2014
ANNUAL
REPORT
SHAREHOLDER LETTER
Fellow Shareholders,
In 2014, we executed on our growth strategy as
planned and achieved all of our key objectives. We
posted $505.9 million in total revenues for 2014,
a 23% increase over 2013, and $419.2 million in
recurring revenues, a 25% increase over 2013.
Recurring revenues were 83% of our total revenues
for the 2014 year, up one point over 2013. We
continued our track record of year-over-year 96%
customer retention, and we grew the number of
people records in our cloud to more than 19 million.
These results position us well to achieve our 2015
goal of surpassing $600 million in revenues.
Both our enterprise and mid-market sales teams closed out
2014 in the fourth quarter with the most successful quarter in
their histories, making it Ultimate’s top-performing quarter ever
for new customers. We began training a new strategic sales
team in the third quarter of 2014 with the objective of targeting
companies with approximately 100-499 employees in 2015.1 We
were surprised when our strategic channel contributed to our
record-breaking fourth quarter by closing $650 thousand in
annual recurring revenue business since we had expected no
strategic sales in 2014.
Our marketing metrics indicate that our brand continues to
inspire market demand. In 2014, we had the highest number
ever of companies with more than 300 employees responding
through our marketing vehicles and telling us they are looking
to purchase a new human capital management (HCM) solution
within 12 months or less. That is 29% more than in 2013. Our
inside sales team had a 90% increase in the number of sales
opportunities generated in 2014, compared with 2013, and it
was the highest number of annual inside sales opportunities
identified in Ultimate’s history.
Our total customer count now exceeds 2,800, and Ultimate has,
we believe, the industry’s largest customer base using a cloud-
based HCM solution that unifies human resources, benefits,
payroll, talent acquisition, talent management, compensation
management, and time and labor management. With the goal
to continuously innovate and enhance the work lives of our
customers and prospective customers, we added significant new
capabilities to our UltiPro product suite in 2014. We released our
new UltiPro Recruiting product, our new UltiPro Compensation
Management product, and new predictive analytics. We further
extended our global HCM capabilities and simplified the payroll
tax management process for United States employees by
introducing a new feature called Smart Tax Search™. We also
previewed our new UltiPro Onboarding product at two industry
conferences in 2014.2
Users, product users from
companies with more than
1,000 employees. G2 Crowd
is an independent website
for end-users to evaluate
their business software
systems, and its “Best of
2014” winners received the
highest satisfaction scores
across a variety of enterprise
products, not just HCM.
Winners were chosen based
upon more than 20,000 user
reviews posted in 2014.
Several industry publications and analysts also honored
Ultimate’s success in 2014 and early in 2015. For the third year
in a row, in January 2014, Ultimate was the only HCM provider
named to FORTUNE® magazine’s “100 Best Companies to
Work For” list, and we ranked #20 among the top 100. Forbes®
magazine ranked Ultimate #8 on its 2014 list of the “Most
Innovative Growth Companies,” and FORTUNE® identified
Ultimate as one of “20 Great Workplaces in Tech.” Analyst
firms Forrester and Nucleus Research both labeled Ultimate
a “Leader” in HCM, and the Great Place to Work®’s Great
Rated!™ website ranked Ultimate #3 on its list of top technology
workplaces and #4 on its list of top workplaces for millennials.
In January 2015, for the third year in a row, Achievers recognized
Ultimate as one of 50 Most Engaged Workplaces™ in North
America. This award aligns with our core belief at Ultimate – that
engaged employees create a culture of innovation that results in
industry-leading products and services.3
We are focused on our plan to exceed $600 million in revenues
in 2015. We believe we have reached a new pinnacle in business
strength. We have passed the pivotal benchmark of $500 million
in annual revenues; we have award-winning products and
services that are respected and desired in the HCM market;
we have talented people who are committed to excellence and
innovation; and we have customers who work closely with us as
partners. By continuing to adhere to the “People First” vision we
are known for, we believe we will achieve our goal to become a
$1 billion franchise in 2018.
We thank our shareholders, customers, employees, and partners
for your continuing support.
Scott Scherr
Chairman of the Board, Chief Executive Officer, and Founder
Customer satisfaction with our products and services continues
to be a strong differentiator for us. In both our Spring and Fall
2014 customer surveys, 84% of customers responding indicated
they are satisfied or very satisfied with UltiPro. The overall
strength of our customer satisfaction was also validated by a
third-party in December 2014. G2 Crowd named Ultimate to its
“Best of 2014” list in the category of Highest Rated by Enterprise
1 Our enterprise sales team targets companies with more than 1,500
employees, including those with 10,000 or more employees, and our
mid-market sales team targets companies with approximately 500-1,500
employees.
2 For more detail on new product capabilities, see the Business Highlights
section of this report.
3 For more detail on awards and recognition, see the Business Highlights
section of this report.
FINANCIAL HIGHLIGHTS
OPERATING DATA
(In Thousands, Except Per-Share Data)
2012
2013
2014
Revenues
Recurring
Services
License
$266,430
$334,434
$419,238
64,563
1,275
75,110
853
86,165
533
TOTAL REVENUES
$332,268
$410,397
$505,936
Gross Profit
As a % of Total Revenues
Operating Expenses and Other
As a % of Total Revenues
Income Tax Provision1
$187,804
57%
$159,065
48%
14,107
$241,719
59%
$198,630
48%
17,559
$302,297
60%
$247,968
49%
9,592
NET INCOME
$14,632
$25,530
$44,737
Diluted Net Income Per Share
$0.52
$0.88
$1.52
BALANCE SHEET DATA
(In Thousands)
2012
2013
2014
Cash and Cash Equivalents
Investments in
Marketable Securities
$58,817
$10,534
$79,794
$10,453
$108,298
$10,156
TOTAL ASSETS
$525,284
$598,194
$1,190,298
Deferred Revenue
$91,976
$103,184
$109,705
Long-Term Debt,
Including Capital Lease Obligations,
Net of Current Portion
$5,070
$2,833
$3,759
Recurring Revenues
$419.2
$334.4
$266.4
2012
2013
2014
Total Revenues
$505.9
$410.4
$332.3
Shareholders’ Equity
$114,670
$188,217
$271,749
2012
2013
2014
1 See Note 15 of the notes to consolidated financial statements included in the Annual Report on Form 10-K for the fiscal
year ended December 31, 2014, of The Ultimate Software Group, Inc. and subsidiaries, filed with the Securities and
Exchange Commission on February 27, 2015 (the “2014 Form 10-K”) for information regarding the income tax provision.
13-YEAR FINANCIAL PERFORMANCE
Recurring Revenues
Dollars in Millions
$419.2
$334.4
$266.4
$213.8
*
R
G
A
9 % C
2
$106.2
$86.2
$170.9
$133.2
$29.3
$39.0
$19.3
$63.7
$50.3
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
$505.9
$410.4
$332.3
Total Revenues
Dollars in Millions
*
R
G
A
0 % C
2
$196.3
$178.0
$269.2
$227.8
$55.1
$60.4
$88.6
$72.0
$150.1
$114.5
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
*CAGR on both graphs represents Ultimate’s compounded annual growth rate from 2002-2014.
BUSINESS HIGHLIGHTS
All achievements referenced occurred in 2014 unless otherwise noted.
1. For the third year in a row, in January 2014, Ultimate was
the only human capital management provider to be named to
FORTUNE® magazine’s 100 Best Companies to Work For list,
and we ranked #20. This honor built upon our #9 rank
on FORTUNE’s 2013 list and our #25 ranking on the 2012 list,
as well as our previous recognition twice as the #1 medium-
size company to work for in America by the Great Place to
Work® Institute. The 2015 list is scheduled to be revealed in
March 2015.
2. We released our new UltiPro Recruiting product, with
its unique consumer-style user interface, gamification,
collaboration tools, mobility, and integration with popular
social networks such as LinkedIn. UltiPro Recruiting is
designed to transform talent acquisition from a recruiter-
centric process to a candidate-focused one that engages
candidates by enabling them to build an in-depth online
presence that gives recruiters and hiring managers a
more complete understanding of who they are rather than
restricting them to posting résumés and completing limited
profile details.
3. We released our new UltiPro Compensation Management
product that assists managers in navigating logically through
the process of allocating pay and rewards to their people. It
also gives them a range of capabilities for analyzing current
compensation and setting up compensation plans by various
factors, such as performance.
4. We expanded our predictive analytics to include the UltiPro
High Performer Indicator™ and UltiPro High Performer
Predictor™, adding to our UltiPro Retention Predictor™ that
won a Gold award in Brandon Hall Group’s Best Advance in
Unique Talent Technology category in January 2014. Based on
each customer’s employee data and more than 20 years of key
HR, payroll, and talent metrics, UltiPro’s predictive analytics
help leaders to better understand and predict employee
performance, and give leaders a statistical backdrop for
creating development plans that help employees fulfill
their potential.
5. We further enhanced UltiPro’s global HCM capabilities
in order to support our growing number of multinational
customers. UltiPro is now available in 10 languages and has
a current list of more than 35 country-specific localizations,
including Indonesia, Qatar, and Vietnam. New globalized
processes and country-specific localizations enable Ultimate’s
customers to process payroll in each country via integrations
with third-party global payroll providers.
6. We simplified UltiPro’s payroll tax management process by
introducing a new feature called Smart Tax Search™ to reduce
the complexities and errors associated with assigning payroll
tax codes to employees in the United States. Rather than
relying on an administrator to assign appropriate tax codes,
UltiPro leverages the latest GIS (geographic information
systems) technology to automatically determine the correct
federal, state, and local payroll taxation rules based on the
home and office addresses in employees’ records.
7. We previewed our new UltiPro Onboarding product at the
HR Technology Conference & Exposition and the Society
for Human Resource Management conferences. UltiPro
Onboarding is designed to help employers engage and
welcome new employees into an organization before the first
day of work and to speed their time to productivity. The new
solution enables dynamic content such as video messages
from executives, managers, and co-workers and gives new
hires the ability to connect with fellow team members, request
a mentor, engage in self-directed learning through a feature
called “Unlock Your Potential,” and complete compliance and
other required documents.
8. Ultimate was named a “Leader” in The Forrester WaveTM:
SaaS HR Management Systems, Q4 2014, and received the
highest possible scores in several areas, including customer
satisfaction, customer experience, long-term vision for HRM,
research and development, and SaaS HRMS.
9. Nucleus Research named Ultimate a “Leader” in its
Technology Value Matrix Second Half 2014, HCM.
10. Forbes® magazine ranked Ultimate #8 on its 2014 list of the
“Most Innovative Growth Companies.”
11. FORTUNE® magazine identified Ultimate as one of “20 Great
Workplaces in Tech” and Great Rated!™ ranked Ultimate
#3 on its “People Picks: Top 20 Great Workplaces in
Technology,” both based on survey results from Ultimate’s
employees.
12. Ultimate was ranked #4 on the list of “Ten Great Workplaces
for Millennials” produced by Great Place to Work®’s Great
Rated!™
13. For the third year in a row, in January 2015, Ultimate
was recognized as one of Achievers’ 50 Most Engaged
Workplaces™ in North America.
UltiPro is a registered trademark of The Ultimate Software Group, Inc. All
other trademarks referenced are the property of their respective owners.
INVESTOR INFORMATION
Shareholders’ Meeting Date:
Monday, May 18, 2015, 10 a.m. EDT
Location:
Ultimate Software, 2000 Ultimate Way, Weston, FL 33326
The annual meeting of shareholders will be held on May 18, 2015, at 10:00 a.m. EDT at Ultimate, 2000 Ultimate
Way, Weston, Florida 33326. Formal notice will be sent to shareholders of record as of March 24, 2015.
Annual Report and Form 10-K
Stock Trading
Ultimate’s 2014 Annual Report, including the 2014 Form 10-K
filed with the Securities and Exchange Commission for the fiscal
year ended December 31, 2014, is available electronically as
a PDF on our website at www.ultimatesoftware.com. Printed
copies of the 2014 Form 10-K are available without charge upon
request to: Ultimate Software, Investor Relations Department,
2000 Ultimate Way, Weston, Florida 33326.
Safe Harbor Statement
Statements in this Annual Report relating to future plans,
results, performance, expectations, achievements, and the like
are considered “forward-looking statements.” These forward-
looking statements involve known and unknown risks and are
subject to change based on various factors and uncertainties
that may cause actual results to differ materially from those
expressed or implied by these statements. Factors and
uncertainties that may cause actual results to differ include,
but are not limited to, the risks disclosed in Ultimate’s filings
with the U.S. Securities and Exchange Commission, including in
Ultimate’s 2014 Form 10-K. Ultimate undertakes no obligation to
revise or update any forward-looking statements.
Independent Registered Public Accounting Firm
KPMG LLP
Legal Counsel
Stroock & Stroock & Lavan LLP
New York, New York
Transfer Agent and Registrar
Computershare Trust Company N.A.
P.O. BOX 30170
College Station, TX 77842
877.282.1168 or 781.575.2879
Investor Relations
For additional information about Ultimate, contact Mitchell K.
Dauerman, 954.331.7369.
Ultimate’s common stock is traded on the Nasdaq Global Select
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
Company Profile
Ultimate is a leading cloud provider of people management
solutions, with more than 19 million people records in its cloud.
Ultimate’s award-winning UltiPro delivers HR, payroll, talent,
and time and labor management solutions that connect people
with the information they need to work more effectively. Founded
in 1990, the company is headquartered in Weston, Florida, and
employs more than 2,300 professionals. In 2015, for the third
year in a row, Ultimate was recognized as one of Achievers’ 50
Most Engaged Workplaces™ in North America. In 2014, Ultimate
was ranked #20 on FORTUNE’s list of the 100 Best Companies to
Work For; ranked #8 on Forbes® magazine’s list of the 100 Most
Innovative Growth Companies; and recognized as a “Leader”
in Nucleus Research’s HCM Technology Value Matrix. Also in
2014, Great Rated!™ ranked Ultimate #3 on its list of Top 20
Great Technology Workplaces. Ultimate has more than 2,800
customers with employees in 150 countries, including Bloomin’
Brands, Culligan International, Major League Baseball, Pep
Boys, Texas Roadhouse, and Yamaha Corporation of America.
More information on Ultimate’s products and services for people
management can be found at www.ultimatesoftware.com.
UltiPro is a registered trademark of The Ultimate Software Group, Inc. All
other trademarks referenced are the property of their respective owners.
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Scott Scherr
Chairman, Chief Executive Officer, and Founder
Ultimate
Marc D. Scherr
Vice Chairman and Chief Operating Officer
Ultimate
James A. FitzPatrick, Jr.
Partner
Hogan Lovells US LLP
LeRoy A. Vander Putten
Former Executive Chairman
The Insurance Center, Inc.
Robert A. Yanover
Former President
Computer Leasing Corporation
Rick A. Wilber
Former President
Lynn’s Hallmark Cards
Al Leiter
President
Leiter’s Landing
EXECUTIVE OFFICERS
Scott Scherr
Chairman, Chief Executive Officer, and Founder
Marc D. Scherr
Vice Chairman and Chief Operating Officer
Mitchell K. Dauerman
Executive Vice President, Chief Financial
Officer, and Treasurer
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 fiscal year ended December 31, 2014
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-24347
_______________
The Ultimate Software Group, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
2000 Ultimate Way,
Weston, FL
(Address of principal executive offices)
65-0694077
(I.R.S. Employer
Identification No.)
33326
(Zip Code)
Registrant’s telephone number, including area code:
(954) 331-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class:
Name of Each Exchange on which Registered:
Common Stock, par value $.01 per share
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of Common Stock, par value $.01 per share, held by non-affiliates of the Registrant, based upon the
closing sale price of such shares on the NASDAQ Global Select Market on June 30, 2014 was approximately $3.8 billion.
As of February 18, 2015, there were 28,606,171 shares of the Registrant’s Common Stock, par value $.01, outstanding.
i
Portions of the Registrant’s Proxy Statement for the 2015 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
ii
THE ULTIMATE SOFTWARE GROUP, INC.
Forward-Looking Statements
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
INDEX
PART I
PART II
Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Independent Registered Public Accounting Firm’s Report on Internal Control over Financial Reporting
Item 9B.
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
PART IV
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Signatures
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iii
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (this “Form 10-K”) of The Ultimate
Software Group, Inc. and subsidiaries (“Ultimate,” "Ultimate Software," “we,” “us” or “our”) 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 our expectations or beliefs,
including, but not limited to, our expectations concerning our operations and financial performance and condition. Words such
as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions are intended to
identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and are
subject to certain risks and uncertainties that are difficult to predict. Ultimate’s actual results could differ materially from those
contained in the forward-looking statements due to risks and uncertainties associated with fluctuations in our quarterly
operating results, concentration of our product offerings, development risks involved with new products and technologies,
competition, our 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 Ultimate’s filings with the Securities and
Exchange Commission. Other factors that may cause such differences include, but are not limited to, those discussed in this
Form 10-K, including the risk factors set forth in Item 1A. Ultimate 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 its related design are registered trademarks of Ultimate 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.
PART I
Item 1. Business
Overview
Ultimate Software is a leading cloud provider of people management solutions, often referred to as human capital
management (“HCM”). Ultimate's UltiPro product suite (“UltiPro”) is a comprehensive, engaging solution that has human
resources ("HR"), payroll, and benefits management at its core and includes global people management, available in ten
languages with more than 35 country-specific localizations. The solution is delivered primarily via the Web to organizations
based in the United States and Canada with global workforces. We attained our leadership position, we believe, through our
focus on unified HCM, people-centric product design, cloud technology, and strong customer relationships. At the close of
2014, we had more than 19 million people records in our HCM cloud.
UltiPro is designed to deliver the functionality businesses need to manage the complete employee life cycle from
recruitment to retirement and to facilitate employee engagement with their employers and each other. The solution includes
unified feature sets for talent acquisition and onboarding, HR management and compliance, benefits management and online
enrollment, payroll, performance management, compensation management with salary planning, budgeting, and development
of incentive plans, succession management, reporting and analytical decision-making and predictive tools, and time and
attendance. UltiPro has role-based features for HR professionals, executives, managers, administrators, and employees whether
they are in or out of the office, including access to business-critical information on mobile devices such as the iPhone, iPad, and
other smartphones and tablets.
Our customers tell us that UltiPro helps them to streamline talent management, HR and payroll processes to
significantly reduce administrative and operational costs while also empowering them to manage the talent in their workforces
more strategically. UltiPro provides our customers tools to analyze workforce trends for better decision making, identify high-
performing talent within their organizations, predict who high-performers will be with a high degree of accuracy, find critical
information quickly and perform routine business activities efficiently.
Our cloud offering of UltiPro (the “Cloud Offering”) provides Web-based access to comprehensive HCM functionality
for organizations that want to simplify delivery and support of their business applications. We have found that our Cloud
Offering is attractive to companies that want to focus on their core competencies to increase sales and profits. Through the
Cloud Offering, we supply and manage the hardware, infrastructure, ongoing maintenance and backup services for our
customers. Customer systems are currently managed at three data centers--one located in the Atlanta, Georgia area, one in the
Phoenix, Arizona area and another one in the Toronto, Canada area. All data centers are owned and operated by independent
third parties.
We market our UltiPro solutions primarily to enterprise companies, which we define as companies with more than
1,500 employees, including those with 10,000 or more employees; mid-market companies, which we define as those having
1
approximately 500-1,500 employees; and strategic companies, which we define as having approximately 100-499 employees.
Our mid-market and strategic customers have access to nearly all the features that our larger enterprise companies have through
UltiPro, plus a bundled services package. Since many companies in the mid- and strategic markets do not have information
technology (“IT”) staff on their premises to help with system deployment or ongoing management issues, we have created a
bundled services package to give these customers a high degree of convenience by handling system configuration, business
rules, and other situations for them “behind the scenes.” UltiPro is marketed primarily through our enterprise, mid-market and
strategic direct sales teams.
Cloud Computing Model
Cloud computing is the current terminology for describing the delivery of software-as-a-service ("SaaS"). Market
acceptance of cloud computing for mission critical enterprise applications has become increasingly common in recent years
since software can be delivered cost-effectively, reliably, and securely to businesses over the Internet without the need for
customers to purchase supporting software and hardware for an on-premise system or the need to keep IT people on staff to
monitor and upgrade such a system.
We introduced our first subscription-based service solution over the Internet in December of 2000, and we began
marketing our first multi-tenant SaaS HCM to enterprise companies in 2002. Since that time, we have significantly expanded
our HCM offerings and enhanced our foundational technologies. Today, we develop our solutions using the latest advances in
cloud computing and provide our customers with solutions that are highly functional, easy to use, configurable, and fast. Our
cloud model is based on a multi-tenant architecture that is both open and secure with support for user experiences on both
desktop and mobile devices. Our customers that have moved away from traditional on-premise software to our cloud-based
service applications benefit by substantially reducing the cost and complexity typical of on-premise software implementations,
customizations, and upgrades. Through cloud computing, we supply and manage the hardware, infrastructure, ongoing
maintenance, and backup services for our customers. We install the latest version of our software for our customers, thereby
reducing their need to buy and maintain their own IT resources. As a part of our cloud model, we also provide activation and
training services to our customers as well as support services.
We provide our hardware, infrastructure, ongoing maintenance and backup services at three data centers: one located
near Atlanta, Georgia, one located near Phoenix, Arizona, and another near Toronto, Canada. Our data center facilities are
owned and operated by independent third parties, who provide redundant power, bandwidth, and physical security. Ultimate
employees deploy, monitor, and manage our hardware and software systems in accordance with our security and data privacy
policies, which are subject to examination by an independent third-party.
Market Share
Based on our customer counts and market data from Hoover's/Dun & Bradstreet in December 2014, we estimate our
approximate market share to be 9 percent for enterprise companies, 6 percent for mid-market companies, and 1 percent for
companies in the strategic market.
Company Information
Ultimate is a Delaware corporation formed in April 1996 to assume the business and operations of The Ultimate
Software Group, Ltd. (the “Partnership”), a limited partnership founded in 1990. During August 2006, Ultimate formed a
wholly-owned subsidiary, The Ultimate Software Group of Canada, Inc. (“Ultimate Canada”), to accommodate our operations
in Canada. There were no material assets or revenues in Canada as of or for the year ended December 31, 2014. Ultimate's
headquarters is located at 2000 Ultimate Way, Weston, Florida 33326 and our telephone number is (954) 331-7000.
Capabilities of UltiPro
UltiPro is a comprehensive cloud-based solution designed to deliver the functionality businesses need to manage the
complete employee life cycle from recruitment to retirement, and to facilitate employee engagement with their employers and
each other. The solution includes feature sets for talent acquisition and onboarding, HR management and compliance, benefits
management and online enrollment, payroll, performance management, compensation management, succession management,
reporting and analytical decision-making tools, time and attendance, and role-based self-service capabilities for executives,
managers, administrators, and employees whether they are in or out of the office. UltiPro offers the following capabilities to
our customers:
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Role-Based Internet Access to Functionality. UltiPro provides Web access to workforce-related business functions,
company communications, and reporting for everyone in our customer's organization, not just the HR department. The access
and specific functionality are based upon our customer's process requirements and the individual user's role. We believe that
UltiPro's employee-facing Web applications can increase management and administrative efficiencies by providing immediate
access to reporting, staff management processes and business intelligence for executives, and can reduce operating costs by
eliminating the need for organizations to print and distribute paper communications, handbooks, forms, and paychecks.
Ultimate also provides UltiPro functionality for use on mobile devices. Using tablets or smartphones, employees can manage
their goals, provide feedback to managers, access their own personal information, such as pay statements, and can quickly
access their company's employee directory to look up contact information or employee photos. In addition, managers can
approve or deny daily workflow transactions—such as salary changes and paid time off-and can readily review goals,
competencies, and accomplishments of their team members.
Rich and Highly Configurable Functionality. UltiPro has rich functionality built into the solution and provides
extensive capabilities for configurability. As a result, we have found that our customers can avoid extensive customizations and
yet are able to achieve a highly tailored solution to meet their specific business needs. Since UltiPro's feature-sets are unified,
our customers are able to streamline their management of the total employment cycle and can generate strategic HR and talent
management reports from UltiPro as their primary, central system of record for their employee data.
Flexible, Rapid System Setup and Configuration. UltiPro has been designed to minimize the time and effort required
to set up and configure the system to address individual company needs. Largely because our UltiPro solutions deliver
extensive functionality that can be configured to align with our customers' various business models with few customizations,
our setup of new customers is faster and simpler than implementations typical of legacy, on-premise software.
Reduced Total Cost of Ownership. We believe that the UltiPro solution provides cost saving opportunities for our
customers and that UltiPro is competitively priced. In addition, we believe that our current practices in activating the UltiPro
solution result in cost savings for customers when compared with implementations of other similar solutions in the industry.
The UltiPro customer may also reduce the administrative and IT support costs associated with the organization's HR, benefits
and payroll functions over time. Administrative costs can be further reduced by providing an organization with greater access to
information, streamlined HR processes and transactions, and control over reporting.
Modern Cloud Technologies. We have consistently focused on identifying leading technologies and practices and
integrating them into our products. The primary characteristics of our technology and cloud architecture are:
Multi-tenant model (multiple instances of UltiPro for different organizations can reside on one server) that allows each
application component to run on a separate farm, or cluster, of load-balanced servers while still providing customer data
security and segregation.
Configurability that enables customers to achieve a highly tailored UltiPro experience for their businesses without
incurring the high expense of custom software.
Web services, with a focus on micro-services (a set of platform-neutral and vendor-independent protocols that enable
application interactions over the Internet using Extensible Markup Language, or XML, and other Web technologies) that
enable UltiPro customers to connect with other applications and data services easily and securely.
Domain-driven, user-centered design framework that leverages industry-leading tools and technologies, including
Microsoft's .NET platform, to streamline the complexities of our HCM domain and focus on how our users want to use
UltiPro rather than expect them to change their behavior to accommodate our product.
HTML-5 framework and responsive Web design for mobile-centric computing that enables a rich, dynamic user experience
for UltiPro users on the smartphones or tablets of their choice.
Rich End-User Experience, Ease of Use and Navigation. We design our products to be user-friendly and to simplify
the complexities of managing employees and complying with government regulations in the HR, payroll, and talent
management areas. UltiPro uses familiar, consumer-style navigation, which we believe makes our solution convenient and easy
to use. While traveling or out of the office, our customer's HR professionals, executives, managers, administrators, and
employees can manage payroll and employee functions and run reports by accessing UltiPro over the Internet or find answers
to key routine questions by using an UltiPro application on their mobile devices.
Comprehensive Customer Services and Industry-Specific Expertise. We provide several types of customer service:
cloud services, professional setup and activation services, knowledge management (or training) services, payment services (tax
filing and check printing), and ongoing product and customer support services. All our customer services are designed to create
a positive, productive UltiPro experience for our customers. We have multiple avenues for our customers to give us feedback
and recommendations on product enhancements, and we provide our customers a portal where they can choose to learn about
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UltiPro and Ultimate in the style that best suits them - online webinars, videos, instructional documents, online chats, customer
communities, and other vehicles. We recognize the importance of issuing timely updates that reflect changes in tax and other
regulatory laws and employ a dedicated research team to track jurisdictional tax changes for more than 13,000 tax codes
included in UltiPro as well as changes in other employee-related regulations.
Managed Services. To further simplify the work lives of our customers’ human resources and payroll people, we
introduced UltiPro Managed Services in the fourth quarter of 2013 as a result of our acquisition of certain assets and liabilities
of Accel HR, LLC ("Accel HR"). See Note 4 of the Notes to Consolidated Financial Statements. UltiPro Managed Services is
designed for those customers who want to outsource some components of their HR, payroll, benefits, and HCM technology
management functions without sacrificing the control of, or access to, their employee data that they enjoy with our cloud
solution. Unlike other outsourced payroll or Human Resources Information System ("HRIS") services that typically take a one-
size-fits-all approach, UltiPro Managed Services allows customers to select from a number of payroll management, HRIS, and/
or benefits management services and combine them into a tailored solution that best suits their unique needs. Accel HR has
provided these types of services to large and mid-market corporate customers in North America since 2004 and, since 2007,
prior to its acquisition by Ultimate, Accel HR partnered exclusively with Ultimate to provide these services.
UltiPro Standard Functionality and Optional Capabilities
UltiPro's standard functionality includes, but is not limited to, a set of role-based features that engage employees while
allowing HR generalists as well as benefits, compensation, and payroll managers and other business managers to develop,
coach, evaluate and reward their people and meet organizational objectives. Business intelligence along with system
configuration tools and integration capabilities support our customers' connections with third-party applications and providers.
UltiPro also includes employee relations tools for managing disciplinary actions and grievances, and health and safety
incidents.
In addition to UltiPro's HCM functionality, our customers have the option to purchase a number of additional
capabilities on a per-employee-per-month (“PEPM”) basis, which are available to enhance and complement the functionality of
UltiPro and which are based on the particular business needs of our customers. These optional UltiPro capabilities currently
include (i) the talent acquisition suite (recruitment and onboarding); (ii) the talent management suite (performance
management, talent predictors, and succession management); (iii) compensation management; (iv) benefits enrollment; (v) time
management; (vi) payment services (formerly referred to as “tax filing”); (vii) wage attachments; and (viii) other optional
features (collectively, “Optional Capabilities”), which are described below.
Differences between capabilities available to our enterprise, mid-market and strategic customers are specified below.
Unless otherwise specified, capabilities are included in both our enterprise and mid-market offerings.
UltiPro's Standard HR/Payroll Functionality
UltiPro can act as the gateway to business activities for a company's executives, management team, HR/payroll staff,
administrators, and employees. Employees of customers can access UltiPro from standard Web browsers such as Microsoft
Internet Explorer and Mozilla Firefox, view information and perform tasks in a language of their individual choice (most
commonly English, Spanish, or French), set their personal preferences for the order and placement of home-page content, and
set up access to any available page in one click. Ultimate believes that UltiPro allows our customers to improve service to their
employees through better communications and to save time because managers and administrators can complete hundreds of
common employee-related tasks, including administering benefits, managing staff and accessing reporting and business
intelligence in real time, from one central solution. UltiPro also enables companies to provide secure, on-demand access to
company and personal information for their employees over the Internet.
UltiPro's Standard HR/payroll functionality includes, but is not limited to, the following:
Human Resources Management. UltiPro manages all aspects of a person and their employment relationship regardless
of where the employee resides. This includes personal details, skills and competencies, international identification documents,
employment history, employment contracts (for those employees in countries that require them), performance, job and salary
information, career development and preferences, and health and wellness programs. This allows single country or
multinational organizations to easily manage and report on worldwide headcounts, and other critical business metrics. In
addition, UltiPro facilitates the recording and tracking of key information for government compliance and reporting in the US,
Canada and many other countries. This includes the Consolidated Omnibus Budget Reconciliation Act (COBRA), the Health
Insurance Portability & Accountability Act (HIPAA), regulations implemented by the Occupational Safety & Health
Administration (OSHA), workers' compensation regulations, the Family Medical Leave Act (FMLA), and Equal Employment
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Opportunity (EEO) laws for the United States. UltiPro also enables compliance with HIPPAA confidentiality requirements for
protecting sensitive data such as employee social security numbers.
Benefits Management. UltiPro allows companies to automate the matching of health, welfare, dental, vision, and other
benefits they offer their employees, including configuration and administration of benefit plans and employee and employer
contributions. UltiPro also enables employees to check benefit options and coverage online. UltiPro eliminates the need for
duplicate rules, duplicate data entry, and reconciliation reporting because it stores details for deductions and benefit plans in
one common table. These features include rules for coverage, premium and employer match computations, and eligibility and
participation determinations. UltiPro also allows companies to maintain and administer paid time off benefits, such as vacation
(including calculating benefit accrual amounts), track leave-time taken, and facilitate the response to employee leave requests.
Payroll. UltiPro's payroll features a powerful engine that 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
UltiPro, a company's central payroll department, remote offices or multiple divisions can process payroll and can define and
report on who completes each specific processing step based on the exact needs of the organization, thus supporting appropriate
separation of duties. All of this is managed through an easy-to-use dashboard of payroll tasks and statuses. To help our
customers reduce the complexities and errors associated with administrators manually assigning appropriate payroll taxes to
employees in the United States, Ultimate introduced a new embedded feature called Smart Tax Search™ in 2014. Smart Tax
Search™ leverages the latest GIS (geographic information systems) technology to enable UltiPro to automatically assign the
correct federal, state, and local payroll taxation rules based upon the home and work addresses listed in UltiPro’s employee
records.
Tablet-Based Time clock. UltiPro TouchBase, which was introduced in connection with our acquisition of
Employtouch (the "Employtouch Acquisition"), provides our customers an interactive mobile time clock device that collects
time punches, as well as highlights the information most critical to employees and managers via an engaging activity stream.
See Note 4 of the Notes to Consolidated Financial Statements. With UltiPro TouchBase, our customers can capture employee
time on a touchscreen tablet device, collecting employee-validated data for cost accounting and payroll; can leverage photos for
accurate capture of employee time-entry, avoiding 'buddy punches'; and can validate transactions using PIN (Personal
Identification Number) entry, HID (Human Interface Device), RFID (Radio Frequency Identification), magnetic swipe or
barcode.
Role-Based Self-Service. Authorized managers have self-service access to staff information such as salary,
compensation history, key dates and emergency contacts, with reporting and workforce analysis tools to facilitate decision-
making. A customer's managers can view and update staff information, manage department activities, post job openings,
leverage recruiting and hiring tools, and perform 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-9 forms
with required identification. Administrators and managers have the ability to attach files in standard formats such as Microsoft
Word, PDF, JPEG, and spreadsheets to employee files. The documents can be grouped and sorted to individual requirements, as
necessary.
Employees also may be given immediate, security-protected access to view their own pay details on a mobile device
or the Web, and benefits summaries, frequently used forms, and company information on the Web. They can also update
personal information such as address, phone number, emergency contacts, and skills; change their preferences such as direct
deposit accounts and benefits selections; make routine requests such as asking for vacation time; and enroll in training.
UltiPro Business Intelligence. UltiPro Business Intelligence uses a business intelligence platform from IBM Cognos
Corporation, a third-party provider, for HR, payroll, and talent management reporting and analysis. Accessed via the Web,
UltiPro Business Intelligence gives users the ability to access data across the UltiPro solution - from HR, payroll to benefits
administration and enrollment, compensation, talent acquisition and onboarding, talent management, compensation,
compliance, year-end data, and more - and enables them to create, modify, and distribute workforce-related reports and
notifications. UltiPro includes a pre-configured data mapping library and pre-authored reports and analytics. Controlled by
role-based security, everyone in a customer's organization—from line managers to executives can have immediate access to key
workforce metrics, and they can personalize their own user experience to show the reports they want to see and how they want
to see them. We believe that UltiPro Business Intelligence gives our customers significant strategic value for managing their
workforce-related functions and saves them labor time and money by eliminating or reducing the need for internal technology
people to generate hundreds of individual reports for disparate executive and management needs. We also embed key data
visualizations in context of the application. These data visualizations are developed as part of the core application and provide
in-context support to decision-makers.
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Other Key Capabilities. UltiPro includes system configuration tools such as graphical workflow configuration and
platform configuration to allow customers to extend UltiPro with new secure, reportable fields. In addition, UltiPro offers role-
based security, flexible business rules, and an easy-to-use content management tool. Conditional workflow enables
organizations to authorize HR/payroll staff, managers, or supervisors to manage key HR processes via UltiPro, expediting
business activities such as hiring an employee or making a salary increase. UltiPro workflow is configurable based on customer
need and includes numerous pre-configured processes based on industry best-practices. System administration is designed to
enable non-technical users to administer UltiPro's role-based security, built-in conditional workflow, and system business rules,
as well as to enable system administrators to post company communications, link to external Web sites and tailor functionality
to reflect the customer's own company user experience requirements. Enterprise Integration Tools also are included to provide
the ability to interface with third-party cloud and on-premise applications and providers such as general ledger, payment
services, time clocks, banks, 401(k) and benefits providers, check printing services and unemployment management services.
UltiPro's Optional Capabilities
UltiPro Talent Acquisition is a suite of add-on products comprised of Recruitment and Onboarding.
i) Recruiting. In the second quarter of 2014, Ultimate introduced a completely new, internally developed
recruiting solution designed to transform the recruiting process by increasing candidate engagement and simplifying
the work of recruiters. The new solution, UltiPro Recruiting, was built to be candidate-centric and has a consumer-like
interface to attract and keep top talent engaged, with the goal to reduce the typical 40 percent to 80 percent online
application drop-off rate typically occurring with traditional applicant tracking solutions. Rather than being restricted
to limited profile information and résumés typical of traditional solutions, candidates can build an in-depth online
presence that gives recruiters and hiring managers a more complete understanding of who they are. UltiPro Recruiting
includes an appealing user interface, gamification, and collaboration tools. It is fully mobile and integrates with
popular social networks such as LinkedIn and Twitter. At the same time, UltiPro Recruiting automates the recruiting
process for hiring managers, recruiters, and HR staff by enabling them to track and manage standard recruitment tasks
such as posting open jobs, reviewing résumés, screening candidates, and scheduling interviews.
ii) Onboarding. UltiPro Onboarding is a comprehensive solution that provides employers the ability to
engage and welcome new employees into an organization before the first day of work and to speed their time to
productivity. UltiPro Onboarding enables dynamic content such as video messages from executives, managers, and co-
workers and gives new hires the ability to connect with fellow team members, request a mentor, engage in self-
directed learning through a feature called ‘Unlock Your Potential,’ and complete compliance and other required
documents. The solution is easily configurable to meet the specific needs of an organization and includes such
activities as obtaining required government and procedural paperwork, including electronic signatures and document
storage; provisioning necessary equipment and job-specific tools such as office location, computer equipment, and
uniforms; ensuring enrollment in necessary training programs; and instilling the employer's core values and business
objectives.
UltiPro Talent Management is a suite of add-on products comprised of Performance Management, Talent Predictors,
and Succession Management.
i) Performance Management. UltiPro Performance Management helps companies maximize the development
of their people and improve employee satisfaction by automating and enhancing the performance process, using
competency-based employee development. UltiPro Performance Management streamlines the processes of evaluating
performance and completing performance reviews, making competency assessments, identifying top performers for
succession planning, and tracking and executing coaching, training and development plans. The solution also supports
a continuous process of capturing real-time employee feedback from a social network and, through our mobile
solution, makes goal management, talent profile information, employee observations, and goal journaling convenient
for employees.
ii) Talent Predictors. In 2013 we added a new predictive analytics solution that is embedded in the talent card
of the UltiPro Talent Management suite, where predictive metrics and indicators are available to support manager
decisions. The new predictors are based on statistical algorithms we developed over the course of more than two years
and validated with numerous customers. UltiPro’s predictive metrics help managers to determine the best actions to
take for further developing or changing the career trajectory of employees reporting to them, thereby helping
organizations to reduce turnover and improve employee engagement. For example, organizations can set tolerances for
certain predictive metrics in our UltiPro Retention Predictor™, giving a manager or HR generalist the ability to see
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immediately if an employee exceeds the tolerance level they have defined as "risk of leaving" and, thereby, providing
them an early warning to take an appropriate action to increase the chances of that employee staying. In addition to
our UltiPro Retention Predictor, the solution includes an UltiPro High Performer Indicator™, which identifies
employees who consistently receive high pay raises, and an UltiPro High Performer Predictor™, which ranks
employees predicted to be high performers based upon a number of variables tracked in UltiPro.
iii) Succession Management. With UltiPro Succession Management, organizations can involve company
leadership, managers, and individuals in an ongoing, collaborative process of succession planning. Employees can
manage their own talent profiles-updating factors that influence succession readiness such as mobility preferences,
languages, education, accomplishments, and competencies-to ensure that leadership has a deeper understanding of the
talent landscape at their organization. Visible to employees and managers, UltiPro's employee “talent card” provides a
consolidated and comparative view of multiple succession-readiness factors, which then can be used in both decision-
making and career development processes.
Other Optional Capabilities include, but are not limited to, the following products, which are supplemental to
UltiPro's standard HR/payroll capabilities:
Compensation Management. UltiPro Compensation Management includes Salary Planning, Salary Budgeting and
Incentive Compensation Plans capabilities. This expanded solution is designed to support executives, managers and
compensation analysts working with salary increase allocations and to incentivize employees by giving them visibility into
their individual compensation plans. Highly configurable, including multi-currency, UltiPro Compensation Management makes
it easy for companies to manage their unique compensation plans and salary award processes with flat amounts, percentages
and unit-based compensation such as Restricted Stock Unit awards. Managers can review their salary budgets and merit pool
guidelines and determine the best way to allocate pay increases to their employees within their approved budget parameters.
Once managers decide on the allocations, they can submit pay increases through UltiPro Payroll.
Benefits Enrollment. With UltiPro Benefits Enrollment, employees can enroll in the appropriate benefit plans for their
individual needs online, either at work or from home, during defined open enrollment periods. Employees can also choose to
quickly renew their benefits in a single click and are guided to make the right selections based on prerequisites that link benefit
plans together. UltiPro mobile capabilities enable employees to update their retirement contributions on the go. Benefits
administrators can configure the enrollment process and messaging to make the process easy for employees and can monitor
the enrollment progress. UltiPro Benefits Enrollment also guides employees through the benefit and personal information
changes necessary as a result of life events such as getting married, having a baby or moving. UltiPro also delivers more than
70 predefined Benefit Carrier templates to facilitate the electronic feeds required for insurance carriers and plan administrators,
reducing the need for manual reporting of employee census information, participant coverage, and billing reconciliation.
Time, Attendance, and Scheduling (designed for enterprise companies). Through a strategic partnership, we have the
right to market and distribute an independent third party's time and labor management product as part of the UltiPro solution.
We have branded this product as UltiPro Time and Attendance, marketing the components as UltiPro Time and Attendance,
UltiPro Leave Management, and UltiPro Workforce Scheduling (collectively, “UTA”). Ultimate is the single-source contact for
customer implementations and ongoing solution support for UTA. UTA is Web-based and integrated with UltiPro's payroll, HR,
and benefits functionality. UltiPro Time and Attendance tracks time and attendance labor metrics and supports a variety of
time-capture mechanisms. UltiPro Leave Management includes all of the functionality required to effectively track and manage
employee leave. UltiPro Workforce Scheduling features industry-specific employee scheduling options to ensure that
organizations in different environments deploy employees in an efficient and legislatively compliant manner.
Time Management (designed for mid-market and strategic companies). UltiPro Time Management delivers the
functionality and flexibility needed to manage employee time and attendance efficiently and provides Web access to real-time
employee time and labor information. UltiPro Time Management provides companies with the tools to proactively prevent
issues that negatively impact business performance, such as employee coverage gaps, labor law violations, and excess labor
spending. Fully integrated scheduling, time and attendance, and leave management capabilities reduce payroll expenditures and
streamline payroll and workforce management processes.
Payment Services. We have the right to market and distribute an independent third party's tax filing solution that we
have branded UltiPro Payment Services (“UltiPro Payment Services”). With this solution, companies are able to meet all
Federal, state, and local payroll tax filing obligations quickly and easily. The UltiPro solution saves payroll staff time by
eliminating the administrative burdens associated with tax filing. UltiPro Payment Services enables businesses to deposit
federal, state, and local tax payments for more than 13,000 tax codes via electronic funds transfer or check and automates filing
for monthly, quarterly, and annual tax returns.
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Wage Attachments. For organizations required to process third-party payments on behalf of their employees for items
such as child support, tax levies, and creditor garnishments, UltiPro Wage Attachments provides the means to effectively
streamline and manage the payment process. UltiPro Wage Attachments eliminates the burden associated with payments to
third parties by using information entered and calculated in UltiPro, so there is no need to manage payment processing or
analyze varying disbursement schedules for multiple jurisdictions. We ensure that each third-party payment is made according
to the designated payment method and reaches its required destination within the assigned timeframe.
Other Optional Capabilities. We offer a number of additional HR and payroll-related services to extend the value of
UltiPro, including test environment services, W-2 print services, pre-employment screening, paycheck modeling, pay cards,
unemployment tax management, employment verification services, employee assistance, health and wellness, and work/life
balance programs. In addition, we offer UltiPro Federated Single Sign-On for standards-based identity management by
leveraging Microsoft's Active Directory Federated Services infrastructure as well as single-sign-on capabilities through our
partner Ping Identity. These solutions help improve and simplify data security by enabling individuals to use a single login
credential (such as a network login) to seamlessly access UltiPro over the Internet.
Technology
We strive to use the most modern and capable technologies available for delivering solutions that are flexible, easy to
use, fast, and secure. Major characteristics of our cloud application platform include, but are not limited to, the following:
Multi-tenancy. As a SaaS provider, we use a multi-tenant cloud model that allows us to support multiple customers on
a single set of systems while maintaining performance, security, and reliability. We manage and maintain our solutions for our
customers, including all hardware and software upgrades. Our customers benefit by reducing their need to keep their own IT
resources on staff for UltiPro solutions. Our cloud customers also benefit from having the most current version of UltiPro
installed as soon as it is available.
Configurability. We have invested in our own technology and approaches for enabling application and system
configurability, enabling customers to achieve a highly tailored solution while minimizing or eliminating the need to create
custom code.
Openness and Connectivity. We leverage widely adopted technology and industry standards for exposing data and
functionality via application programming interfaces (APIs). Customers can access their HCM data based on these standard,
open, and secured connections in order to link to their in-house systems, third-party cloud applications, and other systems that
require data feeds such as benefits providers. Our UltiPro Carrier Network (UCN) leverages industry-leading solutions from
Informatica, allowing Ultimate to create standard, reusable connectors that support the unique data transfer requirements of
individual benefits providers, simplifying both the development and maintenance of these connections. Ultimate also supports a
number of pre-packaged connectors for solutions that expand or extend the functionality included in UltiPro. These packaged
integrations include, but are not limited to: Yammer, a provider of enterprise social networking solutions; CERTPOINT, a
provider of learning management solutions; and Ping Identity, which offers single-sign-on capabilities for business
applications.
Domain-Driven, User-Centered Design. Our solution design approach includes domain-driven design, which provides
a streamlined process for developing software with the complexities of an HCM domain in alignment with the principles of a
service-oriented architecture (SOA). A key focus of our user-centered design is to optimize the overall user experience of our
customers and to maximize user engagement. We have invested significant resources in usability design and testing to create a
consumer-grade experience that is flexible, responsive, and personalized. In the design of the user-experience, our emphasis is
on how users want to use the product rather than the expectation that users will change their behavior to accommodate the
product.
Mobile-Centric User Experience. In addition to the user experience capabilities available through Microsoft.NET,
Ultimate uses Hypertext Markup Language version 5 (HTML5) and responsive Web design approaches to deliver flexible user
experiences for smartphones and tablets. This mobile framework supports applications delivered through multiple browsers and
automatically adapts to screen size and orientation and takes advantage of gesture-based capabilities. Other features of our
mobile-centric user experience include search for both people data and functionality, configurability for individual users that
allows them to drag and drop individual content 'gadgets' and menu controls, and favorite-specific functionality for quick
access.
Workflow. Ultimate supports numerous transactions and operational processes for our customers. These processes are
frequently unique to an individual customer and typically require multiple steps, approvals, data input, and confirmations. To
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support our customers' unique requirements, UltiPro includes configurable business process automation, or workflow, which
enables customers to automate processes based on their own needs and change these processes over time without custom
software code.
Business Intelligence. Ultimate provides sophisticated data query and report authoring via IBM Cognos, a leading
suite of business intelligence tools. Our customers can access reports and conduct data queries from a Web browser and are able
to apply on-line analytical processing to multidimensional data cubes for exploring data on employees graphically and
statistically from diverse angles. We maintain a link between Cognos' report catalog and UltiPro's data dictionary, eliminating
the necessity for customers to create and maintain ad hoc reporting catalogs on their own. We also maintain a BI Exchange, an
online community where Ultimate professionals and customers can post, download, and share standard reports. We have
unified security for the data elements across UltiPro and Cognos instances so that role-based security controls data access
across both solutions. We also provide single sign-on to simplify and secure user access.
Data Centers for Cloud Offering
Our Cloud Offering provides Web-based access to comprehensive HCM functionality for organizations that want to
simplify delivery and support of their business applications. As a part of our Cloud Offering services, Ultimate provides the
hardware, infrastructure, ongoing maintenance and backup services for our customers at three data centers. The data center
located near Atlanta, Georgia, is owned and operated by Quality Technology Services (“QTS”). The data center located near
Toronto, Canada, is owned and operated by CenturyLink Technology Services ("CenturyLink") (formerly known as Savvis
Communications Canada, Inc.) and the data center located in Phoenix, Arizona, is owned and operated by IO Phoenix One,
LLC.
Ultimate's use of the data center located near Atlanta, Georgia, is governed by a Master Space Agreement dated
June 1, 2009 with Quality Technology Services Metro, LLC (“QTS Metro”). Pursuant to the terms of the QTS Agreement,
Ultimate may from time to time submit orders for the use of certain physical space within the data centers for hosting
Ultimate's hardware equipment, as well as Internet connectivity services, security, power and generator back-up, environmental
controls and access controls. The QTS Agreement provides that any service order will automatically renew for successive
renewal terms, unless either party notifies the other party in writing at least sixty days prior to the end of the then current term
that there will be no such renewal. Furthermore, the QTS Agreement may be terminated at any time by either party thereto, if:
(i) the non-terminating party breaches any material term of such QTS Agreement and fails to cure such breach within 10 days
after receipt of written notice; (ii) the non-terminating party becomes the subject of a voluntary or involuntary proceeding
relating to insolvency, bankruptcy, receivership, liquidation, or reorganization; or (iii) a court or other government authority
having jurisdiction over the services prohibits the furnishing of services governed by such QTS Agreement.
Ultimate's use of the data center located near Toronto, Canada, is governed by a Master Services Agreement dated
April 30, 2013 (the “CenturyLink Agreement”) between Ultimate's wholly owned subsidiary Ultimate Canada and
CenturyLink. Pursuant to the terms of the CenturyLink Agreement, Ultimate Canada has use of certain physical space within
the data center for hosting Ultimate Canada's hardware equipment, as well as Internet connectivity services. The CenturyLink
Agreement contains provisions relating to data security and access to the data center. Upon placing a service order, Ultimate
Canada is guaranteed certain pricing terms and is committed to minimum usage levels for a period of at least 36 months from
the service effective date. The CenturyLink Agreement will renew on a month-to-month basis unless either party gives at least
sixty days written notice prior to the completion of the applicable term that there will be no such renewal. The CenturyLink
Agreement provides that its term will end upon the expiration of the term of the last-executed service order. Ultimate has
guaranteed the payment of all amounts due from Ultimate Canada to CenturyLink under the CenturyLink Agreement.
Ultimate's use of the data center located near Phoenix, Arizona is governed by a License and Master Services
Agreement dated February 27, 2012 (the "IO Phoenix Agreement") with IO Phoenix One, LLC. Pursuant to the terms of the IO
Phoenix Agreement, Ultimate has use of certain physical space within the data center for hosting Ultimate's hardware
equipment, as well as Internet connectivity services. The IO Phoenix Agreement contains provisions relating to data security
and access to the data center. Ultimate is guaranteed certain pricing terms and is committed to minimum usage levels for a
period of at least 36 months from the effective date. The IO Phoenix Agreement will automatically renew thereafter for
additional terms of one year unless either party gives written notice prior to the completion of the applicable term that there will
be no such renewal. Ultimate must give written notice within 60 days while IO Phoenix must give written notice within 120
days.
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Pricing
Our Cloud Offering is designed to provide an appealing pricing structure to organizations that prefer to minimize the
initial cash outlay associated with typical capital expenditures for traditional on-premise products. Our cloud customers
purchase the right to use UltiPro on an ongoing basis for a specific term in a shared or dedicated hosted environment, and the
arrangement can typically be renewed after its initial term has expired. In the shared environment, Ultimate provides an
infrastructure with servers shared among many customers who use a Web browser to access the application software through
the related data center. In the dedicated environment, the customer does not share servers with other customers but rather has its
own set of servers. The pricing for our Cloud Offerings, including both the hosting element as well as the right to use UltiPro,
is on a PEPM basis.
Research and Development Activities
Ultimate incurs research and development expenses, consisting primarily of software development personnel costs, in
the normal course of our business. Such research and development expenses are for enhancements to our existing products and
for the development of new products. During 2014, 2013 and 2012, we spent $108.8 million, $86.8 million and $65.9 million,
respectively, on research and development activities, gross of capitalized software. During 2014, 2013 and 2012, $25.2 million,
$19.0 million and $5.2 million, respectively, of research and development expenses were capitalized for computer software
development costs related to an internal-use development project that is expected to be offered in the future as a cloud product
only. UltiPro Recruiting, a component of the overall capitalized development project, became ready for its intended use during
2014. The remaining components of the development project are expected to be completed during 2015 and thereafter.
Amortization for the components of the development project begins when they are ready for their intended use.
Customer Services
We believe that our focus on delivering our customers a positive and productive UltiPro experience has differentiated
Ultimate in the marketplace and is critical to the quality of Ultimate's comprehensive service solution. We provide our customer
services in two broad categories: (i) professional services and (ii) customer support services and product maintenance.
Additionally, we provide services associated with the delivery of our cloud-based solutions. These services include, but are not
limited to, purchasing and supporting hardware and system software; installing new versions of UltiPro; and backing up
customer data.
Professional Services. Ultimate's professional services include system setup and activation (i.e., implementation),
executive relationship management (“ERM”), and knowledge management (or training) services. We believe that our setup and
activation consulting services are differentiated from those of other vendors by speed, predictability and completeness. Our
successful record with rapid system activation and implementations is due, we believe, to our standardized methodology, long-
tenured consultants, highly configurable product functionality, and comprehensive conversion and integration tools.
Ultimate has a long-tenured team of functional and technical consultants who are dedicated to assisting customers with
rapid deployments. In addition, we provide our customers with the opportunity to participate in formal training programs
conducted by our knowledge management services team, as well as online scheduled courses and on-demand training. Training
programs are designed to increase our customers' ability to use the full functionality of our products, thereby maximizing the
value of our customers' investments. Courses are designed to align with the stages of implementation and to give attendees
hands-on experience with UltiPro. Trainees learn such basics as how to enter new employee information, set up benefit plans
and generate standard reports, as well as more complex processes such as defining company rules, configuring the system and
creating custom reports. Ultimate maintains training facilities in Atlanta, Georgia; Schaumburg, Illinois; Dallas, Texas; Santa
Ana, California; and at our headquarters in Weston, Florida. Ultimate rents training facilities in other locations, such as
Toronto, Canada, on an as-needed basis. In addition to offering classes at these facilities, we conduct Web-based training, and
provide recorded on-demand training as well as “Quick Tours” for rapid assistance in specific areas of the solution. After our
customers have processed their first live payroll using UltiPro (referred to as going “Live”) and have been turned over to our
customer support and maintenance program, we assign a customer relationship manager to the account to assist customers
obtaining maximum value of the UltiPro solution, connect with other Ultimate users and advanced business analytics. The
ERM team also focuses a large portion of its time on customer retention, which is an important aspect of Ultimate's long-term
business model.
Customer Support. We offer comprehensive and on-going maintenance services and technical support. These services
have historically been purchased by all of our customers, and Ultimate had a recurring revenue cloud customer retention rate
which exceeded 96% in 2014. Ultimate's customer support services include: software updates that reflect tax and other
legislative changes; a named customer service representative; telephone support 24 hours a day, 7 days a week; unlimited
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access to Ultimate's employee tax center on the Web; seminars on year-end closing procedures; a customer blog; and periodic
newswire emails. In addition, our customer support services team maintains a Customer Success Portal for our customers
where customers can submit inquiries and service requests as well as search a knowledge base of information for instant
answers to questions, holds an annual national user conference and arranges for Ultimate professionals to attend smaller, user-
organized user group meetings on a routine basis throughout the United States.
Customers
As of December 31, 2014, Ultimate provided our UltiPro solutions to more than 2,800 customers. Ultimate's
customers represent a wide variety of industries, including manufacturing, food services, sports, technology, finance, insurance,
retail, real estate, transportation, communications, healthcare and other services. For each of the three years ended
December 31, 2014, no customer accounted for more than 10% of total revenues.
Sales and Marketing
We market and sell our products and services primarily through our direct sales force.
Our direct sales force includes business development vice presidents, directors and managers who have defined
territories, typically geographic. 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, phone-based sales calls, or Web demonstrations, sales
managers work with application and technical sales consultants to analyze prospective client needs, demonstrate Ultimate's
UltiPro solutions and, when required, respond to requests for proposals. The sale is finalized after customers complete their
internal sign-off procedures and the terms of the contract are negotiated and signed.
With a sale of the Cloud Offering, the agreement generally requires PEPM fees based on company size, and bundled
fees for implementation and training. Typical payment terms include a deposit at the time the contract is signed and ongoing
PEPM payments on specific payment dates designated in the contract, usually tied to the Live date.
We support our sales force with a comprehensive marketing program that includes public relations, advertising, direct
mail, trade shows, seminars and workshops, email marketing, social media marketing, and Web marketing. Working closely
with the direct sales force, customers and strategic partners, our marketing team defines positioning strategies and develops a
well-defined plan for implementing these strategies. Our marketing services include market surveys and research, overall
campaign management, creative development, demand generation, results analysis, and communications with field offices,
customers, and marketing partners.
Intellectual Property Rights
Ultimate's success is dependent, in part, on our ability to protect our proprietary technology. We rely on a combination
of copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish
and protect our proprietary rights. We do not have any patents or patent applications pending.
Competition
The market for our products is highly competitive. Our products compete primarily on the basis of technology,
delivered functionality, price/performance and service.
Ultimate's competitors in our enterprise market include (i) large service bureaus, primarily Automatic Data Processing
Inc. (“ADP”) and, to a lesser extent, Ceridian; and (ii) companies, such as Oracle, Lawson, and Workday that offer human
resource management and payroll software products for use on mainframes, client/server environments and/or Web servers. In
our mid-market and strategic market, Ultimate's competitors include payroll service providers, such as ADP, Ceridian and
Paychex.
Backlog
Backlog consists of our UltiPro cloud-based solutions and, to a lesser extent, sales of services related to our Cloud
Offering on a stand-alone basis to customers who already own a perpetual license (“Base Hosting”) under signed contracts for
which the services have not yet been delivered. At December 31, 2014, Ultimate had backlog of $185.7 million compared with
$160.0 million as of December 31, 2013. Ultimate expects to fill approximately $171.1 million of the backlog during 2015.
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Ultimate 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, 2014, Ultimate employed 2,354 persons. Ultimate believes that our relationships with employees
are good, and that belief is validated by Ultimate’s ranking of #20 on FORTUNE’s 2014 “100 Best Companies to Work For”
list as well as our # 3 ranking on Great Rated's 2014 Top 20 Technology Workplaces list and #4 ranking on Great Rated’s 2014
list of Ten Great Places to Work For Millennials, all determined by anonymous employee surveys administered by the Great
Place to Work Institute. Ultimate's history of good employee relationships is further validated by Ultimate's #9 ranking on
FORTUNE's 2013 “100 Best Companies to Work For” list, # 25 ranking on FORTUNE's 2012 list and the Great Place to Work
Institute's ranking of Ultimate as the #1 Best Place to Work in America among medium-sized companies for both 2009 and
2008. However, competition for qualified employees in the technology sector and Ultimate's industry is intense. Management
of Ultimate believes that our future success will depend, in part, on our continued ability to attract, hire and retain qualified
personnel.
Available Information
Ultimate'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, including but not limited to registration statements
on Form S-3, are available free of charge on Ultimate's website at www.ultimatesoftware.com as soon as reasonably practicable
after such reports are electronically filed with the Securities and Exchange Commission (“SEC”). Information contained on or
accessible through Ultimate's website is not part of this Form 10-K. You may record and copy any materials we file with the
SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that
contains the reports, proxy and information statements and other information regarding us that we file with the SEC. You can
access the SEC's website at www.sec.gov.
Item 1A. Risk Factors
Ultimate operates in a rapidly changing and dynamic business environment that involves risk and uncertainty. The
following discussion is a description of risks and uncertainties associated with our business that could cause, or contribute to
causing, actual results to differ materially from expectations. These are not all of the risks we face. We may be adversely
affected by risks not currently known or that we currently consider immaterial.
We may be adversely affected by substantial quarterly fluctuations in our revenues and operating results.
Our quarterly revenues and operating results have varied significantly in the past and are likely to vary substantially
from quarter to quarter in the future. Our quarterly operating results may fluctuate as a result of a number of factors, including:
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Increased expenses from one quarter to another (especially as they relate to product development and sales
and marketing);
Spending patterns of our customers;
Timing of our product releases;
Increased competition;
A drop in the near-term demand for our products, particularly in relation to professional services; and
Announcements of new products by Ultimate or by our competitors.
We establish our expenditure levels based upon our expectations as to future revenues, which are comprised primarily
of recurring revenues and services revenues. If revenue levels are below expectations, particularly services revenues which are
more subject to variations between periods than recurring revenues, expenses can be disproportionately high in a particular
period. For example, while sales production could be at our level of expectations, depending on the spending patterns of our
customers including the timing in which they begin the implementation of UltiPro and the extent to which they use Ultimate’s
resources, the immediate reported total revenues could be lower than expected.
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Our operating results for previous fiscal quarters are not necessarily indicative of our operating results for the full
fiscal years or for any future periods. We believe that, due to the underlying factors for quarterly fluctuations, quarter-to-quarter
comparisons of our operations are not necessarily meaningful and that such comparisons should not be relied upon as
indications of future performance.
Due to the method of accounting for sales from our Cloud Offering, a change in the period of the time from contract date to
the Live date (“Time to Live”) could negatively impact the amount of recurring revenues recognized in a reporting period.
Sales production, as it pertains to sales of cloud units, is not reflected in recurring revenues and related variable costs
in our consolidated statements of operations until the related customer goes Live. In our internal business model, we make
certain assumptions, among other things, with respect to future sales production, revenue growth, variable costs, personnel
costs and other operating expenses.
Our expectations for recurring revenue growth are typically established based on combinations of actual sales
production (for those units that have been previously sold but have not yet gone Live) and expected future sales production,
together with expectations as to the Time to Live periods. Estimates for Time to Live periods are usually based on (i) specific
estimates (for certain backlog sales) provided by our field personnel, which estimates include factors and assumptions that are
not within the control of our field personnel; and (ii) estimates for Time to Live periods for other cloud sales (including backlog
sales without specific estimates at that point in time), as well as expected sales, which are typically based on assumptions
derived from our historical Time to Live periods. These estimates are adjusted periodically, and prospectively, based on
management’s assessment of Time to Live for backlog sales at that point in time. Factors that could impact the estimates for
Time to Live periods include, but are not limited to, customer size (as larger customers may have longer implementations, tend
to go Live on more UltiPro features and have more interface and integration requirements), and the number of complementary
products sold in addition to UltiPro to a single customer, which in some cases involve customers’ desire to go Live on all
products at once, as compared with UltiPro first followed by complementary products.
To the extent there are changes in the underlying assumptions which drive Ultimate’s expected revenue growth from
cloud sales, which include, but are not limited to, actual sales production achieved and changes in Time to Live periods, our
recurring revenues, as reported in our consolidated statements of operations, could differ materially from levels we expected to
achieve.
Rapid technological changes and the introduction of new products and enhancements by new or existing competitors could
undermine our current market position.
The market for our products is characterized by rapid technological advancements, changes in customer requirements,
frequent new product introductions and enhancements and changing industry standards. The life cycles of our products are
difficult to estimate. Rapid technological changes and the introduction of new products and enhancements by new or existing
competitors could undermine our current market position. Our growth and future success will depend, in part, upon our ability
to:
Enhance our current products and introduce new products in order to keep pace with products offered by our
competitors;
Adapt to technological advancements and changing industry standards; and
Expand the functionality of our products to address the increasingly sophisticated requirements of our
customers.
We may not have sufficient resources to make the necessary investments and we may experience difficulties that could
delay or prevent the successful development, introduction or marketing of new products or enhancements. In addition, our
products or enhancements may not meet the increasingly sophisticated customer requirements of the marketplace or achieve
market acceptance at the rate we expect, or at all. Any failure by us to anticipate or respond adequately to technological
advancements, customer requirements and changing industry standards, or any significant delays in the development,
introduction or availability of new products or enhancements, could undermine our current market position.
If we are unable to enhance our product and develop new services, our revenue growth may be harmed.
Our ability to attract new customers and increase revenue from existing customers will depend in large part on our ability
to enhance and improve our existing UltiPro standard/HR payroll product and Optional Capabilities and to introduce new features
and Optional Capabilities to our product. The success of any enhancement or new feature depends on several factors, including
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the timely completion, introduction and market acceptance of the enhancement or service. If we are unable to develop enhancements
and introduce new features and Optional Capabilities to our existing product in a cost-effective manner that keeps pace with rapid
technological developments, our business could be adversely affected. If we are unable to successfully develop, acquire new
services or enhance our existing products to meet customer requirements, our revenue may not grow as expected.
Our stock price has experienced high volatility, may continue to be volatile and may decline.
The trading price of our Common Stock has fluctuated widely in the past and may do so in the future, as a result of a
number of factors, many of which are outside our control, such as:
The volatility inherent in stock prices within the sector in which we conduct business;
The volume of trading in our Common Stock, including sales upon exercise of outstanding stock options and
upon the vesting of restricted stock and restricted stock units;
Failure to achieve earnings expectations;
Changes in our earnings estimates by analysts;
Variations in our actual and anticipated operating results, including, but not limited to, prospective financial
guidance provided by Ultimate to our investors and research analysts; and
The announcement of a merger or acquisition.
Stock markets have experienced extreme price and volume fluctuations that have affected the market prices of many
technology and computer software companies, particularly Internet-related companies. Such fluctuations have often been
unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could
adversely affect the market price of our Common Stock.
Further, securities class action litigation has often been brought against companies that experience periods of volatility
in the market prices of their securities. Securities class action litigation could result in substantial costs and a diversion of our
management’s attention and resources.
Our failure to maintain and increase acceptance of UltiPro, which accounts for substantially all of our revenues, could
cause a significant decline in our revenues.
Currently, the UltiPro solutions, including the UltiPro standard/HR payroll product and Optional Capabilities and
related services, account for substantially all of our revenues. Our future success depends on maintaining and increasing
acceptance of UltiPro. Any decrease in the demand for UltiPro would have a material adverse effect on our business, operating
results and financial condition.
A systems failure or other service interruption at the data center owned and managed by QTS, the data center owned and
managed by CenturyLink (formerly known as Savvis), and the data center owned and managed by IO Phoenix One, LLC
and used for our hosting services could result in substantial expense to us, loss of customers and claims by our customers
for damages caused by any losses they incur.
We offer hosting services, which include hardware, infrastructure, ongoing maintenance and back-up services, to our
customers in the United States at a data center owned and operated by QTS, at a location near Atlanta, Georgia and at a data center
owned and operated by IO Phoenix One, LLC near Phoenix, Arizona. We also offer hosting services, which include hardware,
infrastructure, ongoing maintenance and back-up services, to our customers with employees exclusively in Canada at a data center
owned and operated by CenturyLink (formerly known as Savvis) near Toronto, Canada.
These hosting services, which are provided as part of our Cloud Offering, must be able to be reliably operated on a 24
hours per day, seven days per week basis without interruption or data loss. The success of the Cloud Offering depends on our
ability to protect the infrastructure, equipment and customer data files against damage from:
Human error;
Natural disasters;
Power loss or telecommunication failures;
Sabotage or other intentional acts of vandalism; and
Unforeseen interruption or damages experienced in moving hardware to a new location.
We perform a daily backup of our customer data which is stored offsite of the data centers. In addition, QTS has
implemented various activities comprising QualityTech’s Business Continuity Planning & Disaster Recovery Program which
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includes risk assessment and business impact analysis, redundancy and crisis and emergency response procedures. CenturyLink
also has a Business Continuity Program which handles business continuity planning, incident management and site emergency
action planning. However, the occurrence of one of the above listed events or other unanticipated problems at any of the data
centers could:
Result in interruptions in the services we provide to our customers, during which time our customers may be
unable to retrieve their data;
Require us to spend substantial amounts of money replacing existing equipment and/or purchasing services from
an alternative data center;
Cause existing customers to cancel their contracts;
Cause our customers to seek damages for losses incurred; or
Make it more difficult for us to attract new customers.
We face risks associated with security breaches or cyber-attacks.
We face risks associated with security breaches or cyber-attacks of our computer systems and those of our third-party
representatives, vendors and service providers. Although we have implemented security procedures and controls to address
these threats, our systems and our software products may still be vulnerable to breaches, data theft, computer viruses,
programming errors, attacks by third parties, or similar disruptive problems.
If our systems, or the hosting systems at our third party owned data centers, were breached or attacked, the proprietary
and confidential information of our company and our customers could be disclosed, and we may be required to incur
substantial costs and liabilities, including the following:
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expenses to rectify the consequences of the security breach or cyber-attack;
liability for stolen assets or information;
costs of repairing damage to our systems;
lost revenue and income resulting from any system downtime caused by such breach or attack;
loss of competitive advantage if our proprietary information is obtained by competitors as a result of such
breach or attack;
increased costs of cyber security protection;
costs of incentives we may be required to offer to our customers or business partners to retain their business;
and
damage to our reputation.
As a result, any compromise of security of our systems or cyber-attack could have a material adverse effect on our
business, reputation, financial condition, and operating results.
If our direct sales force is not successful, we may be unable to achieve significant revenue growth in the future.
We sell our products and services primarily through a direct sales force. Our ability to achieve significant revenue
growth in the future will depend upon the success of our direct sales force and our ability to adapt our sales efforts to address
the evolving markets for our products. If our direct sales force does not perform as expected, our revenues could suffer.
Our current and future competitors include companies with greater financial, technical and marketing resources than we
have and if we are unable to compete successfully with other businesses in our industry or with in-house systems developed
by potential customers, our profitability will be adversely affected.
Our future success will depend significantly upon our ability to increase our share of our target market, to maintain
and increase our recurring revenues from new and existing customers and to sell additional products, product enhancements,
maintenance and support services and training and consulting services to existing and new customers. The HCM market is
intensely competitive. Our competitors include:
Large service bureaus, primarily ADP and, to a lesser extent, Ceridian;
A number of companies, such as Oracle, Lawson, and Workday that offer HCM software products for use on
mainframes, client/server environments and/or Web servers; and, in the UltiPro mid-market and strategic
markets, payroll service providers such as ADP, Ceridian and Paychex that service companies on the smaller
end of the mid-market; and
The internal HR/payroll departments of potential customers which use custom-written software.
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Our competitors may develop products that are superior to our products or achieve greater market acceptance. Many
of our competitors or potential competitors have significantly greater financial, technical and marketing resources than we do.
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 we can. We believe
that existing competitors and new market entrants will attempt to develop in-house systems that will compete with our
products. We may be unable to compete successfully against current or future competitors. 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 our prospective customers. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market share.
Our acquisitions of other companies, products, or technologies may result in operating difficulties, dilution, and other
harmful consequences that may adversely impact our business and results of operations.
As part of our overall business strategy, from time to time, we acquire complementary businesses, products and
technologies. These transactions could be material to our financial condition and results of operations. We expect to continue
to evaluate, and potentially enter into, acquisitions and a wide array of strategic transactions in the future.
We may not realize the anticipated benefits of our acquisitions to the extent that we anticipate, or at all, because
acquisitions involve many risks, including:
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difficulties integrating the acquired operations, personnel, technologies, products or infrastructure;
diversion of management's attention or other resources from other critical business operations and strategic
priorities;
unexpected difficulties encountered when we enter new markets in which we have little or no experience, or
where competitors may have stronger market positions;
inability to maintain relationships with customers and partners of the acquired business;
the difficulty of incorporating acquired technology and rights into our products and services;
potential unknown liabilities associated with an acquired business;
unanticipated expenses related to integrating acquired technology with our existing technology;
the impact on our results of operations due to depreciation and amortization related to acquired intangible
assets, fixed assets and deferred compensation;
the tax effects of any such acquisitions;
potential litigation, such as claims by third parties related to intellectual property of the businesses we acquire;
potential write-offs of our investments in acquired businesses;
the need to implement controls, procedures and policies appropriate for a public company at companies that
prior to the acquisition lacked such controls, procedures and policies; and
challenges caused by distance, language and cultural differences.
Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and
strategic transactions could cause us to fail to realize the anticipated benefits of such acquisitions or transactions, incur
unanticipated liabilities, and harm our business generally.
We may issue additional equity securities to pay for future acquisitions or other strategic transactions, the issuance of
which could be dilutive to our existing stockholders and affect the trading price of our securities. If any acquisition or other
strategic transactions is not perceived as ultimately improving our financial condition and operating results, our stock price
may decline. Further, if we fail to properly evaluate and execute acquisitions or other strategic transactions, our business and
financial condition may be seriously harmed.
Adverse changes in general economic or political conditions could adversely affect our operating results.
As our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic
and global economic and political conditions. If the state of the economy and the rate of employment deteriorate in the
future, many customers may delay or reduce technology purchases. This could result in reductions in sales of our products,
longer sales cycles, slower adoption of new technologies, increased price competition, customers purchasing fewer services or
Optional Capabilities than they have in the past, customers requesting longer payment terms, customers failing to pay amounts
due and slower collections of accounts receivable. In addition, increased unemployment could result in significant decreases in
our recurring revenues from our existing customer base as we price our ongoing recurring revenues on a PEPM basis, subject,
in many cases, to minimum employee sizes per customer. Any of these events would likely harm our business, results of
operations, financial condition and cash flows from operations.
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The loss of the services of one or more of our key employees could negatively affect our ability to implement our business
strategy.
Our success depends to a significant extent upon a limited number of members of senior executive management and
other key employees, including Scott Scherr, our Chairman of the Board of Directors, President and Chief Executive Officer.
We do not have employment contracts with any of our key personnel. The loss of the services of one or more of our key
employees could have a material adverse effect upon us. In addition, uncertainty created by turnover of our key employees
could cause further turnover of our employees.
If we are not able to successfully recruit personnel, our revenues could be negatively affected.
Our ability to achieve significant revenue growth in the future will also depend on our success in recruiting, training
and retaining sufficient sales, marketing, professional services, product development and other personnel.
The potential growth of our business and expansion of our customer base may place a significant strain on our
management and operations, and we may be unable to manage that growth and expansion successfully.
We expect to increase research and development, professional services, sales and marketing and administrative
operations as and when appropriate to accommodate our growth plans. Accordingly, our future operating results will depend on
the ability of our management and other key employees to continue to implement and improve our systems for operations,
financial control and information management and to recruit, train, manage and retain our employee base. We cannot be certain
that we will be able to manage any future growth successfully.
Our business relies heavily on the products of Microsoft, which may not always be compatible with our products, and we
may be required to spend significant capital if businesses adopt alternative technologies that are incompatible with our
products.
Our software products are designed primarily to operate with Microsoft technologies and our strategy requires that our
products and technology be compatible with new developments in Microsoft technology. Although we believe that Microsoft
technologies are currently widely utilized by businesses of all sizes, we cannot be certain that businesses will continue to adopt
such technologies as anticipated, will migrate from older Microsoft technologies to newer Microsoft technologies or will not
adopt alternative technologies that are incompatible with our products. As a result, we may be required to develop new products
or improve our existing products to be compatible with different technologies that may be used by our customers. We cannot be
certain we will be able to adapt our product to any technologies other than Microsoft’s.
If our third-party software is not adequately maintained or updated, our sales could be materially adversely affected.
Our products utilize certain software of third-party software developers from whom we have either purchased a license
or the underlying source code of such software or entered into a service agreement with the vendor. Although we believe that
there are alternatives for these products, any significant interruption in the availability of such third-party software could have a
material adverse impact on our sales unless and until we can replace the functionality provided by these products. Additionally,
we are, to a certain extent, dependent upon such third parties’ abilities to enhance their current products, to develop new
products on a timely and cost-effective basis and to respond to emerging industry standards and other technological changes.
We may be unable to replace the functionality provided by the third-party software currently offered in conjunction with our
products in the event that such software becomes obsolete or incompatible with future versions of our products or is otherwise
not adequately maintained or updated.
If we are unable to release annual or periodic updates on a timely basis to reflect changes in tax laws and regulations or
other regulatory provisions applicable to our products, the market acceptance of our products may be adversely affected and
our revenues could decline.
Our products are affected by changes in tax laws and regulations and generally must be updated annually or
periodically to maintain their accuracy and competitiveness. We cannot be certain that we will be able to release these annual or
periodic updates on a timely basis in the future. Failure to do so could have a material adverse effect on market acceptance of
our products. In addition, significant changes in tax laws and regulations or other regulatory provisions applicable to our
products could require us to make a significant investment in product modifications, which could result in significant
unexpected costs to us.
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If we are unable to protect our proprietary rights against unauthorized third-party copying or use, our revenues or our
methods of doing business could be negatively impacted.
Our success is dependent, in part, on our ability to protect our proprietary rights. We rely on a combination of
copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and
protect our proprietary rights. We do not have any patents or patent applications pending, and existing copyright, trademark and
trade secret laws afford only limited protection. As a result, we cannot be certain that we will be able to protect our proprietary
rights against unauthorized third-party copying or use. Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary.
In addition, others may develop products that perform comparably to our proprietary products. Policing the unauthorized use of
our products is difficult.
Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trademarks, copyrights or
trade secrets or to determine the validity and scope of the proprietary rights of others; such litigation may be expensive and
divert the attention of management.
Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trademarks,
copyrights or trade secrets or to determine the validity and scope of the proprietary rights of others. Any litigation could result
in substantial costs and diversion of resources and management attention.
As is common in the software industry, from time to time we may become aware of third-party claims of infringement
by our operations or products of third-party proprietary rights. While we are not currently aware of any such material claim, our
software products may increasingly be subject to such claims as the number of products and competitors in our industry grows,
as the functionality of products overlaps and as the issuance of software patents becomes increasingly common. Any such
claims, with or without merit, can be time consuming and expensive to defend, cause product shipment delays or require us to
enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms
acceptable to us, or at all.
Defects and errors in our software could affect market acceptance of our products.
Software products such as those offered by us may contain undetected errors or failures when first introduced or as
new versions are released. Testing of our products is particularly challenging because it is difficult to simulate the wide variety
of computing environments in which our customers may use these products. Despite extensive testing, from time to time we
have discovered defects or errors in our products. Defects and errors may:
Cause delays in product introductions and shipments;
Result in increased costs and diversion of development resources;
Require design modifications; or
Decrease market acceptance of, or customer satisfaction with, our products.
Despite testing by us and by current and potential customers, errors may be found after commencement of commercial
shipments, which may result in loss of or delay in market acceptance which could have a material adverse impact upon our
business, operating results and financial condition.
The sale and support of software products and the performance of related services by us entail the risk of product or service
liability claims, which could significantly affect our financial results.
Customers use our products in connection with the preparation and filing of tax returns and other regulatory reports. If
any of our products contain errors that produce inaccurate results upon which users rely, or cause users to misfile or fail to file
required information, we could be subject to liability claims from users. Our cloud and maintenance renewal agreements with
our customers typically contain provisions intended to limit our exposure to such claims, but such provisions may not be
effective in limiting our exposure. Contractual limitations we use may not be enforceable and may not provide us with adequate
protection against product liability claims in certain jurisdictions. A successful claim for product or service liability brought
against us could result in substantial cost to us and divert management’s attention from our operations.
Anti-takeover provisions in our certificate of incorporation and by-laws and under our Amended and Restated Rights
Agreement and Delaware law and our Change in Control Bonus Plans could substantially increase the cost to acquire us or
18
prevent or delay a change in control and, as a result, negatively impact our stockholders and the price of our Common
Stock.
We have taken a number of actions that could have the effect of discouraging a takeover attempt. For example, we
have adopted an Amended and Restated Rights Agreement that would cause substantial dilution to a stockholder, and
substantially increase the cost paid by a stockholder, who attempts to acquire us on terms not approved by our Board of
Directors. This rights plan could prevent us from being acquired.
Our Board of Directors is divided into three classes, each of whose members serve for a staggered three-year term.
This board structure may prevent stockholders from changing the composition of our Board of Directors quickly.
In addition, our certificate of incorporation grants our Board of Directors the authority to fix the rights, preferences
and privileges of and issue up to 2,500,000 shares of preferred stock without stockholder approval. Although we have no
present intention to issue shares of preferred stock, such an issuance could have the effect of making it more difficult and less
attractive for a third-party to acquire a majority of our outstanding voting stock. Preferred stock may also have other rights,
including economic rights senior to our Common Stock, which could have a material adverse effect on our stock price.
We are also subject to the anti-takeover provisions of Section 203 of Delaware General Corporation Law. This section
provides that a corporation may not engage in any business combination with any interested stockholder (as defined in that
section) during the three-year period following the time that a stockholder became an interested stockholder. This provision
could have the effect of delaying or preventing a change in control of our company.
We have adopted two Amended and Restated Change in Control Bonus Plans. One plan provides for the payment of
cash amounts to three of our named executive officers, Scott Scherr, Marc D. Scherr and Mitchell K. Dauerman, upon a
“change in control” of Ultimate. The other plan provides for the payment of cash amounts in the event of a "change in control"
to our other executive officers, including our other two named executive officers, and certain of our employees, designated by
the Compensation Committee of our Board of Directors. A “change in control” would occur if more than 50% of our Common
Stock were acquired by a person or entity other than Ultimate or a subsidiary or employee benefit plan of ours. There are other
conditions that could result in a change in control event such as a sale or transfer of all or substantially all of our assets or
business. The aggregate amount of the payments that may be made to all participants under the two Amended and Restated
Change in Control Bonus Plans may be as much as 6% of the gross consideration received by us or our stockholders in a
change in control transaction. The Change in Control Bonus Plan could substantially increase the cost to acquire us.
The growth of the international operations of our business subjects us to additional risks associated with foreign operations.
International operations are subject to risks associated with operating outside of the United States. During the fourth
fiscal quarter of 2006, we began operating in Canada (through the formation of a wholly-owned Canadian subsidiary). During
2014, we continued to grow our operations in Canada and expanded our development operations to the United Kingdom and
Singapore. The financial impact of our international operations to our overall business has been insignificant to
date. However, over time, our international operations may grow and increase their significance to our business. Sales to
international customers subject us to a number of risks, including foreign currency fluctuations, unexpected changes in
regulatory requirements for software, international economic and political instability, compliance with multiple, conflicting,
and changing governmental laws and regulations, difficulty in staffing and managing foreign operations, international tax laws,
potentially weaker protection for our intellectual property than in the United States, and difficulties in enforcing such rights
abroad. If sales to any of our customers outside of the United States are delayed or canceled because of any of the above
factors, our revenue may be negatively impacted.
Our international operations also increase our exposure to international laws and regulations. If we are unable to
comply with foreign laws and regulations, which are often complex and subject to variation and unexpected changes, we could
incur unexpected costs and potential litigation.
If our goodwill or acquired intangible assets become impaired, we may be required to record a significant charge to
earnings.
Under U.S. generally accepted accounting principles, we review our acquired intangible assets for impairment when
events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is required to be tested
for impairment at least annually. Factors that may be considered in circumstances indicating that the carrying value of our
goodwill or acquired intangible assets may not be recoverable include a reduction in our market capitalization (as a result of a
decline in our stock price) to a level below our consolidated stockholders’ equity as of the applicable balance sheet date,
19
declining future cash flows, and slower growth rates in our industry. We may be required to record a significant charge to
earnings in our consolidated financial statements during the period in which any impairment of our goodwill or acquired
intangible assets is determined, resulting in a negative impact on our results of operations.
Changes in, or interpretations of, accounting principles could result in unfavorable accounting changes.
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles
and accompanying accounting pronouncements, implementation guidelines, and interpretations. Changes in these rules or their
interpretation could significantly change our reported results and may even retroactively affect previously reported
transactions. Our accounting principles that recently have been or may be affected by changes in accounting principles include,
but are not limited to: software revenue recognition; accounting for income taxes; and accounting for business combinations
and related goodwill.
Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.
Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates
could be unfavorably affected by changes in tax laws or the interpretation of tax laws, or by changes in the valuation of our
deferred tax assets and liabilities. In addition, we are subject to the examination of our income tax returns by the Internal
Revenue Service and other domestic and foreign tax authorities. We regularly assess the likelihood of outcomes resulting from
these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that these potential
examinations will not have an adverse effect on our operating results and financial position.
Privacy concerns could result in regulatory changes that may harm our business.
Personal privacy is a significant issue in the United States and in many other countries where our customers
operate. The United States and many other countries have imposed restrictions and requirements on the use of personal
information by those collecting such information. Changes to law or regulations affecting privacy, if applicable to our business
or product, could impose additional costs and potential liability on us and could limit our use and disclosure of such
information. If we were required to change our business activities or revise or eliminate services, our business could be
harmed.
20
Item 1B. Unresolved Staff Comments
None.
21
Item 2. Properties
Our corporate headquarters in Weston, Florida are at different locations in the city, which, in the aggregate, consist of
approximately 160,000 square feet of leased space. We also have leased facilities in Atlanta, Georgia; Alpharetta, Georgia;
Santa Ana, California; and Toronto, Canada.
Currently, we also lease satellite offices for certain field personnel in various locations throughout the United States
and, to a much lesser extent, internationally. We believe that our existing facilities are suitable and adequate for our current
operations for the next 12 months. We further believe that suitable space will be available as needed to accommodate any
expansion of our operations on commercially reasonable terms.
Item 3. Legal Proceedings
From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of
business. We are not currently a party to any legal proceedings the adverse outcome of which, individually or in the aggregate,
could reasonably be expected to have a material adverse effect on our operating results or financial condition.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
PART II
Market Information. The following table sets forth, for the periods indicated, the high and low sales prices of Ultimate’s
common stock, $0.01 par value (the "Common Stock"), as quoted on the NASDAQ Global Select Market (“NASDAQ”) under
the symbol “ULTI."
First Quarter ..............................................
Second Quarter..........................................
Third Quarter.............................................
Fourth Quarter...........................................
2014
2013
High
$171.96
139.72
150.71
156.20
Low
$131.79
109.50
125.68
125.74
High
$105.05
118.57
151.08
162.88
Low
$92.14
91.59
116.19
137.24
As of February 19, 2015, we had approximately 83 holders of record, representing approximately 3,824 stockholder
accounts.
We have never declared or paid any cash dividends on our capital stock and do not anticipate paying any cash
dividends in the foreseeable future. We currently intend to retain future earnings to fund the development and growth of our
business. The payment of dividends in the future, if any, will be at the discretion of our Board of Directors.
Performance Graph. The following graph compares the cumulative total stockholder returns on Ultimate’s Common Stock for
the five year period covering December 31, 2009-December 31, 2014, on an annual basis, with the cumulative total return of
The NASDAQ Composite Index and the RDG Software Composite Index for the same period.
22
* $100 invested on 12/31/09 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Issuance of Equity Securities. On October 1, 2013, we entered into agreements (the "Employtouch Agreements") with
the shareholders of Employtouch, Inc., a Canadian-based corporation, to acquire 100% of the issued and outstanding shares of
Employtouch, Inc., in exchange for a combination of cash and restricted shares of Ultimate's Common Stock. Pursuant to the
terms of the Employtouch Agreements, we paid a total of $10.4 million (USD) in cash and a total of 17,788 restricted shares of
Ultimate's Common Stock valued at $2.3 million, which are issuable in three (3) equal installments on April 1, 2014, April 1,
2015 and April 1, 2016 (the "Employtouch Stock Consideration"). During 2014, the first installment of the Employtouch Stock
Consideration in the amount of 5,928 shares was issued.
On November 15, 2013 (the "Accel HR Closing Date"), pursuant to an asset purchase agreement with Accel HR, LLC,
a Delaware limited liability company located in Georgia, and certain members of Accel HR (the "Accel HR Agreement") we
acquired certain assets and liabilities of Accel HR in exchange for a combination of cash and restricted shares of Ultimate's
Common Stock. Pursuant to the terms of the Accel HR Agreement, we paid a total of $14.6 million in cash and a total of
22,017 restricted shares of Ultimate's Common Stock, valued at $3.0 million, which are issuable in three (3) equal installments
on the first, second and third anniversaries of the Accel HR Closing Date (the "Accel HR Stock Consideration"). During 2014,
the first installment of the Accel HR Stock Consideration in the amount of 7,339 shares was issued.
We relied on Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") and Regulation D
thereunder for the exemption from registration of the sale of such shares of Common Stock issued to the EmployTouch, Inc.
shareholders and the members of Accel HR, LLC (the "Stockholders and Members"). The Stockholders and Members
represented their intention to acquire the shares of the Common Stock for investment purposes only, and not with a view
towards the sale or distribution thereof; their knowledge, skill and experience in business, financial and investment matters,
their ability to evaluate the merits and risk and bear the economic risks of such investment in our Common Stock; that they are
"accredited investors" as defined in Regulation D promulgated under the Securities Act; and that they were given the
opportunity to ask questions of, and receive answers from us concerning our business.
23
The restricted shares of Ultimate's Common Stock issuable pursuant to both the Employtouch Stock Consideration and
the Accel HR Stock Consideration are subject only to the passage of time and, as discussed above, such shares will be
unregistered when issued which places certain restrictions on when the shares can be freely traded on the open market. No
other restrictions apply to the Common Stock issuable for both acquisitions. The fair value of the restricted shares of Ultimate's
Common Stock issuable pursuant to the Employtouch Stock Consideration and the Accel HR Stock Consideration was
recorded as of the respective acquisition dates since there are no contingencies related to the future stock issuances.
Purchases of Equity Securities by the Issuer. On October 30, 2000, Ultimate announced that our Board of Directors authorized
the repurchase of up to 1,000,000 shares of our outstanding Common Stock (the “Stock Repurchase Plan”).
On February 6, 2007, Ultimate’s Board of Directors extended the Stock Repurchase Plan by authorizing the
repurchase of up to 1,000,000 additional shares of our issued and outstanding Common Stock.
On February 5, 2008, Ultimate’s Board of Directors extended the Stock Repurchase Plan further by authorizing the
repurchase of up to 1,000,000 additional shares of our Common Stock.
On October 26, 2009, Ultimate’s Board of Directors extended the Stock Repurchase Plan further by authorizing the
repurchase of up to 1,000,000 additional shares of our Common Stock.
On October 24, 2011, Ultimate’s Board of Directors extended the Stock Repurchase Plan further by authorizing the
repurchase of up to 1,000,000 additional shares of our Common Stock.
As of December 31, 2014, Ultimate had purchased 4,216,626 shares of our Common Stock under the Stock
Repurchase Plan, with 783,374 shares available for repurchase in the future. There were no repurchases of shares of our issued
and outstanding Common Stock under the Stock Repurchase Plan during the three months ended December 31, 2014.
The number of shares of Common Stock repurchased by us during the three months ended December 31, 2014 is as
indicated below:
Period
October 1 – 31, 2014..........................................................
November 1 – 30, 2014......................................................
December 1 – 31, 2014 ......................................................
Total...................................................................................
Total Number of
Shares
Purchased (1)
Average Price
Paid per Share
—
50,475
—
50,475
$
$
—
152.59
—
152.59
Total
Cumulative
Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
4,216,626
4,216,626
4,216,626
4,216,626
Maximum
Number of
Shares That May
Yet Be
Purchased
Under the Plans
or Programs
783,374
783,374
783,374
783,374
(1) Represents shares of Common Stock that were acquired by us at the fair market value of the Common Stock as of the
period stated, in connection with the satisfaction of our employees' tax withholding liability resulting from the vesting of
restricted stock holdings.
24
Item 6. Selected Financial Data
The following selected consolidated financial data is qualified by reference to and should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Ultimate’s Consolidated
Financial Statements and Notes thereto included elsewhere in this Form 10-K. The statements of operations data presented
below for each of the years in the three-year period ended December 31, 2014 and the balance sheet data as of December 31,
2014 and 2013 have been derived from our Consolidated Financial Statements included elsewhere in this Form 10-K.
Statement of Operations Data: (in thousands, except per share data)
Revenues:
Years Ended December 31,
2014
2013
2012
2011
2010
533
85,939
117,609
505,936
Recurring ............................................................................. $ 419,238
Services................................................................................
86,165
License.................................................................................
Total revenues.................................................................
Cost of revenues:....................................................................
Recurring .............................................................................
Services................................................................................
License.................................................................................
Total cost of revenues.....................................................
Gross profit ............................................................................
Operating expenses: ...............................................................
Sales and marketing.............................................................
Research and development ..................................................
General and administrative..................................................
Total operating expenses.................................................
Operating income............................................................
Other (expense) income: ........................................................
Interest and other expense ...................................................
Other income, net ................................................................
Total other expense, net .........................................................
117,033
247,954
203,639
302,297
54,343
47,379
83,542
91
(353)
339
(14)
Income from continuing operations before income taxes......
Provision for income taxes ..................................................
Income from continuing operations .......................................
Loss from discontinued operations, net of income taxes ....
Net income ............................................................................. $
Basic earnings per share: (1)..................................................
54,329
(9,592)
44,737
—
44,737
Earnings from continuing operations .................................. $
Loss from discontinued operations......................................
Total..................................................................................... $
Diluted earnings per share: (1)...............................................
Earnings from continuing operations .................................. $
Loss from discontinued operations......................................
Total..................................................................................... $
1.58
—
1.58
1.52
—
1.52
$
$
$
$
$
25
$ 334,434
$ 266,430
$ 213,785
$ 170,905
75,110
853
64,563
1,275
53,195
2,218
55,368
1,538
410,397
332,268
269,198
227,811
91,903
76,577
198
168,678
241,719
93,879
67,757
36,869
198,505
43,214
(229)
104
(125)
43,089
(17,559)
25,530
—
25,530
0.92
—
0.92
0.88
—
0.88
78,121
66,063
280
144,464
187,804
72,565
60,693
25,433
158,691
29,113
(476)
102
(374)
28,739
(14,107)
14,632
—
14,632
0.55
—
0.55
0.52
—
0.52
63,505
52,341
488
116,334
152,864
63,145
51,356
21,931
136,432
16,432
(401)
91
(310)
16,122
(11,840)
4,282
—
4,282
0.17
—
0.17
0.15
—
0.15
$
$
$
$
$
49,144
49,843
255
99,242
128,569
58,374
42,222
19,727
120,323
8,246
(263)
188
(75)
8,171
(5,161)
3,010
(853)
2,157
0.12
(0.03)
0.09
0.11
(0.03)
0.08
$
$
$
$
$
$
$
$
$
$
Years Ended December 31,
2014
2013
2012
2011
2010
Weighted average shares outstanding: (1)
Basic ....................................................................................
Diluted .................................................................................
28,293
29,343
27,773
29,013
26,778
28,375
25,814
27,806
24,960
27,101
Balance Sheet Data:
As of December 31,
2014
2013
2012
2011
2010
Cash and cash equivalents ..................................................... $ 108,298
Investments in marketable securities .....................................
10,156
Total assets............................................................................. 1,190,298
Deferred revenue....................................................................
109,705
Long-term borrowings, including capital lease obligations...
3,759
Stockholders’ equity............................................................... $ 271,749
$
79,794
$
58,817
$
46,149
$
40,889
10,453
598,194
103,184
2,833
10,534
525,284
91,976
5,070
9,130
9,317
318,820
249,557
86,563
2,175
78,095
2,406
$ 188,217
$ 114,670
$
85,624
$
72,985
(1) See Note 11 of the Notes to the Consolidated Financial Statements for information regarding the computation of net
earnings (loss) per share.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations provides information
we believe is relevant to an assessment and understanding of our results of operations and financial condition. This discussion
should be read in conjunction with our Consolidated Financial Statements and Notes that are included in this Form 10-K. Also,
the discussion of Critical Accounting Estimates in this section is an integral part of the analysis of our results of operations and
financial condition.
Overview
Ultimate Software is a leading cloud provider of people management solutions, often referred to as human capital
management (“HCM”). Ultimate's UltiPro product suite (“UltiPro”) is a comprehensive, engaging solution that has human
resources ("HR"), payroll, and benefits management at its core and includes global people management, available in ten
languages with more than 35 country-specific localizations. The solution is delivered primarily via the Web to organizations
based in the United States and Canada with global workforces. We attained our leadership position, we believe, through our
focus on unified HCM, people-centric product design, cloud technology, and strong customer relationships. At the close of
2014, we had more than 19 million people records in our HCM cloud.
UltiPro is designed to deliver the functionality businesses need to manage the complete employee life cycle from
recruitment to retirement and to facilitate employee engagement with their employers and each other. The solution includes
unified feature sets for talent acquisition and onboarding, HR management and compliance, benefits management and online
enrollment, payroll, performance management, compensation management with salary planning, budgeting, and development
of incentive plans, succession management, reporting and analytical decision-making and predictive tools, and time and
attendance. UltiPro has role-based features for HR professionals, executives, managers, administrators, and employees whether
they are in or out of the office, including access to business-critical information on mobile devices such as the iPhone, iPad, and
other smartphones and tablets.
Our cloud offering of UltiPro (the "Cloud Offering") provides Web-based access to comprehensive HCM functionality
for organizations that want to simplify delivery and support of their business applications. We have found that our Cloud
Offering is attractive to companies that want to focus on their core competencies to increase sales and profits. Through the
Cloud Offering, we supply and manage the hardware, infrastructure, ongoing maintenance and backup services for our
customers. Customer systems are currently managed at three data centers--one located in the Atlanta, Georgia area, one in the
Phoenix, Arizona area and another one in the Toronto, Canada area. All data centers are owned and operated by independent
third parties.
We market our UltiPro solutions primarily to enterprise companies, which we define as companies with more than
1,500 employees, including those with 10,000 or more employees; mid-market companies, which we define as those having
approximately 500-1,500 employees; and strategic companies, which we define as having approximately 100-499 employees.
26
Our mid-market and strategic customers have access to nearly all the features that our larger enterprise companies have through
UltiPro, plus a bundled services package. Since many companies in the mid- and strategic markets do not have information
technology (“IT”) staff on their premises to help with system deployment or ongoing management issues, we have created a
bundled services package to give these customers a high degree of convenience by handling system configuration, business
rules, and other situations for them “behind the scenes.” UltiPro is marketed primarily through our enterprise, mid-market and
strategic direct sales teams.
In addition to UltiPro's HCM functionality, our customers have the option to purchase a number of additional
capabilities on a per-employee-per-month (“PEPM”) basis, which are available to enhance and complement the functionality of
UltiPro and which are based on the particular business needs of our customers. These optional UltiPro capabilities currently
include (i) the talent acquisition suite (recruitment and onboarding); (ii) the talent management suite (performance
management, talent predictors, and succession management); (iii) compensation management; (iv) benefits enrollment; (v) time
management; (vi) payment services (formerly referred to as “tax filing”); (vii) wage attachments; and (viii) other optional
features (collectively, “Optional Capabilities”), which are described below.
All Optional Capabilities are priced solely on a subscription basis. Some of the Optional Capabilities are available to
enterprise, mid-market and strategic customers while others are available exclusively to either enterprise, mid-market or
strategic customers, and availability is based on the needs of the respective customers, the number of their employees and the
complexity of their HCM environment.
To further simplify the work lives of our customers’ human resources and payroll people, we introduced UltiPro
Managed Services in November 2013 as a result of the acquisition of Accel HR, a Georgia-based company. UltiPro Managed
Services is designed for those customers who want to outsource some components of their HR, payroll, benefits, and HCM
technology management functions without sacrificing the control of, or access to, their employee data that they enjoy with our
cloud solution. Unlike other outsourced payroll or Human Resources Information System ("HRIS") services that typically take
a one-size-fits-all approach, UltiPro Managed Services allows customers to select from a number of payroll management,
HRIS, and/or benefits management services and combine them into a tailored solution that best suits their unique needs. Accel
HR had provided these types of services to large and mid-market corporate customers in North America since 2004 and, since
2007 Accel HR had partnered exclusively with Ultimate to provide these services to their UltiPro customers.
In October 2013, we introduced UltiPro TouchBase in connection with the acquisition of Employtouch, a Canadian-
based company, which provides our customers an interactive mobile time clock device that collects time punches, as well as
highlights the information most critical to employees and managers via an engaging activity stream. With UltiPro TouchBase,
our customers can capture employee time on a touchscreen tablet device, collecting employee-validated data for cost
accounting and payroll; can leverage photos for accurate capture of employee time-entry, avoiding 'buddy punches'; and can
validate transactions using PIN (Personal Identification Number) entry, HID (Human Interface Device), RFID (Radio
Frequency Identification), magnetic swipe or barcode.
The key drivers of our business are (i) growth in recurring revenues; (ii) operating income, excluding primarily non-
cash stock-based compensation and amortization of acquired intangibles ("Non-GAAP Operating Income"); and (iii) retention
of our customers once our solutions are sold (“Customer Retention”). For the year ended December 31, 2014, our (i) recurring
revenues grew by 25.4%, compared with the same period in 2013 and (ii) Non-GAAP Operating Income was $101.7 million, or
20.1% of total revenues, as compared with $76.3 million, or 18.6% of total revenues, for the same period in 2013. For the year
ended December 31, 2013, our (i) recurring revenues grew by 25.5%, compared with the same period in 2012, and (ii) Non-
GAAP Operating Income was $76.3 million, or 18.6% of total revenues, as compared with $49.5 million, or 14.9% of total
revenues, for the same period in 2012. As of December 31, 2014 and 2013, our Customer Retention exceeded 96%, on a
trailing twelve-month basis. See “Non-GAAP Financial Measures” below.
The HCM market is intensely competitive. We address competitive pressures through improvements and
enhancements to our products and services, the development of additional features of UltiPro and a comprehensive marketing
team and process that distinguishes Ultimate and its products from the competition. Our focus on customer service, which
enables us to maintain a high Customer Retention rate, also helps us address competitive pressures.
As our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic
and global economic conditions. If general economic conditions were to deteriorate, we may experience delays in our sales
cycles, increased pressure from prospective customers to offer discounts and increased pressure from existing customers to
renew expiring recurring revenue agreements for lower amounts. We address continuing economic pressures by, among other
things, efforts to control growth of our operating expenses through the monitoring of controllable costs and vendor
negotiations.
27
Ultimate has two primary revenue sources: recurring revenues and services revenues. Subscription revenues from our
Cloud Offering and customer support and maintenance revenues are the primary components of recurring revenues. The
majority of services revenues are derived from implementation consulting services. Subsequent to the discontinuation of
selling perpetual licenses of UltiPro to new customers, which occurred in 2009, we sell licenses to existing license customers
but only in relation to the customer's employee growth or for Optional Capabilities if the customer already has a perpetual
license for the on-site UltiPro solutions. As perpetual license agreements were sold in the past, annual maintenance contracts
(priced as a percentage of the related license fee) accompanied those agreements. Maintenance contracts typically have a one-
year term with annual renewal periods thereafter. Since 2009, our maintenance revenues are related to renewal maintenance
only. In 2012, we announced that we would no longer support the licensed UltiPro ("Legacy") products after December 31,
2014. In the approximate two-year period after the announcement, Ultimate strengthened its campaign to convert Legacy
customers to cloud customers. Ultimate believes this campaign program for Legacy to cloud conversions was successful. Since
2009, with the sunsetting of the Legacy product, effective December 31, 2014, a majority of our Legacy customers made the
transition to the cloud.
As cloud units are sold, the recurring revenue backlog associated with the Cloud Offering grows, enhancing the
predictability of future revenue streams. Cloud revenues include ongoing monthly subscription fees, priced on a PEPM
basis. Revenue recognition for the Cloud Offering is triggered when the customer processes its first payroll using UltiPro (or
goes “Live”).
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”)
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
We recognize revenues in accordance with Accounting Standards Update No. 2009-13, “Multiple-Deliverable
Revenue Arrangements” (“ASU 2009-13”). We use the relative selling price method to allocate the total consideration to units
of accounting in a multiple element arrangement. We allocate revenue in an arrangement using the estimated selling price
(“ESP”) of deliverables if it does not have vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) of
selling price.
VSOE is the price charged when the same or similar product or service is sold separately. We define VSOE as a
median price of recent stand-alone transactions that are priced within a narrow range.
TPE is determined based on the prices charged by our competitors for a similar deliverable when sold
separately. However, due to the difficulty in obtaining sufficient information on competitor pricing and differences in our
product offerings when compared with those of our peers, we generally are unable to reliably determine TPE.
ESP is our best estimate of the selling price of an element in a transaction. If we are unable to establish selling price
using either VSOE or TPE, we will use ESP in our allocation of arrangement consideration. The objective of ESP is to
determine the price at which we would transact business if the product or service were sold by us on a stand-alone basis. Our
determination of ESP involves the use of a customary discount from the list (or book) price for each element, with the
discounted price applied within a narrow range. The customary discount is derived from historical data that has been analyzed
to determine trends and patterns. We analyze the customary discount used for determining ESP on no less than an annual basis.
We evaluate each deliverable in our arrangements to determine whether it represents a separate unit of accounting. A
deliverable constitutes a separate unit of accounting when it has stand-alone value to our customers. Our products and services
continue to qualify as separate units of accounting under ASU 2009-13.
There are two major elements in our multiple element arrangements for the delivery of our Cloud Offering, which are
recurring revenues (i.e., cloud subscription revenues) and services revenues (mostly implementation consulting services).
For multiple element arrangements, the consideration allocated to cloud subscription revenues is recognized as
recurring revenues over the initial contract period, as those services are delivered, commencing with the Live date of the related
product. The consideration allocated to fixed fee implementation consulting services in multiple element arrangements is
28
recognized as services revenues on a percentage of completion basis, using reasonably dependable estimates with respect to
milestones achieved (in relation to progression through implementation phases), by product.
Single element arrangements typically consist of renewals for cloud subscriptions and renewal maintenance
agreements. In addition, implementation consulting services sold on a time and materials basis typically represent single
element arrangements. Under these single element arrangements, cloud subscription and maintenance revenues are recognized
over the related renewal period, as the services are delivered, and implementation consulting services are recognized as the
services are performed.
We recognize revenues when all of the following criteria are met:
•
•
•
•
persuasive evidence of an arrangement exists;
delivery has occurred;
the fees are fixed and determinable; and
collection is considered probable.
If collection is not considered probable, we recognize revenues when the fees are collected. If the fees are not fixed
and determinable, we recognize revenues when the fees become due from the customer. If non-standard acceptance periods or
non-standard performance criteria are required, we recognize revenue when the acceptance period expires or upon the
satisfaction of the acceptance/performance criteria, as applicable.
The majority of services revenues are recognized over the implementation period, which is from the contract
execution date until the Live date. Cloud revenues are recognized over the initial contract term, beginning in the month the
customer goes Live.
Recurring Revenues
Recurring revenues primarily consist of subscription revenues recognized from our Cloud Offering, as well as
customer support and maintenance revenues.
i) Cloud subscription revenues are principally derived from PEPM fees earned from the Cloud Offering and from
sales of hosting services on a stand-alone basis to customers who already own a perpetual license ("Base Hosting"). Ongoing
PEPM fees from the Cloud Offering and, to a lesser extent, Base Hosting are recognized as subscription revenues as the
services are delivered, commencing when the customer goes Live.
ii) Customer support and maintenance revenues are derived from maintaining, supporting, and providing periodic
updates of our software for our hosting services. Since we stopped selling perpetual licenses to our new customers effective
April 1, 2009, customer support and maintenance revenues stem from annual renewals.
Under our Cloud Offering, our customers do not have the right to take possession of our software and these
arrangements are considered service contracts. The selling price of multiple deliverables in cloud arrangements is derived for
each element based on the guidance provided by ASU 2009-13. The multiple elements that typically exist in cloud
arrangements include (1) recurring revenues from the combination of hosting services, the right to use UltiPro, and
maintenance of UltiPro (i.e., product enhancements, updates and customer support) and (2) professional services (i.e., primarily
implementation consulting services).
The pricing for the three elements that pertain to recurring revenues (i.e., hosting services, the right to use UltiPro and
maintenance of UltiPro) is bundled. Since these three bundled elements are components of recurring revenues in the
consolidated statements of income, allocation of selling price to each of the three elements is not necessary and they are not
reported separately. Selling price, which is established through VSOE, for the bundled elements, as a whole, is determined on
the basis of renewal pricing, without taking into consideration potential price increases or potential changes in the number of
employees of the customer in the future due to the uncertainties surrounding these potential occurrences. These bundled
elements are provided on an ongoing basis, represent undelivered elements and are recognized on a monthly basis as the related
services are performed, commencing once the customer goes Live.
Services Revenues
Services revenues primarily include revenues from fees charged for implementation consulting services in connection
with the implementation of our product solutions and, to a much lesser extent, training of customers in the use of our products
29
and fees for other services, including the provision of payroll-related forms, sales of time clocks and the printing of W-2 forms
for certain customers, as well as certain client reimbursable out-of-pocket expenses.
Our multiple element contracts contain recurring cloud revenues and implementation consulting services priced on a
fixed fee basis. Time and materials implementation consulting services are sold as stand-alone sales not directly related to the
basic implementation of the cloud product. The total arrangement consideration is allocated to services elements in the
arrangement based on relative selling prices, using the prices established when the services are sold on a stand-alone
basis. Selling price is established through ESP for fixed fee implementation consulting services that are included in our
multiple element contracts.
Revenues from implementation consulting services sold on a fixed-fee basis are recognized using the percentage of
completion accounting method, which involves the use of estimates. Percentage of completion is measured at each reporting
date based on progress made to date, using reasonably dependable estimates with respect to milestones achieved or billable
hours, as applicable.
Revenues from implementation consulting services, billed on a time and materials basis (at an hourly rate), are
recognized as these services are performed. Other services are recognized as the product is shipped or as the services are
rendered, depending on the specific terms of the related arrangement.
Income Taxes
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These
estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing
of recognition of revenue and expense for tax and financial statement purposes.
Ultimate assesses the likelihood that it will be able to recover its deferred tax assets. Management considers all
available evidence, both positive and negative, including historical levels of pre-tax book income, expiration of net operating
loss carryforwards, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible
tax planning strategies as well as current tax laws and interpretation of current tax laws in assessing the need for a valuation
allowance. If recovery is not likely, we record a valuation allowance against the deferred tax assets that we estimate will not
ultimately be recoverable. The available positive evidence at December 31, 2014 included, among other factors, three years of
cumulative historical pre-tax book income and a projection of future pre-tax book income and taxable income. As a result of
our analysis of all available evidence, both positive and negative, we believe that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize all of the deferred tax assets as of December 31, 2014. As
such, there was no valuation allowance for the years ended December 31, 2014, 2013, and 2012.
Business Combinations
We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and
liabilities assumed at the acquisition date based upon their estimated fair values. Goodwill as of the acquisition date represents
the excess of the purchase consideration of an acquired business over the fair value of the underlying net tangible and
intangible assets acquired and liabilities assumed. The purchase price allocation and valuation of the acquisition require
management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets.
The estimates used in valuing certain of the intangible assets include, but are not limited to: future expected cash
flows of the assets, discount rates to determine the present value of the future cash flows, financial projections of the acquired
business, attrition rates of customers and expected technology life cycles. We also estimate the useful lives of the intangible
assets based on the expected period over which we anticipate generating economic benefit from the asset.
Our estimates of fair value are based on assumptions believed to be reasonable at that time. If management made
different estimates or judgments, material differences in the fair values of the net assets acquired may result.
The fair value of assets acquired and liabilities assumed was based upon a preliminary purchase price allocation and
our estimates and assumptions are subject to change within the measurement period.
Goodwill and Intangible Assets
The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the
acquired business with the residual of the purchase price recorded as goodwill. The determination of the value of the intangible
30
assets acquired involves certain judgments and estimates. These judgments and estimates can include, but are not limited to, the
cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.
At December 31, 2014, our goodwill totaled $25.7 million and our identifiable net intangible assets totaled $6.8 million.
We assess the impairment of goodwill of our reporting units annually, or more often if events or changes in circumstances
indicate that the carrying value may not be recoverable. Goodwill is tested for impairment at the reporting unit level by first
performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is
less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit's carrying
value is compared to its fair value to the extent necessary. We consider both market and discounted cash flow approaches in
determining the fair value of the reporting unit. Goodwill is considered impaired if the carrying value of the reporting unit
exceeds its fair value. The discounted cash flow approach uses expected future operating results. Failure to achieve these
expected results may cause a future impairment of goodwill at the reporting unit. We conducted our annual impairment tests of
goodwill as of December 31, 2014, 2013 and 2012. As a result of this test, we determined that the fair value was in excess of
the carrying value.
We evaluate our intangible assets for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset or group
of assets. The amount of any impairment is measured as the difference between the carrying value and the fair value of the
impaired asset. We also evaluate the estimated remaining useful lives of intangible assets and whether events or changes in
circumstances warrant a revision to the remaining periods of amortization. Assumptions and estimates about future values and
remaining useful lives of our intangible assets are complex and subjective. They can be affected by a variety of factors,
including external factors such as industry and economic trends and internal factors such as changes in our business strategy
and our internal forecasts.
Allowance for Doubtful Accounts
We perform credit evaluations of our customers to assess their ability to make payments to us for our products and
services. We maintain an allowance for doubtful accounts at an amount estimated to be sufficient to provide adequate
protection against losses resulting from collecting less than full payment on accounts receivable. A considerable amount of
judgment is required in determining the amount of our allowance for doubtful accounts, including assessing the probability of
collection and current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate,
resulting in further impairment of their ability to make payments, an additional provision for doubtful accounts may be
required.
31
Results of Operations
The following table sets forth the consolidated statements of operations data of Ultimate, as a percentage of total revenues,
for the periods indicated.
Revenues:
Recurring ......................................................................................................
Services.........................................................................................................
License..........................................................................................................
Total revenues ..........................................................................................
Cost of revenues:
Recurring ......................................................................................................
Services.........................................................................................................
License..........................................................................................................
Total cost of revenues ..............................................................................
Gross profit .....................................................................................................
Operating expenses:
Sales and marketing......................................................................................
Research and development ...........................................................................
General and administrative ...........................................................................
Total operating expenses..........................................................................
Operating income.....................................................................................
Other income (expense):
Interest expense and other ............................................................................
Other income, net..........................................................................................
Total other income (expense), net ...................................................................
Income from continuing operations before income taxes ...............................
Provision for income taxes ...........................................................................
Income from continuing operations ................................................................
Loss from discontinued operations, net of taxes ..........................................
Net income ......................................................................................................
Comparison of Fiscal Years Ended December 31, 2014 and 2013
Revenues
For the Years Ended December 31,
2014
2013
2012
82.9%
81.5%
80.2%
17.0
0.1
100.0
23.2
17.0
—
40.2
59.8
23.1
16.5
9.4
49.0
10.8
(0.1)
—
(0.1)
10.7
(1.9)
8.8
—
8.8%
18.3
0.2
100.0
22.4
18.7
—
41.1
58.9
22.9
16.5
9.0
48.4
10.5
—
—
—
10.5
(4.3)
6.2
—
6.2%
19.4
0.4
100.0
23.5
19.9
0.1
43.5
56.5
21.8
18.3
7.6
47.7
8.8
(0.1)
—
(0.1)
8.7
(4.3)
4.4
—
4.4%
Our revenues are derived from recurring revenues, services revenues and, to a much lesser extent, license
revenues. See “Revenue Recognition” above for further discussion of Ultimate’s revenue sources and its method of accounting
for each of them.
Total revenues, primarily consisting of recurring and services revenues, increased 23.3% to $505.9 million for 2014 from
$410.4 million for 2013.
Recurring revenues increased 25.4% to $419.2 million for 2014 from $334.4 million for 2013. The increase in
recurring revenues for 2014 was primarily due to an increase in cloud revenues, partially offset by a decrease in maintenance
revenues. After we discontinued selling perpetual licenses in 2009, we began the process of converting our on-premise
customers to the cloud. In 2012, we formally announced to our on-premise (or "Legacy") customers that we would cease
supporting our Legacy product after December 31, 2014. Therefore, beginning in 2012, we strengthened our conversion
program for our Legacy customers. Since 2009, we believe our conversion program was successful in transitioning the majority
32
of our Legacy customers to the cloud. During 2014, our cloud revenues increased primarily as a result of new customers who
went Live on UltiPro and the related Optional Capabilities of UltiPro during the year and, to a lesser extent, the conversion of
Legacy customers to the cloud. As a result of the conversion program, maintenance revenues from Legacy customers continued
to decrease over the course of 2014 and will no longer exist after December 31, 2014. Our annual revenue customer retention
rate for total recurring revenue cloud customer base exceeded 96% in 2014. The impact on recurring revenues of units sold
under the Cloud Offering has been a gradual increase from one reporting period to the next, based on the incremental effect of
revenue recognition of the subscription fees over the terms of the related contracts as sales in backlog go Live.
Services revenues increased 14.7% to $86.2 million for 2014 from $75.1 million for 2013 primarily as a result of an
increase in implementation revenues. The increase in implementation revenues was primarily attributable to a combination of
more billable consultants, and the increased utilization of seasoned consultants and, to a lesser extent, the increased use of
third-party implementation partners. The increased implementation revenues occurred as a result of increased fixed fee
implementations as well as increased time and materials implementation services.
Cost of Revenues
Cost of revenues primarily consists of the costs of recurring and services revenues. Cost of recurring revenues
primarily consists of costs to provide maintenance and technical support to Ultimate's customers, the cost of providing periodic
updates and the cost of recurring subscription revenues, including hosting data center costs and, to a lesser extent, amortization
of capitalized software. Cost of services revenues primarily consists of costs to provide implementation consulting services and
training to Ultimate's customers and, to a lesser extent, costs related to sales of payroll-related forms, time clocks and Form
W-2 services, as well as costs associated with certain client reimbursable out-of-pocket expenses.
Cost of recurring revenues increased 28.0% to $117.6 million for 2014 from $91.9 million for 2013. The $25.7
million increase in the cost of recurring revenues for the year was primarily due to increases in both cloud costs and customer
support and product update costs. The increase in cloud costs was principally as a result of the growth in cloud operations and
increased sales, including increased labor costs (which includes increased non-cash stock-based compensation expense). Non
labor-related hosting data center costs increased slightly when compared to the same period in the prior year. The increase in
customer support and maintenance costs was primarily due to higher labor costs commensurate with the growth in the number
of customers serviced.
Cost of services revenues increased 12.2% to $85.9 million for 2014 from $76.6 million for 2013. The $9.4 million
increase in cost of services revenues was primarily due to an increase in the cost of implementation, which was primarily due to
higher labor and related costs (including non-cash stock-based compensation), particularly in association with an increased
number of implementation consultants and, to a lesser extent, the increased use of third-party implementation partners.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and benefits, sales commissions, travel and promotional
expenses, and facility and communication costs for direct sales offices, as well as advertising and marketing costs. Sales and
marketing expenses increased 24.7% to $117.0 million for 2014 from $93.9 million for 2013. The $23.2 million increase in
sales and marketing during 2014 was primarily due to increased labor and related costs (including additional personnel costs,
increased non-cash stock-based compensation expense and, to a lesser extent, higher sales commissions related to increased
cloud sales), as well as increased advertising and marketing costs. Commissions on cloud sales are amortized over the initial
contract term (typically 24 to 36 months) commencing on the Live date, which corresponds with the related cloud revenue
recognition.
Research and Development
Research and development expenses consist primarily of software development personnel costs. Research and
development expenses increased 23.3% to $83.5 million in 2014 from $67.8 million in 2013. The $15.8 million increase in
research and development expenses during 2014 was principally due to higher labor and related costs (which include increased
non-cash stock-based compensation expense) attributable to the ongoing development of UltiPro and complementary products,
including the impact of increased personnel costs (predominantly from additional headcount), partially offset by capitalized
labor costs and capitalized third-party consulting costs. For the years ended December 31, 2014 and 2013, we capitalized $25.2
million and $19.0 million, respectively, of computer software development costs related to an internal-use development project
to be sold in the future as a cloud product only. The increase in capitalized research and development costs in 2014 was
attributable to the increase in both the internal labor being capitalized and the increased use of third-party consultants working
on the development project.
33
General and Administrative
General and administrative expenses consist primarily of salaries and benefits of executive, administrative and
financial personnel, as well as external professional fees and the provision for doubtful accounts. General and administrative
expenses increased by 28.5% to $47.4 million for 2014 from $36.9 million for 2013. The increase in general and
administrative expenses for 2014 was primarily due to increased labor and related costs (which includes the impact of
additional personnel costs as well as increased non-cash stock-based compensation expense), partially offset by a decrease in
the provision for doubtful accounts and a decrease in professional fees.
Provision for Income Taxes
In 2014, based on pre-tax income, we had income tax expense of $9.6 million as compared to $17.6 million in
2013. The decrease in income tax expense of $8.0 million was primarily due to a benefit recorded for research and
development activities of $14.4 million related to the tax years 1998-2014. This benefit was partially offset by an increase in
pre-tax book income and an increase in non-deductible expenses. Ultimate recorded $13.2 million and $2.3 million of research
and development tax credit carryforwards during the quarters ended September 30, 2014 and December 31, 2014, respectively.
Comparison of Fiscal Years Ended December 31, 2013 and 2012
Revenues
Total revenues, primarily consisting of recurring and services revenues, increased 23.5% to $410.4 million for 2013 from
$332.3 million for 2012.
Recurring revenues increased 25.5% to $334.4 million for 2013 from $266.4 million for 2012. The increase in
recurring revenues for 2013 was primarily due to an increase in cloud revenues, partially offset by a decrease in maintenance
revenues. Cloud revenues increased 30.2% for 2013, primarily due to the continued growth of the Cloud Offering, which
comprised the majority of unit sales. The increase in cloud revenues is based on the revenue impact of incremental units that
have gone Live since December 31, 2012, including the UltiPro standard/HR payroll product and, to a lesser extent, Optional
Capabilities of UltiPro. Recognition of recurring revenues for cloud sales commences upon the respective Live date.
Maintenance revenues from previously sold licenses decreased 11.2%. The decrease resulted from the transition of certain
customers who were formerly using UltiPro in connection with the purchase of a perpetual license to using UltiPro under our
Cloud Offering, combined with the impact of attrition in the ordinary course of business, partially offset by price increases.
Maintenance revenues are recognized on a monthly recurring basis as the maintenance contracts renew annually. Our annual
revenue customer retention rate for total recurring revenues exceeded 96% in 2013. The impact on recurring revenues of units
sold under the Cloud Offering has been a gradual increase from one reporting period to the next, based on the incremental
effect of revenue recognition of the subscription fees over the terms of the related contracts as sales in backlog go Live.
Services revenues increased 16.3% to $75.1 million for 2013 from $64.6 million for 2012 primarily as a result of an
increase in implementation revenues. The increase in implementation revenues was primarily attributable to a combination of
more billable consultants, and the increased utilization of seasoned consultants.
Cost of Revenues
Cost of revenues primarily consists of the costs of recurring and services revenues. Cost of recurring revenues
primarily consists of costs to provide maintenance and technical support to Ultimate's customers, the cost of providing periodic
updates and the cost of recurring subscription revenues, including hosting data center costs and, to a lesser extent, amortization
of capitalized software. Cost of services revenues primarily consists of costs to provide implementation consulting services and
training to Ultimate's customers and, to a lesser extent, costs related to sales of payroll-related forms, time clocks and Form
W-2 services, as well as costs associated with certain client reimbursable out-of-pocket expenses.
Cost of recurring revenues increased 17.6% to $91.9 million for 2013 from $78.1 million for 2012. The $13.8 million
increase in the cost of recurring revenues for the year was primarily due to increases in both cloud costs and customer support
and maintenance costs, as described below:
i) The increase in cloud costs was principally as a result of the growth in cloud operations and increased sales,
including increased labor costs (which includes increased non-cash stock-based compensation expense). Non
labor-related hosting data center costs increased slightly when compared to the same period in the prior year.
34
ii) The increase in customer support and maintenance costs was primarily due to higher labor costs commensurate
with the growth in the number of customers serviced.
Cost of services revenues increased 15.9% to $76.6 million for 2013 from $66.1 million for 2012. The $10.5 million
increase in cost of services revenues was primarily due to an increase in the cost of implementation, which was primarily due to
higher labor and related costs, particularly in association with an increased number of implementation consultants and
increased non-cash stock-based compensation expense. Costs of third-party implementation consulting partners also increased
from more usage.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and benefits, sales commissions, travel and promotional
expenses, and facility and communication costs for direct sales offices, as well as advertising and marketing costs. Sales and
marketing expenses increased 29.4% to $93.9 million for 2013 from $72.6 million for 2012. The $21.3 million increase in
sales and marketing during 2013 was primarily due to increased labor and related costs (including additional personnel costs,
increased non-cash stock-based compensation expense and, to a lesser extent, higher sales commissions related to increased
cloud sales) as well as increased advertising and marketing costs. Commissions on cloud sales are amortized over the initial
contract term (typically 24 months) commencing on the Live date, which corresponds with the related cloud revenue
recognition.
Research and Development
Research and development expenses consist primarily of software development personnel costs. Research and
development expenses increased 11.6% to $67.8 million in 2013 from $60.7 million in 2012. The $7.1 million increase in
research and development expenses during 2013 was principally due to higher labor and related costs (which include increased
non-cash stock-based compensation expense) attributable to the ongoing development of UltiPro and complementary products,
including the impact of increased personnel costs (predominantly from additional headcount), partially offset by capitalized
labor costs. For the years ended December 31, 2013 and 2012, we capitalized $19.0 million and $5.2 million, respectively, of
computer software development costs related to an internal-use development project to be sold in the future as a cloud product
only. There were no such costs capitalized in the year ended December 31, 2011. The increase in capitalized research and
development costs was attributable to the capitalization of the project for a partial year in 2012 compared with a full year in
2013, combined with the additional use of third-party consultants in the capitalized project during 2013.
General and Administrative
General and administrative expenses consist primarily of salaries and benefits of executive, administrative and
financial personnel, as well as external professional fees and the provision for doubtful accounts. General and administrative
expenses increased by 45.0% to $36.9 million for 2013 from $25.4 million for 2012. The increase in general and
administrative expenses for 2013 was primarily due to increased labor and related costs (which includes the impact of
additional personnel costs as well as increased non-cash stock-based compensation expense) and, to a lesser extent, an increase
in the provision for doubtful accounts and an increase in professional fees associated with the 2013 acquisitions.
Interest Expense and Other
Interest expense and other decreased $247 thousand, or 51.9%, to $229 thousand for 2013 from $476 thousand for
2012. The decrease was primarily related to an increase in realized foreign currency exchange losses.
Other Income, net
Other income, net, increased by 2.0% to $104 thousand for 2013 from $102 thousand for 2012. The increase was not
significant.
Provision for Income Taxes
In 2013, based on pre-tax income from continuing operations, we had income tax expense of $17.6 million as
compared to $14.1 million in 2012. The increase in income tax expense of $3.5 million was primarily due to an increase in pre-
tax book income, partially offset by the recognition of a loss previously reserved upon conclusion of our 2010 IRS
examination, and a decrease in non-deductible expenses. Net operating loss carryforwards available at December 31, 2013,
35
which are available to offset future U.S. taxable income, approximated $154.9 million. The carryforwards expire from 2018
through 2033 and from 2014 through 2033, for Federal and state income tax reporting purposes, respectively. As of
December 31, 2013, we had approximately $0.2 million of net operating loss carryforwards for foreign income tax reporting
purposes available to offset future taxable income. The timing and levels of future profitability may result in the expiration of
net operating loss carryforwards before utilization. Additionally, utilization of such net operating losses may be limited as a
result of cumulative ownership changes in our equity instruments.
We recognized $18.6 million of deferred tax assets, net of deferred tax liabilities, as of December 31, 2013. If
estimates of taxable income are decreased, a valuation allowance may need to be provided for some or all deferred tax assets,
which will cause an increase in income tax expense.
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, 2014 and 2013. In management’s opinion, this unaudited information has been prepared on the same basis
as the audited consolidated financial statements and includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information for the quarters presented. This information should be read in conjunction
with Ultimate’s Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K.
Our quarterly revenues and operating results have varied significantly in the past and are likely to vary substantially
from quarter to quarter in the future. Our operating results may fluctuate as a result of a number of factors, including, but not
limited to, increased expenses (especially as they relate to product development, sales and marketing and the use of third-party
consultants), timing of product releases, increased competition, variations in the mix of revenues, announcements of new
products by us or our competitors and capital spending patterns of our customers. We establish our expenditure levels based
upon our expectations as to future revenues, and, if revenue levels are below expectations, expenses can be disproportionately
high. A drop in near term demand for our products could significantly affect both revenues and profits in any quarter. Operating
results achieved in previous fiscal quarters are not necessarily indicative of operating results for the full fiscal years or for any
future periods. As a result of these factors, there can be no assurance that we will be able to achieve or maintain profitability on
a quarterly basis. We believe that, due to the underlying factors for quarterly fluctuations, quarter-to-quarter comparisons of
Ultimate’s operations are not necessarily meaningful and that such comparisons should not be relied upon as indications of
future performance.
36
Quarters Ended
(In thousands, except per share data)
Revenues:
Dec 31,
2014
Sep 30,
2014
Jun 30,
2014
Mar 31,
2014
Dec 31,
2013
Sep 30,
2013
Jun 30,
2013
Mar 31,
2013
(Unaudited)
Recurring..............................................
$ 112,350
$ 107,362
$ 102,108
$ 97,418
$ 90,354
$ 85,244
$ 80,754
$ 78,082
Services ................................................
23,069
20,047
19,841
23,208
21,570
17,703
16,392
19,445
License .................................................
11
22
48
452
(21)
161
323
390
Total revenues .................................
135,430
127,431
121,997
121,078
111,903
103,108
97,469
97,917
Cost of revenues: ....................................
Recurring..............................................
Services ................................................
License .................................................
Total cost of revenues .....................
Gross profit .............................................
Operating expenses:................................
Sales and marketing .............................
Research and development...................
General and administrative ..................
Total operating expenses.................
Operating income............................
Other (expense) income:.........................
Interest and other expense .................
Other income, net ..............................
Total other (expense) income, net .....
31,635
21,300
3
52,938
82,492
30,638
21,970
12,904
65,512
16,980
30,598
21,528
5
52,131
75,300
28,104
21,419
12,172
61,695
13,605
28,422
21,037
11
49,470
72,527
29,462
20,433
11,244
61,139
11,388
26,954
22,074
72
49,100
71,978
28,829
19,720
11,059
59,608
12,370
24,148
19,884
—
44,032
67,871
25,816
17,668
10,590
54,074
13,797
23,384
18,935
35
42,354
60,754
22,481
17,095
9,067
48,643
12,111
22,543
18,030
73
40,646
56,823
22,672
16,864
8,285
47,821
9,002
21,828
19,728
90
41,646
56,271
22,910
16,130
8,927
47,967
8,304
(77)
86
9
(104)
82
(22)
(106)
96
(10)
(66)
75
9
(26)
25
(1)
(67)
32
(35)
(56)
6
(50)
(80)
41
(39)
Income before income taxes ...................
Provision for income tax ......................
16,989
(5,154)
13,583
6,073
11,378
12,379
13,796
12,076
8,952
8,265
(5,015)
(5,496)
(3,988)
(5,776)
(4,050)
(3,745)
Net income..............................................
$ 11,835
$ 19,656
$
6,363
$
6,883
$
9,808
$
6,300
$
4,902
$
4,520
Earnings per share:..................................
Basic ................................................
Diluted .............................................
$
$
0.42
0.40
$
$
0.69
0.67
$
$
0.23
0.22
$
$
0.24
0.23
$
$
0.35
0.34
$
$
0.23
0.22
$
$
0.18
0.17
$
$
0.16
0.16
Weighted average shares outstanding:....
Basic.....................................................
Diluted..................................................
28,432
29,424
28,285
29,306
28,252
29,218
28,196
29,309
28,005
29,192
27,871
29,095
27,735
28,875
27,476
28,704
Seasonality
We have experienced, and may experience in the future, seasonality in our business, and our business, operating results
and financial condition may be affected by such trends in the future. Ultimate's quarterly revenues and operating results have
varied significantly in the past and are likely to vary substantially from quarter to quarter in the future. Revenues have historically
increased at higher rates in the fourth quarter of the year and at lower rates in the next succeeding quarter. We believe such
seasonality is due to a number of factors, including our quota-based compensation arrangements, typical of those used in software
companies, and year-end budgetary pressures on our customers. We believe that the seasonal trend that Ultimate has experienced
in the past may continue in the foreseeable future.
37
Liquidity and Capital Resources
In recent years, we have funded operations from cash flows generated from operations and, to a lesser extent,
equipment financing and borrowing arrangements.
As of December 31, 2014, we had $118.5 million in cash, cash equivalents and investments in marketable securities,
reflecting a net increase of $28.2 million since December 31, 2013. This $28.2 million increase was primarily due to cash
provided by operations of $108.1 million (excluding the non-cash impact of the excess tax benefit from stock option exercises)
and proceeds from the issuance of Common Stock from employee and non-employee director stock option exercises net of the
repurchase of Common Stock of $6.2 million, partially offset by cash purchases of property and equipment (including principal
payments on financed equipment) of $42.2 million (which includes $25.2 million of capitalized labor costs and third-party
consulting fees, paid in cash, associated with an internal-use development project), cash of $20.0 million used for the
repurchases of shares of Common Stock under our previously announced stock repurchase plan ("Stock Repurchase Plan"),
cash used to settle employee tax withholding liabilities for vesting of restricted stock awards and restricted stock units of $19.9
million, net payments on borrowings of $2.7 million and, to a lesser extent, the effect of the exchange rate on cash of $0.8
million.
Our operating cash inflows primarily consist of payments received from our customers related to our Cloud Offering.
Our operating cash outflows primarily consist of cash we invest in personnel and infrastructure to support the anticipated
growth of our business, payments to vendors related to our services, payments under arrangements with third party vendors
who provide hosting infrastructure services in connection with our Cloud Offering, related sales and marketing costs, costs of
operations and systems development and programming costs and, from time to time, payments for acquisitions. Net cash
provided by operating activities increased $6.4 million during 2014 as compared with 2013. This increase was primarily due to
an increase in operating income and changes in working capital accounts, after adjusting for the impact of non-cash expenses
such as depreciation and amortization and expense associated with stock-based compensation awards.
Net cash used in investing activities was $535.2 million for 2014 as compared with $34.4 million for 2013. The
$500.8 million increase from 2013 was primarily attributable to an increase of $517.8 million in funds received from and held
in our bank accounts on behalf of Ultimate’s customers using the UltiPro Payment Services offering (“UltiPro Payment
Services”) and an increase in cash purchases of property and equipment of $7.7 million (including an increase of $6.2 million
of capitalized labor costs and third-party consulting fees, paid in cash, associated with an internal-use development project),
partially offset by a significant decrease in cash used for acquisitions of $24.7 million. Customer funds, temporarily held by us
as a result of our UltiPro Payment Services, are held in our bank accounts for the benefit of our customers and invested by us in
accordance with our internal investment strategies. These customer funds are invested in U.S. Government money market funds
that invest in short-term, high quality money market instruments which consist of U.S. Treasury and U.S. Government Agency
obligations and repurchase agreements collateralized by such obligations. The money market funds are rated AAA by Standard
& Poor's and Aaa by Moody's.
Net cash used in financing activities was $483.9 million for 2014 as compared with net cash provided by financing
activities of $17.3 million for 2013. The $501.2 million increase in net cash provided by financing activities was primarily
related to an increase of $517.8 million in UltiPro Payment Services funds received, and an increase in excess tax benefits from
stock option exercises of $8.3 million, partially offset by cash of $20.0 million used for the repurchases of shares of Common
Stock under our previously announced Stock Repurchase Plan, an increase in cash used to settle employee tax withholding
liabilities for the vesting of restricted stock of $1.8 million, an increase in payments on other borrowings of $0.6 million and
lower proceeds from the issuance of Common Stock from employee and non-employee director stock option exercises of $1.9
million.
Days sales outstanding (“DSO”), calculated on a trailing three-month basis, as of December 31, 2014 were 68 days as
compared with 70 days as of December 31, 2013.
Deferred revenues were $109.7 million at December 31, 2014, as compared with $103.2 million at December 31,
2013. The increase of $6.5 million in deferred revenues for 2014 was primarily due to higher deferred cloud revenues and
higher deferred services revenues, partially offset by decreased deferred maintenance revenues. The decreased deferred
maintenance revenues resulted from the conversion of Legacy customers to the cloud and, to a lesser extent, terminated
maintenance arrangements from customers that did not convert to the cloud as a result of our conversion program which began
in 2009 and heightened during 2014. After December 31, 2014, we no longer support our Legacy product and, therefore, as of
December 31, 2014, our deferred maintenance revenues no longer exist. Also, for those customers that did convert to the cloud,
the related billings changed from annual renewal maintenance billings to quarterly cloud billings for those same customers.
38
Ultimate believes that cash and cash equivalents, investments in marketable securities and cash generated from
operations will be sufficient to fund our 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.
We did not have any material commitments for capital expenditures as of December 31, 2014.
Off-Balance Sheet Arrangements
We do not, and, as of December 31, 2014, we did not, have any off-balance sheet arrangements (as that term is defined
in applicable SEC rules) that are reasonably likely to have a current or future material effect on our financial condition, results
of operations, liquidity, capital expenditures or capital resources.
Non-GAAP Financial Measures
Item 10 (e) of Regulation S-K, "Use of Non-GAAP Financial Measures in Commission Filings," defines and
prescribes the use of non-GAAP financial information. Our measure of Non-GAAP Operating Income, which excludes non-
cash stock-based compensation and amortization of acquired intangibles, meets the definition of a non-GAAP financial
measure.
Ultimate believes that this non-GAAP measure of financial results provides useful information to management and
investors regarding certain financial and business trends relating to Ultimate's financial condition and results of operations.
Ultimate's management uses this non-GAAP result to compare Ultimate's performance to that of prior periods for trend
analyses, for purposes of determining executive incentive compensation, and for budget and planning purposes. This measure is
used in monthly financial reports prepared for management and in quarterly financial reports presented to Ultimate's Board of
Directors. This measure may be different from non-GAAP financial measures used by other companies.
This non-GAAP measure should not be considered in isolation or as an alternative to such measures determined in
accordance with generally accepted accounting principles in the United States (GAAP). The principal limitation of this non-
GAAP financial measure is that it excludes significant expenses that are required by GAAP to be recorded. In addition, it is
subject to inherent limitations as it reflects the exercise of judgment by management about which expenses are excluded from
the non-GAAP financial measure.
To compensate for these limitations, Ultimate presents its non-GAAP financial measure in connection with its GAAP
result. Ultimate strongly urges investors and potential investors in Ultimate's securities to review the reconciliation of its non-
GAAP financial measure to the comparable GAAP financial measure that is included in the table below and not to rely on any
single financial measure to evaluate its business.
We exclude the following items from the non-GAAP financial measure, Non-GAAP Operating Income, as
appropriate:
Stock-based compensation expense. Ultimate's non-GAAP financial measure of Non-GAAP Operating Income
excludes non-cash stock-based compensation expense, which consists of expenses for stock options and stock and stock unit
awards recorded in accordance with Accounting Standards Codification 718, “Compensation - Stock Compensation.” For the
years ended December 31, 2014, 2013 and 2012, stock-based compensation expense was $46.2 million, $32.8 million and
$20.4 million, respectively, on a pre-tax basis. Stock-based compensation expense is excluded from the non-GAAP financial
measures because it is a non-cash expense that Ultimate does not consider part of ongoing operations when assessing its
financial performance. Ultimate believes that such exclusion facilitates the comparison of results of ongoing operations for
current and future periods with such results from past periods. For GAAP net income periods, non-GAAP reconciliations are
calculated on a diluted weighted average share basis.
Amortization of acquired intangible assets. In accordance with GAAP, operating expenses include amortization of
acquired intangible assets over the estimated useful lives of such assets. For the years ended December 31, 2014 and 2013, the
amortization of acquired intangible assets was $1.1 million and $0.2 million, respectively. There was no amortization of
acquired intangible assets for the year ended December 31, 2012. Amortization of acquired intangible assets is excluded from
Ultimate's non-GAAP financial measures because it is a non-cash expense that Ultimate does not consider part of ongoing
operations when assessing its financial performance. Ultimate believes that such exclusion facilitates comparisons to its
historical operating results and to the results of other companies in the same industry, which have their own unique acquisition
histories.
39
For the Year Ended
2013
2012
2014
Non-GAAP operating income reconciliation:
Operating income ...............................................................
Operating income, as a % of total revenues.......................
Add back:
Non-cash stock-based compensation expense....................
Non-cash amortization of acquired intangible assets .........
Non-GAAP operating income ............................................
Non-GAAP operating income, as a % of total revenues ....
$ 54,343
$ 43,214
$ 29,113
10.7%
10.5%
8.8%
46,188
1,139
$ 101,670
32,807
242
$ 76,263
20,412
—
$ 49,525
20.1%
18.6%
14.9%
Contractual Obligations
As of December 31, 2014, Ultimate’s outstanding contractual cash obligations were as follows (in thousands):
Payments Due by Period
Total
Less Than 1
Year
1-3 Years
4-5 Years
More than 5
Years
Capital lease obligations (1)............................... $
Other long-term obligations (2) .........................
Other long-term liabilities (3) ............................
Total contractual cash obligations...................... $
7,014
$
3,655
$
3,359
$
— $
43,144
4,950
10,379
4,950
17,225
—
9,534
—
55,108
$
18,984
$
20,584
$
9,534
$
—
6,006
—
6,006
_________________________
(1) We lease certain computer equipment under non-cancelable agreements, which are accounted for as capital leases
and expire at various dates through 2017. See Note 13 of the Notes to Consolidated Financial Statements included
elsewhere in this Form 10-K for information regarding capital lease obligations.
(2) Included in other long-term obligations were Ultimate’s leases for corporate office space and certain equipment under
non-cancelable operating lease agreements expiring at various dates. Also included in other long-term obligations
is a software license agreement with a third-party vendor, payable over a four-year period. See Note 17 of the Notes
to Consolidated Financial Statements included elsewhere in this Form 10-K for information regarding operating
lease obligations and the software license agreement. Other long-term obligations also included borrowings to
purchase perpetual licenses with third-party vendors, payable over a three-year period. See Note 14 of the Notes to
Consolidated Financial Statements included elsewhere in this Form 10-K for information regarding other borrowings.
(3) Ultimate has an income tax payable related to the benefit of an unrecognized tax position. As of the date of this
report, it is not reasonable to estimate the timing of this payment. Ultimate does not have any other long-term
liabilities as of December 31, 2014.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
In the ordinary course of Ultimate’s operations, we are exposed to certain market risks, primarily interest rate risk and
foreign currency risk. Risks that are either non-financial or non-quantifiable, such as political, economic, tax, or regulatory risks,
are not included in the following assessment of our market risks.
Interest Rate Risk. Ultimate is subject to financial market risks, including changes in interest rates which influence the
valuations of its fixed income investment portfolio. Changes in interest rates could also impact Ultimate’s anticipated interest
income from interest-bearing cash accounts, or cash equivalents and investments in marketable securities. We manage financial
market risks, including interest rate risks, in accordance with our investment guideline objectives, including:
• Maximum safety of principal;
• Maintenance of appropriate liquidity for regular cash needs;
• Maximum yields in relationship to guidelines and market conditions;
• Diversification of risks; and
40
•
Fiduciary control of all investments.
Ultimate targets its fixed income investment portfolio to have maturities of 24 months or less. Investments are held to
enhance the preservation of capital and not for trading purposes.
Cash equivalents consist of money market accounts with original maturities of less than three months. Short-term
investments include obligations of U.S. government agencies and corporate debt securities. Corporate debt securities include
commercial paper which, according to Ultimate’s investment guidelines, must carry minimum short-term ratings of P-1 by Moody’s
Investor Service, Inc. (“Moody’s”) and A-1 by Standard & Poor’s Ratings Service, a Division of The McGraw-Hill Companies,
Inc. (“S&P”). Other corporate debt obligations must carry a minimum rating of A-2 by Moody’s or A by S&P. Asset-backed
securities must carry a minimum AAA rating by Moody’s and S&P with a maximum average life of two years at the time of
purchase.
As of December 31, 2014, total investments in available-for-sale marketable securities were $10.2 million.
As of December 31, 2014, virtually all of the investments in Ultimate’s portfolio were at fixed rates (with a weighted
average interest rate of 0.6% per annum).
To illustrate the potential impact of changes in interest rates, Ultimate has performed an analysis based on its December 31,
2014 consolidated balance sheet and assuming no changes in its investments. Under this analysis, an immediate and sustained
100 basis point increase in the various base rates would result in a decrease in the fair value of Ultimate’s total portfolio of
approximately $68 thousand over the next 12 months. An immediate and sustained 100 basis point decrease in the various base
rates would result in an increase in the fair value of Ultimate’s total portfolio of approximately $44 thousand over the next 12
months.
Foreign Currency Risk. Ultimate has foreign currency risks related to its revenue and operating expenses denominated
in currencies other than the U.S. dollar. Management does not believe movements in the foreign currencies in which Ultimate
transacts business will significantly affect future net income.
41
Item 8. Financial Statements and Supplementary Data
INDEX
Report of Independent Registered Public Accounting Firm ..................................................................................
Consolidated Balance Sheets as of December 31, 2014 and 2013 ........................................................................
Consolidated Statements of Income for the Years Ended December 31, 2014, 2013 and 2012............................
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012..
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012 ......
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012 .....................
Notes to Consolidated Financial Statements..........................................................................................................
Page(s)
43
44
45
46
47
49
51
42
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Ultimate Software Group, Inc.:
We have audited the accompanying consolidated balance sheets of The Ultimate Software Group, Inc. and subsidiaries (the
Company) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income,
stockholders’ equity, and cash flows for each of the years in the
period ended December 31, 2014. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years
in the
period ended December 31, 2014, 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
Ultimate Software Group, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established
in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated February 27, 2015 expressed an unqualified opinion on the effectiveness of The Ultimate
Software Group, Inc.’s internal control over financial reporting.
/s/ KPMG LLP
February 27, 2015
Jacksonville, Florida
Certified Public Accountants
43
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
2014
2013
(In thousands, except share data)
Current assets:
Cash and cash equivalents........................................................................................................................... $
Investments in marketable securities .....................................................................................................
108,298
7,862
$
ASSETS
Accounts receivable, net of allowance for doubtful accounts of $675 for 2014 and 2013....................
Prepaid expenses and other current assets .............................................................................................
Deferred tax assets, net ..........................................................................................................................
Total current assets before funds held for customers .......................................................................
Funds held for customers .......................................................................................................................
Total current assets ...........................................................................................................................
Property and equipment, net........................................................................................................................
Goodwill......................................................................................................................................................
Investments in marketable securities...........................................................................................................
Intangible assets, net ...................................................................................................................................
Other assets, net...........................................................................................................................................
Deferred tax assets, net................................................................................................................................
Total assets ............................................................................................................................................. $
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable ................................................................................................................................... $
Accrued expenses...................................................................................................................................
Deferred revenue....................................................................................................................................
Capital lease obligations ........................................................................................................................
Other borrowings ...................................................................................................................................
Total current liabilities before customer funds obligations ..............................................................
Customer funds obligations ...................................................................................................................
Total current liabilities......................................................................................................................
Deferred revenue .........................................................................................................................................
Deferred rent ...............................................................................................................................................
Capital lease obligations..............................................................................................................................
Other borrowings.........................................................................................................................................
Deferred income tax liability.......................................................................................................................
Total liabilities .......................................................................................................................................
Commitments and contingencies (Note 17) ................................................................................................
Stockholders’ equity:
Series A Junior Participating Preferred Stock, $.01 par value, 500,000 shares authorized, no shares
issued...................................................................................................................................................
Preferred Stock, $.01 par value, 2,000,000 shares authorized, no shares issued ....................................
Common Stock, $.01 par value, 50,000,000 shares authorized, 32,722,864 and 32,132,376 shares issued
and outstanding in 2014 and 2013, respectively .................................................................................
Additional paid-in capital ......................................................................................................................
Accumulated other comprehensive loss.................................................................................................
Accumulated earnings (deficit)..............................................................................................................
Treasury stock, 4,216,626 and 4,053,835 shares, at cost, for 2014 and 2013, respectively .......................
Total stockholders’ equity ......................................................................................................................
Total liabilities and stockholders’ equity ............................................................................................... $
$
$
100,218
34,788
965
252,131
759,087
1,011,218
86,595
25,696
2,294
6,774
20,611
37,110
1,190,298
7,418
30,941
109,552
3,655
567
152,133
759,087
911,220
153
2,368
3,359
400
1,049
918,549
—
—
—
327
376,609
(3,590)
36,928
410,274
(138,525)
271,749
1,190,298
$
79,794
8,682
85,676
29,374
1,015
204,541
262,227
466,768
58,186
26,942
1,771
8,274
17,340
18,913
598,194
6,422
26,040
102,686
2,949
2,264
140,361
262,227
402,588
498
2,687
2,240
593
1,371
409,977
—
—
—
321
315,691
(1,442)
(7,809)
306,761
(118,544)
188,217
598,194
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
44
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Revenues:
Recurring .................................................................................................................. $
Services.....................................................................................................................
License......................................................................................................................
Total revenues.........................................................................................................
Cost of revenues:
Recurring ..................................................................................................................
Services.....................................................................................................................
License......................................................................................................................
Total cost of revenues.............................................................................................
Gross profit ...............................................................................................................
Operating expenses:
Sales and marketing..................................................................................................
Research and development .......................................................................................
General and administrative .......................................................................................
Total operating expenses ........................................................................................
Operating income......................................................................................................
Other (expense) income:
Interest expense ........................................................................................................
Other income, net......................................................................................................
Total other (expense) income, net ..........................................................................
Income from operations............................................................................................
Provision for income taxes .......................................................................................
Net income................................................................................................................ $
For the Years Ended December 31,
2014
2013
2012
(in thousands, except per share data)
419,238
$
334,434
$
266,430
86,165
533
75,110
853
64,563
1,275
505,936
410,397
332,268
117,609
85,939
91
203,639
302,297
117,033
83,542
47,379
247,954
54,343
(353)
339
(14)
54,329
(9,592)
44,737
91,903
76,577
198
168,678
241,719
93,879
67,757
36,869
198,505
43,214
(229)
104
(125)
43,089
(17,559)
25,530
0.92
0.88
$
$
$
78,121
66,063
280
144,464
187,804
72,565
60,693
25,433
158,691
29,113
(476)
102
(374)
28,739
(14,107)
14,632
0.55
0.52
$
$
$
Net income per share:
Basic ....................................................................................................................... $
Diluted.................................................................................................................... $
1.58
1.52
Weighted average shares outstanding:
Basic .........................................................................................................................
Diluted ......................................................................................................................
28,293
29,343
27,773
29,013
26,778
28,375
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
45
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income...................................................................................................... $
Other comprehensive (loss) income :
Unrealized (loss) gain on investments in marketable available for sale
securities.......................................................................................................
Unrealized (loss) gain on foreign currency translation adjustments ............
Other comprehensive (loss) income, before tax .............................................
Income tax benefit (expense) related to items of other comprehensive
income ..........................................................................................................
Other comprehensive (loss) income, net of tax .............................................. $
Comprehensive income .................................................................................. $
For the Years Ended December 31,
2014
2013
2012
44,737
$ 25,530
$ 14,632
4
(1)
(10)
(2,143)
(2,153)
(1,549)
(1,545)
1
(6)
(2,152) $ (1,551) $
42,585
$ 23,979
$ 14,798
166
165
1
166
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
46
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Common Stock
Shares
Amount
Additional
Paid -in
Capital
30,204
$
302
$
242,100
Balance, December 31,
2011 ...............................
Accumulated
Other
Comprehensive
(Loss) Income
$
Accumulated
(Deficit)
Earnings
Treasury Stock
Shares
Amount
Total
Stockholders’
Equity
(57) $
(47,971)
3,942
$ (108,750) $
85,624
Net income.....................
—
—
—
—
14,632
—
—
14,632
—
—
—
751
442
—
31,397
$
—
—
—
—
—
440
296
(20,384)
12,310
—
11,272
—
20,832
266,130
$
$
—
—
(18,058)
19,167
6,115
8,132
—
—
—
8
4
—
314
—
—
—
—
—
4
3
—
—
—
—
—
166
—
—
—
—
—
—
109
—
(2)
—
(1,549)
—
—
—
—
—
—
—
—
—
(33,339)
$
—
4,054
25,530
166
(20,384)
12,310
—
—
—
—
112
(9,794)
(9,794)
—
—
—
—
—
—
—
—
—
—
—
$ (118,544) $
11,280
4
20,832
114,670
—
25,530
—
(2)
—
—
—
—
(1,549)
(18,058)
19,167
6,115
8,136
3
Unrealized gain on
foreign exchange, net of
tax ..................................
Shares acquired to settle
employee tax
withholding liability ......
Excess tax benefits from
employee stock plan ......
Repurchases of
Common Stock ..............
Issuances of Common
Stock from exercises of
stock options..................
Issuances of Common
Stock from restricted
stock releases .................
Non-cash stock-based
compensation expense
for stock options,
restricted stock and
restricted stock units ......
Balance, December 31,
2012 ...............................
Net income.....................
Unrealized loss on
investments in
marketable securities
available-for-sale, net of
tax ..................................
Unrealized loss on
foreign exchange, net of
tax ..................................
Shares acquired to settle
employee tax
withholding liability ......
Excess tax benefits from
employee stock plan ......
Stock consideration for
acquisitions ....................
Issuances of Common
Stock from exercises of
stock options..................
Issuances of Common
Stock from restricted
stock releases .................
Non-cash stock-based
compensation expense
for stock options,
restricted stock and
restricted stock units ......
Balance, December 31,
2013 ...............................
—
—
34,205
—
—
—
—
34,205
32,133
$
321
$
315,691
$
(1,442) $
(7,809)
4,054
$ (118,544) $
188,217
Net income.....................
—
—
—
—
44,737
—
—
44,737
47
Common Stock
Shares
Amount
Additional
Paid -in
Capital
Accumulated
Other
Comprehensive
(Loss) Income
Accumulated
(Deficit)
Earnings
Treasury Stock
Shares
Amount
Total
Stockholders’
Equity
—
—
—
(5)
—
—
—
(5)
—
—
—
13
310
267
—
—
—
—
3
3
(19,883)
27,499
—
(818)
6,205
—
—
—
47,915
(2,143)
—
—
—
—
—
—
—
(2,143)
(19,883)
27,499
—
—
—
—
163
(19,981)
(19,981)
—
—
—
—
—
—
—
(818)
6,208
3
—
47,915
—
—
—
—
—
—
—
32,723
$
327
$
376,609
$
(3,590) $
36,928
4,217
$ (138,525) $
271,749
Unrealized loss on
investments in
marketable securities
available-for-sale, net
of tax..........................
Unrealized loss on
foreign exchange, net of
tax ..................................
Shares acquired to settle
employee tax
withholding liability ......
Excess tax benefits from
employee stock plan ......
Repurchases of
Common Stock ..............
Stock consideration for
acquisitions ....................
Issuances of Common
Stock from exercises of
stock options..................
Issuances of Common
Stock from restricted
stock releases .................
Non-cash stock-based
compensation expense
for stock options,
restricted stock and
restricted stock units ......
Balance, December 31,
2014 ...............................
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
48
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income ...................................................................................................... $
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................................................
Provision for doubtful accounts....................................................................
Non-cash stock-based compensation expense ..............................................
Income taxes .................................................................................................
Excess tax benefits from employee stock plan .............................................
Changes in operating assets and liabilities: ..................................................
Accounts receivable .................................................................................
Prepaid expenses and other current assets ...............................................
Other assets ..............................................................................................
Accounts payable .....................................................................................
Accrued expenses and deferred rent ........................................................
Deferred revenue......................................................................................
Net cash provided by operating activities .............................................
Cash flows from investing activities:
Purchases of marketable securities .................................................................
Maturities of marketable securities .................................................................
Payments for acquisitions, net of cash acquired .............................................
Net purchases of client funds securities ..........................................................
Purchases of property and equipment .............................................................
Net cash used in investing activities......................................................
Cash flows from financing activities:
Repurchases of Common Stock ......................................................................
Net proceeds from issuances of Common Stock ............................................
Excess tax benefits from employee stock plan ...............................................
Shares acquired to settle employee tax withholding liabilities .......................
Principal payments on capital lease obligations .............................................
Repayments of other borrowings ....................................................................
Net increase in customer fund obligations ......................................................
Net cash provided by (used in) financing activities ..............................
Effect of exchange rate changes on cash.........................................................
Net increase in cash and cash equivalents.......................................................
Cash and cash equivalents, beginning of year ................................................
Cash and cash equivalents, end of year........................................................... $
Supplemental disclosure of cash flow information:
49
For the Years Ended December 31,
2014
2013
2012
(in thousands)
44,737
$
25,530
$
14,632
19,263
2,264
46,185
9,030
(27,499)
(16,806)
(5,414)
(3,271)
996
4,582
6,521
80,588
(10,355)
10,377
(257)
(496,860)
(38,100)
(535,195)
(19,981)
6,208
27,499
(19,883)
(4,082)
(2,690)
496,860
483,931
(820)
28,504
79,794
16,058
2,523
32,807
17,347
(19,167)
(16,784)
(2,982)
(403)
(1,415)
10,752
9,946
74,212
(10,741)
10,819
(24,995)
20,908
(30,421)
(34,430)
—
8,139
19,167
(18,058)
(3,541)
(2,055)
(20,908)
(17,256)
(1,549)
20,977
58,817
108,298
$
79,794
$
13,623
1,159
20,412
13,814
(12,310)
(15,747)
(1,880)
(1,631)
1,319
2,859
5,413
41,663
(13,643)
12,239
—
(162,347)
(17,326)
(181,077)
(9,794)
11,284
12,310
(20,384)
(3,418)
(429)
162,347
151,916
166
12,668
46,149
58,817
Cash paid for interest .................................................................................... $
Cash paid for taxes........................................................................................ $
327
582
$
$
358
476
$
$
419
471
Non-cash investing and financing activities:
Capital lease obligations to acquire new equipment ..................................... $
Stock consideration adjustment recorded for acquisitions............................ $
Stock consideration recorded for acquisitions .............................................. $
License agreement with third-party vendor.................................................. $
Stock based compensation for capitalized software ..................................... $
5,907
$
(818) $
3,293
$
3,986
— $
— $
6,115
$
800
1,730
$
$
— $
1,398
$
—
—
—
420
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
50
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations
The Ultimate Software Group, Inc. and subsidiaries (“Ultimate,” “we,” “us” or “our”) is a leading provider of cloud-
based human capital management (“HCM”). Ultimate's UltiPro software (“UltiPro”) is a comprehensive, easy-to-use solution
delivered primarily over the Internet to organizations based in the United States and Canada, including those with global
employees. UltiPro is designed to deliver the functionality businesses need to manage the complete employment life cycle
from recruitment to retirement. We market our UltiPro solutions primarily to enterprise companies, which we define as
companies with more than 1,500 employees, including those with 10,000 or more employees; mid-market companies, which
we define as those having approximately 500-1,500 employees; and strategic companies, which we define as having
approximately 100-499 employees. UltiPro is marketed primarily through our enterprise, mid-market and strategic direct sales
teams.
2. Basis of Presentation, Consolidation and the Use of Estimates
The accompanying consolidated financial statements of Ultimate have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission (the “SEC”).
The consolidated financial statements included herein reflect all adjustments, which are, in the opinion of Ultimate’s
management, necessary for a fair presentation of the information for the periods presented. The preparation of financial
statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Such estimates include, but are not limited to, revenue recognition, income taxes, the allowance for doubtful accounts, the
valuation of deferred tax assets and long-lived assets, among others discussed below. Actual results could differ from those
estimates.
The consolidated financial statements reflect the financial position and operating results of Ultimate and include its
wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
3. Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or less when acquired are considered cash
equivalents and are comprised of interest-bearing accounts.
Accounts Receivable
Accounts receivable are principally from end-users of Ultimate’s products. We perform credit evaluations of our
customers and have recorded allowances for estimated losses. We maintain an allowance for doubtful accounts at an amount
estimated to be sufficient to provide adequate protection against losses resulting from collecting less than full payment on
accounts receivable. A considerable amount of judgment is required when the realization of receivables is assessed, including
assessing the probability of collection and current credit-worthiness of each customer. If the financial condition of our
customers were to deteriorate, resulting in a further impairment of their ability to make payments, an additional provision for
doubtful accounts may be required. We charge off uncollectible amounts against the allowance for doubtful accounts in the
period in which we determine they are uncollectible.
Funds Held for Customers and Customers’ Funds Obligations
Ultimate has the right to market and distribute an independent third party’s tax filing solution that Ultimate has
branded UltiPro Payment Services. Ultimate’s UltiPro Payment Services product provides payment services to our
customers. These payment services are being sold directly by us to our customers only on a per-employee-per-month
(“PEPM”) basis in conjunction with UltiPro, our core product. In connection with our UltiPro Payment Services product, we
receive funds from our customers and hold such funds for purposes of paying the appropriate taxing authorities on behalf of
such customers. We hold our customers’ payment services deposits for the period between collection from our customers and
remittance to the applicable taxing authority. These funds held for customers and the corresponding customer funds obligations
51
are included in current assets and current liabilities, respectively, in our consolidated balance sheets as of December 31, 2014
and 2013. We have reported the cash flows for purchases of securities with funds received from UltiPro Payment Services
customers in the investing activities section of the consolidated statements of cash flows for the years ended December 31,
2014, 2013 and 2012. We have reported the cash flows related to the funds received and paid on behalf of such customers to
the applicable taxing authorities in the financing activities section of the consolidated statements of cash flows for the years
ended December 31, 2014, 2013 and 2012. The associated PEPM fees for UltiPro Payment Services are included in recurring
revenues in the consolidated statements of income for the years ended December 31, 2014, 2013 and 2012. The associated
interest earned was not material for the years ended December 31, 2014, 2013 and 2012.
Fair Value of Financial Instruments
Ultimate’s financial instruments, consisting of cash and cash equivalents, investments in marketable securities, funds
held for customers and the related obligations, accounts receivable, accounts payable, and capital lease obligations and other
borrowings, approximated fair value (due to relatively short maturity) as of December 31, 2014 and 2013.
Prepaid Expenses and Other Current Assets
Ultimate’s financial statements include prepaid expenses and other current assets which include prepaid commissions
on cloud sales. Prepaid expenses are amortized over the life of the asset (typically within one year) and commissions on cloud
sales are amortized over the initial contract term (typically 24 months) commencing on the day the customer processes its first
live payroll using UltiPro (also referred to as going “Live”), which corresponds with the related cloud revenue recognition. The
portion of prepaid commissions that extends beyond one year is classified in other assets, net in the consolidated balance sheets
as of December 31, 2014 and 2013.
Long-Lived Assets
We evaluate the carrying value of long-lived assets when indicators of impairment exist. For the year ended
December 31, 2014, no such events or circumstances were identified. The carrying value of a long-lived asset is considered
impaired when the undiscounted expected future cash flows from such asset (or asset group) are separately identifiable and less
than the asset’s (or asset group’s) carrying value. In that event, a loss is recognized to the extent that the carrying value exceeds
the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. For the years ended December 31, 2014, 2013 and 2012, we recorded no impairment of
our long-lived assets.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and amortization. Property and equipment is
depreciated using the straight-line method over the estimated useful lives of the assets, which range from 2 to 20 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 approximately 3 to 15 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.
Computer Software Development Costs
We previously capitalized software costs in accordance with Accounting Standards Codification ("ASC") Topic
985-20, Costs of Software to Be Sold, Leased, or Marketed. Those capitalized software costs were fully amortized as of
December 31, 2013.
Computer software development costs related to software developed for internal use falls under the accounting
guidance of ASC Topic 350-40, Intangibles Goodwill and Other–Internal Use Software, in which computer software costs are
expensed as incurred during the preliminary project stage and capitalization begins in the application development stage once
the capitalization criteria are met. Costs associated with post implementation activities are expensed as incurred. Costs
capitalized during the application development stage include external direct costs of materials and services consumed in
developing or obtaining internal-use software and payroll and payroll-related costs for employees who are directly associated
with, and who devote time to, the internal-use computer software. In addition to capitalizing costs for software (which are used
by us in our general operations, for internal purposes), we also capitalize costs under ASC Topic 350-40 for certain software
development projects related to our suite of products sold to our customers exclusively on a subscription basis under our
software-as-a-service offering of UltiPro (the “Cloud Offering”).
52
Deferred Revenue
Deferred revenue is primarily comprised of deferrals for recurring revenues for cloud services which are recognized
over the term of the related contract as the services are performed, typically two years; maintenance services which have not
yet been rendered which are recognized ratably over the related annual maintenance period; implementation consulting services
for which the services have not yet been rendered which are primarily recognized prior to the respective Live date; and
subscription revenues which are recognized ratably over the base term of the related contract upon the delivery of the services.
Guarantees
The standard commercial terms in our sales contracts for UltiPro include an indemnification clause that indemnifies
the customer against certain liabilities and damages arising from any claims of patent, copyright, or other proprietary rights of
any third party. Due to the nature of the intellectual property indemnification provided to our customers, we cannot estimate the
fair value, or determine the total nominal amount, of the indemnification until such time as a claim for such indemnification is
made. In the event of a claim made against us under such provision, we evaluate estimated losses for such indemnification
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, Ultimate has not had any claims made against it under such provision and, accordingly, has not
accrued any liabilities related to such indemnifications in its consolidated financial statements.
Segment Information
Public companies are required to report selected information about operating segments in annual and interim financial
reports to shareholders, as well as related disclosures about an enterprise’s business segments, products, services, geographic
areas and major customers. Ultimate operates its business as a single segment and is comprised as a single reporting unit.
Revenue Recognition
We recognize revenues in accordance with Accounting Standards Update No. 2009-13, “Multiple-Deliverable
Revenue Arrangements” (“ASU 2009-13”). We use the relative selling price method to allocate the total consideration to units
of accounting in a multiple element arrangement. We allocate revenue in an arrangement using the estimated selling price
(“ESP”) of deliverables if it does not have vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) of
selling price.
VSOE is the price charged when the same or similar product or service is sold separately. We define VSOE as a
median price of recent stand-alone transactions that are priced within a narrow range.
TPE is determined based on the prices charged by our competitors for a similar deliverable when sold
separately. However, due to the difficulty in obtaining sufficient information on competitor pricing and differences in our
product offerings when compared with those of our peers, we generally are unable to reliably determine TPE.
ESP is our best estimate of the selling price of an element in a transaction. If we are unable to establish selling price
using either VSOE or TPE, we will use ESP in our allocation of arrangement consideration. The objective of ESP is to
determine the price at which we would transact business if the product or service were sold by us on a stand-alone basis. Our
determination of ESP involves the use of a customary discount from the list (or book) price for each element, with the
discounted price applied within a narrow range. The customary discount is derived from historical data that has been analyzed
to determine trends and patterns. We analyze the customary discount used for determining ESP on no less than an annual basis.
We evaluate each deliverable in our arrangements to determine whether it represents a separate unit of accounting. A
deliverable constitutes a separate unit of accounting when it has stand-alone value to our customers. Our products and services
continue to qualify as separate units of accounting under ASU 2009-13.
There are two major elements in our multiple element arrangements for the delivery of our Cloud Offering, which are
recurring revenues (i.e., cloud subscription revenues) and services revenues (mostly implementation consulting services).
For multiple element arrangements, the consideration allocated to cloud subscription revenues is recognized as
recurring revenues over the initial contract period, as those services are delivered, commencing with the Live date of the related
product. The consideration allocated to fixed fee implementation consulting services in multiple element arrangements is
53
recognized as services revenues on a percentage of completion basis, using reasonably dependable estimates with respect to
milestones achieved (in relation to progression through implementation phases), by product.
Single element arrangements typically consist of renewals for cloud subscriptions and renewal maintenance
agreements. In addition, implementation consulting services sold on a time and materials basis typically represent single
element arrangements. Under these single element arrangements, cloud subscription and maintenance revenues are recognized
over the related renewal period, as the services are delivered, and implementation consulting services are recognized as the
services are performed.
We recognize revenues when all of the following criteria are met:
•
•
•
•
persuasive evidence of an arrangement exists;
delivery has occurred;
the fees are fixed and determinable; and
collection is considered probable.
If collection is not considered probable, we recognize revenues when the fees are collected. If the fees are not fixed
and determinable, we recognize revenues when the fees become due from the customer. If non-standard acceptance periods or
non-standard performance criteria are required, we recognize revenue when the acceptance period expires or upon the
satisfaction of the acceptance/performance criteria, as applicable.
The majority of services revenues are recognized over the implementation period, which is from the contract
execution date until the Live date. Cloud revenues are recognized over the initial contract term, beginning in the month the
customer goes Live.
Recurring Revenues
Recurring revenues primarily consist of subscription revenues recognized from our Cloud Offering, as well as
customer support and maintenance revenues.
i) Cloud subscription revenues are principally derived from PEPM fees earned from the Cloud Offering and from
sales of hosting services on a stand-alone basis to customers who already own a perpetual license ("Base Hosting"). Ongoing
PEPM fees from the Cloud Offering and, to a lesser extent, Base Hosting are recognized as subscription revenues as the
services are delivered, commencing when the customer goes Live.
ii) Customer support and maintenance revenues are derived from maintaining, supporting, and providing periodic
updates of our software for our hosting services. Since we stopped selling perpetual licenses to our new customers effective
April 1, 2009, customer support and maintenance revenues stem from annual renewals.
Under our Cloud Offering, our customers do not have the right to take possession of our software and these
arrangements are considered service contracts. The selling price of multiple deliverables in cloud arrangements is derived for
each element based on the guidance provided by ASU 2009-13. The multiple elements that typically exist in cloud
arrangements include (1) recurring revenues from the combination of hosting services, the right to use UltiPro, and
maintenance of UltiPro (i.e., product enhancements, updates and customer support) and (2) professional services (i.e., primarily
implementation consulting services).
The pricing for the three elements that pertain to recurring revenues (i.e., hosting services, the right to use UltiPro and
maintenance of UltiPro) is bundled. Since these three bundled elements are components of recurring revenues in the
consolidated statements of income, allocation of selling price to each of the three elements is not necessary and they are not
reported separately. Selling price, which is established through VSOE, for the bundled elements, as a whole, is determined on
the basis of renewal pricing, without taking into consideration potential price increases or potential changes in the number of
employees of the customer in the future due to the uncertainties surrounding these potential occurrences. These bundled
elements are provided on an ongoing basis, represent undelivered elements and are recognized on a monthly basis as the related
services are performed, commencing once the customer goes Live.
Services Revenues
Services revenues primarily include revenues from fees charged for implementation consulting services in connection
with the implementation of our product solutions and, to a much lesser extent, training of customers in the use of our products
54
and fees for other services, including the provision of payroll-related forms, sales of time clocks and the printing of W-2 forms
for certain customers, as well as certain client reimbursable out-of-pocket expenses.
Our multiple element contracts contain recurring cloud revenues and implementation consulting services priced on a
fixed fee basis. Time and materials implementation consulting services are sold as stand-alone sales not directly related to the
basic implementation of the cloud product. The total arrangement consideration is allocated to services elements in the
arrangement based on relative selling prices, using the prices established when the services are sold on a stand-alone
basis. Selling price is established through ESP for fixed fee implementation consulting services that are included in our
multiple element contracts.
Revenues from implementation consulting services sold on a fixed-fee basis are recognized using the percentage of
completion accounting method, which involves the use of estimates. Percentage of completion is measured at each reporting
date based on progress made to date, using reasonably dependable estimates with respect to milestones achieved or billable
hours, as applicable.
Revenues from implementation consulting services, billed on a time and materials basis (at an hourly rate), are
recognized as these services are performed. Other services are recognized as the product is shipped or as the services are
rendered, depending on the specific terms of the related arrangement.
Business Combinations
We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and
liabilities assumed at the acquisition date based upon their estimated fair values. Goodwill as of the acquisition date represents
the excess of the purchase consideration of an acquired business over the fair value of the underlying net tangible and
intangible assets acquired and liabilities assumed. The purchase price allocation and valuation of the acquisition require
management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets.
The estimates used in valuing certain of the intangible assets include, but are not limited to: future expected cash
flows of the assets, discount rates to determine the present value of the future cash flows, financial projections of the acquired
business, attrition rates of customers and expected technology life cycles. We also estimate the useful lives of the intangible
assets based on the expected period over which we anticipate generating economic benefit from the asset.
Our estimates of fair value are based on assumptions believed to be reasonable at that time. If management made
different estimates or judgments, material differences in the fair values of the net assets acquired may result.
The fair value of assets acquired and liabilities assumed was based upon a preliminary purchase price allocation and
our estimates and assumptions are subject to change within the measurement period.
Goodwill and Intangible Assets
The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the
acquired business with the residual of the purchase price recorded as goodwill. The determination of the value of the intangible
assets acquired involves certain judgments and estimates. These judgments and estimates can include, but are not limited to, the
cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.
At December 31, 2014, our goodwill totaled $25.7 million and our identifiable net intangible assets totaled $6.8 million.
We assess the impairment of goodwill of our reporting unit annually, or more often if events or changes in circumstances
indicate that the carrying value may not be recoverable. Goodwill is tested for impairment at the reporting unit level by first
performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is
less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit's carrying
value is compared to its fair value. We consider both market and discounted cash flow approaches to determine the fair value
of the reporting unit. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The
discounted cash flow approach uses expected future operating results. Failure to achieve these expected results may cause a
future impairment of goodwill at the reporting unit. We conducted our annual impairment test of goodwill as of December 31,
2014, and 2013. As a result of this test, we determined that no adjustment to the carrying value of goodwill for our reporting
unit was required.
We evaluate our amortizable intangible assets for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset
55
or group of assets. The amount of any impairment is measured as the difference between the carrying value and the fair value
of the impaired asset. We also evaluate the estimated remaining useful lives of intangible assets and whether events or changes
in circumstances warrant a revision to the remaining periods of amortization. Assumptions and estimates about future values
and remaining useful lives of our intangible assets are complex and subjective. They can be affected by a variety of factors,
including external factors such as industry and economic trends and internal factors such as changes in our business strategy
and our internal forecasts.
Cost of Revenues
Cost of revenues primarily consists of the costs of recurring and services revenues. Cost of recurring revenues
primarily consists of costs to provide maintenance and technical support to our customers, the cost of providing periodic
updates and the cost of recurring subscription revenues, including amortization of capitalized software. Cost of services
revenues primarily consists of costs to provide implementation consulting services and, to a lesser degree, training to our
customers, costs related to sales of payroll-related forms, time clocks and costs associated with certain client reimbursable out-
of-pocket expenses.
Stock-Based Compensation
Our Amended and Restated 2005 Equity and Incentive Plan (the “Plan”) authorizes the grant of options to non-
employee directors, officers and employees of Ultimate to purchase shares of Ultimate’s Common Stock. The Plan also
authorizes the grant to such persons of restricted and non-restricted shares of Common Stock, stock appreciation rights, stock
units and cash performance awards (collectively, together with stock options, the “Awards”). Prior to the adoption of the Plan,
options to purchase shares of Common Stock were issued under our Nonqualified Stock Option Plan (the “Prior
Plan”). Beginning in 2009, we began making grants to employees of restricted stock units in lieu of stock options.
As of December 31, 2014, the aggregate number of shares of Common Stock that were available to be issued under all
Awards granted under the Plan was 1,165,680 shares.
The Plan provides broad discretion to the Compensation Committee of the Board of Directors to create appropriate
equity incentives for directors, officers and employees of Ultimate. The Plan is intended to attract and retain talented
employees and align employee and stockholder interests.
For purposes of calculating and accounting for stock-based compensation expense (“SBC”) in accordance with ASC
718, “Compensation – Stock Compensation” (“ASC 718”) for restricted stock awards and restricted stock units, we measure
compensation based on the closing market price of our Common Stock at the date of grant and it is recognized on a straight-
line basis over the vesting period. We estimate forfeitures at the time of grant and revise those estimates in subsequent periods
if actual forfeitures differ from those estimates. The weighted-average forfeiture rate is based on historical data.
In accordance with ASC 718, Ultimate capitalizes the portion of SBC expense attributed to research and development
personnel whose labor costs are being capitalized pursuant to ASC Topic 350-40, Intangibles Goodwill and Other-Internal Use
Software, related to software development. The following table summarizes SBC recognized by the Company (in thousands):
For the Years Ended December 31,
2013
2012
2014
SBC - Statements of income ........................................
SBC - Capitalized software ..........................................
SBC - Statements of stockholders' equity ....................
$
$
46,185
1,730
47,915
$
$
32,807
1,398
34,205
$
$
20,412
420
20,832
Rental Costs Incurred in Relation to a Construction Period
We have incurred rental costs associated with operating leases during the construction period. Rental costs incurred
during a construction period are costs incurred for the right to control the use of a leased asset during and after construction of a
leased asset. Since there is no distinction between the right to use a leased asset during the construction period and the right to
use that asset after the construction period, rental costs associated with ground or building operating leases that are incurred
during a construction period are recognized as rental expense on a straight-line basis.
56
Income Taxes
We are subject to Federal, foreign and state corporate income taxes. We account for income taxes using an asset and
liability approach under which deferred income taxes are provided based upon enacted tax laws and rates applicable to the
periods in which the taxes become payable.
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These
estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing
of recognition of revenue and expense for tax and financial statement purposes.
We assess the likelihood that Ultimate will be able to recover its deferred tax assets. Management considers all
available evidence, both positive and negative, including historical levels of pre-tax book income, expiration of net operating
losses, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning
strategies, as well as current tax laws and interpretation of current tax laws, in assessing the need for a valuation allowance. If
recovery is not likely, we record a valuation allowance against the deferred tax assets that we estimate will not ultimately be
recoverable. The available positive evidence at December 31, 2014 included, among other factors, three years of cumulative
historical pre-tax book income and a projection of future pre-tax book income and taxable income sufficient to realize all of our
remaining deferred tax assets. As a result of our analysis of all available evidence, both positive and negative, we believe that it
is more likely than not that the results of future operations will generate sufficient taxable income to realize all of the deferred
tax assets as of December 31, 2014. As such, there was no valuation allowance for the years ended December 31, 2014, 2013,
and 2012. See Note 15 for further discussion.
ASC 740, “Income Taxes” (“ASC 740”), clarified the accounting for uncertainty in income taxes recognized in a
company’s financial statements. Specifically, ASC 740 prescribed a recognition threshold and a measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also
provides guidance on the related de-recognition, classification, interest and penalties, accounting for interim periods, disclosure
and transition of uncertain tax positions. Our accounting policy is to record the tax effects of a change in the opening balance
of the unrecognized tax benefits (including unrecognized tax benefits related to prior-period discontinued operations) in
current-period income (loss) from continuing operations. We recognize interest and penalties accrued related to unrecognized
tax benefits as components of our income tax provision. We did not have any interest and penalties accrued upon the adoption
of ASC 740, and, as of December 31, 2014 and 2013, we did not have any interest and penalties accrued related to
unrecognized tax benefits.
Reimbursable Out-Of-Pocket Expenses
Reimbursable out-of-pocket expenses, which are included in services revenues and cost of services revenues in our
accompanying consolidated statements of operations, were $1.9 million, $1.8 million and $1.4 million for 2014, 2013 and
2012, respectively.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09, ("ASU 2014-09"), which requires an entity to recognize the amount of revenue to which it expects to be entitled for
the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance
in U.S. GAAP when it becomes effective. The new standard is effective for Ultimate on January 1, 2017 and early adoption is
not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating
the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet
selected a transition method and have not determined the effect the standard will have on our ongoing financial reporting.
4. Business Combinations
2013 Business Combinations
We completed two acquisitions in the fourth quarter of 2013 that were non-significant, individually and in the
aggregate, including Employtouch, Inc., (the "Employtouch Acquisition") a Canadian-based corporation and Accel HR, LLC,
(the “Accel HR Acquisition”) a Delaware limited liability company located in Georgia.
Acquisition of Employtouch, Inc.
57
On October 1, 2013, we entered into agreements with the shareholders of Employtouch, Inc., a Canadian-based
corporation, to acquire 100% of the issued and outstanding shares of Employtouch, Inc., in exchange for a combination of cash
and restricted shares of Ultimate's Common Stock. Employtouch Inc. is engaged in the business of developing workforce
management hardware and software products. Employtouch Inc. was consolidated into The Ultimate Software Group of
Canada, Inc. The results of operations from this acquisition have been included in our consolidated financial statements as of
the date of acquisition. We are marketing and selling the workforce management solution as UltiPro Touchbase to both
customers in Canada and the United States.
In October 2013, we introduced UltiPro TouchBase in connection with the Employtouch Acquisition (discussed
above), which provides our customers an interactive mobile time clock device that collects time punches, as well as highlights
the information most critical to employees and managers via an engaging activity stream. With UltiPro TouchBase, our
customers can capture employee time on a touchscreen tablet device, collecting employee-validated data for cost accounting
and payroll; can leverage photos for accurate capture of employee time-entry, avoiding 'buddy punches'; and can validate
transactions using PIN entry, HID, RFID, magnetic swipe or barcode.
We paid a total of $10.4 million (USD) in cash and a total of 17,788 restricted shares of Ultimate's Common Stock
valued at $2.3 million, which are issuable in three (3) equal installments on April 1, 2014, April 1, 2015 and April 1, 2016 (the
"Employtouch Stock Consideration"). During the measurement period, we made certain post-closing adjustments related to the
valuation of the stock consideration and purchase price allocation of Employtouch, which are reflected below and included in
the cash flows from investing activities and non-cash investing and financing activities in the statements of cash flows.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition
(in thousands):
At October 1, 2013
Net tangible assets ................................
Intangible assets....................................
Goodwill ...............................................
Deferred tax liability.............................
Total purchase price..............................
$
$
23
5,350
8,736
(1,418)
12,691
We recorded the Employtouch Acquisition using the acquisition method of accounting and recognized assets and
liabilities assumed at their fair value as of the date of acquisition. The $5.4 million of amortizable intangible assets consists of
$0.1 million in customer relationships, $5.2 million in developed technology and $0.05 million for a covenant not-to-compete.
The fair value of the customer relationships and the developed technology has been estimated using the excess earnings
method, a form of the income approach, and cash flow projections. The covenant not-to-compete has been estimated using a
damages calculation, which is a form of the income approach.
The balance of the acquired intangibles, net of amortization, is stated separately on our consolidated balance sheet. We
acquired net tangible assets of $0.02 million and incurred direct costs of $0.3 million in relation to the acquisition. A deferred
tax liability of $1.4 million resulted from the Employtouch Acquisition, which was a nontaxable transaction. In accordance
with GAAP, direct costs related to the acquisition were expensed as incurred. The balance of $8.7 million was recorded as
goodwill. Since the Employtouch Acquisition was a stock purchase, goodwill and acquired intangibles are not deductible for
tax purposes. For further discussion of acquired intangibles, see Note 12 of "Notes to Consolidated Financial Statements".
Acquisition of Accel HR, LLC
On November 15, 2013 (the "Accel HR Closing Date"), pursuant to an asset purchase agreement with Accel HR, LLC,
a Delaware limited liability company located in Georgia, and certain members of Accel HR (the "Accel HR Agreement") we
acquired certain assets and liabilities in exchange for a combination of cash and restricted shares of Ultimate's Common Stock.
The business we acquired is now known as UltiPro Managed Services ("UMS"). The results of operations from this acquisition
have been included in our consolidated financial statements since that date. We are marketing and selling the comprehensive
outsourcing solutions, services and support to both customers in Canada and the United States.
To further simplify the work lives of our customers’ human resources and payroll people, we introduced UltiPro
Managed Services in November 2013 as a result of the Accel HR Acquisition (discussed above). UltiPro Managed Services is
designed for those customers who want to outsource some components of their HR, payroll, benefits, and HCM technology
management functions without sacrificing the control of, or access to, their employee data that they enjoy with our cloud
58
solution. Unlike other outsourced payroll or HRIS services that typically take a one-size-fits-all approach, UltiPro Managed
Services allows customers to select from a number of payroll management, HRIS, and/or benefits management services and
combine them into a tailored solution that best suits their unique needs. Accel HR has provided these types of services to large
and mid-market corporate customers in North America since 2004 and, since 2007 prior to its acquisition by us, Accel HR
partnered exclusively with Ultimate to provide these services to their UltiPro customers.
Pursuant to the terms of the Accel HR Agreement, we paid a total of $14.6 million in cash and a total of 22,017
restricted shares of Ultimate's Common Stock, valued at $3.0 million, which are issuable in three (3) equal installments on the
first, second and third anniversaries of the Accel HR Closing Date (the "Accel HR Stock Consideration"). During the
measurement period, we made certain post-closing adjustments related to the valuation of the stock consideration and purchase
price allocation of Accel HR, which are reflected below and included in the cash flows from investing activities and non-cash
investing and financing activities in the statements of cash flows.
.
The following table summarized the fair values of the assets acquired and liabilities assumed at the date of acquisition
(in thousands)"
At November 15, 2013
Net tangible liabilities ............................
Intangible assets .....................................
Goodwill.................................................
Total purchase price................................
$
$
(732)
3,350
15,025
17,643
We recorded the Accel HR Acquisition using the acquisition method of accounting and recognized assets and
liabilities assumed at their fair value as of the date of acquisition. The $3.4 million of amortizable intangible assets consists of
$3.1 million in customer relationships and $0.3 million in the covenants not-to-compete. The fair value of the customer
relationships has been estimated using the excess earnings method, a form of the income approach, and cash flow projections.
Covenants not-to-compete have been estimated using a damages calculation, which is a form of the income approach.
The balance of the acquired intangibles, net of amortization, is stated separately on our consolidated balance sheet.
We assumed net liabilities of $0.7 million and incurred direct costs of $0.3 million in relation to the acquisition. In accordance
with GAAP, direct costs related to the acquisition were expensed as incurred. The balance of $15.0 million was recorded as
goodwill. For further discussion of acquired intangibles, see Note 12 of "Notes to Consolidated Financial Statements".
The restricted stock issuable pursuant to both the Employtouch Stock Consideration and the Accel HR Stock
Consideration is subject to the passage of time and such shares will be unregistered when issued which places certain
restrictions on when the shares can be freely traded on the open market. No other restrictions apply to the Common Stock
issuable for both acquisitions. The fair value of the restricted stock issuable pursuant to the Employtouch Stock Consideration
and the Accel HR Stock Consideration was recorded as of the respective acquisition dates since there are no contingencies
related to the future stock issuances.
5. Investments in Marketable Securities and Fair Value of Financial Instruments
We classify our investments in marketable securities with readily determinable fair values as available-for-sale. Available-
for-sale securities consist of debt and equity securities not classified as trading securities or as securities to be held to
maturity. Unrealized gains and losses, net of tax, on available-for-sale securities are reported as a net amount in accumulated other
comprehensive income in stockholders’ equity until realized. Gains and losses on the sale of available-for-sale securities are
determined using the specific identification method. Included in accumulated other comprehensive income was a $10 thousand
net unrealized loss and $4 thousand net unrealized gain on available-for-sale securities at December 31, 2014 and December 31,
2013, respectively. Realized gains and losses resulting on available-for-sale securities are included in other (expense) income,
net, in the consolidated statements of income. There were no significant reclassifications of realized gains and losses on available-
for-sale securities to the consolidated statements of income for the years ended December 31, 2014, 2013 and 2012.
The amortized cost, net unrealized (loss) gain and fair value of our investments in marketable available-for-sale securities
as of December 31, 2014 and December 31, 2013 are shown below (in thousands):
59
As of December 31, 2014
As of December 31, 2013
Amortized
Cost
Net
Unrealized
(Loss).
Fair Value
Amortized
Cost
Net
Unrealized
Gain
Fair Value
Corporate debentures – bonds .......... $
Commercial paper ............................
U.S. Agency bonds ...........................
U.S. Treasury bills............................
Certificates of deposit.......................
Total investments.............................. $
8,513
600
255
798
—
10,166
$
$
(9) $
—
—
(1)
—
(10) $
8,504
600
255
797
—
10,156
$
$
7,375
1,799
760
—
515
10,449
$
$
4
—
—
—
—
4
$
$
7,379
1,799
760
—
515
10,453
The amortized cost and fair value of the marketable available-for-sale securities by contractual maturity at December 31,
2014 is shown below (in thousands):
Due in one year or less .................................................................... $
Due after one year ...........................................................................
Total................................................................................................. $
7,870
2,296
10,166
$
$
7,862
2,294
10,156
As of December 31, 2014
Amortized
Cost
Fair
Value
We classify and disclose fair value measurements in one of the following three categories of fair value hierarchy:
Level 1:
Level 2:
Level 3:
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical,
unrestricted assets and liabilities.
Quoted prices in markets that are not active or financial instruments for which all significant inputs
are observable, either directly or indirectly.
Prices or valuations that require inputs that are both significant to the fair value measurement and
unobservable.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant
to the fair value measurement.
Our assets that are measured by management at fair value on a recurring basis are generally classified within Level 1
or Level 2 of the fair value hierarchy. The types of instruments valued based on quoted market prices in active markets include
most money market securities and certificates of deposit. Such instruments are generally classified within Level 1 of the fair
value hierarchy. We did not have any transfers into and out of Level 1 and Level 2 during the years ended December 31, 2014,
2013 and 2012.
The types of instruments valued by management, based on quoted prices in less active markets, broker or dealer
quotations, or alternative pricing sources with reasonable levels of price transparency, include corporate debentures and bonds,
commercial paper, U.S. agency bonds, and U.S. Treasury bills. Such instruments are generally classified within Level 2 of the
fair value hierarchy. We use consensus pricing, which is based on multiple pricing sources, to value our fixed income
investments.
The following table sets forth, by level within the fair value hierarchy, financial assets accounted for at fair value as of
December 31, 2014 and December 31, 2013 (in thousands):
60
As of December 31, 2014
As of December 31, 2013
Quoted
Prices in
Active
Markets
(Level 1)
Total
Other
Observable
Inputs
(Level 2)
Un-
Observable
Inputs
(Level 3)
Total
Quoted
Prices in
Active
Markets
(Level 1)
Other
Observable
Inputs
(Level 2)
Un-
Observable
Inputs
(Level 3)
Corporate debentures
and bonds..................... $
Commercial paper .......
U.S. Agency bonds ......
U.S. Treasury bills .......
Certificates of deposit..
8,504
$
— $
8,504
$
— $
7,379
$
— $
7,379
$
600
255
797
—
—
—
—
—
600
255
797
—
—
—
—
—
1,799
760
—
515
—
—
—
515
1,799
760
—
—
Total............................. $ 10,156
$
— $ 10,156
$
— $ 10,453
$
515
$
9,938
$
—
—
—
—
—
—
Assets and liabilities measured at fair value on a recurring basis were presented in the consolidated balance sheets as
of December 31, 2014 and as of December 31, 2013 as short-term and long-term investments in marketable securities. There
were no financial liabilities accounted for at fair value as of December 31, 2014 and December 31, 2013.
6. Allowance for Doubtful Accounts
We have established an allowance for doubtful accounts based on a review of the current status of existing accounts
receivable by customer and historical experience.
The activity within allowance for doubtful accounts was as follows (in thousands):
Balance at beginning of year........................................................................... $
Charged to expense .........................................................................................
Write-offs ........................................................................................................
Balance at end of year ..................................................................................... $
675
$
475
$
2,264
(2,264)
675
$
2,523
(2,323)
675
$
475
1,159
(1,159)
475
For the Years Ended December 31,
2014
2013
2012
7. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
Prepaid commissions on cloud sales........................................................................................... $
Other prepaid expenses...............................................................................................................
Other current assets.....................................................................................................................
As of December 31,
2014
2013
17,772
$
19,942
8,064
8,952
2,783
6,649
Total prepaid expenses and other current assets........................................................... $
34,788
$
29,374
8. Property and Equipment, net
Property and equipment, net consists of the following (in thousands):
61
Computer equipment
Internal-use software
Leasehold improvements
Furniture and fixtures
Building
Land
Property and equipment
Less: accumulated depreciation and amortization
Property and equipment, net
As of December 31,
2014
119,716
49,464
18,125
9,220
1,005
655
198,185
111,590
86,595
$
$
$
$
2013
103,154
24,238
15,069
8,318
1,005
655
152,439
94,253
58,186
Depreciation and amortization expense on property and equipment, including depreciation and amortization expense
on property and equipment under capital leases, totaled $18.1 million, $15.3 million and $12.4 million for the years ended
December 31, 2014, 2013 and 2012, respectively.
Included in property and equipment, net, is computer equipment acquired under capital leases as follows (in
thousands):
Computer equipment ................................................................................ $
Less: accumulated amortization ..............................................................
Computer equipment, net.......................................................................... $
38,913
33,556
5,357
$
$
33,006
29,453
3,553
As of December 31,
2014
2013
Capital leases entered into and included in property and equipment totaled $5.9 million, $3.3 million and $4.0 million
for the years ended December 31, 2014, 2013 and 2012, respectively.
See Note 10 in the Notes to Consolidated Financial Statements for further discussion of computer software
development costs related to internal-use software which is included in property and equipment, net.
9. Foreign Currency
The financial statements of Ultimate’s foreign subsidiaries have been translated into U.S. dollars. The functional
currency of our wholly-owned subsidiary, The Ultimate Software Group of Canada, Inc., is the Canadian dollar. Assets and
liabilities are translated into U.S. dollars at period-end exchange rates. Income and expenses are translated at the average
exchange rate for the reporting period. The resulting non-cash foreign currency translation adjustments, representing
unrealized gains or losses, are included in consolidated stockholders’ equity as a component of accumulated other
comprehensive income (loss). Realized gains and losses resulting from foreign exchange transactions are included in total
operating expenses in the consolidated statements of operations. Included in accumulated other comprehensive income (loss),
as presented in the accompanying consolidated balance sheets, are $3.6 million of unrealized translation losses at December 31,
2014 and $1.4 million of unrealized translation losses at December 31, 2013. There were no significant reclassifications of
realized gains and losses resulting from foreign exchange transactions to the consolidated statements of income for the years
ended December 31, 2014, 2013 and 2012.
Included in comprehensive income (loss) for the years ended December 31, 2014, 2013 and 2012 were realized
foreign currency translation losses and unrealized foreign currency translation gains (losses), as follows (in thousands):
Realized foreign currency translation (losses) ........................................................... $
Unrealized foreign currency translation (losses) gains .............................................. $
— $
(2,143) $
— $
(1,549) $
—
166
For the Years Ended December 31,
2014
2013
2012
62
10. Computer Software Development Costs
We previously capitalized software costs in accordance with Accounting Standards Codification ("ASC") Topic
985-20, Costs of Software to Be Sold, Leased, or Marketed. Those capitalized software costs were full amortized as of
December 31, 2013.
Computer software development costs related to software developed for internal use falls under the accounting
guidance of ASC Topic 350-40, Intangibles Goodwill and Other-Internal Use Software. These capitalized costs are included
with property and equipment in the consolidated balance sheets and purchases of property and equipment in the statements of
cash flows. During the years ended December 31, 2014, 2013 and 2012, we capitalized $25.2 million, $19.0 million and $5.2
million, respectively. Internal-use software is amortized on a straight-line basis over its estimated useful life, generally three to
seven years, commencing after the software development is substantially complete and the software is ready for its intended
use. During the year ended December 31, 2014, we amortized $0.7 million of our internal use software due to the mid-2014
product release of our UltiPro Recruiting module within the overall capitalized development project. There was no amortization
for the years ended December 31, 2013 and 2012. At each balance sheet date, we evaluate the useful lives of these assets and
test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. The
amortization of capitalized software (e.g., from the Recruitment release) is included in cost of recurring revenues.
Capitalized computer software development costs and accumulated amortization of capitalized software, developed
for internal use, were as follows (in thousands):
Computer software development costs
$
Less: accumulated amortization
Computer software development costs, net
For the Years Ended December 31,
2014
2013
2012
49,464
(670)
48,794
24,238
—
24,238
5,217
—
5,217
UltiPro Recruiting, a component of the overall capitalized development project, became ready for its intended use
during 2014. The remaining components of the development project are expected to be completed during 2015 and thereafter.
Amortization for the components of the development project begins when they are ready for their intended use.
11. Earnings Per Share
Earnings per share calculations require a dual presentation — “basic” and “diluted.” Basic earnings per share is
computed by dividing income available to common stockholders (the numerator) by the weighted average number of common
shares (the denominator) for the period. The computation of diluted earnings per share is similar to basic earnings per share,
except that the denominator is increased to include the number of additional common shares that would have been outstanding
if the potentially dilutive common shares had been issued.
The following is a reconciliation of the shares used in the computation of basic and diluted net income (loss) per share
(in thousands):
For the Years Ended
December 31,
2014
2013
2012
Basic weighted average shares outstanding ...............................................................
Effect of dilutive equity instruments (1) ....................................................................
Dilutive shares outstanding ........................................................................................
28,293
1,050
29,343
27,773
1,240
29,013
26,778
1,597
28,375
Anti-dilutive equity instruments (1)...........................................................................
(1) Includes options to purchase shares of Common Stock and other stock-based
awards outstanding.
40
47
67
63
12. Goodwill and Intangible Assets
Goodwill represents the excess of cost over the net tangible and identifiable intangible assets of acquired
businesses. Goodwill amounts are not amortized, but rather tested for impairment at least annually. Identifiable intangible
assets acquired in business combinations are recorded based upon fair value at the date of acquisition and amortized over their
estimated useful lives.
On October 1, 2013, we completed the acquisition of Employtouch, Inc., which is engaged in the business of
developing workforce management hardware and software products. On November 15, 2013, we completed the acquisition of
the business of Accel HR, LLC which provides comprehensive outsourcing solutions, services and support for middle to large
market organizations ranging from approximately 500 to over 25,000 employees. Upon the closing of both acquisitions,
Ultimate acquired certain amortizable intangibles for developed technology, customer relationships and non-compete
arrangements. See Note 4 to the Notes to Consolidated Financial Statements for further discussion regarding the acquired
intangibles.
The changes in the carrying value of goodwill were as follows:
Goodwill, December 31, 2013 .................................................................. $
Adjustments (1)......................................................................................
Translation adjustment (2) .....................................................................
Goodwill, December 31, 2014 .................................................................. $
26,942
(561)
(685)
25,696
For the Year Ended
December 31, 2014
(1) Goodwill adjustments represent the net purchase accounting adjustments for acquisitions during the related measurement
periods.
(2) Represents the impact of the foreign currency translation of the portion of goodwill that is recorded by our Canadian
subsidiary whose functional currency is also its local currency. Such goodwill is translated into U.S. dollars using exchange
rates in effect at period end. Adjustments related to foreign currency translation are included in other comprehensive income.
As of December 31, 2014, the Company’s amortizable intangible assets, before amortization expense, have estimated
useful lives as follows (in thousands):
64
December 31, 2014
Gross
Carrying
Amount
Accumulated
Amortization
Cumulative
Translation
Adjustment
Net Carrying
Amount
Weighted
Average
Remaining
Useful Life
Developed
technology .......... $
Customer
relationships .......
Non-compete
agreements..........
5,200
$
(874) $
(537) $
3,200
300
(392)
(115)
$
8,700
$
(1,381) $
(5)
(3)
(545) $
3,789
2,803
182
6,774
6
9
2
7
December 31, 2013
Gross
Carrying
Amount
Accumulated
Amortization
Cumulative
Translation
Adjustment
Net Carrying
Amount
Weighted
Average
Remaining
Useful Life
Developed
technology .......... $
Customer
relationships .......
Non-compete
agreements..........
5,200
$
(180) $
(179) $
3,200
300
(47)
(15)
$
8,700
$
(242) $
(3)
(2)
(184) $
4,841
3,150
283
8,274
7
10
3
8
Acquired intangible assets are amortized over their estimated useful life, generally three to ten years, in a manner that
reflects the pattern in which the economic benefits are consumed. Amortization expense for acquired intangible assets was
$1,139 thousand and $242 thousand for the years ended December 31, 2014 and 2013. There was no amortization expense for
acquired intangible assets for the year ended December 31, 2012. Future amortization expense for acquired intangible assets is
as follows, as of December 31, 2014 (in thousands):
Year
2015.................................................................................... $
2016....................................................................................
2017....................................................................................
2018....................................................................................
2019....................................................................................
Thereafter...........................................................................
Total ................................................................................... $
Amount
1,097
1,075
969
969
969
1,695
6,774
13. Capital Lease Obligations
We lease certain equipment under non-cancelable agreements, which are accounted for as capital leases and expire at
various dates through 2017. Interest rates on these leases are 4.25%. The scheduled lease payments of the capital lease
obligations are as follows as of December 31, 2014 (in thousands):
65
Year
2015 ............................................................................................................
2016 ............................................................................................................
2017 ............................................................................................................
....................................................................................................................
Less amount representing interest ..............................................................
Lease obligations reflected as current ($3,655) and non-current ($3,359).
$
$
Amount
3,877
2,628
832
7,337
(323)
7,014
14. Other Borrowings
During the year ended December 31, 2012, we financed the purchase of perpetual licenses with third-party vendors
totaling $5.3 million, payable over a three-year period. During the year ended December 31, 2014, we signed an addendum to
those agreements totaling $0.8 million, payable over a two-year period. The remaining scheduled repayments of the other
borrowings, which excludes interest, as of December 31, 2014, are as follows (in thousands):
Year
2015 ...........................................................................................................
2016 ...........................................................................................................
Other borrowings.......................................................................................
$
$
Amount
567
400
967
15. Income Taxes
For the year ended December 31, 2014, the income tax provision of $9.6 million was based on book income from
operations before income taxes of $54.3 million. For the year ended December 31, 2013, the income tax provision of $17.6
million was based on book income from operations before income taxes of $43.1 million. For the year ended December 31,
2012, the income tax provision of $14.1 million was based on a book loss from operations before income taxes of $28.7
million. Deferred tax assets and liabilities are determined based on the difference between financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
The income tax (provision) benefit consists of the following (in thousands):
For the Year Ended December 31,
2014
2013
2012
Current taxes:
Federal ................................................................................................................... $
State and local........................................................................................................
Foreign...................................................................................................................
Deferred taxes, net......................................................................................................
Federal ...................................................................................................................
State and local........................................................................................................
Foreign...................................................................................................................
Income tax provision .................................................................................................. $
(22,406) $
(5,078)
(567)
(14,091) $
(3,298)
(201)
(10,085)
(2,354)
(164)
16,607
1,535
317
(9,592) $
(8)
(2)
41
(17,559) $
(1,710)
197
9
(14,107)
The income tax provision is different from that which would be obtained by applying the statutory federal income tax
rate of 35% to income from continuing operations before income taxes as a result of the following (in thousands):
66
Income tax (provision) benefit at statutory federal tax rate ....................................... $
State and local income taxes, net of the federal benefit .............................................
Non-deductible expenses............................................................................................
Change in tax rates .....................................................................................................
Recognition of previously unrecognized tax benefits, federal benefit.......................
Research credit, federal benefit ..................................................................................
Other, net ....................................................................................................................
Income tax provision .................................................................................................. $
For the Year Ended December 31,
2014
(19,015) $
(2,303)
(2,068)
80
—
13,873
(159)
(9,592) $
2013
(15,081) $
(2,144)
(1,965)
51
1,679
—
(99)
(17,559) $
2012
(10,060)
(1,402)
(2,470)
45
—
—
(220)
(14,107)
Deferred tax assets and liabilities reflect the net effect of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our
deferred tax assets and liabilities at December 31, 2014, 2013 and 2012 were as follows (in thousands):
As of December 31,
2014
2013
2012
Deferred tax assets:
Net operating losses, foreign.................................................................................... $
Tax credit carryforwards..........................................................................................
Research credit.........................................................................................................
Deferred revenue......................................................................................................
Accruals not currently deductible ............................................................................
Allowance for doubtful accounts .............................................................................
Charitable contributions...........................................................................................
Stock-based compensation.......................................................................................
Deferred rent adjustment..........................................................................................
Gross deferred tax assets ............................................................................................
Less valuation allowance ...........................................................................................
Deferred tax assets.................................................................................................... $
Deferred tax liabilities: ............................................................................................
59
127
15,518
168
715
248
1,281
41,139
1,292
60,547
—
60,547
$
$
59
127
—
504
472
248
995
29,840
1,349
33,594
—
33,594
$
$
Property and equipment ........................................................................................... $
Acquired intangible assets, foreign..........................................................................
Software development costs ....................................................................................
Other, net..................................................................................................................
Gross deferred tax liabilities ...................................................................................
Net deferred tax assets ............................................................................................. $
(23,248) $
(1,088)
815
—
(23,521)
37,026
$
(14,481) $
(1,371)
815
—
(15,037)
18,557
$
—
127
—
1,140
386
169
751
24,044
1,350
27,967
—
27,967
(8,665)
—
613
—
(8,052)
19,915
Ultimate considers all available evidence, both positive and negative, including historical levels of pre-tax book
income, expiration of net operating loss carryforwards, expectations and risks associated with estimates of future taxable
income, ongoing prudent and feasible tax planning strategies and reversal of deferred tax liabilities in assessing the need for the
valuation allowance. If it is not more likely than not that we will recover our deferred tax assets, we will increase our provision
for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable.
The available positive evidence at December 31, 2014 included, among other factors, three years of cumulative
historical pre-tax book income and a projection of future pre-tax book income and taxable income. As a result of our analysis
of all available evidence, both positive and negative, we believe that it is more likely than not that the results of future
operations will generate sufficient taxable income to realize all of the deferred tax assets as of December 31, 2014. As such,
there was no valuation allowance for the years ended December 31, 2014, 2013 and 2012.
Approximately $1.4 million of deferred tax liabilities were recorded against the identified intangible assets
established upon the acquisition of EmployTouch during 2013.
67
Management continues to apply the exception to the comprehensive recognition of deferred income taxes to the
undistributed earnings of our foreign subsidiary, Ultimate Canada. The comprehensive recognition of deferred income taxes
presumes that all undistributed earnings will be transferred to the parent entity. This presumption may be overcome by the
parent entity, and no income taxes would be accrued, if sufficient evidence shows that the subsidiary has invested or will invest
the undistributed earnings indefinitely or that the earnings will be remitted in a tax-free liquidation. A parent entity shall have
evidence of specific plans for reinvestment of undistributed earnings of a subsidiary which demonstrates that remittance of the
earnings will be postponed indefinitely. These criteria required to overcome the presumption are sometimes referred to as the
indefinite reversal criteria. Accordingly, deferred income taxes were not recognized on the undistributed earnings of Ultimate
Canada. The deferred tax liability, net of available foreign tax credits, resulting from the cumulative undistributed earnings are
not deemed material. We recorded a deferred tax asset, of $13.2 million during the third quarter of 2014, for the years 1998
through 2013, and we recorded a deferred tax asset of $2.3 million during the three and twelve months ended December 31,
2014 for the year 2014, as a result of a research and development credit study.
At December 31, 2014, we had approximately $159.8 million of net operating loss carryforwards for Federal income
tax reporting purposes available to offset future taxable income. The $159.8 million was attributable to deductions from the
exercise of non-qualified employee, and non-employee director, stock options and the vesting of restricted stock units and
restricted stock awards, the tax benefit of which will primarily be credited to paid-in-capital and deferred tax asset when
realized. As a result, the tax benefits associated with stock based compensation are included in net operating loss carryforwards
but not reflected in deferred tax assets. During 2014, we realized a tax benefit of $33.5 million comprised of a $27.5 million
and a $6.0 million credit to paid-in-capital and deferred tax asset, respectively. During 2013, we realized a tax benefit of $25.5
million comprised of a $19.2 million and a $6.3 million credit to paid-in capital and deferred tax asset, respectively. During
2012, we realized a tax benefit of $16.7 million comprised of a $12.3 million and a $4.4 million credit to paid-in capital and
deferred tax asset, respectively. As of December 31, 2014, we had approximately $0.2 million of net operating loss
carryforwards for foreign income tax reporting purposes available to offset future taxable income. The carryforwards expire
from 2018 through 2033 and from 2015 through 2033, for Federal and state income tax reporting purposes, respectively.
Utilization of such net operating loss carryforwards may be limited as a result of cumulative ownership changes in Ultimate’s
equity instruments due to ownership change provisions of Internal Revenue Code Section 382 and similar state provisions. The
Internal Revenue Service examination of our U.S. Federal income tax return for the year ended December 31, 2010 was
completed in 2013 with no change to the taxable income or income tax liability as reported.
ASC 740, “Income Taxes,” ("ASC 740") requires that a position taken or expected to be taken in a tax return be
recognized in the financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the
position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest
amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. During 2013, the Internal
Revenue Service completed their examination of our U.S. Federal income tax return for the year ended December 31, 2010,
which resulted in the recognition of previously unrecognized tax benefits of approximately $1.9 million, which decreased our
provision for income taxes and our effective tax rate. As of December 31, 2014, we had $5.0 million of gross unrecognized tax
benefits resulting from a research and development credit attributable to the 1998-2014 years as a result of the completion of
the research and development activities study that if recognized would affect the annual effective tax rate. While it is often
difficult to predict the final outcome of any particular uncertain tax position, management does not believe that it is reasonably
possible that the estimates of unrecognized tax benefits will change significantly in the next twelve months.
Tax years 1998 to 2014 remain subject to future examination by the tax jurisdictions in which we are subject to tax.
We recognize interest and penalties accrued related to unrecognized tax benefits as components of our income tax
provision. Due to our net operating loss carryover position, we did not have any interest and penalties accrued upon the
adoption of ASC 740, and, as of December 31, 2014 and 2013, we did not have any interest and penalties accrued related to
unrecognized tax benefits.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31,
2014, 2013 and 2012 is as follows (in thousands):
68
Balance at January 1,.................................................................................................. $
Tax positions taken in prior period.............................................................................
Gross increases.........................................................................................................
Gross decreases........................................................................................................
Tax positions taken in current period .........................................................................
Gross increases.........................................................................................................
Settlements .................................................................................................................
Statute expiration........................................................................................................
Balance at December 31,............................................................................................ $
As of December 31,
2014
2013
2012
— $
1,866
$
1,866
—
—
4,950
—
—
—
—
—
(1,866)
—
—
—
—
—
—
4,950
$
— $
1,866
16. Stock-Based Compensation and Equity
Summary of Plans
Our Amended and Restated 2005 Equity and Incentive Plan (the “Plan”) authorizes the grant of options (“Options”) to
non-employee directors, officers and employees of Ultimate to purchase shares of Ultimate's Common Stock ("Common
Stock"). The Plan also authorizes the grant to such persons of restricted and non-restricted shares of Common Stock, stock
appreciation rights, stock units and cash performance awards (collectively, together with the Options, the “Awards”).
As of December 31, 2014, the aggregate number of shares of Common Stock that were available to be issued under all
Awards granted under the Plan was 1,165,680 shares.
Stock-Based Compensation
The following table sets forth the non-cash stock-based compensation expense resulting from stock-based
arrangements that is recorded in our consolidated statements of income for the periods indicated (in thousands):
Cost of recurring revenues........................................................................................ $
Cost of services revenues..........................................................................................
Sales and marketing..................................................................................................
Research and development .......................................................................................
General and administrative .......................................................................................
Total stock-based compensation expense................................................... $
For the Years Ended December 31,
2014
2013
2012
5,495
4,446
20,767
4,788
10,689
46,185
$
$
3,866
3,591
13,625
3,585
8,140
32,807
$
$
2,508
2,729
7,861
2,451
4,863
20,412
Included in computer equipment in property and equipment, net in our consolidated balance sheet and excluded from
purchases of property and equipment in the statements of cash flow at December 31, 2014, 2013 and 2012 was $1.7 million,
$1.4 million and $0.4 million, respectively, in non-cash stock-based compensation expense related to capitalized software
which was developed for internal use during the fiscal years then ended. These amounts would have otherwise been charged to
research and development expense for the years ended December 31, 2014, 2013 and 2012.
Net cash proceeds from the exercise of Options were $6.2 million, $8.1 million and $11.3 million for the years ended
December 31, 2014, 2013 and 2012, respectively. There was a $27.5 million, a $19.2 million and a $12.3 million income tax
benefit recognized in additional paid in capital from the realization of excess stock-based payment deductions during the years
ended December 31, 2014, 2013 and 2012, respectively.
Fair Value
The fair value of restricted stock awards and restricted stock units is equal to the closing price of our Common Stock
on NASDAQ on the date of grant.
69
We estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ
from those estimates. The weighted-average forfeiture rates for the years ended December 31, 2014, 2013 and 2012 were
based on historical data.
Options
There were no Options granted during the years ended December 31, 2014, 2013 and 2012. Options granted to officers
and employees under the Plan generally have a 10-year term, vesting 25% immediately and 25% on each of the first three
anniversaries of the grant date. Options granted to non-employee directors under the Plan generally have a 10-year term and
vest and become exercisable immediately on the grant date.
Restricted Stock Awards
Under the provisions of the Plan, Ultimate may, at the discretion of the Compensation Committee or the Board, grant
restricted stock awards (“Restricted Stock Awards”) to officers, employees and non-employee directors. The shares of
Common Stock issued under Restricted Stock Awards are subject to certain vesting requirements and restrictions on
transfer. During the years ended December 31, 2014, 2013 and 2012, we granted Restricted Stock Awards for 235,000,
191,500 and 396,700 shares, respectively, of Common Stock to officers and employees and we granted Restricted Stock
Awards for 10,375, 18,198 and 21,789 shares, respectively, of Common Stock to non-employee directors. Compensation
expense for Restricted Stock Awards is measured based on the closing market price of our Common Stock at the date of grant
and is recognized on a straight-line basis over the vesting period. Holders of Restricted Stock Awards have all rights of a
stockholder including the right to vote the shares and receive all dividends and other distributions paid or made with respect
thereto during the vesting period. Each Restricted Stock Award becomes vested on the fourth anniversary of the respective date
of grant, subject to the grantee’s continued employment with Ultimate or any of its subsidiaries on each such vesting date and
subject further to accelerated vesting in the event of a change in control of Ultimate, death or disability, the termination of
employment by Ultimate without cause or, in the case of a non-employee director, at cessation of his board services at the end
of his term. Included in our consolidated statements of income for the years ended December 31, 2014, 2013 and 2012 was
$23.3 million, $16.1 million and $9.2 million, respectively, of non-cash stock-based compensation expense for Restricted Stock
Awards.
Restricted Stock Unit Awards
Ultimate may, at the discretion of the Compensation Committee, make Awards of stock units or restricted stock units
under the Plan (“Restricted Stock Unit Awards”) to certain officers and employees. A Restricted Stock Unit Award is a grant of
a number of hypothetical share units with respect to shares of Common Stock that are subject to vesting and transfer
restrictions and conditions under a restricted stock unit award agreement. The value of each unit is equal to the fair value of
one share of Common Stock on any applicable date of determination. The payment with respect to each unit under a Restricted
Stock Unit Award may be made, at the discretion of the Compensation Committee, (i) in a number of shares of our Common
Stock equal to the number of Restricted Stock Units becoming vested, (ii) in cash, in an amount equal to the fair market value
of a share of our Common Stock on the vesting date multiplied by the number of restricted stock units becoming vested on such
date or (iii) in a combination of both. The grantee of a Restricted Stock Unit Award does not have any rights as a stockholder
with respect to the shares subject to a Restricted Stock Unit Award until such time as shares of Common Stock are delivered to
the grantee pursuant to the terms of the related stock unit award agreement.
Restricted Stock Unit Awards vest in three equal annual installments of 33-1/3% of the number of Restricted Stock
Unit Awards on each of the first three anniversaries of the date of grant thereof, subject to the participant’s continued
employment with Ultimate or any of its subsidiaries on each such vesting date, and shall be payable as described above,
provided, however, that if any such anniversary is not a date on which our Common Stock is traded on NASDAQ, then the
vesting date shall be the last such trading day immediately preceding such anniversary; and provided further, however, that if
the Chief Financial Officer (“CFO”) of Ultimate should determine that any such anniversary falls within a period during which
the participant is prohibited from trading Ultimate’s Common Stock under our stock trading policy, the CFO shall so advise the
participant in writing and the vesting date shall be the date as of which the CFO has determined that such period has ended.
There were 207,000, 249,210 and 313,442 Restricted Stock Unit Awards granted to employees during the years ended
December 31, 2014, 2013 and 2012, respectively. Non-cash stock-based compensation expense for Restricted Stock Unit
Awards is measured based on the fair market value of our Common Stock on the date of grant and recognized on a straight-line
basis over the vesting period. Included in Ultimate’s consolidated statements of operations for the years ended December 31,
70
2014, 2013 and 2012 was $22.9 million, $16.7 million and $11.2 million, respectively, of non-cash stock-based compensation
expense for Restricted Stock Unit Awards.
Option, Restricted Stock and Restricted Stock Unit Activity
The following table summarizes Option activity for the years ended December 31, 2012, 2013 and 2014, as follows (in
thousands, except per share amounts):
Options
Outstanding at December 31, 2011....................................
Granted ............................................................................
Exercised .........................................................................
Forfeited or expired .........................................................
Outstanding and exercisable at December 31, 2012..........
Outstanding at December 31, 2012....................................
Granted ............................................................................
Exercised .........................................................................
Forfeited or expired .........................................................
Outstanding and exercisable at December 31, 2013..........
Outstanding at December 31, 2013....................................
Granted ............................................................................
Exercised .........................................................................
Forfeited or expired .........................................................
Outstanding and exercisable at December 31, 2014..........
Shares
Weighted
Average Exercise
Price
2,223
$
20.20
Weighted
Average
Remaining
Contractual
Term (in Years)
Aggregate
Intrinsic Value
$
$
$
$
(750)
—
1,473
1,473
—
(440)
(1)
1,032
1,032
—
(310)
—
722
$
15.04
—
22.83
22.83
—
18.48
23.31
24.69
24.69
—
20.05
—
26.68
3.8
$
105,447
3.1
$
132,615
2.6
$
86,758
The aggregate intrinsic value of Options in the table above represents total pretax intrinsic value (i.e., the difference
between the closing price of our Common Stock on the last trading day of the reporting period and the exercise price, times the
number of shares) that would have been received by the Option holders had all Option holders exercised their Options on
December 31, 2014. The amount of the aggregate intrinsic value changes, based on the fair value of our Common Stock. Total
intrinsic value of Options exercised during the years ended December 31, 2014, 2013 and 2012 was $44.6 million, $42.6
million and $51.7 million, respectively. There were no Options vested during the years ended December 31, 2014, 2013 and
2012. All options granted under the Plan and the Prior Plan are fully vested as of December 31, 2014.
71
The following table summarizes Restricted Stock and Restricted Stock Unit Award activity for the years ended
December 31, 2012, 2013 and 2014, as follows (in thousands, except per share amounts):
Restricted Stock
Shares
Weighted
Average Grant
Date Fair Value
Restricted Stock
Units Shares
Outstanding at December 31, 2011.................................................................
Granted .........................................................................................................
Vested............................................................................................................
Released........................................................................................................
Forfeited or expired ......................................................................................
Outstanding at December 31, 2012.................................................................
Granted .........................................................................................................
Vested............................................................................................................
Released........................................................................................................
Forfeited or expired ......................................................................................
Outstanding at December 31, 2013.................................................................
Granted .........................................................................................................
Vested............................................................................................................
Released........................................................................................................
Forfeited or expired ......................................................................................
Outstanding at December 31, 2014.................................................................
1,045
$
418
—
(457)
(8)
998
210
—
(209)
(31)
968
245
—
(153)
—
$
$
31.25
93.81
—
15.22
31.84
64.81
152.03
—
27.76
77.92
91.28
152.39
—
40.38
—
1,060
$
112.77
430
313
—
(213)
(22)
508
249
—
(229)
(27)
501
207
—
(242)
(22)
444
As of December 31, 2014, $77.2 million of total unrecognized compensation cost related to non-vested Restricted Stock
Awards is expected to be recognized over a weighted average period of 2.07 years. As of December 31, 2014, $35.3 million of
total unrecognized compensation costs related to non-vested Restricted Stock Unit Awards is expected to be recognized over a
weighted average period of 1.51 years.
The following table summarizes information with respect to Options outstanding and Options exercisable under the Plan
at December 31, 2014:
Range of Exercise Prices
$13.63—$18.69......................................
$21.60—$24.20......................................
$24.30—$24.30......................................
$26.72—$26.83......................................
$27.02—$27.02......................................
$28.41—$28.41......................................
$30.34—$30.34......................................
$32.39—$32.39......................................
$32.54—$32.54......................................
$34.89—$34.89......................................
$13.63—$34.89......................................
Number
79,551
94,288
125,423
6,861
1,879
201,861
49,301
87,760
52,300
22,915
722,139
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Term
(Years)
Weighted-
Average Exercise
Price
2.19
1.38
2.10
1.76
2.37
3.10
2.56
3.57
3.32
2.81
2.61
$
$
16.01
22.62
24.30
26.77
27.02
28.41
30.34
32.39
32.54
34.89
26.68
72
Number
79,551
$
94,288
125,423
6,861
1,879
201,861
49,301
87,760
52,300
22,915
722,139
$
Weighted
Average
Exercise Price
16.01
22.62
24.30
26.77
27.02
28.41
30.34
32.39
32.54
34.89
26.68
Board Compensation
Each non-employee director of Ultimate receives compensation for serving on the Board, payable exclusively in the form
of Restricted Stock Awards granted under the Plan.
On October 25, 2010, the Board amended the previously approved arrangement pursuant to which the non-employee
directors and Chairmen of the Audit and Compensation Committees of the Board, respectively, were granted Awards for each
regular Board and Committee meeting attended. Under the arrangement, as amended, (i) each non-employee director was
granted a restricted stock award of 750 shares of Common Stock for each regular meeting of the Board attended during the first
three quarters of 2013 and for the years ended December 31, 2012 and 2011 and (ii) each of the Chairmen of the Audit
Committee and Compensation Committee was granted a restricted stock award of 468 shares of Common Stock for attendance
at each regular meeting of the Committee during the first three quarters of 2013 and for the years ended December 31, 2012
and 2011 that he chaired.
On October 28, 2013, the Board amended the previously approved arrangement pursuant to which the non-employee
directors and Chairmen of the Audit, Compensation and Nominating Committees of the Board, respectively, were granted
Awards for each regular Board and Committee meeting attended. Under the arrangement, as amended, (i) each non-employee
director was granted a restricted stock award of 400 shares of Common Stock for each regular meeting of the Board attended
during the fourth quarter of 2013 and each quarter of 2014 and (ii) each of the Chairmen of the Audit Committee,
Compensation Committee and Nominating Committee was granted a restricted stock award of 50 shares of Common Stock for
attendance at each regular meeting of the Committee during the fourth quarter of 2013 and each quarter of 2014 that he chaired.
In addition, in 2014, 2013 and 2012 each non-employee director was granted, for each fiscal quarter during which he
served, a restricted stock award of that number of shares of Common Stock equal to the quotient of $12,500 divided by the
closing price of the Common Stock on NASDAQ on the date of grant, which is the effective date of the grant determined by the
Board for each such quarter, rounded down to the closest full number of shares. Under the arrangement as amended, the date of
grant shall not be a date prior to the date of the Board’s determination of the same and such restricted stock awards shall vest on
the fourth anniversary of the date of grant, subject to accelerated vesting in the event of a director’s death, disability, cessation
of service or the end of his term or the occurrence of a change of control of Ultimate.
The following table summarizes information about Restricted Stock Awards granted by us to non-employee directors in
exchange for director related services rendered for 2014, 2013 and 2012:
Market
Value of
Restricted
Stock
Awards
Granted
Number of Restricted Stock Awards Granted
Year
2012 ........................................................
$
2013 ........................................................
$
69.00
76.42
93.84
94.50
95.99
109.95
146.25
155.32
2014 ........................................................
$
164.87
118.03
132.23
152.59
5,591
5,501
5,351
5,346
5,336
5,251
5,111
2,500
2,625
2,625
2,570
2,555
The non-cash compensation expense, recognized in the consolidated statements of income related to the Restricted Stock
Awards granted to non-employee directors, including the chairmen of the Audit, Compensation and Nominating Committees,
determined pursuant to the application of ASC 718 for the years ended December 31, 2014, 2013 and 2012, was $1,652,000,
73
$1,449,000 and $1,058,000, respectively, and is included in general and administrative expenses in the consolidated statements
of income. The non-cash stock-based expense amounts are included in the non-cash stock-based compensation expense for restricted
stock awards in the consolidated statements of operations.
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.
17. Commitments and Contingencies
Operating Leases
We lease corporate office space and certain equipment under non-cancelable operating lease agreements expiring at
various dates. Total rent expense under these agreements was $8.5 million, $6.6 million and $5.7 million for the years ended
December 31, 2014, 2013 and 2012, respectively. Future minimum annual rental commitments related to these leases are as
follows as of December 31, 2014 (in thousands):
Year
2015................................................................................................
2016................................................................................................
2017................................................................................................
2018................................................................................................
2019................................................................................................
Thereafter .......................................................................................
$
Amount
8,657
8,642
7,028
5,357
4,177
6,006
$
39,867
Software License Agreements
We have a software license and OEM (original equipment manufacturer) agreement with a third-party vendor for the
purposes of development and testing, and support of end users and use with the customer application expiring on December 31,
2016. Future commitments related to this agreement are as follows as of December 31, 2014 (in thousands):
Year
2015................................................................................................
2016................................................................................................
Amount
$
$
1,155
1,155
2,310
Litigation
From time-to-time, Ultimate is involved in litigation relating to claims arising out of its operations in the normal
course of business. We are not currently a party to any legal proceeding the adverse outcome of which, individually or in the
aggregate, could reasonably be expected to have a material adverse effect on our operating results or financial condition.
18. Related Party Transactions
On October 23, 2006, Ultimate’s Board elected Al Leiter as a non-employee member of Ultimate’s Board of
Directors. During October 2002, Mr. Leiter entered into an agreement with Ultimate pursuant to which he agreed to (i) attend
and participate in certain internal meetings of Ultimate; (ii) assist our salespeople with prospects; and (iii) act as an official
spokesperson for Ultimate in exchange for which we agreed to make contributions to Leiter’s Landing, Mr. Leiter’s non-profit
charitable organization benefiting children, in the amount of one tenth (1/10) of one percent, or 0.1%, of our total revenues as
reported in our consolidated statements of operations. In February 2007, Mr. Leiter and Ultimate agreed that the maximum
amount payable by Ultimate in any one year under this agreement is $200,000. In June 2012, Mr. Leiter and Ultimate
terminated this agreement. Therefore, there were no contributions to Leiter's Landing for the years ended December 31, 2014
74
and 2013. For the fiscal year ended December 31, 2012, Ultimate contributed a total of approximately $50,000 to Leiter’s
Landing.
19. Employee Benefit Plan
Ultimate provides retirement benefits for eligible employees, as defined, through a defined contribution plan that is
qualified under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). Contributions to the 401(k) Plan, which are
made at the sole discretion of Ultimate, were $5.5 million, $3.6 million and $2.9 million for the years ended December 31,
2014, 2013 and 2012, 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
Ultimate carried out an evaluation, under the supervision and with the participation of Ultimate’s management,
including the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), of the effectiveness of the
design and operation of Ultimate’s disclosure controls and procedures as of the end of the period covered by this Form 10-K
pursuant to Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based
on that evaluation, Ultimate’s management, including the CEO and CFO, concluded that, as of December 31, 2014, Ultimate’s
disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in
Ultimate’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the
SEC’s rules and forms and is accumulated and communicated to management, including the CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure. Ultimate’s disclosure controls and procedures were designed to provide
reasonable assurance as to the achievement of these objectives. 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 thus has inherent limitations. Therefore, even
those systems determined to be effective can only provide reasonable assurance as to the achievement of their objectives.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act). Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external reporting purposes in accordance with GAAP. Our management assessed the effectiveness of our
internal control over financial reporting as of December 31, 2014. In making this assessment, our management used the criteria
established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on the results of this assessment, our management has concluded that, as of
December 31, 2014, our internal control over financial reporting was effective. However, because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements and, even when determined to be effective,
can only provide reasonable assurance with respect to financial statement preparation and presentation.
KPMG LLP, the independent registered public accounting firm that audited our consolidated financial statements
included in this Form 10-K, has issued an attestation report on Ultimate’s internal control over financial reporting as of
December 31, 2014, which is included below on this Form 10-K.
Changes in Internal Control Over Financial Reporting
There have been no changes during the fourth quarter of 2014 in Ultimate’s internal control over financial reporting
that have materially affected, or are reasonably likely to materially affect, Ultimate’s internal control over financial reporting.
75
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Ultimate Software Group, Inc.:
We have audited The Ultimate Software Group, Inc.’s (the Company) internal control over financial reporting as of December 31,
2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included 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 financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December
31, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by 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 Ultimate Software Group, Inc. and subsidiaries as of December 31, 2014 and 2013, and the
related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in
the three-year period ended December 31, 2014, and our report dated February 27, 2015 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
February 27, 2015
Jacksonville, Florida
Certified Public Accountants
76
Item 9B. Other Information
None.
77
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The executive officers (Messrs. Scott Scherr, Marc D. Scherr, Mitchell K. Dauerman, Adam Rogers, Greg Swick,
Robert Manne and Chris Phenicie), directors and other key employees of Ultimate, and their ages as of February 18, 2015, are
as follows:
Name
Scott Scherr...............................................
Marc D. Scherr..........................................
Mitchell K. Dauerman ..............................
Adam Rogers ............................................
Greg Swick ...............................................
Robert Manne ...........................................
Chris Phenicie...........................................
James A. FitzPatrick, Jr.............................
Alois T. Leiter ...........................................
LeRoy A. Vander Putten ...........................
Rick A. Wilber ..........................................
Robert A. Yanover.....................................
Julie Dodd.................................................
Bill Hicks ..................................................
Jody Kaminsky .........................................
Vivian Maza..............................................
Age
Position(s)
62 Chairman of the Board, President and Chief Executive Officer
57 Vice Chairman of the Board and Chief Operating Officer
57 Executive Vice President, Chief Financial Officer and Treasurer
40 Senior Vice President, Chief Technology Officer
51 Senior Vice President, Chief Enterprise Sales Officer
61 Senior Vice President, General Counsel
43 Senior Vice President, Chief Mid-Market Sales Officer
65 Director
49 Director
80 Director
68 Director
78 Director
45 Senior Vice President, Chief Services Officer
49 Senior Vice President, Chief Relationship Officer
40 Senior Vice President, Marketing
53 Senior Vice President, Chief People Officer and Secretary
Scott Scherr has served as President and a director of Ultimate since its inception in April 1996 and has been
Chairman of the Board and Chief Executive Officer of Ultimate 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 Ultimate 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 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 Ultimate
and the father-in-law of Adam Rogers, Senior Vice President, Chief Technology Officer.
Marc D. Scherr has been a director of Ultimate since its inception in April 1996 and has served as Vice Chairman
since July 1998 and as Chief Operating Officer since October 2003. Mr. Scherr is also a member of the Executive Committee
of the Board. Mr. Scherr became an executive officer of Ultimate effective March 1, 2000. Mr. Scherr served as a director of
Gerschel & Co., Inc., a private investment firm from January 1992 until March 2000. In December 1995, Mr. Scherr co-
founded Residential Company of America, Ltd. (“RCA”), a real estate firm, and served as President of its general partner until
March 2000. Mr. Scherr also served as Vice President of RCA’s general partner from its inception in August 1993 until
December 1995. From 1990 to 1992, Mr. Scherr was a real estate pension fund advisor at Aldrich, Eastman & Waltch.
Previously, he was a partner in the Boston law firm of Fine & Ambrogne. Mr. Scherr is the brother of Scott Scherr, Chairman of
the Board, President and Chief Executive Officer of Ultimate.
Mitchell K. Dauerman has served as Executive Vice President of Ultimate since April 1998 and as Chief Financial
Officer and Treasurer of Ultimate since September 1996. From 1979 to 1996, Mr. Dauerman held various positions with
KPMG LLP, an accounting firm, serving as a Partner in the firm from 1988 to 1996. Mr. Dauerman is a Certified Public
Accountant.
Adam Rogers has served as Senior Vice President, Chief Technology Officer since February 6, 2007. Mr. Rogers
served as Senior Vice President, Development from December 2002 to February 6, 2007. From July 2001 to December 2002,
Mr. Rogers served as Vice President of Engineering. From May 1997 to July 2001, Mr. Rogers held various positions in
Ultimate’s research and development organization, including Director of Technical Support from October 1998 to November
78
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 Officer of Ultimate.
Greg Swick has served as Senior Vice President since January 2001 and as Chief Enterprise Sales Officer since
February 6, 2007. Mr. Swick served as Vice President and General Manager of the PEO Division of Ultimate’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 Ultimate, Mr. Swick was President of The Ultimate Software Group of New York and New
England, G.P., a reseller of Ultimate Software which was acquired by Ultimate in March 1998. From 1987 to 1994, Mr. Swick
held various positions with ADP, where the most recent position was Area Vice President — ADP Dealer Services Division.
Robert Manne has served as Senior Vice President, General Counsel since February 2004 and served as Vice
President, General Counsel from May 1999 through January 2004. Prior to joining Ultimate, Mr. Manne was an attorney and
partner of Becker & Poliakoff, P.A., an international law firm, since 1978. In addition to administering the Litigation
Department of the law firm, Mr. Manne was a permanent member of the firm’s executive committee which was responsible for
law firm operations. Mr. Manne has performed legal services for Ultimate since its inception.
Chris Phenicie has served as Senior Vice President and Chief Mid-Market Sales Officer since January 2009 and served
as Vice President of Workplace Sales from April 2007 until January 2009. From January 2000 to April 2007, Mr. Phenicie
served as Strategic Account Manager for Ultimate. From July 1997 to January 2000, Mr. Phenicie held various sales positions
with ADP, the most recent of which position was Sales Manager.
James A. FitzPatrick, Jr. has served as a director of Ultimate since July 2000 and is Chairman of the Nominating
Committee of the Board and is a member of the Compensation Committee of the Board since February 2014. Mr. FitzPatrick is,
and since June 2012 has been, a partner in the law firm Hogan Lovells US LLP. Mr. FitzPatrick was a partner in the law firm
Dewey & LeBoeuf LLP and its predecessor firms from January 1983 until May 2012 and was an associate from September
1974 until January 1983.
Al Leiter has served as director of Ultimate since October 2006 and is a member of the Compensation Committee and
the Nominating Committee of the Board. Mr. Leiter was a three-time Major League Baseball World Champion and two-time
All-Star pitcher formerly with the New York Yankees, New York Mets, Toronto Blue Jays, and Florida Marlins, and has been
an official spokesperson for Ultimate since 2002. Mr. Leiter has served as a television commentator for the Yankees
Entertainment and Sports Network since 2006 and as an analyst with MLB Network since January 2009. Mr. Leiter is
president and founder of Leiter’s Landing, a charitable organization formed in 1996. Mr. Leiter has served on the Executive
Committee of New York City’s official tourism marketing organization, NYC & Company, since 2000 and is on the Board of
Directors of America’s Camp, a legacy organization of the Twin Towers Fund, on which he also served as a board member.
LeRoy A. Vander Putten has served as a director of Ultimate since October 1997, is Chairman of the Compensation
Committee of the Board and is a member of the Audit Committee of the Board. Mr. Vander Putten served as the Executive
Chairman of The Insurance Center, Inc., a holding company for 14 insurance agencies, from October 2001 until January 2006
at which time the company was sold. Previously, he served as the Chairman of CORE Insurance Holdings, Inc., a member of
the GE Global Insurance Group, engaged in the underwriting of casualty reinsurance, from August 2000 to August 2001. From
April 1998 to August 2000, he served as Chairman of Trade Resources International Holdings, Ltd., a corporation engaged in
trade finance for exporters from developing countries. From January 1988 until May 1997, Mr. Vander Putten was Chairman
and Chief Executive Officer of Executive Risk Inc., a specialty insurance holding company. From August 1982 to January
1988, Mr. Vander Putten served as Vice President and Deputy Treasurer of The Aetna Life and Casualty Company, an insurance
company.
Rick A. Wilber has served as a director of Ultimate since October 2002 and is a member of the Audit Committee, a
member of the Compensation Committee, and a member of the Nominating Committee of the Board. Mr. Wilber formerly
served on Ultimate’s Board of Directors from October 1997 through May 2000. Mr. Wilber served as the President of Lynn’s
Hallmark Cards, which owned and operated a number of Hallmark Card stores, from 1995 until 2013, at which time Mr. Wilber
retired. Mr. Wilber has served as a director of Synergy Resource Corporation, an oil and gas exploration company, since
October 2008. 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 Royce Laboratories was sold
to Watson Pharmaceuticals, Inc., a pharmaceutical concern.
Robert A. Yanover has served as a director of Ultimate since January 1997 and is Chairman of the Audit Committee
and a member of the Compensation Committee of the Board. Mr. Yanover founded Computer Leasing Corporation of
Michigan, a private leasing company, in 1975 and served as its President from its founding until 2007, at which time Mr.
79
Yanover retired. Mr. Yanover also founded Lason, Inc., a corporation specializing in the imaging business, and served as
Chairman of the Board from its inception in 1987 until 1998 and as a director through February 2001.
Each officer serves at the discretion of the Board and holds office until his or her successor is elected and qualified or
until his or her earliest resignation or removal. Messrs. 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 of stockholders (the “Annual Meeting”) in 2015. Messrs.
Scott Scherr and Al Leiter serve on the Board in the class whose term expires at the Annual Meeting in 2016. Messrs. LeRoy A.
Vander Putten and Robert A. Yanover serve on the Board in the class whose term expires at the Annual Meeting in 2017.
Julie Dodd has served as Senior Vice President and Chief Services Officer since October 2013, responsible for all
support and implementation services provided by the Company to its customers. Ms. Dodd served as Senior Vice President and
General Manager, Mid-Market Services, from April 2010 until January 2014 and served as Vice President and General
Manager of Mid-Market Operations from January 2009 until April 2010. From October 2007 to December 2008, Ms. Dodd
served as the Director of Product Strategy, with primary focus on the UltiPro Mid-Market product offering. Prior to joining
Ultimate, Ms. Dodd provided consulting services for large scale implementations, operations efficiencies projects and new
cloud product launches for various service providers. From 2002 to 2005, Ms. Dodd held various executive positions with
Ceridian Corporation, an information technology company, supporting their small and mid-market solutions.
Bill Hicks has served as Senior Vice President and Chief Relationship Officer since October 2013. Mr. Hicks served
as Senior Vice President of Shared Services and Chief Information Officer since April 2005. Mr. Hicks served as Vice
President and Chief Information Officer from February 2004 through March 2005. From 1993 until February 2004, Mr. Hicks
held various positions in the management of technologies for Precision Response Corporation, a wholly-owned subsidiary of
Interactive Corporation and a provider of call centers and on-line commerce customer care services, including Chief
Information Officer and Senior Vice President of Technology from August 2000 until February 2004.
Jody Kaminsky has served as Senior Vice President of Marketing since April 2010. Ms. Kaminsky served as Vice
President of Marketing from July 2008 until April 2010. Ms. Kaminsky served as Vice President of Marketing Operations from
July 2005 to June 2008, as Director of Strategic Marketing from December 2002 through June 2005, and in various other
Marketing and Communications positions from November 1999 through November 2002. Prior to that, Ms. Kaminsky held
various positions with General Electric's GE Information Services division from April 1997 through August 1999, including
Manager of Communications and Community Relations.
Vivian Maza has served as Senior Vice President, Chief People Officer and Secretary of Ultimate since February 2004
and served as Vice President, People from January 1998 through January 2004. Ms. Maza has served as Secretary of Ultimate
since September 1996. Prior to that, Ms. Maza served as the Office Manager of Ultimate from its organization in April 1996
and of the Partnership from its inception in 1990 until April 1996. Ms. Maza is an HR Generalist and holds a Professional in
Human Resources (PHR) certification from the Society for Human Resource Management (SHRM) association. From 1985 to
1990, Ms. Maza was a systems analyst for the Wholesale Division of ADP.
Code of Ethics
Ultimate has adopted a Code of Ethics within the meaning of Item 406 of Regulation S-K of the Exchange
Act. Ultimate’s Code of Ethics applies to its principal executive officer, principal financial officer and principal accounting
officer. A copy of Ultimate’s Code of Ethics is posted on Ultimate’s website at www.ultimatesoftware.com. In the event that
Ultimate 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, Ultimate will post such information on its website.
Corporate Governance
In 2013 the Board formed a Nominating Committee. The primary function of the Nominating Committee is to
recommend director-nominees to be considered for election or appointment by the Board. Ultimate has established a
Nominating Committee Charter that sets forth the Nominating Committee’s principal duties and responsibilities. This charter is
available on our website.
When considering potential director candidates, the Board considers, and the Nominating Committee will consider, the
candidate’s independence (as mandated by the NASDAQ rules), character, judgment, age, skills, financial literacy, and
experience in the context of the needs of Ultimate and the Board. Other information required by this item is incorporated
herein by reference to the information set forth in Ultimate’s Proxy Statement for the Annual Meeting in 2015 under the
80
heading “Corporate Governance, Board Meetings and Committees of the Board.” In 2014, Ultimate did not pay any fees to a
third party to assist in identifying or evaluating potential nominees.
The Nominating Committee and the Board will consider director candidates recommended by Ultimate’s stockholders
in a similar manner as those recommended by members of management or other directors.
Other Information
The information required by this item is incorporated herein by reference to the information set forth in Ultimate’s
Proxy Statement for the Annual Meeting in 2015 under the headings “Section 16(a) Beneficial Ownership Reporting
Compliance” and “Corporate Governance, Board Meetings and Committees of the Board-Audit Committee.”
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the information in Ultimate’s Proxy
Statement for the 2015 Annual Meeting under the headings “Executive Compensation Policy,” “Director Compensation” and
“Compensation Committee Report.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information set forth in this item is incorporated herein by reference to the information in Ultimate’s Proxy
Statement for the 2015 Annual Meeting under the heading “Security Ownership of Certain Beneficial Owners and
Management.”
Equity Compensation Plan Information.
The following table summarizes information related to Ultimate’s equity compensation plans as of December 31, 2014:
Equity Compensation Plan Information
Plan Category
Equity compensation plans approved by security holders ..........
Equity compensation plans not approved by security holders ....
Total .............................................................................................
(a) Number of
Securities to be
Issued upon Exercise
of Outstanding
Options, Warrants
and Rights
(b) Weighted-
Average Exercise
Price of Outstanding
Options, Warrants
and Rights
722,139
—
722,139
$
$
26.68
—
26.68
(c) Number of
Securities Remaining
Available for Future
Issuance under
Equity
Compensation Plans
(Excluding Securities
Refleceted in Column
( a ))
1,165,680
—
1,165,680
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the information in Ultimate’s Proxy
Statement for the 2015 Annual Meeting under the headings “Certain Relationships and Related Transactions,” “Compensation
Committee Interlocks and Insider Participation” and “Corporate Governance, Board Meetings and Committees of the Board.”
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the information in Ultimate’s Proxy
Statement for the 2015 Annual Meeting under the heading “KPMG LLP Fees.”
PART IV
Item 15. Exhibits and Financial Statement Schedule
(a) Documents filed as part of this Form 10-K:
1. The following consolidated financial statements of Ultimate, together with the report thereon, of KPMG LLP, our
Independent Registered Public Accounting Firm, are included in Part II, Item 8, of this Form 10-K:
Consolidated Balance Sheets as of December 31, 2014 and 2013
81
Consolidated Statements of Income for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
3. Exhibits
Number
Description
3.1
3.2
3.3
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.4 to the Registration
Statement on Form S-1 (File 333-47881), initially filed March 13, 1998 (the "Registration Statement"))
Certificate of Designations of Series A Junior Preferred Stock (incorporated by reference to Exhibit 2 to Ultimate’s
Current Report on Form 8-K dated October 23, 1998)
Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.2 to Ultimate's Current Report on Form
8-K dated February 6, 2013)
Form of Certificate for the Common Stock, par value $0.01 per share (incorporated by reference to Exhibit 4.1 to the
Registration Statement)
Form of Warrant for Common Stock (incorporated by reference to Exhibit 4.4 to Ultimate's Registration Statement
on Form S-3 (File No. 333-107527), initially filed July 31, 2003)
Amended and Restated Rights Agreement, dated as of August 26, 2008, between Ultimate and Computershare Trust
Company, N.A., as Rights Agent. The Rights Agreement includes the Form of Certificate of Designations of Series
A Junior Preferred Stock as Exhibit A, the Form of Rights Certificate as Exhibit B and the Summary of Rights as
Exhibit C (incorporated by reference to Exhibit 4.1 to Ultimate’s Current Report on Form 8-K dated September 2,
2008).
Shareholders Rights Agreement, dated June 6, 1997 among Ultimate and certain stockholders named therein
(incorporated by reference to Exhibit 10.1 to the Registration Statement)
Commercial Office Lease by and between ROHO Ultimate, LTD. II, a Florida limited partnership (“Landlord”) and
Ultimate dated May 23, 2001 (incorporated by reference to Exhibit 10.32 to Ultimate's Annual Report on Form 10-
K dated March 15, 2006)
Weston Town Center South Office Building Lease between South Office Building-DLB, LLC, a Florida Limited
Liability Company, South Office Building Bagtrust, LLC, a Florida Limited Liability Company, and South Office
Building-BJB, LLC, a Florida Limited Liability Company, and Ultimate and Weston Common Area LTD., dated
August 18, 2005 (incorporated by reference to Exhibit 10.35 to Ultimate’s Annual Report on Form 10-K, dated March
15, 2006)
Galleria Atlanta office lease agreement between Galleria 600, LLC, a Delaware limited liability company, and Ultimate,
dated April 27, 2006 (incorporated by reference to Exhibit 10.36 to Ultimate’s Quarterly Report on Form 10-Q, dated
August 8, 2006)
Lease of Office Space by and between OMERS Realty Corporation CPP Investment Board Real Estate Holdings Inc.,
and The Ultimate Group of Canada, Inc., dated August 22, 2006 (incorporated by reference to Exhibit 10.37 to
Ultimate’s Quarterly Report on Form 10-Q, dated November 8, 2006)
Indemnity Agreement between OMERS Realty Corporation, CPP Investment Board Real Estate Holdings, Inc., and
Ultimate dated August 22, 2006 (incorporated by reference to Exhibit 10.38 to Ultimate’s Quarterly Report on Form
10-Q, dated November 8, 2006)
Amendment to Lease by and between ROHO Ultimate, Ltd. I (“Landlord”) and Ultimate Group. Inc. (“Tenant”) for
Demised premises at 2000 Ultimate Way, Weston, FL 33326 (the “Premises”) dated February 15, 2000 (incorporated
by reference to Exhibit 10.39 to Ultimate’s Annual Report on Form 10-K, dated March 16, 2007)
First Amendment to Lease between Galleria 600, LLC (“Landlord”) and Ultimate, dated August 18, 2006 (incorporated
by reference to Exhibit 10.42 to Ultimate’s Annual Report on Form 10-K, dated March 16, 2007)
Amended and Restated 2005 Equity and Incentive Plan (incorporated by reference to Exhibit 10.1 to Ultimate’s Current
Report on Form 8-K, dated May 18, 2012) †
10.10
Commercial lease between Weston Office, LLC (“Landlord”) and Ultimate, dated January 18, 2008 (incorporated by
reference to Exhibit 10.45 to Ultimate’s Annual Report on Form 10-K, dated March 13, 2008)
82
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
Commercial lease between AGF Woodfield Owner, L.L.C., (“Landlord”) and Ultimate, dated October 31, 2008
(incorporated by reference to Exhibit 10.47 to Ultimate’s Annual Report on Form 10-K, dated March 2, 2009)
Commercial lease between 300 Galleria Parkway Associates, L.P., (“Landlord”) and Ultimate, dated September 8,
2009 (incorporated by reference to Exhibit 10.33 to Ultimate’s Quarterly Report on Form 10-Q, dated November 9,
2009)
Commercial lease between RT Twenty-Sixth Pension Properties Limited (“Landlord”) and Ultimate, dated September
4, 2009 (incorporated by reference to Exhibit 10.34 to Ultimate’s Quarterly Report on Form 10-Q, dated November
9, 2009)
Master Space Agreement between Quality Technology Services Miami LLC and Ultimate, dated June 1, 2009
(incorporated by reference to Exhibit 10.1 to Ultimate’s Quarterly Report on Form 10-Q, dated August 9, 2010)
Master Space Agreement between Quality Technology Services Metro LLC and Ultimate, dated June 1, 2009
(incorporated by reference to Exhibit 10.2 to Ultimate’s Quarterly Report on Form 10-Q, dated August 9, 2010)
Service Order Form between Verizon Canada Ltd. and Ultimate, dated September 23, 2009 (incorporated by reference
to Exhibit 10.3 to Ultimate’s Quarterly Report on Form 10-Q, dated August 9, 2010)
Amended and Restated Change in Control Bonus Plan for Executive Officers dated April 26, 2010 (incorporated by
reference to Exhibit 10.4 to Ultimate’s Quarterly Report on Form 10-Q, dated August 9, 2010) †
Commercial lease between 2000 Main Street Associates, LLC (“Landlord”) and Ultimate, dated November 3, 2010
(incorporated by reference to Exhibit 10.54 to Ultimate’s Annual Report on Form 10-K, dated March 1, 2011)
Commercial lease between Micari Holdings, LLC (“Landlord”) and Ultimate, dated November 5, 2010 (incorporated
by reference to Exhibit 10.55 to Ultimate’s Annual Report on Form 10-K, dated March 1, 2011)
Commercial lease between Galleria 400, LLC (“Landlord”) and Ultimate, dated December 29, 2010 (incorporated by
reference to Exhibit 10.56 to Ultimate’s Annual Report on Form 10-K, dated March 1, 2011)
Commercial lease between AG/LPC Griffin Towers, L.P., (“Landlord”) and Ultimate, dated February 23, 2011
(incorporated by reference to Exhibit 10.1 to Ultimate's Quarterly Report on Form 10-Q, dated May 10, 2011)
Commercial lease between TCS-CB LLC, ("Landlord") and Ultimate, dated July 25, 2012 (incorporated by reference
to Exhibit 10.1 to Ultimate's Quarterly Report on Form 10-Q, dated November 9, 2012)
License and Master Services Agreement between IO Phoenix One, LLC and Ultimate, dated February 27, 2012, as
amended (incorporated by reference to Exhibit 10.2 to Ultimate's Quarterly Report on Form 10-Q, dated November
9, 2012)
Master Services Agreement between Savvis Communications Canada, Inc. and Ultimate, dated April 30, 2013
(incorporated by reference to Exhibit 10.1 to Ultimate's Quarterly Report on Form 10-Q, dated August 8, 2013)
Service Schedule between Savvis Communications Canada, Inc. and Ultimate, dated April 30, 2013 (incorporated
by reference to Exhibit 10.2 to Ultimate's Quarterly Report on Form 10-Q, dated August 8, 2013)
Colocation Services Service Level Attachment between Savvis Communications Canada, Inc. and Ultimate, dated
April 30, 2013 (incorporated by reference to Exhibit 10.3 to Ultimate's Quarterly Report on Form 10-Q, dated
August 8, 2013)
Commercial lease between DP Weston Pointe III, LLC, ("Landlord") and Ultimate, dated December 8, 2014 *
10.28
Form of Restricted Stock Award Agreement * †
21.1
23.1
31.1
31.2
32.1
32.2
101.1
Subsidiaries of the Registrant *
Consent of Independent Registered Public Accounting Firm *
Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended *
Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended *
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, as amended *
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, as amended *
Interactive Data Files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of December 31,
2013 and 2012, (ii) Consolidated Statements of Income for the Years Ended December 31, 2013, 2012 and 2011,
(iii) Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012 and 2011;
(iv) Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2013, 2012 and 2011; (v)
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011; and (vi) Notes to
Consolidated Financial Statements.
* Filed herewith.
† Indicates management contract or compensatory plan, contract or arrangement.
83
Confidential treatment has been granted with respect to certain portions of this exhibit pursuant to Rule 24b-2 of the
Securities and Exchange Act of 1934, as amended, and such portions have been omitted and filed separately with the SEC.
84
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 Officer and Treasurer
Date: February 27, 2015
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
President, Chief Executive Officer and Chairman of the Board
February 27, 2015
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
February 27, 2015
Vice Chairman of the Board and Chief Operating Officer
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
/s/ James A. FitzPatrick, Jr.
Director
James A. FitzPatrick, Jr.
/s/ LeRoy A. Vander Putten
Director
LeRoy A. Vander Putten
/s/ Rick Wilber
Rick Wilber
/s/ Robert A. Yanover
Robert A. Yanover
/s/ Alois T. Leiter
Alois T. Leiter
Director
Director
Director
85
Subsidiaries of the Registrant
Exhibit 21.1
Name
Jurisdiction of Incorporation
The Ultimate Software Group of Canada, Inc.
Ontario, Canada
I, Scott Scherr, certify that:
CERTIFICATION
1.
I have reviewed this Form 10-K of The Ultimate Software Group, Inc.;
Exhibit 31.1
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial
reporting (as defined 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 report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness 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 financial reporting that occurred
during the Registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial 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 significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 27, 2015
/s/ Scott Scherr
Chief Executive Officer
I, Mitchell K. Dauerman, certify that:
CERTIFICATION
1.
I have reviewed this Form 10-K of The Ultimate Software Group, Inc.;
Exhibit 31.2
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial
reporting (as defined 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 report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness 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 financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial 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 significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 27, 2015
/s/ Mitchell K. Dauerman
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Scott Scherr, Chief Executive Officer 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 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 financial condition and results of operations of The Ultimate Software
Group, Inc.
/s/ Scott Scherr
Chief Executive Officer
February 27, 2015
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
I, Mitchell K. Dauerman, Chief Financial Officer 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 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 financial condition and results of operations of The Ultimate
Software Group, Inc.
/s/ Mitchell K. Dauerman
Chief Financial Officer
February 27, 2015