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, 1999
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.
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(Exact name of Registrant as specified in its charter)
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DELAWARE 65-0694077
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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)
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
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(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. [ ]
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 March 10, 2000 was approximately
$183.7 million.
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As of March 10, 2000, there were 16,063,338 shares of the Registrant's
Common Stock, par value $.01, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2000 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.
INDEX
PAGE(S)
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PART I
Item 1. Business 4
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 49
PART III
Item 10. Directors and Executive Officers of the Registrant 50
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial Owners and Management 54
Item 13. Certain Relationships and Related Transactions 55
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 55
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
technologically advanced cross-industry human resources management and payroll
("HRMS/payroll") software solutions. In 1999 Ultimate Software was recognized by
International Data Corp. (IDC) as the fastest growing provider of HRMS/payroll
solutions. Likewise, Deloitte & Touche named Ultimate Software to its 1999
Technology Fast 500 list and Bloomberg's PERSONAL FINANCE Magazine rated the
Company as the 46th fastest growing hi-tech company in its Hi-Tech 100 List.
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, 1999, the Company had licensed its UltiPro (as
defined below) solutions to approximately 1,000 businesses, servicing
approximately 1,000,000 employees. Ultimate Software's customers operate in a
wide variety of industries, including healthcare, professional employee
organizations ("PEOs"), manufacturing, food services, retail, technology,
finance, insurance, legal services, real estate, transportation, communications,
services, sports and entertainment. Customers include Chiquita International,
John Deere Information Systems, Phoenix Suns, Arizona Diamondbacks, Austin
Quality Foods, Tutor Time, and Hatteras Yachts.
Ultimate Software's Web-based solutions include UltiPro Employee
Self-Service and UltiPro Manager Self-Service (collectively, "UltiPro Web"), and
UltiPro.com (formerly referred to as "HR Gateway.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 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 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 implementation and training to its customers as well as
support services, which have been certified by the Ziff Davis Support Center
Practices Certification program (the "Ziff Davis Certification").
During June 1999, the Company entered into an agreement with
International Business Machines Global Services, Inc. ("IBM") to provide
application hosting services for the Company's UltiPro Web and
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HRMS/Payroll products, enabling Ultimate Software clients to build a foundation
for e-business (the "IBM Agreement"). The term "e-business" refers to software
applications designed to provide business value through access to the Internet.
Under the terms of the IBM Agreement, IBM provides the installation and
ongoing database and server management of the UltiPro product suite, which
includes UltiPro Web, at an IBM Data Hosting Center. This application hosting
model (which the Company has branded as Intersourcing) provides organizations
real-time access to their employee data, Web-access for managers and employees,
business intelligence tools for executive decision-making, and comprehensive
HRMS/payroll functionality without a requirement for significant support from
in-house information technology resources. Under the terms of the IBM Agreement,
the dedicated server resides at the IBM Data Hosting Center where IBM monitors,
manages and supports it. Ultimate Software believes Intersourcing offers
organizations of all sizes significant business value.
As part of the Company's strategy to provide its customers an easy
pathway to e-business, in June 1999, Ultimate Software introduced 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 value-added products and services
that complement Ultimate Software's Web-based products, which will be accessed
through the portal. UltiPro Web products are fully integrated with UltiPro
HRMS/Payroll and are not stand-alone products. UltiPro Web addresses the growing
demand for Web-based solutions that empower managers and general employee
populations. UltiPro Web Employee Self-Service provides employees online access
to employee handbooks, company news and policies, employee directories, benefit
plans and pay check history and extranet connections to other relevant sites,
such as the site of 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.
In June 1999, Ultimate Software also entered into an agreement with
Action Technologies, Inc., a leader in Web-based workflow and work management
software ("Action"), to deliver collaborative workflow. Collaborative workflow
expands administration workflow capabilities to a new level--from a binary
accept/decline model to a complex negotiation model. Using Action's flagship
product, ActionWorks Metro, Ultimate Software offers its clients business
process automation in its products through a Web-based environment.
Ultimate Software's products have been recognized in the industry for
their excellence. UltiPro HRMS/Payroll was named "Product of the Month" in
August 1999 by Software Product Expertise, a division of the META Group. In
1999, PC COMPUTING selected UltiPro through Intersourcing as a finalist in its
Most Valuable Product Awards. 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.
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 also may 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.
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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 located at 2000 Ultimate Way, Weston, Florida 33326 and its
telephone number is (800) 432-1729.
THE ULTIMATE SOLUTION
Ultimate Software is focused on developing employee-centric
HRMS/payroll solutions for organizations of all sizes.
Ultimate Software's HRMS/payroll solutions are designed to offer the
following benefits to its customers:
WEB CONVENIENCE. UltiPro Web integrates with UltiPro HRMS/Payroll to
improve workflow, increase efficiencies and facilitate communication across
organizations by providing instant access to a wide range of human resource,
benefits and payroll information and the ability to perform a wide variety of
tasks online. Ultimate Software offers additional Web convenience through
Intersourcing, its IBM-hosted model, which enables businesses to have
in-house-type access to their entire UltiPro suite of products through a Web
browser and/or Citrix Metaframe. For business value that is complementary to all
its products, Ultimate Software maintains UltiPro.com, a Web portal that offers
UltiPro users easy access to services such as advanced recruitment, job posting
and resume scoring services provided by Webhire; pre-employment screening and
background checking services provided by Sterling Testing Systems, Inc.; and an
aggregated collection of current regulatory law, tax and legislative compliance
information compiled by Ultimate Software's tax team. UltiPro.com also offers
its users access to select corporate training products and other resource
materials online.
FEATURE-RICH, BUILT-IN FUNCTIONALITY. UltiPro 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. UltiPro 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's robust built-in functionality provides users with
many features that would otherwise require extensive customization or changes to
source code including: sophisticated security controls, federal and state human
resource regulatory compliance capability, safety tracking, benefit program
management, and payroll tax tables for federal, state and thousands of local
jurisdictions.
RAPID IMPLEMENTATION AND SYSTEM UPDATE EFFICIENCY. The Company has
designed UltiPro 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 software is competitively priced. In addition, the
Company believes that its current practices in implementing the UltiPro
HRMS/Payroll solution result in a significant cost savings for customers when
compared with implementations of other similar solutions in the industry. By
using a complete UltiPro suite of solutions, including UltiPro HRMS/Payroll,
UltiPro Web and UltiPro.com, a customer may also reduce the administrative and
information technology support costs associated with an organization's
HRMS/payroll functions over time. Tight integration helps to reduce
administrative costs by facilitating accurate information processing and
reporting and reduces
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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 the UltiPro Web
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, Microsoft COM+,
Microsoft Terminal Server, and Inprise's Delphi ("Delphi"), to greatly enhance
speed, convenience, dependability, ease of use and extensibility. UltiPro
HRMS/Payroll and UltiPro Web include a full suite of Enterprise Integration
Tools, Business Components, and Business-to-Business Links. These tools are
designed to take advantage of emerging Internet-based technology standards such
as XML, HTTP and Java scripting.
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 Web
uses familiar Internet interface techniques and functions through a Web-browser,
making it convenient and easy to use. The graphical user interface of UltiPro
HRMS/Payroll is designed to enable users to find information quickly and easily.
The Employee Explorer allows users access to all employee information in one
common area quickly and easily. The Company refers to this easy navigation as
"Two clicks to anywhere."
COMPREHENSIVE PROFESSIONAL SERVICES AND INDUSTRY-SPECIFIC EXPERTISE.
Ultimate Software provides high quality implementation, training and ongoing
product and customer support services. Ultimate Software employs 161 people in
professional services, which includes the 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. 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 approximately
6,000 separate taxing jurisdictions and changes in other employee-related
regulations.
TECHNOLOGY
Ultimate Software seeks to provide its clients with optimum
performance, rich functionality, scalability and easy access to information
through the use of leading, Internet standard technologies, Microsoft SQL Server
as the database and the enterprise-ready Microsoft Windows 2000 operating
system. Ultimate Software has developed UltiPro HRMS/Payroll and UltiPro Web
(Employee and Manager 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 Web Employee Self-Service and UltiPro Web Manager
Self-Service, are integrated with UltiPro HRMS/Payroll's database and use
several technologies including Active Server Pages, Java script, HTML and COM+.
OBJECT-ORIENTED PROGRAMMING. 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. Payroll and HRMS
involve demanding processing. UltiPro HRMS/Payroll is built using 32-bit
compiled code to manage demand requirements efficiently. 32-bit compiled code
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 architecture in order to enhance the system's speed,
flexibility, scalability and maintainability. When an application's logic
resides
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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 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 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.
ULTIMATE SOFTWARE PRODUCTS
Ultimate Software's software products include UltiPro HRMS/Payroll, a
client/server software product, UltiPro Web, Web-based products including
UltiPro Employee Self-Service and UltiPro Manager Self-Service, 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, but is not
limited to, 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
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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 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 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 WEB
UltiPro Web leverages the Internet to put strategic and practical
work-related information on the desktops of everyone in an organization, from
upper level executives to staff managers to employees. A roles-based system
governed by customer-established security rules, UltiPro Web offers executives
and managers important strategic business value by presenting workforce metrics
in the context of common business challenges such as employee turnover, overtime
containment, recruitment effectiveness and manager efficiency. UltiPro Web gives
employees the ability to review relevant company and personal information for
answers to standard questions or to accomplish routine activities such as
updating their benefits choices, address changes, where they direct deposit
their paychecks, or deductions on their W-4 forms. From home or office,
employees can obtain information they often need when they are away from the
office, such as online benefit statements, paycheck history and other
information needed for mortgage applications, forms for common HR requests, and
details about company policies.
Manager Self-Service. UltiPro's roles-based security model supports
Staff Management for flexible work groups such as self-directed work teams and
employee sharing and enables managers to perform routine tasks concerning their
staff without photocopies, express mail or faxing. The Manager's Approval In-Box
accommodates multiple-person approvals, and is tied to an audit trail to enhance
the process of monitoring in-box content. UltiPro Web includes Staff Requisition
and Management, giving managers full-picture decision making capabilities by
providing detail on both internal and external applicants available for open
positions. Because of its tight integration with UltiPro's Human Resource
Management and Position Management, built-in controls automatically associate
requisitions with a particular manager. In addition, UltiPro Web for managers
includes Performance Management to facilitate on-line collaborative performance
reviews, Training Management to enable managers to make informed decisions about
their staff's professional development, salary planning and reporting.
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Employee Self-Service. UltiPro Web enables employees to manage their
own career development and pathing with access to an on-line inventory of job
and career-related information, including education credits, certifications,
licenses and awards. Employees can make informed benefits choices without making
inquiries to their human resource department because UltiPro Web provides
personalized benefits information and links to benefit providers. UltiPro Web
further reduces administrative burdens by providing employees access to their
personal paycheck detail, enabling them to take control of their direct deposit
and tax-withholding preferences as authorized. In addition, UltiPro Web stores
company handbooks, calendars and forms for convenient Web access.
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.
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 with standardized instruction on UltiPro HRMS/Payroll and UltiPro Web,
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 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
certification recognizes companies which "deliver exceptional service and
support to their customers." 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
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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.
CUSTOMERS
As of December 31, 1999, the Company had licensed its UltiPro
HRMS/Payroll solution to approximately 350 customers and its UltiPro for Lan
solution to approximately 710 customers. No customer accounted for more than 10%
of total revenues in fiscal year 1999 or 1998. Ultimate Software's customers
operate in a wide variety of industries, including manufacturing, food services,
legal 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,
1999 and is not intended to portray a complete list of the Company's customers.
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Manufacturing: Food Services: Sports:
Anthony Doors Austin Quality Foods Arizona Diamondbacks
Globe Manufacturing, Inc. Benihana Corp. Chicago White Sox
Hatteras Yachts, Inc. Bentley's Luggage Colorado Rockies Baseball
Intermatic Bill Heard Enterprises, Inc. Florida Marlins Baseball Club
John Deere Information Systems Carolina Restaurant Group Florida Panthers
MCD International, Inc. Chiquita Brands Montreal Expos
Packerland Packing Co., Inc. Hooters of America New York Giants
PMC, Inc. Paramount Farms New York Jets Football Club
Spang and Company Premiere Foods, Inc. New York Yankees
Spectrum Dyed Yarns Reliable Stores, Inc. The Phoenix Suns
Stevens Graphics, Inc. Spaghetti Warehouse, Inc. & ProPlayer Stadium
Volvo GM Heavy Truck Corp. Subsidiary Texas Rangers Baseball
Wright Industries, Inc. The Portillo Restaurant Group
Finance/Insurance/Real Estate:
Healthcare: Technology: American National Bank
Baptist Health Systems FFV Aerotech, Inc. J.C. Bradford & Co. LLC
Burkhart Dental Supply Global Technical Services, Inc. Michigan Mutual Insurance Co.
Community Hospital of Ingram Entertainment, Inc. Northwest Savings Bank
Monterey Peninsula The National Research Group Republic National Bank
Disabilities Services of the TPS Technologies The Midland Life Insurance Co.
Southwest Tracer Research Trammel Crow Residential
Florida Community Cancer
Group Health Associates Transportation & Services and Other:
Home Nursing Agency Communications: Hart Graphics
Medassist OP Airport Group International, Inc. Hudson Hotels Corp.
National Vision Associates, Ltd. America West Airlines, Inc. Johnson & Wales University
Sunrise Assisted Living Armellini Trucking Corporation Mark Hopkins Intercontinental
University Physicians Group Benton Express Co. Metro Nashville Airport
Xomed Communications & Power Mount St. Mary's College
Industries Omni Hotels Management
Professional Employer Drug Transport, Inc. Tutor Time
Organizations (PEO): Lin Television
Alcott Staff Leasing The Christian Broadcasting
HR America Network, Inc.
Integrated Employment Group
Intraforce.com
National Staff Management
RightSource
</TABLE>
11
<PAGE>
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 network.
Direct Sales. Ultimate Software's direct sales force includes business
development vice presidents, 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 ("RFP"), 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 located 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 Web.
The Company has sales teams focused on two vertical channels, the
healthcare industry and the professional employer organization (PEO) industry.
Each team includes a business development vice president, sales managers and
industry analysts who work with them to deliver functionality required for their
clients' specific needs.
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., Ceridian Tax Service, Epicor, Great Plains Software, Inc., IBM,
Lotus Development Corporation, Kronos, Moore Business Communications Systems,
Inc., Network Specialists, Inc., Pre-Paid Legal Services, Inc., Simplex Time
Recorder Co., SunGard Recovery Services, Inc., Sterling Testing Systems, Time
Vision, Inc., Vizio Enterprises and Webhire. 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 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
12
<PAGE>
customer base and organizations with under 1,000 employees. To date, members of
the affiliate network include Anatek, Inc., Crowe Chizek and Company LLP,
Gondola Group, LLC, CTR Business Systems, Inc., The Dovetail Group, EESIS, Inc,
Executive Information Systems, LLC I-Business Network, LLC, Information
Development Consultants, Inc., MicroData, Inc, Progressive Automated Solutions
Inc., Radcor Technology, Inc., RedKlay Solutions Inc., Science Applications
International Corporation (SAIC), SOLUTECH, StrataSys Corporation, TexSYS RD
Corporation, TriNet, Inc and Vandenburg Business Systems (USA).
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent in part on its ability to protect
its proprietary technology. The Company typically 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.
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
13
<PAGE>
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.
EMPLOYEES
As of December 31, 1999, the Company employed 380 persons, including 86
in sales and marketing, 161 in professional services, 103 in research and
development and 30 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, is located in
Weston, Florida. Commencing July 1999, the Company has leased all the available
square footage in this new facility, or approximately 40,000 square feet, under
a lease expiring in 2014. In addition, the Company presently leases office space
for its sales operations in Albany, Atlanta, Baltimore, Chicago, Cleveland,
Detroit, Dallas, East Rutherford (New Jersey), Fort Lauderdale, Jackson
(Mississippi), Nashville, New York, and Seal Beach (California). Sales
operations in other locations are not supported by leased office space. The
Company believes that its existing facilities are suitable and adequate for its
current operations for the next 12 months. 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 1999.
14
<PAGE>
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.
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.
1999 1998
-------------------------- ------------------------
HIGH LOW HIGH LOW
----------- ----------- ---------- ---------
First Quarter $ 9.625 $ 6.000 $ - $ -
Second Quarter (1) 7.125 3.125 10.188 7.750
Third Quarter 9.125 5.125 10.500 4.750
Fourth Quarter 15.500 6.250 8.750 6.125
- ---------------------------
(1) Second quarter in 1998 represents the period from June 2,1998 through
June 30,1998.
As of March 10, 2000, the Company had approximately 136 holders of
record, representing approximately 3,300 stockholder accounts.
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, 1999, the Company incurred the following expenses in connection
with the issuance and distribution of the Common Stock in the IPO (in
thousands):
Underwriting discounts and commissions $2,275
Other expenses (legal and accounting fees, printing and
engraving expenses, filing and listing fees and miscellaneous) 1,841
------
Total $4,116
======
The net offering proceeds from the IPO to the Company, after deducting
the foregoing expenses, were $28.4 million. In connection with the offering and
sale of the Common Stock registered, except as otherwise noted below, the
Company did not make any direct or indirect payments to directors or officers of
the Company or, to the Company's knowledge, their associates; persons owning 10%
or more of any class of equity securities of the Company; or affiliates of the
Company. From the closing of the IPO on June 5, 1998 until December 31, 1999,
the net offering proceeds were used as follows (in thousands):
Invested in money market and other short-term marketable securities at
December 31, 1999 $ 6,516
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 16,332
-------
Total $28,384
=======
15
<PAGE>
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, 1999 and the Balance Sheet
Data as of December 31, 1999 and 1998 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 appears elsewhere in this Form 10-K.
The Balance Sheet Data as of December 31, 1997, 1996 and 1995 have been derived
from audited financial statements not included herein. 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)
-------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ------------ ------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License .................................................. $23,454 $ 18,811 $ 7,232 $ 4,273 $ 1,929
Service .................................................. 32,303 24,519 10,360 5,039 1,798
------- -------- --------- --------- --------
Total revenues .......................................... 55,757 43,330 17,592 9,312 3,727
------- -------- --------- --------- --------
Cost of revenues:
License .................................................. 751 834 195 -- --
Service .................................................. 20,219 18,018 9,375 5,846 1,834
------- -------- --------- --------- --------
Total cost of revenues .................................. 20,970 18,852 9,570 5,846 1,834
------- -------- --------- --------- --------
Operating expenses:
Sales and marketing ...................................... 17,536 16,024 13,656 10,451 2,645
Research and development ................................. 10,281 6,953 4,837 3,360 2,591
General and administrative ............................... 5,433 4,651 4,148 3,007 1,268
Amortization of acquired intangibles ..................... -- 638 1,442 6,932 39
------- -------- --------- --------- --------
Total operating expenses ................................ 33,250 28,266 24,083 23,750 6,543
------- -------- --------- --------- --------
Operating income (loss) ................................. 1,537 (3,788) (16,061) (20,284) (4,650)
Compensation related to modification of
escrow agreement(3) ...................................... -- (4,183) -- -- --
Interest expense .......................................... (267) (207) (206) (179) (94)
Interest and other income ................................. 507 589 250 77 13
------- -------- --------- --------- --------
Income (loss) before taxes ............................... 1,777 (7,589) (16,017) (20,386) (4,731)
Provision for income taxes ................................ 22 -- -- -- --
------- -------- --------- --------- --------
Net income (loss) ....................................... $ 1,755 $ (7,589) $ (16,017) $ (20,386) $ (4,731)
======= ======== ========= ========= ========
Net income (loss) per share--basic and diluted(2) ......... $ 0.11 $ (0.52) $ (1.37) $ (2.30) $ (0.71)
======= ======== ========= ========= ========
Weighted average number of
shares outstanding:
Basic .................................................... 15,908 14,494 11,710 8,854 6,660
======= ======== ========= ========= ========
Diluted(2) ............................................... 16,125 14,494 11,710 8,854 6,660
======= ======== ========= ========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- ---------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .............. $ 8,946 $17,128 $ 3,270 $ 1,420 $ 421
Working capital (deficit) .............. 17,602 17,494 (6,220) (4,231) (1,341)
Total assets ........................... 38,430 37,214 12,439 7,990 2,736
Long-term borrowings, including
capital lease obligations ............ 1,120 1,010 54 217 324
Stockholders' equity (deficit) ......... 21,960 19,110 (5,508) (2,442) (924)
<FN>
- -----------------------
(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 for purposes of the statements of operations
data and at the end of such periods for purposes of the balance
sheet data. 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 income (loss) per
share.
(3) See Note 16 of the Notes to Consolidated Financial Statements.
</FN>
</TABLE>
16
<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 Web-based solutions include UltiPro Employee
Self-Service and UltiPro Manager Self-Service (collectively, "UltiPro Web"), and
UltiPro.com (formerly referred to as "HR Gateway.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 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 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 solution, the Company
provides high quality implementation, training and ongoing support services to
its customers. The Company's customers operate in a wide variety of industries,
including healthcare, legal services, professional employee organizations
("PEOs"), manufacturing, food services, retail, technology, finance, insurance,
real estate, transportation, communications, services, sports and entertainment.
The Company reaches its customer base and target market through its direct sales
force, a network of strategic alliance partners and its affiliate network
program.
During June 1999, the Company entered into an agreement with
International Business Machines Global Services, Inc. ("IBM") to provide
application hosting services for the Company's UltiPro Web and HRMS/Payroll
products, enabling Ultimate Software clients to build a foundation for
e-business (the "IBM Agreement"). The term "e-business" refers to software
applications designed to provide business value through access to the Internet.
Under the terms of the IBM Agreement, IBM provides the installation and
ongoing database and server management of the UltiPro product family, which
includes UltiPro Web, at an IBM Data Hosting Center. This application hosting
model (which the Company refers to as Intersourcing) provides organizations
real-time access to their employee data, Web-access for managers and employees,
business intelligence tools for executive decision-making, and comprehensive
HRMS/payroll functionality without a requirement for in-house information
technology resources. Under the terms of the IBM Agreement, the dedicated server
resides at the IBM Data Hosting Center where IBM monitors, manages and supports
it. Ultimate Software believes Intersourcing offers organizations of all sizes
significant business value.
As part of the Company's strategy to provide its customers an easy
pathway to e-business, in June 1999, Ultimate Software introduced 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 value-added products and services
that complement Ultimate Software's Web-based products, which will be accessed
through the portal. UltiPro Web products are fully
17
<PAGE>
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.
In June 1999, Ultimate Software also entered into an agreement with
Action Technologies, Inc., a leader in Web-based workflow and work management
software ("Action"), to deliver collaborative workflow. Collaborative workflow
expands current administration workflow capabilities to a new level--from a
binary accept/decline model to a complex negotiation model. Using Action's
flagship product, ActionWorks Metro, Ultimate Software offers its clients
business process automation in its products through a Web-based environment.
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.
Prior to 1995, the Company sold its products solely through a network
of third-party resellers (the "Resellers"). In exchange for certain fees, the
Resellers were granted exclusive rights to sell the Company's products in
certain geographic areas. In mid-1995, in order to gain greater control over its
distribution channels, the Company shifted its distribution strategy from its
network of Resellers to a direct sales force, acquiring the businesses of three
Resellers in 1995 and 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. Such goodwill was fully amortized
as of December 31, 1998. In February and March 1998, the Company acquired the
businesses of the remaining five Resellers which acquisitions were recorded
under the pooling-of-interests method of accounting.
On June 5, 1998, the Company completed the sale of 3,250,000 shares of
the Company's common stock, par value $.01 (the "Common Stock"), in an initial
public offering at an offering price of $10 per share (the "IPO"). The net
proceeds from the IPO, after deducting $4.1 million in underwriting discounts,
commissions and other costs associated with the offering, were $28.4 million. A
portion of the net proceeds from the IPO in the amount of $3.6 million was used
to pay down the outstanding balance of the Company's existing line of credit.
The balance of the remaining net proceeds from the IPO has been and will
continue to be used for general corporate purposes, including working capital
(see "Liquidity and Capital Resources"). The Company may also use a portion of
the net proceeds to fund acquisitions of complementary businesses,
18
<PAGE>
products or technologies. Although the Company may periodically review potential
acquisition opportunities, there are no current agreements with respect to any
such transactions.
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,
--------------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
License 42.1 % 43.4 % 41.1 %
Services 57.9 56.6 58.9
------------ ----------- -----------
Total revenues 100.0 100.0 100.0
------------ ----------- -----------
Cost of revenues:
License 1.3 1.9 1.1
Services 36.3 41.6 53.3
------------ ----------- -----------
Total cost of revenues 37.6 43.5 54.4
------------ ----------- -----------
Operating expenses:
Sales and marketing 31.5 37.0 77.6
Research and development 18.4 16.0 27.5
General and administrative 9.7 10.7 23.6
Amortization of acquired intangibles - 1.5 8.2
------------ ----------- -----------
Total operating expenses 59.6 65.2 136.9
------------ ----------- -----------
Operating income (loss) 2.8 (8.7) (91.3)
Compensation related to modification
of escrow agreement - (9.7) -
Interest expense (0.5) (0.5) (1.2)
Interest and other income 0.9 1.4 1.4
Provision for income taxes 0.0 0.0 0.0
------------ ----------- -----------
Net income (loss) 3.1 % (17.5) % (91.0) %
============ =========== ===========
</TABLE>
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
The Company's revenues are derived from two principal sources: software
licenses ("license revenues") and fees for maintenance, implementation, training
and consulting services (collectively, "service revenues"). License revenues
include revenues from software license agreements, for the Company's products,
entered into between the Company and its customers in which the license fees are
noncancellable. License revenues are generally recognized upon the delivery of
the related software product when all significant contractual obligations have
been satisfied. Until such delivery, the Company records amounts received when
contracts are signed as customer deposits which are included with deferred
revenues in the consolidated balance sheets.
Service revenues are recognized as services are performed and
delivered. Included in service revenues are maintenance fees for maintaining,
supporting and providing periodic updates, which are recognized ratably over the
service period, generally one year. Upon delivery of the software, amounts
included in the contract relating to unperformed service revenues are recorded
as deferred revenue. All of the Company's customers that purchased software
during 1999 and 1998 also purchased maintenance and support service contracts.
Maintenance and support fees are generally priced as a percentage of the initial
license fee for the underlying products.
19
<PAGE>
Total revenues, consisting of license and service revenues, increased
28.7% to $55.8 million for 1999 from $43.3 million for 1998.
License revenues increased 24.7% to $23.5 million for 1999 from $18.8
million for 1998. The increase in license revenues was primarily due to
increased sales of the company's core product, UltiPro HRMS/Payroll, and, to a
lesser degree, revenues generated from sales of UltiPro Web.
Service revenues increased 31.7% to $32.3 million for 1999 from $24.5
million for 1998 primarily due to an increase in services related to the
implementation of UltiPro HRMS/Payroll principally to support increased sales of
the product. Other factors contributing to the increase as it pertains to
implementation services were higher realization of hourly rates charged for
services performed, partially offset by the Company's planned reduction of
implementation consulting services subcontracted to third party providers (the
"IP Decrease"). 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.
Additionally, maintenance and training revenues increased primarily as a result
of an increase in the installed base of UltiPro HRMS/Payroll customers.
COST OF REVENUES
Cost of revenues consists principally of the cost of license and
service revenues. Cost of license revenues primarily consists of fees payable to
a third party for software products distributed by the Company and, to a lesser
degree, amortization of capitalized software costs. Cost of service revenues
primarily consists of costs to provide consulting, implementation, maintenance,
technical support and training to the Company's customers, and the cost of
periodic updates.
Cost of license revenues decreased 10.0% to $751 thousand for 1999 from
$834 thousand for 1998. As a percentage of license revenues, cost of license
revenues decreased to 3.2% for 1999 from 4.4% for 1998. The decrease in cost of
license revenues was primarily attributable to lower third party fees.
Cost of service revenues increased by 12.2% to $20.2 million for 1999
from $18.0 million for 1998. The increase in cost of service revenues was
primarily attributable to the hiring of additional implementation services
personnel principally to support increased sales of the Company's products and,
to a lesser degree, the cost of additional maintenance personnel in support of
UltiPro HRMS/Payroll, partially offset by lower costs resulting from the IP
Decrease. Cost of service revenues, as a percentage of service revenues,
decreased to 62.6% for 1999 from 73.5% for 1998 primarily due to an increase in
service revenues generated by higher HRMS/Payroll revenues and a higher
realization of hourly rates charged for services performed by both Ultimate
Software's service consultants and third-party service consultants. In addition,
a shift in resources pursuant to the IP Decrease reduced the cost of
implementation, as a percentage of service revenues.
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 and marketing costs. Sales and marketing expenses
increased by 9.4% to $17.5 million for 1999 from $16.0 million for 1998
primarily due to higher advertising and marketing costs, higher sales
commissions and, to a lesser degree, additional costs associated with the
Company's newer sales programs-the affiliate network and strategic alliances
programs which were in existence for all of 1999 but only a portion of 1998.
Under the affiliate network program, accounting firms, consulting firms and
independent resellers (collectively "Affiliates") market, sell and implement the
Company's products. The strategic alliance program typically involves strategic
marketing relationships with other leading software vendors. Sales and marketing
expenses, as a percentage of total revenues, decreased to 31.5% for 1999 from
37.0% for 1998 primarily due to the absorption of the expenses in an increased
total revenue base.
20
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of software
development personnel costs. Research and development expenses increased by
47.9% to $10.3 million for 1999 from $7.0 million for 1998. The increases in
research and development expenses were primarily attributable to an increase in
costs associated with hiring additional programmers and engineers for the
development and enhancement of UltiPro HRMS/Payroll, the continued development
of UltiPro Web products, and for the development of new HRMS/payroll-related
enhancement modules. Research and development expenses, as a percentage of total
revenues, increased to 18.4% for 1999 from 16.0% for 1998. The increase in
research and development expenses, as a percentage of total revenues, was
primarily due to increased personnel costs partially offset by the absorption of
the expenses in an increased total revenue base.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries of
executive, administrative and financial personnel, as well as external
professional fees and the provision for doubtful accounts. General and
administrative expenses increased by 16.8% to $5.4 million for 1999 from $4.7
million for 1998. The increase in general and administrative expenses was
principally due to increased staffing to support the Company's growth and an
increase in the provision for doubtful accounts. General and administrative
expenses, as a percentage of total revenues, decreased to 9.7% for 1999 from
10.7% for 1998 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 1999 was consistent with that of 1998 due to the
absence of bank borrowings in 1999 offset by an increase in capital lease
obligations.
INTEREST AND OTHER INCOME
Interest and other income decreased slightly in 1999 primarily due to
the reduction of the remaining balance of the net proceeds from the IPO.
21
<PAGE>
PROVISION FOR INCOME TAXES (BENEFIT)
The provision for income taxes was $22,000 in 1999 as compared to zero
in 1998 as a result of income taxes calculated under the alternative minimum tax
method 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, are $25.3 million. The timing of maintaining sustained
profitability may result in the expiration of net operating loss carryforwards
before utilization. Additionally, utilization of such net operating losses may
be limited as a result of cumulative ownership changes in the Company's equity
instruments. The Company's net deferred tax assets at December 31, 1999 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,
1999 as the realization of deferred taxes is dependent on future events and
earnings, if any, the timing and extent of which are uncertain.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES
Total revenues, consisting of license and service revenues, increased
146.3% to $43.3 million for 1998 from $17.6 million for 1997.
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 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,
22
<PAGE>
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.
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.
23
<PAGE>
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 had approximately $26.4 million of net operating loss
carryforwards available at December 31, 1998, which expire at various times
through the year 2018, available to offset future taxable income. The timing of
maintaining 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 $10.4 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 deferred taxes is dependent on
future events and earnings, if any, the timing and extent of which are
uncertain.
24
<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, 1999 and
1998. 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,
1999 1999 1999 1999 1998 1998 1998 1998
---------- ----------- ---------- ---------- ---------- ----------- ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License $ 6,405 $ 8,019 $ 6,011 $ 3,019 $ 6,732 $ 4,753 $ 4,203 $ 3,123
Services 8,374 7,864 8,339 7,726 7,699 6,436 5,936 4,448
------- ------- ------- -------- ------- -------- -------- --------
Total revenues 14,779 15,883 14,350 10,745 14,431 11,189 10,139 7,571
------- ------- ------- -------- ------- -------- -------- --------
Cost of revenues:
License 200 223 185 143 226 179 225 204
Services 5,222 4,596 5,300 5,101 5,469 4,581 4,225 3,743
------- ------- ------- -------- ------- -------- -------- --------
Total cost of revenues 5,442 4,819 5,485 5,244 5,695 4,760 4,450 3,947
------- ------- ------- -------- ------- -------- -------- --------
Operating expenses:
Sales and marketing 5,147 4,435 4,240 3,714 4,028 4,213 3,969 3,814
Research and development 3,118 2,664 2,405 2,094 2,061 1,847 1,626 1,419
General and administrative 1,601 1,451 1,241 1,140 1,341 1,283 1,111 916
Amortization of acquired intangibles -- -- -- -- 65 191 191 191
------- ------- ------- -------- ------- -------- -------- --------
Total operating expense 9,866 8,550 7,886 6,948 7,495 7,534 6,897 6,340
------- ------- ------- -------- ------- -------- -------- --------
Operating income (loss) (509) 2,514 979 (1,447) 1,241 (1,105) (1,208) (2,716)
Compensation related to modification
of escrow agreement -- -- -- -- -- -- -- (4,183)
Interest expense (105) (81) (42) (39) (29) (23) (117) (38)
Interest and other income 84 101 140 182 209 270 101 9
------- ------- ------- -------- ------- -------- -------- --------
Income (loss) before income taxes (530) 2,534 1,077 (1,304) 1,421 (858) (1,224) (6,928)
Provision for income taxes 22 -- -- -- -- -- -- --
------- ------- ------- -------- ------- -------- -------- --------
Net income (loss) $ (552) $ 2,534 $ 1,077 $ (1,304) $ 1,421 $ (858) $ (1,224) $ (6,928)
======= ======= ======= ======== ======= ======== ======== ========
Weighted average shares outstanding:
Basic 15,952 15,901 15,894 15,884 15,879 15,877 13,550 12,621
======= ======= ======= ======== ======= ======== ======== ========
Diluted 15,952 16,084 15,910 15,884 16,024 15,877 13,550 12,621
======= ======= ======= ======== ======= ======== ======== ========
Net income (loss) per share--basic
and diluted $ (0.03) $ 0.16 $ 0.07 $ (0.08) $ 0.09 $ (0.05) $ (0.09) $ (0.55)
======= ======= ======= ======== ======= ======== ======== ========
</TABLE>
25
<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, 1999 and 1998.
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
1999 1999 1999 1999 1998 1998 1998 1998
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License 43.3% 50.5% 41.9% 28.1% 46.6% 42.5% 41.5% 41.2%
Services 56.7% 49.5% 58.1% 71.9% 53.4% 57.5% 58.5% 58.8%
----- ----- ----- ----- ----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
License 1.4% 1.4% 1.3% 1.3% 1.6% 1.6% 2.2% 2.7%
Services 35.3% 28.9% 36.9% 47.5% 37.9% 40.9% 41.7% 49.4%
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenues 36.7% 30.3% 38.2% 48.8% 39.5% 42.5% 43.9% 52.1%
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Sales and marketing 34.8% 27.9% 29.5% 34.6% 27.9% 37.7% 39.1% 50.4%
Research and development 21.1% 16.8% 16.8% 19.5% 14.3% 16.5% 16.0% 18.7%
General and administrative 10.8% 9.1% 8.7% 10.6% 9.3% 11.5% 11.0% 12.1%
Amortization of acquired intangibles 0.0% 0.0% 0.0% 0.0% 0.5% 1.7% 1.9% 2.5%
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses 66.7% 53.8% 55.0% 64.7% 51.9% 67.3% 68.0% 83.7%
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) (3.4)% 15.9% 6.8% (13.5)% 8.6% (9.9)% (11.9)% (35.8)
Compensation related to modification
of escrow agreement 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% (55.3)
Interest expense (0.7)% (0.5)% (0.3)% (0.3)% (0.2)% (0.2)% (1.2)% ( 0.5)
Interest and other income 0.6% 0.6% 1.0% 1.7% 1.4% 2.4% 1.0% 0.1%
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before taxes (3.6)% 16.0% 7.5% (12.1)% 9.8% (7.7)% (12.1)% (91.5)
Provision for income taxes (0.1)% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) (3.7)% 16.0% 7.5% (12.1)% 9.8% (7.7)% (12.1)% (91.5)
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company has experienced, and may experience in the future, significant
seasonality in its business, and the Company's business, operating results and
financial condition may be affected by such trends in the future. 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.
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 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.
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Prior to the IPO, the Company 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 the
IPO which resulted in net proceeds to the Company totaling $28.4 million.
As of December 31, 1999, the Company had $8.9 million in cash and cash
equivalents, reflecting a net decrease of $8.2 million since December 31, 1998.
Working capital as of December 31, 1999 was $17.6 million as compared to a
working capital of $17.5 million as of December 31, 1998. The consistent balance
of working capital at December 31, 1999 relative to the prior year includes a
decrease in cash and cash equivalents principally to fund operations and an
increase in accounts receivable at December 31, 1999 primarily resulting from
the timing of sales generated during the fourth calendar quarter.
Net cash used in operating activities was $4.9 million for 1999 as
compared to $13.3 million for 1998. The decrease in cash used in operating
activities was primarily attributable to improved operating results and an
increase in accounts receivable collections.
Net cash used in investing activities was $3.2 million for 1999 as
compared to $0.5 million for 1998. The increase in net cash used in investing
activities was primarily attributable to certain leasehold improvements made to
the Company's new headquarters, the lease for which commenced in July 1999, and
additional equipment purchases. In addition, the Company financed less new
equipment in 1999 as compared to the prior year.
Net cash used by financing activities was $0.1 million for 1999 as
compared to net cash provided by financing of $27.6 million for 1998. The
decrease in net cash provided by financing activities was primarily attributable
to the net proceeds from the IPO in June 1998 partially offset by principal
payments made under the line of credit agreements. Financing activities in 1999
primarily relate to capital lease obligations partially offset by proceeds from
the issuance of Common Stock from stock option exercises.
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 December 31, 1999, there was no
amount outstanding under the Credit Facility.
The net proceeds from the IPO, after deducting $4.1 million in
underwriting discounts, commissions and other costs associated with the
offering, were $28.4 million. A portion of the net proceeds from the IPO in the
amount of $3.6 million was used to pay down the outstanding balance of the
Credit Facility. The balance of the Credit Facility was paid with cash generated
from operations in June 1998. The balance of the remaining net proceeds from the
IPO in the amount of $6.5 million as of December 31, 1999 is available for
future working capital and other general corporate purposes. The Company may
also use a portion of the remaining net proceeds to fund acquisitions of
complementary businesses, products or technologies. Although the Company may
periodically review potential acquisition opportunities, there are no current
agreements with respect to any such transactions.
The Company believes that cash and cash equivalents, remaining net
proceeds from the IPO, cash generated from operations, and available borrowings
under the Credit Facility will be sufficient to fund its operations for at least
the next 12 months.
27
<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, 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 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. The Company achieved net
profitability for 1999. 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 has dealt with and must continue to 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.
Impact of Year 2000 Issue
The Company believes it has addressed the Year 2000 issues in its
proprietary software products and, to its knowledge, has not encountered any
material business interruptions associated with these applications, including
third-party software currently embedded in the Company's proprietary software,
for its existing clients. As the year progresses, the Company will continually
monitor the impact, if any, of the Year 2000 issues and address them
accordingly.
The Company did not experience any material Year 2000 computer problems
with respect to its internal technology systems and non-information technology
systems, principally as a result of successful verification testing of the
systems and remediation work completed during 1999. The Company's internal
28
<PAGE>
technology systems include telecommunications, computer hardware and software.
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 estimates the total costs associated with the Year 2000
issue (principally in connection with the use of outside consultants) to be
negligible during 1999 with the majority of remediation costs, aside from new
equipment purchases, attributable to internal costs. New equipment purchases
were deemed to be in the normal course of business. 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.
The Company's current software products have received recognition as
being developed using best practices for addressing Year 2000 issues by the
Information Technology Association of America. However, there can be no
assurance that the Company's software products contain all necessary date code
changes. The Company has not experienced any material adverse impact on its
operations as a result of Year 2000 issues of its major suppliers or customers
as of this report date. The Company will continue to monitor its mission
critical computer applications and those of its customers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly. 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.
RECENT ACCOUNTING STATEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133") and SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities --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.
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 adopted SOP 98-1
effective January 1, 1999. The Company's adoption of SOP 98-1 did not 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
29
<PAGE>
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 of 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, 1999 and the date 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
INDEX
PAGE(S)
--------
Report of Independent Certified Public Accountants 31
Consolidated Balance Sheets as of December 31, 1999 and 1998 32
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 33
Consolidated Statements of Stockholders' Equity (Deficit) for
the Years Ended December 31, 1999, 1998 and 1997 34
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 35
Notes to Consolidated Financial Statements 36
Report of Independent Certified Public Accountants on
Schedule II 57
Valuation and Qualifying Accountants 58
30
<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 subsidiary as of
December 31, 1999 and 1998, 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, 1999. 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 auditing standards generally
accepted in the United States. 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 subsidiary as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
January 28, 2000.
31
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
1999 1998
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,946 $ 17,128
Accounts receivable, net of allowance for doubtful accounts
of $1,673 and $1,119 for 1999 and 1998, respectively 20,670 15,225
Prepaid expenses and other current assets 2,772 2,014
-------- --------
Total current assets 32,388 34,367
Property and equipment, net 5,007 2,458
Other assets, net 1,035 389
-------- --------
Total assets $ 38,430 $ 37,214
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,026 $ 2,761
Accrued expenses 3,625 4,353
Deferred revenue 8,009 8,913
Current portion of capital lease obligations 1,104 846
Income taxes payable 22 --
-------- --------
Total current liabilities 14,786 16,873
Capital lease obligations, net of current portion 1,120 1,010
Deferred revenue 564 221
-------- --------
Total liabilities 16,470 18,104
-------- --------
Stockholders' equity:
Series A Junior Participating Preferred Stock, $.01 par value,
500,000 shares authorized, no shares issued and outstanding
in 1999 and 1998 -- --
Preferred Stock, $.01 par value, 2,000,000 shares authorized
in 1999 and 1998, no shares issued or outstanding -- --
Common Stock, $.01 par value, 50,000,000 shares
authorized, 16,046,769 and 15,879,015 shares issued and
outstanding in 1999 and 1998, respectively 160 159
Additional paid-in capital 65,162 64,068
Accumulated deficit (43,362) (45,117)
-------- --------
Total stockholders' equity 21,960 19,110
-------- --------
Total liabilities and stockholders' equity $ 38,430 $ 37,214
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
32
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
License $ 23,454 $ 18,811 $ 7,232
Services 32,303 24,519 10,360
-------- -------- --------
Total revenues 55,757 43,330 17,592
-------- -------- --------
Cost of revenues:
License 751 834 195
Services 20,219 18,018 9,375
-------- -------- --------
Total cost of revenues 20,970 18,852 9,570
-------- -------- --------
Operating expenses:
Sales and marketing 17,536 16,024 13,656
Research and development 10,281 6,953 4,837
General and administrative 5,433 4,651 4,148
Amortization of acquired intangibles -- 638 1,442
-------- -------- --------
Total operating expenses 33,250 28,266 24,083
-------- -------- --------
Operating income (loss) 1,537 (3,788) (16,061)
Compensation related to modification of escrow agreement -- (4,183) --
Interest expense (267) (207) (206)
Interest and other income 507 589 250
-------- -------- --------
Income (loss) before income taxes 1,777 (7,589) (16,017)
Provision for income taxes 22 -- --
-------- -------- --------
Net income (loss) $ 1,755 $ (7,589) $(16,017)
======== ======== ========
Net income (loss) per share--basic and diluted $ 0.11 $ (0.52) $ (1.37)
======== ======== ========
Weighted average shares outstanding:
Basic 15,908 14,494 11,710
======== ======== ========
Diluted 16,125 14,494 11,710
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
33
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE CLASS A CLASS B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK
----------------- ----------------- ----------------- -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
Issuance of Common Stock for initial public
offering ("IPO") -- -- -- -- -- -- -- --
Underwriting discounts and commissions in
connection with the IPO -- -- -- -- -- -- -- --
Offering costs in connection with the IPO -- -- -- -- -- -- -- --
Issuance of Common Stock from exercise of
stock options -- -- -- -- -- -- -- --
Non-cash issuance of options to Board to purchase
Common Stock for board fees -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Balance, December 31, 1998 -- -- -- -- -- -- -- --
Issuance of Common Stock from exercise of
stock options -- -- -- -- -- -- -- --
Non-cash issuance of options to Board to purchase
Common Stock for board fees -- -- -- -- -- -- -- --
Non-cash issuance of options to purchase
Common Stock for services -- -- -- -- -- -- -- --
Net income -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Balance, December 31, 1999 -- $ -- -- $ -- -- $ -- -- $ --
==== ==== ==== ==== ==== ==== ==== ====
<CAPTION>
TOTAL
COMMON STOCK ADDITIONA STOCKHOLDERS'
----------------- PAID-IN (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT) (DEFICIT)
-------- -------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
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 12,621 126 (113) -- --
Issuance of Common Stock for initial public
offering ("IPO") 3,250 33 32,467 -- 32,500
Underwriting discounts and commissions in
connection with the IPO -- -- (2,275) -- (2,275)
Offering costs in connection with the IPO -- -- (1,841) -- (1,841)
Issuance of Common Stock from exercise of
stock options 8 -- 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 15,879 159 64,068 (45,117) 19,110
Issuance of Common Stock from exercise of
stock options 168 1 947 -- 948
Non-cash issuance of options to Board to purchase
Common Stock for board fees -- -- 80 -- 80
Non-cash issuance of options to purchase
Common Stock for services -- -- 67 -- 67
Net income -- -- -- 1,755 1,755
------ --- ------- -------- -------
Balance, December 31, 1999 16,047 $160 $65,162 $(43,362) $21,960
====== ==== ======= ======== =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
34
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
----------- ------------ -------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 1,755 $ (7,589) $ (16,017)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization 2,068 1,924 2,087
Provision for doubtful accounts 1,771 1,369 444
Non-cash issuance of equity instruments for services 147 31 --
Non-cash equity transactions of 1998 poolings -- -- 8
Compensation related to modification of escrow agreement -- 4,183 --
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (7,216) (10,667) (3,424)
Prepaid expenses and other current assets (705) (1,042) (448)
Other assets 122 (201) (128)
Accounts payable (734) 1,049 860
Accrued expenses (1,564) 129 1,898
Deferred revenue (561) (2,456) 6,672
Other liabilities -- 4 58
Income taxes payable 22 -- --
-------- --------- ---------
Net cash used in operating activities (4,895) (13,266) (7,990)
-------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment (3,138) (241) (1,434)
Amount received from affiliate and shareholder -- -- 25
Net issuances of notes receivable (53) (255) (49)
-------- --------- ---------
Net cash used in investing activities (3,191) (496) (1,458)
-------- --------- ---------
Cash flows from financing activities:
Net payments under line of credit agreements -- (209) (1,409)
Principal payments of notes payable -- -- (273)
Net proceeds from capital lease obligations -- 381 --
Principal payments on capital lease obligations (1,044) (545) (215)
Net proceeds from issuances of Convertible Preferred Stock -- -- 13,479
Equity transactions of 1998 poolings -- (434) (284)
Net proceeds from issuance of Common Stock 948 28,427 --
-------- --------- ---------
Net cash provided by (used in) financing activities (96) 27,620 11,298
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents (8,182) 13,858 1,850
Cash and cash equivalents, beginning of year 17,128 3,270 1,420
-------- --------- ---------
Cash and cash equivalents, end of year $ 8,946 $ 17,128 $ 3,270
======== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 168 $ 207 $ 150
======== ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
- - The Company entered into capital lease obligations to acquire new equipment
totaling $1,412, $2,183 and $0 in 1999, 1998 and 1997, 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 Preferred
Stock, Class A Common Stock, Class B Common Stock and Class C Common Stock.
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
35
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group, Inc. (the "Company") 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiary. 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 $8.0 million and $16.6 million in
interest-bearing accounts as of December 31, 1999 and 1998, respectively.
Accounts Receivable
Accounts receivable are principally from end-users of the Company's
products. The Company performs periodic credit evaluations of its customers and
has recorded allowances for estimated losses.
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 fifteen 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 provisions of Statement of Position
("SOP") 97-2, "Software Revenue Recognition," license revenues are generally
36
<PAGE>
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.
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 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 0.3%, 1.6%, and 41.4% in
1999, 1998, and 1997, respectively.
Deferred Revenue
Deferred revenue is primarily comprised of deferrals for (i) service
revenues for which maintenance services have not yet been rendered; and, to a
lesser degree (ii) license revenues for which product has not yet been delivered
or obligations have not yet been fulfilled (in the case of committed upgrades).
As of December 31, 1999 and 1998, $564,000 and $221,000, respectively,
of deferred revenue will be recognized in periods after the years ending
December 31, 2000 and 1999.
Associated deferred costs, relating to commissions, were $768,000 and
$619,000 at December 31, 1999 and 1998, 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 and, to a lesser
degree, amortization of capitalized software. 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
The Company is subject to corporate Federal and state income taxes and
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) and were fully amortized as of December 31,
1998. In accordance with SFAS No. 121, "Accounting for the Impairment Of
Long-Lived Assets
37
<PAGE>
and for Long-Lived Assets to Be Disposed Of," the Company continually evaluated
whether later events and circumstances occurred that would indicate the
remaining acquired intangibles warranted revision or may not have been
recoverable. When factors indicated that goodwill should be evaluated for
possible impairment, the Company used 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 was
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 $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 zero,
$638,000, and $1,442,000 in 1999, 1998, and 1997, respectively.
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. As of December 31, 1999 and
1998, capitalized software costs totaled $836,000 and $53,000, respectively.
Amortization of capitalized software was $68,000, $8,000 and zero in 1999, 1998
and 1997, respectively.
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 in the period
ended December 31, 1999. See Note 9.
Earnings Per Share
SFAS No. 128, "Earnings Per Share," became effective in the fourth
quarter of 1997 and requires dual presentation 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.
38
<PAGE>
The following is a reconciliation of the shares used in the computation
of basic and diluted net income (loss) per share (in thousands):
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- ---------
Weighted average shares outstanding 15,908 14,494 11,710
Dilutive effect of options "in the money"
(unless antidilutive) 217 -- --
------ ------ ------
Dilutive shares outstanding 16,125 14,494 11,710
====== ====== ======
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. Other common stock equivalents not included in the
computation of diluted net income (loss) per share as their impact is
antidilutive totaled 1,380,000, 2,105,000 and 1,749,000 for 1999, 1998 and 1997,
respectively.
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
income (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.
Recent Accounting Statements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133") and SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the effective date of FASB No.
133" ("SFAS 137") were issued in June 1998 and June 1999, respectively, and 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.
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 adopted SOP 98-1
effective January 1, 1999. The Company's adoption of SOP 98-1 did not have a
material effect on the Company's financial position or results of operations.
39
<PAGE>
Reclassifications
Certain amounts in the notes to consolidated financial statements have
been reclassified to conform to the 1999 classification.
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):
AS OF DECEMBER 31,
-------------------
1999 1998
------- -------
Compensation and benefits $ 498 $ 1,066
Sales commissions 1,663 639
Third-party implementation consultants 378 854
Other items individually less than
5% of total current liabilities 1,086 1,794
------ -------
$ 3,625 $ 4,353
======= =======
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
AS OF DECEMBER 31,
-------------------
1999 1998
------- -------
Equipment $ 6,763 $ 4,675
Furniture, fixtures and improvements 2,919 457
------- -------
9,682 5,132
Less accumulated depreciation and amortization (4,675) (2,674)
------- -------
$ 5,007 $ 2,458
======= =======
40
<PAGE>
Included in property and equipment is equipment acquired under capital
leases as follows (in thousands):
AS OF DECEMBER 31,
----------------------
1999 1998
-------- --------
Equipment $ 3,886 $ 2,474
Less accumulated amortization (2,105) (1,061)
-------- --------
$ 1,781 $ 1,413
======== ========
Depreciation and amortization expense on property and equipment totaled
$2,001,000, $1,286,000, and $645,000 for the years ended December 31, 1999, 1998
and 1997, 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
2002. Interest rates on these leases range from 4.8% to 6.3%. The annual
maturities of the capital lease obligations are as follows as of December 31,
1999 (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ---------
<S> <C>
2000 .................................................................... $1,308
2001 .................................................................... 832
2002 .................................................................... 205
------
2,345
Less amount representing interest ....................................... (121)
------
Lease obligations reflected as current ($1,104) and non-current ($1,120) $2,224
======
</TABLE>
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, from time to time, to extend the agreement to
December 31, 2000 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 (11.011% and 9.885% at December
31, 1999 and 1998, 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, 1999 and 1998. 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.
8. INCOME TAXES
The provision for income taxes for 1999 represents current federal
taxes calculated under the alternative minimum tax method. No provision or
benefit for federal or state income taxes was made for 1998 and 1997 due to the
operating losses incurred in the respective periods.
41
<PAGE>
The provision for income taxes is different from that which would be
obtained by applying the statutory Federal income tax rate to income (loss)
before income taxes. A reconciliation from the Federal income tax provision at
the statutory rate to the effective rate is as follows (in thousands):
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
------- ------- -------
Income tax provision (benefit) at
statutory Federal tax rate $ 614 $(2,656) $(5,606)
Alternative minimum tax 22 -- --
Compensation related to modification
of escrow agreement -- 1,464 --
Earnings from pooling of interests -- (330) 184
Goodwill amortization (57) 166 448
Non-deductible expenses 88 63 62
Change in valuation allowance (645) 1,283 4,912
Other, net -- 10 --
------- ------- -------
Provision for income taxes $ 22 $ -- $ --
======= ======= =======
Effective tax rate 1.25% 0.00% 0.00%
======= ======= =======
The components of the net deferred tax assets included in the
accompanying consolidated balance sheets are as follows (in thousands):
AS OF DECEMBER 31,
--------------------------
1999 1998
-------- --------
Net operating losses $ 8,865 $ 9,242
Alternative minimum tax credit 22 --
Depreciation and amortization 263 233
Deferred revenue 278 510
Accruals not currently deductible 76 76
Allowance for doubtful accounts 586 392
Software development costs (287) (18)
Other, net (12) 2
Valuation allowance (9,791) (10,437)
-------- --------
Net deferred income tax assets $ -- $ --
======== ========
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.
At December 31, 1999, the Company has approximately $25,330,000 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. In addition,
the Company has alternative tax credit carryforwards of approximately $22,000
which are available to reduce future Federal regular income taxes, if any, over
an indefinite period.
42
<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. See Note 10.
A summary of the Company's Plan as of December 31, 1999, 1998 and 1997
and changes during the years then ended, is presented below:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------------- ---------------
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
Granted 1,402,903 7.39
Exercised (167,754) 5.65
Forfeited (102,739) 7.86
--------- -----
Outstanding at December 31, 1999 3,236,972 $8.22
========= =====
The following table summarizes information about stock options
outstanding under the Plan at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES NUMBER LIFE (YEARS) PRICE NUMBER PRICE
- -------------------- ------------ -------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
$1.69 to $4.25 192,321 9.28 $3.99 64,945 $3.49
$5.16 to $6.63 750,042 7.63 5.37 663,371 5.22
$7.21 to $7.75 1,752,243 8.69 7.42 917,117 7.32
$8.03 to $10.00 542,366 8.89 9.79 213,276 8.37
--------- -------
$1.69 to $10.00 3,236,972 8.51 $8.22 1,858,709 $6.72
========= =========
</TABLE>
43
<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 1999 and 1998 and 6.4% for
1997, dividend yield of 0% for all three years presented, expected volatility of
65% for each of the three years presented and an expected life of three years
for each of the three years presented. The Company's pro forma information is as
follows (in thousands, except per share amounts):
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
--------- ------------ -------------
Net income (loss):
As reported $1,755 $ (7,589) $ (16,017)
Pro forma 116 (8,446) (17,385)
Basic and diluted per share:
As reported $ 0.11 $ (0.52) $ (1.37)
Pro forma 0.01 (0.58) (1.48)
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:
<TABLE>
<S> <C>
(i) the businesses owned by nine third-party resellers of the Partnership's products (the
"Participating Resellers") were acquired by the Partnership;
(ii) the shareholders of The Ultimate Software Group, Inc., the then general partner of The
Ultimate Software Group, Ltd. ("GP"), and Strategic Image Systems, Inc. ("Strategic") (the
"Participating Stockholders") assigned and transferred their shares in GP and Strategic to
the Company;
(iii) the business and operations of the Partnership were transferred and conveyed to the
Company;
(iv) the Company entered into escrow agreements with the Partnership and the Participating
Stockholders obligating the Partnership to surrender certain shares for cancellation under
certain circumstances as provided therein; and
(v) J.P. Morgan Investment Corporation ("Morgan") and others invested $10,000,000 in the
Company.
</TABLE>
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.
44
<PAGE>
Description of Capital Stock
Series A Junior Participating Preferred Stock
In October 1998, the Board of Directors of the Company adopted a
Stockholders 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.
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 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
45
<PAGE>
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
On October 21, 1999, the Company entered into a definitive consulting
agreement (the "Consulting Agreement") with Aberdeen Strategic Capital LP
("Aberdeen") under which Aberdeen has been engaged to provide marketing,
strategic and other advisory services to the Company. John R. Walter, a member
of the Company's Board of Directors, is Chairman of the Management Advisory
Board of Aberdeen and has minority ownership interests in Aberdeen and its
general partner.
As sole compensation for the services of Aberdeen and its affiliates
under the Consulting Agreement, on October 21, 1999 the Company issued to
Aberdeen a warrant (the "Warrant") to purchase 100,000 shares of the Company's
Common Stock, par value $0.01 per share, for $10 per share. The Warrant vests in
eight quarterly increments of 12,500 shares, the first of which increments
vested on October 22, 1999. No increment of shares shall vest if the Consulting
Agreement has been terminated before the vesting date for such increment. The
Warrant expires on July 22, 2003. The Company has accounted for such Warrant in
accordance with the requirements prescribed in SFAS 123. Accordingly, the
related compensation expense is $67,000 and is included in general and
administrative expenses in the accompanying statement of operations for the year
ended December 31, 1999.
In 1999, the Company granted options to non-employee directors to
purchase (i) 4,396 shares of the Company's Common Stock for $1.95; (ii) 4,080
shares of the Company's Common Stock for $2.10; (iii) 5,080 shares of the
Company's Common Stock for $1.69; and (iv) 4,012 shares of the Company's Common
Stock for $2.14 in exchange for services rendered. 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 in accordance with the requirements
prescribed in APB 25. The related compensation expense was $80,000 and $31,000
in 1999 and 1998, respectively, and is included in general and administrative
expenses in the accompanying consolidated statements of operations.
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.
46
<PAGE>
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 in July 1999 (see Note 13). Total rent expense
under these agreements was $2,029,000, $2,012,000, and $1,143,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. Future minimum annual
rental commitments related to these leases are as follows at December 31, 1999
(in thousands):
YEAR AMOUNT
---- ---------
2000 $ 1,605
2001 1,349
2002 884
2003 848
2004 763
Thereafter 7,831
-------
$13,280
=======
Product Liability
Software products such as those offered by the Company frequently
contain undetected errors or failures when first introduced or as new versions
are released. Testing of the Company's products is particularly challenging
because it is difficult to simulate the wide variety of computing environments
in which the Company's customers may deploy these products. Despite extensive
testing, the Company from time to time has discovered defects or errors in
products. There can be no assurance that such defects, errors or difficulties
will not cause delays in product introductions and shipments, result in
increased costs and diversion of development resources, require design
modifications or decrease market acceptance or customer satisfaction with the
Company's products. In addition, there can be no assurance that, despite testing
by the Company and by current and potential customers, errors will not be found
after commencement of commercial shipments, resulting in loss of or delay in
market acceptance, which could have a material adverse effect upon the Company's
business, operating results and financial condition.
Litigation
From time-to-time, the Company 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):
Purchase price $7,337
Net liabilities assumed 1,463
------
Acquired intangibles, primarily customer lists and personnel $8,800
======
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
47
<PAGE>
$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 moved its corporate headquarters into a new
and larger facility located 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 and a corporation owned by
an officer of the Company are limited partners (the "Lessor"). 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 January 2000, the Lessor of the Company's new corporate headquarters
sold the related building and land to a third-party corporation and is in the
process of assigning the related commercial office lease to such third-party or
an affiliate thereof. No material revisions to the commercial office lease are
anticipated.
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 $401,000,
$267,000 and $231,000 for the years ended December 31, 1999, 1998 and 1997,
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 the period before the
poolings-of-interests combinations were consummated (in thousands):
FOR THE
YEAR ENDED
DECEMBER 31, 1997
------------------
Revenues:
The Company $ 14,137
Acquired Resellers 3,455
---------
$ 17,592
=========
Net loss:
The Company $ (15,491)
Acquired Resellers (526)
---------
$ (16,017)
=========
Net loss per share--basic and diluted
The Company $ (1.48)
Acquired Resellers 0.11
---------
$ (1.37)
=========
48
<PAGE>
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.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
49
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors, executive officers (Messrs. Scott Scherr, Marc D. Scherr,
Dr. Alan Goldstein, Mitchell K. Dauerman and James M. Alu) and other key
employees of the Company, and their ages as of March 10, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- ----- -----------
<S> <C> <C>
Scott Scherr 48 Chairman of the Board, President and Chief Executive Officer
Marc D. Scherr 42 Vice Chairman of the Board
Alan Goldstein, M.D. 49 Executive Vice President, Chief Technology Officer and Director
Mitchell K. Dauerman 43 Executive Vice President, Chief Financial Officer and Treasurer
James M. Alu 55 Executive Vice President and Chief Operating Officer
Dale T. Baker 50 Vice President--UltiPro.com
Donald M. Causey, Jr. 40 Vice President--Controller
Roy L. Gerber, Ph.D. 43 Vice President--Engineering
J.C. Gonzalez 36 Vice President--Product Support
Paul Gonzalez 48 Vice President--Special Operations
Gene Guhne 35 Vice President--Sales, East Division
Jon Harris 35 Vice President--Professional Services
James A. Jensen III 36 Vice President--Chief Information Officer and Technical Sales
Linda Larrivee 43 Vice President--Product Management
Robert Manne 47 Vice President--General Counsel
Vivian Maza 38 Vice President--People and Secretary
Linda Miller 55 Vice President--Communications and Public Relations
Laura Perkins 35 Vice President--Product Marketing
H. Stephen Smith 50 Vice President--Strategic Sales
Felicia A. Smitha 39 Vice President--Finance
Greg Swick 36 Vice President and General Manager--PEO Division
Elaine Trotter 40 Vice President--Special Projects
John Van Wyckhouse 45 Vice President--Sales, West Division
Carol Wiese 42 Vice President--Education Services
George F. Winter 41 Vice President and General Manager--Healthcare Division
Ofer Nemirovsky 41 Director
LeRoy A. Vander Putten 65 Director
John R. Walter 53 Director
Rick Wilber 53 Director
Robert A. Yanover 63 Director
</TABLE>
Scott Scherr has served as President and a director of the Company
since its inception in April 1996 and has been Chairman of the Board and Chief
Executive Officer of the Company since September 1996. In 1990, Mr. Scherr
founded The Ultimate Software Group, Ltd. (the "Partnership"), the business and
operations of which were assumed by the Company in 1998. Mr. Scherr served as
President of the Partnership's general partner from the inception of the
Partnership until its dissolution in March 1998. From 1979 until 1990, he held
various positions at Automatic Data Processing, Inc. ("ADP"), a payroll services
company, where his titles included Vice President of Operations and Sales
Executive. Prior to joining ADP, Mr. Scherr ran Management Statistics, Inc., a
data processing service bureau founded by his father, Reuben Scherr, in 1959. He
is the brother of Marc Scherr, the Vice Chairman of the Board of the Company.
Marc D. Scherr has been a director of the Company since its inception
in April 1996 and was elected as Vice Chairman in July 1998. Mr. Scherr became
an executive officer of the Company effective March 1, 2000. Mr. Scherr served
as a director of Gerschel & Co., Inc., a private investment firm from January
1992 until March 2000. In December 1995, Mr. Scherr co-founded Residential
Company of America, Ltd.
50
<PAGE>
("RCA"), a real estate firm, and served as President of its general partner
until March 2000. Mr. Scherr also served as Vice President of RCA's general
partner from its inception in August 1993 until December 1995. From 1990 to
1992, Mr. Scherr was a real estate pension fund advisor at Aldrich, Eastman &
Waltch. Previously, he was a partner in the Boston law firm of Fine & Ambrogne.
Mr. Scherr is the brother of Scott Scherr, Chairman of the Board, President and
Chief Executive Officer of the Company.
Alan Goldstein, M.D., FACS has served as a director of the Company
since its inception in April 1996 and as Executive Vice President and Chief
Technology Officer since September 1996. From April 1996 through September 1996,
he served as Vice President and Treasurer of the Company. From January 1994
until February 1998, Dr. Goldstein served as Vice President of the general
partner of the Partnership. In 1989, Dr. Goldstein founded Strategic Image
Systems, Inc., which produced and developed software applications and tools.
From 1985 to 1986, Dr. Goldstein served as Vice President of Information Systems
for Loren Industries, Inc., a jewelry casting manufacturer. From 1985 to 1987,
Dr. Goldstein served as Director of Surgical Services at Kings County Hospital
in New York. In 1985, as a trauma surgeon engaged in research and medical
education, Dr. Goldstein developed a software application for use in hospitals
to aid in patient management, quality assurance and physician education.
Mitchell K. Dauerman has served as Executive Vice President of the
Company since April 1998 and as Chief Financial Officer and Treasurer of the
Company since September 1996. From 1979 to 1996, Mr. Dauerman held various
positions with KPMG LLP, a global accounting and consulting firm, serving as a
Partner in the firm from 1988 to 1996. Mr. Dauerman is a Certified Public
Accountant.
James M. Alu has served as Executive Vice President of the Company
since February 1999 and as Chief Operating Officer since January 1998. Prior to
that, Mr. Alu served as Vice President of the Company from September 1996 and
Vice President of the general partner of the Partnership from July 1993 until
April 1996. From 1988 until 1993, Mr. Alu served as Area Sales Vice President
for the northeastern United States for ADP's Dealer Services Group.
Dale T. Baker has served as Vice President--UltiPro.com since January
1999. From September 1996 until January 1999, he served the Company as Vice
President--Strategic Alliances. From April 1996 through September 1996, he
served as Vice President of the Company. Prior to that, he had served as a Vice
President of the general partner of the Partnership from 1993 until April 1996.
From 1990 to 1993, Mr. Baker was a Branch Manager for Cap Gemini America, an
information services consulting firm.
Donald M. Causey, Jr. has served as Vice President--Controller since
February 2000 and as Controller since September 1996. From 1992 until September
1996, Mr. Causey served as Regional Controller for Latin America of New Zealand
Dairy Board, the largest dairy exporter worldwide. Mr. Causey was with the tax
practice of KPMG LLP from 1988 to 1992. Mr. Causey is a Certified Public
Accountant.
Roy L. Gerber, Ph.D. has served as Vice President--Engineering since
October 1999. From 1995 to October 1999, Mr. Gerber served in various positions
in the research and development organization, including Director of Engineering.
Prior to joining the Company, from 1986 to 1995, Mr. Gerber was Executive Vice
President of Development for Cascade Interactive Designs, Inc. and dBSi which
developed and marketed medical software products. From 1984 to 1988, Mr. Gerber
was Executive Vice President and Chief Operating Officer of Pacific Retirement
Plans, Inc.
J.C. Gonzalez has served as Vice President--Product Support since
January 1999. Prior to that, Mr. Gonzalez served as Manager and Director of
Product Support from January 1994 until December 1998. Mr. Gonzalez is a Payroll
Professional and holds a Certified Payroll Professional (CPP) certification from
the American Payroll Association (APA). From May 1983 until December 1993, Mr.
Gonzalez held various positions at ADP, including Customer Support Manager for
the Major and National Accounts of ADP.
Paul Gonzalez has served as Vice President--Special Operations for the
Company since January 1999. Mr. Gonzalez served as Vice
President--Implementation Partners from April 1997 to January 1999, Vice
51
<PAGE>
President of Support Services from September 1996 to April 1997, and Vice
President of the Company from April 1996 to September 1996. Prior to April 1996,
Mr. Gonzalez served as a Vice President of the general partner of the
Partnership from 1994 until April 1996 and as Secretary of the general partner
from 1990 until 1994. From 1980 to 1990, Mr. Gonzalez held various positions at
ADP, including National Product Manager for the Wholesale Distribution Division
and Branch Manager for the southeast region.
Gene Guhne has served as Vice President--Sales, East Division, since
November 1999. From February 1998 to November 1999, Mr. Guhne served as Director
of Sales, Mid-Atlantic Division. Prior to joining the Company, from 1992 to
1998, Mr. Guhne was the President of The Ultimate Software Group of the
Carolinas, Inc. and the Vice President of The Ultimate Group of Virginia, Inc.,
a reseller of the Company which was acquired by the Company in March 1998. From
1987 to 1992, Mr. Guhne served in various positions at ADP, where his most
recent position was Sales Director.
Jon Harris has served as Vice President--Professional Services since
July 1998. From 1992 to 1997, Mr. Harris held various management positions
within ADP's National Accounts Division. From 1989 to 1992, Mr. Harris held the
position of Consulting Services Director for Sykes Enterprises, Inc., a diverse
information technology company.
James A. Jensen III has served as Vice President--Chief Information
Officer and Technical Sales since March 2000. From April 1998 to March 2000, Mr.
Jensen served as Director of Technical Sales. He served as Director of Internal
Systems from March 1996 to April 1998 and Director of Development for
HRMS/Payroll from March 1995 to March 1996. From 1994 to 1995, Mr. Jensen was
Vice President of U. S. Operations of Prosoft Systems International, a software
consulting services and custom programming company. From 1992 to 1994, Mr.
Jensen was Senior Cost Estimator/Financial Analyst for GTE Government Systems
Corporation, Federal Systems Division, a telecommunications and software
development company for government contracting.
Linda Larrivee has served as Vice President--Product Management since
July 1998. Ms. Larrivee previously served as the Human Resources Product Manager
for the Company from August 1995 until August 1998. Ms. Larrivee has worked in
the human resource and human resource management systems field since 1979, for
various corporations including those engaged in high technology and retail
businesses.
Robert Manne has served as Vice President--General Counsel since May
1999. Prior to joining the Company, Mr. Manne was an attorney and partner of
Becker & Poliakoff, P.A., an international law firm, since 1978. In addition to
administering the Litigation Department of the law firm, Mr. Manne was a
permanent member of the firm's executive committee which was responsible for law
firm operations. Mr. Manne has performed legal services for the Company since
its inception.
Vivian Maza has served as Vice President--People for the Company since
January 1998 and as Secretary of the Company since September 1996. Prior to
that, Ms. Maza served as the Office Manager of the Company from its organization
in April 1996 and of the Partnership from its inception in 1990 until April
1996. Ms. Maza is a HR Generalist and holds a Professional in Human Resources
(PHR) certification from the Society for Human Resource Management (SHRM)
association. From 1985 to 1990, Ms. Maza was a systems analyst for the Wholesale
Division of ADP.
Linda Miller has served as Vice President--Communications and Public
Relations since January 1999. Ms. Miller served as Vice President, Public
Relations, for the Company from July 1998 to January 1999. Prior to that, Ms.
Miller served as the Company's Director of Marketing from January 1997. From
1992 to 1996, Ms. Miller held various positions at Best Software, Inc., a
developer of corporate resource management applications, Abra Products Division,
including Public Relations Manager.
Laura Perkins has served as Vice President--Product Marketing since
July 1998. From May 1996 to July 1998, Ms. Perkins served as the Director of
Applications Consulting for the Company. From 1991 to
52
<PAGE>
1996, Ms. Perkins held various positions with Best Software, Inc., Abra Products
Division. Ms. Perkins holds a Certified Payroll Professional (CPP) certification
from the American Payroll Association (APA).
H. Stephen Smith has served as Vice President--Strategic Sales for the
Company since November 1999. From January 1999 until November 1999, Mr. Smith
served as Vice President--Sales for the Company. From September 1996 until
January 1999, Mr. Smith served as Vice President and General Manager for the
East Region of the Company. Prior to joining the Company in 1996, Mr. Smith was
employed for 20 years at ADP, where his most recent position was Division Vice
President for the development and management of strategic alliances.
Felicia A. Smitha has served as Vice President--Finance since February
2000. Ms. Smitha served as the Company's Director of Finance from June 1998 to
February 2000. From 1990 to June 1998, Ms. Smitha held various financial
management positions, including Director of Finance, from 1990 to 1996, for
Pueblo Xtra International, Inc., the largest food retailer in Puerto Rico and
the U. S. Virgin Islands. Ms. Smitha was with the audit practice of KPMG LLP
from 1987 to 1990. Ms. Smitha is a Certified Public Accountant.
Greg Swick has served as Vice President and General Manager--PEO
Division of the Company's sales organization since November 1999. From February
1998 to November 1999, Mr. Swick was Director of Sales, Northeast Division.
Prior to joining the Company, Mr. Swick was President of The Ultimate Software
Group of New York and New England, G.P., a reseller of the Company which was
acquired by the Company in March 1998. From 1987 to 1994, Mr. Swick held various
positions with ADP, where the most recent position was Area Vice President--ADP
Dealer Services Division.
Elaine Trotter has served as Vice President--Special Projects of the
research and development organization of the Company since March 2000. From
April 1999 to March 2000, Ms. Trotter served as Vice President--Training
Development. From April 1993 until April 1999, Ms. Trotter served in various
positions with the Company, the last of which for such period being Director of
Training Development. From 1988 to 1992, Ms. Trotter held various positions at
ADP, where her most recent position was Manager of Technical Support and
Training. Ms. Trotter holds a Certified Payroll Professional (CPP) certification
from the American Payroll Association (APA).
John Van Wyckhouse has served as Vice President--Sales, West Division
since November 1999. From 1997 to 1999, Mr. Van Wyckhouse served as Director of
Sales--West Division. Prior to joining the Company, Mr. Van Wyckhouse was
employed for 19 years at ADP, holding various positions in sales and operations,
including his most recent position as National Account Sales Executive for the
Chesapeake Region.
Carol Wiese has served as Vice President--Education Services since
October 1999. From March 1999 to October 1999, Ms. Wiese served as Director of
Education Services. Prior to joining the Company, Ms. Wiese was employed for 19
years at ADP, where her most recent position was Director of Marketing/Payroll
Outsourcing Services.
George F. Winter has served as Vice President and General
Manager--Health Care Division of the Company's sales organization since October
1999 when he joined the Company. From 1997 to 1999, Mr. Winter was Vice
President--Sales for Eclipsys Corporation, an end-to-end provider of information
solutions to healthcare providers. From 1993 to 1997, Mr. Winter was Regional
Manager of McKesson/HBOC, a leading health care information technology company.
Ofer Nemirovsky has served as a director of the Company since June 1997
and is Chairman of the Audit Committee of the Board. Mr. Nemirovsky has been a
Managing Director of HarbourVest Partners, LLC since January 1997. HarbourVest
Partners, LLC was formed by the management team of Hancock Venture Partners,
Inc., a venture capital investment firm ("HVP"), where Mr. Nemirovsky had served
in various capacities since 1986. Prior to joining HVP, Mr. Nemirovsky held
various computer sales and marketing positions at Hewlett-Packard Company, a
measurement, computation and communications company. He is currently a director
of Primix Solutions, Inc. (formerly OneWave, Inc.), an Internet software and
services
53
<PAGE>
company and Daleen Technologies, Inc., a telecommunications billing software
company, as well as several privately-held companies.
LeRoy A. Vander Putten has served as a director of the Company since
October 1997 and is Chairman of the Compensation Committee of the Board. Mr.
Vander Putten has served as the Chairman of Trade Resources International
Holdings, Ltd., a corporation engaged in trade finance for exporters from
developing countries, since April 1998. From January 1988 until May 1997, Mr.
Vander Putten was Chairman and Chief Executive Officer of Executive Risk Inc., a
specialty insurance holding company. From August 1982 to January 1988, Mr.
Vander Putten served as Vice President and Deputy Treasurer of The Aetna Life
and Casualty Company, an insurance company.
John R. Walter has served as a director of the Company since July 1999
and is a member of the Audit Committee since February 2000. Mr. Walter is the
current Chairman of Manpower, Inc., a provider of temporary employee services,
retired President and Chief Operating Officer of American Telephone and
Telegraph Company ("AT&T") a telecommunications company, and former Chairman,
President and Chief Executive Officer of R.R. Donnelley & Sons, a financial
printing company. Mr. Walter is Chairman of the Management Advisory Board of
Aberdeen Strategic Capital LP, which has an investment in Ultimate Software.
Aberdeen Strategic Capital is a private equity fund focused on value-added
investments in public companies. In addition to Manpower, Inc., Aberdeen
Strategic Capital and Ultimate Software, Mr. Walter serves on the boards of
directors of Abbott Laboratories, Deere & Company, Celestica, Inc., Jones Lang
LaSalle, Inc., and Prime Capital Corporation. Mr. Walter also serves on the
International Advisory Council of the Singapore Economic Development Board, is a
director of Evanston Northwestern Healthcare Corporation, and holds numerous
other advisory and membership positions. Mr. Walter began his career in 1969 at
R.R. Donnelley. After holding sales and executive positions of increasing
responsibility, in 1989 he was appointed R.R. Donnelley's Chairman, President
and Chief Executive Officer, a position he retained through 1996, when he
resigned to join AT&T. As President and Chief Operating Officer of AT&T, Mr.
Walter was responsible for day-to-day operations of the company's core
long-distance, local, wireless and on-line services businesses, as well as its
credit card and outsourcing businesses.
Rick Wilber has served as a director of the Company since October 1997
and is a member of the Compensation Committee of the Board. Mr. Wilber was a
co-founder of Champs Sports Shops and served as its President from 1974 to 1984.
He served on the Board of Royce Laboratories, a pharmaceutical concern, from
1990 until April 1997, when the company was sold to Watson Pharmaceuticals,
Inc., a pharmaceutical concern. Mr. Wilber currently is the President of Lynn's
Hallmark Cards which owns and operates a number of Hallmark Card stores. Mr.
Wilber has chosen not to serve as a director of the Company beyond his existing
term which ends on May 18, 2000.
Robert A. Yanover has served as a director of the Company since January
1997 and is a member of the Audit Committee of the Board. Mr. Yanover founded
Computer Leasing Corporation of Michigan, a private leasing company, in 1975 and
has served as its President since that time. Mr. Yanover also founded Lason,
Inc., a corporation specializing in the imaging business, and served as Chairman
of the Board from its inception in 1987 until 1998 and is currently a director.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 2000 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 2000 Annual Meeting of Stockholders under
the heading "Security Ownership of Certain Beneficial Owners and Management."
54
<PAGE>
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 2000 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, 1999 and 1998
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules:
Report of Independent Certified Public Accountants
Schedule II--Valuation and Qualifying Accounts
(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 named therein*
10.6 Agreement and Plan of Merger dated February 24, 1998, among the Company, ULD Holding
Corp., Ultimate Software Group of New York and New England, G.P. and certain principals
named therein*
10.7 Nonqualified Stock Option Plan*
10.8 Lease Agreement, between the Company, as successor to The Ultimate Software
55
<PAGE>
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
(incorporated by reference herein to corresponding exhibit in the Company's Form 10-K
dated March 31, 1999)
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
(incorporated by reference herein to corresponding exhibit in the Company's Form 10-K
dated March 31, 1999)
10.11 Commercial Office Lease agreement by and between UltiLand, Ltd., a Florida limited
partnership, and the Company, dated December 31, 1998 (incorporated by reference herein to
corresponding exhibit in the Company's Form 10-K dated March 31, 1999)
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)
10.13 Commercial Office Lease by and between UltiLand, Ltd., a Florida limited partnership and
the Company, dated December 22, 1998 (incorporated herein by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q dated August 15, 1999)
10.14 Letter Agreement between Aberdeen Strategic Capital LP and the Company, dated
October 21, 1999 (incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q dated November 15, 1999)
10.15 Warrant issued to Aberdeen Strategic Capital LP (incorporated herein by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated November 15, 1999)
10.16 Extension Agreement entered into between Greyrock Capital, a Division of NationsCredit
Commercial Corporation, and The Ultimate Software Group, Inc. dated December 14, 1999**
21.1 Subsidiary 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**
<FN>
- ----------------
* Incorporated herein by reference to the corresponding exhibit in the
Company's Registration Statement.
** Filed herewith.
</FN>
</TABLE>
(b) Reports on Form 8-K
None.
56
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To The Ultimate Software Group, Inc.:
We have audited in accordance with auditing standards generally
accepted in the United States, the consolidated financial statements included in
this Form 10-K and have issued our report thereon dated January 28, 2000. Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying Schedule II is the responsibility
of the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
- ---------------------------
ARTHUR ANDERSEN LLP
Miami, Florida,
January 28, 2000.
57
<PAGE>
SCHEDULE II
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Beginning Additions Charged to Balance at End
Classification of Year Operations Deductions (1) of Year
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
December 31, 1999 $ 1,119 $ 1,771 $(1,217) $ 1,673
December 31, 1998 534 1,369 (784) 1,119
December 31, 1997 215 444 (125) 534
<FN>
- -------------
(1) Represents trade receivables written off and credits applied.
</FN>
</TABLE>
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, 2000 By: /s/ Mitchell K. Dauerman
-------------------------------------------
Mitchell K. Dauerman
Executive Vice President, Chief Financial
Officer and Treasurer
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 March 29, 2000
- ---------------------------------- and Chairman of the Board
Scott Scherr
/s/ Mitchell K. Dauerman Executive Vice President, Chief March 29, 2000
- ---------------------------------- Financial Officer and Treasurer (Principal
Mitchell K. Dauerman Financial and Accounting Officer)
/s/ Alan Goldstein Executive Vice President, March 29, 2000
- ---------------------------------- Chief Technology Officer and Director
Alan Goldstein, M.D.
/s/ Marc D. Scherr Vice Chairman of the Board March 29, 2000
- ----------------------------------
Marc D. Scherr
/s/ Ofer Nemirovsky Director March 29, 2000
- ----------------------------------
Ofer Nemirovsky
/s/ LeRoy A. Vander Putten Director March 29, 2000
- ----------------------------------
LeRoy A. Vander Putten
/s/ John R. Walter Director March 29, 2000
- ----------------------------------
John R. Walter
/s/ Rick Wilber Director March 29, 2000
- ----------------------------------
Rick Wilber
/s/ Robert Yanover Director March 29, 2000
- ----------------------------------
Robert Yanover
</TABLE>
59
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.16 Extension Agreement entered into between Greyrock Capital, a Division
of NationsCredit Commercial Corporation, and The Ultimate Software
Group, Inc. dated December 14, 1999.
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.
EXHIBIT 10.16
GREYROCK CAPITAL
EXTENSION AGREEMENT
BORROWER: The Ultimate Software Group, Inc.
ADDRESS: 2000 Ultimate Way
Weston, FL 33326-6350
Date: December 14, 1999
THIS EXTENSION AGREEMENT (this "Agreement") is entered into between
GREYROCK CAPITAL, a Division of Banc of America Commercial Finance Corporation
("GC"), whose address is 10880 Wilshire Boulevard, Suite 1850, Los Angeles,
California 90024, and the Borrower named above ("Borrower").
GC and the 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 the 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 "December 31, 1999" in Section 4 of the Schedule
to Loan Agreement is hereby deleted and replaced with the date "December 31,
2000."
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 change said fee to Borrower's loan
account.
3. 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 words "hereof," "herein," "hereunder," or words of like import
in such Section, shall mean and be reference to the Loan Agreement as amended by
this Agreement.
4. 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 dealings or otherwise create
any express or implied duty by it to provide any
<PAGE>
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 supercede 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.
Borrower: GC:
THE ULTIMATE SOFTWARE GROUP, GREYROCK CAPITAL,
INC. A DIVISION OF BANC OF AMERICA
COMMERCIAL FINANCE CORPORATION
By: /s/ MITCHELL DAUERMAN By: /s/ LISA NAGANO
--------------------- ---------------
Exec. Vice President and CFO Title: Sr. Vice President
By: /s/ ROBERT MANNE
---------------------
General Counsel
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,946
<SECURITIES> 0
<RECEIVABLES> 22,343
<ALLOWANCES> (1,673)
<INVENTORY> 0
<CURRENT-ASSETS> 32,388
<PP&E> 9,682
<DEPRECIATION> (4,675)
<TOTAL-ASSETS> 38,430
<CURRENT-LIABILITIES> 14,786
<BONDS> 0
0
0
<COMMON> 160
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 38,430
<SALES> 55,757
<TOTAL-REVENUES> 55,757
<CGS> 20,970
<TOTAL-COSTS> 33,250
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 267
<INCOME-PRETAX> 1,777
<INCOME-TAX> 22
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,755
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99.1
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT 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, 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 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. The Company achieved net
profitability for 1999. 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.
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
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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.
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 380 as of December 31, 1999. 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
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changing industry standards and expand the functionality of its products to
address the increasingly sophisticated requirements of its customers. There can
be no assurance that the Company will have sufficient resources to make the
necessary investments or that it will not experience difficulties that could
delay or prevent the successful development, introduction or marketing of new
products or enhancements. In addition, there can be no assurance that such
products or enhancements will meet the requirements of the marketplace or
achieve market acceptance or that the Company's existing and potential customers
will migrate to client/server environments at the rate expected by the Company.
Any failure by the Company to anticipate or respond adequately to technological
advancements, customer requirements and changing industry standards, or any
significant delays in the development, introduction or availability of new
products or enhancements, could have a material adverse effect on the Company's
business, operating results and financial condition.
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.
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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 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
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not develop products that perform comparably to the Company's proprietary
products. Policing the unauthorized use of the Company's products is difficult.
Litigation may be necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trademarks, copyrights or trade
secrets or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
operating results and financial condition.
As is common in the software industry, the Company from time to time
may become aware of third-party claims of infringement by the Company's
operations or products of third-party proprietary rights. While the Company is
not currently aware of any such claim, the Company's software products may
increasingly be subject to such claims as the number of products and competitors
in the Company's industry grows and the functionality of products overlaps and
as the issuance of software patents becomes increasingly common. Any such
claims, with or without merit, can be time consuming and expensive to defend,
cause product shipment delays or require the Company to enter into royalty or
licensing agreements. Such royalty agreements, if required, may not be available
on terms acceptable to the Company, or at all, which could have a material
adverse effect on the Company's business, operating results and financial
condition.
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
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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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