UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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.
---------------------------------
(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
2000 ULTIMATE WAY, WESTON, FL 33326
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(Address of principal executive offices) (Zip Code)
(954) 331-7000
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(Registrant's telephone number, including area code)
NONE
----
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
As of November 8, 1999, there were 15,912,793 shares of the
Registrant's Common Stock, par value $.01, outstanding.
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THE ULTIMATE SOFTWARE GROUP, INC.
TABLE OF CONTENTS
<TABLE>
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PAGE(S)
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PART I--FINANCIAL INFORMATION:
Item 1--Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 3
Condensed Consolidated Statements of Operations for the Three Months
and Nine Months Ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 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 8-19
Item 3--Quantitative and Qualitative Disclosures About Market Risk 19
PART II--OTHER INFORMATION:
Item 1--Legal Proceedings 20
Item 2--Changes in Securities and Use of Proceeds 20
Item 3--Defaults upon Senior Securities 20
Item 4--Submission of Matters to a Vote of Security Holders 20
Item 5--Other Information 21
Item 6--Exhibits and Reports on Form 8-K 21
SIGNATURES 22
</TABLE>
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)
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
ASSETS 1999 1998
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Current assets: (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 7,597 $ 17,128
Accounts receivable, net 21,665 15,225
Prepaid expenses and other current assets 1,935 2,014
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Total current assets 31,197 34,367
Property and equipment, net 4,762 2,458
Other assets, net 1,144 389
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Total assets $ 37,103 $ 37,214
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,306 $ 2,761
Accrued expenses 3,287 4,353
Deferred revenue 7,223 8,913
Current portion of capital lease obligations 1,123 846
----------- ----------
Total current liabilities 13,939 16,873
Capital lease obligations, net of current portion 1,106 1,010
Deferred revenue 361 221
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Total liabilities 15,406 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, 15,912,793 and 15,879,015 shares issued and
outstanding in 1999 and 1998, respectively 159 159
Additional paid-in capital 64,348 64,068
Accumulated deficit (42,810) (45,117)
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Total stockholders' equity 21,697 19,110
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Total liabilities and stockholders' equity $ 37,103 $ 37,214
=========== ==========
</TABLE>
The accompanying 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
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- ---------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Revenues:
License $ 8,019 $ 4,753 $17,049 $ 12,079
Services 7,864 6,436 23,929 16,821
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Total revenues 15,883 11,189 40,978 28,900
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Cost of revenues:
License 223 179 551 609
Services 4,596 4,581 14,998 12,549
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Total cost of revenues 4,819 4,760 15,549 13,158
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Operating expenses:
Sales and marketing 4,435 4,213 12,389 11,996
Research and development 2,664 1,847 7,162 4,892
General and administrative 1,451 1,283 3,832 3,310
Amortization of acquired intangible - 191 - 573
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Total operating expenses 8,550 7,534 23,383 20,771
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Operating income (loss) 2,514 (1,105) 2,046 (5,029)
Compensation related to modification
of escrow agreement - - - (4,183)
Interest expense (81) (23) (162) (178)
Interest and other income 101 270 423 380
-------- ------- ------- ----------
Net income (loss) $ 2,534 $ (858) $ 2,307 $ (9,010)
======== ======= ======= ==========
Net income (loss) per share:
Basic $ 0.16 $ (0.05) $ 0.15 $ (0.64)
======== ======= ======= ==========
Diluted $ 0.16 $ (0.05) $ 0.14 $ (0.64)
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Weighted average shares outstanding:
Basic 15,901 15,877 15,893 14,028
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Diluted 16,084 15,877 15,994 14,028
======== ======= ======= ==========
</TABLE>
The accompanying 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
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
--------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,307 $ (9,010)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 994 1,490
Provision for doubtful accounts 993 894
Compensation related to modification of escrow agreement - 4,183
Non-cash issuance of stock options for services 95 -
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (7,433) (8,214)
Prepaid expenses and other current assets (91) 185
Other assets (776) (21)
Accounts payable (453) 42
Accrued expenses (1,066) (746)
Deferred revenue (1,550) (1,795)
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Net cash used in operating activities (6,980) (12,992)
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Cash flows from investing activities:
Purchases of property and equipment (2,160) (236)
Net proceeds from (issuances of) notes receivable 170 (237)
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Net cash used in investing activities (1,990) (473)
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Cash flows from financing activities:
Net borrowings under line of credit agreements - (209)
Net proceeds from capital lease obligations - 381
Principal payments on capital lease obligations (746) (371)
Equity transactions of 1998 poolings - (434)
Net proceeds from issuances of Common Stock 185 28,424
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Net cash provided by (used in) financing activities (561) 27,791
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Net increase (decrease) in cash and cash equivalents (9,531) 14,326
Cash and cash equivalents, beginning of period 17,128 3,270
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Cash and cash equivalents, end of period $ 7,597 $ 17,596
========= ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 135 $ 169
========= ========
</TABLE>
Supplemental disclosure of non-cash financing activities:
- - The Company entered into capital lease obligations to acquire new equipment
totaling $1,119 and $1,308 in the nine months ended September 30, 1999 and
1998, respectively.
- - In 1998, the Company acquired five third-party resellers in transactions
accounted under the pooling-of-interests accounting method.
- - Prior to the initial public offering of the Company's Common Stock effective
June 2, 1998 (the actual closing date was June 5, 1998), shares of Common
Stock were issued upon the conversion of Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock, Class A Common Stock, Class B
Common Stock and Class C Common Stock.
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 and nine months ended September 30, 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.
6
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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 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.
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, the fastest growing provider of integrated
HRMS/payroll e-business solutions, designs, markets, implements and supports
technologically advanced cross-industry human resources management and payroll
("HRMS/payroll") software solutions. Ultimate Software's Web-based solutions
include UltiPro Employee Self-Service and UltiPro Manager Self-Service, released
in the fall of 1998 and 1999, respectively (collectively, "UltiPro Web"), and
HRGateway.com, introduced in June 1999. The Company's software solutions are
marketed primarily to middle-market organizations with 500 to 15,000 employees.
Ultimate Software's core product, UltiPro HRMS/Payroll, automates an
organization's HRMS/payroll functions 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 healthcare, professional employee organizations
("PEOs"), manufacturing, food services, retail, 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 strategic alliance partners and its affiliate network
program.
During June 1999, the Company entered into an agreement with
International Business Machines Global Services, Inc. ("IBM") to provide
application hosting services for the Company's UltiPro Web and HRMS/Payroll
products, enabling Ultimate Software clients to build a foundation for
e-business (the "IBM Agreement"). The term "e-business" refers to software
applications designed to provide business value through access to the Internet.
Under the terms of the IBM Agreement, IBM provides the installation and
ongoing database and server management of the UltiPro product family, which
includes UltiPro Web, at an IBM Data Hosting Center. This application hosting
model (which the Company refers to as Intersourcing) provides organizations
real-time access to their employee data, Web-access for managers and employees,
business intelligence tools for executive decision-making, and comprehensive
HRMS/payroll functionality without a requirement for in-house information
technology resources. Under the terms of the IBM Agreement, the dedicated server
resides at the IBM Data Hosting Center where IBM monitors, manages and supports
it. Ultimate Software believes Intersourcing offers organizations of all sizes
significant business value.
As part of the Company's strategy to provide its customers an easy
pathway to e-business, in June 1999, Ultimate Software introduced HRGateway.com,
a new Web portal and
8
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one-stop shopping supersite for HRMS/payroll professionals, managers and the
employees they support. The first phase of HRGateway.com, introduced in June
1999, offers a variety of third party and private-labeled value-added products
and services that complement Ultimate Software's Web-based products which will
be accessed through the portal. UltiPro Web products are fully integrated with
UltiPro HRMS/Payroll and are not stand-alone products. UltiPro Web addresses the
growing demand for Web-based solutions that empower managers and general
employee populations. UltiPro Web Employee Self-Service provides 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. UltiPro Web
Manager Self-Service provides managers online access to information on their
employee staffs, including features for performance management, recruitment and
staffing, training management and reporting.
In June 1999, Ultimate Software entered into an agreement with Action
Technologies, Inc., a leader in Web-based workflow and work management software
("Action"), to deliver collaborative workflow. Collaborative workflow expands
current administration workflow capabilities to a new level--from a binary
accept/decline model to a complex negotiation model. Using Action's flagship
product, ActionWorks Metro, Ultimate Software offers its clients business
process automation in its products through a Web-based environment.
Ultimate Software also strategically targets certain specific
industries--healthcare and PEOs--and is creating additional functionality in
the UltiPro products to appeal to these business sectors. When the Company
releases new product functionality in the fourth quarter of 1999 with version
4.0 of UltiPro, additional purchasing options will be offered, including both
basic (formerly referred to as "standard") and strategic versions of each of the
following: UltiPro HRMS/Payroll, UltiPro Web, UltiPro Healthcare and UltiPro
PEO. UltiPro Healthcare offers basic and strategic versions and is packaged
particularly for the healthcare industry with functionality such as position
management features required for that industry. Similarly, UltiPro PEO offers
basic and strategic versions with functionality unique to PEOs such as billing
for client companies' usage of employees. Strategic versions of the Company's
products include certain additional functionality relative to the related basic
version, depending on the target industry of the product.
COMPANY HISTORY
The Company was originally organized in August 1990 as The Ultimate
Software Group, Ltd., a Florida limited partnership (the "Partnership"). The
Company was incorporated in April 1996, at the direction of the Partnership, for
the purpose of acquiring and operating the existing business of the Partnership.
The Company began as a reseller of private label PC-based payroll software
products targeted to organizations with under 200 employees. In early 1992, the
Company began to develop a new product that would offer greater flexibility,
more features, more applications and the ability to handle the needs of larger
organizations.
In July 1993, the Company launched its first proprietary product,
UltiPro for Lan, a DOS-based HRMS/payroll software solution for local area
network personal computers. In 1996, in anticipation of the general market shift
to Windows and client/server applications, the Company began developing a
client/server HRMS/payroll solution for middle-market organizations. In June
1997, the Company launched UltiPro HRMS/Payroll, its 32-bit, object-oriented
HRMS/payroll solution for middle-market organizations.
9
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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. Such goodwill was fully amortized
as of December 31, 1998. In February and March 1998, the Company acquired the
businesses of the remaining five Resellers which acquisitions were recorded
under the pooling-of-interests 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.
10
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RESULTS OF OPERATIONS
The following table sets forth the Statements of Operations data of the
Company, as a percentage of total revenues, for the periods indicated.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Revenues:
License 50.5 % 42.5 % 41.6 % 41.8 %
Service 49.5 57.5 58.4 58.2
-------- --------- --------- ---------
Total revenues 100.0 100.0 100.0 100.0
-------- --------- --------- ---------
Cost of revenues:
License 1.4 1.6 1.3 2.1
Service 28.9 40.9 36.6 43.4
-------- --------- --------- ---------
Total cost of revenues 30.3 42.5 37.9 45.5
-------- --------- --------- ---------
Operating expenses:
Sales and marketing 27.9 37.7 30.2 41.5
Research and development 16.8 16.5 17.5 16.9
General and administrative 9.1 11.5 9.4 11.5
Amortization of acquired intangibles 0.0 1.7 0.0 2.0
-------- --------- --------- ---------
Total operating expenses 53.8 67.4 57.1 71.9
-------- --------- --------- ---------
Operating income (loss) 15.9 (9.9) 5.0 (17.4)
Compensation related to modification
of escrow agreement - - - (14.5)
Interest expense (0.5) (0.2) (0.4) (0.6)
Interest and other income 0.6 2.4 1.0 1.3
-------- --------- --------- ---------
Net income (loss) 16.0 % (7.7) % 5.6 % (31.2)%
======== ========= ========= =========
</TABLE>
Revenues
The Company's revenues are derived from two principal sources: software
licenses ("license revenues") and fees for maintenance, implementation, training
and consulting services (collectively, "service revenues"). License revenues
include revenues from software license agreements, for the Company's products,
entered into between the Company and its customers in which the license fees are
noncancellable. 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 service contracts.
Maintenance and support fees are generally priced as a percentage of the initial
license fee for the underlying products.
Total revenues, consisting of license and service revenues, increased
42.0% to $15.9 million for the three months ended September 30, 1999 from $11.2
million for the three months
11
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ended September 30, 1998. Total revenues increased 41.8% to $41.0 million for
the nine months ended September 30, 1999 from $28.9 million for the nine months
ended September 30, 1998.
License revenues increased 68.7% to $8.0 million for the three months
ended September 30, 1999 from $4.8 million for the three months ended September
30, 1998. License revenues increased 41.2% to $17.0 million for the nine months
ended September 30, 1999 from $12.1 million for the nine months ended September
30, 1998. The increases in license revenues were primarily attributable to
increased sales of the Company's core product, UltiPro HRMS/Payroll, and, to a
lesser degree, revenues generated from sales of UltiPro Web.
Service revenues increased 22.2% to $7.9 million for the three months
ended September 30, 1999 from $6.4 million for the three months ended September
30, 1998. Service revenues increased 42.3% to $23.9 million for the nine months
ended September 30, 1999 from $16.8 million for the nine months ended September
30, 1998. The increases in service revenues were primarily attributable to an
increase in services related to the implementation of UltiPro HRMS/Payroll
principally to support increased sales of the product as well as a higher
realization of hourly rates charged for services performed, partially offset by
the Company's planned reduction of implementation consulting services
subcontracted to third party providers. Additionally, maintenance and training
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 increased 24.5% to $223 thousand for the three
months ended September 30, 1999 from $179 thousand for the three months ended
September 30, 1998 primarily as a result of higher third party fees in
conjunction with increased license revenues. Cost of license revenues decreased
9.5% to $551 thousand for the nine months ended September 30, 1999 from $609
thousand for the nine months ended September 30, 1998 primarily as a result of
lower third party rates in 1999. As a percentage of license revenues, cost of
license revenues decreased to 2.8% for the three months ended September 30, 1999
from 3.8% for the three months ended September 30, 1998. As a percentage of
license revenues, cost of license revenues decreased to 3.2% for the nine months
ended September 30, 1999 from 5.0% for the nine months ended September 30, 1998.
The decreases in cost of license revenues, as a percentage of license revenues,
were primarily attributable to lower third-party rates.
Cost of service revenues for the three months ended September 30, 1999
were consistent with the three months ended September 30, 1998, principally due
to the Company's planned reduction of implementation consulting services
subcontracted to third party providers, offset by higher implementation
services, personnel training and maintenance to support the Company's increased
sales of UltiPro HRMS/Payroll. Cost of service revenues increased 19.5% to $15.0
million for the nine months ended September 30, 1999 from $12.5 million for the
nine months ended September 30, 1998 primarily as a result of additional
implementation services, training and maintenance personnel to support the
Company's increased sales of UltiPro HRMS/Payroll and, to a lesser degree,
additional costs associated with providing training to customers. Cost of
service revenues, as a percentage of service revenues, decreased to 58.4% for
the three months
12
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ended September 30, 1999 from 71.2% for the three months ended September 30,
1998 and to 62.7% for the nine months ended September 30, 1999 from 74.6% for
the nine months ended September 30, 1998. These decreases in cost of services,
as a percentage of service revenues, were primarily due to an increase in
service revenues generated by higher HRMS/Payroll revenues as well as a higher
realization of hourly rates charged for services performed by Ultimate
Software's service consultants and third-party service consultants.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries, benefits,
sales commissions, travel and promotional expenses, and facility and
communication costs for direct sales offices and marketing costs. Sales and
marketing expenses increased 5.3% to $4.4 million for the three months ended
September 30, 1999 from $4.2 million for the three months ended September 30,
1998. Sales and marketing expenses increased 3.3% to $12.4 million for the nine
months ended September 30, 1999 from $12.0 million for the nine months ended
September 30, 1998. The increases in sales and marketing expenses were primarily
attributable to higher advertising and marketing costs as well as 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 independent resellers (collectively
"Affiliates") market, sell and implement the Company's products. The strategic
alliance program typically involves strategic marketing relationships with other
leading software vendors. Sales and marketing expenses, as a percentage of total
revenues, decreased to 27.9% for the three months ended September 30, 1999 from
37.7% for the three months ended September 30, 1998. Sales and marketing
expenses, as a percentage of total revenues, decreased to 30.2% for the nine
months ended September 30, 1999 from 41.5% for the nine months ended September
30, 1998. The decreases in sales and marketing expenses, as a percentage of
total revenues, were 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 44.2%
to $2.7 million for the three months ended September 30, 1999 from $1.8 million
for the three months ended September 30, 1998. Research and development expenses
increased 46.4% to $7.2 million for the nine months ended September 30, 1999
from $4.9 million for the nine months ended September 30, 1998. The increases in
research and development expenses were primarily attributable to an increase in
costs associated with hiring additional programmers and engineers for the
development and enhancement of UltiPro HRMS/Payroll, the continued development
of UltiPro Web products, and for the development of new HRMS/payroll-related
enhancement modules. Research and development expenses, as a percentage of total
revenues, increased to 16.8% for the three months ended September 30, 1999 from
16.5% for the three months ended September 30, 1998. Research and development
expenses, as a percentage of total revenues, increased to 17.5% for the nine
months ended September 30, 1999 from 16.9% for the nine months ended September
30, 1998. The increases in research and development expenses, as a percentage of
total revenues, were primarily due to increased personnel costs partially offset
by the absorption of the expenses in an increased total revenue base.
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General and Administrative
General and administrative expenses consist primarily of salaries and
benefits of executive, administrative and financial personnel, as well as
external professional fees and the provision for doubtful accounts. General and
administrative expenses increased 13.1% to $1.5 million for the three months
ended September 30, 1999 from $1.3 million for the three months ended September
30, 1998. General and administrative expenses increased 15.8% to $3.8 million
for the nine months ended September 30, 1999 from $3.3 million for the nine
months ended September 30, 1998. The increases in general and administrative
expenses were principally due to increased staffing to support the Company's
growth and, in the case of the foregoing nine-month comparison, other
incremental costs associated with being a publicly-traded company, primarily
professional fees. General and administrative expenses, as a percentage of total
revenues, decreased to 9.1% for the three months ended September 30, 1999 from
11.5% for the three months ended September 30, 1998. General and administrative
expenses, as a percentage of total revenues, decreased to 9.4% for the nine
months ended September 30, 1999 from 11.5% for the nine months ended September
30, 1998. The decreases in general and administrative expenses, as a percentage
of total revenues, were 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 100% to zero for both the three and nine
months ended September 30, 1999 due to the goodwill associated with the Reseller
acquisitions being fully amortized as of December 31, 1998, thereby eliminating
the amortization expense in 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 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 modification and the price paid
by the holders of the shares.
Interest Expense
Interest expense increased 252.0% to $81 thousand for the three months
ended September 30, 1999 from $23 thousand for the three months ended September
30, 1998 due to increased capital lease obligations. Interest expense decreased
9.0% to $162 thousand for the nine months ended September 30, 1999 from $178
thousand for the nine months ended September 30, 1998 primarily due to the
absence of bank borrowings, partially offset by increased capital lease
obligations.
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<PAGE>
Interest and Other Income
Interest and other income decreased 62.6% to $101 thousand for the
three months ended September 30, 1999 from $270 thousand for the three months
ended September 30, 1998 primarily due to the reduction of the balance of the
remaining net proceeds from the IPO. Interest and other income increased 11.3%
to $423 thousand for the nine months ended September 30, 1999 from $380 thousand
for the nine months ended September 30, 1998 primarily as a result of interest
earned on the remaining net proceeds from the IPO since June 1998.
Provision for Income Taxes (Benefit)
No provision or benefit for federal, state or foreign income taxes was
made for the nine months ended September 30, 1999 or 1998 due to the Company's
cumulative net operating losses incurred through the end of each of 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 maintaining
sustained 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 September 30, 1999, the Company had $7.6 million in cash and cash
equivalents, reflecting a net decrease of $9.5 million since December 31, 1998.
Working capital as of September 30, 1999 was $17.3 million as compared to $17.5
million as of December 31, 1998. The consistent balance of working capital at
September 30, 1999 relative to December 31, 1998 includes a decrease in cash and
cash equivalents to fund operations and an increase in accounts receivable
resulting from the cyclical nature of revenues. Revenues have historically
increased at graduated rates over the course of the year, typically heightening
in the fourth quarter of the year.
Net cash used in operating activities was $7.0 million for the nine
months ended September 30, 1999 as compared to $13.0 million for the nine months
ended September 30, 1998. The decrease in cash used in operating activities was
principally due to improved net operating results for the nine months ended
September 30, 1999.
Net cash used in investing activities was $2.0 million for the nine
months ended September 30, 1999 as compared to $0.5 million for the nine months
ended September 30, 1998. The increase in net cash used in investing activities
was primarily attributable to certain leasehold improvements made to the
Company's new headquarters, the lease for which commenced on July 15, 1999, and
additional equipment purchases in the nine months ended September 30, 1999.
Net cash used in financing activities was $0.6 million for the nine
months ended September 30, 1999 as compared to net cash provided by financing
activities of $27.8 million for the nine months ended September 30, 1998. The
decrease in net cash provided by financing activities was primarily attributable
to the net proceeds from the IPO in June 1998 partially offset
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<PAGE>
by principal payments made under the line of credit agreements during the nine
months ended September 30, 1998. Financing activities in 1999 primarily relate
to capital lease obligations.
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. The Company is in the process of
negotiating for a renewal of the Credit Facility. At September 30, 1999 and
throughout the nine months ended September 30, 1999, there were no amounts
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 $6.5 million as of September 30, 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 and Intersourcing are registered trademarks of The Ultimate
Software Group, Inc. Windows is a registered trademark of Microsoft Corporation.
All other trademarks referenced are the property of their respective owners.
SEASONALITY
The Company has experienced, and may experience in the future,
significant seasonality in its business. The Company's business, operating
results and financial condition may be affected by such trends in the future.
Revenues have historically increased at graduated rates over the course of the
year, typically heightening in the fourth quarter of the year and reducing to
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 software companies, and
year-end budgetary dynamics which may encourage the Company's customers to make
capital expenditures before their fiscal year ends. 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
16
<PAGE>
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 maintain profitability on a quarterly basis.
The Company believes that, due to the underlying factors for quarterly
fluctuations, period-to-period comparisons of its operations are not necessarily
meaningful and that such comparisons should not be relied upon as indications of
future performance.
THE YEAR 2000 ISSUE
Overview
Like other businesses dependent upon computerized information
processing, the Company must deal with the "Year 2000" issues, which stem from
using two digits to reflect the year in many computer programs and data. Because
certain computers and computer applications define dates by the last two digits
of the year, "00" or other two-digit dates after the year 2000 may not be
properly identified as the year 2000 or the appropriate later year, but rather
the year 1900 or a year between 1901 and 1999 (as the case may be). This error
could result in the inaccurate processing of certain date-based information,
which could cause a variety of operational problems for businesses.
State of Readiness
The Company believes it has addressed the Year 2000 issues in its
proprietary software products and does not anticipate any business interruptions
associated with these applications. Existing third-party software embedded in
the Company's proprietary software has been certified by the vendor to be Year
2000 compliant.
The Company's internal technology systems include telecommunications
(i.e., phones, voicemail and network connections), computer hardware (personal
computers and network servers) and software. 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's assessment of the Year 2000 issue with
respect to telecommunications and computer hardware for its field operations
does not indicate such to materially impact its 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 complete with results indicating Year 2000 compliance for
such systems, as tested. 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 relocated to its new headquarters
effective August 1, 1999. The office building for these headquarters, which is
under a 15-year lease, is newly constructed and the Company believes the
17
<PAGE>
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 assessing the extent to which the
Company's interface systems are vulnerable to major business partners'
(including third-party implementation consultants and Affiliates) failure to
remediate their own Year 2000 issues, but does not anticipate such to materially
impact the Company's operations. Although the Company will seek to obtain the
appropriate warranties and assurances that those parties are, or will be, Year
2000 compliant during the fourth calendar quarter of 1999, the Company is
developing contingency plans to accommodate the possibility that any of those
third parties cannot provide such warranties and assurances. 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 on 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's
believes the total cost associated with the Year 2000 issue will be in the range
of $25,000 and $50,000 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.
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
As the Company completes its assessment of the anticipated total impact
of the Year 2000 issue during the fourth calendar quarter of 1999, contingency
plans will be prepared, as 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 by the end of November 1999.
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<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133"), subsequently amended by SFAS No. 137, was issued in
June 1998 and is effective for the Company's fiscal year ending December 31,
2001. 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.
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 are not expected to have a material effect
on cash equivalents. As of September 30, 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.
19
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. As of the
date of this filing, the Company is not a party to any legal proceeding the
adverse outcome of which, individually or in the aggregate, could reasonably be
expected to have a material adverse effect on the Company's business, operating
results and financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From the effective date of the 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 September 30,
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
===========
The net offering proceeds from the IPO to the Company, after deducting
the foregoing expenses, were $28.4 million. In connection with the offering and
sale of the Common Stock registered, except as otherwise noted below, the
Company did not make any direct or indirect payments to directors or officers of
the Company or, to the Company's knowledge, their associates; persons owning 10%
or more of any class of equity securities of the Company; or affiliates of the
Company. From the closing of the IPO on June 5, 1998 until September 30, 1999,
the net offering proceeds were used as follows (in thousands):
Invested in money market and other short-term
marketable securities at September 30, 1999 $6,516
Repayment of certain indebtedness 3,600
Capital expenditures for leasehold improvements
to the Company's new headquarters 1,500
Accrued bonuses to officers who are not
executive officers 436
Other working capital needs 16,332
-------------
Total $28,384
=============
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
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ITEM 5. OTHER INFORMATION
On October 21, 1999, the Company entered into a definitive consulting
agreement (the "Consulting Agreement") with Aberdeen Strategic Capital LP
("Aberdeen") under which Aberdeen has been engaged to provide marketing,
strategic and other advisory services to the Company. John R. Walter, a member
of the Company's Board of Directors, is Chairman of the Management Advisory
Board of Aberdeen and has minority ownership interests in Aberdeen and its
general partner.
As sole compensation for the services of Aberdeen and its affiliates
under the Consulting Agreement, on October 21, 1999 the Company issued to
Aberdeen a warrant (the "Warrant") to purchase 100,000 shares of the Company's
common stock, par value $0.01 per share, for $10 per share. The Warrant vests in
eight quarterly increments of 12,500 shares, the first of which increments
vested on October 22, 1999. No increment of shares shall vest if the Consulting
Agreement has been terminated before the vesting date for such increment. The
Warrant expires on July 22, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Letter Agreement between Aberdeen Strategic Capital LP
and the Company, dated October 21, 1999
10.2 Warrant issued to Aberdeen Strategic Capital LP
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended
September 30, 1999.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ULTIMATE SOFTWARE GROUP, INC.
Date: November 15, 1999 By: /s/ MITCHELL K. DAUERMAN
-----------------------------------------
Executive Vice President, Chief Financial
Officer and Treasurer (Authorized
Signatory and Principal Financial and
Accounting Officer)
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<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.1 Letter Agreement between Aberdeen Strategic Capital LP and
the Company, dated October 21, 1999
10.2 Warrant issued to Aberdeen Strategic Capital LP
27.1 Financial Data Schedule
EXHIBIT 10.1
October 21, 1999
Steven F. Graver
Gordon S. Rubenstein
Aberdeen Strategic Capital LP
100 South Wacker Drive
Suite 2100
Chicago, Illinois 60606
Re: CONSULTING ARRANGEMENT
Dear Messrs. Graver and Rubenstein:
This is to confirm our agreement, effective as of July 22, 1999, that
Aberdeen Strategic Capital LP ("Aberdeen") will provide, and will cause its
affiliates Graver, Bokhof, Goodwin & Sullivan ("GBGS") and The Cambridge Group
("Cambridge") to provide to The Ultimate Software Group, Inc. (the "Company"),
upon request, those advisory and other services described in your June 23, 1999
letter to me and Mitch Dauerman (the "Aberdeen Letter"), a copy of which is
attached hereto as EXHIBIT A. The Aberdeen Letter is incorporated herein by
reference.
The Company has issued to Aberdeen a Warrant (the "Warrant") for
100,000 shares of the Company's common stock, par value $0.01 per share (the
"Shares"), as sole compensation for the advisory and other services of Aberdeen,
GBGS and Cambridge. The Warrant has an exercise price of $10.00 per share and
shall vest in eight increments of 12,500 Shares every three months; PROVIDED,
that no increment of Shares shall vest if this letter agreement has terminated
before the vesting date for such increment.
The Company has furnished and will furnish to Aberdeen, GBGS and
Cambridge (each, a "Consultant") such information as any such Consultant
believes appropriate to its assignment (all such information so furnished being
the "Information"). The Consultants agree to keep all Information confidential
except Information that (i) is or becomes generally available to the public
(other than as a result of disclosure by any of the Consultants), (ii) was
available to the Consultants on a non-confidential basis prior to its disclosure
by the Company, (iii) becomes available to the Consultants on a non-confidential
basis from a person other than the Company who, to the knowledge of the
Consultants, is not bound by a confidentiality agreement with the Company or
otherwise prohibited from transferring such information to the Consultants, (iv)
the Company agrees may be disclosed, or (v) the Consultants are requested
pursuant to, or required
<PAGE>
Steven F. Graver
Gordon S. Rubenstein
October 21, 1999
Page 2
by, law, regulation, legal process or regulatory authority to disclose. Upon
termination of this letter agreement or at any time upon the request of the
Company, each Consultant will promptly deliver to the Company all written
Information and all copies and extracts therefrom.
The Company acknowledges and agrees that the Consultants have been
retained to act solely as advisors to the Company. In such capacity, the
Consultants shall act as independent contractors, and any duties of the
Consultants arising out of their engagement pursuant to this letter agreement
shall be owed solely to the Company.
This letter agreement and the Consultants' engagement hereunder may be
terminated by the Company at any time upon written notice, it being understood
that the status of the Consultants as independent contractors, the confidential
treatment of Information by the Consultants and the obligation of the
Consultants to deliver all written Information to the Company shall survive such
termination.
No waiver, amendment or other modification of this Letter Agreement
shall be effective unless in writing and signed by each party to be bound
thereby.
Very truly yours,
/s/ Scott Scherr
-------------------------------------
Scott Scherr
President and Chief Executive Officer
Accepted and Agreed by:
Aberdeen Strategic Capital LP
By: /s/ Steven F. Graver
-----------------------
Title: Chief Executive Officer
Date: October 21, 1999
<PAGE>
EXHIBIT A
June 23, 1999
Mr. Scott Scherr
Mr. Mitch Dauerman
Ultimate Software Group, Inc.
3111 Stirling Road
Ft. Lauderdale, FL 33312
Dear Scott and Mitch:
We truly enjoyed meeting with you to discuss the benefits of an investment
partnership between your firm and Aberdeen Strategic Capital, Inc. ("Aberdeen").
Aberdeen was formed to provide strategic assistance and improved revenue to its
portfolio companies. Our goals are consistent with your goals; the most
important of which is enhancement of shareholder value. As you prepare for your
next stage of growth, we are confident that we can provide value-added
strategies and solutions through a synergy of three distinct groups.
Aberdeen is equally owned by Graver, Bokhof, Goodwin & Sullivan (an investment
advisory firm), The Cambridge Group (a marketing and consulting company) and a
select group of individuals who comprise our senior management team. This group
is led by John Walter, the former President and Chief Operating Officer of AT&T,
former Chairman and CEO of R.R. Donnelly & Co. and current Chairman of the Board
of Manpower, Inc. In addition to John's role at Manpower, he also serves on
several other corporate boards including Abbott Laboratories, Deere & Co. and
LaSalle Partners. The collective experience, expertise and global contacts which
John and the other senior "members" bring to the table is unquestionably
impressive.
I. GRAVER, BOKHOF, GOODWIN & SULLIVAN
Graver, Bokhof, Goodwin & Sullivan (GBGS) and its affiliates manage in excess of
$1.7 billion of high net worth and institutional funds. The firm currently
employs twenty-five professionals headquartered in Chicago and our newly opened
satellite office in Silicon Valley. GBGS has invested in microcap stocks (issues
of firms with market capitalization of less than $250 million) since 1981.
During that period, the company has created models based on free cash flow
(NOPLAT) analysis and experienced tremendous success providing competitive
returns to investors.
<PAGE>
GBGS can serve as a value-added benefactor to Ultimate Software in the following
ways:
1. As buy-side analysts, GBGS can favorably articulate the Ultimate
Software opportunity in order to meet the interests of other buy-side
investors. Extensive Wall Street experience provides a basis for
meaningful communication with investment banks.
2. GBGS can evaluate both your competitive position in the marketplace and
your relative valuation. Once that analysis is completed, it is
possible to position your company against sell-side analysts'
expectations.
3. GBGS, because of its history and contacts on the sell-side, can secure
additional research coverage for Ultimate Software, particularly in the
institutional market. Preliminary discussion with three Wall Street
firms has confirmed the belief that your firm merits increased
attention.
4. GBGS receives voluminous information about industry and economic trends
as well as individual companies. The firm can identify competitive
threats and changes in the marketplace that may adversely impact
Ultimate Software enabling proactive actions versus reactive measures.
5. GBGS has relationships with the Chief Executive Officers of more than
twenty-five companies within Ultimate Software's target market. These
relationships provide a framework for opening doors to significant
sales opportunities. One of the more interesting initiatives, which
might be further pursued, is the Web-Hosted opportunity where Ultimate
Software could be positioned as the human resources/payroll application
of choice.
II. THE CAMBRIDGE GROUP
The Cambridge Group, founded in the mid-1970's by Rick Kash, is also
headquartered in Chicago and considered to be the premier marketing consulting
firm in the country. The Cambridge Group is credited with developing highly
successful marketing strategies for companies including IBM, Keebler Cookie and
Emerson Electric. The company has fifty partners and/or consultants who possess
significant industry experience in the areas of financial services, technology,
consumer goods and health care. In addition to many Fortunate 500 clientele,
they frequently work with emerging companies which face unique challenges during
early stages of growth. The firm has particularly differentiated itself with
regards to E-commerce and Internet marketing expertise.
The Cambridge Group would bring the following value-added opportunities to
Ultimate Software:
1. A demand side marketing analysis that is unique in the consulting
industry. Their objective is to partner with management to accurately
define customers and their demands, and to distinctly differentiate
clients' product and services. Additionally, they advise as to how to
maintain particular relevance to the customer as economic, regulatory,
technological and competitive environments change.
<PAGE>
2. The Cambridge Group provides management with a fact-based analysis of
customer behavior for use in redirecting sales and marketing resources
in a more focused manner. The "Ultimate" goal is to improve
profitability and increase sales.
3. The Cambridge Group's results position them as one of the most highly
sought after marketing consultants in the industry. The minimum cost
for their service is $250,000 and their average engagement costs about
$1.5 million. Ultimate Software can expect to receive service from the
Cambridge Group, which will substantially exceed their minimum
engagement of $250,000 during the term of Aberdeen's involvement. This
commitment will not include any additional out-of-pocket costs to
Ultimate Software. In this particular situation, Cambridge would be
paid a performance fee through participation in Aberdeen, based on the
success of your common stock price.
4. The Cambridge Group has access to over 200 companies in your market
space and strong relationships with the Chief Executive Officers of
these companies. Clearly, Cambridge can capitalize on their contacts to
assist Ultimate Software in boosting sales and building strategic
alliances.
III. ABERDEEN MEMBERS
In addition to the exceptional talent which Graver, Bokhof, Goodwin & Sullivan
and The Cambridge Group bring to the table, the Aberdeen members have been
carefully selected. Each possesses the following unique characteristics:
1. A proven record of success in running public companies;
2. A sincere interest in working with smaller companies to help transition
them to larger companies; and
3. A clear understanding of the importance of a positive business culture
and the need to act as team players.
We have selected a marquis member, John Walter, to work with Ultimate Software.
John not only brings a wealth of management and board experience that will be
vital to management during the company's growing pains, but he can also:
1. Provide access to his widespread business contacts for prospective
business. In fact, he currently serves as the Chairman of the Board for
the largest provider of temporary services in the world, Manpower, Inc.
It is worth noting that this firm employs the largest number of
employees of any company in the world. John has already begun looking
into possible opportunities resulting from the development of a
strategic relationship between Manpower and Ultimate Software.
2. Provide insight into the specific and difficult needs of a growing
company. He grew R.R. Donnelly from under $1 billion in sales to over
$5 billion in sales during his tenure as Chief Executive Officer and
can prove an invaluable resource to your Board of Directors.
<PAGE>
3. Provide critical and objective review of your business plan. John has
reviewed hundreds of strategic business plans during his career and can
assist management in refining its plan where appropriate.
Finally, the other distinguished members of Aberdeen have access to more than
fifty companies in your target market. Obviously, it is in their best interest
to open these channels of distribution and assist Ultimate Software in
increasing sales.
As we discussed, Aberdeen is prepared to make an initial investment of 170,000
shares of Ultimate Software Group, Inc. This equity position could be sold
either directly from the company or purchased from existing shareholders.
Aberdeen would be issued 100,000 warrants, with a strike price of $10.00 per
share. These warrants would vest at a rate of 12,500 per quarter with a maturity
of four years. Ultimate Software Group, Inc. would retain the right to cancel
all unvested warrants should Aberdeen fail to fulfill its responsibilities. John
Walter would waive the right to receive any compensation for his services as a
Director of the Board.
Additionally, Aberdeen would purchase 170,000 shares in the open market.
Scott and Mitch, while it is impossible to specifically quantify tangible
benefits, we can say that these resources, if fully costed out, would be valued
at approximately $500,000 to $2.0 million per year. The benefits to Ultimate
Software would include incremental increases in revenue, significant improvement
in profitability and increased visibility on Wall Street for your business
model. While we believe you are solely capable of achieving your objectives, we
are confident that we can accelerate your achieving the goal of becoming a $1
billion company. We welcome the challenge and believe our partnership would
prove a classic "win/win" situation.
We look forward to speaking with you again soon.
Cordially,
/s/ Steven F. Graver /s/ Gordon S. Rubenstein
- ----------------------- ------------------------
Steven F. Graver Gordon S. Rubenstein
Chief Executive Officer Senior Managing Director
EXHIBIT 10.2
THIS WARRANT AND THE SECURITIES TO BE ISSUED UPON THE EXERCISE HEREOF
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 WARRANT OR SECURITIES UNDER
THE SECURITIES ACT AND SUCH STATE SECURITIES LAWS OR IN THE OPINION OF COUNSEL
REASONABLY ACCEPTABLE TO THE COMPANY THERE IS AN APPLICABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS OR SUCH REGISTRATION IS NOT OTHERWISE REQUIRED.
THE ULTIMATE SOFTWARE GROUP, INC.
WARRANT
Dated as of July 22, 1999
No: 1
THIS IS TO CERTIFY THAT, for value received, Aberdeen Strategic Capital
LP ("Aberdeen" or the "Holder") is entitled to purchase from The Ultimate
Software Group, Inc., a Delaware corporation (the "Company"), prior to 5:00
p.m., New York City time on July 22, 2003 (the "Expiration Date"), at the
offices of the Company, up to 100,000 shares (each a "Share" and collectively,
the "Shares") of common stock, par value $0.01 per share (the "Common Stock"),
of the Company at an exercise price of $10.00 per Share (subject to adjustment
pursuant to Article III, the "Exercise Price"), upon the terms and conditions as
hereinafter provided.
Certain terms used in this Warrant are defined in Article IV.
ARTICLE I
EXERCISE OF WARRANT
1.1 METHOD OF EXERCISE. To exercise this Warrant in whole or in part,
the Holder shall deliver to the Company (a) this Warrant, (b) a written notice,
in substantially the form of the Subscription Notice attached hereto as EXHIBIT
A, of such Holder's election to exercise this Warrant, which notice shall
specify the number of Shares to be purchased (in lots of not less than 10,000
Shares), the denominations of the Share certificate or certificates desired and
the name or names in which such certificates are to be registered and (c)
payment in immediately available funds or certified check of the Exercise Price
multiplied by the number of Shares to be purchased upon such exercise (the
"Aggregate Exercise Price") UNLESS the Holder elects in the Subscription Notice
to exercise the Warrant (or a portion thereof) by authorizing the Company to
withhold from issuance and apply as payment of the Aggregate Exercise Price such
number of Shares otherwise issuable upon such exercise of the Warrant which,
when multiplied by the Market Price of the Shares as of the date such
Subscription Notice is received by the Company, is equal to the Aggregate
Exercise Price (and such withheld shares shall no longer be issuable under this
Warrant).
The Company shall as promptly as practicable, and in any event within
five Business Days after receipt of the Subscription Notice, execute and deliver
or cause to be executed and
<PAGE>
delivered, in accordance with such notice, a certificate or certificates
representing the aggregate number of Shares to which the Holder is entitled. The
Share certificate or certificates so delivered shall be in such denominations as
may be specified in such notice and shall be issued in the name of the Holder or
such other name or names as shall be designated in such notice. Such certificate
or certificates shall be deemed to have been issued, and the Holder or any other
person so designated to be named therein shall be deemed for all purposes to
have become holders of record of such Shares, as of the date the aforementioned
notice is received by the Company. If this Warrant shall have been exercised
only in part, unless this Warrant shall have expired, the Company shall, at the
time of delivery of the certificate or certificates, deliver to the Holder a new
Warrant evidencing the rights to purchase the remaining Shares called for by
this Warrant, which new Warrant shall in all other respects be identical with
this Warrant. The Company shall pay all expenses, taxes and other charges
payable in connection with the preparation, issuance and delivery of Share
certificates and new Warrants, except that, if Share certificates shall be
registered in a name or names other than the name of the Holder, funds
sufficient to pay all transfer taxes payable as a result of such transfer shall
be paid by the Holder at the time of delivering the aforementioned notice of
exercise or promptly upon receipt of a written request of the Company for
payment.
1.2 VESTING OF WARRANT. This Warrant shall be exercisable only if, when
and to the extent vested and only on or before the Expiration Date. This Warrant
shall vest in eight increments of 12,500 Shares according to the following
schedule, PROVIDED that no increment of Shares shall vest unless the Consulting
Letter Agreement, effective as of July 22, 1999, between Aberdeen and the
Company is in full force and effect on the date that vesting of such increment
is scheduled to occur.
AGGREGATE NUMBER OF SHARES VESTED
VESTING DATES AND EXERCISABLE PURSUANT TO WARRANT
- ------------- -----------------------------------
October 22, 1999 12,500
January 22, 2000 25,000
April 22, 2000 37,500
July 22, 2000 50,000
October 22, 2000 62,500
January 22, 2001 75,000
April 22, 2001 87,500
July 22, 2001 100,000
At any time on or before the Expiration Date, the Holder may exercise
this Warrant for up to that number of Shares for which this Warrant is then
vested and not previously exercised. Notwithstanding the foregoing, this Warrant
shall become 100 percent vested and exercisable upon a Change of Control on or
before the Expiration Date.
1.3 SHARES TO BE FULLY PAID AND NON-ASSESSABLE; RESERVATION. All Shares
issued upon the exercise of this Warrant shall be validly issued, fully paid and
non-assessable and the Company shall at all times reserve and keep available out
of its authorized Shares of Common
<PAGE>
Stock, solely for the purpose of issuance upon the exercise of this Warrant,
such number of Shares as shall be issuable upon the exercise hereof.
1.4 NO FRACTIONAL SHARES TO BE ISSUED. The Company shall not be
required to issue fractions of Shares upon exercise of this Warrant. If any
fraction of a Share would, but for this Section, be issuable upon any exercise
of this Warrant, in lieu of such fractional Share, the Company shall pay to the
Holder, in cash, an amount equal to the same fraction of the Market Price per
Share of outstanding Shares at the close of business on the Business Day
immediately prior to the date of such exercise.
1.5 SHARE LEGEND. Each certificate for Shares issued upon exercise of
this Warrant, unless at the time of exercise such Shares are registered under
the Securities Act, shall bear the following legend:
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 APPLICABLE STATE SECURITIES LAWS OR SUCH
REGISTRATION IS NOT OTHERWISE REQUIRED.
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution pursuant to a registration statement under the
Securities Act) shall also bear such legend unless the holder of such
certificate shall have delivered to the Company an opinion of counsel, in
writing and addressed to the Company (which counsel and opinion shall be
reasonably acceptable to the Company), that the securities represented thereby
need no longer be subject to restrictions on resale under the Securities Act or
any state securities laws.
ARTICLE II
TRANSFER AND
REPLACEMENT OF WARRANTS
2.1 NO TRANSFER. Except as provided herein, the Holder of this Warrant,
by its acceptance hereof, covenants and agrees that neither this Warrant nor any
interest herein may be sold, transferred, pledged or hypothecated. Neither the
Shares issuable upon exercise hereof nor any interest therein may be offered,
sold, transferred, pledged, hypothecated or otherwise
<PAGE>
disposed of, except pursuant to (i) an effective registration statement under
the Securities Act and any applicable state securities laws or (ii) an exemption
from the registration requirements of the Securities Act and any applicable
state securities laws, such exemption to be evidenced by such documentation as
the Company may reasonably request, including an opinion of counsel, in writing
and addressed to the Company (which counsel and opinion shall be reasonably
satisfactory to the Company), that such transfer is not in violation of the
Securities Act and any applicable state laws. The Company shall treat the
Holder, or the transferee of the Holder as permitted hereunder, as the holder
and owner hereof for all purposes.
2.2 LOSS, THEFT, DESTRUCTION OF WARRANT CERTIFICATES. Upon receipt of
evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Company,
or, in the case of any such mutilation, upon surrender and cancellation of such
Warrant, the Company, at the Holder's expense, will make and deliver, in lieu of
such lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor
and representing the right to purchase the same aggregate number of Shares.
ARTICLE III
ADJUSTMENT PROVISIONS
3.1 ADJUSTMENTS GENERALLY. In the event of a reorganization,
recapitalization, stock split, stock dividend, combination of shares, merger or
consolidation, or the sale, conveyance, lease or other transfer by the Company
of all or substantially all of its property, or any other change in the
corporate structure or shares of the Company, pursuant to any of which events
the then outstanding shares of Common Stock are split up or combined, or are
changed into, become exchangeable at the holder's election for, or entitle the
holder thereof to, other shares of stock, or in the case of any other
transaction described in Section 424(a) of the Internal Revenue Code of 1986,
the Board of Directors of the Company shall change the number and kind of Shares
(including by substitution of shares of another corporation) subject to this
Warrant and/or the Exercise Price in the manner that it shall reasonably deem to
be equitable and appropriate.
Notwithstanding anything herein to the contrary, upon a Change of
Control in which shares of Common Stock are converted into cash, securities or
other property, this Warrant shall be terminated and the Holder shall receive,
with respect to each Share issuable under this Warrant at such time, a payment
in cash equal to the excess of the Change of Control Price (as defined below) of
the Share over the Exercise Price. For purposes of this section, Change of
Control Price shall mean the average fair market value (as determined by the
Board of Directors in good faith) of such cash, securities and other property
received, in connection with the Change of Control, by holders of Common Stock
with respect to each share of Common Stock.
3.2 NOTICE OF ADJUSTMENT. Within thirty (30) days after any action is
taken (or sooner, if the Company determines to take any action) which requires
an adjustment or readjustment pursuant to this Article III, the Company shall
give written notice to the Holder of such event, and, if determinable, the
required adjustment and the computation thereof. If the required adjustment is
not determinable at the time of such written notice, the Company shall give
written
<PAGE>
notice to the Holder of such adjustment and computation promptly after such
adjustment becomes determinable.
ARTICLE IV
DEFINITIONS
The following terms, as used in this Warrant, have the following
respective meanings:
"BUSINESS DAY" means each day in which banking institutions in New York
City are not required or authorized by law or executive order to close.
"CHANGE OF CONTROL" means:
(i) The consummation of any consolidation or merger of the Company
pursuant to which the stockholders of the Company immediately prior to
the merger or consolidation do not represent, immediately after the
merger or consolidation, the beneficial owners (within the meaning of
Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange
Act")) of 50% or more of the combined voting power of the Company's (or
the surviving entity's) then outstanding securities ordinarily (and
apart from rights occurring in special circumstances) having the right
to vote in the election of directors;
(ii) The consummation of any sale, lease, exchange or transfer (in any
single transaction or series of related transactions) of all or
substantially all of the assets or business of the Company and its
Subsidiaries; or
(iii) The occurrence of any event the result of which is that any
"person" (as such term is used in Sections 13(d)(3) and 14(d)(2) of the
Exchange Act), other than (A) the Company or any Subsidiary, or (B) any
employee benefit plan sponsored by the Company or any Subsidiary, shall
become the beneficial owner (within the meaning of Rule 13d-3 under the
Exchange Act) of securities of the Company representing more than 50%
of the combined voting power of the Company's then outstanding
securities ordinarily (and apart from rights accruing in special
circumstances) having the right to vote in the election of directors,
as a result of a tender, leveraged buyout or exchange offer, open
market purchases, privately negotiated purchases, other arrangements or
understandings or otherwise.
"COMPANY" shall have the meaning set forth in the first paragraph of
this Warrant.
"EXERCISE PRICE" shall have the meaning set forth in the first
paragraph of this Warrant.
"EXPIRATION DATE" shall have the meaning set forth in the first
paragraph of this Warrant.
"HOLDER" shall have the meaning set forth in the first paragraph of
this Warrant.
"MARKET PRICE" means, as of any date, (i) if shares of Common Stock are
listed on a national securities exchange, the average of the closing sales
prices per share therefor on the
<PAGE>
largest securities exchange on which such shares are traded on the last ten (10)
trading days before such date, (ii) if such shares are listed on the NASDAQ
National Market but not on any national securities exchange, the average of the
closing sales prices per share therefor on the NASDAQ National Market on the
last ten (10) trading days before such date, (iii) if such shares are not listed
on either a national securities exchange or the NASDAQ National Market, the
average of the sales prices per share therefor on the last twenty (20) trading
days before such date, or (iv) if no such sales prices are available, the
parties hereto agree for the purposes of this Warrant that the current Market
Price shall be as determined by an investment banking or appraisal firm of
recognized national standing mutually agreed upon by the Company and Aberdeen.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES" shall have the meaning set forth in the first paragraph of
this Warrant.
"SUBSIDIARY" means any corporation of which 50 percent or more of the
combined voting power of all classes of stock is owned by the Company or a
Subsidiary of the Company.
ARTICLE V
MISCELLANEOUS
5.1 EXPIRATION. This Warrant shall expire and be of no further force
and effect on the Expiration Date.
5.2 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given upon receipt by the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
if to the Company, to:
The Ultimate Software Group, Inc.
2000 Ultimate Way
Weston, Florida 33326-6350
Attention: Robert Manne, Esq.
Telecopy: (954) 331-7300
with a copy to:
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
Attention: James A. Fitzpatrick, Jr.
Telecopy: (212) 259-6333
<PAGE>
if to Aberdeen, to:
Aberdeen Strategic Capital LP
1000 South Wacker Drive
Suite 2100
Chicago, Illinois 60606
Attention: Steven F. Graver
Telecopy: (312) 782-9611
5.3 AMENDMENTS. The provisions of this Warrant may be amended, modified
or waived with (and only with) the written consent of the Company and the
Holder.
5.4 GOVERNING LAW. THIS WARRANT SHALL BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO CHOICE OF
LAW PRINCIPLES.
5.5 SURVIVAL OF AGREEMENTS. All covenants and agreements made by the
parties herein shall be considered to have been relied upon by each party and
shall survive the issuance and delivery of this Warrant, and shall continue in
full force and effect so long as this Warrant is outstanding.
5.6 COVENANTS TO BIND SUCCESSOR AND ASSIGNS. All covenants,
stipulations, promises and agreements in this Warrant contained by or on behalf
of the Company shall bind its successors and assigns, whether so expressed or
not.
5.7 WITHHOLDING. The Company shall be entitled to withhold pay amounts
required to be withheld under applicable law from any amounts to be paid to the
Holder hereunder.
5.8 SEVERABILITY. In case any one or more of the provisions contained
in this Warrant shall be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein and therein shall not in any way be affected or impaired thereby. The
parties shall endeavor in good faith negotiations to replace the invalid,
illegal or unenforceable provisions with valid provisions, the economic effect
of which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.
5.9 SECTION HEADINGS. The section headings used herein are for
convenience of reference only, are not part of this Warrant and are not to
affect the construction of or be taken into consideration in interpreting this
Warrant.
5.10 NO RIGHTS AS STOCKHOLDERS. This Warrant shall not entitle the
Holder to any rights as a stockholder of the Company and no dividends shall be
payable or accrue in respect of this Warrant or the interest represented hereby
or the Shares underlying this Warrant exercisable hereunder unless and until and
only to the extent this Warrant shall be exercised.
5.11 NO REQUIREMENT TO EXERCISE. Nothing contained in this Warrant
shall be construed as requiring the Holder to exercise this Warrant.
<PAGE>
5.12 COUNTERPARTS. This Warrant may be executed in two or more
counterparts, all of which shall be considered one and the same instrument.
IN WITNESS WHEREOF, the Company has executed this Warrant as of the
date first above written.
Acknowledged and Agreed: THE ULTIMATE SOFTWARE GROUP, INC.
ABERDEEN STRATEGIC CAPITAL LP
By: /s/ Steven F. Graver By: /s/ Scott Scherr
----------------------- -------------------
Name: Steven F. Graver Name: Scott Scherr
Title: Chief Executive Officer Title: President and Chief
Executive Officer
<PAGE>
EXHIBIT A
SUBSCRIPTION NOTICE
(To be executed upon exercise of Warrant)
To: The Ultimate Software Group, Inc.
The undersigned irrevocably elects to exercise the right of purchase
represented by the attached Warrant for, and to purchase thereunder, _____
Shares, as provided for therein, and either (mark one with an X) _____ tenders
herewith payment of the Aggregate Exercise Price in immediately available funds
or _____ authorizes the Company to withhold from issuance a number of Shares
issuable upon such exercise of the Warrant which when multiplied by the Market
Price of the Shares as of the date such Subscription Notice is received by the
Company is equal to the Aggregate Exercise Price (failure to indicate a method
of payment shall be deemed an election to pay the Aggregate Exercise Price in
immediately available funds).
Please issue a certificate or certificates for such Shares in the
following name or names and denominations:
If said number of Shares shall not be all the Shares issuable upon
exercise of the attached Warrant, a new Warrant is to be issued in the name of
the undersigned for the balance remaining of such Shares less any fraction of a
Share paid in cash.
Dated:
ABERDEEN STRATEGIC CAPITAL LP
By: /s/ Steven F. Graver
-----------------------
Name: Steven F. Graver
Title: Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,597
<SECURITIES> 0
<RECEIVABLES> 23,025
<ALLOWANCES> (1,360)
<INVENTORY> 0
<CURRENT-ASSETS> 31,197
<PP&E> 8,862
<DEPRECIATION> (4,100)
<TOTAL-ASSETS> 37,103
<CURRENT-LIABILITIES> 13,939
<BONDS> 0
0
0
<COMMON> 159
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 37,103
<SALES> 40,978
<TOTAL-REVENUES> 40,978
<CGS> 15,549
<TOTAL-COSTS> 23,383
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 162
<INCOME-PRETAX> 2,307
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,307
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
