UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 0-24347
THE ULTIMATE SOFTWARE GROUP, INC.
---------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 65-0694077
-------- ----------
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
3111 STIRLING ROAD, SUITE 308, FORT LAUDERDALE, FL 33312
- -------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(954) 266-1000
--------------
(Registrant's telephone number, including area code)
NONE
----
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
As of November 4, 1998, there were 15,879,015 shares of the
Registrant's common stock, par value $.01, outstanding.
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC.
TABLE OF CONTENTS
PAGE(S)
PART I--FINANCIAL INFORMATION:
Item 1--Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1997
and September 30, 1998 3-4
Condensed Consolidated Statements of Operations for the Three
Months and Nine Months Ended September 30, 1997 and 1998 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1998 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-19
PART II--OTHER INFORMATION:
Item 1--Legal Proceedings 20
Item 2--Changes in Securities and Use of Proceeds 20
Item 3--Defaults upon Senior Securities 20
Item 4--Submission of Matters to a Vote of Security Holders 21
Item 5--Other Information 21
Item 6--Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
<PAGE>
PART 1--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 3,270 $ 17,596
Accounts receivable, net 5,927 13,247
Other prepaid expenses 654 769
-------- --------
Total current assets 9,851 31,612
Property and equipment, net 1,703 2,326
Acquired intangibles, net of accumulated
amortization of $8,414 and $8,987, respectively 638 65
Other assets 247 209
-------- --------
Total assets $ 12,439 $ 34,212
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,712 $ 1,754
Accrued expenses 4,224 3,474
Deferred revenue 9,764 8,186
Borrowings under line of credit agreement 209 -
Current portion of capital lease obligations 162 632
-------- --------
Total current liabilities 16,071 14,046
Capital lease obligations, net of current portion 54 903
Deferred revenue 1,717 1,500
Other liabilities 105 109
-------- --------
Total liabilities 17,947 16,558
-------- --------
Commitments and contingencies - -
</TABLE>
(continued)
3
<PAGE>
<TABLE>
<CAPTION>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
LIABILITIES AND (Unaudited)
STOCKHOLDERS' EQUITY (DEFICIT)--(continued)
<S> <C> <C>
Stockholders' equity (deficit):
Preferred Stock, $.01 par value, 501,914 and 2,500,000
shares authorized in 1997 and 1998, respectively;
no shares issued or outstanding - -
Series A Convertible Preferred Stock, $.01 par value,
191,573 shares authorized, issued and outstanding
in 1997; converted into 1,938,527 shares of
Common Stock in 1998 2 -
Series B Convertible Preferred Stock, $.01 par value,
306,513 shares authorized in 1997; 295,672 shares
issued and outstanding in 1997; converted into 2,991,905
shares of Common Stock in 1998 3 -
Common Stock, $.01 par value, 50,000,000 shares
authorized, no shares issued or outstanding in 1997;
15,878,015 shares issued and outstanding in 1998 - 159
Class A Common Stock, $.01 par value, 236,300 shares
authorized in 1997, 236,300 shares issued and outstanding
in 1997, converted into 1,030,398 shares of Common
Stock in 1998 2 -
Class B Common Stock, $.01 par value, 1,600,000 shares
authorized in 1997, 658,125 shares issued and outstanding
in 1997, converted into 6,659,567 shares of Common
Stock in 1998 7 -
Class C Common Stock, $.01 par value, 200,000 shares
authorized in 1997, 50 shares issued and outstanding
in 1997, converted into 409 shares of Common Stock
in 1998 - -
Additional paid-in capital 31,572 64,033
Accumulated deficit (37,094) (46,538)
-------- --------
Total stockholders' equity (deficit) (5,508) 17,654
-------- --------
Total liabilities and stockholders' equity (deficit) $ 12,439 $ 34,212
======== ========
</TABLE>
The accompanying notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -----------------------
1997 1998 1997 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
License $ 709 $ 4,753 $ 2,319 $ 12,079
Service 2,190 6,436 6,321 16,821
-------- -------- --------- --------
Total revenues 2,899 11,189 8,640 28,900
-------- -------- --------- --------
Cost of revenues:
License - 179 - 609
Service 2,313 4,581 6,487 12,549
-------- -------- --------- --------
Total cost of revenues 2,313 4,760 6,487 13,158
-------- -------- --------- --------
Operating expenses:
Sales and marketing 3,345 4,213 10,153 11,996
Research and development 1,342 1,847 3,377 4,892
General and administrative 818 1,283 2,697 3,310
Amortization of acquired intangibles 437 191 1,158 573
-------- -------- --------- --------
Total operating expenses 5,942 7,534 17,385 20,771
-------- -------- --------- --------
Operating loss (5,356) (1,105) (15,232) (5,029)
Compensation related to
modification of escrow
agreement - - - (4,183)
Interest expense (50) (23) (172) (178)
Interest and other income 86 270 150 380
-------- -------- --------- --------
Net loss $ (5,320) $ (858) $ (15,254) $ (9,010)
======== ======== ========= ========
Net loss per share -- basic and diluted $ (0.42) $ (0.05) $ (1.34) $ (0.64)
======== ======== ========= ========
Weighted average shares
outstanding -- basic and diluted 12,599 15,877 11,403 14,028
======== ======== ========= ========
</TABLE>
The accompanying notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1997 1998
--------- ---------
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (15,254) $ (9,010)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,594 1,490
Provision for doubtful accounts (174) 894
Non-cash equity transactions of 1998 poolings 21 -
Compensation related to modification of escrow agreement - 4,183
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (1,754) (8,214)
Other prepaid expenses (462) 185
Other assets (10) (21)
Accounts payable 324 42
Accrued expenses 992 (750)
Deferred revenue 7,166 (1,795)
Other liabilities 58 4
--------- ---------
Net cash used in operating activities (7,499) (12,992)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (912) (236)
Net proceeds from (issuance of) notes receivable 93 (237)
--------- ---------
Net cash used in investing activities (819) (473)
--------- ---------
Cash flows from financing activities:
Net payments under line of credit agreements (1,509) (209)
Principal payment of notes payable (273) -
Net proceeds from capital lease obligations - 381
Principal payments on capital lease obligations (163) (371)
Net proceeds from issuances of Convertible Preferred Stock 13,066 -
Equity transactions of 1998 poolings (284) (434)
Net proceeds from issuance of Common Stock - 28,424
--------- ---------
Net cash provided by financing activities 10,837 27,791
--------- ---------
Net increase in cash and cash equivalents 2,519 14,326
Cash and cash equivalents, beginning of period 1,420 3,270
--------- ---------
Cash and cash equivalents, end of period $ 3,939 $ 17,596
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 149 $ 169
========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
The Company entered into capital lease obligations to acquire new equipment
totaling $0 and $1,308 for the nine months ended September 30, 1997 and 1998,
respectively.
In 1998, the Company acquired five third-party resellers in transactions
accounted under the pooling-of-interests accounting method (see Note 15 of the
Form S-1).
Prior to the initial public offering of the Company's Common Stock effective
June 2, 1998 (the actual closing date was June 5, 1998), shares of Common Stock
were issued upon the conversion of Series A Convertible Preferred Stock, Series
B Convertible Preferred Stock, Class A Common Stock, Class B Common Stock and
Class C Common Stock (see Note 2).
The accompanying notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
6
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of The Ultimate
Software Group, Inc. and subsidiaries (the "Company") have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and footnote disclosures
normally included in financial statements in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The information in this report should be read in conjunction with
the Company's audited financial statements and notes thereto included in the
final prospectus dated June 2, 1998 which is part of the Company's Registration
Statement on Form S-1 (No. 333-47881) filed with the SEC on March 13, 1998, as
amended with the SEC through May 29, 1998 (the "Form S-1").
The unaudited condensed consolidated financial statements included
herein reflect all adjustments (consisting only of normal, recurring
adjustments) which are, in the opinion of the Company's management, necessary
for a fair presentation of the information for the periods presented. 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. Interim results of operations
for the three months and nine months ended September 30, 1998 are not
necessarily indicative of operating results for the full fiscal year or for any
future periods.
2. INITIAL PUBLIC OFFERING
Commencing on June 2, 1998 and completed on June 5, 1998, the Company
sold 3,250,000 shares of the Company's common stock, par value $.01 (the "Common
Stock"), in an initial public offering at an offering price of $10 per share
(the "IPO"). Prior to the IPO, the Company's Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock, Class A Common Stock, Class B
Common Stock and Class C Common Stock were converted into Common Stock (see Note
7). In connection with the IPO, the Company effected a 10.119-for-1 stock split
of the issued and outstanding shares of the Common Stock. All references to
Common Stock amounts, shares and per share data have been adjusted to give
retroactive effect to the stock split.
3. EARNINGS PER SHARE
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 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
7
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THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. EARNINGS PER SHARE (CONTINUED):
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 7, effected for the stock split discussed in
Note 2. Other common stock equivalents have not been included in the computation
of diluted loss per share as their impact is antidilutive.
4. COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income and its components in a full set of financial statements. The objective
of SFAS 130 is to report a measure (comprehensive income) of all changes in
equity of an enterprise that result from transactions and other economic events
in a period other than transactions with owners. The adoption of SFAS 130 did
not have a material impact on the Company's consolidated financial statements
since comprehensive income, as defined in SFAS 130, was equivalent to the
Company's net loss for all periods presented.
5. 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 (converted into 1,233,056 shares of Common Stock). Prior to this
acquisition, 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 pooling-of-interests method of accounting.
Accordingly, all periods presented have been restated to include the operations
of the Acquired Resellers.
6. MODIFICATION TO ESCROW AGREEMENT
In March 1998, the Class B Escrow Agreement, pursuant to which certain
shares of the Class B Common Stock were held in escrow, was modified to provide
that all of the shares of Class B Common Stock held in escrow would 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 the modification, representing 60,429 shares of Class B Common Stock of the
Company (converted into 611,477 shares of Common Stock) subsequently 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.
8
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. RELEASE EVENT:
In March 1998, a release event under the Class A Escrow Agreement
pursuant to which shares of Class A Common Stock were held in escrow (the
"Release Event") occurred when the businesses of the five Acquired Resellers
were acquired by the Company and the general partner of The Ultimate Software
Group, Ltd. (the "Partnership"), described in Note 1 of the Consolidated
Financial Statements contained in the Form S-1, determined that such
acquisitions should result in the liquidation of the Partnership. Following the
occurrence of such Release Event: (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
(converted 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 (converted
into 1,030,398 shares of Common Stock) to nine third-party resellers of the
Partnership's products, the businesses of which were acquired by the Partnership
in 1996, as more fully described in Note 10 of the Consolidated Financial
Statements contained in the Form S-1.
9
<PAGE>
ITEM 2. 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 Ultimate Software Group, Inc. (the "Company") should be read
in conjunction with the unaudited Condensed Consolidated Financial Statements
and Notes thereto included elsewhere in this Form 10-Q. This Form 10-Q 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 in the
final prospectus dated June 2, 1998 which is part of the Company's Registration
Statement on Form S-1 (No. 333-47881) filed with the Securities and Exchange
Commission (the "SEC") on March 13, 1998, as amended with the SEC through May
29, 1998 (the "Form S-1").
OVERVIEW
The Company designs, markets, implements and supports technologically
advanced cross-industry human resources management and payroll ("HRMS/payroll")
software solutions. The Company's software solutions are marketed primarily to
middle-market organizations with 500 to 15,000 employees but are scaleable to
address the needs of much larger organizations.
The Company's core product, UltiPro HRMS/Payroll (formerly known as
"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'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 reaches its customer base and
target market through its direct sales force and a network of national, regional
and local strategic partners.
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 HRMS/payroll 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 solution for middle-market organizations. In June
1997, the Company launched UltiPro HRMS/Payroll, its 32-bit, object-oriented
HRMS/payroll solution for middle-market organizations. 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 HRMS/Payroll, the principal source of the
Company's license revenues has shifted from its DOS-based product to its
client/server product. UltiPro HRMS/Payroll has higher license fees, service
fees and gross margins than the Company's DOS-
10
<PAGE>
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 (the "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, acquiring the businesses of three
Resellers in 1995 and that of nine Resellers in April 1996. These acquisitions
were accounted for under the purchase method of accounting with approximately
$8.8 million of goodwill recorded as a result. In February and March 1998, the
Company acquired the businesses of the remaining five third-party resellers (the
"Acquired Resellers") which acquisitions were recorded under the
pooling-of-interests method of accounting. During the three months ended
September 30, 1997 and 1998, the Acquired Resellers accounted for $0.9 million,
or 29.3% of total revenues, and $2.1 million, or 24.9% of total revenues,
respectively. During the nine months ended September 30, 1997 and 1998, the
Acquired Resellers accounted for $2.2 million, or 25.6% of total revenues, and
$5.6 million, or 19.4% of total revenues, respectively.
Commencing on June 2, 1998 and completed on June 5, 1998, the Company
sold 3,250,000 shares of the Company's common stock, par value $.01 (the "Common
Stock"), in an initial public offering at an offering price of $10 per share
(the "IPO"). The net proceeds from the IPO, after deducting $4.1 million in
underwriting discounts, commissions and other costs associated with the
offering, were $28.4 million. A portion of the net proceeds from the IPO in the
amount of $3.6 million was used to pay down the outstanding balance of the
Company's existing line of credit. The balance of the remaining net proceeds
from the IPO will be used for general corporate purposes, including working
capital (see "Liquidity and Capital Resources"). 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.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the Statement of Operations data of the
Company, as a percentage of total revenues, for the periods indicated.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1997 1998 1997 1998
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License 24.5 % 42.5 % 26.8 % 41.8 %
Service 75.5 57.5 73.2 58.2
-------- --------- -------- --------
Total revenues 100.0 100.0 100.0 100.0
-------- --------- -------- --------
Cost of revenues:
License - 1.6 - 2.1
Service 79.8 40.9 75.1 43.4
-------- --------- -------- --------
Total cost of revenues 79.8 42.5 75.1 45.5
-------- --------- -------- --------
Operating expenses:
Sales and marketing 115.4 37.7 117.5 41.5
Research and development 46.3 16.5 39.1 16.9
General and administrative 28.2 11.5 31.2 11.5
Amortization of acquired intangibles 15.1 1.7 13.4 2.0
-------- --------- -------- --------
Total operating expenses 205.0 67.4 201.2 71.9
-------- --------- -------- --------
Operating loss (184.8) (9.9) (176.3) (17.4)
Compensation related to modification
of escrow agreement - - - (14.5)
Interest expense (1.7) (0.2) (2.0) (0.6)
Interest and other income 3.0 2.4 1.7 1.3
-------- --------- -------- --------
Net loss (183.5)% (7.7)% (176.6)% (31.2)%
======== ========= ======== =========
</TABLE>
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 revenues from noncancellable software license agreements entered into
between the Company and its customers with respect to its products. 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 Company records amounts received when contracts are signed as
customer deposits which are included with deferred revenues in the condensed
consolidated balance sheets.
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 1997 and 1998 also purchased maintenance and support contracts. During
the fiscal year ended December 31, 1997 and the nine months ended September 30,
1998, 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.
Total revenues, consisting of license and service revenues, increased
286.0% from $2.9 million for the three months ended September 30, 1997 to $11.2
million for the three months
12
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ended September 30, 1998. Total revenues increased 234.5% from $8.6 million for
the nine months ended September 30, 1997 to $28.9 million for the nine months
ended September 30, 1998.
License revenues increased 570.4% from $0.7 million for the three
months ended September 30, 1997 to $4.8 million for the three months ended
September 30, 1998. License revenues increased 420.9% from $2.3 million for the
nine months ended September 30, 1997 to $12.1 million for the nine months ended
September 30, 1998. The increase in license revenues was primarily attributable
to the introduction and sale of UltiPro HRMS/Payroll which has significantly
higher license fees than ULTIPRO for LAN. UltiPro HRMS/Payroll accounted for
99.7% and 97.6% of license revenues for the three months and nine months ended
September 30, 1998, respectively.
Service revenues increased 193.9% from $2.2 million for the three
months ended September 30, 1997 to $6.4 million for the three months ended
September 30, 1998. Service revenues increased 166.1% from $6.3 million for the
nine months ended September 30, 1997 to $16.8 million for the nine months ended
September 30, 1998. The increase in service revenues was primarily attributable
to an increase in services related to the implementation of UltiPro
HRMS/Payroll. UltiPro HRMS/Payroll has significantly higher service revenue per
implementation than ULTIPRO for LAN. In addition, support revenues increased as
a result of an increase in the installed base of UltiPro HRMS/Payroll and, to a
lesser extent, ULTIPRO for LAN customers.
COST OF REVENUES
Cost of revenues consists principally of the cost of license and
service revenues. Cost of license revenues consists of fees payable to a third
party for software products distributed by the Company. Cost of service revenues
primarily consists of costs to provide consulting, implementation, maintenance,
technical support and training to the Company's customers, and the cost of
periodic updates.
Cost of license revenues increased from zero for the three months and
nine months ended September 30, 1997 to $0.2 million and $0.6 million for the
three months and nine months ended September 30, 1998, respectively. These
increases were primarily attributable to fees payable to a third party for
products distributed by the Company, which commenced with the launch of UltiPro
HRMS/Payroll. Cost of license revenues, as a percentage of total revenues,
increased from 0.0% for the three months and nine months ended September 30,
1997 to 1.6% and 2.1% for the three months and nine months ended September 30,
1998, respectively.
Cost of service revenues increased by 98.1% from $2.3 million for the
three months ended September 30, 1997 to $4.6 million for the three months ended
September 30, 1998. Cost of service revenues increased by 93.4% from $6.5
million for the nine months ended September 30, 1997 to $12.5 million for the
nine months ended September 30, 1998. These increases were primarily
attributable to the hiring of additional implementation services personnel, as
well as costs associated with the utilization of third-party implementation
partners, and, to a lesser degree, the cost of additional maintenance personnel
in support of UltiPro HRMS/Payroll. Cost of service revenues, as a percentage of
total revenues, decreased from 79.8% to 40.9% for the three months ended
September 30, 1997 and 1998, respectively, and from 75.1% to 43.4% for the nine
months ended September 30, 1997 and 1998, respectively. The decrease in cost of
service revenues, as a percentage of total revenues, was primarily due to higher
gross margins associated
13
<PAGE>
with services provided to the Company's customers using UltiPro HRMS/Payroll as
compared to ULTIPRO for LAN.
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 25.9%
from $3.3 million for the three months ended September 30, 1997 to $4.2 million
for the three months ended September 30, 1998. Sales and marketing expenses
increased by 18.2% from $10.2 million for the nine months ended September 30,
1997 to $12.0 million for the nine months ended September 30, 1998. The increase
in sales and marketing expenses was primarily attributable to an increase in
sales and marketing personnel and an increase in marketing activities
principally relating to the introduction of UltiPro HRMS/Payroll. Sales and
marketing expenses, as a percentage of total revenues, decreased from 115.4% to
37.7% for the three months ended September 30, 1997 and 1998, respectively, and
from 117.5% to 41.5% for the nine months ended September 30, 1997 and 1998,
respectively. The decrease in sales and marketing expenses, as a percentage of
total revenues, was primarily due to the absorption of the expenses in an
increased revenue base. The Company anticipates future increases in sales and
marketing expenses, in absolute dollars, concurrent with continued revenue
growth but does not anticipate significant changes in sales and marketing
expenses as a percentage of total revenues during the remainder of the year
ending December 31, 1998.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of software
development personnel costs. Research and development expenses increased by
37.6% from $1.3 million for the three months ended September 30, 1997 to $1.8
million for the three months ended September 30, 1998. Research and development
expenses increased by 44.9% from $3.4 million for the nine months ended
September 30, 1997 to $4.9 million for the nine months ended September 30, 1998.
The increase in research and development expenses was primarily attributable to
an increase in costs associated with hiring additional programmers and engineers
for the development and enhancement of UltiPro HRMS/Payroll and for the
development of new HRMS/payroll-related modules, including salaries and benefits
and, to a lesser degree, training. Research and development expenses, as a
percentage of total revenues, decreased from 46.3% to 16.5% for the three months
ended September 30, 1997 and 1998, respectively, and from 39.1% to 16.9% for the
nine months ended September 30, 1997 and 1998, respectively. The decrease in
research and development expenses, as a percentage of total revenues, was
primarily due to the absorption of the expenses in an increased revenue base.
The Company anticipates future increases in research and development expenses,
in absolute dollars, concurrent with the development of additional HRMS modules
and the further enhancement of existing modules, but does not anticipate
significant changes in research and development expenses as a percentage of
total revenues during the remainder of the year ending December 31, 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries of
executive, administrative and financial personnel, as well as external
professional fees and the provision for doubtful accounts. General and
administrative expenses increased by 56.8% from $0.8 million for the three
months ended September 30, 1997 to $1.3 million for the three months ended
September 30, 1998. General and administrative expenses increased by 22.7% from
$2.7 million for the nine months ended September 30, 1997 to $3.3 million for
the nine months ended September 30, 1998.
14
<PAGE>
The increase in general and administrative expenses was primarily due to an
increase in the percentage-based provision for doubtful accounts resulting from
increased revenues, costs to support the expansion of business operations, and
expenses associated with being a publicly-held company. General and
administrative expenses, as a percentage of total revenues, decreased from 28.2%
to 11.5% for the three months ended September 30, 1997 and 1998, respectively,
and from 31.2% to 11.5% for the nine months ended September 30, 1997 and 1998,
respectively. The decrease in general and administrative expenses, as a
percentage of total revenues, was due to the absorption of the expenses in an
increased revenue base. The Company anticipates future increases in general and
administrative expenses, in absolute dollars, to support the expansion of its
operations and as a result of anticipated expenses associated with being a
publicly-held company, but does not anticipate significant changes in general
and administrative expenses as a percentage of total revenues during the
remainder of the year ending December 31, 1998.
AMORTIZATION OF ACQUIRED INTANGIBLES
Amortization of acquired intangibles consists of goodwill amortization
associated with the acquisition of three Resellers in 1995 and nine Resellers in
1996. Goodwill amortization decreased by 56.3% from $0.4 million for the three
months ended September 30, 1997 to $0.2 million for the three months ended
September 30, 1998. Goodwill amortization decreased by 50.5% from $1.2 million
for the nine months ended September 30, 1997 to $0.6 million for the nine months
ended September 30, 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 (the "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, a non-recurring, non-cash charge of $4.2
million for compensation expense was recorded during March 1998, 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.
LIQUIDITY AND CAPITAL EXPENDITURES
The Company has historically funded operations primarily through the
sale of private equity securities and, to a lesser extent, equipment financing
and borrowing arrangements. In June 1998, the Company completed an initial
public offering of its Common Stock which resulted in net proceeds to the
Company totaling approximately $28.4 million.
As of September 30, 1998, the Company had $17.6 million in cash and
cash equivalents, reflecting a net increase of $14.3 million since December 31,
1997. Working capital as of September 30, 1998 was $17.6 million as compared to
the working capital deficit of $6.2 million as of December 31, 1997. Excluding
the effect of deferred revenue, working capital as of September 30, 1998 was
$25.8 million as compared to $3.5 million as of December 31, 1997. The
improvement in working capital since December 31, 1997 was primarily due to net
proceeds from the IPO and increased accounts receivable principally resulting
from the significant increase in revenues.
15
<PAGE>
Net cash used in operating activities was $13.0 million for the nine
months ended September 30, 1998 as compared to $7.5 million for the nine months
ended September 30, 1997. The increase in cash used in operating activities was
primarily attributable to an increase in accounts receivable principally
associated with the Company's revenue growth, as well as the research and
development and sales and marketing of UltiPro HRMS/Payroll.
Net cash used in investing activities was $0.5 million for the nine
months ended September 30, 1998 as compared to $0.8 million for the nine months
ended September 30, 1997. The decrease in net cash used in investing activities
was primarily attributable to the utilization of equipment financing for
equipment purchases in the nine months ended September 30, 1998.
Net cash provided by financing activities was $27.8 million for the
nine months ended September 30, 1998 as compared to $10.8 million for the nine
months ended September 30, 1997. The increase in net cash provided by financing
activities was primarily attributable to the incremental increase of the net
proceeds from the IPO in the nine months ended September 30, 1998 as compared to
the net proceeds from a private placement of convertible preferred stock in the
nine months ended September 30, 1997 and, to a lesser degree, reduced payments
under line of credit agreements.
The Company has a working capital revolving line of credit (the "Credit
Facility) 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 the Credit Facility is limited to the lesser of 80% of the
Company's eligible accounts receivable, as defined, or $4.0 million. The Credit
Facility will expire on November 30, 1998. The Company is in the process of
negotiating for a renewal of the Credit Facility. At September 30, 1998, there
was no amount outstanding under the Credit Facility.
The net proceeds from the IPO, after deducting $4.1 million in
underwriting discounts, commissions and other costs associated with the
offering, were $28.4 million. A portion of the net proceeds from the IPO in the
amount of $3.6 million was used to pay down the outstanding balance of the
Credit Facility. The balance of the Credit Facility was paid with cash generated
from operations in June 1998. The balance of the remaining net proceeds from the
IPO in the amount of $16.4 million as of September 30, 1998 is available for
future working capital and other general corporate purposes. 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.
The Company believes that cash and cash equivalents, remaining net
proceeds from the IPO, cash generated from operations, and available borrowings
under the Credit Facility will be sufficient to fund its operations for at least
the next 12 months.
UltiPro is a registered trademark of The Ultimate Software Group, Inc.
Windows is a registered trademark of Microsoft Corporation. All other trademarks
referenced are the property of their respective owners.
SEASONALITY
The Company has experienced, and may experience in the future,
significant seasonality in its business. 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
16
<PAGE>
fourth quarter of the year and at lower rates in the next succeeding quarter.
The Company believes such seasonality is due to a number of factors, including
the Company's quota-based compensation arrangements, typical of those used in
the 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.
QUARTERLY FLUCTUATIONS
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. The Company's operating results may fluctuate as a result
of a number of factors, including, but not limited to, increased expenses
(especially as they relate to product development and sales and marketing),
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. 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. The Company believes
that, due to the underlying factors for quarterly fluctuations, period-to-period
comparisons of its operations are not necessarily meaningful and that such
comparisons should not be relied upon as indications of future performance.
THE YEAR 2000 ISSUE
Overview
Like other businesses dependent upon computerized information
processing, the Company must deal with the "Year 2000" issues, which stem from
using two digits to reflect the year in many computer programs and data. Because
certain computers and computer applications define dates by the last two digits
of the year, "00" or other two-digit dates after the year 2000 may not be
properly identified as the year 2000 or the appropriate later year, but rather
the year 1900 or a year between 1901 and 1999 (as the case may be). This error
could result in the inaccurate processing of certain date-based information,
which could cause a variety of operational problems for businesses.
State of Readiness
The Company believes it has addressed the Year 2000 issues in its
proprietary software products and does not anticipate any business interruptions
associated with these applications. Existing third-party software embedded in
the Company's proprietary software has been certified by the vendor to be Year
2000 compliant.
The Company's internal technology systems include telecommunications
(i.e., phones, voicemail and network connections), computer hardware (personal
computers and network servers) and software. The Company is in the process of
assessing the Year 2000 issue with respect to telecommunications and computer
hardware. The Company's principal software systems include payroll, accounting,
and customer support. The Company utilizes its own proprietary product, which is
Year 2000 compliant, for payroll and human resource data processing. In the past
several years, the Company has replaced certain of its financial and
17
<PAGE>
operational systems, including the accounting and customer support systems which
have each been certified by the respective vendors as being Year 2000 compliant.
The amount of remediation work required to address any Year 2000 problems in
other systems is not expected to be extensive.
Non-information technology systems typically include embedded
technology such as security systems, elevators and other systems which contain
an embedded computer or computer-like device used to control the operation of
plant, machinery and equipment. The Company anticipates that its relocation to
its new headquarters will occur in the spring of 1999. Since the office building
for these headquarters is being newly constructed, the security system, elevator
and other non-information technology systems are believed by the Company to
substantially address Year 2000 issues.
The Company is in the process of initiating formal communications with
significant suppliers and major customers to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues. The Company will seek to obtain the
appropriate warranties and assurances that those parties are, or will be, Year
2000 compliant. 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.
Costs
Based on its assessments to date, 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. The Company
is in the process of estimating the total cost and time associated with the Year
2000 issue, but it does not anticipate such costs will have a material effect on
the Company's results of operations or financial condition, assuming no major
disruption of service from utility companies. Historically, the Company has not
separately tracked the internal costs related to Year 2000 compliance. Such
costs are principally the related payroll costs for the Company's information
systems employees.
Risks
Although the Company currently offers software products that are
designed and have been tested to be ready for the year 2000, there can be no
assurance that the Company's software products contain all necessary date code
changes. Although the Company currently does not anticipate any material adverse
impact on its operations as a result of Year 2000 issues of its major suppliers
or customers, no assurances can be given that the failure by one or more of its
major suppliers or customers to become Year 2000 compliant will not have a
material adverse impact on the Company's operations. It has been widely reported
that a significant amount of litigation will arise out of Year 2000 compliance
issues. Because of the unique nature of such potential litigation, it is
uncertain whether, or to what extent, the Company may be affected by such
litigation. Significant uncertainty exists in the software industry concerning
the potential effects associated with Year 2000 readiness.
18
<PAGE>
Contingency Plans
When the Company completes its assessment of the anticipated total
impact of the Year 2000 issue, contingency plans will be prepared to handle the
most reasonably likely worst case scenario. The Company's target date for the
completion of such contingency plans is September 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has determined that the adoption of recently issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use," and SOP 98-5, "Reporting on the Costs of Start-Up
Activities," will not have a material impact on the Company's financial
condition or results of operations.
FORWARD-LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operations contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the Company's expectations or beliefs,
including, but not limited to, statements concerning the Company's operations
and financial performance and condition. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," and similar expressions
are intended to identify such forward-looking statements. These forward-looking
statements are not guarantees of future performance and are subject to certain
risks and uncertainties that are difficult to predict. 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 in the foregoing Management's Discussion and Analysis of
Financial Condition and Results of Operations as well as those discussed in the
Company's final prospectus dated June 2, 1998 which is part of the Form S-1.
19
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. As of the
date of this filing, the Company is not a party to any legal proceeding the
adverse outcome of which, individually or in the aggregate, could reasonably be
expected to have a material adverse effect on the Company's business, operating
results and financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From the effective date of the Form S-1 through September 30, 1998, the
Company incurred the following expenses in connection with the issuance and
distribution of the Common Stock registered (in thousands):
Underwriting discounts and commissions $2,275
Other expenses (legal and accounting fees,
printing and engraving expenses, filing
and listing fees and miscellaneous) 1,840
-----------
Total $4,115
===========
The net offering proceeds from the IPO to the Company, after deducting
the foregoing expenses, were $28.4 million. In connection with the offering and
sale of the Common Stock registered, except as otherwise noted below, the
Company did not make any direct or indirect payments to directors or officers of
the Company or, to the Company's knowledge, their associates; persons owning 10%
or more of any class of equity securities of the Company; or affiliates of the
Company. From the closing of the IPO on June 5, 1998 until September 30, 1998,
except as otherwise noted, the net offering proceeds were used as follows (in
thousands):
Invested in money market and other short-term
marketable securities at September 30, 1998 $16,446
Repayment of certain indebtedness 3,600
Accrued bonuses to officers who are not
executive officers 436
Other working capital needs 7,903
-------------
Total $28,385
=============
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
20
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
99.1 Incentive Compensation Plan, effective October 22, 1998
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended
September 30, 1998.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ULTIMATE SOFTWARE GROUP, INC.
Date: November 12, 1998 By: /S/ MITCHELL K. DAUERMAN
-------------------------------------
Executive Vice President, Chief
Financial Officer and Treasurer
(Authorized Signatory and Principal
Financial and Accounting Officer)
22
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
99.1 Incentive Compensation Plan, effective October 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 17,596
<SECURITIES> 0
<RECEIVABLES> 14,305
<ALLOWANCES> (1,058)
<INVENTORY> 0
<CURRENT-ASSETS> 31,612
<PP&E> 4,631
<DEPRECIATION> (2,305)
<TOTAL-ASSETS> 34,212
<CURRENT-LIABILITIES> 14,046
<BONDS> 0
0
0
<COMMON> 159
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 34,212
<SALES> 28,900
<TOTAL-REVENUES> 28,900
<CGS> 13,158
<TOTAL-COSTS> 20,771
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 178
<INCOME-PRETAX> (9,010)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,010)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99.1
THE ULTIMATE SOFTWARE GROUP, INC.
INCENTIVE COMPENSATION PLAN
EFFECTIVE AS OF OCTOBER 22, 1998
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC.
INCENTIVE COMPENSATION PLAN
TABLE OF CONTENTS
I. PURPOSE .................................................................1
II. DEFINITIONS...............................................................1
(1) AWARD MEANS THE AGGREGATE DOLLAR AMOUNT AND/OR STOCK OPTIONS
EARNED BY A PARTICIPANT UNDER THE PLAN WITH RESPECT TO A PLAN YEAR...1
(2) BENEFICIARY MEANS THE PERSON OR PERSONS DESIGNATED, IN A
WRITTEN NOTICE DELIVERED TO THE COMPANY, BY THE PARTICIPANT TO
RECEIVE THE AMOUNT, IF ANY, PAYABLE UNDER THE PLAN UPON THE
PARTICIPANT'S DEATH. IF THERE IS NO SUCH SURVIVING BENEFICIARY,
ANY AMOUNTS DUE WITH RESPECT TO THE PARTICIPANT SHALL BE PAYABLE
TO THE PARTICIPANT'S ESTATE..........................................1
(3) BLACK-SCHOLES EVALUATION METHOD MEANS THE GENERALLY ACCEPTED OPTION
PRICING MODEL ADAPTED FOR USE IN VALUING EMPLOYEE STOCK OPTIONS, AND
BASED ON SUCH ASSUMPTIONS AS ARE DETERMINED FROM TIME TO TIME BY THE
COMMITTEE........................... ...............................1
(4) CHAIRMAN AND CEO MEANS THE CHAIRMAN AND CEO OF THE COMPANY...........1
(5) COMMITTEE MEANS THE COMPENSATION COMMITTEE OF THE COMPANY............1
(6) COMPANY MEANS THE ULTIMATE SOFTWARE GROUP, INC.......................1
(7) EPS MEANS THE CONSOLIDATED EARNINGS PER COMMON SHARE ON A
FULLY DILUTED BASIS OF THE COMPANY...................................1
(8) GAAP MEANS GENERALLY ACCEPTED ACCOUNTING PRINCIPLES..................1
(9) KEY PERFORMANCE VARIABLES MEANS THE COMPONENTS OF THE PLAN
WHICH ARE DESIGNATED BY THE COMMITTEE, WITH RESPECT TO EACH PLAN
YEAR, TO DETERMINE ALL OR A PORTION OF EACH PARTICIPANT'S AWARD.
SUCH COMPONENTS MAY INCLUDE: (I) NET INCOME BEFORE BONUSES,
(II) LICENSE REVENUES, AND (III) MANAGEMENT OBJECTIVES. EXCEPT
AS OTHERWISE PROVIDED OR REQUIRED, ALL FINANCIAL AND ACCOUNTING
TERMS USED IN THE PLAN SHALL BE DETERMINED IN ACCORDANCE WITH GAAP
AND DERIVED FROM THE AUDITED FINANCIAL STATEMENTS OF THE COMPANY AS
PREPARED IN THE ORDINARY COURSE OF BUSINESS..........................2
(10) LICENSE REVENUES MEANS THE COMPANY'S CONSOLIDATED LICENSE
REVENUES FOR A PLAN YEAR AS REFLECTED IN THE COMPANY'S
AUDITED FINANCIAL STATEMENTS.........................................2
(11) MANAGEMENT OBJECTIVES MEANS THE FINANCIAL AND/OR OTHER FACTORS
DESIGNATED BY THE COMMITTEE FOR A PARTICIPANT, WITH RESPECT TO A
PLAN YEAR, TO DETERMINE ALL OR A PORTION OF SUCH PARTICIPANT'S
AWARD; PROVIDED, HOWEVER, SUCH FACTORS ARE LIMITED TO THE FOLLOWING
FOR SECTION 162(M) AWARDS: (I) ROE, (II) EPS, (III) TOTAL REVENUES,
AND (IV) STOCK PRICE.................................................2
(12) MAXIMUM MEANS THE LEVEL OF PERFORMANCE, WITH RESPECT TO ANY KEY
PERFORMANCE VARIABLE, WHICH IF MET OR EXCEEDED WILL RESULT IN
THE EARNING OF THE MAXIMUM AWARD ALLOCATION FOR A PLAN YEAR FOR
SUCH KEY PERFORMANCE VARIABLE........................................2
(13) NET INCOME BEFORE BONUSES MEANS THE COMPANY'S CONSOLIDATED
NET INCOME FOR A PLAN YEAR BEFORE TAXES AND THE CHARGE TO EARNINGS
RESULTING FROM THIS PLAN AND ANY SIMILAR PLANS AND AWARDS............2
(14) PARTICIPANT MEANS ANY EMPLOYEE OF THE COMPANY, OTHER THAN THOSE
WHOSE COMPENSATION IS PAYABLE IN PART OR ENTIRELY ON A COMMISSION
BASIS, DESIGNATED, WITH RESPECT TO A PLAN YEAR, BY THE COMMITTEE TO
PARTICIPATE IN THE PLAN..............................................2
(15) PLAN MEANS THIS INCENTIVE COMPENSATION PLAN..........................2
(16) PLAN YEAR MEANS THE 12-MONTH PERIOD USED AS THE ANNUAL ACCOUNTING
PERIOD BY THE COMPANY................................................2
(17) RETURN ON EQUITY ("ROE") MEANS THE CONSOLIDATED RETURN ON
EQUITY OF THE COMPANY, DETERMINED BY DIVIDING THE CONSOLIDATED NET
INCOME OF THE COMPANY, EXCLUDING REALIZED CAPITAL GAINS AND LOSSES
(NET OF TAXES) BY THE AVERAGE CONSOLIDATED STOCKHOLDERS' EQUITY OF
THE COMPANY, EXCLUDING THE EFFECTS OF FAS 115........................2
i
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(18) SALARY MEANS THE AGGREGATE OF A PARTICIPANT'S ANNUAL BASE SALARY AS
OF THE LAST DAY OF THE PLAN YEAR WITH RESPECT TO WHICH THE AWARD
RELATES..............................................................2
(19) SECTION 162(M) MEANS SECTION 162(M) OF THE INTERNAL REVENUE CODE OF
1986, AS AMENDED, AND APPLICABLE INTERPRETIVE AUTHORITY
THEREUNDER...........................................................2
(20) SECTION 162(M) AWARD MEANS ANY AWARD THAT IS INTENDED TO QUALIFY FOR
THE PERFORMANCE-BASED COMPENSATION EXEMPTION UNDER SECTION 162(M)....2
(21) STOCK OPTION MEANS AN OPTION TO PURCHASE COMMON STOCK OF THE COMPANY
ISSUED PURSUANT TO THE STOCK OPTION PLAN.............................2
(22) STOCK OPTION PLAN MEANS THE NONQUALIFIED STOCK OPTION PLAN OF THE
COMPANY..............................................................2
(23) STOCK PRICE MEANS THE AVERAGE OF THE CLOSING PRICES ON THE NASDAQ
NATIONAL MARKET FOR THE COMPANY'S COMMON STOCK FOR THE LAST FULL
MONTH OF THE PLAN YEAR...............................................3
(24) TARGET MEANS THE LEVEL OF PERFORMANCE, WITH RESPECT TO ANY KEY
PERFORMANCE VARIABLE, WHICH IF MET, WILL RESULT IN THE EARNING OF
THE TARGET AWARD ALLOCATION FOR A PLAN YEAR FOR SUCH KEY PERFORMANCE
VARIABLE.............................................................3
(25) THRESHOLD MEANS THE LEVEL OF PERFORMANCE, WITH RESPECT TO ANY KEY
PERFORMANCE VARIABLE, WHICH IF MET, WILL RESULT IN THE EARNING OF
THE MINIMUM AWARD ALLOCATION FOR A PLAN YEAR FOR SUCH KEY
PERFORMANCE VARIABLE.................................................3
(26) TOTAL REVENUES MEANS THE TOTAL REVENUES OF THE COMPANY FOR A PLAN
YEAR.................................................................3
III. ADMINISTRATION.......................................................3
(a) Committee............................................................3
(b) Eligibility for Participation........................................3
(c) Effective Date and Term of the Plan .................................4
(d) Plan Thresholds, Targets and Maximums................................4
(e) Determination of Award Level.........................................5
(f) Payment of Awards....................................................5
(g) Conditions to Award Payouts..........................................5
IV. MISCELLANEOUS........................................................6
(a) Rights to Award......................................................6
(b) Non-Assignability........................................... ........6
(c) Right to Employment..................................................6
(d) Withholding Taxes....................................................6
(e) New Employees........................................................7
(f) Termination; Amendment...............................................7
(g) Beneficiaries........................................................7
(h) Section 162(m) Awards................................................7
ii
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC.
INCENTIVE COMPENSATION PLAN
I. PURPOSE
The Plan is designed to:
- Reward successful performance of the business
- Support retention of valuable employees
- Provide a vehicle through which the Company can base incentive
compensation on an individual's and the Company's performance.
II. DEFINITIONS
Unless otherwise expressly provided, the following definitions are
applicable throughout the remainder of this Plan:
(1) AWARD means the aggregate dollar amount and/or Stock Options
earned by a Participant under the Plan with respect to a Plan Year.
(2) BENEFICIARY means the person or persons designated, in a written
notice delivered to the Company, by the Participant to receive the amount,
if any, payable under the Plan upon the Participant's death. If there is no
such surviving Beneficiary, any amounts due with respect to the Participant
shall be payable to the Participant's estate.
(3) BLACK-SCHOLES EVALUATION METHOD means the generally accepted
option pricing model adapted for use in valuing employee stock options, and
based on such assumptions as are determined from time to time by the
Committee.
(4) CHAIRMAN AND CEO means the Chairman and CEO of the Company.
(5) COMMITTEE means the Compensation Committee of the Company.
(6) COMPANY means The Ultimate Software Group, Inc.
(7) EPS means the consolidated earnings per common share on a fully
diluted basis of the Company.
(8) GAAP means generally accepted accounting principles.
(9) KEY PERFORMANCE VARIABLES means the components of the Plan which
are designated by the Committee, with respect to each Plan Year, to
determine all or a portion of each Participant's Award. Such components may
include: (i) Net Income Before Bonuses, (ii) License Revenues, and (iii)
Management Objectives. Except as otherwise
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provided or required, all financial and accounting terms used in the
Plan shall be determined in accordance with GAAP and derived from the
audited financial statements of the Company as prepared in the ordinary
course of business.
(10) LICENSE REVENUES means the Company's consolidated license
revenues for a Plan Year as reflected in the Company's audited financial
statements.
(11) MANAGEMENT OBJECTIVES means the financial and/or other factors
designated by the Committee for a Participant, with respect to a Plan Year,
to determine all or a portion of such Participant's Award; PROVIDED,
HOWEVER, such factors are limited to the following for Section 162(m)
Awards: (i) ROE, (ii) EPS, (iii) Total Revenues, and (iv) Stock Price.
(12) MAXIMUM means the level of performance, with respect to any Key
Performance Variable, which if met or exceeded will result in the earning
of the maximum Award allocation for a Plan Year for such Key Performance
Variable.
(13) NET INCOME BEFORE BONUSES means the Company's consolidated net
income for a Plan Year before taxes and the charge to earnings resulting
from this Plan and any similar plans and awards.
(14) PARTICIPANT means any employee of the Company, other than those
whose compensation is payable in part or entirely on a commission basis,
designated, with respect to a Plan Year, by the Committee to participate in
the Plan.
(15) PLAN means this Incentive Compensation Plan.
(16) PLAN YEAR means the 12-month period used as the annual accounting
period by the Company.
(17) RETURN ON EQUITY ("ROE") means the consolidated return on equity
of the Company, determined by dividing the consolidated net income of the
Company, excluding realized capital gains and losses (net of taxes) by the
average consolidated stockholders' equity of the Company, excluding the
effects of FAS 115.
(18) SALARY means the aggregate of a Participant's annual base salary
as of the last day of the Plan Year with respect to which the Award
relates.
(19) SECTION 162(M) means section 162(m) of the Internal Revenue Code
of 1986, as amended, and applicable interpretive authority thereunder.
(20) SECTION 162(M) AWARD means any Award that is intended to qualify
for the performance-based compensation exemption under Section 162(m).
(21) STOCK OPTION means an option to purchase Common Stock of the
Company issued pursuant to the Stock Option Plan.
(22) STOCK OPTION PLAN means the Nonqualified Stock Option Plan of the
Company.
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(23) STOCK PRICE means the average of the closing prices on the Nasdaq
National Market for the Company's Common Stock for the last full month of
the Plan Year.
(24) TARGET means the level of performance, with respect to any Key
Performance Variable, which if met, will result in the earning of the
target Award allocation for a Plan Year for such Key Performance Variable.
(25) THRESHOLD means the level of performance, with respect to any Key
Performance Variable, which if met, will result in the earning of the
minimum Award allocation for a Plan Year for such Key Performance Variable.
(26) TOTAL REVENUES means the total revenues of the Company for a Plan
Year.
III. ADMINISTRATION
(a) COMMITTEE
The Plan shall be administered by the Committee. Each Committee member
shall, at all times while serving, satisfy the requirements of an "outside
director" within the meaning of Section 162(m).
The Committee shall have the authority, in its sole discretion, to:
(i) interpret the Plan, adopt, amend and rescind rules and regulations
relating to the Plan, and take all other action necessary or advisable for
the implementation and administration of the Plan, (ii) delegate to a
committee any or all of its responsibilities, functions, or duties under
the Plan, including the administration thereof; PROVIDED, HOWEVER, that
with respect to Section 162(m) Awards, the Committee may not delegate
certain of its responsibilities hereunder if such delegation would
jeopardize compliance with the requirements of Section 162(m), (iii) select
the Participants for the Plan Year, (iv) determine the annual Plan
Thresholds, Targets, Maximums and Key Performance Variables, which
determination shall be made, in the case of Section 162(m) Awards, within
90 days of the beginning of each such Plan Year, and (v) determine which
Awards shall be Section 162(m) Awards.
Decisions and determinations of the Committee on all matters relating
to the Plan shall be in its sole discretion and shall be conclusive. No
member of the Committee shall be liable for any action taken or decision
made in good faith relating to the Plan or any Award thereunder.
(b) ELIGIBILITY FOR PARTICIPATION
The Committee shall designate the Participants for each Plan Year.
Participants shall be designated from among the employees of the Company,
other than those whose compensation is payable in part or entirely on a
commission basis. For Section 162(m) Awards, such determination shall be
made within 90 days of the beginning of such Plan Year. In making its
designations, the Committee will consider the functions and
responsibilities of the individual, past and potential contributions to
annual results and growth, the value of his or her services to the Company,
and any other factors deemed relevant by the Committee.
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(c) EFFECTIVE DATE AND TERM OF THE PLAN
The Plan shall become effective as of October 22, 1998.
The Plan may be terminated as described in Paragraph IV(f) of the
Plan. All Awards made under the Plan prior to its termination shall remain
in effect until satisfied or otherwise terminated in accordance with the
Plan and the terms of such Awards.
(d) PLAN THRESHOLDS, TARGETS AND MAXIMUMS
As to each Plan Year, the Committee shall establish a schedule of the
Key Performance Variables and the Thresholds, Targets and Maximums
applicable to each Participant for each such Key Performance Variable. The
respective percentages of Salary which would apply if the Threshold, Target
or Maximum objectives for each of the Key Performance Variables for each
Participant were met exactly and the portion of the Award which, with
respect to each Key Performance Variable, is payable in cash or in Stock
Options shall be determined by the Committee. With regards to Section
162(m) Awards, all such determinations shall be made within 90 days of the
beginning of such Plan Year and while the performance relating to the Key
Performance Variables and the Threshold, Target and Maximum objectives
remains substantially uncertain. Each Participant granted a Section 162(m)
Award shall be notified in writing as to each of the above-mentioned
factors to be used to determine his or her Section 162(m) Award for such
Plan Year.
Each Participant's Award shall be the aggregate of those amounts, if
any, allocable to the attainment of each of the Key Performance Variables
applicable to such Participant, calculated pursuant to Paragraph III(e)
below. As to each Plan Year, failure to meet the Threshold for any Key
Performance Variable shall mean that no Award allocation will be made for
such Key Performance Variable.
Notwithstanding anything elsewhere in the Plan to the contrary, the
grant of a Section 162(m) Award to a Participant must state, in terms of an
objective formula or standard, the method of computing the amount of
compensation payable to the Participant if the Threshold, Target and
Maximum objectives are attained for each Key Performance Variable, and must
preclude discretion to increase the amount of compensation payable that
would otherwise be due upon attainment of such goals. Notwithstanding the
foregoing, the Committee may, in its sole discretion, reduce the amounts
payable to a Participant with respect to an Award for any reason
whatsoever.
In the event of: (i) a change in corporate capitalization, a corporate
transaction or a complete or partial corporate liquidation, (ii) any
extraordinary gain or loss or other event that is treated for accounting
purposes as an extraordinary item under GAAP, or (iii) any material change
in accounting policies or practices affecting the Key Performance
Variables, the Committee shall make adjustments to the Key Performance
Variables and Threshold, Target and Maximum objectives, so as to neutralize
the effect of the event on all affected Awards; PROVIDED, HOWEVER, that as
to Section 162(m) Awards, any such adjustments shall be based solely on
objective criteria and only as and to the extent permitted by Section
162(m).
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(e) DETERMINATION OF AWARD LEVEL
At the completion of each Plan Year (subject to Paragraph III(g)
below), the Committee shall assess, with respect to each Participant,
attainment of each of the Key Performance Variables applicable to such
Participant, to determine Award levels for such Participant, as described
herein. For Section 162(m) Awards, the Committee shall certify in writing
(by resolution or otherwise) prior to the payment of such Award that the
applicable Key Performance Variables, the target levels and any other
material terms of the Plan were in fact satisfied.
The Award for each Participant shall be calculated, with respect to
each Key Performance Variable, as a percentage of the Participant's Salary
for the Plan Year. With respect to each Key Performance Variable, such
allocations shall equal the individual's Salary times the applicable
percentage of Salary for the performance level achieved with respect to
each Key Performance Variable. However, for any Plan Year, the Chairman and
CEO may recommend to the Committee that no Award be made for a Participant
or that an Award be made in an amount less than, or, except in the case of
a Section 162(m) Award, more than that derived from the formula set forth
in the foregoing sentence. Following receipt of such a recommendation, the
Committee shall determine whether the Participant shall receive no Award, a
reduced Award, or an increased Award for the Plan Year, and the decision of
the Committee shall be conclusive. Interpolation will be used to determine
Award allocations for performance between the Threshold, Target and Maximum
levels for each Key Performance Variable.
The value of each Award shall be the aggregate of the allocations for
each of the Key Performance Variables; PROVIDED, HOWEVER, that the maximum
amount payable to a Participant with respect to Awards for any Plan Year
shall not exceed $1,000,000.
Awards will be payable in the form of Stock Options and/or cash as
determined by the Committee pursuant to Paragraph III(d) above. The per
share purchase price of the Company's Common Stock under the Stock Options
shall be the Fair Market Value (as defined in the Stock Option Plan) of
such Common Stock as of the date on which the Awards are made by the
Committee. The Black-Scholes Evaluation Method will be used for purposes of
determining the number of Stock Options awarded a Participant.
(f) PAYMENT OF AWARDS
Awards will be payable under the Plan each year, on or before March
31, with reference to the Participant's and Company's performance in the
prior calendar year.
(g) CONDITIONS TO AWARD PAYOUTS
In order to receive any payment for any Award with respect to any Plan
Year, a Participant must: (i) be actively employed by the Company on the
day scheduled hereunder for such payment, (ii) have become disabled (which,
for these purposes, means the inability, due to physical or mental illness,
to substantially perform the duties of employment which the employee
customarily performed for the Company immediately prior to becoming
disabled) before the day scheduled hereunder for such payment,(iii) have
retired (1) at age
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65 or greater, or (2) at age 50 or greater so long as the Participant's
age plus his or her full years of employment by the Company equals or
exceeds 60, before the day scheduled hereunder for payment, (iv) have been
granted a leave of absence before the day scheduled hereunder for such
payment, or (v) have died before the day scheduled hereunder for such
payment.
Participants who have become disabled, retired or have been granted a
leave of absence during the Plan Year and Beneficiaries of Participants who
have died during the Plan Year shall be eligible to receive a pro rata
Award in respect to such Plan Year equal to the full year Award (determined
in accordance with Paragraph III(e) hereof) multiplied by the actual number
of whole months (or fractions thereof) of active employment during such
Plan Year divided by 12.
In any other case, including the case of a Participant who voluntarily
terminates or is terminated by the Company, all Award amounts due, but not
previously paid to the Participant (including, without limitation, Stock
Options), shall be forfeited and retained by the Company.
IV. MISCELLANEOUS
(a) RIGHTS TO AWARD
No person, other than a Participant or his or her designated
Beneficiary or legal representatives, shall have any claim or right to
receive an Award under this Plan. Neither a Participant to whom an Award
has been made nor his or her designated Beneficiary or legal representative
shall have any right or interest in the Award until payment thereof shall
have become due in accordance with Paragraphs III(f) and III(g) hereof.
(b) NON-ASSIGNABILITY
The rights of a Participant under the Plan are not assignable during
his or her lifetime, except by will or by the laws of descent and
distribution.
(c) RIGHT TO EMPLOYMENT
Nothing in the Plan shall confer upon any Participant the right to
continue in the employ of the Company or affect the right of the Company to
terminate the employment of such Participant.
(d) WITHHOLDING TAXES
Any Plan payments to be made in cash shall be net of an amount
sufficient to satisfy any Federal, state and/or local withholding or other
employment tax requirements.
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(e) NEW EMPLOYEES
The Committee shall be entitled to make such rules, regulations,
determinations and Awards as it deems appropriate in respect of any
employee who becomes a Participant in the Plan after the commencement of a
Plan Year.
(f) TERMINATION; AMENDMENT
The Board shall have the right to terminate the Plan and the Committee
shall have the right to amend or suspend the Plan at any time, PROVIDED,
HOWEVER, that: (i) no such termination, amendment or suspension shall,
without the consent of the respective Participants, operate to annul an
Award attributable to any completed Plan Year, and (ii) solely to the
extent deemed necessary or advisable by the Board, for purposes of Section
162(m) or for any other reason, the Board may seek the approval of any such
amendment by the Company's stockholders. Any such approval shall be by the
affirmative votes of stockholders of the Company present, or represented,
and entitled to vote at a meeting duly held in accordance with applicable
state law and the Certificate of Incorporation and By-Laws of the Company.
(g) BENEFICIARIES
If a Participant dies prior to the completion of a Plan Year or prior
to the payment of an Award for a completed Plan Year, any amounts due to
the Participant (including, without limitation, Stock Options), shall be
paid to the Participant's Beneficiary.
(h) SECTION 162(M) AWARDS
The Company intends that Section 162(m) Awards satisfy all applicable
requirements of Section 162(m), including the requirements for
performance-based compensation under Section 162(m)(4)(C), so that the
Company's tax deduction for remuneration in respect of such Section 162(m)
Awards granted to Participants is not disallowed in whole or in part. In
this connection, the material terms of the Key Performance Variables must
be disclosed to and reapproved by the stockholders of the Company no later
than the first stockholder meeting that occurs in the fifth year following
the year in which such stockholders previously approved the Key Performance
Variables. If any provision of this Plan (other than Paragraph IV(f)
hereof) would otherwise frustrate or conflict with the intent expressed in
this Paragraph IV(h), that provision, to the extent possible, shall be
interpreted and deemed amended so as to avoid such conflict. To the extent
of any remaining irreconcilable conflict with such intent, such provision
shall be deemed void as applicable to such Participants with respect to
whom such conflict exists.
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