Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________ .
Commission file number: 0-24347
THE ULTIMATE SOFTWARE GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 65-0694077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Ultimate Way, Weston, FL 33326
(Address of principal executive offices) (Zip Code)
(954) 331-7000
(Registrant's telephone number, including area code)
----------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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 15, 2001 was approximately $76.5
million.
As of March 15, 2001, there were 16,046,965 shares of the Registrant's
Common Stock, par value $.01, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2001 Annual Meeting
of Stockholders are incorporated by reference into Part III of this Annual
Report on Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE ULTIMATE SOFTWARE GROUP, INC.
INDEX
Page(s)
--------
PART I
Item 1. Business .................................................................. 3
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 ..................................................... 18
Item 8. Financial Statements and Supplementary Data ............................... 30
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure ...................................................... 52
PART III
Item 10. Directors and Executive Officers of the Registrant ........................ 52
Item 11. Executive Compensation .................................................... 56
Item 12. Security Ownership of Certain Beneficial Owners and Management ............ 56
Item 13. Certain Relationships and Related Transactions ............................ 57
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......... 57
Signatures ................................................................ 61
2
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 in this Form 10-K, including Exhibit 99.1
hereto. 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(R) and Intersourcing(R) 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. The Company's mission is to become the
premier infrastructure provider of Internet payroll and employee management
solutions.
Ultimate Software's Web-based solution, UltiPro Web, includes employee
administration, manager self-service, employee self-service, and benefits
enrollment and is integrated with and supported by a back-office client/server
solution known as UltiPro HRMS/Payroll. UltiPro Web is marketed primarily to
mid-sized and small organizations, those with under 15,000 employees, but
scales to meet the needs of larger organizations. A Web-based self-service
solution, UltiPro Web allows customers to empower their entire
workforce--employees, managers and executives--to improve communications and
efficiencies. UltiPro Web offers business intelligence reporting, access to
benefits and paycheck history, direct deposit maintenance, and human resources
("HR") management including Internet employee administration, benefits
enrollment, recruitment and training features. Along with the back-office
solution UltiPro HRMS/Payroll, UltiPro Web enables businesses to manage the
employee life cycle strategically and cost effectively, from inception of
employment through retirement.
Ultimate Software believes that its solutions provide significant
advantages over other HRMS/payroll products, 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")
leverage the Microsoft technologies, including the Microsoft's DNA architecture.
As part of its comprehensive HRMS/payroll solutions, Ultimate Software provides
high quality implementation and training services to its customers as well as
support services, which are certified by the Support Center Practices
Certification program. Ultimate Software was ranked #1 in customer satisfaction
for integrated HR/payroll in an Institute of Management and Administration
(IOMA) July 2000 customer survey and has received high rankings from Gartner's
Decision Engine in product functionality, implementation services, ongoing
customer support, and low cost of ownership.
Ultimate Software reaches its customer base through its direct sales force
and a network of business service providers ("BSPs") that market to their
customers. The Company's direct sales force markets UltiPro as an in-house
HRMS/payroll solution and alternatively as an application hosting offering.
Pursuant to an agreement entered into during June 1999 with International
Business
3
Machines Global Services, Inc. ("IBM"), IBM hosts UltiPro for Ultimate Software
customers (the "IBM Agreement"). Under the terms of the IBM Agreement, IBM
provides the installation, ongoing maintenance and backup services at an IBM
Data Hosting Center. The Company has branded the IBM hosted model as
"Intersourcing" 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, roles-based Web-access for all
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 up-front cash and convenient
monthly payments.
In April 2000, the Company announced a co-branding alliance program to
target primarily those businesses with under 500 employees and to provide the
opportunity for Ultimate Software to generate recurring revenues to supplement
the license and services revenues, including recurring maintenance revenues,
received primarily from its mid-sized customers, those with 500 to 15,000
employees. The program offers BSPs the opportunity to co-brand UltiPro and to
price their offerings on a per employee per month basis. As of the date of this
Form 10-K, Ultimate Software had signed 11 co-branding alliances.
On March 9, 2001, Ultimate Software signed a co-branding agreement with
Ceridian Corporation ("Ceridian") granting Ceridian a non-exclusive license to
use UltiPro software as part of an on-line offering which Ceridian intends to
market primarily to businesses with under 500 employees (the "Ceridian
Agreement"). Ceridian intends to name the offering "SourceWeb" and to
distribute it as an outsourcing solution hosted by Ceridian or by a third-party
hosting company. Under the terms of the Ceridian Agreement, Ceridian is
responsible for all marketing costs and expenses, and must sell the licensed
software on a per period, per employee, per paycheck basis or other repetitive
payment model. On March 13, 2001, Ceridian completed an up-front payment to
Ultimate Software of $10 million, half of which is subject to the Company's
successful transfer of technology to Ceridian. Assuming the successful
completion of the technology transfer, Ceridian will pay a monthly license fee
based on (i) the number of employees paid using the Ultimate Software product;
and/or (ii) the number of checks per employee. These payments are subject to a
minimum monthly payment of $250,000 beginning in January 2002, increasing to
$500,000 per month in January 2003 with 5% annual increases beginning in 2006.
The maximum monthly payment starting in January 2002 is $1 million, subject to
5 percent annual increases beginning in 2003. The Ceridian Agreement may be
terminated by Ceridian at any time prior to June 30, 2002 if the technology
transfer has not been completed at that time. In such event, the Company would
be obligated to refund $5,000,000 to Ceridian. In addition, after five years,
either party can terminate the agreement with two years' notice, with Ceridian
retaining certain rights to use the licensed software upon termination. Subject
to a successful technical knowledge transfer by January 1, 2002, the parties
expect the minimum term of the agreement to be 7 years and that the amounts
payable to Ultimate, including the $10 million already paid, will be between
$45 million and $94 million during that period. The Ceridian Agreement provides
that Ceridian may acquire an equity interest in Ultimate through purchases in
the open market or from third parties, subject to a contractual limitation of
14.99% of the Company's common stock, $.01 par value (the "Common Stock").
On June 5, 1998, the Company completed the sale of 3,250,000 shares of 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. As of December 31, 2000, there were no remaining
net proceeds from the IPO.
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
4
and its telephone number is (800) 432-1729. To date, the Company derives no
revenue from customers outside of the United States and has no assets located
outside of the United States.
Benefits of UltiPro Solutions
Ultimate Software's UltiPro 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 a Web portal that offers UltiPro
users easy access to services such as advanced recruitment, job posting and
resume scoring services provided by Webhire Inc.; pre-employment screening and
background checking services provided by Sterling Testing Systems, Inc.; and a
collection of current regulatory law, tax and legislative compliance
information compiled by Ultimate Software's tax team.
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 Incorporated ("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 and
UltiPro Web, 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
reducing 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 Web is a three-tier
5
solution that leverages Microsoft's DNA architecture and XML to increase design
efficiencies within the system and particularly for workflow capabilities.
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 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 back-office users to find information
quickly and easily. The Company refers to this easy navigation as "Two clicks to
anywhere(TM)."
Comprehensive Professional Services and Industry-Specific Expertise.
Ultimate Software provides high quality implementation, training and ongoing
product and customer support services. Ultimate Software employs approximately
185 people in customer services, which includes the implementation, product
support, technical support and training departments. Most 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. UltiPro Web leverages Microsoft's
DNA architecture, and UltiPro HRMS/Payroll uses 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 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 solution, UltiPro Web, is integrated with UltiPro HRMS/Payroll's
database and uses several technologies including Active Server Pages, Java
script, XML, HTML, and COM+. UltiPro Web leverages Microsoft's DNA
architecture.
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 only on a client workstation, 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.
6
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 Solutions
Ultimate Software's core software products are UltiPro Web and UltiPro
HRMS/Payroll. UltiPro Web is a roles-based payroll and employee management
solution built using Microsoft's DNA architecture and includes employee
administration, employee self-service, manager self-service, and benefits
enrollment. UltiPro Web is integrated with and supported by UltiPro
HRMS/Payroll, a back-office client/server product, built with Microsoft SQL
Server as the database and the enterprise-ready Microsoft Windows 2000
operating system.
Ultimate Software has re-packaged UltiPro to meet the unique requirements
of diverse markets by leveraging select functionality in UltiPro Web and
UltiPro HRMS/Payroll and adding specific market functionality as required.
UltiPro is currently delivered as four solutions: UltiPro Web and UltiPro
HRMS/Payroll, "Powered by UltiPro" BSP Solution, UltiPro PEO, and UltiPro
Healthcare. The Company also continues to support its customers using UltiPro
for Lan, a DOS-based product.
UltiPro Web and UltiPro HRMS/Payroll (UltiPro)
UltiPro Web, first released in 1998, and UltiPro HRMS/Payroll, first
released in June 1997, together offer comprehensive HRMS/payroll functionality
to mid-sized organizations, those with 500 to 15,000 employees. The solution
can scale to accommodate larger numbers of employees. UltiPro Web is integrated
with and requires UltiPro HRMS/Payroll for back-office functionality. With
UltiPro Web, mid-sized businesses can purchase employee self-service, manager
self-service, and benefits enrollment individually or as a package.
UltiPro Web and UltiPro HRMS/Payroll includes, but is not limited to, the
following functionality:
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. UltiPro Web
includes staff requisition, performance, and training management tools as
well as reporting and business intelligence tools to enable managers to
make informed decisions.
Employee Self-Service. UltiPro Web enables employees to make informed
benefits choices without making inquiries to their human resource
department because UltiPro Web provides personalized benefits information
and company-defined 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.
7
Benefits Enrollment. UltiPro Web Benefits Enrollment enables employees to
use the Web to review, select and submit their benefits information and
allows HR practitioners or managers to set up and monitor the process.
Employees have the ability to view and compare costs and coverages of
current and proposed benefit plans, sign up for new benefit plans on-line,
and modify existing benefits for dependent and beneficiary records. Benefit
administrators can define and set up multiple benefit enrollment sessions,
set controls for employees to view only the benefit choices they are
eligible for, monitor enrollment activity, and post customized messages or
send e-mail as reminders to employees.
Human Resources. UltiPro is designed to streamline and manage human
resource functions within an organization. In addition to enabling
organizations to comply with regulatory requirements, UltiPro 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 "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 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. In
UltiPro HRMS/Payroll, Ultimate Software has developed a one-table design
that maintains deductions and benefit plans in one common set of tables.
One table stores together rules for coverage; premium and employer match
computations; eligibility and participation determination; and taxation,
wage accumulation and withholding requirements for payroll. UltiPro
HRMS/Payroll also delivers rules-based benefits administration
functionality, combining the benefit and payroll deduction tables, to help
improve accuracy and scheduling convenience. Tracking of dependent and
beneficiary information is comprehensive and can be associated with benefit
plans as necessary. In addition, complete historical information is
available in summary and detail views for a quick response to benefit
inquiries and ease in benefit plan research.
Payroll. UltiPro HRMS/Payroll incorporates a comprehensive tax management
system to handle federal, state and local tax computations, including
multi-state taxing rules and reciprocity. In addition, the system is
delivered with complex wage calculations such as shift premiums, piecework
and make-up pay, average pay rates for overtime calculations and
garnishments/
disposable pay. It also includes convenience features enabling users to
generate off-cycle checks, create direct deposit files, perform automatic
check reconciliation, and track the progress of payroll processing steps
online.
Recruitment and Staffing. The Recruitment and Staffing functionality 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.
Enterprise Integration Tools. UltiPro HRMS/Payroll incorporates built-in
tools 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. In
addition, UltiPro Web enables users to link to service providers of their
choice including healthcare providers, 401(k) providers and recruitment
sources.
Reporting. UltiPro provides a library of over 400 reports including
analytical reports, many signature-ready government forms, basic company
and employee listings, employee forms,
8
reconciliation and audit reports. In addition to the many standard reports,
UltiPro includes analytical business intelligence `cubes' specifically
designed to address workforce issues on such topics as overtime and
turnover trends.
"Powered by UltiPro" BSP Solution (the "BSP Solution")
"Powered by UltiPro" BSP Solution is designed for and primarily marketed
to business service providers (previously referred to as "aggregators" and
"strategic partners") that have relationships with smaller organizations, those
with under 500 employees. The BSP Solution, released in December 2000, enables
business service providers to deliver Web-based payroll services to their
customers and Web access for their customers' employees to view their paycheck
and basic benefits information. Business service providers have the opportunity
to co-brand UltiPro and to price their offerings on a per employee per month
basis.
The BSP Solution has been packaged to be easy to use and convenient for
smaller companies. The BSP Solution leverages select functionality from UltiPro
Web and UltiPro HRMS/Payroll, and has a specially designed Web browser
interface for the payroll administrator to sign up their business for the
service, enter employee hours worked and submit payroll. If there are no
changes to employees' standard paycheck information, submitting a payroll can
be done in less than a minute by clicking an icon. With changes, the process
can take several minutes. The initial process of registering for Web payroll
services takes less than an hour if the administrator has all the appropriate
data available for entry. To ensure the process is rapid and easy for
registrants, there is a checklist online with what they need before beginning
the signup process. Through a secure, password-protected login, employees can
view their current paycheck and direct deposit details, paycheck history, and
benefits details such as medical, dental and 401(k) deductions.
UltiPro PEO
UltiPro PEO is a solution designed for professional employer organizations
(PEOs). UltiPro PEO includes UltiPro Web, UltiPro HRMS/Payroll, billing
functionality and additional features required by PEOs.
UltiPro Healthcare
UltiPro Healthcare is a solution designed for healthcare organizations.
UltiPro Healthcare includes UltiPro Web, UltiPro HRMS/Payroll, position
management functionality and additional features required by healthcare
organizations.
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 delivering quality professional services
provides the Company with a significant opportunity to differentiate itself in
the marketplace and is critical to the 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.
9
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 the UltiPro products, including techniques for
systems planning and design, customer-specific configuring of application
modules, conversion from existing systems and interfacing with other software
applications. 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' investments. 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
was awarded the Support Center Practices Certification sponsored by the Service
Strategies Corporation (SSC) in 1999 and 2000. 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 the Company's employee tax center on the World
Wide Web; seminars on year-end closing procedures; and periodic newswires.
10
Customers
As of December 31, 2000, the Company had licensed its software to more
than 1,150 customers, representing approximately 3,500 companies and servicing
approximately 1.3 million employees. Ultimate Software's customers operate in a
wide variety of industries, including manufacturing, food services, sports,
professional employer organizations (PEOs), technology, finance, insurance,
real estate, transportation, communications, healthcare and services. No
customer accounted for more than 10% of total revenues in fiscal year 2000 or
1999. The following is a representative list of the Company's customers as of
December 31, 2000 and is not intended to portray a complete list of the
Company's customers.
Manufacturing: Food Services: Sports:
Anthony International Austin Quality Foods Arizona Diamondbacks
Globe Manufacturing, Inc. Benihana Corp. Chicago White Sox
Hatteras Yachts, Inc. Carolina Restaurant Group Colorado Rockies Baseball
Intermatic, Inc. Chiquita Brands International, Inc. Florida Marlins Baseball Club
John Deere Information Systems Hooters of America Florida Panthers
MCD International, Inc. Paramount Farms, Inc. Houston Astros
PMC, Inc. Premiere Foods, Inc. Montreal Expos
Spang and Company Reliable Stores, Inc. New York Giants
Spectrum Dyed Yarns Trader Joes New York Jets Football Club
Stevens Graphics, Inc. The Portillo Restaurant Group New York Yankees
Volvo GM Heavy Truck Corp. The Phoenix Suns
Wright Industries, Inc. Technology: Pro Player Stadium
Affiliated Computer Services, Inc. Texas Rangers Baseball
Professional Employer FFV Aerotech, Inc.
Organizations (PEO): Global Technical Services, Inc. Finance/Insurance/Real Estate:
Alcott Staff Leasing Ingram Entertainment, Inc. American National Bank
Co-Advantage Resources The National Research Group General Growth Properties, Inc.
EPIX, Inc. TPS Technologies Michigan Mutual Insurance Co.
HRAmerica Tracer Research Northwest Savings Bank
Integrated Employment Group The Midland Life Insurance Co.
Intraforce.com Healthcare: Trammel Crow Residential
National Staff Management Baptist Health Systems
RightSource Burkhart Dental Supply Services and Other:
EmPro Professional Employer Community Hospital of Bill Heard Enterprises, Inc.
Services, LLC Monterey Peninsula Hart Graphics
Community Hospital of Hudson Hotels Corp.
Transportation & Springfield Johnson & Wales University
Communications: Disabilities Services of the La Petite Academy, Inc.
Airport Group International, Inc. Southwest Mark Hopkins Intercontinental
America West Airlines, Inc. Magellan Health Services, Inc. Metro Nashville Airport
Armellini Trucking Corporation Group Health Associates Mount St. Mary's College
Benton Express Co. Home Nursing Agency Omni Hotels Management
Communications & Power Industries Medassist OP Sylvan Learning Systems, Inc.
Drug Transport, Inc. National Vision Associates, Ltd. Tutor Time
Lin Television Sunrise Assisted Living Bentley's Luggage
The Christian Broadcasting University Physicians Group
Network, Inc. Xomed
11
Sales and Marketing
Ultimate Software markets and sells its products and services through its
direct sales force, marketing group, and a network of business service provider
alliances.
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 proposal ("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.
The terms of the Company's sales contract typically include a license
agreement for the product, 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 occurrence of other specified events such as the implementation of the
software and/or specific payment dates designated in the contract. Payment for
implementation and training services under the contract are typically made as
such services are provided.
Business Service Provider (BSP) Network. Ultimate Software introduced an
affiliate alliance program in December 1998. Since that time the program has
been replaced by a co-branding program for BSPs. In April 2000, the Company
announced a new co-branding alliance strategy that enables BSPs to co-brand and
market UltiPro and/or the BSP Solution primarily to businesses with under 500
employees. The goal of the program is to extend the Company's market
penetration to include smaller businesses and build a recurring revenue stream
to supplement its standard license revenue by participating in per employee per
month pricing. BSPs that have joined this program include Advantius, Inc.,
Ceridian Corporation, Crowe, Chizek and Company LLP, EESIS, Inc., ePartners
Incorporated, Epicor Software Corporation, Fourth Shift Corporation, Deere and
Company, Payroll Resource Group, Inc., Push, Inc., and T.R. Hedge & Associates,
Inc. In March 2001, Ultimate Software signed a co-branding agreement with
Ceridian granting Ceridian a non-exclusive license to use UltiPro software as
part of an on-line offering which Ceridian intends to market primarily to
businesses with under 500 employees.
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, demand
generation, results analysis, and communications with field offices, customers
and marketing partners.
Strategic Relationships. Ultimate Software has established a number of
formal and informal marketing relationships with industry-specific vendors and
consulting firms. The companies Ultimate Software has relationships with
include, but are not restricted to: IBM Global Services, Cognos, Citrix
Systems, Inc., Ceridian Tax Service, eLabor.com, Inc., Microsoft Corporation,
Pre-Paid Legal 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
12
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.
Intellectual Property Rights
The Company's success is dependent in part on its ability to protect its
proprietary technology. 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. and PeopleSoft, Inc. which offer
HRMS/payroll software products for use on mainframes and/or client/
server systems; (ii) large service bureaus, such as ADP and Ceridian
Corporation; and (iii) the internal payroll/human resources departments of
potential customers which use custom-written software. Many of the Company's
competitors or potential competitors have significantly greater financial,
technical and marketing resources than the Company. As a result, they may be
able to respond more quickly to new or emerging technologies and to changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of their products than can the Company. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of the Company's prospective customers.
Employees
As of December 31, 2000, the Company employed 443 persons, including 81 in
sales and marketing, 127 in professional services, 197 in research and
development and 38 in finance and
13
administration. The Company believes that its relations with employees are
good. However, competition for qualified personnel in the Company's industry is
intense and the management of the Company believes that its future success will
depend in part on its continued ability to attract, hire and retain qualified
personnel.
Item 2. Properties
Ultimate Software's corporate headquarters, including its principal
administrative, marketing, engineering and support operations, are located in
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 2017. The Company intends to move into a new, adjacent
second building as an extension of its corporate headquarters during the first
half of 2002. The Company is currently negotiating to lease approximately
21,000 square feet in this facility for a 15-year lease term from a third
party. In addition, the Company presently leases office space for its sales
operations in Albany, Baltimore, Chicago, Dallas, East Rutherford (New Jersey),
Nashville 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. 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 business, consolidated operating
results and consolidated financial position.
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 2000.
14
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
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.
2000 1999
---------------------------- --------------------------
High Low High Low
------------- ------------ ------------ -----------
First Quarter .......... $ 13.063 $ 8.000 $ 9.625 $ 6.000
Second Quarter ......... 10.000 7.250 7.125 3.125
Third Quarter .......... 10.000 8.250 9.125 5.125
Fourth Quarter ......... 8.063 2.000 15.500 6.250
As of March 15, 2001, the Company had approximately 145 holders of record,
representing approximately 2,600 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.
15
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, 2000 and the
Balance Sheet Data as of December 31, 2000 and 1999 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, 1998, 1997 and 1996 and the
statements of operations data for the years ended December 31, 1997 and 1996
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.
Years Ended December 31,(1)
--------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ---------- ------------ ------------ ------------
(In thousands, except per share data)
Statement of Operations Data:
Revenues:
License ........................................... $24,103 $23,454 $18,811 $ 7,232 $ 4,273
Services .......................................... 35,927 32,303 24,519 10,360 5,039
------- ------- ------- -------- --------
Total revenues ................................... 60,030 55,757 43,330 17,592 9,312
------- ------- ------- -------- --------
Cost of revenues:
License ........................................... 1,286 751 834 195 --
Services .......................................... 24,011 20,219 18,018 9,375 5,846
------- ------- ------- -------- --------
Total cost of revenues ........................... 25,297 20,970 18,852 9,570 5,846
------- ------- ------- -------- --------
Operating expenses:
Sales and marketing ............................... 20,121 17,536 16,024 13,656 10,451
Research and development .......................... 15,687 10,281 6,953 4,837 3,360
General and administrative ........................ 7,338 5,433 4,651 4,148 3,007
Amortization of acquired intangibles ............... -- -- 638 1,442 6,932
------- ------- ------- -------- --------
Total operating expenses ......................... 43,146 33,250 28,266 24,083 23,750
------- ------- ------- -------- --------
Operating income (loss) .......................... (8,413) 1,537 (3,788) (16,061) (20,284)
Compensation related to modification of
escrow agreement(2) .............................. -- -- (4,183) -- --
Interest expense ................................... (311) (267) (207) (206) (179)
Interest and other income .......................... 320 507 589 250 77
------- ------- ------- -------- --------
Income (loss) before taxes ........................ (8,404) 1,777 (7,589) (16,017) (20,386)
Provision for income taxes ......................... -- 22 -- -- --
------- ------- ------- -------- --------
Net income (loss) ................................. $(8,404) $1,755 $(7,589) $(16,017) $(20,386)
======= ======= ======= ======== ========
Net income (loss) per share--basic and diluted(3) .. $ (0.52) $ 0.11 $ (0.52) $ (1.37) $ (2.30)
======= ======= ======= ======== ========
Weighted average number of
shares outstanding:
Basic ............................................. 16,075 15,908 14,494 11,710 8,854
======= ======= ======= ======== ========
Diluted(3) ........................................ 16,075 16,125 14,494 11,710 8,854
======= ======= ======= ======== ========
16
As of December 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- ---------- ----------- -----------
Balance Sheet Data:
Cash and cash equivalents ................... $ 7,527 $ 8,946 $17,128 $ 3,270 $ 1,420
Working capital (deficit) ................... 8,183 17,602 17,494 (6,220) (4,231)
Total assets ................................ 34,440 38,430 37,214 12,439 7,990
Long-term borrowings, including capital lease
obligations ................................ 943 1,120 1,010 54 217
Stockholders' equity (deficit) .............. 14,088 21,960 19,110 (5,508) (2,442)
- ----------------
(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 16 of the Notes to Consolidated Financial Statements.
(3) See Note 2 of the Notes to Consolidated Financial Statements for
information regarding the computation of net income (loss) per share.
17
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 in this Form 10-K,
including Exhibit 99.1 hereto.
Overview
Ultimate Software designs, markets, implements and supports
technologically advanced cross-industry human resources management and payroll
("HRMS/payroll") software solutions. The Company's mission is to become the
premier infrastructure provider of Internet HRMS/payroll payroll and employee
management solutions.
Ultimate Software's Web-based solution, UltiPro Web, includes employee
administration, manager self-service, employee self-service, and benefits
enrollment and is integrated with and supported by a back-office client/server
solution known as UltiPro HRMS/Payroll. UltiPro Web is marketed primarily to
mid-sized and small organizations, those with under 15,000 employees, but
scales to meet the needs of larger organizations. A Web-based self-service
solution, UltiPro Web allows customers to empower their entire
workforce--employees, managers and executives--to improve communications and
efficiencies. UltiPro Web offers business intelligence reporting, access to
benefits and paycheck history, direct deposit maintenance, and human resources
("HR") management including Internet employee administration, benefits
enrollment, recruitment and training features. Along with the back-office
solution UltiPro HRMS/Payroll, UltiPro Web enables businesses to manage the
employee life cycle strategically and cost effectively, from inception of
employment through retirement.
Ultimate Software reaches its customer base through its direct sales force
and a network of business service providers ("BSPs") that market to their
customers. The Company's direct sales force markets UltiPro as an in-house
HRMS/payroll solution and alternatively as an application hosting offering.
Pursuant to an agreement entered into during June 1999 with International
Business Machines Global Services, Inc. ("IBM"), IBM hosts UltiPro for Ultimate
Software customers (the "IBM Agreement"). Under the terms of the IBM Agreement,
IBM provides the installation, ongoing maintenance and backup services at an
IBM Data Hosting Center. The Company has branded the IBM hosted model as
"Intersourcing" 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, roles-based Web-access for all
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 up-front cash and convenient
monthly payments.
In April 2000, the Company announced a co-branding alliance program to
target primarily those businesses with under 500 employees and to provide the
opportunity for Ultimate Software to generate recurring revenues to supplement
the license and services revenues, including recurring maintenance revenues,
received primarily from its mid-sized customers, those with 500 to 15,000
employees. The program offers BSPs the opportunity to co-brand UltiPro and to
price their offerings on a per employee per month basis. As of the date of this
Form 10-K, Ultimate Software had signed 11 co-branding alliances.
On March 9, 2001, Ultimate Software signed a co-branding agreement with
Ceridian Corporation ("Ceridian") granting Ceridian a non-exclusive license to
use UltiPro software as part of an on-line
18
offering which Ceridian intends to market primarily to businesses with under
500 employees (the "Ceridian Agreement"). Ceridian intends to name the offering
"SourceWeb" and to distribute it as an outsourcing solution hosted by Ceridian
or by a third-party hosting company. Under the terms of the Ceridian Agreement,
Ceridian is responsible for all marketing costs and expenses, and must sell the
licensed software on a per period, per employee, per paycheck basis or other
repetitive payment model. On March 13, 2001, Ceridian completed an up-front
payment to Ultimate Software of $10 million, half of which is subject to the
Company's successful transfer of technology to Ceridian. Assuming the
successful completion of the technology transfer, Ceridian will pay a monthly
license fee based on (i) the number of employees paid using the Ultimate
Software product; and/or (ii) the number of checks per employee. These payments
are subject to a minimum monthly payment of $250,000 beginning in January 2002,
increasing to $500,000 per month in January 2003 with 5% annual increases
beginning in 2006. The maximum monthly payment starting in January 2002 is $1
million, subject to 5 percent annual increases beginning in 2003. The Ceridian
Agreement may be terminated by Ceridian at any time prior to June 30, 2002 if
the technology transfer has not been completed at that time. In such event, the
Company would be obligated to refund $5,000,000 to Ceridian. In addition, after
five years, either party can terminate the agreement with two years' notice,
with Ceridian retaining certain rights to use the licensed software upon
termination. Subject to a successful technical knowledge transfer by January 1,
2002, the parties expect the minimum term of the agreement to be 7 years and
that the amounts payable to Ultimate, including the $10 million already paid,
will be between $45 million and $94 million during that period. The Ceridian
Agreement provides that Ceridian may acquire an equity interest in Ultimate
through purchases in the open market or from third parties, subject to a
contractual limitation of 14.99% of the Company's common stock, $.01 par value
(the "Common Stock").
On June 5, 1998, the Company completed the sale of 3,250,000 shares of 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. As of December 31, 2000, there were no remaining
net proceeds from the IPO.
19
Results of Operations
The following table sets forth the Statements of Operations data of the
Company, as a percentage of total revenues, for the periods indicated.
For the Years Ended December 31,
----------------------------------------
2000 1999 1998
------------ ---------- ------------
Revenues:
License ......................................................... 40.2 % 42.1 % 43.4 %
Services ........................................................ 59.8 57.9 56.6
------- ------- -------
Total revenues ................................................. 100.0 100.0 100.0
------- ------- -------
Cost of revenues:
License ......................................................... 2.1 1.3 1.9
Services ........................................................ 40.0 36.3 41.6
------- ------- -------
Total cost of revenues ......................................... 42.1 37.6 43.5
------- ------- -------
Operating expenses:
Sales and marketing ............................................. 33.5 31.5 37.0
Research and development ........................................ 26.2 18.4 16.0
General and administrative ...................................... 12.2 9.7 10.7
Amortization of acquired intangibles ............................ 0.0 0.0 1.5
------- ------- -------
Total operating expenses ....................................... 71.9 59.6 65.2
------- ------- -------
Operating income (loss) ........................................ (14.0) 2.8 (8.7)
Compensation related to modification of escrow agreement ......... 0.0 0.0 (9.7)
Interest expense ................................................. (0.5) (0.5) (0.5)
Interest and other income ........................................ 0.5 0.9 1.4
Provision for income taxes ....................................... 0.0 0.0 0.0
------- ------- -------
Net income (loss) ............................................... (14.0)% 3.1 % (17.5)%
======= ======== =======
Comparison of Fiscal Years Ended December 31, 2000 and 1999
Revenues
The Company's revenues are derived from two principal sources: software
licenses ("license revenues") and fees for maintenance, implementation,
training, fees from IBM hosted model 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. The majority 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, increased 7.7%
to $60.0 million for 2000 from $55.8 million for 1999.
20
License revenues increased 2.8% to $24.1 million for 2000 from $23.5
million for 1999 due to increased sales of UltiPro HRMS/Payroll and UltiPro Web
and, to a lesser degree, sales generated from the Company's newer sales channel
which focuses on co-branding relationships, strategic business development (the
"SBD Channel").
Service revenues increased 11.2% to $35.9 million for 2000 from $32.3
million for 1999 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 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, costs associated
with revenues generated from the IBM hosted model and the cost of periodic
updates.
Cost of license revenues increased 71.2% to $1.3 million for 2000 from
$0.8 million for 1999. As a percentage of license revenues, cost of license
revenues increased to 5.3% for 2000 from 3.2% for 1999. The increase in cost of
license revenues was primarily attributable to the amortization of capitalized
software for UltiPro Web.
Cost of service revenues increased by 18.8% to $24.0 million for 2000 from
$20.2 million for 1999. Cost of service revenues, as a percentage of service
revenues, increased to 66.8% for 2000 from 62.6% for 1999. The increase in cost
of service revenues was primarily attributable to the 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 and benefits,
sales commissions, travel and promotional expenses, and facility and
communication costs for direct sales offices, as well as advertising and
marketing costs. Sales and marketing expenses increased by 14.7% to $20.1
million for 2000 from $17.5 million for 1999. Sales and marketing expenses, as
a percentage of total revenues, increased to 33.5% for 2000 from 31.5% for
1999. The increase in sales and marketing costs was primarily due to a
combination of increased travel expenses and higher advertising and marketing
costs focusing on branding, particularly the branding of the Company's IBM
hosted model, Intersourcing.
Research and Development
Research and development expenses consist primarily of software
development personnel costs. Research and development expenses increased by
52.6% to $15.7 million for 2000 from $10.3 million for 1999. Research and
development expenses, as a percentage of total revenues, increased to 26.1% for
2000 from 18.4% for 1999. The increase in research and development expenses was
primarily attributable to an 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.
21
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 35.1% to $7.3 million for 2000 from $5.4
million for 1999. General and administrative expenses, as a percentage of total
revenues, increased to 12.2% for 2000 from 9.7% for 1999. The increase in
general and administrative expenses was principally due to an increase in the
provision for doubtful accounts.
Interest Expense
Interest expense increased by 16.4% to $311 thousand for 2000 from $267
thousand from 1999 primarily due to an increase in capital lease obligations.
Interest and Other Income
Interest and other income decreased by 36.9% to $320 thousand for 2000
from $507 thousand from 1999 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
No provision for Federal, state or foreign income taxes was made for 2000
due to the Company's cumulative net operating losses incurred through December
31, 2000. The provision for income taxes was $22 thousand in 1999 as a result
of income taxes calculated under the alternative minimum tax method. Net
operating loss carryforwards available at December 31, 2000, which expire at
various times through the year 2020 and are available to offset future taxable
income, are $33.5 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, 2000 were
$13.0 million, consisting primarily of net operating loss carryforwards. The
Company's benefit of deferred tax assets was fully reserved as of December 31,
2000 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, 1999 and 1998
Revenues
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 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 pertained 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, were 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.
22
Cost of Revenues
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 consisted 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 marketed, sold and implemented the Company's products.
The strategic alliance program typically involves strategic marketing
relationships with other leading software vendors. During 2000, the Company
merged the affiliate network program into the strategic alliance program. Sales
and marketing expenses, as a percentage of total revenues, decreased to 31.5%
for 1999 from 37.0% for 1999 primarily due to the absorption of the expenses in
an increased total revenue base.
Research and Development
Research and development expenses consisted 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 consisted 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.
23
Amortization of Acquired Intangibles
Amortization of acquired intangibles consisted of goodwill amortization
associated with the acquisition of three Resellers in 1995 and nine Resellers
in 1996 (the "Reseller Acquisitions"). As of December 31, 1998, the goodwill
associated with the Reseller Acquisitions was fully amortized.
Compensation Related to Modification of Escrow Agreement
Compensation expense was 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 increased by 29.0% to $267 thousand for 1999 from $207
thousand for 1998 primarily due to an increase in capital lease obligations,
partially offset by the absence of bank borrowings in 1999.
Interest and Other Income
Interest and other income decreased by 13.9% to $507 thousand for 1999
from $589 thousand for 1998 primarily due to the reduction of the remaining
balance of the net proceeds from the IPO.
Provision for Income Taxes
The provision for income taxes was $22 thousand 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 2019 and were available to
offset future taxable income, were $26.7 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 $10.0 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.
24
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, 2000 and
1999. 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.
Quarters Ended
-------------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
2000 2000 2000 2000 1999 1999 1999 1999
------------ ----------- -------------------- ---------- ----------- ---------- -----------
(In thousands, except per share amounts)
Revenues:
License ............................... $ 4,048 $ 4,020 $ 9,549 $ 6,486 $ 6,405 $ 8,019 $ 6,011 $ 3,019
Services .............................. 10,341 8,977 8,267 8,342 8,374 7,864 8,339 7,726
-------- -------- ------- ------- ------- ------- ------- --------
Total revenues ....................... 14,389 12,997 17,816 14,828 14,779 15,883 14,350 10,745
-------- -------- ------- ------- ------- ------- ------- --------
Cost of revenues:
License ............................... 239 286 415 346 200 223 185 143
Services .............................. 7,159 5,962 5,343 5,547 5,222 4,596 5,300 5,101
-------- -------- ------- ------- ------- ------- ------- --------
Total cost of revenues ............... 7,398 6,248 5,758 5,893 5,422 4,819 5,485 5,244
-------- -------- ------- ------- ------- ------- ------- --------
Operating expenses:
Sales and marketing ................... 4,701 5,177 5,532 4,711 5,147 4,435 4,240 3,714
Research and development .............. 4,243 4,024 3,796 3,624 3,118 2,664 2,405 2,094
General and administrative ............ 2,114 2,305 1,627 1,292 1,601 1,451 1,241 1,140
-------- -------- ------- ------- ------- ------- ------- --------
Total operating expenses ............. 11,058 11,506 10,955 9,627 9,866 8,550 7,886 6,948
-------- -------- ------- ------- ------- ------- ------- --------
Operating income (loss) .............. (4,067) (4,757) 1,103 (692) (509) 2,514 979 (1,447)
Interest expense ....................... (67) (64) (75) (105) (105) (81) (42) (39)
Interest and other income .............. 75 88 74 83 84 101 140 182
-------- -------- ------- ------- ------- ------- ------- --------
Income (loss) before income taxes .... (4,059) (4,733) 1,102 (714) (530) 2,534 1,077 (1,304)
Provision for income taxes ............. -- -- -- -- 22 -- -- --
-------- -------- ------- ------- ------- ------- ------- --------
Net income (loss) .................... $ (4,059) $ (4,733) $ 1,102 $ (714) $ (552) $ 2,534 $ 1,077 $ (1,304)
======== ======== ======= ======= ======= ======= ======= ========
Weighted average shares outstanding:
Basic ................................. 16,072 16,094 16,078 16,054 15,952 15,901 15,894 15,884
======== ======== ======= ======= ======= ======= ======= ========
Diluted ............................... 16,072 16,094 16,491 16,054 15,952 16,084 15,910 15,884
======== ======== ======= ======= ======= ======= ======= ========
Net income (loss) per share--basic
and diluted ........................... $ (0.25) $ (0.29) $ 0.07 $ (0.04) $ (0.03) $ 0.16 $ 0.07 $ (0.08)
======== ======== ======= ======= ======= ======= ======= ========
25
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, 2000 and 1999.
Quarters Ended
----------------------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
2000 2000 2000 2000 1999 1999 1999 1999
------------ ----------- ------------------------ ------------ ----------- ------------ ------------
Revenues:
License ...................... 28.1% 30.9% 53.6% 43.7% 43.3% 50.5% 41.9% 28.1%
Services ..................... 71.9% 69.1% 46.4% 56.3% 56.7% 49.5% 58.1% 71.9%
----- ----- ----- ----- ----- ----- ----- -----
Total revenues .............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
License ...................... 1.7% 2.2% 2.3% 2.3% 1.4% 1.4% 1.3% 1.3%
Services ..................... 49.8% 45.9% 30.0% 37.4% 35.3% 28.9% 36.9% 47.5%
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenues ...... 51.4% 48.1% 32.3% 39.7% 36.7% 30.3% 38.2% 48.8%
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Sales and marketing .......... 32.7% 39.8% 31.1% 31.8% 34.8% 27.9% 29.5% 34.6%
Research and development ..... 29.5% 31.0% 21.3% 24.4% 21.1% 16.8% 16.8% 19.5%
General and administrative ... 14.7% 17.7% 9.2% 8.7% 10.8% 9.1% 8.6% 10.6%
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses .... 76.8% 88.5% 61.5% 64.9% 66.8% 53.8% 55.0% 64.7%
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) ..... (28.3)% (36.5)% 6.2% (4.7)% 3.4% 15.8% 6.8% (13.4)%
Interest expense .............. (0.5)% (0.5)% (0.4)% (0.6)% (0.7)% (0.5)% (0.3)% (0.4)%
Interest and other income ..... 0.5% 0.7% 0.4% 0.6% 0.6% 0.6% 1.0% 1.7%
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before taxes ... (28.2)% (36.4)% 6.2% (4.8)% (3.6)% 16.0% 7.5% (12.1)%
Provision for income taxes .... 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.0% 0.0%
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) ............ (28.2)% (36.4)% 6.2% (4.8)% (3.4) 16.0% 7.5% (12.1)%
===== ===== ===== ===== ===== ===== ===== =====
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, 2000, the Company had $7.6 million in cash and cash
equivalents, reflecting a net decrease of $1.4 million since December 31, 1999.
Working capital as of December 31, 2000 was $8.2 million as compared to a
working capital of $17.6 million as of December 31, 1999. The decrease in
working capital since December 31, 1999 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 provided by operating activities was $1.7 million for 2000 as
compared $4.9 million net cash used in operating activities for 1999. The
improvement in net cash provided by 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 year ended December 31, 2000.
Net cash used in investing activities was $1.4 million for 2000 as
compared to $3.2 million for 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 year ended December 31, 2000, as the Company increased
the financing of equipment purchases.
Net cash used in financing activities was $1.7 million for 2000 as
compared to net cash provided by financing activities of $0.1 million for 1999.
The increase in net cash used in financing activities was primarily due to
additional principal payments on capital lease obligations and the Company's
26
purchase of its Common Stock under the Stock Repurchase Plan discussed below,
partially offset by proceeds from the issuances of Common Stock from stock
options held by certain current and former employees of the Company.
Through December 31, 2000, the Company had a working capital revolving
line of credit (the "Credit Facility") with a bank (the "Bank"), which was
secured by the Company's accounts receivable and bore interest at a rate equal
to LIBOR plus 4.875% per annum. The amount available under the Credit Facility
was limited to the lesser of 80% of the Company's eligible accounts receivable,
as defined, or $4.0 million. The Credit Facility expired on December 31, 2000
and was not renewed with the Bank due to a change in ownership of the Bank. The
Company is in the process of securing a similar line of credit to replace the
expired Credit Facility (the "Replacement 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. As of December 31, 2000, there were no remaining
net proceeds from the IPO.
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 (the "Stock Repurchase Plan"). 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. As of December 31, 2000, the
Company had purchased 54,000 shares of the Company's Common Stock under the
Stock Repurchase Plan.
On March 13, 2001, under the Ceridian Agreement, Ceridian completed an
up-front payment to Ultimate Software of $10 million, half of which is subject
to the successful transfer of technology to Ceridian. Assuming the successful
completion of the technology transfer, Ceridian will pay a monthly license fee
based on (i) the number of employees paid using the Ultimate Software product;
and/or (ii) the number of checks per employee. These payments are subject to a
minimum monthly payment of $250,000 beginning in January 2002, increasing to
$500,000 per month in January 2003 with 5% annual increases beginning in 2006.
The maximum monthly payment starting in January 2002 is $1 million, subject to
5% annual increases beginning in 2003. Ceridian may terminate the Ceridian
Agreement at any time prior to June 30, 2002 if the technology transfer has not
been completed at that time. In such event, the Company would be obligated to
refund $5,000,000 to Ceridian. In addition, after five years, either party can
terminate the agreement with two years' notice, with Ceridian retaining certain
rights to use the licensed software upon termination. Subject to successful
technical knowledge transfer by January 1, 2002, the parties expect the minimum
term of the agreement to be 7 years and that the amounts payable to Ultimate,
including the $10 million already paid, will be between $45 million and $94
million during that period. Ceridian may acquire an equity interest in Ultimate
through purchases in the open market or from third parties, subject to a
contractual limitation of 14.99% of the Company's Common Stock.
The Company believes that cash and cash equivalents, cash generated from
operations, cash available pursuant to the Ceridian Agreement, and available
borrowings under the Replacement Credit Facility, if obtained, will be
sufficient to fund its operations for at least the next 12 months.
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
27
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 Literature
On December 3, 1999, the staff of the Securities and Exchange Commission
(the "SEC") published Staff Accounting Bulletin 101, "Revenue Recognition,"
("SAB 101") to provide guidance on the recognition, presentation and disclosure
of revenue in financial statements. SAB 101, as amended, was adopted by the
Company on January 1, 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 did not 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
did not have a material impact on the financial statements of the Company.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the effective date of FASB No. 133" were issued
in June 1998 and June 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 will adopt SFAS No. 133 on January 1, 2001. At December
31, 2000, the Company held no derivative instruments, as defined under SFAS No.
133. Therefore, there was no effect to the Company's financial statements upon
adoption on January 1, 2001.
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 this Form 10-K, including Exhibit
99.1
28
hereto. 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.
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,
which expired on December 31, 2000, was based on LIBOR plus 4.875% per annum.
The Company is in the process of securing the Replacement Credit Facility which
is anticipated to have the related interest rate tied to a market index similar
to the Credit Facility. 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 Replacement
Credit Facility, if obtained.
29
Item 8. Financial Statements and Supplementary Data
INDEX
Page(s)
--------
Report of Independent Certified Public Accountants .......................... 31
Consolidated Balance Sheets as of December 31, 2000 and 1999 ................ 32
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998 .......................................... 33
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 2000, 1999 and 1998 .......................................... 34
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998 .......................................... 35
Notes to Consolidated Financial Statements .................................. 37
30
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, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2000. 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, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
January 26, 2001.
31
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
As of December 31,
---------------------------
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............................................................... $ 7,572 $ 8,946
Accounts receivable, net of allowance for doubtful accounts of $2,461 and $1,673 for
2000 and 1999, respectively ........................................................... 18,825 20,670
Prepaid expenses and other current assets ............................................... 1,025 2,772
--------- ---------
Total current assets ................................................................... 27,422 32,388
Property and equipment, net .............................................................. 6,211 5,007
Other assets, net ........................................................................ 807 1,035
--------- ---------
Total assets ........................................................................... $ 34,440 $ 38,430
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................ $ 2,059 $ 2,026
Accrued expenses ........................................................................ 5,623 3,647
Deferred revenue ........................................................................ 9,540 8,009
Current portion of capital lease obligations ............................................ 2,017 1,104
--------- ---------
Total current liabilities .............................................................. 19,239 14,786
Capital lease obligations, net of current portion ........................................ 943 1,120
Deferred revenue ......................................................................... 354 564
--------- ---------
Total liabilities ...................................................................... 20,536 16,470
--------- ---------
Commitments and contingencies (Note 12) ..................................................
Stockholders' equity:
Series A Junior Participating Preferred Stock, $.01 par value, 500,000 shares authorized,
no shares issued and outstanding in 2000 and 1999 ..................................... -- --
Preferred Stock, $.01 par value, 2,000,000 shares authorized in 2000 and 1999, no shares
issued or outstanding ................................................................. -- --
Common Stock, $.01 par value, 50,000,000 shares authorized, 16,100,090 and 16,046,769
shares issued and outstanding in 2000 and 1999, respectively .......................... 161 160
Additional paid-in capital .............................................................. 65,693 65,162
Accumulated deficit ..................................................................... (51,766) (43,362)
--------- ---------
14,088 21,960
Treasury stock, at cost, 54,000 shares ................................................... (184) --
--------- ---------
Total stockholders' equity ............................................................. 13,904 21,960
--------- ---------
Total liabilities and stockholders' equity ............................................. $ 34,440 $ 38,430
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
32
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Years Ended December 31,
----------------------------------------
2000 1999 1998
------------ ---------- ------------
Revenues:
License ......................................................... $ 24,103 $23,454 $ 18,811
Services ........................................................ 35,927 32,303 24,519
-------- ------- --------
Total revenues ................................................. 60,030 55,757 43,330
-------- ------- --------
Cost of revenues:
License ......................................................... 1,286 751 834
Services ........................................................ 24,011 20,219 18,018
-------- ------- --------
Total cost of revenues ......................................... 25,297 20,970 18,852
-------- ------- --------
Operating expenses:
Sales and marketing ............................................. 20,121 17,536 16,024
Research and development ........................................ 15,687 10,281 6,953
General and administrative ...................................... 7,338 5,433 4,651
Amortization of acquired intangibles ............................ -- -- 638
-------- ------- --------
Total operating expenses ....................................... 43,146 33,250 28,266
-------- ------- --------
Operating income (loss) ........................................ (8,413) 1,537 (3,788)
Compensation related to modification of escrow agreement ......... -- -- (4,183)
Interest expense ................................................. (311) (267) (207)
Interest and other income ........................................ 320 507 589
-------- ------- --------
Income (loss) before income taxes ............................... (8,404) 1,777 (7,589)
Provision for income taxes ....................................... -- 22 --
-------- ------- --------
Net income (loss) ............................................... $ (8,404) $ 1,755 $ (7,589)
======== ======= ========
Net income (loss) per share--basic and diluted ................... $ (0.52) $ 0.11 $ (0.52)
======== ======= ========
Weighted average shares outstanding:
Basic ........................................................... 16,075 15,908 14,494
======== ======= ========
Diluted ......................................................... 16,075 16,125 14,494
======== ======= ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
33
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
Series A Series B
Convertible Convertible Class A Class B
Preferred Stock Preferred Stock Common Stock Common Stock
----------------- ----------------- ----------------- -----------------
Shares Amount Shares Amount Shares Amount Shares Amount
-------- -------- -------- -------- -------- -------- -------- --------
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 .......... -- -- -- -- -- -- -- --
Issuances of Common Stock from exercise of
stock options ..................................... -- -- -- -- -- -- -- --
Non-cash issuances of options to Board to
purchase Common Stock for board fees .............. -- -- -- -- -- -- -- --
Net loss ........................................... -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Balance, December 31, 1998 ......................... -- -- -- -- -- -- -- --
Issuances of Common Stock from exercise of
stock options ..................................... -- -- -- -- -- -- -- --
Non-cash issuances of options to Board to
purchase Common Stock for board fees .............. -- -- -- -- -- -- -- --
Non-cash issuances of options to purchase
Common Stock for services ......................... -- -- -- -- -- -- -- --
Net income ......................................... -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Balance, December 31, 1999 ......................... -- -- -- -- -- -- -- --
Issuances of Common Stock from exercise of
stock options ..................................... -- -- -- -- -- -- -- --
Non-cash issuances of options to Board to
purchase Common Stock for board fees .............. -- -- -- -- -- -- -- --
Purchase of Treasury Stock ......................... -- -- -- -- -- -- -- --
Net loss ........................................... -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Balance, December 31, 2000 ......................... -- $ -- -- $ -- -- $ -- -- $ --
==== ==== ==== ==== ==== ==== ==== ====
Total
Common Stock Additional Treasury Stock Stockholders'
----------------- Paid-in Accumulated ------------------- Equity
Shares Amount Capital Deficit Shares Amount (Deficit)
-------- -------- ------------ ------------- -------- ------------------------
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)
Issuances of Common Stock from exercise of
stock options ..................................... 8 -- 43 -- -- -- 43
Non-cash issuances 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
Issuances of Common Stock from exercise of
stock options ..................................... 168 1 947 -- -- -- 948
Non-cash issuances of options to Board to
purchase Common Stock for board fees .............. -- -- 80 -- -- -- 80
Non-cash issuances 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
Issuances of Common Stock from exercise of
stock options ..................................... 54 1 331 -- -- -- 332
Non-cash issuances of options to Board to
purchase Common Stock for board fees .............. -- -- 200 -- -- -- 200
Purchase of Treasury Stock ......................... -- -- -- -- 54 (184) (184)
Net loss ........................................... -- -- -- (8,404) -- -- (8,404)
------ ---- ------- -------- -- ------ --------
Balance, December 31, 2000 ......................... 16,101 $161 $65,693 $(51,766) 54 $ (184) $ 13,904
====== ==== ======= ======== == ====== ========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these financial statements.
34
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended December 31,
-------------------------------------
2000 1999 1998
------------ ----------- ------------
Cash flow from operating activities:
Net income (loss) ............................................................... $ (8,404) $ 1,755 $ (7,589)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization .................................................. 3,385 2,068 1,924
Provision for doubtful accounts ................................................ 3,572 1,771 1,369
Non-cash issuances of equity instruments ....................................... 200 147 31
Compensation related to modification of escrow agreement ....................... -- -- 4,183
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable ........................................................... (2,599) (7,216) (10,667)
Prepaid expenses and other current assets ..................................... 1,413 (705) (1,042)
Other assets .................................................................. (124) 122 (201)
Accounts payable .............................................................. 64 (734) 1,049
Accrued expenses .............................................................. 2,038 (1,542) 133
Deferred revenue .............................................................. 2,162 (561) (2,456)
-------- -------- ---------
Net cash provided by (used in) operating activities .......................... 1,707 (4,895) (13,266)
-------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment ............................................. (1,428) (3,138) (241)
Net proceeds from (issuances of) notes receivable ............................... 43 (53) (255)
-------- -------- ---------
Net cash used in investing activities ........................................ (1,385) (3,191) (496)
-------- -------- ---------
Cash flows from financing activities:
Net payments under line of credit agreements .................................... -- -- (209)
Net proceeds from capital lease obligations ..................................... -- -- 381
Principal payments on capital lease obligations ................................. (1,844) (1,044) (545)
Equity transactions of 1998 poolings ............................................ -- -- (434)
Net proceeds from issuances of Common Stock ..................................... 332 948 28,427
Purchases of treasury stock ..................................................... (184) -- --
-------- -------- ---------
Net cash provided by (used in) financing activities .......................... (1,696) (96) 27,620
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents ............................. (1,374) (8,182) 13,858
Cash and cash equivalents, beginning of year ..................................... 8,946 17,128 3,270
-------- -------- ---------
Cash and cash equivalents, end of year ........................................... $ 7,572 $ 8,946 $ 17,128
======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest .......................................................... $ 238 $ 168 $ 207
======== ======== =========
(Continued)
35
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Supplemental disclosure of non-cash investing and financing activities:
The Company entered into capital lease obligations to acquire new equipment
totaling $2,581, $1,412 and $2,183 in 2000, 1999 and 1998, respectively.
Certain new equipment financed during 1998 was purchased in the latter part
of 1997.
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 and Class B Common Stock.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
36
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 4). 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 $6.3 million and $8.0 million in
interest-bearing accounts as of December 31, 2000 and 1999, 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
37
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
provisions of Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," license revenues are generally recognized when a noncancellable
license agreement has been signed, the product has been shipped, no significant
vendor obligations remain and collection of the related receivable is
considered probable. Revenues from maintenance agreements for maintaining,
supporting and providing periodic updates are recognized ratably over the
maintenance period, which in most instances is one year. Revenues for training
and consulting services are recognized as services are performed.
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.
Deferred Revenue
Deferred revenue is primarily comprised of deferrals for service revenues
for which maintenance services have not yet been rendered.
Associated deferred costs, representing commissions, were $897,000 and
$768,000 at December 31, 2000 and 1999, respectively. Commission expense is
recognized in the period the related revenue is recognized.
Cost of Revenues
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 No.
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. Amortization of acquired intangibles was $638,000 in 1998.
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
38
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion
of a working model. Software costs capitalized during 2000 and 1999 totaled
$160,000 and $836,000, respectively. Capitalized software is amortized using
the straight-line method over the estimated useful lives of the assets which
range from two to three years. Amortization of capitalized software was
$351,000, $68,000 and $8,000 in 2000, 1999 and 1998, respectively.
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. Such adoption did not have a material effect on
the Company's financial position or results of operations.
Nonmonetary Transaction
During 2000, the Company entered into a nonmonetary transaction with a
third party for the exchange of the Company's HRMS/Payroll product for
dissimilar computer software used in the Company's operations (the "Exchange").
The fair value of the computer software acquired was equivalent to the fair
value of the Company's HRMS/Payroll product exchanged; therefore, there was no
gain or loss recognized on the Exchange. Pricing associated with the Exchange
was reasonable based on cash sales of similar products. In accordance with
Accounting Principles Board Opinion No. 29, "Accounting for Nonmonetary
Transactions," the Company recorded the resulting asset at its fair value of
$393,000 and a corresponding amount as license revenues in 2000.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States 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 capital lease
obligations 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",
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 No. 123 for each of the three years in the period
ended December 31, 2000. See Note 10.
39
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
Earnings Per Share
SFAS No. 128, "Earnings Per Share," 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.
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,
--------------------------------
2000 1999 1998
-------- -------- ---------
Weighted average shares outstanding ..... 16,075 15,908 14,494
Effect of dilutive stock options ........ -- 217 --
------ ------ ------
Dilutive shares outstanding ............. 16,075 16,125 14,494
====== ====== ======
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 11 and 17, effected for the stock split
discussed in Note 4. Other common stock equivalents (i.e., stock options) not
included in the computation of diluted net income (loss) per share, as their
impact is antidilutive, totaled 3,954,000, 1,380,000 and 2,105,000 for 2000,
1999 and 1998, respectively.
Comprehensive Income
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," 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 No. 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. There are no
differences between comprehensive income, as defined in SFAS No. 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," effective December 31, 1998. SFAS No. 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.
Recent Accounting Literature
On December 3, 1999, the staff of the Securities and Exchange Commission
(the "SEC") published Staff Accounting Bulletin 101, "Revenue Recognition,"
("SAB 101") to provide guidance
40
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
on the recognition, presentation and disclosure of revenue in financial
statements. SAB 101, as amended, was adopted by the Company on January 1, 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 did not have a material impact on
the consolidated 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. 00-02") 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"). The adoption of EITF Issue No. 00-02 did not have a material impact on
the consolidated financial statements of the Company.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the effective date of FASB No. 133" were issued
in June 1998 and June 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 will adopt SFAS No. 133 on January 1, 2001. At December
31, 2000, the Company held no derivative instruments, as defined under SFAS No.
133. Therefore, there was no effect to the Company's consolidated financial
statements upon adoption of SFAS No. 133 on January 1, 2001.
3. 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
outstanding Common Stock (the "Stock Repurchase Plan"). 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. As of December
31, 2000, the Company had purchased 54,000 shares of the Company's Common Stock
under the Stock Repurchase Plan.
4. INITIAL PUBLIC OFFERING
On June 5, 1998, the Company completed the sale of 3,250,000 shares of the
Company's 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 and Class B 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.
41
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
As of December 31,
---------------------
2000 1999
--------- ---------
Sales commissions ................................... $1,071 $1,663
Third-party fees for IBM hosted model ............... 1,162 --
Other items individually less than 5% of total
current liabilities................................ 3,390 1,984
------ ------
$5,623 $3,647
====== ======
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
As of December 31,
------------------------
2000 1999
---------- -----------
Equipment ........................................ $ 10,621 $ 6,763
Furniture, fixtures and improvements ............. 3,298 2,919
-------- --------
13,919 9,682
Less accumulated depreciation and amortization ... (7,708) (4,675)
-------- --------
$ 6,211 $ 5,007
======== ========
Included in property and equipment is equipment acquired under capital
leases as follows (in thousands):
As of December 31,
-------------------------
2000 1999
----------- -----------
Equipment ............................. $ 6,467 $ 3,886
Less accumulated amortization ......... (3,949) (2,105)
-------- --------
$ 2,518 $ 1,781
======== ========
Depreciation and amortization expense on property and equipment totaled
$3,033,000, $2,001,000 and $1,286,000, for the years ended December 31, 2000,
1999 and 1998, respectively.
42
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under noncancellable agreements which
are accounted for as capital leases and expire at various dates through 2003.
Interest rates on these leases range from 2.0% to 6.3%. The annual maturities
of the capital lease obligations are as follows as of December 31, 2000 (in
thousands):
Year Amount
- ---- ------
2001 ................................................................... $2,106
2002 ................................................................... 944
2003 ................................................................... 17
------
3,067
Less amount representing interest ...................................... (107)
------
Lease obligations reflected as current ($2,017) and non-current ($943).. $2,960
======
8. LINE OF CREDIT AGREEMENTS
In September 1996, the Company entered into a line of credit with a bank
(the "Bank") for the lesser of $4,000,000 or 80% of eligible receivables, as
defined (the "Working Capital Line"). 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
bore interest at LIBOR plus 4.875% per annum (11.083% at December 31, 2000),
but not less than 8.000% per annum in any month. Interest on the Working
Capital Line was payable monthly. No amounts were outstanding under the Working
Capital Line as of December 31, 2000 and 1999. The Working Capital Line was
collateralized by substantially all of the Company's assets. The Working
Capital Line expired on December 31, 2000 and was not renewed with the Bank due
to a change in ownership of the Bank. The Company is in the process of securing
a similar line of credit with other qualified lenders.
9. INCOME TAXES
No provision or benefit for Federal or state income taxes was made for
2000 and 1998 due to the operating losses incurred in the respective periods.
The provision for income taxes for 1999 represents current Federal taxes
calculated under the alternative minimum tax method.
43
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. INCOME TAXES--(Continued)
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,
--------------------------------------
2000 1999 1998
------------ -------- ------------
Income tax provision (benefit) at statutory Federal tax rate ......... $ (2,941) $ 614 $ (2,656)
Alternative minimum tax .............................................. -- 22 --
Compensation related to modification of escrow agreement ............. -- -- 1,464
Earnings from pooling of interests ................................... -- -- (330)
Goodwill amortization ................................................ (57) (57) 166
Non-deductible expenses .............................................. 105 89 63
Change in valuation allowance ........................................ 2,981 (698) 1,283
Other, net ........................................................... (88) 52 10
-------- ------ --------
Provision for income taxes ........................................... $ -- $ 22 $ --
======== ====== ========
Effective tax rate ................................................... 0.00% 1.25% 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,
---------------------------
2000 1999
------------ ------------
Net operating losses ...................... $ 11,739 $ 9,333
Alternative minimum tax credit ............ -- 22
Depreciation and amortization ............. 487 333
Accruals not currently deductible ......... 105 76
Allowance for doubtful accounts ........... 861 586
Software development costs ................ (220) (287)
Other, net ................................ 71 (1)
Valuation allowance ....................... (13,043) (10,062)
--------- ---------
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, 2000, the Company had approximately $33,540,000 of net
operating loss carryforwards for federal income tax reporting purposes
available to offset future taxable income. The carryforwards expire through
2020. Utilization of such net operating losses may be limited as a result of
cumulative ownership changes in the Company's equity instruments.
44
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. 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. As of December 31, 2000, options available
under the Plan to purchase shares of the Company's Common Stock totaled
876,275.
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 11.
A summary of stock options under the Company's Plan as of December 31,
2000, 1999 and 1998, and changes during the years then ended, is presented
below:
Weighted
Average
Shares Exercise Price
------------- ---------------
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
Granted ................................. 1,031,208 5.61
Exercised ............................... (53,096) 6.24
Forfeited ............................... (261,505) 8.43
--------- -----
Outstanding at December 31, 2000 ......... 3,953,579 $6.67
========= =====
45
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. STOCK OPTIONS--(Continued)
The following table summarizes information about stock options outstanding
under the Plan at December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------------- -------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Number Life (Years) Price Number Price
- -------------------- ------------ -------------- ----------- ------------ ----------
$1.69 to $4.25 648,060 9.4308 $2.78 222,173 $2.96
$5.16 to $6.63 715,727 6.6201 5.35 668,500 5.26
$7.21 to $7.75 1,676,635 7.6998 7.42 1,278,167 7.35
$8.03 to $10.00 913,157 8.6193 9.06 391,542 9.39
--------- ---------
$1.69 to $10.00 3,953,579 8.0040 $6.67 2,560,383 $6.74
========= =========
Pro forma information is required by SFAS No. 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 5.26% for 2000, 5.0%-5.5% for 1999 and
1998, 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,
---------------------------------------
2000 1999 1998
------------ --------- ------------
Net income (loss):
As reported ............... $ (8,404) $1,755 $ (7,589)
Pro forma ................. (10,323) 116 (8,446)
Basic and diluted per share:
As reported ............... $ (0.52) $ 0.11 $ (0.52)
Pro forma ................. (0.64) 0.01 (0.58)
The Company has also issued options to purchase shares of its Common Stock
to non-employees for consulting services. See Note 11.
11. STOCKHOLDERS' EQUITY
Initial Public Offering
As discussed more fully in Note 4, 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. There were no net proceeds available from the IPO as of December
31, 2000.
46
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. STOCKHOLDERS' EQUITY--(Continued)
The Transactions
The Company was formed in April 1996 in connection with the consummation
of a series of transactions during the second and third calendar quarters of
1996, including the following:
(i) the businesses owned by nine third-party resellers of products of
The Ultimate Software Group, Ltd., the Company's predecessor (the
"Partnership"), 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.
The acquisitions of the Participating Resellers were accounted for under
the purchase method of accounting and are more fully described in Note 15. The
exchange of the Participating Stockholders' interest for shares of the Company
was accounted for on a historical cost basis as the exchange was between common
controlling interests. GP and the Company were under common control at the time
of the exchange.
Description of Capital Stock
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.
47
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. STOCKHOLDERS' EQUITY--(Continued)
Class A and Class B Common Stock
The shares of the Class A and Class B 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
and Class B 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 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 was engaged to provide marketing, strategic
and other advisory services to the Company. John R. Walter, a member of the
Company's Board of Directors, 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
48
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. STOCKHOLDERS' EQUITY--(Continued)
purchase 100,000 shares of the Company's common stock, par value $0.01 per
share, for $10 per share. The terms of the Warrant provided for vesting in
eight quarterly increments of 12,500 shares, commencing on October 22, 1999,
with no increment vesting if the Consulting Agreement were to be terminated
before the vesting date for such increment. The Consulting Agreement was
terminated by the Company on October 12, 2000, as of which date 50,000 shares
were vested and the remaining 50,000 shares were canceled. The expiration date
of the Warrant is July 22, 2003. The Company has accounted for such Warrant in
accordance with the requirements prescribed in SFAS No. 123. Accordingly, the
related compensation expense was $117,000 and $67,000 for 2000 and 1999,
respectively, and is included in general and administrative expenses in the
accompanying consolidated statements of operations for the respective years.
In 2000, the Company granted options to non-employee directors to purchase
(i) 2,320 shares of the Company's Common Stock for $3.69; (ii) 2,856 shares of
the Company's Common Stock for $3.00; (iii) 2,540 shares of the Company's
Common Stock for $2.70; and (iv) 4,710 shares of the Company's Common Stock for
$2.42 in exchange for services rendered. 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. 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 $83,000, $80,000 and $31,000 in 2000, 1999 and 1998,
respectively, and is included in general and administrative expenses in the
accompanying consolidated statements of operations.
12. 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 executed a lease for its corporate headquarters which expires in 2017
with lease payments commencing in July 1999 (see Note 13). Total rent expense
under these agreements was $1,868,000, $2,029,000 and $2,012,000, for the years
ended December 31, 2000, 1999 and 1998, respectively. Future minimum annual
rental commitments related to these leases are as follows at December 31, 2000
(in thousands):
Year Amount
- ---- ------
2001 ................ $ 1,506
2002 ................ 999
2003 ................ 945
2004 ................ 837
2005 ................ 839
Thereafter .......... 10,662
-------
$15,788
=======
49
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. COMMITMENTS AND CONTINGENCIES--(Continued)
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.
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 was a limited partnership of which a director and an officer of the
Company were 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 were no less
favorable than could have been 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 non-affiliated third-party corporation
and has assigned the related commercial office lease to such third-party.
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 $421,000,
$401,000 and $267,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
50
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1,233,061 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.
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. See Note 17.
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.
51
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The 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:
Name Age Position(s)
- ---- --- -----------
Scott Scherr 49 Chairman of the Board, President and Chief Executive Officer
Marc D. Scherr 43 Vice Chairman of the Board
Alan Goldstein, M.D. 50 Executive Vice President, Chief Technology Officer and Director
Mitchell K. Dauerman 44 Executive Vice President, Chief Financial Officer and Treasurer
James M. Alu 56 Executive Vice President and Chief Operating Officer
Dale T. Baker 51 Vice President--Strategic Alliances
Donald M. Causey, Jr. 41 Vice President--Controller
Roy L. Gerber, Ph.D. 44 Vice President--Engineering
J.C. Gonzalez 37 Vice President--Product Support
Gene Guhne 36 Vice President--Sales, East Division
Jon Harris 36 Vice President--Professional Services
James A. Jensen III 37 Vice President--Technical Sales
Linda Larrivee 44 Vice President--Product Management
Robert Manne 48 Vice President--General Counsel
Vivian Loynaz 39 Vice President--People and Secretary
Linda Miller 56 Vice President--Communications and Public Relations
Laura Perkins 36 Vice President--Product Strategy
Felicia A. Smitha 40 Vice President--Finance
Greg Swick 37 Senior Vice President--Sales
James C. Thie 41 Vice President--Management Information Systems
John Van Wyckhouse 46 Vice President--Sales, West Division
Carol Wiese 43 Vice President--Education Services
George F. Winter 41 Vice President and General Manager--Healthcare Division
Ofer Nemirovsky 42 Director
LeRoy A. Vander Putten 66 Director
John R. Walter 54 Director
James A. FitzPatrick, Jr. 51 Director
Robert A. Yanover 64 Director
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. Mr. Scherr is also a
member of the Executive Committee of the Board of Directors (the "Board"). 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 operated
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.
52
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 is also a
member of the Executive Committee of the Board. 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. ("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. Dr. Goldstein is also a member of the
Executive Committee of the Board. 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--Strategic Alliances since
January 2001. From January 1999 to January 2001, Mr. Baker served as Vice
President--UltiPro.com. 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 the Latin American division
of the New Zealand Dairy Board, the largest dairy exporter worldwide. Mr.
Causey worked in 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.
53
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.
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 Software 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--Technical Sales since
March 2000. Mr. Jensen served as Vice President--Chief Information Officer and
Technical Sales from March 2000 through February 2001. 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 Loynaz 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. Loynaz 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. Loynaz 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. Loynaz 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 Strategy since July
1998. From May 1996 to July 1998, Ms. Perkins served as the Director of
Applications Consulting for the Company. From 1991
54
to 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).
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 in private industry, 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 worked in the audit
practice of KPMG LLP from 1987 to 1990. Ms. Smitha is a Certified Public
Accountant.
Greg Swick has served as Senior Vice President--Sales since January 2001.
Mr. Swick served as Vice President and General Manager--PEO Division of the
Company's sales organization from November 1999 to January 2001. 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.
James C. Thie has served as Vice President--Management Information Systems
since February 2001. Mr. Thie has worked in the technology field for the past
20 years, principally in the financial services industry, including General
Manager and Business Development Director of Encore Development, Inc., an
e-business and systems integration company specializing in application
development, data warehousing and electronic commerce, from 1999 until joining
the Company. From 1996 to 1999, Mr. Thie held various positions with Computer
Associates International, an international advanced technology consulting and
systems integration company, where his most recent position was Senior Sales
Executive.
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 health
care 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 a member of the Executive 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 Daleen Technologies, Inc., a leading independent
network services provider and global carriers' carrier, as well as several
privately-held companies.
LeRoy A. Vander Putten has served as a director of the Company since
October 1997, is Chairman of the Compensation Committee of the Board and is a
member of the Audit Committee of
55
the Board. Mr. Vander Putten has served as the Chairman of CORE Insurance
Holdings, Inc., a member of the GE Global Insurance Group, engaged in the
underwriting of casualty reinsurance, since August 2000. From April 1998 to
August 2000, he served as Chairman of Trade Resources International Holdings,
Ltd., a corporation engaged in trade finance for exporters from developing
countries. 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.
James A. FitzPatrick, Jr. has served as a director of the Company since
July 2000. Mr. FitzPatrick is a partner in the law firm Dewey Ballantine LLP,
which provides legal services to the Company. Before joining Dewey Ballantine
LLP as a partner in February 1989, Mr. FitzPatrick was a partner in the law
firm LeBoeuf, Lamb, Leiby & MacRae.
John R. Walter has served as a director of the Company since July 1999 and
is a member of the Audit Committee of the Board. Mr. Walter is the current
Chairman of Manpower, Inc., retired President and Chief Operating Officer of
AT&T, and former Chairman, President and Chief Executive Officer of R.R.
Donnelley & Sons. In addition to Manpower, Inc. and Ultimate Software, Mr.
Walter serves on the boards of directors of Abbott Laboratories, Deere &
Company, Celestica, Inc., Applied Graphics Technologies, Inc. and Jones Lang
LaSalle, Inc. Mr. Walter also serves on the International Advisory Council of
the Singapore Economic Development Board, is a director of Evanston
Northwestern Healthcare Corporation, is a trustee of Northwestern University
and the Chicago Symphony Orchestra and holds numerous other advisory and
membership positions. Mr. Walter began his career in 1969 at R.R. Donnelley, a
world leader in the print industry. 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.
Robert A. Yanover has served as a director of the Company since January
1997 and is Chairman of the Audit Committee and a member of the Compensation
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 as a director through February 2001.
Each officer serves at the discretion of the Board and holds office until
his or her successor is elected and qualified or until his or her earliest
resignation or removal. Mr. Scott Scherr, Dr. Alan Goldstein and Mr. Ofer
Nemirovsky serve on the Board in the class whose term expires at the annual
meeting of stockholders (the "Annual Meeting") in 2001. Mr. LeRoy A. Vander
Putten and Mr. Robert A. Yanover serve on the Board in the class whose term
expires at the Annual Meeting in 2002. Mr. Marc D. Scherr, Mr. John R. Walter
and Mr. James A. FitzPatrick, Jr. serve on the Board in the class whose term
expires at the Annual Meeting in 2003.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the
Company's Proxy Statement for the 2001 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 2001 Annual Meeting of Stockholders under the
heading "Security Ownership of Certain Beneficial Owners and Management."
56
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 2001 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, 2000 and 1999
Consolidated Statements of Operations for the Years Ended December
31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended December
31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules:
Report of Independent Certified Public Accountants
Schedule II--Valuation and Qualifying Accounts
(3) Exhibits
Number Description
------ -----------
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 named 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, as amended as of October 26, 2000**
57
Number Description
------ -----------
10.8 Lease Agreement, between the Company, as successor to The Ultimate Software Group, Ltd.,
and Gary A. Poliakoff as Trustee for Emerald Lake Trust, dated November 16, 1993 and
extensions thereof*
10.9 Extension Agreement entered into between Greyrock Capital, a Division of NationsCredit
Commercial Corporation, and The Ultimate Software Group, Inc. dated November 24, 1998
(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
(incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K
dated March 29, 2000)
10.17 Software License Agreement between the Company and Ceridian Corporation dated as of
March 9, 2001***
21.1 Subsidiary of the Registrant*
99.1 Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995**
- ----------------
* Incorporated herein by reference to the corresponding exhibit in the
Company's Registration Statement.
** Filed herewith.
*** Filed herewith. Confidential treatment of various portions of this exhibit
has been requested from the Securities and Exchange Commission (the
"SEC"). Such portions have been confidentially filed with the SEC.
(b) Reports on Form 8-K
None.
58
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 26, 2001. 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 26, 2001.
59
Schedule II
The Ultimate Software Group, Inc. and Subsidiary
Valuation and Qualifying Accounts
Balance at Additions
Beginning of Charged to Balance at
Classification Year Operations Deductions(1) End of Year
-------------- ------------ ---------- ------------- -----------
Allowance for Doubtful Accounts
December 31, 2000 ........... $1,673 $3,572 $ (2,784) $2,461
December 31, 1999 ........... 1,119 1,771 (1,217) 1,673
December 31, 1998 ........... 534 1,369 (784) 1,119
- ----------------
(1) 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.
60
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 27, 2001 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.
Signature Title Date
--------- ----- ----
/s/ Scott Scherr President, Chief Executive Officer March 27, 2001
- ----------------------------------- and Chairman of the Board
Scott Scherr
/s/ Mitchell K. Dauerman Executive Vice President, Chief March 27, 2001
- ----------------------------------- Financial Officer and Treasurer (Principal
Mitchell K. Dauerman Financial and Accounting Officer)
/s/ Alan Goldstein Executive Vice President, March 27, 2001
- ----------------------------------- Chief Technology Officer and Director
Alan Goldstein, M.D.
/s/ Marc D. Scherr Vice Chairman of the Board March 27, 2001
- -----------------------------------
Marc D. Scherr
/s/ Ofer Nemirovsky Director March 27, 2001
- -----------------------------------
Ofer Nemirovsky
/s/ LeRoy A. Vander Putten Director March 27, 2001
- -----------------------------------
LeRoy A. Vander Putten
/s/ John R. Walter Director March 27, 2001
- -----------------------------------
John R. Walter
/s/ James A. FitzPatrick, Jr. Director March 27, 2001
- -----------------------------------
James A. FitzPatrick, Jr.
/s/ Robert Yanover Director March 27, 2001
- -----------------------------------
Robert Yanover
61
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.7 Nonqualified Stock Option Plan, as amended as of October 26,
2000
10.17 Software License Agreement between the Company and Ceridian
Corporation dated as of March 9, 2001
99.1 Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995