##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
  THE ULTIMATE SOFTWARE GROUP, INC.
  Delaware
    
    65-0694077(State or other jurisdiction of incorporation 
or organization)
    
    (I.R.S. Employer Identification No.)
 2000 Ultimate Way, Weston, FL
    
    33326(Address of principal executive offices)
    
    (Zip Code)
 (954) 331-7000
 None
 þ o
   Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
 TABLE OF CONTENTS
 Page(s)Part I  Financial Information:Item 1  Financial Statements:Unaudited Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2008 and 2007
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007
    
    
    5Unaudited Condensed Consolidated Statement of Stockholders Equity and Comprehensive Loss for the Six Months Ended June 30, 2008
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7-15Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15-23Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    24-25Item 4  Controls and Procedures
    
    
    25Part II  Other Information:Item 1A  Risk Factors
    
    
    25Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 4  Submission of Matters to a Vote of Security Holders
    
    
    35Item 6  Exhibits
    
    
    35Signatures
    
    
    36CertificationsEX-31.1 CERTIFICATION PERSUANT TO RULE 13A-14(A)EX-31.2 CERTIFICATION PURSUANT TO RULE 13A-14(A)EX-32.1 CERTIFICATION PURSUANT TO 18 U.S.C.EX-32.2 CERTIFICATION PURSUANT TO 18 U.S.C.
  2




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##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 Item 1  Financial Statements
 THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
 As of
    
    
    As ofJune 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    20,870
    
    
    $
    17,462Short-term investments in marketable securities
    
    
    5,061
    
    
    
    17,120Accounts receivable, net of allowance for doubtful accounts of
$700 for 2008 and 2007, respectively
    
    
    32,123
    
    
    
    34,658Prepaid expenses and other current assets
    
    
    12,020
    
    
    
    9,801Deferred tax assets, net
    
    
    3,516
    
    
    
    3,516Total current assets before funds held for clients
    
    
    73,590
    
    
    
    82,557Funds held for clients
    
    
    1,875
    
    
    
    Total current assets
    
    
    75,465
    
    
    
    82,557Property and equipment, net
    
    
    22,434
    
    
    
    18,238Capitalized software, net
    
    
    5,648
    
    
    
    3,631Goodwill
    
    
    4,063
    
    
    
    4,063Long-term investments in marketable securities
    
    
    
    
    
    
    1,298Other assets, net
    
    
    10,784
    
    
    
    9,365Long-term deferred tax assets, net
    
    
    16,378
    
    
    
    16,004Total assets
    
    $
    134,772
    
    
    $
    135,156LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,707
    
    
    $
    3,528Accrued expenses
    
    
    10,822
    
    
    
    11,405Current portion of deferred revenue
    
    
    44,839
    
    
    
    43,262Current portion of capital lease obligations
    
    
    1,789
    
    
    
    2,002Current portion of long-term debt
    
    
    404
    
    
    
    572Total current liabilities before client funds obligations
    
    
    64,561
    
    
    
    60,769Client funds obligations
    
    
    1,875
    
    
    
    Total current liabilities
    
    
    66,436
    
    
    
    60,769Deferred revenue, net of current portion
    
    
    8,324
    
    
    
    8,446Deferred rent
    
    
    3,134
    
    
    
    2,652Capital lease obligations, net of current portion
    
    
    1,209
    
    
    
    1,991Long-term debt, net of current portion
    
    
    320
    
    
    
    320Total liabilities
    
    
    79,423
    
    
    
    74,178Stockholders equity:Preferred Stock, $.01 par value, 2,000,000 shares authorized,
no shares issued or outstanding
    
    
    
    
    
    
    Series A Junior Participating Preferred Stock, $.01 par value,
500,000 shares authorized, no shares issued or outstanding
    
    
    
    
    
    
    Common Stock, $.01 par value, 50,000,000 shares authorized,
26,711,692 and 26,219,789 shares issued in 2008 and 2007, respectively
    
    
    267
    
    
    
    262Additional paid-in capital
    
    
    156,401
    
    
    
    143,913Accumulated other comprehensive loss
    
    
    (5
    )
    
    
    (18
    )Accumulated deficit
    
    
    (50,832
    )
    
    
    (50,371
    )105,831
    
    
    
    93,786Treasury stock, 2,020,375 and 1,452,375 shares, at cost, for 2008
and 2007, respectively
    
    
    (50,482
    )
    
    
    (32,808
    )Total stockholders equity
    
    
    55,349
    
    
    
    60,978Total liabilities and stockholders equity
    
    $
    134,772
    
    
    $
    135,156
 
 3




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##### Table of Contents



THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
 For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Recurring
    
    $
    25,377
    
    
    $
    21,075
    
    
    $
    51,073
    
    
    $
    40,546Services
    
    
    13,165
    
    
    
    11,274
    
    
    
    27,285
    
    
    
    23,461License
    
    
    2,957
    
    
    
    2,608
    
    
    
    6,610
    
    
    
    7,492Total revenues
    
    
    41,499
    
    
    
    34,957
    
    
    
    84,968
    
    
    
    71,499Cost of revenues:Recurring
    
    
    7,002
    
    
    
    5,480
    
    
    
    13,527
    
    
    
    10,979Services
    
    
    10,580
    
    
    
    9,081
    
    
    
    21,879
    
    
    
    19,373License
    
    
    464
    
    
    
    265
    
    
    
    892
    
    
    
    674Total cost of revenues
    
    
    18,046
    
    
    
    14,826
    
    
    
    36,298
    
    
    
    31,026Gross profit
    
    
    23,453
    
    
    
    20,131
    
    
    
    48,670
    
    
    
    40,473Operating expenses:Sales and marketing
    
    
    11,236
    
    
    
    8,442
    
    
    
    23,065
    
    
    
    17,225Research and development
    
    
    9,299
    
    
    
    6,663
    
    
    
    18,178
    
    
    
    13,834General and administrative
    
    
    4,405
    
    
    
    3,253
    
    
    
    8,701
    
    
    
    6,700Total operating expenses
    
    
    24,940
    
    
    
    18,358
    
    
    
    49,944
    
    
    
    37,759Operating income (loss)
    
    
    (1,487
    )
    
    
    1,773
    
    
    
    (1,274
    )
    
    
    2,714Other income (expense):Interest expense and other
    
    
    (61
    )
    
    
    (53
    )
    
    
    (140
    )
    
    
    (100
    )Other income, net
    
    
    222
    
    
    
    4,774
    
    
    
    579
    
    
    
    5,169Total other income, net
    
    
    161
    
    
    
    4,721
    
    
    
    439
    
    
    
    5,069Income (loss) before benefit (provision) for income taxes
    
    
    (1,326
    )
    
    
    6,494
    
    
    
    (835
    )
    
    
    7,783Benefit (provision) for income taxes
    
    
    575
    
    
    
    (85
    )
    
    
    374
    
    
    
    (115
    )Net income (loss)
    
    $
    (751
    )
    
    $
    6,409
    
    
    $
    (461
    )
    
    $
    7,668Net income (loss) per share:Basic
    
    $
    (0.03
    )
    
    $
    0.26
    
    
    $
    (0.02
    )
    
    $
    0.31Diluted
    
    $
    (0.03
    )
    
    $
    0.23
    
    
    $
    (0.02
    )
    
    $
    0.28Weighted average shares outstanding:Basic
    
    
    24,670
    
    
    
    24,713
    
    
    
    24,676
    
    
    
    24,621Diluted
    
    
    24,670
    
    
    
    27,571
    
    
    
    24,676
    
    
    
    27,479
 
 4




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##### Table of Contents



THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 For the Six MonthsEnded June 30,2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    (461
    )
    
    $
    7,668Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    4,483
    
    
    
    3,302Provision for doubtful accounts
    
    
    944
    
    
    
    723Non-cash stock-based compensation expense
    
    
    8,033
    
    
    
    4,737Deferred income taxes
    
    
    (374
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    1,591
    
    
    
    492Prepaid expenses and other current assets
    
    
    (2,219
    )
    
    
    (427
    )Other assets
    
    
    (1,512
    )
    
    
    (1,260
    )Accounts payable
    
    
    3,179
    
    
    
    (443
    )Accrued expenses and deferred rent
    
    
    (1,601
    )
    
    
    (1,254
    )Deferred revenue
    
    
    1,455
    
    
    
    823Net cash provided by operating activities
    
    
    13,518
    
    
    
    14,361Cash flows from investing activities:Purchases of marketable securities
    
    
    (642
    )
    
    
    (10,636
    )Maturities of marketable securities
    
    
    14,022
    
    
    
    8,845Capitalized software
    
    
    (889
    )
    
    
    (925
    )Acquisition-related expenses
    
    
    
    
    
    
    (24
    )Purchases of property and equipment
    
    
    (8,111
    )
    
    
    (3,493
    )Net cash provided by (used in) investing activities
    
    
    4,380
    
    
    
    (6,233
    )Cash flows from financing activities:Repurchases of Common Stock
    
    
    (17,674
    )
    
    
    (7,706
    )Principal payments on capital lease obligations
    
    
    (1,098
    )
    
    
    (922
    )Repayments of borrowings of long-term debt
    
    
    (168
    )
    
    
    (251
    )Net proceeds from issuances of Common Stock
    
    
    4,460
    
    
    
    4,038Net cash used in financing activities
    
    
    (14,480
    )
    
    
    (4,841
    )Effect of exchange rate changes on cash
    
    
    (10
    )
    
    
    3Net increase in cash and cash equivalents
    
    
    3,408
    
    
    
    3,290Cash and cash equivalents, beginning of period
    
    
    17,462
    
    
    
    16,734Cash and cash equivalents, end of period
    
    $
    20,870
    
    
    $
    20,024Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    39
    
    
    $
    49Cash paid for income taxes
    
    $
    227
    
    
    $
    Supplemental disclosure of non-cash financing activities:
 
    
    The Company entered into capital lease obligations to acquire new equipment totaling $103 and $1,719
for the six months ended June 30, 2008 and 2007, respectively.
    
    The Company entered into an agreement to purchase software from NOVAtime Technology, Inc., a third-party
vendor, for $2.0 million, of which $0.5 million was paid during the six months ended June 30, 2008.
 
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##### Table of Contents



THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE (LOSS)
(In thousands)
 Additional
    
    
    Accumulated Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Accumulated
    
    
    Treasury Stock
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    (Loss)
    
    
    Deficit
    
    
    Shares
    
    
    Amount
    
    
    EquityBalance, December 31, 2007
    
    
    26,220
    
    
    $
    262
    
    
    $
    143,913
    
    
    $
    (18
    )
    
    $
    (50,371
    )
    
    
    1,452
    
    
    $
    (32,808
    )
    
    $
    60,978Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (461
    )
    
    
    
    
    
    
    
    
    
    
    (461
    )Unrealized gain on investments in marketable
securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Unrealized loss on foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (448
    )Repurchases of Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    568
    
    
    
    (17,674
    )
    
    
    (17,674
    )Issuances of Common Stock from exercises
of stock options
    
    
    492
    
    
    
    5
    
    
    
    4,455
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,460Non-cash stock-based compensation
    
    
    
    
    
    
    
    
    
    
    8,033
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,033Balance, June 30, 2008
    
    
    26,712
    
    
    $
    267
    
    
    $
    156,401
    
    
    $
    (5
    )
    
    $
    (50,832
    )
    
    
    2,020
    
    
    $
    (50,482
    )
    
    $
    55,349
 
 6




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##### Table of Contents



THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    Nature of Operations
  2.
    
    Basis of Presentation, Consolidation and the Use of Estimates
    3.
    
    Summary of Significant Accounting Policies and Recent Accounting Pronouncements
 Summary of Significant Accounting Policies
   7




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##### Table of Contents



Recently Adopted Accounting Pronouncements
   Recently Issued Accounting Pronouncements
   8




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##### Table of Contents



4.
    
    Investments in Marketable Securities and Fair Value of Financial Instruments
   Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gain
    
    
    Loss
    
    
    ValueCorporate debentures  bonds
    
    $
    3,102
    
    
    $
    9
    
    
    $
    (1
    )
    
    $
    3,110Commercial paper
    
    
    650
    
    
    
    
    
    
    
    
    
    
    
    650Certificates of deposit
    
    
    650
    
    
    
    
    
    
    
    
    
    
    
    650Asset-backed securities
    
    
    647
    
    
    
    4
    
    
    
    
    
    
    
    651Total investments available-for-sale
    
    $
    5,049
    
    
    $
    13
    
    
    $
    (1
    )
    
    $
    5,061
  Amortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    5,049
    
    
    $
    5,061$
    5,049
    
    
    $
    5,061
  Level 1:
    
    Unadjusted quoted prices in active markets that are accessible at
the measurement date for identical, unrestricted assets and
liabilities.
 Level 2:
    
    Quoted prices in markets that are not active or financial
instruments for which all significant inputs are observable,
either directly or indirectly.
 Level 3:
    
    Prices or valuations that require inputs that are both
significant to the fair value measurement and unobservable.
 9




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##### Table of Contents



QuotedPrices in
    
    
    Other
    
    
    Un-Active
    
    
    Observable
    
    
    observableMarkets
    
    
    Inputs
    
    
    InputsTotal
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Corporate debentures  bonds
    
    $
    3,110
    
    
    $
    
    
    
    $
    3,110
    
    
    $
    Commercial paper
    
    
    650
    
    
    
    
    
    
    
    650
    
    
    
    Certificates of deposit
    
    
    650
    
    
    
    650
    
    
    
    
    
    
    
    Asset-backed securities
    
    
    651
    
    
    
    
    
    
    
    651
    
    
    
    Total investments available-for-sale
    
    $
    5,061
    
    
    $
    650
    
    
    $
    4,411
    
    
    $
    
  5.
    
    Property and Equipment
  10




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##### Table of Contents



As of
    
    
    As ofJune 30, 2008
    
    
    December 31, 2007Property and equipment
    
    $
    60,807
    
    
    $
    52,611Less: accumulated depreciation and amortization
    
    
    38,373
    
    
    
    34,373$
    22,434
    
    
    $
    18,238
 6.
    
    Goodwill and Other Intangible Assets
  7.
    
    Earnings Per Share
   For the Three Months
    
    
    For the Six Monthsended June 30,
    
    
    ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Basic weighted average shares outstanding
    
    
    24,670
    
    
    
    24,713
    
    
    
    24,676
    
    
    
    24,621Effect of dilutive equity instruments
    
    
    
    
    
    
    2,858
    
    
    
    
    
    
    
    2,858Dilutive weighted average shares outstanding
    
    
    24,670
    
    
    
    27,571
    
    
    
    24,676
    
    
    
    27,479Other common stock equivalents (i.e., stock options,
restricted stock awards and stock units)
outstanding which are not included in the calculation
of diluted income (loss) per share because their
impact is
anti-dilutive
    
    
    5,687
    
    
    
    664
    
    
    
    5,687
    
    
    
    554
  11




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8.
    
    Comprehensive Income (Loss)
   For the Three Months
    
    
    For the Six Monthsended June 30,
    
    
    ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    (751
    )
    
    $
    6,409
    
    
    $
    (461
    )
    
    $
    7,668Other comprehensive incomeUnrealized gain (loss) on investments in
marketable securities available-for-sale
    
    
    (21
    )
    
    
    (13
    )
    
    
    23
    
    
    
    (14
    )Unrealized gain (loss) on foreign currency
translation adjustments
    
    
    3
    
    
    
    6
    
    
    
    (10
    )
    
    
    5Comprehensive income (loss)
    
    $
    (769
    )
    
    $
    6,402
    
    
    $
    (448
    )
    
    $
    7,659
 9.
    
    Foreign Currency
  10.
    
    Stock-Based Compensation
 Summary of Plans
   12




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##### Table of Contents



Stock-Based Compensation
  For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Non-cash stock-based compensation expense:Cost of recurring revenues
    
    $
    169
    
    
    $
    114
    
    
    $
    498
    
    
    $
    328Cost of services revenues
    
    
    406
    
    
    
    312
    
    
    
    1,086
    
    
    
    912Cost of license revenues
    
    
    3
    
    
    
    1
    
    
    
    7
    
    
    
    3Sales and marketing
    
    
    1,560
    
    
    
    922
    
    
    
    3,613
    
    
    
    2,123Research and development
    
    
    352
    
    
    
    175
    
    
    
    941
    
    
    
    540General and administrative
    
    
    950
    
    
    
    394
    
    
    
    1,870
    
    
    
    831Total non-cash stock-based
compensation expense
    
    $
    3,440
    
    
    $
    1,918
    
    
    $
    8,015
    
    
    $
    4,737
    For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Expected term (in years)
    
    
    5.4
    
    
    
    5.0
    
    
    
    5.4
    
    
    
    4.9Volatility
    
    
    39
    %
    
    
    39
    %
    
    
    39
    %
    
    
    39
    %Interest rate
    
    
    3.13
    %
    
    
    4.50
    %
    
    
    3.13
    %
    
    
    4.65
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average fair
    
    $
    13.16
    
    
    $
    11.41
    
    
    $
    11.31
    
    
    $
    10.24value at grant date
 13




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##### Table of Contents



Restricted Stock Awards
  Stock Unit Awards
   Stock Option and Restricted Stock Activity
  WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicStock Options
    
    Shares
    
    
    Exercise Price
    
    
    Term (in Years)
    
    
    ValueOutstanding at December 31, 2007
    
    
    4,547
    
    
    $
    13.31
    
    
    
    
    
    
    
    Granted
    
    
    697
    
    
    
    29.10
    
    
    
    
    
    
    
    Exercised
    
    
    (492
    )
    
    
    9.07
    
    
    
    
    
    
    
    Forfeited or expired
    
    
    (26
    )
    
    
    26.65
    
    
    
    
    
    
    
    Outstanding at June 30, 2008
    
    
    4,726
    
    
    $
    16.02
    
    
    
    6.24
    
    
    $
    92,704Exercisable at June 30, 2008
    
    
    3,615
    
    
    $
    12.85
    
    
    
    5.42
    
    
    $
    82,337
 14




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##### Table of Contents



WeightedAverageGrant DateRestricted Stock
    
    Shares
    
    
    Fair ValueOutstanding at December 31, 2007
    
    
    911
    
    
    $
    27.11Granted
    
    
    4
    
    
    
    30.34Vested
    
    
    
    
    
    
    Forfeited or expired
    
    
    
    
    
    
    Outstanding at June 30, 2008
    
    
    915
    
    
    $
    27.13
  
 ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
   Executive Summary
   15




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16




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Critical Accounting Estimates
  Results of Operations
  For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Recurring
    
    
    61.2
    %
    
    
    60.3
    %
    
    
    60.1
    %
    
    
    56.7
    %Services
    
    
    31.7
    
    
    
    32.2
    
    
    
    32.1
    
    
    
    32.8License
    
    
    7.1
    
    
    
    7.5
    
    
    
    7.8
    
    
    
    10.5Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenues:Recurring
    
    
    16.9
    
    
    
    15.7
    
    
    
    15.9
    
    
    
    15.4Services
    
    
    25.5
    
    
    
    26.0
    
    
    
    25.7
    
    
    
    27.1License
    
    
    1.1
    
    
    
    0.8
    
    
    
    1.0
    
    
    
    0.9Total cost of revenues
    
    
    43.5
    
    
    
    42.5
    
    
    
    42.6
    
    
    
    43.4Operating expenses:Sales and marketing
    
    
    27.1
    
    
    
    24.1
    
    
    
    27.2
    
    
    
    24.1Research and development
    
    
    22.4
    
    
    
    19.1
    
    
    
    21.4
    
    
    
    19.3General and administrative
    
    
    10.6
    
    
    
    9.3
    
    
    
    10.2
    
    
    
    9.4Total operating expenses
    
    
    60.1
    
    
    
    52.5
    
    
    
    58.8
    
    
    
    52.8Operating income (loss)
    
    
    (3.6
    )
    
    
    5.0
    
    
    
    (1.4
    )
    
    
    3.8Other income (expense):Interest expense and other
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    (0.2
    )
    
    
    (0.1
    )Other income, net
    
    
    0.5
    
    
    
    13.7
    
    
    
    0.7
    
    
    
    7.2Total other income, net
    
    
    0.4
    
    
    
    13.5
    
    
    
    0.5
    
    
    
    7.1Income (loss) before income taxes
    
    
    (3.2
    )
    
    
    18.5
    
    
    
    (0.9
    )
    
    
    10.9(Provision) benefit for income taxes
    
    
    1.4
    
    
    
    (0.2
    )
    
    
    0.4
    
    
    
    (0.2
    )Net income (loss)
    
    
    (1.8)
    %
    
    
    18.3
    %
    
    
    (0.5
    )%
    
    
    10.7
    %
 17




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##### Table of Contents



Revenues
        a)
    
    Intersourcing revenues increased 48.6% and 53.6% for the three and six months
ended June 30, 2008, respectively, in comparison to the same periods of 2007, primarily
due to the continued growth of the Intersourcing Offering, which comprises the majority
of unit sales. The increase is based on the revenue impact of incremental units that
have gone Live since June 30, 2007, including both UltiPro and, to a lesser extent,
complementary products such as UltiPro Time and Attendance (UTA) and Recruitment.
Intersourcing revenues from the Workplace solution in 2008 also contributed to the
year-over-year growth, particularly since this solution was introduced after June 30,
2007. Recognition of recurring revenues for Intersourcing sales commences upon Live
date. The Companys retention rate of 97% for existing Intersourcing customers also
contributed to the growth in Intersourcing revenues.b)
    
    Maintenance revenues from license sales increased 10.9% and 11.8% for the three
and six months ended June 30, 2008, respectively, in comparison to the same periods of
2007, due to additional maintenance fees resulting from cumulative net increases in the
customer base subsequent to June 30, 2007 due to incremental license sales since such
date. Maintenance
 18




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revenues are recognized over the initial term of the related license contract, which is
typically 12 months, and then on a monthly recurring basis thereafter as the maintenance
contracts renew annually. The Companys retention rate of approximately 96% for
existing customers annual maintenance renewals in the three and six months ended June
30, 2008 combined with the annual price increases that typically accompany renewals also
contributed to the increase in maintenance revenues.c)
    
    The impact on recurring revenues of units sold under the Intersourcing Offering
(as compared to the typical immediate impact on license revenues of licensed units
sold) has been and is expected to be a gradual increase from one period to the next,
based on the incremental effect of revenue recognition of the Intersourcing fees over
the terms of the related contracts as sales in backlog go Live.d)
    
    Recurring subscription revenues decreased 73.1% and 46.8% for the three and six
months ended June 30, 2008, respectively, in comparison to the same periods of 2007,
due to the termination of the Companys agreement with Ceridian Corporation, as
amended, on March 9, 2008, at which time the related revenue recognition ended.
  Cost of Revenues
    19




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ales and Marketing
  20




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Research and Development
  General and Administrative
  Interest Expense and Other
  Other Income, Net
  Income Taxes
  21




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Liquidity and Capital Resources
        22




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Off-Balance Sheet Arrangements
  Quarterly Fluctuations
  Forward-Looking Statements
  23




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ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
  Market risks.
 
    
    Maximum safety of principal;
    
    Maintenance of appropriate liquidity for regular cash needs;
    
    Maximum yields in relationship to guidelines and market conditions;
    
    Diversification of risks; and
    
    Fiduciary control of all investments.
  Interest rates
   Interest rate risk.
 24




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ITEM 4.
    
    Controls and Procedures
 Evaluation of disclosure controls and procedures.
 Changes in internal control over financial reporting.
 
 PART II  OTHER INFORMATION
 
 ITEM 1A.
    
    Risk Factors
  This Form 10-Q may contain certain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. These forward-looking statements represent the Companys expectations or beliefs,
including, but not limited to, statements concerning the Companys operations and financial
performance and condition. Words such as anticipates, expects, intends, plans, believes,
seeks, estimates, and similar expressions are intended to identify such forward-looking
statements. These forward-looking statements are not guarantees of future performance and are
subject to certain risks and uncertainties that are difficult to predict. The Companys actual
results could differ materially from those contained in the forward-looking statements due to risks
and uncertainties associated with fluctuations in the Companys quarterly operating results,
concentration of the Companys product offerings, development risks involved with new products and
technologies, competition, the Companys contractual relationships with third parties, contract
renewals with business partners, compliance by our customers with the terms of their contracts with
us, and other factors disclosed in the Companys filings with the Securities and Exchange
Commission. Other factors that may cause such differences include, but are not limited to, those
discussed in this Form 10-Q , including the following disclosures. The Company
undertakes no obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
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##### Table of Contents



We may be adversely affected by substantial quarterly fluctuations in our revenues and operating
results.
  
    
    Variations in the mix of revenues;
    
    Increased expenses (especially as they relate to product development and sales and
marketing);
    
    Timing of product releases:
    
    Increased competition;
    
    Announcements of new products by us or our competitors;
    
    Capital spending patterns of our customers; and
    
    A drop in near-term demand for our products.
  Due to the method of accounting for Intersourcing sales, a change in the period of the time from
contract date to the Live date (Time to Live) could negatively impact the amount of recurring
revenues recognized in a reporting period.
   26




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Our quarterly revenues and operating results may be negatively impacted by seasonality, especially
in the first fiscal quarter of each year.
   Adverse changes in general economic or political conditions could adversely affect our operating
results.
  Our failure to maintain and increase acceptance of UltiPro, which accounts for substantially all of
our revenues, could cause a significant decline in our revenues.
  A systems failure or other service interruption at either of the data centers managed by Quality
Technology Services (QTS) and used for our hosting services could result in substantial expense
to us, loss of customers and claims by our customers for damages caused by any losses they incur.
  27




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##### Table of Contents




    
    Human error;
    
    Natural disasters;
    
    Power loss or telecommunication failures;
    
    Sabotage or other intentional acts of vandalism; and
    
    Unforeseen interruption or damages experienced in moving hardware to a new location.
  
    
    Result in interruptions in the services we provide to our customers, during which
time our customers may be unable to retrieve their data;
    
    Require us to spend substantial amounts of money replacing existing equipment and/or
purchasing services from an alternative data center;
    
    Cause existing customers to cancel their contracts;
    
    Cause our customers to seek damages for losses incurred; or
    
    Make it more difficult for us to attract new customers.
 If our direct sales force is not successful, we may be unable to achieve significant revenue growth
in the future.
  If we are not able to successfully recruit personnel, our revenues could be negatively affected.
  Rapid technological changes and the introduction of new products and enhancements by new or
existing competitors could undermine our current market position.
  28




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##### Table of Contents




    
    Enhance our current products and introduce new products in order to keep pace with
products offered by our competitors;
    
    Adapt to technological advancements and changing industry standards; and
    
    Expand the functionality of our products to address the increasingly sophisticated
requirements of our customers.
  Our current and future competitors include companies with greater financial, technical and
marketing resources than we have and if we are unable to compete successfully with other businesses
in our industry or with in-house systems developed by potential customers, our profitability will
be adversely affected.
  
    
    Large service bureaus, primarily Automatic Data Processing, Inc. (ADP) and, to a
lesser extent, Ceridian Corporation;
    
    A number of companies, such as PeopleSoft/Oracle, Lawson and Kronos, that offer
human resource management and payroll software products for use on mainframes,
client/server environments and/or Web servers; and
    
    The internal payroll/human resources departments of potential customers which use
custom-written software.
  The loss of the services of one or more of our key employees could negatively affect our ability to
implement our business strategy.
  29




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##### Table of Contents



The potential growth of our business and expansion of our customer base may place a significant
strain on our management and operations and we may be unable to manage that growth and expansion
successfully.
  Our business relies heavily on the products of Microsoft, which may not always be compatible with
our products, and we may be required to spend significant capital if businesses adopt alternative
technologies that are incompatible with our products.
  If our third-party software is not adequately maintained or updated, our sales could be materially
adversely affected.
  If we are unable to release annual or periodic updates on a timely basis to reflect changes in tax
laws and regulations or other regulatory provisions applicable to our products, the market
acceptance of our products may be adversely affected and our revenues could decline.
  30




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##### Table of Contents



If we are unable to protect our proprietary rights against unauthorized third-party copying or use,
our revenues or our methods of doing business could be negatively impacted.
  Litigation may be necessary in the future to enforce our intellectual property rights, to protect
our trademarks, copyrights or trade secrets or to determine the validity and scope of the
proprietary rights of others; such litigation may be expensive and divert the attention of
management.
   Defects and errors in our software could affect market acceptance of our products.
  
    
    Cause delays in product introductions and shipments;
    
    Result in increased costs and diversion of development resources;
    
    Require design modifications; or
    
    Decrease market acceptance of, or customer satisfaction with, our products.
  31




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##### Table of Contents



Our software products may be vulnerable to break-ins and similar disruptive problems; addressing
these issues may be expensive and require a significant amount of our resources.
  The sale and support of software products and the performance of related services by us entail the
risk of product liability claims, which could significantly affect our financial results.
  Anti-takeover provisions in our certificate of incorporation and by-laws and under our Rights
Agreement and Delaware law and our Change in Control Bonus Plans could substantially increase the
cost to acquire us or prevent or delay a change in control and, as a result, negatively impact our
stockholders and the price of our common stock.
     32




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##### Table of Contents



The growth of the international operations of our business subjects us to additional risks
associated with foreign operations.
   If our goodwill or amortizable intangible assets become impaired we may be required to record a
significant charge to earnings.
  Changes in, or interpretations of, accounting principles could result in unfavorable accounting
changes.
  Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax
rates.
  33




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##### Table of Contents



ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
 (c) Purchases of Equity Securities by the Issuer.
    Total Number of Shares
    
    
    Maximum Number ofPurchased as Part
    
    
    Shares That May YetTotal Number of
    
    
    Average Price
    
    
    Of Publicly Announced
    
    
    Be Purchased Under thePeriod
    
    Shares Purchased (1)
    
    
    Paid per Share
    
    
    Plans or Programs
    
    
    Plans or ProgramsApril 1- 30, 2008
    
    
    
    
    
    
    
    
    
    
    1,786,875
    
    
    
    1,213,125May 1- 31, 2008
    
    
    220,200
    
    
    
    34.93
    
    
    
    2,007,075
    
    
    
    992,925June 1- 30, 2008
    
    
    13,300
    
    
    
    37.53
    
    
    
    2,020,375
    
    
    
    979,625Total
    
    
    233,500
    
    
    $
    35. 08
    
    
    
    2,020,375
    
    
    
    979,625
 
 (1)
    
    All shares were purchased through the publicly announced Stock Repurchase Plan in open-market transactions. 34




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##### Table of Contents



ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
   Nominee
    
    For
    
    
    Withheld VoteLeRoy A. Vander Putten
    
    
    21,694,703
    
    
    
    3,841,052Robert A. Yanover
    
    
    21,694,703
    
    
    
    3,841,052
  Term Expires in 2009:
     Marc D. Scherr
     James A. FitzPatrick, Jr.
     Rick A. Wilber
 Term Expires in 2010:
     Scott Scherr
     Alois T. Leiter
  For
    
    Against
    
    Abstain
    
    Broker Non-Votes25,089,227
    
    64,317
    
    382,211
    
    0
 
 ITEM 6.
    
    Exhibits
 Number
    
    Description31.1
    
    
    Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended *31.2
    
    
    Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended *32.1
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as
amended *32.2
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as
amended *
 
 *
    
    Filed herewith. 35




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Signatures
  The Ultimate Software Group, Inc.Date: August 11, 2008
    By:
    /s/ Mitchell K. DauermanMitchell K. DauermanExecutive Vice President, Chief
Financial Officer and Treasurer
(Authorized Signatory and Principal
Financial and Accounting Officer) 36