10-K 1 form_10-k.htm FORM 10-K FOR 12/31/10 form_10-k.htm
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_______________

FORM 10-K

 
  þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
   
 
For the fiscal year ended December 31, 2010
   
 
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
65-0694077
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
2000 Ultimate Way,
33326
Weston, FL
(Zip Code)
(Address of principal executive offices)
 

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 þ  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 þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No ¨

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 þ

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. þ

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.  (Check one):

Large accelerated filer  þ                                                                                                             Accelerated filer  ¨

Non-accelerated filer  ¨ (Do not check if a smaller reporting company) 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 þ

The aggregate market value of Common Stock, par value $.01 per share, held by non-affiliates of the Registrant, based upon the closing sale price of such shares on the NASDAQ Global Select Market on June 30, 2010 was approximately $784.7 million.
 
 
As of February 18, 2011, there were 25,629,806 shares of the Registrant’s Common Stock, par value $.01, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the 2011 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

 


 
i

 

THE ULTIMATE SOFTWARE GROUP, INC.



 
 
 
Page(s)
 
 
 
    1  
           
 
PART I
       
Item 1.
    1  
Item 1A.
    10  
Item 1B.
    17  
Item 2.
    18  
Item 3.
    18  
Item 4.
     18  
           
 
PART II
       
Item 5.
    19  
      19  
Item 6.
    20  
Item 7.
       
      22  
Item 7A.
       
      33  
Item 8.
    34  
Item 9.
       
      61  
Item 9A.
    61  
         
      62  
Item 9B.
    63  
 
PART III
       
Item 10.
    63  
Item 11.
    66  
Item 12.
       
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Item 13.
       
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Item 14.
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PART IV
       
Item 15.
    67  
    71  

 
ii

 


This Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (this “Form 10-K”) of The Ultimate Software Group, Inc. and subsidiaries (“Ultimate,” “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


Overview

The Ultimate Software Group, Inc. and subsidiaries (“Ultimate,” “we,” “us” or “our”) is a leading provider of unified human capital management (“HCM”) software-as-a-service (“SaaS”) solutions for global businesses.

Ultimate’s UltiPro software (“UltiPro”) is a comprehensive SaaS-based solution delivered primarily to organizations based in the United States and Canada and designed to deliver the functionality businesses need to manage the complete employment life cycle from recruitment to retirement. The solution includes feature sets for talent acquisition and onboarding, human resources (“HR”) management and compliance, benefits management and online enrollment, payroll, performance management, learning management, salary planning and budgeting for compensation management, reporting and analytical decision-making tools, and time and attendance.  UltiPro has role-based self-service capabilities for executives, managers, administrators, and employees whether they are in or out of the office, including an UltiPro application for use on the iPhone or iPad.

We believe that UltiPro helps customers streamline HR and payroll processes to significantly reduce administrative and operational costs, while also empowering them to manage the talent in their workforce more strategically.  UltiPro enables its customers to analyze workforce trends for better decision making, find critical information quickly and perform routine business activities efficiently.

UltiPro is marketed as two solution suites based on company size.  UltiPro Enterprise (“Enterprise”) is designed to address the needs of companies with 1,000 or more employees.  UltiPro Workplace (“Workplace”) is designed for companies with fewer than 1,000 employees.  UltiPro Workplace provides medium-sized and smaller companies with nearly all the features that larger Enterprise companies have with UltiPro, plus a bundled services package. Since many companies in this market do not have HR information systems staff on their premises to help with system deployment or management issues, we created UltiPro Workplace’s bundled services package to give these customers a high degree of convenience by handling system setup, business rules, and other situations for customers “behind the scenes.”

Our SaaS offering of UltiPro (the “SaaS 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 SaaS is attractive to companies that want to focus on their core business competencies to increase sales and profits. Through SaaS, we supply and manage the hardware, infrastructure, ongoing maintenance and backup services for our customers.  Customer systems are managed at three data centers; one located near Miami, Florida, one near Atlanta, Georgia, and another near Toronto, Canada. All data centers are owned and operated by independent third parties.

As part of our UltiPro HCM solution, which includes HR, payroll and talent management feature sets, we provide implementation and training services to our customers as well as support services, which have been certified by the Support Center Practices (“SCP”) certification program for twelve consecutive annual evaluations.  UltiPro leverages the Microsoft Corporation (“Microsoft”) technology platform, which is recognized in the industry as a cost-effective, reliable and scalable platform.

UltiPro is marketed primarily through our Enterprise and Workplace direct sales teams.  Ultimate had approximately 2,200 customers as of the end of 2010.  Based on December 2010 market data from Dun & Bradstreet, we estimate our approximate market share to be 9 percent in the over 1,000 employees and larger space and 2 percent in the under 1,000 employee space.

 
    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 its operations in Canada.  In October 2006, Ultimate acquired 100% of the common stock of a United Kingdom (“UK”) company and its wholly-owned U.S. subsidiary, known as The Ultimate Software Group UK Limited.  The Ultimate Software Group UK Limited was discontinued and liquidated in 2010.  See Note 4 in the Notes to the Consolidated Financial Statements.  There were no material assets or revenues in either Canada or the UK as of or for the year ended December 31, 2010.  Ultimate’s headquarters is located at 2000 Ultimate Way, Weston, Florida 33326 and its telephone number is (954) 331-7000.

Features of UltiPro

UltiPro is a comprehensive SaaS-based solution designed to deliver the functionality businesses need to manage the complete employment life cycle from recruitment to retirement. The solution includes feature sets for talent acquisition and onboarding, HR management and compliance, benefits management and online enrollment, payroll, performance management, learning management, salary planning and budgeting for compensation management, reporting and analytical decision-making tools, time and attendance, and role-based self-service for executives, managers, administrators, and employees whether they are in or out of the office.  UltiPro offers the following features to its customers:

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 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 an UltiPro application for use on an iPhone or iPad to allow rapid communication among traveling executives and employees. Using their iPhones or iPads, managers can approve or deny daily workflow transactions—such as salary changes and paid time off—and all employees can quickly access their company’s employee directory to look up contact information or employee photos.

Feature-Rich, Highly Configurable, Built-in Functionality.  Based upon UltiPro’s built-in and unified functionality and its ability to be configured extensively to meet the customer’s specific business needs, Ultimate has found that UltiPro minimizes the need for its customers to make extensive customizations or changes to source code.  UltiPro facilitates streamlined management of the total employment cycle, enables organizations to minimize the time invested in burdensome HR/payroll administrative activities, and provides strategic HR and talent management reports and tools.

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.  UltiPro delivers an extensive amount of functionality “out-of-the-box” that can be configured to align with our customers’ various business models, so that few customizations are required by the typical customer. Ultimate has a proven track record for activating UltiPro rapidly through SaaS.

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 information technology (“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 and control over reporting.

Leveraging of Leading Technologies.  Ultimate has consistently focused on identifying leading technologies and integrating them into its products. The primary characteristics of Ultimate’s technology are:
 
§  
Leading-edge service-oriented-architecture technology platform built using the Microsoft .NET 3.0 framework and now transitioning to Microsoft .NET 4.0.
 
§  
Multi-tenancy (multiple companies can reside on one server).  The multi-tenant model allows each application component to run on a separate farm, or cluster, of load-balanced servers while still providing customer data isolation that customers demand. Ultimate’s multi-tenant site registry functions similar to “yellow pages” to manage tenant location and isolation within the site.

§  
Connecting UltiPro via Web 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-based technologies).  Through Web services, UltiPro interfaces with other applications and data services easily and securely.

Rich End-User Experience, Ease of Use and Navigation.  Ultimate designs its products to be user-friendly and to simplify the complexities of managing employees and complying with government regulations in the HR, payroll, and talent management areas. UltiPro uses familiar Internet navigation techniques, which we believe make its solution convenient and easy to use. While traveling or out of the office, our customer’s 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 iPhone or iPad.

 
Comprehensive Customer Services and Industry-Specific Expertise.  Ultimate believes it provides the highest quality customer services, SaaS services, professional setup and implementation services, knowledge management (or training) services and ongoing product and customer support services. Ultimate’s customer support center has received the SCP Certification for the twelfth consecutive year. The SCP program was created by the Service & Support Professionals Association (“SSPA”) and a consortium of information technology companies to create a recognized quality certification for support centers. SCP Certification quantifies the effectiveness of customer support based upon relevant performance standards and represents best practices within the technology support industry according to the SSPA. Recognizing the importance of issuing timely updates that reflect changes in tax and other regulatory laws, Ultimate employs 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.
 
UltiPro—Core Functionality and Optional Features

UltiPro’s core functionality includes, but is not limited to, a set of Web-based features for HR management, benefits administration, payroll administration, role-based Internet access to functions, and business intelligence along with system administration tools and Enterprise Integration Tools that give customers the ability to interface with third-party applications and providers.

In addition to UltiPro’s core HCM functionality, our customers have the option to purchase a number of additional features on a per-employee-per-month (“PEPM”) basis, which are available to enhance the functionality of UltiPro’s core features which are based on the particular business needs of the customers.  These optional UltiPro features currently include (i) the talent management suite of products (recruitment, onboarding, performance management, learning management, salary planning and budgeting for compensation management, and employee relations tools for managing disciplinary actions, grievances, and succession planning); (ii) benefits enrollment; (iii) time, attendance and scheduling; (iv) time management; (v) tax filing; (vi) wage attachments; and (vii) other optional features (collectively, UltiPro “Optional Features”) , which are described below.

Differences between features available to UltiPro Enterprise and UltiPro Workplace are specified below.  Unless otherwise specified, features are included in both the Enterprise and Workplace offerings.

UltiPro’s Core HR/Payroll Functionality

UltiPro’s core HR/payroll functionality includes, but is not limited to, the following:

UltiPro’s Web Center. 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 multiple Web browsers, including 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 its 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 location. UltiPro also enables companies to provide on-demand access to company and personal information for their employees over the Internet.

Human Resources Management.  UltiPro tracks HR-related information including employment history, performance, job and salary information, career development, and health and wellness programs. In addition, UltiPro facilitates the recording and tracking of key information for government compliance and reporting, including under 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 Opportunity (EEO) laws. UltiPro also enables compliance with HIPPAA confidentiality requirements for protecting sensitive data such as employee social security numbers.
UltiPro also allows customers to track HR information of employees working outside the U.S. and Canada, providing a global view of their workforces and enabling consolidation of global HR/employee information into one central system for HR reporting and analytics by individual country or the entire company as a whole.

Benefits Administration. UltiPro allows companies to automate the matching of the health, welfare, dental, vision, and other benefits that their organizations offer employees, and to set up and administer benefit plans and employee and employer contributions, and it enables employees to check benefit options and coverage online over the Internet. UltiPro eliminates the need for duplicate rules, duplicate data entry, and reconciliation reporting because it stores details for deductions and benefit plans in one common table. This includes rules for coverage, premium and employer match computations, and eligibility and participation 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 Administration.  UltiPro’s payroll engine handles hundreds of payroll-related computations intended to minimize the customer’s need for side calculations or additional programming. For example, UltiPro delivers complex wage calculations such as average pay rates for overtime calculations, shift premiums, garnishments and levy calculations. With UltiPro, a company’s central payroll department, remote offices or multiple divisions can process payroll with specific processing steps based on the exact needs of the organization, and can manage this process through an easy-to-use dashboard of payroll tasks and status, over the Internet.

 
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 Forms I-9 with required identification.  Administrators and managers have the ability to attach Microsoft Word documents, PDF files, JPEG files, spreadsheets, or any other file types supported by Microsoft Internet Explorer to employee files.  The documents can be grouped and sorted to individual requirements, as necessary.
 
Employees also may be given immediate security-protected access to view their own paycheck details and benefits summaries, frequently used forms and company information.  They can also update personal information such as address, phone number, emergency contacts and skills; change preferences such as direct deposit accounts and benefits selections; make routine requests such as asking for vacation time; and enroll in training.

UltiPro Business Intelligence.  UltiPro Business Intelligence uses the IBM Cognos 8 business intelligence platform 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, learning 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 its 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.

    Other Key Features.  UltiPro includes system administration tools such as configuration options, role-based security, built-in conditional workflow, flexible business rules, and an easy-to-use content management tool. Built-in conditional workflow enables users to authorize HR/payroll staff, managers, or supervisors to make updates on the Web through more than 125 pre-defined, highly configurable workflow processes to expedite business activities such as hiring an employee or inputting a salary increase. System administration is designed for the non-technical user 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 pages to reflect the customer’s own company user experience requirements. Enterprise Integration Tools are also included to provide the ability to interface with third-party applications and providers such as general ledger, tax filing services, time clocks, banks, 401(k) and benefits providers, check printing services and unemployment management services.

UltiPro’s Optional Features

UltiPro Talent Management is a suite of add-on products comprised of Recruitment, Onboarding, Performance Management, Learning Management, Salary Planning and Budgeting, and Employee Relations.

i)  Recruitment. UltiPro Recruitment delivers a “one-stop” solution for companies to recruit and hire the most qualified candidates. By automating the entire recruiting and applicant tracking process, UltiPro Recruitment enables hiring managers, recruiters, and HR staff to track and manage all recruitment tasks such as posting open jobs, reviewing resumes, screening candidates, and scheduling interviews through convenient Web access.

ii)  Onboarding.  UltiPro Onboarding is a comprehensive Web-based tool that provides employers the ability to automate the process of bringing a new employee into an organization and speed time to productivity. Employees can be given a “welcome” package online as part of a step-by-step process that is built into UltiPro Onboarding which is easily configurable. It includes such activities as obtaining required government and procedural paperwork, including electronic signatures and document storage; provisioning necessary equipment and job-specific tools such as office location, computer equipment, and uniforms; ensuring enrollment in necessary training programs; and instilling the employer’s core values and business objectives.

iii)  Performance Management and Learning Management. UltiPro Performance Management helps companies maximize talent development and improve employee satisfaction by automating and enhancing the performance process and using competency-based employee development. 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.  UltiPro Learning Management enables businesses to tie performance objectives and employee development requirements to measurable plans that drive individual learning programs. Companies can list or link to educational programs and track attendance, program status, certifications, and other results.
 
    iv)  Salary Planning and Budgeting. UltiPro Salary Planning and Budgeting facilitates salary increase administration by delivering the tools and information managers need to make effective decisions regarding future compensation for individuals and/or an entire team. Highly configurable, UltiPro Salary Planning and Budgeting makes it easy for companies to tie the salary-increase process and business rules into the solution. Working online, managers can rapidly review their salary budgets and guidelines, and determine the best way to allocate pay increases to their employees within their approved budget. Once managers decide on the allocations, they can submit pay increases for processing with no manual calculations or spreadsheets required.
 
 
v)  Employee Relations.  UltiPro Employee Relations allows customers to track employee information that is important to a particular industry such as disciplinary actions and employee grievances.  In addition, career planning features in the UltiPro Employee Relations feature set help companies of all types with succession planning by building a pipeline of future leaders from their workforce pool to fill key positions.
 
Other Optional Features include, but are not limited to, the following products, which are supplemental to UltiPro’s core HR/payroll functionality:
 
Benefits Enrollment. With UltiPro Benefits Enrollment, employees can review their benefit choices and make selections on the Web during defined open enrollment periods. Benefits administrators can set up enrollment sessions over the Web and use tools to monitor the enrollment progress. UltiPro Benefits Enrollment also guides employees through all of the benefit and personal information changes necessary as a result of a life event such as getting married, having a baby or moving.  UltiPro also facilitates the electronic feeds required for insurance carriers and plan administrators, reducing the need for manual reporting of employee census information, participant coverage, and billing reconciliation.
 
    Time, Attendance, and Scheduling (available to prospective customers in the Enterprise market). Through a strategic partnership, Ultimate has the right to market and distribute an independent third party’s time and labor management product as part of the UltiPro solution. Ultimate has 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 the Workplace market). 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.
 
Tax Filing. Ultimate has the right to market and distribute an independent third party’s tax filing solution that Ultimate has branded UltiPro Tax Filing.  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 Tax Filing 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.
 
    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. Ultimate ensures that each third-party payment is made according to the designated payment method and reaches its required destination within the assigned timeframe.
 
    Other Optional Features.  Ultimate offers 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, Ultimate offers UltiPro Federated Single Sign-On for standards-based identity management by leveraging Microsoft’s Active Directory Federated Services infrastructure.  The solution helps 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

Ultimate seeks to provide its clients with optimum performance, user experience, advanced functionality, and ease of scalability and access to information through the use of leading Internet-standard technologies. The UltiPro solution was designed to leverage cutting-edge technologies such as Web 2.0, social software, XML standards, and Web services that use open standards to provide customers with a cost-effective platform for performing critical business functions rapidly over the Web and allowing different systems to communicate with one another.

The use of Microsoft technology helps Ultimate deliver what it believes to be a highly deployable and manageable payroll and talent management solution that includes the following key technological features:

Microsoft.NET framework, Web 2.0 Features, and Social Networking Integration.  The newest version of UltiPro, built on the .NET development platform, allows UltiPro to leverage a contemporary Web framework that provides a common, reusable page foundation for a consistent user experience.  The .NET framework also enables Ultimate to develop and release enhanced features more rapidly. The latest version of UltiPro also takes advantage of Web 2.0 technologies for increased user interactivity, such as “sticky” personal user preferences, and social networking integration that provides value for human capital management in areas such as recruitment and mentoring.  For example, UltiPro on the .NET platform includes social networking integration to sites such as “LinkedIn,” where candidates for open positions can provide a link to their professional profile and other details relevant to job applications, enabling HR and hiring managers to more quickly identify qualified candidates.
 
Internet-Based Technologies and Integration.  Ultimate supports cutting-edge Web technologies and Internet/extranet connectivity to increase access to and usability of its applications. In 2002, Ultimate moved to Web services architecture that allows business logic to be called and executed over standard network protocols, such as HTTP or TCP/IP. UltiPro has an open architecture that supports open integration standards, including XML, HR-XML, SOAP, WSDL, AJAX, and COM, including real-time messaging through Web services.  UltiPro’s Web services architecture is scalable to adapt to the business needs of companies of any size. The solution includes enterprise integration tools that enable customers to exchange data with third-party providers via imports, exports or Web services.
 
Distributed Process Management. The technical architecture UltiPro uses to enable Web services capabilities is called UltiPro Distributed Process Management (“DPM”). This unique platform incorporates leading technologies such as Microsoft Message Queuing (MSMQ), XML, SOAP, and WSDL to create a distributed processing framework that is Internet-enabled for performing business functions on the Web and allowing different enterprise systems to talk to one another over the Internet. UltiPro’s DPM was designed to automate and distribute HR and payroll processes, for example, processing payroll or generating reports, across multiple servers to reduce the amount of time and manual work required. This means that commonly requested services, such as running a report or running steps in the payroll process, can be initiated from the Web. These requests are automatically routed to a separate process application server to ensure efficient processing and load balancing. Ultimate believes that the DPM framework makes UltiPro highly scalable to accommodate a high volume of processing requests cost-effectively for companies that run hundreds or even thousands of payrolls.

Application Framework.  Ultimate has designed certain aspects of its system using a multi-tiered architecture in order to enhance the system’s speed, flexibility, scalability and maintainability. When an application’s logic resides only on a client workstation, a user’s ability to process high volume data transactions is limited. When the logic resides only on a server, the user’s interactive capabilities are reduced. To overcome such limitations, Ultimate built more separation into the application design. The UltiPro application consists of several core components in a decoupled architecture that leverages Microsoft technology. UltiPro’s multi-layered architecture, including an operating system layer, business logic layer, presentation layer and user interface layer, makes it easier to update and maintain UltiPro, as well as integrate UltiPro with other enterprise systems. Ultimate believes that UltiPro’s application framework provides a highly extensible set of services that can scale depending on the customer’s business size. In addition, UltiPro was built using a data-driven, object-oriented application framework that enhances the development and usability of the solution. Object-oriented programming features code reusability and visual form/object inheritance, which decrease the time and cost of developing and fully implementing a new system. With object-oriented programming, system updates do not overwrite prior customizations to the system because custom changes are sub-classed objects that reside “outside” the core program.

Business Intelligence Tools.  In addition to providing an extensive library of standard reports that offer flexibility and ease of use, Ultimate extends what users can do with employee data by embedding business intelligence tools from Cognos Corporation, a third-party provider (“Cognos”). In addition to offering sophisticated data query and report authoring, these tools enable users to apply on-line analytical processing to multidimensional data cubes, allowing users to explore data on employees graphically and statistically from diverse angles. Ultimate maintains a link between Cognos’ report catalog and UltiPro’s data dictionary, eliminating the necessity for users to create and maintain ad hoc reporting catalogs. In addition, for security purposes and ease of use, Ultimate has unified security for the data elements and provided single sign-on for users.  A Cognos Web Package is delivered to UltiPro customers to allow users to access reports and conduct data queries from a Web browser.

 
SaaS Offering

Ultimate’s SaaS Offering provides on-line access to comprehensive HCM functionality for organizations that need to simplify the IT support requirements of their business applications. Through the SaaS Offering, Ultimate provides the hardware, infrastructure, ongoing maintenance and backup services for its customers at three data centers.  Data centers located near Miami, Florida and Atlanta, Georgia, are owned and operated by Quality Technology Services (“QTS”) and the data center located near Toronto, Canada is owned and operated by Verizon Canada Ltd. (“Verizon”).

Ultimate’s use of the data centers located near Miami, Florida and Atlanta, Georgia is governed by a Master Space Agreement dated June 1, 2009 with Quality Technology Services Miami, LLC (“QTS Miami”) and a Master Space Agreement dated June 1, 2009 with Quality Technology Services Metro, LLC (“QTS Metro”), respectively (collectively, the “QTS Agreements”).  Pursuant to the terms of the QTS Agreements, 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.  Each of the QTS Agreements 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, each of the QTS Agreements 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 General Service Agreement dated September 23, 2009 (the “Verizon Agreement”) between Ultimate’s wholly owned subsidiary Ultimate Canada and Verizon.  Pursuant to the terms of the Verizon 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 Verizon 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 Verizon 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 Verizon 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 Verizon under the Verizon Agreement.

The SaaS Offering is designed to provide an appealing pricing structure to customers who prefer to minimize the initial cash outlay associated with typical capital expenditures.  SaaS 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 the SaaS Offering, 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 its business.  Such research and development expenses are for enhancements to our existing products and for the development of new products. During 2010, 2009 and 2008, including capitalized software, we spent $42.2 million, $38.2 million and $36.8 million, respectively, on research and development activities.  During 2010, there were no research and development expenses capitalized.  During 2009 and 2008, $0.1 million and $0.8 million, respectively, of research and development expenses were capitalized for UltiPro Onboarding, which became available for general release to our customers during the spring of  2009.  In addition, in 2009, $0.1 million of research and development expenses were capitalized for certain third-party costs related to UltiPro Time Management.
 
Customer Services

We believe that delivering quality customer services provides us with a significant opportunity to differentiate Ultimate in the marketplace and is critical to the quality of Ultimate’s comprehensive service solution. Ultimate provides its customers services in two broad categories: (i) professional services and (ii) customer support services and product maintenance.  Additionally, Ultimate provides hosting services as a part of our SaaS Offering.  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 implementation, customer relationship management and knowledge management (or training) services. Ultimate believes that its implementation consulting services are differentiated from those of other vendors by speed, predictability and completeness. Ultimate believes that its successful record with rapid system activation and implementations is due to its standardized methodology, long-tenured consultants, the large amount of delivered product functionality, and comprehensive conversion and integration tools.

 
Ultimate has an experienced team of functional and technical consultants that are dedicated to assisting customers with rapid deployments. In addition, Ultimate provides its customers with the opportunity to participate in formal training programs conducted by its knowledge management services team, as well as online and on-demand training. Training programs are designed to increase customers’ ability to use the full functionality of the product, thereby maximizing the value of customers’ investments. Courses are designed to align with the stages of implementation and to give attendees hands-on experience with UltiPro. Trainees learn such basics as how to enter new employee information, set up benefit plans and generate standard reports, as well as more complex processes such as defining company rules, configuring the system and creating custom reports. Ultimate maintains training facilities in Atlanta, Georgia; Schaumburg, Illinois; Dallas, Texas; and at its headquarters in Weston, Florida. In addition to offering classes at these facilities, we conduct Web-based training and on-site training at remote locations. After 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 (“CRM”) to the account to assist customers on an ongoing basis with special projects, including enhancing their existing systems, managing upgrades and writing custom reports.  The CRM 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 and Maintenance.  Ultimate offers 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 customer retention rate of 96% in 2010. Ultimate’s customer support center has received the SCP Certification sponsored by the Service Strategies Corporation (“SSC”) for the twelfth consecutive year. This certification recognizes companies that “deliver exceptional service and support to their customers.” 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 access to Ultimate’s employee tax center on the Web; seminars on year-end closing procedures; and periodic newswire emails. In addition, our customer support services team maintains a support Web site 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, 2010, Ultimate provided its UltiPro solutions to approximately 2,200 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, 2010, no customer accounted for more than 10% of total revenues.

Sales and Marketing

Ultimate markets and sells its products and services primarily through its direct sales force.

Ultimate’s 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 SaaS Offering for both the Enterprise and Workplace markets, the agreement generally requires PEPM fees based on company size and, typically, a one-time upfront (or setup) fee priced on a per-employee basis, to cover services which generally include implementation and training.  Typical payment terms include a deposit at the time the contract is signed for all or a portion of the upfront fees and ongoing PEPM payments on specific payment dates designated in the contract, usually tied to the Live date.
 
With a perpetual license sale (which we stopped offering to new customers as of April 1, 2009), the terms of our sales contract typically included a license agreement for the product, an annual maintenance agreement (which is subject to annual renewal typically after a 12-month period), per-day training rates and hourly charges for implementation services. Typical payment terms included a deposit at the time the contract was signed and additional payments on specific payment dates designated in the contract. Payment for implementation and training services under the contract was typically made as such services were provided.

 
Ultimate supports its sales force with a comprehensive marketing program that includes public relations, advertising, direct mail, trade shows, seminars and workshops, email marketing, and Web marketing. Working closely with the direct sales force, customers and strategic partners, the marketing team defines positioning strategies and develops a well-defined plan for implementing these strategies. Marketing services include market surveys and research, overall campaign management, creative development, demand generation, results analysis, and communications with field offices, customers and marketing partners.

Intellectual Property Rights

Ultimate’s success is dependent, in part, on its ability to protect its 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 the Enterprise market include (i) large service bureaus, primarily Automatic Data Processing Inc. (“ADP”) and, to a lesser extent, Ceridian; and (ii) companies, such as PeopleSoft/Oracle, Lawson, Kronos, and Workday that offer human resource management and payroll software products for use on mainframes, client/server environments and/or Web servers.  In the Workplace market, Ultimate’s competitors include payroll service providers, such as ADP, Ceridian and Paychex, that service companies on the smaller end of the mid-market.

Backlog

Backlog consists of our UltiPro SaaS solutions and sales of SaaS services 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, 2010, Ultimate had backlog of $110.5 million compared to $95.5 million as of December 31, 2009.  Ultimate expects to fill approximately $93.8 million of the backlog during 2011.  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, 2010, Ultimate employed 1,134 persons.  Ultimate believes that its relationships with employees are good, and that belief is validated by The Great Place to Work® Institute, Inc.’s selection of Ultimate as the #1 Best Place to Work in America among medium-sized companies for both 2009 and 2008, as well as one of the 25 best medium-sized companies to work for in America in 2007, 2006, and 2005.  However, competition for qualified personnel in Ultimate’s industry is generally intense and the management of Ultimate believes that its future success will depend, in part, on its 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 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.



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:
 
            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.
 
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 SaaS sales, 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 SaaS 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. Estimates for Time to Live 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 for other SaaS 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, which 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 Time to Live 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), or the number of complementary products sold in addition to UltiPro to a single customer, which in some cases involve customers’ desires to go Live on all products at once, as compared to UltiPro first, followed by complementary products.

 
To the extent there are changes in the underlying assumptions which drive Ultimate’s expected revenue growth from SaaS sales, which include, but are not limited to, actual sales production achieved and changes in Time to Live, our recurring revenues, as reported in our consolidated statements of operations, could differ materially from levels we expected to achieve.

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:

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The volatility inherent in stock prices within the sector in which we conduct business;
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The volume of trading in our Common Stock, including sales upon exercise of outstanding stock options and the vesting of restricted stock and restricted stock units;
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Failure to achieve earnings expectations;
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Changes in our earnings estimates by analysts;
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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
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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.
 
We have incurred operating losses in the past and may incur operating losses in the future.
 
We have incurred operating losses in the past and we may incur operating losses in the future. As of December 31, 2010, our accumulated deficit was approximately $52.3 million.  If our future total revenues do not grow at a higher rate than that of our total expenses, our future operating results could be negatively impacted.  Recent revenue growth should not be considered as indicative of our future performance, particularly with respect to the recent economic environment and the potential impact on our revenue streams, as our subscription revenues from our SaaS Offering are largely impacted by the employee growth or contraction of our existing customer base and customer spending patterns have a significant impact on our services revenues with respect to both the timing and extent of our services they purchase, combined with our business decision to eliminate sales of perpetual license agreements for the UltiPro on-site solutions for new customers (and thereby eliminate prospective license revenues derived from any such agreements).
 
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.  The state of the economy and the rate of employment, which deteriorated in the recent broad recession, may deteriorate more in the future.  If weakness in the economies of the U.S. and other countries persists, 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 Features 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. Any of these events would likely harm our business, results of operations, financial condition and cash flows from operations.
 
 
 
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 core product and Optional Features and related services, account for substantially all of our revenues. Our future success depends on maintaining and increasing acceptance of UltiPro, particularly the SaaS Offering and related services. 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 either of the data centers owned and managed by QTS or at the data center owned and managed by Verizon 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 two data centers owned and operated by QTS—one near Atlanta, Georgia and another one near Miami, Florida.  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 Verizon near Toronto, Canada.
 
These hosting services, which are provided as part of our SaaS 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 SaaS Offering depends on our ability to protect the infrastructure, equipment and customer data files against damage from:
 
 
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Human error;
 
 
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Natural disasters;
 
 
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Power loss or telecommunication failures;
 
 
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Sabotage or other intentional acts of vandalism; and
 
 
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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 includes risk assessment and business impact analysis, redundancy and crisis and emergency response procedures.  Verizon 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:
 
 
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Result in interruptions in the services we provide to our customers, during which time our customers may be unable to retrieve their data;
 
 
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Require us to spend substantial amounts of money replacing existing equipment and/or purchasing services from an alternative data center;
 
 
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Cause existing customers to cancel their contracts;
 
 
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Cause our customers to seek damages for losses incurred; or
 
 
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Make it more difficult for us to attract new customers.
 
 
 
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.
 
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:
 
 
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Enhance our current products and introduce new products in order to keep pace with products offered by our competitors;
 
 
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Adapt to technological advancements and changing industry standards; and
 
 
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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.
 
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:
 
 
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Large service bureaus, primarily ADP and, to a lesser extent, Ceridian;
 
 
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A number of companies, such as PeopleSoft/Oracle, Lawson, Kronos, and Workday that offer HCM software products for use on mainframes, client/server environments and/or Web servers; and, in the UltiPro Workplace market, payroll service providers such as ADP, Ceridian and Paychex that service companies on the smaller end of the mid-market; and
 
 
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The internal HR/payroll departments of potential customers which use custom-written software.
 
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.
 
 
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 other than a confidentiality agreement with Mr. Scherr. 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. 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.
 
 
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 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.
 
Our software products may be vulnerable to break-ins and similar disruptive problems; addressing these issues may be expensive and require a significant amount of our resources.
 
We have included security features in our products that are intended to protect the privacy and integrity of customer data. Despite the existence of these security features, our software products may be vulnerable to break-ins and similar disruptive problems. Addressing these evolving security issues may be expensive and require a significant amount of our resources.
 
 
 
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 license 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 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 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 may prevent a stockholder from gaining control 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 our three 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 employees, other than named executive officers, 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 payment 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 Plans 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 the United Kingdom (“UK”) (through the acquisition of a foreign subsidiary) and Canada (through the formation of a wholly-owned Canadian subsidiary).  During 2010, we discontinued and liquidated our operations in the UK while we continued to grow our operations in Canada.  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 cancelled 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 amortizable 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 amortizable intangible assets for impairment when events or changes in circumstances indicate 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 amortizable 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, 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 amortizable 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 stock-based compensation; 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 has become 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.
 

None.

 

As of December 31, 2010, Ultimate’s corporate headquarters, and its principal administrative, technology, customer support, finance, marketing and information technology operations were located in Weston, Florida.  Ultimate’s principal facilities are described below:

   
Size
 
Lease
     
Location
 
(sq. ft.)
 
Termination
 
General Use
 
Weston, FL – HQ
 
39,872
 
1/31/2017
 
Technology
 
Weston, FL – HQ
 
21,392
 
1/31/2018
 
Executive Management and Customer Support
 
Atlanta, GA  (1)
 
24,609
 
3/31/2011
 
Professional Services and Customer Support
 
Atlanta, GA (2)
 
5,263
 
9/30/2011
 
Professional Services and Customer Support
 
Atlanta, GA (3)
 
49,172
 
5/31/2019
 
Professional Services and Customer Support
 
               
Weston, FL – HQ (4)
 
5,000
 
Owned
 
Information Technology and Hosting Services
 
Weston, FL – HQ (5)
 
30,000
 
5/31/2015
 
Sales Administration, Marketing, Professional Services and Finance
 
Weston, FL – HQ (6)
 
19,950
 
3/31/2018
 
Corporate Support and Information Technology
 
Weston, FL – HQ (7)
 
8,000
 
2/29/2016
 
Technology
 
Schaumburg, Illinois (8)
 
7,861
 
6/30/2014
 
Administration and Training
 
Toronto, Ontario  (9)
 
2,115
 
12/31/2015
 
Professional Services and Customer Support
 
_____________________

(1)  
During the second fiscal quarter of 2006, Ultimate entered into a 79-month lease agreement for office space in Atlanta, Georgia.  Ultimate moved a portion of its service and support operations into this building in August 2006.  In August 2006, Ultimate amended the lease to expand the premises by 10,300 square feet, extend the lease term to 2013 and increase the monthly rental amount.  This lease will terminate on March 31, 2011 as Ultimate entered into a new replacement lease during the first fiscal quarter of 2011 as discussed in (3) below.
(2)  
During the third fiscal quarter of 2009, Ultimate entered into a 24-month lease agreement for office space in Atlanta, Georgia in a building within a short distance of the other Atlanta, Georgia locations.
(3)  
During the first fiscal quarter of 2011, Ultimate entered into a 100-month lease agreement for office space in a building within a short distance of the other Atlanta, Georgia locations.  This lease was entered into after the early termination of the lease discussed in (1) above to accommodate continued growth.  This lease covers approximately twice the square footage of the original lease in (1) above.
(4)  
In December 2004, Ultimate purchased, with available cash, all the available square footage of a building adjacent to its main headquarters buildings that serves as an extension of Ultimate’s corporate headquarters.
(5)  
In January 2008, Ultimate entered into an 84-month lease agreement for a fourth headquarters building located in Weston, Florida within a short distance of the other headquarters locations.  Ultimate moved a portion of its operations into this building in June 2008. After this move, we modified the general use of the remaining three headquarters locations.
(6)  
In November 2010, Ultimate entered into an 84-month lease agreement for a fifth headquarters building located in Weston, Florida within a short distance of the other headquarters locations.  Ultimate moved a portion of its operations into this building in January 2011.
(7)  
In November 2010, Ultimate entered into a 60-month lease agreement for a sixth headquarters building located in Weston, Florida within a short distance of the other headquarters locations.  Ultimate moved a portion of its operations into this building in January 2011.
(8)  
During the fourth quarter of 2008, Ultimate entered into a 65-month lease agreement for office space in Schaumburg, Illinois to accommodate general office space and training facilities.
(9)  
During the third fiscal quarter of 2009, Ultimate entered into a 64-month lease agreement for new office space in Toronto, Ontario with RT Twenty-Sixth Pension Properties Limited to accommodate continued growth in Canada.

Currently, we also lease office space for our sales operations in Albany, New York; Atlanta, Georgia; Dallas, Texas; Detroit, Michigan; Nashville, Tennessee; Lee’s Summit, Missouri; Troy, Michigan; Ann Arbor, Michigan; Overland Park, Kansas; Jacksonville, Florida; Omaha, Nebraska; and Prairie Village, Kansas. Sales operations in other locations are not supported by leased office space.  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.
 
 

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.



PART II


Market Information.  The following table sets forth, for the periods indicated, the high and low sales prices of Ultimate’s Common Stock, as quoted on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “ULTI”.
 
   
2010
   
2009
 
 
 
High
   
Low
   
High
   
Low
 
First Quarter
  $ 34.94     $ 26.81     $ 18.96     $ 12.40  
Second Quarter
    37.25       30.90       26.92       16.49  
Third Quarter
    39.23       31.38       29.50       20.17  
Fourth Quarter
    50.28       37.50       31.66       24.73  

As of February 18, 2011, we had approximately 121 holders of record, representing approximately 2,876 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, 2005-December 31, 2010, on an annual basis, with the cumulative total return of The Nasdaq Composite Index and the RDG Software Composite Index for the same period.
 
                                                                                                     Five Year Total Return
                                                                                                  
 
 
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.

 As of December 31, 2010, Ultimate had purchased 3,594,825 shares of our Common Stock under the Stock Repurchase Plan, with 405,175 shares available for repurchase in the future.  No shares of Common Stock were repurchased by us during the three months ended December 31, 2010 as indicated below:

Period
 
Total Number of Shares Purchased
   
Average Price Paid per Share
   
Total Cumulative Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
 
October 1 – 31, 2010
                3,594,825       405,175  
November 1 – 30, 2010
                3,594,825       405,175  
December 1 – 31, 2010
                3,594,825       405,175  
Total
        $       3,594,825       405,175  
                                 
 
 
 

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, 2010 and the balance sheet data as of December 31, 2010 and 2009 have been derived from our Consolidated Financial Statements included elsewhere in this Form 10-K.

   
Years Ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
Statements of Operations Data:
                             
Revenues:
                             
   Recurring
  $ 170,905     $ 133,159     $ 106,198     $ 86,191     $ 63,683  
   Services
    55,368       58,996       60,535       49,492       38,580  
   License
    1,538       4,125       11,264       14,372       12,237  
      Total revenues
    227,811       196,280       177,997       150,055       114,500  
                                         
Cost of revenues:
                                       
   Recurring
    49,144       38,765       29,605       22,525       17,786  
   Services
    49,843       48,304       50,058       39,995       30,131  
   License
    255       750       1,795       1,659       1,389  
      Total cost of revenues
    99,242       87,819       81,458       64,179       49,306  
Gross profit
    128,569       108,461       96,539       85,876       65,194  
                                         
Operating expenses:
                                       
   Sales and marketing
    58,374       52,810       47,193       36,109       29,248  
   Research and development
    42,222       38,005       36,025       27,536       22,265  
   General and administrative
    19,727       17,803       17,516       14,182       10,597  
      Total operating expenses
    120,323       108,618       100,734       77,827       62,110  
      Operating income (loss)
    8,246       (157 )     (4,195 )     8,049       3,084  
                                         
Other (expense) income:
                                       
   Interest expense and other
    (263 )     (90 )     (243 )     (170 )     (194 )
   Other income, net
    188       162       857       5,988       1,538  
Total other (expense) income, net
    (75 )     72       614       5,818       1,344  
Income (loss) from continuing operations before income taxes
    8,171       (85 )     (3,581 )     13,867       4,428  
   (Provision) benefit for income taxes
    (5,161 )     (721 )     1,016       19,596       (89 )
Income (loss) from continuing operations
    3,010       (806 )     (2,565 )     33,463       4,339  
   Loss from discontinued operations, net of income taxes
    (853 )     (336 )     (332 )     (334 )     (206 )
Net income (loss)
  $ 2,157     $ (1,142 )   $ (2,897 )   $ 33,129     $ 4,133  
                                         
Basic earnings (loss) per share: (1)
                                       
   Earnings (loss) from continuing operations
  $ 0.12     $ (0.04 )   $ (0.10 )   $ 1.35     $ 0.18  
   Loss from discontinued operations
    (0.03 )     (0.01 )     (0.02 )     (0.01 )     (0.01 )
   Total
  $ 0.09     $ (0.05 )   $ (0.12 )   $ 1.34     $ 0.17  
                                         
Diluted earnings (loss) per share: (1)
                                       
   Earnings (loss) from continuing operations
  $ 0.11     $ (0.04 )   $ (0.10 )   $ 1.25     $ 0.16  
   Loss from discontinued operations
    (0.03 )     (0.01 )     (0.02 )     (0.01 )     (0.01 )
   Total
  $ 0.08     $ (0.05 )   $ (0.12 )   $ 1.24     $ 0.15  
                                         
Weighted average shares outstanding: (1)
                                       
   Basic
    24,960       24,463       24,588       24,701       23,853  
   Diluted
    27,101       24,463       24,588       26,722       26,978  
Balance Sheet Data:
 
As of December 31,
 
      2010       2009       2008       2007       2006  
Cash and cash equivalents
  $ 40,889     $ 23,684     $ 17,200     $ 17,462     $ 16,734  
Investments in marketable securities
    9,317       9,523       5,805       18,418       16,286  
Total assets
    249,557       171,130       147,257       135,156       93,530  
Deferred revenue
    78,095       68,559       63,494       51,708       42,969  
Long-term borrowings, including capital lease obligations
    2,406       1,710       1,519       2,311       1,610  
Stockholders’ equity
  $ 72,985     $ 57,770     $ 51,072     $ 60,978     $ 31,022  
                                         
(1) See Note 9 of the Notes to the Consolidated Financial Statements for information regarding the computation of net income (loss) per share.
 
 
 

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 Policies and Estimates in this section is an integral part of the analysis of our results of operations and financial condition.

Overview

Ultimate is a leading provider of unified human capital management (“HCM”) software-as-a-service (“SaaS”) solutions for global businesses.

Ultimate’s UltiPro software (“UltiPro”) is a comprehensive SaaS-based solution delivered primarily to organizations based in the United States and Canada and designed to deliver the functionality businesses need to manage the complete employment life cycle from recruitment to retirement. The solution includes feature sets for talent acquisition and onboarding, human resources (“HR”) management and compliance, benefits management and online enrollment, payroll, performance management, learning management, salary planning and budgeting for compensation management, reporting and analytical decision-making tools, and time and attendance.  UltiPro has role-based self-service capabilities for executives, managers, administrators, and employees whether they are in or out of the office, including an UltiPro application for use on the iPhone or iPad.

Our SaaS offering of UltiPro (the “SaaS 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 SaaS Offering is attractive to companies that want to focus on their core competencies to increase sales and profits. Through the SaaS Offering, we supply and manage the hardware, infrastructure, ongoing maintenance and backup services for our customers.  Customer systems are managed at three data centers, one located in the Miami, Florida area, one in the Atlanta, Georgia area, and another in Toronto, Canada. All data centers are owned and operated by independent third parties.

UltiPro is marketed as two solution suites, based on company size.  UltiPro Enterprise (“Enterprise”) is designed to address the needs of companies with 1,000 or more employees and is delivered primarily through SaaS but is also available as an on-premise solution.  UltiPro Workplace (“Workplace”) is designed for companies with fewer than 1,000 employees and is delivered exclusively through SaaS.  UltiPro Workplace provides medium-sized and smaller companies with nearly all the features that larger Enterprise companies have with UltiPro, plus a bundled services package. Since many companies in this market do not have IT staff on their premises to help with system issues, UltiPro Workplace is designed to give these customers a high degree of convenience by handling system setup, business rules, and other situations for customers “behind the scenes.”  UltiPro is marketed primarily through Ultimate’s Enterprise and Workplace direct sales teams.

In addition to UltiPro’s core HCM functionality, our customers have the option to purchase a number of additional features on a per-employee-per-month (“PEPM”) basis, which are available to enhance the functionality of UltiPro’s core features which are based on the particular business needs of the customers.  These optional UltiPro features currently include (i) the talent management suite of products (recruitment, onboarding, performance management, learning management, salary planning and budgeting for compensation management, and employee relations tools for managing disciplinary actions, grievances, and succession planning); (ii) benefits enrollment; (iii) time, attendance and scheduling; (iv) time management; (v) tax filing; (vi) wage attachments; and (vii) other optional features (collectively, UltiPro “Optional Features”).  All Optional Features are individually priced solely on a subscription basis.  Some of the Optional Features are available to both Enterprise and Workplace customers while others are available exclusively to either Enterprise or Workplace customers, and availability is based on the needs of the respective customer types, including the number of their employees and the complexity of their HCM environment.

The key drivers of our business and indicators of financial condition and operating performance are (i) growth in recurring revenues; (ii) the retention of the underlying customers, once our solutions are sold (“Customer Retention”) and (iii) management’s control of operating expense growth.  For the year ended December 31, 2010, our (i) recurring revenues grew by 28% over those for the year ended December 31, 2009, (ii) annual Customer Retention was 96%, and (iii) operating expenses grew by 10.8% compared with the year ended December 31, 2009.

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.  We provide our sales personnel with comprehensive and continuing training with respect to technology and market place developments.  Aside from sales commissions, we also provide various incentives to encourage our sales representatives, including stock-based compensation awards based upon performance.

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 deterioriate, 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.

Ultimate has two primary revenue sources:  recurring revenues and services revenues.  Revenues from our SaaS Offering and customer support and maintenance revenues are the primary components of recurring revenues.  The majority of services revenues are derived from implementation services.

We discontinued selling our on-site UltiPro solutions to new customers on a perpetual license basis in April 2009, although we continue to sell on-site UltiPro solutions on a subscription basis (priced and billed to customers on a PEPM basis). We sell licenses to existing license customers but only in relation to the customer’s employee growth or for Optional Features if the customer already has a perpetual license for the on-site UltiPro solutions.  As perpetual license agreements were sold, 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.  We have historically maintained a steady Customer Retention rate for our renewal maintenance agreements and do not believe our decision to discontinue new sales of perpetual license agreements will materially affect our future maintenance revenues (as they relate to existing license customers).

As SaaS units are sold, the recurring revenue backlog associated with the SaaS Offering grows, enhancing the predictability of future revenue streams.  SaaS sales include ongoing monthly subscription fees, priced on a PEPM basis, and, to a lesser extent, a one-time upfront (or setup) fee, priced on a per-employee basis.  Revenue recognition for the SaaS Offering is triggered when the customer processes its first payroll using UltiPro (or goes “Live”).  When a SaaS customer goes Live, we begin recognizing the associated ongoing monthly PEPM fees and the related upfront fees are recognized as recurring subscription revenues ratably over the term of the related contract (typically 24 months).

During the year ended December 31, 2010, Ultimate discontinued the operations of The Ultimate Software Group UK Limited, our wholly-owned subsidiary in the United Kingdom.  Loss from discontinued operations, net of income taxes, for the year ended December 31, 2010, was principally comprised of $0.9 million from the realization of a non-cash foreign currency translation adjustment.
 
Critical Accounting Policies and Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Revenue Recognition
 
Our revenues are generated from the delivery of our SaaS Offering (including the right to use UltiPro and software maintenance services), professional services and, to a much lesser degree, the sale of software licenses.
 
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.
 
 
Recurring Revenues
 
Recurring revenues consist of subscription revenues recognized from our SaaS Offering of UltiPro, as well as customer support and maintenance revenues.
 
a)  
Subscription revenues are principally derived from PEPM fees earned from the SaaS Offering and from sales of hosting services on a stand-alone basis to customers who already own a perpetual license (“Base Hosting”). To the extent there are upfront or setup fees associated with our SaaS Offering, subscription revenues are recognized ratably over the term of the related contract, commencing upon the related Live date.  Ongoing PEPM fees from the SaaS Offering and Base Hosting are recognized as subscription revenues as the services are delivered commencing when the customer goes Live.
 
b)  
Customer support and maintenance revenues are derived from maintaining, supporting, and providing periodic updates of our software for our hosting services.
 
Under our SaaS Offering, our customers do not have the right to take possession of our software and these arrangements are considered service contracts. SaaS revenues are recognized ratably over the contract term, commencing upon the delivery of the product and services, which is when the customer goes Live. Fair value of multiple elements in SaaS arrangements is derived for each element based on the guidance provided by Accounting Standards Codification 605, “Revenue Recognition”. The multiple elements that typically exist in SaaS arrangements include hosting services, the right to use UltiPro, maintenance of UltiPro (i.e., product enhancements and updates and customer support) and professional services (i.e., primarily implementation 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 operations, allocation of fair values to each of the three elements is not necessary and they are not reported separately.  Fair value for the bundled elements, as a whole, is determined on the basis of renewal pricing, not taking into consideration potential price increases or changes in the number of underlying employees caused by eventual changes in the size of the customer in the future due to the uncertainties surrounding these future 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. If evidence of the fair value of one or more undelivered elements does not exist, the revenue for the total arrangement is deferred and recognized when delivery of those elements occurs or when fair value can be established.
 
Services Revenues

Services revenues primarily include revenues from fees charged for the implementation of our product solutions and, to a lesser extent, training of customers in the use of our products and fees for other services, including the provision of payroll-related forms and the printing of Forms W-2 for certain customers, as well as certain reimbursable out-of-pocket expenses.  Revenues from implementation services comprise the majority of total services revenues.
 
Revenues from implementation consulting services billed on a time and materials basis (at an hourly rate) are recognized as these services are performed based on their relative fair values.  The total arrangement consideration is allocated to service elements in the arrangement based on their relative fair values, using the prices established when the services are sold on a stand-alone basis.  Other services are recognized as the product is shipped or as the services are rendered, depending on the specific terms of the related arrangement.
 
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 compared to the total estimate to complete the implementation job.
 
License Revenues
 
From our inception through March 31, 2009, we sold perpetual licenses of UltiPro which resulted in license revenues recognized for that period of time.  Customer support and maintenance revenues, from previously sold perpetual license deals, are derived from maintaining, supporting, and providing periodic updates of our software.  Maintenance fees are generally priced as a percentage of the initial perpetual license fee for the underlying products.  Maintenance revenues are recognized ratably over the service period, generally one year, and are included in recurring revenues.  Annual maintenance renewal fees which occur subsequent to the initial contract period are also recognized ratably over the related service period.

 
While we still sell on-site licenses of UltiPro, sales to new customers are only on a subscription basis (priced and billed to our customers on a PEPM basis).  Effective April 1, 2009, we no longer sell our on-site UltiPro solutions to new customers on a perpetual license basis. We do sell licenses to existing license customers but only in relation to the customer’s employee growth or for products complementary to UltiPro for which they already have a perpetual license. Any such licenses are recognized as license revenues in our consolidated financial statements upon the delivery of the related software product when all significant contractual obligations have been satisfied.

 
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 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, 2010 included, among other factors, three years of cumulative historical operating profits and a projection of future financial and taxable income.  As a result of our analysis of all available evidence, both positive and negative, at December 31, 2010, it was considered more likely than not that a valuation allowance for deferred tax assets was not required.

As of December 31, 2010, we believed it more likely than not that the amount of the deferred tax assets recorded on the consolidated balance sheet will ultimately be recovered.  However, should there be a change in our ability to recover the deferred tax assets, the tax provision would increase in the period in which it is determined that recovery is not probable.

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.

   
For the Years Ended December 31,
 
   
2010
   
2009
   
2008
 
Revenues:
                 
   Recurring
    75.0 %     67.8 %     59.7 %
   Services
    24.3       30.1       34.0  
   License
    0.7       2.1       6.3  
      Total revenues
    100.0       100.0       100.0  
Cost of revenues:
                       
   Recurring
    21.6       19.7       16.7  
   Services
    21.9       24.6       28.1  
   License
    0.1       0.4       1.0  
      Total cost of revenues
    43.6       44.7       45.8  
Gross profit
    56.4       55.3       54.2  
Operating expenses:
                       
   Sales and marketing
    25.6       26.9       26.5  
   Research and development
    18.5       19.3       20.2  
   General and administrative
    8.7       9.1       9.9  
      Total operating expenses
    52.8       55.3       56.6  
      Operating income (loss)
    3.6             (2.4 )
Other income (expense):
                       
   Interest expense and other
    (0.1 )           (0.1 )
   Other income, net
    0.1             0.5  
Total other income (expense), net
                0.4  
Income (loss) from continuing operations before income taxes
    3.6             (2.0 )
   (Provision) benefit for income taxes
    (2.3 )     (0.4 )     0.6  
Income (loss) from continuing operations
    1.3       (0.4 )     (1.4 )
   Loss from discontinued operations, net of taxes
    (0.4 )     (0.2 )     (0.2 )
Net income (loss)
    0.9 %     (0.6 ) %     (1.6 ) %
                         

 
Comparison of Fiscal Years Ended December 31, 2010 and 2009

Revenues

Our revenues are derived from recurring revenues, services revenues and, to a 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, consisting of recurring, services and license revenues, increased 16.1% to $227.8 million for 2010 from $196.3 million for 2009.

Recurring revenues increased 28.3% to $170.9 million for 2010 from $133.2 million for 2009.  The increase in recurring revenues for 2010 was primarily due to an increase in SaaS revenues, partially offset by a decrease in maintenance revenues, as described below:

 
i)
SaaS revenues increased 39.9% for 2010, primarily due to the continued growth of the SaaS Offering, which comprised the majority of unit sales. The increase in SaaS revenues is based on the revenue impact of incremental units that have gone Live since December 31, 2009, including the UltiPro core product and, to a lesser extent, Optional Features of UltiPro.  Recognition of recurring revenues for SaaS sales commences upon the Live date.
 
 
ii)
Maintenance revenues from previously sold licenses decreased 3.3% primarily due to the fact we stopped selling licenses on a perpetual basis to new customers effective April 1, 2009.  Maintenance revenues are recognized over the initial term of the related license contract, which is typically 12 months, and then on a monthly recurring basis thereafter as the maintenance contracts renew annually.
 
 
iii)
Our annual revenue customer retention rate for total recurring revenues was 96% in 2010.  This rate is comprised of an annual retention rate exceeding 96% for existing SaaS customers and an annual retention rate of approximately 95% for existing license customers from which renewal maintenance revenues are derived.
 
 
iv)
The impact on recurring revenues of units sold under the SaaS Offering has been a gradual increase from one reporting period to the next, based on the incremental effect of revenue recognition of the SaaS fees over the terms of the related contracts as sales in backlog go Live.
 
Services revenues decreased 6.1% to $55.4 million for 2010 from $59.0 million for 2009 primarily as a result of a decrease in implementation revenues. Implementation revenues decreased due to lower billable hours from a reduction in revenue-generating consultants and a lower net rate per hour, partially offset by increased services revenues from our Workplace solution.

License revenues decreased 62.7% to $1.5 million for 2010 from $4.1 million for 2009.  The decrease in 2010 was principally due to Ultimate’s decision not to sell perpetual licenses to new customers after April 1, 2009.
 
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 services and training to our customers and, to a lesser degree, costs related to sales of payroll-related forms and costs associated with certain client reimbursable out-of-pocket expenses.

Cost of recurring revenues increased 26.8% to $49.1 million for 2010 from $38.8 million for 2009.  The $10.3 million increase in the cost of recurring revenues for the year was primarily due to increases in both SaaS costs and customer support and maintenance costs as described below:
 
 
i)  The increase in SaaS costs was principally a result of the growth in SaaS operations and increased sales, including increased labor costs, costs related to our tax filing services (as we continue to grow that business) and, to a lesser extent, increased hosting data center costs.
 

 
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 3.2% to $49.8 million for 2010 from $48.3 million for 2009.  The $1.5 million increase in cost of services revenues was primarily due to an increase in labor costs to support the increased sales from our Workplace solution.

Cost of license revenues decreased by $0.5 million, or 66.0%, to $0.3 million for 2010 from $0.8 million in 2009.  This decrease in cost was principally due to our decision not to sell perpetual licenses to new customers effective April 1, 2009.
 
 
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 10.5% to $58.4 million for 2010 from $52.8 million for 2009.  The $5.6 million increase for the year was primarily due to increased labor and related costs (including higher sales commissions related to increased SaaS sales), and increased advertising and marketing costs.  The overall increase in sales and marketing expenses was partially offset by lower commissions on license sales which correlates with the decrease in license revenues.  Commissions on SaaS sales are amortized over the initial contract term (typically 24 months) commencing on the Live date, which corresponds with the related SaaS revenue recognition.

Research and Development

Research and development expenses consist primarily of software development personnel costs. Research and development expenses increased 11.1% to $42.2 million in 2010 from $38.0 million, net of capitalized software costs, in 2009.  The increase in research and development expenses during 2010 was principally due to higher labor costs related to the ongoing development of UltiPro and complementary products, including the impact of increased personnel costs (predominantly from additional headcount) and, to a lesser extent, increased third-party consulting costs.
 
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 10.8% to $19.7 million for 2010 from $17.8 million for 2009.  The increase in general and administrative expenses for 2010 was primarily due to increased labor and related costs, an increase  in the provision for doubtful accounts and, to a lesser extent, increased professional fees.
 
Interest Expense and Other

Interest expense and other increased $173 thousand, or 192.2%, to $263 thousand for 2010 from $90 thousand for 2009.

Other Income, net

Other income, net, increased by 16.0% to $188 thousand for 2010 from $162 thousand for 2009.

(Provision) Benefit for Income Taxes

Based on income from continuing operations, in 2010 we had income tax expense of $5.2 million as compared to $0.7 million in 2009.  The increase in income tax expense of $4.4 million was primarily due to an increase in pre-tax book income and non-deductible expenses and a decrease in our foreign valuation allowance.  Net operating loss carryforwards available at December 31, 2010, expiring at various times from 2011 through 2030 and which are available to offset future U.S. taxable income, approximated $91.6 million. The timing and levels of future profitability may result in the expiration of net operating loss carryforwards before utilization. Additionally, utilization of such net operating losses may be limited as a result of cumulative ownership changes in our equity instruments.

We recognized $24.4 million of deferred tax assets, net of deferred tax liabilities, as of December 31, 2010.  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.

 
Comparison of Fiscal Years Ended December 31, 2009 and 2008

Revenues
 
Total revenues increased 10.3% to $196.3 million for 2009 from $178.0 million for 2008.

Recurring revenues increased 25.4% to $133.2 million for 2009 from $106.2 million for 2008.  The increase in recurring revenues for 2009 was primarily due to increases in SaaS revenues and, to a lesser extent, maintenance revenues, partially offset by a decrease in subscription revenues from an agreement with an independent third-party provider, as described below:

 
i)
SaaS revenues increased 39.9% for 2009 from 2008, primarily due to the continued growth of the SaaS Offering, which comprised the majority of unit sales. The increase in SaaS revenues was based on the revenue impact of incremental units that have gone Live since December 31, 2008, including the UltiPro core product and, to a lesser extent, Optional Features of UltiPro.  SaaS revenues from the UltiPro Workplace solution in 2009 also contributed to the year-over-year growth, particularly since this solution was introduced late in 2007 and was ramping up in 2008.  Our annual recurring revenue customer retention rate of 97% in 2009 for existing SaaS customers also contributed to the growth in SaaS revenues when combined with incremental revenues resulting from additional customers going Live in 2009 as compared to 2008.
 
 
ii)
Maintenance revenues from license sales increased 2.1% primarily due to annual price increases to existing customers combined with our annual recurring revenue customer retention rate of 97% in 2009.  We also converted some of our existing maintenance customers to SaaS, which contributed to the marginal increase in maintenance revenues.  Since we stopped selling licenses on a perpetual basis to new customers effective April 1, 2009, we do not expect to have significant increases in our customer support and maintenance revenues.
 
 
iii)
Recurring subscription revenues decreased 40.4% in 2009.  This decrease was primarily due to the termination of an agreement with an independent third-party provider effective March 9, 2008, at which time the related revenue recognition ended. There was no revenue recognized in 2009 under such agreement whereas in 2008, revenue recognized under this agreement amounted to $1.5 million.
 
Services revenues decreased 2.5% to $59.0 million for 2009 from $60.5 million for 2008 primarily as a result of a decrease in training revenues mainly attributable to decreased classroom attendance, lower virtual training revenues and lower revenues from on-site training.  Implementation revenues were comparable to those of the prior year due to higher billable hours from increased utilization of our revenue-generating consultants offset by fewer hours from third-party implementation partners (“IPs”).

License revenues decreased 63.4% to $4.1 million for 2009 from $11.3 million for 2008.  The decrease in 2009 was principally due to Ultimate’s decision not to sell perpetual licenses to new customers after April 1, 2009.
 
Cost of Revenues

Cost of recurring revenues increased 30.9% to $38.8 million for 2009 from $29.6 million for 2008.  The $9.1 million increase in cost of recurring revenues for the year was primarily due to increases in both SaaS costs and customer support and maintenance costs as described below:
 
 
i)  The increase in SaaS costs was principally as a result of the growth in SaaS operations and increased sales, including higher depreciation and amortization of related computer equipment supporting the hosting operations, increased Microsoft licenses for our customer base, increased hosting data center costs and, to a lesser extent, increased labor costs, amortization of capitalized software and increased third-party royalty fees for UltiPro Time and Attendance sales.
 
 
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 decreased 3.5% to $48.3 million for 2009 from $50.1 million for 2008.  The $1.8 million decrease in cost of services revenues was primarily due to a decrease in implementation costs, which was mainly attributable to lower costs for third-party IPs as we had fewer hours worked by third-party IPs in 2009, partially offset by an increase in labor costs associated with building the Workplace implementation infrastructure.

Cost of license revenues decreased by $1.0 million, or 58.2%, to $0.8 million for 2009 from $1.8 million in 2008.  This decrease was principally due to fewer units sold due to our decision not to sell perpetual licenses to new customers effective April 1, 2009.
 
 
Sales and Marketing

Sales and marketing expenses increased 11.9% to $52.8 million for 2009 from $47.2 million for 2008.  The $5.6 million increase for the year was primarily due to increased labor and related costs attributable to hiring additional direct sales force personnel (particularly for our Workplace sales organization) and higher sales commissions principally related to increased SaaS sales.  The overall increase was partially offset by lower commissions on license sales which correlate to the decrease in license revenues.  Commissions on license sales were recognized when the license revenues were recognized, which is when the product was shipped.  Commissions on SaaS sales are amortized over the initial contract term (typically 24 months) commencing on the Live date, which corresponds with the commencement of SaaS revenue recognition.

Research and Development

Research and development expenses, net of capitalized software costs, increased 5.5% to $38.0 million in 2009 from $36.0 million in 2008.  The increase in research and development expenses during 2009 was principally due to higher labor costs related to the ongoing development of UltiPro and complementary products, including the impact of increased personnel costs (predominantly from additional headcount), partially offset by decreased third-party consulting costs.
 
General and Administrative
 
General and administrative expenses increased by 1.6% to $17.8 million for 2009 from $17.5 million for 2008.  The increase for 2009 was primarily due to increased professional fees and, to a lesser extent, increased third-party consulting fees, partially offset by a lower provision for doubtful accounts.
 
Interest Expense and Other

Interest expense and other decreased $153 thousand, or 63.0%, to $90 thousand for 2009 from $243 thousand for 2008.

Other Income, net

Other income, net, decreased by 81.1% to $162 thousand for 2009 from $857 thousand for 2008 primarily due to a decrease in interest rates.

(Provision) Benefit for Income Taxes

In 2009, we had income tax expense of $0.7 million as compared to an income tax benefit of $1.0 million in 2008.  The increase in income tax expense of $1.7 million is primarily due to increased pre-tax book income, non-deductible expenses and our foreign valuation allowance.  Net operating loss carryforwards available at December 31, 2009, expiring at various times from 2011 through 2029 and which are available to offset future U.S. taxable income, approximated $82.1 million. The timing and levels of future profitability may result in the expiration of net operating loss carryforwards before utilization. Additionally, utilization of such net operating losses may be limited as a result of cumulative ownership changes in our equity instruments.

We recognized $20.9 million of deferred tax assets, net of deferred tax liabilities, as of December 31, 2009.
 
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, 2010 and 2009. 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.

 
 
 
29

Quarters Ended
 
Dec. 31, 2010
   
Sep. 30, 2010
   
Jun. 30, 2010
   
Mar. 31, 2010
   
Dec. 31, 2009
   
Sep. 30, 2009
   
Jun. 30, 2009
   
Mar. 31, 2009
 
(In thousands, except per share amount)
                                               
                     
(Unaudited)
                         
Revenues:
                                               
Recurring
  $ 46,038     $ 44,054     $ 41,365     $ 39,448     $ 35,700     $ 34,092     $ 32,544     $ 30,822  
Services
    13,959       12,796       13,032       15,581       15,894       13,778       13,407       15,915  
License
    409       181       320       628       598       252       1,274       2,001  
Total revenues
    60,406       57,031       54,717       55,657       52,192       48,122       47,225       48,738  
Cost of revenues:
                                                               
Recurring
    13,101       12,591       12,048       11,404       10,441       9,917       9,534       8,873  
Services
    12,932       11,853       11,877       13,181       13,312       11,586       11,095       12,311  
License
    105             50       100       152             261       337  
Total cost of revenues
    26,138       24,444       23,975       24,685       23,905       21,503       20,890       21,521  
Gross profit
    34,268       32,587       30,742       30,972       28,287       26,619       26,335       27,217  
Operating expenses:
                                                               
Sales and marketing
    14,038       14,640       14,580       15,116       13,042       13,049       12,884       13,835  
Research and development
    10,790       10,679       10,520       10,233       9,544       9,763       9,469       9,226  
General and administrative
    4,708       4,849       5,169       5,001       4,596       4,337       4,322       4,548  
Total operating expenses
    29,536       30,168       30,269       30,350       27,182       27,149       26,675       27,609  
Operating income (loss)
    4,732       2,419       473       622       1,105       (530 )     (340 )     (392 )
Other (expense) income:
                                                               
    Interest and other expense
    (69 )     (88 )     (61 )     (45 )     (6 )     (19 )     (28 )     (36 )
    Other income, net
    53       68       45       22       21       30       39       72  
 Total other (expense) income, net
    (16 )     (20 )     (16     (23 )     15       11       11       36  
Income (loss) from continuing operations before income taxes
    4,716       2,399       457       599       1,120       (519 )     (329 )     (356 )
Income tax benefit (expense), net
    (3,270 )     (1,426 )     (186 )     (279 )     (974 )     165       72       16  
Income (loss) from continuing operations
    1,446       973       271       320       146       (354 )     (257 )     (340 )
Income (loss) from discontinued operations, net of income taxes
          77       (865 )     (65 )     (76 )     (115 )     (73 )     (73 )
Net income (loss)
  $ 1,446     $ 1,050     $ (594 )   $ 255     $ 70     $ (469 )   $ (330 )   $ (413 )
                                                                 
Basic earnings (loss) per share:
                                                               
    Earnings (loss) from continuing operations
  $ 0.06     $ 0.04     $ 0.01     $ 0.01     $     $ (0.01 )   $ (0.01 )   $ (0.02 )
    Loss form discontinued operations
                (0.03 )                 (0.01 )            
Total
  $ 0.06     $ 0.04     $ (0.02 )   $ 0.01     $     $ (0.02 )   $ (0.01 )   $ (0.02 )
                                                                 
Diluted earnings (loss) per share:
                                                               
    Earnings (loss) from continuing operations
  $ 0.05     $ 0.04     $ 0.01     $ 0.01     $     $ (0.01 )   $ (0.01 )   $ (0.02 )
    Loss from discontinued operations
                (0.03 )                 (0.01 )            
Total
  $ 0.05     $ 0.04     $ (0.02 )   $ 0.01     $     $ (0.02 )   $ (0.01 )   $ (0.02 )
                                                                 
Weighted average shares outstanding:
                                                               
Basic
    25,302       24,937       24,839       24,755       24,604       24,539       24,414       24,292  
Diluted
    27,412       27,011       26,972       26,823       26,590       24,539       24,414       24,292  
                                                                 
 
 
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, 2010, we had $50.2 million in cash, cash equivalents and total investments in marketable securities, reflecting a net increase of $17.0 million since December 31, 2009.  This $17.0 million increase was primarily due to cash provided by operating activities of $25.4 million and excess tax benefits from our employee stock plan of $6.7 million, partially offset by cash purchases of property and equipment (including principal payments on financed equipment) of $7.5 million, the repurchase of Common Stock (net of proceeds from the issuance of Common Stock from employee stock option exercises) of $4.9 million and cash used to settle employee tax withholding liabilities for vesting of restricted stock awards and restricted stock units of $2.8 million,.

Net cash provided by operating activities was $25.4 million for 2010 as compared to $23.3 million for 2009.  During 2010, accrued expenses and deferred rent increased by $3.3 million, accounts payable increased by $2.9 million, other assets decreased by $0.6 million and cash provided by operations was higher by $9.4 million.  These increases in liabilities were partially offset by increased accounts receivable, net of increased deferred revenue, of $5.1 million, excess tax benefits from employee stock plan of $6.1 million and higher prepaid expenses and other current assets of $3.0 million.

Net cash used in investing activities was $54.1 million for 2010 as compared to $26.1 million for 2009.  The $28.0 million increase from 2009 was primarily attributable to an increase of $31.6 million in funds received from and held on behalf of Ultimate’s customers using the UltiPro tax filing offering (“UltiPro Tax Filing Customer Funds”), with such funds being invested by Ultimate in overnight repurchase agreements backed by U.S. Treasury or U.S. Government Agency securities and a slight increase in cash purchases of property and equipment of $0.9 million, partially offset by an increase in cash from maturities of marketable securities of $3.1 million, a decrease in cash purchases of marketable securities of $0.8 million and a decrease in capitalized software costs of $0.6 million.

Net cash provided by financing activities was $45.8 million for 2010 as compared to cash provided by financing activities of $9.2 million for 2009. The $36.6 million increase in net cash provided by financing activities was primarily related to an increase of $31.6 million in UltiPro Tax Filing Customer Funds received, an $8.6 million increase in proceeds from the issuance of Common Stock from employee and non-employee director stock option exercises and increased excess tax benefits from employee stock plan of $6.1 million, partially offset by a $7.6 million increase in repurchases of Common Stock pursuant to Ultimate’s stock repurchase plan, and, to a lesser extent, an increase in cash used to settle employee tax withholding liabilities for vesting of restricted stock awards and restricted stock units of $2.4 million.
 
Days sales outstanding (“DSO”), calculated on a trailing three-month basis, as of December 31, 2010 and December 31, 2009, were 72 days and 68 days, respectively.  The increase in DSOs of 4 days compared to December 31, 2009 was primarily a function of increased accounts receivable due to longer payment terms on certain sales.

Deferred revenues were $78.1 million at December 31, 2010, as compared to $68.6 million at December 31, 2009.  The increase of $9.5 million in deferred revenues for 2010 was primarily due to increased deferred SaaS revenues, higher deferred services revenues and, to a lesser extent, higher deferred maintenance revenues.  Substantially all of the total balance in deferred revenues is related to future recurring revenues, including deferred revenues related to SaaS.

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, 2010.
 
 
Off-Balance Sheet Arrangements

We do not, and as of December 31, 2010 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.

 
Contractual Obligations

As of December 31, 2010, 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)
  $ 5,201     $ 2,717     $ 2,484     $     $  
Other long-term obligations (2)
    20,971       4,026       7,519       5,950       3,476  
Purchase obligations (3)
                             
Other long-term liabilities (4)
                             
Total contractual cash obligations
  $ 26,172     $ 6,743     $ 10,003     $ 5,950     $ 3,476  
_________________________
                                       

(1)  
We lease certain computer equipment under non-cancelable agreements, which are accounted for as capital leases and expire at various dates through 2013. 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 and a software maintenance agreement.  See Note 16 of the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K for information regarding operating lease obligations.  The software maintenance agreement is a 36-month agreement beginning July 21, 2008 and ending on August 1, 2011 with 36 monthly payments.
 
(3)  
Purchase orders or contracts for the purchase of goods and services are not included in the table above.  Ultimate is not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements.  Ultimate does not have significant agreements for the purchase of goods or services specifying minimum quantities or set prices.
 
(4)  
Ultimate does not have any other long-term liabilities as of December 31, 2010.
 
 
 
 
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
 
·
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, 2010, total investments in available-for-sale marketable securities were $9.3 million.

As of December 31, 2010, virtually all of the investments in Ultimate’s portfolio were at fixed rates (with a weighted average interest rate of 0.5% per annum).
 
To illustrate the potential impact of changes in interest rates, Ultimate has performed an analysis based on its December 31, 2010 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 $38 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 $38 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.


 

INDEX




 
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, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2010. 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, 2010 and 2009 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, 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 Company’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 1, 2011, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/ KPMG LLP
KPMG LLP
 

 
March 1, 2011
Miami, Florida
Certified Public Accountants



THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES



 
 
As of December 31,
 
 
 
2010
   
2009
 
(In thousands, except share data)
 
ASSETS
           
Current assets:
           
     Cash and cash equivalents
  $ 40,889     $ 23,684  
     Short-term investments in marketable securities
    8,884       8,079  
     Accounts receivable, net of allowance for doubtful accounts of $800 and $600
               
         for 2010 and 2009, respectively
    47,570       38,450  
     Prepaid expenses and other current assets
    18,613       15,594  
     Deferred tax assets, net
    1,434       1,128  
        Total current assets before funds held for customers
    117,390       86,935  
     Funds held for customers
    72,875       23,560  
        Total current assets
    190,265       110,495  
Property and equipment, net
    18,075       19,496  
Capitalized software, net
    3,115       4,463  
Goodwill
    3,025       3,198  
Long-term investments in marketable securities
    433       1,444  
Other assets, net
    11,656       12,298  
Long-term deferred tax assets, net
    22,988       19,736  
     Total assets
  $ 249,557     $ 171,130  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
         
Current liabilities:
               
     Accounts payable
  $ 4,683     $ 4,476  
     Accrued expenses
    11,074       9,972  
     Current portion of deferred revenue
    71,808       60,980  
     Current portion of capital lease obligations
    2,551       1,897  
         Total current liabilities before customer funds obligations
    90,116       77,325  
     Customer funds obligations
    72,875       23,560  
         Total current liabilities
    162,991       100,885  
Deferred revenue, net of current portion
    6,287       7,579  
Deferred rent
    3,022       3,186  
Capital lease obligations, net of current portion
    2,406       1,710  
Long-term income taxes payable
    1,866        
     Total liabilities
    176,572       113,360  
                 
Commitments and contingencies (Note 16)
           
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, 29,027,277 and
          27,620,384 shares issued in 2010 and 2009, respectively
    290       276  
     Additional paid-in capital
    216,262       184,256  
     Accumulated other comprehensive income (loss)
    126       (696 )
     Accumulated deficit
    (52,253 )     (54,410 )
      164,425       129,426  
Treasury stock, at cost, 3,594,825 and 2,985,425 shares in 2010 and 2009, respectively
    (91,440 )     (71,656 )
     Total stockholders’ equity
    72,985       57,770  
     Total liabilities and stockholders’ equity
  $ 249,557     $ 171,130  
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
 

 
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

   
For the Years Ended December 31,
 
   
2010
   
2009
   
2008