424B4 1 d609623d424b4.htm 424B4 424B4
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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-194462

 

6,645,000 Shares

 

LOGO

Paycom Software, Inc.

Common Stock

 

 

This is the initial public offering of Paycom Software, Inc. We are offering 4,606,882 shares of our common stock and the selling stockholders are offering 2,038,118 shares of our common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. Currently, no public market exists for the shares. The initial public offering price is $15.00 per share.

Our common stock has been approved for listing on the New York Stock Exchange, or the NYSE, under the symbol “PAYC.”

We are an “emerging growth company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements in future reports after the completion of this offering.

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 14.

 

     Per share      Total  

Initial public offering price

   $ 15.00       $ 99,675,000   

Underwriting discounts and commissions

   $ 1.05       $ 6,977,250   

Proceeds, before expenses, to us

   $ 13.95       $ 64,266,004   

Proceeds, before expenses, to the selling stockholders

   $ 13.95       $ 28,431,746   

To the extent that the underwriters sell more than 6,645,000 shares of common stock, the underwriters have the option to purchase up to an additional 996,750 shares of common stock from the selling stockholders at the initial public offering price less underwriting discounts and commissions.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about April 21, 2014.

 

 

 

Barclays    J.P. Morgan
Pacific Crest Securities    Stifel                Canaccord Genuity

 

 

Prospectus dated April 14, 2014


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PROSPECTUS SUMMARY

     1   

RISK FACTORS

     14   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     31   

MARKET, INDUSTRY AND OTHER DATA

     32   

THE REORGANIZATION

     33   

USE OF PROCEEDS

     34   

DIVIDEND POLICY

     35   

CAPITALIZATION

     36   

DILUTION

     37   

SELECTED CONSOLIDATED FINANCIAL DATA

     39   

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

     41   

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     49   

BUSINESS

     68   

MANAGEMENT

     82   

EXECUTIVE COMPENSATION

     88   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     102   

PRINCIPAL AND SELLING STOCKHOLDERS

     107   

DESCRIPTION OF CAPITAL STOCK

     109   

SHARES ELIGIBLE FOR FUTURE SALE

     114   

MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

     116   

UNDERWRITING

     119   

LEGAL MATTERS

     125   

EXPERTS

     125   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     125   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus we have prepared. We, the selling stockholders and the underwriters (and any of our or their affiliates) have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectus we have prepared. We, the selling stockholders and the underwriters (and any of our or their affiliates), take no responsibility for and can provide no assurance as to the reliability of any other information that others may give you. We are offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Until May 9, 2014 (25 days after the date of this prospectus), all dealers that buy, sell or trade shares of our common stock, whether or not participating in our initial public offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: We, the selling stockholders and the underwriters (and any of our or their affiliates), have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus, but it does not contain all of the information that you should consider before deciding to invest in our common stock. You should read the entire prospectus carefully before making an investment in our common stock, including “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto, which are included elsewhere in this prospectus. Some of the statements in this prospectus constitute forward-looking statements. For more information, see “Special Note Regarding Forward-Looking Statements.”

Unless we state otherwise or the context otherwise requires, the terms “Paycom,” “we,” “us,” “our” and the “Company” refer, prior to the Reorganization discussed in the section entitled “The Reorganization,” to Paycom Payroll Holdings, LLC, or Holdings, and its consolidated subsidiaries and, after the Reorganization, to Paycom Software, Inc., or Software, a recently formed Delaware corporation, and its consolidated subsidiaries, including Holdings. Software is a recently formed company that did not engage in any business or other activities prior to the Reorganization, except in connection with its formation. Accordingly, all financial and other information herein relating to periods prior to the Reorganization is that of, or derived from, Holdings. See “The Reorganization.”

Overview

We are a leading provider of a comprehensive, cloud-based human capital management, or HCM, software solution delivered as Software-as-a-Service, or SaaS. We provide functionality and data analytics that businesses need to manage the complete employment life cycle from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources, or HR, management applications. Our user-friendly software allows for easy adoption of our solution by employees, enabling self-management of their HCM activities in the cloud, which reduces the administrative burden on employers and increases employee productivity.

Organizations need sophisticated, flexible and intuitive applications that can quickly adapt to their evolving HCM requirements, streamline their HR processes and systems and enable them to control costs. We believe that the HCM needs of most organizations are currently served either by legacy providers offering outdated on-premise products or multiple providers that partner together in an attempt to replicate a comprehensive product. These approaches often result in large up-front capital requirements, extended delivery times, high costs, low scalability and challenges with system integration. According to the International Data Corporation, or IDC, the U.S. markets for payroll services and HCM applications will collectively total approximately $22.5 billion in 2014, and we believe there is a substantial opportunity for our solution to address these HCM needs.

Because our solution was developed in-house and is based on a single platform, there is no need to integrate, update or access multiple databases, which are common issues with competitor offerings that use multiple third-party systems in order to link together their HCM offerings. Additionally, our solution maintains data integrity for accurate, actionable and real-time analytics and business intelligence and helps clients minimize the risk of compliance errors due to inaccurate or missing information. We deliver feature-rich applications while maintaining excellence in information security and quality management standards as evidenced by our International Organization for Standardization, or ISO, certifications. As a part of our client retention effort, a specialist within a dedicated team is assigned to each client to provide industry-leading, personalized service.

The key benefits of our differentiated solution as compared to competing products are:

 

    Comprehensive HCM solution;

 

    Core system of record enabling data analytics maintained on a single database;

 

 

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    Personalized support provided by trained personnel;

 

    Software-as-a-Service delivery model;

 

    Cloud-based architecture; and

 

    Scalability to grow with our clients.

We sell our solution directly through our internally trained, client-focused and highly skilled sales force based in offices across the United States. We have over 10,000 clients, none of which constituted more than one-half of one percent of our revenues for the year ended December 31, 2013. We believe that as a result of our focus on client retention, we enjoy high client satisfaction as evidenced by an average annual revenue retention rate of 91% from existing clients for the three years ended December 31, 2013. We believe our revenue retention rate understates our client loyalty because this rate also includes former clients that were acquired or otherwise ceased operations.

Since our founding in Oklahoma City in 1998, we have focused on providing an innovative SaaS HCM solution. As of December 31, 2013, we had 840 employees across the United States. For the years ended December 31, 2013, 2012 and 2011, our revenues were $107.6 million, $76.8 million, and $57.2 million, respectively, representing year-over-year growth in revenues of 40% and 34%, respectively. We currently derive most of our revenues from our payroll and tax management applications, which we refer to as payroll processing. We realized net income of $7.7 million, $4.2 million and $1.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Industry Background

Large Market Opportunity for HCM Technologies

According to IDC, the U.S. market for HCM applications is comprised of software that automates business processes covering the entire span of an employee’s relationship with his or her employer. IDC estimates that this market, excluding payroll services, will total $5.8 billion in 2014. According to IDC, the U.S. market for payroll services will be an estimated $16.2 billion in 2014. IDC estimates that the international market for HCM applications (excluding the United States) will be $4.1 billion in 2014.

Economic and Technological Trends Are Driving Demand for HCM Solutions

Organizations operating in today’s global economy are continually under pressure to reduce operating costs in order to maintain or improve their competitive positions. As a result, businesses are increasingly making the strategic decision to leverage HCM technologies in order to improve the effectiveness and efficiency of their internal HR and accounting functions and capture opportunities for cost savings. According to IBISWorld, companies often outsource administrative services, such as time and labor management, after initially outsourcing payroll. We believe that businesses increasingly view data concerning their human capital as a critical strategic resource that can result in more informed decision-making.

Organizations are also managing internal costs and administrative burdens by transitioning technological assets from on-premise to the cloud. The rise of cloud computing has supported the SaaS delivery model. According to IDC, the global SaaS market is projected to grow from $23 billion in 2011 to $67 billion in 2016, at a compounded annual growth rate, or CAGR, of 24%.

Incumbent HCM Products Struggle To Meet the Needs of Businesses

We believe that a majority of businesses and organizations in the United States are using multiple HCM systems from more than one vendor, thereby impeding their ability to share data across these systems. Several

 

 

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incumbent payroll and HCM vendors offer product sets that are comprised of separate systems that require integration. In certain cases, this disparate product offering across several vendors is the result of several acquisitions which often leads to a loosely coupled product set that is marked by significant architectural differences and weak data integration. We believe that this type of offering increases the risk of user or system error and reduces overall effectiveness. Finally, we believe that vendors who pursue market segmentation strategies based on organization size or industry create difficulties for clients who grow, either in size or industry scope, beyond the confines of those vendors’ offerings. A scalable HCM solution based on a core system of record allows for an organization to grow in size and scope without transitioning to a new user interface or back-end database.

The Paycom Solution

We offer an end-to-end SaaS HCM solution that provides our clients and their employees with immediate access to accurate and secure information and analytics 24 hours a day, seven days a week from any location. We believe that our solution delivers the following benefits:

 

    Comprehensive HCM Solution. Our solution offers functionality that manages the entire employment life cycle for employers and employees, from recruitment to retirement. Our user-friendly applications streamline client processes and provide clients and their employees with the ability to directly access and manage administrative processes, including applications that identify candidates, onboard employees, manage time and labor, administer payroll deductions and benefits, manage performance, offboard employees and administer post-termination health benefits such as COBRA.

 

    Core System of Record. Our solution is based on a core system of record that contains payroll and HR information in one convenient database, thereby reducing costs and eliminating the need for multiple software products and vendors and the maintenance of employee data in numerous databases. In addition, our core system of record helps clients minimize the risk of compliance errors due to inaccurate or missing information that results from maintaining multiple databases.

 

    Data Analytics. Our solution allows clients to analyze accurate employee information to make business decisions based upon actionable, real-time, point-and-click analytics provided through our client dashboard. This functionality helps our clients operate with a more complete and accurate picture of their organization as our solution’s embedded analytics capture the content and context of everyday business events, facilitating fast and informed decision-making from any location.

 

    Personalized Support Provided by Trained Personnel. Our applications are supported by one-on-one personal assistance from trained specialists. We strive to provide our clients with high levels of service and support to ensure their continued use of our solution for all of their HCM needs. We have maintained high client satisfaction, as evidenced by an average annual revenue retention rate of 91% from existing clients for the three years ended December 31, 2013.

 

    Software-as-a-Service Delivery Model. Our SaaS delivery model allows clients with a geographically dispersed and mobile workforce to operate more efficiently, and allows these clients to implement, access and use our client-oriented Internet solution on demand and remotely through standard web browsers, smart phones, tablets and other web-enabled devices.

 

    Secure Cloud-Based Architecture. Our cloud-based architecture allows our solution to be implemented remotely with minimal client interaction, allowing our clients to make a smaller investment in hardware, personnel, implementation time and consulting.

 

    Scalability to Grow with our Clients. Our solution is highly scalable. We have served a diversified client base ranging in size from one to more than 8,000 employees. Our clients are able to use the same solution while their businesses grow by deploying applications as-needed in real-time.

 

 

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Our Strategy for Growth

Our strategy is to continue to establish our solution as the HCM industry standard. To accomplish this, we intend to:

 

    Increase Our Presence in Existing Markets. Although we have clients in all 50 states, we believe a significant opportunity exists to expand our presence within markets where we currently have a sales office. We have a sales office in 25 of the 50 largest Metropolitan Statistical Areas, or MSAs, in the United States based on 2010 U.S. census data, only one of which is served by multiple sales teams. We believe that the 50 largest MSAs in the United States could collectively support at least 100 additional sales teams. Each sales office is typically staffed with one sales team, with each team comprised of approximately seven to nine sales professionals. We plan to increase our presence in our existing markets by adding sales offices and increasing the number of our sales teams to further penetrate and effectively capture these markets.

 

    Expand Into Additional Markets. We plan to continue expanding our sales capability by opening sales offices in certain metropolitan areas where we currently have no sales teams. We have identified 50 untapped metropolitan areas where we can potentially open a new sales office staffed with at least one sales team. Since September 2012, we have opened sales offices in Baltimore, Detroit, Indianapolis, Minneapolis, New York, Philadelphia, Portland, San Francisco, Seattle and Silicon Valley. We intend to open six to eight additional offices over the next two years, as well as potentially expand over the longer term into international markets.

 

    Enlarge our Existing Client Relationships. We believe a significant growth opportunity exists in selling additional applications to our current clients. During the year ended December 31, 2013, all of our clients, including our new clients, on average utilized 5.2 of our 18 then available applications. During that same period, however, new clients on average utilized 6.2 applications. We believe that there is a significant opportunity to sell additional applications to our existing clients. As we extend and strengthen the functionality of our solution, we will continue to invest in initiatives to increase the adoption of our solution and maintain our high levels of client satisfaction.

 

    Target Larger Clients. We believe larger employers represent a substantial opportunity to increase the number of clients and to increase our revenue per client, with limited incremental cost to us. To further capitalize on this opportunity, we intend to target larger businesses opportunistically.

 

    Maintain Our Leadership in Innovation by Strengthening and Extending our Solution. We intend to continue to use our in-house development efforts, which are heavily based upon proactive research and client input, to extend the functionality and range of our solution in the future.

Selected Risks Associated with Our Business

Our business is subject to a number of risks and uncertainties, including those highlighted in the section “Risk Factors” immediately following this prospectus summary. Some of these risks include:

 

    Our business depends substantially on our clients’ continued use of our applications, their purchases of additional applications from us and our ability to add new clients.

 

    The market in which we participate is highly competitive, and if we do not compete effectively, our business, operating results or financial condition could be adversely affected.

 

    We have historically derived a majority of our revenue from payroll processing and our efforts to increase the use of our other HCM applications may not be successful and may reduce our revenue growth rate.

 

 

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    If our security measures are breached or unauthorized access to data of our clients or their employees is otherwise obtained, our solution may not be perceived as being secure, clients may reduce, limit or stop using our solution and we may incur significant liabilities.

 

    If the SaaS market develops more slowly than we expect or declines, our growth may slow or stall, and our business could be adversely affected.

 

    If we are not able to develop enhancements or new applications, keep pace with technological developments or respond to future disruptive technologies, our business could be adversely affected.

 

    Our business and operations are experiencing rapid growth and organizational change and if we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of satisfaction or adequately address competitive challenges.

 

    Our financial results may fluctuate due to many factors, some of which may be beyond our control.

Our Principal Stockholders

Following the completion of this offering, Welsh, Carson, Anderson & Stowe X, L.P., or WCAS X, WCAS Capital Partners IV, L.P., or WCAS Capital IV, and WCAS Management Corporation, together with WCAS X and WCAS Capital IV, the WCAS Funds, which are affiliates of Welsh, Carson, Anderson & Stowe, L.P., or Welsh, Carson, Anderson & Stowe, will own approximately 57.1% of our outstanding common stock, or 55.2% if the underwriters exercise in full their option to purchase additional shares. In addition, following the completion of this offering, the WCAS Funds and the other parties to the Amended and Restated Stockholders Agreement, or the Stockholders Agreement, will own approximately 81.6% of our outstanding shares of common stock, or 79.7% of our outstanding shares of common stock if the underwriters exercise in full their option to purchase additional shares. As a result of this ownership and the provisions of the Stockholders Agreement, the WCAS Funds will have control over votes on fundamental and significant corporate matters and transactions.

So long as the parties to the Stockholders Agreement own a majority of our outstanding shares of common stock, we will be a “controlled company” under the NYSE Listed Company Manual. Under these standards, a company of which more than 50% of the voting power for the election of directors is held by another company or group is a “controlled company” that is not required to comply with certain corporate governance requirements. We intend to rely on certain exemptions following the offering, and may rely on any of these exemptions for so long as we are a “controlled company.” See “Risk Factors—Risks Related to This Offering and Ownership of Our Common Stock” and “Certain Relationships and Related Party Transactions—Stockholders Agreement.”

Welsh, Carson, Anderson & Stowe is a leading U.S. private equity investor focused on information/business services and healthcare. Welsh, Carson, Anderson & Stowe has raised and managed $20 billion in capital and has a current portfolio of over 30 companies.

Recent Developments

New Offices

During 2014, we opened five new sales offices in Baltimore, Indianapolis, Philadelphia, Portland and Silicon Valley. We currently have a sales office in 25 of the 50 largest Metropolitan Statistical Areas, or MSAs, in the United States based on 2010 U.S. census data.

First Quarter Estimates

Our consolidated financial information for the three months ended March 31, 2014 discussed below is preliminary, based on currently available information and management estimates, and subject to the completion of our financial closing process. Accordingly, actual results may be different from this preliminary information

 

 

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and the changes may be material. Our estimates included in this prospectus have been prepared by and are the responsibility of our management. Grant Thornton LLP has not audited, reviewed, compiled or performed any procedures with respect to the accompanying financial information. Accordingly, Grant Thornton LLP does not express an opinion or any other form of assurance with respect thereto.

Revenue

We expect total revenues for the three months ended March 31, 2014 to be between $36.0 million and $37.0 million, as compared to our total revenues of $27.6 million for the three months ended March 31, 2013. The $8.4 million to $9.4 million, or 30% to 34%, increase in total revenues was primarily due to adding new clients and selling additional applications to existing clients.

Annualized New Recurring Revenue

We expect annualized new recurring revenue for the three months ended March 31, 2014 to be between $12.0 million and $13.0 million, as compared to our annualized new recurring revenue of $9.6 million for the three months ended March 31, 2013. The $2.4 million to $3.4 million, or 25% to 35%, increase in annualized new recurring revenue was primarily due to adding new clients and selling additional applications to existing clients.

Net Income

We expect net income for the three months ended March 31, 2014 to be between $0.3 million and $1.5 million, compared to our net income of $5.5 million for the three months ended March 31, 2013. The $5.2 million to $4.0 million, or 95% to 73%, decrease in net income was primarily due to increased growth investments, including sales commissions, new office openings and increased headcount and, to a lesser extent, $1.6 million of interest expense related to the 14% Note due 2017 that we assumed in connection with the Reorganization (which will be repaid with the proceeds from this offering).

Adjusted EBITDA

We expect Adjusted EBITDA for the three months ended March 31, 2014 to be between $5.5 million and $7.0 million, compared to our Adjusted EBITDA of $8.1 million for the three months ended March 31, 2013. The $2.6 million to $1.1 million, or 32% to 14%, decrease in Adjusted EBITDA was primarily due to increased growth investments, including sales commissions, new office openings and increased headcount.

Reconciliation

The following table reconciles our Adjusted EBITDA to our net income for the three months ended March 31, 2014 and 2013 for the information presented above:

 

     Three Months Ended
March 31,
 
     2014      2013  
     Low      High         
     (in millions)  

Consolidated statements of income data:

        

Net income

   $ 0.3       $ 1.5       $ 5.5   

Interest expense

     2.3         2.3         0.7   

Taxes

     0.3         0.6         —     

Depreciation and amortization

     1.5         1.5         1.2   

Incentive-based compensation expense

     0.1         0.1         0.7   

Transaction expenses

     1.0         1.0         —     
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 5.5       $ 7.0       $ 8.1   

 

 

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The data presented above reflects our preliminary estimates based solely upon information available to us as of the date of this prospectus, and is not a comprehensive statement of our financial results or position as of or for the periods presented above. Since we have not yet completed our closing procedures for the three months ended March 31, 2014, these estimates are preliminary, are based on management’s internal estimates and are subject to further internal review by management and approval by our audit committee. In addition, the consolidated financial information for the three months ended March 31, 2013 refers to Holdings and its consolidated subsidiaries, and does not reflect any adjustments that would be required to the financial information to give effect to the Reorganization.

Our actual results for the three months ended March 31, 2014 will not be available until after this offering is completed, and may differ materially from our preliminary estimates. Accordingly, you should not place undue reliance upon our preliminary estimates. For example, during the course of closing our financial statements for the three months ended March 31, 2014 or while preparing our historical consolidated financial statements for the three months ended March 31, 2013 that give effect to the Reorganization, additional items that would require material adjustments to be made to the financial information presented above may be identified, including items that would require us to make adjustments that may be material to the results described above. There can be no assurance that these estimates will be realized, and estimates are subject to risks and uncertainties, many of which are not within our control. See “Special Note Regarding Forward-Looking Statements.”

Corporate Information

We were founded in 1998. Software is a Delaware corporation that was formed in October 2013 to undertake this offering. Our principal executive offices are located at 7501 W. Memorial Road, Oklahoma City, Oklahoma 73142 and our telephone number is (405) 722-6900. Our website is www.paycom.com. Information contained on our website or that can be accessed through our website is not incorporated by reference in this prospectus.

“Paycom,” the Paycom logo and other trademarks or service marks of Paycom appearing in this prospectus are the property of Paycom. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective holders.

 

 

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The Reorganization

Software is a newly formed Delaware corporation. In anticipation of this offering, we consummated the Reorganization (as defined herein), effective as of January 1, 2014. For additional information concerning the Reorganization, see “The Reorganization.”

The following diagram depicts our corporate structure immediately after the completion of this offering. We will directly or indirectly hold 100% of the ownership interests in each of our subsidiaries:

 

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THE OFFERING

 

Common stock offered by us

4,606,882 shares

 

Common stock offered by the selling stockholders

2,038,118 shares

 

Option to purchase additional shares of common stock

The selling stockholders have granted the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to an additional 996,750 shares of common stock.

 

Common stock outstanding after the offering

50,811,059 shares

 

Use of proceeds

We estimate that our net proceeds from the sale of the common stock that we are offering will be approximately $60.8 million, based upon the initial public offering price of $15.00 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering for (i) the partial repayment of a 10% Senior Note due 2022 issued by us to an affiliate of Welsh, Carson, Anderson & Stowe in the amount of approximately $18.8 million and (ii) the repayment in full of a 14% Note due 2017 issued by WCAS Paycom Holdings, Inc., or WCAS Holdings, that we assumed in connection with the Reorganization in the amount of approximately $46.2 million (including certain payments made pursuant to a contribution agreement). We intend to repay the remaining principal amount of the 10% Senior Note due 2022 using existing cash. See “Use of Proceeds.”

 

  We will not receive any proceeds from the sale of shares offered by the selling stockholders, who include a director and entities affiliated with members of our board of directors.

 

Dividend policy

We do not currently plan to pay a regular dividend on our common stock following this offering. See “Dividend Policy.”

 

Risk factors

See “Risk Factors” beginning on page 12 and the other information included elsewhere in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Directed Share Program

At our request, the underwriters have reserved for sale at the initial public offering price up to 6.4% of the shares offered hereby for our officers, directors, employees, clients, suppliers, vendors and friends and relatives of our employees. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Chad Richison, our president, chief executive officer and director, Craig E. Boelte, our chief financial officer, William X. Kerber III, our chief information officer, and

 

 

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Frederick C. Peters II, our director, on behalf of themselves and certain of their affiliates, have indicated an interest in purchasing shares of our common stock in this offering pursuant to the Directed Share Program. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same basis as the others offered hereby. Any participants will be prohibited from selling, pledging or assigning any shares sold to them pursuant to this program for a period of 180 days after the date of this prospectus. The Directed Share Program will be arranged through our lead underwriter, Barclays Capital Inc.

 

NYSE trading symbol

“PAYC”

 

 

In this prospectus, unless otherwise indicated, the number of shares of common stock outstanding and the other information based thereon:

 

    exclude 7,604,127 shares of restricted common stock that are subject to time-based or performance-based vesting conditions, including 217,378 shares of restricted stock that vest upon the sale of our common stock in the initial public offering;

 

    exclude 3,746,754 shares of our common stock reserved for future issuance under the Paycom Software, Inc. 2014 Long-Term Incentive Plan, or the 2014 Plan, that we adopted in connection with the Reorganization; and

 

    do not reflect any exercise by the underwriters of their option to purchase 996,750 additional shares of our common stock from the selling stockholders.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following table summarizes our consolidated financial data as of the dates and for the periods indicated. We have derived the summary consolidated statements of income data for the years ended December 31, 2013, 2012 and 2011 and the summary consolidated balance sheet data as of December 31, 2013 and 2012 from our audited consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of results for any future period. We have derived the summary unaudited pro forma condensed consolidated financial data for the years ended December 31, 2013, 2012 and 2011 from the unaudited pro forma condensed consolidated financial statements set forth under “Unaudited Pro Forma Condensed Consolidated Financial Information.”

The summary consolidated financial data set forth below should be read together with “Capitalization,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Condensed Consolidated Financial Information” and our consolidated financial statements and the related notes thereto, which are included elsewhere in this prospectus. The following tables summarize our consolidated and pro forma results:

 

                      Pro forma(4)  
    Year Ended
December 31,
    Year Ended
December 31,
 
    2013     2012     2011     2013     2012     2011  
          (in thousands, except per unit and share data)  

Consolidated statement of income data:

           

Revenues

  $ 107,601      $ 76,810      $ 57,206      $ 107,601      $ 76,810      $ 57,206   

Expenses(1)

           

Cost of revenues:

           

Operating expenses

    19,070        14,895        12,287        19,070        14,895        12,287   

Depreciation

    1,821        1,431        987        1,821        1,431        987   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    20,891        16,326        13,274        20,891        16,326        13,274   

Administrative expenses:

           

Sales and marketing

    42,681        29,255        22,244        42,681        29,255        22,244   

Research and development

    2,146        1,632        1,225        2,146        1,632        1,225   

General and administrative

    28,884        19,450        14,707        29,191        19,452        14,714   

Depreciation and amortization

    3,682        4,092        4,300        3,682        4,092        4,300   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total administrative expenses

    77,393        54,429        42,476        77,700        54,431        42,483   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    9,317        6,055        1,456        9,010        6,053        1,449   

Interest expense

    (2,805     (2,171     (134     (683     (774     (134

Other income, net

    1,199        354        108        553        36        108   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    7,711        4,238        1,430        8,880        5,315        1,423   

Provision for income taxes

    —          —          —          3,462        2,068        573   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    7,711      $ 4,238      $ 1,430        5,418      $ 3,247      $ 850   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Distribution to Series C Preferred Unitholder

   
(6,467

    (4,806     —           
 

 

 

   

 

 

   

 

 

       

Net income (loss) available to Series A Preferred Unitholders and common unit holders

    1,244      $ (568   $ 1,430         
 

 

 

   

 

 

   

 

 

       

Net income (loss) per Series A Preferred Unit and common unit/share(2)

           

Basic

  $ 1.30      $ (0.60   $ 1.53      $ 0.10      $ 0.06      $ 0.02   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 1.22      $ (0.57   $ 1.49      $ 0.10      $ 0.06      $ 0.02   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average units/shares outstanding(2)

           

Basic

    955,983        948,181        935,750        52,019,659        52,019,659        52,019,659   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    1,018,305        1,004,436        960,611        52,704,822        52,704,822        52,704,822   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other financial data:

           

EBITDA(3)

  $ 16,019      $ 11,932      $ 6,851      $ 15,066      $ 11,612      $ 6,844   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(3)

  $ 19,700      $ 12,751      $ 7,016      $ 18,747      $ 12,431      $ 7,009   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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     As of December 31,  
     2013     2012  
    

(in thousands)

 

Consolidated balance sheet data:

    

Cash and cash equivalents

   $ 13,273      $ 13,435   

Restricted cash

     369        368   

Working capital (deficit)(5)

     (7,933     5,096   

Property, plant and equipment, net

     38,671        25,139   

Deferred revenue

     12,572        8,393   

Long-term debt, including current portion

     21,090        14,110   

Long-term debt due to related party

     14,682        14,440   

Member’s capital

     63,645        63,542   

Common stock

     —          —     

Accumulated deficit

     (13,385     (8,871

Total members’ equity

     50,260        54,671   

 

(1) Incentive-based compensation expense included in the consolidated statements of income data above was as follows:

 

       Year Ended
December 31,
 
       2013        2012        2011  
       (in thousands)  

Cost of revenues (operating expenses)

     $ 222         $ 87         $ 36   

Sales and marketing

       114           83           57   

Research and development

       345           100           25   

General and administrative

       253           233           47   
    

 

 

      

 

 

      

 

 

 
     $ 934         $ 503         $ 165   
    

 

 

      

 

 

      

 

 

 

 

(2) Net income (loss) per Series A Preferred Unit and common unit and weighted average units outstanding represent the earnings per unit reported in the consolidated statements of income for the years ended December 31, 2013, 2012 and 2011 that are included elsewhere in this prospectus. Pro forma net income per share of common stock and the weighted average shares of common stock outstanding reflect the estimated number of shares of common stock we expect to have outstanding upon the completion of this offering as discussed in Note (4) below.

 

(3) We use earnings before interest, tax, depreciation and amortization, or EBITDA, and Adjusted EBITDA as supplemental measures to review and assess our performance. We define EBITDA as net income, plus interest expense and depreciation and amortization and Adjusted EBITDA as net income, plus interest expense, depreciation and amortization, incentive-based compensation expense and certain transaction expenses that are not core to the Company’s operations. EBITDA and Adjusted EBITDA are metrics that we believe are useful to investors in evaluating our operating performance and facilitating comparison with other peer companies, many of which use similar non-GAAP financial measures to supplement results under accounting principles generally accepted in the United States of America, or U.S. GAAP.

EBITDA and Adjusted EBITDA are not measures of financial performance under U.S. GAAP, and should not be considered a substitute for net income, which we consider to be the most directly comparable U.S. GAAP measure. EBITDA and Adjusted EBITDA have limitations as analytical tools, and when assessing our operating performance, you should not consider EBITDA or Adjusted EBITDA in isolation, or as a substitute for net income or other consolidated statements of income data prepared in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA may not be comparable to similar titled measures of other companies and other companies may not calculate such measures in the same manner as we do.

The following table reconciles net income to EBITDA and Adjusted EBITDA and pro forma net income to pro forma EBITDA and pro forma Adjusted EBITDA:

 

                      Pro forma(4)  
    Year Ended
December 31,
    Year Ended
December 31,
 
        2013             2012             2011         2013     2012     2011  

Consolidated statements of income data:

      (in thousands)   

Net income

  $ 7,711      $ 4,238      $ 1,430      $ 5,418      $ 3,247      $ 850   

Interest expense

    2,805        2,171        134        683        774        134   

Taxes

    —          —          —          3,462        2,068        573   

Depreciation and amortization

    5,503        5,523        5,287        5,503        5,523        5,287   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    16,019        11,932        6,851        15,066        11,612        6,844   

Incentive-based compensation expense(a)

    934        503        165        934        503        165   

Transaction expenses(b)

    2,747        316        —          2,747        316        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 19,700      $ 12,751      $ 7,016      $ 18,747      $ 12,431      $ 7,009   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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  (a) Represents incentive-based compensation expense reflected in Note (1) above. Pro forma incentive-based compensation expense is the same as that reported under the historical periods as there are no pro forma adjustments to incentive-based compensation expense recorded in our consolidated statements of income for the years ended December 31, 2013, 2012 and 2011.

 

  (b) Represents one-time transaction expenses associated with the April 2012 Corporate Reorganization (as defined herein) and indirect incremental legal and accounting costs and expenses included in general and administrative expenses in the anticipation of and planning for this offering.

 

(4) The pro forma data reflects: (i) the Reorganization, and (ii) the effect of a portion of the net offering proceeds which will be used to repay the 10% Senior Note due 2022 issued by us to an affiliate of Welsh, Carson, Anderson & Stowe in the amount of approximately $18.8 million and the 14% Note due 2017 issued by WCAS Holdings that we assumed in connection with the Reorganization in the amount of approximately $46.2 million (including certain payments made pursuant to a contribution agreement). Any additional net offering proceeds have been excluded for the purposes of the pro forma financial information.

 

(5) Working capital (deficit) is defined as current assets, excluding restricted cash, less current liabilities, excluding current portion of deferred revenue.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below before making a decision to invest in our common stock. Our business, operating results or financial condition could be adversely affected by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. The trading price of our common stock could decline due to any of these risks, and, as a result, you may lose all or part of your investment. Before deciding whether to invest in our common stock, you should also refer to the other information contained in this prospectus, including our consolidated financial statements and the related notes.

Risks Related to Our Business and Industry

Our business depends substantially on our clients’ continued use of our applications, their purchases of additional applications from us and our ability to add new clients. Any decline in our clients’ continued use of our applications or purchases of additional applications could adversely affect our business, operating results or financial condition.

In order for us to maintain or improve our operating results, it is important that our current clients continue to use our applications and purchase additional applications from us, and that we add additional clients. Our clients have no obligation to continue to use our applications, and may choose not to continue to use our applications at the same or higher level of service, if at all. In the past, some of our clients have elected not to continue to use our applications. Moreover, our clients generally have the right to cancel their agreements with us for any or no reason by providing 30 days prior written notice.

Our client retention rates may fluctuate as a result of a number of factors, including the level of client satisfaction with our applications, pricing, the prices of competing products or services, mergers and acquisitions affecting our client base, reduced hiring by our clients or reductions in our clients’ spending levels. If our clients do not continue to use our applications, renew on less favorable terms, fail to purchase additional applications, or if we fail to add new clients, our revenue may decline, and our business, operating results or financial condition could be adversely affected.

The market in which we participate is highly competitive, and if we do not compete effectively, our business, operating results or financial condition could be adversely affected.

The market for HCM software is highly competitive, rapidly evolving and fragmented. We expect competition to intensify in the future with the introduction of new technologies and market entrants. Many of our current and potential competitors are larger and have greater brand name recognition, longer operating histories, more established relationships in the industry and significantly greater financial, technical and marketing resources than we do. As a result, some of these competitors may be able to:

 

    adapt more rapidly to new or emerging technologies and changes in client requirements;

 

    develop superior products or services, gain greater market acceptance and expand their product and service offerings more efficiently or rapidly;

 

    bundle products and services that we may not offer or in a manner that provides our competitors with a price advantage;

 

    take advantage of acquisition and other opportunities for expansion more readily;

 

    maintain a lower cost basis;

 

    adopt more aggressive pricing policies and devote greater resources to the promotion, marketing and sales of their products and services; and

 

    devote greater resources to the research and development of their products and services.

 

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Some of our principal competitors offer their products or services at a lower price, which has resulted in pricing pressures. Similarly, some competitors offer different billing terms, which has resulted in pressures on our billing terms. If we are unable to maintain our pricing levels and our billing terms, our operating results would be negatively impacted. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses or the failure of our solution to achieve or maintain widespread market acceptance, any of which could adversely affect our business, operating results or financial condition.

We compete with firms that provide HCM solutions by various means. Many providers continue to deliver legacy enterprise software, but as demand for greater flexibility and access to information grows, we believe there will be increased competition in the delivery of HCM cloud-based solutions by other SaaS providers. Our competitors offer HCM solutions that overlap with one, several or all categories of applications offered by our solution. Our talent acquisition and talent management applications compete primarily with Cornerstone OnDemand, Inc., Oracle Corporation, SAP AG and Workday, Inc. Our payroll applications, including payroll processing, compete primarily with Automatic Data Processing, Inc., or ADP, Ceridian Corporation, Concur Technologies, Inc., Intuit, Inc., Paychex, Inc. and The Ultimate Software Group, Inc. Our HR management applications compete primarily with ADP, Ceridian Corporation, Oracle Corporation, Paychex, Inc., SAP AG, and Workday, Inc. Our time and labor management applications compete primarily with ADP, Ceridian Corporation and The Ultimate Software Group, Inc. All of our larger competitors compete with us across multiple application categories. In addition, our HCM solution continues to face competition from in-house payroll and HR systems and departments as well as HR systems and software sold by third-party vendors.

Competition in the HCM solutions market is primarily based on service responsiveness, product quality and reputation, breadth of service and product offering and price. Many of our competitors are able to devote greater resources to the development, promotion and sale of their products and services. In addition, many of our competitors have established marketing relationships, access to larger client bases and major distribution agreements with consultants, software vendors and distributors. In addition, some competitors may offer software that addresses one or a limited number of HCM functions at a lower price point or with greater depth than our solution. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or client requirements. Further, some potential clients, particularly large enterprises, may elect to develop their own internal solutions. If we are unable to compete effectively, our business, operating results or financial condition could be adversely affected.

We have historically derived a majority of our revenue from payroll processing and our efforts to increase the use of our other HCM applications may not be successful and may reduce our revenue growth rate.

To date we have derived a majority of our revenue from payroll processing. For the years ended December 31, 2013, 2012 and 2011, payroll processing represented approximately 58%, 60% and 68% of our total revenues, respectively. Compared to payroll processing, our participation in other HCM applications markets is relatively new, and it is uncertain whether our revenue from other HCM applications will continue to grow. The relatively limited extent to which our other HCM applications have been adopted by our clients, and the uncertainty regarding the adoption of any new applications beyond our existing applications, may make it difficult to evaluate our business because the potential market for such applications remains uncertain. Our HCM solution may not achieve and sustain the high level of market acceptance that is critical for the success of our business. The failure to increase the use of our HCM applications and any new applications developed by us may reduce our revenue growth rate, which could adversely affect our business, operating results or financial condition.

If our security measures are breached, or unauthorized access to data of our clients or their employees is otherwise obtained, our solution may not be perceived as being secure, clients may reduce the use of or stop using our solution and we may incur significant liabilities.

Our solution involves the collection, storage and transmission of clients’ and their employees’ confidential and proprietary information, including personal or identifying information, as well as financial and payroll data. Unauthorized access or security breaches could result in the loss of information, litigation, indemnity obligations

 

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and other liability. While we have security measures in place to protect client and employee information and prevent data loss and other security breaches, if these measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and someone obtains unauthorized access to our clients’ data, our reputation could be damaged, our business may suffer and we could incur significant liability. Because the techniques used to obtain unauthorized access or to sabotage systems change frequently, we may not be able to anticipate these techniques and implement adequate preventative measures. Cyber liability insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our cyber liability insurance policy may not cover all claims made against us, and defending a suit, regardless of its merit, could be costly and divert management’s attention.

Any actual or perceived breach of our security could damage our reputation, cause existing clients to discontinue the use of our solution, prevent us from attracting new clients, or subject us to third-party lawsuits, regulatory fines or other action or liability, which could adversely affect our business, operating results or financial condition.

If the SaaS market develops more slowly than we expect or declines, our growth may slow or stall, and our business could be adversely affected.

The SaaS market is not as mature as the market for on-premise enterprise software, and it is uncertain whether SaaS will achieve and sustain high levels of demand and market acceptance. Our success will depend not only on strong demand for HCM services in general, but also to a substantial extent on the widespread adoption of SaaS. Many companies have invested substantial personnel and financial resources to integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to SaaS. It is difficult to predict client adoption rates and demand for our solution, the future growth rate and size of the SaaS market or the entry of competitive products. The expansion of the SaaS market depends on a number of factors, including the cost, performance and perceived value associated with SaaS, as well as the ability of SaaS providers to address security and privacy concerns. If other SaaS providers experience security incidents, loss of client data, disruptions in delivery or other problems, the market for SaaS applications as a whole, including our solution, may be negatively affected. If SaaS does not achieve widespread adoption, or there is a reduction in demand for SaaS caused by a lack of client acceptance, technological challenges, weakening economic conditions, security or privacy concerns, competing technologies and products, decreases in corporate spending or otherwise, our growth may slow or stall, and our business could be adversely affected.

Any interruption or failure of our data centers could impair our ability to effectively provide our solution and adversely affect our business.

We serve all of our clients from our two data centers located in Oklahoma and Texas. These locations are vulnerable to damage or interruption from severe weather, tornados, terrorist attacks, earthquakes, floods, fires, power loss, telecommunications failures, computer viruses or cyber-attacks. They are also subject to break-ins, sabotage, intentional acts of vandalism and other misconduct. Our solution depends on the continuing operation of our data centers and any damage to or failure of our data centers could result in interruptions in our services. Any interruption in our service could damage our reputation, cause our clients to terminate their use of our solution and prevent us from gaining new or additional business from current clients, which could have an adverse effect on our business, operating results or financial condition.

Any significant disruption in our SaaS network infrastructure could harm our reputation and expose us to significant costs.

Our SaaS network infrastructure is a critical part of our business operations. Our clients access our solution through standard web browsers, smart phones, tablets and other web-enabled devises, and depend on us for fast and reliable access to our solution. In the future, we may experience disruptions in our computing and communications infrastructure. Factors that may cause such disruptions include:

 

    human error;

 

    security breaches;

 

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    telecommunications failures or outages from third-party providers;

 

    computer viruses or cyber-attacks;

 

    acts of terrorism, sabotage or other intentional acts of vandalism;

 

    unforeseen interruption or damages experienced in moving hardware to a new location;

 

    tornados, fires, earthquakes, floods and other natural disasters; and

 

    power loss.

If our SaaS network infrastructure or our clients’ ability to access to our solution is interrupted, client and employee data from recent transactions may be permanently lost and we could be exposed to significant claims by clients, particularly if the access interruption is associated with problems in the timely delivery of funds due to employees. Any significant instances of system downtime could negatively affect our reputation and ability to retain clients and sell our solution, which would adversely impact our revenue.

We have also experienced significant growth in the number of clients, transactions and client and employee data that our network infrastructure supports. We seek to maintain sufficient excess capacity in our network infrastructure to meet the needs of all of our clients and their employees and to facilitate the rapid provision of new client deployments and the expansion of existing client deployments. Any changes in the service levels at our data centers or any errors, defects, disruptions or other performance problems with our network infrastructure could adversely affect our reputation and may result in lengthy interruptions in the availability of our solution. Any interruptions in the availability of our solution might reduce our revenues, cause us to issue refunds to clients or adversely affect our retention of existing clients.

If our solution fails to perform properly, our reputation could be adversely affected and our market share could decline.

Our solution is inherently complex and may in the future contain, or develop, undetected defects or errors. Any defects in our applications could adversely affect our reputation, impair our ability to sell our applications in the future and result in significant costs to us. The costs incurred in correcting any application defects may be substantial and could adversely affect our business, operating results or financial condition. Any defects in functionality or that cause interruptions in the availability of our applications could result in:

 

    loss or delayed market acceptance and sales of our applications;

 

    termination of service agreements or loss of clients;

 

    credits or refunds to clients;

 

    breach of contract, breach of warranty or indemnification claims against us, which may result in litigation;

 

    diversion of development and service resources; and

 

    injury to our reputation.

Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems could result in data loss or corruption, or cause the information that we collect to be incomplete or contain inaccuracies that our clients regard as significant. Furthermore, the availability or performance of our solution could be adversely affected by a number of factors, including the failure of our network system or solution or security breaches. We may be liable to our clients for damages they may incur resulting from certain of these events. In addition to potential liability, if we experience interruptions in the availability of our solution, our reputation could be adversely affected and we could lose clients.

 

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Our clients might assert claims against us in the future alleging that they suffered damages due to a defect, error, or other failure of our solution. Our errors and omissions insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our policy may not cover all claims made against us, and defending a suit, regardless of its merit, could be costly and divert management’s attention.

If we do not effectively expand and train our sales force and our support teams, we may be unable to add new clients and retain existing clients.

We need to continue to expand our sales force and support team members in order to grow our client base and increase our revenues. Identifying and recruiting qualified personnel and training them in the use of our solution requires significant time, expense and attention and it can take a substantial amount of time before our sales representatives and support team members are fully-trained and productive. We may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we currently, or intend in the future to do business, and our recent hires and planned hires may not achieve desired productivity levels in a reasonable period of time or become as productive as we expect. If these expansion efforts are unsuccessful or do not generate a corresponding increase in revenues, our business, operating results or financial condition could be adversely affected.

If we are not able to develop enhancements and new applications, keep pace with technological developments or respond to future disruptive technologies, we might not remain competitive and our business could be adversely affected.

Our future success will depend on our ability to adapt and innovate. To attract new clients and increase revenue from existing clients, we need to enhance, add new features and improve our existing applications and introduce new applications. The success of any enhancements or new features and applications depends on several factors, including timely completion, introduction and market acceptance. We may expend significant time and resources developing and pursuing sales of a particular application that may not result in revenues in the anticipated time frame or at all, or may not result in revenue growth sufficient to offset increased expenses. If we are unable to successfully develop enhancements, new features or new applications to meet client needs, our business and operating results could be adversely affected.

In addition, because our applications are designed to operate on a variety of network, hardware and software platforms using Internet tools and protocols, we will need to continuously modify and enhance our applications to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies. If we are unable to respond in a timely and cost-effective manner to these rapid technological developments, our current and future applications may become less marketable and less competitive or even obsolete.

Our success is subject to the risk of future disruptive technologies. If new technologies emerge that are able to deliver HCM solutions at lower prices, more efficiently or more conveniently, such technologies could adversely impact our ability to compete.

The market for our solution among large companies may be limited if these companies demand customized features and functions that we do not offer.

Prospective clients, especially larger companies, may require customized features and functions unique to their business processes that we do not offer. In order to ensure we meet these requirements, we may devote a significant amount of support and services resources to larger prospective clients, increasing the cost and time required to complete sales with no guarantee that these clients will continue to use our solution. We may not be successful in implementing any customized features or functions. If prospective clients require customized features or functions that we do not offer, or that would be difficult for them to deploy themselves, then the market for our solution will be more limited and our business could be adversely affected.

 

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Our business and operations are experiencing rapid growth and organizational change. If we fail to manage such growth and change effectively, we may be unable to execute our business plan, maintain high levels of service or adequately address competitive challenges.

We have experienced, and may continue to experience, rapid growth in our headcount and operations, which has placed, and may continue to place, significant demands on our management, operational and financial resources. For example, our headcount has grown from 523 employees as of December 31, 2011 to 840 employees as of December 31, 2013 and we have expanded from 18 offices as of December 31, 2011 to 24 offices as of December 31, 2013. We have also experienced significant growth in the number of clients, transactions and client and employee data that our infrastructure supports. Finally, our organizational structure and recording systems and procedures are becoming more complex as we improve our operational, financial and management controls. Our success will depend in part on our ability to manage this growth and organizational change effectively. To manage the expected growth of our headcount and operations, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. Our ability to add additional offices may be constrained by the willingness and availability of qualified personnel to help staff and manage any new offices. The failure to effectively manage growth could result in difficulties or delays in obtaining clients, selling additional applications to our clients, declines in quality or client satisfaction of our applications, increases in costs, and difficulties in introducing new applications or other operational difficulties, any of which could adversely affect our ability to retain and attract clients or sell additional applications to our existing clients.

Our business, operating results or financial condition could be adversely affected if our clients are not satisfied with our deployment or technical support services.

Our business depends on our ability to satisfy our clients, both with respect to our applications and the technical support provided to help clients use the applications that address the needs of their businesses. We use our in-house deployment personnel to implement and configure our solution and provide support to our clients. If a client is not satisfied with the quality of our solution or the applications delivered or the support provided, we could be required to incur additional costs to address the situation, the profitability of our solution might be negatively affected, and the client’s dissatisfaction with our deployment service could damage our ability to sell additional applications to that client. In addition, our sales process is highly dependent on the reputation of our solution and applications and on positive recommendations from our existing clients. Any failure to maintain high-quality technical support, or a market perception that we do not maintain high-quality support, could adversely affect our reputation, our ability to sell our applications to existing and prospective clients, and our business, operating results or financial condition.

If we fail to retain key employees and recruit qualified technical and sales personnel, our business could be adversely affected.

We believe that our success depends on the continued services of our senior management and other key employees, including Chad Richison, Craig E. Boelte, Jeffrey D. York and William X. Kerber III. In addition, because our future success is dependent on our ability to continue to enhance and introduce new applications, we are heavily dependent on our ability to attract and retain qualified software developers and IT personnel with the requisite education, background and industry experience. To continue to execute our growth strategy, we must also attract and retain qualified sales, marketing and operational personnel capable of supporting a larger and more diverse client base. The loss of the services of a significant number of our developers or sales professionals could be disruptive to our development efforts or business relationships. In addition, if any of our key employees joins a competitor or decides to otherwise compete with us, we may experience a material disruption of our operations and development plans, which may cause us to lose clients or increase operating expenses or divert management’s attention to recruit replacements for the departed key employees.

 

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Our financial results may fluctuate due to many factors, some of which may be beyond our control.

Our results of operations, including the levels of our revenues, costs of revenues, administrative expenses, operating income, cash flow and deferred revenue, may vary significantly in the future and the results of any one period should not be relied upon as an indication of future performance. Our financial results may fluctuate as a result of a variety of factors, many of which are outside of our control, and as a result, may not fully reflect the underlying performance of our business. Fluctuation in our financial results may negatively impact the value of our common stock. Factors that may cause our financial results to fluctuate from period to period include, without limitation:

 

    our ability to attract new clients or sell additional applications to our existing clients;

 

    the number of new clients and their employees, as compared to the number of existing clients and their employees in a particular period;

 

    the mix of clients between small, mid-sized and large organizations;

 

    the extent to which we retain existing clients and the expansion or contraction of our relationship with them;

 

    the mix of applications sold during a period;

 

    changes in our pricing policies or those of our competitors;

 

    seasonal factors affecting payroll processing, demand for our applications or potential clients’ purchasing decisions;

 

    the amount and timing of operating expenses, including those related to the maintenance and expansion of our business, operations and infrastructure;

 

    the timing and success of new applications introduced by us and the timing of expenses related to the development of new applications and technologies;

 

    the timing and success of current and new competitive products and services by our competitors;

 

    economic conditions affecting our clients, including their ability to outsource HCM solutions and hire employees;

 

    other changes in the competitive dynamics of our industry, including consolidation among competitors or clients;

 

    our ability to manage our existing business and future growth, including expenses related to our data centers and the expansion of such data centers and the addition of new offices;

 

    the effects and expenses of acquisition of third-party technologies or businesses and any potential future charges for impairment of goodwill resulting from those acquisitions;

 

    network outages or security breaches; and

 

    general economic, industry and market conditions.

Certain of our operating results and financial metrics are difficult to predict as a result of seasonality.

We have historically experienced seasonality in our revenues because a significant portion of our recurring revenues relate to the annual processing of payroll forms such as Form W-2 and Form 1099. Because these forms are typically processed in the first quarter of the year, first quarter revenues are generally higher than subsequent quarters. We expect this seasonality to continue in the future, which may cause fluctuations in certain of our operating results and financial metrics, and thus make such results and metrics difficult to predict.

 

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If we fail to adequately protect our proprietary rights, our competitive advantage could be impaired and we may lose valuable assets, generate reduced revenue or incur costly litigation to protect our rights.

Our success is dependent in part upon our intellectual property. We rely on a combination of copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and to protect our intellectual property rights. However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our applications and use information that we regard as proprietary to create products or services that compete with ours.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation may be necessary in the future to protect and enforce our intellectual property rights and to protect our trade secrets and such litigation could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. We may not be able to secure, protect and enforce our intellectual property rights or control access to, and the distribution of, our solution and proprietary information.

We may be sued by third parties for alleged infringement of their proprietary rights.

There is considerable intellectual property development activity in our industry, and we expect that software developers will increasingly be subject to infringement claims as the number of applications and competitors grows and the functionality of applications in different industry segments overlaps. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property in technology areas relating to our solution or applications. From time to time, third parties have asserted and may in the future assert that we are infringing on their intellectual property rights, and we may be found to be infringing upon such rights. A claim of infringement may also be made relating to technology that we acquire or license from third parties. However, we may be unaware of the intellectual property rights of others that may cover, or may be alleged to cover, some or all of our solution or applications.

For example, on July 29, 2013, Dr. Lakshmi Arunachalam filed a complaint against us in the U.S. District Court for the District of Delaware alleging that Paycom Payroll, LLC, or Payroll, infringes on at least one claim of U.S. Patent No. 8,244,833 assigned to her. In her complaint, Dr. Arunachalam seeks a permanent injunction, damages and attorneys’ fees.

The outcome of the foregoing litigation matter is inherently unpredictable, and therefore as a result of this litigation matter or any future claim of infringement, a claim could (i) cause us to enter into an unfavorable royalty or license agreement, pay ongoing royalties or require that we comply with other unfavorable terms, (ii) require us to discontinue the sale of our solution or applications, (iii) require us to indemnify our clients or third-party service providers or (iv) require us to expend additional development resources to redesign our solution or applications. Any of these outcomes could harm our business. Even if we were to prevail, any litigation regarding our intellectual property could be costly and time consuming and divert the attention of our management and key personnel from our business and operations.

We employ third-party licensed software for use in our applications, and the inability to maintain these licenses or errors in the software we license could result in increased costs or reduced service levels, which could adversely affect our business.

Our applications incorporate certain third-party software obtained under licenses from other companies. We anticipate that we will continue to rely on such third-party software and development tools from third parties in

 

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the future. Although we believe that there are commercially reasonable alternatives to the third-party software we currently license, this may not always be the case, or it may be difficult or costly to replace. In addition, integration of the software used in our applications with new third-party software may require significant work and substantial investment of our time and resources. Also, to the extent that our applications depend upon the successful operation of third-party software in conjunction with our software, any undetected errors or defects in this third-party software could prevent the deployment or impair the functionality of our applications, delay new application introductions, result in a failure of our applications and harm our reputation.

The use of open source software in our applications may expose us to additional risks and harm our intellectual property rights.

Some of our applications use software covered by open source licenses. From time to time, there have been claims challenging the ownership of open source software against companies that incorporate such software into their products or applications. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional development resources to change our applications. In addition, if we were to combine our applications with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our applications. If we inappropriately use open source software, we may be required to redesign our applications, discontinue the sale of our applications or take other remedial actions.

The failure to develop our brand cost-effectively could have an adverse effect on our business.

We believe that developing and maintaining widespread awareness of our brand in a cost-effective manner is critical to achieving the widespread acceptance of our solution and is an important element in attracting new clients and retaining existing clients. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful applications at competitive prices. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses incurred in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new clients or retain our existing clients to the extent necessary to realize a sufficient return on our brand-building efforts, which could have an adverse effect on our business.

We might require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.

We have funded our operations since inception through equity financings and cash generated by operations. In the future, we may require additional capital to support our growth and respond to operational challenges, including the need to develop new features and applications or enhance our existing applications, improve our infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our growth and respond to challenges could be significantly limited.

 

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We may acquire other businesses, applications or technologies, which could divert our management’s attention, result in additional dilution to our stockholders and otherwise disrupt our operations and harm our operating results.

In the future, we may seek to acquire or invest in businesses, applications or technologies that we believe complement or expand our applications, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are ultimately consummated.

We do not have any experience in acquiring other businesses. If we acquire additional businesses, we may not be able to integrate the acquired personnel, operations and technologies successfully or to effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including:

 

    the inability to integrate or benefit from acquired applications or services in a profitable manner;

 

    unanticipated costs or liabilities associated with the acquisition;

 

    the incurrence of acquisition-related costs;

 

    difficulty integrating the accounting systems, operations and personnel of the acquired business;

 

    difficulty and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business;

 

    difficulty converting the clients of the acquired business onto our solution, including disparities in the revenues, licensing, support or services of the acquired company;

 

    diversion of management’s attention from other business concerns;

 

    harm to our existing relationships with clients as a result of the acquisition;

 

    the potential loss of key employees;

 

    the use of resources that are needed in other parts of our business; and

 

    the use of substantial portions of our available cash to consummate the acquisition.

In addition, a significant portion of the purchase price of any companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could harm our results of operations. Acquisitions could also result in issuances of equity securities or the incurrence of debt, which would result in dilution to our stockholders.

Our growth depends in part on the success of our relationships with third parties.

We rely on third-party financial and accounting processing systems, as well as various financial institutions, to perform financial services in connection with our applications, such as providing automated clearing house, or ACH, and wire transfers as part of our payroll and expense reimbursement services and to provide technology and content support, manufacture time clocks and process background checks. We anticipate that we will continue to depend on various third-party relationships in order to grow our business, provide technology and content support, manufacture time clocks and process background checks. Identifying, negotiating and documenting relationships with these third parties and integrating third-party content and technology requires significant time and resources. Our agreements with third parties are typically non-exclusive and do not prohibit them from working with our competitors. In addition, these third parties may not perform as expected under our agreements, and we may have disagreements or disputes with such third parties, which could negatively affect

 

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our brand and reputation. A global economic slowdown could also adversely affect the businesses of our third party providers, particularly those financial institutions that process transactions through the ACH network, and it is possible that they may not be able to devote the resources we expect to our relationship.

If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our business, operating results or financial condition could be adversely affected. Even if we are successful, these relationships may not result in improved operating results.

Adverse economic conditions could adversely affect our business, operating results or financial condition.

Our business depends on the overall demand for HCM applications and on the economic health of our current and prospective clients. If economic conditions in the United States remain uncertain or deteriorate, clients may cease their operations or delay or reduce their HCM spending or the number of their employees. This could result in reductions in sales of our applications, longer sales cycles, slower adoption of new technologies and increased price competition. In addition, there has been reduced government spending in the United States during 2013. This might reduce demand for our applications from organizations that receive funding from the U.S. government and could negatively affect the U.S. economy, which could further reduce demand for our applications. Any of these events could adversely affect our business, operating results or financial condition. In addition, HCM spending levels may not increase following any recovery.

If our goodwill or other intangible assets become impaired, we may be required to record a significant charge to earnings.

We are required to test goodwill for impairment at least annually or earlier if events or changes in circumstances indicate the carrying value may not be recoverable. As of December 31, 2013, we had recorded a total of $51.9 million of goodwill and $6.7 million of other intangible assets. An adverse change in market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates made in connection with the impairment testing of goodwill or intangible assets, could result in a change to the estimation of fair value that could result in an impairment charge to our goodwill or other intangible assets. Any such material charges may have a negatively impact our operating results.

Because our long term success depends, in part, on our ability to expand the sales of our solution to customers located outside of the United States, our business will be subject to risks associated with international operations.

An element of our growth strategy is to expand our operations and client base. To date, we have not engaged in any operations outside of the United States. If we decide to expand our operations into international markets, it will require significant resources and management attention and will subject us to regulatory, economic and political risks that are different from those in the United States. Because of our lack of experience with international operations, we cannot assure you that our international expansion efforts will be successful.

Risks Related to Legislation or Regulation

Privacy concerns and laws or other domestic regulations may reduce the effectiveness of our applications.

Our applications require the storage and transmission of the proprietary and confidential information of our clients and their employees, including personal or identifying information, as well as their financial and payroll data. Personal privacy has become a significant issue in the United States. The regulatory framework for privacy issues is rapidly evolving and is likely to remain uncertain for the foreseeable future. Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information. In the United States, these include rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act of 1996, the Family Medical Leave Act of 1993, the Patient Protection and Affordable Care Act and state breach notification laws.

 

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In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards. Because the interpretation and application of privacy and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our solution. As such, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our solution, which could have an adverse effect on our business, operating results or financial condition. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business, operating results or financial condition.

Furthermore, privacy concerns may cause our clients’ employees to resist providing the personal data necessary to allow our clients or their employees to use our applications effectively. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our applications in certain industries. All of these legislative and regulatory initiatives may adversely affect the ability of our clients to process, handle, store, use and transmit demographic and personal information from their employees, which could reduce demand for our applications.

Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand for our applications, and could have a negative impact on our business.

The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business. Federal, state and foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Changes in these laws or regulations could require us to modify our applications in order to comply with these changes. In addition, government agencies or private organizations may impose taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, or result in reductions in the demand for Internet-based applications such as ours.

In addition, the use of the Internet as a means of conducting business could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease of use, accessibility, and quality of service. The performance of the Internet has been adversely affected by “viruses,” “worms” and similar malicious programs and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the Internet is adversely affected by these issues, demand for our applications could suffer.

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering and in each year thereafter. Our auditors will also need to attest to the effectiveness of our internal control over financial reporting in the future to the extent we are no longer an emerging growth company, as defined by the Jumpstart Our Business Startups Act, or the JOBS Act, and are not a smaller reporting company.

If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We are in the process of designing and implementing the internal control over financial reporting to comply with this obligation, which process will be time consuming, costly and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner, if we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public

 

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accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports we could become subject to investigations by the NYSE, the Securities and Exchange Commission, or the SEC, or other regulatory authorities and the market price of our common stock could be negatively affected.

We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could adversely affect our operating results.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements. For example, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and will be required to comply with the applicable requirements of the Sarbanes-Oxley Act, as well as rules and regulations subsequently implemented by the SEC and the NYSE, including the establishment and maintenance of effective disclosure controls and procedures and internal control over financial reporting and changes in corporate governance practices.

We expect that complying with these rules and regulations will substantially increase our legal and financial compliance costs and make some activities more time-consuming and costly. In addition, our management team will have to adapt to the requirements of being a public company. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase to the extent we are no longer an emerging growth company, as defined by the JOBS Act, and are not a smaller reporting company. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs, which could adversely affect our operating results.

The increased costs associated with operating as a public company may decrease our net income or result in a net loss and may require us to reduce costs in other areas of our business or increase the prices of our solution. Additionally, if these requirements divert management’s attention from other business concerns, they could have an adverse effect on our business, operating results or financial condition.

As a public company, we also expect that it may be more difficult or more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.

We are an emerging growth company and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. Pursuant to Section 102 of the JOBS Act, we have reduced executive compensation disclosure and have omitted a Compensation Discussion and Analysis from this prospectus.

For as long as we continue to be an emerging growth company, we intend to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation, the frequency of the nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved and the auditor attestation requirements of Section 404 of the

 

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Sarbanes-Oxley Act. Investors may find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30th, (ii) the end of the fiscal year in which we have total annual gross revenues of $1 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period and (iv) the end of the fiscal year following the five year anniversary of the date of this prospectus.

Adverse tax laws or regulations could be enacted or existing laws could be applied to us or our clients, which could increase the costs of our solution and applications and could adversely affect our business, operating results or financial condition.

The application of federal, state and local tax laws to services provided electronically is evolving. New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time (possibly with retroactive effect), and could be applied solely or disproportionately to services and applications provided over the Internet. These enactments could adversely affect our sales activity, due to the inherent cost increase the taxes would represent and ultimately could adversely affect our business, operating results or financial condition.

In addition, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us (possibly with retroactive effect), which could require us or our clients to pay additional tax amounts, as well as require us or our clients to pay fines or penalties and interest for past amounts. If we are unsuccessful in collecting such taxes from our clients, we could be held liable for such costs, thereby adversely affecting our business, operating results or financial condition.

Risks Related to this Offering and Ownership of our Common Stock

There has been no prior public market for our common stock, the price of our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

There has been no public market for our common stock prior to this initial public offering. The initial public offering price for our common stock was determined through negotiations between the underwriters and us and may vary from the market price of our common stock following our initial public offering. If you purchase shares of our common stock in our initial public offering, you may not be able to resell those shares at or above the initial public offering price. An active or liquid market in our common stock may not develop upon closing of our initial public offering or, if it does develop, it may not be sustainable. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

    our operating performance and the performance of other similar companies;

 

    the overall performance of the equity markets;

 

    announcements by us or our competitors of new applications or enhancements, acquisitions, applications, services, strategic alliances, commercial relationships, joint ventures or capital commitments;

 

    disruptions in our services due to hardware, software or network problems;

 

    recruitment or departure of key personnel;

 

    publication of unfavorable research reports about us or our industry or withdrawal of research coverage by securities analysts;

 

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    trading activity by a limited number of stockholders who together beneficially own a majority of our outstanding common stock;

 

    the size of our public float;

 

    the economy as a whole, market conditions in our industry and the industries of our clients; and

 

    economic, legal and regulatory factors unrelated to our performance.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class actions following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business, operating results or financial condition.

Substantial blocks of our total outstanding shares may be sold into the market when the “lock-up” period ends. If there are substantial sales of shares of our common stock, the price of our common stock could decline.

The price of our common stock could decline if there are substantial sales of our common stock, particularly sales by our directors, executive officers and significant stockholders, or if there is a large number of shares of our common stock available for sale. Upon the completion of this offering, we expect to have 50,811,059 shares of our common stock outstanding. All of the shares of common stock sold in this offering will be eligible for sale in the public market, unless they are held by our affiliates. Shares held by directors, executive officers and other affiliates will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, and various restricted stock award agreements.

After our initial public offering, certain of our stockholders will be subject to lock-up agreements with the underwriters or us that restrict their ability to sell shares of common stock until 181 days after the date of this prospectus. After the lock-up agreements expire, an additional 44,086,474 shares of common stock will be eligible for sale in the public market, subject in many cases to the limitations of either Rule 144 or Rule 701 under the Securities Act. Upon completion of this offering, stockholders owning an aggregate of up to 38,762,864 shares of common stock will be entitled, under a registration rights agreement, to require us to register shares of our common stock owned by them for public sale in the United States. We also intend to register shares of common stock that we have issued and may issue under our employee equity incentive plans. Once we register these shares, they will be able to be sold freely in the public market upon issuance, subject to existing lock-up agreements.

Barclays Capital Inc. and J.P. Morgan Securities LLC, on behalf of the underwriters, may in their discretion permit our stockholders to sell shares prior to the expiration of the restrictive provisions contained in those lock-up agreements. The market price of the shares of our common stock could decline as a result of the sale of a substantial number of our shares of common stock in the public market, the availability of shares for sale or the perception in the market that the holders of a large number of shares intend to sell their shares. In addition, the sale of these shares by stockholders could impair our ability to raise capital through the sale of additional stock.

If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If no or few securities or industry analysts cover our company, the trading price for our common stock would be negatively impacted. If one or more of the analysts who covers

 

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us downgrades our stock or publishes incorrect or unfavorable research about our business, our common stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our common stock price or trading volume to decline.

Our principal stockholders will hold a controlling interest after this offering and may make business decisions with which you disagree and which may adversely affect the value of your investment.

After this offering, the parties to the Stockholders Agreement, which includes Chad Richison, Shannon Rowe, William X. Kerber, III, Jeffrey D. York, Robert J. Levenson and the Estate of Richard Aiello and certain of their affiliates or related entities, and the WCAS Funds, or collectively, the Stockholders Agreement Parties, will beneficially own or control, directly or indirectly, 41,474,602 shares of our common stock in the aggregate, or approximately 81.6% of our outstanding shares, or, if the underwriters’ option to purchase additional shares is exercised in full, 40,477,852 shares of common stock in the aggregate equal to approximately 79.7% of our outstanding shares. As a result of this ownership and the provisions of the Stockholders Agreement, the WCAS Funds will have the ability to control matters submitted to our stockholders for approval, including the election and removal of directors, amendments to our certificate of incorporation and bylaws and the approval of any business combination. These actions may be taken even if they are opposed by other stockholders. This concentration of ownership may also have the effect of delaying or preventing a change of control of our company or discouraging others from making tender offers for our shares, which could prevent our stockholders from receiving a premium for their shares.

Some of these persons or entities may have interests different than yours. For example, because many of these stockholders purchased their shares at prices substantially below the price at which shares are being sold in this offering and have held their shares for a longer period, they may be more interested in selling our company to an acquiror than other investors or may want us to pursue strategies that deviate from the interests of other stockholders.

We will be deemed a “controlled company” and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.

After this offering, the Stockholders Agreement Parties will continue to own common stock representing a majority of our outstanding shares of common stock. So long as such persons collectively own a majority of our outstanding shares of common stock, we will be a “controlled company” within the meaning of corporate governance standards of the NYSE. Under those standards, a company of which more than 50% of the voting power for the election of directors is held by another company or group is a “controlled company” and need not comply with certain requirements, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that there be a nominating and corporate governance committee composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities, (3) the requirement that there be a compensation committee composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities and (4) the requirement of an annual performance evaluation of the nominating/corporate governance and compensation committees. We intend to rely on certain of these exemptions following the offering, and may rely on any of these exemptions for so long as we are a “controlled company.” As a result, we will not have a majority of independent directors on our board of directors, and our compensation committee will not consist entirely of independent directors. If we are no longer eligible to rely on the controlled company exception, we intend to comply with all applicable corporate governance requirements, but we will be able to rely on phase-in periods for certain of these requirements in accordance with the NYSE’s rules. Accordingly, our stockholders may not have the same protections afforded to stockholders of companies that are subject to all NYSE corporate governance requirements.

 

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As a new investor, you will incur immediate and substantial dilution as a result of this offering.

The initial public offering price will be substantially higher than the pro forma net tangible book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate dilution of $14.92 per share, based upon the initial public offering price of $15.00 per share, and new investors from our sale of shares of our common stock in this offering will own approximately 9.2% of our outstanding common stock. This dilution is due in large part to earlier investors having generally paid substantially less than the initial public offering price when they purchased their shares. In addition, the vesting of restricted stock will, and future equity issuances may, result in further dilution to investors.

The issuance of additional stock in connection with acquisitions, our stock incentive plans, warrants or otherwise will dilute all other stockholdings.

After this offering, our certificate of incorporation will authorize us to issue up to one hundred million shares of common stock and up to ten million shares of preferred stock with such rights and preferences as may be determined by our board of directors. Subject to compliance with applicable rules and regulations, we may issue all of these shares that are not already outstanding without any action or approval by our stockholders. We intend to continue to evaluate strategic acquisitions in the future. We may pay for such acquisitions, partly or in full, through the issuance of additional equity securities.

Any issuance of shares in connection with our acquisitions, the exercise of stock options or warrants, the award of shares of restricted stock or otherwise would dilute the percentage ownership held by the investors who purchase our shares in this offering.

We have broad discretion in the use of a portion of the net proceeds from our initial public offering and may not use them effectively.

We cannot specify with any certainty the particular uses of a portion of the net proceeds that we will receive from our initial public offering. We will have broad discretion in the application of these proceeds, including working capital, possible acquisitions and other general corporate purposes, and we may spend or invest these proceeds in a way with which our stockholders disagree. The failure by our management to apply these proceeds effectively could adversely affect our business, operating results or financial condition. Pending their use, we may invest these proceeds in a manner that does not produce income or that loses value. These investments may not yield a favorable return to our investors.

We do not intend to pay dividends for the foreseeable future.

We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. Consequently, stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.

Anti-takeover provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company.

Our certificate of incorporation, bylaws and Delaware law contain provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. For information regarding these and other provisions, see “Description of Capital Stock.”

Any provision of our certificate of incorporation, bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could affect the price that some investors are willing to pay for our common stock.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements and information relating to us that are based on the beliefs of our management as well as assumptions made by, and information currently available to, us. These statements include, but are not limited to, statements about our strategies, plans, objectives, expectations, intentions, expenditures, assumptions and other statements contained in this prospectus that are not historical facts. When used in this document, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan” and “project” and similar expressions as they relate to us are intended to identify forward-looking statements. These statements reflect our current views with respect to future events, are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Further, certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate.

These forward-looking statements include, but are not limited to, statements concerning our business and strategy, possible or assumed future results of operations, cash flows, capital resources and liquidity, trends, opportunities and risks affecting our business, industry and financial results, future expansion or growth plans and potential for future growth, technology, market opportunities and acceptance by new clients of our solution, and the amount, nature and timing of capital expenditures.

These forward-looking statements involve known and unknown risks, inherent uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Actual results and the timing of certain events may differ materially from those contained in these forward-looking statements.

All forward-looking statements speak only at the date of this prospectus. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this prospectus are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. We do not undertake any obligation to update or revise any forward-looking statements except as required by law, including the securities laws of the United States and the rules and regulations of the SEC.

 

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MARKET, INDUSTRY AND OTHER DATA

This prospectus includes industry data and forecasts that we have prepared based, in part, upon data and forecasts obtained from industry publications, surveys and forecasts and internal studies. Third-party industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable.

Although certain of the companies that compete in our markets are publicly held as of the date of this prospectus, others are not. Accordingly, only limited public information is available with respect to our relative market strength or competitive position. Unless we state otherwise, our statements about our relative market strength and competitive position in this prospectus are based on our management’s beliefs, internal studies and our management’s knowledge of industry trends. Although we believe that such information is reliable, we have not had this information verified by any independent sources.

 

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THE REORGANIZATION

Software is a newly formed Delaware corporation that was an indirect wholly-owned subsidiary of Holdings prior to the Reorganization. In anticipation of this offering, Software consummated the Reorganization, as of January 1, 2014, pursuant to which (i) the owners of WCAS Holdings and WCAS CP IV Blocker, Inc., or CP IV Blocker, which are affiliates of Welsh, Carson, Anderson & Stowe, contributed WCAS Holdings and CP IV Blocker, which collectively own all of the Series A Preferred Units of Holdings, to Software in exchange for shares of common stock of Software and (ii) the owners of outstanding Series B Preferred Units of Holdings contributed their Series B Preferred Units for shares of common stock of Software.

Immediately after these contributions, a wholly-owned subsidiary of Software merged with and into Holdings with Holdings surviving the merger. Upon consummation of the merger, the remaining holders of outstanding common and incentive units of Holdings received shares of common stock of Software for their common and incentive units by operation of Delaware law and Holdings’ ownership interest in Software was cancelled. Outstanding common units, Series B Preferred Units and WCAS Holdings and CP IV Blocker were contributed to Software in exchange for, or converted into, 45,708,573 shares of common stock and 8,121,101 restricted shares of common stock of Software.

Following these transactions, all outstanding Series C Preferred Units were eliminated in an intercompany transaction between Holdings and WCAS Holdings, and we assumed the 14% Note due 2017 issued by WCAS Holdings, or the 2017 Note. Following the Reorganization, Software became a holding company with its principal asset being the units of Holdings. We refer to these transactions collectively as the Reorganization. Unless otherwise indicated, or the context otherwise requires, all information in this prospectus is presented giving effect to the Reorganization. For additional information concerning the conversion rates in the Reorganization, see “Unaudited Pro Forma Condensed Consolidated Financial Information, Note 1. Basis of Presentation,” which description is incorporated by reference herein.

The following diagram depicts our corporate structure immediately after the completion of this offering. We will directly or indirectly hold 100% of the ownership interests in each of our subsidiaries:

 

LOGO

 

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of the common stock that we are offering will be approximately $60.8 million, based upon the initial public offering price of $15.00 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds we receive from this offering for (i) the partial repayment of a 10% Senior Note due 2022, or the 2022 Note, issued by us to an affiliate of Welsh, Carson, Anderson & Stowe and (ii) the repayment in full of the 2017 Note assumed in the Reorganization. We intend to use the following amounts of the net proceeds for the above uses:

 

     Amount
(in millions)
 

Use of Net Proceeds

  

Contribution agreement payments(1)

   $ 0.1   

Repayment of the 2022 Note(2)

     14.6   

Repayment of the 2017 Note(3)

     46.1   
  

 

 

 

Total net proceeds

   $ 60.8   
  

 

 

 

 

(1) We are required to direct a portion of any repayment of the 2017 Note to the Estate of Richard Aiello and Mr. Levenson and certain of their affiliated or related entities pursuant to the terms of a Contribution Agreement entered into in connection with the Reorganization. See “Certain Relationships and Related Party Transactions— Contribution Agreement.”
(2) As of December 31, 2013, we had $18.8 million outstanding under the 2022 Note. The 2022 Note accrues interest at 10% per annum and matures on April 3, 2022. We intend to use $14.6 million of the net proceeds from this offering as a partial repayment of the 2022 Note. We intend to repay the remaining $4.2 million principal outstanding on the 2022 Note using existing cash.
(3) As of December 31, 2013, we had Series C Preferred Units outstanding. In connection with the Reorganization, we eliminated the Series C Preferred Units as an intercompany transaction, and assumed the 2017 Note. The 2017 Note accrues interest at 14% per annum and matures on April 3, 2017. Any amounts paid to the Estate of Richard Aiello and Mr. Levenson and certain of their affiliated or related entities as described in Note (1) above will be deemed to have been paid to WCAS X and WCAS Management Corporation, and will reduce the amounts required to be paid under the 2017 Note.

Pending other uses, we intend to invest the proceeds in interest-bearing, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government, or we may hold the proceeds as cash. We cannot predict whether the proceeds invested will yield a favorable return. Our management will have broad discretion in the application of the net proceeds we receive from our initial public offering, and investors will be relying on the judgment of our management regarding the application of the net proceeds.

We will not receive any proceeds from the sale of shares offered by the selling stockholders, who include a director and certain entities affiliated with members of our board of directors.

 

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DIVIDEND POLICY

We do not currently plan to pay a regular dividend on our common stock following this offering. The declaration, amount and payment of any future dividends on shares of common stock will be at the sole discretion of our board of directors and we may reduce or discontinue entirely the payment of such dividends at any time. Our board of directors may take into account general and economic conditions, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications of the payment of dividends by us to our stockholders or by our subsidiaries to us, and such other factors as our board of directors may deem relevant. Our Consolidated, Amended and Restated Loan Agreement, or the 2011 Consolidated Loan, and Loan Agreement, or the 2013 Consolidated Loan, with Kirkpatrick Bank each prohibit the payment of dividends while an event of default exists under the Consolidated Loan or the Construction Loan, respectively, and any future debt agreements that we may enter into the future may prohibit the payment of dividends.

We are a holding company that has no material assets other than our indirect ownership of all of the outstanding units of Holdings. In the event that we decide to pay dividends in the future, we intend to cause Holdings to make distributions to us in an amount sufficient to cover cash dividends, if any, declared by us. Any financing arrangements that we enter into in the future may include restrictive covenants that limit our or our subsidiaries’ ability to pay dividends.

In April 2011 and September 2011, we paid cash distributions of $432,000 and $1,300, respectively, to our common unit holders for the payment of taxes. In April 2012 and October 2012, we paid cash distributions of $120,000 and $2,000, respectively, to our common unit holders for the payment of taxes. We also paid a cash distribution of $18,807,000 to our common unit holders in April 2012 as part of the April 2012 Corporate Reorganization (as defined herein). In April 2013 and December 2013, we paid cash distributions of $1,766,000 and $4,000,000, respectively, to our common unit holders and Series A Preferred unit holders for the payment of taxes.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2013 as follows:

 

    on an actual basis;

 

    on a pro forma basis, giving effect to the Reorganization; and

 

    on a pro forma as further adjusted basis, giving effect to (i) the issuance and sale by us of 4,606,882 shares of common stock in this offering at the initial public offering price of $15.00 per share and (ii) the application of the net proceeds as described in “Use of Proceeds.”

You should read this table in conjunction with the sections entitled “The Reorganization,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and our consolidated financial statements and related notes as of December 31, 2013, 2012 and 2011 included elsewhere in this prospectus.

 

     As of
December 31, 2013
 
         Actual         Pro forma as
adjusted for the
    Reorganization    
    Pro forma as
further
    adjusted    
 
     (in thousands, except share and per share data)  

Cash and cash equivalents

   $ 13,273      $ 13,364      $ 9,199   
  

 

 

   

 

 

   

 

 

 

Current portion of long-term debt

     9,545        9,545        9,545   

Long-term debt, less current portion

     11,545        11,545        11,545   

Long-term debt to related party

     14,682        60,875        —     

Members’ equity / stockholders’ equity

      

Common stock, $0.01 par value, no shares authorized, no shares issued and outstanding, actual; 100,000,000 shares authorized, 45,708,573 shares issued and outstanding, pro forma as adjusted for the Reorganization; 100,000,000 shares authorized, 50,315,455 shares issued and outstanding, pro forma as further adjusted

     —          17,452        17,498   

Additional paid in capital

     —          (12,340     56,717   

Members’ capital

     63,645        —          —     

Accumulated deficit

     (13,385     (37     (3,055
  

 

 

   

 

 

   

 

 

 

Total members’ equity / stockholders’ equity

     50,260        5,075        71,160   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 86,032      $ 87,040      $ 92,250   
  

 

 

   

 

 

   

 

 

 

 

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DILUTION

If you invest in our common stock, you will experience immediate and substantial dilution in the pro forma as adjusted net tangible book value of your shares. Dilution in pro forma as adjusted net tangible book value represents the difference between the public offering price per share of our common stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock immediately after the offering.

Our pro forma net tangible book value as of December 31, 2013 was $(53.5) million, or $(1.17) per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of December 31, 2013, after giving effect to the Reorganization.

After giving effect to our sale in our initial public offering of 4,606,882 shares of common stock at the initial public offering price of $15.00 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2013 would have been approximately $4.3 million, or $0.08 per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $1.25 per share to our existing stockholders and an immediate dilution of $14.92 per share to investors purchasing shares in our initial public offering.

The following table illustrates this per share dilution:

 

Assumed initial offering price per share

     $ 15.00   

Pro forma net tangible book value per share as of December 31, 2013

   $ (1.17  

Increase in pro forma net tangible book value per share attributable to investors purchasing shares in our initial public offering

   $ 1.25     
  

 

 

   

Pro forma as adjusted net tangible book value per share after our initial public offering

     $ 0.08   
    

 

 

 

Dilution in pro forma as adjusted net tangible book value per share to investors in this offering

     $ 14.92   
    

 

 

 

The following table summarizes on a pro forma as adjusted basis as of December 31, 2013, after giving effect to the Reorganization, the differences between the number of shares of our common stock purchased from us, the total cash consideration paid and the average price per share paid by our existing stockholders and by our new investors purchasing shares in our initial public offering at the initial public offering price of $15.00 per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     45,708,573         90.8     5,112,000         6.9   $ 0.11   

New investors

     4,606,882         9.2     69,103,230         93.1   $ 15.00   

Total

     50,315,455         100.0     74,215,230         100  

If the underwriters exercise their over-allotment option in full, our existing stockholders would own 90.8% and our new investors would own 9.2% of the total number of shares of our common stock outstanding after our initial public offering.

The number of common shares shown above to be outstanding after this offering is based on 50,315,455 shares of our common stock outstanding as of December 31, 2013 after giving effect to the Reorganization and excludes the following:

 

    8,121,101 shares of restricted common stock that are subject to time-based or performance-based vesting conditions, which includes 217,378 shares of restricted stock that vest upon the sale of our common stock in the initial public offering;

 

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    3,229,780 shares of our common stock reserved for future issuance under the 2014 Plan that we adopted in connection with the Reorganization; and

 

    any exercise by the underwriters of their option to purchase 996,750 additional shares of our common stock from the selling stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

We have derived the consolidated statements of income data for the years ended December 31, 2013, 2012 and 2011 and the consolidated balance sheet data as of December 31, 2013 and 2012 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the consolidated statements of income data for the years ended December 31, 2010 and 2009 and the audited consolidated balance sheet data as of December 31, 2011, 2010 and 2009 from our audited consolidated financial statements not included in this prospectus. Historical results are not necessarily indicative of results for any future period.

Our selected consolidated financial data set forth below should be read together with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto, which are included elsewhere in this prospectus.

 

    Year Ended
December 31,
 
    2013     2012     2011     2010     2009  
    (in thousands, except per unit amounts)  

Revenues:

         

Recurring

  $ 105,560      $ 75,420      $ 56,382      $ 40,585      $ 29,260   

Implementation and other

    2,041        1,390        824        716        618   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    107,601        76,810        57,206        41,301        29,878   

Expenses:

         

Cost of revenues:

         

Operating expenses

    19,070        14,895        12,287        8,927        5,880   

Depreciation

    1,821        1,431        987        675        457   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    20,891        16,326        13,274        9,602        6,337   

Administrative expenses:

         

Sales and marketing

    42,681        29,255        22,244        15,743        11,212   

Research and development

    2,146        1,632        1,225        977        665   

General and administrative

    28,884        19,450        14,707        11,040        8,327   

Depreciation and amortization

    3,682        4,092        4,300        4,091        4,074   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total administrative expenses

    77,393        54,429        42,476        31,851        24,278   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    9,317        6,055        1,456        (152     (737

Interest expense

    (2,805     (2,171     (134     —          (5

Other income, net

    1,199        354        108        129        281   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 7,711      $ 4,238      $ 1,430      $ (23   $ (461
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Distribution to Series C Preferred Unitholder

    (6,467     (4,806     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to Series A Preferred Unitholders and common unitholders

  $ 1,244      $ (568   $ 1,430      $ (23   $ (461
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per Series A Preferred Unit and common unit

         

Basic

  $ 1.30      $ (0.60   $ 1.53      $ (0.02   $ (0.49
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted(1)

  $ 1.22      $ (0.57   $ 1.49      $ (0.02   $ (0.49
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average units outstanding

         

Basic

    955,983        948,181        935,750        950,000        950,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted(1)

    1,018,305        1,004,436        960,611        950,000        950,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    As of December 31,  
    2013     2012     2011     2010     2009  
   

(in thousands)

 

Consolidated balance sheet data:

         

Cash and cash equivalents

  $ 13,273      $ 13,435      $ 7,252      $ 6,106      $ 5,609   

Restricted cash

    369        368        251        —          —     

Working capital (deficit)(2)

    (7,933     5,096        3,647        3,126        3,343   

Property, plant and equipment, net

    38,671        25,139        22,305        9,492        2,445   

Total assets

    571,567        425,857        347,575        249,153        226,449   

Deferred revenue

    12,572        8,393        5,614        3,430        2,203   

Long-term debt

    21,090        14,110        12,761        3,149        —     

Long-term debt to related party

    14,682        14,440        —          —          —     

Members’ capital

    63,645        63,542        79,373        80,208        80,075   

Accumulated deficit

    (13,385     (8,871     (8,143     (8,130     (7,137

Total members’ equity

    50,260        54,671        71,230        72,078        72,938   

 

(1) Diluted impact of incentive units have not been included to determine the diluted net loss per Series A Preferred Unit and common unit for the years ended December 31, 2010 and 2009 as we reported a net loss for those reporting periods.
(2) Working capital (deficit) is defined as current assets, excluding restricted cash, less current liabilities, excluding current portion of deferred revenue.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma condensed consolidated financial information presents our unaudited pro forma condensed consolidated balance sheet and unaudited pro forma condensed consolidated statements of income based upon our historical financial statements, after giving effect to the Reorganization and the initial public offering described in the accompanying notes. The following unaudited pro forma condensed consolidated financial information was prepared using the assumptions set forth in the notes to the unaudited pro forma condensed consolidated financial information and on a basis consistent with that used in preparing our audited consolidated financial statements and includes all adjustments, consisting of normal and recurring items, that we consider necessary for a fair presentation of our financial position and results of operations for the unaudited periods. The unaudited pro forma condensed consolidated financial information was prepared in accordance with Article 11 of Regulation S-X.

The unaudited pro forma condensed consolidated balance sheet as of December 31, 2013 reflects the Reorganization and the initial public offering as if they occurred on December 31, 2013. The unaudited pro forma condensed consolidated statements of income for the years ended December 31, 2013, 2012 and 2011 reflect the Reorganization and the initial public offering as if they occurred January 1, 2011, the beginning of the earliest period presented.

The unaudited pro forma condensed consolidated financial information is based on the shares of common stock in this offering being sold at $15.00 per share.

The unaudited pro forma condensed consolidated financial information is provided for informational purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the Reorganization and initial public offering had been completed as of the dates set forth above, nor is it indicative of our future results or financial position of our company. The unaudited pro forma condensed consolidated financial information should be read in conjunction with the sections of this prospectus entitled “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our historical consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

AS OF DECEMBER 31, 2013

(IN THOUSANDS, EXCEPT PER UNIT AND SHARE AMOUNTS)

 

    Historical     Pro forma
adjustments
for the
Reorganization
          Pro forma as
adjusted for the
Reorganization
    Pro forma
adjustments
for the

initial public
offering
          Pro forma as
adjusted for the
Reorganization
and initial
public offering
 

Assets

             

Current assets

             

Cash and cash equivalents

  $ 13,273      $ 90        (2c   $ 13,364      $ —          $ 13,364   
      1        (2d        

Deferred tax asset

    —          3,622        (2c     3,622        —            3,622   

Other current assets before funds held for clients

    4,785        —            4,785        —            4,785   

Funds held for clients

    455,779        —            455,779        —            455,779   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total current assets

    473,837        3,713          477,550        —            477,550   

Deferred tax asset

    —          45        (2a     70        —            70   
      25        (2d        

Goodwill

    51,889        —            51,889        —            51,889   

Other long-term assets

    45,841        —            45,841        —            45,841   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total assets

  $ 571,567      $ 3,783        $ 575,350      $ —          $ 575,350   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Liabilities and Member’s Equity / Stockholders’ Equity

             

Income tax payable

  $ —        $ 20        (2d   $ 20      $ —          $ 20   

Other current liabilities before client funds obligations

    27,204        —            27,204        —            27,204   

Client fund obligation

    455,779        —            455,779        —            455,779   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total current liabilities

    482,983        20          483,003        —            483,003   

Deferred tax liabilities

    —          2,755        (2c     2,755        —            2,755   

Long-term debt to related party

    14,682        46,193        (2e     60,875        (60,875     (2f     —     

Derivative liability

    1,107        —            1,107        (1,107     (2f     —     

Other long-term liabilities

    22,535        —            22,535        —            22,535   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total long-term liabilities

    38,324        48,948          87,272        (61,982       25,290   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Members’ equity / Stockholders’ equity

             

Members’ capital

    63,645        (17,452     (2b     —          —            —     
      (46,193     (2e        

Preferred stock, no shares authorized, no shares issued and outstanding, actual; 10,000,000 authorized, no shares issued and outstanding on a pro forma basis

    —          —            —          —            —     

Common stock, no shares authorized, no shares issued and outstanding, actual; 100,000,000 shares authorized, 50,315,455 shares issued and outstanding on a pro forma basis

    —          17,452        (2b     17,452        43        (2f     17,495   

Additional paid in capital

    —          1,039        (2c     (12,340     64,957        (2f     52,617   
      6        (2d        
      (13,385     (2g        

Accumulated deficit

    (13,385     46        (2a     (37     (3,018     (2f     (3,055
      (83     (2c        
      13,385        (2g        
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total members’ equity / stockholders’ equity

    50,260        (45,185       5,075        61,982          67,057   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total liabilities and members’ equity / stockholders’ equity

  $ 571,567      $ 3,783        $ 575,350      $ —          $ 575,350   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2013

(IN THOUSANDS, EXCEPT PER UNIT AND SHARE AMOUNTS)

 

    Historical     Pro forma
adjustments
for the
Reorganization
          Pro Forma as
adjusted for the
Reorganization
     Pro forma
adjustments
for the
initial public
offering
        Pro forma as
adjusted for the
Reorganization
and initial
public offering
 

Revenues

              

Recurring

  $ 105,560      $ —            105,560       $ —          $ 105,560   

Implementation and other

    2,041        —            2,041         —            2,041   
 

 

 

   

 

 

     

 

 

    

 

 

     

 

 

 

Total revenues

    107,601        —            107,601         —            107,601   

Cost of revenues

              

Operating expenses

    19,070        —            19,070         —            19,070   

Depreciation

    1,821        —            1,821         —            1,821   
 

 

 

   

 

 

     

 

 

    

 

 

     

 

 

 

Total cost of revenues

    20,891        —            20,891         —            20,891   

Administrative expenses

              

Sales and marketing

    42,681        —            42,681         —            42,681   

Research and development

    2,146        —            2,146         —            2,146   

General and administrative

    28,884        307        (3a     29,191         —            29,191   

Depreciation and amortization

    3,682        —            3,682         —            3,682   
 

 

 

   

 

 

     

 

 

    

 

 

     

 

 

 

Total administrative expenses

    77,393        307          77,700         —            77,700   

Total operating expenses

    98,284        307          98,591         —            98,591   

Operating income (loss)

    9,317        (307       9,010         —            9,010   

Interest expense

    (2,805     (6,467     (3c     (9,272      2,122      (3d)     (683
             6,467      (3c)  

Other income (expense), net

    1,199        14        (3a     1,213         (660   (3e)     553   
 

 

 

   

 

 

     

 

 

    

 

 

     

 

 

 

Income before income taxes

    7,711        (6,760       951         7,929          8,880   

Provision for income taxes

    —          3,007        (3b     370         3,092      (3f)     3,462   
      (2,637     (3f         
 

 

 

   

 

 

     

 

 

    

 

 

     

 

 

 

Net income (loss)

  $ 7,711      $ (7,130     $ 581       $ 4,837        $ 5,418   
 

 

 

   

 

 

     

 

 

    

 

 

     

 

 

 

Less: Distribution to Series C Preferred Unitholder

    (6,467             
 

 

 

              

Net income available to Series A Preferred Unitholders and common unitholders

  $ 1,244                
 

 

 

              

Net income per Series A Preferred Units and common unit

              

Basic

  $ 1.30                

Diluted

  $ 1.22                

Weighted average units outstanding

              

Basic

    955,983                

Diluted

    1,018,305                

Pro forma net income per share

              

Basic

        (3g   $ 0.01        

(3h)

  $ 0.10   
       

 

 

        

 

 

 

Diluted

        (3g   $ 0.01        

(3h)

  $ 0.10   
       

 

 

        

 

 

 

Pro forma weighted average shares outstanding

              

Basic

        (3g     47,686,326        

(3h)

    52,019,659   
       

 

 

        

 

 

 

Diluted

        (3g     48,371,489        

(3h)

    52,704,822   
       

 

 

        

 

 

 

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2012

(IN THOUSANDS, EXCEPT PER UNIT AND SHARE AMOUNTS)

 

    Historical     Pro forma
adjustments
for the
Reorganization
          Pro Forma as
adjusted for the
Reorganization
    Pro forma
adjustments
for the
initial

public
offering
          Pro forma as
adjusted for the
Reorganization

and initial public
offering
 

Revenues

             

Recurring

  $ 75,420      $ —            75,420      $ —          $ 75,420   

Implementation and other

    1,390        —            1,390        —            1,390   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total revenues

    76,810        —            76,810        —            76,810   

Cost of revenues

    —                 

Operating expenses

    14,895        —            14,895        —            14,895   

Depreciation

    1,431        —            1,431        —            1,431   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total cost of revenues

    16,326        —            16,326        —            16,326   

Administrative expenses

    —                 

Sales and marketing

    29,255        —            29,255        —            29,255   

Research and development

    1,632        —            1,632        —            1,632   

General and administrative

    19,450        2        (3a     19,452        —            19,452   

Depreciation and amortization

    4,092        —            4,092        —            4,092   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total administrative expenses

    54,429        2          54,431        —            54,431   

Total operating expenses

    70,755        2          70,757        —            70,757   

Operating income (loss)

    6,055        (2       6,053        —            6,053   

Interest expense

    (2,171     (6,467     (3c     (8,638     1,397        (3d     (774
            6,467        (3c  

Other income (expense), net

    354        15        (3a     369        (333     (3e     36   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Income before income taxes

    4,238        (6,454       (2,216     7,531          5,315   

Provision for income taxes

    —          1,653        (3b     (869     2,937        (3f     2,068   
      (2,522     (3f        
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Net income (loss)

  $ 4,238      $ (5,585     $ (1,347   $ 4,594        $ 3,247   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Less: Distribution to Series C Preferred unitholders

    (4,806            
 

 

 

             

Net loss available to Series A Preferred unitholders and common unitholders

  $ (568            
 

 

 

             

Net loss per Series A Preferred Unit and common unit

             

Basic

  $ (0.60            
 

 

 

             

Diluted

  $ (0.57            
 

 

 

             

Weighted average units outstanding

             

Basic

    948,181               
 

 

 

             

Diluted

    1,004,436               
 

 

 

             

Pro forma net loss per share

             

Basic

        (3g   $ (0.03       (3h   $ 0.06   
       

 

 

       

 

 

 

Diluted

        (3g   $ (0.03       (3h   $ 0.06   
       

 

 

       

 

 

 

Pro forma weighted average shares outstanding

             

Basic

        (3g     47,686,326          (3h     52,019,659   
       

 

 

       

 

 

 

Diluted

        (3g     47,686,326          (3h     52,704,822   
       

 

 

       

 

 

 

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2011

(IN THOUSANDS, EXCEPT PER UNIT AND SHARE AMOUNTS)

 

    Historical     Pro forma
adjustments
for the
Reorganization
          Pro Forma as
adjusted for the
Reorganization
    Pro forma
adjustments
for the
initial public
offering
          Pro forma as
adjusted for the
Reorganization

and initial
public offering
 

Revenues

             

Recurring

  $ 56,382      $ —            56,382      $ —          $ 56,382   

Implementation and other

    824        —            824        —            824   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total revenues

    57,206        —            57,206        —            57,206   

Cost of revenues

    —                 

Operating expenses

    12,287        —            12,287        —            12,287   

Depreciation

    987        —            987        —            987   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total cost of revenues

    13,274        —            13,274        —            13,274   

Administrative expenses

             

Sales and marketing

    22,244        —            22,244        —            22,244   

Research and development

    1,225        —            1,225        —            1,225   

General and administrative

    14,707        7        (3a     14,714        —            14,714   

Depreciation and amortization

    4,300        —            4,300        —            4,300   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total administrative expenses

    42,476        7          42,483        —            42,483   

Total operating expenses

    55,750        7          55,757        —            55,757   

Operating income (loss)

    1,456        (7       1,449        —            1,449   

Interest expense

    (134     (6,467     (3c     (6,601     6,467        (3c     (134

Other income (expense), net

    108        —            108        —            108   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Income before income taxes

    1,430        (6,474       (5,044     6,467          1,423   

Provision for income taxes

    —          558        (3b     (1,949     2,522        (3f     573   
      (2,522     (3f        
      15        (3a        
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Net income (loss)

  $ 1,430      $ (4,525     $ (3,095   $ 3,945        $ 850   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Net income per Series A Preferred Unit and common unit

             

Basic

  $ 1.53               
 

 

 

             

Diluted

  $ 1.49               
 

 

 

             

Weighted average units outstanding

             

Basic

    935,750               
 

 

 

             

Diluted

    960,611               
 

 

 

             

Pro forma net loss per share

             

Basic

        (3g   $ (0.06       (3h   $ 0.02   
       

 

 

       

 

 

 

Diluted

        (3g   $ (0.06       (3h   $ 0.02   
       

 

 

       

 

 

 

Pro forma weighted average shares outstanding

             

Basic

        (3g     47,686,326          (3h     52,019,659   
       

 

 

       

 

 

 

Diluted

        (3g     47,686,326          (3h     52,704,822   
       

 

 

       

 

 

 

 

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Table of Contents

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

 

1. Basis of Presentation

The historical financial information has been adjusted to give pro forma effect to events that are (i) directly attributable to the Reorganization and this offering, (ii) factually supportable, and (iii) with respect to the statements of income, expected to have a continuing impact on the future results.

Our historical results are derived from our audited consolidated statements of income of Holdings for the years ended December 31, 2013, 2012 and 2011 and audited consolidated balance sheet of Holdings as of December 31, 2013 under U.S. GAAP.

Description of the Transaction

In anticipation of this offering, Software consummated the Reorganization as of January 1, 2014, pursuant to which (i) the owners of WCAS Holdings and CP IV Blocker, which are affiliates of Welsh, Carson, Anderson & Stowe, contributed WCAS Holdings and CP IV Blocker, which collectively own all of the Series A Preferred Units of Holdings, to Software in exchange for shares of common stock of Software and (ii) the owners of outstanding Series B Preferred Units of Holdings contributed their Series B Preferred Units for shares of common stock of Software. Immediately after these contributions, a wholly-owned subsidiary of Software merged with and into Holdings with Holdings surviving the merger. Upon consummation of the merger, the remaining holders of outstanding common and incentive units of Holdings received shares of common stock of Software for their common and incentive units by operation of Delaware law and Holdings’ ownership in Software was cancelled. This resulted in Software controlling, directly or indirectly, Holdings, including Payroll, WCAS Holdings and CP IV Blocker. Outstanding common units, Series B Preferred Units, and incentive units of Holdings were converted into 45,708,573 shares of common stock and 8,121,101 shares of restricted stock of Software at the following conversion rates:

 

    Outstanding common units, Series B Preferred Units, WCAS Holdings and CP IV Blocker were contributed to Software in exchange for, or converted into, the number of shares of common stock determined by a ratio of common units, Series B Preferred Units and Series A Preferred Units to shares of common stock of approximately 1:47, resulting in issuance of 44,560,053 shares of common stock.

 

    Vested incentive units were converted to shares of common stock and restricted stock at various conversion ratios, which ranged from approximately 1:0.2 to 1:24. Unvested incentive units were converted to shares of restricted stock at various conversion ratios, which ranged from 1:24 to 1:47. The conversion to shares of common stock versus restricted stock was determined based on the underlying conditions of the pre-conversion incentive units, reflecting any pre-existing vesting conditions. This resulted in the issuance of 1,148,520 and 8,121,101 shares of common stock and restricted stock, respectively.

The restricted stock was issued subject to various vesting conditions. A portion of the restricted stock is subject to a time-based vesting condition while the remaining portion is subject to performance-based vesting conditions. The performance-based vesting is based on the Company’s total enterprise value exceeding certain specified thresholds. For additional information concerning the vesting conditions of the restricted stock, see “Executive Compensation—Narrative Discussion Regarding Summary Compensation Table—Equity Incentive Units and Restricted Stock Awards.”

Following these transactions, Series C Preferred Units of Holdings were eliminated as an intercompany transaction between Holdings and WCAS Holdings, and the 2017 Note, which was a 14% related party note issued by WCAS Holdings to its parent, WCAS Fund X L.P., was recorded upon the inclusion of WCAS Holdings. Following the Reorganization, Software became a holding company with its principal asset being the units in Holdings. Software was formed for purposes of this offering and has to date, engaged only in activities in contemplation of this offering. See “The Reorganization.”

 

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Table of Contents

WCAS Holdings and CP IV Blocker do not have any independent operations or any significant assets or liabilities and do not comprise a business. The acquisition of WCAS Holdings is deemed to be a reorganization under common control and therefore its underlying assets and liabilities are not required to be re-measured at fair value on the acquisition date. The acquisition of CP IV Blocker is not deemed to be a reorganization under common control and therefore the underlying assets and liabilities are recorded at fair value on their acquisition date.

 

2. Notes to unaudited pro forma condensed consolidated balance sheet

 

  (a) Reflects adjustments to deferred income tax assets and liabilities as a result of recognizing related deferred tax assets and liabilities assuming that the Reorganization occurred on December 31, 2013.

 

  (b) Represents the conversion of common units and Series A Preferred Units to common stock. The amount was estimated given that the Members’ Capital balance ceased to exist upon the Reorganization.

 

  (c) Reflects the inclusion of WCAS Holdings’ assets and liabilities accounted for as a transaction under common control.

 

  (d) Reflects the inclusion of CP IV Blockers’ assets and liabilities recorded at fair value as a result of the acquisition.

 

  (e) Reflects the assumption of the 2017 Note which replaced the Series C Preferred Units in connection with the Reorganization.

 

  (f) Reflects the effect of the net offering proceeds which will be used to repay the 2022 Note issued by us to an affiliate of Welsh, Carson, Anderson & Stowe in the amount of approximately $18.8 million and the 2017 Note issued by between WCAS Holdings in the amount of approximately $46.2 million (including certain payments made pursuant to a contribution agreement). Any additional net offering proceeds have been excluded for purposes of the pro forma financial information.

The 2022 Note was issued at a discount of $2.4 million and also contained a prepayment feature which was valued at $2.1 million. The prepayment feature was recorded as a derivative liability at inception and is recorded at fair value at December 31, 2013. Upon the settlement of the 2022 Note, the derivative liability would cease to exist and therefore a gain is recognized upon the settlement of the liability.

 

  (g) Reflects reclassification of historic accumulated deficit to additional paid in capital due to the Reorganization.

 

3. Notes to unaudited pro forma condensed consolidated statements of income

 

  (a) Reflects the inclusion of the results of operations from WCAS Holdings assuming that the Reorganization took effect on January 1, 2011 and assuming the acquisition of CP IV Blocker occurred on January 1, 2011 and therefore gave rise to Software controlling these entities.

 

  (b) Represents adjustments to income tax expense in connection with the deferred income tax assets and liabilities recognized given the Reorganization, which assumed that Holdings was operating as a C-corporation effective January 1, 2011. The amount was determined using an estimated statutory rate of 39%.

 

  (c) Reflects the recording of interest expense upon assuming the 2017 Note which accrues interest at 14% per annum. The 2017 Note replaced the Series C Preferred Units in the Reorganization. The interest expense is removed in the initial public offering adjustment, assuming a portion of the net proceeds from this offering were used to repay the 2017 Note on January 1, 2011.

 

  (d) Reflects the removal of the amortization from the 2022 Note issued at discount and the related interest expense as a result of using a portion of the net proceeds from this offering to repay the 2022 Note.

 

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  (e) Reflects the removal of the unrealized gains recognized for the derivative liability relating to the 2022 Note as a result of using a portion of the net proceeds from this offering to repay the 2022 Note.

 

  (f) Represents adjustments to income tax expense for the years ended December 31, 2013, 2012 and 2011 as a result of the tax impact on the pro forma adjustments relating to the Reorganization and this offering. The amount was determined using an estimated statutory tax rate of 39%.

 

  (g) Pro forma as adjusted for the Reorganization net income per weighted average basic and diluted shares outstanding reflects the conversion of all our common units, Preferred Units and incentive units into 45,708,573 and 8,121,101 of common shares and restricted shares, respectively, assuming those shares were issued January 1, 2011.

 

  (h) Pro forma net income as adjusted for the Reorganization and initial public offering per weighted average basic and diluted shares outstanding gives effect to the issuance of 4,606,882 common shares relating to the net offering proceeds which will be used to partially repay the 2022 Note and repay in full the 2017 Note, using the initial public offering price of $15.00 per share, and the conversion of all our common units, Preferred Units and incentive units into 45,708,573 and 8,121,101 of common shares and restricted shares, respectively, assuming all shares were issued January 1, 2011.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus. The following discussion contains forward-looking statements that are subject to risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions associated with those statements. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly in the section entitled “Risk Factors.”

Overview

We are a leading provider of a comprehensive, cloud-based HCM software solution delivered as SaaS. We provide functionality and data analytics that businesses need to manage the complete employment life cycle from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and HR management applications. Our user-friendly software allows for easy adoption of our solution by employees, enabling self-management of their HCM activities in the cloud, which reduces the administrative burden on employers and increases employee productivity.

We serve a diverse client base in terms of size and industry. We have over 10,000 clients, none of which constituted more than one-half of one percent of our revenues for the year ended December 31, 2013. We stored data for more than 1,000,000 persons employed by our clients during the year ended December 31, 2013.

Our revenues are primarily generated through our sales force that solicits new clients and our client relations representatives, or CRRs, who sell new applications to existing clients. We have 30 sales teams located in 20 states and plan to open additional sales offices to further expand our presence in the U.S. market. In recent years, we have opened three to four new sales offices in new cities per year and believe that we can increase this annual number to four to six new sales offices in the future.

Our continued growth depends on attracting new clients through geographic expansion, further penetration of our existing markets and the introduction of new applications to our existing client base. We also expect a portion of our growth to generally mirror improvements in the labor market. Our principal marketing programs include telemarketing and email campaigns, search engine marketing methods and national radio advertising.

During the last three years, we have developed several new applications. Our ability to continue to develop new applications and to improve existing applications will enable us to increase revenues in the future, and the number of our new applications adopted by our clients has been a significant factor in our revenue growth over the last three years.

The Reorganization

In anticipation of this offering, we consummated the Reorganization, as of January 1, 2014. Following the Reorganization, Software became a holding company, the principal asset of which is the units in Holdings. The following discussion and analysis of our financial condition and results of operations covers periods prior to the Reorganization and reflects the operations of Holdings and its consolidated subsidiary.

Trends, Opportunities and Challenges

While we currently derive most of our revenues from payroll processing, we expect an increasing percentage of our recurring revenues to come from our additional HCM applications over time. For example, approximately 58%, 60% and 68% of our revenues for the years ended December 31, 2013, 2012 and 2011,

 

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respectively, were derived from payroll processing. Our payroll application is the foundation of our solution and all of our clients are required to utilize this application in order to access our other applications. As a result of our evolving revenue mix, coupled with the unique client benefits that our solution provides (e.g., enabling our clients to scale the number of HCM applications that they use on an as-needed basis), we are presented with a variety of opportunities, challenges and risks.

We generate revenues from (i) fixed amounts charged per billing period or (ii) fixed amounts charged per billing period plus a fee per employee or transaction processed. We do not require clients to enter into long-term contractual commitments with us. Our billing period varies by client based on when they pay their employees, which is either weekly, bi-weekly, semi-monthly or monthly.

We do not have a traditional subscription-based revenue model and do not enter into long-term contractual commitments with our clients. We believe that the traditional subscription model hinders the buying decision by requiring clients to make significant commitments at inception, as well as at the end of each subscription term. By allowing clients to discontinue the use of our solution with 30 days’ notice, our team of trained specialists must focus on providing the best client service. In contrast, a long-term contract often forces a client to continue using a product that may not entirely fit its needs or, in some cases, incur expensive termination fees. Because of our sales model and personalized service, we have maintained high client satisfaction, as evidenced by an average annual revenue retention rate of 91% from existing clients for the three years ended December 31, 2013.

For the year ended December 31, 2013, our gross margin was approximately 81%. We expect changes in our revenue mix to continue to improve gross margins as our current gross margin for our HCM applications is higher than our gross margin for payroll processing. We expect that our total gross margin will gradually improve over time as (i) we add additional clients, (ii) our existing clients deploy additional HCM applications and (iii) we reduce our costs of revenues and administrative expenses as a percentage of total revenues.

Growing our business has also resulted in, and will continue to result in, substantial investment in sales professionals, operating expenses, systems development and programming costs and general and administrative expenses, which has and will continue to increase our expenses. We intend to obtain new clients by (i) continuing to expand our presence in metropolitan areas where we currently have an existing sales office through adding sales teams or offices and increasing the number of our sales professionals and (ii) opening sales offices in new metropolitan areas. Our ability to increase revenues and improve operating results depend on our ability to add new clients.

As we have organically grown our operations and increased the number of our applications, the average size of our clients has also grown significantly. Based on our total revenues, we have grown at an approximately 38% CAGR since 2009. Because we charge our clients on a per employee basis for certain services we provide, any increase or decrease in the number of employees that our clients have will have a positive or negative impact on our results of operations. Our solution requires no adjustment to serve larger clients. We believe larger employers represent a substantial opportunity to increase the number of potential clients and to increase our revenue per client, with limited incremental cost to us. From January 1, 2011 through December 31, 2013, we increased our annualized recurring revenue per average client by 52.7% in part by targeting larger clients and enlarging our existing client relationships.

Throughout our history, we have built strong relationships with our clients. As the HCM needs of our clients evolve, we believe that we are well-positioned to gain additional share of their HCM spending of our clients, and we believe this opportunity is significant. To be successful, we must continue to demonstrate the operational and economic benefits of our solution, as well as effectively hire, train, motivate and retain qualified personnel and executive officers.

 

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Key Metrics

In addition to the U.S. GAAP metrics that we regularly monitor, we also monitor the following metrics to evaluate our business, measure our performance and identify trends affecting our business:

 

     Year Ended December 31,  
     2013     2012     2011  
     (dollars in thousands)  

Key performance indicators:

      

Clients

     10,792        9,233        7,955   

Clients (based on parent company grouping)

     6,788        5,904        5,130   

Sales teams

     26        23        20   

Annualized New Recurring Revenue

   $ 38,236      $ 27,686      $ 23,011   

Revenue retention rate

     91     91     92

 

    Clients. When we calculate the number of clients, we treat client accounts with separate taxpayer identification numbers as separate clients, which often separates client accounts that are affiliated with the same parent organization. We track the number of our clients as it provides an accurate gauge of the size of our business. Unless we state otherwise or the context otherwise requires, references to clients throughout this prospectus refer to this metric.

 

    Clients (based on parent company grouping). When we calculate the number of clients based on parent company grouping, we combine client accounts that have identified the same person(s) as their decision-maker regardless of whether the client accounts have separate taxpayer identification numbers, which often combines client accounts that are affiliated with the same parent organization. We track the number of our clients based on parent company grouping as it provides an alternate measure of the size of our business and clients.

 

    Sales Teams. We monitor our sales professionals by the number of sales teams and each team is comprised of approximately seven to nine sales professionals. Certain larger metropolitan areas can support more than one sales team. We believe that the number of sales teams is an indicator of revenue for future periods.

 

    Annualized New Recurring Revenue. While we do not enter into long-term contractual commitments with our clients, we monitor annualized new recurring revenue as we believe it is an indicator of revenue for future periods. Annualized new recurring revenue is an estimate based on the annualized amount of the first full month of revenue attributable to new clients that were added or existing clients that purchased additional applications during the period presented. Annualized new recurring revenue only includes revenues from these clients who have used our solution for at least one month during the period. Since annualized new recurring revenue is only recorded after a client uses our solution for one month, it includes revenue that has been recognized in historical periods.

 

    Revenue Retention Rate. Our average annual revenue retention rate tracks the percentage of revenue that we retain from our existing clients. We monitor this metric because it is an indicator of client satisfaction and revenue for future periods.

Components of Results of Operations

Sources of Revenues

Revenues are comprised of recurring revenues, and implementation and other revenues. Recurring revenues are recognized in the period services are rendered. Implementation and other revenues includes implementation revenues that are recorded as deferred revenues and recognized over the life of the client which is estimated to be ten years and other revenues which are recognized upon shipment of time clocks. Implementation and other revenue comprised approximately 1.9% of our total revenues for the year ended December 31, 2013. We expect

 

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our revenues to increase as we introduce new applications, expand our client base and renew and expand relationships with existing clients. As a percentage of total revenues, we expect our mix of recurring revenues, and implementation and other revenues to remain relatively constant.

Recurring. Recurring revenues include fees for our talent acquisition, time and labor management, payroll, talent management and HR management applications as well as fees charged for delivery of client payroll checks and reports. These revenues are derived from: (i) fixed amounts charged per processing period or (ii) fixed amounts charged per processing period plus a fee per employee or transaction processed. Because recurring revenues are based in part on fees for use of our applications and the delivery of checks and reports that are levied on a per-employee basis, our recurring revenues increase as our clients hire more employees.

Implementation and Other. Implementation and other revenues are comprised of implementation fees for the deployment of our solution and other revenue from sales of time clocks as part of our time and attendance services. Non-refundable implementation fees which are charged to new clients are generated at inception for a new client and upon the addition of certain incremental applications for existing clients. These fees range from 10% to 30% of the annualized value of the transaction.

Expenses

Cost of Revenues. Cost of revenues consists of expenses related to hosting and supporting our applications, hardware costs, systems support and technology and depreciation of certain owned computer equipment. These costs include employee-related expenses for client support personnel, bank charges for processing ACH transactions, along with delivery charges and paper costs. They also include our cost for clocks held for sale and ongoing technology and support costs related to our systems. Depreciation of owned computer equipment is allocated based upon an estimate of assets used to host and support our applications. We expect our cost of revenues to increase as we continue to invest in new applications and expand our client base, although we expect our overall cost of revenues to gradually decrease as a percentage of total revenues over time.

Administrative Expenses. Administrative expenses consist of sales and marketing, research and development, general and administrative and depreciation and amortization. Sales and marketing expenses consist primarily of employee-related expenses for our direct sales and marketing staff, commissions, bonuses, marketing expenses and other related costs. Research and development expenses consist primarily of employee-related expenses for our development staff, net of capitalized software costs for internally developed software. We expect to grow our research and development efforts as we continue to broaden our payroll and HR solution offerings and extend our technological solutions by investing in the development of new solutions and introducing them to new and existing clients. General and administrative expenses include employee-related expenses for finance and accounting, legal, human resources and management information systems personnel, legal costs, professional fees and other corporate expenses. Depreciation and amortization expenses include depreciation of owned computer equipment allocated based upon an estimate of assets used to support the selling, general and administrative functions, as well as amortization of intangible assets. We expect our administrative expenses to increase in absolute dollars due to additional costs associated with accounting, compliance, investor relations, and other costs associated with being a public company, although our administrative expenses may fluctuate as a percentage of total revenue.

Interest Expense

Interest expense includes interest on the debt incurred for the construction of our corporate headquarters and related party debt. The increase in interest expense for the year ended December 31, 2013 is primarily due to recognizing a full year of interest expense related to the related party debt entered into in connection with the April 2012 Corporate Reorganization in 2013 as opposed to a partial year expense in 2012. We expect our interest expense to remain consistent until the completion of this offering. We intend to use a portion of the net proceeds received from this offering for the repayment of the 2022 Note, at which point we expect our interest expense to decrease.

 

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Other Income, net

Other income, net includes the gain or loss on the sale of fixed assets, interest on funds held for clients that are earned primarily on funds that are collected in advance of either the applicable due date for payroll tax submissions or the applicable disbursement date for employee payment services and change in fair value of the derivative liability relating to the related party debt. We typically invest funds held for clients in money market accounts and certificates of deposit until they are paid to the applicable tax or regulatory agencies or to client employees. These collections from clients are typically disbursed from one to 30 days after receipt, with some funds being held for up to 120 days. We expect that interest on funds held for clients in other income will increase as we grow our cash and increase our funds held from clients as we introduce new applications, expand our client base and renew and expand relationships with existing clients.

Results of Operations

The following tables set forth selected consolidated statement of income data and such data as a percentage of total revenues for each of the periods indicated:

 

     Year Ended December 31,  
     2013     2012     2011  
     (in thousands)  

Consolidated statement of income data:

  

 

Revenues:

      

Recurring

   $ 105,560      $ 75,420      $ 56,382   

Implementation and other

     2,041        1,390        824   
  

 

 

   

 

 

   

 

 

 

Total revenues

     107,601        76,810        57,206   

Expenses:

      

Cost of revenues:

      

Operating expenses

     19,070        14,895        12,287   

Depreciation

     1,821        1,431        987   
  

 

 

   

 

 

   

 

 

 

Total cost of revenues

     20,891        16,326        13,274   

Administrative expenses:

      

Sales and marketing

     42,681        29,255        22,244   

Research and development

     2,146        1,632        1,225   

General and administrative

     28,884        19,450        14,707   

Depreciation and amortization

     3,682        4,092        4,300   
  

 

 

   

 

 

   

 

 

 

Total administrative expenses

     77,393        54,429        42,476   
  

 

 

   

 

 

   

 

 

 

Operating income

     9,317        6,055        1,456   

Interest expense

     (2,805     (2,171     (134

Other income, net

     1,199        354        108   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 7,711      $ 4,238      $ 1,430   
  

 

 

   

 

 

   

 

 

 

 

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Consolidated Statement of Income Data as a Percentage of Revenues

 

     Year Ended December 31,  
         2013             2012             2011      

Consolidated statement of income data:

      

Revenues:

      

Recurring

     98.1     98.2     98.6

Implementation and other

     1.9        1.8        1.4   
  

 

 

   

 

 

   

 

 

 

Total revenues

     100.0        100.0        100.0   

Expenses:

      

Cost of revenues:

      

Operating expenses

     17.7        19.4        21.5   

Depreciation

     1.7        1.9        1.7   
  

 

 

   

 

 

   

 

 

 

Total cost of revenues

     19.4        21.3        23.2   

Administrative expenses:

      

Sales and marketing

     39.7        38.1        38.9   

Research and development

     2.0        2.1        2.1   

General and administrative

     26.8        25.3        25.7   

Depreciation and amortization

     3.4        5.3        7.5   
  

 

 

   

 

 

   

 

 

 

Total administrative expenses

     71.9        70.9        74.3   
  

 

 

   

 

 

   

 

 

 

Operating income

     8.7        7.9        2.5   

Interest expense

     (2.6     (2.8     (0.2

Other income, net

     1.1        0.5        0.2   
  

 

 

   

 

 

   

 

 

 

Net income

     7.2     5.5     2.5
  

 

 

   

 

 

   

 

 

 

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012 and Year Ended December 31, 2012 compared to Year Ended December 31, 2011

Revenues

 

     Year Ended December 31,      % Change  
     2013      2012      2011      2013 v 2012     2012 v 2011  
     (in thousands)               

Recurring

   $ 105,560       $ 75,420       $ 56,382         40.0     33.8

Implementation and other

     2,041         1,390         824         46.8        68.7   
  

 

 

    

 

 

    

 

 

      

Total revenues

   $ 107,601       $ 76,810       $ 57,206         40.1     34.3
  

 

 

    

 

 

    

 

 

      

Total revenues were $107.6 million for the year ended December 31, 2013, compared to $76.8 million for the year ended December 31, 2012, an increase of $30.8 million, or 40.1%. For the year ended December 31, 2013, our client count increased 16.9% and recurring revenue per average client (based on the average number of clients outstanding during the period) increased 17.7%, as compared to the year ended December 31, 2012. The increase in revenues was due to a combination of factors, including (i) the addition of clients in mature sales offices (those offices that have been open for at least 24 months), (ii) the addition of new clients in more recently opened sales offices, (iii) the introduction and sale of additional applications to our existing clients and (iv) the growth in the number of employees of our clients.

Total revenues were $76.8 million for the year ended December 31, 2012, compared to $57.2 million for the year ended December 31, 2011, an increase of $19.6 million, or 34.3%. For the year ended December 31, 2012, our client count increased 16.1% and recurring revenue per average client (based on the average number of

 

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clients outstanding during the period) increased 14.9%, as compared to the year ended December 31, 2011. The increase in revenues was due to a combination of factors, including (i) the addition of clients in mature sales offices, (ii) the addition of new clients in more recently opened sales offices, (iii) the introduction and sale of additional applications to our existing clients and (iv) the growth in the number of employees of our clients.

Expenses

Cost of Revenues

 

     Year Ended December 31,      % Change  
     2013      2012      2011      2013 v 2012     2012 v 2011  
     (in thousands)               

Operating expenses

   $ 19,070       $ 14,895       $ 12,287         28.0     21.2

Depreciation

     1,821         1,431         987         27.3        45.0   
  

 

 

    

 

 

    

 

 

      

Total cost of revenues

   $ 20,891       $ 16,326       $ 13,274         28.0     23.0
  

 

 

    

 

 

    

 

 

      

Cost of revenues was $20.9 million for the year ended December 31, 2013, compared to $16.3 million for the year ended December 31, 2012, an increase of $4.6 million, or 28.0%. The increase in cost of revenues was due primarily to increases of $2.1 million in employee costs related to additional operating personnel, $565,000 in bank fees related to increased sales, $521,000 in shipping and paper costs, $487,000 in technology expense and $249,000 related to our background check service and clock costs of $157,000, related to increased sales of time clocks. Depreciation expense increased $390,000, primarily due to additional assets purchased.

Cost of revenues was $16.3 million for the year ended December 31, 2012, compared to $13.3 million for the year ended December 31, 2011, an increase of $3.1 million, or 23.0%. The increase in cost of revenues was due primarily to increases of $1.9 million in employee costs related to additional operating personnel, $117,000 in paper costs, $258,000 in bank fees related to increased sales, $179,000 related to our background check service and $125,000 in clock costs, relating to increased sales of time clocks versus leased clocks. Depreciation expense increased $444,000, primarily due to entire year of depreciation on data center assets purchased in connection with the construction of our data center in Oklahoma, which was completed in July 2011.

Administrative Expenses

 

     Year Ended December 31,      % Change  
     2013      2012      2011      2013 v 2012     2012 v 2011  
     (in thousands)               

Sales and marketing

   $ 42,681       $ 29,255       $ 22,244         45.9     31.5

Research and development

     2,146         1,632         1,225         31.5        33.2   

General and administrative

     28,884         19,450         14,707         48.5        32.2   

Depreciation and amortization

     3,682         4,092         4,300         (10.0     (4.8
  

 

 

    

 

 

    

 

 

      

Total administrative expenses

   $ 77,393       $ 54,429       $ 42,476         42.2     28.1
  

 

 

    

 

 

    

 

 

      

Total administrative expenses were $77.4 million for the year ended December 31, 2013, compared to $54.4 million for the year ended December 31, 2012, an increase of $23.0 million, or 42.2%. Sales and marketing expenses increased primarily due to a $5.5 million increase in employee-related expenses, resulting from a 28.6% increase in the number of personnel, a $4.6 million increase in commission and bonuses, resulting from increased sales and an increase in marketing expense of $1.1 million primarily due to increased radio and print advertising. Research and development expenses increased primarily due to an increase of 55.0% in the number of development personnel, along with bonus expense. General and administrative expenses increased primarily due to a $4.1 million increase in employee-related expenses, resulting from a 52.5% increase in the number of personnel, along with $2.7 million of expenses related to the initial public offering.

 

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Total administrative expenses were $54.4 million for the year ended December 31, 2012, compared to $42.5 million for the year ended December 31, 2011, an increase of $12.0 million, or 28.1%. Sales and marketing expenses increased primarily due to a $3.3 million increase in employee-related expenses, resulting from a 8.9% increase in the number of personnel, a $1.6 million increase in commission and bonuses, resulting from increased sales and an increase in marketing expense of $635,000 primarily due to increased radio and print advertising. Research and development expenses increased primarily due to an increase of 29.0% in the number of development personnel, along with bonus expense. General and administrative expenses increased primarily due to a $3.6 million increase in employee-related expenses, resulting from a 19.1% increase in the number of personnel, along with increases in administrative expenses related to travel, communication and transportation.

Expenditures for software developed or obtained for internal use are capitalized and amortized over a three-year period on a straight-line basis. The timing of the capitalized expenditures may affect the amount of development costs expensed in any given period. The table below sets forth the amounts of capitalized and expensed research and development expenses for the years ended December 31, 2013, 2012 and 2011.

 

     Year Ended December 31,      % Change  
     2013      2012      2011      2013 v 2012     2012 v 2011  
     (in thousands)               

Capitalized portion of research and development

   $ 1,238       $ 613       $ 497         102.0     23.3

Expensed portion of research and development

     2,146         1,632         1,225         31.5        33.2   
  

 

 

    

 

 

    

 

 

      

Total research and development

   $ 3,384       $ 2,245       $ 1,722         50.7     30.4
  

 

 

    

 

 

    

 

 

      

 

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Quarterly Results of Operations

The following tables set forth selected unaudited quarterly condensed consolidated statements of income data for each of the 12 quarters for the three years ended December 31, 2013. The information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, includes all adjustments, which includes only normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods in accordance with U.S. GAAP. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for a full year or any future period.

 

    Three Months Ended  
    Dec 31,
2013
    Sep 30,
2013
    Jun 30,
2013
    Mar 31,
2013
    Dec 31,
2012
    Sep 30,
2012
    Jun 30,
2012
    Mar 30,
2012
    Dec 31,
2011
    Sep 30,
2011
    Jun 30,
2011
    Mar 30,
2011
 
    (in thousands)  

Consolidated statement of income data:

                       

Revenues

                       

Recurring

  $ 29,752      $ 25,211      $ 23,393      $ 27,204      $ 20,835      $ 18,246      $ 16,817      $ 19,522      $ 15,377      $ 13,721      $ 12,553      $ 14,731   

Implementation and other

    528        620        520        373        472        321        275        322        261        233        157        173   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    30,280        25,831        23,913        27,577        21,307        18,567        17,092        19,844        15,638        13,954        12,710        14,904   

Expenses

                       

Cost of revenues

                       

Operating expenses

    5,437        4,846        4,353        4,434        3,965        3,747        3,366        3,817        3,412        3,089        2,856        2,930   

Depreciation

    501        494        415        411        390        368        341        332        313        261        219        194   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    5,938        5,340        4,768        4,845        4,355        4,115        3,707        4,149        3,725        3,350        3,075        3,124   

Administrative expenses

                       

Sales and marketing

    13,768        10,339        8,716        9,858        8,480        6,860        6,649        7,266        6,719        5,653        4,641        5,231   

Research and development

    829        538        324        455        349        361        542        380        293        390        285        257   

General and administrative

    10,033        6,815        6,040        5,996        5,534        4,778        4,803        4,335        4,141        3,758        3,447        3,361   

Depreciation and amortization

    966        959        873        884        841        837        1,212        1,202        1,174        1,087        1,041        998   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total administrative expenses

    25,596        18,651        15,953        17,193        15,204        12,836        13,206        13,183        12,327        10,888        9,414        9,847   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (1,254     1,840        3,192        5,539        1,748        1,616        179        2,512        (414     (284     221        1,933   

Interest expense

    (713     (699     (713     (680     (702     (683     (650     (136     (134     —          —          —     

Other (expense) income, net

    1,059        (133     (338     611        19        256        66        13        10        13        57        28   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (908   $ 1,008      $ 2,141      $ 5,470      $ 1,065      $ 1,189      $ (405   $ 2,389      $ (538   $ (271   $ 278      $ 1,961   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Revenues Trends

Excluding changes in quarterly revenues due to seasonal factors, our quarterly revenues generally increased sequentially for the periods presented due to a combination of factors, including (i) the addition of clients in mature sales offices, (ii) the addition of new clients in more recently opened sales offices, (iii) the introduction and sale of additional applications to our existing clients and (iv) the growth in the number of employees of our clients. In addition, the annual processing of payroll forms were subject to a one-time price increase in conjunction with increased access and review functionality associated with these forms in 2012, which resulted in an increase of less than 1% of recurring revenues for the years ended December 31, 2013 and 2012.

There are also seasonal factors that affect our revenues. Recurring revenues include revenues relating to the annual processing of payroll forms such as Form W-2 and Form 1099, or Payroll Form Revenues. Because these forms are typically processed in the first quarter of the year, first quarter revenue and margins are generally higher than subsequent quarters. For example, Payroll Form Revenues accounted for 21.5% of total revenues for the three months ended March 31, 2013 and 5.5% of total revenues for the year ended December 31, 2013.

 

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Quarterly Expenses Trends

Selling, general and administrative expenses are generally higher in the fourth and first quarters, due to overtime hours related to preparing client rollovers to the new year, and the preparation of annual client filings.

Liquidity and Capital Resources

As of December 31, 2013, our principal sources of liquidity were cash and cash equivalents totaling $13.3 million. Our cash and cash equivalents are comprised primarily of deposit accounts and money market funds.

We have primarily financed our operations from cash flows generated from operations and through the sale of equity securities. Since inception, we have raised $56.0 million of equity capital. We have also incurred debt to finance the expansion of our corporate headquarters that is currently under construction, as well as other previously constructed facilities, and incurred a related party debt as part of our April 2012 Corporate Reorganization. As of December 31, 2013, the outstanding principal amount of our debt was $35.8 million, which consisted of the 2011 Consolidated Loan, the 2013 Consolidated Loan and the 2022 Note, each of which are discussed in more detail below. In connection with the Reorganization, we also assumed the 2017 Note, which is discussed below.

2011 Consolidated Loan. As of December 31, 2013, we had the 2011 Consolidated Loan with an outstanding principal amount of $12.0 million from Kirkpatrick Bank, due December 15, 2018. At March 31, 2014, the outstanding principal amount under the 2011 Consolidated Loan was approximately $11.9 million. Under the 2011 Consolidated Loan, principal and interest are payable monthly based on a 20-year amortization at an annual rate of 5.0%. The 2011 Consolidated Loan is collateralized by a first mortgage covering our corporate headquarters and is secured by a first lien security interest in certain personal property relating to our corporate headquarters.

We are required to comply with certain financial and non-financial covenants under the Consolidated Loan, including maintaining a debt coverage ratio of EBITDA to indebtedness (defined as current maturities of long- term debt, interest expense and distributions) of not less than 1.5 to 1.0. As of December 31, 2013, the debt coverage ratio was 0.66 and we were not in compliance with the covenant. This was due to the short-term land loan outstanding as of December 31, 2012 and the 2013 Consolidated Loan being included in the calculation of the debt service ratio. The short-term land loan was paid in full from an advance from the 2013 Consolidated Loan during the year ended December 31, 2013. We obtained a letter of waiver from the lender that excluded these items from the calculation of the debt service ratio as of December 31, 2013, which remains in effect through January 15, 2015.

Pursuant to the terms of the 2011 Consolidated Loan, we may not, subject to certain exceptions, until amounts under the 2011 Consolidated Loan are repaid: (i) create any mortgages or liens, (ii) make any loans, advances or extensions of credit with any affiliate or enter into any other transaction with any affiliate, (iii) lease any mortgaged property, (iv) make any distributions to members as long as an event of default exists, (v) make any material change its methods of accounting, (vi) enter into any sale and leaseback arrangement, (vii) amend, modify, restate, cancel or terminate our organizational documents, (viii) sell, transfer or convey any mortgaged property or (ix) incur funded outside debt.

An event of default under the 2011 Consolidated Loan includes, among other events, (i) failure to pay principal or interest when due, (ii) breaches of certain covenants, (iii) the failure to meet the required financial covenants and (iv) the institution of a bankruptcy, reorganization, liquidation or receivership.

2013 Consolidated Loan. As of December 31, 2013, we also had the 2013 Consolidated Loan with an outstanding principal amount of $9.1 million and which allows for a maximum principal amount of $14.6 million under the modification agreement for future expansion from Kirkpatrick Bank, due May 1, 2015. At March 31, 2014, the outstanding principal amount under the 2013 Consolidated Loan was approximately $13.5 million.

 

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Under the 2013 Consolidated Loan, interest accrues monthly at the Wall Street Journal U.S. Prime rate plus 0.5%, adjusted monthly, subject to a minimum interest rate of 4.0% per annum. Outstanding amounts under the 2013 Consolidated Loan are secured by a first mortgage covering all of the second headquarters building and a first lien security interest in certain personal property relating to our second headquarters building.

We are required to comply with certain financial and non-financial covenants under the 2013 Consolidated Loan, including maintaining a debt coverage ratio of EBITDA to indebtedness (defined as current maturities of long- term debt, interest expense and distributions) of not less than 1.5 to 1.0. As of December 31, 2013, the debt coverage ratio was 0.66 and we were not in compliance with the covenant. This was due to the short-term land loan and the 2013 Consolidated Loan being included in the calculation of the debt service ratio. The short-term land loan was paid in full from an advance from the 2013 Consolidated Loan during the year ended December 31, 2013. We obtained a letter of waiver from the lender that excluded these items from the calculation of the debt service ratio as of December 31, 2013, which remains in effect through January 15, 2015.

Pursuant to the terms of the 2013 Consolidated Loan, we may not, subject to certain exceptions, until amounts under the 2013 Consolidated Loan are repaid: (i) create any mortgages or liens, (ii) make any loans, advances or extensions of credit with any affiliate or enter into any other transaction with any affiliate, (iii) lease any mortgaged property, (iv) make any distributions to members as long as an event of default exists, (v) make any material change its methods of accounting, (vi) enter into any sale and leaseback arrangement, (vii) amend, modify, restate, cancel or terminate our organizational documents, (viii) sell, transfer or convey any mortgaged property or (ix) incur funded outside debt.

An event of default under the 2013 Consolidated Loan includes, among other events, (i) failure to pay principal or interest when due, (ii) breaches of certain covenants, (iii) the failure to meet the required financial covenants and (iv) the institution of a bankruptcy, reorganization, liquidation or receivership.

2022 Note. In connection with the April 2012 Corporate Reorganization, we entered into the 2022 Note with WCAS Capital IV, a related party. As of December 31, 2013, the outstanding principal amount of the 2022 Note was $14.7 million (which included an unamortized discount of $4.1 million). At March 31, 2014, the outstanding principal amount under the 2022 Note was approximately $14.7 million (which included an unamortized discount of $4.1 million). The 2022 Note is due on April 3, 2022 and interest is payable at an annual rate of 10%, payable semiannually in arrears on June 30 and December 31 of each year. We may, at our option, choose to defer all or a portion of the accrued interest on the note that is due and payable on any payment date, provided that such amount of accrued interest shall be multiplied by 1.3 and added to the principal amount of the note on such interest payment date (with the result that such interest shall have accrued at an effective rate of 13.0% instead of 10.0% through such payment date). As of December 31, 2013, such option has not been elected and all interest has been paid in cash.

2017 Note. In connection with the Reorganization, we assumed the 2017 Note that was issued by WCAS Holdings payable to WCAS X. As of March 31, 2014, the outstanding principal amount of the 2017 Note was $46.2 million (which excluded accrued interest of $1.6 million). The 2017 Note is due on April 3, 2017 and interest is payable at an annual rate of 14.0%, payable semiannually in arrears on June 30 and December 31 of each year. We may, at our option, choose to defer all or a portion of the accrued interest on the note that is due and payable on any payment date, provided that such amount of accrued interest shall be added to the principal amount of the note on such interest payment date (with the accrued but unpaid interest bearing interest at an annual rate of 14.0%). As of March 31, 2014, such option had not been elected and all interest had been paid in cash.

Our cash flows from operating activities have historically been significantly impacted by profitability, implementation revenue received but deferred, and our investment in sales and marketing to drive growth. Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment in our operations. We believe our existing cash and cash equivalents and cash provided by this offering will be sufficient to meet our working capital and capital expenditure needs over at least the next

 

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12 months. Failure to generate sufficient revenue and related cash flows or to raise additional capital could have a material adverse effect on our ability to meet our liquidity needs and achieve our business objectives.

As part of our payroll and payroll tax filing services, we collect funds for federal, state and local employment taxes from our clients which we remit to the appropriate tax agencies. We invest these funds in short-term certificates of deposit and money market funds from which we earn interest income during the period between their receipt and disbursement. As our business grows, we expect our capital expenditures and our investment activity to continue to increase.

Depending on certain growth opportunities, we may choose to accelerate investments in sales and marketing, acquisitions, technology and services, which may require the use of proceeds from this offering for such additional expansion and expenditures. Actual future capital requirements will depend on many factors, including our future revenues, cash from operating activities and the level of expenditures in all areas of our business.

Cash Flows

The following table summarizes the consolidated statement of cash flows for the years ended December 31, 2013, 2012 and 2011:

 

     Year Ended December 31,     % Change  
     2013     2012     2011     2013 v 2012     2012 v 2011  
     (in thousands)              

Net cash provided by (used in):

          

Operating activities

   $ 23,721      $ 15,782      $ 9,085        50.3     73.7

Investing activities

     (148,442     (76,983     (102,299     (92.8     24.7   

Financing activities

     124,559        67,384        94,360        84.8        (28.6
  

 

 

   

 

 

   

 

 

     

Change in cash and cash equivalents

   $ (162   $ 6,183      $ 1,146        (102.6 )%      439.5
  

 

 

   

 

 

   

 

 

     

Operating Activities

For the year ended December 31, 2013, cash flows provided by operating activities was $23.7 million. The cash flows provided by operating activities resulted primarily from net income of $7.7 million related to a 40.0% increase in recurring revenues over the comparable period in 2012, as well as depreciation and amortization of $5.5 million and an increase in deferred revenue of $4.2 million related to increased implementation fees.

For the year ended December 31, 2012, cash flows provided by operating activities was $15.8 million. The cash flows provided by operating activities resulted primarily from net income of $4.2 million related to an increase in recurring revenue, as well as depreciation and amortization of $5.5 million and an increase in deferred revenue of $2.8 million related to increased implementation fees.

Investing Activities

For the year ended December 31, 2013, cash used in investing activities was $148.4 million. The cash flows used in investing activities resulted primarily from an increase in funds from clients of $131.5 million related to collection of client taxes and capital expenditures related to investments in real property, software and development and facilities and equipment of $17.2 million.

For the year ended December 31, 2012, cash used in investing activities was $77.0 million. The cash flows used in investing activities resulted primarily from an increase in funds from clients of $71.0 million related to the collection of client taxes and capital expenditures related to investments in real property, software and development and facilities and equipment of $6.0 million.

 

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Financing Activities

For the year ended December 31, 2013, cash flows provided by financing activities was $124.6 million. The cash flows provided by financing activities resulted primarily from an increase in client funds obligations of $131.5 million related to the collection of client taxes and advances received from the 2013 Consolidated Loan of $7.0 million, which were partially offset by distributions to members of $12.2 million.

For the year ended December 31, 2012, cash flows provided by financing activities was $67.4 million. The cash flows provided by financing activities resulted primarily from an increase in client funds obligations of $71.0 million related to the collection of client taxes and proceeds from the 2022 Note of $16.4 million, which were partially offset by distributions to members of $23.8 million.

Contractual Obligations

Our principal commitments primarily consist of long-term debt to a related party and other creditors and leases for office space. We disclose our long-term debt to a related party in Note 5 and our commitments and contingencies in Note 11 to our audited consolidated financial statements included elsewhere in this prospectus.

As of December 31, 2013, the future non-cancelable minimum payments under these commitments were as follows:

 

            Payments Due by Period  
     Total      Less
than
1 Year
     1-3
Years
     3-5
Years
     More
than
5 Years
 
     (in thousands)  

Long-term debt obligations(1)

   $ 21,090       $ 9,545       $ 901       $ 10,644       $ —     

2022 Note

     18,807         —           —           —           18,807   

Interest on 2022 Note

     15,515         1,881         3,761         3,761         6,112   

Interest on the 2011 Consolidated Loan

     6,304         597         1,129         1,031         3,547   

Interest on the 2013 Consolidated Loan(2)

     30         30            

Operating lease obligations:

              

Facilities space

     8,304         2,222         3,859         2,170         53   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 70,050       $ 14,275       $ 9,650       $ 17,606       $ 28,519   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The amount represents principal amounts of 2011 Consolidated Loan and the 2013 Consolidated Loan at maturity.
(2) As we have the option to repay for the principal amount of the 2013 Consolidated Loan prior to the maturity date, the amount represents unpaid interest due on the 2013 Consolidated Loan based on the drawn down amount of $9,127 as of December 31, 2013. Interest is accrued monthly at the Wall Street Journal U.S. Prime Rate plus 0.5%, subject to a minimum interest rate of 4% floor and will be paid first day of each month. The interest amount determined assumed the floor of 4% based on the 2013 interest rate and does not consider for potential future prepayments, draw downs and/or additional interest.

We have and we may continue to lease additional office space during the year ending December 31, 2014 to support our growth. In addition, many of our existing lease agreements provide us with the option to renew. Our future operating lease obligations include payments due during any renewal period provided for in the lease where the lease imposes a penalty for failure to renew.

Subsequent to December 31, 2013, we signed seven new leases for our sales offices and entered into one amendment to our existing leases thereby resulting in an additional $5.8 million in future commitments of noncancellable operating leases with initial or remaining terms of one year or more.

The 2022 Note as noted above will be paid in full from the net proceeds from this offering. Refer to “Use of Proceeds” for further details.

 

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The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed minimum or variable price provisions, and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

Off-Balance Sheet Arrangements

Through December 31, 2013, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Quantitative and Qualitative Disclosures about Market Risk

Interest rate sensitivity

We had cash and cash equivalents totaling $13.3 million as of December 31, 2013. We consider all highly liquid debt instruments purchased with a maturity of three months or less and money market mutual funds to be cash equivalents. This amount was invested primarily in deposit accounts and money market funds. The cash and cash equivalents are held for working capital purposes. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes.

Our cash equivalents are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates, or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates.

We do not believe that an increase or decrease in interest rates of 100-basis points would have a material effect on our operating results or financial condition with respect to our cash equivalents.

We are also exposed to changes in interest rates relating to our derivative liability. As of December 31, 2013 and December 31, 2012, we had recorded $1.1 million and $1.8 million, respectively, as derivative liability relating to our long-term debt to related party. Changes in interest rate can lead to fluctuations in the fair value of the instrument.

To perform the sensitivity analysis on the derivative liability, we assessed the risk of a change in fair value from the effect of an interest rate change of 100-basis points as of December 31, 2013, which is shown as follows:

 

     Fair Value      +100 basis
Point Shift
     -100 basis
Point Shift
 
     (in thousands)  

Derivative liability

   $ 1,107       $ 1,885       $ 270   

Critical Accounting Policies and Estimates

Our consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we continually evaluate our estimates and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results may differ from these estimates made by management under different assumptions and conditions.

Certain accounting policies that require significant management estimates, and are deemed critical to our results of operations or financial position, are described below. Accordingly, these are the policies we believe are

 

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the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition

Our total revenues are comprised of recurring revenues, and implementation and other revenues. We recognize revenue in accordance with accounting standards for software and service companies when all of the following criteria have been met:

 

    There is persuasive evidence of an arrangement;

 

    The service has been or is being provided to the customer;

 

    Collection of the fees is reasonably assured; and

 

    The amount of fees to be paid by the customer is fixed or determinable.

Recurring revenues are derived primarily from our talent acquisition, time and labor management, payroll, talent management and HR management applications. These services are rendered during each client’s payroll period with the agreed-upon fee being charged and collected as part of the client’s payroll. Revenues are recognized at time of billing of each client’s payroll period. Collectability is reasonably assured as the fees are collected through an Automated Clearing House, or ACH, as part of the client’s payroll cycle or through direct wire transfer, which minimizes the default risk. Our implementation and other revenues represent non- refundable conversion fees which are charged to new clients to offset the expense of new client set-up and revenues from sale of time clocks as part of our employee time and attendance services. Because these conversion fees and sale of time clocks relate to our recurring revenue, we have evaluated such arrangements under the accounting guidance that governs multiple element arrangements.

For arrangements with multiple elements, we evaluate whether each element represents a separate unit of accounting. In order to treat deliverables in a multiple element arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have standalone value upon delivery, we account for each deliverable separately and revenue is recognized for the respective deliverables as they are delivered. If one or more of the deliverables does not have standalone value upon delivery, the deliverables that do not have standalone value are generally combined with the final deliverable within the arrangement and treated as a single unit of accounting.

For the years ended December 31, 2013, 2012 and 2011, we have determined that there is no standalone value associated with the upfront conversion fees as they do not have value to our clients on a standalone basis nor are they offered as an individual service; therefore, the conversion fees are deferred and recognized ratable over the estimated life of our clients, based on our historical client attrition rate, which we have estimated to be ten years. Revenues from the sale of time clocks are recognized when they are delivered.

Goodwill and Other Intangible Assets

Goodwill is not amortized, but we are required to test the carrying value of goodwill for impairment at least annually, or earlier if, at the reporting unit level, an indicator of impairment arises. The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows. If impairment exists, a write-down to fair value (normally measured by discounting estimated future cash flows) is recorded. Our business is largely homogeneous and, as a result, goodwill is associated with one reporting unit. We have selected June 30 as our annual goodwill impairment testing date and determined there was no impairment as of June 30, 2013. For the years ended December 31, 2013, 2012 and 2011, there were no indicators of impairment. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives.

 

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Impairment of Long-Lived Assets

Long-lived assets, including intangible assets with finite lives, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. We have determined that there is no impairment of long-lived assets for the years ended December 31, 2013, 2012 and 2011.

Incentive Units

Given the absence of a public trading market for our common units and in accordance with the American Institute of Certified Public Accountants, or AICPA, Audit and Accounting Practice Aid Series: Valuation of Privately Held Company Equity Securities Issued as Compensation, or the AICPA Practice Guide, our board of directors exercised reasonable judgment and considered numerous factors to determine the best estimate of the fair value of our incentive units, including:

 

    Valuation analyses performed by unrelated third party specialist (including the application of appropriate valuation techniques and inputs);

 

    Characteristics and specific terms of the units as noted in the equity grant agreements;

 

    Value of the units as determined by the absence of a liquidation value on the date of grant, the ability to participate in our future profits, growth and appreciation and the lack of an exercise price for the units;

 

    Lack of marketability of our common units;

 

    Our actual operating and financial performance;

 

    Our state of development;

 

    Revenue and expense projection;

 

    Likelihood of achieving a liquidating event;

 

    Market performance of comparable publicly traded companies; and

 

    Overall U.S. and global economic and capital market conditions.

The valuations that we used to determine the fair market value of grants issued during and prior to 2013 were based on information available at the time of, or prior to, the grant as the case may be, and were performed by an unrelated valuation specialist, as defined by the AICPA Practice Guide. All grants issued prior to 2013 were valued during June 2013. All grants that were issued during the year ended December 31, 2013 were valued during the fourth quarter of 2013.

Our simulation model requires various subjective assumptions as inputs, including expected life, volatility, risk-free interest rates, and the expected dividend yield. The assumptions used in the simulation model represent our best estimates, which involve inherent uncertainties and the application of our judgment as follows:

 

    Risk-free interest rate—We base the risk-free interest rate used in the Monte Carlo simulation model on the implied yield available on 5 year U.S. Treasury securities with a remaining term equivalent to that of the respective units as of the valuation date.

 

   

Volatility—We determine the volatility factor based on the historical volatilities of comparable guideline companies. To determine the comparable guideline companies, we consider cloud-based application providers and select those that are similar to us in nature of services provided. We intend to continue to consistently apply this process using the same or similar public companies until information regarding the volatility of our own pricing becomes available, or unless circumstances

 

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change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.

 

    Expected term—The expected term represents the period that our incentive units are expected to be outstanding. We determined the expected term assumption based on the vesting terms and contractual terms of the units.

 

    Expected dividend yield—We have not paid and do not expect to pay dividends in the future and therefore an expected dividend yield of 0% was applied. The directors of the Company will determine if and when dividends will be declared and paid in the future based on the Company’s financial position at the relevant time.

The following table presents a summary of the grant-date fair values of incentive units granted based on the Monte Carlo simulation model and the related assumptions for the years ended December 31, 2013, 2012 and 2011:

 

     Year Ended December 31,
     2013    2012    2011

Grant-date fair value

        

2009 Plan

   —      $71.78    $51.16

2012 Management Incentive Units

   $4.67 - $37.39    $8.03 - $14.29    —  

2012 CEO Incentive Units

   —      $6.78 - $9.35    —  

Risk-free interest rate

   0.71% - 1.41%    0.72%    1.74%

Volatility factor

   50.0%    60.0%    60.0%

Expected life (in years)

   5.0    5.0    5.0

In addition to assumptions used in the simulation model, we are required to estimate forfeitures and only record compensation costs for those awards that are expected to vest. Our forfeiture estimate is based on an analysis of our actual forfeitures. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover, and other factors.

We granted the following Management Incentive Units, or the Management Incentive Units, between October 1, 2012 and the date of this prospectus (in thousands, except per unit amounts):

 

Grant Date

   Number of
incentive units
granted
     Fair value
per unit (1)(2)
 

November 19, 2012

     200       $ 11.16   

January 7, 2013

     610       $ 7.92   

January 17, 2013

     3,000       $ 8.08   

March 28, 2013

     700       $ 14.04   

April 17, 2013

     3,000       $ 14.13   

October 14, 2013

     18,493       $ 16.46   

December 3, 2013

     150       $ 17.08   

 

(1) Because our Management Incentive Units do not have an exercise price, the intrinsic value of the unit equals the fair value.
(2) Represents the weighted average fair value per unit, incorporating both time-based and market-based vesting conditions.

There were no other equity instruments granted during the period from October 1, 2012 to the date of this prospectus. During 2012, Management Incentive Units were issued with a strike price that was based on a $400.0 million company enterprise value. During 2013, Management Incentive Units were issued with a strike price that was based on a $400.0 million and $550.0 million company enterprise value. We also issued incentive units to our chief executive officer, or the CEO Incentive Units, with a strike price that was based on a $550.0 million company enterprise value during 2012. These strike prices are a vesting condition, by which the underlying incentive units did not vest unless the value of our company met or exceeded the specified level. Our incentive units did not have an exercise price.

 

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We believe that there is no single event that caused the change in the fair value of our incentive units between the grant dates, but rather a combination of factors described below for the significant difference noted in between certain grants as follow:

 

    Increase in value between the value at the grant date and the value at the initial public offering is a result of improved operating results; and

 

    Increase in the probability assumption of an initial public offering scenario as we approach the estimated initial date.

We believe that it is reasonable to expect that the completion of an initial public offering will increase the value of our shares of common stock (subsequent to the Reorganization) because they will have increased liquidity and marketability and believe that the estimates and factors noted above are a reasonable description of the value that market participants would place on the underlying common stock as of each valuation date.

In connection with the Reorganization, the incentive units we issued as part of the 2009 Incentive Units Plan, or the 2009 Incentive Units, were converted into shares of restricted stock. Upon the sale of common stock in the initial public offering, approximately 217,378 shares of restricted common stock that were granted to replace the 2009 Incentive Units will automatically vest. Total unrecognized compensation cost relating to 2009 Incentive Units was approximately $30,585 as of December 31, 2013.

In connection with the Reorganization, our incentive units were converted into shares of common stock and/or restricted stock of Software. Vested incentive units were converted to shares of common stock and restricted stock at various conversion ratios, which ranged from approximately 1:0.2 to 1:24. Unvested incentive units were converted to shares of restricted stock at various conversion ratios, which ranged from 1:24 to 1:47. The conversion to shares of common stock versus restricted stock was determined based on the underlying conditions of the pre-conversion incentive units, reflecting any pre-existing vesting conditions. This resulted in issuance of 1,148,520 and 8,121,101 shares of common stock and restricted stock, respectively. The shares of restricted stock were subject to either time-based or performance-based vesting conditions. Although there were modifications to the terms and conditions of the existing incentive units plans upon conversion, no additional compensation cost was recorded as the incremental value associated with the modifications was deemed insignificant.

Shares of restricted stock that were issued in connection with the Reorganization that were subject to time-based vesting conditions retained substantially the same time-based vesting conditions as the respective tranche of incentive units from which they were converted. For additional information concerning these vesting conditions, see “Executive Compensation—Narrative Discussion Regarding Summary Compensation Table—Equity Incentive Units and Restricted Stock Awards.” The following table shows the vesting periods for the outstanding shares of restricted stock subject to time-based vesting conditions that were issued in connection with the Reorganization:

 

Year Ending December 31,

   Number of Shares of
Restricted Stock

to Vest
 

2014

     707,168 (1) 

2015

     653,964   

2016

     581,131   

2017

     580,987   

2018

     102,963   

2019

     81   

Total

     2,626,294   

 

(1) Includes 477,320 shares of restricted stock that are scheduled to vest on April 3, 2014.

Shares of restricted stock that were issued in connection with the Reorganization that were subject to performance-based vesting conditions will vest one-half upon the Company reaching a total enterprise value of $1.4 billion and one-half upon the Company reaching a total enterprise value of $1.8 billion, provided that the

 

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person is employed by us on that date. For additional information concerning these vesting conditions, see “Executive Compensation—Narrative Discussion Regarding Summary Compensation Table—Equity Incentive Units and Restricted Stock Awards.” The following table shows the outstanding shares of restricted stock subject to the applicable performance-based vesting conditions that were issued in connection with the Reorganization:

 

Total Enterprise Value

   Number of Shares
of Restricted Stock
to Vest
 

$1,400,000,000

     2,727,642   

$1,800,000,000

     2,727,511   

Derivative Instruments

In April 2012, we entered into the 2022 Note with WCAS Capital IV, a related party. The note contains certain prepayment features related to mandatory redemption upon a liquidation event. As of December 31, 2012, we have identified the prepayment feature of the note as a derivative instrument which is required to be bifurcated and separately accounted for at fair value with changes in fair value recorded in earnings. Refer to Note 7 of our audited consolidated financial statements as of and for the years ended December 31, 2013 and 2012 for further discussion. The following are the significant inputs used to value the derivative instrument as of December 31, 2013 and 2012:

 

     2013    2012

Probability of exit

   90%    90%

Remaining term

   0.8 year - 8.3 years    3.3 years - 9.3 years

Yield Volatility

   21.4% - 31.1%    20.4% - 28.5%

Credit Spread

   8.90%    11.94%

Risk-free rate

   0.13% - 2.45%    0.36% - 1.78%

There were no derivative instruments outstanding as of December 31, 2011.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board, or FASB, issued authoritative guidance which adds new disclosure requirements for items reclassified out of Accumulated Other Comprehensive Income, or AOCI. The update requires that an entity present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of AOCI based on its source and the income statement line items affected by the reclassification. The amendment is effective for fiscal years and interim periods beginning on after December 15, 2012. We adopted this new guidance for the year ended December 31, 2013, which did not have a material impact on our disclosure in the consolidated financial statements.

In February 2013, the FASB issued authoritative guidance, which added new disclosure requirements to measure obligations resulting from joint and several liability arrangement for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date and disclose the arrangements and the total outstanding amount of obligation for all joint parties. These disclosures are in addition to existing related party disclosure requirements. The amendment is effective for fiscal years and interim periods beginning after December 15, 2013 and we do not expect the adoption of such guidance to affect our consolidated financial statements.

 

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BUSINESS

Overview

We are a leading provider of a comprehensive, cloud-based HCM software solution delivered as Software-as-a-Service. We provide functionality and data analytics that businesses need to manage the complete employment life cycle from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and HR management applications. Our user-friendly software allows for easy adoption of our solution by employees, enabling self-management of their HCM activities in the cloud, which reduces the administrative burden on employers and increases employee productivity.

Organizations need sophisticated, flexible and intuitive applications that can quickly adapt to their evolving HCM requirements, streamline their HR processes and systems and enable them to control costs. We believe that the HCM needs of most organizations are currently served either by legacy providers offering outdated on-premise products or multiple providers that partner together in an attempt to replicate a comprehensive product. These approaches often result in large up-front capital requirements, extended delivery times, high costs, low scalability and challenges with system integration.

Because our solution was developed in-house and is based on a single platform, there is no need to integrate, update or access multiple databases, which are common issues with competitor offerings that use multiple third-party systems in order to link together their HCM offerings. Additionally, our solution maintains data integrity for accurate, actionable and real-time analytics and business intelligence and helps clients minimize the risk of compliance errors due to inaccurate or missing information. We deliver feature-rich applications while maintaining excellence in information security and quality management standards as evidenced by our ISO certifications. As part of our client retention effort, a specialist within a dedicated team is assigned to each client to provide industry-leading personalized service.

The key benefits of our differentiated solution as compared to competing products:

 

    Comprehensive HCM solution. Our solution offers functionality that manages the entire employment life cycle for employers and employees, from recruitment to retirement. Our user-friendly applications help clients identify candidates, onboard employees, manage time and labor, administer payroll deductions and benefits, manage performance, offboard employees and administer post-termination health benefits such as COBRA. Our solution also has the advantage of being built in-house by our highly trained and skilled team of software developers;

 

    Core system of record enabling data analytics maintained on a single database. Our solution is based on a core system of record that contains payroll and HR information in one convenient database, thereby reducing costs by eliminating the need for multiple software products and vendors and the maintenance of employee data in numerous databases that have to be merged or synchronized. This core system of record allows our clients the ability to access and analyze accurate employee information to make business decisions based upon actionable, real-time, point-and-click analytics provided on our client dashboard;

 

    Personalized support provided by trained personnel. Our solution is supported by one-on-one personal assistance from trained specialists. Services specialists are assigned to specific clients and are trained across all of our applications, ensuring they provide comprehensive, expert-level service;

 

    Software-as-a-Service delivery model. Our SaaS delivery model allows clients with a geographically dispersed workforce to operate more efficiently and allows these clients to access and use our client-oriented Internet solution on demand and remotely through a standard web browser, smart phones, tablets and other web-enabled devices, which lowers the total cost of ownership as compared to on-premise products;

 

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    Cloud-based architecture. Our cloud-based architecture allows our solution to be implemented remotely and software enhancements and newly developed applications to be deployed without client disruption and involvement, which requires smaller investments in hardware, personnel, implementation time and consulting; and

 

    Scalability to grow with our clients. Our solution offers improved scalability as our clients are able to use the same solution as their businesses grow by deploying applications as-needed in real-time, which allows clients to align HCM spending with evolving HCM needs as compared to traditional HCM products that require clients to migrate to new software as they grow, but retain fixed costs even if the client shrinks in size.

We sell our solution directly through our internally trained, client-focused and highly skilled sales force based in offices across the United States. As a part of our client retention effort, a specialist within a dedicated team is assigned to each client to provide industry-leading, personalized service. We have over 10,000 clients, or over 6,000 clients based on parent company grouping, none of which constituted more than one-half of one percent of our revenues for the year ended December 31, 2013. We believe that as a result of our focus on client retention, we enjoy high client satisfaction as evidenced by an average annual revenue retention rate of 91% from existing clients for the three years ended December 31, 2013. We believe our revenue retention rate understates our client loyalty because this rate also includes former clients that were acquired or otherwise ceased operations.

We were founded in 1998. Software is a Delaware corporation that was formed in October 2013 to undertake this offering. Since our founding, we have focused on providing an innovative SaaS HCM solution. As of December 31, 2013, we had 840 employees across the United States. For the years ended December 31, 2013, 2012 and 2011, our revenues were $107.6 million $76.8 million and $57.2 million, respectively, representing year-over-year growth in revenues of 40% and 34%, respectively. We currently derive most of our revenues from payroll processing. We are able to determine revenues from payroll processing because all of our clients are required to utilize our payroll application in order to access our other applications. We do not separately track our revenues across our other applications because we often sell applications in various groupings and configurations for a single price. We realized net income of $7.7 million, $4.2 million and $1.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Industry Background

Large Market Opportunity for HCM Technologies

According to IDC, the U.S. market for HCM applications is comprised of software that automates business processes covering the entire span of an employee’s relationship with his or her employer. IDC estimates that this market, excluding payroll services, will total $5.8 billion in 2014. These applications include maintenance of HR records, recruiting applications, performance management, time and labor management tracking, compliance, compensation management and other HR functions. According to IDC, the U.S. market for payroll services will be an estimated $16.2 billion in 2014. The payroll services market includes transactional activities associated with paying employees, maintaining accounting records and administrating payroll taxes while payroll accounting applications offer the functionality to effectively track these various payments and transfers.

IDC estimates that the international market for HCM applications (excluding the United States) will be $4.1 billion in 2014.

Economic and Technological Trends Are Driving Demand for HCM Solutions

Organizations operating in today’s global economy are continually under pressure to reduce operating costs in order to maintain or improve their competitive positions. One tactic used by organizations is to utilize information technology, or IT, provided by external resources in order to automate internal processes, reduce internal administrative burdens and more effectively manage capital expenditures and labor costs. As a result, businesses are increasingly making the strategic decision to leverage HCM technologies in order to improve the

 

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effectiveness and efficiency of their internal HR and accounting functions and capture opportunities for cost savings. According to IBISWorld, companies often outsource administrative services, such as time and labor management, after initially outsourcing payroll.

Organizations are also managing internal costs and administrative burdens by transitioning technological assets from on-premise to the cloud. By shifting HR systems to the cloud, businesses seek to avoid the difficulties associated with maintaining software and security updates, and storage needs as well as other maintenance issues. The rise of cloud computing has supported the SaaS delivery model. According to IDC, the global SaaS market is projected to grow from $23 billion in 2011 to $67 billion in 2016, at a CAGR of 24%.

We believe that businesses increasingly view data concerning their human capital as a critical strategic resource that can result in more informed decision-making concerning employee recruitment, retention and compensation. This revolution in data analytics and its extension to HR functions has increased the number of employees within an organization that can benefit from, and who regularly interface with, information technologies. As a result, organizations seek intuitive technologies that do not require extensive training or advanced technological credentials to be effectively utilized. The user experience of business applications is changing to emulate the consumer experience as HR buyers increasingly seek applications that are intuitive and available anywhere on any web-enabled device.

Incumbent HCM Products Struggle To Meet the Needs of Businesses

We believe that a majority of businesses and organizations in the United States are using multiple HCM systems from more than one vendor, thereby impeding their ability to share data across these systems. Several incumbent payroll and HCM vendors offer product sets that are comprised of separate systems that require integration. In certain cases, this disparate product offering across several vendors is the result of several acquisitions which often leads to a loosely coupled product set that is marked by significant architectural differences and weak data integration. We believe that this type of offering increases the risk of user or system error and reduces overall effectiveness.

A comprehensive HCM solution leverages the same data, process and workflow management, security model, reporting and analytics tools, and user portals to provide a uniform user experience. We believe that significant analytical power remains trapped within the data that organizations are accessing across multiple applications and databases but are unable to analyze in a unified context.

We believe that vendors who pursue market segmentation strategies based on organization size or industry create difficulties for clients who grow, either in size or industry scope, beyond the confines of those vendors’ offerings. A scalable HCM solution based on a core system of record allows for an organization to grow in size and scope without transitioning to a new user interface or back-end database.

The Paycom Solution

We offer an end-to-end SaaS HCM solution that provides our clients and their employees with immediate access to accurate and secure information and analytics 24 hours a day, seven days a week from any location. We believe that our solution delivers the following benefits:

Comprehensive HCM Solution

Our solution offers functionality that manages the entire employment life cycle for employers and employees, from recruitment to retirement. Our user-friendly applications streamline client processes and provide clients and their employees with the ability to directly access and manage administrative processes, including applications that identify candidates, onboard employees, manage time and labor, administer payroll deductions and benefits, manage performance, offboard employees and administer post-termination health benefits such as COBRA. The widespread employee usage of our applications helps further integrate our solution into the

 

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administrative processes of our clients. Our solution also has the advantage of being built in-house by our highly trained and skilled team of software developers, thereby minimizing data integrity issues across applications.

Core System of Record

Our solution is based on a core system of record that contains payroll and HR information in one convenient database, thereby reducing costs and eliminating the need for multiple software products and vendors and the maintenance of employee data in numerous databases. This core system of record enables our clients to input employee data one time and enjoy seamless functionality across our applications. When a revision is made to the file of an employee, all appropriate personnel have access to the change in real time. In addition, our core system of record helps clients minimize the risk of compliance errors due to inaccurate or missing information that results from maintaining multiple databases. Through accurate tracking and management of employee payroll and other HR data, such information can be compiled for comprehensive and consistent reporting for our clients.

Data Analytics

Our solution allows clients to analyze accurate employee information to make business decisions based upon actionable, real-time, point-and-click analytics provided through our client dashboard. This functionality helps our clients operate with a more complete and accurate picture of their organization as our solution’s embedded analytics capture the content and context of everyday business events, facilitating fast and informed decision-making from any location. The employees of our clients also benefit from our analytics platform as they are able to model in real-time the impact of their HCM decisions on their compensation, benefits and rewards.

Personalized Support Provided by Trained Personnel

Our applications are supported by one-on-one personal assistance from trained specialists. Services specialists are assigned to specific clients and are trained across all of our applications, ensuring they provide comprehensive, expert-level service. Our client service is ISO 9001:2008 certified on the basis of its quality and consistency. We strive to provide our clients with high levels of service and support to ensure their continued use of our solution for all of their HCM needs. We have maintained high client satisfaction, as evidenced by an average annual revenue retention rate of 91% from existing clients for the three years ended December 31, 2013.

Software-as-a-Service Delivery Model

Our SaaS delivery model allows clients with a geographically dispersed and mobile workforce to operate more efficiently, and allows these clients to implement, access and use our client-oriented Internet solution on demand and remotely through standard web browsers, smart phones, tablets and other web-enabled devices. Our SaaS solution reduces the time, risk, headcount and costs associated with installing and maintaining applications for on-premise products within the information technology infrastructure of our clients.

Secure Cloud-Based Architecture

Our cloud-based architecture allows our solution to be implemented remotely with minimal client interaction. Updates such as software enhancements and newly developed applications can be deployed without client interaction, disruption or involvement, allowing our clients to make a smaller investment in hardware, personnel, implementation time and consulting. Additionally, we own and maintain all of the infrastructure technology to host our solutions and to maximize system availability for clients. Our focus and investment in technology and data security has been recognized with ISO/IEC 27001:2005 certified security standards that provide our clients with a “best-in-class” level of data security.

Scalability to Grow with our Clients

Our solution is highly scalable. We have served a diversified client base ranging in size from one to more than 8,000 employees. We calculate the number of employees using clients based on parent company grouping.

 

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Our clients are able to use the same solution while their businesses grow by deploying applications as-needed in real-time. Pricing is determined by employee headcount and the number of applications utilized, enabling our clients to align HCM spending with their evolving HCM needs as compared to traditional HCM products that require clients to migrate to new software as they grow but retain fixed costs even if the client shrinks in size.

Our Strategy for Growth

Our strategy is to continue to establish our solution as the HCM industry standard. To accomplish this, we intend to:

Increase Our Presence in Existing Markets

Although we have clients in all 50 states, we believe a significant opportunity exists to expand our presence within markets where we currently have a sales office. We have a sales office in 25 of the 50 largest MSAs in the United States based on 2010 U.S. census data, only one of which is served by multiple sales teams. We believe that the 50 largest MSAs in the United States could collectively support at least 100 additional sales teams. Each sales office is typically staffed with one sales team, with each team comprised of approximately seven to nine sales professionals. We plan to increase our presence in existing markets by adding sales offices and increasing the number of our sales teams to further penetrate and effectively capture these markets.

Expand Into Additional Markets

We plan to continue expanding our sales capability by opening sales offices in certain metropolitan areas where we currently have no sales teams. We have identified 50 untapped metropolitan areas where we could potentially open a new sales office staffed with at least one sales team. Since September 2012, we have opened sales offices in Baltimore, Detroit, Indianapolis, Minneapolis, New York, Philadelphia, Portland, San Francisco, Seattle and Silicon Valley. We intend to open six to eight additional offices over the next two years, as well as potentially expand over the longer term into international markets.

Enlarge our Existing Client Relationships

We dedicate our resources to helping our clients facilitate their goals, whether through helping them execute better hiring decisions, manage compensation more effectively or simply operate more efficiently. We believe a significant growth opportunity exists in selling additional applications to our current clients. Many clients have subsequently deployed additional applications as they recognize the benefits of our comprehensive solution. During the year ended December 31, 2013, all of our clients, including our new clients, on average utilized 5.2 of our 18 then available applications. During that same period, however, new clients on average utilized 6.2 applications. We believe that there is a significant opportunity to sell additional applications to our existing clients. As we extend and strengthen the functionality of our solution, we will continue to invest in initiatives to increase the adoption of our solution and maintain our high levels of client satisfaction.

Target Larger Clients

As we have organically grown our operations and increased the number of our applications, the average size of our clients has also grown significantly. Based on our total revenues, we have grown at an approximately 38% CAGR since 2009. Our solution requires no adjustment to serve larger clients. We believe larger employers represent a substantial opportunity to increase the number of clients and to increase our revenue per client, with limited incremental cost to us. From January 1, 2011 through December 31, 2013, we increased our annualized recurring revenue per average client by 52.7%, in part by targeting larger clients and enlarging our existing client relationships. To further capitalize on this opportunity, we intend to target larger businesses opportunistically where our current sales model is effective.

 

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Maintain Our Leadership in Innovation by Strengthening and Extending our Solution

Our ability to develop and deploy new applications and updates rapidly and cost-effectively has been integral to the results that we have achieved to date. We intend to continue extending the functionality and range of our solution in the future, and recently launched a new application. Our development efforts are performed exclusively in-house and are heavily based upon proactive research and client input. In the near-term, we intend to focus our investments on further developing applications within our higher margin HR and talent management applications. Over the long term, we intend to increase our investment in the development of new applications that are responsive to the needs of our clients, which are garnered through ongoing client interaction and collaboration.

Our Applications

Our HCM solution offers a full suite of applications that generally fall within the following categories: talent acquisition, time and labor management, payroll, talent management and HR management.

Talent Acquisition

 

LOGO      Applicant Tracking. Our applicant tracking application simplifies the recruiting processes needed to hire the most qualified employees. By using our all-in-one system, our clients can move candidates from the application process through new employee on-boarding without re-keying data.
LOGO      Employment Background Checks. Our employment background check application helps to ensure that prospective new hires are qualified candidates. We provide clients with the tools for authorizing background checks, creating pre-adverse and adverse action letters and securely storing results as required by the Fair Credit Reporting Act.
LOGO      On-Boarding/Off-Boarding. Our on-boarding/off-boarding application streamlines the hiring and termination processes for employees of our clients by creating online checklists of tasks to be assigned to an employee or group of employees.
LOGO      E-Verify®. Our E-Verify® application automates employment verification and reduces our clients’ exposure to audits and penalties that could result from I-9 violations.
LOGO      Tax Credit Services. Our tax credit services application helps employers process and calculate the available federal tax credits associated with hiring employees who meet various qualifications.

Time and Labor Management

 

LOGO      Time and Attendance. Our time and attendance application allows our clients to accurately and efficiently manage when, where and how employees report their hours worked. Clients can apply customized rules, use batch editing and use timecard management tools to manage complex time and attendance needs. Our web time clocks feature allows employees to clock in and out online, which automatically updates the payroll application when approved, eliminating the need to manually calculate timesheets and rekey information into payroll systems. We also offer several different types of hardware terminals that are ideal for single or multi-clock environments.
LOGO      Scheduling. The scheduling application helps managers with employee scheduling. This application’s automated functionality provides for a seamless workflow with the payroll and time and attendance applications. Cloud-based convenience also provides employees and managers access to their schedules at any time.

 

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LOGO      Time-Off Requests. Our time-off requests application automates and standardizes the time off request procedure and helps employers remain effectively staffed. Managers can view an online time-off calendar to easily monitor and approve or deny time-off requests. Our employee self-service tool allows employees to view the time-off they have available, submit requests and view blackout dates, the status of requests and any manager comments.
LOGO      Labor Allocation. Our labor allocation application simplifies the process of setting up and tracking employee hours based on the job the employee is working.
LOGO      Labor Management Reports. Our labor management report application helps clients get up-to-the-minute reports on the information they need to better manage their labor force, such as overtime and labor distribution.

Payroll

 

LOGO      Payroll and Tax Management. Our payroll application is the foundation of our solution and all of our clients are required to utilize this application in order to access our other applications. Our payroll application is automatically updated with changes in employee information and offers other time saving functionality such as batch editing and effective dating. The application can be accessed at any time to make changes, run payroll and generate custom reports. We also help our clients by handling their payroll taxes and deposits, regulatory correspondence, amendments, and penalty and interest disputes.
LOGO      Paycom Pay. Our Paycom Pay application eliminates the tedious job of check reconciliation by issuing checks to our clients’ employees that clear from a Paycom bank account, which helps clients eliminate potential liability and simplifies the reconciliation process.
LOGO      Expense Management. This application eliminates the manual, paper-based processes associated with employee expense reimbursement and allows employers to control and monitor expenses by setting clearly-defined rules and parameters for reimbursement for employees. Employees can upload receipts when submitting their expenses and access an expense dashboard where they can view the status of their submitted expenses.
LOGO      Garnishment Management. This application allows us to handle communications with garnishment payees and agencies and to calculate and track garnishment payments.

Talent Management

 

LOGO      Employee Self-Service. Our employee self-service application improves employee engagement by empowering our clients’ employees to self-manage certain transactions, obtain quick answers to frequent payroll and HR questions, access their pay history and view performance goals and reviews and total compensation reports to review their compensation and benefits package. Benefits information and paid time off accruals also give employees the ability to make informed decisions regarding their benefit selections and time-off requests.
LOGO      Compensation Budgeting. With compensation and performance information in one system, our compensation budgeting tool provides clients with valuable workforce insight to help manage and formulate salary budgets and help establish merit-based compensation increases.

 

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LOGO      Performance Management. This application allows for standardized positions across a company with set pay grades and performance goals. It also helps streamline the performance review process with online facilitation of the review process.
LOGO      Executive Dashboard. Our executive dashboard offers powerful workforce insight for executives to access information on demand in a variety of report formats. Because we offer an all-in-one solution in a single database, the comprehensive report data provides the workforce intelligence needed to drive human capital decisions at an executive level.

HR Management

 

LOGO      Document Management. Our document management application manages employee files, including the ability to have employees digitally sign and view company documents. We securely store client records to meet retention requirements and protect documents from unauthorized access and other disasters that can threaten businesses.
LOGO      Government and Compliance. Our government and compliance application helps clients reduce exposure to violations, audits and penalties with respect to the employment laws impacting their business, such as the Family Medical Leave Act, Equal Employment Opportunity Commission and other state and federal regulations. A single database keeps our clients’ employee data consistent and enhances reporting capabilities by providing better accuracy and real-time insight.
LOGO      Benefits Administration. Our benefits administration application allows clients to customize benefit plan setup, deduction amounts, enrollment dates and new-hire waiting periods. Employers are provided census and reconciliation reports to ensure they do not overpay for benefits and can update deduction amounts for all employees or groups of employees at once. This application also provides employees with online enrollment and helps educate them and drive informed enrollment decisions for greater employee satisfaction.
LOGO      COBRA Administration. Our COBRA administration application protects employers from COBRA violations and their associated fines and penalties by automatically initiating compliance measures with the entry of qualifying events into the application. This application also tracks important dates, collects and remits premiums and reports on all COBRA activity.
LOGO      Personnel Action Forms. This application helps our clients reduce the amount of time and paperwork required with employee changes such as pay rate, position and title changes by allowing managers to complete and approve online personnel action forms.

Our Clients

We serve a diverse client base in terms of size and industry. We have over 10,000 clients, or over 6,000 clients based on parent company groupings, none of which constituted more than one-half of one percent of our revenues for the year ended December 31, 2013. We stored data for more than 1,000,000 persons employed by our clients during the year ended December 31, 2013.

Based on parent company grouping, companies with fewer than 50 employees comprised approximately 10% of total revenues for the year ended December 31, 2013. Revenues for clients based on parent company grouping, with 50-2,000 employees and more than 2,000 employees represented approximately 86% and 4%, respectively, of total revenues for the year ended December 31, 2013. Many of our clients that are small to mid-sized companies can typically make the decision to adopt our solution more quickly than larger companies,

 

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which we believe results in a shorter sales cycle, which more closely corresponds to our target sales cycle of 30 to 90 days. As a result of the nature and size of our clientele, we maintain a diversified client base and very low client concentration. We believe, however, larger employers represent a substantial opportunity to increase the number of clients and to increase our revenue per client with limited incremental cost.

Competition

The market for HCM solutions is rapidly evolving, highly competitive and subject to changing technology, shifting client needs and frequent introduction of new products and services. Our competitors range from small, regional firms to large, well-established international firms with multiple product offerings.

We compete with firms that provide HCM solutions by various means. Many providers continue to deliver legacy enterprise software, but as demand for greater flexibility and access to information grows, we believe there will be increased competition in the delivery of HCM cloud-based solutions by other SaaS providers. Our competitors offer HCM solutions that overlap with one, several or all categories of applications offered by our solution. Our talent acquisition and talent management applications compete primarily with Cornerstone OnDemand, Inc., Oracle Corporation, SAP AG and Workday, Inc. Our payroll applications, including payroll processing, compete primarily with ADP, Ceridian Corporation, Concur Technologies, Inc., Intuit, Inc., Paychex, Inc. and The Ultimate Software Group, Inc. Our HR management applications compete primarily with ADP, Ceridian Corporation, Oracle Corporation, Paychex, Inc., SAP AG, and Workday, Inc. Our time and labor management applications compete primarily with ADP, Ceridian Corporation and The Ultimate Software Group, Inc. Our larger competitors compete with us across multiple segments. In addition, our HCM solution continues to face competition from in-house payroll and HR systems and departments as well as HR systems and software sold by third-party vendors.

Competition in the HCM solutions market is primarily based on service responsiveness, product quality and reputation, breadth of service and product offering and price. The importance of these factors depends on the size of the business. Price tends to be the most important factor of competition for smaller businesses with fewer employees while the scope of features and customization is more important to larger businesses. We believe that our SaaS delivery model allows us to be most competitive in the HCM solutions market across this spectrum.

Sales and Marketing

We sell our solution exclusively through our sales force that included 218 sales professionals as of December 31, 2013, substantially all of whom have a four-year college degree. Our sales force is comprised of inside sales and field sales personnel who are organized geographically and CRRs, who sell additional applications to existing clients. We have 30 sales teams located in 20 states and plan to open additional sales offices to further expand our presence in the U.S. market. As of December 31, 2013, 23% of our sales force had achieved “executive sales representative” status by generating in excess of $300,000 of annualized new recurring revenue.

We provide our sales force with an intensive four-week training course that includes at least one week of training at our headquarters in Oklahoma City. Our unique training program includes instruction in accounting, business metrics, product features and tax matters relevant to our target market. Our training continues for our sales force through weekly in-office strategy sessions and leadership development training. Executive sales representatives are also required to attend in-person quarterly conferences to share best practices and receive legal and business updates.

When a new client processes with us for an entire month, our sales representative receives a commission based upon annualized new recurring revenue. This commission is only paid once per new customer. Executive sales representatives receive a higher commission rate and base salary based upon both current year and life-to-date realized sales, respectively.

 

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We generate client leads, accelerate sales opportunities and build brand awareness through our marketing programs that target finance and HR executives, technology professionals and senior business leaders of companies that perform HCM functions in-house or outsource these functions to one of our competitors. Our principal marketing programs include:

 

    Direct mail campaigns, email campaigns, personalized URLs, industry-specific print advertising and tradeshow exhibiting;

 

    Search engine marketing methods that include site optimization and pay-per-click searches; and

 

    National radio advertising on Sirius/XM Radio and specifically on the Fox News, Fox Talk, Bloomberg and MSNBC stations.

Our 30 CRRs are focused on expanding the number of applications our clients purchase from us by introducing them to additional applications. Our CRRs call upon select clients periodically and are paid a non-recurring commission on any additional sales they generate.

Technology, Operations and Security

Technology

Our multi-tenant architecture enables us to deliver our solution across our client base with a single instance of our solution, while securely partitioning access to our clients’ respective application data. Because a single version of our solution is developed, supported and deployed across all of our clients, updates are delivered to all of our clients at the same time, making it easier to scale our solution as the number of our clients and their employees expands.

We maintain diverse load-balanced Internet lines serviced by multiple networks to provide our clients continuous access to our solution and their stored data. We back up our client data at regular intervals utilizing live replication, snapshots and cold archive methods of backup and manually monitor backup success and failure regularly. Our server cluster and database servers have redundant “hot swappable” disks to ensure continuous service in the event of a disk failure.

Operations

We physically host our solution for our clients in two secure data center facilities located in Oklahoma and Texas. All of our critical systems are fully redundant and backed-up in real-time to these facilities. Physical security includes ID-oriented access control, alarm systems and manned 24 hour a day camera monitoring by our security guards. Server facilities also have environmental monitoring and extensive environmental controls such as heat and fire protection, moisture, temperature, and humidity sensors, backup power supply and exterior reinforced concrete walls.

Security

We maintain a formal and comprehensive security program designed to ensure the confidentiality, integrity and availability of our clients’ data. During the regular course of business, we receive client data through our online system that we in turn process, record and store following ISO/IEC 270001:2005 certified controls and procedures. All communications with our servers that might contain sensitive information are encrypted before they leave the network and our servers are configured to only allow high-grade encryption algorithms.

We strictly regulate and limit all access to servers and networks at each of our facilities. Local network access is restricted by our authenticated server, using access control lists and remote network access is restricted by a firewall, which provides no accessible route from external networks to systems within our local network. We also employ network and host intrusion detection and prevention sensors throughout our infrastructure, systems that monitor and alert on insecure installations of third-party applications, a full system for managing

 

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and installing patches for those applications and highly restricted access to the Internet for anyone who has access to client data. We retain a third-party penetration testing company to conduct penetration tests and periodic audits to identify and remediate any issues.

Our applications are secured using multiple libraries and secure coding practices. We engage in regular penetration testing performed by both our information security department as well as by a third party testing company. Our network infrastructure is secured and monitored using a number of best practices and tools at multiple layers of the physical and logical network. This security is also continually monitored by our information security department.

Software Development

As of December 31, 2013, we had 30 employees dedicated to our application development process. This team works closely with our clients to improve and enhance our application offerings and develop new applications. Our application development process consists of a focused innovation and development timeframe in order to deliver well-developed applications and enhancements desired by our clients. A key element of our development process is the one-on-one personal interaction between clients and our client relations representatives, through which our clients suggest new applications and features.

We develop our solution from the “ground up” with our internal development and engineering teams. Our development and engineering teams and our employees conceive of new applications and enhancements, review requests, schedule development in order of priority and subsequently develop the applications or enhancements. Our new applications and enhancements are independently reviewed by the quality assurance team, in accordance with our software development process, before being fully implemented. Any enhancements to our applications are released on a monthly scheduled release date to coordinate the communication and release to our clients.

Capitalized development expenses, which include compensation for employees directly associated with development projects, were $1,221,000, $585,000 and $497,000 for the years ended December 31, 2013, 2012 and 2011, respectively.

Client Service

We are committed to providing industry-leading, client-centered service. For this reason, we assign each client a specialist within a dedicated team. This one-to-one service is a key part of our client service model and helps to ensure that we are delivering an industry-leading solution and maintaining high client satisfaction. The primary elements of our client service model include the following:

Streamlined Setup and Onboarding

After a client elects to deploy our solution, that client goes through our onboarding process with assistance from a team of new client setup specialists and the sales professional responsible for obtaining the client’s business. This team works closely with the client until the client is capable of managing our solution independently, in which case it is transferred to our dedicated services specialists.

Dedicated Service Specialists

After completing the onboarding process, each client is assigned to a specialist within a dedicated team that provides primary support for the remainder of the client’s time with the Company. Clients can then contact their dedicated services specialist or a team member if any issues or questions arise. These specialists provide personalized service with actual knowledge of the clients