UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 0-24347
THE ULTIMATE SOFTWARE GROUP, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 65-0694077
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
3111 STIRLING ROAD, FORT LAUDERDALE, FL 33312
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(Address of principal executive offices) (Zip Code)
(954) 266-1000
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(Registrant's telephone number, including area code)
NONE
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of May 5, 1999, there were 15,893,705 shares of the Registrant's
Common Stock, par value $.01, outstanding.
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THE ULTIMATE SOFTWARE GROUP, INC.
TABLE OF CONTENTS
PAGE(S)
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Part I--Financial Information:
Item 1--Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 3
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-17
Item 3--Quantitative and Qualitative Disclosures About Market Risk 18
Part II--Other Information:
Item 1--Legal Proceedings 18
Item 2--Changes in Securities and Use of Proceeds 18-19
Item 3--Defaults upon Senior Securities 19
Item 4--Submission of Matters to a Vote of Security Holders 19
Item 5--Other Information 19
Item 6--Exhibits and Reports on Form 8-K 19
Signatures 20
2
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PART 1--FINANCIAL INFORMATION
ITEM 1--Financial Statements
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
AS OF AS OF
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
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Current assets: (Unaudited)
Cash and cash equivalents $ 13,726 $ 17,128
Accounts receivable, net 14,959 15,225
Prepaid expenses and other current assets 1,252 2,014
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Total current assets 29,937 34,367
Property and equipment, net 2,605 2,458
Other assets, net 523 389
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Total assets $ 33,065 $ 37,214
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,873 $ 2,761
Accrued expenses 3,181 4,353
Deferred revenue 7,868 8,913
Current portion of capital lease obligations 910 846
-------- --------
Total current liabilities 13,832 16,873
Capital lease obligations, net of current portion 1,145 1,010
Deferred revenue 180 221
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Total liabilities 15,157 18,104
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Commitments and contingencies -- --
Stockholders' equity:
Preferred Stock, $.01 par value, 2,000,000 and 501,914
shares authorized in 1999 and 1998, respectively;
no shares issued or outstanding in 1999 and 1998 -- --
Series A Junior Participating Preferred Stock, $.01 par value,
500,000 shares authorized, no shares issued and
outstanding in 1999 and 1998 -- --
Common Stock, $.01 par value, 50,000,000 shares
authorized, 15,893,705 and 15,879,015 shares issued and
outstanding in 1999 and 1998, respectively 159 159
Additional paid-in capital 64,170 64,068
Accumulated deficit (46,421) (45,117)
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Total stockholders' equity 17,908 19,110
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Total liabilities and stockholders' equity $ 33,065 $ 37,214
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The accompany notes to condensed consolidated financial statements are an
integral part of these financial statements.
3
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THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998
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Revenues:
License $ 3,019 $ 3,123
Service 7,726 4,448
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Total revenues 10,745 7,571
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Cost of revenues:
License 143 204
Service 5,101 3,743
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Total cost of revenues 5,244 3,947
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Operating expenses:
Sales and marketing 3,714 3,815
Research and development 2,094 1,419
General and administrative 1,140 916
Amortization of acquired intangibles -- 191
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Total operating expenses 6,948 6,341
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Operating loss (1,447) (2,717)
Compensation related to modification of escrow agreement -- (4,183)
Interest expense (39) (38)
Interest and other income 182 9
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Net loss $ (1,304) $ (6,929)
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Net loss per share -- basic and diluted $ (0.08) $ (0.55)
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Weighted average shares outstanding -- basic and diluted 15,884 12,621
======== ========
The accompany notes to condensed consolidated financial statements are an
integral part of these financial statements.
4
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THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1999 1998
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Cash flows from operating activities:
Net loss $ (1,304) $ (6,929)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 414 443
Provision for doubtful accounts 233 155
Compensation related to modification of escrow agreement -- 4,183
Non-cash issuance of stock options for board fees 27 --
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable 33 (1,708)
Prepaid expenses and other current assets 747 (140)
Other assets (142) (678)
Accounts payable (888) 373
Accrued expenses (1,171) 88
Deferred revenue (1,086) (222)
Other liabilities -- 4
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Net cash used in operating activities (3,137) (4,431)
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Cash flows from investing activities:
Purchases of property and equipment (142) (60)
Net repayments of notes receivable 15 38
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Net cash used in investing activities (127) (22)
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Cash flows from financing activities:
Net borrowings under line of credit agreements -- 1,969
Net proceeds from capital lease obligations -- 381
Principal payments on capital lease obligations (213) (75)
Equity transactions of 1998 poolings -- (434)
Net proceeds from issuance of Common Stock 75 --
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Net cash provided by (used in) financing activities (138) 1,841
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Net decrease in cash and cash equivalents (3,402) (2,612)
Cash and cash equivalents, beginning of period 17,128 3,270
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Cash and cash equivalents, end of period $ 13,726 $ 658
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 69 $ 36
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
- - The Company entered into capital lease obligations to acquire new equipment
totaling $412 and $319 in the three months ended March 31, 1999 and 1998,
respectively.
- - In 1998, the Company acquired five third-party resellers in transactions
accounted under the poolings-of-interest accounting method (see Note 4).
- - Prior to the closing of the initial public offering of the Company's Common
Stock in June 1998, shares of Common Stock were issued upon the conversion of
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock,
Class A Common Stock, Class B Common Stock and Class C Common Stock.
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
5
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THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of The
Ultimate Software Group, Inc. and subsidiaries (the "Company") have been
prepared, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). Certain information and footnote
disclosures normally included in financial statements in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. The information in this report should be read in
conjunction with the Company's audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 filed with the SEC on March 31, 1999 (the "Form 10-K").
The unaudited condensed consolidated financial statements included
herein reflect all adjustments (consisting only of normal, recurring
adjustments) which are, in the opinion of the Company's management, necessary
for a fair presentation of the information for the periods presented. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Interim results of operations
for the three months ended March 31, 1999 and 1998 are not necessarily
indicative of operating results for the full fiscal years or for any future
periods.
2. INITIAL PUBLIC OFFERING
On June 5, 1998, the Company completed the sale of 3,250,000 shares of
the Company's common stock, par value $.01 (the "Common Stock"), in an initial
public offering at an offering price of $10 per share (the "IPO"). Prior to the
closing of the IPO, the Company's Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock, Class A Common Stock, Class B Common Stock and
Class C Common Stock were converted into Common Stock. In connection with the
IPO, the Company effected a 10.119-for-1 stock split of the issued and
outstanding shares of the Common Stock. All references to Common Stock amounts,
shares and per share data have been adjusted to give retroactive effect to the
stock split.
3. MODIFICATION TO ESCROW AGREEMENT
A total of 230,700 shares of the Class B Common Stock (converted into
2,334,453 shares of Common Stock), issued in connection with a series of
transactions occurring in 1996 were held in escrow pursuant to an escrow
agreement among the Company, The Ultimate Software Group, Ltd. (the
"Partnership") and the shareholders of The Ultimate Software Group, Inc., the
Partnership's then general partner (the "GP"), and the shareholders of Strategic
Image Systems, Inc. (the "Class B 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 were to be released upon the execution of a firm
underwriting agreement for the initial public offering of the Company's capital
stock on or before July 1, 1998. Accordingly, approximately $4.2 million of
compensation expense
6
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was recorded as of the date of modification, representing 60,429 shares of Class
B Common Stock of the Company (converted into 611,477 shares of Common Stock)
released to directors, officers and employees of the Company, multiplied by the
difference between the fair market value of the Class B Common Stock on the date
of the modification and the price paid by the holders of the shares.
4. ACQUISITION OF RESELLERS
In February and March 1998, the Company acquired the businesses of five
third-party resellers of the Company's products (the "Acquired Resellers") in
exchange for an aggregate of 121,856 shares of the Company's Class B Common
Stock (converted into 1,233,056 shares of Common Stock). Prior to 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.
5. RELEASE EVENT
In March 1998, a "Release Event" occurred under the Class A Escrow
Agreement (hereinafter defined) when the businesses of the five Acquired
Resellers were acquired by the Company and the GP determined that such
acquisitions should result in the liquidation of the Partnership. Following the
occurrence of such Release Event, the following events occurred: (i) the Board
of Directors declared a mandatory conversion of the outstanding shares of the
Company's Class A, Class B and Class C Common Stock and such shares were
converted into shares of Common Stock of the Company; (ii) 68,747 of the shares
of Class A Common Stock (subsequently converted into 1,030,398 shares of Common
Stock) held in escrow pursuant to an escrow agreement between the Partnership
and the Company (the "Class A Escrow Agreement") were released to the
Partnership and the remaining shares held in escrow pursuant to the Class A
Escrow Agreement were returned to the Company for cancellation; and (iii) the
Partnership was dissolved and liquidated and all of the shares of Common Stock
held by the Partnership were distributed to its partners, including the
distribution of shares (converted into 1,030,398 shares of Common Stock) to nine
third-party resellers of the Partnership's products, the businesses of which
were acquired by the Partnership in 1996 (the "Participating Resellers"). No
modification of the original recorded purchase price of the Participating
Resellers was required.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of The Ultimate Software Group, Inc. ("Ultimate Software" or the
"Company") should be read in conjunction with the unaudited Condensed
Consolidated Financial Statements and Notes thereto included elsewhere in this
Form 10-Q. This Form 10-Q contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those contained in the forward-looking statements. Factors that may cause such
differences include, but are not limited to, those discussed below.
OVERVIEW
Ultimate Software designs, markets, implements and supports
technologically advanced cross-industry human resources management and payroll
("HRMS/payroll") software solutions. The Company's software solutions are
marketed primarily to middle-market organizations with 500 to 15,000 employees
but are scaleable to address the needs of much larger organizations.
Ultimate Software's core product, UltiPro HRMS/Payroll, automates an
organization's HRMS/payroll function and is an enabling tool in the
cost-efficient management of the employee life cycle, from inception of
employment through retirement. As part of its comprehensive HRMS/payroll
solution, the Company provides high quality implementation, training and ongoing
support services to its customers. The Company's customers operate in a wide
variety of industries, including manufacturing, food services, retail,
healthcare, technology, finance, insurance, real estate, transportation,
communications, services, sports and entertainment. The Company reaches its
customer base and target market through its direct sales force, a network of
national, regional and local strategic partners and its affiliate network
program.
Ultimate Software released UltiPro Employee Self-Service, the first in a
line of Web-based products, in the fall of 1998 and is currently developing a
strategic version of this product with more advanced features as well as
Web-based manager self-service, both scheduled for delivery in 1999. UltiPro
Employee Self-Service is fully integrated with UltiPro HRMS/Payroll and is not a
stand-alone product. UltiPro Employee Self-Service helps to address the growing
demand for employee empowerment via the Internet by providing employees online
access to employee handbooks, company news and policies, employee directories,
benefit plans and pay check history and extranet connections to other relevant
sites, such as the site of the 401(k) administrator.
The Company was originally organized in August 1990 as The Ultimate
Software Group, Ltd., a Florida limited partnership (the "Partnership"). The
Company was incorporated in April 1996, at the direction of the Partnership, for
the purpose of acquiring and operating the existing business of the Partnership.
The Company began as a reseller of private label PC-based payroll software
products targeted to organizations with under 200 employees. In early 1992, the
Company began to develop a new product that would offer greater flexibility,
more features, more applications and the ability to handle the needs of larger
organizations.
In July 1993, the Company launched its first proprietary product,
UltiPro for Lan, a DOS-based HRMS/payroll software solution for local area
network personal computers. In 1996, in anticipation of the general market shift
to Windows and client/server applications, the Company began developing a
client/server HRMS/payroll solution for middle-market organizations. In June
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1997, the Company launched UltiPro HRMS/Payroll, its 32-bit, object-oriented
HRMS/payroll solution for middle-market organizations.
Since the release of UltiPro HRMS/Payroll, the principal source of the
Company's license revenues has shifted from its DOS-based product to its
client/server product. UltiPro HRMS/Payroll has higher license fees, service
fees and gross margins than the Company's DOS-based product. While the Company
continues to support its DOS-based product, it no longer actively markets this
product.
Prior to 1995, the Company sold its products solely through a network of
third-party resellers (the "Resellers"). In exchange for certain fees, the
Resellers were granted exclusive rights to sell the Company's products in
certain geographic areas. In mid-1995, in order to gain greater control over its
distribution channels, the Company shifted its distribution strategy from its
network of Resellers to a direct sales force, acquiring the businesses of three
Resellers in 1995 and that of nine Resellers in April 1996. These acquisitions
were accounted for under the purchase method of accounting with approximately
$8.8 million of goodwill recorded as a result. In February and March 1998, the
Company acquired the businesses of the remaining five Resellers which
acquisitions were recorded under the poolings-of-interest method of accounting.
On June 5, 1998, the Company completed the sale of 3,250,000 shares of
the Company's common stock, par value $.01 (the "Common Stock"), in an initial
public offering at an offering price of $10 per share (the "IPO"). The net
proceeds from the IPO, after deducting $4.1 million in underwriting discounts,
commissions and other costs associated with the offering, were $28.4 million. A
portion of the net proceeds from the IPO in the amount of $3.6 million was used
to pay down the outstanding balance of the Company's existing line of credit.
The balance of the remaining net proceeds from the IPO has been and will
continue to be used for general corporate purposes, including working capital
(see "Liquidity and Capital Resources"). The Company may also use a portion of
the net proceeds to fund acquisitions of complementary businesses, products or
technologies. Although the Company may periodically review potential acquisition
opportunities, there are no current agreements with respect to any such
transactions.
9
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RESULTS OF OPERATIONS
The following table sets forth the Statement of Operations data of the
Company, as a percentage of total revenues, for the periods indicated.
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1999 1998
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Revenues:
License 28.1 % 41.3 %
Service 71.9 58.7
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Total revenues 100.0 100.0
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Cost of revenues:
License 1.3 2.7
Service 47.5 49.5
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Total cost of revenues 48.8 52.2
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Operating expenses:
Sales and marketing 34.6 50.4
Research and development 19.5 18.7
General and administrative 10.6 12.1
Amortization of acquired intangibles 0.0 2.5
----- -----
Total operating expenses 64.7 83.7
----- -----
Operating loss (13.5) (35.9)
Compensation related to modification
of escrow agreement -- (55.2)
Interest expense (0.3) (0.5)
Interest and other income 1.7 0.1
----- -----
Net loss (12.1)% (91.5)%
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Revenues
The Company's revenues are derived from two principal sources: software
licenses ("license revenues") and fees for maintenance, implementation, training
and consulting services (collectively, "service revenues"). License revenues
include revenues from noncancellable software license agreements entered into
between the Company and its customers with respect to its products. License
revenues are generally recognized upon the delivery of the related software
product when all significant contractual obligations have been satisfied. Until
such delivery, the Company records amounts received when contracts are signed as
customer deposits which are included with deferred revenues in the condensed
consolidated balance sheets.
Service revenues are recognized as services are performed and delivered.
Included in service revenues are maintenance fees for maintaining, supporting
and providing periodic updates, which are recognized ratably over the service
period, generally one year. Upon delivery of the software, amounts included in
the contract relating to unperformed service revenues are recorded as deferred
revenue. All of the Company's customers that purchased software during 1999 and
1998 also purchased maintenance and support contracts. Maintenance and support
contracts are generally priced as a percentage of the initial license fee for
the underlying products.
10
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Total revenues, consisting of license and service revenues, increased
41.9% to $10.7 million for the three months ended March 31, 1999 from $7.6
million for the three months ended March 31, 1998.
License revenues decreased 3.3% to $3.0 million for the three months
ended March 31, 1999 from $3.1 million for the three months ended March 31,
1998. The Company believes that license revenues were relatively flat for the
first quarter of 1999 compared to the same period last year primarily as a
result of a lengthening of the sales cycle which is principally due to
third-party implementation partners' increased involvement in the sales process.
The Company has traditionally addressed the details of the implementation of its
products with prospective customers during the latter phase of the sales cycle.
As more of the implementation functions formerly fulfilled by the Company are
performed by third-party implementation partners, additional time is required
for discussions with such third parties. Accordingly, the Company intends to
introduce third-party implementation partners earlier in the sales cycle.
Service revenues increased 73.7% to $7.7 million for the three months
ended March 31, 1999 from $4.4 million for the three months ended March 31,
1998. The increase in service revenues was primarily attributable to an increase
in services related to the implementation of UltiPro HRMS/Payroll. UltiPro
HRMS/Payroll has significantly higher service revenue per implementation than
UltiPro for Lan. During the three months ended March 31, 1999, service revenues
generated from the implementation of UltiPro HRMS/Payroll represented 97.9% of
total implementation revenues as compared to 87.2% of total implementation
revenues for the same period last year. In addition, support revenues increased
primarily as a result of an increase in the installed base of UltiPro
HRMS/Payroll customers.
Cost of Revenues
Cost of revenues consists principally of the cost of license and service
revenues. Cost of license revenues primarily consists of fees payable to a third
party for software products distributed by the Company. Cost of service revenues
primarily consists of costs to provide consulting, implementation, maintenance,
technical support and training to the Company's customers, and the cost of
periodic updates.
Cost of license revenues decreased 29.9% to $0.1 million for the three
months ended March 31, 1999 from $0.2 million for the three months ended March
31, 1998. The decrease in cost of license revenues, as a percentage of license
revenues, to 4.7% for the three months ended March 31, 1999 from 6.6% for the
three months ended March 31, 1998 was principally due to lower third-party fees.
Cost of service revenues increased by 36.3% to $5.1 million for the
three months ended March 31, 1999 from $3.7 million for the three months ended
March 31, 1998. This increase was primarily attributable to the hiring of
additional implementation services personnel, as well as costs associated with
the utilization of third-party implementation partners, and, to a lesser degree,
the cost of additional maintenance personnel in support of UltiPro HRMS/Payroll.
The decrease in cost of service revenues, as a percentage of service revenues,
to 66.0% for the three months ended March 31, 1999 from 84.2% for the three
months ended March 31, 1998 was primarily due to an increase in service revenues
generated by a higher level of utilization of service consultants.
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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 decreased by 2.6%
to $3.7 million for the three months ended March 31, 1999 from $3.8 million for
the three months ended March 31, 1998. The slight decrease in sales and
marketing expenses was primarily attributable to a decrease in sales commissions
due to a change in the sales commission structure which currently places more
emphasis on license revenues, partially offset by additional costs associated
with the Company's newer sales programs--the affiliate network and strategic
alliances programs. Under the affiliate network program, accounting firms,
consulting firms and high quality resellers market, sell and implement the
Company's products. The strategic alliance program involves strategic marketing
relationships with other leading software vendors. Sales and marketing expenses,
as a percentage of total revenues, decreased to 34.6% from 50.4% for the three
months ended March 31, 1999 and 1998, respectively. The decrease in sales and
marketing expenses, as a percentage of total revenues, was primarily due to the
absorption of the expenses in an increased total revenue base.
Research and Development
Research and development expenses consist primarily of software
development personnel costs. Research and development expenses increased by
47.6% to $2.1 million for the three months ended March 31, 1999 from $1.4
million for the three months ended March 31, 1998. The increase in research and
development expenses was primarily attributable to an increase in costs
associated with hiring additional programmers and engineers for the development
and enhancement of UltiPro HRMS/Payroll, the development of the Company's
Web-based HRMS products including UltiPro Employee Self-Service which was
released in the third quarter of 1998 and manager self-service which is
scheduled to be released in 1999, and for the development of new
HRMS/payroll-related enhancement modules. Research and development expenses, as
a percentage of total revenues, increased to 19.5% from 18.7% for the three
months ended March 31, 1999 and 1998, respectively. The increase in research and
development expenses, as a percentage of total revenues, was primarily due to
increased personnel costs partially offset by the absorption of the expenses in
an increased total revenue base.
General and Administrative
General and administrative expenses consist primarily of salaries of
executive, administrative and financial personnel, as well as external
professional fees and the provision for doubtful accounts. General and
administrative expenses increased by 24.5% to $1.1 million from $0.9 million for
the three months ended March 31, 1999 and 1998, respectively. The increase in
general and administrative expenses was primarily due to an increase in the
percentage-based provision for doubtful accounts resulting from increased total
revenues. General and administrative expenses, as a percentage of total
revenues, decreased to 10.6% from 12.1% for the three months ended March 31,
1999 and 1998, respectively. The decrease in general and administrative
expenses, as a percentage of total revenues, was primarily due to the absorption
of the expenses in an increased total revenue base.
Amortization of Acquired Intangibles
Amortization of acquired intangibles consisted of goodwill amortization
associated with the acquisition of three Resellers in 1995 and nine Resellers in
1996. Goodwill amortization decreased by 100% to zero for the three months ended
March 31, 1999 from $0.2 million for the
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three months ended March 31, 1998. As of December 31, 1998, the goodwill
associated with the Reseller acquisitions was fully amortized thereby
eliminating the amortization expense in the first quarter of fiscal 1999.
Compensation Related to Modification of Escrow Agreement
Compensation expense is related to the modification of an escrow
agreement, pursuant to which certain shares of the Company's Class B common
stock (the "Class B Common Stock") were placed in escrow (the "Class B Escrow
Agreement"). In March 1998, the Class B Escrow Agreement was modified to provide
for the release of all of the shares of Class B Common Stock held in escrow upon
the execution of a firm underwriting agreement for the Company's capital stock
on or before July 1, 1998. Accordingly, a non-recurring, non-cash charge of $4.2
million for compensation expense was recorded during March 1998, representing
the number of shares of stock released to directors, officers and employees of
the Company multiplied by the difference between the fair market value of the
Class B Common Stock on the date of modification and the price paid by the
holders of the shares.
Interest Expense
Interest expense for the three months ended March 31, 1999 was
consistent with that of the same period last year due to the absence of bank
borrowings in 1999 offset by the increase in capital lease obligations in 1999.
Interest and Other Income
Interest and other income increased by 1,922.2% to $0.2 million for the
three months ended March 31, 1999 from a nominal amount for the same period last
year primarily due to interest earned on the remaining net proceeds from the
IPO.
Provision for Income Taxes (Benefit)
No provision or benefit for federal, state or foreign income taxes was
made for the first quarter of fiscal 1999 or 1998 due to the operating losses
incurred in the respective periods. The Company has reported only tax losses to
date and consequently had approximately $27.4 million of net operating loss
carryforwards available at December 31, 1998, which expire at various times
through the year 2018, 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.
LIQUIDITY AND CAPITAL EXPENDITURES
The Company has historically funded operations primarily through the
sale of private equity securities and, to a lesser extent, equipment financing
and borrowing arrangements. In June 1998, the Company completed an initial
public offering of its Common Stock which resulted in net proceeds to the
Company totaling approximately $28.4 million.
As of March 31, 1999, the Company had $13.7 million in cash and cash
equivalents, reflecting a net decrease of $3.4 million since December 31, 1998.
Working capital as of March 31, 1999 was $16.1 million as compared to $17.4
million as of December 31, 1998. Excluding the effect of deferred revenue,
working capital as of March 31, 1999 was $24.0 million as compared
13
<PAGE>
to $26.4 million as of December 31, 1998. The decrease in working capital for
the three months ended March 31, 1999 was primarily attributable to the
operating loss experienced as compared to the operating gain for the fourth
quarter of 1998. Revenues have historically increased at higher rates in the
fourth quarter of the year and at lower rates in the next succeeding quarter.
Net cash used in operating activities was $3.1 million for the three
months ended March 31, 1999 as compared to $4.4 million for the three months
ended March 31, 1998. The decrease in cash used in operating activities was
primarily attributable to a reduction in the net loss for the quarter and a
decrease in deferred revenues, partially offset by an increase in accounts
receivable principally associated with the Company's total revenue growth.
Net cash used in investing activities was $0.1 million for the three
months ended March 31, 1999 as compared to a nominal amount for the three months
ended March 31, 1998. The increase in net cash used in investing activities was
primarily attributable to additional equipment purchases in the three months
ended March 31, 1999.
Net cash used in financing activities was $0.1 million for the three
months ended March 31, 1999 as compared to net cash provided by financing
activities of $1.8 million for the three months ended March 31, 1998. The
decrease in net cash provided by financing activities was primarily attributable
to the absence of borrowings under the line of credit agreements during the
three months ended March 31, 1999.
The Company has a working capital revolving line of credit (the "Credit
Facility") with a bank, which is secured by the Company's accounts receivable
and bears interest at a rate equal to LIBOR plus 4.875% per annum. The amount
available under the Credit Facility is limited to the lesser of 80% of the
Company's eligible accounts receivable, as defined, or $4.0 million. The Credit
Facility will expire on November 30, 1999. At March 31, 1999, there was no
amount outstanding under the Credit Facility.
The net proceeds from the IPO, after deducting $4.1 million in
underwriting discounts, commissions and other costs associated with the
offering, were $28.4 million. A portion of the net proceeds from the IPO in the
amount of $3.6 million was used to pay down the outstanding balance of the
Credit Facility. The balance of the Credit Facility was paid with cash generated
from operations in June 1998. The balance of the remaining net proceeds from the
IPO in the amount of $13.1 million as of March 31, 1999 is available for future
working capital and other general corporate purposes. The Company may also use a
portion of the remaining net proceeds to fund acquisitions of complementary
businesses, products or technologies. Although the Company may periodically
review potential acquisition opportunities, there are no current agreements with
respect to any such transactions.
The Company believes that cash and cash equivalents, remaining net
proceeds from the IPO, cash generated from operations, and available borrowings
under the Credit Facility will be sufficient to fund its operations for at least
the next 12 months.
UltiPro is a registered trademark of The Ultimate Software Group, Inc.
Windows is a registered trademark of Microsoft Corporation. All other trademarks
referenced are the property of their respective owners.
14
<PAGE>
SEASONALITY
The Company has experienced, and may experience in the future,
significant seasonality in its business. The Company's business, operating
results and financial condition may be affected by such trends in the future.
Revenues have historically increased at higher rates in the fourth quarter of
the year and at lower rates in the next succeeding quarter. The Company believes
such seasonality is due to a number of factors, including the Company's
quota-based compensation arrangements, typical of those used in the software
companies, and year-end budgetary pressures on the Company's customers. The
Company believes that this seasonal trend may continue for the foreseeable
future.
QUARTERLY FLUCTUATIONS
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. The Company's operating results may fluctuate as a result
of a number of factors, including, but not limited to, increased expenses
(especially as they relate to product development and sales and marketing),
timing of product releases, increased competition, variations in the mix of
revenues, announcements of new products by the Company or its competitors and
capital spending patterns of the Company's customers. The Company establishes
its expenditure levels based upon its expectations as to future revenues, and,
if revenue levels are below expectations, expenses can be disproportionately
high. A drop in near term demand for the Company's products could significantly
affect both revenues and profits in any quarter. As a result of these factors,
there can be no assurance that the Company will be able to establish or, if
established, maintain profitability on a quarterly basis. The Company believes
that, due to the underlying factors for quarterly fluctuations, period-to-period
comparisons of its operations are not necessarily meaningful and that such
comparisons should not be relied upon as indications of future performance.
THE YEAR 2000 ISSUE
Overview
Like other businesses dependent upon computerized information
processing, the Company must deal with the "Year 2000" issues, which stem from
using two digits to reflect the year in many computer programs and data. Because
certain computers and computer applications define dates by the last two digits
of the year, "00" or other two-digit dates after the year 2000 may not be
properly identified as the year 2000 or the appropriate later year, but rather
the year 1900 or a year between 1901 and 1999 (as the case may be). This error
could result in the inaccurate processing of certain date-based information,
which could cause a variety of operational problems for businesses.
State of Readiness
The Company believes it has addressed the Year 2000 issues in its
proprietary software products and does not anticipate any business interruptions
associated with these applications. Existing third-party software embedded in
the Company's proprietary software has been certified by the vendor to be Year
2000 compliant.
The Company's internal technology systems include telecommunications
(i.e., phones, voicemail and network connections), computer hardware (personal
computers and network
15
<PAGE>
servers) and software. In February 1999, the Company successfully tested its
"back office" servers which support the Company's critical systems and
supporting infrastructure. Software upgrades have been applied to the base
operating system to ensure Year 2000 compliance. In addition, the Company has
upgraded its phone systems and PC-based software for Year 2000 compliance. The
Company is in the process of assessing the Year 2000 issue with respect to
telecommunications and computer hardware for its field operations. The Company's
principal software systems include payroll, accounting and customer support. The
Company utilizes its own proprietary product, which tests show is Year 2000
compliant, for payroll and human resource data processing. In the past several
years, the Company has replaced certain of its financial and operational
systems, including the accounting and customer support systems which have each
been certified by the respective vendors as being Year 2000 compliant.
Verification testing for certain material aspects of the financial and
operational systems is scheduled to occur by the end of the second quarter of
1999. The amount of remediation work required to address any Year 2000 problems
in other systems is not expected to be extensive.
Non-information technology systems typically include embedded technology
such as security systems, elevators and other systems which contain an embedded
computer or computer-like device used to control the operation of plant,
machinery and equipment. The Company anticipates that its relocation to its new
headquarters will occur in mid-1999. The office building for these headquarters,
which is under a 20-year lease, is being newly constructed and the Company
believes the security system, elevator and other non-information technology
systems substantially address Year 2000 issues. The utility company for the
Company's headquarters, Florida Power & Light, has completed its Year 2000
testing and has certified to the Company its Year 2000 compliance.
The Company has initiated formal communications with certain significant
suppliers and is in the process of initiating formal communications with major
business partners and customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issues. As of the date of this Form 10-Q, such formal
communications have not been concluded. The Company will seek to obtain the
appropriate warranties and assurances that those parties are, or will be, Year
2000 compliant. Although the Company believes that the information systems of
its major vendors (insofar as they relate to the Company's business) comply with
Year 2000 requirements, there can be no assurance that the Year 2000 issue will
not affect the information systems of the Company's major vendors as they relate
to the Company's business, or that any such impact of a major vendor's
information system would not have a material adverse effect on the Company.
Costs
Based on its assessments to date, the Company does not believe that it
has material exposure to the Year 2000 issue with respect to its own information
systems since its existing systems correctly define the year 2000. The Company
estimates the total cost associated with the Year 2000 issue to be in the range
of $72,000 and $150,000 during 1999 (principally in connection with the use of
outside consultants), assuming no major disruption of service from utility
companies. Historically, the Company has not separately tracked the internal
costs related to Year 2000 compliance. Such costs are principally the related
payroll costs for the Company's information systems employees.
16
<PAGE>
Risks
Although the Company currently offers software products that are
designed and have been tested to be ready for the year 2000, there can be no
assurance that the Company's software products contain all necessary date code
changes. Although the Company currently does not anticipate any material adverse
impact on its operations as a result of Year 2000 issues of its major suppliers
or customers, no assurances can be given that the failure by one or more of its
major suppliers or customers to become Year 2000 compliant will not have a
material adverse impact on the Company's operations. It has been widely reported
that a significant amount of litigation will arise out of Year 2000 compliance
issues. Because of the unique nature of such potential litigation, it is
uncertain whether, or to what extent, the Company may be affected by such
litigation. Significant uncertainty exists in the software industry concerning
the potential effects associated with Year 2000 readiness.
Contingency Plans
When the Company completes its assessment of the anticipated total
impact of the Year 2000 issue, contingency plans will be prepared, if deemed
necessary, to handle the most reasonably likely worst case scenario. The
Company's target date for the completion of such contingency plans, if deemed
necessary at the completion of assessing the total impact of the Year 2000
issue, is September 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133") was issued in June 1998 and is effective for the
Company's fiscal year ending December 31, 2000. SFAS 133 establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or a liability measured at its fair value. The
Company believes that the adoption of SFAS 133 will have no material impact on
its financial statements as it has entered into no derivative contracts and has
no current plans to do so in the foreseeable future.
FORWARD-LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operations contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the Company's expectations or beliefs,
including, but not limited to, statements concerning the Company's operations
and financial performance and condition. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," and similar expressions
are intended to identify such forward-looking statements. These forward-looking
statements are not guarantees of future performance and are subject to certain
risks and uncertainties that are difficult to predict. The Company's actual
results could differ materially from those contained in the forward-looking
statements. Factors that may cause such differences include, but are not limited
to, those discussed in the foregoing Management's Discussion and Analysis of
Financial Condition and Results of Operations as well as those discussed in the
Company's Form 10-K.
17
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of its operations, the Company is exposed to
certain market risks, primarily interest rates. Uncertainties that are either
non-financial or non-quantifiable, such as political, economic, tax, other
regulatory or credit risks are not included in the following assessment of the
Company's market risks.
Interest rates. Cash equivalents consist of money market accounts with
original maturities less than three months. Interest on the Credit Facility is
based on LIBOR plus 4.875% per annum. Changes in interest rates could impact the
Company's anticipated interest income from interest-bearing cash accounts, or
cash equivalents, as well as interest expense on borrowings under the Credit
Facility. Changes in interest rates would not have a material effect on cash
equivalents. As of March 31, 1999 and the date of this Form 10-Q, there was no
amount outstanding under the Credit Facility; therefore, changes in interest
rates are not applicable for either interest expense or fair market value of the
debt instrument.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. As of the
date of this filing, the Company is not a party to any legal proceeding the
adverse outcome of which, individually or in the aggregate, could reasonably be
expected to have a material adverse effect on the Company's business, operating
results and financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From the effective date of the Company's Registration Statement on Form
S-1 (No. 333-47881) filed with the Securities and Exchange Commission (the
"SEC") on March 13, 1998, as amended (the "Form S-1"), through March 31, 1999,
the Company incurred the following expenses in connection with the issuance and
distribution of the Common Stock in the IPO (in thousands):
Underwriting discounts and commissions $2,275
Other expenses (legal and accounting fees,
printing and engraving expenses, filing
and listing fees and miscellaneous) 1,841
------
Total $4,116
======
18
<PAGE>
The net offering proceeds from the IPO to the Company, after deducting
the foregoing expenses, were $28.4 million. In connection with the offering and
sale of the Common Stock registered, except as otherwise noted below, the
Company did not make any direct or indirect payments to directors or officers of
the Company or, to the Company's knowledge, their associates; persons owning 10%
or more of any class of equity securities of the Company; or affiliates of the
Company. From the closing of the IPO on June 5, 1998 until March 31, 1999,
except as otherwise noted, the net offering proceeds were used as follows (in
thousands):
Invested in money market and other short-term
marketable securities at March 31, 1999 $13,125
Repayment of certain indebtedness 3,600
Accrued bonuses to officers who are not
executive officers 436
Other working capital needs 11,223
-------
Total $28,384
=======
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the quarter ended March 31, 1999.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended
March 31, 1999.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ULTIMATE SOFTWARE GROUP, INC.
Date: May 14, 1999 By: /s/ MITCHELL K. DAUERMAN
--------------------------------------
Mitchell K. Dauerman
Executive Vice President, Chief Financial
Officer and Treasurer (Authorized
Signatory and Principal Financial and
Accounting Officer)
20
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR
THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 13,726
<SECURITIES> 0
<RECEIVABLES> 16,078
<ALLOWANCES> (1,119)
<INVENTORY> 0
<CURRENT-ASSETS> 29,937
<PP&E> 5,279
<DEPRECIATION> (2,674)
<TOTAL-ASSETS> 33,065
<CURRENT-LIABILITIES> 13,832
<BONDS> 0
0
0
<COMMON> 159
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 33,065
<SALES> 10,745
<TOTAL-REVENUES> 10,745
<CGS> 5,244
<TOTAL-COSTS> 6,948
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39
<INCOME-PRETAX> (1,304)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,304)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
