2002 A N N U A L R E P O R T
K N O W U S B Y T H E
C O M P A N I E S W E E M P O W E R
S E L E C T E D F I N A N C I A L D ATA
o p e r a t i n g d a t a i n t h o u s a n d s , e x c e p t p e r s h a r e d a t a
r e v e n u e s :
l i c e n s e
r e c u r r i n g
s e r v i c e s
t o t a l r e v e n u e s
g r o s s m a r g i n
a s a % o f r e v e n u e s
o p e r a t i n g e x p e n s e s a n d o t h e r
a s a % o f r e v e n u e s
f o r t h e y e a r s e n d e d d e c e m b e r 3 1 ,
2 0 0 2
2 0 0 1
2 0 0 0
$ 1 2 , 1 7 0
1 9 , 3 4 5
2 3 , 6 3 4
$ 1 6 , 8 26
1 4 , 3 6 4
2 8 , 2 8 9
$ 2 4 , 1 0 3
1 0 , 5 2 0
2 7 , 3 3 1
5 5 , 1 4 9
5 9 , 4 7 9
6 1 , 9 5 4
2 7 , 6 2 1
5 0 %
4 2 , 1 8 9
7 7 %
3 2 , 1 8 4
5 4 %
4 0 , 9 3 4
6 9 %
3 4 , 7 3 3
5 6 %
4 3 , 1 3 7
7 0 %
n e t l o s s
$ ( 1 4 , 5 6 8 )
$ ( 8 , 7 5 0 )
$ ( 8 , 4 0 4 )
d i l u t e d n e t l o s s p e r s h a r e ( 1 )
$ ( 0 . 9 0 )
$ ( 0 . 5 5 )
$ ( 0 . 5 2 )
(1) See Note 2 of the Notes to Consolidated Financial Statements included elsewhere in this
Annual Report for information regarding the computation of diluted net loss per share.
b a l a n c e s h e e t d a t a i n t h o u s a n d s
c a s h a n d e q u i v a l e n t s
t o t a l a s s e t s
d e f e r r e d r e v e n u e
a s o f d e c e m b e r 3 1 ,
2 0 0 2
2 0 0 1
2 0 0 0
$ 8 , 9 7 4
$ 8 , 4 6 4
$ 7 , 5 7 2
3 1 , 1 4 3
3 4 , 2 5 1
3 4 , 4 4 0
2 7 , 8 1 5
2 0 , 2 1 5
9 , 8 9 4
long-term debt, including capital lease
obligations, net of current portion
1,206
4 0 8
9 4 3
s t o c k h o l d e r s ’ e q u i t y ( d e f i c i t )
$ ( 7 , 3 6 8 )
$ 4 , 5 9 0
$ 1 3 , 9 0 4
C O M PA N Y P R O F I L E . Ultimate Software, a leading provider of Web-based payroll and workforce management
solutions, markets award-winning UltiPro® as licensed software, a hosted application through Intersourcing®, and a
co-branded offering to Business Service Providers (BSPs) under the “Powered by UltiPro®” brand. The Company employs
415 professionals who are united in their commitment to developing trend-setting solutions and delivering quality service.
Ultimate Software customers represent diverse industries and include such organizations as The Arizona Diamondbacks/
Phoenix Suns, Benihana Restaurants, The Container Store, Elizabeth Arden, Omni Hotels, Ruth’s Chris Steak House and
Trammell Crow Residential.
T O O U R S H A R E H O L D E R S . During 2002, we made great progress in transforming our business model into one with
a higher percentage of recurring revenues. The importance of this transition would be difficult to overstate. Our objective
is to continue increasing our pipeline of recurring funds and make our financial picture more predictable and secure.
In 2002, we delivered Web Services Internet technology in UltiPro 6.0 that paves the way for our business transformation.
With the new product architecture, UltiPro can now manage hundreds of companies’ workforce management functions
economically over the Internet and can scale across multiple servers. These new Internet capabilities gave our sales team
the option of selling UltiPro on a per-employee-per-month basis through a pricing package designed to align with our
recurring revenue strategy and to appeal to customers who prefer monthly payments and a lower initial capital
investment. The new product architecture also gave our Business Service Provider (BSP) alliances the ability to deliver
payroll and HR services to their customers over the Internet.
We ended the 2002 year strong in several respects. In the third quarter, our total recurring revenues were up 32% over
the previous year’s third quarter, our license revenues increased 19%, and we began recognizing revenues from Ceridian’s
marketing of our UltiPro co-branded solution on a recurring basis. In the fourth quarter, our direct sales force closed out
the year by executing 85% more contracts than in the fourth quarter of 2001.
The driving force for this growth is, we believe, market responsiveness to our value proposition – more functionality for
the price. We are confident that we have the most technologically advanced and feature-rich workforce management
solution available to U.S. businesses today for the total cost of ownership.
In 2002, we successfully leveraged the infrastructure we’ve built over the years to increase our recurring revenues, and
we have also continued to penetrate the market of mid-sized to large companies with the added adrenaline of our
Intersourcing service offering.
We have a clear strategy to increase the predictability of our financial model. Our employees are experienced and
understand our business objective. We have a product that has been well received by the market, and we have many
referenceable customers.
We thank you, our shareholders, for your continued commitment and support.
Scott Scherr
Chairman, President and Chief Executive Officer
T H E C O N T A I N E R S T O R E® O N I N T E R S O U R C I N G®
“
We selected Ultimate Software’s Intersourcing delivery
method because it provides us with the convenience of
having control of our data without the hassles of server
storage, system maintenance and upgrades.”
Claudine Tudgay | Payroll Director
2002
U L T I P R O U N I T S
I N T E R S O U R C I N G
S A L E S Q U A R T E R LY
2323
66
33
0
1ST
2ND
3RD
4TH
Q U A R T E R S
We rolled out the new per-
employee-per-month (PEPM)
pricing for Intersourcing in
May 2002. In the second
quarter, we signed 3 PEPM
contracts, in the third quarter
6 and in the fourth quarter 23.
A S T R O N G F I N I S H F O R 2 0 0 2
2002 was a year of transition, and Ultimate Software finished on a high note, with recurring
revenues growing to $6.4 million in the fourth quarter. This is an increase of $2.6 million,
or a growth of 67%, over the same period in 2001. Our total revenues include recurring,
license and services revenues. In support of our long-term objectives, we focused on building
our recurring revenues throughout 2002 and achieved growth of 35% in these revenues
over the previous year.
I N T E R S O U R C I N G ® S A L E S G R O W T H . In May 2002, we rolled out a new
per-employee-per-month pricing model for our hosted offering of UltiPro, called
“Intersourcing,” and targeted businesses with under 1,000 employees. The surprise of 2002
was that our new approach to Intersourcing turned out to have broader appeal than we
had anticipated. We discovered that some of our larger business prospects, companies
with thousands of employees, liked the advantages of Intersourcing as well as small
businesses do. Besides the attractiveness of the pricing package, buyers responded favorably
to the convenience of having Ultimate Software manage such functions as purchasing
and maintaining the hardware and operating system software, performing system and
data backups, loading third-party software and synchronizing releases. Some of the
larger companies that chose to have UltiPro hosted through our Intersourcing solution
include Bunzl with 2,700 employees, National Equipment Services with 3,300 employees and
U.S. Filter Distribution with 1,460 employees.
Ultimate Software has a history of converting service bureau customers to on-site UltiPro
user licenses and, in 2002, 53% of our new accounts came from former service bureau
customers. Having a hosted model with service-based monthly pricing to offer our prospects
has made it easier to acquire new customers. Now that we have service-based pricing as an
alternative to a license purchase, we believe we are well positioned to increase our market
penetration effectiveness.
T R A M M E L L C R O W R E S I D E N T I A L O N R O I
“
With a single initiative, UltiPro‘s Web self-service will save us
upwards of $75,000 per year, and this is just the beginning…
we expect to realize even more savings as we expand the
system’s use among our workforce.”
Tim Swango | National Director of Human Resources
I N D U S T RY R E C O G N I T I O N O F U LT I P R O ®. UltiPro earned significant industry
recognition in 2002. William Blair & Company interviewed 400 payroll and HR managers,
most from companies with more than 1,000 employees, and reported: “Of those users who
had switched to in-house providers within the last two years, about one-quarter switched
to PeopleSoft and one-quarter switched to Ultimate Software, with the rest switching
to a handful of other providers.”
IDC, a leading provider of global IT research and advice, published a research study entitled,
“Innovative Ultimate Software and Ceridian Partnership Indicative of Future BSP Offerings”
(#28591), which offered the following opinion on the relationship between Ceridian and
Ultimate Software: “This endeavor is a prime example of the type of innovative and mutually
financially rewarding partnerships that software and services companies can achieve and
heralds the first of many such offerings.”
In addition, Ultimate Software was one of three companies added to ASPnews‘ list of the top
30 most influential software or infrastructure providers for the ASP and Web Services industry
in January 2003. Others on the list are: Cisco, Microsoft, Oracle, PeopleSoft, SAP and Sprint.
S T R AT E G Y F O R 2 0 0 3 . Ultimate Software’s business strategy for 2003 is clear.
Our objective is to deliver more predictable, consistent financial performance by increasing
our recurring revenues by at least 50% over those in 2002. We aim to achieve that growth
through: (1) revenues from our Business Service Provider alliances, (2) per-employee-per-
month revenues earned through Intersourcing contracts and (3) maintenance revenues
we receive in conjunction with license sales.
H O U L I H A N ‘ S® R E S T A U R A N T S I N C .
“
We wanted the same functionality of our previous large Enterprise
Resource Management (ERM) solution without the high price tag for
upgrades and ongoing system maintenance. In hard maintenance
costs alone, we anticipate saving $100,000 each year with UltiPro…
and we didn’t compromise any of the functionality.”
Susan Corp | Director of Corporate Systems
O M N I H O T E L S
“
Before UltiPro, we used a service bureau and the consolidation of the
information from our different employee-related systems was an
extremely time-consuming process…With UltiPro, we are now able
to print analytical documents at no additional cost, anytime.”
Diana Deluna | Payroll Manager
B U S I N E S S B E N E F I T S O F U LT I P R O ® W O R K F O R C E M A N A G E M E N T.
UltiPro Workforce Management is designed to address the most critical business needs of
U.S.-based companies. UltiPro provides executives, managers and administrators Internet
access to staff information, strategic reporting, and processes such as new hire, rehire and
employee transfers. The general employee population can access their important personal
information, such as paycheck and benefits details, as well as company information like
handbooks, healthcare claim forms, 401(k) enrollment forms and company news – all online.
Employees can also update select personal information through eLife Events and save their
employer valuable administrative time.
One UltiPro advantage is its comprehensive workforce management functionality, including
eManagement, eEmployee Self-Service, eWork Events, eLife Events, eHuman Resources,
eTime Entry, ePayroll Processing, eReporting, eBenefits Enrollment, eRecruitment, eTraining
Enrollment, a Cognos Web reporting package, and a workforce portal design for centralized
company communications and business partner links. Another advantage is the lower total
cost of ownership that results from implementations that are typically faster than those of
competitors’ solutions of comparable quality and from reduced ongoing support requirements.
E M E R G E N C Y P H Y S I C I A N S M E D I C A L G R O U P
“
We had thought that the service bureau we used before UltiPro was
the most cost-effective way to go, but when we actually calculated
the manpower and time we spent generating payroll in addition to
the cost of the service, we were surprised to see how much we could
save with UltiPro.”
Ann Evans | Director of Human Resources and Credentialing
Manufacturing
Amcor Sunclipse North America
Enodis
Elizabeth Arden, Inc.
Hatteras Yachts, Inc.
Intermatic, Inc.
JELD-WEN
Lifetime Products, Inc.
Oil States Industries, Inc.
Spang & Company
Spectrum
Styline Industries, Inc.
Tredegar Corporation
Volvo Trucks North America
Williams International
Woodgrain Millwork, Inc.
Technology
Affiliated Computer Services, Inc.
Ingram Entertainment, Inc.
Nintendo of America
Toshiba America Medical Systems, Inc.
Transportation & Communications
Allen Samuels Auto Group
Bill Heard Enterprises, Inc.
Metropolitan Nashville Airport Authority
Sewell Automotive
SkyWest Airlines
Universal Weather and Aviation, Inc.
Food Services & Hospitality
Benihana Inc.
Chiquita Brands International, Inc.
Consolidated Restaurants, Inc.
Creative Resource Solutions
Hooters of America, Inc.
Houlihan’s Restaurants Inc.
Omni Hotels
Premium Standard Farms
Ruth’s Chris Steak House
Souper Salad, Inc.
The Portillo Restaurant Group
Healthcare
Emergency Physicians Medical Group
Sarah A. Reed Retirement Center
University of Louisville Hospital
VCU Health System
Wenatchee Valley Medical Center
+
+
+
Retail
Factory Card Outlet
The Container Store
The Deb Shops
The Paradies Shops
Sports
Arizona Diamondbacks
Chicago White Sox
Colorado Rockies Baseball Club
Florida Marlins Baseball Club
Florida Panthers
Montreal Expos
New York Giants
New York Jets Football Club
New York Yankees
Pro Player Stadium
Texas Rangers Baseball Club
The Philadelphia Phillies
The Phoenix Suns
Finance/Insurance/Real Estate
Credit Lyonnais, New York
Goldbelt, Incorporated
Sky Financial Group, Inc.
Stephens Inc.
Trammell Crow Residential
Amerisure
Services and Other
La Petite Academy, Inc.
Mount St. Mary’s College
Regal Cinemas
Rush Enterprises
Tohono O’Odham Gaming Authority
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
¥
n
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Ñscal year ended December 31, 2002
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission Ñle number: 0-24347
The Ultimate Software Group, Inc.
(Exact name of Registrant as speciÑed in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
2000 Ultimate Way,
Weston, FL
(Address of principal executive oÇces)
65-0694077
(I.R.S. Employer
IdentiÑcation No.)
33326
(Zip Code)
Registrant's telephone number, including area code:
(954) 331-7000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class:
Common Stock, par value $.01 per share
Indicate by check mark whether the Registrant (1) has Ñled all reports required to be Ñled 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 Ñle such reports), and (2) has been subject to such
Ñling requirements for the past 90 days. Yes ¥
No n
Indicate by check mark if disclosure of delinquent Ñlers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrant's knowledge, in deÑnitive proxy
or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. n
Indicate by check mark whether the Registrant is an accelerated Ñler (as deÑned in Exchange Act
Rule 12b-2). Yes n
No ¥
The aggregate market value of Common Stock, par value $.01 per share, held by non-aÇliates of the
Registrant, based upon the closing sale price of such shares on the Nasdaq National Market on March 14,
2003 was approximately $63.6 million.
As of March 14, 2003, there were 17,331,268 shares of the Registrant's Common Stock, par value
$.01, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2003 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Annual Report on Form 10-K.
THE ULTIMATE SOFTWARE GROUP, INC.
INDEX
PART I
Page(s)
Item 1.
Item 2.
Item 3.
Item 4.
Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Submission of Matters to a Vote of Security Holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder MattersÏÏÏÏÏÏÏ
Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 6.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Financial Statements and Supplementary Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 8.
Changes in and Disagreements With Accountants on Accounting and Financial
Item 9.
DisclosureÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PART III
Item 10. Directors and Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 11. Executive Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 12.
Security Ownership of Certain BeneÑcial Owners and Management and Related
Stockholder Matters ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 13. Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 14. Controls and ProceduresÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-KÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Signatures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CertiÑcations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PART IV
2
12
13
13
13
13
15
28
29
52
53
56
56
56
56
57
62
63
1
PART I
This Annual Report on Form 10-K (the ""Form 10-K'') of The Ultimate Software Group, Inc.
(""Ultimate Software'' or the ""Company'') may include forward-looking statements which reÖect the
Company's current views with respect to future events and Ñnancial performance. These forward-looking
statements are subject to certain risks and uncertainties that could cause actual results to diÅer materially
from such statements. These risks and uncertainties include, but are not limited to, those discussed in this
Form 10-K, including Exhibit 99.1 hereto. The words ""believe,'' ""expect,'' ""anticipate,'' ""project,'' and
similar expressions identify forward-looking statements. These forward-looking statements speak only as of
their dates. The Company undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
UltiPro» and Intersourcing» and their related designs are registered trademarks of Ultimate Software
in the United States. This Form 10-K also includes names, trademarks, service marks and registered
trademarks and service marks of companies other than Ultimate Software.
Item 1. Business
Overview
Ultimate Software designs, markets, implements and supports technologically advanced payroll and
workforce management solutions. The Company's mission is to become the premier infrastructure provider
of Internet payroll and workforce management solutions.
Ultimate Software's UltiPro Workforce Management (""UltiPro'') is a Web-based solution designed to
deliver the functionality businesses need to manage the employee life cycle, whether their processes are
centralized at headquarters or distributed across multiple divisions or branch oÇces. UltiPro's human
resources (""HR'') and beneÑts management functionality is wholly integrated with a Öexible payroll
engine, reporting and analytical decision-making tools, and a central Web portal that can serve as the
customer's gateway for its workforce to access company-related and personal information. Ultimate
Software believes that UltiPro helps customers streamline HR and payroll processes to signiÑcantly reduce
administration and operational costs, while also empowering executives and staÅ to access critical
information quickly and perform routine business activities eÇciently.
UltiPro Workforce Management is marketed both through the Company's direct sales team as well as
through alliances with business service providers (BSPs) that market co-branded UltiPro to their customer
bases. Ultimate Software's direct sales team focuses on companies with more than 500 employees and sells
both on a license (typically in-house) and service basis (typically hosted and priced on a per-employee-
per-month basis). The Company's BSP alliances focus primarily on companies with under 500 employees
and typically sell an Internet solution priced on a monthly/service basis, sharing revenue with Ultimate
Software.
UltiPro leverages the Microsoft technology platform, which is recognized in the industry as a cost-
eÅective, reliable and scalable platform for mid-sized organizations. As part of its comprehensive payroll
and workforce management solutions, Ultimate Software provides implementation and training services to
its customers as well as support services, which have been certiÑed by the Support Center Practices
CertiÑcation program for four consecutive years.
The Company's direct sales force markets UltiPro as an in-house payroll and workforce management
solution and alternatively as a hosted oÅering branded ""Intersourcing.'' Intersourcing provides Web access
to comprehensive workforce management functionality for organizations that need to simplify the
information technology (IT) support requirements of their business applications. Ultimate Software
believes that Intersourcing is attractive to companies that want to focus on their core competencies to
increase sales and proÑts. Through the Intersourcing model introduced in 2002, the Company provides the
hardware, infrastructure, ongoing maintenance and backup services for its customers at a BellSouth data
center.
2
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 on-
line oÅering that Ceridian intends to market primarily to businesses with under 500 employees. The
aggregate minimum payments that Ceridian is obligated to pay Ultimate Software over the minimum term
of the agreement is $42.7 million. To date, Ceridian has paid to Ultimate Software a total of $16.5 million
under the agreement. The parties expect the minimum term of the agreement to be 7 years. See
""Management's Discussion and Analysis of Financial Condition and Results of Operations'' for a more
detailed discussion of this agreement.
The Company is a Delaware corporation formed in April 1996 to assume the business and operations
of The Ultimate Software Group, Ltd. (the ""Partnership''), a limited partnership founded in 1990.
Ultimate Software's headquarters is located at 2000 Ultimate Way, Weston, Florida 33326 and its
telephone number is (954) 331-7000. To date, the Company has derived no revenue from customers
outside of the United States and has no assets located outside of the United States.
Features of UltiPro
Ultimate Software's UltiPro is a payroll and workforce management solution designed to oÅer the
following features to its customers:
Web Workforce Portal. UltiPro includes a Web workforce portal that serves as a company's
communications hub and the central gateway for business activities. It provides functionality for everyone
in the customer's organization, not just human resources/payroll and Ñnance departments, but also
executives, staÅ managers and individual employees. With UltiPro's workforce portal, a company's
HR/payroll staÅ, managers and administrators can complete daily employee administration tasks,
administer beneÑts, manage staÅ and access reporting in real-time, from one central location. Managers
and executives can access commonly requested reports and analyze workforce statistics and trends on-
demand. Employees can access pay and beneÑts information, get questions answered and complete routine
updates instantly. The Company believes that UltiPro's workforce portal can increase administrative
eÇciencies by providing reporting, staÅ management processes and business intelligence to management
over the Internet and can reduce operating costs by eliminating the need for organizations to print and
distribute paper communications, handbooks, forms and paychecks.
Feature-Rich, Built-in Functionality. UltiPro includes human resources, payroll, and beneÑts
management, comprehensive reporting (more than 400 standard and customizable reports delivered,
including government compliance reporting and strategic analytics), a workforce portal with Web-based
employee and manager self-service, Web-based beneÑts enrollment, Web employee administration
(including workÖow), recruitment and training management. Based upon the amount of built-in and
integrated functionality, the Company believes that UltiPro minimizes the need for extensive customiza-
tions or changes to source code, facilitates streamlined management of the total employment cycle, and
enables organizations to minimize the time invested in burdensome HR/payroll administrative activities.
Implementation and System Update EÇciency. Ultimate Software oÅers a solution that has been
designed to minimize the time and eÅort required for implementation, customization and updating. UltiPro
delivers an extensive amount of functionality ""out-of-the-box'' so that minimal customizations are required
by the customer. The Company also provides an implementation methodology, experienced implementation
staÅ and customer training to facilitate rapid implementation. Ultimate Software continues to reÑne and
improve its implementation process to allow customers to implement more quickly. To facilitate
customizations and fast system upgrades, the Company has designed UltiPro so that when users load
system updates, they do not overwrite their customizations because the system stores custom changes as
sub-classed objects or data that reside ""outside'' the core program, thus avoiding the time-consuming
process of rewriting custom changes.
Reduced Total Cost of Ownership. The Company believes that the UltiPro solution provides cost
saving opportunities for its customers and that UltiPro, whether purchased as a license or as a service
through Intersourcing, is competitively priced. In addition, the Company believes that its current practices
3
in implementing the UltiPro solution result in a cost savings for customers when compared with
implementations of other similar solutions in the industry. A customer may also reduce the administrative
and information technology support costs associated with the organization's human resources, beneÑts and
payroll functions over time. Tight integration helps to reduce administrative costs by facilitating accurate
information processing and reporting, and reducing discrepancies, errors and the need for time-consuming
adjustments. In addition, administrative costs can be reduced by providing an organization with greater
access to information and control over reporting.
Leveraging of Leading Technologies. Ultimate Software has consistently focused on identifying
leading technologies and integrating them into its products. UltiPro Workforce Management is a three-tier
solution that leverages Microsoft's technical architecture as well as XML to increase design eÇciencies
within the system and particularly for workÖow capabilities. With UltiPro version 6.0, released in 2002,
Ultimate Software introduced a new technology architecture for UltiPro to enable advanced Web Services
capabilities. Ultimate Software's Distributed Process Management platform leverages leading technologies
such as Microsoft's Component Object Model (COM), Microsoft Message Queuing (MSMQ),
eXtensible Markup Language (XML), Simple Object Access Protocol (SOAP) and Web Services
DeÑnition Language (WSDL) to create a distributed processing framework that is Internet-enabled. This
allows customers to initiate commonly requested services such as running a report from the Web. These
requests are automatically routed to a separate process application server to ensure eÇcient processing and
load balancing. UltiPro's XML Web Services feature set allows customers to scale as they grow and take
advantage of additional Web Services as needed. In addition, UltiPro includes a suite of enterprise
integration tools, business components and business-to-business links. These tools are designed to take
advantage of emerging Internet-based technology standards such as XML, HTTP and Java scripting.
Ease of Use and Navigation. Ultimate Software designs its products to be user-friendly and to
simplify the complexities of managing employees and complying with government regulations in the payroll
and workforce management areas. UltiPro uses familiar Internet interface techniques and functions
through a Web browser, making it convenient and easy to use. A customer's executives, managers,
administrators and employees have Web access to manage payroll and employee functions, run reports or
Ñnd answers to routine questions through an intuitive user interface. The Company refers to this easy
navigation as ""Two clicks to anywhere.''
Comprehensive Professional Services and Industry-SpeciÑc Expertise. Ultimate Software believes it
provides high quality implementation, training and ongoing product and customer support services.
Ultimate Software employs 170 people in customer services, which includes the implementation, product
support, technical support and training departments. In November 2002, Ultimate Software's customer
support center received the Support Center Practices (""SCP'') CertiÑcation for the fourth consecutive
year. The SCP program was created by the Service & Support Professionals Association (SSPA) and a
consortium of information technology companies to create a recognized quality certiÑcation for support
centers. SCP CertiÑcation quantiÑes the eÅectiveness of customer support based upon relevant
performance standards and represents best practices within the technology support industry according to
SSPA. Recognizing the importance of issuing timely updates that reÖect changes in tax and other
regulatory laws, Ultimate Software employs a dedicated research team to track jurisdictional tax changes
to the more than 12,000 tax codes included in UltiPro as well as changes in other employee-related
regulations.
Technology
Ultimate Software seeks to provide its clients with optimum performance, advanced functionality and
ease of scalability and access to information through the use of leading Internet standard technologies. The
UltiPro Workforce Management solution was designed to leverage cutting-edge technologies such as XML
and Web Services that use open standards to provide customers with a cost-eÅective platform for
performing critical business functions rapidly over the Web and allowing diÅerent systems to communicate
with one another. The use of Microsoft technology helps the Company to deliver what it believes to be a
4
highly deployable and manageable payroll and workforce management solution that includes the following
key technological features:
Web-Based Technologies and Internet Integration. Ultimate Software supports emerging Web
technologies and Internet/extranet connectivity to increase access to and usability of its applications.
UltiPro is a Web solution with a backoÇce component for handling such functions as payroll processing,
company and system setup, and security. One of the highlights of UltiPro's technology is the Company's
Distributed Process Management (""DPM'') framework of XML Web Services, a framework that enables
business functions to be performed over the Web, and allows diÅerent enterprise systems to talk to one
another over the Internet. UltiPro's DPM was designed to automate and distribute HR and payroll
processes, for example, entering group time or generating reports, across multiple servers to reduce the
amount of time and manual work required. The DPM framework leverages Microsoft's Component Object
Model (COM), eXtensible Markup Language (XML), Simple Object Access Protocol (SOAP), Web
Services DeÑnition Language (WSDL) and Microsoft Message Queuing (MSMQ) to improve system
speed and performance. The Company believes that the DPM framework makes UltiPro highly scalable to
accommodate a high volume of processing requests cost-eÅectively, particularly for companies that run
hundreds or even thousands of payrolls.
Application Framework. Ultimate Software has designed certain aspects of its system using a multi-
tiered architecture in order to enhance the system's speed, Öexibility, scalability and maintainability. When
an application's logic resides only on a client workstation, a user's ability to process high volume data
transactions is limited. When the logic resides only on a server, the user's interactive capabilities are
reduced. To overcome such limitations, Ultimate Software built more separation into the application
design to increase the extensibility, scalability and maintainability of the application. The UltiPro
Workforce Management application consists of several core components in a layered architecture that
leverages Microsoft technology. UltiPro's multi-layered architecture, including an Operating System Layer,
Business Logic Layer, Presentation Layer and User Interface Layer, makes it easier to update and
maintain UltiPro, as well as integrate UltiPro with other enterprise systems. The Company believes that
UltiPro's application framework provides a highly extensible set of services that can scale depending on the
customer's business size. In addition, UltiPro was built using a data-driven, object-oriented application
framework that enhances the development and usability of the solution. Object-oriented programming
features code reusability and visual form/object inheritance, which decrease the time and cost of
developing and fully implementing a new system. With object-oriented programming, system updates do
not overwrite prior customizations to the system because custom changes are sub-classed objects that
reside ""outside'' the core program.
Business Intelligence Tools.
In addition to an extensive library of standard reports that oÅer
Öexibility and ease of use, the Company extends what users can do with employee data by embedding
business intelligence tools from Cognos Corporation, a third-party provider (""Cognos''). In addition to
oÅering sophisticated data query and report authoring, these tools enable users to apply online analytical
processing (""OLAP'') to multidimensional data cubes, allowing users to explore data on employees
graphically and statistically from diverse angles. Ultimate Software maintains a link between Cognos'
report catalog and UltiPro's data dictionary, eliminating the necessity for users to create and maintain ad
hoc reporting catalogs. A Cognos Web Package is delivered to UltiPro customers to allow users to access
reports and conduct data queries from a Web browser.
Ultimate Software Solutions
Ultimate Software's core solution for mid-sized enterprise customers, those with 500 to 15,000
employees, is UltiPro Workforce Management. Ultimate Software also oÅers the ""Powered by UltiPro''
BSP Solution (the ""BSP Solution'') with Internet Payroll to business services providers that have
relationships with smaller organizations, those with fewer than 500 employees.
5
UltiPro Workforce Management (""UltiPro'')
UltiPro Workforce Management is designed to provide customers the functionality they need to
manage every aspect of the employee life cycle in one place, whether their processes are centralized at
headquarters or managed by multiple divisions or branch oÇces. Though UltiPro was designed for mid-
sized enterprises, the solution can scale to accommodate larger numbers of employees. UltiPro's HR and
beneÑts management functionality is wholly integrated with a Öexible payroll engine, reporting and
analytical decision-making tools, and a central Web portal that can serve as the customer's gateway for its
workforce to access company-related activities. Ultimate Software believes that UltiPro helps customers
streamline HR and payroll processes to signiÑcantly reduce administration and operational costs, while also
empowering executives and staÅ to access critical information quickly and perform routine business
activities more eÇciently.
UltiPro Workforce includes, but is not limited to, the following functionality:
UltiPro's Workforce Portal. UltiPro's workforce portal can act as the gateway to business activities
for a customer's administrators, HR/payroll staÅ and management team. Ultimate Software believes that
UltiPro's workforce portal allows customers to improve service to their employees through better
communications and save time because managers can complete common employee administrative tasks,
administer beneÑts, manage staÅ and access reporting in real-time, from one central location.
eEmployee Self-Service. UltiPro eEmployee Self-Service gives a customer's workforce immediate
security-protected access to view paycheck details, beneÑts summaries, frequently used forms and company
information; update personal information such as address, phone number, emergency contacts and skills;
change preferences such as direct deposit accounts and beneÑts selections; make routine requests such as
asking for vacation time; and enroll in training.
eManagement. As authorized, managers have self-service access to staÅ information such as salary,
key dates and emergency contacts, with reporting and analysis tools to facilitate decision-making. A
customer's managers can view and update staÅ information, manage department activities, post job
openings or leverage recruiting and hiring tools.
eAdministration. UltiPro's eAdministration includes eWork Events, eStandard Reporting, and
eSystem Administration. eWork Events enables users to authorize HR/payroll staÅ, managers or
supervisors to make updates on the Web through more than 100 pre-deÑned workÖow processes to
expedite business activities such as hiring an employee or inputting a salary increase. eStandard Reporting
allows authorized managers or HR/payroll staÅ to run approximately 100 standard UltiPro reports,
including upcoming performance reviews, headcount reports, average salary reports, government compli-
ance reports, general ledger reporting, and other point-in-time HR/payroll reports from the Web without
requiring the time of central HR/payroll or IT staÅ. eSystem Administration was designed for the non-
technical user to administer UltiPro's roles-based security, built-in workÖow and system business rules, as
well as enable system administrators to post company communications, link to external Web sites from the
UltiPro portal, and, through UltiPro's ePalette feature, select the colors of UltiPro's Web pages to match
the customer's own company image.
eHuman Resources. UltiPro tracks HR-related information including employment history, perform-
ance, job and salary information, career development, and health and wellness programs. In addition,
UltiPro facilitates the recording and tracking of key information for government compliance and reporting,
including COBRA compliance; HIPAA certiÑcates; OSHA and workers' compensation; FMLA tracking;
and EEO compliance. UltiPro also ensures compliance with SSA and HIPAA conÑdentiality legislation
for protecting sensitive data such as employee social security numbers. eHuman Resources includes
beneÑts administration, recruitment and staÇng tools, compensation management and training manage-
ment functionality.
ePayroll Processing. UltiPro's payroll engine handles hundreds of payroll-related computations
intended to minimize the customer's need for side calculations or additional programming. For example,
UltiPro delivers complex wage calculations such as average pay rates for overtime calculations, shift
6
premiums, garnishments and levy calculations. With ePayroll Processing, a company's central payroll
department, remote oÇces or multiple divisions can process payroll on the Web in several steps. ePayroll
Processing includes eTime Entry to allow customers' supervisors or managers at branch oÇces to input and
submit time for their team through the Web.
UltiPro Business Intelligence. Ultimate Software believes that, with UltiPro Business Intelligence,
customers are able to provide their managers and executives with Web access to workforce-related reports,
workforce analytics and point-in-time reporting, without installing reporting software on users' PCs or
writing custom reports. With UltiPro Business Intelligence, users can run and print pre-formatted reports
for the executive team or run instant queries on the Web for answers to routine questions. UltiPro
Business Intelligence also delivers workforce analytics to enable managers to evaluate workforce trends
strategically on topics such as compensation, turnover and overtime.
eTraining Enrollment. With eTraining Enrollment, employees can view course schedules and
descriptions and register online. Managers can also approve staÅ training requests from the Web.
eBeneÑts Enrollment. With eBeneÑts Enrollment, customers' employees can review their beneÑt
choices and make selections on the Web. BeneÑts administrators can set up enrollment sessions from the
Web and use tools to monitor enrollment progress. eBeneÑts Enrollment also walks employees through all
of the beneÑt and personal information changes necessary as a result of a life event such as getting
married, having a baby or moving.
eRecruitment. UltiPro eRecruitment automates, tracks and manages the hiring and recruiting process
to help reduce overall ""cost per hire'' and ""time to hire.'' With UltiPro eRecruitment, users can post
openings to job sites they subscribe to, track applications and hire candidates from within UltiPro's
workforce portal.
eCo-Branding. For organizations that want to co-brand UltiPro for the purpose of delivering services
to a customer base, UltiPro oÅers eCo-Branding as an extra-cost option. eCo-Branding provides Web
access to important personal information for customers' employees, including the ability to view current
paycheck and direct deposit details, paycheck history and beneÑts details. Customers can display their own
company logo with the ""Powered by UltiPro'' logo to their user base to strengthen their brand.
Position Management. UltiPro Position Management helps customers manage their resource budget,
measure trends and forecast future needs. Users can manage by full-time equivalents and dollars, and
evaluate budgeted versus actual numbers. Authorized users can check the status of fund allocations,
available open positions and staÇng requirements. Because HR and payroll are integrated, reporting on
position information for budgeted and actual does not require multiple spreadsheets.
UltiPro Wireless. Ultimate Software recognizes the mobile workforce today and is delivering a
wireless application geared for today's mobile employees, managers, administrators and executives. UltiPro
Wireless provides employees with access to their paycheck details and company directory via a wireless
device. Managers can elect to receive wireless notiÑcations for workÖow events requiring their approval
(such as an employee vacation request).
Other Key Features. UltiPro also includes Tax Management to deliver Federal, state and local tax
updates automatically every quarter as part of the core solution; Enterprise Integration Tools that provide
the ability to interface with third-party applications and providers such as general ledger, tax Ñling services,
time clocks, banks, 401(k) and beneÑt providers, check printing services and unemployment management
services; and Distributed Process Management XML Web Services that batch and distribute
HRMS/payroll processes across multiple servers to increase eÇciency, reduce the time required to ensure
processes are completed, and allow them to be initiated over the Web.
""Powered by UltiPro'' BSP Solution (the ""BSP Solution'')
""Powered by UltiPro'' BSP Solution is designed for and primarily marketed to business service
providers that have relationships with smaller organizations, those with fewer than 500 employees. The
7
BSP Solution, released in December 2000, enables business service providers to deliver Web-based
workforce management and payroll services to their customers and Web-access for their customers'
employees to view their paycheck and basic beneÑts information. Business service providers have the
opportunity to co-brand UltiPro and to price their oÅerings on a per-employee-per-month or other monthly
basis.
The BSP Solution has been packaged to be easy to use and convenient for smaller companies. The
BSP Solution leverages select functionality from UltiPro Workforce Management, and has a specially
designed Web browser interface for payroll administrators to sign up their businesses for the service, enter
employee hours worked and submit payroll. If there are no changes to employees' standard paycheck
information, submitting a payroll can be done in less than a minute by clicking an icon. With changes, the
process can take several minutes. The initial process of registering for Web payroll services takes less than
an hour if the administrator has all the appropriate data available for entry. To ensure the process is rapid
and easy for registrants, there is a checklist online with what they need before beginning the signup
process. Through a secure, password-protected login, employees can view their current paycheck and direct
deposit details, paycheck history, and beneÑts details such as medical, dental and 401(k) deductions.
Intersourcing OÅering
In 2002, the Company introduced hosting services through which the Company provides the
hardware, infrastructure, ongoing maintenance and back-up services for its customers at a BellSouth data
center. DiÅerent types of hosting arrangements include the sale of hosting services as a part of the
Intersourcing oÅering, discussed below, and, to a lesser extent, the sale of hosting services to customers
that license UltiPro on a perpetual basis. Hosting services, available in a shared or dedicated environment,
provide Web access to comprehensive workforce management functionality for organizations that need to
simplify the information technology (IT) support requirements of their business applications and are
priced on a per-employee-per-month basis. In a shared environment, commonly used for Intersourcing,
Ultimate Software provides an infrastructure with applicable servers shared among many customers who
use a Web browser to access the application software through the data center. In a dedicated environment,
servers are dedicated to speciÑc customers that purchase this particular service. The majority of hosting
arrangements are provided through a shared environment.
Intersourcing is the hosted oÅering 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 speciÑc term in a shared hosted
environment. The pricing for Intersourcing, including both the hosting element as well as the right to use
UltiPro, is on a per-employee-per-month basis. The Company's direct sales force markets UltiPro as an in-
house payroll and workforce management solution and alternatively as a hosted oÅering through
Intersourcing. Ultimate Software believes that Intersourcing is attractive to companies that want to focus
on their core competencies to increase sales and proÑts.
Customer Services
Ultimate Software believes that delivering quality customer services provides the Company with a
signiÑcant opportunity to diÅerentiate itself in the marketplace and is critical to the comprehensive
solution. Ultimate Software provides its customers services in two broad categories: (i) professional
services which includes implementation, customer relationship management, and educational services and
(ii) customer support services and maintenance.
Professional Services. Ultimate Software's professional services include implementation, customer
relationship management and educational services. Ultimate Software believes that its implementation
services are diÅerentiated from those of other vendors by speed, predictability and completeness. The
Company believes that its successful record with rapid implementations is due to its standardized
methodology, long-tenured consultants, the large amount of delivered product functionality, and
comprehensive conversion and integration tools.
8
Ultimate Software has an experienced team of system and functional consultants that are dedicated to
assisting customers with rapid implementations. In addition, Ultimate Software provides its customers with
the opportunity to participate in formal training programs conducted by its education services team.
Training programs are designed to increase customers' ability to use the full functionality of the product,
thereby maximizing the value of customers' investments. Courses are designed to align with the stages of
implementation and to give attendees hands-on experience with UltiPro. Trainees learn such basics as how
to enter new employee information, set up beneÑt plans and generate standard reports, as well as more
complex processes such as deÑning company rules, customizing the system and creating custom reports.
The Company maintains training facilities in Atlanta, Georgia; Schaumburg, Illinois; Dallas, Texas; and at
its headquarters in Weston, Florida. In addition to oÅering classes at these facilities, the Company
conducts Web-based training and on-site training at customer facilities. After customers have implemented
UltiPro and been turned over to the Company's customer support and maintenance program, professional
services assigns a customer relationship manager to the account to assist customers on an ongoing basis
with special projects, including enhancing their existing systems, managing upgrades and writing custom
reports. These services, like all of the Company's professional services, are typically billed on a time and
materials basis.
Customer Support and Maintenance. Ultimate Software oÅers comprehensive technical support and
maintenance services, which have historically been purchased by all of its customers. Ultimate Software's
customer support center was awarded the Support Center Practices CertiÑcation sponsored by the Service
Strategies Corporation (SSC) for the fourth consecutive year in 2002. This certiÑcation recognizes
companies that ""deliver exceptional service and support to their customers.'' Ultimate Software's customer
support services include: software updates that reÖect tax and other legislative changes; telephone support
24 hours a day, 7 days a week; unlimited access to the Company's employee tax center on the World
Wide Web; seminars on year-end closing procedures; and periodic newswires. In addition, the Company's
customer support services team maintains a support Web site for its customers and individual
representatives attend user-organized user group meetings on a routine basis throughout the United States.
9
Customers
As of December 31, 2002, the Company had licensed its software to approximately 900 customers,
representing approximately 2,000 companies and servicing approximately 1.4 million employees. Ultimate
Software's customers operate in a wide variety of industries, including manufacturing, food services, sports,
technology, Ñnance, insurance, retail, real estate, transportation, communications, healthcare and services.
No customer accounted for more than 10% of total revenues in 2002 or 2001. The following is a
representative list of the Company's customers as of December 31, 2002 and is not intended to portray a
complete list of the Company's customers.
Manufacturing:
Food Services & Hospitality:
Sports:
Elizabeth Arden, Inc.
Hatteras Yachts, Inc.
Intermatic, Inc.
Jeld-Wen
Lifetime Products, Inc.
Oil States Industries, Inc.
Styline Industries, Inc.
Spang & Company
Tredegar Corporation
Volvo IT North America, Inc.
Williams International
Woodgrain Millwork, Inc.
Retail:
Gamestop
Factory Card Outlet
The Container Store
The Deb Shops
The Paradies Shops
Transportation &
Communications:
Allen Samuels Enterprises, Inc.
Bill Heard Enterprises, Inc.
Metropolitan Nashville Airport
Authority
Sewell Companies
Universal Weather & Aviation,
Inc.
Sales and Marketing
Benihana Inc.
Consolidated Restaurants, Inc.
Chiquita Brands International,
Inc.
Hooters of America, Inc.
Houlihan Restaurants, Inc.
Omni Hotels
Premium Standard Farms
Paramount Citrus Association
Ruth's Chris Steak House
Souper Salad
The Portillo Restaurant Group
Finance/Insurance/Real Estate:
Credit Lyonnais
Goldbelt, Incorporated
Sky Financial Group, Inc.
Stephens Inc.
Trammell Crow Residential
Whitney National Bank
Healthcare:
Baptist Health Systems
Emergency Physicians Medical
Group, PC
Sarah A. Reed Retirement
Center
Scottsdale Healthcare
University of Louisville Hospital
VCU Health System
Wenatchee Valley Medical
Center
Arizona Diamondbacks
Chicago White Sox
Colorado Rockies Baseball Club
Florida Marlins Baseball Club
Florida Panthers
Montreal Expos
New York Giants
New York Jets Football Club
New York Yankees
Pro Player Stadium
Texas Rangers Baseball
The Philadelphia Phillies
The Phoenix Suns
Technology:
AÇliated Computer Services,
Inc.
Ingram Entertainment, Inc.
Toshiba America Medical
Systems, Inc.
Nikon Precision
Nintendo of America, Inc.
Services and Other:
Community Coordinated Care
For Children, Inc.
La Petite Academy, Inc.
Milton Hershey Schools
Mount St. Mary's College
Rush Enterprises, Inc.
Tohono O'Odham Gaming
Authority
Winter Park Recreational Assoc.
Ultimate Software markets and sells its products and services through its direct sales force, marketing
group, and a network of business service provider alliances.
Direct Sales. Ultimate Software's direct sales force includes business development vice presidents,
directors and managers who have deÑned territories. The sales cycle begins with a sales lead generated
through a national, corporate marketing campaign or a territory-based activity. In one or more on-site
visits, sales managers work with application and technical consultants to analyze prospective client needs,
demonstrate the Company's product and, when required, respond to RFPs (Requests for Proposals). The
sale is Ñnalized after clients complete their internal sign-oÅ procedures and terms of the contract are
negotiated and signed.
10
With a license sale, the terms of the Company's sales contract typically include a license agreement
for the product, an annual maintenance agreement, per-day training rates and hourly charges for
implementation services. Typical payment terms include a deposit at the time the contract is signed and
additional payments upon the occurrence of other speciÑed events such as the implementation of the
software and/or speciÑc payment dates designated in the contract. Payment for implementation and
training services under the contract is typically made as such services are provided. A service sale is a
hosting, or Intersourcing, agreement that typically requires, but is not limited to, a per-employee-per-
month fee, setup fees and hourly charges for implementation.
Business Service Provider (BSP) Network.
In April 2000, the Company announced a new co-
branding alliance strategy that enables BSPs to co-brand and market UltiPro and/or the BSP Solution
primarily to businesses with under 500 employees. The goal of the program is to extend the Company's
market penetration to include smaller businesses and build a recurring revenue stream to supplement its
standard license revenue by participating in per-employee-per-month pricing. BSPs that are active in this
program include, among others, Advantius, Inc. and Ceridian Corporation.
Marketing. Ultimate Software supports its sales force with a comprehensive marketing program that
includes public relations, advertising, direct mail, trade shows, seminars and Web site maintenance.
Working closely with the direct sales force, customers and strategic partners, the marketing team deÑnes
positioning strategies and develops a well-deÑned plan for implementing these strategies. Marketing
services include market surveys and research, overall campaign management, creative development,
production control, demand generation, results analysis, and communications with Ñeld oÇces, customers
and marketing partners.
Intellectual Property Rights
The Company's success is dependent in part on its ability to protect its proprietary technology. The
Company relies on a combination of copyright, trademark and trade secret laws, as well as conÑdentiality
agreements and licensing arrangements, to establish and protect its proprietary rights. The Company does
not have any patents or patent applications pending, and existing copyright, trademark and trade secret
laws aÅord only limited protection. Accordingly, there can be no assurance that the Company will be able
to protect its proprietary rights against unauthorized third-party copying or use, which could materially
adversely aÅect the Company's business, operating results and Ñnancial condition.
Despite the Company's eÅorts to protect its proprietary rights, attempts may be made to copy or
reverse engineer aspects of the Company's products or to obtain and use information that the Company
regards as proprietary. Moreover, there can be no assurance that others will not develop products that
perform comparably to the Company's proprietary products. Policing the unauthorized use of the
Company's products is diÇcult. Litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trademarks, copyrights or trade secrets or to
determine the validity and scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse eÅect on the Company's
business, operating results and Ñnancial condition.
As is common in the software industry, the Company from time to time may become aware of third
party claims of infringement by the Company's products of third-party proprietary rights. While the
Company is not currently subject to any such claim, the Company's software products may increasingly be
subject to such claims as the number of products and competitors in the Company's industry segments
grows and the functionality of products overlaps and as the issuance of software patents becomes
increasingly common. Any such claim, with or without merit, could result in signiÑcant litigation costs and
require the Company to enter into royalty and licensing agreements, which could have a material adverse
eÅect on the Company's business, operating results and Ñnancial condition. Such royalty and licensing
agreements, if required, may not be available on terms acceptable by the Company or at all.
11
Competition
The market for the Company's products is highly competitive. The Company's products compete
primarily on the basis of technology, delivered functionality and price/performance.
Ultimate Software's competitors include (i) large service bureaus, primarily ADP and to a lesser
extent Ceridian Corporation; (ii) a number of companies, such as Lawson Software, Inc., Oracle
Corporation, PeopleSoft, Inc. and SAP, which oÅer human resource management and payroll
(""HRMS/payroll'') software products for use on mainframes, client/server environments and/or Web
servers; and (iii) the internal payroll/human resources departments of potential customers which use
custom-written software. Many of the Company's competitors or potential competitors have signiÑcantly
greater Ñnancial, technical and marketing resources than the Company. As a result, they may be able to
respond more quickly to new or emerging technologies and to changes in customer requirements, or to
devote greater resources to the development, promotion and sale of their products than can the Company.
In addition, current and potential competitors have established or may establish cooperative relationships
among themselves or with third parties to increase the ability of their products to address the needs of the
Company's prospective customers.
Product Liability
Software products such as those oÅered by the Company frequently contain undetected errors or
failures when Ñrst introduced or as new versions are released. Testing of the Company's products is
particularly challenging because it is diÇcult to simulate the wide variety of computing environments in
which the Company's customers may deploy these products. Despite extensive testing, the Company from
time to time has discovered defects or errors in products. There can be no assurance that such defects,
errors or diÇculties will not cause delays in product introductions and shipments, result in increased costs
and diversion of development resources, require design modiÑcations or decrease market acceptance or
customer satisfaction with the Company's products or result in claims by customers against the Company.
In addition, there can be no assurance that, despite testing by the Company and by current and potential
customers, errors will not be found after commencement of commercial shipments, resulting in loss of or
delay in market acceptance, which could have a material adverse eÅect upon the Company's business,
operating results and Ñnancial condition.
Employees
As of December 31, 2002, the Company employed 415 persons, including 67 in sales and marketing,
112 in professional services, 131 in research and development, 58 in customer support and 45 in Ñnance
and administration. The Company believes that its relations with employees are good. However,
competition for qualiÑed personnel in the Company's industry is generally intense and the management of
the Company believes that its future success will depend in part on its continued ability to attract, hire and
retain qualiÑed personnel.
Available Information
The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, proxy statements and amendments to those reports, are available free of charge on our
Internet website at www.ultimatesoftware.com as soon as reasonably practicable after such reports are
electronically Ñled with the Securities and Exchange Commission. Information contained on Ultimate
Software's website is not part of this report.
Item 2. Properties
Ultimate Software's corporate headquarters, including its principal administrative, marketing,
engineering and support operations, are located in Weston, Florida. Commencing in July 1999, the
Company leased all the available square footage in this facility, or approximately 40,000 square feet, under
lease expiring in 2017. Commencing in November 2002, the Company leased all the available square
12
footage of a new adjacent building that serves as an extension of the Company's corporate headquarters,
approximately 21,000 square feet, under a lease expiring in 2017. In addition, the Company presently
leases oÇce space for its sales operations in Albany, New York; Columbia, Maryland; Dallas, Texas;
Millburn, New Jersey; Nashville, Tennessee; Ridgeland, Mississippi; Seal Beach, California; and
Schaumburg, Illinois. Sales operations in other locations are not supported by leased oÇce space. The
Company believes that its existing facilities are suitable and adequate for its current operations for the next
12 months. The Company further believes that suitable space will be available as needed to accommodate
any expansion of its operations on commercially reasonable terms.
Item 3. Legal Proceedings
From time-to-time, the Company is involved in litigation relating to claims arising out of its
operations in the normal course of business. The Company is not currently a party to any legal proceedings
the adverse outcome of which, individually or in the aggregate, could reasonably be expected to have a
material adverse eÅect on the Company's operating results or Ñnancial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of 2002.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
The following table sets forth, for the periods indicated, the high closing and low closing sales prices
of the Company's Common Stock, as quoted on the Nasdaq National Market.
2002
2001
High
Low
High
Low
First QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$4.880
4.560
3.620
4.200
$3.300
2.220
2.050
2.470
$5.438
6.030
5.040
4.000
$3.000
3.525
3.150
2.370
As of March 20, 2003, the Company had approximately 150 holders of record, representing
approximately 2,300 stockholder accounts.
The Company has never declared or paid any cash dividends on its capital stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain
future earnings to fund the development and growth of its business. The payment of dividends in the
future, if any, will be at the discretion of the Board of Directors. Under the terms of the Company's
revolving line of credit with Silicon Valley Bank, the Company may not pay dividends without the prior
written consent of Silicon Valley Bank. See ""Management's Discussion and Analysis of Financial
Condition and Results of Operations Ì Liquidity and Capital Resources.''
Item 6. Selected Financial Data
The following selected consolidated Ñnancial data is qualiÑed by reference to and should be read in
conjunction with ""Management's Discussion and Analysis of Financial Conditions and Results of
Operations'' and the Company's Consolidated Financial Statements and Notes thereto included elsewhere
in this Form 10-K. The statement of operations data presented below for the year ended December 31,
2002 and the balance sheet data as of December 31, 2002 have been derived from the Company's
Consolidated Financial Statements included elsewhere in this Form 10-K, which have been audited by
KPMG LLP whose report appears elsewhere in this Form 10-K. The statement of operations data below
13
for each of the years in the two-year period ended December 31, 2001 and the balance sheet data as of
December 31, 2001 have been derived from the Company's Consolidated Financial Statements included
elsewhere in this Form 10-K which have been audited by Arthur Andersen LLP, an international
accounting Ñrm that has subsequently ceased operations, a copy of whose report is included elsewhere in
this Form 10-K. The balance sheet data as of December 31, 2000, 1999 and 1998 and the statements of
operations data for the years ended December 31, 1999 and 1998 have been derived from audited
consolidated Ñnancial statements not included herein. The Ñnancial data reÖects the results of the
Company and Ñve former third-party resellers of the Company's products, the businesses of which were
acquired in February and March 1998 (the ""Acquired Resellers''), as if the Company and the Acquired
Resellers had operated as one entity during the periods presented. These acquisitions were accounted for
under the poolings-of-interests method of accounting during 1998.
2002
Years Ended December 31,(1)
2000
2001
(In thousands, except per share data)
1999
1998
Statement of Operations Data:
Revenues:
License ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recurring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 12,170
19,345
23,634
$16,826
14,364
28,289
$24,103
10,520
27,331
$23,454
8,315
25,624
$18,811
6,059
19,622
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
55,149
59,479
61,954
57,393
44,492
Cost of revenues:
License ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recurring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total cost of revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expenses:
Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Research and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of acquired intangibles ÏÏÏÏÏÏÏÏÏÏ
Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,163
8,098
18,267
27,528
17,479
17,675
6,890
Ì
42,044
1,287
5,789
20,219
27,295
18,261
12,775
10,065
Ì
41,101
1,286
4,957
20,978
27,221
20,121
15,687
7,338
Ì
43,146
751
3,930
17,925
22,606
17,536
10,281
5,433
Ì
33,250
834
2,219
16,961
20,014
16,024
6,953
4,651
638
28,266
Operating income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(14,423)
(8,917)
(8,413)
1,537
(3,788)
Compensation related to modiÑcation of escrow
agreement(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
(283)
138
Ì
(208)
375
Ì
(311)
320
Income (loss) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(14,568)
(8,750)
(8,404)
Ì
Ì
Ì
Ì
(267)
507
1,777
22
(4,183)
(207)
589
(7,589)
Ì
Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(14,568)
$(8,750)
$(8,404)
$ 1,755
$(7,589)
Net income (loss) per share Ì basic and
diluted(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
(0.90)
$ (0.55)
$ (0.52)
$
0.11
$ (0.52)
Weighted average number of shares outstanding:
Basic(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
16,189
15,944
16,075
15,908
14,494
Diluted(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
16,189
15,944
16,075
16,125
14,494
14
2002
2001
2000
1999
1998
Balance Sheet Data:
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term borrowings, including capital lease
obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' equity (deÑcit) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 8,974
31,143
27,815
$ 8,464
34,251
20,215
$ 7,572
34,440
9,894
$ 8,946
38,430
8,573
$17,128
37,214
9,134
1,206
(7,368)
408
4,590
943
13,904
1,120
21,960
1,010
19,110
(1) In February and March 1998, the Company acquired the businesses of Ñve third-party resellers of the
Company's products (the ""Acquired Resellers'') in exchange for an aggregate of 121,856 shares of the
Company's Class B Common Stock (converted into 1,233,061 shares of the Company's common
stock, par value $.01 per share (the ""Common Stock'') in connection with an initial public oÅering,
completed in June 1998). The Company accounted for these transactions using the poolings-of-
interest method of accounting. Therefore, the accounts of the Acquired Resellers have been included
retroactively in the consolidated Ñnancial statements as if the companies had operated as one entity
since inception for purposes of the statements of operations data and at the end of such periods for
purposes of the balance sheet data.
(2) In March 1998, an escrow agreement was modiÑed to provide that all of the shares of Class B
Common Stock held in escrow were to be released upon the execution of a Ñrm commitment
underwriting agreement for the initial public oÅering of the Company's capital stock on or before
July 1, 1998. Approximately $4.2 million of compensation expense was recorded as of the date of
modiÑcation, representing 60,429 shares of Class B Common Stock of the Company (converted into
611,477 shares of Common Stock) released to directors, oÇcers and employees of the Company,
multiplied by the diÅerence between the fair market value of the Class B Common Stock on the date
of the modiÑcation and the price paid by the holders of the shares.
(3) See Note 2 of the Notes to Consolidated Financial Statements for information regarding the
computation of net income (loss) per share.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the Ñnancial condition and results of operations of the Company should be
read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in
this Form 10-K. This Form 10-K contains forward-looking statements that involve risks and uncertainties.
The Company's actual results could diÅer materially from those contained in the forward-looking
statements. Factors that may cause such diÅerences include, but are not limited to, those discussed in this
Form 10-K, including Exhibit 99.1 hereto. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Critical Accounting Policies and Estimates
The preparation of Ñnancial statements in conformity with accounting principles generally accepted in
the United States requires management to make estimates and assumptions that aÅect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
Ñnancial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could diÅer from those estimates.
Revenue Recognition
The Company licenses software under non-cancelable license agreements and provides services
including maintenance, training, implementation consulting and hosting services, including Intersourcing.
In accordance with the provisions of Statement of Position (""SOP'') 97-2, ""Software Revenue
Recognition,'' license revenues are generally recognized when a non-cancelable license agreement has been
15
signed by both parties, the product has been shipped, no signiÑcant vendor obligations remain and
collection of the related receivable is considered probable.
For multiple-element software arrangements, each element of the arrangement is analyzed and the
Company allocates a portion of the total fee under the arrangement to the elements based on the fair
value of the element, regardless of any separate prices stated within the contract for each element. Fair
value is generally considered the price a customer would be required to pay if the element were to be sold
separately. The Company applies the residual method as allowed under SOP 98-9, ""ModiÑcations of
SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions'' in accounting for any
element of an arrangement that remains undelivered.
Recurring revenues include maintenance revenues and subscription revenues. Maintenance revenues
are derived from maintaining, supporting and providing periodic updates for the Company's software.
Subscription revenues are principally derived from per employee per month (""PEPM'') fees earned
through the Intersourcing OÅering (deÑned below), hosting services oÅered to customers that license
UltiPro on a perpetual basis (""Base Hosting'') and the business service provider (BSP) sales channel
(deÑned below), as well as revenues generated from the Ceridian Agreement (deÑned below).
Maintenance revenues are recognized ratably over the service period, generally one year. Maintenance and
support fees are generally priced as a percentage of the initial license fee for the underlying products.
Subscription revenues are recognized ratably over the term of the related contract upon the delivery of the
product and services. Commencing on August 28, 2002, subscription revenues generated from the Ceridian
Agreement are recognized ratably over the minimum term of the contract, which is expected to be 7 years.
Subscription revenues of approximately $640,000 per month, are based on guaranteed minimum payments
from Ceridian Corporation of approximately $42.7 million over the contract term, including $16.5 million
received to date.
Subscription revenues generated from the Intersourcing OÅering, deÑned below, are recognized in
accordance with Emerging Issues Task Force (""EITF'') No. 00-21, ""Revenue Arrangements with
Multiple Deliverables'' as a services arrangement since the customer is purchasing the right to use UltiPro
rather than licensing the software on a perpetual basis. Fair value of multiple elements in Intersourcing
arrangements is assigned to each element based on the guidance provided by EITF 00-21. Subscription
revenues generated from Base Hosting are recognized in accordance with EITF 00-3, ""Application of
AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on
Another Entity's Hardware,'' which provides guidance as to the application of SOP 97-2 to hosting
arrangements that include a license right to the software. Fair value of multiple elements in Base Hosting
arrangements is assigned in accordance with guidelines provided by SOP 97-2.
Services revenues include revenues from fees charged for the implementation of the Company's
software products and training of customers in the use of such products, fees for other services, including
the provision of payroll-related forms and the printing of Form W-2's for certain customers, as well as
certain reimbursable out-of-pocket expenses. Revenues for training and implementation consulting services
are recognized as services are performed. Other services are recognized as the product is shipped or as the
services are rendered.
Arrangement fees related to Ñxed-fee implementation services contracts are recognized using the
percentage of completion accounting method. Percentage of completion is measured at each reporting date
based on hours incurred to date compared to total estimated hours to complete.
The Company recognizes revenue in accordance with the SEC StaÅ Accounting Bulletin No. 101,
""Revenue Recognition in Financial Statements'' (""SAB No. 101''). Management believes the Company is
currently in compliance with the current provisions set forth in SOP 97-2, SOP 98-9, EITF 00-21,
EITF 00-3 and SAB No. 101. However, the accounting profession continues to discuss various provisions
of these guidelines with the objective of providing additional guidance on their future application. These
discussions and issuance of new interpretations, once Ñnalized, could lead to changes in the way revenue is
recognized.
16
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts at an amount estimated to be suÇcient
to provide adequate protection against losses resulting from collecting less than full payment on accounts
receivables. A considerable amount of judgment is required when the realization of receivables is assessed,
including assessing the probability of collection and current credit-worthiness of each customer. If the
Ñnancial condition of the Company's customers were to deteriorate, resulting in an impairment of their
ability to make payments, an additional provision for doubtful accounts may be required.
Software Development Costs
SFAS No. 86, ""Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed,'' requires capitalization of certain software development costs subsequent to the establishment
of technological feasibility. Based on the Company's product development process, technological feasibility
is established upon completion of a working model. Software costs capitalized during 2002 and 2001
totaled zero and $4,621,000, respectively. Capitalized software is amortized using the straight-line method
over the estimated useful lives of the assets, which are typically three years. Amortization of capitalized
software was $1,792,743, $706,000 and $351,000 in 2002, 2001 and 2000, respectively. Accumulated
amortization of capitalized software was $2.9 million and $1.1 million as of December 31, 2002 and 2001,
respectively.
Overview
Ultimate Software designs, markets, implements and supports technologically advanced payroll and
workforce management solutions. The Company's mission is to become the premier infrastructure provider
of Internet payroll and workforce management solutions.
Ultimate Software's UltiPro Workforce Management (""UltiPro'') is a Web-based solution designed to
deliver the functionality businesses need to manage the employee life cycle, whether their processes are
centralized at headquarters or distributed across multiple divisions or branch oÇces. UltiPro's human
resources (""HR'') and beneÑts management functionality is wholly integrated with a Öexible payroll
engine, reporting and analytical decision-making tools, and a central Web portal that can serve as the
customer's gateway for its workforce to access company-related and personal information. Ultimate
Software believes that UltiPro helps customers streamline HR and payroll processes to signiÑcantly reduce
administration and operational costs, while also empowering executives and staÅ to access critical
information quickly and perform routine business activities eÇciently.
UltiPro Workforce Management is marketed both through the Company's direct sales team as well as
through alliances with business service providers (BSPs) that market co-branded UltiPro to their customer
bases. Ultimate Software's direct sales team focuses on companies with more than 500 employees and sells
both on a license (typically in-house) and service basis (typically hosted and priced on a per-employee-
per-month basis). The Company's BSP alliances focus primarily on companies with under 500 employees
and typically sell an Internet solution priced on a monthly/service basis, sharing revenue with Ultimate
Software.
The Company's direct sales force markets UltiPro as an in-house payroll and workforce management
solution and alternatively as a hosted oÅering branded ""Intersourcing'' (the ""Intersourcing OÅering'').
Intersourcing provides Web access to comprehensive workforce management functionality for organizations
that need to simplify the information technology (IT) support requirements of their business applications.
Ultimate Software believes that Intersourcing is attractive to companies that want to focus on their core
competencies to increase sales and proÑts. Through the Intersourcing model introduced in 2002, the
Company provides the hardware, infrastructure, ongoing maintenance and backup services for its customers
at a BellSouth data center.
17
Intersourcing OÅering
In 2002, the Company introduced hosting services through which the Company provides the
hardware, infrastructure, ongoing maintenance and back-up services for its customers at a BellSouth data
center. DiÅerent types of hosting arrangements include the sale of hosting services as a part of the
Intersourcing oÅering, discussed below, and, to a lesser extent, the sale of hosting services to customers
that license UltiPro on a perpetual basis. Hosting services, available in a shared or dedicated environment,
provide Web access to comprehensive workforce management functionality for organizations that need to
simplify the information technology (IT) support requirements of their business applications and are
priced on a per-employee-per-month basis. In a shared environment, commonly used for Intersourcing,
Ultimate Software provides an infrastructure with applicable servers shared among many customers who
use a Web browser to access the application software through the data center. In a dedicated environment,
servers are dedicated to speciÑc customers that purchase this particular service. The majority of hosting
arrangements are provided through a shared environment.
Intersourcing is the hosted oÅering 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 speciÑc term in a shared hosted
environment. The pricing for Intersourcing, including both the hosting element as well as the right to use
UltiPro, is on a per-employee-per-month basis. The Company's direct sales force markets UltiPro as an in-
house payroll and workforce management solution and alternatively as a hosted oÅering through
Intersourcing. Ultimate Software believes that Intersourcing is attractive to companies that want to focus
on their core competencies to increase sales and proÑts.
Ceridian Agreement
On April 24, 2002, the Company dismissed its independent public accountants, Arthur Andersen LLP
(""Andersen''), and retained KPMG LLP (""KPMG'') as its new independent public accountants. As part
of their quarterly review process for the Ñscal quarter ended March 31, 2002, KPMG reviewed, among
other things, the Company's revenue recognition policies, including the co-branding agreement signed with
Ceridian Corporation (""Ceridian'') on March 9, 2001, as amended from time to time (the ""Ceridian
Agreement''). Based upon consultations with KPMG as a result of their review of the Ceridian
Agreement, during the three month period ended March 31, 2002, the Company reassessed its original
conclusion regarding the timing of the revenue recognition to be applied to the Ceridian Agreement.
Ceridian is obligated to pay to Ultimate Software a minimum of approximately $42.7 million,
including $16.5 million received to date, over the minimum term of the Ceridian Agreement, which is
expected to be 7 years (the ""Minimum Term''). The eÅect of the change in revenue recognition for the
Ceridian Agreement was to modify the date at which revenue recognition would begin Ì changing the
onset of the revenue recognition process from February 5, 2002, which was the date the Company
completed a successful transfer of technology to Ceridian, to the earlier of (i) the delivery of the
UltiPro 6.0 release (also known as Evolution), or (ii) January 1, 2003. The change in the timing of
revenue recognition applied to the Ceridian Agreement does not impact Ceridian's payment obligations to
the Company over the Minimum Term nor does it impact the nature of the underlying business
transaction.
On August 28, 2002, Ultimate Software delivered the UltiPro 6.0 release to Ceridian. The delivery of
UltiPro 6.0 marked the commencement of recurring revenue recognition for the Ceridian transaction at the
minimum rate of approximately $640,000 per month from that date through March 2008.
On February 5, 2002, Ultimate Software and Ceridian entered into an agreement which provided that
if Ultimate Software were to deliver UltiPro 6.0 on or before August 30, 2002, Ceridian would pay
Ultimate Software $500,000 for such advanced delivery (the ""Evolution Bonus''). Upon receipt in
September 2002, the Evolution Bonus, was recorded as deferred revenue in the accompanying consolidated
balance sheet. The Evolution Bonus is being recognized as subscription revenue (a component of recurring
revenue) ratably over the remaining minimum term of the Ceridian Agreement and is included in the
18
minimum rate of $640,000 per month through March 2008. The Company awarded substantially all of the
Evolution Bonus to members of the Company's development team as an incentive bonus for the early
delivery of UltiPro 6.0 (the ""Incentive Bonus''). The Incentive Bonus was expensed in the three months
ended September 30, 2002 and was included with research and development expenses.
Results of Operations
The following table sets forth the Statements of Operations data of the Company, as a percentage of
total revenues, for the periods indicated.
For the Years Ended December 31,
2000
2001
2002
Revenues:
License ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recurring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
22.1%
35.1
42.8
28.3%
24.1
47.6
38.9%
17.0
44.1
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
100.0
100.0
100.0
Cost of revenues:
License ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recurring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total cost of revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expenses:
Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Research and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2.1
14.7
33.1
49.9
31.7
32.1
12.5
76.3
2.2
9.7
34.0
45.9
30.7
21.5
16.9
69.1
2.1
8.0
33.9
44.0
32.5
25.3
11.8
69.6
Operating loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(26.2)
(0.5)
0.3
(15.0)
(0.3)
0.6
(13.6)
(0.5)
0.5
Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(26.4)%
(14.7)%
(13.6)%
Comparison of Fiscal Years Ended December 31, 2002 and 2001
Revenues
The Company's revenues are derived from three principal sources: software licenses (""license
revenues''), recurring revenues and services revenues.
License revenues include revenues from software license agreements for the Company's products,
entered into between the Company and its customers in which the license fees are noncancellable. License
revenues are generally recognized upon the delivery of the related software product when all signiÑcant
contractual obligations have been satisÑed. Until such delivery, the Company records amounts received
when contracts are signed as customer deposits which are included with deferred revenues in the
consolidated balance sheets.
Recurring revenues include maintenance and subscription revenues. Maintenance revenues are derived
from maintaining, supporting and providing periodic updates for the Company's software. Subscription
revenues are principally derived from per-employee-per-month (""PEPM'') fees earned through the
Intersourcing OÅering, Base Hosting and the BSP sales channel, as well as revenues generated from the
Ceridian arrangement. Maintenance revenues are recognized ratably over the service period, generally one
19
year. Subscription revenues are recognized ratably over the term of the related contract upon the delivery
of the product and services. All of the Company's customers that purchased software during 2002 and
2001 also purchased maintenance and support service contracts. Maintenance and support fees are
generally priced as a percentage of the initial license fee for the underlying products.
Services revenues include revenues from fees charged for the implementation of the Company's
software products and training of customers in the use of such products, fees for other services, including
the provision of payroll-related forms and the printing of Form W-2's for certain customers, as well as
certain reimbursable out-of-pocket expenses. Services revenues are recognized as services are performed
and delivered.
Total revenues, consisting of license, recurring and service revenues, decreased to $55.1 million for
2002 from $59.5 million for 2001.
License revenues decreased 27.7% to $12.2 million for 2002 from $16.8 million for 2001. The decrease
in license revenues for 2002 is primarily due to a reduction in the number of new units sold by the
Company's direct sales channel during the Ñrst half of 2002 which management believes was partly due to
unfavorable economic conditions, partially oÅset by increased sales of UltiPro to existing clients using the
Company's DOS-based product, UltiPro for Lan (""DOS Clients''), which had a lower average sales price.
In addition, during 2002 the Company adjusted its sales and marketing strategy to also target sales from
its new Intersourcing OÅering, which produces subscription revenue (a component of recurring revenue)
rather than license revenue. Ultimate Software introduced UltiPro for Lan in July 1993 as its Ñrst
proprietary software product. The Company no longer markets this DOS-based product and discontinued
support for UltiPro for Lan in late January 2003. The Company actively marketed the UltiPro product to
Dos Clients as part of a loyalty program designed to encourage these clients to purchase UltiPro before
support for UltiPro for Lan was discontinued.
Recurring revenues increased 34.7% to $19.3 million for 2002 from $14.4 million for 2001 primarily
due to the recognition of the subscription revenue under the Ceridian Agreement beginning on August 28,
2002 and the increase in maintenance revenue generated from incremental licenses sold in 2001 and 2002.
Services revenues decreased 16.5% to $23.6 million for 2002 from $28.3 million for 2001 primarily as
a result of a decrease in implementation revenue resulting from fewer billable hours stemming from a
decrease in the number of billable consultants consequential to the reduction in the number of total units
sold in 2002 and, to a lesser extent, a decrease in reimbursable out of pocket expenses.
Cost of Revenues
Cost of revenues consists of the cost of license, recurring and services revenues. Cost of license
revenues primarily consists of fees payable to a third party for software products distributed by the
Company and, to a lesser degree, amortization of capitalized software costs. Capitalized software is
amortized using the straight-line method over the estimated useful life of the related asset, which is
typically three years. Cost of recurring revenues consists of costs to provide maintenance and technical
support to the Company's customers, the cost of providing periodic updates and the costs of subscription
revenues, including amortization of capitalized software. Cost of services revenues primarily consists of
costs to provide implementation services and training to the Company's customers and, to a lesser degree,
costs related to sales of payroll-related forms and costs associated with reimbursable out-of-pocket
expenses, discussed below.
EÅective January 1, 2002, the Company adopted Financial Accounting Standards Board Emerging
Issues Task Force No. 01-14, ""Income Statement Characterization of Reimbursements Received for "Out-
of-Pocket' Expenses Incurred,'' (""EITF 01-14''). EITF 01-14 requires companies to characterize
reimbursements received for out-of-pocket expenses incurred as revenue and to reclassify prior period
Ñnancial statements to conform to current year presentation for comparative purposes. Reimbursable out-
of-pocket expenses, which are included in services revenues and cost of services revenues in the Company's
accompanying consolidated statements of operations, were $1.2 million and $2.0 million for 2002 and 2001,
20
respectively. Prior to the adoption of EITF 01-14, the Company's historical consolidated Ñnancial
statements oÅset these amounts within cost of services revenues.
Cost of license revenues decreased 9.6% to $1.2 million for 2002 from $1.3 million for 2001. The
decrease in the cost of license revenues was primarily attributable to lower third party licensing fees
resulting from the decrease in licensing activity for the year, partially oÅset by higher software
amortization. As a percentage of license revenues, cost of license revenues increased to 9.6% for 2002 from
7.6% for 2001 primarily as a result of an increase in the amortization of capitalized software for UltiPro
combined with the absorption of these higher expenses in a decreased license revenue base.
Cost of recurring revenues increased 39.9% to $8.1 million for 2002 from $5.8 million for 2001. This
increase was primarily attributable to increased costs of maintenance principally due to higher labor costs
to support the Company's customer base and an increase in costs of subscriptions, principally from a full
year of amortization of capitalized software, which began in August of 2001. As a percentage of recurring
revenues, cost of recurring revenues increased to 41.9% for 2002 from 40.3% for 2001 primarily due to a
full year of software amortization costs in 2002 as compared to four month's software amortization in
2001.
Cost of services revenues decreased 9.7 % to $18.3 million for 2002 from $20.2 million for 2001. The
decrease was primarily due to reduced labor and travel costs from implementation services and, to a lesser
extent, lower reimbursable out-of-pocket expenses. Cost of services revenues, as a percentage of services
revenues, increased to 77.3% for 2002 from 71.5% for 2001 primarily as a result of the absorption of these
expenses in a decreased services revenue base.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and beneÑts, sales commissions, travel and
promotional expenses, and facility and communication costs for direct sales oÇces, as well as advertising
and marketing costs. Sales and marketing expenses decreased 4.3% to $17.5 million for 2002 from
$18.3 million for 2001. The decrease in sales and marketing expenses was primarily due to lower labor
costs, partially oÅset by higher advertising and marketing costs. Sales and marketing expenses, as a
percentage of total revenues, increased to 31.7% for 2002 from 30.7% for 2001 primarily due to the
absorption of these expenses in a reduced total revenue base.
Research and Development
Research and development expenses consist primarily of software development personnel costs.
Research and development expenses increased 38.4% to $17.7 million for 2002 from $12.8 million for
2001. Research and development expenses, as a percentage of total revenues, increased to 32.1% for 2002
from 21.5% for 2001. The increase in research and development expenses was primarily attributable to the
absence of the capitalization of software development costs in 2002 as compared to the capitalization of
$4.2 million of software development costs in 2001, and, to a lesser extent, a $0.5 million incentive bonus
paid to members of the Company's development team for the advanced delivery of UltiPro 6.0 (also
known as Evolution) to Ceridian on August 28, 2002. Capitalized software costs consists of software
development personnel costs associated with the development of certain major products which were
available for general release in the third and fourth Ñscal quarters of 2001. Such capitalized software costs
are amortized ratably to cost of license revenues and cost of recurring revenues, on a product-by-product
basis over the estimated life (which is typically three years) following the general release of the underlying
software products.
General and Administrative
General and administrative expenses consist primarily of salaries and beneÑts of executive,
administrative and Ñnancial personnel, as well as external professional fees and the provision for doubtful
accounts. General and administrative expenses decreased 31.5% to $6.9 million for 2002 from $10.1 million
for 2001 primarily due to a reduction in the provision for doubtful accounts and settlement of legal matter
21
which occurred in 2001, partially oÅset by increased professional fees. General and administrative
expenses, as a percentage of total revenues, increased to 12.5% for 2002 from 16.9% for 2001 primarily due
to the absorption of these costs in a lower total revenue base.
Interest Expense
Interest expense increased 36.1% to $283,000 for 2002 from $208,000 for 2001 primarily due to
additional borrowings under the Credit Facility, deÑned below.
Interest and Other Income
Interest and other income decreased 63.2% to $138,000 for 2002 from $375,000 for 2001 primarily
due to the reduction in funds available for investment in 2002.
Provision for Income Taxes
No provision or beneÑt for Federal, state or foreign income taxes was made for 2002 due to the
operating losses and operating loss carryforwards from prior periods incurred in the respective periods. Net
operating loss carryforwards available at December 31, 2002, expiring at various times through the year
2022 and which are available to oÅset future taxable income, were $42.8 million. The timing and levels of
future proÑtability may result in the expiration of net operating loss carryforwards before utilization.
Additionally, utilization of such net operating losses may be limited as a result of cumulative ownership
changes in the Company's equity instruments.
Comparison of Fiscal Years Ended December 31, 2001 and 2000
Revenues
Total revenues, consisting of license, recurring and service revenues, decreased to $59.5 million for
2001 from $62.0 million for 2000.
License revenues decreased 30.2% to $16.8 million for 2001 from $24.1 million for 2000 primarily due
to lower volume of sales generated by the Company's direct sales channel which management believes was
partly due to current economic conditions. In addition, the Company changed its business strategy for its
sales channel which focused on co-branding relationships with BSPs (the ""BSP Channel''). The
Company's objective with the BSP Channel was to achieve a more predictable recurring revenue model.
Based on market conditions, during the three months ended September 30, 2000, the Company made
adjustments to its strategy for attaining its BSP Channel objective. The Company revised its former
requirement for strategic partners to pay an upfront license fee along with ongoing per-employee-per-
month (""PEPM'') fees by de-emphasizing the upfront license fee and emphasizing the recurring revenue
from PEPM fees. The planned result was to provide a higher percentage of recurring revenue in the BSP
Channel with correspondingly lower upfront commitments.
Recurring revenues increased 36.5% to $14.4 million for 2001 from $10.5 million for 2000 primarily
due to the increase in maintenance revenue generated from incremental licenses sold in 2001, combined
with a high customer retention rate.
Services revenues increased 3.5% to $28.3 million for 2001 from $27.3 million for 2000 primarily as a
result of an increase in implementation revenue from increased billable hours resulting from the
combination of additional billable consultants and higher utilization of billable consultants, and to a lesser
extent, additional billable hours from third party consultants, partially oÅset by a decrease in revenue
generated from a hosting arrangement with International Business Machines (the ""IBM Hosted Model'')
which terminated in 2002 as to the addition of new customers. The amount of revenue generated from the
IBM Hosted Model in 2001 was $0.9 million as compared to $2.5 million in 2000.
22
Cost of Revenues
Cost of license revenues totaling $1.3 million for 2001 was consistent with 2000. As a percentage of
license revenues, cost of license revenues increased to 7.6% for 2001 from 5.3% for 2000. The increase in
the cost of license revenues rate was primarily attributable to an increase in the amortization of capitalized
software for UltiPro during 2001 combined with lower license revenues.
Cost of recurring revenues increased 16.8% to $5.8 million for 2001 from $5.0 million for 2000. This
increase was attributable to increased costs of maintenance principally due to higher labor costs to support
the Company's customer base and an increase in costs of subscriptions, principally from labor costs and
amortization of capitalized software, which began in 2001. As a percentage of recurring revenues, cost of
recurring revenues decreased to 40.3% for 2001 from 47.1% for 2000. This decrease was primarily
attributable to higher costs absorbed by an increased recurring revenue base.
Cost of services revenues decreased 3.6% to $20.2 million for 2001 from $21.0 million for 2000. Cost
of services revenues, as a percentage of services revenues, decreased to 71.5% for 2001 from 76.8% for
2000. The decrease in the cost of services revenues was primarily attributable to the reduction in costs
associated with lower revenues recognized from the IBM Hosted Model, partially oÅset by increased labor
costs.
Sales and Marketing
Sales and marketing expenses decreased 9.2% to $18.3 million for 2001 from $20.1 million for 2000.
Sales and marketing expenses, as a percentage of total revenues, decreased to 30.7% for 2001 from 32.5%
for 2000. The decrease in sales and marketing expenses was primarily due to lower advertising and
marketing costs, a reduction in travel expenses and, to a lesser degree, less sales commissions resulting
from lower license revenues.
Research and Development
Research and development expenses decreased 18.6% to $12.8 million for 2001 from $15.7 million for
2000. The decrease in research and development expenses was primarily attributable to the capitalization
during 2001 of $4.2 million in software development personnel costs associated with the development of
certain major products which were available for general release in the third and fourth Ñscal quarters of
2001. Such capitalized software costs are amortized ratably to cost of license revenues and cost of
recurring revenues, on a product-by-product basis over the estimated life (which is typically three years)
following the general release of the underlying software products. As of December 31, 2001, the amount of
capitalized software remaining for future amortization to cost of license and cost of recurring revenues was
$1.4 million and $3.1 million, respectively.
Research and development expenses, as a percentage of total revenues, decreased to 21.5% for 2001
from 25.3% for 2000. The decrease in research and development expenses, as a percentage of total
revenues, was primarily due to the capitalization of software. Excluding the impact of research and
development expenses capitalized in the period, research and development expenses, as a percentage of
total revenues, were 28.5% for 2001 and 25.3% for 2000. The increase in research and development costs,
excluding the impact of capitalized software, was primarily attributable to additional software development
personnel costs.
General and Administrative
General and administrative expenses increased 37.2% to $10.1 million for 2001 from $7.3 million for
2000. General and administrative expenses, as a percentage of total revenues, increased to 16.9% for 2001
from 11.8% for 2000. The increase in general and administrative expenses was principally due to the
settlement of a litigation matter and an increase in the provision for doubtful accounts.
23
Interest Expense
Interest expense decreased 33.1% to $208,000 for 2001 from $311,000 from 2000 primarily due to
lower interest rates on new capital lease obligations.
Interest and Other Income
Interest and other income increased 17.2% to $375,000 for 2001 from $320,000 from 2000 primarily
due to interest earned on additional funds available for investment in 2001.
Provision for Income Taxes
No provision for Federal, state or foreign income taxes was made for 2001 due to the operating losses
and operating loss carryforwards from prior periods incurred in the respective periods. Net operating loss
carryforwards available at December 31, 2001, expiring at various times through the year 2021 and which
are available to oÅset future taxable income, were $34.3 million. The timing and levels of future
proÑtability may result in the expiration of net operating loss carryforwards before utilization. Additionally,
utilization of such net operating losses may be limited as a result of cumulative ownership changes in the
Company's equity instruments.
Liquidity and Capital Resources
The Company has historically funded operations primarily through the private and public sale of
equity securities and, to a lesser extent, equipment Ñnancing and borrowing arrangements.
As of December 31, 2002, the Company had $9.0 million in cash and cash equivalents, reÖecting a
net increase of $0.5 million since December 31, 2001. Working capital as of December 31, 2002 was a
working capital deÑcit of $9.7 million as compared to working capital of $2.1 million as of December 31,
2001. The decline in working capital resulted primarily from the impact of the net loss from operations for
2002, partially oÅset by a total of $2.7 million of capital raised through private sales of the Company's
common stock, par value $0.01 (""Common Stock'') in June, July and December 2002, as discussed below.
Net cash provided by operating activities was $2.8 million for 2002 as compared to $10.4 million for
2001. The decrease in net cash provided by operating activities was primarily attributable to an increase in
research and development expenses and the funding of operations, partially oÅset by increased collections
of accounts receivable. During 2001, $4.6 million of internally developed software costs (principally
research and development expenses) were capitalized.
Net cash used in investing activities was $4.3 million for 2002 as compared to $6.5 million for 2001.
The decrease in net cash used in investing activities was primarily attributable to the decrease in the
capitalization of software development costs, partially oÅset by an increase in capital expenditures,
principally computer equipment, which were not Ñnanced.
Net cash provided by Ñnancing activities was $2.0 million for 2002 as compared to net cash used in
Ñnancing activities of $3.0 million for 2001. The increase in net cash provided by Ñnancing activities was
primarily due to the increase in net proceeds from issuances of Common Stock coupled with borrowings
on the Credit Facility, discussed below, for equipment purchases, partially oÅset by the reduction of
common stock repurchases in 2002.
During the second quarter of 2002, the Company raised $2.0 million of capital through the private
sale of 500,000 shares of the Company's Common Stock and a warrant to purchase 50,000 shares of
Common Stock at $4 per share to a shareholder of the Company. During July and December 2002, the
Company raised an additional aggregate amount of $0.7 million of capital through the private sale of
175,000 shares of the Company's Common Stock and a warrant to purchase 17,500 shares of Common
Stock at $4 per share. As the Company's revenue mix shifts from license revenue to recurring revenue,
particularly through the Intersourcing OÅering, and cash inÖow consequently shifts from relatively large,
one-time upfront payments to recurring monthly payments, the Company may seek to raise additional
funds through the sale of additional shares of Common Stock or other securities or through borrowings.
24
The capital raised in July 2002 included the sale of 100,000 shares of Common Stock and a warrant
to purchase 10,000 shares of Common Stock at $4 per share, for an aggregate amount of $400,000, to an
irrevocable trust established by a member of the Company's Board of Directors (the ""Director''). The
Director has informed the Company that he has no voting or investment power or other controlling interest
in this irrevocable trust.
On January 23, 2003, the Company raised $0.2 million of capital through the private sale of
50,000 shares of the Company's Common Stock and a warrant to purchase 5,000 shares of Common Stock
at $4 per share to a shareholder of the Company. On March 13, 2003, the Company raised an additional
$3.0 million of capital through the private sale of 750,000 shares of the Company's Common Stock and a
warrant to purchase 75,000 shares of Common Stock at $4 per share to Ceridian. The additional capital
raised in January 2003 and March 2003 is collectively referred to as ""Recent Capital Raised.''
On February 10, 2003, the Company entered into a services agreement with Ceridian (the ""Ceridian
Services Agreement'') under which Ceridian will pay Ultimate Software a total of $2.25 million in four
equal installments during 2003 in exchange for additional services provided by Ultimate Software in 2003.
The Ceridian Services Agreement terminates on December 31, 2003.
In November 2001, the Company entered into a $5.0 million revolving line of credit (the ""Credit
Facility'') with Silicon Valley Bank. The Credit Facility, as amended, expires on May 28, 2004 and bears
interest at a rate equal to Prime Rate plus 1.0% per annum (reduced to Prime Rate plus 0.5% per annum
upon two consecutive quarters of net proÑtability, as deÑned). The Credit Facility provides working capital
Ñnancing for up to 75% of the Company's eligible accounts receivable, as deÑned, Ñnancing for eligible
equipment purchases for up to $2.5 million with additional limits for software purchases (the ""Equipment
Term Note''), and stand-by letters of credit for up to $0.5 million. The Equipment Term Note is payable
in 36 equal monthly installments, plus interest at Prime Rate plus 1%. The maximum amount available
under the Credit Facility is $5.0 million. At December 31, 2002, approximately $3.7 million was available
for borrowing under the Credit Facility and approximately $1.3 million was outstanding under the
Equipment Term Note.
Borrowings under the Credit Facility are secured by all of the Company's corporate assets, including a
negative pledge on intellectual property, and the Company is required to comply with certain Ñnancial and
other covenants. As of December 31, 2002, the Company was in compliance with all covenants included in
the terms of the Credit Facility.
The Company believes that cash and cash equivalents, cash generated from operations, cash generated
from Recent Capital Raised, cash generated from the Ceridian Services Agreement and available
borrowings under the Credit Facility, as amended on March 27, 2003, will be suÇcient to fund its
operations for at least the next 12 months. This belief is based upon, among other factors, management's
expectations for future revenue growth, controlled expenses and collections of accounts receivable.
However, as discussed above, the Company may seek to raise additional funds during such period through
the sale of additional shares of Common Stock or other securities. There can be no assurance that the
Company will be able to raise such funds on terms acceptable to the Company.
Quarterly Fluctuations
The Company's quarterly revenues and operating results have varied signiÑcantly in the past and are
likely to vary substantially from quarter to quarter in the future. The Company's operating results may
Öuctuate as a result of a number of factors, including, but not limited to, increased expenses (especially as
they relate to product development and sales and marketing), timing of product releases, increased
competition, variations in the mix of revenues, announcements of new products by the Company or its
competitors and capital spending patterns of the Company's customers. The Company establishes its
expenditure levels based upon its expectations as to future revenues, and, if revenue levels are below
expectations, expenses can be disproportionately high. A drop in near term demand for the Company's
products could signiÑcantly aÅect both revenues and proÑts in any quarter. Operating results achieved in
previous Ñscal quarters are not necessarily indicative of operating results for the full Ñscal years or for any
25
future periods. As a result of these factors, there can be no assurance that the Company will be able to
establish or, when established, maintain proÑtability on a quarterly basis. The Company believes that, due
to the underlying factors for quarterly Öuctuations, period-to-period comparisons of its operations are not
necessarily meaningful and that such comparisons should not be relied upon as indications of future
performance.
Recent Accounting Literature
EÅective January 1, 2002, the Company adopted SFAS No. 142, ""Goodwill and Other Intangible
Assets,'' which addresses Ñnancial accounting and reporting for acquired goodwill and other intangible
assets and supersedes Accounting Principles Board (""APB'') Opinion No. 17, ""Intangible Assets.'' SFAS
No. 142 addresses how intangible assets that are acquired individually or with a group of other assets (but
not those acquired in a business combination) should be accounted for in Ñnancial statements upon their
acquisition. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization. Rather,
goodwill will be subject to at least an annual assessment for impairment by applying a fair value-based
test. The adoption of SFAS No. 142 did not have an impact on the Company's Ñnancial position, results
of operations or cash Öows.
EÅective January 1, 2002, the Company adopted SFAS No. 144, ""Accounting for the Impairment or
Disposal of Long-Lived Assets,'' which addresses the Ñnancial accounting and reporting for the impairment
or disposal of long-lived assets and supercedes SFAS No. 121, ""Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of,'' and the accounting and reporting provisions
of APB No. 30, ""Reporting the Results of Operations Ì Reporting the EÅects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,'' for the
disposal of a segment. The adoption of SFAS No. 144 did not have an impact on the Company's Ñnancial
position, results of operations or cash Öows.
EÅective January 1, 2002, the Company adopted Financial Accounting Standards Board Emerging
Issues Task Force (""EITF'') No. 01-14, ""Income Statement Characterization of Reimbursements
Received for "Out-of-Pocket' Expenses Incurred,'' (""EITF 01-14''). EITF 01-14 requires companies to
characterize reimbursements received for out-of-pocket expenses incurred as revenue and to reclassify prior
period Ñnancial statements to conform to current year presentation for comparative purposes. Reimbursable
out-of-pocket expenses, which are included in services revenues and cost of services revenues in the
Company's accompanying consolidated statements of operations, were $1.2 million and $ 2.0 million for
2002 and 2001, respectively. Prior to the adoption of EITF 01-14, the Company's historical consolidated
Ñnancial statements oÅset these amounts within cost of services revenues.
In August 2001, the Financial Accounting Standards Board (""FASB'') issued SFAS No. 143,
""Accounting for Asset Retirement Obligations'' (""SFAS No. 143''), which will be eÅective for the
Company beginning January 1, 2003. SFAS No. 143 addresses the Ñnancial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the associated asset retirement
costs. The adoption of SFAS No. 143 is not expected to have a material impact on the consolidated
Ñnancial statements of the Company.
In April 2002, the FASB issued SFAS No. 145, ""Rescission of FASB Statements No. 4, 44, 64,
Amendment of FASB Statement No. 13, and Technical Corrections'' (""SFAS No. 145''), which will be
eÅective for the Company beginning January 1, 2003. SFAS No. 145 rescinds FASB Statement No. 4, 44,
64 and amends SFAS No. 13, ""Accounting for Leases'', to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting for certain lease
modiÑcations that have economic eÅects similar to sale-leaseback transactions. The adoption of SFAS
No. 145 is not expected to have a material impact on the consolidated Ñnancial statements of the
Company.
In June 2002, the FASB issued SFAS No. 146, ""Accounting for Costs Associated with Exit or
Disposal Activities'' (""SFAS No. 146''), which addresses Ñnancial accounting and reporting for costs
associated with exit or disposal activities and nulliÑes EITF Issue No. 94-3, ""Liability Recognition for
26
Certain Employee Termination BeneÑts and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)'' and is eÅective for the Company beginning January 1, 2003. SFAS No. 146
requires that a liability for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recognized at the date of
an entity's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be
measured and recorded at fair value. The adoption of SFAS No. 146 is not expected to have a material
impact on the consolidated Ñnancial statements of the Company.
In December 2002, SFAS No. 148, ""Accounting for Stock-Based Compensation-Transition and
Disclosure-An Amendment of SFAS No. 123'' (""SFAS No. 148''), was issued. SFAS No. 148 amends
SFAS No. 123, ""Accounting for Stock-Based Compensation'' (""SFAS No. 123''), to provide alternative
methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in not only annual, but also interim Ñnancial statements about the eÅect the
fair value method would have had on reported results. The transition and annual disclosure requirements of
SFAS No. 148 are eÅective for Ñscal years ending after December 15, 2002. The interim disclosure
requirements are eÅective for interim periods beginning after December 15, 2002. The Company is
currently evaluating the impact of adopting SFAS No. 148.
In January 2003, the FASB issued EITF No. 00-21, ""Revenue Arrangements with Multiple
Deliverables'' (""EITF 00-21''). EITF 00-21 provides guidance on how to determine whether an
arrangement involving multiple deliverables contains more than one unit of accounting and how
consideration from the arrangement should be measured and allocated to the separate units of accounting
in the arrangement. The Company adopted the provisions of EITF 00-21 in 2002 to account for
Intersourcing OÅerings.
In November 2002, the FASB issued Interpretation No. 45, ""Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,'' (""FIN 45'').
FIN 45 expands previously issued accounting guidance and disclosure requirements for certain guarantees
and requires recognition of an initial liability for the fair value of an obligation assumed by issuing a
guarantee. The provision for initial recognition and measurement of liability will be applied on a
prospective basis to guarantees issued or modiÑed after December 31, 2002. The adoption of FIN 45 is not
expected to have a material impact on the Company's consolidated Ñnancial statements.
In January 2003, the FASB issued Interpretation No. 46, ""Consolidation of Variable Interest
Entities,'' (""FIN 46''). FIN 46 clariÑes the application of Accounting Research Bulletin No. 51,
""Consolidated Financial Statements,'' for certain entities that do not have suÇcient equity at risk for the
entity to Ñnance its activities without additional subordinated Ñnancial support from other parties or in
which equity investors do not have the characteristics of a controlling Ñnancial interest (""variable interest
entities''). Variable interest entities within the scope of FIN 46 will be required to be consolidated by their
primary beneÑciary. The primary beneÑciary of a variable interest entity is determined to be the party that
absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both.
FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It applies in the Ñrst Ñscal year
or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The Company is currently evaluating the impact
of adopting FIN 46. However, the Company does not believe that it is party to any arrangement that
would fall within the scope of FIN 46.
Forward-Looking Statements
The foregoing Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements represent the Company's expectations or beliefs, including, but
27
not limited to, statements concerning the Company's operations and Ñnancial 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 diÇcult to
predict. The Company's actual results could diÅer materially from those contained in the forward-looking
statements. Factors that may cause such diÅerences include, but are not limited to, those discussed in this
Form 10-K, including Exhibit 99.1 hereto. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
In the ordinary course of its operations, the Company is exposed to certain market risks, primarily
interest rates. Uncertainties that are either non-Ñnancial or non-quantiÑable, such as political, economic,
tax, other regulatory or credit risks are not included in the following assessment of the Company's market
risks.
Interest rates. Cash equivalents consist of money market accounts with original maturities of less than
three months. Interest on the Credit Facility, as amended, which expires on May 28, 2004, is based on
Prime Rate plus 1.0% per annum. As of December 31, 2002, the Company had $1.3 million outstanding
for borrowings under the Credit Facility. Changes in interest rates could impact the Company's anticipated
interest income from interest-bearing cash accounts, or cash equivalents, as well as interest expense on
borrowings under the Credit Facility.
28
Item 8. Financial Statements and Supplementary Data
INDEX
Independent Auditors' Report ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Balance Sheets as of December 31, 2002 and 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001
and 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Stockholders' Equity (DeÑcit) for the Years Ended
December 31, 2002, 2001 and 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001
and 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Page(s)
30
32
33
34
35
36
29
INDEPENDENT AUDITORS' REPORT
To: Board of Directors
The Ultimate Software Group, Inc.:
We have audited the accompanying consolidated balance sheet of The Ultimate Software Group, Inc.
and subsidiary (the ""Company'') as of December 31, 2002 and the related consolidated statements of
operations, stockholders' equity (deÑcit) and cash Öows for the year then ended. These consolidated
Ñnancial statements are the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated Ñnancial statements based on our audit. The consolidated Ñnancial
statements of the Company as of December 31, 2001, and for each of the two years in the period ended
December 31, 2001, were audited by other auditors who have ceased operations. Those auditors expressed
an unqualiÑed opinion on those consolidated Ñnancial statements in their report dated February 1, 2002.
We conducted our audit in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Ñnancial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the Ñnancial statements. An
audit also includes assessing the accounting principles used and signiÑcant estimates made by
management, as well as evaluating the overall Ñnancial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the 2002 consolidated Ñnancial statements referred to above present fairly, in all
material respects, the Ñnancial position of The Ultimate Software Group, Inc. and subsidiary as of
December 31, 2002 and the results of their operations and their cash Öows for the year then ended in
conformity with accounting principles generally accepted in the United States of America.
Miami, Florida,
January 31, 2003, except as to Note 4, which is as of March 27, 2003.
/s/ KPMG LLP
KPMG LLP
30
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY
ARTHUR ANDERSEN LLP IN CONNECTION WITH THE ULTIMATE SOFTWARE GROUP,
INC.'S FILING ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001. THIS REPORT
HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS
FILING ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002. FOR FURTHER
DISCUSSION, SEE EXHIBIT 23.2 WHICH IS FILED HEREWITH.
REPORT OF INDEPENDENT AUDITORS
To The Ultimate Software Group, Inc.:
We have audited the accompanying consolidated balance sheets of The Ultimate Software Group,
Inc. (a Delaware corporation) and subsidiary as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash Öows for each of the three years in the
period ended December 31, 2001. These Ñnancial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these Ñnancial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the Ñnancial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Ñnancial statements. An audit also includes
assessing the accounting principles used and signiÑcant estimates made by management, as well as
evaluating the overall Ñnancial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the Ñnancial statements referred to above present fairly, in all material respects, the
Ñnancial position of The Ultimate Software Group, Inc. and subsidiary as of December 31, 2001 and 2000,
and the results of their operations and their cash Öows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in the United States.
Miami, Florida,
February 1, 2002.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
31
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
As of December 31,
2002
2001
(In thousands, except
share data)
Current assets:
ASSETS
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts receivable, net of allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
of $1,000 and $2,465 for 2002 and 2001, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepaid expenses and other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property and equipment, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capitalized software, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
8,974
$
8,464
10,381
1,273
20,628
7,233
2,753
529
14,006
836
23,306
5,786
4,545
614
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 31,143
$ 34,251
Current liabilities:
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current portion of deferred revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current portion of long term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current portion of capital lease obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital lease obligations, net of current portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt, net of current portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred revenue, net of current portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,693
5,529
20,874
501
767
30,364
361
845
6,941
38,511
$
1,901
5,548
12,162
Ì
1,589
21,200
408
Ì
8,053
29,661
Commitments and contingencies (Note 13)
Stockholders' equity (deÑcit):
Series A Junior Participating Preferred Stock, $.01 par value, 500,000 shares
authorized, no shares issued in 2002 and 2001ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred Stock, $.01 par value, 2,000,000 shares authorized, no shares issued in
2002 and 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common Stock, $.01 par value, 50,000,000 shares authorized, 16,787,940 and
16,105,665 shares issued in 2002 and 2001, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated deÑcitÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock, at cost, 257,647 and 211,497 shares in 2002 and 2001, respectively
Ì
Ì
Ì
Ì
168
68,602
(75,084)
(6,314)
(1,054)
161
65,808
(60,516)
5,453
(863)
4,590
Total stockholders' equity (deÑcit) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(7,368)
Total liabilities and stockholders' equity (deÑcit) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 31,143
$ 34,251
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Ñnancial statements.
32
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
2002
2000
2001
(In thousands, except per share
amounts)
Revenues:
License ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recurring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 12,170
19,345
23,634
$16,826
14,364
28,289
$24,103
10,520
27,331
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
55,149
59,479
61,954
Cost of revenues:
License ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Recurring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total cost of revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Research and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,163
8,098
18,267
27,528
17,479
17,675
6,890
42,044
1,287
5,789
20,219
27,295
18,261
12,775
10,065
41,101
1,286
4,957
20,978
27,221
20,121
15,687
7,338
43,146
Operating loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(14,423)
(283)
138
(8,917)
(208)
375
(8,413)
(311)
320
Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(14,568)
$(8,750)
$(8,404)
Net loss per share Ì basic and diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
(0.90)
$ (0.55)
$ (0.52)
Weighted average shares outstanding:
Basic and dilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
16,189
15,944
16,075
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Ñnancial statements.
33
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
16,047
$160
$65,162
Accumulated
DeÑcit
(In thousands)
$(43,362)
Treasury Stock
Shares
Amount
Total
Stockholders'
Equity
(DeÑcit)
Ì $ Ì $ 21,960
54
Ì
Ì
Ì
Ì
1
Ì
Ì
Ì
Ì
331
83
117
Ì
Ì
16,101
161
65,693
(51,766)
5
Ì
Ì
Ì
Ì
Ì
Ì
Ì
13
102
Ì
Ì
Ì
Ì
Ì
(8,750)
Ì
Ì
Ì
Ì
Ì
(8,404)
Ì
Ì
54
54
Ì
Ì
Ì
Ì
(184)
332
83
117
(184)
(8,404)
(184)
13,904
Ì
13
Ì
157
Ì
(679)
102
(679)
(8,750)
16,106
161
65,808
(60,516)
211
(863)
4,590
Balance, December 31, 1999 ÏÏÏÏÏÏÏÏÏÏ
Issuances of Common Stock from
exercise of stock options ÏÏÏÏÏÏÏÏÏÏÏÏ
Non-cash issuances of options to Board
to purchase Common Stock for board
fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-cash issuances of options to
purchase Common Stock for services
Purchase of Treasury Stock ÏÏÏÏÏÏÏÏÏÏÏ
Net lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance, December 31, 2000 ÏÏÏÏÏÏÏÏÏÏ
Issuances of Common Stock from
exercise of stock options ÏÏÏÏÏÏÏÏÏÏÏÏ
Non-cash issuances of options to Board
to purchase Common Stock for board
fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase of Treasury Stock ÏÏÏÏÏÏÏÏÏÏÏ
Net lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance, December 31, 2001 ÏÏÏÏÏÏÏÏÏÏ
Issuances of Common Stock from
exercise of stock options ÏÏÏÏÏÏÏÏÏÏÏÏ
7
Issuance of Common Stock for private
placement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
675
Non-cash issuances of options to Board
to purchase Common Stock for board
fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase of Treasury Stock ÏÏÏÏÏÏÏÏÏÏÏ
Net lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
Ì
Ì
7
Ì
Ì
Ì
17
2,693
84
Ì
Ì
Ì
Ì
Ì
Ì
(14,568)
Ì
Ì
Ì
47
Ì
Ì
Ì
17
2,700
Ì
(191)
Ì
84
(191)
(14,568)
Balance, December 31, 2002 ÏÏÏÏÏÏÏÏÏÏ
16,788
$168
$68,602
$(75,084)
258
$(1,054)
$ (7,368)
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Ñnancial statements.
34
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Öow from operating activities:
Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-cash issuances of equity instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in operating assets and liabilities:
Accounts receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepaid expenses and other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
For the Years Ended December 31,
2000
2001
(In thousands)
2002
$(14,568)
$(8,750)
$(8,404)
5,838
1,657
84
1,968
(437)
(138)
792
(19)
7,600
4,368
4,151
102
3,385
3,572
200
668
(98)
(138)
(158)
(75)
10,321
(2,599)
1,413
36
64
2,038
2,162
Net cash provided by operating activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,777
10,391
1,867
Cash Öows from investing activities:
Purchases of property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additions to capitalized software ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net proceeds from (issuances of) notes receivableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(4,263)
Ì
Ì
(1,849)
(4,621)
(12)
(1,428)
(160)
43
Net cash used in investing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(4,263)
(6,482)
(1,545)
Cash Öows from Ñnancing activities:
Principal payments on capital lease obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net proceeds from issuances of Common StockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net proceeds from long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of Treasury Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash provided by (used in) Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏ
Net increase (decrease) in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1,876)
2,717
1,346
(191)
1,996
510
8,464
(2,351)
13
Ì
(679)
(1,844)
332
Ì
(184)
(3,017)
(1,696)
892
7,572
(1,374)
8,946
Cash and cash equivalents, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
8,974
$ 8,464
$ 7,572
Supplemental disclosure of cash Öow information:
Cash paid for interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
216
$
180
$
238
Supplemental disclosure of non-cash investing and Ñnancing activities:
- The Company entered into capital lease obligations to acquire new equipment totaling $1,007, $1,388
and $2,581 in 2002, 2001 and 2000, respectively.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Ñnancial statements.
35
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Ultimate Software Group, Inc. (""Ultimate Software'' or the ""Company'') designs, markets,
implements and supports technologically advanced, cross-industry human resource management and payroll
software solutions, marketed primarily to middle-market organizations with 500 to 15,000 employees. The
Company reaches its customer base and target market through its direct sales force and a network of
national, regional and local strategic partners.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated Ñnancial statements include the accounts of the Company and its subsidiary,
Ultimate BeneÑts, Inc., an inactive company. Intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or less when acquired are
considered cash equivalents and are comprised of interest-bearing accounts.
Accounts Receivable
Accounts receivable are principally from end-users of the Company's products. The Company
performs credit evaluations of its customers and has recorded allowances for estimated losses. The
Company maintains an allowance for doubtful accounts at an amount estimated to be suÇcient to provide
adequate protection against losses resulting from collecting less than full payment on accounts receivables.
A considerable amount of judgment is required when the realization of receivables is assessed, including
assessing the probability of collection and current credit-worthiness of each customer. If the Ñnancial
condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to
make payments, an additional provision for doubtful accounts may be required.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and amortization. Property
and equipment is depreciated using the straight-line method over the estimated useful lives of the assets,
which range from two to Ñve 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 Ñfteen
years. Maintenance and repairs are charged to expense when incurred; betterments are capitalized. Upon
the sale or retirement of assets, the cost, accumulated depreciation and amortization are removed from the
accounts and any gain or loss is recognized.
Revenue Recognition
The Company licenses software under noncancellable license agreements and provides services
including maintenance, implementation, training, implementation consulting and hosting services, including
Intersourcing. In accordance with the provisions of Statement of Position (""SOP'') 97-2, ""Software
Revenue Recognition,'' license revenues are generally recognized when a noncancellable license agreement
has been signed, the product has been shipped, no signiÑcant vendor obligations remain and collection of
the related receivable is considered probable.
For multiple-element software arrangements, each element of the arrangement is analyzed and the
Company allocates a portion of the total fee under the arrangement to the elements based on the fair
36
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
value of the element, regardless of any separate prices stated within the contract for each element. Fair
value is generally considered the price a customer would be required to pay if the element were to be sold
separately. The Company applies the residual method as allowed under SOP 98-9, ""ModiÑcations of
SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions'' in accounting for any
element of an arrangement that remains undelivered.
Recurring revenues include maintenance revenues and subscription revenues. Maintenance revenues
are derived from maintaining, supporting and providing periodic updates for the Company's software.
Subscription revenues are principally derived from per-employee-per-month (""PEPM'') fees earned
through the hosted oÅering branded ""Intersourcing'' (the ""Intersourcing OÅering''), hosting services
oÅered to customers that license UltiPro on a perpetual basis (""Base Hosting'') and the business service
provider sales channel, as well as revenues generated from the Ceridian Agreement (see Note 3).
Maintenance revenues are recognized ratably over the service period, generally one year. Maintenance and
support fees are generally priced as a percentage of the initial license fee for the underlying products.
Subscription revenues are recognized ratably over the term of the related contract upon the delivery of the
product and services.
Subscription revenues generated from the Intersourcing OÅering, deÑned below, are recognized in
accordance with Emerging Issues Task Force (""EITF'') No. 00-21, ""Revenue Arrangements with
Multiple Deliverables'' as a services arrangement since the customer is purchasing the right to use UltiPro
rather than licensing the software on a perpetual basis. Fair value of multiple elements in Intersourcing
arrangements is assigned to each element based on the guidance provided by EITF 00-21. Subscription
revenues generated from Base Hosting are recognized in accordance with EITF 00-3, ""Application of
AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on
Another Entity's Hardware,'' which provides guidance as to the application of SOP 97-2 to hosting
arrangements that include a license right to the software. Fair value of multiple elements in Base Hosting
arrangements is assigned in accordance with guidelines provided by SOP 97-2.
Services revenues include revenues from fees charged for the implementation of the Company's
software products and training of customers in the use of such products, fees for other services, including
the provision of payroll-related forms and the printing of Form W-2's for certain customers, as well as
certain reimbursable out-of-pocket expenses. Revenues for training and implementation consulting services
are recognized as services are performed. Other services are recognized as the product is shipped or as the
services are rendered.
Arrangement fees related to Ñxed-fee implementation services contracts are recognized using the
percentage of completion accounting method. Percentage of completion is measured at each reporting date
based on hours incurred to date compared to total estimated hours to complete.
The Company recognizes revenue in accordance with the SEC StaÅ Accounting Bulletin No. 101,
""Revenue Recognition in Financial Statements'' (""SAB No. 101''). Management believes the Company is
currently in compliance with the current provisions set forth in SOP 97-2, SOP 98-9, EITF 00-21,
EITF 00-3 and SAB No. 101. However, the accounting profession continues to discuss various provisions
of these guidelines with the objective of providing additional guidance on their future application. These
discussions and issuance of new interpretations, once Ñnalized, could lead to changes in the way revenue is
recognized.
Deferred Revenue
Deferred revenue is primarily comprised of deferrals for recurring revenues for which maintenance
services have not yet been rendered, implementation consulting services for which the services have not yet
been rendered, Intersourcing services which are recognized over the term of the related contract as the
37
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
services are performed, typically two years, and subscription revenues which are recognized ratably over
the term of the related contract upon the delivery of the product and services. See Note 3.
Cost of Revenues
Cost of revenues consists of cost of license, recurring and services revenues. Cost of license revenues
primarily consists of fees payable to a third party for software products distributed by the Company and, to
a lesser degree, amortization of capitalized software. Cost of recurring revenues consists of costs to provide
maintenance and technical support to the Company's customers, the cost of providing periodic updates and
the costs of subscription revenues, including amortization of capitalized software. Cost of service revenues
primarily consists of costs to provide implementation services and training to the Company's customers,
and, to a lesser degree, costs related to sales of payroll-related forms and costs associated with
reimbursable out-of-pocket expenses.
Income Taxes
The Company is subject to corporate Federal and state income taxes and accounts for income taxes
under the provisions of Statement of Financial Accounting Standards (""SFAS'') No. 109, ""Accounting for
Income Taxes.'' SFAS No. 109 provides for a liability approach under which deferred income taxes are
provided based upon enacted tax laws and rates applicable to the periods in which the taxes become
payable.
Software Development Costs
SFAS No. 86, ""Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed,'' requires capitalization of certain software development costs subsequent to the establishment
of technological feasibility. Based on the Company's product development process, technological feasibility
is established upon completion of a working model. Software costs capitalized during 2002 and 2001
totaled zero and $4,621,000, respectively. Capitalized software is amortized using the straight-line method
over the estimated useful lives of the assets which are typically three years. Amortization of capitalized
software was $1,792,000, $706,000 and $351,000 in 2002, 2001 and 2000, respectively. Accumulated
amortization of capitalized software was $2.9 million and $1.1 million as of December 31, 2002 and 2001,
respectively.
Non-monetary Transaction
During 2000, the Company entered into a non-monetary transaction with a third party for the
exchange of the Company's HRMS/Payroll product for dissimilar computer software used in the
Company's operations (the ""Exchange''). The fair value of the computer software acquired was equivalent
to the fair value of the Company's HRMS/Payroll product exchanged; therefore, there was no gain or loss
recognized on the Exchange. Pricing associated with the Exchange was reasonable based on cash sales of
similar products. In accordance with Accounting Principles Board Opinion No. 29, ""Accounting for Non-
monetary Transactions,'' the Company recorded the resulting asset at its fair value of $393,000 and a
corresponding amount as license revenues in 2000.
Use of Estimates
The preparation of Ñnancial statements in conformity with generally accepted accounting principles in
the United States requires management to make estimates and assumptions that aÅect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
Ñnancial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could diÅer from those estimates.
38
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Fair Value of Financial Instruments
The Company's Ñnancial instruments, consisting of cash and cash equivalents, accounts receivable,
accounts payable, long-term debt and capital lease obligations approximate fair value as of December 31,
2002 and 2001.
Accounting for Stock-Based Compensation
As permitted by SFAS No. 123, ""Accounting for Stock-Based Compensation'', the Company
continues to account for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, ""Accounting for Stock Issued to Employees'' and has made
the pro forma disclosures required by SFAS No. 123 for each of the three years in the period ended
December 31, 2002. See Note 11.
Earnings Per Share
SFAS No. 128, ""Earnings Per Share,'' requires dual presentation of earnings per share Ì ""basic'' and
""diluted.'' Basic earnings per share is computed by dividing income available to common stockholders (the
numerator) by the weighted average number of common shares (the denominator) for the period. The
computation of diluted earnings per share is similar to basic earnings per share, except that the
denominator is increased to include the number of additional common shares that would have been
outstanding if the potentially dilutive common shares had been issued.
The following is a reconciliation of the shares used in the computation of basic and diluted net loss
per share (in thousands):
For the Years Ended
December 31,
2001
2000
2002
Weighted average shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EÅect of dilutive stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
16,189
Ì
15,944
Ì
16,075
Ì
Dilutive shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
16,189
15,944
16,075
Other common stock equivalents (i.e., stock options) not included in the computation of diluted net
loss per share, as their impact is antidilutive, totaled 4,729,000, 4,596,000 and 3,954,000 for 2002, 2001
and 2000, respectively.
Comprehensive Income
In 1998, the Company adopted SFAS No. 130, ""Reporting Comprehensive Income,'' which
establishes standards for the reporting and display of comprehensive income and its components in a full
set of Ñnancial statements. The objective of SFAS No. 130 is to report a measure (comprehensive
income) of all changes in equity of an enterprise that result from transactions and other economic events
in a period other than transactions with owners. There are no diÅerences between comprehensive income,
as deÑned in SFAS No. 130, and the Company's net loss for all periods presented.
Segment Information
The Company adopted SFAS No. 131, ""Disclosures about Segments of an Enterprise and Related
Information,'' eÅective December 31, 1998. SFAS No. 131 establishes standards for the way that public
companies report selected information about operating segments in annual and interim Ñnancial reports to
shareholders. It also establishes standards for related disclosures about an enterprise's business segments,
39
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
products, services, geographic areas and major customers. The Company operates its business as a single
segment.
Derivative Financial Instruments
The Company adopted SFAS No. 133, ""Accounting for Derivative Instruments and Hedging
Activities'' on January 1, 2001. At December 31, 2002 and 2001, the Company held no derivative Ñnancial
instruments, as deÑned by SFAS No. 133, as amended. Therefore, there was no eÅect to the Company's
consolidated Ñnancial statements upon adoption.
Business Combinations
On July 1, 2001, the Company adopted SFAS No. 141, ""Business Combinations,'' which addresses
Ñnancial accounting and reporting for business combinations and supersedes Accounting Principles Board
(""APB'') No. 16, ""Business Combinations'' and SFAS No. 38, ""Accounting for Preacquisition
Contingencies of Purchased Enterprises.'' All business combinations in the scope of SFAS No. 141 are to
be accounted for under the purchase method. The adoption of SFAS No. 141 did not have an impact on
the Company's consolidated Ñnancial statements.
Long-Lived Assets
On January 1, 2002, the Company adopted SFAS No. 144, ""Accounting for the Impairment or
Disposal of Long-Lived Assets,'' which addresses the Ñnancial accounting and reporting for the impairment
or disposal of long-lived assets and supercedes SFAS No. 121, ""Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of,'' and the accounting and reporting provisions
of APB No. 30, ""Reporting the Results of Operations Ì Reporting the EÅects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,'' for the
disposal of a segment. The adoption of SFAS No. 144 did not have an impact on the Company's
consolidated Ñnancial statements.
Reimbursable Out-Of-Pocket Expenses
EÅective January 1, 2002, the Company adopted Financial Accounting Standards Board Emerging
Issues Task Force No. 01-14, ""Income Statement Characterization of Reimbursements Received for "Out-
of-Pocket' Expenses Incurred'' (""EITF 01-14''). EITF 01-14 requires companies to characterize
reimbursements received for out-of-pocket expenses incurred as revenue and to reclassify prior period
Ñnancial statements to conform to current year presentation for comparative purposes. Reimbursable out-
of-pocket expenses, which are included in services revenues and cost of services revenues in the Company's
accompanying consolidated statements of operations, were $1.2 million and $2.0 million for 2002 and 2001,
respectively. Prior to the adoption of EITF 01-14, the Company's historical consolidated Ñnancial
statements oÅset these amounts within cost of services revenues.
Recent Accounting Literature
In August 2001, the Financial Accounting Standards Board (""FASB'') issued SFAS No. 143,
""Accounting for Asset Retirement Obligations'' (""SFAS No. 143''), which will be eÅective for the
Company beginning January 1, 2003. SFAS No. 143 addresses the Ñnancial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the associated asset retirement
costs. The adoption of SFAS No. 143 is not expected to have a material impact on the consolidated
Ñnancial statements of the Company.
40
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
In April 2002, the FASB issued SFAS No. 145, ""Rescission of FASB Statements No. 4, 44, 64,
Amendment of FASB Statement No. 13, and Technical Corrections'' (""SFAS 145''), which will be
eÅective for the Company beginning January 1, 2003. SFAS No. 145 rescinds FASB Statement No. 4, 44,
64 and amends SFAS No. 13, ""Accounting for Leases'', to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting for certain lease
modiÑcations that have economic eÅects similar to sale-leaseback transactions. The adoption of SFAS
No. 145 is not expected to have a material impact on the consolidated Ñnancial statements of the
Company.
In June 2002, the FASB issued SFAS No. 146, ""Accounting for Costs Associated with Exit or
Disposal Activities'' (""SFAS No. 146''), which addresses Ñnancial accounting and reporting for costs
associated with exit or disposal activities and nulliÑes EITF Issue No. 94-3, ""Liability Recognition for
Certain Employee Termination BeneÑts and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)'' and is eÅective for the Company beginning January 1, 2003. SFAS No. 146
requires that a liability for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recognized at the date of
an entity's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be
measured and recorded at fair value. The adoption of SFAS No. 146 is not expected to have a material
impact on the consolidated Ñnancial statements of the Company.
In December 2002, SFAS No. 148, ""Accounting for Stock-Based Compensation Ì Transition and
Disclosure Ì An Amendment of SFAS No. 123'' (""SFAS No. 148''), was issued. SFAS No. 148 amends
SFAS No. 123, ""Accounting for Stock-Based Compensation'' (""SFAS No. 123''), to provide alternative
methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in not only annual, but also interim Ñnancial statements about the eÅect the
fair value method would have had on reported results. The transition and annual disclosure requirements of
SFAS No. 148 are eÅective for Ñscal years ending after December 15, 2002. The interim disclosure
requirements are eÅective for interim periods beginning after December 15, 2002. The Company is
currently evaluating the impact of adopting SFAS No. 148.
In January 2003, the FASB issued EITF No. 00-21, ""Revenue Arrangements with Multiple
Deliverables'' (""EITF 00-21''). EITF 00-21 provides guidance on how to determine whether an
arrangement involving multiple deliverables contains more than one unit of accounting and how
consideration from the arrangement should be measured and allocated to the separate units of accounting
in the arrangement. The Company adopted the provisions of EITF 00-21 in 2002 to account for
Intersourcing OÅerings.
In November 2002, the FASB issued Interpretation No. 45, ""Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,'' (""FIN 45'').
FIN 45 expands previously issued accounting guidance and disclosure requirements for certain guarantees
and requires recognition of an initial liability for the fair value of an obligation assumed by issuing a
guarantee. The provision for initial recognition and measurement of liability will be applied on a
prospective basis to guarantees issued or modiÑed after December 31, 2002. The adoption of FIN 45 is not
expected to have a material impact on the Company's consolidated Ñnancial statements.
In January 2003, the FASB issued Interpretation No. 46, ""Consolidation of Variable Interest
Entities,'' (""FIN 46''). FIN 46 clariÑes the application of Accounting Research Bulletin No. 51,
""Consolidated Financial Statements,'' for certain entities that do not have suÇcient equity at risk for the
entity to Ñnance its activities without additional subordinated Ñnancial support from other parties or in
which equity investors do not have the characteristics of a controlling Ñnancial interest (""variable interest
entities''). Variable interest entities within the scope of FIN 46 will be required to be consolidated by their
41
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
primary beneÑciary. The primary beneÑciary of a variable interest entity is determined to be the party that
absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both.
FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It applies in the Ñrst Ñscal year
or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The Company is currently evaluating the impact
of adopting FIN 46. However, the Company does not believe that it is party to any arrangement that
would fall within the scope of FIN 46.
ReclassiÑcations
Certain reclassiÑcations have been made to prior year balances to conform to the current year
presentation.
3. SIGNIFICANT TRANSACTIONS
On April 24, 2002, the Company dismissed its independent public accountants, Arthur Andersen LLP
(""Andersen''), and retained KPMG LLP (""KPMG'') as its new independent public accountants. As part
of their quarterly review process for the Ñscal quarter ended March 31, 2002, KPMG reviewed, among
other things, the Company's revenue recognition policies, including the co-branding agreement signed with
Ceridian Corporation (""Ceridian'') on March 9, 2001, as amended from time to time (the ""Ceridian
Agreement''). Based upon consultations with KPMG as a result of their review of the Ceridian
Agreement, the Company reassessed its original conclusion regarding the timing of the revenue recognition
to be applied to the Ceridian Agreement.
Ceridian is obligated to pay to Ultimate Software a minimum of approximately $42.7 million,
including $16.5 million received to date, over the minimum term of the Ceridian Agreement, which is
expected to be 7 years (the ""Minimum Term''). The eÅect of the change in revenue recognition for the
Ceridian Agreement was to modify the date at which revenue recognition would begin Ì changing the
onset of the revenue recognition process from February 5, 2002, which was the date the Company
completed a successful transfer of technology to Ceridian, to the earlier of (i) the delivery of the
UltiPro 6.0 release (also known as Evolution), or (ii) January 1, 2003. The change in the timing of
revenue recognition applied to the Ceridian Agreement does not impact Ceridian's payment obligations to
the Company over the Minimum Term nor does it impact the nature of the underlying business
transaction.
On August 28, 2002, Ultimate Software delivered the UltiPro 6.0 release to Ceridian. The delivery of
UltiPro 6.0 marked the commencement of recurring revenue recognition for the Ceridian transaction at the
minimum rate of approximately $640,000 per month from that date through March 2008.
On February 5, 2002, Ultimate Software and Ceridian entered into an agreement which provided that
if Ultimate Software were to deliver UltiPro 6.0 on or before August 30, 2002, Ceridian would pay
Ultimate Software $500,000 for such advanced delivery (the ""Evolution Bonus''). The Evolution Bonus,
received in September 2002, was recorded as deferred revenue in the accompanying unaudited consolidated
balance sheet. The Evolution Bonus is being recognized as subscription revenue (a component of recurring
revenue) ratably over the remaining minimum term of the Ceridian Agreement and is included in the
minimum rate of $640,000 per month through March 2008. The Company awarded substantially all of the
Evolution Bonus to members of the Company's development team as an incentive bonus for the early
delivery of UltiPro 6.0 (the ""Incentive Bonus''). The Incentive Bonus was expensed in the three months
ended September 30, 2002 and is included with research and development expenses in the accompanying
consolidated statement of operations for the year ended December 31, 2002.
42
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Under the Ceridian Agreement, Ceridian is permitted to acquire an equity interest in Ultimate
through purchases in the open market or from third parties, subject to a contractual limitation of 14.99%
of the Company's Common Stock.
4. CAPITAL RESOURCES
The Company's cash Öows from operations have historically been insuÇcient to fund its operations.
Shortfalls in cash Öows from operations have been funded primarily through the private and public sale of
equity securities and, to a lesser extent, equipment Ñnancing and borrowing arrangements.
On January 23, 2003, the Company raised $0.2 million of capital through the private sale of 50,000
shares of the Company's Common Stock and a warrant to purchase 5,000 shares of Common Stock at $4
per share to a shareholder of the Company. On March 13, 2003, the Company raised an additional
$3.0 million of capital through the private sale of 750,000 shares of the Company's Common Stock and a
warrant to purchase 75,000 shares of Common Stock at $4 per share to Ceridian. The additional capital
raised in January 2003 and March 2003 is collectively referred to as ""Recent Capital Raised.''
On February 10, 2003, the Company entered into a services agreement with Ceridian (the ""Ceridian
Services Agreement'') under which Ceridian will pay Ultimate Software a total of $2.25 million in four
equal installments during 2003 in exchange for additional services provided by Ultimate Software in 2003.
The Ceridian Services Agreement terminates on December 31, 2003.
On March 27, 2003, the Company amended the revolving line of credit with Silicon Valley Bank (see
Note 9) to extend the expiration date of the agreement to May 28, 2004.
The Company believes that cash and cash equivalents, cash generated from operations, cash generated
from Recent Capital Raised, cash generated from the Ceridian Services Agreement and available
borrowings under the existing revolving line of credit with Silicon Valley Bank (see Note 9), as amended,
will be suÇcient to fund its operations for at least the next 12 months. This belief is based upon, among
other factors, management's expectations for future revenue growth, controlled expenses and collections of
accounts receivable. However, the Company may seek to raise additional funds during such period through
the sale of additional shares of the Company's common stock, par value $0.01, or other securities or
borrowings. There can be no assurance that the Company will be able to raise such funds on terms
acceptable to the Company.
5. STOCK REPURCHASE PLAN
On October 30, 2000, the Company announced that its board of directors authorized the repurchase
of up to 1,000,000 shares of the Company's outstanding Common Stock (the ""Stock Repurchase Plan'').
Stock repurchases may be made periodically in the open market, in privately negotiated transactions or a
combination of both. The extent and timing of these transactions will depend on market conditions and
other business considerations. As of December 31, 2002 and 2001, respectively, the Company had
purchased 257,647 and 211,497 shares of the Company's Common Stock under the Stock Repurchase
Plan at an average cost of $4.14 per share in 2002 and $4.31 per share in 2001.
43
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
6. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
Sales commissions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other items individually less than 5% of total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,563
3,966
$1,225
4,323
As of December 31,
2002
2001
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
$5,529
$5,548
As of December 31,
2001
2002
Computer equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Leasehold improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Furniture and Ñxtures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 14,132
3,657
1,225
$ 12,642
2,937
1,031
Less accumulated depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
19,014
(11,781)
16,610
(10,824)
$
7,233
$
5,786
Included in property and equipment is equipment acquired under capital leases as follows (in
thousands):
As of December 31,
2001
2002
Equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less accumulated amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 5,444
(4,723)
$ 7,308
(5,724)
$
721
$ 1,584
Depreciation and amortization expense on property and equipment totaled $3,823,000, $3,662,000 and
$3,033,000, for the years ended December 31, 2002, 2001 and 2000, respectively.
8. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under noncancellable agreements, which are accounted for as
capital leases and expire at various dates through 2004. Interest rates on these leases range from 5.3% to
9.3%. The annual maturities of the capital lease obligations are as follows as of December 31, 2002 (in
thousands):
Year
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less amount representing interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amount
$ 831
375
1,206
(78)
Lease obligations reÖected as current ($767) and non-current ($361) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,128
44
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
9. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
Equipment Term Note ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less current portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
As of
December 31,
2002
$1,346
(501)
$ 845
In November 2001, the Company entered into a $5.0 million revolving line of credit (the ""Credit
Facility) with Silicon Valley Bank. The Credit Facility, as amended, expires on May 28, 2004 and bears
interest at a rate equal to Prime Rate plus 1.0% per annum (reduced to Prime Rate plus 0.5% per annum
upon two consecutive quarters of net proÑtability, as deÑned). The Credit Facility provides working capital
Ñnancing for up to 75% of the Company's eligible accounts receivable, as deÑned, Ñnancing for eligible
equipment purchases for up to $2.5 million with additional limits for software purchases (the ""Equipment
Term Note''), and stand-by letters of credit for up to $0.5 million. The Equipment Term Note is payable
in 36 equal monthly installments, plus interest at Prime Rate plus 1%. The Equipment Term Note expires
on May 28, 2004 as a component of the Credit Facility. The maximum amount available under the Credit
Facility is $5.0 million. At December 31, 2002, approximately $3.7 million was available for borrowing
under the Credit Facility and approximately $1.3 million was outstanding under the Equipment Term
Note. There were no borrowings outstanding under the Credit Facility as of December 31, 2001.
Borrowings under the Credit Facility are secured by all of the Company's corporate assets, including a
negative pledge on intellectual property, and the Company is required to comply with certain Ñnancial and
other covenants. As of December 31, 2002, the Company was in compliance with all covenants included in
the terms of the Credit Facility.
Maturities of long-term debt are as follows (in thousand):
Year
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amount
$ 501
845
$1,346
10.
INCOME TAXES
No provision or beneÑt for Federal or state income taxes was made for 2002, 2001 and 2000 due to
the operating losses incurred in the respective periods.
45
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The provision for income taxes is diÅerent from that which would be obtained by applying the
statutory Federal income tax rate of 35% to loss before income taxes as a result of the following (in
thousands):
For the Year Ended December 31,
2000
2001
2002
Income tax provision (beneÑt) at statutory Federal tax rate ÏÏÏÏÏ
State and local income taxes, net of Federal income tax beneÑt
Change in valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(5,099)
(492)
5,450
141
$(3,063)
(267)
3,136
194
$(2,941)
(252)
3,236
(43)
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ Ì $ Ì $ Ì
The components of the net deferred tax assets included in the accompanying consolidated balance
sheets are as follows (in thousands):
As of December 31,
2001
2002
2000
Deferred tax assets:
Net operating losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accruals not currently deductible ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 16,272
5,841
1,166
165
380
35
$ 13,047
3,790
933
183
937
37
$ 12,551
55
573
143
935
37
Gross deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
23,859
(22,642)
18,927
(17,192)
14,294
(14,056)
Net deferred tax assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,217
1,735
238
Deferred tax liabilities:
Software development costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepaid commissionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1,046)
(171)
(1,735)
Ì
Gross deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1,217)
(1,735)
(238)
Ì
(238)
Net deferred taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Ì $
Ì $
Ì
The Company has provided a full valuation allowance on the deferred tax assets as realization of such
amounts is not considered more likely than not. The Company reviews the valuation allowance
requirement periodically and makes adjustments as warranted. Of the total valuation allowance at
December 31, 2002, approximately $468,000 is attributed to net operating losses generated from the
exercise of non-statutory employee stock options, the beneÑt of which will be credited to additional paid-in
capital when realized.
At December 31, 2002, the Company had approximately $42,821,000 of net operating loss
carryforwards for Federal income tax reporting purposes available to oÅset future taxable income. The
carryforwards expire through 2022. Utilization of such net operating losses may be limited as a result of
cumulative ownership changes in the Company's equity instruments.
46
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
11. STOCK OPTIONS
The Company has adopted The Ultimate Software Group, Inc. NonqualiÑed Stock Option Plan (the
""Plan'') under which the Company is authorized to issue options to purchase a total of 9,000,000 shares of
the Company's Common Stock to directors, oÇcers and employees of the Company. Under the Plan,
options to purchase shares of Common Stock may be granted at prices equal to the market value of shares
of the Company's Common Stock as of the date of grant, or at such other amount as may be determined
by the Compensation Committee of the Board of Directors appointed to administer the Plan (the
""Committee''). The Committee has discretion under the Plan to prescribe vesting periods for options
which are granted under the Plan. In addition, options granted under the Plan become immediately
exercisable in the event of a change in control of the Company and in certain other circumstances. The
maximum term of the options granted under the Plan is 10 years. As of December 31, 2002, options to
purchase 4,028,497 shares of the Company's Common Stock were available for grant under the Plan.
The Plan provides that non-employee members of the Company's Board of Directors shall receive
options in lieu of any retainer or meeting fees for serving on the Board or committees thereof. Such
options vest upon the date of grant and have an exercise price equal to 30% of fair market value of the
Company's Common Stock on the date of grant. See Note 12.
A summary of stock options under the Company's Plan as of December 31, 2002, 2001 and 2000, and
changes during the years then ended, is presented below:
Outstanding at December 31, 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Canceled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Outstanding at December 31, 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Canceled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Outstanding at December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Canceled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shares
3,236,972
1,031,208
(53,096)
(261,505)
3,953,579
929,737
(5,575)
(281,500)
4,596,241
345,769
(7,275)
(205,461)
Outstanding at December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4,729,274
Weighted
Average
Exercise Price
$8.22
5.61
6.24
8.43
$6.67
3.63
2.62
5.72
$6.06
3.54
3.92
6.58
$5.84
47
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The following table summarizes information about stock options outstanding under the Plan at
December 31, 2002:
Options Outstanding
Options Exercisable
Range of Exercise
Prices
$0.89Ì$3.38 ÏÏÏÏ
$3.38Ì$5.16 ÏÏÏÏ
$6.63Ì$7.63 ÏÏÏÏ
$7.75Ì$8.89 ÏÏÏÏ
$10.00Ì$10.00 ÏÏ
Number
1,243,773
1,095,109
1,538,498
514,200
337,694
$0.89Ì$10.00 ÏÏÏ
4,729,274
Weighted-Average
Remaining
Contractual Life
(Years)
Weighted-Average
Exercise Price
8.19
6.25
5.67
6.83
6.08
6.62
$ 2.87
$ 4.75
$ 7.35
$ 8.07
$10.00
$ 5.84
Number
820,250
846,963
1,538,498
422,013
319,194
3,946,918
Weighted-Average
Exercise Price
$ 2.73
$ 4.90
$ 7.35
$ 8.06
$10.00
$ 6.15
SFAS No. 123 requires pro forma information for options issued to employees and has been
determined as if the Company had accounted for its stock-based compensation plan under the fair value
method. The fair value of each option granted was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for grants: risk-free interest
rates of 2.72% for 2002, 5.26% for 2001 and 5.0-5.5% for 2000, a dividend yield of 0% for all three years
presented, expected volatility of 68% for 2002 and 65% for 2001 and 2000 and an expected life of three
years for each of the three years presented. The Company's pro forma information is as follows (in
thousands, except per share amounts):
For the Years Ended December 31,
2000
2001
2002
Net loss:
As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(14,568)
(16,961)
(0.90)
(1.05)
$
$(8,750)
(10,053)
$ (0.55)
(0.63)
$ (8,404)
(10,323)
(0.52)
(0.64)
$
The weighted average grant date fair value per share of options granted during 2002, 2001 and 2000
were $2.16, $1.73 and $3.10, respectively. The Company has also issued options to purchase shares of its
Common Stock to non-employees for consulting services. See Note 12.
During 2002, the Company raised an aggregate of $2.7 million through the issuances of an aggregate
of 675,000 shares of the Company's Common Stock and warrants to purchase shares of the Company's
Common Stock at $4 per share. Warrants granted during 2002 are as follows:
Date From Which
Warrants Are
Exercisable
June 21, 2002
July 14, 2002
December 2, 2002
Expiration Date of
Warrants
June 21, 2006
July 13, 2006
December 2, 2006
Aggregate Amount of
Common Stock
Called for by
Warrants
Outstanding
50,000
12,500
5,000
Price at Which
Warrants Are
Exercisable
$4.00
$4.00
$4.00
48
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
12. STOCKHOLDERS' EQUITY
Common Stock
The holders of Common Stock are entitled to one vote per share for each share held of record on all
matters submitted to a vote of the stockholders.
Other Equity Transactions
On October 21, 1999, the Company entered into a consulting agreement (the ""Consulting
Agreement'') with Aberdeen Strategic Capital LP (""Aberdeen'') under which Aberdeen was engaged to
provide marketing, strategic and other advisory services to the Company. John R. Walter, a former
member of the Company's Board of Directors, had minority ownership interests in Aberdeen and its
general partner. As sole compensation for the services of Aberdeen and its aÇliates under the Consulting
Agreement, on October 21, 1999 the Company issued to Aberdeen a warrant (the ""Warrant'') to purchase
100,000 shares of the Company's common stock, par value $0.01 per share, for $10 per share. The terms
of the Warrant provided for vesting in eight quarterly increments of 12,500 shares, commencing on
October 22, 1999, with no increment vesting if the Consulting Agreement were to be terminated before
the vesting date for such increment. The Company terminated the Consulting Agreement on October 12,
2000, as of which date 50,000 shares were vested and the remaining 50,000 shares were canceled. The
expiration date of the Warrant is July 22, 2003. The Company has accounted for such Warrant in
accordance with the requirements prescribed in SFAS No. 123 and Emerging Issues Task Force
(""EITF'') No. 96-18, ""Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services.'' Accordingly, the related compensation
expense was zero for 2002 and 2001 and $117,000 for 2000, and is included in general and administrative
expenses in the accompanying consolidated statements of operations for the respective years.
In 2002, the Company granted options to non-employee directors to purchase (i) 7,315 shares of the
Company's Common Stock for $1.23; (ii) 8,766 shares of the Company's Common Stock for $1.32;
(iii) 7,614 shares of the Company's Common Stock for $0.96; (iv) 12,528 shares of the Company's
Common Stock for $0.89; and (v) 100,000 shares of the Company's Common Stock for $3.10, in each
case in exchange for services rendered. In 2001, the Company granted options to non-employee directors
to purchase (i) 9,806 shares of the Company's Common Stock for $1.01; (ii) 11,429 shares of the
Company's Common Stock for $1.05; (iii) 13,335 shares of the Company's Common Stock for $1.13; and
(iv) 5,667 shares of the Company's Common Stock for $1.51, in each case in exchange for services
rendered. In 2000, the Company granted options to non-employee directors to purchase (i) 2,320 shares of
the Company's Common Stock for $3.69; (ii) 2,856 shares of the Company's Common Stock for $3.00;
(iii) 2,540 shares of the Company's Common Stock for $2.70; and (iv) 4,710 shares of the Company's
Common Stock for $2.42, in each case in exchange for services rendered. Such options are currently
exercisable and were valued on the date of grant in accordance with the requirements prescribed in APB
25. The related compensation expense was $86,000, $102,000 and $83,000 in 2002, 2001 and 2000,
respectively, and is included in general and administrative expenses in the accompanying consolidated
statements of operations.
13. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases corporate oÇce space and certain equipment under noncancellable operating
lease agreements expiring at various dates. Total rent expense under these agreements was $2,024,000,
$2,052,000 and $1,868,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Future
49
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
minimum annual rental commitments related to these leases are as follows at December 31, 2002 (in
thousands):
Year
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amount
$ 1,915
1,687
1,678
1,587
1,623
18,026
$26,516
Product Liability
Software products such as those oÅered by the Company frequently contain undetected errors or
failures when Ñrst introduced or as new versions are released. Testing of the Company's products is
particularly challenging because it is diÇcult to simulate the wide variety of computing environments in
which the Company's customers may deploy these products. Despite extensive testing, the Company from
time to time has discovered defects or errors in products. There can be no assurance that such defects,
errors or diÇculties will not cause delays in product introductions and shipments, result in increased costs
and diversion of development resources, require design modiÑcations or decrease market acceptance or
customer satisfaction with the Company's products. In addition, there can be no assurance that, despite
testing by the Company and by current and potential customers, errors will not be found after
commencement of commercial shipments, resulting in loss of or delay in market acceptance, which could
have a material adverse eÅect upon the Company's business, operating results and Ñnancial condition.
Litigation
From time-to-time, the Company is involved in litigation relating to claims arising out of its
operations in the normal course of business. The Company is not currently a party to any legal proceeding
the adverse outcome of which, individually or in the aggregate, could reasonably be expected to have a
material adverse eÅect on the Company's operating results or Ñnancial condition.
14. RELATED PARTY TRANSACTIONS
During the fourth quarter of 2001, The Company began leasing equipment with a computer leasing
company (the ""Leasing Company'') that is owned by an irrevocable trust (the ""Trust'') for the beneÑt of
the children of Robert A. Yanover, a member of the Company's Board of Directors. Additionally, the
Leasing Company's business is managed and operated by a management company (the ""Management
Company'') pursuant to a management agreement. Mr. Yanover has a 50% ownership interest in the
general partner of the Management Company. The Company Ñnanced equipment with the Leasing
Company totaling $1,007,000 and $258,000 during 2002 and 2001, respectively. Related amortization
totaling $415,000 and $12,000 and total cash paid totaling $467,000 and $14,000 were recorded during
2002 and 2001, respectively. The capital lease obligation with the Leasing Company and related
accumulated amortization were $869,000 and $427,000, respectively, at December 31, 2002 and $247,000
and $12,000, respectively, at December 31, 2001. The Company believes that the terms of the leases were
no less favorable to the Company than could have been obtained from an unaÇliated party.
50
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
15. EMPLOYEE BENEFIT PLAN
The Company provides retirement beneÑts for eligible employees, as deÑned, through a deÑned
contribution beneÑt plan that is qualiÑed under Section 401(k) of the Internal Revenue Code (the
""Plan''). Contributions to the Plan, which are made at the sole discretion of the Company, were $602,000,
$587,000 and $421,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
51
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
On April 24, 2002, the Company dismissed its independent auditors, Arthur Andersen LLP
(""Andersen''), and on April 24, 2002 the Company retained KPMG LLP as its new independent auditors.
The change in auditors was approved by the Board of Directors of the Company, upon the
recommendation of the Audit Committee of the Board of Directors.
The audit reports issued by Andersen on the consolidated Ñnancial statements of the Company as of
and for the Ñscal years ended December 31, 2001 and December 31, 2000 did not contain any adverse
opinion or disclaimer of opinion, nor were they qualiÑed or modiÑed as to uncertainty, audit scope or
accounting principles. During the Company's two Ñscal years that ended December 31, 2001, and during
the subsequent interim period prior to engaging KPMG LLP, there were no disagreements between
Ultimate Software and Andersen on any matter of accounting principles or practices, Ñnancial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved to Andersen's satisfaction,
would have caused Andersen to make reference to the subject matter in their reports.
None of the reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred during
the Company's two Ñscal years that ended December 31, 2001, or during any subsequent interim period
through April 24, 2002.
The Company provided Andersen with a copy of the foregoing disclosures, and a letter from Andersen
conÑrming its agreement with these disclosures was Ñled as an exhibit to the Company's Current Report
on Form 8-K Ñled with the Securities and Exchange Commission on May 1, 2002.
During the Company's two Ñscal years that ended December 31, 2001 and during the subsequent
interim period prior to engaging KPMG LLP, neither the Company nor someone on behalf of the
Company consulted with KPMG LLP regarding either the application of accounting principles to a
speciÑed transaction, either completed or proposed, or the type of audit opinion that might be rendered on
the Company's Ñnancial statements.
52
PART III
Item 10. Directors and Executive OÇcers of the Registrant
The directors, executive oÇcers (Messrs. Scott Scherr, Marc D. Scherr, Mitchell K. Dauerman and
James M. Alu) and other key employees of the Company, and their ages as of March 10, 2003, are as
follows:
Name
Age
Position(s)
Scott ScherrÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
51
Marc D. Scherr ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mitchell K. Dauerman ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
45
46
James M. Alu ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
58
Roy L. Gerber, Ph.D. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Jon Harris ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Robert Manne ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Vivian Maza ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Linda MillerÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Laura Perkins ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adam RogersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Greg Swick ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
James C. Thie ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LeRoy A. Vander Putten ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
James A. FitzPatrick, Jr. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Robert A. Yanover ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rick Wilber ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
46
38
50
41
58
38
28
39
43
68
53
66
56
Chairman of the Board, President and Chief
Executive OÇcer
Vice Chairman of the Board
Executive Vice President, Chief Financial
OÇcer and Treasurer
Executive Vice President and Chief
Operating OÇcer
Vice President Ì Chief Technology OÇcer
Senior Vice President Ì Professional
Services
Vice President Ì General Counsel
Vice President Ì People and Secretary
Vice President Ì Communications and
Public Relations
Vice President Ì Product Strategy
Senior Vice President Ì Development
Senior Vice President Ì Sales
Vice President Ì Chief Information OÇcer
Director
Director
Director
Director
Scott Scherr has served as President and a director of the Company since its inception in April 1996
and has been Chairman of the Board and Chief Executive OÇcer of the Company since September 1996.
Mr. Scherr is also a member of the Executive Committee of the Board of Directors (the ""Board''). In
1990, Mr. Scherr founded The Ultimate Software Group, Ltd. (the ""Partnership''), the business and
operations of which were assumed by the Company in 1998. Mr. Scherr served as President of the
Partnership's general partner from the inception of the Partnership until its dissolution in March 1998.
From 1979 until 1990, he held various positions at Automatic Data Processing, Inc. (""ADP''), a payroll
services company, where his titles included Vice President of Operations and Sales Executive. Prior to
joining ADP, Mr. Scherr operated Management Statistics, Inc., a data processing service bureau founded
by his father, Reuben Scherr, in 1959. He is the brother of Marc Scherr, the Vice Chairman of the Board
of the Company.
Marc D. Scherr has been a director of the Company since its inception in April 1996 and was elected
as Vice Chairman in July 1998. Mr. Scherr is also a member of the Executive Committee of the Board.
Mr. Scherr became an executive oÇcer of the Company eÅective March 1, 2000. Mr. Scherr served as a
director of Gerschel & Co., Inc., a private investment Ñrm from January 1992 until March 2000. In
December 1995, Mr. Scherr co-founded Residential Company of America, Ltd. (""RCA''), a real estate
Ñrm, and served as President of its general partner until March 2000. Mr. Scherr also served as Vice
President of RCA's general partner from its inception in August 1993 until December 1995. From 1990 to
1992, Mr. Scherr was a real estate pension fund advisor at Aldrich, Eastman & Waltch. Previously, he was
53
a partner in the Boston law Ñrm of Fine & Ambrogne. Mr. Scherr is the brother of Scott Scherr,
Chairman of the Board, President and Chief Executive OÇcer of the Company.
Mitchell K. Dauerman has served as Executive Vice President of the Company since April 1998 and
as Chief Financial OÇcer and Treasurer of the Company since September 1996. From 1979 to 1996,
Mr. Dauerman held various positions with KPMG LLP, a global accounting and consulting Ñrm, serving
as a Partner in the Ñrm from 1988 to 1996. Mr. Dauerman is a CertiÑed Public Accountant.
James M. Alu has served as Executive Vice President of the Company since February 1999 and as
Chief Operating OÇcer since January 1998. Prior to that, Mr. Alu served as Vice President of the
Company from September 1996 and Vice President of the general partner of the Partnership from July
1993 until April 1996. From 1990 until 1993, Mr. Alu served as Area Sales Vice President for the
northeastern United States for ADP's Dealer Services Group. From 1986 through 1989, Mr. Alu served as
Vice President of Sales for ADP's Employer Services Group, National Accounts Division, and was
responsible for the sales and implementation of payroll and human resource services to companies with
more than 500 employees nationwide.
Roy L. Gerber, Ph.D. has served as Vice President Ì Chief Technology OÇcer since January 1,
2002. Mr. Gerber served as Vice President Ì Engineering from October 1999 through December 31, 2001.
From 1995 to October 1999, Mr. Gerber served in various positions in the research and development
organization, including Director of Engineering. Prior to joining the Company, from 1988 to 1995,
Mr. Gerber was Executive Vice President of Development for Cascade Interactive Designs, Inc. and dBSi
which developed and marketed medical software products. From 1984 to 1988, Mr. Gerber was Executive
Vice President and Chief Operating OÇcer of PaciÑc Retirement Plans, Inc.
Jon Harris has served as Senior Vice President Ì Professional Services since January 1, 2002.
Mr. Harris served as Vice President Ì Professional Services from July 1998 through December 31, 2001.
From 1992 to 1997, Mr. Harris held various management positions within ADP's National Accounts
Division. From 1989 to 1992, Mr. Harris held the position of Consulting Services Director for Sykes
Enterprises, Inc., a diverse information technology company.
Robert Manne has served as Vice President Ì General Counsel since May 1999. Prior to joining the
Company, Mr. Manne was an attorney and partner of Becker & PoliakoÅ, P.A., an international law Ñrm,
since 1978. In addition to administering the Litigation Department of the law Ñrm, Mr. Manne was a
permanent member of the Ñrm's executive committee which was responsible for law Ñrm operations.
Mr. Manne has performed legal services for the Company since its inception.
Vivian Maza has served as Vice President Ì People for the Company since January 1998 and as
Secretary of the Company since September 1996. Prior to that, Ms. Maza served as the OÇce Manager of
the Company from its organization in April 1996 and of the Partnership from its inception in 1990 until
April 1996. Ms. Maza is a HR Generalist and holds a Professional in Human Resources
(PHR) certiÑcation from the Society for Human Resource Management (SHRM) association. From 1985
to 1990, Ms. Maza was a systems analyst for the Wholesale Division of ADP.
Linda Miller has served as Vice President Ì Communications and Public Relations since January
1999. Ms. Miller served as Vice President, Public Relations, for the Company from July 1998 to January
1999. Prior to that, Ms. Miller served as the Company's Director of Marketing from January 1997. From
1992 to 1996, Ms. Miller held various positions at Best Software, Inc., a developer of corporate resource
management applications, Abra Products Division, including Public Relations Manager.
Laura Perkins has served as Vice President Ì Product Strategy since July 1998. From May 1996 to
July 1998, Ms. Perkins served as the Director of Applications Consulting for the Company. From 1991 to
1996, Ms. Perkins held various positions with Best Software, Inc., Abra Products Division. Ms. Perkins
holds a CertiÑed Payroll Professional (CPP) certiÑcation from the American Payroll Association (APA).
Adam Rogers has served as Senior Vice President Ì Development since December 2002. From July
2001 to December 2002, Mr. Rogers served as Vice President of Engineering. From May 1997 to July
54
2001, Mr. Rogers held various positions in the Company's research and development organization,
including Director of Technical Support from October 1998 to November 1999 and Director of Web
Development from November 1999 to July 2001.
Greg Swick has served as Senior Vice President Ì Sales since January 2001. Mr. Swick served as
Vice President and General Manager Ì PEO Division of the Company's sales organization from
November 1999 to January 2001. From February 1998 to November 1999, Mr. Swick was Director of
Sales, Northeast Division. Prior to joining the Company, Mr. Swick was President of The Ultimate
Software Group of New York and New England, G.P., a reseller of the Company which was acquired by
the Company in March 1998. From 1987 to 1994, Mr. Swick held various positions with ADP, where the
most recent position was Area Vice President Ì ADP Dealer Services Division.
James C. Thie has served as Chief Information OÇcer since October 2001. Mr. Thie served as Vice
President Ì Information Technology Group from February 2001 through September 2001. Mr. Thie has
worked in the technology Ñeld for the past 20 years, principally in the Ñnancial services industry, including
General Manager and Business Development Director of Encore Development, Inc., an e-business and
systems integration company specializing in application development, data warehousing and electronic
commerce, from 1999 until joining the Company. From 1996 to 1999, Mr. Thie held various positions with
Computer Associates International, an international advanced technology consulting and systems
integration company, where his most recent position was Senior Sales Executive.
LeRoy A. Vander Putten has served as a director of the Company since October 1997, is Chairman
of the Compensation Committee of the Board and is a member of the Audit Committee of the Board.
Mr. Vander Putten has served as the Executive Chairman of the Insurance Center, Inc., a holding
company for 14 insurance agencies, since October 2001. Previously, he served as the Chairman of CORE
Insurance Holdings, Inc., a member of the GE Global Insurance Group, engaged in the underwriting of
casualty reinsurance, from August 2000 to August 2001. From April 1998 to August 2000, he served as
Chairman of Trade Resources International Holdings, Ltd., a corporation engaged in trade Ñnance for
exporters from developing countries. From January 1988 until May 1997, Mr. Vander Putten was
Chairman and Chief Executive OÇcer of Executive Risk Inc., a specialty insurance holding company.
From August 1982 to January 1988, Mr. Vander Putten served as Vice President and Deputy Treasurer of
The Aetna Life and Casualty Company, an insurance company.
James A. FitzPatrick, Jr. has served as a director of the Company since July 2000 and is a member
of the Compensation Committee of the Board. Mr. FitzPatrick is a partner in the law Ñrm Dewey
Ballantine LLP, which provides legal services to the Company. Before joining Dewey Ballantine LLP as a
partner in February 1989, Mr. FitzPatrick was a partner in the law Ñrm LeBoeuf, Lamb, Leiby &
MacRae.
Robert A. Yanover has served as a director of the Company since January 1997 and is Chairman of
the Audit Committee and a member of the Compensation Committee of the Board. Mr. Yanover founded
Computer Leasing Corporation of Michigan, a private leasing company, in 1975 and has served as its
President since that time. Mr. Yanover also founded Lason, Inc., a corporation specializing in the imaging
business, and served as Chairman of the Board from its inception in 1987 until 1998 and as a director
through February 2001.
Rick Wilber has served as a director of the Company since October 2002 and is a member of the
Audit Committee and a member of the Compensation Committee. Mr. Wilber formerly served on the
Company's Board of Directors from October 1997 through May 2000. Mr. Wilber is currently the
President of Lynn's Hallmark Cards, which owns and operates a number of Hallmark Card stores.
Mr. Wilber was a co-founder of Champs Sports Shops and served as its President from 1974 to 1984. He
served on the Board of Royce Laboratories, a pharmaceutical concern, from 1990 until April 1997, when
the company was sold to Watson Pharmaceuticals, Inc., a pharmaceutical concern.
Each oÇcer serves at the discretion of the Board and holds oÇce until his or her successor is elected
and qualiÑed or until his or her earliest resignation or removal. Mr. Marc D. Scherr, Mr. James A.
55
FitzPatrick, Jr. and Mr. Rick Wilber serve on the Board in the class whose term expires at the annual
meeting of stockholders (the ""Annual Meeting'') in 2003. Mr. Scott Scherr serves on the Board in the
class whose term expires at the Annual Meeting in 2004. Mr. LeRoy A. Vander Putten and Mr. Robert A.
Yanover serve on the Board in the class whose term expires at the Annual Meeting of stockholders in
2005.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the Company's Proxy Statement
for the 2003 Annual Meeting of Stockholders under the heading ""Executive Compensation.''
Item 12. Security Ownership of Certain BeneÑcial Owners and Management and Related Stockholder
Matters
Equity Compensation Plan Information
The following table summarizes the securities authorized for issuance under the Company's equity
compensation plans as of December 31, 2002:
Plan Category
(a)
Number of
Securities to be
Issued upon
Exercise of
Outstanding
Options, Warrants
and Rights
(b)
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
(c)
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (Excluding
Securities ReÖected in
Column (a))
Equity compensation plans approved
3,946,918
by security holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity compensation plans not
approved by security holders ÏÏÏÏÏÏ
Ì
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3,946,918
$5.84
Ì
$5.84
4,729,274
Ì
4,729,274
The information set forth in the Company's Proxy Statement for the 2003 Annual Meeting of
Stockholders under the heading ""Security Ownership of Certain BeneÑcial Owners and Management'' is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the Company's Proxy Statement
for the 2003 Annual Meeting of Stockholders under the heading ""Certain Related Transactions.''
Item 14. Controls and Procedures
Within the 90 days prior to the Ñling date of this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company's management, including the Chief
Executive OÇcer (the ""CEO'') and the Chief Financial OÇcer (the ""CFO''), of the eÅectiveness of the
design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15. Based on that evaluation, the Company's management, including the CEO and CFO,
concluded that the Company's disclosure controls and procedures are eÅective in timely alerting them to
material information required to be included in the Company's periodic SEC reports. In addition, there
have been no signiÑcant changes in the Company's internal controls or in other factors that could
signiÑcantly aÅect those controls subsequent to the date of their evaluation, including any corrective
actions with respect to signiÑcant deÑciencies or material weaknesses. It should be noted that the design of
any system of controls is based in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.
56
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents Ñled as part of this report:
PART IV
(1) Financial Statements. The following Ñnancial statements of the Company are included in Part II,
Item 8, of this Annual Report on Form 10-K:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity (DeÑcit) for the Years Ended December 31,
2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules:
Independent Auditors' Report
Schedule II Ì Valuation and Qualifying Accounts
(3) Exhibits
Number
Description
3.1 Ì Amended and Restated CertiÑcate of Incorporation (incorporated herein by reference to
Exhibit 3.4 to the Registration Statement on Form S-1 (File No. 333-47881), initially Ñled
March 13, 1998 (the ""Registration Statement'')
3.2 Ì CertiÑcate of Designations of Series A Junior Preferred Stock (incorporated by reference herein to
Exhibit 2 to the Company's Current Report on Form 8-K dated October 23, 1998)
3.3 Ì Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.5 to the Registration
Statement)
4.1 Ì Form of CertiÑcate for the Common Stock, par value $0.01 per share*
10.1 Ì Shareholders Rights Agreement, dated June 6, 1997 among the Company and certain stockholders
named therein*
10.2 Ì Asset Purchase Agreement, dated February 2, 1998, among The Ultimate Software Group of
Virginia, Inc., the Company and certain principals named therein*
10.3 Ì Asset Purchase Agreement, dated February 2, 1998, among the Company, The Ultimate Software
Group of the Carolinas, Inc. and certain principals name therein*
10.4 Ì Asset Acquisition Agreement, dated February 20, 1998, among the Company, The Ultimate
Software Group of Northern California, Inc. and certain principals named therein*
10.5 Ì Asset Purchase Agreement dated March 4, 1998, among the Company, Ultimate Investors Group,
Inc. and certain principals name therein*
10.6 Ì Agreement and Plan of Merger dated February 24, 1998, among the Company, ULD Holding
Corp., Ultimate Software Group of New York and New England, G.P. and certain principals
named therein*
10.7 Ì NonqualiÑed Stock Option Plan, as amended and restated as of December 20, 2002**
10.8 Ì Commercial OÇce Lease agreement by and between UltiLand, Ltd., a Florida limited partnership,
and the Company, dated December 31, 1998 (incorporated by reference herein to corresponding
exhibit in the Company's Annual Report on Form 10-K dated March 31, 1999)
10.9 Ì Rights Agreement, dated as of October 22, 1998, between the Company and BankBoston, N.A., as
Rights Agent. The Rights Agreement includes the Form of CertiÑcate of Designations of Series A
Junior Preferred Stock as Exhibit A, the Form of Rights CertiÑcate as Exhibit B, and the Summary
of Rights as Exhibit C (incorporated by reference herein to Exhibit 2 to the Company's Current
Report on Form 8-K dated October 23, 1998)
57
Number
Description
10.10 Ì Commercial OÇce Lease by and between UltiLand, Ltd., a Florida limited partnership and the
Company, dated December 22, 1998 (incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q dated August 15, 1999)
10.11 Ì Letter Agreement between Aberdeen Strategic Capital LP and the Company, dated October 21,
1999 (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q dated November 15, 1999)
10.12 Ì Warrant issued to Aberdeen Strategic Capital LP (incorporated herein by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q dated November 15, 1999)
10.13 Ì Software License Agreement between the Company and Ceridian Corporation dated as of March 9,
2001 (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K
dated March 27, 2001)
10.14 Ì Letter amendment between the Company and Ceridian Corporation dated as of August 9, 2001
(incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K dated
March 29, 2002)
10.15 Ì Letter amendment between the Company and Ceridian Corporation dated as of February 5, 2002
(incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K dated
March 29, 2002)
10.16 Ì Loan and Security Agreement by and between the Company and Silicon Valley Bank dated as of
November 29, 2001 (incorporated by reference to Exhibit 10.16 to the Company's Annual Report
on Form 10-K dated March 29, 2002)
10.17 Ì Revolving Promissory Note by and between the Company and Silicon Valley Bank dated as of
November 29, 2001 (incorporated by reference to Exhibit 10.17 to the Company's Annual Report
on Form 10-K dated March 29, 2002)
10.18 Ì Equipment Term Note by and between the Company and Silicon Valley Bank dated as of
November 29, 2001 (incorporated by reference to Exhibit 10.18 to the Company's Annual Report
on Form 10-K dated March 29, 2002)
10.19 Ì Services Agreement between the Company and Ceridian Corporation dated as of February 10,
2003**
10.20 Ì Third Loan ModiÑcation Agreement by and between the Company and Silicon Valley Bank dated
March 27, 2003**
21.1 Ì Subsidiary of the Registrant*
23.1 Ì Consent of KPMG LLP**
23.2 Ì Notice of inability to obtain consent from Arthur Andersen LLP**
99.1 Ì Cautionary Statement for Purposes of the ""Safe Harbor'' Provisions of the Private Securities
Litigation Reform Act of 1995**
99.2 Ì CertiÑcation Pursuant to 18 U.S.C. Section 1350, Scott Scherr**
99.3 Ì CertiÑcation Pursuant to 18 U.S.C. Section 1350, Mitchell K. Dauerman**
* Incorporated herein by reference to the corresponding exhibit in the Company's Registration
Statement.
** Filed herewith.
(b) Reports on Form 8-K
On October 25, 2002, the Company Ñled a Current Report on Form 8-K with the SEC reporting
(i) the appointment of Rick Wilber to the Company's Board of Directors and (ii) that the Board of
Directors of the Company voted to exempt Michael Feinberg from the deÑnition of an Acquiring Person
under the Company's Rights Agreement provided Mr. Feinberg does not acquire a number of shares of
Common Stock of the Company which, when combined with the shares he currently owns, exceeds 19.9%
of the shares of the Company's Common Stock outstanding.
58
INDEPENDENT AUDITORS' REPORT
To Board of Directors
The Ultimate Software Group, Inc.:
Under date of January 31, 2003 except as to Note 4 which is as of March 27, 2003, we reported on
the consolidated balance sheet of The Ultimate Software Group, Inc. and subsidiary (the ""Company'') as
of December 31, 2002 and the related consolidated statements of operations, stockholders' equity (deÑcit),
and cash Öows for the year then ended, as contained in the annual report on Form 10-K for the year
ended December 31, 2002. In connection with our audit of the aforementioned consolidated Ñnancial
statements, we also audited the related 2002 Ñnancial statement schedule as listed in Item 15 of this
Form 10-K. This Ñnancial statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this Ñnancial statement schedule based on our audit. The
consolidated Ñnancial statements and Ñnancial statement schedule of The Ultimate Software Group, Inc.
and subsidiary as of December 31, 2001, and for each of the years in the two year period then ended were
audited by other auditors who have ceased operations. Those auditors expressed an unqualiÑed opinion on
those consolidated Ñnancial statements and Ñnancial statement schedule in their reports dated February 1,
2002.
In our opinion, such 2002 Ñnancial statement schedule, when considered in relation to the basic 2002
consolidated Ñnancial statements taken as a whole, presents fairly, in all material respects, the information
set forth therein.
Miami, Florida,
January 31, 2003, except as to Note 4 which is as of March 27, 2003.
/s/ KPMG LLP
KPMG LLP
59
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY
ARTHUR ANDERSEN LLP IN CONNECTION WITH THE ULTIMATE SOFTWARE GROUP,
INC.'S FILING ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001. THIS REPORT
HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS
FILING ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002. FOR FURTHER
DISCUSSION, SEE EXHIBIT 23.2 WHICH IS FILED HEREWITH.
INDEPENDENT AUDITORS' REPORT
To The Ultimate Software Group, Inc.:
We have audited in accordance with auditing standards generally accepted in the United States, the
consolidated Ñnancial statements included in this Form 10-K and have issued our report thereon dated
February 1, 2002. Our audits were made for the purpose of forming an opinion on the basic Ñnancial
statements taken as a whole. The accompanying Schedule II is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and Exchange Commission's
rules and is not part of the basic Ñnancial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic Ñnancial statements and, in our opinion, fairly states, in all
material respects, the Ñnancial data required to be set forth therein in relation to the basic Ñnancial
statements taken as a whole.
Miami, Florida,
February 1, 2002.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
60
SCHEDULE II
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
ClassiÑcation
Allowance for Doubtful Accounts
Balance at
Beginning of
Year
Additions
Charged to
Operations
Deductions(1)
Balance at
End of Year
December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,465
$2,461
1,673
$1,798
$4,151
3,572
$(3,263)
$(4,147)
(2,784)
$1,000
$2,465
2,461
(1) Accounts receivable are principally from end-users of the Company's products. The Company
performs periodic credit evaluations of its customers and has recorded allowances for estimated losses.
61
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SIGNATURES
THE ULTIMATE SOFTWARE GROUP, INC.
By:
/s/ MITCHELL K. DAUERMAN
Mitchell K. Dauerman
Executive Vice President, Chief Financial
OÇcer and Treasurer
Date: March 31, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Signature
Title
Date
/s/ Scott Scherr
Scott Scherr
/s/ Mitchell K. Dauerman
Mitchell K. Dauerman
/s/ Marc D. Scherr
Marc D. Scherr
/s/ LeRoy A. Vander Putten
LeRoy A. Vander Putten
/s/
James A. FitzPatrick, Jr.
James A. FitzPatrick, Jr.
/s/ Robert A. Yanover
Robert A. Yanover
/s/ Rick Wilber
Rick Wilber
President, Chief Executive OÇcer March 31, 2003
and Chairman of the Board
Executive Vice President, Chief
Financial OÇcer and Treasurer
(Principal Financial and
Accounting OÇcer)
March 31, 2003
Vice Chairman of the Board
March 31, 2003
Director
March 31, 2003
Director
March 31, 2003
Director
March 31, 2003
Director
March 31, 2003
62
B O A R D OF D I R E C T OR S
Scott Scherr
Chairman, President and Chief Executive Officer
The Ultimate Software Group, Inc.
Marc D. Scherr
Vice-Chairman
The Ultimate Software Group, Inc.
James A. FitzPatrick, Jr.
Partner
Dewey Ballantine LLP
E X E C U T I V E OF F I C E R S
Scott Scherr
Chairman, President and Chief Executive Officer
Marc D. Scherr
Vice-Chairman
LeRoy A. Vander Putten
Executive Chairman
Insurance Center, Inc.
Robert A. Yanover
President
Computer Leasing Corporation
Rick A. Wilber
President
Lynn’s Hallmark Cards
Mitchell K. Dauerman
Executive Vice President
Chief Financial Officer and Treasurer
James M. Alu
Executive Vice President
and Chief Operating Officer
A N N U A L M E E T I N G
The annual meeting of stockholders will be held on Wednesday, May 14, 2003, at 10:00 a.m. EDT at
2000 Ultimate Way, Weston, Florida. Formal notice will be sent to stockholders of record as of March 20, 2003.
A N N U A L R E PORT A N D FOR M 1 0 - K
A copy of the Company’s 2002 Form 10-K filed with the Securities and Exchange Commission, which is provided with this
Annual Report, is available without charge upon request to: Investor Relations Department, 2000 Ultimate Way,
Weston, Florida 33326.
I N D E P E N D E N T A U D I TOR S
I N V E S TOR R E L AT I O N S
KPMG LLP
Miami, Florida
L E G A L COU N S E L
Dewey Ballantine LLP
New York, New York
T R A N S F E R A G E N T A N D R E G I S T R A R
EquiServe, Trust Company, N.A.
150 Royall Street
Canton, MA 02021
877.282.1168
www.equiserve.com
For additional information
about Ultimate Software, contact
Mitchell K. Dauerman, 954.331.7369.
S TOC K T R A D I N G
Ultimate Software’s common stock is
traded on the Nasdaq National Market
under the symbol ULTI.
C OM PA N Y A D D R E S S
The Ultimate Software Group, Inc.
2000 Ultimate Way
Weston, Florida 33326
800.432.1729 or 954.331.7000
www.ultimatesoftware.com
The Ultimate Software Group, Inc.
2000 Ultimate Way
Weston, Florida 33326
800.432.1729
954.331.7000
www.ultimatesoftware.com