The Ultimate Software Group
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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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, 2006
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or
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF 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
The Ultimate Software Group, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware
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65-0694077
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
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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Registrants telephone number, including area code:
(954) 331-7000
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Title
of Class:
Common
Stock, par value $.01 per share
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o 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 o 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
o
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 Registrants 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. o
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer
þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o 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
National Market on June 30, 2006 was approximately
$445.0 million.
As of February 18, 2007, there were 25,106,529 shares
of the Registrants Common Stock, par value $.01,
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for the 2007
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
i
PART I
This Annual Report on
Form 10-K
(the
Form 10-K)
of The Ultimate Software Group, Inc. (Ultimate
Software or the Company) may 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 the
Companys expectations or beliefs, including, but not
limited to, statements concerning the Companys operations
and financial performance and condition. Words such as
anticipates, expects,
intends, plans, believes,
seeks, estimates, and similar
expressions are intended to identify such forward-looking
statements. These forward-looking statements are not guarantees
of future performance and are subject to certain risks and
uncertainties that are difficult to predict. The Companys
actual results could differ materially from those contained in
the forward-looking statements due to risks and uncertainties
associated with fluctuations in the Companys quarterly
operating results, concentration of the Companys product
offerings, development risks involved with new products and
technologies, competition, the Companys 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 the
Companys 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 Exhibit 99.1 hereto. The Company undertakes no
obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise.
UltiPro®
and
Intersourcing®
and their related designs are registered trademarks of Ultimate
Software in the United States. This
Form 10-K
also includes names, trademarks, service marks and registered
trademarks and service marks of companies other than Ultimate
Software.
Overview
Ultimate Software designs, markets, implements and supports
human resources, payroll and talent management solutions in the
United States.
Ultimate Softwares UltiPro software (UltiPro)
is a comprehensive, single source Web-based solution designed to
deliver the functionality businesses need to manage the complete
employee life cycle from recruitment to retirement. The solution
includes feature-sets for talent acquisition and hiring, human
resources compliance, online benefits enrollment and management,
payroll, performance management and appraisals, learning
management, reporting and analytical decision-making tools, time
and attendance, and a self-service Web portal for executives,
managers, administrators, and employees.
Ultimate Software believes that UltiPro helps customers
streamline HR and payroll processes to significantly reduce
administrative and operational costs, while also empowering
managers and staff to analyze workforce trends for better
decision making, accessing critical information quickly and
performing routine business activities efficiently.
UltiPro is marketed primarily through the Companys direct
sales team. Ultimate Software has 1,400 customers,
representing approximately 9,000 companies. Based upon
October 2006 market data from Hoovers and Dun & Bradstreet,
Ultimate Software estimates that its approximate market share is
3 percent in the 15,000 employee and larger space;
4 percent in the 600 to 15,000 employee space, and
2 percent in the 200 to 600 employee space.
Ultimate Softwares hosted offering, branded
Intersourcing (the Intersourcing
Offering), provides Web access to comprehensive workforce
management functionality for organizations that need to simplify
the information technology (IT) support requirements of their
business applications. Ultimate Software believes that
Intersourcing is attractive to companies that want to focus on
their core competencies to increase sales and profits. Through
the Intersourcing model, Ultimate Software provides the
hardware, infrastructure, ongoing maintenance and backup
services for its customers at two data centers, one located in
Miami, Florida and the other in Atlanta, Georgia. Both data
centers are managed by International Business Machines
(IBM).
As part of its comprehensive HR, payroll and talent management
solutions, Ultimate Software provides implementation and
training services to its customers as well as support services,
which have been certified by the Support Center Practices
Certification program for eight consecutive annual evaluations.
UltiPro leverages the Microsoft technology platform, which is
recognized in the industry as a cost-effective, reliable and
scalable platform.
In October 2006, the Company 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 RTIX Acquisition). RTIX
developed the performance management, appraisals, and learning
management solution (RTIX Products) that Ultimate
Software has offered its customers since February 2006. The
Companys newly acquired subsidiary, RTIX Ltd. is currently
marketing and selling the RTIX Products in the United Kingdom as
UltiPro Talent Management, a stand-alone product set.
In October 2006, the Company acquired the rights to the source
code from First Advantage Corporation for its third party
recruitment product, the integrated online recruitment/talent
acquisition solution that Ultimate Software has offered its
customers since April 2005 (Recruitment).
As previously disclosed, Ultimate Software and Ceridian
Corporation (Ceridian) signed an agreement in 2001,
as amended, granting Ceridian a non-exclusive license to use
UltiPro software as part of an on-line offering for Ceridian to
market primarily to businesses with less than 500 employees (the
Original Ceridian Agreement). Ceridian marketed that
solution under the name SourceWeb. During December 2004, RSM
McGladrey Employer Services (RSM), an existing
business service provider (BSP) of Ultimate
Software, acquired Ceridians SourceWeb HR/payroll and
self-service product and existing SourceWeb base of small and
mid-size business customers throughout the United States (the
RSM Acquisition). The financial terms of the
Original Ceridian Agreement have not changed as a result of the
RSM Acquisition. During 2005, Ceridian continued to be
financially obligated to pay, and did pay, Ultimate Software a
minimum fee of $500,000 per month. Effective
January 1, 2006, these minimum fee payments increased
5% per annum, in accordance with the terms of the Original
Ceridian Agreement, and are subject to further 5% per annum
increases, compounded annually, effective January 1, 2007.
The aggregate minimum payments that Ceridian is obligated to pay
Ultimate Software under the Original Ceridian Agreement over the
minimum term of the agreement are $42.7 million. To date,
Ceridian has paid to Ultimate Software a total of
$35.4 million under the Original Ceridian Agreement.
Ultimate Software expects to continue to recognize a minimum of
$642,000 per month in subscription revenues (a component of
recurring revenues) from the Original Ceridian Agreement until
its termination. The amount of subscription revenues recognized
under the Original Ceridian Agreement during the year ended
December 31, 2006, totaling $7.7 million, was the same
as that recognized in 2005 and 2004. Effective March 9,
2006, Ceridian provided Ultimate Software with a two years
advance written notice of termination of the Original Ceridian
Agreement, as permitted under the terms of the Agreement.
Pursuant to such notice, the Original Ceridian Agreement will
terminate on March 9, 2008 (unless terminated earlier for
an uncured material breach).
Ultimate Software 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, the Company formed a wholly-owned
subsidiary, The Ultimate Software Group of Canada, Inc., to
accommodate the planned sales of the Companys products in
Canada. Pursuant to the RTIX Acquisition in October 2006, the
Company expanded business operations to the United Kingdom.
Ultimate Softwares headquarters is located at 2000
Ultimate Way, Weston, Florida 33326 and its telephone number is
(954) 331-7000.
The Companys revenues for the year ended December 31,
2006 include revenues of RTIX, beginning in October 2006 and, as
a result of the RTIX Acquisition, include assets in the United
Kingdom as of December 31, 2006. There are no material
assets or revenues in Canada as of December 31, 2006.
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Revenue
Sources
The Companys revenues are derived from three principal
sources: recurring revenues, services revenues and software
licenses (license revenues).
Recurring revenues consist of maintenance revenues,
Intersourcing revenues from the Companys hosted offering
of UltiPro and, to a lesser extent, subscription revenues from
per-employee-per-month (PEPM) fees generated by
business partners, principally Ceridian. Maintenance revenues
are derived from maintaining, supporting and providing periodic
updates for the Companys products under software license
agreements. Subscription revenues are principally derived from
PEPM fees earned through the Intersourcing Offering, Base
Hosting (defined below), and revenues generated from the
Original Ceridian Agreement. Maintenance revenues are recognized
ratably over the service period, generally one year. To the
extent there are upfront fees associated with the Intersourcing
Offering, Base Hosting or the BSP sales channel, subscription
revenues are recognized ratably over the minimum term of the
related contract upon the delivery of the product and services.
Ongoing PEPM fees from the Intersourcing Offering, Base Hosting
and the BSP sales channel are recognized as subscription
revenues (a component of recurring revenues in the consolidated
statements of operations) as the services are delivered.
Services revenues include revenues from fees charged for the
implementation of the Companys software products and
training of customers in the use of such products, fees for
other services, the provision of payroll-related forms and the
printing of
Form W-2s
for certain customers, as well as certain reimbursable
out-of-pocket
expenses. Revenues for training and implementation consulting
services are recognized as services are performed to the extent
the pricing for such services is on a time and materials basis
and the payment terms are within the Companys ordinary and
customary payment cycle. In the event payments for services are
outside the ordinary and customary period for the Company, the
related revenues are recognized as payments come due based on
their relative fair values. Other services are recognized as the
product is shipped or as the services are rendered, depending on
the specific terms of the arrangement.
Arrangement fees related to fixed-fee implementation services
contracts are recognized using the percentage of completion
accounting method, which involves the use of estimates.
Percentage of completion is measured at each reporting date
based on hours incurred to date compared to total estimated
hours to complete 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 the
Company receives final acceptance from the customer.
License revenues include revenues from software license
agreements for the Companys products, entered into between
the Company and its customers in which the license fees are
non-cancellable. License revenues are generally recognized upon
the delivery of the related software product when all
significant contractual obligations have been satisfied. Until
such delivery, the Company records amounts received when
contracts are signed as customer deposits, which are included
with deferred revenues in the consolidated balance sheets.
The percentage contribution for each of the three principal
sources of revenue was as follows:
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For the Years Ended December 31,
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2006
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2005
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2004
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Revenues:
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Recurring
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55.7
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56.7
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%
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54.2
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Services
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33.6
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31.5
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34.6
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License
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10.7
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11.8
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11.2
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Total revenues
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100.0
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%
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100.0
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100.0
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%
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3
Features
of UltiPro
Ultimate Softwares UltiPro product is a payroll and talent
management solution designed to offer the following features to
its customers:
Web Workforce Portal. UltiPro includes a Web
workforce portal that can serve as a companys
communications hub and the central gateway for business
activities. It provides functionality for everyone in the
customers organization, not just human resources/payroll
and finance departments, but also executives, staff managers and
individual employees. With UltiPros workforce portal, a
companys HR/payroll staff, managers and administrators can
complete daily employee administration tasks, administer
benefits, manage staff and access reporting in real-time, from
one central location. Managers and executives can perform
real-time Web queries on their workforce data, access commonly
requested reports and analyze workforce statistics and trends
on-demand. Employees can review their own pay and benefits
information, get questions answered and complete routine updates
instantly. HR and other administrators can expedite more than
100 routine business processes such as hiring, rehiring or
terminating an employee; inputting salary increases; and
changing an employees job, division, or department.
Ultimate Software believes that UltiPros workforce portal
can increase administrative efficiencies by providing reporting,
staff management processes and business intelligence to
management over the Internet and can reduce operating costs by
eliminating the need for organizations to print and distribute
paper communications, handbooks, forms and paychecks.
Feature-Rich, Built-in Functionality. UltiPro
includes human resources, payroll, and benefits management,
comprehensive reporting (more than 600 standard and customizable
reports delivered, including government compliance reporting and
strategic analytics), a workforce portal with Web-based employee
and manager self-service, Web-based benefits enrollment, Web
employee administration (including workflow), recruitment and
training management, time and attendance management, workforce
scheduling, and compensation and performance management. Based
upon the amount of built-in and integrated functionality, the
Company believes that UltiPro minimizes the need for extensive
customizations or changes to source code, facilitates
streamlined management of the total employment cycle, enables
organizations to minimize the time invested in tactical,
burdensome HR/payroll administrative activities, and provides
strategic HR management reports and tools.
Implementation and System Update
Efficiency. Ultimate Software offers a solution that
has been designed to minimize the time and effort required for
implementing, customizing and updating. UltiPro delivers an
extensive amount of functionality
out-of-the-box
so that few customizations are required by the typical customer.
The Company also provides an implementation methodology,
experienced implementation staff and customer training to
facilitate rapid implementation. Ultimate Software continues to
refine and improve its implementation process to enable its
customers to implement more quickly than competitive solutions
with comparable functionality deployed. To facilitate
customizations and fast system upgrades, the Company has
designed UltiPro to allow customers to load system updates, and
not overwrite their customizations because the system stores
custom changes as
sub-classed
objects or data that reside outside the core
program, thus avoiding the time-consuming process of rewriting
custom changes.
Reduced Total Cost of Ownership. The Company
believes that the UltiPro solution provides cost saving
opportunities for its customers and that UltiPro, whether
purchased as a license or as a service through Intersourcing, is
competitively priced. In addition, the Company believes that its
current practices in implementing the UltiPro solution result in
a cost savings for customers when compared with implementations
of other similar solutions in the industry. A customer may also
reduce the administrative and information technology support
costs associated with the organizations human resources,
benefits and payroll functions over time. Tight integration
helps to reduce administrative costs by facilitating accurate
information processing and reporting, and reducing
discrepancies, errors and the need for time-consuming
adjustments. In addition, administrative costs can be reduced by
providing an organization with greater access to information and
control over reporting.
Leveraging of Leading Technologies. Ultimate
Software has consistently focused on identifying leading
technologies and integrating them into its products. UltiPro
leverages Microsofts technical architecture as well as XML
to increase design efficiencies within the system and
particularly for workflow capabilities.
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With UltiPro version 6.0, released in 2002, Ultimate Software
introduced new technology architecture for UltiPro to enable
advanced Web Services capabilities. Ultimate Softwares
Distributed Process Management platform leverages leading
technologies such as Microsofts Component Object Model
(COM), Microsoft Message Queuing (MSMQ), eXtensible Markup
Language (XML), Simple Object Access Protocol (SOAP) and Web
Services Definition Language (WSDL) to create a distributed
processing framework that is Internet-enabled. This allows
customers to initiate commonly requested services such as
running a report from the Web. These requests are automatically
routed to a separate process application server to ensure
efficient processing and load balancing. UltiPros XML Web
Services feature set allows customers to scale as they grow and
take advantage of additional Web Services as needed.
Ultimate Software has been working on the Microsoft .NET
platform, and it is expected to be the foundation of the
Companys next major product release. Ultimate Software is
using AJAX (Asynchronous JavaScript and XML) to enable
delivery of richer user interfaces, such as allowing users to
get information from the Web server without having to submit the
Web page and wait for the server to redraw the screen. With
AJAX, building data entry pages is expected to be more rapid
than traditional programming methods, and the end-result pages
should be more user-friendly. Basic things like validating
controls on the Web page are expected to happen almost
instantaneously versus waiting for a compiled list of errors
after clicking a submit button.
Ease of Use and Navigation. Ultimate Software
designs its products to be user-friendly and to simplify the
complexities of managing employees and complying with government
regulations in the payroll and talent management areas. UltiPro
uses familiar Internet interface techniques and functions
through a Web browser, which the Company believes makes it
convenient and easy to use. A customers executives,
managers, administrators and employees have Web access to manage
payroll and employee functions, run reports or find answers to
routine questions through an intuitive user interface. The
Company refers to this easy navigation as Two clicks to
anywhere.
Comprehensive Customer Services and Industry-Specific
Expertise. Ultimate Software 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. As of December 31, 2006,
Ultimate Software employed approximately 263 people in
customer services, which includes the implementation, product
support, technical support and knowledge management (or
training) departments and approximately 30 additional people in
hosting services. Ultimate Softwares customer support
center has received the Support Center Practices
(SCP) Certification for the eighth consecutive year.
The SCP program was created by the Service & Support
Professionals Association (SSPA) and a consortium of information
technology companies to create a recognized quality
certification for support centers. SCP Certification quantifies
the effectiveness of customer support based upon relevant
performance standards and represents best practices within the
technology support industry according to SSPA. Recognizing the
importance of issuing timely updates that reflect changes in tax
and other regulatory laws, Ultimate Software employs a dedicated
research team to track jurisdictional tax changes to the more
than 12,000 tax codes included in UltiPro as well as changes in
other employee-related regulations.
Technology
Ultimate Software seeks to provide its clients with optimum
performance, advanced functionality and ease of scalability and
access to information through the use of leading Internet
standard technologies. The UltiPro solution was designed to
leverage cutting-edge technologies such as XML and Web Services
that use open standards to provide customers with a
cost-effective platform for performing critical business
functions rapidly over the Web and allowing different systems to
communicate with one another. The use of Microsoft technology
helps the Company to deliver what it believes to be a highly
deployable and manageable payroll and talent management solution
that includes the following key technological features:
Web-Based Technologies and Internet
Integration. Ultimate Software supports emerging
Web technologies and Internet/extranet connectivity to
increase access to and usability of its applications. UltiPro is
a Web solution with a backoffice component for handling such
functions as payroll processing, company and system setup, and
security. One of the highlights of UltiPros technology is
the Companys
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Distributed Process Management (DPM) framework of
XML Web Services, a framework that enables business functions to
be performed over the Web, and allows different enterprise
systems to talk to one another over the Internet. UltiPros
DPM was designed to automate and distribute HR and payroll
processes, for example, entering group time or generating
reports, across multiple servers to reduce the amount of time
and manual work required. The DPM framework leverages
Microsofts Component Object Model (COM), eXtensible Markup
Language (XML), Simple Object Access Protocol (SOAP), Web
Services Definition Language (WSDL) and Microsoft Message
Queuing (MSMQ) to improve system speed and performance. The
Company believes that the DPM framework makes UltiPro highly
scalable to accommodate a high volume of processing requests
cost-effectively, particularly for companies that run hundreds
or even thousands of payrolls.
Application Framework. Ultimate Software has
designed certain aspects of its system using a multi-tiered
architecture in order to enhance the systems speed,
flexibility, scalability and maintainability. When an
applications logic resides only on a client workstation, a
users ability to process high volume data transactions is
limited. When the logic resides only on a server, the
users interactive capabilities are reduced. To overcome
such limitations, Ultimate Software built more separation into
the application design to increase the extensibility,
scalability and maintainability of the application. The UltiPro
application consists of several core components in a layered
architecture that leverages Microsoft technology. UltiPros
multi-layered architecture, including an Operating System Layer,
Business Logic Layer, Presentation Layer and User Interface
Layer, makes it easier to update and maintain UltiPro, as well
as integrate UltiPro with other enterprise systems. The Company
believes that UltiPros application framework provides a
highly extensible set of services that can scale depending on
the customers 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 an
extensive library of standard reports that offer flexibility and
ease of use, the Company extends what users can do with employee
data by embedding business intelligence tools from Cognos
Corporation, a third-party provider (Cognos). In
addition to offering sophisticated data query and report
authoring, these tools enable users to apply on-line analytical
processing (OLAP) to multidimensional data cubes,
allowing users to explore data on employees graphically and
statistically from diverse angles. Ultimate Software maintains a
link between Cognos report catalog and UltiPros data
dictionary, eliminating the necessity for users to create and
maintain ad hoc reporting catalogs. A Cognos Web Package is
delivered to UltiPro customers to allow users to access reports
and conduct data queries from a Web browser.
UltiPro
Workforce Management Software (UltiPro)
Ultimate Softwares UltiPro software (UltiPro)
is a comprehensive, single source Web-based solution designed to
deliver the functionality businesses need to manage the complete
employee life cycle from recruitment to retirement.
UltiPros HR and benefits management functionality is
wholly integrated with a flexible payroll engine, reporting and
analytical decision-making tools, and a central Web portal that
can serve as the customers gateway for its workforce to
access company-related activities. Ultimate Software believes
that UltiPro helps customers streamline HR and payroll processes
to significantly reduce administration and operational costs,
while also empowering executives and staff to access critical
information quickly and perform routine business activities more
efficiently.
UltiPro includes, but is not limited to, the following
functionality:
UltiPros Business/Employee
Portal. UltiPros Web portal can act as the
gateway to business activities for a companys executives,
management team, HR/payroll staff, administrators, and
employees. Ultimate Software believes that UltiPros portal
allows its customers to improve service to their employees
through better communications and save time because managers and
administrators can complete hundreds of common employee-related
tasks, including administering benefits, managing staff and
accessing reporting and
6
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. 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 Consolidated Omnibus Budget Reconciliation
Act compliance; Health Insurance Portability &
Accountability Act certificates; Occupational Safety &
Health Administration and workers compensation; Family
Medical Leave Act tracking; and Equal Employment Opportunity
compliance. UltiPro also enables compliance with the Health
Insurance Portability & Accountability Act
confidentiality legislation for protecting sensitive data such
as employee social security numbers. eHuman Resources includes
benefits administration, recruitment and staffing tools,
compensation management and training management functionality.
UltiPro
Talent Management
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Recruitment. UltiPro Recruitment delivers a
one-stop shopping solution for companies to recruit,
acquire, 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.
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Performance Management. UltiPro Performance
Management helps companies maximize talent development and
improve employee satisfaction by automating and enhancing
performance evaluations and using competency-based employee
development. UltiPros performance management streamlines
the processes of evaluating performance and completing
performance appraisals, performing competency assessments,
identifying top performers for succession planning, and tracking
and executing coaching and development plans.
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Learning Management. UltiPro Learning Management
(expected to be released in mid-2007) will provide tools
designed for organizations to effectively manage employee
learning objectives and company training activities. From
initial planning and logistics to course and content evaluation,
UltiPro will facilitate the training registration process, track
program costs, and record employee training achievements.
UltiPro Learning Management is expected to bring relevant
training options to employee and manager desktops. Employees
will be able to view course schedules and descriptions and
register online, and managers can approve staff training
requests over the Web. UltiPro Learning Management will be
integrated with UltiPros performance management so that
competency-based learning goals set during performance
evaluation and coaching plans are linked to upcoming training
courses to ensure completion.
|
Benefits Administration. UltiPro allows companies to
match all of the health, welfare, dental, vision, and other
benefits that their organizations offer employees, set up and
administer benefit plans, and 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 determination.
Benefits Enrollment. With Benefits Enrollment,
employees can review their benefit choices and make selections
on the Web. 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 Business Intelligence. Using UltiPros
Business Intelligence tools, customers can provide their
managers and executives with Web access to workforce-related
reports, workforce analytics and
point-in-time
reporting, without installing reporting software on users
PCs or writing custom reports. With UltiPro Business
Intelligence, users can run and print pre-formatted reports for
the executive team or run
7
instant queries on the Web for answers to routine questions.
UltiPro Business Intelligence also delivers workforce analytics
to enable managers to evaluate workforce trends strategically on
topics such as compensation, turnover and overtime.
Payroll Processing. UltiPros payroll engine
handles hundreds of payroll-related computations intended to
minimize the customers need for side calculations or
additional programming. For example, UltiPro delivers complex
wage calculations such as average pay rates for overtime
calculations, shift premiums, garnishments and levy
calculations. With ePayroll Processing, a companys central
payroll department, remote offices or multiple divisions can
process payroll on the Web in several steps. ePayroll Processing
includes eTime Entry to allow customers supervisors or
managers at branch offices to input and submit time for their
team through the Web.
Time, Attendance, and Scheduling. Through a
strategic partnership with Workbrain Corporation, Ultimate
Software has the right to market and distribute Workbrains
time and attendance product, referred to as Workbrain Express,
to Ultimate Softwares customer base and prospective
customers as part of the UltiPro solution. Ultimate Software has
rebranded Workbrain Express as UltiPro Time and Attendance,
marketing the components as UltiPro Time, UltiPro Leave
Management, and UltiPro Workforce Scheduling (collectively,
UTA). Ultimate Software is the single-source contact
for customer implementations and ongoing solution support for
UTA. UTA is Web-based and integrated with UltiPros
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.
Manager Self-Service. As 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 customers managers can view and update
staff information, manage department activities, post job
openings, leverage recruiting and hiring tools, and perform Web
queries on workforce data. UltiPros document management
features can be used to house and categorize employee-related
documents such as drivers licenses, consent forms, and
completed 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 customers 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.
Administration. UltiPros Administration
includes Work Events, Standard Reporting, and System
Administration. Work Events enables users to authorize
HR/payroll staff, managers or supervisors to make updates on the
Web through more than 100 pre-defined workflow processes to
expedite business activities such as hiring an employee or
inputting a salary increase. Standard Reporting allows
authorized managers or HR/payroll staff to run standard UltiPro
reports, including upcoming performance reviews, headcount
reports, average salary reports, government compliance reports,
general ledger reporting, and other
point-in-time
HR/payroll reports from the Web without requiring the time of
central HR/payroll or IT staff. System Administration was
designed for the non-technical user to administer UltiPros
roles-based security, built-in workflow and system business
rules, as well as enable system administrators to post company
communications, link to external Web sites from the UltiPro
portal, and, through UltiPros Palette feature, select the
colors of UltiPros Web pages to match the customers
own company image.
Other Key Features. UltiPro also includes tax
management to deliver Federal, state and local tax updates
automatically every quarter as part of the core solution;
Enterprise Integration Tools that provide the ability to
interface with third-party applications and providers such as
general ledger, tax filing services, time
8
clocks, banks, 401(k) and benefit providers, check printing
services and unemployment management services; employee debit
cards; paycheck printing; garnishments and wage attachment
management; paycheck modeling; employment verification services;
employment tax credits; employee assistance, health and
wellness, and work-life balance programs; unemployment tax
management; pre-employment screening services; test environment
services; and disaster recovery services.
Intersourcing
Offering
The Company offers a hosting service, branded Intersourcing,
whereby the Company provides the hardware, infrastructure,
ongoing maintenance and
back-up
services for its customers at data centers located in Miami,
Florida and in Atlanta, Georgia, both managed by IBM (the
Intersourcing Offering). Different types of hosting
arrangements include the sale of hosting services as a part of
the Intersourcing Offering and, to a lesser extent, the sale of
hosting services to customers that license UltiPro on a
perpetual basis (Base Hosting). Hosting services,
typically available in a shared environment, provide Web access
to UltiPro, including comprehensive talent management
functionality for organizations that need to simplify the
information technology (IT) support requirements of their
business applications and are priced on a PEPM basis. In the
shared environment, Ultimate Software 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.
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. The pricing for
Intersourcing, including both the hosting element as well as the
right to use UltiPro, is on a PEPM basis.
Research
and Development Activities
Ultimate Software incurs research and development expenses,
consisting primarily of software development personnel costs, in
the normal course of its business. Such research and development
expenses are for enhancements and future betterments to the
Companys existing products and for the development of new
products. During 2006, 2005 and 2004, the Company spent
$24.3 million, $20.2 million and $18.3 million,
respectively, on research and development activities. During
2006 and 2005, $1.8 million and $0.2 million,
respectively, of research and development expenses were
capitalized for the development of UltiPro Canadian HR/payroll
(UltiPro Canada) functionality. UltiPro Canada is
being built from the existing product infrastructure of UltiPro
(e.g., using UltiPros source code and architecture).
UltiPro Canada is designed to provide 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).
Capitalization of software costs for UltiPro Canada began during
the fourth fiscal quarter of 2005, when technological
feasibility (as defined by Statement of Financial Accounting
Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise
Marketed) (SFAS No. 86) was
attained. In accordance with SFAS No. 86, software
capitalization for UltiPro Canada will end when it is available
for general release to Ultimate Softwares customers, which
is expected to occur in approximately the second half of fiscal
2007. There were no software costs capitalized in 2004.
Customer
Services
Ultimate Software believes that delivering quality customer
services provides the Company with a significant opportunity to
differentiate itself in the marketplace and is critical to the
comprehensive solution. Ultimate Software provides its customers
services in two broad categories: (i) professional services
which include implementation, customer relationship management,
and knowledge management (or training) services and
(ii) customer support services and product maintenance.
Additionally, Ultimate Software provides hosting services for
those customers that subscribe to the Companys
Intersourcing model. 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.
9
Professional Services. Ultimate Softwares
professional services include implementation, customer
relationship management and knowledge management (or training)
services. Ultimate Software believes that its implementation
services are differentiated from those of other vendors by
speed, predictability and completeness. The Company believes
that its successful record with rapid implementations is due to
its standardized methodology, long-tenured consultants, the
large amount of delivered product functionality, and
comprehensive conversion and integration tools.
Ultimate Software has an experienced team of system and
functional consultants that are dedicated to assisting customers
with rapid implementations. In addition, Ultimate Software
provides its customers with the opportunity to participate in
formal training programs conducted by its knowledge management
services team. Training programs are designed to increase
customers ability to use the full functionality of the
product, thereby maximizing the value of customers
investments. Courses are designed to align with the stages of
implementation and to give attendees hands-on experience with
UltiPro. Trainees learn such basics as how to enter new employee
information, set up benefit plans and generate standard reports,
as well as more complex processes such as defining company
rules, customizing the system and creating custom reports. The
Company maintains training facilities in Atlanta, Georgia;
Schaumburg, Illinois; Dallas, Texas; and at its headquarters in
Weston, Florida. In addition to offering classes at these
facilities, the Company conducts Web-based training and
on-site
training at remote locations. After customers have implemented
UltiPro and have been turned over to the Companys customer
support and maintenance program, the Company assigns a customer
relationship manager to the account to assist customers on an
ongoing basis with special projects, including enhancing their
existing systems, managing upgrades and writing custom reports.
These services, like all of the Companys professional
services, are typically billed on a time and materials basis.
Customer Support and Maintenance. Ultimate Software
offers comprehensive technical support and maintenance services,
which have historically been purchased by all of its customers.
Ultimate Softwares customer support center has received
the Support Center Practices Certification sponsored by the
Service Strategies Corporation (SSC) for the eighth consecutive
year. This certification recognizes companies that deliver
exceptional service and support to their customers.
Ultimate Softwares customer support services include:
software updates that reflect tax and other legislative changes;
telephone support 24 hours a day, 7 days a week;
unlimited access to the Companys employee tax center on
the World Wide Web; seminars on year-end closing procedures; and
periodic newswires. In addition, the Companys customer
support services team maintains a support Web site for its
customers and individual representatives attend user-organized
user group meetings on a routine basis throughout the United
States.
Customers
As of December 31, 2006, Ultimate Software had provided its
software to more than 1,400 customers that represent
approximately 9,000 companies. Ultimate Softwares
customers operate in a wide variety of industries, including
manufacturing, food services, sports, technology, finance,
insurance, retail, real estate, transportation, communications,
healthcare and services. During 2006, 2005 and 2004, one of the
Companys customers, Ceridian, accounted for 7%, 9% and
16%, respectively, of total revenues. No other customer
accounted for more than 10% of total revenues in 2006, 2005 or
2004. The decrease in the percentage of total revenues
contributed by Ceridian in 2006 and 2005 resulted from the
expiration of the Ceridian Services Agreement on
December 31, 2004 combined with the fixed nature of the
recurring revenues recognized pursuant to the Original Ceridian
Agreement when total revenues increased in both 2006 and 2005 as
compared to the previous years. The Company anticipates a
continued reduction in the percentage of total revenues
contributed by Ceridian, as fixed recurring revenues under the
Original Ceridian Agreement of $642,000 per month will be
recognized until the termination of the Original Ceridian
Agreement on March 9, 2008 and total revenues are expected
to continue to increase in comparison to prior years.
Sales and
Marketing
Ultimate Software markets and sells its products and services
primarily through its direct sales force.
Direct Sales. Ultimate Softwares direct sales
force includes business development vice presidents, directors
and managers who have defined territories. The sales cycle
begins with a sales lead generated through a
10
national, corporate marketing campaign or a territory-based
activity. In one or more
on-site
visits, sales managers work with application and technical
consultants to analyze prospective client needs, demonstrate the
Companys product and, when required, respond to RFPs
(Requests for Proposals). The sale is finalized after clients
complete their internal sign-off procedures and terms of the
contract are negotiated and signed.
With a license sale, the terms of the Companys sales
contract typically include a license agreement for the product,
an annual maintenance agreement,
per-day
training rates and hourly charges for implementation services.
Typical payment terms include a deposit at the time the contract
is signed and additional payments 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. A service sale is a hosting, or
Intersourcing, agreement that typically requires, but is not
limited to, a PEPM fee, setup fees and hourly charges for
implementation.
Ultimate Software supports its sales force with a comprehensive
marketing program that includes public relations, advertising,
direct mail, trade shows, seminars and Web site maintenance.
Working closely with the direct sales force, customers and
strategic partners, the marketing team defines positioning
strategies and develops a well-defined plan for implementing
these strategies. Marketing services include market surveys and
research, overall campaign management, creative development,
production control, demand generation, results analysis, and
communications with field offices, customers and marketing
partners.
Intellectual
Property Rights
The Companys success is dependent, in part, on its ability
to protect its proprietary technology. The Company relies on a
combination of copyright, trademark and trade secret laws, as
well as confidentiality agreements and licensing arrangements,
to establish and protect its proprietary rights. The Company
does not have any patents or patent applications pending, and
existing copyright, trademark and trade secret laws afford only
limited protection. Accordingly, there can be no assurance that
the Company will be able to protect its proprietary rights
against unauthorized third-party copying or use, which could
materially adversely affect the Companys business,
operating results and financial condition.
Despite the Companys efforts to protect its proprietary
rights, attempts may be made to copy or reverse engineer aspects
of the Companys products or to obtain and use information
that the Company regards as proprietary. Moreover, there can be
no assurance that others will not develop products that perform
comparably to the Companys proprietary products. Policing
the unauthorized use of the Companys products is
difficult. Litigation may be necessary in the future to enforce
the Companys intellectual property rights, to protect the
Companys trademarks, copyrights or trade secrets or to
determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect
on the Companys business, operating results and financial
condition.
As is common in the software industry, the Company from time to
time may become aware of third-party claims of infringement by
the Companys products of third-party proprietary rights.
While the Company is not currently subject to any such claim,
the Companys software products may increasingly be subject
to such claims as the number of products and competitors in the
Companys industry segments grows and the functionality of
products overlaps and as the issuance of software patents
becomes increasingly common. Any such claim, with or without
merit, could result in significant litigation costs and require
the Company to enter into royalty and licensing agreements,
which could have a material adverse effect on the Companys
business, operating results and financial condition. Such
royalty and licensing agreements, if required, may not be
available on terms acceptable by the Company or at all.
Competition
The market for the Companys products is highly
competitive. The Companys products compete primarily on
the basis of technology, delivered functionality and
price/performance.
Ultimate Softwares competitors include (i) large
service bureaus, primarily ADP and, to a lesser extent,
Ceridian; and (ii) companies, such as PeopleSoft/Oracle,
Lawson and Kronos that offer human resource
11
management and payroll (HRMS/payroll) software
products for use on mainframes, client/server environments
and/or Web
servers. Many of Ultimate Softwares competitors or
potential competitors have significantly greater financial,
technical and marketing resources than the Company. As a result,
they may be able to respond more quickly to new or emerging
technologies and to changes in customer requirements, or to
devote greater resources to the development, promotion and sale
of their products than can the Company. In addition, current and
potential competitors have established or may establish
cooperative relationships among themselves or with third parties
to increase the ability of their products to address the needs
of the Companys prospective customers.
Product
Liability
Software products such as those offered by the Company
frequently contain undetected errors or failures when first
introduced or as new versions are released. Testing of the
Companys products is particularly challenging because it
is difficult to simulate the wide variety of computing
environments in which the Companys customers may deploy
these products. Despite extensive testing, the Company from time
to time has discovered defects or errors in products. There can
be no assurance that such defects, errors or difficulties will
not cause delays in product introductions and shipments, result
in increased costs and diversion of development resources,
require design modifications or decrease market acceptance or
customer satisfaction with the Companys products or result
in claims by customers against the Company. In addition, there
can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found after
commencement of commercial shipments, resulting in loss of or
delay in market acceptance, which could have a material adverse
effect upon the Companys business, operating results and
financial condition.
Backlog
Backlog consists of Intersourcing and Base Hosting services sold
under signed contracts for which the services have not yet been
delivered. At December 31, 2006, the Company had backlog of
$60.0 million compared to $33.1 million as of
December 31, 2005. The Company expects to fill
approximately $41.5 million of the backlog during 2007. The
Company does not believe that backlog is a meaningful indicator
of sales that can be expected for any future period. There can
be no assurance that backlog at any point in time will translate
into revenue in any subsequent period.
Employees
As of December 31, 2006, the Company employed 623 persons,
including 92 in sales and marketing, 202 in professional
services, 163 in research and development, 66 in customer
support, 64 in information technology and hosting technical
services and 36 in finance and administration. The Company
believes that its relations with employees are good. However,
competition for qualified personnel in the Companys
industry is generally intense and the management of the Company
believes that its future success will depend, in part, on its
continued ability to attract, hire and retain qualified
personnel.
Available
Information
The Companys 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
Form S-3,
are available free of charge on the Companys Internet
website at www.ultimatesoftware.com as soon as reasonably
practicable after such reports are electronically filed with the
Securities and Exchange Commission. Information contained on
Ultimate Softwares website is not part of this report.
For a discussion of certain risks with respect to Ultimate
Software and its financial condition and results of operations,
see Exhibit 99.1 of this
Form 10-K.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
12
As of December 31, 2006, Ultimate Softwares corporate
headquarters, and its principal administrative, development,
customer support, finance, marketing and information technology
operations, were located in Weston, Florida. The Companys
principal facilities are described below:
|
|
|
|
|
|
|
|
|
Size
|
|
Lease
|
|
|
Location
|
|
(sq. ft.)
|
|
Termination
|
|
General Use
|
|
Weston, FL HQ
|
|
39,872
|
|
1/31/2017
|
|
Administration, Development and
Customer Support
|
Weston, FL HQ
|
|
21,392
|
|
1/31/2018
|
|
Sales Administration, Marketing,
Executives and Finance
|
Atlanta, GA (1)
|
|
24,609
|
|
7/31/2013
|
|
Professional Services and Customer
Support
|
Weston, FL HQ (2)
|
|
9,000
|
|
3/31/2011
|
|
Knowledge Management Services,
Development and Implementation Services Administration
|
Weston, FL HQ (3)
|
|
5,000
|
|
Owned
|
|
Information Technology
|
Toronto, Ontario (4)
|
|
2,251
|
|
9/30/2009
|
|
Sales and Customer Support
|
Harrogate, North Yorkshire,
England (5)
|
|
5,063
|
|
2/20/2010
|
|
UK Operations, including
Development,
Customer Support, Sales and
Administration
|
|
|
|
|
(1)
|
During the second fiscal quarter of 2006, the Company entered
into a
79-month
lease agreement with Galleria 600 LLC, in Atlanta, Georgia. The
Company moved a portion of its service and support operations
into this building in August 2006. In August 2006, the Company
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)
|
In August 2005, the Company entered into a five-year lease
agreement for a fourth headquarters building located in Weston,
Florida near the other three locations. The Company moved a
portion of its operations into this building in April 2006.
|
|
|
(3)
|
In December 2004, the Company purchased, with available cash,
all the available square footage of a building adjacent to its
main headquarters buildings that serves as an extension of the
Companys corporate headquarters.
|
|
|
(4)
|
During the third fiscal quarter of 2006, the Company entered
into a three-year lease agreement for office space in Toronto,
Ontario, to accommodate future growth into Canada.
|
|
|
(5)
|
As part of the RTIX Acquisition, the Company assumed a five-year
lease for office space used for the United Kingdom operations.
|
In addition, the Company presently leases office space for its
sales operations in Albany, New York; Atlanta, Georgia;
Columbia, Maryland; Dallas, Texas; Detroit, Michigan; Millburn,
New Jersey; Nashville, Tennessee; Ridgeland, Mississippi; and
Schaumburg, Illinois. Sales operations in other locations are
not supported by leased office space. The Company believes that
its existing facilities are suitable and adequate for its
current operations for the next 12 months. The Company
further believes that suitable space will be available as needed
to accommodate any expansion of its operations on commercially
reasonable terms.
|
|
Item 3.
|
Legal
Proceedings
|
From
time-to-time,
the Company is involved in litigation relating to claims arising
out of its operations in the normal course of business. The
Company is not currently a party to any legal proceedings the
adverse outcome of which, individually or in the aggregate,
could reasonably be expected to have a material adverse effect
on the Companys operating results or financial condition.
13
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter of 2006.
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
Market Information. The following table sets
forth, for the periods indicated, the high and low sales prices
of the Companys Common Stock, as quoted on the NASDAQ
National Market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
26.000
|
|
|
$
|
19.170
|
|
|
$
|
16.060
|
|
|
$
|
11.960
|
|
Second Quarter
|
|
|
27.060
|
|
|
|
18.900
|
|
|
|
16.940
|
|
|
|
13.810
|
|
Third Quarter
|
|
|
24.450
|
|
|
|
17.080
|
|
|
|
18.900
|
|
|
|
15.830
|
|
Fourth Quarter
|
|
|
26.370
|
|
|
|
22.180
|
|
|
|
20.290
|
|
|
|
15.950
|
|
As of February 16, 2007, the Company had approximately 128
holders of record, representing approximately 4,000 stockholder
accounts.
The Company has never declared or paid any cash dividends on its
capital stock and does not anticipate paying any cash dividends
in the foreseeable future. The Company currently intends to
retain future earnings to fund the development and growth of its
business. The payment of dividends in the future, if any, will
be at the discretion of the Board of Directors. Under the terms
of the Companys credit agreement with Silicon Valley Bank,
the Company may not pay dividends without the prior written
consent of Silicon Valley Bank. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
Securities
Authorized for Issuance Under Equity Compensation
Plans.
The following table summarizes the securities authorized for
issuance under the Companys equity compensation plans as
of December 31, 2006:
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( a )
|
|
|
|
|
|
( c )
|
|
|
|
Number of
|
|
|
|
|
|
Number of Securities
|
|
|
|
Securities to be
|
|
|
( b )
|
|
|
Remaining Available for
|
|
|
|
Issued upon
|
|
|
Weighted Average
|
|
|
Future Issuance under
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Equity Compensation
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Plans (Excluding
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
Securities Reflected in
|
|
Plan Category
|
|
and Rights
|
|
|
and Rights
|
|
|
Column ( a ))
|
|
|
Equity compensation plans approved
by security holders
|
|
|
4,921,985
|
|
|
$
|
10.07
|
|
|
|
575,931
|
|
Equity compensation plans not
approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,921,985
|
|
|
$
|
10.07
|
|
|
|
575,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Performance Graph. The following graph
compares the cumulative total stockholder returns on the
Companys Common Stock for the five year period covering
December 31,
2001-December 31,
2006, on a quarterly basis, with the cumulative total return of
The Nasdaq Stock Market US (the Nasdaq
Market) Index and the RDG Software Composite Index for the
same period.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among
The Ultimate Software Group, Inc., The NASDAQ Composite Index
And The RDG Software Composite Index
|
|
|
* |
|
Assumes the investment of $100 on December 31, 2001 and
reinvestment of dividends (no dividends were declared on the
Companys Common Stock during the period). |
15
Issuance of Equity Securities. On October 5,
2006, the Company entered into a stock purchase agreement (the
Stock Purchase Agreement) with the stockholders of
RTIX Limited (the RTIX Stockholders) to acquire 100%
of the common stock of RTIX Limited in exchange for a
combination of $3,400,000 in cash and 27,897 shares of the
Companys Common Stock, $0.01 par value per share
(Common Stock) (the Stock Consideration)
issuable upon the satisfaction of the contingency discussed
below. The acquisition was completed on October 5, 2006 and
the cash consideration of $3.4 million was paid at that
time.
Pursuant to the Stock Purchase Agreement, the Stock
Consideration is subject to a downward adjustment based on
RTIXs recurring revenues over a twelve-month period
beginning October 5, 2006, recorded in accordance with
generally accepted accounting principles in the United States,
and will be delivered within 30 days after the final
determination of any such adjustments. The Company did not
record the impact of the issuance of the Stock Consideration as
of December 31, 2006 and will evaluate the recurring
revenues of RTIX on a monthly basis, cumulative from
October 5, 2006, to determine when and the extent to which
the contingency has been satisfied, at which time the Stock
Consideration will be recorded in the Companys
consolidated financial statements.
The Company relied on Section 4(2) of the Securities Act of
1933, as amended (the Securities Act) and
Regulation D thereunder for the exemption from registration
of the sale of such shares of Common Stock issued to the RTIX
Stockholders. The RTIX Stockholders represented their intention
to acquire the shares of the Common Stock of the Company for
investment purposes only, and not with a view towards the sale
or distribution thereof; their knowledge, skill and experience
in business, financial and investment matters, their ability to
evaluate the merits and risk and bear the economic risks of such
investment in the Companys Common Stock; that they are
accredited investors as defined in Regulation D
promulgated under the Securities Act; and that they were given
the opportunity to ask questions of, and receive answers from,
the Company concerning the Companys business. The RTIX
Stockholders received, or had access to, material information
concerning the Company and the appropriate legends were affixed
to the certificates evidencing the shares of Common Stock issued
in the transaction.
Purchases of Equity Securities by the
Issuer. On October 30, 2000, the Company
announced that its Board of Directors authorized the repurchase
of up to 1,000,000 shares of the Companys outstanding
Common Stock (the Stock Repurchase Plan). For
purposes of mitigating the expected dilution created by
stock-based compensation, during the first quarter of 2006, the
Companys Board of Directors authorized the Company to
resume repurchasing its Common Stock under the Stock Repurchase
Program, commencing in 2006. There were 451,790 shares of
the Companys Common Stock repurchased during 2006 but no
repurchases were made during 2005 or 2004. As of
December 31, 2006, an aggregate of 290,563 shares of
Common Stock remained authorized for repurchase under the Stock
Repurchase Program.
On February 6, 2007, the Companys Board of Directors
extended the Stock Repurchase Plan, authorizing the repurchase
of up to 1,000,000 additional shares of the Companys
issued and outstanding Common Stock (the Increased
Shares Authorized). As a result of the Increased
Shares Authorized, there were 1,290,563 shares of
Common Stock available for repurchase under the Stock Repurchase
Program as of February 6, 2007. Stock repurchases may be
made periodically in the open market, in privately negotiated
transactions or in a combination of both. The extent and timing
of these repurchase transactions will depend on market
conditions and other business considerations.
16
As of December 31, 2006, the Company had purchased
709,437 shares of the Companys Common Stock under the
Stock Repurchase Plan. The details of Common Stock repurchases
for the year ended December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cumulative Number of
|
|
|
Maximum Number of
|
|
|
|
|
|
|
|
|
|
Shares Purchased as Part
|
|
|
Shares That May Yet
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Of Publicly Announced
|
|
|
Be Purchased Under the
|
|
Period
|
|
Shares Purchased (1)
|
|
|
Paid per Share
|
|
|
Plans or Programs (2)
|
|
|
Plans or Programs
|
|
|
January 1 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
742,353
|
|
February 1 28, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
742,353
|
|
March 1 31, 2006
|
|
|
43,800
|
|
|
|
22.84
|
|
|
|
301,447
|
|
|
|
698,553
|
|
April 1 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
698,553
|
|
May 1 31, 2006
|
|
|
120,190
|
|
|
|
22.69
|
|
|
|
421,637
|
|
|
|
578,363
|
|
June 1 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
578,363
|
|
July 1 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
578,363
|
|
August 1 31, 2006
|
|
|
211,200
|
|
|
|
20.27
|
|
|
|
632,837
|
|
|
|
367,163
|
|
September 1 30, 2006
|
|
|
76,600
|
|
|
|
22.63
|
|
|
|
709,437
|
|
|
|
290,563
|
|
October 1 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290,563
|
|
November 1 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290,563
|
|
December 1 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290,563
|
|
|
|
|
|
|
|
Total
|
|
|
451,790
|
|
|
$
|
22.11
|
|
|
|
709,437
|
|
|
|
290,563
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All shares were purchased through the publicly announced Stock
Repurchase Plan in open-market transactions. |
|
(2) |
|
On October 30, 2000, the Company announced that its Board
of Directors authorized the repurchase of up to
1,000,000 shares of the Companys Common Stock
pursuant to the Stock Repurchase Plan. On February 6, 2007,
the Companys Board of Directors extended the Stock
Repurchase Plan, authorizing the repurchase of up to 1,000,000
additional shares of the Companys Common Stock. The
Companys stock repurchase transaction will be conducted
over an indefinite period of time. |
17
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data is qualified
by reference to and should be read in conjunction with
Managements Discussion and Analysis of Financial
Conditions and Results of Operations and the
Companys Consolidated Financial Statements and Notes
thereto included elsewhere in this
Form 10-K.
The statement of operations data presented below for each of the
years in the three-year period ended December 31, 2006 and
the balance sheet data as of December 31, 2006 and 2005
have been derived from the Companys Consolidated Financial
Statements included elsewhere in this
Form 10-K,
which have been audited by KPMG LLP whose report appears
elsewhere in this
Form 10-K.
The statement of operations data below for the years ended
December 31, 2003 and December 2002 and the balance sheet
data as of December 31, 2004, 2003 and 2002 have been
derived from audited consolidated financial statements not
included herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
$
|
63,935
|
|
|
$
|
50,259
|
|
|
$
|
39,049
|
|
|
$
|
29,344
|
|
|
$
|
19,345
|
|
Services
|
|
|
38,617
|
|
|
|
27,894
|
|
|
|
24,924
|
|
|
|
23,478
|
|
|
|
23,634
|
|
License
|
|
|
12,259
|
|
|
|
10,450
|
|
|
|
8,055
|
|
|
|
7,594
|
|
|
|
12,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
114,811
|
|
|
|
88,603
|
|
|
|
72,028
|
|
|
|
60,416
|
|
|
|
55,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
17,875
|
|
|
|
13,740
|
|
|
|
11,961
|
|
|
|
9,495
|
|
|
|
8,098
|
|
Services
|
|
|
30,256
|
|
|
|
21,410
|
|
|
|
18,448
|
|
|
|
17,277
|
|
|
|
18,267
|
|
License
|
|
|
1,389
|
|
|
|
709
|
|
|
|
993
|
|
|
|
807
|
|
|
|
1,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
49,520
|
|
|
|
35,859
|
|
|
|
31,402
|
|
|
|
27,579
|
|
|
|
27,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
65,291
|
|
|
|
52,744
|
|
|
|
40,626
|
|
|
|
32,837
|
|
|
|
27,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
29,382
|
|
|
|
21,783
|
|
|
|
20,630
|
|
|
|
17,788
|
|
|
|
17,479
|
|
Research and development
|
|
|
22,471
|
|
|
|
19,999
|
|
|
|
18,317
|
|
|
|
18,229
|
|
|
|
17,675
|
|
General and administrative
|
|
|
10,648
|
|
|
|
8,131
|
|
|
|
6,806
|
|
|
|
5,871
|
|
|
|
6,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
62,501
|
|
|
|
49,913
|
|
|
|
45,753
|
|
|
|
41,888
|
|
|
|
42,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
2,790
|
|
|
|
2,831
|
|
|
|
(5,127
|
)
|
|
|
(9,051
|
)
|
|
|
(14,423
|
)
|
Interest expense
|
|
|
(195
|
)
|
|
|
(225
|
)
|
|
|
(182
|
)
|
|
|
(221
|
)
|
|
|
(283
|
)
|
Interest and other income
|
|
|
1,538
|
|
|
|
819
|
|
|
|
285
|
|
|
|
103
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,133
|
|
|
$
|
3,425
|
|
|
$
|
(5,024
|
)
|
|
$
|
(9,169
|
)
|
|
$
|
(14,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
share Basic (1)
|
|
$
|
0.17
|
|
|
$
|
0.15
|
|
|
$
|
(0.23
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
share Diluted (1)
|
|
$
|
0.15
|
|
|
$
|
0.13
|
|
|
$
|
(0.23
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
|
|
23,853
|
|
|
|
23,040
|
|
|
|
21,743
|
|
|
|
18,738
|
|
|
|
16,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (1)
|
|
|
26,978
|
|
|
|
26,288
|
|
|
|
21,743
|
|
|
|
18,738
|
|
|
|
16,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,734
|
|
|
$
|
17,731
|
|
|
$
|
14,766
|
|
|
$
|
13,783
|
|
|
$
|
8,974
|
|
Investments in marketable
securities
|
|
|
16,286
|
|
|
|
15,035
|
|
|
|
10,544
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
93,530
|
|
|
|
69,581
|
|
|
|
52,546
|
|
|
|
35,812
|
|
|
|
31,143
|
|
Deferred revenue
|
|
|
42,969
|
|
|
|
33,031
|
|
|
|
28,476
|
|
|
|
24,610
|
|
|
|
27,815
|
|
Long-term borrowings, including
capital lease obligations
|
|
|
1,610
|
|
|
|
1,828
|
|
|
|
1,231
|
|
|
|
796
|
|
|
|
1,206
|
|
Stockholders equity (deficit)
|
|
|
31,022
|
|
|
|
23,546
|
|
|
|
13,524
|
|
|
|
1,661
|
|
|
|
(7,368
|
)
|
|
|
|
(1) |
|
See Note 2 of the Notes to Consolidated Financial
Statements for information regarding the computation of net
income (loss) per share. |
18
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion of the financial condition and results
of operations of the Company contains certain forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the Companys
expectations or beliefs, including, but not limited to,
statements concerning the Companys operations and
financial performance and condition. Words such as
anticipates, expects,
intends, plans, believes,
seeks, estimates, and similar
expressions are intended to identify such forward-looking
statements. These forward-looking statements are not guarantees
of future performance and are subject to certain risks and
uncertainties that are difficult to predict. The Companys
actual results could differ materially from those contained in
the forward-looking statements due to risks and uncertainties
associated with fluctuations in the Companys quarterly
operating results, concentration of the Companys product
offerings, development risks involved with new products and
technologies, competition, the Companys 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 the
Companys 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 Exhibit 99.1 hereto. The Company undertakes no
obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise.
Executive
Summary
Ultimate Softwares UltiPro software (UltiPro)
is an
end-to-end,
single source Web-based solution designed to deliver the
functionality businesses need to manage the employee life cycle,
from compensating and managing benefits to recruiting and hiring
to terminating, whether the customers processes are
centralized at headquarters or distributed across multiple
divisions or branch offices. UltiPros
end-to-end
functionality includes comprehensive online recruitment tools,
human resources (HR) and benefits management, a
strong payroll engine, time and attendance management, workforce
scheduling, on-line benefits enrollment, training management,
performance and learning management, reporting and analytical
decision-making tools, and a self-service Web portal for
executives, managers, administrators, and employees. Ultimate
Software believes that UltiPro helps customers streamline HR and
payroll processes to significantly reduce administrative and
operational costs, while also empowering managers and staff to
analyze workforce trends for better decision making, access
critical information quickly and perform routine business
activities efficiently.
The Companys main sources of revenues include sales from
the Intersourcing Offering (defined below), sales of perpetual
software licenses for UltiPro (and the related annual
maintenance) and sales of services (mostly implementation)
related to both Intersourcing and license sales.
Since 2002, the Companys business strategy has been to
sell its UltiPro software offerings primarily on a recurring
revenue basis, with perpetual software licenses of UltiPro
offered to customers that do not prefer a subscription-based
arrangement. The primary focus is to maximize the recurring
revenue streams in an effort to minimize the volatility and
unpredictable nature of a business strategy predominantly
focused on license sales. Prior to 2002, the Companys
business strategy was centered on sales of perpetual software
licenses of UltiPro.
The primary sources of the Companys recurring revenue
stream are hosting services, branded Intersourcing,
and product maintenance (i.e., software updates and telephone
customer support). Other recurring revenue sources include
subscription revenues from third-party business service
providers (BSPs) and recurring revenues from the Original
Ceridian Agreement. See also Overview Original
Ceridian Agreement.
Ultimate Software offers hosting services at two separate data
center locations the original location in Miami,
Florida, which was opened in 2002, and the location opened in
August 2005 in Atlanta, Georgia. With Intersourcing, Ultimate
Software provides the hardware, infrastructure, ongoing
maintenance and
back-up
services for its customers at its data centers. Operations of
the facilities at both data centers are managed by
19
International Business Machines. Intersourcing is designed to
appeal to those customers that want to minimize their internal
technology support requirements for the application and hardware.
For the past several years (following the introduction of its
Intersourcing offering in 2002), the revenue mix in the
Companys sales production has favored Intersourcing.
Management believes that this trend in sales mix composition
will continue to occur in the foreseeable future, with a
concentration of unit sales in Intersourcing. Management also
believes the shift in sales mix has helped to produce a more
predictable revenue stream by providing recurring revenue and
cash from Intersourcing over the related contract periods,
typically 24 months. 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 fee, priced on a
per-employee basis, and ongoing monthly fees, priced on a
per-employee-per-month (PEPM) basis. Upfront fees
associated with the Intersourcing sale are recognized as
recurring subscription revenues ratably over the term of the
related contract beginning when the related customer processes
its first live payroll (or goes Live). Ongoing
monthly PEPM fees are recognized as recurring subscription
revenues each month commencing when the related customer goes
Live.
In connection with the Companys business strategy, an
internal financial metric used by the Company in measuring
future financial performance is new annual recurring revenues.
New annual recurring revenues (ARR) represent the
expected one-year value from (i) new Intersourcing sales
from the Companys hosted model (including prorated
one-time fees); (ii) maintenance revenues related to new
license sales; (iii) recurring revenues from new business
service providers (BSPs), as well as recurring
revenues from new sales by existing BSPs; and
(iv) recurring revenues from additional sales to Ultimate
Softwares existing client base. New annual recurring
revenues attributable to sales during 2006 were
$24.5 million as compared to $16.5 million for 2005.
The main contributors to the increase in new ARR were new sales
from the Companys hosted model Intersourcing (including
prorated one-time fees) and, to a lesser extent, an increase in
annual recurring maintenance revenues related to new license
sales.
Acquisition
On October 5, 2006, the Company 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 RTIX Acquisition), for a
total consideration of $4.0 million payable in the form of
$3.4 million in cash and 27,897 shares of the
Companys Common Stock, per value $0.01 per share
(Common Stock) (the Stock
Consideration). The Stock Consideration is contingent upon
RTIX meeting certain financial criteria within a specified
timeframe. RTIX developed the performance management/appraisals
solution that Ultimate Software has offered its customers since
February 2006. See Note 3 of the Notes to Consolidated
Financial Statements for information regarding the purchase
price allocation for the RTIX Acquisition.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP
in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue
Recognition
Sources of revenue for the Company include:
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Sales of the right to use UltiPro through Intersourcing (the
Intersourcing Offering), which includes Hosting
Services (defined below);
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Sales of perpetual licenses for UltiPro in conjunction with
services to host the UltiPro application (Hosting
Services);
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Sales of Hosting Services on a stand-alone basis to customers
who already own a perpetual license or are simultaneously
acquiring a perpetual license for UltiPro (Base
Hosting);
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Recurring revenues derived from (1) maintenance revenues
generated from maintaining, supporting and providing periodic
updates for the Companys software and
(2) subscription revenues generated from PEPM fees earned
through the Intersourcing Offering and Base Hosting,
amortization of Intersourcing or Hosting Services one-time
fees, revenues generated from the Original Ceridian Agreement
and, to a lesser extent, PEPM fees from the BSP sales channel;
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Sales of perpetual licenses for UltiPro; and
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Sales of services including implementation, training (also known
as knowledge management) and other services, including the
provision of payroll-related forms and the printing of
Form W-2s
for certain customers, as well as services provided to BSPs.
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Sales
Generated from the Intersourcing Offering
Subscription revenues generated from the Intersourcing Offering
are recognized in accordance with Emerging Issues Task Force
(EITF)
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF No. 00-21)
as a services arrangement since the customer is purchasing the
right to use UltiPro rather than licensing the software on a
perpetual basis. Fair value of multiple elements in
Intersourcing arrangements is assigned to each element based on
the guidance provided by EITF
No. 00-21.
The elements that typically exist in Intersourcing arrangements
include hosting services, the right to use UltiPro, maintenance
of UltiPro (i.e., product enhancements and customer support) and
professional services (i.e., implementation services and
training in the use of UltiPro). The pricing for hosting
services, the right to use UltiPro and maintenance of UltiPro is
bundled (the Bundled Elements). Since these three
Bundled Elements are components of recurring revenues in the
consolidated statements of operations, allocation of fair values
to each of the three elements is not necessary and they are not
reported separately. Fair value for the Bundled Elements, as a
whole, is based upon evidence provided by the Companys
pricing for Intersourcing arrangements sold separately. The
Bundled Elements are provided on an ongoing basis and represent
undelivered elements under EITF
No. 00-21;
they are recognized on a monthly basis as the services are
performed, once the customer processes its first live payroll
(i.e., goes Live).
Implementation and training services (the Professional
Services) provided for Intersourcing arrangements are
typically priced on a time and materials basis and are
recognized as services revenue in the consolidated statements of
operations as the services are performed. Under EITF
00-21, fair
value is assigned to service elements in the arrangement based
on their relative fair values, using the prices established when
the services are sold on a stand-alone basis. Fair value for
Professional Services is based on the respective Implementation
Valuation and Training Valuation. If evidence of the fair value
of one or more undelivered elements does not exist, the revenue
is deferred and recognized when delivery of those elements
occurs or when fair value can be established.
The Company believes that applying EITF
00-21 to
Intersourcing arrangements as opposed to applying
SOP 97-2
is appropriate given the nature of the arrangements whereby the
customer has no right to the UltiPro license.
Sales of
Base Hosting Services
Subscription revenues generated from Base Hosting are recognized
in accordance with EITF
No. 00-3,
Application of AICPA Statement of Position
97-2 to
Arrangements that Include the Right to Use Software Stored on
Another Entitys Hardware, which provides guidance as
to the application of
SOP 97-2
to hosting arrangements that include a license right to the
software. The elements that typically exist for Base Hosting
arrangements include hosting services and implementation
services. Base Hosting is different than Intersourcing
arrangements in that the customer already owns a perpetual
license or is purchasing a perpetual license for UltiPro and is
purchasing hosting services subsequently in a separate
transaction, whereas with Intersourcing the customer is
purchasing the right to use (not license) UltiPro.
Implementation services provided for Base Hosting
21
arrangements are less than those provided for Intersourcing
arrangements since UltiPro is already implemented in Base
Hosting arrangements and only needs to be transitioned to a
hosted environment. Fair value for hosting services is based on
the Hosting Valuation. The fair value for implementation
services is based on the Implementation Valuation in accordance
with guidelines provided by
SOP 97-2.
Recurring
Revenues
Recurring revenues include maintenance revenues and subscription
revenues. Maintenance revenues are derived from maintaining,
supporting and providing periodic updates for the Companys
software. Subscription revenues are principally derived from
PEPM fees earned through the Intersourcing Offering, Base
Hosting and the BSP sales channel, as well as revenues generated
from the Original Ceridian Agreement. Maintenance revenues are
recognized ratably over the service period, generally one year.
Maintenance and support fees are generally priced as a
percentage of the initial license fee for the underlying
products.
To the extent there are upfront fees associated with the
Intersourcing Offering, Base Hosting or the business service
providers (or BSP) sales channel, subscription
revenues are recognized ratably over the minimum term of the
related contract upon the delivery of the product and services.
In the cases of Intersourcing and Base Hosting sales,
amortization of the upfront fees commences when the customer
processes its first Live payroll, which typically occurs four to
six months after the sale, and extends until the end of the
initial contract period. In the case of BSP channel sales,
amortization of the upfront fee typically commences when the
contract is signed, which is when the BSPs rights under
the agreement begin, continuing until the initial contract term
ends. Ongoing PEPM fees from the Intersourcing Offering, Base
Hosting and the BSP sales channel are recognized as subscription
revenue as the services are delivered, typically on a monthly
basis.
Commencing on August 28, 2002, subscription revenues
generated from the Original Ceridian Agreement have been
recognized ratably over the minimum term of the contract, which
extends until March 9, 2008 (7 years from the
effective date of the Original Ceridian Agreement). Subscription
revenues of $642,000 per month are based on guaranteed
minimum payments from Ceridian of approximately
$42.7 million over the minimum contract term, including
$35.4 million received to date. The amount of subscription
revenue recognized under the Original Ceridian Agreement during
2006, $7.7 million, was the same as that recognized in
2005. The Company expects to continue to recognize
$642,000 per month (or $7.7 million per annum) as
recurring subscription revenue until March 9, 2008 when the
Original Ceridian Agreement terminates.
Maintenance services provided to customers include product
updates and technical support services. Product updates are
included in general releases to the Companys customers and
are distributed on a periodic basis. Such updates may include,
but are not limited to, product enhancements, payroll tax
updates, additional security features or bug fixes. All features
provided in general releases are unspecified upgrade rights. To
the extent specified upgrade rights or entitlements to future
products are included in a multi-element arrangement, revenue is
recognized upon delivery provided fair value for the elements
exists. In multi-element arrangements that include a specified
upgrade right or entitlement to a future product, if fair value
does not exist for all undelivered elements, revenue for the
entire arrangement is deferred until all elements are delivered
or when fair value can be established.
Subscription revenues generated from the BSP sales channel
include both the right to use UltiPro and maintenance. The BSP
is charged a fee on a PEPM basis. Revenue is recognized on a
PEPM basis. To the extent the BSP pays the Company a one-time
upfront fee, the Company accounts for such fee by recognizing it
as subscription revenue over the minimum term of the related
agreement.
Perpetual
Licenses for UltiPro Sold With or Without Hosting
Services
Sales of perpetual licenses for UltiPro and sales of perpetual
licenses for UltiPro in conjunction with Hosting Services are
multiple-element arrangements that involve the sale of software
and consequently fall under the guidance of Statement of
Position (SOP)
97-2,
Software Revenue Recognition, for revenue
recognition.
22
The Company licenses software under non-cancelable license
agreements and provides services including maintenance,
implementation consulting and training services. In accordance
with the provisions of
SOP 97-2,
license revenues are generally recognized when (1) a
non-cancelable license agreement has been signed by both
parties, (2) the product has been shipped, (3) no
significant vendor obligations remain and (4) collection of
the related receivable is considered probable. To the extent any
one of these four criteria is not satisfied, license revenue is
deferred and not recognized in the audited consolidated
statements of operations until all such criteria are met.
For multiple-element software arrangements, each element of the
arrangement is analyzed and the Company allocates a portion of
the total fee under the arrangement to the elements based on
vendor-specific objective evidence of fair value of the element
(VSOE), regardless of any separate prices stated
within the contract for each element. Fair value is considered
the price a customer would be required to pay when the element
is sold separately.
The Residual Method (as defined below) is used to recognize
revenue when a license agreement includes one or more elements
to be delivered at a future date and VSOE of the fair value of
all undelivered elements exists. The fair value of the
undelivered elements is determined based on the historical
evidence of stand-alone sales of these elements to customers.
Undelivered elements in a license arrangement typically include
maintenance, implementation and training services (the
Standard Undelivered Elements). The fair value for
maintenance fees is based on the price of the services sold
separately, which is determined by the annual renewal rate
historically and consistently charged to customers (the
Maintenance Valuation). Maintenance fees are
generally priced as a percentage of the related license fee. The
fair value for implementation services is based on standard
pricing (i.e., rate per hour charged to customers for
implementation services), for stand-alone sales of
implementation services (the Implementation
Valuation). The fair value for training services is based
on standard pricing (i.e., rate per training day charged to
customers for class attendance), taking into consideration
stand-alone sales of training services through year-end seminars
and historically consistent pricing for such services (the
Training Valuation). Under the residual method (the
Residual Method), the fair value of the undelivered
elements is deferred and the remaining portion of the
arrangement fee attributable to the delivered element, the
license fee, is recognized as license revenue. If VSOE for one
or more undelivered elements does not exist, the revenue is
deferred on the entire arrangement until the earlier of the
point at which (i) such VSOE does exist or (ii) all
elements of the arrangement have been delivered.
Perpetual licenses of UltiPro sold without Hosting Services
typically include a license fee and the Standard Undelivered
Elements. Fair value for the Standard Undelivered Elements is
based on the Maintenance Valuation, the Implementation Valuation
and the Training Valuation. The delivered element of the
arrangement, the license fee, is accounted for in accordance
with the Residual Method.
Perpetual licenses of UltiPro sold with Hosting Services
typically include a license fee, the Standard Undelivered
Elements and Hosting Services. Fair value for the Standard
Undelivered Elements is based on the Maintenance Valuation, the
Training Valuation and the Implementation Valuation. Hosting
Services are delivered to customers on a PEPM basis over the
term of the related customer contract (Hosting PEPM
Services). Upfront fees charged to customers represent
fees for the hosting infrastructure, including hardware costs,
third-party license fees and other upfront costs incurred by the
Company in relation to providing such services (Hosting
Upfront Fees). Hosting PEPM Services and Hosting Upfront
Fees (collectively, Hosting Services) represent
undelivered elements in the arrangement since their delivery is
over the course of the related contract term. The fair value for
Hosting Services is based on standard pricing (i.e., rate
charged PEPM), taking into consideration stand-alone sales of
Hosting Services through the sale of such services to existing
customers (i.e., those who already own the UltiPro perpetual
license at the time Hosting Services are sold to them) and
historically consistent pricing for such services (the
Hosting Valuation). The delivered element of the
arrangement, the license fee, is accounted for in accordance
with the Residual Method.
The Companys customer contracts are non-cancelable
agreements. The Company does not provide for rights of return or
price protection on its software. The Company provides a limited
warranty that its software will perform in accordance with user
manuals for varying periods, which are generally less than one
year from the contract date. The Companys customer
contracts generally do not include conditions of
23
acceptance. However, if conditions of acceptance are included in
a contract or uncertainty exists about customer acceptance of
the software, license revenue is deferred until acceptance
occurs.
Services,
including Implementation and Training Services
Services revenues include revenues from fees charged for the
implementation of the Companys software products and
training of customers in the use of such products, fees for
other services, including services provided to BSPs, the
provision of payroll-related forms and the printing of
Form W-2s
for certain customers, as well as certain reimbursable
out-of-pocket
expenses. Revenues for implementation consulting and training
services are recognized as services are performed to the extent
the pricing for such services is on a time and materials basis
and the payment terms are within the Companys ordinary and
customary payment cycle. In the event payments for services are
outside the ordinary and customary period for the Company, the
related revenues are recognized as payments come due based on
their relative fair values. Other services are recognized as the
product is shipped or as the services are rendered depending on
the specific terms of the arrangement.
Arrangement fees related to fixed-fee implementation services
contracts are recognized using the percentage of completion
accounting method, which involves the use of estimates.
Percentage of completion is measured at each reporting date
based on hours incurred to date compared to total estimated
hours to complete. If a sufficient basis to measure the progress
towards completion does not exist, revenue is recognized when
the project is completed or when the Company receives final
acceptance from the customer.
The Company recognizes revenue in accordance with the Securities
Exchange Commission (SEC) Staff Accounting
Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB No. 101)
and the SEC Staff Accounting Bulletin No. 104,
Revenue Recognition
(SAB No. 104). Management believes the
Company is currently in compliance in all material aspects with
the current provisions set forth in
SOP 97-2,
SOP 98-9,
EITF 00-21,
EITF 00-3,
SAB No. 101 and SAB No. 104.
Concentration
of Revenues
During the years ended December 31, 2006, 2005 and 2004,
Ceridian accounted for 6.7%, 8.7% and 15.5%, respectively, of
total revenues. No other customer accounted for more than 10% of
total revenues in the periods presented. Due to the significant
concentration of total revenues with this single customer, the
Company has exposure if this customer loses its credit
worthiness. The Ceridian Services Agreement, under which
services revenues were recognized in 2004, expired on
December 31, 2004 and no services revenues were recognized
with respect to it in 2005 or thereafter. See Note 2 of the
Notes to Consolidated Financial Statements.
The decrease in the percentage of total revenues contributed by
Ceridian in 2006 and 2005 resulted from the expiration of the
Ceridian Services Agreement on December 31, 2004, combined
with the fixed nature of the recurring revenues recognized
pursuant to the Original Ceridian Agreement. As total revenues
have increased each year, on a
year-over-year
basis, particularly with respect to the recurring revenues
growth, the fixed amount of recurring revenues recognized each
year from the Original Ceridian Agreement diminishes in its
overall contribution and, therefore, continues to become less
significant to the amount of the Companys total revenues.
The Company anticipates a continued reduction in the percentage
of total revenues contributed by Ceridian, as fixed recurring
revenues under the Original Ceridian Agreement of
$642,000 per month are expected to be recognized until the
termination of the Original Ceridian Agreement on March 9,
2008.
The composition of the revenues recognized from Ceridian, as a
percentage of total revenues, for the years ended
December 31, 2006, 2005 and 2004 was as follows:
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2006
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2005
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2004
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Recurring revenues
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6.7
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%
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8.7
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%
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10.9
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%
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Services revenues
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4.6
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Total revenues
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6.7
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%
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8.7
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%
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15.5
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%
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24
Allowance
for Doubtful Accounts
The Company maintains an allowance for doubtful accounts at an
amount estimated to be sufficient to provide adequate protection
against losses resulting from collecting less than full payment
on accounts receivable. In assessing the adequacy of the
allowance for doubtful accounts, the Company considers multiple
factors including historical bad debt experience, the general
economic environment, and the aging of its receivables. A
considerable amount of judgment is required when the realization
of receivables is assessed, including assessing the probability
of collection and current credit-worthiness of each customer. If
the financial condition of the Companys customers were to
deteriorate, resulting in an impairment of their ability to make
payments, an additional provision for doubtful accounts may be
required.
Deferred
Taxes
The Company provides a valuation allowance for that portion of
deferred tax assets which is not likely to be recognized due to
the Companys cumulative losses and the uncertainty as to
future recoverability. Any reversal of the deferred tax
valuation allowance is made when the Company believes that it is
more likely than not that this portion of the deferred tax asset
will be realized. The computation of the deferred tax assets and
related valuation allowance is based on taxable income expected
to be earned over future periods which will include the
utilization of previously accumulated net operating tax losses.
Each quarter, the Company will continue to evaluate the amount,
if any, of additional reduction or increase of the valuation
allowance that should be made. This will be based on
managements estimate and conclusions regarding the
ultimate realization of the deferred tax assets, including but
not limited to the Companys recent financial results as
well as projected earnings over future periods. While the
Company has considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for
the deferred tax valuation allowance, in the event and to the
extent the Company is able to determine that it would be able to
realize the deferred tax assets in the future, a reduction in
the deferred tax asset valuation allowance would increase income
in the period the determination was made.
Overview
Ultimate Software designs, markets, implements and supports
human resources, payroll and talent management solutions in the
United States.
Ultimate Softwares UltiPro software (UltiPro)
is an
end-to-end,
single source Web-based solution designed to deliver the
functionality businesses need to manage the employee life cycle,
from compensating and managing benefits to recruiting and hiring
to terminating, whether their processes are centralized at
headquarters or distributed across multiple divisions or branch
offices. UltiPros
end-to-end
functionality includes comprehensive online recruitment tools,
human resources (HR) and benefits management, a
strong payroll engine, time and attendance management, workforce
scheduling, on-line benefits enrollment, training management,
performance and learning management, reporting and analytical
decision-making tools, and a self-service Web portal for
executives, managers, administrators, and employees. Ultimate
Software believes that UltiPro helps customers streamline HR and
payroll processes to significantly reduce administrative and
operational costs, while also empowering managers and staff to
analyze workforce trends for better decision making, access
critical information quickly and perform routine business
activities efficiently.
UltiPro is marketed primarily through the Companys direct
sales team. Ultimate Software has 1,400 customers,
representing approximately 9,000 companies. Based upon
October 2006 market data from Hoovers and Dun &
Bradstreet, Ultimate Software estimates that its approximate
market share is 3 percent in the 15,000 employee and
larger space; 4 percent in the 600 to 15,000 employee
space, and 2 percent of companies in the 200 to 600
employee space.
As part of its comprehensive HR, payroll and talent management
solutions, Ultimate Software provides implementation and
training services to its customers as well as support services,
which have been certified by the Support Center Practices
Certification program for eight consecutive annual evaluations.
UltiPro leverages the Microsoft technology platform, which is
recognized in the industry as a cost-effective, reliable and
scalable platform.
25
Intersourcing
Offering
In 2002, the Company began offering a hosting service, branded
Intersourcing, whereby the Company provides the hardware,
infrastructure, ongoing maintenance and
back-up
services for its customers at a data center located in Miami,
Florida, which is managed by IBM. In August 2005, the Company
opened a second data center, which is located in Atlanta,
Georgia and is also managed by IBM. Different types of hosting
arrangements include the sale of Hosting Services as a part of
the Intersourcing Offering, discussed below, and, to a lesser
extent, the sale of Hosting Services to customers that license
UltiPro on a perpetual basis. Hosting Services, typically
available in a shared environment, provide Web access to
UltiPro, including comprehensive learning management
functionality for organizations that need to simplify the IT
support requirements of their business applications and are
priced on a PEPM basis. In the shared environment, Ultimate
Software provides an infrastructure with applicable servers
shared among many customers who use a Web browser to access the
application software through the data centers.
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, typically in a
shared environment. The pricing for Intersourcing, including
both the hosting element as well as the right to use UltiPro, is
on a PEPM basis.
Original
Ceridian Agreement
During 2001, Ultimate Software and Ceridian reached an
agreement, as amended in 2002, which granted Ceridian a
non-exclusive license to use UltiPro software as part of an
on-line offering that Ceridian can market primarily to
businesses with under 500 employees (the Original Ceridian
Agreement). Ceridian marketed that solution under the name
SourceWeb.
Under the agreement, Ceridian is required to pay the Company a
monthly license fee based on the number of employees paid using
the licensed software. In 2006, Ceridian made monthly payments
of $525,000. The aggregate minimum payments that Ceridian is
obligated to pay Ultimate Software under the Original Ceridian
Agreement over the minimum term of the Agreement are
$42.7 million. To date, Ceridian has paid to Ultimate
Software a total of $35.4 million under the Original
Ceridian Agreement.
Effective March 9, 2006, Ceridian provided Ultimate
Software with a two years advance written notice of
termination of the Original Ceridian Agreement, as permitted
under the terms of the Agreement. Pursuant to such notice, the
Original Ceridian Agreement will terminate on March 9, 2008
(unless terminated earlier for an uncured material breach).
During December 2004, RSM McGladrey Employer Services
(RSM), an existing BSP of Ultimate Software,
acquired Ceridians SourceWeb HR/payroll and self-service
product and existing SourceWeb base of small and midsize
business customers throughout the United States (the RSM
Acquisition). The financial terms of the Original Ceridian
Agreement have not changed as a result of the RSM Acquisition.
Ceridian continues to be financially obligated to pay Ultimate
Software a minimum fee of $500,000 per month with increases
of 5% per annum, compounded beginning in January 2006.
Therefore, the minimum monthly fee payable to Ultimate Software
from Ceridian in 2006 was $525,000.
Ultimate Software expects to continue to recognize a minimum of
$642,000 per month, or $7.7 million per year, in recurring
subscription revenues from the Original Ceridian Agreement until
its termination on March 9, 2008.
Items Affecting
Comparability between Periods
Prior to January 1, 2006, the Company accounted for
share-based plans under the recognition and measurement
requirements of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations, as
permitted by Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based
Compensation. Prior to January 1, 2006, stock-based
compensation expense was recognized only for grants of
restricted stock awards, stock units and stock options which
were granted at exercise prices less
26
than the fair market value of the underlying Common Stock on the
grant date. During the year ended December 31, 2005, while
there were no grants of stock units, there were grants of
restricted stock awards. For the year ended December 31,
2004, there were no grants of stock units or restricted stock
awards. In addition, for the two years ended December 31,
2005 and 2004, stock options that had exercise prices less than
the fair market value of the Common Stock on the grant date were
granted to certain members of the Board of Directors for board
services and fully vested on the grant date. Therefore,
stock-based compensation expense for the year ended
December 31, 2005 is related to both restricted stock
awards granted and the options granted to certain members of the
Board for board services, recorded in accordance with APB
No. 25. Stock-based compensation expense for the year ended
December 31, 2004 is related to the options granted to
certain members of the Board for board services, recorded in
accordance with APB No. 25.
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of SFAS No. 123R,
Share-Based Payment, 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, 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
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R). Results of
prior periods have not been restated.
The following table sets forth the stock-based compensation
expense (SBC) resulting from share-based
arrangements that is recorded in the Companys consolidated
statements of operations for the periods indicated (in
thousands):
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For the Years Ended December 31,
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2006
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2005
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2004
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Cost of recurring revenues
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$
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394
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$
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6
|
|
|
$
|
|
|
Cost of service revenues
|
|
|
874
|
|
|
|
13
|
|
|
|
|
|
Cost of license revenues
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
2,967
|
|
|
|
395
|
|
|
|
112
|
|
Research and development
|
|
|
620
|
|
|
|
7
|
|
|
|
24
|
|
General and administrative
|
|
|
1,385
|
|
|
|
346
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SBC
|
|
$
|
6,246
|
|
|
$
|
767
|
|
|
$
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, $4.7 million of total
unrecognized compensation costs related to
non-vested
stock options is expected to be recognized over a weighted
average period of 1.7 years. As of December 31, 2006,
$7.6 million of total unrecognized compensation costs
related to non-vested restricted stock awards and stock units is
expected to be recognized over a weighted average period of
3.2 years.
Included in capitalized software on the Companys
consolidated balance sheet at December 31, 2006 was $41
thousand in stock-based compensation incurred in the development
of UltiPro Canada during 2006. This amount would otherwise have
been charged to research and development expense for the year
ended December 31, 2006. There was no stock-based
compensation included in capitalized software on the
Companys consolidated balance sheet at December 31,
2005.
27
Results
of Operations
The following table sets forth the Statements of Operations data
of the Company, as a percentage of total revenues, for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
55.7
|
%
|
|
|
56.7
|
%
|
|
|
54.2
|
%
|
Services
|
|
|
33.6
|
|
|
|
31.5
|
|
|
|
34.6
|
|
License
|
|
|
10.7
|
|
|
|
11.8
|
|
|
|
11.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
15.6
|
|
|
|
15.5
|
|
|
|
16.6
|
|
Services
|
|
|
26.4
|
|
|
|
24.2
|
|
|
|
25.6
|
|
License
|
|
|
1.2
|
|
|
|
0.8
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
43.2
|
|
|
|
40.5
|
|
|
|
43.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
56.8
|
|
|
|
59.5
|
|
|
|
56.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
25.5
|
|
|
|
24.5
|
|
|
|
28.7
|
|
Research and development
|
|
|
19.6
|
|
|
|
22.6
|
|
|
|
25.4
|
|
General and administrative
|
|
|
9.3
|
|
|
|
9.2
|
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
54.4
|
|
|
|
56.3
|
|
|
|
63.5
|
|
Operating income (loss)
|
|
|
2.4
|
|
|
|
3.2
|
|
|
|
(7.1
|
)
|
Interest expense
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
Interest and other income
|
|
|
1.3
|
|
|
|
0.9
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
3.6
|
%
|
|
|
3.9
|
%
|
|
|
(7.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Fiscal Years Ended December 31, 2006 and 2005
Revenues
The Companys revenues are derived from three principal
sources: recurring revenues, services revenues and software
licenses (license revenues).
Recurring revenues consist of maintenance revenues,
Intersourcing revenues from the Companys hosted offering
of UltiPro and subscription revenues from per-employee-per-month
(PEPM) fees generated by business partners,
principally Ceridian. Maintenance revenues are derived from
maintaining, supporting and providing periodic updates for the
Companys products under software license agreements.
Subscription revenues are principally derived from PEPM fees
earned through the Intersourcing Offering, Base Hosting (defined
below) and revenues generated from the Original Ceridian
Agreement. Maintenance revenues are recognized ratably over the
service period, generally one year. To the extent there are
upfront fees associated with the Intersourcing Offering or Base
Hosting, subscription revenues are recognized ratably over the
minimum term of the related contract upon the delivery of the
product and services. Ongoing PEPM fees from the Intersourcing
Offering and Base Hosting are recognized as subscription
revenues (a component of recurring revenues in the consolidated
statements of operations) as the services are delivered.
Services revenues include revenues from fees charged for the
implementation of the Companys software products and
training of customers in the use of such products, fees for
other services, the provision of payroll-related forms and the
printing of
Form W-2s
for certain customers and certain reimbursable
28
out-of-pocket
expenses. Revenues for training and implementation consulting
services are recognized as services are performed to the extent
the pricing for such services is on a time and materials basis
and the payment terms are within the Companys ordinary and
customary payment cycle. In the event payments for services are
outside the ordinary and customary period for the Company, the
related revenues are recognized as payments come due based on
their relative fair values. Other services are recognized as the
product is shipped or as the services are rendered, depending on
the specific terms of the arrangement.
Arrangement fees related to fixed-fee implementation services
contracts are recognized using the percentage of completion
accounting method, which involves the use of estimates.
Percentage of completion is measured at each reporting date
based on hours incurred to date compared to total estimated
hours to complete 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 the
Company receives final acceptance from the customer.
License revenues include revenues from software license
agreements for the Companys products, entered into between
the Company and its customers in which the license fees are
non-cancelable. License revenues are generally recognized upon
the delivery of the related software product when all
significant contractual obligations have been satisfied. Until
such delivery, the Company records amounts received when
contracts are signed as customer deposits which are included
with deferred revenues in the consolidated balance sheets.
Total revenues, consisting of recurring, services and license
revenues, increased 29.6% to $114.8 million for 2006 from
$88.6 million for 2005.
Recurring revenues increased 27.2% to $63.9 million for
2006 from $50.3 million for 2005. The increases in
recurring revenues for 2006 were primarily due to increases in
Intersourcing revenues and maintenance revenues.
|
|
|
|
a)
|
Intersourcing revenues increased primarily due to incremental
recurring revenues generated from additional (previously sold)
Intersourcing units which went live (i.e., when the
underlying customer processes its first live payroll for its
employees) since December 31, 2005. Recognition of
recurring revenues for Intersourcing unit sales commences upon
live date.
|
|
|
b)
|
Maintenance revenues increased due to additional maintenance
fees resulting from cumulative increases in the customer base
subsequent to December 31, 2005 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 recurring basis
thereafter (on a monthly basis ratably over the term of the
respective renewal period). The Companys high retention
rate of approximately 97% for existing customers annual
maintenance renewals in 2006 combined with the annual price
increases that typically accompany renewals also contributed to
the increase in maintenance revenues.
|
|
|
c)
|
Recurring subscription revenues recognized in 2006 from the
Original Ceridian Agreement, totaling $7.7 million, were
the same as in 2005. Beginning on August 28, 2002,
subscription revenues generated from the Original Ceridian
Agreement of $642,000 per month have been recognized, and
are expected to be recognized, over the minimum term of the
contract. Future recurring revenues to be recognized from the
Original Ceridian Agreement are expected to be comparable to
2006, or $7.7 million per year, through March 9, 2008.
|
|
|
d)
|
The impact on recurring revenues for units sold under the
Intersourcing Offering (as compared to the impact on license
revenues for licensed units sold) is expected to be a gradual
increase from one period to the next, based on the revenue
recognition of the Intersourcing fees over the terms of the
related contracts. The Company continues to believe that a
combination of units sold under the Intersourcing Offering and
regular licensed units sold will provide a more predictable
business model in the future.
|
29
Services revenues increased 38.4% to $38.6 million for 2006
from $27.9 million for 2005 primarily as a result of an
increase of $9.3 million in implementation revenues and a
$0.9 million increase in training revenues. Other service
revenues were comparable to the prior year. The increase in
implementation revenues in 2006 was primarily due to higher
billable hours from billable consultants stemming from a
combination of implementing incremental units sold and an
increase in the number of the Companys revenue-generating
consultants, as well as a higher net rate per hour. In addition,
the Company used third-party implementation partners
significantly more in 2006 to assist in handling the increased
demand for implementations due to increased sales, which also
contributed to the growth in services revenues. The increase in
training revenues was attributable to increased classroom
attendance and higher Web-based training revenues.
License revenues increased 17.3% to $12.3 million for 2006
from $10.5 million for 2005. The increase in 2006 was
principally due to the sale of one larger than average license
unit sold during 2006 and a higher average selling price per
unit for UltiPro. There were also license sales of add-on
products (i.e., products sold with UltiPro, which have an
incremental fee), including Recruitment (defined below under
Cost of Services) and the newly introduced UltiPro
time and attendance (UTA).
Cost of
Revenues
Cost of revenues consists of the cost of recurring, services and
license revenues. Cost of recurring revenues consists of costs
to provide maintenance and technical support to the
Companys customers, the cost of providing periodic updates
and the cost of subscription revenues, including amortization of
capitalized software. Cost of services revenues primarily
consists of costs to provide implementation services and
training to the Companys customers and, to a lesser
degree, costs related to sales of payroll-related forms, costs
associated with certain reimbursable
out-of-pocket
expenses, discussed below, and costs to support additional
services provided to BSPs (or BSP services). Cost of license
revenues primarily consists of fees payable to third-parties for
software products distributed by the Company. UltiPro includes
third-party software for enhanced report writing purposes and
for time and attendance functionality. When UltiPro licenses are
sold, customers pay the Company on a per user basis for the
license rights to the third-party report writing software and
for the add-on product, UTA, which was introduced in 2006.
Cost of recurring revenues increased 30.1% to $17.9 million
for 2006 from $13.7 million for 2005. The increase in cost
of recurring revenues for 2006 (which included stock-based
compensation of $0.4 million), was primarily due to the
increases in both Intersourcing costs and maintenance costs.
|
|
|
|
a)
|
The increase in the Intersourcing costs was principally due to
the growth in Intersourcing operations and increased sales
(including increased labor costs and higher operating costs such
as depreciation and amortization of related computer equipment
supporting the operations and costs associated with the
operations of the Companys two data centers), fees paid to
the third party for Recruitment combined with an increase in
fees paid to the third-party provider of UTA.
|
|
|
|
|
a.
|
In October 2006, the Company acquired the rights to the source
code from First Advantage Corporation for its third-party
recruitment product, the integrated online recruitment/talent
acquisition solution that Ultimate Software has offered its
customers since April 2005 (Recruitment). First
Advantage previously acquired the company (RecruiterNet Inc.)
that developed the recruitment product known as Projectix, which
was the basis for Ultimate Softwares Recruitment offering.
First Advantage is one of Ultimate Softwares existing
UltiPro customers. As a result of this source code purchase, the
Company did not incur any third-party fees for Recruitment for
the majority of the fourth fiscal quarter of 2006 and will not
incur any such fees in future years. Instead, the Company will
amortize the cost of the source code over the estimated useful
life of the underlying asset, which, as determined by the
Company, is five years. A portion of that amortization is
allocated to cost of license and the remainder is allocated to
cost of recurring revenues, based on proportionate unit sales.
|
|
|
|
|
b)
|
The increase in maintenance costs was primarily related to
increased labor costs commensurate with the growth in the number
of customers served.
|
30
Cost of services revenues increased 41.3% to $30.3 million
for 2006 from $21.4 million for 2005. The increase in cost
of services revenues for 2006 (which included stock-based
compensation of $0.9 million), was primarily due to an
increase in costs of implementation. Due to the continued sales
growth of both Intersourcing and license units, there was an
increase in labor costs primarily resulting from additional
billable consultants hired to support this growth and, to a
lesser extent, the use of third-party implementation partners
who assisted in handling the increased demand for implementing
UltiPro and add-on products.
Cost of license revenues increased 95.9% to $1.4 million
for 2006 from $0.7 million for 2005. The increase in cost
of license revenues for 2006 was principally due to higher
royalties paid to third-party vendors for products sold in
conjunction with UltiPro, including the new add-on product, UTA.
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 34.9% to $29.4 million for 2006 from
$21.8 million for 2005. The $7.6 million increase in
2006 was principally due to increased sales commissions and
other additional labor costs (including $3.0 million of
stock-based compensation, representing a $2.6 million
increase over 2005), partly attributable to hiring additional
personnel for the expected sales growth, including the new
UltiPro add-on product offerings, such as UTA, as well as
expected sales of UltiPro Canada (defined below under
Research and Development), once developed. Sales
commissions increased on both license revenues as well as
Intersourcing revenues, correlating with the growth in those
revenue sources. Sales commissions on license sales are
recognized when the license revenues are recognized, which is
typically when the product is shipped. Sales commissions on
Intersourcing sales are amortized over the initial contract term
(typically 24 months) commencing on live date,
which corresponds to Intersourcing revenue recognition.
Increased sales commissions also resulted from a higher
percentage of sales being made by salespeople in the direct
sales force whose
year-to-date
performance placed them at higher commission rates.
Research
and Development
Research and development expenses consist primarily of software
development personnel costs. Research and development expenses
increased 12.4% to $22.5 million in 2006 from
$20.0 million in 2005. Excluding the impact of capitalized
costs associated with UltiPro Canada, which totaled
$1.8 million for 2006, research and development expenses
increased $4.1 million in comparison to 2005, principally
due to higher labor costs, including the impact of increased
staffing related to the ongoing development of UltiPro Canada,
increased development for UltiPro, including product
enhancements and additional functionality, as well as annual
merit increases and, to a lesser extent, $0.6 million of
stock-based compensation expense for 2006.
In accordance with SFAS No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, the Company began capitalizing certain research
and development personnel costs for the development of UltiPro
Canadian HR/payroll (UltiPro Canada) functionality
in November 2005, when technological feasibility was attained.
UltiPro Canada is being built from the existing product
infrastructure of UltiPro (e.g., using UltiPros source
code and architecture). UltiPro Canada will provide
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). The
Company expects to capitalize additional research and
development costs relative to the UltiPro Canada project until
its anticipated general release, which is expected to occur in
the second half of 2007, at which time capitalization would
cease under SFAS No. 86 guidelines. The Company
capitalized a total of $1.8 million in 2006 as compared to
$0.2 million in 2005 relative to UltiPro Canada.
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.
31
General and administrative expenses increased 31.0% to
$10.6 million for 2006 from $8.1 million for 2005. The
increase for 2006 was primarily due to increased labor costs
attributable to hiring additional personnel to support the
Companys growth and, to a lesser extent, annual merit
increases. Also, included in general and administrative expenses
was stock-based compensation expense of $1.4 million in
2006 as compared to $0.3 million in 2005.
Interest
Expense
Interest expense decreased 13.3% to $195,000 for 2006 from
$225,000 for 2005 primarily due to principal payments made in
2006 on the outstanding borrowings from the Credit Facility
(defined below under Liquidity and Capital
Resources). There were no borrowings made in 2006.
Interest
and Other Income
Interest and other income increased 87.8% to $1.5 million
for 2006 from $819,000 for 2005 primarily due to an increase in
interest rates as well as additional interest income on cash
available for investments.
Provision
for Income Taxes
No provision or benefit for Federal, state or foreign income
taxes was made for 2006 due to the operating losses and
operating loss carryforwards from prior periods incurred in the
respective periods. Net operating loss carryforwards available
at December 31, 2006, expiring at various times through the
year 2026 and which are available to offset future taxable
income, approximated $76.0 million. The timing and levels
of future profitability may result in the expiration of net
operating loss carryforwards before utilization. Additionally,
utilization of such net operating losses may be limited as a
result of cumulative ownership changes in the Companys
equity instruments.
Comparison
of Fiscal Years Ended December 31, 2005 and 2004
Revenues
Total revenues, consisting of recurring, services and license
revenues, increased 23.0% to $88.6 million for 2005 from
$72.0 million for 2004.
Recurring revenues increased 28.7% to $50.3 million for
2005 from $39.0 million for 2004 primarily due to an
increase in revenues generated from the Intersourcing Offering
and an increase in maintenance revenues.
|
|
|
|
a)
|
The increase in revenues generated from the Intersourcing
Offering resulted from incremental Intersourcing units sold in
2005 and an increase in the number of Intersourcing customers
that processed their first live payroll during 2005 as those
revenues were layered on to the Intersourcing revenue base in
existence at December 31, 2004.
|
|
|
b)
|
The increase in maintenance revenues resulted from higher
license sales on which maintenance revenues are generated. The
Companys high retention rate of approximately 97% for
existing customers annual renewals in 2005 combined with
the annual price increases that typically accompany renewals
also contributed to the increase in maintenance revenues.
|
|
|
c)
|
Recurring subscription revenues recognized in 2005 from the
Original Ceridian Agreement, totaling $7.7 million, were
the same as in 2004.
|
Services revenues increased 11.9% to $27.9 million for 2005
from $24.9 million for 2004 primarily as a result of an
increase of $2.4 million in implementation revenues and a
$0.6 million increase in training revenues, partially
offset by a decrease in BSP services revenues of
$0.6 million. The increase in implementation revenues is
principally a result of additional billable hours stemming from
an increase in the number of revenue-generating consultants,
incremental units sold, partially offset by a lower net rate per
hour. The increase in training revenues was attributable to more
units sold in 2005 versus the prior year and additional
32
Web-based training. The decrease in BSP services revenues since
2004 is due to the expiration of the Ceridian Services
Agreement effective December 31, 2004, partially offset by
additional BSP services revenues generated from RSM during 2005.
License revenues increased 29.7% to $10.5 million for 2005
from $8.1 million for 2004 primarily due to a higher number
of unit sales in 2005 as compared to unit sales in 2004 and a
slightly higher average selling price per unit.
Cost of
Revenues
Cost of recurring revenues increased 14.9% to $13.7 million
for 2005 from $12.0 million for 2004. The $1.7 million
increase in cost of recurring revenue for 2005 was attributable
to additional costs associated with the growth in the
Intersourcing Offering, including labor costs, depreciation and
amortization of related computer equipment and costs associated
with the operations of the Companys two data centers,
including the impact of opening the second data center in August
2005.
Cost of services revenues increased 16.1% to $21.4 million
for 2005 from $18.4 million for 2004 primarily due to
higher costs of implementation and higher costs of BSP services.
Costs of implementation services increased by $1.7 million
in comparison to 2004 due to additional labor costs associated
with hiring additional consultants to support the increase in
unit sales. Costs of BSP services increased $1.1 million in
comparison to 2004 due to increased personnel to provide
contractual services to the BSP channel, including RSM, which
was more labor-intensive in 2005.
Cost of license revenues primarily consists of fees payable to a
third-party for software products distributed by the Company
and, to a lesser degree, amortization of capitalized software
costs (which ended in July 2004). UltiPro includes third-party
software for enhanced report writing purposes. When UltiPro
licenses are sold, customers pay the Company on a per user basis
for the license rights to the third-party report writing
software. Capitalized software was amortized using the
straight-line method over the estimated useful life of the
related asset, which is typically three years. Cost of license
revenues decreased 28.7% to $0.7 million for 2005 from
$1.0 million for 2004. The decrease in cost of license
revenues for 2005 was mostly due to a $0.2 million
reduction in the amortization of capitalized software.
Capitalized software (previously capitalized prior to UltiPro
Canada) impacting the cost of license revenues was fully
amortized as of July 31, 2004. Capitalized software related
to UltiPro Canada will commence being amortized with its general
release, currently anticipated to occur in the second half of
2007.
Sales and
Marketing
Sales and marketing expenses increased 5.6% to
$21.8 million for 2005 from $20.6 million for 2004.
The increase in sales and marketing expenses was primarily due
to a $2.0 million increase in labor costs (including sales
commissions which correlate with increased revenues and
performance-based bonuses), partially offset by a decrease in
advertising and marketing costs of $0.2 million.
Research
and Development
Research and development expenses increased 9.2% to
$20.0 million in 2005 from $18.3 million in 2004.
Excluding the impact of capitalized costs associated with
UltiPro Canada which totaled $0.2 million for the year (all
incurred in the fourth fiscal quarter of 2005 commencing when
technological feasibility was attained), research and
development expenses increased $1.9 million in 2005
principally due to higher labor costs, including the impact of
staffing needs related to the ongoing development of UltiPro
Canada.
General
and Administrative
General and administrative expenses increased 19.5% to
$8.1 million for 2005 from $6.8 million for 2004. The
$1.3 million increase in general and administrative
expenses was primarily due to increased labor costs, an increase
in performance-based bonuses principally associated with the
Companys executive incentive program tied to the overall
financial performance of the Company and an increase in the
provision for doubtful
33
accounts associated with the growth of the Companys
operations, partially offset by lower professional fees, which
include legal, accounting and auditing fees.
Interest
Expense
Interest expense increased 23.6% to $225,000 for 2005 from
$182,000 for 2004 primarily due to the increase in borrowings
from the Credit Facility, defined below.
Interest
and Other Income
Interest and other income increased 187.7% to $819,000 for 2005
from $285,000 for 2004 primarily due to additional interest
income on cash available for investments.
Provision
for Income Taxes
No provision or benefit for Federal, state or foreign income
taxes was made for 2005 or 2004 due to the operating losses and
operating loss carryforwards from prior periods incurred in the
respective periods. Net operating loss carryforwards available
at December 31, 2005, expiring at various times through the
year 2025 and which are available to offset future taxable
income, approximated $67.0 million. The timing and levels
of future profitability may result in the expiration of net
operating loss carryforwards before utilization. Additionally,
utilization of such net operating losses may be limited as a
result of cumulative ownership changes in the Companys
equity instruments.
34
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, 2006 and 2005. In managements
opinion, this unaudited information has been prepared on the
same basis as the audited consolidated financial statements and
includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the
information for the quarters presented. This information should
be read in conjunction with the Companys Consolidated
Financial Statements and Notes thereto, included elsewhere in
this
Form 10-K.
The Companys quarterly revenues and operating results have
varied significantly in the past and are likely to vary
substantially from quarter to quarter in the future. The
Companys operating results may fluctuate as a result of a
number of factors, including, but not limited to, increased
expenses (especially as they relate to product development and
sales and marketing), timing of product releases, increased
competition, variations in the mix of revenues, announcements of
new products by the Company or its competitors and capital
spending patterns of the Companys customers. The Company
establishes its expenditure levels based upon its expectations
as to future revenues, and, if revenue levels are below
expectations, expenses can be disproportionately high. A
significant change in the revenue mix (between Intersourcing and
perpetual license unit sales) could cause the quarterly results
to differ significantly. A drop in near term demand for the
Companys products could significantly affect both revenues
and profits in any quarter. Operating results achieved in
previous fiscal quarters are not necessarily indicative of
operating results for the full fiscal years or for any future
periods. As a result of these factors, there can be no assurance
that the Company will be able to maintain profitability on a
quarterly basis. The Company believes that, due to the
underlying factors for quarterly fluctuations,
period-to-period
comparisons of its operations are not necessarily meaningful and
that such comparisons should not be relied upon as indications
of future performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
Dec. 31,
|
|
|
Sep. 30,
|
|
|
Jun. 30,
|
|
|
Mar. 31,
|
|
|
Dec. 31,
|
|
|
Sep. 30,
|
|
|
Jun. 30,
|
|
|
Mar. 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousand, except per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
$
|
17,478
|
|
|
$
|
16,487
|
|
|
$
|
15,531
|
|
|
$
|
14,439
|
|
|
$
|
13,574
|
|
|
$
|
12,956
|
|
|
$
|
12,141
|
|
|
$
|
11,588
|
|
Services
|
|
|
12,645
|
|
|
|
9,410
|
|
|
|
8,335
|
|
|
|
8,227
|
|
|
|
8,845
|
|
|
|
6,484
|
|
|
|
6,389
|
|
|
|
6,176
|
|
License
|
|
|
2,919
|
|
|
|
2,882
|
|
|
|
4,472
|
|
|
|
1,986
|
|
|
|
2,542
|
|
|
|
2,746
|
|
|
|
2,778
|
|
|
|
2,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
33,042
|
|
|
|
28,779
|
|
|
|
28,338
|
|
|
|
24,652
|
|
|
|
24,961
|
|
|
|
22,186
|
|
|
|
21,308
|
|
|
|
20,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
4,836
|
|
|
|
4,602
|
|
|
|
4,325
|
|
|
|
4,112
|
|
|
|
3,716
|
|
|
|
3,588
|
|
|
|
3,367
|
|
|
|
3,069
|
|
Services
|
|
|
9,601
|
|
|
|
7,287
|
|
|
|
6,404
|
|
|
|
6,964
|
|
|
|
6,419
|
|
|
|
5,171
|
|
|
|
4,786
|
|
|
|
5,034
|
|
License
|
|
|
423
|
|
|
|
319
|
|
|
|
391
|
|
|
|
256
|
|
|
|
245
|
|
|
|
165
|
|
|
|
176
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
14,860
|
|
|
|
12,208
|
|
|
|
11,120
|
|
|
|
11,332
|
|
|
|
10,380
|
|
|
|
8,924
|
|
|
|
8,329
|
|
|
|
8,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
18,182
|
|
|
|
16,571
|
|
|
|
17,218
|
|
|
|
13,320
|
|
|
|
14,581
|
|
|
|
13,262
|
|
|
|
12,979
|
|
|
|
11,922
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
7,670
|
|
|
|
7,222
|
|
|
|
7,548
|
|
|
|
6,942
|
|
|
|
5,803
|
|
|
|
5,523
|
|
|
|
5,267
|
|
|
|
5,190
|
|
Research and development
|
|
|
5,937
|
|
|
|
5,887
|
|
|
|
5,273
|
|
|
|
5,374
|
|
|
|
4,762
|
|
|
|
5,251
|
|
|
|
5,184
|
|
|
|
4,802
|
|
General and administrative
|
|
|
3,124
|
|
|
|
2,526
|
|
|
|
2,556
|
|
|
|
2,442
|
|
|
|
2,430
|
|
|
|
1,945
|
|
|
|
1,948
|
|
|
|
1,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
16,731
|
|
|
|
15,635
|
|
|
|
15,377
|
|
|
|
14,758
|
|
|
|
12,995
|
|
|
|
12,719
|
|
|
|
12,399
|
|
|
|
11,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
1,451
|
|
|
|
936
|
|
|
|
1,841
|
|
|
|
(1,438
|
)
|
|
|
1,586
|
|
|
|
543
|
|
|
|
580
|
|
|
|
122
|
|
Interest expense
|
|
|
(43
|
)
|
|
|
(52
|
)
|
|
|
(60
|
)
|
|
|
(40
|
)
|
|
|
(44
|
)
|
|
|
(65
|
)
|
|
|
(61
|
)
|
|
|
(55
|
)
|
Interest and other income
|
|
|
390
|
|
|
|
419
|
|
|
|
390
|
|
|
|
339
|
|
|
|
293
|
|
|
|
223
|
|
|
|
170
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,798
|
|
|
$
|
1,303
|
|
|
$
|
2,171
|
|
|
$
|
(1,139
|
)
|
|
$
|
1,835
|
|
|
$
|
701
|
|
|
$
|
689
|
|
|
$
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
24,270
|
|
|
|
24,130
|
|
|
|
24,078
|
|
|
|
23,709
|
|
|
|
23,403
|
|
|
|
23,229
|
|
|
|
22,952
|
|
|
|
22,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
27,229
|
|
|
|
27,030
|
|
|
|
27,311
|
|
|
|
23,709
|
|
|
|
26,740
|
|
|
|
26,566
|
|
|
|
26,023
|
|
|
|
25,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
0.05
|
|
|
$
|
0.09
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.08
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.07
|
|
|
$
|
0.05
|
|
|
$
|
0.08
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.07
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Liquidity
and Capital Resources
The Company has historically funded operations, when necessary,
primarily through the private and public sale of equity
securities and, to a lesser extent, equipment financing and
borrowing arrangements.
As of December 31, 2006, the Company had $33.0 million
in cash, cash equivalents and total investments in marketable
securities, reflecting a net increase of $0.3 million since
December 31, 2005. As of December 31, 2006, the
Company had working capital of $14.2 million as compared to
$15.7 million as of December 31, 2005. The
$1.5 million decrease in working capital resulted primarily
from $3.4 million in cash paid for the RTIX Acquisition
(with the majority of the acquired assets and liabilities being
long-term in nature and therefore moving out of working
capital), an increase in cash purchases of property and
equipment and an increase in long-term prepaid Intersourcing
commissions which are included in other assets in the
consolidated balance sheets, partially offset by cash provided
by the Companys operations.
Net cash provided by operating activities was $15.4 million
for 2006 as compared to $5.4 million for 2005. The
$10.0 million increase was primarily due to an improvement
in operations related to increased sales, excluding the impact
of non-cash charges, of $7.1 million, an increase in
accrued expenses of $2.5 million (primarily related to
sales commissions and performance-based bonuses which, from a
timing perspective, are typically paid in the following
quarter), an increase in deferred revenue (net of the change in
accounts receivable which generally correlates with changes in
deferred revenue) of $2.5 million (principally related to
increased Intersourcing sales), partially offset by increased
prepaid sales commissions (predominantly Intersourcing-related)
of $2.8 million. Intersourcing commissions are paid in
advance of the recognition of the related expense since, in
accordance with generally accepted accounting principles, they
are amortized when the related Intersourcing client processes
its first live payroll and the consequential revenue recognition
period begins.
Net cash used in investing activities was $13.0 million for
2006 as compared to net cash used in investing activities of
$7.7 million for 2005. The additional $5.3 million in
net cash used in investing activities was primarily due to the
cash paid in the acquisition of RTIX of $3.6 million, an
increase in cash purchases of property and equipment of
$3.3 million (including installments paid for the purchase
of the Recruitment source code) and an increase in capitalized
software of $1.6 million, partially offset by a net
decrease in investments in marketable securities of
$3.3 million.
Net cash used in financing activities was $3.4 million for
2006 as compared to net cash provided by financing activities of
$5.3 million for 2005. The $8.7 million increase in
net cash used in financing activities was primarily related to
repurchases of Common Stock of $9.8 million, principal
payments on the Credit Facility of $0.5 million in 2006 as
compared to net borrowings of $0.8 million in 2005,
partially offset by a $2.8 million increase in proceeds
from exercises of employee stock options to purchase Common
Stock.
Days sales outstanding, calculated on a trailing three-month
basis (DSO), as of December 31, 2006 and 2005,
were 74 days and 67 days, respectively. The increase
in DSOs as of December 31, 2006 is discussed below.
Deferred revenues of $43.0 million at December 31,
2006 increased $10.0 million since December 31, 2005
primarily due to increased sales from Intersourcing operations
(which originate deferred revenues upon contract execution for
the upfront fees and initial PEPM fees). Substantially all of
the total balance in deferred revenues is related to future
recurring revenues, including Intersourcing. With respect to
Intersourcing unit sales, the increase in deferred revenues
creates a corresponding increase in accounts receivable which
impacts days sales outstanding (DSO) at that time, which
contributed to the increase in DSOs of 7 days
compared to December 31, 2005.
The Company had a credit facility (the Credit
Facility) with Silicon Valley Bank, which was secured by
the Companys eligible accounts receivable. The Credit
Facility was comprised of a revolving line of credit (the
Revolver) and an equipment term loan (the
Equipment Loan). The Credit Facilitys Revolver
expired on May 27, 2006. Based upon the strength and
consistency of the cash flow position as well as
managements expectations for the next twelve months, the
Company chose not to renew the Credit Facility upon its
expiration. The Credit Facilitys Equipment Loan, while
still effective, did not have any future
36
borrowing capacity after May 27, 2006. The outstanding
balance of $0.7 million under the Equipment Loan as of
December 31, 2006 is payable on or before December 31,
2008 under the payment terms of such agreement. As of
December 31, 2006, the Company was in compliance with all
covenants included in the terms of the Credit Facility.
In October 2006, the Company 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), for a total consideration of
$4.0 million payable in the form of $3.4 million in
cash and 27,897 shares of Common Stock (the Stock
Consideration).
|
|
|
|
a)
|
Pursuant to the stock purchase agreement with RTIX, the Stock
Consideration is subject to downward adjustment based on
RTIXs recurring revenues over a twelve-month period
beginning October 5, 2006, recorded in accordance with
generally accepted accounting principles in the United States,
and will be delivered within 30 days after the final
determination of any such adjustments. The Company did not
record the impact of the issuance of the Stock Consideration as
of December 31, 2006 and will evaluate the recurring
revenues of RTIX on a monthly basis, cumulative from
October 5, 2006, to determine when and the extent to which
the contingency has been satisfied, at which time the Stock
Consideration will be recorded in the Companys
consolidated financial statements.
|
|
|
b)
|
In addition, as part of the acquisition, the Company incurred
direct costs totaling $0.2 million and assumed net
liabilities of $0.3 million. See Note 3 of the Notes
to Consolidated Financial Statements for information regarding
the purchase price allocation for the RTIX Acquisition. RTIX
developed the performance management/appraisals solution that
Ultimate Software has offered its customers since February 2006.
|
|
|
c)
|
In accordance with EITF
01-3,
Accounting in a Purchase Business Combination for Deferred
Revenue of an Acquiree, the deferred maintenance revenue
liability assumed in the acquisition of RTIX was adjusted to
fair value, which is the sum of direct and incremental costs of
fulfilling the maintenance obligation plus a normal profit
margin on those fulfillment costs. As a result of the adjustment
to fair value, a $0.1 million decrease in the deferred
revenues liability assumed in the acquisition of RTIX was
recorded in the Companys consolidated financial
statements, which will be recognized entirely within
approximately a nine-month period following the acquisition date
of October 5, 2006.
|
During August 2006, the Company formed a wholly-owned
subsidiary, The Ultimate Software Group of Canada, Inc. (the
Canadian Subsidiary). The Canadian Subsidiary is
expected to accommodate the Companys future sales
operations in Canada, primarily related to UltiPro Canada, which
is currently under development and is expected to be available
for general release (pursuant to SFAS No. 86) in
the second half of 2007.
In October 2006, the Company acquired the rights to the source
code from First Advantage Corporation for its third-party
recruitment product, the integrated online recruitment/talent
acquisition solution that Ultimate Software has offered its
customers since April 2005 (Recruitment). First
Advantage previously acquired the company (RecruiterNet Inc.)
that developed the recruitment product known as Projectix, which
was the basis for Ultimate Softwares Recruitment offering.
First Advantage is one of Ultimate Softwares existing
UltiPro customers.
The Company believes that cash and cash equivalents, investments
in marketable securities and cash generated from operations will
be sufficient to fund its operations for at least the next
12 months. This belief is based upon, among other factors,
managements expectations for future revenue growth,
controlled expenses and collections of accounts receivable.
Recent
Accounting Literature
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities-Including an
amendment of FASB Statement
37
No. 115, (SFAS No. 159).
SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair
value. Most of the provisions of this Statement apply only to
entities that elect the fair value option. However, the
amendment to FASB Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities,
(SFAS No. 115), applies to all entities
with
available-for-sale
and trading securities. SFAS No. 159 is effective for
the Companys consolidated financial statements for the
annual reporting period beginning after November 15, 2007.
The Company is currently evaluating the impact of this new
pronouncement on its consolidated financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements (SFAS No. 157).
SFAS No. 157 defines fair value as used in numerous
accounting pronouncements, establishes a framework for measuring
fair value in GAAP and expands disclosures related to the use of
fair value measures in financial statements.
SFAS No. 157 does not expand the use of fair value
measures in financial statements, but standardizes its
definition and guidance in GAAP and emphasizes that fair value
is a market-based measurement and not an entity-specific
measurement based on an exchange transaction in which the entity
sells an asset or transfers a liability (exit price).
SFAS No. 157 establishes a fair value hierarchy from
observable market data as the highest level to fair value based
on an entitys own fair value assumptions as the lowest
level. SFAS No. 157 is effective for the
Companys consolidated financial statements for interim and
annual reporting periods beginning after November 15, 2007.
The Company is currently evaluating the impact of this new
pronouncement on its consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes,
(FAS No. 48). The interpretation clarifies
the accounting for uncertainty in income taxes recognized in a
companys financial statements in accordance with Statement
of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Specifically, the pronouncement
prescribes 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. The
interpretation also provides guidance on the related
derecognition, classification, interest and penalties,
accounting for interim periods, disclosure and transition of
uncertain tax positions. FAS No. 48 is effective for
fiscal years beginning after December 15, 2006. The Company
is currently evaluating the impact of this new pronouncement on
its consolidated financial statements.
In March 2006, the Emerging Issues Task Force (EITF)
reached a consensus on EITF Issue
No. 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation),
(EITF
No. 06-3),
that entities may adopt a policy of presenting taxes in the
income statement either on a gross or net basis. Gross or net
presentation may be elected for each different type of tax, but
similar taxes should be presented consistently. Taxes within the
scope of this EITF would include taxes that are imposed on a
revenue transaction between the seller and a customer (e.g.,
sales taxes, use taxes, value-added taxes, and some types of
excise taxes). EITF
No. 06-3
is effective for the Companys financial statements for
interim and annual reporting periods beginning after
December 15, 2006. The Company believes that EITF
No. 06-3
will not have a material impact on its consolidated financial
statements.
Off-Balance
Sheet Arrangements
The Company does 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
the Companys financial condition, results of operations,
liquidity, capital expenditures or capital resources.
38
Contractual
Obligations
As of December 31, 2006, the Companys outstanding
contractual cash obligations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less Than
|
|
|
1-3
|
|
|
4-5
|
|
|
After 5
|
|
|
|
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Capital lease obligations (1)
|
|
$
|
2,986
|
|
|
$
|
1,552
|
|
|
$
|
1,434
|
|
|
$
|
|
|
|
$
|
|
|
Other long-term obligations (2)
|
|
|
22,467
|
|
|
|
2,785
|
|
|
|
5,449
|
|
|
|
4,375
|
|
|
|
9,858
|
|
Purchase obligations (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities (4)
|
|
|
736
|
|
|
|
535
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
26,189
|
|
|
$
|
4,872
|
|
|
$
|
7,084
|
|
|
$
|
4,375
|
|
|
$
|
9,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company leases certain equipment under non-cancelable
agreements, which are accounted for as capital leases and expire
at various dates through 2009. See Note 9 of the Notes to
Consolidated Financial Statements for information regarding
capital lease obligations. |
|
(2) |
|
The Company leases corporate office space and certain equipment
under non-cancelable operating lease agreements expiring at
various dates. See Note 13 of the Notes to Consolidated
Financial Statements for information regarding operating lease
obligations. |
|
(3) |
|
Purchase orders or contracts for the purchase of goods and
services are not included in the table above. The Company 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. The Company does not have significant agreements for
the purchase of goods or services specifying minimum quantities
or set prices. |
|
(4) |
|
The Company had a credit facility (the Credit
Facility) with Silicon Valley Bank, which was secured by
the Companys eligible accounts receivable. The Credit
Facility was comprised of a revolving line of credit (the
Revolver) and an equipment term loan (the
Equipment Loan). The Credit Facilitys Revolver
expired on May 27, 2006. Based upon the strength and
consistency of the cash flow position as well as
managements expectations for the next twelve months, the
Company chose not to renew the Credit Facility upon its
expiration. The Credit Facilitys Equipment Loan, while
still effective, did not have any future borrowing capacity
after May 27, 2006. The outstanding balance of
$0.7 million under the Equipment Loan as of
December 31, 2006 is payable on or before December 31,
2008 under the payment terms of such agreement. As of
December 31, 2006, the Company was in compliance with all
covenants included in the terms of the Credit Facility. |
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
In the ordinary course of its operations, the Company is exposed
to certain market risks, primarily interest rates. Uncertainties
that are either non-financial or non-quantifiable, such as
political, economic, tax, other regulatory or credit risks, are
not included in the following assessment of the Companys
market risks.
Market risks. The Company manages market risk in
accordance with its 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.
|
39
The Company targets its 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.
Interest rates. 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 must
carry minimum short-term ratings of
P-1 by
Moodys and
A-1 by
Standard & Poors. Other corporate debt obligations must
carry a minimum rating of
A-2 by
Moodys Investor Service (Moodys) or A by
Standard & Poors Rating Services
(S&P). Asset-backed securities must carry a
minimum AAA rating by Moodys and S&P with a maximum
average life of two years at the time of purchase.
Interest on the Credit Facility is based on Prime Rate per
annum. Because of the Companys existing cash position and
its expected cash flows from operations, the Company chose not
to renew the Credit Facility upon its expiration. The Company
was charged a weighted average interest rate of 6.5% per annum
during the year ended December 31, 2006 under the Credit
Facility. As of December 31, 2006, there was no amount
outstanding under the Credit Facilitys Revolver and
$0.7 million outstanding under the Credit Facilitys
Equipment Loan, with no future availability to draw on the
Equipment Loan and payment of the outstanding balance of such
Equipment Loan due on or before December 31, 2008.
As of December 31, 2006, total investments in
available-for-sale
marketable securities were $16.3 million. The Company is
subject to financial market risks, including changes in interest
rates and the valuations of its investment portfolio. Changes in
amounts borrowed or interest rates could impact the
Companys anticipated interest income from interest-bearing
cash accounts, or cash equivalents and investments in marketable
securities, as well as interest expense on borrowings under the
Credit Facility.
Interest rate risk. As of December 31, 2006,
virtually all of the investments in the Companys portfolio
were at fixed rates (with a weighted average interest rate of
5.3% per annum). In addition, the Credit Facilitys
Equipment Loan is based on a variable interest rate.
To illustrate the potential impact of changes in interest rates,
the Company has performed the following analysis based on its
December 31, 2006 consolidated balance sheet and assuming
no changes in its investment and borrowing structure. Under this
analysis, an immediate and sustained 100 basis point increase in
the various base rates would result in a decrease in the fair
market value of the Companys total portfolio of
approximately $86,000 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 market value of
the Companys total portfolio of approximately $86,000 over
the next 12 months.
40
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
INDEX
|
|
|
|
|
|
|
Page(s)
|
|
|
|
|
42
|
|
|
|
|
43
|
|
|
|
|
44
|
|
|
|
|
45
|
|
|
|
|
46
|
|
|
|
|
47
|
|
41
Report of
Independent Registered Public Accounting Firm
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, 2006 and 2005 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, 2006. These consolidated financial statements
are the responsibility of the Companys 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 and subsidiaries as of December 31,
2006 and 2005 and the results of their operations and their cash
flows for each of the years in the three-year period ended
December 31, 2006, in conformity with U.S. generally
accepted accounting principles.
As discussed in Notes 2 and 12 to the consolidated
financial statements, effective January 1, 2006, the
Company adopted the provision of Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based
Payment.
Also, as discussed in Notes 2 and 4 to the consolidated
financial statements, the Company changed its method of
quantifying errors in 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2006, 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 16, 2007, expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.
KPMG LLP
March 16, 2007
Miami, Florida
Certified Public Accountants
42
THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,734
|
|
|
$
|
17,731
|
|
Accounts receivable, net of
allowance for doubtful accounts of $500 for 2006 and 2005
|
|
|
26,575
|
|
|
|
18,126
|
|
Short-term investments in
marketable securities
|
|
|
14,247
|
|
|
|
14,422
|
|
Prepaid expenses and other current
assets
|
|
|
8,279
|
|
|
|
5,526
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
65,835
|
|
|
|
55,805
|
|
Property and equipment, net
|
|
|
13,480
|
|
|
|
10,026
|
|
Capitalized software, net
|
|
|
2,055
|
|
|
|
238
|
|
Goodwill
|
|
|
2,734
|
|
|
|
|
|
Long-term investments in
marketable securities
|
|
|
2,039
|
|
|
|
613
|
|
Other assets, net
|
|
|
7,387
|
|
|
|
2,899
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
93,530
|
|
|
$
|
69,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,894
|
|
|
$
|
2,613
|
|
Accrued expenses
|
|
|
9,230
|
|
|
|
6,406
|
|
Current portion of deferred revenue
|
|
|
36,524
|
|
|
|
29,385
|
|
Current portion of capital lease
obligations
|
|
|
1,512
|
|
|
|
1,393
|
|
Current portion of long-term debt
|
|
|
505
|
|
|
|
338
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
51,665
|
|
|
|
40,135
|
|
Deferred revenue, net of current
portion
|
|
|
6,445
|
|
|
|
3,646
|
|
Deferred rent
|
|
|
2,788
|
|
|
|
426
|
|
Capital lease obligations, net of
current portion
|
|
|
1,416
|
|
|
|
966
|
|
Long-term debt, net of current
portion
|
|
|
194
|
|
|
|
862
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
62,508
|
|
|
|
46,035
|
|
Commitments and contingencies
(Note 13)
|
|
|
|
|
|
|
|
|
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, 25,102,824 and
23,786,097 shares issued in 2006 and 2005, respectively
|
|
|
251
|
|
|
|
238
|
|
Additional paid-in capital
|
|
|
125,121
|
|
|
|
110,245
|
|
Accumulated comprehensive income
(loss)
|
|
|
1
|
|
|
|
(31
|
)
|
Accumulated deficit
|
|
|
(83,500
|
)
|
|
|
(85,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
41,873
|
|
|
|
24,600
|
|
Treasury stock, at cost, 709,437
and 257,647 shares in 2006 and 2005, respectively
|
|
|
(10,851
|
)
|
|
|
(1,054
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
31,022
|
|
|
|
23,546
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
93,530
|
|
|
$
|
69,581
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
43
THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
$
|
63,935
|
|
|
$
|
50,259
|
|
|
$
|
39,049
|
|
Services
|
|
|
38,617
|
|
|
|
27,894
|
|
|
|
24,924
|
|
License
|
|
|
12,259
|
|
|
|
10,450
|
|
|
|
8,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
114,811
|
|
|
|
88,603
|
|
|
|
72,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
17,875
|
|
|
|
13,740
|
|
|
|
11,961
|
|
Services
|
|
|
30,256
|
|
|
|
21,410
|
|
|
|
18,448
|
|
License
|
|
|
1,389
|
|
|
|
709
|
|
|
|
993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
49,520
|
|
|
|
35,859
|
|
|
|
31,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
65,291
|
|
|
|
52,744
|
|
|
|
40,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
29,382
|
|
|
|
21,783
|
|
|
|
20,630
|
|
Research and development
|
|
|
22,471
|
|
|
|
19,999
|
|
|
|
18,317
|
|
General and administrative
|
|
|
10,648
|
|
|
|
8,131
|
|
|
|
6,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
62,501
|
|
|
|
49,913
|
|
|
|
45,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
2,790
|
|
|
|
2,831
|
|
|
|
(5,127
|
)
|
Interest and other expense
|
|
|
(195
|
)
|
|
|
(225
|
)
|
|
|
(182
|
)
|
Interest and other income
|
|
|
1,538
|
|
|
|
819
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,133
|
|
|
$
|
3,425
|
|
|
$
|
(5,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
|
$
|
0.15
|
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.15
|
|
|
$
|
0.13
|
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,853
|
|
|
|
23,040
|
|
|
|
21,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
26,978
|
|
|
|
26,288
|
|
|
|
21,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
44
THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
Equity
|
|
|
Balance, December 31,
2003
|
|
|
20,844
|
|
|
$
|
208
|
|
|
$
|
86,760
|
|
|
$
|
|
|
|
$
|
(84,253
|
)
|
|
|
258
|
|
|
$
|
(1,054
|
)
|
|
$
|
1,661
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,024
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,024
|
)
|
Unrealized loss on investments in
marketable securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances of Common Stock from
exercises of stock options and warrant
|
|
|
507
|
|
|
|
5
|
|
|
|
2,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,292
|
|
Issuance of Common Stock for
private placement
|
|
|
1,398
|
|
|
|
14
|
|
|
|
14,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,333
|
|
Non-cash issuances of options to
Board to purchase Common Stock for board fees
|
|
|
|
|
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141
|
|
Non-cash compensation expense for
stock option modification
|
|
|
|
|
|
|
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2004
|
|
|
22,749
|
|
|
|
227
|
|
|
|
103,643
|
|
|
|
(15
|
)
|
|
|
(89,277
|
)
|
|
|
258
|
|
|
|
(1,054
|
)
|
|
|
13,524
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,425
|
|
|
|
|
|
|
|
|
|
|
|
3,425
|
|
Unrealized loss on investments in
marketable securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances of Common Stock from
exercises of stock options and warrant
|
|
|
1,037
|
|
|
|
11
|
|
|
|
5,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,846
|
|
Non-cash issuances of options to
Board to purchase Common Stock for board fees
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
Non-cash stock-based compensation
expense for restricted stock
|
|
|
|
|
|
|
|
|
|
|
642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2005
|
|
|
23,786
|
|
|
|
238
|
|
|
|
110,245
|
|
|
|
(31
|
)
|
|
|
(85,852
|
)
|
|
|
258
|
|
|
|
(1,054
|
)
|
|
|
23,546
|
|
SAB 108 cumulative
adjustment (Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,781
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,781
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balance,
January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87,633
|
)
|
|
|
|
|
|
|
|
|
|
|
21,765
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,133
|
|
|
|
|
|
|
|
|
|
|
|
4,133
|
|
Unrealized gain on investments in
marketable securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
Unrealized loss on foreign exchange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
451
|
|
|
|
(9,797
|
)
|
|
|
(9,797
|
)
|
Issuances of Common Stock from
exercises of stock options and warrants
|
|
|
1,317
|
|
|
|
13
|
|
|
|
8,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,602
|
|
Non-cash stock-based compensation
expense for stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
6,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2006
|
|
|
25,103
|
|
|
$
|
251
|
|
|
$
|
125,121
|
|
|
$
|
1
|
|
|
$
|
(83,500
|
)
|
|
|
709
|
|
|
$
|
(10,851
|
)
|
|
$
|
31,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
45
THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,133
|
|
|
$
|
3,425
|
|
|
$
|
(5,024
|
)
|
Adjustments to reconcile net
income (loss) to net cash provided by operating activities, net
of effects from business combination:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,371
|
|
|
|
4,426
|
|
|
|
5,055
|
|
Provision for doubtful accounts
|
|
|
813
|
|
|
|
869
|
|
|
|
419
|
|
Non-cash compensation expense for
stock based compensation
|
|
|
6,246
|
|
|
|
767
|
|
|
|
277
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(8,940
|
)
|
|
|
(6,395
|
)
|
|
|
(3,727
|
)
|
Prepaid expenses and other current
assets
|
|
|
(2,684
|
)
|
|
|
(2,412
|
)
|
|
|
(405
|
)
|
Other assets, net
|
|
|
(3,512
|
)
|
|
|
(1,066
|
)
|
|
|
(471
|
)
|
Accounts payable
|
|
|
1,021
|
|
|
|
411
|
|
|
|
(347
|
)
|
Accrued expenses
|
|
|
3,365
|
|
|
|
817
|
|
|
|
637
|
|
Deferred revenue
|
|
|
9,617
|
|
|
|
4,555
|
|
|
|
3,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
15,430
|
|
|
|
5,397
|
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(22,208
|
)
|
|
|
(21,421
|
)
|
|
|
(10,560
|
)
|
Maturities of marketable securities
|
|
|
20,990
|
|
|
|
16,914
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(6,367
|
)
|
|
|
(3,022
|
)
|
|
|
(4,695
|
)
|
Capitalized software
|
|
|
(1,801
|
)
|
|
|
(182
|
)
|
|
|
|
|
Payments for acquisition
|
|
|
(3,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(13,013
|
)
|
|
|
(7,711
|
)
|
|
|
(15,255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of Common Stock
|
|
|
(9,797
|
)
|
|
|
|
|
|
|
|
|
Principal payments on capital
lease obligations
|
|
|
(1,717
|
)
|
|
|
(1,318
|
)
|
|
|
(1,116
|
)
|
Net proceeds from issuances of
Common Stock
|
|
|
8,602
|
|
|
|
5,846
|
|
|
|
16,625
|
|
Borrowings under Credit Facility
|
|
|
|
|
|
|
1,000
|
|
|
|
503
|
|
Principal payments under Credit
Facility
|
|
|
(501
|
)
|
|
|
(249
|
)
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities
|
|
|
(3,413
|
)
|
|
|
5,279
|
|
|
|
15,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
|
(997
|
)
|
|
|
2 ,965
|
|
|
|
983
|
|
Cash and cash equivalents,
beginning of year
|
|
|
17,731
|
|
|
|
14,766
|
|
|
|
13,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
year
|
|
$
|
16,734
|
|
|
$
|
17,731
|
|
|
$
|
14,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
102
|
|
|
$
|
110
|
|
|
$
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing
activities:
|
|
-
|
The Company entered into capital lease obligations to acquire
new equipment totaling $2,285, $1,797 and $1,382 in 2006, 2005
and 2004, respectively.
|
|
-
|
The Company included in capitalized software on the
Companys consolidated balance sheet at December 31,
2006 a total of $41 in stock-based compensation incurred in the
development of UltiPro Canada. There was no stock-based
compensation capitalized in 2005 or 2004.
|
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
46
The Ultimate Software Group, Inc. (Ultimate Software
or the Company) designs, markets, implements and
supports payroll and talent management solutions, marketed
primarily to middle-market organizations with 200 to 15,000
employees. The Company reaches its customer base and target
market through its direct sales force and a network of national,
regional and local strategic partners.
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of
Consolidation
The consolidated financial statements reflect the financial
position and operating results of the Company which include
wholly-owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Reclassifications
As a result of implementing Staff Accounting
Bulletin No. 108 in 2006, the Company reclassified
$426 thousand from accrued expenses to long term deferred rent
to conform to the 2006 presentation. See Note 4 for further
discussion.
Staff
Accounting Bulletin No. 108
In September 2006, the SEC released Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(SAB 108). SAB 108 addresses how the
effects of prior-year uncorrected misstatements should be
considered when quantifying misstatements in current-year
financial statements. SAB 108 requires an entity to
quantify misstatements using a balance sheet and income
statement approach and to evaluate whether either approach
results in quantifying an error that is material in light of
relevant quantitative and qualitative factors. During the fourth
quarter of 2006, the Company adopted the provisions of
SAB 108. See Note 4 of the Notes to Consolidated
Financial Statements for further discussion.
Fair
Value of a Conditional Asset Retirement Obligation
The Company adopted FASB Interpretation (FIN) No. 47,
Accounting for Conditional Asset Retirement Obligation, an
interpretation of FASB Statement No. 143, effective
December 31, 2005. FIN 47 requires an entity to
recognize a liability for the fair value of a conditional asset
retirement obligation when incurred if the liabilitys fair
value can be reasonably estimated. The adoption of FIN 47
did not have an impact on the Companys consolidated
financial statements.
Fair
Value of Financial Instruments
The Companys financial instruments, consisting of cash and
cash equivalents, investments in marketable securities, accounts
receivable, accounts payable, long-term debt and capital lease
obligations, approximated fair value as of December 31,
2006 and 2005.
47
Cash and
Cash Equivalents
All highly liquid instruments with an original maturity of three
months or less when acquired are considered cash equivalents and
are comprised of interest-bearing accounts.
Accounts
Receivable
Accounts receivable are principally from end-users of the
Companys products. The Company performs credit evaluations
of its customers and has recorded allowances for estimated
losses. The Company maintains an allowance for doubtful accounts
at an amount estimated to be sufficient to provide adequate
protection against losses resulting from collecting less than
full payment on accounts receivables. A considerable amount of
judgment is required when the realization of receivables is
assessed, including assessing the probability of collection and
current credit-worthiness of each customer. If the financial
condition of the Companys customers were to deteriorate,
resulting in an impairment of their ability to make payments, an
additional provision for doubtful accounts may be required.
Investments
in Marketable Securities
The Company classifies its investments in marketable securities
with readily determinable fair values as securities
available-for-sale
in accordance with Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt
and Equity Securities (FAS 115) and FASB
Staff Position Financial Accounting Standards
No. 115-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments
(FSP
FAS 115-1).
The Company has classified all investments as
available-for-sale.
Available-for-sale
securities consist of debt and equity securities not classified
as trading securities nor as securities to be held to maturity.
Unrealized holding gains and losses on securities
available-for-sale
are reported as a net amount in accumulated other comprehensive
loss in stockholders equity until realized. Gains and
losses on the sale of securities
available-for-sale
are determined using the specific identification method.
Included in accumulated other comprehensive loss at the end of
2006 and 2005 are an unrealized gain of $2 thousand and an
unrealized loss of $31 thousand, respectively, of unrealized
losses on trading securities held at each year end.
The amortized cost and market value of the Companys
investments in
available-for-sale
securities at December 31, 2006 are shown in the table
below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
Investments in marketable
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
1,086
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,086
|
|
Corporate debentures
bonds
|
|
|
12,911
|
|
|
|
3
|
|
|
|
6
|
|
|
|
12,908
|
|
Certificates of deposit
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
1,200
|
|
Asset-backed fixed
|
|
|
1,091
|
|
|
|
1
|
|
|
|
|
|
|
|
1,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments,
available-for-sale
|
|
$
|
16,288
|
|
|
$
|
4
|
|
|
$
|
6
|
|
|
$
|
16,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of the
available-for-sale
securities by contractual maturity at December 31, 2006 are
shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Due in one year or less
|
|
$
|
14,247
|
|
|
$
|
14,247
|
|
Due after one year
|
|
|
2,041
|
|
|
|
2,039
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,288
|
|
|
$
|
16,286
|
|
|
|
|
|
|
|
|
|
|
48
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 two to fifteen
years. Maintenance and repairs are charged to expense when
incurred; betterments are capitalized. Upon the sale or
retirement of assets, the cost, accumulated depreciation and
amortization are removed from the accounts and any gain or loss
is recognized.
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
2006
|
|
|
December 31,
2005
|
|
|
Property and equipment
|
|
$
|
41,173
|
|
|
$
|
32,453
|
|
Less: accumulated depreciation and
amortization
|
|
|
27,693
|
|
|
|
22,427
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,480
|
|
|
$
|
10,026
|
|
|
|
|
|
|
|
|
|
|
Rental
Costs Incurred during a Construction Period
Effective January 1, 2006, the Company adopted FSP
FAS 13-1,
Accounting for Rental Costs Incurred during a Construction
Period, 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 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. The adoption of FSP
FAS 13-1
did not have a material impact on the Companys
consolidated financial statements.
Long-Lived
Assets
On January 1, 2002, the Company adopted
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets,
(SFAS No. 144). The Company evaluates the
carrying value of long-lived assets, when indicators of
impairment exist. For the year ended December 31, 2006, 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
assets (or asset groups) 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, 2006, 2005 and 2004, the
Company made no material adjustments to its long-lived assets.
Goodwill
and Other Intangible Assets
Goodwill and other intangible assets with indefinite lives are
not subject to amortization, but are subject to an impairment
test at least annually or more frequently if events or
circumstances indicate that impairment might exist. The Company
completed its annual impairment analysis of goodwill in the
fourth quarter of 2006 and determined goodwill had not been
impaired as of December 31, 2006. SFAS No. 142,
Goodwill and Other Intangible Assets,
(SFAS No. 142), also requires that
intangible assets with definite lives be amortized over their
estimated useful lives and reviewed for impairment in accordance
with SFAS No. 144. The Company is currently amortizing
its acquired intangible assets with finite lives over periods
ranging from one to six years.
49
Revenue
Recognition
Sources of revenue for the Company include:
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|
|
|
|
Sales of the right to use UltiPro through
Intersourcing (the Intersourcing
Offering), which includes Hosting Services (defined below);
|
|
|
|
Sales of perpetual licenses for UltiPro in conjunction with
services to host the UltiPro application (Hosting
Services);
|
|
|
|
Sales of Hosting Services on a stand-alone basis to customers
who already own a perpetual license or are simultaneously
acquiring a perpetual license for UltiPro (Base
Hosting);
|
|
|
|
Recurring revenues derived from (1) maintenance revenues
generated from maintaining, supporting and providing periodic
updates for the Companys software and
(2) subscription revenues generated from
per-employee-per-month (PEPM) fees earned through
the Intersourcing Offering, Base Hosting and the business
service provider (BSP) sales channel, amortization
of Intersourcing or Hosting Services one-time fees, and
revenues generated from the Original Ceridian Agreement (defined
below);
|
|
|
|
Sales of perpetual licenses for UltiPro; and
|
|
|
|
Sales of services including implementation, training (also known
as knowledge management) and other services, including the
provision of payroll-related forms and the printing of
Form W-2s
for certain customers, as well as services provided to BSPs.
|
Sales
Generated from the Intersourcing Offering
Subscription revenues generated from the Intersourcing Offering
are recognized in accordance with Emerging Issues Task Force
(EITF)
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF No. 00-21)
as a services arrangement since the customer is purchasing the
right to use UltiPro rather than licensing the software on a
perpetual basis. Fair value of multiple elements in
Intersourcing arrangements is assigned to each element based on
the guidance provided by EITF
No. 00-21.
The elements that typically exist in Intersourcing arrangements
include hosting services, the right to use UltiPro, maintenance
of UltiPro (i.e., product enhancements and customer support) and
professional services (i.e., implementation services and
training in the use of UltiPro). The pricing for Hosting
Services, the right to use UltiPro and maintenance of UltiPro is
bundled (the Bundled Elements). Since these three
Bundled Elements are components of recurring revenues in the
consolidated statements of operations, allocation of fair values
to each of the three elements is not necessary and they are not
reported separately. Fair value for the Bundled Elements, as a
whole, is based upon evidence provided by the Companys
pricing for Intersourcing arrangements sold separately. The
Bundled Elements are provided on an ongoing basis and represent
undelivered elements under EITF
No. 00-21;
they are recognized on a monthly basis as the services are
performed, once the customer processes its first live payroll
(i.e., goes Live).
Implementation and training services (the Professional
Services) provided for Intersourcing arrangements are
typically priced on a time and materials basis and are
recognized as services revenue in the consolidated statements of
operations as the services are performed. Under EITF
00-21, fair
value is assigned to service elements in the arrangement based
on their relative fair values, using the prices established when
the services are sold on a stand-alone basis. Fair value for
Professional Services is based on the respective Implementation
Valuation and Training Valuation. If evidence of the fair value
of one or more undelivered elements does not exist, the revenue
is deferred and recognized when delivery of those elements
occurs or when fair value can be established.
The Company believes that applying EITF
00-21 to
Intersourcing arrangements as opposed to applying
SOP 97-2
is appropriate given the nature of the arrangements whereby the
customer has no right to the UltiPro license.
50
Sales of
Base Hosting Services
Subscription revenues generated from Base Hosting are recognized
in accordance with EITF
No. 00-3,
Application of AICPA Statement of Position
97-2 to
Arrangements that Include the Right to Use Software Stored on
Another Entitys Hardware, which provides guidance as
to the application of
SOP 97-2
to hosting arrangements that include a license right to the
software. The elements that typically exist for Base Hosting
arrangements include hosting services and implementation
services. Base Hosting is different than Intersourcing
arrangements in that the customer already owns a perpetual
license or is purchasing a perpetual license for UltiPro and is
purchasing hosting services subsequently in a separate
transaction, whereas with Intersourcing the customer is
purchasing the right to use (not license) UltiPro.
Implementation services provided for Base Hosting arrangements
are substantially less than those provided for Intersourcing
arrangements since UltiPro is already implemented in Base
Hosting arrangements and only needs to be transitioned to a
hosted environment. Fair value for hosting services is based on
the Hosting Valuation. The fair value for implementation
services is based on the Implementation Valuation in accordance
with guidelines provided by
SOP 97-2.
Recurring
Revenues
Recurring revenues include maintenance revenues and subscription
revenues. Maintenance revenues are derived from maintaining,
supporting and providing periodic updates for the Companys
software. Subscription revenues are principally derived from
PEPM fees earned through the Intersourcing Offering, Base
Hosting and the BSP sales channel, as well as revenues generated
from the Original Ceridian Agreement. Maintenance revenues are
recognized ratably over the service period, generally one year.
Maintenance and support fees are generally priced as a
percentage of the initial license fee for the underlying
products.
To the extent there are upfront fees associated with the
Intersourcing Offering, Base Hosting or the BSP sales channel,
subscription revenues are recognized ratably over the minimum
term of the related contract upon the delivery of the product
and services. In the cases of Intersourcing and Base Hosting
sales, amortization of the upfront fees commences when the
customer processes its first Live payroll, which typically
occurs four to six months after the sale, and extends until the
end of the initial contract period. In the case of BSP channel
sales, amortization of the upfront fee typically commences when
the contract is signed, which is when the BSPs rights
under the agreement begin, continuing until the initial contract
term ends. Ongoing PEPM fees from the Intersourcing Offering,
Base Hosting and the BSP sales channel are recognized as
subscription revenue as the services are delivered, typically on
a monthly basis.
Commencing on August 28, 2002, subscription revenues
generated from the Original Ceridian Agreement have been
recognized ratably over the minimum term of the contract, which
extends until March 9, 2008 (7 years from the
effective date of the Original Ceridian Agreement). Subscription
revenues of $642,000 per month are based on guaranteed
minimum payments from Ceridian of approximately
$42.7 million over the minimum contract term, including
$35.4 million received to date. The amount of subscription
revenue recognized under the Original Ceridian Agreement during
the year ended December 31, 2006, totaling
$7.7 million, was the same as that recognized in 2005. The
Company expects to continue to recognize $642,000 per month
(or $7.7 million per annum) as recurring subscription
revenue until March 9, 2008 when the Original Ceridian
Agreement terminates.
Maintenance services provided to customers include product
updates and technical support services. Product updates are
included in general releases to the Companys customers and
are distributed on a periodic basis. Such updates may include,
but are not limited to, product enhancements, payroll tax
updates, additional security features or bug fixes. All features
provided in general releases are unspecified upgrade rights. To
the extent specified upgrade rights or entitlements to future
products are included in a multi-element arrangement, revenue is
recognized upon delivery provided fair value for the elements
exists. In multi-element arrangements that include a specified
upgrade right or entitlement to a future product, if fair value
does not exist for all undelivered elements, revenue for the
entire arrangement is deferred until all elements are delivered
or when fair value can be established.
51
Subscription revenues generated from the BSP sales channel
include both the right to use UltiPro and maintenance. The BSP
is charged a fee on a PEPM basis. Revenue is recognized on a
PEPM basis. To the extent the BSP pays the Company a one-time
upfront fee, the Company accounts for such fee by recognizing it
as subscription revenue over the minimum term of the related
agreement.
Perpetual
Licenses for UltiPro Sold With or Without Hosting
Services
Sales of perpetual licenses for UltiPro and sales of perpetual
licenses for UltiPro in conjunction with Hosting Services are
multiple-element arrangements that involve the sale of software
and consequently fall under the guidance of Statement of
Position (SOP)
97-2,
Software Revenue Recognition, for revenue
recognition.
The Company licenses software under non-cancelable license
agreements and provides services including maintenance,
implementation consulting and training services. In accordance
with the provisions of
SOP 97-2,
license revenues are generally recognized when (1) a
non-cancelable license agreement has been signed by both
parties, (2) the product has been shipped, (3) no
significant vendor obligations remain and (4) collection of
the related receivable is considered probable. To the extent any
one of these four criteria is not satisfied, license revenue is
deferred and not recognized in the consolidated statements of
operations until all such criteria are met.
For multiple-element software arrangements, each element of the
arrangement is analyzed and the Company allocates a portion of
the total fee under the arrangement to the elements based on
vendor-specific objective evidence of fair value of the element
(VSOE), regardless of any separate prices stated
within the contract for each element. Fair value is considered
the price a customer would be required to pay when the element
is sold separately.
The Residual Method (as defined below) is used to recognize
revenue when a license agreement includes one or more elements
to be delivered at a future date and VSOE of the fair value of
all undelivered elements exists. The fair value of the
undelivered elements is determined based on the historical
evidence of stand-alone sales of these elements to customers.
Undelivered elements in a license arrangement typically include
maintenance, implementation and training services (the
Standard Undelivered Elements). The fair value for
maintenance fees is based on the price of the services sold
separately, which is determined by the annual renewal rate
historically and consistently charged to customers (the
Maintenance Valuation). Maintenance fees are
generally priced as a percentage of the related license fee. The
fair value for implementation services is based on standard
pricing (i.e., rate per hour charged to customers for
implementation services), for stand-alone sales of
implementation services (the Implementation
Valuation). The fair value for training services is based
on standard pricing (i.e., rate per training day charged to
customers for class attendance), taking into consideration
stand-alone sales of training services through year-end seminars
and historically consistent pricing for such services (the
Training Valuation). Under the residual method (the
Residual Method), the fair value of the undelivered
elements is deferred and the remaining portion of the
arrangement fee attributable to the delivered element, the
license fee, is recognized as license revenue. If VSOE for one
or more undelivered elements does not exist, the revenue is
deferred on the entire arrangement until the earlier of the
point at which (i) such VSOE does exist or (ii) all
elements of the arrangement have been delivered.
Perpetual licenses of UltiPro sold without Hosting Services
typically include a license fee and the Standard Undelivered
Elements. Fair value for the Standard Undelivered Elements is
based on the Maintenance Valuation, the Implementation Valuation
and the Training Valuation. The delivered element of the
arrangement, the license fee, is accounted for in accordance
with the Residual Method.
Perpetual licenses of UltiPro sold with Hosting Services
typically include a license fee, the Standard Undelivered
Elements and Hosting Services. Fair value for the Standard
Undelivered Elements is based on the Maintenance Valuation, the
Training Valuation and the Implementation Valuation. Hosting
Services are delivered to customers on a PEPM basis over the
term of the related customer contract (Hosting PEPM
Services). Upfront fees charged to customers represent
fees for the hosting infrastructure, including hardware costs,
third-party license fees and other upfront costs incurred by the
Company in relation to providing such
52
services (Hosting Upfront Fees). Hosting PEPM
Services and Hosting Upfront Fees (collectively, Hosting
Services) represent undelivered elements in the
arrangement since their delivery is over the course of the
related contract term. The fair value for Hosting Services is
based on standard pricing (i.e., rate charged PEPM), taking into
consideration stand-alone sales of Hosting Services through the
sale of such services to existing customers (i.e., those who
already own the UltiPro perpetual license at the time Hosting
Services are sold to them) and historically consistent pricing
for such services (the Hosting Valuation). The
delivered element of the arrangement, the license fee, is
accounted for in accordance with the Residual Method.
The Companys customer contracts are non-cancelable
agreements. The Company does not provide for rights of return or
price protection on its software. The Company provides a limited
warranty that its software will perform in accordance with user
manuals for varying periods, which are generally less than one
year from the contract date. The Companys customer
contracts generally do not include conditions of acceptance.
However, if conditions of acceptance are included in a contract
or uncertainty exists about customer acceptance of the software,
license revenue is deferred until acceptance occurs.
Services,
including Implementation and Training Services
Services revenues include revenues from fees charged for the
implementation of the Companys software products and
training of customers in the use of such products, fees for
other services, including services provided to BSPs, the
provision of payroll-related forms and the printing of
Form W-2s
for certain customers, as well as certain reimbursable
out-of-pocket
expenses. Revenues for implementation consulting and training
services are recognized as services are performed to the extent
the pricing for such services is on a time and materials basis
and the payment terms are within the Companys ordinary and
customary payment cycle. In the event payments for services are
outside the ordinary and customary period for the Company, the
related revenues are recognized as payments come due based on
their relative fair values. Other services are recognized as the
product is shipped or as the services are rendered depending on
the specific terms of the arrangement.
Arrangement fees related to fixed-fee implementation services
contracts are recognized using the percentage of completion
accounting method, which involves the use of estimates.
Percentage of completion is measured at each reporting date
based on hours incurred to date compared to total estimated
hours to complete. If a sufficient basis to measure the progress
towards completion does not exist, revenue is recognized when
the project is completed or when the Company receives final
acceptance from the customer.
The Company recognizes revenue in accordance with the Securities
Exchange Commission (SEC) Staff Accounting
Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB No. 101)
and the SEC Staff Accounting Bulletin No. 104,
Revenue Recognition
(SAB No. 104). Management believes the
Company is currently in compliance in all material aspects with
the current provisions set forth in
SOP 97-2,
SOP 98-9,
EITF 00-21,
EITF 00-3,
SAB No. 101 and SAB No. 104.
Concentration
of Revenues
During the years ended December 31, 2006, 2005 and 2004,
Ceridian Corporation (Ceridian) accounted for 6.7%,
8.7%, 15.5%, respectively, of total revenues. No other customer
accounted for more than 10% of total revenues in the periods
presented. Due to the significant concentration of total
revenues with this single customer, the Company has exposure if
this customer loses its credit worthiness. See Note 5.
The decrease in the percentage of total revenues contributed by
Ceridian in 2006 and 2005 resulted from the expiration of the
Ceridian Services Agreement on December 31, 2004, combined
with the fixed nature of the recurring revenues recognized
pursuant to the Original Ceridian Agreement. As total revenues
have increased each year, on a
year-over-year
basis, particularly with respect to the recurring revenues
growth, the fixed amount of recurring revenues recognized each
year from the Original Ceridian Agreement diminishes in its
overall contribution and, therefore, continues to become less
significant to the amount of the Companys total revenues.
The Company anticipates a continued reduction in the percentage
of total revenues contributed by Ceridian, as fixed recurring
revenues under the Original Ceridian Agreement of
$642,000 per month will be recognized until the termination
of the Original Ceridian Agreement on March 9, 2008.
53
The composition of the revenues recognized from Ceridian, as a
percentage of total revenues, for the years ended
December 31, 2006, 2005 and 2004 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Recurring revenues
|
|
|
6.7
|
%
|
|
|
8.7
|
%
|
|
|
10.9
|
%
|
Services revenues
|
|
|
|
|
|
|
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
6.7
|
%
|
|
|
8.7
|
%
|
|
|
15.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
In accordance with EITF
01-3,
Accounting in a Purchase Business Combination for Deferred
Revenue of an Acquiree, the deferred maintenance revenue
liability assumed in the acquisition of RTIX was adjusted to
fair value, which is the sum of direct and incremental costs of
fulfilling the maintenance obligation plus a normal profit
margin on those fulfillment costs. As a result of the adjustment
to fair value, a $0.1 million decrease in the deferred
revenues liability assumed in the acquisition of RTIX was
recorded in the Companys consolidated financial
statements, which will be recognized entirely within
approximately a nine-month period following the acquisition date
of October 5, 2006.
Cost of
Revenues
Cost of revenues consists of the cost of recurring, services and
license revenues. Cost of recurring revenues consists of costs
to provide maintenance and technical support to the
Companys customers, the cost of providing periodic updates
and the cost of subscription revenues, including amortization of
capitalized software. Cost of services revenues primarily
consists of costs to provide implementation services and
training to the Companys customers and, to a lesser
degree, costs related to sales of payroll-related forms, costs
associated with certain reimbursable
out-of-pocket
expenses, discussed below, and costs to support additional
services provided to BSPs (or BSP services). Cost of license
revenues primarily consists of fees payable to third-parties for
software products distributed by the Company. UltiPro includes
third-party software for enhanced report writing purposes and
for time and attendance functionality. When UltiPro licenses are
sold, customers pay the Company on a per user basis for the
license rights to the third-party report writing software and
for the add-on product, UltiPro Time and Attendance, which was
introduced in 2006.
Income
Taxes
The Company is subject to corporate Federal and state income
taxes and accounts for income taxes under the provisions of
Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes.
SFAS No. 109 provides for a liability approach under
which deferred income taxes are provided based upon enacted tax
laws and rates applicable to the periods in which the taxes
become payable.
Foreign
Currency
The financial statements of the Companys 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, while fixed assets and equity
accounts are translated at historical 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 comprehensive net income. Realized
gains and losses resulting from foreign exchange transactions
are included in total operating costs in the statements of
operations. The
54
Company had a $1 thousand unrealized loss for the year ended
December 31, 2006. There were no foreign currency
transactions during 2005 or 2004.
Software
Development Costs
SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise
Marketed, requires capitalization of certain software
development costs subsequent to the establishment of
technological feasibility. Based on the Companys product
development process, technological feasibility is established
upon completion of a working model. During 2006 and 2005,
$1.8 million and $0.2 million, respectively, of
research and development expenses were capitalized for the
development of UltiPro Canadian HR/payroll (UltiPro
Canada) functionality.
UltiPro Canada is being built from the existing product
infrastructure of UltiPro (e.g., using UltiPros 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). There
was no software costs capitalized in 2004.
Annual amortization is based on the greater of the amount
computed using (a) the ratio that current gross revenues
for the related product bears to the total of current and
anticipated future gross revenues for that product or
(b) the straight-line method over the remaining estimated
economic life of the product including the period being reported
on.
Capitalized software is amortized using the straight-line method
over the estimated useful lives of the assets, which are
typically three years. Amortization of capitalized software was
$26,000, $86,000 and $1,151,000 in 2006, 2005 and 2004,
respectively. Accumulated amortization of capitalized software
was $5.6 million, $5.6 million and $5.5 million
as of December 31, 2006, 2005 and 2004, respectively.
Capitalized software, net of amortization, was
$2.1 million, $0.2 million and $0.1 million as of
December 31, 2006, 2005 and 2004, respectively.
The Company evaluates the recoverability of capitalized software
based on estimated future gross revenues reduced by the
estimated costs of completing the products and of performing
maintenance and customer support. If the Companys gross
revenues were to be significantly less than its estimates, the
net realizable value of the Companys 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.
Stock-Based
Compensation
Effective January 1, 2006, the Company adopted the
provisions of SFAS No. 123 (revised 2004),
Share-Based Payment
(SFAS No. 123R), using the modified
prospective method (with the Black-Scholes fair value model),
which requires the Company to recognize expense related to the
fair value of stock-based compensation awards. Under the
modified prospective method, stock-based compensation expense
for the year ended December 31, 2006 includes compensation
expense for all stock-based compensation awards granted prior
to, but not yet vested as of, January 1, 2006, based on
grant date fair value estimated in accordance with the original
provisions of SFAS No. 123, Accounting for
Stock-Based Compensation
(SFAS No. 123), and compensation expense
for all stock-based compensation awards granted subsequent to
January 1, 2006, based on the grant date fair values
estimated in accordance with the provisions of
SFAS No. 123R. In addition, stock options granted to
certain members of the Board of Directors (Board) as
payment for services rendered as board members (Board
Services) recorded in accordance with
SFAS No. 123R and the issuance of restricted stock
awards and stock units to certain employees are also included in
stock-based compensation for the three and twelve months ended
December 31, 2006. Accordingly, prior period amounts
presented herein have not been restated to reflect the adoption
of SFAS No. 123R.
Prior to January 1, 2006, the Company accounted for its
stock-based compensation plan as permitted by
SFAS No. 123, using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB
No. 25), and made the pro forma disclosures required
by
55
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure
(SFAS No. 148) for the year ended
December 31, 2005. Except for options granted to certain
members of the Board for board services, all options granted
under the Plan and Prior Plan (discussed in
Note 12) had exercise prices equal to the fair market
value of the underlying Common Stock on the date of grant.
Accordingly, for the year ended December 31, 2005,
stock-based compensation is related to options granted to
certain members of the Board for board services and the issuance
of restricted stock awards and stock units to certain employees
recorded in accordance with APB No. 25.
See Note 12 for further information on stock based
compensation.
In accordance with SFAS No. 123R, the Company
capitalizes the portion of stock-based compensation expense
attributed to research and development personnel whose labor
costs are being capitalized pursuant to SFAS No. 86
for the development of UltiPro Canada. The following table
summarizes stock-based compensation (SBC) related to
the development of UltiPro Canada (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
SBC Statements of
operations
|
|
$
|
6,246
|
|
|
$
|
767
|
|
|
$
|
277
|
|
SBC Capitalized
software (UltiPro Canada)
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBC Statements of
stockholdersequity
|
|
$
|
6,287
|
|
|
$
|
767
|
|
|
$
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of fiscal 2006, the Company adopted
FASB Staff Position (FSP)
FAS 123R-2,
Practical Accommodation to the Application of Grant Date
as Defined in FASB Statement No. 123R. This FSP
provides guidance on the application of grant date as defined in
SFAS 123R. As a practical accommodation, a mutual
understanding of the key terms and conditions of an award is
approved in accordance with the relevant corporate governance
requirements if certain conditions are met. The adoption of this
FSP did not have a material impact on the Companys
consolidated financial statements.
In November 2005, the FASB issued FASB Staff Position
No. FAS 123(R)-3, Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards
(FSP 123(R)-3). The Company has elected to
adopt the alternative transition method provided in the FASB
Staff Position for calculating the tax effects of stock-based
compensation expense pursuant to SFAS 123(R). 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 director stock-based compensation 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 director stock-based awards that were outstanding
upon adoption of SFAS 123(R). Due to the Companys
history of tax net operating losses, there was no beginning
balance in the APIC pool at the date of adoption of
SFAS 123R on January 1, 2006.
The Company also adopted FSP
FAS 123R-4,
Classification of Options and Similar Instruments Issued
as Employee Compensation That Allow for Cash Settlement upon the
Occurrence of a Contingent Event, during the first quarter
of fiscal year 2006. This FSP addresses the classification of
options and similar instruments issued as employee compensation
that allow for cash settlement upon the occurrence of a
contingent event. This FSP amends FAS 123R so that a cash
settlement feature that can be exercised only upon the
occurrence of a contingent event that is outside the
employees control does not meet the condition to classify
as a liability until it becomes probable that the event will
occur. The adoption of this FSP did not have a material impact
on the Companys consolidated financial statements.
Earnings
Per Share
SFAS No. 128, Earnings Per Share, requires
dual presentation of earnings per share
basic and diluted. Basic earnings per
share is computed by dividing income available to common
stockholders (the numerator) by the weighted average number of
common shares (the denominator) for the period. The computation
of diluted earnings per share is similar to basic earnings per
share, except that the denominator is
56
increased to include the number of additional common shares that
would have been outstanding if the potentially dilutive common
shares had been issued.
The following is a reconciliation of the shares used in the
computation of basic and diluted net loss per share (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Basic weighted average shares
outstanding
|
|
|
23,853
|
|
|
|
23,040
|
|
|
|
21,743
|
|
Effect of dilutive equity
instruments
|
|
|
3,125
|
|
|
|
3,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive shares outstanding
|
|
|
26,978
|
|
|
|
26,288
|
|
|
|
21,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other common stock equivalents
(i.e., stock options, restricted stock awards and warrants)
outstanding which are not included in the calculation of diluted
income (loss) per share because their impact is antidilutive
|
|
|
485
|
|
|
|
343
|
|
|
|
5,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income (Loss)
SFAS No. 130, Reporting Comprehensive
Income, establishes standards for the reporting and
display of comprehensive income and its components in the
Companys consolidated financial statements. The objective
of SFAS No. 130 is to report a measure (comprehensive
income (loss)), 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, as presented on the accompanying audited
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 income (loss) for the years ended
December 31, 2006, 2005 and 2004 was as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income (loss)
|
|
$
|
4,133
|
|
|
$
|
3,425
|
|
|
$
|
(5,024
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on
investments in marketable securities
available-for-sale
|
|
|
33
|
|
|
|
(16
|
)
|
|
|
(15
|
)
|
Unrealized loss on foreign
currency translation adjustments
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
4,165
|
|
|
$
|
3,409
|
|
|
$
|
(5,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
The Company adopted FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, (FIN 45) on January 1, 2003.
The provision for initial recognition and measurement of
liability is applied on a prospective basis to guarantees issued
or modified after December 31, 2002. FIN 45 expands
previously issued accounting guidance and disclosure
requirements for certain guarantees and requires recognition of
an initial liability for the fair value of an obligation assumed
by issuing a guarantee. As an element of standard commercial
terms in its standard sales contracts for UltiPro, the Company
includes 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
57
its customers, the Company 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 the Company under such provision,
the Company evaluates estimated losses for such indemnification
under SFAS No. 5, Accounting for
Contingencies, as interpreted by FIN 45, 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, the Company 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.
Accounting
Changes and Error Corrections
The Company adopted SFAS No. 154, Accounting
Changes and Error Corrections (SFAS 154),
which replaces APB Opinion No. 20, Accounting
Changes (APB 20) and FASB Statement
No. 3, Reporting Accounting Changes in Interim
Financial Statements (SFAS 3) effective
December 31, 2006. APB 20 required that changes in
accounting principles be recognized by including the cumulative
effect of the change in the period in which the new accounting
principle was adopted. SFAS 154 requires retrospective
application of the change to prior periods financial
statements, unless it is impracticable to determine the
period-specific effects of the change. SFAS 154 also
provides that a change in method of depreciating or amortizing a
long-lived non-financial asset be accounted for as a change in
estimate effected by a change in accounting principle, and also
provides that correction of errors in previously issued
financial statements should be termed a restatement.
The FASB identified the reason for the issuance of SFAS 154
to be part of a broader attempt to eliminate differences with
the International Accounting Standards Board (IASB).
The adoption of SFAS 154 did not have an impact on the
Companys consolidated financial statements.
Segment
Information
The Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information,
effective December 31, 1998
(SFAS No. 131). SFAS No. 131
establishes standards for the way that public companies report
selected information about operating segments in annual and
interim financial reports to shareholders. It also establishes
standards for related disclosures about an enterprises
business segments, products, services, geographic areas and
major customers. The Company operates its business as a single
segment.
Reimbursable
Out-Of-Pocket
Expenses
Effective January 1, 2002, the Company adopted Financial
Accounting Standards Board Emerging Issues Task Force
No. 01-14,
Income Statement Characterization of Reimbursements
Received for
Out-of-Pocket
Expenses Incurred (EITF
01-14).
EITF 01-14
requires companies to characterize reimbursements received for
out-of-pocket
expenses incurred. Reimbursable
out-of-pocket
expenses, which are included in services revenues and cost of
services revenues in the Companys accompanying
consolidated statements of operations, were $1.4 million,
$1.3 million and $1.0 million for 2006, 2005 and 2004
respectively.
Recent
Accounting Literature
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities-Including an
amendment of FASB Statement No. 115,
(SFAS No. 159). SFAS No. 159
permits entities to choose to measure many financial instruments
and certain other items at fair value. Most of the provisions of
this Statement apply only to entities that elect the fair value
option. However, the amendment to FASB Statement No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, (SFAS No. 115), applies
to all entities with
available-for-sale
and trading securities. SFAS No. 159 is effective for
the Companys consolidated financial statements for the
annual reporting period beginning after November 15, 2007.
The company is currently evaluating the impact of this new
pronouncement on its consolidated financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements (SFAS No. 157).
SFAS No. 157 defines fair value as used in numerous
accounting
58
pronouncements, establishes a framework for measuring fair value
in GAAP and expands disclosures related to the use of fair value
measures in financial statements. SFAS No. 157 does
not expand the use of fair value measures in financial
statements, but standardizes its definition and guidance in GAAP
and emphasizes that fair value is a market-based measurement and
not an entity-specific measurement based on an exchange
transaction in which the entity sells an asset or transfers a
liability (exit price). SFAS No. 157 establishes a
fair value hierarchy from observable market data as the highest
level to fair value based on an entitys own fair value
assumptions as the lowest level. SFAS No. 157 is
effective for the Companys consolidated financial
statements for interim and annual reporting periods beginning
after November 15, 2007. The Company is currently
evaluating the impact of this new pronouncement on its
consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes,
(FAS No. 48). The interpretation clarifies
the accounting for uncertainty in income taxes recognized in a
companys financial statements in accordance with Statement
of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Specifically, the pronouncement
prescribes 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. The
interpretation also provides guidance on the related
derecognition, classification, interest and penalties,
accounting for interim periods, disclosure and transition of
uncertain tax positions. FAS No. 48 is effective for
fiscal years beginning after December 15, 2006. The Company
is currently evaluating the impact of this new pronouncement on
its consolidated financial statements.
In March 2006, the Emerging Issues Task Force (EITF)
reached a consensus on EITF Issue
No. 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation),
(EITF
No. 06-3),
that entities may adopt a policy of presenting taxes in the
income statement either on a gross or net basis. Gross or net
presentation may be elected for each different type of tax, but
similar taxes should be presented consistently. Taxes within the
scope of this EITF would include taxes that are imposed on a
revenue transaction between the seller and a customer (e.g.,
sales taxes, use taxes, value-added taxes, and some types of
excise taxes). EITF
No. 06-3
is effective for the Companys financial statements for
interim and annual reporting periods beginning after
December 15, 2006. The Company believes that EITF
No. 06-3
will not have a material impact on the Companys
consolidated financial statements.
On October 5, 2006, the Company 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 RTIXs operations have
been included in the Companys consolidated financial
statements since that date. RTIX developed the performance
management/appraisals solution that Ultimate Software has
offered its customers since February 2006 (the RTIX
Performance Management Product). Ultimate Software is
marketing and selling the performance management, appraisals,
and learning management solution as UltiPro Talent Management, a
stand-alone product set, in the United Kingdom, and continuing
to offer the performance and learning management feature sets as
optional features to
U.S.-based
companies.
The aggregate purchase price was $4.0 million, payable in
the form of $3.4 million in cash and 27,897 shares of
the Companys Common Stock, per value $0.01 per share
(Common Stock) (the Stock
Consideration). Pursuant to the stock purchase agreement
with RTIX, the Stock Consideration is subject to a downward
adjustment based on RTIXs recurring revenues over a
twelve-month period beginning October 5, 2006, recorded in
accordance with generally accepted accounting principles in the
United States, and will be delivered within 30 days after
the final determination of any such adjustments. The Company did
not record the impact of the issuance of the Stock Consideration
as of December 31, 2006 and will evaluate the recurring
revenues of RTIX on a monthly basis, cumulative from
October 5, 2006, to determine when, and the extent to
which, the contingency has been satisfied, at which time the
Stock Consideration will be recorded in the Companys
consolidated financial statements as an increase in goodwill.
59
The following table summarized the fair values of the assets
acquired and liabilities assumed at the date of acquisition (in
thousands):
|
|
|
|
|
|
At October 5,
2006
|
|
Accounts receivable
|
|
$
|
322
|
Prepaid expenses and other assets
|
|
|
69
|
Property and equipment
|
|
|
93
|
Intangible assets
|
|
|
1,030
|
Goodwill
|
|
|
2,734
|
|
|
|
|
Total assets acquired
|
|
|
4,248
|
Accounts payable
|
|
|
260
|
Accrued expenses
|
|
|
40
|
Deferred revenues
|
|
|
321
|
|
|
|
|
Total liabilities assumed
|
|
|
621
|
|
|
|
|
Net assets acquired
|
|
$
|
3,627
|
|
|
|
|
Based on a third-party valuation obtained by the Company,
approximately $450 thousand of the purchase price represents the
estimated fair value of acquired customer relationships in the
United Kingdom (U.K.), $30 thousand represents the estimated
fair value of backlog in the U.K. and $550 thousand represents
the estimated fair value of the acquired developed technology
(for the RTIX Performance Management Product). The balance of
the acquired intangibles, net of amortization, is included in
other assets on the Companys consolidated balance sheet.
The Company assumed net liabilities of $137 thousand and
incurred direct costs of $227 thousand in relation to the
acquisition. There was no value assigned to acquired in-process
research and development projects. The balance of
$2.7 million was recorded as goodwill. Since the RTIX
Acquisition was a stock purchase, goodwill and acquired
intangibles are not deductible for tax purposes.
The value 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, 2006, the Companys intangible
assets have estimated useful lives and are classified as follows
(in thousands):
|
|
|
|
|
|
|
Estimated
|
|
|
|
Useful Lives
|
|
|
Acquired intangible assets:
|
|
|
|
|
Developed technology
|
|
|
5 Years
|
|
Customer relationships
|
|
|
6 Years
|
|
Backlog
|
|
|
1 Year
|
|
Amortization expense for the acquired intangible assets
reflected above was $54 thousand for the year ended
December 31, 2006. There was no amortization expense for
acquired intangible assets for the years ended December 31,
2005 or 2004. Future amortization expense for acquired
intangible assets are as follows, as of December 31, 2006
(in thousands):
|
|
|
|
|
Year
|
|
Amount
|
|
|
2007
|
|
$
|
208
|
|
2008
|
|
|
185
|
|
2009
|
|
|
185
|
|
2010
|
|
|
185
|
|
2011
|
|
|
157
|
|
Thereafter
|
|
|
56
|
|
|
|
|
|
|
Total
|
|
$
|
976
|
|
|
|
|
|
|
60
|
|
4.
|
STAFF
ACCOUNTING BULLETIN NO. 108
|
During the fourth quarter of 2006, the Company adopted the
provisions of Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements (SAB 108). SAB 108
addresses how the effects of prior-year uncorrected
misstatements should be considered when quantifying
misstatements in current-year financial statements. SAB 108
requires an entity to quantify misstatements using a balance
sheet and income statement approach and to evaluate whether
either approach results in quantifying an error that is material
in light of relevant quantitative and qualitative factors.
During 2005, the Company identified prior year misstatements
(covering 1998 through 2005) related to accounting for rent
holidays associated with the construction periods of certain
real estate leases. The Company assessed the materiality for
each of the years impacted by these misstatements, using the
permitted rollover method (or income statement approach), and
determined that the effect on the financial statements, taken as
a whole, was not material. As allowed by SAB 108, the
Company elected to not restate prior year financial statements
and, instead (as permitted by SAB 108), increased the 2006
beginning balance of the accumulated deficit and deferred rent
in the amount of $1.8 million.
|
|
5.
|
SIGNIFICANT
TRANSACTIONS
|
As previously disclosed, Ultimate Software and Ceridian
Corporation (Ceridian) signed an agreement in 2001,
as amended, granting Ceridian a non-exclusive license to use
UltiPro software as part of an on-line offering for Ceridian to
market primarily to businesses with less than 500 employees (the
Original Ceridian Agreement). Ceridian marketed that
solution under the name SourceWeb. During December 2004, RSM
McGladrey Employer Services (RSM), an existing BSP
of Ultimate Software, acquired Ceridians SourceWeb
HR/payroll and self-service product and existing SourceWeb base
of small and mid-size business customers throughout the United
States (the RSM Acquisition). The financial terms of
the Original Ceridian Agreement have not changed as a result of
the RSM Acquisition. During 2005, Ceridian continued to be
financially obligated to pay, and did pay, Ultimate Software a
minimum fee of $500,000 per month. Effective
January 1, 2006, these minimum fee payments increased
5% per annum in accordance with the terms of the Original
Ceridian Agreement and is subject to further 5% per annum
increases, compounded annually, effective January 1, 2007.
The aggregate minimum payments that Ceridian is obligated to pay
Ultimate Software under the Original Ceridian Agreement over the
minimum term of the agreement are $42.7 million. To date,
Ceridian has paid to Ultimate Software a total of
$35.4 million under the Original Ceridian Agreement.
Ultimate Software expects to continue to recognize
$642,000 per month in subscription revenues (a component of
recurring revenues) from the Original Ceridian Agreement until
its termination. The amount of subscription revenues recognized
under the Original Ceridian Agreement during the year ended
December 31, 2006, totaling $7.7 million, was the same
as that recognized in 2005 and 2004. Effective March 9,
2006, Ceridian provided Ultimate Software with a two years
advance written notice of termination of the Original Ceridian
Agreement, as permitted under the terms of the Agreement.
Pursuant to such notice, the Original Ceridian Agreement will
terminate on March 9, 2008 (unless terminated earlier for
an uncured material breach).
During 2004, Ultimate Software entered into a services agreement
(the Ceridian Services Agreement) with Ceridian.
Under the Ceridian Services Agreement, Ceridian paid Ultimate
Software a total of $3.3 million in 2004, in exchange for
services provided by Ultimate Software during the term of the
agreement. Services revenue from the Ceridian Services
Agreement, which expired on December 31, 2004, was
recognized on a straight-line basis from January 1, 2004
through December 31, 2004. There were no revenues
recognized under the Ceridian Services Agreement in 2006 or 2005.
On October 30, 2000, the Company announced that its Board
of Directors authorized the repurchase of up to
1,000,000 shares of the Companys outstanding Common
Stock (the Stock Repurchase Plan). For purposes of
mitigating the expected dilution created by stock-based
compensation, during the first quarter of
61
2006, the Companys Board of Directors authorized the
Company to resume repurchasing its Common Stock under the Stock
Repurchase Program, commencing in 2006. There were
451,790 shares of the Companys Common Stock
repurchased during 2006 but no repurchases were made during 2005
or 2004. As of December 31, 2006, an aggregate of
290,563 shares of Common Stock remained authorized for
repurchase under the Stock Repurchase Program.
On February 6, 2007, the Companys Board of Directors
extended the Stock Repurchase Plan, authorizing the repurchase
of up to 1,000,000 additional shares of the Companys
issued and outstanding Common Stock (the Increased
Shares Authorized). As a result of the Increased
Shares Authorized, there were 1,290,563 shares of
Common Stock available for repurchase under the Stock Repurchase
Program as of February 6, 2007. Stock repurchases may be
made periodically in the open market, in privately negotiated
transactions or in a combination of both. The extent and timing
of these repurchase transactions will depend on market
conditions and other business considerations.
Total shares purchased under the Stock Repurchase Plan as of
December 31, 2006, was 709,437 shares of the
Companys Common Stock. The details of Common Stock
repurchases for the year ended December 31, 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cumulative Number of
|
|
|
Maximum Number of
|
|
|
|
|
|
|
|
|
|
Shares Purchased as Part
|
|
|
Shares That May Yet
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Of Publicly Announced
|
|
|
Be Purchased Under the
|
|
Period
|
|
Shares Purchased(1)
|
|
|
Paid per Share
|
|
|
Plans or Programs(2)
|
|
|
Plans or Programs
|
|
|
January 1 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
742,353
|
|
February 1 28, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
742,353
|
|
March 1 31, 2006
|
|
|
43,800
|
|
|
|
22.84
|
|
|
|
301,447
|
|
|
|
698,553
|
|
April 1 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
698,553
|
|
May 1 31, 2006
|
|
|
120,190
|
|
|
|
22.69
|
|
|
|
421,637
|
|
|
|
578,363
|
|
June 1 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
578,363
|
|
July 1 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
578,363
|
|
August 1 31, 2006
|
|
|
211,200
|
|
|
|
20.27
|
|
|
|
632,837
|
|
|
|
367,163
|
|
September 1 30, 2006
|
|
|
76,600
|
|
|
|
22.63
|
|
|
|
709,437
|
|
|
|
290,563
|
|
October 1 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290,563
|
|
November 1 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290,563
|
|
December 1 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290,563
|
|
|
|
|
|
|
|
Total
|
|
|
451,790
|
|
|
$
|
22.11
|
|
|
|
709,437
|
|
|
|
290,563
|
|
|
|
|
|
|
|
(1) All shares were purchased through the publicly
announced Stock Repurchase Plan in open-market transactions.
(2) On October 30, 2000, the Company announced that
its Board of Directors authorized the repurchase of up to
1,000,000 shares of the Companys Common Stock
pursuant to the Stock Repurchase Plan. On February 6, 2007,
the Companys Board of Directors extended the Stock
Repurchase Plan, authorizing the repurchase of up to 1,000,000
additional shares of the Companys Common Stock. The
Companys stock repurchase transaction will be conducted
over an indefinite period of time.
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Sales commissions
|
|
$
|
4,005
|
|
|
$
|
2,337
|
|
Other items individually less than
5% of total current liabilities
|
|
|
5,225
|
|
|
|
4,069
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,230
|
|
|
$
|
6,406
|
|
|
|
|
|
|
|
|
|
|
62
|
|
8.
|
PROPERTY
AND EQUIPMENT
|
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Computer equipment
|
|
$
|
32,844
|
|
|
$
|
25,426
|
|
Leasehold improvements
|
|
|
4,853
|
|
|
|
4,071
|
|
Furniture and fixtures
|
|
|
1,951
|
|
|
|
1,431
|
|
Building
|
|
|
870
|
|
|
|
870
|
|
Land
|
|
|
655
|
|
|
|
655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,173
|
|
|
|
32,453
|
|
Less: accumulated depreciation and
amortization
|
|
|
27,693
|
|
|
|
22,427
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,480
|
|
|
$
|
10,026
|
|
|
|
|
|
|
|
|
|
|
Included in property and equipment is equipment acquired under
capital leases as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Equipment
|
|
$
|
11,625
|
|
|
$
|
9,340
|
|
Less: accumulated amortization
|
|
|
10,247
|
|
|
|
7,886
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,378
|
|
|
$
|
1,454
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense on property and equipment
totaled $5,291,000, $4,305,000 and $3,754,000, for the years
ended December 31, 2006, 2005 and 2004, respectively.
|
|
9.
|
CAPITAL
LEASE OBLIGATIONS
|
The Company leases certain equipment under non-cancelable
agreements, which are accounted for as capital leases and expire
at various dates through 2009. Interest rates on these leases
range from 1.0% to 10.0%. The annual maturities of the capital
lease obligations are as follows as of December 31, 2006
(in thousands):
|
|
|
|
|
Year
|
|
Amount
|
|
|
2007
|
|
$
|
1,552
|
|
2008
|
|
|
990
|
|
2009
|
|
|
444
|
|
|
|
|
|
|
|
|
|
2,986
|
|
Less amount representing interest
|
|
|
(58
|
)
|
|
|
|
|
|
Lease obligations reflected as
current ($1,512) and non-current ($1,416)
|
|
$
|
2,928
|
|
|
|
|
|
|
The Company had a credit facility (the Credit
Facility) with Silicon Valley Bank, which was secured by
the Companys eligible accounts receivable. The Credit
Facility was comprised of a revolving line of credit (the
Revolver) and an equipment term loan (the
Equipment Loan). The Credit Facilitys Revolver
expired on May 27, 2006. Based upon the strength and
consistency of the cash flow position as well as
managements expectations for the next twelve months, the
Company chose not to renew the Credit Facility upon its
expiration. The Credit Facilitys Equipment Loan, while
still effective, did not have any future borrowing capacity
after May 27, 2006. The outstanding balance of
$0.7 million under the Equipment Loan as
63
of December 31, 2006 is payable on or before
December 31, 2008 under the payment terms of such
agreement. As of December 31, 2006, the Company was in
compliance with all covenants included in the terms of the
Credit Facility.
The annual maturities of the long-term debt obligations as of
December 31, 2006 are as follows (in thousands): $505 in
2007 and $194 in 2008. There are no payments due after
December 31, 2008. Interest expense related to the
long-term debt obligations as of December 31, 2005 is as
follows (in thousands): $30 in 2007 and $7 in 2008.
No provision or benefit for Federal or state income taxes was
made for 2006, 2005 and 2004 due to the operating losses
incurred in the respective periods.
The provision for income taxes is different from that which
would be obtained by applying the statutory Federal income tax
rate of 35% to income (loss) before income taxes as a result of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Income tax provision (benefit) at
statutory Federal tax rate
|
|
$
|
1,446
|
|
|
$
|
1,199
|
|
|
$
|
(1,758
|
)
|
State and local income taxes
(benefit)
|
|
|
238
|
|
|
|
197
|
|
|
|
(289
|
)
|
Non deductible expenses
|
|
|
224
|
|
|
|
216
|
|
|
|
197
|
|
Change in valuation allowance
|
|
|
(1,841
|
)
|
|
|
(1,597
|
)
|
|
|
1,916
|
|
Other, net
|
|
|
(67
|
)
|
|
|
(15
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the net deferred tax assets included in the
accompanying consolidated balance sheets are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
31,076
|
|
|
$
|
27,478
|
|
|
$
|
25,721
|
|
Deferred revenue
|
|
|
5,686
|
|
|
|
4,459
|
|
|
|
4,467
|
|
Property and equipment
|
|
|
1,205
|
|
|
|
1,133
|
|
|
|
1,029
|
|
Accruals not currently deductible
|
|
|
85
|
|
|
|
111
|
|
|
|
85
|
|
Allowance for doubtful accounts
|
|
|
204
|
|
|
|
204
|
|
|
|
204
|
|
Charitable contributions
|
|
|
312
|
|
|
|
248
|
|
|
|
163
|
|
Stock-based compensation
|
|
|
3,179
|
|
|
|
701
|
|
|
|
410
|
|
Other, net
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
41,750
|
|
|
|
34,337
|
|
|
|
32,082
|
|
Less valuation allowance
|
|
|
(40,003
|
)
|
|
|
(33,838
|
)
|
|
|
(31,759
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
1,747
|
|
|
|
499
|
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired intangible assets
|
|
|
(398
|
)
|
|
|
|
|
|
|
|
|
Software development costs
|
|
|
(825
|
)
|
|
|
(97
|
)
|
|
|
(33
|
)
|
Prepaid commissions
|
|
|
(524
|
)
|
|
|
(402
|
)
|
|
|
(290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(1,747
|
)
|
|
|
(499
|
)
|
|
|
(323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
The Company has provided a full valuation allowance on the
deferred tax assets as realization of such amounts is not
considered more likely than not. The Company reviews the
valuation allowance requirement periodically and makes
adjustments as warranted. Of the total valuation allowance at
December 31, 2006, approximately $14,100,000 is attributed
to net operating losses generated from the exercise of
non-statutory employee stock options, the benefit of which will
be credited to additional paid-in capital when realized. Of the
change in the valuation allowance for 2006, 2005 and 2004
approximately $8,293,000, $3,678,000, and $1,466,000,
respectively is attributable to exercise of non-statutory
employee stock options.
At December 31, 2006, the Company had approximately
$76,000,000 of net operating loss carryforwards for Federal
income tax reporting purposes available to offset future taxable
income. Of the total net operating loss carryforwards,
approximately $34,727,000 is attributable to deductions from the
exercise of non-statutory employee stock options. Due to the
RTIX Acquisition, the Company recorded a net deferred tax
liability of $287,000 which resulted in a decrease in the
valuation allowance. The carryforwards expire through 2026.
Utilization of such net operating losses may be limited as a
result of cumulative ownership changes in the Companys
equity instruments.
Staff
Accounting Bulletin No. 108
In September 2006, the SEC released Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(SAB 108). SAB 108 addresses how the
effects of prior-year uncorrected misstatements should be
considered when quantifying misstatements in current-year
financial statements. SAB 108 requires an entity to
quantify misstatements using a balance sheet and income
statement approach and to evaluate whether either approach
results in quantifying an error that is material in light of
relevant quantitative and qualitative factors.
During the fourth quarter of 2006, the Company adopted the
provisions of SAB 108. During 2005, the Company identified
prior year misstatements (covering 1998 through
2005) related to accounting for rent holidays associated
with the construction periods of certain real estate leases. The
Company assessed the materiality for each of the years impacted
by these misstatements, using the permitted rollover method, and
determined that the effect on the financial statements, taken as
a whole, was not material. As allowed by SAB 108, the
Company elected to not restate prior year financial statements
and, instead (as permitted by SAB 108), increased the 2006
beginning balance of the accumulated deficit and deferred rent
in the amount of $1.8 million. See Note 4 of the Notes
to Consolidated Financial Statements for further discussion.
Private
Sales of Common Stock
On May 12, 2004, the Company entered into a definitive
agreement to sell 1,398,182 newly issued shares of the
Companys Common Stock, par value $0.01 per share (the
Common Stock) to three institutional investors in a
private placement for gross proceeds of approximately
$15.4 million (the Recent Capital Raised).
These shares of Common Stock were sold at $11.00 per share.
After deducting commissions and other stock issuance costs, the
Company received approximately $14.4 million. The Company
filed a registration statement with the Securities and Exchange
Commission on
Form S-3
(Registration
No. 333-115894)
covering resales of the Common Stock by investors, which
registration statement was declared effective on June 25,
2004.
STOCK-BASED
COMPENSATION
Summary
of Plans
The Companys 2005 Equity and Incentive Plan (the
Plan) authorizes the grant of options to directors,
officers and employees of the Company to purchase shares of the
Companys 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, and together with stock
options, the Awards). The Plan was approved by the
Companys stockholders at the annual meeting of
stockholders on
65
May 17, 2005. Prior to that date, options to purchase
shares of Common Stock were issued under the Companys
Nonqualified Stock Option Plan (the Prior Plan).
Effective May 17, 2005, no additional options may be
granted under the Prior Plan. However, options previously
granted under the Prior Plan remain outstanding to the extent
they have not been exercised and have not expired. The aggregate
number of shares of Common Stock authorized under the Plan and
the Prior Plan is 9,000,000. As of December 31, 2006, the
aggregate number of shares of Common Stock that were available
to be issued under all Awards granted under the Plan was
575,931 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 the anniversary of the
grant date for each of the following three years. Options
granted to non-employee directors under the Plan and the Prior
Plan generally have a
10-year term
and vest immediately on the grant date. However, options granted
to non-employee directors for board services under the Plan
first 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 of Directors or
(iii) the effective date of a change in control of the
Company.
Fair
Value
Prior to January 1, 2006, the Company accounted for
share-based plans under the recognition and measurement
requirements of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations, as
permitted by Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based
Compensation. Prior to January 1, 2006, stock-based
compensation expense was recognized only for grants of
restricted stock awards, stock units and stock options which
were granted at exercise prices less than the fair market value
of the underlying Common Stock on the grant date. During the
year ended December 31, 2005, while there were no grants of
stock units, there were grants of restricted stock awards. For
the year ended December 31, 2004, there were no grants of
stock units or restricted stock awards. In addition, for the two
years ended December 31, 2005 and 2004, stock options that
had exercise prices less than the fair market value of the
Common Stock on the grant date were granted to certain members
of the Board of Directors for board services and fully vested on
the grant date. Therefore, stock-based compensation expense for
the year ended December 31, 2005 is related to both
restricted stock awards granted and the options granted to
certain members of the Board for board services, recorded in
accordance with APB No. 25. Stock-based compensation
expense for the year ended December 31, 2004 is related to
the options granted to certain members of the Board for board
services, recorded in accordance with APB No. 25.
On January 1, 2006, the Company adopted the provisions of
SFAS No. 123R, which requires the Company to recognize
expense related to the fair value of stock-based compensation
awards. The Company elected the modified prospective transition
method as permitted by SFAS No. 123R and therefore has
not restated the financial results for prior periods. Under the
modified prospective method, stock-based compensation expense
for year ended December 31, 2006, includes compensation
expense for all stock-based compensation awards granted prior
to, but not yet vested as of, January 1, 2006, based on
grant date fair value estimated in accordance with the
provisions of SFAS No. 123 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
SFAS No. 123R. In addition, options granted to certain
members of the Board of Directors for Board Services recorded in
accordance with SFAS No. 123R and the issuance of
restricted stock awards and stock units are also included in
stock-based compensation for the year ended December 31,
2006. The Company recognizes compensation expense for restricted
stock awards and restricted stock units on a straight-line basis
over the requisite service period of the award.
66
The following table sets forth the stock-based compensation
expense (SBC) resulting from share-based
arrangements that is recorded in the Companys consolidated
statements of operations for the periods indicated
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cost of recurring revenues
|
|
$
|
394
|
|
|
$
|
6
|
|
|
$
|
|
|
Cost of service revenues
|
|
|
874
|
|
|
|
13
|
|
|
|
|
|
Cost of license revenues
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
2,967
|
|
|
|
395
|
|
|
|
112
|
|
Research and development
|
|
|
620
|
|
|
|
7
|
|
|
|
24
|
|
General and administrative
|
|
|
1,385
|
|
|
|
346
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SBC
|
|
$
|
6,246
|
|
|
$
|
767
|
|
|
$
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in capitalized software in the Companys
consolidated balance sheet at December 31, 2006 was $41
thousand in stock-based compensation incurred in the development
of UltiPro Canada during the fiscal year ended December 31,
2006. This amount would have otherwise been charged to research
and development expense for the year ended December 31,
2006.
Net cash proceeds from the exercise of stock options and
warrants were $8.6 million and $5.8 million for the
years ended December 31, 2006 and 2005, respectively. No
income tax benefit was realized from stock option exercises
during years ended December 31, 2006 and 2005.
Prior to January 1, 2006, the Company accounted for its
stock-based compensation plan as permitted by
SFAS No. 123, using the intrinsic value method
prescribed in APB No. 25, and made the pro forma
disclosures required by SFAS No. 148 for the years
ended December 31, 2005 and 2004. Except for options
granted to certain members of the Board for Board Services, all
options granted under the Plan and Prior Plan had exercise
prices equal to the fair market value of the underlying Common
Stock on the date of grant.
The following table illustrates the effect on net income (loss)
after tax and net income (loss) per share of Common Stock as if
the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based compensation for the years
ended December 31, 2005 and 2004 (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
3,425
|
|
|
$
|
(5,024
|
)
|
Compensation expense, pro forma
|
|
|
(2,975
|
)
|
|
|
(1,997
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
450
|
|
|
$
|
(7,021
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) per share, basic:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.15
|
|
|
$
|
(0.23
|
)
|
Compensation expense, pro forma
|
|
|
(0.13
|
)
|
|
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
0.02
|
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) per share, diluted:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.13
|
|
|
$
|
(0.23
|
)
|
Compensation expense, pro forma
|
|
|
(0.11
|
)
|
|
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
0.02
|
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
67
The fair value of stock-based awards was estimated using the
Black-Scholes model with the following weighted-average
assumptions for the years ended December 31, 2006, 2005 and
2004 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Expected term (in years)
|
|
|
4.61
|
|
|
|
4.5
|
|
|
|
4.0
|
|
Volatility
|
|
|
40
|
%
|
|
|
41
|
%
|
|
|
46
|
%
|
Interest rate
|
|
|
4.74
|
%
|
|
|
4.25
|
%
|
|
|
3.50
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value at
grant date
|
|
$
|
8.55
|
|
|
$
|
5.95
|
|
|
$
|
5.02
|
|
The Companys computation of the expected volatility for
the years ended December 31, 2006, 2005 and 2004 is based
primarily upon historical volatility and the expected term of
the option. The expected term is based on the historical
exercise experience under the share-based plans of the
underlying award (including post-vesting employment termination
behavior) and represents the period of time the share-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 SFAS 123R effective
January 1, 2006, the Company is 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 of 5% for the
year ended December 31, 2006 was based on historical data.
Restricted
Stock Awards
Under the provisions of the Plan, the Company may, at its
discretion, grant restricted stock awards to certain officers
and employees (Restricted Stock Awards). The shares
of Common Stock issued under Restricted Stock Awards are subject
to certain vesting requirements and restrictions on transfer.
During the year ended December 31, 2006, the Company
granted Restricted Stock Awards for 263,000 shares of
Common Stock of which none has been forfeited as of
December 31, 2006. During the year ended December 31,
2005, the Company granted Restricted Stock Awards for
169,000 shares of Common Stock of which none has been
forfeited as of December 31, 2006. There were no Restricted
Stock Awards granted for the year ended December 31, 2004.
Compensation expense for Restricted Stock Awards is measured
based on the closing market price of the Companys 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 Award
becomes vested on the fourth anniversary of the respective date
of grant, subject to the grantees continued employment
with the Company 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 the Company, the employees death or
disability or the termination of his employment by the Company
without cause. Included in the Companys financial results
for the years ended December 31, 2006 and 2005 was
$1.4 million and $0.2 million, respectively, of
compensation expense for Restricted Stock Awards. There was no
compensation expense for Restricted Stock Awards included in the
Companys financial results for the year ended
December 31, 2004.
Stock
Unit Awards
The Company may, at its discretion, make awards of stock units
under the Plan (Stock Unit Awards) to certain
officers and employees. A 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 stock unit award agreement.
The value of each unit is equal to the fair market value of one
share of Common Stock on any applicable date of determination.
The payment with respect to each unit under a Stock Unit Award
may be made, at the discretion of the compensation committee of
the Board of Directors, in cash or shares of Common Stock or in
a combination of both. The grantee of a Stock Unit Award does
not have any rights as a
68
stockholder with respect to the shares subject to a 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.
As provided for in the Plan, the Chief Executive Officer and the
Chief Operating Officer (collectively, the Executive
Officers) deferred receipt of one-half of their cash
performance awards under the Plan for 2006 and 2005 in exchange
for the grant of Stock Unit Awards under the Plan (the
Elected Deferral). Upon this election, the Company
provided a matching contribution equal to one-half of the amount
deferred (the Company Match). The number of stock
units subject to such Stock Unit Award is determined by dividing
the total amount deferred (including the Company Match) by the
fair market value of a share of the Companys Common Stock
on the date of payment of the non-deferred portion of the cash
performance awards. The Stock Unit Awards vest on the fourth
anniversary of the date of grant, subject to the Executive
Officers continued employment with the Company, or any of
its subsidiaries, on such vesting date and subject further to
accelerated vesting in the event of a change in control of the
Company, the Executive Officers death or disability or the
termination of his employment by the Company without cause. The
vested 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 Executive Officers death, disability or
termination of employment with the Company or a change in
control of the Company. In the event that an Executive Officer
were to terminate employment and stock units resulting from his
Elected Deferral remain unvested, the Company would be required
to refund to the Executive Officer a cash amount equal to the
lesser of such Elected Deferral (less taxes withheld) and the
fair market value of such units upon termination of employment.
During the year ended December 31, 2006, the Company
granted 28,518 stock units to the Executive Officers, of which
none has been forfeited as of December 31, 2006. During the
years ended December 31, 2005 and 2004, no Stock Unit
Awards were granted. Included in the Companys financial
results for the years ended December 31, 2006 and 2005 was
$0.3 million and $0.4 million, respectively, of
compensation expense from Stock Unit Awards. There was no
compensation expense from Stock Unit Awards included in the
Companys financial results for the year ended
December 31, 2004.
69
Stock
Option and Restricted Stock Activity
The following table summarizes stock option activity for the
year ended December 31, 2006, as follows (in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Stock Options
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term (in Years)
|
|
|
Value
|
|
|
Outstanding at December 31,
2003
|
|
|
5,639
|
|
|
$
|
5.89
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
675
|
|
|
|
12.04
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(478
|
)
|
|
|
4.54
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(36
|
)
|
|
|
7.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
5,800
|
|
|
$
|
6.70
|
|
|
|
5.68
|
|
|
$
|
34,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2004
|
|
|
4,803
|
|
|
$
|
6.24
|
|
|
|
5.02
|
|
|
$
|
30,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
5,800
|
|
|
$
|
6.70
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
652
|
|
|
|
15.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(924
|
)
|
|
|
6.00
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(38
|
)
|
|
|
11.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
5,490
|
|
|
$
|
7.77
|
|
|
|
5.38
|
|
|
$
|
62,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2005
|
|
|
4,486
|
|
|
$
|
6.77
|
|
|
|
4.65
|
|
|
$
|
55,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
5,490
|
|
|
$
|
7.77
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
727
|
|
|
|
21.62
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,290
|
)
|
|
|
6.60
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(34
|
)
|
|
|
18.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
4,893
|
|
|
$
|
10.07
|
|
|
|
5.68
|
|
|
$
|
64,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
3,931
|
|
|
$
|
8.09
|
|
|
|
4.93
|
|
|
$
|
59,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of stock options in the table
above represents total pretax intrinsic value (i.e., the
difference between the closing price of the Companys
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, 2006. The amount of
the aggregate intrinsic value changes, based on the fair market
value of the Companys Common Stock. Total intrinsic value
of share options exercised during the years ended
December 31, 2006, 2005 and 2004 was $22.3 million,
$9.2 million and $3.7 million, respectively. Total
fair value of options vested during the years ended
December 31, 2006, 2005 and 2004 is $3.6 million and
$2.3 million and $1.7 million, respectively.
As of December 31, 2006, $4.7 million of total
unrecognized compensation costs related to non-vested stock
options is expected to be recognized over a weighted average
period of 1.7 years.
70
The following table summarizes restricted stock activity for the
year ended December 31, 2006, as follows (in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
|
|
Restricted
|
|
|
|
|
Stock Units
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
Restricted Stock
|
|
Shares
|
|
Fair Value
|
|
Shares
|
|
Outstanding at December 31,
2003
|
|
|
|
|
$
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
169
|
|
|
16.86
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
169
|
|
|
16.86
|
|
|
|
Granted
|
|
|
263
|
|
|
23.16
|
|
|
29
|
Vested
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
432
|
|
$
|
20.70
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, $7.6 million of total
unrecognized compensation costs related to non-vested Restricted
Stock Awards and stock units is expected to be recognized over a
weighted average period of 3.2 years.
The following table summarizes information about stock options
outstanding under the Plan at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
Range of
|
|
|
|
|
Contractual
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
|
|
|
Life
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Prices
|
|
Number
|
|
|
(Years)
|
|
|
Price
|
|
|
Number
|
|
|
Price
|
|
|
$0.89 $3.38
|
|
|
752,954
|
|
|
|
4.48
|
|
|
$
|
2.84
|
|
|
|
752,954
|
|
|
$
|
2.84
|
|
$3.38 $4.23
|
|
|
528,083
|
|
|
|
5.79
|
|
|
|
3.85
|
|
|
|
528,083
|
|
|
|
3.85
|
|
$4.25 $7.21
|
|
|
544,222
|
|
|
|
1.99
|
|
|
|
6.17
|
|
|
|
544,222
|
|
|
|
6.17
|
|
$7.63 $8.03
|
|
|
616,815
|
|
|
|
2.86
|
|
|
|
7.78
|
|
|
|
616,815
|
|
|
|
7.78
|
|
$8.38 $10.00
|
|
|
578,682
|
|
|
|
4.56
|
|
|
|
9.48
|
|
|
|
578,682
|
|
|
|
9.48
|
|
$10.54 $13.05
|
|
|
574,475
|
|
|
|
7.57
|
|
|
|
12.37
|
|
|
|
419,339
|
|
|
|
12.38
|
|
$13.63 $16.68
|
|
|
536,311
|
|
|
|
8.30
|
|
|
|
15.00
|
|
|
|
266,147
|
|
|
|
15.01
|
|
$17.11 $21.60
|
|
|
577,450
|
|
|
|
9.18
|
|
|
|
20.41
|
|
|
|
159,362
|
|
|
|
20.11
|
|
$24.20 $24.20
|
|
|
158,600
|
|
|
|
9.81
|
|
|
|
24.20
|
|
|
|
58,589
|
|
|
|
24.20
|
|
$26.72 $26.72
|
|
|
25,875
|
|
|
|
9.30
|
|
|
|
26.72
|
|
|
|
6,938
|
|
|
|
26.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.89 $26.72
|
|
|
4,893,467
|
|
|
|
5.68
|
|
|
$
|
10.07
|
|
|
|
3,931,131
|
|
|
$
|
8.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase shares of the Companys Common Stock,
with all of the balance at December 31, 2006 expiring in
2007, are fully vested and exercisable as of the date of
issuance. A summary
71
of warrants as of December 31, 2006, 2005 and 2004, and
changes during the years then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding at December 31,
2003
|
|
|
225,800
|
|
|
$
|
|
|
Granted
|
|
|
|
|
|
|
4.00
|
|
Exercised
|
|
|
(28,750
|
)
|
|
|
4.00
|
|
Canceled
|
|
|
|
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
197,050
|
|
|
$
|
4.00
|
|
Granted
|
|
|
|
|
|
|
4.00
|
|
Exercised
|
|
|
(125,000
|
)
|
|
|
4.00
|
|
Canceled
|
|
|
|
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
72,050
|
|
|
$
|
4.00
|
|
Granted
|
|
|
|
|
|
|
4.00
|
|
Exercised
|
|
|
(27,500
|
)
|
|
|
4.00
|
|
Canceled
|
|
|
|
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
44,550
|
|
|
$
|
4.00
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
The holders of Common Stock are entitled to one vote per share
for each share held of record on all matters submitted to a vote
of the stockholders.
Other
Equity Transactions
The following table summarizes information about stock options
granted by the Company to non-employee directors to purchase the
Companys Common Stock in exchange for services rendered
for 2006, 2005 and 2004 (Board Options):
|
|
|
|
|
|
|
|
|
Exercise Price of Stock
|
|
|
Number of Options
|
|
Options Granted (1) (2) (3)
|
|
|
Granted
|
|
|
2004:
|
|
|
4.05
|
|
|
|
3,074
|
|
|
|
|
3.17
|
|
|
|
3,926
|
|
|
|
|
3.87
|
|
|
|
4,146
|
|
|
|
|
3.65
|
|
|
|
4,806
|
|
|
|
|
|
|
|
|
|
|
2005:
|
|
|
4.71
|
|
|
|
2,857
|
|
|
|
|
4.88
|
|
|
|
2,761
|
|
|
|
|
5.42
|
|
|
|
2,488
|
|
|
|
|
5.86
|
|
|
|
2,300
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
7.80
|
|
|
|
1,728
|
|
|
|
|
5.74
|
|
|
|
2,350
|
|
|
|
|
6.94
|
|
|
|
2,012
|
|
|
|
|
6.86
|
|
|
|
2,351
|
|
|
|
|
(1) |
|
All stock option grants to non-employee directors during 2006,
2005 and 2004 were granted at an exercise price equal to 30% of
the fair market value of the Companys Common Stock on the
date of grant. In October 2006, 25,000 stock options were issued
at grant date market value to Al Leiter upon his election to the
Companys Board of Directors. |
|
(2) |
|
Stock options granted in 2004 are currently exercisable and
stock options granted in 2006 and 2005 become exercisable on the
earliest of (i) the fifth anniversary of the date of grant,
(ii) the date on which |
72
|
|
|
|
|
the director ceases to be a member of the Board of Directors and
(iii) the effective date of a change in control of the
Company. All such stock options were valued on the date of grant
in accordance with the requirements prescribed in APB 25.
See Note 2. These options were granted in lieu of cash
retainers and board meeting fees. |
|
(3) |
|
The compensation expense related to the Board Options granted in
2006, 2005 and 2004, determined pursuant to the application of
SFAS 123R for 2006 and APB 25 for 2005 and 2004, was
$343,000, $125,000 and $136,000, respectively, and is included
in general and administrative expenses in the accompanying
consolidated statements of operations. |
|
|
13.
|
COMMITMENTS
AND CONTINGENCIES
|
Operating
Leases
The Company leases corporate office space and certain equipment
under non-cancellable operating lease agreements expiring at
various dates. Total rent expense under these agreements was
$2,738,000, $2,189,000 and $2,659,000 for the years ended
December 31, 2006, 2005 and 2004, respectively. Future
minimum annual rental commitments related to these leases are as
follows at December 31, 2006 (in thousands):
|
|
|
|
|
Year
|
|
Amount
|
|
|
2007
|
|
$
|
2,785
|
|
2008
|
|
|
2,874
|
|
2009
|
|
|
2,575
|
|
2010
|
|
|
2,182
|
|
2011
|
|
|
2,193
|
|
Thereafter
|
|
|
9,858
|
|
|
|
|
|
|
|
|
$
|
22,467
|
|
|
|
|
|
|
Product
Liability
Software products such as those offered by the Company
frequently contain undetected errors or failures when first
introduced or as new versions are released. Testing of the
Companys products is particularly challenging because it
is difficult to simulate the wide variety of computing
environments in which the Companys customers may deploy
these products. Despite extensive testing, the Company from time
to time has discovered defects or errors in products. There can
be no assurance that such defects, errors or difficulties will
not cause delays in product introductions and shipments, result
in increased costs and diversion of development resources,
require design modifications or decrease market acceptance or
customer satisfaction with the Companys products. In
addition, there can be no assurance that, despite testing by the
Company and by current and potential customers, errors will not
be found after commencement of commercial shipments, resulting
in loss of or delay in market acceptance, which could have a
material adverse effect upon the Companys business,
operating results and financial condition.
Litigation
From
time-to-time,
the Company is involved in litigation relating to claims arising
out of its operations in the normal course of business. The
Company is not currently a party to any legal proceeding the
adverse outcome of which, individually or in the aggregate,
could reasonably be expected to have a material adverse effect
on the Companys operating results or financial condition.
|
|
14.
|
RELATED
PARTY TRANSACTIONS
|
During the fourth quarter of 2001, the Company began leasing
equipment with a computer leasing company (the Leasing
Company) that is owned by an irrevocable trust (the
Trust) for the benefit of the children of Robert A.
Yanover, a member of the Companys Board of Directors.
Additionally, the Leasing Companys business is managed and
operated by a management company (the Management
Company) pursuant to a management agreement.
Mr. Yanover has a 50% ownership interest in the general
partner of the
73
Management Company. The Company did not finance equipment with
the Leasing Company in 2006, 2005 or 2004. The Company financed
equipment with the Leasing Company totaling $1,007,000 and
$258,000 during 2002 and 2001, respectively. Related
amortization was $0, $0 and $331,000 and total cash paid was $0,
$0 and $499,000 during 2006, 2005 and 2004, respectively. The
unamortized capital lease obligation with the Leasing Company
and related accumulated amortization were both $0 at
December 31, 2006 and 2005 and $0 and $1,265,000,
respectively, at December 31, 2004. The Company believes
that the terms of the leases were no less favorable to the
Company than could have been obtained from an unaffiliated party.
On October 23, 2006, the Companys Board of Directors
elected Al Leiter to the Companys Board of Directors,
effective October 23, 2006. During October 2002,
Mr. Leiter entered into an agreement with the Company
pursuant to which he agreed to (i) attend and participate
in certain internal meetings of the Company; (ii) assist
the Companys salespeople with prospects; and
(iii) act as an official spokesperson for the Company in
exchange for which the Company agreed to make contributions to
Leiters Landing, Mr. Leiters non-profit
charitable organization benefiting children, in the amount of
one tenth (1/10) of one percent, or 0.1%, of the Companys
total revenue as reported on its financial statements. Pursuant
to this agreement, for the fiscal years ended December 31,
2006, 2005 and 2004, the Company contributed a total of
approximately $107,000, $84,000 and $68,000, respectively to
Leiters Landing. In February 2007, Mr. Leiter and the
Company agreed that the maximum amount payable by the Company in
any one year under this agreement is $200,000.
|
|
15.
|
EMPLOYEE
BENEFIT PLAN
|
The Company provides retirement benefits for eligible employees,
as defined, through a defined contribution benefit plan that is
qualified under Section 401(k) of the Internal Revenue Code
(the Plan). Contributions to the Plan, which are
made at the sole discretion of the Company, were $918,000,
$756,000 and $718,000 for the years ended December 31,
2006, 2005 and 2004, respectively.
Effective February 28, 2007, the Companys Chief
Executive Officer (CEO) voluntarily forfeited a
restricted stock award for 60,000 shares of Common Stock which
was granted to him at the February 6, 2007 meeting of the
Compensation Committee of the Board of Directors (the
Compensation Committee) under the Companys
2005 Equity and Incentive Plan (the Plan). The CEO
voluntarily forfeited these shares because their issuance
inadvertently caused the Company to have exceeded the limit on
shares authorized for issuance under the Plan. In addition, the
cancellation allowed the Company to have sufficient shares
authorized under the Plan for the Company to provide stock
options to purchase shares of Common Stock to new employees
hired between February 6, 2007 and May 15, 2007, the
date of the 2007 annual meeting of the Companys
stockholders (the Annual Meeting). The Company will
propose in its 2007 proxy statement that stockholders approve at
the Annual Meeting a 3,000,000 share increase in the number of
shares that may be issued pursuant to awards under the Plan (the
Proposal to Amend the Plan).
The cancellation of the CEOs restricted stock award was
accompanied by the Companys concurrent offer to grant a
replacement award of similar value to the CEO. Accordingly, the
Compensation Committee adopted a resolution by unanimous written
consent dated as of March 13, 2007 approving the grant to
the CEO of an award of 60,000 restricted shares of Common Stock,
contingent upon the approval by the Companys stockholders
of the Proposal to Amend the Plan at the Annual Meeting. Such
restricted stock award would be issued on the date of the Annual
Meeting, would become fully vested on the fourth anniversary of
the Annual Meeting and would have such other terms as are
provided in a Restricted Stock Award Agreement entered into in
accordance with the Plan. The Compensation Committee resolution
states that, in the event that the stockholders do not approve
the Proposal to Amend the Plan, the Company will pay to its CEO,
on the date such restricted stock award otherwise would have
become fully vested, an amount in cash equal to the fair market
value of the shares that otherwise would have been subject to
such restricted stock award, as determined pursuant to the Plan.
74
|
|
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and
with the participation of the Companys management,
including the Chief Executive Officer (the CEO) and
the Chief Financial Officer (the CFO), of the
effectiveness of the design and operation of the Companys
disclosure controls and procedures as of the end of the period
covered by this report pursuant to Securities Exchange Act of
1934
Rule 13a-15.
Based on that evaluation, the Companys management,
including the CEO and CFO, concluded that the Companys
disclosure controls and procedures are effective in timely
alerting them to material information required to be included in
the Companys periodic SEC reports. It should be noted that
the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in
achieving its stated goals under all potential future
conditions, regardless of how remote.
Managements
Annual Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f).
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal
Control Integrated Framework, our management
concluded that our internal control over financial reporting was
effective as of December 31, 2006. Our managements
assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2006 has been
audited by KPMG LLP, an independent registered public accounting
firm, as stated in their report, which is included below.
75
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Ultimate Software Group, Inc.:
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
Over Financial Reporting that The Ultimate Software Group, Inc.
and subsidiaries (the Company) maintained effective
internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is
to express an opinion on managements assessment and an
opinion on the effectiveness of the Companys 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, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys 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 companys
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
Companys 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, managements assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2006, is fairly stated, in all material
respects, based on criteria established in Internal
Control Integrated Framework issued by the COSO.
Also, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued
by the COSO.
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, 2006 and 2005 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, 2006, and
our report dated March 16, 2007 expressed an unqualified
opinion on those consolidated financial statements.
KPMG LLP
March 16, 2007
Miami, Florida
Certified Public Accountants
76
Changes
in Internal Control Over Financial Reporting
There have been no significant changes in internal control over
financial reporting during the fourth quarter of 2006 that have
materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial
reporting.
|
|
Item 9B.
|
Other
Information
|
The information set forth in footnote 16 of the Notes to
Consolidated Financial Statements under Item 8 is
incorporated by reference herein.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
The directors, executive officers (Messrs. Scott Scherr,
Marc D. Scherr and Mitchell K. Dauerman) and other key employees
of the Company, and their ages as of February 18, 2007, are
as follows:
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position(s)
|
|
|
Scott Scherr
|
|
|
54
|
|
|
|
Chairman of the Board, President and Chief Executive Officer
|
|
Marc D. Scherr
|
|
|
49
|
|
|
|
Vice Chairman of the Board and Chief Operating Officer
|
|
Mitchell K. Dauerman
|
|
|
49
|
|
|
|
Executive Vice President, Chief Financial Officer and Treasurer
|
|
Jon Harris
|
|
|
42
|
|
|
|
Senior Vice President, Chief Services Officer
|
|
Robert Manne
|
|
|
53
|
|
|
|
Senior Vice President, General Counsel
|
|
Vivian Maza
|
|
|
45
|
|
|
|
Senior Vice President, People and Secretary
|
|
Linda Miller
|
|
|
62
|
|
|
|
Senior Vice President, Marketing
|
|
Laura Johnson
|
|
|
42
|
|
|
|
Senior Vice President, Product Strategy
|
|
Adam Rogers
|
|
|
32
|
|
|
|
Senior Vice President, Chief Technology Officer
|
|
Greg Swick
|
|
|
43
|
|
|
|
Senior Vice President, Chief Sales Officer
|
|
Bill Hicks
|
|
|
41
|
|
|
|
Senior Vice President, Chief Information Officer
|
|
Daniel Taylor
|
|
|
37
|
|
|
|
Senior Vice President, Talent Management
|
|
James A. FitzPatrick, Jr.
|
|
|
57
|
|
|
|
Director
|
|
LeRoy A. Vander Putten
|
|
|
72
|
|
|
|
Director
|
|
Rick A. Wilber
|
|
|
60
|
|
|
|
Director
|
|
Robert A. Yanover
|
|
|
70
|
|
|
|
Director
|
|
Alois T. Leiter
|
|
|
41
|
|
|
|
Director
|
|
Scott Scherr has served as President and a director of the
Company since its inception in April 1996 and has been Chairman
of the Board and Chief Executive Officer of the Company since
September 1996. Mr. Scherr is also a member of the
Executive Committee of the Board of Directors (the
Board). In 1990, Mr. Scherr founded The
Ultimate Software Group, Ltd. (the Partnership), the
business and operations of which were assumed by the Company in
1998. Mr. Scherr served as President of the
Partnerships general partner from the inception of the
Partnership until its dissolution in March 1998. From 1979 until
1990, he held various positions at Automatic Data Processing,
Inc. (ADP), a payroll services company, where his
titles included Vice President of Operations and Sales
Executive. Prior to joining ADP, Mr. Scherr operated
Management Statistics, Inc., a data processing service bureau
founded by his father, Reuben Scherr, in 1959. He is the brother
of Marc Scherr, the Vice Chairman of the Board of the Company
and the
father-in-law
of Adam Rogers, Senior Vice President, Chief Technology Officer.
77
Marc D. Scherr has been a director of the Company 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 the
Company effective March 1, 2000. Mr. Scherr served as
a director of Gerschel & Co., Inc., a private
investment firm from January 1992 until March 2000. In December
1995, Mr. Scherr co-founded Residential Company of America,
Ltd. (RCA), a real estate firm, and served as
President of its general partner until March 2000.
Mr. Scherr also served as Vice President of RCAs
general partner from its inception in August 1993 until December
1995. From 1990 to 1992, Mr. Scherr was a real estate
pension fund advisor at Aldrich, Eastman & Waltch.
Previously, he was a partner in the Boston law firm of
Fine & Ambrogne. Mr. Scherr is the brother of
Scott Scherr, Chairman of the Board, President and Chief
Executive Officer of the Company.
Mitchell K. Dauerman has served as Executive Vice President of
the Company since April 1998 and as Chief Financial Officer and
Treasurer of the Company since September 1996. From 1979 to
1996, Mr. Dauerman held various positions with KPMG LLP,
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. 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 ADPs 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 the Company, Mr. Manne was an attorney and partner
of Becker & Poliakoff, P.A., an international law firm,
since 1978. In addition to administering the Litigation
Department of the law firm, Mr. Manne was a permanent
member of the firms executive committee which was
responsible for law firm operations. Mr. Manne has
performed legal services for the Company since its inception.
Vivian Maza has served as Senior Vice President, People for the
Company since February 2004 and served as Vice President, People
from January 1998 through January 2004. Ms. Maza has served
as Secretary of the Company since September 1996. Prior to that,
Ms. Maza served as the Office Manager of the Company from
its organization in April 1996 and of the Partnership from its
inception in 1990 until April 1996. Ms. Maza is 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.
Linda Miller has served as Senior Vice President, Marketing
since February 2004 and served as Vice President, Communications
and Public Relations from January 1999 through January 2004.
Ms. Miller served as Vice President, Marketing, for the
Company from July 1998 to January 1999. Prior to that,
Ms. Miller served as the Companys Director of
Marketing from January 1997. From 1992 to 1996, Ms. Miller
held various positions at Best Software, Inc., a developer of
corporate resource management applications, Abra Products
Division, including Public Relations Manager.
Laura 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 for the Company. 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
the Companys research and development organization,
including Director of Technical Support from October 1998 to
November 1999 and Director of Web Development from
78
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 the Company.
Greg Swick has served as Senior Vice President, Sales since
January 2001. Mr. Swick served as Vice President and
General Manager of the PEO Division of the Companys sales
organization from November 1999 to January 2001. From February
1998 to November 1999, Mr. Swick was Director of Sales,
Northeast Division. Prior to joining the Company, Mr. Swick
was President of The Ultimate Software Group of New York and New
England, G.P., a reseller of the Company which was acquired by
the Company in March 1998. From 1987 to 1994, Mr. Swick
held various positions with ADP, where the most recent position
was Area Vice President ADP Dealer Services Division.
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.
Daniel Taylor has served as Senior Vice President, Talent
Management Systems since October 2006 following Ultimate
Softwares acquisition of RTIX Limited. and its wholly
owned subsidiary RTIX Americas, Inc. (collectively
RTIX). Mr. Taylor was co-founder of RTIX, a
United Kingdom performance and talent management software
company, and served as its Director from 1991 through October
2004. Mr. Taylor served as CEO of RTIX Americas, Inc. from
October 2005 and CEO of RTIX Limited. from May 2006 until the
companies were acquired by Ultimate Software in October 2006.
James A. FitzPatrick, Jr. has served as a director of the
Company since July 2000. Mr. FitzPatrick is a partner in
the law firm Dewey Ballantine LLP, which provides legal services
to the Company. Before joining Dewey Ballantine LLP as a partner
in February 1989, Mr. FitzPatrick was a partner in the law
firm LeBoeuf, Lamb, Leiby & MacRae.
LeRoy A. Vander Putten has served as a director of the Company
since October 1997, is Chairman of the Compensation Committee of
the Board and is a member of the Audit Committee of the Board.
Mr. Vander Putten 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 the Company 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 the Companys Board of Directors from
October 1997 through May 2000. Mr. Wilber is currently the
President of Lynns 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 the Company since
January 1997 and is Chairman of the Audit Committee and a member
of the Compensation Committee of the Board. Mr. Yanover
founded Computer Leasing Corporation of Michigan, a private
leasing company, in 1975 and has served as its President since
that time. Mr. Yanover also founded Lason, Inc., a
corporation specializing in the imaging business, and served as
Chairman of the Board from its inception in 1987 until 1998 and
as a director through February 2001.
79
Al Leiter has served as director of the Company since October
2006. 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
Software since 2002. Mr. Leiter has served as a television
commentator for the Yankees Entertainment and Sports Network
since 2006. Mr. Leiter is president and founder of
Leiters Landing, a charitable organization formed in 1996.
Mr. Leiter has served on the Executive Committee of New
York Citys official tourism marketing organization,
NYC & Company, since 2000 and is on the Board of
Directors of Americas 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 the
stockholders (the Annual Meeting) in 2007.
Messrs. LeRoy A. Vander Putten and Robert A. Yanover serve
on the Board in the class whose term expires at the Annual
Meeting in 2008. 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 2009.
Code of
Ethics
The Company has adopted a Code of Ethics within the meaning of
Item 406 of
Regulation S-K
of the Exchange Act. The Companys Code of Ethics applies
to its principal executive officer, principal financial officer
and principal accounting officer. A copy of the Companys
Code of Ethics is posted on the Companys website at
www.ultimatesoftware.com. In the event that the Company
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,
the Company 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 candidates independence (as mandated by the
NASD rules), character, judgment, age, skills, financial
literacy, and experience in the context of the needs of the
Company and the Board. In 2006, the Company 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 the
Companys stockholders in a similar manner as those
recommended by members of management or other directors.
Other
Information
The information set forth in the Companys Proxy Statement
for the 2007 Annual Meeting of Stockholders under the headings
Section 16(a) Beneficial Ownership Reporting
Compliance and Board Meetings and Committees of the
Board-Audit Committee, is incorporated by reference.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated by
reference to the Companys Proxy Statement for the 2007
Annual Meeting of Stockholders under the heading Executive
Compensation.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information set forth in the Companys Proxy Statement
for the 2007 Annual Meeting of Stockholders under the heading
Security Ownership of Certain Beneficial Owners and
Management is incorporated by reference.
80
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required by this item is incorporated by
reference to the Companys Proxy Statement for the 2007
Annual Meeting of Stockholders under the heading Certain
Related Transactions.
|
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Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this item is incorporated by
reference to the Companys Proxy Statement for the 2007
Annual Meeting of Stockholders under the heading KPMG LLP
Fees.
81
PART IV
|
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Item 15.
|
Exhibits
and Financial Statement Schedule
|
Documents filed as part of this report:
|
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(1)
|
Financial Statements. The following financial statements of the
Company are included in Part II, Item 8, of this
Annual Report on
Form 10-K:
|
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Operations for the Years Ended
December 31, 2006, 2005 and 2004
Consolidated Statements of Stockholders Equity and
Comprehensive Income (Loss) for the Years Ended
December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
(2) Consolidated Financial
Statement Schedule:
Report of Independent Registered Public Accounting
Schedule II Valuation and Qualifying Accounts
82
(3) Exhibits
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|
Number
|
|
|
|
Description
|
|
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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)
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3
|
.2
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|
Certificate of Designations of
Series A Junior Preferred Stock (incorporated by reference to
Exhibit 2 to the Companys Current Report on Form
8-K dated
October 23, 1998)
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3
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.3
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Amended and Restated Bylaws
(incorporated herein by reference to Exhibit 3.5 to the
Registration Statement)
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4
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.1
|
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Form of Certificate for the Common
Stock, par value $0.01 per share **
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4
|
.2
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|
Form of Warrant for Common Stock
(incorporated by reference to Exhibit 4.4 to the
Companys Registration Statement on Form
S-3 (File
No. 333-107527),
initially filed July 31, 2003
|
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10
|
.1
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Shareholders Rights Agreement,
dated June 6, 1997 among the Company and certain
stockholders named therein **
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10
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.2
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Asset Purchase Agreement, dated
February 2, 1998, among The Ultimate Software Group of
Virginia, Inc., the Company and certain principals named
therein **
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10
|
.3
|
|
|
|
Asset Purchase Agreement, dated
February 2, 1998, among the Company, The Ultimate Software Group
of the Carolinas, Inc. and certain principals name
therein **
|
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10
|
.4
|
|
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|
Asset Acquisition Agreement, dated
February 20, 1998, among the Company, The Ultimate Software
Group of Northern California, Inc. and certain principals named
therein **
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10
|
.5
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|
Asset Purchase Agreement dated
March 4, 1998, among the Company, Ultimate Investors Group,
Inc. and certain principals name therein **
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10
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.6
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Agreement and Plan of Merger dated
February 24, 1998, among the Company, ULD Holding Corp.,
Ultimate Software Group of New York and New England, G.P.
and certain principals named therein **
|
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10
|
.7
|
|
|
|
Nonqualified Stock Option Plan, as
amended and restated as of December 20, 2002 (incorporated
by reference to the corresponding exhibit in the Companys
Annual Report on Form
10-K dated
March 31, 2003)
|
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10
|
.8
|
|
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Commercial Office Lease agreement
by and between UltiLand, Ltd., a Florida limited partnership,
and the Company, dated December 31, 1998 (incorporated by
reference herein to corresponding exhibit in the Companys
Annual Report on Form
10-K dated
March 31, 1999)
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10
|
.9
|
|
|
|
Rights Agreement, dated as of
October 22, 1998, between the Company and BankBoston, N.A.,
as Rights Agent. The Rights Agreement includes the Form of
Certificate of Designations of Series A Junior Preferred Stock
as Exhibit A, the Form of Rights Certificate as Exhibit B, and
the Summary of Rights as Exhibit C (incorporated by reference
herein to Exhibit 2 to the Companys Current Report on Form
8-K dated
October 23, 1998)
|
83
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|
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
10
|
.10
|
|
|
|
Commercial Office Lease by and
between UltiLand, Ltd., a Florida limited partnership and the
Company, dated December 22, 1998 (incorporated by reference
to Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q
dated August 15, 1999)
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10
|
.11
|
|
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Letter Agreement between Aberdeen
Strategic Capital LP and the Company, dated October 21,
1999 (incorporated herein by reference to Exhibit 10.1 to
the Companys Quarterly Report on Form
10-Q dated
November 15, 1999)
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10
|
.12
|
|
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Warrant issued to Aberdeen
Strategic Capital LP (incorporated by reference to
Exhibit 10.2 to the Companys Quarterly Report on Form
10-Q dated
November 15, 1999)
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10
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.13
|
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Software License Agreement between
the Company and Ceridian Corporation dated as of March 9,
2001 (incorporated by reference to Exhibit 10.17 to the
Companys Annual Report on Form
10-K dated
March 27, 2001)
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10
|
.14
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Letter amendment between the
Company and Ceridian Corporation dated as of August 9, 2001
(incorporated by reference to Exhibit 10.14 to the
Companys Annual Report on Form 10-K dated March 29, 2002)
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10
|
.15
|
|
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Letter amendment between the
Company and Ceridian Corporation dated as of February 5,
2002 (incorporated by reference to Exhibit 10.15 to the
Companys Annual Report on Form
10-K dated
March 29, 2002)
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10
|
.16
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|
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Loan and Security Agreement by and
between the Company and Silicon Valley Bank dated as of November
29, 2001 (incorporated by reference to Exhibit 10.16 to the
Companys Annual Report on Form
10-K dated
March 29, 2002)
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10
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.17
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Revolving Promissory Note by and
between the Company and Silicon Valley Bank dated as of November
29, 2001 (incorporated by reference to Exhibit 10.17 to the
Companys Annual Report on Form
10-K dated
March 29, 2002)
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10
|
.18
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|
|
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Equipment Term Note by and between
the Company and Silicon Valley Bank dated as of
November 29, 2001 (incorporated herein by reference to
Exhibit 10.18 to the Companys Annual Report on Form
10-K dated
March 29, 2002)
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10
|
.19
|
|
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Services Agreement between the
Company and Ceridian Corporation dated as of February 10,
2003 (incorporated by reference to the corresponding exhibit in
the Companys Annual Report on Form
10-K dated
March 31, 2003)
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10
|
.20
|
|
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Third Loan Modification Agreement
by and between the Company and Silicon Valley Bank dated
March 27, 2003 (incorporated by reference to the
corresponding exhibit in the Companys Annual Report on
Form 10-K
dated March 31, 2003)
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10
|
.21
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|
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Fourth Loan Modification Agreement
by and between the Company and Silicon Valley Bank dated as of
April 29, 2003 (incorporated by reference to Exhibit 10.10
to the Companys Quarterly Report on Form
10-Q dated
May 14, 2003)
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10
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.22
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|
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Change in Control Bonus Plan for
Executive Officers, effective March 5, 2004 (incorporated
by reference to Exhibit 10.1 to the Companys Quarterly
Report on Form
10-Q dated
May 13, 2004)
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84
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Number
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Description
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10
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.23
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|
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Fifth Loan Modification Agreement
by and between the Company and Silicon Valley Bank dated as of
May 28, 2004 (incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on Form
10-Q dated
August 12, 2004)
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10
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.24
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|
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Silicon Valley Bank Second Amended
and Restated Revolving Promissory Note by and between the
Company and Silicon Valley Bank dated May 28, 2004
(incorporated by reference to Exhibit 10.2 to the Companys
Quarterly Report on Form
10-Q dated
August 12, 2004)
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10
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.25
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Amended Nonqualified stock option
agreement (incorporated by reference to Exhibit 10.1 to the
Companys Form
8-K dated
January 3, 2006).
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10
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.26
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Amended Director Fee Option Award
Agreement (incorporated by reference to Exhibit 10.2 to the
Companys Form
8-K dated
January 3, 2006).
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10
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.27
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Amended Director Fee Option
Agreement for Non-Employee Directors (incorporated by reference
to Exhibit 10.27 to the Companys Annual Report on
Form 10-K,
dated March 5, 2006)
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|
10
|
.28
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|
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Entry into a Material Definitive
Agreement with executives (incorporated by reference to the
Companys Form
8-K, Item
1.01 dated February 10, 2006).
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10
|
.29
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Seventh Loan Modification
Agreement between the Company and Silicon Valley Bank
(incorporated by reference to Exhibit 10.1 to the Companys
Form 8-K
dated June 17, 2005).
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10
|
.30
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Term Note between the Company and
Silicon Valley Bank (incorporated by reference to
Exhibit 10.2 to the Companys Form
8-K dated
June 17, 2005).
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10
|
.31
|
|
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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 Companys Annual Report on Form
10-K, dated
March 15, 2006)
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10
|
.32
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Commercial Office Lease by and
between ROHO Ultimate, LTD. II, a Florida limited partnership
(Landlord) and the Company dated May 23,
2001 (incorporated by reference to Exhibit 10.32 to the
Companys Annual Report on Form
10-K, dated
March 15, 2006)
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10
|
.33
|
|
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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 Companys Annual Report
on Form
10-K, dated
March 15, 2006)
|
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10
|
.34
|
|
|
|
Assignment of Agreement of
Purchase and Sale by and between Robert J. Manne a/k/a Robert
Manne and the Company dated October 26, 2004 (incorporated
by reference to Exhibit 10.34 to the Companys Annual
Report on Form
10-K, dated
March 15, 2006)
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10
|
.35
|
|
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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 the
Company and Weston Common Area LTD., dated August 18, 2005
(incorporated by reference to Exhibit 10.35 to the
Companys Annual Report on Form
10-K, dated
March 15, 2006)
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85
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Number
|
|
|
|
Description
|
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10
|
.36
|
|
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Galleria Atlanta office lease
agreement between Galleria 600, LLC, a Delaware limited
liability company, and the Company, dated April 27, 2006
(incorporated by reference to Exhibit 10.36 to the
Companys Quarterly Report on Form
10-Q, dated
August 8, 2006.
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10
|
.37
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Lease of Office Space by and
between OMERS Realty Corporation CPP Investment Board Real
Estate Holdings Inc., and The Ultimate Software Group of Canada,
Inc., dated August 22, 2006 (incorporated by reference to
Exhibit 10.37 to the Companys Quarterly Report on Form
10-Q, dated
November 8, 2006)
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10
|
.38
|
|
|
|
Indemnity Agreement between OMERS
Realty Corporation, CPP Investment Board Real Estate Holdings,
Inc., and the Company dated August 22, 2006 (incorporated
by reference to Exhibit 10.38 to the Companys Quarterly
Report on Form
10-Q, dated
November 8, 2006)
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10
|
.39
|
|
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|
Amendment to Lease by and between
ROHO Ultimate, Ltd. I (Landlord) and The Ultimate
Software Group. Inc. (Tenant) for Demised premises
at 2000 Ultimate Way, Weston, FL 33326 (the
Premises) dated February 15, 2000 *
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10
|
.40
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|
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 *
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10
|
.41
|
|
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|
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 (The
Tenant) dated May 25, 2005 *
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10
|
.42
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First Amendment to Lease between
Galleria 600, LLC (Landlord) and the Company, dated
August 18, 2006*
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21
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.1
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Subsidiary of the Registrant *
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23
|
.1
|
|
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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
|
|
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|
Certification Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002*
|
|
32
|
.2
|
|
|
|
Certification Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002*
|
|
99
|
.1
|
|
|
|
Cautionary Statement for Purposes
of the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995 *
|
|
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* |
|
Filed herewith. |
** |
|
Incorporated by reference to the corresponding exhibit in the
Companys Registration Statement. |
86
Report of
Independent Registered Public Accounting Firm
The Board of Directors
The Ultimate Software Group, Inc.:
Under date of March 16, 2007, we reported on the
consolidated balance sheets of The Ultimate Software Group, Inc.
and subsidiaries (the Company) as of
December 31, 2006 and 2005, 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, 2006
which reports appear in the December 31, 2006, Annual
Report on
Form 10-K.
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
10-K. This
financial statement schedule is the responsibility of the
Companys management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
As discussed in Notes 2 and 12 to the Consolidated
Financial Statements, effective January 1, 2006, the
Company adopted the provision of Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based
Payment.
Also, as discussed in Notes 2 and 4 to the consolidated
financial statements, the Company changed its method of
quantifying errors in 2006.
In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
KPMG LLP
March 16, 2007
Miami, Florida
Certified Public Accountants
87
SCHEDULE II
THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
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Balance at
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|
|
|
|
|
|
Beginning of
|
|
|
Charged to Expenses
|
|
|
Write-offs and
|
|
|
Balance at
|
|
Classification
|
|
Year
|
|
|
and Other
|
|
|
Other
|
|
|
End of Year
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
$
|
500
|
|
|
$
|
813
|
|
|
$
|
(813
|
)
|
|
$
|
500
|
|
December 31, 2005
|
|
|
500
|
|
|
|
869
|
|
|
|
(869
|
)
|
|
|
500
|
|
December 31, 2004
|
|
|
525
|
|
|
|
419
|
|
|
|
(444
|
)
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for deferred
tax asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
$
|
33,838
|
|
|
$
|
6,165
|
|
|
$
|
|
|
|
$
|
40,003
|
|
December 31, 2005
|
|
|
31,759
|
|
|
|
2,079
|
|
|
|
|
|
|
|
33,838
|
|
December 31, 2004
|
|
|
28,377
|
|
|
|
3,382
|
|
|
|
|
|
|
|
31,759
|
|
88
SIGNATURES
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 16, 2007
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
Scott
Scherr
|
|
President, Chief Executive Officer
and Chairman of the Board
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Mitchell
K. Dauerman
Mitchell
K. Dauerman
|
|
Executive Vice President, Chief
Financial Officer and Treasurer (Principal Financial and
Accounting Officer)
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Marc
D. Scherr
Marc
D. Scherr
|
|
Vice Chairman of the Board and
Chief Operating Officer
|
|
March 16, 2007
|
|
|
|
|
|
/s/ James
A. FitzPatrick Jr.
James
A. FitzPatrick, Jr.
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ LeRoy
A. Vander Putten
LeRoy
A. Vander Putten
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Rick
A. Wilber
Rick
Wilber
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Robert
A. Yanover
Robert
A. Yanover
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Alois
T. Leiter
Alois
T. Leiter
|
|
Director
|
|
March 16, 2007
|
89