
shall have a par value of $0.01 per share and shall be designated
Preferred Stock (the "Preferred Stock").
(b) Rights, Preferences and Restrictions of Series A
Convertible Preferred Stock. The rights, preferences, privileges and
restrictions granted to and imposed on the Series A Convertible Preferred
Stock, which series consists of 191,573 shares ("Original Series A
Preferred"), and any New A Series (as defined in and created pursuant to
Section 4(b)(3)(b)(ii) hereof) (the Original Series A Preferred, together
with any such New A Series, the "Series A Preferred") are as follows:
1
<PAGE>
(1) Dividend Provisions. The holders of shares of Series A
Preferred shall be entitled to receive dividends and other
distributions equivalent to those declared or paid on Class B Common
(or any other class of capital stock of this Corporation (other than
Class A Common) junior as to payment of dividends to the Series A
Preferred), determined as if the Series A Preferred had been
converted into Class B Common at the then applicable Conversion
Price (as defined in Section 4(b)(3)(a) hereof) (or, in the case of
dividends or distributions on junior stock (other than Class A
Common) other than Class B Common, determined on a comparable
basis), and payable when, as and if declared by the Board of
Directors on such Class B Common (or other such junior stock). Such
dividends shall not be cumulative.
(2) Liquidation Preference.
a. In the event of any liquidation, dissolution or
winding up of this Corporation, either voluntary or
involuntary, the holders of Series A Preferred shall be
entitled to receive, prior and in preference to any
distribution of any of the assets of this Corporation to the
holders of any class of Common Shares or any other junior
securities by reason of their ownership thereof, an amount per
share in cash equal to $52.20 (or such larger amount provided
for in the second sentence of paragraph (b) below) for each
outstanding share of Series A Preferred (the "Original Series A
Issue Price"), plus all declared but unpaid dividends as of the
date of such event. If upon the occurrence of such event, the
assets and funds thus distributed among the holders of the
Series A Preferred shall be insufficient to permit the payment
to such holders of the full aforesaid preferential amounts,
then the entire assets and funds of the Corporation legally
available for distribution shall be distributed ratably among
the holders of the Series A Preferred, the Series B Preferred
(as defined in Section 4(c) hereof) and any other class or
series of stock of the Corporation that is on parity with the
Series A Preferred with respect to the distribution of assets
on liquidation in proportion to the full preferential amount
each holder would otherwise be entitled to receive.
b. Following completion of the distribution required by
the first sentence of paragraph (a) of this Section 4(b)(2) and
by the terms of any other class or series of stock that is
senior to the Common Shares with respect to the distribution of
assets upon liquidation, if assets remain in the Corporation,
the holders of Common Shares shall share ratably in all
remaining assets of this Corporation in accordance with the
provisions contained in Sections 4(h), (i), (j) and (k) below.
In no event shall any holder of Series A Preferred receive less
(pursuant to paragraph (a) of this Section 4(b)(2)) than the
amount it would have received had it converted all its shares
of Series A Preferred into Class B Common prior to such
distribution.
2
<PAGE>
c. For purposes of this Section 4(b)(2), (i) any
consolidation or merger of this Corporation with or into any
other corporation or other entity or person, or any other
corporate reorganization in which this Corporation shall not be
the continuing or surviving entity of such consolidation,
merger or reorganization, (ii) unless the holders of a majority
of the outstanding shares of Series A Preferred voting as a
class otherwise agree, any transaction or series of related
transactions by this Corporation in which in excess of 50% of
the Corporation's voting power is transferred, and (iii) a sale
or transfer of all or substantially all of the assets of the
Corporation in a single transaction or series of related
transactions, shall be deemed to be a liquidation, dissolution
or winding up within the meaning of this Section 4(b)(2).
d. In the event that, immediately prior to the closing of
a transaction described in Section 4(b)(2)(c) the cash
distributions required by Section 4(b)(2)(a) have not been
made, this Corporation shall forthwith either:
(i) cause such closing to be postponed until such
time as such cash distributions have been made, or
(ii) cancel such transaction, in which event the
rights, preferences and privileges of the holders of the
Series A Preferred shall revert to and be the same as
such rights, preferences and privileges existing
immediately prior to the date of the first notice
referred to in Section 4(b)(3)(k) hereof.
(3) Conversion. The holders of the Series A Preferred shall
have conversion rights as follows (the "Conversion Rights"):
a. Right to Convert. Each share of Series A Preferred
shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share, at the
office of this Corporation or any transfer agent for the Series
A Preferred into such number of fully paid and non-assessable
shares of Class B Common as is determined by dividing the
Original Series A Issue Price by the "Conversion Price" at the
time in effect for such share. The initial Conversion Price per
share for shares of Series A Preferred shall be the Original
Series A Issue Price; provided, however, that such Conversion
Price shall be subject to adjustment as provided hereinafter.
3
<PAGE>
b. Automatic Conversion.
(i) Mandatory Conversion. With the prior written
consent of the holders of a majority of the then
outstanding shares of Series A Preferred, each share of
Series A Preferred shall automatically be converted into
shares of Common Stock at the Conversion Price then in
effect with respect to such share upon the declaration of
a Mandatory Conversion (defined below) pursuant to
Section 4(l) hereof.
(ii) New A Series.
1. Each share of Original Series A Preferred
of a holder thereof who does not exercise in full
such holder's right to purchase, on the terms and
conditions set forth in Section 4(d) hereof, New
Securities (as defined in Section 4(d)(2) hereof)
with respect to any particular issuance of such New
Securities (the "Converting Issuance") shall
automatically be converted into a new series of
Preferred Stock (each, a "New A Series") at the
conversion rate of one share of such new series for
each share of Original Series A Preferred of such
holder. Each New A Series shall be designated
Series A-X Convertible Preferred Stock, where 'X'
is the next consecutive whole number following the
number used in the designation of the New A Series
last created prior thereto, with the first such New
A Series being designated Series A-2 Convertible
Preferred Stock. Any conversion pursuant to this
subsection (ii) shall be deemed to have occurred
immediately prior to the relevant Converting
Issuance.
2. Any holder of shares of Original Series A
Preferred whose shares are converted into shares of
a New A Series shall, upon written request from the
Corporation, surrender any certificates for shares
of Original Series A Preferred held by such holder.
The Corporation shall, as soon as practicable after
receipt thereof, issue and deliver to such holder a
certificate or certificates for the number of
shares of the New A Series to which such holder
shall be entitled as set forth in the immediately
preceding subsection (1).
c. Mechanics of Conversion. Before any holder of the
Corporation's Series A Preferred shall be entitled to convert
the same into shares of Class B Common as permitted in Section
4(b)(3)(a) hereof or to receive certificates evidencing shares
of Class B Common following a conversion pursuant to Section
4(b)(3)(b)(i) hereof, the holder(s) shall surrender the
certificate or certificates therefor, duly endorsed, at the
office of this Corporation or of any transfer agent for the
applicable capital stock and shall give written notice by mail,
postage prepaid, or such other means as the holder may elect,
to this Corporation at its principal corporate office of the
4
<PAGE>
election to convert the same and shall state therein the name
or names in which the certificate or certificates for shares of
the Class B Common are to be issued. This Corporation shall, as
soon as practicable following receipt thereof, issue and
deliver at such office to such holder of capital stock or to
the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Class B Common to
which such holder shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior
to the close of business on the date of such surrender of the
shares of Series A Preferred for conversion, in the case of a
conversion pursuant to Section 4(b)(3)(a) hereof, or the record
date for (or, if no record date is fixed therefor, the
effective date of) conversion of the Series A Preferred, in the
case of a conversion pursuant to Section 4(b)(3)(b)(i) hereof,
and the person or persons entitled to receive the shares
issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares as of such date.
If the conversion is in connection with an underwritten
offering of securities registered pursuant to the Securities
Act of 1933, as amended, the conversion may, at the option of
the holders of a majority of the outstanding Series A
Preferred, be conditioned upon the closing with the underwriter
of the sale of securities pursuant to such offering, in which
event the person(s) entitled to receive the shares issuable
upon such conversion shall not be deemed to have converted such
shares until immediately prior to the closing of such sale of
securities.
d. Adjustments to Conversion Price for Certain Diluting
Issues.
(i) Special Definitions. For purposes hereof,
the following definitions shall apply:
1. "Options" shall mean rights, options or
warrants to subscribe for, purchase or otherwise acquire either
Common Shares or Convertible Securities (as defined below).
2. "Original Issue Date" shall mean the date
on which a share of Series A Preferred or Series B Preferred,
as the case may be, was first issued.
3. "Convertible Securities" shall mean any
evidence of indebtedness, shares (other than Common Shares) or
other securities convertible into or exchangeable for Common
Shares.
4. "Additional Common Shares" shall mean all
Common Shares issued (or, pursuant to Section 4(b)(3)(d)(iii),
deemed to be issued) by the Corporation after the Original
Issue Date, other than Common Shares issued or issuable:
5
<PAGE>
A) upon conversion of the Series A
Preferred or the Series B Preferred;
B) to officers, directors or employees, or
consultants to, the Corporation pursuant to stock option
or stock purchase plans or agreements on terms approved
by the Board of Directors of the Corporation, including a
majority of the members of the Board of Directors who are
not officers or employees of the Corporation (up to a
maximum of 77,532 shares of Class C Common);
C) as a dividend or distribution on the
Series A Preferred or the Series B Preferred;
D) for which adjustment of the Series A
Preferred Conversion Price is made pursuant to Section
4(b)(3)(e) or, adjustment of the Series B Preferred
Conversion Price is made pursuant to Section 4(c)(3)(e);
or
E) pursuant to the acquisition of a business
or assets of a business, provided that such acquisition
is approved by the Board of Directors of the Corporation,
including the Series A Director and the Series B Director
(as such terms are defined below).
5. "Protection Period" shall mean the period
beginning on June 6, 1997 and ending upon the earliest to
occur of (1) the execution of a firm underwriting agreement for
an initial public offering of capital stock of the Corporation,
(2) the acquisition by a third party of (a) shares representing
a majority of the voting power or the outstanding shares of
capital stock of the Corporation or (b) more than 50% of the
assets of the Corporation, (3) a material acquisition or
business combination involving the Corporation that the general
partner of the Partnership (as defined below) determines should
result in a liquidation or dissolution of the Partnership, (4)
the conversion by a majority in interest of the Series A
Preferred into Common Stock, if the general partner of the
Partnership determines that such conversion should result in a
liquidation or dissolution of the Partnership or (5) an
election by the holders of a majority of the outstanding shares
of each of the Series A Preferred and the Series B Preferred.
6
<PAGE>
(ii) No Adjustment Of Conversion Price. No adjustment in
the Conversion Price of shares of Series A Preferred of a
holder thereof shall be made in respect of the issuance of
Additional Common Shares unless the consideration per share
(determined pursuant to Section 4(b)(3)(d)(v) hereof) for an
Additional Common Share issued or deemed to be issued by the
Corporation is less than the Conversion Price in effect on the
date of, and immediately prior to, such issue with respect to
the shares of Series A Preferred of such holder.
(iii) Deemed Issue of Additional Common Shares. In the
event the Corporation at any time or from time to time after
the Original Issue Date shall issue any Options or Convertible
Securities or shall fix a record date for the determination of
holders of any class of securities then entitled to receive any
such Options or Convertible Securities, then the maximum number
of Common Shares (as set forth in the instrument relating
thereto without regard to any provisions contained therein
designed to protect against dilution) issuable upon the
exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of
such Convertible Securities, shall be deemed to be Additional
Common Shares, subject to the limitations of Section
4(b)(3)(d)(i)(4), issued as of the time of such issue or, in
case such a record date shall have been fixed, as of the close
of business on such record date, provided that in any such case
in which Additional Common Shares are deemed to be issued:
1. no further adjustments in an applicable
Conversion Price shall be made upon the subsequent issue
of Convertible Securities or Common Shares upon the
exercise of such Options or conversion or exchange of
such Convertible Securities;
2. if such Options or Convertible Securities by
their terms provide, with the passage of time or
otherwise, for any increase or decrease in the
consideration payable to the Corporation, or decrease or
increase in the number of Common Shares issuable, upon
the exercise, conversion or exchange thereof, a
Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon,
shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or
decrease insofar as it affects such Options or the rights
of conversion or exchange under such Convertible
Securities (provided, however, that no such adjustment of
the Conversion Price shall affect Class B Common
previously issued upon conversion of any shares of Series
A Preferred or Series B Preferred, as the case may be);
7
<PAGE>
3. upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible
Securities which shall not have been exercised, a
Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon,
shall, upon such expiration, be recomputed as if:
A) in the case of Convertible Securities or
Options for Common Shares, the only Additional
Common Shares issued were the Common Shares, if
any, actually issued upon the exercise of such
Options or the conversion or exchange of such
Convertible Securities and the consideration
received therefor was the consideration actually
received by the Corporation for the issue of all
such Options, whether or not exercised, plus the
consideration actually received by the Corporation
upon such exercise, or for the issue of all such
Convertible Securities which were actually
converted or exchanged, plus the additional
consideration, if any, actually received by the
Corporation upon such conversion or exchange
(provided, however, that no such adjustment of the
Conversion Price shall affect Class B Common
previously issued upon conversion of any shares of
Series A Preferred or the Series B Preferred, as
the case may be), and
B) in the case of Options for Convertible
Securities, only the Convertible Securities, if
any, actually issued upon the exercise thereof were
issued at the time of issue of such Options, and
the consideration received by the Corporation for
the Additional Common Shares deemed to have been
then issued was the consideration actually received
by the Corporation for the issue of all such
Options, whether or not exercised, plus the
consideration deemed to have been received by the
Corporation (determined pursuant to Section
4(b)(3)(d)(v)(2)) upon the issue of the Convertible
Securities with respect to which such Options were
actually exercised (provided, however, that no such
adjustment of the Conversion Price shall affect
Class B Common previously issued upon conversion of
any shares of Series A Preferred or Series B
Preferred, as the case may be);
4. no readjustment pursuant to clause (2) or (3)
above shall have the effect of increasing an applicable
Conversion Price to an amount which exceeds the lower of
(a) such Conversion Price on the original adjustment
date, or (b) such Conversion Price that would have
resulted from any issuance of Additional Common Shares
between the original adjustment date and such
readjustment date.
8
<PAGE>
5. in the case of any Options which expire by their
terms not more than 90 days after the date of issue
thereof, no adjustment of a Conversion Price shall be
made until the expiration or exercise of all such
Options, whereupon such adjustment shall be made in the
same manner provided in clause (3) above.
(iv) Adjustment of Conversion Price Upon Issuance of
Additional Common Shares.
1. In the event the Corporation, at any time during
the Protection Period shall issue Additional Common
Shares (including Additional Common Shares deemed to be
issued pursuant to Section 4(b)(3)(d)(iii) but subject to
the limitations of Section 4(b)(3)(d)(i)(4)) without
consideration or for a consideration per share less than
the Conversion Price in effect on the date of, and
immediately prior to, such issue with respect to the
shares of Original Series A Preferred of a holder
thereof, then and in such event the Conversion Price
applicable to the shares of any such holder shall be
reduced, concurrently with such issue, to a Conversion
Price (calculated to the nearest cent) equal to the
lowest consideration per share for which such Additional
Common Shares are issued; provided, however, that with
respect to any such issuance this subsection 1 shall not
apply unless and until the Corporation has issued New
Securities during the Protection Period for an aggregate
consideration which exceeds $1,000,000, in which event
this subsection 1 shall apply to all such issuances.
2. In the event that (x) subsection 1 above does
not apply with respect to the shares of Series A
Preferred of any holder thereof and (y) the Corporation,
at any time after the Original Issue Date shall issue
Additional Common Shares (including Additional Common
Shares deemed to be issued pursuant to Section
4(b)(3)(d)(iii) but subject to the limitations of Section
4(b)(3)(d)(i)(4)) without consideration or for a
consideration per share less than the Conversion Price in
effect on the date of, and immediately prior to, such
issue with respect to the shares of Series A Preferred of
such holder, then and in such event the Conversion Price
applicable to the shares of such holder shall be reduced,
concurrently with such issue, to a Conversion Price
(calculated to the nearest cent) determined by
multiplying such Conversion Price by a fraction, the
numerator of which shall be the number of Common Shares
outstanding immediately prior to such issue plus the
number of Common Shares which the aggregate consideration
received by the Corporation for the total number of
Additional Common Shares so issued would purchase at such
Conversion Price; and the denominator of which shall be
the number of Common Shares outstanding immediately prior
to such issue plus the number of such Additional Common
9
<PAGE>
Shares so issued; provided, that, for the purposes of
this Section 4(b)(3)(d)(iv), (W) all Common Shares
issuable upon conversion of all outstanding Series A
Preferred shall be deemed to be outstanding, (X) all
Common Shares issuable upon conversion of all outstanding
Convertible Securities, and upon exercise of all
outstanding Options bearing an exercise price which is
lower than the price at which the Additional Common
Shares were issued (or deemed to be issued), shall be
deemed to be outstanding, (Y) immediately after any
Additional Common Shares are deemed issued pursuant to
subsection (iii) above, such Additional Common Shares
shall be deemed to be outstanding and (Z) all Common
Shares subject to an escrow agreement under which such
shares will (under certain circumstances) be surrendered
to the Corporation for cancellation shall not be deemed
to be outstanding, provided that if any such Common
Shares subject to an escrow agreement are subsequently
released from escrow and not surrendered to the
Corporation for cancellation ("Released Shares"), all
adjustments to an applicable Conversion Price made during
the period during which such shares were held in escrow
shall be recalculated as if such Released Shares had been
outstanding at the time of each such adjustment.
(v) Determination of Consideration. For purposes of this
Section 4(b)(3)(d) and Section 4(c)(3)(d) hereof, the
consideration received by the Corporation for the issue of any
Additional Common Shares shall be computed as follows:
1. Cash and Property. Such consideration shall:
A) insofar as it consists of cash, be
computed at the aggregate amount of cash received
by the Corporation excluding amounts paid or
payable for accrued interest or accrued dividends;
B) insofar as it consists of property other
than cash, be computed at the fair market value
thereof at time of such issue, as determined in
good faith by the Board of Directors; and
C) in the event Additional Common Shares are
issued together with other shares or securities or
other assets of the Corporation for consideration
which covers both, be the proportion of such
consideration so received, computed as provided in
clauses (A) and (B) above, as determined in good
faith by the Board of Directors.
10
<PAGE>
2. Options and Convertible Securities. The
consideration per share received by the Corporation for
Additional Common Shares deemed to have been issued
pursuant to Section 4(b)(3)(d)(iii), relating to Options
and Convertible Securities shall be determined by
dividing:
A) the total amount, if any, received or
receivable by the Corporation as consideration for
the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the
instruments relating thereto, without regard to any
provision contained therein designed to protect
against dilution) payable to the Corporation upon
the exercise of such Options or the conversion or
exchange of such Convertible Securities, or in the
case of Options for Convertible Securities, the
exercise of such Options for Convertible Securities
and the conversion or exchange of such Convertible
Securities; by
B) the maximum number of Common Shares (as set
forth in the instruments relating thereto, without
regard to any provision contained therein designed
to protect against dilution) issuable upon the
exercise of such Options or conversion or exchange
of such Convertible Securities.
e. Conversion Price Adjustments for Subdivisions,
Combinations or Consolidations of Common Shares.
(i) In the event this Corporation should at any
time or from time to time after the date hereof fix a
record date for the effectuation of a split or
subdivision of the outstanding Common Shares or the
determination of holders of Common Shares entitled to
receive a dividend or other distribution payable in
additional Common Shares or other securities or rights
convertible into, or entitling the holder thereof to
receive directly or indirectly, additional Common Shares
(hereinafter referred to as "Common Share Equivalents"),
without payment of any consideration by such holder for
the additional Common Shares or the Common Share
Equivalents (including the additional Common Shares
issuable upon conversion or exercise thereof), then, as
of such record date (or the date of such dividend
distribution, split or subdivision if no record date is
fixed), the Conversion Price applicable to each share of
Series A Preferred shall be appropriately decreased so
that the number of shares of Class B Common issuable on
conversion of each such share of Series A Preferred shall
be increased in proportion to such increase of
outstanding Common Shares and shares issuable with
respect to Common Share Equivalents.
11
<PAGE>
(ii) If the number of Common Shares outstanding at
any time after the date hereof is decreased by a
combination of the outstanding Common Shares, then,
following the record date of such combination, the
Conversion Price applicable to each share of Series A
Preferred shall be appropriately increased so that the
number of shares of Class B Common issuable on conversion
of each such share of Series A Preferred shall be
decreased in proportion to such decrease in outstanding
shares.
f. Other Distributions. In the event this Corporation
shall declare a distribution payable in securities of other
persons, evidences of indebtedness issued by this Corporation
or other persons, assets (excluding cash dividends) or options
or rights not referred to in Section 4(b)(3)(e)(i), the holders
of the Series A Preferred shall be entitled to a proportionate
share of any such distribution as though they were the holders
of the number of shares of Class B Common of the Corporation
into which their shares of Series A Preferred are convertible
as of the record date fixed for the determination of the
holders of Common Shares of the Corporation entitled to receive
such distribution or, if no such record date is fixed, as of
the date such distribution is made.
g. Recapitalization. If at any time or from time to time
there shall be a recapitalization of the Common Shares (other
than a subdivision, combination or reclassification provided
for elsewhere in this Section 4(b)(3)), or a merger or
consolidation of this Corporation with or into another
corporation, or the sale of all or substantially all of this
Corporation's assets to any other person or entity, then, as a
part of such recapitalization, merger, consolidation or sale,
provision shall be made so that the holders of the Series A
Preferred shall thereafter be entitled to receive upon
conversion of the Series A Preferred the number of shares of
stock or other securities or property of this Corporation or of
the successor corporation resulting from such merger,
consolidation or sale, to which a holder of Class B Common
deliverable upon conversion would have been entitled on such
recapitalization, merger, consolidation or sale. In any such
case, appropriate adjustment shall be made in the application
of the provisions of this Section 4(b)(3) with respect to the
rights of the holders of the Series A Preferred after the
recapitalization, merger, consolidation or sale to the end that
the provisions of this Section 4(b)(3) (including adjustment of
the Conversion Price then in effect with respect to, and the
number of shares issuable upon conversion of, each share of
Series A Preferred) shall be applicable after that event as
nearly equivalent as may be practicable.
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h. Minimal Adjustments. No adjustment in the Conversion
Price applicable to any share of Series A Preferred need be
made if such adjustment would result in a change in the
Conversion Price of such share of less than 0.1% of the
Conversion Price then in effect. Any adjustment of less than
0.1% of the Conversion Price then in effect that is not made
shall be carried forward and shall be made at the time of and
together with any subsequent adjustment which, on a cumulative
basis, amounts to an adjustment of 0.1% or more in such
Conversion Price.
i. No Impairment. This Corporation will not, by amendment
of its Certificate of Incorporation or through any
reorganization, recapitalization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities
or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed hereunder by this Corporation, but will at all times
in good faith assist in the carrying out of all the provisions
of this Section 4(b)(3) and in the taking of all such actions
as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series A Preferred
against impairment.
j. No Fractional Shares and Certificate as to
Adjustments.
(i) Fractional Shares. In lieu of any fractional
shares to which the holder of Series A Preferred would
otherwise be entitled, the Corporation shall pay cash
equal to such fraction multiplied by the fair market
value of one share of Class B Common, as determined in
good faith by the Board of Directors of the Corporation.
Whether or not fractional shares are issuable upon such
conversion shall be determined on the basis of the total
number of shares of Series A Preferred of each holder at
the time converting into shares of Class B Common stock
and the number of shares of Class B Common issuable upon
such aggregate conversion.
(ii) Upon the occurrence of each adjustment or
readjustment of the Conversion Price at the time in
effect with respect to the shares of Series A Preferred
of any holder pursuant to this Section 4(b)(3), this
Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each such holder a
certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such
adjustment or readjustment is based. This Corporation
shall, upon the written request at any time of any holder
of Series A Preferred, furnish or cause to be furnished
to such holder a like certificate setting forth (A) such
adjustment and readjustment, (B) the Conversion Price at
the time in effect with respect to the shares of Series A
Preferred of such holder, and (C) the number of shares of
Class B Common and the amount, if any, of other
securities and property which at the time would be
received upon the conversion of such holder's shares of
Series A Preferred.
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k. Notices of Record Date. In the event that this
Corporation shall propose at any time: (A) to declare any
dividend or distribution upon any class or series of capital
stock, whether in cash, property, stock or other securities;
(B) to effect any reclassification or recapitalization of its
Common Shares outstanding involving a change in the Common
Shares; (C) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all
of its property or business, or to liquidate, dissolve or wind
up; then, in connection with each such event, this Corporation
shall mail to each holder of Series A Preferred:
1. at least twenty (20) days' prior written notice
of the date on which a record shall be taken for such
dividend or distribution (and specifying the date on
which the holders of the affected class or series of
capital stock shall be entitled thereto) or for
determining the rights to vote, if any, in respect of the
matters referred to in (B) and (C) above; and
2. in the case of the matters referred to in (B)
and (C), written notice of such impending transaction not
later than twenty (20) days prior to the shareholders'
meeting called to approve such transaction, or twenty
(20) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holder
in writing of the final approval of such transaction. The
first of such notices shall describe the material terms
and conditions of the impending transaction (and specify
the date on which the holders of Common Shares shall be
entitled to exchange their Common Shares for securities
or other property deliverable upon the occurrence of such
event) and this Corporation shall thereafter give such
holders prompt notice of any material changes. The
transaction shall in no event take place sooner than
twenty (20) days after this Corporation has given the
first notice provided for herein or sooner than ten (10)
days after this Corporation has given notice of any
material changes provided for herein.
l. Reservation of Stock Issuable Upon Conversion. This
Corporation shall at all times reserve and keep available out
of its authorized but unissued Class B Common solely for the
purpose of effecting the conversion of the shares of the Series
A Preferred such number of shares of its Class B Common as
shall from time to time be sufficient to effect the conversion
of all outstanding shares of the Series A Preferred; and if at
any time the number of authorized but unissued Class B Common
shall not be sufficient to effect the conversion of all then
outstanding shares of the Series A Preferred, in addition to
such other remedies as shall be available to the holder of such
Series A Preferred, this Corporation will take such corporate
action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued Class B Common to such
number of shares as shall be sufficient for such purposes.
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<PAGE>
m. Notices. Any notice required by the provisions of this
Section 4(b)(3) to be given to the holders of shares of Series
A Preferred shall be deemed given three (3) business days after
deposited in the United States mail, first class postage
prepaid, and addressed to each holder of record at his, her or
its address appearing on the books of this Corporation.
n. Waivers. Notwithstanding anything contained herein to
the contrary, any provision of this Section 4(b)(3) may be
waived by a writing signed by, or the vote of, the holders of
at least a majority of the outstanding shares of Series A
Preferred.
(4) Voting Rights. Except as otherwise required by law and as
provided in Section 4(f)(2) hereof with respect to the number of
directors, the holder of each share of Series A Preferred shall have
the right to one vote for each share of Class B Common into which
such share of Series A Preferred could then be converted (with any
fractional share determined on an aggregate conversion basis being
rounded to the nearest whole share), and with respect to such vote
such holder shall have full voting rights and powers equal to the
voting rights and powers of the holders of Class B Common, and shall
be entitled, notwithstanding any provision hereof, to notice of any
stockholders' meeting in accordance with the bylaws of the
Corporation, and shall be entitled to vote, together with holders of
Class B Common, with respect to any question upon which holders of
Class B Common have the right to vote.
(5) Protective Provisions.
a. In addition to any other rights provided by law, so
long as shares of Series A Preferred are outstanding, this
Corporation shall not without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of
a majority of the outstanding shares of the Series A Preferred
(voting as a class on a converted basis):
(i) create or issue shares of any new class or
series of stock or any other securities convertible into
equity securities of this Corporation that are on parity
with or senior to the Series A Preferred with respect to
the payment of dividends or the distribution of assets on
liquidation;
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<PAGE>
(ii) increase the authorized number of shares of
any such new class or series;
(iii) increase the authorized number of shares of
Series A Preferred;
(iv) issue any shares of Series A Preferred;
(v) sell, convey or otherwise dispose of (including
by license) all or substantially all of its property or
business or merge with or into or consolidate with any
other Corporation;
(vi) effect any liquidation, dissolution or winding
up of this Corporation;
(vii) declare or pay any dividend on (including a
dividend payable in stock of this Corporation), make any
other distribution with respect to, or repurchase any,
stock or any other securities convertible into equity
securities of this Corporation which are junior to the
Series A Preferred with respect to the payment of
dividends or the distribution of assets upon liquidation;
(viii) do any act or thing which would result in
taxation of the holders of shares of the Series A
Preferred under Section 305 of the Internal Revenue Code
of 1986, as amended (or any comparable provision of the
Internal Revenue Code as hereafter from time to time
amended); or
(ix) amend this Certificate of Incorporation in any
manner that adversely affects the rights of the Series A
Preferred (including, without limitation, the liquidation
preference provision).
b. In addition to any other rights holders of Series A
Preferred may have, whether in this Certificate of
Incorporation or otherwise, so long as shares of Series A
Preferred are outstanding, this Corporation shall not without
first obtaining the approval (by vote or written consent, as
provided by law) of the holders of a majority (or such larger
proportion as may be required by law) of the outstanding shares
of Series A Preferred (voting separately as a class), take any
action on which said class is entitled under applicable law to
vote separately as a class.
(6) Status of Converted Stock. In the event any shares of
Series A Preferred shall be converted pursuant to Section 4(b)(3)
hereof, the shares so converted shall be cancelled and shall not be
reissued by the Corporation.
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<PAGE>
(7) Conversion of Class A, Class B and Class C Common into
Common Stock. Upon and after the Mandatory Conversion, (i) each
reference in this Section 4(b) to the Class B Common, shall be
deemed to be a reference to the Common Stock, (ii) the Conversion
Price of the Series A Preferred shall be adjusted, if necessary, so
that each share of Series A Preferred shall be (as of the time of
such Mandatory Conversion) convertible into the number of shares of
Common Stock into which the number of shares of Class B Common
issuable upon conversion of such share of Series A Preferred would
have been converted upon such Mandatory Conversion.
(c) Rights, Preferences and Restrictions of Series B
Convertible Preferred Stock. The rights, preferences, privileges and
restrictions granted to and imposed on the Series B Convertible Preferred
Stock, which series consists of 306,513 shares ("Original Series B
Preferred"), and any New B Series (as defined in and created pursuant to
Section 4(c)(3)(b)(ii) hereof) (the Original Series B Preferred, together
with any such New B Series, the "Series B Preferred") are as follows:
(1) Dividend Provisions. The holders of shares of Series B
Preferred shall be entitled to receive dividends and other
distributions equivalent to those declared or paid on Class B Common
(or any other class of capital stock of this Corporation (other than
Class A Common) junior as to payment of dividends to the Series B
Preferred), determined as if the Series B Preferred had been
converted into Class B Common at the then applicable Series B
Conversion Price (as defined in Section 4(c)(3)(a) hereof) (or, in
the case of dividends or distributions on junior stock (other than
Class A Common) other than Class B Common, determined on a
comparable basis), and payable when, as and if declared by the Board
of Directors on such Class B Common (or other such junior stock).
Such dividends shall not be cumulative. The Series B Preferred is on
parity with the Series A Preferred with respect to the payment of
dividends.
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<PAGE>
(2) Liquidation Preference.
a. In the event of any liquidation, dissolution or
winding up of this Corporation, either voluntary or
involuntary, the holders of Series B Preferred shall be
entitled to receive, prior and in preference to any
distribution of any of the assets of this Corporation to the
holders of any class of Common Shares or any other junior
securities by reason of their ownership thereof, an amount per
share in cash equal to $52.20 (or such larger amount provided
for in the second sentence of paragraph (b) below) for each
outstanding share of Series B Preferred (the "Original Series B
Issue Price"), plus all declared but unpaid dividends as of the
date of such event. If upon the occurrence of such event, the
assets and funds thus distributed among the holders of the
Series B Preferred shall be insufficient to permit the payment
to such holders of the full aforesaid preferential amounts,
then the entire assets and funds of the Corporation legally
available for distribution shall be distributed ratably among
the holders of the Series A Preferred, the Series B Preferred
and any other class or series of stock of the Corporation that
is on parity with the Series B Preferred with respect to the
distribution of assets on liquidation in proportion to the full
preferential amount each holder would otherwise be entitled to
receive. The Series B Preferred is on parity with the Series A
Preferred with respect to the distribution of assets upon
liquidation.
b. Following completion of the distribution required by
the first sentence of paragraph (a) of this Section 4(c)(2) and
by the terms of any other class or series of stock that is
senior to the Common Shares with respect to the distribution of
assets upon liquidation, if assets remain in the Corporation,
the holders of Common Shares shall share ratably in all
remaining assets of this Corporation in accordance with the
provisions contained in Sections 4(h), (i), (j) and (k) below.
In no event shall any holder of Series B Preferred receive less
(pursuant to paragraph (a) of this Section 4(c)(2)) than the
amount it would have received had it converted all its shares
of Series B Preferred into Class B Common prior to such
distribution.
c. For purposes of this Section 4(c)(2), (i) any
consolidation or merger of this Corporation with or into any
other corporation or other entity or person, or any other
corporate reorganization in which this Corporation shall not be
the continuing or surviving entity of such consolidation,
merger or reorganization, (ii) unless the holders of a majority
of the outstanding shares of Series B Preferred voting as a
class otherwise agree, any transaction or series of related
transactions by this Corporation in which in excess of 50% of
the Corporation's voting power is transferred, and (iii) a sale
or transfer of all or substantially all of the assets of the
Corporation in a single transaction or series of related
transactions, shall be deemed to be a liquidation, dissolution
or winding up within the meaning of this Section 4(c)2.
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<PAGE>
d. In the event that, immediately prior to the closing of
a transaction described in Section 4(c)(2)(c) the cash
distributions required by Section 4(c)(2)(a) have not been
made, this Corporation shall forthwith either:
(i) cause such closing to be postponed until such
time as such cash distributions have been made, or
(ii) cancel such transaction, in which event the
rights, preferences and privileges of the holders of the
Series B Preferred shall revert to and be the same as
such rights, preferences and privileges existing
immediately prior to the date of the first notice
referred to in Section 4(c)(3)(k) hereof.
(3) Conversion. The holders of the Series B Preferred shall
have conversion rights as follows (the "Series B Conversion
Rights"):
a. Right to Convert. Each share of Series B Preferred
shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share, at the
office of this Corporation or any transfer agent for the Series
B Preferred into such number of fully paid and non-assessable
shares of Class B Common as is determined by dividing the
Original Series B Issue Price by the "Conversion Price" at the
time in effect for such share. The initial Conversion Price per
share for shares of Series B Preferred shall be the Original
Series B Issue Price; provided, however, that such Conversion
Price shall be subject to adjustment as provided hereinafter.
b. Automatic Conversion.
(i) Mandatory Conversion. With the prior written
consent of the holders of a majority of the then
outstanding shares of Series B Preferred, each share of
Series B Preferred shall automatically be converted into
shares of Common Stock at the Conversion Price then in
effect with respect to such share upon the declaration of
a Mandatory Conversion (defined below) pursuant to
Section 4(l) hereof.
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(ii) New B Series.
1. Each share of Original Series B Preferred
of a holder thereof who does not exercise in full
such holder's right to purchase, on the terms and
conditions set forth in Section 4(d) hereof, New
Securities (as defined in Section 4(d)(2) hereof)
with respect to any particular issuance of such New
Securities (the "Converting Issuance") shall
automatically be converted into a new series of
Preferred Stock (each, a "New B Series") at the
conversion rate of one share of such new series for
each share of Original Series B Preferred of such
holder. Each New B Series shall be designated
Series B-X Convertible Preferred Stock, where 'X'
is the next consecutive whole number following the
number used in the designation of the New B Series
last created prior thereto, with the first such New
B Series being designated Series B-2 Convertible
Preferred Stock. Any conversion pursuant to this
subsection (ii) shall be deemed to have occurred
immediately prior to the relevant Converting
Issuance.
2. Any holder of shares of Original Series B
Preferred whose shares are converted into shares of
a New B Series shall, upon written request from the
Corporation, surrender any certificates for shares
of Original Series B Preferred held by such holder.
The Corporation shall, as soon as practicable after
receipt thereof, issue and deliver to such holder a
certificate or certificates for the number of
shares of the New B Series to which such holder
shall be entitled as set forth in the immediately
preceding subsection (1).
c. Mechanics of Conversion. Before any holder of the
Corporation's Series B Preferred shall be entitled to convert
the same into shares of Class B Common as permitted in Section
4(c)(3)(a) hereof or to receive certificates evidencing shares
of Class B Common following a conversion pursuant to Section
4(c)(3)(b)(i) hereof, the holder(s) shall surrender the
certificate or certificates therefor, duly endorsed, at the
office of this Corporation or of any transfer agent for the
applicable capital stock and shall give written notice by mail,
postage prepaid, or such other means as the holder may elect,
to this Corporation at its principal corporate office of the
election to convert the same and shall state therein the name
or names in which the certificate or certificates for shares of
the Class B Common are to be issued. This Corporation shall, as
soon as practicable following receipt thereof, issue and
deliver at such office to such holder of capital stock or to
the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Class B Common to
which such holder shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior
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<PAGE>
to the close of business on the date of such surrender of the
shares of Series B Preferred for conversion, in the case of a
conversion pursuant to Section 4(c)(3)(a) hereof, or the record
date for (or, if no record date is fixed therefor, the
effective date of) conversion of the Series B Preferred, in the
case of a conversion pursuant to Section 4(c)(3)(b)(i) hereof,
and the person or persons entitled to receive the shares
issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares as of such date.
If the conversion is in connection with an underwritten
offering of securities registered pursuant to the Securities
Act of 1933, as amended, the conversion may, at the option of
the holders of a majority of the outstanding Series B
Preferred, be conditioned upon the closing with the underwriter
of the sale of securities pursuant to such offering, in which
event the person(s) entitled to receive the shares issuable
upon such conversion shall not be deemed to have converted such
shares until immediately prior to the closing of such sale of
securities.
d. Adjustments to Conversion Price for Certain Diluting
Issues.
(i) No Adjustment Of Conversion Price. No adjustment in
the Conversion Price of shares of Series B Preferred of a
holder thereof shall be made in respect of the issuance of
Additional Common Shares unless the consideration per share
(determined pursuant to Section 4(b)(3)(d)(v) hereof) for an
Additional Common Share issued or deemed to be issued by the
Corporation is less than the Conversion Price in effect on the
date of, and immediately prior to, such issue with respect to
the shares of Series B Preferred of such holder.
(ii) Adjustment of Conversion Price Upon Issuance of
Additional Common Shares.
1. In the event the Corporation, at any time during
the Protection Period shall issue Additional Common
Shares (including Additional Common Shares deemed to be
issued pursuant to Section 4(b)(3)(d)(iii) but subject to
the limitations of Section 4(b)(3)(d)(i)(4)) without
consideration or for a consideration per share less than
the Conversion Price in effect on the date of, and
immediately prior to, such issue with respect to the
shares of Original Series B Preferred of a holder
thereof, then and in such event the Conversion Price
applicable to the shares of any such holder shall be
reduced, concurrently with such issue, to a Conversion
Price (calculated to the nearest cent) equal to the
lowest consideration per share for which such Additional
Common Shares are issued; provided, however, that with
respect to any such issuance this subsection 1 shall not
apply unless and until the Corporation has issued New
Securities during the Protection Period for an aggregate
consideration which exceeds $1,000,000, in which event
this subsection 1 shall apply to all such issuances.
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2. In the event that (x) subsection 1 above does
not apply with respect to the shares of Series B
Preferred of any holder thereof and (y) the Corporation,
at any time after the Original Issue Date shall issue
Additional Common Shares (including Additional Common
Shares deemed to be issued pursuant to Section
4(b)(3)(d)(iii) but subject to the limitations of Section
4(b)(3)(d)(i)(4)) without consideration or for a
consideration per share less than the Conversion Price in
effect on the date of, and immediately prior to, such
issue with respect to the shares of Series B Preferred of
such holder, then and in such event the Conversion Price
applicable to the shares of such holder shall be reduced,
concurrently with such issue, to a Conversion Price
(calculated to the nearest cent) determined by
multiplying such Conversion Price by a fraction, the
numerator of which shall be the number of Common Shares
outstanding immediately prior to such issue plus the
number of Common Shares which the aggregate consideration
received by the Corporation for the total number of
Additional Common Shares so issued would purchase at such
Conversion Price; and the denominator of which shall be
the number of Common Shares outstanding immediately prior
to such issue plus the number of such Additional Common
Shares so issued; provided, that, for the purposes of
this Section 4(c)(3)(d)(ii), (W) all Common Shares
issuable upon conversion of all outstanding Series A
Preferred and Series B Preferred shall be deemed to be
outstanding, (X) all Common Shares issuable upon
conversion of all outstanding Convertible Securities, and
upon exercise of all outstanding Options bearing an
exercise price which is lower than the price at which the
Additional Common Shares were issued (or deemed to be
issued), shall be deemed to be outstanding, (Y)
immediately after any Additional Common Shares are deemed
issued pursuant to subsection (iii) above, such
Additional Common Shares shall be deemed to be
outstanding and (Z) all Common Shares subject to an
escrow agreement under which such shares will (under
certain circumstances) be surrendered to the Corporation
for cancellation shall not be deemed to be outstanding,
provided that if any such Common Shares subject to an
escrow agreement are subsequently released from escrow
and not surrendered to the Corporation for cancellation
("Released Shares"), all adjustments to an applicable
Conversion Price made during the period during which such
shares were held in escrow shall be recalculated as if
such Released Shares had been outstanding at the time of
each such adjustment.
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e. Conversion Price Adjustments for Subdivisions,
Combinations or Consolidations of Common Shares.
(i) In the event this Corporation should at any time or
from time to time after the date hereof fix a record date for
the effectuation of a split or subdivision of the outstanding
Common Shares or the determination of holders of Common Shares
entitled to receive a dividend or other distribution payable in
additional Common Shares or other securities or rights
convertible into, or entitling the holder thereof to receive
directly or indirectly, additional Common Shares (hereinafter
referred to as "Common Share Equivalents"), without payment of
any consideration by such holder for the additional Common
Shares or the Common Share Equivalents (including the
additional Common Shares issuable upon conversion or exercise
thereof), then, as of such record date (or the date of such
dividend distribution, split or subdivision if no record date
is fixed), the Conversion Price applicable to each share of
Series B Preferred shall be appropriately decreased so that the
number of shares of Class B Common issuable on conversion of
each such share of Series B Preferred shall be increased in
proportion to such increase of outstanding Common Shares and
shares issuable with respect to Common Share Equivalents.
(ii) If the number of Common Shares outstanding at any
time after the date hereof is decreased by a combination of the
outstanding Common Shares, then, following the record date of
such combination, the Conversion Price applicable to each share
of Series B Preferred shall be appropriately increased so that
the number of shares of Class B Common issuable on conversion
of each such share of Series B Preferred shall be decreased in
proportion to such decrease in outstanding shares.
f. Other Distributions. In the event this Corporation
shall declare a distribution payable in securities of other
persons, evidences of indebtedness issued by this Corporation
or other persons, assets (excluding cash dividends) or options
or rights not referred to in Section 4(c)(3)(e)(i), the holders
of the Series B Preferred shall be entitled to a proportionate
share of any such distribution as though they were the holders
of the number of shares of Class B Common of the Corporation
into which their shares of Series B Preferred are convertible
as of the record date fixed for the determination of the
holders of Common Shares of the Corporation entitled to receive
such distribution or, if no such record date is fixed, as of
the date such distribution is made.
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g. Recapitalization. If at any time or from time to time
there shall be a recapitalization of the Common Shares (other
than a subdivision, combination or reclassification provided
for elsewhere in this Section 4(c)(3)), or a merger or
consolidation of this Corporation with or into another
corporation, or the sale of all or substantially all of this
Corporation's assets to any other person or entity, then, as a
part of such recapitalization, merger, consolidation or sale,
provision shall be made so that the holders of the Series B
Preferred shall thereafter be entitled to receive upon
conversion of the Series B Preferred the number of shares of
stock or other securities or property of this Corporation or of
the successor corporation resulting from such merger,
consolidation or sale, to which a holder of Class B Common
deliverable upon conversion would have been entitled on such
recapitalization, merger, consolidation or sale. In any such
case, appropriate adjustment shall be made in the application
of the provisions of this Section 4(c)(3) with respect to the
rights of the holders of the Series B Preferred after the
recapitalization, merger, consolidation or sale to the end that
the provisions of this Section 4(c)(3) (including adjustment of
the Conversion Price then in effect with respect to, and the
number of shares issuable upon conversion of, each share of
Series B Preferred) shall be applicable after that event as
nearly equivalent as may be practicable.
h. Minimal Adjustments. No adjustment in the Conversion
Price applicable to any share of Series B Preferred need be
made if such adjustment would result in a change in the
Conversion Price of such share of less than 0.1% of the
Conversion Price then in effect. Any adjustment of less than
0.1% of the Conversion Price then in effect that is not made
shall be carried forward and shall be made at the time of and
together with any subsequent adjustment which, on a cumulative
basis, amounts to an adjustment of 0.1% or more in such
Conversion Price.
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i. No Impairment. This Corporation will not, by amendment
of its Certificate of Incorporation or through any
reorganization, recapitalization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities
or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed hereunder by this Corporation, but will at all times
in good faith assist in the carrying out of all the provisions
of this Section 4(c)(3) and in the taking of all such actions
as may be necessary or appropriate in order to protect the
Series B Conversion Rights of the holders of the Series B
Preferred against impairment.
j. No Fractional Shares and Certificate as to
Adjustments.
(i) Fractional Shares. In lieu of any fractional
shares to which the holder of Series B Preferred would
otherwise be entitled, the Corporation shall pay cash
equal to such fraction multiplied by the fair market
value of one share of Class B Common, as determined in
good faith by the Board of Directors of the Corporation.
Whether or not fractional shares are issuable upon such
conversion shall be determined on the basis of the total
number of shares of Series B Preferred of each holder at
the time converting into shares of Class B Common stock
and the number of shares of Class B Common issuable upon
such aggregate conversion.
(ii) Upon the occurrence of each adjustment or
readjustment of the Conversion Price at the time in
effect with respect to the shares of Series B Preferred
of any holder pursuant to this Section 4(c)(3), this
Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each such holder a
certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such
adjustment or readjustment is based. This Corporation
shall, upon the written request at any time of any holder
of Series B Preferred, furnish or cause to be furnished
to such holder a like certificate setting forth (A) such
adjustment and readjustment, (B) the Conversion Price at
the time in effect with respect to the shares of Series B
Preferred of such holder, and (C) the number of shares of
Class B Common and the amount, if any, of other
securities and property which at the time would be
received upon the conversion of such holder's shares of
Series B Preferred.
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<PAGE>
k. Notices of Record Date. In the event that this
Corporation shall propose at any time: (A) to declare any
dividend or distribution upon any class or series of capital
stock, whether in cash, property, stock or other securities;
(B) to effect any reclassification or recapitalization of its
Common Shares outstanding involving a change in the Common
Shares; (C) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all
of its property or business, or to liquidate, dissolve or wind
up; then, in connection with each such event, this Corporation
shall mail to each holder of Series B Preferred:
1. at least twenty (20) days' prior written notice
of the date on which a record shall be taken for such dividend
or distribution (and specifying the date on which the holders
of the affected class or series of capital stock shall be
entitled thereto) or for determining the rights to vote, if
any, in respect of the matters referred to in (B) and (C)
above; and
2. in the case of the matters referred to in (B)
and (C), written notice of such impending transaction not later
than twenty (20) days prior to the shareholders' meeting called
to approve such transaction, or twenty (20) days prior to the
closing of such transaction, whichever is earlier, and shall
also notify such holder in writing of the final approval of
such transaction. The first of such notices shall describe the
material terms and conditions of the impending transaction (and
specify the date on which the holders of Common Shares shall be
entitled to exchange their Common Shares for securities or
other property deliverable upon the occurrence of such event)
and this Corporation shall thereafter give such holders prompt
notice of any material changes. The transaction shall in no
event take place sooner than twenty (20) days after this
Corporation has given the first notice provided for herein or
sooner than ten (10) days after this Corporation has given
notice of any material changes provided for herein.
l. Reservation of Stock Issuable Upon Conversion. This
Corporation shall at all times reserve and keep available out
of its authorized but unissued Class B Common solely for the
purpose of effecting the conversion of the shares of the Series
B Preferred such number of shares of its Class B Common as
shall from time to time be sufficient to effect the conversion
of all outstanding shares of the Series B Preferred; and if at
any time the number of authorized but unissued Class B Common
shall not be sufficient to effect the conversion of all then
outstanding shares of the Series B Preferred, in addition to
such other remedies as shall be available to the holder of such
Series B Preferred, this Corporation will take such corporate
action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued Class B Common to such
number of shares as shall be sufficient for such purposes.
26
<PAGE>
m. Notices. Any notice required by the provisions of this
Section 4(c)(3) to be given to the holders of shares of Series
B Preferred shall be deemed given three (3) business days after
deposited in the United States mail, first class postage
prepaid, and addressed to each holder of record at his, her or
its address appearing on the books of this Corporation.
n. Waivers. Notwithstanding anything contained herein to
the contrary, any provision of this Section 4(c)(3) may be
waived by a writing signed by, or the vote of, the holders of
at least a majority of the outstanding shares of Series B
Preferred.
(4) Voting Rights. Except as otherwise required by law and as
provided in Section 4(f)(3) hereof with respect to the number of
directors, the holder of each share of Series B Preferred shall have
the right to one vote for each share of Class B Common into which
such share of Series B Preferred could then be converted (with any
fractional share determined on an aggregate conversion basis being
rounded to the nearest whole share), and with respect to such vote
such holder shall have full voting rights and powers equal to the
voting rights and powers of the holders of Class B Common, and shall
be entitled, notwithstanding any provision hereof, to notice of any
stockholders' meeting in accordance with the bylaws of the
Corporation, and shall be entitled to vote, together with holders of
Class B Common, with respect to any question upon which holders of
Class B Common have the right to vote.
(5) Protective Provisions.
a. In addition to any other rights provided by law, so
long as shares of Series B Preferred are outstanding, this
Corporation shall not without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of
a majority of the outstanding shares of the Series B Preferred
(voting as a class on a converted basis):
(i) create or issue shares of any new class or
series of stock or any other securities convertible into
equity securities of this Corporation that are on parity
with or senior to the Series B Preferred with respect to
the payment of dividends or the distribution of assets on
liquidation;
(ii) increase the authorized number of shares of
any such new class or series;
(iii) increase the authorized number of shares of
Series B Preferred;
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<PAGE>
(iv) issue any shares of Series B Preferred, other
than the issuance of up to 19,713 shares of Series B
Preferred pursuant to the terms of Section 11 of the
Series B Convertible Preferred Stock Purchase Agreement
between the Corporation and Hancock Venture Partners
V-Direct Fund L.P.;
(v) sell, convey or otherwise dispose of (including
by license) all or substantially all of its property or
business or merge with or into or consolidate with any
other Corporation;
(vi) effect any liquidation, dissolution or winding
up of this Corporation;
(vii) declare or pay any dividend on (including a
dividend payable in stock of this Corporation), make any
other distribution with respect to, or repurchase any,
stock or any other securities convertible into equity
securities of this Corporation which are junior to the
Series B Preferred with respect to the payment of
dividends or the distribution of assets upon liquidation;
or
(viii) amend this Certificate of Incorporation in
any manner that adversely affects the rights of the
Series B Preferred (including, without limitation, the
liquidation preference provision).
b. In addition to any other rights holders of Series B
Preferred may have, whether in this Certificate of
Incorporation or otherwise, so long as shares of Series B
Preferred are outstanding, this Corporation shall not without
first obtaining the approval (by vote or written consent, as
provided by law) of the holders of a majority (or such larger
proportion as may be required by law) of the outstanding shares
of Series B Preferred (voting separately as a class), take any
action on which said class is entitled under applicable law to
vote separately as a class.
(6) Status of Converted Stock. In the event any shares of
Series B Preferred shall be converted pursuant to Section 4(c)(3)
hereof, the shares so converted shall be cancelled and shall not be
reissued by the Corporation.
(7) Conversion of Class A, Class B and Class C Common into
Common Stock. Upon and after the Mandatory Conversion, (i) each
reference in this Section 4(c) to the Class B Common, shall be
deemed to be a reference to the Common Stock, (ii) the Conversion
Price of the Series B Preferred shall be adjusted, if necessary, so
that each share of Series B Preferred shall be (as of the time of
such Mandatory Conversion) convertible into the number of shares of
Common Stock into which the number of shares of Class B Common
issuable upon conversion of such share of Series B Preferred would
have been converted upon such Mandatory Conversion.
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<PAGE>
(d) Preemptive Rights.
(1) During the Protection Period (as defined in Section
4(b)(3)(d)(i)(5) hereof), each holder of shares of Series A
Preferred or Series B Preferred shall have a preemptive right to
purchase, pro rata, all or any part of New Securities (as defined
below) which the Corporation may, from time to time, propose to sell
and issue. A pro rata share, for purposes of this preemptive right,
is the ratio that the number of shares of Series A Preferred and
Series B Preferred then held by such Investor bears to the total
number of shares of Series A Preferred and Series B Preferred then
outstanding.
(2) "New Securities" shall mean any Additional Common Shares
(including Additional Common Shares deemed to be issued pursuant to
Section 4(b)(3)(d)(iii) but subject to the limitations of Section
4(b)(3)(d)(i)(4)) issued for a consideration per share less than
$52.20 (as adjusted for any subdivision, combination or
reclassification of shares).
(3) In the event the Corporation proposes to undertake an
issuance of New Securities, it shall give each holder of shares of
Series A Preferred and Series B Preferred written notice of its
intention, describing the type of New Securities, and the price and
general terms upon which the Corporation proposes to issue the same
(the "Company Notice"). Each such holder shall have fifteen (15)
days from the date the Company Notice is given to agree to purchase
up to such holder's pro rata share of such New Securities for the
price and upon the general terms specified in the notice by giving
written notice to the Corporation and stating therein the quantity
of New Securities to be purchased. Unless otherwise agreed by the
Corporation, each such holder electing to purchase New Securities
(each a "Participating Holder") shall make payment in full therefor
within ten (10) days after a definitive purchase document has been
executed by Participating Holders holding a majority of the shares
of Series A Preferred and Series B Preferred held by all
Participating Holders (the "Payment Period").
(4) In the event (x) one or more holders of shares of Series A
Preferred or Series B Preferred fail to exercise in full their
preemptive rights within said fifteen (15) day period or (y) one or
more holders exercising preemptive rights hereunder fail to make
payment within the Payment Period (in addition to any other rights
or remedies the Corporation may have with respect to such a failure
to make payment), the Corporation shall have ninety (90) days
thereafter to sell or enter into an agreement to sell the New
Securities not elected to be purchased, or for which the purchase
price has not been paid, by such holders at the price and upon the
general terms no more favorable to the purchasers of such securities
than those specified in the Corporation's notice. In the event the
Corporation has not sold the New Securities or entered into an
agreement to sell the New Securities within said ninety (90) day
period, the Corporation shall not thereafter issue or sell any New
Securities without first offering such securities in the manner
provided above.
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<PAGE>
(5) The preemptive rights granted under this Section 4(d) shall
terminate upon the expiration of the Protection Period.
(e) Other Preferred Stock. Subject to the terms of the Series A
Preferred and the Series B Preferred, shares of Preferred Stock, other
than the Series A Preferred and the Series B Preferred which shall have
the designations and terms set forth herein, may be issued from time to
time in one or more classes or series, each of which class or series shall
have such distinctive designation or title as shall be fixed by the Board
of Directors of the Corporation (the "Board") prior to the issuance of any
shares thereof. Each such class or series of Preferred Stock shall consist
of such number of shares, and have such voting powers, full or limited, or
no voting powers, and such preferences and relative, participating,
optional or other special rights and such qualifications, limitations or
restrictions thereof, as shall be stated in such resolution or resolutions
providing for the issue of such class or series of Preferred Stock as may
be adopted from time to time by the Board prior to the issuance of any
shares thereof pursuant to the authority hereby expressly vested in it,
all in accordance with the laws of the State of Delaware.
(f) Board of Directors.
(1) The authorized number of directors of the Corporation shall
be no less than five (5) and no more than nine (9) as determined
from time to time by the Board of Directors of the Corporation.
(2) So long as at least 47,893 shares of Series A Preferred (as
adjusted for any subdivision, combination or reclassification of
shares) are outstanding, the holders of shares of Series A
Preferred, voting as a separate class, shall be entitled to elect
one (1) director (the "Series A Director"). In the case of any
vacancy in the office of a director elected by the holders of Series
A Preferred, a successor shall be elected to hold office for the
unexpired term of such director by the affirmative vote of the
holders of a majority of the Series A Preferred given at a special
meeting of such shareholders duly called or by an action by written
consent for that purpose.
(3) So long as at least 76,628 shares of Series B Preferred (as
adjusted for any subdivision, combination or reclassification of
shares) are outstanding, the holders of shares of Series B
Preferred, voting as a separate class, shall be entitled to elect
one (1) director (the "Series B Director"). In the case of any
vacancy in the office of a director elected by the holders of Series
B Preferred, a successor shall be elected to hold office for the
unexpired term of such director by the affirmative vote of the
holders of a majority of the Series B Preferred given at a special
meeting of such shareholders duly called or by an action by written
consent for that purpose.
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<PAGE>
(4) The holders of the Corporation's Common Shares (with all
classes voting together as a single class) shall be entitled to
elect the directors other than the directors that (x) the Series A
Preferred shall be entitled to elect pursuant to the preceding
subsection (2) and (y) the Series B Preferred shall be entitled to
elect pursuant to the preceding subsection (3).
(5) Any director who shall have been elected by a specified
class or classes of shares may be removed during such director's
term of office, either for or without cause by, and only by, the
affirmative vote of the holders of a majority of the shares of such
specified class or classes, as the case may be, given at a special
meeting of the shareholders duly called or by an action by written
consent for that purpose, and any such vacancy thereby created may
be filled by the vote of the holders of a majority of the shares of
such specified class or classes represented at such meeting or in
such consent.
(g) Voting Rights of Class Common Stock. Except as otherwise
required by the Delaware General Corporation Law, the holders of the
outstanding shares of Class Common Stock, voting as a single class, shall
be entitled to one vote per share on all matters submitted to a vote of
the stockholders.
(h) Class A Common. Each outstanding share of Class A Common shall
represent an entitlement to the Class A Percentage (as hereinafter
defined) of any Dividend Amount (as hereinafter defined) and the Class A
Percentage of the Liquidation Amount (as hereinafter defined), provided,
however, that the Series A Preferred shall be paid its portion of the
Liquidation Amount prior to any such payment to the Class A Common.
(i) Class B Common. The outstanding shares of Class B Common will
represent, in the aggregate, an entitlement to (and each such outstanding
share will represent an entitlement to its pro rata share of) (i) any
Dividend Amount and the Liquidation Amount less, in each case, the portion
of such Dividend Amount or Liquidation Amount to which the then
outstanding shares of Class A Common and Series A Preferred are entitled
hereunder and (ii) any dividend payable or payment on liquidation in
respect of Shares of Class B Common issued upon conversion of Series B
Preferred.
(j) Class C Common. Each outstanding share of Class C Common shall
be entitled to the same amount of dividends and liquidation proceeds as a
share of Class B Common, provided, however, that following a reduction in
the number of outstanding shares of Class A Common or Class B Common
pursuant to the operation of the Class A Escrow Agreement dated April 25,
1996, between the Corporation and The Ultimate Software Group, Ltd. (the
"Partnership") and/or the Class B Escrow Agreement dated April 25, 1996
among the Corporation, the Partnership and the individuals named therein,
the amount of dividends and/or liquidation proceeds thereafter payable
with respect to shares of Class C Common shall be determined as if such
reductions had not occurred.
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(k) Common Stock. No shares of Common Stock shall be issued prior to
the occurrence of a Mandatory Conversion (as hereinafter defined). Upon
issuance, the Common Stock shall represent the only class of common stock
of the Corporation and the outstanding shares of Common Stock shall
represent, in the aggregate, an entitlement to (and each such outstanding
share will represent an entitlement to its pro rata share of) all
dividends and liquidation proceeds thereafter payable to holders of any
class of common stock of the Corporation. The holders of the outstanding
shares of Common Stock shall be entitled to one vote per share on all
matters submitted to a vote of the stockholders.
(l) Mandatory Conversion. The Board shall have the authority,
following the occurrence of a Release Event (as hereinafter defined), to
declare a mandatory conversion (a "Mandatory Conversion"). Upon a
declaration of a Mandatory Conversion, each share of Series A Preferred,
Series B Preferred, Class Common Stock, and each share of convertible
Preferred Stock which may hereafter be authorized, if the terms thereof
provide that shares of such stock are subject to this Section 4(l), and
outstanding on the record date therefor (each, a "Converting Share"),
shall be automatically converted into, and represent the right to receive,
(x) in the case of the Class A Common, the Class B Common and the Class C
Common, that number of shares (or that fraction of a share) of Common
Stock having a Percent Equity Participation (as hereinafter defined)
(after all Converting Shares are converted, treating all shares of Series
A Preferred and Series B Preferred as Converting Shares for this purpose)
equal to the Percent Equity Participation (before conversion) of the
Converting Share, and (y) in the case of Series A Preferred, Series B
Preferred or other convertible Preferred Stock, that number of shares of
Common Stock into which the Underlying Shares (as hereinafter defined)
would then be convertible under clause (x) above; provided, however, that
(i) the shares of Series A Preferred shall not be subject to such
Mandatory Conversion without the prior written consent of the holders of a
majority of the outstanding shares of the Series A Preferred and (ii) the
shares of Series B Preferred shall not be subject to such Mandatory
Conversion without the prior written consent of the holders of a majority
of the outstanding shares of the Series B Preferred.
(m) Other Provisions Relating to Common Shares. (i) No
dividends or other distributions shall be declared or paid in Common
Shares or options, warrants or rights to acquire such stock or
securities convertible into or exchangeable for shares of such
stock, except dividends or other distributions payable to the
holders thereof ratably according to the number of Common Shares
held by them, in shares of, or options, warrants or rights to
acquire or securities convertible into or exchangeable for, Class A
Common to holders of that class of stock, Class B Common to holders
of that class of stock and Class C Common to holders of that class
of stock.
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(ii) The Corporation will at all times reserve and keep
available out of its authorized but unissued shares of Common Stock,
solely for the purpose of issue upon conversion of shares of Class
Common Stock, Series A Preferred, Series B Preferred and other
convertible Preferred Stock, such number of shares of Common Stock
as shall then be issuable upon the conversion of all outstanding
shares of Class Common Stock, Series A Preferred, Series B Preferred
and other convertible Preferred Stock.
(iii) Shares of Class Common Stock that are converted
into shares of Common Stock shall not be reissued.
(iv) The issue of certificates evidencing shares of
Common Stock upon conversion of Class Common Stock shall be made
without charge to the holders of such shares for any issue tax in
respect thereof or other cost incurred by the Corporation in
connection with such conversion; provided, however, that the
Corporation shall not be required to pay any tax that may be payable
in respect of any transfer involved in the issuance and delivery of
any certificate in a name other than that of the holder of the Class
Common Stock converted.
(v) If the Corporation shall in any manner subdivide (by
stock split, stock dividend or otherwise) or combine (by reverse
stock split or otherwise) the outstanding shares of any class of
Common Shares, the outstanding shares of all other classes shall be
proportionately subdivided or combined, as the case may be, and
effective provision shall be made for the protection of all rights
hereunder. In case of any reorganization, reclassification or change
of Common Shares (other than a change in par value, or from par
value to no par value as a result of a subdivision or combination),
or in case of any consolidation of the Corporation with one or more
other corporations or a merger of the Corporation with another
corporation (other than a consolidation or merger in which the
Corporation is the continuing corporation and which does not result
in any reclassification or change of outstanding Common Shares), or
in the case of any sale, lease or other disposition to another
corporation (other than a wholly owned subsidiary of the
Corporation) of all or substantially all the assets of the
Corporation, effective provision shall be made in the certificate of
incorporation of the resulting or surviving corporation or otherwise
for the protection of the conversion rights of the Common Shares of
each class that shall be applicable, as nearly as reasonably may be,
to any such other shares of stock and other securities and property
deliverable upon conversion of Common Shares into which such Common
Shares might have been converted (without regard to restrictions on
such conversion) immediately prior to such event.
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<PAGE>
(n) Definitions. (i) As used herein, the term "Class A
Percentage" shall mean the percentage obtained by dividing 24.5% by
236,300.
(ii) As used herein, the term "Dividend Amount"
shall mean the aggregate amount declared on any date as a dividend
with respect to the Series A Preferred, the Class A Common and the
Class B Common (excluding shares of Class B Common issued upon
conversion of Series B Preferred).
(iii) As used herein the term "Liquidation Amount"
shall mean the aggregate amount payable upon liquidation of the
corporation to holders of outstanding shares of Series A Preferred,
Class A Common and Class B Common (excluding shares of Class B
Common issued upon conversion of Series B Preferred).
(iv) As used herein, the term "Percent Equity
Participation" shall mean the portion, expressed as a percent of a
hypothetical dividend, paid to holders of record on the date of
determination, to which an outstanding share of Class Common Stock
or Common Stock, as the case may be, would be entitled at the time
of determination.
(v) As used herein, the term "Release Event" shall
mean the earliest to occur of (1) the execution of a firm
underwriting agreement for an initial public offering of capital
stock of the Corporation, (2) the acquisition by a third party of
(a) shares representing a majority of the voting power or the
outstanding shares of capital stock of the Corporation or (b) more
than 50% of the assets of the Corporation, (3) a material
acquisition or business combination involving the Corporation that
the general partner of the Partnership determines should result in a
liquidation or dissolution of the Partnership, (4) the conversion by
a majority in interest of the Series A Preferred into Common Stock,
if the general partner of the Partnership determines that such
conversion should result in a liquidation or dissolution of the
Partnership, or (5) March 31, 2001.
(vi) As used herein, the term "Underlying Shares"
shall mean as of any date (i) with respect to the Series A Preferred
and Series B Preferred, the number of shares of Class B Common into
which the outstanding shares of Series A Preferred and Series B
Preferred, respectively, are then convertible and (ii) in the case
of other convertible preferred stock, the number of shares of Class
A Common, Class B Common or Class C Common into which the
outstanding shares of such other convertible preferred stock are
then convertible.
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<PAGE>
5. Elections of directors need not be by written ballot unless
required by the By-laws of the Corporation. Any director, other than the Series
A Director and the Series B Director, may be removed from office either with or
without cause at any time by the affirmative vote of the holders of a majority
of the outstanding stock of the Corporation entitled to vote, given at a
meeting of the stockholders called for that purpose, or by the consent of the
holders of a majority of the outstanding stock of the Corporation entitled to
vote, given in accordance with Section 228 of the General Corporation Law of
the State of Delaware. The Series A Director may be removed from office either
with or without cause at any time by the affirmative vote of the holders of a
majority of the outstanding shares of the Series A Preferred entitled to vote,
given at a meeting of the holders of Series A Preferred called for that
purpose, or by the consent of the holders of a majority of the outstanding
shares of Series A Preferred entitled to vote, given in accordance with Section
228 of the General Corporation Law of the State of Delaware. The Series B
Director may be removed from office either with or without cause at any time by
the affirmative vote of the holders of a majority of the outstanding shares of
the Series B Preferred entitled to vote, given at a meeting of the holders of
Series B Preferred called for that purpose, or by the consent of the holders of
a majority of the outstanding shares of Series B Preferred entitled to vote,
given in accordance with Section 228 of the General Corporation Law of the
State of Delaware.
6. In furtherance and not in limitation of the powers conferred upon
the Board of Directors by law, the Board of Directors shall have the power to
make, adopt, alter, amend and repeal from time to time the By-laws of the
Corporation subject to the right of the stockholders entitled to vote with
respect thereto to alter, amend and repeal By-laws made by the Board of
Directors.
7. A director of the Corporation shall not be personally liable to
the Corporation or to its stockholders for monetary damages for breach of
fiduciary duty as a director of the Corporation, except for liability (i) for
any breach of the director's duty of loyalty to the Corporation or to its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the General Corporation Law of the State of Delaware, or (iv) for any
transaction from which the director derives any improper personal benefit. If,
after approval of this Article by the stockholders of the corporation, the
General Corporation Law of the State of Delaware is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the General Corporation Law of the State of
Delaware, as so amended.
Any repeal or modification of this Article by the stockholders of
the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification.
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8. The Corporation shall indemnify, in the manner and to the full
extent permitted by law, any person (or the estate of any person) who was or is
a party to, or is threatened to be made a party to, any threatened, pending or
completed action, suit or proceeding, whether or not by or in the right of the
Corporation, and whether civil, criminal, administrative, investigative or
otherwise, by reason of the fact that such person is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise. Where required by law, the indemnification provided for herein
shall be made only as authorized in the specific case upon a determination, in
the manner provided by law, that indemnification of the director, officer,
employee or agent is proper in the circumstances. The Corporation may, to the
full extent permitted by law, purchase and maintain insurance on behalf of any
such person against any liability which may be asserted against such person. To
the full extent permitted by law, the indemnification provided herein shall
include expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement, and, in the manner provided by law, any such expenses shall be
paid by the Corporation in advance of the final disposition of such action,
suit or proceeding. The indemnification provided herein shall not be deemed to
limit the right of the Corporation to indemnify any other person for any such
expenses to the full extent permitted by law, nor shall it be deemed exclusive
of any other rights to which any person seeking indemnification from the
Corporation may be entitled under any agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office. Such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person.
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IN WITNESS WHEREOF, the undersigned has executed this Third Amended
and Restated Certificate of Incorporation as of June 6, 1997.
THE ULTIMATE SOFTWARE GROUP, INC.
By: /s/ MITCHELL DAUERMAN
-----------------------------
Name: Mitchell Dauerman
Title: Chief Financial Officer
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
THE ULTIMATE SOFTWARE GROUP, INC.
(Original Certificate of
Incorporation filed
on April 15, 1996)
This Certificate of Amendment, which amends the Third Amended
and Restated Certificate of Incorporation of The Ultimate Software Group, Inc.
(the "Corporation") filed with the Secretary of State of the State of Delaware
on June 6, 1997, was duly adopted by action of the Board of Directors of the
Corporation and by written consent of the stockholders of the Corporation
pursuant to the provisions of Section 228 and 242 of the General Corporation
Law of the State of Delaware.
The Third Amended and Restated Certificate of Incorporation
of the Corporation is hereby amended by amending and restating Section
4(b)(5)(a)(iv) to read in its entirety as follows:
"(iv) (1) issue any shares of Series A Preferred or
(2) so long as any shares of Series A Preferred are held by
J.P. Morgan Investment Corporation ("JPMIC") or Sixty Wall
Street SBIC Fund, L.P. ("Sixty Wall"), issue any Additional
Common Shares (including Additional Common Shares deemed to
be issued pursuant to Section 4(b)(3)(d)(iii) but subject to
the limitations of Section 4(b)(3)(d)(i)(4)) if either JPMIC
or Sixty Wall notifies the Corporation in writing, within
five (5) days after receiving written notice from the
Corporation of the Corporation's intent to issue such
Additional Common Shares, that the purchase by it of its pro
rata share of such Additional Common Shares would result in a
violation of the Small Business Investment Act of 1958, as
amended, or any of the rules or regulations promulgated
thereunder (including, without limitation, part 107 of Title
13 of the Code of Federal Regulations); provided, that this
clause (2) shall remain in effect only so long as the
provisions of Section 4(b)(3)(d)(iv)(1) apply to any shares
of Series A Preferred."
IN WITNESS WHEREOF, the undersigned has executed this
Certificate of Amendment as of July 31, 1997.
THE ULTIMATE SOFTWARE GROUP, INC.
By:/s/ MITCHELL K. DAUERMAN
------------------------------
Name: Mitchell K. Dauerman
Title: CFO
<PAGE>
-------------------------------------
BY-LAWS
OF
THE ULTIMATE SOFTWARE GROUP, INC.
-------------------------------------
Adopted by the Board of Directors
on April 25, 1996
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
OFFICES.................................................................... 1
SECTION 1.01. Registered Office.................................. 1
SECTION 1.02. Other Offices...................................... 1
ARTICLE II
MEETING OF STOCKHOLDERS.................................................... 1
SECTION 2.01. Annual Meetings.................................... 1
SECTION 2.02. Special Meetings................................... 1
SECTION 2.03. Notice of Meetings................................. 1
SECTION 2.04. Waiver of Notice................................... 2
SECTION 2.05. Adjournments....................................... 2
SECTION 2.06. Quorum............................................. 2
SECTION 2.07. Voting............................................. 3
SECTION 2.08. Proxies............................................ 3
SECTION 2.09. Stockholders' Consent in Lieu of Meeting........... 3
ARTICLE III
BOARD OF DIRECTORS......................................................... 3
SECTION 3.01. General Powers..................................... 3
SECTION 3.02. Number and Term of Office.......................... 3
SECTION 3.03. Resignation........................................ 4
SECTION 3.04. Removal............................................ 4
SECTION 3.05. Vacancies.......................................... 4
SECTION 3.06. Meetings........................................... 4
SECTION 3.07. Committees of the Board............................ 5
SECTION 3.08. Directors' Consent in Lieu of Meeting.............. 6
SECTION 3.09. Action by Means of Telephone or Similar
Communications Equipment......................... 6
SECTION 3.10. Compensation....................................... 6
ARTICLE IV
OFFICERS................................................................... 7
SECTION 4.01. Officers........................................... 7
SECTION 4.02. Authority and Duties............................... 7
SECTION 4.03. Term of Office, Resignation and Removal............ 7
SECTION 4.04. Vacancies.......................................... 7
SECTION 4.05. The Chairman....................................... 7
SECTION 4.06. The President...................................... 8
SECTION 4.07. Vice Presidents.................................... 8
SECTION 4.08. The Secretary...................................... 8
SECTION 4.09. Assistant Secretaries.............................. 8
SECTION 4.10. The Treasurer...................................... 8
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SECTION 4.11. Assistant Treasurers............................... 9
SECTION 4.12. Compensation....................................... 9
SECTION 4.13. Interested Directors; Quorum....................... 9
ARTICLE V
SHARES AND TRANSFERS OF SHARES............................................. 10
SECTION 5.01. Certificates Evidencing Shares..................... 10
SECTION 5.02. Stock Ledger....................................... 10
SECTION 5.03. Transfers of Shares................................ 10
SECTION 5.04. Addresses of Stockholders.......................... 10
SECTION 5.05. Lost, Destroyed and Mutilated Certificates......... 10
SECTION 5.06. Regulation......................................... 11
SECTION 5.07. Fixing Date for Determination of Stockholders of
Record..................................................................... 11
ARTICLE VI
SEAL....................................................................... 11
SECTION 6.01. Seal............................................... 11
ARTICLE VII
FISCAL YEAR................................................................ 11
SECTION 7.01. Fiscal Year........................................ 11
ARTICLE VIII.
VOTING OF SHARES IN OTHER CORPORATIONS..................................... 12
SECTION 8.01. Voting of Shares in Other Corporations............. 12
ARTICLE IX.
INDEMNIFICATION AND INSURANCE.............................................. 12
SECTION 9.01. Indemnification and Insurance...................... 12
ARTICLE X.
AMENDMENTS................................................................. 13
SECTION 10.01. Amendments........................................ 13
ii
<PAGE>
BY-LAWS
OF
THE ULTIMATE SOFTWARE GROUP, INC.
ARTICLE I
OFFICES
SECTION 1.01. Registered Office. Unless and until otherwise determined
by the Board of Directors of The Ultimate Software Group, Inc. (the
"Corporation"), the registered office of the Corporation in the State of
Delaware shall be at the office of The Corporation Trust Company, 1209 Orange
Street, Wilmington, Delaware 19801 and the registered agent in charge thereof
shall be The Corporation Trust Company.
SECTION 1.02. Other Offices. The Corporation may also have an office
or offices at any other place or places within or without the State of Delaware
as the Board of Directors of the Corporation (the "Board") may from time to
time determine or the business of the Corporation may from time to time
require.
ARTICLE II
MEETING OF STOCKHOLDERS
SECTION 2.01. Annual Meetings. The annual meeting of stockholders of
the Corporation for the election of directors of the Corporation ("Directors")
and for the transaction of such other business as may properly come before such
meeting, shall be held at such place, date and time as shall be fixed by the
Board and designated in the notice or waiver of notice of such annual meeting;
provided, however, that no annual meeting of stockholders need be held if all
actions, including the election of Directors, required by the General
Corporation Law of the State of Delaware (the "General Corporation Law") to be
taken at such annual meeting are taken by written consent in lieu of meeting
pursuant to Section 2.09 hereof.
SECTION 2.02. Special Meetings. Special meetings of stockholders for
any purpose or purposes may be called by the Board or the Chairman of the Board
of the Corporation (the "Chairman"), the President or the Secretary of the
Corporation or by the recordholders of at least a majority of the shares of
common stock of the Corporation issued and outstanding ("Shares") and entitled
to vote thereat, to be held at such place, date and time as shall be designated
in the notice or waiver of notice thereof.
SECTION 2.03. Notice of Meetings. (a) Except as otherwise provided by
law, written notice of each annual or special meeting of stockholders stating
the place, date and time of such meeting and, in the case of a special meeting,
the purpose or purposes for which such meeting is to be held, shall be given
personally or by first-class mail (airmail in
<PAGE>
the case of international communications) to each recordholder of Shares (a
"Stockholder") entitled to vote thereat, not less than 10 nor more than 60 days
before the date of such meeting. If mailed, such notice shall be deemed to be
given when deposited in the United States mail, postage prepaid, directed to
the Stockholder at such Stockholder's address as it appears on the records of
the Corporation. If, prior to the time of mailing, the Secretary of the
Corporation (the "Secretary") shall have received from any Stockholder a
written request that notices intended for such Stockholder are to be mailed to
some address other than the address that appears on the records of the
Corporation, notices intended for such Stockholder shall be mailed to the
address designated in such request.
(b) Notice of a special meeting of Stockholders may be given by the
person or persons calling the meeting, or, upon the written request of such
person or persons, such notice shall be given by the Secretary on behalf of
such person or persons. If the person or persons calling a special meeting of
Stockholders give notice thereof, such person or persons shall deliver a copy
of such notice to the Secretary. Each request to the Secretary for the giving
of notice of a special meeting of Stockholders shall state the purpose or
purposes of such meeting.
SECTION 2.04. Waiver of Notice. Notice of any annual or special
meeting of Stockholders need not be given to any Stockholder who files a
written waiver of notice with the Secretary, signed by the person entitled to
notice, whether before or after such meeting. Neither the business to be
transacted at, nor the purpose of, any meeting of Stockholders need be
specified in any written waiver of notice thereof. Attendance of a Stockholder
at a meeting, in person or by proxy, shall constitute a waiver of notice of
such meeting, except when such Stockholder attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of
any business on the grounds that the notice of such meeting was inadequate or
improperly given.
SECTION 2.05. Adjournments. Whenever a meeting of Stockholders, annual
or special, is adjourned to another date, time or place, notice need not be
given of the adjourned meeting if the date, time and place thereof are
announced at the meeting at which the adjournment is taken. If the adjournment
is for more than 30 days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each Stockholder entitled to vote thereat. At the adjourned meeting,
any business may be transacted which might have been transacted at the original
meeting.
SECTION 2.06. Quorum. Except as otherwise provided by law or the
Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation"), the recordholders of a majority of the Shares entitled to vote
thereat, present in person or by proxy, shall constitute a quorum for the
transaction of business at all meetings of Stockholders, whether annual or
special. If, however, such quorum shall not be present in person or by proxy at
any meeting of Stockholders, the Stockholders entitled to vote thereat may
adjourn the meeting from time to time in accordance with Section 2.05 hereof
until a quorum shall be present in person or by proxy.
SECTION 2.07. Voting. Each Stockholder shall be entitled to one vote
for
2
<PAGE>
each Share held of record by such Stockholder. Except as otherwise provided by
law or the Certificate of Incorporation, when a quorum is present at any
meeting of Stockholders, the vote of the recordholders of a majority of the
Shares constituting such quorum shall decide any question brought before such
meeting.
SECTION 2.08. Proxies. Each Stockholder entitled to vote at a meeting
of Stockholders or to express, in writing, consent to or dissent from any
action of Stockholders without a meeting may authorize another person or
persons to act for such Stockholder by proxy. Such proxy shall be filed with
the Secretary before such meeting of Stockholders or such action of
Stockholders without a meeting, at such time as the Board may require. No proxy
shall be voted or acted upon more than three years from its date, unless the
proxy provides for a longer period.
SECTION 2.09. Stockholders' Consent in Lieu of Meeting. Except as may
otherwise be provided by law or in the Certificate of Incorporation, any action
required by the General Corporation Law to be taken at any annual or special
meeting of Stockholders, and any action which may be taken at any annual or
special meeting of Stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the recordholders of Shares having not less than the
minimum number of votes necessary to authorize or take such action at a meeting
at which the recordholders of all Shares entitled to vote thereon were present
and voted.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.01. General Powers. Except as may otherwise be provided by
law or in the Certificate of Incorporation, the business and affairs of the
Corporation shall be managed by the Board, which may exercise all such powers
of the Corporation and do all such lawful acts and things as are not by law,
the Certificate of Incorporation or these By-laws directed or required to be
exercised or done by Stockholders.
SECTION 3.02. Number and Term of Office. The number of Directors shall
be as stated in the Certificate of Incorporation. Directors need not be
Stockholders. Directors shall be elected at the annual meeting of Stockholders
or, if, in accordance with Section 2.01 hereof, no such annual meeting is held,
by written consent in lieu of meeting pursuant to Section 2.09 hereof, and each
Director shall hold office until his successor is elected and qualified, or
until his earlier death or resignation or removal in the manner hereinafter
provided.
SECTION 3.03. Resignation. Any Director may resign at any time by
giving written notice to the Board, the Chairman or the Secretary. Such
resignation shall take effect at the time specified in such notice or, if the
time be not specified, upon receipt thereof by the Board, the Chairman or the
Secretary, as the case may be. Unless otherwise specified therein, acceptance
of such resignation shall not be necessary to make it effective.
3
<PAGE>
SECTION 3.04. Removal. Subject to the provisions in the Certificate of
Incorporation, any or all of the Directors may be removed, with or without
cause, at any time by vote of the recordholders of a majority of the Shares
then entitled to vote at an election of Directors, or by written consent of the
recordholders of Shares pursuant to Section 2.09 hereof.
SECTION 3.05. Vacancies. Subject to the provisions in the Certificate
of Incorporation, vacancies occurring on the Board as a result of the removal
of Directors without cause may be filled only by vote of the recordholders of a
majority of the Shares then entitled to vote at an election of Directors, or by
written consent of such recordholders pursuant to Section 2.09 hereof.
Vacancies occurring on the Board for any other reason, including, without
limitation, vacancies occurring as a result of the creation of new
directorships that increase the number of Directors, may be filled by such vote
or written consent or by vote of the Board or by written consent of the
Directors pursuant to Section 3.08 hereof. If the number of Directors then in
office is less than a quorum, such other vacancies may be filled by vote of a
majority of the Directors then in office or by written consent of all such
Directors pursuant to Section 3.08 hereof. Unless earlier removed pursuant to
Section 3.04 hereof, each Director chosen in accordance with this Section 3.05
shall hold office until the next annual election of Directors by the
Stockholders and until his successor shall be elected and qualified.
SECTION 3.06. Meetings. (a) Annual Meetings. As soon as practicable
after each annual election of Directors by the Stockholders, the Board shall
meet for the purpose of organization and the transaction of other business,
unless it shall have transacted all such business by written consent pursuant
to Section 3.08 hereof.
(b) Other Meetings. Other meetings of the Board shall be held at such
times as the Chairman, the President of the Corporation (the "President"), the
Secretary or a majority of the Board shall from time to time determine.
(c) Notice of Meetings. The Secretary shall give written notice to
each Director of each meeting of the Board, which notice shall state the place,
date, time and purpose of such meeting. Notice of each such meeting shall be
given to each Director, if by mail, addressed to him at his residence or usual
place of business, at least five days before the day on which such meeting is
to be held, or shall be sent to him at such place by telecopy, telegraph,
cable, or other form of recorded communication, or be delivered personally or
by telephone not later than the day before the day on which such meeting is to
be held. A written waiver of notice, signed by the Director entitled to notice,
whether before or after the time of the meeting referred to in such waiver,
shall be deemed equivalent to notice. Neither the business to be transacted at,
nor the purpose of any meeting of the Board need be specified in any written
waiver of notice thereof. Attendance of a Director at a meeting of the Board
shall constitute a waiver of notice of such meeting, except as provided by law.
(d) Place of Meetings. The Board may hold its meetings at such place
or places within or without the State of Delaware as the Board may from time
4
<PAGE>
to time determine, or as shall be designated in the respective notices or
waivers of notice of such meetings.
(e) Quorum and Manner of Acting. One-third of the total number of
Directors then in office (but in no event less than two if the total number of
directorships, including vacancies, is greater than one or in no event a number
less than one-third of the total number of directorships, including vacancies)
shall be present in person at any meeting of the Board in order to constitute a
quorum for the transaction of business at such meeting, and the vote of a
majority of those Directors present at any such meeting at which a quorum is
present shall be necessary for the passage of any resolution or act of the
Board, except as otherwise expressly required by law, the Certificate of
Incorporation or these By-laws. In the absence of a quorum for any such
meeting, a majority of the Directors present thereat may adjourn such meeting
from time to time until a quorum shall be present.
(f) Organization. At each meeting of the Board, one of the following
shall act as chairman of the meeting and preside, in the following order of
precedence:
(i) the Chairman, if any;
(ii) the President;
(iii) any Director chosen by a majority of the Directors present.
The Secretary or, in the case of his absence, any person (who shall be an
Assistant Secretary, if an Assistant Secretary is present) whom the chairman
of the meeting shall appoint shall act as secretary of such meeting and keep
the minutes thereof.
SECTION 3.07. Committees of the Board. The Board may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more Directors. The Board may designate one or
more Directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of such committee. In the absence
or disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another Director to act at
the meeting in the place of any such absent or disqualified member. Any
committee of the Board, to the extent provided in the resolution of the Board
designating such committee, shall have and may exercise all the powers and
authority of the Board in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; provided, however, that no such committee shall
have such power of authority in reference to amending the Certificate of
Incorporation (except that such a committee may, to the extent authorized in
the resolution or resolutions providing for the issuance of shares of stock
adopted by the Board as provided in Section 151(a) of the General Corporation
Law, fix the designations and any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the Corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes of stock of the Corporation or fix the
number of shares of any series of stock
5
<PAGE>
or authorize the increase or decrease of the shares of any series), adopting an
agreement of merger or consolidation under Section 251 or 252 of the General
Corporation Law, recommending to the Stockholders the sale, lease or exchange
of all or substantially all the Corporation's property and assets, recommending
to the Stockholders a dissolution of the Corporation or the revocation of a
dissolution, or amending these By-laws; provided further, however, that, unless
expressly so provided in the resolution of the Board designating such
committee, no such committee shall have the power or authority to declare a
dividend, to authorize the issuance of stock, or to adopt a certificate of
ownership and merger pursuant to Section 253 of the General Corporation Law.
Each committee of the Board shall keep regular minutes of its proceedings and
report the same to the Board when so requested by the Board.
SECTION 3.08. Directors' Consent in Lieu of Meeting. Any action
required or permitted to be taken at any meeting of the Board or
of any committee thereof may be taken without a meeting, without prior notice
and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by all the members of the Board or such committee and
such consent is filed with the minutes of the proceedings of the Board or such
committee.
SECTION 3.09. Action by Means of Telephone or Similar Communications
Equipment. Any one or more members of the Board, or of any committee thereof,
may participate in a meeting of the Board or such committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in
a meeting by such means shall constitute presence in person at such meeting.
SECTION III.10 Compensation. Directors shall not receive any stated
salary for their services as directors or as members of committees, except as
authorized by the Stockholders. No such compensation or reimbursement shall
preclude any Director from serving the Corporation in any other capacity and
receiving compensation therefor.
ARTICLE IV
OFFICERS
SECTION 4.01. Officers. The officers of the Corporation shall be the
President, the Secretary and a Treasurer and may include a Chairman, one or
more Vice Presidents (including, one or more Executive and/or Senior Vice
Presidents), one or more Assistant Secretaries, one or more Assistant
Treasurers and such other officers as the Board may determine. Any two or more
offices may be held by the same person.
SECTION 4.02. Authority and Duties. All officers shall have such
authority and perform such duties in the management of the Corporation as may
be provided in these By-laws or, to the extent not so provided, by resolution
of the Board.
SECTION 4.03. Term of Office, Resignation and Removal. (a) Each
officer shall be appointed by the Board and shall hold office for such term as
may be
6
<PAGE>
determined by the Board. Each officer shall hold office until his successor has
been appointed and qualified or his earlier death or resignation or removal in
the manner hereinafter provided. The Board may require any officer to give
security for the faithful performance of his duties.
(b) Any officer may resign at any time by giving written notice to the
Board, the Chairman, the President or the Secretary. Such resignation shall
take effect at the time specified in such notice or, if the time be not
specified, upon receipt thereof by the Board, the Chairman, the President or
the Secretary, as the case may be. Unless otherwise specified therein,
acceptance of such resignation shall not be necessary to make it effective.
(c) All officers and agents appointed by the Board shall be subject to
removal, with or without cause, at any time by the Board or by the action of
the recordholders of a majority of the Shares entitled to vote thereon.
SECTION 4.04. Vacancies. Any vacancy occurring in any office of the
Corporation, for any reason, shall be filled by action of the Board. Unless
earlier removed pursuant to Section 4.03 hereof, any officer appointed by the
Board to fill any such vacancy shall serve only until such time as the
unexpired term of his predecessor expires unless reappointed by the Board.
SECTION 4.05. The Chairman. The Chairman, if one shall be appointed,
shall have the power to call special meetings of Stockholders, to call special
meetings of the Board and, if present, to preside at all meetings of
Stockholders and all meetings of the Board. The Chairman shall perform all
duties incident to the office of Chairman of the Board and all such other
duties as may from time to time be assigned to him by the Board or these
By-laws.
SECTION 4.06. The President. The President shall have general and
active management and control of the business and affairs of the Corporation,
subject to the control of the Board, and shall see that all orders and
resolutions of the Board are carried into effect. The President shall perform
all duties incident to the office of President and all such other duties as may
from time to time be assigned to him by the Board or these By-laws.
SECTION 4.07. Vice President. Vice Presidents, if any, in order of
their seniority or in any other order determined by the Board, shall generally
assist the President and perform such other duties as the Board or the
President shall prescribe, and in the absence or disability of the President,
shall perform the duties and exercise the powers of the President.
SECTION 4.08. The Secretary. The Secretary shall, to the extent
practicable, attend all meetings of the Board and all meetings of Stockholders
and shall record all votes and the minutes of all proceedings in a book to be
kept for that purpose, and shall perform the same duties for any committee of
the Board when so requested by such committee. He shall give or cause to be
given notice of all meetings of Stockholders and of the Board, shall perform
such other duties as may be prescribed by the Board, the Chairman
7
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or the President and shall act under the supervision of the President. He shall
keep in safe custody the seal of the Corporation and affix the same to any
instrument that requires that the seal be affixed to it and which shall have
been duly authorized for signature in the name of the Corporation and, when so
affixed, the seal shall be attested by his signature or by the signature of the
Treasurer of the Corporation (the "Treasurer") or an Assistant Secretary or
Assistant Treasurer of the Corporation. He shall keep in safe custody the
certificate books and stockholder records and such other books and records of
the Corporation as the Board, the Chairman or the President may direct and
shall perform all other duties incident to the office of Secretary and such
other duties as from time to time may be assigned to him by the Board, the
Chairman or the President.
SECTION 4.09. Assistant Secretaries. Assistant Secretaries of the
Corporation ("Assistant Secretaries"), if any, in order of their seniority or
in any other order determined by the Board, shall generally assist the
Secretary and perform such other duties as the Board or the Secretary shall
prescribe, and, in the absence or disability of the Secretary, shall perform
the duties and exercise the powers of the Secretary.
SECTION IV.10. The Treasury. The Treasurer shall have the care and
custody of all the funds of the Corporation and shall deposit such funds in
such banks or other depositories as the Board, or any officer or officers, or
any officer and agent jointly, duly authorized by the Board, shall, from time
to time, direct or approve. He shall disburse the funds of the Corporation
under the direction of the Board and the President. He shall keep a full and
accurate account of all moneys received and paid on account of the Corporation
and shall render a statement of his accounts whenever the Board, the Chairman
or the President shall so request. He shall perform all other necessary actions
and duties in connection with the administration of the financial affairs of
the Corporation and shall generally perform all the duties usually appertaining
to the office of treasurer of a corporation. When required by the Board, he
shall give bonds for the faithful discharge of his duties in such sums and with
such sureties as the Board shall approve.
SECTION IV.11. Assistant Treasurers. Assistant Treasurers of the
Corporation ("Assistant Treasurers"), if any, in order of their seniority or in
any other order determined by the Board, shall generally assist the Treasurer
and perform such other duties as the Board or the Treasurer shall prescribe,
and, in the absence or disability of the Treasurer, shall perform the duties
and exercise the powers of the Treasurer.
SECTION IV.12. Compensation. The compensation of the officers of the
Corporation shall be fixed by the Board.
SECTION IV.13. Interested Directors; Quorum. (a) No contract or
transaction between the Corporation and one or more of its directors or
officers, or between the Corporation and any other corporation, partnership,
association, or other organization in which one or more of its directors or
officers are directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director or officer
is present at or participates in the meeting of the Board or Committee thereof
which authorizes the contract or transaction, or solely because the votes of
one or more of such directors or officers are counted for such purpose, if:
8
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(1) The material facts as to that person's relationship or
interest and as to the contract or transaction are disclosed or are known
to the Board or the Committee, and the Board or Committee in good faith
authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or
(2) The material facts as to that person's relationship or
interest and as to the contract or transaction are disclosed or are known
to the Stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the
shareholders; or
(3) The contract or transaction is fair as to the Corporation as
of the time it is authorized, approved or ratified, by the Board of
Directors, a Committee thereof, or the shareholders.
(b) Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a Committee
which authorizes the contract or transaction.
ARTICLE V
SHARES AND TRANSFERS OF SHARES
SECTION 5.01. Certificates Evidencing Shares. Shares shall be
evidenced by certificates in such form or forms as shall be approved by the
Board. Certificates shall be issued in consecutive order and shall be numbered
in the order of their issue, and shall be signed by the Chairman, the President
or any Vice President and by the Secretary, any Assistant Secretary, the
Treasurer or any Assistant Treasurer. Any or all of the signatures on a
Certificate my be a facsimile. In the event any such officer who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to hold such office or to be employed by the Corporation before such
certificate is issued, such certificate may be issued by the Corporation with
the same effect as if such officer had held such office on the date of issue.
SECTION 5.02. Stock Ledger. A stock ledger in one or more counterparts
shall be kept by the Secretary, in which shall be recorded the name and address
of each person, firm or corporation owning the Shares evidenced by each
certificate evidencing Shares issued by the Corporation, the number of Shares
evidenced by each such certificate, the date of issuance thereof and, in the
case of cancellation, the date of cancellation. Except as otherwise expressly
required by law, the person in whose name Shares stand on the stock ledger of
the Corporation shall be deemed the owner and recordholder thereof for all
purposes.
SECTION 5.03. Transfer of Shares. Registration of transfers of Shares
shall be made only in the stock ledger of the Corporation upon request of the
registered holder of such shares, or of his attorney thereunto authorized by
power of attorney duly
9
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executed and filed with the Secretary, and upon the surrender of the
certificate or certificates evidencing such Shares properly endorsed or
accompanied by a stock power duly executed, together with such proof of the
authenticity of signatures as the Corporation may reasonably require.
SECTION 5.04. Addresses of Stockholders. Each Stockholder shall
designate to the Secretary an address at which notices of meetings and all
other corporate notices may be served or mailed to such Stockholder, and, if
any Stockholder shall fail to so designate such an address, corporate notices
may be served upon such Stockholder by mail directed to the mailing address, if
any, as the same appears in the stock ledger of the Corporation or at the last
known mailing address of such Stockholder.
SECTION 5.05. Lost, Destroyed and Mutilated Certificates. Each
recordholder of Shares shall promptly notify the Corporation of any loss,
destruction or mutilation of any certificate or certificates evidencing any
Share or Shares of which he is the recordholder. The Board may, in its
discretion, cause the Corporation to issue a new certificate in place of any
certificate theretofore issued by it and alleged to have been mutilated, lost,
stolen or destroyed, upon the surrender of the mutilated certificate or, in the
case of loss, theft or destruction of the certificate, upon satisfactory proof
of such loss, theft or destruction, and the Board may, in its discretion,
require the recordholder of the Shares evidenced by the lost, stolen or
destroyed certificate or his legal representative to give the Corporation a
bond sufficient to indemnify the Corporation against any claim made against it
on account of the alleged loss, theft or destruction of any such certificate or
the issuance of such new certificate.
SECTION 5.06. Regulations. The Board may make such other rules and
regulations as it may deem expedient, not inconsistent with these By-laws,
concerning the issue, transfer and registration of certificates evidencing
Shares.
SECTION 5.07. Fixing Date for Determination of Stockholders of Record.
In order that the Corporation may determine the Stockholders entitled to notice
of or to vote at any meeting of Stockholders or any adjustment thereof, or to
express consent to, or to dissent from, corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution
or allotment of any rights, or entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board may fix, in advance, a record date, which shall not be
more than 60 nor less than 10 days before the date of such meeting, nor more
than 60 days prior to any other such action. A determination of the
Stockholders entitled to notice of or to vote at a meeting of Stockholders
shall apply to any judgment of such meeting; provided, however, that the Board
may fix a new record date for the adjourned meeting.
ARTICLE VI
SEAL
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SECTION 6.01. Seal. The Board may approve and adopt a corporate seal,
which shall be in the form of a circle and shall bear the full name of the
Corporation, the year of its incorporation and the words "Corporate Seal
Delaware".
ARTICLE VII
FISCAL YEAR
SECTION 7.01. Fiscal Year. The fiscal year of the Corporation shall
end on the thirty-first day of December of each year unless changed by
resolution of the Board.
ARTICLE VIII.
VOTING OF SHARES IN OTHER CORPORATIONS
SECTION VIII.01 Voting of Shares in Other Corporations. Shares in
other corporations which are held by the Corporation may be represented and
voted by the Chairman, President or a Vice President of the Corporation or by
proxy or proxies appointed by one of them. The Board may however, appoint some
other person to vote the shares.
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ARTICLE IX.
INDEMNIFICATION AND INSURANCE
SECTION IX.01. Indemnification and Insurance. The Corporation shall
indemnify, in the manner and to the full extent permitted by law, any person
(or the estate of any person) who was or is a party to, or is threatened to be
made a party to, any threatened, pending or completed action, suit or
proceeding, whether or not by or in the right of the Corporation, and whether
civil, criminal, administrative, investigative or otherwise, by reason of the
fact that such person is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. Where required by law, the indemnification
provided for herein shall be made only as authorized in the specific case upon
a determination, in the manner provided by law, that indemnification of the
director, officer, employee or agent is proper in the circumstances. The
Corporation may, to the full extent permitted by law, purchase and maintain
insurance on behalf of any such person against any liability which may be
asserted against such person. To the full extent permitted by law, the
indemnification provided herein shall include expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement, and, in the manner
provided by law, any such expenses may be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding. The indemnification
provided herein shall not be deemed to limit the right of the Corporation to
indemnify any other person for any such expenses to the full extent permitted
by law, nor shall it be deemed exclusive of any other rights to which any
person seeking indemnification from the Corporation may be entitled under any
agreement, vote of stockholders or disinterested directors or otherwise, both
as to action in his official capacity and as to action in another capacity
while holding such office. Such indemnification shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such person.
ARTICLE X.
AMENDMENTS
SECTION X.01. Amendments. Any By-law (including these By-laws) may be
adopted, amended or repealed by the vote of the recordholders of a majority of
the Shares then entitled to vote at an election of Directors or by written
consent of Stockholders pursuant to Section 2.09 hereof, or by vote of the
Board or by a written consent of Directors pursuant to Section 3.08 hereof.
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AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
THE ULTIMATE SOFTWARE GROUP, INC.
(Original Certificate of
Incorporation filed
on April 15, 1996)
This Amended and Restated Certificate of Incorporation, which
restates and amends the Third Amended and Restated Certificate of Incorporation
of The Ultimate Software Group, Inc. (the "Corporation") filed with the
Secretary of State of the State of Delaware on June 6, 1997, was duly adopted
by action of the Board of Directors of the Corporation and approved by a vote
of a majority of the outstanding stock entitled to vote thereon at a meeting of
the stockholders in accordance with the provisions of Sections 242 and 245 of
the General Corporation Law of the State of Delaware.
FIRST: The name of the corporation is The Ultimate Software
Group, Inc.
SECOND: The address of the Corporation's registered office in
the state of Delaware is Corporation Trust Center, 1209 Orange Street, in the
city of Wilmington, County of New Castle. The name of the Corporation's
registered agent at such address is The Corporation Trust Company.
THIRD: The nature of the business of the Corporation and its
purpose is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of the State of Delaware.
FOURTH: The authorized capital stock of the Corporation shall
consist of (i) 2,500,000 shares of Preferred Stock, par value $0.01 per share
(the "Preferred Stock"), and (ii) 50,000,000 shares of Common Stock, $0.01 par
value per share (the "Common Stock").
The Preferred Stock shall consist of one or more series of
Preferred Stock which shall have the powers, terms, conditions, designations,
preferences and privileges, the relative, participating, optional and other
special rights, and the qualifications, limitations and restrictions, if any,
as provided herein.
A. SERIES OF PREFERRED STOCK
The Board of Directors (or a duly authorized committee
thereof) is hereby expressly authorized to provide for, designate and issue,
out of the authorized but unissued shares of Preferred Stock, one or more
series of Preferred Stock. Before any
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shares of any such series are issued, the Board of Directors (or a duly
authorized committee thereof) shall fix, and is hereby expressly empowered to
fix, as to the shares of any such series:
(a) the designation of such series, the number of shares to
constitute such series and the stated value thereof, if different from the par
value thereof;
(b) whether the shares of such series shall have voting
rights or powers, in addition to any voting rights required by law and, if so,
the terms of such voting rights or powers, which may be full or limited;
(c) the dividends, if any, payable on such series, whether
any such dividends shall be cumulative and, if so, from what dates, the
conditions and dates upon which such dividends shall be payable, the
preferences or relation which such dividends shall bear to the dividends
payable on any shares of stock of any other class or any other series of this
class;
(d) whether the shares of such series shall be subject to
redemption by the Corporation and, if so, the times, prices and other
conditions of such redemption;
(e) the amount or amounts payable upon shares of such series
upon, and the rights of the holders of such series in, the voluntary or
involuntary liquidation, or upon any distribution of the assets, of the
Corporation;
(f) whether the shares of such series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to which and
manner in which any such retirement or sinking fund shall be applied to the
purchase or redemption of the shares of such series for retirement or other
corporate purposes and the terms and provisions relative to the operation
thereof;
(g) whether the shares of such series shall be convertible
into or exchangeable for shares of stock of any other class or any other series
of this class or any other securities and, if so, the price or prices or the
rate or rates of conversion or exchange and the method, if any, of adjusting
the same, and any other terms and conditions of conversion or exchange;
(h) the limitations and restrictions, if any, to be effective
while any shares of such series are outstanding upon the payment of dividends
or the making of other distributions on, and upon the purchase, redemption or
other acquisition by the Corporation of, the Common Stock or shares of stock of
any other class or any other series of this class;
(i) the conditions or restrictions, if any, to be effective
while any shares of such series are outstanding upon the creation of
indebtedness of the Corporation or upon the issue of any additional stock,
including additional shares of such series or of any other series of this class
or of any other class; and
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(j) any other powers, designations, preferences and relative,
participating, optional or other special rights, and any qualifications,
limitations, or restrictions thereof.
The powers, designations, preferences and relative,
participating, optional or other special rights of each series of Preferred
Stock, and the qualifications, limitations or restrictions thereof, if any, may
differ from those of any and all other series at any time outstanding. The
Board of Directors is hereby expressly authorized from time to time to increase
(but not above the total number of authorized shares of Preferred Stock) or
decrease (but not below the number of shares thereof then outstanding) the
number of shares of Preferred Stock designated to any one or more series of
Preferred Stock pursuant to this Section A of this Paragraph Fourth.
B. COMMON STOCK
All shares of Common Stock will be identical and will entitle
the holders thereof to the same rights and privileges.
I. Dividends
When, as and if dividends are declared thereon, whether
payable in cash, property or securities of the Corporation, the holders of
Common Stock will be entitled to share equally in and receive, in accordance
with the number of shares of Common Stock held by each such holder, such
dividends. Dividends payable under this Section B.I shall be paid to the
holders of record of the outstanding Common Stock as their names shall appear
on the stock register of the Corporation on the record date fixed by the Board
of Directors in advance of declaration and payment of each dividend. Any Common
Stock issued as a dividend pursuant to this Section B.I shall, when so issued,
be duly authorized, validly issued, fully paid and non-assessable, and free of
all liens and charges.
Notwithstanding anything contained herein to the contrary, no
dividends on Common Stock shall be declared by the Corporation's Board of
Directors or paid or set apart for payment by the Corporation at any time that
such declaration, payment, or setting apart is prohibited by applicable law.
II. Voting Rights
Each holder of the Common Stock shall be entitled to one vote
for each share of Common Stock held on all matters submitted to a vote of the
stockholders.
III. Other Rights
Except for and subject to those rights expressly granted to
the holders of Preferred Stock, or as otherwise provided herein, and except as
may be provided by the laws of the State of Delaware, the holders of Common
Stock shall have exclusively all other rights of stockholders, including,
without limitation, (a) the right to receive dividends, when, as and if
declared by the Board of Directors, out of assets lawfully available therefor,
and (b) in the event of any distribution of assets upon a liquidation or
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otherwise, the right to receive ratably and equally with all other holders of
Common Stock all of the assets and funds of the Corporation remaining after the
payment to the holders of the Preferred Stock, of the specific amounts which
they are entitled to receive upon such liquidation.
FIFTH: A. Board of Directors. Subject to the rights of the
holders of the Preferred Stock, the number which shall constitute the Board of
Directors of the Corporation shall be no greater than eleven (11) and no less
than five (5), as determined by the Board of Directors from time to time. The
Board of Directors shall be classified, with respect to the time for which the
directors severally hold office, into three classes, as nearly equal in number
as possible, in the manner specified in the By-laws of the Corporation, one
class to hold office initially for a term expiring at the annual meeting of
stockholders to be held in 1999, another class to hold office initially for a
term expiring at the annual meeting of stockholders to be held in 2000, and
another class to hold office initially for a term expiring at the annual
meeting of stockholders to be held in 2001, with the members of each class to
hold office until their successors are duly elected and qualified. At each
annual meeting of the stockholders of the Corporation, the successors to the
class of directors whose term expires at that meeting shall be elected to hold
office for a term expiring at the annual meeting of stockholders held in the
third year following the year of their election. Any vacancy on the Board of
Directors that results from an increase in the number of directors may be
filled by a majority of the Board of Directors then in office, provided that a
quorum is present, and any other vacancy occurring in the Board of Directors
may be filled by a majority of the Board of Directors then in office, even if
less than a quorum, or a sole remaining director. Any director elected to fill
a vacancy not resulting from an increase in the number of directors shall have
the same remaining term as that of his or her predecessor.
B. Removal of Directors Solely for Cause. No director may be
removed from office except for cause and only by the affirmative vote of the
holders of a majority of the combined voting power of all outstanding shares of
stock then entitled to vote generally in the election of directors, voting as a
single class. Notwithstanding the foregoing, directors who shall have been
elected by the holders of a series or class of Preferred Stock, voting
separately as a class, shall be removed only pursuant to the provisions
establishing the rights of such series or class to elect such directors.
The election of directors need not be by ballot unless the
By-laws of the Corporation so provide.
SIXTH: The following provisions are inserted for the
management of the business and for the conduct of the affairs of the
Corporation, and in furtherance and, except as specifically set forth in this
Paragraph, not in limitation of the powers of the Corporation and of its
directors and stockholders conferred by statute:
(1) Subject to the provisions of Article Eleventh hereof, the
Board of Directors shall have power without (except as provided by applicable
law) the assent or vote of the stockholders to make, alter, amend, change, add
to or repeal the By-laws of the Corporation; to authorize and cause to be
executed mortgages and liens upon all or
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any part of the property of the Corporation; to determine the use and
disposition of any surplus or net profits; to fix the times for the
declaration and payment of dividends; and to set apart out of any of the
funds of the Corporation available for dividends a reserve or reserves for
any proper purpose and to abolish any such reserve.
(2) In addition to the powers and authorities hereinbefore or
by statute expressly conferred upon them, the Board of Directors is hereby
empowered to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation; subject, nevertheless, to the provisions
of the laws of the State of Delaware, this Amended and Restated Certificate of
Incorporation and the Corporation's By-laws, as in effect from time to time.
SEVENTH: The books and records of the Corporation may be kept
(subject to any mandatory requirement of law) outside the State of Delaware at
such place or places as may be designated from time to time by the Board of
Directors or by the By-laws of the Corporation.
EIGHTH: No director shall be liable to the Corporation or any
of its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that the foregoing does not eliminate or limit any liability
that may exist with respect to (1) a breach of the director's duty of loyalty
to the Corporation or its stockholders, (2) acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (3)
liability under Section 174 of the Delaware General Corporation Law or (4) a
transaction from which the director derived an improper personal benefit, it
being the intention of the foregoing provision to eliminate the liability of
the Corporation's directors to the Corporation or its stockholders to the
fullest extent permitted by Section 102(b)(7) of the Delaware General
Corporation Law, as in effect on the date hereof and as such Section may be
amended after the date hereof to the extent such amendment permits such
liability to be further eliminated or limited. The Corporation shall indemnify
to the fullest extent permitted by Section 145 of the Delaware General
Corporation Law (as in effect on the date hereof and as such Section may be
amended after the date hereof) each person that such Section grants the
Corporation the power to indemnify. No amendment, modification or repeal of
this Paragraph Eighth shall adversely affect any right or protection of a
director that exists at the time of such amendment, modification or repeal.
NINTH: The Corporation reserves the right to amend or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation in the manner now or hereafter prescribed by the laws of the
State of Delaware, and all rights herein conferred upon stockholders or
directors are granted subject to this reservation.
TENTH: Following the consummation of an initial public
offering of Common Stock or any transaction or event as a result of which any
Common Stock is listed on a national securities exchange or registered under
Section 12 of the Securities Exchange Act of 1934, as amended, any action
required or permitted to be taken by the stockholders of the Corporation must
be affected at a duly called annual or special meeting of stockholders of the
Corporation, and the ability of the stockholders to consent
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in writing to the taking of any action is hereby specifically denied except
as fixed pursuant to the provisions of Section A of Paragraph FOURTH hereof
relating to the rights of the holders of Preferred Stock. Except as otherwise
required by law, special meetings of stockholders of the Corporation may be
called only by (i) the Chairman of the Board or the President of the
Corporation and (ii) shall be called by the Secretary of the Corporation at
the request in writing of a majority of the members of the Board of Directors.
ELEVENTH: In furtherance and not in limitation of the powers
conferred upon it by the laws of the State of Delaware, the Board of Directors
shall have the power to adopt, alter, amend, terminate or repeal the
Corporation's By-laws. The affirmative vote of at least 66-2/3% of the entire
Board of Directors shall be required to adopt, alter, amend, terminate or
repeal the Corporation's By-laws.
TWELFTH: The provisions of Paragraphs Fifth, Tenth, Eleventh
and Twelfth hereof and Section 2.11 of the Corporation's By-laws may only be
altered, amended, terminated or repealed, or a provision adopted that is
inconsistent with the purpose and intent of the provisions of such Paragraphs
or Article, as the case may be, by the affirmative vote of the holders of at
least 66-2/3% of the voting power of the shares entitled to vote at an election
of directors.
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IN WITNESS WHEREOF, The Ultimate Software Group, Inc. has
caused this Amended and Restated Certificate of Incorporation to be signed by
its President and attested to by its Secretary and caused the corporate seal of
the Corporation to be hereunto affixed this _____day of _______, 1998.
----------------------------------
Name: Scott Scherr
Title: President and
Chief Executive Officer
Attest:
- ------------------------------
Name: Vivian Maza
Title: Secretary
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------------------------------------------------------------------------
THE ULTIMATE SOFTWARE GROUP, INC.
AMENDED AND RESTATED BY-LAWS
------------------------------------------------------------------------
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC.
AMENDED AND RESTATED BY-LAWS
----------------------------
ARTICLE I
STOCKHOLDERS
------------
Section 1.01. Annual Meeting. An annual meeting of the
stockholders, for the election of directors to succeed those whose terms expire
and for the transaction of such other business as may properly come before the
meeting, shall be held at such place, on such date and at such time as the
Board of Directors shall each year fix, which date shall be within thirteen
months subsequent to the date of the last annual meeting of stockholders and
shall be set forth in the notice and waiver of notice of the meeting.
To be properly brought before an annual meeting, business
must be (a) specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the Board of Directors, (b) otherwise properly
brought before the meeting by or at the direction of the Board of Directors or
(c) otherwise properly brought before the meeting by a stockholder of the
Corporation who was a stockholder of record at the time of giving of notice
provided for in Section 1.10, who is entitled to vote at the meeting and who
complied with the notice procedures set forth in Section 1.10. The Chairman of
the meeting shall, if the facts warrant, determine and declare to the meeting
that business was not properly brought before the meeting in accordance with
the provisions of this Section 1.01, and if he should so determine, the
Chairman shall declare to the meeting that any such business not properly
brought before the meeting shall not be transacted.
Section 1.02. Special Meetings. Special meetings of the
stockholders may be called by the Chairman of the Board or the President and
shall be called by the Secretary at the request in writing of a majority of the
members of the Board of Directors. No business other than that included in the
notice of the special meeting shall be acted upon at such meeting.
Section 1.03. Notice of Meetings; Waiver. The Secretary or
any Assistant Secretary shall cause written notice of the place, date and hour
of each meeting of the stockholders and, in the case of a special meeting, the
purpose or purposes for which such meeting is called, to be given personally or
by mail, not less than 10 nor more than 60 days prior to the meeting, to each
stockholder of record entitled to vote at such meeting. If such notice is
mailed, it shall be deemed to have been given to a stockholder when deposited
in the United States mail, postage prepaid, or delivered to a nationally
recognized overnight delivery service for overnight delivery, in each case
directed to the stockholder at his or her address as it appears on the record
of stockholders of the Corporation, or, if he or she shall have filed with the
Secretary a written request that notices to him or her be mailed to some other
address, then directed to him or her at such other address. Such further notice
shall be given as may be required by law.
<PAGE>
No notice of any meeting of stockholders need be given to any
stockholder who submits a signed waiver of notice, whether before or after the
meeting. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders need be specified in a written
waiver of notice. The attendance of any stockholder at a meeting of
stockholders in person or by proxy shall constitute a waiver of notice of such
meeting, except when the stockholder attends a meeting for the express purpose
of objecting, at the beginning of the meeting, to the transaction of any
business on the ground that the meeting is not lawfully called or convened.
Section 1.04. Quorum. A stockholders' meeting duly called
shall not be organized for the transaction of business unless a quorum is
present. Except as otherwise expressly provided by law, the Certificate of
Incorporation, these By-laws or any certificate filed under Section 151(g) of
the Delaware General Corporation Law (the "DGCL") (or its successor statute as
in effect from time to time), the presence in person or by proxy of holders of
record entitled to exercise at least a majority of the voting power of the
Corporation shall constitute a quorum for such meeting. The stockholders
present at a duly organized meeting can continue to do business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave
less than a quorum. If a meeting cannot be organized because a quorum has not
attended, stockholders representing a majority of the voting power of the
stockholders present may adjourn or, in the absence of a decision by the
majority, any officer entitled to preside at such meeting may adjourn, the
meeting from time to time to such time (not more than 30 days after the
previously adjourned meeting) and place as such stockholders or officer may
determine, without notice other than by announcement at the meeting of the time
and place of the adjourned meeting.
Section 1.05. Voting. If, pursuant to Section 5.05 of these
By-laws, a record date has been fixed, every holder of record of shares
entitled to vote at a meeting of stockholders shall be entitled to one vote for
each share outstanding in his or her name on the books of the Corporation at
the close of business on such record date. If no record date has been fixed,
then every holder of record of shares entitled to vote at a meeting of
stockholders shall be entitled to one vote for each share of stock outstanding
in his or her name on the books of the Corporation at the close of business on
the day next preceding the day on which notice of the meeting is given. Except
as otherwise required by law, the Certificate of Incorporation or these
By-laws, the vote of a majority of the shares represented in person or by proxy
at any meeting at which a quorum is present shall be sufficient for the
transaction of any business at such meeting.
Section 1.06. Voting by Ballot. No vote of the stockholders
need be taken by written ballot, unless otherwise required by law. Any vote
which need not be taken by ballot may be conducted in any manner approved by
the meeting.
Section 1.07. Adjournment. Notice of any adjourned meeting of
the stockholders of the Corporation need not be given if the place, date and
hour thereof are announced at the meeting at which the adjournment is taken,
provided that if the adjournment is for more than thirty days, or if after the
adjournment a new record date for the adjourned meeting is fixed pursuant to
Section 5.05 of these By-laws, a notice of the adjourned meeting, conforming to
the requirements of Section 1.03 hereof, shall be given to each stockholder of
record entitled
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to vote at such meeting. At any adjourned meeting at which a quorum is
present, any business may be transacted that might have been transacted on
the original date of the meeting.
Section 1.08. Proxies. Any stockholder entitled to vote at
any meeting of the stockholders may, by a written instrument signed by such
stockholder or his or her attorney-in-fact, authorize another person or persons
to vote at any such meeting for him by proxy. No such proxy shall be voted
after the expiration of three years from the date of such proxy, unless such
proxy provides for a longer period. Every proxy shall be revocable at the
pleasure of the stockholder executing it, except in those cases where
applicable law provides that a proxy shall be irrevocable. A stockholder may
revoke any proxy which is not irrevocable by attending the meeting and voting
in person, by filing an instrument in writing revoking the proxy or by filing
another duly executed proxy bearing a later date with the Secretary.
Section 1.09. Organization; Procedure. At every meeting of
stockholders the presiding officer shall be the Chairman of the Board or, in
the event of his or her absence or disability, a presiding officer chosen by
the Board of Directors. The Secretary, or in the event of his or her absence or
disability, the Assistant Secretary, if any, or if there be no Assistant
Secretary, in the absence of the Secretary, an appointee of the presiding
officer, shall act as Secretary of the meeting. The order of business and all
other matters of procedure at every meeting of stockholders may be determined
by the presiding officer.
Section 1.10. Advance Notice of Stockholder Proposals and
Stockholder Nominations of Directors. In order to properly submit any business
to, or nominate any person for election to the Board of Directors at, any
annual meeting of stockholders, a stockholder must give notice in writing to
the Secretary. To be considered timely, a stockholder's notice must be
delivered either in person or by United States certified mail, postage prepaid,
and received at the principal executive offices of the Corporation (i) not less
than 60 days nor more than 90 days before the first anniversary date of the
Corporation's proxy statement in connection with the last annual meeting of
stockholders or (ii) if no annual meeting was held in the previous year or the
date of the applicable annual meeting has been changed by more than 30 days
from the date contemplated at the time of the previous year's proxy statement,
not less than a reasonable time, as determined by the Board of Directors, prior
to the date of the applicable annual meeting.
The Secretary shall deliver any stockholder proposals and
nominations received in a timely manner for review by the Board of Directors or
a committee designated by the Board of Directors.
A stockholder's notice to submit business at an annual
meeting of stockholders shall set forth (1) the name and address of such
stockholder, (2) the class and number of shares of stock beneficially owned by
such stockholder, (3) the name in which such shares are registered on the stock
transfer books of the Corporation, (4) a representation that such stockholder
intends to appear at the meeting in person or by proxy to submit the business
specified in such notice, (5) any material interest of such stockholder in the
business to be submitted and (6) a brief description of the business desired to
be submitted at the annual meeting, including the complete text of any
resolutions to be presented at the annual meeting, and the reasons for
conducting such business at the annual meeting. In addition, the stockholder
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making such proposal shall promptly provide any other information reasonably
requested by the Corporation.
In addition to the information required above to be given by
a stockholder who intends to submit business at a meeting of stockholders, if
the business to be submitted is the nomination of a person or persons for
election to the Board of Directors, then such stockholder's notice must also
set forth, as to each person whom such stockholder proposes to nominate for
election as a director, (A) the name, age, business address and, if known,
residential address of such person, (B) the principal occupation or employment
of such person, (C) the class and number of shares of stock of the Corporation
which are beneficially owned by such person, (D) any other information relating
to such person that is required to be disclosed in solicitations of proxies for
election of directors or is otherwise required by the rules and regulations of
the Securities and Exchange Commission promulgated under the Securities
Exchange Act of 1934, as amended, (E) the written consent of such person to be
named in the proxy statement as a nominee and to serve as a director if elected
and (F) a description of all arrangements or understandings between such
stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by such stockholder.
Any person nominated for election as a director by the Board
of Directors or any committee designated by the Board of Directors shall, upon
the request of the Board of Directors or such committee, furnish to the
Secretary all such information pertaining to such person that is required to be
set forth in a stockholder's notice of nomination.
Notwithstanding the foregoing provisions of this Section
1.10, a stockholder who seeks to have any proposal included in the
Corporation's proxy statement shall comply with the requirements of Regulation
14A under the Securities Exchange Act of 1934, as amended, at any time when
such requirements are applicable thereto.
ARTICLE II
BOARD OF DIRECTORS
------------------
Section 2.01. General Powers. Except as may otherwise be
provided by law, the Certificate of Incorporation or these By-laws, the
property, affairs and business of the Corporation shall be managed by or under
the direction of the Board of Directors and the Board of Directors may exercise
all the powers of the Corporation.
Section 2.02. Number and Term of Office. Subject to the
rights of any holders of Preferred Stock of the Corporation, the Board of
Directors shall consist of not less than five nor more than eleven Directors.
The exact number of Directors shall be determined from time to time by a
resolution or resolutions adopted by the affirmative vote of a majority of the
total number of Directors which the Corporation would have if there were no
vacancies (the "entire Board of Directors"). The Board of Directors shall be
classified, with respect to the time for which they severally hold office, into
three classes, as nearly equal in number as possible, the
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first class to hold office initially for a term expiring at the annual meeting
of stockholders to be held in 1999, the second class to hold office
initially for a term expiring at the annual meeting of stockholders to
be held in 2000 and the third class to hold office initially for a term
expiring at the annual meeting of stockholders to be held in 2001, with the
members of each class to hold office until their successors are duly elected
and qualified, subject, however, to the Director's prior death, resignation,
disqualification or removal from office.
At each meeting of the stockholders for the election of
Directors, provided a quorum is present, the Directors nominated in accordance
with Section 1.10 for election at such meeting shall be elected by a plurality
of the votes validly cast in such election.
Section 2.03. Annual and Regular Meetings. The annual meeting
of the Board of Directors for the purpose of electing officers and for the
transaction of such other business as may come before the meeting shall be held
as soon as possible following adjournment of the annual meeting of the
stockholders at the place of such annual meeting of the stockholders. Notice of
such annual meeting of the Board of Directors need not be given. The Board of
Directors from time to time may by resolution provide for the holding of
regular meetings and fix the place (which may be within or without the State of
Delaware) and the date and hour of such meetings. Notice of regular meetings
need not be given, provided that if the Board of Directors shall fix or change
the time or place of any regular meeting, written notice of such action shall
be given to each Director who shall not have been present at the meeting at
which such action was taken at least two days in advance thereof. Any such
notice shall be deemed given to a Director five days after it has been sent by
mail or immediately when sent by telecopy, e-mail or other electronic means of
transmission addressed to him or her at his or her address furnished to the
Secretary. Notice of such action need not be given to any Director who attends
such regular meeting or to any Director who submits a signed waiver of notice,
whether before or after such meeting.
Section 2.04. Special Meetings; Notice. Special meetings of
the Board of Directors shall be held whenever called by the Chairman of the
Board or, in the event of his or her absence or disability, by the President or
by not less than one-quarter of the Directors then in office, at such place
(within or without the State of Delaware), date and hour as may be specified in
the respective notices or waivers of notice of such meetings. Written notice of
each special meeting of the Board of Directors shall be given to each Director
at least one day in advance thereof. Such notice shall state in general terms
the purpose or purposes of the meeting. Any such notice for a special meeting
shall be deemed given to a Director five days after it has been sent by mail,
or immediately when sent by telecopy, e-mail other electronic means of
transmission addressed to him or her at his or her address furnished to the
Secretary. Notice of any special meeting need not be given to any Director who
attends such meeting, or to any Director who submits a signed waiver of notice,
whether before or after such meeting.
Section 2.05. Quorum; Voting. At all meetings of the Board of
Directors, the presence of not less than a majority of the entire Board of
Directors shall constitute a quorum for the transaction of business. Except as
otherwise required by law, the Certificate of Incorporation or these By-laws,
the vote of a majority of the Directors present at any meeting at which a
quorum is present shall be the act of the Board of Directors.
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Section 2.06. Adjournment. A majority of the Directors
present, whether or not a quorum is present, may adjourn any meeting of the
Board of Directors to another time or place. No notice need be given of any
adjourned meeting unless the time and place of the adjourned meeting are not
announced at the time of adjournment, in which case notice conforming to the
requirements of Section 2.04 shall be given to each Director.
Section 2.07. Action Without a Meeting. Any action required
or permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting if all members of the Board of Directors consent thereto in
writing, and such writing or writings are filed with the minutes of proceedings
of the Board of Directors.
Section 2.08. Regulations; Manner of Acting. To the extent
consistent with applicable law, the Certificate of Incorporation and these
By-laws, the Board of Directors may adopt such rules and regulations for the
conduct of meetings of the Board of Directors and for the management of the
property, affairs and business of the Corporation as the Board of Directors may
deem appropriate. The Directors shall act only as a Board, and the individual
Directors shall have no power as such.
Section 2.09. Action by Telephonic Communications. Members of
the Board of Directors may participate in a meeting of the Board of Directors
by means of conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each other, and
participation in a meeting pursuant to this provision shall constitute presence
in person at such meeting.
Section 2.10. Resignations. Any Director may resign at any
time by delivering a written notice of resignation, signed by such Director, to
the President or the Secretary. Unless otherwise specified therein, such
resignation shall take effect upon delivery.
Section 2.11. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any series of Preferred Stock of the
Corporation, 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, although less than a quorum, or by a sole remaining Director, except
that the stockholders shall fill any vacancy resulting from the removal of a
Director by the stockholders.
Section 2.12. Compensation. The amount, if any, which each
Director shall be entitled to receive as compensation for his or her services
as such shall be fixed from time to time by resolution of the Board of
Directors.
Section 2.13. Reliance on Accounts and Reports, etc. A
Director, or a member of any Committee designated by the Board of Directors,
shall, in the performance of his or her duties, be fully protected in relying
in good faith upon the records of the Corporation and upon information,
opinions, reports or statements presented to the Corporation by any of the
Corporation's officers or employees, by Committees designated by the Board of
Directors or by any other person as to the matters the member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.
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ARTICLE III
EXECUTIVE COMMITTEE AND OTHER COMMITTEES
----------------------------------------
Section 3.01. How Constituted. The Board of Directors may, by
resolution adopted from time to time by a majority of the entire Board of
Directors, create one or more Committees, including an Executive Committee, and
designate the Directors who are to serve as members of each such Committee.
Each member of any such Committee shall hold office until his or her successor
shall have been designated or until he or she shall cease to be a Director, or
until his or her earlier death, resignation or removal.
Section 3.02. Powers. During the intervals between the
meetings of the Board of Directors, the Executive Committee, except as
otherwise provided in this section and subject to the Certificate of
Incorporation and these By-laws, shall have and may exercise all the powers and
authority of the Board of Directors in the day to day management of the
property, affairs and business of the Corporation. Each such other Committee,
except as otherwise provided in this section, shall have and may exercise
powers of the Board of Directors as may be provided by resolution or
resolutions of the Board of Directors. Neither the Executive Committee nor any
such other Committee shall have the power or authority:
(a) to amend the Certificate of Incorporation (except that a
Committee may, to the extent authorized in a resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors
as provided in Section 151(a) of the General Corporation Law of the State of
Delaware, fix the designations and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the Corporation or the conversion into, or the exchange of such
shares for, shares of any other class or classes or any other series of the
same or any other class or classes of stock of the Corporation or fix the
number of shares of any series of stock or authorize the increase or decrease
of the shares of any series);
(b) to adopt an agreement of merger or consolidation;
(c) to recommend to the stockholders the sale, lease or
exchange of all or substantially all of the Corporation's property and assets;
(d) to recommend to the stockholders a dissolution of the
Corporation or a revocation of a dissolution;
(e) to amend these By-laws;
(f) to approve or recommend to the stockholders any other
extraordinary corporate transaction, except where such committee has been
established by the affirmative vote of at least two-thirds of the entire Board
of Directors to consider a transaction proposed by an affiliate of the
Corporation;
(g) to declare any dividend; or
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(h) to issue any capital stock of the Corporation or any
securities convertible into or exchangeable for capital stock of the
Corporation, except that such committee may constitute a committee to fix
pricing terms for the issue and sale of any capital stock the issuance of which
has been authorized by action of the Board of Directors.
The Executive Committee shall have, and any such other
Committee may be granted by the Board of Directors, power to authorize the seal
of the Corporation to be affixed to any or all papers which may require it.
Section 3.03. Proceedings. Each such Committee may fix its
own rules of procedure consistent with these By-laws and may meet at such place
(within or without the State of Delaware), at such time and upon such notice,
if any, as it shall determine from time to time. Each such Committee shall keep
minutes of its proceedings and shall report such proceedings to the Board of
Directors at the meeting of the Board of Directors next following any such
proceedings.
Section 3.04. Quorum and Manner of Acting. Except as may be
otherwise provided in the resolution creating such Committee, at all meetings
of any Committee the presence of members constituting a majority of the total
authorized membership of such Committee shall constitute a quorum for the
transaction of business. The act of the majority of the members present at any
meeting at which a quorum is present shall be the act of such Committee. Any
action required or permitted to be taken at any meeting of any such Committee
may be taken without a meeting, if all members of such Committee shall consent
to such action in writing and such writing or writings are filed with the
minutes of the proceedings of the Committee. The members of any such Committee
shall act only as a Committee, and the individual members of such Committee
shall have no power as such.
Section 3.05. Action by Telephonic Communications. Members of
any Committee designated by the Board of Directors may participate in a meeting
of such Committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this provision shall
constitute presence in person at such meeting.
ARTICLE IV
OFFICERS
--------
Section 4.01. Number. The officers of the Corporation shall
be chosen by the Board of Directors and may include a Chairman of the Board and
Vice Chairman of the Board (who shall be chosen from among the Directors) and
shall include a President, one or more Vice Presidents, a Secretary, a
Treasurer and such other officers as the Board of Directors may determine. Any
number of offices may be held by the same person, except that the President and
the Secretary shall not be the same person. Except as otherwise provided in
these By-laws, no officer need be a Director.
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Section 4.02. Election. Unless otherwise determined by the
Board of Directors, the officers of the Corporation shall be elected by the
Board of Directors at the annual meeting of the Board of Directors, and shall
be elected to hold office until the next succeeding annual meeting of the Board
of Directors. In the event of the failure to elect officers at such annual
meeting, officers may be elected at any regular or special meeting of the Board
of Directors. Each officer shall hold office until his or her successor has
been elected and qualified, or until his or her earlier death, resignation or
removal.
Section 4.03. Removal and Resignation; Vacancies. Any officer
may be removed for or without cause at any time by the Board of Directors. Any
officer may resign at any time by delivering a written notice of resignation,
signed by such officer, to the Board of Directors or the President. Unless
otherwise specified therein, such resignation shall take effect upon delivery.
Any vacancy occurring in any office of the Corporation by death, resignation,
removal or otherwise, shall be filled by the Board of Directors.
Section 4.04. Authority and Duties of Officers. The officers
of the Corporation shall have such authority and shall exercise such powers and
perform such duties as may be specified in these By-laws, except that in any
event each officer shall exercise such powers and perform such duties as may be
required by law.
Section 4.05. Chairman of the Board. The Board of Directors
may at a regular or special meeting elect from among their number a Chairman of
the Board who shall hold office, at the pleasure of the Board of Directors,
until the next annual meeting. The Chairman of the Board shall preside at all
meetings of the Board of Directors and also shall exercise such powers and
perform such duties as may be delegated or assigned to or required of him or
her by or pursuant to these By-laws or by or pursuant to authorization of the
Board of Directors.
Section 4.06. Vice-Chairman of the Board. The Board of
Directors may at a regular or special meeting elect from among their number one
or more Vice-Chairman of the Board who shall hold office, at the pleasure of
the Board of Directors, until the next annual meeting. The Vice-Chairman of the
Board shall exercise such powers and perform such duties as may be delegated or
assigned to or required of him, her or them by or pursuant to these By-laws or
by or pursuant to authorization of the Board of Directors or by the Chairman of
the Board.
Section 4.07. President. The Board of Directors shall at a
regular or special meeting elect from among their number a President who shall
hold office, at the pleasure of the Board of Directors, until the next annual
meeting and until the election of his or her successor. The President shall
exercise such powers and perform such duties as may be delegated or assigned
to, or required of him or her by or pursuant to these By-laws or by or pursuant
to authorization of the Board of Directors or (if the President is not the
chief executive officer) the chief executive officer.
Section 4.08. Chief Executive Officer. The Chairman of the
Board or the President shall be the chief executive officer of the Corporation
as the Board of Directors from time to time shall determine, and the Board of
Directors from time to time may determine who shall act as chief executive
officer in the absence or inability to act of the then incumbent.
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Subject to the control of the Board of Directors, and to the extent not
otherwise prescribed by these By-laws, the chief executive officer
shall have plenary power over all departments, officers, employees and agents
of the Corporation, and shall be responsible for the general management and
direction of all the business and affairs of the Corporation.
Section 4.09. The Secretary. The Secretary shall have the
following powers and duties:
(a) He or she shall keep or cause to be kept a record of all
the proceedings of the meetings of the stockholders and of the Board
of Directors in books provided for that purpose.
(b) He or she shall cause all notices to be duly given in
accordance with the provisions of these By-laws and as required by
law.
(c) Whenever any Committee shall be appointed pursuant to a
resolution or resolutions of the Board of Directors, he or she shall
furnish a copy of such resolution or resolutions to the members of
such Committee.
(d) He or she shall be the custodian of the records and of
the seal of the Corporation and shall cause such seal (or a facsimile
thereof) to be affixed to all certificates representing shares of the
Corporation prior to the issuance thereof and to all instruments the
execution of which on behalf of the Corporation under its seal shall
have been duly authorized in accordance with these By-laws, and when
so affixed he or she may attest the same.
(e) He or she shall properly maintain and file all books,
reports, statements, certificates and all other documents and records
required by law, the Certificate of Incorporation or these By-laws.
(f) He or she shall have charge of the stock books and
ledgers of the Corporation and shall cause the stock and transfer
books to be kept in such manner as to show at any time the number of
shares of stock of the Corporation of each class issued and
outstanding, the names (alphabetically arranged) and the addresses of
the holders of record of such shares, the number of shares held by
each holder and the date as of which each became such holder of
record.
(g) He or she shall sign (unless the Treasurer, an Assistant
Treasurer or Assistant Secretary shall have signed) certificates
representing shares of the Corporation, the issuance of which shall
have been authorized by the Board of Directors.
(h) He or she shall perform, in general, all duties incident
to the office of secretary and such other duties as may be specified
in these By-laws or as may be assigned to him or her from time to
time by the Board of Directors or the chief executive officer.
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Section 4.10. The Treasurer. The Treasurer shall have the
following powers and duties:
(a) He or she shall have charge and supervision over and be
responsible for the moneys, securities, receipts and disbursements of
the Corporation and shall keep or cause to be kept full and accurate
records of all receipts of the Corporation.
(b) He or she shall cause the moneys and other valuable
effects of the Corporation to be deposited in the name and to the
credit of the Corporation in such banks or trust companies or with
such bankers or other depositaries as shall be selected in accordance
with Section 8.05 of these By-laws.
(c) He or she shall cause the moneys of the Corporation to be
disbursed by checks or drafts (signed as provided in Section 8.06 of
these By-laws) upon the authorized depositaries of the Corporation
and cause to be taken and preserved proper vouchers for all moneys
disbursed.
(d) He or she shall render to the Board of Directors or the
President, whenever requested, a statement of the financial condition
of the Corporation and of all his or her transactions as Treasurer,
and render a full financial report at the annual meeting of the
stockholders, if called upon to do so.
(e) He or she shall be empowered from time to time to require
from all officers or agents of the Corporation reports or statement
giving such information as he or she may desire with respect to any
and all financial transactions of the Corporation.
(f) He or she may sign (unless an Assistant Treasurer or the
Secretary or an Assistant Secretary shall have signed) certificates
representing stock of the Corporation, the issuance of which shall
have been duly authorized by the Board of Directors.
(g) He or she shall perform, in general, all duties incident
to the office of Treasurer and such other duties as may be specified
in these By-laws or as may be assigned to him or her from time to
time by the Board of Directors or the chief executive officer.
Section 4.11. Additional Officers. The Board of Directors may
appoint such other officers and agents as it may deem appropriate, and such
other officers and agents shall hold their offices for such terms and shall
exercise such powers and perform such duties as may be determined from time to
time by the Board of Directors. The President may appoint subordinate officers
or agents (other than the Vice President, Secretary and Treasurer) and
prescribe their respective rights, terms of office, authorities and duties. The
President may remove any such subordinate officer or agent appointed by him or
her, for or without cause.
Section 4.12. Security. The Board of Directors may require
any officer, agent or employee of the Corporation to provide security for the
faithful performance of his or her duties, in such amount and of such character
as may be determined from time to time by the Board of Directors.
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ARTICLE V
CAPITAL STOCK
-------------
Section 5.01. Certificates of Stock; Uncertificated Shares.
The Shares of the Corporation shall be represented by certificates, provided
that the Board of Directors may provide by resolution or resolutions that some
or all of any or all classes or series of the stock of the Corporation shall be
uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until each certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution by the Board of
Directors, every holder of stock in the Corporation represented by certificates
and upon request every holder of uncertificated shares shall be entitled to
have a certificate signed by, or in the name of, the Corporation by the
Chairman of the Board, or the President or a Vice President and by the
Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary,
representing the number of shares registered in certificate form. Such
certificate shall be in such form as the Board of Directors may determine, to
the extent consistent with applicable law, the Certificate of Incorporation and
these By-laws.
Section 5.02. Signatures; Facsimile. All of such signatures
on the certificate may be a facsimile, engraved or printed, to the extent
permitted by law. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he or she were such officer, transfer agent or registrar at the date of
issue.
Section 5.03. Lost, Stolen or Destroyed Certificates. The
Board of Directors may direct that a new certificate be issued in place of any
certificate theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon delivery to the Board of Directors of an affidavit of
the owner or owners of such certificate setting forth such allegation. The
Board of Directors may require the owner of such lost, stolen or destroyed
certificate, or his or her legal representative, to give the Corporation a bond
sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or
the issuance of any such new certificate.
Section 5.04. Transfer of Stock. Upon surrender to the
Corporation or the transfer agent of the Corporation of a certificate for
shares, duly endorsed or accompanied by appropriate evidence of succession,
assignment or authority to transfer, the Corporation shall issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books. Within a reasonable time after the
transfer of uncertificated stock, the Corporation shall send to the registered
owner thereof a written notice containing the information required to be set
forth or stated on certificates pursuant to Sections 151, 156, 202(a) or 218(a)
of the General Corporation Law of the State of Delaware. Subject to the
provisions of the Certificate of Incorporation and these By-laws, the Board of
Directors may prescribe such additional rules and regulations as it may deem
appropriate relating to the issue, transfer and registration of shares of the
Corporation.
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Section 5.05. Record Date. In order to determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board of Directors may fix, in advance, a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted by the Board of Directors, and which shall
not be more than 60 nor less than 10 days before the date of such meeting. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting, provided
that the Board of Directors may fix a new record date for the adjourned
meeting.
In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights of the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than 60 days prior to such
action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
Section 5.06. Registered Stockholders. Prior to due surrender
of a certificate for registration of transfer, the Corporation may treat the
registered owner as the person exclusively entitled to receive dividends and
other distributions, to vote, to receive notice and otherwise to exercise all
the rights and powers of the owner of the shares represented by such
certificate and the Corporation shall not be bound to recognize any equitable
or legal claim to or interest in such shares on the part of any other person,
whether or not the Corporation shall have notice of such claim or interests.
Whenever any transfer of shares shall be made for collateral security, and not
absolutely, it shall be so expressed in the entry of the transfer if, when the
certificates are presented to the Corporation for transfer or uncertificated
shares are requested to be transferred, both the transferor and transferee
request the Corporation to do so.
Section 5.07. Transfer Agent and Registrar. The Board of
Directors may appoint one or more transfer agents and one or more registrars,
and may require all certificates representing shares to bear the signature of
any such transfer agents or registrars.
ARTICLE VI
INDEMNIFICATION
---------------
Section 6.01. Nature of Indemnity. The Corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
or she is or was or has agreed to become a Director or officer of the
Corporation, is or was serving or has agreed to serve at the request of the
Corporation as a Director or officer of another corporation, partnership, joint
venture, trust or other enterprise, including an employee benefit plan, or by
reason of any action alleged to have been taken or omitted in such capacity,
and may indemnify any person who was or is a party or is threatened to be made
a party to such an action, suit or proceeding by reason of the fact that he or
she is or was or has agreed to become an employee or agent of the Corporation,
or is or was serving or has agreed to serve at
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the request of the Corporation as a director, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
including an employee benefit plan, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her or on his or her behalf in connection with
such action, suit or proceeding and any appeal therefrom, if he or she acted in
good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interests of the Corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful; except that in the case of an action or suit by or in the
right of the Corporation to procure a judgment in its favor (i) such
indemnification shall be limited to expenses (including attorneys' fees)
actually and reasonably incurred by such person in the defense or settlement of
such action or suit and (ii) no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper.
The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or
its equivalent shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed to be
in or not opposed to the best interests of the Corporation and, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
Section 6.02. Successful Defense. To the extent that a
Director, officer, employee or agent of the Corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred
to in Section 6.01 hereof or in defense of any claim, issue or matter therein,
he or she shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection therewith.
Section 6.03. Determination That Indemnification Is Proper.
Any indemnification of a Director or officer of the Corporation under Section
6.01 hereof (unless ordered by a court) shall be made by the Corporation unless
a determination is made that indemnification of the Director or officer is not
proper in the circumstances because he or she has not met the applicable
standard of conduct set forth in Section 6.01 hereof. Any indemnification of an
employee or agent of the Corporation under Section 6.01 hereof (unless ordered
by a court) may be made by the Corporation upon a determination that
indemnification of the employee or agent is proper in the circumstances because
he or she has met the applicable standard of conduct set forth in Section 6.01
hereof. Any such determination shall be made (i) by the Board of Directors by a
majority vote of a quorum consisting of Directors who were not parties to such
action, suit or proceeding, (ii) if such a quorum is not obtainable, or, even
if obtainable a quorum of disinterested Directors so directs, by independent
legal counsel in a written opinion or (iii) by the stockholders.
Section 6.04. Advance Payment of Expenses. Expenses
(including attorneys' fees) incurred by a Director or officer in defending any
civil, criminal, administrative or
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investigative action, suit or proceeding shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of the Director or officer to repay
such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the Corporation as authorized in this
Article VI. Such expenses (including attorneys' fees) incurred by other
employees and agents may be so paid upon such terms and conditions, if any, as
the Board of Directors deems appropriate. The Board of Directors may authorize
the Corporation's counsel to represent such Director, officer, employee or
agent in any action, suit or proceeding, whether or not the Corporation is a
party to such action, suit or proceeding.
Section 6.05. Procedure for Indemnification of Directors and
Officers. Any indemnification of a Director or officer of the Corporation under
Sections 6.01 and 6.02 or advance of costs, charges and expenses to a Director
or officer under Section 6.04 shall be made promptly, and in any event within
30 days, upon the written request of the Director or officer. If a
determination by the Corporation that the Director or officer is entitled to
indemnification pursuant to this Article is required, and the Corporation fails
to respond within 60 days to a written request for indemnity, the Corporation
shall be deemed to have approved such request. If the Corporation denies a
written request for indemnity or advancement of expenses, in whole or in part,
or if payment in full pursuant to such request is not made within 30 days, the
right to indemnification or advances as granted by this Article VI shall be
enforceable by the Director or officer in any court of competent jurisdiction.
Such person's costs and expenses incurred in connection with successfully
establishing his or her right to indemnification, in whole or in part, in any
such action shall also be indemnified by the Corporation. It shall be a defense
to any such action (other than an action brought to enforce a claim for the
advance of costs, charges and expenses under Section 6.04 where the required
undertaking, if any, has been received by the Corporation) that the claimant
has not met the standard of conduct set forth in Section 6.01, but the burden
of providing such defense shall be on the Corporation. Neither the failure of
the Corporation (including its Board of Directors, its independent legal
counsel and its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in Section 6.01, nor the fact that there has been an actual
determination by the Corporation (including its Board of Directors, its
independent legal counsel and its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that the claimant has not met the applicable standard of conduct.
Section 6.06. Survival; Preservation of Other Rights. The
foregoing indemnification provisions shall be deemed to be a contract between
the Corporation and each Director, officer, employee and agent who serves in
any such capacity at any time while these provisions as well as the relevant
provisions of the General Corporation Law of the State of Delaware are in
effect, and any repeal or modification thereof shall not affect any right or
obligation then existing with respect to any state of facts then or previously
existing or any action, suit or proceeding previously or thereafter brought or
threatened based in whole or in part upon any such state of facts. Such a right
may not be modified retroactively without the consent of such Director,
officer, employee or agent.
The indemnification provided by this Article VI shall not be
deemed exclusive of any other rights to which those indemnified may be entitled
under any By-law, agreement, vote
15
<PAGE>
of stockholders or disinterested Directors or otherwise, both as to action
in his or her official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be
a Director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
Section 6.07. Insurance. The Corporation may purchase and
maintain insurance on behalf of any person who is or was or has agreed to
become a Director or officer of the Corporation, or is or was serving at the
request of the Corporation as a Director or officer of another corporation,
partnership, joint venture, trust or other enterprise, including an employee
benefit plan, against any liability asserted against him or her and incurred by
him or her or on his or her behalf in any such capacity, or arising out of his
or her status as such, whether or not the Corporation would have the power to
indemnify him or her against such liability under the provisions of this
Article.
Section 6.08. Severability. If this Article or any portion
hereof shall be invalidated on any ground by any court of competent
jurisdiction, then the Corporation shall nevertheless indemnify each Director
or officer and may indemnify each employee or agent of the Corporation as to
costs, charges and expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement with respect to any action, suit or proceeding,
whether civil, criminal, administrative or investigative, including an action
by or in the right of the Corporation, to the fullest extent permitted by any
applicable portion of this Article VI that shall not have been invalidated and
to the fullest extent permitted by applicable law.
ARTICLE VII
OFFICES
-------
Section 7.01. Registered Office. The registered office of the
Corporation in the State of Delaware shall be located at Corporation Trust
Center, 1209 Orange Street in the City of Wilmington, County of New Castle.
Section 7.02. Other Offices. The Corporation may maintain
offices or places of business at such other locations within or without the
State of Delaware as the Board of Directors may from time to time determine or
as the business of the Corporation may require.
ARTICLE VIII
GENERAL PROVISIONS
------------------
Section 8.01. Dividends. Subject to any applicable provisions
of law and the Certificate of Incorporation, dividends upon the shares of the
Corporation may be declared by the Board of Directors at any regular or special
meeting of the Board of Directors and any such dividend may be paid in cash,
property or shares of the Corporation's capital stock.
A member of the Board of Directors shall be fully protected
in relying in good faith upon the records of the Corporation and upon such
information, opinions, reports or statements presented to the Corporation by
any of its officers or employees, Committees of the Board of Directors, or any
other person as to matters the Director reasonably believes are within
16
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such other person's professional or expert competence and who has been
selected with reasonable care by or on behalf of the Corporation, as
to the value and amount of the assets, liabilities and/or net profits of the
Corporation, or any other facts pertinent to the existence and amount of
surplus or other funds from which dividends might properly be declared and
paid.
Section 8.02. Reserves. There may be set aside out of any
funds of the Corporation available for dividends such sum or sums as the Board
of Directors from time to time, in its absolute discretion, thinks proper as a
reserve or reserves to meet contingencies, for equalizing dividends or for
repairing or maintaining any property of the Corporation or for such other
purpose as the Board of Directors shall think conducive to the interest of the
Corporation, and the Board of Directors may similarly modify or abolish any
such reserve.
Section 8.03. Deposits. Any funds of the Corporation may be
deposited from time to time in such banks, trust companies or other
depositaries as may be determined by the Board of Directors, the Chairman of
the Board or the President or by such officers or agents as may be authorized
by the Board of Directors, the Chairman of the Board or the President to make
such determination.
Section 8.04. Checks. All checks or demands for money and
notes of the Corporation shall be signed by such officer or officers or such
agent or agents of the Corporation, and in such manner, as the Board of
Directors, the Chairman of the Board or the President from time to time may
determine.
Section 8.05. Sale, Transfer, etc., of Securities. To the
extent authorized by the Board of Directors, the Chairman of the Board or by
the President, any Vice President, the Secretary or the Treasurer or any other
officers designated by the Board of Directors, the Chairman of the Board or the
President may sell, transfer, endorse, and assign, in each case in the ordinary
course of business, any shares of stock (other than stock of a subsidiary if
such transaction has not been approved by the Board of Directors), bonds or
other securities owned by or held in the name of the Corporation, and may make,
execute and deliver in the name of the Corporation, under its corporate seal,
any instruments that may be appropriate to effect any such sale, transfer,
endorsement or assignment.
Section 8.06. Voting as Stockholder. Unless otherwise
determined by resolution of the Board of Directors, the Chairman of the Board,
the President, any Vice President or the Treasurer shall have full power and
authority on behalf of the Corporation to attend any meeting of stockholders of
any corporation in which the Corporation may hold stock, and to act, vote (or
execute proxies to vote) and exercise in person or by proxy all other rights,
powers and privileges incident to the ownership of such stock. Such officers
acting on behalf of the Corporation shall have full power and authority to
execute any instrument expressing consent to or dissent from any action of any
such corporation without a meeting. The Board of Directors may by resolution
from time to time confer such power and authority upon any other person or
persons.
Section 8.07. Fiscal Year. The fiscal year of the Corporation
shall commence on the first day of January of each year and shall terminate in
each case on December 31.
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Section 8.08. Seal. The seal of the Corporation shall be
circular in form and shall contain the name of the Corporation, the year of its
incorporation and the words "Corporate Seal" and "Delaware". The form of such
seal shall be subject to alteration by the Board of Directors. The seal may be
used by causing it or a facsimile thereof to be impressed, affixed or
reproduced, or may be used in any other lawful manner.
Section 8.09. Books and Records. Except to the extent
otherwise required by law, the books and records of the Corporation shall be
kept at such place or places within or without the State of Delaware as may be
determined from time to time by the Board of Directors.
ARTICLE IX
AMENDMENT OF BY-LAWS
--------------------
Section 9.01. Amendment. The Board of Directors shall have
the express power, without a vote of stockholders, to adopt any By-law, and to
amend, alter or repeal the By-laws of the Corporation, except to the extent
that the By-laws or the Certificate of Incorporation otherwise provide. The
Board of Directors may exercise such power upon the affirmative vote of a
majority of the entire Board of Directors. Stockholders may adopt any By-law,
or amend, alter or repeal the By-laws of the Corporation at any annual or
special meeting of the stockholders held in accordance with these By-laws.
ARTICLE X
CONSTRUCTION
------------
Section 10.01. Construction. In the event of any conflict
between the provisions of these By-laws as in effect from time to time and the
provisions of the Certificate of Incorporation of the Corporation as in effect
from time to time, the provisions of such Certificate of Incorporation shall be
controlling.
18
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THE ULTIMATE SOFTWARE GROUP, INC.
AMENDED AND RESTATED BY-LAWS
----------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
ARTICLE I STOCKHOLDERS............................................................................................1
Section 1.01. Annual Meeting................................................................................1
Section 1.02. Special Meetings..............................................................................1
Section 1.03. Notice of Meetings; Waiver....................................................................1
Section 1.04. Quorum........................................................................................2
Section 1.05. Voting........................................................................................2
Section 1.06. Voting by Ballot..............................................................................2
Section 1.07. Adjournment...................................................................................2
Section 1.08. Proxies.......................................................................................3
Section 1.09. Organization; Procedure.......................................................................3
Section 1.10. Advance Notice of Stockholder Proposals and Stockholder Nominations of Directors..............3
ARTICLE II BOARD OF DIRECTORS.....................................................................................4
Section 2.01. General Powers................................................................................4
Section 2.02. Number and Term of Office.....................................................................4
Section 2.03. Annual and Regular Meetings...................................................................5
Section 2.04. Special Meetings; Notice......................................................................5
Section 2.05. Quorum; Voting................................................................................5
Section 2.06. Adjournment...................................................................................6
Section 2.07. Action Without a Meeting......................................................................6
Section 2.08. Regulations; Manner of Acting.................................................................6
Section 2.09. Action by Telephonic Communications...........................................................6
Section 2.10. Resignations..................................................................................6
Section 2.11. Vacancies and Newly Created Directorships.....................................................6
Section 2.12. Compensation..................................................................................6
Section 2.13. Reliance on Accounts and Reports, etc.........................................................6
ARTICLE III EXECUTIVE COMMITTEE AND OTHER COMMITTEES..............................................................7
Section 3.01. How Constituted...............................................................................7
Section 3.02. Powers........................................................................................7
Section 3.03. Proceedings...................................................................................8
Section 3.04. Quorum and Manner of Acting...................................................................8
Section 3.05. Action by Telephonic Communications...........................................................8
<PAGE>
ARTICLE IV OFFICERS ..............................................................................................8
Section 4.01. Number........................................................................................8
Section 4.02. Election......................................................................................9
Section 4.03. Removal and Resignation; Vacancies............................................................9
Section 4.04. Authority and Duties of Officers..............................................................9
Section 4.05. Chairman of the Board.........................................................................9
Section 4.06. Vice-Chairman of the Board....................................................................9
Section 4.07. President.....................................................................................9
Section 4.08. Chief Executive Officer.......................................................................9
Section 4.09. The Secretary................................................................................10
Section 4.10. The Treasurer................................................................................11
Section 4.11. Additional Officers..........................................................................11
Section 4.12. Security.....................................................................................11
ARTICLE V CAPITAL STOCK..........................................................................................12
Section 5.01. Certificates of Stock; Uncertificated Shares.................................................12
Section 5.02. Signatures; Facsimile........................................................................12
Section 5.03. Lost, Stolen or Destroyed Certificates.......................................................12
Section 5.04. Transfer of Stock............................................................................12
Section 5.05. Record Date..................................................................................13
Section 5.06. Registered Stockholders......................................................................13
Section 5.07. Transfer Agent and Registrar.................................................................13
ARTICLE VI INDEMNIFICATION.......................................................................................13
Section 6.01. Nature of Indemnity..........................................................................13
Section 6.02. Successful Defense...........................................................................14
Section 6.03. Determination That Indemnification Is Proper.................................................14
Section 6.04. Advance Payment of Expenses..................................................................14
Section 6.05. Procedure for Indemnification of Directors and Officers......................................15
Section 6.06. Survival; Preservation of Other Rights.......................................................15
Section 6.07. Insurance....................................................................................16
Section 6.08. Severability.................................................................................16
ARTICLE VII OFFICES .............................................................................................16
Section 7.01. Registered Office............................................................................16
Section 7.02. Other Offices................................................................................16
ARTICLE VIII GENERAL PROVISIONS..................................................................................16
Section 8.01. Dividends....................................................................................16
Section 8.02. Reserves.....................................................................................17
Section 8.03. Deposits.....................................................................................17
Section 8.04. Checks.......................................................................................17
Section 8.05. Sale, Transfer, etc., of Securities..........................................................17
Section 8.06. Voting as Stockholder........................................................................17
ii
<PAGE>
Section 8.07. Fiscal Year..................................................................................17
Section 8.08. Seal.........................................................................................18
Section 8.09. Books and Records............................................................................18
ARTICLE IX AMENDMENT OF BY-LAWS..................................................................................18
Section 9.01. Amendment....................................................................................18
ARTICLE X CONSTRUCTION...........................................................................................18
Section 10.01. Construction.................................................................................18
iii
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<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC.
NONQUALIFIED STOCK OPTION PLAN
AS AMENDED AND RESTATED
AS OF APRIL 3, 1998
1. Purpose of the Plan.
The purpose of The Ultimate Software Group, Inc. Nonqualified
Stock Option Plan (the "Plan") is to further the long-term growth in earnings
of the Ultimate Software Group, Inc. (the "Company") by offering special
incentives in the form of a nonqualified stock option plan for the benefit of
those officers, directors and employees of the Company and its Subsidiaries who
have been and will be largely responsible for such growth. It is the express
purpose of this Plan to provide such officers, directors and employees with the
opportunity to acquire or increase their equity ownership in the Company
through the purchase of shares of the Company's Common Stock, par value $.01
per share, under a plan which is not designed to meet the requirements of
Section 422 of the Internal Revenue Code of 1986.
2. Definitions.
The singular shall include the plural and vice versa, and the
use of one gender shall be deemed to include the other whenever appropriate.
a. Board - The Board of Directors of the Company.
b. Change of Control -
(i) The consummation of any consolidation or merger
of the Company pursuant to which the stockholders of the
Company immediately prior to the merger or consolidation do
not represent, immediately after the merger or consolidation,
the beneficial owners (within the meaning of Rule 13d-3 under
the Securities Exchange Act of 1934 (the "Exchange Act")) of
50% or more of the combined voting power of the Company's (or
the surviving entity's) then outstanding securities
ordinarily (and apart from rights occurring in special
circumstances) having the right to vote in the election of
directors;
(ii) The consummation of any sale, lease, exchange
or transfer (in any single transaction or series of related
transactions) of all or substantially all of the assets or
business of the Company and its Subsidiaries; or
(iii) The occurrence of any event the result of
which is that any "person" (as such term is used in Sections
13(d)(3) and 14(d)(2) of the Exchange Act), other than (A)
the Company or any Subsidiary, or (B) any employee benefit
plan sponsored by the Company or any Subsidiary, shall
<PAGE>
become the beneficial owner (within the meaning of Rule 13d-3
under the Exchange Act) of securities of the Company
representing more than 50% of the combined voting power of
the Company's then outstanding securities ordinarily (and
apart from rights accruing in special circumstances) having
the right to vote in the election of directors, as a result
of a tender, leveraged buyout or exchange offer, open market
purchases, privately negotiated purchases, other arrangements
or understandings or otherwise.
c. Committee - The Compensation Committee of the
Board.
d. Employee - Any person, including any officer,
employed by the Company or any Subsidiary of the Company.
e. Employment - The time period during which any
individual is an Employee. Employment shall be determined in accordance with
Section 1.421-7(h) of the Treasury Regulations.
f. Fair Market Value - With respect to the value of
the Stock as of a particular day, (i) if an initial public offering of Stock
under the Securities Act of 1933 has occurred, the last reported sales price of
such Stock on the principal national securities exchange on which the Stock is
listed or (ii) if no such public offering has occurred, the fair market value
of the Stock determined in good faith by the Committee in whatever manner it
considers appropriate.
g. Fee Option - A stock option granted in lieu of
certain directors fees under Section 13 of the Plan.
h. Fees - All compensation earned by a Nonemployee
Director for services rendered by him as a Nonemployee Director, including any
retainer or fees for participating in meetings of the Board or of any standing
or special committee of the Board, other than such compensation, if any, as the
Board determines shall be paid in cash.
i. Nonemployee Director - Any current or former
member of the Board who is not an officer or employee of the Company.
j. Option - A Participant's right to purchase one
or more shares of Stock, as granted and determined in accordance with the
provisions of this Plan.
k. Option Price - The amount to be paid for the
purchase of shares of Stock on exercise of an Option as determined by the
Committee.
l. Participant - A Person who becomes eligible to
participate in this Plan under Section 4 hereof.
m. Permanent and Total Disability - The inability
of a Participant to engage in his normal employment activity for the Company
(or to serve as a member
2
<PAGE>
of the Board) by reason of any medically determined physical or mental
impairment that can be expected to result in death or that can be expected to
last for a continuous period of not less than 12 months.
n. Person - includes a natural person, corporation,
partnership, limited liability company, trust, or similar entity, or any group
of any of the foregoing acting in concert with respect to their ownership of
capital stock of the Company.
o. Stock - The Company's Common Stock, par value
$.01 per share.
p. Subsidiary - Any corporation of which 50 percent
or more of the combined voting power of all classes of stock is owned by the
Company or a Subsidiary of the Company.
3. Administration of the Plan.
a. Subject to the provisions of the Plan
(including, without limitation, the provisions of Section 13 hereof concerning
Fee Options), the Committee shall have exclusive power to select the Persons to
be granted Options pursuant to the Plan, to determine the number of shares of
Stock to be covered by any Option, to determine the Option Price for any Stock,
and to determine the conditions subject to which Options may be granted or
exercised.
b. The Plan shall be administered by the Committee.
Membership on the Board or the Committee shall in no way affect the eligibility
of a Person for participation in the Plan; provided, however, that no such
member shall participate in any decision affecting solely his interest or
participation in the Plan.
c. Decisions and determinations by the Committee
shall be final and binding upon all parties, including stockholders,
Participants, Beneficiaries and other Employees. The Committee shall have the
authority to interpret the Plan, to establish and revise rules and regulations
relating to the Plan, and to make any other determinations that it believes
necessary or advisable for the administration of the Plan.
d. The Company shall supply full and timely
information to the Committee on all matters relating to Employees, including
the occurrence of any Employee's death, disability or other termination of
employment, and such other pertinent facts as the Committee may require. The
Company shall furnish the Committee with such clerical and other assistance as
is necessary in the performance of its duties.
4. Participation.
a. Participants in the Plan shall be selected by
the Committee from among the officers, directors and Employees of the Company
and its Subsidiaries.
3
<PAGE>
5. Effective Date and Termination of Plan.
a. The Plan became effective on April 25, 1996.
b. The Plan shall terminate on April 25, 2006, but
the Board may terminate the Plan at any time prior thereto. Termination of the
Plan under this Section 5(b) (or under Section 14(d)) shall not alter or impair
any rights or obligations under any outstanding Option without the consent of
the holder of the Option.
6. Limitations on Number of Shares Subject to Options.
Subject to Section 12 hereof, the number of shares of Stock
that may be issued pursuant to Options granted under this Plan shall not exceed
500,000. Shares of Stock issued and sold under the Plan may be either
authorized but unissued shares or shares held in the Company's treasury. Shares
of Stock covered by an Option that shall have been exercised shall not again be
available for an Option grant. If an Option shall expire or terminate for any
reason (including, without limitation, the cancellation of an Option pursuant
to Section 9(e) below), the unpurchased shares subject to such expired or
terminated Option may again be optioned under this Plan, subject to its terms.
7. Duration of Options.
Subject to Section 10 and Section 13(f) hereof, any Option
granted to a Participant shall cease to be exercisable on the tenth anniversary
of the date of grant, or at such other date as may be determined by the
Committee.
8. Option Price.
Subject to Section 13(c) hereof, the Option Price for each
share of Stock subject to any Option granted to Participants shall be equal to
the Fair Market Value of such share as of the date on which the Option is
granted, or such other amount as may be determined by the Committee.
9. Terms of Exercise.
a. Medium of Payment. The Option Price for shares
purchased through the exercise of an Option shall be payable either in cash, in
shares of Stock, or in any combination thereof, as determined by the Committee.
If shares of Stock are used as the medium of payment, the Fair Market Value of
such shares of Stock shall be determined as of the date on which the payment is
made. As an alternative, payment of the Option Price shall be deemed satisfied
(i) if the Stock is listed on a national securities exchange, by delivery to
the Company of an assignment of a sufficient amount of the proceeds from the
sale of Stock acquired upon exercise to pay for all of the Stock acquired upon
exercise and an authorization to the broker or selling agent to pay that amount
to the Company, which sale shall be made at the Participant's direction at the
time of exercise, and (ii) if the Stock is not listed on a national securities
exchange, by having the Company withhold a number of shares of Stock otherwise
issuable to the Participant upon exercise of the Option, the Fair Market Value
of which equals the
4
<PAGE>
Option Price. For purposes hereof, the Fair Market Value of the shares of
Stock delivered and withheld shall be determined as of the date on which the
Option is exercised. In lieu of the delivery to the Participant of any
fractional share of Stock that would otherwise be due to him hereunder, the
Company shall pay the value of such fractional share to the Participant in
cash.
In addition to and at the time of payment of the Option
Price, the Participant shall pay to the Company in cash or, at the discretion
of the Committee, in Stock the full amount of all federal and state withholding
and other employment taxes applicable to the taxable income of such Participant
resulting from such exercise.
b. Transferability of Options. All Options shall be
nontransferable except (i) upon the Participant's death, by the Participant's
will or the laws of descent and distribution or (ii) on a case-by-case basis as
may be approved by the Committee in its discretion, in accordance with the
terms provided below. Each Option Agreement shall provide that the Participant
may, during his lifetime and subject to the prior approval of the Committee at
the time of proposed transfer, transfer all or part of the Option to a
Permitted Transferee (as defined below), provided that such transfer is made by
the Participant for estate or tax planning purposes or for donative purposes
and no consideration (other than nominal consideration) is received by the
Participant therefor. The transfer of an Option shall be subject to such other
terms and conditions as the Committee may in its discretion impose from time to
time, including a condition that the portion of the Option to be transferred be
vested and exercisable by the Participant at the time of transfer. Subsequent
transfers of an Option transferred under this Section 9(b) shall be prohibited
other than by will or the laws of descent and distribution upon the death of
the transferee.
For purposes hereof, a "Permitted Transferee" shall be any
member of the Participant's immediate family or a charitable institution (each
as defined below), or a trust for the exclusive benefit of such immediate
family members and/or charitable institution, or to a partnership, corporation
or limited liability company the equity interests of which are owned
exclusively by the Participant and/or one or more members of his immediate
family. For purposes of the preceding definition, (i) the "immediate family" of
the Participant shall mean and include the Participant's spouse, any descendant
of the Participant or his spouse (including descendants by adoption), and any
descendant of either parent of the Participant (including descendants by
adoption), and (ii) a "charitable institution" shall mean and include any
organization described in each of sections 170(b)(1)(A), 170(c), 2055(a) and
2522(a) of the Code, as well as any charitable remainder trust created under
section 664 of the Code, the income beneficiary of which is a member of the
Participant's immediately family or a trust or other entity described above in
this Section 9(b).
c. Transferability of Stock. All Options shall be
granted on the condition that the Participant shall not resell any Stock
purchased by the exercise of an Option except in compliance with all applicable
State and Federal securities laws and regulations. Unless there is a
registration statement in effect with respect to the resale of Stock subject to
an Option held by the Participant, each Participant shall, prior to the
5
<PAGE>
exercise of any Option, deliver to the Company a written representation in
form satisfactory to the Committee that it is his intention to acquire the
shares for investment and not for resale, and each Participant shall, prior to
any transfer of Stock purchased through the exercise of an Option, advise the
Company of the proposed transfer and demonstrate, to the satisfaction of the
Committee, that such transfer is in compliance with such laws and regulations.
The Company reserves the right to legend any Stock Certificates, conditioning
sales of such Stock upon compliance with applicable federal and state
securities laws and regulations.
d. Vesting. Subject to Section 13(e) hereof, the
Committee, in its sole discretion, shall prescribe vesting periods for each
Participant's Option Agreement and may accelerate the exercisability of any
Option at any time. An Option shall also become 100 percent vested and
exercisable upon the Participant's Permanent and Total Disability, the
Participant's death, or a Change of Control.
e. Cancellation, Substitution and Amendment of
Options. The Committee shall have the authority to effect, at any time and from
time to time, with the consent of the affected Participants, (i) the
cancellation of any or all outstanding Options and the grant in substitution
therefor of new Options covering the same or different numbers of shares of
Stock and having an Option Price which may be the same as or different than the
Option Price of the cancelled Options or (ii) the amendment of the terms of any
and all outstanding Options.
f. Other Terms. The Committee at the date of grant
or the Committee thereafter shall have the power to determine such additional
terms for the exercise of Options not inconsistent with the terms of this Plan
as it deems appropriate.
10. Termination.
Except as provided in Section 13(f) hereof with respect to
Options granted to Nonemployee Directors, if any Participant's Employment
should terminate for any reason other than his death or Permanent and Total
Disability, at a time when one or more of the Participant's Options remains
outstanding, then each such Option shall terminate on the earlier to occur of
the date provided in the Option Agreement or the date that is 90 days after the
date of such termination of Employment; provided, however, that such 90 day
period may be extended for any such Participant (but not beyond the respective
terms of the Participant's Options) upon determination of the Committee
following recommendation of the Chief Executive Officer. In such event, the
Participant's Options shall be exercisable during such period after termination
of Employment only to the extent vested and exercisable on the date of such
termination. Notwithstanding the foregoing, if a Participant's Employment with
the Company should be terminated for cause, the Participant's right to exercise
any unexercised portion of his Option shall immediately terminate and all
rights thereunder shall cease. For purposes hereof, termination for "cause"
shall include, but not be limited to, embezzlement or misappropriation of
corporate funds, any acts of dishonesty resulting in conviction for a felony,
misconduct resulting in material injury to the Company, significant activities
harmful to the reputation of the Company, a significant violation of Company
policy,
6
<PAGE>
willful refusal to perform, or substantial disregard of, the duties
properly assigned to the Participant, or a significant violation of any
contractual, statutory or common law duty of loyalty to the Company. The
Committee shall have the power to determine whether the Participant has been
terminated for cause and the date upon which such termination for cause occurs.
Any such determination shall be final, conclusive and binding upon the
Participant. In the event a Participant dies during Employment or terminates
Employment by reason of Permanent and Total Disability with one or more
outstanding Options, the Participant's outstanding Options shall continue to be
exercisable until one year after the date of such death or disability.
11. Option Agreements.
Upon the grant of any Option hereunder, the Participant shall
be required to sign an Option Agreement, in such form as shall be prescribed by
the Committee, reflecting the terms and conditions of the Option. Each such
Option Agreement shall refer to this Plan and shall give notice to the
Participant that all Options are subject to the terms and conditions of this
Plan.
12. Anti-Dilution Provisions.
In the event of a reorganization, recapitalization, stock
split, stock dividend, combination of shares, merger or consolidation, or the
sale, conveyance, lease or other transfer by the Company of all or
substantially all of its property, or any other change in the corporate
structure or shares of the Company, pursuant to any of which events the then
outstanding shares of Stock are split up or combined, or are changed into,
become exchangeable at the holder's election for, or entitle the holder thereof
to, other shares of stock, or in the case of any other transaction described in
Section 424(a) of the Internal Revenue Code of 1986, the Board shall change (i)
the number and kind of shares (including by substitution of shares of another
corporation) subject to the Options and/or the Option Price of such shares and
(ii) the number and kind of shares (including by substitution of shares of
another corporation) that may be issued pursuant to Options granted under this
Plan, in the manner that it shall deem to be equitable and appropriate.
Notwithstanding anything herein to the contrary, upon a
Change of Control in which shares of Stock are converted into cash, securities
or other property, any outstanding Option shall be terminated and the
Participant shall receive, with respect to each share of Stock issuable under
any Option outstanding at such time, a payment in cash equal to the excess of
the Change of Control Price (as defined below) of the Stock over the Option
Price of the Stock less amounts withheld in satisfaction of applicable federal
and state withholding and other employment taxes. For purposes of this section,
Change of Control Price shall mean the average fair market value (as determined
by the Board in good faith) of such cash, securities and other property
received, in connection with the Change of Control, by holders of Stock with
respect to each share of Stock.
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13. Fee Options.
a. Grant of Fee Option. Subject to Section 13(f)
hereof, as of each Date of Grant (determined under Section 13(b)), each
Nonemployee Director shall receive a grant of a Fee Option at an Option Price
(determined under Section 13(c)) to purchase a number of shares of Stock
(determined under Section 13(d)) in lieu of Fees which he earned during the
calendar quarter ending immediately prior to such Date of Grant.
b. Fee Option Date of Grant. The Date of Grant of a
Fee Option shall be the first business day of the calendar quarter immediately
following the calendar quarter during which Fees are earned by a Nonemployee
Director.
c. Fee Option Price. The Option Price of each share
of Stock subject to a Fee Option shall be 30% of Fair Market Value on the
applicable Date of Grant. d. Number of Fee Option Shares. The number of shares
of Stock subject to any Fee Option shall equal "A" divided by "B," rounded to
the nearest whole share, where:
"A" equals the dollar amount of the
Nonemployee Director's Fees which were
earned during the calendar quarter ending
immediately prior to the Date of Grant; and
"B" equals the excess of Fair Market Value of
the Stock on the applicable Date of Grant
over the Option Price with respect to a Fee
Option (determined under Section 13(c)).
e. Vesting. Each Fee Option shall vest and become
exercisable immediately on the Date of Grant of such Option.
f. Termination of Plan Participation.
Notwithstanding anything elsewhere in the Plan to the contrary, a Nonemployee
Director's eligibility for grants of Fee Options under the Plan shall cease as
of the date on which he no longer is a member of the Board. The Fee for any
Nonemployee Director whose Board membership terminates at any time after such
Fee is earned by such Nonemployee Director, but before the Date of Grant
relating to such Fee Option, shall be paid in cash. If a Nonemployee Director's
service as a member of the Board shall be terminated for any reason other than
for cause (as defined in Section 10 hereof), the Nonemployee Director (or his
legal representative or estate in the case of termination as a result of
Permanent and Total Disability or death) shall have the right, during the
period ending three years after such termination, to exercise the Options of
such Nonemployee Director to the extent not previously exercised. If a
Nonemployee Director shall be removed from the Board for cause, the Nonemployee
Director's right to exercise any unexercised portion of his Options shall
immediately terminate and all rights thereunder shall cease.
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14. Miscellaneous Provisions.
a. This Plan shall be governed by, and construed in
accordance with, the internal laws of Delaware.
b. Subject to Section 13 hereof with respect to
Nonemployee Directors, no Employee or other Person shall have any claim or
right to become a Participant of this Plan. Neither this Plan nor any action
taken hereunder shall be construed as giving to any Employee or member of the
Board any right to remain employed or to continue service as a member of the
Board.
c. The Company shall at all times during the term
of this Plan reserve and keep available an amount of Stock sufficient to
satisfy the requirements of this Plan, and shall pay all fees and expenses
necessarily incurred by the Company in connection with the exercise of Options
granted hereunder.
d. The Board may at any time terminate or amend
this Plan in any respect; provided that any such termination or amendment may
not alter or impair any rights or obligations under any outstanding Option
without the consent of the holder of the Option.
THE ULTIMATE SOFTWARE GROUP, INC.
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COMMERCIAL OFFICE LEASE
THIS LEASE, made and entered into this 16th day of November,
1993 by and between GARY A. POLIAKOFF, TRUSTEE (hereinafter referred to as
"Landlord"), and THE ULTIMATE SOFTWARE GROUP, LTD. (hereinafter referred to as
"Tenant");
W I T N E S S E T H: THAT
In consideration of the rents, covenants and agreements
hereinafter reserved and contained on the part of the Tenant to be observed and
performed, the Landlord demises and leases to the Tenant, and Tenant takes,
accepts and rents from Landlord, the premises hereinafter described, for the
period, at the rental, and upon the terms and conditions hereinafter set forth.
ARTICLE I
PREMISES
SECTION 1.01. PREMISES. Landlord leases to Tenant, and
Tenant leases from Landlord, on the terms and for the rental set forth, the
premises known as Suite C-307, in the Office Building located at 3111 Stirling
Road, in the City of Ft. Lauderdale, County of Broward, and State of Florida,
which demised premises contains three thousand four hundred sixty (3,460)
square feet, more or less, of net leasable area (as hereinafter defined)
referred to herein as the "Premises." The Premises are outlined on the floor
plan drawing attached as Exhibit A and made a part hereof. The Landlord
reserves the right, at any time, to relocate the various tenants at the expense
of Landlord. The Landlord also reserves the right to reduce, enlarge or
reconfigure the Office Building and automobile parking areas.
SECTION 1.02. NET RENTABLE AREA. The term "net rentable
area" shall refer to the area calculated within the boundaries defined by any
exterior walls bounding the Premises (measured to the outside surface of the
outer glass walls and the midpoint of outer finished column walls, the center
line of any common wall separating the Premises from any public corridors and
other common areas on such floor). No deduction from the net rentable area
shall be made for columns or projections of the Building. Net rentable area in
the Premises is stipulated for all purposes to be three thousand four hundred
sixty (3,460) square feet, more or less as a result of minor variations.
Neither the rent nor any other obligation of Tenant shall be reduced, increased
or otherwise affected by determination that the amount of net rentable area
contained in the Premises as determined by calculations made pursuant to the
definition set forth above after construction of the tenant improvements is
more or less than the amount set forth herein.
SECTION 1.03. GROSS RENTABLE AREA. The term "Gross Rentable
Area" shall mean 115% of the net rentable area. For purposes of this Lease,
all payments due Landlord by Tenant which are determined by square footage
shall be based upon a Gross Rentable Area of three thousand nine hundred
seventy nine (3,979) square feet.
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SECTION 1.04. USE OF ADDITIONAL AREA. The use of occupancy by
the Tenant of the Premises shall include the use in common with others entitled
thereto of the automobile parking areas, driveways, pathways, entranceways,
means of ingress and egress, loading and unloading facilities, and other
facilities as may be designated from time to time by the Landlord, subject,
however, to the term and conditions of this agrement, and to reasonable rules
and regulations for the use thereof, as prescribed from time to time by the
Landlord.
ARTICLE II
TERM
SECTION 2.01. LENGTH OF TERM. The length of this Lease shall
be for a term of one (1) year and eleven (11) months, unless otherwise
terminated or extended as provided herein.
SECTION 2.02. COMMENCEMENT DATE. The term of this Lease shall
commence on February 1, 1994 and shall expire on December 31, 1995, unless
otherwise terminated or extended as provided herein. If the Tenant occupies the
Premises prior to the Commencement Date, such early occupancy shall be subject
to all terms and conditions contained in this Lease. All property of Tenant
brought upon the Premises shall be kept at Tenant's sole risk.
ARTICLE III
RENT
SECTION 3.01. PAYMENT OF RENT. Tenant hereby covenants and
agrees to pay Rent to Landlord as hereinafter provided. The payment of said
Rent shall begin on the Commencement Date. In the event the Commencement Date
occurs on a day other than the first day of a month, Tenant shall pay rent for
the fractional month on a per diem basis (calculated on the basis of a thirty
[30] day month) until the first day of the month following such Commencement
Date, and thereafter the Rent shall be paid in equal monthly installments on
the first day of each and every month in advance. Said Rent shall be paid to
the Landlord at c/o Becker & Poliakoff, P.A., P.O. Box 9057, Fort Lauderdale,
FL 33310, or at such other place as may be designated in writing from time to
time by Landlord.
SECTION 3.02. BASE RENT
A. Rent. Tenant agrees to pay Landlord as Base Rent annually
(to be adjusted as provided in Section 3.03 hereof, without any right of
setoff, counterclaim or deduction, the annual sum of Eighty Three Thousand Four
Hundred Thirty Six and 60/100 ($83, 436.60) Dollars ($20.97) per square foot of
Gross Rentable Area per year), plus all applicable sales or rental tax thereon,
payable in equal monthly installments of Six Thousand Nine Hundred Fifty Three
and 05/100 ($6,953.05) Dollars plus sales tax (as adjusted). Notwithstanding
the provisions of the previous sentence, the monthly rent
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for the period beginning February 1, 1994 and ending December 31, 1994 shall be
Six Thousand Nine Hundred Fifty Three and 05/100 ($6,953.05) Dollars plus sales
tax. Beginning January 1, 1995, the monthly rent shall be Six Thousand Nine
Hundred Fifty Three and 05/100 ($6,953.05) Dollars plus sales tax and plus the
adjustment provided in Section 3.03. All past due installments of rent or any
other sums due by Tenant to Landlord hereunder shall bear interest at the
maximum lawful rate from date due until paid.
B. Late fee. Any payment not received by Landlord by the
tenth (10th) day of the month shall be considered in arrears and in default of
the terms hereof and shall be subject to a late charge in the amount of the
greater of five (5%) percent of the outstanding amount or $100.00, which Tenant
agrees to pay along with the late rent in the form of a cashier's check,
certified check or money order.
C. Returned Checks. In the event that Tenant's check is
returned for any reason, Tenant agrees to pay Landlord $50.00 as a handling
charge in addition any applicable late charge. Returned checks must be redeemed
by cashier's check, certified check or money order. In the event that more than
one (1) check is returned, Tenant agrees to pay all subsequent rents and
charges by cashier's check, certified check or money order.
SECTION 3.03. RENTAL ADJUSTMENT. The Base Rent shall be
adjusted as follows:
(a) For the purposes of this Section 3.03, the following
definitions shall apply:
(i) The term "CPI Index" shall mean the Consumer Price
Index for all Urban Consumers based upon the U.S. City
Average (all items included, 1967 = 100) published by
the United States Department of Labor, Bureau of Labor
Statistics;
(ii) The term "Base Index" shall mean the CPI Index
publicly reported for the calendar month during which
the Commencement Date occurs;
(iii)The term "Anniversary Month" shall mean December of
the calendar year in which the Commencement Date
occurs and each successive December thereafter during
the Term;
(iv) The term "Percentage Increase" shall mean the
percentage equal to the fraction, the numerator of
which shall be the CPI Index in the Anniversary Month
and the Denominator of which shall be the Base Index.
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In the event the CPI Index publicly reported in an
Anniversary Month shall exceed the Base Index, then
Tenant shall pay to Landlord each month during the
ensuing calendar year, and thereafter until a new
index comparative statement is sent to Tenant an
amount equal to the product obtained by multiplying
(i) the Percentage Increase by (ii) the monthly base
rental for the prior year. Landlord shall send to
Tenant an index comparative statement setting forth
(i) the CPI Index in the Anniversary Month preceding
the date of the statement, (ii) the Base Index, (iii)
the Percentage Increase and (iv) the increase in
monthly rent. On the first day of the calendar month
following the month in which the index comparative
statement was rendered, Tenant shall pay to Landlord
as additional rent, said increase in monthly rent
multiplied by the number of calendar months of the
term then elapsed since the previous January 1st and
thereafter, until a different index comparative
statement is sent to Tenant. During the last year for
which such payments were payable, any necessary
adjustments will be made when the next index
comparative statement is rendered to Tenant.
In the event (i) the CPI Index ceases to use the 1967
average of 100 as the basis of calculation, or (ii) a
substantial change is made in the quality or quantity
of the terms utilized in determining the CPI Index, or
(iii) the publishing of the CPI Index shall be
discontinued for any reason, the United States
Department of Labor may furnish a new index comparable
to the CPI Index together with the information which
will make possible the conversion of such new index to
replace the CPI Index for the purposes of computing
the Additional Rent, if any, payable under this
Section 3.03. If, for any reason, the United States
Department of Labor does not furnish such an index and
information, the parties shall thereafter accept and
use such other index or comparable statistics to
measure the cost of living as shall be computed and
published by an agency of the United States government
or by a reasonable financial periodical of recognized
authority selected by Landlord.
The Tenant's failure to pay, when due, any amounts
payable pursuant to the provisions of this Section,
shall be deemed a default of the Tenant's covenant to
pay rent and shall entitle the Landlord to avail itself
of any of the rights and remedies reserved in this
Lease or available under applicable laws on account of
such default.
The Tenant's obligation to pay any amounts due pursuant
to the provisions of this Section 3.03 shall survive
the expiration or sooner termination of the term of
this Lease.
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Any amounts payable under this Section 3.03 for a
portion of a month shall be prorated.
Nothing contained herein shall be deemed or
construed to reduce the Base Rent and other charges
payable under the other provisions of this Lease in
the event of a decrease in the CPI Index below the
Base Index.
(b) Notwithstanding the provisions of subparagraph (a) above,
the Base Rental shall increase a minimum of four percent
and a maximum of eight percent each year.
ARTICLE IV
IMPROVEMENTS
SECTION 4.01. IMPROVEMENTS BY LANDLORD. Landlord shall not
be responsible for any improvements to the Premises. Tenant takes the Premises
in an "as is" condition. All alterations, additions or improvements upon the
Premises, including partitions made by either Tenant shall become the property
of Landlord and shall remain upon and be surrendered with the Premises upon the
expiration of the term of this lease. Upon Landlord's request, Tenant shall at
termination of this lease, remove any such improvements and place the Premises
in the condition they were in prior to such improvements.
SECTION 4.02. IMPORVEMENTS BY TENANT. Unless otherwise
agreed in a writing attached hereto, Tenant, at its sole cost and expense,
shall be responsible for all improvements to the Premises. Provided however,
that before any such improvements are made, Tenant shall submit its plans,
drawings and specifications to Landlord for Landlord's approval which approval
shall not be unreasonably withheld. All bills shall be paid for in full, and
Tenant does hereby agree to indemnify, defend and hold harmless Landlord from
any and all liens, claims or demands in connection therewith. If any liens are
placed against the Premises or the Office Building itself, Tenant shall be
responsible for clearing all such liens immediately and, to the extent Landlord
incurs any expenses (including attorney fees), Tenant shall be responsible for
reimbursement.
SECTION 4.03. INSTALLATION OF FIXTURES. Prior to the
commencement of the term, if Tenant enters upon the Premises for the purpose of
installing trade fixtures and furnishings, such activity on the part of the
Tenant shall be done only in such manner as not to interfere with the normal
operations of the Office Building or any work being done by Landlord and
Landlord shall not be liable to Tenant for damage to or loss of such fixtures,
equipment or furnishings. Any equipment or work done which the Landlord
installs or constructs in the Premises on the Tenant's behalf shall be paid for
by the Tenant as Additional Rent, and shall be subject to all of Landlord's
lien rights for unpaid rent. It is mutually agreed that all work performed or
requested by the Tenant shall be subject to the approval of the Landlord's
architect, mechanical and electrical engineers.
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SECTION 4.04. ATLERATIONS. Tenant shall not make any
alterations or additions to the Premises, nor make any contract therefor,
without first procuring Landlord's written consent. All alterations, additions
and improvements made by Tenant to or upon the Premises, except signs,
electrical equipment or other removable trade fixtures or furnishings shall,
when made or installed, be deemed to have attached to the Premises and to have
become the property of Landlord; provided, however, if prior to termination of
this Lease, or within fifteen (15) days thereafter, Landlord so directs by
written notice to Tenant, Tenant shall promptly remove the additions,
improvements, trade fixtures and installations which were placed in the
Premises by the Tenant and which are designated in said notice and shall repair
any damage occasioned by such removal, and in default thereof, Landlord may
effect said removal and repair at Tenant's expense. All signs, electrical
equipment, fixtures, furnishings and other personal property of Tenant kept on
the Premises and not removed prior to the expiration of the term or earlier
termination thereof shall become the property of the Landlord, to do with as
Landlord exclusively deems appropriate.
ARTICLE V
USE BY TENANT
SECTION 5.01. USE OF PREMISES. Tenant shall occupy and use
the Premises for general office use and for no other purpose. Tenant shall
continuously and uninterruptedly during the term of this Lease conduct its
customary business activity therein during all normal business days and hours,
unless prevented from so doing by strikes, fire, casualty or other causes
beyond Tenant's control.
SECTION 5.02. RESTRICTIONS ON USE. Tenant shall not use nor
permit the Premises to be used for any purpose other than that set forth in
Section 5.01 above, and further covenants and agrees to execute and comply
promptly with all statutes, ordinances, rules, orders, regulations and
requirements of federal, state, county and city governments regulating the use
by Tenant of the Premises. Tenant will not use, or permit the use of the
Premises in any such manner that will tend to create a nuisance or tend to
disturb other tenants or occupants of the Office Building. The restrictions set
forth in this Paragraph shall extend to all agents and employees of the Tenant.
Tenant shall take good care of the Premises, fixtures, appurtenances and all
alterations, additions and improvements thereof; shall make all repairs in and
about the Premises as may be necessary to preserve same in good order and
condition, which repairs shall be equal in quality to the original work; shall
promptly pay the expenses of such repairs and shall promptly notify Landlord of
damage that may occur to the Premises.
NO SMOKING POLICY: PURSUANT TO THE INTENT OF THE FLORIDA
INDOOR CLEAN AIR ACT AND WITH A VIEW TOWARDS THE HEALTH AND SAFETY OF THE
TENANTS, GUESTS AND INVITEES, THERE SHALL BE NO SMOKING ANYWHERE WITHIN THE
PREMISES OR THE BUILDING OF WHICH IT IS A PART. SMOKING SHALL BE ALLOWED IN
DESIGNATED AREAS ONLY. FAILURE TO OBSERVE AND ENFORCE THIS POLICY SHALL
CONSTITUTE A VIOLATION OF FLORIDA LAW AND A DEFAULT UNDER THE LEASE.
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SECTION 5.03. BUILDING ACCESS. The main (Atrium) entrance
shall be open to the public from 8 a.m. to 7 p.m. Monday through Friday. Access
to the Premises during any other times shall be limited to other entry doors,
if any.
SECTION 5.04. PARKING. Tenant's employees, principals,
agents, contractors and others working on the Premises shall not park in spaces
designated as visitor parking. Vehicles are limited to passenger cars and vans;
other than normal commercial office deliveries, no trucks or heavy equipment is
permitted. Tenant shall give Landlord a list of the make, model and license
number of the automobiles of all persons working at the Premises.
SECTION 5.05. SIGNS. Without Landlord's prior consent and
approval, Tenant shall not (a) install any exterior lighting, awnings, shades
or exterior decorations or painting; (b) erect or install any exterior or
interior window or door signs or advertising media, window or door lettering or
placards or (c) keep or display any merchandise on, or otherwise obstruct the
areaways adjacent to the premises. It is the intention of this Section, as
related to signs, to maintain an overall sign control for the protection of all
tenants. All signs must conform with the Landlord's sign specifications and/or
be approved by Landlord prior to installation.
ARTICLE VI
MAINTENANCE, REPAIRS AND SERVICES
SECTION 6.01. MAINTENANCE BY TENANT. Tenant shall at all
times keep the Premises, fixtures, appurtenances, and all alterations,
additions and improvements thereof, including, but not limited to all
partitions, doors, equipment and all heating, air conditioning, lighting and
plumbing fixtures, in good order, condition and repair, any damage by
unavoidable casualty excepted. Provided however that structural portions of the
Premises, shall be maintained by Landlord; but if Landlord is required to make
repairs to structural portions by reason of Tenant's negligent acts or omission
to act, Landlord may add the cost of such repairs to the rent which shall
thereafter become due. Tenant shall keep the Premises and the areaways adjacent
thereto at all times in a neat, clean and sanitary condition, free from waste
or debris and shall neither commit nor permit any waste or nuisance thereon.
Tenant shall procure trash containers adequate to handle Tenant's trash
accumulation.
SECTION 6.02. MIANTANANCE BY LANDLORD. If Tenant refuses or
neglects to repair promptly the premises as required in Sections 6.01 and 6.03
hereof, in a reasonable time after written demand by the Landlord, the Landlord
may make such repairs without liability to Tenant for any loss or damage that
may accrue to Tenant's equipment, fixtures and/or other property; or to the
loss of business occasioned by reason thereof; and further, upon completion of
such repairs, Tenant shall pay Landlord's incurred costs occasioned by such
repairs. It is further agreed and understood that said billing of costs so
incurred shall include interest at the highest rate allowed by law from the
date of completion of the repairs by the Landlord.
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SECTION 6.03. REPAIRS BY TENANT. Tenant shall make all
repairs to the Premises, except those which Landlord is specifically obligated
to make under the provisions of Sections 6.01 and 6.04 hereof, and except that
Tenant shall not be obligated to make structural repairs to the Premises.
Tenant shall be responsible for replacement of all plate glass.
SECTION 6.04. REPAIRS BY LANDLORD. Landlord shall keep the
foundations, exterior and structural walls and roof of the Premises and the
Office Building, in good order, condition and repair, and make modifications or
replacements which become necessary or required by governmental authority or by
reason of the acts of Tenant, its agents, servants or employees, providing
however that Tenant shall reimburse Landlord its pro rata share of all expenses
of such repairs for each Lease year. Tenant's share of such costs shall be that
fractional part of the total of such costs as the total leaseable ground floor
area of the Premises bears to the total leaseable ground floor area of the
Office Building.
SECTION 6.05. SERVICES TO BE RENDERED BY LANDLORD. Landlord
will furnish Tenant, while occupying the Premises, with hot and cold water at
those points of supply provided; central heat and air conditioning in season,
at such time as Landlord normally furnishes these services to other tenants in
the Building and at such temperatures and in such amounts as are considered by
Landlord to be necessary; provided, however, such service on Saturdays, Sundays
and legal holidays shall be provided only upon Tenant's request and agreement
in advance to bear the cost of operations attributable to such additional
services; and routine maintenance and electrical lighting service for all
public areas and special service areas of the building in the manner and to the
extent deemed by Landlord to be standard. Landlord will furnish janitorial
services on a five (5) day week basis at an additional cost of $-0- per month,
proper electrical facilities to furnish sufficient power to typewriter,
calculating machines and other office machines of similar low electrical
consumption, but not including electricity for electronic data processing
equipment, special lighting in excess of Building standard, or any other item
of electric equipment, or similar use or kilowatt capacity or a voltage other
than 120 volts, single phase; fluorescent bulb replacement in Premises; and two
(2) keys for each corridor door entering the Premises.
SECTION 6.06. SPECIAL SERVICES. In the event that by prior
agreement with Tenant, Landlord furnishes extra or additional services to be
paid by Tenant, a failure to pay for such services within ten (10) days after
notice shall authorize Landlord, at Landlord's discretion and with further
notice, to discontinue all such services and the services herein provided. Sums
due for extra or additional services shall be deemed additional rental due
hereunder and the same shall be subject to the provisions herein pertaining to
the payment of rent.
SECTION 6.07. INTERRUPTION OF SERVICE. Landlord does not
warrant that any services will be free from interruption caused by repairs,
renewals, improvements, changes of service, alterations, strikes, lockouts,
labor controversies, accidents, inability to obtain fuel or power or other
causes beyond Landlord's control. No such interruptions shall be deemed an
eviction or disturbance of Tenant's use and possession or a breach by
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Landlord of Landlord?s obligations, or render Landlord liable for damages, by
abatement of rent or otherwise, or relieve Tenant from any obligation
hereunder. Failure by Landlord to any extent to provide any services as set
forth herein shall not work as an abatement of rent or relieve Tenant from the
fulfillment of any covenant hereof.
SECTION 6.08. WAIVER OF CLAIMS. Neither Landlord or
Landlord?s agents nor servants shall be liable, and Tenant waives all claims
for damage to persons or property sustained by Tenant or any occupant of the
Premises or other part of the Office Building, or any equipment or appurtenance
becoming out of repair, or resulting from any accident in or about the Premises
or the Office Building, or resulting directly or indirectly from any act or
neglect of any tenant or occupant or of any other person. This Paragraph shall
apply especially, but not exclusively, to the flooding of basements or other
subsurface areas, and to damage caused by roof leaks, air conditioning
apparatus, sprinkling devices, water, excessive heat or cold, falling plaster,
broken glass, sewage, gas odors or noise, or the bursting or leaking of pipes
or plumbing fixtures, and shall apply equally whether any such damage results
from the act or neglect of Landlord or of other tenants, occupants or servants
in the Office Building or of any other person and whether such damage be caused
or result from any thing or circumstances above mentioned or referred to, or
any other thing or circumstances, whether of a like nature or of a wholly
different nature. All property belonging to Tenant or any occupant of the
Premises or the Office Building shall be there at the risk of Tenant or such
other person only, and Landlord shall not be liable for damage thereto or theft
or misappropriation thereof.
SECTION 6.09. LANDLORD'S RIGHT OF ACCESS. Landlord and its
agents shall have free access to the Premises during all reasonable hours for
the purpose of examining same and to ascertain if they are in good repair, to
make reasonable repairs which the Landlord may be required to make hereunder
and to exhibit the same to prospective purchasers, lenders or tenants. In case
of any emergency originating in or threatening the Premises, regardless of the
time of day or whether the Tenant is present at the time of such emergency, the
Landlord, its agents and employees, shall have the right to enter the Premises
for the purpose of remedying or abating the cause of such emergency and such
right of entry shall be immediate and without the necessity of prior notice to
or consent of Tenant. To facilitate entry in the event of such emergency, the
Tenant shall deposit under the control of the Landlord a key to the Premises.
ARTICLE VII
INSURANCE
SECTION 7.01. INSURANCE BY TENANT. Tenant agrees that, at
its own cost and expense, it shall procure and continue in force, in the name
of Tenant and with Landlord as an Additional Insured, general liability
insurance against any and all claims for injuries to persons and property
occurring in, upon, or about the Premises, during the term of this Lease; such
insurance, at all times, to be in an amount not less than One Million
($1,000,000) Dollars combined single limit per occurrence. Such insurance shall
be written in a company or companies authorized to engage in the business of
general
9
<PAGE>
liability insurance in the State in which the Premises are located, and there
shall be delivered to the Landlord customary certificates evidencing such
paid-up insurance, which certificates are to be issued by the insurance
companies.
The policies of insurance provided herein are to be provided
by the Tenant, and shall be for a period of not less than one (1) year, it
being understood and agreed that fifteen (15) days prior to the expiration of
any policy of insurance, the Tenant will deliver to the Landlord a renewal or
new policy to take the place of the expiring policy, with the further
understanding that, should the Tenant fail to furnish policies, as is provided
in this Lease, and at the times herein provided, the Landlord may obtain such
insurance, and the premiums on such insurance shall be deemed Additional Rental
to be paid by the Tenant to the Landlord upon demand. Tenant shall make no
claim for recovery against Landlord and expressly waives any right of recovery
against Landlord for damage to or loss of the Premises, or improvements
thereon, which damage or loss may arise by fire or any other peril covered by
any policy of insurance containing a waiver of subrogation right against the
Landlord in which said policy the Tenant is or may be the insured and when said
loss is caused by or results from any acts of carelessness or negligence of the
Landlord, its officers, employees or other persons under its control. Tenant
further covenants and agrees to apply to its insurers for waiver of subrogation
against Landlord, its agents and employees, and to obtain same if Tenant's
insurers will issue such waiver without cost.
SECTION 7.02. INSURANCE BY LANDLORD. Landlord shall maintain
at its own cost and expense during the term of this Lease, fire, windstorm, and
extended coverage insurance on the Office Building; provided, however, Tenant
shall reimburse Landlord for its share of the actual net cost and expense to
Landlord of such insurance for that Lease Year. Tenant's share of such costs
shall be that fractional part of the total of such costs as the total leasable
ground floor area of the Premises bears to the total leasable ground floor area
of the Office Building.
SECTION 7.03. INDEMNITY FOR ACCIDENTS. Tenant covenants and
agrees that it will protect, defend and save and keep the Landlord forever
harmless and indemnified against and from any penalty or damage or charges
imposed for any violation of any laws or ordinances, whether occasioned by the
neglect of Tenant or those holding under Tenant, and that Tenant will at all
times protect, defend, indemnify and save and keep harmless the Landlord
against and from any and all claims, loss, cost, damage or expense arising out
of or from any accident or other occurrence on or about the Premises, causing
injury to any person or property whomsoever or whatsoever, and will protect,
defend, indemnify and save and keep harmless the Landlord against and from any
and all claims, loss, cost, damage or expense arising out of any failure of
Tenant in any respect to comply with and perform all the requirements and
provisions of this Lease.
SECTION 7.04. DESTRUCTION BY FIRE OR CASUALTY. The Tenant
shall give immediate notice to Landlord in case of fire or, other casualty in
or about the Premises or the Office Building. In the event the Premises shall
be damaged by fire, explosion, windstorm or any other casualty, then Landlord
shall repair such damages and put the
10
<PAGE>
Premises in good condition as rapidly as reasonably possible, and Tenant shall
be entitled to an equitable abatement of the Fixed Minimum Rent, unless
Landlord shall establish that such damage was occasioned by the acts of Tenant,
its agents or employees.
Notwithstanding any other provisions of this Paragraph to the
contrary, if the Premises shall be damaged during the last two (2) years of the
lease term, and such damage shall be to the extent of more than twenty-five
percent (25%) of the value of the Premises at the time of such damage, then
Landlord may, at its election, upon notice to Tenant, within ninety (90) days
after such damage, terminate this Lease as of the date of such damage.
ARTICLE VIII
TAXES
SECTION 8.01. REAL ESTATE TAXES. Landlord shall pay all real
property taxes and assessments levied or payable during the term hereof, by the
county and municipality upon the demised land, building and other improvements
making up the Office Building.
SECTION 8.02 PERSONAL PROPERTY TAXES AND ASSESSMENTS. The
Tenant shall pay, before delinquent, any and all taxes, licenses, fees and
public charges levied, assessed or imposed, and which become payable during the
lease term upon Tenant's fixtures, furniture, appliances and personal property
located or installed in the Premises.
ARTICLE IX
TITLE
SECTION 9.01. POSSESSION BY TENANT. Tenant covenants and
warrants that it has full right and authority to enter into this Lease for the
full term hereof. Landlord covenants that Tenant, upon paying the Rent provided
for herein and upon performance of the covenants and agreements of this Lease
to be performed by said Tenant, will have, hold and enjoy quiet possession of
the Premises.
SECTION 9.02. SUBLEASE AND ASSIGNMENT. Landlord shall have
first refusal right to recapture the premises, on a request by Tenant to
sublease or assign. If Landlord does not desire to recapture the premises, then
Tenant shall not sublease, sublet or assign the Premises or any portion thereof
except by written permission and consent of Landlord, references elsewhere
contained herein to assignees notwithstanding. Any such subleasing or
assignment, even with the approval of the Landlord, shall not relieve the
Tenant from liability for payment of the rental and any other monies due
Landlord herein provided for or from the obligation to keep and be bound by the
terms, conditions and covenants of this Lease. The acceptance of rent from any
other person shall not be deemed to be a waiver of any of the provisions of
this Lease or a consent to the assignment or subletting of the Premises. Any
change in twenty percent (20%) or more
11
<PAGE>
of the equitable or beneficial ownership of Tenant shall be deemed on
assignment of this Lease.
SECTION 9.03. FINANCING. Tenant agrees that Tenant's rights
under this Lease are and shall always be subordinate to the lien of any
mortgage or trust deeds now or hereafter placed from time to time upon the land
and the Office Building. Tenant shall, upon written demand from Landlord,
execute such other and further instruments or assurances subordinating this
Lease to the lien or liens of any such mortgage or trust deeds. If any mortgage
or trustee under a trust deed elects to have Tenant's interest in this Lease
superior to any such interest by notice to Tenant, then this Lease shall be
deemed superior to any such mortgage or trust deed whether this Lease was
executed before or after such mortgage or trust deed.
SECTION 9.04. SURRENDER OF PREMISES. Tenant shall, upon the
expiration date or sooner termination of this Lease, surrender to Landlord the
Premises, together with all replacements thereto in good order, condition and
repair, except for ordinary wear and tear and loss by fire or other casualty.
If Tenant fails to surrender the Premises as required herein, Tenant shall be
deemed a month-to-month tenant and shall pay Landlord, as holdover rent, the
monthly rental amount as was payable in the last month of the lease term
multiplied by three (3), in addition to all other costs or payments required
under this Lease Agreement, for the duration of such holdover period.
SECTION 9.05. EMINENT DOMAIN. In the event the Premises, or
any part thereof, shall be taken or condemned for public purposes by any
competent authority, the entire compensation awarded therefore shall belong to
the Landlord, without any deduction therefrom for any present or future estate
of Tenant; provided, however, that in the event any part of the Premises itself
or more than twenty percent (20%) of the Office Building shall be so taken or
condemned, then either the Landlord or Tenant shall have the option of
terminating the term of this Lease upon giving to the other written notice of
such election within thirty (30) days after possession of the part condemned
has been taken by proper authorities, whereupon the term of this Lease shall be
terminated, as of the date on which possession is so taken. If neither Landlord
or Tenant so elects to terminate the term of this Lease, the Landlord at its
own expense, shall repair and restore the premises not affected by the taking
and thereafter, if a part of Premises itself has been taken or condemned, the
Fixed Minimum Rent to be paid by the Tenant shall be equitably and
proportionately reduced.
ARTICLE X
DEFAULT
SECTION 10.01. DEFAULT BY TENANT. All of the rights and
remedies of Landlord herein enumerated shall be cumulative, and none shall
exclude any other right or remedy allowed by law. It is agreed that in the
event:
(i) That the Tenant shall fail, neglect or refuse to pay any
installment of Fixed Minimum Rent or Additional
12
<PAGE>
Rent at the time, and in the amount as herein provided, or
to pay any other monies agreed by it to be paid promptly
when and as the same shall become due and payable under the
terms hereof;
(ii) That any voluntary or involuntary petition or similar
pleading, under any section or sections of any bankruptcy
act, shall be filed by or against Tenant, or any voluntary
or involuntary proceeding in any court or tribunal shall be
instituted to declare Tenant insolvent or unable to pay
Tenant's debts, and the same shall not be dismissed or
discharged within thirty (30) days after notice thereof in
writing;
(iii)That the Tenant shall fail, neglect or refuse to keep and
perform any of the other covenants, conditions,
stipulations or agreements herein contained and to be kept
and performed by it, and in the event any such default
shall continue, for a period of more than thirty (30) days
after notice thereof in writing given to the Tenant, by the
Landlord; provided, however, that if the cause for giving
such notice involves the making of repairs, or other
matters reasonably requiring a longer period of time than
the period of such notice, the Tenant shall be deemed to
have complied with such notice so long as it has commenced
to comply with said notice within the period set forth in
the notice, and is diligently prosecuting compliance with
said notice, or has taken proper steps or proceedings,
under the circumstances, to prevent the seizure,
destruction, alteration or other interference with said
Premises by reason of noncompliance with the requirements
of any law or any ordinance or with the regulations, rules
or directions of any government authority, as the case may
be;
(iv) That the Tenant makes any assignment of its property for
the benefit of creditors, or should the Premises be taken
under a levy of execution or attachment, in an action
against the Tenant, and such levy, attachment or assignment
is not dismissed and discharged within thirty (30) days
after written notice thereof to Tenant by Landlord, the
Tenant does hereby authorize and fully empower said
Landlord or Landlord's agent to cancel or annul this Lease
at once and to re-enter and take possession of said
Premises immediately, and remove all persons and their
property therefrom, and
13
<PAGE>
to use such force and assistance in effecting and
perfecting such removal as said Landlord may deem necessary
and advisable to recover at once full and exclusive
possession of all of said Premises, whether in possession
of said Tenant or of their persons or otherwise. At
Landlord's option, Landlord may declare all installments of
Minimum Rent and Additional Rent as adjusted at the time of
default for the remainder of the Lease term, to be
immediately due and payable whereupon the same shall become
immediately due and payable.
The Landlord may, however, at its option, at any time after
such default or violation of condition or covenant, reenter and take possession
of said Premises without such re-entering working a forfeiture of the rents to
be paid and the covenants, agreements and conditions to be kept and performed
by said Tenant for the full term of this Lease. In such event, the Landlord
shall have the right, but not the obligation, to divide or subdivide the
Premises in any manner the Landlord may determine and to lease or let the same
or portions thereof for such periods of time and at such rentals and for such
use and upon such covenants and conditions as Landlord may elect, applying the
net rentals from such letting first to the payment of Landlord's expenses
incurred in dispossessing the Tenant and the costs and expenses of making such
improvements in the Premises as may be necessary in order to enable the
Landlord to relet the same, and to the payment of any brokerage commissions or
other necessary expenses of the Landlord in connection with such reletting. The
balance, if any, shall be applied by the Landlord from time to time, but in any
event not less than once each month, on account of the payments due or payable
by the Tenant hereunder, with the right reserved to Landlord to bring such
actions or proceedings for the recovery of any deficits remaining unpaid as it
may deem advisable from time to time, without being obligated to await the end
of the term hereof for a final determination of the Tenant's account and the
commencement or maintenance of one (1) or more actions shall not bar the
Landlord from bringing other or subsequent actions for further accruals
pursuant to the provisions of this Paragraph. Any balance remaining, however,
after full payment and liquidation of Landlord's account, as aforesaid, shall
be paid to the Tenant from time to time with the right reserved to the Landlord
at any time to give notice in writing to the Tenant of Landlord's election to
cancel and terminate this Lease and all Tenant's obligations hereunder and upon
the giving of such notice and the simultaneous payment by Landlord to Tenant of
any credit balance in Tenant's favor that may at the time be owing to Tenant
shall constitute a final and effective cancellation and termination of this
Lease and the obligations thereunder on the part of either party to the other.
In addition to the foregoing, collection costs and reasonable
attorneys' fees shall be paid by Tenant if delinquencies are referred for
collection.
SECTION 10.02. LIEN OF LANDLORD FOR RENT, TAXES AND OTHER
SUMS. Landlord shall have, and Tenant hereby grants, a security interest in
any furnishings, equipment, fixtures, inventory, accounts receivable, or other
personal property of any
14
<PAGE>
kind belonging to Tenant, or the equity of Tenant therein, on the Premises. The
security interest is granted for the purpose of securing the payment of rent,
other charges, assessments, penalties and damages herein covenanted to be paid
by Tenant and for the purpose of securing the performance of all other
obligations of Tenant under this Lease. Upon Tenant's default or breach of any
covenants of this Lease, Landlord shall have all remedies available under the
law of the State where the Premises are located including, but not limited to,
the right to take possession of the above mentioned property and dispose of it
by public or private sale in a commercially reasonable manner. Tenant shall,
upon demand, reimburse Landlord for all filing and recording fees and taxes
incurred in connection with filing and recording of Financing Statements if the
same be necessary to perfect Landlord's security interest. Landlord's statutory
lien for rent is not hereby waived, the express contractual lien herein granted
being in addition and supplementary thereto.
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. NOTICES. Whenever under this Lease a provision
is made for any demand or notice of any kind, or where it is deemed desirable
or necessary by either party to give or serve any such notice or demand to the
other, it shall be in writing sent by overnight mail or certified mail,
return-receipt requested, postage prepaid, if to the Tenant addressed to the
Tenant at 3111 Stirling Road, Suite C307, Ft. Lauderdale, FL 33312, and if to
the Landlord addressed to the Landlord at c/o Becker & Poliakoff, P.A., P.O.
Box 9057, Ft. Lauderdale, FL 33310, and either party may by like notice at any
time and from time to time designate a different address to which notices shall
be sent. Such notices or demands shall be deemed sufficiently served or given
for all purposes hereunder at the time they shall be mailed by an overnight
delivery service or by United States certified mail, as aforesaid.
SECTION 11.02. WAIVER. One (1) or more waivers of any
covenant, term or condition of this Lease by either party shall not be
construed by the other party as a waiver of a subsequent breach of the same
term, covenant or condition. The consent or approval of either party to or of
any act by the other party of a nature requiring consent or approval shall not
be deemed to waive or render unnecessary consent to or approval of any
subsequent similar act.
SECTION 11.03. RELATIONSHIP OF PARTIES. Nothing contained in
this Lease nor any act or acts of the parties shall be deemed or construed by
the parties hereto or by any third party to create the relationship of
principal and agent or of partnership or of joint venture or of any association
whatsoever between Landlord and Tenant, other than the relationship of landlord
and tenant.
SECTION 11.04. GOVERING LAWS. The laws of the State in which
the Premises is situated shall govern the validity, performance and enforcement
of this Lease.
15
<PAGE>
SECTION 11.05. SAVINGS CLAUSE. The inva1idity or
unenforceability of any provision of this Lease shall not affect or impair the
validity of any other provision.
SECTION 11.06. MARGINAL HEADINGS. The paragraph titles
herein are for convenience only and do not define, limit or construe the
contents of such paragraph.
SECTION 11.07. COVENANT TO BIND SUCCESSORS. It is agreed
that the provisions, covenants and conditions of this Lease shall be binding on
the legal representatives, heirs, successors and assigns of the respective
parties hereto.
SECTION 11.08. FINANCIAL STATMENTS. Throughout the term of
this lease, Tenant shall provide Landlord at the time such statements are
available to Tenant and without notice or demand its most current and complete
financial statement, including, but not limited to, its balance sheet and
profit and loss statement.
SECTION 11.09. CREDIT REPORTS. The Tenant's performance
under this Lease Agreement may be reported to credit reporting agencies. The
Landlord may also obtain a consumer report of Tenant's credit history from a
credit reporting agency. Upon request, Tenant will be informed whether a
consumer report was obtained and if so, the name and address of the agency
furnishing the report.
SECTION 11.10. NO RECORDATION. This Lease shall not be
recorded by Tenant in the Public Records of Broward County, Florida or in any
other place. Any attempted recordation by Tenant shall render this Lease null
and void and entitle the Landlord to the remedies provided against Tenant's
default. However, at the request of Landlord, Tenant shall promptly execute,
acknowledge and deliver to Landlord a memorandum of Lease in respect of any
modification of this Lease, sufficient for recording. Such memorandum shall not
be deemed to change or otherwise affect any of the obligations or provisions of
this Lease.
SECTION 11.11. ESTOPPEL CERTIFICATE. Within ten (10) days
after request therefor by Landlord, the Tenant shall furnish an estoppel
certificate. Tenant agrees to deliver in recordable form a certificate to any
proposed mortgagee or purchaser, or to Landlord, certifying (if such be the
case) that this Lease is in full force and effect and there are no defenses or
offsets thereto, or stating those claimed by Tenant.
SECTION 11.12. EXCULPATION. Tenant agrees that Tenant shall
look solely to Landlord's interest in the Office Building for the satisfaction
of any claims, judgments or decrees requiring the payment of money by Landlord
based upon default hereunder. No other property or assets of Landlord, its
successors or assigns shall be subject to levy, execution or other enforcement
procedure.
SECTION 11.13. FORCE MAJEURE. Landlord or Tenant shall not
be required to perform any term, condition or covenant in this Lease so long as
such performance is delayed or prevented by Acts of God, strikes, lockouts,
decree or restriction by any governmental authority, civil riot, floods,
financing, and any other cause not reasonably within the control of Landlord or
Tenant, and which by the exercise of due diligence Landlord or Tenant is
unable, wholly or in part to prevent or overcome.
16
<PAGE>
SECTION 11.14. PREVAILING PARTY. In the event that
litigation is required to enforce this Agreement, the prevailing party shall be
entitled to reimbursement of its legal costs and attorney's fees, including
appeals.
SECTION 11.15. RADON GAS. In accordance with the provisions
of Florida Statutes Chapter 404.29(8), notification is hereby tendered
concerning the possible existence of Radon Gas in or about the Property. Please
be advised that:
"RADON GAS: Radon is a naturally occurring radioactive gas
that, when it has accumulated in a building in sufficient
quantities, may present health risks to persons who are
exposed to it overtime. Levels of radon that exceed Federal
and State guidelines have been found in buildings in Florida.
Additional information regarding radon and radon testing may
be obtained from your County Public Health Unit."
SECTION 11.16. ENTIRE AGREEMENT. This Lease, and the
Exhibits and Rider, if any, attached hereto and forming a part hereof, set
forth all of the covenants, promises, agreements, conditions and understandings
between the Landlord and the Tenant governing the Premises. There are no
covenants, promises, agreements, conditions and understandings, either oral or
written, between them other than those herein set forth. Except as herein
provided, no subsequent alterations, amendments, changes or additions to this
Lease shall be binding upon the Landlord or Tenant, unless reduced to writing
and signed by both parties.
SECTION 11.17. NEGOTIATION AND EXECUTION. The furnishing of
this Lease by the Landlord to the prospective Tenant shall not be considered an
offer to lease, even though completed in every respect, until and unless the
document has been executed by the appropriate officers of Landlord. No
correspondence or other communication respecting this Lease shall create any
obligation to go forward with this Lease until the Lease document is fully
completed and executed by both the Landlord and Tenant.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Lease this day and year first above written.
Signed and Acknowledged Landlord
In the Presence Of: GARY A. POLIAKOFF, TRUSTEE
/s/ Carmen Siena /s/ Gary A. Poliakoff, Trustee
- ----------------- -------------------------------
/s/ Sharon Adams
- -----------------
Tenant:
THE ULTIMATE SOFTWARE
GROUP, LTD.
/s/ Vivian Maza By: /s/ Scott Scherr
- ----------------- -----------------
/s/ Sherry Ginsberger Its: General Partner
- ----------------------- ----------------
Federal Tax I.D. No. (if
corporation) or Social Security
No. (if individual):
65-0223024
---------------------------
(Must be filled in)
18
<PAGE>
GUARANTY
--------
In consideration of the execution by Gary A. Poliakoff, as
Trustee, ("Landlord") of that certain Lease Agreement dated 11-16-1993 with THE
ULTIMATE SOFTWARE GROUP, LTD., a Florida limited partnership, ("Tenant"), the
undersigned being the majority shareholder of the general partner of the Tenant
hereby unconditionally and irrevocably guarantees the Tenant's performance of
its obligations under the lease including the payment of all sums due and owing
Landlord by Tenant.
The undersigned further consents that the Landlord shall have
the absolute right, without notice to the undersigned, to extend the time
performance of the obligations of Tenant or to vary or modify any of the terms
of the lease without affecting the undersigned's liability hereunder. This
Guaranty shall remain in full force and effect notwithstanding any failure of
the Landlord to exercise any right against the Tenant. This Guaranty shall
inure to the benefit of the Landlord, his beneficiaries, successors, and
assignees and shall be binding upon the successors and assignees of the
undersigned.
WITNESSES:
/s/ Vivian Maza
- -----------------
/s/ Sherry Ginsberger /s/ Scott Scherr
- ----------------------- --------------------------------
Scott Scherr
19
<PAGE>
LEASE MODIFICATION AGREEMENT
----------------------------
THIS LEASE MODIFICATION AGREEMENT is made and entered into
this 6 day of December, 1993, by and between GARY A. POLIAKOFF, TRUSTEE
(hereinafter referred to as "Landlord"), and THE ULTIMATE SOFTWARE GROUP, LTD.
(hereinafter referred to as "Tenant");
W I T N E S S E T H:
--------------------
WHEREAS, Landlord and Tenant entered into that certain Lease
Agreement (hereinafter referred to as "Lease"), dated November 16, 1993
regarding certain leased premises more particularly described as Suite 308 in
the Office Building located at 3111 Stirling Road, in the City of Ft.
Lauderdale, County of Broward, and State of Florida, which premises contains
three thousand four hundred sixty (3,460) square feet, more or less, of net
leasable area (as hereinafter defined) referred to herein as the "Premises"
(which Lease is attached hereto), and,
WHEREAS, Landlord and Tenant desire to modify the Lease as
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises and
covenants herein contained and other good and valuable considerations, the
parties hereto agree as follows:
1. Representations. The representations set forth above are
true and correct and made a part hereof.
2 Premises/Net Rentable Area. The Premises is hereby enlarged
and expanded to include Suite 307, adjacent to Suite 308, all comprising a part
of the Office Building located at 3111 Stirling Road, in the City of Ft.
Lauderdale, County of Broward, and State of Florida. The total Net Rentable
Area of the Premises, as hereby enlarged and expanded, contains four thousand
nine hundred twenty four (4924) square feet, more or less, of net leasable area
(as hereinafter defined) referred to herein as the "Premises" (which Lease is
attached hereto), and,
3 Gross Rentable Area. Gross Rentable Area in the Premises,
as defined in Section 1.03 of the Lease Agreement, is stipulated to be five
thousand six hundred sixty three (5663) square feet, more or less as a result
of minor variations.
4. Base Rent. The modified Base Rent, as defined in Section
3.02 of the Lease Agreement, and as hereafter adjusted as provided in Section
3.03 in the Lease Agreement, is the annual sum of One Hundred Eighteen Thousand
Two Hundred Thirty Six and sixty/100ths ($118,236.60) Dollars, plus all
applicable sales or rental tax thereon, payable in equal monthly installments
of Nine Thousand Eight Hundred Fifty Three and 05/100ths ($9853.05) Dollars
plus sales tax (as adjusted). Beginning January 1, 1995, the monthly Base Rent
installment shall be Nine Thousand Eight Hundred, Fifty Three and
<PAGE>
05/100ths ($9853.05) Dollars plus sales tax and plus the adjustment provided in
Section 3.03 of the Lease Agreement.
5. Remaining Lease Provisions. All remaining terms and
conditions of the Lease shall remain in full force and effect and are hereby
reaffirmed, restated and ratified except as specifically modified herein.
6 IN WITNESS WHEREOF, Landlord and Tenant have set their
hands and seals on the date set forth above.
Landlord:
GARY A. POLIAKOFF, TRUSTEE
/s/ Gary A. Poliakoff, Trustee
-------------------------------
Tenant:THE ULTIMATE SOFTWARE
GROUP, LTD.
By: /s/ Scott Scherr
-----------------
Its: General Partner
----------------
2
<PAGE>
[Letterhead of Gary A. Poliakoff, Trustee]
November 18, 1997
Scott Sherr, President
Ultimate Software Group
3111 Stirling Road, #C-308
Fort Lauderdale, FL 33312
Re: Extension of Lease for an Additional One Year Term
Expiring on December 31, 1998.
Dear Scott:
It's hard to believe another year has past. I trust your new
building is moving forward and that you will soon be able to relocate into your
new home. For the past two years I have accommodated your need to remain in
place; and in fact have allowed you to utilize every available nook and
cranny -- far beyond the anticipated occupancy limitations. I have also frozen
your rental notwithstanding the fact that both the real estate taxes and cost
of maintenance have increased.
I am prepared to grant an additional one year extension,
through December 31, 1998, at a slight increase of rental. Ultimate Software is
currently paying $15,867.00 monthly, exclusive of sales taxes. [This does not
include your sub-let of Suite B from Becker & Poliakoff, P.A.] I propose an
increase of $500.00 per month for the term of the lease. If this meets with
your approval, kindly indicate same by signing and returning one original to my
attention.
Sincerely,
/s/ Gary A. Poliakoff, J.D.
---------------------------
GARY A. POLIAKOFF, J.D.
Gap / AE
Agreement to extend the expiring lease for an additional term
of one year commencing on January 1, 1998 and ending on December 31, 1998,
under the same terms and conditions of the existing lease and all addenda
thereto, at the monthly rental of $16,367.00 plus applicable sales taxes.
Ultimate Software Group
By: /s/ Mitchell Dauerman
---------------------------
Mitchell Dauerman, CFO
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Registrant
------------------------------
ULD Holding Corp. (NY)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use
of our reports and to all references to our firm included in or made a part
of this Registration Statement.
ARTHUR ANDERSEN LLP
Miami, Florida,
April 23, 1998.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001016125
<NAME> THE ULTIMATE SOFTWARE GROUP
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 3,269,964
<SECURITIES> 0
<RECEIVABLES> 5,926,695
<ALLOWANCES> 533,827
<INVENTORY> 0
<CURRENT-ASSETS> 7,479,828
<PP&E> 3,091,073
<DEPRECIATION> (1,388,266)
<TOTAL-ASSETS> 12,439,323
<CURRENT-LIABILITIES> 16,071,331
<BONDS> 0
0
4,873
<COMMON> 8,945
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<TOTAL-LIABILITY-AND-EQUITY> 12,439,323
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<INTEREST-EXPENSE> 206,094
<INCOME-PRETAX> (16,016,956)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,016,956)
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</TABLE>
