UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] 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)
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DELAWARE 65-0694077
State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization
3111 STIRLING ROAD, FORT LAUDERDALE, FL 33312
(Address of principal executive offices) (Zip Code)
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(954) 266-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Common Stock, par value $.01 per share,
held by non-affiliates of the Registrant, based upon the closing sale price of
such shares on the Nasdaq National Market on February 22, 1999, was
approximately $98.1 million.
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As of February 22, 1999, there were 15,880,015 shares of the
Registrant's Common Stock, par value $.01, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1999 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K.
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THE ULTIMATE SOFTWARE GROUP, INC.
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INDEX
PAGE(S)
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PART I
Item 1. Business 4
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 19
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 22
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 57
PART III
Item 10. Directors and Executive Officers of the Registrant 57
Item 11. Executive Compensation 57
Item 12. Security Ownership of Certain Beneficial Owners and Management 57
Item 13. Certain Relationships and Related Transactions 57
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 57
Signatures 59
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PART I
This Annual Report on Form 10-K (the "Form 10-K") of The Ultimate
Software Group, Inc. ("Ultimate Software" or the "Company") may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from such statements. These risks and
uncertainties include, but are not limited to, those discussed below and
elsewhere in this Form 10-K. The words "believe," "expect," "anticipate,"
"project," and similar expressions identify forward-looking statements. These
forward-looking statements speak only as of their dates. The Company undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
UltiPro/registered trademark/, US Group/registered trademark/,
Intersourcing/registered trademark/ and their related designs are registered
trademarks of Ultimate Software in the United States. This Form 10-K also
includes names, trademarks, service marks and registered trademarks and service
marks of companies other than Ultimate Software.
ITEM 1. BUSINESS
OVERVIEW
Ultimate Software designs, markets, implements and supports Web-based
and client/server cross-industry human resource management ("HRMS") and payroll
software solutions. Ultimate Software's solutions are marketed primarily to
middle-market organizations having 500 to 15,000 employees, but are scaleable to
address the needs of much larger organizations. Ultimate Software's products
automate an organization's HRMS/payroll function and are enabling tools in the
cost-efficient management of the employee life cycle, from inception of
employment through retirement. Ultimate Software released UltiPro Employee
Self-Service, the first in a line of Web-based products in the fall of 1998 and
is currently developing a strategic version of this product with more advanced
features as well as Web-based manager self-service, both scheduled for delivery
in 1999. Ultimate Software's core client/server product set, UltiPro
HRMS/Payroll (formerly known as "UltiPro for Windows") was introduced in June
1997 and is believed by the Company to be the first 32-bit, object-oriented
HRMS/payroll software solution to take advantage of Microsoft SQL Server and
Microsoft NT technologies. Ultimate Software believes that UltiPro
HRMS/Payroll's distributed, object-oriented architecture and integrated
Web-based solutions provide significant advantages over other HRMS/payroll
software products, including (i) greater scalability and transaction throughput;
(ii) reduced total cost of ownership; and (iii) ease of implementation,
customization and use. UltiPro HRMS/Payroll and UltiPro Employee Self-Service
(collectively "UltiPro") are designed to support new technologies as they
emerge, including the Internet and corporate intranets, and to be readily
integrated with other applications. As part of its comprehensive HRMS/payroll
solutions, Ultimate Software provides high quality implementation and training
to its customers as well as support services which are certified by the Ziff
Davis Support Center Practices Certification program (the "Ziff Davis
Certification").
Ultimate Software's products have been recognized in the industry for
their excellence. UltiPro HRMS/Payroll was selected as a finalist in Microsoft's
1998 Industry Solution Awards and UltiPro Employee Self-Service as a finalist in
Lotus' international Beacon Awards 1998 competition. In December 1997, "Human
Resource Executive," a leading human resource industry publication, selected
UltiPro HRMS/Payroll as the only HRMS/payroll software product to be included as
one of the Top Ten HR Products of the Year.
Ultimate Software reaches its customer base and target market through
its direct sales force and a network of national, regional and local strategic
partners. As of December 31, 1998, the Company had licensed its earlier
DOS-based product, UltiPro for Lan, to approximately 750 organizations and its
UltiPro HRMS/Payroll solution to approximately 200 organizations. Ultimate
Software's customers operate in a wide variety of industries, including
manufacturing, food services, retail, healthcare, technology, finance,
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insurance, real estate, transportation, communications, services and sports and
entertainment. Ultimate Software's customers include, among others: GMAC
Mortgage, Inc., United States Filter Corporation, Scottsdale Healthcare,
Hatteras Yachts, Inc., JC Bradford & Co. LLC, Baptist Health Systems, The
Florida Marlins Baseball Club, Rexam Industries Corp., Delta Beverage Group, The
Christian Broadcasting Network, Inc., Discovery Zone, Inc., Duro Bag
Manufacturing Company, First American Corporation, Ingram Entertainment, Inc.,
and Callaway Gardens Resorts, Inc.
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 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 is a Delaware corporation formed in April 1996 to assume
the business and operations of The Ultimate Software Group, Ltd. (the
"Partnership"), a limited partnership founded in 1990. Ultimate Software's
headquarters are currently located at 3111 Stirling Road, Fort Lauderdale,
Florida 33312 and its telephone number is (800) 432-1729. After mid-1999, the
Company's headquarters will be located at Ultimate Way, P.O. Box 266350, Weston,
Florida 33326-6350.
INDUSTRY OVERVIEW
Increased competitive pressures and rapidly changing market conditions
are continually challenging organizations of all sizes to enhance profitability
by improving operating efficiencies and implementing better cost controls.
Because human resource management and payroll processing are core functions that
require a significant allocation of resources, the HRMS/payroll functions have
increasingly become mission-critical within many organizations. As the work
force has become more mobile and geographically dispersed, management of
HRMS/payroll functions has increased in complexity and requires greater
flexibility, accuracy, accountability and security controls. In addition,
multiple tax jurisdictions, intricate corporate structures and the variety of
benefit plans afforded to employees further compound the complexity of
HRMS/payroll functions. As a result, managing administrative details such as
tracking employee benefits, updating employee files and incorporating payroll
taxes can become increasingly burdensome, leading to inefficiencies,
inaccuracies and higher costs.
Effective management of HRMS/payroll functions requires highly
specialized expertise and the ability to remain abreast of frequently changing
regulatory requirements such as federal, state and local tax withholding
regulations, equal employment opportunity laws and other government regulations,
including the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"),
the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and
the Occupational Safety and Health Act of 1970 ("OSHA"). More recently,
organizations are actively seeking to improve employee communications, morale
and retention by empowering their employees through the provision of Web-based
access to human resource benefits and payroll information. Organizations are
also looking for managerial Web-based tools that streamline workflow, speed
communication and facilitate decision-making from remote locations.
Traditionally, many organizations have utilized third-party outsourcing
vendors in an attempt to address the increasingly high costs associated with the
management of HRMS/payroll functions. A recent market study conducted by
International Data Corporation, a market research company ("IDC"), indicates
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that expenditures with third-party service firms for payroll outsourcing
services total approximately $10.0 billion annually.
In theory, the advantage of outsourcing lies in the belief that an
organization can focus on its core competencies and rely upon a third-party
vendor to stay abreast of frequently changing regulatory requirements and to
manage HRMS/payroll functions cost effectively. In practice, however,
outsourcing can be an inflexible and expensive alternative, particularly for
middle-market organizations, because the organization gives up control over
critical processes, such as scheduling pay cycles and reporting, which can
result in greater inefficiency and insufficient data for decision-making.
Furthermore, certain features and functional requirements, such as timely
printing of off-cycle checks to correct errors or meet unexpected demand, are
limited due to the technological restraints and generic nature of the
outsourcing process. Moreover, use of third-party outsourcing vendors for
payroll processing limits an organization's ability to achieve operational
efficiencies by integrating the information common to both human resources
management and payroll processing. Without such integration, organizations are
required to enter information twice, thereby increasing the likelihood of
mistakes and the costs associated with maintaining duplicate records. For
example, when changes are made to an employee's benefit plans in a human
resource system, the changes are not automatically translated into corresponding
adjustments in the payroll processing system.
As an alternative to outsourcing, many organizations have historically
automated their HRMS/payroll functions by developing in-house legacy systems to
address their needs. However, because of the use of proprietary programming
languages to write legacy applications, such in-house HRMS/payroll systems are
typically cumbersome, time consuming to operate and expensive to implement,
customize, update and support. Additionally, many legacy systems use proprietary
operating and database management systems, thereby reducing compatibility with
other information systems used within an organization. As a result, these legacy
systems have certain utility constraints, particularly for middle-market
organizations that usually do not have sufficient information technology
resources necessary to operate, manage and enhance such systems. Moreover, the
failure of many legacy systems to comply with Year 2000 requirements has further
exacerbated the limitations of such systems and has caused organizations to seek
alternative solutions.
With the advent of client/server and Web-based technologies as an
alternative to in-house legacy systems and the greater availability of
affordable computing solutions, many middle-market organizations are
increasingly seeking to automate and streamline the mission-critical processes
associated with HRMS/payroll functions. According to a market study by IDC, the
United States market for HRMS/payroll software licenses was estimated to be $2.3
billion in 1998 and is projected to grow at a compounded annual growth rate of
approximately 21.0%. Market studies by IDC further estimate that the worldwide
market for HRMS/payroll software licenses will experience the same rate of
growth, moving to $4.2 billion by 2001. The Company believes that the market for
HRMS/payroll-related services is of equal or greater size than the market for
HRMS/payroll software licenses and has similar growth characteristics.
First-generation client/server technologies have provided organizations
with greater flexibility to address their HRMS/payroll needs by combining the
ease of use and data accessibility of personal computers with the high volume
processing and data storage capabilities of minicomputers and mainframe legacy
systems. However, these first-generation client/server solutions lack certain
critical performance criteria and sophisticated security features, are difficult
to implement and have a high cost of ownership because they have less built-in
functionality than mainframe systems, are typically written in proprietary
programming languages and cannot be readily integrated with the Internet and
other emerging technologies.
To date, many HRMS/payroll software vendors have simply ported
traditional functionality to a first-generation client/server environment by
preserving their core legacy system and underlying proprietary code and adapting
only what is required to allow the application to operate in a client/server
environment. In addition, vendors of first-generation client/server HRMS/payroll
software typically provide enterprise-wide, or Enterprise Resource Planning
("ERP"), systems which seek to address an organization's financial, supply
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chain management, manufacturing and HRMS needs. However, HRMS is typically an
add-on module with limited functionality in ERP systems. Furthermore, ERP
systems have been designed primarily to meet the requirements of very large
organizations and may not be particularly suitable for middle-market
organizations. As a result, these first-generation client/server and ERP systems
are often plagued with many of the inconveniences of legacy systems, such as
higher costs, lengthy implementation cycles and difficulties associated with
customization.
In recent years, a new generation of object-oriented, component-based
client/server technologies has emerged. Object-oriented methodologies address
many of the limitations of first-generation client/server systems and facilitate
integration with newer technologies and the Internet. Object-oriented,
component-based programming enables more rapid creation, customization and
implementation because the software is built from libraries of pre-programmed,
reusable components called "objects." The virtue of using a large portion of
pre-tested code is that quality is improved and fewer programmers are required
in the process, resulting in significant savings on development costs. Moreover,
when a system update occurs, the customer does not overwrite or lose the
customization that was created, resulting in a system that is much faster and
easier to update. With advancements in client/server technology and new system
architectures, processing can occur on two, three or more tiers. Distributing
various processes to multiple servers, or tiers, enhances the system's speed,
scalability, flexibility and maintainability.
Middle-market organizations are increasingly seeking more
cost-effective software solutions that (i) provide them greater control over
their HRMS/payroll functions; (ii) deliver the broad functionality necessary to
streamline and effectively manage the complex and administratively burdensome
HRMS/payroll functions; (iii) take advantage of the latest object-oriented
client/server technologies that enable organizations to better utilize the
Internet and other emerging technologies; (iv) are easy to implement, customize,
update and use and can scale to accommodate an organization's growth; (v)
empower their general employee populations by providing them with electronic
access to human resource, benefits and payroll information; and (vi) are
reinforced by extensive service and support capabilities.
THE ULTIMATE SOLUTION
Ultimate Software is focused on providing tightly integrated Web-based
and client/server HRMS/payroll solutions to middle-market organizations.
Ultimate Software's award-winning HRMS/payroll products provide middle-market
organizations with highly functional, cost-effective software solutions that can
be rapidly implemented and are designed to be easy to learn and use, leverage
emerging technologies and scale to accommodate an organization's growth.
Ultimate Software's core product, UltiPro HRMS/Payroll, is an enabling tool in
the cost-efficient management of the employee life cycle, from inception of
employment through retirement. UltiPro HRMS/Payroll is a feature-rich,
completely integrated HRMS/payroll solution which includes business intelligence
tools of Cognos Corporation ("Cognos") for data analysis and generation of
custom reports. As part of its comprehensive HRMS/payroll solution, the Company
provides high quality implementation, training and ongoing support through an
extensive service and support network.
Ultimate Software's HRMS/payroll solutions are designed to offer the
following benefits to its customers:
FEATURE-RICH, BUILT-IN FUNCTIONALITY. UltiPro HRMS/Payroll is a
feature-rich, completely integrated human resources, benefits administration and
payroll software solution that enables organizations to minimize the time
invested in burdensome HRMS/payroll administrative activities and facilitates
strategic decision-making capabilities. The UltiPro HRMS/Payroll solution is
complemented by UltiPro Employee Self-Service, the first in a planned line of
Web-enabled products. UltiPro HRMS/Payroll facilitates management of the total
employee cycle, from inception of employment through retirement, including
complex payroll processing and benefits administration, and ships with business
intelligence tools from Cognos for "slice and dice" data analysis and generation
of custom reports. UltiPro HRMS/Payroll's robust built-in functionality provides
users with many features that would otherwise require extensive customization
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or changes to source code including: sophisticated security controls, federal
and state human resource regulatory compliance capability, safety tracking,
benefit program management, and payroll tax tables for federal, state and
thousands of local jurisdictions. In addition, UltiPro HRMS/Payroll includes
specific features designed to address problems faced by multiple-company
organizations. Designed to integrate seamlessly with UltiPro HRMS/Payroll,
UltiPro Employee Self-Service provides managers and general employee populations
convenient access to human resources, benefits and payroll data through Web
browsers and offers sophisticated security for protecting the privacy of that
information. Web-based UltiPro Employee Self-Service provides employees with
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 their 401(k) administrator.
RAPID IMPLEMENTATION AND SYSTEM UPDATE EFFICIENCY. The Company has
designed UltiPro HRMS/Payroll to minimize the time and effort required for
implementation, customization and updating by incorporating into its product
hundreds of built-in rules, options and complex calculation methods. Ultimate
Software offers three implementation methodologies, experienced implementation
staff, and customer training to further facilitate rapid implementation. In
addition, UltiPro HRMS/Payroll's object-oriented technology improves
efficiencies by enabling faster system updates. When users load system updates,
they do not overwrite their customizations because the system stores custom
changes as sub-classed objects or data that reside "outside" the core program,
thus avoiding the time-consuming process of rewriting custom changes.
REDUCED TOTAL COST OF OWNERSHIP. The Company believes its software
solutions provide significant cost saving opportunities for its customers. The
Company believes that its feature-rich solutions are competitively priced for
middle-market organizations and significantly reduce the traditionally high
implementation and customization costs associated with legacy and
first-generation client/server systems. By using the Company's software
solutions, a customer may reduce the administrative and information technology
support costs associated with an organization's HRMS/payroll functions. Since
data for employee benefits and payroll calculations are maintained in a series
of shared tables, UltiPro HRMS/Payroll helps to reduce administrative costs by
facilitating accurate information processing and reporting and reduces
discrepancies, errors and the need for time-consuming adjustments. In addition,
administrative costs can be reduced by providing an organization with greater
access to information and control over reporting through its Web-based solution.
INTEGRATION AND LEVERAGING OF LEADING TECHNOLOGIES. Ultimate Software
has consistently focused on identifying leading technologies and integrating
them into its products. UltiPro HRMS/Payroll incorporates and leverages leading
technologies, such as Microsoft SQL Server, Microsoft NT Server, Inprise's
Delphi ("Delphi"), Lotus Domino, Microsoft COM/DCOM and ActiveX, to greatly
enhance speed, convenience, dependability, ease of use and extensibility. For
example, UltiPro HRMS/Payroll is based on Delphi's object-oriented programming
which enables more rapid product development, customization and implementation.
In addition, UltiPro HRMS/Payroll employs Internet and workflow technologies to
facilitate employees' access to human resource, payroll and benefits information
and to remotely complete and update forms and information. This functionality
addresses the growing demand for employee empowerment.
EASE OF USE AND NAVIGATION. Ultimate Software designs its products to
be user-friendly and to simplify the complexities of managing employees and
complying with government regulations in the HRMS/payroll area. UltiPro
HRMS/Payroll is designed to enable users to find information quickly and easily.
Ultimate Software has developed a user interface called the Employee Explorer
that allows access to all employee information in one common area. The graphical
user interface of UltiPro HRMS/Payroll is designed to allow a user to access any
part of the system quickly and efficiently. The UltiPro HRMS/Payroll Wizards
simplify common tasks such as "New Hire" and "Employee Transfer."
COMPREHENSIVE PROFESSIONAL SERVICES AND INDUSTRY-SPECIFIC EXPERTISE.
Ultimate Software provides high quality implementation, training and ongoing
product and customer support services. Ultimate
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Software employs 111 people in professional services, which includes
implementation, product support, technical support and training departments.
Substantially all of the Company's product support associates have been
designated as Certified Payroll Professionals ("CPP") by the American Payroll
Association and have received Ziff Davis Certification. Moreover, the Company's
executives and managers have an average of over 10 years of experience in
HRMS/payroll as well as 15 years in the software industry. This experience
provides the Company with insights into trends in the HRMS/payroll area and
provides the Company with the ability to better address its customers'
HRMS/payroll needs. Recognizing the importance of issuing timely updates that
reflect changes in tax and other regulatory laws, the Company employs a
dedicated tax research team to track changes in the tax rules of more than 5,500
separate taxing jurisdictions and changes in other employee-related regulations.
WEB-BASED EMPLOYEE SELF-SERVICE. UltiPro Employee Self-Service is a
Web-based product that does not stand-alone but is fully integrated with UltiPro
HRMS/Payroll. The Internet, workflow and security features enable an
organization's employees to access employee human resource, payroll and benefits
information and to remotely complete and update forms and certain information in
the organization's UltiPro database. UltiPro Employee Self-Service, which was
released in the third quarter of 1998, helps to address the growing demand for
employee empowerment via the Internet by providing employees online access to
employee handbooks, company news and policies, employee directories, benefit
plans and pay check history and extranet connections to other relevant sites,
such as the site of their 401(k) administrator.
STRATEGY
Ultimate Software's objective is to be the leading provider of
Web-based and client/server HRMS/payroll software solutions. Key components of
the Company's strategy include:
EXTEND TECHNOLOGY LEADERSHIP. Ultimate Software intends to continue to
expend significant resources to further identify, utilize and take advantage of
emerging technologies in order to maintain and extend its leadership position as
a provider of technologically advanced HRMS/payroll solutions. Ultimate Software
believes that by developing Web-based products that integrate tightly with its
object-oriented products on the Microsoft SQL Server platform and incorporate
workflow technologies, the Company will maintain a competitive advantage over
other HRMS/payroll vendors. Ultimate Software seeks to identify and utilize new
technologies to further enhance UltiPro HRMS/Payroll's functionality and
performance. In addition, Ultimate Software intends to continue to support new
and emerging industry standards to ensure that its products continue to readily
integrate with such technologies. Ultimate Software maintains technical
relationships with many leading vendors, including Microsoft, Inprise Inc.,
Citrix Systems, Inc., Cognos, and Lotus Development Corporation ("Lotus"). These
relationships provide Ultimate Software with access to new and emerging
technologies as well as products under development.
LEVERAGE PROBUSINESS RELATIONSHIP. Ultimate Software intends to expand
its distribution channels for UltiPro and to provide integration with an
outsourced payroll option through its relationship with ProBusiness Services,
Inc. (Nasdaq: PRBZ), a leading provider of outsourced employee administrative
services to large companies. ProBusiness' direct sales force will offer Ultimate
Software's UltiPro HRMS and Web-based self-service solutions with ProBusiness'
outsourced payroll, tax filing and benefits administration services. Both
companies are currently marketing their solution to middle-market organizations
and have begun development of an integrated interface between UltiPro
HRMS/Payroll and ProBusiness Payroll Service.
EXPAND AFFILIATE CHANNEL NETWORK. Ultimate Software intends to expand
its affiliate alliance program, which was rolled out in December 1998. The
program gives accounting firms, consulting firms and high quality value
resellers the opportunity to grow their businesses by marketing, selling and
implementing UltiPro to their existing customer bases and to organizations with
under 1,000 employees. To date, members of the affiliate network include Crowe,
Chizek and Company, LLP, Science
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Applications International Corporation ("SAIC"), Technology Management &
Integration Group, The Dovetail Group, Bechamp Software Consultants, Progressive
Automated Solutions, Inc. and Rockleigh Services Corporation.
LEVERAGE STRATEGIC ALLIANCES. Ultimate Software intends to expand its
existing and develop new, strategic marketing relationships with leading
software vendors. Ultimate Software believes that these relationships will
provide it with access to a larger potential customer base and will enable the
Company to leverage their technical and marketing expertise. Ultimate Software
has strategic relationships with Microsoft and Lotus that involve coordinated
public relations and marketing opportunities as well as planned trade show
activities specifically targeted to the HRMS/payroll industry. In addition, the
Company has technical and marketing relationships with Cognos, Citrix Systems,
Inc., Great Plains Software, Inc., Platinum Software Corporation, Kronos
Incorporated, Simplex Time Recorder Co., National Bond & Trust Company Inc.,
Network Specialists, Inc., Paradigm Software Technologies, Inc., SunGard
Recovery Services, Inc., FlexiInternational Software, Inc. and Systems Tax
Service, Inc.
INTEGRATE WITH OTHER LEADING SOFTWARE APPLICATIONS. Ultimate Software
intends to continue to design application interfaces which integrate UltiPro
HRMS/Payroll with other leading software applications. By having the ability to
interface with other business software applications such as financial or
accounting software solutions, UltiPro HRMS/Payroll is designed to extend an
organization's technology enterprise and allow an organization to effectively
address its enterprise-wide management needs. For example, the Company has built
interfaces into UltiPro HRMS/Payroll for exporting payroll information to
Platinum Software Corporation's Platinum SQL General Ledger, Great Plains
Software, Inc.'s Dynamics C/S+ and FlexiInternational Software, Inc.'s
FlexiFinancials. Ultimate Software has also built interfaces into UltiPro
HRMS/Payroll for importing time and attendance information with Kronos'
TimeKeeper series and Simplex Time Recorder Co.'s WinSTAR.
EXPAND AND LEVERAGE IMPLEMENTATION PARTNERS. Ultimate Software seeks to
continually expand its network of implementation partners. The Company believes
that the use of implementation partners will further increase its market
penetration, complement its direct distribution channel and enable more rapid
implementation of its products. Ultimate Software expends significant resources
on training its implementation partners. Ultimate Software has formal
implementation partnership agreements with national, regional and local
information technology consulting firms which specialize in human resource
management, including CDG & Associates Inc., Cornerstone Solutions, Inc., Crowe,
Chizek and Company, Deloitte & Touche LLP, Cotelligent Inc. (formerly HC
Associates International, Inc.), Insight Technology Partners, Inc.,
PricewaterhouseCoopers LLP, Soft Link, Inc. and ARIS Corporation.
EXPAND PRODUCT FUNCTIONALITY. Ultimate Software seeks to continually
expand the functionality of its software. Having released the recruitment and
staffing functionality in the core product during January 1999 and Web-based
UltiPro Employee Self-Service in 1998, Ultimate Software is currently developing
position management, training administration, compensation management, open
enrollment and Web-based manager self-service that will integrate with UltiPro
HRMS/Payroll. Ultimate Software also intends to develop solutions to help
multinational, U.S.-based companies with employees who live abroad. In addition,
Ultimate Software plans to offer a Canadian version of its product. These
solutions will include features such as international dates and address fields,
and support for Eurodollar and Eurodollar exchange rate conversion.
EXTEND PRODUCT PACKAGING AND IMPLEMENTATION OPTIONS. To offer
middle-market customers more flexible purchasing options and the ability to
select targeted functionality to meet their specific needs, Ultimate Software is
packaging its UltiPro solutions in two product sets--basic and strategic--each
with core product and Web-based product choices. Likewise, with the
implementation of its products, Ultimate Software is committed to providing
choices to its customers. In 1998, the Company offered UltiPro IN DAYS, a
fixed-cost implementation program, as an alternative to its standard open-ended
implementation plan, UltiPro BY CHOICE. The Company plans to continue its
efforts to design new license and implementation purchasing options to fit the
unique requirements of the middle market.
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LEVERAGE EXISTING CUSTOMER BASE. Ultimate Software seeks to enhance its
market position by targeting sales of UltiPro HRMS/Payroll to its existing DOS
customer base. The existing DOS customer base represents a significant potential
market for future sales of the Company's products as such customers migrate from
DOS to Windows environments and from individual or networked personal computers
to client/server environments.
TECHNOLOGY
Ultimate Software seeks to provide its clients with optimum
performance, rich functionality, scalability and easy access to information
through the use of leading technologies such as Delphi and C++ Builder as the
development environment and Microsoft SQL Server as the database operating on
the Microsoft NT platform. Ultimate Software has developed UltiPro HRMS/Payroll
and UltiPro Employee Self-Service to include the following key technological
features:
WEB-BASED TECHNOLOGIES AND INTERNET INTEGRATION. Ultimate Software
supports emerging Web technologies and Internet/extranet connectivity to
increase access to and usability of its applications. Ultimate Software's
Web-based solutions, UltiPro Employee Self-Service and UltiPro Manager
Self-Service, the latter of which is currently under development, are integrated
with UltiPro HRMS/Payroll's database and use Lotus Domino Server, Microsoft IIS
Web Server, Java script, HTML and COM/ActiveX.
OBJECT-ORIENTED PROGRAMMING. Delphi is an object-oriented, visual,
integrated database application development environment for Windows 95 and
Windows NT. Delphi delivers a combination of an optimizing native code compiler,
a visual component library with source code and database connectivity.
Object-oriented programming features code reusability and visual form/object
inheritance, which decrease the time and cost of developing and fully
implementing a new system. With object-oriented programming, system updates do
not overwrite prior customizations to the system because custom changes are
sub-classed objects that reside "outside" the core program.
32-BIT COMPILED CODE AND DISTRIBUTED ARCHITECTURE. Delphi is a 32-bit
code compiler, which results in more stable applications that are significantly
faster than interpreted applications and provides greater memory access than
compilers built on a 16-bit compiler. Ultimate Software has designed certain
aspects of its system using a multi-tiered client/server architecture in order
to enhance the system's speed, flexibility, scalability and maintainability.
When an application's logic resides only on a client, a user's ability to
process high volume data transactions is limited. When the logic resides only on
a server, the user's interactive capabilities are reduced. Ultimate Software's
use of distributed architecture is intended to overcome such limitations.
APPLICATION FRAMEWORK. Ultimate Software has developed a proprietary
data-driven, object-oriented application framework that enhances the
development, usability, maintainability and extensibility of its applications.
The major areas of the system such as company setup, code setup, employee setup,
pay data entry and reporting have been developed using the Company's application
framework to enhance usability. The extension of the system's functionality is
enhanced due to the use of the framework with its driver tables and object-class
library.
BUSINESS INTELLIGENCE TOOLS. In addition to an extensive library of
standard reports that offer flexibility and ease of use, the Company extends
what users can do with employee data by embedding leading business intelligence
tools from Cognos in UltiPro HRMS/Payroll. In addition to offering sophisticated
data query and report authoring, these tools enable users to apply online
analytical processing ("OLAP") to multidimensional data cubes, allowing users to
explore data on employees graphically and statistically from diverse angles.
Ultimate Software maintains a link between Cognos' report catalog and UltiPro
HRMS/Payroll's data dictionary, eliminating the necessity for users to create
and maintain ad hoc reporting catalogs.
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ULTIMATE SOFTWARE PRODUCTS
Ultimate Software's software products include UltiPro HRMS/Payroll, a
client/server software product, UltiPro Employee Self-Service, a Web-based
product, and UltiPro for Lan, a DOS-based product, all of which automate and
manage HRMS/payroll functions.
ULTIPRO HRMS/PAYROLL
UltiPro HRMS/Payroll, released in June 1997, is a fully integrated,
technologically advanced HRMS/payroll software product that offers comprehensive
functionality to middle-market organizations. In December 1997,"Human Resource
Executive," a leading human resource industry publication, selected UltiPro
HRMS/Payroll as the only HRMS/payroll software product to be included as one of
its Top Ten HR Products of the Year. UltiPro HRMS/Payroll includes the following
modules:
HUMAN RESOURCES. UltiPro HRMS/Payroll is designed to streamline and
manage the human resource function within an organization. In addition to
enabling organizations to comply with regulatory requirements, UltiPro
HRMS/Payroll generates, manages and stores information that satisfies a broad
range of internal and external reporting requirements. Examples of information
and processes handled by the system are employee performance, job and salary
history; COBRA and HIPAA administration; OSHA incident and safety; career
development; wellness programs; company-issued property; dependent, beneficiary
and emergency contact details; and history of previous employment. The system
uses help features, or "wizards", to guide human resource administrators through
multi-step processes such as recording new hire information, employee job
changes and employee terminations. Wizards provide "To Do" lists, sequentially
presented data-entry windows, validation of data and summaries of changed
information. The system also includes effective dated record handling and
detailed audit trails.
BENEFITS ADMINISTRATION. UltiPro HRMS/Payroll provides a comprehensive,
automated means of administering all types of health and welfare plans, employee
loans, qualified and non-qualified deferred compensation, and fund allocations.
Ultimate Software has developed a one-table design that maintains deductions and
benefit plans in one common set of tables. One table stores together rules for
coverage; premium and employer match computations; eligibility and participation
determination; and taxation, wage accumulation and withholding requirements for
payroll. UltiPro HRMS/Payroll also delivers rules-based benefits administration
functionality, combining the benefit and payroll deduction tables, to help
improve accuracy and scheduling convenience. Tracking of dependent and
beneficiary information is comprehensive and can be associated with benefit
plans as necessary. In addition, complete historical information is available in
summary and detail views for a quick response to benefit inquiries and ease in
benefit plan research.
PAYROLL. UltiPro HRMS/Payroll incorporates a comprehensive tax
management system to handle federal, state and local tax computations, including
multi-state taxing rules and reciprocity. In addition, the system is delivered
with complex wage calculations such as shift premiums, piecework and make-up
pay, average pay rates for overtime calculations and garnishments/disposable
pay. It also includes convenience features enabling users to generate off-cycle
checks, create direct deposit files, perform automatic check reconciliation, and
track the progress of payroll processing steps online.
RECRUITMENT AND STAFFING. The Recruitment and Staffing module, released
in January 1999, is designed to assist organizations in coordinating the
management of open positions and applicants, tracking and evaluating costs
associated with recruiting, and handling government compliance issues.
INTERFACE TEMPLATES. UltiPro HRMS/Payroll incorporates built-in
interfaces and an engine that facilitate importing and exporting data with a
number of third-party software systems, including time clocks, point-of-sale
systems and job costing systems. Organizations can link to their banks, 401(k)
provider, tax
12
<PAGE>
filing service and unemployment cost management services. UltiPro HRMS/Payroll's
development tools give the user the ability to interface the Company's software
with many leading applications running on a variety of platforms.
REPORTING. UltiPro HRMS/Payroll provides a library of over 100 standard
reports including basic company and employee listings, employee forms,
analytical reports, notifications and upcoming events, reconciliation and audit
reports and date- or event-driven historical reports. UltiPro HRMS/Payroll
includes true point-in-time reporting, giving users access to historical
information whenever they need it. In addition to many standard reports, UltiPro
HRMS/Payroll includes other tools such as Cognos' business intelligence tools
for data analysis and generation of custom reports.
ULTIPRO EMPLOYEE SELF-SERVICE
UltiPro Employee Self-Service is a Web-based product which was released
in the third quarter of 1998 and is fully integrated with UltiPro HRMS/Payroll.
Based upon user-established security rules, employees are able to access
authorized database information from remote locations with an Internet
connection. UltiPro Employee Self-Service provides: (i) employees with access to
data, thereby decreasing HRMS/payroll staff requirements to service employees;
(ii) employees with the ability to change their own data or make a change
request subject to approval, again decreasing demands made on HRMS/ payroll
staff; (iii) an additional means for an organization and its HRMS/payroll staff
to communicate with employees; and (iv) a low-maintenance and cost-effective
method for data entry (new hires, terminations, payroll data) and inquiry at
multiple or remote locations. More specifically, using UltiPro Employee
Self-Service, employees have the ability to enroll in benefit plans and view
benefit statement information and complete and file leave of absence and
vacation requests.
ULTIPRO FOR LAN
Ultimate Software introduced UltiPro for Lan in July 1993 as its first
proprietary software product. UltiPro for Lan is a DOS-based product that is a
fully integrated human resource management, benefits administration and payroll
processing system with a number of the same features as UltiPro HRMS/Payroll.
While the Company continues to support UltiPro for Lan, it no longer actively
markets this DOS-based product.
PRODUCT DEVELOPMENT
Ultimate Software continually invests significant resources in product
development in order to take advantage of emerging technologies and to further
broaden its products' functionality and performance. Ultimate Software employs
an iterative, rapid application development ("RAD") process. New product
specifications are primarily developed by product managers with input from
professional services employees and clients. Feature teams, which include
product managers, programmer analysts, as well as employees from the quality
assurance, tax research and documentation departments, jointly review
specifications, products in development, test plans and documentation. Published
programming standards and guidelines, code "walkthroughs" and more formal code
reviews are used in an attempt to deliver more error-free code in a shorter
period of time. Ultimate Software believes that this iterative,
multi-disciplinary, team-based approach results in application development that
is more responsive to client needs than products developed using other available
approaches. Ultimate Software believes that software product development is most
effectively and efficiently accomplished by small development teams focused on
specific areas. Ultimate Software provides on-going technical training and
state-of-the-art equipment to its research and development staff.
Ultimate Software is focused on enhancing its UltiPro Web-based product
line and its core HRMS/Payroll set. Planned functionality includes, but is not
limited to, the following:
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<PAGE>
WEB-BASED MANAGER SELF-SERVICE, STANDARD SERIES. The basic manager
self-service system, expected to be released in 1999, is designed to provide
managers with the capability to manage their staff, recruiting and future
staffing needs, performance evaluation and reporting over the Internet.
WEB-BASED MANAGER SELF-SERVICE, STRATEGIC SERIES. The strategic series,
expected to be released in 1999, is designed to provide managers with training
management and compensation management functionality over the Internet. Managers
will have access to such information as course schedules, staff members who have
enrolled in course work, approval forms for funding course work and other
related activities. Managers will also have online access to historical and
projected compensation reporting and compensation analysis tools.
WEB-BASED EMPLOYEE SELF-SERVICE, STRATEGIC SERIES. The strategic
series, expected to be released in 1999, includes advanced personal benefits
management and training functionality. This product is designed to give
employees the ability to enroll in a variety of benefit programs online,
including, but not limited to, health maintenance organizations ("HMO"),
preferred provider organizations ("PPO"), healthcare options, dental plans, and
401(k) plans. They will also have the ability to view course schedules,
descriptions and instructors as well as enroll in classes and route approval
requests to their managers.
ULTIPRO HRMS/PAYROLL, STRATEGIC SERIES. The strategic version of
UltiPro HRMS/Payroll, expected to be released in 1999, will include all the
functionality in the standard UltiPro HRMS/Payroll product plus additional
functionality. This additional functionality will provide compensation
management, training management, FSA claims administration and position
management.
There can be no assurance that the Company will successfully complete
the development of one or more of these products or that they will be
successfully completed in a timely manner.
Since inception, the Company has invested a substantial amount of its
resources in research and development. During the fiscal years ended December
31, 1998, 1997 and 1996, research and development expenses aggregated
approximately $7.0 million, $4.8 million and $3.4 million, respectively.
PROFESSIONAL SERVICES
Ultimate Software believes that offering quality professional services
provides it with a significant opportunity to differentiate itself in the
marketplace and is critical to the Company's comprehensive solution. Ultimate
Software provides its customers professional services in three areas:
implementation, training, and customer support and maintenance.
IMPLEMENTATION. Ultimate Software's implementation services provide its
customers with a standardized methodology and assistance in implementing the
Company's HRMS/payroll solutions. Ultimate Software believes that its
implementation services ensure its customers' early success with its products
and assist customers in their ongoing efforts to enhance their existing systems
and manage upgrades. In addition, these services strengthen the relationship
with customers and add to the Company's industry-specific knowledge base for use
in future implementation and product development efforts. Ultimate Software's
implementation process is handled either by the Company's implementation team or
in partnership with third-party consultants. Ultimate Software has established a
training program that provides the Company's associates and its implementation
partners standardized instruction on UltiPro HRMS/Payroll, including techniques
for systems planning and design, customer-specific configuring of application
modules, conversion from existing systems and interfacing with other software
applications. Ultimate Software's implementation group consists of HRMS/payroll
consultants, database administrators and technology consultants. Implementation
services are typically billed on a time and materials basis.
TRAINING. Ultimate Software provides its customers with the opportunity
to participate in formal training programs. Ultimate Software believes that this
training increases customers' ability to use the full
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<PAGE>
functionality of the product, thereby maximizing the value of customers'
investment. Courses are designed to give attendees practical, hands-on
experience with the Company's products. Trainees learn such basics as how to
enter new employee information, set up benefit plans and generate standard
reports, as well as more complex processes such as defining company rules,
customizing the system and creating custom reports. The Company maintains
training facilities in each of the following locations: Atlanta, Georgia; Seal
Beach, California; Chicago, Illinois; Dallas, Texas and East Rutherford, New
Jersey. In certain instances, the Company conducts on-site training at customer
facilities.
CUSTOMER SUPPORT AND MAINTENANCE. Ultimate Software offers
comprehensive technical support and maintenance services, which have
historically been purchased by all of its customers. Ultimate Software's
customer support center has been awarded the Support Center Practices
Certification from the Ziff Davis Service & Support Consultants. This
prestigious certification recognizes companies which deliver exceptional service
and support to their customers. Other recipients include Oracle, Xerox, The
Sabre Group, Sybase, Intuit, Rockwell and Lockheed Martin. Ultimate Software's
customer support services include: software updates that reflect tax and other
legislative changes; telephone support 24 hours a day, 7 days a week; unlimited
access to the Company's employee tax center on the World Wide Web; seminars on
year-end closing procedures; and periodic newsletters. In addition, Ultimate
Software uses Symantec Corporation's PC Anywhere software for remote
accessibility to the customer's system in order to perform quick diagnostics and
provide on-line assistance.
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<PAGE>
CUSTOMERS
As of December 31, 1998, the Company had licensed its UltiPro
HRMS/Payroll solution to approximately 200 customers and its UltiPro for Lan
solution to approximately 750 customers. No customer accounted for more than 10%
of total revenues in fiscal year 1998 or 1997. Ultimate Software's customers
operate in a wide variety of industries, including manufacturing, food services,
retail, healthcare, technology, finance, insurance, real estate, transportation,
communications, services and sports and entertainment. The following is a
representative list of the Company's customers as of December 31, 1998 and is
not intended to portray a complete list of the Company's customers.
<TABLE>
<CAPTION>
<S> <C> <C>
MANUFACTURING: FOOD SERVICES: SPORTS:
Duro Bag Manufacturing Co. AT Williams Oil Arizona Diamondbacks
Globe Manufacturing, Inc. Benihana Corp. Chicago White Sox
Halstead Metal Products, Inc. Bentley's Luggage Colorado Rockies Baseball
Hatteras Yachts, Inc. Bill Heard Enterprises, Inc. Montreal Expos
MCD International, Inc. Carolina Restaurant Group New York Giants
Packerland Packing Co., Inc. Delta Beverage Group New York Jets Football Club
PMC, Inc. Hooters of America New York Yankees
Stevens Graphics, Inc. Reliable Stores, Inc. Philadelphia Phillies
United States Filter Corporation Spaghetti Warehouse, Inc. & The Phoenix Suns
Volvo GM Heavy Truck Corp. Subsidiaries ProPlayer Stadium
Wright Industries, Inc. The Portillo Restaurant Group Texas Rangers Baseball
The Florida Marlins Baseball
HEALTHCARE: TECHNOLOGY: Club
Baptist Health Systems FFV Aerotech, Inc. The Florida Panthers
Community Hospital of Global Technical Services, Inc.
Monterey Peninsula Ingram Entertainment, Inc. SERVICES AND OTHER:
Disabilities Services of the The National Research Group Boston Ballet
Southwest TPS Technologies Callaway Gardens Resorts, Inc.
Florida Community Cancer Tracer Research Discovery Zone, Inc.
Group Health Associates Hart Graphics
Medassist OP TRANSPORTATION & Hotel Intercontinental
National Vision Associates, Ltd. COMMUNICATIONS: Hudson Hotels Corp.
Scottsdale Healthcare Airport Group International, Inc. Mark Hopkins Intercontinental
Sunrise Assisted Living America West Airlines, Inc. Omni Hotels Management
University Physicians Group Armellini Trucking Corporation Rexam Industries Corporation
Benton Express Co.
FINANCE/INSURANCE/REAL ESTATE: Communications & Power
First American Corporation Industries
GMAC Mortgage, Inc. Drug Transport, Inc.
J.C. Bradford & Co. LLC Lin Television
Michigan Mutual Insurance Co. The Christian Broadcasting
Northwest Savings Bank Network, Inc.
Republic National Bank World Maintenance Service
The Midland Life Insurance Co.
Trammel Crow Residential
</TABLE>
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SALES AND MARKETING
Ultimate Software markets and sells its products and services through
its direct sales force, marketing group, a network of strategic partners and an
affiliate channel.
DIRECT SALES. Ultimate Software's direct sales force includes business
development directors and managers who have defined territories and conduct
lead-generation activities within given parameters. The sales cycle begins with
a sales lead generated through a corporate marketing vehicle or a
territory-based activity. Whether the lead is a telephone request, fax, email or
request for proposals ("RFPs"), the lead is qualified and entered into a
lead-tracking system. When the lead is received on the local level, prospect
information is entered via the Internet into an electronic system resident at
headquarters. When headquarters receives the lead, the information is recorded
and forwarded to the business development manager in the prospect's region of
the country. Business development managers rely on face-to-face meetings with
prospects to build relationships. In one or more on-site visits, business
development managers work with application and technical consultants to analyze
prospective client needs, demonstrate the Company's product and, when required,
respond to an RFP. The sale is finalized after clients complete their internal
sign-off procedures and terms of the contract are negotiated and signed. While
the length of sales cycles varies from client to client, the sales cycle
typically requires two to six months for UltiPro HRMS/Payroll and UltiPro
Employee Self-Service.
The terms of the Company's sales contract typically include a license,
an annual maintenance agreement, per-day training rates and hourly charges for
implementation services. The contract does not typically provide for
cancellation of software purchases. Typical payment terms include a deposit at
the time the contract is signed and additional payments upon the delivery of the
product and the occurrence of other specified events such as the implementation
of the software. Payment for implementation and training services under the
contract are typically made as such services are provided.
MARKETING. Ultimate Software supports its sales force with a
comprehensive marketing program that includes public relations, advertising,
direct mail, trade shows, seminars and Web site maintenance. Working closely
with the direct sales force, customers and strategic partners, the marketing
team defines positioning strategies and develops a well-defined plan for
implementing these strategies. Marketing services include market surveys and
research, overall campaign management, creative development, production control,
lead generation and tracking, results analysis, and communications with field
offices, customers and strategic partners.
STRATEGIC PARTNERS. Ultimate Software has established a number of
formal and informal marketing relationships with industry-specific vendors and
consulting firms. Ultimate Software has a strategic partnership with Microsoft
Corporation that involves coordinated public relations and marketing
opportunities as well as trade show activities specifically targeted to the HRMS
industry. In addition, the Company has relationships with Cognos, Citrix
Systems, Inc., FlexiInternational Software, Inc., Great Plains Software, Inc.,
Lotus Development Corporation, National Bond & Trust Company Inc., Network
Specialists, Inc., Paradigm Software Technologies, Platinum Software
Corporation, ProBusiness Services, Inc., Simplex Time Recorder Co., SunGard
Recovery Services, Inc. and Systems Tax Service. These relationships include
joint marketing activities such as joint press releases, direct mail programs,
seminars, on-site product demonstrations, reciprocal web site links and referral
programs. Ultimate Software believes that these activities expand the
opportunity for sales of the Ultimate Software's products.
AFFILIATE CHANNEL NETWORK. Ultimate Software introduced an affiliate
alliance program in December 1998. The program gives accounting firms,
consulting firms and high quality resellers the opportunity to grow their
businesses by marketing, selling and implementing UltiPro to their existing
customer base and organizations with under 1,000 employees. To date, members of
the affiliate network include Crowe, Chizek and Company, LLP, Science
Applications International Corporation (SAIC),
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<PAGE>
Technology Management & Integration Group, The Dovetail Group, Bechamp Software
Consultants, Progressive Automated Solutions, Inc. and Rockleigh Services
Corporation.
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent in part on its ability to protect
its proprietary technology. The Company licenses its products in object code
form only, although it has source code escrow arrangements when required by
customers. The Company relies on a combination of copyright, trademark and trade
secret laws, as well as confidentiality agreements and licensing arrangements,
to establish and protect its proprietary rights. The Company does not have any
patents or patent applications pending, and existing copyright, trademark and
trade secret laws afford only limited protection. Accordingly, there can be no
assurance that the Company will be able to protect its proprietary rights
against unauthorized third-party copying or use, which could materially
adversely affect the Company's business, operating results and financial
condition.
Despite the Company's efforts to protect its proprietary rights,
attempts may be made to copy or reverse engineer aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Moreover, there can be no assurance that others will not develop
products that perform comparably to the Company's proprietary products. Policing
the unauthorized use of the Company's products is difficult. Litigation may be
necessary in the future to enforce the Company's intellectual property rights,
to protect the Company's trademarks, copyrights or trade secrets or to determine
the validity and scope of the proprietary rights of others. Such litigation
could result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, operating results and
financial condition.
As is common in the software industry, the Company from time to time
may become aware of third party claims of infringement by the Company's products
of third-party proprietary rights. While the Company is not currently subject to
any such claim, the Company's software products may increasingly be subject to
such claims as the number of products and competitors in the Company's industry
segments grows and the functionality of products overlaps and as the issuance of
software patents becomes increasingly common. Any such claim, with or without
merit, could result in significant litigation costs and require the Company to
enter into royalty and licensing agreements, which could have a material adverse
effect on the Company's business, operating results and financial condition.
Such royalty and licensing agreements, if required, may not be available on
terms acceptable by the Company or at all.
COMPETITION
The market for the Company's products is highly competitive. The
Company's products compete primarily on the basis of technology, delivered
functionality and price/performance. The Company believes that its products
generally compete effectively with respect to these factors.
Ultimate Software's competitors include (i) a number of companies, such
as Cyborg Systems, Inc., Genesys Software Systems, Inc., Lawson Software, Inc.,
Oracle Corporation, PDS Software, Inc., PeopleSoft, Inc. and SAP America, Inc.
which offer HRMS/payroll software products for use on mainframes and/or
client/server systems; (ii) large service bureaus, such as ADP and Ceridian
Corporation; and (iii) the internal payroll/human resources departments of
potential customers which use custom-written software. Many of the Company's
competitors or potential competitors have significantly greater financial,
technical and marketing resources than the Company. As a result, they may be
able to respond more quickly to new or emerging technologies and to changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of their products than can the Company. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of the Company's prospective customers.
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<PAGE>
EMPLOYEES
As of December 31, 1998, the Company employed 322 persons, including 94
in sales and marketing, 111 in professional services, 99 in research and
development and 18 in finance and administration. The Company believes that its
relations with employees are good. However, competition for qualified personnel
in the Company's industry is intense and the management of the Company believes
that its future success will depend in part on its continued ability to attract,
hire and retain qualified personnel.
ITEM 2. PROPERTIES
Ultimate Software's corporate headquarters, including its principal
administrative, marketing, engineering and support operations, are located in a
total of approximately 19,000 square feet in two buildings in Fort Lauderdale,
Florida. The Company leases these premises under three leases which expire on
May 31, 1999, renewable on a monthly basis thereafter for two of the three
leases and through June 30, 1999 for the third lease covering approximately
4,000 square feet. In mid-1999, the Company intends to move into a new and
larger facility currently under construction in Weston, Florida. The Company has
leased all available square footage in this new facility, or approximately
40,000 square feet, under a lease expiring in 2014 with lease payments
thereunder commencing upon occupancy. In addition, the Company presently leases
office space for its sales operations in Albany, Atlanta, Baltimore, Chicago,
Cincinnati, Cleveland, Columbus (Ohio), Dallas, East Rutherford (New Jersey),
Fort Lauderdale, Houston, Jackson (Mississippi), Minneapolis, Nashville,
Philadelphia, Pittsburgh, Seal Beach (California) and Tampa. Sales operations in
other locations are not supported by leased office space. The Company believes
that its existing facilities, including the new facility discussed above, are
suitable and adequate for its current operations. The Company further believes
that suitable space will be available as needed to accommodate any expansion of
its operations on commercially reasonable terms.
ITEM 3. 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. Although
the Company has not experienced any material product liability claims to date,
the sale and support of software products and the performance of related
services entail the risk of such claims. As of the date of this Form 10-K, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Ultimate Software's Common Stock began trading on the Nasdaq National
Market under the symbol "ULTI" on June 2, 1998 at an initial offering price of
$10.00 per share. Prior to such date, there was no established public trading
market for the Company's Common Stock.
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<PAGE>
The following table sets forth, for the periods indicated, the high
closing and low closing sales prices of the Company's Common Stock, as quoted on
the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ------
<S> <C> <C>
Second Quarter Fiscal 1998
(from June 2, 1998 through June 30, 1998) $10.188 $7.750
Third Quarter Fiscal 1998 $10.500 $4.750
Fourth Quarter Fiscal 1998 $8.750 $6.125
</TABLE>
As of February 22, 1999, the Company had approximately 214 holders of
record, representing approximately 1,914 stockholder accounts.
In February and March 1998, the Company issued a total of 121,856 of
Class B Common Stock, which converted into 1,233,061 shares of Common Stock (see
Note 10 of the Notes to Consolidated Financial Statements included elsewhere in
this Form 10-K), pursuant to section 4(2) of the Securities Act of 1933, as
amended, in connection with the acquisition of the businesses of five
third-party resellers of the Company's products.
The Company has never declared or paid any cash dividends on its
capital stock and does not anticipate paying any cash dividends in the
foreseeable future. The Company currently intends to retain future earnings to
fund the development and growth of its business. The payment of dividends in the
future, if any, will be at the discretion of the Board of Directors.
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
December 31, 1998, the Company incurred the following expenses in connection
with the issuance and distribution of the Common Stock in the IPO (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
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
======
</TABLE>
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 December 31, 1998,
except as otherwise noted, the net offering proceeds were used as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Invested in money market and other short-term
marketable securities at December 31, 1998 $16,649
Repayment of certain indebtedness 3,600
Accrued bonuses to officers who are not
executive officers 436
Other working capital needs 7,699
-------
Total $28,384
=======
</TABLE>
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to and should be read in conjunction with "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Form 10-K. The Statement of Operations Data presented below for each of the
years in the three year period ended December 31, 1998 and the Balance Sheet
Data as of December 31, 1998 and 1997 have been derived from the Company's
Financial Statements included elsewhere in this Form 10-K which have been
audited by Arthur Andersen LLP whose report with respect thereto appears
elsewhere in this Form 10-K. The Balance Sheet Data as of December 31, 1996 and
1995 have been derived from audited financial statements not included herein.
The Balance Sheet Data as of December 31, 1994 and the Statement of Operations
Data for the year ended December 31, 1994 have been derived from the unaudited
financial statements of the Company. In the opinion of management, the unaudited
financial statements include all adjustments (consisting only of normal and
recurring adjustments) necessary for a fair presentation of its financial
position and the results of operations for such periods. The financial data
reflects the results of the Company and five former third-party resellers of the
Company's products, the businesses of which were acquired in February and March
1998 (the "Acquired Resellers"), as if the Company and the Acquired Resellers
had operated as one entity during the periods presented. These acquisitions were
accounted for under the poolings-of-interests method of accounting. See the
Consolidated Financial Statements and the related Notes thereto included
elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (1)
--------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
STATEMENT OF OPERATIONS DATA: (In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
License $ 18,811 $ 7,232 $ 4,273 $ 1,929 $ 796
Service 24,519 10,360 5,039 1,798 1,376
-------- -------- -------- ------- -------
Total revenues 43,330 17,592 9,312 3,727 2,172
-------- -------- -------- ------- -------
Cost of revenues:
License 834 195 - - -
Service 18,018 9,375 5,846 1,834 312
-------- -------- -------- ------- -------
Total cost of revenues 18,852 9,570 5,846 1,834 312
-------- -------- -------- ------- -------
Operating expenses:
Sales and marketing 16,024 13,656 10,451 2,645 798
Research and development 6,953 4,837 3,360 2,591 914
General and administrative 4,651 4,148 3,007 1,268 1,683
Amortization of acquired
intangibles 638 1,442 6,932 39 -
-------- -------- -------- ------- -------
Total operating expenses 28,266 24,083 23,750 6,543 3,395
-------- -------- -------- ------- -------
Operating loss (3,788) (16,061) (20,284) (4,650) (1,535)
Compensation related to
modification of escrow
agreement (3) (4,183) - - - -
Interest expense (207) (206) (179) (94) (33)
Interest and other income 589 250 77 13 3
-------- -------- -------- ------- -------
Net loss $ (7,589) $(16,017) $(20,386) $(4,731) $(1,565)
======== ======== ======== ======= =======
Net loss per share--basic and
diluted (2) $ (0.52) $ (1.37) $ (2.30) $ (0.71) $ (0.24)
======== ======== ======== ======= =======
Weighted average number of
shares outstanding--diluted (2) 14,494 11,710 8,854 6,660 6,660
======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
BALANCE SHEET DATA: (In thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 17,128 $ 3,270 $ 1,420 $ 421 $ 208
Working capital (deficit) 17,494 (6,220) (4,231) (1,341) 562
Total assets 37,214 12,439 7,990 2,736 1,507
Long-term borrowings, including
capital lease obligations 1,010 54 217 324 174
Stockholders' equity
(deficit) 19,110 (5,508) (2,442) (924) 564
</TABLE>
- -----------------------
(1) Consolidated financial data gives retroactive effect to the
acquisitions of the acquired resellers, which was accounted for under
the poolings-of-interest method of accounting, as if the Company and
the Acquired Resellers had operated as one entity during the periods
presented. See the Consolidated Financial Statements and the related
Notes thereto included elsewhere in this Form 10-K.
(2) See Note 2 of the Notes to Consolidated Financial Statements for
information regarding the computation of net loss per share.
(3) See Note 16 of the Notes to Consolidated Financial Statements.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Form 10-K.
This Form 10-K 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 and elsewhere
in this Form 10-K.
OVERVIEW
Ultimate Software designs, markets, implements and supports
technologically advanced cross-industry human resources management and payroll
("HRMS/payroll") software solutions. Ultimate Software's software solutions are
marketed primarily to middle-market organizations with 500 to 15,000 employees
but are scaleable to address the needs of much larger organizations.
Ultimate Software's core product, UltiPro HRMS/Payroll (formerly known
as "UltiPro for Windows"), automates an organization's HRMS/payroll function and
is an enabling tool in the cost-efficient management of the employee life cycle,
from inception of employment through retirement. As part of its comprehensive
HRMS/payroll solution, the Company provides high quality implementation,
training and ongoing support services to its customers. Ultimate Software's
customers operate in a wide variety of industries, including manufacturing, food
services, retail, healthcare, technology, finance, insurance, real estate,
transportation, communications, services and sports and entertainment. Ultimate
Software reaches its customer base and target market through its direct sales
force and a network of national, regional and local strategic partners and an
affiliate channel network.
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. Since 1996, significant
investments were made in research and development, sales and marketing and
professional services to develop, sell and support the Company's client/server
solution.
Since the release of UltiPro HRMS/Payroll, the principal source of the
Company's license revenues has shifted from its DOS-based product to its
client/server product. UltiPro HRMS/Payroll has higher license fees, service
fees and gross margins than the Company's DOS-based product. While the Company
continues to support its DOS-based product, it no longer actively markets this
product. Accordingly, the Company's future success will depend on maintaining
and increasing the acceptance of UltiPro.
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
22
<PAGE>
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 those of nine Resellers in April 1996. These acquisitions
were accounted for under the purchase method of accounting with approximately
$8.8 million of goodwill recorded as a result. In February and March 1998, the
Company acquired the businesses of the remaining five Acquired Resellers which
acquisitions were recorded under the pooling-of-interests method of accounting.
During 1998 and 1997, the Acquired Resellers accounted for $9.1 million, or
20.9% of total revenues, and $3.5 million, or 19.6% of total revenues,
respectively.
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 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.
23
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the Statement of Operations data of the
Company, as a percentage of total revenues, for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
----- ----- ------
<S> <C> <C> <C>
Revenues:
License 43.4 % 41.1 % 45.9 %
Service 56.6 58.9 54.1
----- ----- ------
Total revenues 100.0 100.0 100.0
----- ----- ------
Cost of revenues:
License 1.9 1.1 -
Service 41.6 53.3 62.8
----- ----- ------
Total cost of revenues 43.5 54.4 62.8
----- ----- ------
Operating expenses:
Sales and marketing 37.0 77.6 112.2
Research and development 16.0 27.5 36.1
General and administrative 10.7 23.6 32.3
Amortization of acquired intangibles 1.5 8.2 74.4
----- ----- ------
Total operating expenses 65.2 136.9 255.0
----- ----- ------
Operating loss (8.7) (91.3) (217.8)
Compensation related to modification
of escrow agreement (9.7) - -
Interest expense (0.5) (1.2) (1.9)
Interest and other income 1.4 1.4 0.8
----- ----- ------
Net loss (17.5)% (91.0)% (218.9)%
===== ===== ======
</TABLE>
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES
The Company's revenues are derived from two principal sources: software
licenses ("license revenues") and fees for maintenance, implementation, training
and consulting services (collectively, "service revenues"). License revenues
include revenues from noncancellable software license agreements entered into
between the Company and its customers with respect to its products. License
revenues are generally recognized upon the delivery of the related software
product when all significant contractual obligations have been satisfied. Until
such delivery, the Company records amounts received when contracts are signed as
customer deposits which are included with deferred revenues in the 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 revenues. All of the Company's customers that purchased software
during 1997 and 1998 also purchased maintenance and support contracts. During
the fiscal year ended December 31, 1998 and 1997, average annual renewal rates
for existing maintenance and support customers were at least 95%. Maintenance
and support contracts are generally priced as a percentage of the initial
license fee for the underlying products.
Total revenues, consisting of license and service revenues, increased
146.3% to $43.3 million for 1998 from $17.6 million for 1997.
24
<PAGE>
License revenues increased 160.1% to $18.8 million for 1998 from $7.2
million for 1997. The increase in license revenues was primarily attributable to
increased sales of UltiPro HRMS/Payroll which has significantly higher license
fees than UltiPro for Lan. Ultimate Software introduced UltiPro HRMS/Payroll in
the second half of 1997. UltiPro HRMS/Payroll represented 98.4% and 58.6% of
license revenues for 1998 and 1997, respectively.
Service revenues increased 136.7% to $24.5 million for 1998 from $10.4
million for 1997. The increase in service revenues was primarily attributable to
an increase in services related to the implementation of UltiPro HRMS/Payroll.
UltiPro HRMS/Payroll has significantly higher service revenue per implementation
than UltiPro for Lan. In addition, support revenues increased as a result of an
increase in the installed base of UltiPro HRMS/Payroll and, to a lesser extent,
UltiPro for Lan customers.
COST OF REVENUES
Cost of revenues consists principally of the cost of license and
service revenues. Cost of license revenues 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 by 327.7% to $0.8 million for 1998
from $0.2 million for 1997. Cost of license revenues, as a percentage of total
revenues, increased to 1.9% for 1998 from 1.1% for 1997. The increase in cost of
license revenues was primarily attributable to fees payable to a third party for
products distributed by the Company, which commenced with the launch of UltiPro
HRMS/Payroll.
Cost of service revenues increased by 92.2% to $18.0 million for 1998
from $9.4 million for 1997. The increase in cost of service revenues was
primarily attributable to the hiring of additional implementation services
personnel, as well as costs associated with the utilization of third-party
implementation partners, and, to a lesser degree, the cost of additional
maintenance personnel in support of UltiPro HRMS/Payroll. Cost of service
revenues, as a percentage of total revenues, decreased to 41.6% for 1998 from
53.3% for 1997 primarily due to higher gross margins associated with services
provided to the Company's customers using UltiPro HRMS/Payroll as compared to
UltiPro for Lan.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries, sales
commissions, travel and promotional expenses, and facility and communication
costs for direct sales offices. Sales and marketing expenses increased by 17.3%
to $16.0 million for 1998 from $13.7 million for 1997. The increase in sales and
marketing expenses was primarily attributable to an increase in sales and
marketing personnel and an increase in marketing activities principally relating
to UltiPro HRMS/Payroll. Sales and marketing expenses, as a percentage of total
revenues, decreased to 37.0% for 1998 from 77.6% for 1997 primarily due to the
absorption of the expenses in an increased revenue base.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of software
development personnel costs. Research and development expenses increased by
43.7% to $7.0 million for 1998 from $4.8 million for 1997. The increase in
research and development expenses was primarily attributable to an increase in
costs associated with hiring additional programmers and engineers for the
development and enhancement of UltiPro HRMS/Payroll and for the development of
new HRMS/payroll-related modules, including salaries and benefits. Research and
development expenses, as a percentage of total revenues, decreased to 16.0% for
1998 from 27.5% for 1997 primarily due to the absorption of the expenses in an
increased revenue base.
25
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries of
executive, administrative and financial personnel, as well as external
professional fees and the provision for doubtful accounts. General and
administrative expenses increased by 12.2% to $4.7 million for 1998 from $4.1
million for 1997. The increase in general and administrative expenses was
primarily due to an increase in the percentage-based provision for doubtful
accounts resulting from increased revenues and corresponding increases in
accounts receivable, costs to support the expansion of business operations, and
expenses associated with being a publicly-held company. General and
administrative expenses, as a percentage of total revenues, decreased to 10.7%
for 1998 from 23.6% for 1997 primarily due to the absorption of the expenses in
an increased revenue base.
AMORTIZATION OF ACQUIRED INTANGIBLES
Amortization of acquired intangibles consists of goodwill amortization
associated with the acquisition of three Resellers in 1995 and nine Resellers in
1996 (the "Reseller Acquisitions"). Goodwill amortization decreased by 55.8% to
$0.6 million for 1998 from $1.4 million for 1997. As of December 31, 1998, the
goodwill associated with the Reseller Acquisitions was fully amortized.
COMPENSATION RELATED TO MODIFICATION OF ESCROW AGREEMENT
Compensation expense is related to the modification of an escrow
agreement, pursuant to which certain shares of the Company's Class B common
stock (the "Class B Common Stock") were placed in escrow (the "Class B Escrow
Agreement"). In March 1998, the Class B Escrow Agreement was modified to provide
for the release of all of the shares of Class B Common Stock held in escrow upon
the execution of a firm underwriting agreement for the Company's capital stock
on or before July 1, 1998. Accordingly, a non-recurring, non-cash charge of $4.2
million for compensation expense was recorded during March 1998, representing
the number of shares of stock released to directors, officers and employees of
the Company multiplied by the difference between the fair market value of the
Class B Common Stock on the date of modification and the price paid by the
holders of the shares.
INTEREST EXPENSE
Interest expense for 1998 was consistent with that of 1997 due to the
decrease in bank borrowings in 1998 offset by the increase in capital lease
obligations.
INTEREST AND OTHER INCOME
Interest and other income increased by 135.6% to $0.6 million in 1998
from $0.3 million in 1997 primarily due to interest earned on the remaining net
proceeds from the IPO.
PROVISION FOR INCOME TAXES (BENEFIT)
No provision or benefit for federal, state or foreign income taxes was
made for 1998 and 1997 due to the operating losses incurred in the respective
periods. The Company has reported only tax losses to date and consequently had
approximately $27.4 million of net operating loss carryforwards available at
December 31, 1998, which expire at various times through the year 2018,
available to offset future taxable income. The timing of attaining profitability
may result in the expiration of net operating loss carryforwards before
utilization. Additionally, utilization of such net operating losses may be
limited as a result of cumulative ownership changes in the Company's equity
instruments. The Company's net deferred tax assets at December 31, 1998 were
$11.2 million, consisting primarily of net operating loss carryforwards. The
Company's benefit of deferred tax assets was fully reserved as of December 31,
1998 as the realization of
26
<PAGE>
deferred taxes is dependent on future events and earnings, if any, the timing
and extent of which are uncertain.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES
Total revenues increased 88.9% to $17.6 million for 1997 from $9.3
million for 1996.
License revenues increased 69.2% to $7.2 million for 1997 from $4.3
million for 1996. This increase was primarily attributable to the introduction
and sale of UltiPro HRMS/Payroll, which has significantly higher license fees
than UltiPro for Lan. The increase in UltiPro HRMS/Payroll license revenues was
offset, in part, by a decrease in license revenues attributable to UltiPro for
Lan resulting from a decrease in the sales and marketing of the Company's
DOS-based product. UltiPro HRMS/Payroll accounted for 58.6% of license revenues
for 1997 and 0% for 1996.
Service revenues increased 105.6% to $10.4 million for 1997 from $5.0
million for 1996. The increase in service revenues was primarily attributable to
services related to the implementation of UltiPro HRMS/Payroll and increased
implementations of the Company's UltiPro for Lan product licensed in 1996.
UltiPro HRMS/Payroll has significantly higher service revenue per implementation
than UltiPro for Lan. In addition, maintenance revenues increased as a result of
an increase in the installed base of UltiPro HRMS/Payroll and UltiPro for Lan
customers.
COST OF REVENUES
Cost of license revenues increased to $0.2 million for 1997 from zero
for 1996. The increase was primarily attributable to fees payable to a third
party for software products distributed by the Company, which commenced with the
launch of UltiPro HRMS/Payroll.
Cost of service revenues increased by 60.4% to $9.4 million for 1997
from $5.8 million for 1996. This increase was primarily attributable to hiring
of additional implementation services personnel, as well as costs associated
with the utilization of third-party implementation partners. Cost of service
revenues, as a percentage of total revenues, decreased to 53.3% for 1997 from
62.8% for 1996 primarily due to an increase in total revenues.
SALES AND MARKETING
Sales and marketing expenses increased by 30.7% to $13.7 million for
1997 from $10.5 million for 1996. This increase was primarily attributable to
higher costs associated with an increase in sales and marketing personnel,
including salary and commission expenses, and increased marketing activities
relating to the introduction of UltiPro HRMS/Payroll. Sales and marketing
expenses, as a percentage of total revenues, decreased to 77.6% for 1997 from
112.2% for 1996 primarily due to an increase in total revenues.
RESEARCH AND DEVELOPMENT
Research and development expenses increased by 44.0% to $4.8 million
for 1997 from $3.4 million for 1996. This increase was primarily attributable to
the hiring of additional programmers and engineers for the development and
enhancement of UltiPro HRMS/Payroll and for the development of new HRMS/payroll
related modules. Research and development expenses, as a percentage of total
revenues, decreased to 27.5% for 1997 from 36.1% for 1996 primarily due to an
increase in total revenues.
27
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by 38.0% to $4.1 million
for 1997 from $3.0 million for 1996. This increase was due to an increase in the
provision for doubtful accounts directly related to the increase in the
Company's customer base, an increase in personnel and overhead necessary to
manage and support the growth of the Company and an increase in professional
fees due to the increased use of professional service providers. General and
administrative expenses, as a percentage of total revenues, decreased to 23.6%
for 1997 from 32.3% for 1996 primarily due to an increase in total revenues.
AMORTIZATION OF ACQUIRED INTANGIBLES
Goodwill amortization decreased 79.2% to $1.4 million for 1997 from
$6.9 million for 1996. Such decrease was attributable to the Company's recording
of additional amortization of $0.3 million in 1997 compared to additional
amortization of $5.1 million in 1996 as a result of the operating results and
projected future cash flows of the nine Resellers acquired in 1996 indicating an
impairment of the related intangibles acquired. Such change was made in
accordance with the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-lived Assets and for Long-lived Assets to be Disposed Of." The Company
had amortized $8.4 million of goodwill as of December 31, 1997. Goodwill in the
amount of $0.6 million remained on the balance sheet as of December 31, 1997 and
was amortized over the subsequent ten months.
PROVISION FOR INCOME TAXES (BENEFIT)
No provision or benefit for federal, state or foreign income taxes was
made for 1997 and 1996 due to the operating losses incurred in the respective
periods. The Company has reported only tax losses to date and consequently had
approximately $21.5 million of net operating loss carryforwards available at
December 31, 1997, which expire at various times through the year 2012,
available to offset future taxable income. The timing of attaining profitability
may result in the expiration of net operating loss carryforwards before
utilization. Additionally, utilization of such net operating losses may be
limited as a result of cumulative ownership changes in the Company's equity
instruments. The Company's net deferred tax assets at December 31, 1997 were
$9.8 million, consisting primarily of net operating loss carryforwards. The
Company's benefit of deferred tax assets was fully reserved as of December 31,
1997 as the realization of deferred taxes is dependent on future events and
earnings, if any, the timing and extent of which are uncertain.
28
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly results of
operations for each of the quarters in the years ended December 31, 1998 and
1997. In management's opinion, this unaudited information has been prepared on
the same basis as the audited consolidated financial statements and includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the information for the quarters presented, when read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto, included elsewhere in this Form 10-K. The Company believes that
quarter-to-quarter comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
1998 1998 1998 1998 1997 1997 1997 1997
-------- --------- -------- -------- ------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License $6,732 $ 4,753 $ 4,203 $ 3,123 $4,913 $ 709 $ 792 $ 818
Services 7,699 6,436 5,936 4,448 4,039 2,190 1,919 2,212
------ -------- ------- -------- ------ ------- ------- --------
Total revenues 14,431 11,189 10,139 7,571 8,952 2,899 2,711 3,030
------ -------- ------- -------- ------ ------- ------- --------
Cost of revenues:
License 226 179 225 204 195 - - -
Services 5,469 4,581 4,225 3,743 2,887 2,313 2,029 2,145
------ -------- ------- -------- ------ ------- ------- --------
Total cost of revenues 5,695 4,760 4,450 3,947 3,082 2,313 2,029 2,145
------ -------- ------- -------- ------ ------- ------- --------
Operating expenses:
Sales and marketing 4,028 4,213 3,969 3,814 3,503 3,345 3,413 3,395
Research and
development 2,061 1,847 1,626 1,419 1,460 1,342 1,152 883
General and
administrative 1,341 1,283 1,111 916 1,451 818 858 1,021
Amortization of acquired
intangibles 65 191 191 191 284 437 437 284
------ -------- ------- -------- ------ ------- ------- --------
Total operating expense 7,495 7,534 6,897 6,340 6,698 5,942 5,860 5,583
------ -------- ------- -------- ------ ------- ------- --------
Operating income (loss) 1,241 (1,105) (1,208) (2,716) (828) (5,356) (5,178) (4,698)
Compensation related to
modification of escrow
agreement - - - (4,183) - - - -
Interest expense (29) (23) (117) (38) (34) (50) (64) (58)
Interest and other income 209 270 101 9 100 86 38 26
------ -------- ------- -------- ------ ------- ------- --------
Net income (loss) $1,421 $ (858) $(1,224) $ (6,928) $ (762) $(5,320) $(5,204) $ (4,730)
====== ======== ======= ======== ====== ======= ======= ========
Weighted average shares
outstanding--diluted 16,024 15,877 13,550 12,621 12,621 12,599 11,264 10,330
====== ======== ======= ======== ====== ======= ======= ========
Basic and diluted
net income
(loss) per share $ 0.09 $ (0.05) $ (0.09) $ (0.55) $(0.06) $ (0.42) $ (0.46) $ (0.46)
====== ======== ======= ======== ====== ======= ======= ========
</TABLE>
29
<PAGE>
The following table sets forth unaudited quarterly results of
operations, as a percentage of total revenues, as applicable, for each of the
quarters in the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
1998 1998 1998 1998 1997 1997 1997 1997
-------- --------- -------- -------- -------- --------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License 46.6% 42.5% 41.5% 41.2% 54.9% 24.5% 29.2% 27.0%
Services 53.4% 57.5% 58.5% 58.8% 45.1% 75.5% 70.8% 73.0%
----- ----- ----- ----- ----- ------ ------ ------
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ------ ------ ------
Cost of revenues:
License 1.6% 1.6% 2.2% 2.7% 2.2% 0.0% 0.0% 0.0%
Services 37.9% 40.9% 41.7% 49.4% 32.2% 79.8% 74.8% 70.8%
----- ----- ----- ----- ----- ------ ------ ------
Total cost
of revenues 39.5% 42.5% 43.9% 52.1% 34.4% 79.8% 74.8% 70.8%
----- ----- ----- ----- ----- ------ ------ ------
Operating expenses:
Sales and marketing 27.9% 37.7% 39.1% 50.4% 39.1% 115.4% 125.9% 112.0%
Research and
development 14.3% 16.5% 16.0% 18.7% 16.3% 46.3% 42.5% 29.1%
General and
administrative 9.3% 11.5% 11.0% 12.1% 16.2% 28.2% 31.6% 33.7%
Amortization of
acquired intangibles 0.4% 1.7% 1.9% 2.5% 3.2% 15.1% 16.1% 9.4%
----- ----- ----- ----- ----- ------ ------ ------
Total operating
expenses 51.9% 67.3% 68.0% 83.7% 74.8% 205.0% 216.2% 184.3%
----- ----- ----- ----- ----- ------ ------ ------
Operating income
(loss) 8.6% -9.9% -11.9% -35.9% -9.2% -184.8% -191.0% -155.0%
Compensation related to
modification of escrow
agreement 0.0% 0.0% 0.0% -55.3% 0.0% 0.0% 0.0% 0.0%
Interest expense -0.2% -0.2% -1.2% -0.5% -0.4% -1.7% -2.4% -1.9%
Interest and
other income 1.4% 2.4% 1.0% 0.1% 1.1% 3.0% 1.4% 0.9%
----- ----- ----- ----- ----- ------ ------ ------
Net income (loss) 9.8% -7.7% -12.1% -91.5% -8.5% -183.5% -192.0% -156.1%
===== ===== ===== ===== ===== ====== ====== ======
</TABLE>
The Company has experienced, and may experience in the future,
significant seasonality in its business, and the Company's business, operating
results and financial condition may be affected by such trends in the future.
Revenues have historically increased at higher rates in the fourth quarter of
the year and at lower rates in the next succeeding quarter, which the Company
believes is due to a number of factors, including the Company's quota-based
compensation arrangements, typical of those used in software companies, and
year-end budgetary pressures on the Company's customers. The Company believes
that this seasonal trend may continue for the foreseeable future.
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. Specifically, the Company experienced a significant
increase in license revenues in the quarters ended December 31, 1998 and 1997.
30
<PAGE>
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 $28.4 million.
As of December 31, 1998, the Company had $17.1 million in cash and cash
equivalents, reflecting a net increase of $13.9 million since December 31, 1997.
Working capital as of December 31, 1998 was $17.5 million as compared to a
working capital deficit of $6.2 million as of December 31, 1997. Excluding the
effect of deferred revenue, working capital as of December 31, 1998 was $26.4
million as compared to $3.5 million as of December 31, 1997. The improvement in
working capital since December 31, 1997 was primarily due to net proceeds from
the IPO and increased accounts receivable principally resulting from the
significant increase in revenues.
Net cash used in operating activities was $13.3 million for 1998 as
compared to $8.0 million for 1997. The increase in cash used in operating
activities was primarily attributable to an increase in accounts receivable
principally associated with the Company's revenue growth, as well as the
research and development and sales and marketing activities related to UltiPro
HRMS/Payroll.
Net cash used in investing activities was $0.5 million for 1998 as
compared to $1.5 million for 1997. The decrease in net cash used in investing
activities was primarily attributable to the utilization of equipment financing
for certain equipment purchases in 1998 as compared to the purchases of
equipment in 1997 for cash.
Net cash provided by financing activities was $27.6 million for 1998 as
compared to $11.3 million for 1997. The increase in net cash provided by
financing activities was primarily attributable to the incremental increase of
the net proceeds from the IPO in 1998 as compared to the net proceeds from a
private placement of convertible preferred stock in 1997 and, to a lesser
degree, reduced payments under line of credit agreements.
The Company has a working capital revolving line of credit (the "Credit
Facility) with a bank, which is secured by the Company's accounts receivable and
bears interest at a rate equal to LIBOR plus 4.875% per annum. The amount
available under the Credit Facility is limited to the lesser of 80% of the
Company's eligible accounts receivable, as defined, or $4.0 million. The Credit
Facility will expire on November 30, 1999. At December 31, 1998, there was no
amount outstanding under the Credit Facility.
The net proceeds from the IPO, after deducting $4.1 million in
underwriting discounts, commissions and other costs associated with the
offering, were $28.4 million. A portion of the net proceeds from the IPO in the
amount of $3.6 million was used to pay down the outstanding balance of the
Credit Facility. The balance of the Credit Facility was paid with cash generated
from operations in June 1998. The balance of the remaining net proceeds from the
IPO in the amount of $16.6 million as of December 31, 1998 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.
31
<PAGE>
SEASONALITY
The Company has experienced, and may experience in the future,
significant seasonality in its business. The Company's business, operating
results and financial condition may be affected by such trends in the future.
Revenues have historically increased at higher rates in the fourth quarter of
the year and at lower rates in the next succeeding quarter. The Company believes
such seasonality is due to a number of factors, including the Company's
quota-based compensation arrangements, typical of those used in the software
companies, and year-end budgetary pressures on the Company's customers. The
Company believes that this seasonal trend may continue for the foreseeable
future.
QUARTERLY FLUCTUATIONS
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. The Company's operating results may fluctuate as a result
of a number of factors, including, but not limited to, increased expenses
(especially as they relate to product development and sales and marketing),
timing of product releases, increased competition, variations in the mix of
revenues, announcements of new products by the Company or its competitors and
capital spending patterns of the Company's customers. The Company establishes
its expenditure levels based upon its expectations as to future revenues, and,
if revenue levels are below expectations, expenses can be disproportionately
high. A drop in near term demand for the Company's products could significantly
affect both revenues and profits in any quarter. The Company achieved net
profitability for the fourth quarter of fiscal 1998. However, as a result of the
factors described above, 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 is in the process of assessing the Year 2000
issue with respect to telecommunications and computer hardware for its field
operations. The
32
<PAGE>
Company's principal software systems include payroll, accounting, and customer
support. The Company utilizes its own proprietary product, which tests show is
Year 2000 compliant, for payroll and human resource data processing. In the past
several years, the Company has replaced certain of its financial and operational
systems, including the accounting and customer support systems which have each
been certified by the respective vendors as being Year 2000 compliant.
Verification testing for certain material aspects of the financial and
operational systems is scheduled to occur by the end of the second quarter of
1999. The amount of remediation work required to address any Year 2000 problems
in other systems is not expected to be extensive.
Non-information technology systems typically include embedded
technology such as security systems, elevators and other systems which contain
an embedded computer or computer-like device used to control the operation of
plant, machinery and equipment. The Company anticipates that its relocation to
its new headquarters will occur in mid-1999. The office building for these
headquarters is being newly constructed and the Company believes the security
system, elevator and other non-information technology systems substantially
address Year 2000 issues. The utility company for the Company's headquarters,
Florida Power & Light, has completed their Year 2000 testing and has certified
to the Company their Year 2000 compliance.
The Company has initiated formal communications with certain
significant suppliers and is in the process of initiating formal communications
with major business partners and customers to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues. As of the date of this Form 10-K, such
formal communications have not been concluded. The Company will seek to obtain
the appropriate warranties and assurances that those parties are, or will be,
Year 2000 compliant. Although the Company believes that the information systems
of its major vendors (insofar as they relate to the Company's business) comply
with Year 2000 requirements, there can be no assurance that the year 2000 issue
will not affect the information systems of the Company's major vendors as they
relate to the Company's business, or that any such impact of a major vendor's
information system would not have a material adverse effect on the Company.
COSTS
Based on its assessments to date, the Company does not believe that it
has material exposure to the Year 2000 issue with respect to its own information
systems since its existing systems correctly define the year 2000. The Company
estimates the total cost associated with the Year 2000 issue to be in the range
of $72,000 and $150,000 during 1999 (principally in connection with the use of
outside consultants) and does not anticipate such costs will have a material
effect on the Company's results of operations or financial condition, assuming
no major disruption of service from utility companies. Historically, the Company
has not separately tracked the internal costs related to Year 2000 compliance.
Such costs are principally the related payroll costs for the Company's
information systems employees.
RISKS
Although the Company currently offers software products that are
designed and have been tested to be ready for the year 2000, there can be no
assurance that the Company's software products contain all necessary date code
changes. Although the Company currently does not anticipate any material adverse
impact on its operations as a result of Year 2000 issues of its major suppliers
or customers, no assurances can be given that the failure by one or more of its
major suppliers or customers to become Year 2000 compliant will not have a
material adverse impact on the Company's operations. It has been widely reported
that a significant amount of litigation will arise out of Year 2000 compliance
issues. Because of the unique nature of such potential litigation, it is
uncertain whether, or to what extent, the Company may be affected by such
litigation. Significant uncertainty exists in the software industry concerning
the potential effects associated with Year 2000 readiness.
33
<PAGE>
CONTINGENCY PLANS
When the Company completes its assessment of the anticipated total
impact of the Year 2000 issue, contingency plans will be prepared, if deemed
necessary, to handle the most reasonably likely worst case scenario. The
Company's target date for the completion of such contingency plans, if deemed
necessary at the completion of assessing the total impact of the Year 2000
issue, is September 1999.
RECENT ACCOUNTING STATEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133") was issued in June 1998 and is effective for the
Company's fiscal year ending December 31, 2000. SFAS 133 establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or a liability measured at its fair value. The
Company believes that the adoption of SFAS 133 will have no material impact on
its financial statements as it has entered into no derivative contracts and has
no current plans to do so in the foreseeable future.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("ACSEC") issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 establishes criteria for determining which
costs of developing or obtaining internal-use computer software should be
charged to expense and which should be capitalized. The Company will adopt SOP
98-1 prospectively effective January 1, 1999. The Company does not believe that
the adoption of SOP 98-1 will have a material effect on the Company's financial
position or results of operations.
FORWARD-LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operations contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the Company's expectations or beliefs,
including, but not limited to, statements concerning the Company's operations
and financial performance and condition. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," and similar expressions
are intended to identify such forward-looking statements. These forward-looking
statements are not guarantees of future performance and are subject to certain
risks and uncertainties that are difficult to predict. The Company's actual
results could differ materially from those contained in the forward-looking
statements. Factors that may cause such differences include, but are not limited
to, those discussed in the foregoing Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of its operations, the Company is exposed to
certain market risks, primarily interest rates. Uncertainties that are either
non-financial or non-quantifiable, such as political, economic, tax, other
regulatory or credit risks are not included in the following assessment of the
Company's market risks.
INTEREST RATES. Cash equivalents consist of money market accounts with
original maturities less than three months. Interest on the Credit Facility is
based on LIBOR plus 4.875% per annum. Changes in interest rates could impact the
Company's anticipated interest income from interest-bearing cash accounts, or
cash equivalents, as well as interest expense on borrowings under the Credit
Facility. Changes in interest rates would not have a material effect on cash
equivalents. As of December 31, 1998 and the date
34
<PAGE>
of this Form 10-K, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX PAGE(S)
----- -------
<S> <C>
Report of Independent Certified Public Accountants 36
Consolidated Balance Sheets as of December 31, 1998 and 1997 37
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 39
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1998, 1997 and 1996 40
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 41
Notes to Consolidated Financial Statements 42
</TABLE>
35
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Ultimate Software Group, Inc.:
We have audited the accompanying consolidated balance sheets of The
Ultimate Software Group, Inc. (a Delaware corporation and formerly The Ultimate
Software Group, Ltd., a Florida limited partnership) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Ultimate
Software Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
February 1, 1999.
36
<PAGE>
<TABLE>
<CAPTION>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
AS OF DECEMBER 31,
-------------------
1998 1997
--------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,128 $ 3,270
Accounts receivable, net 15,225 5,927
Prepaid expenses and other current assets 2,014 654
--------- -------
Total current assets 34,367 9,851
Property and equipment, net 2,458 1,703
Acquired intangibles, net of accumulated
amortization of $9,050 and $8,414, respectively - 638
Other assets 389 247
--------- -------
Total assets $ 37,214 $12,439
========= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 2,761 $ 1,712
Accrued expenses 4,353 4,224
Deferred revenue 8,913 9,764
Borrowings under line of credit agreement - 209
Current portion of capital lease obligations 846 162
--------- -------
Total current liabilities 16,873 16,071
Capital lease obligations, net of current portion 1,010 54
Deferred revenue 221 1,717
Other liabilities - 105
--------- -------
Total liabilities 18,104 17,947
--------- -------
Commitments and contingencies - -
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
37
<PAGE>
<TABLE>
<CAPTION>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
AS OF DECEMBER 31,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)--(continued)
Stockholders' equity (deficit):
Preferred Stock, $.01 par value, 2,000,000 and 501,914
shares authorized in 1998 and 1997, respectively; - -
no shares issued or outstanding
Series A Junior Participating Preferred Stock, $.01 par value,
500,000 shares authorized, no shares issued and outstanding
in 1998 and 1997 - -
Series A Convertible Preferred Stock, $.01 par value,
191,573 shares authorized, issued and outstanding
in 1997; converted into 1,938,527 shares of
Common Stock in 1998 - 2
Series B Convertible Preferred Stock, $.01 par value,
306,513 shares authorized in 1997; 295,672 shares
issued and outstanding in 1997; converted into 2,991,905
shares of Common Stock in 1998 - 3
Common Stock, $.01 par value, 50,000,000 shares
authorized, no shares issued or outstanding in 1997;
15,879,015 shares issued and outstanding in 1998 159 -
Class A Common Stock, $.01 par value, 236,300 shares
authorized in 1997, 236,300 issued and outstanding
in 1997, converted into 1,030,398 shares of
Common Stock in 1998 - 2
Class B Common Stock, $.01 par value, 1,600,000 shares
authorized in 1997, 658,125 issued and outstanding
in 1997, converted into 6,659,567 shares of
Common Stock in 1998 - 7
Class C Common Stock, $.01 par value, 200,000 shares
authorized in 1997; 50 shares issued and outstanding
in 1997, converted into 409 shares of Common Stock
in 1998 - -
Additional paid-in capital 64,068 31,572
Accumulated deficit (45,117) (37,094)
-------- --------
Total stockholders' equity (deficit) 19,110 (5,508)
-------- --------
Total liabilities and stockholders' equity (deficit) $ 37,214 $ 12,439
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
38
<PAGE>
<TABLE>
<CAPTION>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
FOR THE YEARS
ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Revenues:
License $18,811 $ 7,232 $ 4,273
Services 24,519 10,360 5,039
------- -------- --------
Total revenues 43,330 17,592 9,312
------- -------- --------
Cost of revenues:
License 834 195 -
Services 18,018 9,375 5,846
------- -------- --------
Total cost of revenues 18,852 9,570 5,846
------- -------- --------
Operating expenses:
Sales and marketing 16,024 13,656 10,451
Research and development 6,953 4,837 3,360
General and administrative 4,651 4,148 3,007
Amortization of acquired intangibles 638 1,442 6,932
------- -------- --------
Total operating expenses 28,266 24,083 23,750
------- -------- --------
Operating loss (3,788) (16,061) (20,284)
Compensation related to
modification of escrow
agreement (4,183) - -
Interest expense (207) (206) (179)
Interest and other income 589 250 77
------- -------- --------
Net loss $(7,589) $(16,017) $(20,386)
======= ======== ========
Net loss per share -- basic and diluted $ (0.52) $ (1.37) $ (2.30)
======= ======== ========
Weighted average shares
outstanding -- basic and diluted 14,494 11,710 8,854
======= ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
39
<PAGE>
<TABLE>
<CAPTION>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE CLASS A CLASS B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK COMMON STOCK
--------------- --------------- --------------- --------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 - $ - - $ - - $ - 122 $ 1 - $ -
Contributions
Net loss prior to the transfer of
the Partnership to the
Company - - - - - - - - - -
Issuance of stock in connection
with the Transaction 192 2 - - 236 2 536 6 - -
Net proceeds from issuances
of Series B Convertible
Preferred Stock - - 33 - - - - - - -
Non-cash issuance of options
to purchase Common Stock
for consulting services - - - - - - - - - -
Equity transaction of 1998 pooling
transactions - - - - - - - - - -
Net loss - - - - - - - - - -
---- ------ ---- ------ --- ------ ---- ------ ------ ------
Balance, December 31, 1996 192 2 33 - 236 2 658 7 - -
Net proceeds from issuances of
Series B Convertible Preferred
Stock - - 263 3 - - - - - -
Equity transaction of 1998 pooling
transactions - - - - - - - - - -
Net loss - - - - - - - - - -
---- ------ ---- ------ --- ------ ---- ------ ------ ------
Balance, December 31, 1997 192 2 296 3 236 2 658 7 - -
Compensation related to modification
of escrow agreement - - - - - - - - - -
Equity transaction of 1998 pooling
transactions - - - - - - - - - -
Cancellation of shares related to
release of escrow - - - - (168) (1) - - - -
Mandatory conversion in connection
with the Release Event (192) (2) (296) (3) (68) (1) (658) (7) 12,621 126
Issuance of Common Stock for
initial public offering ("IPO") - - - - - - - - 3,250 33
Underwriting discounts and commissions
in connection with the IPO - - - - - - - - - -
Offering costs in connection with the - - - - - - - - - -
Issuance of Common Stock from
exercise of stock options - - - - - - - - 8 -
Non-cash issuance of options
to Board to purchase Common
Stock for board fees - - - - - - - - - -
Net loss - - - - - - - - - -
---- ------ ---- ------ --- ------ ---- ------ ------ ------
Balance, December 31, 1998 - $ - - $ - - $ - - $ - 15,879 $ 159
==== ====== ==== ====== === ====== ==== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
(Continued)
RETAINED TOTAL
ADDITIONAL EARNINGS STOCKHOLDERS'
GENERAL LIMITED PAID-IN (ACCUMULATED EQUITY
PARTNER PARTNERS CAPITAL DEFICIT) (DEFICIT)
------- -------- ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $(3,698) $2,726 $1,663 $ (1,616) $ (924)
Contributions 1,070 1,070
Net loss prior to the transfer of
the Partnership to the
Company (1,116) (478) - - (1,594)
Issuance of stock in connection
with the Transaction 4,814 (3,318) 14,185 - 15,691
Net proceeds from issuances
of Series B Convertible
Preferred Stock - - 1,634 - 1,634
Non-cash issuance of options
to purchase Common Stock
for consulting services - - 285 - 285
Equity transaction of 1998 pooling
transactions - - 295 (108) 187
Net loss - - - (18,792) (18,792)
---- ---- ------- --------- ---------
Balance, December 31, 1996 - - 18,062 (20,516) (2,443)
Net proceeds from issuances of
Series B Convertible Preferred
Stock - - 13,477 - 13,480
Equity transaction of 1998 pooling
transactions - - 33 (561) (528)
Net loss - - - (16,017) (16,017)
---- ---- ------- --------- ---------
Balance, December 31, 1997 - - 31,572 (37,094) (5,508)
Compensation related to modification
of escrow agreement - - 4,183 - 4,183
Equity transaction of 1998 pooling
transactions - - - (434) (434)
Cancellation of shares related to
release of escrow - - 1 - -
Mandatory conversion in connection
with the Release Event - - (113) - -
Issuance of Common Stock for
initial public offering ("IPO") - - 32,467 - 32,500
Underwriting discounts and commission
in connection with the IPO - - (2,275) - (2,275)
Offering costs in connection with the - - (1,841) - (1,841)
Issuance of Common Stock from
exercise of stock options - - 43 - 43
Non-cash issuance of options
to Board to purchase Common
Stock for board fees - - 31 - 31
Net loss - - - (7,589) (7,589)
---- ---- ------- --------- ---------
Balance, December 31, 1998 $ - $ - $64,068 $ (45,117) $ 19,110
==== ==== ======= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
40
<PAGE>
<TABLE>
<CAPTION>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flow from operating activities:
Net loss $ (7,589) $ (16,017) $ (20,386)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,924 2,087 7,316
Provision for doubtful accounts 1,369 444 241
Issuance of equity instruments for services 31 - 285
Non-cash equity transactions of 1998 poolings - 8 34
Compensation related to modification of
escrow agreement 4,183 - -
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (10,667) (3,424) (1,930)
Prepaid expenses and other current assets (1,042) (448) (347)
Other assets (201) (128) (7)
Accounts payable 1,049 860 486
Accrued expenses 129 1,898 1,936
Deferred revenue (2,456) 6,672 2,357
Other liabilities 4 58 -
--------- --------- ---------
Net cash used in operating activities (13,266) (7,990) (10,015)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment (241) (1,434) (155)
Amount received from affiliate and shareholder - 25 221
Net issuances of notes receivable (255) (49) (45)
Cash used in acquisitions - - (661)
--------- --------- ---------
Net cash used in investing activities (496) (1,458) (640)
--------- --------- ---------
Cash flows from financing activities:
Net borrowings (payments) under line of credit agreements (209) (1,409) 926
Net proceeds from notes payable - related parties - - 595
Due to affiliate - - (450)
Borrowings (principal payments) of notes payable - (273) 23
Net proceeds from capital lease obligations 381 - -
Principal payments on capital lease obligations (545) (215) (162)
Contributions to partners' capital - - 1,070
Net proceeds from issuances of Convertible Preferred Stock - 13,479 9,423
Equity transactions of 1998 poolings (434) (284) 229
Net proceeds from issuance of Common Stock 28,427 - -
--------- --------- ---------
Net cash provided by financing activities 27,620 11,298 11,654
--------- --------- ---------
Net increase in cash and cash equivalents 13,858 1,850 999
Cash and cash equivalents, beginning of year 3,270 1,420 421
--------- --------- ---------
Cash and cash equivalents, end of year $ 17,128 $ 3,270 $ 1,420
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 207 $ 150 $ 152
========= ========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
The Company entered into capital lease obligations to acquire new equipment
totaling $2,183, $0 and $207 in 1998, 1997 and 1996, respectively. Certain new
equipment financed during 1998 was purchased in the latter part of 1997.
In 1998, the Company acquired five third-party resellers in transactions
accounted under the pooling-of-interests accounting method (see Note 15).
Prior to the closing of the initial public offering of the Company's Common
Stock in June 1998, shares of Common Stock were issued upon the conversion of
Series A Convertible Preferred Stock, Series B Convertible Perferred Stock,
Class A Common Stock, Class B Common Stock and Class C Common Stock.
In 1996, the Company issued Class A Common Stock and Class B common Stock in
connection with the transactions discussed in Note 10.
In 1996, the Company issued 8,534 shares of Series A Convertible Preferred
Stock (converted into 86,356 shares of Common Stock) valued at $446 to certain
former limited parnters for limited partnership interests in the Partnership
(see Note 10).
In 1996, $75 of accrued but unpaid dividends were declared by one of the
Acquired Resellers.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
41
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group, Inc. (the "Company") or, prior to the
transactions consummated in April 1996 as further discussed below, The Ultimate
Software Group, Ltd. (the "Partnership"), designs, markets, implements and
supports technologically advanced, cross-industry human resource management and
payroll software solutions, marketed primarily to middle-market organizations
with 500 to 15,000 employees. The Company reaches its customer base and target
market through its direct sales force and a network of national, regional and
local strategic partners.
In April 1996, the Company completed a series of transactions (the
"Transactions") whereby the businesses of certain third-party resellers of the
Company's products were purchased by the Partnership, and the business and
operations of the Partnership, along with the acquired businesses, were
transferred and conveyed to the Company in exchange for certain shares of Class
A and Class B Common Stock of the Company. The acquisitions were accounted for
under the purchase method of accounting. See Note 12. The Company issued shares
of its Class B Common Stock in exchange for all of the issued and outstanding
shares of the capital stock of the Partnership's general partner, The Ultimate
Software Group, Inc., a Florida corporation ("GP"), and for all of the issued
and outstanding shares of the capital stock of Strategic Image Systems, Inc.
("Strategic"), a limited partner of the Partnership. Such exchange was accounted
for on a historical cost basis as GP and Strategic were related to the
Partnership. As a result of the Transactions, GP and Strategic became
wholly-owned subsidiaries of the Company. For a more detailed description of the
Transactions, see Note 10.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Intercompany accounts and transactions have been
eliminated in consolidation.
In February and March 1998, the Company acquired the businesses of five
third-party resellers of the Company's products (the "Acquired Resellers") in
exchange for an aggregate of 121,856 shares of the Company's Class B Common
Stock, (converted into 1,233,061 shares of the Company's common stock, par value
$.01 per share (the "Common Stock") in connection with the initial public
offering discussed in Note 3). The Company accounted for these transactions
using the poolings-of-interest method of accounting. Therefore the accounts of
the Acquired Resellers have been included retroactively in the consolidated
financial statements as if the companies had operated as one entity since
inception. See Note 15.
CASH AND CASH EQUIVALENTS
All highly liquid instruments with an original maturity of three months
or less when acquired are considered cash equivalents. The accompanying
consolidated balance sheets include $16.6 million and $1.5 million in
interest-bearing accounts as of December 31, 1998 and 1997, respectively.
42
<PAGE>
ACCOUNTS RECEIVABLE
Accounts receivable are principally from end-users of the Company's
products. The Company performs periodic credit evaluations of its customers and
has recorded allowances for estimated losses.
A rollforward of allowances for doubtful accounts is as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------ ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 534 $215 $ 24
Provision for doubtful accounts 1,369 444 241
Deductions (1) (784) (125) (50)
------ ---- ----
Balance, end of year $1,119 $534 $215
====== ==== ====
</TABLE>
- -------------
(1) Represents trade receivables written off and credits applied.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated
depreciation and amortization. Property and equipment is depreciated using the
straight-line method over the estimated useful lives of the assets which range
from three to five years. Leasehold improvements and assets under capital leases
are amortized over the shorter of the life of the asset or the term of the lease
over periods ranging from three to five years. Maintenance and repairs are
charged to expense when incurred; betterments are capitalized. Upon the sale or
retirement of assets, the cost, accumulated depreciation and amortization are
removed from the accounts and any gain or loss is recognized.
REVENUE RECOGNITION
The Company licenses software under noncancellable license agreements
and provides services including maintenance, implementation, training and
consulting services. In accordance with the provision of Statement of Position
("SOP") 97-2, "Software Revenue Recognition," license revenues are generally
recognized when a noncancellable license agreement has been signed, the product
has been shipped, no significant vendor obligations remain and collection of the
related receivable is considered probable. Revenues from maintenance agreements
for maintaining, supporting and providing periodic updates are recognized
ratably over the maintenance period, which in most instances is one year.
Revenues for training and consulting services are recognized as services are
performed.
Prior to 1996, the Company entered into 18 exclusive reseller
agreements with third parties, which provided each such party with exclusive
distribution rights to sell the Company's products in a specified territory. In
consideration, the Company received an up-front nonrefundable fee, which ranged
from $25,000 to $300,000. Such fees were recognized as revenues, at the time an
agreement was executed. In 1996 and 1995, the Company bought back, or otherwise
reacquired, the distribution rights of 13 of its resellers. As of December 31,
1997, the Company had five third-party resellers, the businesses of which were
subsequently acquired in 1998. See Notes 10 and 15.
The Company also generates revenues relating to the sale of
payroll-related forms and the printing of Form W-2's for certain customers. Such
revenues are recognized as the product is shipped or as the services are
rendered.
Until 1997, substantially all of the Company's revenues were derived
from its UltiPro for Lan product and related services. The Company has shifted
its focus from a product based on DOS and local area
43
<PAGE>
network (Lan) technologies, UltiPro for Lan, to a product based on Windows and
client/server technologies, UltiPro HRMS/Payroll. As a result of this shift and
the decrease in general market demand for DOS-based products, the Company's
revenues from its UltiPro for Lan product declined to an immaterial amount in
1998. While the Company still derives revenues from the support, service and
limited sales of the UltiPro for Lan product line, its UltiPro HRMS/Payroll
product and related support and services are expected to continue to account for
substantially all of the Company's revenues for the foreseeable future as the
Company no longer actively markets the DOS-based product. As a percentage of
total license revenues, revenues derived from UltiPro for Lan were 1.6%, 41.4%
and 100.0% in 1998, 1997 and 1996, respectively.
DEFERRED REVENUE
Deferred revenue is comprised of deferrals for (i) license revenues for
which product has not yet been delivered or obligations have not yet been
fulfilled (in the case of committed upgrades) and (ii) service revenues for
which maintenance, implementation, training and consulting services have not yet
been rendered.
As of December 31, 1998 and 1997, $221,000 and $1,717,000,
respectively, of deferred revenue will be recognized in periods after the years
ending December 31, 1998 and 1999.
Associated deferred costs, relating to commissions, were $388,000 and
$330,000 at December 31, 1998 and 1997, respectively. Commission expense is
recognized in the period the related revenue is recognized.
COST OF REVENUES
The cost of revenues consists of cost of license revenues and cost of
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, the cost
of providing periodic updates and costs related to sales of payroll-related
forms.
INCOME TAXES
Income taxes were not provided for, or payable, by the Partnership.
Partners were taxed individually on their share of Partnership earnings.
Subsequent to the Transactions discussed in Note 10, the Company is subject to
corporate Federal and state income taxes. The Company accounts for income taxes
under the provisions of Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 provides for a
liability approach under which deferred income taxes are provided based upon
enacted tax laws and rates applicable to the periods in which the taxes become
payable.
ACQUIRED INTANGIBLES
Acquired intangibles were amortized on a straight-line basis over 30
months, the estimated useful life of such acquired assets (primarily consisting
of customer lists and personnel). In accordance with SFAS No. 121, "Accounting
for the Impairment Of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," the Company continually evaluates whether later events and circumstances
have occurred that indicate the remaining acquired intangibles may warrant
revision or may not be recoverable. When factors indicate that goodwill should
be evaluated for possible impairment, the Company uses an estimate of the
related business' undiscounted cash flows from operations over the remaining
life of the cost in excess of net assets of acquired businesses, in measuring
whether such cost is recoverable. Operating results as well as projected future
cash flows relating to the resellers acquired during 1996 indicated an
impairment in acquired intangibles as of December 31, 1997 and 1996.
Accordingly, the Company charged additional amounts of
44
<PAGE>
$308,000 and $5,050,000 to amortization of acquired intangibles in 1997 and
1996, respectively, to reduce acquired intangibles to their estimated realizable
value. Amortization of acquired intangibles was $638,000, $1,442,000 and
$6,932,000 in 1998, 1997 and 1996, respectively. As of December 31, 1998,
acquired intangibles were fully amortized.
SOFTWARE DEVELOPMENT COSTS
SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," requires capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
Based on the Company's product development process, technological feasibility is
established upon completion of a working model. Costs incurred by the Company
between the achievement of technological feasibility of the Company's products
and the point at which the product is ready for general release have
historically substantially coincided, and, as a result, software development
costs required to be capitalized have been immaterial. As of December 31, 1998,
capitalized software costs totaled $53,000. There were no capitalized software
costs as of December 31, 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, consisting of cash and cash
equivalents, accounts receivable, accounts payable and borrowings approximate
fair value due to their short-term nature.
ACCOUNTING FOR STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), the Company continues to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and has made the pro
forma disclosures required by SFAS 123 for each of the three years ended in the
period ended December 31, 1998. See Note 9.
EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," became effective in the fourth
quarter of 1997 and requires two presentations of earnings per share--"basic"
and "diluted." Basic earnings per share is computed by dividing income available
to common stockholders (the numerator) by the weighted average number of common
shares (the denominator) for the period. The computation of diluted earnings per
share is similar to basic earnings per share, except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potentially dilutive common shares had been issued.
45
<PAGE>
The following options to purchase shares of common stock were
outstanding during each year, but were not included in the computation of
diluted earnings per share because the Company reported a net loss for all years
presented and, therefore, the effect would be antidilutive:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Number of options 2,104,562 1,748,735 768,123
Weighted average
exercise price $6.89 $6.27 $5.16
</TABLE>
For the Company, earnings per share under SFAS No. 128 for each of the
three years ended December 31, 1998 was the same as if it were computed in
accordance with the prior rule due to the antidilutive nature of the potential
common stock equivalents. See Note 2 and Note 9 for more information regarding
earnings per share and options to purchase Common Stock, respectively.
Basic and diluted loss per share for all periods presented include the
impact of the subsequent conversion of shares of Preferred and Common Stock
outstanding as described in Notes 10 and 17, effected for the stock split
discussed in Note 3.
COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," ("SFAS 130") which establishes standards for the reporting and display
of comprehensive income and its components in a full set of financial
statements. The objective of SFAS 130 is to report a measure (comprehensive
income) of all changes in equity of an enterprise that result from transactions
and other economic events in a period other than transactions with owners. The
adoption of SFAS 130 did not have a material impact on the Company's
consolidated financial statements since there are no material differences
between comprehensive income, as defined in SFAS 130, and the Company's net loss
for all periods presented.
SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS 131") effective December 31, 1998.
SFAS 131 establishes standards for the way that public companies report selected
information about operating segments in annual interim financial reports to
shareholders. It also establishes standards for related disclosures about an
enterprise's business segments, products, services, geographic areas and major
customers. The Company operates its business as a single segment. As a result,
no additional disclosure was required.
46
<PAGE>
RECENT ACCOUNTING STATEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133") was issued in June 1998 and is effective for the
Company's fiscal year ending December 31, 2000. SFAS 133 establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or a liability measured at its fair value. The
Company believes that the adoption of SFAS 133 will have no material impact on
its financial statements as it has entered into no derivative contracts and has
no current plans to do so in the foreseeable future.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("ACSEC") issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 establishes criteria for determining which
costs of developing or obtaining internal-use computer software should be
charged to expense and which should be capitalized. The Company will adopt SOP
98-1 prospectively effective January 1, 1999. The Company does not believe that
the adoption of SOP 98-1 will have a material effect on the Company's financial
position or results of operations.
3. 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.
4. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
1998 1997
------ ------
<S> <C> <C>
Compensation and benefits $1,705 $ 692
Bonuses - 1,778
Third-party implementation consultants 854 152
Other items individually less than
5% of total current liabilities 1,794 1,602
------ ------
$4,353 $4,224
====== ======
</TABLE>
47
<PAGE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1998 1997
------- -------
<S> <C> <C>
Equipment $ 4,675 $ 2,847
Furniture, fixtures and improvements 457 244
------- -------
5,132 3,091
Less accumulated depreciation
and amortization (2,674) (1,388)
------- -------
$ 2,458 $ 1,703
======= =======
</TABLE>
Included in property and equipment is equipment acquired under capital
leases as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1998 1997
------ ------
<S> <C> <C>
Equipment $2,474 $672
Less accumulated amortization (1,061) (528)
------ -----
$1,413 $144
====== =====
</TABLE>
Depreciation and amortization expense on property and equipment totaled
$1,286,000, $645,000 and $384,000 for the years ended December 31, 1998, 1997
and 1996, respectively.
6. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under noncancellable agreements
which are accounted for as capital leases and expire at various dates through
2001. Interest rates on these leases range from 4.8% to 17.9%. The annual
maturities of the capital lease obligations are as follows as of December 31,
1998 (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- ------
<S> <C>
1999 $ 846
2000 795
2001 340
------
1,981
Less amount representing interest (125)
------
Lease obligations reflected as current
($846) and non-current ($1,010) $1,856
======
</TABLE>
48
<PAGE>
7. LINE OF CREDIT AGREEMENTS
In September 1996, the Company entered into a line of credit with a
bank (the "Working Capital Line") for the lesser of $4,000,000 or 80% of
eligible receivables, as defined. The Working Capital Line was increased to the
lesser of 80% of the eligible receivables (as defined) or $6.0 million for the
period beginning April 23, 1998 and ending September 30, 1998. The Working
Capital Line was further amended, to extend the agreement to November 30, 1999
with available borrowings equivalent to the lesser of $4,000,000 or 80% of
eligible receivables, as defined. The Working Capital Line bears interest at
LIBOR plus 4.875% per annum (9.885% and 10.875% at December 31, 1998 and 1997,
respectively), but not less than 8.000% per annum in any month. Interest on the
Working Capital Line is payable monthly. No amounts were outstanding under the
Working Capital Line as of December 31, 1998 and 1997. The Working Capital Line
is renewable for successive one-year terms, unless either party elects to
terminate the agreement. The Working Capital Line is collateralized by
substantially all of the Company's assets.
The Company had a $200,000 line of credit with a bank bearing interest
at prime plus 1.0% (9.5% at December 31, 1997), payable quarterly through
maturity. The line matured in January 1998 and was collateralized by the
accounts receivable of a subsidiary of the Company. The amount outstanding under
the line of credit was $109,000 as of December 31, 1997.
The Company had $130,000 available under another line of credit
agreement with a bank bearing interest at 9.0% per annum. As of December 31,
1997, $100,000 was outstanding under the line of credit which was repaid in
1998.
8. INCOME TAXES
No provision for federal and state income taxes has been recorded as
the Company has incurred net operating losses. At December 31, 1998, the Company
has approximately $27,400,000 of net operating loss carryforwards for federal
income tax reporting purposes available to offset future taxable income. The
carryforwards expire through 2018. Utilization of such net operating losses may
be limited as a result of cumulative ownership changes in the Company's equity
instruments.
The components of the net deferred tax assets included in the
accompanying consolidated balance sheets are as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Net operating losses $ 10,700 $ 8,091
Deferred revenue 86 1,010
Accruals not currently deductible - 693
Allowance for doubtful accounts 436 170
Deferred commissions - (129)
Other (38) (18)
Valuation allowance (11,184) (9,817)
-------- --------
Net deferred income tax assets $ - $ -
======== ========
</TABLE>
The Company has provided a full valuation allowance on the deferred tax
assets as realization of such amounts is not considered more likely than not.
The Company reviews the valuation allowance requirement periodically and makes
adjustments as warranted.
No pro forma adjustments to reflect income tax benefits have been
included in the accompanying statements as it is management's belief that
realization of such amounts do not meet the criteria required by generally
accepted accounting principles.
49
<PAGE>
9. STOCK OPTIONS
The Company has adopted The Ultimate Software Group, Inc. Nonqualified
Stock Option Plan (the "Plan") under which the Company is authorized to issue
options to purchase a total of 5,059,500 shares of the Company's Common Stock to
directors, officers and employees of the Company. Under the Plan, options to
purchase shares of Common Stock may be granted at prices equal to the market
value of shares of the Company's Common Stock as of the date of grant, or at
such other amount as may be determined by the Compensation Committee of the
Board of Directors appointed to administer the Plan (the "Committee"). The
Committee has discretion under the Plan to prescribe vesting periods for options
which are granted under the Plan. In addition, options granted under the Plan
become immediately exercisable in the event of a change in control of the
Company and in certain other circumstances . The maximum term of the options
granted under the Plan is 10 years.
The Plan provides that non-employee members of the Company's Board of
Directors shall receive options in lieu of any retainer or meeting fees for
serving on the Board or committees thereof. Such options vest upon the date of
grant and have an exercise price equal to 30% of fair market value of the
Company's Common Stock on the date of grant. The Company has accounted for such
options in accordance with the requirements prescribed in SFAS 123 with a total
non-cash charge of $31,000 and zero in 1998 and 1997, respectively.
A summary of the Company's Plan as of December 31, 1998 and 1997 and
changes during the years then ended, is presented below: WEIGHTED AVERAGE
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Outstanding at December 31, 1996 768,123 $ 5.16
Granted 1,000,010 7.12
Exercised (506) 5.16
Forfeited (18,892) 5.16
---------- --------
Outstanding at December 31, 1997 1,748,735 6.27
Granted 443,174 9.10
Exercised (8,300) 5.16
Forfeited (79,047) 5.77
---------- --------
Outstanding at December 31, 1998 2,104,562 $ 6.89
========== ========
Options exercisable at December 31, 1998 1,354,150 $ 6.30
========== ========
</TABLE>
At December 31, 1998, the weighted average contractual life of options
outstanding was 104 months.
50
<PAGE>
Pro forma information is required by SFAS 123 for options issued to
employees and has been determined as if the Company had accounted for its
stock-based compensation plan under the fair value method. The fair value of
each option granted was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants: risk-free interest rates of 5.0%-5.5% for 1998 and 6.4%-6.7% for 1997
and 1996, dividend yield of 0% for all three years presented, expected
volatility of 65% in 1998 and 1997 and .01% in 1996 and an expected life of 3-6
years for each of the three years presented. The Company's pro forma information
is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Net loss:
As reported $ (7,589) $ (16,017) $ (20,386)
Pro forma (8,446) (17,385) (20,853)
Basic and Diluted per share:
As reported $ (0.52) $ (1.37) $ (2.30)
Pro forma (0.58) (1.48) (2.36)
</TABLE>
The Company has also issued options to purchase shares of its Common
Stock to non-employees for consulting services. See Note 10.
10. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
As discussed more fully in Note 3, in June 1998 the Company sold
3,250,000 shares of the Company's Common Stock in an initial public offering at
an offering price of $10 per share. Net proceeds to the Company from the IPO
were $28.4 million.
THE TRANSACTIONS
The Company was formed in April 1996 in connection with the
consummation of a series of transactions during the second and third calendar
quarters of 1996, including the following:
(i) the businesses owned by nine third-party resellers of the
Partnership's products (the "Participating Resellers") were
acquired by the Partnership in consideration for the issuance
by the Partnership to such Participating Resellers of special
limited partnership interests in the Partnership;
(ii) the shareholders of GP and Strategic (the "Participating
Stockholders") assigned and transferred their shares in GP and
Strategic to the Company in exchange for the issuance by the
Company of an aggregate of 272,157 shares of Class B Common
Stock (subsequently converted into 2,753,957 shares of Common
Stock);
(iii) the business and operations of the Partnership were
transferred and conveyed to the Company in exchange for the
issuance by the Company of 236,300 shares of Class A Common
Stock (subsequently converted into 1,030,398 shares of Common
Stock) and 536,269 shares of Class B Common Stock (converted
into 5,426,506 shares of Common Stock), 272,157 of such shares
of Class B Common Stock (converted into 2,753,956 shares of
Common Stock) were beneficially owned by the Company as a
result of its acquisition of GP and Strategic, and payment of
$661,000 in cash;
(iv) the Company entered into escrow agreements with the
Partnership and the Participating Stockholders, respectively,
obligating the Partnership to surrender shares of Class A and
Class B Common Stock and the Participating Stockholders and
the Partnership to
51
<PAGE>
surrender certain shares of Class B Common Stock to the
Company for cancellation under certain circumstances as
provided therein; and
(v) J.P. Morgan Investment Corporation ("Morgan") and others
invested $10,000,000 in 191,573 newly issued shares of the
Company's Series A Convertible Preferred Stock (converted into
1,938,527 shares of Common Stock) (including approximately
$1,300,000 for 24,904 shares (converted into 252,004 shares of
Common Stock) representing cancellation of indebtedness of the
Company and $446,000 for 8,534 shares (converted into 86,356
shares of Common Stock) representing limited partnership
interest conversions). All shares of Series A Convertible
Preferred Stock were issued at $52.20 per share.
The acquisitions of the Participating Resellers were accounted for
under the purchase method of accounting and are more fully described in Note 15.
The exchange of the Participating Stockholders' interest for shares of the
Company was accounted for on a historical cost basis as the exchange was between
common controlling interests. GP and the Company were under common control at
the time of the exchange.
DESCRIPTION OF CAPITAL STOCK
PREFERRED STOCK
During 1998, the Company authorized for future issuance a total of
2,500,000 shares of Preferred Stock, $.01 par value, including the 500,000
shares of Series A Junior Participating Preferred Stock discussed below.
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
In October 1998, the Board of Directors of the Company adopted a
Stockholder Rights Plan (the "Rights Plan") in which one preferred stock
purchase right was distributed as a dividend for each share of Common Stock held
of record as of the close of business on November 15, 1998 (the "Right" or,
collectively, the "Rights").
The Rights are exercisable only if a person or group acquires
beneficial ownership of 15% or more of the Company's outstanding Common Stock or
commences or announces a tender offer which would result in such person or group
beneficially owning 15% or more of the Company's outstanding Common Stock. Each
Right entitles the holder to buy one one-hundredth of a share of Series A Junior
Participating Preferred Stock for $45.
The Rights Plan has certain anti-takeover effects. The Rights will
cause substantial dilution to a person or group that attempts to acquire the
Company on terms not approved by the Board of Directors.
SERIES A AND SERIES B CONVERTIBLE PREFERRED STOCK
Pursuant to Board action taken in the second calendar quarter of 1998
following the occurrence of the Release Event (see Note 17) (the "Board
Action"), each of the outstanding shares of Series A and Series B Convertible
Preferred Stock was converted into 10.119 shares of the Company's Common Stock
prior to the closing of the IPO.
CLASS A, CLASS B AND CLASS C COMMON STOCK
The shares of the Class A, Class B and Class C Common Stock were
subject to mandatory conversion into shares of Common Stock if the Board of
Directors of the Company declared a mandatory conversion following the
occurrence of a Release Event. Pursuant to the Board Action, each outstanding
share of Class A, Class B and Class C Common Stock was converted into shares of
the Company's Common Stock.
COMMON STOCK
Shares of Common Stock were issued upon the conversion of shares of the
other classes of Common and Preferred Stock and no shares of Common Stock were
issued prior to any such conversion.
The holders of Common Stock are entitled to one vote per share for each
share held of record on all matters submitted to a vote of the stockholders.
ESCROW AGREEMENTS
All of the 236,300 shares of Class A Common Stock issued in connection
with the Transactions were placed in escrow pursuant to an escrow agreement
between the Partnership and the Company (the "Class A Escrow Agreement") to be
held until the occurrence of a Release Event. Upon the occurrence of a Release
Event, the Class A Escrow Agreement required the Partnership to return to the
Company for cancellation any shares of Class A Common Stock that the Partnership
was not entitled to retain under a formula that generally measured (i) the
revenues of the Participating Resellers during a recent 12 month period
preceding the Release Event, against (ii) the total revenues of the Company in
the same 12 month
52
<PAGE>
period. In March 1998, 68,747 of the shares of Class A Common Stock (which were
converted into 1,030,398 shares of Common Stock) held under the Class A Escrow
Agreement were released to the Partnership and the remaining 167,553 shares of
Class A Common Stock held in the Class A Escrow were surrendered to the Company
and cancelled. See Note 17.
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 the Transactions
were held in escrow pursuant to an escrow agreement among the Company, the
Partnership and the Participating Stockholders (the "Class B Escrow Agreement")
until the occurrence of a Release Event. Of such 230,700 shares of Class B
Common Stock, 77,665 (converted into 785,892 shares of Common Stock) were
beneficially owned by the Company as a result of its acquisition of GP and
Strategic. See Note 17.
OTHER EQUITY TRANSACTIONS
In 1998, the Company granted options to non-employee directors to
purchase (i) 1,230 shares of the Company's Common Stock for $2.78 and (ii) 3,688
shares of the Company's Common Stock for $2.33 in exchange for services
rendered. Such options are currently exercisable and were valued on the date of
grant using the Black-Scholes option-pricing model. Assumptions used in valuing
such options are discussed in Note 9. The related expense was $31,000 and is
included in general and administrative expenses in the accompanying consolidated
statement of operations for the year ended December 31, 1998.
In December 1996, the Company sold 32,736 shares of Series B
Convertible Preferred Stock (converted into 331,256 shares of Common Stock) at
$52.20 per share. Net proceeds from such sales were $1,633,800. In 1997, the
Company sold 262,934 additional shares of Series B Convertible Preferred Stock
(converted into 2,660,649 shares of Common Stock) at $52.20 per share. Net
proceeds from such sales were $13,479,193.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases corporate office space and certain equipment under
noncancellable operating lease agreements expiring at various dates. The Company
has executed a lease for its new corporate headquarters which expires in 2014
with lease payments commencing upon occupancy. The Company intends to move into
the new facility in mid-1999. Total rent expense under these agreements was
$2,012,000, $1,143,000 and $1,139,000 for the years ended December 31, 1998,
1997 and 1996, respectively. Future minimum annual rental commitments related to
these leases are as follows at December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1999 $1,598
2000 1,418
2001 1,279
2002 881
2003 880
------
$6,056
======
</TABLE>
PRODUCT LIABILITY
Software products such as those offered by the Company frequently
contain undetected errors or failures when first introduced or as new versions
are released. Testing of the Company's products is particularly challenging
because it is difficult to simulate the wide variety of computing environments
in
53
<PAGE>
which the Company's customers may deploy these products. Despite extensive
testing, the Company from time to time has discovered defects or errors in
products. There can be no assurance that such defects, errors or difficulties
will not cause delays in product introductions and shipments, result in
increased costs and diversion of development resources, require design
modifications or decrease market acceptance or customer satisfaction with the
Company's products. In addition, there can be no assurance that, despite testing
by the Company and by current and potential customers, errors will not be found
after commencement of commercial shipments, resulting in loss of or delay in
market acceptance, which could have a material adverse effect upon the Company's
business, operating results and financial condition.
LITIGATION
From time-to-time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently a party to any legal 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.
12. PARTNERSHIP ACQUISITIONS
Effective April 25, 1996, the Partnership acquired the businesses of
the Participating Resellers for special limited partnership interests in the
Partnership, the assumption of certain obligations and $661,000 in cash. The
acquisitions were accounted for under the purchase accounting method. The
purchase price, together with the net liabilities assumed, was recorded as
intangible assets as follows (in thousands):
<TABLE>
<S> <C>
Purchase price $7,337
Net liabilities assumed 1,463
------
Acquired intangibles, primarily customer lists and personnel $8,800
======
</TABLE>
During 1996, subsequent to the Transactions, and during the year ended
December 31, 1997, the Company paid the former owners of the Participating
Resellers fees totaling approximately $130,000 and $213,000, respectively, in
accordance with an agreement entered into as part of the Transactions. Such fees
are included in general and administrative expenses in the accompanying
consolidated statements of operations. In accordance with the agreement, monthly
payments aggregating approximately $14,000 will continue until the Company
completes an initial public offering of its Common Stock.
13. RELATED PARTY TRANSACTIONS
In mid-1999, the Company intends to move its corporate headquarters
into a new and larger facility currently under construction in Weston, Florida.
On December 31, 1998, the Company executed a commercial office lease to lease
all available square footage in this new facility, or approximately 40,000
square feet. The lessor for this facility is a limited partnership of which a
director of the Company is a limited partner. Execution of the lease was made
upon approval of a majority of disinterested members of the Board of Directors
of the Company. The Company believes that the terms of the lease are no less
favorable than could be obtained from an unaffiliated party.
In 1996, the Partnership issued promissory notes to related parties in
the aggregate amount of $1,300,000 which bore interest at 12%. The obligations
of the Partnership under such notes were assumed by the Company in connection
with the Transactions and were cancelled in May 1996 in consideration of the
issuance of approximately 24,904 shares of Series A Convertible Preferred Stock
(converted into 252,004 shares of Common Stock) to the holders thereof.
54
<PAGE>
14. EMPLOYEE BENEFIT PLAN
The Company provides retirement benefits for eligible employees, as
defined, through a defined contribution benefit plan that is qualified under
Section 401(k) of the Internal Revenue Code (the "Plan"). Contributions to the
Plan, which are made at the sole discretion of the Company, were $267,000,
$231,000 and $56,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
15. ACQUISITION OF RESELLERS
In February and March 1998, the Company acquired the businesses of five
third-party resellers of the Company's products (the "Acquired Resellers") in
exchange for an aggregate of 121,856 shares of the Company's Class B Common
Stock (converted into 1,233,056 shares of Common Stock). Prior to these
acquisitions, the Company and its stockholders had no ownership interest in the
five Acquired Resellers and the financial and operating policies of the Acquired
Resellers were not controlled by the Company. The acquisition of such Acquired
Resellers was accounted for under the poolings-of-interest method of accounting.
The following information details the results of operations of the
Company and the Acquired Resellers for periods before the poolings-of-interests
combinations were consummated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues:
The Company $ 14,137 $ 6,621
Acquired Resellers 3,455 2,691
-------- --------
$ 17,592 $ 9,312
======== ========
Net loss:
The Company $(15,491) $(19,997)
Acquired Resellers (526) (389)
-------- --------
$(16,017) $(20,386)
======== ========
Net loss per share- basic and diluted:
The Company $ (1.48) $ (2.62)
Acquired Resellers 0.11 0.32
-------- --------
$ (1.37) $ (2.30)
======== ========
</TABLE>
16. MODIFICATION TO ESCROW AGREEMENT
In March 1998, the Class B Escrow Agreement was modified to provide
that all of the shares of Class B Common Stock held in escrow 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.
55
<PAGE>
17. RELEASE EVENT
In March 1998, the "Release Event" occurred when the businesses of the
five Acquired Resellers were acquired by the Company and the GP determined that
such acquisitions should result in the liquidation of the Partnership. Following
the occurrence of such Release Event, the following events occurred: (i) the
Board of Directors declared a mandatory conversion of the outstanding shares of
the Company's Class A, Class B and Class C Common Stock and such shares were
converted into shares of Common Stock of the Company; (ii) 68,747 of the shares
of Class A Common Stock (subsequently converted into 1,030,398 shares of Common
Stock) held in escrow pursuant to the Class A Escrow Agreement were released to
the Partnership and the remaining shares held in escrow pursuant to the Class A
Escrow Agreement were returned to the Company for cancellation; and (iii) the
Partnership was dissolved and liquidated and all of the shares of Common Stock
held by the Partnership were distributed to its partners, including the
distribution of shares (converted into 1,030,398 shares of Common Stock) to the
Participating Resellers. No modification of the original recorded purchase price
of the Participating Resellers was required.
56
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders under
the headings "Election of Directors," "Section 16(a) Beneficial Ownership
Reporting Compliance" and "Management."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders under
the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders under
the heading "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders under
the heading "Certain Related Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial Statements. The following financial statements of the
Company are included in Part II, Item 8, of this Annual Report on
Form 10-K:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules. None.
57
<PAGE>
(3) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation (incorporated
herein by reference to Exhibit 3.4 to the Registration Statement on
Form S-1 (File No. 333-47881), initially filed March 13, 1998 (the
"Registration Statement")
3.2 Amended and Restated Bylaws (incorporated herein by reference to
Exhibit 3.5 to the Registration Statement)
4.1 Form of Certificate for the Common Stock, par value $0.01 per share*
10.1 Shareholders Rights Agreement, dated June 6, 1997 among the Company
and certain stockholders named therein*
10.2 Asset Purchase Agreement, dated February 2, 1998, among The Ultimate
Software Group of Virginia, Inc., the Company and certain principals
named therein*
10.3 Asset Purchase Agreement, dated February 2, 1998, among the Company,
The Ultimate Software Group of the Carolinas, Inc. and certain
principals name therein*
10.4 Asset Acquisition Agreement, dated February 20, 1998, among the
Company, The Ultimate Software Group of Northern California, Inc.
and certain principals named therein*
10.5 Asset Purchase Agreement dated March 4, 1998, among the Company,
Ultimate Investors Group, Inc. and certain principals name therein*
10.6 Agreement and Plan of Merger dated February 24, 1998, among the
Company, ULD Holding Corp., Ultimate Software Group of New York and
New England, G.P. and certain principals named therein*
10.7 Nonqualified Stock Option Plan*
10.8 Lease Agreement, between the Company, as successor to The Ultimate
Software Group, Ltd., and Gary A. Poliakoff as Trustee for Emerald
Lake Trust, dated November 16, 1993 and extensions thereof*
10.9 Extension Agreement entered into between Greyrock Capital, a
Division of NationsCredit Commercial Corporation, and The Ultimate
Software Group, Inc. dated November 24, 1998**
10.10 Extensions of Lease Agreement, between the Company, as successor to
The Ultimate Software Group, Ltd., and Gary A. Poliakoff as Trustee
for Emerald Lake Trust**
10.11 Commercial Office Lease agreement by and between UltiLand, Ltd., a
Florida limited partnership, and the Company, dated December 31,
1998**
10.12 Rights Agreement, dated as of October 22, 1998, between the Company
and BankBoston, N.A., as Rights Agent. The Rights Agreement includes
the Form of Certificate of Designations of Series A Junior Preferred
Stock as Exhibit A, the Form of Rights Certificate as Exhibit B, and
the Summary of Rights as Exhibit C (incorporated by reference herein
to Exhibit 2 to the Company's Current Report on Form 8-K dated
October 23, 1998)
21.1 Subsidiaries of the Registrant*
27.1 Financial Data Schedule**
99.1 Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995**
</TABLE>
- ----------
* Incorporated herein by reference to the corresponding exhibit in the
Company's Registration Statement.
** Filed herewith.
(b) Reports on Form 8-K
On October 23, 1998, the Company filed a Current Report on Form 8-K,
dated October 22, 1998, which announced the adoption by the Board of Directors
of a Rights Agreement and the dividend of one preferred share purchase right for
each outstanding share of Common Stock.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, 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: March 29, 1999 By: /S/ MITCHELL K. DAUERMAN
--------------------------------------
Executive Vice President, Chief Financial Officer
and Treasurer
(Authorized Signatory and
Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ SCOTT SCHERR President, Chief Executive Officer and March 29, 1999
---------------- Chairman of the Board
Scott Scherr
/S/ MITCHELL K. DAUERMAN Executive Vice President, Chief Financial March 29, 1999
------------------------ Officer and Treasurer
Mitchell K. Dauerman
/S/ ALAN GOLDSTEIN Executive Vice President, Chief Technology March 29, 1999
------------------ Officer and Director
Alan Goldstein, M.D.
/S/ MARC D. SCHERR Vice Chairman of the Board March 29, 1999
------------------
Marc D. Scherr
/S/ OFER NEMIROVSKY Director March 29, 1999
-------------------
Ofer Nemirovsky
/S/ RICK WILBER Director March 29, 1999
---------------
Rick Wilber
</TABLE>
59
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.9 Extension Agreement entered into between Greyrock Capital, a
Division of NationsCredit Commercial Corporation, and The Ultimate
Software Group, Inc. dated November 24, 1998**
10.10 Extensions of Lease Agreement, between the Company, as successor to
The Ultimate Software Group, Ltd., and Gary A. Poliakoff as Trustee
for Emerald Lake Trust**
10.11 Commercial Office Lease agreement by and between UltiLand, Ltd., a
Florida limited partnership, and the Company, dated December 31,
1998**
27.1 Financial Data Schedule**
99.1 Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995**
</TABLE>
EXHIBIT 10.9
EXTENSION AGREEMENT
Borrower: The Ultimate Software Group, Inc.
Address: 3111 Stirling Road, Suite 308
Ft. Lauderdale, FL 33312
Date: November 24, 1998
THIS EXTENSION AGREEMENT (this "Agreement") is entered into between
GREYROCK CAPITAL, a Division of NationsCredit Commercial Corporation ("GC"),
whose address is 10880 Wilshire Boulevard, Suite 950, Los Angeles, California
90024, and the Borrower named above ("Borrower").
GC and Borrower agree to amend and supplement the Loan and Security
Agreement between them, dated September 25, 1996, as amended (as amended, the
"Loan Agreement"), as follows. (This Agreement, the Loan Agreement, any prior
written amendments to the Loan Agreement signed by GC and Borrower, and all
other written documents and agreements between GC and Borrower, are referred to
herein collectively as the "Loan Documents." Capitalized terms used but not
defined in this Agreement shall have the meanings set forth in the Loan
Agreement.)
1. Extension. The date "November 30, 1998" in Section 4 of the
Schedule to Loan Agreement, as amended, is hereby deleted and
replaced with the date "November 30, 1999".
2. Fee. In consideration of GC entering into this Agreement,
Borrower shall concurrently pay GC a fee in the amount of
$40,000, which shall be non-refundable and in addition to all
interest and other fees payable to GC under the Loan
Documents. GC is authorized to charge said fee to Borrower's
loan account.
3. Minimum Interest Charge. Section 2 of the Schedule to the Loan
Agreement, as amended, is hereby amended by inserting
immediately following the text "8.000% per annum" and before
the period the following: ", and provided that the interest
charged for each calendar year shall be a minimum of $20,000,
regardless of the amount of the Obligations outstanding, if at
any time during such calendar year Loans are outstanding
hereunder".
4. Representations True. To induce GC to enter into this
Agreement, Borrower hereby confirms and restates, as of the
date hereof, the representations and warranties made by it in
Section 3 of the Loan Agreement. For the purposes of this
Section 3 each reference in Section 3 of the Loan Agreement to
"this Agreement," and the words "hereof," "herein,"
"hereunder," or words of like import in such Section, shall
mean and be a reference to the Loan Agreement as amended by
this Agreement.
<PAGE>
Greyrock Capital Extension Agreement
5. General Provisions. GC's execution and delivery of, or
acceptance of, this Agreement and any other documents and
instruments in connection herewith shall not be deemed to
create a course of dealing or otherwise create any express or
implied duty by it to provide any other or further amendments,
consents or waivers in the future. This Agreement, the Loan
Agreement, and the other Loan Documents set forth in full all
of the representations and agreements of the parties with
respect to the subject matter hereof and supersede all prior
discussions, representations, agreements and understandings
between the parties with respect to the subject hereof. Except
as herein expressly amended and supplemented, all of the terms
and provisions of the Loan Agreement and the other Loan
Documents shall continue in full force and effect and the same
are hereby ratified and confirmed. This Agreement forms part
of the Loan Agreement and the terms of the Loan Agreement are
incorporated herein by reference. This Agreement expressly
supersedes that certain Notice of Termination dated September
30, 1998, from GC to Borrower, and such notice is hereby
rescinded by GC.
Borrower: GC:
THE ULTIMATE SOFTWARE GROUP, GREYROCK CAPITAL,
INC. a Division of NationsCredit
Commercial Corporation
By: /S/ MITCHELL DAUERMAN By: /s/ LISA NAGANO
-------------------------------- ---------------------------------
Chief Financial Officer Title: Senior Vice President
By: /S/ JAMES M. ALU
--------------------------------
Chief Operating Officer
"Loans" do not include any fees due pursuant to #2 above or any fees incurred in
connection with the execution of the "Extension Agreement."
2
EXHIBIT 10.10
Law Offices
BECKER & POLIAKOFF, P.A.
[Letterhead]
October 22, 1998
The Ultimate Software Group, Ltd.
c/o Scott Scherr, President
3111 Stirling Road, Suite C
Fort Lauderdale, Florida 33312
RE: Extension of Sub-lease of Suite B (4,773 sq.ft.) with
Becker & Poliakoff, P.A.
Dear Scott:
Please be advised that, effective January 1, 1999, the monthly rental
for Suite B will be $8,352.00 per month, plus applicable sales taxes. Your
current rent is $7,700.00 per month. The lease is month to month, provided,
however, that you must give sixty (60) days notice prior to termination of same.
Please advise if there are any questions.
Very truly yours,
/s/ Gary A. Poliakoff
GARY A. POLIAKOFF, J.D.
GAP/cas
cc: Gilma Moreno
Peg Myers
<PAGE>
GARY A. POLIAKOFF, TRUSTEE
P.O. BOX 9057
FORT LAUDERDALE, FL 33310
(305) 987-7550
October 22, 1998
THE ULTIMATE SOFTWARE GROUP, LTD.
c/o Scott Scherr, President
3111 Stirling Road, Suite C
Fort Lauderdale, Florida 33312
RE: Extension of Expiring Lease
Dear Scott:
As you are aware, your current lease expires on December 31, 1998. As
an accommodation to you, I extended your initial lease, which expired in 1996
and then in 1997, with only a nominal increase, based upon the assumption that
you were moving out at the end of 1997 and then 1998. The problem I have is that
the rental rate you are paying, $15.67 sq.ft. (gross), is grossly below the
market. Your uncertainty as to when you will be able to move into your new
building is causing a problem insofar as my ability to lease the building.
Accordingly, it will be necessary to increase the rent to the market rate, which
is $21.00 sq.ft. (gross) or $21,875.00 per month, plus sales taxes, and extend
same for an additional period of one year, granting you the right to cancel same
after six (6) months, with ninety days' notice. In other words, if you desire to
cancel by June 30, 1999, you must notify me by March 30, 1999. If you notify me
on April 30, 1999, you will be obligated through July 30, 1999. Any notice must
be given through the end of a given month.
Please call to discuss this matter.
Very truly yours,
/s/ Gary A. Poliakoff
GARY A. POLIAKOFF, J.D.
GAP/cas
<PAGE>
GARY A. POLIAKOFF, TRUSTEE
P.O. BOX 9057
FORT LAUDERDALE, FL 33310
(305) 987-7550
November 20, 1998
Via Hand-Delivery
THE ULTIMATE SOFTWARE GROUP
c/o Scott Scherr, President
3111 Stirling Road, Suite C
Fort Lauderdale, Florida 33312-6525
RE: Extension of Lease
Dear Scott:
By correspondence of October 22, 1998, I advised of a slight adjustment
in your rent during the extension of your lease into 1999. However, most
importantly, I advised that the initial term would be six (6) months, with a
right to cancel after six months upon ninety (90) days notice. Subsequently, you
advised that your new building will be completed by the end of April 1999.
Accordingly, I am prepared to extend your lease for a period of 120 days, with a
right to cancel thereafter on sixty days notice. In other words, the minimum
commitment is four (4) months; however, you can stay longer, as long as I have a
minimum of sixty (60) days notice before you move out. Thus, if you find you can
be out by the end of April, you need to advise me by the end of February. If you
will not be out until the end of May, you need to advise me by the end of March.
If this is acceptable to you, kindly sign and return an original of
this letter to my attention.
Very truly yours,
/s/ Gary A. Poliakoff
GARY A. POLIAKOFF, J.D.
GAP/cas
The above-noted terms and conditions for an extension of the expiring lease is
hereby agreed to, at a monthly rental of $21,875.00 per month, plus sales tax.
THE ULTIMATE SOFTWARE GROUP, INC.
By /S/ MITCHELL K. DAUERMAN
Mitchell K. Dauerman, Chief Financial Officer
EXHIBIT 10.11
COMMERCIAL OFFICE LEASE
BY AND BETWEEN
ULTILAND, LTD., A FLORIDA LIMITED PARTNERSHIP
("LANDLORD")
AND
ULTIMATE SOFTWARE GROUP, INC., A DELAWARE CORPORATION
("TENANT")
<PAGE>
COMMERCIAL OFFICE LEASE
ARTICLE I - DEMISED PREMISES
1.01 DEMISED PREMISES
1.02 USE OF ADDITIONAL AREAS
ARTICLE II - TERM
2.01 LENGTH OF TERM
2.02 COMMENCEMENT DATE
2.03 OPTION TO RENEW
ARTICLE III - RENT
3.01 PAYMENT OF RENT
3.02 FIXED MINIMUM RENT
ARTICLE IV - IMPROVEMENTS
4.01 IMPROVEMENTS BY LANDLORD
4.02 IMPROVEMENTS BY TENANT
4.03 INSTALLATION OF FIXTURES
ARTICLE V - USE BY TENANT
5.01 USE OF PREMISES
5.02 RESTRICTIONS ON USE
5.03 SIGNS
5.04 UTILITIES AND SERVICES
ARTICLE VI - MAINTENANCE AND REPAIRS
6.01 MAINTENANCE BY TENANT
6.02 REPAIRS BY TENANT
6.03 MAINTENANCE AND REPAIRS BY LANDLORD
6.04 ALTERATIONS
6.05 WAIVER OF CLAIMS
6.06 LANDLORD'S RIGHT TO INSPECT
6.07 CLEANLINESS AND WASTE
6.08 TRIPLE NET LEASE
ARTICLE VII - INSURANCE
7.01 INSURANCE BY TENANT
7.02 INDEMNITY FOR ACCIDENTS
7.03 DESTRUCTION BY FIRE OR CASUALTY
ARTICLE VIII - TAXES
8.01 REAL ESTATE TAXES
8.02 PERSONAL PROPERTY TAXES AND ASSESSMENTS
ARTICLE IX - TITLE
9.01 POSSESSION BY TENANT
9.02 SUBLEASE AND ASSIGNMENT
9.03 FINANCING
9.04 SURRENDER OF PREMISES
9.05 EMINENT DOMAIN
9.06 NONDISTURBANCE AND ATTORNMENT
ARTICLE X - DEFAULT
10.01 DEFAULT BY TENANT
10.02 LIEN OF LANDLORD FOR RENT, TAXES AND OTHER SUMS
10.03 NO LIENS CREATED BY TENANT
ARTICLE XI - ENVIRONMENTAL
11.01 COMPLIANCE WITH LAWS
11.02 STORAGE OF CONTAMINATION
11.03 NO LIENS
11.04 ENVIRONMENTAL ASSESSMENT AND REMEDIATION
11.05 NOTICE OF CONTAMINATION OR ENFORCEMENT
ARTICLE XII - MISCELLANEOUS
12.01 NOTICES
12.02 WAIVER
12.03 RELATIONSHIP OF PARTIES
12.04 GOVERNING LAW
12.05 SAVINGS CLAUSE
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12.06 MARGINAL HEADINGS
12.07 COVENANT TO BIND SUCCESSORS
12.08 CREDIT REPORTS
12.09 ESTOPPEL CERTIFICATE
12.10 EXCULPATION
12.11 FORCE MAJEURE
12.12 PREVAILING PARTY
12.13 RADON GAS
12.14 ENTIRE AGREEMENT
12.15 NEGOTIATION AND EXECUTION
<PAGE>
COMMERCIAL OFFICE LEASE
THIS LEASE, made and entered into this 31 day of December, 1998, by and
between ULTILAND, LTD., A FLORIDA LIMITED PARTNERSHIP (hereinafter referred to
as "Landlord") and ULTIMATE SOFTWARE GROUP, INC., A DELAWARE CORPORATION
(hereinafter referred to as "Tenant");
W I T N E S S E T H: THAT
In consideration of the rents, covenants and agreements hereinafter
reserved and contained on the part of the Tenant to be observed and performed,
the Landlord demises and leases to the Tenant, and Tenant takes, accepts and
rents from Landlord, the premises hereinafter described, for the period, at the
rental, and upon the terms and conditions hereinafter set forth.
ARTICLE I
DEMISED PREMISES
SECTION 1.01 - DEMISED PREMISES: The Landlord demises and leases to the
Tenant, and the Tenant rents from Landlord, that certain real property located
in Broward County, Florida and more particularly described on Exhibit "A"
attached hereto, (the "Property") together with all improvements located or to
be located thereon, including but not limited to a three-story office building
to be known as the Ultimate Software Group Building, located in Town Center
Circle, in the City of Weston, County of Broward, and State of Florida,
(hereinafter the Property and improvements thereon are referred to as the
"Demised Premises"), in its "AS IS" condition.
SECTION 1.02 - USE OF ADDITIONAL AREAS: The use of occupancy by the
Tenant of the Demised Premises shall include the use of the automobile parking
areas, driveways, pathways, entranceways, restrooms, means of ingress and
egress, loading and unloading facilities, and other facilities as may be
designated from time to time by the Landlord, subject, however, to the terms and
conditions of this agreement, and to reasonable rules and regulations for the
use thereof, as prescribed from time to time by the Landlord.
ARTICLE II
TERM
SECTION 2.01 - LENGTH OF TERM: The length of this Lease shall be for a
term of fifteen (15) years (the "Term"), or as set forth below, unless otherwise
terminated or extended as provided herein.
SECTION 2.02 - COMMENCEMENT DATE: The term of this Lease shall commence
on a date thirty (30) days after Landlord obtains a Certificate of Occupancy
(the "Commencement Date"). If the Tenant occupies the Demised Premises prior to
the Commencement Date, such early occupancy shall be subject to all terms and
conditions contained in this Lease. All property of Tenant brought upon the
Demised Premises shall be kept at Tenant's sole risk.
SECTION 2.03 - OPTION TO RENEW: Provided Lessee shall not be in default
hereunder and upon one hundred eighty (180) days' written notice prior to the
end of the Term, Lessee shall have one (1) option to renew this Lease for a term
of five (5) years ("Option Term").
ARTICLE III
RENT
SECTION 3.01 - PAYMENT OF RENT: Tenant hereby covenants
<PAGE>
and agrees to pay rent to Landlord, which rent shall be as hereinafter provided.
The payment of said Rent shall begin on the Commencement Date. In the event the
Commencement Date occurs on a day other than the first day of a month, Tenant
shall pay rent for the fractional month on a per diem basis (calculated on the
basis of a thirty [30] day month) until the first day of the month following
such Commencement Date, and thereafter the Rent shall be paid in equal monthly
installments on the first day of each and every month in advance. Said Rent
shall be paid to the Landlord at c/o Marc Scherr, Gerschel & Company, 720
Fifth Avenue, 10th Floor, New York, New York, 10019, or at such other place as
may be designated in writing from time to time by Landlord.
SECTION 3.02 - RENT:
A. Tenant shall pay to Landlord during the first year of this Lease,
commencing on the Commencement Date (the "Initial Lease Year"), and as adjusted
pursuant to Section 3.03 of this Lease, without any prior notice or demand
therefor, and without any deduction or setoff whatsoever, a total fixed minimum
annual rental of $697,760.00 per annum, payable in equal monthly installments of
$58,146.67, plus sales tax and use tax as required by law. The parties
acknowledge that the amount of fixed minimum annual rental has been arrived at
by calculating $17.50 per square foot per annum, based on an assumed square
footage of 39,872 feet of Demised Premises. Rent shall be payable in advance on
the first day of each and every calendar month, as provided in Section 3.01
hereof.
B. Commencing with the second year of this Lease, for a term of twelve
(12) months, and for each successive year of this Lease, fixed minimum annual
rent shall be adjusted in accordance with the CPI as more fully set forth in
this Article III, Section 3.03 below, whereupon the adjusted Rent shall be
payable in equal monthly installments, plus applicable sales tax and use tax as
required by law. Rent shall be payable in advance on the first day of each and
every calendar month, as provided in Section 3.01 hereof.
C. Landlord acknowledges receipt of the sum of $0. If, during the term
hereof, Tenant shall be in default in the payment of rent herein reserved or any
portion thereof, Landlord may apply all or any portion of the deposit as may be
necessary to the payment of overdue rent or any other charges which accrue in
favor of Landlord. Tenant agrees to forthwith, without demand, replace the
monies so used.
D. Late fee: Any payment not received by Landlord by the tenth (10th)
day of the month shall be considered in arrears and in default of the terms
hereof and shall be subject to a late charge in the amount of one (1%) percent
of the monthly rent, which Tenant agrees to pay along with the late rent in the
form of a cashier's check, certified check or money order.
E. Returned Checks: In the event that Tenant's check is returned for
any reason, Tenant agrees to pay Landlord $50.00 as a handling charge in
addition any applicable late charge. Returned checks must be redeemed by
cashier's check, certified check or money order. In the event that more than one
(1) check is returned, Tenant agrees to pay all subsequent rents and charges by
cashier's check, certified check or money order.
SECTION 3.03 - COST OF LIVING INCREASE IN FIXED MINIMUM ANNUAL RENT:
Commencing with the second year of this Lease, and at the beginning of each
successive year of this Lease, the fixed minimum annual rent shall be adjusted
in accordance with the Consumer Price Index For All Urban Consumers and Wage
Earners and
<PAGE>
Clerical Workers (U.S. City Average: All Items) issued by the Bureau of Labor
Statistics of the U.S. Department of Labor, using the year 1982-84 as a base of
100. At the commencement of each year of this Lease, and each year thereafter,
the fixed minimum annual rent shall be adjusted by multiplying said rent by a
fraction, the numerator of which shall be the Index Number for the month
preceding the commencement of the successive year of this Lease, and the
denominator of which shall be the Index Number for the month of the commencement
of the Term of this Lease. In no event shall the fixed minimum annual rent, as
adjusted, be less than the fixed minimum annual rent for the last year of the
preceding year's rental as specified in Section 3.02 hereof. In the event that
the Index herein referred to ceases to be published during the term of this
Lease, or if a substantial change is made in the method of establishing such
Index, then the determination of the adjustment in the fixed minimum annual rent
shall be made with the use of such conversion factor, formula or table as may be
published by the Bureau of Labor Statistics, or if none is available, the
parties shall accept comparable statistics on the cost of living in the United
States, as shall then be computed and published by an agency of the United
States, or if none, by a respected financial periodical selected by Landlord.
Further, if the publication of the Index is delayed or receipt of same is
untimely, then the Rent shall be adjusted as soon as the Index is received, and
the Tenant agrees to pay any adjustments in rent for those months which may not
have been calculable due to the unavailability of the Index.
ARTICLE IV
IMPROVEMENTS
SECTION 4.01 - IMPROVEMENTS BY LANDLORD: Landlord shall not be
responsible for any improvements to the Demised Premises other than those
Landlord improvements set forth on Exhibit "B" attached hereto and made a part
hereof ("Landlord Improvements"). Tenant takes the Demised Premises in an "AS
IS" condition other than Landlord's Improvements.
SECTION 4.02 - IMPROVEMENTS BY TENANT: Tenant, at its sole cost and
expense, shall be responsible for all improvements to the Demised Premises.
Provided however, that before any such improvements are made, Tenant shall
submit its plans, drawings and specifications to Landlord for Landlord's
approval which approval shall be in writing and shall not be unreasonably
withheld and provided that any and all improvements to be made by Tenant meet
all applicable building codes and/or zoning requirements as may be required by
the appropriate governmental authorities and that Tenant secure, in advance of
commencement of any improvements, the requisite governmental approvals and
permits. All bills shall be paid for in full, and Tenant does hereby agree to
indemnify, defend and hold harmless Landlord from any and all liens, claims or
demands in connection therewith. If any liens are placed against the Demised
Premises, Tenant shall be responsible for clearing all such liens immediately,
and, to the extent Landlord incurs any expenses (including attorney fees),
Tenant shall be responsible for reimbursement.
SECTION 4.03 - INSTALLATION OF FIXTURES: Prior to the commencement of
the Term, if Tenant enters upon the Demised Premises for the purpose of
installing trade fixtures and furnishings, Landlord shall not be liable to
Tenant for damage to or loss of such fixtures, equipment or furnishings. It is
mutually agreed that all work performed or requested by the Tenant shall be
subject to the approval of the Landlord's architect, mechanical and electrical
engineers.
<PAGE>
ARTICLE V
USE BY TENANT
SECTION 5.01 - USE OF PREMISES: Tenant shall occupy and use the Demised
Premises as offices for a computer software company and related use, and for
no other purpose. Tenant shall continuously and uninterruptedly during the Term
of this Lease conduct its customary business activity therein during all normal
business days and hours, unless prevented from so doing by strikes, fire,
casualty or other causes beyond Tenant's control.
SECTION 5.02 - RESTRICTIONS ON USE: Tenant shall not use nor permit the
Demised Premises to be used for any purpose other than that set forth in Section
5.01 above, will not use or suffer anyone to use, the Demised Premises, or any
part thereof, for any purpose in violation of the laws of the United States, the
State of Florida, or the ordinances and regulations of a county or a
municipality having jurisdiction over the Demised Premises. Tenant further
covenants and agrees to execute and comply promptly with all statutes,
ordinances, rules, orders, regulations and requirements of federal, state,
county and city governments regulating the use by Tenant of the Demised
Premises. Tenant will not use, or permit the use of the Demised Premises in any
such manner that will tend to create a nuisance. The restrictions set forth in
this Paragraph shall extend to all agents and employees of the Tenant. Tenant
shall take good care of the Demised Premises, fixtures, appurtenances and all
alterations, additions and improvements thereof; shall make all repairs in and
about the Demised Premises as may be necessary to preserve same in good order
and condition, which repairs shall be equal in quality to the original work;
shall promptly pay the expenses of such repairs and shall promptly notify
Landlord of damage that may occur to the Demised Premises.
5.03 - SIGNS: Without Landlord's prior consent and approval, Tenant
shall not (a) install any exterior lighting, awnings, shades or exterior
decorations or painting; (b) erect or install any exterior or interior window or
door signs or advertising media, window or door lettering or placards or (c)
keep or display any merchandise on, or otherwise obstruct the areaways adjacent
to the premises. All signs must conform with the Landlord's sign specifications
and/or be approved by Landlord prior to installation.
5.04 - UTILITIES AND SERVICES: The Tenant shall be solely responsible
for and shall promptly pay all charges for public utilities and/or private
services rendered or furnished to the premises during the term hereof,
including, but not limited to, heat, water, gas, electricity, rubbish disposal
and sewer rental, together with all taxes or other charges based upon the use of
such utilities. Landlord shall in no event be liable for the quality, quantity
or interference of such services.
ARTICLE VI
MAINTENANCE AND REPAIRS
SECTION 6.01 - MAINTENANCE BY TENANT: Tenant shall at all times keep
the Demised Premises, including the foundations, exterior and structural walls
and roof of the Demised Premises, fixtures, appurtenances, and all alterations,
additions and improvements thereof, including, but not limited to all
partitions, doors, equipment and all heating, air conditioning, lighting and
plumbing fixtures, in good order, condition and repair, any damage by
unavoidable casualty excepted.
SECTION 6.02 - REPAIRS BY TENANT: Tenant shall make all
<PAGE>
repairs to the Demised Premises, including without limitation, structural
repairs to the Demised Premises.
SECTION 6.03 - MAINTENANCE AND REPAIRS BY LANDLORD: If Tenant refuses
or neglects to maintain or repair promptly the premises as required in Sections
6.01 and 6.02 hereof, in a reasonable time after written demand by the Landlord,
the Landlord may make such repairs without liability to Tenant for any loss or
damage that may accrue to Tenant's equipment, fixtures and/or other property; or
to the loss of business occasioned by reason thereof; and further, upon
completion of such maintenance or repairs, Tenant shall pay Landlord's incurred
costs occasioned by such maintenance or repairs. It is further agreed and
understood that said billing of costs so incurred shall include interest at the
highest rate allowed by law from the date of completion of the repairs by the
Landlord.
SECTION 6.04 - ALTERATIONS: Tenant shall not make any alterations or
additions to the Demised Premises, nor make any contract therefor, without first
procuring Landlord's written consent. All alterations, additions and
improvements made by Tenant to or upon the Demised Premises, except signs,
electrical equipment or other removable trade fixtures or furnishings shall,
when made or installed, be deemed to have attached to the Demised Premises and
to have become the property of Landlord; provided, however, if prior to
termination of this Lease, or within fifteen (15) days thereafter, Landlord so
directs by written notice to Tenant, Tenant shall promptly remove the additions,
improvements, trade fixtures and installations which were placed in the Demised
Premises by the Tenant and which are designated in said notice and shall repair
any damage occasioned by such removal, and in default thereof, Landlord may
effect said removal and repair at Tenant's expense and Tenant hereby agrees to
pay same. All signs, electrical equipment, fixtures, furnishings and other
personal property of Tenant kept on the Demised Premises and not removed prior
to the expiration of the term or earlier termination thereof shall become the
property of the Landlord, to do with as Landlord exclusively deems appropriate.
SECTION 6.05 - WAIVER OF CLAIMS: Neither Landlord nor Landlord's agents
nor servants shall be liable, and Tenant waives all claims for damage to persons
or property sustained by Tenant or any occupant of the Demised Premises or other
part of the Property, or any equipment or appurtenance becoming out of repair,
or resulting from any accident in or about the Demised Premises, or resulting
directly or indirectly from any act or neglect of any tenant or occupant or of
any other person. This Paragraph shall apply especially, but not exclusively, to
the flooding of basements or other subsurface areas, and to damage caused by
roof leaks, air conditioning apparatus, sprinkling devices, water, excessive
heat or cold, falling plaster, broken glass, sewage, gas odors or noise, or the
bursting or leaking of pipes or plumbing fixtures, and shall apply equally
whether any such damage results from the act or neglect of Landlord or of other
tenants, occupants or servants in the Property or of any other person and
whether such damage be caused or result from any thing or circumstances above
mentioned or referred to, or any other thing or circumstances, whether of a like
nature or of a wholly different nature. All property belonging to Tenant or any
occupant of the Demised Premises shall be there at the risk of Tenant or such
other person only, and Landlord shall not be liable for damage thereto or theft
or misappropriation thereof.
SECTION 6.06 - LANDLORD'S RIGHT TO INSPECT: Landlord and its agents
shall have free access to the Demised Premises during all reasonable hours for
the purpose of examining same and to ascertain if they are in good repair, to
make reasonable repairs which the Landlord may be required to make hereunder and
to exhibit the same to prospective purchasers, lenders or tenants.
<PAGE>
SECTION 6.07 - CLEANLINESS AND WASTE: Tenant shall keep the Demised
Premises, and the areaways adjacent thereto at all times in a neat, clean and
sanitary condition, free from waste or debris and shall neither commit nor
permit any waste or nuisance thereon. Tenant shall procure trash containers
adequate to handle Tenant's trash accumulation.
SECTION 6.08 - TRIPLE NET LEASE: Notwithstanding any provision in this
Lease to the contrary, it is understood and agreed that this is a triple net
lease with all costs, expense, taxes (inclusive of real property taxes and
assessments), insurances, repairs and maintenance to be paid by Tenant.
ARTICLE VII
INSURANCE
SECTION 7.01 - INSURANCE BY TENANT: Tenant shall procure, provide and
pay for, and shall maintain throughout the term of this Lease, the following
insurance coverages, in the following limits, in the name of the Tenant and with
Landlord named therein as an additional insured:
(1) a policy of insurance covering the Tenant's property in the Demised
Premises in the amount determined by Tenant;
(2) a comprehensive general liability insurance against any and all
claims for injuries to persons and property occurring in, upon, or
about the Demised Premises, during the Term of this Lease; such
insurance, at all times, to be in an amount not less than One Million
($1,000,000) Dollars combined single limit per occurrence,
$2,000,000.00 general aggregate; and
(3) casualty, fire, windstorm, flood and extended coverage insurance in
the amount equal to the maximum insurable value of the Demised Premises
together with all improvements thereon.
All such insurance shall be written on a company or companies authorized to
engage in the business of casualty and general liability insurance in the State
of Florida, and there shall be delivered, by the Tenant, to the Landlord
customary certificates evidencing such paid-up insurance, and certifying
Landlord as an additional insured, which certificates are to be issued by the
insurance companies, and delivered on a yearly basis at the commencement of each
year during the Term of this Lease.
The policies of insurance provided herein are to be provided by the
Tenant, and shall be for a period of not less than one (1) year, it being
understood and agreed that fifteen (15) days prior to the expiration of any
policy of insurance, the Tenant will deliver to the Landlord a renewal or new
policy to take the place of the expiring policy, with the further understanding
that, should the Tenant fail to furnish policies, as is provided in this Lease,
and at the times herein provided, the Landlord may obtain such insurance, and
the premiums on such insurance shall be deemed Additional Rental to be paid by
the Tenant to the Landlord upon demand. Tenant shall make no claim for recovery
against Landlord and expressly waives any right of recovery against Landlord for
damage to or loss of the Demised Premises or improvements thereon, which damage
or loss may arise by fire or any other peril covered by any policy of insurance
containing a waiver of subrogation right against the Landlord in which said
policy the Tenant is or may be the insured and when said loss is caused by or
results from any acts of carelessness or negligence of the Landlord, its
officers, employees or other persons under its control. Tenant further covenants
and agrees to apply to its insurers for waiver of subrogation against Landlord,
its agents
<PAGE>
and employees, and to obtain same if Tenant's insurers will issue such waiver
without cost.
SECTION 7.02 - INDEMNITY FOR ACCIDENTS: Tenant covenants and agrees
that it will protect, defend and save and keep the Landlord forever harmless and
indemnified against and from any penalty or damage or charges imposed for any
violation of any laws or ordinances, whether occasioned by the neglect of Tenant
or those holding under Tenant, and that Tenant will at all times protect,
defend, indemnify and save and keep harmless the Landlord against and from any
and all claims, loss, cost, damage or expense arising out of or from any
accident or other occurrence on or about the Demised Premises, causing injury to
any person or property whomsoever or whatsoever, and will protect, defend,
indemnify and save and keep harmless the Landlord against and from any and all
claims, loss, cost, damage or expense arising out of any failure of Tenant in
any respect to comply with and perform all the requirements and provisions of
this Lease.
SECTION 7.03 - DESTRUCTION BY FIRE OR CASUALTY: The Tenant shall give
immediate notice to Landlord in case of fire or other casualty in or about the
Demised Premises. In the event the Demised Premises shall be damaged by fire,
then Tenant shall repair such damages and put the Demised Premises in good
condition as rapidly as reasonably possible. Tenant shall not be entitled to any
abatement of the Rent, unless such damage was occasioned by the negligent acts
of Landlord, its agents or employees.
Notwithstanding any other provisions of this Paragraph to the contrary,
if the Demised Premises, shall be damaged to the extent of more than twenty-five
percent (25%) of its value at the time of such damage, then Landlord may, at its
sole election, upon notice to Tenant, within sixty (60) days after such damage,
terminate this Lease as of the date of such damage.
ARTICLE VIII
TAXES
SECTION 8.01 - REAL ESTATE TAXES: Tenant shall pay, not less than
thirty (30) days before delinquent, all real property taxes and assessments
levied or payable during the term hereof, by the county and municipality upon
the Property.
SECTION 8.02 - PERSONAL PROPERTY TAXES AND ASSESSMENTS: The Tenant
shall pay, not less than thirty (30) days before delinquent, any and all taxes,
licenses, fees and public charges levied, assessed or imposed, and which become
payable during the lease term upon Tenant's fixtures, furniture, appliances and
personal property located or installed in the Demised Premises.
ARTICLE IX
TITLE
SECTION 9.01 - POSSESSION BY TENANT: Tenant covenants and warrants that
it has full right and authority to enter into this Lease for the full term
hereof. Landlord covenants that Tenant, upon paying the Rent provided for herein
and upon performance of the covenants and agreements of this Lease to be
performed by said Tenant, will have, hold and enjoy quiet possession of the
Demised Premises.
SECTION 9.02 - SUBLEASE AND ASSIGNMENT: Landlord shall have first
refusal right to recapture the premises, on a request by Tenant to sublease or
assign. If Landlord does not desire to recapture the premises, then Tenant shall
not sublease, sublet or assign the Demised Premises or any portion thereof
except by
<PAGE>
written permission and consent of Landlord which approval or disapproval shall
be in Landlord's sole discretion, references elsewhere contained herein to
assignees notwithstanding. Any consent by Landlord once shall not constitute a
waiver of the requirement for its consent to any future subletting or assignment
of this Lease. Any such subleasing or assignment, even with the approval of the
Landlord, shall not relieve the Tenant from liability for payment of the rental
and any other monies due Landlord herein provided for or from the obligation to
keep and be bound by the terms, conditions and covenants of this Lease. The
acceptance of rent from any other person shall not be deemed to be a waiver of
any of the provisions of this Lease or a consent to the assignment or subletting
of the Demised Premises. Any change in ten percent (10%) or more of the
equitable or beneficial ownership of Tenant shall be deemed an assignment of
this Lease.
SECTION 9.03 - FINANCING: Tenant agrees that Tenant's rights under this
Lease are and shall always be subordinate to the lien of any mortgage or trust
deeds now or hereafter placed from time to time upon the Demised Premises.
Tenant shall, upon written demand from Landlord, execute such other and further
instruments or assurances subordinating this Lease to the lien or liens of any
such mortgage or trust deeds. If any mortgagee or trustee under a trust deed
elects to have Tenant's interest in this Lease superior to any such interest by
notice to Tenant, then this Lease shall be deemed superior to any such mortgage
or trust deed whether this Lease was executed before or after such mortgage or
trust deed.
SECTION 9.04 - SURRENDER OF PREMISES: Tenant shall, upon the expiration
date or sooner termination of this Lease, surrender to Landlord the Demised
Premises, together with all replacements thereto in good order, condition and
repair, except for ordinary wear and tear and loss by fire or other casualty. If
Tenant fails to surrender the Premises as required herein, Tenant shall be
deemed a month-to-month tenant and shall for the duration of such holdover
period pay Landlord, as holdover rent, twice the monthly rental amount as was
payable in the last month of the lease term in addition to all other payments
required under this Lease Agreement,
SECTION 9.05 - EMINENT DOMAIN: In the event the Demised Premises, or
any part thereof, shall be taken or condemned for public purposes by any
competent authority, the entire compensation awarded therefor shall belong to
the Landlord, without any deduction therefrom for any present or future estate
of Tenant; provided, however, that in the event more than twenty (20%) percent
of the Demised Premises shall be so taken or condemned, then either the Landlord
or Tenant shall have the option of terminating the term of this Lease upon
giving to the other written notice of such election within thirty (30) days
after possession of the part condemned has been taken by proper authorities,
whereupon the term of this Lease shall be terminated, as of the date on which
possession is so taken. If neither Landlord or Tenant so elects to terminate the
term of this Lease, the Landlord at its own expense, shall repair and restore
the premises not affected by the taking and thereafter, if a part of Demised
Premises itself has been taken or condemned, the Rent to be paid by the Tenant
shall be equitably reduced.
SECTION 9.06 - NONDISTURBANCE AND ATTORNMENT: In the event any
proceedings are brought for the foreclosure of, or in the event of the
conveyance by deed in lieu of foreclosure of, or in the event of the execution
of the power of sale under any superior mortgage, or in the event of transfer or
conveyance of the Demised Premises, or any part thereof, to any party for any
reason whatsoever, Tenant hereby attorns to, and covenants and agrees to execute
an instrument in writing reasonably satisfactory to the new owner whereby Tenant
attorns to such successor in interest and recognizes such successor as the
landlord under the Lease.
<PAGE>
ARTICLE X
DEFAULT
SECTION 10.01 - DEFAULT BY TENANT: All of the rights and remedies of
Landlord herein enumerated shall be cumulative, and none shall exclude any other
right or remedy allowed by law. It is agreed that in the event:
(i) That the Tenant shall fail, neglect or refuse to pay any
installment of Rent at the time, and in the amount as herein provided,
or to pay any other monies agreed by it to be paid promptly when and as
the same shall become due and payable under the terms hereof;
(ii) That any voluntary or involuntary petition or similar
pleading, under any section or sections of any bankruptcy act, shall be
filed by or against Tenant, or any voluntary or involuntary proceeding
in any court or tribunal shall be instituted to declare Tenant
insolvent or unable to pay Tenant's debts, and the same shall not be
dismissed or discharged within thirty (30) days after notice thereof in
writing;
(iii) That the Tenant shall fail, neglect or refuse to keep
and perform any of the other covenants, conditions, stipulations or
agreements herein contained and to be kept and performed by it, and in
the event any such default shall continue, for a period of more than
thirty (30) days after notice thereof in writing given to the Tenant,
by the Landlord; provided, however, that if the cause for giving such
notice involves the making of repairs, or other matters reasonably
requiring a longer period of time than the period of such notice, the
Tenant shall be deemed to have complied with such notice so long as it
has commenced to comply with said notice within the period set forth in
the notice, and is diligently prosecuting compliance with said notice,
or has taken proper steps or proceedings, under the circumstances, to
prevent the seizure, destruction, alteration or other interference with
said Demised Premises by reason of non-compliance with the requirements
of any law or any ordinance or with the regulations, rules or
directions of any government authority, as the case may be;
(iv) That the Tenant makes any assignment of its property for
the benefit of creditors, or should the Demised Premises be taken under
a levy of execution or attachment, in an action against the Tenant, and
such levy, attachment or assignment is not dismissed and discharged
within thirty (30) days after written notice thereof to Tenant by
Landlord, the Tenant does hereby authorize and fully empower said
Landlord or Landlord's agent to cancel or annul this Lease at once and
to re-enter and take possession of said Demised Premises immediately,
and remove all persons and their property therefrom, and to use such
force and assistance in effecting and perfecting such removal as said
Landlord may deem necessary and advisable to recover at once full and
exclusive possession of all of said Demised Premises, whether in
possession of said Tenant or of their persons or otherwise. At
Landlord's option, Landlord may declare all installments of Rent for
the remainder of the lease term, to be immediately due and payable
whereupon the same shall become immediately due and payable.
The Landlord may, however, at its option, at any time after a default
or violation of condition or covenant, re-enter and take possession of said
Premises without such re-entering working a forfeiture of the rents to be paid
and the covenants, agreements and conditions to be kept and performed by said
Tenant for the full term of this Lease. In such event, the Landlord shall have
the right, but not the obligation, to divide or
<PAGE>
subdivide the Premises in any manner the Landlord may determine and to lease or
let the same or portions thereof for such periods of time and at such rentals
and for such use and upon such covenants and conditions as Landlord may elect,
applying the net rentals from such letting first to the payment of Landlord's
expenses incurred in dispossessing the Tenant and the costs and expenses of
making such improvements in the Premises as may be necessary in order to enable
the Landlord to relet the same, and to the payment of any brokerage commissions
or other necessary expenses of the Landlord in connection with such reletting.
The balance, if any, shall be applied by the Landlord from time to time, but in
any event not less than once each month, on account of the payments due or
payable by the Tenant hereunder, with the right reserved to Landlord to bring
such actions or proceedings for the recovery of any deficits remaining unpaid as
it may deem advisable from time to time, without being obligated to await the
end of the term hereof for a final determination of the Tenant's account and the
commencement or maintenance of one (1) or more actions shall not bar the
Landlord from bringing other or subsequent actions for further accruals pursuant
to the provisions of this Paragraph. Any balance remaining, however, after full
payment and liquidation of Landlord's account, as aforesaid, shall be paid to
the Tenant from time to time with the right reserved to the Landlord at any time
to give notice in writing to the Tenant of Landlord's election to cancel and
terminate this Lease and all Tenant's obligations hereunder and upon the giving
of such notice and the simultaneous payment by Landlord to Tenant of any credit
balance in Tenant's favor that may at the time be owing to Tenant shall
constitute a final and effective cancellation and termination of this Lease and
the obligations thereunder on the part of either party to the other.
In addition to the foregoing, collection costs and reasonable
attorneys' fees shall be paid by Tenant if delinquencies are referred for
collection.
SECTION 10.02 - LIEN OF LANDLORD FOR RENT, TAXES AND OTHER SUMS:
Landlord shall have, and Tenant hereby grants, a security interest in any
furnishings, equipment, fixtures, inventory, accounts receivable, or other
personal property of any kind belonging to Tenant, or the equity of Tenant
therein, in the Demised Premises. The security interest is granted for the
purpose of securing the payment of rent, other charges, assessments, penalties
and damages herein covenanted to be paid by Tenant and for the purpose of
securing the performance of all other obligations of Tenant under this Lease.
Upon Tenant's default or breach of any covenants of this Lease, Landlord shall
have all remedies available under the law of the State of Florida including, but
not limited to, the right to take possession of the above mentioned property and
dispose of it by public or private sale in a commercially reasonable manner.
Tenant shall, upon demand, reimburse Landlord for all filing and recording fees
and taxes incurred in connection with filing and recording of Financing
Statements if the same be necessary to perfect Landlord's security interest.
Landlord's statutory lien for rent is not hereby waived, the express contractual
lien herein granted being in addition and supplementary thereto.
SECTION 10.03 NO LIENS CREATED BY TENANT: The Tenant covenants and
agrees that it has no power to incur any indebtedness giving a right to a lien
of any kind or character upon the rights, title and interest of the Landlord in
and to the property covered by this Lease, and that no person shall ever be
entitled to any lien directly or indirectly derived through or under the Tenant,
or its agents or servants, or on account of any act or remission of said Tenant,
which lien shall be superior to the title of the Landlord to the Demised
Premises. All persons contracting with said Tenant, or furnishing materials or
labor to said Tenant, or to its agents or servants, as well as all persons
whomsoever, shall be bound by this provision of this Lease. Should any such lien
be filed, the Tenant shall discharge
<PAGE>
the same within thirty (30) days thereafter, by paying the same or by filing a
bond, or otherwise, as permitted by law. The Tenant shall not be deemed to be
the agent of the Landlord, so as to confer upon a laborer bestowing labor or
confer upon a materialman furnishing materials upon the leased premises the
right to a mechanic's lien thereon.
ARTICLE XI
ENVIRONMENTAL
SECTION 11.01 - COMPLIANCE WITH LAWS: Tenant, at Tenant's expense,
shall keep and maintain the Demised Premises in compliance with, and shall not
cause or permit the Demised Premises to be in violation of, any federal, state,
county and municipal laws, ordinances or regulations including, without
limitation, those relating to contamination, air and water quality, waste
disposal, occupational safety and health, industrial hygiene, or to the
environmental conditions on, under or about the Demised Premises, including, but
not limited to, soil and groundwater conditions ("Laws"); provided, however,
Tenant shall have no obligation to keep or maintain the Demised Premises at a
level or standard different than that existing as of the date of this Lease.
Provided further, Tenant shall have no obligation or liability hereunder except
as to any actions or matters caused by Tenant's uses or actions.
SECTION 11.02 - STORAGE OF CONTAMINATION: Except in the ordinary course
of business in strict compliance with applicable laws, Tenant shall not use,
general, manufacture, store, or dispose of, on, under or about the Demised
Premises or transport to or from the Demised Premises any flammable explosives,
radioactive materials, including, without limitation, any substances defined as,
or included in the definition of hazardous substances, hazardous materials,
toxic substances or other similar or regulated substances, residues or wastes,
pollutants, asbestos, petroleum products and by-products, including any other
environmental contamination whatsoever (collectively "Tenant Contamination").
SECTION 11.03 - NO LIENS: Tenant shall not create or suffer to exist
with respect to the Demised Premises, or permit any of its agent to create or
suffer to exist any lien, security interest or other charge or encumbrance of
any kind, including without limitation, any lien imposed pursuant to Section
107(f) of the Superfund Amendments and Reauthorization Act of 1986 (42 U.S.C.
Section 9607(l)) or any similar Law.
SECTION 11.04 - ENVIRONMENTAL ASSESSMENT AND REMEDIATION:
Notwithstanding any other provision of this agreement, Tenant shall be solely
responsible for and agrees to indemnify, defend and hold harmless Landlord, its
employees, agents, officers, directors, heirs and assigns, from and against any
and all fines, suits and claims, demands, penalties, liabilities, costs or
expenses, losses, settlements, remedial actions requirements and enforcement
actions, administrative proceedings and any other actions of whatever kind or
nature, including attorneys' fees and costs (and costs and fees on appeal), fees
of environmental consultants and laboratory fees, known or unknown, contingent
or otherwise, arising out of or in any way related to the discovery,
remediation, or disposal of such Tenant Contamination, including any personal
injury (including wrongful death) or property damage (real or personal) arising
therefrom. Landlord agrees to indemnify, defend and hold harmless Tenant, its
employees, agents, officers, directors, heirs and assigns, from and against any
and all fines, suits, claims, demands, penalties, liabilities, costs or
expenses, losses, settlements, remedial action requirements and enforcement
actions, administrative proceeds and all other actions of whatever kind or
nature, including attorneys' fees and costs (and costs and fees on appeal), fees
of environmental consultants and laboratory
<PAGE>
fees, known or unknown, continent or otherwise, arising out of or in any way
related to the discovery, remediation, or disposal of contamination on or about
the Demised Premises or the Property other than Tenant Contamination, including
any personal injury (including wrongful death) or property damage (real or
personal) arising therefrom. This paragraph shall survive termination or
expiration of this Lease.
SECTION 11.05 - NOTICE OF CONTAMINATION OR ENFORCEMENT: Each party
shall immediately advise the other by telephone, followed up in writing, with a
copy to Landlord, of any and all enforcement, cleanup, removal, claims made or
threatened by any third party, or other governmental or regulatory actions
instituted, completed, or threatened, or any release, discharge, or spill of
Contamination, pursuant to any Laws affecting the Demised Premises, or adjoining
or neighboring properties. Each party shall provide copies to the other in a
timely fashion, in whatever capacity and in whatever form obtained, any and all
information, test results, correspondence or other data acquired in connection
with the locating, remediating, removing, or disposing of contamination on or
about the Demised Premises, or regarding such parties notice of contamination or
enforcement, or otherwise.
ARTICLE XII
MISCELLANEOUS
SECTION 12.01 - NOTICES: Whenever under this Lease a provision is made
for any demand or notice of any kind, or where it is deemed desirable or
necessary by either party to give or serve any such notice or demand to the
other, it shall be in writing sent by overnight mail or certified mail, return
receipt requested, postage prepaid, if to the Tenant addressed to the Tenant at
3111 Stirling Road, Florida 33312 and if to the Landlord addressed to the
Landlord at 720 Fifth Avenue, 10th Floor, New York, New York, 10019, c/o Marc
Scherr, Gerschel & Company, and either party may by like notice at any time and
from time to time designate a different address to which notices shall be sent.
Such notices or demands shall be deemed sufficiently served or given for all
purposes hereunder at the time they shall be mailed by an overnight delivery
service or by United States certified mail, as aforesaid.
SECTION 12.02 - WAIVER: One (1) or more waivers of any covenant, term
or condition of this Lease by either party shall not be construed by the other
party as a waiver of a subsequent breach of the same term, covenant or
condition. The consent or approval of either party to or of any act by the other
party of a nature requiring consent or approval shall not be deemed to waive or
render unnecessary consent to or approval of any subsequent similar act.
SECTION 12.03 - RELATIONSHIP OF PARTIES: Nothing contained in this
Lease nor any act or acts of the parties shall be deemed or construed by the
parties hereto or by any third party to create the relationship of principal and
agent or of partnership or of joint venture or of any association whatsoever
between Landlord and Tenant, other than the relationship of landlord and tenant.
SECTION 12.04 - GOVERNING LAW: The laws of the State of Florida shall
govern the validity, performance and enforcement of this Lease.
SECTION 12.05 - SAVINGS CLAUSE: The invalidity or unenforceability of
any provision of this Lease shall not affect or impair the validity of any other
provision.
SECTION 12.06 - MARGINAL HEADINGS: The paragraph titles herein are for
convenience only and do not define, limit or
<PAGE>
construe the contents of such paragraph.
SECTION 12.07 - COVENANT TO BIND SUCCESSORS: It is agreed that the
provisions, covenants and conditions of this Lease shall be binding on the legal
representatives, heirs, successors and assigns of the respective parties hereto.
SECTION 12.08 - CREDIT REPORTS: The Tenant's performance under this
Lease Agreement may be reported to credit reporting agencies. The Landlord may
also obtain a consumer report of Tenant's credit history from a credit reporting
agency. Upon request, Tenant will be informed whether a consumer report was
obtained and if so, the name and address of the agency furnishing the report.
SECTION 12.09 - ESTOPPEL CERTIFICATE: Within ten (10) days after
request therefor by Landlord, the Tenant shall furnish an estoppel certificate.
Tenant agrees to deliver in recordable form a certificate to any proposed
mortgagee or purchaser, or to Landlord, certifying (if such be the case) that
this Lease is in full force and effect and there are no defenses or offsets
thereto, or stating those claimed by Tenant.
SECTION 12.10 - EXCULPATION: Tenant agrees that Tenant shall look
solely to Landlord's interest in the Demised Premises for the satisfaction of
any claims, judgments or decrees requiring the payment of money by Landlord
based upon default hereunder. No other property or assets of Landlord, its
successors or assigns shall be subject to levy, execution or other enforcement
procedure.
SECTION 12.11 - FORCE MAJEURE: Landlord or Tenant shall not be required
to perform any term, condition or covenant in this Lease so long as such
performance is delayed or prevented by Acts of God, strikes, lockouts, decree or
restriction by any governmental authority, civil riot, floods, financing, and
any other cause not reasonably within the control of Landlord or Tenant, and
which by the exercise of due diligence Landlord or Tenant is unable, wholly or
in part to prevent or overcome.
SECTION 12.12 - PREVAILING PARTY: In the event that litigation is
required to enforce this Agreement, the prevailing party shall be entitled to
reimbursement of its legal costs and attorney's fees, including appeals.
SECTION 12.13 - RADON GAS: In accordance with the provisions of Florida
Statutes Chapter 404.29(8), notification is hereby tendered concerning the
possible existence of Radon Gas in or about the Demised Premises. Please be
advised that:
"RADON GAS: Radon is a naturally occurring radioactive gas that, when
it has accumulated in a building in sufficient quantities, may present
health risks to persons who are exposed to it overtime. Levels of radon
that exceed Federal and State guidelines have been found in buildings
in Florida. Additional information regarding radon and radon testing
may be obtained from your County Public Health Unit."
SECTION 12.14 - ENTIRE AGREEMENT: This Lease sets forth all of the
covenants, promises, agreements, conditions and understandings between the
Landlord and the Tenant governing the Demised Premises. There are no covenants,
promises, agreements, conditions and understandings, either oral or written,
between them other than those herein set forth. Except as herein provided, no
subsequent alterations, amendments, changes or additions to this Lease shall be
binding upon the Landlord or Tenant, unless reduced to writing and signed by
both parties.
SECTION 12.15 - NEGOTIATION AND EXECUTION: The furnishing
<PAGE>
of this Lease by the Landlord to the prospective Tenant shall not be considered
an offer to lease, even though completed in every respect, until and unless the
document has been executed by the appropriate officers of Landlord. No
correspondence or other communication respecting this Lease shall create any
obligation to go forward with this Lease until the Lease document is fully
completed and executed by both the Landlord and Tenant.
IN WITNESS WHEREOF, the parties hereto have executed this Lease this
day and year first above written.
Signed and Acknowledged Landlord:
In the Presence of:
ULTILAND, LTD., a Florida
limited partnership
/s/ JODIE M. SCARILLO
- ------------------------------
Witness signature By: /s/ P.A.G. EQUITIES CORP., a
New York corporation, as
general partner
Jodie M. Scarillo
- ------------------------------
Witness print name
/s/ MARYBETH BOTTONE
- ------------------------------
Witness signature
Marybeth Bottone
- ------------------------------
Witness print name By: /s/ MARC D. SCHERR
-------------------------------
Its: Vice President
------------------------------0
(SEAL)
ULTIMATE SOFTWARE GROUP, INC.,
a Delaware corporation
/s/ George H. Hogge, Jr.
- ------------------------------
Witness signature
George H. Hogge, Jr.
- ------------------------------
Witness print name
/s/ Mark Marsden
- ------------------------------
Witness signature
Mark Marsden
- ------------------------------
Witness print name By: /s/ Scott Scherr
--------------------------------
Its: President
(CORPORATE SEAL)
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION OF PROPERTY
A portion of SECTOR 6, according to the Plat thereof, as recorded in
Plat Book 141, Page 21, Public Records, Broward County, Florida, being more
particularly described as follows:
Commence at the intersection of the Southwest corner of Parcel 2 of said Plat
and the Northerly right of way for Arvida Parkway; Thence North 33"40'01' West
along the Western line of said Parcel 2, for a distance of 49.68 feet; Thence
North 11"32'29' East along the new alignment of Tract X, as described on the
Plat of SECTOR 6, EAST, as recorded in Plat Book 155, Page 4, Public Records,
Broward County, Florida, for 15.19 feet to a point of curvature; Thence
Northeasterly and Northwesterly along a circular curve to the left, having a
radius of 500.00 feet, a central angle of 12"34'21', for an arc distance of
109.72 feet to a point of reverse curvature; Thence Northwesterly and
Northeasterly along a circular curve to the right, having a radius of 500.00
feet , a central angle of 18"21'57', for an arc distance of 150.27 feet to a
point of compound curvature; Thence Northeasterly along a circular curve in the
right, having a radius of 700.00 feet, a central angle of 36"29'27', for an arc
distance of 445.82 feet to a point where the remaining portion of the
description is not coincident with said new alignment; Thence North 59"52'56'
East for 38.31 feet; Thence North 56"57'31' East for a distance of 131.88 feet;
Thence South 78"02'29' East, for a distance of 42.43 feet; Thence South
33"02'29' East, for a distance of 17.00 feet to a point of curvature; Thence
Southeastern along a circular curve to the left, having a radius of 550.00 feet,
a central angle of 23"17'57, for an arc distance of 223.66 feet to the POINT OF
BEGINNING; Thence continue Southeasterly along a circular to the left, having a
radius of 550.00 feet, a central angle of 29"45'19', for an arc distance of
285.63 feet; Thence South 26"28'28' West for 393.63 feet to a point on a curve,
said point bears North 05"52'46' West to the radius point on the next described
curve; Thence Southwesterly along a circular curve to the right, having a radius
of 500.00 feet, a central angle of 33"45'55', for an arc distance of 294.66
feet; Thence north 26"28'28' East for 433.30 feet to the POINT OF BEGINNING.
TOGETHER WITH:
EASEMENT ESTATE AS TO THAT CERTAIN PARCEL CONTAINED IN AND PURSUANT TO THAT
CERTAIN INGRESS/EGRESS EASEMENT, BY AND BETWEEN ARVIDA/JMB PARTNERS, A FLORIDA
GENERAL PARTNERSHIP AND B.C.B., INC., A FLORIDA CORPORATION, DATED APRIL 25,
1996, FILED OF RECORD MAY 3, 1996, IN OFFICIAL RECORD BOOK 24825, PAGE 128, OF
THE PUBLIC RECORDS OF BROWARD COUNTY, FLORIDA, SAID PARCEL BEING MORE
PARTICULARLY DESCRIBED AS FOLLOWS:
ROADWAY EASEMENT:
A PORTION OF PARCEL 1, C-1 AND X-2, SECTOR 6, ACCORDING TO THE PLAT THEREOF AS
RECORDED IN PLAT BOOK 141, PAGE 21, OF THEPUBLIC RECORDS OF BROWARD COUNTY,
FLORIDA, BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:
COMMENCE AT THE CENTERLINE INTERSECTION OF TRACT X-2 AND THE WESTERLY RIGHT OF
WAY LINE OF BONAVENTURE BOULEVARD, AS DEPICTED ON SAID PLAT OF SECTOR 6; THENCE
NORTH 74/degree/21'58' WEST FOR 53.80 FEET; THENCE SOUTH 15/degree/38'02' WEST
FOR 40.00 FEET; THENCE NORTH 74/degree/21'58' WEST FOR 714.40 FEET TO THE POINT
OF CURVATURE; THENCE NORTHWESTERLY ALONG A CIRCULAR CURVE TO THE RIGHT, HAVING A
RADIUS OF 1528.39 FEET; A CENTRAL ANGLE OF 13/degree/18'49' FOR AN ARC DISTANCE
OF 355.14 FEET; THENCE SOUTH 75/degree/30'20' WEST FOR 48.13 FEET; THENCE SOUTH
32/degree/03'50' WEST FOR 12.31 FEET TO A POINT OF BEGINNING; THENCE SOUTH
32/degree/03'50' WEST FOR 9.64 FEET TO A POINT OF CURVATURE; THENCE
SOUTHWESTERLY ALONG A CIRCULAR CURVE TO THE RIGHT, HAVING A RADIUS OF 1050.00
FEET, A CENTRAL ANGLE OF 41/degree/06'09', FOR AN ARC DISTANCE OF 753.24 FEET TO
A POINT OF COMPOUND CURVATURE; THENCE SOUTHWESTERLY AND NORTHWESTERLY ALONG A
CIRCULAR CURVE TO THE RIGHT, HAVING A RADIUS OF 550.00 FEET, A CENTRAL ANGLE OF
73/degree/47'32'; FOR AN ARC DISTANCE OF 708.35 FEET TO A POINT OF TANGENCY;
THENCE NORTH 33/degree/02'29' WEST FOR 17.00 FEET; THENCE NORTH 78/degree/02'29'
WEST FOR 42.43 FEET; THENCE SOUTH 56/degree/57'31' WEST FOR 131.88 FEET; THENCE
SOUTH 59/degree/52'56' WEST FOR 38.31 FEET TO THE EASTERLY LINE OF SECTOR 6 EAST
PLAT AS RECORDED IN PLAT BOOK 155, PAGE 4, OF THE PUBLIC RECORDS OF BROWARD
COUNTY, FLORIDA, SAID POINT BEARS SOUTH 36/degree/10'28' EAST TO THE RADIUS
POINT OF THE NEXT DESCRIBED CURVE; THENCE NORTHEASTERLY ALONG A CIRCULAR CURVE
TO THE RIGHT; HAVING A RADIUS OF 700.00 FEET, A CENTRAL ANGLE OF
03/degree/07'59', FOR AN ARC DISTANCE OF 38.25 FEET TO A POINT OF TANGENCY;
THENCE NORTH 56/degree/57'31' EAST FOR 256.88 FEET; THENCE SOUTH
11/degree/57'31' WEST FOR 49.50 FEET; THENCE SOUTH 33"02'29' EAST FOR 15.00 FEET
TO A POINT OF CURVATURE; THENCE SOUTHEASTERLY AND NORTHEASTERLY ALONG A CIRCULAR
CURVE TO THE LEFT, HAVING A RADIUS OF 490.00 FEET, A CENTRAL ANGLE OF
73/degree/47'32' FOR AN ARC DISTANCE OF 631.08 FEET TO A POINT OF COMPOUND
CURVATURE; THENCE NORTHEASTERLY ALONG A CIRCULAR CURVE TO THE LEFT, HAVING A
RADIUS OF 990.00 FEET, A CENTRAL ANGLE OF 41/degree/06'09' FOR AN ARC DISTANCE
OF 710.20 FEET TO A POINT OF TANGENCY; THENCE NORTH 32"03'50' EAST FOR 9.64
FEET; THENCE SOUTH 57/degree/56'10' EAST FOR 30.00 FEET TO A POINT HEREINAFTER
REFERRED TO A POINT A; THENCE SOUTH 57/degree/56'10' EAST FOR 30.00 FEET TO THE
POINT OF BEGINNING.
RECORDED IN THE OFFICIAL RECORDS BOOK
OF BROWARD COUNTY, FLORIDA
COUNTY ADMINISTRATOR
<PAGE>
EXHIBIT "B"
LANDLORD IMPROVEMENTS
Construction of improvements of a three (3) story office building in accordance
with those certain plans and specifications prepared by Manuel Synalovski
Architects, Inc. as Project No. 9401-3 dated ________________, 1998, of which
the parties each acknowledge having a complete copy.
Landlord Initials: Tenant Initials:
/s/ MS /s/ SS
- --------------------------- ---------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
TWELVE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<CIK> 0001016125
<NAME> THE ULTIMATE SOFTWARE GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 17,128
<SECURITIES> 0
<RECEIVABLES> 16,344
<ALLOWANCES> (1,119)
<INVENTORY> 0
<CURRENT-ASSETS> 34,367
<PP&E> 5,132
<DEPRECIATION> (2,674)
<TOTAL-ASSETS> 37,214
<CURRENT-LIABILITIES> 16,873
<BONDS> 0
0
0
<COMMON> 159
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 37,214
<SALES> 43,330
<TOTAL-REVENUES> 43,330
<CGS> 18,852
<TOTAL-COSTS> 28,266
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 207
<INCOME-PRETAX> (7,589)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,589)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99.1
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION
REFORMACT OF 1995 - "SAFE HARBOR" FOR FORWARD LOOKING STATEMENTS
Certain "forward-looking statements" (within the meaning of the Private
Securities Litigation Reform Act of 1995) are included in this Form 10-K and may
be made by Company spokespersons based on current expectations of management.
This Cautionary Statement is for the purpose of qualifying for the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 with respect
to forward-looking statements. Certain factors, including but not limited to
those listed below, may cause actual results to differ materially from current
expectations, historical results and those contained in forward-looking
statements.
SEASONALITY
The Company has experienced, and may experience in the future,
significant seasonality in its business. The Company's business, operating
results and financial condition may be affected by such trends in the future.
Revenues have historically increased at higher rates in the fourth quarter of
the year and at lower rates in the next succeeding quarter. The Company believes
such seasonality is due to a number of factors, including the Company's
quota-based compensation arrangements, typical of those used in the software
companies, and year-end budgetary pressures on the Company's customers. The
Company believes that this seasonal trend may continue for the foreseeable
future.
QUARTERLY FLUCTUATIONS
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. The Company's operating results may fluctuate as a result
of a number of factors, including, but not limited to, increased expenses
(especially as they relate to product development and sales and marketing),
timing of product releases, increased competition, variations in the mix of
revenues, announcements of new products by the Company or its competitors and
capital spending patterns of the Company's customers. The Company establishes
its expenditure levels based upon its expectations as to future revenues, and,
if revenue levels are below expectations, expenses can be disproportionately
high. A drop in near term demand for the Company's products could significantly
affect both revenues and profits in any quarter. Although the Company achieved
net profitability for the fourth quarter of fiscal 1998, as a result of the
factors described herein, 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.
PRODUCT CONCENTRATION
Until 1997, substantially all of the Company's revenues were derived
from its Ultipro for Lan product and related services. The Company has shifted
its focus from a product based on DOS and local area network technologies,
Ultipro for Lan, to a product based on Windows, client/server and Web-based
technologies, UltiPro HRMS/Payroll. As a result of this shift and the decrease
in general market demand for DOS-based products, the Company's revenues from its
Ultipro for Lan product have been declining and are expected to decline for the
foreseeable future. There can be no assurance that the decline in revenues from
sales of Ultipro for Lan will not have a material adverse effect on the
Company's business, operating results and financial condition. While the Company
still derives revenues from the support and service of the Ultipro for Lan
product line, its UltiPro HRMS/Payroll product and related services are expected
to account for substantially all of the Company's revenues for the foreseeable
future.
<PAGE>
Accordingly, the Company's future success will depend on maintaining and
increasing acceptance of UltiPro HRMS/Payroll and related services and its
ability to successfully implement the product. There can be no assurance that
UltiPro HRMS/Payroll will gain broad market acceptance or that the Company will
be able to successfully implement UltiPro HRMS/Payroll in a timely manner. Any
factors adversely affecting the demand for UltiPro HRMS/Payroll would have a
material adverse effect on the Company's business, operating results and
financial condition.
MANAGEMENT OF GROWTH
The Company has experienced a period of rapid growth. For example, the
number of the Company's employees has increased from 227 as of December 31, 1996
to 322 as of December 31, 1998. The growth of the Company's business and
expansion of its customer base has placed, and is expected to continue to place,
a significant strain on the Company's management and operations. The Company
expects to continue to increase its research and development, professional
services, sales and marketing and administrative operations. Accordingly, the
Company's future operating results will depend on the ability of its management
and other key employees to continue to implement and improve its systems for
operations, financial control and information management and to recruit, train,
manage and retain its employee base. There can be no assurance that the Company
will be able to manage or continue to manage its recent or any future growth
successfully, and any inability to do so would have a material adverse effect on
the Company's business, operating results and financial condition.
RISKS ASSOCIATED WITH SALES CHANNELS
The Company sells its products and services primarily through a direct
sales force. The Company's ability to achieve significant revenue growth in the
future will depend, in part, on its success in recruiting, training and
retaining sufficient direct sales personnel. The Company also markets its
products and services through a network of national, local and regional
strategic partners, and is attempting to establish more of such relationships.
Historically, a significant portion of the Company's revenues had been derived
from sale of the Company's products by certain third-party resellers. By March
1998, the Company had acquired the businesses of all of its third-party
resellers in order to gain greater control over its distribution channel. There
can be no assurance that the Company's shift to a direct distribution channel
will be successful. The Company's ability to achieve significant revenue growth
in the future will depend, in large part, upon the success of its direct sales
force, its ability to establish and maintain relationships with strategic
partners and its ability to adapt its sales channels to address the evolving
markets for its products. Failure to do so could have a material adverse effect
on the Company's business, operating results and financial condition.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS
The market for the Company's products is characterized by rapid
technological advancements, changes in customer requirements, frequent new
product introductions and enhancements and changing industry standards. The life
cycles of the Company's products are difficult to estimate and the Company's
current market position could be undermined by rapid technological changes and
the introduction of new products and enhancements by new or existing
competitors. The Company's growth and future success will depend, in part, upon
its ability to enhance its current products and introduce new products in order
to keep pace with products offered by the Company's competitors, adapt to
technological advancements and changing industry standards and expand the
functionality of its products to address the increasingly sophisticated
requirements of its customers. There can be no assurance that the Company will
have sufficient resources to make the necessary investments or that it will not
experience difficulties that could delay or prevent the successful development,
introduction or marketing of new products or enhancements. In addition, there
can be no assurance that such products or enhancements will meet the
requirements of the marketplace or achieve market acceptance or that the
Company's existing and potential customers will
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migrate to client/server environments at the rate expected by the Company. Any
failure by the Company to anticipate or respond adequately to technological
advancements, customer requirements and changing industry standards, or any
significant delays in the development, introduction or availability of new
products or enhancements, could have a material adverse effect on the Company's
business, operating results and financial condition.
COMPETITION
The Company's future success will depend significantly upon its ability
to increase its share of its target market, to maintain and increase its renewal
revenues from existing customers and to sell additional products, product
enhancements, maintenance and support agreements and training and consulting
services to existing and new customers. The HRMS/payroll market is intensely
competitive. The Company has a variety of competitors, including (i) a number of
companies, such as Cyborg Systems, Inc., Genesys Software Systems, Inc., Lawson
Software, Inc., Oracle Corporation, PDS Software, Inc., PeopleSoft, Inc. and SAP
America, Inc. which offer HRMS/payroll software products for use on mainframes
and/or client/server systems; (ii) large service bureaus, such as Automatic Data
Processing, Inc. and Ceridian Corporation; and (iii) the internal payroll/human
resources departments of potential customers which use custom-written software.
The Company believes that existing competitors and new market entrants will
attempt to develop in-house systems that will compete with the Company's
products. Many of the Company's current and potential competitors have
significantly greater financial, technical, marketing and other resources than
the Company. As a result, they may be able to respond more quickly to new or
emerging technologies and to changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products than
can the Company. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competitive
pressures will not materially adversely affect the Company's business, operating
results and financial condition. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products to address the
needs of the Company's prospective customers. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share. There can be no assurance that competitors will not
develop products that are superior to the Company's products or achieve greater
market acceptance.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon a limited
number of members of senior management and other key employees, including Scott
Scherr, the Company's Chairman of the Board, President and Chief Executive
Officer, and Alan Goldstein, M.D., the Company's Executive Vice President and
Chief Technology Officer and a director of the Company. The Company does not
have employment contracts with any of its key personnel other than certain
non-competition and confidentiality agreements entered into with Mr. Scherr and
Dr. Goldstein. The Company maintains key man life insurance for Scott Scherr in
the amount of $2.0 million. The loss of the service of one or more key managers
or other employees could have a material adverse effect upon the Company's
business, operating results and financial condition.
RELIANCE ON MICROSOFT CORPORATION AND OTHER THIRD-PARTY TECHNOLOGIES
The Company's software products are designed primarily to operate with
Microsoft Corporation ("Microsoft") technologies and the Company's strategy
requires that its products and technology be compatible with new developments in
Microsoft technology. Although the Company believes that Microsoft technologies
are currently widely utilized by businesses of all sizes, there can be no
assurance that businesses will continue to adopt such technologies as
anticipated, will migrate from older Microsoft technologies (such as DOS or
earlier versions of Windows) to newer Microsoft technologies or will not
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adopt alternative technologies that are incompatible with the Company's
products. If businesses do not migrate from older technologies and adopt the
Microsoft technologies with which the Company's products are compatible, the
Company's business, operating results and financial condition could be
materially and adversely affected. In addition, the Company's products utilize
certain software licensed to it by other third-party software developers.
Although the Company believes that there are alternatives for these products,
any significant interruption in the availability of such third-party software
could have a material adverse impact on the Company's sales unless and until the
Company can replace the functionality provided by these products. Moreover, the
Company is to a certain extent dependent upon such third parties' abilities to
enhance their current products, to develop new products on a timely and
cost-effective basis and to respond to emerging industry standards and other
technological changes. There can be no assurance that the Company would be able
to replace the functionality provided by the third-party software currently
offered in conjunction with the Company's products in the event that such
software becomes obsolete or incompatible with future versions of the Company's
products or is otherwise not adequately maintained or updated. The absence of or
any significant delay in the replacement of that functionality could have a
material adverse effect on the Company's business, operating results and
financial condition.
TIMELY RELEASE OF PERIODIC UPDATES TO REFLECT TAX LAW AND
OTHER REGULATORY CHANGES
The Company's products are affected by changes in laws and regulations
and generally must be updated annually or periodically to maintain their
accuracy and competitiveness. There can be no assurance that the Company will be
able to release these annual or periodic updates on a timely basis in the
future. Failure to do so could have a material adverse effect on market
acceptance of the Company's products, which could have a material adverse effect
on the Company's business, operating results and financial condition. In
addition, significant changes in tax laws and regulations or other regulatory
provisions applicable to the Company's products could require the Company to
make a significant investment in product modifications, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
PROTECTION OF INTELLECTUAL PROPERTY; RISKS OF INFRINGEMENT
The Company's success is dependent in part on its ability to protect
its proprietary rights. The Company generally licenses its products in object
code form only, although it has source code escrow arrangements when required by
customers. The Company relies on a combination of copyright, trademark and trade
secret laws, as well as confidentiality agreements and licensing arrangements,
to establish and protect its proprietary rights. The Company does not have any
patents or patent applications pending, and existing copyright, trademark and
trade secret laws afford only limited protection. Accordingly, there can be no
assurance that the Company will be able to protect its proprietary rights
against unauthorized third party copying or use, which could materially
adversely affect the Company's business, operating results and financial
condition. Despite the Company's efforts to protect its proprietary rights,
attempts may be made by unauthorized parties to copy or reverse engineer aspects
of the Company's products or to obtain and use information that the Company
regards as proprietary. Moreover, there can be no assurance that others will not
develop products that perform comparably to the Company's proprietary products.
Policing the unauthorized use of the Company's products is difficult. Litigation
may be necessary in the future to enforce the Company's intellectual property
rights, to protect the Company's trademarks, copyrights or trade secrets or to
determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, operating
results and financial condition.
As is common in the software industry, the Company from time to time
may become aware of third-party claims of infringement by the Company's
operations or products of third-party proprietary
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rights. While the Company is not currently aware of any such claim, the
Company's software products may increasingly be subject to such claims as the
number of products and competitors in the Company's industry grows and the
functionality of products overlaps and as the issuance of software patents
becomes increasingly common. Any such claims, with or without merit, can be time
consuming and expensive to defend, cause product shipment delays or require the
Company to enter into royalty or licensing agreements. Such royalty agreements,
if required, may not be available on terms acceptable to the Company, or at all,
which could have a material adverse effect on the Company's business, operating
results and financial condition.
PRODUCT ERRORS; PRODUCT LIABILITY
Software products such as those offered by the Company frequently contain
undetected errors or failures when first introduced or as new versions are
released. Testing of the Company's products is particularly challenging because
it is difficult to simulate the wide variety of computing environments in which
the Company's customers may deploy these products. Despite extensive testing,
the Company from time to time has discovered defects or errors in its products.
There can be no assurance that such defects, errors or difficulties will not
cause delays in product introductions and shipments, result in increased costs
and diversion of development resources, require design modifications or decrease
market acceptance or customer satisfaction with the Company's products. In
addition, there can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found after commencement of
commercial shipments, resulting in loss of or delay in market acceptance, which
could have a material adverse effect upon the Company's business, operating
results and financial condition. The Company has included security features in
its products that are intended to protect the privacy and integrity of customer
data. Despite the existence of these security features, the Company's software
products may be vulnerable to break-ins and similar disruptive problems.
Addressing these evolving security issues may require significant expenditures
of capital and resources by the Company, which may have a material adverse
effect on the Company's business, operating results and financial condition.
Although the Company has not experienced any material product liability
claims to date, the sale and support of software products and the performance of
related services by the Company entails the risk of such claims. The Company's
products are used by customers in connection with the preparation and filing of
tax returns and other regulatory reports. If any of the Company's products
contain errors that produce inaccurate results upon which users rely, or cause
users to misfile or fail to file required information, the Company could be
subject to liability claims from users which could, in turn, materially
adversely affect the Company's business, operating results and financial
condition. The Company's license agreements with its customers typically contain
provisions intended to limit the Company's exposure to such claims, but such
provisions may not be effective in limiting the Company's exposure. There can be
no assurance that the contractual limitations used by the Company will be
enforceable or will provide the Company with adequate protection against product
liability claims in certain jurisdictions. A successful claim for product or
service liability brought against the Company could result in substantial cost
to the Company and divert management's attention from the Company's operation,
which could have a material adverse effect upon the Company's business,
operating results and financial condition.
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