Ultimate Software
2000 Ultimate Way
Weston, Florida 33326
800.432.1729
954.331.7000
www.ultimatesoftware.com
selected financial data
operating data in thousands, except per share data for the years ended december 31,
2 0 0 4
2 0 0 3
2 0 0 2
revenues:
recurring
services
license
total revenues
gross margin
as a % of total revenues
operating expenses and other
as a % of total revenues
$39,049
24,924
8,055
$29,344
23,478
7,594
$19,345
23,634
12,170
72,028
60,416
55,149
40,626
56%
45,650
63%
32,837
54%
42,006
70%
27,621
50%
42,189
77%
net loss
$(5,024)
$(9,169)
$(14,568)
diluted net loss per share (1)
$(0.23)
$(0.49)
$(0.90)
(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.
balance sheet data in thousands as of december 31,
2 0 0 4
2 0 0 3
2 0 0 2
annual meeting
cash and cash equivalents
$14,766
$13,783
$8,974
investments in marketable securities
total assets
deferred revenue
long-term debt, including capital lease
obligations, net of current portion
10,544
52,546
28,476
–
–
35,812
31,143
24,610
27,815
1,231
796
1,206
stockholders’ equity (deficit)
$13,524
$1,661
$(7,368)
independent registered public accounting firm
investor relations
company profile
Ultimate Software, a leading provider of Web-based payroll and workforce management solutions, markets
award-winning UltiPro as licensed software, as a hosted application through Intersourcing, and as a co-branded
offering to Business Service Providers (BSPs) under the “Powered by UltiPro” brand. The Company employs
approximately 450 professionals who are united in their commitment to developing trendsetting solutions and
delivering quality service. Ultimate Software customers represent diverse industries and include such organizations
as Benihana Restaurants, The Container Store, Elizabeth Arden, Omni Hotels, Ruth’s Chris Steak House, SkyWest
Airlines, and Trammell Crow Residential. More information on Ultimate Software’s products and services can be
found at www.ultimatesoftware.com.
UltiPro and Intersourcing are registered trademarks of The Ultimate Software Group, Inc.
All other trademarks referenced in this report are the property of their respective owners.
Chairman, President, and Chief Executive Officer
Vice Chairman and Chief Operating Officer
board of directors
Scott Scherr
Ultimate Software
Marc D. Scherr
Ultimate Software
James A. FitzPatrick, Jr.
Partner
Dewey Ballantine LLP
executive officers
Scott Scherr
Chairman, President, and Chief Executive Officer
Marc D. Scherr
Vice Chairman and Chief Operating Officer
LeRoy A. Vander Putten
Executive Chairman
The 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
The annual meeting of stockholders will be held on Tuesday, May 17, 2005, at 10:00 a.m. EDT at 2000 Ultimate Way, Weston, Florida.
Formal notice will be sent to stockholders of record as of March 18, 2005.
annual report and form 10-K
A copy of the Company’s 2004 Form 10-K filed with the Securities and Exchange Commission, which is provided in this Annual Report, is
available without charge upon request to: Investor Relations Department, 2000 Ultimate Way, Weston, Florida 33326.
KPMG LLP
Miami, Florida
legal counsel
Dewey Ballantine LLP
New York, New York
transfer agent and registrar
EquiServe Trust Company, N.A.
P.O. Box 219045
Kansas City, MO 64121-9045
877.282.1168
www.equiserve.com
For additional information
about Ultimate Software, contact
Mitchell K. Dauerman, 954.331.7369
stock trading
Ultimate Software’s common stock is
traded on the Nasdaq National Market
under the symbol ULTI.
company address
Ultimate Software
2000 Ultimate Way
Weston, Florida 33326
800.432.1729 or 954.331.7000
www.ultimatesoftware.com
1
Intersourcing: more than
an innovation – a transformation
Our hosted service model is giving companies a new way
generating primarily license revenues to a hybrid financial
of outsourcing their human resources and payroll needs.
model with some license revenue and a higher percentage
Providing them on-demand services. Making UltiPro a
of recurring revenues.
smarter choice than ever for organizations across all
industries. And generating more consistent recurring
For our customers, Intersourcing means convenience with no
revenue for our business.
loss of control. They have Web access to the comprehensive,
award-winning functionality of UltiPro, with the added benefit
When Ultimate Software decided to offer its customers the
of Ultimate Software providing the hardware, technology
option of using the UltiPro Workforce Management product
support, product updates, and ongoing system maintenance.
through Intersourcing, an on-demand, hosted service model,
it was a visionary form of outsourcing, and it has become
For Ultimate Software and its investors, the advantages of
the cornerstone of the company’s recurring revenue
Intersourcing priced on a per-employee-per-month basis are
growth plan. With the increasing popularity of Intersourcing,
consistent recurring revenues and the enhanced opportunity
Ultimate Software has transitioned successfully from
to deliver predictable, dependable financial results.
a letter to shareholders
2
2004 was a good year for Ultimate Software. The decision
of UltiPro, and subscription revenues from fees generated
to transform our business from a primarily license-based
by business partners.
model of UltiPro to a hybrid model that includes a higher
percentage of recurring revenues was validated by our
We increased total revenues by 19%, and we held our
2004 results.
increase in operating expenses to 9%. We also generated
$12 million in new annual recurring revenue (ARR)
As forecasted, we achieved positive cash flow in both
business in 2004. That’s squarely in line with our
the third and fourth quarters of 2004, and we achieved
targeted projection of $11 to $13 million, and the $12
profitability in the fourth quarter. The $39 million we
million in ARR represents a 31% increase over the $9.2
produced in total recurring revenues in 2004 is a 33%
million in ARR we produced in 2003. In the fourth
increase over those in 2003, and above the 30%
quarter of 2004, we generated a record $3.5 million
objective we targeted in our business plan. Intersourcing
in ARR. ARR is the key to our new business model’s
revenues were the principal factor in our year-over-year
strength, and our success in this area is an important
growth in recurring revenues, which consist of maintenance
contribution to the predictability of our financial
revenues, Intersourcing revenues from our hosted offering
performance moving forward.
recurring revenues increased
by 33% in 2004
$45
40
35
30
25
20
15
10
5
0
/
$39.0
$29.3
54%
$19.3
49%
$14.4
24%
35%
$10.5
17%
2000
2001
2002
2003
2004
In 2000, recurring revenues were $10.5 million, 17% of
total revenues. In 2004, they were $39 million, 54% of
total revenues.
3
We expanded our business service provider channel in 2004
1,000 client surveys we conducted this year, users ranked
by signing agreements with three new distribution partners:
our customer support team a 4.7 out of 5 for satisfaction.
Aon Human Resources Outsourcing, a division of Aon
None of this would have been possible without the
Consulting, Inc.; Nationwide Mutual Insurance Company;
unwavering support of the Ultimate Software family of
and RSM McGladrey Employer Services, Inc., a part of RSM
employees. I am humbled by their commitment and
McGladrey Business Services, a wholly owned subsidiary of
proud of their achievements. I am also grateful to our
H&R Block. We have begun to work closely with all three
shareholders and board of directors, who believe in our
companies as they build their infrastructures and develop
vision and understand the path we are taking to what I
their sales and marketing plans.
believe is a truly great future.
Currently, our UltiPro Workforce Management solution
Sincerely,
benefits more than 1,200 customers that represent
approximately 5,000 companies serving in excess of 2
million employees. This year, our customer retention rate
Scott Scherr
rose to an all-time high of 97%. In the approximately
Chairman, President, and Chief Executive Officer
Intersourcing, our on-demand, hosted service model, has gained in popularity over the last couple of years with new
customers, as well as with our current customers that upgrade to Intersourcing, looking to reduce internal technology
support requirements for their UltiPro Workforce Management solution. By the end of 2004, more than 225 companies
representing 300,000 employees had selected Intersourcing.
4
UltiPro currently serves more
than 1,200 customers that
represent approximately 5,000
companies serving in excess
of 2 million employees.
Service Customer (UltiPro through Intersourcing)
The Columbia
House Company
employees: 1,500
industry: retail
headquarters: new york, ny
The Columbia House Company, the nation’s largest direct
marketer of home entertainment, needed an integrated
system that manages payroll, human resources, and benefits
processes with an intuitive user interface and comprehensive
reporting. The company selected Ultimate Software’s
Intersourcing because the solution offered the necessary
functionality through UltiPro Workforce Management,
along with the additional technology and ongoing support
benefits of the on-demand hosted delivery model. The
Columbia House Company is now “live,” finding UltiPro easy
to use, and experiencing improved efficiencies, particularly
with more flexible reporting.
Intersourcing sales figured prominently in our 33% growth
1,100 employees in 2003 to approximately 1,300 in 2004.
in recurring revenues in 2004 over 2003, and recurring
In total, Ultimate Software generated $12 million in new
revenues accounted for 54% of our total revenue in 2004,
annual recurring revenues (ARR) in 2004. ARR represents the
with total revenue at $72 million. The fourth quarter of 2004
expected one-year value from (i) new Intersourcing sales
was the most successful quarter in Ultimate Software’s history
(including prorated onetime charges); (ii) maintenance
with total revenues of more than $20 million, a 24% increase
revenues related to new license sales; (iii) recurring revenues
over 2003’s final quarter. More than 60% of our new
from new business service providers; and (iv) recurring
customers in 2004 selected Intersourcing, and the average size
revenues from additional sales to Ultimate Software’s
of a new Intersourcing customer grew from approximately
existing client base.
5
Service Customer (UltiPro through Intersourcing)
License Customer (UltiPro on Customer’s Site)
Sybra
employees: 6,000
industry: hospitality
headquarters: fort lauderdale, fl
Quicken Loans
employees: 2,250
industry: finance
headquarters: livonia, mi
Sybra, the second largest Arby’s franchisee in the United
Prior to operating independently, Quicken Loans was owned
States with 236 locations, upgraded from Ultimate
and operated by Intuit, Inc., which used a large enterprise
Software’s in-house version of UltiPro Workforce
resource planning solution for human resources and a service
Management to Intersourcing to gain more flexibility
provider for payroll. When the companies separated, Quicken
in managing the solution. Now Sybra, whose 6,000
Loans’ human resources team wanted a system with comparable
employees are spread across 9 states, can run reports or
functionality, and they needed it fast. The mortgage provider
payroll from any location using a Web browser. Although
selected UltiPro for its integrated human resources, benefits,
most processing is done at company headquarters in Fort
and payroll functionality, as well as its standard and customizable
Lauderdale, Sybra’s staff liked the idea that they could
reports and Web self-service. The company went “live” with
be equally productive while in the office, on the road,
the initial phase in 8 weeks and has advised us that it’s on
or while working from home using only a laptop and
track to save $100,000 annually after completing the second
an Internet connection.
phase of implementation.
precisely what the customer needs
delivered exactly how they want it
For many executives, the final decision on whether to purchase a new HR/payroll solution comes down to total cost
of ownership and return on investment. Ultimate Software solutions have met the criteria of the most discriminating and
informed buyers. Customers that have purchased UltiPro as an on-site license and those that have acquired UltiPro as a
service through Intersourcing and paid for it on a per-employee-per-month basis have had appealing results. Our customer
case studies below illustrate the returns.
6
Service Customer (UltiPro through Intersourcing)
License Customer (UltiPro on Customer’s Site)
Genmar Holdings
employees: 7,000
industry: manufacturing
headquarters: minneapolis, mn
Ruth’s Chris
Steak House
employees: 2,500
industry: hospitality
headquarters: metairie, la
Genmar Holdings, one of the largest global manufacturers
When Ruth’s Chris Steak House decided to bring its
of recreational boats, has reported saving $540,000 annually
HR/payroll processes in-house in 2001, it was impressed
since adopting Intersourcing, by eliminating service bureau
with Ultimate Software’s comprehensive technology.
fees and payments to an external HR/payroll auditor. A
The restaurant chain has advised us that it has saved an
company that has grown through acquisitions, Genmar
average of $220,000 a year in service bureau fees, enjoys
turned to UltiPro to consolidate its disparate solutions,
improved reporting capabilities, and has greatly increased
improve its reporting capabilities, and save money. In
the productivity of its managers, HR/payroll department,
addition, Genmar increased HR productivity, experienced
and IT staff. Since implementing UltiPro, Ruth’s Chris has
weekly time savings for the payroll department, and freed
reported an annual ROI of 112%, with payback on the
up its IT department.
company’s initial investment in 11 months.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2004
or
n
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 ¥ No n
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 June 30, 2004 was approximately
$185.8 million.
As of February 18, 2005, there were 22,558,866 shares of the Registrant's Common Stock, par value $.01,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2005 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
Item 1.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART I
BusinessÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Submission of Matters to a Vote of Security HoldersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PART II
Market for the Registrant's Common Equity and Related Stockholder Matters ÏÏÏÏ
Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Management's Discussion and Analysis of Financial Condition and Results of
OperationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Quantitative and Qualitative Disclosures about Market Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Financial Statements and Supplementary Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Controls and Procedures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PART III
Directors and Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Executive Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Security Ownership of Certain BeneÑcial Owners and Management and Related
Stockholder Matters ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Principal Accountant Fees and Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PART IV
Exhibits and Financial Statement Schedules ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 15.
Signatures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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68
PART I
This Annual Report on Form 10-K (the ""Form 10-K'') of The Ultimate Software Group, Inc.
(""Ultimate Software'' or the ""Company'') may contain certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements represent the Company's expectations
or beliefs, including, but 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 due to risks and uncertainties associated with Öuctuations in the Company's
quarterly operating results, concentration of the Company's product oÅerings, development risks involved with
new products and technologies, competition, the Company's contractual relationships with third parties,
contract renewals with business partners, compliance by our customers with the terms of their contracts with
us, and other factors disclosed in the Company's Ñlings with the Securities and Exchange Commission. Other
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.
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 payroll and workforce management
solutions in the United States.
Ultimate Software's UltiPro Workforce Management Software (""UltiPro'') is a Web-based solution
designed to deliver the functionality businesses need to manage the employee life cycle, from recruiting and
hiring to compensating and managing beneÑts to terminating, 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 self-service Web portal for executives, managers, administrators, and employees
to review and update work-related and personal information. Ultimate Software believes that UltiPro helps
customers streamline HR and payroll processes to signiÑcantly reduce administrative and operational costs,
while also empowering managers and staÅ to analyze workforce trends for better decision making, 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 primarily on companies with more than 500 employees
and sells UltiPro both as a license model (typically in-house) and a service model (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, which includes UltiPro, priced on a monthly/service
basis. In 2004, Ultimate Software extended its BSP program to allow for alliances that target very large
corporations, generally those having more than 10,000 employees that the Company's direct sales force would
not see in a typical sales process. When the BSP sells its Internet solution, incorporating UltiPro in the
oÅering, the BSP is obligated to remit a fee to the Company, typically measured on a per-employee-per-
month basis and, in some cases, subject to a guaranteed monthly minimum amount.
UltiPro leverages the Microsoft technology platform, which is recognized in the industry as a cost-
eÅective, reliable and scalable platform. 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 six consecutive
annual evaluations.
The Company's direct sales force markets UltiPro as an in-house human resources, 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 managed by International Business Machines (""IBM'').
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 markets primarily to businesses with less than 500 employees (the ""Original Ceridian
Agreement''). Ceridian marketed this oÅering as the SourceWeb solution, which uses UltiPro software as its
core payroll and human resource platform. According to the Ñnancial terms of the Original Ceridian
Agreement (the ""Ceridian Financial Terms''), Ceridian is required (i) to pay the Company a monthly license
fee based on the number of employees paid using the licensed software, subject to a minimum monthly
payment of $500,000 per month with increases of 5% per annum, compounded beginning in January 2006. The
aggregate minimum payments that Ceridian is obligated to pay Ultimate Software under the Original Ceridian
Agreement over the minimum term of the agreement are $42.7 million. To date, Ceridian has paid to
Ultimate Software a total of $23.0 million under the Original Ceridian Agreement. The earliest date upon
which the Ceridian Agreement can be terminated by either party (except for an uncured material breach) is
March 9, 2008, resulting in an expected minimum term of 7 years. Ceridian retains certain rights to use the
software upon termination.
During December 2004, RSM McGladrey Employer Services (""RSM''), an existing business service
provider of Ultimate Software's, acquired Ceridian's SourceWeb HR/payroll and self-service product and
existing SourceWeb base of small and midsize business customers throughout the United States (the ""RSM
Acquisition''). The Ceridian Financial Terms have not changed as a result of the RSM Acquisition. Ultimate
Software expects to continue to recognize a minimum of $642,000 per month in recurring revenues from the
Original Ceridian Agreement until its termination.
Ultimate Software is a Delaware corporation formed in April 1996 to assume the business and operations
of The Ultimate Software Group, Ltd. (the ""Partnership''), a limited partnership founded in 1990. 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.
Revenue Sources
The Company's revenues are derived from three principal sources: recurring revenues, services revenues
and software licenses (""license revenues'').
Recurring revenues consist of maintenance revenues, Intersourcing revenues and subscription revenues
from per-employee-per-month (""PEPM'') fees generated by business partners. Maintenance revenues are
derived from maintaining, supporting and providing periodic updates for the Company's products under
software license agreements. Subscription revenues are principally derived from PEPM fees earned through
the Intersourcing OÅering, Base Hosting (deÑned below) and the BSP sales channel, as well as revenues
generated from the Original Ceridian Agreement. Maintenance revenues are recognized ratably over the
service period, generally one year. To the extent there are upfront fees associated with the Intersourcing
OÅering, Base Hosting or the BSP sales channel, subscription revenues are recognized ratably over the term of
the related contract upon the delivery of the product and services. PEPM fees from the Intersourcing OÅering,
2
Base Hosting and the BSP sales channel are recognized as subscription revenue (a component of recurring
revenues in the consolidated statements of operations) as the services are delivered.
Services revenues include revenues from fees charged for the implementation of the Company's software
products and training of customers in the use of such products, fees for services provided to business service
providers, including those related to the Ceridian Services Agreement (deÑned below) which expired on
December 31, 2004, the provision of payroll-related forms and the printing of Form W-2's for certain
customers and certain reimbursable out-of-pocket expenses. Revenues for training and implementation
consulting services are typically recognized as services are performed. Revenues for the Ceridian Services
Agreement were recognized ratably from February 11, 2003 until December 31, 2004 based on the terms of
the agreement. Other services are recognized as the services are rendered or as the product is shipped.
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 non-cancellable. 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.
The percentage contribution for each of the three principal sources of revenue was as follows:
For the Years Ended December 31,
2002
2003
2004
Revenues:
Recurring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
License ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
54.2%
34.6
11.2
48.6%
38.8
12.6
35.1%
42.8
22.1
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
100.0%
100.0%
100.0%
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 can serve as a company's
communications hub and the central gateway for business activities. It provides functionality for everyone in
the customer's organization, not just 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 perform real-
time Web queries on their workforce data, access commonly requested reports and analyze workforce statistics
and trends on-demand. Employees can review their own pay and beneÑts information, get questions answered
and complete routine updates instantly. HR and other administrators can expedite more than 100 routine
business processes such as hiring, rehiring or terminating an employee; inputting salary increases; and
changing an employee's job, division, or department. Ultimate Software 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 manage-
ment, 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 customizations or changes to source code,
3
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 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 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. With UltiPro version 7.0, released in 2003, Ultimate Software enhanced and validated the
performance of UltiPro's Internet functions, including eEmployee Self-Service, eManagement, and eAdminis-
tration by benchmark testing with Mercury Loadrunner Controller. 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, which the Company believes makes 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 approximately 170 people in customer services, which includes the implementation, product
support, technical support and training departments. Ultimate Software's customer support center has
received the Support Center Practices (""SCP'') CertiÑcation for the sixth consecutive year. The SCP
4
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 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 technol-
ogies and Internet/extranet connectivity to increase access to and usability of its applications. UltiPro is a
Web solution with a back oÇce 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 applica-
tion 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, Presenta-
tion 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
5
(""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, UltiPro Workforce Management, was originally designed for mid-
sized enterprise customers, primarily those with 500 to 15,000 employees but is appropriate for and is used by
both smaller and larger organizations. 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, typically those with fewer than 500 employees and, since 2004, is now available to BSPs to use
for very large corporations.
UltiPro Workforce Management Software (""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, from recruiting and hiring to compensating and managing
beneÑts to terminating, whether a customer's processes are centralized at headquarters or managed by
multiple divisions or branch oÇces. 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 administra-
tion 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 for a company's
executives, management team, HR/payroll staÅ, administrators, and employees to business activities.
Ultimate Software believes that UltiPro's workforce portal allows its customers to improve service to their
employees through better communications and save time because managers and administrators can complete
hundreds of common employee-related tasks, including administering beneÑts, managing staÅ and accessing
reporting and business intelligence in real-time, from one central location.
eManager Self-Service. As authorized, managers have self-service access to staÅ information such as
salary, compensation history, key dates and emergency contacts, with reporting and workforce analysis tools to
facilitate decision-making. A customer's managers can view and update staÅ information, manage department
activities, post job openings, leverage recruiting and hiring tools, and perform Web queries on workforce data.
UltiPro's document management features can be used to house and categorize employee-related documents
such as drivers' licenses, consent forms, and completed I-9s with required identiÑcation. Administrators and
managers have the ability to attach Microsoft Word documents, PDFs, JPEG Ñles, spreadsheets, or any other
Ñle types supported by Microsoft Internet Explorer to employee Ñles. The documents can be grouped and
sorted to individual requirements, as necessary.
eEmployee Self-Service. UltiPro eEmployee Self-Service gives a customer's employees immediate
security-protected access to view their own paycheck details and beneÑts summaries, frequently used forms
and company information. They can also update personal information such as address, phone number,
emergency contacts and skills; change preferences such as direct deposit accounts and beneÑts selections;
make routine requests such as asking for vacation time; and enroll in training.
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
6
HR/payroll staÅ to run standard UltiPro reports, including upcoming performance reviews, headcount reports,
average salary reports, government compliance reports, general ledger reporting, and other point-in-time
HR/payroll reports from the Web without requiring the time of central HR/payroll or IT 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
Consolidated Omnibus Budget Reconciliation Act compliance; Health Insurance Portability & Accountability
Act certiÑcates; Occupational Safety & Health Administration and workers' compensation; Family Medical
Leave Act tracking; and Equal Employment Opportunity compliance. UltiPro also ensures compliance with
the Health Insurance Portability & Accountability Act 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 management functionality.
Payroll 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 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. Using UltiPro's Business Intelligence tools, customers can provide their
managers and executives with Web access to workforce-related reports, workforce analytics and point-in-time
reporting, without installing reporting software on users' PCs or writing custom reports. With UltiPro Business
Intelligence, users can run and print pre-formatted reports for the executive team or run 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, customers' 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 employee 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.
7
UltiPro Wireless. Ultimate Software recognizes the mobile workforce today and delivers 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 BSP Solution
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. In 2004, Ultimate Software extended its BSP program to allow BSPs that target very large
corporations to use UltiPro as part of an HR Outsourcing oÅering. The very large corporations targeted in this
type of oÅering, generally having more than 10,000 employees would be those that Ultimate Software's direct
sales force would not typically see in the sales process. 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 and is
appropriate for larger companies as well. For the small company market, companies with less than 500
employees, the BSP Solution leverages select functionality from UltiPro Workforce Management, and have 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 generally can be done in less than a minute by clicking an icon. With
changes, the process generally can take several minutes. The initial process of registering for Web payroll
services generally 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 began oÅering a hosting service, branded Intersourcing, whereby the Company
provides the hardware, infrastructure, ongoing maintenance and back-up services for its customers at a
BellSouth data center managed by IBM (the ""Intersourcing OÅering''). DiÅerent types of hosting arrange-
ments 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 (""Base
Hosting''). Hosting services, typically available in a shared environment, provide Web access to comprehen-
sive 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 the shared environment, Ultimate Software provides an infrastructure with applicable servers shared among
many customers who use a Web browser to access the application software through the data center.
The Intersourcing OÅering is designed to provide an appealing pricing structure to customers who prefer
to minimize the initial cash outlay associated with typical capital expenditures. Intersourcing customers
purchase the right to use UltiPro on an ongoing basis for a speciÑc term in a shared or dedicated hosted
8
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.
Research and Development Activities
Ultimate Software incurs research and development expenses, consisting primarily of software develop-
ment personnel costs, in the normal course of its business. Such research and development expenses are for
enhancements and future betterments to the Company's existing products and for the development of new
products. During 2004, 2003 and 2002, the Company spent $18.3 million, $18.2 million and $17.7 million,
respectively, on research and development activities, which corresponds with the related amounts expensed in
the consolidated statements of operations during those periods. There were no software costs capitalized in
2004, 2003 or 2002.
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 methodol-
ogy, long-tenured consultants, the large amount of delivered product functionality, and comprehensive
conversion and integration tools.
Ultimate Software has an experienced team of system and functional consultants that are dedicated to
assisting customers with rapid implementations. In addition, Ultimate Software provides its customers with
the opportunity to participate in formal training programs conducted by its 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 implementa-
tion 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 have been turned over to
the Company's customer support and maintenance program, the Company assigns a customer relationship
manager to the account to assist customers on an ongoing basis with special projects, including enhancing their
existing systems, managing upgrades and writing custom reports. These services, like all of the 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 has received the Support Center Practices CertiÑcation sponsored by the Service
Strategies Corporation (SSC) for the sixth consecutive year. 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, 2004, Ultimate Software had licensed its software to more than 1,200 customers that
represent approximately 5,000 companies serving in excess of 2 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. During 2004
and 2003, one of the Company's customers, Ceridian, accounted for 16% and 17%, respectively, of total
revenues. Ceridian did not account for more than 10% of total revenues in 2002. No other customer accounted
for more than 10% of total revenues in 2004, 2003 or 2002.
Sales and Marketing
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, demon-
strate 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.
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. The BSP network is a co-branding alliance strategy that
enables BSPs to co-brand and market UltiPro and/or the BSP Solution primarily to businesses with fewer
than 500 employees and, since 2004, is available for very large companies, generally those having more than
10,000 employees, as well. The goal of the program is to extend the Company's market penetration in markets
where the Company's direct sales force does not have a signiÑcant presence and to build a recurring revenue
stream through per-employee-per-month pricing.
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.
10
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.
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; (ii) companies, such as PeopleSoft/Oracle and Kronos, that 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.
Backlog
Backlog consists of Intersourcing and Base Hosting services sold under signed contracts for which the
services have not yet been delivered. At December 31, 2004, the Company had backlog of $26.4 million
11
compared to $17.9 million as of December 31, 2003. The Company expects to Ñll $12.4 million of the backlog
during 2005. The Company does not believe that backlog is a meaningful indicator of sales that can be
expected for any future period. There can be no assurance that backlog at any point in time will translate into
revenue in any subsequent period.
Employees
As of December 31, 2004, the Company employed 456 persons, including 65 in sales and marketing, 110
in professional services, 158 in research and development, 61 in customer support and 62 in Ñnance,
information technology 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 and any registration statements, included but
not limited to, Form S-3 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, engineer-
ing and support operations, are located in three adjacent oÇce buildings in Weston, Florida. The Company
leases all the available square footage in two buildings, or approximately 61,000 total square feet, under two
leases, each expiring in 2017. In December 2004, the Company purchased, with available cash, all the
available square footage of an adjacent building that serves as an extension of the Company's corporate
headquarters, with approximately 5,000 square feet. In addition, the Company presently leases oÇce space for
its sales operations in Albany, New York; Atlanta, Georgia; Columbia, Maryland; Dallas, Texas; Detroit,
Michigan; 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 2004.
12
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 and low sales prices of the Company's
Common Stock, as quoted on the Nasdaq National Market.
2004
2003
High
Low
High
Low
First QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$14.150
14.140
13.250
13.950
$ 8.500
9.900
9.710
11.670
$ 4.549
5.470
10.190
10.690
$3.060
3.610
4.900
8.020
As of February 18, 2005, the Company had approximately 167 holders of record, representing
approximately 2,700 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.''
13
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 each of the years in the three-year period
ended December 31, 2004 and the balance sheet data as of December 31, 2004 and 2003 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 for the years ended December 31, 2001 and December 2000 and the balance sheet data as of
December 31, 2002, 2001 and 2000 have been derived from audited consolidated Ñnancial statements not
included herein.
2004
Years Ended December 31,
2002
(In thousands, except per share data)
2003
2001
2000
Statement of Operations Data:
Revenues:
Recurring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LicenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$39,049
24,924
8,055
72,028
$29,344
23,478
7,594
60,416
$ 19,345
23,634
12,170
55,149
$14,364
28,289
16,826
59,479
$10,520
27,331
24,103
61,954
Cost of revenues:
Recurring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LicenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total cost of revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
11,961
18,448
993
31,402
9,495
17,277
807
27,579
8,098
18,267
1,163
27,528
5,789
20,219
1,287
27,295
4,957
20,978
1,286
27,221
Operating expenses:
Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Research and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
20,121
15,687
7,338
43,146
(8,413)
(311)
320
Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(5,024) $(9,169) $(14,568) $(8,750) $(8,404)
17,479
17,675
6,890
42,044
(14,423)
(283)
138
17,788
18,229
5,871
41,888
(9,051)
(221)
103
20,630
18,317
6,806
45,753
(5,127)
(182)
285
18,261
12,775
10,065
41,101
(8,917)
(208)
375
Net loss per share Ì basic and diluted(1) ÏÏÏÏ
$ (0.23) $ (0.49) $
(0.90) $ (0.55) $ (0.52)
Weighted average number of shares
outstanding:
Basic and diluted(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
21,743
18,738
16,189
15,944
16,075
Balance Sheet Data:
Cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investments in marketable securities ÏÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term borrowings, including capital lease
obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' equity (deÑcit) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$14,766
10,544
52,546
28,476
1,231
13,524
$13,783
Ó
35,812
24,610
$
8,974
Ó
31,143
27,815
$ 8,464
Ó
34,251
20,215
$ 7,572
Ó
34,440
9,894
796
1,661
1,206
(7,368)
408
4,590
943
13,904
(1) See Note 2 of the Notes to Consolidated Financial Statements for information regarding the computation
of net loss per share.
14
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 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 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 due to risks and
uncertainties associated with Öuctuations in the Company's quarterly operating results, concentration of the
Company's product oÅerings, development risks involved with new products and technologies, competition,
the Company's contractual relationships with third parties, contract renewals with business partners,
compliance by our customers with the terms of their contracts with us, and other factors disclosed in the
Company's Ñlings with the Securities and Exchange Commission. Other 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.
Executive Summary
Ultimate Software's UltiPro Workforce Management Software (""UltiPro'') is a Web-based solution
designed to deliver the functionality businesses need to manage the employee life cycle, from recruiting and
hiring to compensating and managing beneÑts to terminating, whether their processes are centralized at
headquarters or distributed across multiple divisions or branch oÇces. The Company's main sources of
revenues include sales from the Intersourcing OÅering (deÑned below), sales of perpetual software licenses for
UltiPro (and the related annual maintenance) and sales of services (mostly implementation) related to both
Intersourcing and license sales.
In the past, the Company's primary business strategy was centered on sales of perpetual software licenses
of UltiPro. In an eÅort to reduce the volatility and unpredictable nature of a business strategy predominantly
focused on license sales, the Company introduced Intersourcing as an additional revenue source during 2002.
In 2002, Ultimate Software began oÅering hosting services, branded ""Intersourcing'' by the Company,
whereby Ultimate Software provides the hardware, infrastructure, ongoing maintenance and back-up services
for its customers at a BellSouth data center managed by IBM. Intersourcing is designed to appeal to those
customers that want to minimize their internal technology support requirements for the application and
hardware.
After the introduction of Intersourcing in mid-2002, the sales mix gradually began to shift towards
Intersourcing, especially during 2003 and continuing in 2004. Management believes the shift in sales mix helps
to produce a more predictable revenue stream by providing recurring revenue and cash from Intersourcing
over the related contract periods, typically 24 months. As Intersourcing units are sold, the recurring revenue
backlog associated with Intersourcing grows, enhancing the predictability of future revenue streams. For the
last six months of 2003, the sales mix for number of units sold began shifting to favor Intersourcing units over
license units, with this shift continuing into 2004. During the year ended December 31, 2004, the sales mix
(for new units sold) was comprised of approximately 60% Intersourcing units and 40% license units, which
reÖected a higher concentration of new Intersourcing units sold compared to the same period of 2003, when
the sales mix (for new units sold) was comprised of 55% Intersourcing units and 45% license units. The
Company expects the sales mix composition to continue to favor Intersourcing during 2005.
The Ñnancial impact of the shift (from sales of license units to a combination of sales of license units and
Intersourcing units) relates to (1) the type of revenue recognized and the timing of recognition; (2) the
amount of services revenue recognized; and (3) the timing of cash received from the sale.
15
When an Intersourcing unit is sold instead of a license unit, license revenue is replaced with recurring
revenue. The license revenue which would otherwise have been recognized upfront (assuming all required
accounting criteria are met) is replaced with recurring revenue recognized over the contract term (typically
24 months) with such recurring revenue recognition commencing when the customer runs its Ñrst ""live''
payroll (i.e., generally between four and six months from the date of sale). The total revenue from the sale of
an average Intersourcing unit sold is usually no less than it would have been if it were a license sale, with the
main diÅerence pertaining to the period of recognition (i.e., being spread over a period of time rather than
100% upfront).
In addition to the change in type of revenue and the timing of revenue recognition, implementation
revenue (a component of services revenue) is also impacted by the shift in sales mix to Intersourcing. On
average, an Intersourcing unit takes less time to implement than a license unit. Therefore, as the sales mix
shifts towards Intersourcing, billable hours for the Company's implementation services per unit typically
decrease.
Cash is also impacted when an Intersourcing unit is sold instead of a license unit. For a typical license
unit sale, the cash due for the license and the Ñrst year of annual maintenance is received within 9 months
from the contract date. However, when an Intersourcing unit is sold, the cash due from the Intersourcing sale
is received over the course of the contract term, typically 24 months. The total cash received from the sale of
an average Intersourcing unit sold is usually no less than it would have been if it were a license sale with the
main diÅerence pertaining to the period of time in which it is received.
While making the transition from a business model focused solely on sales of perpetual licenses to a
business model that includes both license sales and Intersourcing sales, the Company raised additional capital
in 2004 and 2003 to address expected cash needs related to the transition. In May 2004, capital from a private
placement of the Company's common stock, par value $0.01 per share (the ""Common Stock''), totaling
$14.4 million, net of stock issuance costs, was raised to provide cash to fund future operations based on the
Company's anticipated growth in Intersourcing sales. In 2003, capital from private placements of the
Company's Common Stock, totaling $17.5 million, net of stock issuance costs, was raised to fund 2003
operations (including the impact of the transition toward more sales of Intersourcing units) and to provide
cash to fund future operations based on the Company's anticipated growth in Intersourcing sales.
As a result of the Company's recent transition to a sales mix favoring Intersourcing units, a key Ñnancial
metric used by the Company in measuring future Ñnancial performance is new ""annual recurring revenues.''
New annual recurring revenues represent the expected one-year value from (i) new Intersourcing sales from
the Company's hosted model (including prorated one-time charges); (ii) maintenance revenues related to
new license sales; (iii) recurring revenues from new business service providers; and (iv) recurring revenues
from additional sales to Ultimate Software's existing client base. New annual recurring revenues attributable
to sales during 2004 were $12.0 million as compared to $9.2 million for 2003.
Another major component of recurring revenues is subscription revenues generated from the Company's
business service provider (""BSP'') channel. The BSP contributing the most revenues from the BSP Channel
during each of 2004, 2003 and 2002 was Ceridian Corporation (""Ceridian'') under the Original Ceridian
Agreement (deÑned below). See also ""OverviewÓOriginal Ceridian Agreement.''
As previously disclosed, Ultimate Software and Ceridian signed an agreement in 2001, as amended,
granting Ceridian a non-exclusive license to use UltiPro software as part of an on-line oÅering for Ceridian to
market primarily to businesses with less than 500 employees (the ""Original Ceridian Agreement''). Ceridian
marketed that solution under the name SourceWeb. During December 2004, RSM McGladrey Employer
Services (""RSM'') an existing business service provider of Ultimate Software's, acquired Ceridian's
SourceWeb HR/payroll and self-service product and existing SourceWeb base of small and midsize business
customers throughout the United States (the ""RSM Acquisition''). The Ñnancial terms of the Original
Ceridian Agreement have not changed as a result of the RSM Acquisition. Ceridian will continue to be
Ñnancially obligated to pay Ultimate Software a minimum fee of $500,000 per month with increases of 5% per
annum, compounded beginning in January 2006. The aggregate minimum payments that Ceridian is obligated
to pay Ultimate Software under the Original Ceridian Agreement over the minimum term of the agreement
16
are $42.7 million. To date, Ceridian has paid to Ultimate Software a total of $23.0 million under the Original
Ceridian Agreement. Ultimate Software expects to continue to recognize a minimum of $642,000 per month
in recurring subscription revenues from the Original Ceridian Agreement until its termination. The earliest
date that this agreement can be terminated by either party is March 9, 2008 (except for an uncured material
breach). The amount of subscription revenue, a component of recurring revenues, recognized under the
Original Ceridian Agreement in 2004, totaling $7.7 million, was the same as that recognized in 2003.
During 2004 and 2003, Ultimate Software entered into services agreements, as amended and extended
from time to time, (individually, the ""Ceridian Services Agreement'' and collectively, the ""Ceridian Services
Agreements''), with Ceridian. Under the Ceridian Services Agreements, Ceridian was obligated to pay
Ultimate Software a total of $3.3 million and $2.3 million in 2004 and 2003, respectively, payable in equal
quarterly installments, in exchange for additional services provided by Ultimate Software during the term of
the agreements. The 2003 Ceridian Services Agreement expired eÅective December 31, 2003 and was
recognized on a straight-line basis from February 10, 2003 through December 31, 2003. The 2004 Ceridian
Services Agreement, as extended from time to time during 2004, expired on December 31, 2004 and was
recognized on a straight-line basis from January 1, 2004 through December 31, 2004. The Company oÅers and
provides certain services to other BSPs.
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
Sources of revenue for the Company include:
‚ Sales of perpetual licenses for UltiPro;
‚ Sales of perpetual licenses for UltiPro in conjunction with services to host the UltiPro application
(""Hosting Services'');
‚ Sales of the right to use UltiPro through ""Intersourcing'' (the ""Intersourcing OÅering''), which
includes Hosting Services;
‚ Sales of Hosting Services on a stand-alone basis to customers who already own a perpetual license or
are simultaneously acquiring a perpetual license for UltiPro (""Base Hosting'');
‚ Sales of services including implementation, training and other services, including the provision of
payroll-related forms and the printing of Form W-2's for certain customers, as well as services provided
to BSPs, including Ceridian through December 31, 2004 pursuant to the Ceridian Services Agree-
ments; and
‚ Recurring revenues derived from (1) maintenance revenues generated from maintaining, supporting
and providing periodic updates for the Company's software and (2) subscription revenues generated
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 Original Ceridian
Agreement.
Perpetual Licenses for UltiPro Sold With or Without Hosting Services
Sales of perpetual licenses for UltiPro and sales of perpetual licenses for UltiPro in conjunction with
Hosting Services are multiple-element arrangements that involve the sale of software and consequently fall
under the guidance of Statement of Position (""SOP'') 97-2, ""Software Revenue Recognition,'' for revenue
recognition.
17
The Company licenses software under non-cancelable license agreements and provides services including
maintenance, training and implementation consulting services. In accordance with the provisions of SOP 97-2,
license revenues are generally recognized when (1) a non-cancelable license agreement has been signed by
both parties, (2) the product has been shipped, (3) no signiÑcant vendor obligations remain and (4) collec-
tion of the related receivable is considered probable. To the extent any one of these four criteria is not satisÑed,
license revenue is deferred and not recognized in the consolidated statements of operations until all such
criteria are met.
For multiple-element software arrangements, each element of the arrangement is analyzed and the
Company allocates a portion of the total fee under the arrangement to the elements based on vendor-speciÑc
objective evidence of fair value of the element (""VSOE''), regardless of any separate prices stated within the
contract for each element. Fair value is considered the price a customer would be required to pay when the
element is sold separately.
The Residual Method (as deÑned below) is used to recognize revenue when a license agreement includes
one or more elements to be delivered at a future date and VSOE of the fair value of all undelivered elements
exists. The fair value of the undelivered elements is determined based on the historical evidence of stand-alone
sales of these elements to third parties. Undelivered elements in a license arrangement typically include
maintenance, training and implementation services (the ""Standard Undelivered Elements''). The fair value
for maintenance fees is based on the price of the services sold separately, which is determined by the annual
renewal rate historically and consistently charged to customers (the ""Maintenance Valuation''). Maintenance
fees are generally priced as a percentage of the related license fee. The fair value for training services is based
on standard pricing (i.e., rate per training day charged to customers for class attendance), taking into
consideration stand-alone sales of training services through year-end seminars and historically consistent
pricing for such services (the ""Training Valuation''). The fair value for implementation services is based on
standard pricing (i.e., rate per hour charged to customers for implementation services), taking into
consideration stand-alone sales of implementation services through special projects and historically consistent
pricing for such services (the ""Implementation Valuation''). Under the residual method (the ""Residual
Method''), the fair value of the undelivered elements is deferred and the remaining portion of the arrangement
fee attributable to the delivered element, the license fee, is recognized as revenue. If VSOE for one or more
undelivered elements does not exist, the revenue is deferred on the entire arrangement until the earlier of the
point at which (i) such VSOE does exist or (ii) all elements of the arrangement have been delivered.
Perpetual licenses of UltiPro sold without Hosting Services typically include a license fee and the
Standard Undelivered Elements. Fair value for the Standard Undelivered Elements is based on the
Maintenance Valuation, the Training Valuation and the Implementation Valuation. The delivered element of
the arrangement, the license fee, is accounted for in accordance with the Residual Method.
Perpetual licenses of UltiPro sold with Hosting Services typically include a license fee, the Standard
Undelivered Elements and Hosting Services. Fair value for the Standard Undelivered Elements is based on
the Maintenance Valuation, the Training Valuation and the Implementation Valuation. Hosting Services are
delivered to customers on a PEPM basis over the term of the related customer contract (""Hosting PEPM
Services''). Upfront fees charged to customers represent fees for the hosting infrastructure, including
hardware costs, third-party license fees and other upfront costs incurred by the Company in relation to
providing such services (""Hosting Upfront Fees''). Hosting PEPM Services and Hosting Upfront Fees
(collectively, ""Hosting Services'') represent undelivered elements in the arrangement since their delivery is
over the course of the related contract term. The fair value for Hosting Services is based on standard pricing
(i.e., rate charged per-employee-per-month), taking into consideration stand-alone sales of Hosting Services
through the sale of such services to existing customers (i.e., those who already own the UltiPro perpetual
license at the time Hosting Services are sold to them) and historically consistent pricing for such services (the
""Hosting Valuation''). The delivered element of the arrangement, the license fee, is accounted for in
accordance with the Residual Method.
The Company's customer contracts are non-cancelable agreements. The Company does not provide for
rights of return or price protection on its software. The Company provides a limited warranty that its software
18
will perform in accordance with user manuals for varying periods, which are generally less than one year from
the contract date. The Company's customer contracts generally do not include conditions of acceptance.
However, if conditions of acceptance are included in a contract or uncertainty exists about customer
acceptance of the software, license revenue is deferred until acceptance occurs.
Sales Generated from the Intersourcing OÅering
Subscription revenues generated from the Intersourcing OÅering 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.
The elements that typically exist in Intersourcing arrangements include hosting services, the right to use
UltiPro, maintenance of UltiPro (i.e., product enhancements and customer support) and professional services
(i.e., implementation services and training in the use of UltiPro). The pricing for hosting services, the right to
use UltiPro and maintenance of UltiPro is bundled (the ""Bundled Elements''). Since these three Bundled
Elements are components of recurring revenues in the consolidated statements of operations, allocation of fair
values to each of the three elements is not necessary and they are not reported separately. Fair value for the
Bundled Elements, as a whole, is based upon evidence provided by the Company's pricing for Intersourcing
arrangements sold separately. The Bundled Elements are provided on an ongoing basis and represent
undelivered elements under EITF 00-21; they are recognized on a monthly basis as the services are performed,
once the customer has begun to process payrolls used to pay its employees (i.e., goes ""Live'').
Implementation and training services (the ""Professional Services'') provided for Intersourcing arrange-
ments are priced on a time and materials basis and are recognized as services revenue in the consolidated
statements of operations as the services are performed. Under EITF 00-21, fair value is assigned to service
elements in the arrangement based on their relative fair values, using the prices established when the services
are sold on a stand-alone basis. Fair value for Professional Services is based on the respective Training
Valuation and Implementation Valuation. If evidence of the fair value of one or more undelivered elements
does not exist, the revenue is deferred and recognized when delivery of those elements occurs or when fair
value can be established. The Company believes that applying EITF 00-21 to Intersourcing arrangements as
opposed to applying SOP 97-2 is appropriate given the nature of the arrangements whereby the customer has
no right to the UltiPro license.
Sales of Base Hosting Services
Subscription revenues generated from Base Hosting are recognized in accordance with EITF 00-3,
""Application of AICPA Statement of Position 97-2 to Arrangements that Include the Right to Use Software
that 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. The elements that typically exist for Base
Hosting arrangements include hosting services and implementation services. Base Hosting is diÅerent than
Intersourcing arrangements in that the customer already owns a perpetual license or is purchasing a perpetual
license for UltiPro and is purchasing hosting services subsequently in a separate transaction whereas, with
Intersourcing, the customer is purchasing the right to use (not license) UltiPro. Implementation services
provided for Base Hosting arrangements are substantially less than those provided for Intersourcing
arrangements since UltiPro is already implemented in Base Hosting arrangements and only needs to be
transitioned to a hosted environment. Fair value for hosting services is based on the Hosting Valuation. The
fair value for implementation services is based on standard pricing (i.e., rate per hour charged to customers for
implementation services), taking into consideration stand-alone sales of implementation services through
special projects and historically consistent pricing for such services (the ""Implementation Valuation''). Fair
value for implementation services is assigned in accordance with guidelines provided by SOP 97-2 based on
the Implementation Valuation.
19
Services, including Implementation and Training Services
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 those related
to the Ceridian Services Agreements through December 31, 2004, 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 depending on the speciÑc
terms of the arrangement.
Arrangement fees related to Ñxed-fee implementation services contracts are recognized using the
percentage of completion accounting method, which involves the use of estimates. Percentage of completion is
measured at each reporting date based on hours incurred to date compared to total estimated hours to
complete. If a suÇcient basis to measure the progress towards completion does not exist, revenue is recognized
when the project is completed or when we receive Ñnal acceptance from the customer.
Recurring Revenues
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 PEPM fees earned through the Intersourcing OÅering, Base Hosting
and the BSP sales channel, as well as revenues generated from the Original Ceridian Agreement. Maintenance
revenues are recognized ratably over the service period, generally one year. Maintenance and support fees are
generally priced as a percentage of the initial license fee for the underlying products. To the extent there are
upfront fees associated with the Intersourcing OÅering, Base Hosting or the BSP sales channel, subscription
revenues are recognized ratably over the term of the related contract upon the delivery of the product and
services. In the cases of Intersourcing and Base Hosting sales, amortization of the upfront fees commences
when the customer processes its Ñrst Live payroll, which typically occurs four to six months after the sale, and
extends until the end of the contract period. In the case of BSP channel sales, amortization of the upfront fee
typically commences when the contract is signed, which is when the BSP's rights under the agreement begin,
continuing until the contract term ends. PEPM fees from the Intersourcing OÅering, Base Hosting and the
BSP sales channel are recognized as subscription revenue as the services are delivered. Commencing on
August 28, 2002, subscription revenues generated from the Original Ceridian Agreement are recognized
ratably over the minimum term of the contract, which is expected to extend until March 9, 2008 (7 years from
the eÅective date of the Original Ceridian Agreement). Subscription revenues of $642,000 per month are
based on guaranteed minimum payments from Ceridian of approximately $42.7 million over the minimum
contract term, including $23.0 million received to date.
Maintenance services provided to customers include product updates and technical support services.
Product updates are included in general releases to the Company's customers and are distributed on a periodic
basis. Such updates may include, but are not limited to, product enhancements, payroll tax updates, additional
security features or bug Ñxes. All features provided in general releases are unspeciÑed upgrade rights. To the
extent speciÑed upgrade rights or entitlements to future products are included in a multi-element arrange-
ment, revenue is recognized upon delivery provided fair value for the elements exists. In multi-element
arrangements that include a speciÑed upgrade right or entitlement to a future product, if fair value does not
exist for all undelivered elements, revenue for the entire arrangement is deferred until all elements are
delivered or when fair value can be established.
Subscription revenues generated from the BSP sales channel include both the right to use UltiPro and
maintenance. The BSP is charged a fee on a per-employee-per-month basis and, in several cases, is subject to
a guaranteed monthly minimum amount for the term of the related agreement. Revenue is recognized on a
per-employee-per-month basis. To the extent the BSP pays the Company a one-time upfront fee, the
Company accounts for such fee by recognizing it as subscription revenue over the minimum term of the
related agreement.
20
The Company recognizes revenue in accordance with the Securities Exchange Commission (""SEC'')
StaÅ Accounting Bulletin No. 101, ""Revenue Recognition in Financial Statements'' (""SAB No. 101'') and
the SEC StaÅ Accounting Bulletin No. 104, ""Revenue Recognition'' (""SAB No. 104''). Management
believes the Company is currently in compliance in all material aspects with the current provisions set forth in
SOP 97-2, SOP 98-9, EITF 00-21, EITF 00-3, SAB No. 101 and SAB No. 104.
Concentration of Revenues
During the years ended December 31, 2004 and 2003, Ceridian accounted for 15.5% and 16.6%,
respectively, of total revenues. Ceridian did not account for more than 10% of total revenues in 2002. No other
customer accounted for more than 10% of total revenues in the periods presented. Due to the signiÑcant
concentration of total revenues with this single customer, the Company has exposure if this customer loses its
credit worthiness. The Ceridian Services Agreements, under which services revenues were recognized in 2004
and 2003, have terminated and no further services revenues will be recognized with respect to them. See
Note 3 of the Notes to Consolidated Financial Statements.
The composition of the revenues recognized from Ceridian, as a percentage of total revenues, for the
years ended December 31, 2004, 2003 and 2002 was as follows:
Recurring revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Services revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
10.9% 12.8% 4.8%
4.6
3.8 Ì
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
15.5% 16.6% 4.8%
2004
2003
2002
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
receivable. In assessing the adequacy of the allowance for doubtful accounts, the Company considers multiple
factors including historical bad debt experience, the general economic environment, and the aging of its
receivables. A considerable amount of judgment is required when the realization of receivables is assessed,
including assessing the probability of collection and current credit-worthiness of each customer. If the
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.
Overview
Ultimate Software designs, markets, implements and supports payroll and workforce management
solutions.
Ultimate Software's UltiPro Workforce Management Software (""UltiPro'') is a Web-based solution
designed to deliver the functionality businesses need to manage the employee life cycle, from recruiting and
hiring to compensating and managing beneÑts to terminating, 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 self-service Web portal for executives, managers, administrators, and employees
to review and update work-related and personal information. Ultimate Software believes that UltiPro helps
customers streamline HR and payroll processes to signiÑcantly reduce administrative and operational costs,
while also empowering executives and staÅ to access critical information quickly and perform routine business
activities eÇciently.
UltiPro 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 primarily on companies with more than 500 employees and sells both a
license model (typically in-house) and a service model (typically hosted and priced on a per-employee-per-
21
month basis). The Company's BSP alliances focus primarily on companies with under 500 employees and,
since 2004, very large companies, generally those with over 10,000 employees, as well. The Company's BSP
alliances typically sell an Internet solution, which includes UltiPro, priced on a monthly/service basis. When
the BSP sells its Internet solution, incorporating UltiPro in the oÅering, the BSP is obligated to remit a fee to
the Company, typically measured on a per-employee-per-month basis and, in some cases, subject to a
guaranteed monthly minimum amount.
The Company's direct sales force markets UltiPro as an in-house human resources, 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 managed by International Business Machines (""IBM'').
Intersourcing OÅering
In 2002, the Company began oÅering a hosting service, branded Intersourcing, whereby the Company
provides the hardware, infrastructure, ongoing maintenance and back-up services for its customers at a
BellSouth data center, which is managed by IBM. 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, typically available in
a shared environment, provide Web access to comprehensive workforce management functionality for
organizations that need to simplify the IT support requirements of their business applications and are priced
on a per-employee-per-month basis. In the shared environment, Ultimate Software provides an infrastructure
with applicable servers shared among many customers who use a Web browser to access the application
software through the data center.
The Intersourcing OÅering is designed to provide an appealing pricing structure to customers who prefer
to minimize the initial cash outlay associated with typical capital expenditures. Intersourcing customers
purchase the right to use UltiPro on an ongoing basis for a speciÑc term, typically in a shared environment.
The pricing for Intersourcing, including both the hosting element as well as the right to use UltiPro, is on a
per-employee-per-month basis.
Original Ceridian Agreement
During 2001, Ultimate Software and Ceridian reached an agreement, as amended in 2002, which granted
Ceridian a non-exclusive license to use UltiPro software as part of an on-line oÅering that Ceridian can market
primarily to businesses with under 500 employees (the ""Original Ceridian Agreement''). Ceridian marketed
that solution under the name SourceWeb.
Under the agreement, Ceridian is responsible for all marketing costs and expenses, and must sell the
licensed software on a per period, per employee, per paycheck basis or other repetitive payment model.
Ceridian is required to pay the Company a monthly license fee based on the number of employees paid using
the licensed software. These payments are subject to a minimum monthly payment of $500,000 per month
with increases of 5% per annum, compounded beginning in January 2006. The maximum monthly payment is
$1.0 million, subject to increases of 5% per annum, compounded. The aggregate minimum payments that
Ceridian is obligated to pay Ultimate Software under the Original Ceridian Agreement over the minimum
term of the agreement is $42.7 million. To date, Ceridian has paid to Ultimate Software a total of
$23.0 million under the Original Ceridian Agreement. The earliest date upon which the Ceridian Agreement
can be terminated by either party (except for an uncured material breach) is March 9, 2008, resulting in an
expected minimum term of 7 years. Ceridian retains certain rights to use the software upon termination.
During December 2004, RSM McGladrey Employer Services (""RSM''), an existing business service
provider of Ultimate Software's, acquired Ceridian's SourceWeb HR/payroll and self-service product and
22
existing SourceWeb base of small and midsize business customers throughout the United States (the ""RSM
Acquisition''). The Ñnancial terms of the Original Ceridian Agreement have not changed as a result of the
RSM Acquisition. Ceridian will continue to be Ñnancially obligated to pay Ultimate Software a minimum fee
of $500,000 per month with increases of 5% per annum, compounded beginning in January 2006. Ultimate
Software expects to continue to recognize a minimum of $642,000 per month in recurring subscription
revenues from the Original Ceridian Agreement until its termination.
Ceridian Services Agreements
On April 7, 2004, the Company and Ceridian extended their services agreement, which expired on
December 31, 2003 (the ""Extended Ceridian Services Agreement''). Under the Extended Ceridian Services
Agreement, which was eÅective January 1, 2004 through September 30, 2004, Ceridian was obligated to pay
Ultimate Software a total of $2.5 million in three equal installments in exchange for services provided by
Ultimate Software during the term of that agreement. All three installment payments due under the Extended
Services Agreement were received by the Company through July 2004. During October 2004, the Extended
Ceridian Services Agreement was further extended until December 31, 2004 for a fee of $0.8 million, received
in a single installment in November 2004. Services revenue from the Extended Ceridian Services Agreement
was recognized on a straight-line basis from January 1, 2004 through December 31, 2004. The Extended
Ceridian Services Agreement expired on December 31, 2004 and was not renewed. The Company oÅers and
provides certain services to other BSPs.
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,
2003
2002
2004
Revenues:
Recurring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
License ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
54.2%
34.6
11.2
48.6%
38.8
12.6
35.1%
42.8
22.1
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
100.0
100.0
100.0
Cost of revenues:
Recurring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
License ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total cost of revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expenses:
Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Research and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
16.6
25.6
1.4
43.6
28.7
25.4
9.4
63.5
(7.1)
(0.3)
0.4
15.7
28.6
1.3
45.6
29.4
30.2
9.7
14.7
33.1
2.1
49.9
31.7
32.1
12.5
69.3
(14.9)
(0.4)
0.2
76.3
(26.2)
(0.5)
0.3
Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(7.0)% (15.1)% (26.4)%
23
Comparison of Fiscal Years Ended December 31, 2004 and 2003
Revenues
The Company's revenues are derived from three principal sources: recurring revenues, services revenues
and software licenses (""license revenues'').
Recurring revenues include annual maintenance on software license agreements for the Company's
products 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 Original Ceridian Agreement. Maintenance
revenues are recognized ratably over the service period, generally one year. To the extent there are upfront fees
associated with the Intersourcing OÅering, Base Hosting or the BSP sales channel, subscription revenues are
recognized ratably over the term of the related contract upon the delivery of the product and services. PEPM
fees from the Intersourcing OÅering, Base Hosting and the BSP sales channel are recognized as subscription
revenues as the services are delivered. All of the Company's customers that purchased software during 2004
and 2003 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 services provided to BSPs, including
those related to the Ceridian Services Agreement (which expired on December 31, 2004), the provision of
payroll-related forms and the printing of Form W-2's for certain customers and certain reimbursable out-of-
pocket expenses. Revenues for training and implementation consulting services are recognized as services are
performed. Revenues for the Ceridian Services Agreement were recognized ratably based on the terms of the
agreement, from January 1, 2004 through December 31, 2004. Other services are recognized as the product is
shipped or as the services are rendered.
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 non-cancelable. 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.
Total revenues, consisting of recurring, services and license revenues, increased 19.2% to $72.0 million for
2004 from $60.4 million for 2003.
Recurring revenues increased 33.1% to $39.0 million for 2004 from $29.3 million for 2003 primarily due
to a total increase of $6.5 million in revenues generated from the Intersourcing OÅering resulting from
incremental Intersourcing units sold and an increase in the number of Intersourcing customers that processed
their Ñrst live payroll during 2004 combined with additional maintenance revenues generated from incremen-
tal licenses sold. Recurring subscription revenues recognized in 2004 from the Original Ceridian Agreement,
totaling $7.7 million, were the same as in 2003. Beginning on August 28, 2002, subscription revenues
generated from the Original Ceridian Agreement of $642,000 per month have been recognized, and are
expected to be recognized, over the minimum term of the contract. The earliest date upon which the Ceridian
Agreement can be terminated by either party (except for an uncured material breach) is March 9, 2008,
resulting in an expected minimum term of 7 years. Future recurring revenues to be recognized from the
Original Ceridian Agreement are expected to be comparable to 2004, or $7.7 million per year through
March 9, 2008. The impact on recurring revenues for units sold under the Intersourcing OÅering (as opposed
to the impact on license revenues for licensed units sold) is expected to be gradual, based on the revenue
recognition of the Intersourcing fees over the terms of the related contracts. The Company believes that a
combination of units sold under the Intersourcing OÅering and regular licensed units sold will provide a more
predictable business model in the future.
Services revenues increased 6.2% to $24.9 million for 2004 from $23.5 million for 2003 primarily as a
result of an increase of $1.1 million in services revenue generated from the Extended Ceridian Services
24
Agreement and an increase of $0.5 million in implementation revenues, partially oÅset by a decrease of
$0.3 million in certain reimbursable out-of-pocket expenses.
License revenues increased 6.1% to $8.0 million for 2004 from $7.6 million for 2003 primarily due to a
higher average selling price in 2004 as unit sales were comparable.
Cost of Revenues
Cost of revenues consists of the cost of recurring, services and license revenues. Cost of recurring
revenues consists of costs to provide maintenance and technical support to the Company's customers, the cost
of providing periodic updates and the cost of subscription revenues, including amortization of capitalized
software. Cost of services revenues primarily consists of costs to provide implementation services and training
to the Company's customers and, to a lesser degree, costs related to sales of payroll-related forms, costs
associated with certain reimbursable out-of-pocket expenses, discussed below, and costs to support additional
services provided to BSPs. Cost of license revenues primarily consists of fees payable to a third-party for
software products distributed by the Company and, to a lesser degree, amortization of capitalized software
costs. UltiPro includes third-party software for enhanced report writing purposes. When UltiPro licenses are
sold, customers pay the Company on a per user basis for the license rights to the third-party report writing
software. Capitalized software 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 increased 26.0% to $12.0 million for 2004 from $9.5 million for 2003. The
$2.5 million increase in cost of recurring revenue for 2004 was attributable to additional costs associated with
the growth in the Intersourcing OÅering, including labor costs, depreciation and amortization of related
computer equipment and costs associated with the BellSouth data center. As a percentage of recurring
revenues, cost of recurring revenues decreased to 30.6% for 2004 from 32.4% for 2003 primarily due to the
absorption of these expenses in an expanded recurring revenue base.
Cost of services revenues increased 6.8% to $18.4 million for 2004 from $17.3 million for 2003 primarily
as a result of increased costs to provide additional services to BSPs, principally labor-related, and higher
implementation and training costs, partially oÅset by a decrease in certain reimbursable out-of-pocket
expenses. Cost of services revenues, as a percentage of services revenues, increased to 74.0% for 2004 from
73.6% for 2003 primarily as a result of higher expenses.
Cost of license revenues increased 23% to $1.0 million for 2004 from $0.8 million for 2003. The increase
in cost of license revenues for 2004 was due to increased labor costs and additional third-party royalty fees,
partially oÅset by a reduction in the amortization of capitalized software. Capitalized software impacting the
cost of license revenues were fully amortized as of July 31, 2004. As a percentage of license revenues, cost of
license revenues increased to 12.3% for 2004 from 10.6% for 2003 primarily as a result of a disproportionate
increase in the cost of licenses in comparison to the increase in the license revenue base. Cost of license
revenues, as a percentage of license revenues, generally Öuctuates from period to period principally due to the
mix of sales of software products which generate third-party license fees in each period and Öuctuations in
revenues contrasted with Ñxed expenses such as labor costs and the amortization of capitalized software.
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 increased 16.0% to $20.6 million for 2004 from $17.8 million
for 2003. The increase in sales and marketing expenses was primarily due to a $2.3 million increase in labor
costs and, to a lesser extent, an increase in advertising and marketing costs of $0.5 million. The main
contributing factors for the increase in labor costs in 2004 were sales commissions and salaries, beneÑts and
travel costs. The increase in sales commissions was predominantly related to the increase in recurring revenues
from Intersourcing, which are amortized over the initial term of the contracts, usually two years, commencing
when the customer processes its Ñrst Live payroll. The addition of personnel to the sales infrastructure during
25
the three months ended September 30, 2003 was the primary cause for the increase in salaries, beneÑts and
travel costs in 2004.
Research and Development
Research and development expenses consist primarily of software development personnel costs. Research
and development expenses of $18.3 million in 2004 were consistent with expenses of $18.2 million in 2003 with
2004 labor costs increasing slightly over 2003.
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 increased 15.9% to $6.8 million for 2004 from $5.9 million for 2003 primarily due
to an increase of $0.6 million principally related to additional external professional fees associated with
Sarbanes-Oxley Section 404 compliance and an increase of $0.2 million in the provision for doubtful accounts.
Interest Expense
Interest expense decreased 17.6% to $182,000 for 2004 from $221,000 for 2003 primarily due to the
reduction in borrowings from the Credit Facility, deÑned below.
Interest and Other Income
Interest and other income increased 176.7% to $285,000 for 2004 from $103,000 for 2003 primarily due to
interest income on cash available for investments.
Provision for Income Taxes
No provision or beneÑt for Federal, state or foreign income taxes was made for 2004 due to the operating
losses and operating loss carryforwards from prior periods incurred in the respective periods. Net operating loss
carryforwards available at December 31, 2004, expiring at various times through the year 2024 and which are
available to oÅset future taxable income, were $62.9 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, 2003 and 2002
Revenues
Total revenues, consisting of recurring, services and license revenues, increased to $60.4 million for 2003
from $55.1 million for 2002.
Recurring revenues increased 51.7% to $29.3 million for 2003 from $19.3 million for 2002 primarily due
to an increase of $5.0 million in subscription revenues recognized under the Original Ceridian Agreement, and
a $4.7 million increase in recurring revenues generated from the Intersourcing OÅering resulting from
additional Intersourcing units sold and maintenance revenues generated from incremental licenses sold.
During 2003, there was an increase of $5.0 million in recurring revenues from the Original Ceridian
Agreement in comparison to 2002. This increase was a result of the duration of revenue recognition in 2003
versus 2002 Ì in 2003, a full year of recurring revenues was recognized whereas in 2002 slightly more than
four months of recurring revenues was recognized. Beginning on August 28, 2002, subscription revenues
generated from the Original Ceridian Agreement of $642,000 per month have been, and are expected to be,
recognized over the minimum term of the contract, which is expected to extend until March 9, 2008. Future
recurring revenues to be recognized from the Original Ceridian Agreement are expected to be comparable to
2003, or $7.7 million per year, through March 9, 2008.
26
Services revenues decreased 0.7% to $23.5 million for 2003 from $23.6 million for 2002 primarily as a
result of a decrease in implementation revenues of $2.7 million primarily resulting from fewer billable hours in
2003 principally caused by the shift towards Intersourcing units, which generally require less time to
implement than license units, partially oÅset by an increase of $2.3 million in services revenue generated from
the Ceridian Services Agreement, which were recognized ratably from February 10, 2003 through Decem-
ber 31, 2003.
License revenues decreased 37.6% to $7.6 million for 2003 from $12.2 million for 2002. The decrease in
license revenues was due to the combination of fewer license units sold, principally due to a shift in targeted
sales (i.e., a sales mix which includes more Intersourcing units sold), and a decrease in sales of UltiPro to
existing clients using the Company's discontinued DOS-based product, UltiPro for Lan (""DOS Clients''). In
the second half of 2002, the Company adjusted its sales and marketing strategy to include sales from its
Intersourcing OÅering, which produces subscription revenues (a component of recurring revenues) rather
than license revenues. In 2003, more units were sold from the Intersourcing OÅering than in the prior year. In
addition, sales of the UltiPro product to DOS Clients ended during the last Ñscal quarter of 2002, shortly
before support for UltiPro for Lan was discontinued (in January 2003). Prior to discontinuing support, 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. More than
half of the DOS Clients converted to the UltiPro product in 2002.
Cost of Revenues
Cost of recurring revenues increased 17.3% to $9.5 million for 2003 from $8.1 million for 2002. The
$1.4 million increase in cost of recurring revenue for 2003 was primarily attributable to additional costs
associated with the Intersourcing OÅering, including depreciation and amortization of related computer
equipment and costs associated with the BellSouth data center, and higher costs of maintenance revenues
principally due to increased labor costs, including beneÑts. As a percentage of recurring revenues, cost of
recurring revenues decreased to 32.4% for 2003 from 41.9% for 2002 primarily due to the absorption of these
expenses in an expanded recurring revenue base.
Cost of services revenues decreased 5.4% to $17.3 million for 2003 from $18.3 million for 2002. The
decrease was due to a decrease of $0.7 million in costs of implementation, principally from lower third-party
consultant fees and, to a lesser extent, a reduction in performance-based bonuses paid to Ultimate Software's
consultants in 2003. Cost of services revenues, as a percentage of services revenues, decreased to 73.6% for
2003 from 77.3% for 2002 primarily as a result of lower expenses.
Cost of license revenues decreased 30.6% to $0.8 million for 2003 from $1.2 million for 2002. The
decrease in cost of license revenues for 2003 was due to lower third-party royalty fees resulting from fewer
licensed units sold and a reduction in the amortization of capitalized software. As a percentage of license
revenues, cost of license revenues increased to 10.6% for 2003 from 9.6% for 2002 primarily as a result of a
decreased license revenue base. Cost of license revenues, as a percentage of license revenues, generally
Öuctuates from period to period principally due to the mix of sales of software products which generate third-
party license fees in each period and Öuctuations in revenues contrasted with Ñxed expenses such as labor costs
and the amortization of capitalized software.
Sales and Marketing
Sales and marketing expenses increased 1.8% to $17.8 million for 2003 from $17.5 million for 2002. The
increase in sales and marketing expenses was primarily due to a $0.8 million increase in labor costs, excluding
sales commissions, and an increase in advertising and marketing costs of $0.2 million, partially oÅset by a
decrease of $0.7 million attributable to lower sales commissions tied to the decrease in license revenues. The
addition of personnel to the sales infrastructure during the three months ended September 30, 2003 was the
main contributing factor for the increase in labor costs in 2003.
27
Research and Development
Research and development expenses increased 3.1% to $18.2 million for 2003 from $17.7 million for
2002. The increase in 2003 was due to increased labor costs of $0.8 million principally resulting from increased
beneÑt costs and additional personnel costs incurred as a result of the June 2003 acquisition of substantially all
of the assets of Hireworks, Inc., a software company that developed, marketed and supported an Internet
recruitment solution.
General and Administrative
General and administrative expenses decreased 14.8% to $5.9 million for 2003 from $6.9 million for 2002
primarily due to a $1.4 million reduction in the provision for doubtful accounts, partially oÅset by increased
labor costs of $0.5 million. The provision for doubtful accounts decreased to $0.2 million for 2003 from
$1.7 million in 2002. This decrease was primarily attributable to three factors: (1) a decrease of $1.6 million in
the balance of accounts receivable, gross of the allowance for doubtful accounts; (2) a decrease of $2.4 million
in individual accounts charged-oÅ during 2003 as compared to 2002; and (3) a decrease of $0.5 million in the
allowance for doubtful accounts. The balance of gross accounts receivable declined principally due to a shift in
targeted sales (i.e., a sales mix which includes more Intersourcing units sold). Intersourcing units typically
have a shorter payment period than license units. Charge-oÅs were lower in 2003 due to the improvement in
the quality of composition of the Company's accounts receivable portfolio. The allowance for doubtful
accounts decreased as a result of the combination of the lower gross accounts receivable balance and the
improvement of the quality of the composition of the accounts receivable portfolio in 2003 as compared to
2002.
Interest Expense
Interest expense decreased 21.9% to $221,000 for 2003 from $283,000 for 2002 primarily due to the
payoÅ of outstanding borrowings under the Credit Facility (deÑned below) during September 2003.
Interest and Other Income
Interest and other income decreased 25.4% to $103,000 for 2003 from $138,000 for 2002 primarily due to
the reduction in funds available for investment during the Ñrst half of 2003.
Provision for Income Taxes
No provision or beneÑt for Federal, state or foreign income taxes was made for 2003 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, 2003, expiring at various times through the year 2023 and which are
available to oÅset future taxable income, were $56.6 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.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly results of operations for each of the quarters in
the years ended December 31, 2004 and 2003. In management's opinion, this unaudited information has been
prepared on the same basis as the audited consolidated Ñnancial statements and includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the
quarters presented. This information should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto, included elsewhere in this Form 10-K.
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
28
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 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.
Dec. 31,
2004
Sep. 30,
2004
Jun. 30,
2004
Mar. 31,
2004
Dec. 31,
2003
Sep. 30,
2003
Jun. 30,
2003
Mar. 31,
2003
Quarters Ended
(Unaudited)
(In thousands, except per share amounts)
Revenues:
RecurringÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,068
6,907
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,533
License ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
20,508
Total revenuesÏÏÏÏÏÏÏÏÏÏ
$10,075
6,079
2,011
18,165
$ 9,207
6,129
2,114
17,450
$ 8,699
5,809
1,397
15,905
$ 8,005
6,667
1,811
16,483
$ 7,364
5,440
2,506
15,310
$ 7,114
5,043
2,064
14,221
$ 6,861
6,328
1,213
14,402
Cost of revenues:
RecurringÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
License ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total cost of revenues ÏÏÏ
3,019
5,051
162
8,232
3,103
4,283
288
7,674
2,957
4,457
270
7,684
2,882
4,657
273
7,812
2,624
4,744
145
7,513
2,305
4,041
182
6,528
5,380
4,414
1,785
11,579
697
(49)
167
815
$
5,158
4,805
1,894
11,857
(1,366)
(34)
69
$(1,331)
5,261
4,543
1,669
11,473
(1,707)
(70)
34
$(1,743)
4,831
4,555
1,458
10,844
(2,751)
(29)
15
$(2,765)
4,991
4,566
1,480
11,037
(2,067)
(43)
33
$(2,077)
4,499
4,807
1,480
10,786
(2,004)
(50)
34
$(2,020)
Operating expenses:
Sales and marketingÏÏÏÏÏÏÏ
Research and development
General and administrative
Total operating expenses
Operating income (loss)
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income ÏÏÏÏ
Net income (loss) ÏÏÏÏÏÏ
Weighted average shares
outstanding:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
25,221
Net earnings (loss) per share:
22,447
22,353
22,353
21,479
21,479
20,680
20,680
20,550
20,550
20,110
20,110
17,515
17,515
16,718
16,718
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.04
$ (0.06)
$ (0.08)
$ (0.13)
$ (0.10)
$ (0.10)
$ (0.14)
$ (0.16)
DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.03
$ (0.06)
$ (0.08)
$ (0.13)
$ (0.10)
$ (0.10)
$ (0.14)
$ (0.16)
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, 2004, the Company had $25.3 million in cash, cash equivalents and investments in
marketable securities, reÖecting a net increase of $11.5 million since December 31, 2003. As of December 31,
2004, the Company had working capital of $3.7 million as compared to a working capital deÑcit of $5.2 million
as of December 31, 2003. The increase in working capital resulted primarily from the additional equity raised
in 2004, partially oÅset by the funding of operations.
Net cash provided by operating activities was $0.3 million for 2004 as compared to net cash used in
operating activities of $8.7 million for 2003. The increase in net cash provided by operating activities was
primarily due to cash received from Ceridian of $5.5 million, in accordance with the payment terms of the
29
2,275
4,057
237
6,569
4,209
4,527
1,293
10,029
(2,377)
(75)
16
2,291
4,435
243
6,969
4,089
4,329
1,618
10,036
(2,603)
(53)
20
$(2,436)
$(2,636)
Original Ceridian Agreement, partially oÅset by an increase in accounts receivable. In February 2002, the
Company received $6.0 million from Ceridian as a prepayment by Ceridian of minimum guaranteed payments
for 2003 due to the Company pursuant to the Original Ceridian Agreement, as amended from time to time,
and the Company received $0.5 million in September 2002 for the early delivery of the general release,
UltiPro 6.0 (also known as ""Evolution''). During 2003, the Company did not receive any cash from Ceridian
under the Original Ceridian Agreement. Guaranteed minimum payments from Ceridian under the Original
Ceridian Agreement of $500,000 per month resumed eÅective January 1, 2004. As of the date of this
Form 10-K, the Company has received $1.0 million from Ceridian during 2005 pursuant to the payment terms
of the Original Ceridian Agreement. In addition, during 2004, the Company received an additional
$0.8 million from Ceridian pursuant to the Extended Ceridian Services Agreement, which expired on
December 31, 2004.
Net cash used in investing activities was $15.3 million for 2004 as compared to $2.3 million for 2003. The
increase in net cash used in investing activities was primarily due to investing in marketable securities
available-for-sale and an increase in purchases of property and equipment, including additional equipment
purchases associated with the Intersourcing operations and the cash purchase in December 2004 of a 5,000
square foot building adjacent to the Company's headquarters which is being used to accommodate the growth
in the Company's operations, partially oÅset by decrease in acquisitions.
Net cash provided by Ñnancing activities was $16.0 million for 2004 as compared to $15.8 million for
2003. The increase in net cash provided by Ñnancing activities in 2004 as compared to 2003 was primarily
related to increased borrowings under the equipment line of the Credit Facility, partially oÅset by a
$1.6 million decrease in net proceeds from issuances of the Company's common stock, $0.01 par value per
share (""Common Stock'') due to the combination of lower net proceeds from private sales of Common Stock
and higher net proceeds from exercises of options to purchase Common Stock. For the year ended
December 31, 2004, the Company had net borrowings of $0.4 million under the equipment line under the
Credit Facility whereas in the year ended December 31, 2003, the Company had net repayments of
$1.3 million under the Credit Facility.
Days sales outstanding, calculated on a trailing three-month basis (""DSO''), as of December 31, 2004
and 2003, were 57 days and 52 days, respectively. The increase in DSO's as of December 31, 2004 was the
result of an increase in accounts receivable attributable to higher license sales and certain BSP sales.
Deferred revenue was $28.5 million at December 31, 2004 as compared to $24.6 million at December 31,
2003. The increase of $3.9 million in deferred revenue was primarily due to the combination of higher deferred
Intersourcing revenues which are recognized over the term of the related contract and higher deferred revenue
from several new BSP sales which are also recognized over the related contract term, partially oÅset by non-
cash amortization of $1.7 million under the Original Ceridian Agreement.
On May 12, 2004, the Company entered into a deÑnitive agreement to sell 1,398,182 newly issued shares
of its Common Stock to three institutional investors in a private placement for gross proceeds of approximately
$15.4 million (the ""Recent Capital Raised''). These shares of Common Stock were sold at $11.00 per share.
After deducting commissions and other stock issuance costs, the Company received approximately $14.4 mil-
lion. The Company is using the net proceeds from the Recent Capital Raised for general corporate purposes,
including working capital and funding the Company's transition from a license model to a business model with
a higher percentage of recurring revenues. The Company Ñled a registration statement with the Securities and
Exchange Commission on Form S-3 (Registration No. 333-115894) covering resales of the Common Stock
by investors, which registration statement was declared eÅective on June 25, 2004.
On July 16, 2003, the Company sold 2,200,000 newly issued shares of its Common Stock to two
institutional investors in a private placement for gross proceeds of approximately $11.7 million. These shares
of Common Stock were sold at $5.30 per share. After deducting commissions and other stock issuance costs,
the Company received approximately $10.6 million. The Company Ñled a registration statement with the
Securities and Exchange Commission on Form S-3 (Registration No. 333-107527) covering resales of the
Common Stock by investors, which registration statement was declared eÅective on December 9, 2003.
30
Certain other shareholders exercised their right to include shares owned by them in such registration
statement on Form S-3.
In addition to the July 16, 2003 private placement, during 2003 the Company sold an aggregate of
1,708,000 newly issued shares of Common Stock and warrants to purchase 170,800 shares of Common Stock
at $4 per share to a group of investors, including Ceridian and some existing shareholders, for gross proceeds of
$6.8 million.
The Company's primary motive for raising additional capital in 2004 and 2003 was to fund the transition
in its business model which shifts some of its UltiPro unit sales to Intersourcing. Management believes the
shift in sales mix helps to produce a more predictable revenue stream by providing recurring revenue and cash
from Intersourcing over the related contract periods, typically 24 months. As Intersourcing units are sold, the
recurring revenue backlog associated with Intersourcing grows, providing visibility for the future and
enhancing the predictability of future revenue streams.
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 27, 2005 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 not to exceed $3.0 million (the
""Revolving Note''), as deÑned, stand-by letters of credit for up to $0.5 million as a component of the
Revolving Note and Ñnancing for eligible equipment purchases for up to $2.0 million with additional limits for
software purchases (the ""Equipment Term Note''). 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, 2004, $4.5 million was available for borrowing under the Credit
Facility with $0.4 million 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. Under the terms of the Credit Facility, the Company may not pay dividends without the prior
written consent of Silicon Valley Bank. The material covenants require that the Company maintain, on a
monthly basis, a minimum quick ratio (representing the ratio of current assets to current liabilities, excluding
deferred revenue) of 1.75 to 1.0 and certain quarterly revenue levels as of the end of each quarter, as provided
in the Credit Facility, as amended. As of December 31, 2004, the Company was in compliance with all
covenants included in the terms of the Credit Facility.
The Company believes that cash and cash equivalents and cash generated from operations 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.
Recent Accounting Literature
In December 2004, the FASB issued SFAS No. 123 (revised 2004), ""Share-Based Payment''
(""SFAS 123R''), which replaces SFAS No. 123, ""Accounting for Stock-Based Compensation''
(""SFAS 123'') and supercedes APB Opinion No. 25, ""Accounting for Stock Issued to Employees.''
SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be
recognized in the Ñnancial statements based on their fair values and the recording of such expense in the
consolidated statements of income. The accounting provisions of SFAS 123R are eÅective for reporting
periods beginning after June 15, 2005. The pro forma disclosures previously permitted under SFAS 123, no
longer will be an alternative to Ñnancial statement recognition. The Company is required to adopt SFAS 123R
in the third quarter of Ñscal 2005. Under SFAS 123R, the Company must determine the appropriate fair value
model to be used for valuing share-based payments, the amortization method for compensation cost and the
transition method to be used at date of adoption. The Company is evaluating the requirements of SFAS 123R
and expects that the adoption of SFAS 123R will have a material impact on the consolidated results of
operations and earnings per share. The Company has not yet determined the method of adoption or the eÅect
31
of adopting SFAS 123R, and has not determined whether the adoption will result in amounts that are similar
to the current pro forma disclosures under SFAS 123 in Note 2 of the Notes to Consolidated Financial
Statements.
In December 2003, the FASB issued a revised Interpretation No. 46, ""Consolidation of Variable Interest
Entities, an interpretation of Accounting Research Bulletin No. 51,'' (""FIN 46R''). FIN 46R requires the
consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a
majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other
Ñnancial interests in the entity. Currently entities are generally consolidated by an enterprise when it has a
controlling Ñnancial interest through ownership of a majority voting interest in the entity. The provisions of
FIN 46R are generally eÅective for existing (prior to February 1, 2003) variable interest relationships of a
public entity no later than the end of the Ñrst reporting period that ends after March 15, 2004. However, prior
to the required application of this interpretation a public entity that is not a small business issuer shall apply
FIN 46R to those entities that are considered to be special-purpose entities no later than the end of the Ñrst
reporting period that ends after December 15, 2003. The adoption of FIN 46R did not have an impact on the
Company's consolidated Ñnancial statements.
OÅ-Balance Sheet Arrangements
The Company does not have any oÅ-balance sheet arrangements (as that term is deÑned in applicable
SEC rules) that are reasonably likely to have a current or future material eÅect on the Company's Ñnancial
condition, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
As of December 31, 2004, the Company's outstanding contractual cash obligations were as follows (in
thousands):
Capital lease obligations (1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other long-term obligations (2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase obligations (3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other long-term liabilities (4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payments Due by Period
Less Than
1 Year
1-3
Years
$ 990
1,775
Ì
Ì
$ 824
3,208
Ì
449
4-5
Years
$ 153
2,968
Ì
Ì
After 5
Years
$ Ì
9,216
Ì
Ì
Total
$ 1,967
17,167
Ì
449
Total contractual cash obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$19,583
$2,765
$4,481
$3,121
$9,216
(1) The Company leases certain equipment under non-cancellable agreements, which are accounted for as
capital leases and expire at various dates through 2006. See Note 9 of the Notes to Consolidated
Financial Statements for information regarding capital lease obligations.
(2) The Company leases corporate oÇce space and certain equipment under non-cancellable operating lease
agreements expiring at various dates. See Note 13 of the Notes to Consolidated Financial Statements for
information regarding operating lease obligations.
(3) Purchase orders or contracts for the purchase of goods and services are not included in the table above.
The Company is not able to determine the aggregate amount of such purchase orders that represent
contractual obligations, as purchase orders may represent authorizations to purchase rather than binding
agreements. The Company does not have signiÑcant agreements for the purchase of goods or services
specifying minimum quantities or set prices.
(4) The Company has a $5.0 million revolving line of credit (the ""Credit Facility'') that expires on May 27,
2005. As of December 31, 2004, $0.4 million was outstanding under the Equipment Term Note of the
Credit Facility, of which $0.3 million is classiÑed as long-term. See Note 10 of the Notes to Consolidated
Financial Statements for information regarding long-term debt. There were no other long-term liabilities,
other than those referred to in the table above, which were payable in cash. Other long-term liabilities in
32
the Company's consolidated balance sheet as of December 31, 2004 include deferred revenues which do
not represent obligations payable in cash. See Note 2 of the Notes to Consolidated Financial Statements
for information regarding deferred revenues.
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.
Market risks. The Company manages market risk in accordance with its investment guideline
objectives, including:
‚ Maximum safety of principal
‚ Maintenance of appropriate liquidity for regular cash needs
‚ Maximum yields in relationship to guidelines and market conditions
‚ DiversiÑcation of risks
‚ Fiduciary control of all investments
The Company targets its portfolio to have maturities of twenty-four months or less. Investments are held
to enhance the preservation of capital and not for trading purposes.
Interest rates. Cash equivalents consist of money market accounts with original maturities of less than
three months. Short-term investments include obligations of U.S. government agencies and corporate debt
securities with ratings of at least doubleÓA by Moody's or Standard and Poor, which limits credit risk.
Interest on the Credit Facility, as amended, which expires on May 28, 2005, is based on 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). As of December 31, 2004, $4.5 million was available for borrowing under the Credit
Facility with $0.4 million outstanding under the Equipment Term Note. As of December 31, 2004, total
investments in marketable securities were $10.5 million. Changes in amounts borrowed or interest rates could
impact the Company's anticipated interest income from interest-bearing cash accounts, or cash equivalents,
investments in marketable securities, as well as interest expense on borrowings under the Credit Facility.
Item 8. Financial Statements and Supplementary Data
INDEX
Report of Independent Registered Public Accounting Firm ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Balance Sheets as of December 31, 2004 and 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003
and 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Stockholders' Equity (DeÑcit) for the Years Ended
December 31, 2004, 2003 and 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003
and 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Page(s)
34
35
36
37
38
39
33
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Ultimate Software Group, Inc.:
We have audited the accompanying consolidated balance sheets of The Ultimate Software Group, Inc.
and subsidiary (the ""Company'') as of December 31, 2004 and 2003, and the related consolidated statements
of operations, stockholders' equity (deÑcit), and cash Öows for each of the years in the three-year period
ended December 31, 2004. 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 audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 consolidated Ñnancial statements referred to above present fairly, in all material
respects, the Ñnancial position of the Company as of December 31, 2004 and 2003, and the results of their
operations and their cash Öows for each of the years in the three-year period ended December 31, 2004, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the eÅectiveness of the Company's internal control over Ñnancial reporting as of
December 31, 2004, based on criteria established in Internal Control Ó Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
March 10, 2005, expressed an unqualiÑed opinion on management's assessment of, and the eÅective operation
of, internal control over Ñnancial reporting.
/s/ KPMG LLP
KPMG LLP
Miami, Florida
March 10, 2005
34
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
As of December 31,
2004
2003
(In thousands, except
share data)
Current assets:
ASSETS
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts receivable, net of allowance for doubtful accounts of $500 and $525 for
2004 and 2003, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term investments in marketable securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepaid expenses and other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property and equipment, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capitalized software, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term investments in marketable securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 14,766
$ 13,783
12,600
8,103
3,114
38,583
9,512
82
2,441
1,928
9,292
Ì
2,709
25,784
7,188
1,234
Ì
1,606
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 52,546
$ 35,812
Current liabilities:
LIABILITIES AND STOCKHOLDERS' EQUITY
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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,202
6,015
25,591
170
928
34,906
952
279
2,885
39,022
$
2,549
5,378
22,277
Ì
818
31,022
796
Ì
2,333
34,151
Commitments and contingencies (Note 13)
Stockholders' equity:
Series A Junior Participating Preferred Stock, $.01 par value, 500,000 shares
authorized, no shares issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred Stock, $.01 par value, 2,000,000 shares authorized, no shares issued ÏÏÏ
Common Stock, $.01 par value, 50,000,000 shares authorized, 22,749,363 and
20,843,935 shares issued in 2004 and 2003, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated comprehensive lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated deÑcitÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock, at cost, 257,647 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
Ì
Ì
227
103,643
(15)
(89,277)
14,578
(1,054)
208
86,760
Ì
(84,253)
2,715
(1,054)
1,661
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
13,524
Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 52,546
$ 35,812
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Ñnancial statements.
35
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
2002
2003
(In thousands, except per share amounts)
2004
Revenues:
Recurring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
License ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$39,049
24,924
8,055
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
72,028
$29,344
23,478
7,594
60,416
$ 19,345
23,634
12,170
55,149
Cost of revenues:
Recurring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
License ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
11,961
18,448
993
Total cost of revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
31,402
Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Research and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
20,630
18,317
6,806
Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
45,753
9,495
17,277
807
27,579
17,788
18,229
5,871
41,888
8,098
18,267
1,163
27,528
17,479
17,675
6,890
42,044
Operating loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(5,127)
(9,051)
(14,423)
Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(182)
285
(221)
103
(283)
138
Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(5,024)
$(9,169)
$(14,568)
Net loss per share Ì basic and diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (0.23)
$ (0.49)
$
(0.90)
Weighted average shares outstanding:
Basic and dilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
21,743
18,738
16,189
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Ñnancial statements.
36
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Comprehensive Accumulated
Treasury Stock
$161
Ì
$ 65,808
Ì
Balance, December 31, 2001 ÏÏ 16,106
Net lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Issuances of Common Stock
from exercise of stock
optionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7
Issuance of Common Stock
from private placement ÏÏÏÏÏ
675
Non-cash issuances of options
to Board to purchase
Common Stock for board
fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase of Treasury Stock ÏÏÏ
Ì
Ì
Balance, December 31, 2002 ÏÏ 16,788
Net lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Issuances of Common Stock
from exercise of stock
options and warrant ÏÏÏÏÏÏÏÏ
Issuance of Common Stock for
private placementÏÏÏÏÏÏÏÏÏÏ
3,908
148
Non-cash issuances of options
to Board to purchase
Common Stock for board
fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Balance, December 31, 2003 ÏÏ 20,844
Ì
Net lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized loss on investments
in marketable securities
available-for-sale ÏÏÏÏÏÏÏÏÏÏ
Comprehensive loss ÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
Issuances of Common Stock
from exercise of stock
options and warrants ÏÏÏÏÏÏÏ
Issuance of Common Stock for
private placementÏÏÏÏÏÏÏÏÏÏ
Non-cash issuances of options
to Board to purchase
Common Stock for board
fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
507
1,398
Ì
7
Ì
Ì
168
Ì
1
39
Ì
208
Ì
Ì
Ì
5
14
Loss
$ Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
17
2,693
84
Ì
68,602
Ì
571
17,455
132
86,760
Ì
Ì
Ì
(15)
Ì
2,287
14,319
Ì
Ì
Ì
Ì
141
Ì
Non-cash compensation
expense for stock option
modiÑcations ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Balance, December 31, 2004 ÏÏ 22,749
Ì
$227
136
$103,643
Ì
$(15)
DeÑcit
Shares
Amount
$(60,516)
(14,568)
Ì
Ì
Ì
Ì
(75,084)
(9,169)
Ì
Ì
Ì
(84,253)
(5,024)
Ì
Ì
Ì
Ì
Ì
Ì
$(89,277)
211
Ì
Ì
Ì
Ì
47
258
Ì
Ì
Ì
Ì
258
Ì
Ì
Ì
Ì
Ì
Ì
Ì
258
$ (863)
Ì
Ì
Ì
Ì
(191)
(1,054)
Ì
Ì
Ì
Ì
(1,054)
Ì
Ì
Ì
Ì
Ì
Ì
Ì
$(1,054)
Total
Stockholders'
Equity
$
4,590
(14,568)
17
2,700
84
(191)
(7,368)
(9,169)
572
17,494
132
1,661
(5,024)
(15)
(5,039)
2,292
14,333
141
136
$ 13,524
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Ñnancial statements.
37
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2002
2003
2004
(In thousands)
$ (5,024)
$(9,169)
$(14,568)
Cash Öows from operating activities:
Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-cash issuances of options to Board to purchase Common
Stock for board fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-cash compensation expense for stock option modiÑcations ÏÏÏÏ
Changes in operating assets and liabilities:
Accounts receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepaid expenses and other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5,055
419
141
136
(3,727)
(405)
(471)
(347)
637
3,866
5,032
213
132
Ì
876
(1,436)
(838)
(144)
(151)
(3,205)
(8,690)
Net cash provided by (used in) operating activities ÏÏÏÏÏÏÏÏ
280
Cash Öows from investing activities:
Purchases of marketable securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AcquisitionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(10,560)
(4,695)
Ì
Ì
(1,953)
(350)
Net cash used in investing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(15,255)
(2,303)
Cash Öows from Ñnancing activities:
Principal payments on capital lease obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net proceeds from issuances of Common StockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net borrowings (repayments) under Credit FacilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of Treasury Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash provided by Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net increase in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1,116)
16,625
449
Ì
15,958
983
13,783
(918)
18,066
(1,346)
Ì
15,802
4,809
8,974
Cash and cash equivalents, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 14,766
$13,783
$
8,974
Supplemental disclosure of cash Öow information:
Cash paid for interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
72
$
144
$
216
Supplemental disclosure of non-cash investing and Ñnancing activities:
Ó The Company entered into capital lease obligations to acquire new equipment totaling $1,382, $1,404
and $1,007 in 2004, 2003 and 2002, respectively
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Ñnancial statements.
38
5,838
1,657
84
Ì
1,968
(437)
(138)
792
(19)
7,600
2,777
Ì
(4,263)
Ì
(4,263)
(1,876)
2,717
1,346
(191)
1,996
510
8,464
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 payroll and workforce management 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.
Investments in Marketable Securities
The Company classiÑes its investments in marketable securities with readily determinable fair values as
securities available-for-sale in accordance with Statement of Financial Accounting Standards No. 115,
""Accounting for Certain Investments in Debt and Equity Securities'' (""FAS 115''). The Company has
classiÑed all investments as available-for-sale. Available-for-sale securities consist of debt and equity
securities not classiÑed as trading securities nor as securities to be held to maturity. Unrealized holding gains
and losses on securities available-for-sale are reported as a net amount in accumulated other comprehensive
loss in stockholders' equity until realized. Gains and losses on the sale of securities available-for-sale are
determined using the speciÑc identiÑcation method.
39
The amortized cost and market value of the Company's investments in available-for-sale securities at
December 31, 2004 are shown in the table below. There were no such investments held at December 31, 2003
or during the Ñscal year then ended (in thousands).
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Market
Value
Investments in marketable securities:
U.S. government obligations ÏÏÏÏÏÏÏÏÏ
Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏÏ
$ 5,863
4,697
$ Ì
Ì
Cash equivalents:
U.S. government obligations ÏÏÏÏÏÏÏÏÏ
Corporate debt securities ÏÏÏÏÏÏÏÏÏÏÏÏ
10,560
3,631
2,520
6,151
Ì
1
Ì
1
$ 6
10
16
Ì
Ì
Ì
$ 5,857
4,687
10,544
3,632
2,520
6,152
Total investments, available-for-sale ÏÏÏÏÏ
$16,711
$ 1
$16
$16,696
The amortized cost and estimated fair value of the available-for-sale securities by contractual maturity at
December 31, 2004 are shown below (in thousands):
Amortized
Cost
Estimated
Fair Value
Due in one year or lessÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$14,261
2,450
$14,255
2,441
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$16,711
$16,696
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and amortization. Property and
equipment is depreciated using the straight-line method over the estimated useful lives of the assets, which
range from two to twenty years. Leasehold improvements and assets under capital leases are amortized over
the shorter of the life of the asset or the term of the lease over periods ranging from two to 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
Sources of revenue for the Company include:
‚ Sales of perpetual licenses for UltiPro Workforce Management Software (""UltiPro''), 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;
‚ Sales of perpetual licenses for UltiPro in conjunction with services to host the UltiPro application
(""Hosting Services'');
‚ Sales of the right to use UltiPro, including Hosting Services (the ""Intersourcing OÅering'');
‚ Sales of Hosting Services on a stand-alone basis to customers who already own a perpetual license or
are simultaneously acquiring a perpetual license for UltiPro (""Base Hosting'');
‚ Sales of other services including implementation, training and other services, including the provision of
payroll-related forms and the printing of Form W-2's for certain customers, as well as services provided
40
to business service providers (""BSPs'') in 2004 and 2003,principally Ceridian Corporation (""Cer-
idian'') pursuant to the Ceridian Services Agreements (deÑned below); and
‚ Recurring revenues derived from (1) maintenance revenues generated from maintaining, supporting
and providing periodic updates for the Company's software and (2) subscription revenues generated
from per-employee-per-month (""PEPM'') fees earned through the Intersourcing OÅering, Base
Hosting and the business service provider (""BSP'') sales channel, as well as revenues generated from
the Original Ceridian Agreement (deÑned below).
Perpetual Licenses for UltiPro Sold With or Without Hosting Services
Sales of perpetual licenses for UltiPro and sales of perpetual licenses for UltiPro in conjunction with
Hosting Services are multiple-element arrangements that involve the sale of software and consequently fall
under the guidance of Statement of Position (""SOP'') 97-2, ""Software Revenue Recognition,'' for revenue
recognition.
The Company licenses software under non-cancelable license agreements and provides services including
maintenance, training and implementation consulting services. In accordance with the provisions of SOP 97-2
license revenues are generally recognized when (1) a non-cancelable license agreement has been signed by
both parties, (2) the product has been shipped, (3) no signiÑcant vendor obligations remain and (4) collec-
tion of the related receivable is considered probable. To the extent any one of these four criteria is not satisÑed,
license revenue is deferred and not recognized in the consolidated statement of operations until all such
criteria are met.
For multiple-element software arrangements, each element of the arrangement is analyzed and the
Company allocates a portion of the total fee under the arrangement to the elements based on vendor-speciÑc
objective evidence of fair value of the element (""VSOE''), regardless of any separate prices stated within the
contract for each element. Fair value is considered the price a customer would be required to pay when the
element is sold separately.
The residual method is used to recognize revenue when a license agreement includes one or more
elements to be delivered at a future date and VSOE of the fair value of all undelivered elements exists. The
fair value of the undelivered elements is determined based on the historical evidence of stand-alone sales of
these elements to third parties. Undelivered elements in a license arrangement typically include maintenance,
training and implementation services (the ""Standard Undelivered Elements''). The fair value for maintenance
fees is based on the price of the services sold separately, which is determined by the annual renewal rate
historically and consistently charged to customers (the ""Maintenance Valuation''). Maintenance fees are
generally priced as a percentage of the related license fee. The fair value for training services is based on
standard pricing (i.e., rate per training day charged to customers for class attendance), taking into
consideration stand-alone sales of training services through year-end seminars and historically consistent
pricing for such services (the ""Training Valuation''). The fair value for implementation services is based on
standard pricing (i.e., rate per hour charged to customers for implementation services), taking into
consideration stand-alone sales of implementation services through special projects and historically consistent
pricing for such services (the ""Implementation Valuation''). Under the residual method (the ""Residual
Method''), the fair value of the undelivered elements is deferred and the remaining portion of the arrangement
fee attributable to the delivered element, the license fee, is recognized as revenue. If VSOE for one or more
undelivered elements does not exist, the revenue is deferred on the entire arrangement until the earlier of the
point at which (i) such VSOE does exist or (ii) all elements of the arrangement have been delivered.
Perpetual licenses of UltiPro sold without Hosting Services typically include a license fee and the
Standard Undelivered Elements. Fair value for the Standard Undelivered Elements is based on the
Maintenance Valuation, the Training Valuation and the Implementation Valuation. The delivered element of
the arrangement, the license fee, is accounted for in accordance with the Residual Method.
Perpetual licenses of UltiPro sold with Hosting Services typically include a license fee, the Standard
Undelivered Elements and Hosting Services. Fair value for the Standard Undelivered Elements is based on
41
the Maintenance Valuation, the Training Valuation and the Implementation Valuation. Hosting Services are
delivered to customers on a PEPM basis over the term of the related customer contract (""Hosting PEPM
Services''). Upfront fees charged to customers represent fees for the hosting infrastructure, including
hardware costs, third-party license fees and other upfront costs incurred by the Company in relation to
providing such services (""Hosting Upfront Fees''). Hosting PEPM Services and Hosting Upfront Fees
(collectively, ""Hosting Services'') represent undelivered elements in the arrangement since their delivery is
over the course of the related contract term. The fair value for Hosting Services is based on standard pricing
(i.e., rate charged per-employee-per-month), taking into consideration stand-alone sales of Hosting Services
through the sale of such services to existing customers (i.e., those who already own the UltiPro perpetual
license at the time Hosting Services are sold to them) and historically consistent pricing for such services (the
""Hosting Valuation''). The delivered element of the arrangement, the license fee, is accounted for in
accordance with the Residual Method.
The Company's customer contracts are non-cancelable agreements. The Company does not provide for
rights of return or price protection on its software. The Company provides a limited warranty that its software
will perform in accordance with user manuals for varying periods, which are generally less than one year from
the contract date. The Company's customer contracts generally do not include conditions of acceptance.
However, if conditions of acceptance are included in a contract or uncertainty exists about customer
acceptance of the software, license revenue is deferred until acceptance occurs.
Sales Generated from the Intersourcing OÅering
Subscription revenues generated from the Intersourcing OÅering, 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.
The elements that typically exist in Intersourcing arrangements include hosting services, the right to use
UltiPro, maintenance of UltiPro (i.e., product enhancements and customer support) and professional services
(i.e., implementation services and training in the use of UltiPro). The pricing for hosting services, the right to
use UltiPro and maintenance of UltiPro is bundled (the ""Bundled Elements''). Since these three Bundled
Elements are components of recurring revenues in the consolidated statements of operations, allocation of fair
values to each of the three elements is not necessary and they are not reported separately. Fair value for the
Bundled Elements, as a whole, is based upon evidence provided by the Company's pricing for Intersourcing
arrangements sold separately. The Bundled Elements are provided on an ongoing basis and represent
undelivered elements under EITF 00-21; they are recognized on a monthly basis as the services are performed,
once the customer has begun to process payrolls used to pay its employees (i.e., goes ""Live'').
Implementation and training services (the ""Professional Services'') provided for Intersourcing arrange-
ments are priced on a time and materials basis and are recognized as services revenue in the consolidated
statements of operations as the services are performed. Fair value for Professional Services is based on the
respective Training Valuation and Implementation Valuation. Under EITF 00-21, fair value is assigned to
service elements in the arrangement based on their relative fair values, using the prices established when the
services are sold on a stand-alone basis. If evidence of the fair value of one or more undelivered elements does
not exist, the revenue is deferred and recognized when delivery of those elements occurs or when fair value can
be established. The Company believes that applying EITF 00-21 to Intersourcing arrangements as opposed to
applying SOP 97-2 is appropriate given the nature of the arrangements whereby the customer has no right to
the UltiPro license.
Sales of Base Hosting Services
Subscription revenues generated from Base Hosting are recognized in accordance with EITF 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
42
arrangements that include a license right to the software. The elements that typically exist for Base Hosting
arrangements include hosting services and implementation services. Base Hosting is diÅerent than Intersourc-
ing arrangements (described above) in that the customer already owns a perpetual license or is purchasing a
perpetual license for UltiPro and is purchasing hosting services subsequently in a separate transaction whereas,
with Intersourcing, the customer is purchasing the right to use (not license) UltiPro. Implementation services
provided for Base Hosting arrangements are substantially less than those provided for Intersourcing
arrangements since UltiPro is already implemented in Base Hosting arrangements and only needs to be
transitioned to a hosted environment. Fair value for hosting services is based on the Hosting Valuation. Fair
value for implementation services is assigned in accordance with guidelines provided by SOP 97-2 based on
the Implementation Valuation.
Services, including Implementation and Training Services
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 services provided to BSPs, including
those related to the Ceridian Services Agreements through December 31, 2004, 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 depending
on the speciÑc terms of the arrangement.
Arrangement fees related to Ñxed-fee implementation services contracts are recognized using the
percentage of completion accounting method, which involves the use of estimates. Percentage of completion is
measured at each reporting date based on hours incurred to date compared to total estimated hours to
complete. If a suÇcient basis to measure the progress towards completion does not exist, revenue is recognized
when the project is completed or when the Company receives Ñnal acceptance from the customer.
Recurring Revenues
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 PEPM fees earned through the Intersourcing OÅering, Base Hosting
and the business service provider (BSP) sales channel (deÑned below), as well as revenues generated from
the Original 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. To the extent there are upfront fees associated with the
Intersourcing OÅering, Base Hosting or the BSP sales channel, subscription revenues are recognized ratably
over the term of the related contract upon the delivery of the product and services. PEPM fees from the
Intersourcing OÅering, Base Hosting and the BSP sales channel are recognized as subscription revenue as the
services are delivered. Commencing on August 28, 2002, subscription revenues generated from the Original
Ceridian Agreement are recognized ratably over the minimum term of the contract, which is expected to
extend until March 9, 2008 (7 years after the eÅective date of the Original Ceridian Agreement). Subscription
revenues of approximately $642,000 per month are based on guaranteed minimum payments from Ceridian
Corporation of approximately $42.7 million over the contract term, including $23.0 million received to date.
Maintenance services provided to customers include product updates and technical support services.
Product updates are included in general releases to the Company's customers and are distributed on a periodic
basis. Such updates may include, but are not limited to, product enhancements, payroll tax updates, additional
security features or bug Ñxes. All features provided in general releases are unspeciÑed upgrade rights. To the
extent speciÑed upgrade rights or entitlements to future products are included in a multi-element arrange-
ment; revenue is recognized upon delivery provided fair value for the elements exists. In multi-element
arrangements that include a speciÑed upgrade right or entitlement to a future product, if fair value does not
exist for all undelivered elements, revenue for the entire arrangement is deferred until all elements are
delivered or when fair value can be established.
43
Subscription revenues generated from the BSP sales channel include both the right to use UltiPro and
maintenance. The BSP is charged a fee on a PEPM basis and, in several cases, is subject to a guaranteed
monthly minimum amount for the term of the related agreement. Revenue is recognized on a PEPM basis. To
the extent the BSP pays the Company a one-time upfront fee, the Company accounts for such fee by
recognizing it as subscription revenue over the minimum term of the related agreement.
The Company recognizes revenue in accordance with the Securities Exchange Commission (""SEC'')
StaÅ Accounting Bulletin No. 101, ""Revenue Recognition in Financial Statements'' (""SAB No. 101'') and
the SEC StaÅ Accounting Bulleting No. 104, ""Revenue Recognition'' (""SAB No. 104''). 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, SAB No. 101 and SAB No. 104.
Concentration of Revenues
During the years ended December 31, 2004 and 2003, Ceridian accounted for 15.5% and 16.6%,
respectively, of total revenues. Ceridian did not account for more than 10% of total revenues in 2002. No other
customer accounted for more than 10% of total revenues in the periods presented. Due to the signiÑcant
concentration of total revenues with this single customer, the Company has exposure if this customer loses its
credit worthiness. See Note 3.
The composition of the revenues recognized from Ceridian, as a percentage of total revenues, for the
years ended December 31, 2004, 2003 and 2002 was as follows:
Recurring revenues
Services revenues
Total revenues
2004
2003
2002
10.9%
4.6
12.8%
3.8
15.5%
16.6%
4.8%
Ì
4.8%
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
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.
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.
44
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. There were no software costs capitalized during 2004, 2003
or 2002. Annual amortization is based on the greater of the amount computed using (a) the ratio that current
gross revenues for the related product bears to the total of current and anticipated future gross revenues for
that product or (b) the straight-line method over the remaining estimated economic life of the product
including the period being reported on. Capitalized software is amortized using the straight-line method over
the estimated useful lives of the assets, which are typically three years. Amortization of capitalized software
was $1,151,000, $1,519,000 and $1,792,000 in 2004, 2003 and 2002, respectively. Accumulated amortization
of capitalized software was $5.5 million and $4.4 million as of December 31, 2004 and 2003, respectively.
Capitalized software, net of amortization, was $0.1 million and $1.2 million as of December 31, 2004 and
2003, respectively. The Company evaluates the recoverability of capitalized software based on estimated
future gross revenues reduced by the estimated costs of completing the products and of performing
maintenance and customer support. If the Company's gross revenues were to be signiÑcantly less than its
estimates, the net realizable value of the Company's capitalized software intended for sale would be impaired,
which could result in the write-oÅ of all or a portion of the unamortized balance of such capitalized software.
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.
Fair Value of Financial Instruments
The Company's Ñnancial instruments, consisting of cash and cash equivalents, investments in marketable
securities, accounts receivable, accounts payable, long-term debt and capital lease obligations approximated
fair value as of December 31, 2004 and 2003.
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, 2004. See Note 12.
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 3.5% for 2004, 3.1%
for 2003 and 2.7% for 2002, a dividend yield of 0% for all three years presented, expected volatility of 46% for
45
2004, 48% for 2003 and 68% for 2002 and an expected life of four years for 2004 and 2003 and three years for
2002. The Company's pro forma information is as follows (in thousands, except per share amounts):
For the Years Ended December 31,
2002
2003
2004
Net loss:
As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Compensation expense, pro forma ÏÏÏÏÏÏÏÏ
$(5,024)
(1,997)
$ (9,169)
(1,424)
$(14,568)
(2,393)
Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(7,021)
$(10,593)
$(16,961)
Loss Per Share:
As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Compensation expense, pro forma ÏÏÏÏÏÏÏÏ
$ (0.23)
(0.09)
$
(0.49)
(0.08)
$
(0.90)
(0.15)
Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (0.32)
$
(0.57)
$
(1.05)
The weighted average grant date fair value per share of options granted during 2004, 2003 and 2002 were
$5.02, $2.22 and $2.16, respectively.
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,
2003
2004
2002
Weighted average shares outstanding ÏÏÏÏÏÏÏÏÏ
EÅect of dilutive stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
21,743
Ì
Dilutive shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
21,743
18,738
Ì
18,738
16,189
Ì
16,189
Other common stock equivalents (i.e., stock options and warrants) not included in the computation of
diluted net loss per share, as their impact is antidilutive, totaled 5,935,000, 5,797,000 and 4,821,000 for 2004,
2003 and 2002, respectively.
Comprehensive Income (Loss)
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 (loss)) of all
changes in equity of an enterprise that result from transactions and other economic events in a period other
than transactions with owners. Accumulated other comprehensive loss, as presented on the accompanying
consolidated balance sheets and statements of stockholders' equity, consists entirely of unrealized gains on
available-for-sale securities.
Stock-Based Compensation
The Company adopted SFAS No. 148, ""Accounting for Stock-Based CompensationÌTransition and
DisclosureÌAn Amendment of SFAS No. 123'' (""SFAS No. 148'') in December 2002. SFAS No. 148
46
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 No. 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 Company accounted for stock-based
compensation in accordance with SFAS No. 148.
Guarantees
The Company adopted FASB Interpretation No. 45, ""Guarantor's Accounting and Disclosure Require-
ments for Guarantees, Including Indirect Guarantees of Indebtedness of Others,'' (""FIN 45'') on January 1,
2003. The provision for initial recognition and measurement of liability is applied on a prospective basis to
guarantees issued or modiÑed after December 31, 2002. FIN 45 expands previously issued accounting
guidance and disclosure requirements for certain guarantees and requires recognition of an initial liability for
the fair value of an obligation assumed by issuing a guarantee. As an element of standard commercial terms in
its standard sales contracts for UltiPro, the Company includes an indemniÑcation clause that indemniÑes the
customer against certain liabilities and damages arising from any claims of patent, copyright, or other
proprietary rights of any third party. Due to the nature of the intellectual property indemniÑcation provided to
its customers, the Company can not estimate the fair value, nor determine the total nominal amount, of the
indemniÑcation until such time as a claim for such indemniÑcation is made. In the event of a claim made
against the Company under such provision, the Company evaluates estimated losses for such indemniÑcation
under SFAS No. 5, ""Accounting for Contingencies,'' as interpreted by FIN 45, considering such factors as the
degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount
of loss. To date, the Company has not had any claims made against it under such provision and, accordingly,
has not accrued any liabilities related to such indemniÑcations in its unaudited condensed consolidated
Ñnancial statements.
Segment Information
The Company adopted SFAS No. 131, ""Disclosures about Segments of an Enterprise and Related
Information,'' eÅective December 31, 1998 (""SFAS No. 131''). SFAS No. 131 establishes standards for the
way that public companies report selected information about operating segments in annual and interim
Ñnancial reports to shareholders. It also establishes standards for related disclosures about an enterprise's
business segments, products, services, geographic areas and major customers. The Company operates its
business as a single segment.
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 reimburse-
ments 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 accompany-
ing consolidated statements of operations, were $1.0 million, $1.3 million and $1.2 million for 2004, 2003 and
2002 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 December 2004, the FASB issued SFAS No. 123 (revised 2004), ""Share-Based Payment''
(""SFAS 123R''), which replaces SFAS No. 123, ""Accounting for Stock-Based Compensation''
(""SFAS 123'') and supercedes APB Opinion No. 25, ""Accounting for Stock Issued to Employees.''
SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be
recognized in the Ñnancial statements based on their fair values and the recording of such expense in the
47
consolidated statements of operations. The accounting provisions of SFAS 123R are eÅective for reporting
periods beginning after June 15, 2005. The Company is required to adopt the provisions of SFAS 123R
eÅective July 1, 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an
alternative to Ñnancial statement recognition. Under SFAS 123R, the Company must determine the
appropriate fair value model to be used for valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at date of adoption. The Company has not yet
determined the method of adoption or the eÅect of adopting SFAS 123R, and has not determined whether the
adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.
In December 2003, the FASB issued a revised Interpretation No. 46, ""Consolidation of Variable Interest
Entities, an interpretation of Accounting Research Bulletin No. 51,'' (""FIN 46R''). FIN 46R requires the
consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a
majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other
Ñnancial interests in the entity. Currently entities are generally consolidated by an enterprise when it has a
controlling Ñnancial interest through ownership of a majority voting interest in the entity. The provisions of
FIN 46R are generally eÅective for existing (prior to February 1, 2003) variable interest relationships of a
public entity no later than the end of the Ñrst reporting period that ends after March 15, 2004. However, prior
to the required application of this interpretation a public entity that is not a small business issuer shall apply
FIN 46R to those entities that are considered to be special-purpose entities no later than the end of the Ñrst
reporting period that ends after December 15, 2003. The adoption of FIN 46R did not have an impact on the
Company's consolidated Ñnancial statements.
3. SIGNIFICANT TRANSACTIONS
Original Ceridian Agreement
During 2001, Ultimate Software and Ceridian Corporation (""Ceridian'') reached an agreement, as
amended in 2002, which granted Ceridian a non-exclusive license to use UltiPro software as part of an on-line
oÅering that Ceridian can market primarily to businesses with under 500 employees (the ""Original Ceridian
Agreement''). Ceridian marketed that solution under the name SourceWeb.
Under the agreement, Ceridian is responsible for all marketing costs and expenses, and must sell the
licensed software on a per period, per employee, per paycheck basis or other repetitive payment model.
Ceridian is required to pay the Company a monthly license fee based on the number of employees paid using
the licensed software. These payments are subject to a minimum monthly payment of $500,000 per month
with increases of 5% per annum, compounded beginning in January 2006. The maximum monthly payment is
$1.0 million, subject to increases of 5% per annum, compounded. The aggregate minimum payments that
Ceridian is obligated to pay Ultimate Software under the Original Ceridian Agreement over the minimum
term of the agreement is $42.7 million. To date, Ceridian has paid to Ultimate Software a total of
$23.0 million under the Original Ceridian Agreement. The earliest date upon which the Ceridian Agreement
can be terminated by either party (except for an uncured material breach) is March 9, 2008, resulting in an
expected minimum term of 7 years. Ceridian retains certain rights to use the software upon termination.
During December 2004, RSM McGladrey Employer Services, an existing business service provider of
Ultimate Software's, acquired Ceridian's SourceWeb HR/payroll and self-service product and existing
SourceWeb base of small and midsize business customers throughout the United States (the ""RSM
Acquisition''). The Ñnancial terms of the Original Ceridian Agreement have not changed as a result of the
RSM Acquisition. Ceridian will continue to be Ñnancially obligated to pay Ultimate Software a minimum fee
of $500,000 per month with increases of 5% per annum, compounded beginning in January 2006. Ultimate
Software expects to continue to recognize a minimum of $642,000 per month in recurring subscription
revenues from the Original Ceridian Agreement until its termination.
Ceridian Services Agreements
On April 7, 2004, the Company and Ceridian extended their services agreement which expired on
December 31, 2003 (the ""Extended Ceridian Services Agreement''). Under the Extended Ceridian Services
48
Agreement, which was eÅective January 1, 2004 through September 30, 2004, Ceridian was obligated to pay
Ultimate Software a total of $2.5 million in three equal installments in exchange for services provided by
Ultimate Software during the term of that agreement. All three installment payments due under the Extended
Services Agreement were received by the Company through July 2004. During October 2004, the Extended
Ceridian Services Agreement was further extended until December 31, 2004 for a fee of $0.8 million, received
in a single installment in November 2004. Services revenue from the Extended Ceridian Services Agreement
was recognized on a straight-line basis from January 1, 2004 through December 31, 2004. The Extended
Ceridian Services Agreement expired on December 31, 2004 and was not renewed.
4. INVESTMENTS IN MARKETABLE SECURITIES
Investments in marketable securities consist entirely of equity securities available-for-sale. Included in
accumulated other comprehensive loss for 2004 is $15,558 of unrealized loss on trading securities held at year
end. There was no unrealized gain or loss in 2003 and 2002 as no such securities were held during those
periods.
5. ACQUISITION
On June 9, 2003, the Company purchased substantially all of the assets of HireWorks, Inc., a software
company that developed, marketed and supported an Internet recruitment solution. The assets acquired
included customer contracts, the source code for its software and computer equipment. The Company has
accounted for this transaction as a purchase. The resulting intangible asset related to the customer contracts
acquired is being amortized over 26 months. The Company had no acquisitions in 2004.
6. 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. There were no repurchases of the Company's Common Stock during 2004 and 2003.
During 2002, the Company purchased 46,150 shares of the Company's Common Stock under the Stock
Repurchase Plan at an average cost of $4.14 per share. As of December 31, 2004 and 2003, the Company had
purchased 257,647 shares of the Company's Common Stock under the Stock Repurchase Plan.
7. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
Sales commissions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other items individually less than 5% of total current
As of December 31,
2003
2004
$1,258
$1,246
liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4,757
4,132
$6,015
$5,378
49
8. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
As of December 31,
2003
2004
Computer equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Leasehold improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Furniture and Ñxtures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BuildingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 21,073
4,038
1,306
670
655
$ 16,473
3,952
1,281
Ì
Ì
Less accumulated depreciation and amortization ÏÏÏÏ
27,742
(18,230)
21,706
(14,518)
$
9,512
$
7,188
Included in property and equipment is equipment acquired under capital leases as follows (in thousands):
Equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less accumulated amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 7,543
(6,057)
$ 6,161
(4,941)
$ 1,486
$ 1,220
As of December 31,
2003
2004
Depreciation and amortization expense on property and equipment totaled $3,754,000, $3,424,000 and
$3,823,000, for the years ended December 31, 2004, 2003 and 2002, respectively.
9. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under noncancellable agreements, which are accounted for as
capital leases and expire at various dates through 2007. Interest rates on these leases range from 1.0% to
10.0%. The annual maturities of the capital lease obligations are as follows as of December 31, 2004 (in
thousands):
Year
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less amount representing interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amount
$ 990
824
153
1,967
(87)
Lease obligations reÖected as current ($928) and non-current
($952) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,880
10. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
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 27, 2005 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 not to exceed $3.0 million (the
""Revolving Note''), as deÑned, stand-by letters of credit for up to $0.5 million as a component of the
Revolving Note and Ñnancing for eligible equipment purchases for up to $2.0 million with additional limits for
software purchases (the ""Equipment Term Note''). The Equipment Term Note is payable in 36 equal
50
monthly installments, plus interest at Prime Rate plus 1%. The maximum amount available under the Credit
Facility is $5.0 million. At December 31, 2004, $4.5 million was available for borrowing under the Credit
Facility with $0.4 million 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. Under the terms of the Credit Facility, the Company may not pay dividends without the prior
written consent of Silicon Valley Bank. The material covenants require that the Company maintain, on a
monthly basis, a minimum quick ratio (representing the ratio of current assets to current liabilities, excluding
deferred revenue) of 1.75 to 1.0 and certain quarterly revenue levels as of the end of each quarter, as provided
in the Credit Facility, as amended. As of December 31, 2004, the Company was in compliance with all
covenants included in the terms of the Credit Facility.
11. INCOME TAXES
No provision or beneÑt for Federal or state income taxes was made for 2004, 2003 and 2002 due to the
operating losses incurred in the respective periods.
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,
2002
2003
2004
Income tax beneÑt at statutory Federal tax rate ÏÏÏÏÏÏÏ
State and local income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non deductible expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(1,758)
(289)
320
1,752
(25)
$(3,210)
(527)
248
3,514
(25)
$(5,099)
(838)
210
5,768
(41)
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 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,
2003
2004
2002
Deferred tax assets:
Net operating losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accruals not currently deductible ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 25,640
4,467
1,102
85
204
3
$ 23,092
4,160
904
227
214
3
$ 17,851
6,264
835
177
408
3
Gross deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
31,501
(31,177)
28,600
(27,959)
25,538
(24,233)
Net deferred tax assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
324
641
1,305
Deferred tax liabilities:
Software development costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepaid commissionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(34)
(290)
(324)
(502)
(139)
(641)
(1,121)
(184)
(1,305)
Net deferred taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Ì $
Ì $
Ì
51
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, 2004,
approximately $2,180,000 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. Of
the change in the valuation allowance for 2004, 2003 and 2002, approximately $1,466,000, $212,000 and
$4,000, respectively, is attributable to exercise of non-statutory employee stock options.
At December 31, 2004, the Company had approximately $62,900,000 of net operating loss carryforwards
for Federal income tax reporting purposes available to oÅset future taxable income. Of the total net operating
loss carryforwards, approximately $5,350,000 is attributable to deductions from the exercise of non-statutory
employee stock options. The carryforwards expire through 2024. Utilization of such net operating losses may
be limited as a result of cumulative ownership changes in the Company's equity instruments.
12. STOCKHOLDERS' EQUITY
Private Sales of Common Stock
On May 12, 2004, the Company entered into a deÑnitive agreement to sell 1,398,182 newly issued shares
of the Company's common stock, par value $0.01 per share (the ""Common Stock'') to three institutional
investors in a private placement for gross proceeds of approximately $15.4 million (the ""Recent Capital
Raised''). These shares of Common Stock were sold at $11.00 per share. After deducting commissions and
other stock issuance costs, the Company received approximately $14.4 million. The Company is using the net
proceeds from the Recent Capital Raised for general corporate purposes, including working capital and
funding the Company's transition from a license model to a business model with a higher percentage of
recurring revenues. The Company Ñled a registration statement with the Securities and Exchange Commis-
sion on Form S-3 (Registration No. 333-115894) covering resales of the Common Stock by investors, which
registration statement was declared eÅective on June 25, 2004.
From January 1, 2003 through July 16, 2003, the Company raised an aggregate of approximately
$17.5 million of capital, net of estimated stock issuance costs, through the private sales of (i) a total of
1,708,000 shares of the Common Stock, and warrants to purchase an aggregate 170,800 shares of Common
Stock at $4.00 per share to investors, including Ceridian Corporation and some existing shareholders; and
(ii) a total of 2,200,000 shares of Common Stock at $5.30 per share, before stock issuance costs, to two
institutional investors.
Stock-Based Compensation
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 fair 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, 2004, options to purchase 2,405,525 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 the grant. Options granted to non-employee Board members prior to December 31, 2004
are fully exercisable upon grant date.
52
A summary of stock options under the Company's Plan as of December 31, 2004, 2003 and 2002, and
changes during the years then ended, is presented below:
Outstanding at December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Canceled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Outstanding at December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Canceled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Outstanding at December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Canceled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shares
4,596,241
345,769
(7,275)
(205,461)
4,729,274
1,018,814
(135,495)
(56,445)
5,556,148
674,756
(478,446)
(14,153)
Outstanding at December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5,738,305
Weighted
Average
Exercise Price
$ 6.06
3.54
3.92
6.58
$ 5.84
5.93
3.86
5.43
$ 5.89
12.04
4.55
8.49
$ 6.70
The following table summarizes information about stock options outstanding under the Plan at
December 31, 2004:
Range of Exercise
Prices
Contractual Life Weighted-Average
Number
(Years)
Exercise Price
Number
Weighted-Average
Exercise Price
Options Outstanding
Weighted-Average
Remaining
Options Exercisable
$0.89Ì$3.38 ÏÏÏÏÏÏÏÏ
$3.38Ì$4.23 ÏÏÏÏÏÏÏÏ
$4.25Ì$5.16 ÏÏÏÏÏÏÏÏ
$6.24Ì$7.00 ÏÏÏÏÏÏÏÏ
$7.21Ì$7.21 ÏÏÏÏÏÏÏÏ
$7.63Ì$7.63 ÏÏÏÏÏÏÏÏ
$7.75Ì$9.40 ÏÏÏÏÏÏÏÏ
$10.00Ì$11.53 ÏÏÏÏÏÏ
$11.76Ì$11.76 ÏÏÏÏÏÏ
$13.05Ì$13.05 ÏÏÏÏÏÏ
961,575
724,398
787,261
98,387
826,842
573,844
803,654
585,894
13,450
363,000
$0.89Ì$13.05 ÏÏÏÏÏÏÏ
5,738,305
6.39
7.78
3.65
4.87
2.82
4.80
6.49
6.43
9.30
9.80
5.73
$ 2.81
3.88
4.97
6.57
7.21
7.63
8.60
10.61
11.76
13.05
$ 6.70
954,325
391,384
787,261
85,387
826,842
573,844
633,776
383,512
3,366
90,938
4,730,635
$ 2.80
3.85
4.97
6.62
7.21
7.63
8.41
10.24
11.76
13.05
$ 6.23
53
A summary of warrants to purchase shares of the Company's Common Stock as of December 31, 2004,
2003 and 2002, and changes during the years then ended, is presented below:
Outstanding at December 31, 2001ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
GrantedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CanceledÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Outstanding at December 31, 2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
GrantedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CanceledÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Outstanding at December 31, 2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
GrantedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CanceledÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shares
Ì
67,500
Ì
Ì
67,500
170,800
(12,500)
Ì
225,800
Ì
(28,750)
Ì
Outstanding at December 31, 2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
197,050
Weighted
Average
Exercise Price
$ Ì
4.00
4.00
4.00
$4.00
4.00
4.00
4.00
$4.00
4.00
4.00
4.00
$4.00
Common Stock
The holders of Common Stock are entitled to one vote per share for each share held of record on all
matters submitted to a vote of the stockholders.
Other Equity Transactions
The following table summarizes information about stock options granted by the Company to non-
employee directors to purchase the Company's Common Stock in exchange for services rendered for 2004,
2003 and 2002 (""Board Options''):
Exercise Price of Stock
Options Granted(1)(2)(3)
Number of Options
Granted
2002:
2003:
2004:
$1.23
1.32
0.96
0.89
3.10
1.19
1.58
2.58
2.67
4.05
3.17
3.87
3.65
7,315
8,766
7,614
12,528
100,000
10,850
7,892
4,818
7,067
3,074
3,926
4,146
4,806
(1) In 2002, options to purchase 100,000 shares of the Company's Common Stock for $3.10 per share
were granted at fair market value to non-employee directors. All other stock option grants to non-employee
54
directors during 2004, 2003 and 2002 were granted at an exercise price equal to 30% of the fair market value of
the Company's Common Stock on the date of grant.
(2) Such options are currently exercisable and were valued on the date of grant in accordance with the
requirements prescribed in APB 25. See Note 2. These options were granted in lieu of cash retainers and
meeting fees.
(3) The compensation expense related to the Board Options granted in 2004, 2003 and 2002, determined
pursuant to the application of APB 25, was $136,000, $132,000 and $86,000, respectively, and is included in
general and administrative expenses in the accompanying consolidated statements of operations.
13. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases corporate oÇce space and certain equipment under noncancellable operating lease
agreements expiring at various dates. Total rent expense under these agreements was $2,659,000, $2,408,000
and $2,024,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Future minimum annual
rental commitments related to these leases are as follows at December 31, 2004 (in thousands):
Year
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amount
$ 1,775
1,653
1,555
1,520
1,448
9,216
$17,167
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'')
55
pursuant to a management agreement. Mr. Yanover has a 50% ownership interest in the general partner of the
Management Company. The Company did not Ñnance equipment with the Leasing Company in 2004 or 2003.
The Company Ñnanced equipment with the Leasing Company totaling $1,007,000 and $258,000 during 2002
and 2001, respectively. Related amortization was $331,000, $506,000 and $415,000 and total cash paid was
$499,000, $569,000 and $467,000 during 2004, 2003 and 2002, respectively. The unamortized capital lease
obligation with the Leasing Company and related accumulated amortization were $0 and $1,265,000,
respectively, at December 31, 2004, $360,000 and $933,000, respectively, at December 31, 2003 and $869,000
and $427,000, respectively, at December 31, 2002. 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.
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 $718,000, $587,000
and $602,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the
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 as of the end of the period covered by this report pursuant to Securities Exchange Act of 1934
Rule 13a-15. Based on that evaluation, the 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. 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.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over Ñnancial
reporting, as such term is deÑned in Exchange Act Rules 13a-15(f). Under the supervision and with the
participation of our management, including our principal executive oÇcer and principal Ñnancial oÇcer, we
conducted an evaluation of the eÅectiveness of our internal control over Ñnancial reporting based on the
framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on our evaluation under the framework in Internal Control-Integrated
Framework, our management concluded that our internal control over Ñnancial reporting was eÅective as of
December 31, 2004. Our management's assessment of the eÅectiveness of our internal control over Ñnancial
reporting as of December 31, 2004 has been audited by KPMG LLP, an independent registered public
accounting Ñrm, as stated in their report, which is included below.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Ultimate Software Group, Inc.:
We have audited management's assessment, included in the accompanying Management's Annual
Report on Internal Control Over Financial Reporting that The Ultimate Software Group, Inc. and subsidiary
56
(the ""Company'') maintained eÅective internal control over Ñnancial reporting as of December 31, 2004,
based on criteria established in Internal Control Ó Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible
for maintaining eÅective internal control over Ñnancial reporting and for its assessment of the eÅectiveness of
internal control over Ñnancial reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the eÅectiveness of the Company's internal control over Ñnancial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether eÅective internal control over Ñnancial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over Ñnancial reporting, evaluating
management's assessment, testing and evaluating the design and operating eÅectiveness of internal control,
and performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company's internal control over Ñnancial reporting is a process designed to provide reasonable
assurance regarding the reliability of Ñnancial reporting and the preparation of Ñnancial statements for external
purposes in accordance with generally accepted accounting principles. A company's internal control over
Ñnancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reÖect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of Ñnancial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material eÅect on the Ñnancial
statements.
Because of its inherent limitations, internal control over Ñnancial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of eÅectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained eÅective internal control over
Ñnancial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria
established in Internal Control Ó Integrated Framework issued by the COSO. Also, in our opinion, the
Company maintained, in all material respects, eÅective internal control over Ñnancial reporting as of
December 31, 2004, based on criteria established in Internal Control Ó Integrated Framework issued by the
COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of the Company as of December 31, 2004 and 2003,
and the related consolidated statements of operations, stockholders' equity (deÑcit), and cash Öows for each of
the years in the three-year period ended December 31, 2004, and our report dated March 10, 2005 expressed
an unqualiÑed opinion on those consolidated Ñnancial statements.
Miami, Florida
March 10, 2005
/s/ KPMG LLP
KPMG LLP
57
Changes in Internal Control over Financial Reporting
There have been no signiÑcant changes in internal control over Ñnancial reporting during the fourth
quarter of 2004 that have materially aÅected, or are reasonably likely to materially aÅect, the Company's
internal control over Ñnancial reporting.
Item 9B. Other Information
On October 20, 2004, the Compensation Committee of the Board of Directors approved awards under the
Company's NonqualiÑed Stock Option Plan to employees of the Company, including executive oÇcers. The
options granted have an exercise price equal to the fair market value of the Common Stock as of the close of
business on the date of grant ($13.05) and vest as follows: 25% of the options were immediately vested, an
additional 25% shall become vested at each of the Ñrst, second and third anniversaries of the grant, provided in
each case that the individual is employed by the Company on such date. The number of shares subject to the
options granted to the executive oÇcers were as follows: Scott Scherr, 100,000; Marc D. Scherr, 75,000; and
Mitchell K. Dauerman, 25,000.
58
PART III
Item 10. Directors and Executive OÇcers of the Registrant
The directors, executive oÇcers (Messrs. Scott Scherr, Marc D. Scherr and Mitchell K. Dauerman) and
other key employees of the Company, and their ages as of February 18, 2005, are as follows:
Name
Age
Position(s)
Scott Scherr ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
52
Marc D. ScherrÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
47
Mitchell K. Dauerman ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
47
Jon Harris ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Robert Manne ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Vivian Maza ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Linda Miller ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Laura JohnsonÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adam Rogers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Greg Swick ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Bill HicksÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Roy L. Gerber, Ph.D. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
James A. FitzPatrick, Jr. ÏÏÏÏÏÏÏÏÏÏÏ
LeRoy A. Vander Putten ÏÏÏÏÏÏÏÏÏÏÏÏ
Rick A. Wilber ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Robert A. Yanover ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
40
51
43
60
40
30
41
39
48
55
70
58
68
Chairman of the Board, President and Chief
Executive OÇcer
Vice Chairman of the Board and Chief
Operating OÇcer
Executive Vice President, Chief Financial OÇcer
and Treasurer
Senior Vice President, Services
Senior Vice President, General Counsel
Senior Vice President, People and Secretary
Senior Vice President, Marketing
Senior Vice President, Product Strategy
Senior Vice President, Development
Senior Vice President, Sales
Vice President, Chief Information OÇcer
Vice President, Chief Technology 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 and the father-in-law of
Adam Rogers, Senior Vice President, Development.
Marc D. Scherr has been a director of the Company since its inception in April 1996 and has served as
Vice Chairman since July 1998 and as Chief Operating OÇcer since October 2003. 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 partnership until March
2000. Mr. Scherr also served as Vice President of RCA's general partnership from its inception in August
1993 until December 1995. From 1990 to 1992, Mr. Scherr was a real estate pension fund advisor at Aldrich,
Eastman & Waltch. Previously, he was a partner in the Boston law 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,
59
Mr. Dauerman held various positions with KPMG LLP, serving as a Partner in the Ñrm from 1988 to 1996.
Mr. Dauerman is a CertiÑed Public Accountant.
Jon Harris has served as Senior Vice President, Services since January 1, 2002. Mr. Harris served as Vice
President, Professional Services from July 1998 through December 31, 2001. From 1992 to 1997, Mr. Harris
held various management positions within ADP's National Accounts Division. From 1989 to 1992, Mr. Harris
held the position of Consulting Services Director for Sykes Enterprises, Inc., a diverse information technology
company.
Robert Manne has served as Senior Vice President, General Counsel since February 2004 and as Vice
President, General Counsel from May 1999 through January 2004. Prior to joining the Company, Mr. Manne
was an attorney and partner of Becker & 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 Senior Vice President, People for the Company since February 2004 and as
Vice President, People from January 1998 through January 2004. Ms. Maza has served as Secretary of the
Company since September 1996. Prior to that, Ms. Maza served as the 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 Senior Vice President, Marketing since February 2004 and as Vice President,
Communications and Public Relations from January 1999 through January 2004. Ms. Miller served as Vice
President, Marketing, for the Company from July 1998 to January 1999. Prior to that, Ms. Miller served as the
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 Johnson has served as Senior Vice President, Product Strategy since February 2004 and as Vice
President, Product Strategy from July 1998 through January 2004. From May 1996 to July 1998, Ms. Johnson
served as the Director of Applications Consulting for the Company. From 1991 to 1996, Ms. Johnson held
various positions with Best Software, Inc., Abra Products Division. Ms. Johnson holds a CertiÑed Payroll
Professional (CPP) certiÑcation from the American Payroll Association (APA).
Adam Rogers has served as Senior Vice President, Development since December 2002. From July 2001
to December 2002, Mr. Rogers served as Vice President of Engineering. From May 1997 to July 2001,
Mr. Rogers held various positions in the 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. Mr. Rogers is the son-in-law of Scott Scherr, Chairman of the Board, President
and Chief Executive OÇcer of the Company.
Greg Swick has served as Senior Vice President, Sales since January 2001. Mr. Swick served as Vice
President and General Manager of the PEO Division of the 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.
Bill Hicks has served as Vice President, Chief Information OÇcer since February 2004. From 1993 until
February 2004, Mr. Hicks held various positions in the management of technologies for Precision Response
Corporation, a wholly-owned subsidiary of Interactive Corporation and a provider of call centers and online
commerce customer care services, including Chief Information OÇcer and Senior Vice President of
Technology from August 2000 until February 2004.
60
Roy L. Gerber, Ph.D. has served as Vice President, Chief Technology OÇcer since January 1, 2002.
Mr. Gerber served as Vice President, 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.
James A. FitzPatrick, Jr. has served as a director of the Company since July 2000. 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.
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.
Rick A. Wilber has served as a director of the Company since October 2002 and is a member of the
Audit Committee and a member of the Compensation Committee of the Board. Mr. Wilber formerly served
on the 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.
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.
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. Messrs. LeRoy A. Vander Putten and Robert A.
Yanover serve on the Board in the class whose term expires at the annual meeting of the stockholders (the
""Annual Meeting'') in 2005. Messrs. Marc D. Scherr, James A. FitzPatrick, Jr. and Rick A. Wilber serve on
the Board in the class whose term expires at the Annual Meeting in 2006. Mr. Scott Scherr serves on the
Board in the class whose term expires at the Annual Meeting in 2007.
Code of Ethics
The Company has adopted a Code of Ethics within the meaning of Item 406 of Regulation S-K of the
Exchange Act. The Company's Code of Ethics applies to its principal executive oÇcer, principal Ñnancial
oÇcer and principal accounting oÇcer. A copy of the Company's Code of Ethics is posted on the Company's
website at www.ultimatesoftware.com. In the event that the Company makes any amendments to, or grants
any waiver from, a provision of the Code of Ethics that requires disclosure under Item 5.05 of Form 8-K, the
Company will post such information on its website.
61
Other Information
The information set forth in the Company's Proxy Statement for the 2005 Annual Meeting of
Stockholders under the headings ""Section 16(a) BeneÑcial Ownership Reporting Compliance'' and ""Board
Meetings and Committees of the Board-Audit Committee'', is incorporated by reference.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the Company's Proxy Statement for
the 2005 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, 2004:
( a )
Number of
Securities to be
Issued upon
Exercise of
Outstanding
Options, Warrants
and Rights
( b )
Weighted Ó 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))
Plan Category
Equity compensation plans approved by
security holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5,738,305
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5,738,305
$6.70
$6.70
2,405,525
2,405,525
The information set forth in the Company's Proxy Statement for the 2005 Annual Meeting of
Stockholders under the heading ""Security Ownership of Certain BeneÑcial Owners and Management'' is
incorporated 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 2005 Annual Meeting of Stockholders under the heading ""Certain Related Transactions.''
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the Company's Proxy Statement for
the 2005 Annual Meeting of Stockholders under the heading ""KPMG LLP Fees''.
Item 15. Exhibits and Financial Statement Schedules
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:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003 and
2002
62
Consolidated Statements of Stockholders' Equity (DeÑcit) for the Years Ended Decem-
ber 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003
and 2002
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedule:
Report of Independent Registered Public Accounting Firm
Schedule II Ì Valuation and Qualifying Accounts
(3) Exhibits
Number
Description
3.1 Ì Amended and Restated CertiÑcate of Incorporation (incorporated 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 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**
4.2 Ì Form of Warrant for Common Stock (incorporated by reference to Exhibit 4.4 to
the Company's Registration Statement on Form S-3 (File No. 333-107527),
initially Ñled July 31, 2003
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 (incorporated by reference to the corresponding exhibit in the Company's
Annual Report on Form 10-K dated March 31, 2003)
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)
63
Number
Description
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)
10.10 Ì Commercial OÇce Lease by and between UltiLand, Ltd., a Florida limited
partnership and the Company, dated December 22, 1998 (incorporated by
reference to Exhibit 10.1 to the 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 by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated Novem-
ber 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 herein 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 (incorporated by reference to the corresponding exhibit in the
Company's Annual Report on Form 10-K dated March 31, 2003)
10.20 Ì Third Loan ModiÑcation Agreement by and between the Company and Silicon
Valley Bank dated March 27, 2003 (incorporated by reference to the correspond-
ing exhibit in the Company's Annual Report on Form 10-K dated March 31,
2003)
10.21 Ì Fourth Loan ModiÑcation Agreement by and between the Company and Silicon
Valley Bank dated as of April 29, 2003 (incorporated by reference to Ex-
hibit 10.10 to the Company's Quarterly Report on Form 10-Q dated May 14,
2003)
10.22 Ì Change in Control Bonus Plan for Executive OÇcers, eÅective March 5, 2004
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q dated May 13, 2004)
10.23 Ì Fifth Loan ModiÑcation Agreement by and between the Company and Silicon
Valley Bank dated as of May 28, 2004 (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q dated August 12, 2004)
64
Number
Description
10.24 Ì Silicon Valley Bank Second Amended and Restated Revolving Promissory Note
by and between the Company and Silicon Valley Bank dated May 28, 2004
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q dated August 12, 2004)
21.1 Ì Subsidiary of the Registrant**
23.1 Ì Consent of Registered Public Accounting Firm*
31.1 Ì CertiÑcation Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended*
31.2 Ì CertiÑcation Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended*
32.1 Ì CertiÑcation Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*
32.2 Ì CertiÑcation Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*
99.1 Ì Cautionary Statement for Purposes of the ""Safe Harbor'' Provisions of the Private
Securities Litigation Reform Act of 1995*
* Filed herewith.
** Incorporated by reference to the corresponding exhibit in the Company's Registration Statement.
65
Report of Independent Registered Public Accounting Firm
The Board of Directors
The Ultimate Software Group, Inc.:
Under date of March 10, 2005, we reported on the consolidated balance sheets of The Ultimate Software
Group, Inc. and subsidiary as of December 31, 2004 and 2003, and the related consolidated statements of
operations, stockholders' equity (deÑcit), and cash Öows for each of the years in the three-year period ended
December 31, 2004, which reports appear in the December 31, 2004, Annual Report on Form 10-K. In
connection with our audits of the aforementioned consolidated Ñnancial statements, we also audited the
related consolidated Ñnancial statement schedule as listed in Item 15 of this 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 audits.
In our opinion, such Ñnancial statement schedule, when considered in relation to the basic consolidated
Ñnancial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
Miami, Florida
March 10, 2005
/s/ KPMG LLP
KPMG LLP
66
SCHEDULE II
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
ClassiÑcation
Allowance for doubtful accounts:
Balance at
Beginning of
Year
Charged to Write-oÅs
Expenses
and Other
and
Other
Balance at
End of Year
December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
525
1,000
2,465
$ 419
213
1,657
$ (444)
(688)
(3,122)
$
500
525
1,000
Valuation allowance for deferred tax asset:
December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$27,959
24,233
18,461
$3,218
3,726
5,772
$ Ì
Ì
Ì
$31,177
27,959
24,233
67
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
SIGNATURES
THE ULTIMATE SOFTWARE GROUP, INC.
By: /s/ Mitchell K. Dauerman
Mitchell K. Dauerman
Executive Vice President, Chief Financial
OÇcer and Treasurer
Date: March 10, 2005
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
James A. FitzPatrick, Jr.
/s/
James A. FitzPatrick, Jr.
/s/ LeRoy A. Vander Putten
LeRoy A. Vander Putten
/s/ Rick Wilber
Rick Wilber
/s/ Robert A. Yanover
Robert A. Yanover
President, Chief Executive OÇcer
and Chairman of the Board
March 10, 2005
Executive Vice President, Chief
Financial OÇcer and Treasurer
(Principal Financial and
Accounting OÇcer)
March 10, 2005
Vice Chairman of the Board and
Chief Operating OÇcer
March 10, 2005
Director
March 10, 2005
Director
March 10, 2005
Director
March 10, 2005
Director
March 10, 2005
68
Exhibit 31.1
I, Scott Scherr, certify that:
CERTIFICATIONS
1.
I have reviewed this annual report on Form 10-K of The Ultimate Software Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the Ñnancial statements, and other Ñnancial information included in this annual
report, fairly present in all material respects the Ñnancial condition, results of operations and cash Öows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying oÇcer and I are responsible for establishing and maintaining disclosure
controls and procedures (as deÑned in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over Ñnancial reporting (as deÑned in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
Registrant and have:
a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) Designed such internal control over Ñnancial reporting, or caused such internal control over Ñnancial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of Ñnancial reporting and the preparation of Ñnancial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the eÅectiveness of the Registrant's disclosure controls and procedures and presented in
this report our conclusions about the eÅectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the Registrant's internal control over Ñnancial reporting that
occurred during the Registrant's most recent Ñscal quarter (the Registrant's fourth Ñscal quarter in
the case of an annual report) that has materially aÅected, or is reasonably likely to materially aÅect,
the Registrant's internal control over Ñnancial reporting; and
5. The Registrant's other certifying oÇcer and I have disclosed, based on our most recent evaluation of
internal control over Ñnancial reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors (or persons performing the equivalent functions):
a) All signiÑcant deÑciencies and material weaknesses in the design or operation of internal control over
Ñnancial reporting which are reasonably likely to adversely aÅect the Registrant's ability to record,
process, summarize and report Ñnancial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
signiÑcant role in the Registrant's internal control over Ñnancial reporting.
/s/ Scott Scherr
Scott Scherr
Chief Executive OÇcer
Date: March 10, 2005
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Exhibit 31.1
I, Scott Scherr, certify that:
CERTIFICATIONS
1.
I have reviewed this annual report on Form 10-K of The Ultimate Software Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the Ñnancial statements, and other Ñnancial information included in this annual
report, fairly present in all material respects the Ñnancial condition, results of operations and cash Öows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying oÇcer and I are responsible for establishing and maintaining disclosure
controls and procedures (as deÑned in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over Ñnancial reporting (as deÑned in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
Registrant and have:
a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) Designed such internal control over Ñnancial reporting, or caused such internal control over Ñnancial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of Ñnancial reporting and the preparation of Ñnancial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the eÅectiveness of the Registrant's disclosure controls and procedures and presented in
this report our conclusions about the eÅectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the Registrant's internal control over Ñnancial reporting that
occurred during the Registrant's most recent Ñscal quarter (the Registrant's fourth Ñscal quarter in
the case of an annual report) that has materially aÅected, or is reasonably likely to materially aÅect,
the Registrant's internal control over Ñnancial reporting; and
5. The Registrant's other certifying oÇcer and I have disclosed, based on our most recent evaluation of
internal control over Ñnancial reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors (or persons performing the equivalent functions):
a) All signiÑcant deÑciencies and material weaknesses in the design or operation of internal control over
Ñnancial reporting which are reasonably likely to adversely aÅect the Registrant's ability to record,
process, summarize and report Ñnancial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
signiÑcant role in the Registrant's internal control over Ñnancial reporting.
/s/ Scott Scherr
Scott Scherr
Chief Executive OÇcer
Date: March 10, 2005
(This page intentionally left blank)
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Scott Scherr, Chief Executive OÇcer of The Ultimate Software Group, Inc., hereby certify to the best
of my knowledge and belief that this Annual Report on Form 10-K fully complies with the requirements of
Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and that
the information contained in this Annual Report on Form 10-K fairly represents, in all material respects, the
Ñnancial condition and results of operations of The Ultimate Software Group, Inc.
/s/ Scott Scherr
Scott Scherr
Chief Executive OÇcer
Date: March 10, 2005
(This page intentionally left blank)
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Mitchell K. Dauerman, Chief Financial OÇcer of The Ultimate Software Group, Inc., hereby certify
to the best of my knowledge and belief that this Annual Report on Form 10-K fully complies with the
requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 (15 U.S.C. 78m(a) or
78o(d)) and that the information contained in this Annual Report on Form 10-K fairly represents, in all
material respects, the Ñnancial condition and results of operations of The Ultimate Software Group, Inc.
/s/ Mitchell K. Dauerman
Mitchell K. Dauerman
Chief Financial OÇcer
(Principal Financial and Accounting OÇcer)
Date: March 10, 2005
(This page intentionally left blank)
operating data in thousands, except per share data for the years ended december 31,
2 0 0 4
2 0 0 3
2 0 0 2
net loss
$(5,024)
$(9,169)
$(14,568)
diluted net loss per share (1)
$(0.23)
$(0.49)
$(0.90)
(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.
$39,049
24,924
8,055
$29,344
23,478
7,594
$19,345
23,634
12,170
72,028
60,416
55,149
40,626
56%
45,650
63%
32,837
54%
42,006
70%
27,621
50%
42,189
77%
10,544
52,546
28,476
–
–
35,812
31,143
24,610
27,815
1,231
796
1,206
selected financial data
revenues:
recurring
services
license
total revenues
gross margin
as a % of total revenues
operating expenses and other
as a % of total revenues
investments in marketable securities
total assets
deferred revenue
long-term debt, including capital lease
obligations, net of current portion
company profile
board of directors
Scott Scherr
Chairman, President, and Chief Executive Officer
Ultimate Software
Marc D. Scherr
Vice Chairman and Chief Operating Officer
Ultimate Software
James A. FitzPatrick, Jr.
Partner
Dewey Ballantine LLP
executive officers
Scott Scherr
Chairman, President, and Chief Executive Officer
Marc D. Scherr
Vice Chairman and Chief Operating Officer
LeRoy A. Vander Putten
Executive Chairman
The 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
balance sheet data in thousands as of december 31,
2 0 0 4
2 0 0 3
2 0 0 2
annual meeting
cash and cash equivalents
$14,766
$13,783
$8,974
The annual meeting of stockholders will be held on Tuesday, May 17, 2005, at 10:00 a.m. EDT at 2000 Ultimate Way, Weston, Florida.
Formal notice will be sent to stockholders of record as of March 18, 2005.
stockholders’ equity (deficit)
$13,524
$1,661
$(7,368)
Ultimate Software, a leading provider of Web-based payroll and workforce management solutions, markets
award-winning UltiPro as licensed software, as a hosted application through Intersourcing, and as a co-branded
offering to Business Service Providers (BSPs) under the “Powered by UltiPro” brand. The Company employs
approximately 450 professionals who are united in their commitment to developing trendsetting solutions and
delivering quality service. Ultimate Software customers represent diverse industries and include such organizations
as Benihana Restaurants, The Container Store, Elizabeth Arden, Omni Hotels, Ruth’s Chris Steak House, SkyWest
Airlines, and Trammell Crow Residential. More information on Ultimate Software’s products and services can be
found at www.ultimatesoftware.com.
UltiPro and Intersourcing are registered trademarks of The Ultimate Software Group, Inc.
All other trademarks referenced in this report are the property of their respective owners.
annual report and form 10-K
A copy of the Company’s 2004 Form 10-K filed with the Securities and Exchange Commission, which is provided in this Annual Report, is
available without charge upon request to: Investor Relations Department, 2000 Ultimate Way, Weston, Florida 33326.
independent registered public accounting firm
investor relations
KPMG LLP
Miami, Florida
legal counsel
Dewey Ballantine LLP
New York, New York
transfer agent and registrar
EquiServe Trust Company, N.A.
P.O. Box 219045
Kansas City, MO 64121-9045
877.282.1168
www.equiserve.com
For additional information
about Ultimate Software, contact
Mitchell K. Dauerman, 954.331.7369
stock trading
Ultimate Software’s common stock is
traded on the Nasdaq National Market
under the symbol ULTI.
company address
Ultimate Software
2000 Ultimate Way
Weston, Florida 33326
800.432.1729 or 954.331.7000
www.ultimatesoftware.com
Ultimate Software
2000 Ultimate Way
Weston, Florida 33326
800.432.1729
954.331.7000
www.ultimatesoftware.com