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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
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
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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, 33326
WESTON, FL (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(954) 331-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF CLASS:
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Common Stock, par value $.01 per share
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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
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 14, 2003 was approximately
$63.6 million.
As of March 14, 2003, there were 17,331,268 shares of the Registrant's
Common Stock, par value $.01, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2003 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K.
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EXPLANATORY NOTE
The Ultimate Software Group, Inc. is filing this amendment to its
Annual Report on Form 10-K for the fiscal year ended December 31, 2002,
originally filed March 31, 2003, in response to comments received from the
Securities and Exchange Commission in connection with their review of the
Registration Statement on Form S-3 (File No. 333-107527) filed by The Ultimate
Software Group, Inc. on July 31, 2003. This amendment to the original Form 10-K
amends and restates the original Form 10-K in its entirety, but does not reflect
events occurring after the original filing of the Form 10-K. All information
contained in this amendment and the original Form 10-K is subject to updating
and supplementing as provided in the periodic reports filed subsequent to the
original filing date with the Securities and Exchange Commission. The Ultimate
Software Group, Inc. has updated the certifications of the chief executive and
financial officers in light of intervening Securities and Exchange Commission
rules.
In addition, The Ultimate Software Group, Inc. has filed the following
exhibits herewith:
31.1 Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended
31.2 Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended
32.1 Certification Pursuant to 18 U.S.C Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
THE ULTIMATE SOFTWARE GROUP, INC.
INDEX
PAGE(s)
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PART I
Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 11
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk 28
Item 8. Financial Statements and Supplementary Data 29
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 55
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 55
Item 13. Certain Relationships and Related Transactions 55
Item 14. Controls and Procedures 55
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K 56
Signatures............................................................... 62
Certifications........................................................... 63
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PART I
This Annual Report on Form 10-K (the "Form 10-K") of The Ultimate
Software Group, Inc. ("Ultimate Software" or the "Company") may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from such statements. These risks and
uncertainties include, but are not limited to, those discussed 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 payroll and
workforce management solutions.
Ultimate Software's UltiPro Workforce Management Software ("UltiPro")
is a Web-based solution designed to deliver the functionality businesses need to
manage the employee life cycle, whether their processes are centralized at
headquarters or distributed across multiple divisions or branch offices.
UltiPro's human resources ("HR") and benefits management functionality is wholly
integrated with a flexible payroll engine, reporting and analytical
decision-making tools, and a central Web portal that can serve as the customer's
gateway for its workforce to access company-related and personal information.
Ultimate Software believes that UltiPro helps customers streamline HR and
payroll processes to significantly reduce administration and operational costs,
while also empowering executives and staff to access critical information
quickly and perform routine business activities efficiently.
UltiPro Workforce Management is marketed both through the Company's
direct sales team as well as through alliances with business service providers
(BSPs) that market co-branded UltiPro to their customer bases. Ultimate
Software's direct sales team focuses on companies with more than 500 employees
and sells both on a license (typically in-house) and service basis (typically
hosted and priced on a per-employee-per-month basis). The Company's BSP
alliances focus primarily on companies with under 500 employees and typically
sell an Internet solution, which includes UltiPro, priced on a monthly/service
basis. When the BSP sells its Internet solution, incorporating UltiPro in the
offering, the BSP is obligated to remit a fee to the Company, typically measured
on a per employee per month basis and, in some cases, subject to a monthly
minimum amount.
UltiPro leverages the Microsoft technology platform, which is
recognized in the industry as a cost-effective, reliable and scalable platform
for mid-sized organizations. As part of its comprehensive payroll and workforce
management solutions, Ultimate Software provides implementation and training
services to its customers as well as support services, which have been certified
by the Support Center Practices Certification program for four consecutive
years.
The Company's direct sales force markets UltiPro as an in-house payroll
and workforce management solution and alternatively as a hosted offering branded
"Intersourcing." Intersourcing provides Web access to comprehensive workforce
management functionality for organizations that need to simplify the information
technology (IT) support requirements of their business applications. Ultimate
Software believes that Intersourcing is attractive to companies that want to
focus on their core competencies to increase sales and profits. Through the
Intersourcing model introduced in 2002, the Company provides the hardware,
infrastructure, ongoing maintenance and backup services for its customers at a
BellSouth data center.
During 2001, Ultimate Software and Ceridian Corporation ("Ceridian")
reached an agreement (the "Ceridian Agreement"), as amended in 2002, which
grants Ceridian a non-exclusive license to use UltiPro software as part of an
on-line offering that Ceridian markets primarily to businesses with under 500
employees. In addition, under the Ceridian Agreement, the Company provides
product updates through general releases to Ceridian.
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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. Ceridian is required to pay the Company a
monthly license fee based on the number of employees paid using the licensed
software. These payments are subject to a minimum monthly payment of $500,000
per month beginning in January 2003 with 5% annual increases beginning in 2006.
The maximum monthly payment is $1.0 million, subject to 5% annual increases
beginning in 2003. In February 2002, Ceridian paid to the Company $6.0 million,
representing a prepayment of the minimum monthly fees due in 2003. Minimum
monthly payments under the Ceridian Agreement are required to resume on January
1, 2004.
The aggregate minimum payments that Ceridian is obligated to pay
Ultimate Software over the minimum term of the agreement is $42.7 million. To
date, Ceridian has paid to Ultimate Software a total of $16.5 million under the
Ceridian Agreement. The earliest date upon which the Ceridian Agreement can be
terminated by either party (except for an uncured material breach) is March 9,
2008, resulting in an expected minimum term of 7 years. Ceridian retains certain
rights to use the software upon termination.
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 is located at 2000 Ultimate Way, Weston, Florida 33326 and its
telephone number is (954) 331-7000. To date, the Company has derived no revenue
from customers outside of the United States and has no assets located outside of
the United States.
REVENUE SOURCES
The Company's revenues are derived from three principal sources:
software licenses ("license revenues"), recurring revenues and services
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.
Recurring revenues include maintenance and subscription revenues.
Maintenance revenues are derived from maintaining, supporting and providing
periodic updates for the Company's software. Subscription revenues are
principally derived from per-employee-per-month ("PEPM") fees earned through the
Intersourcing Offering, Base Hosting (defined below) and the BSP sales channel,
as well as revenues generated from the Ceridian Agreement. Maintenance revenues
are recognized ratably over the service period, generally one year. To the
extent there are upfront fees associated with the Intersourcing Offering, Base
Hosting or the BSP sales channel, subscription revenues are recognized ratably
over the term of the related contract upon the delivery of the product and
services. PEPM fees from the Intersourcing Offering, Base Hosting and the BSP
sales channel are recognized as subscription revenue as the services are
delivered.
Services revenues include revenues from fees charged for the
implementation of the Company's software products and training of customers in
the use of such products, fees for other services, including the provision of
payroll-related forms and the printing of Form W-2's for certain customers, as
well as certain reimbursable out-of-pocket expenses. Services revenues are
recognized as services are performed and delivered.
The percentage contribution for each of the three principal sources of
revenue was as follows:
FOR THE YEARS ENDED DECEMBER 31,
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2002 2001 2000
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Revenues:
License ......................... 22.1% 28.3% 38.9%
Recurring ....................... 35.1 24.1 17.0
Services ........................ 42.8 47.6 44.1
-------- -------- --------
Total revenues ............... 100.0% 100.0% 100.0%
======== ======== ========
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FEATURES OF ULTIPRO
Ultimate Software's UltiPro is a payroll and workforce management
solution designed to offer the following features to its customers:
Web Workforce Portal. UltiPro includes a Web workforce portal that
serves as a company's communications hub and the central gateway for business
activities. It provides functionality for everyone in the customer's
organization, not just human resources/payroll and finance departments, but also
executives, staff managers and individual employees. With UltiPro's workforce
portal, a company's HR/payroll staff, managers and administrators can complete
daily employee administration tasks, administer benefits, manage staff and
access reporting in real-time, from one central location. Managers and
executives can access commonly requested reports and analyze workforce
statistics and trends on-demand. Employees can access pay and benefits
information, get questions answered and complete routine updates instantly. The
Company believes that UltiPro's workforce portal can increase administrative
efficiencies by providing reporting, staff management processes and business
intelligence to management over the Internet and can reduce operating costs by
eliminating the need for organizations to print and distribute paper
communications, handbooks, forms and paychecks.
Feature-Rich, Built-in Functionality. UltiPro includes human resources,
payroll, and benefits management, comprehensive reporting (more than 400
standard and customizable reports delivered, including government compliance
reporting and strategic analytics), a workforce portal with Web-based employee
and manager self-service, Web-based benefits enrollment, Web employee
administration (including workflow), recruitment and training management. Based
upon the amount of built-in and integrated functionality, the Company believes
that UltiPro minimizes the need for extensive customizations or changes to
source code, facilitates streamlined management of the total employment cycle,
and enables organizations to minimize the time invested in burdensome HR/payroll
administrative activities.
Implementation and System Update Efficiency. Ultimate Software offers a
solution that has been designed to minimize the time and effort required for
implementation, customization and updating. UltiPro delivers an extensive amount
of functionality "out-of-the-box" so that minimal customizations are required by
the customer. The Company also provides an implementation methodology,
experienced implementation staff and customer training to facilitate rapid
implementation. Ultimate Software continues to refine and improve its
implementation process to allow customers to implement more quickly. To
facilitate customizations and fast system upgrades, the Company has designed
UltiPro so that 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 that the UltiPro
solution provides cost saving opportunities for its customers and that UltiPro,
whether purchased as a license or as a service through Intersourcing, is
competitively priced. In addition, the Company believes that its current
practices in implementing the UltiPro solution result in a cost savings for
customers when compared with implementations of other similar solutions in the
industry. A customer may also reduce the administrative and information
technology support costs associated with the organization's human resources,
benefits and 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.
Leveraging of Leading Technologies. Ultimate Software has consistently
focused on identifying leading technologies and integrating them into its
products. UltiPro Workforce Management is a three-tier solution that leverages
Microsoft's technical architecture as well as XML to increase design
efficiencies within the system and particularly for workflow capabilities. With
UltiPro version 6.0, released in 2002, Ultimate Software introduced a new
technology architecture for UltiPro to enable advanced Web Services
capabilities. Ultimate Software's Distributed Process Management platform
leverages leading technologies such as Microsoft's Component Object Model (COM),
Microsoft Message Queuing (MSMQ), eXtensible Markup Language (XML), Simple
Object Access Protocol (SOAP) and Web Services Definition Language (WSDL) to
create a distributed processing framework that is Internet-enabled. This allows
customers to initiate commonly requested services such as running a report from
the Web. These requests are automatically routed to a separate process
application server to ensure efficient processing and load balancing. UltiPro's
XML Web Services feature set allows customers to scale as they grow and take
advantage of additional Web Services as needed. In addition, UltiPro includes a
suite of enterprise integration tools, business components and
business-to-business links. These
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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 payroll and workforce management
areas. UltiPro uses familiar Internet interface techniques and functions through
a Web browser, making it convenient and easy to use. A customer's executives,
managers, administrators and employees have Web access to manage payroll and
employee functions, run reports or find answers to routine questions through an
intuitive user interface. The Company refers to this easy navigation as "Two
clicks to anywhere."
Comprehensive Professional Services and Industry-Specific Expertise.
Ultimate Software believes it provides high quality implementation, training and
ongoing product and customer support services. Ultimate Software employs 170
people in customer services, which includes the implementation, product support,
technical support and training departments. In November 2002, Ultimate
Software's customer support center received the Support Center Practices ("SCP")
Certification for the fourth consecutive year. The SCP program was created by
the Service & Support Professionals Association (SSPA) and a consortium of
information technology companies to create a recognized quality certification
for support centers. SCP Certification quantifies the effectiveness of customer
support based upon relevant performance standards and represents best practices
within the technology support industry according to SSPA. Recognizing the
importance of issuing timely updates that reflect changes in tax and other
regulatory laws, Ultimate Software employs a dedicated research team to track
jurisdictional tax changes to the more than 12,000 tax codes included in UltiPro
as well as changes in other employee-related regulations.
TECHNOLOGY
Ultimate Software seeks to provide its clients with optimum
performance, advanced functionality and ease of scalability and access to
information through the use of leading Internet standard technologies. The
UltiPro Workforce Management solution was designed to leverage cutting-edge
technologies such as XML and Web Services that use open standards to provide
customers with a cost-effective platform for performing critical business
functions rapidly over the Web and allowing different systems to communicate
with one another. The use of Microsoft technology helps the Company to deliver
what it believes to be a highly deployable and manageable payroll and workforce
management solution that includes 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. UltiPro is a Web solution
with a backoffice component for handling such functions as payroll processing,
company and system setup, and security. One of the highlights of UltiPro's
technology is the Company's Distributed Process Management ("DPM") framework of
XML Web Services, a framework that enables business functions to be performed
over the Web, and allows different enterprise systems to talk to one another
over the Internet. UltiPro's DPM was designed to automate and distribute HR and
payroll processes, for example, entering group time or generating reports,
across multiple servers to reduce the amount of time and manual work required.
The DPM framework leverages Microsoft's Component Object Model (COM), eXtensible
Markup Language (XML), Simple Object Access Protocol (SOAP), Web Services
Definition Language (WSDL) and Microsoft Message Queuing (MSMQ) to improve
system speed and performance. The Company believes that the DPM framework makes
UltiPro highly scalable to accommodate a high volume of processing requests
cost-effectively, particularly for companies that run hundreds or even thousands
of payrolls.
Application Framework. 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. To overcome such limitations,
Ultimate Software built more separation into the application design to increase
the extensibility, scalability and maintainability of the application. The
UltiPro Workforce Management application consists of several core components in
a layered architecture that leverages Microsoft technology. UltiPro's
multi-layered architecture, including an Operating System Layer, Business Logic
Layer, Presentation Layer and User Interface Layer, makes it easier to update
and maintain UltiPro, as well as integrate UltiPro with other enterprise
systems. The Company believes that UltiPro's application framework provides a
highly extensible set of services that can scale depending on the customer's
business size. In addition, UltiPro was built using a data-driven,
object-oriented application framework that enhances the development and
usability of the solution.
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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.
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 business intelligence tools
from Cognos Corporation, a third-party provider ("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's data dictionary, eliminating the necessity for users to
create and maintain ad hoc reporting catalogs. A Cognos Web Package is delivered
to UltiPro customers to allow users to access reports and conduct data queries
from a Web browser.
ULTIMATE SOFTWARE SOLUTIONS
Ultimate Software's core solution for mid-sized enterprise customers,
those with 500 to 15,000 employees, is UltiPro Workforce Management. Ultimate
Software also offers the "Powered by UltiPro" BSP Solution (the "BSP Solution")
with Internet Payroll to business services providers that have relationships
with smaller organizations, those with fewer than 500 employees.
UltiPro Workforce Management Software ("UltiPro")
UltiPro Workforce Management is designed to provide customers the
functionality they need to manage every aspect of the employee life cycle in one
place, whether their processes are centralized at headquarters or managed by
multiple divisions or branch offices. Though UltiPro was designed for mid-sized
enterprises, the solution can scale to accommodate larger numbers of employees.
UltiPro's HR and benefits management functionality is wholly integrated with a
flexible payroll engine, reporting and analytical decision-making tools, and a
central Web portal that can serve as the customer's gateway for its workforce to
access company-related activities. Ultimate Software believes that UltiPro helps
customers streamline HR and payroll processes to significantly reduce
administration and operational costs, while also empowering executives and staff
to access critical information quickly and perform routine business activities
more efficiently.
UltiPro Workforce includes, but is not limited to, the following
functionality:
UltiPro's Workforce Portal. UltiPro's workforce portal can act as the
gateway to business activities for a customer's administrators, HR/payroll staff
and management team. Ultimate Software believes that UltiPro's workforce portal
allows customers to improve service to their employees through better
communications and save time because managers can complete common employee
administrative tasks, administer benefits, manage staff and access reporting in
real-time, from one central location.
eEmployee Self-Service. UltiPro eEmployee Self-Service gives a
customer's workforce immediate security-protected access to view paycheck
details, benefits summaries, frequently used forms and company information;
update personal information such as address, phone number, emergency contacts
and skills; change preferences such as direct deposit accounts and benefits
selections; make routine requests such as asking for vacation time; and enroll
in training.
Management. As authorized, managers have self-service access to staff
information such as salary, key dates and emergency contacts, with reporting and
analysis tools to facilitate decision-making. A customer's managers can view and
update staff information, manage department activities, post job openings or
leverage recruiting and hiring tools.
eAdministration. UltiPro's eAdministration includes eWork Events,
eStandard Reporting, and eSystem Administration. eWork Events enables users to
authorize HR/payroll staff, managers or supervisors to make updates on the Web
through more than 100 pre-defined workflow processes to expedite business
activities such as hiring an employee or inputting a salary increase. eStandard
Reporting allows authorized managers or HR/payroll staff to run approximately
100 standard UltiPro reports, including upcoming performance reviews, headcount
reports, average salary reports, government compliance reports, general ledger
reporting, and other point-in-time HR/payroll reports from the Web without
requiring the time of central HR/payroll or IT staff. eSystem Administration was
designed for the non-technical user to administer
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UltiPro's roles-based security, built-in workflow and system business rules, as
well as enable system administrators to post company communications, link to
external Web sites from the UltiPro portal, and, through UltiPro's ePalette
feature, select the colors of UltiPro's Web pages to match the customer's own
company image.
eHuman Resources. UltiPro tracks HR-related information including
employment history, performance, job and salary information, career development,
and health and wellness programs. In addition, UltiPro facilitates the recording
and tracking of key information for government compliance and reporting,
including COBRA compliance; HIPAA certificates; OSHA and workers' compensation;
FMLA tracking; and EEO compliance. UltiPro also ensures compliance with SSA and
HIPAA confidentiality legislation for protecting sensitive data such as employee
social security numbers. eHuman Resources includes benefits administration,
recruitment and staffing tools, compensation management and training management
functionality.
Payroll Processing. UltiPro's payroll engine handles hundreds of
payroll-related computations intended to minimize the customer's need for side
calculations or additional programming. For example, UltiPro delivers complex
wage calculations such as average pay rates for overtime calculations, shift
premiums, garnishments and levy calculations. With ePayroll Processing, a
company's central payroll department, remote offices or multiple divisions can
process payroll on the Web in several steps. ePayroll Processing includes eTime
Entry to allow customers' supervisors or managers at branch offices to input and
submit time for their team through the Web.
UltiPro Business Intelligence. Ultimate Software believes that, with
UltiPro Business Intelligence, customers are able to provide their managers and
executives with Web access to workforce-related reports, workforce analytics and
point-in-time reporting, without installing reporting software on users' PCs or
writing custom reports. With UltiPro Business Intelligence, users can run and
print pre-formatted reports for the executive team or run instant queries on the
Web for answers to routine questions. UltiPro Business Intelligence also
delivers workforce analytics to enable managers to evaluate workforce trends
strategically on topics such as compensation, turnover and overtime.
eTraining Enrollment. With eTraining Enrollment, employees can view
course schedules and descriptions and register online. Managers can also approve
staff training requests from the Web.
eBenefits Enrollment. With eBenefits Enrollment, customers' employees
can review their benefit choices and make selections on the Web. Benefits
administrators can set up enrollment sessions from the Web and use tools to
monitor enrollment progress. eBenefits Enrollment also walks employees through
all of the benefit and personal information changes necessary as a result of a
life event such as getting married, having a baby or moving.
eRecruitment. UltiPro eRecruitment automates, tracks and manages the
hiring and recruiting process to help reduce overall "cost per hire" and "time
to hire." With UltiPro eRecruitment, users can post openings to job sites they
subscribe to, track applications and hire candidates from within UltiPro's
workforce portal.
eCo-Branding. For organizations that want to co-brand UltiPro for the
purpose of delivering services to a customer base, UltiPro offers eCo-Branding
as an extra-cost option. eCo-Branding provides Web access to important personal
information for customers' employees, including the ability to view current
paycheck and direct deposit details, paycheck history and benefits details.
Customers can display their own company logo with the "Powered by UltiPro" logo
to their user base to strengthen their brand.
Position Management. UltiPro Position Management helps customers manage
their resource budget, measure trends and forecast future needs. Users can
manage by full-time equivalents and dollars, and evaluate budgeted versus actual
numbers. Authorized users can check the status of fund allocations, available
open positions and staffing requirements. Because HR and payroll are integrated,
reporting on position information for budgeted and actual does not require
multiple spreadsheets.
UltiPro Wireless. Ultimate Software recognizes the mobile workforce
today and is delivering a wireless application geared for today's mobile
employees, managers, administrators and executives. UltiPro Wireless provides
employees with access to their paycheck details and company directory via a
wireless device. Managers can elect to receive wireless notifications for
workflow events requiring their approval (such as an employee vacation request).
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Other Key Features. UltiPro also includes Tax Management to deliver
Federal, state and local tax updates automatically every quarter as part of the
core solution; Enterprise Integration Tools that provide the ability to
interface with third-party applications and providers such as general ledger,
tax filing services, time clocks, banks, 401(k) and benefit providers, check
printing services and unemployment management services; and Distributed Process
Management XML Web Services that batch and distribute HRMS/payroll processes
across multiple servers to increase efficiency, reduce the time required to
ensure processes are completed, and allow them to be initiated over the Web.
"Powered by UltiPro" BSP Solution (the "BSP Solution")
"Powered by UltiPro" BSP Solution is designed for and primarily
marketed to business service providers that have relationships with smaller
organizations, those with fewer than 500 employees. The BSP Solution, released
in December 2000, enables business service providers to deliver Web-based
workforce management and 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 or other monthly 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
Workforce Management, and has a specially designed Web browser interface for
payroll administrators to sign up their businesses 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.
Intersourcing Offering
In 2002, the Company introduced hosting services through which the
Company provides the hardware, infrastructure, ongoing maintenance and back-up
services for its customers at a BellSouth data center. Different types of
hosting arrangements include the sale of hosting services as a part of the
Intersourcing offering, discussed below, and, to a lesser extent, the sale of
hosting services to customers that license UltiPro on a perpetual basis. Hosting
services, available in a shared or dedicated environment, provide Web access to
comprehensive workforce management functionality for organizations that need to
simplify the information technology (IT) support requirements of their business
applications and are priced on a per-employee-per-month basis. In a shared
environment, commonly used for Intersourcing, Ultimate Software provides an
infrastructure with applicable servers shared among many customers who use a Web
browser to access the application software through the data center. In a
dedicated environment, servers are dedicated to specific customers that purchase
this particular service. The majority of hosting arrangements are provided
through a shared environment.
Intersourcing is the hosted offering designed to provide an appealing
pricing structure to customers who prefer to minimize the initial cash outlay
associated with typical capital expenditures. Intersourcing customers purchase
the right to use UltiPro on an ongoing basis for a specific term in a shared
hosted environment. The pricing for Intersourcing, including both the hosting
element as well as the right to use UltiPro, is on a per-employee-per-month
basis. The Company's direct sales force markets UltiPro as an in-house payroll
and workforce management solution and alternatively as a hosted offering through
Intersourcing. Ultimate Software believes that Intersourcing is attractive to
companies that want to focus on their core competencies to increase sales and
profits.
RESEARCH AND DEVELOPMENT ACTIVITIES
The Company incurs research and development expenses, consisting
primarily of software development personnel costs, in the normal course of its
business. Such research and development expenses are for enhancements and future
betterments to the Company's existing products and for the development of new
products. During 2002, 2001 and 2000, the Company spent $17.7 million, $17.0
million and $15.7 million, respectively, on research and development activities.
Such amounts represent the amounts spent during the three years ended December
31, 2002 as distinguished from the related amounts expensed in the consolidated
statements of operations during those periods. In accordance with generally
accepted
7
accounting principles, the Company capitalized software development personnel
costs associated with the development of certain major products totaling $4.2
million during 2001.
CUSTOMER SERVICES
Ultimate Software believes that delivering quality customer 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 services in two broad categories: (i) professional
services which includes implementation, customer relationship management, and
educational services and (ii) customer support services and maintenance.
Professional Services. Ultimate Software's professional services
include implementation, customer relationship management and educational
services. Ultimate Software believes that its implementation services are
differentiated from those of other vendors by speed, predictability and
completeness. The Company believes that its successful record with rapid
implementations is due to its standardized methodology, long-tenured
consultants, the large amount of delivered product functionality, and
comprehensive conversion and integration tools.
Ultimate Software has an experienced team of system and functional
consultants that are dedicated to assisting customers with rapid
implementations. In addition, Ultimate Software provides its customers with the
opportunity to participate in formal training programs conducted by its
education services team. Training programs are designed to increase customers'
ability to use the full functionality of the product, thereby maximizing the
value of customers' investments. Courses are designed to align with the stages
of implementation and to give attendees hands-on experience with UltiPro.
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 Atlanta, Georgia;
Schaumburg, Illinois; Dallas, Texas; and at its headquarters in Weston, Florida.
In addition to offering classes at these facilities, the Company conducts
Web-based training and on-site training at customer facilities. After customers
have implemented UltiPro and been turned over to the Company's customer support
and maintenance program, professional services assigns a customer relationship
manager to the account to assist customers on an ongoing basis with special
projects, including enhancing their existing systems, managing upgrades and
writing custom reports. These services, like all of the Company's professional
services, are typically billed on a time and materials basis.
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) for the fourth consecutive
year in 2002. This certification recognizes companies that "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. In addition, the Company's customer
support services team maintains a support Web site for its customers and
individual representatives attend user-organized user group meetings on a
routine basis throughout the United States.
CUSTOMERS
As of December 31, 2002, the Company had licensed its software to
approximately 900 customers, representing approximately 2,000 companies and
approximately 1.4 million employees. Ultimate Software's customers operate in a
wide variety of industries, including manufacturing, food services, sports,
technology, finance, insurance, retail, real estate, transportation,
communications, healthcare and services. No customer accounted for more than 10%
of total revenues in 2002 or 2001.
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. The sales cycle begins with a sales lead generated through a
national, corporate
8
marketing campaign or a territory-based activity. In one or more on-site visits,
sales managers work with application and technical consultants to analyze
prospective client needs, demonstrate the Company's product and, when required,
respond to RFPs (Requests for Proposals). The sale is finalized after clients
complete their internal sign-off procedures and terms of the contract are
negotiated and signed.
With a license sale, 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. 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 is typically made as such services are provided. A service
sale is a hosting, or Intersourcing, agreement that typically requires, but is
not limited to, a per-employee-per-month fee, setup fees and hourly charges for
implementation.
Business Service Provider (BSP) Network. 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 are active in this program include, among others, Advantius, Inc. and
Ceridian Corporation.
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.
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
9
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) large service bureaus,
primarily ADP and to a lesser extent Ceridian Corporation; (ii) a number of
companies, such as Lawson Software, Inc., Oracle Corporation, PeopleSoft, Inc.
and SAP, which offer human resource management and payroll ("HRMS/payroll")
software products for use on mainframes, client/server environments and/or Web
servers; 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.
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 or result in claims by customers against the Company. 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.
BACKLOG
At December 31, 2002, the Company had an approximate backlog of $5.7
million. The Company expects to fill approximately $2.0 million of the 2002
backlog during 2003. Backlog consists of Intersourcing and Base Hosting (defined
below) services sold under signed contracts for which the services have not yet
been delivered. Since the Company did not introduce the Intersourcing and Base
Hosting offerings until mid-2002, there was no backlog as of December 31, 2001.
The Company does not believe that backlog is a meaningful indicator of sales
that can be expected for any future period. There can be no assurance that
backlog at any point in time will translate into revenue in any subsequent
period.
EMPLOYEES
As of December 31, 2002, the Company employed 415 persons, including 67
in sales and marketing, 112 in professional services, 131 in research and
development, 58 in customer support and 45 in finance and administration. The
Company believes that its relations with employees are good. However,
competition for qualified personnel in the Company's industry is generally
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.
AVAILABLE INFORMATION
The Company's Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, proxy statements and amendments to those
reports, are available free of charge on our Internet website at
www.ultimatesoftware.com as soon as reasonably practicable after such reports
are electronically filed with the Securities and Exchange Commission.
Information contained on Ultimate Software's website is not part of this report.
ITEM 2. PROPERTIES
Ultimate Software's corporate headquarters, including its principal
administrative, marketing, engineering and support operations, are located in
Weston, Florida. Commencing in July 1999, the Company leased all the available
square footage in this facility, or approximately 40,000 square feet, under
lease expiring in 2017. Commencing in November 2002,
10
the Company leased all the available square footage of a new adjacent building
that serves as an extension of the Company's corporate headquarters,
approximately 21,000 square feet, under a lease expiring in 2017. In addition,
the Company presently leases office space for its sales operations in Albany,
New York; Columbia, Maryland; Dallas, Texas; Millburn, New Jersey; Nashville,
Tennessee; Ridgeland, Mississippi; Seal Beach, California; and Schaumburg,
Illinois. 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 not currently a party to any legal proceedings the adverse outcome of
which, individually or in the aggregate, could reasonably be expected to have a
material adverse effect on the Company's operating results or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 2002.
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.
2002 2001
--------------- ---------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First Quarter .............................. $4.880 $3.300 $5.438 $3.000
Second Quarter ............................. 4.560 2.220 6.030 3.525
Third Quarter .............................. 3.620 2.050 5.040 3.150
Fourth Quarter ............................. 4.200 2.470 4.000 2.370
As of March 20, 2003, the Company had approximately 150 holders of
record, representing approximately 2,300 stockholder accounts.
The Company has never declared or paid any cash dividends on its
capital stock and does not anticipate paying any cash dividends in the
foreseeable future. The Company currently intends to retain future earnings to
fund the development and growth of its business. The payment of dividends in the
future, if any, will be at the discretion of the Board of Directors. Under the
terms of the Company's revolving line of credit with Silicon Valley Bank, the
Company may not pay dividends without the prior written consent of Silicon
Valley Bank. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
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 the year ended
December 31, 2002 and the balance sheet data as of December 31, 2002 have been
derived from the Company's Consolidated Financial Statements included elsewhere
in this Form 10-K, which have been audited by KPMG LLP whose report appears
elsewhere in this Form 10-K. The statement of operations data below for each of
the years in the two-year period ended December 31, 2001 and the balance sheet
data as of December 31, 2001 have been derived from the Company's Consolidated
Financial Statements included elsewhere in this Form 10-K which have been
audited by Arthur Andersen LLP, an international accounting firm that has
subsequently ceased operations, a copy of whose report is included elsewhere in
this Form 10-K. The balance sheet data as of December 31, 2000, 1999 and 1998
and the statements of operations data for the years ended December 31, 1999 and
1998 have been derived from audited
11
consolidated 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 during 1998.
YEARS ENDED DECEMBER 31,(1)
--------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
License ................................... $ 12,170 $ 16,826 $ 24,103 $ 23,454 $ 18,811
Recurring ................................. 19,345 14,364 10,520 8,315 6,059
Services .................................. 23,634 28,289 27,331 25,624 19,622
-------- -------- -------- -------- --------
Total revenues ......................... 55,149 59,479 61,954 57,393 44,492
-------- -------- -------- -------- --------
Cost of revenues:
License ................................... 1,163 1,287 1,286 751 834
Recurring ................................. 8,098 5,789 4,957 3,930 2,219
Services .................................. 18,267 20,219 20,978 17,925 16,961
-------- -------- -------- -------- --------
Total cost of revenues ................. 27,528 27,295 27,221 22,606 20,014
-------- -------- -------- -------- --------
Operating expenses:
Sales and marketing ....................... 17,479 18,261 20,121 17,536 16,024
Research and development .................. 17,675 12,775 15,687 10,281 6,953
General and administrative ................ 6,890 10,065 7,338 5,433 4,651
Amortization of acquired intangibles ...... -- -- -- -- 638
-------- -------- -------- -------- --------
Total operating expenses ............... 42,044 41,101 43,146 33,250 28,266
-------- -------- -------- -------- --------
Operating income (loss) ................ (14,423) (8,917) (8,413) 1,537 (3,788)
Compensation related to modification of
escrow agreement(2) ....................... -- -- -- -- (4,183)
Interest expense ............................ (283) (208) (311) (267) (207)
Interest and other income ................... 138 375 320 507 589
-------- -------- -------- -------- --------
Income (loss) before taxes ................ (14,568) (8,750) (8,404) 1,777 (7,589)
Provision for income taxes .................. -- -- -- 22 --
-------- -------- -------- -------- --------
Net income (loss) ......................... $(14,568) $ (8,750) $ (8,404) $ 1,755 $ (7,589)
======== ======== ======== ======== ========
Net income (loss) per share -- basic and
diluted(3) ................................ $ (0.90) $ (0.55) $ (0.52) $ 0.11 $ (0.52)
======== ======== ======== ======== ========
Weighted average number of shares
outstanding:
Basic(3) .................................. 16,189 15,944 16,075 15,908 14,494
======== ======== ======== ======== ========
Diluted(3) ................................ 16,189 15,944 16,075 16,125 14,494
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and cash equivalents ................... $ 8,974 $ 8,464 $ 7,572 $ 8,946 $ 17,128
Total assets ................................ 31,143 34,251 34,440 38,430 37,214
Deferred revenue ............................ 27,815 20,215 9,894 8,573 9,134
Long-term borrowings, including capital lease
obligations ............................... 1,206 408 943 1,120 1,010
Stockholders' equity (deficit) .............. (7,368) 4,590 13,904 21,960 19,110
- ----------
(1) 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 an initial public offering, completed in June 1998).
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 for purposes of the statements of operations
data and at the end of such periods for purposes of the balance sheet
data.
(2) In March 1998, an 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 commitment underwriting agreement for the
initial public offering of the Company's capital stock on or before
July 1, 1998. 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.
12
(3) See Note 2 of the Notes to Consolidated Financial Statements for
information regarding the computation of net income (loss) per share.
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. 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted 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.
REVENUE RECOGNITION
Sources of revenue for the Company include:
- Sales of perpetual licenses for UltiPro;
- Sales of perpetual licenses for UltiPro in conjunction with
services to host the UltiPro application (or "Hosting
Services");
- Sales of the right to use UltiPro through the Company's
Intersourcing Offering, which includes Hosting Services;
- Sales of Hosting Services on a stand-alone basis to customers
who already own a perpetual license or are simultaneously
acquiring a perpetual license for UltiPro, or ("Base
Hosting");
- Sales of other services including implementation, training and
other services, including the provision of payroll-related
forms and the printing of Form W-2's for certain customers;
and
- Recurring revenues derived from (1) maintenance revenues
generated from maintaining, supporting and providing periodic
updates for the Company's software and (2) subscription
revenues generated from per employee per month ("PEPM") fees
earned through the Intersourcing Offering, Base Hosting and
the business service provider (BSP) sales channel (defined
below), as well as revenues generated from the Ceridian
Agreement (defined below).
Perpetual Licenses for UltiPro Sold With or Without Hosting Services
Sales of perpetual licenses for UltiPro and sales of perpetual licenses
for UltiPro in conjunction with Hosting Services are multiple-element
arrangements that involve the sale of software and consequently fall under the
guidance of SOP 97-2 for revenue recognition.
The Company licenses software under non-cancelable license agreements
and provides services including maintenance, training and implementation
consulting services. In accordance with the provisions of Statement of Position
("SOP") 97-2, "Software Revenue Recognition," license revenues are generally
recognized when (1) a non-cancelable license agreement has been signed by both
parties, (2) the product has been shipped, (3) no significant vendor obligations
remain and (4) collection of the related receivable is considered probable. To
the extent any one of these four criteria is not satisfied, license revenue is
deferred and not recognized in the consolidated statement of operations until
all such criteria are met.
13
For multiple-element software arrangements, each element of the
arrangement is analyzed and the Company allocates a portion of the total fee,
under the arrangement to the element based on vendor-specific objective evidence
of fair value of the element, ("VSOE") regardless of any separate prices stated
within the contract for each element. Fair value is considered the price a
customer would be required to pay when the element is sold separately.
The residual method is used to recognize revenue when a license
agreement includes one or more elements to be delivered at a future date and
vendor specific objective evidence of the fair value of all undelivered elements
exists. The fair value of the undelivered elements is determined based on the
historical evidence of stand-alone sales of these elements to third parties.
Undelivered elements in a license arrangement typically include maintenance,
training and implementation services (the "Standard Undelivered Elements"). The
fair value for maintenance fees is based on the price of the services sold
separately, which is determined by the annual renewal rate historically and
consistently charged to customers (the "Maintenance Valuation"). Maintenance
fees are generally priced as a percentage of the related license fee. The fair
value for training services is based on standard pricing (i.e., rate per
training day charged to customers for class attendance), taking into
consideration stand-alone sales of training services through year-end seminars
and historically consistent pricing for such services (the "Training Valuation")
The fair value for implementation services is based on standard pricing (i.e.,
rate per hour charged to customers for implementation services), taking into
consideration stand-alone sales of implementation services through special
projects and historically consistent pricing for such services (the
"Implementation Valuation"). Under the residual method (the "Residual Method"),
the fair value of the undelivered elements is deferred and the remaining portion
of the arrangement fee attributable to the delivered element, the license fee,
is recognized as revenue. If VSOE for one or more undelivered elements does not
exist, the revenue is deferred on the entire arrangement until the earlier of
the point at which (i) such VSOE does exist or (ii) all elements of the
arrangement have been delivered.
Perpetual licenses of UltiPro sold without Hosting Services typically
include a license fee and the Standard Undelivered Elements. Fair value for the
Standard Undelivered Elements is based on the Maintenance Valuation, the
Training Valuation and the Implementation Valuation. The delivered element of
the arrangement, the license fee, is accounted for in accordance with the
Residual Method.
Perpetual licenses of UltiPro sold with Hosting Services typically
include a license fee, the Standard Undelivered Elements and Hosting Services.
Fair value for the Standard Undelivered Elements is based on the Maintenance
Valuation, the Training Valuation and the Implementation Valuation. Hosting
Services are delivered to customers on a PEPM basis over the term of the related
customer contract ("Hosting PEPM Services"). Upfront fees charged to customers
represent fees for the hosting infrastructure, including hardware costs,
third-party license fees and other upfront costs incurred by the Company in
relation to providing such services ("Hosting Upfront Fees"). Hosting PEPM
Services and Hosting Upfront Fees (collectively, "Hosting Services") represent
undelivered elements in the arrangement since their delivery is over the course
of the related contract term. The fair value for Hosting Services is based on
standard pricing (i.e., rate charged per employee per month), taking into
consideration stand-alone sales of Hosting Services through the sale of such
services to existing customers (i.e., those who already own the UltiPro
perpetual license at the time Hosting Services are sold to them) and
historically consistent pricing for such services (the "Hosting Valuation"). The
delivered element of the arrangement, the license fee, is accounted for in
accordance with the Residual Method.
The Company's customer contracts are non-cancelable agreements. The
Company does not provide for rights of return or price protection on its
software. The Company provides a limited warranty that its software will perform
in accordance with user manuals for varying periods, which are generally less
than one year from the contract date. The Company's customer contracts generally
do not include conditions of acceptance. However, if conditions of acceptance
are included in a contract or uncertainty exists about customer acceptance of
the software, license revenue is deferred until acceptance occurs.
Sales Generated from the Intersourcing Offering
Subscription revenues generated from the Intersourcing Offering,
defined below, are recognized in accordance with Emerging Issues Task Force
("EITF") No. 00-21, "Revenue Arrangements with Multiple Deliverables" as a
services arrangement since the customer is purchasing the right to use UltiPro
rather than licensing the software on a perpetual basis. Fair value of multiple
elements in Intersourcing arrangements is assigned to each element based on the
guidance provided by EITF 00-21.
The elements that typically exist in Intersourcing arrangements include
hosting services, the right to use UltiPro, maintenance of UltiPro (i.e.,
product enhancements and customer support) and professional services (i.e.,
implementation services and training in the use of UltiPro). The pricing for
hosting services, the right to use UltiPro and maintenance of UltiPro is bundled
(the "Bundled Elements"). Since these three Bundled Elements are components of
recurring revenues in the consolidated statements of operations, allocation of
fair values to each of the three elements is not necessary since they are not
reported separately. Fair value for the Bundled Elements, as a whole, is based
upon evidence provided by the Company's pricing for Intersourcing arrangements
sold separately. The Bundled Elements are provided on an ongoing basis and
represent undelivered elements under EITF 00-21; they are recognized on a
monthly basis as the services are performed, once the customer has begun to
process payrolls used to pay their employees (i.e., goes "Live").
Implementation and training services (the "Professional Services")
provided for Intersourcing arrangements are priced on a time and materials basis
and are recognized as services revenue in the consolidated statements of
operations as the services are performed. Under EITF 00-21, fair value is
assigned to service elements in the arrangement based on their relative fair
values, using the prices established when the services are sold on a stand-alone
basis. Fair value for Professional Services is based on the respective Training
Valuation and Implementation Valuation. If evidence of the fair value of one or
more undelivered elements does not exist, the revenue is deferred and recognized
when delivery of those elements occurs or when fair value can be established.
The Company believes that applying EITF 00-21 to Intersourcing arrangements as
opposed to applying SOP 97-2 is appropriate given the nature of the arrangements
whereby the customer has no right to the UltiPro license.
Sales of Base Hosting Services
Subscription revenues generated from Base Hosting are recognized in
accordance with EITF 00-3, "Application of AICPA Statement of Position 97-2 to
Arrangements That Include the Right to Use Software Stored on Another Entity's
Hardware," which provides guidance as to the application of SOP 97-2 to hosting
arrangements that include a license right to the software. The elements that
typically exist for Base Hosting arrangements include hosting services and
implementation services. Base Hosting is different than Intersourcing
arrangements (described above) in that the customer already owns a perpetual
license or is purchasing a perpetual license for UltiPro and is purchasing
hosting services subsequently in a separate transaction whereas, with
Intersourcing, the customer is purchasing the right to use (not license)
14
UltiPro. Implementation services provided for Base Hosting arrangements are
substantially less than those provided for Intersourcing arrangements since
UltiPro is already implemented in Base Hosting arrangements and only needs to be
transitioned to a hosted environment. Fair value for hosting services is based
on the Hosting Valuation. Fair value for implementation services is assigned in
accordance with guidelines provided by SOP 97-2 based on the Implementation
Valuation.
Other Services, including Implementation and Training Services
Services revenues include revenues from fees charged for the
implementation of the Company's software products and training of customers in
the use of such products, fees for other services, including the provision of
payroll-related forms and the printing of Form W-2's for certain customers, as
well as certain reimbursable out-of-pocket expenses. Revenues for training and
implementation consulting services are recognized as services are performed.
Other services are recognized as the product is shipped or as the services are
rendered.
Arrangement fees related to fixed-fee implementation services contracts
are recognized using the percentage of completion accounting method, which
involves the use of estimates. Percentage of completion is measured at each
reporting date based on hours incurred to date compared to total estimated hours
to complete. If a sufficient basis to measure the progress towards completion
does not exist, revenue is recognized when the project is completed or when we
receive final acceptance from the customer.
Recurring Revenues
Recurring revenues include maintenance revenues and subscription
revenues. Maintenance revenues are derived from maintaining, supporting and
providing periodic updates for the Company's software. Subscription revenues are
principally derived from per employee per month ("PEPM") fees earned through the
Intersourcing Offering, hosting services offered to customers that license
UltiPro on a perpetual basis ("Base Hosting") and the business service provider
(BSP) sales channel (defined below), as well as revenues generated from the
Ceridian Agreement (defined below). Maintenance revenues are recognized ratably
over the service period, generally one year. Maintenance and support fees are
generally priced as a percentage of the initial license fee for the underlying
products. To the extent there are upfront fees associated with the Intersourcing
Offering, Base Hosting or the BSP sales channel, subscription revenues are
recognized ratably over the term of the related contract upon the delivery of
the product and services. PEPM fees from the Intersourcing Offering, Base
Hosting and the BSP sales channel are recognized as subscription revenue as the
services are delivered. Commencing on August 28, 2002, subscription revenues
generated from the Ceridian Agreement are recognized ratably over the minimum
term of the contract, which is expected to extend until March 9, 2008 (7 years
from the effective date of the Ceridian Agreement). Subscription revenues of
approximately $642,000 per month are based on guaranteed minimum payments from
Ceridian Corporation of approximately $42.7 million over the contract term,
including $16.5 million received to date.
Maintenance services provided to customers include product updates and
technical support services. Product updates are included in general releases to
the Company's customers and are distributed on a periodic basis. Such updates
may include, but are not limited to, product enhancements, payroll tax updates,
additional security features or bug fixes. All features provided in general
releases are unspecified upgrade rights. To the extent specified upgrade rights
or entitlements to future products are included in a multi-element arrangement,
revenue is recognized upon delivery provided fair value for the elements exists.
In multi-element arrangements that include a specified upgrade right or
entitlement to a future product, if fair value does not exist for all
undelivered elements, revenue for the entire arrangement is deferred until all
elements are delivered or when fair value can be established.
Subscription revenues generated from the BSP sales channel include both
the right to use UltiPro and maintenance. The BSP is charged a fee on a per
employee per month basis and, in several cases, is subject to a monthly minimum
amount for the term of the related agreement. Revenue is recognized on a per
employee per month basis. To the extent the BSP pays the Company a one-time
upfront fee, the Company accounts for such fee by recognizing it as subscription
revenue over the minimum term of the related agreement. The Company does not
host UltiPro for the BSP sales channel.
The Company recognizes revenue in accordance with the SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
No. 101"). Management believes the Company is currently in compliance with the
current provisions set forth in SOP 97-2, SOP 98-9, EITF 00-21, EITF 00-3 and
SAB No. 101.
15
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts at an amount
estimated to be sufficient to provide adequate protection against losses
resulting from collecting less than full payment on accounts receivables. In
assessing the adequacy of the allowance for doubtful accounts, the Company
considers multiple factors including historical bad debt experience, the general
economic environment, and the aging of its receivables. A considerable amount of
judgment is required when the realization of receivables is assessed, including
assessing the probability of collection and current credit-worthiness of each
customer. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments, an
additional provision for doubtful accounts may be required.
Software Development Costs
SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," requires capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
Based on the Company's product development process, technological feasibility is
established upon completion of a working model. Software costs capitalized
during 2002 and 2001 totaled zero and $4,621,000, respectively. Annual
amortization is based on the greater of the amount computed using (a) the ratio
that current gross revenues for the related product bears to the total of
current and anticipated future gross revenues for that product or (b) the
straight-line method over the remaining estimated economic life of the product
including the period being reported on. Capitalized software is amortized using
the straight-line method over the estimated useful lives of the assets, which
are typically three years. Amortization of capitalized software was $1,792,743,
$706,000 and $351,000 in 2002, 2001 and 2000, respectively. Accumulated
amortization of capitalized software was $2.9 million and $1.1 million as of
December 31, 2002 and 2001, respectively. The Company evaluates the
recoverability of capitalized software based on estimated future gross revenues
reduced by the estimated costs of completing the products and of performing
maintenance and customer support. If the Company's gross revenues were to be
significantly less than its estimates, the net realizable value of the Company's
capitalized software intended for sale would be impaired, which could result in
the write-off of all or a portion of the unamortized balance of such capitalized
software.
OVERVIEW
Ultimate Software designs, markets, implements and supports payroll and
workforce management solutions.
Ultimate Software's UltiPro Workforce Management Software ("UltiPro")
is a Web-based solution designed to deliver the functionality businesses need to
manage the employee life cycle, whether their processes are centralized at
headquarters or distributed across multiple divisions or branch offices.
UltiPro's human resources ("HR") and benefits management functionality is wholly
integrated with a flexible payroll engine, reporting and analytical
decision-making tools, and a central Web portal that can serve as the customer's
gateway for its workforce to access company-related and personal information.
Ultimate Software believes that UltiPro helps customers streamline HR and
payroll processes to significantly reduce administration and operational costs,
while also empowering executives and staff to access critical information
quickly and perform routine business activities efficiently.
UltiPro Workforce Management is marketed both through the Company's
direct sales team as well as through alliances with business service providers
(BSPs) that market co-branded UltiPro to their customer bases. Ultimate
Software's direct sales team focuses on companies with more than 500 employees
and sells both on a license (typically in-house) and service basis (typically
hosted and priced on a per-employee-per-month basis). The Company's BSP
alliances focus primarily on companies with under 500 employees and typically
sell an Internet solution, which includes UltiPro priced on a monthly/service
basis. When the BSP sells its Internet solution, incorporating UltiPro in the
offering, the BSP is obligated to remit a fee to the Company, typically measured
on a per employee per month basis and, in some cases, subject to a monthly
minimum amount.
The Company's direct sales force markets UltiPro as an in-house payroll
and workforce management solution and alternatively as a hosted offering branded
"Intersourcing" (the "Intersourcing Offering"). Intersourcing provides Web
access to comprehensive workforce management functionality for organizations
that need to simplify the information technology (IT) support requirements of
their business applications. Ultimate Software believes that Intersourcing is
attractive to companies that want to focus on their core competencies to
increase sales and profits. Through the Intersourcing model introduced in 2002,
the Company provides the hardware, infrastructure, ongoing maintenance and
backup services for its customers at a BellSouth data center.
16
Intersourcing Offering
In 2002, the Company introduced hosting services through which the
Company provides the hardware, infrastructure, ongoing maintenance and back-up
services for its customers at a BellSouth data center. Different types of
hosting arrangements include the sale of hosting services as a part of the
Intersourcing offering, discussed below, and, to a lesser extent, the sale of
hosting services to customers that license UltiPro on a perpetual basis. Hosting
services, available in a shared or dedicated environment, provide Web access to
comprehensive workforce management functionality for organizations that need to
simplify the information technology (IT) support requirements of their business
applications and are priced on a per-employee-per-month basis. In a shared
environment, commonly used for Intersourcing, Ultimate Software provides an
infrastructure with applicable servers shared among many customers who use a Web
browser to access the application software through the data center. In a
dedicated environment, servers are dedicated to specific customers that purchase
this particular service. The majority of hosting arrangements are provided
through a shared environment.
Intersourcing is the hosted offering designed to provide an appealing
pricing structure to customers who prefer to minimize the initial cash outlay
associated with typical capital expenditures. Intersourcing customers purchase
the right to use UltiPro on an ongoing basis for a specific term in a shared
hosted environment. The pricing for Intersourcing, including both the hosting
element as well as the right to use UltiPro, is on a per-employee-per-month
basis. The Company's direct sales force markets UltiPro as an in-house payroll
and workforce management solution and alternatively as a hosted offering through
Intersourcing. Ultimate Software believes that Intersourcing is attractive to
companies that want to focus on their core competencies to increase sales and
profits.
Ceridian Agreement
On April 24, 2002, the Company dismissed its independent public
accountants, Arthur Andersen LLP ("Andersen"), and retained KPMG LLP ("KPMG") as
its new independent public accountants. As part of their quarterly review
process for the fiscal quarter ended March 31, 2002, KPMG reviewed, among other
things, the Company's revenue recognition policies, including the co-branding
agreement signed with Ceridian Corporation ("Ceridian") on March 9, 2001, as
amended from time to time (the "Ceridian Agreement"). Based upon consultations
with KPMG as a result of their review of the Ceridian Agreement, during the
three month period ended March 31, 2002, the Company reassessed its original
conclusion regarding the timing of the revenue recognition to be applied to the
Ceridian Agreement.
When the Company completed a successful transfer of technology to
Ceridian on February 5, 2002, a separate agreement, the Evolution Agreement,
defined below, was executed with Ceridian. The Company had intended to begin
recognition of revenue under the Ceridian Agreement on February 5, 2002 upon the
successful transfer of technology to Ceridian. However, when KPMG reviewed the
transaction, it was determined that the Evolution Agreement was an extension of
the Ceridian Agreement. The relationship of these two agreements was based on
the application of Technical Practice Aid (TPA) 5100.39. When the determination
was made that the two agreements were related, the UltiPro 6.0 general release
became a specified upgrade for this arrangement. Since the Company could not
establish fair value for the specified upgrade, revenue recognition was deferred
until the specified upgrade was delivered. The revenue recognition for the
Ceridian Agreements began when the UltiPro 6.0 release (also known as Evolution)
was delivered on August 28, 2002.
Ceridian is obligated to pay to Ultimate Software a minimum of
approximately $42.7 million, including $16.5 million received to date, over the
minimum term of the Ceridian Agreement. The earliest date upon which the
Ceridian Agreement can be terminated by either party (except for an uncured
material breach) is March 9, 2008, resulting in an expected minimum term of 7
years (the "Minimum Term"). Ceridian retains certain rights to use the software
upon termination. The effect of the change in revenue recognition for the
Ceridian Agreement was to modify the date at which revenue recognition would
begin -- changing the onset of the revenue recognition process from February 5,
2002, which was the date the Company completed a successful transfer of
technology to Ceridian, to the earlier of (i) the delivery of the UltiPro 6.0
release, or (ii) January 1, 2003. The change in the timing of revenue
recognition applied to the Ceridian Agreement does not impact Ceridian's payment
obligations to the Company over the Minimum Term nor does it impact the nature
of the underlying business transaction.
On August 28, 2002, Ultimate Software delivered the UltiPro 6.0 release
to Ceridian. The delivery of UltiPro 6.0 marked the commencement of recurring
revenue recognition for the Ceridian transaction at the minimum rate of
approximately $642,000 per month from that date through March 2008. The
recurring revenue amount of $642,000 per
17
month was calculated by aggregating the minimum guaranteed payments under the
Ceridian Agreement, totaling $42.2 million, and accreting them over the
remaining minimum life of the contract, which ends March 9, 2008.
The Ceridian Agreement provides for a monthly fee for all employees
paid by Ceridian incorporating UltiPro software. To the extent this monthly
calculation exceeds the minimum monthly payment, such excess would be recorded
as additional recurring revenue in the month to which it relates, up to monthly
maximum amounts pursuant to the Ceridian Agreement.
On February 5, 2002, Ultimate Software and Ceridian entered into an
agreement (the "Evolution Agreement") which provided that if Ultimate Software
were to deliver UltiPro 6.0 on or before August 30, 2002, Ceridian would pay
Ultimate Software $500,000 for such advanced delivery (the "Evolution Bonus").
Upon receipt in September 2002, the Evolution Bonus, was recorded as deferred
revenue in the accompanying consolidated balance sheet. The Evolution Bonus is
being recognized as subscription revenue (a component of recurring revenue)
ratably over the remaining minimum term of the Ceridian Agreement and is
included in the minimum rate of $642,000 per month through March 2008. The
Company awarded substantially all of the Evolution Bonus to members of the
Company's development team as an incentive bonus for the early delivery of
UltiPro 6.0 (the "Incentive Bonus"). The Incentive Bonus was expensed in the
three months ended September 30, 2002 and was included with research and
development expenses.
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,
----------------------------------
2002 2001 2000
-------- -------- --------
Revenues:
License ...................... 22.1% 28.3% 38.9%
Recurring .................... 35.1 24.1 17.0
Services ..................... 42.8 47.6 44.1
-------- -------- --------
Total revenues ............ 100.0 100.0 100.0
-------- -------- --------
Cost of revenues:
License ...................... 2.1 2.2 2.1
Recurring .................... 14.7 9.7 8.0
Services ..................... 33.1 34.0 33.9
-------- -------- --------
Total cost of revenues .... 49.9 45.9 44.0
-------- -------- --------
Operating expenses:
Sales and marketing .......... 31.7 30.7 32.5
Research and development ..... 32.1 21.5 25.3
General and administrative 12.5 16.9 11.8
-------- -------- --------
Total operating expenses 76.3 69.1 69.6
-------- -------- --------
Operating loss ............ (26.2) (15.0) (13.6)
Interest expense ............... (0.5) (0.3) (0.5)
Interest and other income ...... 0.3 0.6 0.5
-------- -------- --------
Net loss ..................... (26.4)% (14.7)% (13.6)%
======== ======== ========
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 2002 AND 2001
Revenues
The Company's revenues are derived from three principal sources:
software licenses ("license revenues"), recurring revenues and services
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.
18
Recurring revenues include maintenance and subscription revenues.
Maintenance revenues are derived from maintaining, supporting and providing
periodic updates for the Company's software. Subscription revenues are
principally derived from per-employee-per-month ("PEPM") fees earned through the
Intersourcing Offering, Base Hosting and the BSP sales channel, as well as
revenues generated from the Ceridian arrangement. Maintenance revenues are
recognized ratably over the service period, generally one year. Subscription
revenues are recognized ratably over the term of the related contract upon the
delivery of the product and services. All of the Company's customers that
purchased software during 2002 and 2001 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.
Services revenues include revenues from fees charged for the
implementation of the Company's software products and training of customers in
the use of such products, fees for other services, including the provision of
payroll-related forms and the printing of Form W-2's for certain customers, as
well as certain reimbursable out-of-pocket expenses. Services revenues are
recognized as services are performed and delivered.
Total revenues, consisting of license, recurring and service revenues,
decreased to $55.1 million for 2002 from $59.5 million for 2001.
License revenues decreased 27.7% to $12.2 million for 2002 from $16.8
million for 2001. The decrease in license revenues for 2002 is primarily due to
a reduction in the number of new units sold by the Company's direct sales
channel during the first half of 2002 which management believes was partly due
to unfavorable economic conditions, partially offset by increased sales of
UltiPro to existing clients using the Company's DOS-based product, UltiPro for
Lan ("DOS Clients"), which had a lower average sales price. In addition, during
2002 the Company adjusted its sales and marketing strategy to also target sales
from its new Intersourcing Offering, which produces subscription revenue (a
component of recurring revenue) rather than license revenue. Ultimate Software
introduced UltiPro for Lan in July 1993 as its first proprietary software
product. The Company no longer markets this DOS-based product and discontinued
support for UltiPro for Lan in late January 2003. The Company actively marketed
the UltiPro product to Dos Clients as part of a loyalty program designed to
encourage these clients to purchase UltiPro before support for UltiPro for Lan
was discontinued.
Recurring revenues increased 34.7% to $19.3 million for 2002 from $14.4
million for 2001 primarily due to the recognition of the subscription revenue
under the Ceridian Agreement beginning on August 28, 2002 and the increase in
maintenance revenue generated from incremental licenses sold in 2001 and 2002.
Services revenues decreased 16.5% to $23.6 million for 2002 from $28.3
million for 2001 primarily as a result of a decrease in implementation revenue
resulting from fewer billable hours stemming from a decrease in the number of
billable consultants consequential to the reduction in the number of total units
sold in 2002 and, to a lesser extent, a decrease in reimbursable out of pocket
expenses.
Cost of Revenues
Cost of revenues consists of the cost of license, recurring and
services 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. UltiPro includes
third-party software for enhanced report writing purposes. When UltiPro licenses
are sold, customers pay the Company on a per user basis for the license rights
to the third-party report writing software. Capitalized software is amortized
using the straight-line method over the estimated useful life of the related
asset, which is typically three years. Cost of recurring revenues consists of
costs to provide maintenance and technical support to the Company's customers,
the cost of providing periodic updates and the costs of subscription revenues,
including amortization of capitalized software. Cost of services revenues
primarily consists of costs to provide implementation services and training to
the Company's customers and, to a lesser degree, costs related to sales of
payroll-related forms and costs associated with reimbursable out-of-pocket
expenses, discussed below.
Effective January 1, 2002, the Company adopted Financial Accounting
Standards Board Emerging Issues Task Force No. 01-14, "Income Statement
Characterization of Reimbursements Received for `Out-of-Pocket' Expenses
Incurred," ("EITF 01-14"). EITF 01-14 requires companies to characterize
reimbursements received for out-of-pocket expenses incurred as revenue and to
reclassify prior period financial statements to conform to current year
presentation for comparative purposes. Reimbursable out-of-pocket expenses,
which are included in services revenues and cost of services
19
revenues in the Company's accompanying consolidated statements of operations,
were $1.2 million and $2.0 million for 2002 and 2001, respectively. Prior to the
adoption of EITF 01-14, the Company's historical consolidated financial
statements offset these amounts within cost of services revenues.
Cost of license revenues decreased 9.6% to $1.2 million for 2002 from
$1.3 million for 2001. The decrease in the cost of license revenues was
primarily attributable to lower third party licensing fees totaling $0.3 million
resulting from the decrease in licensing activity for the year, partially offset
by $0.2 million in higher software amortization. As a percentage of license
revenues, cost of license revenues increased to 9.6% for 2002 from 7.6% for 2001
primarily as a result of an increase in the amortization of capitalized software
for UltiPro combined with the absorption of these higher expenses in a decreased
license revenue base.
Cost of recurring revenues increased 39.9% to $8.1 million for 2002
from $5.8 million for 2001. This increase was primarily attributable to an
increase in costs of maintenance of $1.3 million principally due to higher labor
costs to support the Company's customer base and an increase of $0.7 million in
costs of subscriptions, principally from a full year of amortization of
capitalized software, which began in August of 2001. As a percentage of
recurring revenues, cost of recurring revenues increased to 41.9% for 2002 from
40.3% for 2001 primarily due to a full year of software amortization costs in
2002 as compared to four month's software amortization in 2001.
Cost of services revenues decreased 9.7% to $18.3 million for 2002
from $20.2 million for 2001. The decrease was primarily due to a reduction of
$0.9 million in labor and travel costs from implementation services and a
decrease in reimbursable out-of-pocket expenses totaling $0.8 million. Cost of
services revenues, as a percentage of services revenues, increased to 77.3% for
2002 from 71.5% for 2001 primarily as a result of the absorption of these
expenses in a decreased services revenue base.
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 decreased 4.3% to $17.5 million
for 2002 from $18.3 million for 2001. The decrease in sales and marketing
expenses was primarily due to a $0.8 million reduction in labor costs, partially
offset by an increase of $0.3 million in advertising and marketing costs. Sales
and marketing expenses, as a percentage of total revenues, increased to 31.7%
for 2002 from 30.7% for 2001 primarily due to the absorption of these expenses
in a reduced total revenue base.
Research and Development
Research and development expenses consist primarily of software
development personnel costs. Research and development expenses increased 38.4%
to $17.7 million for 2002 from $12.8 million for 2001. Research and development
expenses, as a percentage of total revenues, increased to 32.1% for 2002 from
21.5% for 2001. The increase in research and development expenses was primarily
attributable to the absence of the capitalization of software development costs
in 2002 as compared to the capitalization of $4.2 million of software
development costs in 2001, and, to a lesser extent, a $0.5 million incentive
bonus paid to members of the Company's development team for the advanced
delivery of UltiPro 6.0 (also known as Evolution) to Ceridian on August 28,
2002. Capitalized software costs consists of software development personnel
costs associated with the development of certain major products which were
available for general release in the third and fourth fiscal quarters of 2001.
Such capitalized software costs are amortized ratably to cost of license
revenues and cost of recurring revenues, on a product-by-product basis over the
estimated life (which is typically three years) following the general release of
the underlying software products.
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 decreased 31.5% to $6.9 million for 2002 from $10.1
million for 2001 primarily due to (1) a reduction in the provision for doubtful
accounts and (2) the settlement of a legal matter which occurred in 2001, (3)
partially offset by increased professional fees. The provision for doubtful
accounts decreased to $1.7 million for 2002 from $4.2 million in 2001. This
decrease was primarily attributable to two factors: (1) a decrease of $5.1
million in the balance of accounts receivable, gross of the allowance for
doubtful accounts; and (2) a decrease of $0.9 million in individual
20
accounts charged-off during 2002 as compared to 2001. The balance of gross
accounts receivable declined principally due to lower license sales in 2002
resulting from a combination of fewer units sold in 2002 combined with the
Company's business strategy to shift a portion of its business to Intersourcing,
in addition to better collections. Charge-offs were higher in 2001 due to (1)
the write-off of the account receivable from a single customer totaling $0.7
million pursuant to the legal settlement discussed below; and (2) the write-off
of several accounts receivable from various customers in the Professional
Employer Organization ("PEO") sector that encountered financial difficulties
during 2001. During 2001, the Company settled a legal matter with a single PEO
customer ("PEO Customer") arising out of the Company's claim for payment for
services from the PEO Customer and the PEO Customer's claim related to
performance-based issues for the delivered product. The amount of the legal
settlement was $1.3 million, excluding the amount of the write-off referred to
above. The Company has substantially reduced its sales and marketing efforts to
the PEO industry since 2001. General and administrative expenses, as a
percentage of total revenues, decreased to 12.5% for 2002 from 16.9% for 2001
primarily due to the absorption of these costs in a lower total revenue base.
Interest Expense
Interest expense increased 36.1% to $283,000 for 2002 from $208,000 for
2001 primarily due to additional borrowings under the Credit Facility, defined
below.
Interest and Other Income
Interest and other income decreased 63.2% to $138,000 for 2002 from
$375,000 for 2001 primarily due to the reduction in funds available for
investment in 2002.
Provision for Income Taxes
No provision or benefit for Federal, state or foreign income taxes was
made for 2002 due to the operating losses and operating loss carryforwards from
prior periods incurred in the respective periods. Net operating loss
carryforwards available at December 31, 2002, expiring at various times through
the year 2022 and which are available to offset future taxable income, were
$42.8 million. The timing and levels of future profitability may result in the
expiration of net operating loss carryforwards before utilization. Additionally,
utilization of such net operating losses may be limited as a result of
cumulative ownership changes in the Company's equity instruments.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 2001 AND 2000
Revenues
Total revenues, consisting of license, recurring and service revenues,
decreased to $59.5 million for 2001 from $62.0 million for 2000.
License revenues decreased 30.2% to $16.8 million for 2001 from $24.1
million for 2000 primarily due to a lower volume of sales generated by the
Company's direct sales channel (i.e. fewer licensed units sold) which management
believes was partly due to current economic conditions. While the predominant
cause for the decrease in license revenues was lower sales volume,,the Company's
change in its business strategy for its sales channel which focused on
co-branding relationships with BSPs (the "BSP Channel") contributed $0.9 million
to the decrease in license revenues from 2000 to 2001. There were no license
revenues generated in 2001 by the BSP Channel as a result of the change in the
Company's business strategy, discussed below. Based in part on prevailing market
conditions, during the three months ended September 30, 2000, the Company
revised its BSP Channel business strategy to focus on recurring revenues from
per employee per month fees and to change the nature of the underlying
agreements with BSPs to include both the right to use UltiPro and maintenance
over a specified term (the "Business Strategy Revision"). Consequently, the
Business Strategy Revision shifted the type of revenue generated from the BSP
Channel from both license revenues and subscription revenues to only
subscription revenues.
Recurring revenues increased 36.5% to $14.4 million for 2001 from $10.5
million for 2000 primarily due to the increase in maintenance revenue generated
from incremental licenses sold in 2001, combined with a high customer retention
rate.
21
Services revenues increased 3.5% to $28.3 million for 2001 from $27.3
million for 2000 primarily as a result of an increase in implementation revenue
from increased billable hours resulting from the combination of additional
billable consultants and higher utilization of billable consultants, and to a
lesser extent, additional billable hours from third party consultants, partially
offset by a decrease in revenue generated from a hosting arrangement with
International Business Machines (the "IBM Hosted Model") which terminated in
2002 as to the addition of new customers. The amount of revenue generated from
the IBM Hosted Model in 2001 was $0.9 million as compared to $2.5 million in
2000.
Cost of Revenues
Cost of license revenues totaling $1.3 million for 2001 was consistent
with 2000. As a percentage of license revenues, cost of license revenues
increased to 7.6% for 2001 from 5.3% for 2000. The increase in the cost of
license revenues was primarily attributable to a $0.1 million increase in third
party licensing fees and amortization of capitalized software for UltiPro during
2001 combined with lower license revenues.
Cost of recurring revenues increased 16.8% to $5.8 million for 2001
from $5.0 million for 2000. This increase was attributable to increased labor
costs of $0.4 million to support the Company's customer base and amortization of
capitalized software totaling $0.2 million, which began in 2001. As a percentage
of recurring revenues, cost of recurring revenues decreased to 40.3% for 2001
from 47.1% for 2000. This decrease was primarily attributable to higher costs
absorbed by an increased recurring revenue base.
Cost of services revenues decreased 3.6% to $20.2 million for 2001 from
$21.0 million for 2000. Cost of services revenues, as a percentage of services
revenues, decreased to 71.5% for 2001 from 76.8% for 2000. The decrease in the
cost of services revenues was primarily attributable to the reduction in costs
associated with $1.5 million of lower revenues recognized from the IBM Hosted
Model, partially offset by a $1.0 million increase in labor costs.
Sales and Marketing
Sales and marketing expenses decreased 9.2% to $18.3 million for 2001
from $20.1 million for 2000. Sales and marketing expenses, as a percentage of
total revenues, decreased to 30.7% for 2001 from 32.5% for 2000. The decrease in
sales and marketing expenses was primarily due to a $1.0 million reduction in
advertising and marketing costs, a $0.9 million reduction in sales commissions
due to lower license sales and a $0.4 million reduction in travel expenses,
partially offset by $0.6 million increase in labor costs.
Research and Development
Research and development expenses decreased 18.6% to $12.8 million for
2001 from $15.7 million for 2000. The decrease in research and development
expenses was primarily attributable to the capitalization during 2001 of $4.2
million in software development personnel costs associated with the development
of certain major products which were available for general release in the third
and fourth fiscal quarters of 2001. Such capitalized software costs are
amortized ratably to cost of license revenues and cost of recurring revenues, on
a product-by-product basis over the estimated life (which is typically three
years) following the general release of the underlying software products. As of
December 31, 2001, the amount of capitalized software remaining for future
amortization to cost of license and cost of recurring revenues was $1.4 million
and $3.1 million, respectively.
Research and development expenses, as a percentage of total revenues,
decreased to 21.5% for 2001 from 25.3% for 2000. The decrease in research and
development expenses, as a percentage of total revenues, was primarily due to
the capitalization of software. Excluding the impact of research and development
expenses capitalized in the period, research and development expenses, as a
percentage of total revenues, were 28.5% for 2001 and 25.3% for 2000. The
increase in research and development costs, excluding the impact of capitalized
software, was primarily attributable to additional software development
personnel costs of $1.3 million.
General and Administrative
General and administrative expenses increased 37.2% to $10.1 million
for 2001 from $7.3 million for 2000. General and administrative expenses, as a
percentage of total revenues, increased to 16.9% for 2001 from 11.8% for 2000.
The increase in general and administrative expenses was principally due to the
settlement of a litigation matter and an
22
increase in the provision for doubtful accounts. Charge-offs were higher in 2001
due to (1) the write-off of the account receivable from a single customer
totaling $0.7 million pursuant to the legal settlement discussed below; and (2)
the write-off of several accounts receivable from various customers in the
Professional Employer Organization ("PEO") sector that encountered financial
difficulties during 2001. During 2001, the Company settled a legal matter with
the PEO Customer arising out of the Company's claim for payment for services
from the PEO Customer and the PEO Customer's claim related to performance-based
issues for the delivered product. The amount of the legal settlement was $1.3
million, excluding the amount of the write-off referred to above. The Company
has substantially reduced its sales and marketing efforts to the PEO industry
since 2001.
Interest Expense
Interest expense decreased 33.1% to $208,000 for 2001 from $311,000
from 2000 primarily due to lower interest rates on new capital lease
obligations.
Interest and Other Income
Interest and other income increased 17.2% to $375,000 for 2001 from
$320,000 from 2000 primarily due to interest earned on additional funds
available for investment in 2001.
Provision for Income Taxes
No provision for Federal, state or foreign income taxes was made for
2001 due to the operating losses and operating loss carryforwards from prior
periods incurred in the respective periods. Net operating loss carryforwards
available at December 31, 2001, expiring at various times through the year 2021
and which are available to offset future taxable income, were $34.3 million. The
timing and levels of future profitability may result in the expiration of net
operating loss carryforwards before utilization. Additionally, utilization of
such net operating losses may be limited as a result of cumulative ownership
changes in the Company's equity instruments.
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, 2002 and
2001. 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. This
information should be 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.
23
QUARTERS ENDED
-------------------------------------------------------------------------------------
DEC. 31, SEPT.30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2002 2002 2002 2002 2001 2001 2001 2001
-------- -------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
License $ 2,851 $ 3,625 $ 4,299 $ 1,395 $ 4,015 $ 3,034 $ 4,450 $ 5,327
Recurring 6,434 4,936 4,041 3,934 3,862 3,735 3,626 3,141
Services 7,170 5,932 4,905 5,627 7,242 6,189 6,936 7,922
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues 16,455 14,493 13,245 10,956 15,119 12,958 15,012 16,390
-------- -------- -------- -------- -------- -------- -------- --------
Cost of revenues:
License 297 343 383 140 391 258 326 312
Recurring 2,166 2,017 1,965 1,950 1,656 1,364 1,380 1,389
Services 5,184 4,230 4,295 4,558 5,549 4,799 4,850 5,021
-------- -------- -------- -------- -------- -------- -------- --------
Total cost of revenues 7,647 6,590 6,643 6,648 7,596 6,421 6,556 6,722
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing 4,217 4,227 4,497 4,538 4,333 4,422 4,879 4,627
Research and development 4,326 4,683 4,335 4,331 3,845 2,333 2,331 4,266
General and administrative 2,093 2,101 1,566 1,130 2,837 3,995 1,848 1,385
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses 10,636 11,011 10,398 9,999 11,015 10,750 9,058 10,278
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) (1,828) (3,108) (3,796) (5,691) (3,492) (4,213) (602) (610)
Interest expense: (72) (60) (79) (72) (60) (56) (42) (50)
Interest and other income: 23 26 49 40 37 82 136 120
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes (1,877) (3,142) (3,826) (5,723) (3,515) (4,187) (508) (540)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ (1,877) $ (3,142) $ (3,826) $ (5,723) $ (3,515) $ (4,187) $ (508) $ (540)
======== ======== ======== ======== ======== ======== ======== ========
Weighted average shares outstanding:
Basic 16,496 16,460 15,907 15,885 15,894 15,905 15,938 16,043
======== ======== ======== ======== ======== ======== ======== ========
Diluted 16,496 16,460 15,907 15,885 15,894 15,905 15,938 16,043
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per share--basic
and diluted: $ (0.11) $ (0.19) $ (0.24) $ (0.36) $ (0.22) $ (0.26) $ (0.03) $ (0.03)
======== ======== ======== ======== ======== ======== ======== ========
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded operations primarily through the
private and public sale of equity securities and, to a lesser extent, equipment
financing and borrowing arrangements.
As of December 31, 2002, the Company had $9.0 million in cash and cash
equivalents, reflecting a net increase of $0.5 million since December 31, 2001.
Working capital as of December 31, 2002 was a working capital deficit of $9.7
million as compared to working capital of $2.1 million as of December 31, 2001.
The decline in working capital resulted primarily from the impact of the net
loss from operations for 2002, partially offset by a total of $2.7 million of
capital raised through private sales of the Company's common stock, par value
$0.01 ("Common Stock") in June, July and December 2002, as discussed below.
Net cash provided by operating activities was $2.8 million for 2002 as
compared to $10.4 million for 2001. The decrease in net cash provided by
operating activities was primarily attributable to an increase in research and
development
24
expenses and the funding of operations, partially offset by increased
collections of accounts receivable. During 2001, $4.6 million of internally
developed software costs (principally research and development expenses) were
capitalized.
Net cash used in investing activities was $4.3 million for 2002 as
compared to $6.5 million for 2001. The decrease in net cash used in investing
activities was primarily attributable to the decrease in the capitalization of
software development costs, partially offset by an increase in capital
expenditures, principally computer equipment, which were not financed.
Net cash provided by financing activities was $2.0 million for 2002 as
compared to net cash used in financing activities of $3.0 million for 2001. The
increase in net cash provided by financing activities was primarily due to the
increase in net proceeds from issuances of Common Stock coupled with borrowings
on the Credit Facility, discussed below, for equipment purchases, partially
offset by the reduction of common stock repurchases in 2002.
Days sales outstanding, calculated on a trailing three-month basis
("DSO"), as of December 31, 2002 and 2001, were 58 days and 85 days,
respectively. The decrease in DSO's as of December 31, 2002 was the result of
(1) the recognition of subscription revenue in the three months ended December
31, 2002 from the Original Ceridian Agreement totaling $1.9 million, which does
not have related accounts receivable; (2) an improvement in the quality of
accounts receivable; and (3) the Company's change in business strategy to focus
on both license sales (as in the past) and Intersourcing sales (beginning in
mid-2002).
Deferred revenue was $27.8 million at December 31, 2002 as compared to
$20.2 million at December 31, 2001. The increase of $7.6 million in deferred
revenue was primarily due to an increase in deferred revenue from the Ceridian
Agreement and an increase in deferred revenue from Intersourcing sales made
during 2002.
During the second quarter of 2002, the Company raised $2.0 million of
capital through the private sale of 500,000 shares of the Company's Common Stock
and a warrant to purchase 50,000 shares of Common Stock at $4 per share to a
shareholder of the Company. During July and December 2002, the Company raised an
additional aggregate amount of $0.7 million of capital through the private sale
of 175,000 shares of the Company's Common Stock and a warrant to purchase 17,500
shares of Common Stock at $4 per share. As the Company's revenue mix shifts from
license revenue to recurring revenue, particularly through the Intersourcing
Offering, and cash inflow consequently shifts from relatively large, one-time
upfront payments to recurring monthly payments, the Company may seek to raise
additional funds through the sale of additional shares of Common Stock or other
securities or through borrowings.
The capital raised in July 2002 included the sale of 100,000 shares of
Common Stock and a warrant to purchase 10,000 shares of Common Stock at $4 per
share, for an aggregate amount of $400,000, to an irrevocable trust established
by a member of the Company's Board of Directors (the "Director"). The Director
has informed the Company that he has no voting or investment power or other
controlling interest in this irrevocable trust.
On January 23, 2003, the Company raised $0.2 million of capital through
the private sale of 50,000 shares of the Company's Common Stock and a warrant to
purchase 5,000 shares of Common Stock at $4 per share to a shareholder of the
Company. On March 13, 2003, the Company raised an additional $3.0 million of
capital through the private sale of 750,000 shares of the Company's Common Stock
and a warrant to purchase 75,000 shares of Common Stock at $4 per share to
Ceridian. The additional capital raised in January 2003 and March 2003 is
collectively referred to as "Recent Capital Raised."
On February 10, 2003, the Company entered into a services agreement
with Ceridian (the "Ceridian Services Agreement") under which Ceridian will pay
Ultimate Software a total of $2.25 million in four equal installments during
2003 in exchange for additional services provided by Ultimate Software in 2003.
The Ceridian Services Agreement terminates on December 31, 2003.
In November 2001, the Company entered into a $5.0 million revolving
line of credit (the "Credit Facility") with Silicon Valley Bank. The Credit
Facility, as amended, expires on May 28, 2004 and bears interest at a rate equal
to Prime Rate plus 1.0% per annum (reduced to Prime Rate plus 0.5% per annum
upon two consecutive quarters of net profitability, as defined). The Credit
Facility provides working capital financing for up to 75% of the Company's
eligible accounts receivable, as defined, financing for eligible equipment
purchases for up to $2.5 million with additional limits for software purchases
(the "Equipment Term Note"), and stand-by letters of credit for up to $0.5
million. The Equipment Term Note is
25
payable in 36 equal monthly installments, plus interest at Prime Rate plus 1%.
The maximum amount available under the Credit Facility is $5.0 million. At
December 31, 2002, approximately $3.7 million was available for borrowing under
the Credit Facility and approximately $1.3 million was outstanding under the
Equipment Term Note.
Borrowings under the Credit Facility are secured by all of the
Company's corporate assets, including a negative pledge on intellectual
property, and the Company is required to comply with certain financial and other
covenants. The material covenants require that the Company maintain, on a
monthly basis, a minimum quick ratio (representing the ratio of current assets
to current liabilities, excluding deferred revenue) of 2.0 to 1.0 and a combined
minimum cash and accounts receivable balance of $12.0 million. As of December
31, 2002, the Company was in compliance with all covenants included in the terms
of the Credit Facility.
The Company believes that cash and cash equivalents, cash generated
from operations, cash generated from Recent Capital Raised, cash generated from
the Ceridian Services Agreement and available borrowings under the Credit
Facility, as amended on March 27, 2003, will be sufficient to fund its
operations for at least the next 12 months. This belief is based upon, among
other factors, management's expectations for future revenue growth, controlled
expenses and collections of accounts receivable. However, as discussed above,
the Company may seek to raise additional funds during such period through the
sale of additional shares of Common Stock or other securities. There can be no
assurance that the Company will be able to raise such funds on terms acceptable
to the Company.
QUARTERLY FLUCTUATIONS
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. The Company's operating results may fluctuate as a result
of a number of factors, including, but not limited to, increased expenses
(especially as they relate to product development and sales and marketing),
timing of product releases, increased competition, variations in the mix of
revenues, announcements of new products by the Company or its competitors and
capital spending patterns of the Company's customers. The Company establishes
its expenditure levels based upon its expectations as to future revenues, and,
if revenue levels are below expectations, expenses can be disproportionately
high. A drop in near term demand for the Company's products could significantly
affect both revenues and profits in any quarter. Operating results achieved in
previous fiscal quarters are 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, when
established, maintain profitability on a quarterly basis. The Company believes
that, due to the underlying factors for quarterly fluctuations, period-to-period
comparisons of its operations are not necessarily meaningful and that such
comparisons should not be relied upon as indications of future performance.
RECENT ACCOUNTING LITERATURE
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets," which addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes Accounting
Principles Board ("APB") Opinion No. 17, "Intangible Assets." SFAS No. 142
addresses how intangible assets that are acquired individually or with a group
of other assets (but not those acquired in a business combination) should be
accounted for in financial statements upon their acquisition. With the adoption
of SFAS No. 142, goodwill is no longer subject to amortization. Rather, goodwill
will be subject to at least an annual assessment for impairment by applying a
fair value-based test. The adoption of SFAS No. 142 did not have an impact on
the Company's financial position, results of operations or cash flows.
Effective January 1, 2002, the Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses the financial accounting and reporting for the impairment or disposal
of long-lived assets and supercedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of APB No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment. The adoption of SFAS No. 144 did not have an impact
on the Company's financial position, results of operations or cash flows.
Effective January 1, 2002, the Company adopted Financial Accounting
Standards Board Emerging Issues Task Force ("EITF") No. 01-14, "Income Statement
Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses
26
Incurred," ("EITF 01-14"). EITF 01-14 requires companies to characterize
reimbursements received for out-of-pocket expenses incurred as revenue and to
reclassify prior period financial statements to conform to current year
presentation for comparative purposes. Reimbursable out-of-pocket expenses,
which are included in services revenues and cost of services revenues in the
Company's accompanying consolidated statements of operations, were $1.2 million
and $ 2.0 million for 2002 and 2001, respectively. Prior to the adoption of EITF
01-14, the Company's historical consolidated financial statements offset these
amounts within cost of services revenues.
In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No.
143"), which will be effective for the Company beginning January 1, 2003. SFAS
No. 143 addresses the financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The adoption of SFAS No. 143 is not expected to have a
material impact on the consolidated financial statements of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145"), which will be effective for the Company beginning
January 1, 2003. SFAS No. 145 rescinds FASB Statement No. 4, 44, 64 and amends
SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects similar to
sale-leaseback transactions. The adoption of SFAS No. 145 is not expected to
have a material impact on the consolidated financial statements of the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)" and is effective for the Company
beginning January 1, 2003. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recognized
at the date of an entity's commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at fair
value. The adoption of SFAS No. 146 is not expected to have a material impact on
the consolidated financial statements of the Company.
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-An Amendment of SFAS No. 123" ("SFAS No.
148"), was issued. SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), to provide alternative methods of transition for
a voluntary change to the fair-value-based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures in not only annual,
but also interim financial statements about the effect the fair value method
would have had on reported results. The transition and annual disclosure
requirements of SFAS No. 148 are effective for fiscal years ending after
December 15, 2002. The interim disclosure requirements are effective for interim
periods beginning after December 15, 2002. The Company is currently evaluating
the impact of adopting SFAS No. 148.
In January 2003, the FASB issued EITF No. 00-21, "Revenue Arrangements
with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 provides guidance on how
to determine whether an arrangement involving multiple deliverables contains
more than one unit of accounting and how consideration from the arrangement
should be measured and allocated to the separate units of accounting in the
arrangement. The Company adopted the provisions of EITF 00-21 in 2002 to account
for Intersourcing Offerings.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," ("FIN 45"). FIN 45 expands previously
issued accounting guidance and disclosure requirements for certain guarantees
and requires recognition of an initial liability for the fair value of an
obligation assumed by issuing a guarantee. The provision for initial recognition
and measurement of liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of FIN 45 is
not expected to have a material impact on the Company's consolidated financial
statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities," ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," for
certain entities that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated
27
financial support from other parties or in which equity investors do not have
the characteristics of a controlling financial interest ("variable interest
entities"). Variable interest entities within the scope of FIN 46 will be
required to be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be the party that
absorbs a majority of the entity's expected losses, receives a majority of its
expected returns, or both. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company is currently evaluating the impact
of adopting FIN 46. However, the Company does not believe that it is party to
any arrangement that would fall within the scope of FIN 46.
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 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,
as amended, which expires on May 28, 2004, is based on Prime Rate plus 1.0% per
annum. As of December 31, 2002, the Company had $1.3 million outstanding for
borrowings under 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 Credit
Facility.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
PAGE(s)
-------
Independent Auditors' Report..................................... 30
Consolidated Balance Sheets as of December 31, 2002 and
2001........................................................... 32
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000............................... 33
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 2002, 2001 and 2000........... 34
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000............................... 35
Notes to Consolidated Financial Statements....................... 36
29
INDEPENDENT AUDITORS' REPORT
To: Board of Directors
The Ultimate Software Group, Inc.:
We have audited the accompanying consolidated balance sheet of The
Ultimate Software Group, Inc. and subsidiary (the "Company") as of December 31,
2002 and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of the
Company as of December 31, 2001, and for each of the two years in the period
ended December 31, 2001, were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on those
consolidated financial statements in their report dated February 1, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 consolidated 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, 2002 and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
KPMG LLP
Miami, Florida,
January 31, 2003, except as to Note 4, which is as of March 27, 2003.
30
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR
ANDERSEN LLP IN CONNECTION WITH THE ULTIMATE SOFTWARE GROUP, INC.'S FILING ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001. THIS REPORT HAS NOT BEEN
REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 2002. FOR FURTHER DISCUSSION, SEE EXHIBIT 23.2 WHICH
IS FILED HEREWITH.
REPORT OF INDEPENDENT AUDITORS
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, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2001. 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, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
February 1, 2002.
31
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
-------------------------
2002 2001
----------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 8,974 $ 8,464
Accounts receivable, net of allowance for doubtful accounts of $1,000 and $2,465
for 2002 and 2001, respectively............................................... 10,381 14,006
Prepaid expenses and other current assets....................................... 1,273 836
----------- -----------
Total current assets.......................................................... 20,628 23,306
Property and equipment, net....................................................... 7,233 5,786
Capitalized software, net......................................................... 2,753 4,545
Other assets, net................................................................. 529 614
----------- -----------
Total assets.................................................................. $ 31,143 $ 34,251
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................................ $ 2,693 $ 1,901
Accrued expenses................................................................ 5,529 5,548
Current portion of deferred revenue............................................. 20,874 12,162
Current portion of long term debt............................................... 501 --
Current portion of capital lease obligations.................................... 767 1,589
----------- -----------
Total current liabilities..................................................... 30,364 21,200
Capital lease obligations, net of current portion................................. 361 408
Long-term debt, net of current portion............................................ 845 --
Deferred revenue, net of current portion.......................................... 6,941 8,053
----------- -----------
Total liabilities............................................................. 38,511 29,661
----------- -----------
Commitments and contingencies (Note 13)
Stockholders' equity (deficit):
Series A Junior Participating Preferred Stock, $.01 par
value, 500,000 shares authorized, no shares issued in
2002 and 2001................................................................. -- --
Preferred Stock, $.01 par value, 2,000,000 shares
authorized, no shares issued in 2002 and 2001................................. -- --
Common Stock, $.01 par value, 50,000,000 shares
authorized, 16,787,940 and 16,105,665 shares issued in
2002 and 2001, respectively................................................... 168 161
Additional paid-in capital...................................................... 68,602 65,808
Accumulated deficit............................................................. (75,084) (60,516)
----------- -----------
(6,314) 5,453
Treasury stock, at cost, 257,647 and 211,497 shares in 2002
and 2001, respectively.......................................................... (1,054) (863)
----------- -----------
Total stockholders' equity (deficit).......................................... (7,368) 4,590
----------- -----------
Total liabilities and stockholders' equity (deficit).......................... $ 31,143 $ 34,251
=========== ===========
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
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
2002 2001 2000
----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Revenues:
License................................. $ 12,170 $ 16,826 $ 24,103
Recurring............................... 19,345 14,364 10,520
Services................................ 23,634 28,289 27,331
----------- --------- ---------
Total revenues....................... 55,149 59,479 61,954
----------- --------- ---------
Cost of revenues:
License................................. 1,163 1,287 1,286
Recurring............................... 8,098 5,789 4,957
Services................................ 18,267 20,219 20,978
----------- --------- ---------
Total cost of revenues............... 27,528 27,295 27,221
----------- --------- ---------
Sales and marketing..................... 17,479 18,261 20,121
Research and development................ 17,675 12,775 15,687
General and administrative.............. 6,890 10,065 7,338
----------- --------- ---------
Total operating expenses............. 42,044 41,101 43,146
----------- --------- ---------
Operating loss....................... (14,423) (8,917) (8,413)
Interest expense.......................... (283) (208) (311)
Interest and other income................. 138 375 320
----------- --------- ---------
Net loss................................ $ (14,568) $ (8,750) $ (8,404)
=========== ========= =========
Net loss per share -- basic and diluted... $ (0.90) $ (0.55) $ (0.52)
=========== ========= =========
Weighted average shares outstanding:
Basic and diluted....................... 16,189 15,944 16,075
=========== ========= =========
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)
TOTAL
COMMON STOCK ADDITIONAL TREASURY STOCK STOCKHOLDERS'
------------------- PAID-IN ACCUMULATED ------------------ EQUITY
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT (DEFICIT)
------ ------ ------- ----------- ------ ------ ---------
(IN THOUSANDS)
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................ -- -- 83 -- -- -- 83
Non-cash issuances of options to
purchase Common Stock for
services...................... -- -- 117 -- -- -- 117
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
Issuances of Common Stock from
exercise of stock options..... 5 -- 13 -- -- -- 13
Non-cash issuances of options to
Board to purchase Common Stock
for board fees................ -- -- 102 -- -- -- 102
Purchase of Treasury Stock...... -- -- -- -- 157 (679) (679)
Net loss........................ -- -- -- (8,750) (8,750)
------ ----- -------- --------- --- -------- ---------
BALANCE, DECEMBER 31, 2001...... 16,106 161 65,808 (60,516) 211 (863) 4,590
Issuances of Common Stock from
exercise of stock options..... 7 -- 17 -- -- -- 17
Issuance of Common Stock for
private placement............. 675 7 2,693 -- -- -- 2,700
Non-cash issuances of options to
Board to purchase Common Stock
for board fees................ -- -- 84 -- -- -- 84
Purchase of Treasury Stock...... -- -- -- -- 47 (191) (191)
Net loss........................ -- -- -- (14,568) -- -- (14,568)
------ ----- -------- --------- --- -------- ---------
BALANCE, DECEMBER 31, 2002...... 16,788 $ 168 $ 68,602 $ (75,084) 258 $ (1,054) $ (7,368)
====== ===== ======== ========= === ======== =========
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
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2002 2001 2000
------------- ----------- ---------
(IN THOUSANDS)
Cash flow from operating activities:
Net loss.......................................................... $ (14,568) $ (8,750) $ (8,404)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.................................. 5,838 4,368 3,385
Provision for doubtful accounts................................ 1,657 4,151 3,572
Non-cash issuances of equity instruments....................... 84 102 200
Changes in operating assets and liabilities:
Accounts receivable.......................................... 1,968 668 (2,599)
Prepaid expenses and other current assets.................... (437) (98) 1,413
Other assets................................................. (138) (138) 36
Accounts payable............................................. 792 (158) 64
Accrued expenses............................................. (19) (75) 2,038
Deferred revenue............................................. 7,600 10,321 2,162
------------- ----------- ---------
Net cash provided by operating activities................. 2,777 10,391 1,867
------------- ----------- ---------
Cash flows from investing activities:
Purchases of property and equipment............................... (4,263) (1,849) (1,428)
Additions to capitalized software................................. -- (4,621) (160)
Net proceeds from (issuances of) notes receivable................. -- (12) 43
------------- ----------- ---------
Net cash used in investing activities..................... (4,263) (6,482) (1,545)
------------- ----------- ---------
Cash flows from financing activities:
Principal payments on capital lease obligations................... (1,876) (2,351) (1,844)
Net proceeds from issuances of Common Stock....................... 2,717 13 332
Net proceeds from long-term debt.................................. 1,346 -- --
Purchases of Treasury Stock....................................... (191) (679) (184)
------------- ----------- ---------
Net cash provided by (used in) financing
activities.............................................. 1,996 (3,017) (1,696)
------------- ----------- ---------
Net increase (decrease) in cash and cash equivalents................ 510 892 (1,374)
Cash and cash equivalents, beginning of year........................ 8,464 7,572 8,946
------------- ----------- ---------
Cash and cash equivalents, end of year.............................. $ 8,974 $ 8,464 $ 7,572
============= =========== =========
Supplemental disclosure of cash flow information:
Cash paid for interest............................................ $ 216 $ 180 $ 238
============= =========== =========
Supplemental disclosure of non-cash investing and financing activities:
- - The Company entered into capital lease obligations to acquire new equipment
totaling $1,007, $1,388 and $2,581 in 2002, 2001 and 2000, respectively.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
35
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group, Inc. ("Ultimate Software" or the
"Company") designs, markets, implements and supports payroll and workforce
management 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, Ultimate Benefits, Inc., an inactive company.
Intercompany accounts and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
All highly liquid instruments with an original maturity of three months
or less when acquired are considered cash equivalents and are comprised of
interest-bearing accounts.
ACCOUNTS RECEIVABLE
Accounts receivable are principally from end-users of the Company's
products. The Company performs credit evaluations of its customers and has
recorded allowances for estimated losses. The Company maintains an allowance for
doubtful accounts at an amount estimated to be sufficient to provide adequate
protection against losses resulting from collecting less than full payment on
accounts receivables. A considerable amount of judgment is required when the
realization of receivables is assessed, including assessing the probability of
collection and current credit-worthiness of each customer. If the financial
condition of the Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, an additional provision for
doubtful accounts may be required.
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 two 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 two 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
Sources of revenue for the Company include:
- Sales of perpetual licenses for UltiPro Workforce Management
Software ("UltiPro"), a Web-based solution designed to deliver the
functionality businesses need to manage the employee life cycle,
whether their processes are centralized at headquarters or
distributed across multiple divisions or branch offices;
- Sales of perpetual licenses for UltiPro in conjunction with
services to host the UltiPro application (or "Hosting Services");
- Sales of the right to use UltiPro, including Hosting Services (the
"Intersourcing Offering");
- Sales of Hosting Services on a stand-alone basis to customers who
already own a perpetual license or are simultaneously acquiring a
perpetual license for UltiPro, or ("Base Hosting");
36
- Sales of other services including implementation, training and
other services, including the provision of payroll-related forms
and the printing of Form W-2's for certain customers; and
- Recurring revenues derived from (1) maintenance revenues generated
from maintaining, supporting and providing periodic updates for
the Company's software and (2) subscription revenues generated
from per employee per month ("PEPM") fees earned through the
Intersourcing Offering, Base Hosting and the business service
provider (BSP) sales channel (defined below), as well as revenues
generated from the Ceridian Agreement (defined below).
Perpetual Licenses for UltiPro Sold With or Without Hosting Services
Sales of perpetual licenses for UltiPro and sales of perpetual licenses
for UltiPro in conjunction with Hosting Services are multiple-element
arrangements that involve the sale of software and consequently fall under the
guidance of SOP 97-2 for revenue recognition.
The Company licenses software under non-cancelable license agreements
and provides services including maintenance, training and implementation
consulting services. In accordance with the provisions of Statement of Position
("SOP") 97-2, "Software Revenue Recognition," license revenues are generally
recognized when (1) a non-cancelable license agreement has been signed by both
parties, (2) the product has been shipped, (3) no significant vendor obligations
remain and (4) collection of the related receivable is considered probable. To
the extent any one of these four criteria is not satisfied, license revenue is
deferred and not recognized in the consolidated statement of operations until
all such criteria are met.
For multiple-element software arrangements, each element of the
arrangement is analyzed and the Company allocates a portion of the total fee
under the arrangement to the element based on vendor-specific objective
evidence of fair value of the element ("VSOE"), regardless of any separate
prices stated within the contract for each element. Fair value is generally
considered the price a customer would be required to pay when the element is
sold separately.
The residual method is used to recognize revenue when a license
agreement includes one or more elements to be delivered at a future date and
vendor specific objective evidence of the fair value of all undelivered elements
exists. The fair value of the undelivered elements is determined based on the
historical evidence of stand-alone sales of these elements to third parties.
Undelivered elements in a license arrangement typically include maintenance,
training and implementation services (the "Standard Undelivered Elements"). The
fair value for maintenance fees is based on the price of the services sold
separately, which is determined by the annual renewal rate historically and
consistently charged to customers (the "Maintenance Valuation"). Maintenance
fees are generally priced as a percentage of the related license fee. The fair
value for training services is based on standard pricing (i.e., rate per
training day charged to customers for class attendance), taking into
consideration stand-alone sales of training services through year-end seminars
and historically consistent pricing for such services (the "Training Valuation")
The fair value for implementation services is based on standard pricing (i.e.,
rate per hour charged to customers for implementation services), taking into
consideration stand-alone sales of implementation services through special
projects and historically consistent pricing for such services (the
"Implementation Valuation"). Under the residual method (the "Residual Method"),
the fair value of the undelivered elements is deferred and the remaining portion
of the arrangement fee attributable to the delivered element, the license fee,
is recognized as revenue. If VSOE for one or more undelivered elements does not
exist, the revenue is deferred on the entire arrangement until the earlier of
the point at which (i) such VSOE does exist or (ii) all elements of the
arrangement have been delivered.
Perpetual licenses of UltiPro sold without Hosting Services typically
include a license fee and the Standard Undelivered Elements. Fair value for the
Standard Undelivered Elements is based on the Maintenance Valuation, the
Training Valuation and the Implementation Valuation. The delivered element of
the arrangement, the license fee, is accounted for in accordance with the
Residual Method.
Perpetual licenses of UltiPro sold with Hosting Services typically
include a license fee, the Standard Undelivered Elements and Hosting Services.
Fair value for the Standard Undelivered Elements is based on the Maintenance
Valuation, the Training Valuation and the Implementation Valuation. Hosting
Services are delivered to customers on a PEPM basis over the term of the related
customer contract ("Hosting PEPM Services"). Upfront fees charged to customers
represent fees for the hosting infrastructure, including hardware costs,
third-party license fees and other upfront costs incurred by the Company in
relation to providing such services ("Hosting Upfront Fees"). Hosting PEPM
Services and Hosting Upfront Fees (collectively, "Hosting Services") represent
undelivered elements in the arrangement since their delivery is over the course
of the related contract term. The fair value for Hosting Services is based on
standard pricing (i.e., rate charged per employee per month), taking into
consideration stand-alone sales of Hosting Services through the sale of such
services to existing customers (i.e., those who already own the UltiPro
perpetual license at the time Hosting Services are sold to them) and
historically consistent pricing for such services (the "Hosting Valuation"). The
delivered element of the arrangement, the license fee, is accounted for in
accordance with the Residual Method.
The Company's customer contracts are non-cancelable agreements. The
Company does not provide for rights of return or price protection on its
software. The Company provides a limited warranty that its software will perform
in accordance with user manuals for varying periods, which are generally less
than one year from the contract date. The Company's customer contracts generally
do not include conditions of acceptance. However, if conditions of acceptance
are included in a contract or uncertainty exists about customer acceptance of
the software, license revenue is deferred until acceptance occurs.
Sales Generated from the Intersourcing Offering
Subscription revenues generated from the Intersourcing Offering,
defined below, are recognized in accordance with Emerging Issues Task Force
("EITF") No. 00-21, "Revenue Arrangements with Multiple Deliverables" as a
services arrangement since the customer is purchasing the right to use UltiPro
rather than licensing the software on a perpetual basis. Fair value of multiple
elements in Intersourcing arrangements is assigned to each element based on the
guidance provided by EITF 00-21.
The elements that typically exist in Intersourcing arrangements include
hosting services, the right to use UltiPro, maintenance of UltiPro (i.e.,
product enhancements and customer support) and professional services (i.e.,
implementation services and training in the use of UltiPro). The pricing for
hosting services, the right to use UltiPro and maintenance of UltiPro is bundled
(the "Bundled Elements"). Since these three Bundled Elements are components of
recurring revenues in the consolidated statements of operations, allocation of
fair values to each of the three elements is not necessary since they
37
are not reported separately. Fair value for the Bundled Elements, as a whole, is
based upon evidence provided by the Company's pricing for Intersourcing
arrangements sold separately. The Bundled Elements are provided on an ongoing
basis and represent undelivered elements under EITF 00-21; they are recognized
on a monthly basis as the services are performed, once the customer has begun to
process payrolls used to pay their employees (i.e., goes "Live").
Implementation and training services (the "Professional Services")
provided for Intersourcing arrangements are priced on a time and materials basis
and are recognized as services revenue in the consolidated statements of
operations as the services are performed. Fair value for Professional Services
is based on the respective Training Valuation and Implementation Valuation.
Under EITF 00-21, fair value is assigned to service elements in the arrangement
based on their relative fair values, using the prices established when the
services are sold on a stand-alone basis. If evidence of the fair value of one
or more undelivered elements does not exist, the revenue is deferred and
recognized when delivery of those elements occurs or when fair value can be
established. The Company believes that applying EITF 00-21 to Intersourcing
arrangements as opposed to applying SOP 97-2 is appropriate given the nature of
the arrangements whereby the customer has no right to the UltiPro license.
Sales of Base Hosting Services
Subscription revenues generated from Base Hosting are recognized in
accordance with EITF 00-3, "Application of AICPA Statement of Position 97-2 to
Arrangements That Include the Right to Use Software Stored on Another Entity's
Hardware," which provides guidance as to the application of SOP 97-2 to hosting
arrangements that include a license right to the software. The elements that
typically exist for Base Hosting arrangements include hosting services and
implementation services. Base Hosting is different than Intersourcing
arrangements (described above) in that the customer already owns a perpetual
license or is purchasing a perpetual license for UltiPro and is purchasing
hosting services subsequently in a separate transaction whereas, with
Intersourcing, the customer is purchasing the right to use (not license)
UltiPro. Implementation services provided for Base Hosting arrangements are
substantially less than those provided for Intersourcing arrangements since
UltiPro is already implemented in Base Hosting arrangements and only needs to be
transitioned to a hosted environment. Fair value for hosting services is based
on the Hosting Valuation. Fair value for implementation services is assigned in
accordance with guidelines provided by SOP 97-2 based on the Implementation
Valuation.
Other Services, including Implementation and Training Services
Services revenues include revenues from fees charged for the
implementation of the Company's software products and training of customers in
the use of such products, fees for other services, including the provision of
payroll-related forms and the printing of Form W-2's for certain customers, as
well as certain reimbursable out-of-pocket expenses. Revenues for training and
implementation consulting services are recognized as services are performed.
Other services are recognized as the product is shipped or as the services are
rendered.
Arrangement fees related to fixed-fee implementation services contracts
are recognized using the percentage of completion accounting method, which
involves the use of estimates. Percentage of completion is measured at each
reporting date based on hours incurred to date compared to total estimated hours
to complete. If a sufficient basis to measure the progress towards completion
does not exist, revenue is recognized when the project is completed or when we
receive final acceptance from the customer.
Recurring Revenues
Recurring revenues include maintenance revenues and subscription
revenues. Maintenance revenues are derived from maintaining, supporting and
providing periodic updates for the Company's software. Subscription revenues are
principally derived from per employee per month ("PEPM") fees earned through the
Intersourcing Offering (defined below), hosting services offered to customers
that license UltiPro on a perpetual basis ("Base Hosting") and the business
service provider (BSP) sales channel (defined below), as well as revenues
generated from the Ceridian Agreement (defined below). Maintenance revenues are
recognized ratably over the service period, generally one year. Maintenance and
support fees are generally priced as a percentage of the initial license fee for
the underlying products. To the extent there are upfront fees associated with
the Intersourcing Offering, Base Hosting or the BSP sales channel, subscription
revenues are recognized ratably over the term of the related contract upon the
delivery of the product and services. PEPM fees from the Intersourcing Offering,
Base Hosting and the BSP sales channel are recognized as subscription revenue as
the services are delivered. Commencing on
38
August 28, 2002, subscription revenues generated from the Ceridian Agreement are
recognized ratably over the minimum term of the contract, which is expected to
extend until March 9, 2008 (7 years after the effective date of the Ceridian
Agreement). Subscription revenues of approximately $642,000 per month are based
on guaranteed minimum payments from Ceridian Corporation of approximately $42.7
million over the contract term, including $16.5 million received to date.
Maintenance services provided to customers include product updates and
technical support services. Product updates are included in general releases to
the Company's customers and are distributed on a periodic basis. Such updates
may include, but are not limited to, product enhancements, payroll tax updates,
additional security features or bug fixes. All features provided in general
releases are unspecified upgrade rights. To the extent specified upgrade rights
or entitlements to future products are included in a multi-element arrangement,
revenue is recognized upon delivery provided fair value for the elements exists.
In multi-element arrangements that include a specified upgrade right or
entitlement to a future product, if fair value does not exist for all
undelivered elements, revenue for the entire arrangement is deferred until all
elements are delivered or when fair value can be established.
Subscription revenues generated from the BSP sales channel include both
the right to use UltiPro and maintenance. The BSP is charged a fee on a per
employee per month basis and, in several cases, is subject to a monthly minimum
amount for the term of the related agreement. Revenue is recognized on a per
employee per month basis. The Company does not host UltiPro for the BSP sales
channel.
The Company recognizes revenue in accordance with the SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
No. 101"). Management believes the Company is currently in compliance with the
current provisions set forth in SOP 97-2, SOP 98-9, EITF 00-21, EITF 00-3 and
SAB No. 101.
DEFERRED REVENUE
Deferred revenue is primarily comprised of deferrals for recurring
revenues for which maintenance services have not yet been rendered,
implementation consulting services for which the services have not yet been
rendered, Intersourcing services which are recognized over the term of the
related contract as the services are performed, typically two years, and
subscription revenues which are recognized ratably over the term of the related
contract upon the delivery of the product and services. See Note 3.
COST OF REVENUES
Cost of revenues consists of cost of license, recurring and services
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 recurring revenues consists of
costs to provide maintenance and technical support to the Company's customers,
the cost of providing periodic updates and the costs of subscription revenues,
including amortization of capitalized software. Cost of service revenues
primarily consists of costs to provide implementation services and training to
the Company's customers, and, to a lesser degree, costs related to sales of
payroll-related forms and costs associated with reimbursable out-of-pocket
expenses.
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.
SOFTWARE DEVELOPMENT COSTS
SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," requires capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
Based on the Company's product development process, technological feasibility is
established upon completion of a working model. Software costs capitalized
during 2002 and 2001 totaled zero and $4,621,000, respectively. Annual
amortization is based on the greater of the amount computed using (a) the ratio
that current gross revenues for the related product bears to the total of
current and anticipated future gross revenues for that product or (b) the
straight-line method
39
over the remaining estimated economic life of the product including the period
being reported on. Capitalized software is amortized using the straight-line
method over the estimated useful lives of the assets which are typically three
years. Amortization of capitalized software was $1,792,000, $706,000 and
$351,000 in 2002, 2001 and 2000, respectively. Accumulated amortization of
capitalized software was $2.9 million and $1.1 million as of December 31, 2002
and 2001, respectively. The Company evaluates the recoverability of capitalized
software based on estimated future gross revenues reduced by the estimated costs
of completing the products and of performing maintenance and customer support.
If the Company's gross revenues were to be significantly less than its
estimates, the net realizable value of the Company's capitalized software
intended for sale would be impaired, which could result in the write-off of all
or a portion of the unamortized balance of such capitalized software.
NON-MONETARY TRANSACTION
During 2000, the Company entered into a non-monetary 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 Non-monetary
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, long-term debt and capital
lease obligations approximate fair value as of December 31, 2002 and 2001.
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, 2002. See Note 11.
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 loss per share (in thousands):
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2002 2001 2000
------- ------- -------
Weighted average shares outstanding..... 16,189 15,944 16,075
Effect of dilutive stock options........ -- -- --
------- ------- -------
Dilutive shares outstanding............. 16,189 15,944 16,075
======= ======= =======
40
Other common stock equivalents (i.e., stock options) not included in
the computation of diluted net loss per share, as their impact is antidilutive,
totaled 4,729,000, 4,596,000 and 3,954,000 for 2002, 2001 and 2000,
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 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 and 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.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" on January 1, 2001. At December 31, 2002 and
2001, the Company held no derivative financial instruments, as defined by SFAS
No. 133, as amended. Therefore, there was no effect to the Company's
consolidated financial statements upon adoption.
BUSINESS COMBINATIONS
On July 1, 2001, the Company adopted SFAS No. 141, "Business
Combinations," which addresses financial accounting and reporting for business
combinations and supersedes Accounting Principles Board ("APB") No. 16,
"Business Combinations" and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." All business combinations in the scope
of SFAS No. 141 are to be accounted for under the purchase method. The adoption
of SFAS No. 141 did not have an impact on the Company's consolidated financial
statements.
LONG-LIVED ASSETS
On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," which addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets and
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of APB No. 30, "Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a segment.
The adoption of SFAS No. 144 did not have an impact on the Company's
consolidated financial statements.
REIMBURSABLE OUT-OF-POCKET EXPENSES
Effective January 1, 2002, the Company adopted Financial Accounting
Standards Board Emerging Issues Task Force No. 01-14, "Income Statement
Characterization of Reimbursements Received for `Out-of-Pocket' Expenses
Incurred" ("EITF 01-14"). EITF 01-14 requires companies to characterize
reimbursements received for out-of-pocket expenses incurred as revenue and to
reclassify prior period financial statements to conform to current year
presentation for comparative purposes. Reimbursable out-of-pocket expenses,
which are included in services revenues and cost of services revenues in the
Company's accompanying consolidated statements of operations, were $1.2 million
and $2.0 million for 2002 and 2001, respectively. Prior to the adoption of EITF
01-14, the Company's historical consolidated financial statements offset these
amounts within cost of services revenues.
41
RECENT ACCOUNTING LITERATURE
In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No.
143"), which will be effective for the Company beginning January 1, 2003. SFAS
No. 143 addresses the financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The adoption of SFAS No. 143 is not expected to have a
material impact on the consolidated financial statements of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"), which will be effective for the Company beginning
January 1, 2003. SFAS No. 145 rescinds FASB Statement No. 4, 44, 64 and amends
SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects similar to
sale-leaseback transactions. The adoption of SFAS No. 145 is not expected to
have a material impact on the consolidated financial statements of the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)" and is effective for the Company
beginning January 1, 2003. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recognized
at the date of an entity's commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at fair
value. The adoption of SFAS No. 146 is not expected to have a material impact on
the consolidated financial statements of the Company.
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- An Amendment of SFAS No. 123"
("SFAS No. 148"), was issued. SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), to provide alternative methods of
transition for a voluntary change to the fair-value-based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in not only
annual, but also interim financial statements about the effect the fair value
method would have had on reported results. The transition and annual disclosure
requirements of SFAS No. 148 are effective for fiscal years ending after
December 15, 2002. The interim disclosure requirements are effective for interim
periods beginning after December 15, 2002. The Company is currently evaluating
the impact of adopting SFAS No. 148.
In January 2003, the FASB issued EITF No. 00-21, "Revenue Arrangements
with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 provides guidance on how
to determine whether an arrangement involving multiple deliverables contains
more than one unit of accounting and how consideration from the arrangement
should be measured and allocated to the separate units of accounting in the
arrangement. The Company adopted the provisions of EITF 00-21 in 2002 to account
for Intersourcing Offerings.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," ("FIN 45"). FIN 45 expands previously
issued accounting guidance and disclosure requirements for certain guarantees
and requires recognition of an initial liability for the fair value of an
obligation assumed by issuing a guarantee. The provision for initial recognition
and measurement of liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of FIN 45 is
not expected to have a material impact on the Company's consolidated financial
statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities," ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," for
certain entities that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an
42
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Company is currently evaluating the impact of adopting FIN 46. However, the
Company does not believe that it is party to any arrangement that would fall
within the scope of FIN 46.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances to
conform to the current year presentation.
3. SIGNIFICANT TRANSACTIONS
On April 24, 2002, the Company dismissed its independent public
accountants, Arthur Andersen LLP ("Andersen"), and retained KPMG LLP ("KPMG") as
its new independent public accountants. As part of their quarterly review
process for the fiscal quarter ended March 31, 2002, KPMG reviewed, among other
things, the Company's revenue recognition policies, including the co-branding
agreement signed with Ceridian Corporation ("Ceridian") on March 9, 2001, as
amended from time to time (the "Ceridian Agreement"). Based upon consultations
with KPMG as a result of their review of the Ceridian Agreement, the Company
reassessed its original conclusion regarding the timing of the revenue
recognition to be applied to the Ceridian Agreement.
When the Company completed a successful transfer of technology to
Ceridian on February 5, 2002, a separate agreement, the Evolution Agreement,
defined below, was executed with Ceridian. The Company had intended to begin
recognition of revenue under the Ceridian Agreement on February 5, 2002 upon the
successful transfer of technology to Ceridian. However, when KPMG reviewed the
transaction, it was determined that the Evolution Agreement was an extension of
the Ceridian Agreement. The relationship of these two agreements was based on
the application of Technical Practice Aid (TPA) 5100.39. When the determination
was made that the two agreements were related, the UltiPro 6.0 general release
became a specified upgrade for this arrangement. Since the Company could not
establish fair value for the specified upgrade, revenue recognition was deferred
until the specified upgrade was delivered. The revenue recognition for the
Ceridian Agreements began when the UltiPro 6.0 general release (also known as
Evolution) was delivered on August 28, 2002.
Ceridian is obligated to pay to Ultimate Software a minimum of
approximately $42.7 million, including $16.5 million received to date, over the
minimum term of the Ceridian Agreement. The earliest date upon which the
Ceridian Agreement can be terminated by either party (except for an uncured
material breach) is March 9, 2008, resulting in an expected minimum term of 7
years (the "Minimum Term"). Ceridian retains certain rights to use the software
upon termination. The effect of the change in revenue recognition for the
Ceridian Agreement was to modify the date at which revenue recognition would
begin -- changing the onset of the revenue recognition process from February 5,
2002, which was the date the Company completed a successful transfer of
technology to Ceridian, to the earlier of (i) the delivery of the UltiPro 6.0
release, or (ii) January 1, 2003. The change in the timing of revenue
recognition applied to the Ceridian Agreement does not impact Ceridian's payment
obligations to the Company over the Minimum Term nor does it impact the nature
of the underlying business transaction.
On August 28, 2002, Ultimate Software delivered the UltiPro 6.0 release
to Ceridian. The delivery of UltiPro 6.0 marked the commencement of recurring
revenue recognition for the Ceridian transaction at the minimum rate of
approximately $642,000 per month from that date through March 2008. The
recurring revenue amount of $642,000 per month was calculated by aggregating the
minimum guaranteed payments under the Ceridian Agreement, totaling $42.7
million, and accreting them over the remaining minimum life of the contract,
which ends March 9, 2008.
The Ceridian Agreement provides for a monthly fee for all employees
paid by Ceridian incorporating UltiPro software. To the extent this monthly
calculation exceeds the minimum monthly payment, such excess would be recorded
as additional recurring revenue in the month to which it relates, up to monthly
maximum amounts pursuant to the Ceridian Agreement.
On February 5, 2002, Ultimate Software and Ceridian entered into an
agreement which provided that if Ultimate Software were to deliver UltiPro 6.0
on or before August 30, 2002, Ceridian would pay Ultimate Software $500,000 for
such advanced delivery (the "Evolution Bonus"). The Evolution Bonus, received in
September 2002, was recorded as deferred revenue in the accompanying unaudited
consolidated balance sheet. The Evolution Bonus is being recognized as
43
subscription revenue (a component of recurring revenue) ratably over the
remaining minimum term of the Ceridian Agreement and is included in the minimum
rate of $642,000 per month through March 2008. The Company awarded substantially
all of the Evolution Bonus to members of the Company's development team as an
incentive bonus for the early delivery of UltiPro 6.0 (the "Incentive Bonus").
The Incentive Bonus was expensed in the three months ended September 30, 2002
and is included with research and development expenses in the accompanying
consolidated statement of operations for the year ended December 31, 2002.
Under the Ceridian Agreement, Ceridian is permitted to 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.
4. CAPITAL RESOURCES
The Company's cash flows from operations have historically been
insufficient to fund its operations. Shortfalls in cash flows from operations
have been funded primarily through the private and public sale of equity
securities and, to a lesser extent, equipment financing and borrowing
arrangements.
On January 23, 2003, the Company raised $0.2 million of capital through
the private sale of 50,000 shares of the Company's Common Stock and a warrant to
purchase 5,000 shares of Common Stock at $4 per share to a shareholder of the
Company. On March 13, 2003, the Company raised an additional $3.0 million of
capital through the private sale of 750,000 shares of the Company's Common Stock
and a warrant to purchase 75,000 shares of Common Stock at $4 per share to
Ceridian. The additional capital raised in January 2003 and March 2003 is
collectively referred to as "Recent Capital Raised."
On February 10, 2003, the Company entered into a services agreement
with Ceridian (the "Ceridian Services Agreement") under which Ceridian will pay
Ultimate Software a total of $2.25 million in four equal installments during
2003 in exchange for additional services provided by Ultimate Software in 2003.
The Ceridian Services Agreement terminates on December 31, 2003.
On March 27, 2003, the Company amended the revolving line of credit
with Silicon Valley Bank (see Note 9) to extend the expiration date of the
agreement to May 28, 2004.
The Company believes that cash and cash equivalents, cash generated
from operations, cash generated from Recent Capital Raised, cash generated from
the Ceridian Services Agreement and available borrowings under the existing
revolving line of credit with Silicon Valley Bank (see Note 9), as amended, will
be sufficient to fund its operations for at least the next 12 months. This
belief is based upon, among other factors, management's expectations for future
revenue growth, controlled expenses and collections of accounts receivable.
However, the Company may seek to raise additional funds during such period
through the sale of additional shares of the Company's common stock, par value
$0.01, or other securities or borrowings. There can be no assurance that the
Company will be able to raise such funds on terms acceptable to the Company.
5. 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, 2002 and
2001, respectively, the Company had purchased 257,647 and 211,497 shares of the
Company's Common Stock under the Stock Repurchase Plan at an average cost of
$4.14 per share in 2002 and $4.31 per share in 2001.
44
6. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
AS OF DECEMBER 31,
--------------------
2002 2001
-------- --------
Sales commissions........................................ $ 1,563 $ 1,225
Other items individually less than 5% of total current
liabilities............................................ 3,966 4,323
-------- --------
$ 5,529 $ 5,548
======== ========
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
AS OF DECEMBER 31,
-------------------------
2002 2001
----------- -----------
Computer equipment................................. $ 14,132 $ 12,642
Leasehold improvements............................. 3,657 2,937
Furniture and fixtures............................. 1,225 1,031
----------- -----------
19,014 16,610
Less accumulated depreciation and amortization..... (11,781) (10,824)
----------- -----------
$ 7,233 $ 5,786
=========== ===========
Included in property and equipment is equipment acquired under capital
leases as follows (in thousands):
AS OF DECEMBER 31,
-----------------------
2002 2001
---------- ----------
Equipment......................... $ 5,444 $ 7,308
Less accumulated amortization..... (4,723) (5,724)
---------- ----------
$ 721 $ 1,584
========== ==========
Depreciation and amortization expense on property and equipment totaled
$3,823,000, $3,662,000 and $3,033,000, for the years ended December 31, 2002,
2001 and 2000, respectively.
45
8. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under noncancellable agreements,
which are accounted for as capital leases and expire at various dates through
2004. Interest rates on these leases range from 5.3% to 9.3%. The annual
maturities of the capital lease obligations are as follows as of December 31,
2002 (in thousands):
YEAR AMOUNT
- ---- ---------
2003................................................ $ 831
2004................................................ 375
---------
1,206
Less amount representing interest................... (78)
---------
Lease obligations reflected as current ($767) and
non-current ($361)................................ $ 1,128
=========
9. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
AS OF
DECEMBER 31,
2002
----------
Equipment Term Note...... $ 1,346
Less current portion..... (501)
---------
$ 845
=========
In November 2001, the Company entered into a $5.0 million revolving
line of credit with Silicon Valley Bank. The Credit Facility, as amended,
expires on May 28, 2004 and bears interest at a rate equal to Prime Rate plus
1.0% per annum (reduced to Prime Rate plus 0.5% per annum upon two consecutive
quarters of net profitability, as defined). The Credit Facility provides working
capital financing for up to 75% of the Company's eligible accounts receivable,
as defined, financing for eligible equipment purchases for up to $2.5 million
with additional limits for software purchases (the "Equipment Term Note"), and
stand-by letters of credit for up to $0.5 million. The Equipment Term Note is
payable in 36 equal monthly installments, plus interest at Prime Rate plus 1%.
The Equipment Term Note expires on May 28, 2004 as a component of the Credit
Facility. The maximum amount available under the Credit Facility is $5.0
million. At December 31, 2002, approximately $3.7 million was available for
borrowing under the Credit Facility and approximately $1.3 million was
outstanding under the Equipment Term Note. There were no borrowings outstanding
under the Credit Facility as of December 31, 2001.
Borrowings under the Credit Facility are secured by all of the
Company's corporate assets, including a negative pledge on intellectual
property, and the Company is required to comply with certain financial and other
covenants. As of December 31, 2002, the Company was in compliance with all
covenants included in the terms of the Credit Facility.
Maturities of long-term debt are as follows (in thousand):
YEAR AMOUNT
- ------- ---------
2003........... $ 501
2004........... 845
---------
$ 1,346
=========
46
10. INCOME TAXES
No provision or benefit for Federal or state income taxes was made for
2002, 2001 and 2000 due to the operating losses incurred in the respective
periods.
The provision for income taxes is different from that which would be
obtained by applying the statutory Federal income tax rate of 35% to loss before
income taxes as a result of the following (in thousands):
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Income tax provision (benefit) at
statutory Federal tax rate............... $ (5,099) $ (3,063) $ (2,941)
State and local income taxes, net of
Federal income tax benefit............... (492) (267) (252)
Change in valuation allowance.............. 5,450 3,136 3,236
Other, net................................. 141 194 (43)
--------- --------- ---------
Provision for income taxes................. $ -- $ -- $ --
========= ========= =========
The components of the net deferred tax assets included in the
accompanying consolidated balance sheets are as follows (in thousands):
AS OF DECEMBER 31,
---------------------------------------
2002 2001 2000
----------- ----------- -----------
Deferred tax assets:
Net operating losses................ $ 16,272 $ 13,047 $ 12,551
Deferred revenue.................... 5,841 3,790 55
Depreciation and amortization....... 1,166 933 573
Accruals not currently deductible... 165 183 143
Allowance for doubtful accounts..... 380 937 935
Other, net.......................... 35 37 37
----------- ----------- -----------
Gross deferred tax assets............. 23,859 18,927 14,294
Less valuation allowance.............. (22,642) (17,192) (14,056)
----------- ----------- -----------
Net deferred tax assets............... 1,217 1,735 238
----------- ----------- -----------
47
AS OF DECEMBER 31,
---------------------------------------
2002 2001 2000
----------- ----------- -----------
Deferred tax liabilities:
Software development costs.......... (1,046) (1,735) (238)
Prepaid commissions................. (171) -- --
----------- ----------- -----------
Gross deferred tax liabilities...... (1,217) (1,735) (238)
----------- ----------- -----------
Net deferred taxes.................... $ -- $ -- $ --
=========== =========== ===========
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. Of the total valuation allowance at December 31, 2002,
approximately $468,000 is attributed to net operating losses generated from the
exercise of non-statutory employee stock options, the benefit of which will be
credited to additional paid-in capital when realized.
At December 31, 2002, the Company had approximately $42,821,000 of net
operating loss carryforwards for Federal income tax reporting purposes available
to offset future taxable income. The carryforwards expire through 2022.
Utilization of such net operating losses may be limited as a result of
cumulative ownership changes in the Company's equity instruments.
11. 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 9,000,000 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, 2002, options to purchase
4,028,497 shares of the Company's Common Stock were available for grant under
the Plan.
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 12.
A summary of stock options under the Company's Plan as of December 31,
2002, 2001 and 2000, and changes during the years then ended, is presented
below:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------ --------------
Outstanding at December 31, 1999...... 3,236,972 $ 8.22
Granted............................. 1,031,208 5.61
Exercised........................... (53,096) 6.24
Canceled............................ (261,505) 8.43
--------- -------
Outstanding at December 31, 2000...... 3,953,579 $ 6.67
Granted............................. 929,737 3.63
Exercised........................... (5,575) 2.62
Canceled............................ (281,500) 5.72
--------- -------
Outstanding at December 31, 2001...... 4,596,241 $ 6.06
Granted............................. 345,769 3.54
Exercised........................... (7,275) 3.92
Canceled............................ (205,461) 6.58
--------- -------
Outstanding at December 31, 2002...... 4,729,274 $ 5.84
========= =======
48
The following table summarizes information about stock options
outstanding under the Plan at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ----------------------------
WEIGHTED-AVERAGE
REMAINING
RANGE OF EXERCISE CONTRACTUAL LIFE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
PRICES NUMBER (YEARS) EXERCISE PRICE NUMBER EXERCISE PRICE
------ ------ ------- -------------- ------ --------------
$0.89--$3.38....... 1,243,773 8.19 $ 2.87 820,250 $ 2.73
$3.38--$5.16....... 1,095,109 6.25 $ 4.75 846,963 $ 4.90
$6.63--$7.63....... 1,538,498 5.67 $ 7.35 1,538,498 $ 7.35
$7.75--$8.89....... 514,200 6.83 $ 8.07 422,013 $ 8.06
$10.00--$10.00..... 337,694 6.08 $ 10.00 319,194 $ 10.00
--------- ---- ------- --------- -------
$0.89--$10.00...... 4,729,274 6.62 $ 5.84 3,946,918 $ 6.15
========= ==== ======= ========= =======
SFAS No. 123 requires pro forma information 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 2.72% for 2002, 5.26% for 2001 and 5.0-5.5%
for 2000, a dividend yield of 0% for all three years presented, expected
volatility of 68% for 2002 and 65% for 2001 and 2000 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,
----------------------------------------
2002 2001 2000
------------ ------------ ------------
Net loss:
As reported... $ (14,568) $ (8,750) $ (8,404)
Pro forma..... (16,961) (10,053) (10,323)
As reported... $ (0.90) $ (0.55) $ (0.52)
Pro forma..... (1.05) (0.63) (0.64)
The weighted average grant date fair value per share of options granted
during 2002, 2001 and 2000 were $2.16, $1.73 and $3.10, respectively. The
Company has also issued options to purchase shares of its Common Stock to
non-employees for consulting services. See Note 12.
During 2002, the Company raised an aggregate of $2.7 million through
the issuances of an aggregate of 675,000 shares of the Company's Common Stock
and warrants to purchase shares of the Company's Common Stock at $4 per share.
Warrants granted during 2002 are as follows:
AGGREGATE AMOUNT OF
COMMON STOCK
DATE FROM WHICH CALLED FOR BY PRICE AT WHICH
WARRANTS ARE EXPIRATION DATE OF WARRANTS WARRANTS ARE
EXERCISABLE WARRANTS OUTSTANDING EXERCISABLE
- ---------------- ------------------ ------------------- --------------
June 21, 2002 June 21, 2006 50,000 $ 4.00
July 14, 2002 July 13, 2006 12,500 $ 4.00
December 2, 2002 December 2, 2006 5,000 $ 4.00
12. STOCKHOLDERS' EQUITY
COMMON STOCK
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.
OTHER EQUITY TRANSACTIONS
On October 21, 1999, the Company entered into a 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 former member of the
Company's Board of Directors, had minority ownership interests in Aberdeen and
its general partner. As sole compensation for the services of Aberdeen and its
affiliates
49
under the Consulting Agreement, on October 21, 1999 the Company issued to
Aberdeen a warrant (the "Warrant") to purchase 100,000 shares of the Company's
common stock, par value $0.01 per share, for $10 per share. The 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
Company terminated the Consulting Agreement 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
and Emerging Issues Task Force ("EITF") No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." Accordingly, the related
compensation expense was zero for 2002 and 2001 and $117,000 for 2000, and is
included in general and administrative expenses in the accompanying consolidated
statements of operations for the respective years.
In 2002, the Company granted options to non-employee directors to
purchase (i) 7,315 shares of the Company's Common Stock for $1.23; (ii) 8,766
shares of the Company's Common Stock for $1.32; (iii) 7,614 shares of the
Company's Common Stock for $0.96; (iv) 12,528 shares of the Company's Common
Stock for $0.89; and (v) 100,000 shares of the Company's Common Stock for $3.10,
in each case in exchange for services rendered. In 2001, the Company granted
options to non-employee directors to purchase (i) 9,806 shares of the Company's
Common Stock for $1.01; (ii) 11,429 shares of the Company's Common Stock for
$1.05; (iii) 13,335 shares of the Company's Common Stock for $1.13; and (iv)
5,667 shares of the Company's Common Stock for $1.51, in each case in exchange
for services rendered. 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 each case in exchange for services rendered. With the
exception of the 100,000 shares of the Company's Common Stock which were granted
in 2002 at fair market value to non-employee directors, all other stock option
grants to non-employee directors were granted at an exercise price equal to 30%
of the fair market value of the Company's Common Stock on the date of grant.
Such options are currently exercisable and were valued on the date of grant in
accordance with the requirements prescribed in APB 25. The exercise price for
all such options, except the options for 100,000 shares of the Company's Common
Stock, is equal to 30% of the fair market value of the Company's Common Stock on
the respective dates of grant. These options were granted in lieu of cash
retainers and meeting fees. See note 11. The exercise price for the options for
100,000 shares of the Company's Common Stock granted in 2002 is equal to 100% of
the fair market value of the Company's Common Stock on the date of grant. The
related compensation expense, determined pursuant to the application of APB 25,
was $86,000, $102,000 and $83,000 in 2002, 2001 and 2000, respectively, and is
included in general and administrative expenses in the accompanying consolidated
statements of operations.
13. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases corporate office space and certain equipment under
noncancellable operating lease agreements expiring at various dates. Total rent
expense under these agreements was $2,024,000, $2,052,000 and $1,868,000 for the
years ended December 31, 2002, 2001 and 2000, respectively. Future minimum
annual rental commitments related to these leases are as follows at December 31,
2002 (in thousands):
YEAR AMOUNT
- -------------------- ----------
2003.............. $ 1,915
2004.............. 1,687
2005.............. 1,678
2006.............. 1,587
2007.............. 1,623
Thereafter.......... 18,026
----------
$ 26,516
==========
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
50
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 operating results or financial
condition.
14. RELATED PARTY TRANSACTIONS
During the fourth quarter of 2001, The Company began leasing equipment
with a computer leasing company (the "Leasing Company") that is owned by an
irrevocable trust (the "Trust") for the benefit of the children of Robert A.
Yanover, a member of the Company's Board of Directors. Additionally, the Leasing
Company's business is managed and operated by a management company (the
"Management Company") pursuant to a management agreement. Mr. Yanover has a 50%
ownership interest in the general partner of the Management Company. The Company
financed equipment with the Leasing Company totaling $1,007,000 and $258,000
during 2002 and 2001, respectively. Related amortization totaling $415,000 and
$12,000 and total cash paid totaling $467,000 and $14,000 were recorded during
2002 and 2001, respectively. The capital lease obligation with the Leasing
Company and related accumulated amortization were $869,000 and $427,000,
respectively, at December 31, 2002 and $247,000 and $12,000, respectively, at
December 31, 2001. The Company believes that the terms of the leases were no
less favorable to the Company than could have been obtained from an unaffiliated
party.
15. 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 $602,000,
$587,000 and $421,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 24, 2002, the Company dismissed its independent auditors,
Arthur Andersen LLP ("Andersen"), and on April 24, 2002 the Company retained
KPMG LLP as its new independent auditors. The change in auditors was approved by
the Board of Directors of the Company, upon the recommendation of the Audit
Committee of the Board of Directors.
The audit reports issued by Andersen on the consolidated financial
statements of the Company as of and for the fiscal years ended December 31, 2001
and December 31, 2000 did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles. During the Company's two fiscal years that ended December
31, 2001, and during the subsequent interim period prior to engaging KPMG LLP,
there were no disagreements between Ultimate Software and Andersen on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to Andersen's
satisfaction, would have caused Andersen to make reference to the subject matter
in their reports.
None of the reportable events described under Item 304(a)(1)(v) of
Regulation S-K occurred during the Company's two fiscal years that ended
December 31, 2001, or during any subsequent interim period through April 24,
2002.
The Company provided Andersen with a copy of the foregoing disclosures,
and a letter from Andersen confirming its agreement with these disclosures was
filed as an exhibit to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 1, 2002.
During the Company's two fiscal years that ended December 31, 2001 and
during the subsequent interim period prior to engaging KPMG LLP, neither the
Company nor someone on behalf of the Company consulted with KPMG LLP regarding
either the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on the Company's financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors, executive officers (Messrs. Scott Scherr, Marc D.
Scherr, Mitchell K. Dauerman and James M. Alu) and other key employees of the
Company, and their ages as of March 10, 2003, are as follows:
NAME AGE POSITION(S)
- --------------------------- --- ------------------------------------
Scott Scherr................ 51 Chairman of the Board, President and
Chief Executive Officer
Marc D. Scherr.............. 45 Vice Chairman of the Board
Mitchell K. Dauerman........ 46 Executive Vice President, Chief
Financial Officer and Treasurer
James M. Alu................ 58 Executive Vice President and Chief
Operating Officer
Roy L. Gerber, Ph.D......... 46 Vice President -- Chief Technology
Officer
Jon Harris.................. 38 Senior Vice
President -- Professional Services
Robert Manne................ 50 Vice President -- General Counsel
Vivian Maza................. 41 Vice President -- People and
Secretary
Linda Miller................ 58 Vice President -- Communications and
Public Relations
Laura Perkins............... 38 Vice President -- Product Strategy
Adam Rogers................. 28 Senior Vice President -- Development
Greg Swick.................. 39 Senior Vice President -- Sales
James C. Thie............... 43 Vice President -- Chief Information
Officer
52
NAME AGE POSITION(s)
- --------------------------- --- ------------------------------------
LeRoy A. Vander Putten...... 68 Director
James A. FitzPatrick, Jr.... 53 Director
Robert A. Yanover........... 66 Director
Rick Wilber................. 56 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.
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.
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 1990 until 1993, Mr. Alu served as Area Sales Vice President
for the northeastern United States for ADP's Dealer Services Group. From 1986
through 1989, Mr. Alu served as Vice President of Sales for ADP's Employer
Services Group, National Accounts Division, and was responsible for the sales
and implementation of payroll and human resource services to companies with more
than 500 employees nationwide.
Roy L. Gerber, Ph.D. has served as Vice President -- Chief Technology
Officer since January 1, 2002. Mr. Gerber served as Vice President --
Engineering from October 1999 through December 31, 2001. 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 1988 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.
Jon Harris has served as Senior Vice President -- Professional Services
since January 1, 2002. Mr. Harris served as Vice President -- Professional
Services from July 1998 through December 31, 2001. 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.
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.
53
Vivian Maza has served as Vice President -- People for the Company
since January 1998 and as Secretary of the Company since September 1996. Prior
to that, Ms. Maza served as the Office Manager of the Company from its
organization in April 1996 and of the Partnership from its inception in 1990
until April 1996. Ms. Maza is a HR Generalist and holds a Professional in Human
Resources (PHR) certification from the Society for Human Resource Management
(SHRM) association. From 1985 to 1990, Ms. Maza was a systems analyst for the
Wholesale Division of ADP.
Linda Miller has served as Vice President -- Communications and Public
Relations since January 1999. Ms. Miller served as Vice President, Public
Relations, for the Company from July 1998 to January 1999. Prior to that, Ms.
Miller served as the Company's Director of Marketing from January 1997. From
1992 to 1996, Ms. Miller held various positions at Best Software, Inc., a
developer of corporate resource management applications, Abra Products Division,
including Public Relations Manager.
Laura Perkins has served as Vice President -- Product Strategy since
July 1998. From May 1996 to July 1998, Ms. Perkins served as the Director of
Applications Consulting for the Company. From 1991 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).
Adam Rogers has served as Senior Vice President -- Development since
December 2002. From July 2001 to December 2002, Mr. Rogers served as Vice
President of Engineering. From May 1997 to July 2001, Mr. Rogers held various
positions in the Company's research and development organization, including
Director of Technical Support from October 1998 to November 1999 and Director of
Web Development from November 1999 to July 2001.
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 Chief Information Officer since October
2001. Mr. Thie served as Vice President -- Information Technology Group from
February 2001 through September 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.
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 the Board. Mr. Vander Putten has served as the
Executive Chairman of the Insurance Center, Inc., a holding company for 14
insurance agencies, since October 2001. Previously, he served as the Chairman of
CORE Insurance Holdings, Inc., a member of the GE Global Insurance Group,
engaged in the underwriting of casualty reinsurance, from August 2000 to August
2001. 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 and is a member of the Compensation Committee of the Board. 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.
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
54
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.
Rick Wilber has served as a director of the Company since October 2002
and is a member of the Audit Committee and a member of the Compensation
Committee. Mr. Wilber formerly served on the Company's Board of Directors from
October 1997 through May 2000. Mr. Wilber is currently the President of Lynn's
Hallmark Cards, which owns and operates a number of Hallmark Card stores. Mr.
Wilber was a co-founder of Champs Sports Shops and served as its President from
1974 to 1984. He served on the Board of Royce Laboratories, a pharmaceutical
concern, from 1990 until April 1997, when the company was sold to Watson
Pharmaceuticals, Inc., a pharmaceutical concern.
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. Marc D. Scherr, Mr. James A. FitzPatrick, Jr. and
Mr. Rick Wilber serve on the Board in the class whose term expires at the annual
meeting of stockholders (the "Annual Meeting") in 2003. Mr. Scott Scherr serves
on the Board in the class whose term expires at the Annual Meeting in 2004. Mr.
LeRoy A. Vander Putten and Mr. Robert A. Yanover serve on the Board in the class
whose term expires at the Annual Meeting of stockholders in 2005.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Company's Proxy Statement for the 2003 Annual Meeting of Stockholders under
the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table summarizes the securities authorized for issuance
under the Company's equity compensation plans as of December 31, 2002:
(a) (c)
NUMBER OF NUMBER OF SECURITIES
SECURITIES TO BE (b) REMAINING AVAILABLE FOR
ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION
OUTSTANDING OUTSTANDING PLANS (EXCLUDING
OPTIONS, WARRANTS OPTIONS, WARRANTS SECURITIES REFLECTED IN
PLAN CATEGORY AND RIGHTS AND RIGHTS COLUMN (a))
- ---------------------------------------- ----------------- ----------------- -----------------------
Equity compensation plans approved 4,729,274 $ 5.84 4,028,497
by security holders...................
Equity compensation plans not -- -- --
approved by security holders..........
---------- ------- ---------
Total......................... 4,729,274 $ 5.84 4,028,497
========== ======= =========
The information set forth in the Company's Proxy Statement for the 2003
Annual Meeting of Stockholders under the heading "Security Ownership of Certain
Beneficial Owners and Management" is incorporated herein by reference.
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 2003 Annual Meeting of Stockholders under
the heading "Certain Related Transactions."
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Chief Executive Officer (the "CEO") and
the Chief Financial Officer (the "CFO"), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15. Based on that evaluation, the Company's management,
55
including the CEO and CFO, concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in the Company's periodic SEC reports. In addition,
there have been no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls subsequent to the
date of their evaluation, including any corrective actions with respect to
significant deficiencies or material weaknesses. It should be noted that the
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
PART IV
ITEM 15. 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:
Independent Auditors' Report
Consolidated Balance Sheets as of December
31, 2002 and 2001
Consolidated Statements of Operations for
the Years Ended December 31, 2002, 2001 and
2000
Consolidated Statements of Stockholders'
Equity (Deficit) for the Years Ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for
the Years Ended December 31, 2002, 2001 and
2000
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules:
Independent Auditors' Report
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 -- Certificate of Designations of Series A Junior Preferred Stock
(incorporated by reference herein to Exhibit 2 to the Company's
Current Report on Form 8-K dated October 23, 1998)
3.3 -- 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
56
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------
10.2 -- Asset Purchase Agreement, dated February 2, 1998, among The
Ultimate Software Group of Virginia, Inc., the Company and certain
principals named therein
10.3 -- Asset Purchase Agreement, dated February 2, 1998, among the
Company, The Ultimate Software Group of the Carolinas, Inc. and
certain principals name therein
10.4 -- Asset Acquisition Agreement, dated February 20, 1998, among the
Company, The Ultimate Software Group of Northern California, Inc.
and certain principals named therein
10.5 -- Asset Purchase Agreement dated March 4, 1998, among the Company,
Ultimate Investors Group, Inc. and certain principals name 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 and restated as of
December 20, 2002
10.8 -- 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 Annual Report on Form 10-K dated March 31, 1999)
10.9 -- 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)
10.10 -- 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)
10.11 -- 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)
10.12 -- 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)
10.13 -- Software License Agreement between the Company and Ceridian
Corporation dated as of March 9, 2001 (incorporated by reference to
Exhibit 10.17 to the Company's Annual Report on Form 10-K dated
March 27, 2001)
10.14 -- Letter amendment between the Company and Ceridian Corporation
dated as of August 9, 2001 (incorporated by reference to Exhibit
10.14 to the Company's Annual Report on Form 10-K dated March 29,
2002)
10.15 -- Letter amendment between the Company and Ceridian Corporation
dated as of February 5, 2002 (incorporated by reference to Exhibit
10.15 to the Company's Annual Report on Form 10-K dated March 29,
2002)
57
NUMBER DESCRIPTION
- ------ -----------
10.16 -- Loan and Security Agreement by and between the Company and
Silicon Valley Bank dated as of November 29, 2001 (incorporated by
reference to Exhibit 10.16 to the Company's Annual Report on Form
10-K dated March 29, 2002)
10.17 -- Revolving Promissory Note by and between the Company and Silicon
Valley Bank dated as of November 29, 2001 (incorporated by reference
to Exhibit 10.17 to the Company's Annual Report on Form 10-K dated
March 29, 2002)
10.18 -- Equipment Term Note by and between the Company and Silicon Valley
Bank dated as of November 29, 2001 (incorporated by reference to
Exhibit 10.18 to the Company's Annual Report on Form 10-K dated
March 29, 2002)
10.19 -- Services Agreement between the Company and Ceridian Corporation
dated as of February 10, 2003
10.20 -- Third Loan Modification Agreement by and between the Company and
Silicon Valley Bank dated March 27, 2003
21.1 -- Subsidiary of the Registrant
23.2 -- Notice of inability to obtain consent from Arthur Andersen LLP
31.1 -- Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended*
31.2 -- Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended*
32.1 -- Certification Pursuant to 18 U.S.C Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2 -- Certification Pursuant to 18 U.S.C Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
99.1 -- Cautionary Statement for Purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995
- ------------------
* Filed herewith.
(b) Reports on Form 8-K
On October 25, 2002, the Company filed a Current Report on Form 8-K
with the SEC reporting (i) the appointment of Rick Wilber to the Company's Board
of Directors and (ii) that the Board of Directors of the Company voted to exempt
Michael Feinberg from the definition of an Acquiring Person under the Company's
Rights Agreement provided Mr. Feinberg does not acquire a number of shares of
Common Stock of the Company which, when combined with the shares he currently
owns, exceeds 19.9% of the shares of the Company's Common Stock outstanding.
58
INDEPENDENT AUDITORS' REPORT
To Board of Directors
The Ultimate Software Group, Inc.:
Under date of January 31, 2003 except as to Note 4 which is as of March
27, 2003, we reported on the consolidated balance sheet of The Ultimate Software
Group, Inc. and subsidiary (the "Company") as of December 31, 2002 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the year then ended, as contained in the annual report on
Form 10-K for the year ended December 31, 2002. In connection with our audit of
the aforementioned consolidated financial statements, we also audited the
related 2002 financial statement schedule as listed in Item 15 of this Form
10-K. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audit. The consolidated financial statements and
financial statement schedule of The Ultimate Software Group, Inc. and subsidiary
as of December 31, 2001, and for each of the years in the two year period then
ended were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those consolidated financial statements and
financial statement schedule in their reports dated February 1, 2002.
In our opinion, such 2002 financial statement schedule, when considered
in relation to the basic 2002 consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
KPMG LLP
Miami, Florida,
January 31, 2003, except as to Note 4 which is as of March 27, 2003.
59
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR
ANDERSEN LLP IN CONNECTION WITH THE ULTIMATE SOFTWARE GROUP, INC.'S FILING ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001. THIS REPORT HAS NOT BEEN
REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 2002. FOR FURTHER DISCUSSION, SEE EXHIBIT 23.2 WHICH
IS FILED HEREWITH.
INDEPENDENT AUDITORS' REPORT
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 February 1, 2002. 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,
February 1, 2002.
60
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, 2002.................. $ 2,465 $ 1,798 $ (3,263) $ 1,000
December 31, 2001.................. $ 2,461 $ 4,151 $ (4,147) $ 2,465
December 31, 2000.................. 1,673 3,572 (2,784) 2,461
- ------------------
(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.
61
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.
By: /s/ Mitchell K. Dauerman
----------------------------------
Mitchell K. Dauerman
Executive Vice President, Chief Financial
Officer and Treasurer
Date: December 1, 2003
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 December 1, 2003
- --------------------------- Officer and Chairman of the
Scott Scherr Board
/s/ Mitchell K. Dauerman Executive Vice President, December 1, 2003
- --------------------------- Chief Financial Officer and
Mitchell K. Dauerman Treasurer (Principal
Financial and Accounting Officer)
/s/ Marc D. Scherr Vice Chairman of the Board December 1, 2003
- ---------------------------
Marc D. Scherr
/s/ LeRoy A. Vander Putten Director December 1, 2003
- ---------------------------
LeRoy A. Vander Putten
/s/ James A. FitzPatrick, Jr. Director December 1, 2003
- -----------------------------
James A. FitzPatrick, Jr.
/s/ Rick Wilber Director December 1, 2003
- ---------------------------
Rick Wilber
62