Ultimate Software Group Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-24347
THE ULTIMATE SOFTWARE GROUP, INC.
(Exact name of Registrant as specified in its charter)
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Delaware
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65-0694077 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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2000 Ultimate Way, Weston, FL
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33326 |
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(Address of principal executive offices)
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(Zip Code) |
(954) 331-7000
(Registrants telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
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 whether the Registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of October 10, 2007, there were 24,705,238 shares of the Registrants Common Stock, par
value $0.01, outstanding.
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
2
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
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As of |
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As of |
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September 30, |
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December 31, |
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2007 |
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2006 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
15,934 |
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$ |
16,734 |
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Accounts receivable, net of allowance for doubtful accounts of
$600 and $500 for 2007 and 2006, respectively |
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29,055 |
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26,575 |
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Short-term investments in marketable securities |
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15,658 |
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14,247 |
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Prepaid expenses and other current assets |
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|
9,899 |
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|
8,279 |
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Total current assets |
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70,546 |
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65,835 |
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Property and equipment, net |
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16,616 |
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13,480 |
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Capitalized software, net |
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3,465 |
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|
2,055 |
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Goodwill |
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2,758 |
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|
2,734 |
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Long-term investments in marketable securities |
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|
643 |
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|
2,039 |
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Other assets, net |
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8,705 |
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|
7,387 |
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Total assets |
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$ |
102,733 |
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$ |
93,530 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
5,373 |
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$ |
3,894 |
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Accrued expenses |
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|
7,987 |
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|
9,230 |
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Current portion of deferred revenue |
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38,852 |
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|
36,524 |
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Current portion of capital lease obligations |
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1,894 |
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|
1,512 |
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Current portion of long-term debt |
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614 |
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|
505 |
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Total current liabilities |
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54,720 |
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|
51,665 |
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Deferred revenue, net of current portion |
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7,527 |
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|
6,445 |
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Deferred rent |
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2,708 |
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2,788 |
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Capital lease obligations, net of current portion |
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1,871 |
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1,416 |
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Long-term debt, net of current portion |
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362 |
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|
194 |
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Total liabilities |
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67,188 |
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|
62,508 |
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Stockholders equity: |
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Preferred Stock, $.01 par value, 2,000,000 shares authorized,
no shares issued or outstanding |
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Series A Junior Participating Preferred Stock, $.01 par value,
500,000 shares authorized, no shares issued or outstanding |
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Common Stock, $.01 par value, 50,000,000 shares authorized,
26,043,094 and 25,102,824 shares issued in 2007 and 2006, respectively |
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260 |
|
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|
251 |
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Additional paid-in capital |
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138,568 |
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|
125,121 |
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Accumulated other comprehensive income |
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7 |
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1 |
|
Accumulated deficit |
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(73,477 |
) |
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(83,500 |
) |
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65,358 |
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41,873 |
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Treasury stock, 1,364,375 and 709,437 shares, at cost, for 2007
and 2006, respectively |
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(29,813 |
) |
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(10,851 |
) |
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Total stockholders equity |
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35,545 |
|
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|
31,022 |
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Total liabilities and stockholders equity |
|
$ |
102,733 |
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$ |
93,530 |
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The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.
3
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
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For the Three Months |
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For the Nine Months |
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Ended September 30, |
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Ended September 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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Revenues: |
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Recurring |
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$ |
22,174 |
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$ |
16,487 |
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$ |
62,720 |
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$ |
46,456 |
|
Services |
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12,312 |
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|
9,410 |
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|
35,773 |
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25,972 |
|
License |
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|
3,337 |
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2,882 |
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10,829 |
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|
9,340 |
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Total revenues |
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37,823 |
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28,779 |
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109,322 |
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81,768 |
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Cost of revenues: |
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Recurring |
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5,630 |
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|
|
4,602 |
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|
16,609 |
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|
13,040 |
|
Services |
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10,066 |
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|
7,287 |
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|
29,439 |
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20,655 |
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License |
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|
352 |
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|
319 |
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|
1,026 |
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|
966 |
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|
Total cost of revenues |
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|
16,048 |
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|
12,208 |
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|
47,074 |
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|
34,661 |
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Gross profit |
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21,775 |
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|
16,571 |
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|
62,248 |
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|
47,107 |
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Operating expenses: |
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|
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Sales and marketing |
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|
9,040 |
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|
7,222 |
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|
26,265 |
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|
21,711 |
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Research and development |
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|
7,107 |
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|
5,887 |
|
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|
20,941 |
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|
16,533 |
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General and administrative |
|
|
3,645 |
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|
|
2,526 |
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|
|
10,345 |
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|
7,524 |
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|
|
|
|
|
|
|
|
|
|
|
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Total operating expenses |
|
|
19,792 |
|
|
|
15,635 |
|
|
|
57,551 |
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|
45,768 |
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|
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|
|
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|
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Operating income |
|
|
1,983 |
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|
|
936 |
|
|
|
4,697 |
|
|
|
1,339 |
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Other income (expense): |
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|
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|
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Interest expense |
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|
(61 |
) |
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|
(52 |
) |
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|
(161 |
) |
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|
(152 |
) |
Other income, net |
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|
433 |
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|
|
419 |
|
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|
5,602 |
|
|
|
1,148 |
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|
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Total other income, net |
|
|
372 |
|
|
|
367 |
|
|
|
5,441 |
|
|
|
996 |
|
|
|
|
|
|
|
|
|
|
|
|
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Income before provision for income taxes |
|
|
2,355 |
|
|
|
1,303 |
|
|
|
10,138 |
|
|
|
2,335 |
|
Provision for income taxes |
|
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|
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|
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(115 |
) |
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|
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Net income |
|
$ |
2,355 |
|
|
$ |
1,303 |
|
|
$ |
10,023 |
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$ |
2,335 |
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|
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Net income per share: |
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|
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Basic |
|
$ |
0.10 |
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|
$ |
0.05 |
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|
$ |
0.41 |
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|
$ |
0.10 |
|
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|
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Diluted |
|
$ |
0.09 |
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|
$ |
0.05 |
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|
$ |
0.36 |
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|
$ |
0.09 |
|
|
|
|
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|
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Weighted average shares outstanding: |
|
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|
|
|
|
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Basic |
|
|
24,764 |
|
|
|
24,130 |
|
|
|
24,688 |
|
|
|
23,713 |
|
|
|
|
|
|
|
|
|
|
|
|
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Diluted |
|
|
27,692 |
|
|
|
27,030 |
|
|
|
27,577 |
|
|
|
26,891 |
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|
|
|
|
|
|
|
|
|
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|
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.
4
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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For the Nine Months |
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Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,023 |
|
|
$ |
2,335 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
5,071 |
|
|
|
3,727 |
|
Provision for doubtful accounts |
|
|
1,075 |
|
|
|
873 |
|
Non-cash stock-based compensation expense |
|
|
7,294 |
|
|
|
4,264 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(3,555 |
) |
|
|
(3,336 |
) |
Prepaid expenses and other current assets |
|
|
(1,620 |
) |
|
|
(1,737 |
) |
Other assets |
|
|
(1,478 |
) |
|
|
(2,244 |
) |
Accounts payable |
|
|
1,479 |
|
|
|
1,190 |
|
Accrued expenses and deferred rent |
|
|
(1,323 |
) |
|
|
1,068 |
|
Deferred revenue |
|
|
3,410 |
|
|
|
4,141 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
20,376 |
|
|
|
10,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of marketable securities |
|
|
(13,629 |
) |
|
|
(17,903 |
) |
Maturities of marketable securities |
|
|
13,614 |
|
|
|
15,383 |
|
Capitalized software |
|
|
(1,391 |
) |
|
|
(1,273 |
) |
Acquisition-related expenses |
|
|
(24 |
) |
|
|
|
|
Purchases of property and equipment |
|
|
(4,777 |
) |
|
|
(4,725 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(6,207 |
) |
|
|
(8,518 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Repurchases of Common Stock |
|
|
(18,962 |
) |
|
|
(9,797 |
) |
Principal payments on capital lease obligations |
|
|
(1,452 |
) |
|
|
(1,247 |
) |
Repayments of borrowings of long-term debt |
|
|
(684 |
) |
|
|
(376 |
) |
Net proceeds from issuances of Common Stock |
|
|
6,123 |
|
|
|
6,236 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(14,975 |
) |
|
|
(5,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash |
|
|
6 |
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(800 |
) |
|
|
(3,421 |
) |
Cash and cash equivalents, beginning of period |
|
|
16,734 |
|
|
|
17,731 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
15,934 |
|
|
$ |
14,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
73 |
|
|
$ |
79 |
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities: |
|
|
|
|
|
|
|
|
The Company entered into capital lease obligations to acquire new equipment totaling $2,289 and $1,433 during the nine months ended
September 30, 2007 and 2006, respectively. |
The Company
entered into a long-term installment loan agreement with a vendor to acquire computer software totaling $961 during the nine
months ended September 30, 2007. |
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.
5
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Treasury Stock |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Income |
|
|
Deficit |
|
|
Shares |
|
|
Amount |
|
|
Equity |
|
Balance, December 31, 2006 |
|
|
25,103 |
|
|
$ |
251 |
|
|
$ |
125,121 |
|
|
$ |
1 |
|
|
$ |
(83,500 |
) |
|
|
709 |
|
|
$ |
(10,851 |
) |
|
$ |
31,022 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,023 |
|
|
|
|
|
|
|
|
|
|
|
10,023 |
|
Unrealized gain on foreign currency
translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
655 |
|
|
|
(18,962 |
) |
|
|
(18,962 |
) |
Issuances of Common Stock from exercises
of stock options and warrants |
|
|
940 |
|
|
|
9 |
|
|
|
6,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,123 |
|
Non-cash stock-based compensation |
|
|
|
|
|
|
|
|
|
|
7,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,333 |
|
|
|
|
Balance, September 30, 2007 |
|
|
26,043 |
|
|
$ |
260 |
|
|
$ |
138,568 |
|
|
$ |
7 |
|
|
$ |
(73,477 |
) |
|
|
1,364 |
|
|
$ |
(29,813 |
) |
|
$ |
35,545 |
|
|
|
|
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.
6
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of The Ultimate
Software Group, Inc. and subsidiaries (the Company) have been prepared, without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain
information and footnote disclosures normally included in financial statements in accordance with
U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to
such rules and regulations. The information in this report should be read in conjunction with the
Companys audited consolidated financial statements and notes thereto included in the Companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the SEC on March
16, 2007 (the Form 10-K).
The unaudited condensed 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 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. Interim results of operations for the three and nine months ended September
30, 2007 and 2006 are not necessarily indicative of operating results for the full fiscal years or
for any future periods.
The unaudited condensed 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.
2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Summary of Significant Accounting Policies
The Companys significant accounting policies are discussed in Note 2 to its audited
consolidated financial statements for the fiscal year ended December 31, 2006, included in the Form
10-K. These accounting policies have not significantly changed.
Recently Adopted Accounting Pronouncements
Effective January 1, 2007, the Company adopted FASB Interpretation 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
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. 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. As of January 1, 2007 and September 30, 2007, the Company believes that no reserves for
uncertain income tax positions need to be recorded pursuant to FIN No. 48. The Company has net
operating loss carryforwards expiring at various times through the year 2026 of $74.4 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
7
operating losses may be limited as a result of cumulative ownership changes in the Companys
equity instruments. Tax years 1996 to 2006 remain subject to future examination by the major tax
jurisdictions in which the Company is subject to tax. The adoption of FIN No. 48 did not have an
impact on the Companys unaudited condensed consolidated financial statements.
In May 2007, the FASB published FASB Staff Position FIN 48-1, Definition of Settlement in
FASB Interpretation No. 48 (FSP 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 Companys accounting is consistent with the
guidance in FSP FIN 48-1.
Effective January 1, 2007, the Company adopted the Emerging Issues Task Force Issue No. 06-3,
How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That is, Gross versus Net Presentation) (EITF No. 06-3). EITF No. 06-3
allows entities to adopt a policy of presenting taxes in the income statement either on a gross or
net basis. Gross or net presentation may be elected for each different type of tax, but similar
taxes should be presented consistently. Taxes within the scope of 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 unaudited condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities; including an amendment of FASB
Statement No. 115 (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Most of the provisions of SFAS No.
159 apply only to entities that elect the fair value option. However, the amendment to FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS No.
115), applies to all entities with available-for-sale and trading securities. SFAS No. 159 is
effective for the Companys consolidated financial statements for the annual reporting period
beginning after November 15, 2007. The Company is currently evaluating the impact of this new
pronouncement on its consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value as used in numerous
accounting pronouncements, establishes a framework for measuring fair value in GAAP and expands
disclosures related to the use of fair value measures in financial statements. SFAS No. 157 does
not expand the use of fair value measures in financial statements, but standardizes its
definition and guidance in GAAP and emphasizes that fair value is a market-based measurement and
not an entity-specific measurement based on an exchange transaction in which the entity sells an
asset or transfers a liability (exit price). SFAS No. 157 establishes a fair value hierarchy from
observable market data as the highest level to fair value based on an entitys own fair value
assumptions as the lowest level. SFAS No. 157 is effective for the Companys consolidated
financial statements for interim and annual reporting periods beginning after November 15, 2007.
The Company is currently evaluating the impact of this new pronouncement on its consolidated
financial statements.
8
3. Investments in Marketable Securities
The Company classifies its investments in marketable securities with readily determinable fair
values as securities available-for-sale in accordance with Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities and FASB
Staff Position Financial Accounting Standards No. 115-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. 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 holding gains
and losses on securities available-for-sale are reported as a net amount in accumulated other
comprehensive 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 income is $2 thousand of unrealized gains on available-for-sale
securities at September 30, 2007 and $2 thousand of unrealized gains on available-for-sale
securities held at December 31, 2006.
The amortized cost and market value of the Companys investments in marketable securities
available-for-sale at September 30, 2007 are shown in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
|
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Value |
|
Investments in marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debentures bonds |
|
$ |
11,471 |
|
|
$ |
4 |
|
|
$ |
7 |
|
|
$ |
11,468 |
|
Commercial paper |
|
|
647 |
|
|
|
|
|
|
|
|
|
|
|
647 |
|
Certificates of deposit |
|
|
1,200 |
|
|
|
|
|
|
|
|
|
|
|
1,200 |
|
Asset-backed fixed |
|
|
2,983 |
|
|
|
3 |
|
|
|
|
|
|
|
2,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments, available-for-sale |
|
$ |
16,301 |
|
|
$ |
7 |
|
|
$ |
7 |
|
|
$ |
16,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and market value of the available-for-sale securities by contractual
maturity at September 30, 2007 are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Market |
|
|
|
Cost |
|
|
Value |
|
Due in one year or less |
|
$ |
15,660 |
|
|
$ |
15,658 |
|
Due after one year |
|
|
641 |
|
|
|
643 |
|
|
|
|
|
|
|
|
|
|
$ |
16,301 |
|
|
$ |
16,301 |
|
|
|
|
|
|
|
|
4. 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.
9
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
Property and equipment |
|
$ |
49,008 |
|
|
$ |
41,173 |
|
Less: accumulated depreciation
and amortization |
|
|
32,392 |
|
|
|
27,693 |
|
|
|
|
|
|
|
|
|
|
$ |
16,616 |
|
|
$ |
13,480 |
|
|
|
|
|
|
|
|
5. 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. SFAS No. 142, Goodwill and Other Intangible
Assets, 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, Accounting for the
Impairment or Disposal of Long-Lived Assets. The $0.8 million balance of the acquired
intangibles, net of amortization, is included in other assets on the Companys unaudited condensed
consolidated balance sheets. The Company is currently amortizing its acquired intangible assets
with finite lives over periods ranging from five to six years.
6. Other Income, net
Other income, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the nine months |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Interest income |
|
$ |
375 |
|
|
$ |
356 |
|
|
$ |
1,087 |
|
|
$ |
970 |
|
Other income |
|
|
58 |
|
|
|
63 |
|
|
|
140 |
|
|
|
178 |
|
Non-recurring settlement fee, net |
|
|
|
|
|
|
|
|
|
|
4,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
$ |
433 |
|
|
$ |
419 |
|
|
$ |
5,602 |
|
|
$ |
1,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other income, net, in the unaudited condensed consolidated statement of operations
for the nine months ended September 30, 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.
7. Earnings Per Share
SFAS No. 128, Earnings Per Share, requires dual presentation of earnings per share
basic and diluted. Basic earnings per share is computed by dividing income available to common
stockholders (the numerator) by the weighted average number of common shares outstanding (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.
10
The following is a reconciliation of the shares used in the computation of basic and diluted
net income per share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the nine months |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Basic weighted average shares outstanding |
|
|
24,764 |
|
|
|
24,130 |
|
|
|
24,688 |
|
|
|
23,713 |
|
Effect of dilutive equity instruments |
|
|
2,928 |
|
|
|
2,900 |
|
|
|
2,889 |
|
|
|
3,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted average shares outstanding |
|
|
27,692 |
|
|
|
27,030 |
|
|
|
27,577 |
|
|
|
26,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other common stock equivalents (i.e., stock
options, restricted stock awards, stock
units and warrants) outstanding which are
not included in the calculation of diluted
income per share because their impact is
anti-dilutive |
|
|
179 |
|
|
|
523 |
|
|
|
634 |
|
|
|
383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Comprehensive Income
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 unaudited
condensed 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 income, as presented on the accompanying unaudited condensed 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 three and nine months ended September 30, 2007 and 2006 was as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the nine months |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
2,355 |
|
|
$ |
1,303 |
|
|
$ |
10,023 |
|
|
$ |
2,335 |
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investments in
marketable securities available-for-sale |
|
|
14 |
|
|
|
42 |
|
|
|
|
|
|
|
33 |
|
Unrealized gain on foreign currency
translation adjustments |
|
|
1 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
2,370 |
|
|
$ |
1,345 |
|
|
$ |
10,029 |
|
|
$ |
2,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Foreign Currency
The financial statements of the Companys foreign subsidiaries have been translated into U.S.
dollars. The functional currency of The Ultimate Software Group of Canada, Inc. is the Canadian
dollar and the functional currency of The Ultimate Software Group UK Limited is the British pound.
Assets and liabilities are translated into U.S. dollars at period-end exchange rates, while fixed
assets and equity accounts are translated at historical rates. Income and expenses are translated
at the average exchange rate for the reporting period. The resulting translation adjustments,
representing unrealized gains or losses, are included in stockholders equity as a component of
accumulated other comprehensive income. Realized gains and losses resulting from foreign exchange
transactions are included in total operating
11
costs in the unaudited condensed consolidated statements of operations. The Company had unrealized
translation gains of $1 thousand and $6 thousand for the three months and nine months ended
September 30, 2007, respectively.
10. Guarantees
The Company applies the provisions of FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
(FIN No. 45). The provision for initial recognition and measurement of a liability is applied on
a prospective basis to guarantees issued or modified after December 31, 2002. FIN No. 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 No. 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 unaudited condensed consolidated financial statements.
11. Stock-Based Compensation
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).
On January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004),
Share-Based Payment (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 three and nine months ended September 30, 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.
As of September 30, 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 2,785,912 shares. Options
12
granted to officers and employees under the Plan and the Prior Plan generally have a 10-year
term, vesting 25% immediately and 25% on each of the first three anniversaries of the grant date .
Options granted to non-employee directors under the Plan and the Prior Plan generally have a
10-year term and vest and become exercisable immediately on the grant date. However, certain
options granted to non-employee directors for board services during the period January 3, 2005
through July 2, 2007 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 shall be 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 shall be
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 shall vest immediately upon grant.
In addition to the option grants discussed above, commencing with the third calendar quarter
of 2007, each non-employee director shall be 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.
13
Stock-Based Compensation
The following table sets forth the stock-based compensation resulting from stock-based
arrangements that was recorded in the Companys unaudited condensed consolidated statements of
operations for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the nine months |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Non-cash stock-based compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of recurring revenues |
|
$ |
161 |
|
|
$ |
89 |
|
|
$ |
489 |
|
|
$ |
289 |
|
Cost of service revenues |
|
|
330 |
|
|
|
157 |
|
|
|
1,242 |
|
|
|
605 |
|
Cost of license revenues |
|
|
1 |
|
|
|
1 |
|
|
|
4 |
|
|
|
5 |
|
Sales and marketing |
|
|
1,151 |
|
|
|
797 |
|
|
|
3,274 |
|
|
|
2,134 |
|
Research and development |
|
|
213 |
|
|
|
117 |
|
|
|
753 |
|
|
|
413 |
|
General and administrative |
|
|
701 |
|
|
|
266 |
|
|
|
1,532 |
|
|
|
818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-cash stock-based compensation expense |
|
$ |
2,557 |
|
|
$ |
1,427 |
|
|
$ |
7,294 |
|
|
$ |
4,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in capitalized software in the Companys unaudited condensed consolidated balance
sheets at September 30, 2007 and December 31, 2006 was $39 thousand and $41 thousand, respectively,
in stock-based compensation incurred in the development of UltiPro Canadian HR/Payroll (UltiPro
Canada) during the nine months ended September 30, 2007 and the year ended December 31, 2006.
These amounts would have otherwise been charged to research and development expense in the
unaudited condensed consolidated statements of operations for the nine months ended September 30,
2007 and the year ended December 31, 2006.
Net cash proceeds from the exercise of stock options and warrants were $2.1 million and $6.1
million for the three and nine months ended September 30, 2007, respectively, and $0.9 million and
$6.2 million for the three and nine months ended September 30, 2006, respectively. No income tax
benefit was realized from stock option exercises during the three and nine months ended September
30, 2007 and 2006.
The fair value of stock-based awards was estimated using the Black-Scholes model with the
following weighted-average assumptions for the three and nine months ended September 30, 2007 and
2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the nine months |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Expected term (in years) |
|
|
5.0 |
|
|
|
4.7 |
|
|
|
5.0 |
|
|
|
4.6 |
|
Volatility |
|
|
39 |
% |
|
|
41 |
% |
|
|
39 |
% |
|
|
40 |
% |
Interest rate |
|
|
4.63 |
% |
|
|
4.88 |
% |
|
|
4.64 |
% |
|
|
4.79 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair
value at grant date |
|
$ |
12.67 |
|
|
$ |
7.85 |
|
|
$ |
10.80 |
|
|
$ |
8.61 |
|
14
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 three months ended September 30, 2007 and September 30,
2006, there were no grants of Restricted Stock Awards for shares of Common Stock to certain
officers or employees. During the nine months ended September 30, 2007 and September 30, 2006, the
Company granted Restricted Stock Awards for an aggregate of 105,000 shares and 105,000 shares,
respectively, of Common Stock to certain officers and employees. During the three months and nine
months ended September 30, 2007, the Company granted Restricted Stock Awards for an aggregate of
2,055 shares of Common Stock to non-employee directors. There were no grants of Restricted Stock
Awards for the three and nine months ended September 30, 2006 to non-employee directors. Included
in the Companys unaudited condensed consolidated statements of operations for the three and nine
months ended September 30, 2007 was $0.7 million and $2.1 million, respectively, of stock-based
compensation expense for Restricted Stock Awards. There was $0.3 million and $0.9 million of
stock-based compensation expense for Restricted Stock Awards included in the Companys unaudited
condensed consolidated statements of operations for the three and nine months ended September 30,
2006, respectively.
Stock Unit Awards
The Company may, at its discretion, make awards of stock units under the Plan (Stock Unit
Awards) to certain officers and employees. A Stock Unit Award is a grant of a number of
hypothetical share units with respect to shares of Common Stock that are subject to vesting and
transfer restrictions and conditions under a stock unit award agreement. The value of each unit is
equal to the fair market value of one share of Common Stock on any applicable date of
determination. The payment with respect to each unit under a Stock Unit Award may be made, at the
discretion of the Compensation Committee, 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.
There were no grants of Stock Unit Awards during the three months ended September 30, 2007 or
2006. During the nine months ended September 30, 2007 and 2006, the Company granted an aggregate
of 16,603 stock units and 28,518 stock units, respectively, to certain officers, of which none have
been forfeited as of September 30, 2007. Included in the Companys unaudited condensed
consolidated statements of operations for the three and nine months ended September 30, 2007 was
$19 thousand and $57 thousand, respectively, of stock-based compensation expense for Stock Unit
Awards. During the three and nine months ended September 30, 2006, $18 thousand and $41 thousand,
respectively, of stock-based compensation expense for Stock Unit Awards was included in the
Companys unaudited condensed consolidated statements of operations.
15
Stock Option and Restricted Stock Activity
The following table summarizes stock option activity for the nine months ended September 30,
2007, (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, 2006 |
|
|
4,893 |
|
|
$ |
10.07 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
696 |
|
|
|
25.72 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(870 |
) |
|
|
6.90 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(30 |
) |
|
|
22.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007 |
|
|
4,689 |
|
|
$ |
12.90 |
|
|
|
6.02 |
|
|
$ |
103,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2007 |
|
|
3,587 |
|
|
$ |
10.14 |
|
|
|
5.21 |
|
|
$ |
88,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2007. The amount of the aggregate intrinsic value changes, based on the fair
value of the Companys Common Stock. Total intrinsic value of options exercised was $5.9 million
and $18.5 million for the three and nine months ended September 30, 2007, respectively, and $2.3
million and $16.4 million for the three and nine months ended September 30, 2006, respectively.
Total fair value of options vested during the three and nine months ended September 30, 2007 was
$1.0 million and $4.1 million, respectively, and $1.5 million and $3.4 million during the three and
nine months ended September 30, 2006, respectively.
As of September 30, 2007, $6.6 million of total unrecognized compensation costs related to
non-vested stock options is expected to be recognized over a weighted average period of 1.7 years.
The following table summarizes restricted stock activity for the nine months ended September
30, 2007, (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date |
|
Restricted Stock |
|
Shares |
|
|
Fair Value |
|
Outstanding at December 31, 2006 |
|
|
432 |
|
|
$ |
20.70 |
|
Granted |
|
|
107 |
|
|
|
25.94 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007 |
|
|
539 |
|
|
$ |
21.74 |
|
|
|
|
|
|
|
|
As of September 30, 2007, $8.0 million of total unrecognized compensation costs related to
non-vested Restricted Stock Awards is expected to be recognized over a weighted average period of
2.7 years. As of September 30, 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 2.7
years.
16
|
|
|
ITEM 2. |
|
Managements Discussion and Analysis of Financial Condition and Results
of Operations |
The following discussion of the financial condition and results of operations of The Ultimate
Software Group, Inc. (Ultimate Software or the Company) should be read in conjunction with the
unaudited Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this
Quarterly Report on Form 10-Q.
Executive Summary
Ultimate Software designs, markets, implements and supports human resources, payroll and
talent management solutions.
Ultimate Softwares UltiPro software (UltiPro) is an end-to-end, single source Web-based
solution designed to deliver the functionality businesses need to manage the employee life cycle,
from 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,
human resources (HR) and benefits management, a strong payroll engine, time and attendance
management, workforce scheduling, on-line benefits enrollment, training management, performance and
learning management, reporting and analytical decision-making tools, and a self-service Web portal
for executives, managers, administrators, and employees. Ultimate Software believes that UltiPro
helps customers streamline HR and payroll processes to significantly reduce administrative and
operational costs, while also empowering managers and staff to analyze workforce trends for better
decision making, access critical information quickly and perform routine business activities
efficiently.
The Companys main sources of revenues include sales from the Intersourcing Offering (defined
below), sales of perpetual software licenses for UltiPro (and the related annual maintenance) and
sales of services (mostly implementation) related to both Intersourcing and license sales.
Since 2002, the Companys business strategy has been to sell its UltiPro software offerings
primarily on a recurring revenue basis, with perpetual software licenses of UltiPro offered to
customers that do not prefer a subscription-based arrangement. The primary focus is to maximize
the recurring revenue streams in an effort to minimize the volatility and unpredictable nature of a
business strategy predominantly focused on license sales. Prior to 2002, the Companys business
strategy was centered on sales of perpetual software licenses of UltiPro.
The primary sources of the Companys recurring revenue stream are hosting services, branded
Intersourcing and product maintenance (i.e., software updates and telephone customer support).
Other recurring revenue sources include subscription revenues from third-party business service
providers (BSPs) and recurring revenues from the Original Ceridian Agreement. See also Original
Ceridian Agreement below.
Ultimate Software offers hosting services at two separate data center locationsthe original
location in Miami, Florida, which was opened in 2002, and the location opened in August 2005 in
Atlanta, Georgia. With Intersourcing, Ultimate Software provides the hardware, infrastructure,
ongoing maintenance and back-up services for its customers at its data centers. Operations of the
facilities at both data centers are managed by International Business Machines (IBM).
Intersourcing is designed to appeal to those customers that want to minimize their internal
technology support requirements for the application and hardware.
17
For the past several years (following the introduction of its Intersourcing Offering in 2002),
the revenue mix in the Companys sales production has favored Intersourcing. Management believes
that this trend in sales mix composition will continue to occur in the foreseeable future, with a
concentration of unit sales in Intersourcing. Management also believes the shift in sales mix has
helped to produce a more predictable revenue stream by providing recurring revenue and cash from
Intersourcing over the related contract periods, typically 24 months. As Intersourcing units are
sold, the recurring revenue backlog associated with Intersourcing grows, enhancing the
predictability of future revenue streams. Intersourcing sales include a one-time upfront fee,
priced on a per-employee basis, and ongoing monthly fees, priced on a per-employee-per-month
(PEPM) basis. Upfront fees associated with the Intersourcing sale are recognized as recurring
subscription revenues ratably over the term of the related contract beginning when the related
customer processes its first live payroll (or goes Live). Ongoing monthly PEPM fees are
recognized as recurring subscription revenues each month commencing when the related customer goes
Live.
In connection with the Companys business strategy, an internal financial metric used by the
Company in measuring future financial performance is new annual recurring revenues. New annual
recurring revenues (ARR) represent the expected one-year value from (i) new Intersourcing sales
from the Companys hosted model (including prorated one-time fees); (ii) maintenance revenues
related to new license sales; (iii) recurring revenues from new BSPs, as well as recurring revenues
from new sales by existing BSPs; and (iv) recurring revenues from additional sales to Ultimate
Softwares existing client base. New annual recurring revenues attributable to sales during the
third fiscal quarter of 2007 were $7.1 million as compared to $5.1 million for the same period in
2006. New annual recurring revenues attributable to sales during the nine months ended
September 30, 2007 were $20.1 million as compared to $16.5 million for the nine months ended
September 30, 2006.
Intersourcing Offering
In 2002, the Company began offering a hosting service, branded Intersourcing, whereby the
Company provides the hardware, infrastructure, ongoing maintenance and back-up services for its
customers at a data center located in Miami, Florida, which is managed by IBM (Hosting Services).
In August 2005, the Company opened a second data center, which is located in Atlanta, Georgia and
is also managed by IBM. Different types of hosting arrangements include the sale of Hosting
Services as a part of the Intersourcing Offering, discussed below, and, to a lesser extent, the
sale of Hosting Services to customers that license UltiPro on a perpetual basis (Base Hosting).
Hosting Services, typically available in a shared environment, provide Web access to UltiPro,
including comprehensive learning management functionality for organizations that need to simplify
the IT support requirements of their business applications and are priced on a PEPM basis. In the
shared environment, Ultimate Software provides an infrastructure with applicable servers shared
among many customers who use a Web browser to access the application software through the data
centers.
The Intersourcing Offering is designed to provide an appealing pricing structure to customers
who prefer to minimize the initial cash outlay associated with typical capital expenditures.
Intersourcing customers purchase the right to use UltiPro on an ongoing basis for a specific term,
typically in a shared environment. The pricing for Intersourcing, including both the hosting
element as well as the right to use UltiPro, is on a PEPM basis.
Original Ceridian Agreement
During 2001, Ultimate Software and Ceridian Corporation (Ceridian) reached an agreement, as
amended in 2002, which granted Ceridian a non-exclusive license to use UltiPro software as part of
an
18
on-line offering that Ceridian can market primarily to businesses with under 500 employees
(the Original Ceridian Agreement). Ceridian marketed that solution under the name SourceWeb.
Under the agreement, Ceridian is required to pay the Company a monthly license fee based on
the number of employees paid using the licensed software. In 2007, Ceridian is required to make
monthly payments of $551,250. The aggregate minimum payments that Ceridian is obligated to pay
Ultimate Software under the Original Ceridian Agreement over the minimum term of the Agreement are
$42.7 million. To date, Ceridian has paid to Ultimate Software a total of $39.8 million under the
Original Ceridian Agreement.
Effective March 9, 2006, Ceridian provided Ultimate Software with a two years advance written
notice of termination of the Original Ceridian Agreement, as permitted under the terms of the
Agreement. Pursuant to such notice, the Original Ceridian Agreement will terminate on March 9,
2008 (unless terminated earlier for an uncured material breach). Ceridian continues to be
financially obligated to pay Ultimate Software a minimum monthly fee through the termination of the
Original Ceridian Agreement. The minimum monthly fee payable to Ultimate Software by Ceridian in
2007 is $551,250 and was $525,000 in 2006.
Ultimate Software expects to continue to recognize a minimum of $642,000 per month in
recurring subscription revenues from the Original Ceridian Agreement until its termination in March
2008.
Significant Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. 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 Companys significant accounting policies are discussed in Managements Discussion and
Analysis of Financial Condition and Results of Operations included in the Form 10-K. These
accounting policies have not significantly changed.
19
Results of Operations
The following table sets forth the unaudited condensed consolidated statements of operations
data of the Company, as a percentage of total revenues, for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring |
|
|
58.6 |
% |
|
|
57.3 |
% |
|
|
57.4 |
% |
|
|
56.8 |
% |
Services |
|
|
32.6 |
|
|
|
32.7 |
|
|
|
32.7 |
|
|
|
31.8 |
|
License |
|
|
8.8 |
|
|
|
10.0 |
|
|
|
9.9 |
|
|
|
11.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring |
|
|
14.9 |
|
|
|
16.0 |
|
|
|
15.2 |
|
|
|
15.9 |
|
Services |
|
|
26.6 |
|
|
|
25.3 |
|
|
|
26.9 |
|
|
|
25.2 |
|
License |
|
|
0.9 |
|
|
|
1.1 |
|
|
|
0.9 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
42.4 |
|
|
|
42.4 |
|
|
|
43.0 |
|
|
|
42.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
23.9 |
|
|
|
25.1 |
|
|
|
24.0 |
|
|
|
26.6 |
|
Research and development |
|
|
18.8 |
|
|
|
20.4 |
|
|
|
19.2 |
|
|
|
20.2 |
|
General and administrative |
|
|
9.6 |
|
|
|
8.8 |
|
|
|
9.5 |
|
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
52.3 |
|
|
|
54.3 |
|
|
|
52.7 |
|
|
|
56.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
5.3 |
|
|
|
3.3 |
|
|
|
4.3 |
|
|
|
1.7 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
Other income, net |
|
|
1.1 |
|
|
|
1.4 |
|
|
|
5.1 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
|
0.9 |
|
|
|
1.2 |
|
|
|
5.0 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
6.2 |
|
|
|
4.5 |
|
|
|
9.3 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
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|
|
|
|
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|
|
|
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Net income |
|
|
6.2 |
% |
|
|
4.5 |
% |
|
|
9.2 |
% |
|
|
2.9 |
% |
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Revenues
The Companys revenues are derived from three principal sources: recurring revenues, services
revenues and software licenses (license revenues).
Recurring revenues consist of maintenance revenues, Intersourcing revenues from the Companys
hosted offering of UltiPro and subscription revenues from per-employee-per-month (PEPM) fees
generated by BSPs, principally Ceridian. Maintenance revenues are derived from maintaining,
supporting and providing periodic updates for the Companys products under software license
agreements. Subscription revenues are principally derived from PEPM fees earned through the
Intersourcing Offering, Base Hosting and revenues generated from the Original Ceridian Agreement.
Maintenance revenues are recognized ratably over the service period, generally one year. To the
extent there are upfront fees associated with the Intersourcing Offering or Base Hosting,
subscription revenues are recognized ratably over the minimum term of the related contract upon the
delivery of the product and services. Ongoing PEPM fees from the Intersourcing Offering and Base
Hosting are recognized as subscription revenues (a component of recurring revenues in the unaudited
condensed consolidated statements of operations) as the services are delivered.
Services revenues include revenues from fees charged for the implementation of the Companys
software products and training of customers in the use of such products, fees for other services,
including
20
the provision of payroll-related forms and the printing of Form W-2s for certain customers
and certain reimbursable out-of-pocket expenses. Revenues for training and implementation
consulting services are recognized as services are performed to the extent the pricing for such
services is on a time and materials basis. Other services are recognized as the product is shipped
or as the services are rendered, depending on the specific terms of the arrangement.
Arrangement fees related to fixed-fee implementation services contracts are recognized using
the percentage of completion accounting method, which involves the use of estimates. Percentage of
completion is measured at each reporting date based on hours incurred to date compared to total
estimated hours to complete the implementation job. If a sufficient basis to measure the progress
towards completion does not exist, revenue is recognized when the project is completed or when the
Company receives final acceptance from the customer.
License revenues include revenues from software license agreements for the Companys products,
entered into between the Company and its customers in which the license fees are non-cancelable.
License revenues are generally recognized upon the delivery of the related software product when
all significant contractual obligations have been satisfied. Until such delivery, the Company
records amounts received when contracts are signed as customer deposits which are included with
deferred revenues in the unaudited condensed consolidated balance sheets.
Total revenues, consisting of recurring, services and license revenues, increased 31.4% to
$37.8 million for the three months ended September 30, 2007 from $28.8 million for the three months
ended September 30, 2006, and 33.7% to $109.3 million for the nine months ended September 30, 2007
from $81.8 million for the nine months ended September 30, 2006.
Recurring revenues increased 34.5% to $22.2 million for the three months ended September 30,
2007 and 35.0% to $62.7 million for the nine months ended September 30, 2007. The increases in
recurring revenues for the three and nine months ended September 30, 2007 were primarily due to
increases in Intersourcing revenues and, to a lesser extent, maintenance revenues.
|
a) |
|
Intersourcing revenues increased primarily due to the continued
growth of the Intersourcing offering, which comprises the majority of unit sales.
The increase is based on the revenue impact of incremental units that have gone
live (i.e., when the underlying customer processes its first live payroll for
its employees) since September 30, 2006. Recognition of recurring revenues for
Intersourcing unit sales commences upon live date. |
|
|
b) |
|
Maintenance revenues increased due to additional maintenance fees
resulting from cumulative increases in the customer base subsequent to September
30, 2006 due to incremental license sales since such date. Maintenance revenues
are recognized over the initial term of the related license contract, which is
typically 12 months, and then on a recurring basis thereafter (on a monthly basis
ratably over the term of the respective renewal period). |
|
|
c) |
|
Recurring subscription revenues recognized for the three and nine
months ended September 30, 2007 from the Original Ceridian Agreement, totaling
$1.9 million and $5.8 million, respectively, were the same as those recognized
during the same periods of the prior year. Beginning on August 28, 2002,
subscription revenues generated from the Original Ceridian Agreement of $642,000
per month have been recognized, and are expected to be recognized, over the
minimum term of the contract expiring in March 2008. |
|
|
d) |
|
The impact on recurring revenues of units sold under the
Intersourcing Offering (as compared to the impact on license revenues of licensed
units sold) is expected to be a
gradual increase from one period to the next, based on the revenue recognition of
the Intersourcing fees over the terms of the related contracts. |
21
Services revenues increased 30.8% to $12.3 million for the three months ended September 30,
2007 and 37.7% to $35.8 million for the nine months ended September 30, 2007. The increases in the
three- and nine-month periods were mainly due to an increase in implementation revenues. The
increase in implementation revenues was principally due to additional billable hours, stemming from
an increase in the number of revenue-generating consultants and incremental units sold. In
addition, the Company used third-party implementation partners more in the nine months ended
September 30, 2007 than during the comparable period of the prior year to assist in handling the
increased demand for implementations due to increased sales, which also contributed to the growth
in services revenues.
License revenues increased 15.8% to $3.3 million for the three months ended September 30, 2007
and 15.9% to $10.8 million for the nine months ended September 30, 2007. The increases in the
three and nine months ended September 30, 2007 were principally due to a larger number of new units
sold by the Companys direct sales force (particularly in the first quarter of 2007 with respect to
the nine-month comparison), a higher average selling price per unit and, to a lesser extent,
increased sales to existing clients.
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 and costs associated with certain reimbursable
out-of-pocket expenses, discussed below. 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. The Company pays a license fee to a third-party provider for report
writing software used in conjunction with UltiPro. When UltiPro licenses are sold with the add-on
time and attendance product introduced in 2006, referred to as Ultimate Time and Attendance
(UTA), customers pay the Company on a per user basis for the license rights to such third-party
software.
Total cost of revenues (including $0.5 million and $1.7 million in stock-based compensation
for the three and nine months ended September 30, 2007, respectively, as compared to $0.2 million
and $0.9 million for the three and nine months ended September 30, 2006, respectively) increased
31.5% to $16.0 million for the three months ended September 30, 2007 and 35.8% to $47.1 million for
the nine months ended September 30, 2007.
Cost of recurring revenues increased 22.3% to $5.6 million for the three months ended
September 30, 2007 and 27.4% to $16.6 million for the nine months ended September 30, 2007. The
increases in cost of recurring revenues for the three and nine months ended September 30, 2007
(which included stock-based compensation of $0.2 million and $0.5 million for the three and nine
months ended September 30, 2007, respectively, as compared to $0.1 million and $0.3 million for the
three and nine months ended September 30, 2006, respectively) 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. The increase in maintenance costs was
primarily related to increased labor costs commensurate with the growth in the number of
customers serviced.
22
Cost of services revenues increased 38.1% to $10.1 million for the three months ended
September 30, 2007 and 42.5% to $29.4 million for the nine months ended September 30, 2007. The
increases in cost of services revenues for the three and nine month periods ended September 30,
2007 (which included stock-based compensation of $0.3 million and $1.2 million for the three and
nine months ended September 30, 2007 as compared to $0.2 million and $0.6 million for the three and
nine months ended September 30, 2006, respectively), 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 since
September 30, 2006 to support this growth. Also impacting the increase in implementation costs for
the nine-month period was the increased 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 10.3% to $352 thousand for the three months ended September
30, 2007 and 6.2% to $1.0 million for the nine months ended September 30, 2007. The slight
increases in cost of license revenues for the three and nine months ended September 30, 2007 as
compared to the same period in 2006 was consistent with the increased license revenues during the
three and nine months ended September 30, 2007.
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 25.2% to $9.0
million for the three months ended September 30, 2007 and 21.0% to $26.3 million for the nine
months ended September 30, 2007. The increases in sales and marketing expenses for the three and
nine month periods ended September 30, 2007 were primarily due to increased labor and related costs
(including $1.2 million and $3.3 million of stock-based compensation for the three and nine months
ended September 30, 2007, respectively, compared to $0.8 million and $2.0 million of stock-based
compensation for the three and nine months ended September 30, 2006, respectively), attributable to
hiring additional direct sales force personnel for the sales organization and higher sales
commissions principally related to increased Intersourcing and license sales. Commissions on
license sales are recognized when the license revenues are recognized, which is typically when the
product is shipped. Commissions on Intersourcing sales are amortized over the initial contract
term (typically 24 months) commencing on live date, which corresponds to Intersourcing revenue
recognition.
Research and Development
Research and development expenses consist primarily of software development personnel costs.
Research and development expenses increased 20.7% to $7.1 million for the three months ended
September 30, 2007 and 26.7% to $20.9 million for the nine months ended September 30, 2007.
Excluding the impact of capitalized costs associated with UltiPro Canada, which totaled $0.5
million and $1.4 million for the three and nine month periods ended September 30, 2007,
respectively, research and development expenses increased by $1.2 million and $4.5 million for the
three and nine months ended September 30, 2007, respectively, in comparison to the same periods
last year, principally due to higher labor costs, including the impact of increased staffing
related to the ongoing development of UltiPro and add-on products, as well as annual merit
increases and, to a lesser extent, $0.2 million and $0.8 million of stock-based compensation
expense for the three and nine month periods ended September 30, 2007,
respectively, as compared to $0.1 million and $0.4 million for the three and nine month
periods ended September 30, 2006, respectively.
23
In accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed (SFAS No. 86), the Company capitalized certain research and
development personnel costs for the development of UltiPro Canada functionality. UltiPro Canada is
being built from the existing product infrastructure of UltiPro (e.g., using UltiPros source code
and architecture). UltiPro Canada is designed to provide HR/payroll functionality which includes
the availability of Canadian tax rules, as well as Canadian human resources functionality, taking
into consideration labor laws in Canada and including changes to the language where necessary
(i.e., English to French). The Company expects to capitalize additional research and development
costs relative to the UltiPro Canada project until its anticipated general release, which is
expected to occur in the last quarter of 2007, at which time capitalization would cease under SFAS
No. 86 guidelines.
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 for the three months ended September 30,
2007 increased 44.3% to $3.6 million and 37.5% to $10.3 million for the nine months ended September
30, 2007. The increases for the three and nine months ended September 30, 2007 were primarily due
to additional labor costs (including additional personnel costs to support the Companys growth)
and an increase in the provision for doubtful accounts. Included in general and administrative
expenses for the three and nine month periods ended September 30, 2007 were $0.7 million and $1.5
million, respectively, of stock-based compensation expense as compared to $0.3 million and $0.8
million for the three and nine months ended September 30, 2006, respectively, and $0.1 million and
$0.2 million of amortization of acquired intangible assets for the three- and nine-month period
ended September 30, 2007, respectively. There was no amortization of acquired intangible assets
for the same periods in the prior year.
Interest Expense
Interest expense of $61 thousand and $161 thousand for the three and nine months ended
September 30, 2007, respectively, was comparable to interest expense during the same period in the
prior year.
Other Income, Net
Other income, net, for the three months ended September 30, 2007 was comparable to other
income, net for the three months ended September 30, 2006 and increased to $5.6 million for the
nine months ended September 30, 2007 from $1.1 million for the nine months ended September 30,
2006. Included in other income, net, in the unaudited condensed consolidated statement of
operations for the nine months ended September 30, 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 (the
Non-Recurring Settlement).
24
Income Taxes
For the three months ended September 30, 2007, there was no income tax provision and for the
nine months ended September 30, 2007, there was an income tax provision of $115 thousand. There
was no such provision for the same periods in the prior year. We assess the likelihood that we
will be able to recover our deferred tax assets. We consider all available evidence, both positive
and negative, including historical levels of income, expectations and risk associated with
estimates of future taxable income, ongoing, prudent and feasible tax planning strategies in
assessing the amount of the valuation allowance. If recovery is not more likely than not, we record
a valuation allowance against the deferred tax assets that we estimate will not ultimately be
recoverable.
The Companys net operating loss carryforwards available at December 31, 2006, which expire at
various times through the year 2026 and that are available to offset future taxable income, were
$74.4 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.
Liquidity and Capital Resources
The Company funds operations primarily through the private and public sale of equity
securities, cash generated from operations and, to a lesser extent, equipment financing and
borrowing arrangements.
As of September 30, 2007, the Company had $32.2 million in cash, cash equivalents and total
investments in marketable securities, reflecting a net decrease of $0.8 million since December 31,
2006. The $0.8 million decrease was primarily due to repurchases of Common Stock under the
Companys stock repurchase plan of $19.0 million and an increase in capital expenditures of $6.9
million (including cash purchases of property, equipment and payments on financed equipment,
including capital lease obligations), partially offset by cash generated from operations of $20.4
million (including $4.5 million in cash received for the Non-Recurring Settlement) and cash
provided from employee stock option exercises totaling $6.1 million.
Net cash provided by operating activities was $20.4 million for the nine months ended
September 30, 2007 as compared to $10.3 million for the nine months ended September 30, 2006. The
$10.1 million increase in net cash provided by operating activities was primarily due to increased
funds generated from operations which included receipt of the settlement fee from the Non-Recurring
Settlement, as well as the Companys increase in sales, including both increased sales of
Intersourcing units and license units.
Net cash used in investing activities was $6.2 million for the nine months ended September 30,
2007 as compared to $8.5 million for the nine months ended September 30, 2006. The $2.3 million
decrease in net cash used in investing activities was primarily due to a net decrease in cash
purchases of marketable securities of $2.5 million.
Net cash used in financing activities was $15.0 million for the nine months ended September
30, 2007 as compared to $5.2 million for the nine months ended September 30, 2006. The $9.8 million
increase in net cash used in financing activities was primarily related to a $9.2 million increase
in repurchases of Common Stock pursuant to the Companys stock repurchase plan.
Days sales outstanding, calculated on a trailing three-month basis (DSO), as of September
30, 2007 and 2006, were 71 days and 66 days, respectively. The increase in DSOs as of September
30, 2007 was related to the increase in accounts receivable principally from incremental revenues
generated.
25
Deferred revenues were $46.4 million at September 30, 2007 as compared to $43.0 million at
December 31, 2006. The increase of $3.4 million in deferred revenues in 2007 was primarily due to
increased sales from Intersourcing operations (which originate upon contract execution for the
one-time fees and PEPM fees, payment for which are included in the contract payment terms),
partially offset by a decrease in deferred maintenance and, to a lesser extent, the reduction in
deferred revenues from Ceridian (from quarterly amortization of Ceridian recurring revenue
attributable to the Original Ceridian Agreement) and a decrease in deferred services (as the
prepayment of certain services were recognized as those services were performed). Substantially
all of the total balance in deferred revenues is related to future recurring revenues, including
deferred revenues related to Intersourcing.
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 September 30, 2007 is payable on
or before December 31, 2008. As of September 30, 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 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.
Quarterly Fluctuations
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 considerably. A drop in near term demand for the
Companys products could significantly affect both revenues and profits in any quarter. Operating
results achieved in previous fiscal quarters are not necessarily indicative of operating results
for the full fiscal years or for any future periods. As a result of these factors, there can be no
assurance that the Company will be able to maintain profitability on a quarterly basis. The Company
believes that, due to the underlying factors for quarterly fluctuations, period-to-period
comparisons of its operations are not necessarily meaningful and that such comparisons should not
be relied upon as indications of future performance.
26
Forward-Looking Statements
The foregoing Managements Discussion and Analysis of Financial Condition and Results of
Operations and the following Quantitative and Qualitative Disclosures about Market Risk contain
certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act). 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 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 this Quarterly Report on Form 10-Q and the Annual
Report on Form 10-K for the year ended December 31, 2006, including Exhibit 99.1 thereto, filed
with the SEC on March 16, 2007. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future events or
otherwise.
ITEM 3. 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; |
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|
|
|
Maintenance of appropriate liquidity for regular cash needs; |
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|
Maximum yields in relationship to guidelines and market conditions; |
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|
Diversification of risks; and |
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|
|
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.
27
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 third quarter of 2007 under the Credit Facility. As of September 30,
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 or before
December 31, 2008.
As of September 30, 2007, total investments in available-for-sale marketable securities were
$16.3 million. The Company is subject to financial market risks, including changes in interest
rates and the valuations of its investment portfolio. Changes in amounts borrowed or interest
rates could impact the Companys anticipated interest income from interest-bearing cash accounts,
or cash equivalents and investments in marketable securities, as well as interest expense on
borrowings under the Credit Facility.
Interest rate risk. As of September 30, 2007, virtually all of the investments in the
Companys portfolio were at fixed rates (with a weighted average interest rate of 5.2% 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 an
analysis based on its September 30, 2007 unaudited condensed 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 value of the Companys total portfolio of approximately $72,000 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 value of the Companys total portfolio of approximately $72,000 over the next
12 months.
ITEM 4. Controls and Procedures
(a) 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 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 Exchange Act Rule 13a-15. Based on that evaluation, the Companys management, including
the CEO and CFO, concluded that the Companys disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that the Company files
or submits under the Exchange Act is recorded, processed, summarized and timely reported as
specified in the SECs rules and forms and accumulated and communicated to the Companys
management, including the CEO and CFO, to allow timely decisions regarding disclosure. It should
be noted that the design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of how remote.
(b) Changes in internal control over financial reporting. In connection with the evaluation
required by Exchange Act Rule 13a-15, the Companys management, including the CEO and CFO,
concluded that no changes occurred during the quarter ended September 30, 2007 in the Companys
internal control over financial reporting that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial reporting.
28
PART II OTHER INFORMATION
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer. On October 30, 2000, the Company announced
that its Board authorized the repurchase of up to 1,000,000 shares of the Companys outstanding
Common Stock (the Stock Repurchase Plan). For purposes of mitigating the expected dilution
created by stock-based compensation, during the first quarter of 2006, the Board authorized the
Company to resume repurchasing its Common Stock under the Stock Repurchase Plan. There were
451,790 shares of the Companys Common Stock repurchased during 2006. As of December 31, 2006, an
aggregate of 290,563 shares of Common Stock remained authorized for repurchase under the Stock
Repurchase Plan.
On February 6, 2007, the Board extended the Stock Repurchase Plan, authorizing the repurchase
of up to 1,000,000 additional shares of the Companys issued and outstanding Common Stock (the
Increased Shares Authorized). As a result of the Increased Shares Authorized, there were
1,290,563 shares of Common Stock available for repurchase under the Stock Repurchase Plan as of
February 6, 2007. Stock repurchases may be made periodically in the open market, in privately
negotiated transactions or in a combination of both. The extent and timing of these repurchase
transactions will depend on market conditions and other business considerations.
As of September 30, 2007, the Company had purchased 1,364,375 shares of the Companys Common
Stock under the Stock Repurchase Plan, with 635,625 available for repurchase in the future. The
details of Common Stock repurchases for the nine months ended September 30, 2007 were as follows:
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Total Number of Shares |
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Maximum Number of |
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Purchased as Part |
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Shares That May Yet |
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Total Number of |
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Average Price |
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Of Publicly Announced |
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Be Purchased Under the |
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Period |
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Shares Purchased (1) |
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Paid per Share |
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Plans or Programs |
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Plans or Programs |
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January 1 31, 2007 |
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|
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1,290,563 |
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February 1
28, 2007 |
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62,000 |
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|
|
26.79 |
|
|
|
771,437 |
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|
|
1,228,563 |
|
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 |
|
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 |
|
|
|
|
Total |
|
|
654,938 |
|
|
$ |
28.39 |
|
|
|
1,364,375 |
|
|
|
635,625 |
|
|
|
|
|
|
|
(1) |
|
All shares were purchased through the publicly announced Stock Repurchase Plan in open-market transactions. |
29
ITEM 6. Exhibits
|
|
|
|
|
Number |
|
Description |
|
|
|
|
|
|
21.1 |
|
|
Subsidiaries of the Registrant * |
|
|
|
|
|
|
31.1 |
|
|
Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended * |
|
|
|
|
|
|
31.2 |
|
|
Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended * |
|
|
|
|
|
|
32.1 |
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted |
|
|
|
|
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as
amended * |
|
|
|
|
|
|
32.2 |
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as
amended * |
30
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
The Ultimate Software Group, Inc.
|
|
Date: November 8, 2007 |
By: |
/s/ Mitchell K. Dauerman
|
|
|
|
Mitchell K. Dauerman |
|
|
|
Executive Vice President, Chief
Financial Officer and Treasurer
(Authorized Signatory and Principal
Financial and Accounting Officer) |
|
|
31