UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 0-24347
THE ULTIMATE SOFTWARE GROUP, INC.
---------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 65-0694077
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
2000 Ultimate Way, Weston, FL 33326
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(Address of principal executive offices) (Zip Code)
(954) 331-7000
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(Registrant's telephone number, including area code)
None
----
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 7, 2000, there were 16,079,590 shares of the
Registrant's Common Stock, par value $.01, outstanding.
<PAGE>
THE ULTIMATE SOFTWARE GROUP, INC.
TABLE OF CONTENTS
<TABLE>
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Page(s)
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<S> <C>
Part I--Financial Information:
Item 1--Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 3
Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-16
Item 3--Quantitative and Qualitative Disclosures About Market Risk 16
Part II--Other Information:
Item 1--Legal Proceedings 16
Item 2--Changes in Securities and Use of Proceeds 16
Item 3--Defaults upon Senior Securities 16
Item 4--Submission of Matters to a Vote of Security Holders 16
Item 5--Other Information 17
Item 6--Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
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PART 1--FINANCIAL INFORMATION
ITEM 1--Financial Statements
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
ASSETS 2000 1999
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Current assets: (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 6,168 $ 8,946
Accounts receivable, net 22,400 20,670
Prepaid expenses and other current assets 1,555 2,772
-------- --------
Total current assets 30,123 32,388
Property and equipment, net 6,373 5,007
Other assets, net 815 1,035
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Total assets $ 37,311 $ 38,430
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,243 $ 2,026
Accrued expenses 4,670 3,625
Deferred revenue 8,931 8,009
Current portion of capital lease obligations 1,903 1,104
Income taxes payable -- 22
-------- --------
Total current liabilities 17,747 14,786
Capital lease obligations, net of current portion 1,097 1,120
Deferred revenue 349 564
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Total liabilities 19,193 16,470
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Commitments and contingencies -- --
Stockholders' equity:
Preferred Stock, $.01 par value, 2,000,000
shares authorized in 2000 and 1999, respectively;
no shares issued or outstanding in 2000 and 1999 -- --
Series A Junior Participating Preferred Stock, $.01 par value,
500,000 shares authorized, no shares issued and
outstanding in 2000 and 1999 -- --
Common Stock, $.01 par value, 50,000,000 shares
authorized, 16,099,590 and 16,046,769 shares issued and
outstanding in 2000 and 1999, respectively 161 160
Additional paid-in capital 65,664 65,162
Accumulated deficit (47,707) (43,362)
-------- --------
Total stockholders' equity 18,118 21,960
-------- --------
Total liabilities and stockholders' equity $ 37,311 $ 38,430
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
3
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THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License $ 4,020 $ 8,019 $ 20,055 $ 17,049
Services 8,977 7,864 25,588 23,929
-------- -------- -------- --------
Total revenues 12,997 15,883 45,643 40,978
-------- -------- -------- --------
Cost of revenues:
License 286 223 1,047 551
Services 5,962 4,596 16,851 14,998
-------- -------- -------- --------
Total cost of revenues 6,248 4,819 17,898 15,549
-------- -------- -------- --------
Operating expenses:
Sales and marketing 5,177 4,435 15,420 12,389
Research and development 4,024 2,664 11,444 7,162
General and administrative 2,305 1,451 5,224 3,832
-------- -------- -------- --------
Total operating expenses 11,506 8,550 32,088 23,383
-------- -------- -------- --------
Operating income (loss) (4,757) 2,514 (4,343) 2,046
Interest expense (64) (81) (245) (162)
Interest and other income 88 101 243 423
-------- -------- -------- --------
Net income (loss) $ (4,733) $ 2,534 $ (4,345) $ 2,307
======== ======== ======== ========
Net income (loss) per share:
Basic $ (0.29) $ 0.16 $ (0.27) $ 0.15
======== ======== ======== ========
Diluted $ (0.29) $ 0.16 $ (0.27) $ 0.14
======== ======== ======== ========
Weighted average shares outstanding:
Basic 16,094 15,901 16,076 15,893
======== ======== ======== ========
Diluted 16,094 16,084 16,076 15,994
======== ======== ======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
4
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THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
---------------------
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,345) $ 2,307
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 2,376 994
Provision for doubtful accounts 2,600 993
Non-cash issuance of stock options for board fees and services 174 95
Changes in operating assets and liabilities:
Accounts receivable (5,201) (7,433)
Prepaid expenses and other current assets 877 (91)
Other assets 32 (776)
Accounts payable 248 (453)
Accrued expenses 1,086 (1,066)
Deferred revenue 1,547 (1,550)
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Net cash used in operating activities (606) (6,980)
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Cash flows from investing activities:
Purchases of property and equipment (1,260) (2,160)
Net proceeds from notes receivable 47 170
-------- --------
Net cash used in investing activities (1,213) (1,990)
-------- --------
Cash flows from financing activities:
Principal payments on capital lease obligations (1,289) (746)
Net proceeds from issuances of Common Stock 330 185
-------- --------
Net cash used in financing activities (959) (561)
-------- --------
Net decrease in cash and cash equivalents (2,778) (9,531)
Cash and cash equivalents, beginning of period 8,946 17,128
-------- --------
Cash and cash equivalents, end of period $ 6,168 $ 7,597
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 179 $ 135
======== ========
Supplemental disclosure of non-cash financing activities:
- The Company entered into capital lease obligations to acquire new equipment totaling
$2,064 and $1,119 in the nine months ended September 30, 2000 and 1999, respectively.
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
5
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THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of The
Ultimate Software Group, Inc. and subsidiary (the "Company") have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and footnote disclosures
normally included in financial statements in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. The information in this report
should be read in conjunction with the Company's audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 filed with the SEC on March 30, 2000 (the
"Form 10-K").
The unaudited condensed consolidated financial statements included
herein reflect all adjustments (consisting only of normal, recurring
adjustments) which are, in the opinion of the Company's management, necessary
for a fair presentation of the information for the periods presented. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Interim results of operations
for the three and nine months ended September 30, 2000 and 1999 are not
necessarily indicative of operating results for the full fiscal years or for any
future periods.
2. STOCK REPURCHASE PLAN
On October 30, 2000, the Company announced that its board of directors
authorized the repurchase of up to 1,000,000 shares of the Company's Common
Stock. Stock repurchases may be made periodically in the open market, in
privately negotiated transactions or a combination of both. The extent and
timing of these transactions will depend on market conditions and other business
considerations.
6
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of
operations of The Ultimate Software Group, Inc. ("Ultimate Software" or the
"Company") should be read in conjunction with the unaudited Condensed
Consolidated Financial Statements and Notes thereto included elsewhere in this
Form 10-Q. This Form 10-Q contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those contained in the forward-looking statements. Factors that may cause such
differences include, but are not limited to, those discussed below.
Overview
Ultimate Software designs, markets, implements and supports
technologically advanced cross-industry human resources management and payroll
("HRMS/payroll") software solutions.
Ultimate Software's Web-based solutions include UltiPro Employee
Self-Service and UltiPro Manager Self-Service (collectively, "UltiPro Web"), and
UltiPro.com. The Company's software solutions are marketed primarily to
middle-market organizations with 500 to 15,000 employees. UltiPro HRMS/Payroll,
Ultimate Software's core product, automates HRMS/payroll functions for
businesses and enables them to manage the employee life cycle strategically and
cost effectively, from inception of employment through retirement. UltiPro Web
leverages the Internet to "face" every person in an organization. Ultimate
Software believes that UltiPro HRMS/Payroll's distributed, object-oriented
architecture and integrated Web-based solutions provide significant advantages
over other HRMS/payroll software solutions, including (i) more comprehensive
payroll, benefits and employee management functionality, (ii) better customer
services, (iii) lower initial investment, (iv) easier, more cost-effective
implementation, (v) reduced ongoing costs, and (vi) advanced technology
architecture. UltiPro HRMS/Payroll and UltiPro Web (collectively "UltiPro") are
designed to support new technologies as they emerge, including the Internet and
corporate intranets, and to be readily integrated with other applications. As
part of its comprehensive HRMS/payroll solutions, Ultimate Software provides
high quality implementation, training and ongoing support services to its
customers.
As part of the Company's strategy to provide its customers an easy
pathway to e-business, in September 1999, Ultimate Software introduced
UltiPro.com (previously referred to as "HR Gateway"), a new Web portal and
one-stop shopping supersite for HR/payroll professionals, managers and the
employees they support. UltiPro.com offers a variety of third party and
private-labeled products and services that complement Ultimate Software's
Web-based products, which are accessed through the portal. UltiPro Web products
are fully integrated with UltiPro HRMS/Payroll and are not stand-alone products.
UltiPro Web addresses the growing demand for Web-based solutions that empower
managers and general employee populations. UltiPro Web Employee Self-Service
provides employees online access to employee handbooks, company news and
policies, employee directories, benefit plans and pay check history and extranet
connections to other relevant sites, such as the site of their 401(k)
administrator. UltiPro Web Manager Self-Service provides managers online access
to information on their employee staffs, including features for performance
management, recruitment and staffing, training management and reporting.
The Company also provides application hosting services for its UltiPro
Web and HRMS/Payroll products pursuant to an agreement entered into during
September 1999 with International Business Machines Global Services, Inc.
("IBM") which enables Ultimate Software's clients to build a foundation for
e-business (the "IBM Agreement").
7
<PAGE>
Under the terms of the IBM Agreement, IBM provides the installation and
ongoing maintenance and backup services at an IBM Data Hosting Center. The
Company has branded the IBM hosted model as "Intersourcing" for marketing
purposes to underscore the idea that part of the business value of this model is
the convenience of outsourcing, coupled with in-house control over the client's
own data. Intersourcing provides organizations real-time access to their
employee information and reporting, Web-access for managers and employees,
business intelligence tools for executive decision-making, and comprehensive
HRMS/payroll functionality without a requirement for significant support from
in-house information technology resources. IBM and Ultimate Software work
together with Intersourcing customers to procure leasing agreements that provide
a reduced requirement for upfront cash and convenient monthly payments.
Ultimate Software also offers "Powered by UltiPro," a pre-packaged
HRMS/payroll solution specifically designed to be marketed and co-branded by
companies that offer complementary products and services. "Powered by UltiPro"
offers aggregators such as application service providers (ASPs), enterprise
resource planning (ERP) vendors, insurance companies, technology companies that
focus on business offerings, and vertical market vendors and service providers
(collectively, "Strategic Partners") the opportunity to expand the scope of
their offerings. The "Powered by UltiPro" solution enables aggregators to extend
their customer base beyond the traditional business-to-business community into
the business-to-employee market through solutions that face everyone in the
organization.
Ultimate Software reaches its customer base and target market through
its direct sales force and a network of strategic partners. Ultimate Software's
customers operate in a wide variety of industries, including healthcare,
professional employee organizations ("PEO's"), sports and entertainment,
manufacturing, food services, retail, technology, finance, insurance, legal
services, real estate, transportation, communications, and services.
8
<PAGE>
Results of Operations
The following table sets forth the Statement of Operations data of the
Company, as a percentage of total revenues, for the periods indicated.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
Revenues:
License 30.9% 50.5 % 43.9 % 41.6 %
Services 69.1 49.5 56.1 58.4
-------- -------- -------- --------
Total revenues 100.0 100.0 100.0 100.0
-------- -------- -------- --------
Cost of revenues:
License 2.2 1.4 2.3 1.3
Services 45.9 28.9 36.9 36.6
-------- -------- -------- --------
Total cost of revenues 48.1 30.3 39.2 37.9
-------- -------- -------- --------
Operating expenses:
Sales and marketing 39.8 27.9 33.8 30.2
Research and development 30.9 16.8 25.0 17.5
General and administrative 17.8 9.1 11.5 9.4
-------- -------- -------- --------
Total operating expenses 88.5 53.8 70.3 57.1
-------- -------- -------- --------
Operating income (loss) (36.6) 15.9 (9.5) 5.0
Interest expense (0.5) (0.5) (0.5) (0.4)
Interest and other income 0.7 0.6 0.5 1.0
-------- -------- -------- --------
Net income (loss) (36.4)% 16.0 % (9.5)% 5.6 %
======== ======== ======== ========
Revenues
The Company's revenues are derived from two principal sources: software
licenses ("license revenues") and fees for maintenance, implementation, training
and consulting services (collectively, "service revenues"). License revenues
include revenues from noncancellable software license agreements entered into
between the Company and its customers with respect to its products. License
revenues are generally recognized upon the delivery of the related software
product when all significant contractual obligations have been satisfied. Until
such delivery, the Company records amounts received when contracts are signed as
customer deposits which are included with deferred revenues in the condensed
consolidated balance sheets.
Service revenues are recognized as services are performed and
delivered. Included in service revenues are maintenance fees for maintaining,
supporting and providing periodic updates, which are recognized ratably over the
service period, generally one year. Upon delivery of the software, amounts
included in the contract relating to unperformed service revenues are recorded
as deferred revenue. All of the Company's customers that purchased software
during 2000 and 1999 also purchased maintenance and support service contracts.
Maintenance and support fees are generally priced as a percentage of the initial
license fee for the underlying products.
Total revenues, consisting of license and service revenues, decreased
18.2% to $13.0 million for the three months ended September 30, 2000 from $15.9
million for the three months ended September 30, 1999. Total revenues increased
11.4% to $45.6 million for the nine months ended September 30, 2000 from $41.0
million for the nine months ended September 30, 1999.
License revenues decreased 49.9% to $4.0 million for the three months
ended September 30, 2000 from $8.0 million for the three months ended September
30, 1999. This
9
<PAGE>
decrease in license revenues was primarily due to lower sales of the Company's
core product, UltiPro HRMS/Payroll, which the Company believes is principally
attributable to an unexpected lengthening of the closing process with a number
of prospective clients, as well as the absence of revenue-generation by the
Company's newer sales channel which focuses on co-branding relationships,
strategic business development (the "SBD Channel"). During the three months
ended September 30, 1999, the SBD Channel contributed $1.5 million to license
revenues while there were no SBD Channel revenues generated during the three
months ended September 30, 2000. The Company's objective with the SBD
Channel--to achieve a more predictable linear revenue model--remains the same.
However, based on market conditions, during the three months ended September 30,
2000, the Company made adjustments to its strategy for achieving this objective.
The Company has revised its former requirement for Strategic Partners to pay a
large upfront license fee along with ongoing per employee per month ("PEPM")
fees by de-emphasizing the upfront license fee and emphasizing the recurring
revenue from PEPM fees, typically done during the contract negotiation process.
The planned result is to provide a higher percentage of recurring revenue in the
SBD Channel with correspondingly lower upfront commitments.
License revenues increased 17.6% to $20.1 million for the nine months
ended September 30, 2000 from $17.0 million for the nine months ended September
30, 1999 due to increased sales of UltiPro HRMS/Payroll and sales generated from
the SBD Channel.
Service revenues increased 14.2% to $9.0 million for the three months
ended September 30, 2000 from $7.9 million for the three months ended September
30, 1999. Service revenues increased 6.9% to $25.6 million for the nine months
ended September 30, 2000 from $23.9 million for the nine months ended September
30, 1999. The increases in service revenues were primarily as a result of
increases in maintenance and training revenues generated from a larger installed
customer base and revenues generated from the IBM hosted model, partially offset
by a decrease in implementation revenues resulting primarily from the Company's
planned reduction of implementation consulting services subcontracted to third
party providers. Fees for services performed by such third party providers on
behalf of Ultimate Software, and typically under the supervision of Ultimate
Software's service consultants, are recognized as service revenues in the period
performed.
Cost of Revenues
Cost of revenues consists principally of the cost of license and
service revenues. Cost of license revenues primarily consists of fees payable to
a third party for software products distributed by the Company. Cost of service
revenues primarily consists of costs to provide consulting, implementation,
maintenance, technical support and training to the Company's customers, and the
cost of periodic updates.
Cost of license revenues increased 28.3% to $0.3 million for the three
months ended September 30, 2000 from $0.2 million for the three months ended
September 30, 1999. Cost of license revenues increased 90.0% to $1.0 million for
the nine months ended September 30, 2000 from $0.6 million for the nine months
ended September 30, 1999. As a percentage of license revenues, cost of license
revenues increased to 7.1% for the three months ended September 30, 2000 from
2.8% for the three months ended September 30, 1999 and to 5.2% for the nine
months ended September 30, 2000 from 3.2% for the nine months ended September
30, 1999. The increases in cost of revenues were primarily attributable to the
amortization of capitalized software for UltiPro Web and, in relation to the
three months ended September 30, 2000, the absorption of these costs into a
lower license revenue base.
10
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Cost of service revenues increased 29.7% to $6.0 million for the three
months ended September 30, 2000 from $4.6 million for the three months ended
September 30, 1999. Cost of service revenues increased 12.4% to $16.9 million
for the nine months ended September 30, 2000 from $15.0 million for the nine
months ended September 30, 1999. Cost of service revenues, as a percentage of
service revenues, increased to 66.4% for the three months ended September 30,
2000 from 58.4% for the three months ended September 30, 1999 and to 65.9% for
the nine months ended September 30, 2000 from 62.7% for the nine months ended
September 30, 1999. The increases in cost of service revenues were primarily due
to increased labor costs to support the implementation and maintenance of
UltiPro HRMS/Payroll and costs associated with revenues generated from the IBM
hosted model, partially offset by lower third-party implementation consulting
fees.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries, benefits,
sales commissions, travel and promotional expenses, facility and communication
costs for direct sales offices, and advertising and marketing costs. Sales and
marketing expenses increased 16.7% to $5.2 million for the three months ended
September 30, 2000 from $4.4 million for the three months ended September 30,
1999. Sales and marketing expenses increased 24.5% to $15.4 million for the nine
months ended September 30, 2000 from $12.4 million for the nine months ended
September 30, 1999. Sales and marketing expenses, as a percentage of total
revenues, increased to 39.8% for the three months ended September 30, 2000 from
27.9% for the three months ended September 30, 1999 and to 33.8% for the nine
months ended September 30, 2000 from 30.2% for the nine months ended September
30, 1999. The increase in sales and marketing expenses for the three months
ended September 30, 2000 was primarily attributable to higher advertising and
marketing costs focusing on branding, particularly the branding of the Company's
IBM hosted model, Intersourcing, partially offset by lower sales commissions.
The increase in sales and marketing expenses for the nine months ended September
30, 2000 was primarily due to higher advertising and marketing costs focusing on
branding, particularly the branding of the Company's IBM hosted model,
Intersourcing, and increased sales commissions and other variable costs
associated with increased license revenues.
Research and Development
Research and development expenses consist primarily of software
development personnel costs. Research and development expenses increased 51.1%
to $4.0 million for the three months ended September 30, 2000 from $2.7 million
for the three months ended September 30, 1999. Research and development expenses
increased 59.8% to $11.4 million for the nine months ended September 30, 2000
from $7.2 million for the nine months ended September 30, 1999. The increases in
research and development expenses were primarily attributable to the increase in
the number of software programmers, engineers and other development-related
positions for the development and enhancement of UltiPro HRMS/Payroll, the
continued development of UltiPro Web products, the expansion of application
hosting capabilities and for the development of new HRMS/payroll-related
enhancement modules. Research and development expenses, as a percentage of total
revenues, increased to 31.0% for the three months ended September 30, 2000 from
16.8% for the three months ended September 30, 1999 and to 25.1% for the nine
months ended September 30, 2000 from 17.5% for the nine months ended September
30, 1999. The increase in research and development expenses for the three months
ended September 30, 2000, as a percentage of total revenues, was primarily due
to increased personnel costs and lower total revenues. The increase in research
and development expenses for the nine months ended September 30, 2000, as a
percentage
11
<PAGE>
of total revenues, was primarily due to increased personnel costs, partially
offset by the absorption of the expenses in an increased total revenue base.
General and Administrative
General and administrative expenses consist primarily of salaries and
benefits of executive, administrative and financial personnel, as well as
external professional fees and the provision for doubtful accounts. General and
administrative expenses increased 58.9% to $2.3 million for the three months
ended September 30, 2000 from $1.5 million for the three months ended September
30, 1999. General and administrative expenses increased 36.3% to $5.2 million
for the nine months ended September 30, 2000 from $3.8 million for the nine
months ended September 30, 1999. General and administrative expenses, as a
percentage of total revenues, increased to 17.7% for the three months ended
September 30, 2000 from 9.1% for the three months ended September 30, 1999.
General and administrative expenses, as a percentage of total revenues,
increased to 11.4% for the nine months ended September 30, 2000 from 9.4% for
the nine months ended September 30, 1999. The increases in general and
administrative expenses for the three and nine months ended September 30, 2000
were principally attributable to an increase in the provision for doubtful
accounts.
Interest Expense
Interest expense decreased 21.0% to $64 thousand for the three months
ended September 30, 2000 from $81 thousand for the three months ended September
30, 1999. Interest expense increased 51.2% to $245 thousand for the nine months
ended September 30, 2000 from $162 thousand for the nine months ended September
30, 1999. The variances in interest expense are related to changes in total
capital lease obligations.
Interest and Other Income
Interest and other income decreased 12.9% to $88 thousand for the three
months ended September 30, 2000 from $101 thousand for the three months ended
September 30, 1999. Interest and other income decreased 42.6% to $243 thousand
for the nine months ended September 30, 2000 from $423 thousand for the nine
months ended September 30, 1999. The decreases in interest and other income were
primarily due to a decrease in cash and cash equivalents available for
investment in money market and other short-term marketable securities.
Provision for Income Taxes (Benefit)
No provision or benefit for federal, state or foreign income taxes was
made for the nine months ended September 30, 2000 due to the Company's
cumulative net operating losses incurred through the end of that period. No
provision or benefit for federal, state or foreign income taxes was made for the
nine months ended September 30, 1999 due to the net operating loss carryforwards
from prior periods. Net operating loss carryforwards available at December 31,
1999, which expire at various times through the year 2018 and are available to
offset future taxable income, were $25.3 million. The timing and levels of
future profitability may result in the expiration of net operating loss
carryforwards before utilization. Additionally, utilization of such net
operating losses may be limited as a result of cumulative ownership changes in
the Company's equity instruments.
12
<PAGE>
Liquidity and Capital Expenditures
The Company has historically funded operations primarily through the
sale of private equity securities and, to a lesser extent, equipment financing
and borrowing arrangements. In June 1998, the Company completed an initial
public offering of its Common Stock which resulted in net proceeds to the
Company totaling approximately $28.4 million.
As of September 30, 2000, the Company had $6.2 million in cash and cash
equivalents, reflecting a net decrease of $2.8 million since December 31, 1999.
Working capital as of September 30, 2000 was $12.4 million as compared to $17.6
million as of December 31, 1999. The decline in working capital for the nine
months ended September 30, 2000 totaling $5.2 million resulted primarily from
the impact of the net loss on operations as well as additional capital lease
obligations that are due within twelve months, principally for the purchase of
computer equipment.
Net cash used in operating activities was $0.6 million for the nine
months ended September 30, 2000 as compared to $7.0 million for the nine months
ended September 30, 1999. The improvement in net cash used in operating
activities was primarily attributable to enhanced collection efforts with
respect to accounts receivable, partially offset by a decrease in the Company's
operating results for the nine months ended September 30, 2000.
Net cash used in investing activities was $1.2 million for the nine
months ended September 30, 2000 as compared to $2.0 million for the nine months
ended September 30, 1999. The decrease in net cash used in investing activities
was primarily attributable to lower capital expenditures on equipment and
certain computer software purchases used in the Company's operations during the
nine months ended September 30, 2000 as the Company increased the financing of
equipment purchases.
Net cash used in financing activities for the nine months ended
September 30, 2000 was $1.0 million, as compared to $0.6 million for the nine
months ended September 30, 1999. The increase was primarily due to an increase
in principal payments on capital lease obligations, partially offset by
additional proceeds from the issuances of Common Stock pursuant to exercises of
stock options held by certain current and former employees of the Company.
The Company has a working capital revolving line of credit (the "Credit
Facility") with a bank, which is secured by the Company's accounts receivable
and bears interest at a rate equal to LIBOR plus 4.875% per annum. The amount
available under the Credit Facility is limited to the lesser of 80% of the
Company's eligible accounts receivable, as defined, or $4.0 million. The Credit
Facility will expire on December 31, 2000. The Company is in the process of
securing another working capital revolving line of credit to replace the
existing Credit Facility (the "Replacement Credit Facility"). At September 30,
2000 and as of the date of this Form 10-Q, there was no amount outstanding under
the Credit Facility.
The net proceeds from the IPO, after deducting $4.1 million in
underwriting discounts, commissions and other costs associated with the
offering, were $28.4 million. A portion of the net proceeds from the IPO in the
amount of $3.6 million was used to pay down the outstanding balance of the
Credit Facility. The balance of the Credit Facility was paid with cash generated
from operations in June 1998. As of September 30, 2000, there were no net
proceeds from the IPO remaining.
On October 30, 2000, the Company announced that its board of directors
authorized the repurchase of up to 1,000,000 shares of the Company's Common
Stock. Stock repurchases may be
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made periodically in the open market, in privately negotiated transactions or a
combination of both. The extent and timing of these transactions will depend on
market conditions and other business considerations.
The Company believes that cash and cash equivalents, cash generated
from operations, and available borrowings under the Credit Facility and the
Replacement Credit Facility, if obtained, will be sufficient to fund its
operations for at least the next 12 months.
UltiPro is a registered trademark of The Ultimate Software Group, Inc.
All other trademarks referenced are the property of their respective owners.
Seasonality
The Company has experienced, and may experience in the future,
significant seasonality in its business. The Company's business, operating
results and financial condition may be affected by such trends in the future.
Revenues have historically increased at higher rates in the fourth quarter of
the year and at lower rates in the next succeeding quarter, except for the
fourth quarter of 1999 discussed below. The Company believes such seasonality is
due to a number of factors, including the Company's quota-based compensation
arrangements, typical of those used in software companies, and year-end
budgetary pressures on the Company's customers. The Company believes revenues
for the fourth quarter of 1999 were not consistent with the historical trend
previously discussed principally as a result of a delay in closing year-end
license business due to companies' unique focus on their year 2000 issues.
Excluding the impact of the fourth quarter of 1999, the Company believes that
the seasonal trend that the Company has experienced in the past may continue in
the foreseeable future.
Quarterly Fluctuations
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. The Company's operating results may fluctuate as a result
of a number of factors, including, but not limited to, increased expenses
(especially as they relate to product development and sales and marketing),
timing of product releases, increased competition, variations in the mix of
revenues, announcements of new products by the Company or its competitors and
capital spending patterns of the Company's customers. The Company establishes
its expenditure levels based upon its expectations as to future revenues, and,
if revenue levels are below expectations, expenses can be disproportionately
high. A drop in near term demand for the Company's products could significantly
affect both revenues and profits in any quarter. Profitability achieved in
previous fiscal quarters is not necessarily indicative of operating results for
the full fiscal years or for any future periods. As a result of these factors,
there can be no assurance that the Company will be able to establish or maintain
profitability on a quarterly basis. The Company believes that, due to the
underlying factors for quarterly fluctuations, period-to-period comparisons of
its operations are not necessarily meaningful and that such comparisons should
not be relied upon as indications of future performance.
Recent Accounting Pronouncements
On December 3, 1999, the staff of the Securities and Exchange
Commission (the "SEC") published Staff Accounting Bulletin 101, "Topic 13:
Revenue Recognition," ("SAB 101") to provide guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB 101, as
amended, becomes effective for the Company during the three months
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ended December 31, 2000. Specific items discussed in SAB 101 include
bill-and-hold transactions, long-term service transactions, refundable
membership fees, contingent rental income, up-front fees when the seller has
significant continuing involvement and the amount of revenue recognized when the
seller is acting as a sales agent or in a similar capacity. SAB 101 also
provides guidance on disclosures that should be made for revenue recognition
policies and the impact of events and trends on revenue. The adoption of SAB 101
is not expected to have a material impact on the financial statements of the
Company.
In March 2000, the Emerging Issues Task Force (the "EITF") reached a
consensus on Issue No. 00-2, "Accounting for Web Site Development Costs", ("EITF
Issue No. 00-2") which applies to all Web site development costs incurred for
the quarters beginning after September 30, 2000. The consensus states that the
accounting for specific Web site development costs should be based on a model
consistent with AICPA Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use,"("SOP 98-1").
Accordingly, certain Web site development costs that are currently expensed as
incurred may be capitalized and amortized. The adoption of EITF Issue No. 00-2
is not expected to have a material impact on the financial statements of the
Company.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133") and SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -Deferral of the effective date of FASB No.
133" ("SFAS 137") were issued in September 1998 and September 1999,
respectively. They are effective for the Company's fiscal year ending December
31, 2001. These pronouncements, as further amended by SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities--An Amendment
of FASB Statement No. 133," 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 the Company currently has no derivative instruments.
Forward-Looking Statements
The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operations contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the Company's expectations or beliefs,
including, but not limited to, statements concerning the Company's operations
and financial performance and condition. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," and similar expressions
are intended to identify such forward-looking statements. These forward-looking
statements are not guarantees of future performance and are subject to certain
risks and uncertainties that are difficult to predict. The Company's actual
results could differ materially from those contained in the forward-looking
statements. Factors that may cause such differences include, but are not limited
to, those discussed in the foregoing Management's Discussion and Analysis of
Financial Condition and Results of Operations as well as those discussed in the
Company's Form 10-K and those disclosed in the Company's Form 10-Q for the
quarterly period ended June 30, 2000, filed with the SEC on August 9, 2000.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
In the ordinary course of its operations, the Company is exposed to
certain market risks, primarily interest rates. Uncertainties that are either
non-financial or non-quantifiable, such as
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political, economic, tax, other regulatory or credit risks, are not included in
the following assessment of the Company's market risks.
Interest rates. Cash equivalents consist of money market accounts with
original maturities less than three months. Interest on the Credit Facility is
based on LIBOR plus 4.875% per annum. Changes in interest rates could impact the
Company's anticipated interest income from interest-bearing cash accounts, or
cash equivalents, as well as interest expense on borrowings under the Credit
Facility. As of September 30, 2000 and the date of this Form 10-Q, there was no
amount outstanding under the Credit Facility; therefore, changes in interest
rates are not applicable for either interest expense or fair market value of the
debt instrument.
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is currently defending such proceedings and claims and anticipates that
it will be able to resolve these matters in a manner that will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flow.
ITEM 2. Changes in Securities and Use of Proceeds
The net offering proceeds from the IPO to the Company, after deducting
$4.1 million for expenses incurred in connection with the issuance and
distribution of the Common Stock in the IPO, were $28.4 million. In connection
with the offering and sale of the Common Stock registered, except as otherwise
noted below, the Company did not make any direct or indirect payments to
directors or officers of the Company or, to the Company's knowledge, their
associates; persons owning 10% or more of any class of equity securities of the
Company; or affiliates of the Company. From the closing of the IPO on September
5, 1998 until September 30, 2000 the net offering proceeds were used as follows
(in thousands):
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 22,848
---------
Total $ 28,384
=========
As of September 30, 2000, there were no net proceeds from the IPO
remaining.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
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ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended
September 30, 2000.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Ultimate Software Group, Inc.
Date: November 14, 2000 By: /S/ Mitchell K. Dauerman
-------------------------------------
Executive Vice President,
Chief Financial Officer and Treasurer
(Authorized Signatory and Principal
Financial and Accounting Officer)
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
27.1 Financial Data Schedule
