The Ultimate Software Group, Inc.
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, 2007
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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
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(I.R.S. Employer
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incorporation or
organization)
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Identification No.)
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2000 Ultimate Way,
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33326
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Weston, FL
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(Zip Code)
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(Address of principal executive
offices)
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Registrants telephone number, including area code:
(954) 331-7000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class:
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Name of Each Exchange on which
Registered:
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Common Stock, par value $.01 per share
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The Nasdaq Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes 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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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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 Global Market on
June 29, 2007 was approximately $692.5 million.
As of February 19, 2008, there were 24,772,225 shares
of the Registrants Common Stock, par value $.01,
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for the 2008
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
FORWARD-LOOKING
STATEMENTS
This Annual Report on
Form 10-K
(the
Form 10-K)
of The Ultimate Software Group, Inc. and subsidiaries
(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.
PART I
Overview
Ultimate Software designs, markets, implements and supports
human resources (HR), payroll and talent management
solutions principally in the United States.
Ultimate Softwares UltiPro software (UltiPro)
is a comprehensive Web-based solution designed to deliver the
functionality businesses need to manage the complete employment
life cycle from recruitment to retirement. The solution includes
feature-sets for talent acquisition and hiring, HR 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.
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. Intersourcing is available to
companies primarily on a subscription basis and is known in the
industry as software-as-a-service (SaaS)
and on-demand. 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 the Miami, Florida
area and the other in the Atlanta, Georgia area.
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 nine
consecutive annual evaluations. UltiPro leverages the Microsoft
technology platform, which is recognized in the industry as a
cost-effective, reliable and scalable platform.
UltiPro is marketed primarily through the Companys direct
sales team. Ultimate Software has approximately 1,600 customers
as of the end of 2007. Based on December 2007 market data from
Dun & Bradstreet, Ultimate Software estimates its
approximate market share to be 3 percent of the 15,000 and
larger employee space; 6 percent in the 700 to
15,000 employee space, and less than 2 percent in the
200 to 700 employee space.
In 2007, Ultimate Software began the expansion of its sales team
for its new solution offering Workplace. Workplace
is an offering of UltiPro targeted for companies with 200 to
700 employees in size and is a subscription-based SaaS
solution that provides these medium-sized and smaller companies
nearly all the features that larger enterprise companies have
with UltiPro, plus a bundled service package. Workplace is
designed to give customers a high degree of convenience since
Ultimate Software handles system setup, business rules, and
other situations for customers behind the scenes,
and many companies of this size do not have IT staff on-premises
to help with system issues.
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), a former
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 did not change as a result of the
RSM Acquisition. Subsequent to the RSM Acquisition, Ceridian
continued to be financially obligated to pay, and did pay,
Ultimate Software minimum fees pursuant to the terms of the
Original Ceridian Agreement. The aggregate minimum payments that
Ceridian was obligated to pay Ultimate Software under the
Original Ceridian Agreement over the minimum term of the
agreement aggregated $42.7 million. To date, Ceridian has
paid to Ultimate Software a total of $42.1 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 date. The
amount of subscription revenues recognized under the Original
Ceridian Agreement during the year ended December 31, 2007,
totaling $7.7 million, was the same as those recognized in
2006 and 2005. 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 terminated on March 9, 2008.
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 future operations in Canada. 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). Pursuant
to the RTIX Acquisition, 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,
2007 include revenues of RTIX, and, as a result of the RTIX
Acquisition, the consolidated financial statements include
assets in the United Kingdom as of December 31, 2007. There
were no material assets or revenues in Canada as of
December 31, 2007.
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Revenue
Sources
The Companys revenues are derived from three principal
sources: recurring revenues, services revenues and license
revenues.
Recurring revenues consist of Intersourcing revenues from the
Companys hosted offering of UltiPro, maintenance revenues
and, to a lesser extent, subscription revenues from
per-employee-per-month (PEPM) fees generated by
BSPs. 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 derived
from maintaining, supporting and providing periodic updates for
the Companys products under software license agreements.
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, to a lesser extent, sales provided from
BSPs are recognized as subscription revenues (a component
of recurring revenues in the consolidated statements of income)
as the services are delivered. Maintenance revenues are
recognized ratably over the service period, generally one year.
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 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. 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 services sold on a fixed-fee basis
are recognized using the percentage of completion accounting
method, which involves the use of estimates. Percentage of
completion is measured at each reporting date based on hours
incurred to date compared to total estimated hours to complete
the implementation job. If a sufficient basis to measure the
progress towards completion does not exist, revenue is
recognized when the project is completed or when 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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2007
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2006
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2005
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Revenues:
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Recurring
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57.5%
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55.7%
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56.7%
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Services
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32.9
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33.6
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31.5
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License
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9.6
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10.7
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11.8
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Total revenues
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100.0%
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100.0%
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100.0%
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3
Features
of UltiPro
Ultimate Softwares UltiPro product is an HR, payroll and
talent management solution designed to increase overall
efficiencies for managing the complete employee life cycle.
UltiPro offers 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 the human resources
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. 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. UltiPro
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. 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 HR, benefits and
payroll functions over time. Tight integration helps to reduce
administrative costs by facilitating accurate information
processing and reporting, and reducing discrepancies, errors and
the need for time-consuming adjustments. In addition,
administrative costs can be reduced by providing an organization
with greater access to information and control over reporting.
Leveraging of Leading Technologies. Ultimate
Software has consistently focused on identifying leading
technologies and integrating them into its products. The primary
characteristics of Ultimate Softwares technology are:
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Leading-edge service-oriented-architecture (SOA)
technology platform built using Microsoft .NET 3.0
framework; and
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Multi-tenancy (multiple companies can reside on one server):
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The multi-tenant model allows each application component to run
on a separate farm of load-balanced servers while still
providing database isolation that customers demand. Ultimate
Softwares multi-tenant site registry functions similar to
a yellow pages to manage tenant location and
isolation within the site.
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Connecting UltiPro via Web Services:
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Through Web Services, Ultimate Software exposes appropriate
surface areas of UltiPro to integrate with other applications
and data services easily and securely regardless of firewall
boundaries.
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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 HR, payroll and talent management areas.
UltiPro uses familiar Internet navigation techniques, which the
Company believes makes its portal 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. 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. Ultimate Softwares customer
support center has received the Support Center Practices
(SCP) Certification for the ninth 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. One of the
highlights of UltiPros technology is the Companys
Distributed Process Management (DPM) framework, a
framework that enables business functions to be performed in
UltiPro Web (UltiPro 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 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. UltiPro has a complementary backoffice component
for handling payroll processing, company and system setup, and
security.
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
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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
Ultimate Softwares UltiPro software (UltiPro)
is an end-to-end HR, payroll, benefits administration and talent
management solution designed to fit the needs of organizations
with 200 employees or larger. UltiPro delivers
functionality businesses need to manage the complete employment
life cycle, from recruiting and hiring the most qualified
candidates, to managing benefits programs and compensation
plans, to managing learning programs and performance reviews.
All features are delivered through a centralized Web portal that
is easy to access for businesses that are centralized at
headquarters or distributed across multiple locations or branch
offices. Ultimate Software believes that UltiPro helps customers
streamline HR and payroll processes to significantly reduce
administrative and operational costs, while also empowering
executives and staff to find critical information quickly and
perform routine business activities more efficiently.
UltiPros core functionality includes, but is not limited
to, a business/employee portal, human resources, benefits
administration, UltiPro business intelligence, payroll
processing, manager self-service, employee self-service,
administration and other key features such as, but not limited
to, tax updates, tax filing, time clocks and the ability to
interface with third-party applications and providers
(UltiPro Core).
In addition to UltiPro Core, the Companys customers have
the option to purchase a number of add-on products on a PEPM
basis, which are available to enhance the functionality of
UltiPro Core based on certain business needs of the customers.
These UltiPro add-on products currently include (i) the
talent management suite of products; (ii) benefits
enrollment; and (iii) time, attendance and scheduling
(collectively, UltiPro Add-On Products), which are
described below.
UltiPro
Core
UltiPro Core 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 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
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Health Insurance Portability & Accountability Act
confidentiality legislation for protecting sensitive data such
as employee social security numbers.
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 employee and employer
contributions, 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. UltiPro also allows
companies to maintain and administer paid time off benefits,
such as vacation (including calculating benefit accrual
amounts), track leave time taken, and facilitate the response to
employee leave requests.
UltiPro Business Intelligence. Using UltiPro
Business Intelligence tools, customers can provide their
managers and executives with Web access to a library of hundreds
of workforce-related reports, workforce analytics and
point-in-time
reporting, without installing reporting software on users
PCs or writing custom reports. With UltiPro Business
Intelligence, users can run and print pre-formatted reports for
the executive team or run instant queries on the Web for answers
to routine questions. UltiPro Business Intelligence also
delivers workforce analytics to enable managers to evaluate
workforce trends strategically on topics such as compensation,
turnover and overtime.
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 UltiPro, a companys central payroll
department, remote offices or multiple divisions can process
payroll with specific processing steps based on the exact needs
of the organization, and manage this process through a payroll
processing dashboard within the UltiPro portal. UltiPro includes
group time entry to allow customers supervisors or
managers to input and submit time at branch offices for their
teams as well as employee based timesheets for employees to
enter and submit their time to managers for review and approval.
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
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. UltiPro includes many tools designed
to streamline employee administration. Administration features
include workflow-based work events, standard reporting, and
system administration. Workflow work events features enable
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
7
rules, as well as enable system administrators to post company
communications, link to external Web sites from the UltiPro
portal, and, through UltiPros Color 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 clocks, banks, 401(k)
and benefit providers, check printing services and unemployment
management services; and disaster recovery services.
UltiPro
Add-On Products
UltiPro Add-On Products include, but are not limited to,
the following products, which are supplemental to UltiPro Core:
UltiPro Talent Management (UTM), is a suite
of add-on products comprised of Recruitment, Onboarding,
Performance Management, Learning Management and Compensation
Management, which are sold individually or as a product suite.
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.
Onboarding. UltiPro Onboarding is a comprehensive
Web-based tool that provides employers the ability to automate
the process of bringing a new employee into an organization.
Employees can be given a welcome package online as
part of a
step-by-step
process that is built into UltiPro Onboarding and is easily
configurable by the customer. It includes such activities as:
obtaining required government and procedural paperwork,
including electronic signatures and document storage;
provisioning necessary equipment and job-specific tools such as
office location, computer equipment, uniforms, etc.; ensuring
enrollment in necessary training programs; and instilling the
companys core values and business objectives.
Performance Management. UltiPro Performance
Management helps companies maximize talent development and
improve employee satisfaction by automating and enhancing the
performance process and using competency-based employee
development. UltiPros performance management streamlines
the processes of evaluating performance and completing
performance reviews, performing competency assessments,
identifying top performers for succession planning, and tracking
and executing coaching and development plans.
Learning Management. UltiPro Learning Management
provides 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 facilitates the training registration
process, tracks program costs, and records employee training
achievements. UltiPro Learning Management brings relevant
training options to employee and manager desktops. Employees can
view course schedules and descriptions and register online, and
managers can approve staff training requests over the Web.
UltiPro Learning Management is integrated with UltiPros
Performance Management so that competency-based learning goals
can be set during performance evaluation and coaching plans are
linked to upcoming training courses to ensure completion.
Compensation Management. UltiPros Compensation
Management programs (including variable pay programs)
accommodate pay scales or salary grades, help regulate merit
increases to stay on budget, and track and reports on global
compensation. UltiPro also provides salary planning and
budgeting tools for executives and managers to plan and
facilitate annual compensation increases or lump sum bonuses
based on assigned percent or dollar allocations eliminating the
need for manual reporting and spreadsheet distribution. These
tools include workflow review and approval for
roll-up and
final approval at the executive level.
8
Benefits Enrollment. With Benefits Enrollment,
employees can review their benefit choices and make selections
on the Web during defined open enrollment periods. Benefits
administrators can set up enrollment sessions over the Web and
use tools to monitor the enrollment progress. Benefits
Enrollment also guides employees through all of the benefit and
personal information changes necessary as a result of a life
event such as getting married, having a baby or moving. UltiPro
also facilitates the electronic feeds required for insurance
carriers and plan administrators, reducing the need for manual
reporting of employee census information, participant coverage,
and billing reconciliation.
Time, Attendance, and Scheduling. Through a
strategic partnership with Infor Corporation (formerly Workbrain
Corporation), Ultimate Software has the right to market and
distribute Infors time and attendance product, referred to
as Infor Express, to Ultimate Softwares customer base and
prospective customers as part of the UltiPro solution. Ultimate
Software has rebranded Infor Express as UltiPro Time and
Attendance, marketing the components as UltiPro Time and
Attendance, UltiPro Leave Management, and UltiPro Workforce
Scheduling (collectively, UTA). Ultimate 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.
Intersourcing Offering
The Company offers a hosting service, branded Intersourcing,
whereby Ultimate Software provides the hardware, infrastructure,
ongoing maintenance and
back-up
services for its customers at two data centers located in the
Miami, Florida and Atlanta, Georgia areas, respectively. Both
data centers are owned by AT&T. Management of the data
centers was provided to the Company by IBM until
November 1, 2007 when the Companys data center
management contract was assigned by IBM to Quality Technology
Services (QTS). QTS is one of the largest privately
held providers of data center facilities and management services
in the United States. The Companys hardware at the Atlanta
data center is scheduled to be moved to a data center owned and
operated by QTS in the Atlanta area in late March 2008.
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.
The Intersourcing Offering is primarily offered to two main
groups of customers, based on their relative sizes. Companies
with over 700 employees are sold the full Intersourcing
Offering solution, which contains all available functionality of
UltiPro Core. Companies with 200 to 700 employees receive
the newest Intersourcing offering, Workplace, which provides
limited functionality of UltiPro Core and is designed to give
customers a high degree of convenience since Ultimate Software
handles system setup, business rules, and other situations for
customers behind the scenes. Many companies of this
size do not have IT staff on-premises to help with system
issues. In addition, included with the Workplace offering is a
bundled service package which provides specific implementation
and training services to this customer group. All companies,
regardless of size, may purchase UltiPro Add-On Products, which
are offered on a subscription basis together with UltiPro.
9
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 2007, 2006 and 2005, the Company spent
$29.9 million, $24.3 million and $20.2 million,
respectively, on research and development activities. During
2007, 2006 and 2005, $1.7 million, $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 was 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 (SFAS) 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 ended when it was available for general release to
Ultimate Softwares customers in the fourth calendar
quarter of 2007.
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.
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
10
customer support center has received the Support Center
Practices Certification sponsored by the Service Strategies
Corporation (SSC) for the ninth 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, 2007, Ultimate Software provided its
software to more than 1,600 customers. 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 other services. No customer accounted for more
than 10% of total revenues in 2007, 2006 or 2005.
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 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 Requests
for Proposals (RFPs). 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
11
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 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, 2007, the Company had backlog of
$77.7 million compared to $60.0 million as of
December 31, 2006. The Company expects to fill
approximately $68.4 million of the backlog during 2008. 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.
12
Employees
As of December 31, 2007, the Company employed
747 persons, including 109 in sales and marketing, 261 in
professional services, 174 in research and development, 55 in
information technology, 28 in hosting services, 83 in customer
support and 37 in the HR, finance and legal departments. The
Company believes that its relationships with employees are good,
and that belief is validated by The Great Place to
Work®
Institute, Inc.s selection of Ultimate Software as one of
the 25 best medium-sized companies to work for in America in
each of the last three years, with Ultimate Software ranking
3rd in 2006 and 2007. 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
registration statements on
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 (SEC).
Information contained on Ultimate Softwares website is not
part of this report. You may record and copy any materials we
file with the SEC at the SECs Public Reference Room at
100 F Street, NE, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
The SEC also maintains an internet site that contains the
reports, proxy and information statements and other information
regarding us that we file with the SEC. You can access the
SECs website at www.sec.gov.
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.
13
As of December 31, 2007, 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:
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Size
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Lease
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Location
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(sq. ft.)
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Termination
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General Use
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Weston, FL HQ
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39,872
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1/31/2017
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Research and Development and Customer Support
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Weston, FL HQ
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21,392
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1/31/2018
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Sales Administration, Marketing, Executive Management and Finance
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Atlanta, GA (1)
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24,609
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7/31/2013
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Professional Services and Customer Support
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Weston, FL HQ (2)
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5,000
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Owned
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Information Technology and Hosting services
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Weston, FL HQ (3)
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9,000
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8/7/2008
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Professional Services and Research and Development
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Weston, FL HQ (4)
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30,000
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5/31/2015
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|
When property is ready for use and all personnel moves have been
made, it is expect to be used for: Sales Administration,
Marketing, Professional Services and Finance
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Toronto, Ontario (5)
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2,251
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9/30/2009
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Professional Services and Customer Support
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Harrogate, North Yorkshire, England (6)
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5,063
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2/20/2010
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UK Operations, including Research and Development, Professional
Services, Customer Support and Finance
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(1)
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During the second calendar 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.
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(2)
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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.
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(3)
|
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.
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(4)
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In January 2008, the Company entered into an
84-month
lease agreement for a fifth headquarters building located in
Weston, Florida within a short distance of the other four
headquarters locations. The Company plans to move a portion of
its operations into this building in approximately May or June
2008. The expected general use of this location will accommodate
the Companys current and expected growth in operations. At
the time of expected occupancy of this location, the Company
will modify the general use of the remaining four headquarter
locations.
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(5)
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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.
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(6)
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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;
San Clemente, California; Columbia, Maryland; Dallas,
Texas; Detroit, Michigan; Millburn,
14
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.
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|
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.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter of 2007.
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
Global Market.
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2007
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2006
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High
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Low
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|
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High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
28.30
|
|
|
$
|
21.79
|
|
|
$
|
26.00
|
|
|
$
|
19.17
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Second Quarter
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|
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30.27
|
|
|
|
25.68
|
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|
|
27.06
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|
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18.90
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Third Quarter
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|
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36.50
|
|
|
|
26.56
|
|
|
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24.45
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|
|
17.08
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Fourth Quarter
|
|
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36.63
|
|
|
|
30.50
|
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|
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26.37
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22.18
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As of February 15, 2008, the Company had approximately 135
holders of record, representing approximately 3,710 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
(which expired in May 2006 but which has an outstanding term
loan), 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.
15
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, 2007:
Equity
Compensation Plan Information
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(a)
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(c)
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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
|
|
|
4,591,870
|
|
|
$
|
13.31
|
|
|
|
2,379,642
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,591,870
|
|
|
$
|
13.31
|
|
|
|
2,379,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Performance Graph. The following graph
compares the cumulative total stockholder returns on the
Companys Common Stock for the five year period covering
December 31,
2002-December 31,
2007, on an annual basis, with the cumulative total return of
The Nasdaq Stock Market US Index (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 Market Index
And The RDG Software Composite Index
* $100 invested on 12/31/02 in stock or index-including
reinvestment of dividends.
Fiscal year ending December 31.
17
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 27,894 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 was subject to a downward adjustment based on the
measurement (as of October 5, 2007) of RTIXs
annual recurring revenues against a target amount established in
said agreement (the Measurement). Based on the
Measurement, the Company determined there was no downward
adjustment required under the terms of the Stock Purchase
Agreement and the Stock Consideration was recorded in the
Companys consolidated financial statements as of
October 5, 2007. The value of the Stock Consideration was
$1.0 million.
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).
On February 6, 2007, the Companys Board of Directors
extended the Stock Repurchase Plan by authorizing the repurchase
of up to 1,000,000 additional shares of the Companys
issued and outstanding Common Stock.
18
As of December 31, 2007, the Company had purchased
1,452,375 shares of the Companys Common Stock under
the Stock Repurchase Plan, with 547,625 available for repurchase
in the future. The details of Common Stock repurchases for the
twelve months ended December 31, 2007 are 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
|
|
Plans or Programs
|
|
January 1 31, 2007
|
|
|
|
|
|
|
|
290,563
|
February 1 28, 2007
|
|
62,000
|
|
26.79
|
|
771,437
|
|
1,228,563 (2)
|
March 1 31, 2007
|
|
103,600
|
|
26.37
|
|
875,037
|
|
1,124,963
|
April 1 30, 2007
|
|
|
|
|
|
875,037
|
|
1,124,963
|
May 1 31, 2007
|
|
95,200
|
|
27.76
|
|
970,237
|
|
1,029,763
|
June 1 30, 2007
|
|
23,500
|
|
28.09
|
|
993,737
|
|
1,006,263
|
July 1 31, 2007
|
|
|
|
|
|
993,737
|
|
1,006,263
|
August 1 31, 2007
|
|
276,238
|
|
29.90
|
|
1,269,975
|
|
730,025
|
September 1 30, 2007
|
|
94,400
|
|
31.66
|
|
1,364,375
|
|
635,625
|
October 1 31, 2007
|
|
|
|
|
|
1,364,375
|
|
635,625
|
November 1 30, 2007
|
|
88,000
|
|
34.20
|
|
1,452,375
|
|
547,625
|
December 1 31, 2007
|
|
|
|
|
|
1,452,375
|
|
547,625
|
|
|
|
|
|
|
Total
|
|
742,938
|
|
$29.25
|
|
1,452,375
|
|
547,625
|
|
|
|
|
|
|
(1) All shares were purchased through the publicly
announced Stock Repurchase Plan in open-market transactions.
(2) On February 6, 2007, the Company announced that
its Board of Directors authorized the repurchase of up to
1,000,000 additional shares of the Companys Common Stock
pursuant to the Stock Repurchase Plan.
On February 5, 2008, the Companys Board of Directors
extended the Stock Repurchase Plan further by authorizing the
repurchase of up to 1,000,000 additional shares of the
Companys Common Stock. As a result, an aggregate of
1,547,625 shares of Common Stock were available for
repurchase under the Stock Repurchase Plan as of
February 5, 2008. 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 repurchase transactions will depend on market conditions and
other business considerations.
19
|
|
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
Condition and Results of Operations and the Companys
Consolidated Financial Statements and Notes thereto included
elsewhere in this
Form 10-K.
The statements of income data presented below for each of the
years in the three-year period ended December 31, 2007 and
the balance sheet data as of December 31, 2007 and 2006
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 statements of income data below for the years ended
December 31, 2004 and December 2003 and the balance sheet
data as of December 31, 2005, 2004 and 2003 have been
derived from audited consolidated financial statements not
included herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
$
|
87,017
|
|
|
$
|
63,935
|
|
|
$
|
50,259
|
|
|
$
|
39,049
|
|
|
$
|
29,344
|
|
Services
|
|
|
49,857
|
|
|
|
38,617
|
|
|
|
27,894
|
|
|
|
24,924
|
|
|
|
23,478
|
|
License
|
|
|
14,590
|
|
|
|
12,259
|
|
|
|
10,450
|
|
|
|
8,055
|
|
|
|
7,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
151,464
|
|
|
|
114,811
|
|
|
|
88,603
|
|
|
|
72,028
|
|
|
|
60,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
22,798
|
|
|
|
17,875
|
|
|
|
13,740
|
|
|
|
11,961
|
|
|
|
9,495
|
|
Services
|
|
|
40,327
|
|
|
|
30,256
|
|
|
|
21,410
|
|
|
|
18,448
|
|
|
|
17,277
|
|
License
|
|
|
1,659
|
|
|
|
1,389
|
|
|
|
709
|
|
|
|
993
|
|
|
|
807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
64,784
|
|
|
|
49,520
|
|
|
|
35,859
|
|
|
|
31,402
|
|
|
|
27,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
86,680
|
|
|
|
65,291
|
|
|
|
52,744
|
|
|
|
40,626
|
|
|
|
32,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
36,479
|
|
|
|
29,382
|
|
|
|
21,783
|
|
|
|
20,630
|
|
|
|
17,788
|
|
Research and development
|
|
|
28,162
|
|
|
|
22,471
|
|
|
|
19,999
|
|
|
|
18,317
|
|
|
|
18,229
|
|
General and administrative
|
|
|
14,434
|
|
|
|
10,648
|
|
|
|
8,131
|
|
|
|
6,806
|
|
|
|
5,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
79,075
|
|
|
|
62,501
|
|
|
|
49,913
|
|
|
|
45,753
|
|
|
|
41,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
7,605
|
|
|
|
2,790
|
|
|
|
2,831
|
|
|
|
(5,127
|
)
|
|
|
(9,051
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(214
|
)
|
|
|
(195
|
)
|
|
|
(225
|
)
|
|
|
(182
|
)
|
|
|
(221
|
)
|
Other income, net
|
|
|
6,002
|
|
|
|
1,538
|
|
|
|
819
|
|
|
|
285
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
5,788
|
|
|
|
1,343
|
|
|
|
594
|
|
|
|
103
|
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
13,393
|
|
|
|
4,133
|
|
|
|
3,425
|
|
|
|
(5,024
|
)
|
|
|
(9,169
|
)
|
Income tax benefit, net
|
|
|
19,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
33,129
|
|
|
$
|
4,133
|
|
|
$
|
3,425
|
|
|
$
|
(5,024
|
)
|
|
$
|
(9,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share Basic (1)
|
|
$
|
1.34
|
|
|
$
|
0.17
|
|
|
$
|
0.15
|
|
|
$
|
(0.23
|
)
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share Diluted (1)
|
|
$
|
1.24
|
|
|
$
|
0.15
|
|
|
$
|
0.13
|
|
|
$
|
(0.23
|
)
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
|
|
24,701
|
|
|
|
23,853
|
|
|
|
23,040
|
|
|
|
21,743
|
|
|
|
18,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (1)
|
|
|
26,722
|
|
|
|
26,978
|
|
|
|
26,288
|
|
|
|
21,743
|
|
|
|
18,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,462
|
|
|
$
|
16,734
|
|
|
$
|
17,731
|
|
|
$
|
14,766
|
|
|
$
|
13,783
|
|
Investments in marketable securities
|
|
|
18,418
|
|
|
|
16,286
|
|
|
|
15,035
|
|
|
|
10,544
|
|
|
|
|
|
Total assets
|
|
|
135,156
|
|
|
|
93,530
|
|
|
|
69,581
|
|
|
|
52,546
|
|
|
|
35,812
|
|
Deferred revenue
|
|
|
51,708
|
|
|
|
42,969
|
|
|
|
33,031
|
|
|
|
28,476
|
|
|
|
24,610
|
|
Long-term borrowings, including capital lease obligations
|
|
|
2,311
|
|
|
|
1,610
|
|
|
|
1,828
|
|
|
|
1,231
|
|
|
|
796
|
|
Stockholders equity
|
|
|
60,978
|
|
|
|
31,022
|
|
|
|
23,546
|
|
|
|
13,524
|
|
|
|
1,661
|
|
|
|
|
(1) |
|
See Note 8 of the Notes to Consolidated Financial
Statements for information regarding the computation of net
income (loss) per share. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Our Managements Discussion and Analysis of Financial
Condition and Results of Operations provides information we
believe is relevant to an assessment and understanding of our
results of operations and financial condition. This discussion
should be read in conjunction with our Consolidated Financial
Statements and Notes that are included with this Annual Report
on
Form 10-K.
Also, the discussion of Critical Accounting Estimates in this
section is an integral part of the analysis of our results of
operations and financial condition.
Executive
Summary
Ultimate Software designs, markets, implements and supports
human resources, payroll and talent management solutions.
Ultimate Softwares UltiPro software (UltiPro)
is a comprehensive Web-based solution designed to deliver the
functionality businesses need to manage the employee life cycle,
from recruiting and hiring to compensating and managing benefits
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,
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 (defined below) offering, 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
21
recurring revenue sources include subscription revenues from
third-party business service providers (BSPs) and
recurring revenues from the Original Ceridian Agreement. (See
Original Ceridian Agreement below).
Ultimate Software offers hosting services at two separate data
center locations the original location in the Miami,
Florida area, which began operating in 2002, and the second
location in the Atlanta, Georgia area, which began operating in
August 2005. Both data centers are owned by AT&T.
Management of the data centers was provided to the Company by
IBM until November 1, 2007 when the Companys data
center management contract was assigned by IBM to Quality
Technology Services (QTS). QTS is one of the largest
privately held providers of data center facilities and
management services in the United States. The Companys
hardware at the Atlanta data center is scheduled to be moved to
a data center owned and operated by QTS in late March 2008. With
Intersourcing, Ultimate Software provides the hardware,
infrastructure, ongoing maintenance and
back-up
services for its customers at its data centers in the Atlanta
area. Intersourcing is designed to appeal to those customers
that want to minimize their internal technology support
requirements for the application and hardware.
Since 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; and (iii) recurring revenues from additional
sales to Ultimate Softwares existing client base. New
annual recurring revenues attributable to sales during 2007 were
$31.1 million as compared to $24.5 million for 2006.
The main contributors to the increase in new ARR were new sales
from the Companys Intersourcing Offering (including
prorated one-time fees, and add-on products) and, to a lesser
extent, an increase in annual recurring maintenance revenues
related to new license sales.
Original
Ceridian Agreement
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 Source Web. During December 2004,
RSM McGladrey Employer Services (RSM), a BSP of
Ultimate Software, acquired Ceridians Source Web
HR/payroll and self-service product and existing Source Web base
of small and mid-size business customers throughout the United
States (the RSM Acquisition). The financial terms of
the Original Ceridian Agreement were not changed as a result of
the RSM Acquisition. Subsequent to the RSM Acquisition, Ceridian
continued to be financially obligated to pay, and did pay,
Ultimate Software minimum fees pursuant to the terms of the
Original Ceridian Agreement.
The aggregate minimum payments that Ceridian was 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
$42.1 million under the Original Ceridian Agreement.
Ultimate Software expects to continue to recognize a minimum of
$642,000 per month in subscription revenues (a
22
component of recurring revenues) from the Original Ceridian
Agreement until its termination date. The amount of subscription
revenues recognized under the Original Ceridian Agreement during
the year ended December 31, 2007, totaling
$7.7 million, was the same as those recognized in 2006 and
2005. 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 terminated on March 9, 2008.
Critical
Accounting Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles in the United
States (GAAP) requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue
Recognition
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 services to host the UltiPro application (Hosting
Services) in conjunction with sales of perpetual licenses
of UltiPro;
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Sales of Hosting Services on a stand-alone basis to customers
who already own a perpetual license (Base Hosting);
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Recurring revenues derived from (1) maintenance revenues
generated from maintaining, supporting and providing periodic
updates for the Companys products under software license
agreements and (2) subscription revenues generated from per
employee per month (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 sales of BSPs;
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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.
|
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 income, 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
23
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
income 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 (defined below) and Training Valuation
(defined below). 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 and is subsequently adding Hosting Services or is
purchasing a perpetual license for UltiPro together with Hosting
Services, whereas, with Intersourcing, the customer is
purchasing the right to use (not license) UltiPro together with
Hosting Services. Implementation services provided for Base
Hosting arrangements, whereby the customer already owns a
perpetual license, are less than those provided for
Intersourcing arrangements since UltiPro is already implemented
in these Base Hosting arrangements and only needs to be
transitioned to a hosted environment. Fair value for Hosting
Services is based on the Hosting Valuation (defined below). 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.
As discussed above, subscription revenues from the Original
Ceridian Agreement of $642,000 per month were recognized in each
of the three years ended December 31, 2007 and are expected
to be recognized until the expiration of such agreement on
March 9, 2008.
24
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 as the services are provided to the underlying
customer. 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.
Sales of
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 audited consolidated
statements of income 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.
25
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 acceptance.
However, if conditions of acceptance are included in a contract
or uncertainty exists about customer acceptance of the software,
license revenue is deferred until acceptance occurs.
Sales of
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. 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.
Income
Taxes
The Company makes certain estimates and judgments in determining
income tax expense for financial statement purposes. These
estimates and judgments occur in the calculation of certain tax
assets and liabilities, which arise from differences in the
timing of recognition of revenue and expense for tax and
financial statement purposes.
The Company assesses the likelihood that it will be able to
recover its deferred tax assets. Management considers all
available evidence, both positive and negative, including
historical levels of income, expectations and risks associated
with estimates of future taxable income and ongoing prudent and
feasible tax planning strategies as well as current tax laws and
interpretation of current tax laws in assessing the need for a
valuation
26
allowance. If recovery is not likely, we record a valuation
allowance against the deferred tax assets that we estimate will
not ultimately be recoverable. The available positive evidence
at December 31, 2007 included three years of cumulative
historical operating profits and a projection of future income.
As a result of our analysis of all available evidence, both
positive and negative, at December 31, 2007, it was
considered more likely than not that a full valuation allowance
for deferred tax assets was not required, resulting in the
release of the valuation allowance for deferred tax assets and
generating a $19.9 million non-cash tax benefit recorded in
the consolidated statements of income during the fourth quarter
of 2007.
As of December 31, 2007, the Company believes it is more
likely than not that the amount of the deferred tax assets
recorded on the balance sheet as a result of the release of the
valuation allowance will ultimately be recovered. However,
should there be a change in the Companys ability to
recover the deferred tax assets, the tax provision would
increase in the period in which it is determined that recovery
is not probable.
Stock-Based
Compensation
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 SFAS No. 123, Accounting for
Stock-Based Compensation
(SFAS No. 123). 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 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
non-employee 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 non-employee
members of the Board for board services, recorded in accordance
with APB No. 25.
The Company accounts for stock based compensation in accordance
with SFAS 123R. 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.
For purposes of calculating and accounting for stock-based
compensation expense in accordance with SFAS 123R, the
Company makes a computation of expected volatility, 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 is based on
historical data.
27
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 income for the periods indicated (in thousands):
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|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cost of recurring revenues
|
|
$
|
635
|
|
|
$
|
394
|
|
|
$
|
6
|
|
Cost of services revenues
|
|
|
1,542
|
|
|
|
874
|
|
|
|
13
|
|
Cost of license revenues
|
|
|
5
|
|
|
|
6
|
|
|
|
|
|
Sales and marketing
|
|
|
4,617
|
|
|
|
2,967
|
|
|
|
395
|
|
Research and development
|
|
|
985
|
|
|
|
620
|
|
|
|
7
|
|
General and administrative
|
|
|
2,388
|
|
|
|
1,385
|
|
|
|
346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SBC
|
|
$
|
10,172
|
|
|
$
|
6,246
|
|
|
$
|
767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in capitalized software in the Companys
consolidated balance sheet at December 31, 2007 and 2006
was $42 thousand and $41 thousand, respectively, in stock-based
compensation incurred in the development of UltiPro Canada
during the fiscal years then ended. This amount would have
otherwise been charged to research and development expense for
the years ended December 31, 2007 and 2006.
28
Results
of Operations
The following table sets forth the consolidated statements of
income data of the Company, as a percentage of total revenues,
for the periods indicated.
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|
|
|
|
|
|
|
For the Years Ended December 31,
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|
|
2007
|
|
|
2006
|
|
|
2005
|
|
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Revenues:
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|
|
|
|
|
|
|
|
|
|
|
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Recurring
|
|
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57.5
|
%
|
|
|
55.7
|
%
|
|
|
56.7
|
%
|
Services
|
|
|
32.9
|
|
|
|
33.6
|
|
|
|
31.5
|
|
License
|
|
|
9.6
|
|
|
|
10.7
|
|
|
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
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|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
15.1
|
|
|
|
15.6
|
|
|
|
15.5
|
|
Services
|
|
|
26.6
|
|
|
|
26.4
|
|
|
|
24.2
|
|
License
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
42.8
|
|
|
|
43.2
|
|
|
|
40.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
57.2
|
|
|
|
56.8
|
|
|
|
59.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
24.1
|
|
|
|
25.5
|
|
|
|
24.5
|
|
Research and development
|
|
|
18.6
|
|
|
|
19.6
|
|
|
|
22.6
|
|
General and administrative
|
|
|
9.5
|
|
|
|
9.3
|
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
52.2
|
|
|
|
54.4
|
|
|
|
56.3
|
|
Operating income
|
|
|
5.0
|
|
|
|
2.4
|
|
|
|
3.2
|
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
Other income, net
|
|
|
4.0
|
|
|
|
1.3
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
3.9
|
|
|
|
1.2
|
|
|
|
0.7
|
|
Income before income tax benefit
|
|
|
8.9
|
|
|
|
3.6
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit, net
|
|
|
13.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
21.9
|
%
|
|
|
3.6
|
%
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Fiscal Years Ended December 31, 2007 and 2006
Revenues
The Companys revenues are derived from three principal
sources: recurring revenues, services revenues and license
revenues. See Revenue Recognition (above) for
further discussion of the Companys revenue sources and its
method of accounting for each of them.
Total revenues, consisting of recurring, services and license
revenues, increased 31.9% to $151.5 million for 2007 from
$114.8 million for 2006.
Recurring revenues increased 36.1% to $87.0 million for
2007 from $63.9 million for 2006. The increases in
recurring revenues for 2007 were primarily due to increases in
Intersourcing revenues and maintenance revenues.
29
|
|
|
|
a)
|
Intersourcing revenues increased primarily due to the continued
growth of the recurring revenues generated from previously sold
Intersourcing units which went Live after December 31,
2006. Recognition of recurring revenues for Intersourcing unit
sales commences upon Live date.
|
|
|
b)
|
Maintenance revenues increased due to additional maintenance
generated from incremental license sales since December 31,
2006. 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
96% for existing customers annual maintenance renewals in
2007 combined with the annual price increases that typically
accompany renewals also contributed to the increase in
maintenance revenues.
|
Services revenues increased 29.1% to $49.9 million for 2007
from $38.6 million for 2006 primarily as a result of an
increase of $10.4 million in implementation revenues and a
$1.2 million increase in training revenues. The increase in
implementation revenues in 2007 was primarily due to more
billable hours generated from our billable consultants
(including the impact of hiring additional billable consultants
during the year) and, to a lesser extent, from the increased use
of third-party implementation partners (or IPs).
These additional billable hours stemmed from an increase in unit
sales (particularly Intersourcing and certain add-on products),
partially offset by a lower net rate per hour. The increase in
training revenues was attributable to increased classroom
attendance and Web-based training, also tied to increased unit
sales.
License revenues increased 19.0% to $14.6 million for 2007
from $12.3 million for 2006. The increase in 2007 was
principally due to a higher average selling price due to
increased sales of UltiPro time and attendance
(UTA), an add-on product introduced in 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. 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 27.5% to $22.8 million
for 2007 from $17.9 million for 2006. The increase in the
cost of recurring revenues for 2007, 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), an increase
in the amortization of the purchased source code of the
integrated online recruitment/talent acquisition solution that
Ultimate has offered its customers since April 2005
(Recruitment) (which began amortizing in 2007), and
an increase in royalty fees and annual maintenance fees paid to
the third-party provider of UTA (tied to increased sales).
|
|
|
b)
|
The increase in maintenance costs was primarily related to
increased labor costs commensurate with the growth in the number
of customers served.
|
Cost of services revenues increased 33.3% to $40.3 million
for 2007 from $30.3 million for 2006. The increase in cost
of services revenues for 2007, was primarily due to an increase
in implementation labor costs
30
and IP costs. In response to the need to implement more units
(resulting from increased unit sales of UltiPro and add-on
products), during 2007, the Company hired additional
implementation personnel comprised of revenue-generating, or
billable, consultants and certain related managerial
personnel. In addition, the Company increased its use of IPs to
assist in handling the increased demand for implementing UltiPro
and add-on products.
Cost of license revenues increased 19.4% to $1.7 million
for 2007 from $1.4 million for 2006. The increase in cost
of license revenues for 2007 was principally due to higher
royalties paid to third-party vendors for products sold in
conjunction with UltiPro.
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 24.2% to $36.5 million for 2007 from
$29.4 million for 2006. The $7.1 million increase in
2007 was principally due to increased sales commissions of
$1.8 million and other additional labor costs (including a
$1.7 million increase of stock-based compensation in 2007),
partly attributable to hiring additional sales personnel.
Included in sales and marketing expenses was stock-based
compensation expense of $4.6 million in 2007 as compared to
$3.0 million in 2006. Sales commissions increased primarily
from Intersourcing revenues, correlating with the growth in that
revenue source. Sales commissions on Intersourcing sales are
amortized over the initial contract term (typically
24 months) commencing on the 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
performance placed them at higher commission rates than in the
prior year.
Research
and Development
Research and development expenses consist primarily of software
development personnel costs. Research and development expenses
increased 25.3% to $28.2 million in 2007 from
$22.5 million in 2006. Excluding the impact of capitalized
labor costs associated with the development of UltiPro Canadian
HR/payroll (UltiPro Canada), which totaled
$1.7 million for 2007, research and development expenses
increased $5.6 million in comparison to 2006, principally
due to higher labor costs, related to an increase in headcount
and, to a lesser extent, an increase in third-party consulting
costs. Included in research and development expenses was
stock-based compensation expense of $1.0 million in 2007 as
compared to $0.6 million in 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
Canada functionality in November 2005, when technological
feasibility was attained. UltiPro Canada was 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). The Company has capitalized
additional research and development costs relative to the
UltiPro Canada project through its general release, which
occurred during the fourth quarter of 2007, at which time
capitalization ceased under SFAS No. 86 guidelines.
The Company capitalized a total of $1.7 million in 2007, as
compared to $1.8 million in 2006, 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. General and administrative
expenses increased 35.6% to $14.4 million for 2007 from
$10.6 million for 2006. The increase for 2007 was primarily
due to increased labor costs attributable to hiring additional
personnel to support the Companys growth and annual merit
increases, an increase in the provision for doubtful accounts
and an increase in accounting and legal expenses related to
compliance with new accounting and legal requirements.
31
Also, included in general and administrative expenses was
stock-based compensation expense of $2.4 million in 2007,
as compared to $1.4 million in 2006, and amortization of
intangible assets of $0.2 million in 2007 as compared to
$54 thousand in 2006.
Interest
Expense
Interest expense increased 9.7% to $214 thousand for 2007 from
$195 thousand for 2006 primarily due to an increase in payments
of capital lease obligations from additional capital leases
entered into during 2007. There were no borrowings made in 2007.
Interest
and Other Income, net
Interest and other income, net, increased significantly to
$6.0 million for 2007 from $1.5 million for 2006
primarily due a non-recurring cash settlement fee of
$4.4 million, net of related costs, resulting from the
early termination of a multi-year business arrangement with one
of our BSPs that decided to exit the payroll business (the
Non-Recurring Settlement).
Income
Tax Benefit, net
During the year ended December 31, 2007, the Company
recorded an income tax benefit of $19.9 million primarily
related to the release of the valuation allowance against
deferred tax assets, partially offset by a provision for income
tax of $115 thousand as compared to no provision or benefit for
Federal, state or foreign income taxes for the year ended
December 31, 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, 2007, expiring at various times from 2011
through the year 2027 and which are available to offset future
taxable income, approximated $71.9 million. The timing and
levels of future profitability may result in the expiration of
net operating loss carryforwards before utilization.
Additionally, utilization of such net operating losses may be
limited as a result of cumulative ownership changes in the
Companys equity instruments.
Comparison
of Fiscal Years Ended December 31, 2006 and
2005
Revenues
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 primarily due to an
increase in revenues generated from the Intersourcing Offering
and an increase in maintenance revenues.
|
|
|
|
a)
|
Intersourcing revenues increased primarily due to incremental
recurring revenues generated from additional (previously sold)
Intersourcing units which went Live since December 31, 2005.
|
|
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. 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.
|
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. The increase in
implementation revenues is principally a result of additional
billable hours stemming from an increase in the number of
billable (i.e., revenue-generating) consultants (associated with
incremental units sold), as well as a higher net rate per hour.
In addition, the Company used IPs significantly more in
2006 than in 2005 to assist in handling the increased demand for
implementations due to increased sales,
32
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.
License revenues increased 17.3% to $12.3 million for 2006
from $10.5 million for 2005 primarily due to one larger
than average license unit sold during 2006 and a higher average
selling price per unit of UltiPro. There were also license sales
of add-on products (i.e., products sold with UltiPro, which have
an incremental fee), including Recruitment and UTA.
Cost of
Revenues
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. 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. In October 2006,
the Company acquired the rights to the source code from First
Advantage Corporation for its third-party Recruitment product.
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 is amortizing 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. The increase in maintenance costs was
primarily related to increased labor costs commensurate with the
growth in the number of customers served.
Cost of services revenues increased 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 UTA.
Sales and
Marketing
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). Sales
commissions increased on both license revenues as well as
Intersourcing revenues, correlating with the growth in those
revenue sources.
Research
and Development
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 staffing needs related to the ongoing
development of UltiPro Canada, increased development for
UltiPro, including product enhancements and additional
functionality, as
33
well as annual merit increases, and to a lesser extent,
$0.6 million of stock-based compensation expense for 2006.
General
and Administrative
General and administrative expenses increased 31.0% to
$10.6 million for 2006 from $8.1 million for 2005. The
$2.5 million increase in general and administrative
expenses 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 compared to
$0.3 million in 2005.
Interest
Expense
Interest expense decreased 13.3% to $195 thousand for 2006 from
$225 thousand 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 thousand for 2005 primarily due to an
increase in interest rates as well as interest income on
additional cash available for investments.
Provision
for Income Taxes
No provision or benefit for Federal, state or foreign income
taxes was made for 2006 or 2005 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 from 2011
through the year 2026 and which are available to offset future
taxable income, approximated $75.6 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.
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, 2007 and 2006. 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
34
quarterly fluctuations, quarter-to-quarter 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,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
(In thousand, except per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
$
|
24,297
|
|
|
$
|
22,174
|
|
|
$
|
21,075
|
|
|
$
|
19,471
|
|
|
$
|
17,478
|
|
|
$
|
16,487
|
|
|
$
|
15,531
|
|
|
$
|
14,439
|
|
Services
|
|
|
14,084
|
|
|
|
12,312
|
|
|
|
11,274
|
|
|
|
12,187
|
|
|
|
12,645
|
|
|
|
9,410
|
|
|
|
8,335
|
|
|
|
8,227
|
|
License
|
|
|
3,761
|
|
|
|
3,337
|
|
|
|
2,608
|
|
|
|
4,884
|
|
|
|
2,919
|
|
|
|
2,882
|
|
|
|
4,472
|
|
|
|
1,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
42,142
|
|
|
|
37,823
|
|
|
|
34,957
|
|
|
|
36,542
|
|
|
|
33,042
|
|
|
|
28,779
|
|
|
|
28,338
|
|
|
|
24,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
6,189
|
|
|
|
5,630
|
|
|
|
5,480
|
|
|
|
5,499
|
|
|
|
4,836
|
|
|
|
4,602
|
|
|
|
4,325
|
|
|
|
4,112
|
|
Services
|
|
|
10,888
|
|
|
|
10,066
|
|
|
|
9,081
|
|
|
|
10,292
|
|
|
|
9,601
|
|
|
|
7,287
|
|
|
|
6,404
|
|
|
|
6,964
|
|
License
|
|
|
633
|
|
|
|
352
|
|
|
|
265
|
|
|
|
409
|
|
|
|
423
|
|
|
|
319
|
|
|
|
391
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
17,710
|
|
|
|
16,048
|
|
|
|
14,826
|
|
|
|
16,200
|
|
|
|
14,860
|
|
|
|
12,208
|
|
|
|
11,120
|
|
|
|
11,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
24,432
|
|
|
|
21,775
|
|
|
|
20,131
|
|
|
|
20,342
|
|
|
|
18,182
|
|
|
|
16,571
|
|
|
|
17,218
|
|
|
|
13,320
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
10,214
|
|
|
|
9,040
|
|
|
|
8,442
|
|
|
|
8,783
|
|
|
|
7,670
|
|
|
|
7,222
|
|
|
|
7,548
|
|
|
|
6,942
|
|
Research and development
|
|
|
7,221
|
|
|
|
7,107
|
|
|
|
6,663
|
|
|
|
7,171
|
|
|
|
5,937
|
|
|
|
5,887
|
|
|
|
5,273
|
|
|
|
5,374
|
|
General and administrative
|
|
|
4,089
|
|
|
|
3,645
|
|
|
|
3,253
|
|
|
|
3,447
|
|
|
|
3,124
|
|
|
|
2,526
|
|
|
|
2,556
|
|
|
|
2,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
21,524
|
|
|
|
19,792
|
|
|
|
18,358
|
|
|
|
19,401
|
|
|
|
16,731
|
|
|
|
15,635
|
|
|
|
15,377
|
|
|
|
14,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
2,908
|
|
|
|
1,983
|
|
|
|
1,773
|
|
|
|
941
|
|
|
|
1,451
|
|
|
|
936
|
|
|
|
1,841
|
|
|
|
(1,438
|
)
|
Interest expense
|
|
|
(53
|
)
|
|
|
(61
|
)
|
|
|
(53
|
)
|
|
|
(47
|
)
|
|
|
(43
|
)
|
|
|
(52
|
)
|
|
|
(60
|
)
|
|
|
(40
|
)
|
Interest and other income
|
|
|
400
|
|
|
|
433
|
|
|
|
4,774
|
|
|
|
395
|
|
|
|
390
|
|
|
|
419
|
|
|
|
390
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
347
|
|
|
|
372
|
|
|
|
4,721
|
|
|
|
348
|
|
|
|
347
|
|
|
|
367
|
|
|
|
330
|
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
3,255
|
|
|
|
2,355
|
|
|
|
6,494
|
|
|
|
1,289
|
|
|
|
1,798
|
|
|
|
1,303
|
|
|
|
2,171
|
|
|
|
(1,139
|
)
|
Income tax benefit (expense), net (1)
|
|
|
19,851
|
|
|
|
|
|
|
|
(85
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
23,106
|
|
|
$
|
2,355
|
|
|
$
|
6,409
|
|
|
$
|
1,259
|
|
|
$
|
1,798
|
|
|
$
|
1,303
|
|
|
$
|
2,171
|
|
|
$
|
(1,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
24,742
|
|
|
|
24,764
|
|
|
|
24,713
|
|
|
|
24,527
|
|
|
|
24,270
|
|
|
|
24,130
|
|
|
|
24,078
|
|
|
|
23,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
26,803
|
|
|
|
27,692
|
|
|
|
27,571
|
|
|
|
27,383
|
|
|
|
27,229
|
|
|
|
27,030
|
|
|
|
27,311
|
|
|
|
23,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share Basic
|
|
$
|
0.93
|
|
|
$
|
0.10
|
|
|
$
|
0.26
|
|
|
$
|
0.05
|
|
|
$
|
0.07
|
|
|
$
|
0.05
|
|
|
$
|
0.09
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.86
|
|
|
$
|
0.09
|
|
|
$
|
0.23
|
|
|
$
|
0.05
|
|
|
$
|
0.07
|
|
|
$
|
0.05
|
|
|
$
|
0.08
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During the fourth quarter of 2007, the Company released its
valuation allowance for certain deferred tax assets resulting in
a $19.9 million non-cash tax benefit recorded in the
consolidated statements of income. See Note 17 of the Notes
to Consolidated Financial Statements for further discussion. |
Liquidity
and Capital Resources
In recent years, the Company has funded operations from cash
flows generated from operations and, to a lesser extent,
equipment financing and borrowing arrangements.
35
As of December 31, 2007, the Company had $35.9 million
in cash, cash equivalents and total investments in marketable
securities, reflecting a net increase of $2.9 million since
December 31, 2006. The $2.9 million increase is due to
cash generated from operations of $29.1 million (which
included the Non-Recurring Settlement of $4.5 million in
cash received in the second quarter of 2007), partially offset
by an increase in cash used for stock repurchases of
$14.3 million (net of proceeds from the issuance of Common
Stock from stock option exercises) which were made pursuant to
the Stock Repurchase Plan, an increase in capital expenditures,
including cash purchases of property and equipment, as well as
principal payments on financed equipment totaling
$10.2 million and an increase in capitalized software of
$1.7 million, which was mostly attributable to development
labor costs.
Net cash provided by operating activities was $29.1 million
for 2007 as compared to $15.4 million for 2006. The
$13.7 million increase was primarily due to increased funds
generated from operations related to increased sales and the
receipt of the Non-Recurring Settlement, partially offset by
increased prepaid sales commissions (predominantly
Intersourcing-related). 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 $11.3 million for
2007 as compared to $13.0 million for 2006. The decrease of
$1.7 million in net cash used in investing activities was
primarily due to the decrease in cash payments made for the
acquisition of RTIX in 2006 ($3.6 million in 2006 compared
to $24 thousand in 2007), partially offset by an increase in
cash purchases of property and equipment of $1.1 million
and a net increase in investments in marketable securities of
$0.9 million.
Net cash used in financing activities was $17.2 million for
2007 as compared to $3.4 million for 2006. The
$13.8 million increase in net cash used in financing
activities was primarily related to increased repurchases of
Common Stock of $12.2 million combined with a
$1.0 million reduction in proceeds from the issuance of
Common Stock from stock option exercises and an increase of
$0.6 million in principal payments on financed equipment.
Days sales outstanding, calculated on a trailing three-month
basis (DSO), as of December 31, 2007 and 2006,
were 76 days and 74 days, respectively. The increase
in DSOs as of December 31, 2007 is discussed below.
Deferred revenues of $51.7 million at December 31,
2007 increased by $8.7 million as compared to
December 31, 2006 primarily due to increased sales from
Intersourcing operations (which originate deferred revenues upon
contract execution for the upfront fees and initial PEPM fees)
and, to a lesser extent, due to an increase in deferred
maintenance. Substantially all of the total balance in deferred
revenues is related to future recurring revenues, including
those from Intersourcing. With respect to Intersourcing unit
sales, the increase in deferred revenues creates a corresponding
increase in accounts receivable in relation to contracted
upfront fees and PEPM fees due within a short period of time
from the contract date, which impacts DSOs and which
contributed to the increase in DSOs of 2 days
compared to December 31, 2006.
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
$0.3 million under the Equipment Loan as of
December 31, 2007 is payable on or before December 31,
2008 under the payment terms of such agreement. As of
December 31, 2007, the Company was in compliance with all
covenants included in the terms of the Credit Facility.
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
36
is based upon, among other factors, managements
expectations for future revenue growth, controlled expenses and
collections of accounts receivable.
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.
Contractual
Obligations
As of December 31, 2007, the Companys outstanding
contractual cash obligations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
4-5
|
|
|
After 5
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Capital lease obligations (1)
|
|
$
|
4,073
|
|
|
$
|
2,056
|
|
|
$
|
2,017
|
|
|
$
|
|
|
|
$
|
|
|
Other long-term obligations (2)
|
|
|
24,654
|
|
|
|
3,197
|
|
|
|
6,003
|
|
|
|
5,958
|
|
|
|
9,496
|
|
Purchase obligations (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities (4)
|
|
|
892
|
|
|
|
572
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
29,619
|
|
|
$
|
5,825
|
|
|
$
|
8,340
|
|
|
$
|
5,958
|
|
|
$
|
9,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company leases certain equipment under non-cancelable
agreements, which are accounted for as capital leases and expire
at various dates through 2010. See Note 15 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 19 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) |
|
As of December 31, 2007, the Company had an outstanding
balance of $0.3 million under the Equipment Loan of the
Credit Facility, which is payable on or before December 31,
2008 under the payment terms of such agreement (see Liquidity
and Capital Resources for further discussion). The remaining
balance of $0.3 million in other long-term liabilities is
related to the long-term installment loan agreement that was
entered into during 2007 with a third-party vendor to acquire
computer software, of which, $0.3 million is payable on or
before September 1, 2008 and $0.3 million is payable
on or before September 1, 2009. |
|
|
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;
|
37
|
|
|
|
|
Maximum yields in relationship to guidelines and market
conditions;
|
|
|
|
Diversification of risks; and
|
|
|
|
Fiduciary control of all investments.
|
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 Investor Service, Inc. (Moodys)
and A-1 by
Standard & Poors Ratings Service, a Division of
The McGraw-Hill Companies, Inc. (S&P). Other
corporate debt obligations must carry a minimum rating of
A-2 by
Moodys or A by 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, 2007 under the Credit
Facility. As of December 31, 2007, there was no amount
outstanding under the Credit Facilitys Revolver and
$0.3 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 December 31, 2008.
As of December 31, 2007, total investments in
available-for-sale marketable securities were
$18.4 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, 2007,
virtually all of the investments in the Companys portfolio
were at fixed rates (with a weighted average interest rate of
5.0% 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, 2007 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 $65,000 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 $65,000 over
the next 12 months.
Foreign currency risk. The Company has foreign
currency risks related to its revenue and operating expenses
denominated in currencies other than the U.S. dollar.
Management does not believe movements in the foreign currencies
in which the Company transacts business will significantly
affect future net earnings.
38
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
INDEX
|
|
|
|
|
|
|
Page(s)
|
|
|
|
|
40
|
|
|
|
|
41
|
|
|
|
|
42
|
|
|
|
|
43
|
|
|
|
|
44
|
|
|
|
|
45
|
|
39
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, 2007 and 2006, and
the related consolidated statements of income,
stockholders equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
December 31, 2007. 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,
2007 and 2006 and the results of their operations and their cash
flows for each of the years in the three-year period ended
December 31, 2007, in conformity with U.S. generally
accepted accounting principles.
As discussed in Notes 3 and 18 to the consolidated
financial statements, effective January 1, 2006, the
Company adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based
Payment. Also, as discussed in Note 22 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
Companys internal control over financial reporting as of
December 31, 2007, 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 13, 2008,
expressed an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
KPMG LLP
March 13, 2008
Miami, Florida
Certified Public Accountants
40
THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,462
|
|
|
$
|
16,734
|
|
Short-term investments in marketable securities
|
|
|
17,120
|
|
|
|
14,247
|
|
Accounts receivable, net of allowance for doubtful accounts of
$700 and $500 for 2007 and 2006, respectively
|
|
|
34,658
|
|
|
|
26,575
|
|
Prepaid expenses and other current assets
|
|
|
9,801
|
|
|
|
8,611
|
|
Deferred tax assets, net
|
|
|
3,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
82,557
|
|
|
|
66,167
|
|
Property and equipment, net
|
|
|
18,238
|
|
|
|
13,480
|
|
Capitalized software, net
|
|
|
3,631
|
|
|
|
2,055
|
|
Goodwill
|
|
|
4,063
|
|
|
|
2,734
|
|
Long-term investments in marketable securities
|
|
|
1,298
|
|
|
|
2,039
|
|
Other assets, net
|
|
|
9,365
|
|
|
|
7,055
|
|
Long-term deferred tax assets, net
|
|
|
16,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
135,156
|
|
|
$
|
93,530
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,528
|
|
|
$
|
3,894
|
|
Accrued expenses
|
|
|
11,405
|
|
|
|
9,230
|
|
Current portion of deferred revenue
|
|
|
43,262
|
|
|
|
36,524
|
|
Current portion of capital lease obligations
|
|
|
2,002
|
|
|
|
1,512
|
|
Current portion of long-term debt
|
|
|
572
|
|
|
|
505
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
60,769
|
|
|
|
51,665
|
|
Deferred revenue, net of current portion
|
|
|
8,446
|
|
|
|
6,445
|
|
Deferred rent
|
|
|
2,652
|
|
|
|
2,788
|
|
Capital lease obligations, net of current portion
|
|
|
1,991
|
|
|
|
1,416
|
|
Long-term debt, net of current portion
|
|
|
320
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
74,178
|
|
|
|
62,508
|
|
Commitments and contingencies (Note 19)
|
|
|
|
|
|
|
|
|
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, 26,219,789 and 25,102,824 shares issued in 2007
and 2006, respectively
|
|
|
262
|
|
|
|
251
|
|
Additional paid-in capital
|
|
|
143,913
|
|
|
|
125,121
|
|
Accumulated other comprehensive (loss) income
|
|
|
(18
|
)
|
|
|
1
|
|
Accumulated deficit
|
|
|
(50,371
|
)
|
|
|
(83,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
93,786
|
|
|
|
41,873
|
|
Treasury stock, at cost, 1,452,375 and 709,437 shares in
2007 and 2006, respectively
|
|
|
(32,808
|
)
|
|
|
(10,851
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
60,978
|
|
|
|
31,022
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
135,156
|
|
|
$
|
93,530
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
41
THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
$
|
87,017
|
|
|
$
|
63,935
|
|
|
$
|
50,259
|
|
Services
|
|
|
49,857
|
|
|
|
38,617
|
|
|
|
27,894
|
|
License
|
|
|
14,590
|
|
|
|
12,259
|
|
|
|
10,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
151,464
|
|
|
|
114,811
|
|
|
|
88,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
22,798
|
|
|
|
17,875
|
|
|
|
13,740
|
|
Services
|
|
|
40,327
|
|
|
|
30,256
|
|
|
|
21,410
|
|
License
|
|
|
1,659
|
|
|
|
1,389
|
|
|
|
709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
64,784
|
|
|
|
49,520
|
|
|
|
35,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
86,680
|
|
|
|
65,291
|
|
|
|
52,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
36,479
|
|
|
|
29,382
|
|
|
|
21,783
|
|
Research and development
|
|
|
28,162
|
|
|
|
22,471
|
|
|
|
19,999
|
|
General and administrative
|
|
|
14,434
|
|
|
|
10,648
|
|
|
|
8,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
79,075
|
|
|
|
62,501
|
|
|
|
49,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
7,605
|
|
|
|
2,790
|
|
|
|
2,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(214
|
)
|
|
|
(195
|
)
|
|
|
(225
|
)
|
Other income, net
|
|
|
6,002
|
|
|
|
1,538
|
|
|
|
819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
5,788
|
|
|
|
1,343
|
|
|
|
594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax benefit
|
|
|
13,393
|
|
|
|
4,133
|
|
|
|
3,425
|
|
Income tax benefit, net
|
|
|
19,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,129
|
|
|
$
|
4,133
|
|
|
$
|
3,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.34
|
|
|
$
|
0.17
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.24
|
|
|
$
|
0.15
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
24,701
|
|
|
|
23,853
|
|
|
|
23,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
26,722
|
|
|
|
26,978
|
|
|
|
26,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
42
THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE
INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Loss) Income
|
|
|
Deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
Equity
|
|
|
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 22)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,129
|
|
|
|
|
|
|
|
|
|
|
|
33,129
|
|
Unrealized loss on investments in marketable securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
Unrealized loss on foreign exchange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
743
|
|
|
|
(21,957
|
)
|
|
|
(21,957
|
)
|
Issuances of Common Stock from exercises of stock options and
warrants
|
|
|
1,117
|
|
|
|
11
|
|
|
|
8,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,589
|
|
Non-cash stock-based compensation expense for stock options and
restricted stock
|
|
|
|
|
|
|
|
|
|
|
10,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
26,220
|
|
|
$
|
262
|
|
|
$
|
143,913
|
|
|
$
|
(18
|
)
|
|
$
|
(50,371
|
)
|
|
|
1,452
|
|
|
$
|
(32,808
|
)
|
|
$
|
60,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
43
THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,129
|
|
|
$
|
4,133
|
|
|
$
|
3,425
|
|
Adjustments to reconcile net income to net cash provided by
operating activities, net of effects from business combination:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,068
|
|
|
|
5,371
|
|
|
|
4,426
|
|
Provision for doubtful accounts
|
|
|
1,505
|
|
|
|
813
|
|
|
|
869
|
|
Non-cash expense for stock based compensation
|
|
|
10,172
|
|
|
|
6,246
|
|
|
|
767
|
|
Deferred income taxes
|
|
|
(19,851
|
)
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(9,588
|
)
|
|
|
(8,940
|
)
|
|
|
(6,395
|
)
|
Prepaid expenses and other current assets
|
|
|
(1,190
|
)
|
|
|
(2,712
|
)
|
|
|
(2,412
|
)
|
Other assets, net
|
|
|
(2,517
|
)
|
|
|
(3,484
|
)
|
|
|
(1,066
|
)
|
Accounts payable
|
|
|
(366
|
)
|
|
|
1,021
|
|
|
|
411
|
|
Accrued expenses
|
|
|
2,039
|
|
|
|
3,365
|
|
|
|
817
|
|
Deferred revenue
|
|
|
8,739
|
|
|
|
9,617
|
|
|
|
4,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
29,140
|
|
|
|
15,430
|
|
|
|
5,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(20,036
|
)
|
|
|
(22,208
|
)
|
|
|
(21,421
|
)
|
Maturities of marketable securities
|
|
|
17,890
|
|
|
|
20,990
|
|
|
|
16,914
|
|
Purchases of property and equipment
|
|
|
(7,429
|
)
|
|
|
(6,367
|
)
|
|
|
(3,022
|
)
|
Capitalized software
|
|
|
(1,653
|
)
|
|
|
(1,801
|
)
|
|
|
(182
|
)
|
Payments for acquisition
|
|
|
(24
|
)
|
|
|
(3,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(11,252
|
)
|
|
|
(13,013
|
)
|
|
|
(7,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of Common Stock
|
|
|
(21,957
|
)
|
|
|
(9,797
|
)
|
|
|
|
|
Principal payments on capital lease obligations
|
|
|
(2,045
|
)
|
|
|
(1,717
|
)
|
|
|
(1,318
|
)
|
Net proceeds from issuances of Common Stock
|
|
|
7,617
|
|
|
|
8,602
|
|
|
|
5,846
|
|
Borrowings under Credit Facility
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Repayments of borrowings of long term debt
|
|
|
(768
|
)
|
|
|
(501
|
)
|
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(17,153
|
)
|
|
|
(3,413
|
)
|
|
|
5,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(7
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
728
|
|
|
|
(997
|
)
|
|
|
2,965
|
|
Cash and cash equivalents, beginning of year
|
|
|
16,734
|
|
|
|
17,731
|
|
|
|
14,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
17,462
|
|
|
$
|
16,734
|
|
|
$
|
17,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
96
|
|
|
$
|
102
|
|
|
$
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
75
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing
activities:
|
|
-
|
The Company entered into capital lease obligations to acquire
new equipment totaling $3,109, $2,285 and $1,797 in 2007, 2006
and 2005, respectively.
|
|
-
|
The Company included in capitalized software on the
Companys consolidated balance sheet a total of $42 and $41
in stock-based compensation incurred in the development of
UltiPro Canada at December 31, 2007 and 2006, respectively.
There was no stock-based compensation capitalized in 2005.
|
|
-
|
The Company entered into a long-term installment loan agreement
with a third-party vendor to acquire computer software totaling
$961 during the year ended December 31, 2007.
|
|
-
|
The Company satisfied its agreement for the 2006 purchase of
RTIX during the year ended December 31, 2007 with a stock
consideration payment valued at $972.
|
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
44
The Ultimate Software Group, Inc. and subsidiaries
(Ultimate Software or the Company)
designs, markets, implements and supports human resources,
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.
|
|
2.
|
Basis of
Presentation, Consolidation and the Use of Estimates
|
The accompanying consolidated financial statements of the
Company have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission (the SEC).
The consolidated financial statements included herein reflect
all adjustments (consisting only of normal, recurring
adjustments), which are, in the opinion of the Companys
management, necessary for a fair presentation of the information
for the periods presented. The preparation of financial
statements in conformity with generally accepted accounting
principles in the United States (GAAP) requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
The consolidated financial statements reflect the financial
position and operating results of the Company and include its
wholly-owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
The consolidated financial statements reflect certain
reclassifications from other assets, net to prepaid expenses and
other current assets for certain deposits to conform to the 2007
presentation.
|
|
3.
|
Summary
of Significant Accounting Policies and Recent Accounting
Pronouncements
|
Cash and
Cash Equivalents
All highly liquid instruments with an original maturity of three
months or less when acquired are considered cash equivalents and
are comprised of interest-bearing accounts.
Accounts
Receivable
Accounts receivable are principally from end-users of 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 receivable. A considerable amount of
judgment is required when the realization of receivables is
assessed, including assessing the probability of collection and
current credit-worthiness of each customer. If the financial
condition of 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.
Fair
Value of Financial Instruments
The Companys financial instruments, consisting of cash and
cash equivalents, investments in marketable securities, accounts
receivable, accounts payable, and capital lease obligations,
approximated fair value as of December 31, 2007 and 2006.
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
45
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.
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 and
determined goodwill had not been impaired as of
December 31, 2007. Statement of Financial Accounting
Standards (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 (defined below). The Company is
currently amortizing its acquired intangible assets with finite
lives over periods ranging from five to six years. See
Note 10 for further discussion.
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, 2007, 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, 2007, 2006 and 2005, the
Company made no material adjustments to its long-lived assets.
Property
and Equipment
Property and equipment is stated at cost, net of accumulated
depreciation and amortization. Property and equipment is
depreciated using the straight-line method over the estimated
useful lives of the assets, which range from two to twenty
years. Leasehold improvements and assets under capital leases
are amortized over the shorter of the life of the asset or the
term of the lease over periods ranging from 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,
2007
|
|
|
December 31,
2006
|
|
|
Property and equipment
|
|
$
|
52,611
|
|
|
$
|
41,173
|
|
Less: accumulated depreciation and amortization
|
|
|
34,373
|
|
|
|
27,693
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,238
|
|
|
$
|
13,480
|
|
|
|
|
|
|
|
|
|
|
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.
46
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 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
No. 154), which replaced APB Opinion No. 20,
Accounting Changes (APB No. 20) and
FASB Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements (SFAS No. 3)
effective December 31, 2006. APB No. 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 No. 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 No. 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 No. 154 to be part of a broader attempt to
eliminate differences with the International Accounting
Standards Board (IASB). The adoption of SFAS
No. 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.
Revenue
Recognition
Sources of revenue for the Company include:
|
|
|
|
|
Sales of the right to use UltiPro software (UltiPro)
through Intersourcing (the Intersourcing Offering),
which includes Hosting Services (defined below);
|
|
|
|
Sales of services to host the UltiPro application (Hosting
Services) in conjunction with sales of perpetual licenses
of UltiPro;
|
|
|
|
Sales of Hosting Services on a stand-alone basis to customers
who already own a perpetual license (Base Hosting);
|
47
|
|
|
|
|
Recurring revenues derived from (1) maintenance revenues
generated from maintaining, supporting and providing periodic
updates for the Companys products under software license
agreements and (2) subscription revenues generated from per
employee per month (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 business service provider
(BSP) sales channel;
|
|
|
|
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 income, 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
income as the services are performed. Under EITF
No. 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 (defined below) and Training Valuation
(defined below). 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
No. 00-21
to Intersourcing arrangements as opposed to applying Statement
of Position (SOP)
97-2,
Software Revenue Recognition, (SOP
No. 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
No. 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 and is subsequently adding Hosting Services or is
purchasing a perpetual license for UltiPro together with Hosting
Services, whereas, with Intersourcing, the customer is
purchasing the right to use (not license) UltiPro together with
Hosting Services. Implementation services provided for Base
Hosting arrangements whereby the customer already owns a
48
perpetual license are less than those provided for Intersourcing
arrangements since UltiPro is already implemented in these Base
Hosting arrangements and only needs to be transitioned to a
hosted environment. Fair value for hosting services is based on
the Hosting Valuation (defined below). The fair value for
implementation services is based on the Implementation Valuation
(defined below) in accordance with guidelines provided by SOP
No. 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 (defined below).
Maintenance revenues are recognized ratably over the service
period, generally one year. Maintenance and support fees are
generally priced as a percentage of the initial license fee for
the underlying products.
To the extent there are upfront fees associated with the
Intersourcing Offering, Base Hosting or the BSP sales channel,
subscription revenues are recognized ratably over the 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.
As discussed in Note 11, subscription revenues from the
Original Ceridian Agreement of $642,000 per month were
recognized in the three year period ended December 31, 2007
and are expected to be recognized until the expiration of such
agreement on March 9, 2008.
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 as the services are provided to the underlying
customer. 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 SOP
No. 97-2,
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
No. 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
49
not satisfied, license revenue is deferred and not recognized in
the consolidated statements of income 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 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.
50
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. 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 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 No. 97-2,
SOP No. 98-9,
EITF No. 00-21,
EITF No. 00-3,
SAB No. 101 and SAB No. 104.
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. 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, (UTA), which was
introduced in 2006.
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 (SBC) awards.
Under the modified prospective method, stock-based compensation
expense for the years ended December 31, 2007 and 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 and
restricted stock awards 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 years ended
December 31, 2007 and 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,
51
Accounting for Stock Issued to Employees (APB
No. 25), and made the pro forma disclosures required
by 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 18) had exercise prices equal to the fair 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 18
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
Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed, (SFAS
No. 86), for the development of UltiPro Canada. The
following table summarizes SBC recognized by the Company (in
thousands):
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For the Years Ended
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December 31,
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|
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2007
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|
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2006
|
|
|
2005
|
|
|
SBC Statements of income
|
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$
|
10,172
|
|
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$
|
6,246
|
|
|
$
|
767
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|
SBC Capitalized software (UltiPro Canada)
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42
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41
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SBC Statements of stockholders equity
|
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$
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10,214
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$
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6,287
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$
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767
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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 (FSP
No. FAS 123R-2). This FSP provides guidance on the
application of grant date as defined in SFAS No. 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 FSP No. FAS 123R-2 did not have an
impact on the Companys consolidated financial statements.
In November 2005, the FASB issued FSP
No. FAS 123(R)-3, Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards
(FSP No. FAS 123(R)-3). The Company has elected
to adopt the alternative transition method provided in the FSP
for calculating the tax effects of stock-based compensation
expense pursuant to SFAS No. 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 SBC expense, and to determine the subsequent impact
on the APIC pool and the consolidated statements of cash flows
of the tax effects of employee and non-employee director
stock-based awards that were outstanding upon adoption of SFAS
No. 123(R). Due to the Companys accumulated tax net
operating losses, there was no beginning balance in the APIC
pool at the date of adoption of SFAS No. 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, (FSP No. FAS
123R-4) during the first quarter of fiscal year 2006. FSP
No. FAS 123R-4 addresses the classification of options and
similar instruments issued as employee compensation that allow
for cash settlement upon the occurrence of a contingent event.
FSP No. FAS123R-4 amends SFAS No. 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 FSP No. FAS 123R-4 did not have an impact
on the Companys consolidated financial statements.
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, (FSP No. FAS 13-1), which addresses
the accounting for rental costs associated with operating leases
that are incurred during a construction period. Rental costs
incurred during
52
and after a construction period are costs incurred for the right
to control the use of a leased asset during and after
construction of a leased asset. Since there is no distinction
between the right to use a leased asset during the construction
period and the right to use that asset after the construction
period, rental costs associated with ground or building
operating leases that are incurred during a construction period
shall be recognized as rental expense on a straight-line basis.
The adoption of FSP
No. FAS 13-1
did not have a material impact on the Companys
consolidated financial statements.
Income
Taxes
The Company is subject to corporate Federal, foreign and state
income taxes and accounts for income taxes under the provisions
of SFAS No. 109, Accounting for Income
Taxes, (SFAS No. 109).
SFAS No. 109 provides for an asset and liability
approach under which deferred income taxes are provided based
upon enacted tax laws and rates applicable to the periods in
which the taxes become payable.
The Company makes certain estimates and judgments in determining
income tax expense for financial statement purposes. These
estimates and judgments occur in the calculation of certain tax
assets and liabilities, which arise from differences in the
timing of recognition of revenue and expense for tax and
financial statement purposes.
The Company assesses the likelihood that it will be able to
recover its deferred tax assets. Management considers all
available evidence, both positive and negative, including
historical levels of income, expectations and risks associated
with estimates of future taxable income and ongoing prudent and
feasible tax planning strategies as well as current tax laws and
interpretation of current tax laws in assessing the need for a
valuation allowance. If recovery is not likely, we record a
valuation allowance against the deferred tax assets that we
estimate will not ultimately be recoverable. The available
positive evidence at December 31, 2007 included three years
of historical operating profits and a projection of future
income. As a result of our analysis of all available evidence,
both positive and negative, at December 31, 2007, it was
considered more likely than not that a full valuation allowance
for deferred tax assets was not required, resulting in the
release of the valuation allowance for deferred tax assets and
generating a $19.9 million non-cash tax benefit, recorded
in the consolidated statement of income for the fourth quarter
of 2007. See Note 17 for further discussion.
As of December 31, 2007, the Company believes it is more
likely than not that the amount of the deferred tax assets
recorded on the consolidated balance sheet as a result of the
release of the valuation allowance will ultimately be recovered.
However, should there be a change in the Companys ability
to recover the deferred tax assets, the tax provision would
increase in the period in which it is determined that recovery
is more likely than not.
Reimbursable
Out-Of-Pocket Expenses
Effective January 1, 2002, the Company adopted EITF
No. 01-14,
Income Statement Characterization of Reimbursements
Received for Out-of-Pocket Expenses Incurred
(EITF No. 01-14).
EITF No. 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 income, were $1.7 million,
$1.4 million and $1.3 million for 2007, 2006 and 2005,
respectively.
Recently
Adopted Accounting Pronouncements
Effective January 1, 2007, the Company adopted FIN
No. 48, Accounting for Uncertainty in Income
Taxes (FIN No. 48). The
interpretation clarifies the accounting for uncertainty in
income taxes recognized in a companys financial statements
in accordance with SFAS No. 109. Specifically, the
interpretation 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. The Company recognizes
interest and penalties accrued related to unrecognized tax
benefits as components of its income tax provision. The Company
did not have
53
any interest and penalties accrued upon the adoption of
FIN No. 48, and, as of December 31, 2007, the
Company does not have any interest and penalties accrued related
to unrecognized tax benefits.
As of January 1, 2007 and December 31, 2007, the
Company believes that no reserves for uncertain income tax
positions need to be recorded pursuant to FIN No. 48.
The adoption of FIN No. 48 did not have an impact on
the Companys consolidated financial statements.
In May 2007, the FASB published FSP
No. FIN 48-1,
Definition of Settlement in FASB Interpretation
No. 48
(FSP No. FIN 48-1),
which is an amendment to FIN No. 48. It clarifies how
an enterprise should determine whether a tax position is
effectively settled for the purpose of recognizing previously
unrecognized tax benefits. The adoption of FSP No. FIN 48-1
did not have an impact on the Companys consolidated
financial statements.
Effective January 1, 2007, the Company adopted the EITF
No. 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statements (That is, Gross versus Net Presentation)
(EITF
No. 06-3).
EITF
No. 06-3
allows entities to adopt a policy of presenting taxes in the
consolidated statements of income 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 EITF
No. 06-3
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). The adoption
of EITF
No. 06-3
did not have an impact on the Companys consolidated
financial statements.
Recently
Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS No. 141R) and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting
Research Bulletin No. 51
(SFAS No. 160). SFAS No. 141R
will change how business acquisitions are accounted for and will
impact financial statements both on the acquisition date and in
subsequent periods. SFAS No. 160 will change the
accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a
component of equity. SFAS No. 141R and
SFAS No. 160 are effective for the Company beginning
in the first quarter of 2009. Early adoption is not permitted.
This will only affect the Company if the Company makes an
acquisition.
In February 2007, the FASB issued SFAS 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 SFAS No. 159 apply
only to entities that elect the fair value option. However, the
amendment SFAS 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 SFAS 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.
54
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4.
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Investments
in Marketable Securities
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The Company classifies its investments in marketable securities
with readily determinable fair values as securities
available-for-sale in accordance with SFAS No. 115 and
FSP No. FAS 115-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments (FSP
No. 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 or as securities to be held to maturity. Unrealized
gains and losses on securities available-for-sale are reported
as a net amount in accumulated other comprehensive (loss) income
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) income at December 31, 2007 and
2006 are an unrealized loss of $13 thousand and an unrealized
gain of $2 thousand, respectively, on available-for-sale
securities held at each year end.
The amortized cost and market value of the Companys
investments in available-for-sale securities at
December 31, 2007 are shown in the table below (in
thousands).
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Gross
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Gross
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Estimated
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Amortized
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Unrealized
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Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
Investments in marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
3,875
|
|
|
$
|
|
|
|
$
|
(3
|
)
|
|
$
|
3,872
|
|
Corporate debentures bonds
|
|
|
12,055
|
|
|
|
1
|
|
|
|
(5
|
)
|
|
|
12,051
|
|
Asset-backed fixed
|
|
|
2,499
|
|
|
|
1
|
|
|
|
(5
|
)
|
|
|
2,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments, available-for-sale
|
|
$
|
18,429
|
|
|
$
|
2
|
|
|
$
|
(13
|
)
|
|
$
|
18,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of the
available-for-sale securities by contractual maturity at
December 31, 2007 are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Due in one year or less
|
|
$
|
17,132
|
|
|
$
|
17,120
|
|
Due after one year
|
|
|
1,297
|
|
|
|
1,298
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,429
|
|
|
$
|
18,418
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Property
and Equipment
|
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Computer equipment
|
|
$
|
43,611
|
|
|
$
|
32,844
|
|
Leasehold improvements
|
|
|
5,094
|
|
|
|
4,853
|
|
Furniture and fixtures
|
|
|
2,381
|
|
|
|
1,951
|
|
Building
|
|
|
870
|
|
|
|
870
|
|
Land
|
|
|
655
|
|
|
|
655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,611
|
|
|
|
41,173
|
|
Less: accumulated depreciation and amortization
|
|
|
34,373
|
|
|
|
27,693
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,238
|
|
|
$
|
13,480
|
|
|
|
|
|
|
|
|
|
|
55
Included in property and equipment is computer equipment
acquired under capital leases as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Computer equipment
|
|
$
|
14,734
|
|
|
$
|
11,625
|
|
Less: accumulated amortization
|
|
|
13,114
|
|
|
|
10,247
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,620
|
|
|
$
|
1,378
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense on property and equipment
totaled $6.7 million, $5.3 million and
$4.3 million for the years ended December 31, 2007,
2006 and 2005, respectively.
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 accumulated other comprehensive (loss)
income. Realized gains and losses resulting from foreign
exchange transactions are included in total operating expenses
in the consolidated statements of income. For the years ended
December 31, 2007 and 2006, the Company had a cumulative $7
thousand and $1 thousand unrealized translation loss,
respectively. There were no foreign currency transactions during
2005.
|
|
7.
|
Software
Development Costs
|
SFAS No. 86, 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 2007, 2006 and 2005,
$1.7 million, $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 was
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). Annual amortization is based on the
greater of the amount computed using (a) the ratio that
current gross revenues for the related product bears to the
total of current and anticipated future gross revenues for that
product or (b) the straight-line method over the remaining
estimated economic life of the product including the period
being reported on.
Capitalized software is amortized using the straight-line method
over the estimated useful lives of the assets, which are
typically five years. Amortization of capitalized software was
$119,000, $26,000 and $86,000 in 2007, 2006 and 2005,
respectively. Accumulated amortization of capitalized software
was $5.0 million, $5.6 million and $5.6 million
as of December 31, 2007, 2006 and 2005, respectively.
Capitalized software, net of amortization, was
$3.6 million, $2.1 million and $0.2 million as of
December 31, 2007, 2006 and 2005, 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.
56
SFAS No. 128, Earnings Per Share, requires
dual presentation of earnings per share
basic and diluted. Basic earnings per
share is computed by dividing income available to common
stockholders (the numerator) by the weighted average number of
common shares (the denominator) for the period. The computation
of diluted earnings per share is similar to basic earnings per
share, except that the denominator is increased to include the
number of additional common shares that would have been
outstanding if the potentially dilutive common shares had been
issued.
The following is a reconciliation of the shares used in the
computation of basic and diluted net income per share (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Basic weighted average shares outstanding
|
|
|
24,701
|
|
|
|
23,853
|
|
|
|
23,040
|
|
Effect of dilutive equity instruments
|
|
|
2,021
|
|
|
|
3,125
|
|
|
|
3,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive shares outstanding
|
|
|
26,722
|
|
|
|
26,978
|
|
|
|
26,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other common stock equivalents (i.e., stock options, restricted
stock awards and warrants) outstanding which are not included in
the calculation of diluted income per share because their impact
is antidilutive
|
|
|
615
|
|
|
|
485
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 130, Reporting Comprehensive
Income, (SFAS No. 130) 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), of all changes in equity of an
enterprise that result from transactions and other economic
events in a period other than transactions with owners.
Accumulated other comprehensive (loss) income, as presented on
the consolidated balance sheets, consists of unrealized gains
and losses on available-for-sale securities and foreign currency
translation adjustments, recorded net of any related tax.
Comprehensive income for the years ended December 31, 2007,
2006 and 2005 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net income
|
|
$
|
33,129
|
|
|
$
|
4,133
|
|
|
$
|
3,425
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on investments in marketable securities
available-for-sale
|
|
|
(13
|
)
|
|
|
33
|
|
|
|
(16
|
)
|
Unrealized loss on foreign currency translation adjustments
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
33,110
|
|
|
$
|
4,165
|
|
|
$
|
3,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
10.
|
Goodwill
and Intangible Assets
|
Goodwill represents the excess of cost over the net tangible and
identifiable intangible assets of acquired businesses.
Identifiable intangible assets acquired in business combinations
are recorded based upon fair value at the date of acquisition.
Goodwill consists of the following (in thousands):
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
2007
|
|
|
Goodwill, December 31, 2006
|
|
$
|
2,734
|
|
Stock Consideration (see Note 18)
|
|
|
972
|
|
Income tax liability
|
|
|
333
|
|
Other changes
|
|
|
24
|
|
|
|
|
|
|
Goodwill, December 31, 2007
|
|
$
|
4,063
|
|
|
|
|
|
|
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, which have been
incorporated into the Companys UltiPro Talent Management
product suite that it markets and sells to its customers in the
U.S.
The values assigned to each of the intangible assets included in
the RTIX valuation were based on an income approach valuation
methodology. The income approach presumes that the value of an
asset can be estimated by the net economic benefit (i.e., cash
flows) to be received over the life of the asset, discounted to
present value.
As of December 31, 2007, the Companys intangible
assets have estimated useful lives and are classified in other
assets, net as follows (in thousands):
|
|
|
|
|
|
|
Estimated
|
|
|
|
Useful Lives
|
|
|
Acquired intangible assets:
|
|
|
|
|
Developed technology
|
|
|
5 years
|
|
Customer relationships
|
|
|
6 years
|
|
Amortization expense for the acquired intangible assets
reflected above was $208 thousand for the year ended
December 31, 2007 and $54 thousand for the year ended
December 31, 2006. There was no amortization expense for
acquired intangible assets for the year ended December 31,
2005. Future amortization expense for acquired intangible assets
is as follows, as of December 31, 2007 (in thousands):
|
|
|
|
|
Year
|
|
Amount
|
|
|
2008
|
|
$
|
185
|
|
2009
|
|
|
185
|
|
2010
|
|
|
185
|
|
2011
|
|
|
158
|
|
2012
|
|
|
56
|
|
|
|
|
|
|
Total
|
|
$
|
769
|
|
|
|
|
|
|
|
|
11.
|
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
58
offering for Ceridian to market primarily to businesses with
less than 500 employees (the Original Ceridian
Agreement). Ceridian marketed that solution under the name
Source Web. During December 2004, RSM McGladrey Employer
Services (RSM), a former BSP of Ultimate Software,
acquired Ceridians Source Web HR/payroll and self-service
product and existing Source Web base of small and mid-size
business customers throughout the United States (the RSM
Acquisition). The financial terms of the Original Ceridian
Agreement did not change as a result of the RSM Acquisition.
Subsequent to the RSM Acquisition, Ceridian continued to be
financially obligated to pay, and did pay, Ultimate Software
minimum fees pursuant to the terms of the Original Ceridian
Agreement. The aggregate minimum payments that Ceridian was
obligated to pay Ultimate Software under the Original Ceridian
Agreement over the minimum term of the agreement aggregated
$42.7 million. To date, Ceridian has paid to Ultimate
Software a total of $42.1 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 date. The amount of
subscription revenues recognized under the Original Ceridian
Agreement during the year ended December 31, 2007, totaling
$7.7 million, was the same as those recognized in 2006 and
2005. 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 terminated on March 9, 2008.
12. Other
Income, net
Other income, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Interest income
|
|
$
|
1,413
|
|
|
$
|
1,295
|
|
|
$
|
437
|
|
Other income
|
|
|
214
|
|
|
|
243
|
|
|
|
382
|
|
Non-recurring settlement fee, net
|
|
|
4,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
$
|
6,002
|
|
|
$
|
1,538
|
|
|
$
|
819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other income, net, in the consolidated statement of
income for the year ended December 31, 2007, is a
non-recurring settlement fee of $4.4 million, net of
related costs, resulting from the early termination of a
multi-year business arrangement with one of our business
partners that decided to exit the payroll business.
|
|
13.
|
Stock
Repurchase Plan
|
On October 30, 2000, the Company announced that its Board
of Directors authorized the repurchase of up to
1,000,000 shares of the Companys outstanding Common
Stock (the Stock Repurchase Plan).
On February 6, 2007, the Companys Board of Directors
extended the Stock Repurchase Plan by authorizing the repurchase
of up to 1,000,000 additional shares of the Companys
issued and outstanding Common Stock.
59
As of December 31, 2007, the Company had purchased
1,452,375 shares of the Companys Common Stock under
the Stock Repurchase Plan, with 547,625 shares available
for repurchase in the future. The details of Common Stock
repurchases for the year ended December 31, 2007 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
|
|
Plans or Programs
|
|
January 1 31, 2007
|
|
|
|
|
|
|
|
290,563
|
February 1 28, 2007
|
|
62,000
|
|
26.79
|
|
771,437
|
|
1,228,563(2)
|
March 1 31, 2007
|
|
103,600
|
|
26.37
|
|
875,037
|
|
1,124,963
|
April 1 30, 2007
|
|
|
|
|
|
875,037
|
|
1,124,963
|
May 1 31, 2007
|
|
95,200
|
|
27.76
|
|
970,237
|
|
1,029,763
|
June 1 30, 2007
|
|
23,500
|
|
28.09
|
|
993,737
|
|
1,006,263
|
July 1 31, 2007
|
|
|
|
|
|
993,737
|
|
1,006,263
|
August 1 31, 2007
|
|
276,238
|
|
29.90
|
|
1,269,975
|
|
730,025
|
September 1 30, 2007
|
|
94,400
|
|
31.66
|
|
1,364,375
|
|
635,625
|
October 1 31, 2007
|
|
|
|
|
|
1,364,375
|
|
635,625
|
November 1 30, 2007
|
|
88,000
|
|
34.20
|
|
1,452,375
|
|
547,625
|
December 1 31, 2007
|
|
|
|
|
|
1,452,375
|
|
547,625
|
|
|
|
|
|
|
Total
|
|
742,938
|
|
$ 29.25
|
|
1,452,375
|
|
547,625
|
|
|
|
|
|
|
(1) All shares were purchased through the publicly
announced Stock Repurchase Plan in open-market transactions.
(2) On February 6, 2007, the Company announced that
its Board of Directors had authorized the repurchase of up to
1,000,000 additional shares of the Companys Common Stock
pursuant to the Stock Repurchase Plan.
On February 5, 2008, the Companys Board of Directors
extended the Stock Repurchase Plan further by authorizing the
repurchase of up to 1,000,000 additional shares of the
Companys Common Stock. As a result, an aggregate of
1,547,625 shares of Common Stock were available for
repurchase under the Stock Repurchase Plan as of
February 5, 2008. 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 repurchase transactions will depend on market conditions and
other business considerations.
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Sales commissions
|
|
$
|
3,811
|
|
|
$
|
4,005
|
|
Other items individually less than 5% of total current
liabilities
|
|
|
7,594
|
|
|
|
5,225
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,405
|
|
|
$
|
9,230
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
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 2010. Interest rates on these leases
range from 1.0% to
60
7.0%. The scheduled lease payments of the capital lease
obligations are as follows as of December 31, 2007 (in
thousands):
|
|
|
|
|
Year
|
|
Amount
|
|
|
2008
|
|
$
|
2,056
|
|
2009
|
|
|
1,511
|
|
2010
|
|
|
506
|
|
|
|
|
|
|
|
|
|
4,073
|
|
Less amount representing interest
|
|
|
(80
|
)
|
|
|
|
|
|
Lease obligations reflected as current ($2,002) and
non-current ($1,991)
|
|
$
|
3,993
|
|
|
|
|
|
|
The Company entered into a long-term Installment Payment
Agreement (IPA) with a vendor to acquire computer
software for consideration totaling $1.0 million during the
year ended December 31, 2007. The debt is payable in three
equal annual installments beginning September 1, 2007. The
outstanding long-term balance of $0.3 million as of
December 31, 2007 is payable on or before September 1,
2009.
Income tax expense is based on income before income taxes.
Deferred tax assets and liabilities are determined based on the
difference between financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
The income tax benefit consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
95
|
|
|
$
|
|
|
|
$
|
|
|
State and Local
|
|
|
20
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(16,523
|
)
|
|
|
|
|
|
|
|
|
State and Local
|
|
|
(2,768
|
)
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit, net
|
|
$
|
(19,736
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
The income tax (benefit) provision is different from that which
would be obtained by applying the statutory Federal income tax
rate of 35% to income before income taxes as a result of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Income tax provision at statutory Federal tax rate
|
|
$
|
4,687
|
|
|
$
|
1,446
|
|
|
$
|
1,199
|
|
State and local income taxes
|
|
|
353
|
|
|
|
238
|
|
|
|
197
|
|
Non deductible expenses
|
|
|
312
|
|
|
|
282
|
|
|
|
216
|
|
Change in tax rates
|
|
|
1,979
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(26,863
|
)
|
|
|
(1,899
|
)
|
|
|
(1,597
|
)
|
Other, net
|
|
|
(204
|
)
|
|
|
(67
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit, net
|
|
$
|
(19,736
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets and liabilities reflect the net
effect of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Deferred tax assets are
also recorded for the future tax benefit of net operating losses
and tax credit carryforwards. Significant components of the
Companys deferred tax assets and liabilities at
December 31, 2007, 2006 and 2005 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
10,251
|
|
|
$
|
21,780
|
|
|
$
|
27,079
|
|
Tax credit carryforwards
|
|
|
222
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
6,603
|
|
|
|
5,686
|
|
|
|
4,459
|
|
Property and equipment
|
|
|
1,206
|
|
|
|
1,217
|
|
|
|
1,132
|
|
Accruals not currently deductible
|
|
|
141
|
|
|
|
85
|
|
|
|
111
|
|
Allowance for doubtful accounts
|
|
|
272
|
|
|
|
204
|
|
|
|
204
|
|
Charitable contributions
|
|
|
195
|
|
|
|
312
|
|
|
|
248
|
|
Stock-based compensation
|
|
|
7,166
|
|
|
|
3,362
|
|
|
|
817
|
|
Deferred rent adjustment
|
|
|
1,029
|
|
|
|
1,135
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
27,085
|
|
|
|
33,781
|
|
|
|
34,224
|
|
Less valuation allowance
|
|
|
(5,592
|
)
|
|
|
(32,455
|
)
|
|
|
(33,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
21,493
|
|
|
|
1,326
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired intangible assets
|
|
|
(299
|
)
|
|
|
(398
|
)
|
|
|
|
|
Software development costs
|
|
|
(1,412
|
)
|
|
|
(837
|
)
|
|
|
(97
|
)
|
Other, net
|
|
|
(262
|
)
|
|
|
(91
|
)
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(1,973
|
)
|
|
|
(1,326
|
)
|
|
|
(269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
19,520
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 109 provides for the recognition of deferred
tax assets if realization of such assets is more likely than
not. The Company considers all available evidence, both positive
and negative, including historical levels of income,
expectations and risks associated with estimates of future
taxable income, ongoing prudent and feasible tax planning
strategies and reversal of deferred tax liabilities in assessing
the need for the
62
valuation allowance. If it is not more likely than not that we
will recover our deferred tax assets, we will increase our
provision for taxes by recording a valuation allowance against
the deferred tax assets that we estimate will not ultimately be
recoverable.
The available positive evidence at December 31, 2007,
included three years of historical operating profits and a
projection of future financial and taxable income by
jurisdiction including the estimated impact of future tax
deductions from the exercise of stock options sufficient to
realize most of our remaining deferred tax assets. As a result
of our analysis of all available evidence, both positive and
negative, we recorded a release of the valuation allowance for
deferred tax assets generating a $19.9 million non-cash tax
benefit in fiscal year 2007. We continue to maintain a valuation
allowance of $5.6 million of which $5.5 million
relates to stock option tax deductions claimed prior to the
adoption of SFAS No. 123R, which will result in a
credit to equity when the deductions reduce cash taxes payable.
We will continue to assess the realizability of the deferred tax
assets based on actual and forecasted operating results.
The net decrease in the valuation allowance for the year ended
December 31, 2007 was $26.9 million. The principal
reason for the decrease in the valuation allowance in fiscal
2007 relates to the release of the valuation allowance against
deferred tax assets.
At December 31, 2007, the Company had approximately
$70.9 million and $1.0 million of net operating loss
carryforwards for Federal and foreign income tax reporting
purposes, respectively, available to offset future taxable
income. Of the total net operating loss carryforwards,
approximately $59.0 million is attributable to deductions
from the exercise of non-qualified employee, and non-employee
director, stock options the benefit of which will be credited to
paid in capital when realized. The carryforwards expire from
2011 through 2027. Utilization of such net operating losses may
be limited as a result of cumulative ownership changes in the
Companys equity instruments.
Effective January 1, 2007, the Company adopted
FIN No. 48. FIN No. 48 requires that a
position taken or expected to be taken in a tax return be
recognized in the financial statements when it is more likely
than not (i.e., a likelihood of more than fifty percent) that
the position would be sustained upon examination by tax
authorities. A recognized tax position is then measured at the
largest amount of benefit that is greater than fifty percent
likely of being realized upon ultimate settlement. Upon adoption
and as of December 31, 2007, the Company did not have any
unrecognized tax benefits.
The Company recognizes interest and penalties accrued related to
unrecognized tax benefits as components of its income tax
provision. The Company did not have any interest and penalties
accrued upon the adoption of FIN No. 48, and, as of
December 31, 2007, the Company does not have any interest
and penalties accrued related to unrecognized tax benefits.
Tax years 1996 to 2007 remain subject to future examination by
the major tax jurisdictions in which the Company is subject to
tax.
|
|
18.
|
Stock-Based
Compensation and Equity
|
Summary
of Plans
The Companys Amended and Restated 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). Prior
to the adoption of the Plan, options to purchase shares of
Common Stock were issued under the Companys Nonqualified
Stock Option Plan (the Prior Plan).
As of December 31, 2007, the aggregate number of shares of
Common Stock authorized under the Plan and the Prior Plan was
12,000,000 and the aggregate number of shares of Common Stock
that were available to be issued under all Awards granted under
the Plan was 2,379,642 shares. Options granted to officers
and employees under the Plan and the Prior Plan generally have a
10-year
term, vesting 25% immediately and 25% on each of the first three
anniversaries of the grant date. Options granted to non-employee
directors under
63
the Plan and the Prior Plan generally have a
10-year term
and vest and become exercisable immediately on the grant date.
However, certain options granted to non-employee directors for
Board Services during the period January 3, 2005 through
July 2, 2007 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 of the Company (the Board)
or (iii) the effective date of a change in control of the
Company.
Prior to July 24, 2007, non-employee directors received
discounted options under the Plan and the Prior Plan as
compensation for their services. On that date, the Compensation
Committee of the Board rescinded the previously approved fee
schedule for service on the Board and Board Committees and
replaced it with a program involving market price options and
restricted stock awards under the Plan. Under resolutions
adopted by the Compensation Committee, commencing with the third
calendar quarter of 2007, (i) each non-employee director
was granted an option to purchase 3,750 shares of the
Companys Common Stock for each regular quarterly meeting
of the Board attended in 2007, dated as of the date of such
meeting, at an exercise price equal to the closing price of the
Companys Common Stock on NASDAQ on the date of such
meeting, and (ii) each of the Chairman of the Audit
Committee of the Board and the Chairman of the Compensation
Committee of the Board was granted an option to purchase
2,500 shares of the Companys Common Stock for each
calendar quarter in 2007, dated as of the date of the regularly
scheduled meeting of such Committee during such quarter, at an
exercise price equal to the closing price of the Companys
Common Stock on NASDAQ on the date of such meeting. These option
grants vested immediately upon grant.
In addition to the option grants discussed above, commencing
with the third calendar quarter of 2007, each non-employee
director was granted a restricted stock award under the Plan for
each calendar quarter in 2007, dated as of the date of the
regularly scheduled meeting of the Compensation Committee during
such quarter, of that number of shares of the Companys
Common Stock equal to the quotient of $12,500 divided by the
closing price of the Companys Common Stock on NASDAQ on
the date of such meeting, rounded down to the nearest full
number of shares. The restricted stock awards shall vest on the
fourth anniversary of the date of grant, subject to accelerated
vesting in the event of a directors death, disability,
cessation of service at the end of his term or the occurrence 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 No. 25 and related
Interpretations, as permitted by SFAS No. 123. 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. In addition, for the year ended
December 31, 2005, 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.
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. Under the
modified prospective transition method, stock based compensation
expense for the years ended December 31, 2007 and 2006
includes compensation expense for all stock-based compensation
awards granted prior to, but not yet vested as of,
January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of
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 years ended December 31,
2007 and 2006. The Company
64
recognizes compensation expense for restricted stock awards and
restricted stock units on a straight-line basis over the
requisite service period of the award.
The following table sets forth the SBC resulting from
share-based arrangements that is recorded in the Companys
consolidated statements of income for the periods indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cost of recurring revenues
|
|
$
|
635
|
|
|
$
|
394
|
|
|
$
|
6
|
|
Cost of service revenues
|
|
|
1,542
|
|
|
|
874
|
|
|
|
13
|
|
Cost of license revenues
|
|
|
5
|
|
|
|
6
|
|
|
|
|
|
Sales and marketing
|
|
|
4,617
|
|
|
|
2,967
|
|
|
|
395
|
|
Research and development
|
|
|
985
|
|
|
|
620
|
|
|
|
7
|
|
General and administrative
|
|
|
2,388
|
|
|
|
1,385
|
|
|
|
346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SBC
|
|
$
|
10,172
|
|
|
$
|
6,246
|
|
|
$
|
767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in capitalized software in the Companys
consolidated balance sheets at December 31, 2007 and 2006
was $42 thousand and $41 thousand, respectively, in stock-based
compensation incurred in the development of UltiPro Canada
during the fiscal years then ended. There was no stock-based
compensation capitalized in 2005. These amounts would have
otherwise been charged to research and development expense for
the years ended December 31, 2007 and 2006, respectively.
Net cash proceeds from the exercise of stock options and
warrants were $7.6 million, $8.6 million, and
$5.8 million for the years ended December 31, 2007,
2006, and 2005, respectively. No income tax benefit was realized
from stock option exercises during the years ended
December 31, 2007, 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 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 had exercise prices equal
to the fair market value of the underlying Common Stock on the
date of grant.
65
The following table illustrates the effect on net income and net
income per share as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based
compensation for the year ended December 31, 2005 (in
thousands, except per share amounts):
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
2005
|
|
|
Net income:
|
|
|
|
|
As reported
|
|
$
|
3,425
|
|
Compensation expense, pro forma
|
|
|
(2,975)
|
|
|
|
|
|
|
Pro forma
|
|
$
|
450
|
|
|
|
|
|
|
Income per share, basic:
|
|
|
|
|
As reported
|
|
$
|
0.15
|
|
Compensation expense, pro forma
|
|
|
(0.13)
|
|
|
|
|
|
|
Pro forma
|
|
$
|
0.02
|
|
|
|
|
|
|
Income per share, diluted:
|
|
|
|
|
As reported
|
|
$
|
0.13
|
|
Compensation expense, pro forma
|
|
|
(0.11)
|
|
|
|
|
|
|
Pro forma
|
|
$
|
0.02
|
|
|
|
|
|
|
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, 2007, 2006 and
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected term (in years)
|
|
|
5.0
|
|
|
|
4.6
|
|
|
|
4.5
|
|
Volatility
|
|
|
39%
|
|
|
|
40%
|
|
|
|
41%
|
|
Interest rate
|
|
|
4.45%
|
|
|
|
4.74%
|
|
|
|
4.25%
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value at grant date
|
|
$
|
11.06
|
|
|
$
|
8.55
|
|
|
$
|
5.95
|
|
The Companys computation of the expected volatility for
the years ended December 31, 2007, 2006 and 2005 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 No. 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 rates of
4.6% and 5.0% for the years ended December 31, 2007 and
2006, respectively were based on historical data.
Restricted
Stock Awards
Under the provisions of the Plan, the Company may, at its
discretion, grant restricted stock awards (Restricted
Stock Awards) to officers, employees and non-employee
directors. The shares of Common Stock issued under Restricted
Stock Awards are subject to certain vesting requirements and
restrictions on transfer. During the year ended
December 31, 2007, the Company granted Restricted Stock
Awards for 475,592 shares of Common Stock to officers and
employees and the Company granted Restricted Stock Awards for
3,845 shares of Common Stock to non-employee directors.
During the years ended December 31, 2006 and 2005, the
Company granted Restricted Stock Awards for 263,000 and
169,000 shares of Common Stock,
66
respectively, to officers and employees. There were no
Restricted Stock Awards granted to non-employee directors for
the years ended December 31, 2006 and 2005. 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, death or disability, the termination of employment
by the Company without cause or, in the case of a non-employee
director, at cessation of his Board Services at the end of his
term. Included in the Companys consolidated statements of
income for the years ended December 31, 2007, 2006, and
2005 was $3.4 million, $1.4 million, and
$0.2 million, respectively, of compensation expense for
Restricted Stock Awards.
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 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, 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
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 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). No such election was made in
2007. Upon the elections made in 2006 and 2005, 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 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 respective
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, his 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
respective Officers death, disability or termination of
employment with the Company or a change in control of the
Company. In the event that the Chief Executive Officer or the
Chief Operating Officer were to terminate employment and Stock
Unit Awards resulting from his Elected Deferral remain unvested,
the Company would be required to refund to him a cash amount
equal to the lesser of such Elected Deferral (less taxes
withheld) and the fair value of such units upon termination of
employment. During the years ended December 31, 2007 and
2006, the Company granted 16,603, and 28,518 Stock Unit Awards,
respectively, to the Chief Executive Officer and the Chief
Operating Officer. During the year ended December 31, 2005,
no Stock Unit Awards were granted. Included in the
Companys consolidated statements of income for the years
ended December 31, 2007, 2006, and 2005 was $77 thousand,
$0.3 million and $0.4 million, respectively, of
compensation expense from Stock Unit Awards.
67
Stock
Option and Restricted Stock Activity
The following table summarizes stock option activity for the
years ended December 31, 2005, 2006 and 2007, 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, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
4,893
|
|
$
|
10.07
|
|
|
|
|
|
|
Granted
|
|
|
759
|
|
|
26.48
|
|
|
|
|
|
|
Exercised
|
|
|
(1,047)
|
|
|
7.16
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(58)
|
|
|
22.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
4,547
|
|
$
|
13.31
|
|
|
5.90
|
|
$
|
82,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
3,582
|
|
$
|
10.69
|
|
|
5.16
|
|
$
|
74,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2007. The amount of
the aggregate intrinsic value changes, based on the fair value
of the Companys Common Stock. Total intrinsic value of
share options exercised during the years ended December 31,
2007, 2006 and 2005 was $23.0 million, $22.3 million
and $9.2 million, respectively. Total fair value of options
vested during the years ended December 31, 2007, 2006 and
2005 was $4.9 million, $3.6 million and
$2.3 million, respectively.
As of December 31, 2007, $5.7 million of total
unrecognized compensation cost related to non-vested stock
options is expected to be recognized over a weighted average
period of 1.7 years.
68
The following table summarizes restricted stock activity for the
year ended December 31, 2007, as follows (in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
Restricted Stock Awards
|
|
Stock Units
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
Restricted Stock
|
|
Shares
|
|
Fair Value
|
|
Shares
|
|
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
|
Granted
|
|
|
479
|
|
|
32.89
|
|
|
16
|
Vested
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
911
|
|
$
|
27.11
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, $11.4 million of total
unrecognized compensation cost related to non-vested Restricted
Stock Awards is expected to be recognized over a weighted
average period of 3.0 years. As of December 31, 2007,
$0.2 million of total unrecognized compensation costs
related to non-vested Stock Unit Awards is expected to be
recognized over a weighted average period of 2.5 years.
The following table summarizes information about stock options
outstanding under the Plan at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
Range of
|
|
|
|
|
Contractual
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
Exercise
|
|
|
|
|
Life
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Prices
|
|
Number
|
|
|
(Years)
|
|
|
Exercise Price
|
|
|
Number
|
|
|
Exercise Price
|
|
|
$0.89$3.38
|
|
|
539,880
|
|
|
|
3.61
|
|
|
$
|
2.79
|
|
|
|
539,880
|
|
|
$
|
2.79
|
|
$3.38$4.25
|
|
|
466,875
|
|
|
|
4.49
|
|
|
|
3.85
|
|
|
|
466,875
|
|
|
|
3.85
|
|
$4.66$8.03
|
|
|
623,111
|
|
|
|
2.29
|
|
|
|
7.25
|
|
|
|
623,111
|
|
|
|
7.25
|
|
$8.38$10.00
|
|
|
480,414
|
|
|
|
4.15
|
|
|
|
9.39
|
|
|
|
480,414
|
|
|
|
9.39
|
|
$10.54$13.05
|
|
|
515,100
|
|
|
|
6.58
|
|
|
|
12.41
|
|
|
|
515,100
|
|
|
|
12.41
|
|
$13.63$16.68
|
|
|
496,406
|
|
|
|
7.29
|
|
|
|
15.05
|
|
|
|
363,899
|
|
|
|
15.07
|
|
$17.11$21.60
|
|
|
534,025
|
|
|
|
8.14
|
|
|
|
20.49
|
|
|
|
271,557
|
|
|
|
20.36
|
|
$24.20$24.20
|
|
|
143,950
|
|
|
|
8.04
|
|
|
|
24.20
|
|
|
|
90,826
|
|
|
|
24.20
|
|
$24.30$24.30
|
|
|
459,938
|
|
|
|
9.06
|
|
|
|
24.30
|
|
|
|
115,176
|
|
|
|
24.30
|
|
$26.72$34.89
|
|
|
287,050
|
|
|
|
9.40
|
|
|
|
30.43
|
|
|
|
114,703
|
|
|
|
30.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.89$34.89
|
|
|
4,546,749
|
|
|
|
5.90
|
|
|
$
|
13.31
|
|
|
|
3,581,541
|
|
|
$
|
10.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
Board Compensation. 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 2007, 2006 and 2005
(Board Options):
|
|
|
|
|
|
|
|
|
Exercise Price of
|
|
|
Stock Options Granted
|
|
Number of Options
|
(1) (2) (3) (4) (5)
|
|
Granted
|
|
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
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
$
|
7.82
|
|
|
|
2,120
|
|
|
|
|
8.76
|
|
|
|
1,890
|
|
|
|
|
30.34
|
|
|
|
23,750
|
|
|
|
|
34.89
|
|
|
|
23,750
|
|
|
|
|
(1) |
|
Stock option grants to non-employee directors during 2005, 2006,
and the first half of 2007 were granted at an exercise price
equal to 30% of the fair value of the Companys Common
Stock on the date of grant. In October 2006, 25,000 stock
options were issued at grant date fair value to Al Leiter upon
his election to the Companys Board of Directors. |
|
(2) |
|
Stock option grants to non-employee directors beginning in the
second half of 2007 were granted at fair value based on the
closing price of the Companys Common Stock on the date of
grant. |
|
(3) |
|
Stock options granted during 2005, 2006, and the first half of
2007 become exercisable on the earliest of (i) the fifth
anniversary of the date of grant, (ii) the date on which
the director ceases to be a member of the Board of Directors and
(iii) the effective date of a change in control of the
Company. All such stock options granted during 2005 were valued
on the date of grant in accordance with the requirements
prescribed in APB No. 25. All stock options granted
during 2006 and 2007 were valued on the date of grant in
accordance with SFAS No. 123R. See Note 3. These
options were granted in lieu of cash retainers and board meeting
fees. |
|
(4) |
|
Stock options granted during the second half of 2007 become
exercisable immediately. All such stock options were valued on
the date of grant in accordance with the requirements prescribed
in SFAS No. 123R. See Note 3. These options were
granted in lieu of cash retainers and board meeting fees. |
|
(5) |
|
The compensation expense related to the Board Options granted in
2007, 2006 and 2005, determined pursuant to the application of
SFAS No. 123R for 2007 and 2006 and
APB No. 25 for 2005, was $757,000, $343,000 and
$125,000, respectively, and is included in general and
administrative expenses in the accompanying consolidated
statements of income. |
70
Warrants
Warrants to purchase shares of the Companys Common Stock,
all of which were exercised as of December 31, 2007, were
fully vested and exercisable as of the date of issuance. A
summary of warrants as of December 31, 2007, 2006 and 2005,
and changes during the years then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
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
|
|
Granted
|
|
|
|
|
|
|
4.00
|
|
Exercised
|
|
|
(44,550
|
)
|
|
|
4.00
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
The holders of Common Stock are entitled to one vote per share
for each share held of record on all matters submitted to a vote
of the stockholders.
Other
Equity Transactions
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 $3.4 million in cash and
27,894 shares of the Companys 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 was subject to a downward adjustment based on the
measurement (as of October 5, 2007) of RTIXs
annual recurring revenues against a target amount established in
said agreement (the Measurement). Based on the
Measurement, the Company determined there was no downward
adjustment required under the terms of the Stock Purchase
Agreement and the Stock Consideration was recorded in the
Companys consolidated financial statements as of
October 5, 2007 in accordance to GAAP. The value of the
Stock Consideration was $1.0 million.
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
71
information concerning the Company and the appropriate legends
were affixed to the certificates evidencing the shares of Common
Stock issued in the transaction.
|
|
19.
|
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
$3.2 million, $2.7 million and $2.2 million for
the years ended December 31, 2007, 2006 and 2005,
respectively. Future minimum annual rental commitments related
to these leases are as follows at December 31, 2007 (in
thousands):
|
|
|
|
|
Year
|
|
Amount
|
|
|
2008
|
|
$
|
3,197
|
|
2009
|
|
|
3,070
|
|
2010
|
|
|
2,933
|
|
2011
|
|
|
2,938
|
|
2012
|
|
|
3,020
|
|
Thereafter
|
|
|
9,496
|
|
|
|
|
|
|
|
|
$
|
24,654
|
|
|
|
|
|
|
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.
|
|
20.
|
Related
Party Transactions
|
Effective on October 23, 2006, the Companys Board of
Directors elected Al Leiter as a non-employee member of the
Companys Board of Directors. 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 revenues as reported in its consolidated statements of
income. Pursuant to this agreement, for the fiscal years ended
December 31, 2007, 2006 and 2005, the Company contributed a
total of approximately $142,000 $107,000 and $84,000,
respectively, to Leiters Landing. In February 2007,
Mr. Leiter
72
and the Company agreed that the maximum amount payable by the
Company in any one year under this agreement is $200,000.
|
|
21.
|
Employee
Benefit Plan
|
The Company provides retirement benefits for eligible employees,
as defined, through a defined contribution plan that is
qualified under Section 401(k) of the Internal Revenue Code
(the 401(K) Plan). Contributions to the 401(K) Plan,
which are made at the sole discretion of the Company, were
$1.1 million, $0.9 million and $0.8 million for
the years ended December 31, 2007, 2006 and 2005,
respectively.
22. 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 No. 108).
SAB No. 108 addresses how the effects of prior year
uncorrected misstatements should be considered when quantifying
misstatements in current-year financial statements.
SAB No. 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 No. 108,
the Company elected to not restate prior year financial
statements and, instead, increased the 2006 beginning balance of
the accumulated deficit and deferred rent in the amount of
$1.8 million.
73
|
|
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, as of
December 31, 2007, 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 defined
in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended). Our
management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2007. In making
this assessment, our management used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated
Framework. Our management has concluded that, as of
December 31, 2007, our internal control over financial
reporting is effective based on these criteria. The
Companys internal control over financial reporting as of
December 31, 2007 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in
their report, which is included below.
74
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Ultimate Software Group, Inc.:
We have audited The Ultimate Software Group, Inc. and
subsidiaries (the Company) internal control over
financial reporting as of December 31, 2007, 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, included in the accompanying
Managements Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on 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, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. 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, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (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, 2007 and 2006 and the related consolidated
statements of income, stockholders equity and
comprehensive income, and cash flows for each of the years in
the three-year period ended December 31, 2007, and our
report dated March 13, 2008 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
KPMG LLP
March 13, 2008
Miami, Florida
Certified Public Accountants
75
Changes
in Internal Control Over Financial Reporting
There have been no significant changes in internal control over
financial reporting during the fourth quarter of 2007 that have
materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial
reporting.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
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, 2008, are
as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position(s)
|
|
Scott Scherr
|
|
|
55
|
|
|
Chairman of the Board, President and Chief Executive Officer
|
Marc D. Scherr
|
|
|
50
|
|
|
Vice Chairman of the Board and Chief Operating Officer
|
Mitchell K. Dauerman
|
|
|
50
|
|
|
Executive Vice President, Chief Financial Officer and Treasurer
|
Jon Harris
|
|
|
43
|
|
|
Senior Vice President, Chief Services Officer
|
Robert Manne
|
|
|
54
|
|
|
Senior Vice President, General Counsel
|
Vivian Maza
|
|
|
46
|
|
|
Senior Vice President, People and Secretary
|
Linda Miller
|
|
|
63
|
|
|
Senior Vice President, Marketing
|
Laura Johnson
|
|
|
43
|
|
|
Senior Vice President, Product Strategy
|
Adam Rogers
|
|
|
33
|
|
|
Senior Vice President, Chief Technology Officer
|
Greg Swick
|
|
|
44
|
|
|
Senior Vice President, Chief Sales Officer
|
Bill Hicks
|
|
|
42
|
|
|
Senior Vice President, Chief Information Officer
|
James A. FitzPatrick, Jr.
|
|
|
58
|
|
|
Director
|
LeRoy A. Vander Putten
|
|
|
73
|
|
|
Director
|
Rick A. Wilber
|
|
|
61
|
|
|
Director
|
Robert A. Yanover
|
|
|
71
|
|
|
Director
|
Alois T. Leiter
|
|
|
42
|
|
|
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.
76
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 and Chief Services Officer since February
6, 2007. Mr. Harris served as Vice President, Professional
Services from July 1998 through December 31, 2001. From
1992 to 1997, Mr. Harris held various management positions
within 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 Office 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
77
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 since January
2001 and as Chief Sales Officer since February 6, 2007.
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.
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 & LeBoeuf LLP, which provides legal
services to the Company. Mr FitzPatrick has been a partner in
Dewey & LeBoeuf LLP or its predecessor firms since
January 1983 and was an associate from September 1974 until
January 1983.
LeRoy A. Vander Putten has served as a director of 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 served as its President from its
founding until 2007, at which time Mr. Yanover retired.
Mr. Yanover also founded Lason, Inc., a corporation
specializing in the imaging business, and served as Chairman of
the Board from its inception in 1987 until 1998 and as a
director through February 2001.
Al Leiter has served as director of 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
78
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. LeRoy A. Vander Putten and Robert A. Yanover serve
on the Board in the class whose term expires at the annual
meeting of stockholders (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.
Messrs. Scott Scherr and Al Leiter serve on the Board in
the class whose term expires at the Annual Meeting in 2010.
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 2007, 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 Annual Meeting in 2008 under the headings
Section 16(a) Beneficial Ownership Reporting
Compliance and Board Meetings and Committees of the
Board-Audit Committee, is incorporated herein by reference.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated herein by
reference to the Companys Proxy Statement for the 2008
Annual Meeting 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 2008 Annual Meeting of Stockholders under the heading
Security Ownership of Certain Beneficial Owners and
Management is incorporated herein by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independance
|
The information required by this item is incorporated herein by
reference to the Companys Proxy Statement for the 2008
Annual Meeting of Stockholders under the heading Certain
Related Transactions.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this item is incorporated herein by
reference to the Companys Proxy Statement for the 2008
Annual Meeting of Stockholders under the heading KPMG LLP
Fees.
79
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedule
|
Documents filed as part of this report:
|
|
|
|
(1)
|
Financial Statements. The following financial statements of the
Company are included in Part II, Item 8, of this
Annual Report on
Form 10-K:
|
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Income for the Years Ended
December 31, 2007, 2006 and 2005
Consolidated Statements of Stockholders Equity and
Comprehensive Income for the Years Ended December 31, 2007,
2006 and 2005
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
|
|
|
|
(2)
|
Consolidated Financial Statement Schedule:
|
Report of Independent Registered Public Accounting
Schedule II Valuation and Qualifying Accounts
(3) Exhibits
|
|
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
3
|
.1
|
|
|
|
Amended and Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3.4 to the Registration Statement
on
Form S-1
(File
No. 333-47881),
initially filed March 13, 1998 (the Registration
Statement)
|
|
3
|
.2
|
|
|
|
Certificate of Designations of Series A Junior Preferred
Stock (incorporated by reference to Exhibit 2 to the
Companys Current Report on
Form 8-K
dated October 23, 1998)
|
|
3
|
.3
|
|
|
|
Amended and Restated Bylaws (incorporated herein by reference to
Exhibit 3.5 to the Registration Statement)
|
|
4
|
.1
|
|
|
|
Form of Certificate for the Common Stock, par value $0.01 per
share**
|
|
4
|
.2
|
|
|
|
Form of Warrant for Common Stock (incorporated by reference to
Exhibit 4.4 to the Companys Registration Statement on
Form S-3
(File
No. 333-107527),
initially filed July 31, 2003
|
|
10
|
.1
|
|
|
|
Shareholders Rights Agreement, dated June 6, 1997 among the
Company and certain stockholders named therein**
|
|
10
|
.2
|
|
|
|
Asset Purchase Agreement, dated February 2, 1998, among The
Ultimate Software Group of Virginia, Inc., the Company and
certain principals named therein**
|
|
10
|
.3
|
|
|
|
Asset Purchase Agreement, dated February 2, 1998, among the
Company, The Ultimate Software Group of the Carolinas, Inc. and
certain principals name therein**
|
|
10
|
.4
|
|
|
|
Asset Acquisition Agreement, dated February 20, 1998, among
the Company, The Ultimate Software Group of Northern California,
Inc. and certain principals named therein**
|
|
10
|
.5
|
|
|
|
Asset Purchase Agreement dated March 4, 1998, among the
Company, Ultimate Investors Group, Inc. and certain principals
name therein**
|
|
10
|
.6
|
|
|
|
Agreement and Plan of Merger dated February 24, 1998, among
the Company, ULD Holding Corp., Ultimate Software Group of New
York and New England, G.P. and certain principals named
therein**
|
80
|
|
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
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)
|
|
10
|
.8
|
|
|
|
Commercial Office Lease agreement by and between UltiLand, Ltd.,
a Florida limited partnership, and the Company, dated
December 31, 1998 (incorporated by reference herein to
corresponding exhibit in the Companys Annual Report on
Form 10-K
dated March 31, 1999)
|
|
10
|
.9
|
|
|
|
Rights Agreement, dated as of October 22, 1998, between the
Company and BankBoston, N.A., as Rights Agent. The Rights
Agreement includes the Form of Certificate of Designations of
Series A Junior Preferred Stock as Exhibit A, the Form
of Rights Certificate as Exhibit B, and the Summary of
Rights as Exhibit C (incorporated by reference herein to
Exhibit 2 to the Companys Current Report on
Form 8-K
dated October 23, 1998)
|
|
10
|
.10
|
|
|
|
Commercial Office Lease by and between UltiLand, Ltd., a Florida
limited partnership and the Company, dated December 22,
1998 (incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on
Form 10-Q
dated August 15, 1999)
|
|
10
|
.11
|
|
|
|
Letter Agreement between Aberdeen Strategic Capital LP and the
Company, dated October 21, 1999 (incorporated herein by
reference to Exhibit 10.1 to the Companys Quarterly
Report on
Form 10-Q
dated November 15, 1999)
|
|
10
|
.12
|
|
|
|
Warrant issued to Aberdeen Strategic Capital LP (incorporated by
reference to Exhibit 10.2 to the Companys Quarterly
Report on
Form 10-Q
dated November 15, 1999)
|
|
10
|
.13
|
|
|
|
Software License Agreement between the Company and Ceridian
Corporation dated as of March 9, 2001 (incorporated by
reference to Exhibit 10.17 to the Companys Annual
Report on
Form 10-K
dated March 27, 2001)
|
|
10
|
.14
|
|
|
|
Letter amendment between the Company and Ceridian Corporation
dated as of August 9, 2001 (incorporated by reference to
Exhibit 10.14 to the Companys Annual Report on
Form 10-K
dated March 29, 2002)
|
|
10
|
.15
|
|
|
|
Letter amendment between the Company and Ceridian Corporation
dated as of February 5, 2002 (incorporated by reference to
Exhibit 10.15 to the Companys Annual Report on
Form 10-K
dated March 29, 2002)
|
|
10
|
.16
|
|
|
|
Loan and Security Agreement by and between the Company and
Silicon Valley Bank dated as of November 29, 2001
(incorporated by reference to Exhibit 10.16 to the
Companys Annual Report on
Form 10-K
dated March 29, 2002)
|
|
10
|
.17
|
|
|
|
Revolving Promissory Note by and between the Company and Silicon
Valley Bank dated as of November 29, 2001 (incorporated by
reference to Exhibit 10.17 to the Companys Annual
Report on
Form 10-K
dated March 29, 2002)
|
|
10
|
.18
|
|
|
|
Equipment Term Note by and between the Company and Silicon
Valley Bank dated as of November 29, 2001 (incorporated
herein by reference to Exhibit 10.18 to the Companys
Annual Report on
Form 10-K
dated March 29, 2002)
|
|
10
|
.19
|
|
|
|
Services Agreement between the Company and Ceridian Corporation
dated as of February 10, 2003 (incorporated by reference to
the corresponding exhibit in the Companys Annual Report on
Form 10-K
dated March 31, 2003)
|
|
10
|
.20
|
|
|
|
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)
|
|
10
|
.21
|
|
|
|
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)
|
|
10
|
.22
|
|
|
|
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)
|
81
|
|
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
10
|
.23
|
|
|
|
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)
|
|
10
|
.24
|
|
|
|
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)
|
|
10
|
.25
|
|
|
|
Amended Nonqualified stock option agreement (incorporated by
reference to Exhibit 10.1 to the Companys
Form 8-K
dated January 3, 2006).
|
|
10
|
.26
|
|
|
|
Amended Director Fee Option Award Agreement (incorporated by
reference to Exhibit 10.2 to the Companys
Form 8-K
dated January 3, 2006).
|
|
10
|
.27
|
|
|
|
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 15, 2006).
|
|
10
|
.28
|
|
|
|
Entry into a Material Definitive Agreement with executives
(incorporated by reference to the Companys
Form 8-K,
Item 1.01 dated February 10, 2006).
|
|
10
|
.29
|
|
|
|
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).
|
|
10
|
.30
|
|
|
|
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).
|
|
10
|
.31
|
|
|
|
Notice of Termination of License Agreement and Acknowledgement
of Receipt by Ceridian Corporation dated, March 9, 2006
(incorporated by reference to Exhibit 10.31 to the
Companys Annual Report on
Form 10-K,
dated March 15, 2006)
|
|
10
|
.32
|
|
|
|
Commercial Office Lease by and between ROHO Ultimate, LTD. II, a
Florida limited partnership (Landlord) and 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)
|
|
10
|
.33
|
|
|
|
Agreement of Purchase and Sale by and between Parry F. Goodman
and Ivy Goodman and Robert J. Manne and/or assigns dated
September 22, 2004 (incorporated by reference to
Exhibit 10.33 to the Companys Annual Report on
Form 10-K,
dated March 15, 2006)
|
|
10
|
.34
|
|
|
|
Assignment of Agreement of Purchase and Sale by and between
Robert J. Manne a/k/a Robert Manne and 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)
|
|
10
|
.35
|
|
|
|
Weston Town Center South Office Building Lease between South
Office Building-DLB, LLC, a Florida Limited Liability Company,
South Office Building Bagtrust, LLC, a Florida Limited Liability
Company, and South Office Building-BJB, LLC, a Florida Limited
Liability Company, and 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)
|
|
10
|
.36
|
|
|
|
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.
|
|
10
|
.37
|
|
|
|
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)
|
|
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)
|
82
|
|
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
10
|
.39
|
|
|
|
Amendment to Lease by and between ROHO Ultimate, Ltd. I
(Landlord) and Ultimate Software Group. Inc.
(Tenant) for Demised premises at 2000 Ultimate Way,
Weston, FL 33326 (the Premises) dated
February 15, 2000 (incorporated by reference to
Exhibit 10.39 to the Companys Annual Report on
Form 10-K,
dated March 16, 2007)
|
|
10
|
.40
|
|
|
|
Lease Relating to Unit 2 Sceptre House, Hornbeam Park, Harrogate
between St. James Property Management Limited (The
Landlord) And RTIX Limited (The Tenant) dated
May 25, 2005 (incorporated by reference to
Exhibit 10.40 to the Companys Annual Report on
Form 10-K,
dated March 16, 2007)
|
|
10
|
.41
|
|
|
|
Counterpart/Underlease relating to Unit 2 Second Floor Sceptre
House Hornbeam Square North Hornbeam Business Park, Harrogate
between RTIX Limited (The Landlord) and First 4 IT
Limited (The Tenant) dated May 25, 2005
(incorporated by reference to Exhibit 10.41 to the
Companys Annual Report on
Form 10-K,
dated March 16, 2007)
|
|
10
|
.42
|
|
|
|
First Amendment to Lease between Galleria 600, LLC
(Landlord) and the Company, dated August 18,
2006 (incorporated by reference to Exhibit 10.42 to the
Companys Annual Report on
Form 10-K,
dated March 16, 2007)
|
|
10
|
.43
|
|
|
|
Amended and Restated Change in Control Bonus Plan for Executive
Officers, effective July 24, 2007 (incorporated by
reference to Exhibit 10.1 to the Companys Quarterly
Report on
Form 10-Q,
dated August 8, 2007)
|
|
10
|
.44
|
|
|
|
Amended and Restated 2005 Equity and Incentive Plan
(incorporated by reference to Exhibit 10.2 to the
Companys Quarterly Report on
Form 10-Q,
dated August 8, 2007)
|
|
10
|
.45
|
|
|
|
Commercial lease between Weston Office, LLC
(Landlord) and the Company, dated January 18,
2008*
|
|
21
|
.1
|
|
|
|
Subsidiary of the Registrant (incorporated by reference to
Exhibit 21.1 to the Companys Quarterly Report on
Form 10-Q,
dated November 8, 2007)
|
|
23
|
.1
|
|
|
|
Consent of Independent Registered Public Accounting Firm*
|
|
31
|
.1
|
|
|
|
Certification Pursuant to
Rule 13a-14(a)
and
Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended*
|
|
31
|
.2
|
|
|
|
Certification Pursuant to
Rule 13a-14(a)
and
Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended*
|
|
32
|
.1
|
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002*
|
|
32
|
.2
|
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002*
|
|
99
|
.1
|
|
|
|
Cautionary Statement for Purposes of the Safe Harbor
Provisions of the Private Securities Litigation Reform Act of
1995*
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
Incorporated by reference to the corresponding exhibit in the
Companys Registration Statement. |
83
Report of
Independent Registered Public Accounting Firm
The Board of Directors
The Ultimate Software Group, Inc.:
Under date of March 13, 2008, we reported on the
consolidated balance sheets of The Ultimate Software Group, Inc.
and subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of income, stockholders
equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2007
which report appears in the December 31, 2007 Annual Report
on
Form 10-K
of The Ultimate Software Group, Inc. In connection with our
audits of the aforementioned consolidated financial statements,
we also audited the related consolidated financial statement
schedule as listed in Item 15 of this Annual Report on
Form 10-K.
This financial statement schedule is the responsibility of the
Companys management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Notes 3 and 18 to the consolidated
financial statements, effective January 1, 2006, the
Company adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based
Payment. Also, as discussed in Note 22 to the
consolidated financial statements, the Company changed its
method of quantifying errors in 2006.
/s/ KPMG LLP
KPMG LLP
March 13, 2008
Miami, Florida
Certified Public Accountants
84
SCHEDULE II
THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
Charged to Expenses
|
|
|
Write-offs and
|
|
|
Balance at
|
|
Classification
|
|
Year
|
|
|
and Other
|
|
|
Other
|
|
|
End of Year
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
$
|
500
|
|
|
$
|
1,505
|
|
|
$
|
(1,305
|
)
|
|
$
|
700
|
|
December 31, 2006
|
|
|
500
|
|
|
|
813
|
|
|
|
(813
|
)
|
|
|
500
|
|
December 31, 2005
|
|
|
500
|
|
|
|
869
|
|
|
|
(869
|
)
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
Expenses
|
|
|
Write-offs and
|
|
|
Balance at
|
|
|
|
Year
|
|
|
and Other
|
|
|
Other
|
|
|
End of Year
|
|
|
Valuation allowance for deferred tax asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
$
|
32,455
|
|
|
$
|
|
|
|
$
|
(26,863
|
)(1)
|
|
$
|
5,592
|
|
December 31, 2006
|
|
|
33,955
|
|
|
|
|
|
|
|
(1,500
|
)
|
|
|
32,455
|
|
December 31, 2005
|
|
|
31,876
|
|
|
|
2,079
|
|
|
|
|
|
|
$
|
33,955
|
|
|
|
|
|
(1)
|
Represents the decrease in the valuation allowance for the
release of the reserves against deferred tax assets.
|
85
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 13, 2008
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 13, 2008
|
|
|
|
|
|
/s/ Mitchell K. Dauerman
Mitchell K. Dauerman
|
|
Executive Vice President,
Chief Financial Officer and Treasurer (Principal
Financial
and Accounting Officer)
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Marc D. Scherr
Marc D. Scherr
|
|
Vice Chairman of the Board
and Chief Operating Officer
|
|
March 13, 2008
|
|
|
|
|
|
/s/ James A. FitzPatrick Jr.
James A. FitzPatrick,, Jr.
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ LeRoy A. Vander Putten
LeRoy A. Vander Putten
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Rick Wilber
Rick Wilber
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Robert A. Yanover
Robert A. Yanover
|
|
Director
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Alois T. Leiter
Alois T. Leiter
|
|
Director
|
|
March 13, 2008
|
86