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 MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 0-24347
THE ULTIMATE SOFTWARE GROUP, INC.
(Exact name of Registrant as specified in its charter)
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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
(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 May 9, 2000, there were 16,075,598 shares of the Registrant's
Common Stock, par value $.01, outstanding.
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THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
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PAGE(S)
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PART I--FINANCIAL INFORMATION:
Item 1--Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 3
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 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 7-15
Item 3--Quantitative and Qualitative Disclosures About Market Risk 15
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 17
Item 4--Submission of Matters to a Vote of Security Holders 17
Item 5--Other Information 17
Item 6--Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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2
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PART 1--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
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As of As of
March 31, December 31,
2000 1999
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(Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 6,739 $ 8,946
Accounts receivable, net 21,913 20,670
Prepaid expenses and other current assets 2,213 2,772
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Total current assets 30,865 32,388
Property and equipment, net 6,117 5,007
Other assets, net 922 1,035
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Total assets $ 37,904 $ 38,430
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,777 $ 2,026
Accrued expenses 3,083 3,625
Deferred revenue 7,343 8,009
Current portion of capital lease obligations 1,476 1,104
Income taxes payable - 22
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Total current liabilities 14,679 14,786
Capital lease obligations, net of current portion 1,211 1,120
Deferred revenue 511 564
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Total liabilities 16,401 16,470
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Stockholders' equity:
Preferred Stock, $.01 par value, 2,000,000 shares authorized
in 2000 and 1999, respectively; no shares issued or out - -
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, 16,075,598 and 16,046,769 shares issued and
outstanding in 2000 and 1999, respectively 161 160
Additional paid-in capital 65,418 65,162
Accumulated deficit (44,076) (43,362)
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Total stockholders' equity 21,503 21,960
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Total liabilities and stockholders' equity $ 37,904 $ 38,430
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The accompanying notes to condensed consolidated
financial statements are an integral
3
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THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
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For the Three Months
Ended March 31,
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2000 1999
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Revenues, net:
License $ 6,486 $ 3,019
Services 8,342 7,726
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Total revenues, net 14,828 10,745
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Cost of revenues:
License 346 143
Services 5,547 5,101
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Total cost of revenues 5,893 5,244
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Operating expenses:
Sales and marketing 4,711 3,714
Research and development 3,624 2,094
General and administrative 1,292 1,140
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Total operating expenses 9,627 6,948
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Operating loss (692) (1,447)
Interest expense (105) (39)
Interest and other income 83 182
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Net loss $ (714) $ (1,304)
========= =========
Net loss per share:
Basic and diluted $ (0.04) $ (0.08)
========= =========
Weighted average shares outstandin
Basic and diluted 16,054 15,884
========= =========
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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)
For the Three Months
Ended March 31,
--------------------
2000 1999
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Cash flows from operating activities:
Net loss $ (714) $ (1,304)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 710 414
Provision for doubtful accounts 411 233
Non-cash issuances of stock options for services 58 27
Changes in operating assets and liabilities:
Accounts receivable (2,523) 33
Prepaid expenses and other current assets 329 747
Other assets 51 (142)
Accounts payable 781 (888)
Accrued expenses (564) (1,171)
Deferred revenue 120 (1,086)
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Net cash used in operating activities (1,341) (3,137)
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Cash flows from investing activities:
Purchases of property and equipment (717) (142)
Net proceeds from notes receivable - 15
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Net cash used in investing activities (717) (127)
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Cash flows from financing activities:
Principal payments on capital lease obligations (347) 75
Net proceeds from issuances of Common Stock 198 (138)
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Net cash used in financing activities (149) (63)
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Net decrease in cash and cash equivalents (2,207) (3,327)
Cash and cash equivalents, beginning of period 8,946 17,128
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Cash and cash equivalents, end of period $ 6,739 $ 13,801
========= ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 67 $ 69
========= ========
Supplemental disclosure of non-cash financing activities:
- -The Company entered into capital lease obligations to acquire new equipment
totaling $810 and $412 in the three months ended March 31, 2000 and 1999,
respectively.
The accompanying notes to condensed consolidated
financial statements are an integral part of these financial statement
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 months ended March 31, 2000 and 1999 are not necessarily
indicative of operating results for the full fiscal years or for any future
periods.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of The Ultimate Software Group, Inc. ("Ultimate Software" or the
"Company") should be read in conjunction with the unaudited Condensed
Consolidated Financial Statements and Notes thereto included elsewhere in this
Form 10-Q. This Form 10-Q contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those contained in the forward-looking statements. Factors that may cause such
differences include, but are not limited to, those discussed below.
OVERVIEW
Ultimate Software designs, markets, implements and supports
technologically advanced cross-industry human resources management and payroll
("HRMS/payroll") software solutions.
Ultimate Software's Web-based solutions include UltiPro Employee
Self-Service and UltiPro Manager Self-Service (collectively, "UltiPro Web"), and
UltiPro.com. The Company's software solutions are marketed primarily to
middle-market organizations with 500 to 15,000 employees. UltiPro HRMS/Payroll,
Ultimate Software's core product, automates HRMS/payroll functions for
businesses and enables them to manage the employee life cycle strategically and
cost effectively, from inception of employment through retirement. UltiPro Web
leverages the Internet to "face" every person in an organization. Ultimate
Software believes that UltiPro HRMS/Payroll's distributed, object-oriented
architecture and integrated Web-based solutions provide significant advantages
over other HRMS/payroll software 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 high quality implementation, training and
ongoing support services to its customers.
As part of the Company's strategy to provide its customers an easy
pathway to e-business, in June 1999, Ultimate Software introduced UltiPro.com, a
new Web portal and one-stop shopping supersite for HR/payroll professionals,
managers and the employees they support. The first phase of UltiPro.com offers a
variety of third party and private-labeled products and services that complement
Ultimate Software's Web-based products, which are accessed through the portal.
UltiPro Web products are fully integrated with UltiPro HRMS/Payroll and are not
stand-alone products. UltiPro Web addresses the growing demand for Web-based
solutions that empower managers and general employee populations. UltiPro Web
Employee Self-Service provides employees online access to employee handbooks,
company news and policies, employee directories, benefit plans and pay check
history and extranet connections to other relevant sites, such as the site of
their 401(k) administrator. UltiPro Web Manager Self-Service provides managers
online access to information on their employee staffs, including features for
performance management, recruitment and staffing, training management and
reporting.
The Company also provides application hosting services for its
UltiPro Web and HRMS/Payroll products pursuant to an agreement entered into
during June 1999 with International Business Machines Global Services, Inc.
("IBM") which enables Ultimate Software's clients to build a foundation for
e-business (the "IBM Agreement").
7
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Under the terms of the IBM Agreement, IBM provides the installation
and ongoing 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) (the "IBM Hosting Model")
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.
Ultimate Software also offers "Powered by UltiPro," a pre-packaged
HRMS/payroll solution specifically designed to be marketed and private-labeled
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 technology
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 national, regional and local
strategic partners. Ultimate Software's customers operate in a wide variety of
industries, including healthcare, professional employee organizations ("PEO's"),
sports and entertainment, manufacturing, food services, retail, technology,
finance, insurance, legal services, real estate, transportation, communications,
and services.
COMPANY HISTORY
The Company was originally organized in August 1990 as The Ultimate
Software Group, Ltd., a Florida limited partnership (the "Partnership"). The
Company was incorporated in April 1996, at the direction of the Partnership, for
the purpose of acquiring and operating the existing business of the Partnership.
The Company began as a reseller of private label PC-based payroll software
products targeted to organizations with under 200 employees. In early 1992, the
Company began to develop a new product that would offer greater flexibility,
more features, more applications and the ability to handle the needs of larger
organizations.
In July 1993, the Company launched its first proprietary product,
UltiPro for Lan, a DOS-based HRMS/payroll software solution for local area
network personal computers. In 1996, in anticipation of the general market shift
to Windows and client/server applications, the Company began developing a
client/server HRMS/payroll solution for middle-market organizations. In June
1997, the Company launched UltiPro HRMS/Payroll, its 32-bit, object-oriented
HRMS/payroll solution for middle-market organizations.
Since the release of UltiPro HRMS/Payroll, the principal source of the
Company's license revenues has shifted from its DOS-based product to its
client/server product. UltiPro HRMS/Payroll has higher license fees, service
fees and gross margins than the Company's DOS-based product. While the Company
continues to support its DOS-based product, it no longer actively markets this
product.
8
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Prior to 1995, the Company sold its products solely through a network
of third-party resellers (the "Resellers"). In exchange for certain fees, the
Resellers were granted exclusive rights to sell the Company's products in
certain geographic areas. In mid-1995, in order to gain greater control over its
distribution channels, the Company shifted its distribution strategy from its
network of Resellers to a direct sales force, acquiring the businesses of three
Resellers in 1995 and that of nine Resellers in April 1996. These acquisitions
were accounted for under the purchase method of accounting with approximately
$8.8 million of goodwill recorded as a result. In February and March 1998, the
Company acquired the businesses of the remaining five Resellers and these
acquisitions were recorded under the poolings-of-interest method of accounting.
On June 5, 1998, the Company completed the sale of 3,250,000 shares of
the Company's common stock, par value $.01 (the "Common Stock"), in an initial
public offering at an offering price of $10 per share (the "IPO"). The net
proceeds from the IPO, after deducting $4.1 million in underwriting discounts,
commissions and other costs associated with the offering, were $28.4 million. A
portion of the net proceeds from the IPO in the amount of $3.6 million was used
to pay down the outstanding balance of the Company's existing line of credit.
The balance of the remaining net proceeds from the IPO has been and will
continue to be used for general corporate purposes, including working capital
(see "Liquidity and Capital Resources"). The Company may also use a portion of
the net proceeds to fund acquisitions of complementary businesses, products or
technologies. Although the Company may periodically review potential acquisition
opportunities, there are no current agreements with respect to any such
transactions.
9
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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
Ended March 31,
--------------------
2000 1999
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Revenues, net:
License 43.7% 28.1%
Services 56.3 71.9
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Total revenues, net 100.0 100.0
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Cost of revenues:
License 2.3 1.3
Services 37.4 47.5
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Total cost of revenues 39.7 48.8
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Operating expenses:
Sales and marketing 31.8 34.6
Research and development 24.4 19.5
General and administrative 8.7 10.6
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Total operating expenses 64.9 64.7
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Operating loss (4.6) (13.5)
Interest expense (0.7) (0.3)
Interest and other income 0.6 1.7
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Net loss (4.7)% (12.1)%
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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 contracts.
Maintenance and support contracts are generally priced as a percentage of the
initial license fee for the underlying products.
Total revenues, consisting of license and service revenues, increased
38.0% to $14.8 million for the three months ended March 31, 2000 from $10.7
million for the three months ended March 31, 1999.
10
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License revenues increased 114.8% to $6.5 million for the three months
ended March 31, 2000 from $3.0 million for the three months ended March 31,
1999. The increase in license revenues was primarily due to increased sales of
the Company's core product, UltiPro HRMS/Payroll, as well as revenues generated
by the Company's newer sales channel, strategic business development (the "SBD
Channel") and, to a lesser degree, revenues generated from sales of UltiPro Web.
The SBD Channel typically involves business relationships with Strategic
Partners which generally include an up-front license fee and ongoing license
fees which are tied to the Strategic Partners' sales growth.
Service revenues increased 8.0% to $8.3 million for the three months
ended March 31, 2000 from $7.7 million for the three months ended March 31,
1999. The increase in service revenues was primarily attributable to increases
in maintenance and training revenues generated from a larger installed customer
base, partially offset by a decrease in implementation revenues resulting 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 to $0.3 million for the three months
ended March 31, 2000 from $0.1 million for the three months ended March 31, 1999
principally as a result of increased license revenues. Cost of license revenues,
as a percentage of license revenues, was 5.3% for the three months ended March
31, 2000 as compared to 4.7% for the three months ended March 31, 1999 primarily
due to the amortization of capitalized software for UltiPro Web.
Cost of service revenues increased by 8.7% to $5.5 million for the
three months ended March 31, 2000 from $5.1 million for the three months ended
March 31, 1999 primarily due to increased labor costs to support the
implementation and maintenance of UltiPro HRMS/Payroll, partially offset by
lower third-party implementation consulting fees. Cost of service revenues, as a
percentage of service revenues, for the three months ended March 31, 2000 was
consistent with the same period last year.
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 26.8%
to $4.7 million for the three months ended March 31, 2000 from $3.7 million for
the three months ended March 31, 1999. The increase in sales and marketing
expenses was primarily attributable to increased sales commissions and other
variable costs relating to increased license revenues. Additionally, advertising
and marketing expenses increased as a result of the Company's focus on branding,
particularly the branding of the IBM Hosting Model and Internet-based and direct
mail lead generation. Sales and marketing expenses, as a percentage of total
revenues, decreased to 31.8% from 34.6% for the three months ended
11
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March 31, 2000 and 1999, respectively, primarily due to the absorption of the
expenses in an increased total revenue base.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of software
development personnel costs. Research and development expenses increased by
73.1% to $3.6 million for the three months ended March 31, 2000 from $2.1
million for the three months ended March 31, 1999. The increase in research and
development expenses was primarily attributable to the increase in the number of
software programmers, engineers and other development-related positions for the
development and enhancement of UltiPro HRMS/Payroll, the continued development
of UltiPro Web products, the expansion of application hosting capabilities and
for the development of new HRMS/payroll-related enhancement modules. Research
and development expenses, as a percentage of total revenues, increased to 24.4%
from 19.5% for the three months ended March 31, 2000 and 1999, respectively. The
increase in research and development expenses, as a percentage of total
revenues, was primarily due to increased personnel costs, partially offset by
the absorption of the expenses in an increased total revenue base.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries and
benefits of executive, administrative and financial personnel, as well as
external professional fees and the provision for doubtful accounts. General and
administrative expenses increased by 13.4% to $1.3 million for the three months
ended March 31, 2000 from $1.1 million for the three months ended March 31,
1999. The increase in general and administrative expenses was primarily due to
increased personnel costs 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 8.7% from 10.6% for the three months
ended March 31, 2000 and 1999, respectively, primarily due to the absorption of
the expenses in an increased total revenue base.
INTEREST EXPENSE
Interest expense for the three months ended March 31, 2000 increased
slightly to $105,000 from $39,000 for the same period last year due to the
increase in capital lease obligations.
INTEREST AND OTHER INCOME
Interest and other income decreased to $0.1 million for the three
months ended March 31, 2000 from $0.2 million for the same period last year
primarily due to lower interest earned on the remaining net proceeds from the
IPO.
PROVISION FOR INCOME TAXES (BENEFIT)
No provision or benefit for federal, state or foreign income taxes was
made for the three months ended March 31, 2000 or 1999 due to the operating
losses incurred in the respective 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
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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 March 31, 2000, the Company had $6.7 million in cash and cash
equivalents, reflecting a net decrease of $2.2 million since December 31, 1999.
Working capital as of March 31, 2000 was $16.2 million as compared to $17.6
million as of December 31, 1999. The decline in working capital includes a
decrease in cash and cash equivalents principally to fund operations, partially
offset by an increase in accounts receivable.
Net cash used in operating activities was $1.3 million for the three
months ended March 31, 2000 as compared to $3.1 million for the three months
ended March 31, 1999. The decrease in cash used in operating activities was
primarily attributable to improved operating results, partially offset by an
increase in accounts receivable principally associated with the Company's total
revenue growth.
Net cash used in investing activities was $0.7 million for the three
months ended March 31, 2000 as compared to $0.1 million for the three months
ended March 31, 1999. The increase in net cash used in investing activities was
primarily attributable to additional equipment purchases and certain computer
software purchases used in the Company's operations during the three months
ended March 31, 2000.
Net cash used in financing activities for the three months ended March
31, 2000 was $149,000, as compared with $63,000 for the three months ended March
31, 1999. The increase in principal payments on capital lease obligations for
the three months ended March 31, 2000 relative to that of the same period last
year was offset by additional proceeds from the issuances of Common Stock
pursuant to exercises of stock options held by certain current and former
employees of the Company.
The Company has a working capital revolving line of credit (the "Credit
Facility") with a bank, which is secured by the Company's accounts receivable
and bears interest at a rate equal to LIBOR plus 4.875% per annum. The amount
available under the Credit Facility is limited to the lesser of 80% of the
Company's eligible accounts receivable, as defined, or $4.0 million. The Credit
Facility will expire on December 31, 2000. At March 31, 2000 and as of the date
of this Form 10-Q, there was no amount outstanding under the Credit Facility.
The net proceeds from the IPO, after deducting $4.1 million in
underwriting discounts, commissions and other costs associated with the
offering, were $28.4 million. A portion of the net proceeds from the IPO in the
amount of $3.6 million was used to pay down the outstanding balance of the
Credit Facility. The balance of the Credit Facility was paid with cash generated
from operations in June 1998. The balance of the remaining net proceeds from the
IPO in the amount of $4.3 million as of March 31, 2000 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.
13
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The Company believes that cash and cash equivalents, remaining net
proceeds from the IPO, cash generated from operations, and available borrowings
under the Credit Facility will be sufficient to fund its operations for at least
the next 12 months.
ULTIPRO IS A REGISTERED TRADEMARK OF THE ULTIMATE SOFTWARE GROUP, INC.
WINDOWS IS A REGISTERED TRADEMARK OF MICROSOFT CORPORATION. ALL OTHER TRADEMARKS
REFERENCED ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS.
SEASONALITY
The Company has experienced, and may experience in the future,
significant seasonality in its business. The Company's business, operating
results and financial condition may be affected by such trends in the future.
Revenues have historically increased at higher rates in the fourth quarter of
the year and at lower rates in the next succeeding quarter, except for the
fourth quarter of 1999 discussed below. The Company believes such seasonality is
due to a number of factors, including the Company's quota-based compensation
arrangements, typical of those used in software companies, and year-end
budgetary pressures on the Company's customers. The 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, if
established, 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 becomes
effective for the Company during the three months ended June 30, 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
14
<PAGE>
acting as a sales agent or in a similar capacity. SAB 101 also provides guidance
on disclosures that should be made for revenue recognition policies and the
impact of events and trends on revenue. The adoption of SAB 101 is not expected
to have a material impact on the financial statements of the Company.
In March 2000, the Emerging Issues Task Force (the "EITF") reached
a consensus on Issue No. 00-2, "Accounting for Web Site Development Costs",
("EITF Issue No. 00-2") which applies to all Web site development costs incurred
for the quarters beginning after June 30, 2000. The consensus states that the
accounting for specific Web site development costs should be based on a model
consistent with AICPA Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use,"("SOP 98-1").
Accordingly, certain Web site development costs that are currently expensed as
incurred may be capitalized and amortized. The adoption of EITF Issue No. 00-2
is not expected to have a material impact on the financial statements of the
Company.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133") and SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -Deferral of the effective date of FASB No.
133" ("SFAS 137") were issued in June 1998 and June 1999 respectively. They are
effective for the Company's fiscal year ending December 31, 2001. These
pronouncements establish accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded on the balance sheet as either an asset or a
liability measured at its fair value. The Company believes that the adoption of
SFAS 133 and SFAS 137 will not have a material impact on its financial
statements as it has not entered into derivative contracts or hedging activities
and has no current plans to do so in the foreseeable future.
FORWARD-LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operations contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the Company's expectations or beliefs,
including, but not limited to, statements concerning the Company's operations
and financial performance and condition. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," and similar expressions
are intended to identify such forward-looking statements. These forward-looking
statements are not guarantees of future performance and are subject to certain
risks and uncertainties that are difficult to predict. The Company's actual
results could differ materially from those contained in the forward-looking
statements. Factors that may cause such differences include, but are not limited
to, those discussed in the foregoing Management's Discussion and Analysis of
Financial Condition and Results of Operations as well as those discussed in the
Company's Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of its operations, the Company is exposed to
certain market risks, primarily interest rates. Uncertainties that are either
non-financial or non-quantifiable, such as political, economic, tax, other
regulatory or credit risks are not included in the following assessment of the
Company's market risks.
INTEREST RATES. Cash equivalents consist of money market accounts with
original maturities less than three months. Interest on the Credit Facility is
based on LIBOR plus 4.875%
15
<PAGE>
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 March
31, 2000 and the date of this Form 10-Q, there was no amount outstanding under
the Credit Facility; therefore, changes in interest rates are not applicable for
either interest expense or fair market value of the debt instrument.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. As of the
date of this filing, the Company is not a party to any legal proceeding the
adverse outcome of which, individually or in the aggregate, could reasonably be
expected to have a material adverse effect on the Company's business, operating
results and financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From the effective date of the Company's Registration Statement on Form
S-1 (No. 333-47881) filed with the Securities and Exchange Commission (the
"SEC") on March 13, 1998, as amended (the "Form S-1"), through March 31, 2000,
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 March 31, 2000,
except as otherwise noted, the net offering proceeds were used as follows (in
thousands):
Invested in money market and other short-term
marketable securities at March 31, 2000 $4,781
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 18,067
-------------
Total $28,384
=============
16
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 March 31, 2000.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ULTIMATE SOFTWARE GROUP, INC.
Date: May 15, 2000 By: /S/ MITCHELL K. DAUERMAN
------------------------
Executive Vice President,
Chief Financial Officer
and Treasurer
(Authorized Signatory and Principal
Financial and Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,739
<SECURITIES> 0
<RECEIVABLES> 24,033
<ALLOWANCES> (2,120)
<INVENTORY> 0
<CURRENT-ASSETS> 30,865
<PP&E> 11,439
<DEPRECIATION> (5,322)
<TOTAL-ASSETS> 37,904
<CURRENT-LIABILITIES> 14,679
<BONDS> 0
0
0
<COMMON> 161
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 37,904
<SALES> 14,828
<TOTAL-REVENUES> 14,828
<CGS> 5,893
<TOTAL-COSTS> 9,627
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105
<INCOME-PRETAX> (714)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (714)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
