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 JUNE 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.
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(Exact name of Registrant as specified in its charter)
Delaware 65-0694077
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
3111 Stirling Road, Suite 308, Fort Lauderdale, FL 33312
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(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 [ ] No [ X ]
As of August 3, 1998, there were 15,878,015 shares of the Registrant's
common stock, par value $.01, outstanding.
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC.
TABLE OF CONTENTS
PAGE(S)
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PART I--FINANCIAL INFORMATION:
Item 1--Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1997
and June 30, 1998 3-4
Condensed Consolidated Statements of Operations for the Three
Months and Six Months Ended June 30, 1997 and 1998 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 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 10-17
PART II--OTHER INFORMATION:
Item 1--Legal Proceedings 18
Item 2--Changes in Securities and Use of Proceeds 18
Item 3--Defaults upon Senior Securities 18
Item 4--Submission of Matters to a Vote of Security Holders 19
Item 5--Other Information 20
Item 6--Exhibits and Reports on Form 8-K 20
SIGNATURES 21
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, JUNE 30,
1997 1998
------------ ----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,270 $ 21,565
Accounts receivable, net 5,927 10,132
Other prepaid expenses 654 774
-------- --------
Total current assets 9,851 32,471
Property and equipment, net 1,703 1,962
Acquired intangibles, net of accumulated
amortization of $8,414 and $8,796, respectively 638 256
Other assets 247 270
-------- --------
Total assets $ 12,439 $ 34,959
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,712 $ 2,106
Accrued expenses 4,224 3,340
Deferred revenue 9,764 8,186
Borrowings under line of credit agreement 209 -
Current portion of capital lease obligations 162 322
-------- --------
Total current liabilities 16,071 13,954
-------- --------
Capital lease obligations, net of current portion 54 791
Deferred revenue 1,822 1,672
-------- --------
Total liabilities 17,947 16,417
-------- --------
Commitments and contingencies - -
</TABLE>
(continued)
3
<PAGE>
<TABLE>
<CAPTION>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(Dollars in thousands, except share data)
AS OF AS OF
DECEMBER 31, JUNE 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;
15,874,015 shares issued and outstanding in 1998 - 159
Class A Common Stock, $.01 par value, 236,300 shares
authorized in 1997, 236,300 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 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 64,062
Accumulated deficit (37,094) (45,679)
-------- --------
Total stockholders' equity (deficit) (5,508) 18,542
-------- --------
Total liabilities and stockholders' equity (deficit) $ 12,439 $ 34,959
======== ========
</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
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ -------------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License $ 792 $ 4,203 $ 1,610 $ 7,326
Service 1,919 5,936 4,131 10,385
-------- -------- -------- --------
Total revenues 2,711 10,139 5,741 17,711
-------- -------- -------- --------
Cost of revenues:
License - 225 - 430
Service 2,029 4,225 4,174 7,968
-------- -------- -------- --------
Total cost of revenues 2,029 4,450 4,174 8,398
-------- -------- -------- --------
Operating expenses:
Sales and marketing 3,413 3,969 6,808 7,783
Research and development 1,152 1,626 2,035 3,045
General and administrative 858 1,111 1,879 2,027
Amortization of acquired intangibles 437 191 721 382
-------- -------- -------- --------
Total operating expenses 5,860 6,897 11,443 13,237
-------- -------- -------- --------
Operating loss (5,178) (1,208) (9,876) (3,924)
Compensation related to
modification of escrow
agreement - - - (4,183)
Interest expense (64) (117) (122) (155)
Interest and other income 38 101 64 110
-------- -------- -------- --------
Net loss $ (5,204) $ (1,224) $ (9,934) $ (8,152)
======== ======== ======== ========
Net loss per share -- basic and diluted $ (0.46) $ (0.09) $ (0.92) $ (0.62)
======== ======== ======== ========
Weighted average shares
outstanding -- basic and diluted 11,264 13,550 10,797 13,085
======== ======== ======== ========
</TABLE>
The accompanying notes to Condensed Consolidated Financial Statements
are an integral part of these financial statements.
5
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<TABLE>
<CAPTION>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
1997 1998
-------- --------
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (9,934) $ (8,152)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 937 943
Provision for doubtful accounts - 446
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 (257) (4,651)
Other prepaid expenses (139) 120
Other assets (42) (82)
Accounts payable (259) 394
Accrued expenses (1,510) (884)
Deferred revenue 4,580 (1,728)
-------- --------
Net cash used in operating activities (6,603) (9,411)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (648) (101)
Net proceeds from (issuance of) notes receivable 93 (177)
-------- --------
Net cash used in investing activities (555) (278)
-------- --------
Cash flows from financing activities:
Net payments under line of credit agreements (1,492) (209)
Principal payment of notes payable (193) -
Principal payments received under capital leases - 381
Principal payments on capital lease obligations (109) (207)
Net proceeds from issuances of Convertible Preferred Stock 14,327 -
Equity transactions of 1998 poolings (74) (434)
Net proceeds from issuance of Common Stock - 28,453
-------- --------
Net cash provided by financing activities 12,459 27,984
-------- --------
Net increase in cash and cash equivalents 5,301 18,295
Cash and cash equivalents, beginning of period 1,420 3,270
-------- --------
Cash and cash equivalents, end of period $ 6,721 $ 21,565
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 117 $ 146
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
The Company entered into capital lease obligations to acquire new equipment
totaling $0 and $721 in the six months ended June 30, 1997 and 1998,
respectively.
In 1998, the Company acquired five third-party resellers in transactions
accounted for 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 which
commenced on June 2, 1998 and was completed on 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 six months ended June 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 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 adopted SFAS No. 130, "Reporting Comprehensive Income,"
during the quarter ended June 30, 1998. SFAS 130 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.
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 300 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 June
30, 1997 and 1998, the Acquired Resellers accounted for $0.7 million, or 26.4%
of total revenues, and $1.9 million, or 18.7% of total revenues, respectively.
During the six months ended June 30, 1997 and 1998, the Acquired Resellers
accounted for $1.4 million, or 23.7% of total revenues, and $3.5 million, or
19.5% 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 net proceeds will be used
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.
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- -------------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
License 29.2% 41.5% 28.0% 41.4%
Service 70.8 58.5 72.0 58.6
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
License - 2.2 - 2.4
Service 74.8 41.7 72.7 45.0
----- ----- ----- -----
Total cost of revenues 74.8 43.9 72.7 47.4
----- ----- ----- -----
Operating expenses:
Sales and marketing 125.9 39.1 118.6 43.9
Research and development 42.5 16.0 35.4 17.2
General and administrative 31.6 11.0 32.7 11.4
Amortization of acquired intangibles 16.1 1.9 12.6 2.2
----- ----- ----- -----
Total operating expenses 216.1 68.0 199.3 74.7
----- ----- ----- -----
Operating loss (190.9) (11.9) (172.0) (22.1)
Compensation related to modification
of escrow agreement - - - (23.6)
Interest expense (2.4) (1.2) (2.1) (0.9)
Interest and other income 1.4 1.0 1.1 0.6
----- ----- ----- -----
Net loss (191.9)% (12.1)% (173.0)% (46.0)%
===== ===== ===== =====
</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 six months ended June 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.
12
<PAGE>
Total revenues, consisting of license and service revenues, increased
274.0% from $2.7 million for the three months ended June 30, 1997 to $10.1
million for the three months ended June 30, 1998. Total revenues increased
208.5% from $5.7 million for the six months ended June 30, 1997 to $17.7 million
for the six months ended June 30, 1998.
License revenues increased 430.7% from $0.8 million for the three
months ended June 30, 1997 to $4.2 million for the three months ended June 30,
1998. License revenues increased 355.0% from $1.6 million for the six months
ended June 30, 1997 to $7.3 million for the six months ended June 30, 1997. 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 98.8% and 96.2% of license
revenues for the three months and six months ended June 30, 1998, respectively.
Service revenues increased 209.3% from $1.9 million for the three
months ended June 30, 1997 to $5.9 million for the three months ended June 30,
1998. Service revenues increased 151.4% from $4.1 million for the six months
ended June 30, 1997 to $10.4 million for the six months ended June 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
six months ended June 30, 1997 to $0.2 million and $0.4 million for the three
months and six months ended June 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 six months ended June 30, 1997 to 2.2% and 2.4% for the three
months and six months ended June 30, 1998, respectively.
Cost of service revenues increased by 108.2% from $2.0 million for the
three months ended June 30, 1997 to $4.2 million for the three months ended June
30, 1998. Cost of service revenues increased by 90.9% from $4.2 million for the
six months ended June 30, 1997 to $8.0 million for the six months ended June 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
74.8% to 41.7% for the three months ended June 30, 1997 and 1998, respectively,
and from 72.7% to 45.0% for the six months ended June 30, 1997 and 1998,
respectively. The decrease in cost of service revenues, as a percentage of total
revenues, was primarily due to the absorption of the costs in an increased
revenue base.
13
<PAGE>
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 16.3%
from $3.4 million for the three months ended June 30, 1997 to $4.0 million for
the three months ended June 30, 1998. Sales and marketing expenses increased by
14.3% from $6.8 million for the six months ended June 30, 1997 to $7.8 million
for the six months ended June 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 125.9% to 39.1% for the three
months ended June 30, 1997 and 1998, respectively, and from 118.6% to 43.9% for
the six months ended June 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
41.1% from $1.2 million for the three months ended June 30, 1997 to $1.6 million
for the three months ended June 30, 1998. Research and development expenses
increased by 49.6% from $2.0 million for the six months ended June 30, 1997 to
$3.0 million for the six months ended June 30, 1998. The increase in research
and development expenses was primarily attributable to an increase in
compensation relative to hiring additional programmers and engineers for the
development and enhancement of UltiPro HRMS/Payroll and for the development of
new HRMS/payroll-related modules. Research and development expenses, as a
percentage of total revenues, decreased from 42.5% to 16.0% for the three months
ended June 30, 1997 and 1998, respectively, and from 35.4% to 17.2% for the six
months ended June 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 provisions for
doubtful accounts and outside professional fees. General and administrative
expenses increased by 29.5% from $0.9 million for the three months ended June
30, 1997 to $1.1 million for the three months ended June 30, 1998. General and
administrative expenses increased by 7.9% from $1.9 million for the six months
ended June 30, 1997 to $2.0 million for the six months ended June 30, 1998. The
increase in general and administrative expenses, principally in the second
quarter, was primarily due to an increase in the provision for doubtful accounts
resulting from increased total revenues. General and administrative expenses, as
a percentage of total revenues, decreased from 31.6% to 11.0% for the three
months ended June 30, 1997 and 1998, respectively, and from 32.7% to 11.4% for
14
<PAGE>
the six months ended June 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 nine Resellers in April 1996. Goodwill
amortization decreased by 56.3% from $0.4 million for the three months ended
June 30, 1997 to $0.2 million for the three months ended June 30, 1998. Goodwill
amortization decreased by 47.0% from $0.7 million for the six months ended June
30, 1997 to $0.4 million for the six months ended June 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 June 30, 1998, the Company had $21.6 million in cash and cash
equivalents, reflecting a net increase of $18.3 million since December 31, 1997.
Working capital as of June 30, 1998 was $18.5 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 June 30, 1998 was $26.7 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.
Net cash used in operating activities was $9.4 million for the six
months ended June 30, 1998 as compared to $6.6 million for the six months ended
June 30, 1997. The increase in cash used in operating activities was primarily
attributable to research and development and sales and marketing of UltiPro
HRMS/Payroll.
15
<PAGE>
Net cash used in investing activities was $0.3 million for the six
months ended June 30, 1998 as compared to $0.6 million for the six months ended
June 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 six months ended June 30, 1998.
Net cash provided by financing activities was $28.0 million for the six
months ended June 30, 1998 as compared to $12.5 million for the six months ended
June 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 six months ended June 30, 1998 as compared to the net proceeds from a
private placement of convertible preferred stock in the six months ended June
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 $6.0 million for the
period beginning April 23, 1998 and ending September 30, 1998. The Credit
Facility will expire on October 30, 1998. The Company is in the process of
negotiating for a renewal of the Credit Facility. At June 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 net proceeds from the IPO 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 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.
16
<PAGE>
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,
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
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.
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 Form S-1.
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.
17
<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
On June 2, 1998, the SEC declared effective the Company's Registration
Statement (No. 333-47881) on Form S-1, as then amended, relating to the
Company's IPO. The managing underwriters for the offering were Donaldson, Lufkin
& Jenrette Securities Corporation and Volpe Brown Whelan & Company, LLC (the
"Underwriters"). In connection with the IPO, the Company registered the Common
Stock under the Securities Exchange Act of 1934, as amended. The public offering
commenced on June 2, 1998 and terminated upon the sale of all the 3,250,000
shares of Common Stock which were registered for sale. The aggregate offering
price of the securities sold was $32,500,000. All 3,250,000 shares of Common
Stock were sold for the account of the Company. From the effective date of the
Registration Statement through June 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, transfer agent and
registrar fees and miscellaneous) 1,790
-------
Total $4,065
=======
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 June 5, 1998 until June 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 June 30, 1998 $21,346
Repayment of certain indebtedness 3,600
Accrued bonuses to officers who are not
executive officers 436
Other working capital needs 3,053
--------
Total $28,435
========
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
18
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on April 15, 1998.
The following is a summary of the matters voted on at the meeting.
(a) The amendment and restatement of the Company's Certificate of
Incorporation was approved by the following shareholder vote:
For: 1,170,315
Against: -
Abstain: -
(b) The seven management nominees for Director were elected to serve terms
ending in the years indicated below, as follows:
NOMINEE FOR WITHHELD VOTE
------- --- -------------
Term Expires in 1999:
Robert A. Yanover 1,170,315 -
Le Roy A. Vander Putten 1,170,315 -
Term Expires in 2000:
Marc D. Scherr 1,170,315 -
Rick Wilber 1,170,315 -
Term Expires in 2001:
Scott Scherr 1,170,315 -
Alan Goldstein, M.D. 1,170,315 -
Ofer Nemirovsky 1,170,315 -
(c) The Company's Nonqualified Stock Option Plan was ratified by the
following shareholder vote::
For: 1,170,315
Against: -
Abstain: -
Prior to the IPO, in a written consent of holders of common stock in
lieu of a special meeting, holders of 257,119 shares of the outstanding Common
Stock approved the amendment and restatement of the Company's Certificate of
Incorporation. In a written consent of the holders of the preferred stock of the
Company, holders of 146,079 shares of Series A Convertible Preferred Stock and
264,221 shares of Series B Convertible Preferred Stock approved (i) the
conversion of shares of Preferred Stock into shares of Common Stock, (ii) the
amendment and restatement of the Company's Certificate of Incorporation and
(iii) the commencement of the IPO.
19
<PAGE>
ITEM 5. OTHER INFORMATION
The SEC recently amended Rule 14a-4, which governs the use by the
Company of discretionary voting authority with respect to shareholder proposals.
SEC Rule 14a-4(c)(1) provides that, if the proponent of a shareholder proposal
fails to notify the Company at least 45 days prior to the month and day of
mailing the prior year's proxy statement, the proxies of the Company's
management would be permitted to use their discretionary authority at the
Company's next annual meeting of shareholders if the proposal were raised at the
meeting without any discussion of the matter in the proxy statement. For
purposes of the Company's 1999 Annual Meeting of Shareholders, this deadline is
February 17, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter
ended June 30, 1998.
20
<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: August 14, 1998 By: /s/ Mitchell K. Dauerman
------------------------
Executive Vice President, Chief
Financial Officer and Treasurer
(Authorized Signatory and Principal
Financial and Accounting Officer)
21
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
<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 SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 21,565
<SECURITIES> 0
<RECEIVABLES> 10,890
<ALLOWANCES> (758)
<INVENTORY> 0
<CURRENT-ASSETS> 32,471
<PP&E> 3,911
<DEPRECIATION> (1,949)
<TOTAL-ASSETS> 34,959
<CURRENT-LIABILITIES> 13,954
<BONDS> 0
0
0
<COMMON> 159
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 34,959
<SALES> 17,711
<TOTAL-REVENUES> 17,711
<CGS> 8,398
<TOTAL-COSTS> 13,237
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 155
<INCOME-PRETAX> (8,152)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,152)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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