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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1998
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE ULTIMATE SOFTWARE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 7372 65-0694077
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
3111 STIRLING ROAD
FT. LAUDERDALE, FLORIDA 33312
(954) 266-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SCOTT SCHERR
THE ULTIMATE SOFTWARE GROUP, INC.
3111 STIRLING ROAD
FT. LAUDERDALE, FLORIDA 33312
(954) 266-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
PLEASE ADDRESS A COPY OF ALL COMMUNICATIONS TO:
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<S> <C>
JAMES A. FITZPATRICK, JR. ELLEN B. CORENSWET
DEWEY BALLANTINE LLP BABAK YAGHMAIE
1301 AVENUE OF THE AMERICAS BROBECK, PHLEGER & HARRISON LLP
NEW YORK, NEW YORK 10019 1633 BROADWAY, 47TH FLOOR
(212) 259-8000 NEW YORK, NEW YORK 10019
(212) 581-1600
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following. [ ]
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------
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PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE AGGREGATE OFFERING REGISTRATION
REGISTERED PRICE(1) FEE(2)
COMMON STOCK, PAR VALUE $0.01 PER SHARE ......... $48,587,500.00 $14,333.31
</TABLE>
- -----------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o).
(2) Calculated pursuant to Rule 457(a) based on an estimate of the proposed
maximum aggregate offering price.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION DATED MARCH , 1998
PROSPECTUS
, 1998
SHARES
[US GROUP LOGO]
THE ULTIMATE SOFTWARE GROUP, INC.
COMMON STOCK
All of the shares (the "Shares") of common stock, par value $0.01 per
share (the "Common Stock"), of The Ultimate Software Group, Inc., a Delaware
corporation (the "Company"), offered hereby (the "Offering") are being issued
and sold by the Company.
Prior to the Offering, there has been no public market for the Shares. It
is currently anticipated that the initial offering price will be between $
and $ per share. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price.
The Company has applied to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "ULTI."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6 FOR INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share ..... $ $ $
Total(3) ...... $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the
Underwriters.
(2) Before deducting expenses estimated at $ payable by the Company.
(3) The Company and certain stockholders of the Company have granted to
the Underwriters a 30-day option to purchase up to an aggregate of
additional shares at the Price to the Public less Underwriting
Discounts and Commissions, solely to cover over-allotments, if any.
If such option is exercised in full, the total Price to the Public,
Underwriting Discounts and Commissions, Proceeds to the Company and
Proceeds to such stockholders will be $ , $ , $ and $
, respectively. See "Underwriting."
The Shares are being offered by the several Underwriters when, as, and if
delivered to and accepted by the Underwriters and subject to various prior
conditions, including their right to reject orders in whole or in part. It is
expected that delivery of the Shares will be made in New York, New York on or
about , 1998.
DONALDSON, LUFKIN & JENRETTE VOLPE BROWN WHELAN & COMPANY
SECURITIES CORPORATION
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The private securities litigation reform act of 1995 provides a "safe
harbor" for forward-looking statements. This Prospectus may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are subject to uncertainties and other factors that could cause
actual results to differ materially from such statements. These uncertainties
and other factors include, but are not limited to, those discussed in "Risk
Factors" and elsewhere in this Prospectus. The words "believe," "expect,"
"anticipate," "project," and similar expressions identify forward-looking
statements. These forward-looking statements speak only as of their dates.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ULTIPRO(Registered Trademark) is a registered trademark of the Company in
the United States. US Group, Intersourcing and Ultipro Tax Forms are
trademarks of the Company and are the subject of pending trademark and
service mark applications in the United States. This Prospectus also includes
names, trademarks, service marks and registered trademarks and service marks
of companies other than the Company.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus. The Common Stock offered hereby
involves a high degree of risk. See "Risk Factors" beginning on page 6.
Unless otherwise indicated, all information in this Prospectus (i) assumes no
exercise of the Underwriters' over-allotment option, (ii) assumes the
conversion of all outstanding shares of Series A Convertible Preferred Stock
and Series B Convertible Preferred Stock (as such terms are defined) into
shares of Common Stock, (iii) assumes the conversion of all outstanding
shares of Class A Common Stock, Class B Common Stock and Class C Common Stock
into shares of Common Stock and (iv) reflects the issuance of shares of
Common Stock to the five Acquired Resellers (as defined). References to the
Company's "fiscal" year mean the twelve months ended on December 31.
References to the "Company" shall be deemed to include the Partnership (as
defined), as appropriate.
The Company
The Ultimate Software Group, Inc. designs, markets, implements and
supports technologically advanced, cross-industry human resource management
and payroll ("HRMS/payroll") software solutions. The Company's solutions are
marketed primarily to middle-market organizations with 300 to 15,000
employees, but are scaleable to address the needs of much larger
organizations. The Company's products automate an organization's HRMS/payroll
functions and are enabling tools in the cost-efficient management of the
employee life cycle, from inception of employment through retirement. As part
of its comprehensive HRMS/payroll solution, the Company provides high quality
implementation, training and ongoing support services to its customers.
In June 1997, the Company introduced its most recent product, UltiPro for
Windows, a feature-rich, completely integrated HRMS/payroll solution with
embedded Internet technology, employee self-service capability and Cognos
Corporation's business intelligence tools for data analysis and generation of
custom reports. The Company believes that UltiPro for Windows is the first
32-bit, object-oriented HRMS/payroll software solution which takes advantage
of Microsoft SQL Server and Microsoft NT technologies. The Company believes
that UltiPro for Windows provides middle-market organizations with a highly
functional, cost-effective software solution that can accomodate emerging
technologies and provides significant advantages over other HRMS/payroll
software products, including greater scalability and transaction throughput,
reduced total cost of ownership and ease of implementation, customization and
use. In December 1997, Human Resource Executive, a leading human resource
industry publication, selected UltiPro for Windows as the only HRMS/payroll
software product to be included as one of its Top Ten HR Products of the
Year.
Because human resource management and payroll processing are core
functions that require a significant allocation of resources, the
HRMS/payroll functions have increasingly become mission-critical within many
organizations. Traditionally, many organizations have utilized third-party
outsourcing vendors in an attempt to address the increasingly high costs
associated with the management of HRMS/payroll functions. However,
outsourcing can be an inflexible and expensive alternative, particularly for
middle-market organizations, because organizations give up control over
critical processes, which can result in greater inefficiency and insufficient
data for decision-making. As an alternative to outsourcing, many
organizations have historically automated their HRMS/payroll functions by
developing in-house legacy systems to address their needs. However, because
of the use of proprietary programming languages and operating and database
management systems, such in-house HRMS/payroll systems are typically
cumbersome, time consuming to operate, incompatible with other information
systems and expensive to implement, customize, update and support.
With the advent of client/server technologies as an alternative to
in-house legacy systems and the greater availability of affordable computing
solutions, many middle-market organizations are increasingly seeking to
automate and streamline the mission-critical processes associated with
HRMS/payroll functions. However, first-generation client/server solutions
lack certain critical performance criteria and
3
<PAGE>
sophisticated security features, are difficult to implement and have a high
cost of ownership. In addition, first-generation client/server HRMS/payroll
software is typically an add-on module with limited functionality in
enterprise-wide, or Enterprise Resource Planning ("ERP'), systems. In recent
years, a new generation of object-oriented, component-based client/server
technologies has emerged, which addresses many of the limitations of
first-generation client/server systems and facilitates integration with newer
technologies and the Internet.
According to International Data Corporation ("IDC"), a market research
company, the United States market for HRMS/payroll software licenses totaled
$1.1 billion in 1996 and is projected to grow to $2.9 billion by the year
2001. IDC further estimates that the worldwide market for HRMS/payroll
software licenses will experience approximately the same rate of growth,
moving from $1.6 billion in 1996 to $4.2 billion by 2001. The Company
believes that the market for HRMS/payroll-related services is of equal or
greater size than the market for HRMS/payroll software licenses and has
similar growth characteristics.
The Company reaches its customer base and target market through its direct
sales force and a network of national, regional and local strategic partners.
As of February 28, 1998, the Company had licensed its earlier DOS-based
product, ULTIPRO for LAN, to approximately 750 organizations and its UltiPro
for Windows solution to approximately 85 organizations. The Company's
customers operate in a wide variety of industries, including manufacturing,
retail, healthcare, technology, finance, insurance, real estate,
transportation, communications, services and sports. The Company's customers
include: Bill Heard Enterprises, Inc., Callaway Gardens Resort, Inc.,
Discovery Zone, Inc., Duro Bag Manufacturing Company, First American
Corporation, The Florida Marlins Baseball Club, Ingram Entertainment, Inc.,
National Realty Trust (Coldwell Banker), Telemundo Group, Inc., United States
Filter Corporation and Winn Dixie Stores, Inc.
The Company's objective is to be the leading provider of HRMS/payroll
software solutions. The Company intends to achieve this objective by (i)
extending its technology leadership by continuing to invest in research and
development; (ii) leveraging its existing and new strategic alliances with
leading software vendors in order to access a larger potential customer base
and to leverage their technical and marketing expertise; (iii) integrating
its products with other leading software applications in order to effectively
address an organization's enterprise-wide management needs; (iv) expanding
and leveraging its network of implementation partners to further increase its
market penetration and to enable more rapid implementation of its products;
(v) expanding the functionality of its existing and future products; and (vi)
leveraging its existing client base as clients migrate from DOS to
client/server environments.
The Company is a Delaware corporation formed in April 1996 to assume the
business and operations of The Ultimate Software Group, Ltd. (the
"Partnership"), a limited partnership founded in 1990. The Company's
headquarters are located at 3111 Stirling Road, Ft. Lauderdale, Florida 33312
and its telephone number is (954) 266-1000.
THE OFFERING
Common Stock offered by the
Company .......................
Common Stock to be outstanding
after the Offering ............ (1)
Use of Proceeds ............... Working capital and other general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market
symbol ........................ ULTI
(1) Excludes (i) shares subject to options outstanding and (ii)
additional shares reserved for issuance pursuant to options available for
grant under the Company's Nonqualified Stock Option Plan. See "Management
-- Stock Option Plan."
4
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SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA(1)
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YEARS ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues ................................ $ 3,727 $ 9,311 $ 17,592
Gross profit ............................ 1,893 3,465 8,023
Operating loss .......................... (4,650) (20,284) (16,060)
Net loss ................................ $(4,731) $(20,385) $(16,016)
========== =========== ===========
Basic and diluted pro forma net loss per
share(2) ...............................
Basic and diluted pro forma weighted
average shares outstanding(2)...........
</TABLE>
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<CAPTION>
QUARTERS ENDED
-----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
License ................................ $ 818 $ 792 $ 709 $4,914
Service ................................ 1,958 1,652 1,900 3,570
Other .................................. 254 267 290 468
----------- ---------- ----------- ----------
Total revenues......................... 3,030 2,711 2,899 8,952
Gross profit ............................ 885 682 586 5,870
Operating loss .......................... (4,697) (5,178) (5,356) (829)
Net loss ................................ $(4,729) $(5,204) $(5,320) $ (763)
=========== ========== =========== ==========
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AS OF DECEMBER 31, 1997
----------------------------
PRO FORMA
PRO FORMA(3) AS ADJUSTED(4)
(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents .... $ 3,270 $
Working capital (deficit) .... (6,221)
Total assets .................. 12,439
Long-term borrowings .......... 54
Stockholders' equity (deficit) (5,508)
</TABLE>
(1) Pro forma consolidated financial data gives effect to the
acquisitions of five third-party resellers which had exclusive rights
to sell the Company's products in certain geographic areas (the
"Acquired Resellers") in February and March 1998, accounted for under
the poolings-of-interest method of accounting. See Pro Forma
Financial Statements and the related Notes thereto included elsewhere
in this Prospectus.
(2) See Note 2 to the Consolidated Financial Statements for information
regarding the computation of net loss per share.
(3) Pro forma to give effect to (i) the conversion of all outstanding
shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock into shares of Common Stock, (ii) the
conversion of all outstanding shares of Class A Common Stock, Class B
Common Stock and Class C Common Stock into shares of Common Stock,
(iii) the issuance of shares of Common Stock to the Acquired
Resellers and (iv) a non-recurring, one-time compensation charge of
approximately $4.0 million (the "Non-Recurring Charge"). See Note 15
to the Consolidated Financial Statements.
(4) Pro forma as adjusted to give effect to the sale of shares of
Common Stock offered hereby at an assumed initial public offering
price of $ per share, after deducting estimated underwriting
discounts and commissions and Offering expenses payable by the
Company. See "Use of Proceeds" and "Capitalization."
5
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RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the
shares of Common Stock offered hereby. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those contained in the
forward-looking statements. Factors that may cause such differences include,
but are not limited to, those discussed below as well as those discussed
elsewhere in this Prospectus.
Limited Operating History; Accumulated Deficit; Net Losses. The Company
began operations in 1990 as The Ultimate Software Group, Ltd. and released
its first proprietary product in 1993. Until 1997, substantially all of the
Company's revenues were attributable to the licensing of its DOS-based
HRMS/payroll software product, ULTIPRO for LAN, and the provision of related
consulting, training, installation and support services. The Company's most
recent product, UltiPro for Windows, was introduced in June 1997 and has a
limited history of customer acceptance and use. Accordingly, the Company has
only a limited operating history upon which an evaluation of the Company and
its prospects can be based. The Company's prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in their early stage of development, particularly companies in new
and rapidly evolving markets. To address these risks, the Company must, among
other things, respond to competitive developments, continue to attract,
retain and motivate qualified management and other employees, continue to
upgrade its technologies and commercialize products and services that
incorporate such technologies and achieve market acceptance for its products
and services. There can be no assurance that the Company will be successful
in addressing such risks. The Company had an accumulated deficit of $33.9
million at December 31, 1997 and incurred net losses of $20.0 million and
$15.5 million during 1996 and 1997, respectively. The Company has increased
its expense levels to support anticipated growth in demand for its
HRMS/payroll products, including the hiring of additional research and
development, professional services, sales and marketing, and administrative
personnel. As a result, the Company is dependent upon increasing revenues and
profit margins to achieve profitability. If the Company's sales and profit
margins do not increase to support the higher levels of operating expenses,
the Company's business, operating results and financial condition would be
materially adversely affected. There can be no assurance that the Company
will ever achieve profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Significant Fluctuations in Quarterly Operating Results; Seasonality. The
Company's revenues and operating results have varied substantially in the
past and are likely to vary substantially in the future due to a variety of
factors, including (i) demand for its products, (ii) the length of the sales
cycle for the Company's software products, which is typically two to six
months, (iii) the fact that a significant portion of the Company's revenues
in any given quarter may be recognized in the last month, weeks or even days
of the quarter, (iv) variations in the length of the implementation process
of the Company's products, (v) the mix of license and service revenues, (vi)
the timing of the introduction of new products or product enhancements by the
Company and its competitors, (vii) the timing and success of sales and
marketing programs, (viii) changes in customer budgets, (ix) the timing and
extent of product development programs and (x) seasonality of technology
purchases by customers and general economic conditions. The Company's expense
levels are based, in significant part, on its expectations as to future
revenues and are largely fixed in the short term. As a result, the Company
may be unable to adjust spending in a timely manner to compensate for any
unexpected shortfall in revenues. Accordingly, any significant shortfall of
revenues in relation to the Company's expectations would have an immediate
and material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company has increased, and plans to
continue to increase its operating expenses to expand its research and
development, professional services, sales and marketing, and administrative
organizations. The timing of such expansion and the rate at which new
personnel become productive could cause material fluctuations in quarterly
and annual results of operations. The Company has experienced, and may
experience in the future, significant seasonality in its business, and the
Company's business, operating results and financial condition may be affected
by such trends in the future. Revenues have historically increased at higher
rates in the fourth quarter of the year and at lower rates in the next
succeeding quarter, which the Company believes is due to a number of factors,
including the Company's quota-based compensation
6
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arrangements, typical of those used in software companies, and year-end
budgetary pressures on the Company's customers. The Company believes that
this seasonal trend will continue for the foreseeable future. Due to all of
the foregoing factors, period-to-period comparisons of the revenues and
operating results of the Company are not necessarily meaningful and such
comparisons cannot be relied upon as indicators of future performance. There
also can be no assurance that the Company will be able to sustain the rates
of revenue growth that it has experienced in the past, or that the Company
will be able to improve its operating results. In addition, the Company's
operating results in future periods may be below the expectations of
securities analysts and investors. In that event, the market price of the
Common Stock would likely be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Product Concentration; New Product. Until 1997, substantially all of the
Company's revenues were derived from its ULTIPRO for LAN product and related
services. The Company has shifted its focus from a product based on DOS and
local area network ("LAN") technologies, ULTIPRO for LAN, to a product based
on Windows and client/server technologies, UltiPro for Windows. As a result
of this shift and the decrease in general market demand for DOS-based
products, the Company's revenues from its ULTIPRO for LAN product have been
declining and are expected to decline for the foreseeable future. There can
be no assurance that the decline in revenues from sales of ULTIPRO for LAN
will not have a material adverse effect on the Company's business, operating
results and financial condition. While the Company still derives revenues
from the support, service and limited sales of the ULTIPRO for LAN product
line, its UltiPro for Windows product and related services are expected to
account for substantially all of the Company's revenues for the foreseeable
future. In 1997, UltiPro for Windows license and service revenues accounted
for $5.2 million, or 36.6%, on a historical basis, and $5.2 million, or
29.4%, on a pro forma basis, of the Company's total revenues. However, to
date, the Company has had only limited experience with customer acceptance
and use, as well as in implementing, UltiPro for Windows. Accordingly, the
Company's future success will depend on maintaining and increasing acceptance
of UltiPro for Windows and related services and its ability to successfully
implement the product. There can be no assurance that UltiPro for Windows
will gain broad market acceptance or that the Company will be able to
successfully implement UltiPro for Windows in a timely manner. Any factors
adversely affecting the demand for UltiPro for Windows would have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Products."
Uncertainties Relating to Acquisition of Resellers. In February and March
1998, the Company acquired the businesses of the Acquired Resellers. In 1996
and 1997, the Acquired Resellers accounted for $3.5 million, or 37.2%, and
$4.5 million, or 25.8%, respectively, of the Company's total revenues on a
pro forma basis. The success of the acquisitions will depend on a number of
factors, including the Company's ability to integrate the businesses and
operations of the Acquired Resellers with those of the Company, to retain
certain key personnel of the Acquired Resellers, and to preserve and expand
the businesses and operations of the Acquired Resellers. There can be no
assurance that the Company will be able to successfully integrate and operate
the businesses of the Acquired Resellers or that it will not experience
losses as a result of the acquisitions. Failure to achieve the anticipated
benefits of the acquisitions or to successfully integrate the operations of
the Acquired Resellers could have a material adverse effect upon the
business, operating results and financial condition of the Company.
Management of Growth. The Company has experienced a period of rapid
growth. For example, the number of the Company's employees has increased from
75 as of December 31, 1995 to 265 as of February 28, 1998. The growth of the
Company's business and expansion of its customer base has placed, and is
expected to continue to place, a significant strain on the Company's
management and operations. The Company expects to continue to increase its
research and development, professional services, sales and marketing and
administrative operations. Accordingly, the Company's future operating
results will depend on the ability of its management and other key employees
to continue to implement and improve its systems for operations, financial
control and information management and to recruit, train, manage and retain
its employee base. There can be no assurance that the Company will be able to
manage or continue to manage its recent or any future growth successfully,
and any inability to do so would have a material adverse effect on the
Company's business, operating results and financial condition.
7
<PAGE>
Risks Associated with Sales Channels. The Company sells its products and
services primarily through a direct sales force. The Company's ability to
achieve significant revenue growth in the future will depend, in part, on its
success in recruiting, training and retaining sufficient direct sales
personnel. The Company also markets its products and services through a
network of national, local and regional strategic partners, and is attempting
to establish more of such relationships. Historically, a significant portion
of the Company's revenues have been derived from sale of the Company's
products by certain third-party resellers. By March 1998, the Company had
acquired the businesses of all of its third-party resellers in order to gain
greater control over its distribution channel. There can be no assurance that
the Company's shift to a direct distribution channel will be successful. The
Company's ability to achieve significant revenue growth in the future will
depend, in large part, upon the success of its direct sales force, its
ability to establish and maintain relationships with strategic partners and
its ability to adapt its sales channels to address the evolving markets for
its products. Failure to do so could have a material adverse effect on the
Company's business, operating results and financial condition. See
"--Uncertainties Relating to Acquisition of Resellers," "Business --
Strategy" and "--Sales and Marketing."
Rapid Technological Change; Dependence on New Products. The market for the
Company's products is characterized by rapid technological advancements,
changes in customer requirements, frequent new product introductions and
enhancements and changing industry standards. The life cycles of the
Company's products are difficult to estimate and the Company's current market
position could be undermined by rapid technological changes and the
introduction of new products and enhancements by new or existing competitors.
The Company's growth and future success will depend, in part, upon its
ability to enhance its current products and introduce new products in order
to keep pace with products offered by the Company's competitors, adapt to
technological advancements and changing industry standards and expand the
functionality of its products to address the increasingly sophisticated
requirements of its customers. There can be no assurance that the Company
will have sufficient resources to make the necessary investments or that it
will not experience difficulties that could delay or prevent the successful
development, introduction or marketing of new products or enhancements. In
addition, there can be no assurance that such products or enhancements will
meet the requirements of the marketplace or achieve market acceptance or that
the Company's existing and potential customers will migrate to client/server
environments at the rate expected by the Company. Any failure by the Company
to anticipate or respond adequately to technological advancements, customer
requirements and changing industry standards, or any significant delays in
the development, introduction or availability of new products or
enhancements, could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Product
Development."
Competition. The Company's future success will depend significantly upon
its ability to increase its share of its target market, to maintain and
increase its renewal revenues from existing customers and to sell additional
products, product enhancements, maintenance and support agreements and
training and consulting services to existing and new customers. The
HRMS/payroll market is intensely competitive. The Company has a variety of
competitors, including (i) a number of companies, such as Cyborg Systems,
Inc., Genesys Software Systems, Inc., Lawson Software, Inc., Oracle
Corporation, PDS Software, Inc., PeopleSoft, Inc. and SAP America, Inc. which
offer HRMS/payroll software products for use on mainframes and/or
client/server systems; (ii) large service bureaus, such as Automatic Data
Processing, Inc. ("ADP") and Ceridian Corporation; and (iii) the internal
payroll/human resources departments of potential customers which use
custom-written software. The Company believes that existing competitors and
new market entrants will attempt to develop in-house systems that will
compete with the Company's products. Many of the Company's current and
potential competitors have significantly greater financial, technical,
marketing and other resources than the Company. As a result, they may be able
to respond more quickly to new or emerging technologies and to changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of their products than can the Company. There can be no
assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures will not
materially adversely affect the Company's business, operating results and
financial condition. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products to address the
needs of the Company's prospective customers. Accordingly, it is possible
8
<PAGE>
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. There can be no assurance that competitors
will not develop products that are superior to the Company's products or
achieve greater market acceptance. See "Business -- Industry Overview" and
"--Competition."
Protection of Intellectual Property; Risks of Infringement. The Company's
success is dependent in part on its ability to protect its proprietary
rights. The Company licenses its products in object code form only, although
it has source code escrow arrangements when required by customers. The
Company relies on a combination of copyright, trademark and trade secret
laws, as well as confidentiality agreements and licensing arrangements, to
establish and protect its proprietary rights. The Company does not have any
patents or patent applications pending, and existing copyright, trademark and
trade secret laws afford only limited protection. Accordingly, there can be
no assurance that the Company will be able to protect its proprietary rights
against unauthorized third party copying or use, which could materially
adversely affect the Company's business, operating results and financial
condition. Despite the Company's efforts to protect its proprietary rights,
attempts may be made by unauthorized parties to copy or reverse engineer
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Moreover, there can be no assurance that
others will not develop products that perform comparably to the Company's
proprietary products. Policing the unauthorized use of the Company's products
is difficult. Litigation may be necessary in the future to enforce the
Company's intellectual property rights, to protect the Company's trademarks,
copyrights or trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on
the Company's business, operating results and financial condition.
As is common in the software industry, the Company from time to time may
become aware of third-party claims of infringement by the Company's
operations or products of third-party proprietary rights. While the Company
is not currently aware of any such claim, the Company's software products may
increasingly be subject to such claims as the number of products and
competitors in the Company's industry grows and the functionality of products
overlaps and as the issuance of software patents becomes increasingly common.
Any such claims, with or without merit, can be time consuming and expensive
to defend, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty agreements, if required, may
not be available on terms acceptable to the Company, or at all, which could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Business -- Intellectual Property Rights."
Reliance on Microsoft Corporation and Other Third-Party Technologies. The
Company's software products are designed primarily to operate with Microsoft
Corporation ("Microsoft") technologies and the Company's strategy requires
that its products and technology be compatible with new developments in
Microsoft technology. Although the Company believes that Microsoft
technologies are currently widely utilized by businesses of all sizes, there
can be no assurance that businesses will continue to adopt such technologies
as anticipated, will migrate from older Microsoft technologies (such as DOS
or earlier versions of Windows) to newer Microsoft technologies or will adopt
alternative technologies that are incompatible with the Company's products.
If businesses do not migrate from older technologies and adopt the Microsoft
technologies with which the Company's products are compatible, the Company's
business, operating results and financial condition could be materially and
adversely affected. In addition, the Company's products utilize certain
software licensed to it by other third-party software developers. Although
the Company believes that there are alternatives for these products, any
significant interruption in the availability of such third-party software
could have a material adverse impact on the Company's sales unless and until
the Company can replace the functionality provided by these products.
Moreover, the Company is to a certain extent dependent upon such third
parties' abilities to enhance their current products, to develop new products
on a timely and cost-effective basis and to respond to emerging industry
standards and other technological changes. There can be no assurance that the
Company would be able to replace the functionality provided by the
third-party software currently offered in conjunction with the Company's
products in the event that such software becomes obsolete or incompatible
with
9
<PAGE>
future versions of the Company's products or is otherwise not adequately
maintained or updated. The absence of or any significant delay in the
replacement of that functionality could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business
- -- The Ultimate Solution" and "--Strategy."
Timely Release of Periodic Updates to Reflect Tax Law and Other Regulatory
Changes. The Company's products are affected by changes in laws and
regulations and generally must be updated annually or periodically to
maintain their accuracy and competitiveness. There can be no assurance that
the Company will be able to release these annual or periodic updates on a
timely basis in the future. Failure to do so could have a material adverse
effect on market acceptance of the Company's products, which could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, significant changes in tax laws and
regulations or other regulatory provisions applicable to the Company's
products could require the Company to make a significant investment in
product modifications, which could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business
- -- Products" and "--Product Development."
Product Errors; Product Liability. Software products such as those offered
by the Company frequently contain undetected errors or failures when first
introduced or as new versions are released. Testing of the Company's products
is particularly challenging because it is difficult to simulate the wide
variety of computing environments in which the Company's customers may deploy
these products. Despite extensive testing, the Company from time to time has
discovered defects or errors in its products. There can be no assurance that
such defects, errors or difficulties will not cause delays in product
introductions and shipments, result in increased costs and diversion of
development resources, require design modifications or decrease market
acceptance or customer satisfaction with the Company's products. In addition,
there can be no assurance that, despite testing by the Company and by current
and potential customers, errors will not be found after commencement of
commercial shipments, resulting in loss of or delay in market acceptance,
which could have a material adverse effect upon the Company's business,
operating results and financial condition. The Company has included security
features in its products that are intended to protect the privacy and
integrity of customer data. Despite the existence of these security features,
the Company's software products may be vulnerable to break-ins and similar
disruptive problems. Addressing these evolving security issues may require
significant expenditures of capital and resources by the Company, which may
have a material adverse effect on the Company's business, operating results
and financial condition.
Although the Company has not experienced any material product liability
claims to date, the sale and support of software products and the performance
of related services by the Company entails the risk of such claims. The
Company's products are used by customers in connection with the preparation
and filing of tax returns and other regulatory reports. If any of the
Company's products contain errors that produce inaccurate results upon which
users rely, or cause users to misfile or fail to file required information,
the Company could be subject to liability claims from users which could, in
turn, materially adversely affect the Company's business, operating results
and financial condition. The Company's license agreements with its customers
typically contain provisions intended to limit the Company's exposure to such
claims, but such provisions may not be effective in limiting the Company's
exposure. There can be no assurance that the contractual limitations used by
the Company will be enforceable or will provide the Company with adequate
protection against product liability claims in certain jurisdictions. A
successful claim for product or service liability brought against the Company
could result in substantial cost to the Company and divert management's
attention from the Company's operation, which could have a material adverse
effect upon the Company's business, operating results and financial
condition.
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies may need to be upgraded to
comply with such "Year 2000" requirements. Significant uncertainty exists in
the software industry concerning the potential effects associated with such
compliance. The Company believes that the purchasing patterns of customers
and potential customers may be affected by Year 2000 issues. Many companies
are expending significant
10
<PAGE>
resources to correct or patch their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase software products such as those offered by the Company. Many
potential customers may also choose to defer purchasing Year 2000 compliant
products until they believe it is absolutely necessary, thus resulting in
potentially stalled market sales within the industry. Conversely, Year 2000
issues may cause other companies to accelerate purchases, thereby causing an
increase in short-term demand and a consequent decrease in long-term demand
for software products. Additionally, Year 2000 issues could cause a
significant number of companies, including current Company customers, to
reevaluate their current financial accounting system needs, and, as a result
consider switching to other systems or suppliers. Any of the foregoing could
result in a material adverse effect on the Company's business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Dependence on Key Personnel. The Company's success depends to a
significant extent upon a limited number of members of senior management and
other key employees, including Scott Scherr, the Company's Chairman of the
Board, President and Chief Executive Officer, and Alan Goldstein, M.D., the
Company's Executive Vice President and Chief Technology Officer and a
director of the Company. The Company does not have employment contracts with
any of its key personnel other than certain non-competition and
confidentiality agreements entered into with Mr. Scherr and Dr. Goldstein.
The Company maintains key man life insurance for Scott Scherr in the amount
of $2.0 million. The loss of the service of one or more key managers or other
employees could have a material adverse effect upon the Company's business,
operating results and financial condition. See "Management."
Control by Principal Stockholders, Officers and Directors. Upon completion
of the Offering, the present directors, executive officers and principal
stockholders of the Company will beneficially own in the aggregate
approximately % of the outstanding Common Stock ( % if the Underwriters'
over-allotment option is exercised in full). These directors, officers and
stockholders will be able to substantially influence the business and affairs
of the Company, including the election of individuals to the Company's Board
of Directors, and to otherwise affect the outcome of certain actions that
require stockholder approval, including the adoption of amendments to the
Company's Amended and Restated Certificate of Incorporation (the "Certificate
of Incorporation"), and certain mergers, sales of assets and other business
acquisitions or dispositions. This concentration of ownership may have the
effect of delaying or preventing a change in control of the Company, which
could limit the price that investors might be willing to pay in the future
for shares of the Common Stock. See "Management" and "Principal
Stockholders."
Dilution. Investors participating in the Offering will incur immediate and
substantial dilution of pro forma net tangible book value per share of $
from the initial public offering price. To the extent outstanding options to
purchase the Company's Common Stock are exercised, there will be further
dilution to investors participating in this Offering. There can be no
assurance that the Company will not require additional funds to support its
working capital requirements or for other purposes, in which case the Company
may seek to raise such additional funds through public or private equity
financing or from other sources. There can be no assurance that such
additional financing will be available or that, if available, such financing
will be obtained on terms favorable to the Company and would not result in
additional dilution of the Company's stockholders. See "Dilution."
Broad Discretion in Allocation of Net Proceeds. The principal purposes of
the Offering are to increase the Company's equity capital, to create a public
market for the Common Stock, to increase the visibility of the Company in the
marketplace and to facilitate future access by the Company to public equity
markets. The Company expects to use the net proceeds from the Offering for
general corporate purposes, including the funding of working capital.
Although the Company has no plans, commitments or agreements with respect to
any material acquisitions as of the date of this Prospectus, the Company may
seek acquisitions of businesses, products or technologies that are
complementary to those of the Company, and a portion of the net proceeds may
be used for such acquisitions. Accordingly, the Company will have significant
flexibility in applying the net proceeds of the Offering. See "Use of
Proceeds."
No Prior Public Market; Possible Volatility of Stock Price. Prior to the
Offering, there has been no public market for the Common Stock and there is
no assurance that an active trading market will develop
11
<PAGE>
or be sustained after this Offering. The initial public offering price will
be determined through negotiations among the Company and the representatives
of the Underwriters and may not be indicative of the market price of the
Common Stock after the Offering. The trading price of the Common Stock is
likely to be highly volatile and may be significantly affected by factors
such as actual or anticipated fluctuations in the Company's operating
results, announcements of technological innovations, new products or new
contracts by the Company or its competitors, developments with respect to
patents, copyrights or proprietary rights, conditions and trends in the
software industry, changes in financial estimates by securities analysts,
general market conditions and other factors. In addition, the public equity
markets have from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the stock
of technology companies. These broad market fluctuations, as well as
shortfalls in sales or earnings as compared with securities analysts'
expectations, changes in such analysts' recommendations or projections and
general economic and market conditions, may materially and adversely affect
the market price of the Common Stock. See "Underwriting."
Shares Eligible for Future Sale. Sales of significant amounts of Common
Stock in the public market after the Offering or the perception that such
sales will occur could adversely affect the market price of the Common Stock
or the future ability of the Company to raise capital through an offering of
its equity securities. Of the shares of Common Stock to be outstanding
upon completion of the Offering, the shares offered hereby will be
eligible for immediate sale in the public market without restriction unless
the shares are purchased by "affiliates" of the Company within the meaning of
Rule 144 of the Securities Act of 1933, as amended (the "Securities Act").
The remaining shares of Common Stock held by existing stockholders
upon completion of the Offering will be "restricted securities" as that term
is defined in Rule 144 under the Securities Act. Restricted securities may be
sold in the public market only if registered or if they qualify for an
exemption from registration under the Securities Act. Directors, officers and
certain stockholders of the Company holding an aggregate of shares of
Common Stock have agreed that they will not sell, directly or indirectly, any
Common Stock without the prior consent of Donaldson, Lufkin & Jenrette
Securities Corporation for a period of 180 days from the date of this
Prospectus (the "Lock-up Agreements"). Subject to these Lock-up Agreements,
additional shares will be available for sale in the public market (subject in
the case of shares held by affiliates in compliance with certain volume
restrictions) as follows: (i) shares will be available for immediate sale
in the public market on the date of this Prospectus, (ii) shares will be
eligible for sale 90 days after the date of this Prospectus and (iii)
shares will be eligible for sale upon the expiration of lock-up
agreements 180 days after the date of this Prospectus.
After the date of this Prospectus, the Company intends to file a
Registration Statement on Form S-8 under the Securities Act to register all
shares of Common Stock issuable under the Company's Nonqualified Stock Option
Plan. Such registration statement will become effective immediately upon
filing, and shares covered by that Registration Statement will thereupon be
eligible for sale in the public markets, subject to Rule 144 limitations
applicable to affiliates. The Company is unable to predict the effect that
sales made under Rule 144, or otherwise, may have on the then prevailing
market price of the Common Stock. The holders of approximately shares
of Common Stock are entitled to certain incidental and demand registration
rights with respect to such shares. By exercising their registration rights,
such holders could cause a large number of shares to be registered and sold
in the public market. Sales pursuant to Rule 144 or other exemptions from
registration, or pursuant to registration rights, may have an adverse effect
on the market price for the Common Stock and could impair the Company's
ability to raise capital through offerings of its equity securities. See
"Shares Eligible for Future Sale."
Anti-Takeover Effect of Certain Certificate of Incorporation, By-Law and
Statutory Provisions; Possible Issuance of Preferred Stock. The Company's
Certificate of Incorporation and By-Laws, as well as Delaware corporate law,
contain certain provisions that could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company. The Company intends to adopt
certain amendments to its Certificate of Incorporation and By-Laws prior to
consummation of the Offering which will, among other things, (i) divide the
Company's Board of Directors into three classes, which will serve for
staggered three-year terms, (ii) provide that
12
<PAGE>
only the Company's Board of Directors, its Chairman, or the President of the
Company may call special meetings of the stockholders and (iii) eliminate the
ability of the stockholders to take any action without a meeting. The By-Laws
also establish certain advance notice procedures for nomination of candidates
for election as directors and for stockholder proposals to be considered at
stockholders' meetings. These provisions could limit the price that certain
investors might be willing to pay in the future for shares of the Company's
Common Stock.
In addition, the Company intends to enter into a Rights Agreement (the
"Rights Agreement") prior to the consummation of the Offering pursuant to
which a preferred stock purchase right (collectively, the "Rights") is
attached to each share of Common Stock and will become exercisable under
certain specified circumstances involving the acquisition of or tender offer
for 15% or more of the issued and outstanding shares of Common Stock. The
issuance of the Rights will have certain anti-takeover effects by causing
substantial dilution to a person or group that attempts to acquire the
Company on terms not approved by the Company's Board of Directors. See
"Description of Capital Stock --Preferred Stock" and "--Anti-Takeover Effects
of Certain Provisions of Delaware Law and the Certificate of Incorporation
and By-Laws."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered by the Company pursuant to the Offering are estimated to be
$ ($ if the Underwriters' over-allotment option is exercised in
full), at an assumed offering price of $ per share after deducting the
estimated underwriting discounts and commissions and Offering expenses
payable by the Company. The principal purposes of the Offering are to
increase the Company's equity capital, to create a public market for the
Common Stock, to increase the visibility of the Company in the marketplace
and to facilitate future access by the Company to public equity markets. The
Company expects to use the net proceeds from the Offering for general
corporate purposes, including working capital. The Company may also use a
portion of the net proceeds to fund acquisitions of complementary businesses,
products or technologies. Although the Company may periodically review
potential acquisition opportunities, there are no current agreements with
respect to any such transactions. Pending such uses, the Company intends to
invest the net proceeds from the Offering in short-term, investment-grade,
interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company currently intends to retain future earnings to fund the
development and growth of its business. The payment of dividends in the
future, if any, will be at the discretion of the Board of Directors.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 (i) on a pro forma basis to give effect to (a) the
conversion of all outstanding shares of Series A Convertible Preferred Stock
and Series B Convertible Preferred Stock into shares of Common Stock, (b) the
conversion of all outstanding shares of Class A Common Stock, Class B Common
Stock and Class C Common Stock into shares of Common Stock, (c) the issuance
of shares of Common Stock to the Acquired Resellers and (d) the Non-Recurring
Charge (see Note 15 to the Consolidated Financial Statements) and (ii) pro
forma as adjusted to give effect to the sale of shares of Common Stock
offered hereby at an assumed initial public offering price of $ per share
and after deducting estimated underwriting discounts and commissions and
Offering expenses payable by the Company. This information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
--------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Long-term borrowings.................................................. $ 54 $
----------- -------------
Stockholders' equity:
Preferred Stock, $0.01 par value, 1,000,000 shares authorized, no
shares outstanding .................................................
Common Stock, $0.01 par value, shares authorized, pro forma and
pro forma as adjusted shares issued and outstanding (1) ............
Additional paid-in capital ...........................................
Accumulated deficit .................................................. (40,245)
----------- -------------
Total stockholders' equity (deficit) ................................ (5,508)
----------- -------------
Total capitalization ............................................... $ (5,454) $
=========== =============
</TABLE>
(1) Excludes (i) shares subject to options outstanding upon the
consummation of the Offering and (ii) additional shares
reserved for issuance pursuant to options available for grant under the
Company's Nonqualified Stock Option Plan. See "Management--Stock Option
Plan."
15
<PAGE>
DILUTION
As of December 31, 1997, the pro forma net tangible book value (deficit)
of the Company was $(6,146,000) or $ per share of Common Stock. Pro forma
net tangible book value per share is equal to the Company's pro forma total
tangible assets less pro forma total liabilities, divided by the total number
of shares of Common Stock outstanding. After giving effect to the sale by the
Company of the shares of Common Stock offered hereby at an assumed
initial public offering price of $ per share, and after deducting the
underwriting discounts and commissions and estimated offering expenses
payable by the Company, the pro forma net tangible book value of the Company
as of December 31, 1997 would have been $ million or $ per share of
Common Stock. This represents an immediate increase in pro forma net tangible
book value of $ per share to existing stockholders and an immediate
dilution of $ per share to new stockholders. The following table
illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share ....................... $ $
Pro forma net tangible book deficit per share before the Offering ....
Increase per share attributable to new investors ......................
Pro forma net tangible book value per share after the Offering .......
------- -------
Dilution per share to new investors ................................... $ $
======= =======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1997, the difference between the existing stockholders and new stockholders
with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price
paid per share by existing stockholders and by new stockholders:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C> <C>
Existing stockholders .... % $ % $
New stockholders ..........
---------- ----------- ---------- ----------- -----------------
Total..................... % $ % $
========== =========== ========== =========== =================
</TABLE>
The foregoing tables and calculations assume no exercise of outstanding
options. At December 31, 1997, there were shares subject to options
outstanding and additional shares reserved for issuance pursuant to
options available for grant under the Company's Nonqualified Stock Option
Plan. See "Management--Stock Option Plan."
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to and should be read in conjunction with "Management's Discussion
and Analysis of Financial Conditions and Results of Operations" and the
Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus. The Statement of Operations Data presented
below for each of the years in the three-year period ended December 31, 1997
and the Balance Sheet Data as of December 31, 1996 and 1997 have been derived
from the Company's Financial Statements included elsewhere in this Prospectus
which have been audited by Arthur Andersen LLP whose report with respect
thereto appears elsewhere in this Prospectus. The Balance Sheet Data as of
December 31, 1995 has been derived from audited financial statements not
included herein. The Balance Sheet Data as of December 31, 1993 and 1994 and
the Statement of Operations Data for the years ended December 31, 1993 and
1994 have been derived from the unaudited financial statements of the
Company. In the opinion of management, the unaudited financial statements
include all adjustments (consisting only of normal and recurring adjustments)
necessary for a fair presentation of its financial position and the results
of operations for such periods. The pro forma financial data reflects the pro
forma results of the Company and the Acquired Resellers (The Ultimate
Software Group of the Carolinas, Inc., The Ultimate Software Group of
Virginia, Inc., Ultimate Investors Group, Inc., Ultimate Software Group of
New York/New England G.P. and The Ultimate Software Group of Northern
California, Inc.). These acquisitions were accounted for under the
poolings-of-interest method of accounting. The pro forma data is based upon
the Pro Forma Financial Statements and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
License .................... $ 426 $ 399 $ 1,022 $ 2,934 $ 6,057
Service .................... 280 262 747 2,989 6,903
Other ...................... 296 1,601 705 698 1,177
-------- -------- ---------- ----------- -----------
Total revenues ............ 1,002 2,262 2,474 6,621 14,137
-------- -------- ---------- ----------- -----------
Cost of revenues:
License .................... -- -- -- -- 195
Service .................... 103 299 1,079 4,039 7,255
Other ...................... 7 18 34 442 819
-------- -------- ---------- ----------- -----------
Total cost of revenues ... 110 317 1,113 4,481 8,269
-------- -------- ---------- ----------- -----------
Operating expenses:
Sales and marketing ........ 172 466 1,597 9,274 11,917
Research and development .. 629 914 2,591 3,360 4,837
General and administrative 440 1,191 992 2,471 3,123
Amortization of acquired
intangibles ............... -- -- 39 6,932 1,442
-------- -------- ---------- ----------- -----------
Total operating expenses . 1,241 2,571 5,219 22,037 21,319
-------- -------- ---------- ----------- -----------
Operating loss ............ (349) (626) (3,858) (19,897) (15,451)
Interest expense ............ (46) (33) (88) (161) (191)
Interest and other income .. -- -- -- 61 151
-------- -------- ---------- ----------- -----------
Net loss .................. $ (395) $ (659) $(3,946) $(19,997) $(15,491)
======== ======== ========== =========== ===========
Net loss per share basic and
diluted (2)..................
======== ======== ========== =========== ===========
Weighted average number of
shares outstanding (2) .....
======== ======== ========== =========== ===========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA(1)
------------------------------------
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
License .................... $ 1,929 $ 4,274 $ 7,233
Service .................... 1,344 4,251 9,080
Other ...................... 454 786 1,279
---------- ----------- -----------
Total revenues ............ 3,727 9,311 17,592
---------- ----------- -----------
Cost of revenues:
License .................... -- -- 195
Service .................... 1,794 5,388 8,539
Other ...................... 40 458 835
---------- ----------- -----------
Total cost of revenues ... 1,834 5,846 9,569
---------- ----------- -----------
Operating expenses:
Sales and marketing ........ 2,645 10,450 13,656
Research and development .. 2,591 3,360 4,837
General and administrative 1,268 3,007 4,148
Amortization of acquired
intangibles ............... 39 6,932 1,442
---------- ----------- -----------
Total operating expenses . 6,543 23,749 24,083
---------- ----------- -----------
Operating loss ............ (4,650) (20,284) (16,060)
Interest expense ............ (94) (178) (206)
Interest and other income .. 13 77 250
---------- ----------- -----------
Net loss .................. $(4,731) $(20,385) $(16,016)
========== =========== ===========
Net loss per share basic and
diluted (2)..................
========== =========== ===========
Weighted average number of
shares outstanding (2) .....
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF DECEMBER 31, 1997
------------------------------------------------------- --------------------------------
AS
1993 1994 1995 1996 1997 PRO FORMA(3) ADJUSTED(4)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ...... $218 $ 8 $ 83 $ 770 $ 2,018 $ 3,270
Working capital (deficit) ..... 588 421 (1,439) (3,952) (4,916) (6,221)
Total assets ................... 672 1,029 1,697 6,176 9,621 12,439
Long-term borrowings ........... 150 100 100 217 54 54
Stockholders' equity (deficit) 507 447 (972) (2,288) (4,300) (5,508)
</TABLE>
(1) Pro forma consolidated financial data gives effect to the acquisitions
of the Acquired Resellers in February and March 1998, accounted for
under the poolings-of-interest method of accounting. See Pro Forma
Financial Statements and the related Notes thereto included elsewhere
in this Prospectus.
(2) See Note 2 to the Consolidated Financial Statements for information
regarding the computation of net loss per share.
(3) Pro forma to give effect to (i) the conversion of all outstanding
shares of Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock into shares of Common Stock, (ii) the conversion of all
outstanding shares of Class A Common Stock, Class B Common Stock and
Class C Common Stock into shares of Common Stock, (iii) the issuance of
shares of Common Stock to the Acquired Resellers and (iv) the
Non-Recurring Charge. See Note 15 to the Consolidated Financial
Statements.
(4) Pro forma as adjusted to give effect to the sale of shares of
Common Stock offered hereby at an assumed initial public offering price
of $ per share, after deducting estimated underwriting discounts
and commissions and Offering expenses payable by the Company. See "Use
of Proceeds" and "Capitalization."
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from
those contained in the forward-looking statements. Factors that may cause
such differences include, but are not limited to, those discussed below as
well as those discussed elsewhere in this Prospectus.
OVERVIEW
The Company designs, markets, implements and supports technologically
advanced, cross-industry HRMS/payroll software solutions. The Company's
solutions are marketed primarily to middle-market organizations, with 300 to
15,000 employees, but are scaleable to address the needs of much larger
organizations. The Company's core product, UltiPro for Windows, automates an
organization's HRMS/ payroll function and is an enabling tool in the
cost-efficient management of the employee life cycle, from inception of
employment through retirement. As part of its comprehensive HRMS/payroll
solution, the Company provides high quality implementation, training and
ongoing support services to its customers. The Company has customers in a
wide variety of industries, including: manufacturing, retail, healthcare,
technology, finance, insurance, real estate, transportation, communications,
services and sports.
The Company was originally organized in August 1990 as The Ultimate
Software Group, Ltd., a Florida limited partnership (the "Partnership"). The
Company was incorporated in April 1996, at the direction of the Partnership,
for the purpose of acquiring and operating the existing business of the
Partnership. The Company began as a reseller of private label PC-based
payroll software products targeted to organizations with under 200 employees.
In early 1992, the Company began to develop a new product that would offer
greater flexibility, more features, more applications and the ability to
handle the needs of larger organizations. In July 1993, the Company launched
its first proprietary product, ULTIPRO for LAN, a DOS-based software solution
for local area network personal computers. In 1996, in anticipation of the
general market shift to Windows and client/server applications, the Company
began developing a client/server HRMS/payroll software solution. In June
1997, the Company launched UltiPro for Windows, its 32-bit, object-oriented
HRMS/payroll solution for middle-market organizations. As a result, in 1996
and 1997, significant investments were made in research and development,
sales and marketing and professional services to develop, sell and support
the Company's client/server solution. Since the release of UltiPro for
Windows, the principal source of the Company's license revenues has shifted
from its DOS-based product to its client/server product. UltiPro for Windows
has higher license fees, service fees and gross margins than the Company's
DOS-based product. While the Company continues to support its DOS-based
product, it no longer actively markets this product.
Prior to 1995, the Company sold its products solely through a network of
third-party resellers ("Resellers"). In exchange for certain fees, the
Resellers were granted exclusive rights to sell the Company's products in
certain geographic areas. In mid-1995, in order to gain greater control over
its distribution channels, the Company shifted its distribution strategy from
its network of Resellers to a direct sales force. As a result, in 1995, the
Company acquired the businesses of three Resellers and in April 1996,
acquired the businesses of nine additional Resellers. These acquisitions were
accounted for under the purchase method of accounting and resulted in the
Company recording approximately $8.8 million of goodwill. In February and
March 1998, the Company acquired the businesses of the Acquired Resellers,
which were the only remaining Resellers. These acquisitions were accounted
for under the poolings-of-interest method of accounting. On a pro forma
basis, the Acquired Resellers contributed $3.5 million, or 37.2%, and $4.5
million, or 25.8%, of the Company's total revenues for 1996 and 1997,
respectively.
The Company's revenues are derived from two principal sources: software
licenses ("license revenues") and fees for maintenance, implementation,
training and consulting services (collectively, "service revenues"). License
revenues include (i) revenues from noncancellable software license agreements
entered into between the Company and its customers with respect to its
products and (ii) in 1995 and part of 1996, revenues from noncancellable
software license agreements entered into between the Company and its
Resellers. License revenues are generally recognized upon the delivery of the
related
18
<PAGE>
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. As of February 28, 1998, the
Company had licensed its DOS-based product, ULTIPRO for LAN, to approximately
750 organizations and its client/server solution, UltiPro for Windows, to
approximately 85 organizations.
Service revenues are recognized as services are performed and delivered.
Included in service revenues are maintenance fees for maintaining, supporting
and providing periodic updates, which are recognized ratably over the service
period, generally one year. Upon delivery of the software, amounts included
in the contract relating to unperformed service revenues are recorded as
deferred revenue. All of the Company's customers that purchased software
during 1996 and 1997 purchased maintenance and support contracts. During the
years ended December 31, 1996 and 1997, average annual renewal rates for
existing maintenance and support customers exceeded 95%. Maintenance and
support contracts are generally priced as a percentage of the initial license
fee for the underlying products.
The Company employs a multi-channel sales and marketing strategy utilizing
a direct sales organization, strategic marketing alliances, and a network of
national, regional and local implementation partners. Sales through direct
channels generally have higher gross margins than sales through indirect
channels, although these higher margins may be offset, in whole or in part,
by higher sales and marketing expense.
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, the Company has evaluated the establishment of technological
feasibility of its products during the development phase. The time period
during which costs could be capitalized from the point of reaching
technological feasibility until the time of general product release is very
short, and, consequently, the amounts that could be capitalized are not
material to the Company's financial position or operating results.
RESULTS OF OPERATIONS
The following table sets forth the Statement of Operations Data of the
Company, both on a historical and pro forma basis, expressed as a percentage
of total revenues, as applicable, for the periods indicated.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1995 1996 1997 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License ..................... 41.3% 44.3% 42.8% 51.8% 45.9% 41.1%
Service ..................... 30.2 45.1 48.8 36.0 45.7 51.6
Other ....................... 28.5 10.6 8.4 12.2 8.4 7.3
---------- ---------- ---------- ---------- ---------- --------
Total revenues ............. 100.0 100.0 100.0 100.0 100.0 100.0
---------- ---------- ---------- ---------- ---------- --------
Cost of revenues:
License ..................... -- -- 1.4 -- -- 1.2
Service ..................... 43.6 61.0 51.3 48.1 57.9 48.5
Other ....................... 1.4 6.7 5.8 1.1 4.9 4.7
---------- ---------- ---------- ---------- ---------- --------
Total cost of revenues .... 45.0 67.7 58.5 49.2 62.8 54.4
---------- ---------- ---------- ---------- ---------- --------
Operating expenses:
Sales and marketing ......... 64.6 140.1 84.3 71.0 112.2 77.6
Research and development ... 104.7 50.7 34.2 69.5 36.1 27.5
General and administrative . 40.1 37.3 22.1 34.1 32.3 23.6
Amortization of acquired
intangibles ................ 1.6 104.7 10.2 1.0 74.4 8.2
---------- ---------- ---------- ---------- ---------- --------
Total operating expenses .. 211.0 332.8 150.8 175.6 255.0 136.9
---------- ---------- ---------- ---------- ---------- --------
Operating loss ............. (156.0) (300.5) (109.3) (124.8) (217.8) (91.3)
Interest expense ............. (3.5) (2.4) (1.4) (2.5) (1.9) (1.1)
Interest and other income ... 0.0 0.9 1.1 0.4 0.8 1.4
---------- ---------- ---------- ---------- ---------- --------
Net loss ................... (159.5)% (302.0)% (109.6)% (126.9)% (218.9)% (91.0)%
========== ========== ========== ========== ========== ========
</TABLE>
19
<PAGE>
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues. Total revenues, consisting of license revenues, service revenues
and other revenues, increased 113.5% from $6.6 million for the year ended
December 31, 1996 to $14.1 million for the year ended December 31, 1997. On a
pro forma basis, total revenues increased 88.9% from $9.3 million for the
year ended December 31, 1996 to $17.6 million for the year ended December 31,
1997.
License revenues increased 106.5% from $2.9 million for the year ended
December 31, 1996 to $6.1 million for the year ended December 31, 1997. On a
pro forma basis, license revenues increased 69.2% from $4.3 million for the
year ended December 31, 1996 to $7.2 million for the year ended December 31,
1997. This increase was primarily attributable to the introduction and sale
of UltiPro for Windows, which has significantly higher license fees than
ULTIPRO for LAN. The increase in UltiPro for Windows license revenues was
offset, in part, by a decrease in license revenues attributable to ULTIPRO
for LAN resulting from a decrease in the sales and marketing of the Company's
DOS-based product. On a historical and pro forma basis, UltiPro for Windows
accounted for 58.6% and 49.1%, respectively, of license revenues for the year
ended December 31, 1997.
Service revenues increased 131.0% from $3.0 million for the year ended
December 31, 1996 to $6.9 million for the year ended December 31, 1997. On a
pro forma basis, service revenues increased 113.6% from $4.3 million for the
year ended December 31, 1996 to $9.1 million for the year ended December 31,
1997. The increase in service revenues was primarily attributable to services
related to the implementation of UltiPro for Windows and increased
implementations of the Company's ULTIPRO for LAN product licensed in the
fiscal year ended December 31, 1996. UltiPro for Windows has significantly
higher service revenue per implementation than ULTIPRO for LAN. In addition,
maintenance revenues increased as a result of an increase in the installed
base of UltiPro for Windows and ULTIPRO for LAN customers.
Other revenues consist of revenues generated primarily from sales of
payroll-related forms. Other revenues increased 68.5% from $0.7 million for
the year ended December 31, 1996 to $1.2 million for the year ended December
31, 1997. On a pro forma basis, other revenues increased 62.7% from $0.8
million for the year ended December 31, 1996 to $1.3 million for the year
ended December 31, 1997. The increase in other revenues was primarily
attributable to an increase in the Company's installed base of customers.
Cost of revenues. The cost of revenues consists of cost of license
revenues, cost of service revenues and cost of other revenues. Cost of
license revenues consists of fees payable to a third party for software
products distributed by the Company. Cost of service revenues consists of
costs to provide consulting, implementation, maintenance, technical support
and training to the Company's customers and the cost of providing periodic
updates. Cost of other revenues consist of costs related to sales of
payroll-related forms.
Cost of license revenues increased from zero for the year ended December
31, 1996 to $0.2 million for the year ended December 31, 1997 on both a
historical and pro forma basis. The increase was primarily attributable to
fees payable to a third party for software products distributed by the
Company, which commenced with the launch of UltiPro for Windows.
Cost of service revenues increased by 79.6% from $4.0 million for the year
ended December 31, 1996 to $7.3 million for the year ended December 31, 1997.
On a pro forma basis, cost of service revenues increased by 58.5% from $5.4
million for the year ended December 31, 1996 to $8.5 million for the year
ended December 31, 1997. This increase was primarily attributable to hiring
of additional implementation services personnel, as well as costs associated
with the utilization of third-party implementation partners. Cost of service
revenues decreased as a percentage of service revenues from 135.1% to 105.1%
on a historical basis and 126.7% to 94.0% on a pro forma basis for the years
ended December 31, 1996 and 1997, respectively. This decrease was primarily
due to an increase in service revenues.
Cost of other revenues increased by 85.4% from $0.4 million for the year
ended December 31, 1996 to $0.8 million for the year ended December 31, 1997.
On a pro forma basis, cost of other revenues increased by 82.3% from $0.5
million for the year ended December 31, 1996 to $0.8 million for the year
ended December 31, 1997. This increase was primarily attributable to an
increase in the Company's
20
<PAGE>
installed base of customers. Cost of other revenues increased as a percentage
of other revenues from 63.3% to 69.6% on a historical basis and from 58.3% to
65.3% on a pro forma basis for the years ended December 31, 1996 and December
31, 1997, respectively. This increase was a result of increased product
costs.
Sales and marketing. Sales and marketing expenses consist primarily of
salaries, sales commissions, travel and promotional expenses, and facility
and communication costs for direct sales offices. Sales and marketing
expenses increased by 28.5% from $9.3 million for the year ended December 31,
1996 to $11.9 million for the year ended December 31, 1997. On a pro forma
basis, sales and marketing expenses increased by 30.7% from $10.5 million for
the year ended December 31, 1996 to $13.7 million for the year ended December
31, 1997. This increase was primarily attributable to higher costs associated
with an increase in sales and marketing personnel, including salary and
commission expenses, and increased marketing activities relating to the
introduction of UltiPro for Windows. Sales and marketing expenses as a
percentage of total revenues decreased from 140.1% to 84.3% on a historical
basis and from 112.2% to 77.6% on a pro forma basis, for the years ended
December 31, 1996 and 1997, respectively. This decrease was primarily due to
an increase in total revenues.
Research and development. Research and development expenses primarily
consist of software development personnel costs. Research and development
expenses increased by 44.0% from $3.4 million for the year ended December 31,
1996 to $4.8 million for the year ended December 31, 1997 on both a
historical and pro forma basis. This increase was primarily attributable to
the hiring of additional programmers and engineers for the development and
enhancement of UltiPro for Windows and for the development of new
HRMS/payroll related modules. Research and development expenses as a
percentage of total revenues decreased from 50.7% to 34.2% on a historical
basis and from 36.1% to 27.5% on a pro forma basis, for the years ended
December 31, 1996 and 1997, respectively. This decrease was primarily due to
an increase in total revenues.
General and administrative. General and administrative expenses 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 26.4% from $2.5 million for
the year ended December 31, 1996 to $3.1 million for the year ended December
31, 1997. On a pro forma basis, general and administrative expenses increased
by 37.9% from $3.0 million for the year ended December 31, 1996 to $4.1
million for the year ended December 31, 1997. This increase was due to an
increase in the provision for doubtful accounts directly related to the
increase in the Company's customer base, an increase in personnel and
overhead necessary to manage and support the growth of the Company and an
increase in professional fees due to the increased use of professional
service providers. General and administrative expenses as a percentage of
total revenues decreased from 37.3% to 22.1% on a historical basis and from
32.3% to 23.6% on a pro forma basis, for the years ended December 31, 1996
and 1997, respectively. This decrease was due to an increase in total
revenues.
Amortization of acquired intangibles. Amortization of acquired intangibles
consists of goodwill amortization associated with the acquisition of nine
Resellers in April 1996. Goodwill amortization decreased 79.2% from $6.9
million for the year ended December 31, 1996 to $1.4 million for the year
ended December 31, 1997 on both a historical and pro forma basis. Such
decrease was attributable to the Company's recording of additional
amortization of $0.3 million in 1997 compared to additional amortization of
$5.1 million as a result of the operating results and projected future cash
flows of the nine Resellers acquired in 1996 indicating an impairment of the
related intangibles acquired. Such change was made in accordance with the
provisions of SFAS 121, Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed Of. The Company had amortized $8.4
million of goodwill as of December 31, 1997. Goodwill in the amount of $0.6
million remained on the balance sheet as of December 31 1997, and will be
amortized over the subsequent ten months.
Provision for income taxes (benefit). No provision or benefit for federal,
state or foreign income taxes was made for the years ended December 31, 1996
or December 31, 1997 due to the operating losses incurred in the respective
periods. The Company has reported only tax losses to date and consequently
has approximately $21.5 million of net operating loss carryforwards, which
expire at various times through
21
<PAGE>
the year 2012, available to offset future taxable income. The timing of
attaining profitability may result in the expiration of net operating loss
carryforwards before utilization. Additionally, utilization of such net
operating losses may be limited as a result of cumulative ownership changes
in the Company's equity instruments. The Company's deferred tax assets at
December 31, 1997 were $8.7 million, consisting primarily of net operating
loss carryforwards. The Company's benefit of deferred tax assets has been
fully reserved as of December 31, 1997 as the realization of deferred taxes
is dependent on future events and earnings, if any, the timing and extent of
which are uncertain.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues. Total revenues increased 167.6% from $2.5 million for the year
ended December 31, 1995 to $6.6 million for the year ended December 31, 1996.
On a pro forma basis, total revenues increased 149.8% from $3.7 million for
the year ended December 31, 1995 to $9.3 million for the year ended December
31, 1996.
License revenues increased 187.2% from $1.0 million for the year ended
December 31, 1995 to $2.9 million for the year ended December 31, 1996. On a
pro forma basis, license revenues increased 121.6% from $1.9 million for the
year ended December 31, 1995 to $4.3 million for the year ended December 31,
1996. This increase was primarily due to an increase in demand for and sales
of the Company's ULTIPRO for LAN product.
Service revenues increased 300.0% from $0.7 million for the year ended
December 31, 1995 to $3.0 million for the year ended December 31, 1996. On a
pro forma basis, service revenues increased 216.4% from $1.3 million for the
year ended December 31, 1995 to $4.3 million for the year ended December 31,
1996. This increase was primarily attributable to services related to
increased implementations of the Company's ULTIPRO for LAN product and an
increase in the Company's installed base of customers.
Other revenues consist of revenues generated from sales of payroll-related
forms and fees received in connection with the grant by the Company of
exclusive rights to sell the Company's products in certain geographic areas.
Other revenues were $0.7 million for the years ended December 31, 1995 and
1996. On a pro forma basis, other revenues increased by 73.1% from $0.5
million for the year ended December 31, 1995 to $0.8 million for the year
ended December 31, 1996. In 1995, $0.3 million of fees paid to the Company
for geographic rights by Resellers were eliminated upon consolidation. On a
pro forma basis, the increase in other revenues was primarily attributable to
an increase in the Company's installed base of customers.
Cost of revenues. There was no cost of license revenues for the years
ended December 31, 1995 and December 31, 1996.
Cost of service revenues increased by 274.2% from $1.1 million for the
year ended December 31, 1995 to $4.0 million for the year ended December 31,
1996. On a pro forma basis, cost of service revenues increased by 200.3% from
$1.8 million for the year ended December 31, 1995 to $5.4 million for the
year ended December 31, 1996. This increase was primarily attributable to
hiring of additional implementation services personnel. Cost of service
revenues decreased as a percentage of service revenues from 144.4% to 135.1%
on a historical basis and 133.5% to 126.7% on a pro forma basis for the years
ended December 31, 1995 and 1996, respectively. This decrease was due to an
increase in service revenues.
Cost of other revenues increased from $34,000 for the year ended December
31, 1995 to $0.4 million for the year ended December 31, 1996. On a pro forma
basis, cost of other revenues increased from $40,000 for the year ended
December 31, 1995 to $0.5 million for the year ended December 31, 1996. Cost
of other revenues increased as a percentage of other revenues from 4.8% to
63.3% on a historical basis and 8.8% to 58.3% on a pro forma basis. This
increase was due to an increase in product costs.
Sales and marketing. Sales and marketing expenses increased by 480.7% from
$1.6 million for the year ended December 31, 1995 to $9.3 million for the
year ended December 31, 1996. On a pro forma basis, sales and marketing
increased by 295.1% from $2.6 million for the year ended December 31, 1995 to
$10.5 million for the year ended December 31, 1996. This increase was
primarily attributable to an
22
<PAGE>
increase in the Company's direct sales force, an increase in the number of
sales offices in 1996, an increase in commission expenses and increased
marketing activities. Sales and marketing expenses as a percentage of total
revenues increased from 64.6% to 140.1% on a historical basis and from 71.0%
to 112.2% on a pro forma basis, for the years ended December 31, 1995 and
1996, respectively. This increase was primarily due to a greater increase
sales and marketing expenses in relation to the increase in total revenues.
Research and development. Research and development expenses increased by
29.7% from $2.6 million for the year ended December 31, 1995 to $3.4 million
for the year ended December 31, 1996 on both a historical and pro forma
basis. This increase was primarily attributable to the hiring of additional
programmers and engineers for the development of UltiPro for Windows and for
continued enhancements to ULTIPRO for LAN. Research and development expenses
as a percentage of total revenues decreased from 104.7% to 50.7% on a
historical basis and from 69.5% to 36.1% on a pro forma basis, for the years
ended December 31, 1995 and 1996, respectively. This decrease was due to an
increase in total revenues.
General and administrative. General and administrative expenses increased
by 149.0% from $1.0 million for the year ended December 31, 1995 to $2.5
million for the year ended December 31, 1996. On a pro forma basis, general
and administrative expenses increased by 137.1% from $1.3 million for the
year ended December 31, 1995 to $3.0 million for the year ended December 31,
1996. This increase was primarily due to an increase in the provision for
doubtful accounts directly related to the increase in the customer base, an
increase in personnel and overhead necessary to manage and support the growth
of the Company, and an increase in professional fees due to the increased use
of professional service providers. General and administrative expenses as a
percentage of total revenues decreased from 40.1% to 37.3% on a historical
basis and decreased from 34.1% to 32.3% on a pro forma basis, for the years
ended December 31, 1995 and 1996, respectively. This decrease was due to an
increase in total revenues.
Amortization of acquired intangibles. Goodwill amortization increased from
$39,000 for the year ended December 31, 1995 to $6.9 million for the year
ended December 31, 1996 on both a historical and pro forma basis. The Company
incurred goodwill as a result of the acquisition of nine Resellers in April
1996. In accordance with the provisions of SFAS 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of,
as of December 31, 1996, the Company determined based on the operating
results, as well as projected future cash flows, of the nine Resellers that
an impairment of acquired intangibles had occurred. Accordingly, the Company
charged $5.1 million to amortization to reduce acquired intangibles to their
estimated realizable value.
Provision for income taxes (benefit). No provision or benefit for federal,
state or foreign income taxes was made for the year ended December 31, 1996
due to operating losses incurred in the periods. As of December 31, 1996, the
Company had reported only tax losses to date and consequently had
approximately $8.6 million of net operating loss carryforwards, which expire
at various times through the year 2011, available to offset future taxable
income. The timing of attaining profitability may result in the expiration of
net operating loss carryforwards before utilization. Additionally,
utilization of such net operating losses may be limited as a result of
cumulative ownership changes in the Company's equity instruments. The
Company's deferred tax assets at December 31, 1996 were $3.9 million,
consisting primarily of net operating loss carryforwards. The Company's
benefit of deferred tax assets has been fully reserved as of December 31,
1996 as the realization of deferred taxes is dependent on future events and
earnings, if any, the timing and extent of which are uncertain. No provision
or benefit for federal, state or foreign income taxes was made for the year
ended December 31, 1995 and for the period ended April 1996 because the
Company operated as a partnership during those periods and, accordingly, the
partners were taxed individually on their share of partnership earnings.
23
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited proforma quarterly
results of operations for each of the quarters in the years ended December
31, 1996 and 1997. In management's opinion, this unaudited information has
been prepared on the same basis as the audited consolidated financial
statements and includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information for the
quarters presented, when read in conjunction with the Company's Consolidated
Financial Statements and Unaudited Pro Forma Financial Statements and Notes
thereto, included elsewhere in this Prospectus. The Company believes that
quarter-to-quarter comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future
performance.
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
License ................. $ 778 $ 682 $ 933 $ 1,881
Service ................. 549 694 1,191 1,817
Other ................... 119 219 183 265
---------- ---------- ----------- ----------
Total revenues ......... 1,446 1,595 2,307 3,963
---------- ---------- ----------- ----------
Cost of revenues:
License ................. -- -- -- --
Service ................. 626 1,286 1,653 1,823
Other ................... 50 105 93 210
---------- ---------- ----------- ----------
Total cost of revenues . 676 1,391 1,746 2,033
---------- ---------- ----------- ----------
Operating expenses:
Sales and marketing .... 884 2,582 3,278 3,706
Research and
development ............ 603 846 954 957
General and
administrative ......... 306 878 865 958
Amortization of
acquired intangibles .. 21 470 695 5,746
---------- ---------- ----------- ----------
Total operating
expenses ............. 1,814 4,776 5,792 11,367
---------- ---------- ----------- ----------
Operating loss ......... (1,044) (4,572) (5,231) (9,437)
Interest expense ......... (41) (35) (22) (80)
Interest and other
income................... 2 27 19 29
---------- ---------- ----------- ----------
Net loss ............... $(1,083) $(4,580) $(5,234) $(9,488)
========== ========== =========== ==========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
<S> <C> <C> <C> <C>
Revenues:
License ................. $ 818 $ 792 $ 709 $4,914
Service ................. 1,958 1,652 1,900 3,570
Other ................... 254 267 290 468
---------- ---------- ----------- ----------
Total revenues ......... 3,030 2,711 2,899 8,952
---------- ---------- ----------- ----------
Cost of revenues:
License ................. -- -- -- 195
Service ................. 1,961 1,877 2,139 2,562
Other ................... 184 152 174 325
---------- ---------- ----------- ----------
Total cost of revenues . 2,145 2,029 2,313 3,082
---------- ---------- ----------- ----------
Operating expenses:
Sales and marketing .... 3,394 3,413 3,345 3,504
Research and
development ............ 883 1,152 1,342 1,460
General and
administrative ......... 1,021 858 818 1,451
Amortization of
acquired intangibles .. 284 437 437 284
---------- ---------- ----------- ----------
Total operating
expenses ............. 5,582 5,860 5,942 6,699
---------- ---------- ----------- ----------
Operating loss ......... (4,697) (5,178) (5,356) (829)
Interest expense ......... (58) (64) (50) (34)
Interest and other
income................... 26 38 86 100
---------- ---------- ----------- ----------
Net loss ............... $(4,729) $(5,204) $(5,320) $ (763)
========== ========== =========== ==========
</TABLE>
24
<PAGE>
The following table sets forth unaudited pro forma quarterly results of
operations as a percentage of total revenues, as applicable, for each of the
quarters in the years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
<S> <C> <C> <C> <C>
Revenues:
License ................. 53.8% 42.8% 40.5% 47.4%
Service ................. 38.0 43.5 51.6 45.9
Other ................... 8.2 13.7 7.9 6.7
---------- ---------- ----------- ----------
Total revenues ......... 100.0 100.0 100.0 100.0
---------- ---------- ----------- ----------
Cost of revenues:
License ................. -- -- -- --
Service ................. 43.3 80.6 71.7 46.0
Other ................... 3.5 6.6 4.0 5.3
---------- ---------- ----------- ----------
Total cost of revenues . 46.8 87.2 75.7 51.3
---------- ---------- ----------- ----------
Operating expenses:
Sales and marketing .... 61.1 162.0 142.1 93.6
Research and development 41.7 53.0 41.3 24.1
General and
administrative ......... 21.2 55.0 37.5 24.1
Amortization of acquired
intangibles ............ 1.5 29.5 30.1 144.9
---------- ---------- ----------- ----------
Total operating
expenses ............. 125.5 299.5 251.0 286.7
---------- ---------- ----------- ----------
Operating loss ......... (72.3) (286.7) (226.7) (238.0)
Interest expense ......... (2.8) (2.2) (1.0) (2.0)
Interest and other
income................... 0.1 1.7 0.8 0.7
---------- ---------- ----------- ----------
Net loss ............... (75.0)% (287.2)% (226.9)% (239.3)%
========== ========== =========== ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
<S> <C> <C> <C> <C>
Revenues:
License ................. 27.0% 29.2% 24.5% 54.9%
Service ................. 64.6 60.9 65.5 39.9
Other ................... 8.4 9.9 10.0 5.2
---------- ---------- ----------- ----------
Total revenues ......... 100.0 100.0 100.0 100.0
---------- ---------- ----------- ----------
Cost of revenues:
License ................. -- -- -- 2.2
Service ................. 64.7 69.2 73.8 28.6
Other ................... 6.1 5.6 6.0 3.6
---------- ---------- ----------- ----------
Total cost of revenues . 70.8 74.8 79.8 34.4
---------- ---------- ----------- ----------
Operating expenses:
Sales and marketing .... 112.0 125.9 115.4 39.1
Research and development 29.1 42.5 46.3 16.3
General and
administrative ......... 33.7 31.6 28.2 16.2
Amortization of acquired
intangibles ............ 9.4 16.2 15.1 3.2
---------- ---------- ----------- ----------
Total operating
expenses ............. 184.2 216.2 205.0 74.8
---------- ---------- ----------- ----------
Operating loss ......... (155.0) (191.0) (184.8) (9.2)
Interest expense ......... (1.9) (2.4) (1.7) (0.4)
Interest and other
income................... 0.8 1.4 3.0 1.1
---------- ---------- ----------- ----------
Net loss ............... (156.1)% (192.0)% (183.5)% (8.5)%
========== ========== =========== ==========
</TABLE>
The Company has experienced, and may experience in the future, significant
seasonality in its business, and the Company's business, operating results
and financial condition may be affected by such trends in the future.
Revenues have historically increased at higher rates in the fourth quarter of
the year and at lower rates in the next succeeding quarter, which the Company
believes is due to a number of factors, including the Company's quota-based
compensation arrangements, typical of those used in software companies, and
year-end budgetary pressures on the Company's customers. The Company believes
that this seasonal trend may continue for the foreseeable future.
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter
to quarter in the future. Specifically, the Company experienced a significant
increase in license revenues in the quarter ended December 31, 1997 compared
to the previously ended quarter. The Company believes that this increase was
primarily due to (i) the introduction and sale of UltiPro for Windows which
has a significantly higher license fee than ULTIPRO for LAN and (ii) the
recognition of license revenues in the quarter ended December 31, 1997 for
products licensed during the previous periods for which significant vendor
obligations remained and were subsequently satisfied in the quarter ended
December 31, 1997. Such fluctuations may result in volatility in the price of
the Company's Common Stock. In the future, the Company's operating results
may fluctuate as a result of a number of factors, including increased
expenses, timing of product releases, increased competition, variations in
the mix of revenues, announcements of new products by the Company or its
competitors and capital spending patterns of the Company's customers. The
Company establishes its expenditure levels based upon its expectations as to
future revenues, and, if revenue levels
25
<PAGE>
are below expectations, expenses can be disproportionately high. As a result,
a drop in near term demand for the Company's products could significantly
affect both revenues and profits in any quarter. As a result of these
factors, there can be no assurance that the Company will be able to establish
or, if established, maintain profitability on a quarterly basis.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations primarily through
the sale of private equity securities and, to a lesser extent, equipment
financing and borrowing arrangements.
As of December 31, 1997, on a historical basis the Company had $2.0
million in cash and cash equivalents, an increase of $1.2 million from
December 31, 1996. The Company's working capital deficit at December 31, 1996
was $4.0 million, compared to a deficit of $4.9 million at December 31, 1997.
Excluding customer deposits and deferred revenue of $2.3 million and $6.6
million at December 31, 1996 and 1997, respectively, the Company would have
had a working capital deficit of $1.7 million and a working capital balance
of $1.7 million at December 31, 1996 and 1997, respectively.
On a historical basis, the Company's operating activities used $3.4
million, $10.2 million and $8.9 million for the years ended December 31,
1995, 1996 and 1997, respectively, principally for sales and marketing and
research and development. On a historical basis, investing activities,
consisting of capital expenditures (primarily computer equipment) provided
$0.1 million and used $0.5 million and $1.4 million for the years ended
December 31, 1995, 1996 and 1997, respectively. At February 28, 1998, the
Company had no material commitments for capital expenditures. On a historical
basis, financing activities generated $3.3 million, $11.4 million and $11.5
million for the years ended December 31, 1995, 1996 and 1997, respectively.
Such cash was primarily attributable to proceeds from private placements of
the Company's stock and from borrowings.
The Company has a working capital revolving line of credit with a bank,
which is secured by the Company's accounts receivable and bears interest at a
rate equal to LIBOR plus 4.875% per annum. The amount available under this
facility is limited to the lesser of 80% of the Company's eligible accounts
receivable, as defined, or $4.0 million. The facility will expire on October
30, 1998. At February 28, 1998, $1.3 million was outstanding under this line
of credit.
The Company believes that cash and cash equivalents, net proceeds from the
Offering, cash from operations, and available borrowings under the line of
credit will be sufficient to fund its operations for at least the next twelve
months.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards Number 128, Earnings per Share
("SFAS 128"), which changes the method of calculating earnings per share.
SFAS 128 requires the presentation of "basic" earnings per share and
"diluted" earnings per share on the face of the income statement. Basic
earnings per share is computed by dividing the net income available to common
shareholders by the weighted average shares of outstanding common stock. The
calculation of diluted earnings per share is similar to basic earnings per
share except that the denominator includes dilutive common stock equivalents
such as stock options and warrants. The statement is effective for financial
statements for periods ending after December 15, 1997 and has been adopted by
the Company in the quarter ended December 31, 1997.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountings issued Statement of
Position 97-2, Software Revenue Recognition ("SOP 97-2"). SOP 97-2 requires
companies to defer revenue and profit recognition if four required criteria
of a sale are not met. In addition, SOP 97-2 requires that revenue be
allocated to multiple element arrangements. SOP 97-2 is effective for all
transactions entered into in fiscal years beginning after December 15, 1997.
The Company has adopted the provisions of SOP 97-2 effective December 31,
1997 and such adoption did not have a material impact on the Company's
business, operating results or financial condition.
26
<PAGE>
In June 1997, the FASB issued Statements of Financial Accounting Standards
Number 130, Comprehensive Income ("SFAS 130"), and Number 131, Disclosures
about Segments of an Enterprise ("SFAS 131"). The Company is required to
adopt these statements in 1998. SFAS 130 establishes standards for reporting
comprehensive income and SFAS 131 establishes standards for reporting
information about operating segments. Management does not believe that the
adoption of SFAS 130 and 131 will have a significant impact on the Company's
financial statements or related disclosures.
THE YEAR 2000 ISSUE
The Company does not believe that it has material exposure to the Year
2000 issue with respect to its own information systems since its existing
systems correctly define the year 2000. Although the Company believes that
the information systems of its major vendors (insofar as they relate to the
Company's business) comply with Year 2000 requirements, there can be no
assurance that the Year 2000 issue will not affect the information systems of
the Company's major vendors as they relate to the Company's business, or that
any such impact of a major vendor's information system would not have a
material adverse effect on the Company.
27
<PAGE>
BUSINESS
The Company designs, markets, implements and supports technologically
advanced, cross-industry human resource management and payroll software
solutions. The Company's solutions are marketed primarily to middle-market
organizations having 300 to 15,000 employees, but are scaleable to address
the needs of much larger organizations. The Company's products automate an
organization's HRMS/payroll function and are enabling tools in the
cost-efficient management of the employee life cycle, from inception of
employment through retirement. The Company believes its most recent product,
UltiPro for Windows, introduced in June 1997, is the first 32-bit,
object-oriented HRMS/payroll software solution which takes advantage of
Microsoft SQL Server and Microsoft NT technologies. The Company believes that
UltiPro for Windows' distributed, object-oriented architecture provides
significant advantages over other HRMS/payroll software products, including
greater scalability and transaction throughput, reduced total cost of
ownership and ease of implementation, customization and use. UltiPro for
Windows is designed to support new technologies as they emerge, including the
Internet and corporate intranets, and to be readily integrated with other
applications. As part of its comprehensive HRMS/payroll solution, the Company
provides high quality implementation, training and ongoing support services
to its customers. In December 1997, Human Resource Executive, a leading human
resource industry publication, selected UltiPro for Windows as the only
HRMS/payroll software product to be included as one of the Top Ten HR
Products of the Year.
The Company reaches its customer base and target market through its direct
sales force and a network of national, regional and local strategic partners.
As of February 28, 1998, the Company had licensed its earlier DOS-based
product, ULTIPRO for LAN, to approximately 750 organizations and its UltiPro
for Windows solution to approximately 85 organizations. The Company's
customers operate in a wide variety of industries, including manufacturing,
retail, healthcare, technology, finance, insurance, real estate,
transportation, communications, services and sports. The Company's customers
include: Bill Heard Enterprises, Inc., Callaway Gardens Resorts, Inc.,
Discovery Zone, Inc., Duro Bag Manufacturing Company, First American
Corporation, The Florida Marlins Baseball Club, Ingram Entertainment, Inc.,
National Realty Trust (Coldwell Banker), Telemundo Group, Inc., United States
Filter Corporation and Winn Dixie Stores, Inc.
INDUSTRY OVERVIEW
Increased competitive pressures and rapidly changing market conditions are
continually challenging organizations of all sizes to enhance profitability
by improving operating efficiencies and implementing better cost controls.
Because human resource management and payroll processing are core functions
that require a significant allocation of resources, the HRMS/payroll
functions have increasingly become mission-critical within many
organizations. As the work force has become more mobile and geographically
dispersed, management of HRMS/payroll functions has increased in complexity
and requires greater flexibility, accuracy, accountability and security
controls. In addition, multiple tax jurisdictions, intricate corporate
structures and the variety of benefit plans afforded to employees further
compound the complexity of HRMS/payroll functions. As a result, managing
administrative details such as tracking employee benefits, updating employee
files and incorporating payroll taxes can become increasingly burdensome,
leading to inefficiencies, inaccuracies and higher costs. Effective
management of HRMS/ payroll functions requires highly specialized expertise
and the ability to remain abreast of frequently changing regulatory
requirements such as federal, state and local tax withholding regulations,
equal employment opportunity laws and other government regulations, including
the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), the
Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and the
Occupational Safety and Health Act of 1970 ("OSHA"). More recently,
organizations have actively sought to improve employee morale and retention
by empowering their employees through the provision of electronic access to
human resource benefits and payroll information.
Traditionally, many organizations have utilized third-party outsourcing
vendors in an attempt to address the increasingly high costs associated with
the management of HRMS/payroll functions. According to Business
Communications Company, Inc., a market research company, the market for
third-party HRMS/payroll outsourcing was approximately $9.8 billion in 1996.
In theory, the advantage of
28
<PAGE>
outsourcing lies in the belief that an organization can focus on its core
competencies and rely upon a third-party vendor to stay abreast of frequently
changing regulatory requirements and to manage HRMS/payroll functions cost
effectively. In practice, however, outsourcing can be an inflexible and
expensive alternative, particularly for middle-market organizations, because
the organization gives up control over critical processes, such as scheduling
pay cycles and reporting, which can result in greater inefficiency and
insufficient data for decision-making. Furthermore, certain features and
functional requirements, such as timely printing of off-cycle checks to
correct errors or meet unexpected demand, are limited due to the
technological restraints and generic nature of the outsourcing process.
Moreover, use of third-party outsourcing vendors for payroll processing
limits an organization's ability to achieve operational efficiencies by
integrating the information common to both human resources management and
payroll processing. Without such integration, organizations are required to
enter information twice, thereby increasing the likelihood of mistakes and
the costs associated with maintaining duplicate records. For example, when
changes are made to an employee's benefit plans in a human resource system,
the changes are not automatically translated into corresponding adjustments
in the payroll processing system.
As an alternative to outsourcing, many organizations have historically
automated their HRMS/ payroll functions by developing in-house legacy systems
to address their needs. However, because of the use of proprietary
programming languages to write legacy applications, such in-house
HRMS/payroll systems are typically cumbersome, time consuming to operate and
expensive to implement, customize, update and support. Additionally, many
legacy systems use proprietary operating and database management systems,
thereby reducing compatibility with other information systems used within an
organization. As a result, these legacy systems have certain utility
constraints, particularly for middle-market organizations that usually do not
have sufficient information technology resources necessary to operate, manage
and enhance such systems. Moreover, the failure of many legacy systems to
comply with Year 2000 requirements has further exacerbated the limitations of
such systems and has caused organizations to seek alternative solutions.
With the advent of client/server technology as an alternative to in-house
legacy systems and the greater availability of affordable computing
solutions, many middle-market organizations are increasingly seeking to
automate and streamline the mission-critical processes associated with
HRMS/payroll functions. According to International Data Corporation ("IDC"),
a market research company, the United States market for HRMS/payroll software
licenses, totaled $1.1 billion in 1996 and is projected to grow to $2.9
billion by the year 2001, representing a compound annual growth rate of
21.4%. IDC further estimates that the worldwide market for HRMS/payroll
software licenses will experience the same rate of growth, moving from $1.6
billion in 1996 to $4.2 billion by 2001. The Company believes that the market
for HRMS/payroll-related services is of equal or greater size than the market
for HRMS/payroll software licenses and has similar growth characteristics.
First-generation client/server technologies have provided organizations
with greater flexibility to address their HRMS/payroll needs by combining the
ease of use and data accessibility of personal computers with the high volume
processing and data storage capabilities of minicomputers and mainframe
legacy systems. However, these first-generation client/server solutions lack
certain critical performance criteria and sophisticated security features,
are difficult to implement and have a high cost of ownership because they
have less built-in functionality than mainframe systems, are typically
written in proprietary programming languages and cannot be readily integrated
with the Internet and other emerging technologies. To date, many HRMS/payroll
software vendors have simply ported traditional functionality to a
first-generation client/server environment by preserving their core legacy
system and underlying proprietary code and adapting only what is required to
allow the application to operate in a client/server environment. In addition,
vendors of first-generation client/server HRMS/payroll software typically
provide enterprise-wide, or Enterprise Resource Planning ("ERP"), systems
which seek to address an organization's financial, supply chain management,
manufacturing and HRMS needs. However, HRMS is typically an add-on module
with limited functionality in ERP systems. Furthermore, ERP systems have been
designed primarily to meet the requirements of very large organizations and
may not be particularly suitable for middle-market organizations. As a
result, these first-generation client/ server and ERP systems are often
plagued with many of the inconveniences of legacy systems, such as higher
costs, lengthy implementation cycles and difficulties associated with
customization.
29
<PAGE>
In recent years, a new generation of object-oriented, component-based
client/server technologies has emerged. Object-oriented methodologies address
many of the limitations of first-generation client/server systems and
facilitate integration with newer technologies and the Internet.
Object-oriented, component-based programming enables more rapid creation,
customization and implementation because the software is built from libraries
of pre-programmed, reusable components called "objects." The virtue of using
a large portion of pre-tested code is that quality is improved and fewer
programmers are required in the process, resulting in significant savings on
development costs. Moreover, when a system update occurs, the customer does
not overwrite or lose the customization that was created, resulting in a
system that is much faster and easier to update. With advancements in
client/server technology and new system architectures, processing can occur
on two, three or more tiers. Distributing various processes to multiple
servers, or tiers, enhances the system's speed, scalability, flexibility and
maintainability.
Middle-market organizations are increasingly seeking more cost-effective
software solutions that (i) provide them greater control over their
HRMS/payroll functions, (ii) deliver the broad functionality necessary to
streamline and effectively manage the complex and administratively burdensome
HRMS/ payroll functions, (iii) take advantage of the latest object-oriented
client/server technologies that enable organizations to better utilize the
Internet and other emerging technologies, (iv) are easy to implement,
customize, update and use and can scale to accommodate an organization's
growth, (v) empower their general employee populations by providing them with
electronic access to human resource, benefits and payroll information and
(vi) are reinforced by extensive service and support capabilities.
THE ULTIMATE SOLUTION
The Company is focused on providing complete HRMS/payroll solutions to
middle-market organizations. The Company's award-winning HRMS/payroll product
provides middle-market organizations with a highly functional, cost-effective
software solution that can be rapidly implemented and is designed to be easy
to learn and use, leverage emerging technologies and scale to accommodate an
organization's growth. The Company's core product, UltiPro for Windows, is an
enabling tool in the cost-efficient management of the employee life cycle,
from inception of employment through retirement. UltiPro for Windows is a
feature-rich, completely integrated HRMS/payroll solution with embedded
Internet technology, employee self-service capability and business
intelligence tools of Cognos Corporation ("Cognos") for data analysis and
generation of custom reports. As part of its comprehensive HRMS/ payroll
solution, the Company provides high quality implementation, training and
ongoing support through an extensive service and support network.
The Company's solution is designed to offer the following benefits to its
customers:
Feature-Rich, Built-in Functionality. UltiPro for Windows is a
feature-rich, completely integrated human resources, benefits administration
and payroll software solution that enables organizations to minimize the time
invested in burdensome HRMS/payroll administrative activities and facilitate
strategic decision-making capabilities. UltiPro for Windows' robust built-in
functionality provides users many features that would otherwise require
extensive customization or changes to source code including: sophisticated
security controls, federal and state human resource regulatory compliance
capability, safety tracking, benefit program management, and payroll tax
tables for federal, state and thousands of local jurisdictions. In addition,
UltiPro for Windows includes specific features designed to address problems
faced by multiple-company organizations. For example, when an employee
transfers from one company to another or works concurrently for multiple
companies within an organization, UltiPro for Windows enables the
organization to consolidate an employee's pay from all companies to ensure
tax withholding limits are properly recognized and to generate a single W-2
reflecting the employee's aggregate income from all companies within the
organization.
Rapid Implementation and System Update Efficiency. The Company has
designed UltiPro for Windows to minimize the time and effort required for
implementation, customization and updating by incorporating into its product
hundreds of built-in rules, options and complex calculation methods. The
Company's standardized implementation methodology, experienced implementation
staff, and customer training further facilitate rapid implementation. In
addition, UltiPro for Windows' object-oriented technology improves
efficiencies by enabling faster system updates. When users load system
updates, they
30
<PAGE>
do not overwrite their customizations because the system stores custom
changes as sub-classed objects or data that reside "outside" the core
program, thus avoiding the time-consuming process of rewriting custom
changes.
Reduced Total Cost of Ownership. The Company believes its software
solution provides significant cost saving opportunities for its customers.
The Company believes that its feature-rich solution is competitively priced
for middle-market organizations and significantly reduces the traditionally
high implementation and customization costs associated with legacy and
first-generation client/server systems. By using the Company's software
solution, a customer may reduce the administrative and information technology
support costs associated with an organization's HRMS/payroll functions. Since
data for employee benefits and payroll calculations are maintained in a
series of shared tables, UltiPro for Windows helps to reduce administrative
costs by facilitating accurate information processing and reporting and
reduces discrepancies, errors and the need for time-consuming adjustments. In
addition, administrative costs can be reduced by providing an organization
with greater access to information and control over reporting.
Integration and Leveraging of Leading Technologies. The Company has
consistently focused on identifying leading technologies and integrating them
into its products. UltiPro for Windows incorporates and leverages leading
technologies, such as Microsoft SQL Server, Microsoft NT Server, Borland's
Delphi ("Delphi"), Lotus Domino, Java and ActiveX, to greatly enhance speed,
convenience, dependability, ease of use and extensibility. For example,
UltiPro for Windows is based on Delphi's object-oriented programming which
enables more rapid product development, customization and implementation. In
addition, UltiPro for Windows employs Internet-and intranet-enabled
technologies to facilitate employees' access to human resource, payroll and
benefits information and to remotely complete and update forms and
information. This functionality addresses the growing demand for employee
empowerment.
Ease of Use and Navigation. The Company designs its products to be
user-friendly and to simplify the complexities of managing employees and
complying with government regulations in the HRMS/ payroll area. UltiPro for
Windows is designed to enable users to find information quickly and easily.
The Company has developed a user interface called the Employee Explorer that
allows access to all employee information in one common area. The graphical
user interface of UltiPro for Windows is designed to allow a user to access
any part of the system quickly and efficiently.
Comprehensive Professional Services and Industry-Specific Expertise. The
Company provides high quality implementation, training and ongoing product
and customer support services. The Company employs 86 people in professional
services, which includes implementation, product support, technical support
and training departments. Substantially all of the Company's product support
associates have been designated as Certified Payroll Professionals ("CPP") by
the American Payroll Association. Moreover, the Company's executives and
managers have an average of over 10 years of experience in HRMS/payroll as
well as 15 years in the software industry. This experience provides the
Company with insights into trends in the HRMS/payroll area and provides the
Company with the ability to better address its customers' HRMS/payroll needs.
In addition, the Company employs a dedicated tax research team to track
changes in the tax rules of more than 4,500 separate taxing jurisdictions and
changes in other employee-related regulations.
Employee Self-Service Capability. The Internet-enabled and security
features of UltiPro for Windows are designed to allow an organization's
employees to access employee human resource, payroll and benefits information
and to remotely complete and update forms and information. The Employee
Self-Service feature in UltiPro for Windows, which is scheduled for release
in the second quarter of 1998, will help to address the growing demand for
employee empowerment. In addition, by providing an additional means to
communicate with its employees, employee self-service is designed to help to
reduce an organization's administrative burden and resources to disseminate
information to its employees.
STRATEGY
The Company's objective is to be the leading provider of HRMS/payroll
software solutions. Key components of the Company's strategy include:
31
<PAGE>
Extend Technology Leadership. The Company intends to continue to expend
significant resources to further identify, utilize and take advantage of
emerging technologies in order to maintain and extend its leadership position
as a provider of technologically advanced HRMS/payroll solutions. The Company
believes that by developing UltiPro for Windows as the first HRMS/payroll
solution to use object-oriented, component-based technology in combination
with Microsoft SQL Server operating on the Microsoft NT platform, as well as
Internet-enabled technologies, the Company maintains a competitive advantage
over other HRMS/payroll vendors. The Company seeks to identify and utilize
new technologies to further enhance UltiPro for Windows' functionality and
performance. In addition, the Company intends to continue to support new and
emerging industry standards to ensure that its products continue to readily
integrate with such technologies. The Company maintains technical
relationships with many leading vendors, including Borland International
Inc., Citrix Systems, Inc., Cognos, Lotus Development Corporation ("Lotus")
and Microsoft. These relationships provide the Company with access to new and
emerging technologies as well as products under development.
Leverage Strategic Alliances. The Company intends to expand its existing,
and develop new, strategic marketing relationships with leading software
vendors. The Company believes that these relationships will provide it with
access to a larger potential customer base and will enable the Company to
leverage their technical and marketing expertise. The Company has strategic
relationships with Microsoft and Lotus that involve coordinated public
relations and marketing opportunities as well as planned trade show
activities specifically targeted to the HRMS/payroll industry. In addition,
the Company has technical and marketing relationships with Cognos, Citrix
Systems, Inc., FlexiInternational Software, Inc., Great Plains Software,
Inc., National Bond & Trust Company Inc., Network Specialists, Inc., Paradigm
Software Technologies, Inc., Platinum Software Corporation, ProBusiness
Services, Inc., Simplex Time Recorder Co., SunGard Recovery Services, Inc.
and Systems Tax Service, Inc.
Integrate with Other Leading Software Applications. The Company intends to
continue to design application interfaces which integrate UltiPro for Windows
with other leading software applications. By having the ability to interface
with other business software applications such as financial or accounting
software solutions, UltiPro for Windows is designed to extend an
organization's technology enterprise and allow an organization to effectively
address its enterprise-wide management needs. For example, the Company has
built interfaces into UltiPro for Windows for exporting payroll information
to Platinum Software Corporation's Platinum SQL General Ledger and for
exchanging information with WinSTAR, the pay data entry system from the
Time/Data Division of Simplex Time Recorder Co. The Company is currently
designing interfaces for FlexiInternational Software, Inc.'s FlexiFinancials
and Great Plains Software, Inc.'s Dynamics C/S+.
Expand and Leverage Implementation Partners. The Company seeks to
continually expand its network of implementation partners. The Company
believes that the use of implementation partners will further increase its
market penetration, complement its direct distribution channel and enable
more rapid implementation of its products. The Company expends significant
resources on training its implementation partners. The Company has formal
implementation partnership agreements with national, regional and local
information technology consulting firms which specialize in human resource
management, including CDG & Associates Inc., Cornerstone Solutions, Inc., HC
Associates International, Inc., Insight Technology Partners, Inc., Soft Link,
Inc. and The Consulting Team, Inc.
Expand Product Functionality. The Company seeks to continually expand the
functionality of its software and is currently developing modules for
recruitment and staffing, position management and training administration
that will integrate with UltiPro for Windows. The Company also intends to
develop solutions to help multinational, U.S.-based companies with employees
who live abroad. In addition, the Company plans to offer a Canadian version
of its product. These solutions will include features such as international
dates and address fields, and support for Eurodollar and Eurodollar exchange
rate conversion.
Leverage Existing Customer Base. The Company seeks to enhance its market
position by targeting sales of UltiPro for Windows to its existing DOS
customer base. This existing base of approximately 750 organizations
represents a significant potential market for future sales of the Company's
products as such customers migrate from DOS to Windows environments and from
individual or networked personal computers to client/server environments.
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TECHNOLOGY
The Company seeks to provide its clients with optimum performance, rich
functionality, scalability and easy access to information through the use of
leading technologies such as Delphi and C++ Builder as the development
environment and Microsoft SQL Server as the database operating on the
Microsoft NT platform. The Company has developed UltiPro for Windows to
include the following key technological features:
Object-oriented Programming. Delphi is an object-oriented, visual,
integrated database application development environment for Windows 95 and
Windows NT. Delphi delivers a combination of an optimizing native code
compiler, a visual component library with source code and database
connectivity. Object-oriented programming features code reusability and
visual form/object inheritance, which decrease the time and cost of
developing and fully implementing a new system. With object-oriented
programming, system updates do not overwrite prior customizations to the
system because custom changes are sub-classed objects that reside "outside"
the core program.
32-bit Compiled Code and Distributed Architecture. Delphi is a 32-bit
code compiler, which results in more stable applications that are
significantly faster than interpreted applications and provides greater
memory access than compilers built on a 16-bit compiler. The Company has
designed certain aspects of its system using a multi-tiered client/server
architecture in order to enhance the system's speed, flexibility, scalability
and maintainability. When an application's logic resides only on a client, a
user's ability to process high volume data transactions is limited. When the
logic resides only on a server, the user's interactive capabilities are
reduced. The Company's use of distributed architecture is intended to
overcome such limitations.
Application Framework. The Company has developed a proprietary
data-driven, object-oriented application framework that enhances the
development, usability, maintainability and extensibility of its
applications. The major areas of the system such as company setup, code
setup, employee setup, pay data entry and reporting have been developed using
the Company's application framework to enhance usability. The extension of
the system's functionality is enhanced due to the use of the framework with
its driver tables and object-class library.
Business Intelligence Tools. In addition to an extensive library of
standard reports that offer flexibility and ease of use, the Company extends
what users can do with employee data by embedding leading business
intelligence tools from Cognos in UltiPro for Windows. In addition to
offering sophisticated data query and report authoring, these tools enable
users to apply online analytical processing ("OLAP") to multidimensional data
cubes, allowing users to explore data on employees graphically and
statistically from diverse angles. The Company maintains a link between
Cognos' report catalog and UltiPro for Windows' data dictionary, eliminating
the necessity for users to create and maintain ad hoc reporting catalogs.
Internet and Intranet Integration. The Company supports emerging
technologies such as those associated with the Internet and corporate
intranets to increase access to and usability of its applications. The
Company's Internet-enabled applications, such as employee self-service, are
integrated with UltiPro for Windows database and use Lotus Domino Server,
Java, Java script, HTML and COM/ActiveX.
PRODUCTS
The Company's software products include UltiPro for Windows, a
client/server software product, and ULTIPRO for LAN, a DOS-based product,
both of which automate and manage HRMS/payroll functions.
ULTIPRO FOR WINDOWS
UltiPro for Windows, released in June 1997, is a fully integrated,
technologically advanced HRMS/payroll software product that offers
comprehensive functionality to middle-market organizations. In December 1997,
Human Resource Executive, a leading human resource industry publication,
selected UltiPro for Windows as the only HRMS/payroll software product to be
included as one of its Top Ten HR Products of the Year. UltiPro for Windows
includes the following modules:
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Human Resources. UltiPro for Windows is designed to streamline and manage
the human resource function within an organization. In addition to enabling
organizations to comply with regulatory requirements, UltiPro for Windows
generates, manages and stores information that satisfies a broad range of
internal and external reporting requirements. Examples of information and
processes handled by the system are employee performance, job and salary
history; COBRA and HIPAA administration; OSHA incident and safety; career
development; wellness programs; company-issued property; dependent,
beneficiary and emergency contact details; and history of previous
employment. The system uses help features, or "wizards", to guide human
resource administrators through multi-step processes such as recording new
hire information, employee job changes and employee terminations. Wizards
provide "To Do" lists, sequentially presented data-entry windows, validation
of data and summaries of changed information. The system also includes
effective dated record handling and detailed audit trails.
Benefits Administration. UltiPro for Windows provides a comprehensive,
automated means of administering all types of health and welfare plans,
employee loans, qualified and non-qualified deferred compensation, and fund
allocations. The Company has developed a one-table design that maintains
deductions and benefit plans in one common set of tables. One table stores
together rules for coverage; premium and employer match computations;
eligibility and participation determination; and taxation, wage accumulation
and withholding requirements for payroll. UltiPro for Windows also delivers
rules-based benefits administration functionality, combining the benefit and
payroll deduction tables, to help improve accuracy and scheduling
convenience. Tracking of dependent and beneficiary information is
comprehensive and can be associated with benefit plans as necessary. In
addition, complete historical information is available in summary and detail
views for a quick response to benefit inquiries and ease in benefit plan
research.
Payroll. UltiPro for Windows incorporates a comprehensive tax management
system to handle federal, state and local tax computations, including
multi-state taxing rules and reciprocity. In addition, the system is
delivered with complex wage calculations such as shift premiums, piecework
and make-up pay, average pay rates for overtime calculations and
garnishments/disposable pay. It also includes convenience features enabling
users to generate off-cycle checks, create direct deposit files, perform
automatic check reconciliation, and track the progress of payroll processing
steps online.
Interface Templates. UltiPro for Windows incorporates built-in interfaces
and an engine that facilitate importing and exporting data with a number of
third-party software systems, including time clocks, point-of-sale systems
and job costing systems. Organizations can link to their banks, 401(k)
provider, tax filing service and unemployment cost management services. The
UltiPro for Windows' development tools give the user the ability to interface
the Company's software with many leading applications running on a variety of
platforms.
Reporting. UltiPro for Windows provides a library of over 100 standard
reports including basic company and employee listings, employee forms,
analytical reports, notifications and upcoming events, reconciliation and
audit reports and date-or event-driven historical reports. UltiPro for
Windows includes true point-in-time reporting, giving users access to
historical information whenever they need it. In addition to many standard
reports, UltiPro for Windows includes other tools such as Cognos' business
intelligence tools for data analysis and generation of custom reports.
Employee Self-Service. UltiPro for Windows takes advantage of emerging
technologies that not only reduce the administrative workload of the
HRMS/payroll department but also provide greater access to HRMS/payroll
information to employees within an organization. Employee Self-Service is an
Internet-enabled module which is expected to be released in the second
quarter of 1998 and will be fully integrated with UltiPro for Windows. Based
upon user-established security rules, employees will be able to access
authorized database information from remote locations with an Internet
connection. UltiPro for Windows' Internet/intranet application will provide:
(i) employees with access to data, thereby decreasing HRMS/payroll staff
requirements to service employees; (ii) employees with the ability to change
their own data or make a change request subject to approval, again decreasing
demands made on HRMS/ payroll staff; (iii) an additional means for the
Company and its HRMS/payroll staff to communicate with employees; and (iv) a
low-maintenance and cost-effective method for data entry (new hires,
terminations,
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payroll data) and inquiry at multiple or remote locations. More specifically,
using UltiPro for Windows, employees will have the ability to enroll in
benefit plans and view benefit statement information and complete and file
leave of absence and vacation requests.
ULTIPRO for LAN
The Company introduced ULTIPRO for LAN in July 1993 as its first
proprietary software product. ULTIPRO for LAN is a DOS-based product that is
a fully integrated human resource management, benefits administration and
payroll processing system with a number of the same features as UltiPro for
Windows. While the Company continues to support ULTIPRO for LAN, it no longer
actively markets this DOS-based product.
The following table contains selected information pertaining to the
Company's client/server product, UltiPro for Windows, and the Company's
DOS-based product, ULTIPRO for LAN:
<TABLE>
<CAPTION>
ULTIPRO FOR WINDOWS ULTIPRO FOR LAN
<S> <C> <C>
FIRST RELEASE: June 1997 July 1993
CURRENT VERSION/
RELEASE DATE: 1.5/December 1997 3.5/December 1997
PRIMARY DATABASE: Microsoft SQL Server Microsoft FoxPro
SOURCE CODE LANGUAGE: Borland Delphi, C++ Microsoft FoxPro
NETWORKS: TCP/IP & NetBios (Microsoft NT Novell Netware, Microsoft NT
4.0 compatible) Server
CLIENT PROFILE: Companies with 300-15,000 Companies with 100-5,000
employees employees
PRICE RANGE*: $75,000--$1,000,000 and up $25,000--$100,000 and up
*Pricing represents license fees based upon several variables, including number of sites,
employees, concurrent users and options selected. Pricing excludes related service and
maintenance fees.
- --------------------------------------------------------------------------------------------
</TABLE>
PRODUCT DEVELOPMENT
The Company continually invests significant resources in product
development in order to take advantage of emerging technologies and to
further broaden its products' functionality and performance. The Company
employs an iterative, rapid application development ("RAD") process. New
product specifications are primarily developed by product managers with input
from professional services employees and clients. Feature teams, which
include product managers, programmer analysts, as well as employees from the
quality assurance, tax research and documentation departments, jointly review
specifications, products in development, test plans and documentation.
Published programming standards and guidelines, code "walkthroughs" and more
formal code reviews are used in an attempt to deliver more error-free code in
a shorter period of time. The Company believes that this iterative,
multi-disciplinary, team-based approach results in application development
that is more responsive to client needs than products developed using other
available approaches. The Company believes that software product development
is most effectively and efficiently accomplished by small development teams
focused on specific areas. The Company provides on-going technical training
and state-of-the-art equipment to its research and development staff.
The Company is currently focused on enhancing UltiPro for Windows through
development of the following fully integrated modules, each of which is
expected to be released in the second half of 1998:
Recruitment and Staffing. The Recruitment and Staffing module is designed
to assist organizations in coordinating the management of open positions and
applicants, tracking and evaluating costs associated with recruiting, and
handling government compliance issues.
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Position Management. The Position Management module is designed to provide
organizations with strategic tools for the generation of reports necessary
for managing and planning positions. In addition to tracking the numbers and
types of positions within an organization, it is designed to address the
sophisticated needs of larger organizations for projecting future staffing
requirements, budgeting, comparisons of actual versus budgeted figures,
salary planning, projection of training needs, and assistance with succession
planning.
Training Administration. The Training Administration module is designed to
assist organizations in planning training events and classes, managing
facilities and trainers, handling registrations for training, and tracking
training results. Additionally, it will support the management of financial
and budgeting activities related to training, projections for future training
needs, and succession or replacement planning activities.
There can be no assurance that the Company will successfully complete the
development of one or more of these modules or that they will be successfully
completed in a timely manner.
Since inception, the Company has invested a substantial amount of its
resources in research and development. During fiscal years 1995, 1996 and
1997, research and development expenses aggregated approximately $2.6
million, $3.4 million and $4.8 million, respectively.
PROFESSIONAL SERVICES
The Company believes that offering quality professional services provides
it with a significant opportunity to differentiate itself in the marketplace
and is critical to the Company's comprehensive solution. The Company provides
its customers professional services in three areas: implementation, training,
and customer support and maintenance.
Implementation. The Company's implementation services provide its
customers with a standardized methodology and assistance in implementing the
Company's HRMS/payroll solutions. The Company believes that its
implementation services ensure its customers' early success with its products
and assist customers in their ongoing efforts to enhance their existing
systems and manage upgrades. In addition, these services strengthen the
relationship with customers and add to the Company's industry-specific
knowledge base for use in future implementation and product development
efforts. The Company's implementation process is handled either by the
Company's implementation team or in partnership with third-party consultants.
In each case, the project team includes an HRMS/payroll consultant from the
Company, representatives from the client organization and a variety of
experts from the Company and/or the Company's implementation partners. The
Company has established a training program that provides the Company's
associates and its implementation partners standardized instruction on
UltiPro for Windows, including techniques for systems planning and design,
customer-specific configuring of application modules, conversion from
existing systems and interfacing with other software applications. The
Company's implementation group consists of HRMS/payroll consultants, database
administrators and technology consultants. Implementation services are
typically billed on a time and materials basis.
Training. The Company provides its customers with the opportunity to
participate in formal training programs. The Company believes that this
training increases customers' ability to use the full functionality of the
product, thereby maximizing the value of customers' investment. Courses are
designed to give attendees practical, hands-on experience with the Company's
products. Trainees learn such basics as how to enter new employee
information, set up benefit plans and generate standard reports, as well as
more complex processes such as defining company rules, customizing the system
and creating custom reports. The Company maintains four training facilities
in Atlanta, Georgia; Seal Beach, California; Chicago, Illinois; and East
Rutherford, New Jersey. In certain instances, the Company conducts on-site
training at customer facilities.
Customer Support and Maintenance. The Company offers comprehensive
technical support and maintenance services, which have historically been
purchased by all of its customers. These services include software updates
that reflect tax and other legislative changes; telephone support 24 hours a
day, 7 days a week; unlimited access to the Company's employee tax center on
the World Wide Web; and periodic newsletters. In addition, the Company uses
Symantec Corporation's PC Anywhere software for
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remote accessibility to the customer's system in order to perform quick
diagnostics and provide on-line assistance. In the final quarter of each
year, the Company conducts seminars for customers and distributes
documentation on how to handle year-end closing activities effectively. To
monitor, evaluate and continually enhance its support process, the Company
uses advanced technology tools and sends surveys to its customers to obtain
their opinions and suggestions. The Company's use of AT&T Corporation's TRACK
IT software expedites call handling and its use of Magic Solutions Inc.'s
SupportMagic SQL provides Statistical Information Reporting on call history.
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CUSTOMERS
As of February 28, 1998, the Company had licensed its UltiPro for Windows
solution to approximately 85 customers and its ULTIPRO for LAN solution to
approximately 750 customers. No customer accounted for more than 10% of total
revenues in fiscal year 1997. The Company's customers operate in a wide
variety of industries, including manufacturing, retail, healthcare,
technology, finance, insurance, real estate, transportation, communications,
services and sports. The following is a representative list of the Company's
customers as of February 28, 1998:
MANUFACTURING
Duro Bag Manufacturing
Company
Globe Manufacturing, Inc.
Great American Cookie Co.
Halstead Metal Products, Inc.
MCD International Inc.
Packerland Packing Company, Inc.
PMC, Inc.
Stevens Graphics, Inc.
United States Filter
Corporation
Volvo GM Heavy Truck
Corporation
Wright Industries, Inc.
HEALTHCARE
Community Hospital of
Monterey Peninsula
Disabilities Services of the
Southwest
Florida Community Cancer
Group Health Associates
Medassist OP
National Vision Associates, Ltd.
Sunrise Assisted Living
University Physicians Group
FINANCE/INSURANCE/REAL ESTATE
First American Corporation
GMAC Mortgage, Inc.
J.C. Bradford & Company LLC
Michigan Mutual Insurance Co.
National Realty Trust
Northwest Savings Bank
Republic National Bank
The Midland Life Insurance Co.
Trammel Crow Residential
United Companies Financial Corporation
<PAGE>
RETAIL
AT Williams Oil
Benihana Corporation
Bentley's Luggage
Bill Heard Enterprises, Inc.
Carolina Restaurant Group
Hooters of America
Reliable Stores, Inc.
Spaghetti Warehouse Inc. &
Subsidiaries
The Krystal Company, Inc.
The Portillo Restaurant Group
Winn Dixie Stores, Inc.
TECHNOLOGY
FFV Aerotech, Inc.
Global Technical Services, Inc.
Ingram Entertainment, Inc.
SARCOM, Inc.
The National Research Group
TPS Technologies
Tracer Research
TRANSPORTATION &
COMMUNICATIONS
Airport Group International Inc.
America West Airlines Inc.
Armellini Trucking Corporation
Benton Express Co.
Communications & Power
Industries
Drug Transport Inc.
Lin Television
Telemundo Television Network
World Maintenance Service
SPORTS
Arizona Diamondbacks
Chicago White Sox
Colorado Rockies Baseball
Montreal Expos
New York Giants
New York Jets Football Club
New York Yankees
Philadelphia Phillies
The Phoenix Suns
Limited Partnership
ProPlayer Stadium
Texas Rangers Baseball
The Florida Marlins Baseball Club
The Florida Panthers
SERVICES
Boston Ballet
Buena Vista Hotel
Callaway Gardens Resorts
Discovery Zone
Hotel Intercontinental
Hudson Hotels Corp.
Mark Hopkins Intercontinental
Omni Hotels Management
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CUSTOMER CASE STUDIES
The following examples illustrate the selection of the Company's products
by several of the Company's customers and the types of needs addressed by
those products:
United States Filter Corporation
United States Filter Corporation ("U.S. Filter"), one of the world's
largest global water treatment companies, provides industrial, commercial
water and wastewater treatment systems and services. With corporate offices
in Palm Desert, California, U.S. Filter serves its customers through a
worldwide network of over 600 sales and service facilities in 33 countries.
U.S. Filter has over 17,000 employees and expects to add more employees with
its recent agreement to acquire Culligan Water Technologies, Inc. U.S. Filter
has acquired numerous companies over the last year and a half, which has
increased the complexity of its HRMS/payroll functions.
U.S. Filter has been using a service bureau system for payroll processing
and a manual system for handling its human resources functions. With these
two systems, human resource and payroll data are not integrated, and U.S.
Filter does not have the control it desires for processing or analyzing
critical employee data.
U.S. Filter selected UltiPro for Windows to gain control over employee
data and to integrate employee management processes. UltiPro for Windows will
provide U.S. Filter with comprehensive human resource and benefits management
functionality and business intelligence tools. With the system's Microsoft
SQL Server and Windows NT environment, U.S. Filter will have the ability to
integrate HRMS/payroll with its other business applications and to scale the
system to expand with the company's growth. The Company is currently in the
process of implementing its solution for U.S. Filter.
First American Corporation
First American Corporation ("First American") is a bank-holding company
with assets of $10.6 billion, 4,200 employees and 169 bank offices in
Tennessee, Virginia and Kentucky. First American has been using a mainframe
system to process payroll and maintain its human resources information. Using
that system, First American does not have the flexibility or the ability to
readily access data that it requires. To generate reports, users need to
schedule a request with the Information Technology department. Reports are
delivered on a monthly cycle and are not readily available on an ad hoc
basis. In addition, users often have to import the data into a spreadsheet
application and manipulate it further to provide meaningful information.
First American has found this process to be increasingly cumbersome and
inefficient.
After a detailed evaluation of several products offered by other vendors,
including ERPs, First American selected UltiPro for Windows as its
HRMS/payroll solution and PeopleSoft's Financials for its financial
accounting solution. UltiPro for Windows' built-in functionality and ease of
use will allow First American users to generate customized point-in-time
reports and to analyze the data from a number of different perspectives. Upon
its release, UltiPro for Windows' employee self-service module is expected to
meet First American's objective to move from a paper-intensive HRMS/payroll
organization to a paperless model. This online system will offer First
American employees the convenience of immediate access to personal and
company information. The Company is currently in the process of implementing
its solution for First American.
The Florida Marlins Baseball Club and ProPlayer Stadium
The 1997 World Champion Florida Marlins Baseball Club (the "Florida
Marlins") has 360 employees. Miami-based ProPlayer Stadium, owner and
operator of the baseball and entertainment arena in which the Florida Marlins
play, has 100 full-time and 300 to 500 part-time employees, depending upon
the stadium event. HRMS/payroll functions are handled centrally for the two
organizations.
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The Florida Marlins and ProPlayer Stadium previously used a third-party
outsourcing service to handle its payroll. The system lacked the flexibility
needed to handle the payroll requirements typical of sports teams. For
example, many states including Illinois, Maryland, Minnesota and New York
require professional athletes to pay taxes to that state when they play
there. The third-party system was unable to calculate and print payroll
withholding taxes for multiple states in one paycheck. Because of this, the
Florida Marlins had to establish a new company for each state where the ball
team played to withhold the proper taxes. In addition, the Florida Marlins
and ProPlayer Stadium were required to pay for and maintain two separate
systems because the third-party software was unable to handle
multiple-company organizations. These two issues resulted in a complicated
payroll process that was inflexible, expensive and time consuming to run.
The Florida Marlins and ProPlayer Stadium report that payroll is running
more efficiently because of the flexibility and depth of functionality
provided by the ULTIPRO for LAN solution. The system's multiple-company
capability has enabled the Florida Marlins and ProPlayer Stadium to use one
centralized system to run payroll. ULTIPRO for LAN has also allowed the
Florida Marlins to withhold taxes from many states in one paycheck, which
eliminates the need to issue more than one paycheck to an employee. In
addition, ULTIPRO for LAN has allowed the Florida Marlins to cut off-cycle
paychecks on demand, make last minute changes to payroll as needed and
integrate human resource and benefits information with payroll.
Ingram Entertainment, Inc.
Ingram Entertainment, Inc. ("Ingram") distributes home entertainment
products such as videotapes, audio-books and CD-ROMs. Currently, the company
has offices in 22 locations nationwide and employs 945 associates.
Previously, Ingram processed its payroll with commercially available software
running on a mainframe-based system. The company found that supporting a
mainframe-based HRMS/payroll system was costly and time-consuming. The system
required extensive information technology resources to maintain, update and
customize. In addition, it was difficult for associates to access and
generate data for required reports. To increase efficiencies, Ingram
determined that it needed a cost-effective solution that more tightly
integrated human resources and payroll.
The Company's ULTIPRO for LAN solution now used by Ingram offers complete
integration of payroll, human resources and benefits and provides more
built-in functionality than its mainframe-based counterpart. According to
Ingram, payroll check processing costs have been reduced by 20% and time for
processing has been reduced by half a day per week. Ingram users also have
immediate access to essential data and can generate standard and ad hoc
reports without relying on its information technology department for support.
SALES AND MARKETING
The Company markets and sells its products and services through its direct
sales force, marketing group and a network of strategic partners. The Company
had a staff of 86 associates as of February 28, 1998 and maintained 26 sales
offices located in major metropolitan areas throughout the United States,
including its headquarters in Ft. Lauderdale, Florida.
Direct Sales. The Company's direct sales force includes business
development directors and managers who have defined territories and conduct
lead-generation activities within given parameters. The sales cycle begins
with a sales lead generated through a corporate marketing vehicle or a
territory-based activity. Whether the lead is a telephone request, fax, email
or request for proposals ("RFPs"), the lead is qualified and entered into a
lead-tracking system. When the lead is received on the local level, prospect
information is entered via the Internet into an electronic system resident at
headquarters. When headquarters receives the lead, the information is
recorded and forwarded to the business development manager in the prospect's
region of the country. Business development managers rely on face-to-face
meetings with prospects to build relationships. In one or more on-site
visits, business development managers work with application and technical
consultants to analyze prospective client needs, demonstrate the Company's
product and, when required, respond to an RFP. The sale is finalized
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after clients complete their internal sign-off procedures and terms of the
contract are negotiated and signed. While the length of sales cycles varies
from client to client, the sales cycle typically requires two to six months
for UltiPro for Windows.
Marketing. The Company supports its sales force with a comprehensive
marketing program that includes public relations, advertising, direct mail,
trade shows, seminars and Web site maintenance. Working closely with the
direct sales force, customers and strategic partners, the marketing team
defines positioning strategies and develops a well-defined plan for
implementing these strategies. Marketing services include market surveys and
research, overall campaign management, creative development, production
control, lead generation and tracking, results analysis, and communications
with field offices, customers and strategic partners.
Strategic Partners. The Company has established a number of formal and
informal marketing relationships with industry-specific vendors and
consulting firms. The Company has a strategic partnership with Microsoft
Corporation that involves coordinated public relations and marketing
opportunities as well as trade show activities specifically targeted to the
HRMS industry. In addition, the Company has relationships with Cognos, Citrix
Systems, Inc., FlexiInternational Software, Inc., Great Plains Software,
Inc., Lotus Development Corporation, National Bond & Trust Company Inc.,
Network Specialists, Inc., Paradigm Software Technologies, Platinum Software
Corporation, ProBusiness Services, Inc., Simplex Time Recorder Co., SunGard
Recovery Services, Inc. and Systems Tax Service.
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent in part on its ability to protect its
proprietary technology. The Company licenses its products in object code form
only, although it has source code escrow arrangements when required by
customers. The Company relies on a combination of copyright, trademark and
trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect its proprietary rights. The Company
does not have any patents or patent applications pending, and existing
copyright, trademark and trade secret laws afford only limited protection.
Accordingly, there can be no assurance that the Company will be able to
protect its proprietary rights against unauthorized third-party copying or
use, which could materially adversely affect the Company's business,
operating results and financial condition.
Despite the Company's efforts to protect its proprietary rights, attempts
may be made to copy or reverse engineer aspects of the Company's products or
to obtain and use information that the Company regards as proprietary.
Moreover, there can be no assurance that others will not develop products
that perform comparably to the Company's proprietary products. Policing the
unauthorized use of the Company's products is difficult. Litigation may be
necessary in the future to enforce the Company's intellectual property
rights, to protect the Company's trademarks, copyrights or trade secrets or
to determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, operating
results and financial condition.
As is common in the software industry, the Company from time to time may
become aware of third party claims of infringement by the Company's products
of third-party proprietary rights. While the Company is not currently subject
to any such claim, the Company's software products may increasingly be
subject to such claims as the number of products and competitors in the
Company's industry segments grows and the functionality of products overlaps
and as the issuance of software patents becomes increasingly common. Any such
claim, with or without merit, could result in significant litigation costs
and require the Company to enter into royalty and licensing agreements, which
could have a material adverse effect on the Company's business, operating
results and financial condition. Such royalty and licensing agreements, if
required, may not be available on terms acceptable by the Company or at all.
COMPETITION
The market for the Company's products is highly competitive. The Company's
products compete primarily on the basis of technology, delivered
functionality and price/performance. The Company believes that its products
generally compete effectively with respect to these factors.
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The Company's competitors include (i) a number of companies, such as
Cyborg Systems, Inc., Genesys Software Systems, Inc., Lawson Software, Inc.,
Oracle Corporation, PDS Software, Inc., PeopleSoft, Inc. and SAP America,
Inc. which offer HRMS/payroll software products for use on mainframes and/or
client/server systems; (ii) large service bureaus, such as ADP and Ceridian
Corporation; and (iii) the internal payroll/human resources departments of
potential customers which use custom-written software. Many of the Company's
competitors or potential competitors have significantly greater financial,
technical and marketing resources than the Company. As a result, they may be
able to respond more quickly to new or emerging technologies and to changes
in customer requirements, or to devote greater resources to the development,
promotion and sale of their products than can the Company. In addition,
current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase
the ability of their products to address the needs of the Company's
prospective customers.
FACILITIES
The Company's principal administrative, engineering, support and marketing
facilities total approximately 15,000 square feet and are located in a single
building in Fort Lauderdale, Florida. The Company leases these premises under
a lease which expires on December 31, 1998. The Company intends to move into
new and larger facilities in Weston, Florida in the first calendar quarter of
1999. In addition, the Company leases office space for its sales operations
in Albany, Atlanta, Baltimore, Boston, Buffalo, Chicago, Cincinnati,
Cleveland, Columbus (Ohio), Dallas, Denver, Detroit, East Rutherford (New
Jersey), Fort Lauderdale, Houston, Jackson (Mississippi), Nashville, New York
City, Philadelphia, Phoenix, Pittsburgh, San Francisco, Seal Beach
(California), Seattle and Tampa.
EMPLOYEES
As of February 28, 1998, the Company employed 265 persons, including 86 in
sales and marketing, 86 in professional services, 77 in research and
development and 16 in finance and administration. The Company believes that
its relations with employees are good. However, competition for qualified
personnel in the Company's industry is intense and the management of the
Company believes that its future success will depend in part on its continued
ability to attract, hire and retain qualified personnel.
LEGAL PROCEEDINGS
From time-to-time, the Company is involved in litigation relating to
claims arising out of its operation in the normal course of business. As of
the date of this Prospectus, the Company is not a party to any legal
proceeding the adverse outcome of which, individually or in the aggregate,
could reasonably be expected to have a material adverse effect on the
Company's business, operating results and financial condition.
42
<PAGE>
MANAGEMENT
The directors, executive officers and other key employees of the Company,
and their ages as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
<S> <C> <C>
Scott Scherr (1) ........... 45 Chairman of the Board of Directors,
President and Chief Executive Officer
Alan Goldstein, M.D. (1) .. 47 Executive Vice President, Chief Technology
Officer and Director
Mitchell K. Dauerman ....... 40 Chief Financial Officer and Treasurer
James Alu .................. 53 Chief Operating Officer and Vice President
Vivian Maza ................ 35 Vice President--People and Secretary
Sarah H. Bodman ............ 29 Vice President--Finance
Paul Gonzalez .............. 45 Vice President--Implementation Partners
Dale T. Baker .............. 47 Vice President--Strategic Alliances
H. Stephen Smith ........... 48 Vice President/General Manager for East
Region
Steven J. Oakley ........... 39 Vice President/General Manager for West
Region
Ofer Nemirovsky (1)(2) .... 39 Director
LeRoy A. Vander Putten (3) 63 Director
Marc D. Scherr (1) ......... 39 Director
Rick Wilber (3) ............ 50 Director
Robert A. Yanover (2) ..... 61 Director
</TABLE>
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
Scott Scherr has served as President and a director of the Company since
its inception in April 1996 and has been Chairman of the Board of Directors
and Chief Executive Officer of the Company since September 1996. Mr. Scherr
founded the Partnership in April 1990 and has served as President of its
general partner from the inception of the Partnership until its dissolution
in 1998. From 1979 until 1990, he held various positions at ADP, a
payroll services company, where his titles included Vice President of
Operations and Sales Executive. Prior to joining ADP, Mr. Scherr ran
Management Statistics, Inc., a data processing service bureau founded by his
father, Reuben Scherr, in 1959. He is the brother of Marc D. Scherr, a
director of the Company.
Alan Goldstein, M.D., FACS has served as a director of the Company since
its inception in April 1996 and as Executive Vice President and Chief
Technology Officer since September 1996. From April 1996 through September
1996, he served as Vice President and Treasurer of the Company. From January
1994 until February 1998, Dr. Goldstein served as Vice President of the
general partner of the Partnership. In 1989, Dr. Goldstein founded Strategic
Image Systems, Inc., which produced and developed software applications and
tools. From 1985 to 1986, Dr. Goldstein served as Vice President of
Information Systems for Loren Industries, Inc., a jewelry casting
manufacturer. From 1985 to 1987, Dr. Goldstein served as Director of Surgical
Services at Kings County Hospital in New York. In 1985, as a trauma surgeon
engaged in research and medical education, Dr. Goldstein developed a software
application for use in hospitals to aid in patient management, quality
assurance and physician education.
Mitchell K. Dauerman has served as Chief Financial Officer and Treasurer
of the Company since September 1996. From 1979 to 1988, Mr. Dauerman held
various positions with KPMG Peat Marwick, a global accounting and consulting
firm. From 1988 to 1996, he served as a Partner in the firm.
James Alu has served as Chief Operating Officer since January 1998 and
Vice President of the Company since September 1996. Prior to that, Mr. Alu
served as Vice President of the general partner of
43
<PAGE>
the Partnership from July 1993 until April 1996. From 1988 until 1993, Mr.
Alu served as Area Sales Vice President for the northeastern United States
for ADP's Dealer Services Group. From 1986 to 1988, he was Vice President of
Sales for the National Accounts Division of ADP.
Vivian Maza has served as Vice President -- People for the Company since
January 1998 and as Secretary of the Company since September 1996. Prior to
that, Ms. Maza had served as the Office Manager of the Company from its
organization in April 1996 and of the Partnership from its inception in 1990
until April 1996. Ms. Maza is an HR Generalist and holds a Professional in
Human Resources (PHR) certification from the Society for Human Resource
Management (SHRM) association. From 1985 to 1990, Ms. Maza was a systems
analyst for the Wholesale Division of ADP.
Sarah H. Bodman has served as Vice President -- Finance for the Company
since September 1996. From 1995 to 1996, Ms. Bodman was a Vice President at
J.P. Morgan Capital Corporation. From 1993 to 1995, Ms. Bodman attended
Harvard Business School where she earned a Masters in Business
Administration. From 1990 until 1993, she worked for J.P. Morgan & Co.,
Incorporated where her responsibilities ranged from derivatives marketing to
mergers and acquisitions.
Paul Gonzalez has served as Vice President -- Implementation Partners for
the Company since April 1997. He served as Vice President of the Company from
April 1996 to September 1996 when he was elected Vice President of Support
Services. Prior to that, he had served as a Vice President of the general
partner of the Partnership from 1994 until April 1996 and as Secretary from
1990 until 1994. From 1980 to 1990, Mr. Gonzalez held various management
positions at ADP where his titles included National Product Manager for ADP's
Wholesale Distribution Division and Branch Manager for the southeast region.
Dale T. Baker has served as Vice President -- Strategic Alliances for the
Company since September 1996. From April 1996 through September 1996, he
served as Vice President of the Company. Prior to that, he had served as a
Vice President of the general partner of the Partnership from 1993 until
April 1996. From 1990 to 1993, Mr. Baker was a Branch Manager for Cap Gemini
America, an information services consulting firm. From 1979 to 1989, Mr.
Baker held various management positions in accounting services, payroll and
national accounts at ADP.
H. Stephen Smith has served as Vice President/General Manager for the East
Region of the Company since September 1996. Prior to joining the Company in
1996, Mr. Smith spent 20 years at ADP, where his most recent title was
Division Vice President for the development and management of strategic
alliances.
Steven J. Oakley has served as Vice President/General Manager for the West
Region of the Company since January 1997. From 1989 to 1996, Mr. Oakley was
National Accounts Division Vice President for ADP. Prior to that, he worked
for Bank of America's Business Services Division from 1985 until 1989. He is
a former NCAA Baseball Academic All American.
Ofer Nemirovsky has served as a director of the Company since June 1997.
Mr. Nemirovsky has been a Managing Director of HarbourVest Partners, LLC
since January 1997. HarbourVest Partners, LLC was formed by the management
team of Hancock Venture Partners, Inc. ("HVP"), where Mr. Nemirovsky had
served in various capacities since 1986. Prior to joining HVP, Mr. Nemirovsky
held various computer sales and marketing positions at Hewlett-Packard
Company, a measurement, computation and communications company. He is
currently a director of OneWave, Inc., an Internet software and services
company, as well as several privately-held companies.
LeRoy A. Vander Putten has served as a director of the Company since
October 1997. From January 1988 until May 1997, Mr. Vander Putten was
Chairman and Chief Executive Officer of Executive Risk, Inc., a specialty
insurance holding company ("ERI"). Since May 1997, Mr. Vander Putten has been
engaged as a consultant to ERI. From August 1982 to January 1988, Mr. Vander
Putten served as Vice President and Deputy Treasurer of The Aetna Life and
Casualty Company, an insurance company.
Marc D. Scherr has been a director of the Company since its inception in
April 1996. Currently, he is also a director of Gerschel & Co., Inc., a
private investment firm. In December 1995, Mr. Scherr co-founded Residential
Company of America, Ltd. ("RCA"), a real estate firm, and has since served as
44
<PAGE>
President of its general partner. Mr. Scherr also served as Vice President of
RCA's general partner from its inception in August 1993 until December 1995.
From 1990 to 1992, Mr. Scherr was a real estate pension fund advisor at
Aldrich, Eastman & Waltch. Previously, he was a partner in the Boston law
firm of Fine & Ambrogne. Mr. Scherr is the brother of Scott Scherr, Chairman
of the Board of Directors, President and Chief Executive Officer of the
Company.
Rick Wilber has served as a director of the Company since October 1997.
Mr. Wilber was a co-founder of Champs Sports Shops and served as its
President from 1974 to 1984. He served on the Board of Directors of Royce
Laboratories, a pharmaceutical concern, from 1990 until April 1997, when the
company was sold to Watson Pharmaceuticals, Inc., a pharmaceutical concern.
Mr. Wilber currently owns and operates a number of Hallmark Card stores.
Robert A. Yanover has served as a director of the Company since January
1997. Mr. Yanover founded Computer Leasing Corporation of Michigan, a private
leasing company, in 1975 and has served as its President since that time. Mr.
Yanover also founded Lason, Inc., a corporation specializing in the imaging
business, and has served as Chairman of the Board since its inception in
1987.
Prior to the consummation of Offering, the Board of Directors will be
divided into three classes, each of whose members will serve for a staggered
three-year term. Upon the expiration of the term of a class of directors,
directors in such class will be elected for three-year terms at the annual
meeting of stockholders in the year in which such term expires. See
"Description of Capital Stock -- Anti-Takeover Effects of Certain Provisions
of Delaware Law and the Certificate of Incorporation and By-Laws."
Each officer serves at the discretion of the Board of Directors and holds
office until his or her successor is elected and qualified or until his or
her earlier resignation or removal.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Executive Committee composed of Messrs.
Scott Scherr (Chairman), Nemirovsky, Marc Scherr and Dr. Goldstein, which has
the authority to exercise (except as provided by law or as may have been
specifically reserved by or for the Board of Directors) all the powers and
authority of the Board of Directors in the management of the Business and
affairs of the Company between regular meetings of the Board of Directors and
while the Board of Directors is not in session. The Board of Directors has
also appointed a Compensation Committee composed of Messrs. Vander Putten and
Wilber, which establishes the compensation of officers of the Company and
oversees the Company's stock option plan and such other benefits plans as the
Company may from time to time maintain. The Company also has an Audit
Committee composed of Messrs. Nemirovsky and Yanover, which reviews the
Company's financial condition with officers and employees of the Company, as
well as the Company's independent auditors, and reports to the Board of
Directors concerning such reviews.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee of the Board of
Directors are Messrs. LeRoy A. Vander Putten and Rick Wilber. No executive
officer of the Company has served as a member of the compensation committee
of any other entity whose executive officers served as a member of the
Compensation Committee of the Board of Directors of the Company.
45
<PAGE>
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth all compensation paid
or accrued for the fiscal year ended December 31, 1997 for the Company's
Chief Executive Officer and its two other executive officers (collectively,
the "Named Executive Officers") for services rendered to the Company in all
capacities during such fiscal year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
--------------
SECURITIES ALL OTHER
ANNUAL COMPENSATION UNDERLYING COMPENSATION
------------------- OPTIONS (1)
NAME AND POSITION SALARY BONUS
<S> <C> <C> <C> <C>
Scott Scherr................. $200,000 $-- 31,300 $2,084
Chairman of the Board,
President and Chief Executive
Officer
Alan Goldstein, M.D.......... 200,000 -- 24,200 2,375
Executive Vice President and
Chief Technology Officer
Mitchell K. Dauerman......... 200,000 -- 8,500 2,375
Chief Financial Officer and
Treasurer
</TABLE>
(1) Consists of contributions by the Company to the Company's 401(k) Plan
on behalf of the Named Executive Officers indicated.
OPTION GRANTS
The following table summarizes options granted during the year ended
December 31, 1997 to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT
NUMBER OF ASSUMED ANNUAL RATES OF
SECURITIES % OF STOCK PRICE APPRECIATION
UNDERLYING TOTAL EXERCISE FOR OPTION TERM (2)
OPTIONS OPTIONS OR BASE EXPIRATION --------------------------
NAME GRANTED (1) GRANTED PRICE DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Scott Scherr ......... 31,300 34.8 $73 10/23/07 $1,437,956 $3,644,638
Alan Goldstein, M.D. 24,200 26.9 73 10/23/07 1,111,775 2,817,899
Mitchell K. Dauerman 8,500 9.4 73 10/23/07 390,499 989,758
</TABLE>
(1) These options have been granted pursuant to the Company's
Nonqualified Stock Option Plan, and 25% vested immediately upon the
date of grant and an additional 25% shall vest on each of the first,
second and third anniversaries of the date of grant.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The 5%
and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and
do not represent the Company's estimate or projection of the
Company's future Common Stock prices. These amounts represent certain
assumed rates of appreciation in the value of the Company's Common
Stock from the fair market value on the date of grant. Actual gains,
if any, on stock option exercises are dependent on the future
performance of the Common Stock and overall stock market conditions.
The amounts reflected in the table may not necessarily be achieved.
46
<PAGE>
The following table shows the number of shares covered by both exercisable
and unexercisable stock options held by the Named Executive Officers as of
the fiscal year ended on December 31, 1997, and the values for exercisable
and unexercisable options. No options were exercised during such fiscal year
by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL 1997
AND OPTION VALUES AT FISCAL YEAR-END
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997 (1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Scott Scherr ......... 7,825 23,475 -- --
Alan Goldstein, M.D. . 6,050 18,150 -- --
Mitchell K. Dauerman 9,403 6,375 151,382 --
</TABLE>
(1) Options are in-the-money if the market value of the shares covered
thereby is greater than the option exercise price. This calculation is
based on the fair market value at December 31, 1997 of $73.00 per
share, less the exercise price.
STOCK OPTION PLAN
The Company's Nonqualified Stock Option Plan (the "Plan") was adopted in
April 1996. Under the Plan, options to purchase shares of Common Stock may be
granted to employees and directors of the Company upon approval of the
Compensation Committee of the Board of Directors. As of the date hereof,
options to purchase 200,000 shares were authorized for issuance under the
Plan, of which 171,561 options to purchase shares were outstanding with a
weighted average exercise price of $63.49 per share. Other than with respect
to options granted as compensation to non-employee Directors, the option price
for each share of stock subject to any option granted under the Plan will be
equal to the fair market value of such share on the date on which the option
is granted, or such other amount as may be determined by the Compensation
Committee of the Board of Directors. The option price for shares purchased
through the exercise of an option is payable in cash, in shares of stock, or
in any combination thereof, as determined by the Compensation Committee. In
the event of a change in control (as defined in the Plan) in which shares are
converted into other property, outstanding options will become fully vested,
will be terminated and the option holder will receive a cash payment equal to
the value of his or her option. All options cease to be exercisable upon the
tenth anniversary of the date of grant.
DIRECTOR COMPENSATION
As compensation for serving on the Board of Directors, each director who
is not employed by the Company receives a quarterly retainer of $5,000,
payable exclusively in the form of options to purchase Common Stock under the
Plan. Such options are exercisable at a 70% discount to the grant date market
value of the Common Stock, with the total discount on all options granted for
a calendar quarter equaling the retainer fees earned by the non-employee
directors for such quarter. All directors are reimbursed for expenses
incurred in connection with their attendance at Board of Directors and
committee meetings.
LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers
a corporation to indemnify its officers and directors and to purchase
insurance with respect to liability arising out of their capability or status
as directors and officers, provided that this provision shall not eliminate
or limit the liability of a director: (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) payment of an improper dividend or improper
repurchase of the Corporation's stock under Section 174 of the DGCL, or (iv)
for actions or omissions pursuant to which the director received an improper
personal benefit. None of the foregoing, however, alters a director's
liability under the federal securities laws or affects the availability of
equitable remedies, such as an injunction or rescission, for breach of
fiduciary duty. The DGCL provides further that the indemnification permitted
thereunder shall not be deemed exclusive of any other rights to which the
directors and officers may be entitled under the corporation's by-laws, any
agreement, a vote of stockholders or otherwise. The
47
<PAGE>
Company's Certificate of Incorporation contains a provision eliminating the
personal liability of directors to the maximum extent permitted and the
Certificate of Incorporation and By-Laws each require the Company to
indemnify its officers and directors to the fullest extent permitted by the
DGCL.
CERTAIN TRANSACTIONS
In June 1992, the Partnership entered into a Software Development
Agreement with Strategic Image Systems, Inc. ("Strategic"), a corporation
controlled by Dr. Goldstein, the Executive Vice President, Chief Technology
Officer and a director and stockholder of the Company, which provided for the
payment of royalties by the Partnership to Strategic on sales of software
developed by Strategic for the Partnership. At the time the parties entered
into this Agreement, Dr. Goldstein was not an employee, officer or partner of
the Partnership and the parties were not otherwise affiliated. In connection
with the Agreement, in 1993 the Partnership granted a 10% limited partnership
interest in the Partnership to Strategic. In January 1995, the Partnership
agreed to pay $650,000 and granted a 12% limited partnership interest in the
Partnership to Strategic, in exchange for the contribution by Strategic to
the Partnership of all rights under the Software Development Agreement,
thereby terminating the Partnership's obligation to make royalty payments
thereunder. Also in 1995, the Partnership paid approximately $61,000 to
employees of Strategic for commissions on sales of the Partnership's products
to Resellers. In 1995 and 1996, the Partnership purchased certain assets of
Strategic amounting to approximately $86,000 and $139,000, respectively.
In June 1995, the Partnership acquired the business of The Ultimate
Software Group of New York, Inc. ("USGNY"), a Reseller of the Company's
products, in exchange for a 3.86% limited partnership interest in the
Partnership. Mr. Marc Scherr, a director and stockholder of the Company and the
brother of Mr. Scott Scherr, the Company's Chairman of the Board of Directors,
President and Chief Executive Officer, was the controlling stockholder of
USGNY. In addition, Reuben Scherr, the father of Messrs. Marc and Scott Scherr,
was a stockholder of USGNY.
In October 1995, Mr. Marc Scherr and Rick Wilber, each a director and
stockholder of the Company, loaned $50,000 and $300,000, respectively, to the
Partnership at an interest rate of 1% per month. In May 1996, Mr. Marc Scherr
agreed to the cancellation of his loan in exchange for the issuance of
approximately 958 shares of Series A Convertible Preferred Stock of the
Company. Also, in May 1996, Mr. Wilber was repaid $50,000 plus accrued
interest and agreed to the cancellation of the remaining $250,000 of his loan
in exchange for the issuance of approximately 4,789 shares of Series A
Convertible Preferred Stock of the Company.
The Company consummated a series of transactions during the second and
third calendar quarters of 1996. At the time of these transactions, the
Company and the Partnership were under common control and certain directors
and officers of the Company were partners in the Partnership. These
transactions included the following: (i) the Company acquired all of the
issued and outstanding capital stock of Strategic from its shareholders,
including Dr. Goldstein and members of his immediate family, in exchange for
approximately 97,813 shares of the Company's Class B Common Stock, (ii) the
Company acquired all of the issued and outstanding capital stock of The
Ultimate Software Group, Inc. ("GP"), a Florida corporation controlled by Mr.
Scott Scherr, from its shareholders (together with the shareholders of
Strategic, the "Participating Stockholders"), including Mr. Scott Scherr,
members of his immediate family and certain other of the Company's officers,
in exchange for an aggregate of approximately 174,344 shares of the Company's
Class B Common Stock, (iii) the business and operations of the Partnership
were transferred and conveyed to the Company in exchange for the issuance by
the Company of 236,300 shares of Class A Common Stock and 536,269 shares of
Class B Common Stock (272,157 of which were beneficially owned by the Company
as a result of its acquisition of GP and Strategic), and payment of $660,555
in cash, (iv) the Company entered into an escrow agreement with the
Partnership, pursuant to which all 236,300 shares of Class A Common Stock
issued to the Partnership were placed in escrow (the "Class A Escrow") and
(v) the Company entered into an escrow agreement with the Partnership and the
Participating Stockholders, pursuant to which 230,700 shares of the Class B
Common Stock (77,665 of which were beneficially owned by the Company as a
result of it acquisition of Strategic and GP) issued to the Partnership and
the Participating Stockholders, were placed in escrow (the "Class B Escrow").
48
<PAGE>
In April 1996, the Company sold a total of 95,787 shares of Series A
Convertible Preferred Stock to J.P. Morgan Investment Corporation and its
affiliate, Sixty Wall Street SBIC Fund, L.P., (collectively, "Morgan") at an
aggregate purchase price of approximately $5.0 million. In connection with
the sale, the Company entered into a Series A Convertible Preferred Stock
Purchase Agreement (the "Morgan Purchase Agreement") and the Shareholders
Rights Agreement (as defined), pursuant to which Morgan was granted certain
consent, preemptive and registration rights. In addition, the holders of Series
A Convertible Preferred Stock, voting separately as a class, were granted the
right to elect a director of the Company (the "Series A Director"). Morgan, by
virtue of its ownership of a majority of the issued and outstanding shares of
Series A Convertible Preferred Stock, has the power to elect the Series A
Director. There is currently no Series A Director. Prior to the consummation of
the Offering, all shares of Series A Convertible Preferred Stock will be
converted into shares of Common Stock. See "Shares Eligible for Future Sale --
Registration Rights".
In April 1996, the Company issued to Mr. Marc Scherr and Patrick A.
Gerschel fully-vested options to purchase an aggregate of 31,933 shares of
Class C Common Stock at an exercise price of $52.20 per share, 23,766 of
which are currently held by Mr. Marc Scherr, as consideration for consulting
services performed for the Company. Mr. Gerschel is the principal shareholder
of Gerschel & Co., Inc., of which Mr. Marc Scherr is a director. Mr. Gerschel
is a stockholder of the Company and previously was a shareholder of USGNY. In
1995, Mr. Gerschel loaned an aggregate of $250,000 to the Partnership at an
interest rate of 1% per month. In 1996, Mr. Gerschel loaned an aggregate of
$750,000 to the Partnership at an interest rate of 1% per month. In May 1996,
Mr. Gerschel agreed to the cancellation of all such loans in exchange for the
issuance of approximately 19,157 shares of Series A Convertible Preferred
Stock of the Company.
In May 1996, Robert A. Yanover, a director of the Company, purchased 4,000
shares of the Company's Series A Convertible Preferred Stock, and in
December, 1996, Mr. Yanover purchased 4,000 shares of the Company's Series B
Convertible Preferred Stock, in each case, at a purchase price of $52.20 per
share.
In May 1996, Michael Feinberg, a holder of more than 5% of the outstanding
capital stock of the Company, and his wife purchased an aggregate of
approximately 28,736 shares of the Company's Series A Convertible Preferred
Stock at a purchase price of $52.20 per share. In December 1996 and April 1997,
Mr. Feinberg purchased 28,736 and 19,157 shares, respectively, of the
Company's Series B Convertible Preferred Stock, in each case, at a purchase
price of $52.20 per share. At the time of these purchases, Mr. Feinberg was
a limited partner in the Partnership.
Upon commencement of his employment with the Company in September 1996,
Mitchell K. Dauerman, Chief Financial Officer and Treasurer of the Company,
was granted fully-vested options to purchase 7,278 shares of Class C Common
Stock of the Company at an exercise price of $52.20 per share.
In June 1997, the Company sold a total of 153,257 shares of Series B
Convertible Preferred Stock to HarbourVest Venture Partners V -- Direct Fund
L.P. ("HarbourVest") for an aggregate purchase price of approximately $8.0
million. In connection with such sale, the Company entered into a Series B
Convertible Preferred Stock Purchase Agreement (the "HarbourVest Purchase
Agreement") and the Shareholders Rights Agreement, pursuant to which
HarbourVest was granted certain consent, preemptive and registration rights.
In addition, the holders of Series B Convertible Preferred Stock, voting
separately as a class, were granted the right to elect a director of the
Company (the "Series B Director"). HarbourVest, by virtue of its ownership of
a majority of the issued and outstanding shares of Series B Convertible
Preferred Stock, has the power to elect the Series B Director. In June 1997,
Mr. Nemirovsky, a Managing Director of HarbourVest, was elected as the Series
B Director. Prior to the consummation of the Offering, all shares of Series B
Convertible Preferred Stock will be converted into shares of Common Stock.
See "Shares Eligible for Future Sale -- Registration Rights."
In October 1997, each of Messrs. Marc Scherr, Wilber and Yanover were
granted fully-vested options to purchase up to 2,500 shares of Class C Common
Stock at an exercise price of $73.00 per share, in consideration of services
provided to the Company as directors.
In 1998, the Partnership was dissolved, all of the Company's
outstanding shares of Class A, Class B and Class C Common Stock were
converted into shares of Common Stock and the shares of the Company's Common
Stock held by the Partnership were distributed to its partners. 68,749 of the
shares of Class A Common Stock held in the Class A Escrow were released to the
Partnership and the remaining 167,551 shares of Class A Common Stock held in
the Class A Escrow have been surrendered to the Company and cancelled. Prior
to the consummation of the Offering, all of the shares of Class B Common Stock
held in the Class B Escrow will be released from escrow and distributed to
the Participating Stockholders and the Partnership (or its successors), as
appropriate.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of March 31,
1998, after giving effect to the conversion into Common Stock of the Class A
Common Stock, Class B Common Stock and Class C Common Stock and the Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock, by: (i)
each person who is known by the Company to own beneficially more than 5% of
the outstanding shares of the Common Stock, (ii) each of the Company's Named
Executive Officers, (iii) each director of the Company and (iv) all directors
and executive officers of the Company as a group. The address of each of the
officers and directors of the Company is c/o The Ultimate Software Group,
Inc., 3111 Stirling Road, Ft. Lauderdale, Florida 33312.
<TABLE>
<CAPTION>
PERCENTAGE
OF OUTSTANDING SHARES
--------------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1)(2) OFFERING OFFERING
<S> <C> <C> <C>
HarbourVest Partners V--Direct Fund L.P. ..........
1 Financial Center, 44th Fl.
Boston, MA 02111
J.P. Morgan Investment Corporation(3)..............
60 Wall Street
New York, NY 10005
Michael Feinberg...................................
3980 N. 32 Terrace
Hollywood, FL 33312
Scott Scherr.......................................
Alan Goldstein, M.D................................
Mitchell K. Dauerman...............................
Ofer Nemirovsky....................................
Marc D. Scherr.....................................
LeRoy A. Vander Putten.............................
Rick Wilber........................................
Robert A. Yanover..................................
All directors and executive officers as a group
(8 persons).......................................
</TABLE>
(1) Unless otherwise indicated in these footnotes, the persons named in the
table above have sole voting and investment power with respect to all
shares beneficially owned.
(2) Based on shares outstanding prior to the Offering and shares to
be outstanding after the Offering, except that shares underlying options
exercisable within 60 days of March 31, 1998 are deemed to be outstanding
for purposes of calculating shares beneficially owned and percentages
owned by the holder of such options.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Following the consummation of this Offering, the authorized capital stock
of the Company will consist of million shares of Common Stock, $0.01 par
value per share, and 1,000,000 authorized shares of preferred stock, $0.01
par value per share ("Preferred Stock"). Options to purchase shares have
been granted under the Plan ranging from $ per share to $ per share.
COMMON STOCK
As of , 1998, there were shares of Common Stock outstanding and
held of record by stockholders, assuming the conversion of all shares of
the Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock. Based upon the number of shares outstanding as of that date and after
giving effect to the issuance of the shares of Common Stock offered
hereby, there will be shares of Common Stock outstanding upon the
closing of this Offering. The outstanding shares of Common Stock are, and the
shares offered by the Company in this Offering will be, when issued and paid
for, fully paid and nonassessable.
The holders of Common Stock will possess exclusive voting rights in the
Company, except to the extent that the Board of Directors shall have
designated voting power with respect to any Preferred Stock issued. Each
holder of Common Stock is entitled, on each matter submitted for a vote of
holders of Common Stock, to one vote for each share of such stock registered
in such holder's name on the books of the Company. Except as otherwise
required by law and subject to the rights of any holders of Preferred Stock,
the presence in person or by proxy of the holders of record of a majority of
the shares entitled to vote at a meeting of stockholders constitutes a quorum
for the transaction of business at that meeting. Actions requiring approval
of stockholders will generally require approval by a majority vote at a
meeting at which a quorum is present, except that at each stockholder meeting
for the election of directors, provided a quorum is present, directors will
be elected by a plurality of votes validly cast in the election. Stockholders
will not have any right to cumulate votes in the election of directors.
Subject to the rights of any holders of Preferred Stock, each holder of
Common Stock is entitled to receive dividends out of funds legally available
therefor when, as, and if, declared by the Board of Directors. Dividends may
be paid in cash, property or shares of the Company's capital stock. In the
event of liquidation, dissolution or winding-up of the Company, the holders
of the Common Stock will be entitled to share ratably in the distribution of
all assets of the Company remaining after payment of all of the Company's
debts and liabilities and of all sums to which holders of any Preferred Stock
may be entitled. Holders of the Common Stock will not generally be entitled
to preemptive rights with respect to any shares of capital stock which may be
issued by the Company.
PREFERRED STOCK
Upon the consummation of the Offering, no shares of Preferred Stock will
be issued or outstanding. The Preferred Stock may be issued by the Board of
Directors in one or more series and may have such voting rights, if any,
designations, preferences and relative, participating, optional and other
special rights, and such qualifications, limitations and restrictions, as the
Board of Directors (or a duly authorized committee thereof) may fix by
resolution or resolutions. Moreover, the Board of Directors may issue such
Preferred Stock, from time to time, in transactions without the approval of
the stockholders of the Company, and the preferences, designations, voting
and other rights of any such shares of Preferred Stock may materially limit
or qualify the rights of the outstanding shares of Common Stock. See " --
Anti-Takeover Effects of Certain Provisions of Delaware Law and the
Certificate of Incorporation and the By-Laws."
The holders of Preferred Stock issued by the Company may be given the
right to vote for the election of directors generally or to elect a specified
number or percentage of the members of the Board of Directors. The number of
directors that may be elected by the holders of any class or series of
Preferred Stock having the right to elect directors may be in addition to the
number of directors fixed by or pursuant to the Certificate of Incorporation.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer,
51
<PAGE>
proxy contest, merger or otherwise, and thereby to protect the continuity of
the Company's management. The issuance of shares of Preferred Stock pursuant
to the authority of the Board of Directors described above may adversely
affect the rights of the holders of Common Stock. For example, Preferred
Stock issued by the Company may rank prior to the Common Stock as to dividend
rights, liquidation preference or both, may have full or limited voting
rights and may be convertible into shares of Common Stock. Accordingly, the
issuance of shares of Preferred Stock may discourage bids for the Common
Stock at a premium or may otherwise adversely affect the market price of the
Common Stock.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND THE
CERTIFICATE OF INCORPORATION AND BY-LAWS
Interested Stockholder Restrictions. Section 203 of the DGCL prohibits an
"interested stockholder" of a Delaware corporation from engaging in certain
business combinations with the corporation, including mergers or
consolidations or acquisitions of additional shares of the corporation, for a
period of three years following the time that the stockholder becomes an
"interested stockholder." An "interested stockholder" is defined to include
persons owning directly or indirectly 15% or more of the outstanding voting
stock of a corporation. The prohibitions under Section 203 are not applicable
in certain circumstances, including those in which (i) the business
combination or the transaction which results in the stockholder becoming an
"interested stockholder" is approved by the corporation's board of directors
prior to the time the stockholder becomes an "interested stockholder," (ii)
the "interested stockholder" upon consummation of such transaction owns at
least 85% of the voting stock of the corporation outstanding prior to such
transaction or (iii) the corporation has elected not to be governed by such
prohibitions.
Issuance of Common and Preferred Stock. The Company believes that its
ability to issue the authorized but unissued shares of Common Stock and
shares of Preferred Stock without stockholder consent will provide the
Company with the flexibility necessary to meet its future needs without
experiencing the time delay of having to seek stockholder approval. The
unissued shares of Common Stock and Preferred Stock will be issuable from
time to time for any corporate purpose, including, without limitation, stock
splits, stock dividends, employee benefit and compensation plans,
acquisitions and public or private sales for cash as a means of raising
capital. It is possible that the Board of Directors might use its authority
(subject to the restrictions referred to above) to issue Common Stock or
Preferred Stock in a way which could deter or impede the completion of a
tender offer or other attempt to gain control of the Company which the Board
of Directors does not approve. The Company does not have any predetermined
plans or commitments to use its authority to effect any such issuance, but
reserves the right to take any action in the future which the Board of
Directors deems to be in the best interests of the stockholders and the
Company under the circumstances.
It is not possible to state the actual effect of any issuance of Preferred
Stock upon the rights of holders of Common Stock because the Board of
Directors has not determined an issuance price or prices, terms or the rights
of the holders of Preferred Stock. However, such effects might include: (i)
restrictions on Common Stock dividends if Preferred Stock dividends have not
been paid; (ii) dilution of the voting power and equity interest of existing
holders of Common Stock to the extent that any Preferred Stock series has
voting rights or would acquire voting rights upon the occurrence of certain
events (such as the failure to pay dividends for a specified period) or that
any Preferred Stock series is convertible into Common Stock; and (iii)
current holders of Common Stock not being entitled to share in the Company's
assets upon liquidation, dissolution or winding-up until satisfaction of any
liquidation preferences granted to any series of Preferred Stock.
Board of Directors. On 1998, the Certificate of Incorporation was
amended to provide that the Board of Directors will consist of not less than
nor more than directors (subject to the rights of the holders of any
series of Preferred Stock), with the exact number to be determined from time
to time by the affirmative vote of a majority of the entire Board of
Directors. Pursuant to the Certificate of Incorporation, the Board of
Directors of the Company will be divided into three classes, each of whose
members will serve for a staggered three-year term. The Board will consist of
Class I Directors ( and ), Class II Directors ( and
) and
52
<PAGE>
Class III Directors ( and ). At each annual meeting of
stockholders, a class of directors will be elected for a three-year term to
succeed the directors of the same class whose terms are then expiring. The
terms of the Class I Directors, Class II Directors and Class III Directors
expire upon the election and qualification of successor directors at the
annual meeting of stockholders held during the calendar years 1999, 2000 and
2001, respectively. At any meeting of the Board of Directors, a majority of
the entire Board of Directors will constitute a quorum for the transaction of
business, and, subject to certain exceptions, at any meeting at which a
quorum is present the affirmative vote of a majority of the directors present
will constitute an act of the Board of Directors. Subject to the rights of
the holders of any series of Preferred Stock, any newly created directorship
and any other vacancy occurring on the Board of Directors may be filled by a
majority of the directors then in office (regardless of whether such majority
constitutes a quorum of directors) or by a sole remaining director, except
that the stockholders shall fill any vacancy resulting from the removal of a
director by the stockholders.
Pursuant to the DGCL any director or the entire Board of Directors may be
removed at any time, with or without cause, by the affirmative vote of the
holders of a majority of the total number of votes entitled to be cast by all
holders of the voting stock of the Company, which will include the Common
Stock and any series of Preferred Stock which by its terms is entitled to
vote generally in the election of directors of the Company.
Limitation on Call of Special Meetings of Stockholders. Under the DGCL,
special meetings of stockholders may be called by the Board of Directors or
by such other persons as may be authorized by the Certificate of
Incorporation or the By-Laws. On , 1998 the Company's By-Laws were
amended to provide that special meetings may be called only by the Board of
Directors pursuant to a written request signed by not less than one-third of
the total number of directors then in office. Except as otherwise required by
law or the Certificate of Incorporation, no business will be transacted at
any special meeting of stockholders other than the items of business stated
in the notice.
Advance Notice Requirements. The By-Laws establish advance notice
procedures with regard to (i) the nomination, other than by or at the
direction of the Board of Directors, of candidates for election to the Board
of Directors (the "Nomination Provision") and (ii) certain business to be
brought before an annual meeting of stockholders (the "Business Provision").
The Nomination Provision, by requiring advance notice of nominations by
stockholders, affords the Board of Directors a meaningful opportunity to
consider the qualifications of the proposed nominees and, to the extent
deemed necessary or desirable by the Board of Directors, to inform
stockholders about such qualifications.
The Business Provision, by requiring advance notice of business proposed
to be brought before an annual meeting, provides a more orderly procedure for
conducting annual meetings of stockholders and provides the Board of
Directors with a meaningful opportunity prior to the meeting to inform
stockholders, to the extent deemed necessary or desirable by the Board of
Directors, of any business proposed to be conducted at such meeting, together
with any recommendation of the Board of Directors. The Business Provision
does not affect the right of stockholders to make stockholder proposals for
inclusion in proxy statements for the Company's annual meetings of
stockholders pursuant to the rules of the Securities and Exchange Commission.
Although these By-Laws provisions do not give the Board of Directors any
power to approve or disapprove of stockholder nominations for the election of
directors or of any other business desired by stockholders to be conducted at
an annual meeting of stockholders if the proper procedures are followed,
these By-Laws provisions may have the effect of precluding a nomination or
precluding the conducting of business at a particular annual meeting, and may
make it difficult for a third party to conduct a solicitation of proxies to
elect its own slate of directors or otherwise attempt to obtain control of
the Company, even if such a solicitation or attempt might be beneficial to
the Company and its stockholders.
Preferred Share Purchase Rights. The Company intends to enter into a
Rights Agreement prior to the consummation of the Offering pursuant to which
one Preferred Stock purchase right is attached to each share of Common Stock.
The Rights are transferable only with Common Stock, until they become
exercisable at an exercise price to be determined by the Board of Directors
prior to the time the Company enters into the Rights Agreement.
53
<PAGE>
Generally, the Rights will become exercisable only if a person or group
(other than certain affiliates of the Company) acquires 15% or more of the
issued and outstanding shares of Common Stock or announces a tender offer,
the consummation of which would result in ownership by a person or group of
15% or more of the issued and outstanding shares of Common Stock. Each Right
will entitle the holder, until the tenth anniversary of the Rights Agreement,
to buy one one-hundredth of a share of Preferred Stock, at an exercise price
of .
If a person or group (other than certain affiliates of the Company)
acquires 15% or more of the issued and outstanding shares of Common Stock or
if the Company is the surviving corporation in a merger, each Right will
entitle its holder (other than such person or members of such group) to
purchase, at the Right's then current exercise price, shares of Common Stock
having a market value of twice the Right's exercise price. If the Company is
acquired in a merger or other business combination transaction, other than a
merger which follows an offer which the Continuing Directors (as defined in
the Rights Agreement) determines to be fair and in the best interests of the
shareholders, each right will entitle its holder to purchase, at the Right's
then current exercise price, a number of the acquiring company's common
shares having a then current market value of twice the Right's exercise
price.
Following the acquisition by a person or group of beneficial ownership of
15% or more of the Common Stock, the Board of Directors of the Company may
exchange the Rights (other than Rights owned by such person or group), in
whole or in part, at an exchange ratio of one share of Common Stock per
Right.
Prior to ten days after the acquisition by a person or group of beneficial
ownership of 15% or more of the Common Stock, the Rights will be redeemable
in whole, not in part, for one cent per Right.
The issuance of the Rights to purchase shares of Preferred Stock will have
certain anti-takeover effects. The Rights will cause substantial dilution to
a person or group that attempts to acquire the Company on terms not approved
by the Board of Directors. The Rights should not interfere with any merger or
other business combination approved by the Board of Directors prior to ten
days after the time that a person or group has acquired beneficial ownership
of 15% or more of the Common Stock, as the rights will be redeemable by the
Company at $0.01 per Right prior to such time.
The Company's transfer agent, , is the Rights Agent under the Rights
Agreement.
LIMITATIONS ON DIRECTOR LIABILITY
The Certificate of Incorporation contains a provision that is designed to
limit the directors' liability to the extent permitted by the DGCL and any
amendments thereto. Specifically, directors will not be held liable to the
Company or its stockholders for an act or omission in such capacity as a
director, except for liability as a result of (i) any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) payment of an improper dividend or improper
repurchase of the Company's stock under Section 174 of the Delaware General
Corporation Law, or (iv) actions or omissions pursuant to which the director
received an improper personal benefit. The principal effect of the limitation
on liability provision is that a stockholder is unable to prosecute an action
for monetary damages against a director of the Company unless the stockholder
can demonstrate one of the specified bases for liability. This provision,
however, does not eliminate or limit director liability arising in connection
with causes of action brought under the federal securities laws. The
Certificate of Incorporation does not eliminate its directors' duty of care.
The inclusion of this provision in the Certificate of Incorporation may,
however, discourage or deter stockholders or management from bringing a
lawsuit against directors for a breach of their fiduciary duties, even though
such an action, if successful, might otherwise have benefited the Company and
its stockholders. This provision should not affect the availability of
equitable remedies such as injunction or rescission based upon a director's
breach of the duty of care.
The By-Laws also provide that the Company will indemnify its officers and
directors to the fullest extent permitted by Delaware law. The Company is
generally required to indemnify its directors and officers for all judgments,
fines, settlements, legal fees and other expenses incurred in connection with
pending or threatened legal proceedings because of the officer's or
director's position with the Company
54
<PAGE>
or another entity that the officer or director serves at the Company's
request, subject to certain conditions, and to advance funds to its officers
and directors to enable them to defend against such proceedings. To receive
indemnification, the officer or director must have been successful in the
legal proceeding or acted in good faith and in what was reasonably believed
to be a lawful manner in the Company's best interest.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is .
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Offering, the Company will have an aggregate
of shares of Common Stock outstanding, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options to
purchase Common Stock. Of these shares, the shares sold in the Offering
are freely tradable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), except that any
shares held by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act ("Rule 144"), may generally be sold only in
compliance with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining shares of Common Stock are deemed "restricted
securities" as defined under Rule 144. Restricted securities may be sold in
the public market only if registered or if they qualify for an exemption from
registration under the Securities Act. Subject to the lock-up agreements
described below, additional shares will be available for sale in the public
market (subject in the case of shares held by affiliates to compliance with
certain volume restrictions) as follows: (i) shares will be available
for immediate sale in the public market on the date of this Prospectus, (ii)
shares will be eligible for sale 90 days after the date of this
Prospectus and (iii) shares will be eligible for sale upon the
expiration of the Lock-up Agreements 180 days after the date of this
Prospectus.
In general, under Rule 144, a person (or persons whose shares are
aggregated) including an affiliate, who has beneficially owned shares for at
least one year is entitled to sell, within any three-month period commencing
90 days after the date of this Prospectus, a number of shares that does not
exceed the greater of (i) one percent of the then outstanding shares of
Common Stock (approximately shares immediately after the Offering) or
(ii) the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the date on which notice of such sale is filed,
subject to certain restrictions. In addition, a person who is not deemed to
have been an affiliate of the Company at any time during the 90 days
preceding a sale and who has beneficially owned the shares proposed to be
sold for at least two years would be entitled to sell such shares under Rule
144(k) without regard to the volume limitations described above. To the
extent that shares were acquired from an affiliate of the Company, such
affiliates' holding period for the purpose of effecting a sale under Rule 144
commences on the date of transfer from the affiliate.
An employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or
contract is entitled to rely on the resale provisions of Rule 701 under the
Securities Act, which permits non-affiliates to sell their Rule 701 shares
without having to comply with the public information, holding period, volume
limitation or notice provisions of Rule144 and permits affiliates to sell
their Rule 701 shares without having to comply with Rule 144's holding period
restrictions, in each case commencing 90 days after the date of this
Prospectus.
OPTIONS
Following the Offering, the Company intends to file a Registration
Statement on Form S-8 under the Securities Act to register all shares of
Common Stock subject to the Plan which do not qualify for exemption from the
registration requirements of the Securities Act. Such Registration Statement
will become effective upon filing. Shares covered by this Registration
Statement will be eligible for sale in the public market after the effective
date of such Registration Statement, subject to the Lock-up Agreements, if
applicable.
REGISTRATION RIGHTS
Pursuant to a Shareholders Rights Agreement (the "Shareholders Rights
Agreement") dated June 6, 1997 among the Company and certain persons and
entities (the "Rightsholders"), including Scott Scherr, Alan Goldstein,
Morgan and HarbourVest, such Rightsholders will be entitled following the
Offering to certain rights with respect to the registration under the
Securities Act of a total of approximately shares of
56
<PAGE>
Common Stock (the "Registrable Stock"). The Shareholders Rights Agreement
generally provides that, in the event the Company proposes to register any of
its securities under the Securities Act, the Rightsholders shall be entitled
to include their Registrable Stock in such Registration, subject to the right
of the managing underwriter of any underwritten offering to limit for
marketing reasons the number of shares of Registrable Stock included in such
"piggyback" registration.
At any time following six months after the effective date of the Offering,
each of Morgan, HarbourVest or Rightsholders holding more than 25% of the
shares subject to the Shareholders Rights Agreement may require the Company
to prepare and file a registration statement under the Securities Act with
respect to their shares of Registrable Stock. The Company need effect no more
than two such demand registrations for each of Morgan and HarbourVest and two
demand registrations for the other Rightsholders. The Company is not required
to file a demand registration statement within six months after the effective
date of any other demand registration statement filed by the Company.
In addition, the Acquired Resellers whose businesses were acquired in
1998, were granted certain piggyback registration rights with respect to the
shares issued in connection with the acquisition of their businesses. Such
registration rights, with respect to each Acquired Reseller, expire on the
first anniversary of the date of the acquisition of such Acquired Reseller's
business.
EFFECT OF SALES OF SHARES
Prior to the Offering, there has been no public market for the Common
Stock, and no precise prediction can be made as to the effect, if any, that
market sales of shares of Common Stock or the availability of shares of
Common Stock for sale will have on the market price of the Common Stock
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock in the public market could adversely affect prevailing market
prices and could impair the Company's future ability to raise capital through
the sale of its equity securities.
LOCK-UP AGREEMENTS
All directors and officers and certain stockholders of the Company
(holding an aggregate of shares of Common Stock) have agreed that they
will not, without the prior written consent of the representatives of the
Underwriters and subject to certain exceptions, sell or otherwise dispose of
any shares of Common Stock or options to acquire shares of Common Stock
during the 180-day period following the date of this Prospectus. See
"Underwriting."
The Company has agreed not to sell or otherwise dispose of any shares of
Common Stock during the day period following the date of the Prospectus,
except the Company may issue, and grant options to purchase, shares of Common
Stock under the Plan. In addition, the Company may issue shares of Common
Stock in connection with any acquisition of another company if the terms of
such issuance provide that such Common Stock shall not be resold prior to the
expiration of the -day period referenced in the preceding sentence. See
"Risk Factors -- Shares Eligible for Future Sale."
57
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
March , 1998 (the "Underwriting Agreement"), the Underwriters named below,
who are represented by Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") and Volpe Brown Whelan & Company, LLC (the "Representatives"), have
severally agreed to purchase from the Company the respective number of shares
of Common Stock set forth opposite their names below.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- -------------------------------------------------------- --------------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation ....
Volpe Brown Whelan & Company, LLC .......................
--------------------
Total .................................................
====================
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal
matters and to certain other conditions. The Underwriters are obligated to
purchase and accept delivery of all the shares of Common Stock offered hereby
(other than those shares covered by the over-allotment option described
below) if any are purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including
the Underwriters) at such price less a concession not in excess of $
per share. The Underwriters may allow, and such dealers may re-allow, to
certain other dealers a concession not in excess of $ per share. After
the initial offering of the Common Stock, the public offering price and other
selling terms may be changed by the Representatives at any time without
notice. The Underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
The Company and certain stockholders of the Company (the "Selling
Stockholders") have granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase, from time to time, in
whole or in part, up to an aggregate of additional shares of Common
Stock at the initial public offering price less underwriting discounts and
commissions. The Underwriters may exercise such option solely to cover
overallotments, if any, made in connection with the Offering. To the extent
that the Underwriters exercise such option, each Underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such Underwriter's percentage underwriting
commitment as indicated in the preceding table.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Each of the Company, its executive officers and directors and certain
stockholders of the Company (including the Selling Stockholders) has agreed,
subject to certain exceptions, not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common
Stock or (ii) enter into any swap or other arrangement that transfers all or
a portion of the economic consequences associated with the ownership of any
Common Stock (regardless of whether any of the transactions described in
clause (i) or (ii) is to be settled by the delivery of Common Stock, or such
other securities, in cash or otherwise) for a period of 180 days after the
date of this Prospectus without the prior written consent of DLJ. In
addition, during such period, the Company has also agreed not to file any
registration statement with respect to, and each of its executive officers,
directors and certain stockholders
58
<PAGE>
of the Company (including the Selling Stockholders) has agreed not to make
any demand for, or exercise any right with respect to, the registration of
any shares of Common Stock or any securities convertible into or exercisable
or exchangeable for Common Stock without DLJ's prior written consent.
Prior to the Offering, there has been no established trading market for
the Common Stock. The initial public offering price for the shares of Common
Stock offered hereby will be determined by negotiation among the Company and
the Representatives. The factors to be considered in determining the initial
public offering price include the history of and the prospects for the
industry in which the Company competes, the past and present operations of
the Company, the historical results of operations of the Company, the
prospects for future earnings of the Company, the recent market prices of
securities of generally comparable companies and the general condition of the
securities markets at the time of the Offering.
Other than in the United States, no action has been taken by the Company,
the Selling Stockholders or the Underwriters that would permit a public
offering of the shares of Common Stock offered hereby in any jurisdiction
where action for that purpose is required. The shares of Common Stock offered
hereby may not be offered or sold, directly or indirectly, nor may this
Prospectus or any other offering material or advertisements in connection
with the offer and sale of any such shares of Common Stock be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of such jurisdiction.
Persons into whose possession this Prospectus comes are advised to inform
themselves about and to observe any restrictions relating to the Offering and
the distribution of this Prospectus. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any shares of Common Stock
offered hereby in any jurisdiction in which such an offer or a solicitation
is unlawful.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. The Underwriters may bid for and
purchase shares of Common Stock in the open market to cover such syndicate
short position or to stabilize the price of the Common Stock. In addition,
the underwriting syndicate may reclaim selling concessions from syndicate
members and selected dealers if they repurchase previously distributed Common
Stock in syndicate covering transactions, in stabilizing transactions or
otherwise. These activities may stabilize or maintain the market price of the
Common Stock above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities
at any time.
LEGAL MATTERS
The validity of the shares of the Common Stock offered hereby will be
passed upon for the Company by Dewey Ballantine LLP, New York, New York.
Certain legal matters relating to the sale of the Common Stock offered hereby
will be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP,
New York, New York.
EXPERTS
The financial statements of the Company included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (including all amendments
thereto, the "Registration Statement") under the Securities Act with respect to
the Common Stock offered hereby. As permitted by the rules and regulations of
the Commission, this Prospectus omits certain information contained in the
Registration Statement. For further information with respect to the Company
and the Common Stock offered hereby, reference is hereby made to the
Registration Statement and to the exhibits and schedules filed therewith.
Statements
59
<PAGE>
contained in this Prospectus regarding the contents of any agreement or other
document filed as an exhibit to the Registration Statement are not
necessarily complete, and in each instance reference is made to the copy of
such agreement filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement, including the exhibits and schedules thereto, may be inspected at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of all or any part thereof
may be obtained from such office upon payment of the prescribed fees. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's Web site
is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by an independent accounting firm and
will make available copies of quarterly reports containing unaudited
financial information for the first three quarters of each fiscal year.
60
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Introduction.......................................................................... F-3
Balance Sheet--December 31, 1997...................................................... F-4
Statements of Operations--For the years ended December 31, 1995, 1996 and 1997 ...... F-5
Notes to Unaudited Pro Forma Financial Statements .................................... F-8
REGISTRANT
The Ultimate Software Group, Inc. and Subsidiaries
Report of Independent Certified Public Accountants ................................... F-9
Consolidated Balance Sheets--December 31, 1996 and 1997 .............................. F-10
Consolidated Statements of Operations--For the years ended December 31, 1995, 1996
and 1997 ............................................................................ F-11
Consolidated Statements of Stockholders' Deficit--For the years ended December 31,
1995, 1996 and 1997.................................................................. F-12
Consolidated Statements of Cash Flows--For the years ended December 31, 1995, 1996
and 1997 ............................................................................ F-13
Notes to Consolidated Financial Statements ........................................... F-15
BUSINESSES ACQUIRED IN 1996
Torrence & Associates, Inc. d/b/a The Ultimate Software Group
Report of Independent Certified Public Accountants ................................... F-29
Balance Sheet--December 31, 1995 ..................................................... F-30
Statement of Operations--For the year ended December 31, 1995 ........................ F-31
Statement of Shareholders' Deficit--For the year ended December 31, 1995 ............ F-32
Statement of Cash Flows--For the year ended December 31, 1995 ........................ F-33
Notes to Financial Statements ........................................................ F-34
The Ultimate Software Group of Georgia, Inc.
Report of Independent Certified Public Accountants ................................... F-37
Balance Sheet--December 31, 1995 ..................................................... F-38
Statement of Operations--For the year ended December 31, 1995 ........................ F-39
Statement of Shareholders' Deficit--For the year ended December 31, 1995 ............. F-40
Statement of Cash Flows--For the year ended December 31, 1995 ........................ F-41
Notes to Financial Statements ........................................................ F-42
The Ultimate Software Group Midwest, Ltd.
Report of Independent Certified Public Accountants ................................... F-45
Balance Sheet--December 31, 1995 ..................................................... F-46
Statement of Operations--For the year ended December 31, 1995 ........................ F-47
Statement of Partner's Deficit--For the year ended December 31, 1995 ................ F-48
Statement of Cash Flows--For the year ended December 31, 1995 ........................ F-49
Notes to Financial Statements ........................................................ F-50
BUSINESSES ACQUIRED IN 1998
The Ultimate Software Group of the Carolinas, Inc. and The Ultimate Software Group
of Virginia, Inc.
Report of Independent Certified Public Accountants ................................... F-53
Combined Balance Sheets--December 31, 1996 and 1997 .................................. F-54
F-1
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
PAGE
Combined Statements of Operations--For the years ended December 31, 1995,
1996 and 1997 ....................................................................... F-55
Combined Statements of Shareholders' Deficit--For the years ended December 31, 1995,
1996 and 1997........................................................................ F-56
Combined Statements of Cash Flows--For the years ended December 31, 1995,
1996 and 1997 ....................................................................... F-57
Notes to Combined Financial Statements ............................................... F-58
The Ultimate Software Group of New York and New England, G.P.
Report of Independent Certified Public Accountants ................................... F-61
Balance Sheets--December 31, 1996 and 1997 ........................................... F-62
Statements of Operations--For the years ended December 31, 1995, 1996 and 1997 ...... F-63
Statements of Partners' Deficit--For the years ended December 31, 1995,
1996 and 1997 ....................................................................... F-64
Statements of Cash Flows--For the years ended December 31, 1995, 1996 and 1997 ...... F-65
Notes to Financial Statements ........................................................ F-66
Ultimate Investors Group, Inc. and Subsidiary
Report of Independent Certified Public Accountants.................................... F-69
Consolidated Balance Sheets--December 31, 1996 and 1997............................... F-70
Consolidated Statements of Operations--For the years ended December 31, 1995,
1996 and 1997........................................................................ F-71
Consolidated Statements of Shareholders' Deficit--For the years ended December 31,
1995, 1996 and 1997.................................................................. F-72
Consolidated Statements of Cash Flows--For the years ended December 31, 1995,
1996 and 1997........................................................................ F-73
Notes to Consolidated Financial Statements............................................ F-74
</TABLE>
F-2
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC.
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma financial statements give effect to the
acquisitions of the following five third-party resellers of the Company's
products by The Ultimate Software Group, Inc. (the "Company"). These
acquisitions were accounted for under the poolings-of-interest method of
accounting:
<TABLE>
<CAPTION>
SHARES OF CLASS B
DATE COMMON STOCK
NAME OF THIRD-PARTY RESELLER ACQUIRED ISSUED
<S> <C> <C>
The Ultimate Software Group of the Carolinas,
Inc. and the Ultimate Software Group of
Virginia, Inc. ("Carolinas/Virginia")--commonly
controlled by the same shareholders.............. February 25, 1998 30,677
The Ultimate Software Group of New York and New
England, G.P. ("New York/New England")........... February 24, 1998 40,265
Ultimate Investors Group, Inc. ("Dallas") ........ March 4, 1998 38,000
The Ultimate Software Group of Northern
California, Inc. ("California").................. February 20, 1998 12,914
-----------------
121,856
=================
</TABLE>
Adjustments have been reflected to present the combined financial position
as of December 31, 1997 on a pro forma basis as if the acquisitions occurred
on December 31, 1997, and the combined results of operations for each of the
three years in the period ended December 31, 1997. Such pro forma results do
not necessarily represent the actual combined financial position or combined
results of operations and may not be indicative of future combined operating
results.
F-3
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC.
UNAUDITED PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-----------------------------------------------------------------
CAROLINAS/ NEW YORK/
THE COMPANY VIRGINIA NEW ENGLAND DALLAS CALIFORNIA
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents ......... $ 2,018 $ 32 $ 564 $ 466 $ 190
Accounts receivable,
net ................. 4,641 272 196 769 135
Other current assets . 575 98 154 125 9
------------- ------------ ------------- -------- ------------
Total current assets 7,234 402 914 1,360 334
Property and
equipment, net ....... 1,596 19 45 5 38
Other assets .......... 791 2 33 88 249
------------- ------------ ------------- -------- ------------
Total assets ........ $ 9,621 $ 423 $ 992 $1,453 $ 621
============= ============ ============= ======== ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and
accrued expenses ... $ 5,389 $ 47 $ 271 $ 282 $ 35
Customer deposits ... 2,107 194 137 333 95
Deferred
revenue--current ... 4,493 385 933 747 340
Current borrowings .. 162 109 -- 100 --
------------- ------------ ------------- -------- ------------
Total current
liabilities ........ 12,151 735 1,341 1,462 470
------------- ------------ ------------- -------- ------------
Long-term borrowings . 54 -- -- -- --
------------- ------------ ------------- -------- ------------
Deferred
revenue--long-term
and other ............ 1,716 -- -- 105 --
------------- ------------ ------------- -------- ------------
Stockholders' deficit:
Common and Preferred
stock ............... 11 1 -- 2 --
Paid-in
capital/partners'
capital ............. 33,582 137 (349) 453 900
Deficit .............. (37,893) (450) -- (569) (749)
------------- ------------ ------------- -------- ------------
Total stockholders'
deficit ............ (4,300) (312) (349) (114) 151
------------- ------------ ------------- -------- ------------
Total liabilities
and stockholders'
deficit ............ $ 9,621 $ 423 $ 992 $1,453 $ 621
============= ============ ============= ======== ============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA OFFERING PRO FORMA
ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
<S> <C> <C> <C> <C><C> <C>
ASSETS
Current assets:
Cash and cash
equivalents ......... $ -- $ 3,270 $ (a) $
Accounts receivable,
net ................. (87)(b) 5,926 5,926
Other current assets . (306)(c) 655 656
------------- ----------- ------------- -------------
Total current assets (393) 9,851
Property and
equipment, net ....... -- 1,703 1,703
Other assets .......... (278)(d) 885 885
------------- ----------- ------------- -------------
Total assets ........ $(671) $ 12,439 $ $
============= =========== ============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and
accrued expenses ... $ (87)(b) $ 5,937 $ $ 5,937
Customer deposits ... -- 2,866 2,866
Deferred
revenue--current ... -- 6,898 6,898
Current borrowings .. -- 371 371
------------- ----------- ------------- -------------
Total current
liabilities ........ (87) 16,072 16,072
------------- ----------- ------------- -------------
Long-term borrowings . -- 54 54
------------- ----------- ------------- -------------
Deferred
revenue--long-term
and other ............ -- 1,821 1,821
------------- ----------- ------------- -------------
Stockholders' deficit:
Common and Preferred
stock ............... (2)(e) 12 (a)
Paid-in
capital/partners'
capital ............. 2 (e) 34,725
Deficit .............. (584)(c)(d) (40,245) (40,245)
------------- ----------- ------------- -------------
Total stockholders'
deficit ............ (584) (5,508)
------------- ----------- ------------- -------------
Total liabilities
and stockholders'
deficit ............ $(671) $ 12,439 $ $
============= =========== ============= =============
</TABLE>
F-4
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------
CAROLINAS/ NEW YORK/
THE COMPANY VIRGINIA NEW ENGLAND DALLAS CALIFORNIA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues ..................... $ 14,137 $ 859 $1,776 $1,448 $ 456
Cost of revenues ............. 8,269 325 768 778 300
------------- ------------ ------------- -------- ------------
Operating expenses:
Sales and marketing ......... 11,917 568 673 451 259
Research and
development ................ 4,837 -- -- -- --
General and administrative .. 3,123 227 360 358 80
Amortization of acquired
intangibles ................ 1,442 10 107 40 18
------------- ------------ ------------- -------- ------------
Total operating expenses . 21,319 805 1,140 849 357
------------- ------------ ------------- -------- ------------
Operating loss ............ (15,451) (271) (132) (179) (201)
Other income (expense) ....... (40) (11) 13 37 45
------------- ------------ ------------- -------- ------------
Net loss .................. $(15,491) $(282) $ (119) $ (142) $(156)
============= ============ ============= ======== ============
Net loss per share, basic and
diluted ..................... $
=============
Weighted average shares
outstanding..................
=============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
<S> <C> <C>
Revenues ..................... $(1,084)(f) $ 17,592
Cost of revenues ............. (871)(f) 9,569
-------------- -----------
Operating expenses:
Sales and marketing ......... (212)(f) 13,656
Research and
development ................ -- 4,837
General and administrative .. -- 4,148
Amortization of acquired
intangibles ................ (175)(g) 1,442
-------------- -----------
Total operating expenses . (387) 24,083
-------------- -----------
Operating loss ............ 174 (16,060)
Other income (expense) ....... -- 44
-------------- -----------
Net loss .................. $ 174 $(16,016)
============== ===========
Net loss per share, basic and
diluted ..................... $
============== ===========
Weighted average shares
outstanding..................
</TABLE>
F-5
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------
CAROLINAS/ NEW YORK/
THE COMPANY VIRGINIA NEW ENGLAND DALLAS CALIFORNIA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues ..................... $ 6,621 $648 $1,281 $1,149 $ 386
Cost of revenues ............. 4,481 290 589 637 623
------------- ------------ ------------- -------- ------------
Operating expenses:
Sales and marketing ......... 9,274 196 515 382 83
Research and
development ................ 3,360 -- -- -- --
General and administrative .. 2,471 173 241 70 52
Amortization of acquired
intangibles ................ 6,932 10 107 40 18
------------- ------------ ------------- -------- ------------
Total operating expenses . 22,037 379 863 492 153
------------- ------------ ------------- -------- ------------
Operating income (loss) .. (19,897) (21) (171) 20 (390)
Other income (expense) ....... (100) (16) 6 -- 9
------------- ------------ ------------- -------- ------------
Net income (loss) ......... $(19,997) $(37) $ (165) $ 20 $(381)
============= ============ ============= ======== ============
Net loss per share, basic and
diluted ..................... $
=============
Weighted average shares
outstanding .................
=============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
<S> <C> <C>
Revenues ..................... $(774)(f) $ 9,311
Cost of revenues ............. (774)(f) 5,846
------------- -----------
Operating expenses:
Sales and marketing ......... -- 10,450
Research and
development ................ -- 3,360
General and administrative .. -- 3,007
Amortization of acquired
intangibles ................ (175)(g) 6,932
------------- -----------
Total operating expenses . (175) 23,749
------------- -----------
Operating income (loss) .. 175 (20,284)
Other income (expense) ....... -- (101)
------------- -----------
Net income (loss) ......... $ 175 $(20,385)
============= ===========
Net loss per share, basic and
diluted ..................... $
============= ===========
Weighted average shares
outstanding .................
</TABLE>
F-6
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------
CAROLINAS/ NEW YORK/
THE COMPANY VIRGINIA NEW ENGLAND DALLAS CALIFORNIA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues ..................... $ 2,474 $474 $ 884 $ 559 $ 121
Cost of revenues ............. 1,113 181 417 427 206
------------- ------------ ------------- -------- ------------
Operating expenses:
Sales and marketing ......... 1,597 139 683 182 44
Research and
development ................ 2,591 -- -- -- --
General and administrative .. 992 112 76 15 73
Amortization of acquired
intangibles ................ 39 10 107 40 15
------------- ------------ ------------- -------- ------------
Total operating expenses . 5,219 261 866 237 132
------------- ------------ ------------- -------- ------------
Operating income (loss) .. (3,858) 32 (399) (105) (217)
Other income (expense) ....... (88) (6) 1 5 7
------------- ------------ ------------- -------- ------------
Net income (loss) ......... $(3,946) $ 26 $(398) $(100) $(210)
============= ============ ============= ======== ============
Net loss per share, basic and
diluted ..................... $
=============
Weighted average shares
outstanding .................
=============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
<S> <C> <C>
Revenues ..................... $(785)(f) $ 3,727
Cost of revenues ............. (510)(f) 1,834
------------- -----------
Operating expenses:
Sales and marketing ......... -- 2,645
Research and
development ................ -- 2,591
General and administrative .. -- 1,268
Amortization of acquired
intangibles ................ (172)(g) 39
------------- -----------
Total operating expenses . (172) 6,543
------------- -----------
Operating income (loss) .. (103) (4,650)
Other income (expense) ....... -- (81)
------------- -----------
Net income (loss) ......... $(103) $(4,731)
============= ===========
Net loss per share, basic and
diluted ..................... $
============= ===========
Weighted average shares
outstanding .................
</TABLE>
F-7
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(a) Pro forma as adjusted to give effect to the sale of shares of
Common Stock offered hereby at an assumed initial public offering price
of $ per share, after deducting estimated underwriting discounts and
commissions and offering expenses payable by the Company. See "Use of
Proceeds."
(b) Represents the elimination of amounts receivable from or payable to the
Company and the third-party resellers.
(c) Represents the elimination of costs deferred by the third-party
resellers for cost of licenses paid to the Company related to deferred
revenue.
(d) Represents the elimination of the unamortized intangibles representing
fees paid to the Company for exclusive rights to sell the Company's
products in certain geographic areas.
(e) Reflects the issuance of 121,856 shares of the Company's Class B Common
Stock in connection with the acquisitions of the businesses of the
third-party resellers and the elimination of the third-party resellers'
equity accounts.
(f) Represents the elimination of revenues derived from the third-party
resellers.
(g) Represents the elimination of the amortization of the third-party
resellers' intangible assets.
F-8
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Ultimate Software Group, Inc.:
We have audited the accompanying consolidated balance sheets of The
Ultimate Software Group, Inc. (a Delaware corporation and formerly The
Ultimate Software Group, Ltd., a Florida limited partnership) and
subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' deficit and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Ultimate Software
Group, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
January 20, 1998 (except with respect to the
matters discussed in Note 15, as to which
the date is March 11, 1998).
F-9
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------
1997
1996 1997 PRO FORMA
(NOTE 15)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 769,921 $ 2,017,507 $ 2,017,507
Accounts receivable, net of allowances of $200,000 and
$458,803 in 1996 and 1997 ................................. 2,168,916 4,641,367 4,641,367
Due from stockholder ....................................... 25,000 -- --
Prepaid commissions ........................................ 228,713 330,081 330,081
Other prepaid expenses ..................................... 23,147 244,847 244,847
-------------- -------------- --------------
Total current assets ..................................... 3,215,697 7,233,802 7,233,802
-------------- -------------- --------------
Property and equipment, net ................................. 827,207 1,595,525 1,595,525
-------------- -------------- --------------
Other assets:
Acquired intangibles, net of accumulated amortization of
$6,971,226 and $8,413,552 in 1996 and 1997 ................ 2,079,222 638,319 638,319
Other....................................................... 54,095 153,041 153,041
-------------- -------------- --------------
Total other assets........................................ 2,133,317 791,360 791,360
-------------- -------------- --------------
Total assets.............................................. $ 6,176,221 $ 9,620,687 $ 9,620,687
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ........................................... $ 764,278 $ 1,538,653 $ 1,538,653
Accrued expenses ........................................... 2,169,421 3,849,362 3,849,362
Customer deposits .......................................... 389,114 2,106,988 2,106,988
Deferred revenue--current .................................. 1,891,894 4,492,769 4,492,769
Note payable ............................................... 250,000 -- --
Borrowings under line of credit agreement .................. 1,487,784 -- --
Current portion of capital lease obligations ............... 215,481 162,286 162,286
-------------- -------------- --------------
Total current liabilities ................................ 7,167,972 12,150,058 12,150,058
Capital lease obligations, net of current portion .......... 216,514 54,228 54,228
Deferred revenue--long-term ................................. 1,079,851 1,716,222 1,716,222
-------------- -------------- --------------
Total liabilities ........................................ 8,464,337 13,920,508 13,920,508
-------------- -------------- --------------
Commitments and contingencies (Notes 10 and 11)
Stockholders' deficit:
Preferred Stock, $.01 par value, 616,854 and 501,914 shares
authorized in 1996 and 1997, no shares issued or
outstanding................................................ -- -- --
Series A Convertible Preferred Stock, $.01 par value,
191,573 shares authorized, issued and outstanding in 1996
and 1997................................................... 1,916 1,916 --
Series B Convertible Preferred Stock, $.01 par value,
191,573 and 306,513 shares authorized, 32,736 and 295,650
shares issued and outstanding in 1996 and 1997............. 327 2,957 --
Common Stock, $.01 par value, 2,500,000 and 3,000,000
shares authorized, no shares issued or outstanding in 1996
and 1997; pro forma 1,125,370 shares issued and
outstanding................................................ -- -- 11,254
Class A Common Stock, $.01 par value, 236,300 shares
authorized, issued and outstanding in 1996 and 1997 ....... 2,363 2,363 --
Class B Common Stock, $.01 par value, 1,200,000 and
1,600,000 shares authorized, 536,269 shares issued and
outstanding in 1996 and 1997 .............................. 5,363 5,363 --
Class C Common Stock, $.01 par value, 200,000 shares
authorized, 0 and 50 shares issued and outstanding in 1996
and 1997 .................................................. -- -- --
Additional paid-in capital.................................. 16,104,372 29,580,935 33,582,280
Accumulated deficit......................................... (18,402,457) (33,893,355) (37,893,355)
-------------- -------------- --------------
Total stockholders' deficit............................... (2,288,116) (4,299,821) (4,299,821)
-------------- -------------- --------------
Total liabilities and stockholders' deficit............... $ 6,176,221 $ 9,620,687 $ 9,620,687
============== ============== ==============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-10
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Revenues:
License ............................. $ 1,021,669 $ 2,933,907 $ 6,057,183
Service ............................. 747,150 2,988,856 6,902,966
Other ............................... 704,983 698,197 1,176,426
-------------- --------------- ---------------
Total revenues .................... 2,473,802 6,620,960 14,136,575
-------------- --------------- ---------------
Cost of revenues:
License ............................. -- -- 195,243
Service ............................. 1,079,477 4,039,099 7,254,531
Other ............................... 33,880 441,818 818,948
-------------- --------------- ---------------
Total cost of revenues ............ 1,113,357 4,480,917 8,268,722
-------------- --------------- ---------------
Operating expenses:
Sales and marketing ................. 1,596,864 9,273,774 11,917,099
Research and development ............ 2,590,715 3,359,878 4,837,131
General and administrative .......... 992,419 2,471,165 3,122,364
Amortization of acquired intangibles 38,889 6,932,337 1,442,326
-------------- --------------- ---------------
Total operating expenses .......... 5,218,887 22,037,154 21,318,920
-------------- --------------- ---------------
Operating loss .................... (3,858,442) (19,897,111) (15,451,067)
Interest expense ..................... (87,970) (161,062) (191,156)
Interest and other income ............ -- 61,522 151,325
-------------- --------------- ---------------
Net loss .......................... $(3,946,412) $(19,996,651) $(15,490,898)
============== =============== ===============
Net loss per share--basic and diluted $ $ $
============== =============== ===============
Weighted average shares outstanding ..
============== ===============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-11
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE CLASS A COMMON CLASS B COMMON
PREFERRED STOCK PREFERRED STOCK STOCK STOCK
--------------- --------------- --------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ...... -- $ -- -- $ -- -- $ -- -- $ --
Partnership interest issued for
acquisitions .................... -- -- -- -- -- -- -- --
Partnership interest issued for
consulting services ............. -- -- -- -- -- -- -- --
Contributions .................... -- -- -- -- -- -- -- --
Net loss ......................... -- -- -- -- -- -- -- --
------- ------ ------- ------ ------- ------ ------- ------
Balance, December 31, 1995 ...... -- -- -- -- -- -- -- --
Contributions .................... -- -- -- -- -- -- -- --
Net loss prior to the transfer of
the Partnership to the Company . -- -- -- -- -- -- -- --
Issuance of stock in connection
with the Transactions
(Note 10) ....................... 191,573 1,916 -- -- 236,300 2,363 536,269 5,363
Net proceeds from issuances of
Series B Convertible Preferred
Stock ........................... -- -- 32,736 327 -- -- -- --
Non-cash issuance of options to
purchase Class C Common Stock
for consulting services ......... -- -- -- -- -- -- -- --
Net loss ......................... -- -- -- -- -- -- -- --
------- ------ ------- ------ ------- ------ ------- ------
Balance, December 31, 1996 ...... 191,573 1,916 32,736 327 236,300 2,363 536,269 5,363
Net proceeds from issuances of
Series B Convertible Preferred
Stock ........................... -- -- 262,914 2,630 -- -- -- --
Net loss ......................... -- -- -- -- -- -- -- --
------- ------ ------- ------ ------- ------ ------- ------
Balance, December 31, 1997 ...... 191,573 $1,916 295,650 $2,957 236,300 $2,363 536,269 $5,363
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
GENERAL LIMITED PAID-IN ACCUMULATED STOCKHOLDERS'
PARTNER PARTNERS CAPITAL DEFICIT DEFICIT
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ...... $ (935,536) $ 1,382,698 $ -- $ -- $ 447,162
Partnership interest issued for
acquisitions .................... -- 250,000 -- -- 250,000
Partnership interest issued for
consulting services ............. -- 123,125 -- -- 123,125
Contributions .................... -- 2,154,376 -- -- 2,154,376
Net loss ......................... (2,762,488) (1,183,924) -- -- (3,946,412)
----------- ----------- ----------- ------------- -------------
Balance, December 31, 1995 ...... (3,698,024) 2,726,275 -- -- (971,749)
Contributions .................... -- 1,070,000 -- -- 1,070,000
Net loss prior to the transfer of
the Partnership to the Company . (1,115,936) (478,258) -- -- (1,594,194)
Issuance of stock in connection
with the Transactions
(Note 10) ....................... 4,813,960 (3,318,017) 14,185,845 -- 15,691,430
Net proceeds from issuances of
Series B Convertible Preferred
Stock ........................... -- -- 1,633,473 -- 1,633,800
Non-cash issuance of options to
purchase Class C Common Stock
for consulting services ......... -- -- 285,054 -- 285,054
Net loss ......................... -- -- -- (18,402,457) (18,402,457)
----------- ----------- ----------- ------------- -------------
Balance, December 31, 1996 ...... -- -- 16,104,372 (18,402,457) (2,288,116)
Net proceeds from issuances of
Series B Convertible Preferred
Stock ........................... -- -- 13,476,563 -- 13,479,193
Net loss ......................... -- -- -- (15,490,898) (15,490,898)
----------- ----------- ----------- ------------- -------------
Balance, December 31, 1997 ...... $ -- $ -- $29,580,935 $(33,893,355) $ (4,299,821)
=========== =========== =========== ============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-12
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ........................................... $(3,946,412) $(19,996,651) $(15,490,898)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization .................... 201,269 7,261,434 2,065,033
Provision for doubtful accounts .................. 24,000 226,000 383,678
Issuance of equity instruments for consulting
services ........................................ 123,125 285,054 --
Changes in operating assets and liabilities, net
of effects of acquisitions:
Accounts receivable ............................. (356,298) (1,629,728) (2,856,129)
Prepaid commissions ............................. -- (228,713) (101,368)
Other prepaid expenses .......................... 150,000 (52,101) (320,646)
Accounts payable ................................ 132,424 464,854 774,375
Accrued expenses ................................ 87,917 1,868,358 1,679,941
Deferred revenue and customer deposits ......... 214,093 1,598,919 4,955,120
-------------- --------------- ---------------
Net cash used in operating activities ............... (3,369,882) (10,202,574) (8,910,894)
-------------- --------------- ---------------
Cash flows from investing activities:
Capital expenditures ............................... (117,148) (107,137) (1,392,448)
Amounts (paid to) received from affiliate and
shareholder ....................................... (205,000) 228,600 25,000
Due from distributor ............................... 425,000 -- --
Cash used in acquisitions .......................... -- (660,555) --
-------------- --------------- ---------------
Net cash provided by (used in) investing activities 102,852 (539,092) (1,367,448)
-------------- --------------- ---------------
Cash flows from financing activities:
Net borrowings under line of credit agreements .... 440,566 897,217 (1,487,784)
Net proceeds from notes payable-related parties ... 409,843 650,158 --
Due to affiliate ................................... 450,000 (450,000) --
Payments on note payable ........................... -- -- (250,000)
Payments on capital lease obligations .............. (113,349) (161,819) (215,481)
Contributions to partners' capital ................. 2,154,376 1,070,000 --
Net proceeds from issuances of Convertible
Preferred Stock ................................... -- 9,423,331 13,479,193
-------------- --------------- ---------------
Net cash provided by financing activities .......... 3,341,436 11,428,887 11,525,928
-------------- --------------- ---------------
Net increase in cash and cash equivalents............ 74,406 687,221 1,247,586
Cash and cash equivalents, beginning of year ....... 8,294 82,700 769,921
-------------- --------------- ---------------
Cash and cash equivalents, end of year .............. $ 82,700 $ 769,921 $ 2,017,507
============== =============== ===============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-13
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest .......................... $88,324 $152,166 $150,247
========= ========== ==========
Supplemental disclosure of non-cash financing
activities:
The Company entered into capital lease obligations to acquire new equipment totaling
$408,127 and $206,739 in 1995 and 1996, respectively.
In 1996, the Company issued Class A Common Stock and Class B Common Stock in connection
with the transactions discussed in Note 10.
In 1996, the Company issued 24,904 shares of Series A Convertible Preferred Stock as
payment for certain obligations to related parties (see Note 10).
In 1996, the Company issued 8,534 shares of Series A Convertible Preferred Stock valued
at $445,500 to certain former limited partners for limited partnership interests in
the Partnership (see Note 10).
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-14
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group, Inc. (the "Company") or, prior to the
transactions consummated in April 1996 as further discussed below, The
Ultimate Software Group, Ltd. (the "Partnership"), designs, markets,
implements and supports technologically advanced, cross-industry human
resource management and payroll software solutions, marketed primarily to
middle-market organizations with 300 to 15,000 employees. The Company reaches
its customer base and target market through its direct sales force and a
network of national, regional and local strategic partners.
In April 1996, the Company completed a series of transactions (the
"Transactions") whereby the businesses of certain third-party resellers of
the Company's products were purchased by the Partnership, and the business
and operations of the Partnership, along with the acquired businesses, were
transferred and conveyed to the Company in exchange for certain shares of
Class A and Class B Common Stock of the Company. The acquisitions were
accounted for under the purchase method of accounting. See Note 12. The
Company issued shares of its Class B Common Stock in exchange for all of the
issued and outstanding shares of the capital stock of the Partnership's
general partner, The Ultimate Software Group, Inc., a Florida corporation
("GP"), and for all of the issued and outstanding shares of the capital stock
of Strategic Image Systems, Inc. ("Strategic"), a limited partner of the
Partnership. Such exchange was accounted for on a historical cost basis as GP
and Strategic were related to the Partnership. As a result of the
Transactions, GP and Strategic became wholly-owned subsidiaries of the
Company. For a more detailed description of the Transactions, see Note 10.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Intercompany accounts and transactions have been
eliminated in consolidation.
Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. The accompanying
consolidated balance sheets include $765,328 and $1,358,973 in
interest-bearing accounts as of December 31, 1996 and 1997, respectively.
Accounts Receivable
Accounts receivable are principally from end-users of the Company's
products. The Company performs periodic credit evaluations of its customers
and has recorded allowances for estimated losses.
A rollforward of allowances is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
<S> <C> <C> <C>
Balance, beginning of year ..... $ -- $ 24,000 $ 200,000
Provision for doubtful accounts 24,000 226,000 383,678
Write-offs ..................... -- (50,000) (124,875)
--------- ---------- -----------
Balance, end of year ............ $24,000 $200,000 $ 458,803
========= ========== ===========
</TABLE>
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repairs
are charged to expense when incurred; betterments are capitalized. Upon the
sale or retirement of assets, the cost, accumulated depreciation and
amortization are removed from the accounts and any gain or loss is
recognized.
F-15
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered. The principal components of deferred revenue were as
follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1996 1997
<S> <C> <C>
License revenues $ 873,666 $1,982,655
Service revenues 2,098,079 4,226,336
------------ ------------
$2,971,745 $6,208,991
============ ============
</TABLE>
As of December 31, 1996 and 1997, $1,079,851 and $1,716,222, respectively,
of deferred revenue will be recognized in periods after the year ending
December 31, 1997 and 1998.
Associated deferred costs, primarily relating to commissions, amounted to
$228,713 and $330,081 at December 31, 1996 and 1997, respectively. Commission
expense is recognized in the period the related revenue is recognized.
Revenue Recognition
The Company licenses software under noncancelable license agreements and
provides services including maintenance, implementation, training and
consulting services. In accordance with the provision of SOP 97-2, license
revenues are generally recognized when a noncancelable license agreement has
been signed, the product has been delivered, no significant vendor
obligations remain and collection of the related receivable is considered
probable. Revenues from maintenance agreements for maintaining, supporting
and providing periodic updates are recognized ratably over the maintenance
period, which in most instances is one year. Revenues for training and
consulting services are recognized as services are performed.
Prior to 1996, the Company entered into 18 exclusive reseller agreements
with third parties, which provided each such party with exclusive
distribution rights to sell the Company's products in a specified territory.
In consideration, the Company received an up-front nonrefundable fee, which
ranged from $25,000 to $300,000. Such fees were recognized as revenues, at
the time an agreement was executed. In 1995 and 1996, the Company bought back
or otherwise reacquired the distribution rights of 13 of its resellers. As of
December 31, 1996 and 1997, the Company had five third-party resellers, the
businesses of which were subsequently acquired. See Notes 10 and 15.
The Company also generates revenues relating to the sale of
payroll-related forms. Such revenues are recognized as the product is shipped
or as the services are rendered.
Until 1997, substantially all of the Company's revenues were derived from
its ULTIPRO for LAN product and related services. The Company has shifted its
focus from a product based on DOS and local area network (LAN) technologies,
ULTIPRO for LAN, to a product based on Windows and client/server
technologies, UltiPro for Windows. As a result of this shift and the decrease
in general market demand for DOS-based products, the Company's revenues from
its ULTIPRO for LAN product have been declining and are expected to decline
for the foreseeable future. There can be no assurance that the decline in
revenues from sales of ULTIPRO for LAN will not have a material adverse
effect on the Company's business, operating results and financial condition.
While the Company still derives revenues from the support, service and
limited sales of the ULTIPRO for LAN product line, its UltiPro for Windows
product and related support and services are expected to account for
substantially all of the Company's revenues for the foreseeable future.
However, to date, the Company has had only limited experience with customer
acceptance and use, as well as in implementing UltiPro for Windows.
Accordingly, the Company's future success will depend on maintaining and
increasing acceptance of
F-16
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UltiPro for Windows and related services and its ability to successfully
implement the product. There can be no assurance that UltiPro for Windows
will gain broad market acceptance or that the Company will be able to
successfully implement UltiPro for Windows in a timely manner. Any factors
adversely affecting the demand for UltiPro for Windows would have a material
adverse effect on the Company's business, operating results and financial
condition. The Company operates in a highly competitive industry
characterized by rapidly changing technology which could adversely affect the
Company's revenues and the related operating results.
Cost of Revenues
The cost of revenues consists of cost of license revenues, cost of service
revenues and cost of other revenues. Cost of license revenues consists of
fees payable to a third party for software products distributed by the
Company. Cost of service revenues consists of costs to provide consulting,
implementation, maintenance, technical support and training to the Company's
customers and the cost of providing periodic updates. Cost of other revenues
consist of costs related to sales of payroll-related forms.
Income Taxes
Income taxes were not provided for, or payable, by the Partnership.
Partners were taxed individually on their share of Partnership earnings.
Subsequent to the Transactions discussed in Note 10, the Company is subject
to corporate Federal and state income taxes. The Company accounts for income
taxes under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, Accounting for Income Taxes. SFAS 109 provides for a
liability approach under which deferred income taxes are provided based upon
enacted tax laws and rates applicable to the periods in which the taxes
become payable.
Acquired Intangibles
Acquired intangibles are being amortized on a straight-line basis over 30
months, the estimated useful life of such acquired assets (primarily
consisting of customer lists and workforce). In accordance with SFAS No. 121,
Accounting for the Impairment Of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of, the Company continually evaluates whether later events and
circumstances have occurred that indicate the remaining acquired intangibles
may warrant revision or may not be recoverable. When factors indicate that
goodwill should be evaluated for possible impairment, the Company uses an
estimate of the related business' undiscounted cash flows from operations
over the remaining life of the cost in excess of net assets of acquired
businesses, in measuring whether such cost is recoverable. Operating results
as well as projected future cash flows relating to the resellers acquired
during 1996 indicated an impairment in acquired intangibles as of December
31, 1996 and 1997. Accordingly, the Company charged $5,050,308 and $308,206
to amortization of acquired intangibles in 1996 and 1997, respectively, to
reduce acquired intangibles to their estimated realizable value.
Software Development Costs
SFAS No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed, requires capitalization of certain software
development costs subsequent to the establishment of technological
feasibility. Based on the Company's product development process,
technological feasibility is established upon completion of a working model.
Costs incurred by the Company between completion of a working model and the
point at which the product is ready for general release have not been
significant.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-17
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fair Value of Financial Instruments
The Company's financial instruments, consisting of cash and cash
equivalents, accounts receivable, due from stockholder, accounts payable and
borrowings approximate fair value due to their short-term nature.
Accounting for Stock Options
In October 1995, SFAS No. 123, Accounting for Stock-Based Compensation,
was issued and is effective for the year ending December 31, 1996. As
permitted by SFAS No. 123, the Company has continued to account for employee
stock options in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and has included the pro forma
disclosures required by SFAS No. 123 for the years ending December 31, 1996
and 1997 at Note 9.
SFAS No. 123 also applies to transactions in which equity instruments are
issued to acquire goods or services from nonemployees. Those transactions
must be accounted for based on the fair value of the consideration received
or the fair value of the instruments issued, whichever is more reliably
measurable. Accordingly, the Company has valued the issuance of such options
to nonemployees to purchase Class C Common Stock using the Black-Scholes
option pricing model. See Note 10.
Per Share Amounts
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings Per Share. This statement simplifies the standards for
computing and presenting earnings per share ("EPS") and makes them comparable
to international EPS standards. SFAS 128 replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities
with complex capital structures. SFAS 128 became effective for financial
statements issued for periods ending after December 31, 1997 and requires
restatement of all prior periods presented. Basic EPS is calculated by
dividing income available to common stockholders by the weighted average
number of shares of Common Stock outstanding during each period. Diluted EPS
includes the potential impact of convertible securities and dilutive common
stock equivalents using the treasury stock method of accounting. Common stock
equivalents have not been included in the computation of diluted loss per
share as their impact is antidilutive.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
which is required to be adopted in fiscal 1998. This statement establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. This
statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in financial statements and (b) display
the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of
statements of financial position. Comprehensive income is defined as the
change in equity during the financial reporting period of a business
enterprise resulting from non-owner sources.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information, which is required to be adopted in
fiscal 1998. This statement requires that a public business enterprise report
financial and descriptive information about its reportable operating segments
including, among other things, a measure of segment profit or loss, certain
specific revenue and expense items, and segment assets.
The Company has not yet determined the impact on its financial statement
presentation as a result of adopting SFAS Nos. 130 and 131.
F-18
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1996 1997
<S> <C> <C>
Payroll............................................................ $ 412,917 $ 521,154
Bonuses ........................................................... 1,343,097 1,778,000
Other items individually representing less than 5% of total
current liabilities .............................................. 413,407 1,550,208
------------ ------------
$2,169,421 $3,849,362
============ ============
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
ESTIMATED ---------------------------
USEFUL LIFE 1996 1997
<S> <C> <C> <C>
Equipment ........................................ 3 years $1,283,254 $ 2,616,921
Furniture, fixtures and improvements ............. 5 years 149,820 208,601
------------ -------------
1,433,074 2,825,522
Less--accumulated depreciation and amortization . (605,867) (1,229,997)
------------ -------------
$ 827,207 $ 1,595,525
============ =============
</TABLE>
Included in property and equipment is equipment acquired under capital
leases as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1996 1997
<S> <C> <C>
Equipment........................ $ 672,122 $ 672,122
Less -accumulated amortization . (309,526) (527,628)
----------- -----------
$ 362,596 $ 144,494
=========== ===========
</TABLE>
Depreciation and amortization expense on property and equipment totaled
$124,235, $329,097 and $624,131 for the years ended December 31, 1995, 1996
and 1997, respectively.
F-19
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under noncancellable agreements which
are accounted for as capital leases and expire at various dates through 1999.
Interest rates on these leases range from 7.5% to 17.9%. The annual
maturities of the capital lease obligations are as follows as of December 31,
1997:
<TABLE>
<CAPTION>
<S> <C>
1998 ............................................. $180,903
1999 ............................................. 58,059
----------
238,962
Less -amount representing interest ............... (22,448)
----------
Lease obligations reflected as current ($162,286)
and non-current ($54,228) ....................... $216,514
==========
</TABLE>
6. LINE OF CREDIT AGREEMENTS
In September 1996, the Company entered into a line of credit with a bank
for the lesser of $4,000,000 or 80% of Eligible Receivables, as defined. The
line of credit bears interest at LIBOR plus 4.875% per annum (10.875% at
December 31, 1997), but not less than 8.000% per annum in any month. Interest
on the line of credit is payable monthly. As of December 31, 1996, $1,487,784
was outstanding under this line. Such amount was repaid with proceeds from
the sale of the Company's Series B Convertible Preferred Stock. The line of
credit matures on October 30, 1998, and will automatically renew for
successive one-year terms, unless either party elects to terminate the
agreement. The line of credit is collateralized by substantially all of the
Company's assets.
Through August 1996, the Company had two revolving credit agreements with
a bank which permitted total borrowings of up to $600,000. As of December 31,
1995, $590,567 was outstanding under the previous lines. Such amount was
repaid with proceeds from the sale of the Company's Series A Convertible
Preferred Stock and the related revolving credit agreements were terminated.
7. NOTE PAYABLE
Note payable at December 31, 1996 consists of a note to an unrelated party
which bore interest at 10%, payable annually beginning in April 1997. The
note was assumed by the Company in connection with the 1996 acquisitions
discussed in Note 12 and was repaid in 1997 with the proceeds from the sale
of the Company's Series B Convertible Preferred Stock.
8. INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses. At December 31, 1997, the Company
has approximately $21,500,000 of net operating loss carryforwards for federal
income tax reporting purposes available to offset future taxable income. The
carryforwards expire through 2012. Utilization of such net operating losses
may be limited as a result of cumulative ownership changes in the Company's
equity instruments.
Deferred tax assets at December 31, 1996 and 1997 consist primarily of the
tax effect of net operating loss carryforwards which amounted to
approximately $3,900,000 and $7,300,000, respectively. Other deferred tax
assets and liabilities are not significant. The Company has provided a full
valuation allowance on the deferred tax assets as realization of such amounts
is not considered more likely than not. The Company reviews the valuation
allowance requirement periodically and makes adjustments as warranted.
No pro forma adjustments to reflect income tax benefits have been included
in the accompanying statements as it is management's belief that realization
of such amounts do not meet the criteria required by generally accepted
accounting principles.
F-20
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. STOCK OPTIONS
In 1996, the Company adopted The Ultimate Software Group, Inc.
Nonqualified Stock Option Plan (the "Plan") under which the Company is
authorized to issue options to purchase a total of 200,000 shares of the
Company's Class C Common Stock to directors, officers and employees of, and
equity investors in, the Company. Under the Plan, options to purchase shares
of Class C Common Stock may be granted at prices equal to the market value of
shares of the Company's Class C Common Stock as of the date of grant, or at
such other amount as may be determined by the committee appointed to
administer the Plan (the "Committee"). Options become exercisable on the
30-month anniversary of a participant's date of hire, unless otherwise
prescribed by the Committee. The maximum term of the options is 10 years.
A summary of the Company's Plan as of December 31, 1996 and 1997, and
changes during the years then ended, is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
Outstanding at December 31, 1995 ........ -- $ --
Granted ................................. 76,009 52.20
Exercised ............................... -- --
Forfeited ............................... (100) 52.20
--------- --------------
Outstanding at December 31, 1996 ........ 75,909 52.20
Granted ................................. 97,569 72.06
Exercised ............................... (50) 52.20
Forfeited ............................... (1,867) 52.20
--------- --------------
Outstanding at December 31, 1997 ........ 171,561 $63.49
========= ==============
Options exercisable at December 31, 1997 96,600 $58.47
========= ==============
</TABLE>
At December 31, 1997, the weighted average contractual life of options
outstanding was 105 months.
Pro forma information is required by SFAS No. 123 for options issued to
employees and has been determined as if the Company had accounted for its
stock-based compensation plan under the fair value method. The fair value of
each option granted was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants: risk-free interest rates of 6.35% -- 6.7%,
dividend yield of 0%, expected volatility of 0% in 1996 and 65% in 1997 and
expected life of 3-6 years. The Company's pro forma information is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
1996 1997
<S> <C> <C>
Net loss:
As reported ............... $(19,996,651) $(15,490,898)
Pro forma ................. (20,464,355) (16,849,127)
Basic and Diluted per share:
As reported ...............
Pro forma .................
</TABLE>
The Company has also issued options to purchase shares of its Class C
Common Stock to non-employees for consulting services. See Note 10.
F-21
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. STOCKHOLDERS' EQUITY
The Transactions
The Company was formed in April 1996 in connection with the consummation
of a series of transactions during the second and third calendar quarters of
1996, including the following: (i) the businesses owned by nine third-party
resellers of the Partnership's products (the "Participating Resellers") were
acquired by the Partnership in consideration for the issuance by the
Partnership to such Participating Resellers of special limited partnership
interests in the Partnership, (ii) the shareholders of GP and Strategic (the
"Participating Stockholders") assigned and transferred their shares in GP and
Strategic to the Company in exchange for the issuance by the Company of an
aggregate of 272,157 shares of Class B Common Stock, (iii) the business and
operations of the Partnership were transferred and conveyed to the Company in
exchange for the issuance by the Company of 236,300 shares of Class A Common
Stock and 536,269 shares of Class B Common Stock (272,157 of which were
beneficially owned by the Company as a result of its acquisition of GP and
Strategic), and payment of $660,555 in cash, (iv) the Company entered into
escrow agreements with the Partnership and the Participating Stockholders,
respectively, obligating the Partnership to surrender shares of Class A and
Class B Common Stock and the Participating Stockholders and the Partnership
to surrender certain shares of Class B Common Stock to the Company for
cancellation under certain circumstances as provided therein, (v) J.P. Morgan
Investment Corporation ("Morgan") and others invested $10,000,000 (including
approximately $1,300,000 for 24,904 shares representing cancellation of
indebtedness of the Company and $445,500 for 8,534 shares representing
limited partnership interest conversions) in 191,573 newly issued shares of
the Company's Series A Convertible Preferred Stock. All shares of Series A
Convertible Preferred Stock were issued at $52.20 per share.
The acquisitions of the Participating Resellers were accounted for under
the purchase method of accounting and are more fully described in Note 12.
The exchange of the Participating Stockholders' interest for shares of the
Company was accounted for on a historical cost basis as the exchange was
between common controlling interests. GP and the Company were under common
control at the time of the exchange.
Description of Capital Stock
Series A and Series B Convertible Preferred Stock
The Series A Convertible Preferred Stock, with respect to dividend rights
and rights on liquidation, dissolution and winding up, ranks senior to all
classes of the Company's Common Stock, pari passu with the Series B
Convertible Preferred Stock, and pari passu with, or senior to, all other
series or classes of preferred stock. When, as and if the Board of Directors
of the Company declares a dividend on any Common Stock, each holder of the
Series A and Series B Convertible Preferred Stock will be entitled to
receive, out of funds legally available therefor, dividends in an amount per
share equal to the amount of dividends so declared and payable upon the
number of shares of Class B Common Stock (or, if applicable, Common Stock)
into which the shares of Series A or Series B Convertible Preferred Stock are
then convertible.
In the event of a liquidation, before any payment is made to the holders
of any class of Common Stock or any other securities ranking junior to the
Series A and Series B Convertible Preferred Stock, the holders of the Series
A and Series B Convertible Preferred Stock will be entitled to be paid an
amount in cash equal to the greater of (i) $52.20 per share or (ii) the
amount which each holder of Series A and Series B Convertible Preferred Stock
would have been entitled to receive had it converted all its shares of Series
A and Series B Convertible Preferred Stock into Class B Common Stock, plus,
in each case, any accrued and unpaid dividends to the date payment is made to
the holders of the Series A and Series B Convertible Preferred Stock.
F-22
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The holders of the Series A and Series B Convertible Preferred Stock are
entitled, for each share of Series A and Series B Convertible Preferred Stock
held of record, to one vote for each share of Class B Common Stock into which
such shares of Series A and Series B Convertible Preferred Stock could have
been converted, on all matters submitted to a vote of the stockholders. The
holders of Series A and Series B Convertible Preferred Stock have no
cumulative voting rights.
Each holder of Series A and Series B Convertible Preferred Stock has the
right, at the holder's option, to convert any or all such holder's shares of
Series A and Series B Convertible Preferred Stock into shares of Class B
Common Stock (or into shares of Common Stock, if the Class B Common Stock
shall have been converted into Common Stock) at an initial conversion ratio
of one share of Class B Common Stock (or such number of shares of Common
Stock into which each share of Class B Common Stock shall have been
converted, if the Class B Common Stock shall have been converted into Common
Stock) for one share of Series A or Series B Convertible Preferred Stock.
The shares of the Series A and Series B Convertible Preferred Stock are
subject to mandatory conversion into shares of Class B Common Stock (or into
shares of Common Stock, if the Class B Common Stock shall have been converted
into Common Stock), at the same initial conversion ratio, upon the written
consent of the holders of a majority of the outstanding shares of Series A
and Series B Convertible Preferred Stock, if the Board of Directors of the
Company declares a mandatory conversion following the occurrence of a Release
Event. A Release Event is generally defined as (i) the execution of a firm
underwriting agreement for an initial public offering of the Company's Common
Stock, (ii) an acquisition by a third party of a controlling interest in, or
more than 50% of the assets of, the Company, (iii) a material acquisition or
business combination involving the Company that the GP determines should
result in a liquidation or dissolution of the Partnership, (iv) the
conversion by a majority in interest of the Series A Convertible Preferred
Stock into the Company's Common Stock, if the GP determines that such
conversion should result in a liquidation or dissolution of the Partnership
or (v) March 31, 2001.
Class A, Class B and Class C Common Stock
The holders of Class A Common Stock and Class B Common Stock are entitled
to one vote per share. Additionally, each holder of Class A Common Stock is
entitled to receive the Class A Percentage, as defined, of the aggregate
amount of dividends declared on any date by the Board of Directors of the
Company on the Class A Common Stock, the Class B Common Stock or the Series A
Convertible Preferred Stock. Class A Common Stock is convertible into the
Company's Common Stock in accordance with a prescribed formula and each share
of Class B Common Stock is convertible into one share of the Company's Common
Stock. See Note 15.
The holders of Class B Common Stock are entitled to receive ratably an
amount of such dividends as may be declared on any date by the Board of
Directors of the Company less the portion of such dividend amount to which
the then outstanding shares of Class A Common Stock and Series A Convertible
Preferred Stock are entitled.
The amount available for distribution to holders of Class A Common Stock
upon liquidation will be net of payments to creditors and payments to the
holders of the Series A and Series B Convertible Preferred Stock and any
other Preferred Stock that may be at the time outstanding.
Class C Common Stock is generally reserved for issuance in the event of
stock option exercises. The holders of Class C Common Stock will be entitled
to one vote per share for each share held of record on all matters submitted
to a vote of the stockholders. Additionally, each holder of Class C Common
Stock will be entitled to receive the same amount of dividends and
liquidation proceeds to which a share of Class B Common Stock would be
entitled (determined as if no reduction has occured in the number of
outstanding shares of Class A or Class B Common Stock pursuant to the
operations of the escrow agreements discussed below).
F-23
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The shares of the Class A, Class B and Class C Common Stock are subject
to mandatory conversion into shares of Common Stock if the Board of Directors
of the Company declares a mandatory conversion following the occurrence of a
Release Event.
Common Stock
Shares of Common Stock will be issued only upon the conversion of shares
of the other classes of Common or Preferred Stock and no shares of Common
Stock have been or will be issued prior to any such conversion.
The holders of Common Stock will be entitled to one vote per share for
each share held of record on all matters submitted to a vote of the
stockholders.
Escrow Agreements
All of the 236,300 shares of Class A Common Stock issued in connection
with the Transactions are being held in escrow pursuant to an escrow
agreement between the Partnership and the Company (the "Class A Escrow
Agreement") until the occurrence of a Release Event. Upon the occurrence of a
Release Event, the Partnership will be obligated to return to the Company for
cancellation any shares of Class A Common Stock that the Partnership is not
entitled to retain under a formula that generally measures (i) the revenues
of the Participating Resellers during a recent 12 month period preceding the
Release Event, against (ii) the total revenues of the Company in the same 12
month period. See Note 15.
230,700 shares of the Class B Common Stock (77,665 of which were
beneficially owned by the Company as a result of its acquisition of GP and
Strategic) issued in connection with the Transactions are being held in
escrow pursuant to an escrow agreement among the Company, the Partnership and
the Participating Stockholders (the "Class B Escrow Agreement") until the
occurrence of a Release Event. Upon a Release Event, the Partnership will
surrender the escrowed shares of Class B Common Stock to the Company for
cancellation in the event that, as of the date of such Release Event, the
value of the 95,787 shares of Series A Convertible Preferred Stock issued to
Morgan does not meet certain threshold levels (ranging upward from
$10,000,000 in the 12 months ending March 31, 1997 to $37,000,000 in the 12
months ending March 31, 2001). See Note 15.
Other Equity Transactions
During 1995, the Partnership issued certain limited partnership interests
to two individuals, one of whom was at the time a limited partner, in
connection with consulting services. The limited partnership interests were
valued at $123,125, and the related expense is included in general and
administrative expenses in the accompanying consolidated statement of
operations for the year ended December 31, 1995.
In 1996, the Company granted to non-employees options to purchase 31,933
shares of the Company's Class C Common Stock for $52.20 per share in exchange
for consulting services. Such options are currently exercisable and were
valued on the date of grant using the Black-Scholes option pricing model.
Assumptions used in valuing such options are discussed in Note 9. The related
expense amounted to $285,054 and is included in general and administrative
expenses in the accompanying consolidated statement of operations for the
year ended December 31, 1996.
In December 1996, the Company sold 32,736 shares of Series B Convertible
Preferred Stock at $52.20 per share. Net proceeds from such sales were
$1,633,800. In 1997, the Company sold 262,914 additional shares of Series B
Convertible Preferred Stock at $52.20 per share. Net proceeds from such sales
were $13,479,193.
F-24
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases corporate office space and certain equipment under
noncancelable operating lease agreements expiring at various dates. Total
rent expense under these agreements was $222,159, $965,709 and $953,724 for
the years ended December 31, 1995, 1996 and 1997, respectively. Future
minimum annual rental commitments related to these leases are as follows at
December 31, 1997:
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
1998 ... $1,366,872
1999 ... 617,827
2000 ... 280,181
2001 ... 185,577
2002 ... 5,347
------------
$2,455,804
============
</TABLE>
Consulting Agreements
The Company is subject to a series of consulting agreements with certain
third parties to assist in locating and designing future corporate office
space as well as to assist the Company in connection with capital
requirements needed to fund continued growth. Monthly payments under these
agreements of approximately $6,500 are due through the date on which the
Company has a change in controlling ownership or has a public offering of its
Common Stock.
Guarantees
The Company has guaranteed debt owed by a Participating Reseller. The debt
amounts to $175,000 at December 31, 1996 and 1997, respectively.
Product Liability
Software products such as those offered by the Company frequently contain
undetected errors or failures when first introduced or as new versions are
released. Testing of the Company's products is particularly challenging
because it is difficult to simulate the wide variety of computing
environments in which the Company's customers may deploy these products.
Despite extensive testing, the Company from time to time has discovered
defects or errors in products. There can be no assurance that such defects,
errors or difficulties will not cause delays in product introductions and
shipments, result in increased costs and diversion of development resources,
require design modifications or decrease market acceptance or customer
satisfaction with the Company's products. In addition, there can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not be found after commencement of commercial
shipments, resulting in loss of or delay in market acceptance, which could
have a material adverse effect upon the Company's business, operating results
and financial condition.
Litigation
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Company's business, operating results and financial
condition.
F-25
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. PARTNERSHIP ACQUISITIONS
In 1995, the Partnership acquired the businesses of two third-party
resellers in exchange for a 1.25% interest in the Partnership. In connection
with these transactions, acquired intangibles were recorded as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase price, 1.25% interest in the
Partnership...................................... $250,000
Fair value of net assets acquired ................ --
----------
Acquired intangibles, primarily customer lists
and workforce ................................... $250,000
==========
</TABLE>
In June 1995, the Partnership acquired the business of another third-party
reseller. The controlling stockholders of the reseller were related to the
controlling shareholder of GP. The purchase price was a 3.86% limited
partnership interest in the Partnership and was recorded at the carryover
basis of the net assets transferred as the transactions occurred between
related parties.
Effective April 25, 1996, the Partnership acquired the businesses of the
Participating Resellers for special limited partnership interests in the
Partnership, the assumption of certain obligations and $660,555 in cash. The
acquisitions were accounted for under the purchase accounting method. The
purchase price, together with the net liabilities assumed, was recorded as
intangible assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase price ................................ $7,337,574
Net liabilities assumed ....................... 1,462,874
------------
Acquired intangibles, primarily customer lists
and workforce ................................ $8,800,448
============
</TABLE>
During 1996, subsequent to the Transactions, and during the year ended
December 31, 1997, the Company paid the former owners of the Participating
Resellers fees totaling approximately $130,000 and $213,000, respectively, in
accordance with an agreement entered into as part of the Transactions. Such
fees are included in general and administrative expenses in the accompanying
consolidated statements of operations. In accordance with the agreement,
monthly payments aggregating approximately $14,000 will continue until the
Company completes an initial public offering of its Common Stock.
13. RELATED PARTY TRANSACTIONS
Due from stockholder in the amount of $25,000 consists of
noninterest-bearing loan to a stockholder which was due on demand. This loan
was repaid in full in 1997.
The Partnership purchased substantially all of the assets of Strategic,
amounting to approximately $86,000 and $139,000 (through the date of the
Transactions) in 1995 and 1996, respectively. Also during 1995, the
Partnership paid approximately $61,000 to Strategic's employees for
commissions on sales to resellers. Effective January 1, 1995, the Partnership
terminated its royalty agreement with Strategic, which previously provided
for payments equal to 20% of gross collected sales revenues and 10% of
collected maintenance revenues, for payments in the aggregate amount of
$650,000 and a 12% limited partnership interest in the Partnership. At
December 31, 1995, $450,000 of the termination fee was outstanding. Such
amount was paid in 1996. The termination fee is reflected in general and
administrative expenses in the accompanying consolidated statement of
operations for the year ended December 31, 1995.
During 1995, the Partnership paid certain limited partners approximately
$57,000 in commissions as a result of the execution of reseller agreements.
F-26
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1995 and 1996, the Partnership issued promissory notes to related
parties in the aggregate amount of $600,000 and $1,300,000, respectively,
which bore interest at 12%. The obligations of the Partnership under such
notes were assumed by the Company in connection with the Transactions and
were cancelled in May 1996 in consideration of the issuance of approximately
24,904 shares of Series A Convertible Preferred Stock to the holders thereof.
14. EMPLOYEE BENEFIT PLAN
The Company provides retirement benefits for eligible employees, as
defined, through a defined contribution benefit plan that is qualified under
Section 401(k) of the Internal Revenue Code (the "Plan"). Contributions to
the Plan are made at the sole discretion of the Company and amounted to
$32,987, $55,851 and $230,861 for the years ended December 31, 1995, 1996 and
1997, respectively.
15. SUBSEQUENT EVENTS
Acquisition of Resellers
In February and March 1998, the Company acquired the businesses of five
third-party resellers of the Company's products (the "Acquired Resellers") in
exchange for an aggregate of 121,856 shares of the Company's Class B Common
Stock. Prior to these acquisitions, the Company and its stockholders had no
ownership interest in the five Acquired Resellers and the financial and
operating policies of the Acquired Resellers were not controlled by the
Company. The acquisition of such Acquired Resellers was accounted for under
the poolings-of-interest method of accounting.
Pro forma results of operations, assuming the acquisitions of the Acquired
Resellers had been consummated as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues .......................... $ 3,727 $ 9,311 $ 17,592
Net loss .......................... (4,731) (20,385) (16,016)
Loss per share, basic and diluted
</TABLE>
Modification to Escrow Agreement
In March 1998, the Class B Escrow Agreement was modified to provide that
all of the shares of Class B Common Stock held in escrow will be released
upon the execution of a firm underwriting agreement for the initial public
offering of the Company's capital stock on or before July 1, 1998.
Accordingly, approximately $4.0 million of compensation expense will be
recorded as of the date of modification, representing the number of shares
released to directors, officers and employees of the Company, multiplied by
the difference between the initial public offering price and the price paid
by the holders of the shares.
Release Event
In 1998, a Release Event occurred when the businesses of the five
Acquired Resellers were acquired by the Company and the GP determined that
such acquisitions should result in the liquidation of the Partnership.
Following the occurrence of such Release Event, the following events
occurred: (i) the Board of Directors declared a mandatory conversion of the
outstanding shares of the Company's Class A, Class B and Class C Common Stock
and such shares were converted into shares of Common Stock of the Company;
(ii) 101,828 of the shares of Common Stock resulting from the conversion of
shares of Class A Common Stock and 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
F-27
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 101,828 shares to the Participating Resellers.
No modification of the original recorded purchase price of the Participating
Resellers was required.
Initial Public Offering
In March 1998, the Company filed a Registration Statement with the
Securities and Exchange Commission in connection with the initial public
offering of its Common Stock. In connection with this offering, the Company
declared a for -1 split of the outstanding shares of its Common Stock.
Such split has been retroactively reflected in the accompanying financial
statements.
Pro Forma Balance Sheet
The accompanying pro forma balance sheet at December 31, 1997 assumes the
effects of the following transactions: (i) the conversion of all of the
issued and outstanding shares of the Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock into shares of Common Stock, (ii) the
conversion of all of the issued and outstanding shares of Class A, Class B
and Class C Common Stock into shares of Common Stock, (iii) the liquidation
of the Partnership and the resulting cancellation of certain shares of Common
Stock, (iv) the termination of the Class A Escrow Agreement and resulting
cancellation of certain shares of Common Stock and (v) the termination of the
Class B Escrow Agreement and the recording of a related compensation expense
of approximately $4.0 million.
F-28
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Torrence & Associates, Inc.:
We have audited the accompanying balance sheet of Torrence & Associates,
Inc. d/b/a The Ultimate Software Group (an Illinois corporation) as of
December 31, 1995, and the related statements of operations, shareholders'
deficit and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Torrence & Associates,
Inc. d/b/a The Ultimate Software Group as of December 31, 1995, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- -----------------------
ARTHUR ANDERSEN LLP
Miami, Florida,
October 15, 1996.
F-29
<PAGE>
TORRENCE & ASSOCIATES, INC.
D/B/A THE ULTIMATE SOFTWARE GROUP
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 13,726
Accounts receivable ........................................................... 38,811
Other ......................................................................... 29,873
-----------------
Total current assets ........................................................ 82,410
Property and equipment, net .................................................... 58,043
Other assets ................................................................... 67,485
-----------------
Total assets ................................................................ $ 207,938
=================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accrued expenses .............................................................. $ 81,423
Deferred revenue .............................................................. 108,657
Current portion of capital lease obligations .................................. 10,647
-----------------
Total current liabilities ................................................... 200,727
Notes payable to related parties ............................................... 661,000
Capital lease obligations, net of current portion .............................. 20,716
-----------------
Total liabilities ........................................................... 882,443
-----------------
Commitments and contingencies (Notes 5 and 7)
Shareholders' deficit:
Common Stock, $.08 par value, 25,000 shares authorized, 12,563 shares issued
and outstanding .............................................................. 1,005
Additional paid-in capital .................................................... 232,683
Accumulated deficit ........................................................... (908,193)
-----------------
Total shareholders' deficit ................................................. (674,505)
-----------------
Total liabilities and shareholders' deficit ................................. $ 207,938
=================
</TABLE>
The accompanying notes to financial statements are an integral part of this
balance sheet.
F-30
<PAGE>
TORRENCE & ASSOCIATES, INC.
D/B/A THE ULTIMATE SOFTWARE GROUP
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
<S> <C>
Revenues .................. $ 153,741
Operating expenses:
Cost of revenues ......... 64,909
Sales and marketing ..... 310,224
General and
administrative........... 643,165
------------------
Total operating
expenses............... 1,018,298
------------------
Operating loss.......... (864,557)
Interest expense .......... (43,636)
------------------
Net loss................ $ (908,193)
==================
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-31
<PAGE>
TORRENCE & ASSOCIATES, INC.
D/B/A THE ULTIMATE SOFTWARE GROUP
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED SHAREHOLDER'S
----------------- ----------- CAPITAL DEFICIT DEFICIT
SHARES AMOUNT
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 -- $ -- $ -- $ -- $ --
Sale of common stock ..... 12,563 1,005 232,683 -- 233,688
Net loss .................. -- -- -- (908,193) (908,193)
-------- -------- ------------ ------------- ---------------
Balance, December 31, 1995 12,563 $1,005 $232,683 $(908,193) $(674,505)
======== ======== ============ ============= ===============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-32
<PAGE>
TORRENCE & ASSOCIATES, INC.
D/B/A THE ULTIMATE SOFTWARE GROUP
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
<S> <C>
Cash flows from operating activities:
Net loss ................................................................. $(908,193)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ........................................... 253,089
Gain on disposal of fixed assets ........................................ (626)
Changes in operating assets and liabilities:
Accounts receivable .................................................... (38,811)
Other assets............................................................ (339,067)
Accrued expenses........................................................ 81,423
Deferred revenue........................................................ 108,657
------------------
Net cash used in operating activities...................................... (843,528)
------------------
Cash flows from investing activities:
Capital expenditures...................................................... (31,685)
------------------
Cash flows from financing activities:
Net proceeds from notes payable to related parties........................ 661,000
Payments of capital lease obligations..................................... (5,749)
Proceeds from sale of common stock........................................ 233,688
------------------
Net cash provided by financing activities.................................. 888,939
------------------
Net increase in cash and cash equivalents.................................. 13,726
Cash and cash equivalents, beginning of year............................... --
------------------
Cash and cash equivalents, end of year..................................... $ 13,726
==================
Supplemental disclosure of cash flow information:
Cash paid for interest.................................................... $ 43,635
==================
Supplemental disclosure of non-cash financing activities:
The Company entered into capital lease obligations to acquire new
equipment totaling $37,113 in 1995.
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-33
<PAGE>
TORRENCE & ASSOCIATES, INC.
D/B/A THE ULTIMATE SOFTWARE GROUP
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Torrence & Associates, Inc. d/b/a The Ultimate Software Group (the
"Company") is a third-party reseller of The Ultimate Software Group, Inc.'s
human resource management and payroll software solutions. Substantially all
of the products are developed and sold to the Company by The Ultimate
Software Group, Inc. ("USG", formerly The Ultimate Software Group, Ltd.)
which, subsequent to December 31, 1995, acquired the business, operations and
certain assets and liabilities of the Company (see Note 9). The Company began
operations on December 29, 1994 and markets its products in the States of
Illinois, Iowa, Minnesota, Missouri and Wisconsin.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. There were no cash
equivalents at December 31, 1995.
Accounts Receivable
Accounts receivable is from end-users of the Company's products. The
Company performs periodic credit evaluations of its customers and has
determined that an allowance for estimated losses was not required at
December 31, 1995.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repairs
are charged to expense when incurred; betterments are capitalized. Upon the
sale or retirement of assets, the cost, accumulated depreciation and
amortization are removed from the accounts and any gain or loss is
recognized.
Other Assets
Other assets includes a fee of $300,000, net of accumulated amortization
of $241,708, paid to USG under an exclusive reseller agreement (the
"Agreement"). The Agreement allowed the Company to exclusively market USG's
products in Illinois, Iowa, Minnesota, Missouri and Wisconsin. As a result of
the sale of the Company's operations and certain of its assets and
liabilities to USG in April 1996 (see Note 9), the carrying value reflects
the estimated useful life of this asset through the date of the acquisition.
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered. Associated deferred costs, primarily relating to the cost
of the products for licensing contracts purchased from USG, amounted to
approximately $26,000 at December 31, 1995 and are included in other current
assets.
Revenue Recognition
The Company licenses software under noncancellable license agreements and
provides services including maintenance, implementation, training and
consulting services. License revenues are generally recognized when a
noncancellable license agreement has been signed, the product has been
delivered, no significant vendor obligations remain and the collection of the
related receivable is deemed probable. Revenues from maintenance agreements
for maintaining, supporting and providing periodic updates are
F-34
<PAGE>
TORRENCE & ASSOCIATES, INC.
D/B/A THE ULTIMATE SOFTWARE GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
recognized ratably over the maintenance period, which in most instances is
one year. Revenues for training and consulting services are recognized as
services are performed.
Cost of Revenues
Cost of revenues consists of direct product costs and the costs of
providing consulting, implementation, maintenance, technical support and
training to the Company's customers.
Income Taxes
The Company has elected S Corporation status with the Internal Revenue
Service. Accordingly, net income (loss) and the related differences that
arise in the recording of income and expense items for financial reporting
and income tax reporting purposes are included in the individual income tax
returns of the shareholders and no income taxes are included in the
accompanying financial statements.
Because of the Company's net loss position, had the Company been a C
Corporation, subject to tax at the corporate level, no tax benefit would have
been recorded.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments, consisting of cash and cash
equivalents, accounts receivable and notes payable approximate fair value.
3. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
<S> <C>
Accrued compensation $58,079
Due to USG ........... 21,347
Other ................ 1,997
-----------------
$81,423
=================
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED AS OF
USEFUL LIFE DECEMBER 31, 1995
<S> <C> <C>
Equipment ............................ 3 years $ 64,655
Furniture, fixtures and improvements 5 years 4,144
-----------------
68,799
Less--accumulated depreciation and
amortization......................... (10,756)
-----------------
$ 58,043
=================
</TABLE>
Included in property and equipment is equipment acquired under capital
leases amounting to $37,112, less accumulated amortization of $5,434. The
leases are being amortized over their useful lives ranging from 3-4 years.
F-35
<PAGE>
TORRENCE & ASSOCIATES, INC.
D/B/A THE ULTIMATE SOFTWARE GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under noncancellable agreements,
which are accounted for as capital leases and expire at various dates through
January 1999. Interest rates on these leases are 10.8%. The annual maturities
of capital lease obligations are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 .................................................................... $14,073
1997 .................................................................... 14,073
1998 .................................................................... 7,873
---------
36,019
Less--amount representing interest ...................................... (4,656)
---------
Lease obligations reflected as current ($10,647) and noncurrent
($20,716)............................................................... $31,363
=========
</TABLE>
6. NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consists of two-year, 10% interest
bearing notes due to the President of the Company. The maturities of the
notes range from January 1, 1997 to October 20, 1997.
7. COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain equipment under noncancellable
operating lease agreements expiring at various dates. Total rent expense
under these agreements was $15,967. Future minimum annual rental commitments
related to these leases are $41,000 in 1996, $43,000 in 1997 and $14,000 in
1998.
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Company's financial position or results of operations.
8. EMPLOYEE BENEFIT PLAN
The Company provides retirement benefits for eligible employees, as
defined, through a defined contribution benefit plan (the "Plan") that is
qualified under Section 401(k) of the Internal Revenue Code. Employees must
provide at least one month of service and may contribute up to 15% of their
salary. The Company makes discretionary contributions to the Plan in which
employees vest after three years of service.
9. SUBSEQUENT EVENT
Effective April 25, 1996, the Company sold its operations and certain
assets and liabilities to USG. As a result, the results of operations of the
Company subsequent to that date are included with that of USG.
F-36
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
The Ultimate Software Group of Georgia, Inc.:
We have audited the accompanying balance sheet of The Ultimate Software
Group of Georgia, Inc. (a Georgia corporation) as of December 31, 1995, and
the related statements of operations, shareholders' deficit and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Ultimate Software
Group of Georgia, Inc. as of December 31, 1995, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
- -----------------------
ARTHUR ANDERSEN LLP
Miami, Florida,
November 7, 1997.
F-37
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 2,423
Accounts receivable .................................................. 62,233
-----------------
Total current assets ............................................... 64,656
Property and equipment, net ........................................... 28,243
Other assets........................................................... 7,707
-----------------
Total assets........................................................ $ 100,606
=================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable ..................................................... $ 7,518
Accrued expenses ..................................................... 55,119
Deferred revenue ..................................................... 20,400
-----------------
Total current liabilities .......................................... 83,037
Notest payable to related parties ..................................... 246,000
-----------------
Total liabilities................................................... 329,037
-----------------
Commitments and contingencies (Note 7)
Shareholders' deficit:
Common Stock, $.10 par value, 1,000,000 shares authorized, 4,236
shares issued and outstanding ....................................... 424
Additional paid-in capital............................................ 119,076
Accumulated deficit................................................... (347,931)
-----------------
Total shareholders' deficit......................................... (228,431)
-----------------
Total liabilities and shareholders' deficit......................... $ 100,606
=================
</TABLE>
The accompanying notes to financial statements are an integral part of this
balance sheet.
F-38
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
<S> <C>
Revenues.................... $ 568,037
Operating expenses:
Cost of revenues .......... 141,793
Sales and marketing ....... 36,609
General and administrative 472,051
------------------
Total operating expenses 650,453
------------------
Operating loss .......... (82,416)
Interest expense ........... (35,500)
------------------
Net loss ................ $(117,916)
==================
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-39
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED SHAREHOLDERS'
------------------ CAPITAL DEFICIT DEFICIT
SHARES AMOUNT
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ...... 3,800 $380 $ 94,120 $(230,015) $(135,515)
Shares issued with notes payable 187 19 (19) -- --
Shares issued for services ..... 250 25 49,975 -- 50,000
Purchase and retirement of
treasury shares ................ -- -- (25,000) -- (25,000)
Net loss ........................ (117,916) (117,916)
-------- -------- ------------ ------------- ---------------
Balance, December 31, 1995 ...... 4,237 $424 $119,076 $(347,931) $(228,431)
======== ======== ============ ============= ===============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-40
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
<S> <C>
Cash flows from operating activities:
Net loss ................................................................. $(117,916)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ........................................... 94,276
Issuance of equity instruments for services ............................. 50,000
Changes in operating assets and liabilities:
Accounts receivable .................................................... (38,363)
Accounts payable ....................................................... (3,032)
Accrued expenses ....................................................... 54,997
Deferred revenue ....................................................... 20,400
------------------
Net cash provided by operating activities ................................. 60,362
------------------
Cash flows from investing activities:
Capital expenditures...................................................... (12,597)
------------------
Cash flows from financing activities:
Net payments of notes payable to related parties ......................... (37,000)
Purchase of treasury shares .............................................. (25,000)
------------------
Net cash used in financing activities ..................................... (62,000)
------------------
Net decrease in cash and cash equivalents.................................. (14,235)
Cash and cash equivalents, beginning of year .............................. 16,658
------------------
Cash and cash equivalents, end of year .................................... $ 2,423
==================
Supplemental disclosure of cash flow information:
Cash paid for interest ................................................... $ 29,500
==================
Supplemental disclosure of non-cash financing information:
In 1995, the Company issued 250 shares of Common Stock valued at $50,000
to certain employees for services performed.
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-41
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group of Georgia, Inc. (the "Company") is a
third-party reseller of The Ultimate Software Group, Inc.'s human resource
management and payroll software solutions. Substantially all the products are
developed and sold to the Company by The Ultimate Software Group, Inc.
("USG", formerly The Ultimate Software Group, Ltd.) which, subsequent to
December 31, 1995, acquired the business, operations and certain assets and
liabilities of the Company (see Note 8). The Company markets its products in
the State of Georgia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. There were no cash
equivalents at December 31, 1995.
Accounts Receivable
Accounts receivable are from end-users of the Company's products. The
Company performs periodic credit evaluations of its customers and has
determined that an allowance for estimated losses was not required at
December 31, 1995.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repairs
are charged to expense when incurred; betterments are capitalized. Upon the
sale or retirement of assets, the cost, accumulated depreciation and
amortization are removed from the accounts and any gain or loss is
recognized.
Other Assets
Other assets includes a fee of $100,000, net of accumulated amortization
of $92,793, paid to USG under an exclusive reseller agreement (the
"Agreement"). The Agreement allowed the Company to exclusively market USG's
products in Georgia. As a result of the sale of the Company's operations and
certain of its assets and liabilities to USG in April 1996 (see Note 8), the
carrying value reflects the estimated useful life of this asset through the
date of the acquisition.
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered.
Revenue Recognition
The Company licenses software under noncancellable license agreements and
provides services including maintenance, implementation, training and
consulting services. License revenues are generally recognized when a
noncancellable license agreement has been signed, the product has been
delivered, no significant vendor obligations remain and the collection of the
related receivable is deemed probable. Revenues from maintenance agreements
for maintaining, supporting and providing periodic updates are recognized
ratably over the maintenance period, which in most instances is one year.
Revenues for training and consulting services are recognized as services are
performed.
F-42
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Cost of Revenues
Cost of revenues consists of direct product costs and the costs of
providing consulting, implementation, maintenance, technical support and
training to the Company's customers.
Income Taxes
The Company has elected S Corporation status with the Internal Revenue
Service. Accordingly, net income (loss) and the related differences that
arise in the recording of income and expense items for financial reporting
and income tax reporting purposes are included in the individual income tax
returns of the shareholders and no income taxes are included in the
accompanying financial statements.
Because of the Company's net loss position, had the Company been a C
Corporation, subject to tax at the corporate level, no tax benefit would have
been recorded.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments, consisting of cash and cash
equivalents and accounts receivable approximate fair value due to their
short-term nature.
3. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
<S> <C>
Accrued compensation $53,982
Other ................ 1,137
-----------------
$55,119
=================
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED AS OF
USEFUL LIFE DECEMBER 31, 1995
<S> <C> <C>
Equipment ....................................... 3 years $ 44,719
Furniture, fixtures and improvements ............ 5 years 8,798
-----------------
53,517
Less -accumulated depreciation and amortization . (25,274)
-----------------
$ 28,243
=================
</TABLE>
F-43
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF GEORGIA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. NOTES PAYABLE TO SHAREHOLDERS
Notes payable to shareholders consists of the following unsecured amounts:
<TABLE>
<CAPTION>
<S> <C>
Due to shareholder, interest payable monthly at 12%, due February 1,
1998.................................................................... $ 46,000
Due to shareholder, interest payable monthly at 12%, due May 1, 1997 ... 50,000
Due to shareholder, interest payable monthly at 12%, due $50,000 on May
1, 1997, $50,000 on July 1, 1997 and $50,000 on February 1, 1998 ...... 150,000
---------
$246,000
=========
</TABLE>
6. EQUITY TRANSACTIONS
In 1995, the Company issued 187 shares of Common Stock to a shareholder in
connection with a borrowing. The borrowing is reflected in notes payable to
shareholders at December 31, 1995. No value was assigned to the stock that
was issued as it was issued to a related party.
In 1995, the Company issued 250 shares of Common Stock to an employee for
services performed. The fair value of this transaction was $50,000, based
upon prior sales of the Company's Common Stock.
In 1994, the Company became obligated to pay $25,000 to two shareholders
for the purchase of 250 treasury shares. The balance due of $25,000 was paid
to the shareholders in 1995.
7. COMMITMENTS AND CONTINGENCIES
The Company leases office space under a noncancellable operating lease
agreement expiring in December 1996. Total rent expense under this agreement
was $13,748. The future minimum annual rental commitment related to this
lease is approximately $14,000 in 1996.
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Company's financial position or results of operations.
8. SUBSEQUENT EVENT
Effective April 25, 1996, the Company sold its operations and certain
assets and liabilities to USG. As a result, the results of operations of the
Company subsequent to that date are included with that of USG.
F-44
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
The Ultimate Software Group Midwest, Ltd.:
We have audited the accompanying balance sheet of The Ultimate Software
Group Midwest, Ltd. (an Ohio Limited Partnership) as of December 31, 1995,
and the related statements of operations, partners' deficit and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Ultimate Software
Group Midwest, Ltd. as of December 31, 1995, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
- -----------------------
ARTHUR ANDERSEN LLP
Miami, Florida,
January 30, 1998.
F-45
<PAGE>
THE ULTIMATE SOFTWARE GROUP MIDWEST, LTD.
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents ........................ $ 66,498
Accounts receivable, net ......................... 113,727
Prepaid expenses ................................. 4,400
-----------
Total current assets ............................ 184,625
Property and equipment, net ....................... 35,979
Investment in USG ................................. 100,709
Other assets ...................................... 70,717
-----------
Total assets .................................... $ 392,030
===========
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable ................................. $ 454,379
Accrued expenses ................................. 191,823
Deferred revenue ................................. 192,262
Current portion of capital lease obligations .... 15,158
Due to related parties ........................... 85,704
-----------
Total current liabilities ....................... 939,326
Capital lease obligations, net of current portion 10,148
-----------
Total liabilities ............................... 949,474
Commitments and contingencies (Note 7)
Total partners' deficit ......................... (557,444)
-----------
Total liabilities and partners' deficit ........ $ 392,030
===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
balance sheet.
F-46
<PAGE>
THE ULTIMATE SOFTWARE GROUP MIDWEST, LTD.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
<S> <C>
Revenues.................... $ 441,579
Operating expenses:
Cost of revenues .......... 263,219
Sales and marketing ....... 380,019
General and administrative 1,017,815
------------------
Total operating expenses 1,661,053
------------------
Operating loss............ (1,219,474)
Interest expense ........... (6,356)
Interest income ............ 2,807
------------------
Net loss ................. $(1,223,023)
==================
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-47
<PAGE>
THE ULTIMATE SOFTWARE GROUP MIDWEST, LTD.
STATEMENT OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
TOTAL
GENERAL LIMITED PARTNERS'
PARTNER PARTNERS DEFICIT
<S> <C> <C> <C>
December 31, 1994 $ 111,739 $ 353,840 $ 465,579
Contributions ... -- 200,000 200,000
Net loss ......... (330,216) (892,807) (1,223,023)
------------ ------------ -------------
December 31, 1995 $(218,477) $(338,967) $ (557,444)
============ ============ =============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-48
<PAGE>
THE ULTIMATE SOFTWARE GROUP MIDWEST, LTD.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
<S> <C>
Cash flows from operating activities:
Net loss ................................................................. $(1,223,023)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ........................................... 130,570
Provision for doubtful accounts.......................................... 54,287
Change in operating assets and liabilities:
Accounts receivable .................................................... (29,651)
Prepaid expenses ....................................................... 14,970
Other assets ........................................................... (39,973)
Accounts payable ....................................................... 445,758
Accrued expenses ....................................................... 72,605
Deferred revenue ....................................................... 192,262
------------------
Net cash used in operating activities ..................................... (382,195)
------------------
Cash flows from investing activities:
Capital expenditures ..................................................... (2,532)
Repayment of note receivable ............................................. 126,667
------------------
Net cash provided by investment activities ................................ 124,135
------------------
Cash flows from financing activities:
Proceeds from due to related parties ..................................... 85,704
Payments on capital lease obligations .................................... (8,762)
Partners' capital contributions .......................................... 200,000
------------------
Net cash provided by financing activities ................................. 276,942
------------------
Net increase in cash and cash equivalents ................................. 18,882
Cash and cash equivalents, beginning of year .............................. 47,616
------------------
Cash and cash equivalents, end of year .................................... $ 66,498
==================
Supplemental disclosure of cash flow information:
Cash paid for interest ................................................... $ 6,356
==================
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-49
<PAGE>
THE ULTIMATE SOFTWARE GROUP MIDWEST, LTD.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group Midwest, Ltd. (the "Partnership") is a
third-party reseller of The Ultimate Software Group Inc.'s human resource
management and payroll software solutions. Substantially all of the products
are developed and sold to the Partnership by The Ultimate Software Group,
Inc. ("USG" formerly, The Ultimate Software Group, Ltd.) which, subsequent to
December 31, 1995, acquired the business, operations and certain assets and
liabilities of the Partnership (see Note 8). The Partnership markets its
products in the States of Kentucky, Michigan, Ohio, Pennsylvania and West
Virginia.
The partners share in income and loss and have ownership percentages as
follows:
<TABLE>
<CAPTION>
OWNERSHIP SHARE OF INCOME
PERCENTAGE AND LOSS
<S> <C> <C>
General partner ...... 27% 27%
Limited partners .... 73 73
-------------- -------------------
100% 100%
============== ===================
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. There were no cash
equivalents at December 31, 1995.
Accounts Receivable
Accounts receivable are from end-users of the Partnership's products. The
Partnership performs periodic credit evaluations of its customers and has
determined the allowance for estimated losses to be $54,287 at December 31,
1995.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repairs
are charged to expense when incurred; betterments are capitalized. Upon the
sale or retirement of assets, the cost, accumulated depreciation and
amortization are removed from the accounts and any gain or loss is
recognized.
Investment in USG
Investment in USG represents the partnership's purchase of a 0.69%
interest in USG for cash prior to 1995. Such investment is accounted for at
cost.
Other Assets
Other assets includes a fee of $237,005, net of accumulated amortization
of $212,921 paid to USG under an exclusive reseller agreement (the
"Agreement"). The Agreement allowed the Partnership to exclusively market
USG's products in Kentucky, Michigan, Ohio, West Virginia and Western
Pennsylvania. As a result of the sale of the Partnership's operations and
certain of its assets and liabilities to USG in April 1996 (see Note 8), the
Partnership has reflected the estimated useful life of this asset through the
date of the acquisition.
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered.
F-50
<PAGE>
THE ULTIMATE SOFTWARE GROUP MIDWEST, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
The Partnership licenses software under noncancellable license agreements
and provides services including maintenance, implementation, training and
consulting services. License revenues are generally recognized when a
noncancellable license agreement has been signed, the product has been
delivered, no significant vendor obligations remain and the collection of the
related receivable is deemed probable. Revenues from maintenance agreements
for maintaining, supporting and providing periodic updates are recognized
ratably over the maintenance period, which in most instances is one year.
Revenues for training and consulting services are recognized as services are
performed.
Cost of Revenues
Cost of revenues consists of direct product costs and the costs of
providing consulting, implementation, maintenance, technical support and
training to the Partnership's customers.
Income Taxes
The Partnership is organized as a limited Partnership. Accordingly, income
taxes were not provided for or payable by the Partnership. Partners were
taxed individually based on their share of partnership earnings (losses).
Because of the Partnership's net loss position, had the Partnership been a
C Corporation, subject to tax at the corporate level, no tax benefit would
have been recorded.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Partnership's financial instruments, consisting of cash and cash
equivalents and accounts receivable approximate fair value due to their
short-term nature.
3. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
<S> <C>
Accrued compensation and related payroll expenses $101,815
Management fees ................................... 60,000
Other ............................................. 30,008
-----------------
$191,823
=================
</TABLE>
F-51
<PAGE>
THE ULTIMATE SOFTWARE GROUP MIDWEST, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED AS OF
USEFUL LIFE DECEMBER 31, 1995
<S> <C> <C>
Equipment ........................................ 3 years $64,597
Furniture, fixtures and improvements ............. 5 years 1,343
-----------------
65,940
Less -accumulated depreciation and amortization . 29,961
-----------------
$35,979
=================
</TABLE>
Included in property and equipment is equipment acquired under capital
leases amounting to $35,647, less accumulated amortization of $10,878.
5. CAPITAL LEASE OBLIGATIONS
The Partnership leases certain equipment under noncancellable agreements
which are accounted for as capital leases and expire at various dates through
1998. The annual maturities of the capital lease obligations are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 .................................................................... $15,158
1997 .................................................................... 9,026
1998 .................................................................... 1,122
---------
Lease obligations reflected as current ($15,158) and noncurrent
($10,148)............................................................... $25,306
=========
</TABLE>
6. DUE TO RELATED PARTIES
Due to related parties represents noninterest-bearing amounts that are due
on demand.
7. COMMITMENTS AND CONTINGENCIES
The Partnership leases office space and certain equipment under
noncancelable operating lease agreements expiring at various dates. Total
rent expense under these agreements was $102,383. Future minimum annual
rental commitments related to these leases are $27,284 through 1996.
From time to time, the Partnership may be involved in litigation relating
to claims arising out of its operations in the normal course of business. The
Partnership is not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Partnership's financial position or results of
operations.
8. SUBSEQUENT EVENT
Effective April 25, 1996, the Partnership sold its operations and certain
assets and liabilities to USG. As a result, the results of operations of the
Partnership subsequent to that date are included with that of USG.
F-52
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of The Ultimate Software
Group of the Carolinas, Inc. and The Ultimate Software
Group of Virginia, Inc.:
We have audited the accompanying combined balance sheets of The Ultimate
Software Group of The Carolinas, Inc. (a North Carolina corporation) and The
Ultimate Software Group of Virginia, Inc. (a Virginia corporation)
(collectively, the "Companies") as of December 31, 1996 and 1997 and the
related combined statements of operations, shareholders' deficit and cash
flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of The
Ultimate Software Group of The Carolinas, Inc. and The Ultimate Software
Group of Virginia, Inc. as of December 31, 1996 and 1997 and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
- -----------------------
ARTHUR ANDERSEN LLP
Miami, Florida,
January 20, 1998 (except with respect
to the matter discussed in Note 9, as
to which the date is February 25, 1998).
F-53
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1996 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 51,151 $ 32,651
Accounts receivable..................................... 136,819 271,929
Other current assets.................................... 29,666 97,890
----------- -----------
Total current assets.................................. 217,636 402,470
Equipment, net........................................... 17,555 18,963
Other assets............................................. 11,498 1,640
----------- -----------
Total assets.......................................... $ 246,689 $ 423,073
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accrued expenses........................................ $ 13,885 $ 46,671
Deferred revenue........................................ 110,337 579,390
Borrowings under line of credit agreement............... 129,841 109,091
Note payable............................................ 23,142 --
----------- -----------
Total current liabilities............................. 277,205 735,152
----------- -----------
Commitments and contingencies (Note 8)
Shareholders' deficit:
Common Stock -Carolinas, $1.00 par value, 100,000
shares authorized, 1,000 shares issued and outstanding 1,000 1,000
Common Stock -Virginia, $.01 par value, 10,000 shares
authorized, 5,150 shares issued and outstanding ...... 52 52
Additional paid-in capital ............................. 136,548 136,548
Accumulated deficit .................................... (168,116) (449,679)
----------- -----------
Total shareholders' deficit .......................... (30,516) (312,079)
----------- -----------
Total liabilities and shareholders' deficit ......... $ 246,689 $ 423,073
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
combined balance sheets.
F-54
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Revenues ................... $474,283 $648,067 $ 859,173
Operating expenses:
Cost of revenues .......... 181,150 289,665 325,388
Sales and marketing ....... 138,815 196,102 567,850
General and administrative 122,301 182,848 236,849
---------- ----------- -----------
Total operating expenses 442,266 668,615 1,130,087
---------- ----------- -----------
Operating income (loss) . 32,017 (20,548) (270,914)
Other expense, net ......... (5,600) (16,642) (10,649)
---------- ----------- -----------
Net income (loss) ........ $ 26,417 $(37,190) $ (281,563)
========== =========== ===========
</TABLE>
The accompanying notes to combined financial statements are an integral part
of these statements.
F-55
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
CAROLINAS VIRGINIA
------------------ ------------------
COMMON STOCK COMMON STOCK ADDITIONAL TOTAL
$1.00 PAR VALUE $.01 PAR VALUE PAID-IN ACCUMULATED SHAREHOLDERS'
------------------ ------------------ CAPITAL DEFICIT DEFICIT
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 . 1,000 $1,000 5,150 $52 $126,548 $(157,343) $ (29,743)
Net income ................. -- -- -- -- -- 26,417 26,417
-------- -------- -------- -------- ------------ ------------- ---------------
Balance, December 31, 1995 . 1,000 1,000 5,150 52 126,548 (130,926) (3,326)
Contribution of shares to
fund issuance of stock to
employees for services ... (10) (10) -- -- 10 -- --
Noncash issuance of stock
to employees for services 10 10 -- -- 9,990 -- 10,000
Net loss ................... -- -- -- -- -- (37,190) (37,190)
-------- -------- -------- -------- ------------ ------------- ---------------
Balance, December 31, 1996 . 1,000 1,000 5,150 52 136,548 (168,116) (30,516)
Net loss ................... -- -- -- -- -- (281,563) (281,563)
-------- -------- -------- -------- ------------ ------------- ---------------
Balance, December 31, 1997 . 1,000 $1,000 5,150 $52 $136,548 $(449,679) $(312,079)
======== ======== ======== ======== ============ ============= ===============
</TABLE>
The accompanying notes to combined financial statements are an integral part
of these statements.
F-56
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................... $ 26,417 $(37,190) $(281,563)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ..................... 15,365 17,477 15,558
Issuance of equity instruments for services ...... -- 10,000 --
Changes in operating assets and liabilities:
Accounts receivable .............................. (50,184) (54,193) (135,110)
Other current assets ............................. (17,993) (11,673) (68,224)
Accrued expenses ................................. (2,591) (5,407) 32,786
Deferred revenue ................................. (12,125) 102,962 469,053
---------- ----------- ------------
Net cash provided by (used in) operating activities . (41,111) 21,976 32,500
---------- ----------- ------------
Cash flows from investing activities:
Capital expenditures ................................ (13,804) (7,635) (7,108)
---------- ----------- ------------
Cash flows from financing activities:
Borrowings under line of credit agreement .......... 85,000 50,016 --
Payments under line of credit agreement ............. (14,277) (20,898) (20,750)
Borrowings under note payable ....................... -- 24,936 --
Payments under note payable ......................... -- (1,794) (23,142)
Payments on amounts due to related party ............ -- (40,500) --
---------- ----------- ------------
Net cash provided by (used in) financing activities . 70,723 11,760 (43,892)
---------- ----------- ------------
Net increase (decrease) in cash and cash equivalents 15,808 26,101 (18,500)
Cash and cash equivalents, beginning of year ........ 9,242 25,050 51,151
---------- ----------- ------------
Cash and cash equivalents, end of year ............... $ 25,050 $ 51,151 $ 32,651
========== =========== ============
Supplemental disclosure of cash flow information:
Cash paid for interest .............................. $ 5,600 $ 16,642 $ 12,046
========== =========== ============
</TABLE>
The accompanying notes to combined financial statements are an integral part
of these statements.
F-57
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group of the Carolinas, Inc. and the Ultimate
Software Group of Virginia, Inc. (collectively, the "Companies") is a
third-party reseller of The Ultimate Group Software, Inc.'s human resource
management and payroll software solutions. Substantially all of the
Companies' products are developed and sold to the Companies by The Ultimate
Software Group, Inc. ("USG", formerly The Ultimate Software Group, Ltd.). The
Companies market their products in the states of North Carolina, South
Carolina and Virginia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Combination
The combined financial statements include the accounts of The Ultimate
Software Group of the Carolinas, Inc. and The Ultimate Software Group of
Virginia, Inc. who have the same shareholders. Intercompany accounts and
transactions have been eliminated in combination.
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. There were no cash
equivalents at December 31, 1996 and 1997.
Accounts Receivable
Accounts receivable are from end-users of the Companies' products. The
Companies perform periodic credit evaluations of their customers and
determined that an allowance for estimated losses was not required at
December 31, 1996 and 1997.
Equipment
Equipment is stated at cost less accumulated depreciation and
amortization. Equipment is depreciated using the straight-line method over
the estimated useful lives of the assets. Maintenance and repairs are charged
to expense when incurred; betterments are capitalized. Upon the sale or
retirement of assets, the cost, accumulated depreciation and amortization are
removed from the accounts and any gain or loss is recognized.
Other Assets
Other assets includes a fee of $50,000, net of accumulated amortization of
$42,058 in 1996 and $47,534 in 1997 paid to USG under an exclusive reseller
agreement (the "Agreement"). The Agreement allowed the Companies to
exclusively market USG's products in North Carolina, South Carolina and
Virginia. Such asset is being amortized over its estimated period of benefit
of approximately 5 years.
In accordance with SFAS No. 121, Accounting for the Impairment Of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Companies
continually evaluate whether later events and circumstances have occurred
that indicate the remaining acquired intangibles may warrant revision or may
not be recoverable. When factors indicate that intangibles should be
evaluated for possible impairment, the Companies use an estimate of the
related business' undiscounted cash flows from operations in measuring
whether such cost is recoverable.
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered.
F-58
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Associated deferred costs, primarily relating to the cost of the products
for licensing contracts, amounted to approximately $21,000 and $97,000 at
December 31, 1996 and 1997, respectively, and are included in other assets in
the accompanying combined balance sheets.
Revenue Recognition
The Company licenses software under noncancellable license agreements and
provides services including maintenance, implementation, training and
consulting services. License revenues are generally recognized when a
noncancellable license agreement has been signed, the product has been
delivered, no significant vendor obligations remain and the collection of the
related receivable is deemed probable. Revenues from maintenance agreements
for maintaining, supporting and providing periodic updates are recognized
ratably over the maintenance period, which in most instances is one year.
Revenues for training and consulting services are recognized as services are
performed.
Cost of Revenues
Cost of revenues consists of direct product costs and the costs of
providing consulting, implementation, maintenance, technical support and
training to the Company's customers.
Income Taxes
The Companies have elected S Corporation status with the Internal Revenue
Service. Accordingly, net income (loss) and the related differences that
arise in the recording of income and expense items for financial reporting
and income tax reporting purposes are included in the individual income tax
returns of the shareholders and no income taxes are included in the
accompanying combined financial statements.
Because of the Companies' net loss position, had the Companies been a C
Corporations, subject to tax at the corporate level, no tax benefit would
have been recorded.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Companies' financial instruments, consisting of cash and cash
equivalents, accounts receivable, borrowings under line of credit
requirements, notes payable and due to related party approximate fair value
due to their short-term nature.
3. EQUIPMENT
Equipment consists of computer equipment of $39,339 in 1996 and $46,448 in
1997, less accumulated depreciation of $21,784 in 1996 and $27,485 in 1997.
These assets are depreciated over their estimated useful life of three years.
4. NOTE PAYABLE
Note payable at December 31, 1996 consists of a note to a bank which bears
interest at prime plus 1.5% (9.75% at December 31, 1996), payable monthly
through maturity. The note was collateralized by substantially all of the
Companies' assets and was repaid during 1997.
F-59
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF THE CAROLINAS, INC.
AND
THE ULTIMATE SOFTWARE GROUP OF VIRGINIA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. LINE OF CREDIT
In June 1995, the Companies entered into a $200,000 line of credit with a
bank which bears interest at prime plus 1.0% (9.5% at December 31, 1997),
payable quarterly through maturity. The line was renewed in December 1996 and
matures in January 1998. The line is collateralized by the Companies'
accounts receivable, as well as certain shares of common stock of the
Companies.
6. EQUITY TRANSACTIONS
In 1996, the Companies issued 10 shares of Common Stock to employees for
services performed. The shares are valued at $10,000 based on their estimated
fair value at the date of issuance and related expense is included in general
and administrative expense in the accompanying combined statement of
operations for the year ended December 31, 1996.
7. DUE TO RELATED PARTY
Due to related party consists of noninterest-bearing loans that are due on
demand.
8. COMMITMENTS AND CONTINGENCIES
The Companies lease office space under a noncancellable operating lease
agreement expiring in December 1998. Total rent expense under this agreement
was $12,578, $14,720 and $17,186 in 1995, 1996 and 1997. The future minimum
annual rental commitment related to this lease is approximately $12,000 in
1998.
From time to time, the Companies may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Companies are not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Companies' financial position or results of operations.
9. SUBSEQUENT EVENT
On February 25, 1998, the Companies exchanged substantially all of their
net assets for 30,677 shares of Class B Common Stock of USG in a transaction
to be accounted for under the poolings-of-interest method of accounting .
F-60
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
The Ultimate Software Group of New York
and New England, G.P.:
We have audited the accompanying balance sheets of The Ultimate Software
Group of New York and New England, G.P. (a New York general partnership) as
of December 31, 1996 and 1997 and the related statements of operations,
partners' deficit and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Ultimate Software
Group of New York and New England, G.P. as of December 31, 1996 and 1997 and
the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
- -----------------------
ARTHUR ANDERSEN LLP
Miami, Florida,
January 15, 1998 (except with respect
to the matter discussed in Note 7, as
to which the date is February 24, 1998).
F-61
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1996 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................ $321,366 $ 563,795
Accounts receivable, net ................. 72,142 196,642
Prepaid expenses and other current assets 66,776 153,890
---------- -----------
Total current assets ................... 460,284 914,327
Property and equipment, net ............... 46,472 45,000
Other assets .............................. 142,268 32,601
---------- -----------
Total assets ........................... $649,024 $ 991,928
========== ===========
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable ......................... $ 47,714 $ 88,565
Accrued expenses ......................... 75,604 182,091
Deferred revenue ......................... 481,198 932,654
Customer deposits ........................ 113,008 137,127
---------- -----------
Total current liabilities .............. 717,524 1,340,437
Commitments and contingencies (Note 6)
Total partners' deficit ................ (68,500) (348,509)
---------- -----------
Total liabilities and partners' deficit $649,024 $ 991,928
========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-62
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Revenues.................... $ 883,656 $1,281,534 $1,776,030
Operating expenses:
Cost of revenues .......... 416,887 589,635 767,955
Sales and marketing ....... 683,192 515,015 673,327
General and administrative 182,530 348,200 467,142
------------ ------------ ------------
Total operating expenses 1,282,609 1,452,850 1,908,424
------------ ------------ ------------
Operating loss ........... (398,953) (171,316) (132,394)
Other income ............... 858 6,111 13,483
------------ ------------ ------------
Net loss ................. $ (398,095) $ (165,205) $ (118,911)
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-63
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
STATEMENTS OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
THE TOTAL
NEW COUNTRY WEDGEWOOD PARTNERS'
DEVELOPMENT, INC. MCNEARY, INC. GROUP, INC. DEFICIT
<S> <C> <C> <C> <C>
Balance, December 31, 1994 .. $ 157,425 $ 52,475 $ 209,900 $ 419,800
Sale of partnership
interest................... (127,875) 127,875 -- --
Partners' contributions .... 56,250 18,750 -- 75,000
Net loss.................... (149,286) (49,762) (199,047) (398,095)
----------------- --------------- ------------- -------------
Balance, December 31, 1995 .. (63,486) 149,338 10,853 96,705
Net loss.................... (61,952) (20,651) (82,602) (165,205)
----------------- --------------- ------------- -------------
Balance, December 31, 1996 .. (125,438) 128,687 (71,749) (68,500)
Net loss.................... (44,592) (14,863) (59,456) (118,911)
Partners' distributions .... (60,184) (20,183) (80,731) (161,098)
----------------- --------------- ------------- -------------
Balance, December 31, 1997 .. $(230,214) $ 93,641 $ (211,936) $ (348,509)
================= =============== ============= =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-64
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $(398,095) $(165,205) $(118,911)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization ........................ 130,005 129,929 126,991
Changes in operating assets and liabilities:
Accounts receivable ................................. (93,881) 70,549 (124,500)
Prepaid expenses and other current assets .......... 8,106 (40,783) (87,114)
Other assets ........................................ (7,200) (701) 3,000
Accounts payable .................................... 30,092 12,296 40,851
Accrued expenses .................................... 8,446 40,824 106,487
Deferred revenue .................................... 219,713 261,485 451,456
Customer deposits ................................... 50,449 (57,900) 24,119
------------ ------------ ------------
Net cash provided by (used in) operating activities .... (52,365) 250,494 422,379
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures ................................... (26,183) (15,087) (18,852)
------------ ------------ ------------
Cash flows from financing activities:
Contributions .......................................... 75,000 -- --
Distributions .......................................... -- -- (161,098)
------------ ------------ ------------
Net cash provided by (used in) financing activities .... 75,000 -- (161,098)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ... (3,548) 235,407 242,429
Cash and cash equivalents, beginning of year ........... 89,507 85,959 321,366
------------ ------------ ------------
Cash and cash equivalents, end of year .................. $ 85,959 $ 321,366 $ 563,795
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-65
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group of New York and New England, G.P. (the
"Partnership") is a third-party reseller of The Ultimate Software Group,
Inc.'s human resource management and payroll software solutions.
Substantially all of the products are developed and sold to the Partnership
by The Ultimate Software Group, Inc. ("USG", formerly The Ultimate Software
Group, Ltd.). The Partnership markets its products in the states of
Connecticut, Maine, Massachusetts, New Hampshire, New York, Rhode Island and
Vermont.
The general partners share in income and loss and have ownership
percentages as follows:
<TABLE>
<CAPTION>
OWNERSHIP SHARE OF INCOME
PERCENTAGE AND LOSS
<S> <C> <C>
New County Development, Inc. 37.5% 37.5%
McNeary, Inc. ................ 12.5 12.5
The Wedgewood Group, Inc. ... 50.0 50.0
------------ ---------------
100.0% 100.0%
============ ===============
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. There were no cash
equivalents at December 31, 1996 and 1997.
Accounts Receivable
Accounts receivable are from end-users of the Partnership's products. The
Partnership performs periodic credit evaluations of its customers and has
determined the allowance for estimated losses to be $10,000 at December 31,
1996 and 1997, respectively.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repairs
are charged to expense when incurred; betterments are capitalized. Upon the
sale or retirement of assets, the cost, accumulated depreciation and
amortization are removed from the accounts and any gain or loss is
recognized.
Other Assets
Other assets includes a fee of $400,000, net of accumulated amortization
of $266,666 and $373,333 in 1996 and 1997, respectively, paid to USG under an
exclusive reseller agreement (the "Agreement"). The Agreement allowed the
Partnership to exclusively market USG's products in Connecticut, Maine,
Massachusetts, New Hampshire, New York (except New York City and Long
Island), Rhode Island and Vermont. Such asset is being amortized over its
estimated period of benefit of approximately 5 years.
In accordance with SFAS No. 121, Accounting for the Impairment Of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the
Partnership continually evaluates whether later events and circumstances have
occurred that indicate the remaining acquired intangibles may warrant
revision or may not be recoverable. When factors indicate that intangibles
should be evaluated for possible impairment, the Partnership uses an estimate
of the related business' undiscounted cash flows from operations in measuring
whether such cost is recoverable.
F-66
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered.
Associated deferred costs, primarily relating to the cost of the products
for licensing such contracts, amounted to approximately $63,000 and $149,000
at December 31, 1996 and 1997, respectively, and are included in other assets
in the accompanying combined balance sheets.
Revenue Recognition
The Company licenses software under noncancellable license agreements and
provides services including maintenance, implementation, training and
consulting services. License revenues are generally recognized when a
noncancellable license agreement has been signed, the product has been
delivered, no significant vendor obligations remain and the collection of the
related receivable is deemed probable. Revenues from maintenance agreements
for maintaining, supporting and providing periodic updates are recognized
ratably over the maintenance period, which in most instances is one year.
Revenues for training and consulting services are recognized as services are
performed.
Cost of Revenues
Cost of revenues consists of direct product costs and the costs of
providing consulting, implementation, maintenance, technical support and
training to the Partnership's customers.
Income Taxes
The Partnership is organized as a general partnership. Accordingly, net
income (loss) and the related differences that arise in the recording of
income and expense items for financial reporting and income tax reporting
purposes are included in the individual income tax returns of the partners
and no income taxes are included in the accompanying financial statements.
Because of the Partnership's net loss position, had the Partnership been a
C Corporation, subject to tax at the corporate level, no tax benefit would
have been recorded.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Partnership's financial instruments, consisting of cash and cash
equivalents, accounts receivable and customer deposits approximate fair value
due to their short-term nature.
F-67
<PAGE>
THE ULTIMATE SOFTWARE GROUP OF NEW YORK
AND NEW ENGLAND, G.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------
1996 1997
<S> <C> <C>
Accrued payroll $75,604 $ 82,091
Accrued legal . -- 85,000
Other .......... -- 15,000
--------- ----------
$75,604 $182,091
========= ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
ESTIMATED --------------------
USEFUL LIFE 1996 1997
<S> <C> <C> <C>
Equipment ........................................ 5 years $ 79,000 $ 97,852
Furniture, fixtures and improvements ............. 5-10 years 23,996 23,996
--------- ---------
102,996 121,848
Less--accumulated depreciation and amortization . 56,524 76,848
--------- ---------
$ 46,472 $ 45,000
========= =========
</TABLE>
5. RELATED PARTY TRANSACTIONS
The Partnership paid the Wedgewood Group, Inc., a general partner,
management fees of $228,000 in 1995, 1996 and 1997.
6. COMMITMENTS AND CONTINGENCIES
The Partnership leases office space under a noncancellable operating lease
agreement expiring in August 1998. The Partnership also leases various office
equipment under noncancellable operating lease agreements expiring from
January 1999 to December 1999. Total rent expense under these agreements was
$26,271, $36,365 and $40,689 in 1995, 1996 and 1997, respectively. The future
minimum annual rental commitment related to these leases is approximately
$25,386 and $5,721 in 1998 and 1999, respectively as of December 31, 1997.
From time to time, the Partnership may be involved in litigation relating
to claims arising out of its operations in the normal course of business. The
Partnership is not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Partnership's financial position or results of
operations.
7. SUBSEQUENT EVENT
On February 24, 1998, the Partnership transferred its net assets into a
newly formed corporation and exchanged 100% of the outstanding shares of the
newly formed entity for 40,265 shares of Class B Common Stock of USG in a
transaction to be accounted for under the poolings-of-interest method of
accounting.
F-68
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Ultimate Investors Group, Inc.:
We have audited the accompanying consolidated balance sheets of Ultimate
Investors Group, Inc. (a Texas corporation) and subsidiary as of December 31,
1996 and 1997, and the related consolidated statements of operations,
shareholders' deficit and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Ultimate
Investors Group, Inc. and subsidiary as of December 31, 1996 and 1997, and
the results of their operations and their cash flows for the each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
- -----------------------
ARTHUR ANDERSEN LLP
Miami, Florida,
February 2, 1998 (except with respect to
the matter discussed in Note 9, as to
which the date is March 4, 1998).
F-69
<PAGE>
ULTIMATE INVESTORS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1996 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 29,453 $ 466,505
Accounts receivable, net ................................ 497,566 768,764
Notes receivable ........................................ 34,722 51,954
Other current assets .................................... 73,384 71,782
----------- ------------
Total current assets .................................. 635,125 1,359,005
Equipment, net............................................ 13,240 4,938
Other assets:
Notes receivable ........................................ 33,379 65,599
Other assets ............................................ 61,655 23,259
----------- ------------
Total other assets .................................... 95,034 88,858
----------- ------------
Total assets........................................... $ 743,399 $1,452,801
=========== ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable......................................... $ 75,752 $ 137,027
Accrued expenses ........................................ 141,586 145,413
Deferred revenue ........................................ 410,171 1,079,549
Line of credit .......................................... -- 100,000
----------- ------------
Total current liabilities ............................. 627,509 1,461,989
----------- ------------
Minority interest ........................................ 47,497 105,197
----------- ------------
Commitments and contingencies (Note 8)
Shareholders' deficit:
Common Stock, $.01 par value, 1,000,000 shares
authorized, 407,875 and 415,150 issued in 1996 and 1997 4,079 4,152
Subscriptions receivable ................................ (15,942) (8,155)
Additional paid-in capital .............................. 435,363 460,753
Accumulated deficit ..................................... (353,107) (569,135)
Less-Treasury Stock, 3,825 shares at cost ............... (2,000) (2,000)
----------- ------------
Total shareholders' equity (deficit) .................. 68,393 (114,385)
----------- ------------
Total liabilities and shareholders' deficit ........... $ 743,399 $1,452,801
=========== ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-70
<PAGE>
ULTIMATE INVESTORS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Revenues ................... $ 558,914 $1,149,274 $1,448,379
Operating expenses:
Cost of revenues .......... 427,037 636,680 778,571
Sales and marketing ....... 182,210 382,801 451,139
General and administrative 54,983 110,070 398,138
------------ ------------ ------------
Total operating expenses 664,230 1,129,551 1,627,848
------------ ------------ ------------
Operating income (loss) . (105,316) 19,723 (179,469)
Other income (expense) .... 4,824 (97) 36,495
------------ ------------ ------------
Net income (loss) ........ $(100,492) $ 19,626 $ (142,974)
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-71
<PAGE>
ULTIMATE INVESTORS GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TREASURY SUBSCRIPTIONS
------------------- STOCK RECEIVABLE
SHARES AMOUNT
<S> <C> <C> <C> <C>
Balance, December 31, 1994 388,825 $3,888 $ -- $(17,000)
Stock issued to employees
for services ............. 3,825 38 -- --
Sale of common stock ..... 7,650 77 -- (14,275)
Purchase of treasury stock -- -- (2,000) --
Compensation expense on
stock options granted ... -- -- -- --
Repayment of stock
subscription receivable . -- -- -- 17,000
Distributions ............. -- -- -- --
Net loss .................. -- -- -- --
--------- -------- ---------- ---------------
Balance, December 31, 1995 400,300 4,003 (2,000) (14,275)
Compensation expense on
stock options vested .... -- -- -- --
Stock issued to employees
for services ............. 3,750 38 -- --
Sale of stock ............. 3,825 38 -- (7,787)
Repayment of stock
subscription receivable . -- -- -- 6,120
Distributions ............. -- -- -- --
Net income ................ -- -- -- --
--------- -------- ---------- ---------------
Balance, December 31, 1996 407,875 4,079 (2,000) (15,942)
Stock issued to employees
for services ............. 7,275 73 -- --
Repayment of stock
subscription receivable . -- -- -- 7,787
Distributions ............. -- -- -- --
Net loss .................. -- -- -- --
--------- -------- ---------- ---------------
Balance, December 31, 1997 415,150 $4,152 $(2,000) $ (8,155)
========= ======== ========== ===============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
UNEARNED PAID-IN ACCUMULATED SHAREHOLDERS'
COMPENSATION CAPITAL DEFICIT DEFICIT
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ -- $358,612 $ (69,741) $ 275,759
Stock issued to employees
for services ............. -- 2,962 -- 3,000
Sale of common stock ..... -- 26,698 -- 12,500
Purchase of treasury stock -- -- -- (2,000)
Compensation expense on
stock options granted ... (10,327) 20,655 -- 10,328
Repayment of stock
subscription receivable . -- -- -- 17,000
Distributions ............. -- -- (94,500) (94,500)
Net loss .................. -- -- (100,492) (100,492)
-------------- ------------ ------------- ---------------
Balance, December 31, 1995 (10,327) 408,927 (264,733) 121,595
Compensation expense on
stock options vested .... 10,327 -- -- 10,327
Stock issued to employees
for services ............. -- 13,087 -- 13,125
Sale of stock ............. -- 13,349 -- 5,600
Repayment of stock
subscription receivable . -- -- -- 6,120
Distributions ............. -- -- (108,000) (108,000)
Net income ................ -- -- 19,626 19,626
-------------- ------------ ------------- ---------------
Balance, December 31, 1996 -- 435,363 (353,107) 68,393
Stock issued to employees
for services ............. -- 25,390 -- 25,463
Repayment of stock
subscription receivable . -- -- -- 7,787
Distributions ............. -- -- (73,054) (73,054)
Net loss .................. -- -- (142,974) (142,974)
-------------- ------------ ------------- ---------------
Balance, December 31, 1997 $ -- $460,753 $(569,135) $(114,385)
============== ============ ============= ===============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-72
<PAGE>
ULTIMATE INVESTORS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................... $(100,492) $ 19,626 $(142,974)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ..................... 51,148 53,300 54,290
Minority interest ................................. (2,673) 97 (17,300)
Compensation expense associated with stock option
grants ........................................... 10,328 10,327 --
Issuance of common stock for services ............. 3,000 13,125 25,463
Changes in operating assets and liabilities:
Accounts receivable .............................. (183,856) (265,490) (271,198)
Other current assets ............................. (53,152) (19,000) 1,602
Other long-term assets ........................... -- (4,045) (1,600)
Accounts payable ................................. 3,348 53,409 61,275
Accrued expenses ................................. 33,882 32,704 78,827
Deferred revenue ................................. 155,693 221,210 669,378
------------ ----------- ------------
Net cash provided by (used in) operating activities . (82,774) 115,263 457,763
------------ ----------- ------------
Cash flows from investing activities:
Capital expenditures ................................ (12,943) (2,430) (5,992)
Advance to related party ............................ (100) (7,500) --
Repayment of shareholder loan ....................... 6,000 -- --
Issuance of notes receivable ........................ -- (45,382) (66,104)
Repayment of notes receivable ....................... -- -- 16,652
------------ ----------- ------------
Net cash used in investing activities ................ (7,043) (55,312) (55,444)
------------ ----------- ------------
Cash flows from financing activities:
Proceeds from line of credit ........................ $ -- $ -- $ 180,000
Repayment of line of credit ......................... -- -- (80,000)
Distributions ....................................... (94,500) (33,000) (148,054)
Purchase of treasury shares ......................... (2,000) -- --
Sale of common stock ................................ 12,500 5,600 --
Repayment of stock subscriptions .................... 17,000 6,120 7,787
Advances to (repayments from) related party ........ 15,000 (15,000) --
Minority interest contributions ..................... 47,000 -- 75,000
------------ ----------- ------------
Net cash provided by (used in) financing activities . (5,000) (36,280) 34,733
------------ ----------- ------------
Net increase (decrease) in cash and cash equivalents (94,817) 23,671 437,052
Cash and cash equivalents, beginning of year ........ 100,599 5,782 29,453
------------ ----------- ------------
Cash and cash equivalents, end of year ............... $ 5,782 $ 29,453 $ 466,505
============ =========== ============
Supplemental disclosure of cash flow information:
Cash paid for interest .............................. $ -- $ -- $ 1,644
============ =========== ============
</TABLE>
The acompanying notes to consolidated financial statements are an integral
part of these statements.
F-73
<PAGE>
ULTIMATE INVESTORS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Ultimate Investors Group, Inc. (the "Company") is a third-party reseller
of the The Ultimate Software Group, Inc.'s human resource management and
payroll software solutions. Substantially all of the products are developed
and sold to the Company by The Ultimate Software Group, Inc. ("USG", formerly
The Ultimate Software Group, Ltd.). The Company markets its products in the
State of Texas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its 92.5%-owned subsidiary, Ultimate Software Group of North Texas, Ltd.
Intercompany accounts and transactions have been eliminated in consolidation.
Minority interest has been reflected.
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less when acquired are considered cash equivalents. There were no cash
equivalents at December 31, 1996 and 1997.
Accounts Receivable
Accounts receivable are from end-users of the Company's products. The
Company performs periodic credit evaluations of its customers and has
determined that an allowance for estimated losses of $5,000 and $65,024 was
required at December 31, 1996 and 1997, respectively.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the assets. Maintenance and repairs
are charged to expense when incurred; betterments are capitalized. Upon the
sale or retirement of assets, the cost, accumulated depreciation and
amortization are removed from the accounts and any gain or loss is
recognized.
Other Assets
Other assets includes a fee of $150,000, net of accumulated amortization
of $99,990 and $139,986 in 1996 and 1997, respectively, paid to USG under an
exclusive reseller agreement (the "Agreement"). The Agreement allows the
Company to exclusively market USG's products in Dallas and North Texas. Such
asset is being amortized over its estimated period of benefit of
approximately 5 years.
In accordance with SFAS No. 121, Accounting for the Impairment Of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company
continually evaluates whether later events and circumstances have occurred
that indicate the remaining acquired intangibles may warrant revision or may
not be recoverable. When factors indicate that intangibles should be
evaluated for possible impairment, the Company uses an estimate of the
related business' undiscounted cash flows from operations in measuring
whether such cost is recoverable.
Deferred Revenue
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not
yet been rendered.
F-74
<PAGE>
ULTIMATE INVESTORS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Associated deferred costs, primarily relating to the cost of the products
for licensing contracts, amounted to approximately $67,000 and $60,000 at
December 31, 1996 and 1997, respectively, and are included in other assets in
the accompanying combined balance sheets.
Revenue Recognition
The Company licenses software under noncancellable license agreements and
provides services including maintenance, implementation, maintenance,
training and consulting services. License revenues are generally recognized
when a noncancellable license agreement has been signed, the product has been
delivered, no significant vendor obligations remain and the collection of the
related receivable is deemed probable. Revenues from maintenance agreements
for maintaining, supporting and providing periodic updates are recognized
ratably over the maintenance period, which in most instances is one year.
Revenues for training and consulting services are recognized as services are
performed.
Cost of Revenues
Cost of revenues consists of direct product costs and the costs of
providing consulting, implementation, maintenance, technical support and
training to the Company's customers.
Income Taxes
The Company has elected S Corporation status with the Internal Revenue
Service. Accordingly, net income and the related differences that arise in
the recording of income and expense items for financial reporting and income
tax reporting purposes are included in the individual income tax returns of
the shareholders and no income taxes are included in the accompanying
financial statements.
Because of the Company's net loss position, had the Company been a C
Corporation, subject to tax at the corporate level, no tax benefit would have
been recorded.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments, consisting of cash and cash
equivalents, accounts receivable and customer deposits approximate fair value
due to their short-term nature.
3. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------
1996 1997
<S> <C> <C>
Distributions to shareholders $ 75,000 $ --
Professional fees ............. -- 130,000
Other ......................... 66,586 15,413
---------- ---------
$141,586 $145,413
========== =========
</TABLE>
F-75
<PAGE>
ULTIMATE INVESTORS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. NOTES RECEIVABLE
Notes receivable represents amounts due for trade receivables which have
been documented in the form of a note and bear interest at rates ranging from
9 to 12%.
5. EQUIPMENT
Equipment consists of assets amounting to $40,434 in 1996 and $46,426 in
1997, less accumulated depreciation of $27,194 in 1996 and $41,488 in 1997.
These assets are being depreciated over their estimated useful lives of three
years.
6. LINE OF CREDIT
The Company has $130,000 available under a line of credit agreement with a
bank. The line of credit bears interest at an annual rate of 9%. The line of
credit renews annually. Amounts outstanding under the line of credit were
zero and $100,000 as of December 31, 1996 and 1997, respectively. The
outstanding balance was repaid subsequent to year end.
7. EQUITY TRANSACTIONS
In 1995, the Company issued 3,825 shares of Common Stock to an employee
for services rendered. The fair value of this transaction was $3,000, based
upon prior sales of the Company's Common Stock. The Company also granted to
an employee options to purchase 7,650 shares of its Common Stock in exchange
for services rendered. Such options were valued on the date of grant based
upon prior sales of the Company's Common Stock. The options vested at 50% per
year. The related compensation expense is included in sales and marketing
expenses in the accompanying 1995 and 1996 consolidated statements of
operations. The options were exercised by the employee in January 1998.
Also, in 1995, the Company sold 7,650 shares of Common Stock for $26,775,
for which the Company received $12,500 in cash and a note for the balance of
$14,275. The balance due on the note is reflected in the consolidated
statements of shareholders' deficit as a stock subscription receivable at
December 31, 1995.
In 1996, an employee purchased 3,825 shares of the Company's Common Stock
for $13,387. A portion of the employee's 1996 sales bonus was applied to the
purchase price and a note was received for the balance of $7,787, which is
reflected in the consolidated statements of shareholders' deficit as a stock
subscription receivable at December 31, 1996.
In 1996, the Company granted 11,025 shares of Common Stock to an employee
for services rendered, of which 3,750 shares were issued at December 31,
1996. The related compensation expense is included in general and
administrative expenses in the accompanying 1996 consolidated statement of
operations. The remaining 7,275 shares were issued in 1997.
8. COMMITMENTS AND CONTINGENCIES
The Company leases office space under a noncancellable operating lease
agreement expiring in September 2001. Total rent expense under this agreement
was $24,009, $61,414 and $56,628 in 1995, 1996 and 1997, respectively. The
future minimum annual rental commitment related to this lease is
approximately $212,000 through 2001.
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse effect on the Company's financial position or results of operations.
F-76
<PAGE>
ULTIMATE INVESTORS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. SUBSEQUENT EVENT
On March 4, 1998, the Company exchanged substantially all of its assets
and liabilities for 38,000 shares of Class B Common Stock of USG in a
transaction to be accounted for under the poolings-of-interest method of
accounting.
F-77
<PAGE>
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary ............................ 3
Risk Factors .................................. 6
Use of Proceeds ............................... 14
Dividend Policy ............................... 14
Capitalization ................................ 15
Dilution ...................................... 16
Selected Consolidated Financial Data ......... 17
Management Discussion and Analysis of
Financial Condition and Results of Operations 18
Business ...................................... 28
Management .................................... 43
Certain Transactions .......................... 48
Principal Stockholders ........................ 51
Description of Capital Stock .................. 52
Shares Eligible for Future Sale ............... 57
Underwriting .................................. 59
Legal Matters ................................. 60
Experts ....................................... 60
Additional Information ........................ 60
Index to Consolidated Financial Statements .... F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
SHARES
THE ULTIMATE SOFTWARE GROUP, INC.
COMMON STOCK
PROSPECTUS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
VOLPE BROWN WHELAN & COMPANY
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
offering of the Registrant's common stock, $0.01 par value per share (the
"Common Stock"), pursuant to this Registration Statement that will be paid
fully by the Registrant. All amounts shown are estimates, except the
Securities and Exchange Commission registration fee, the NASD filing fee and
the NASDAQ National Market listing fees.
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee $14,333
NASD filing fee ..................................... 5,359
NASDAQ listing fee .................................. 60,000
"Blue Sky" fees and expenses ........................ 15,000
Printing, engraving and postage expenses ............ 250,000
Accounting fees and expenses ........................ 150,000
Legal fees and expenses ............................. 350,000
Transfer agent fees and expenses .................... 5,000
Miscellaneous ....................................... 35,308
- ---------
Total ............................................. 885,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of The Ultimate Software Group, Inc. (the
"Company") provides for indemnification, to the fullest extent permitted by
law, of any person who was or is a director, officer, employee or agent of
the Company or was serving in such capacity at another entity at the
Company's request (each, an "Indemnified Person"), and is a party to, or is
threatened to be made a party to, any threatened, pending or completed
action, suit or proceeding, whether derivative or not. Indemnification
continues as to an Indemnified Person who has ceased to be a director,
officer, employee or agent and inures to the benefit of the heirs, executors
and administrators of an Indemnified Person. The indemnification provisions
in the Certificate of Incorporation are non-exclusive and allow the Company
to indemnify by agreement or vote of stockholders or disinterested directors.
Any indemnification is subject to applicable law requiring a case-by-case
determination that indemnification is appropriate.
The Certificate of Incorporation permits the Company to, and the Company
intends to, purchase liability insurance on behalf of any such person against
any liability which may be asserted.
The Certificate of Incorporation also authorizes, to the fullest extent
allowed by law, indemnification for expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement, as well as the advancement
of expenses to an Indemnified Person.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since the Company's formation in April 1996, the Company has issued the
following securities that were not registered under the Securities Act of
1933, as amended (the "Act"). Except where noted, all issuances were made in
transactions exempt from the registration requirements pursuant to Section
4(2) of the Act or Regulation D promulgated thereunder ("Regulation D")
relative to sales by an issuer not involving a public offering.
In April 1996, The Ultimate Software Group, Ltd. (the "Partnership")
transferred and conveyed its then existing business and operations to the
Company pursuant to an Asset Contribution Agreement between the Partnership
and the Company. In such transfer, the Company acquired substantially all of
the assets of the Partnership, and assumed certain specified liabilities
related to the business and assets so transferred. In consideration for the
transfer, the Company issued to the Partnership 236,300 shares of the
II-1
<PAGE>
Company's Class A Common Stock, par value $0.01 per share (the "Class A
Common Stock"), and 536,269 shares of the Company's Class B Common Stock, par
value $0.01 per share (the "Class B Common Stock"), and paid $500,000 in cash
to the Partnership.
On April 25 1996, J.P. Morgan Investment Corporation ("Morgan") and Sixty
Wall Street SBIC Fund, L.P. (an affiliate of Morgan), purchased an aggregate
of 95,787 newly issued shares of Series A Convertible Preferred Stock, par
value $0.01 per share (the "Series A Convertible Preferred Stock"), from the
Company, for an aggregate cash purchase price of $5,000,000.
On April 25 1996, pursuant to the Company's Non-Qualified Stock Option
Plan (the "Plan"), the Company granted to Patrick A. Gerschel and Marc D.
Scherr, options to purchase up to an aggregate of 31,933 shares of Class C
Common Stock, par value $0.01 per share (the "Class C Common Stock"). These
grants were made pursuant to the exemption from registration provided by Rule
701 of the Rules and Regulations promulgated under the Act.
Between April 1996 and December 31, 1997, the Company granted to certain
of its officers, directors and employees options to purchase up to an
aggregate of up to 171,561 shares of its Class C Common Stock and an option
to purchase 50 of such shares was exercised for $52.50 per share in cash.
These grants were made pursuant to the exemption from registration contained
in Section 3(b) of the Securities Act and Rule 701 promulgated thereunder
relative to sales pursuant to certain compensatory benefits plans.
On April 26, 1996, the Company issued an aggregate of 272,157 shares of
Class B Common Stock to the shareholders of The Ultimate Software Group,
Inc., a Florida corporation ("GP"), and Strategic Image Systems, Inc., a
Florida corportion ("Strategic"), in exchange for the assignment and transfer
by such shareholders to the Company of all of the outstanding capital stock
of GP and Strategic.
On May 24, 1996, the Company sold 95,786 shares of Series A Convertible
Preferred Stock to certain investors, for an aggregate of $5,000,000 in cash,
forgiveness of debt and other consideration.
From December 1996 through September, 1997, the Company sold 295,650
shares of newly issued Series B Convertible Preferred Stock, par value $0.01
per share, to certain investors (including 153,257 shares to HarbourVest
Partners V -- Direct Fund, L.P.) for an aggregate amount of $15,432,930 in
cash.
In February and March 1998, the Company issued a total of 121,856 shares
of Class B Common Stock in connection with the acquisition of the businesses
of five third-party resellers of the Company's products.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
<S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation.*
3.2 Bylaws.*
4.1 Form of Certificate for the Common Stock, par value $0.01 per
share.*
5.1 Opinion of Dewey Ballantine LLP.*
10.1 Shareholders Rights Agreement, dated June 6, 1997 among the
Company and certain stockholders named therein.
10.2 Asset Purchase Agreement, dated February 2, 1998, among The
Ultimate Software Group of Virginia, Inc., the Company and
certain principals named therein.
10.3 Asset Purchase Agreement, dated February 2, 1998, among the
Company, The Ultimate Software Group of the Carolinas, Inc. and
certain principals named therein.
10.4 Asset Acquisition Agreement, dated February 20, 1998, among the
Company, The Ultimate Software Group of Northern California,
Inc. and certain principals named therein.
10.5 Asset Purchase Agreement dated March 4, 1998, among the
Company, Ultimate Investors Group, Inc. and certain principals
named therein.
10.6 Agreement and Plan of Merger dated February 24, 1998, among the
Company, ULD Holding Corp., Ultimate Software Group of New York
and New England, G.P. and certain principals named therein.
10.7 Non-Qualified Stock Option Plan.*
10.8 Lease Agreement, between the Company and Gary A. Poliakoff as
Trustee for Emerald Lake Trust, dated August 15, 1990.*
21.1 Subsidiaries of the registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Dewey Ballantine LLP (included in Exhibit 5.1).*
24.1 Powers of Attorney (included on signature page hereto).
27.1 Financial Data Schedule.
99.1 Rights Plan of the Company.*
</TABLE>
- ------------
* To be filed by amendment.
(b) FINANCIAL DATA SCHEDULES.
None.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of the counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement
certificates in such denominations, and registered in such names, as required
by the underwriters to permit prompt delivery to each purchaser.
II-3
<PAGE>
The undersigned registrant hereby undertakes that:
1. For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fort Lauderdale, State
of Florida, on March 12, 1998.
THE ULTIMATE SOFTWARE GROUP, INC.
By: /s/ Scott Scherr
-------------------------------
Scott Scherr, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below on March 12, 1998 by the
following persons in the capacities indicated. Each person whose signature
appears below hereby appoints and constitutes Scott Scherr, Marc D. Scherr,
Mitchell K. Dauerman and Sarah H. Bodman, and each of them, as his
attorney-in-fact, with full power of substitution, for him in any and all
capacities, to execute in the name and on behalf of such person any amendment
to this Registration Statement (including any post-effective amendment) and
to file the same, with exhibits thereto, and other documents in connection
therewith, making such changes in this Registration Statement as the person
so acting deems appropriate, hereby ratifying and confirming all that said
attorney-in-fact, or his substitute, may do or cause to be done by virtue
hereof.
SIGNATURE TITLE
--------- -----
/s/ Scott Scherr President, Chief Executive Officer
- ------------------------------ and Director
Scott Scherr
/s/ Mitchell K. Dauerman Chief Financial Officer, Treasurer and
- ------------------------------- Chief Accounting Officer
Mitchell K. Dauerman
/s/ Alan S. Goldstein Executive Vice President, Chief
- ------------------------------- Technology Officer and Director
Alan S. Goldstein
/s/ Marc D. Scherr Director
- -------------------------------
Marc D. Scherr
/s/ Ofer Nemirovsky Director
- -------------------------------
Ofer Nemirovsky
/s/ LeRoy A. Vander Putten Director
- -------------------------------
LeRoy A. Vander Putten
/s/ Rick Wilber Director
- -------------------------------
Rick Wilber
/s/ Robert A. Yanover Director
- -------------------------------
Robert A. Yanover
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION PAGE
<S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation.*
3.2 Bylaws.*
4.1 Form of Certificate for the Common Stock, par value $0.01 per share.*
5.1 Opinion of Dewey Ballantine LLP.*
10.1 Shareholders Rights Agreement, dated June 6, 1997 among the Company and certain
stockholders named therein.
10.2 Asset Purchase Agreement, dated February 2, 1998, among The Ultimate Software Group
of Virginia, Inc., the Company and certain principals named therein.
10.3 Asset Purchase Agreement, dated February 2, 1998, among the Company, The Ultimate
Software Group of the Carolinas, Inc. and certain principals named therein.
10.4 Asset Acquisition Agreement, dated February 20, 1998, among the Company, The
Ultimate Software Group of Northern California, Inc. and certain principals named
therein.
10.5 Asset Purchase Agreement dated March 4, 1998, among the Company, Ultimate Investors
Group, Inc. and certain principals named therein.
10.6 Agreement and Plan of Merger dated February 24, 1998, among the Company, ULD Holding
Corp., Ultimate Software Group of New York and New England, G.P. and certain
principals named therein.
10.7 Non-Qualified Stock Option Plan.*
10.8 Lease Agreement, between the Company and Gary A. Poliakoff as Trustee for Emerald
Lake Trust, dated August 15, 1990.*
21.1 Subsidiaries of the registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Dewey Ballantine LLP (included in Exhibit 5.1).*
24.1 Powers of Attorney (included on signature page hereto).
27.1 Financial Data Schedule.
99.1 Rights Plan of the Company.*
</TABLE>
- ------------
* To be filed by amendment.
<PAGE>
Exhibit 10.1
AMENDED AND RESTATED
SHAREHOLDERS RIGHTS AGREEMENT
This AMENDED AND RESTATED SHAREHOLDERS RIGHTS AGREEMENT (this
"Agreement") is made and entered into by and among The Ultimate Software Group,
Inc., a Delaware corporation (the "Company"), J.P. Morgan Investment
Corporation, a Delaware corporation ("JPMIC"), Sixty Wall Street SBIC Fund,
L.P., a Delaware limited partnership ("Sixty Wall"), Hancock Venture Partners V
- - Direct Fund L.P. ("Fund V"), The Ultimate Software Group, Ltd., a Florida
limited partnership ("USG"), Scott Scherr ("Scherr") and Alan Goldstein
("Goldstein"). This Agreement amends and restates, effective as of June 6,
1997, the Shareholders Rights Agreement dated as of April 25, 1996 by and among
the Company, JPMIC, Sixty Wall, USG, Scherr and Goldstein.
RECITALS:
A. Concurrently with the execution and delivery of this
Agreement, Fund V is acquiring from the Company shares of Series B Convertible
Preferred Stock pursuant to the Series B Convertible Preferred Stock Purchase
Agreement of even date herewith (the "Series B Purchase Agreement").
B. USG presently holds 536,269 shares of the Company's Class
B Common Stock and 236,300 shares of the Company's Class A Common Stock,
subject to the terms and conditions of escrow agreements relating to certain of
such shares.
C. Scherr and Goldstein presently own an aggregate of 106,115
shares of the Company's Class B Common Stock, subject to the terms and
conditions of an escrow agreement relating to certain of such shares.
D. The execution and delivery of this Agreement is a
condition to the closing of the transactions contemplated by the Series B
Purchase Agreement.
NOW, THEREFORE, in consideration of the foregoing, the
parties hereto hereby agree as follows:
1. Transfer Provisions.
1.1 Definitions, For purposes of this Section 1:
(a) "Affiliate," with respect to any Person,
means any other Person that directly or indirectly, through one or more
intermediaries, controls or is controlled by, or is under common control with,
such Person. (The term
<PAGE>
"Affiliate" shall include without limitation (i) in the
case of JPMIC, Sixty Wall and (ii) in the case of Sixty Wall, JPMIC.)
(b) "Common Share Equivalents" means Common
Shares outstanding and Common Shares directly or indirectly issuable upon
conversion of shares of Class A Common Stock, Class B Common Stock, Class C
Common Stock and Preferred Stock (without regard to any restriction on
conversion that may be applicable to any particular holder of such stock) or
upon exercise, conversion or exchange of any other securities of the Company.
(c) "Common Shareholders" means USG, Scherr and
Goldstein, and any other Person that may become a "Common Shareholder" pursuant
to the terms of this Agreement.
(d) "Common Shares" means, collectively, the
shares of Common Stock of the Company, the shares of Class A Common Stock of
the Company, the shares of Class B Common Stock of the Company and the Shares
of Class C Common Stock of the Company, and, without duplication, any other
shares of capital stock into which such shares may be converted or for which
they may be exchanged from time to time.
(e) "Fund V Investors" means, individually
and/or collectively, as applicable, Fund V and any assignee of Fund V in
accordance with Section 1.6 below.
(f) "Investors" means, individually and/or
collectively, as applicable, JPMIC, Sixty Wall and Fund V, and any assignee of
the foregoing in accordance with Section 1.6 below.
(g) "JPM Investors" means, individually and/or
collectively, as applicable, JPMIC and Sixty Wall, and any assignee of the
foregoing in accordance with Section 1.6 below.
(h) "Person" means any individual, partnership,
joint venture, corporation, association, trust or any other entity or
organization.
(i) "Preferred Stock" means the Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock of the
Company, and any other class or series of preferred stock the Company may issue
from time to time.
(j) "Rule 144 Sales" means transfers pursuant
to Rule 144 under the Securities Act (or any successor rule or regulation) that
are in compliance with the requirements of paragraphs (c), (e) and (f) of the
rule, without giving effect to paragraph (k) of the rule.
2
<PAGE>
(k) "Securities Act" means the Securities Act
of 1933, as amended.
(l) "Stock" means the Common Shares and the
Preferred Stock.
(m) "Stockholder" means, individually and
collectively, the Common Shareholder(s) and each of the Investors, and any
other Person that shall become a Common Shareholder or Investor pursuant to the
terms of this Agreement.
1.2 Restriction on Transfer. (a) No Common Shares or shares
of Preferred Stock held by a Stockholder shall be sold, assigned, transferred,
pledged or otherwise encumbered or disposed of except in accordance with or as
otherwise specifically permitted by the provisions of this Agreement.
(b) In addition to each other restriction on
transfer contained in this Agreement, except for Rule 144 Sales and a sale of
shares in a public offering pursuant to Section 2 of this Agreement, no
Stockholder shall sell, assign, transfer, pledge or otherwise encumber or
dispose of any Common Shares or shares of Preferred Stock to any Person, unless
(a) the certificates representing such shares bear appropriate legends
reflecting the restrictions on transfer contained in this Agreement, and (b)
such transferee shall have executed and delivered to the Company, as a
condition to its acquisition of Common Shares or shares of Preferred Stock, as
applicable, an appropriate document confirming that such transferee takes such
shares subject to all the terms and conditions of this Agreement. The Company
shall not transfer upon its books and records any Common Shares or shares of
Preferred Stock transferred to any Person in violation of this Agreement.
1.3 Excluded Transfers. The restrictions of this
Section 1 shall not apply to:
(a) Rule 144 Sales,
(b) Transfers by an Investor to any of its
Affiliates that, at the time of such transfer, is expected to remain an
Affiliate of such Investor for the foreseeable future,
(c) Transfers by The Ultimate Software Group,
Ltd. to all of its constituent partners in liquidation,
(d) Transfers by a Common Shareholder of Common
Shares, without consideration, to such Common
3
<PAGE>
Shareholder's spouse, siblings, parents, lineal descendant or trusts for their
benefit, and
(e) sales of shares in a public offering pursuant
to Section 2 of this Agreement;
provided that in each of cases (b) and (d), each transferee agrees in writing
to take subject to and to comply with the restrictions contained in this
Agreement. In addition, none of the restrictions on transfer contained in this
Agreement shall apply to any transfers of Stock by will, by the laws of descent
or by operation of law, except that any such transferee shall be deemed to take
such shares subject to all restrictions on transfer provided in this Agreement
applicable to the transferor. Each transferee pursuant to clause (b) above,
shall be deemed an Investor upon consummation of such transfer, and each
transferee pursuant to clause (d) above, or by will, by the laws of descent or
by operation of law, shall be deemed a Common Shareholder upon consummation of
such transfer.
1.4 First Offer Rights.
(a) General. Except as otherwise permitted under
Section 1.3 of this Agreement, a Stockholder may sell or otherwise transfer
Common Shares and/or shares of Preferred Stock, as applicable, only in
compliance with the provisions of this Section 1.4.
(b) First Offer Provisions.
(1) A Stockholder desiring to sell or
otherwise transfer Common Shares or shares of Preferred Stock in
compliance with this Section 1.4 (a "Selling Stockholder") shall
first deliver written notice to the Company (hereinafter referred to
as the "Notice of Offer") which Notice of Offer shall specify (i) the
number and class of shares of Stock owned by the Selling Stockholder
which such Selling Stockholder wishes to sell (the "Offered Shares");
(ii) the proposed cash purchase price per share for each of the
Offered Shares (the "Offer Price"); and (iii) all other terms and
conditions of the offer. The Notice of Offer shall constitute an
irrevocable offer by the Selling Stockholder to sell to the Company
and the other Stockholders the Offered Shares at the Offer Price and
on the terms hereinafter provided. Within five (5) business days of
its receipt of the Notice of Offer, the Company shall send a copy of
the Notice of Offer to each Stockholder.
(2) Within fifteen (15) days following its
receipt of the Notice of Offer, the Company may notify the Selling
Stockholder and each other
4
<PAGE>
Stockholder that it is electing to purchase all the Offered Shares
(such notification shall be referred to hereinafter as the "Company
Acceptance"). The election to purchase the Offered Shares shall be
made on behalf of the Company by those members of the Board of
Directors of the Company who have not been designated by, and are not
affiliated or associated with, the Selling Stockholder. The Company
Acceptance shall be deemed to be an irrevocable commitment to
purchase from the Selling Stockholder all the Offered Shares.
(3) If the Company does not deliver a
Company Acceptance within fifteen (15) days following its receipt of
the Notice of Offer providing for the purchase by the Company of all
of the Offered Shares, then, within fifteen (15) days following the
expiration of such fifteen-day notice period, each other Stockholder
of record shall notify the Company and the Selling Stockholder as to
the number of Offered Shares, if any, it is electing to purchase
(such notification is hereinafter referred to as the "Stockholder's
Acceptance"). If the Company does not receive a Stockholder's
Acceptance from one or more of the other Stockholders within such
period, such other Stockholders that did not deliver a Stockholder's
Acceptance shall be deemed to have declined to purchase any of the
Offered Shares. A Stockholder's Acceptance shall be deemed to be an
irrevocable commitment to purchase from the Selling Stockholder the
number of Offered Shares which such Stockholder has elected to
purchase pursuant to its Stockholder's Acceptance, subject to
allocation of Offered Shares among Stockholders accepting the Notice
of Offer as hereinafter provided.
(4) If the other Stockholders have elected
to purchase a number of Offered Shares that in the aggregate exceeds
the total number of Offered Shares, the Offered Shares shall be
allocated among such Stockholders accepting the Selling Stockholder's
offer (the "Accepting Stockholders") (a) first, to the Accepting
Stockholders as nearly as possible in proportion to the number of
Common Share Equivalents held by such Stockholders; (b) next, to
those Accepting Stockholders that elected to purchase more shares
than the number to which they are entitled under clause (a), in such
equitable manner as the Company shall determine taking into account
the relative number of Common Share Equivalents held by each
Accepting Stockholder. Clauses (a) and (b) shall be construed and
given effect in such manner that no Stockholder shall be required or
entitled to purchase a number of Offered Shares greater than the
number set forth in its Stockholder's Acceptance. If any Stockholders
shall elect to purchase any of the Offered Shares, the Company shall
5
<PAGE>
promptly notify each such Stockholder of the number of shares
allocated to it, and each such Stockholder shall be obligated to
purchase at the Offer Price such shares at a closing as set forth in
Section 1.4(b)(6).
(5) If neither the Company nor the other
Stockholders has elected to purchase all of the Offered Shares
available for purchase under this Section 1.4, the Selling
Stockholder (a) shall be under no obligation to sell any of the
Offered Shares to the Company or any other Stockholder, unless the
Selling Stockholder so elects, and (b) may, within a period of four
months from the date of the Notice of Offer, subject to the
provisions of Section 1.5, if applicable, sell at least two-thirds of
the Offered Shares to one or more third parties (each a "Third Party
Transferee"), for cash at a price per share not less than the Offer
Price and on such other terms and conditions as are no more favorable
to the proposed Third Party Transferee than those specified in the
Notice of Offer; provided, however, that if there is more than one
Third Party Transferee, the Selling Stockholder in good faith must
obtain binding and definitive commitments to purchase at least
two-thirds of the Offered Shares within such four-month period before
any sale to a Third Party Transferee of the Offered Shares may take
place. Upon any such sale, the Third Party Transferee of such shares
of Stock shall execute an agreement in form and substance
satisfactory to the Company and the Stockholders pursuant to which
such Third Party Transferee agrees that the shares of Stock it
acquired from the Selling Stockholder are subject to the provisions
of this Agreement. Any Third Party Transferee to whom shares of Stock
are transferred pursuant to and in compliance with this Section
1.4(b)(5) shall, upon consummation of such transfer, be deemed a
Stockholder, and any such Third Party Transferee of an Investor or
Common Shareholder shall, upon consummation of such transfer, be
deemed an Investor or Common Shareholder, respectively, for purposes
of this Agreement. If the Selling Stockholder does not complete the
sale of the Offered Shares within such four-month period, the
provisions of this Section 1.4 shall again apply, and no sale of
shares of Stock of the Selling Stockholder shall be made otherwise
than in accordance with the terms of this Agreement.
(6) The closing of purchases of Offered
Shares by the Company or other Stockholders pursuant to this Section
1.4 shall take place within twenty (20) days after the delivery of
the Company Acceptance or fifty (50) days after the date of the
Notice of Offer, whichever is later, at 11:00 A.M. local time at the
principal offices of the Company, or at such other date, time or
place as the parties to the sale may
6
<PAGE>
agree. At least five (5) business days prior to such closing, the
Company shall notify the Selling Stockholder(s) in writing of the
name of the purchasers and the portion of the Offered Shares to be
purchased by each. At such closing, the Selling Stockholder(s) shall
sell, transfer and deliver to each purchaser full right, title and
interest in and to the Offered Shares so purchased by such purchaser,
free and clear of all liens, security interests or adverse claims of
any kind and nature (except as otherwise set forth in this
Agreement), and shall deliver to each purchaser a certificate or
certificates representing the Offered Shares sold to such purchaser,
in each case duly endorsed for transfer or accompanied by appropriate
stock transfer powers duly endorsed with signatures guaranteed by a
commercial bank, trust company or registered broker dealer. Upon
surrender of the certificate(s) representing the Offered Shares
purchased, or to be purchased, by other Stockholders pursuant to this
Section 1.4(b), the Company shall promptly issue new certificates
representing such Offered Shares in the name(s) of such purchaser(s)
and representing the appropriate number, class and series of Stock.
Simultaneously with delivery of such certificates, each purchaser of
the Offered Shares shall deliver to the Selling Stockholder(s), by
wire transfer of immediately available funds to such bank and account
as the Selling Stockholder(s) shall designate, a cash amount equal to
the product of the Offer Price and the number of Offered Shares being
acquired by such purchaser, in full payment of the purchase price of
the Offered Shares purchased.
(c) Termination. The terms of Section 1.2(a) and
this Section 1.4 shall terminate and be of no further force or effect upon the
consummation of a firm commitment underwritten public offering of the Company's
Common Shares registered under the Securities Act.
1.5 Right to Join in Sale
(a) Anything in this Agreement to the contrary
notwithstanding (but subject to Section 1.3), if (after complying with Section
1.4 above, if such Section 1.4 is still in effect) any of USG, Scott Scherr
and/or Alan Goldstein (each a "Selling Common Shareholder") proposes, in a
single transaction or a series of related transactions, directly or indirectly
to sell, dispose of or otherwise transfer for consideration a number of shares
of Stock (or any other securities of the Company held by such Selling Common
Shareholder) ("Offer Shares") representing, when combined with all other
transfers of Stock by such Selling Common Shareholder since the date of this
Agreement, more than 10% of the Common Share Equivalents held by such
7
<PAGE>
Selling Common Shareholder on the date hereof (as adjusted for any stock
splits, dividends, combinations or other reorganizations of the Company), such
Selling Common Shareholder shall refrain from effecting such transaction
unless, prior to the consummation thereof, each Investor shall have been
afforded the opportunity to join in such transfer on a pro rata basis, as
provided in Section 1.5(b).
(b) Prior to the consummation of any transaction
subject to this Section 1.5, the person or group that proposes to acquire any
of the Offer Shares in a transaction subject to this Section 1.5 (the "Proposed
Purchaser(s)") shall offer (the "Purchase Offer") in writing to each Investor
to acquire from such Investor the same proportion of the Common Share
Equivalents beneficially owned by such Investor as the Proposed Purchaser(s)
acquire from any of the Selling Common Shareholder(s), at the same price per
Common Share Equivalent (the "Offering Price") and on the same terms and
conditions (the "Offering Terms") as the Proposed Purchaser(s) have offered to
such Selling Common Shareholder(s). If the Proposed Purchaser(s) are acquiring
Offer Shares in a single transaction from more than one Selling Common
Shareholder or in a series of related transactions from one or more Selling
Common Shareholder(s), (a) each Investor shall have the right, at its election,
to select the transaction or transactions in which, and the Selling Common
Shareholder(s) with which, it will participate and (b) each Investor shall be
afforded the right to sell to the Proposed Purchaser(s) in such transaction or
transactions any amount of the Common Stock Equivalents beneficially owned by
such Investor that is less than or equal to the same proportion of Common Stock
Equivalents being sold by such Selling Common Shareholder(s) in such
transaction. (For the purpose of determining the Common Stock Equivalents owned
by a Selling Common Shareholder, shares held in escrow shall not be counted.)
Each Investor shall have at least twenty (20) days from the receipt of the
Purchase Offer in which to accept such Purchase Offer. If an Investor holds
shares of different series or classes of Stock, such Investor shall be entitled
to designate the series or class or classes of Stock which are to be the
subject of such acceptance and the number of shares of such series, class or
classes to be included therein. The Selling Common Shareholder(s) shall notify
the Proposed Purchaser(s) that the sale or other transfer is subject to this
Section 1.5 and shall ensure that no sale or other transfer is consummated
without the Proposed Purchaser(s) first complying with this Section 1.5.
(c) The terms of this Section 1.5 shall terminate
and be of no further force or effect (i) with respect to the JPM Investors, at
such time as the JPM Investors do not beneficially own, in the aggregate, at
least fifty percent (50%) of the Common Share Equivalents held by the JPM
Investors on the date hereof and (ii) with
8
<PAGE>
respect to the Fund V Investors, at such time as the Fund V Investors do not
beneficially own, in the aggregate, at least fifty percent (50%) of the Common
Share Equivalents held by the Fund V Investors on the date hereof.
1.6 Assignment. Each Stockholder and each Stockholder's
assignee, may, without any other party's consent, assign in whole or in part
its rights under this Section 1 to (i) any Affiliate of such Stockholder that,
at the time of such assignment, is expected to remain an Affiliate of such
Stockholder for the foreseeable future and (ii) in connection with any sale or
other transfer of at least twenty-five percent (25%) of the Common Share
Equivalents held by such Stockholder; provided that any such assignee shall
agree in writing to take subject to and to comply with the restrictions
contained in this Section 1 and shall be deemed (i) an Investor upon
consummation of such transfer or assignment by an Investor and (ii) a Common
Shareholder upon consummation of such transfer or assignment by a Common
Shareholder; and provided further that no Common Shareholder shall become an
"Investor" under this Section 1.
1.7 Amendment.
(a) The provisions of this Section 1 may be amended
only with the written consent of (i) the holders of a majority of the aggregate
Common Share Equivalents held by the JPM Investors, (ii) a majority of the
aggregate Common Share Equivalents held by the Fund V Investors, (iii) a
majority of the aggregate Common Share Equivalents held by the Common
Shareholder(s) and (iv) the Company. The observance of the provisions of this
Section 1 may be waived (either generally or in a particular instance and
either retroactively or prospectively), only by written instrument executed by
the party against whom enforcement is sought.
(b) Any such amendment or waiver shall be effective
and shall be binding upon the Company, all Investors and all Common
Shareholders, as applicable.
2. Registration Rights.
2.1 Definitions. For purposes of this Section 2:
(a) "Affiliate" has the meaning set forth in
paragraph 1.1(a) hereof.
(b) "Common Shareholders" has the meaning set
forth in paragraph 1.1(c) hereof.
(c) "Common Shares" has the meaning set forth
in paragraph 1.1(d) hereof.
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(d) "Common Stock" means shares of the Common
Stock of the Company.
(e) "Exchange Act" means the Securities
Exchange Act of 1934, as amended.
(f) "Form S-3" means such form under the
Securities Act as in effect on the date hereof or any registration form under
the Securities Act subsequently adopted by the SEC which permits inclusion or
incorporation of substantial information by reference to other documents filed
by the Company with the SEC.
(g) "Fund V Request" means a request from Fund
V or any assignee of Fund V in accordance with Section 2.13 below.
(h) "Holder(s)" means individually and/or
collectively, as applicable, the Investors and the Common Shareholders (or any
assignees thereof in accordance with Section 2.13) that hold Registrable
Securities.
(i) "Initiating Holders" means the Holders
initiating a registration request under Section 2.2.
(j) "Investors" means, individually and/or
collectively, as applicable, JPMIC, Sixty Wall and Fund V, and any assignee of
the foregoing in accordance with Section 2.13 below.
(k) "JPM Request" means a request from JPMIC
and/or Sixty Wall, and any assignee of the foregoing in accordance with Section
2.13 below.
(l) "Person" has the meaning set forth in
paragraph 1.1(g) hereof.
(m) "Preferred Stock" has the meaning set forth
in paragraph 1.1(h)
hereof.
(n) "Qualifying Investor Request" means a
request from any Holder(s) (other than Investors) that in the aggregate
possess(es) at least twenty-five percent (25%) of the Registrable Securities
outstanding as of the date of such request.
(o) "Register," "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement or
document.
(p) "Registrable Securities" means (1) all
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shares of Common Stock directly or indirectly issuable (without regard to any
restriction on conversion that may be applicable to any particular holder of
such stock) or issued upon conversion of the Preferred Stock (or any Common
Shares of another class issued upon conversion of the Preferred Stock)
purchased by the Investors pursuant to the Series A Convertible Preferred Stock
Purchase Agreement dated as of April 25, 1996 by and among the Company, USG,
JPMIC and Sixty Wall and the Series B Purchase Agreement, as applicable (2) all
shares of Common Stock directly or indirectly issuable (without regard to any
restriction on conversion that may be applicable to any particular holder of
such stock) or issued upon conversion of the Common Shares of another class
held by Common Shareholders on the date hereof, and (3) any Common Stock
directly or indirectly issued as (or issuable upon the conversion or exercise
of any warrant, right or other security which is directly or indirectly issued
as) a dividend or other distribution with respect to, or in exchange for or in
replacement of, or upon conversion of, such Preferred Stock or Common Shares
referred to in clauses (1) and (2); provided, however, that any Registrable
Securities sold by a Person in a transaction in which such Person's rights
under this Agreement are not assigned pursuant to Section 2.13 below shall
cease to be Registrable Securities from and after the time of such sale. In the
event that at the time of a demand pursuant to Section 2.2 the Preferred Stock
is convertible only into Class B Common Stock, references to "Registrable
Securities" shall be deemed to include Class B Common Stock.
(q) The number of shares of "Registrable
Securities then outstanding" shall be determined by the number of shares of
Common Stock outstanding which are, and the number of shares of Common Stock
issuable which are, Registrable Securities.
(r) "SEC" means the Securities and Exchange
Commission.
(s) "Securities Act" means the Securities Act
of 1933, as amended.
(t) "Violation" means any of the following
statements, omissions or violations: (i) any untrue statement or alleged untrue
statement of a material fact contained in a registration statement under this
Section 2, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto or any documents filed under
state securities or "blue sky" laws in connection therewith, (ii) the omission
or alleged omission to state therein a material fact required to be stated
therein, or necessary to make the statements therein not misleading, or (iii)
any violation or alleged violation by the Company of the Securities Act, the
Exchange Act, any state securities law or any rule or regulation promulgated
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under the Securities Act, the Exchange Act or any state securities law.
2.2 Request for Registration.
(a) If, (i) after the earlier of (A) June 30,
1999, and (B) six (6) months after an initial public offering of the Company's
securities, the Company shall receive a written JPM Request or Fund V Request,
or (ii) after six (6) months after an initial public offering of the Company's
securities, the Company shall receive a written Qualifying Investor Request,
that the Company file a registration statement under the Securities Act, then
the Company shall, within ten (10) days of the receipt thereof, give written
notice of such request to all Holders and, subject to the limitations of
paragraph 2.2(b) below, shall file and use its best efforts to effect (as soon
as practicable and, in any event, to file within sixty (60) days of the receipt
of such request) the registration under the Securities Act of all Registrable
Securities which the Holders request to be registered within twenty (20) days
of the mailing of such notice by the Company in accordance with Section 3.4.
(b) If Initiating Holders intend to distribute
the Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as a part of their request made
pursuant to this Section 2.2 and the Company shall include such information in
the written notice referred to in Paragraph 2.2(a). In such event, the right of
any Holder to include such Holder's Registrable Securities in such registration
shall be conditioned upon such Holder's participation in such underwriting and
the inclusion of such Holder's Registrable Securities in the underwriting
(unless otherwise mutually agreed by a majority in interest of the Initiating
Holders) to the extent provided herein. All Holders proposing to distribute
their securities through such underwriting shall (together with the Company as
provided in Paragraph 2.4(e)) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting by a
majority-in-interest of the Initiating Holders (which underwriter or
underwriters shall be reasonably acceptable to the Company); provided, however,
that no such Holder shall be required to make any representations or warranties
except as they relate to such Holder's ownership of shares and authority to
enter into the underwriting agreement and to such Holder's intended method of
distribution, and the liability of such Holder shall be limited to an amount
equal to the net proceeds from the offering received by such Holder.
Notwithstanding any other provision of this Section 2.2, if the underwriter
advises the Initiating Holders in writing that marketing factors require a
limitation of the number of shares to be underwritten, then the Initiating
Holders shall so advise
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the Company and the Company shall so advise all Holders holding Registrable
Securities which would otherwise be underwritten pursuant hereto, and the
number of shares of Registrable Securities that may be included in the
underwriting shall be allocated pro rata among all Holders thereof, including
the Initiating Holders, in proportion (as nearly as practicable) to the amount
of Registrable Securities of the Company owned by each such Holder; provided,
however, that if the request for registration is a JPM Request or Fund V
Request, the number of shares of Registrable Securities that may be included in
the underwriting shall be allocated (i) first to the Investors in proportion
(as nearly as practicable) to the amount of Registrable Securities owned by
each such Holder requesting inclusion of such Registrable Securities in such
underwriting, and (ii) thereafter among all other Holders thereof, in
proportion (as nearly as practicable) to the amount of Registrable Securities
of the Company owned by each such other Holder requesting inclusion of such
Registrable Securities in such underwriting.
(c) The Company shall be obligated to effect
only two (2) registrations pursuant to a JPM Request, only two (2)
registrations pursuant to a Fund V Request and only two (2) registrations
pursuant to a Qualifying Investor Request (registrations which are not
consummated shall not be counted for this purpose); provided, however, that,
subject to the following two sentences, the Company is obligated to effect as
many registrations as may be requested by Holders in the event and so long as a
registration pursuant to Form S-3 or any similar "short-form" registration
statement is available. The Company will not be required to effect (i) a Form
S-3 or "short-form" registration if such registration covers less than 2% of
the aggregate Common Share Equivalents of the Company or (ii) any other
registration under this Section 2.2 if such registration covers less than 5% of
the aggregate Common Share Equivalents of the Company. The Company will not be
required to effect a registration until the expiration of a period of six (6)
months from the effective date of the immediately previous demand registration
effected pursuant to this Section 2.2.
(d) Notwithstanding the foregoing, if the
Company shall furnish to Holders requesting a registration statement pursuant
to this Section 2.2, a certificate signed by the President of the Company
stating that, in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its shareholders
for such registration statement to be filed and it is therefore essential to
defer the filing of such registration statement, the Company shall have the
right to defer such filing for a period of not more than 120 days after receipt
of the request of the Initiating Holders; provided, however, that the Company
may not utilize this
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right more than once in any twelve (12) month period.
2.3 Company Registration. If (but without any obligation to
do so) the Company proposes to register (including for this purpose a
registration effected by the Company for shareholders other than the Holders)
any of its stock or other securities under the Securities Act in connection
with the public offering of such securities solely for cash (other than a
registration on Form S-8 relating solely to the sale of securities to
participants in a Company stock plan or to other compensatory arrangements to
the extent includable on Form S-8, or a registration on Form S-4), the Company
shall, at such time, promptly give each Holder written notice of such
registration. Upon the written request of each Holder given within twenty (20)
days after mailing of such notice by the Company in accordance with Section
3.4, the Company shall, subject to the provisions of Section 2.8, cause to be
registered under the Securities Act all of the Registrable Securities that each
such Holder has requested to be registered.
2.4 Obligations of the Company. Whenever required under this
Section 2 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a
registration statement with respect to such Registrable Securities and use its
best efforts to cause such registration statement to become effective, and,
upon the request of the Holders of a majority of the Registrable Securities
registered thereunder, keep such registration statement effective for up to one
hundred twenty (120) days or until the Holders have completed the distribution
referred to in such registration statement, whichever occurs first (but in any
event for at least any period required under the Securities Act); provided that
before filing such registration statement or any amendments thereto, the
Company will furnish to the Holders copies of all such documents proposed to be
filed.
(b) Prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such registration statement.
(c) Furnish to the Holders such numbers of
copies of such registration statement and of each amendment and supplement
thereto (in each case including all exhibits), such number of copies of the
prospectus contained in such registration statement (including each preliminary
prospectus and any summary prospectus) and any other prospectus filed under
Rule 424 under the Securities Act, in
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conformity with the requirements of the Securities Act, and such other
documents as Holders may reasonably request in order to facilitate the
disposition of Registrable Securities owned by them.
(d) Use its diligent efforts to register and
qualify the securities covered by such registration statement under such other
securities or "blue sky" laws of such states or jurisdictions as shall be
reasonably requested by the Holders, provided that the Company shall not be
required in connection therewith or as a condition thereto (i) to qualify to do
business in any state or jurisdiction where it would not otherwise be required
to qualify but for the requirements of this Paragraph 2.4(d), or (ii) to file a
general consent to service of process in any such states or jurisdictions.
(e) Use diligent efforts to cause all
Registrable Securities covered by such registration statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary by virtue of the Company's business or operations to enable the
seller or sellers thereof to consummate the disposition of such Registrable
Securities.
(f) In the event of any underwritten public
offering, enter into and perform its obligations under an underwriting
agreement, in usual and customary form (except as otherwise provided in Section
2.8), with the managing underwriter of such offering.
(g) Notify each Holder of Registrable
Securities covered by such registration statement at any time when a prospectus
relating thereto is required to be delivered under the Securities Act of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in the light of the
circumstances then existing.
(h) Notify each Holder of Registrable
Securities covered by such registration statement and such Holder's
underwriters, if any, and confirm such advice in writing: (i) when the
registration statement has become effective, (ii) when any post-effective
amendment to the registration statement becomes effective and (iii) of any
request by the SEC for any amendment or supplement to the registration
statement or prospectus or for additional information.
(i) Notify each Holder of Registrable
Securities if at any time the SEC should institute or threaten to institute any
proceedings for the purpose of
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issuing, or should issue, a stop order suspending the effectiveness of the
Registration Statement. Upon the occurrence of any of the events mentioned in
the preceding sentence, the Company will use diligent efforts to prevent the
issuance of any such stop order or to obtain the withdrawal thereof as soon as
possible. The Company will advise each Holder of Registrable Securities
promptly of any order or communication of any public board or body addressed to
the Company suspending or threatening to suspend the qualification of any
Registrable Securities for sale in any jurisdiction.
(j) Furnish, at the request of any Holder
requesting registration of Registrable Securities pursuant to this Agreement,
(i) on the date that such Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this
Section 2, if such securities are being sold through underwriters, or, if such
securities are not being sold through underwriters, on the date that the
registration statement with respect to such securities becomes effective, an
opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities
and (ii) on the date that the registration statement with respect to such
securities becomes effective, a "comfort" letter dated such date, from the
independent certified public accountants of the Company, in form and substance
as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities,
and, if such securities are being sold through underwriters, a reaffirmation of
such letter on the date that such Registrable Securities are delivered to the
underwriters for sale.
(k) As soon as practicable after the effective
date of the registration statement, and in any event within sixteen (16) months
thereafter, have "made generally available to its security holders" (within the
meaning of Rule 158 under the Securities Act) an earning statement (which need
not be audited) covering a period of at least twelve (12) months beginning
after the effective date of the registration statement and otherwise complying
with Section 11(a) of the Securities Act.
2.5 Furnish Information. It shall be a condition precedent to
the obligations of the Company to take any action pursuant to this Section 2
with respect to the Registrable Securities of any selling Holder that such
Holder shall furnish to the Company such information regarding itself, the
Registrable Securities held by it, and
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the intended method of disposition of such securities as shall be required to
effect the registration of such Holder's Registrable Securities. If any
registration statement or comparable statement under the Securities Act refers
to an Investor or any of such Investor's Affiliates, by name or otherwise, as
the holder of any securities of the Company then, unless counsel to the Company
advises the Company that the Securities Act requires that such reference be
included in any such statement, each such holder shall have the right to
require the deletion of such reference to itself and its affiliates.
2.6 Expenses of Demand Registration. All expenses, other than
underwriting discounts and commissions, incurred in connection with
registrations, filings or qualifications pursuant to Section 2.2, including
without limitation all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company, and the
reasonable fees and disbursements of one counsel (selected by the Holders of a
majority of the Registrable Securities being registered) for the selling
Holders shall be borne by the Company (except that in the case of a
registration pursuant to Form S-3 or any similar "short-form" registration
statement, the Company shall bear such expenses for a maximum of four (4) such
demands); provided, however, that the Company shall not be required to pay any
of such expenses for the Holders in connection with any registration begun
pursuant to Section 2.2 if the registration request is subsequently withdrawn
at the request of the Holders of a majority of the Registrable Securities to be
registered (in which case all participating Holders shall bear such expenses
pro rata), unless the Holders of a majority of Registrable Securities then
outstanding agree to forfeit one (1) demand registration right pursuant to
Section 2.2; provided further, however, that if at the time of such withdrawal,
(a) the Holders have learned of a material adverse change in the condition
(financial or otherwise), business or prospects of the Company from that known
to the Holders at the time of their request, or (b) the filing or effecting of
the registration was delayed by or as a result of action or inaction by the
Company and there has occurred a material adverse change in marketing factors
related to the sale of Registrable Securities to the public from those existing
at the time of the Holder's request, then the Holders shall not be required to
pay any of such expenses and shall retain their rights pursuant to Section 2.2.
2.7 Expenses of Company Registration. The Company shall bear
and pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 2.3 for each Holder, including without limitation all
registration, filing, and qualification fees, printers' and accounting fees
relating or apportionable
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thereto and the fees and disbursements of one counsel for the selling Holders
(selected by the Holders of a majority of the Registrable Securities being
registered), but excluding underwriting discounts and commissions relating to
Registrable Securities.
2.8 Underwriting Requirements. In connection with any
offering involving an underwriting of shares being issued by the Company, the
Company shall not be required under Section 2.3 to include any of the Holders'
securities in such underwriting unless they accept the terms of the
underwriting as agreed upon between the Company and the underwriters selected
by it (provided however that the selection of the managing underwriter shall be
subject to the approval of the Investors, such approval not to be unreasonably
withheld), and then only in such quantity as will not, in the opinion of the
underwriters, jeopardize the success of the offering by the Company; provided,
however, that no Holder participating in such underwriting shall be required to
make any representations or warranties except as they relate to such Holder and
its intended method of distribution and that the liability of such a Holder
shall be limited to an amount equal to the net proceeds from the offering
received by such Holder. If the total amount of securities, including
Registrable Securities, requested by shareholders to be included in such
offering exceeds the amount of securities sold other than by the Company that
the underwriters reasonably believe compatible with the success of the
offering, then the Company shall be required to include in the offering only
that number of such securities, including Registrable Securities, that the
underwriters believe will not jeopardize the success of the offering, and with
the exception of the primary shares of the Company, the Registrable Securities
shall be given priority over any other securities, with the remaining
securities so included to be apportioned pro rata among the selling
shareholders according to the total amount of securities entitled to be
included therein owned by each selling shareholder or in such other proportions
as shall mutually be agreed to by such selling shareholders.
2.9 Indemnification. In the event any Registrable
Securities are included in a registration statement under this Section 2:
(a) To the extent permitted by law, the Company
will indemnify and hold harmless each Holder, its heirs, personal
representatives and assigns, each of such Holder's officers, directors,
employees and Affiliates, any underwriter (as defined in the Securities Act)
for such Holder and each Person, if any, who controls such Holder or
underwriter within the meaning of the Securities Act or the Exchange Act
against any losses, claims, damages or liabilities (joint or several) to which
they may become subject under the Securities Act, the Exchange Act or other
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federal or state law, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon a Violation; and
the Company will pay to each such indemnified party, as incurred, any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided,
however, that the indemnity agreement contained in this Paragraph 2.9(a) shall
not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case to a particular indemnified party for any
such loss, claim, damage, liability or action to the extent that it arises out
of or is based upon a Violation which occurs in reliance upon and in conformity
with written information furnished expressly for use in connection with such
registration by such indemnified party; and, provided further, that if any
amounts shall have been paid hereunder to an indemnified party and it shall be
determined by a court of competent jurisdiction in a final non-appealable
decision that such indemnified party was not entitled to indemnification under
this Paragraph 2.9(a), then such indemnified party shall (subject to Section
2.11 below) refund the amounts so paid.
(b) To the extent permitted by law, each
selling Holder will indemnify and hold harmless the Company, each of its
directors, each of its officers who has signed the registration statement, each
Person, if any, who controls the Company within the meaning of the Securities
Act, any underwriter, any other Holder selling securities in such registration
statement and any controlling Person of any such underwriter or other Holder,
against any losses, claims, damages or liabilities (joint or several) to which
any of the foregoing Persons may become subject, under the Securities Act, the
Exchange Act or other federal or state law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereto) arise out of or are
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished by such Holder expressly for use in connection with such
registration; and each such Holder will pay, as incurred, any legal or other
expenses reasonably incurred by any Person intended to be indemnified pursuant
to this Paragraph 2.9(b), in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this Paragraph 2.9(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder, which consent
shall not be unreasonably withheld; and provided further, that, in no event
shall the liability of any Holder under this Paragraph 2.9(b) exceed
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the net proceeds from the offering received by such Holder. Notwithstanding the
preceding sentence, if any amounts shall have been paid under this Paragraph
2.9(b) to any Person intended to be indemnified pursuant to this Paragraph
2.9(b) and it shall be determined by a court of competent jurisdiction in a
final non-appealable decision that such Person was not entitled to
indemnification under this Section 2.9(b), then such Person shall (subject to
Section 2.11 below) refund the amounts so paid.
(c) Promptly after receipt by an indemnified
party under this Section 2.9 of notice of the commencement of any action
(including any governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under this Section
2.9, deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in, and,
to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with
counsel mutually satisfactory to the parties; provided, however, that an
indemnified party shall have the right to retain its own counsel, with the fees
and expenses to be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action shall not
relieve such indemnifying party of any liability to the indemnified party under
this Section 2.9 except if, and only to the extent that, the indemnifying party
is actually prejudiced thereby; and such failure to deliver written notice to
the indemnifying party will not relieve it of any liability that it may have to
any indemnified party otherwise than under this Section 2.9.
(d) The obligations of the Company and Holders
under this Section 2.9 shall survive the completion of any offering of
Registrable Securities in a registration statement under this Section 2, and
otherwise.
2.10 Non-Exclusive Indemnity. Any indemnity agreements
contained herein shall be in addition to any other rights to indemnification or
contribution which any indemnified party may have pursuant to law or contract
and shall remain operative and in full force and effect regardless of any
investigation made or omitted by or on behalf of any indemnified party.
2.11 Contribution. If for any reason the indemnity provided
in Section 2.9 above is unavailable, then the indemnifying party shall
contribute to the amount paid
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or payable by the indemnified party as a result of such losses, claims,
damages, liabilities or expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the indemnifying party on the one
hand and the indemnified party on the other (taking into consideration the fact
that the provision of the registration rights and indemnification hereunder is
a material inducement to the Investors to purchase Registrable Securities) or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law or provides a lesser sum to the indemnified party than the
amount hereinafter calculated, in such proportion as is appropriate to reflect
not only the relative benefits received by the indemnifying party on the one
hand (taking into consideration the fact that the provision of the registration
rights and indemnification hereunder is a material inducement to the Investors
to purchase Registrable Securities) and the indemnified party on the other but
also the relative fault of the indemnifying party and the indemnified party as
well as any other relevant equitable considerations. The relative fault shall
be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the indemnifying
party or the indemnified party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. No Person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation. Notwithstanding anything to the contrary in this Section
2.11, no Holder shall be required, pursuant to this Section 2.11, to contribute
any amount in excess of the lesser of (x) the net proceeds received by such
indemnifying party from the sale of shares in the offering to which the losses,
claims, damages, liabilities or expenses of the indemnified party relate and
(y) the amount it would have been obligated to pay if the indemnity provided in
Section 2.9 had been available.
2.12 Reports Under the Exchange Act. If the Company shall
have filed a registration statement pursuant to the requirements of Section 12
of the Exchange Act, or a registration statement pursuant to the Securities
Act, then, with a view to making available to the Holders the benefits of Rule
144 under the Securities Act and any other rule or regulation of the SEC that
may at any time permit a Holder to sell securities of the Company to the public
without registration or pursuant to a registration on Form S-3, the Company
agrees to:
(a) make and keep public information
available, as those terms are understood and defined in Rule 144 under the
Securities Act, at all times;
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(b) take such action, including the voluntary
registration of its Common Stock under Section 12 of the Exchange Act, as is
necessary to enable the Holders to utilize Form S-3 for the sale of their
Registrable Securities;
(c) file with the SEC in a timely manner all
reports and other documents required of the Company under the Securities Act
and the Exchange Act; and
(d) furnish to any Holder, so long as the
Holder owns any Registrable Securities, forthwith upon request (i) a written
statement by the Company that it has complied with the reporting requirements
of Rule 144 under the Securities Act, or that it qualifies as a registrant
whose securities may be resold pursuant to Form S-3 (at any time after it so
qualifies), (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested in availing any Holder of
any rule or regulation of the SEC which permits the selling of any such
securities without registration or pursuant to such form.
2.13 Assignment of Registration Rights. The rights to cause
the Company to register Registrable Securities pursuant to this Section 2 may
be assigned in whole or in part by a Holder to one or more of its Affiliates or
to one or more transferees or assignees of not less than twenty-five percent
(25%) of all Registrable Securities acquired by the Holder under the Purchase
Agreement, provided that such transferee or assignee delivers to the Company a
written instrument by which such transferee or assignee agrees to be bound by
the obligations imposed on Holders under this Agreement to the same extent as
if such transferee was a party hereto.
2.14 Limitations on Subsequent Registration Rights; Existing
Registration Rights. From and after the date of this Agreement, the Company
shall not, without the prior written consent of the Holders of a majority of
the outstanding Registrable Securities, enter into any agreement with any
holder or prospective holder of any securities of the Company which would allow
such holder or prospective holder (a) to include such securities in any
registration filed under Section 2.2, unless under the terms of such agreement,
such holder or prospective holder may include such securities in any such
registration only to the extent that the inclusion of such holder's securities
will not reduce the amount of the Registrable Securities of the Holders which
is included or (b) to demand a registration.
2.15 "Market Stand-Off" Agreement. Each Holder and each
holder of Common Shares that is a party to this
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Agreement hereby agrees that, during the period of ninety (90) days (or, in the
case of the Company's initial public offering, one hundred eighty (180) days)
following the effective date of a registration statement of the Company filed
under the Securities Act in connection with an underwritten offering, it shall
not, without the consent of the managing underwriter, sell or otherwise
transfer or dispose of (other than to donees who agree to be similarly bound)
any Common Shares of the Company held by it except Common Shares included in
such registration.
2.16 Amendment; Waiver. Any provision of this Section 2 may
be amended only with the written consent of the Company and the Holders of
seventy-five percent (75%) of the Registrable Securities then outstanding. The
observance of any provision of this Section 2 may be waived (either generally
or in a particular instance and either retroactively or prospectively) only
with the written consent of the party to be charged, provided that the holders
of seventy-five percent (75%) of the Registrable Securities then outstanding
may act on behalf of all such holders. Any amendment or waiver effected in
accordance with this Section 2.16 shall be binding upon each holder of
Registrable Securities at the time outstanding, each future holder of all such
securities, and the Company.
2.17 Changes in Registrable Securities. If, and as often as,
there are any changes in the Registrable Securities by way of stock split,
stock dividend, combination or reclassification, or through merger,
consolidation, reorganization or recapitalization, or by any other means,
appropriate adjustment shall be made in the provisions of this Section 2, as
may be required, so that the rights and privileges granted hereby shall
continue with respect to the Registrable Securities as so changed. Without
limiting the generality of the foregoing, the Company will require any
successor by merger or consolidation to assume and agree to be bound by the
terms of this Section 2, as a condition to any such merger or consolidation.
3. Miscellaneous.
3.1 Entire Agreement. This Agreement constitutes the full and
entire understanding and agreement among the parties with regard to the subject
matter hereof. Nothing in this Agreement, express or implied, is intended to
confer upon any person or entity, other than the parties hereto and their
respective successors and assigns, any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
herein.
3.2 Governing Law. This Agreement shall be governed in all
respects by the laws of the State of New York as such laws are applied to
agreements between New York
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residents entered into and to be performed entirely within New York, whether or
not all parties hereto are residents of New York.
3.3 Successors and Assigns. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto.
3.4 Notices. Unless otherwise provided, any notice required
or permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon receipt by the party to be notified, by delivery or
confirmed telecopy, or three (3) days after deposit with the United States Post
Office, by registered or certified mail, postage prepaid and addressed to the
party to be notified (a) if to a party other than the Company, at such party's
address set forth at the end of this Agreement or at such other address as such
party shall have furnished the Company in writing, or, until any such party so
furnishes an address to the Company, then to and at the address of the last
holder of the shares covered by this Agreement who has so furnished an address
to the Company, or (b) if to the Company, at its address set forth at the end
of this Agreement, or at such other address as the Company shall have furnished
to the parties in writing.
3.5 Severability. Any invalidity, illegality or limitation on
the enforceability of this Agreement or any part hereof, by any party whether
arising by reason of the law of the respective party's domicile or otherwise,
shall in no way affect or impair the validity, legality or enforceability of
this Agreement with respect to other parties. If any provision of this
Agreement shall be judicially determined to be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
3.6 Titles and Subtitles. The titles of the Sections and
subsections of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
3.7 Delays or Omissions; Remedies Cumulative. It is agreed
that no delay or omission to exercise any right, power or remedy accruing to
the parties, upon any breach or default of the Company under this Agreement,
shall impair any such right, power or remedy, nor shall it be construed to be a
waiver of any such breach or default, or any acquiescence therein, or of any
similar breach or default thereafter occurring; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
theretofore or thereafter occurring. It is further
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<PAGE>
agreed that any waiver, permit, consent or approval of any kind or character by
a party of any breach or default under this Agreement, or any waiver by a party
of any provisions or conditions of this Agreement must be in writing and shall
be effective only to the extent specifically set forth in writing and that all
remedies, either under this Agreement, or by law or otherwise afforded to a
party, shall be cumulative and not alternative.
3.8 Attorneys' Fees. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorney's fees, costs and necessary
disbursements in addition to any other relief to which such party may be
entitled.
3.9 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
[SIGNATURE PAGES IMMEDIATELY FOLLOW THIS PAGE]
25
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SIGNATURE PAGE TO
SHAREHOLDERS RIGHTS AGREEMENT
The undersigned hereby execute this Amended and Restated
Shareholders Rights Agreement dated as of the date first above written and
authorize this signature page to be attached to a counterpart of said
Agreement.
"COMPANY"
Address: The Ultimate Software Group, Inc.,
a Delaware corporation
3111 Stirling Road
Ft. Lauderdale, FL 33312
Attn: Mr. Scott Scherr By:/s/Scott Scherr
Fax: (954) 266-1301 -------------------------------
Name: Scott Scherr
Title: President
"INVESTORS"
Address: J.P. Morgan Investment Corporation
60 Wall Street
New York, NY 10260
Attn: Mr. Thomas M. Snell By:/s/ Thomas M. Snell
Fax: (212) 648-5032 -------------------------------
Name: Thomas M. Snell
Title: Managing Director
Address: Sixty Wall Street SBIC Fund, L.P.
By: Sixty Wall Street SBIC
60 Wall Street Corporation, its general partner
New York, NY 10260
Attn: Mr. L.E. Franic
Fax: (212) 648-5032 By:/s/ L.E. Franic
-------------------------------
Name: L.E. Franic
Title: Vice President
Address: Hancock Venture Partners V - Direct
Fund L.P.
One Financial Center, 44th Floor
Boston, MA 02111 By:/s/ Ofer Nemirovsky
Attn: Mr. Ofer Nemirovsky -------------------------------
Fax: (617) 350-0305 Name: Ofer Nemirovsky
Title: Managing Director
26
<PAGE>
SIGNATURE PAGE TO
SHAREHOLDERS RIGHTS AGREEMENT
The undersigned hereby execute this Amended and Restated
Shareholders Rights Agreement dated as of the date first above written and
authorize this signature page to be attached to a counterpart of said
Agreement.
"COMMON SHAREHOLDERS"
Address: The Ultimate Software Group, Ltd.
By: The Ultimate Software Group of
3111 Stirling Road South Florida, Inc., a Florida
Ft. Lauderdale, FL 33312 corporation, its general partner
Attn: Mr. Scott Scherr
Fax: (954) 266-1301
By:/s/ Scott Scherr
-------------------------------
Name: Scott Scherr
Title: President
Address:
3111 Stirling Road /s/ Alan Goldstein
Ft. Lauderdale, FL 33312 ----------------------------------
Attn: Mr. Alan Goldstein Alan Goldstein
Fax: (954) 266-1301
Address: /s/ Scott Scherr
----------------------------------
3111 Stirling Road Scott Scherr
Ft. Lauderdale, FL 33312
Attn: Mr. Scott Scherr
Fax: (954) 266-1301
<PAGE>
Exhibit 10.2
ASSET PURCHASE AGREEMENT
Asset Purchase Agreement (this "Agreement") by and among The
Ultimate Software Group of Virginia, Inc., a Virginia corporation ("Assignor"),
The Ultimate Software Group, Inc., a Delaware corporation (the "Company"), and
the principals whose names appear on the signature page hereto (the
"Principals") dated as of February 2, 1998.
WHEREAS, Assignor entered into the Exclusive Reseller
Agreement (the "Reseller Agreement") dated March 3, 1993 with The Ultimate
Software Group, Ltd. (the "Partnership"), the assets and liabilities of which
were subsequently assigned to and assumed by the Company;
WHEREAS, Assignor desires to assign and transfer to the
Company, and the Company desires to assume from Assignor, certain business
assets and liabilities of Assignor pursuant to the terms hereof;
WHEREAS, the transactions contemplated hereby are intended to
be treated as a pooling of interests business combination by the Company for
financial accounting purposes and as a tax free reorganization for United
States federal income tax purposes; and
WHEREAS, this Agreement is intended by Assignor to constitute
a "plan of reorganization" as described in Section 361(a) of the Internal
Revenue Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Assignment. Subject to the terms hereof, Assignor, upon
the Closing Date (as defined below), shall sell, assign, convey, transfer and
deliver to the Company all right, title, benefits and interest in the assets
described on Schedule I hereto (the "Assets") and deliver bills of sale and
assignment documents in form and substance satisfactory to the Company with
respect to such Assets in exchange for (i) the assumption by the Company of
Assignor's obligations, duties and liabilities described on Schedule II hereto
(the "Assumed Liabilities") and (ii) 9,370 shares (the "Shares") of Class B
Common Stock of the Company, subject to adjustment for any stock splits or
stock combinations affecting the Class B Common Stock prior to the Closing
Date.
<PAGE>
2. Reseller Agreement. Each of the parties hereto agrees
that because the Reseller Agreement is among the Assets being sold to the
Company hereunder, any rights of Assignor and its affiliates arising thereunder
shall terminate on the Closing Date.
3. Representations and Warranties of the Company. The Company
hereby represents and warrants to and agrees with Assignor as follows:
(a) Organization, Good Standing and Qualification. The
Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite
power and authority to carry on its business as now conducted and as
proposed to be conducted, and the Company has all requisite power and
authority to enter into and perform this Agreement and the
transactions contemplated hereby.
(b) Authorization. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement, the
performance of all obligations of the Company hereunder and the
authorization, issuance (or reservation for issuance) and delivery of
the Shares and any interest therein has been taken or will be taken
prior to the Closing Date.
(c) Valid Issuance of Shares. The Shares, when issued and
delivered in accordance with the terms hereof, (i) will be duly and
validly issued, fully paid and nonassessable, (ii) will be free of any
pledges, liens, security interests, claims or other encumbrances of
any kind, and (iii) will be issued in compliance with all applicable
federal and state securities laws.
(d) Prospectus. The Company shall provide Assignor with the
preliminary and final prospectuses with respect to its proposed
initial public offering of common stock and any amendments thereto,
promptly after the Company's Registration Statement and amendments
thereto containing such prospectuses are filed with the Securities and
Exchange Commission (the "SEC").
(e) Financial Statements. The Company has delivered to
Assignor and Assignor may rely upon copies of (i) the audited
financial statements of the Company for the fiscal years ended
December 31, 1995 and December 31, 1996, respectively, (ii) unaudited
financial statements of the Company for the fiscal year ended December
31, 1997, and (iii) Management's Discussion and Analysis of Financial
Condition and Results of Operation, in each case, certified by an
officer of the Company as being true and complete copies of such
financial statements.
(f) No Conflicts. The execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of
the transactions contemplated hereby do not contravene (i) the
Company's organizational documents, (ii) any law or (iii) any
contractual restriction binding on or affecting the Company.
2
<PAGE>
(g) Litigation. There is no pending or threatened action or
proceeding affecting the Company before any court, governmental agency
or arbitrator, which may materially adversely affect the business,
financial condition or results of operations of the Company or which
could affect the legality, validity or enforceability of this
Agreement.
(h) No Material Adverse Change. Since December 31, 1997,
there has not been any change in the business financial condition or
results of operations of the Company from that reflected in the
unaudited financial statements of the Company for the fiscal year
ended December 31, 1997, except changes in the ordinary course of
business which have not been materially adverse.
(i) Reseller Agreement. Assignor has not materially breached
any of its obligations under the Reseller Agreement as of the date
hereof.
(j) Registration Rights. None of the officers or directors,
individually, of the Company, other than Scott Scherr and Alan
Goldstein, has registration rights with respect to the capital
stock of the Company.
(k) Percentage Interest. As of the Closing Date, the Shares
will represent at least 0.66% of the outstanding capital stock of the
Company on a fully diluted basis determined as if all outstanding
shares of such capital stock had been converted into one class of
common stock of the Company. For purposes of this Section 3(k), the
Company has assumed that it will issue, to certain other resellers of
the Company's products, a number of shares of the Company's Class B
Common Stock in connection with the acquisition of such resellers'
businesses, at or about the time of the Closing Date. To the extent
that the Company does not issue such shares in connection with such
acquisitions, the Shares sold to the Assignor hereunder will
represent, pro rata, a greater percentage of the outstanding capital
stock of the Company.
4. Representations and Warranties of Assignor and the
Principals. Assignor and the Principals hereby jointly and severally represent
and warrant to and agree with the Company as follows:
(a) Assets. Assignor is the legal and beneficial
owner of the Assets, free and clear of any lien, charge, encumbrance
or adverse claim, except as set forth on Schedule II hereto, and has
the legal authority to transfer the Assets. There are no assets used
in, or necessary for the operation of, the business of Assignor as
presently operated (the "Business") other than the Assets. The Assets
are substantially all of the assets of Assignor.
(b) Liabilities; Litigation. Assignor has no
liabilities known or unknown, fixed or contingent, including
contractual liabilities, other than the Assumed Liabilities. There is
no pending or threatened action or proceeding
3
<PAGE>
affecting the Assets or the Business before any court, governmental
agency or arbitrator, which may materially adversely affect the
Assets or the Business or which could affect the legality,
validity or enforceability of this Agreement.
(c) Consents; No Conflicts. The execution, delivery
and performance of this Agreement by Assignor and the Principals and
the consummation by Assignor and the Principals of the transactions
contemplated hereby (x) do not contravene (i) Assignor's
organizational documents, (ii) any law or (iii) any contractual
restriction binding on or affecting Assignor or the Principals and (y)
do not require the consent, approval, permission or other
authorization of any court, arbitrator or governmental, administrative
or self-regulatory authority or consent under any material lease,
license, agreement or other material instrument of Assignor, the
Principals or the Business and (z) do not require any stockholder,
director, partnership or other authorization or action, other than
authorizations that have been duly obtained and actions that have been
duly taken.
(d) Financial Statements. Assignor has delivered to
the Company all of its quarterly financial statements for the years
ended December 31, 1996 and December 31, 1997 and, it will, on or
before February 6, 1998, deliver to the Company its financial
statements for the fiscal years ended December 31, 1995, December 31,
1996 and December 31, 1997, audited by Arthur Andersen LLP
("Andersen") (the "Audited Statements"), and such financial statements
do and will fairly present the financial position and results of
operations of Assignor as of the dates and for the periods indicated
therein. Such financial statements were and will be prepared in
accordance with generally accepted accounting principles, consistently
applied.
(e) No Brokers. No broker, finder or any other third
party is entitled to any fee or commission in connection with the
transactions contemplated hereby.
(f) Investor Certificates. Assignor has delivered
on the date hereof a certificate of each shareholder of Assignor in the
form attached hereto as Exhibit A.
(g) Investment Intent. Assignor (i) has such
knowledge, sophistication and experience in business and financial
matters that it is capable of evaluating the merits and risks of an
investment in the Shares and any interest therein, (ii) can bear the
economic risk of an investment in the Shares and any interest therein
for an indefinite period of time and can afford a complete loss of
such investment, and (iii) is acquiring the Shares and any interest
therein for its own account and not with a view to, or for a sale in
connection with, a distribution in violation of any applicable
securities laws of any jurisdiction.
4
<PAGE>
(h) No Registration. Assignor understands that the
offering and the issuance of the Shares have not been and will not be
registered or qualified under the laws of any jurisdiction regarding
the offering or sale of securities, and that the Shares and any
interest therein may not be resold or otherwise transferred by
Assignor unless any such subsequent sale or transfer is duly
registered and qualified under the applicable securities laws or is
exempt from such registration and qualification.
(i) Access to Information. Assignor (i) has been
furnished with, and hereby acknowledges the receipt and review of, (a)
the audited financial statements of the Company for the fiscal years
ended December 31, 1995 and December 31, 1996, respectively, and (b)
unaudited financial statements of the Company for the fiscal year
ended December 31, 1997, (ii) has been afforded the opportunity to
obtain such additional information from the Company and its
representatives as Assignor has deemed necessary in order to evaluate
the merits, risks and other considerations relating to an acquisition
of Shares and any interest therein, (iii) fully understands the risks
and other considerations relating to the investment contemplated
hereby, and (iv) with respect to tax and employee benefits, has relied
on the advice of Assignor's own professional advisors.
(j) Draft Prospectus. Assignor understands that (i)
the draft of the Preliminary Prospectus of the Company dated December
31, 1997 and any attachments thereto (the "Draft Prospectus") received
by Assignor is a preliminary draft and that future drafts may contain
material changes from the Draft Prospectus and (ii) there can be no
assurance that an initial public offering of the Company's stock will
be consummated in the near future or ever or that the Registration
Statement filed in connection therewith will be declared effective by
the SEC.
(k) Assignor Information. All information which
Assignor has heretofore furnished or furnishes herewith to the Company
in connection with the transactions contemplated hereby is correct and
complete in all respects as of the date of this Agreement, and if
there should be any change in such information prior to the
consummation of the transactions contemplated hereby, Assignor will
immediately furnish such revised or corrected information to the
Company.
(l) Schedule of Contracts. Attached hereto as
Schedule III is a true and complete list of all oral and written
contracts and agreements entered into by Assignor through the date
hereof. Complete copies of all such written contracts and complete
descriptions of all such oral contracts have been delivered to the
Company.
(m) Certain Accounting Matters. Assignor has not
taken or agreed to take any action that would prevent the Company from
accounting for the transactions contemplated hereby as a pooling of
interest business combination.
5
<PAGE>
(n) Shareholder Agreements. Assignor acknowledges
that it is the parties' intention that the transactions contemplated
by this Agreement be accounted for as a pooling of interests business
combination and that each of the shareholders of Assignor may be
deemed to be an "affiliate" of Assignor within the meaning of Rule 145
promulgated under the Securities Act. Accordingly, Assignor has
delivered on the date hereof an agreement of each shareholder of
Assignor wherein such shareholder covenants and agrees that he, she or
it will not (i) take any action after the date hereof to cause the
transactions contemplated hereby not to be accountable under the
pooling of interests method of accounting, or (ii) sell, transfer,
pledge, dispose of or otherwise part with any interest in or with
respect to, or in any other manner reduce his, her or its investment
risk with respect to, (A) any shares of capital stock of Assignor at
any time prior to the Closing Date, and (B) any shares of the
Company's stock received by such shareholder in connection with the
transactions contemplated hereby or otherwise until such time as the
Company publishes financial results covering at least 30 days of
combined operations of the Company and Assignor or (iii) from the
Closing Date until the time the Company publishes financial results
covering at least thirty days of combined operations of the Company
and Assignor, directly or indirectly sell or purchase or enter into
any agreement, contract or arrangement to sell or purchase any put or
call options or other derivative securities (including any short
sales) with respect to shares of the Company's stock or enter into any
other agreements, contracts or arrangements providing for the
alteration of such shareholder's investment risk with respect to any
shares of the Company's stock.
(o) Reseller Agreement. The Company has not
materially breached any of its obligations under the Reseller
Agreement as of the date hereof.
(i) No Material Adverse Change. Since December 31,
1997, there has not been any change in the business financial
condition or results of operations of Assignor from that reflected in
the financial statements of Assignor for the fiscal year ended
December 31, 1997, except changes in the ordinary course of business
which have not been materially adverse.
(j) Purchaser Representative. Eugene Guhne has
agreed to act as the purchaser representative of any Shareholders who
are not "accredited investors" as defined in Rule 501(a) of Regulation
D promulgated under the Securities Act of 1933, as amended.
5. Securities Laws. Assignor hereby acknowledges and agrees that:
(a) the Shares must be held indefinitely unless
subsequently registered under the Securities Act and under any
applicable state securities laws or unless an exemption from such
registration is available.
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(b) the Shares will not be registered under the
Securities Act on the grounds that the offering and sale thereof
contemplated by this Agreement will be exempt from registration under
the Securities Act, and that the Company's reliance upon such
exemption is based in part upon the representations of Assignor set
forth herein.
(c) "stop transfer" instructions shall be placed
against the Shares on the transfer books of the Company and that the
certificate(s) evidencing the Shares shall bear a legend, in addition
to any legend required by applicable state securities laws, in
substantially the following form:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD OR
OTHERWISE DISPOSED OF FOR VALUE UNLESS A REGISTRATION
STATEMENT HAS BECOME EFFECTIVE WITH RESPECT TO SUCH
SECURITIES UNDER THE SECURITIES ACT AND SUCH STATE SECURITIES
LAWS OR IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO
THE CORPORATION THERE IS AN APPLICABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND THE
APPLICABLE STATE SECURITIES LAWS OR SUCH REGISTRATION IS NOT
OTHERWISE REQUIRED."
6. Due Diligence; Termination. (a) Assignor shall afford any
and all authorized representatives of the Company access, during normal
business hours, to its employees, properties, books, contracts and records and
shall furnish promptly all information concerning its business, properties and
personnel and copies of any of its books, records or contracts as the Company
or its representatives shall request; provided, that no investigation pursuant
to this Section 6 shall effect or be deemed to modify any representation or
warranty made in this Agreement by Assignor.
(b) Until the date which is ten days after Assignor
delivers to the Company the Audited Statements pursuant to Section 4(d) hereof,
the Company shall have the right to terminate this Agreement if the Company
shall determine in its sole discretion, based on its investigation of Assignor
pursuant to Section 6(a) or a review of such Audited Statements, that
consummating the transactions contemplated hereby would not be in the best
interests of the Company.
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(c) The Company shall have the right to terminate
this Agreement if the Company does not receive requisite approval of the
transactions contemplated hereunder from its Board of Directors and/or
stockholders on or before February 15, 1998.
7. Closing. Subject to Section 6(b) hereof and the
satisfaction or waiver of the conditions set forth in Section 9 hereof,
consummation of the transactions contemplated by Section 1 hereof (the
"Closing") shall take place at the offices of Dewey Ballantine LLP, 1301 Avenue
of the Americas, New York, New York 10019 on a date (the "Closing Date") which
is the earlier of (a) March 31, 1998 and (b) the date specified in a written
notice given by the Company no less than five (5) days prior to such date.
8. Covenants.
(a) Interim Operations. Prior to the Closing Date,
unless the Company has consented in writing thereto,
Assignor:
(i) shall conduct its operations according to its usual,
regular and ordinary course in substantially the same
manner as heretofore conducted;
(ii) shall use its reasonable efforts to preserve intact
its business organization and goodwill and maintain
satisfactory relationships with those persons having
business relationships with it;
(iii) shall promptly notify the Company of (x) any
material change in its condition (financial or
otherwise), business, properties, assets,
liabilities or the normal course of its business or
of its properties, (y) any material litigation or
material governmental complaints, investigations or
hearings (or communications indicating that the same
may be contemplated), or (z) the breach of any
representation or warranty contained herein;
(iv) shall not issue any shares of its capital stock or
securities;
(v) shall not (w) incur, create, assume or otherwise
become liable for borrowed money or assume,
guarantee, endorse or otherwise become responsible or
liable for the obligations of any other individual,
corporation or other entity, (x) make any loans or
advances to any other person, except in each case in
the ordinary course of business, (y) acquire
(including, without limitation, for cash or shares of
stock, by merger, consolidation, or acquisition of
stock or assets) any interest in any corporation,
partnership or other business organization or
division thereof or any assets, or make any
investment either by purchase of stock or securities,
contributions of capital or property transfer or,
except in the
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<PAGE>
ordinary course of business, consistent with past
practice, purchase any property or assets of any
other person or (z) effect a sale or other
disposition of any of the Assets or allow the
creation of any lien or encumbrance thereon;
(vi) shall not (x) declare, set aside or pay any dividend
or make any other distribution or payment with
respect to any shares of its capital stock or other
ownership interests or (y) directly or indirectly
redeem, purchase or otherwise acquire any shares of
its capital stock or make any commitment for any
such action;
(vii) shall not amend or otherwise change its articles of
incorporation or bylaws or equivalent organizational
documents
(viii) shall not increase the compensation payable or to
become payable to its officers or employees, pay any
employment related or other bonus to its
shareholder, or, except as presently bound to do,
grant any severance or termination pay to, or enter
into any employment or severance agreement with, any
of its directors, officers or other employees;
(ix) shall not take any action other than in the ordinary
course of business and in a manner consistent with
past practice with respect to accounting policies or
procedures; and
(x) shall not agree, in writing or otherwise, to take
any of the foregoing actions or take any action
which would make any representation or warranty in
this Agreement untrue or incorrect as of the Closing
Date.
(b) Trading in Company Stock. Except as otherwise
expressly consented to by the Company, from the date of this Agreement
until the Closing Date, Assignor will not directly or indirectly
purchase or sell (including short sales) any shares of the Company's
stock, or sell, transfer, pledge, dispose of or otherwise part with
any interest in or with respect to or in any other manner reduce its
investment risk with respect to any shares of the Company's stock to
be received pursuant to this Agreement.
(c) Confidentiality of Prospectus. Assignor
acknowledges and agrees that the Draft Prospectus is highly
confidential, that it may not be photocopied, distributed or otherwise
communicated to persons other than Assignor or its representatives
retained for purposes of this transaction and that upon receipt by
Assignor of a preliminary or final prospectus of the Company, the
Draft Prospectus will be returned to the Company.
9
<PAGE>
(d) Custom Applications. Assignor shall provide on
the date hereof a Schedule IV which lists, by customer, all custom
applications, including, without limitation, custom programs, modules
and interfaces (other than software purchased by Assignor from the
Company) ("Custom Applications"), which have been provided to any
customer of the Assignor. Assignor shall provide source code with
respect to all Custom Applications on or before the Closing Date.
(e) Assignor's Name. From and after the Closing,
Assignor shall not use the name "The Ultimate Software Group" or any
expression containing the word "Ultimate" or "US Group" or expression
similar thereto or derivative in whole or in part therefrom. As
promptly as practicable (and in any event within thirty days)
following the Closing, Assignor will change its name to a name
complying with the immediately preceding sentence, and shall deliver
to the Company written evidence of such name change.
(f) Cooperation; Tax Schedule. Following the Closing
Date, Assignor shall promptly furnish the Company with such financial
and reporting data and other information with respect to the Assets
and Assumed Liabilities as the Company may from time to time
reasonably request, for any reasonable business purpose, including,
without limitation, the preparation of tax returns and financial
statements. Within sixty (60) days following the Closing Date,
Assignor shall prepare and deliver to the Company a schedule
indicating the federal income tax basis and state income tax basis, if
different, of each of the Assets and Assumed Liabilities.
(g) Options. The Company hereby agrees that from the
date hereof until April 30, 1998, the Company will not issue any
options to purchase shares of capital stock of the Company to any
persons who are officers of the Company as of the date hereof.
(h) Combined Operations. The Company shall publish
financial results covering at least thirty days of combined operations
of the Company and Assignor within one year from the Closing Date.
(i) Registration Rights Agreement. (i) The Company
agrees that if at any time between the Closing Date and the
first anniversary of the Closing Date, the Company proposes
to register any shares of capital stock of the Company owned
by Scott Scherr and/or Alan Goldstein, other than on a
Registration Statement on Form S-8, shareholders of Assignor
shall have the right to register in such registration, on the
same terms, including terms with respect to the payment by
the Company of associated expenses, as have been given to
Messrs. Scherr and/or Goldstein, under the Amended and
Restated Shareholders Rights Agreement, dated as of June 6,
1997, by and among the Company, J.P. Morgan Investment
Corporation, Sixty Wall Street SBIC Fund, L.P., Hancock
Venture Partners V-Direct Fund L.P., The Ultimate Software
Group, Ltd., Scott
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<PAGE>
Scherr and Alan Goldstein, a number of Shares equal to the
total number of Shares held by each such shareholder of
Assignor multiplied by a fraction, the numerator of which is
the total number of shares of Messrs. Scherr and/or
Goldstein, as applicable, proposed to be registered
and the denominator of which is the total number of
shares of the Company's capital stock owned by Messrs.
Scherr and/or Goldstein, as applicable, at the time of
registration.
(ii) The Company shall bear and pay all
expenses incurred in connection with any registration, filing
or qualification of Shares with respect to a registration
pursuant to Section 8(i)(i), including without limitation all
registration, filing, and qualification fees, printers' and
accounting fees relating or apportionable thereto and the
fees and disbursements of one counsel for all holders of the
Company's securities being registered in such registration
(selected by the holders of a majority of such securities
being registered), but excluding underwriting discounts and
commissions relating to the Shares being registered.
9. Conditions to Closing. (a) The obligations of the Company
under this Agreement are subject to the fulfillment or waiver on or before the
Closing Date of the following conditions:
(i) Representations and Warranties. The representations
and warranties of Assignor contained in Section 4
shall be true on and as of the Closing Date with the
same effect as though such representations and
warranties had been made on and as of the Closing
Date.
(ii) Performance. Assignor shall have performed and
complied with all agreements, obligations and
conditions contained in this Agreement.
(iii) No Material Adverse Change. There shall have been no
material adverse change in the condition of Assignor
or the Assets since the date hereof.
(iv) Pooling Letter. The Company shall have received from
Andersen, a letter dated the Closing Date,
confirming that the transactions contemplated
hereby, if consummated, can properly be accounted
for as a pooling of interests combination in
accordance with GAAP and the criteria of Accounting
Principles Board Opinion No. 16 and the regulations
of the SEC.
(v) Approvals. The Company shall have obtained all
requisite approvals of its Board of Directors and
stockholders for the transactions contemplated by
this Agreement.
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<PAGE>
(vi) Balance Sheet. Assignor shall have delivered to the
Company a balance sheet of the Assignor, dated as of
the Closing Date, prepared in accordance with
generally accepted accounting principles,
consistently applied, and which shall be subject to
review or audit by Andersen at the sole discretion of
the Company. Such balance sheet shall demonstrate
that the assets of Assignor, other than the Reseller
Agreement and other intangible assets, have an
aggregate value greater than the aggregate value of
the liabilities of Assignor.
(vii) Updated Schedules. Assignor shall have prepared and
delivered to the Company updated Schedules I, II,
III and IV which reflect, as of the Closing Date,
the information required to be stated therein.
(viii) Assignor shall have delivered to the Company a
Certificate of the President of Assignor that the
representations and warranties of Assignor contained
in this Agreement are true on and as of the Closing
Date and that Assignor has satisfied and performed
all of its respective obligations hereunder.
(ix) Other Documents. The Company shall have received such
other documents as it shall reasonably request prior
to the Closing.
(b) The obligations of Assignor under this Agreement
are subject to the fulfillment or waiver on or before the Closing Date
of each of the following conditions:
(i) Representations and Warranties. The representations
and warranties of the Company contained in Section 3
shall be true on and as of the Closing Date with the
same effect as though such representations and
warranties had been made on and as of the date
thereof.
(ii) Delivery of Shares. The Company shall have delivered
the Shares specified in Section 1.
(iii) The Company shall have delivered to Assignor a
certificate of the President or any Vice President
of the Company that the representations and
warranties of the Company contained in this
Agreement are true on and as of the Closing Date and
that the Company has satisfied and performed all of
its respective obligations hereunder.
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<PAGE>
10. Certain Tax Matters. The parties to this Agreement intend
that the transactions contemplated hereby (and the distribution of the Shares
of the Company to Assignor's shareholders) (collectively, the "Transaction")
will constitute a reorganization described in Section 368(a)(1)(C) of the Code
and each party agrees that it will not take any action which would result in
the Transaction not so qualifying. However, each of the parties to this
Agreement acknowledges that it is relying solely upon its respective advisors
in determining the tax consequences of the Transaction and will not rely on any
representation or assurance of the other party other than the representations
and covenants set forth in this Agreement or any other agreement or certificate
delivered in connection herewith. None of the Company, the Assignor or the
shareholders of the Assignor will take any tax reporting position or make any
tax election inconsistent with the characterization of the Transaction
qualifying as a reorganization described in Section 368(a)(1)(C) of the Code,
except as may be required upon examination by the Internal Revenue Service or
any other tax authority.
11. Waiver. Subject to the consummation of the transactions
contemplated hereby, each of the parties hereto hereby releases and discharges
the other party, its partners, employees, parents, subsidiaries, affiliates,
successors and assigns from all actions, causes of action, suits, debts,
agreements, judgments, claims, and demands whatsoever, in law or equity which
such party ever had, now have or hereafter can, shall or may have, for, upon or
by reason of any claim relating to the Reseller Agreement and the relationship
of the parties thereunder.
12. Indemnification. (a) Assignor and the Principals hereby
jointly and severally agree to indemnify and hold harmless the Company
and any fiduciary, officer, director, employee, agent or controlling
person of the Company (each, an "Indemnified Person") against any and
all losses, claims, damages, expenses and liabilities (or actions in
respect thereof) whatsoever by reason of or arising from (i) any
breach of the representations and warranties of this Agreement, (ii)
any failure by the Assignor to comply with any covenant in this
Agreement, (iii) any liabilities whether known or unknown, fixed or
contingent (including contractual liabilities) of Assignor or any of
its affiliates, other than the Assumed Liabilities and (iv) any
failure of Assignor to comply with the Bulk Sales Act (as defined
below); provided, however that (A) the aggregate liability of Mr.
David Auler, as Principal, under this Agreement shall not exceed
$384,000 and (B) the aggregate liability of Mr. Eugene Guhne, as
Principal, under this Agreement shall not exceed $384,000. Assignor
and the Principals will reimburse any Indemnified Person for all
expenses (including reasonable attorneys' fees) as they are incurred
by any such Indemnified Person in connection with investigating,
preparing or defending any such action or claim, whether or not in
connection with pending or threatened litigation in which any
Indemnified Person is a party.
(b) The Company hereby agrees to indemnify and hold harmless
Assignor and the Principals and any fiduciary, officer, director,
employee, agent or controlling person of Assignor (each, an
"Indemnified Person") against any and all losses, claims, damages,
expenses and liabilities (or actions in respect thereof)
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<PAGE>
whatsoever by reason of or arising from (i) any breach of the Company's
representations and warranties in this Agreement, (ii) any failure by
the Company to comply with any of its covenants in this Agreement and
(iii) for any action or omission of the Company occurring after the
Closing Date with respect to contracts with customers of the
Assignor. The Company will reimburse any Indemnified Person for all
expenses (including reasonable attorneys' fees) as they are incurred
by any such Indemnified Person in connection with investigating,
preparing or defending any such action or claim, whether or not in
connection with pending or threatened litigation in which any
Indemnified Person is a party.
13. Miscellaneous.
(a) Notices Any notices or other communications required
or permitted to be given or delivered under this Agreement shall be
in writing and shall be sufficiently given to a party if delivered
personally or mailed by registered or certified mail, postage
prepaid, return receipt requested, or by overnight delivery by a
nationally-recognized courier or by telecopier, as follows (or to
such other address or person as either party may from time to time
designate to the other in writing):
To Assignor or the Principals:
c/o Eugene Guhne
The Ultimate Software Group of Virginia, Inc.
6106 Lindley Woods Drive
Greensboro, NC 27410
Telecopier: (919) 571-1783
To the Company:
The Ultimate Software Group, Inc.
3111 Stirling Road, Suite 308
Ft. Lauderdale, FL 33312
Attention: Scott Scherr
Telecopier: (954) 266-1301
Any such notice or other communication shall be deemed to be given as
of the date it is personally delivered, five (5) days after being
deposited in the United States mail, one (1) day after being deposited
with a nationally recognized courier for overnight delivery or the
date it is transmitted via telecopier, answerback received (followed
promptly by delivery of such notice in accordance with one of the
other methods above).
(b) Binding Effect; Assignability. This Agreement
shall be binding upon and inure to the benefit of all of the parties
and their successors, legal representatives and assigns. Neither party
hereto may transfer its rights
14
<PAGE>
hereunder without the prior written consent of the other party, which
consent may be given or withheld for any reason or no reason.
(c) Severability. If any provision hereof is held to
be illegal or unenforceable, such provision shall be fully severable,
and the remaining provisions of this Agreement shall remain in full
force and effect and shall not be affected by such provision's
severance. Furthermore, in lieu of any such provision, there shall be
added automatically as part of this Agreement a legal and enforceable
provision as similar in terms to the severed provision as may be
possible.
(d) Counterparts. This Agreement may be executed in
any number of counterparts with the same effect as if all parties
hereto had signed the same document. All counterparts shall be
construed together and shall constitute one instrument.
(e) Integration. This Agreement constitutes the
entire agreement among the parties hereto pertaining to the subject
matter hereof and supersedes all prior agreements and understandings
pertaining thereto.
(f) Governing Law. This Agreement and the rights of
the parties hereunder shall be interpreted in accordance with the laws
of the State of Delaware, and all rights and remedies shall be
governed by such laws without regard to principles of conflict of
laws.
(g) State Securities Laws. The offer and sale of the
Shares is intended to be exempt from registration under the securities
laws of certain states. Assignor must note that there are restrictions
on transfer of the Shares, as agreed upon in Section 5 of this
Agreement.
(h) Bulk Sales Waiver. Subject to Section 12(a)
hereof, the parties hereto waive compliance with the Bulk Sales Act or
similar acts or provisions of any jurisdiction which may apply to the
transaction contemplated by this Agreement (collectively, the "Bulk
Sales Act").
(g) Survival. The representations, warranties
and indemnities of the parties set forth in this Agreement shall
survive for a period of one year from the Closing Date.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING
THE MERITS AND RISKS INVOLVED. THE SECURITIES OFFERED HEREBY HAVE NOT
BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR
REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
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<PAGE>
AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE
ADEQUACY OF THIS AGREEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT
AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE
APPLICABLE STATE SECURITIES LAWS PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR
THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF
TIME.
16
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Agreement
to be executed as of the day and year first above written.
THE ULTIMATE SOFTWARE GROUP, INC.
By:/s/ Scott Scherr
---------------------------
Name: Scott Scherr
Title: President
THE ULTIMATE SOFTWARE GROUP
OF VIRGINIA, INC.
By:/s/ Eugene Guhne
--------------------------
Name: Eugene Guhne
Title: President
PRINCIPALS:
/s/ David Auler
-----------------------------
David Auler
/s/ Eugene Guhne
-----------------------------
Eugene Guhne
<PAGE>
EXHIBIT A
INVESTOR CERTIFICATION
_______________________________________ hereby certifies that he or she EITHER:
(Check Box that Applies)
|_| 1. meets one or more of the following criteria:
(A) He or she is a person having individual
net worth, or joint net worth with his
or her spouse, exceeding $1,000,000; or
(B) He or she is a person having an income in
excess of $200,000 in each of the two (2)
most recent years or a joint income with
his or her spouse in excess of $300,000 in
each of those years and having a reasonable
expectation of reaching the same income
level in the current year.
|_| 2. does not meet either of the criterion described in
1(A) or (B) above and acknowledges that he or she
has appointed Eugene Guhne as his or her purchaser
representative.
---------------------------------
<PAGE>
[Schedules intentionally omitted.]
<PAGE>
Exhibit 10.3
ASSET PURCHASE AGREEMENT
Asset Purchase Agreement (this "Agreement") by and among The
Ultimate Software Group of the Carolinas, Inc., a North Carolina corporation
("Assignor"), The Ultimate Software Group, Inc., a Delaware corporation (the
"Company"), and the principals whose names appear on the signature page hereto
(the "Principals") dated as of February 2, 1998.
WHEREAS, Assignor entered into the Exclusive Reseller
Agreement (the "Reseller Agreement") dated February 27, 1992 with The Ultimate
Software Group, Ltd. (the "Partnership"), the assets and liabilities of which
were subsequently assigned to and assumed by the Company;
WHEREAS, Assignor desires to assign and transfer to the
Company, and the Company desires to assume from Assignor, certain business
assets and liabilities of Assignor pursuant to the terms hereof;
WHEREAS, the transactions contemplated hereby are intended to
be treated as a pooling of interests business combination by the Company for
financial accounting purposes and as a tax free reorganization for United
States federal income tax purposes; and
WHEREAS, this Agreement is intended by Assignor to constitute
a "plan of reorganization" as described in Section 361(a) of the Internal
Revenue Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Assignment. Subject to the terms hereof, Assignor, upon
the Closing Date (as defined below), shall sell, assign, convey, transfer and
deliver to the Company all right, title, benefits and interest in the assets
described on Schedule I hereto (the "Assets") and deliver bills of sale and
assignment documents in form and substance satisfactory to the Company with
respect to such Assets in exchange for (i) the assumption by the Company of
Assignor's obligations, duties and liabilities described on Schedule II hereto
(the "Assumed Liabilities") and (ii) 21,307 shares (the "Shares") of Class B
Common Stock of the Company, subject to adjustment for any stock splits or
stock combinations affecting the Class B Common Stock prior to the Closing
Date.
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<PAGE>
2. Reseller Agreement. Each of the parties hereto
agrees that because the Reseller Agreement is among the Assets being sold to
the Company hereunder, any rights of Assignor and its affiliates arising
thereunder shall terminate on the Closing Date.
3. Representations and Warranties of the Company.
The Company hereby represents and warrants to and agrees with Assignor as
follows:
(a) Organization, Good Standing and Qualification. The
Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite
power and authority to carry on its business as now conducted and as
proposed to be conducted, and the Company has all requisite power and
authority to enter into and perform this Agreement and the
transactions contemplated hereby.
(b) Authorization. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement, the
performance of all obligations of the Company hereunder and the
authorization, issuance (or reservation for issuance) and delivery of
the Shares and any interest therein has been taken or will be taken
prior to the Closing Date.
(c) Valid Issuance of Shares. The Shares, when issued and
delivered in accordance with the terms hereof, (i) will be duly and
validly issued, fully paid and nonassessable, (ii) will be free of any
pledges, liens, security interests, claims or other encumbrances of
any kind, and (iii) will be issued in compliance with all applicable
federal and state securities laws.
(d) Prospectus. The Company shall provide Assignor with the
preliminary and final prospectuses with respect to its proposed
initial public offering of common stock and any amendments thereto,
promptly after the Company's Registration Statement and amendments
thereto containing such prospectuses are filed with the Securities and
Exchange Commission (the "SEC").
(e) Financial Statements. The Company has delivered to
Assignor and Assignor may rely upon copies of (i) the audited
financial statements of the Company for the fiscal years ended
December 31, 1995 and December 31, 1996, respectively, (ii) unaudited
financial statements of the Company for the fiscal year ended December
31, 1997 and (iii) Management's Discussion and Analysis of Financial
Condition and Results of Operation, in each case, certified by an
officer of the Company as being true and complete copies of such
financial statements.
(f) No Conflicts. The execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of
the transactions contemplated hereby do not contravene (i) the
Company's
2
<PAGE>
organizational documents, (ii) any law or (iii) any contractual
restriction binding on or affecting the Company.
(g) Litigation. There is no pending or threatened action or
proceeding affecting the Company before any court, governmental agency
or arbitrator, which may materially adversely affect the business,
financial condition or results of operations of the Company or which
could affect the legality, validity or enforceability of this
Agreement.
(h) No Material Adverse Change. Since December 31, 1997,
there has not been any change in the business financial condition or
results of operations of the Company from that reflected in the
unaudited financial statements of the Company for the fiscal year
ended December 31, 1997, except changes in the ordinary course of
business which have not been materially adverse.
(i) Reseller Agreement. Assignor has not materially
breached any of its obligations under the Reseller Agreement as of
the date hereof.
(j) Registration Rights. None of the officers or directors,
individually, of the Company, other than Scott Scherr and Alan
Goldstein, has registration rights with respect to the capital stock
of the Company.
(k) Percentage Interest. As of the Closing Date, the Shares
will represent at least 1.49% of the outstanding capital stock of the
Company on a fully diluted basis determined as if all outstanding
shares of such capital stock had been converted into one class of
common stock of the Company. For purposes of this Section 3(k), the
Company has assumed that it will issue, to certain other resellers of
the Company's products, a number of shares of the Company's Class B
Common Stock in connection with the acquisition of such resellers'
businesses, at or about the time of the Closing Date. To the extent
that the Company does not issue such shares in connection with such
acquisitions, the Shares sold to the Assignor hereunder will
represent, pro rata, a greater percentage of the outstanding capital
stock of the Company.
4. Representations and Warranties of Assignor and the
Principals. Assignor and the Principals hereby jointly and severally represent
and warrant to and agree with the Company as follows:
(a) Assets. Assignor is the legal and beneficial
owner of the Assets, free and clear of any lien, charge, encumbrance
or adverse claim, except as set forth on Schedule II hereto, and has
the legal authority to transfer the Assets. There are no assets used
in, or necessary for the operation of, the business of Assignor as
presently operated (the "Business") other than the Assets. The Assets
are substantially all of the assets of Assignor.
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<PAGE>
(b) Liabilities; Litigation. Assignor has no
liabilities known or unknown, fixed or contingent, including
contractual liabilities, other than the Assumed Liabilities. There is
no pending or threatened action or proceeding affecting the Assets or
the Business before any court, governmental agency or arbitrator,
which may materially adversely affect the Assets or the Business or
which could affect the legality, validity or enforceability of this
Agreement.
(c) Consents; No Conflicts. The execution, delivery
and performance of this Agreement by Assignor and the Principals and
the consummation by Assignor and the Principals of the transactions
contemplated hereby (x) do not contravene (i) Assignor's
organizational documents, (ii) any law or (iii) any contractual
restriction binding on or affecting Assignor or the Principals and (y)
do not require the consent, approval, permission or other
authorization of any court, arbitrator or governmental, administrative
or self-regulatory authority or consent under any material lease,
license, agreement or other material instrument of Assignor, the
Principals or the Business and (z) do not require any stockholder,
director, partnership or other authorization or action, other than
authorizations that have been duly obtained and actions that have been
duly taken.
(d) Financial Statements. Assignor has delivered to
the Company all of its quarterly financial statements for the years
ended December 31, 1996 and December 31, 1997 and, it will, on or
before February 6, 1998, deliver to the Company its financial
statements for the fiscal years ended December 31, 1995, December 31,
1996 and December 31, 1997, audited by Arthur Andersen LLP
("Andersen") (the "Audited Statements"), and such financial statements
do and will fairly present the financial position and results of
operations of Assignor as of the dates and for the periods indicated
therein. Such financial statements were and will be prepared in
accordance with generally accepted accounting principles, consistently
applied.
(e) No Brokers. No broker, finder or any other third
party is entitled to any fee or commission in connection with the
transactions contemplated hereby.
(f) Investor Certificates. Assignor has delivered on
the date hereof a certificate of each shareholder of Assignor in the
form attached hereto as Exhibit A.
(g) Investment Intent. Assignor (i) has such
knowledge, sophistication and experience in business and financial
matters that it is capable of evaluating the merits and risks of an
investment in the Shares and any interest therein, (ii) can bear the
economic risk of an investment in the Shares and any interest therein
for an indefinite period of time and can afford a complete loss of
such investment, and (iii) is acquiring the Shares and any interest
therein for its
4
<PAGE>
own account and not with a view to, or for a sale in connection
with, a distribution in violation of any applicable securities laws
of any jurisdiction.
(h) No Registration. Assignor understands that the
offering and the issuance of the Shares have not been and will not be
registered or qualified under the laws of any jurisdiction regarding
the offering or sale of securities, and that the Shares and any
interest therein may not be resold or otherwise transferred by
Assignor unless any such subsequent sale or transfer is duly
registered and qualified under the applicable securities laws or is
exempt from such registration and qualification.
(i) Access to Information. Assignor (i) has been
furnished with, and hereby acknowledges the receipt and review of, (a)
the audited financial statements of the Company for the fiscal years
ended December 31, 1995 and December 31, 1996, respectively, and (b)
unaudited financial statements of the Company for the fiscal year
ended December 31, 1997, (ii) has been afforded the opportunity to
obtain such additional information from the Company and its
representatives as Assignor has deemed necessary in order to evaluate
the merits, risks and other considerations relating to an acquisition
of Shares and any interest therein, (iii) fully understands the risks
and other considerations relating to the investment contemplated
hereby, and (iv) with respect to tax and employee benefits, has relied
on the advice of Assignor's own professional advisors.
(j) Draft Prospectus. Assignor understands that (i)
the draft of the Preliminary Prospectus of the Company dated December
31, 1997 and any attachments thereto (the "Draft Prospectus") received
by Assignor is a preliminary draft and that future drafts may contain
material changes from the Draft Prospectus and (ii) there can be no
assurance that an initial public offering of the Company's stock will
be consummated in the near future or ever or that the Registration
Statement filed in connection therewith will be declared effective by
the SEC.
(k) Assignor Information. All information which
Assignor has heretofore furnished or furnishes herewith to the Company
in connection with the transactions contemplated hereby is correct and
complete in all respects as of the date of this Agreement, and if
there should be any change in such information prior to the
consummation of the transactions contemplated hereby, Assignor will
immediately furnish such revised or corrected information to the
Company.
(l) Schedule of Contracts. Attached hereto as
Schedule III is a true and complete list of all oral and written
contracts and agreements entered into by Assignor through the date
hereof. Complete copies of all such written contracts and complete
descriptions of all such oral contracts have been delivered to the
Company.
5
<PAGE>
(m) Certain Accounting Matters. Assignor has not
taken or agreed to take any action that would prevent the Company
from accounting for the transactions contemplated hereby as a
pooling of interest business combination.
(n) Shareholder Agreements. Assignor acknowledges
that it is the parties' intention that the transactions contemplated
by this Agreement be accounted for as a pooling of interests business
combination and that each of the shareholders of Assignor may be
deemed to be an "affiliate" of Assignor within the meaning of Rule 145
promulgated under the Securities Act. Accordingly, Assignor has
delivered on the date hereof an agreement of each shareholder of
Assignor wherein such shareholder covenants and agrees that he, she or
it will not (i) take any action after the date hereof to cause the
transactions contemplated hereby not to be accountable under the
pooling of interests method of accounting, or (ii) sell, transfer,
pledge, dispose of or otherwise part with any interest in or with
respect to, or in any other manner reduce his, her or its investment
risk with respect to, (A) any shares of capital stock of Assignor at
any time prior to the Closing Date, and (B) any shares of the
Company's stock received by such shareholder in connection with the
transactions contemplated hereby or otherwise until such time as the
Company publishes financial results covering at least 30 days of
combined operations of the Company and Assignor or (iii) from the
Closing Date until the time the Company publishes financial results
covering at least thirty days of combined operations of the Company
and Assignor, directly or indirectly sell or purchase or enter into
any agreement, contract or arrangement to sell or purchase any put or
call options or other derivative securities (including any short
sales) with respect to shares of the Company's stock or enter into any
other agreements, contracts or arrangements providing for the
alteration of such shareholder's investment risk with respect to any
shares of the Company's stock.
(o) Reseller Agreement. The Company has not
materially breached any of its obligations under the Reseller
Agreement as of the date hereof.
(p) No Material Adverse Change. Since December 31,
1997, there has not been any change in the business financial
condition or results of operations of Assignor from that reflected in
the financial statements of Assignor for the fiscal year ended
December 31, 1997, except changes in the ordinary course of business
which have not been materially adverse.
(q) Purchaser Representative. David Auler has agreed
to act as the purchaser representative of any Shareholders who are not
"accredited investors" as defined in Rule 501(a) of Regulation D
promulgated under the Securities Act of 1933, as amended.
6
<PAGE>
5. Securities Laws. Assignor hereby acknowledges and
agrees that:
(a) the Shares must be held indefinitely unless
subsequently registered under the Securities Act and under any
applicable state securities laws or unless an exemption from such
registration is available.
(b) the Shares will not be registered under the
Securities Act on the grounds that the offering and sale thereof
contemplated by this Agreement will be exempt from registration under
the Securities Act, and that the Company's reliance upon such
exemption is based in part upon the representations of Assignor set
forth herein.
(c) "stop transfer" instructions shall be placed
against the Shares on the transfer books of the Company and that the
certificate(s) evidencing the Shares shall bear a legend, in addition
to any legend required by applicable state securities laws, in
substantially the following form:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD OR
OTHERWISE DISPOSED OF FOR VALUE UNLESS A REGISTRATION
STATEMENT HAS BECOME EFFECTIVE WITH RESPECT TO SUCH
SECURITIES UNDER THE SECURITIES ACT AND SUCH STATE SECURITIES
LAWS OR IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO
THE CORPORATION THERE IS AN APPLICABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND THE
APPLICABLE STATE SECURITIES LAWS OR SUCH REGISTRATION IS NOT
OTHERWISE REQUIRED."
6. Due Diligence; Termination. (a) Assignor shall afford any
and all authorized representatives of the Company access, during normal
business hours, to its employees, properties, books, contracts and records and
shall furnish promptly all information concerning its business, properties and
personnel and copies of any of its books, records or contracts as the Company
or its representatives shall request; provided, that no investigation pursuant
to this Section 6 shall effect or be deemed to modify any representation or
warranty made in this Agreement by Assignor.
7
<PAGE>
(b) Until the date which is ten days after Assignor
delivers to the Company the Audited Statements pursuant to Section 4(d) hereof,
the Company shall have the right to terminate this Agreement if the Company
shall determine in its sole discretion, based on its investigation of Assignor
pursuant to Section 6(a) or a review of such Audited Statements, that
consummating the transactions contemplated hereby would not be in the best
interests of the Company.
(c) The Company shall have the right to terminate
this Agreement if the Company does not receive requisite approval of the
transactions contemplated hereunder from its Board of Directors and/or
stockholders on or before February 15, 1998.
7. Closing. Subject to Section 6(b) hereof and the
satisfaction or waiver of the conditions set forth in Section 9 hereof,
consummation of the transactions contemplated by Section 1 hereof (the
"Closing") shall take place at the offices of Dewey Ballantine LLP, 1301 Avenue
of the Americas, New York, New York 10019 on a date (the "Closing Date") which
is the earlier of (a) March 31, 1998 and (b) the date specified in a written
notice given by the Company no less than five (5) days prior to such date.
8. Covenants.
(a) Interim Operations. Prior to the Closing Date,
unless the Company has consented in writing thereto, Assignor:
(i) shall conduct its operations according to its usual,
regular and ordinary course in substantially the same
manner as heretofore conducted;
(ii) shall use its reasonable efforts to preserve intact
its business organization and goodwill and maintain
satisfactory relationships with those persons having
business relationships with it;
(iii) shall promptly notify the Company of (x) any
material change in its condition (financial or
otherwise), business, properties, assets,
liabilities or the normal course of its business or
of its properties, (y) any material litigation or
material governmental complaints, investigations or
hearings (or communications indicating that the same
may be contemplated), or (z) the breach of any
representation or warranty contained herein;
(iv) shall not issue any shares of its capital stock
or securities;
(v) shall not (w) incur, create, assume or otherwise
become liable for borrowed money or assume,
guarantee, endorse or otherwise become responsible or
liable for the obligations of any other
8
<PAGE>
individual, corporation or other entity, (x) make
any loans or advances to any other person, except in
each case in the ordinary course of business, (y)
acquire (including, without limitation, for cash or
shares of stock, by merger, consolidation, or
acquisition of stock or assets) any interest in any
corporation, partnership or other business
organization or division thereof or any assets, or
make any investment either by purchase of stock or
securities, contributions of capital or property
transfer or, except in the ordinary course of
business, consistent with past practice, purchase any
property or assets of any other person or (z) effect
a sale or other disposition of any of the Assets or
allow the creation of any lien or encumbrance
thereon;
(vi) shall not (x) declare, set aside or pay any dividend
or make any other distribution or payment with
respect to any shares of its capital stock or other
ownership interests or (y) directly or indirectly
redeem, purchase or otherwise acquire any shares of
its capital stock or make any commitment for any
such action;
(vii) shall not amend or otherwise change its articles of
incorporation or bylaws or equivalent organizational
documents
(viii) shall not increase the compensation payable or to
become payable to its officers or employees, pay any
employment related or other bonus to its
shareholder, or, except as presently bound to do,
grant any severance or termination pay to, or enter
into any employment or severance agreement with, any
of its directors, officers or other employees;
(ix) shall not take any action other than in the ordinary
course of business and in a manner consistent with
past practice with respect to accounting policies or
procedures; and
(x) shall not agree, in writing or otherwise, to take
any of the foregoing actions or take any action
which would make any representation or warranty in
this Agreement untrue or incorrect as of the Closing
Date.
(b) Trading in Company Stock. Except as otherwise
expressly consented to by the Company, from the date of this Agreement
until the Closing Date, Assignor will not directly or indirectly
purchase or sell (including short sales) any shares of the Company's
stock, or sell, transfer, pledge, dispose of or otherwise part with
any interest in or with respect to or in any other manner reduce its
investment risk with respect to any shares of the Company's stock to
be received pursuant to this Agreement.
9
<PAGE>
(c) Confidentiality of Prospectus. Assignor
acknowledges and agrees that the Draft Prospectus is highly
confidential, that it may not be photocopied, distributed or otherwise
communicated to persons other than Assignor or its representatives
retained for purposes of this transaction and that upon receipt by
Assignor of a preliminary or final prospectus of the Company, the
Draft Prospectus will be returned to the Company.
(d) Custom Applications. Assignor shall provide on
the date hereof a Schedule IV which lists, by customer, all custom
applications, including, without limitation, custom programs, modules
and interfaces (other than software purchased by Assignor from the
Company) ("Custom Applications"), which have been provided to any
customer of the Assignor. Assignor shall provide source code with
respect to all Custom Applications on or before the Closing Date.
(e) Assignor's Name. From and after the Closing,
Assignor shall not use the name "The Ultimate Software Group" or any
expression containing the word "Ultimate" or "US Group" or expression
similar thereto or derivative in whole or in part therefrom. As
promptly as practicable (and in any event within thirty days)
following the Closing, Assignor will change its name to a name
complying with the immediately preceding sentence, and shall deliver
to the Company written evidence of such name change.
(f) Cooperation; Tax Schedule. Following the Closing
Date, Assignor shall promptly furnish the Company with such financial
and reporting data and other information with respect to the Assets
and Assumed Liabilities as the Company may from time to time
reasonably request, for any reasonable business purpose, including,
without limitation, the preparation of tax returns and financial
statements. Within sixty (60) days following the Closing Date,
Assignor shall prepare and deliver to the Company a schedule
indicating the federal income tax basis and state income tax basis, if
different, of each of the Assets and Assumed Liabilities.
(g) Options. The Company hereby agrees that from the
date hereof until April 30, 1998, the Company will not issue any
options to purchase shares of capital stock of the Company to any
persons who are officers of the Company as of the date hereof.
(h) Combined Operations. The Company shall publish
financial results covering at least thirty days of combined
operations of the Company and Assignor within one year from the
Closing Date.
(i) Registration Rights Agreement. (i) The Company
agrees that if at any time between the Closing Date and the
first anniversary of the Closing Date, the Company proposes
to register any shares of capital
10
<PAGE>
stock of the Company owned by Scott Scherr and/or Alan
Goldstein, other than on a Registration Statement on Form
S-8, shareholders of Assignor shall have the right to
register in such registration, on the same terms as have
been given to Messrs. Scherr and/or Goldstein, under the
Amended and Restated Shareholders Rights Agreement, dated
as of June 6, 1997, by and among the Company, J.P. Morgan
Investment Corporation, Sixty Wall Street SBIC Fund, L.P.,
Hancock Venture Partners V-Direct Fund L.P., The Ultimate
Software Group, Ltd., Scott Scherr and Alan Goldstein, a
number of Shares equal to the total number of Shares held
by each such shareholder of Assignor multiplied by a
fraction, the numerator of which is the total number of
shares of Messrs. Scherr and/or Goldstein, as applicable,
proposed to be registered and the denominator of which is
the total number of shares of the Company's capital stock
owned by Messrs. Scherr and/or Goldstein, as applicable, at
the time of registration.
(ii) The Company shall bear and pay all
expenses incurred in connection with any registration, filing
or qualification of Shares with respect to a registration
pursuant to Section 8(i)(i), including without limitation all
registration, filing, and qualification fees, printers' and
accounting fees relating or apportionable thereto and the
fees and disbursements of one counsel for all holders of the
Company's securities being registered in such registration
(selected by the holders of a majority of such securities
being registered), but excluding underwriting discounts and
commissions relating to the Shares being registered.
9. Conditions to Closing. (a) The obligations of the
Company under this Agreement are subject to the fulfillment or waiver
on or before the Closing Date of the following conditions:
(i) Representations and Warranties. The representations
and warranties of Assignor contained in Section 4
shall be true on and as of the Closing Date with the
same effect as though such representations and
warranties had been made on and as of the Closing
Date.
(ii) Performance. Assignor shall have performed and
complied with all agreements, obligations and
conditions contained in this Agreement.
(iii) No Material Adverse Change. There shall have been no
material adverse change in the condition of Assignor
or the Assets since the date hereof.
(iv) Pooling Letter. The Company shall have received from
Andersen, a letter dated the Closing Date,
confirming that the transactions
11
<PAGE>
contemplated hereby, if consummated, can properly be
accounted for as a pooling of interests combination
in accordance with GAAP and the criteria of
Accounting Principles Board Opinion No. 16 and the
regulations of the SEC.
(v) Approvals. The Company shall have obtained all
requisite approvals of its Board of Directors and
stockholders for the transactions contemplated by
this Agreement.
(vi) Balance Sheet. Assignor shall have delivered to the
Company a balance sheet of the Assignor, dated as of
the Closing Date, prepared in accordance with
generally accepted accounting principles,
consistently applied, and which shall be subject to
review or audit by Andersen at the sole discretion of
the Company. Such balance sheet shall demonstrate
that the assets of Assignor, other than the Reseller
Agreement and other intangible assets, have an
aggregate value greater than the aggregate value of
the liabilities of Assignor.
(vii) Updated Schedules. Assignor shall have prepared and
delivered to the Company updated Schedules I, II,
III and IV which reflect, as of the Closing Date,
the information required to be stated therein.
(viii) Assignor shall have delivered to the Company a
Certificate of the President of Assignor that the
representations and warranties of Assignor contained
in this Agreement are true on and as of the Closing
Date and that Assignor has satisfied and performed
all of its respective obligations hereunder.
(ix) Other Documents. The Company shall have received such
other documents as it shall reasonably request prior
to the Closing.
(b) The obligations of Assignor under this Agreement
are subject to the fulfillment or waiver on or before the Closing Date
of each of the following conditions:
(i) Representations and Warranties. The representations
and warranties of the Company contained in Section 3
shall be true on and as of the Closing Date with the
same effect as though such representations and
warranties had been made on and as of the date
thereof.
(ii) Delivery of Shares. The Company shall have delivered
the Shares specified in Section 1.
12
<PAGE>
(iii) The Company shall have delivered to Assignor a
certificate of the President or any Vice President
of the Company that the representations and
warranties of the Company contained in this
Agreement are true on and as of the Closing Date and
that the Company has satisfied and performed all of
its respective obligations hereunder.
10. Certain Tax Matters. The parties to this Agreement intend
that the transactions contemplated hereby (and the distribution of the Shares
of the Company to Assignor's shareholders) (collectively, the "Transaction")
will constitute a reorganization described in Section 368(a)(1)(C) of the Code
and each party agrees that it will not take any action which would result in
the Transaction not so qualifying. However, each of the parties to this
Agreement acknowledges that it is relying solely upon its respective advisors
in determining the tax consequences of the Transaction and will not rely on any
representation or assurance of the other party other than the representations
and covenants set forth in this Agreement or any other agreement or certificate
delivered in connection herewith. None of the Company, the Assignor or the
shareholders of the Assignor will take any tax reporting position or make any
tax election inconsistent with the characterization of the Transaction
qualifying as a reorganization described in Section 368(a)(1)(C) of the Code,
except as may be required upon examination by the Internal Revenue Service or
any other tax authority.
11. Waiver. Subject to the consummation of the transactions
contemplated hereby, each of the parties hereto hereby releases and discharges
the other party, its partners, employees, parents, subsidiaries, affiliates,
successors and assigns from all actions, causes of action, suits, debts,
agreements, judgments, claims, and demands whatsoever, in law or equity which
such party ever had, now have or hereafter can, shall or may have, for, upon or
by reason of any claim relating to the Reseller Agreement and the relationship
of the parties thereunder.
12. Indemnification. (a) Assignor and the Principals hereby
jointly and severally agree to indemnify and hold harmless the Company
and any fiduciary, officer, director, employee, agent or controlling
person of the Company (each, an "Indemnified Person") against any and
all losses, claims, damages, expenses and liabilities (or actions in
respect thereof) whatsoever by reason of or arising from (i) any
breach of the representations and warranties of this Agreement, (ii)
any failure by the Assignor to comply with any covenant in this
Agreement, (iii) any liabilities whether known or unknown, fixed or
contingent (including contractual liabilities) of Assignor or any of
its affiliates, other than the Assumed Liabilities and (iv) any
failure of Assignor to comply with the Bulk Sales Act (as defined
below); provided, however that (A) the aggregate liability of Mr.
David Auler, as Principal, under this Agreement shall not exceed $
1,552,500 and (B) the aggregate liability of Mr. Eugene Guhne, as
Principal, under this Agreement shall not exceed $1,012,500. Assignor
and the Principals will reimburse any
13
<PAGE>
Indemnified Person for all expenses (including reasonable attorneys'
fees) as they are incurred by any such Indemnified Person in connection
with investigating, preparing or defending any such action or claim,
whether or not in connection with pending or threatened litigation in
which any Indemnified Person is a party.
(b) The Company hereby agrees to indemnify and hold harmless
Assignor and the Principals and any fiduciary, officer, director,
employee, agent or controlling person of Assignor (each, an
"Indemnified Person") against any and all losses, claims, damages,
expenses and liabilities (or actions in respect thereof) whatsoever by
reason of or arising from (i) any breach of the Company's
representations and warranties in this Agreement, (ii) any failure by
the Company to comply with any of its covenants in this Agreement and
(iii) for any action or omission of the Company occurring after the
Closing Date with respect to contracts with customers of the Assignor.
The Company will reimburse any Indemnified Person for all expenses
(including reasonable attorneys' fees) as they are incurred by any
such Indemnified Person in connection with investigating, preparing or
defending any such action or claim, whether or not in connection with
pending or threatened litigation in which any Indemnified Person is a
party.
13. Miscellaneous. (a) Notices Any notices or other
communications required or permitted to be given or delivered under
this Agreement shall be in writing and shall be sufficiently given to
a party if delivered personally or mailed by registered or certified
mail, postage prepaid, return receipt requested, or by overnight
delivery by a nationally-recognized courier or by telecopier, as
follows (or to such other address or person as either party may from
time to time designate to the other in writing):
To Assignor or the Principals:
c/o David Auler
The Ultimate Software Group of the
Carolinas, Inc.
4601 Six Forks Road, Suite 500
Raleigh, NC 27609
Telecopier: (919) 846-2508
To the Company:
The Ultimate Software Group, Inc.
3111 Stirling Road, Suite 308
Ft. Lauderdale, FL 33312
Attention: Scott Scherr
Telecopier: (954) 266-1301
14
<PAGE>
Any such notice or other communication shall be deemed to be given as
of the date it is personally delivered, five (5) days after being
deposited in the United States mail, one (1) day after being deposited
with a nationally recognized courier for overnight delivery or the
date it is transmitted via telecopier, answerback received (followed
promptly by delivery of such notice in accordance with one of the
other methods above).
(b) Binding Effect; Assignability. This Agreement
shall be binding upon and inure to the benefit of all of the parties
and their successors, legal representatives and assigns. Neither party
hereto may transfer its rights hereunder without the prior written
consent of the other party, which consent may be given or withheld for
any reason or no reason.
(c) Severability. If any provision hereof is held to
be illegal or unenforceable, such provision shall be fully severable,
and the remaining provisions of this Agreement shall remain in full
force and effect and shall not be affected by such provision's
severance. Furthermore, in lieu of any such provision, there shall be
added automatically as part of this Agreement a legal and enforceable
provision as similar in terms to the severed provision as may be
possible.
(d) Counterparts. This Agreement may be executed in
any number of counterparts with the same effect as if all parties
hereto had signed the same document. All counterparts shall be
construed together and shall constitute one instrument.
(e) Integration. This Agreement constitutes the
entire agreement among the parties hereto pertaining to the subject
matter hereof and supersedes all prior agreements and understandings
pertaining thereto.
(f) Governing Law. This Agreement and the rights of
the parties hereunder shall be interpreted in accordance with the laws
of the State of Delaware, and all rights and remedies shall be
governed by such laws without regard to principles of conflict of
laws.
(g) State Securities Laws. The offer and sale of the
Shares is intended to be exempt from registration under the securities
laws of certain states. Assignor must note that there are restrictions
on transfer of the Shares, as agreed upon in Section 5 of this
Agreement.
(h) Bulk Sales Waiver. Subject to Section 12(a)
hereof, the parties hereto waive compliance with the Bulk Sales Act or
similar acts or provisions of any jurisdiction which may apply to the
transaction contemplated by this Agreement (collectively, the "Bulk
Sales Act").
15
<PAGE>
(g) Survival. The representations, warranties and
indemnities of the parties set forth in this Agreement shall survive
for a period of one year from the Closing Date.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING
THE MERITS AND RISKS INVOLVED. THE SECURITIES OFFERED HEREBY HAVE NOT
BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR
REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT
CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS AGREEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT
AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE
APPLICABLE STATE SECURITIES LAWS PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR
THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF
TIME.
16
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Agreement
to be executed as of the day and year first above written.
THE ULTIMATE SOFTWARE GROUP, INC.
By: /s/ Scott Scherr
------------------------------------
Name: Scott Scherr
Title: President
THE ULTIMATE SOFTWARE GROUP
OF THE CAROLINAS, INC.
By: /s/ David Auler
------------------------------------
Name: David Auler
Title: President
PRINCIPALS:
/s/ David Auler
---------------------------------------
David Auler
/s/ Eugene Guhne
---------------------------------------
Eugene Guhne
<PAGE>
EXHIBIT A
INVESTOR CERTIFICATION
_______________________________________ hereby certifies that he or she EITHER:
(Check Box that Applies)
[ ] 1. meets one or more of the following criteria:
(A) He or she is a person having individual net
worth, or joint net worth with his or her
spouse, exceeding $1,000,000; or
(B) He or she is a person having an income in
excess of $200,000 in each of the two (2)
most recent years or a joint income with
his or her spouse in excess of $300,000 in
each of those years and having a reasonable
expectation of reaching the same income
level in the current year.
[ ] 2. does not meet either of the criterion described in
1(A) or (B) above and acknowledges that it has
appointed David Auler as its purchaser
representative.
---------------------------------
<PAGE>
[Exhibit B intentionally omitted]
[Schedules intentionally omitted.]
<PAGE>
Exhibit 10.4
ASSET ACQUISITION AGREEMENT
Asset Acquisition Agreement (this "Agreement") by and among
The Ultimate Software Group of Northern California, Inc., an Illinois
corporation ("Assignor"), The Ultimate Software Group, Inc., a Delaware
corporation (the "Company"), and Liron Petrushka ("Petrushka") dated as of
February 20, 1998.
WHEREAS, the predecessor of Assignor entered into the
Exclusive Reseller Agreement (the "Reseller Agreement") dated February 7, 1995
with The Ultimate Software Group, Ltd. (the "Partnership"), the assets and
liabilities of which were subsequently assigned to and assumed by the Company;
WHEREAS, Assignor desires to assign and transfer to the
Company, and the Company desires to assume from Assignor, certain business
assets and liabilities of Assignor pursuant to the terms hereof;
WHEREAS, the transactions contemplated hereby are intended to
be treated as a pooling of interests business combination by the Company for
financial accounting purposes and as a tax free reorganization for United
States federal income tax purposes;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Assignment. Subject to the terms hereof, Assignor, upon
the Closing Date (as defined below), shall assign, convey, transfer and deliver
to the Company all right, title, benefits and interest in the assets described
on Schedule I hereto except that in the case of Custom Applications (as defined
below) Assignor shall transfer only its interest therein including the source
code (the "Assets") and deliver assignment documents in form and substance
reasonably satisfactory to the Company with respect to such Assets in exchange
for (i) the assumption by the Company of Assignor's obligations, duties and
liabilities described on Schedule II hereto (the "Assumed Liabilities") and
(ii) 12,914 shares (the "Shares") of Class B Common Stock of the Company.
2. Reseller Agreement. Each of the parties hereto agrees that
because the Reseller Agreement is among the Assets being acquired by the
Company hereunder, any rights of Assignor and its affiliates arising thereunder
shall terminate on the Closing Date; provided, however, that the provisions of
this Section 2 shall not constitute a waiver by the Assignor of its rights to
make claims against the Company for indemnification for claims made against it
with respect to the Company's products, other than claims related to Custom
Applications.
<PAGE>
3. Representations and Warranties of the Company. The Company
hereby represents and warrants to and agrees with Assignor as follows:
(a) Organization, Good Standing and Qualification. The
Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite
power and authority to carry on its business as now conducted and as
proposed to be conducted, and the Company has all requisite power and
authority to enter into and perform this Agreement and the
transactions contemplated hereby.
(b) Authorization. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement, the
performance of all obligations of the Company hereunder and the
authorization, issuance (or reservation for issuance) and delivery of
the Shares and any interest therein has been taken or will be taken
prior to the Closing Date.
(c) Valid Issuance of Shares. The Shares, when issued and
delivered in accordance with the terms hereof, (i) will be duly and
validly issued, fully paid and nonassessable, (ii) will be free of any
pledges, liens, security interests, claims or other encumbrances of
any kind, and (iii) will be issued in compliance with all applicable
federal and state securities laws.
(d) Prospectus. The Company shall provide Assignor with the
preliminary and final prospectuses with respect to its proposed
initial public offering of common stock and any amendments thereto,
promptly after the Company's Registration Statement and amendments
thereto containing such prospectuses are filed with the Securities and
Exchange Commission (the "SEC").
(e) Percentage Interest. As of the Closing Date, the Shares
will represent at least 0.904% of the outstanding capital stock of the
Company on a fully diluted basis determined as if all outstanding
shares of such capital stock had been converted into one class of
common stock of the Company and all then existing options were
exercised on that date.
(f) No Brokers. The Company has not engaged any broker,
finder or any third party who is entitled to any fee or commission in
connection with the transactions contemplated hereby.
(g) Charter. Attached hereto as Exhibit B is a true and
complete copy of the Third Amended and Restated Certificate of
Incorporation of the Company, as amended, and such Third Amended and
Restated Certificate of Incorporation, as amended, is in full force
and effect as of the date hereof.
(h) Reseller Agreement. To the Company's knowledge, Assignor
has not materially breached any of its obligations under the Reseller
Agreement as of the date hereof.
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4. Representations and Warranties of Assignor and Petrushka.
Assignor and Petrushka hereby jointly and severally represent and warrant to
and agree with the Company as follows:
(a) Assets. Assignor is the legal and beneficial owner of the
Assets, free and clear of any lien, charge, encumbrance or adverse
claim, except as set forth on Schedule II hereto, and has the legal
authority to transfer the Assets. There are no assets used in, or
necessary for the operation of, the business of Assignor as presently
operated (the "Business") other than the Assets. The Assets are
substantially all of the assets of Assignor.
(b) Liabilities; Litigation. Assignor has no known
liabilities, fixed or contingent, including contractual liabilities,
other than the Assumed Liabilities. There is no pending or, to the
knowledge of Assignor, threatened action or proceeding affecting the
Assets or the Business before any court, governmental agency or
arbitrator, which may materially adversely affect the Assets or the
Business or which could affect the legality, validity or
enforceability of this Agreement.
(c) Consents; No Conflicts. The execution, delivery and
performance of this Agreement by Assignor and Petrushka and the
consummation by Assignor and Petrushka of the transactions
contemplated hereby (x) do not contravene (i) Assignor's
organizational documents, (ii) any law or (iii) any contractual
restriction binding on or affecting Assignor or Petrushka and (y)
except as set forth on Schedule IV, do not require the consent,
approval, permission or other authorization of any court, arbitrator
or governmental, administrative or self-regulatory authority or
consent under any material lease, license, agreement or other material
instrument of Assignor, Petrushka or the Business and (z) do not
require any stockholder, director, partnership or other authorization
or action, other than authorizations that have been duly obtained or
will be obtained prior to the Closing Date and actions that have been
duly taken or will be taken prior to the Closing Date.
(d) Financial Statements. Assignor has delivered to the
Company any and all financial information of Assignor to enable the
Company to prepare annual and quarterly financial statements for
Assignor, for the years ended December 31, 1995, December 31, 1996 and
December 31, 1997 (the "Financial Statements"). The financial
statements have been reviewed by Assignor and fairly present, in all
material respects, the financial position and results of operations as
of the dates and for the periods indicated therein.
(e) No Brokers. Assignor has not engaged any broker, finder
or any other third party who is entitled to any fee or commission in
connection with the transactions contemplated hereby.
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(f) Investor Certificates. Within 10 days after the date
hereof or, if earlier, on the Closing Date, the Assignor shall deliver
a certificate of each shareholder of the Assignor in the form attached
hereto as Exhibit A.
(g) Investment Intent. Assignor (i) has such knowledge,
sophistication and experience in business and financial matters that
it is capable of evaluating the merits and risks of an investment in
the Shares and any interest therein, (ii) can bear the economic risk
of an investment in the Shares and any interest therein for an
indefinite period of time and can afford a complete loss of such
investment, and (iii) is acquiring the Shares and any interest therein
for its own account and not with a view to, or for a sale in
connection with, a distribution in violation of any applicable
securities laws of any jurisdiction.
(h) No Registration. Assignor understands that the offering
and the issuance of the Shares have not been and will not be
registered or qualified under the laws of any jurisdiction regarding
the offering or sale of securities, and that the Shares and any
interest therein may not be resold or otherwise transferred by
Assignor unless any such subsequent sale or transfer is duly
registered and qualified under the applicable securities laws or is
exempt from such registration and qualification.
(i) Access to Information. Assignor (i) has been furnished
with, and hereby acknowledges the receipt and review of, (a) a copy of
a draft (the "Draft Prospectus") of the Preliminary Prospectus of the
Company dated December 31, 1997 and any attachments thereto, (b) the
audited financial statements of the Company for the fiscal years ended
December 31, 1995 and December 31, 1996, respectively, and (c)
unaudited financial statements of the Company as of and for the period
ended September 30, 1997, (ii) has been afforded the opportunity to
obtain such additional information from the Company and its
representatives as Assignor has deemed necessary in order to evaluate
the merits, risks and other considerations relating to an acquisition
of Shares and any interest therein, (iii) fully understands the risks
and other considerations relating to the investment contemplated
hereby, and (iv) with respect to tax, employee benefits and other
financial and economic considerations related to the investment
contemplated hereby, has relied solely on the advice of Assignor's own
professional advisors.
(j) Draft Prospectus. Assignor understands that (i) the Draft
Prospectus is a preliminary draft and that future drafts may contain
material changes from the Draft Prospectus and (ii) there can be no
assurance that an initial public offering of the Company's stock will
be consummated in the near future or ever or that the Registration
Statement filed in connection therewith will be declared effective by
the SEC.
(k) Assignor Information. All written information which
Assignor has heretofore furnished or furnishes herewith to the Company
in connection with the transactions contemplated hereby is correct and
complete in all respects as of the date of this Agreement, and if
there should be any change in such information
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prior to the consummation of the transactions contemplated hereby,
Assignor will immediately furnish such revised or corrected
information to the Company.
(l) Schedule of Contracts. Attached hereto as Schedule V is a
true and complete list of all oral and written contracts and
agreements entered into by Assignor through the date hereof. Complete
copies of all such written contracts and complete descriptions of all
such oral contracts have been delivered to the Company.
(m) Certain Accounting Matters. Assignor has not knowingly
taken or agreed to take any action that would prevent the Company from
accounting for the transactions contemplated hereby as a pooling of
interest business combination.
(n) Shareholder Agreements. Assignor acknowledges that it is
the parties' intention that the transactions contemplated by this
Agreement be accounted for as a pooling of interests business
combination and that each of the shareholders of Assignor may be
deemed to be an "affiliate" of Assignor within the meaning of Rule 145
promulgated under the Securities Act. Accordingly, Assignor shall
deliver within 10 days after the date hereof or, if earlier, on the
Closing Date, an agreement of each shareholder of Assignor wherein
such shareholder covenants and agrees that he, she or it will not (i)
knowingly take any action after the date hereof to cause the
transactions contemplated hereby not to be accountable under the
pooling of interests method of accounting, or (ii) sell, transfer,
pledge, dispose of or otherwise part with any interest in or with
respect to, or in any other manner reduce his, her or its investment
risk with respect to, (A) any shares of capital stock of Assignor at
any time prior to the Closing Date, and (B) any shares of the
Company's stock received by such shareholder in connection with the
transactions contemplated hereby or otherwise until such time as the
Company publishes financial results covering at least 30 days of
combined operations of the Company and Assignor or (iii) from the
Closing Date until the time the Company publishes financial results
covering at least thirty days of combined operations of the Company
and Assignor, directly or indirectly sell or purchase or enter into
any agreement, contract or arrangement to sell or purchase any put or
call options or other derivative securities (including any short
sales) with respect to shares of the Company's stock or enter into any
other agreements, contracts or arrangements providing for the
alteration of such shareholder's investment risk with respect to the
Shares.
(o) Reseller Agreement. To Assignor's knowledge, the Company
has not materially breached any of its obligations under the Reseller
Agreement as of the date hereof.
(p) Purchaser Representative. Liron Petrushka has agreed to
act as the purchaser representative of any Shareholders who are not
"accredited investors" as defined in Rule 501(a) of Regulation D
promulgated under the Securities Act of 1933, as amended.
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<PAGE>
5. Securities Laws. Assignor hereby acknowledges and agrees
that:
(a) Subject to Assignor's right to distribute the Shares to
its current shareholders, the Shares must be held indefinitely unless
subsequently registered under the Securities Act and under any
applicable state securities laws or unless an exemption from such
registration is available.
(b) the Shares will not be registered under the Securities
Act on the grounds that the offering and sale thereof contemplated by
this Agreement will be exempt from registration under the Securities
Act, and that the Company's reliance upon such exemption is predicated
upon the representations of Assignor set forth herein.
(c) "stop transfer" instructions shall be placed against the
Shares on the transfer books of the Company and that the
certificate(s) evidencing the Shares shall bear a legend, in addition
to any legend required by applicable state securities laws, in
substantially the following form:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS
AND MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE DISPOSED
OF FOR VALUE UNLESS A REGISTRATION STATEMENT HAS BECOME
EFFECTIVE WITH RESPECT TO SUCH SECURITIES UNDER THE
SECURITIES ACT AND SUCH STATE SECURITIES LAWS OR IN THE
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE CORPORATION
THERE IS AN APPLICABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND THE APPLICABLE STATE
SECURITIES LAWS OR SUCH REGISTRATION IS NOT OTHERWISE
REQUIRED."
6. Due Diligence; Termination. (a) Assignor shall afford any
and all authorized representatives of the Company access, during
normal business hours, to its employees, properties, books, contracts
and records and shall furnish promptly all information concerning its
business, properties and personnel and copies of any of its books,
records or contracts as the Company or its representatives shall
request; provided, that no investigation pursuant to this Section 6
shall effect or be deemed to modify any representation or warranty
made in this Agreement by Assignor.
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(b) Until the earlier of (i) the Closing Date and (ii) the
date which is ten days after the Company prepares the Financial
Statements of Assignor pursuant to Section 4(d) hereof, the Company
shall have the right to terminate this Agreement if the Company shall
determine in its sole discretion, based on its investigation of
Assignor pursuant to Section 6(a) or a review of such Financial
Statements, that consummating the transactions contemplated hereby
would not be in the best interests of the Company.
(c) The Company shall have the right to terminate this
Agreement if the Company does not receive requisite approval of the
transactions contemplated hereunder from its preferred stockholders on
or before February 22, 1998.
7. Closing. Subject to the satisfaction or waiver of (i)
Section 6(c) hereof and (ii) the conditions set forth in Section 9
hereof, consummation of the transactions contemplated by Section 1
hereof (the "Closing") shall take place at the offices of Dewey
Ballantine LLP, 1301 Avenue of the Americas, New York, New York 10019
on a date (the "Closing Date") which is the earlier of (a) March 31,
1998 and (b) the date specified in a written notice given by the
Company no less than five (5) days prior to such date.
8. Covenants.
(a) Interim Operations. Prior to the Closing Date, unless the
Company has consented in writing thereto, Assignor:
(i) shall conduct its operations according to its usual,
regular and ordinary course in substantially the
same manner as heretofore conducted;
(ii) shall use its reasonable efforts to preserve intact
its business organization and goodwill and maintain
satisfactory relationships with those persons having
business relationships with it;
(iii) shall promptly notify the Company of (x) any
material change in its condition (financial or
otherwise), business, properties, assets,
liabilities or the normal course of its business or
of its properties, (y) any material litigation or
material governmental complaints, investigations or
hearings (or communications indicating that the same
may be contemplated), or (z) the breach of any
representation or warranty contained herein;
(iv) shall not issue any shares of its capital stock or
securities;
(v) shall not (w) incur, create, assume or otherwise
become liable for borrowed money or assume,
guarantee, endorse or otherwise become responsible
or liable for the obligations of any other
individual, corporation or other entity, (x) make
any loans or advances to any other person, except in
each case in the ordinary
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<PAGE>
course of business, (y) acquire (including, without
limitation, for cash or shares of stock, by merger,
consolidation, or acquisition of stock or assets)
any interest in any corporation, partnership or
other business organization or division thereof or
any assets, or make any investment either by
purchase of stock or securities, contributions of
capital or property transfer or, except in the
ordinary course of business, consistent with past
practice, purchase any property or assets of any
other person or (z) effect a sale or other
disposition of any of the Assets or allow the
creation of any lien or encumbrance thereon;
(vi) shall not (x) declare, set aside or pay any dividend
or make any other distribution or payment with
respect to any shares of its capital stock or other
ownership interests or (y) directly or indirectly
redeem, purchase or otherwise acquire any shares of
its capital stock or make any commitment for any
such action;
(vii) shall not amend or otherwise change its articles of
incorporation or bylaws or equivalent organizational
documents
(viii) shall not increase the compensation payable or to
become payable to its officers or employees, pay any
employment related or other bonus to its
shareholder, or, except as presently bound to do,
grant any severance or termination pay to, or enter
into any employment or severance agreement with, any
of its directors, officers or other employees;
(ix) shall not take any action other than in the ordinary
course of business and in a manner consistent with
past practice with respect to accounting policies or
procedures; and
(x) shall not agree, in writing or otherwise, to take
any of the foregoing actions or take any action
which would make any representation or warranty in
this Agreement untrue or incorrect as of the Closing
Date.
(b) Trading in Company Stock. Except as otherwise expressly
consented to by the Company, from the date of this Agreement until the
Closing Date, Assignor will not directly or indirectly purchase or
sell (including short sales) any shares of the Company's stock, or
sell, transfer, pledge, dispose of or otherwise part with any interest
in or with respect to or in any other manner reduce its investment
risk with respect to any shares of the Company's stock to be received
pursuant to this Agreement.
(c) Confidentiality of Prospectus. Assignor acknowledges and
agrees that the Draft Prospectus is highly confidential, that it may
not be photocopied, distributed or otherwise communicated to persons
other than Assignor, Assignor's
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<PAGE>
shareholders and the respective representatives thereof, and that upon
receipt by Assignor of a preliminary or final prospectus of the
Company, the Draft Prospectus will be returned to the Company.
(d) Custom Applications. Assignor shall provide on the date
hereof a Schedule VI which lists by customer, all custom applications,
including, without limitation, custom programs, modules and interfaces
(other than software purchased by Assignor from the Company) ("Custom
Applications") which have been provided to any customer of the
Assignor. Assignor shall provide source code with respect to all
Custom Applications on or before the Closing Date.
(e) Assignor's Name. From and after the Closing, Assignor
shall not use the name "The Ultimate Software Group" or any expression
containing the word "Ultimate" or "US Group", or expression similar
thereto or derivative in whole or in part therefrom. As promptly as
practicable (and in any event within thirty days) following the
Closing, Assignor will change its name to a name complying with the
immediately preceding sentence, and shall deliver to the Company
written evidence of such name change.
(f) Cooperation; Tax Schedule. Following the Closing Date,
Assignor shall promptly forward to the Company such financial and
reporting data and other information with respect to the Assets and
Assumed Liabilities as the Company may from time to time reasonably
request, for any reasonable business purpose, including, without
limitation, the preparation of tax returns and financial statements.
Within sixty (60) days following the Closing Date, Assignor shall
prepare and deliver to the Company a schedule indicating the federal
income tax basis and state income basis, if different, of each of the
Assets and Assumed Liabilities.
(g) Options. The Company hereby agrees that from the date
hereof until April 30, 1998, the Company will not issue any options to
purchase shares of capital stock of the Company to any persons who are
officers of the Company as of the date hereof.
(h) Piggyback Registration Rights. (i) If at any time within
one year following the Closing Date the Company proposes to
register (including for this purpose a registration effected
by the Company for shareholders of the Company other than
Assignor or Assignor's existing shareholders) securities
under the Securities Act of 1933 in connection with a public
offering solely for cash on Form S-1, S-2 or S-3 (or any
replacement or successor forms), the Company shall promptly
give each person or entity which is a shareholder of Assignor
on the date hereof (each a "Holder") written notice of such
registration (a "Piggyback Registration"). Upon the written
request of each Holder given within 20 days following the
date of such notice, the Company shall, subject to Section
8(h)(ii), cause to be included in such registration statement
and use its best efforts to be registered under the
Securities Act all Shares that each such Holder shall
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<PAGE>
have requested to be registered; provided, however, that such
right of inclusion shall not apply to (i) the registration
statement for the initial public offering of the Company's
securities, or (ii) any registration statement covering an
underwritten offering of convertible debt securities, unless
the underwriters' representative or agent expressly consents
thereto. The Company shall have the absolute right to
withdraw or cease to prepare or file any registration
statement for any offering referred to in this Section 8(h)
without any obligation or liability to any Holder.
(ii) If the underwriters' representative or agent shall
advise the Company in writing (with a copy to each Holder
that requests that its securities be included in such
registration) that, in the opinion of the underwriter,
marketing factors require a limitation of the number of
securities requested to be included in such registration,
then the Company will include in such registration, to the
extent of the amount and class which the Company is so
advised can be sold without such material adverse effect in
such offering: first, all securities proposed to be sold by
the Company for its own account; second, all securities
requested to be included in such registration by J.P. Morgan
Investment Corporation, Sixty Wall Street SBIC Fund, L.P.,
HarbourVest Partners V-Direct Fund L.P. and their respective
permitted assigns; third, the Shares requested to be included
in such registration by Holders pursuant to this Section
8(h), and all other securities being registered pursuant to
the exercise of contractual rights comparable to the rights
granted in this Section 8(h), in proportion (as nearly as
practicable) to the amount of such Shares and securities of
the Company owned by each holder thereof requesting inclusion
of such Shares and securities in such registration; and
fourth, all other securities requested to be included in such
registration.
(iii) The Company shall bear and pay all expenses
incurred in connection with any registration, filing or
qualification of Shares with respect to a registration
pursuant to this Section 8(h), including without limitation
all registration, filing, and qualification fees, printers'
and accounting fees relating or apportionable thereto and the
fees and disbursements of one counsel for all holders of the
Company's securities being registered in such registration
(selected by the holders of a majority of such securities
being registered), but excluding underwriting discounts and
commissions relating to the Shares being registered.
(i) Material Changes of the Company. Prior to the Closing
Date, the Company shall promptly notify the Assignor of (x) any
material change in its condition (financial or otherwise), business,
properties, assets, liabilities or normal course of its business or
its properties, (y) any material litigation or material governmental
complaints, investigations or hearings (or communications indicating
that the same may be contemplated), or (z) the breach of any
representation or warranty contained herein.
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<PAGE>
(j) Consents. Upon request of the Company, Assignor shall use
its reasonable efforts (which shall not include the payment of any
consideration) to obtain any and all consents required in connection
with the transactions contemplated by this Agreement. The Company
shall reasonably cooperate (which shall not include the payment of any
consideration) with Assignor in obtaining such consents.
(k) Transfer of Shares. Following the Closing, on written
request of Assignor, and redelivery of the Shares originally issued in
the name of Assignor on the Closing Date, the Company shall reissue
the Shares in the names of those persons and entities which are
shareholders of Assignor on the date hereof (as specified by
Petrushka) and shall record such shareholders as the owners of the
Shares in the share register maintained by the Company or its agent.
Such reissued shares shall be returned promptly to Assignor for
delivery to Assignor's shareholders and shall be subject to the terms
of this Agreement, including without limitation Section 5 hereof.
(l) Information. Upon the earlier of (i) 60 days following
the initial public offering of the Company's common stock and (ii) 330
days after the Closing Date, upon Assignor's request, the Company will
promptly provide Assignor with such information as shall be necessary
to allow Assignor to verify the accuracy of the representation made in
Section 3(e) hereof.
9. Conditions to Closing. (a) The obligations of the Company
under this Agreement are subject to the fulfillment or waiver on or before the
Closing Date of the following conditions:
(i) Representations and Warranties. The representations
and warranties of Assignor contained in Section 4
shall be true on and as of the Closing Date with the
same effect as though such representations and
warranties had been made on and as of the Closing
Date.
(ii) Performance. Assignor shall have performed and
complied with all agreements, obligations and
conditions contained in this Agreement.
(iii) No Material Adverse Change. There shall have been no
material adverse change in the condition of Assignor
or the Assets since the date hereof.
(iv) Pooling Letter. The Company shall have received from
Arthur Andersen LLP ("Andersen"), a letter dated the
Closing Date, confirming that the transactions
contemplated hereby, if consummated, can properly be
accounted for as a pooling of interests combination
in accordance with GAAP and the criteria of
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Accounting Principles Board Opinion No. 16 and the
regulations of the SEC.
(v) Approvals. The Company shall have obtained all
requisite approvals of its Board of Directors and
stockholders for the transactions contemplated by
this Agreement.
(vi) Balance Sheet. Assignor shall have delivered to the
Company sufficient financial information in order
for the Company to prepare a balance sheet of the
Assignor, dated as of the day prior to the Closing
Date, prepared in accordance with Assignor's
accounting practices, consistently applied, and
which shall be subject to review or audit by
Andersen at the sole discretion of the Company.
Assignor shall reasonably cooperate with the Company
and Andersen in the preparation of a balance sheet
dated as of the Closing Date, prepared in accordance
with generally accepted accounting principles. Such
balance sheet shall demonstrate that the assets of
Assignor, other than the Reseller Agreement and
other intangible assets, have an aggregate value
greater than the aggregate value of the liabilities
of Assignor; provided, that in the event the
aggregate value of the liabilities exceeds the value
of such assets, Assignor shall pay the Company, as
additional consideration for the Shares, such
difference within five days of the receipt of such
balance sheet dated as of the Closing Date provided
that such payment shall not be considered an act of
Assignor for purposes of Section 4(m) hereof.
(vii) Updated Schedules. Assignor shall have prepared and
delivered to the Company updated Schedules I, II,
IV, V and VI which reflect, as of the Closing Date,
the information required to be stated therein.
(viii) Other Documents. The Company shall have received
such other documents as it shall reasonably request
prior to the Closing.
(b) The obligations of Assignor under this Agreement are
subject to the fulfillment or waiver on or before the Closing Date of
each of the following conditions:
(i) Representations and Warranties. The representations
and warranties of the Company contained in Section 3
and in Schedule III hereto shall be true on and as
of the Closing Date with the same effect as though
such representations and warranties had been made on
and as of the date thereof.
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(ii) No Material Adverse Change. There shall have been no
material adverse change in the condition of the
Company since the date hereof.
(iii) Delivery of Shares. The Company shall have delivered
the Shares specified in Section 1.
10. Certain Tax Matters. The parties to this Agreement intend
that the transactions contemplated hereby (and the distribution of the Shares
of the Company to the Assignor's shareholders) (collectively, the
"Transaction") will constitute a reorganization described in Section
368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the "Code") and
each party agrees that it will not knowingly take any action which would result
in the Transaction not so qualifying. However, each of the parties to this
Agreement acknowledges that it is relying solely upon its respective advisors
in determining the tax consequences of the Transaction and will not rely on any
representation or assurance of the other party other than the representations
and covenants set forth in this Agreement or any other agreement or certificate
delivered in connection herewith. None of the Company, the Assignor or the
shareholders of the Assignor will take any tax reporting position or make any
tax election inconsistent with the characterization of the Transaction
qualifying as a reorganization described in Section 368(a)(1)(C) of the Code,
except as may be required upon examination (or as the result of a prior
determination) by the Internal Revenue Service or any other tax authority.
11. Waiver. Subject to the consummation of the transactions
contemplated hereby, except as provided in Section 2 hereof, each of the
parties hereto hereby releases and discharges the other party, its partners,
employees, parents, subsidiaries, affiliates, successors and assigns from all
actions, causes of action, suits, debts, agreements, judgments, claims, and
demands whatsoever, in law or equity which such party ever had, now have or
hereafter can, shall or may have, for, upon or by reason of any claim relating
to the Reseller Agreement and the relationship of the parties thereunder.
12. Indemnification. (a) Assignor and Petrushka hereby
jointly and severally agree to indemnify and hold harmless the Company and any
fiduciary, officer, director, employee, agent or controlling person of the
Company (each, an "Indemnified Person") against any and all losses, claims,
damages, expenses and liabilities (or actions in respect thereof) whatsoever by
reason of or arising from (i) any breach of the representations and warranties
of this Agreement, (ii) any failure by the Assignor to comply with any covenant
in this Agreement and (iii) any liabilities whether known or unknown, fixed or
contingent (including contractual liabilities) of Assignor or any of its
affiliates, other than the Assumed Liabilities provided, however that Liron
Petrushka will only be liable under this Section 12(a) for up to an aggregate
amount equal to $1.6 million. Assignor will reimburse any Indemnified Person
for all expenses (including reasonable attorneys' fees) as they are incurred by
any such Indemnified Person in connection with investigating, preparing or
defending any such action or claim, whether or not in connection with pending
or threatened litigation in which any Indemnified Person is a party.
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<PAGE>
(b) The Company hereby agrees to indemnify and hold harmless
the Assignor and Petrushka and any fiduciary, officer, director,
employee, agent or controlling person of the Operating Company (each,
an "Indemnified Person") against any and all losses, claims, damages,
expenses and liabilities (or actions in respect thereof) whatsoever by
reason of or arising from (i) any breach of the Company's
representations and warranties in this Agreement and (ii) any failure
by the Company to comply with any of its covenants in this Agreement.
The Company will reimburse any Indemnified Person for all expenses
(including reasonable attorneys' fees) as they are incurred by any
such Indemnified Person in connection with investigating, preparing or
defending any such action or claim, whether or not in connection with
pending or threatened litigation in which any Indemnified Person is a
party.
(c) Promptly after the receipt by any party hereto of notice
of any third party claim or the commencement of any third party
action, suit or proceeding subject to indemnification hereunder (a
"Third Party Claim"), such party (the "Indemnified Party") will, if a
claim in respect thereto is to be made against any party obligated to
provide indemnification hereunder (the "Indemnifying Party"), give
such Indemnifying Party reasonable written notice of such Third Party
Claim; provided, however, that the failure to provide such notice will
not relieve the Indemnifying Party of any of its or his obligations,
or impair the right of the Indemnified Party to indemnification,
pursuant to this Section 12 unless, and only to the extent that, such
failure materially prejudices the Indemnifying Party's opportunity to
defend or compromise the Third Party Claim. Such Indemnifying Party
shall have the right, at its option, to defend at its own expense and
by its own counsel any Third Party Claim, provided that (i) the
Indemnifying Party acknowledges in writing (at the time such
Indemnifying Party elects to assume such defense) its obligation under
this Section 12 to indemnify the Indemnified Party with respect to
such Third Party Claim, (ii) such counsel is reasonably satisfactory
to the Indemnified Party, (iii) the Indemnified Party is kept fully
informed of all developments, and is furnished with copies of all
documents and papers, related thereto and is given the right to
participate in the defense and investigation thereof as provided
below, and (iv) such counsel proceeds with diligence and in good faith
with respect thereto. If the Indemnifying Party shall undertake to
defend any Third Party Claim, such Indemnifying Party shall notify the
Indemnified Party of its intention to do so promptly (and in any event
no later than thirty (30) days) after receipt of notice of the Third
Party Claim, and the Indemnified Party agrees to cooperate in good
faith with the Indemnifying Party and its counsel in the defense of
such Third Party Claim. Notwithstanding the foregoing, the Indemnified
Party shall have the right to participate in the defense and
investigation of any Third Party Claim with its own counsel at its own
expense, except that the Indemnifying Party shall bear the expense of
such separate counsel if (A) in the written opinion of counsel to the
Indemnified Party reasonably acceptable to the Indemnifying Party, use
of counsel of the Indemnifying Party's choice would be expected to
give rise to a conflict of interest, (B) there are or may be legal
defenses available to the Indemnified Party
14
<PAGE>
that are different from or additional to those available to the
Indemnifying Party, (C) the Indemnifying Party shall not have employed
counsel to represent the Indemnified Party within a reasonable time
after notice of the Third Party Claim is given to the Indemnifying
Party or notice that the Indemnifying Party intends to assume the
defense of the Third Party Claim is given to the Indemnified Party or
(D) the Indemnifying Party shall authorize the Indemnified Party to
employ separate counsel at the expense of the Indemnifying Party. The
Indemnifying Party shall not settle any Third Party Claim without the
prior written consent of the Indemnified Party, which shall not be
unreasonably withheld; provided, however, that an Indemnified Party
shall not be required to consent to any settlement involving the
imposition of equitable remedies.
13. Miscellaneous.
(a) Notices Any notices or other communications required or
permitted to be given or delivered under this Agreement shall be in
writing and shall be sufficiently given to a party if delivered
personally or mailed by registered or certified mail, postage prepaid,
return receipt requested, or by overnight delivery by a
nationally-recognized courier or by telecopier, as follows (or to such
other address or person as either party may from time to time
designate to the other in writing):
To Assignor or Petrushka:
c/o Liron Petrushka
The Ultimate Software Group of Northern California, Inc.
1670 South Amphlett Boulevard, Suite 314
San Mateo, CA 94402
Telecopier: 650-655-4081
To the Company:
The Ultimate Software Group, Inc.
3111 Stirling Road, Suite 308
Ft. Lauderdale, FL 33312
Attention: Scott Scherr
Telecopier: (954) 266-1301
Any such notice or other communication shall be deemed to be given as of the
date it is personally delivered, five (5) days after being deposited in the
United States mail, one (1) day after being deposited with a nationally
recognized courier for overnight delivery or the date it is transmitted via
telecopier, answerback received (followed promptly by delivery of such notice
in accordance with one of the other methods above).
(b) Binding Effect; Assignability. This Agreement shall be
binding upon and inure to the benefit of all of the parties and their
successors, legal representatives and assigns. Neither party hereto
may transfer its rights hereunder
15
<PAGE>
without the prior written consent of the other party, which consent
may be given or withheld for any reason or no reason.
(c) Severability. If any provision hereof is held to be
illegal or unenforceable, such provision shall be fully severable, and
the remaining provisions of this Agreement shall remain in full force
and effect and shall not be affected by such provision's severance;
provided, however, that if a court of competent jurisdiction shall
determine that any provision hereof is illegal or unenforceable, the
parties hereto will accept the written decision of such court as to
what would be enforceable, and the parties shall use reasonable
efforts, including, but not limited to the amendment of this
Agreement, to ensure that this Agreement shall reflect as closely as
practicable the intent of the parties hereto.
(d) Counterparts. This Agreement may be executed in any
number of counterparts with the same effect as if all parties hereto
had signed the same document. All counterparts shall be construed
together and shall constitute one instrument.
(e) Integration. This Agreement constitutes the entire
agreement among the parties hereto pertaining to the subject matter
hereof and supersedes all prior agreements and understandings
pertaining thereto.
(f) Governing Law. This Agreement and the rights of the
parties hereunder shall be interpreted in accordance with the laws of
the State of Delaware, and all rights and remedies shall be governed
by such laws without regard to principles of conflict of laws.
(g) State Securities Laws. The offer and sale of the Shares
is intended to be exempt from registration under the securities laws
of certain states. Assignor must note that there are restrictions on
transfer of the Shares, as agreed upon in Section 5 of this Agreement.
(h) Survival. The representations, warranties and indemnities
of the parties set forth in this Agreement shall survive for a period
of one year from the Closing Date. Any claim which is made as a result
of a breach or a claimed breach of a representation, warranty or
covenant contained herein shall be timely if made on or before the
first anniversary of the Closing Date.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION
OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS
INVOLVED. THE SECURITIES OFFERED HEREBY HAVE NOT BEEN RECOMMENDED BY ANY
FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE,
THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE
ADEQUACY OF THIS AGREEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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THE SECURITIES OFFERED HEREBY ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY
AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS
PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT
THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN
INDEFINITE PERIOD OF TIME.
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IN WITNESS WHEREOF, the undersigned has caused this Agreement
to be executed as of the day and year first above written.
THE ULTIMATE SOFTWARE GROUP, INC.
By: /s/ Scott Scherr
-------------------------------------
Name: Scott Scherr
Title: President
THE ULTIMATE SOFTWARE GROUP OF NORTHERN
CALIFORNIA, INC.
By: /s/ Liron Petrushka
-------------------------------------
Name: Liron Petrushka
Title: President
/s/ Liron Petrushka
-------------------------------------
Liron Petrushka
<PAGE>
EXHIBIT A
INVESTOR CERTIFICATION
_______________________________________ hereby certifies that he or she EITHER:
(Check Box that Applies)
[ ] 1. meets one or more of the following criteria:
(A) He or she is a person having individual net
worth, or joint net worth with his or her
spouse, exceeding $1,000,000; or
(B) He or she is a person having an income in
excess of $200,000 in each of the two (2)
most recent years or a joint income with
his or her spouse in excess of $300,000 in
each of those years and having a reasonable
expectation of reaching the same income
level in the current year.
[ ] 2. does not meet either of the criterion described
in 1(A) or (B) above and acknowledges that he or
she has appointed Liron Petrushka as his or her
purchaser representative.
---------------------------------
Dated: ___________________
<PAGE>
[Exhibit B intentionally omitted]
[Schedules intentionally omitted]
<PAGE>
Exhibit 10.5
ASSET PURCHASE AGREEMENT
Asset Purchase Agreement (this "Agreement") by and among
Ultimate Investors Group, Inc., a Texas corporation ("Assignor"), The Ultimate
Software Group, Inc., a Delaware corporation (the "Company") and the principals
whose names appear on the signature page hereto (the "Principals"), dated as of
March 4, 1998.
WHEREAS, Assignor entered into the Exclusive Reseller
Agreement (the "Reseller Agreement") dated July 13, 1994 with The Ultimate
Software Group, Ltd. (the "Partnership"), the assets and liabilities of which
were subsequently assigned to and assumed by the Company;
WHEREAS, Assignor desires to assign and transfer to the
Company, and the Company desires to assume from Assignor, certain business
assets and liabilities of Assignor pursuant to the terms hereof;
WHEREAS, the transactions contemplated hereby are intended to
be treated as a pooling of interests business combination by the Company for
financial accounting purposes;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Assignment. Subject to the terms hereof, Assignor, upon
the Closing Date (as defined below), shall sell, assign, convey, transfer and
deliver to the Company all right, title, benefits and interest in the assets
described on Schedule I hereto (the "Assets") and deliver bills of sale and
assignment documents in form and substance satisfactory to the Company with
respect to such Assets in exchange for (i) the assumption by the Company of
Assignor's obligations, duties and liabilities described on Schedule II hereto
(the "Assumed Liabilities") and (ii) 38,000 shares (the "Shares") of Class B
Common Stock of the Company.
2. Reseller Agreement. Each of the parties hereto agrees
that because the Reseller Agreement is among the Assets being sold to the
Company hereunder, any rights of Assignor and its affiliates arising
thereunder shall terminate on the Closing Date.
3. Representations and Warranties of the Company.
The Company hereby represents and warrants to and agrees with Assignor
as follows:
(a) Organization, Good Standing and Qualification. The
Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite
power and authority to carry on its business as now conducted and as
proposed to be conducted, and the Company
1
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has all requisite power and authority to enter into and perform this
Agreement and the transactions contemplated hereby.
(b) Authorization. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement, the
performance of all obligations of the Company hereunder and the
authorization, issuance (or reservation for issuance) and delivery of
the Shares and any interest therein has been taken or will be taken
prior to the Closing Date.
(c) Valid Issuance of Shares. The Shares, when issued and
delivered in accordance with the terms hereof, (i) will be duly and
validly issued, fully paid and nonassessable, (ii) will be free of any
pledges, liens, security interests, claims or other encumbrances of
any kind, and (iii) will be issued in compliance with all applicable
federal and state securities laws.
(d) Prospectus. The Company shall provide Assignor with the
preliminary and final prospectuses with respect to its proposed
initial public offering of common stock and any amendments thereto,
promptly after the Company's Registration Statement and amendments
thereto containing such prospectuses are filed with the Securities and
Exchange Commission (the "SEC").
(e) Outstanding Options and Warrants. Except as set forth on
Schedule III hereto, there are not outstanding any options, warrants or
agreements for the purchase or acquisition from or by the Company of
any shares of its capital stock.
(f) Anti-Dilution Adjustments. No outstanding options,
warrants or other securities exercisable or convertible into common
stock of the Company require anti-dilution adjustments by reason of the
consummation of the transactions contemplated hereby.
(g) Percentage Interest. As of the Closing Date, the Shares
will represent at least 2.658% of the outstanding capital stock of the
Company on a fully diluted basis determined as if all outstanding
shares of such capital stock had been converted into one class of
common stock of the Company.
(h) Reseller Agreement. To the knowledge of the Company, the
Assignor is not in material breach of any of its obligations under
the Reseller Agreement as of the date hereof.
4. Representations and Warranties of Assignor and the Principals.
Assignor and the Principals hereby jointly and severally represent and warrant
to and agree with the Company as follows:
2
<PAGE>
(a) Assets. Assignor is or on the Closing Date will
be the legal and beneficial owner of the Assets, free and clear of any
lien, charge, encumbrance or adverse claim, except as set forth on
Schedule II hereto, and has or on the Closing Date will have the legal
authority to transfer the Assets. There are no assets used in, or
necessary for the operation of, the business of Assignor as presently
operated (the "Business") other than (i) the Assets and (ii) $40,000.
The Assets are substantially all of the assets of Assignor.
(b) Liabilities; Litigation. Assignor has no
liabilities known or unknown, fixed or contingent, including
contractual liabilities, other than the Assumed Liabilities and as set
forth in Section 12. There is no pending or threatened action or
proceeding affecting the Assets or the Business before any court,
governmental agency or arbitrator, which may materially adversely
affect the Assets or the Business or which could affect the legality,
validity or enforceability of this Agreement.
(c) Consents; No Conflicts. The execution, delivery
and performance of this Agreement by Assignor and the Principals and
the consummation by Assignor and the Principals of the transactions
contemplated hereby (x) do not contravene (i) Assignor's
organizational documents, (ii) any law or (iii) any contractual
restriction binding on or affecting Assignor or the Principals and (y)
except as set forth on Schedule IV hereto, do not require the consent,
approval, permission or other authorization of any court, arbitrator
or governmental, administrative or self-regulatory authority or
consent under any material lease, license, agreement or other material
instrument of Assignor, the Principals or the Business and (z) do not
require any stockholder, director, partnership or other authorization
or action, other than authorizations that have been duly obtained and
actions that have been duly taken.
(d) Financial Statements. Assignor has delivered to
the Company all of its quarterly financial statements which include
all business activity conducted by its affiliate, Ultimate Software
Group of North Texas, Ltd. ("USG North Texas") for the years ended
December 31, 1996 and December 31, 1997 and, it will, on or before
February 4, 1998, deliver to the Company its financial statements,
which include all business activity conducted by USG North Texas, for
the fiscal year ended December 31, 1995, December 31, 1996 and
December 31, 1997, audited by Arthur Andersen LLP ("Andersen") (the
"Audited Statements"), and such financial statements do and will
fairly present the financial position and results of operations of the
Assignor and USG North Texas, as combined, as of the dates and for the
periods indicated therein. Such financial statements were and will be
prepared in accordance with generally accepted accounting principles,
consistently applied.
(e) No Brokers. No broker, finder or any other third
party is entitled to any fee or commission in connection with the
transactions contemplated hereby.
3
<PAGE>
(f) Investor Certificates. Assignor has delivered on
the date hereof a certificate of each shareholder of Assignor in the
form attached hereto as Exhibit A.
(g) Investment Intent. Assignor (i) has such
knowledge, sophistication and experience in business and financial
matters that it is capable of evaluating the merits and risks of an
investment in the Shares and any interest therein, (ii) can bear the
economic risk of an investment in the Shares and any interest therein
for an indefinite period of time and can afford a complete loss of
such investment, and (iii) is acquiring the Shares and any interest
therein for its own account and not with a view to, or for a sale in
connection with, a distribution in violation of any applicable
securities laws of any jurisdiction.
(h) No Registration. Assignor understands that the
offering and the issuance of the Shares have not been and will not be
registered or qualified under the laws of any jurisdiction regarding
the offering or sale of securities, and that the Shares and any
interest therein may not be resold or otherwise transferred by
Assignor unless any such subsequent sale or transfer is duly
registered and qualified under the applicable securities laws or is
exempt from such registration and qualification.
(i) Access to Information. Assignor (i) has been
furnished with, and hereby acknowledges the receipt and review of, (a)
a copy of drafts of the Preliminary Prospectus of the Company dated
December 31, 1997 (the "12/31/97 Draft Prospectus") and February 13,
1998 (the "2/13/98 Draft Prospectus" and together with the 12/31/97
Draft Prospectus, the "Drafts of the Prospectus") and any attachments
thereto, (b) the audited financial statements of the Company for the
fiscal years ended December 31, 1995 and December 31, 1996,
respectively, and (c) unaudited financial statements of the Company as
of and for the period ended September 30, 1997, (ii) has been afforded
the opportunity to obtain such additional information from the Company
and its representatives as Assignor has deemed necessary in order to
evaluate the merits, risks and other considerations relating to an
acquisition of Shares and any interest therein, (iii) fully
understands the risks and other considerations relating to the
investment contemplated hereby, and (iv) with respect to tax, employee
benefits and other financial and economic considerations related to
the investment contemplated hereby, has relied solely on the advice of
Assignor's own professional advisors.
(j) Drafts of the Prospectus. Assignor understands
that (i) the Drafts of the Prospectus are preliminary drafts and that
future drafts may contain material changes from the Drafts of the
Prospectus and (ii) there can be no assurance that an initial public
offering of the Company's stock will be consummated in the near future
or ever or that the Registration Statement filed in connection
therewith will be declared effective by the SEC.
4
<PAGE>
(k) Assignor Information. All information which
Assignor has heretofore furnished or furnishes herewith to the Company
in connection with the transactions contemplated hereby is correct and
complete in all respects as of the date of this Agreement, and if
there should be any change in such information prior to the
consummation of the transactions contemplated hereby, Assignor will
immediately furnish such revised or corrected information to the
Company.
(l) Schedule of Contracts. Attached hereto as
Schedule V is a true and complete list of all oral and written
contracts and agreements entered into by Assignor through the date
hereof. Complete copies of all such written contracts and complete
descriptions of all such oral contracts have been delivered to the
Company.
(m) Certain Accounting Matters. Assignor has not
taken or agreed to take any action that would prevent the Company
from accounting for the transactions contemplated hereby as a
pooling of interest business combination.
(n) Shareholder Agreements. Assignor acknowledges
that it is the parties' intention that the transactions contemplated
by this Agreement be accounted for as a pooling of interests business
combination and that each of the shareholders of Assignor may be
deemed to be an "affiliate" of Assignor within the meaning of Rule 145
promulgated under the Securities Act. Accordingly, Assignor has
delivered on the date hereof an agreement of each shareholder of
Assignor wherein such shareholder covenants and agrees that he, she or
it will not (i) take any action after the date hereof to cause the
transactions contemplated hereby not to be accountable under the
pooling of interests method of accounting, or (ii) sell, transfer,
pledge, dispose of or otherwise part with any interest in or with
respect to, or in any other manner reduce his, her or its investment
risk with respect to, (A) any shares of capital stock of Assignor at
any time prior to the Closing Date, and (B) any shares of the
Company's stock received by such shareholder in connection with the
transactions contemplated hereby or otherwise until such time as the
Company publishes financial results covering at least 30 days of
combined operations of the Company and Assignor or (iii) from the
Closing Date until six months following the time the Company publishes
financial results covering at least thirty days of combined operations
of the Company and Assignor, directly or indirectly sell or purchase
or enter into any agreement, contract or arrangement to sell or
purchase any put or call options or other derivative securities
(including any short sales) with respect to shares of the Company's
stock or enter into any other agreements, contracts or arrangements
providing for the alteration of such shareholder's investment risk
with respect to any shares of the Company's stock.
(o) Reseller Agreement. To the knowledge of the
Assignor and the Principals, the Company is not in material breach of
any of its obligations under the Reseller Agreement as of the
date hereof.
5
<PAGE>
(p) Purchaser Representative. Donald Kelly has
agreed to act as the purchaser representative of any Shareholders who
are not "accredited investors" as defined in Rule 501(a) of Regulation
D promulgated under the Securities Act of 1933, as amended.
5. Securities Laws. Assignor hereby acknowledges and agrees
that:
(a) the Shares must be held indefinitely unless
subsequently registered under the Securities Act and under any
applicable state securities laws or unless an exemption from such
registration is available.
(b) the Shares will not be registered under the
Securities Act on the grounds that the offering and sale thereof
contemplated by this Agreement will be exempt from registration under
the Securities Act, and that the Company's reliance upon such
exemption is predicated upon the representations of Assignor set forth
herein.
(c) "stop transfer" instructions shall be placed
against the Shares on the transfer books of the Company and that the
certificate(s) evidencing the Shares shall bear a legend, in addition
to any legend required by applicable state securities laws, in
substantially the following form:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD OR
OTHERWISE DISPOSED OF FOR VALUE UNLESS A REGISTRATION
STATEMENT HAS BECOME EFFECTIVE WITH RESPECT TO SUCH
SECURITIES UNDER THE SECURITIES ACT AND SUCH STATE SECURITIES
LAWS OR IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO
THE CORPORATION THERE IS AN APPLICABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND THE
APPLICABLE STATE SECURITIES LAWS OR SUCH REGISTRATION IS NOT
OTHERWISE REQUIRED."
6. Due Diligence; Termination. Assignor shall afford any and
all authorized representatives of the Company access, during normal business
hours, to its employees, properties, books, contracts and records and shall
furnish promptly all information concerning its business, properties and
personnel and copies of any of its books, records or contracts as the Company
or its representatives shall request; provided,
6
<PAGE>
that no investigation pursuant to this Section 6 shall effect or be deemed to
modify any representation or warranty made in this Agreement by Assignor.
7. Closing. Subject to the satisfaction or waiver of the
conditions set forth in Section 9 hereof, consummation of the transactions
contemplated by Section 1 hereof (the "Closing") shall take place at the
offices of Dewey Ballantine LLP, 1301 Avenue of the Americas, New York, New
York 10019 on the date hereof or such other date as may be mutually agreed upon
by the parties hereto (the "Closing Date").
8. Covenants.
(a) Interim Operations. Prior to the Closing Date,
unless the Company has consented in writing thereto, which consent
will not be unreasonably withheld, Assignor:
(i) shall conduct its operations according to its usual,
regular and ordinary course in substantially the same
manner as heretofore conducted;
(ii) shall use its reasonable efforts to preserve intact
its business organization and goodwill and maintain
satisfactory relationships with those persons having
business relationships with it;
(iii) shall promptly notify the Company of (x) any
material change in its condition (financial or
otherwise), business, properties, assets,
liabilities or the normal course of its business or
of its properties, (y) any material litigation or
material governmental complaints, investigations or
hearings (or communications indicating that the same
may be contemplated), or (z) the breach of any
representation or warranty contained herein;
(iv) shall not issue any shares of its capital stock or
securities;
(v) shall not (w) incur, create, assume or otherwise
become liable for borrowed money or assume,
guarantee, endorse or otherwise become responsible or
liable for the obligations of any other individual,
corporation or other entity, (x) make any loans or
advances to any other person, except in each case in
the ordinary course of business, (y) acquire
(including, without limitation, for cash or shares of
stock, by merger, consolidation, or acquisition of
stock or assets) any interest in any corporation,
partnership or other business organization or
division thereof or any assets, or make any
investment either by purchase of stock or securities,
contributions of capital or property transfer or,
except in the ordinary course of business, consistent
with past practice, purchase any property or assets
of any other person or (z) effect a sale or
7
<PAGE>
other disposition of any of the Assets or allow the
creation of any lien or encumbrance thereon;
(vi) shall not (x) declare, set aside or pay any dividend
or make any other distribution or payment with
respect to any shares of its capital stock or other
ownership interests or (y) directly or indirectly
redeem, purchase or otherwise acquire any shares of
its capital stock or make any commitment for any
such action;
(vii) shall not amend or otherwise change its articles of
incorporation or bylaws or equivalent organizational
documents
(viii) shall not increase the compensation payable or to
become payable to its officers or employees, pay any
employment related or other bonus to its
shareholder, or, except as presently bound to do,
grant any severance or termination pay to, or enter
into any employment or severance agreement with, any
of its directors, officers or other employees;
(ix) shall not take any action other than in the ordinary
course of business and in a manner consistent with
past practice with respect to accounting policies or
procedures; and
(x) shall not agree, in writing or otherwise, to take
any of the foregoing actions or take any action
which would make any representation or warranty in
this Agreement untrue or incorrect as of the Closing
Date.
(b) Trading in Company Stock. Except as otherwise
expressly consented to by the Company, from the date of this Agreement
until the Closing Date, Assignor will not directly or indirectly
purchase or sell (including short sales) any shares of the Company's
stock, or sell, transfer, pledge, dispose of or otherwise part with
any interest in or with respect to or in any other manner reduce its
investment risk with respect to any shares of the Company's stock to
be received pursuant to this Agreement.
(c) Confidentiality of Prospectus. Assignor
acknowledges and agrees that the Drafts of the Prospectus are highly
confidential, that they may not be photocopied, distributed or
otherwise communicated to persons other than Assignor and that upon
receipt by Assignor of a preliminary or final prospectus of the
Company, the 12/31/97 Draft Prospectus will be returned to the
Company.
(d) Custom Applications. Assignor shall provide on
the date hereof a Schedule VI which lists, by customer, all custom
applications, including, without limitation, custom programs, modules
and interfaces (other than software purchased by Assignor from the
Company) ("Custom Applications"), which have
8
<PAGE>
been provided to any customer of the Assignor. Assignor shall provide
source code with respect to all Custom Applications on or before the
Closing Date.
(e) Assignor's Name. From and after the Closing,
Assignor shall not use the name "The Ultimate Software Group" or any
expression containing the word "Ultimate" or "US Group" or expression
similar thereto or derivative in whole or in part therefrom. As
promptly as practicable (and in any event within thirty days)
following the Closing, Assignor will change its name to a name
complying with the immediately preceding sentence, and shall deliver
to the Company written evidence of such name change.
(f) Cooperation; Tax Schedule. Following the Closing
Date, Assignor shall promptly furnish the Company with such financial
and reporting data and other information with respect to the Assets
and Assumed Liabilities as the Company may from time to time
reasonably request, for any reasonable business purpose, including,
without limitation, the preparation of tax returns and financial
statements. Within sixty (60) days following the Closing Date,
Assignor shall prepare and deliver to the Company a schedule
indicating the federal income tax basis and state income tax basis, if
different, of each of the Assets and Assumed Liabilities.
(g) Options. The Company hereby agrees that from the
date hereof until May 14, 1998, the Company will not issue any options
to purchase shares of capital stock of the Company to any persons who
are officers of the Company as of the date hereof.
(h) Registration Rights Agreement. The Company
agrees that if at any time between the Closing Date and the first
anniversary of the Closing Date, the Company proposes to register any
shares of capital stock of the Company owned by Scott Scherr and/or
Alan Goldstein, other than on a Registration Statement on Form S-8,
Assignor shall have the right to register in such registration, on the
same terms as Messrs. Scherr and/or Goldstein, a number of Shares
equal to the total number of Shares held by Assignor multiplied by a
fraction, the numerator of which is the total number of shares of
Messrs. Scherr and/or Goldstein, as applicable, proposed to be
registered and the denominator of which is the total number of shares
of the Company's capital stock owned by Messrs. Scherr and/or
Goldstein, as applicable, at the time of registration.
(i) Assignor Consents. Prior to Closing, Assignor
shall have obtained, made or given any and all consents required in
connection with the transactions contemplated by this Agreement and
such consents shall be in full force and effect, without the
imposition upon the Company of any material condition, restriction or
required undertaking.
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<PAGE>
9. Conditions to Closing. (a) The obligations of the Company
under this Agreement are subject to the fulfillment or waiver on or before the
Closing Date of the following conditions:
(i) Representations and Warranties. The representations
and warranties of Assignor contained in Section 4
shall be true on and as of the Closing Date with the
same effect as though such representations and
warranties had been made on and as of the Closing
Date, except as would not have a material adverse
effect; provided, however, that any representation
or warranty which is qualified as to materiality
shall be true.
(ii) Performance. Assignor shall have performed and
complied with all agreements, obligations and
conditions contained in this Agreement, except where
Assignor's failure to perform shall not have a
material adverse effect.
(iii) No Material Adverse Change. There shall have been no
material adverse change in the condition of Assignor
or the Assets since the date hereof.
(iv) Pooling Letter. The Company shall have received from
Andersen, a letter dated the Closing Date,
confirming that the transactions contemplated
hereby, if consummated, can properly be accounted
for as a pooling of interests combination in
accordance with GAAP and the criteria of Accounting
Principles Board Opinion No. 16 and the regulations
of the SEC.
(v) Approvals. The Company shall have obtained all
requisite approvals of its Board of Directors and
stockholders for the transactions contemplated by
this Agreement.
(vi) Transfer of Assets and Assumed Liabilities. USG
North Texas shall have been liquidated and
terminated, the Assets and Assumed Liabilities of
USG North Texas shall have been transferred to the
Assignor and the Assignor shall have provided to the
Company such evidence of the same as the Company
shall reasonably request.
(vii) Balance Sheet. Assignor shall have delivered to the
Company a balance sheet of the Assignor, dated as of
the Closing Date, prepared in accordance with
generally accepted accounting principles,
consistently applied, and which shall be subject to
review or audit by Andersen at the sole discretion of
the Company. Such balance sheet shall demonstrate
that the assets of Assignor, other than the Reseller
Agreement and other intangible assets, have
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<PAGE>
an aggregate value greater than the aggregate value
of the liabilities of Assignor.
(viii) Updated Schedules. Assignor shall have prepared and
delivered to the Company updated Schedules I, II, V
and VI which reflect, as of the Closing Date, the
information required to be stated therein.
(ix) Other Documents. The Company shall have received such
other documents as it shall reasonably request prior
to the Closing.
(b) The obligations of Assignor under this Agreement
are subject to the fulfillment or waiver on or before the Closing Date
of each of the following conditions:
(i) Representations and Warranties. The representations
and warranties of the Company contained in Section 3
shall be true on and as of the Closing Date with the
same effect as though such representations and
warranties had been made on and as of the date
thereof.
(ii) Delivery of Shares. The Company shall have delivered
the Shares specified in Section 1.
10. Certain Tax Matters. The parties to this Agreement intend
that the transactions contemplated hereby (and the distribution of the Shares
of the Company to the Assignor's shareholders) (collectively, the
"Transaction") will constitute a reorganization described in Section
368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the "Code").
However, each of the parties to this Agreement acknowledges that it is relying
solely upon its respective advisors in determining the tax consequences of the
Transaction and will not rely on any representation or assurance of the other
party other than the representations and covenants set forth in this Agreement
or any other agreement or certificate delivered in connection herewith. None of
the Company, the Assignor or the shareholders of the Assignor will take any tax
reporting position or make any tax election inconsistent with the
characterization of the Transaction qualifying as a reorganization described in
Section 368(a)(1)(C) of the Code, except as may be required upon examination
(or as the result of a prior determination) by the Internal Revenue Service or
any other tax authority.
11. Waiver. (a) Subject to the consummation of the
transactions contemplated hereby, the Assignor and the Principals hereby
forever waive, release and discharge the Company, its partners, officers,
directors, employees, parents, subsidiaries, affiliates, successors and
assigns, from all actions, causes of action, suits, debts, judgments,
agreements, and demands whatsoever, in law or equity which the Assignor or the
Principals ever had, now have or hereafter can, shall or may have, for, upon or
by reason of any claim, whether known or unknown to the Assignor or the
Principals, relating to the Reseller Agreement and the relationship of the
parties thereunder.
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<PAGE>
(b) Subject to the consummation of the transactions
contemplated hereby, the Company hereby forever waives, releases and discharges
the Assignor and the Principals, their partners, officers, directors,
employees, parents, subsidiaries, affiliates, successors and assigns, from all
actions, causes of action, suits, debts, judgments, agreements, and demands
whatsoever, in law or equity which the Company ever had or now has for, upon or
by reason of any claim known to the Company as of the date hereof relating to
the Reseller Agreement and the relationship of the parties thereunder.
12. Possible RMark Liability. (a) For purposes of clarity,
the parties hereto agree that the Company is not assuming any responsibility or
liability with respect to any dispute with or claim by RMark Services, Inc.,
its subsidiaries or affiliates, or officers, directors or employees of any of
the foregoing ("RMark").
(b) Assignor shall retain cash in the amount of
$40,000 which shall be used exclusively for the following purposes: (i) payment
of the reasonable expenses associated with its legal defense in respect of any
claim by RMark, (ii) payment to RMark in settlement of any such claim;
provided, that the Assignor shall first obtain the written consent of the
Company for any proposed settlement, which consent shall not be unreasonably
withheld, or (iii) payment to RMark in satisfaction of any court or arbitration
awarded judgment in favor of RMark.
(c) Not later than the first anniversary of this
Agreement, Assignor shall pay to the Company any portion of the $40,000
referred to in paragraph (b) above which has not been spent for any of the
purposes described in paragraph (b) above.
13. Indemnification. (a) Subject to the provisions of
paragraph (b) of this Section 13, Assignor and the Principals hereby jointly
and severally agree to indemnify and hold harmless the Company and any
fiduciary, officer, director, employee, agent or controlling person of the
Company (each, an "Indemnified Person") against any and all losses, claims,
damages, expenses and liabilities (or actions in respect thereof) whatsoever by
reason of or arising from (i) any breach of the representations and warranties
of this Agreement, (ii) any failure by the Assignor to comply with any covenant
in this Agreement and (iii) any liabilities whether known or unknown, fixed or
contingent (including contractual liabilities) of Assignor or any of its
affiliates, other than the Assumed Liabilities. Assignor will reimburse any
Indemnified Person for all expenses (including reasonable attorneys' fees) as
they are incurred by any such Indemnified Person in connection with
investigating, preparing or defending any such action or claim, whether or not
in connection with pending or threatened litigation in which any Indemnified
Person is a party.
(b) The aggregate amount of the liability of Assignor and the
Principals under this Agreement shall be limited to $4.6 million. Assignor and
the Principals shall first satisfy their indemnification obligations under this
Section 13 by
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<PAGE>
transferring to the Company Shares then owned by them, free of liens and
encumbrances, with each such Share being valued for such purposes at $126. In
the event that Assignor and the Principals cannot fully satisfy such
indemnification obligations by transferring shares, they shall pay cash to the
Company, subject to the $4.6 million limit referred to above.
14. Miscellaneous. (a) Notices Any notices or other
communications required or permitted to be given or delivered under
this Agreement shall be in writing and shall be sufficiently given to
a party if delivered personally or mailed by registered or certified
mail, postage prepaid, return receipt requested, or by overnight
delivery by a nationally-recognized courier or by telecopier, as
follows (or to such other address or person as either party may from
time to time designate to the other in writing):
To Assignor or the Principals:
c/o Donald Kelly
Ultimate Investors Group, Inc.
2711 LBJ Freeway
Suite 1050
Dallas, Texas 75234
Telecopier: (972) 855-2294
To the Company:
The Ultimate Software Group, Inc.
3111 Stirling Road, Suite 308
Ft. Lauderdale, FL 33312
Attention: Scott Scherr
Telecopier: (954) 266-1301
Any such notice or other communication shall be deemed to be given as
of the date it is personally delivered, five (5) days after being
deposited in the United States mail, one (1) day after being deposited
with a nationally recognized courier for overnight delivery or the
date it is transmitted via telecopier, answerback received (followed
promptly by delivery of such notice in accordance with one of the
other methods above).
(b) Binding Effect; Assignability. This Agreement
shall be binding upon and inure to the benefit of all of the parties
and their successors, legal representatives and assigns. Neither party
hereto may transfer its rights hereunder without the prior written
consent of the other party, which consent may be given or withheld for
any reason or no reason.
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<PAGE>
(c) Severability. If any provision hereof is held to
be illegal or unenforceable, such provision shall be fully severable,
and the remaining provisions of this Agreement shall remain in full
force and effect and shall not be affected by such provision's
severance. Furthermore, in lieu of any such provision, there shall be
added automatically as part of this Agreement a legal and enforceable
provision as similar in terms to the severed provision as may be
possible.
(d) Counterparts. This Agreement may be executed in
any number of counterparts with the same effect as if all parties
hereto had signed the same document. All counterparts shall be
construed together and shall constitute one instrument.
(e) Integration. This Agreement constitutes the
entire agreement among the parties hereto pertaining to the subject
matter hereof and supersedes all prior agreements and understandings
pertaining thereto.
(f) Governing Law. This Agreement and the rights of
the parties hereunder shall be interpreted in accordance with the laws
of the State of Florida, and all rights and remedies shall be governed
by such laws without regard to principles of conflict of laws.
(g) State Securities Laws. The offer and sale of the
Shares is intended to be exempt from registration under the securities
laws of certain states. Assignor must note that there are restrictions
on transfer of the Shares, as agreed upon in Section 5 of this
Agreement.
(h) Survival. The representations, warranties and
indemnities of the parties set forth in this Agreement shall survive
for a period of one year from the Closing Date.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING
THE MERITS AND RISKS INVOLVED. THE SECURITIES OFFERED HEREBY HAVE NOT
BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR
REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT
CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS AGREEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT
AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE
APPLICABLE
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<PAGE>
STATE SECURITIES LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
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<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Agreement
to be executed as of the day and year first above written.
THE ULTIMATE SOFTWARE GROUP, INC.
By: /s/ Scott Scherr
---------------------------------------
Name: Scott Scherr
Title: President
ULTIMATE INVESTORS GROUP, INC.
By: /s/ Donald Kelly
---------------------------------------
Name: Donald Kelly
Title: President
PRINCIPALS:
/s/ Donald Kelly
------------------------------------------
Donald Kelly
/s/ Gary Kloepper
------------------------------------------
Gary Kloepper
/s/ Fred Klein
------------------------------------------
Fred Klein
<PAGE>
EXHIBIT A
INVESTOR CERTIFICATION
_______________________________________ hereby certifies that he or she EITHER:
(Check Box that Applies)
[ ] 1. meets one or more of the following criteria:
(A) He or she is a person having individual net
worth, or joint net worth with his or her
spouse, exceeding $1,000,000; or
(B) He or she is a person having an income in
excess of $200,000 in each of the two (2)
most recent years or a joint income with
his or her spouse in excess of $300,000 in
each of those years and having a reasonable
expectation of reaching the same income
level in the current year.
[ ] 2. does not meet either of the criterion described in
1(A) or (B) above and acknowledges that it has
appointed Donald Kelly as its purchaser
representative.
---------------------------------
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<PAGE>
[Exhibit B intentionally omitted]
[Schedules intentionally omitted.]
18
<PAGE>
Exhibit 10.6
AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger (this "Agreement") by ULD
Holding Corp., a New York corporation (the "Operating Company"), USG
Acquisition Sub, Inc. a New York corporation (the "Acquisition Company"), The
Ultimate Software Group, Inc., a Delaware corporation (the "Company"), and the
principals whose names appear on the signature page hereto (the "Principals")
dated as of February 24, 1998.
WHEREAS, Ultimate Software Group of New York and New England,
G.P. (the "Assignor"), the assets and liabilities of which (including the
Reseller Agreement) were assigned to and assumed by the Operating Company)
entered into the Exclusive Reseller Agreement (the "Reseller Agreement") dated
March 24, 1994 with The Ultimate Software Group, Ltd., the assets and
liabilities of which were subsequently assigned to and assumed by the Company;
WHEREAS, the Company desires to acquire all the issued and
outstanding stock of the Operating Company pursuant to the terms hereof;
WHEREAS, the transactions contemplated hereby are intended to
be treated as a pooling of interests business combination by the Company for
financial accounting purposes and as a tax free reorganization for United
States federal income tax purposes;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Merger.
(a) The Merger. Subject to the terms hereof, the
Acquisition Company shall be merged with and into the Operating
Company on the Closing Date (as defined below). Upon the Closing Date,
the parties hereto shall cause to be executed and filed with the
Secretary of State of New York, a certificate of merger. Following the
Closing Date, the separate existence of the Acquisition Company shall
cease, and the Operating Company shall be the surviving corporation
(the "Surviving Corporation").
(b) Charter and By-laws. The Certificate of
Incorporation of the Operating Company, as in effect immediately prior
to the Closing Date, shall be the initial Certificate of Incorporation
of the Surviving Corporation. The by-laws of the Operating Company, as
in effect immediately prior to the Closing Date, shall be the initial
by-laws of the Surviving Corporation.
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<PAGE>
(c) Directors. The directors of the Acquisition
Company at the Closing Date shall be the initial directors of the
Surviving Corporation. The officers of the Acquisition Company at the
Closing Date shall be the initial officers of the Surviving
Corporation.
(d) Effect on Stock. (i) The authorized capital
stock of the Operating Company consists of 200 shares of voting
common stock, no par value, of which all 200 shares are issued and
outstanding. The authorized capital stock of the Acquisition Company
consists of 1,000 shares of voting common stock, par value $.01 per
share, of which all 1,000 shares are issued and outstanding.
(ii) Upon the Closing Date, each issued and
outstanding share of common stock of the Acquisition Company
shall be converted into one validly issued, fully paid and
nonassessable share of common stock of the Surviving
Corporation.
(iii) Upon the Closing Date all the issued
and outstanding Capital Stock (as defined below) of the
Operating Company by virtue of the merger and without any
action on the part of the holders of Operating Company shares
shall be converted into the right to receive 40,265 shares
(the "Shares") of Class B Common Stock of the Company on a
pro rata basis.
(iv) As of the Closing Date, all of the
shares of Capital Stock of the Operating Company shall no
longer be outstanding and shall automatically be canceled and
retired and shall cease to exist, and each holder of a
certificate or certificates which immediately prior to the
Closing Date represented outstanding Capital Stock (the
"Certificates") shall cease to have any rights with respect
thereto, except the right to receive certificates
representing the number of Shares into which such shares have
been converted. The Company shall exchange the Certificates
for certificates representing the Shares promptly upon
receipt of the Certificates.
2. Reseller Agreement. Each of the parties hereto agrees that
any rights of the Assignor and the Operating Company and its affiliates arising
under the Reseller Agreement shall terminate on the Closing Date; provided
however, that the terms of this Section 2 shall not constitute a waiver by the
Assignor, the Principals or the Operating Company, on the one hand, or the
Company, on the other hand, of its right to assert claims against the other
with respect to any breach by the other of the Reseller Agreement, which breach
preceded the date hereof and was unknown to the party asserting such claim on
the date hereof.
2
<PAGE>
3. Representations and Warranties of the Company. The
Company hereby represents and warrants to and agrees with the Operating Company
as follows:
(a) Organization, Good Standing and Qualification.
The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all
requisite power and authority to carry on its business as now
conducted and as proposed to be conducted, and the Company has all
requisite power and authority to enter into and perform this Agreement
and the transactions contemplated hereby.
(b) Authorization. All corporate action on the part
of the Company, its officers, directors and shareholders necessary for
the authorization, execution and delivery of this Agreement, the
performance of all obligations of the Company hereunder and the
authorization, issuance (or reservation for issuance) and delivery of
the Shares and any interest therein has been taken or will be taken
prior to the Closing Date.
(c) Valid Issuance of Shares. The Shares, when
issued and delivered in accordance with the terms hereof, (i) will be
duly and validly issued, fully paid and nonassessable, (ii) will be
free of any pledges, liens, security interests, claims or other
encumbrances of any kind, and (iii) will be issued in compliance with
all applicable federal and state securities laws.
(d) Prospectus. The Company shall provide the
Operating Company with the preliminary and final prospectuses with
respect to its proposed initial public offering of common stock and
any amendments thereto, promptly after the Company's Registration
Statement and amendments thereto containing such prospectuses are
filed with the Securities and Exchange Commission (the "SEC").
(e) Outstanding Options and Warrants. Except as set
forth on Schedule 3(e) hereto, there are no outstanding options,
warrants or agreements, oral or written, for the purchase or
acquisition from or by the Company of any shares, options or warrants
for its capital stock.
(f) Anti-Dilution Adjustments. Except for the
outstanding shares of Series A and Series B Convertible Preferred
Stock of the Company, no outstanding options, warrants, shares or
other securities of the Company contain provisions for anti-dilution
adjustments by reason of the issuance of additional securities of the
Company.
(g) Exercise Price of Options. The exercise price
of options granted on the date hereof, if any, under the Company's
Nonqualified Stock Option Plan is $90.00.
(h) Percentage Interest. As of the Closing Date, the
Shares will represent at least 2.82% of the outstanding capital stock
of the Company on a
3
<PAGE>
fully diluted basis determined as if all outstanding shares of such
capital stock had been converted into one class of common stock of
the Company.
(i) Financial Statements. The Company has delivered
to the Operating Company, and the Operating Company and the Principals
may rely upon, copies of (i) the audited financial statements of the
Company for the fiscal years ended December 31, 1995 and December 31,
1996, respectively and (ii) unaudited financial statements of the
Company for the fiscal year ended December 31, 1997, in each case,
certified by an officer of the Company as being true and complete
copies of such financial statements. Such financial statements fairly
present the financial position and results of the Company as of the
dates and for the periods indicated therein, and have been prepared in
accordance with generally acceptable accounting principles,
consistently applied.
(j) Litigation. There is no pending or threatened
action or proceeding affecting the Company before any court,
governmental agency or arbitrator which may materially adversely
affect the Company or which could affect the legality, validity or
enforceability of this Agreement.
4. Representations and Warranties of the Operating Company and the
Principals. The Operating Company and the Principals hereby jointly and
severally represent and warrant to and agree with the Company as follows:
(a) Operating Company. (i) The Operating Company is
a corporation duly organized, existing and in good standing
under the laws of the State of New York, and has all
requisite corporate power and corporate authority to own,
lease and operate its properties and to conduct its business
as currently being conducted. The Operating Company has all
requisite corporate power and corporate authority to execute
and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated
hereby.
(ii) The authorized capital stock of the
Operating Company consists of 200 shares of common stock, no
par value (the "Capital Stock"), all of which are issued and
outstanding. All of the issued and outstanding shares of the
Capital Stock (1) have been duly authorized and validly
issued and are fully paid and nonassessable, (2) are free of
any pledges, liens, security interests, claims or other
encumbrances of any kind, (3) have been issued in compliance
with all applicable federal and state securities laws and (4)
are held by the person(s) listed on Schedule 4(a)(ii)
attached hereto.
(iii) The Operating Company has not issued
or granted any options, warrants, rights, or other securities
convertible into or exchangeable or exercisable for the
Capital Stock, any other commitments or agreements providing
for the issuance of additional shares of the Capital Stock,
the sale of treasury shares, or for the repurchase or
4
<PAGE>
redemption of shares of the Capital Stock, and there are no
agreements of any kind which may obligate the Company to
issue, purchase, register for sale, redeem, or otherwise
acquire any of its securities or interests
(b) Assets. The Operating Company is the legal and
beneficial owner of the assets described on Schedule 4(b) hereto (the
"Assets"), free and clear of any lien, charge, encumbrance or adverse
claim, except as set forth on Schedule 4(c) hereto. There are no
assets used in, or necessary for the operation of, the business of the
Operating Company as presently operated (the "Business") other than
the Assets. The Assets are all of the assets of Operating Company.
(c) Liabilities; Litigation. The Operating Company
has no liabilities known or unknown, fixed or contingent, including
contractual liabilities, other than the liabilities described on
Schedule 4(c) hereto (the "Liabilities"). There is no pending or
threatened action or proceeding affecting the Assets or the Business
before any court, governmental agency or arbitrator, which may
materially adversely affect the Assets or the Business or which could
affect the legality, validity or enforceability of this Agreement.
(d) Consents; No Conflicts. The execution, delivery
and performance of this Agreement by the Operating Company and the
Principals and the consummation by the Operating Company and the
Principals of the transactions contemplated hereby (x) do not
contravene (i) the Operating Company's organizational documents, (ii)
any law or (iii) any contractual restriction binding on or affecting
the Operating Company or the Principals and (y) do not require the
consent, approval, permission or other authorization of any court,
arbitrator or governmental, administrative or self-regulatory
authority or consent under any material lease, license, agreement or
other material instrument of the Operating Company, the Principals or
the Business and (z) do not require any stockholder, director or other
authorization or action, other than authorizations that have been duly
obtained and actions that have been duly taken.
(e) Financial Statements. The Operating Company has
delivered to the Company all of the Assignor's quarterly financial
statements for the years ended December 31, 1996 and December 31, 1997
and, it will, on or before the Closing Date, deliver to the Company
the Assignor's financial statements for the fiscal years ended
December 31, 1995, December 31, 1996 and December 31, 1997, audited by
Arthur Andersen LLP ("Andersen") (the "Audited Statements"), and such
financial statements do and will fairly present the financial position
and results of operations of the Assignor as of the dates and for the
periods indicated therein. Such financial statements were and will be
prepared in accordance with generally accepted accounting principles,
consistently applied.
(f) No Brokers. No broker, finder or any other
third party is entitled to any fee or commission in connection with
the transactions contemplated hereby.
5
<PAGE>
(g) Accredited Investor. Each of the Operating
Company and the Principals is an "accredited investor" within the
meaning of Rule 501(a) of Regulation D promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), and each
Principal has executed an Accredited Investor Certification in the
form attached hereto.
(h) Investment Intent. Each Principal (i) has such
knowledge, sophistication and experience in business and financial
matters that it is capable of evaluating the merits and risks of an
investment in the Shares and any interest therein, (ii) can bear the
economic risk of an investment in the Shares and any interest therein
for an indefinite period of time and can afford a complete loss of
such investment, and (iii) is acquiring the Shares and any interest
therein for its own account and not with a view to, or for a sale in
connection with, a distribution in violation of any applicable
securities laws of any jurisdiction.
(i) No Registration. Each Principal understands that
the offering and the issuance of the Shares have not been and will not
be registered or qualified under the laws of any jurisdiction
regarding the offering or sale of securities, and that the Shares and
any interest therein may not be resold or otherwise transferred by the
Principals unless any such subsequent sale or transfer is duly
registered and qualified under the applicable securities laws or is
exempt from such registration and qualification.
(j) Access to Information. The Operating Company (i)
has been furnished with, and hereby acknowledges the receipt and
review of, (a) a copy of a draft (the "Draft Prospectus") of the
Preliminary Prospectus of the Company dated December 31, 1997 and any
attachments thereto, (b) the audited financial statements of the
Company for the fiscal years ended December 31, 1995 and December 31,
1996, respectively, and (c) unaudited financial statements of the
Company for the fiscal year ended December 31, 1997, (ii) has been
afforded the opportunity to obtain such additional information from
the Company and its representatives as the Operating Company has
deemed necessary in order to evaluate the merits, risks and other
considerations relating to an acquisition of Shares and any interest
therein, (iii) fully understands the risks and other considerations
relating to the investment contemplated hereby, and (iv) with respect
to tax, employee benefits and other financial and economic
considerations related to the investment contemplated hereby, has
relied solely on the advice of the Operating Company's own
professional advisors.
(k) Draft Prospectus. The Operating Company
understands that (i) the Draft Prospectus is a preliminary draft and
that future drafts may contain material changes from the Draft
Prospectus and (ii) there can be no assurance that an initial public
offering of the Company's stock will be consummated in the near future
or ever or that the Registration Statement filed in connection
therewith will be declared effective by the SEC.
6
<PAGE>
(l) Information. All information which the Operating
Company has heretofore furnished or furnishes herewith to the Company
in connection with the transactions contemplated hereby is correct and
complete in all respects as of the date of this Agreement, and if
there should be any change in such information prior to the
consummation of the transactions contemplated hereby, the Operating
Company will immediately furnish such revised or corrected information
to the Company.
(m) Schedule of Contracts. Attached hereto as
Schedule 4(m) is a true and complete list of all oral and written
contracts and agreements entered into by the Assignor or the Operating
Company with respect to the Business through the date hereof. Complete
copies of all such written contracts and complete descriptions of all
such oral contracts have been delivered to the Company. To the
knowledge of the Operating Company, the Operating Company is not in
material default under any such contracts.
(n) Certain Accounting Matters. Neither the Assignor
nor the Operating Company have knowingly taken or agreed to take any
action that would prevent the Company from accounting for the
transactions contemplated hereby as a pooling of interest business
combination.
(o) Shareholder Agreements. The Operating Company
and Principals acknowledge that it is the parties' intention that the
transactions contemplated by this Agreement be accounted for as a
pooling of interests business combination and that each of the
shareholders of the Operating Company may be deemed to be an
"affiliate" of the Operating Company within the meaning of Rule 145
promulgated under the Securities Act. Accordingly, each of the
Operating Company and the Principals covenants and agrees that he, she
or it will not (i) knowingly take any action after the date hereof to
cause the transactions contemplated hereby not to be accountable under
the pooling of interests method of accounting, or (ii) sell, transfer,
pledge, dispose of or otherwise part with any interest in or with
respect to, or in any other manner reduce his, her or its investment
risk with respect to, (A) any shares of capital stock of the Operating
Company at any time prior to the Closing Date, and (B) any shares of
the Company's stock received by such shareholder in connection with
the transactions contemplated hereby or otherwise until such time as
the Company publishes financial results covering at least 30 days of
combined operations of the Company and the Operating Company or (iii)
from the Closing Date until the time the Company publishes financial
results covering at least thirty days of combined operations of the
Company and the Operating Company, directly or indirectly sell or
purchase or enter into any agreement, contract or arrangement to sell
or purchase any put or call options or other derivative securities
(including any short sales) with respect to shares of the Company's
stock or enter into any other agreements, contracts or arrangements
providing for the alteration of such shareholder's investment risk
with respect to any shares of the Company's stock.
7
<PAGE>
(p) Reseller Agreement. To its knowledge, the
Operating Company has not materially breached any of its obligations
under the Reseller Agreement as of the date hereof.
5. Securities Laws. The Operating Company hereby
acknowledges and agrees that:
(a) the Shares must be held indefinitely unless
subsequently registered under the Securities Act and under any
applicable state securities laws or unless an exemption from such
registration is available.
(b) the Shares will not be registered under the
Securities Act on the grounds that the offering and sale thereof
contemplated by this Agreement will be exempt from registration under
the Securities Act, and that the Company's reliance upon such
exemption is predicated upon the representations of the Operating
Company set forth herein.
(c) "stop transfer" instructions shall be placed
against the Shares on the transfer books of the Company and that the
certificate(s) evidencing the Shares shall bear a legend, in addition
to any legend required by applicable state securities laws, in
substantially the following form:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD OR
OTHERWISE DISPOSED OF FOR VALUE UNLESS A REGISTRATION
STATEMENT HAS BECOME EFFECTIVE WITH RESPECT TO SUCH
SECURITIES UNDER THE SECURITIES ACT AND SUCH STATE SECURITIES
LAWS OR IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO
THE CORPORATION THERE IS AN APPLICABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND THE
APPLICABLE STATE SECURITIES LAWS OR SUCH REGISTRATION IS NOT
OTHERWISE REQUIRED."
6. Due Diligence; Termination.
(a) The Operating Company and the Principals shall
afford any and all authorized representatives of the Company access,
during normal business hours, to its employees, properties, books,
contracts and records and shall furnish promptly all information
concerning its business, properties and personnel and
8
<PAGE>
copies of any of its books, records or contracts as the Company or
its representatives shall request; provided, that no investigation
pursuant to this Section 6 shall effect or be deemed to modify any
representation or warranty made in this Agreement by the Operating
Company.
(b) Until the date which is ten days after the
Operating Company delivers to the Company the Audited Statements
pursuant to Section 4(e) hereof, the Company shall have the right to
terminate this Agreement if the Company shall determine in its sole
discretion, based on its investigation of the Operating Company
pursuant to Section 6(a) or a review of such Audited Statements, that
consummating the transactions contemplated hereby would not be in the
best interests of the Company.
(c) The Company shall have the right to terminate
this Agreement if the Company does not receive requisite approval of
the transactions contemplated hereunder from its stockholders on or
before the Closing Date.
7. Closing. Subject to Section 6(b) hereof and the
satisfaction or waiver of the conditions set forth in Section 9 hereof,
consummation of the transactions contemplated by Section 1 hereof (the
"Closing") shall take place at the offices of Dewey Ballantine LLP, 1301 Avenue
of the Americas, New York, New York 10019 on a date (the "Closing Date") which
is the earlier of (a) March 31, 1998 and (b) the date specified in a written
notice given by the Company no less than five (5) days prior to such date.
8. Covenants.
(a) Interim Operations. Prior to the Closing Date, unless
the Company has consented in writing thereto, the Operating
Company:
(i) shall conduct its operations according to its
usual, regular and ordinary course in substantially
the same manner as heretofore conducted;
(ii) shall use its reasonable efforts to preserve intact
its business organization and goodwill and maintain
satisfactory relationships with those persons having
business relationships with it;
(iii) shall promptly notify the Company of (x) any
material change in its condition (financial or
otherwise), business, properties, assets,
liabilities or the normal course of its business or
of its properties, (y) any material litigation or
material governmental complaints, investigations or
hearings (or communications indicating that the same
may be contemplated), or (z) the breach of any
representation or warranty contained herein;
(iv) shall not issue any equity interest;
9
<PAGE>
(v) shall not (w) incur, create, assume or otherwise
become liable for borrowed money or assume,
guarantee, endorse or otherwise become
responsible or liable for the obligations of any
other individual, corporation or other entity,
(x) make any loans or advances to any other
person, except in each case in the ordinary
course of business, (y) acquire (including,
without limitation, for cash or shares of stock,
by merger, consolidation, or acquisition of stock
or assets) any interest in any corporation,
partnership or other business organization or
division thereof or any assets, or make any
investment either by purchase of stock or
securities, contributions of capital or property
transfer or, except in the ordinary course of
business, consistent with past practice, purchase
any property or assets of any other person or (z)
effect a sale or other disposition of any of the
Assets or allow the creation of any lien or
encumbrance thereon;
(vi) shall not (x) declare, set aside or make any
distribution or payment with respect to any shares
of its capital stock or other ownership interest,
other than such distributions or payments as are
consistent with past practice or (y) directly or
indirectly redeem, purchase or otherwise acquire any
shares of its capital stock or make any commitment
for any such action;
(vii) shall not amend or otherwise change its articles of
incorporation, by-laws or equivalent organizational
documents;
(viii) shall not increase the compensation payable or to
become payable to its officers or employees, pay any
employment related or other bonus to its
shareholder, or, except as presently bound to do,
grant any severance or termination pay to, or enter
into any employment or severance agreement with, any
of its directors, officers or other employees;
(ix) shall not take any action other than in the ordinary
course of business and in a manner consistent with
past practice with respect to accounting policies or
procedures; and
(x) shall not agree, in writing or otherwise, to take
any of the foregoing actions or take any action
which would make any representation or warranty in
this Agreement untrue or incorrect as of the Closing
Date.
(b) Trading in Company Stock. Except as otherwise
expressly consented to by the Company, from the date of this Agreement
until the Closing Date, neither the Operating Company nor the
Principals will directly or indirectly purchase or sell (including
short sales) any shares of the Company's stock, or sell, transfer,
pledge, dispose of or otherwise part with any interest in or with
respect to
10
<PAGE>
or in any other manner reduce its investment risk with respect to any
shares of the Company's stock to be received pursuant to this
Agreement.
(c) Confidentiality of Prospectus. The Operating
Company acknowledges and agrees that the Draft Prospectus is highly
confidential, that it may not be photocopied, distributed or otherwise
communicated to persons other than the Operating Company or its
representatives retained for purposes of this transaction and that
upon receipt by the Operating Company of a preliminary or final
prospectus of the Company, the Draft Prospectus will be returned to
the Company.
(d) Custom Applications. The Operating Company shall
provide on the date hereof a Schedule 8(d) which lists, by customer,
all custom applications, including, without limitation, custom
programs, modules and interfaces (other than software purchased by the
Operating Company from the Company) ("Custom Applications"), which
have been provided to any customer of the Operating Company. The
Operating Company shall provide source code with respect to all Custom
Applications on or before the Closing Date.
(e) Cooperation; Tax Schedule. Following the Closing
Date, the Operating Company shall promptly furnish the Company with
such financial and reporting data and other information with respect
to the Assets and Liabilities as the Company may from time to time
reasonably request, for any reasonable business purpose, including,
without limitation, the preparation of tax returns and financial
statements. Within sixty (60) days following the Closing Date, the
Operating Company shall prepare and deliver to the Company a schedule
indicating the federal income tax basis and state income tax basis, if
different, of each of the Assets and Liabilities.
(f) Options; Dilution. The Company hereby agrees
that from the date hereof until April 30, 1998, the Company will not
issue any options to purchase shares of capital stock of the Company
to any persons who are officers of the Company as of the date hereof.
The Company shall not enter into a transaction pursuant to which any
shares of Class B Common Stock of the Company, including the Shares,
are diluted in a manner which is not pari passu with other shares of
Class B Common Stock of the Company.
(g) Registration Rights Agreement. The Company
agrees that if at any time between the Closing Date and the first
anniversary of the Closing Date, the Company proposes to register any
shares of capital stock of the Company owned by Scott Scherr and/or
Alan Goldstein, other than on a Registration Statement on Form S-8,
the shareholders of the Operating Company shall have the right to
register in such registration, on the same terms as Messrs. Scherr
and/or Goldstein, a number of Shares equal to the total number of
Shares held by the shareholders of the Operating Company multiplied by
a fraction, the numerator of which
11
<PAGE>
is the total number of shares of Messrs. Scherr and/or Goldstein, as
applicable, proposed to be registered and the denominator of which is
the total number of shares of the Company's capital stock owned by
Messrs. Scherr and/or Goldstein, as applicable, at the time of
registration.
9. Conditions to Closing. (a) The obligations of the Company
under this Agreement are subject to the fulfillment or waiver on or
before the Closing Date of the following conditions:
(i) Representations and Warranties. The representations
and warranties of the Operating Company and the
Principals contained in Section 4 shall be true on
and as of the Closing Date with the same effect as
though such representations and warranties had been
made on and as of the Closing Date.
(ii) Performance. The Operating Company shall have
performed and complied with all agreements,
obligations and conditions contained in this
Agreement.
(iii) No Material Adverse Change. There shall have been no
material adverse change in the condition of the
Operating Company or the Assets since the date
hereof.
(iv) Pooling Letter. The Company shall have received from
Andersen, a letter dated the Closing Date,
confirming that the transactions contemplated
hereby, if consummated, can properly be accounted
for as a pooling of interests combination in
accordance with GAAP and the criteria of Accounting
Principles Board Opinion No. 16 and the regulations
of the SEC.
(v) Balance Sheet. The Operating Company shall have
delivered to the Company a balance sheet of the
Operating Company, dated as of the Closing Date,
prepared in accordance with generally accepted
accounting principles, consistently applied, and
which shall be subject to review or audit by
Andersen at the sole discretion of the Company. Such
balance sheet shall demonstrate that the assets of
the Operating Company, other than the Reseller
Agreement and other intangible assets, have an
aggregate value greater than the aggregate value of
the liabilities of the Operating Company.
(vi) Updated Schedules. The Operating Company shall have
prepared and delivered to the Company updated
Schedules 4(b), 4(c), 4(m) and 8(d) which reflect,
as of the Closing Date, the information required to
be stated therein.
(vii) Other Documents. The Company shall have received
such other documents as it shall reasonably request
prior to the Closing.
12
<PAGE>
(b) The obligations of the Operating Company under this
Agreement are subject to the fulfillment or waiver on or before the Closing
Date of each of the following conditions:
(i) Representations and Warranties. The representations
and warranties of the Company contained in Section 3
shall be true on and as of the Closing Date with the
same effect as though such representations and
warranties had been made on and as of the date
thereof.
(ii) Delivery of Shares. The Company shall have delivered
the Shares specified in Section 1.
(iii) Performance. The Purchaser shall have performed and
complied with all agreements, obligations and
conditions contained in this Agreement.
(iv) No Material Adverse Change. There shall have been no
material adverse change in the financial condition
of the Company after the date hereof.
10. Certain Tax Matters. The parties to this Agreement intend
that the transactions contemplated hereby (and the distribution of the Shares
of the Company to the Operating Company's shareholders) (collectively, the
"Transaction") will constitute a reorganization described in Section
368(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code").
However, each of the parties to this Agreement acknowledges that it is relying
solely upon its respective advisors in determining the tax consequences of the
Transaction and will not rely on any representation or assurance of the other
party other than the representations and covenants set forth in this Agreement
or any other agreement or certificate delivered in connection herewith. None of
the Company, the Operating Company or the Principals will take any tax
reporting position or make any tax election inconsistent with the
characterization of the Transaction qualifying as a reorganization described in
Section 368(a)(2)(E) of the Code, except as may be required upon examination
(or as the result of a prior determination) by the Internal Revenue Service or
any other tax authority.
11. Waiver. Subject to the consummation of the transactions
contemplated hereby, each of the parties hereto hereby releases and discharges
the other party, its shareholders, employees, parents, subsidiaries,
affiliates, successors and assigns from all actions, causes of action, suits,
debts, agreements, judgments, claims, and demands whatsoever, in law or equity
which such party ever had, now have or hereafter can, shall or may have, for,
upon or by reason of any claim relating to the Reseller Agreement and the
relationship of the parties thereunder.
12. Indemnification.
13
<PAGE>
(a) The Principals and, until the Closing Date, the
Operating Company hereby jointly and severally agree to indemnify and
hold harmless the Company and any fiduciary, officer, director,
employee, agent or controlling person of the Company (each, an
"Indemnified Person") against any and all losses, claims, damages,
expenses and liabilities (or actions in respect thereof) whatsoever by
reason of or arising from (i) any breach of the representations and
warranties of this Agreement, (ii) any failure by the Operating
Company or the Principals to comply with any covenant in this
Agreement and (iii) any liabilities whether known or unknown, fixed or
contingent (including contractual liabilities) of the Operating
Company or any of its affiliates, other than the Liabilities. The
Principals will reimburse any Indemnified Person for all expenses
(including reasonable attorneys' fees) as they are incurred by any
such Indemnified Person in connection with investigating, preparing or
defending any such action or claim, whether or not in connection with
pending or threatened litigation in which any Indemnified Person is a
party.
(b) The Company hereby agrees to indemnify and hold
harmless the Operating Company and the Principals and any fiduciary,
officer, director, employee, agent or controlling person of the
Operating Company (each, an "Indemnified Person") against any and all
losses, claims, damages, expenses and liabilities (or actions in
respect thereof) whatsoever by reason of or arising from (i) any
breach of the Company's representations and warranties in this
Agreement and (ii) any failure by the Company to comply with any of
its covenants in this Agreement. The Company will reimburse any
Indemnified Person for all expenses (including reasonable attorneys'
fees) as they are incurred by any such Indemnified Person in
connection with investigating, preparing or defending any such action
or claim, whether or not in connection with pending or threatened
litigation in which any Indemnified Person is a party.
(c) Promptly after the receipt by a party of notice
of any third party claim or the commencement of any third party
action, suit or proceeding subject to indemnification hereunder (a
"Third Party Claim"), such party (the "Indemnified Party") will, if a
claim in respect thereto is to be made against any party obligated to
provide indemnification hereunder (the "Indemnifying Party"), give
such Indemnifying Party reasonable written notice of such Third Party
Claim; provided, however, that the failure to provide such notice will
not relieve the Indemnifying Party of any of its or his obligations,
or impair the right of the Indemnified Party to indemnification,
pursuant to this Section 12 unless, and only to the extent that, such
failure materially prejudices the Indemnifying Party's opportunity to
defend or compromise the Third Party Claim. Such Indemnifying Party
shall have the right, at its option, to defend at its own expense and
by its own counsel any Third Party Claim, provided that (i) the
Indemnifying Party acknowledges in writing (at the time such
Indemnifying Party elects to assume such defense) its obligation under
this Section 12 to indemnify the Indemnified Party with respect to
such Third Party Claim, (ii) such counsel is reasonably satisfactory
to the Indemnified Party, (iii) the Indemnified Party is kept fully
informed of all developments, and is furnished with copies of all
documents and
14
<PAGE>
papers, related thereto and is given the right to participate in the
defense and investigation thereof as provided below, and (iv) such
counsel proceeds with diligence and in good faith with respect
thereto. If the Indemnifying Party shall undertake to defend any Third
Party Claim, such Indemnifying Party shall notify the Indemnified
Party of its intention to do so promptly (and in any event no later
than thirty (30) days) after receipt of notice of the Third Party
Claim, and the Indemnified Party agrees to cooperate in good faith
with the Indemnifying Party and its counsel in the defense of such
Third Party Claim. Notwithstanding the foregoing, the Indemnified
Party shall have the right to participate in the defense and
investigation of any Third Party Claim with its own counsel at its own
expense, except that the Indemnifying Party shall bear the expense of
such separate counsel if (A) in the written opinion of counsel to the
Indemnified Party reasonably acceptable to the Indemnifying Party, use
of counsel of the Indemnifying Party's choice would be expected to
give rise to a conflict of interest, (B) there are or may be legal
defenses available to the Indemnified Party that are different from or
additional to those available to the Indemnifying Party, (C) the
Indemnifying Party shall not have employed counsel to represent the
Indemnified Party within a reasonable time after notice of the Third
Party Claim is given to the Indemnifying Party or notice that the
Indemnifying Party intends to assume the defense of the Third Party
Claim is given to the Indemnified Party or (D) the Indemnifying Party
shall authorize the Indemnified Party to employ separate counsel at
the expense of the Indemnifying Party. The Indemnifying Party shall
not settle any Third Party Claim without the prior written consent of
the Indemnified Party, which shall not be unreasonably withheld;
provided, however, that an Indemnified Party shall not be required to
consent to any settlement involving the imposition of equitable
remedies.
13. Miscellaneous.
(a) Notices. Any notices or other communications required or
permitted to be given or delivered under this Agreement shall be in
writing and shall be sufficiently given to a party if delivered
personally or mailed by registered or certified mail, postage prepaid,
return receipt requested, or by overnight delivery by a
nationally-recognized courier or by telecopier, as follows (or to such
other address or person as either party may from time to time
designate to the other in writing):
To the Operating Company or the Principals:
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
To the Company:
The Ultimate Software Group, Inc.
15
<PAGE>
3111 Stirling Road, Suite 308
Ft. Lauderdale, FL 33312
Attention: Scott Scherr
Telecopier: (954) 266-1301
Any such notice or other communication shall be deemed to be given as
of the date it is personally delivered, five (5) days after being
deposited in the United States mail, one (1) day after being deposited
with a nationally recognized courier for overnight delivery or the
date it is transmitted via telecopier, answerback received (followed
promptly by delivery of such notice in accordance with one of the
other methods above).
(b) Binding Effect; Assignability. This Agreement
shall be binding upon and inure to the benefit of all of the parties
and their successors, legal representatives and assigns. None of the
parties hereto may transfer its rights hereunder without the prior
written consent of the other party, which consent may be given or
withheld for any reason or no reason.
(c) Severability. If any provision hereof is held to
be illegal or unenforceable, such provision shall be fully severable,
and the remaining provisions of this Agreement shall remain in full
force and effect and shall not be affected by such provision's
severance. Furthermore, in lieu of any such provision, there shall be
added automatically as part of this Agreement a legal and enforceable
provision as similar in terms to the severed provision as may be
possible.
(d) Counterparts. This Agreement may be executed in
any number of counterparts with the same effect as if all parties
hereto had signed the same document. All counterparts shall be
construed together and shall constitute one instrument.
(e) Integration. This Agreement constitutes the
entire agreement among the parties hereto pertaining to the subject
matter hereof and supersedes all prior agreements and understandings
pertaining thereto.
(f) Governing Law. This Agreement and the rights of
the parties hereunder shall be interpreted in accordance with the laws
of the State of Delaware, and all rights and remedies shall be
governed by such laws without regard to principles of conflict of
laws.
(g) State Securities Laws. The offer and sale of the
Shares is intended to be exempt from registration under the securities
laws of certain states. The Operating Company and the Principals must
note that there are restrictions on transfer of the Shares, as agreed
upon in Section 5 of this Agreement.
16
<PAGE>
(h) Survival. The representations, warranties and
indemnities of the parties set forth in this Agreement shall survive
for a period of one year from the Closing Date.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING
THE MERITS AND RISKS INVOLVED. THE SECURITIES OFFERED HEREBY HAVE NOT
BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR
REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT
CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS AGREEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT
AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE
APPLICABLE STATE SECURITIES LAWS PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR
THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF
TIME.
17
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Agreement
to be executed as of the day and year first above written.
ULD HOLDING CORP.
By: /s/ Gregory M. Swick
---------------------------------------
Name: Gregory M. Swick
Title: President
USG ACQUISITION SUB, INC.
By: /s/ Scott Scherr
---------------------------------------
Name: Scott Scherr
Title: President
THE ULTIMATE SOFTWARE GROUP, INC.
By: /s/ Scott Scherr
--------------------------------------
Name: Scott Scherr
Title: President
PRINCIPALS:
ULTIMATE SOFTWARE GROUP OF NEW YORK AND NEW
ENGLAND, G.P.
By: /s/ Gregory M. Swick
---------------------------------------
Name: Gregory M. Swick
Title: President
18
<PAGE>
WEDGEWOOD GROUP, INC.
By: /s/ Patrick Juliano
---------------------------------------
Name: Patrick Juliano
Title: Managing Director/
Secretary/Treasurer
NEW COUNTRY DEVELOPMENT
GROUP, INC.
By: /s/ Michael J. Cantanucci
---------------------------------------
Name: Michael J. Cantanucci
Title: President
MCNEARY, INC.
By: /s/ William J. McNeary, IV
---------------------------------------
Name: William J. McNeary, IV
Title: President
/s/ Gregory M. Swick
---------------------------------------
Gregory M. Swick
/s/ Patrick Juliano
---------------------------------------
Patrick Juliano
/s/ Carmine J. DeCrescente Jr.
---------------------------------------
Carmine J. DeCrescente Jr.
/s/ Michael J. Cantanucci
---------------------------------------
Michael J. Cantanucci
19
<PAGE>
/s/ Anthony R. Ianniello
---------------------------------------
Anthony R. Ianniello
/s/ William J. McNeary, IV
---------------------------------------
William J. McNeary, IV
20
<PAGE>
ACCREDITED INVESTOR CERTIFICATION
SIGN BELOW
_____________________ hereby certifies that EITHER (Check Box that Applies):
|_| 1. It is a corporation or a partnership with total
assets in excess of $5,000,000 that was not formed
for the specific purpose of acquiring the Shares or
any interest therein (as defined above); OR
|_| 2. All of the equity owners of the undersigned meet
one or more of the following criteria:
(A) A person having individual net worth, or
joint net worth with his or her spouse,
exceeding $1,000,000; or
(B) A person having an income in excess of
$200,000 in each of the two (2) most recent
years or a joint income with his or her
spouse in excess of $300,000 in each of
those years and having a reasonable
expectation of reaching the same income
level in the current year.
|_| 3. He or she is an individual that meets one or more
of the following criteria:
(A) A person having individual net worth, or
joint net worth with his or her spouse,
exceeding $1,000,000; or
(B) A person having an income in excess of
$200,000 in each of the two (2) most recent
years or a joint income with his or her
spouse in excess of $300,000 in each of
those years and having a reasonable
expectation of reaching the same income
level in the current year.
-----------------------------------
21
<PAGE>
[Exhibit B intentionally omitted]
[Schedules intentionally omitted.]
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Registrant
------------------------------
ULD Holdings Corp. (NY)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use
of our reports and to all references to our firm included in or made a part
of this Registration Statement.
/s/ Arthur Andersen LLP
- -----------------------
ARTHUR ANDERSEN LLP
Miami, Florida,
March 11, 1998.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001016125
<NAME> THE ULTIMATE SOFTWARE GROUP
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,017,507
<SECURITIES> 0
<RECEIVABLES> 4,641,367
<ALLOWANCES> 458,803
<INVENTORY> 0
<CURRENT-ASSETS> 7,233,802
<PP&E> 2,825,522
<DEPRECIATION> (1,229,997)
<TOTAL-ASSETS> 9,620,687
<CURRENT-LIABILITIES> 12,150,058
<BONDS> 0
0
4,873
<COMMON> 7,726
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,620,687
<SALES> 14,136,575
<TOTAL-REVENUES> 14,136,575
<CGS> 8,268,722
<TOTAL-COSTS> 21,318,920
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 191,156
<INCOME-PRETAX> (15,490,898)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,490,898)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
