UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] 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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<CAPTION>
Delaware 65-0694077
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<S> <C>
State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization
2000 Ultimate Way, Weston, FL 33326
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(Address of principal executive offices) (Zip Code)
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(954) 331-7000
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(Registrant's telephone number, including area code)
None
----
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of August 1, 2000, there were 16,085,313 shares of the Registrant's
Common Stock, par value $.01, outstanding.
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THE ULTIMATE SOFTWARE GROUP, INC.
TABLE OF CONTENTS
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Page(s)
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Part I--Financial Information:
Item 1--Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 3
Condensed Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-16
Item 3--Quantitative and Qualitative Disclosures About Market Risk 16
Part II--Other Information:
Item 1--Legal Proceedings 15
Item 2--Changes in Securities and Use of Proceeds 16
Item 3--Defaults upon Senior Securities 16
Item 4--Submission of Matters to a Vote of Security Holders 16-17
Item 5--Other Information 17
Item 6--Exhibits and Reports on Form 8-K 17
Signatures 18
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2
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PART 1--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
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<CAPTION>
As of As of
June 30, December 31,
ASSETS 2000 1999
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Current assets: (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 8,038 $ 8,946
Accounts receivable, net 23,631 20,670
Prepaid expenses and other current assets 2,064 2,772
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Total current assets 33,733 32,388
Property and equipment, net 6,253 5,007
Other assets, net 927 1,035
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Total assets $ 40,913 $ 38,430
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,192 $ 2,026
Accrued expenses 3,496 3,625
Deferred revenue 8,200 8,009
Current portion of capital lease obligations 1,651 1,104
Income taxes payable -- 22
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Total current liabilities 16,539 14,786
Capital lease obligations, net of current portion 1,114 1,120
Deferred revenue 553 564
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Total liabilities 18,206 16,470
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Commitments and contingencies -- --
Stockholders' equity:
Preferred Stock, $.01 par value, 2,000,000
shares authorized in 2000 and 1999, respectively;
no shares issued or outstanding in 2000 and 1999 -- --
Series A Junior Participating Preferred Stock, $.01 par value,
500,000 shares authorized, no shares issued and
outstanding in 2000 and 1999 -- --
Common Stock, $.01 par value, 50,000,000 shares
authorized, 16,084,313 and 15,893,705 shares issued and
outstanding in 2000 and 1999, respectively 161 160
Additional paid-in capital 65,520 65,162
Accumulated deficit (42,974) (43,362)
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Total stockholders' equity 22,707 21,960
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Total liabilities and stockholders' equity $ 40,913 $ 38,430
======== ========
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The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
3
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THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
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For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Revenues:
License $ 9,549 $ 6,011 $ 16,035 $ 9,030
Services 8,267 8,339 16,609 16,065
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Total revenues 17,816 14,350 32,644 25,095
-------- -------- -------- --------
Cost of revenues:
License 415 185 761 328
Services 5,343 5,300 10,890 10,402
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Total cost of revenues 5,758 5,485 11,651 10,730
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Operating expenses:
Sales and marketing 5,532 4,240 10,243 7,955
Research and development 3,796 2,405 7,420 4,499
General and administrative 1,627 1,241 2,919 2,379
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Total operating expenses 10,955 7,886 20,582 14,833
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Operating income (loss) 1,103 979 411 (468)
Interest expense (75) (42) (180) (81)
Interest and other income 74 140 157 322
-------- -------- -------- --------
Net income (loss) $ 1,102 $ 1,077 $ 388 $ (227)
======== ======== ======== ========
Net income (loss) per share -- basic
and diluted $ 0.07 $ 0.07 $ 0.02 $ (0.01)
======== ======== ======== ========
Weighted average shares outstanding:
Basic 16,078 15,894 16,066 15,889
======== ======== ======== ========
Diluted 16,491 15,910 16,623 15,889
======== ======== ======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
4
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THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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For the Six Months
Ended June 30,
----------------------
2000 1999
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Cash flows from operating activities:
Net income (loss) $ 388 $ (227)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,481 902
Provision for doubtful accounts 1,049 534
Non-cash issuance of stock options for board fees and services 116 46
Changes in operating assets and liabilities:
Accounts receivable (4,878) (2,674)
Prepaid expenses and other current assets 430 609
Other assets (16) (373)
Accounts payable 1,196 (973)
Accrued expenses (151) (588)
Deferred revenue 1,019 (1,684)
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Net cash provided by (used in) operating activities 634 (4,428)
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Cash flows from investing activities:
Purchases of property and equipment (1,057) (1,483)
Net proceeds from notes receivable 47 127
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Net cash used in investing activities (1,010) (1,356)
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Cash flows from financing activities:
Principal payments on capital lease obligations (774) (464)
Net proceeds from issuances of Common Stock 242 75
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Net cash used in financing activities (532) (389)
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Net decrease in cash and cash equivalents (908) (6,173)
Cash and cash equivalents, beginning of period 8,946 17,128
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Cash and cash equivalents, end of period $ 8,038 $ 10,955
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 136 $ 101
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
</TABLE>
- The Company entered into capital lease obligations to acquire new equipment
totaling $1,315 and $797 in the six months ended June 30, 2000 and 1999,
respectively.
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
5
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THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of The
Ultimate Software Group, Inc. and subsidiary (the "Company") have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and footnote disclosures
normally included in financial statements in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. The information in this report
should be read in conjunction with the Company's audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 filed with the SEC on March 30, 2000 (the
"Form 10-K").
The unaudited condensed consolidated financial statements included
herein reflect all adjustments (consisting only of normal, recurring
adjustments) which are, in the opinion of the Company's management, necessary
for a fair presentation of the information for the periods presented. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Interim results of operations
for the three and six months ended June 30, 2000 and 1999 are not necessarily
indicative of operating results for the full fiscal years or for any future
periods.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of
operations of The Ultimate Software Group, Inc. ("Ultimate Software" or the
"Company") should be read in conjunction with the unaudited Condensed
Consolidated Financial Statements and Notes thereto included elsewhere in this
Form 10-Q. This Form 10-Q contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those contained in the forward-looking statements. Factors that may cause such
differences include, but are not limited to, those discussed below.
Overview
Ultimate Software designs, markets, implements and supports
technologically advanced cross-industry human resources management and payroll
("HRMS/payroll") software solutions.
Ultimate Software's Web-based solutions include UltiPro Employee
Self-Service and UltiPro Manager Self-Service (collectively, "UltiPro Web"), and
UltiPro.com. The Company's software solutions are marketed primarily to
middle-market organizations with 500 to 15,000 employees. UltiPro HRMS/Payroll,
Ultimate Software's core product, automates HRMS/payroll functions for
businesses and enables them to manage the employee life cycle strategically and
cost effectively, from inception of employment through retirement. UltiPro Web
leverages the Internet to "face" every person in an organization. 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 solutions, including (i) more comprehensive
payroll, benefits and employee management functionality, (ii) better customer
services, (iii) lower initial investment, (iv) easier, more cost-effective
implementation (v) reduced ongoing costs, and (vi) advanced technology
architecture. UltiPro HRMS/Payroll and UltiPro Web (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, training and ongoing support services to its
customers.
As part of the Company's strategy to provide its customers an easy
pathway to e-business, in June 1999, Ultimate Software introduced UltiPro.com, a
new Web portal and one-stop shopping supersite for HR/payroll professionals,
managers and the employees they support. The first phase of UltiPro.com offers a
variety of third party and private-labeled products and services that complement
Ultimate Software's Web-based products, which are accessed through the portal.
UltiPro Web products are fully integrated with UltiPro HRMS/Payroll and are not
stand-alone products. UltiPro Web addresses the growing demand for Web-based
solutions that empower managers and general employee populations. UltiPro Web
Employee Self-Service provides employees online access to employee handbooks,
company news and policies, employee directories, benefit plans and pay check
history and extranet connections to other relevant sites, such as the site of
their 401(k) administrator. UltiPro Web Manager Self-Service provides managers
online access to information on their employee staffs, including features for
performance management, recruitment and staffing, training management and
reporting.
The Company also provides application hosting services for its
UltiPro Web and HRMS/Payroll products pursuant to an agreement entered into
during June 1999 with International Business Machines Global Services, Inc.
("IBM") which enables Ultimate Software's clients to build a foundation for
e-business (the "IBM Agreement").
7
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Under the terms of the IBM Agreement, IBM provides the installation
and ongoing maintenance and backup services at an IBM Data Hosting Center. The
Company has branded the IBM hosted model as "Intersourcing" for marketing
purposes to underscore the idea that part of the business value of this model is
the convenience of outsourcing, coupled with in-house control over the client's
own data. Intersourcing provides organizations real-time access to their
employee information and reporting, Web-access for managers and employees,
business intelligence tools for executive decision-making, and comprehensive
HRMS/payroll functionality without a requirement for significant support from
in-house information technology resources. IBM and Ultimate Software work
together with Intersourcing customers to procure leasing agreements that provide
a reduced requirement for upfront cash and convenient monthly payments.
Ultimate Software also offers "Powered by UltiPro," a pre-packaged
HRMS/payroll solution specifically designed to be marketed and co-branded by
companies that offer complementary products and services. "Powered by UltiPro"
offers aggregators such as application service providers (ASPs), enterprise
resource planning (ERP) vendors, insurance companies, technology companies that
focus on business offerings, and vertical market vendors and service providers
(collectively, "Strategic Partners") the opportunity to expand the scope of
their offerings. The "Powered by UltiPro" solution enables aggregators to extend
their customer base beyond the traditional business-to-business community into
the business-to-employee market through solutions that face everyone in the
organization.
Ultimate Software reaches its customer base and target market
through its direct sales force and a network of strategic partners. Ultimate
Software's customers operate in a wide variety of industries, including
healthcare, professional employee organizations ("PEO's"), sports and
entertainment, manufacturing, food services, retail, technology, finance,
insurance, legal services, real estate, transportation, communications, and
services.
Company History
The Company was originally organized in August 1990 as The Ultimate
Software Group, Ltd., a Florida limited partnership (the "Partnership"). The
Company was incorporated in April 1996, at the direction of the Partnership, for
the purpose of acquiring and operating the existing business of the Partnership.
The Company began as a reseller of private label PC-based payroll software
products targeted to organizations with under 200 employees. In early 1992, the
Company began to develop a new product that would offer greater flexibility,
more features, more applications and the ability to handle the needs of larger
organizations.
In July 1993, the Company launched its first proprietary product,
UltiPro for LAN, a DOS-based HRMS/payroll software solution for local area
network personal computers. In 1996, in anticipation of the general market shift
to Windows and client/server applications, the Company began developing a
client/server HRMS/payroll solution for middle-market organizations. In June
1997, the Company launched UltiPro HRMS/Payroll, its 32-bit, object-oriented
HRMS/payroll solution for middle-market organizations.
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.
8
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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").
Results of Operations
The following table sets forth the Statement of Operations data of
the Company, as a percentage of total revenues, for the periods indicated.
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
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2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Revenues:
License 53.6 % 41.9 % 49.1 % 36.0 %
Services 46.4 58.1 50.9 64.0
-------- --------- --------- ---------
Total revenues 100.0 100.0 100.0 100.0
-------- --------- --------- ---------
Cost of revenues:
License 2.3 1.3 2.3 1.3
Services 30.0 36.9 33.4 41.5
-------- --------- --------- ---------
Total cost of revenues 32.3 38.2 35.7 42.8
-------- --------- --------- ---------
Operating expenses:
Sales and marketing 31.1 29.5 31.4 31.7
Research and development 21.3 16.8 22.7 17.9
General and administrative 9.1 8.7 8.9 9.5
-------- --------- --------- ---------
Total operating expenses 61.5 55.0 63.0 59.1
-------- --------- --------- ---------
Operating income (loss) 6.2 6.8 1.3 (1.9)
Interest expense (0.4) (0.3) (0.6) (0.3)
Interest and other income 0.4 1.0 0.5 1.3
-------- --------- --------- ---------
Net income (loss) 6.2 % 7.5 % 1.2 % (0.9) %
======== ========= ========= =========
</TABLE>
Revenues
The Company's revenues are derived from two principal sources:
software licenses ("license revenues") and fees for maintenance, implementation,
training and consulting services (collectively, "service revenues"). License
revenues include revenues from noncancellable software license agreements
entered into between the Company and its customers with respect to its products.
License revenues are generally recognized upon the delivery of the related
software product when all significant contractual obligations have been
satisfied. Until such delivery, the Company records amounts received when
contracts are signed as customer deposits which are included with deferred
revenues in the condensed consolidated balance sheets.
Service revenues are recognized as services are performed and
delivered. Included in service revenues are maintenance fees for maintaining,
supporting and providing periodic updates, which are recognized ratably over the
service period, generally one year. Upon delivery of the software, amounts
included in the contract relating to unperformed service revenues are recorded
as deferred revenue. All of the Company's customers that purchased software
during 2000 and
9
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1999 also purchased maintenance and support service contracts. Maintenance and
support fees are generally priced as a percentage of the initial license fee for
the underlying products.
Total revenues, consisting of license and service revenues,
increased 24.2% to $17.8 million for the three months ended June 30, 2000 from
$14.4 million for the three months ended June 30, 1999. Total revenues increased
30.1% to $32.6 million for the six months ended June 30, 2000 from $25.1 million
for the six months ended June 30, 1999.
License revenues increased 58.9% to $9.5 million for the three
months ended June 30, 2000 from $6.0 million for the three months ended June 30,
1999. License revenues increased 77.6% to $16.0 million for the six months ended
June 30, 2000 from $9.0 million for the six months ended June 30, 1999. The
increase in license revenues was primarily due to increased sales of the
Company's core product, UltiPro HRMS/Payroll, as well as revenues generated by
the Company's newer sales channel, strategic business development (the "SBD
Channel") and, to a lesser degree, revenues generated from sales of UltiPro Web.
The SBD Channel typically involves business relationships with Strategic
Partners which generally include an up-front license fee and ongoing license
fees which are usually a percentage or some other component of the Strategic
Partner's sales of the Company's products.
Service revenues totaling $8.3 million for the three months ended
June 30, 2000 were consistent with service revenues for the three months ended
June 30, 1999. Service revenues increased by 3.4% to $16.6 million for the six
months ended June 30, 2000 from $16.1 million for the six months ended June 30,
1999. Service revenues for the three and six months ended June 30, 2000 were
relatively consistent with the comparable periods of the prior year primarily as
a result of increases in maintenance and training revenues generated from a
larger installed customer base and revenues generated from the IBM hosted model,
offset by a decrease in implementation revenues resulting primarily from the
Company's planned reduction of implementation consulting services subcontracted
to third party providers. Fees for services performed by such third party
providers on behalf of Ultimate Software, and typically under the supervision of
Ultimate Software's service consultants, are recognized as service revenues in
the period performed.
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 124.3% to $0.4 million for the
three months ended June 30, 2000 from $0.2 million for the three months ended
June 30, 1999. Cost of license revenues increased 132.0% to $0.8 million for the
six months ended June 30, 2000 from $0.3 million for the six months ended June
30, 1999. As a percentage of license revenues, cost of license revenues
increased to 4.3% for the three months ended June 30, 2000 from 3.1% for the
three months ended June 30, 1999 and to 4.7% for the six months ended June 30,
2000 from 3.6% for the six months ended June 30, 1999. The increase in cost of
revenues was primarily attributable to the amortization of capitalized software
for UltiPro Web.
Cost of service revenues totaling $5.3 million for the three months
ended June 30, 2000 were consistent with cost of service revenues for the three
months ended June 30, 1999. Cost of service revenues increased by 4.7% to $10.9
million for the six months ended June 30, 2000 from
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$10.4 million for the six months ended June 30, 1999. Cost of service revenues,
as a percentage of service revenues, increased to 64.6% for the three months
ended June 30, 2000 from 63.6% for the three months ended June 30, 1999 and to
65.6% for the six months ended June 30, 2000 from 64.7% for the six months ended
June 30, 1999. The increase in cost of services for the three and six months
ended June 30, 2000 was primarily due to increased labor costs to support the
implementation and maintenance of UltiPro HRMS/Payroll and costs associated with
revenues generated from the IBM hosted model, partially offset by lower
third-party implementation consulting fees.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries,
benefits, sales commissions, travel and promotional expenses, and facility and
communication costs for direct sales offices and marketing costs. Sales and
marketing expenses increased 30.5% to $5.5 million for the three months ended
June 30, 2000 from $4.2 million for the three months ended June 30, 1999. Sales
and marketing expenses increased 28.8% to $10.2 million for the six months ended
June 30, 2000 from $8.0 million for the six months ended June 30, 1999. Sales
and marketing expenses, as a percentage of total revenues, increased to 31.1%
for the three months ended June 30, 2000 from 29.5% for the three months ended
June 30, 1999. Sales and Marketing expenses, as a percentage of total revenues,
decreased to 31.4% for the six months ended June 30, 2000 from 31.4% for the six
months ended June 30, 1999. The increase in sales and marketing expenses was
primarily attributable to higher sales commissions and other variable costs
relating to increased license fees. Other factors contributing to the increase
were higher advertising and marketing expenses focusing on branding,
particularly the branding of the Company's IBM hosted model, Intersourcing.
Research and Development
Research and development expenses consist primarily of software
development personnel costs. Research and development expenses increased 57.8%
to $3.8 million for the three months ended June 30, 2000 from $2.4 million for
the three months ended June 30, 1999. Research and development expenses
increased 64.9% to $7.4 million for the six months ended June 30, 2000 from $4.5
million for the six months ended June 30, 1999. The increase in research and
development expenses was primarily attributable to the increase in the number of
software programmers, engineers and other development-related positions for the
development and enhancement of UltiPro HRMS/Payroll, the continued development
of UltiPro Web products, the expansion of application hosting capabilities and
for the development of new HRMS/payroll-related enhancement modules. Research
and development expenses, as a percentage of total revenues, increased to 21.3%
for the three months ended June 30, 2000 from 16.8% for the three months ended
June 30, 1999 and to 22.7% for the six months ended June 30, 2000 from 17.9% for
the six months ended June 30, 1999. The increase in research and development
expenses, as a percentage of total revenues, was primarily due to increased
personnel costs partially offset by the absorption of the expenses in an
increased total revenue base.
General and Administrative
General and administrative expenses consist primarily of salaries
and benefits of executive, administrative and financial personnel, as well as
external professional fees and the provision for doubtful accounts. General and
administrative expenses increased 31.1% to $1.6 million for the three months
ended June 30, 2000 from $1.2 million for the three months ended June 30, 1999.
General and administrative expenses increased 22.7% to $2.9 million for the six
months ended June 30, 2000 from $2.4 million for the six months ended June 30,
1999. General
11
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and administrative expenses, as a percentage of total revenues, increased to
9.1% for the three months ended June 30, 2000 from 8.7% for the three months
ended June 30, 1999. General and administrative expenses, as a percentage of
total revenues, decreased to 8.9% for the six months ended June 30, 2000 from
9.5% for the six months ended June 30, 1999. The increase in general and
administrative expenses for the three and six months ended June 30, 2000 and as
a percentage of total revenues for the three months ended June 30, 2000 was
principally attributable to an increase in the provision for doubtful accounts.
The decrease in general and administrative expenses, as a percentage of total
revenues, for the six months ended June 30, 2000, was primarily due to the
absorption of the additional expenses, including certain labor costs associated
with the growth of the Company and the provision for doubtful accounts, in an
increased total revenue base.
Interest Expense
Interest expense increased 78.5% to $75 thousand for the three
months ended June 30, 2000 from $42 thousand for the three months ended June 30,
1999. Interest expense increased 122.2% to $180 thousand for the six months
ended June 30, 2000 from $81 thousand for the six months ended June 30, 1999 due
to the increase in capital lease obligations.
Interest and Other Income
Interest and other income decreased 47.1% to $74 thousand for the
three months ended June 30, 2000 from $140 thousand for the three months ended
June 30, 1999. Interest and other income decreased 51.2% to $157 thousand for
the six months ended June 30, 2000 from $322 thousand for the six months ended
June 30, 1999 primarily due to lower interest earned on the remaining net
proceeds from the IPO.
Provision for Income Taxes (Benefit)
No provision or benefit for federal, state or foreign income taxes
was made for the six months ended June 30, 2000 or 1999 due to the operating
loss carryforwards from prior periods. Net operating loss carryforwards
available at December 31, 1999, which expire at various times through the year
2018 and are available to offset future taxable income, were $25.3 million. The
timing and levels of future profitability may result in the expiration of net
operating loss carryforwards before utilization. Additionally, utilization of
such net operating losses may be limited as a result of cumulative ownership
changes in the Company's equity instruments.
Liquidity and Capital Expenditures
The Company has historically funded operations primarily through
the sale of private equity securities and, to a lesser extent, equipment
financing and borrowing arrangements. In June 1998, the Company completed an
initial public offering of its Common Stock which resulted in net proceeds to
the Company totaling approximately $28.4 million.
As of June 30, 2000, the Company had $8.0 million in cash and cash
equivalents, reflecting a net decrease of $0.9 million since December 31, 1999.
Working capital as of June 30, 2000 was $17.2 million as compared to $17.6
million as of December 31, 1999. The decline in working capital for the six
months ended June 30, 2000 totaling $0.4 million resulted from an increase in
accounts payable and additional capital lease obligations and a decrease in cash
and cash equivalents principally to fund operations during the three months
ended March 31, 2000, partially offset by an increase in accounts receivable.
12
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Net cash provided by operating activities was $0.6 million for the
six months ended June 30, 2000 as compared to net cash used in operating
activities of $4.4 million for the six months ended June 30, 1999. The increase
in cash provided by operating activities was primarily attributable to improved
operating results and an increase in accounts payable, partially offset by an
increase in accounts receivable principally associated with the Company's total
revenue growth.
Net cash used in investing activities was $1.0 million for the six
months ended June 30, 2000 as compared to $1.4 million for the six months ended
June 30, 1999. The decrease in net cash used in investing activities was
primarily attributable to lower capital expenditures on equipment and certain
computer software purchases used in the Company's operations during the six
months ended June 30, 2000 as the Company increased the financing of equipment
purchases.
Net cash used in financing activities for the six months ended June
30, 2000 was $0.5 million, as compared to $0.4 million for the six months ended
June 30, 1999. The increase in principal payments on capital lease obligations
for the six months ended June 30, 2000 relative to that of the same period last
year was partially offset by additional proceeds from the issuances of Common
Stock pursuant to exercises of stock options held by certain current and former
employees of the Company.
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 December 31, 2000. At June 30, 2000 and as of the
date of this Form 10-Q, 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 $2.3 million, as of June 30, 2000 is available for future
working capital needs and other general corporate purposes
The Company believes that cash and cash equivalents, remaining net
proceeds from the IPO, cash generated from operations, and available borrowings
under the Credit Facility will be sufficient to fund its operations for at least
the next 12 months.
UltiPro is a registered trademark of The Ultimate Software Group,
Inc. Windows is a registered trademark of Microsoft Corporation. All other
trademarks referenced are the property of their respective owners.
Seasonality
The Company has experienced, and may experience in the future,
significant seasonality in its business. The Company's business, operating
results and financial condition may be affected by such trends in the future.
Revenues have historically increased at higher rates in the fourth quarter of
the year and at lower rates in the next succeeding quarter, except for the
fourth quarter of 1999 discussed below. The Company believes such seasonality is
due to a number of factors, including the Company's quota-based compensation
arrangements, typical of those used in software companies, and year-end
budgetary pressures on the Company's customers. The
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Company believes revenues for the fourth quarter of 1999 were not consistent
with the historical trend previously discussed principally as a result of a
delay in closing year-end license business due to companies' unique focus on
their year 2000 issues. Excluding the impact of the fourth quarter of 1999, the
Company believes that the seasonal trend that the Company has experienced in the
past may continue in 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. Profitability achieved in
previous fiscal quarters is not necessarily indicative of operating results for
the full fiscal years or for any future periods. As a result of these factors,
there can be no assurance that the Company will be able to maintain
profitability on a quarterly basis. The Company believes that, due to the
underlying factors for quarterly fluctuations, period-to-period comparisons of
its operations are not necessarily meaningful and that such comparisons should
not be relied upon as indications of future performance.
Recent Accounting Pronouncements
On December 3, 1999, the staff of the Securities and Exchange
Commission (the "SEC") published Staff Accounting Bulletin 101, "Topic 13:
Revenue Recognition," ("SAB 101") to provide guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB 101, as
amended, becomes effective for the Company during the three months ended
December 31, 2000. Specific items discussed in SAB 101 include bill-and-hold
transactions, long-term service transactions, refundable membership fees,
contingent rental income, up-front fees when the seller has significant
continuing involvement and the amount of revenue recognized when the seller is
acting as a sales agent or in a similar capacity. SAB 101 also provides guidance
on disclosures that should be made for revenue recognition policies and the
impact of events and trends on revenue. The adoption of SAB 101 is not expected
to have a material impact on the financial statements of the Company.
In March 2000, the Emerging Issues Task Force (the "EITF") reached
a consensus on Issue No. 00-2, "Accounting for Web Site Development Costs",
("EITF Issue No. 00-2") which applies to all Web site development costs incurred
for the quarters beginning after June 30, 2000. The consensus states that the
accounting for specific Web site development costs should be based on a model
consistent with AICPA Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use,"("SOP 98-1").
Accordingly, certain Web site development costs that are currently expensed as
incurred may be capitalized and amortized. The adoption of EITF Issue No. 00-2
is not expected to have a material impact on the financial statements of the
Company.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133") and SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities
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-Deferral of the effective date of FASB No. 133" ("SFAS 137") were issued in
June 1998 and June 1999, respectively. They are effective for the Company's
fiscal year ending December 31, 2001. These pronouncements establish 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 and SFAS 137 will not have a
material impact on its financial statements as it has not entered into
derivative contracts or hedging activities and has no current plans to do so in
the foreseeable future.
Forward-Looking Statements
The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operations contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the Company's expectations or beliefs,
including, but not limited to, statements concerning the Company's operations
and financial performance and condition. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," and similar expressions
are intended to identify such forward-looking statements. These forward-looking
statements are not guarantees of future performance and are subject to certain
risks and uncertainties that are difficult to predict. The Company's actual
results could differ materially from those contained in the forward-looking
statements. Factors that may cause such differences include, but are not limited
to, those discussed in the foregoing Management's Discussion and Analysis of
Financial Condition and Results of Operations as well as those discussed in the
Company's Form 10-K and those disclosed in Exhibit 99.1 to this Form 10-Q.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
In the ordinary course of its operations, the Company is exposed to
certain market risks, primarily interest rates. Uncertainties that are either
non-financial or non-quantifiable, such as political, economic, tax, other
regulatory or credit risks are not included in the following assessment of the
Company's market risks.
Interest rates. Cash equivalents consist of money market accounts
with original maturities less than three months. Interest on the Credit Facility
is based on LIBOR plus 4.875% per annum. Changes in interest rates could impact
the Company's anticipated interest income from interest-bearing cash accounts,
or cash equivalents, as well as interest expense on borrowings under the Credit
Facility. As of June 30, 2000 and the date of this Form 10-Q, there was no
amount outstanding under the Credit Facility; therefore, changes in interest
rates are not applicable for either interest expense or fair market value of the
debt instrument.
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings
From time to time, the Company is involved in litigation relating
to claims arising out of its operations in the normal course of business. As of
the date of this filing, the Company is not a party to any legal proceeding the
adverse outcome of which, individually or in the aggregate, could reasonably be
expected to have a material adverse effect on the Company's business, operating
results and financial condition.
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ITEM 2. Changes in Securities and Use of Proceeds
The net offering proceeds from the IPO to the Company, after
deducting $4.1 million for expenses incurred in connection with the issuance and
distribution of the Common Stock in the IPO, 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 June 30, 2000, except as otherwise noted, the net offering proceeds
were used as follows (in thousands):
Invested in money market and other short-term
marketable securities at June 30, 2000 $2,330
Repayment of certain indebtedness 3,600
Capital expenditures for leasehold improvements
to the Company's headquarters 1,500
Accrued bonuses to officers who are not
Executive officers 436
Other working capital needs 20,518
-------------
Total $28,384
=============
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 18,
2000. The principal business of the meeting was to elect two directors to serve
for three-year terms or until their respective successors are duly elected and
qualified. No other business came before the meeting.
The names of the two nominees for director whose terms expired at
the 2000 Annual Meeting of Stockholders of the Company and who were elected to
serve as directors until the 2002 Annual Meeting of Stockholders are as follows:
Nominee For Withheld Vote
-------------------------- --------------- -------------------
Marc D. Scherr 11,659,432 14,259
John R. Walter 11,663,597 10,094
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The names of each other director whose term of office as a director
continues after the 2000 Annual Meeting of Stockholders and their respective
term expirations are as follows:
Term Expires in 2001:
Scott Scherr
Alan Goldstein, M.D.
Ofer Nemirovsky
Term Expires in 2002:
LeRoy A. Vander Putten
Robert A. Yanover
Term Expires in 2003:
James A. FitzPatrick, Jr. (1)
-------------------------
(1) James A. FitzPatrick, Jr. was elected as a director by the Company's board
of directors on July 27, 2000. Mr. Fitzpatrick is a member of the law firm Dewey
Ballantine LLP, which firm has in the past and is currently expected to provide
legal representation and services to the Company.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended
June 30, 2000.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
<TABLE>
<S> <C>
The Ultimate Software Group, Inc.
Date: August 9, 2000 By: /s/ Mitchell K. Dauerman
------------------------
Executive Vice President, Chief Financial Officer
and Treasurer (Authorized Signatory and Principal
Financial and Accounting Officer)
</TABLE>
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Exhibit Index
Exhibit No. Exhibit Description
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
