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EX-32.1 - CEO CERTIFICATION - ULTIMATE SOFTWARE GROUP INC | exhibit_32-1.htm |
EX-31.2 - CFO CERTIFICATION - ULTIMATE SOFTWARE GROUP INC | exhibit_31-2.htm |
EX-31.1 - CEO CERTIFICATION - ULTIMATE SOFTWARE GROUP INC | exhibit_31-1.htm |
EX-32.2 - CFO CERTIFICATION - ULTIMATE SOFTWARE GROUP INC | exhibit_32-2.htm |
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - ULTIMATE SOFTWARE GROUP INC | exhibit_23-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
FORM
10-K
þ
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|
SECURITIES
EXCHANGE ACT OF 1934
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|
For
the fiscal year ended December 31, 2009
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or
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|
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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For
the transition period
from to
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Commission
file number: 0-24347
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_______________
The
Ultimate Software Group, Inc.
(Exact
name of Registrant as specified in its charter)
Delaware
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65-0694077
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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2000
Ultimate Way,
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33326
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Weston,
FL
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(Zip
Code)
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(Address
of principal executive offices)
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Registrant’s
telephone number, including area code:
(954)
331-7000
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each Class:
|
Name of Each Exchange on which
Registered:
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Common
Stock, par value $.01 per share
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The
Nasdaq Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ¨ No
þ
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes ¨ No
þ
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 þ No
¨
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
Registrant was required to submit and post such files). Yes ¨ 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 a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer”, “accelerated
filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer ¨ Accelerated
filer þ
Non-accelerated
filer ¨
(Do not check if a smaller reporting company) Smaller reporting company ¨
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No
þ
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 Global Select Market on June 30, 2009 was approximately
$569.0 million.
As of
February 18, 2010, there were 24,825,084 shares of the Registrant’s Common
Stock, par value $.01, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s Proxy Statement for the 2010 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Annual Report on Form
10-K.
THE
ULTIMATE SOFTWARE GROUP, INC.
INDEX
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Page(s)
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1
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PART
I
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Item
1.
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1
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Item
1A.
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9
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Item
1B.
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16
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Item
2.
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16
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Item
3.
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16
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Item
4.
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PART
II
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Item
5.
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17
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Item
6.
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Item
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Item
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31
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Item
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33
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Item
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58
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Item
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58
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59 | ||
Item
9B.
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60
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PART
III
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Item
10.
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60
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Item
11.
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63
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Item
12.
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63
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Item
13.
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63
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Item
14.
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63
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PART
IV
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Item
15.
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63
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67
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i
FORWARD-LOOKING
STATEMENTS
This
Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (this
“Form 10-K”) of The Ultimate Software Group, Inc. and subsidiaries (“Ultimate,”
“we,” “us” or “our”) may contain 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 our expectations or beliefs, including, but not limited to,
our expectations concerning our 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. Ultimate’s actual results could
differ materially from those contained in the forward-looking statements due to
risks and uncertainties associated with fluctuations in our quarterly operating
results, concentration of our product offerings, development risks
involved with new products and technologies, competition, our contractual
relationships with third parties, contract renewals with business partners,
compliance by our customers with the terms of their contracts with us, and other
factors disclosed in Ultimate’s filings with the Securities and Exchange
Commission. Other factors that may cause such differences include,
but are not limited to, those discussed in this Form 10-K, including the risk
factors set forth in Item 1A. Ultimate undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
UltiPro®
and Intersourcing® and their related designs are registered trademarks of
Ultimate 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.
PART
I
Ultimate’s
UltiPro software (“UltiPro”) is a comprehensive Internet-based solution
delivered primarily as an online service and designed to deliver the
functionality businesses need to manage the complete employment life cycle from
recruitment to retirement. The solution includes feature sets for talent
acquisition and onboarding, HR management and compliance, benefits management
and online enrollment, payroll, performance management, learning management,
salary planning and budgeting for compensation management, reporting and
analytical decision-making tools, time and attendance, and a self-service Web
portal for executives, managers, administrators, and employees.
We
believe that UltiPro helps customers streamline HR and payroll processes to
significantly reduce administrative and operational costs, while also empowering
them to manage the talent in their workforce more
strategically. Designed for the Internet, UltiPro enables its
customers to analyze workforce trends for better decision making, find critical
information quickly and perform routine business activities
efficiently.
UltiPro
is available as two solution suites based on company size. UltiPro
Enterprise (“Enterprise”) was developed to address the needs of large and very
large companies (companies with 1,000 or more employees) and is delivered either
through software-as-a-service (“SaaS”) or an on-premise
solution. UltiPro Workplace (“Workplace”) was designed for companies
in the mid-market (companies with under 1,000 employees) and is delivered
exclusively through SaaS. UltiPro Workplace provides medium-sized and
smaller companies with nearly all the features that larger Enterprise companies
have with UltiPro, plus a bundled services package. Since many companies in this
market do not have information technology (“IT”) staff on their premises to help
with system issues, UltiPro Workplace is designed to give these customers a high
degree of convenience by handling system setup, business rules, and other
situations for customers “behind the scenes.”
Our SaaS
offering of UltiPro, branded “Intersourcing” (the “Intersourcing Offering”),
provides on-line access to comprehensive human capital management functionality
for organizations that need to simplify the IT support requirements of their
business applications. We have found that Intersourcing is attractive to
companies that want to focus on their core business competencies to increase
sales and profits. Through the Intersourcing Offering, we supply and manage the
hardware, infrastructure, ongoing maintenance and backup services for our
customers. Customer systems are managed at three data centers, one
located near Miami, Florida, one near Atlanta, Georgia, and another near
Toronto, Canada. All
data centers are owned and operated by independent third
parties.
As part
of our comprehensive HR, payroll and talent management solutions, we provide
implementation and training services to our customers as well as support
services, which have been certified by the Support Center Practices (“SCP”)
Certification program for eleven consecutive annual
evaluations. UltiPro leverages the Microsoft Corporation
(“Microsoft”) technology platform, which is recognized in the industry as a
cost-effective, reliable and scalable platform.
UltiPro
is marketed primarily through our Enterprise and Workplace direct sales
teams. Ultimate had approximately 1,900 customers as of the end of
2009. Based on December 2009 market data from Dun & Bradstreet,
we estimate our approximate market share to be 8 percent in the over 1,000
employee and larger space and 2 percent in the under 1,000 employee
space.
Ultimate 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.
During August 2006, Ultimate formed a wholly-owned subsidiary, The Ultimate
Software Group of Canada, Inc., to accommodate future operations in
Canada. In October 2006, Ultimate acquired 100% of the common stock
of a United Kingdom (“UK”) company and its wholly-owned U.S. subsidiary
(collectively, “RTIX”), now known as The Ultimate Software Group UK
Limited. There were no material assets or revenues in either Canada
or the UK as of or for the year ended December 31, 2009. Ultimate’s
headquarters is located at 2000 Ultimate Way, Weston, Florida 33326 and its
telephone number is (954) 331-7000.
Features
of UltiPro
UltiPro
is a comprehensive Internet-based solution designed to deliver the functionality
businesses need to manage the complete employment life cycle from recruitment to
retirement. The solution includes feature sets for talent acquisition and
onboarding, HR management and compliance, benefits management and online
enrollment, payroll, performance management, learning management, salary
planning and budgeting for compensation management, reporting and analytical
decision-making tools, time and attendance, and a self-service Web portal for
executives, managers, administrators, and employees. UltiPro offers
the following features to its customers:
Web
Portal. UltiPro includes a Web workforce portal that can serve
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 the HR department. We believe that UltiPro’s
Web portal can increase administrative efficiencies by providing immediate
access to 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, Highly Configurable,
Built-in Functionality. Based upon UltiPro’s built-in and
unified functionality and its ability to be configured extensively to the
customer’s specific business needs, Ultimate has found that UltiPro minimizes
the need for its customers to make extensive customizations or changes to source
code, facilitates streamlined management of the total employment cycle, enables
organizations to minimize the time invested in burdensome HR/payroll
administrative activities, and provides strategic HR management reports and
tools.
Flexible, Rapid System Setup and
Configuration. UltiPro has been designed to minimize the time
and effort required to set up and configure the system to address individual
company needs. UltiPro delivers an extensive amount of functionality
“out-of-the-box” that can be configured to meet customers’ various business
models, so that few customizations are required by the typical customer.
Ultimate has a proven track record for implementing UlitPro’s feature-sets
rapidly and for setting up the system for delivery as
software-as-a-service. Our service teams for on-premise
implementations of UltiPro and for SaaS setup are experienced professionals, the
majority of whom are long tenured, who help companies to select the most
appropriate options and configure UltiPro to align with customers’ business
requirements.
Reduced Total Cost of
Ownership. We believe that the UltiPro solution provides cost
saving opportunities for its customers and that UltiPro is competitively priced.
In addition, we believe that our current practices in setting up 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 HR, 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 has consistently focused on identifying
leading technologies and integrating them into its products. The primary
characteristics of Ultimate’s technology are:
§
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Leading-edge
service-oriented-architecture technology platform built using
Microsoft.NET 3.0 framework.
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§
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Multi-tenancy
(multiple companies can reside on one server). The multi-tenant
model allows each application component to run on a separate farm, or
cluster, of load-balanced servers while still providing database isolation
that customers demand. Ultimate’s multi-tenant site registry functions
similar to “yellow pages” to manage tenant location and isolation within
the site.
|
§
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Connecting
UltiPro via Web services (a set of platform-neutral and vendor-independent
protocols that enable application interactions over the Internet using
Extensible Markup Language, or XML, and other Web-based
technologies). Through Web services, Ultimate exposes
appropriate surface areas of UltiPro to integrate with other applications
and data services easily and
securely.
|
Rich End-User Experience and Ease of
Use and Navigation. Ultimate designs its products to be
user-friendly and to simplify the complexities of managing employees and
complying with government regulations in the HR, payroll, and talent management
areas. UltiPro uses familiar Internet navigation techniques, which we believe
make its portal 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.
Comprehensive Customer Services and
Industry-Specific Expertise. Ultimate believes it provides the
highest quality customer services, including on-demand hosting services,
professional implementation services, knowledge management (or training)
services and ongoing product and customer support services. Ultimate’s customer
support center has received the SCP Certification for the eleventh 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 the SSPA. Recognizing the importance of issuing timely updates that
reflect changes in tax and other regulatory laws, Ultimate employs a dedicated
research team to track jurisdictional tax changes for more than 13,000 tax codes
included in UltiPro as well as changes in other employee-related
regulations.
UltiPro—Functionality
and Optional Features
UltiPro’s
core functionality includes, but is not limited to, a Web portal, human
resources management, benefits administration, payroll administration, manager
self-service, employee self-service, UltiPro business intelligence, and other
key features such as, System Administration Tools and Enterprise Integration
Tools that deliver the ability to interface with third-party applications and
providers.
In
addition to UltiPro’s core HR/payroll functionality, our customers have the
option to purchase a number of additional features on a per-employee-per-month
(“PEPM”) basis, which are available to enhance the functionality of UltiPro’s
core features based on certain business needs of the customers. These
optional UltiPro features currently include (i) the talent management suite of
products (recruitment, onboarding, performance management, learning management,
salary planning and budgeting for compensation management, and employee
relations tools for managing disciplinary actions, grievances, and succession
planning); (ii) benefits enrollment; (iii) time, attendance and scheduling; (iv)
time management; (v) tax filing; (vi) wage attachments; and (vii) other optional
features (collectively, UltiPro “Optional Features”) , which are described
below.
Differences
between features available to UltiPro Enterprise and UltiPro Workplace are
specified below. Unless otherwise specified, features are included in
both the Enterprise and Workplace offerings.
UltiPro’s
Core HR/Payroll
Functionality
UltiPro’s core HR/payroll
functionality includes, but is not limited to, the following:
UltiPro’s Web Portal.
UltiPro’s Web portal can act as the gateway to business activities for a
company’s executives, management team, HR/payroll staff, administrators, and
employees. UltiPro is highly configurable and offers configuration
options that enable a customer’s workforce to launch the portal from multiple
Web browsers, including Microsoft Internet Explorer and Mozilla Firefox, view
information and perform tasks in a language of their choice (English, Spanish,
or French), set their preferences for the order and placement of home-page
content, and access any available page in one click. Ultimate
believes that UltiPro’s Web portal allows its customers to improve service to
their employees through better communications and to save time because managers
and administrators can complete hundreds of common employee-related tasks,
including administering benefits, managing staff and accessing reporting and
business intelligence in real time, from one central location. UltiPro also
enables companies to provide on-demand access to company and personal
information for their employees over the Web.
Human Resources
Management. 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 under the Consolidated Omnibus Budget Reconciliation Act (COBRA), the
Health Insurance Portability & Accountability Act (HIPAA), regulations
implemented by the Occupational Safety & Health Administration (OSHA),
workers’ compensation regulations, the Family Medical Leave Act (FMLA), and
Equal Employment Opportunity (EEO) laws. UltiPro also enables compliance with
HIPPA confidentiality requirements for protecting sensitive data such as
employee social security numbers.
UltiPro
also allows customers to track HR information of employees working outside the
U.S. and Canada, providing a global view of their workforces and enabling
consolidation of global HR/employee information into one central system for HR
reporting and analytics by individual country or the entire company as a
whole.
Benefits Administration.
UltiPro allows companies to match all of the health, welfare, dental, vision,
and other benefits that their organizations offer employees, and to set up and
administer benefit plans and employee and employer contributions, and it enables
employees to check benefit options and coverage from the UltiPro portal. UltiPro
eliminates the need for duplicate rules, duplicate data entry, and
reconciliation reporting because it stores details for deductions and benefit
plans in one common table. This includes rules for coverage, premium and
employer match computations, and eligibility and participation
determinations. UltiPro also allows companies to maintain and
administer paid time off benefits, such as vacation (including calculating
benefit accrual amounts), track leave time taken, and facilitate the response to
employee leave requests.
Payroll
Administration. 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 UltiPro, a company’s central
payroll department, remote offices or multiple divisions can process payroll
with specific processing steps based on the exact needs of the organization, and
can manage this process through a “payroll gateway,” an easy-to-use dashboard of
payroll tasks and status, within the UltiPro portal.
Manager
Self-Service. Authorized managers have self-service access to
staff information such as salary, compensation history, key dates and emergency
contacts, with reporting and workforce analysis tools to facilitate
decision-making. A customer’s managers can view and update staff
information, manage department activities, post job openings, leverage
recruiting and hiring tools, and perform queries on workforce
data. UltiPro’s document management features can be used to house and
categorize employee-related documents such as drivers’ licenses, consent forms,
and completed Form I-9s with required identification. Administrators
and managers have the ability to attach Microsoft Word documents, PDFs, JPEG
files, spreadsheets, or any other file types supported by Microsoft Internet
Explorer to employee files. The documents can be grouped and sorted
to individual requirements, as necessary.
Employee
Self-Service. UltiPro Employee Self-Service gives a customer’s
employees immediate security-protected access to view their own paycheck details
and benefits summaries, frequently used forms and company
information. They can also 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.
UltiPro Business
Intelligence. UltiPro Business Intelligence uses the IBM
Cognos 8 business intelligence platform for HR, payroll, and talent management
reporting and analysis. Accessed through the Web portal, UltiPro Business
Intelligence gives users the ability to pull data across the UltiPro solution –
from human resources, payroll, benefits administration and enrollment,
compensation, talent acquisition and development, compensation, compliance,
year-end data, and more – and enables them to create, modify, and distribute
workforce-related reports and notifications. UltiPro includes a pre-configured
data mapping library and pre-authored reports and analytics. Everyone
in a customer’s organization who has security clearance – from line managers to
executives – can have immediate access to key workforce metrics on their
desktops through the UltiPro Web portal, and they can personalize their own
portal views to show the reports they want to see and how they want to see them.
We believe that UltiPro Business Intelligence gives its customers significant
strategic value for managing their workforce-related functions and saves them
labor time and money by eliminating or reducing the need for internal technology
people to generate hundreds of individual reports for disparate executive and
management needs.
Other Key
Features. UltiPro includes system administration tools such as
configuration options, role-based security, built-in conditional workflow,
flexible business rules, and an easy-to-use content management tool. Built-in
conditional workflow enables users to authorize HR/payroll staff, managers, or
supervisors to make updates on the Web through more than 125 pre-defined, highly
configurable workflow processes to expedite business activities such as hiring
an employee or inputting a salary increase. System administration was designed
for the non-technical user to administer UltiPro’s roles-based security,
built-in conditional workflow, and system business rules, as well as to enable
system administrators to post company communications, link to external Web sites
from the UltiPro portal, and, through UltiPro’s Color Palette feature, select
the colors of UltiPro’s Web pages to reflect the customer’s own company
branding. Enterprise Integration Tools are also included to provide the ability
to interface with third-party applications and providers such as general ledger,
tax filing services, time clocks, banks, 401(k) and benefits providers, check
printing services and unemployment management services.
UltiPro’s
Optional Features
UltiPro Talent Management
(“UTM”) is
a suite of add-on products comprised of Recruitment, Onboarding, Performance
Management, Learning Management, Salary Planning and Budgeting, and Employee
Relations.
a) Recruitment.
UltiPro Recruitment delivers a “one-stop shopping” solution for companies to
recruit and hire the most qualified candidates. By automating the entire
recruiting and applicant tracking process, UltiPro Recruitment enables hiring
managers, recruiters, and HR staff to track and manage all recruitment tasks
such as posting open jobs, reviewing resumes, screening candidates, and
scheduling interviews from the central UltiPro portal.
b) Onboarding. UltiPro
Onboarding is a comprehensive Web-based tool that provides employers the ability
to automate the process of bringing a new employee into an organization.
Employees can be given a “welcome” package online as part of a step-by-step
process that is built into UltiPro Onboarding and is easily configurable by the
customer. It includes such activities as: obtaining required government and
procedural paperwork, including electronic signatures and document storage;
provisioning necessary equipment and job-specific tools such as office location,
computer equipment, and uniforms; ensuring enrollment in necessary training
programs; and instilling Ultimate’s core values and business
objectives.
c) Performance Management
and Learning Management. UltiPro Performance Management helps companies
maximize talent development and improve employee satisfaction by automating and
enhancing the performance process and using competency-based employee
development. UltiPro’s performance management streamlines the processes of
evaluating performance and completing performance reviews, performing competency
assessments, identifying top performers for succession planning, and tracking
and executing coaching and development plans. Learning Management
enables businesses to tie performance objectives and weaknesses to employee
development plans that drive individual learning programs. Companies can list or
link to educational programs and track attendance, program status,
certifications, and other results.
d) Salary Planning and
Budgeting. UltiPro Salary Planning and Budgeting facilitates salary
increase administration by delivering the tools and information managers need to
make effective decisions regarding future compensation for individuals and/or an
entire team. Highly configurable, UltiPro Salary Planning and Budgeting makes it
easy for companies to tie the salary-increase process and business rules into
the solution. Working online, managers can rapidly review their salary budgets
and guidelines, and determine the best way to allocate pay increases to their
employees within their approved budget. Once managers decide on the allocations,
they can submit pay increases for processing with no manual calculations or
spreadsheets required.
e) Employee
Relations. UltiPro Employee Relations allows customers to
track employee information that is important to a particular industry such as
disciplinary actions and employee grievances. In addition, career
planning features in the Employee Relations feature-set help companies of all
types with succession planning by building a pipeline of future leaders from
their workforce pool to fill key positions.
Other Optional Features
include, but are not limited to, the following products, which are
supplemental to UlitPro’s core HR/payroll functionality:
Benefits Enrollment. With
Benefits Enrollment, employees can review their benefit choices and make
selections on the Web during defined open enrollment periods. Benefits
administrators can set up enrollment sessions over the Web and use tools to
monitor the enrollment progress. Benefits Enrollment also guides 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. UltiPro also facilitates the electronic feeds required for
insurance carriers and plan administrators, reducing the need for manual
reporting of employee census information, participant coverage, and billing
reconciliation.
Time, Attendance, and Scheduling
(available to prospective customers in the Enterprise market). Through a
strategic partnership with Infor Corporation (formerly Workbrain Corporation),
Ultimate has the right to market and distribute Infor’s time and labor
management product, referred to as Infor Express, to prospective customers as
part of the UltiPro solution. Ultimate has rebranded Infor Express as UltiPro
Time and Attendance, marketing the components as UltiPro Time and Attendance,
UltiPro Leave Management, and UltiPro Workforce Scheduling (collectively,
“UTA”). Ultimate is the single-source contact for customer implementations and
ongoing solution support for UTA. UTA is Web-based and integrated with UltiPro’s
payroll, HR, and benefits functionality. UltiPro Time and Attendance tracks time
and attendance labor metrics and supports a variety of time-capture mechanisms.
UltiPro Leave Management includes all of the functionality required to
effectively track and manage employee leave. UltiPro Workforce Scheduling
features industry-specific employee scheduling options to ensure that
organizations in different environments deploy employees in an efficient and
legislatively compliant manner.
Time Management (designed for the
Workplace market). UltiPro Time Management, a proprietary solution,
delivers the functionality and flexibility needed to manage employee time and
attendance efficiently and provides Web access to real-time employee time and
labor information. UltiPro Time Management provides companies the tools to
proactively prevent issues that negatively impact business performance, such as
employee coverage gaps, labor law violations, and excess labor spending. Fully
integrated scheduling, time and attendance, and leave management capabilities
reduce payroll expenditures and streamline payroll and workforce management
processes.
Tax Filing. UltiPro Tax
Filing protects businesses against tax filing errors through the use of
professionals specializing in tax filing. With UltiPro Tax Filing, companies are
able to meet all Federal, state, and local payroll tax filing obligations
quickly and easily. The UltiPro solution saves payroll staff time by eliminating
the administrative burdens associated with tax filing. UltiPro Tax Filing
enables businesses to deposit federal, state, and local tax payments for more
than 13,000 tax codes via electronic funds transfer or check and automates
filing for monthly, quarterly, and annual tax returns.
Wage Attachments. For
organizations required to process third-party payments on behalf of their
employees for items such as child support, tax levies, and creditor
garnishments, UltiPro Wage Attachments enables these companies to effectively
streamline and manage the payment process. UltiPro Wage Attachments eliminates
the burden associated with payments to third parties by using information
entered and calculated in UltiPro, so there is no need to manage payment
processing or analyze varying disbursement schedules for multiple jurisdictions.
Ultimate ensures that each third-party payment is made according to the
designated payment method and reaches its required destination within the
assigned timeframe.
Other Optional
Features. Ultimate offers a number of additional HR and
payroll-related services to extend the value of UltiPro, including business
continuity services, test environment services, W-2 print services,
pre-employment screening, paycheck modeling, pay cards, unemployment tax
management, employment verification services, employee assistance, health and
wellness, and work/life balance programs. In addition, Ultimate
offers UltiPro Federated Single Sign-On for standards-based identity management
by leveraging Microsoft’s Active Directory Federated Services (“ADFS”)
infrastructure. The solution helps improve and simplify data security
by enabling individuals to use a single login credential (such as a network
login) to seamlessly access the UltiPro Web portal.
Technology
Ultimate
seeks to provide its clients with optimum performance, user experience, advanced
functionality, and ease of scalability and access to information through the use
of leading Internet-standard technologies. The UltiPro solution was designed to
leverage cutting-edge technologies such as Web 2.0, social software, XML
standards, 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 Ultimate deliver what it believes to be a highly
deployable and manageable payroll and talent management solution that includes
the following key technological features:
Microsoft.NET framework, Web 2.0
Features, and Social Networking Integration. The newest
version of UltiPro, built on the .NET development platform, allows UltiPro to
leverage a contemporary Web framework that provides a common, reusable page
foundation for a consistent user experience. The .NET framework also
enables Ultimate to develop and release enhanced features more rapidly. The
latest version of UltiPro also takes advantage of Web 2.0 technologies for
increased user interactivity, such as “sticky” personal user preferences, and
social networking integration that provides value for human capital management
in areas such as recruitment and mentoring. For example, UltiPro on
the .NET platform includes social networking integration to sites such as
“LinkedIn,” where candidates for open positions can provide a link to their
professional profile and other details relevant to job applications, enabling HR
and hiring managers to more quickly identify qualified candidates.
Internet-Based Technologies and
Integration. Ultimate supports cutting-edge Web technologies
and Internet/extranet connectivity to increase access to and usability of its
applications. In 2002, Ultimate moved to Web services architecture that allows
business logic to be called and executed over standard network protocols, such
as HTTP or TCP/IP. UltiPro has an open architecture that supports open
integration standards, including XML, HR-XML, SOAP, WSDL, AJAX, COM, including
real-time messaging through Web services. UltiPro’s Web services
architecture is scalable to adapt to the business needs of companies of any
size. The solution includes enterprise integration tools that enable customers
to exchange data with third-party providers via imports, exports or Web
services.
Distributed Process
Management. The technical architecture UltiPro uses to enable Web
services capabilities is called UltiPro Distributed Process Management (“DPM”).
This unique platform incorporates leading technologies such as Microsoft Message
Queuing (MSMQ), XML, SOAP, and WSDL to create a distributed processing framework
that is Internet-enabled for performing business functions on the Web portal and
allowing 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, processing payroll or generating reports, across multiple servers
to reduce the amount of time and manual work required. This means that commonly
requested services, such as running a report or running steps in the payroll
process, can be initiated from the Web. These requests are automatically routed
to a separate process application server to ensure efficient processing and load
balancing. Ultimate believes that the DPM framework makes UltiPro highly
scalable to accommodate a high volume of processing requests cost-effectively
for companies that run hundreds or even thousands of payrolls.
Application
Framework. Ultimate 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 built more separation into the application design. The UltiPro
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. Ultimate 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. 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 providing an extensive library of
standard reports that offer flexibility and ease of use, Ultimate 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
on-line analytical processing to multidimensional data cubes, allowing users to
explore data on employees graphically and statistically from diverse angles.
Ultimate 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. In addition, for security purposes and ease of use, Ultimate
has integrated security for the data elements and provided single sign-on for
users. A Cognos Web Package is delivered to UltiPro customers to
allow users to access reports and conduct data queries from a Web
browser.
Intersourcing
Offering
Ultimate’s
Intersourcing Offering is comprised of hosted arrangements that provide on-line
access to comprehensive human capital management functionality for organizations
that need to simplify the IT support requirements of their business
applications. Through the Intersourcing Offering, Ultimate provides the
hardware, infrastructure, ongoing maintenance and backup services for its
customers at three
data centers. Data centers located near Miami, Florida and Atlanta,
Georgia, are owned and operated by Quality Technology Services (“QTS”) and the
data center located near Toronto, Canada is owned and operated by
Verizon.
The
Intersourcing Offering is 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 or dedicated
hosted environment and the arrangement can typically be renewed after its
initial term has expired. In the shared environment, Ultimate
provides an infrastructure with applicable servers shared among many customers
who use a Web browser to access the application software through the related
data center. In the dedicated environment, the customer does not
share servers with other customers but rather has its own set. The
pricing for the Intersourcing Offering, including both the hosting element as
well as the right to use UltiPro, is on a PEPM basis.
Significant
Transaction
Ultimate
and Ceridian Corporation (“Ceridian”) signed an agreement in 2001, as
subsequently amended, granting Ceridian a non-exclusive license to use UltiPro
as part of an on-line offering for Ceridian to market primarily to businesses
with less than 500 employees (the “Original Ceridian Agreement”). During
December 2004, RSM McGladrey Employer Services (“RSM”), a former business
service provider (“BSP”) of Ultimate, acquired Ceridian’s product and existing
base of small and mid-size business customers throughout the United States (the
“RSM Acquisition”). The financial terms of the Original Ceridian
Agreement did not change as a result of the RSM Acquisition. Subsequent to the
RSM Acquisition, Ceridian continued to be financially obligated to pay, and did
pay, Ultimate minimum fees pursuant to the terms of the Original Ceridian
Agreement. The Original Ceridian Agreement was terminated by Ceridian
pursuant to its terms on March 9, 2008. During its term, Ceridian
paid the aggregate minimum $42.7 million which was due under the Original
Ceridian Agreement on a cumulative basis since the inception of the
arrangement. The amount of subscription revenues
recognized under the Original Ceridian Agreement during the year ended December
31, 2008 was $1.5 million (through the effective date of the termination of the
Original Ceridian Agreement) and $7.7 million for the year ended December 31,
2007. No revenue was recognized under the Original Ceridian Agreement
during the year ended December 31, 2009.
Research
and Development Activities
Ultimate 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 our existing
products and for the development of new products. During 2009, 2008 and 2007, we
spent $38.6 million, $37.5 million and $29.9 million, respectively, on research
and development activities. During 2009 and 2008, $0.1 million and
$0.8 million, respectively, of research and development expenses were
capitalized for the Onboarding product
which handles certain HR functionality for new hires of a company, and became
available for general release to our customers during the spring
of 2009. In addition, in 2009, $0.1 million of research
and development expenses were capitalized for certain third-party costs related
to our Time Management product. There were no research and
development expenses capitalized in 2008 and 2007 in relation to our Time
Management product. During 2007, $1.7 million of research and
development expenses were capitalized for the development of UltiPro Canadian
HR/payroll (“UltiPro Canada”) functionality. UltiPro Canada was built
from the existing product infrastructure of UltiPro (e.g., using UltiPro’s
source code and architecture). UltiPro Canada was designed to provide
HR/payroll functionality, which includes the availability of Canadian tax rules,
as well as Canadian HR functionality, taking into consideration labor laws in
Canada and including changes to the language where necessary (i.e., English to
French). Capitalization of software costs for UltiPro Canada extended
from the fourth fiscal quarter of 2005, when technological feasibility (as
defined by Accounting Standards Codification (“ASC”) 985, “Software” (“ASC 985”)
(formerly Statement of Financial Accounting Standards (“SFAS”) No. 86,
“Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”
(“SFAS No. 86”)) was attained until the fourth fiscal quarter of 2007, when
UltiPro Canada became available for general release to our
customers.
Customer
Services
We
believe that delivering quality customer services provides us with a significant
opportunity to differentiate Ultimate in the marketplace and is critical to the
quality of Ultimate’s comprehensive service solution. Ultimate provides its
customers services in two broad categories: (i) professional services and (ii)
customer support services and product maintenance. Additionally,
Ultimate provides hosting services as a part of the Intersourcing
Offering. These services include, but are not limited to, purchasing
and supporting hardware and system software; installing new versions of UltiPro;
and backing up customer data.
Professional
Services. Ultimate’s professional services include
implementation, customer relationship management and knowledge management (or
training) services. Ultimate believes that its implementation consulting
services are differentiated from those of other vendors by speed, predictability
and completeness. Ultimate 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
has an experienced team of functional and technical consultants that are
dedicated to assisting customers with rapid deployments. In addition, Ultimate
provides its customers with the opportunity to participate in formal training
programs conducted by its knowledge management services team, as well as online
and on-demand training. 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, configuring the system and creating custom
reports. Ultimate 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, we conduct Web-based training and
on-site training at remote locations. After customers have processed their first
live payroll using UltiPro (referred to as going “Live”) and have been turned
over to our customer support and maintenance program, we assign a customer
relationship manager (“CRM”) 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 most of our
professional services, are typically billed on a time and materials
basis. The CRM team also focuses a large portion of its time on
customer retention, which is an important aspect of Ultimate’s long-term
business model.
Customer Support and
Maintenance. Ultimate offers comprehensive and on-going
maintenance services and technical support. These services have
historically been purchased by all of our customers, and Ultimate currently has
a recurring revenue retention rate of 97% . Ultimate’s customer support center
has received the SCP Certification sponsored by the Service Strategies
Corporation (“SSC”) for the eleventh consecutive year. This certification
recognizes companies that “deliver exceptional service and support to their
customers.” Ultimate’s customer support services include: software updates that
reflect tax and other legislative changes; a named customer service
representative (“NSR”); telephone support 24 hours a day, 7 days a week;
unlimited access to Ultimate’s employee tax center on the Web; seminars on
year-end closing procedures; and periodic newswire emails. In addition, our
customer support services team maintains a support Web site for our customers
where customers can submit inquiries and service requests as well as search a
knowledge base of information for instant answers to questions, holds an annual
national user conference and enables Ultimate professionals to attend smaller,
user-organized user group meetings on a routine basis throughout the United
States.
Customers
As of
December 31, 2009, Ultimate provided its UltiPro solutions to approximately
1,900 customers. Ultimate’s customers represent a wide variety of industries,
including manufacturing, food services, sports, technology, finance, insurance,
retail, real estate, transportation, communications, healthcare and other
services. No customer accounted for more than 10% of total revenues
in any of the years 2009, 2008 or 2007.
Sales
and Marketing
Ultimate
markets and sells its products and services primarily through its direct sales
force.
Ultimate’s
direct sales force includes business development vice presidents, directors and
managers who have defined territories, typically geographic. The sales cycle
begins with a sales lead generated through a national, corporate marketing
campaign or a territory-based activity. In one or more on-site visits,
phone-based sales calls, or Web demonstrations, sales managers work with
application and technical sales consultants to analyze prospective client needs,
demonstrate Ultimate’s UltiPro solutions and, when required, respond to requests
for proposals (“RFPs”). The sale is finalized after customers complete their
internal sign-off procedures and the terms of the contract are negotiated and
signed.
With a
sale of the Intersourcing Offering for the Enterprise market, the agreement
typically requires PEPM fees based on company size, one-time upfront (or setup)
fees priced on a per-employee basis, hourly charges for implementation and
per-day training rates. Typical payment terms include a deposit at
the time the contract is signed for all or a portion of the setup fees and
ongoing PEPM payments on specific payment dates designated in the contract,
usually tied to the Live date. Payment for implementation and training services
under the contract is typically made as such services are provided.
With a
sale of the Intersourcing Offering for the Workplace market, the agreement
generally requires PEPM fees based on company size and, typically, a one-time
upfront (or setup) fee, priced on a per employee basis, to cover bundled
services, which generally include implementation and training services. Typical
payment terms include a deposit at the time the contract is signed for all or a
portion of the upfront fees and ongoing PEPM payments on specific payment dates
designated in the contract, usually tied to the Live date.
With a
perpetual license sale, the terms of our sales contract typically include a
license agreement for the product, an annual maintenance agreement (which is
subject to annual renewal typically after a 12-month period), 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 on
specific payment dates designated in the contract. Payment for implementation
and training services under the contract is typically made as such services are
provided. We stopped selling perpetual licenses to new customers on April 1,
2009.
Ultimate
supports its sales force with a comprehensive marketing program that includes
public relations, advertising, direct mail, trade shows, seminars and workshops,
email marketing, and Web marketing. 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
Ultimate’s
success is dependent, in part, on its ability to protect its proprietary
technology. We rely on a combination of copyright, trademark and trade secret
laws, as well as confidentiality agreements and licensing arrangements, to
establish and protect our proprietary rights. We do 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
we will be able to protect our proprietary rights against unauthorized
third-party copying or use, which could materially adversely affect our
business, operating results and financial condition.
Despite
our efforts to protect our proprietary rights, attempts may be made to copy or
reverse engineer aspects of Ultimate’s products or to obtain and use information
that we regard as proprietary. Moreover, there can be no assurance that others
will not develop products that perform comparably to our proprietary products.
Policing the unauthorized use of our products is difficult. Litigation may be
necessary in the future to enforce Ultimate’s intellectual property rights, to
protect our 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 our business, operating results and financial condition.
As is
common in the software industry, from time to time we may become aware of
third-party claims of infringement by Ultimate’s products of third-party
proprietary rights. While we are not currently subject to any such claim, our
software products may increasingly be subject to such claims as the number of
products and competitors in our 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 us to enter into royalty and licensing agreements,
which could have a material adverse effect on our business, operating results
and financial condition. Such royalty and licensing agreements, if required, may
not be available on terms acceptable to us or at all.
Competition
The
market for our products is highly competitive. Our products compete primarily on
the basis of technology, delivered functionality, price/performance and
service.
Ultimate’s
competitors in the Enterprise market include (i) large service bureaus,
primarily Automatic Data Processing Inc. (“ADP”) and, to a lesser extent,
Ceridian; and (ii) companies, such as PeopleSoft/Oracle, Lawson, Kronos, and
Workday that offer human resource management and payroll software products for
use on mainframes, client/server environments and/or Web servers. In
the Workplace market, Ultimate’s competitors include payroll service providers,
such as ADP and Paychex, that service companies on the smaller end of the
mid-market. Many of Ultimate’s competitors or potential competitors
have significantly greater financial, technical and marketing resources than we
do. 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 we can.
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 our prospective
customers.
Product
Liability
Software
products such as those offered by Ultimate frequently contain undetected errors
or failures when first introduced or as new versions are released. Testing of
our products is particularly challenging because it is difficult to simulate the
wide variety of computing environments in which our customers may deploy these
products. Despite extensive testing, from time to time we have 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 our products or result in claims by customers against us. In
addition, there can be no assurance that, despite testing by us 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 our business, operating results and
financial condition.
Backlog
Backlog
consists of Intersourcing and sales of hosting services
on a stand-alone basis to customers who already own a perpetual license (“Base
Hosting”) under signed contracts for which the services have not yet been
delivered. At December 31, 2009, Ultimate had backlog of $98.4
million compared to $99.1 million as of December 31, 2008. Ultimate
expects to fill approximately $85.7 million of the backlog during
2010. Ultimate 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, 2009, Ultimate employed 989 persons, including 132 in sales and
marketing, 162 in research and development, 76 in product strategy, 316 in
solution deployment and training, 262 in shared services including Intersourcing
and customer support, and 41 in the HR, finance, and legal
groups. Ultimate believes that its relationships with employees are
good, and that belief is validated by The Great Place to Work® Institute, Inc.’s
selection of Ultimate as the #1 Best Place to Work in America among medium-sized
companies for both 2009 and 2008, as well as one of the 25 best medium-sized
companies to work for in America in 2007, 2006, and 2005. However,
competition for qualified personnel in Ultimate’s industry is generally intense
and the management of Ultimate believes that its future success will depend, in
part, on its continued ability to attract, hire and retain qualified
personnel.
Available
Information
Ultimate’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 and any registration
statements, including but not limited to registration statements on Form S-3,
are available free of charge on Ultimate’s Internet website at www.ultimatesoftware.com
as soon as reasonably practicable after such reports are electronically filed
with the Securities and Exchange Commission (“SEC”). Information contained on
Ultimate’s website is not part of this report. You may record and
copy any materials we file with the SEC at the SEC’s Public Reference Room at
100 F Street, NE, Washington, DC 20549. You may obtain information on
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an internet site that contains
the reports, proxy and information statements and other information regarding us
that we file with the SEC. You can access the SEC’s website at www.sec.gov.
Ultimate
operates in a rapidly changing and dynamic business environment that involves
risk and uncertainty. The following discussion is a description of
risks and uncertainties associated with our business that could cause, or
contribute to causing, actual results to differ materially from
expectations. These are not all of the risks we face. We
may be adversely affected by risks not currently known or that we currently
consider immaterial.
We
may be adversely affected by substantial quarterly fluctuations in our revenues
and operating results.
Our
quarterly revenues and operating results have varied significantly in the past
and are likely to vary substantially from quarter to quarter in the future. Our
quarterly operating results may fluctuate as a result of a number of factors,
including:
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•
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Increased
expenses from one quarter to another (especially as they relate to product
development and sales and
marketing);
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• Spending
patterns of our customers;
• Timing
of our product releases;
• Increased
competition;
• A
drop in the near-term demand for our products, particularly in relation to
implementation consulting and training services; and
• Announcements
of new products by Ultimate or by our competitors.
We
establish our expenditure levels based upon our expectations as to future
revenues, which are comprised primarily of recurring revenues and services
revenues. If revenue levels are below expectations,
particularly services revenues which are more subject to variations between
periods than recurring revenues, expenses can be disproportionately high in a
particular period. For example, while sales production could be at our level of
expectations, depending on the spending patterns of our customers including the
timing in which they begin the implementation of UltiPro and the extent to which
they use Ultimate’s resources, the immediate reported total revenues could be
lower than expected.
Our
operating results for previous fiscal quarters are not necessarily indicative of
our operating results for the full fiscal years or for any future periods. We
believe that, due to the underlying factors for quarterly fluctuations,
quarter-to-quarter comparisons of our operations are not necessarily meaningful
and that such comparisons should not be relied upon as indications of future
performance.
Due
to the method of accounting for Intersourcing sales, a change in the period of
the time from contract date to the Live date (“Time to Live”) could negatively
impact the amount of recurring revenues recognized in a reporting
period.
Sales
production, as it pertains to sales of Intersourcing units, is not reflected in
recurring revenues and related variable costs in our consolidated statements of
operations until the related customer goes Live. In our internal business model,
we make certain assumptions, among other things, with respect to future sales
production, revenue growth, variable costs, personnel costs and other operating
expenses.
Our
expectations for recurring revenue growth are typically established based on
combinations of actual Intersourcing sales production (for those units that have
been previously sold but have not yet gone Live) and expected future
Intersourcing sales production, together with expectations as to the Time to
Live. Estimates for Time to Live are usually based on (i) specific estimates
(for certain Backlog sales) provided by our field personnel, which estimates
include factors and assumptions that are not within the control of our field
personnel; and (ii) estimates for Time to Live for other Intersourcing sales
(including Backlog sales without specific estimates at that point in time), as
well as expected sales which are typically based on assumptions derived from our
historical Time to Live periods, which are adjusted periodically, and
prospectively, based on management’s assessment of Time to Live for Backlog
sales at that point in time. Factors that could impact the Time to Live include,
but are not limited to, customer size (as larger customers may have longer
implementations, tend to go Live on more UltiPro features and have more
interface and integration requirements), or the number of complementary products
sold in addition to UltiPro to a single customer, which in some cases involve
customers’ desires to go Live on all products at once, as compared to UltiPro
first, followed by complementary products.
To the
extent there are changes in the underlying assumptions which drive Ultimate’s
expected revenue growth from Intersourcing sales, which include, but are not
limited to, actual sales production achieved and changes in Time to Live, our
recurring revenues, as reported in our consolidated statements of operations,
could differ materially from levels we expected to achieve.
Our
stock price has experienced high volatility, may continue to be volatile and may
decline.
The
trading price of our Common Stock has fluctuated widely in the past and may do
so in the future, as a result of a number of factors, many of which are outside
our control, such as:
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The
volatility inherent in stock prices within the sector within which we
conduct business;
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The
volume of trading in our Common Stock, including sales upon exercise of
outstanding options;
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§
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Failure
to achieve earnings expectations;
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§
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Changes
in our earnings estimates by
analysts;
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§
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Variations
in our actual and anticipated operating results, including, but not
limited to, prospective financial guidance provided by Ultimate to our
investors and research analysts;
and
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The
announcement of a merger or
acquisition.
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Stock
markets have experienced extreme price and volume fluctuations that have
affected the market prices of many technology and computer software companies,
particularly Internet-related companies. Such fluctuations have often been
unrelated or disproportionate to the operating performance of these companies.
These broad market fluctuations could adversely affect the market price of our
Common Stock.
Further,
securities class action litigation has often been brought against companies that
experience periods of volatility in the market prices of their securities.
Securities class action litigation could result in substantial costs and a
diversion of our management’s attention and resources.
We
have incurred operating losses in the past and may incur operating losses in the
future.
We have
incurred operating losses in the past and we may incur operating losses in the
future. As of December 31, 2009, our accumulated deficit was approximately $54.4
million. If our future total revenues do not grow at a higher rate
than that of our total expenses, our future operating results could be
negatively impacted. Recent revenue growth should not be considered
as indicative of our future performance, particularly with respect to the recent
economic environment and the potential impact on our revenue streams, as our
subscription revenues from our Intersourcing Offering are largely impacted by
the employee growth or contraction of our existing customer base and customer
spending patterns have a significant impact on our services revenues with
respect to both the timing and extent of our services they purchase, combined
with our business decision to eliminate sales of perpetual license agreements
for the UltiPro on-site solutions for new customers (and thereby eliminate
prospective license revenues derived from any such agreements).
Adverse changes in
general economic or political conditions could adversely affect our operating
results.
As our
business has grown, we have become increasingly subject to the risks arising
from adverse changes in domestic and global economic and political
conditions. The state of the economy and the rate of employment,
which deteriorated in the recent broad recession, may deteriorate more in the
future. If weakness in the economies of the U.S. and other countries
persists, many customers may delay or reduce technology
purchases. This could result in reductions in sales of our products,
longer sales cycles, slower adoption of new technologies, increased price
competition, customers purchasing fewer services or Optional Features than they
have in the past, customers requesting longer payment terms, customers failing
to pay amounts due and slower collections of accounts receivable. In
addition, increased unemployment could result in significant decreases to our
recurring revenues from our existing customer base as we price our ongoing
recurring revenues on a PEPM basis. Any of these events would likely harm our
business, results of operations, financial condition and cash flow from
operations.
Our
failure to maintain and increase acceptance of UltiPro, which accounts for
substantially all of our revenues, could cause a significant decline in our
revenues.
Currently,
the UltiPro solutions, including the UltiPro core product and Optional Features
and related services, account for substantially all of our revenues. Our future
success depends on maintaining and increasing acceptance of UltiPro,
particularly the Intersourcing Offering and related services. Any decrease in
the demand for UltiPro would have a material adverse effect on our business,
operating results and financial condition.
A
systems failure or other service interruption at either of the data centers
owned and managed by QTS or at the data
center owned and managed by Verizon and used for our hosting services could
result in substantial expense to us, loss of customers and claims by our
customers for damages caused by any losses they incur.
We offer
hosting services, which include hardware, infrastructure, ongoing maintenance
and back-up services, to our customers in the United States at two data centers
owned and operated by QTS—one near Atlanta, Georgia and another one near Miami,
Florida. We also offer hosting services, which include hardware,
infrastructure, ongoing maintenance and back-up services, to our customers with
employees exclusively in Canada at a data center owned and operated by Verizon
near Toronto, Canada.
These
hosting services, which are provided as part of our Intersourcing Offering, must
be able to be reliably operated on a 24 hours per day, seven days per week basis
without interruption or data loss. The success of the Intersourcing Offering
depends on our ability to protect the infrastructure, equipment and customer
data files against damage from:
|
§
|
Human
error;
|
|
§
|
Natural
disasters;
|
|
§
|
Power
loss or telecommunication failures;
|
|
§
|
Sabotage
or other intentional acts of vandalism;
and
|
|
§
|
Unforeseen
interruption or damages experienced in moving hardware to a new
location.
|
We
perform a daily backup of our customer data which is stored offsite of the data
centers. However, the occurrence of one of the above listed events or other
unanticipated problems at any of the data centers could:
|
§
|
Result
in interruptions in the services we provide to our customers, during which
time our customers may be unable to retrieve their
data;
|
|
§
|
Require
us to spend substantial amounts of money replacing existing equipment
and/or purchasing services from an alternative data
center;
|
|
§
|
Cause
existing customers to cancel their
contracts;
|
|
§
|
Cause
our customers to seek damages for losses incurred;
or
|
|
§
|
Make
it more difficult for us to attract new
customers.
|
If
our direct sales force is not successful, we may be unable to achieve
significant revenue growth in the future.
We sell
our products and services primarily through a direct sales force. Our
ability to achieve significant revenue growth in the future will depend upon the
success of our direct sales force and our ability to adapt our sales efforts to
address the evolving markets for our products. If our direct sales force does
not perform as expected, our revenues could suffer.
Rapid
technological changes and the introduction of new products and enhancements by
new or existing competitors could undermine our current market
position.
The
market for our products is characterized by rapid technological advancements,
changes in customer requirements, frequent new product introductions and
enhancements and changing industry standards. The life cycles of our products
are difficult to estimate. Rapid technological changes and the introduction of
new products and enhancements by new or existing competitors could undermine our
current market position. Our growth and future success will depend, in part,
upon our ability to:
|
§
|
Enhance
our current products and introduce new products in order to keep pace with
products offered by our
competitors;
|
|
§
|
Adapt
to technological advancements and changing industry standards;
and
|
|
§
|
Expand
the functionality of our products to address the increasingly
sophisticated requirements of our
customers.
|
We may
not have sufficient resources to make the necessary investments and we may
experience difficulties that could delay or prevent the successful development,
introduction or marketing of new products or enhancements. In addition, our
products or enhancements may not meet the increasingly sophisticated customer
requirements of the marketplace or achieve market acceptance at the rate we
expect, or at all. Any failure by us to anticipate or respond adequately to
technological advancements, customer requirements and changing industry
standards, or any significant delays in the development, introduction or
availability of new products or enhancements, could undermine our current market
position.
Our
current and future competitors include companies with greater financial,
technical and marketing resources than we have and if we are unable to compete
successfully with other businesses in our industry or with in-house systems
developed by potential customers, our profitability will be adversely
affected.
Our
future success will depend significantly upon our ability to increase our share
of our target market, to maintain and increase our recurring revenues from new
and existing customers and to sell additional products, product enhancements,
maintenance and support services and training and consulting services to
existing and new customers. The HRMS/payroll (“HRMS/payroll”) market is
intensely competitive. Our competitors include:
|
§
|
Large
service bureaus, primarily ADP and, to a lesser extent,
Ceridian;
|
|
§
|
A
number of companies, such as PeopleSoft/Oracle, Lawson, Kronos, and
Workday that offer HRMS/payroll software products for use on mainframes,
client/server environments and/or Web servers; and, in the UltiPro
Workplace market, (iii) payroll service providers such as ADP and Paychex
that service companies on the smaller end of the mid-market;
and
|
|
§
|
The
internal HRMS/payroll departments of potential customers which use
custom-written software.
|
Our
competitors may develop products that are superior to our products or achieve
greater market acceptance. Many of our competitors or potential competitors have
significantly greater financial, technical and marketing resources than we do.
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 we can.
We believe that existing competitors and new market entrants will attempt to
develop in-house systems that will compete with our products. We may be unable
to compete successfully against current or future competitors. 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 our prospective customers. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share.
The loss of the
services of one or more of our key employees could negatively affect our ability
to implement our business strategy.
Our
success depends to a significant extent upon a limited number of members of
senior executive management and other key employees, including Scott Scherr, our
Chairman of the Board of Directors, President and Chief Executive Officer. We do
not have employment contracts with any of our key personnel other than a
confidentiality agreement with Mr. Scherr. The loss of the services of one
or more of our key employees could have a material adverse effect upon us. In
addition, uncertainty created by turnover of our key employees could cause
further turnover of our employees.
If
we are not able to successfully recruit personnel, our revenues could be
negatively affected.
Our
ability to achieve significant revenue growth in the future will also depend on
our success in recruiting, training and retaining sufficient sales, marketing,
professional services, product development and other personnel.
The
potential growth of our business and expansion of our customer base may place a
significant strain on our management and operations and we may be unable to
manage that growth and expansion successfully.
We expect
to increase research and development, professional services, sales and marketing
and administrative operations as and when appropriate to accommodate our growth
plans. Accordingly, our future operating results will depend on the ability of
our management and other key employees to continue to implement and improve our
systems for operations, financial control and information management and to
recruit, train, manage and retain our employee base. We cannot be certain that
we will be able to manage any future growth successfully.
Our
business relies heavily on the products of Microsoft, which may not always be
compatible with our products, and we may be required to spend significant
capital if businesses adopt alternative technologies that are incompatible with
our products.
Our
software products are designed primarily to operate with Microsoft Corporation
(“Microsoft”) technologies and our strategy requires that our products and
technology be compatible with new developments in Microsoft technology. Although
we believe that Microsoft technologies are currently widely utilized by
businesses of all sizes, we cannot be certain that businesses will continue to
adopt such technologies as anticipated, will migrate from older Microsoft
technologies to newer Microsoft technologies or will not adopt alternative
technologies that are incompatible with our products. As a result, we may be
required to develop new products or improve our existing products to be
compatible with different technologies that may be used by our customers. We
cannot be certain we will be able to adapt our product to any technologies other
than Microsoft’s.
If
our third-party software is not adequately maintained or updated, our sales
could be materially adversely affected.
Our
products utilize certain software of third-party software developers from whom
we have either purchased a license or the underlying source code of such
software. Although we believe that there are alternatives for these products,
any significant interruption in the availability of such third-party software
could have a material adverse impact on our sales unless and until we can
replace the functionality provided by these products. Additionally, we are, to a
certain extent, dependent upon such third parties’ abilities to enhance their
current products, to develop new products on a timely and cost-effective basis
and to respond to emerging industry standards and other technological changes.
We may be unable to replace the functionality provided by the third-party
software currently offered in conjunction with our products in the event that
such software becomes obsolete or incompatible with future versions of our
products or is otherwise not adequately maintained or updated.
If
we are unable to release annual or periodic updates on a timely basis to reflect
changes in tax laws and regulations or other regulatory provisions applicable to
our products, the market acceptance of our products may be adversely affected
and our revenues could decline.
Our
products are affected by changes in tax laws and regulations and generally must
be updated annually or periodically to maintain their accuracy and
competitiveness. We cannot be certain that we will be able to release these
annual or periodic updates on a timely basis in the future. Failure to do so
could have a material adverse effect on market acceptance of our products. In
addition, significant changes in tax laws and regulations or other regulatory
provisions applicable to our products could require us to make a significant
investment in product modifications, which could result in significant
unexpected costs to us.
If
we are unable to protect our proprietary rights against unauthorized third-party
copying or use, our revenues or our methods of doing business could be
negatively impacted.
Our
success is dependent in part on our ability to protect our proprietary rights.
We rely on a combination of copyright, trademark and trade secret laws, as well
as confidentiality agreements and licensing arrangements, to establish and
protect our proprietary rights. We do not have any patents or patent
applications pending, and existing copyright, trademark and trade secret laws
afford only limited protection. As a result, we cannot be certain that we will
be able to protect our proprietary rights against unauthorized third-party
copying or use. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or reverse engineer aspects of our
products or to obtain and use information that we regard as proprietary. In
addition, others may develop products that perform comparably to our proprietary
products. Policing the unauthorized use of our products is
difficult.
Litigation may be
necessary in the future to enforce our intellectual property rights, to protect
our trademarks, copyrights or trade secrets or to determine the validity and
scope of the proprietary rights of others; such litigation may be expensive and
divert the attention of management.
Litigation
may be necessary in the future to enforce our intellectual property rights, to
protect our trademarks, copyrights or trade secrets or to determine the validity
and scope of the proprietary rights of others. Any litigation could result in
substantial costs and diversion of resources and management
attention.
As is
common in the software industry, from time to time we may become aware of
third-party claims of infringement by our operations or products of third-party
proprietary rights. While we are not currently aware of any such claim, our
software products may increasingly be subject to such claims as the number of
products and competitors in our industry grows, as the functionality of products
overlaps and as the issuance of software patents becomes increasingly common.
Any such claims, with or without merit, can be time consuming and expensive to
defend, cause product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to us, or at all.
Defects
and errors in our software could affect market acceptance of our
products.
Software
products such as those offered by us frequently contain undetected errors or
failures when first introduced or as new versions are released. Testing of our
products is particularly challenging because it is difficult to simulate the
wide variety of computing environments in which our customers may use these
products. Despite extensive testing, from time to time we have discovered
defects or errors in our products. Defects and errors may:
|
§
|
Cause
delays in product introductions and
shipments;
|
|
§
|
Result
in increased costs and diversion of development
resources;
|
|
§
|
Require
design modifications; or
|
|
§
|
Decrease
market acceptance of, or customer satisfaction with, our
products.
|
Despite
testing by us and by current and potential customers, errors may be found after
commencement of commercial shipments, which may result in loss of or delay in
market acceptance.
Our
software products may be vulnerable to break-ins and similar disruptive
problems; addressing these issues may be expensive and require a significant
amount of our resources.
We have
included security features in our products that are intended to protect the
privacy and integrity of customer data. Despite the existence of these security
features, our software products may be vulnerable to break-ins and similar
disruptive problems. Addressing these evolving security issues may be expensive
and require a significant amount of our resources.
The
sale and support of software products and the performance of related services by
us entail the risk of product liability claims, which could significantly affect
our financial results.
Customers
use our products in connection with the preparation and filing of tax returns
and other regulatory reports. If any of our products contain errors that produce
inaccurate results upon which users rely, or cause users to misfile or fail to
file required information, we could be subject to liability claims from users.
Our license agreements with our customers typically contain provisions intended
to limit our exposure to such claims, but such provisions may not be effective
in limiting our exposure. Contractual limitations we use may not be enforceable
and may not provide us with adequate protection against product liability claims
in certain jurisdictions. A successful claim for product or service liability
brought against us could result in substantial cost to us and divert
management’s attention from our operations.
Anti-takeover
provisions in our certificate of incorporation and by-laws and under our Amended
and Restated Rights Agreement and Delaware law and our Change in Control Bonus
Plans could substantially increase the cost to acquire us or prevent or delay a
change in control and, as a result, negatively impact our stockholders and the
price of our Common Stock.
We have
taken a number of actions that could have the effect of discouraging a takeover
attempt. For example, we have adopted an Amended and Restated Rights Agreement
that would cause substantial dilution to a stockholder, and substantially
increase the cost paid by a stockholder, who attempts to acquire us on terms not
approved by our Board of Directors. This could prevent us from being acquired.
Our Board of Directors is divided into three classes, each of whose members
serve for a staggered three-year term. This may prevent a stockholder from
gaining control of our Board of Directors quickly.
In
addition, our certificate of incorporation grants our Board of Directors the
authority to fix the rights, preferences and privileges of and issue up to
2,500,000 shares of preferred stock without stockholder approval. Although we
have no present intention to issue shares of preferred stock, such an issuance
could have the effect of making it more difficult and less attractive for a
third-party to acquire a majority of our outstanding voting stock. Preferred
stock may also have other rights, including economic rights senior to our common
stock, which could have a material adverse effect on our stock
price.
We are
also subject to the anti-takeover provisions of Section 203 of Delaware
General Corporation Law. This section provides that a corporation may not engage
in any business combination with any interested stockholder (as defined in that
section) during the three-year period following the time that a stockholder
became an interested stockholder. This provision could have the
effect of delaying or preventing a change in control of our
company.
We have
adopted two Amended and Restated Change in Control Bonus Plans. One plan
provides for the payment of cash amounts to our three named executive officers,
Scott Scherr, Marc D. Scherr and Mitchell K. Dauerman, upon a “change in
control” of Ultimate. The other plan provides for the payment of cash amounts in
the event of a “change in control” to our employees, other than named executive
officers, designated by the Compensation Committee of our Board of Directors. A
“change in control” would occur if more than 50% of our Common Stock were
acquired by a person or entity other than Ultimate or a subsidiary or employee
benefit plan of ours. There are other conditions that could result in a change
in control event such as a sale or transfer of all or substantially all of our
assets or business. The aggregate amount of payment that may be made to all
participants under the two Amended and Restated Change in Control Bonus Plans
may be as much as 6% of the gross consideration received by us or our
stockholders in a change in control transaction. The Change in Control Bonus
Plans could substantially increase the cost to acquire us.
The
growth of the international operations of our business subjects us to additional
risks associated with foreign operations.
International
operations are subject to risks associated with operating outside of the United
States. Our international operations are new. During the
fourth fiscal quarter of 2006, we began operating in the UK (through the
acquisition of a foreign subsidiary) and Canada (through the formation of a
wholly-owned Canadian subsidiary). The financial impact of our
international operations to our overall business has been insignificant to
date. However, over time, our international operations may grow and
increase their significance to our business. Sales to international
customers subject us to a number of risks, including foreign currency
fluctuations, unexpected changes in regulatory requirements for software,
international economic and political instability, compliance with multiple,
conflicting, and changing governmental laws and regulations, difficulty in
staffing and managing foreign operations, international tax laws, potentially
weaker protection for our intellectual property than in the United States, and
difficulties in enforcing such rights abroad. If sales to any of our
customers outside of the United States are delayed or cancelled because of any
of the above factors, our revenue may be negatively impacted.
Our
international operations also increase our exposure to international laws and
regulations. If we are unable to comply with foreign laws and regulations, which
are often complex and subject to variation and unexpected changes, we could
incur unexpected costs and potential litigation.
If
our goodwill or amortizable intangible assets become impaired we may be required
to record a significant charge to earnings.
Under
generally accepted accounting principles, we review our amortizable intangible
assets for impairment when events or changes in circumstances indicate the
carrying value may not be recoverable. Goodwill is required to be
tested for impairment at least annually. Factors that may be
considered in circumstances indicating that the carrying value of our goodwill
or amortizable intangible assets may not be recoverable include a reduction in
our market capitalization (as a result of a decline in our stock price) to a
level below our consolidated stockholders’ equity as of the applicable balance
sheet date, declining future cash flows, and slower growth rates in our
industry. We may be required to record a significant charge to
earnings in our financial statements during the period in which any impairment
of our goodwill or amortizable intangible assets is determined, resulting in a
negative impact on our results of operations.
Changes
in, or interpretations of, accounting principles could result in unfavorable
accounting changes.
We
prepare our consolidated financial statements in conformity with U.S. generally
accepted accounting principles and accompanying accounting pronouncements,
implementation guidelines, and interpretations. Changes in these
rules or their interpretation could significantly change our reported results
and may even retroactively affect previously reported
transactions. Our accounting principles that recently have been or
may be affected by changes in accounting principles include, but are not limited
to: software revenue recognition; accounting for stock-based
compensation; accounting for income taxes; and accounting for business
combinations and related goodwill.
Changes
in, or interpretations of, tax rules and regulations may adversely affect our
effective tax rates.
Unanticipated
changes in our tax rates could affect our future results of
operations. Our future effective tax rates could be unfavorably
affected by changes in tax laws or the interpretation of tax laws, or by changes
in the valuation of our deferred tax assets and liabilities. In
addition, we are subject to the examination of our income tax returns by the
Internal Revenue Service and other domestic and foreign tax
authorities. We regularly assess the likelihood of outcomes resulting
from these examinations to determine the adequacy of our provision for income
taxes. There can be no assurance that these potential examinations
will not have an adverse effect on our operating results and financial
position.
Privacy
concerns could result in regulatory changes that may harm our
business.
Personal
privacy has become a significant issue in the United States and in many other
countries where our customers operate. The United States and many
other countries have imposed restrictions and requirements on the use of
personal information by those collecting such information. Changes to
law or regulations affecting privacy, if applicable to our business or product,
could impose additional costs and potential liability on us and could limit our
use and disclosure of such information. If we were required to change
our business activities or revise or eliminate services, our business could be
harmed.
None.
As of December 31, 2009, Ultimate’s
corporate headquarters, and its principal administrative, development, customer
support, finance, marketing and information technology operations were located
in Weston, Florida. Ultimate’s principal facilities are described
below:
Size
|
Lease
|
||||||
Location
|
(sq.
ft.)
|
Termination
|
General
Use
|
||||
Weston,
FL – HQ
|
39,872
|
1/31/2017
|
Research
and Development
|
||||
Weston,
FL – HQ
|
21,392
|
1/31/2018
|
Executive
Management and Customer Support
|
||||
Atlanta,
GA (1)
|
24,609
|
7/31/2013
|
Professional
Services and Customer Support
|
||||
Atlanta,
GA (2)
|
5,263
|
9/30/2011
|
Professional
Services and Customer Support
|
||||
Weston,
FL – HQ (3)
|
5,000
|
Owned
|
Information
Technology and Hosting Services
|
||||
Weston,
FL – HQ (4)
|
30,000
|
5/31/2015
|
Sales
Administration, Marketing, Professional Services and
Finance
|
||||
Schaumburg,
Illinois (5)
|
7,861
|
6/30/2014
|
Administration
and Training
|
||||
Toronto,
Ontario (6)
|
2,251
|
9/30/2009
|
Professional
Services and Customer Support
|
||||
Toronto,
Ontario (7)
|
2,115
|
12/31/2015
|
Professional
Services and Customer Support
|
||||
Harrogate,
North Yorkshire, England (8)
|
5,063
|
2/20/2010
|
UK
Operations, primarily Research and Development, and Customer
Support
|
_____________________
(1)
|
During
the second fiscal quarter of 2006, Ultimate entered into a 79-month lease
agreement with Galleria 600 LLC, in Atlanta, Georgia. Ultimate
moved a portion of its service and support operations into this building
in August 2006. In August 2006, Ultimate amended the lease to
expand the premises by 10,300 square feet, extend the lease term to 2013
and increase the monthly rental
amount.
|
(2)
|
During
the third fiscal quarter of 2009, Ultimate entered into a 24-month lease
agreement with 300 Galleria Parkway Associates, L.P., a Texas limited
partnership, in Atlanta, Georgia in a building within a short distance of
the other Atlanta, Georgia
location.
|
(3)
|
In
December 2004, Ultimate purchased, with available cash, all the available
square footage of a building adjacent to its main headquarters buildings
that serves as an extension of Ultimate’s corporate
headquarters.
|
(4)
|
In
January 2008, Ultimate entered into an 84-month lease agreement for a
fourth headquarters building located in Weston, Florida within a short
distance of the other three headquarters locations. Ultimate
moved a portion of its operations into this building in June 2008. After
this move, we modified the general use of the remaining three headquarters
locations.
|
(5)
|
During
the fourth quarter of 2008, Ultimate entered into a 65-month lease
agreement for office space in Schaumburg, Illinois to accommodate general
office space and training
facilities.
|
(6)
|
During
the third fiscal quarter of 2006, Ultimate entered into a three-year lease
agreement for office space in Toronto, Ontario, to accommodate future
growth into Canada. This lease terminated September 30,
2009.
|
(7)
|
After
the termination of the lease in Toronto, Ontario (discussed in (6) above),
during the third fiscal quarter of 2009, Ultimate entered into a 64-month
lease agreement for new office space in Toronto, Ontario with RT
Twenty-Sixth Pension Properties Limited to accommodate continued growth in
Canada.
|
(8)
|
As
part of the RTIX Acquisition in the fourth fiscal quarter of 2006,
Ultimate assumed a five-year lease for office space used for the UK
operations. Upon expiration, we did not replace the lease
arrangement as our employees in the UK will work on a virtual
basis.
|
Currently,
we also lease office space for our sales operations in Albany, New York;
Atlanta, Georgia; Dallas, Texas; Detroit, Michigan; Millburn, New Jersey;
Nashville, Tennessee; Lee’s Summit, Missouri; Troy, Michigan; Ann Arbor,
Michigan; Overland Park, Kansas; Jacksonville, Florida; Omaha, Nebraska; and
Prairie Village, Kansas. Sales operations in other locations are not supported
by leased office space. We believe that our existing facilities are
suitable and adequate for our current operations for the next 12 months. We
further believe that suitable space will be available as needed to accommodate
any expansion of our operations on commercially reasonable terms.
From time
to time, we are involved in litigation relating to claims arising out of our
operations in the normal course of business. We are 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 our
operating results or financial condition.
No
matters were submitted to a vote of security holders during the fourth quarter
of 2009.
PART
II
Market
Information. The following table sets forth, for the periods
indicated, the high and low sales prices of Ultimate’s Common Stock, as quoted
on the NASDAQ Global Select Market (“NASDAQ”).
2009
|
2008
|
|||||||||||||||
|
High
|
Low
|
High
|
Low
|
||||||||||||
First
Quarter
|
$ | 18.96 | $ | 12.40 | $ | 32.40 | $ | 25.20 | ||||||||
Second
Quarter
|
26.92 | 16.49 | 41.68 | 29.73 | ||||||||||||
Third
Quarter
|
29.50 | 20.17 | 37.25 | 23.12 | ||||||||||||
Fourth
Quarter
|
31.66 | 24.73 | 26.82 | 10.70 |
As of
February 16, 2010, we had approximately 121 holders of record, representing
approximately 2,176 stockholder accounts.
We have
never declared or paid any cash dividends on our capital stock and do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings to fund the development and growth of our
business. The payment of dividends in the future, if any, will be at the
discretion of our Board of Directors.
Equity Compensation Plan
Information.
The
following table summarizes information related to Ultimate’s equity compensation
plans as of December 31, 2009:
Equity Compensation Plan
Information
|
||||||||||||
Plan
Category
|
(a)
Number of Securities to be Issued upon Exercise of Outstanding Options,
Warrants and Rights
|
(b)
Weighted-Average Exercise Price of Outstanding Options, Warrants and
Rights
|
(c)
Number of Securities Remaining Available for Future Issuance under Equity
Compensation Plans (Excluding Securities Reflected in Column ( a
)
|
|||||||||
Equity
compensation plans approved
|
||||||||||||
by
security holders
|
4,412,444 | $ | 17.79 | 1,164,962 | ||||||||
Equity
compensation plans not approved
|
||||||||||||
by
security holders
|
– | – | – | |||||||||
Total
|
4,412,444 | $ | 17.79 | 1,164,962 |
Performance
Graph. The following graph compares the cumulative total
stockholder returns on Ultimate’s Common Stock for the five year period covering
December 31, 2004-December 31, 2009, on an annual basis, with the cumulative
total return of The Nasdaq Composite Index and the RDG Software Composite Index
for the same period.
Purchases
of Equity Securities by the Issuer. On October 30, 2000,
Ultimate announced that our Board of Directors authorized the repurchase of up
to 1,000,000 shares of our outstanding Common Stock (the “Stock Repurchase
Plan”).
On
February 6, 2007, Ultimate’s Board of Directors extended the Stock Repurchase
Plan by authorizing the repurchase of up to 1,000,000 additional shares of our
issued and outstanding Common Stock.
On
February 5, 2008, Ultimate’s Board of Directors extended the Stock Repurchase
Plan further by authorizing the repurchase of up to 1,000,000 additional shares
of our Common Stock.
On
October 26, 2009, Ultimate’s Board of Directors extended the Stock Repurchase
Plan further by authorizing the repurchase of up to 1,000,000 additional shares
of our Common Stock.
As
of December 31, 2009, Ultimate had purchased 2,985,425 shares of our Common
Stock under the Stock Repurchase Plan, with 1,014,575 shares available for
repurchase in the future. The details of Common Stock repurchases for
the three months ended December 31, 2009 are as follows:
Period
|
Total Number of Shares Purchased
(1)
|
Average Price Paid per
Share
|
Total Cumulative Number of Shares Purchased as
Part of Publicly Announced Plans or Programs
|
Maximum Number of Shares That May Yet Be Purchased
Under the Plans or Programs
|
||||||||||||
October
1 – 31, 2009
|
33,000 | 25.95 | 2,829,825 | 1,170,175 | (2) | |||||||||||
November
1 – 30, 2009
|
155,600 | 26.77 | 2,985,425 | 1,014,575 | ||||||||||||
December
1 – 31, 2009
|
– | – | 2,985,425 | 1,014,575 | ||||||||||||
Total
|
188,600 | $ | 26.68 | 2,985,425 | 1,014,575 | |||||||||||
(1) All
shares were purchased through the publicly announced Stock Repurchase Plan
in open-market transactions.
|
||||||||||||||||
(2)
On October 26, 2009, Ultimate announced that its Board of Directors
authorized the repurchase of up to 1,000,000 additional shares of our
Common Stock pursuant to the Stock Repurchase Plan.
|
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 Condition and Results of Operations” and Ultimate’s Consolidated
Financial Statements and Notes thereto included elsewhere in this Form 10-K. The
statements of operations data presented below for each of the years in the
three-year period ended December 31, 2009 and the balance sheet data as of
December 31, 2009 and 2008 have been derived from our Consolidated Financial
Statements included elsewhere in this Form 10-K.
Years Ended December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
(In
thousands, except per share data)
|
||||||||||||||||||||
Statements
of Operations Data:
|
||||||||||||||||||||
Revenues:
|
||||||||||||||||||||
Recurring
|
$ | 133,411 | $ | 106,681 | $ | 87,017 | $ | 63,935 | $ | 50,259 | ||||||||||
Services
|
59,043 | 60,627 | 49,857 | 38,617 | 27,894 | |||||||||||||||
License
|
4,125 | 11,264 | 14,590 | 12,259 | 10,450 | |||||||||||||||
Total
revenues
|
196,579 | 178,572 | 151,464 | 114,811 | 88,603 | |||||||||||||||
Cost
of revenues:
|
||||||||||||||||||||
Recurring
|
38,910 | 29,754 | 22,798 | 17,875 | 13,740 | |||||||||||||||
Services
|
48,346 | 50,106 | 40,327 | 30,256 | 21,410 | |||||||||||||||
License
|
750 | 1,795 | 1,659 | 1,389 | 709 | |||||||||||||||
Total
cost of revenues
|
88,006 | 81,655 | 64,784 | 49,520 | 35,859 | |||||||||||||||
Gross
profit
|
108,573 | 96,917 | 86,680 | 65,291 | 52,744 | |||||||||||||||
Operating
expenses:
|
||||||||||||||||||||
Sales
and marketing
|
52,810 | 47,193 | 36,479 | 29,382 | 21,783 | |||||||||||||||
Research
and development
|
38,475 | 36,738 | 28,162 | 22,471 | 19,999 | |||||||||||||||
General
and administrative
|
17,874 | 17,623 | 14,434 | 10,648 | 8,131 | |||||||||||||||
Total
operating expenses
|
109,159 | 101,554 | 79,075 | 62,501 | 49,913 | |||||||||||||||
Operating
(loss) income
|
(586 | ) | (4,637 | ) | 7,605 | 2,790 | 2,831 | |||||||||||||
Other
income (expense):
|
||||||||||||||||||||
Interest
and other expense
|
(133 | ) | (279 | ) | (214 | ) | (195 | ) | (225 | ) | ||||||||||
Other
income, net
|
162 | 860 | 6,002 | 1,538 | 819 | |||||||||||||||
Total
other income, net
|
29 | 581 | 5,788 | 1,343 | 594 | |||||||||||||||
Income
(loss) before income taxes
|
(557 | ) | (4,056 | ) | 13,393 | 4,133 | 3,425 | |||||||||||||
(Expense)
benefit for income taxes
|
(585 | ) | 1,159 | 19,736 | – | – | ||||||||||||||
Net
(loss) income
|
$ | (1,142 | ) | $ | (2,897 | ) | $ | 33,129 | $ | 4,133 | $ | 3,425 | ||||||||
Net
(loss) income per share – Basic (1)
|
$ | (0.05 | ) | $ | (0.12 | ) | $ | 1.34 | $ | 0.17 | $ | 0.15 | ||||||||
Net
(loss) income per share – Diluted (1)
|
$ | (0.05 | ) | $ | (0.12 | ) | $ | 1.24 | $ | 0.15 | $ | 0.13 | ||||||||
Weighted
average number of shares outstanding:
|
||||||||||||||||||||
Basic
(1)
|
24,463 | 24,588 | 24,701 | 23,853 | 23,040 | |||||||||||||||
Diluted
(1)
|
24,463 | 24,588 | 26,722 | 26,978 | 26,288 | |||||||||||||||
Balance
Sheet Data:
|
As of December 31,
|
|||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Cash
and cash equivalents
|
$ | 23,684 | $ | 17,200 | $ | 17,462 | $ | 16,734 | $ | 17,731 | ||||||||||
Investments
in marketable securities
|
9,523 | 5,805 | 18,418 | 16,286 | 15,035 | |||||||||||||||
Total
assets
|
171,130 | 147,257 | 135,156 | 93,530 | 69,581 | |||||||||||||||
Deferred
revenue
|
68,559 | 63,494 | 51,708 | 42,969 | 33,031 | |||||||||||||||
Long-term
borrowings, including capital lease obligations
|
1,710 | 1,519 | 2,311 | 1,610 | 1,828 | |||||||||||||||
Stockholders’
equity
|
$ | 57,770 | $ | 51,072 | $ | 60,978 | $ | 31,022 | $ | 23,546 |
(1)
|
See
Note 8 of the Notes to Consolidated Financial Statements for information
regarding the computation of net (loss) income per
share.
|
Our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations provides information we believe is relevant to an assessment and
understanding of our results of operations and financial
condition. This discussion should be read in conjunction with our
Consolidated Financial Statements and Notes that are included in this Form
10-K. Also, the discussion of Critical Accounting Policies and
Estimates in this section is an integral part of the analysis of our results of
operations and financial condition.
Executive
Summary
The
Ultimate Software Group, Inc. and subsidiaries (“Ultimate,” the “Company,” “we,”
“our,” or “us”) designs, markets, implements and supports human resources
(“HR”), payroll and talent management solutions principally in the United States
and Canada.
Ultimate’s
UltiPro software (“UltiPro”) is a comprehensive Internet-based solution
delivered primarily as an online service and designed to deliver the
functionality businesses need to manage the complete employment life cycle from
recruitment to retirement. The solution includes feature sets for talent
acquisition and onboarding, HR management and compliance, benefits management
and online enrollment, payroll, performance management, salary planning and
budgeting for compensation management, reporting and analytical decision-making
tools, time and attendance, and a self-service Web portal for executives,
managers, administrators, and employees.
Our
software-as-a-service (“SaaS”) offering of UltiPro, branded “Intersourcing” (the
“Intersourcing Offering”), provides on-line access to comprehensive human
capital management functionality for organizations that need to simplify the
information technology (“IT”) support requirements of their business
applications. We have found that Intersourcing is attractive to companies that
want to focus on their core competencies to increase sales and profits. Through
the Intersourcing Offering, we supply and manage the hardware, infrastructure,
ongoing maintenance and backup services for our customers. Customer
systems are managed at three data centers, one located in the Miami, Florida
area, one in the Atlanta, Georgia area, and another in Toronto, Canada. All data centers are owned
and operated by independent third parties.
UltiPro
is available as two solution suites based on company size. UltiPro
Enterprise (“Enterprise”) was developed to address the needs of large and very
large companies (companies with 1,000 or more employees) and is delivered either
through SaaS or an on-premise solution. UltiPro Workplace
(“Workplace”) was designed for companies in the mid-market (companies with under
1,000 employees) and is delivered exclusively through SaaS. UltiPro
Workplace provides medium-sized and smaller companies with nearly all the
features that larger Enterprise companies have with UltiPro, plus a bundled
services package. Since many companies in this market do not have IT staff on
their premises to help with system issues, UltiPro Workplace is designed to give
these customers a high degree of convenience by handling system setup, business
rules, and other situations for customers “behind the
scenes.” UltiPro is marketed primarily through Ultimate’s Enterprise
and Workplace direct sales teams.
In
addition to UltiPro’s core HR/payroll functionality, Ultimate’s customers have
the option to purchase a number of additional features on a
per-employee-per-month (or “PEPM”) basis, which are available to enhance the
functionality of UltiPro’s core features based on certain business needs of the
customers. These optional UltiPro features currently include (i) the
talent management suite of products (recruitment, onboarding, performance
management, and salary planning and budgeting for compensation management, and
employee relations tools for managing disciplinary actions, grievances, and
succession planning); (ii) benefits enrollment; (iii) time, attendance and
scheduling; (iv) time management, (v) tax filing; (vi) wage attachments; and
(vii) other optional features (collectively, UltiPro “Optional Features”). All
Optional Features are individually priced solely on a subscription basis with
some of the Optional Features available to both Enterprise and Workplace
customers while others are available exclusively to either Enterprise or
Workplace customers, based on the needs of the respective customers, including
their employee size and the complexity of their HR/payroll
environment.
Ultimate
has two primary revenue sources: recurring revenues and services
revenues. Intersourcing revenues and maintenance revenues are the
primary components of recurring revenues in Ultimate’s audited consolidated
statements of operations. The majority of services revenues are
derived from implementation services and, to a lesser extent, training services.
In addition to recurring revenues and services revenues, Ultimate has marketed
UltiPro on a perpetual license basis since its inception, through which it has
recognized license revenues. For 2007, 2008 and 2009, license
revenues, as a percentage of total revenues, represented 9.6%, 6.3% and 2.1%,
respectively.
Effective
April 1, 2009, Ultimate discontinued selling its on-site UltiPro solutions to
new customers on a perpetual license basis, although we continue to sell on-site
UltiPro solutions on a subscription basis (priced and billed to customers on a
PEPM basis). We do sell licenses to existing license customers but only in
relation to the customer’s employee growth or for products complementary to
UltiPro for which they already have a perpetual license. After the
elimination of new sales of perpetual licenses, the variable costs associated
with licenses, such as sales commissions, have also been eliminated. However,
there remain certain fixed third-party costs that were formerly allocated to
costs of license revenues (in proportion to their contribution to the total
sales mix) which have been shifted to costs of recurring revenues. As perpetual
license agreements were sold, annual maintenance contracts (priced as a
percentage of the related license fee) accompanied those
agreements. Maintenance contracts typically have a one-year term with
annual renewal periods thereafter. We have historically maintained a
steady customer retention rate for our renewal maintenance agreements and do not
believe our decision to discontinue new sales of perpetual license agreements
will materially affect our future maintenance revenues (as they relate to
existing license customers).
As
Intersourcing units are sold, the recurring revenue backlog associated with
Intersourcing grows, enhancing the predictability of future revenue
streams. Intersourcing sales include a one-time upfront (or setup)
fee, priced on a per-employee basis, and ongoing monthly fees, priced on a PEPM
basis. Revenue recognition for Intersourcing is triggered when the
related customer processes its first payroll (or goes “Live”). When
an Intersourcing customer goes Live, the related upfront fees are recognized as
recurring subscription revenues ratably over the term of the related contract
(typically 24 months) and we begin recognizing the associated ongoing monthly
PEPM fees.
Significant
Transaction
Ultimate
and Ceridian Corporation (“Ceridian”) signed an agreement in 2001, as
subsequently amended, granting Ceridian a non-exclusive license to use UltiPro
as part of an on-line offering for Ceridian to market primarily to businesses
with less than 500 employees (the “Original Ceridian Agreement”). During
December 2004, RSM McGladrey Employer Services (“RSM”), a former business
service provider (“BSP”) of Ultimate, acquired Ceridian’s product and existing
base of small and mid-size business customers throughout the United States (the
“RSM Acquisition”). The financial terms of the Original Ceridian
Agreement did not change as a result of the RSM Acquisition. Subsequent to the
RSM Acquisition, Ceridian continued to be financially obligated to pay, and did
pay, Ultimate minimum fees pursuant to the terms of the Original Ceridian
Agreement. The Original Ceridian Agreement was terminated by Ceridian
pursuant to its terms on March 9, 2008. During its term, Ceridian
paid the aggregate minimum $42.7 million which was due under the Original
Ceridian Agreement on a cumulative basis since the inception of the
arrangement. The amount of subscription revenues
recognized under the Original Ceridian Agreement during the year ended December
31, 2008 was $1.5 million (through the effective date of the termination of the
Original Ceridian Agreement) and $7.7 million for the year ended December 31,
2007. No revenue was recognized under the Original Ceridian Agreement
during the year ended December 31, 2009.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles in the United States (“GAAP”) 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
Our
revenues are generated from the delivery of subscription services (including the
right to use UltiPro and software maintenance services), professional services
and, to a much lesser degree, the sale of software licenses.
We
recognize revenues when all of the following criteria are met:
·
|
persuasive
evidence of an arrangement exists;
|
·
|
delivery
has occurred;
|
·
|
the
fees are fixed and determinable;
and
|
·
|
collection
is considered probable.
|
If
collection is not considered probable, we recognize revenues when the fees are
collected. If the fees are not fixed and determinable, we recognize revenues
when the fees become due from the customer. If non-standard acceptance periods
or non-standard performance criteria are required, we recognize revenue when the
acceptance period expires or upon the satisfaction of the acceptance/performance
criteria, as applicable.
Under
subscriptions, our customers do not have the right to take possession of our
software and, in accordance with Accounting Standards Codification (“ASC”) 985,
“Software” (“ASC 985”), (formerly Emerging Issues Task Force (“EITF”) Issue
00-3, “Application of AICPA Statement of Position (“SOP”) 97-2 to Arrangements
That Include the Right to Use Software Stored on Another Entity’s Hardware”
(“EITF 00-3”), these arrangements are considered service contracts which are
outside the scope of ASC 985 (formerly SOP 97-2, “Software Revenue Recognition”
(“SOP 97-2”). Therefore, we account for subscription services under ASC 605,
“Revenue Recognition” (“ASC 605”) (formerly Staff Accounting Bulletin 104,
“Revenue Recognition” and EITF 00-21, “Revenue Arrangements with Multiple
Deliverables” (“EITF 00-21”)). Subscription revenues are recognized ratably over
the length of the agreement, commencing upon the delivery of the product and
services, which is when the customer processes its first live payroll using
UltiPro (also referred to as going “Live”). Fair value of multiple elements in
Intersourcing arrangements is assigned to each element based on the guidance
provided by ASC 605 (formerly ETIF 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. 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 and they are not reported
separately. Fair value for the bundled elements, as a whole, is based
upon evidence provided by our pricing for Intersourcing arrangements sold
separately. These bundled elements are provided on an ongoing basis
and represent undelivered elements under ASC 605 (formerly ETIF 00-21); they are
recognized on a monthly basis as the services are performed, once the customer
goes Live. If
evidence of the fair value of one or more undelivered elements does not exist,
the revenue for the total arrangement is deferred and recognized when delivery
of those elements occurs or when fair value can be
established.
Recurring
revenues consist of subscription revenues recognized from Ultimate’s
Intersourcing SaaS offerings of UltiPro, as well as maintenance
revenues.
a)
|
Subscription
revenues are principally derived from upfront or setup fees and PEPM fees
earned from the Intersourcing Offering and from sales of
hosting services on a stand-alone basis to customers who already own a
perpetual license (“Base Hosting”). To the extent there are upfront
or setup fees associated with the Intersourcing Offering and Base Hosting,
subscription revenues are recognized ratably over the minimum term of the
related contract commencing upon the related Live date. Ongoing
PEPM fees from the Intersourcing Offering and Base Hosting are recognized
as subscription revenues as the services are delivered when the customer
goes Live.
|
b)
|
Maintenance
revenues are derived from maintaining, supporting, and providing periodic
updates of our software. Maintenance and support fees are generally priced
as a percentage of the initial perpetual license fee for the underlying
products. Maintenance revenues are recognized ratably over the
service period, generally one year. Annual maintenance renewal
fees which occur subsequent to the initial contract period are also
recognized ratably over the related service
period.
|
Services
revenues include revenues from fees charged for the implementation of Ultimate’s
product solutions and training of customers in the use of our products, fees for
other services, including the provision of payroll-related forms and the
printing of Forms W-2 for certain customers, as well as certain reimbursable
out-of-pocket expenses. Revenues from implementation services
comprise the majority of total services revenues. Revenues from
implementation consulting services and training services are recognized as these
services are performed based on their relative fair values. Under ASC
605 (formerly 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. Other services are
recognized as the product is shipped or as the services are rendered, depending
on the specific terms of the related arrangement.
Fees
related to services sold on a fixed-fee basis 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 the implementation job. If a sufficient basis to measure the
progress towards completion does not exist, revenue is recognized when the
project is completed or when Ultimate receives final acceptance from the
customer.
From our
inception through March 31, 2009, we sold perpetual licenses of UltiPro which
resulted in license revenues recognized pursuant to ASC 985-605 (formerly SOP
97-2) for that period of time. While we still sell on-site licenses
of UltiPro, sales to new customers are only on a subscription basis (priced and
billed to our customers on a PEPM basis). Effective April 1, 2009, we
no longer sell our on-site UltiPro solutions to new customers on a perpetual
license basis. We do sell licenses to existing license customers but only in
relation to the customer’s employee growth or for products complementary to
UltiPro for which they already have a perpetual license. Any such licenses are
recognized as license revenues in our financial statements upon the delivery of
the related software product when all significant contractual obligations have
been satisfied, in accordance with ASC 985-605 (formerly SOP 97-2).
Income
Taxes
We make certain estimates and judgments
in determining income tax expense for financial statement
purposes. These estimates and judgments occur in the calculation of
certain tax assets and liabilities, which arise from differences in the timing
of recognition of revenue and expense for tax and financial statement
purposes.
Ultimate assesses the likelihood that
it will be able to recover its deferred tax assets. Management
considers all available evidence, both positive and negative, including
historical levels of income, expiration of net operating loss carryforwards,
expectations and risks associated with estimates of future taxable income and
ongoing prudent and feasible tax planning strategies as well as current tax laws
and interpretation of current tax laws in assessing the need for a valuation
allowance. If recovery is not likely, we record a valuation allowance
against the deferred tax assets that we estimate will not ultimately be
recoverable. The available positive evidence at December 31, 2009
included, among other factors, three years of cumulative historical operating
profits and a projection of future financial and taxable income. As a
result of our analysis of all available evidence, both positive and negative, at
December 31, 2009, it was considered more likely than not that a full valuation
allowance for deferred tax assets was not required.
As of December 31, 2009, we believe it
is more likely than not that the amount of the deferred tax assets recorded on
the consolidated balance sheet will ultimately be recovered. However,
should there be a change in our ability to recover the deferred tax assets, the
tax provision would increase in the period in which it is determined that
recovery is not probable.
Stock-Based
Compensation
Effective
January 1, 2006, we adopted the fair value recognition provisions of ASC 718,
“Compensation – Stock Compensation,” (“ASC 718”) (formerly SFAS No. 123R,
“Share-Based Payment” (“SFAS 123R”)), using the modified-prospective transition
method. Under this transition method, compensation was recognized beginning
January 1, 2006 and includes (a) compensation expense for all share-based
employee compensation arrangements granted prior to, but not yet vested as of,
January 1, 2006, based on the grant date fair value estimated in accordance with
the original provisions of SFAS No. 123 “Share-Based Payment”, and (b)
compensation expense for all share-based employee compensation arrangements
granted subsequent to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of ASC 718. In accordance
with ASC 718, we capitalize the portion of stock-based compensation attributed
to internally developed software. Under the provisions of ASC 718, we
recognize the fair value of stock-based compensation in the financial statements
on a straight-line basis over the requisite service period of the individual
grants. See Note 3 “Summary of Significant Accounting Policies and
Recent Accounting Pronouncements” and Note 16 “Stock Based Compensation and
Equity” in the Notes to Consolidated Financial Statements for further
disclosure. Estimates are used in determining the fair value of such
awards. Changes in these estimates could result in changes to our
compensation charges.
Results
of Operations
The
following table sets forth the consolidated statements of operations data of
Ultimate, as a percentage of total revenues, for the periods
indicated.
For
the Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Revenues:
|
||||||||||||
Recurring
|
67.9 | % | 59.7 | % | 57.5 | % | ||||||
Services
|
30.0 | 34.0 | 32.9 | |||||||||
License
|
2.1 | 6.3 | 9.6 | |||||||||
Total
revenues
|
100.0 | 100.0 | 100.0 | |||||||||
Cost
of revenues:
|
||||||||||||
Recurring
|
19.8 | 16.7 | 15.1 | |||||||||
Services
|
24.5 | 28.0 | 26.6 | |||||||||
License
|
0.4 | 1.0 | 1.1 | |||||||||
Total
cost of revenues
|
44.7 | 45.7 | 42.8 | |||||||||
Gross
profit
|
55.3 | 54.3 | 57.2 | |||||||||
Operating
expenses:
|
||||||||||||
Sales
and marketing
|
26.9 | 26.4 | 24.1 | |||||||||
Research
and development
|
19.6 | 20.6 | 18.6 | |||||||||
General
and administrative
|
9.1 | 9.9 | 9.5 | |||||||||
Total
operating expenses
|
55.6 | 56.9 | 52.2 | |||||||||
Operating
(loss) income
|
(0.3 | ) | (2.6 | ) | 5.0 | |||||||
Other
income (expense):
|
||||||||||||
Interest
and other expense
|
(0.1 | ) | (0.1 | ) | (0.1 | ) | ||||||
Other
income, net
|
0.1 | 0.5 | 4.0 | |||||||||
Total
other income, net
|
– | 0.4 | 3.9 | |||||||||
(Loss)
income before income taxes
|
(0.3 | ) | (2.2 | ) | 8.9 | |||||||
(Expense)
benefit for income taxes
|
(0.3 | ) | 0.6 | 13.0 | ||||||||
Net
(loss) income
|
(0.6 | )% | (1.6 | )% | 21.9 | % |
Comparison
of Fiscal Years Ended December 31, 2009 and 2008
Revenues
Our
revenues are derived from recurring revenues, services revenues and, to a lesser
extent, license revenues. See “Revenue Recognition” (above) for
further discussion of Ultimate’s revenue sources and its method of accounting
for each of them.
Total
revenues, consisting of recurring, services and license revenues, increased
10.1% to $196.6 million for 2009 from $178.6 million for 2008.
Recurring
revenues increased 25.1% to $133.4 million for 2009 from $106.7 million for
2008. The increases in recurring revenues for 2009 were primarily due
to increases in Intersourcing revenues and, to a lesser extent, maintenance
revenues, partially offset by a decrease in subscription revenues from the
Original Ceridian Agreement, as described below:
|
a)
|
Intersourcing
revenues increased 39.6% for 2009, primarily due to the continued growth
of the Intersourcing Offering, which comprised the majority of unit sales.
The increase in Intersourcing revenues is based on the revenue impact of
incremental units that have gone Live since December 31, 2008, including
the UltiPro core product and, to a lesser extent, Optional Features of
UltiPro. Intersourcing revenues from the UltiPro Workplace
solution in 2009 also contributed to the year-over-year growth,
particularly since this solution was introduced late in 2007 and was
ramping up in 2008. Recognition of recurring revenues for
Intersourcing sales commences upon the Live date. Our 2009 twelve month
recurring revenue retention rate of 97% for existing Intersourcing
customers also contributed to the growth in Intersourcing revenues when
combined with incremental revenues resulting from additional customers
going Live in 2009 as compared to
2008.
|
|
b)
|
Maintenance
revenues from license sales increased 1.1% primarily due to annual price
increases to existing customers combined with our current twelve month
recurring revenue retention rate of 97%. We also converted some
of our existing maintenance customers to Intersourcing, which contributed
to the marginal increase in maintenance revenues. Maintenance
revenues are recognized over the initial term of the related license
contract, which is typically 12 months, and then on a monthly recurring
basis thereafter as the maintenance contracts renew
annually. Since we stopped selling licenses on a perpetual
basis to new customers effective April 1, 2009, we do not expect to have
significant increases in our maintenance
revenues.
|
|
c)
|
The
impact on recurring revenues of units sold under the Intersourcing
Offering has been a gradual increase from one period to the next, based on
the incremental effect of revenue recognition of the Intersourcing fees
over the terms of the related contracts as sales in backlog go
Live.
|
|
d)
|
Subscription
revenues decreased 40.4% in 2009. This decrease was primarily
due to the termination of the Original Ceridian Agreement effective March
9, 2008, at which time the related revenue recognition ended. There was no
revenue recognized in 2009 under the Original Ceridian
Agreement. In 2008, revenue recognized under the Original
Ceridian Agreement amounted to $1.5
million.
|
Services
revenues decreased 2.6% to $59.0 million for 2009 from $60.6 million for 2008
primarily as a result of a decrease in training revenues mainly attributable to
decreased classroom attendance, lower virtual training revenues and lower
revenues from on-site training. Implementation revenues were
comparable to those of the prior year due to higher billable hours from
increased utilization of our revenue-generating consultants offset by fewer
hours from third-party implementation partners (or “IPs”).
License
revenues decreased 63.4% to $4.1 million for 2009 from $11.3 million for
2008. The decrease in 2009 was principally due to Ultimate’s decision
not to sell perpetual licenses to new customers after April 1,
2009.
Cost
of Revenues
Cost of
revenues primarily consists of the costs of recurring and services revenues.
Cost of recurring revenues primarily consists of costs to provide maintenance
and technical support to our customers, the cost of providing periodic updates
and the cost of recurring subscription revenues, including amortization of
capitalized software. Cost of services revenues primarily consists of costs to
provide implementation services and training to our customers and, to a lesser
degree, costs related to sales of payroll-related forms and costs associated
with certain client reimbursable out-of-pocket expenses.
Cost of
recurring revenues increased 30.8% to $38.9 million for 2009 from $29.8 million
for 2008. The $9.1 million increase in cost of recurring revenues for
the year was primarily due to increases in both Intersourcing costs and
maintenance costs as described below:
|
a) The increase in
Intersourcing costs was principally as a result of the growth in
Intersourcing operations and increased sales, including higher
depreciation and amortization of related computer equipment supporting the
hosting operations, increased Microsoft licenses for our customer base,
increased hosting data center costs and, to a lesser extent, increased
labor costs, amortization of capitalized software and increased
third-party royalty fees for UltiPro time, attendance and scheduling
sales.
|
|
b) The
increase in maintenance costs was primarily due to higher labor costs
commensurate with the growth in the number of customers
serviced.
|
Cost of
services revenues decreased 3.5% to $48.3 million for 2009 from $50.1 million
for 2008. The $1.8 million decrease in costs of services revenues was
primarily due to a decrease in implementation costs, which was mainly
attributable to lower costs for third-party IPs as we had fewer hours worked by
third-party IPs in 2009, partially offset by an increase in labor costs
associated with building the Workplace implementation
infrastructure.
Cost of
license revenues decreased by $1.0 million, or 58.2%, to $0.8 million for 2009
from $1.8 million in 2008. This decrease was principally due to fewer
units sold due to our decision not to sell perpetual licenses to new customers
effective April 1, 2009.
Sales
and Marketing
Sales and
marketing expenses consist primarily of salaries and benefits, sales
commissions, travel and promotional expenses, and facility and communication
costs for direct sales offices, as well as advertising and marketing costs.
Sales and marketing expenses increased 11.9% to $52.8 million for 2009 from
$47.2 million for 2008. The $5.6 million increase for the year was
primarily due to increased labor and related costs attributable to hiring
additional direct sales force personnel (particularly for our Workplace sales
organization) and higher sales commissions principally related to increased
Intersourcing sales. The overall increase was partially offset by
lower commissions on license sales which correlate to the decrease in license
revenues. Commissions on license sales are recognized when the
license revenues are recognized, which is typically when the product is
shipped. Commissions on Intersourcing sales are amortized over the
initial contract term (typically 24 months) commencing on the Live date, which
corresponds with the commencement of Intersourcing revenue
recognition.
Research
and Development
Research
and development expenses consist primarily of software development personnel
costs. Research and development expenses increased 4.7% to $38.5 million in 2009
from $36.7 million in 2008. The increase in research and development
expenses during 2009 was principally due to higher labor costs related to the
ongoing development of UltiPro and complementary products, including the impact
of increased personnel costs (predominantly from additional headcount),
partially offset by decreased third-party consulting costs.
General
and administrative
General
and administrative expenses consist primarily of salaries and benefits of
executive, administrative and financial personnel, as well as external
professional fees and the provision for doubtful accounts. General and
administrative expenses increased by 1.4% to $17.9 million for 2009 from $17.6
million for 2008. The increase for 2009 was primarily due to
increased professional fees and, to a lesser extent, increased third-party
consulting fees, partially offset by lower bad debt expense.
Interest
and Other Expense
Interest
and other expense decreased $146 thousand, or 52.3%, to $133 thousand for 2009
from $279 thousand for 2008.
Interest
and Other Income, net
Interest
and other income, net, decreased by 81.2% to $0.2 million for 2009 from $0.8
million for 2008 primarily due to a decrease in interest rates.
(Expense)
Benefit for Income Tax
In 2009,
we had income tax expense of $0.6 million as compared to an income tax benefit
of $1.2 million in 2008. The increase in income tax expense of $1.8
million is primarily due to increased pre-tax book income, non-deductible
expenses and our foreign valuation allowance. Net operating loss
carryforwards available at December 31, 2009, expiring at various times from
2011 through 2029 and which are available to offset future U.S. taxable income,
approximated $82.1 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 our equity instruments.
We
recognized $20.9 million of deferred tax assets, net of deferred tax
liabilities, as of December 31, 2009. If estimates of taxable income
are decreased, a valuation allowance may need to be provided for some or all
deferred tax assets, which will cause an increase in income tax
expense.
Comparison
of Fiscal Years Ended December 31, 2008 and 2007
Revenues
Total
revenues, consisting of recurring, services and license revenues, increased
17.9% to $178.6 million for 2008 from $151.5 million for 2007.
Recurring
revenues increased 22.6% to $106.7 million for 2008 from $87.0 million for
2007. The increases in recurring revenues for 2008 were primarily due
to increases in subscription revenues from the Intersourcing Offering and, to a
lesser extent, maintenance revenues, partially offset by a decrease in
subscription revenues from the Original Ceridian Agreement, as described
below:
|
a)
|
Intersourcing
revenues increased 48.5% for 2008, primarily due to the continued growth
of the Intersourcing Offering, which comprised the majority of unit sales.
The increase in Intersourcing revenues was based on the revenue impact of
incremental units that have gone Live since December 31, 2007, including
the UltiPro core product and, to a lesser extent, Optional Features of
UltiPro. Intersourcing revenues from the UltiPro Workplace
solution in 2008 also contributed to the year-over-year growth,
particularly since this solution was introduced after September 30,
2007. Recognition of recurring revenues for Intersourcing sales
commences upon the Live date. Our twelve month retention rate of 97% for
existing Intersourcing customers also contributed to the growth in
Intersourcing revenues when combined with incremental revenues resulting
from additional customers going Live in 2008 as compared to
2007.
|
|
b)
|
Maintenance
revenues from license sales increased 9.0% due to cumulative net increases
in the customer base subsequent to December 31, 2007 due to incremental
license sales since such date. Maintenance revenues are
recognized over the initial term of the related license contract, which is
typically 12 months, and then on a monthly recurring basis thereafter as
the maintenance contracts renew annually. Our twelve month
retention rate of 96% for existing customers’ annual maintenance renewals
during 2008, combined with the annual price increases, also contributed to
the increase in maintenance
revenues.
|
|
c)
|
The
impact on recurring revenues of units sold under the Intersourcing
Offering has been a gradual increase from one period to the next, based on
the incremental effect of revenue recognition of the Intersourcing fees
over the terms of the related contracts as sales in backlog go
Live.
|
|
d)
|
Subscription
revenues decreased 58.0% in 2008. This decrease was primarily
due to the termination of the Original Ceridian Agreement effective March
9, 2008, at which time the related revenue recognition ended. In 2008,
revenue recognized under the Original Ceridian Agreement, amounted to $1.5
million as compared to $7.7 million in
2007.
|
Services
revenues increased 21.6% to $60.6 million for 2008 from $49.9 million for 2007
primarily as a result of an increase in implementation revenues, which was
primarily due to additional billable hours, a higher net rate per hour and, to a
lesser extent, increased implementation revenues recognized for the new
Workplace sales. The additional billable hours stemmed from an
increase in the number of revenue-generating consultants (as we hired more
implementation personnel to accommodate the increased sales growth) as well as
additional hours worked by third-party IPs. The net rate per hour for
2008 was higher than that for 2007 as the blended rate on a time and materials
basis increased. Implementation revenues from UltiPro Workplace increased
primarily as a result of the increased volume in UltiPro Workplace sales (as
compared to 2007 which did not have a full year of Workplace unit
sales).
License
revenues decreased 22.8% to $11.3 million for 2008 from $14.6 million for
2007. The decrease in 2008 was principally due to a lower number of
units sold with more unit sales concentrated in the Intersourcing
Offering.
Cost
of Revenues
Cost of
recurring revenues increased 30.5% to $29.8 million for 2008 from $22.8 million
for 2007. The $7.0 million increase in cost of recurring revenues for
the year was primarily due to increases in both Intersourcing costs and
maintenance costs as described below:
|
a) The
increase in Intersourcing costs was principally due to the growth in
Intersourcing operations associated with increased sales, including higher
operating costs such as depreciation and amortization of related computer
equipment supporting the hosting operations, increased third-party royalty
fees for UTA sales, increased labor costs and increased hosting data
center costs. In addition, there was increased amortization for
UltiPro Canadian HR/payroll (“UltiPro Canada”) due to the general release
of UltiPro Canada in the fourth quarter of 2007 and the resulting
commencement of the amortization of the capitalized costs at that time as
compared to a full year’s amortization in
2008.
|
|
b) The
increase in maintenance costs was primarily related to increased labor
costs commensurate with the growth in the number of customers
served.
|
Cost of
services revenues increased 24.2% to $50.1 million for 2008 from $40.3 million
for 2007. The $9.8 million increase in costs of services revenues was
primarily due to increased implementation costs. The increase in
implementation costs was mainly attributable to labor costs associated with
growing the implementation infrastructure (predominantly billable consultants)
to accommodate the overall growth in unit sales and, to a lesser extent,
increased costs for third-party IPs which correlate with the increased
implementation revenues generated from the work performed by IPs.
Cost of
license revenues increased by $0.1 million, or 8.2%, to $1.8 million for 2008
from $1.7 million in 2007. This slight increase was principally due
to increased amortization for UltiPro Canada due to the general release of
UltiPro Canada in the fourth quarter of 2007 and the resulting commencement of
the amortization of the capitalized costs.
Sales
and Marketing
Sales and
marketing expenses increased 29.4% to $47.2 million for 2008 from $36.5 million
for 2007. The $10.7 million increase for the year was primarily due
to increased labor and related costs attributable to hiring additional direct
sales force personnel (particularly for Ultimate’s Workplace sales organization)
and higher sales commissions principally related to increased Intersourcing
sales. Marketing expenses associated with the investment in the Workplace
solution also increased in comparison to 2007. The overall increase
was partially offset by lower commissions on license sales which correlate to
the decrease in license revenues. Commissions on license sales are
recognized when the license revenues are recognized, which is typically when the
product is shipped. Commissions on Intersourcing sales are amortized
over the initial contract term (typically 24 months) commencing on the Live
date, which corresponds with the commencement of Intersourcing revenue
recognition.
Research
and Development
Research
and development expenses increased 30.5% to $36.7 million in 2008 from $28.2
million in 2007. The increases in research and development expenses
during 2008 was principally due to higher labor costs related to the ongoing
development of UltiPro and complementary products, including the impact of
increased personnel costs (predominantly from additional headcount) and
increased third-party consulting costs, and, to a lesser extent, a net reduction
in capitalized labor costs. Capitalization of costs for UltiPro Canada ended in
November 2007 (upon its general release) and certain labor costs were
capitalized in 2008 in relation to Onboarding which had its general release in
the first quarter of 2009.
General
and administrative
General
and administrative expenses increased 22.1% to $17.6 million for 2008 from $14.4
million for 2007. The increase for 2008 was primarily due to
increased labor and related costs (resulting from additional personnel costs to
support our growth).
Interest
and Other Expense
Interest
and other expense increased $65 thousand, or 30.4%, to $279 thousand for 2008
from $214 thousand for 2007.
Interest
and Other Income, net
Interest
and other income, net, decreased to $0.8 million for 2008 from $6.0 million for
2007 primarily because in 2007, we received a non-recurring cash settlement fee
of $4.4 million, net of related costs, resulting from the early termination in
2007 of a multi-year business arrangement with one of our BSP’s that decided to
exit the payroll business. In addition, in 2008, we had a decrease in
interest income due to less cash, cash equivalents and marketable securities and
a decrease in interest rates.
Income
Tax Benefit, net
The
income tax benefit decreased by 94.1% during the year ended December 31, 2008
due to the fact that in 2007 we recorded an income tax benefit of $19.9 million
primarily related to the release of the valuation allowance against deferred tax
assets, partially offset by a provision for income tax of $115
thousand. Net operating loss carryforwards available at December 31,
2008, expiring at various times from 2011 through 2028 and which are available
to offset future taxable income, approximated $73.9 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
our equity instruments.
We
recognized $20.9 million of deferred tax assets, net of deferred tax
liabilities, as of December 31, 2008. If estimates of taxable income
are decreased, a valuation allowance may need to be provided for some or all
deferred tax assets, which will cause an increase in income tax
expense.
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, 2009 and 2008. 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 Ultimate’s Consolidated Financial
Statements and Notes thereto, included elsewhere in this Form 10-K.
Our quarterly
revenues and operating results have varied significantly in the past and are
likely to vary substantially from quarter to quarter in the future. Our
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, sales and marketing and the use of third-party consultants), timing
of product releases, increased competition, variations in the mix of revenues,
announcements of new products by us or our competitors and capital spending
patterns of our customers. We establish our expenditure levels based upon our
expectations as to future revenues, and, if revenue levels are below
expectations, expenses can be disproportionately high. A drop in near term
demand for our 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 we
will be able to achieve or maintain profitability on a quarterly basis. We
believe that, due to the underlying factors for quarterly fluctuations,
quarter-to-quarter comparisons of Ultimate’s operations are not necessarily
meaningful and that such comparisons should not be relied upon as indications of
future performance.
Quarters
Ended
|
Dec.
31, 2009
|
Sep.
30, 2009
|
Jun.
30, 2009
|
Mar.
31, 2009
|
Dec.
31, 2008
|
Sep.
30, 2008
|
Jun.
30, 2008
|
Mar.
31, 2008
|
||||||||||||||||||||||||
(In
thousands, except per share amount)
|
||||||||||||||||||||||||||||||||
(Unaudited)
|
||||||||||||||||||||||||||||||||
Revenues:
|
||||||||||||||||||||||||||||||||
Recurring
|
$ | 35,747 | $ | 34,153 | $ | 32,623 | $ | 30,888 | $ | 28,870 | $ | 26,738 | $ | 25,377 | $ | 25,696 | ||||||||||||||||
Services
|
15,912 | 13,792 | 13,409 | 15,930 | 18,340 | 15,002 | 13,165 | 14,120 | ||||||||||||||||||||||||
License
|
598 | 252 | 1,274 | 2,001 | 2,482 | 2,172 | 2,957 | 3,653 | ||||||||||||||||||||||||
Total
revenues
|
52,257 | 48,197 | 47,306 | 48,819 | 49,692 | 43,912 | 41,499 | 43,469 | ||||||||||||||||||||||||
Cost
of revenues:
|
||||||||||||||||||||||||||||||||
Recurring
|
10,478 | 9,959 | 9,567 | 8,906 | 8,300 | 7,927 | 7,002 | 6,525 | ||||||||||||||||||||||||
Services
|
13,314 | 11,593 | 11,112 | 12,327 | 15,476 | 12,751 | 10,580 | 11,299 | ||||||||||||||||||||||||
License
|
152 | – | 261 | 337 | 440 | 463 | 464 | 428 | ||||||||||||||||||||||||
Total
cost of revenues
|
23,944 | 21,552 | 20,940 | 21,570 | 24,216 | 21,141 | 18,046 | 18,252 | ||||||||||||||||||||||||
Gross
profit
|
28,313 | 26,645 | 26,366 | 27,249 | 25,476 | 22,771 | 23,453 | 25,217 | ||||||||||||||||||||||||
Operating
expenses:
|
||||||||||||||||||||||||||||||||
Sales
and marketing
|
13,042 | 13,049 | 12,884 | 13,835 | 11,645 | 12,483 | 11,236 | 11,829 | ||||||||||||||||||||||||
Research
and development
|
9,615 | 9,940 | 9,582 | 9,338 | 8,648 | 9,912 | 9,299 | 8,879 | ||||||||||||||||||||||||
General
and administrative
|
4,635 | 4,351 | 4,331 | 4,557 | 4,225 | 4,697 | 4,405 | 4,296 | ||||||||||||||||||||||||
Total
operating expenses
|
27,292 | 27,340 | 26,797 | 27,730 | 24,518 | 27,092 | 24,940 | 25,004 | ||||||||||||||||||||||||
Operating
income (loss)
|
1,021 | (695 | ) | (431 | ) | (481 | ) | 958 | (4,321 | ) | (1,487 | ) | 213 | |||||||||||||||||||
Interest
and other expense
|
(22 | ) | (29 | ) | (38 | ) | (44 | ) | (97 | ) | (42 | ) | (61 | ) | (79 | ) | ||||||||||||||||
Other
income, net
|
21 | 30 | 39 | 72 | 104 | 177 | 222 | 357 | ||||||||||||||||||||||||
Total
other income, net
|
(1 | ) | 1 | 1 | 28 | 7 | 135 | 161 | 278 | |||||||||||||||||||||||
Income
(loss) before income taxes
|
1,020 | (694 | ) | (430 | ) | (453 | ) | 965 | (4,186 | ) | (1,326 | ) | 491 | |||||||||||||||||||
Income
tax benefit (expense), net
|
(950 | ) | 225 | 100 | 40 | (350 | ) | 1,135 | 575 | (201 | ) | |||||||||||||||||||||
Net
income (loss)
|
$ | 70 | $ | (469 | ) | $ | (330 | ) | $ | (413 | ) | $ | 615 | $ | (3,051 | ) | $ | (751 | ) | $ | 290 | |||||||||||
Weighted
average shares outstanding:
|
||||||||||||||||||||||||||||||||
Basic
|
24,604 | 24,539 | 24,414 | 24,292 | 24,389 | 24,613 | 24,670 | 24,682 | ||||||||||||||||||||||||
Diluted
|
26,590 | 24,539 | 24,414 | 24,292 | 25,567 | 24,613 | 24,670 | 26,460 | ||||||||||||||||||||||||
Net
earnings (loss) per share
|
||||||||||||||||||||||||||||||||
Basic
|
$ | – | $ | ( 0.02 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | 0.03 | $ | ( 0.12 | ) | $ | (0.03 | ) | $ | 0.01 | |||||||||||
Diluted
|
$ | – | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | 0.02 | $ | (0.12 | ) | $ | (0.03 | ) | $ | 0.01 | |||||||||||
Liquidity
and Capital Resources
In recent
years, we have funded operations from cash flows generated from operations and,
to a lesser extent, equipment financing and borrowing arrangements.
As of
December 31, 2009, we had $33.2 million in cash, cash equivalents and total
investments in marketable securities, reflecting a net increase of $10.2 million
since December 31, 2008. This $10.2 million increase was primarily
due to cash provided by operations of $23.5 million, partially offset by cash
purchases of property and equipment of (including principal payments on financed
equipment) of $6.8 million, repurchase of Common Stock (net of proceeds from the
issuance of Common Stock from employee stock option exercises) of $5.9 million,
and payments related to capitalized software of $0.6 million.
Net cash
provided by operating activities was $23.5 million for 2009 as compared to $25.8
million for 2008. The $2.3 million decrease resulted from additional
vendor payments made (resulting in decreases in accounts payable and accrued
expenses) and increased deferred revenue, net of increased accounts receivable,
partially offset by additional cash generated from operations.
Net cash
used in investing activities was $26.1 million for 2009 as compared to $7.7
million for 2008. The $18.4 million increase from 2008 was primarily
attributable to an increase of $11.8 million in funds received from and held on
behalf of Ultimate’s customers using the UltiPro tax filing offering (“UltiPro
Tax Filing Customer Funds”), with such funds being invested by Ultimate in
overnight repurchase agreements backed by U.S. Treasury or U.S. Government
Agency securities, a decrease in cash from maturities of marketable securities
of $13.0 million and an increase in cash purchases of marketable securities of
$3.4 million, partially offset by a decrease in cash purchases of property and
equipment of $8.2 million and, to a lesser extent, a decrease in capitalized
software costs of $1.6 million.
Net cash
provided by financing activities was $9.1 million for 2009 as compared to cash
used in financing activities of $18.4 million for 2008. The $27.5 million
increase in net cash provided by financing activities was primarily related to a
$14.5 million decrease in repurchases of Common Stock pursuant to Ultimate’s
stock repurchase plan, an increase of $11.8 million in UltiPro Tax Filing
Customer Funds received and, to a lesser extent, an increase of $1.1 million in
proceeds from the issuance of Common Stock from stock option
exercises.
Days
sales outstanding (“DSO”), calculated on a trailing three-month basis, as of
December 31, 2009 and December 31, 2008, were 68 days and 71 days,
respectively. The decrease in DSOs of 4 days compared to December 31,
2008 was primarily a function of increased revenues and stronger accounts
receivable collections.
Deferred
revenues were $68.6 million at December 31, 2009, as compared to $63.5 million
at December 31, 2008. The increase of $5.1 million in deferred
revenues for 2009 was primarily due to increased deferred Intersourcing revenues
and higher deferred services revenues, partially offset by decreased
subscription revenues and decreased deferred maintenance
revenues. Substantially all of the total balance in deferred revenues
is related to future recurring revenues, including deferred revenues related to
Intersourcing.
Ultimate
believes that cash and cash equivalents, investments in marketable securities
and cash generated from operations will be sufficient to fund our 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.
We did
not have any material commitments for capital expenditures as of December 31,
2009.
Off-Balance
Sheet Arrangements
We do not, and as of December 31, 2009
we did not, have any off-balance sheet arrangements (as that term is defined in
applicable SEC rules) that are reasonably likely to have a current or future
material effect on our financial condition, results of operations, liquidity,
capital expenditures or capital resources.
Contractual
Obligations
As of
December 31, 2009, Ultimate’s outstanding contractual cash obligations were as
follows (in thousands):
Payments
Due by Period
|
||||||||||||||||||||
Total
|
Less
Than 1 Year
|
1-3
Years
|
4-5
Years
|
More
than 5 Years
|
||||||||||||||||
Capital
lease obligations (1)
|
$ | 3,784 | $ | 2,018 | $ | 1,766 | $ | — | $ | — | ||||||||||
Other
long-term obligations (2)
|
21,289 | 3,937 | 7,162 | 5,523 | 4,667 | |||||||||||||||
Purchase
obligations (3)
|
— | — | — | — | — | |||||||||||||||
Other
long-term liabilities (4)
|
— | — | — | — | — | |||||||||||||||
Total
contractual cash obligations
|
$ | 25,073 | $ | 5,955 | $ | 8,928 | $ | 5,523 | $ | 4,667 | ||||||||||
_________________________
|
(1)
|
We
lease certain equipment under non-cancelable agreements, which are
accounted for as capital leases and expire at various dates through 2012.
See Note 14 of the Notes to Consolidated Financial Statements for
information regarding capital lease
obligations.
|
(2)
|
Included
in other long-term obligations were Ultimate’s leases for corporate office
space and certain equipment under non-cancelable operating lease
agreements expiring at various dates and a software maintenance
agreement. See Note 17 of the Notes to Consolidated Financial
Statements for information regarding operating lease
obligations. The software maintenance agreement is a 36-month
agreement beginning July 21, 2008 and ending on August 1, 2011 with 36
monthly payments.
|
(3)
|
Purchase
orders or contracts for the purchase of goods and services are not
included in the table above. Ultimate is not able to determine
the aggregate amount of such purchase orders that represent contractual
obligations, as purchase orders may represent authorizations to purchase
rather than binding agreements. Ultimate does not have
significant agreements for the purchase of goods or services specifying
minimum quantities or set prices.
|
(4)
|
Ultimate does not have any other long-term liabilities as of December 31, 2009. |
In the
ordinary course of its operations, Ultimate is exposed to certain market risks,
primarily interest rate risk and foreign currency risk. Risks that
are either non-financial or non-quantifiable, such as political, economic, tax,
or regulatory risks, are not included in the following assessment of our market
risks.
Interest Rate Risk. We are
subject to financial market risks, including changes in interest rates and in
the valuations of our investment portfolio. Changes in interest rates
could impact our anticipated interest income from interest-bearing cash
accounts, or cash equivalents and investments in marketable
securities. We manage financial market risks, including interest rate
risks, in accordance with our investment guideline objectives,
including:
|
·
|
Maximum
safety of principal;
|
|
·
|
Maintenance
of appropriate liquidity for regular cash
needs;
|
|
·
|
Maximum
yields in relationship to guidelines and market
conditions;
|
|
·
|
Diversification
of risks; and
|
|
·
|
Fiduciary
control of all investments.
|
We target
our fixed income investment portfolio to have maturities of 24 months or
less. Investments are held to enhance the preservation of capital and
not for trading purposes.
Cash
equivalents consist of money market accounts with original maturities of less
than three months. Short-term investments include obligations of U.S. government
agencies and corporate debt securities. Corporate debt securities
include commercial paper which according to our investment guidelines must carry
minimum short-term ratings of P-1 by Moody’s Investor Service, Inc. (“Moody’s”)
and A-1 by Standard & Poor’s Ratings Service, a Division of The McGraw-Hill
Companies, Inc. (“S&P”). Other corporate debt obligations must
carry a minimum rating of A-2 by Moody’s or A by
S&P. Asset-backed securities must carry a minimum AAA rating by
Moody’s and S&P with a maximum average life of two years at the time of
purchase.
As of
December 31, 2009, total investments in available-for-sale marketable securities
were $9.5 million.
As of
December 31, 2009, virtually all of the investments in our portfolio were at
fixed rates (with a weighted average interest rate of 0.5% per
annum).
To
illustrate the potential impact of changes in interest rates, Ultimate has
performed an analysis based on its December 31, 2009 consolidated balance sheet
and assuming no changes in its investments. Under this analysis, an
immediate and sustained 100 basis point increase in the various base rates would
result in a decrease in the fair value of Ultimate’s total portfolio of
approximately $53 thousand over the next 12 months. An immediate and
sustained 100 basis point decrease in the various base rates would result in an
increase of the fair value of Ultimate’s total portfolio of approximately $53
thousand over the next 12 months.
Foreign Currency
Risk. We have foreign currency risks related to our revenue
and operating expenses denominated in currencies other than the U.S.
dollar. Management does not believe movements in the foreign
currencies in which we transact business will significantly affect future net
income.
INDEX
Page(s)
|
|
34
|
|
35
|
|
36
|
|
37
|
|
38
|
|
39
|
The Board
of Directors and Stockholders
The
Ultimate Software Group, Inc.:
We have
audited the accompanying consolidated balance sheets of The Ultimate Software
Group, Inc. and subsidiaries (the Company) as of December 31, 2009 and
2008, and the related consolidated statements of operations, stockholders’
equity and comprehensive income (loss), and cash flows for each of the years in
the three-year period ended December 31, 2009. 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 audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of
December 31, 2009 and 2008 and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2009, in conformity with U.S. generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over
financial reporting as of December 31, 2009, based on criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 5, 2010, expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
/s/ KPMG LLP
KPMG
LLP
March 5,
2010
Miami,
Florida
Certified
Public Accountants
THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
|
As of December 31,
|
|||||||
|
2009
|
2008
|
||||||
(In thousands, except share data) | ||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 23,684 | $ | 17,200 | ||||
Short-term
investments in marketable securities
|
8,079 | 5,805 | ||||||
Accounts
receivable, net of allowance for doubtful accounts of $600 and
$700
|
||||||||
for
2009 and 2008
|
38,450 | 38,302 | ||||||
Prepaid
expenses and other current assets
|
15,594 | 16,011 | ||||||
Deferred
tax assets, net
|
1,128 | 3,533 | ||||||
Total
current assets before funds held for customers
|
86,935 | 80,851 | ||||||
Funds
held for customers
|
23,560 | 5,863 | ||||||
Total
current assets
|
110,495 | 86,714 | ||||||
Property
and equipment, net
|
19,496 | 22,984 | ||||||
Capitalized
software, net
|
4,463 | 5,642 | ||||||
Goodwill
|
3,198 | 2,906 | ||||||
Long-term
investments in marketable securities
|
1,444 | – | ||||||
Other
assets, net
|
12,298 | 11,668 | ||||||
Long-term
deferred tax assets, net
|
19,736 | 17,343 | ||||||
Total
assets
|
$ | 171,130 | $ | 147,257 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 4,476 | $ | 7,200 | ||||
Accrued
expenses
|
9,972 | 12,701 | ||||||
Current
portion of deferred revenue
|
60,980 | 54,687 | ||||||
Current
portion of capital lease obligations
|
1,897 | 2,034 | ||||||
Current
portion of long-term debt
|
– | 320 | ||||||
Total
current liabilities before customer funds obligations
|
77,325 | 76,942 | ||||||
Customer
funds obligations
|
23,560 | 5,863 | ||||||
Total
current liabilities
|
100,885 | 82,805 | ||||||
Deferred
revenue, net of current portion
|
7,579 | 8,807 | ||||||
Deferred
rent
|
3,186 | 3,054 | ||||||
Capital
lease obligations, net of current portion
|
1,710 | 1,519 | ||||||
Total
liabilities
|
113,360 | 96,185 | ||||||
Commitments
and contingencies (Note 17)
|
– | – | ||||||
Stockholders’
equity:
|
||||||||
Series
A Junior Participating Preferred Stock, $.01 par value, 500,000
shares
authorized,
no shares issued
|
– | – | ||||||
Preferred
Stock, $.01 par value, 2,000,000 shares
authorized,
no shares issued
|
– | – | ||||||
Common
Stock, $.01 par value, 50,000,000 shares authorized, 27,620,384
and
26,796,169
shares issued in 2009 and 2008, respectively
|
276 | 268 | ||||||
Additional
paid-in capital
|
184,256 | 164,574 | ||||||
Accumulated
other comprehensive loss
|
(696 | ) | (1,002 | ) | ||||
Accumulated
deficit
|
(54,410 | ) | (53,268 | ) | ||||
129,426 | 110,572 | |||||||
Treasury
stock, at cost, 2,985,425 and 2,533,575 shares in 2009 and 2008,
respectively
|
(71,656 | ) | (59,500 | ) | ||||
Total
stockholders’ equity
|
57,770 | 51,072 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 171,130 | $ | 147,257 |
The
accompanying Notes to Consolidated Financial Statements
are an
integral part of these financial statements.
THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
|
For the Years Ended December
31,
|
|||||||||||
|
2009
|
2008
|
2007
|
|||||||||
(In thousands, except per share
amounts)
|
||||||||||||
Revenues:
|
||||||||||||
Recurring
|
$ | 133,411 | $ | 106,681 | $ | 87,017 | ||||||
Services
|
59,043 | 60,627 | 49,857 | |||||||||
License
|
4,125 | 11,264 | 14,590 | |||||||||
Total
revenues
|
196,579 | 178,572 | 151,464 | |||||||||
Cost
of revenues:
|
||||||||||||
Recurring
|
38,910 | 29,754 | 22,798 | |||||||||
Services
|
48,346 | 50,106 | 40,327 | |||||||||
License
|
750 | 1,795 | 1,659 | |||||||||
Total
cost of revenues
|
88,006 | 81,655 | 64,784 | |||||||||
Gross
profit
|
108,573 | 96,917 | 86,680 | |||||||||
Operating
expenses:
|
||||||||||||
Sales
and marketing
|
52,810 | 47,193 | 36,479 | |||||||||
Research
and development
|
38,475 | 36,738 | 28,162 | |||||||||
General
and administrative
|
17,874 | 17,623 | 14,434 | |||||||||
Total
operating expenses
|
109,159 | 101,554 | 79,075 | |||||||||
Operating
(loss) income
|
(586 | ) | (4,637 | ) | 7,605 | |||||||
Other
income (expense):
|
||||||||||||
Interest
expense and other
|
(133 | ) | (279 | ) | (214 | ) | ||||||
Interest
and other income, net
|
162 | 860 | 6,002 | |||||||||
Total
other income, net
|
29 | 581 | 5,788 | |||||||||
(Loss)
income before income taxes
|
(557 | ) | (4,056 | ) | 13,393 | |||||||
(Expense)
benefit for income taxes
|
(585 | ) | 1,159 | 19,736 | ||||||||
Net
(loss) income
|
$ | (1,142 | ) | $ | (2,897 | ) | $ | 33,129 | ||||
Net
(loss) income per share:
|
||||||||||||
Basic
|
$ | (0.05 | ) | $ | (0.12 | ) | $ | 1.34 | ||||
Diluted
|
$ | (0.05 | ) | $ | (0.12 | ) | $ | 1.24 | ||||
Weighted
average shares outstanding:
|
||||||||||||
Basic
|
24,463 | 24,588 | 24,701 | |||||||||
Diluted
|
24,463 | 24,588 | 26,722 |
The
accompanying Notes to Consolidated Financial Statements
are an
integral part of these financial statements.
36
THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In
thousands)
Common
Stock
|
Additional
Paid -in Capital
|
Accumulated
Other Comprehensive
(Loss) Income
|
Accumulated
Deficit
|
Treasury Stock
|
Total
Stockholders’
Equity
|
|||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||||||||||||
Balance,
December 31, 2006
|
25,103 | $ | 251 | $ | 125,121 | $ | 1 | $ | (83,500 | ) | 709 | $ | (10,851 | ) | $ | 31,022 | ||||||||||||||||
Net
income
|
– | – | – | – | 33,129 | – | – | 33,129 | ||||||||||||||||||||||||
Unrealized
loss on investments in
marketable
securities available-for-sale
|
– | – | – | (13 | ) | – | – | – | (13 | ) | ||||||||||||||||||||||
Unrealized
loss on foreign exchange
|
(6 | ) | (6 | ) | ||||||||||||||||||||||||||||
Comprehensive
income
|
– | – | – | – | – | – | – | 33,110 | ||||||||||||||||||||||||
Repurchase
of Common Stock
|
– | – | – | – | – | 743 | (21,957 | ) | (21,957 | ) | ||||||||||||||||||||||
Issuances
of Common Stock from exercises
of
stock options and warrants
|
1,117 | 11 | 8,578 | – | – | – | – | 8,589 | ||||||||||||||||||||||||
Non-cash
stock-based compensation expense
for
stock options and restricted stock
|
|
|
10,214 | – | – | – | – | 10,214 | ||||||||||||||||||||||||
Balance,
December 31, 2007
|
26,220 | $ | 262 | $ | 143,913 | $ | (18 | ) | $ | (50,371 | ) | 1,452 | $ | (32,808 | ) | $ | 60,978 | |||||||||||||||
Net
loss
|
– | – | – | – | (2,897 | ) | – | – | (2,897 | ) | ||||||||||||||||||||||
Unrealized
gain on investments in
marketable
securities available-for-sale
|
– | – | – | 15 | – | – | – | 15 | ||||||||||||||||||||||||
Unrealized
loss on foreign exchange
|
(999 | ) | (999 | ) | ||||||||||||||||||||||||||||
Comprehensive
loss
|
– | – | – | – | – | – | – | (3,881 | ) | |||||||||||||||||||||||
Repurchase
of Common Stock
|
– | – | – | – | – | 1,082 | (26,692 | ) | (26,692 | ) | ||||||||||||||||||||||
Issuances
of Common Stock from exercises
of
stock options and warrants
|
576 | 6 | 5,175 | – | – | – | – | 5,181 | ||||||||||||||||||||||||
Non-cash
stock-based compensation expense
for
stock options and restricted stock
|
–
|
–
|
15,486 | – | – | – | – | 15,486 | ||||||||||||||||||||||||
Balance,
December 31, 2008
|
26,796 | $ | 268 | $ | 164,574 | $ | (1,002 | ) | $ | (53,268 | ) | 2,534 | $ | (59,500 | ) | $ | 51,072 | |||||||||||||||
Net
loss
|
– | – | – | – | (1,142 | ) | – | – | (1,142 | ) | ||||||||||||||||||||||
Unrealized
gain on investments in
marketable
securities available-for-sale
|
– | – | – | 1 | – | – | – | 1 | ||||||||||||||||||||||||
Unrealized
gain on foreign exchange
|
305 | 305 | ||||||||||||||||||||||||||||||
Comprehensive
loss
|
– | – | – | – | – | – | – | (836 | ) | |||||||||||||||||||||||
Tax
charge from equity awards
|
– | – | (373 | ) | – | – | – | – | (373 | ) | ||||||||||||||||||||||
Realized
excess share-based payment deductions
|
– | – | 549 | – | – | – | – | 549 | ||||||||||||||||||||||||
Repurchase
of Common Stock
|
– | – | – | – | – | 451 | (12,156 | ) | (12,156 | ) | ||||||||||||||||||||||
Issuances
of Common Stock from exercises
of
stock options and warrants
|
824 | 8 | 6,270 | – | – | – | – | 6,278 | ||||||||||||||||||||||||
Non-cash
stock-based compensation expense
for
stock options and restricted stock
|
–
|
–
|
13,236 | – | – | – | – | 13,236 | ||||||||||||||||||||||||
Balance,
December 31, 2009
|
27,620 | $ | 276 | $ | 184,256 | $ | (696 | ) | $ | (54,410 | ) | 2,985 | $ | (71,656 | ) | $ | 57,770 |
The
accompanying Notes to Consolidated Financial Statements
are an
integral part of these financial statements.
THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
For the Years Ended December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
|||||||||
(In
thousands)
|
||||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
(loss) income
|
$ | (1,142 | ) | $ | (2,897 | ) | $ | 33,129 | ||||
Adjustments
to reconcile net income (loss) to net cash provided
|
||||||||||||
by
operating activities:
|
||||||||||||
Depreciation
and amortization
|
11,806 | 10,106 | 7,068 | |||||||||
Provision
for doubtful accounts
|
972 | 1,546 | 1,505 | |||||||||
Tax
charge for equity awards
|
(373 | ) | – | – | ||||||||
Non-cash
expense for stock based compensation
|
13,234 | 15,456 | 10,172 | |||||||||
Deferred
income taxes
|
561 | (1,205 | ) | (19,851 | ) | |||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Accounts
receivable
|
(1,120 | ) | (5,190 | ) | (9,588 | ) | ||||||
Prepaid
expenses and other current assets
|
417 | (6,210 | ) | (1,190 | ) | |||||||
Other
assets, net
|
(851 | ) | (2,488 | ) | (2,517 | ) | ||||||
Accounts
payable
|
(2,724 | ) | 3,672 | (366 | ) | |||||||
Accrued
expenses
|
(2,372 | ) | 1,199 | 2,039 | ||||||||
Deferred
revenue
|
5,065 | 11,786 | 8,739 | |||||||||
Net
cash provided by operating activities
|
23,473 | 25,775 | 29,140 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Purchases
of marketable securities
|
(10,040 | ) | (6,688 | ) | (20,036 | ) | ||||||
Maturities
of marketable securities
|
6,323 | 19,315 | 17,890 | |||||||||
Net
purchases of client funds securities
|
(17,697 | ) | (5,863 | ) | – | |||||||
Purchases
of property and equipment
|
(4,011 | ) | (12,206 | ) | (7,429 | ) | ||||||
Capitalized
software
|
(630 | ) | (2,230 | ) | (1,653 | ) | ||||||
Payments
for acquisition
|
– | – | (24 | ) | ||||||||
Net
cash used in investing activities
|
(26,055 | ) | (7,672 | ) | (11,252 | ) | ||||||
Cash
flows from financing activities:
|
||||||||||||
Repurchases
of Common Stock
|
(12,156 | ) | (26,692 | ) | (21,957 | ) | ||||||
Principal
payments on capital lease obligations
|
(2,445 | ) | (2,152 | ) | (2,045 | ) | ||||||
Net
increase in client fund obligations
|
17,697 | 5,863 | – | |||||||||
Net
proceeds from issuances of Common Stock
|
6,278 | 5,182 | 7,617 | |||||||||
Repayments
of borrowings of long-term debt
|
(320 | ) | (572 | ) | (768 | ) | ||||||
Net
cash provided by (used in) financing activities
|
9,054 | (18,371 | ) | (17,153 | ) | |||||||
Effect
of exchange rate changes on cash
|
12 | 6 | (7 | ) | ||||||||
Net
increase (decrease) in cash and cash equivalents
|
6,484 | (262 | ) | 728 | ||||||||
Cash
and cash equivalents, beginning of year
|
17,200 | 17,462 | 16,734 | |||||||||
Cash
and cash equivalents, end of year
|
$ | 23,684 | $ | 17,200 | $ | 17,462 | ||||||
Supplemental
disclosure of cash flow information:
|
||||||||||||
Cash
paid for interest
|
$ | 149 | $ | 85 | $ | 96 | ||||||
Cash
paid for income taxes
|
$ | 175 | $ | 332 | $ | 75 | ||||||
Supplemental
disclosure of non-cash investing and financing activities (in
thousands):
|
||||||||||||
- The Company entered into capital lease obligations to acquire
new equipment totaling $2,499, $1,712 and $3,109 in 2009, 2008 and 2007,
respectively.
|
||||||||||||
- The Company included in capitalized software on the Company’s
consolidated balance sheet a total of $2, $30 and $42 in stock-based
compensation related to capitalized software at December 31, 2009, 2008
and 2007, respectively.
|
||||||||||||
- The
Company entered into an agreement to purchase source code from a
third-party vendor for $2.0 million, of which $0.5 million was paid
during 2009 and $1.5 million was paid during 2008.
|
||||||||||||
- The
Company had adjustments of $701 and $1,005 between goodwill and other
comprehensive loss (related to foreign currency translation) during 2009
and 2008, respectively.
|
||||||||||||
- The
Company entered into a long-term installment loan agreement with a
third-party vendor to acquire computer software totaling $961 during the
year ended December 31, 2007.
|
||||||||||||
- The
Company satisfied its agreement for the 2006 purchase of RTIX during 2007
with a stock consideration payment valued at $972.
|
The
accompanying Notes to Consolidated Financial Statements
are an
integral part of these financial statements.
THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
1. Nature
of Operations
The
Ultimate Software Group, Inc. and subsidiaries (“Ultimate”, the “Company,” “we,”
“us,” or “our”) designs, markets, implements and supports human resources
(“HR”), payroll and talent management solutions principally in the United States
and Canada. Ultimate solutions are available as two solution suites
based on company size. UltiPro Enterprise (“Enterprise”) was
developed to address the needs of large and very large companies (1,000 or more
employees) and UltiPro Workplace (“Workplace”) was developed for companies in
the mid-market (less than 1,000 employees). UltiPro is marketed
primarily through our Enterprise and Workplace direct sales teams.
2. Basis
of Presentation, Consolidation and the Use of Estimates
The
accompanying consolidated financial statements of Ultimate have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”).
The
consolidated financial statements included herein reflect all adjustments, which
are, in the opinion of Ultimate’s management, necessary for a fair presentation
of the information for the periods presented. The preparation of financial
statements in conformity with generally accepted accounting principles in the
United States (“GAAP”) 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. Such
estimates include the valuation of deferred tax assets and long-lived assets and
the fair value of stock-based compensation. Actual results could
differ from those estimates.
The
consolidated financial statements reflect the financial position and operating
results of Ultimate and include its wholly-owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation.
3. Summary
of Significant Accounting Policies and Recent Accounting
Pronouncements
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 Ultimate’s products. We perform
credit evaluations of our customers and have recorded allowances for estimated
losses. We maintain 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 receivable. 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 our customers were to
deteriorate, resulting in an impairment of their ability to make payments, an
additional provision for doubtful accounts may be required.
Funds
Held for Customers and Customers Funds Obligations
During
the first quarter of 2009, Ultimate introduced its UltiPro Tax Filing product to
its Enterprise customers. This product was introduced to our
Workplace customers during the second quarter of 2008. Tax filing
services provided to our customers through our UltiPro Tax Filing product are
being sold directly by us to our customers only on a per-employee-per-month
(“PEPM”) basis in conjunction with UltiPro, our core product. As a
result of rolling out our new UltiPro Tax Filing product, we receive funds from
our customers and hold such funds for purposes of paying the appropriate taxing
authorities on behalf of such customers. We hold our customers’ tax
filing deposits for the period between collection from our customers and
remittance to the applicable taxing authority. These funds held for
customers and the corresponding customer funds obligations are included in
current assets and current liabilities, respectively, in our consolidated
balance sheets as of December 31, 2009 and 2008. We have reported the
cash flows related to the purchases of overnight repurchase agreements backed by
U.S. Treasury or U.S. Government Agency securities using funds received from
UltiPro Tax Filing customers in the investing activities section of the
consolidated statements of cash flows for the years ended December 31, 2009 and
2008. We have reported the cash flows related to the funds received
and paid on behalf of such customers to the applicable taxing authorities in the
financing activities section of the consolidated statements of cash flows for
the years ended December 31, 2009 and 2008. The associated PEPM fees
for UltiPro Tax Filing are included in recurring revenues in the consolidated
statements of operations for the years ended December 31, 2009 and
2008. There were no PEPM fees for UltiPro Tax Filing recognized for
the year ended December 31, 2007. Since the initial introduction of
UltiPro Tax Filing during 2008, the associated interest earned was not material
for the years ended December 31, 2009 and 2008.
Fair
Value of Financial Instruments
Ultimate’s
financial instruments, consisting of cash and cash equivalents, investments in
marketable securities, funds held for customer and the related obligations,
accounts receivable, accounts payable, and capital lease obligations,
approximated fair value as of December 31, 2009 and 2008.
Goodwill
and Other Intangible Assets
Goodwill is not subject to
amortization, but is subject to an impairment test at least annually or more
frequently if events or circumstances indicate that impairment might
exist. We completed our annual impairment analysis of goodwill as of
December 31, 2009 and determined goodwill had not been impaired as of December
31, 2009. ASC 350, “Intangibles - Goodwill and Other” (“ASC 350”),
(formerly Statement of Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets” (“SFAS 142”)) also requires that
intangible assets with definite lives be amortized over their estimated useful
lives and reviewed for impairment in accordance with ASC 360, “Property, Plant
and Equipment” (“ASC 360”) (formerly SFAS No. 144, “Accounting for the
Impairment of Disposal of Long-Lived Assets” (“SFAS 144”). We are
currently amortizing our acquired intangible assets with finite lives over
periods ranging from five to six years. See Note 10 for further
discussion.
Long-Lived
Assets
We evaluate the carrying value of
long-lived assets when indicators of impairment exist. For the year
ended December 31, 2009, no such events or circumstances were
identified. The carrying value of a long-lived asset is considered
impaired when the undiscounted expected future cash flows from such asset (or
asset group) are separately identifiable and less than the asset’s (or asset
group’s) carrying value. In that event, a loss is recognized to the
extent that the carrying value exceeds the fair value of the long-lived
asset. Fair value is determined primarily using the anticipated cash
flows discounted at a rate commensurate with the risk involved. For
the years ended December 31, 2009, 2008 and 2007, we recorded no impairment of
our long-lived assets.
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 twenty years. Leasehold improvements and
assets under capital leases are amortized over the shorter of the life of the
asset or the term of the lease over periods ranging from three to fifteen years.
Maintenance and repairs are charged to expense when incurred; betterments are
capitalized. Upon the sale or retirement of assets, the cost, accumulated
depreciation and amortization are removed from the accounts and any gain or loss
is recognized.
Deferred
Revenue
Deferred
revenue is primarily comprised of deferrals for recurring revenues for
Intersourcing services which are recognized over the term of the related
contract as the services are performed, typically two years; maintenance
services which have not yet been rendered; implementation consulting services
for which the services have not yet been rendered; and subscription revenues
which are recognized ratably over the minimum term of the related contract upon
the delivery of the product and services.
Guarantees
We
adopted ASC 460, “Guarantees” (“ASC 460”) and ASC 850, “Related Party
Disclosures” (“ASC 850”) (formerly FIN No. 45, “Guarantor’s Accounting and
Disclosure Requirement for Guarantees, Including Indirect Guarantees of
Indebtedness of Others” (“FIN 45”)). The provision for initial
recognition and measurement of liability is applied on a prospective basis to
guarantees issued or modified after December 31, 2002. ASC 460 and ASC 850
expand 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 standard
commercial terms in our sales contracts for UltiPro, include an indemnification
clause that indemnifies the customer against certain liabilities and damages
arising from any claims of patent, copyright, or other proprietary rights of any
third party. Due to the nature of the intellectual property indemnification
provided to our customers, we cannot estimate the fair value, or determine the
total nominal amount, of the indemnification until such time as a claim for such
indemnification is made. In the event of a claim made against us
under such provision, we evaluate estimated losses for such indemnification
under ASC 450, “Contingencies” (“ASC 450”) (formerly SFAS No. 5, “Accounting for
Contingencies”) as interpreted by ASC 460 and ASC 850 considering such factors
as the degree of probability of an unfavorable outcome and the ability to make a
reasonable estimate of the amount of loss. To date, Ultimate has not
had any claims made against it under such provision and, accordingly, has not
accrued any liabilities related to such indemnifications in its consolidated
financial statements.
Segment
Information
ASC 280,
“Segment Reporting” (“ASC 280”) (formerly SFAS No. 131, “Disclosures about
Segments of an Enterprise and Related Information” (“SFAS 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.
Ultimate operates its business as a single segment.
Revenue
Recognition
Our
revenues are generated from the delivery of subscription services (including the
right to use UltiPro and software maintenance services), professional services
and, to a much lesser degree, the sale of software licenses.
We
recognize revenues when all of the following criteria are met:
·
|
persuasive
evidence of an arrangement exists;
|
·
|
delivery
has occurred;
|
·
|
the
fees are fixed and determinable;
and
|
·
|
collection
is considered probable.
|
If
collection is not considered probable, we recognize revenues when the fees are
collected. If the fees are not fixed and determinable, we recognize revenues
when the fees become due from the customer. If non-standard acceptance periods
or non-standard performance criteria are required, we recognize revenue when the
acceptance period expires or upon the satisfaction of the acceptance/performance
criteria, as applicable.
Under
subscriptions, our customers do not have the right to take possession of our
software and, in accordance with Accounting Standards Codification (“ASC”) 985,
“Software” (“ASC 985”), (formerly Emerging Issues Task Force (“EITF”) Issue
00-3, “Application of AICPA Statement of Position (“SOP”) 97-2 to Arrangements
That Include the Right to Use Software Stored on Another Entity’s Hardware”
(“EITF 00-3”), these arrangements are considered service contracts which are
outside the scope of ASC 985 (formerly SOP 97-2, “Software Revenue Recognition”
(“SOP 97-2”). Therefore, we account for subscription services under ASC 605,
“Revenue Recognition” (“ASC 605”) (formerly Staff Accounting Bulletin 104,
“Revenue Recognition” and EITF 00-21, “Revenue Arrangements with Multiple
Deliverables” (“EITF 00-21”)). Subscription revenues are recognized ratably over
the length of the agreement, commencing upon the delivery of the product and
services, which is when the customer processes its first live payroll using
UltiPro (also referred to as going “Live”). Fair value of multiple elements in
Intersourcing arrangements is assigned to each element based on the guidance
provided by ASC 605 (formerly 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. 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 and they are not reported
separately. Fair value for the bundled elements, as a whole, is based
upon evidence provided by our pricing for Intersourcing arrangements sold
separately. These bundled elements are provided on an ongoing basis
and represent undelivered elements under ASC 605 (formerly EITF 00-21); they are
recognized on a monthly basis as the services are performed, once the customer
goes Live. If
evidence of the fair value of one or more undelivered elements does not exist,
the revenue for the total arrangement is deferred and recognized when delivery
of those elements occurs or when fair value can be
established.
Recurring
revenues consist of subscription revenues recognized from Ultimate’s
Intersourcing SaaS offerings of UltiPro, as well as maintenance
revenues.
a)
|
Subscription
revenues are principally derived from upfront or setup fees and PEPM fees
earned from the Intersourcing Offering and from sales of
hosting services on a stand-alone basis to customers who already own a
perpetual license (“Base Hosting”). To the extent there are upfront
or setup fees associated with the Intersourcing Offering and Base Hosting,
subscription revenues are recognized ratably over the minimum term of the
related contract commencing upon the related Live date. Ongoing
PEPM fees from the Intersourcing Offering and Base Hosting are recognized
as subscription revenues as the services are delivered when the customer
goes Live.
|
b)
|
Maintenance
revenues are derived from maintaining, supporting, and providing periodic
updates of our software. Maintenance and support fees are generally priced
as a percentage of the initial perpetual license fee for the underlying
products. Maintenance revenues are recognized ratably over the
service period, generally one year. Annual maintenance renewal
fees which occur subsequent to the initial contract period are also
recognized ratably over the related service
period.
|
Services
revenues include revenues from fees charged for the implementation of Ultimate’s
product solutions and training of customers in the use of our products, fees for
other services, including the provision of payroll-related forms and the
printing of Forms W-2 for certain customers, as well as certain reimbursable
out-of-pocket expenses. Revenues from implementation services
comprise the majority of total services revenues. Revenues from
implementation consulting services and training services are recognized as these
services are performed based on their relative fair values. Under ASC
605 (formerly 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. Other services are
recognized as the product is shipped or as the services are rendered, depending
on the specific terms of the related arrangement.
Fees
related to services sold on a fixed-fee basis 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 the implementation job. If a sufficient basis to measure the
progress towards completion does not exist, revenue is recognized when the
project is completed or when Ultimate receives final acceptance from the
customer.
From our
inception through March 31, 2009, we sold perpetual licenses of UltiPro which
resulted in license revenues recognized pursuant to ASC 605 (formerly SOP 97-2)
for that period of time. While we still sell on-site licenses of
UltiPro, sales to new customers are only on a subscription basis (priced and
billed to our customers on a PEPM basis). Effective April 1, 2009, we
no longer sell our on-site UltiPro solutions to new customers on a perpetual
license basis. We do sell licenses to existing license customers but only in
relation to the customer’s employee growth or for products complementary to
UltiPro for which they already have a perpetual license. Any such licenses are
recognized as license revenues in our consolidated financial statements upon the
delivery of the related software product when all significant contractual
obligations have been satisfied, in accordance with ASC 605 (formerly SOP
97-2).
Cost
of Revenues
Cost of
revenues primarily consists of the costs of recurring and services revenues.
Cost of recurring revenues primarily consists of costs to provide maintenance
and technical support to our customers, the cost of providing periodic updates
and the cost of recurring subscription revenues, including amortization of
capitalized software. Cost of services revenues primarily consists of costs to
provide implementation services and training to our customers and, to a lesser
degree, costs related to sales of payroll-related forms and costs associated
with certain client reimbursable out-of-pocket expenses.
Stock-Based
Compensation
Our
Amended and Restated 2005 Equity and Incentive Plan (the “Plan”) authorizes the
grant of options to non-employee directors, officers and employees of Ultimate
to purchase shares of the Ultimate’s Common Stock. The Plan also
authorizes the grant to such persons of restricted and non-restricted shares of
Common Stock, stock appreciation rights, stock units and cash performance awards
(collectively, together with stock options, the “Awards”). Prior to
the adoption of the Plan, options to purchase shares of Common Stock were issued
under our Nonqualified Stock Option Plan (the “Prior
Plan”). Beginning in 2009, we began making grants to employees of
restricted stock units in lieu of stock options..
At the
2009 Annual Meeting of Stockholders, held on May 12, 2009 (the “2009 Annual
Meeting”), the stockholders of Ultimate approved the Plan, as amended to
increase the number of shares of Ultimate’s Common Stock authorized for issuance
pursuant to Awards granted under the Plan by 500,000 shares. The
aggregate number of shares of Common Stock previously authorized for issuance
under all Awards granted under the Plan and Prior Plan was 12,000,000
shares. As of December 31, 2009, the aggregate number of shares of
Common Stock authorized under the Plan and the Prior Plan was 12,500,000 and the
aggregate number of shares of Common Stock that were available to be issued
under all Awards granted under the Plan was 1,164,962 shares. A
complete copy of the Plan is contained in Ultimate’s Form 8-K that was filed
with the SEC on May 18, 2009.
The Plan provides broad
discretion to the Compensation Committee of the Board of Directors to create
appropriate equity incentives for directors, officers and employees of
Ultimate. The Plan is intended to attract and retain talented
employees and align employee and stockholder
interests. Effective January 1, 2006, we adopted the fair
value recognition provisions of ASC 718, “Compensation – Stock Compensation”
(“ASC 718”), (formerly SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”) using
the modified-prospective transition method. Under this transition method,
compensation was recognized beginning January 1, 2006 and includes (a)
compensation expense for all stock-based employee compensation arrangements
granted prior to, but not yet vested as of, January 1, 2006, based on the grant
date fair value estimated in accordanc with SFAS No. 123, “Accounting for
Stock-Based Compensation” and (b) compensation expense for all stock-based
employee compensation arrangements granted subsequent to January 1, 2006, based
on the grant-date fair value estimated in accordance with the provisions of ASC
718. In accordance with ASC 718, we capitalize the portion of
stock-based compensation attributed to internally developed
software.
For
purposes of calculating and accounting for stock-based compensation expense in
accordance with ASC 718 for stock options, Ultimate makes a computation of
expected volatility, based upon historical volatility and the expected term of
the option. The expected term is based on the historical exercise
experience under the stock-based plans of the underlying award (including
post-vesting employment termination behavior) and represents the period of time
the stock-based awards are expected to be outstanding. The interest
rate is based on the U.S. Treasury yield in effect at the time of grant for a
period commensurate with the estimated expected life. Pursuant to implementing
ASC 718 effective January 1, 2006, we are required to estimate forfeitures at
the time of grant and revise those estimates in subsequent periods if actual
forfeitures differ from those estimates. The weighted-average
forfeiture rate is based on historical data.
In
accordance with ASC 718, we capitalize the portion of stock-based compensation
(“SBC”) expense attributed to research and development personnel whose labor
costs are being capitalized pursuant to ASC 985, “Software” (“ASC 985”) and ASC
730, “Research and Development” (“ASC 730”), related to software
development. The following
table summarizes SBC recognized by Ultimate (in thousands):
For
the Years Ended
December
31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
SBC
– Statements of operations
|
$ | 13,234 | $ | 15,456 | $ | 10,172 | ||||||
SBC
– Capitalized software
|
2 | 30 | 42 | |||||||||
SBC
– Statements of stockholders’ equity
|
$ | 13,236 | $ | 15,486 | $ | 10,214 |
In
accordance with ASC 718, we elected to adopt the alternative transition method
for calculating the tax effects of stock-based compensation expense pursuant to
ASC 718. The alternative transition method includes a simplified method to
establish the beginning balance of the additional paid-in capital pool (“APIC
pool”) related to the tax effects of employee and non-employee director SBC
expense, and to determine the subsequent impact on the APIC pool and the
consolidated statements of cash flows of the tax effects of employee and
non-employee director stock-based awards that were outstanding upon adoption of
ASC 718. Due to our accumulated tax net operating losses, there was
no beginning balance in the APIC pool at the date of adoption of ASC 718 on
January 1, 2006.
Rental
Costs Incurred during a Construction Period
We
adopted ASC 840, “Leases,” (“ASC 840”) (formerly FASB Staff Position (“FSP”) FAS
13-1, “Accounting for Rental Costs Incurred during a Construction Period” (“FSP
FAS 13-1”)), which addresses the accounting for rental costs associated with
operating leases that are incurred during a construction
period. Rental costs incurred during and after a construction period
are costs incurred for the right to control the use of a leased asset during and
after construction of a leased asset. Since there is no distinction
between the right to use a leased asset during the construction period and the
right to use that asset after the construction period, rental costs associated
with ground or building operating leases that are incurred during a construction
period shall be recognized as rental expense on a straight-line
basis.
Income
Taxes
We are
subject to corporate Federal, foreign and state income taxes. We
account for income taxes under the provisions of ASC 740, “Income Taxes” (“ASC
740”) (formerly SFAS No. 109, “Accounting for Income Taxes” (“SFAS
109”). ASC 740 provides for an asset and 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.
We make
certain estimates and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments occur in the
calculation of certain tax assets and liabilities, which arise from differences
in the timing of recognition of revenue and expense for tax and financial
statement purposes.
We assess the likelihood that Ultimate
will be able to recover its deferred tax assets. Management considers
all available evidence, both positive and negative, including historical levels
of income, expiration of net operating losses, expectations and risks associated
with estimates of future taxable income and ongoing prudent and feasible tax
planning strategies as well as current tax laws and interpretation of current
tax laws in assessing the need for a valuation allowance. If recovery
is not likely, we record a valuation allowance against the deferred tax assets
that we estimate will not ultimately be recoverable. The available
positive evidence at December 31, 2009 included, among other
factors, three years of historical operating profits and a projection
of future financial and taxable income including the estimated impact of future
tax deductions from the exercise of stock options sufficient to realize most of
our remaining deferred tax assets. As a result of our analysis of all
available evidence, both positive and negative, at December 31, 2009, it was
considered more likely than not that a full valuation allowance for deferred tax
assets was not required. See Note 15 for further discussion.
Effective
January 1, 2007, ASC 740 (formerly FIN 48), clarified the accounting for
uncertainty in income taxes recognized in a company’s financial
statements. Specifically, ASC 740 prescribed a recognition threshold
and a measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. ASC 740 also provides guidance on the related derecognition,
classification, interest and penalties, accounting for interim periods,
disclosure and transition of uncertain tax positions. We recognize
interest and penalties accrued related to unrecognized tax benefits as
components of our income tax provision. We did not have any interest and
penalties accrued upon the adoption of ASC 740, and, as of December 31,
2009, we did not have any interest and penalties accrued related to unrecognized
tax benefits.
Reimbursable
Out-Of-Pocket Expenses
ASC 605,
“Revenue Recognition” (“ASC 605”), (formerly Emerging Issues Task Force (“EITF”)
No. 01-14, “Income Statement Characterization of Reimbursements Received for
‘Out-of-Pocket’ Expenses Incurred” (“EITF 01-14)), requires companies to
characterize reimbursements received for out-of-pocket expenses
incurred. Reimbursable out-of-pocket expenses, which are
included in services revenues and cost of services revenues in our accompanying
consolidated statements of operations, were $1.3 million, $1.8 million and $1.7
million for 2009, 2008 and 2007, respectively.
Recently
Adopted Accounting Pronouncements
In
January 2010, we adopted ASU 2009-05, “Fair Value Measurements and Disclosures
(Topic 820)-Measuring Liabilities at Fair Value” (“ASU 2009-05”). ASU
2009-05, which amends ASC Topic 820, Fair Value Measurements (FASB Statement No.
157, Fair Value Measurements), allows companies determining the fair value of a
liability to use the perspective of an investor that holds the related
obligation as an asset. The update addresses practice difficulties
caused by the tension between fair-value measurements based on the price that
would be paid to transfer a liability to a new obligor and contractual or legal
requirements that prevent such transfers from taking place. The
adoption of ASU 2009-05 did not have an impact on our consolidated financial
statements.
In
September 2009, we adopted Accounting Standards Update No. 2009-01, “Topic
105-Generally Accepted Accounting Principles amendments based on Statement of
Financial Accounting Standards No. 168–the FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles,” (“ASU 2009-01”). The FASB Accounting Standards
Codification is the source of authoritative GAAP recognized by the
Financial Accounting Standards Board (“FASB”) to be applied by non-governmental
entities. Rules and interpretive releases of the SEC under authority
of Federal securities laws are also sources of authoritative GAAP for SEC
registrants. As of September 30, 2009, the Codification supersedes
all then-existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting literature not included in the
Codification is non-authoritative. The Hierarchy of Generally
Accepted Accounting Principles (the “Hierarchy”), which became effective on
November 13, 2008, identified the sources of accounting principles and the
framework for selecting the principles used in preparing the financial
statements of non-governmental entities that are presented in conformity with
GAAP and arranged these sources of GAAP in a hierarchy for users to apply
accordingly. As of September 30, 2009, all of the Hierarchy’s content
carries the same level of authority with only two levels of
GAAP: authoritative and non-authoritative. ASU 2009-01 was
effective for interim or annual reporting periods ending after September 15,
2009.
In June
2009, we adopted Accounting Standards Codification (“ASC”) 825, “Financial
Instruments” (“ASC 825”), which increased the frequency of fair value
disclosures to a quarterly basis from an annual basis. ASC 825
relates to fair value disclosures for any financial instruments that are not
currently reflected on the balance sheet at fair value. ASC 825 was
effective for interim reporting periods ending after June 15,
2009. Ultimate’s financial instruments, consisting of cash and cash
equivalents, investments in marketable securities, funds held for customers and
the related obligations, accounts receivable, accounts payable, and capital
lease obligations, approximated fair value as of December 31, 2009 and December
31, 2008.
In June
2009, we adopted ASC 855, “Subsequent Events” (“ASC 855”). ASC 855
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date, that is, whether that date represents the date the financial statements
were issued or were available to be issued. ASC 855 was effective for
interim or annual reporting periods ending after June 15, 2009. We
evaluated events that occurred subsequent to December 31, 2009, and determined
that there were no recordable or reportable subsequent events.
In June
2009, we adopted ASC 820, “Fair Value Measurements and Disclosures” (“ASC
820”). ASC 820 provides guidance on how to determine the fair value
of assets and liabilities in the current economic environment and re-emphasizes
that the objective of a fair value measurement remains the determination of an
exit price. If we were to conclude that there has been a significant decrease in
the volume and level of activity of the asset or liability in relation to normal
market activities, quoted market values may not be representative of fair value
and we may conclude that a change in valuation technique or the use of multiple
valuation techniques may be appropriate. ASC 820 did not have an
impact on our consolidated financial statements.
In June
2009, we adopted ASC 320, “Investments – Debt and Equity Securities” (“ASC
320”). ASC 320 modifies the requirements for recognizing
other-than-temporarily impaired debt securities and revises the existing
impairment model for such securities by modifying the current intent and ability
indicator in determining whether a debt security is other-than-temporarily
impaired. ASC 320 did not have an impact on our consolidated
financial statements.
In
January 2009, we adopted ASC 350, “Intangibles – Goodwill and Other” (“ASC 350”)
and ASC 275, “Risks and Uncertainties” (“ASC 275”). ASC 350 and ASC
275 amended the factors an entity should consider in developing renewal or
extension assumptions used in determining the useful life of recognized
intangible assets under ASC 350 and ASC 275. This new guidance
applies prospectively to intangible assets that are acquired individually or
with a group of other assets in business combinations and asset
acquisitions. ASC 350 and ASC 275 did not have an impact on our
consolidated financial statements.
In
January 2009, we adopted ASC 805, “Business Combinations” (“ASC 805”) and ASC
810, “Consolidation” (“ASC 810”). ASC 805 changed how business
acquisitions are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods. ASC 810 changed the
accounting and reporting for minority interests, which will be recharacterized
as noncontrolling interests and classified as a component of
equity. ASC 805 and ASC 810 were effective for Ultimate beginning in
the first quarter of 2009. ASC 805 and ASC 810 will only affect
Ultimate if we make an acquisition after the effective date of our adoption of
ASC 805 and ASC 810. For the year ended December 31, 2009, neither
ASC 805 nor ASC 810 had an impact on our consolidated financial
statements.
Recently
Issued Accounting Pronouncements
During
October 2009, the FASB issued Accounting Standard Update (“ASU”) 2009-14,
“Certain Revenue Arrangements That Include Software Elements” (“ASU
2009-14”). ASU 2009-14 changes the accounting model for revenue
arrangements that include both tangible products and software
elements. ASU 2009-14 also provides guidance on how a vendor should
allocate arrangement consideration to deliverables in an arrangement that
includes both tangible products and software. ASU 2009-14 will be
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. We do
not believe ASU 2009-14 will have an impact on our consolidated financial
statements.
During
the third calendar quarter of 2009, the FASB issued ASU 2009-13 (EITF 08-1),
“Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13 (EITF
08-1)”). ASC Subtopic 605-25, “Revenue Recognition-Multiple-Element
Arrangements” (EITF Issue No. 00-21, “Revenue Arrangements with Multiple
Deliverables”) (“ASC Subtopic 605-25”), sets forth requirements that must be met
for an entity to recognize revenue from the sale of a delivered item that is
part of a multiple-element arrangement when other items have not yet been
delivered. One of those current requirements is that there be
objective and reliable evidence of the stand-alone selling price of the
undelivered items, which must be supported by either vendor-specific objective
evidence (“VSOE”) or third-party evidence (“TPE”).
ASU
2009-13 (EITF 08-1) amends ASC Subtopic 605-25 to eliminate the requirement that
all undelivered elements have VSOE or TPE before an entity can recognize the
portion of an overall arrangement fee that is attributable to items that already
have been delivered. In the absence of VSOE or TPE of the stand-alone
selling price for one or more delivered or undelivered elements in a
multiple-element arrangement, entities will be required to estimate the selling
prices of those elements. The overall arrangement fee will be
allocated to each element (both delivered and undelivered items) based on their
relative selling prices, regardless of whether those selling prices are
evidenced by VSOE or TPE or are based on the entity’s estimated selling
price. Application of the “residual method” of allocating an overall
arrangement fee between delivered and undelivered elements will no longer be
permitted upon adoption of ASU 2009-13 (EITF 08-1). Additionally, the
new guidance will require entities to disclose more information about their
multiple-element revenue arrangements. ASU 2009-13 is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. If a company elects early adoption and the period of
adoption is not the beginning of its fiscal year, the requirements must be
applied retrospectively to the beginning of the fiscal year. We are evaluating
the impact of ASU 2009-13 (EITF 08-1) on our consolidated financial
statements.
4. Investments
in Marketable Securities and Fair Value of Financial Instruments
We
classify our investments in marketable securities with readily determinable fair
values as available-for-sale. Available-for-sale securities consist
of debt and equity securities not classified as trading securities or as
securities to be held to maturity. Unrealized gains and losses on
available-for-sale securities are reported as a net amount in accumulated other
comprehensive income or loss in stockholders’ equity until
realized. Gains and losses on the sale of available-for-sale
securities are determined using the specific identification
method. Included in accumulated other comprehensive loss were $6
thousand of unrealized gains on available-for-sale securities and $4 thousand of
unrealized gains on available-for-sale securities at December 31, 2009 and
December 31, 2008, respectively.
The
amortized cost, net unrealized gain (loss) and fair value of the Company’s
investments in marketable available-for-sale securities at December 31, 2009 and
December 31, 2008 are shown below (in thousands):
As
of December 31, 2009
|
As
of December 31, 2008
|
|||||||||||||||||||||||
Net
|
Net
|
|||||||||||||||||||||||
Amortized
|
Unrealized
|
Fair
|
Amortized
|
Unrealized
|
Fair
|
|||||||||||||||||||
Cost
|
Gain
|
Value
|
Cost
|
Gain
|
Value
|
|||||||||||||||||||
Corporate
debentures – bonds
|
$ | 3,025 | $ | 3 | $ | 3,028 | $ | 4,306 | $ | 2 | $ | 4,308 | ||||||||||||
Commercial
paper
|
1,499 | – | 1,499 | 995 | 2 | 997 | ||||||||||||||||||
Agency
bonds
|
1,407 | 1 | 1,408 | –– | –– | –– | ||||||||||||||||||
U.S.
Treasury bills
|
1,995 | 2 | 1,997 | –– | –– | –– | ||||||||||||||||||
U.S.
Treasury bonds
|
501 | – | 501 | –– | –– | –– | ||||||||||||||||||
Certificates
of deposit
|
1,090 | – | 1,090 | 500 | –– | 500 | ||||||||||||||||||
Total
investments
|
$ | 9,517 | $ | 6 | $ | 9,523 | $ | 5,801 | $ | 4 | $ | 5,805 |
The
amortized cost and fair value of the marketable available-for-sale securities by
contractual maturity at December 31, 2009 is shown below (in
thousands):
As
of December 31, 2009
|
||||||||
Amortized
|
Fair
|
|||||||
Cost
|
Value
|
|||||||
Due
in one year or less
|
$ | 8,071 | $ | 8,079 | ||||
Due
after one year
|
1,446 | 1,444 | ||||||
Total
|
$ | 9,517 | $ | 9,523 |
We
classify and disclose fair value measurements in one of the following three
categories of fair value hierarchy:
|
Level
1:
|
Unadjusted
quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets and
liabilities.
|
|
Level
2:
|
Quoted
prices in markets that are not active or financial instruments for which
all significant inputs are observable, either directly or
indirectly.
|
|
Level
3:
|
Prices
or valuations that require inputs that are both significant to the fair
value measurement and unobservable.
|
A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value
measurement.
Our
assets that are measured by management at fair value on a recurring basis are
generally classified within Level 1 or Level 2 of the fair value
hierarchy. The types of instruments valued based on quoted market
prices in active markets include most money market securities and certificates
of deposit. Such instruments are generally classified within Level 1
of the fair value hierarchy.
The types
of instruments valued by management based on quoted prices in less active
markets, broker or dealer quotations, or alternative pricing sources with
reasonable levels of price transparency, include Ultimate’s corporate debentures
and bonds, commercial paper, agency bonds, and U.S. Treasury bills and
bonds. Such instruments are generally classified within Level 2 of
the fair value hierarchy. Ultimate uses consensus pricing,
which is based on multiple pricing sources, to value its fixed income
investments.
The
following table sets forth, by level within the fair value hierarchy, financial
assets and liabilities accounted for at fair value as of December 31, 2009 and
December 31, 2008 (in thousands):
As
of December 31, 2009
|
As
of December 31, 2008
|
|||||||||||||||
Quoted
|
Quoted
|
|||||||||||||||
Prices
in
|
Other
|
Un-
|
Prices
in
|
Other
|
Un-
|
|||||||||||
Active
|
Observable
|
Observable
|
Active
|
Observable
|
Observable
|
|||||||||||
Markets
|
Inputs
|
Inputs
|
Markets
|
Inputs
|
Inputs
|
|||||||||||
Total
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
Total
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||
Corporate
debentures and bonds
|
$ 3,028
|
$ –
|
$ 3,028
|
$
–
|
$4,308
|
$
–
|
$4,308
|
$
–
|
||||||||
Commercial
paper
|
1,499
|
–
|
1,499
|
–
|
997
|
–
|
997
|
–
|
||||||||
Agency
bonds
|
1,408
|
–
|
1,408
|
–
|
–
|
–
|
–
|
|||||||||
U.S.
Treasury bills
|
1,997
|
–
|
1,997
|
–
|
–
|
–
|
–
|
|||||||||
U.S.Treasury
bonds
|
501
|
–
|
501
|
–
|
–
|
–
|
–
|
|||||||||
Certificates
of deposit
|
1,090
|
1,090
|
–
|
–
|
500
|
500
|
–
|
–
|
||||||||
Total
|
$9,523
|
$
1,090
|
$8,433
|
$
–
|
$5,805
|
$500
|
$5,305
|
$
–
|
Assets
and liabilities measured at fair value on a recurring basis were presented in
the consolidated balance sheets as of December 31, 2009 and as of December 31,
2008 as short-term and long-term investments in marketable
securities. There were no financial liabilities accounted for at fair
value as of December 31, 2009 and December 31, 2008.
5. Property
and Equipment
Property
and equipment consists of the following (in thousands):
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Computer
equipment
|
$ | 59,234 | $ | 53,758 | ||||
Leasehold
improvements
|
8,307 | 7,420 | ||||||
Furniture
and fixtures
|
3,592 | 3,231 | ||||||
Building
|
929 | 870 | ||||||
Land
|
655 | 655 | ||||||
Property
and equipment
|
72,717 | 65,934 | ||||||
Less: accumulated
depreciation and amortization
|
53,221 | 42,950 | ||||||
Property
and equipment, net
|
$ | 19,496 | $ | 22,984 |
Depreciation
and amortization expense on property and equipment totaled $10.8 million, $9.2
million and $6.7 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
Included
in property and equipment is computer equipment acquired under capital leases as
follows (in thousands):
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Computer
equipment
|
$ | 18,946 | $ | 16,447 | ||||
Less: accumulated
amortization
|
16,936 | 14,489 | ||||||
$ | 2,010 | $ | 1,958 |
Depreciation
and amortization expense on property and equipment under capital leases, totaled
$2.4 million, $2.2 million and $2.1 million for the years ended December 31,
2009, 2008 and 2007, respectively.
6. Foreign
Currency
The financial statements of Ultimate’s
foreign subsidiaries have been translated into U.S. dollars. The
functional currency of The Ultimate Software Group of Canada, Inc. is the
Canadian dollar and the functional currency of The Ultimate Software Group UK
Limited is the British pound. Assets and liabilities are translated
into U.S. dollars at period-end exchange rates. Income and expenses
are translated at the average exchange rate for the reporting
period. The resulting translation adjustments, representing
unrealized gains or losses, are included in stockholders’ equity as a component
of accumulated other comprehensive (loss) income. Realized gains and
losses resulting from foreign exchange transactions are included in total
operating expenses in the consolidated statements of operations. For the years
ended December 31, 2009 and 2008, Ultimate had cumulative unrealized translation
losses of $0.7 million and $1.0 million, respectively. There was a $6
thousand unrealized translation loss for the year ended December 31,
2007.
7. Software
Development Costs
ASC 985
(formerly SFAS No. 86), requires capitalization of certain software development
costs subsequent to the establishment of technological feasibility. Based on
Ultimate’s product development process, technological feasibility is established
upon completion of a working model. During 2009 and
2008, a total of $0.1 million and $0.8 million, respectively, of research and
development expenses were capitalized in relation to Onboarding, which is a
product that handles certain human resources functionality for new hires of a
company, and had its general release in the first quarter of
2009. During 2007 $1.7 million of research and development expenses
were capitalized for the development of UltiPro Canadian HR/payroll (“UltiPro
Canada”) functionality. UltiPro Canada was built from the existing
product infrastructure of UltiPro (e.g., using UltiPro’s source code and
architecture). UltiPro Canada provides HR/payroll functionality which
includes the availability of Canadian tax rules, as well as Canadian human
resources functionality, taking into consideration labor laws in Canada and
including changes to the language where necessary (i.e., English to
French). 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 five years. Amortization of capitalized
software was $1.3 million, $0.7 million and $0.1 million in 2009, 2008 and 2007,
respectively, and is included within cost of sales in the consolidated
statements of operations. Accumulated amortization of capitalized software was
$6.9 million, $5.7 million and $5.0 million as of December 31, 2009, 2008 and
2007, respectively. Capitalized software, net of amortization, was $4.5 million,
$5.6 million and $3.6 million as of December 31, 2009, 2008 and 2007,
respectively.
Ultimate
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 Ultimate’s gross
revenues were to be significantly less than its estimates, the net realizable
value of Ultimate’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.
8. Earnings
Per Share
ASC 260,
“Earnings Per Share” (“ASC 260”) (formerly SFAS No. 128, “Earnings Per Share”),
requires dual presentation of earnings per share — “basic” and “diluted.” Basic
earnings per share is computed by dividing income available to common
stockholders (the numerator) by the weighted average number of common shares
(the denominator) for the period. The computation of diluted earnings per share
is similar to basic earnings per share, except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if the potentially dilutive common shares had been
issued.
The
following is a reconciliation of the shares used in the computation of basic and
diluted net income (loss) per share (in thousands):
For
the Years Ended
December
31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Basic
weighted average shares outstanding
|
24,463 | 24,588 | 24,701 | |||||||||
Effect
of dilutive equity instruments
|
– | – | 2,021 | |||||||||
Dilutive
shares outstanding
|
24,463 | 24,588 | 26,722 | |||||||||
Options
to purchase shares of Common Stock and other stock-based
|
||||||||||||
awards
outstanding which are not included in the calculation of
diluted
|
||||||||||||
income
(loss) per share because their impact is anti-dilutive
|
6,161 | 5,927 | 615 |
9. Comprehensive
Income
ASC 220,
“Comprehensive Income, (“ASC 220”) (formerly SFAS No. 130, “Reporting
Comprehensive Income” (“SFAS No. 130”)), establishes standards for the reporting
and display of comprehensive income and its components in Ultimate’s
consolidated financial statements. The objective of ASC 220 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. Accumulated other comprehensive (loss) income, as
presented on the consolidated balance sheets, consists of unrealized gains and
losses on available-for-sale securities and foreign currency translation
adjustments, recorded net of any related tax.
Comprehensive
(loss) income for the years ended December 31, 2009, 2008 and 2007 was as
follows (in thousands):
For
the Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
(loss) income
|
$ | (1,142 | ) | $ | (2,897 | ) | $ | 33,129 | ||||
Other
comprehensive (loss) income:
|
||||||||||||
Unrealized
gain (loss) on investments in
|
||||||||||||
marketable
securities available-for-sale
|
1 | 15 | (13 | ) | ||||||||
Unrealized
gain (loss) on foreign currency
|
||||||||||||
translation
adjustments
|
305 | (999 | ) | (6 | ) | |||||||
Comprehensive
(loss) income
|
$ | (836 | ) | $ | (3,881 | ) | $ | 33,110 |
10. Goodwill
and Intangible Assets
Goodwill
represents the excess of cost over the net tangible and identifiable intangible
assets of acquired businesses. Identifiable intangible assets
acquired in business combinations are recorded based upon fair value at the date
of acquisition. Goodwill consists of the following (in
thousands):
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Goodwill,
beginning balance
|
$ | 2,906 | $ | 4,063 | ||||
RTIX
tax-related adjustment
|
– | (152 | ) | |||||
Impact
of foreign currency translation
|
292 | (1,005 | ) | |||||
Goodwill,
ending balance
|
$ | 3,198 | $ | 2,906 |
On
October 5, 2006, Ultimate acquired 100% of the common stock of RTIX Limited, a
United Kingdom company, now known as The Ultimate Software Group UK Limited, and
its wholly-owned U.S. subsidiary, RTIX Americas, Inc. (collectively,
“RTIX”). The results of RTIX’s operations have been included in
Ultimate’s consolidated financial statements since that date. RTIX
developed the performance management/appraisals solution that Ultimate has
offered its customers since February 2006, which has been incorporated into
Ultimate’s UltiPro Talent Management product suite that it markets and sells to
its customers in the U.S.
The
values assigned to each of the intangible assets included in the RTIX valuation
were based on an income approach valuation methodology. The income
approach presumes that the value of an asset can be estimated by the net
economic benefit (i.e., cash flows) to be received over the life of the asset,
discounted to present value.
As of
December 31, 2009, Ultimate’s intangible assets have estimated useful lives and
are classified in other assets, net, in our consolidated balance sheet as
follows (in thousands):
As of December 31, | |||||||||
Estimated
Useful Lives
|
2009
|
2008
|
|||||||
Acquired
intangible assets:
|
|||||||||
Developed
technology
|
5
years
|
$ | 192 | $ | 302 | ||||
Customer
relationships
|
6
years
|
170 | 281 |
Amortization
expense for the acquired intangible assets reflected above was $221 thousand,
$185 thousand and $208 thousand for the years ended December 31, 2009, 2008 and
2007, respectively. Future amortization expense for acquired
intangible assets is as follows, as of December 31, 2009 (in
thousands):
Year
|
Amount
|
|||
2010
|
$ | 172 | ||
2011
|
144 | |||
2012
|
46 | |||
Total
|
$ | 362 |
11. Significant
Transaction
Ultimate
and Ceridian Corporation (“Ceridian”) signed an agreement in 2001, as amended,
granting Ceridian a non-exclusive license to use UltiPro as part of an on-line
offering for Ceridian to market primarily to businesses with less than 500
employees (the “Original Ceridian Agreement”). During December 2004, RSM
McGladrey Employer Services (“RSM”), a former business service provider (“BSP”)
of Ultimate, acquired Ceridian’s product and existing base of small and mid-size
business customers throughout the United States (the “RSM
Acquisition”). The financial terms of the Original Ceridian Agreement
did not change as a result of the RSM Acquisition. Subsequent to the RSM
Acquisition, Ceridian continued to be financially obligated to pay, and did pay,
Ultimate minimum fees pursuant to the terms of the Original Ceridian
Agreement. The Original Ceridian Agreement, was terminated pursuant
to its terms on March 9, 2008. The amount of subscription revenues
recognized under the Original Ceridian Agreement during the year ended December
31, 2008 was $1.5 million (through the effective date of the termination of the
agreement) and $7.7 million for the year ended December 31,
2007. There were no revenues recognized under the Original Ceridian
Agreement in 2009.
12. Other
Income, net
Other
income, net, consisted of the following (in thousands):
For
the Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Interest
income
|
$ | 195 | $ | 776 | $ | 1,413 | ||||||
Other
income, net
|
(33 | ) | 84 | 214 | ||||||||
Non-recurring
settlement fee, net
|
– | – | 4,375 | |||||||||
Total
other income, net
|
$ | 162 | $ | 860 | $ | 6,002 |
Included in other income, net, in the
consolidated statement of operations for the year ended December 31, 2007, is a
non-recurring settlement fee of $4.4 million, net of related costs, resulting
from the early termination of a multi-year business arrangement with one of our
business partners that decided to exit the payroll business.
13. Accrued
Expenses
Accrued
expenses consist of the following (in thousands):
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Sales
commissions
|
$ | 2,974 | $ | 3,745 | ||||
Other
items individually less than 5% of total current
liabilities
|
6,998 | 8,956 | ||||||
$ | 9,972 | $ | 12,701 | |||||
14. Capital
Lease Obligations
We lease
certain equipment under non-cancelable agreements, which are accounted for as
capital leases and expire at various dates through 2012. Interest rates on these
leases range from 1.0% to 6.0%. The scheduled lease payments of the capital
lease obligations are as follows as of December 31, 2009 (in
thousands):
Year
|
Amount
|
|||
2010
|
$ | 2,018 | ||
2011
|
1,338 | |||
2012
|
428 | |||
3,784 | ||||
Less
amount representing interest
|
(177 | ) | ||
Lease
obligations reflected as current ($1,897) and
non-current
($1,710)
|
$ | 3,607 |
15. Income
Taxes
Income
tax (expense) benefit is based on a loss before income taxes of $557 thousand,
comprised of a domestic pre-tax loss of $748 thousand net of a foreign pre-tax
gain of $190 thousand. Deferred tax assets and liabilities are
determined based on the difference between financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
The
income tax (expense) benefit consists of the following (in
thousands):
For
the Year Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Current
taxes:
|
||||||||||||
Federal
|
$ | — | $ | — | $ | (95 | ) | |||||
State
and Local
|
(24 | ) | (45 | ) | (20 | ) | ||||||
Foreign
|
— | — | — | |||||||||
Deferred
taxes, net
|
||||||||||||
Federal
|
(369 | ) | 931 | 16,523 | ||||||||
State
and Local
|
(29 | ) | 337 | 2,768 | ||||||||
Foreign
|
(163 | ) | (64 | ) | 560 | |||||||
Income
tax (expense) benefit, net
|
$ | (585 | ) | $ | 1,159 | $ | 19,736 |
The
income tax (expense) benefit is different from that which would be obtained by
applying the statutory Federal income tax rate of 35% to income (loss) before
income taxes as a result of the following (in thousands):
For
the Year Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Income
tax (expense) benefit at statutory Federal tax rate
|
$ | 195 | $ | 1,420 | $ | (4,687 | ) | |||||
State
and local income taxes
|
(20 | ) | 169 | (353 | ) | |||||||
Non
deductible expenses
|
(662 | ) | (380 | ) | (312 | ) | ||||||
Change
in tax rates
|
5 | (25 | ) | (1,979 | ) | |||||||
Change
in foreign valuation allowance
|
(103 | ) | (65 | ) | 26,863 | |||||||
Other,
net
|
– | 40 | 204 | |||||||||
Income
tax (expense) benefit, net
|
$ | (585 | ) | $ | 1,159 | $ | 19,736 |
Deferred
income tax assets and liabilities reflect the net effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax
purposes. Deferred tax assets are also recorded for the future tax
benefit of net operating losses and tax credit
carryforwards. Significant components of our deferred tax assets and
liabilities at December 31, 2009, 2008 and 2007 were as follows (in
thousands):
|
As of December 31,
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
Deferred
tax assets:
|
||||||||||||
Net
operating losses
|
$ | 4,886 | $ | 6,515 | $ | 10,251 | ||||||
Tax
credit carryforwards
|
224 | 224 | 222 | |||||||||
Deferred
revenue
|
3,849 | 7,515 | 6,603 | |||||||||
Accruals
not currently deductible
|
213 | 129 | 141 | |||||||||
Allowance
for doubtful accounts
|
233 | 272 | 272 | |||||||||
Charitable
contributions
|
234 | 251 | 195 | |||||||||
Stock-based
compensation
|
17,608 | 13,168 | 7,166 | |||||||||
Deferred
rent adjustment
|
1,235 | 1,188 | 1,029 | |||||||||
Gross
deferred tax assets
|
28,482 | 29,262 | 25,879 | |||||||||
Less
valuation allowance
|
(4,972 | ) | (5,657 | ) | (5,592 | ) | ||||||
Deferred
tax assets
|
$ | 23,510 | $ | 23,605 | $ | 20,287 | ||||||
Deferred
tax liabilities:
|
||||||||||||
Property
and equipment
|
(1,391 | ) | (1,057 | ) | 1,206 | |||||||
Acquired
intangible assets
|
(141 | ) | (227 | ) | (299 | ) | ||||||
Software
development costs
|
(1,099 | ) | (1,417 | ) | (1,412 | ) | ||||||
Other,
net
|
(15 | ) | (28 | ) | (262 | ) | ||||||
Gross
deferred tax liabilities
|
(2,646 | ) | (2,729 | ) | (767 | ) | ||||||
Net
deferred tax assets
|
$ | 20,864 | $ | 20,876 | $ | 19,520 |
ASC 740
“Income Taxes” (“ASC 740”), (formerly SFAS 109), provides for the recognition of
deferred tax assets if realization of such assets is more likely than
not. Ultimate considers all available evidence, both positive and
negative, including historical levels of income, expiration of net operating
losses, expectations and risks associated with estimates of future taxable
income, ongoing prudent and feasible tax planning strategies and reversal of
deferred tax liabilities in assessing the need for the valuation allowance. If
it is not more likely than not that we will recover our deferred tax assets, we
will increase our provision for taxes by recording a valuation allowance against
the deferred tax assets that we estimate will not ultimately be
recoverable.
The
available positive evidence at December 31, 2009, included, among other
factors, three years of historical operating profits and a projection
of future financial and taxable income by jurisdiction including the estimated
impact of future tax deductions from the exercise of stock options sufficient to
realize most of our remaining deferred tax assets. As a result of our analysis
of all available evidence, both positive and negative, we believe that is it
more likely than not that a portion of the deferred tax asset as of December 31,
2009 will be realized in the future. We continue to maintain a
valuation allowance of $4.7 million which relates to stock option tax deductions
claimed prior to the adoption of ASC 718, which will result in a credit to
equity when the deductions reduce cash taxes payable. We also
maintain a valuation allowance of $0.3 million which relates to our foreign
operations.
The net
decrease in the valuation allowance for the year ended December 31, 2009 was
$0.7 million, $0.8 million relating primarily to the recognition of stock-based
payment deductions in stockholders’ equity and a $0.1 million increase relating
to foreign operations. The net increase in the valuation allowance
for the year ended December 31, 2008 was $65 thousand relating primarily to
foreign operations.
At
December 31, 2009, we had approximately $82.1 million and $0.9 million of net
operating loss carryforwards for Federal and foreign income tax reporting
purposes, respectively, available to offset future taxable income. Of the total
net operating loss carryforwards, approximately $82.1 million was attributable
to deductions from the exercise of non-qualified employee, and non-employee
director, stock options the benefit of which will primarily be credited to
paid-in capital and deferred tax asset when realized. The
carryforwards expire from 2011 through 2029. Utilization of such net operating
loss carryforwards may be limited as a result of cumulative ownership changes in
Ultimate’s equity instruments.
Effective
January 1, 2007, we adopted ASC 740 (formerly FIN
No. 48). ASC 740 requires that a position taken or expected to
be taken in a tax return be recognized in the financial statements when it is
more likely than not (i.e., a likelihood of more than fifty percent) that the
position would be sustained upon examination by tax authorities. A recognized
tax position is then measured at the largest amount of benefit that is greater
than fifty percent likely of being realized upon ultimate settlement. Upon
adoption and as of December 31, 2009, Ultimate did not have any unrecognized tax
benefits.
We
recognize interest and penalties accrued related to unrecognized tax benefits as
components of its income tax provision. We did not have any interest and
penalties accrued upon the adoption of ASC 740, and, as of December 31,
2009, we did not have any interest and penalties accrued related to unrecognized
tax benefits.
Tax years
1996 to 2009 remain subject to future examination by the major tax jurisdictions
in which we are subject to tax.
16. Stock-Based
Compensation and Equity
Summary
of Plans
Our
Amended and Restated 2005 Equity and Incentive Plan (the “Plan”) authorizes the
grant of options to non-employee directors, officers and employees of Ultimate
to purchase shares of Ultimate’s Common Stock (“Options”). The Plan
also authorizes the grant to such persons of restricted and non-restricted
shares of Common Stock, stock appreciation rights, stock units and cash
performance awards (collectively, the “Awards”). Prior to the
adoption of the Plan, options to purchase shares of Common Stock were issued
under Ultimate’s Nonqualified Stock Option Plan (the “Prior
Plan”). Beginning in 2009, we commenced making grants to employees of
restricted stock grants in lieu of Options.
As of
December 31, 2009, the aggregate number of shares of Common Stock authorized
under the Plan and the Prior Plan was 12,000,000 and the aggregate number of
shares of Common Stock that were available to be issued under all Awards granted
under the Plan was 1,164,962 shares. Options granted to officers and
employees under the Plan and the Prior Plan generally have a 10-year term,
vesting 25% immediately and 25% on each of the first three anniversaries of the
grant date. Options granted to non-employee directors under the Plan
and the Prior Plan generally have a 10-year term and vest and become exercisable
immediately on the grant date. However, certain Options granted to
non-employee directors for board services during the period January 3, 2005
through July 2, 2007 become exercisable on the earliest of (i) the fifth
anniversary of the date of grant, (ii) the 90th day
after the date on which the director ceases to be a member of the Board of
Directors of Ultimate (the “Board”) or (iii) the effective date of a change in
control of Ultimate.
Prior
to July 24, 2007, non-employee directors received discounted Options under
the Plan and the Prior Plan as compensation for their services. On
that date, the Compensation Committee of the Board (the “Compensation
Committee”) rescinded the previously approved fee schedule for service on the
Board and Board Committees and replaced it with a program involving market price
Options and restricted stock awards under the Plan. Under resolutions
adopted by the Compensation Committee, commencing with the third fiscal quarter
of 2007, (i) each non-employee director was granted an Option to purchase
3,750 shares of Ultimate’s Common Stock for each regular quarterly meeting of
the Board attended in 2007 and 2008, dated as of the date of such meeting, at an
exercise price equal to the closing price of our Common Stock on NASDAQ on the
date of such meeting, and (ii) each of the Chairman of the Audit Committee and
the Chairman of the Compensation Committee of the Board was granted an Option to
purchase 2,500 shares of Ultimate’s Common Stock for each fiscal quarter in 2007
and 2008, dated as of the date of the regularly scheduled meeting of such
Committee during such quarter, at an exercise price equal to the closing price
of our Common Stock on NASDAQ on the date of such meeting. These
Option grants vested immediately upon grant.
In
addition to the Option grants discussed above, commencing with the third fiscal
quarter of 2007, each non-employee director was granted a restricted stock award
under the Plan for each fiscal quarter in 2007 and 2008, dated as of the date of
the regularly scheduled meeting of the Compensation Committee during such
quarter, of that number of shares of Ultimate’s Common Stock equal to the
quotient of $12,500 divided by the closing price of our Common Stock on NASDAQ
on the date of such meeting, rounded down to the nearest full number of
shares. The restricted stock awards shall vest on the fourth
anniversary of the date of grant, subject to accelerated vesting in the event of
a director’s death, disability, cessation of service at the end of his term or
the occurrence of a change in control of Ultimate.
On
February 4, 2009, the Compensation Committee amended the previously approved
arrangement pursuant to which the non-employee directors and the Chairman of the
Audit and Compensation Committees of the Board, respectively, were granted
Options for each regular Board and Committee meeting attended. Under
the arrangement as amended, (i) each non-employee director was granted a
restricted stock award of 1,000 shares of Common Stock for each regular meeting
of the Board attended in 2009 and (ii) each of the Chairmen of the Audit
Committee and Compensation Committee of the Board was granted a restricted stock
award of 625 shares of Common Stock for attendance at each regular meeting of
the Committee in 2009 that he chaired. In addition, in 2009, each
non-employee director was granted, for each fiscal quarter during which he
served, a restricted stock award of that number of shares of Common Stock equal
to the quotient of $12,500 divided by the closing price of the Common Stock on
NASDAQ on the date of grant, which is the effective date of the grant determined
by the Board for each such quarter, rounded down to the closest full number of
shares. The date of grant shall not be a date prior to the date of
the Board’s determination of the same. Such restricted stock awards
shall vest on the fourth anniversary of the date of grant, subject to
accelerated vesting in the event of a director’s death, disability, cessation of
service or the end of his term or the occurrence of a change of control of
Ultimate.
Stock-Based
Compensation
The
following table sets forth the SBC resulting from stock-based arrangements that
is recorded in our consolidated statements of operations for the periods
indicated (in thousands):
For
the Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cost
of recurring revenues
|
$ | 689 | $ | 871 | $ | 635 | ||||||
Cost
of service revenues
|
1,316 | 1,988 | 1,542 | |||||||||
Cost
of license revenues
|
- | 12 | 5 | |||||||||
Sales
and marketing
|
7,059 | 7,389 | 4,617 | |||||||||
Research
and development
|
1,228 | 1,570 | 985 | |||||||||
General
and administrative
|
2,942 | 3,626 | 2,388 | |||||||||
Total
SBC
|
$ | 13,234 | $ | 15,456 | $ | 10,172 |
Included
in capitalized software in our consolidated balance sheet at December 31, 2009
and 2008 was $2 thousand and $30 thousand, respectively, in stock-based
compensation expense related to capitalized software during the fiscal years
then ended. This amount
would have otherwise been charged to research and development expense for the
years ended December 31, 2009 and 2008.
Net cash
proceeds from the exercise of stock options and warrants were $6.3 million, $5.2
million, and $7.6 million for the years ended December 31, 2009, 2008, and 2007,
respectively. There was a $0.5 million income tax benefit recognized
in additional paid in capital from the realization of excess share-based payment
deductions during the year ended December 31, 2009. There was no
income tax benefit realized from stock option exercises during the years ended
December 31, 2008 and 2007.
Fair
Value
On
January 1, 2006, we adopted the provisions of ASC 718, which requires us to
recognize expense related to the fair value of stock-based compensation
awards. We elected the modified prospective transition method as
permitted by ASC 718. Under the modified prospective transition
method, stock-based compensation expense for the years ended December 31, 2009,
2008 and 2007 includes compensation expense for all stock-based compensation
awards granted prior to, but not yet vested as of, January 1, 2006, based on the
grant date fair value estimated in accordance with the provisions of ASC 718 and
compensation expense for all stock-based compensation awards granted subsequent
to January 1, 2006, based on the grant date fair value estimated in accordance
with the provisions of ASC 718. In addition, options granted to
certain members of the Board for board services recorded in accordance with ASC
718 and the issuance of restricted stock awards and stock units are also
included in stock-based compensation for the years ended December 31, 2009, 2008
and 2007. We recognize compensation expense for restricted stock
awards and restricted stock units on a straight-line basis over the requisite
service period of the award.
There
were no Options granted during the year ended December 31, 2009. The
fair value of stock options granted for the years ended December 31, 2008 and
2007 was estimated using the Black-Scholes model with the following
weighted-average assumptions:
For
the Years Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Expected
term (in years)
|
5.2 | 5.0 | ||||||
Volatility
|
41 | % | 39 | % | ||||
Interest
rate
|
2.78 | % | 4.45 | % | ||||
Dividend
yield
|
– | – | ||||||
Weighted
average fair value at grant date
|
$ | 11.17 | $ | 11.06 |
Our
computation of the expected term is based on the historical exercise experience
under the stock-based plans of the underlying award (including post-vesting
employment termination behavior) and represents the period of time the
stock-based awards are expected to be outstanding. Our computation of
the expected volatility for the years ended December 31, 2008 and 2007 is based
upon historical volatility and the expected term of the Option. The
interest rate is based on the U.S. Treasury yield in effect at the time of grant
for a period commensurate with the estimated expected life. Pursuant to ASC 718,
which was implemented effective January 1, 2006, we are required to estimate
forfeitures at the time of grant and revise those estimates in subsequent
periods if actual forfeitures differ from those estimates. The
weighted-average forfeiture rates of 5.2% and 4.6% for the years ended December
31, 2008 and 2007, respectively, were based on historical data.
Restricted
Stock Awards
Under the
provisions of the Plan, Ultimate may, at the discretion of the Compensation
Committee or the Board, grant restricted stock awards (“Restricted Stock
Awards”) to officers, employees and non-employee directors. The
shares of Common Stock issued under Restricted Stock Awards are subject to
certain vesting requirements and restrictions on transfer. During the
years ended December 31, 2009 and 2008, we granted Restricted Stock Awards for
175,000 and 439,991 shares, respectively, of Common Stock to officers and
employees and we granted Restricted Stock Awards for 37,235 and 10,285 shares,
respectively, of Common Stock to non-employee directors. Compensation
expense for Restricted Stock Awards is measured based on the closing market
price of our Common Stock at the date of grant and is recognized on a
straight-line basis over the vesting period. Holders of Restricted
Stock Awards have all rights of a stockholder including the right to vote the
shares and receive all dividends and other distributions paid or made with
respect thereto. Each Restricted Stock Award becomes vested on the
fourth anniversary of the respective date of grant, subject to the grantee’s
continued employment with Ultimate or any of its subsidiaries on each such
vesting date and subject further to accelerated vesting in the event of a change
in control of Ultimate, death or disability, the termination of
employment by Ultimate without cause or, in the case of a non-employee director,
at cessation of his board services at the end of his term. Included
in our consolidated statements of operations for the years ended December 31,
2009, 2008, and 2007 was $7.9 million, $6.5 million, and $3.4 million,
respectively, of compensation expense for Restricted Stock Awards.
Restricted
Stock Unit Awards
Ultimate may, at the discretion of the
Compensation Committee, make awards of stock units or restricted stock units
under the Plan (“Restricted Stock Unit Awards”) to certain officers and
employees. A Restricted Stock Unit Award is a grant of a number of
hypothetical share units with respect to shares of Common Stock that are subject
to vesting and transfer restrictions and conditions under a restricted stock
unit award agreement. The value of each unit is equal to the fair
value of one share of Common Stock on any applicable date of
determination. The payment with respect to each unit under a
Restricted Stock Unit Award may be made, at the discretion of the Compensation
Committee, (i) in a number of shares of our Common Stock equal to the number of
Restricted Stock Units becoming vested, (ii) in cash, in an amount equal to the
fair market value of a share of our Common Stock on the vesting date multiplied
by the number of restricted stock units becoming vested on such date or (iii) in
a combination of both. The grantee of a Restricted
Stock Unit Award does not have any rights as a stockholder with respect to the
shares subject to a Restricted Stock Unit Award until such time as shares of
Common Stock are delivered to the grantee pursuant to the terms of the related
stock unit award agreement.
Beginning
in 2009, we commenced granting Restricted Stock Unit Awards to employees and
discontinued the grant of Options under the Plan. Such Restricted
Stock Unit Awards vest in three equal annual installments of 33-1/3% of the
number of Restricted Stock Unit Awards on each of the first three anniversaries
of the date of grant thereof, subject to the participant’s continued employment
with Ultimate or any of its subsidiaries on each such vesting date, and shall be
payable as described above, provided, however, that if any such anniversary is
not a date on which our Common Stock is traded on NASDAQ, then the vesting date
shall be the next such date; and provided further, however, that if the Chief
Financial Officer (“CFO”) of Ultimate should determine that any such anniversary
falls within a period during which the participant is prohibited from trading
Ultimate’s Common Stock under our stock trading policy, the CFO shall so advise
the participant in writing and the vesting date shall be the date as of which
the CFO has determined that such period has ended.
As
provided for in the Plan, the Chief Executive Officer and the Chief Operating
Officer deferred receipt of one-half of their cash performance awards under the
Plan for 2005 and 2006 performance in exchange for the grant of Restricted Stock
Unit Awards under the Plan made in 2006 and 2007 (the “Elected
Deferral”). No such election was made for 2007, 2008 or 2009
performance. Pursuant to the terms of the Plan, Ultimate provided
matching contributions equal to one-half of the amount deferred for each year
(the “Company Match”). The number of restricted stock units subject
to such Restricted Stock Unit Award is determined by dividing the total amount
deferred (including the Company Match) by the fair value of a share of our
Common Stock on the date of payment of the non-deferred portion of the cash
performance awards. During the years ended December 31, 2007 and
2006, Ultimate granted 16,603, and 28,518 Restricted Stock Unit Awards,
respectively, to the Chief Executive Officer and the Chief Operating
Officer. The Restricted
Stock Unit Awards granted to the Chief Executive Officer and the Chief Operating
Officer vest on the fourth anniversary of the date of grant, subject to the
respective Officer’s continued employment with Ultimate, or any of its
subsidiaries, on such vesting date and subject further to accelerated vesting in
the event of a change in control of Ultimate, his death or disability or the
termination of his employment by Ultimate without cause. The vested
Restricted Stock Unit Awards are payable in shares of Common Stock upon the
earliest to occur of the fifth anniversary of the date of grant, the respective
Officer’s death, disability or termination of employment with Ultimate or a
change in control of Ultimate. In the event that the Chief Executive
Officer or the Chief Operating Officer were to terminate employment and
Restricted Stock Unit Awards resulting from his Elected Deferral remain
unvested, Ultimate would be required to refund to him a cash amount equal to the
lesser of such Elected Deferral (less taxes withheld) and the fair value of such
units upon termination of employment.
There
were 211,635 Restricted Stock Unit Awards granted to employees during the year
ended December 31, 2009. There were no Restricted Stock Unit Awards granted
during the year ended December 31, 2008. Included in
Ultimate’s consolidated statements of operations for the years ended December
31, 2009, 2008 and 2007 was $0.9 million, $77 thousand and $77 thousand,
respectively, of non-cash compensation expense from Restricted Stock Unit
Awards.
Stock
Option and Restricted Stock Activity
The
following table summarizes Option activity for the years ended December 31,
2007, 2008 and 2009, as follows (in thousands, except per share
amounts):
Stock
Options
|
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (in Years)
|
Aggregate
Intrinsic Value
|
||||||||||||
Outstanding
at December 31, 2006
|
4,893 | $ | 10.07 | – | – | |||||||||||
Granted
|
759 | 26.48 | – | – | ||||||||||||
Exercised
|
(1,047 | ) | 7.16 | – | – | |||||||||||
Forfeited
or expired
|
(58 | ) | 22.92 | – | – | |||||||||||
Outstanding
at December 31, 2007
|
4,547 | $ | 13.31 | 5.90 | $ | 82,771 | ||||||||||
Exercisable
at December 31, 2007
|
3,582 | $ | 10.69 | 5.16 | $ | 74,550 | ||||||||||
Outstanding
at December 31, 2007
|
4,547 | $ | 13.31 | – | – | |||||||||||
Granted
|
1,066 | 28.33 | – | – | ||||||||||||
Exercised
|
(576 | ) | 8.97 | – | – | |||||||||||
Forfeited
or expired
|
(73 | ) | 26.54 | – | – | |||||||||||
Outstanding
at December 31, 2008
|
4,964 | $ | 16.86 | 6.02 | $ | 16,140 | ||||||||||
Exercisable
at December 31, 2008
|
3,792 | $ | 13.73 | 5.17 | $ | 16,140 | ||||||||||
Outstanding
at December 31, 2008
|
4,964 | $ | 16.86 | – | – | |||||||||||
Granted
|
– | – | – | – | ||||||||||||
Exercised
|
(668 | ) | 9.40 | – | – | |||||||||||
Forfeited
or expired
|
(131 | ) | 24.94 | – | – | |||||||||||
Outstanding
at December 31, 2009
|
4,165 | $ | 17.79 | 5.55 | $ | 49,687 | ||||||||||
Exercisable
at December 31, 2009
|
3,576 | $ | 16.12 | 5.15 | $ | 48,360 |
The
aggregate intrinsic value of Options in the table above represents total pretax
intrinsic value (i.e., the difference between the closing price of our Common
Stock on the last trading day of the reporting period and the exercise price,
times the number of shares) that would have been received by the Option holders
had all Option holders exercised their Options on December 31,
2009. The amount of the aggregate intrinsic value changes, based on
the fair value of our Common Stock. Total intrinsic value of Options
exercised during the years ended December 31, 2009, 2008 and 2007 was $10.1
million, $13.0 million and $23.0 million, respectively. Total fair
value of Options vested during the years ended December 31, 2009, 2008 and 2007
was $5.7 million, $7.6 million and $4.9 million, respectively.
As of
December 31, 2009, $3.4 million of total unrecognized compensation cost related
to non-vested Options is expected to be recognized over a weighted average
period of 1.0 year.
The
following table summarizes restricted stock and restricted stock unit activity
for the years ended December 31, 2007, 2008 and 2009, as follows (in thousands,
except per share amounts):
Restricted
Stock Awards
|
Restricted
Stock Units
|
|||||||||||
Restricted
Stock
|
Shares
|
Weighted
Average Grant Date Fair Value
|
Shares
|
|||||||||
Outstanding
at December 31, 2006
|
432 | $ | 20.70 | 29 | ||||||||
Granted
|
479 | 32.89 | 16 | |||||||||
Vested
|
– | – | – | |||||||||
Forfeited
or expired
|
– | – | – | |||||||||
Outstanding
at December 31, 2007
|
911 | $ | 27.11 | 45 | ||||||||
Granted
|
450 | 14.94 | – | |||||||||
Vested
|
– | – | – | |||||||||
Forfeited
or expired
|
– | – | – | |||||||||
Outstanding
at December 31, 2008
|
1,361 | $ | 23.09 | 45 | ||||||||
Granted
|
212 | 26.55 | 211 | |||||||||
Vested
|
– | – | – | |||||||||
Released
|
(169 | ) | 16.86 | |||||||||
Forfeited
or expired
|
– | – | (9 | ) | ||||||||
Outstanding
at December 31, 2009
|
1,404 | $ | 24.36 | 247 |
As of
December 31, 2009, $17.6 million of total unrecognized compensation cost related
to non-vested Restricted Stock Awards is expected to be recognized over a
weighted average period of 2.2 years. As of December 31, 2009, $2.8
million of total unrecognized compensation costs related to non-vested
Restricted Stock Unit Awards is expected to be recognized over a weighted
average period of 1.9 years.
The
following table summarizes information with respect to Options outstanding and
Options exercisable under the Plan at December 31, 2009:
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||
Range
of Exercise
Prices
|
Number
|
Weighted-Average
Remaining
Contractual
Life
(Years)
|
Weighted-Average
Exercise Price
|
Number
|
Weighted-Average
Exercise Price
|
|||||||||||||||||
$ | 0.89—$3.375 | 461,206 | 1.69 | $ | 2.83 | 461,206 | $ | 2.83 | ||||||||||||||
$ | 3.38—$8.375 | 418,892 | 2.56 | 4.33 | 418,892 | 4.33 | ||||||||||||||||
$ | 8.75—$13.05 | 703,253 | 4.19 | 11.41 | 703,253 | 11.41 | ||||||||||||||||
$ | 13.63—$16.68 | 501,211 | 5.95 | 15.06 | 464,963 | 15.08 | ||||||||||||||||
$ | 17.11—$21.60 | 432,412 | 6.19 | 20.47 | 432,412 | 20.47 | ||||||||||||||||
$ | 24.20—$24.30 | 516,438 | 6.94 | 24.28 | 413,263 | 24.27 | ||||||||||||||||
$ | 26.72—$27.02 | 62,400 | 6.88 | 26.84 | 52,588 | 26.83 | ||||||||||||||||
$ | 28.41—$28.41 | 539,976 | 8.08 | 28.41 | 280,205 | 28.41 | ||||||||||||||||
$ | 30.34—$32.54 | 473,200 | 8.17 | 31.83 | 301,652 | 31.68 | ||||||||||||||||
$ | 34.89—$34.89 | 56,000 | 7.81 | 34.89 | 47,938 | 34.89 | ||||||||||||||||
$ | 0.89—$34.89 | 4,164,988 | 5.55 | $ | 17.79 | 3,576,372 | $ | 16.12 |
Board
Compensation. The following table summarizes information about
Options to purchase Ultimate’s Common Stock and Restricted Stock Awards granted
by us to non-employee directors in exchange for services rendered for 2009, 2008
and 2007:
Year
|
Exercise
Price of Stock Options Granted (1) (2) (3) (4) (5)
|
Number
of Options Granted
|
Market
Value of Restricted Stock Awards Granted
|
Number
of Restricted Stock Awards Granted
|
||||
2007
|
$7.82
|
2,120
|
$–
|
–
|
||||
8.76
|
1,890
|
–
|
–
|
|||||
30.34
|
23,750
|
30.34
|
2,055
|
|||||
34.89
|
23,750
|
34.89
|
1,790
|
|||||
2008
|
$28.41
|
20,000
|
$28.41
|
2,195
|
||||
32.54
|
23,750
|
32.54
|
1,920
|
|||||
32.39
|
23,750
|
32.39
|
1,925
|
|||||
14.72
|
23,750
|
14.72
|
4,245
|
|||||
2009
|
–
|
–
|
$14.43
|
10,580
|
||||
–
|
–
|
18.75
|
9,580
|
|||||
–
|
–
|
26.97
|
8,565
|
|||||
–
|
–
|
27.63
|
8,510
|
|||||
______________________
|
(1)
|
Option
grants to non-employee directors during the first half of 2007 were
granted at an exercise price equal to 30% of the fair value of Ultimate’s
Common Stock on the date of grant.
|
|
(2)
|
Option
grants to non-employee directors beginning in the second half of 2007 were
granted at fair value based on the closing price of Ultimate’s Common
Stock on the date of grant.
|
|
(3)
|
Options
granted during the first half of 2007 become exercisable on the earliest
of (i) the fifth anniversary of the date of grant, (ii) the date on which
the director ceases to be a member of the Board and (iii) the effective
date of a change in control of Ultimate. All Options granted
during 2007, 2008 and 2009 were valued on the date of grant in accordance
with ASC 718. These Options were
granted in lieu of cash retainers and Board meeting
fees.
|
|
(4)
|
Options
granted during the second half of 2007 and 2008 became exercisable
immediately. All such Options
were valued on the date of grant in accordance with the requirements
prescribed in ASC 718. These Options were granted in
lieu of cash retainers and Board meeting
fees.
|
|
(5)
|
The
non-cash compensation expense related to the Board Options and Restricted
Stock Awards granted in 2009, 2008 and 2007, determined pursuant to the
application of ASC 718 was $188,000, $1,052,000 and $767,000,
respectively, and is included in general and administrative expenses in
the accompanying consolidated statements of
operations.
|
Warrants
Warrants
to purchase shares of our Common Stock, all of which were exercised as of
December 31, 2007, were fully vested and exercisable as of the date of
issuance. There were no warrants outstanding during the years ended
December 31, 2009 and December 31, 2008. A summary of warrants as of
December 31, 2007 and changes during the year ended, is presented
below:
Shares
|
Weighted
Average Exercise Price
|
|||||||
Outstanding
at December 31, 2006
|
44,550 | $ | 4.00 | |||||
Granted
|
— | 4.00 | ||||||
Exercised
|
(44,550 | ) | 4.00 | |||||
Canceled
|
— | 4.00 | ||||||
Outstanding
at December 31, 2007
|
— | $ | – |
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.
17. Commitments
and Contingencies
Operating
Leases
We lease
corporate office space and certain equipment under non-cancellable operating
lease agreements expiring at various dates. Total rent expense under these
agreements was $3.8 million, $3.9 million and $2.2 million for the years ended
December 31, 2009, 2008 and 2007, respectively. Future minimum annual rental
commitments related to these leases are as follows at December 31, 2009 (in
thousands):
Year
|
Amount
|
|||
2010
|
$ | 3,561 | ||
2011
|
3,511 | |||
2012
|
3,432 | |||
2013
|
2,841 | |||
2014
|
2,682 | |||
Thereafter
|
4,667 | |||
$ | 20,694 |
Product
Liability
Software
products such as those offered by Ultimate frequently contain undetected errors
or failures when first introduced or as new versions are released. Testing of
our products is particularly challenging because it is difficult to simulate the
wide variety of computing environments in which our customers may deploy these
products. Despite extensive testing, we have from time to time 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 our products. In addition, there can be no assurance that,
despite testing by us 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 our
business, operating results and financial condition.
Litigation
From
time-to-time, Ultimate is involved in litigation relating to claims arising out
of its operations in the normal course of business. We are 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 our
operating results or financial condition.
18. Related
Party Transactions
On
October 23, 2006, Ultimate’s Board elected Al Leiter as a non-employee member of
Ultimate’s Board of Directors. During October 2002, Mr. Leiter
entered into an agreement with Ultimate pursuant to which he agreed to (i)
attend and participate in certain internal meetings of Ultimate; (ii) assist our
salespeople with prospects; and (iii) act as an official spokesperson for
Ultimate in exchange for which we agreed to make contributions to Leiter’s
Landing, Mr. Leiter’s non-profit charitable organization benefiting children, in
the amount of one tenth (1/10) of one percent, or 0.1%, of our total revenues as
reported in our consolidated statements of operations. Pursuant to
this agreement, for the fiscal years ended December 31, 2009, 2008 and 2007,
Ultimate contributed a total of approximately $197,000, $179,000, and $142,000,
respectively, to Leiter’s Landing. In February 2007, Mr. Leiter and
Ultimate agreed that the maximum amount payable by Ultimate in any one year
under this agreement is $200,000.
19. Employee
Benefit Plan
Ultimate
provides retirement benefits for eligible employees, as defined, through a
defined contribution plan that is qualified under Section 401(k) of the Internal
Revenue Code (the “401(k) Plan”). Contributions to the 401(k) Plan, which are
made at the sole discretion of Ultimate, were $1.8 million, $1.6 million and
$1.1 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
None.
Evaluation of Disclosure Controls and
Procedures
Ultimate
carried out an evaluation, under the supervision and with the participation of
Ultimate’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 Ultimate’s disclosure controls and procedures as of the end of the
period covered by this Form 10-K pursuant to Rules 13a-15(e) or 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on
that evaluation, Ultimate’s management, including the CEO and CFO, concluded
that, as of December 31, 2009, Ultimate’s disclosure controls and procedures
were effective to provide reasonable assurance that information required to be
disclosed in Ultimate’s Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified by the SEC’s rules and forms and
is accumulated and communicated to management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required
disclosure. 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 thus has inherent limitations. Therefore, even
those systems determined to be effective can only provide reasonable assurance
as to the achievement of their objectives.
Management's
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f)
under the Exchange Act). Internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
reporting purposes in accordance with GAAP. Our management assessed
the effectiveness of our internal control over financial reporting as of
December 31, 2009. In making this assessment, our management used the
criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on the results of this assessment,
our management has concluded that, as of December 31, 2009, our internal control
over financial reporting was effective. However, because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements and, even when determined to be effective, can only
provide reasonable assurance with respect to financial statement preparation and
presentation.
KPMG LLP,
the independent registered public accounting firm that audited our consolidated
financial statements included in this Form 10-K, has issued an attestation
report on Ultimate’s internal control over financial reporting as of December
31, 2009, which is included on page 59 of this Form 10-K.
Changes in Internal Control Over
Financial Reporting
There
have been no changes during the fourth quarter of 2009 in Ultimate’s internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, Ultimate’s internal control over
financial reporting.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
The
Ultimate Software Group, Inc.:
We have
audited The Ultimate Software Group, Inc. and subsidiaries (the Company)
internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the
Company as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders’ equity and comprehensive income (loss),
and cash flows for each of the years in the three-year period ended December 31,
2009, and our report dated March 5, 2010 expressed an unqualified opinion on
those consolidated financial statements.
/s/
KPMG LLP
KPMG LLP
March 5, 2010
Miami,
Florida
Certified
Public Accountants
None.
PART
III
The
directors, executive officers (Messrs. Scott Scherr, Marc D. Scherr and Mitchell
K. Dauerman) and other key employees of Ultimate, and their ages as of February
18, 2010, are as follows:
Name
|
Age
|
Position(s)
|
Scott
Scherr
|
57
|
Chairman
of the Board, President and Chief Executive Officer
|
Marc
D. Scherr
|
52
|
Vice
Chairman of the Board and Chief Operating Officer
|
Mitchell
K. Dauerman
|
52
|
Executive
Vice President, Chief Financial Officer and Treasurer
|
Jon
Harris
|
45
|
Senior
Vice President, Chief Services Officer
|
Robert
Manne
|
56
|
Senior
Vice President, General Counsel
|
Vivian
Maza
|
48
|
Senior
Vice President, People and Secretary
|
Laura
Johnson
|
45
|
Senior
Vice President, Product Strategy
|
Adam
Rogers
|
35
|
Senior
Vice President, Chief Technology Officer
|
Greg
Swick
|
46
|
Senior
Vice President, Chief Sales Officer of Enterprise Sales
|
Chris
Phenicie
|
38
|
Senior
Vice President, Workplace Sales
|
Bill
Hicks
|
44
|
Senior
Vice President, Chief Information Officer
|
Julie
Dodd
|
40
|
Vice
President and General Manager of Workplace Operations
|
Jody
Kaminsky
|
35
|
Vice
President, Marketing
|
James
A. FitzPatrick, Jr.
|
60
|
Director
|
LeRoy
A. Vander Putten
|
75
|
Director
|
Rick
A. Wilber
|
63
|
Director
|
Robert
A. Yanover
|
73
|
Director
|
Alois
T. Leiter
|
44
|
Director
|
Scott
Scherr has served as President and a director of Ultimate since its inception in
April 1996 and has been Chairman of the Board and Chief Executive Officer of
Ultimate 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 Ultimate 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 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 Ultimate and the father-in-law of Adam Rogers,
Senior Vice President, Chief Technology Officer.
Marc D.
Scherr has been a director of Ultimate since its inception in April 1996 and has
served as Vice Chairman since July 1998 and as Chief Operating Officer since
October 2003. Mr. Scherr is also a member of the Executive Committee of the
Board. Mr. Scherr became an executive officer of Ultimate 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
Ultimate.
Mitchell
K. Dauerman has served as Executive Vice President of Ultimate since April 1998
and as Chief Financial Officer and Treasurer of Ultimate since September 1996.
From 1979 to 1996, Mr. Dauerman held various positions with KPMG LLP, an
accounting firm, serving as a Partner in the firm from 1988 to 1996. Mr.
Dauerman is a Certified Public Accountant.
Jon
Harris has served as Senior Vice President, Services since January 1, 2002 and
Chief Services Officer since February 6, 2007. 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 Senior Vice President, General Counsel since February 2004
and served as Vice President, General Counsel from May 1999 through January
2004. Prior to joining Ultimate, 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 Ultimate since its
inception.
Vivian
Maza has served as Senior Vice President, People of Ultimate since February 2004
and served as Vice President, People from January 1998 through January
2004. Ms. Maza has served as Secretary of Ultimate since September
1996. Prior to that, Ms. Maza served as the Office Manager of Ultimate from its
organization in April 1996 and of the Partnership from its inception in 1990
until April 1996. Ms. Maza is an 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.
Laura
Johnson has served as Senior Vice President, Product Strategy since February
2004 and served as Vice President, Product Strategy from July 1998 through
January 2004. From May 1996 to July 1998, Ms. Johnson served as the Director of
Applications Consulting. From 1991 to 1996, Ms. Johnson held various positions
with Best Software, Inc., Abra Products Division. Ms. Johnson holds a Certified
Payroll Professional (CPP) certification from the American Payroll Association
(APA).
Adam
Rogers has served as Senior Vice President, Chief Technology Officer since
February 6, 2007. Mr. Rogers served as Senior Vice President,
Development from December 2002 to February 6, 2007. 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 Ultimate’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. Mr. Rogers is the son-in-law of Scott Scherr, Chairman of the
Board, President and Chief Executive Officer of Ultimate.
Greg
Swick has served as Senior Vice President since January 2001 and as Chief Sales
Officer of Enterprise Sales since February 6, 2007. Mr. Swick served as Vice
President and General Manager of the PEO Division of Ultimate’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
Ultimate, Mr. Swick was President of The Ultimate Software Group of New York and
New England, G.P., a reseller of Ultimate Software which was acquired by
Ultimate 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.
Chris
Phenicie has served as Senior Vice President of Workplace Sales since January
2009 and as Vice President of Workplace Sales since April 2007. From January
2000 to April 2007, Mr. Phenicie served as Strategic Account Manager for
Ultimate. From July 1997 to January 2000, Mr. Phenicie held various sales
positions with ADP, the most recent of which position was Sales
Manager.
Bill
Hicks has served as Senior Vice President, Chief Information Officer since April
2005. Mr. Hicks served as Vice President, Chief Information Officer
from February 2004 through March 2005. From 1993 until February 2004,
Mr. Hicks held various positions in the management of technologies for Precision
Response Corporation, a wholly-owned subsidiary of Interactive Corporation and a
provider of call centers and on-line commerce customer care services, including
Chief Information Officer and Senior Vice President of Technology from August
2000 until February 2004.
Julie
Dodd has served as Vice President and General Manager of Workplace Operations
since January 2009. From October 2007 to December 2008, Ms. Dodd
served as the Director of Product Strategy, with primary focus on the UltiPro
Workplace product offering. Prior to joining Ultimate, Ms. Dodd
provided consulting services for large scale implementations, operations
efficiencies projects and new SaaS product launches for various service
providers. From 2002 to 2005, Ms. Dodd held various executive positions with
Ceridian Corporation, an information technology company, supporting their small
and mid-market solutions.
Jody Kaminsky has served as Vice
President, Marketing since July 2008. Ms. Kaminsky served as Vice
President, Marketing Operations from July 2005 to June 2008, as Director of
Strategic Marketing from December 2002 through June 2005, and in
various other Marketing and Communications positions from November 1999 through
November 2002. Prior to that, Ms. Kaminsky held various positions
with General Electric's GE Information Services division from April 1997 through
August 1999 including Manager of Communications and Community
Relations.
James A.
FitzPatrick, Jr. has served as a director of Ultimate since July 2000. Mr.
FitzPatrick is a partner in the law firm Dewey & LeBoeuf LLP, which provides
legal services to Ultimate. Mr. FitzPatrick has been a partner in Dewey &
LeBoeuf LLP or its predecessor firms since January 1983 and was an associate
from September 1974 until January 1983.
LeRoy A.
Vander Putten has served as a director of Ultimate 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 served as the Executive Chairman of
The Insurance Center, Inc., a holding company for 14 insurance agencies, from
October 2001 until January 2006 at which time the company was sold. 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.
Rick A.
Wilber has served as a director of Ultimate since October 2002 and is a member
of the Audit Committee and a member of the Compensation Committee of the Board.
Mr. Wilber formerly served on Ultimate’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.
Robert A.
Yanover has served as a director of Ultimate since January 1997 and is Chairman
of the Audit Committee and a member of the Compensation Committee of the Board.
Mr. Yanover founded Computer Leasing Corporation of Michigan, a private leasing
company, in 1975 and served as its President from its founding until 2007, at
which time Mr. Yanover retired. 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.
Al Leiter
has served as director of Ultimate since October 2006 and is a member of the
Compensation Committee. Mr. Leiter was a three-time Major League
Baseball World Champion and two-time All-Star pitcher formerly with the New York
Yankees, New York Mets, Toronto Blue Jays, and Florida Marlins, and has been an
official spokesperson for Ultimate since 2002. Mr. Leiter has served
as a television commentator for the Yankees Entertainment and Sports Network
since 2006 and as an analyst with MLB Network since January 2009. Mr.
Leiter is president and founder of Leiter’s Landing, a charitable organization
formed in 1996. Mr. Leiter has served on the Executive Committee of
New York City’s official tourism marketing organization, NYC & Company,
since 2000 and is on the Board of Directors of America’s Camp, a legacy
organization of the Twin Towers Fund, on which he also served as a board
member.
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. Messrs. Scott Scherr and Al Leiter serve on the Board in the
class whose term expires at the Annual Meeting of stockholders (the “Annual
Meeting”) in 2010. Messrs. LeRoy A. Vander Putten and Robert A.
Yanover serve on the Board in the class whose term expires at the Annual Meeting
in 2011. Messrs. Marc D. Scherr, James A. FitzPatrick, Jr. and Rick
A. Wilber serve on the Board in the class whose term expires at the Annual
Meeting in 2012.
Code
of Ethics
Ultimate has adopted a Code of Ethics
within the meaning of Item 406 of Regulation S-K of the Exchange
Act. Ultimate’s Code of Ethics applies to its principal executive
officer, principal financial officer and principal accounting
officer. A copy of Ultimate’s Code of Ethics is posted on Ultimate’s
website at www.ultimatesoftware.com. In
the event that Ultimate makes any amendments to, or grants any waiver from, a
provision of the Code of Ethics that requires disclosure under Item 5.05 of Form
8-K, Ultimate will post such information on its website.
Corporate
Governance
The Board
does not have a standing nominating committee or committee performing similar
functions. The Board has determined that it is appropriate not to
have a nominating committee because of the relatively small size of the Board
and because the entire Board functions in the capacity of a nominating
committee.
When
considering potential director candidates, the Board considers the candidate’s
independence (as mandated by the NASDAQ rules), character, judgment, age,
skills, financial literacy, and experience in the context of the needs of
Ultimate and the Board. Other information required by this item is
incorporated herein by reference to the information set forth in Ultimate’s
Proxy Statement for the Annual Meeting in 2010 under the heading “Corporate
Governance, Board Meetings and Committees of the Board.” In 2009,
Ultimate did not pay any fees to a third party to assist in identifying or
evaluating potential nominees.
The Board
will consider director candidates recommended by Ultimate’s stockholders in a
similar manner as those recommended by members of management or other
directors.
Other
Information
The
information required by this item is incorporated herein by reference to the
information set forth in Ultimate’s Proxy Statement for the Annual Meeting in
2010 under the headings “Section 16(a) Beneficial Ownership Reporting
Compliance” and “Board Meetings and Committees of the Board-Audit
Committee.”
The
information required by this item is incorporated herein by reference to the
information in Ultimate’s Proxy Statement for the 2010 Annual Meeting under the
headings “Executive Compensation,” “Director Compensation” and “Compensation
Committee Report.”
The
information set forth in this item is incorporated herein by reference to the
information in Ultimate’s Proxy Statement for the 2010 Annual Meeting under the
heading “Security Ownership of Certain Beneficial Owners and
Management.” See page [28] of this Form 10-K for information related
to our equity compensation plans.
The
information required by this item is incorporated herein by reference to the
information in Ultimate’s Proxy Statement for the 2010 Annual Meeting under the
headings “Certain Related Transactions” and “Corporate Governance, Board
Meetings and Committees of the Board.”
The information required by this item
is incorporated herein by reference to the information in Ultimate’s Proxy
Statement for the 2010 Annual Meeting under the heading “KPMG LLP
Fees.”
PART
IV
Documents
filed as part of this Form 10-K:
|
(1)
|
Consolidated
Financial Statements. The following consolidated financial statements of
Ultimate are included in Part II, Item 8, of this Form
10-K:
|
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of December 31, 2009 and 2008
Consolidated
Statements of Operations for the Years Ended December 31, 2009, 2008 and
2007
Consolidated
Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the Years
Ended December 31, 2009, 2008 and 2007
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
2007
Notes to Consolidated Financial
Statements
(2) Consolidated
Financial Statement Schedule:
Report of
Independent Registered Public Accounting Firm
Schedule
II — Valuation and Qualifying Accounts
(3)
|
Exhibits
|
Number
|
Description
|
3.1
|
Amended
and Restated Certificate of Incorporation (incorporated 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 to Exhibit 2 to Ultimate’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
**
|
4.2
|
Form
of Warrant for Common Stock (incorporated by reference
to
|
Exhibit
4.4 to Ultimate’s Registration Statement on Form S-3 (File No.
333-107527), initially filed July 31, 2003)
|
|
10.1
|
Shareholders
Rights Agreement, dated June 6, 1997 among Ultimate and
certain
|
stockholders
named therein **
|
|
10.2
|
Asset
Purchase Agreement, dated February 2, 1998, among The Ultimate Software
Group of Virginia, Inc., Ultimate and certain principals named therein
**
|
10.3
|
Asset
Purchase Agreement, dated February 2, 1998, among
Ultimate,
|
The
Ultimate Software Group of the Carolinas, Inc. and certain principals name
therein **
|
|
10.4
|
Asset
Acquisition Agreement, dated February 20, 1998, among
Ultimate,
|
The
Ultimate Software Group of Northern California, Inc. and certain
principals named therein **
|
|
10.5
|
Asset
Purchase Agreement dated March 4, 1998, among Ultimate, Ultimate Investors
Group, Inc. and certain principals name therein **
|
10.6
|
Agreement
and Plan of Merger dated February 24, 1998, among Ultimate, 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
|
(incorporated
by reference to the corresponding exhibit in Ultimate’s Annual Report on
Form 10-K dated March 31, 2003)
|
|
10.8
|
Commercial
Office Lease agreement by and between UltiLand, Ltd., a Florida limited
partnership,
|
and
Ultimate, dated December 31, 1998 (incorporated by reference herein
to
|
|
corresponding
exhibit in Ultimate’s Annual Report on Form 10-K dated March 31,
1999)
|
|
10.9
|
Rights
Agreement, dated as of October 22, 1998, between Ultimate 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 Ultimate’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
Ultimate, dated December 22, 1998 (incorporated by reference to Exhibit
10.1
|
|
to
Ultimate’s Quarterly Report on Form 10-Q dated August 15,
1999)
|
|
10.11
|
Letter
Agreement between Aberdeen Strategic Capital LP and Ultimate, dated
October 21, 1999
|
(incorporated
herein by reference to Exhibit 10.1 to Ultimate’s Quarterly
Report
|
|
on
Form 10-Q dated November 15, 1999)
|
|
10.12
|
Warrant
issued to Aberdeen Strategic Capital LP (incorporated 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 Ultimate and Ceridian
|
Corporation
dated as of March 9, 2001 (incorporated by reference to Exhibit 10.17 to
Ultimate’s
|
|
Annual
Report on Form 10-K dated March 27, 2001)
|
|
10.14
|
Letter
amendment between Ultimate and Ceridian Corporation dated as of August 9,
2001
|
(incorporated
by reference to Exhibit 10.14 to Ultimate’s Annual Report on Form
10-K
|
|
dated
March 29, 2002)
|
|
10.15
|
Letter
amendment between Ultimate and Ceridian Corporation dated as of February
5, 2002
|
(incorporated
by reference to Exhibit 10.15 to Ultimate’s Annual Report on Form
10-K
|
|
dated
March 29, 2002)
|
|
10.16
|
Loan
and Security Agreement by and between Ultimate and Silicon Valley
Bank
|
dated
as of November 29, 2001 (incorporated by reference to Exhibit 10.16 to
Ultimate’s
|
|
Annual
Report on Form 10-K dated March 29, 2002)
|
|
10.17
|
Revolving
Promissory Note by and between Ultimate and Silicon Valley Bank dated as
of November 29, 2001 (incorporated by reference to Exhibit 10.17 to
Ultimate’s
|
Annual
Report on Form 10-K dated March 29, 2002)
|
|
10.18
|
Equipment
Term Note by and between Ultimate and Silicon Valley Bank dated as
of
|
November
29, 2001 (incorporated herein by reference to Exhibit 10.18 to Ultimate’s
Annual Report on Form 10-K dated March 29, 2002)
|
|
10.19
|
Services
Agreement between Ultimate and Ceridian Corporation dated as of February
10, 2003
|
(incorporated
by reference to the corresponding exhibit in Ultimate’s Annual Report on
Form 10-K dated March 31, 2003)
|
|
10.20
|
Third
Loan Modification Agreement by and between Ultimate
|
and
Silicon Valley Bank dated March 27, 2003 (incorporated by reference to the
corresponding exhibit in Ultimate’s Annual Report on Form 10-K dated March
31, 2003)
|
|
10.21
|
Fourth
Loan Modification Agreement by and between Ultimate
|
and
Silicon Valley Bank dated as of April 29, 2003 (incorporated by reference
to Exhibit 10.10 to Ultimate’s Quarterly Report on Form 10-Q dated May 14,
2003)
|
|
10.22
|
Change
in Control Bonus Plan for Executive Officers, effective
|
March
5, 2004 (incorporated by reference to Exhibit 10.1 to Ultimate’s Quarterly
Report on Form 10-Q dated May 13, 2004)
|
|
10.23
|
Fifth
Loan Modification Agreement by and between Ultimate
|
and
Silicon Valley Bank dated as of May 28, 2004 (incorporated by reference to
Exhibit 10.1 to Ultimate’s Quarterly Report on Form 10-Q dated August 12,
2004)
|
|
10.24
|
Silicon
Valley Bank Second Amended and Restated Revolving Promissory Note by and
between
|
Ultimate
and Silicon Valley Bank dated May 28, 2004 (incorporated by reference to
Exhibit 10.2 to Ultimate’s Quarterly Report on Form 10-Q dated August 12,
2004)
|
|
10.25
|
Amended
Nonqualified stock option agreement (incorporated by reference to Exhibit
10.1 to Ultimate’s Form 8-K dated January 3, 2006)
|
10.26
|
Amended
Director Fee Option Award Agreement (incorporated by reference to Exhibit
10.2 to Ultimate’s Form 8-K dated January 3, 2006)
|
10.27
|
Amended
Director Fee Option Agreement for Non-Employee Directors (as incorporated
by reference to Exhibit 10.27 to Ultimate’s Annual Report on Form 10-K
dated March 15, 2006)
|
10.28
|
Entry
into a Material Definitive Agreement with executives
(incorporated by reference to Ultimate’s Form 8-K, Item 1.01 dated
February 10, 2006)
|
10.29
|
Seventh
Loan Modification Agreement between Ultimate and Silicon Valley
Bank
|
(incorporated
by reference to Exhibit 10.1 to Ultimate’s Form 8-K dated June 17,
2005)
|
|
10.30
|
Term
Note between Ultimate and Silicon Valley Bank (incorporated by reference
to Exhibit 10.2
|
to
Ultimate’s Form 8-K dated June 17, 2005)
|
|
10.31
|
Notice
of Termination of License Agreement and Acknowledgement of Receipt
by
|
Ceridian
Corporation dated, March 9, 2006 (incorporated by reference to Exhibit
10.31 to the Company’s Annual
Report on Form 10-K, dated March 15, 2006)
|
|
10.32
|
Commercial
Office Lease by and between ROHO Ultimate, LTD. II, a Florida limited
partnership (“Landlord”) and
Ultimate dated May 23, 2001 (incorporated by reference to
Exhibit 10.32 to the Company’s Annual Report on Form 10-K,
dated March 15, 2006)
|
10.33
|
Agreement
of Purchase and Sale by and between Parry F. Goodman and Ivy Goodman and
Robert J. Manne and/or assigns dated September 22,
2004 (incorporated by reference to Exhibit 10.33 to
the Company’s Annual Report on Form 10-K, dated March 15,
2006)
|
10.34
|
Assignment
of Agreement of Purchase and Sale by and between Robert J. Manne a/k/a
Robert Manne and Ultimate dated October 26, 2004 (incorporated by
reference to Exhibit 10.34 to Ultimate’s Annual Report on Form 10-K, dated
March 15, 2006)
|
10.35
|
Weston
Town Center South Office Building Lease between South Office Building-DLB,
LLC, a Florida Limited Liability Company, South Office Building Bagtrust,
LLC, a Florida Limited Liability Company, and South Office Building-BJB,
LLC, a Florida Limited Liability Company, and Ultimate and Weston Common
Area LTD., dated August 18, 2005 (incorporated by reference to Exhibit
10.35 to Ultimate’s Annual Report on Form 10-K, dated March 15,
2006)
|
10.36
|
Galleria
Atlanta office lease agreement between Galleria 600, LLC, a Delaware
limited liability company, and Ultimate, dated April 27,
2006 (incorporated by reference to Exhibit 10.36 to Ultimate’s
Quarterly Report on Form 10-Q, dated August 8, 2006
|
10.37
|
Lease
of Office Space by and between OMERS Realty Corporation CPP Investment
Board Real Estate Holdings Inc., and The Ultimate Group of Canada, Inc.,
dated August 22, 2006 (incorporated by reference to Exhibit 10.37 to
Ultimate’s Quarterly Report on Form 10-Q, dated November 8,
2006)
|
10.38
|
Indemnity
Agreement between OMERS Realty Corporation, CPP Investment Board Real
Estate Holdings, Inc., and Ultimate dated August 22, 2006 (incorporated by
reference to Exhibit 10.38 to Ultimate’s Quarterly Report on Form 10-Q,
dated November 8, 2006)
|
10.39
|
Amendment
to Lease by and between ROHO Ultimate, Ltd. I (“Landlord”) and Ultimate
Group. Inc. (“Tenant”) for Demised premises at 2000 Ultimate Way, Weston,
FL 33326 (the “Premises”) dated February 15, 2000 (incorporated by
reference to Exhibit 10.39 to Ultimate’s Annual Report on Form 10-K, dated
March 16, 2007)
|
10.40
|
Lease
Relating to Unit 2 Sceptre House, Hornbeam Park, Harrogate between St.
James Property Management Limited (“The Landlord”) And RTIX Limited (“The
Tenant”) dated May 25, 2005 (incorporated by reference to Exhibit 10.40 to
Ultimate’s Annual Report on Form 10-K, dated March 16,
2007)
|
10.41
|
Counterpart/Underlease
relating to Unit 2 Second Floor Sceptre House Hornbeam Square North
Hornbeam Business Park, Harrogate between RTIX Limited (“The Landlord”)
and First 4 IT Limited to (“The Tenant”) dated May 25, 2005 (incorporated
by reference to Exhibit 10.41 to Ultimate’s Annual Report on Form 10-K,
dated March 16, 2007)
|
10.42
|
First
Amendment to Lease between Galleria 600, LLC (“Landlord”) and Ultimate,
dated August 18, 2006 (incorporated by reference to Exhibit 10.42 to
Ultimate’s Annual Report on Form 10-K,
dated March 16, 2007)
|
10.43
|
Amended
and Restated Change in Control Bonus Plan for Executive Officers,
effective July 24, 2007 (incorporated by reference to Exhibit 10.1 to
Ultimate’s Quarterly Report on Form 10-Q, dated August 8,
2007)
|
10.44
|
Amended
and Restated 2005 Equity and Incentive Plan (incorporated by reference to
Exhibit 10.1 to Ultimate’s Form 8-K, dated May 18,
2009)
|
10.45
|
Commercial
lease between Weston Office, LLC (“Landlord”) and Ultimate, dated January
18, 2008 (incorporated by reference to Exhibit 10.45 to Ultimate’s Annual
Report on Form 10-K, dated March 13, 2008)
|
10.46
|
Amended
and Restated Rights Agreement, dated as of August 26, 2008, between
Ultimate and Computershare Trust Company, N.A., as Rights
Agent. The Rights Agreement includes the Form of Certificate
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 4.1 to Ultimate’s Current
Report on Form 8-K dated September 2, 2008).
|
10.47
|
Commercial
lease between AGF Woodfield Owner, L.L.C., (“Landlord”) and Ultimate,
dated October 31, 2008 (incorporated by reference to Exhibit 10.47 to
Ultimate’s Annual Report on Form 10-K, dated March 2,
2009)
|
10.48
|
Commercial
lease between 300 Galleria Parkway Associates, L.P., (“Landlord”) and
Ultimate, dated September 8, 2009 (incorporated by reference to Exhibit
10.33 to Ultimate’s Quarterly Report on Form 10-Q, dated November 9,
2009)
|
10.49
|
Commercial
lease between RT Twenty-Sixth Pension Properties Limited (“Landlord”) and
Ultimate, dated September 4, 2009 (incorporated by reference to Exhibit
10.34 to Ultimate’s Quarterly Report on Form 10-Q, dated November 9,
2009)
|
21.1
|
Subsidiary
of the Registrant (incorporated by reference to Exhibit 21.1 to Ultimate’s
Quarterly Report on Form 10-Q, dated November 8, 2007)
|
23.1
|
Consent
of Independent Registered Public Accounting Firm *
|
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, as amended
*
|
|
32.2
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted
|
Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, as amended
*
|
* Filed
herewith.
** Incorporated
by reference to the corresponding exhibit in Ultimate’s Registration
Statement.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
The
Ultimate Software Group, Inc.:
Under
date of March 5, 2010, we reported on the consolidated balance sheets of The
Ultimate Software Group, Inc. and subsidiaries (the Company) as of December 31,
2009 and 2008, and the related consolidated statements of operations,
stockholders’ equity and comprehensive income (loss), and cash flows for each of
the years in the three-year period ended December 31, 2009, which report appears
in the December 31, 2009 Annual Report on Form 10-K of the Company. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed in Item 15 of this Annual Report on 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 audits.
In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth
therein.
/s/
KPMG LLP
KPMG LLP
March 5, 2010
Miami,
Florida
Certified
Public Accountants
SCHEDULE
II
THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
VALUATION
AND QUALIFYING ACCOUNTS
(in
thousands)
Classification
|
Balance
at
Beginning
of Year
|
Charged
to Expenses and Other
|
Write-offs
and
Other
|
Balance
at
End of Year
|
||||||||||||
Allowance
for doubtful accounts:
|
||||||||||||||||
December
31, 2009
|
$ | 700 | $ | 972 | $ | (1,072 | ) | $ | 600 | |||||||
December
31, 2008
|
700 | 1,546 | (1,546 | ) | 700 | |||||||||||
December
31, 2007
|
500 | 1,505 | (1,305 | ) | 700 | |||||||||||
Valuation
allowance for deferred tax asset:
|
Balance
at
Beginning
of Year
|
Charged
to Expenses and Other
|
Write-offs
and
Other
|
Balance
at
End of Year
|
||||||||||||
December
31, 2009
|
$ | 5,657 | (685 | )(3) | $ | – | $ | 4,972 | ||||||||
December
31, 2008
|
5,592 | 65 | (1) | – | 5,657 | |||||||||||
December
31, 2007
|
32,455 | – | (26,863 | ) (2) | 5,592 | |||||||||||
(1) Represents
an increase in the valuation allowance primarily due to foreign
operations.
|
||||||||||||||||
(2) Represents
a decrease in the valuation allowance for the release of the reserves
against deferred tax assets.
(3) Represents
a decrease in the allowance primarily for the recognition in equity of
stock-based payment deductions.
|
Pursuant
to the requirements of 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: March 5, 2010
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
|
March
5, 2010
|
Scott Scherr
|
Officer
and Chairman of the
|
|
Board
|
||
/s/ Mitchell K. Dauerman
|
Executive
Vice President,
|
March
5, 2010
|
Mitchell
K. Dauerman
|
Chief
Financial Officer and
|
|
Treasurer
(Principal Financial
|
||
and
Accounting Officer)
|
|
|
/s/ Marc D. Scherr
|
Vice
Chairman of the Board
|
March
5, 2010
|
Marc
D. Scherr
|
and
Chief Operating Officer
|
|
/s/ James A. FitzPatrick,
Jr.
|
Director
|
March
5, 2010
|
James
A. FitzPatrick, Jr.
|
||
/s/ LeRoy A. Vander Putten
|
Director
|
March
5, 2010
|
LeRoy
A. Vander Putten
|
||
/s/ Rick Wilber
|
Director
|
March
5, 2010
|
Rick
Wilber
|
||
/s/ Robert A. Yanover
|
Director
|
March
5, 2010
|
Robert
A. Yanover
|
||
/s/ Alois T. Leiter
|
Director
|
March
5, 2010
|
Alois
T. Leiter
|
67