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 September 30, 2009
 
  ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
transition period from _______ to _______
 Commission
file
number:                                           0-24347
 
 THE ULTIMATE SOFTWARE GROUP,
INC.
 (Exact
name of Registrant as specified in its charter)
 
 Delaware
              
              65-0694077(State
      or other jurisdiction of incorporation)
              
              (I.R.S.
      Employer Identification No.)or
      organization
 
 2000 Ultimate Way, Weston,
    FL
              
              33326(Address
      of principal executive offices)
              
              (Zip
      Code)
 
 (954) 331 -
7000
 (Registrant’s
telephone number, including area code)
 
 None
 (Former
name, former address and former fiscal year, if changed since last
report)
 
 Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes þ  No  ̈
 
 Indicate
by check mark whether registrant has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding twelve months (or for such period that the registrant was
required to submit and post such files).  Yes  ̈  No  ̈
 
 Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  (Check one):
 
 Large
      accelerated filer  þ
              
              Accelerated
      filer   ̈Non-accelerated
      filer   ̈
              (Do
      not check if a smaller reporting company)
              Smaller
      reporting company  ̈
 
 Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  ̈ No þ
 
 As of
November 2, 2009, there were 24,664,733 shares of the Registrant’s Common Stock,
par value $0.01, outstanding.
  
  
 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 September 30, 2009 and December 31, 2008
              
              
              1Unaudited Condensed Consolidated Statements of
      Operations for the Three and Nine Months Ended September 30, 2009 and
      September 30, 2008
              
              
              2Unaudited Condensed Consolidated Statements of
      Cash Flows for the Nine Months Ended September 30, 2009 and September 30,
      2008
              
              
              3Unaudited Condensed Consolidated Statement of
      Stockholders’ Equity and Comprehensive Loss for the Nine Months Ended
      September 30, 2009
              
              
              4Notes to Unaudited Condensed Consolidated Financial
      Statements
              
              
              5-10Item
      2 – Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              
              
              11-14Item
      3 – Quantitative and Qualitative Disclosures About
      Market Risk
              
              
              15Item
      4 – Controls and Procedures
              
              
              15Part
      II – Other Information:Item
      1A – Risk Factors
              
              
              16Item
      2 – Unregistered Sales of Equity Securities
      and Use of Proceeds
              
              
              16Item
      6 – Exhibits
              
              
              17Signatures
              
              
              18Certifications
  
 i
 Table of Contents
 
 
 PART
      1 – FINANCIAL INFORMATIONItem
      1 – Financial StatementsTHE
      ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIESUNAUDITED
      CONDENSED CONSOLIDATED BALANCE SHEETS(Dollars
      in thousands, except share and per share data)As
      of
              
              
              As
      ofSeptember
      30,
              
              
              December
      31,2009
              
              
              2008ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              22,934
              
              
              $
              17,200Short-term
      investments in marketable securities
              
              
              6,781
              
              
              
              5,805Accounts
      receivable, net of allowance for doubtful accounts of
                $650
      for 2009 and $700 for 2008
              
              
              35,258
              
              
              
              38,302Prepaid
      expenses and other current assets
              
              
              15,669
              
              
              
              16,011Deferred
      tax assets, net
              
              
              3,533
              
              
              
              3,533Total
      current assets before funds held for customers
              
              
              84,175
              
              
              
              80,851Funds
      held for customers
              
              
              11,230
              
              
              
              5,863Total
      current assets
              
              
              95,405
              
              
              
              86,714Property
      and equipment, net
              
              
              20,290
              
              
              
              22,984Capitalized
      software, net
              
              
              4,801
              
              
              
              5,642Goodwill
              
              
              3,196
              
              
              
              2,906Long-term
      investments in marketable securities
              
              
              937
              
              
              
              –Other
      assets, net
              
              
              11,929
              
              
              
              11,668Long-term
      deferred tax assets, net
              
              
              17,708
              
              
              
              17,343Total
      assets
              
              $
              154,266
              
              
              $
              147,257LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              4,903
              
              
              $
              7,200Accrued
      expenses
              
              
              9,754
              
              
              
              12,701Current
      portion of deferred revenue
              
              
              56,569
              
              
              
              54,687Current
      portion of capital lease obligations
              
              
              1,856
              
              
              
              2,034Current
      portion of long-term debt
              
              
              –
              
              
              
              320Total
      current liabilities before customer funds obligations
              
              
              73,082
              
              
              
              76,942Customer
      funds obligations
              
              
              11,230
              
              
              
              5,863Total
      current liabilities
              
              
              84,312
              
              
              
              82,805Deferred
      revenue, net of current portion
              
              
              7,797
              
              
              
              8,807Deferred
      rent
              
              
              3,248
              
              
              
              3,054Capital
      lease obligations, net of current portion
              
              
              1,451
              
              
              
              1,519Total
      liabilities
              
              
              96,808
              
              
              
              96,185Stockholders’
      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, 27,347,107 and
      26,796,169 shares issued in 2009 and 2008, respectively
              
              
              273
              
              
              
              268Additional
      paid-in capital
              
              
              179,050
              
              
              
              164,574Accumulated
      other comprehensive loss
              
              
              (728
              )
              
              
              (1,002
              )Accumulated
      deficit
              
              
              (54,480
              )
              
              
              (53,268
              )124,115
              
              
              
              110,572Treasury stock, 2,796,825 and
      2,533,575 shares, at cost, for 2009 and 2008, respectively
              
              
              (66,657
              )
              
              
              (59,500
              )Total
      stockholders’ equity
              
              
              57,458
              
              
              
              51,072Total
      liabilities and stockholders’ equity
              
              $
              154,266
              
              
              $
              147,257
 
 The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are
an integral part of these financial statements.
 
 
 1
 Table of Contents
 
 THE
      ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIESUNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In
      thousands, except per share amounts)For
      the Three Months
              
              
              For
      the Nine MonthsEnded
      September 30,
              
              
              Ended
      September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Revenues:Recurring
              
              $
              34,153
              
              
              $
              26,738
              
              
              $
              97,664
              
              
              $
              77,811Services
              
              
              13,792
              
              
              
              15,002
              
              
              
              43,131
              
              
              
              42,287License
              
              
              252
              
              
              
              2,172
              
              
              
              3,527
              
              
              
              8,782Total
      revenues
              
              
              48,197
              
              
              
              43,912
              
              
              
              144,322
              
              
              
              128,880Cost
      of revenues:Recurring
              
              
              9,959
              
              
              
              7,927
              
              
              
              28,432
              
              
              
              21,454Services
              
              
              11,593
              
              
              
              12,751
              
              
              
              35,032
              
              
              34,630License
              
              
              –
              
              
              
              463
              
              
              
              598
              
              
              
              1,355Total
      cost of revenues
              
              
              21,552
              
              
              
              21,141
              
              
              
              64,062
              
              
              
              57,439Gross
      profit
              
              
              26,645
              
              
              
              22,771
              
              
              
              80,260
              
              
              
              71,441Operating
      expenses:Sales
      and marketing
              
              
              13,049
              
              
              
              12,483
              
              
              
              39,768
              
              
              
              35,548Research
      and development
              
              
              9,940
              
              
              
              9,912
              
              
              
              28,860
              
              
              
              28,090General
      and administrative
              
              
              4,351
              
              
              
              4,697
              
              
              
              13,239
              
              
              
              13,398Total
      operating expenses
              
              
              27,340
              
              
              
              27,092
              
              
              
              81,867
              
              
              
              77,036Operating
      loss
              
              
              (695
              )
              
              
              (4,321
              )
              
              
              (1,607
              )
              
              
              (5,595
              )Other
      income (expense):Interest
      expense and other
              
              
              (29
              )
              
              
              (33
              )
              
              
              (111
              )
              
              
              (173
              )Other
      income, net
              
              
              30
              
              
              
              168
              
              
              
              141
              
              
              
              747Total
      other income, net
              
              
              1
              
              
              
              135
              
              
              
              30
              
              
              
              574Loss
      before benefit for income taxes
              
              
              (694
              )
              
              
              (4,186
              )
              
              
              (1,577
              )
              
              
              (5,021
              )Benefit
      for income taxes
              
              
              225
              
              
              
              1,135
              
              
              
              365
              
              
              
              1,509Net
      loss
              
              $
              (469
              )
              
              $
              (3,051
              )
              
              $
              (1,212
              )
              
              $
              (3,512
              )Net
      loss per share:Basic
              
              $
              (0.02
              )
              
              $
              (0.12
              )
              
              $
              (0.05
              )
              
              $
              (0.14
              )Diluted
              
              $
              (0.02
              )
              
              $
              (0.12
              )
              
              $
              (0.05
              )
              
              $
              (0.14
              )Weighted
      average shares outstanding:Basic
              
              
              24,539
              
              
              
              24,613
              
              
              
              24,416
              
              
              
              24,654Diluted
              
              
              24,539
              
              
              
              24,613
              
              
              
              24,416
              
              
              
              24,654
 
 The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are
an integral part of these financial statements.
  2
 Table of Contents
  
 THE
      ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIESUNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In
      thousands)For
      the Nine MonthsEnded
      September 30,2009
              
              
              2008Cash flows from operatingactivities:Net
      loss
              
              $
              (1,212
              )
              
              $
              (3,512
              )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              8,855
              
              
              
              7,108Provision
      for doubtful accounts
              
              
              661
              
              
              
              1,325Non-cash
      stock-based compensation expense
              
              
              9,912
              
              
              
              11,969Deferred
      income taxes
              
              
              (365
              )
              
              
              (1,509
              )Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              2,383
              
              
              
              1,105Prepaid
      expenses and other current assets
              
              
              342
              
              
              
              (3,197
              )Other
      assets
              
              
              (409
              )
              
              
              (1,780
              )Accounts
      payable
              
              
              (2,297
              )
              
              
              2,506Accrued
      expenses and deferred rent
              
              
              (2,528
              )
              
              
              (721
              )Deferred
      revenue
              
              
              872
              
              
              
              5,219Net
      cash provided by operating activities
              
              
              16,214
              
              
              
              18,513Cash
      flows from investing activities:Purchases
      of property and equipment
              
              
              (3,162
              )
              
              
              (10,137
              )Purchases
      of marketable securities
              
              
              (7,640
              )
              
              
              (6,688
              )Maturities
      of marketable securities
              
              
              5,722
              
              
              
              16,563Net
      purchases of securities with customer funds
              
              
              (5,367
              )
              
              
              (1,734
              )Capitalized
      software
              
              
              (632
              )
              
              
              (1,511
              )Net
      cash used in investing activities
              
              
              (11,079
              )
              
              
              (3,507
              )Cash
      flows from financing activities:Repurchases
      of common stock
              
              
              (7,157
              )
              
              
              (21,690
              )Principal
      payments on capital lease obligations
              
              
              (1,849
              )
              
              
              (1,598
              )Net
      increase in customer fund obligations
              
              
              5,367
              
              
              
              1,727Repayments
      of borrowings of long-term debt
              
              
              (320
              )
              
              
              (529
              )Net
      proceeds from issuances of common stock
              
              
              4,569
              
              
              
              4,919Net
      cash provided by (used in) financing activities
              
              
              610
              
              
              
              (17,171
              )Effect
      of exchange rate changes on cash
              
              
              (11
              )
              
              
              (19
              )Net
      increase in cash and cash equivalents
              
              
              5,734
              
              
              
              (2,184
              )Cash
      and cash equivalents, beginning of period
              
              
              17,200
              
              
              
              17,462Cash
      and cash equivalents, end of period
              
              $
              22,934
              
              
              $
              15,278Supplemental
      disclosure of cash flow information:Cash
      paid for interest
              
              $
              109
              
              
              $
              57Cash
      paid for income taxes
              
              $
              155
              
              
              $
              316Supplemental
      disclosure of non-cash financing activities:- The
      Company entered into capital lease obligations to acquire new equipment
      totaling $1.6 million and $0.7 million for the ninemonths
      ended September 30, 2009 and September 30, 2008,
    respectively.- The
      Company entered into an agreement to purchase certain source code from a
      third-party vendor for $2.0 million, of which$0.5
      million and $1.0 million were paid during each of the nine months ended
      September 30, 2009 and September 30, 2008, respectively, and $0.5 million
      was paid during the three months ended December 31, 2008.
 The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are
an integral part of these financial statements.
  3
 Table of Contents
  
 
 THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
 UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
LOSS
 (In
thousands)
 
 
 Common
      Stock
              
              
              Additional
      Paid-in
              
              
              Accumulated
      Other Comprehensive
              
              
              Accumulated
              
              
              TreasuryStock
              
              
              Total
      Stockholders’Shares
              
              
              Amount
              
              
              Capital
              
              
              Loss
              
              
              Deficit
              
              
              Shares
              
              
              Amount
              
              
              EquityBalance, December 31, 2008
              
              
              26,796
              
              
              $
              268
              
              
              $
              164,574
              
              
              $
              (1,002
              )
              
              $
              (53,268
              )
              
              
              2,534
              
              
              $
              (59,500
              )
              
              $
              51,072Net
      loss
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              (1,212
              )
              
              
              –
              
              
              
              –
              
              
              
              (1,212
              )Unrealized
      loss on investments in marketable securities available for
      sale
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              (4
              )
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              (4
              )Unrealized
      gain on foreign currency translationadjustments
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              278
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              278Comprehensive
      loss
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              (938
              )Issuances
      of Common Stock from exercises of stock options
              
              
              551
              
              
              
              5
              
              
              
              4,564
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              4,569Repurchases
      of Common Stock
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              263
              
              
              
              (7,157
              )
              
              
              (7,157
              )Non-cash
      stock-based compensation
              
              
              –
              
              
              
              –
              
              
              
              9,912
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              9,912Balance,
      September 30, 2009
              
              
              27,347
              
              
              $
              273
              
              
              $
              179,050
              
              
              $
              (728
              )
              
              $
              (54,480
              )
              
              
              2,797
              
              
              $
              (66,657
              )
              
              $
              57,458
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are
an integral part of these financial statements.
  4
 Table of Contents
  THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS
 
 1.           Nature
of Operations
 
 The
Ultimate Software Group, Inc. and subsidiaries (“Ultimate” or the “Company”)
designs, markets, implements and supports human resources (“HR”), payroll and
talent management solutions principally in the United States and
Canada.  Ultimate’s UltiPro software (“UltiPro”) is a comprehensive
Internet-based solution designed to deliver the functionality businesses need to
manage the complete employment life cycle from recruitment to
retirement.  Ultimate’s solutions are available in two suites, based
on company size.  UltiPro Enterprise (“Enterprise”) was developed to
address the needs of large and very large companies (700 or more employees and
including companies as large as 15,000 employees and larger) and UltiPro
Workplace (“Workplace”) was developed for medium-sized and smaller companies
(200 to 700 employees).  UltiPro is marketed primarily through the
Company’s Enterprise and Workplace direct sales teams.
 
 2.           Basis
of Presentation, Consolidation and the Use of Estimates
 
 The
accompanying unaudited condensed consolidated financial statements of the
Company have been prepared, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission (the “SEC”). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles (“GAAP”) have been
condensed or omitted pursuant to such rules and regulations. The information in
this quarterly report should be read in conjunction with the Company’s audited
consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed
with the SEC on March 2, 2009 (the “Form 10-K”).
 
 The
unaudited condensed consolidated financial statements included herein reflect
all adjustments (consisting only of normal, recurring adjustments) which are, in
the opinion of the Company’s management, necessary for a fair presentation of
the information for the periods presented. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Interim
results of operations for the three and nine months ended September 30, 2009 and
September 30, 2008 are not necessarily indicative of operating results for the
full fiscal years or for any future periods.
 
 The
unaudited condensed consolidated financial statements reflect the financial
position and operating results of the Company and include its wholly-owned
subsidiaries.  Intercompany accounts and transactions have been
eliminated in consolidation.
 
 3.           Summary
of Significant Accounting Policies and Recent Accounting
Pronouncements
 
 Summary
of Significant Accounting Policies
 
 Ultimate’s
significant accounting policies discussed in Note 3 to its audited consolidated
financial statements for the fiscal year ended December 31, 2008, included in
the Form 10-K, have not significantly changed.
 
 Recently
Adopted Accounting Pronouncements
 
 In
September 2009, the Company adopted Accounting Standards Update No. 2009-01,
“Topic 105-Generally Accepted Accounting Principles amendments based on
Statement of Financial Accounting Standards No. 168–theFASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles,” (“ASU 2009-01”).   The FASB Accounting Standards
Codification is the source of authoritative GAAP recognized by the
Financial Accounting Standards Board (“FASB”) to be applied by non-governmental
entities.  Rules and interpretive releases of the SEC under authority
of federal securities laws are also sources of authoritative GAAP for SEC
registrants.  As of September 30, 2009, the Codification supersedes
all then-existing non-SEC accounting and reporting standards.  All
other non-grandfathered non-SEC accounting literature not included in the
Codification is non-authoritative.  The Hierarchy of Generally
Accepted Accounting Principles, which became effective on November 13, 2008,
identified the sources of accounting principles and the framework for selecting
the principles used in preparing the financial statements of non-governmental
entities that are presented in conformity with GAAP and arranged these sources
of GAAP in a hierarchy for users to apply accordingly.  As of
September 30, 2009, all of the Hierarchy’s content carries the same level of
authority with only two levels of GAAP:  authoritative and
non-authoritative.  ASU 2009-01 was effective for interim or annual
reporting periods ending after September 15, 2009.
 
 In June
2009, the Company adopted Accounting Standards Codification (“ASC”) 825,
“Financial Instruments” (“ASC 825”), which increased the frequency of fair value
disclosures to a quarterly basis from an annual basis.  ASC 825
relates to fair value disclosures for any financial instruments that are not
currently reflected on the balance sheet at fair value.  ASC 825 was
effective for interim reporting periods ending after June 15,
2009.  The Company’s financial instruments, consisting of cash and
cash equivalents, investments in marketable securities, funds held for customers
and the related obligations, accounts receivable, accounts payable, and capital
lease obligations, approximated fair value as of September 30, 2009 and December
31, 2008.
 
 In June
2009, the Company adopted ASC 855, “Subsequent Events” (“ASC
855”).  ASC 855 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.  It
requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date, that is, whether that date
represents the date the financial statements were issued or were available to be
issued.  ASC 855 was effective for interim or annual reporting periods
ending after June 15, 2009.  The Company evaluated events that
occurred subsequent to September 30, 2009, through the financial statement issue
date of November 9, 2009, and determined that there were no recordable or
reportable subsequent events.
 
 In June
2009, the Company adopted ASC 820, “Fair Value Measurements and Disclosures”
(“ASC 820”).  ASC 820 provides guidance on how to determine the fair
value of assets and liabilities in the current economic environment and
re-emphasizes that the objective of a fair value measurement remains the
determination of an exit price. If the Company were to conclude that there has
been a significant decrease in the volume and level of activity of the asset or
liability in relation to normal market activities, quoted market values may not
be representative of fair value and the Company may conclude that a change in
valuation technique or the use of multiple valuation techniques may be
appropriate.  ASC 820 did not have an impact on the Company’s
unaudited condensed consolidated financial statements.
 
 In June
2009, the Company adopted ASC 320, “Investments – Debt and Equity Securities”
(“ASC 320”).  ASC 320 modifies the requirements for recognizing
other-than-temporarily impaired debt securities and revises the existing
impairment model for such securities by modifying the current intent and ability
indicator in determining whether a debt security is other-than-temporarily
impaired.  ASC 320 did not have an impact on the Company’s unaudited
condensed consolidated financial statements.
 5
 Table of Contents
 
 In
January 2009, the Company adopted ASC 350, “Intangibles – Goodwill and Other”
(“ASC 350”) and ASC 275, “Risks and Uncertainties” (“ASC 275”).  ASC
350 and ASC 275 amended the factors an entity should consider in developing
renewal or extension assumptions used in determining the useful life of
recognized intangible assets under ASC 350 and ASC 275.  This new
guidance applies prospectively to intangible assets that are acquired
individually or with a group of other assets in business combinations and asset
acquisitions.  ASC 350 and ASC 275 did not have an impact on the
Company’s unaudited condensed consolidated financial statements.
 
 In
January 2009, the Company adopted ASC 805, “Business Combinations” (“ASC 805”)
and ASC 810, “Consolidation” (“ASC 810”).  ASC 805 changed how
business acquisitions are accounted for and will impact financial statements
both on the acquisition date and in subsequent periods.  ASC 810
changed the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of
equity.  ASC 805 and ASC 810 were effective for the Company beginning
in the first quarter of 2009.  ASC 805 and ASC 810 will only affect
the Company if the Company makes an acquisition after December 31,
2008.  For the nine months ended September 30, 2009, neither ASC 805
nor ASC 810 had an impact on the Company’s unaudited condensed consolidated
financial statements.
 
 Recently
Issued Accounting Pronouncements
 
 During
the third calendar quarter of 2009, the FASB issued Accounting Standard Update
(“ASU”) 2009-13 (EITF 08-1), Multiple-Deliverable Revenue Arrangements (“ASU
2009-13 (EITF 08-1)”).  ASC Subtopic 605-25, Revenue
Recognition-Multiple-Element Arrangements (EITF Issue No. 00-21, “Revenue
Arrangements with Multiple Deliverables”) (“ASC Subtopic 605-25”), sets forth
requirements that must be met for an entity to recognize revenue from the sale
of a delivered item that is part of a multiple-element arrangement when other
items have not yet been delivered.  One of those current requirements
is that there be objective and reliable evidence of the standalone selling price
of the undelivered items, which must be supported by either vendor-specific
objective evidence (“VSOE”) or third-party evidence (“TPE”).
 
 ASU
2009-13 (EITF 08-1) amends ASC Subtopic 650-25 to eliminate the requirement that
all undelivered elements have VSOE or TPE before an entity can recognize the
portion of an overall arrangement fee that is attributable to items that already
have been delivered.  In the absence of VSOE or TPE of the standalone
selling price for one or more delivered or undelivered elements in a
multiple-element arrangement, entities will be required to estimate the selling
prices of those elements.  The overall arrangement fee will be
allocated to each element (both delivered and undelivered items) based on their
relative selling prices, regardless of whether those selling prices are
evidenced by VSOE or TPE or are based on the entity’s estimated selling
price.  Application of the “residual method” of allocating an overall
arrangement fee between delivered and undelivered elements will no longer be
permitted upon adoption of ASU 2009-13 (EITF 08-1).  Additionally, the
new guidance will require entities to disclose more information about their
multiple-element revenue arrangements.  ASU 2009-13 is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010.  Early adoption is
permitted.  If a company elects early adoption and the period of
adoption is not the beginning of its fiscal year, the requirements must be
applied retrospectively to the beginning of the fiscal year. The Company is
evaluating the impact of ASU 2009-13 (EITF08-1) on its unaudited condensed
consolidated financial statements.
 
 During
the third quarter of 2009, the FASB issued ASU 2009-05, Fair Value Measurements
and Disclosures (Topic 820)-Measuring Liabilities at Fair Value (“ASU
2009-05”).  ASU 2009-05, that amends ASC Topic 820, Fair Value
Measurements (FASB Statement No. 157, Fair Value Measurements), allows companies
determining the fair value of a liability to use the perspective of an investor
that holds the related obligation as an asset.  The update addresses
practice difficulties caused by the tension between fair-value measurements
based on the price that would be paid to transfer a liability to a new obligor
and contractual or legal requirements that prevent such transfers from taking
place.  The new guidance is effective for the Company for its fiscal
year ending December 31, 2009.  ASU 2009-05 is not expected to have an
impact on the Company’s consolidated financial statements.
 
 6
 Table of Contents
 4.           Investments
in Marketable Securities and Fair Value of Financial Instruments
 
 The
Company classifies its investments in marketable securities with readily
determinable fair values as available-for-sale.  Available-for-sale
securities consist of debt and equity securities not classified as trading
securities or as securities to be held to maturity.  Unrealized gains
and losses on available-for-sale securities are reported as a net amount in
accumulated other comprehensive income or loss in stockholders’ equity until
realized.  Gains and losses on the sale of available-for-sale
securities are determined using the specific identification
method.  Included in accumulated other comprehensive loss were $0 of
unrealized gains or losses on available-for-sale securities and $4 thousand of
unrealized gains on available-for-sale securities at September 30, 2009 and
December 31, 2008, respectively.
 
 The
amortized cost, net unrealized gain (loss) and fair value of the Company’s
investments in marketable available-for-sale securities at September 30, 2009
and December 31, 2008 are shown below (in thousands):
 
 As
      of September 30, 2009
              
              
              As
      of December 31, 2008Net
              
              
              
              
              
              
              
              
              NetAmortized
              
              
              Unrealized
              
              
              Fair
              
              
              Amortized
              
              
              Unrealized
              
              
              FairCost
              
              
              Gain/(Loss)
              
              
              Value
              
              
              Cost
              
              
              Gain
              
              
              ValueCorporate
      debentures – bonds
              
              $
              3,029
              
              
              $
              (3
              )
              
              $
              3,026
              
              
              $
              4,306
              
              
              $
              2
              
              
              $
              4,308Commercial
      paper
              
              
              1,198
              
              
              
              (1
              )
              
              
              1,197
              
              
              
              995
              
              
              
              2
              
              
              
              997Agency
      bonds
              
              
              1,009
              
              
              
              1
              
              
              
              1,010
              
              
              
              ––
              
              
              
              ––
              
              
              
              ––U.S.
      Treasury bills
              
              
              1,993
              
              
              
              2
              
              
              
              1,995
              
              
              
              ––
              
              
              
              ––
              
              
              
              ––Certificates
      of deposit
              
              
              490
              
              
              
              –
              
              
              
              490
              
              
              
              500
              
              
              
              ––
              
              
              
              500Total
      investments
              
              $
              7,719
              
              
              $
              (1
              )
              
              $
              7,718
              
              
              $
              5,801
              
              
              $
              4
              
              
              $
              5,805
 
 The
amortized cost and fair value of the fixed income securities by contractual
maturity at September 30, 2009 and December 31, 2008 are shown below (in
thousands):
 
 As
      of September 30, 2009
              
              
              As
      of December 31, 2008Amortized
              
              
              Fair
              
              
              Amortized
              
              
              FairCost
              
              
              Value
              
              
              Cost
              
              
              ValueDue
      in one year or less
              
              $
              6,780
              
              
              $
              6,781
              
              
              $
              5,801
              
              
              $
              5,805Due
      after one year
              
              
              939
              
              
              
              937
              
              
              
              —
              
              
              
              —Total
              
              $
              7,719
              
              
              $
              7,718
              
              
              $
              5,801
              
              
              $
              5,805
 
 The
Company classifies and discloses fair value measurements in one of the following
three categories of fair value hierarchy:
 
 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.
 
 A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of any
 input
      that is significant to the fair value
  measurement.
 
 7
 Table of Contents
 
 The
Company’s assets that are measured by management at fair value on a recurring
basis are generally classified within Level 1 or Level 2 of the fair value
hierarchy.  The types of instruments valued based on quoted market
prices in active markets include most money market securities and certificates
of deposit.  Such instruments are generally classified within Level 1
of the fair value hierarchy.
 
 The types
of instruments valued by management based on quoted prices in less active
markets, broker or dealer quotations, or alternative pricing sources with
reasonable levels of price transparency, include the Company’s corporate
debentures - bonds, commercial paper, U.S. Treasury bills and asset-backed
securities.  Such instruments are generally classified within Level 2
of the fair value hierarchy.  The Company uses consensus pricing,
which is based on multiple pricing sources, to value its fixed income
investments.
 
 The
following table sets forth, by level within the fair value hierarchy, financial
assets and liabilities accounted for at fair value as of September 30, 2009 and
December 31, 2008 (in thousands):
 
 As
      of September 30, 2009
              
              
              As
      of December 31, 2008Quoted
              
              
              
              
              
              
              
              
              
              
              
              QuotedPrices
      in
              
              
              Other
              
              
              Un-
              
              
              
              
              
              Prices
      in
              
              
              Other
              
              
              Un-Active
              
              
              Observable
              
              
              Observable
              
              
              
              
              
              Active
              
              
              Observable
              
              
              ObservableMarkets
              
              
              Inputs
              
              
              Inputs
              
              
              
              
              
              Markets
              
              
              Inputs
              
              
              InputsTotal
              
              
              (Level
      1)
              
              
              (Level
      2)
              
              
              (Level
      3)
              
              
              Total
              
              
              (Level
      1)
              
              
              (Level
      2)
              
              
              (Level
      3)Corporate
      debentures – bonds
              
              $
              3,026
              
              
              $
              –
              
              
              $
              3,026
              
              
              $
              –
              
              
              $
              4,308
              
              
              $
              –
              
              
              $
              4,308
              
              
              $
              –Commercial
      paper
              
              
              1,197
              
              
              
              –
              
              
              
              1,197
              
              
              
              –
              
              
              
              997
              
              
              
              –
              
              
              
              997
              
              
              
              –Agency
      bonds
              
              
              1,010
              
              
              
              –
              
              
              
              1,010
              
              
              
              
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –U.S.
      Treasury bills
              
              
              1,995
              
              
              
              –
              
              
              
              1,995
              
              
              
              
              
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –Certificates
      of deposit
              
              
              490
              
              
              
              490
              
              
              
              –
              
              
              
              –
              
              
              
              500
              
              
              
              500
              
              
              
              –
              
              
              
              –Total
              
              $
              7,718
              
              
              $
              490
              
              
              $
              7,228
              
              
              $
              –
              
              
              $
              5,805
              
              
              $
              500
              
              
              $
              5,305
              
              
              $
              –
 
 Assets
and liabilities measured at fair value on a recurring basis were presented in
the unaudited condensed consolidated balance sheet as of September 30, 2009 and
in the audited consolidated balance sheet as of December 31, 2008 as short-term
and long-term investments in marketable securities.  There were no
financial liabilities accounted for at fair value as of September 30, 2009 and
December 31, 2008.
 
 5.              Property
and Equipment
 
 Property
and equipment are stated at cost, net of accumulated depreciation and
amortization. Property and equipment are depreciated using the straight-line
method over the estimated useful lives of the assets, which range from two to
twenty years. Leasehold improvements and assets under capital leases are
amortized over the shorter of the estimated useful life of the asset or the term
of the lease, which range from three to fifteen years. Maintenance and repairs
are charged to expense when incurred; betterments are capitalized. Upon the sale
or retirement of assets, the cost, accumulated depreciation and amortization are
removed from the accounts and any gain or loss is recognized.
 
 Property
and equipment consist of the following (in thousands):
 
 As
      of
              
              
              As
      ofSeptember
      30, 2009
              
              
              December
      31, 2008Property
      and equipment
              
              $
              70,951
              
              
              $
              65,934Less:  accumulated
      depreciation and amortization
              
              
              50,661
              
              
              
              42,950$
              20,290
              
              
              $
              22,984
 
 6.           Earnings
Per Share
 
 Basic
earnings per share is computed by dividing income available to common
stockholders (the numerator) by the weighted average number of common shares
outstanding (the denominator) for the period. The computation of diluted
earnings per share is similar to basic earnings per share, except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the potentially dilutive common shares had been
issued.
 
 The
following is a reconciliation of the shares used in the computation of basic and
diluted net income (loss) per share (in thousands):
  For
      the Three Months
                  Ended
      September 30,
                
                
                For
      the Nine Months Ended September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Basic
      weighted average shares outstanding
                
                
                24,539
                
                
                
                24,613
                
                
                
                24,416
                
                
                
                24,654Effect
      of dilutive equity instruments
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –Dilutive
      weighted average shares outstanding
                
                
                24,539
                
                
                
                24,613
                
                
                
                24,416
                
                
                
                24,654Options
      to purchase shares of Common Stock and other stock-based awards
      outstanding which are not included in the calculation of diluted income
      (loss) per share because their impact is anti-dilutive6,074
                
                
                
                5,843
                
                
                
                6,264
                
                
                
                5,816
  8
 Table of
Contents
  7.           Comprehensive
Income (Loss)
 
 Comprehensive
income (loss) represents all changes in equity that result from transactions and
other economic events in a period other than transactions with owners.
Accumulated other comprehensive loss, as presented in the accompanying unaudited
condensed consolidated balance sheets, consists of unrealized gains and losses
on available-for-sale securities and foreign currency translation adjustments,
recorded net of any related income tax.
 
 Comprehensive
income (loss) for the periods presented was as follows (in
thousands):
 
 For
      the Three Months
                Ended
      September 30,
              
              
              For
      the Nine Months
                Ended
      September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Net
      loss
              
              $
              (469
              )
              
              $
              (3,051
              )
              
              
              (1,212
              )
              
              $
              (3,512
              )Other
      comprehensive income (loss)Unrealized
      loss on investments inmarketable
      available-for-sale securities
              
              
              (3
              )
              
              
              (50
              )
              
              
              (4
              )
              
              
              (26
              )Unrealized
      gain (loss) on foreign currencytranslation
      adjustments
              
              
              (117
              )
              
              
              (9
              )
              
              
              278
              
              
              
              (19
              )Comprehensive
      loss
              
              $
              (589
              )
              
              $
              (3,110
              )
              
              $
              (938
              )
              
              $
              (3,557
              )
 
 8.           Foreign
Currency
 
 The
financial statements of the Company’s foreign subsidiaries have been translated
into U.S. dollars.  The functional currency of The Ultimate Software
Group of Canada, Inc. is the Canadian dollar and the functional currency of The
Ultimate Software Group UK Limited is the British pound.  Assets and
liabilities (including related goodwill) are translated into U.S. dollars at
period-end exchange rates.  Income and expenses are translated at the
average exchange rate for the applicable reporting period.  The
resulting translation adjustments, representing unrealized gains or losses, are
included in stockholders’ equity as a component of accumulated other
comprehensive loss.  Realized gains and losses resulting from foreign
exchange transactions are included in total operating expenses in the unaudited
condensed consolidated statements of operations. For the three months ended
September 30, 2009, the Company had an unrealized translation loss of $117
thousand.  For the nine months ended September 30, 2009, the Company
had an unrealized translation gain of $278 thousand.  For the three
and nine months ended September 30, 2008, the Company had unrealized translation
losses of $9 thousand and $19 thousand, respectively.  Included in
accumulated other comprehensive loss, as presented in the accompanying unaudited
condensed consolidated balance sheets, is $0.7 million of unrealized translation
losses at September 30, 2009 and $1.0 million of unrealized translation losses
at December 31, 2008.
 
 9.           Stock-Based
Compensation
 
 The
Company’s Amended and Restated 2005 Equity and Incentive Plan (the “Plan”)
authorizes the grant of options to non-employee directors, officers and
employees of the Company to purchase shares of the Company’s Common
Stock.  The Plan also authorizes the grant to such persons of
restricted and non-restricted shares of Common Stock, stock appreciation rights,
stock units and cash performance awards (collectively, together with stock
options, the “Awards”).  Prior to the adoption of the Plan, options to
purchase shares of Common Stock were issued under the Company’s Nonqualified
Stock Option Plan (the “Prior Plan”).  Beginning in 2009, the Company
began making grants to employees of restricted stock units in lieu of stock
options.
 
 At the
2009 Annual Meeting of Stockholders, held on May 12, 2009 (the “2009 Annual
Meeting”), the stockholders of the Company approved the Plan, as amended to
increase the number of shares of the Company’s Common Stock authorized for
issuance pursuant to Awards granted under the Plan by 500,000
shares.  The aggregate number of shares of Common Stock previously
authorized for issuance under all Awards granted under the Plan and Prior Plan
was 12,000,000 shares.  As of September 30, 2009, the aggregate number
of shares of Common Stock authorized under the Plan and the Prior Plan was
12,500,000 and the aggregate number of shares of Common Stock that were
available to be issued under all Awards granted under the Plan was 1,331,686
shares.  A complete copy of the Plan is contained in the Company’s
Form 8-K that was filed with the SEC on May 18, 2009.
 
 The
following table sets forth the non-cash stock-based compensation expense
resulting from stock-based arrangements that was recorded in the Company’s
unaudited condensed consolidated statements of operations for the periods
indicated (in thousands):
 
 For
      the Three Months
                Ended
      September 30,
              
              
              For
      the Nine Months
                Ended
      September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Non-cash stock-based compensation
      expense:Cost
      of recurring revenues
              
              $
              170
              
              
              $
              191
              
              
              $
              506
              
              
              $
              689Cost
      of services revenues
              
              
              326
              
              
              
              479
              
              
              
              994
              
              
              
              1,565Cost
      of license revenues
              
              
              –
              
              
              
              2
              
              
              
              –
              
              
              
              9Sales
      and marketing
              
              
              1,776
              
              
              
              2,043
              
              
              
              5,311
              
              
              
              5,656Research
      and development
              
              
              316
              
              
              
              316
              
              
              
              926
              
              
              
              1,257General
      and administrative
              
              
              735
              
              
              
              924
              
              
              
              2,175
              
              
              
              2,793Total
      non-cash stock-based compensation expense
              
              $
              3,323
              
              
              $
              3,955
              
              
              $
              9,912
              
              
              $
              11,969
 
 Included
in capitalized software in the Company’s unaudited condensed consolidated
balance sheets at September 30, 2009 and December 31, 2008 was $2 thousand and
$30 thousand, respectively, in stock-based compensation expense related to
capitalized software during the periods then ended.  The amounts
capitalized would have otherwise been charged to research and development
expense.
 
 Net cash
proceeds from the exercise of stock options were $2.9 million and $4.6 million
for the three and nine months ended September 30, 2009, respectively, and $0.5
million and $4.9 million for the three and nine months ended September 30, 2008,
respectively. There was no income tax benefit realized from stock option
exercises during any of these periods.
 
 9
 Table of Contents
 
 Stock
Option, Restricted Stock and Restricted Stock Unit Activity
 
 There
were no stock options granted during the nine months ended September 30,
2009.  The following table summarizes stock option activity (for
previously granted stock options) for the nine months ended September 30, 2009
(in thousands, except per share amounts):
 
 WeightedAverageWeighted
              
              
              Remaining
              
              
              AggregateAverage
              
              
              Contractual
              
              
              IntrinsicStock
      Options
              
              Shares
              
              
              Exercise
      Price
              
              
              Term
      (in Years)
              
              
              ValueOutstanding
      at December 31, 2008
              
              
              4,964
              
              
              $
              16.85Granted
              
              
              –
              
              
              
              –Exercised
              
              
              (516
              )
              
              
              8.86Forfeited
      or expired
              
              
              (116
              )
              
              
              24.57Outstanding
      at September 30, 2009
              
              
              4,332
              
              
              $
              17.60
              
              
              
              5.69
              
              
              $
              50,021Exercisable
      at September 30, 2009
              
              
              3,685
              
              
              $
              15.86
              
              
              
              5.28
              
              
              $
              48,559
 
 The
aggregate intrinsic value of stock options in the table above represents total
pretax intrinsic value (i.e., the difference between the closing price of the
Company’s Common Stock on the last trading day of the reporting period and the
exercise price, times the number of shares) that would have been received by the
option holders had all option holders exercised their options on September 30,
2009.  The amount of the aggregate intrinsic value changes based on
the fair value of the Company’s Common Stock.  Total intrinsic value
of options exercised was $5.4 million and $7.6 million for the three and nine
months ended September 30, 2009, respectively, and $0.6 million and $ 12.6
million for the three and nine months ended September 30, 2008,
respectively.  Total fair value of options vested during the three and
nine months ended September 30, 2009 was $1.5 million and $5.2 million,
respectively, and $2.1 million and $6.6 million for the three and nine months
ended September 30, 2008, respectively.
 
 As of
September 30, 2009, $4.4 million of total unrecognized compensation costs
related to non-vested stock options is expected to be recognized over a weighted
average period of 1.25 years.
 
 The
following table summarizes restricted stock and restricted stock unit activity
for the nine months ended September 30, 2009 (in thousands, except per share
amounts):
 
 Restricted
      Stock Awards
              
              
              Restricted
      Stock Unit AwardsWeightedAverageGrant
      DateShares
              
              
              Fair
      Value
              
              
              SharesOutstanding
      at December 31, 2008
              
              
              1,361
              
              
              $
              23.09
              
              
              
              45Granted
              
              
              29
              
              
              
              19.61
              
              
              
              198Vested
              
              
              –
              
              
              
              –
              
              
              
              –Released
              
              
              (35
              )
              
              
              15.90
              
              
              
              –Forfeited
      or expired
              
              
              –
              
              
              
              –
              
              
              
              (6
              )Outstanding
      at September 30, 2009
              
              
              1,355
              
              
              $
              23.20
              
              
              
              237
 
 As of
September 30, 2009, $14.6 million of total unrecognized compensation costs
related to non-vested restricted stock Awards is expected to be recognized over
a weighted average period of 1.9 years.  As of September 30, 2009,
$2.9 million of total unrecognized compensation costs related to non-vested
restricted stock unit Awards is expected to be recognized over a weighted
average period of 2.1 years.
 
 10
 Table of Contents
 ITEM
2.                    Management’s Discussionand Analysis of Financial
Condition and Results of Operations
 
 The
following discussion of the financial condition and results of operations of The
Ultimate Software Group, Inc. and its subsidiaries (“Ultimate” or the “Company”)
should be read in conjunction with the unaudited condensed consolidated
financial statements and notes thereto included elsewhere in this Quarterly
Report on Form 10-Q (the “Form 10-Q”) and in the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2008, filed with the Securities and
Exchange Commission (the “SEC”) on March 2, 2009 (the “Form 10-K”).
 
 The
Company’s significant accounting policies discussed in Note 3 to its audited
consolidated financial statements for the fiscal year ended December 31, 2008,
included in the Form 10-K have not significantly changed.
 
 Executive
Summary
 
 Ultimate
designs, markets, implements and supports human resources (“HR”), payroll and
talent management solutions principally in the United States and
Canada.
 
 Ultimate’s
UltiPro software (“UltiPro” or “Core UltiPro”) is a comprehensive Internet-based
solution designed to deliver the functionality businesses need to manage the
complete employment life cycle from recruitment to retirement.
 
 Ultimate’s
software-as-a-service (“SaaS”) offering, branded “Intersourcing” (the
“Intersourcing Offering”), provides on-line access to comprehensive human
capital management functionality for organizations that need to simplify the
information technology (“IT”) support requirements of their business
applications. Through the Intersourcing Offering, Ultimate provides the
hardware, infrastructure, ongoing maintenance and backup services for its
customers at two data centers located in the Miami, Florida and Atlanta, Georgia
areas.  Both data centers are owned and operated by a third party,
Quality Technology Services (“QTS”). QTS is one of the largest privately-held
providers of data center facilities and management services in the United
States.  During the three months ended September 30, 2009, Ultimate
opened a third data center in Toronto, Canada, which is owned and operated by
Verizon Communications Inc.  This new data center is for the Company’s
customers with employees exclusively based in Canada.
 
 UltiPro
is available as two solution suites, based on company size.  UltiPro
Enterprise (“Enterprise”) was developed to address the needs of large and very
large companies (700 or more employees and including companies as large as
15,000 employees and larger) and is delivered as either a SaaS solution or an
on-premise solution.  UltiPro Workplace (“Workplace”) was developed
for companies in the mid-market (200 to 700 employees) and is delivered
exclusively as SaaS.  UltiPro Workplace provides medium-sized and
smaller companies with nearly all the features that larger Enterprise companies
have with UltiPro, plus a bundled service package. Since many companies in this
market do not have IT staff on their premises to help with system issues,
UltiPro Workplace is designed to give these customers a high degree of
convenience by handling system setup, business rules, and other situations for
customers “behind the scenes.”  UltiPro is marketed primarily through
the Company’s Enterprise and Workplace direct sales teams.
 
 In
addition to Core UltiPro’s HR/payroll functionality, the Company’s customers
have the option to purchase a number of additional features on a
per-employee-per-month (or “PEPM”) basis, which are available to enhance the
functionality of UltiPro’s core features based on certain business needs of the
customers.  These optional UltiPro features currently include (i) the
talent management suite of products; (ii) benefits enrollment; (iii) time,
attendance and scheduling; (iv) time management; (v) tax filing; (vi) wage
attachments; and (vii) other optional features (collectively, “Optional
Features”). All Optional Features are individually priced solely on a
subscription basis with some of the Optional Features available to both
Enterprise and Workplace customers while others are available exclusively to
either Enterprise or Workplace customers, based on the needs of the respective
customers, including their employee size and the complexity of their HR/payroll
environment.
 
 Ultimate
has two primary revenue sources:  recurring revenues and services
revenues.  Intersourcing subscription revenues and maintenance
revenues are the primary components of the Company’s recurring
revenues.  Ultimate’s annualized retention rate for its existing
recurring revenue customer base was 97% as of September 30, 2009. The majority
of services revenues are derived from implementation services and, to a lesser
extent, training services.  In addition to recurring revenues and
services revenues, until April 1, 2009 Ultimate marketed on-site UltiPro
solutions on a perpetual license basis, through which it has recognized license
revenues.  For the three and nine months ended September 30, 2009,
license revenues, as a percentage of total revenues, represented 0.5% and 2.4%,
respectively, as compared to 4.9% and 6.8% for the three and nine months ended
September 30, 2008, respectively.
 
 On
February 5, 2009, Ultimate announced that after April 1, 2009 it no longer
intended to sell its on-site UltiPro solutions on a perpetual license
basis.  However, the Company continues to sell on-premise UltiPro
solutions on a subscription basis (priced and billed to customers on a PEPM
basis). Since April 1, 2009, the Company has had license revenues attributable
to contractual arrangements with existing license customers which primarily
relate to growth provisions for the underlying employee base and/or the
contractual rights of existing license customers to purchase Optional Features
of UltiPro. After the elimination of sales of perpetual licenses to new
customers, the variable costs associated with new customer licenses, such as
related sales commissions, are also eliminated. As a result of the discontinued
sales of perpetual licenses to new customers, certain fixed third-party costs
that were formerly allocated to costs of license revenues (in proportion to
their contribution to the total sales mix) were shifted to costs of recurring
revenues. When perpetual license agreements were sold, annual maintenance
contracts (priced as a percentage of the related license fee) accompanied those
agreements.  Maintenance contracts typically have a one-year term with
annual renewal periods thereafter.  The Company has historically
maintained a strong customer retention rate for its renewal maintenance
agreements and does not foresee its decision to discontinue sales of perpetual
license agreements to new customers to materially affect its future maintenance
revenues (as they relate to existing license customers).
 
 As
Intersourcing units are sold, the recurring revenue backlog associated with
Intersourcing grows, enhancing the predictability of future revenue
streams.  Intersourcing sales include a one-time upfront (or setup)
fee, priced on a per-employee basis, and ongoing monthly fees, priced on a PEPM
basis.  Revenue recognition for Intersourcing is triggered when the
related customer processes its first payroll (or goes “Live”).  When
an Intersourcing customer goes Live, the related upfront fees are recognized as
recurring subscription revenues ratably over the term of the related contract
(typically 24 months) and the Company begins recognizing the associated ongoing
monthly PEPM fees as recurring subscription revenues.
 
 Critical
Accounting Estimates
 
 The
preparation of the Company’s financial statements in conformity with U.S.
generally accepted accounting principles (“GAAP”) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.  The Company’s critical accounting estimates, as discussed
in Item 7, Management’s Discussion and Analysis of Financial Condition and
Results of Operations, included in the Form 10-K, have not significantly
changed.
  11
 Table of Contents
  
 Results
of Operations
 
 The
following table sets forth the unaudited condensed consolidated statements of
operations data of the Company, as a percentage of total revenues, for the
periods indicated.
 
 For
      the Three Months
              
              
              For
      the Nine MonthsEnded
      September 30,
              
              
              Ended
      September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Revenues:Recurring
              
              
              70.9
              %
              
              
              60.9
              %
              
              
              67.7
              %
              
              
              60.4
              %Services
              
              
              28.6
              
              
              
              34.2
              
              
              
              29.9
              
              
              
              32.8License
              
              
              0.5
              
              
              
              4.9
              
              
              
              2.4
              
              
              
              6.8Total
      revenues
              
              
              100.0
              
              
              
              100.0
              
              
              
              100.0
              
              
              
              100.0Cost
      of revenues:Recurring
              
              
              20.7
              
              
              
              18.1
              
              
              
              19.7
              
              
              
              16.6Services
              
              
              24.1
              
              
              
              29.0
              
              
              
              24.3
              
              
              
              26.9License
              
              
              0.0
              
              
              
              1.1
              
              
              
              0.4
              
              
              
              1.1Total
      cost of revenues
              
              
              44.8
              
              
              
              48.2
              
              
              
              44.4
              
              
              
              44.6Operating
      expenses:Sales
      and marketing
              
              
              27.1
              
              
              
              28.4
              
              
              
              27.6
              
              
              
              27.5Research
      and development
              
              
              20.6
              
              
              
              22.5
              
              
              
              20.0
              
              
              
              21.8General
      and administrative
              
              
              9.0
              
              
              
              10.7
              
              
              
              9.2
              
              
              
              10.4Total
      operating expenses
              
              
              56.7
              
              
              
              61.7
              
              
              
              56.8
              
              
              
              59.7Operating
      loss
              
              
              (1.4
              )
              
              
              (9.8
              )
              
              
              (1.1
              )
              
              
              (4.3
              )Other
      income (expense):Interest
      expense and other
              
              
              (0.1
              )
              
              
              (0.1
              )
              
              
              (0.1
              )
              
              
              (0.1
              )Other
      income, net
              
              
              0.1
              
              
              
              0.4
              
              
              
              0.1
              
              
              
              0.5Total
      other income, net
              
              
              0.0
              
              
              
              0.3
              
              
              
              0.0
              
              
              
              0.4Loss
      before income taxes
              
              
              (1.4
              )
              
              
              (9.5
              )
              
              
              (1.1
              )
              
              
              (3.9
              )Benefit
      for income taxes
              
              
              0.5
              
              
              
              2.6
              
              
              
              0.3
              
              
              
              1.2Net
      loss
              
              
              (0.9
              )
      %
              
              
              (6.9
              )
      %
              
              
              (0.8
              )
      %
              
              
              (2.7
              )
      %
 
 The
following table sets forth the non-cash stock-based compensation expense
(excluding the income tax effect) resulting from the stock-based arrangements
and the amortization of acquired intangibles that are recorded in the Company’s
unaudited condensed consolidated statements of operations for the periods
indicated (in thousands):
 
 For
      the Three Months
                Ended
      September 30,
              
              
              For
      the Nine Months
                Ended
      September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Stock-based compensation:Cost
      of recurring revenues
              
              
              170
              
              
              
              191
              
              
              
              506
              
              
              
              689Cost
      of services revenues
              
              
              326
              
              
              
              479
              
              
              
              994
              
              
              
              1,565Cost
      of license revenues
              
              
              –
              
              
              
              2
              
              
              
              –
              
              
              
              9Sales
      and marketing
              
              
              1,776
              
              
              
              2,043
              
              
              
              5,311
              
              
              
              5,656Research
      and development
              
              
              316
              
              
              
              316
              
              
              
              926
              
              
              
              1,257General
      and administrative
              
              
              735
              
              
              
              924
              
              
              
              2,175
              
              
              
              2,793Total
      non-cash stock-based compensation expense
              
              $
              3,323
              
              
              $
              3,955
              
              
              $
              9,912
              
              
              $
              11,969Amortization
      of acquired intangibles:General
      and administrative
              
              $
              55
              
              
              $
              46
              
              
              $
              147
              
              
              $
              139
 
 Revenues
 
 The
Company’s revenues are derived from recurring revenues and services revenues
and, to a lesser extent, license revenues.  The Company’s significant
revenue recognition policies, as discussed in Note 3 to its audited consolidated
financial statements for the fiscal year ended December 31, 2008, included in
the Form 10-K, have not changed.
 
 Total
revenues, consisting of recurring, services and license revenues, increased 9.8%
to $48.2 million for the three months ended September 30, 2009 from $43.9
million for the three months ended September 30, 2008, and 12.0% to $144.3
million for the nine months ended September 30, 2009 from $128.9 million for the
nine months ended September 30, 2008.
 
 12
 Table of Contents
 
 Recurring
revenues increased 27.7 % to $34.2 million for the three months ended September
30, 2009 from $26.7 million for the three months ended September 30, 2008, and
25.5% to $97.7 million for the nine months ended September 30, 2009 from $77.8
million for the nine months ended September 30, 2008. The increases for the
three and nine months ended September 30, 2009 were primarily due to increases
in Intersourcing revenues and, to a lesser extent, maintenance revenues
(discussed below).
 
 a)
              Intersourcing
      revenues increased 41.8% and 41.0% for the three and nine months ended
      September 30, 2009, respectively, in comparison to the same periods in
      2008. The increases in Intersourcing revenues were based on the revenue
      impact of incremental units sold that have gone Live since September 30,
      2008, including Core UltiPro and, to a lesser extent, Optional Features of
      UltiPro.  Intersourcing revenues from the Workplace solution in
      2009 also contributed to the year-over-year growth, particularly since
      this solution was introduced late in 2007 and was ramping up in
      2008.  Recognition of recurring subscription revenues for
      Intersourcing sales begins when the related customer goes
      Live.
 
 b)
              Maintenance
      revenues from past license sales increased 1.7% and 2.5% for the three and
      nine months ended September 30, 2009, in comparison to the same periods of
      2008, due to additional maintenance fees resulting from cumulative net
      increases in the customer base subsequent to September 30, 2008 resulting
      from incremental license sales since such date.  Maintenance
      revenues are recognized over the initial term of the related license
      contract, which is typically 12 months, and then on a monthly recurring
      basis thereafter as the maintenance contracts renew
    annually.
 
 Services
revenues decreased 8.1% to $13.8 million for the three months ended September
30, 2009 from $15.0 million for the three months ended September 30, 2008, and
increased 2.0% to $43.1 million for the nine months ended September 30, 2009
from $42.3 million for the nine months ended September 30, 2008. The decrease
for the three months ended September 30, 2009 was mainly due to (i) less
billable hours from the reduced use of third party implementation partners
(“IP’s”) and, to a lesser extent, from fewer Ultimate revenue-generating
consultants for Enterprise sales, and, to a lesser extent, (ii) a decrease in
the Enterprise blended net rate per hour, partially offset by (iii) higher
implementation revenues recognized for Workplace sales principally resulting
from incremental Workplace sales production.  The increase for the
nine months ended September 30, 2009 was primarily related to (i) higher
implementation revenues recognized for Workplace sales and, to a lesser extent,
(ii) an increase in the blended net rate per hour for Enterprise
implementations, partially offset by (iii) less billable hours from
IP’s.
 
 License
revenues decreased 88.4% to $0.3 million for the three months ended September
30, 2009 from $2.2 million for the three months ended September 30,
2008.  For the nine months ended September 30, 2009, license revenues
decreased 59.8% to $3.5 million from $8.8 million for the nine months ended
September 30, 2008.  The decreases in the three and nine month periods
ended September 30, 2009 were principally due to the Company’s decision not to
sell perpetual licenses to new customers after April 1, 2009.
 
 Cost
of Revenues
 
 Cost of
revenues primarily consists of the costs of recurring and services revenues.
Cost of recurring revenues primarily consists of costs to provide maintenance
and technical support to the Company’s customers, the cost of providing periodic
updates and the cost of recurring subscription revenues, including amortization
of capitalized software. Cost of services revenues primarily consists of costs
to provide implementation services and training to the Company’s customers and,
to a lesser degree, costs related to sales of payroll-related forms and costs
associated with certain client reimbursable out-of-pocket expenses.
 
 Total
cost of revenues increased 1.9% to $21.6 million for the three months ended
September 30, 2009 from $21.1 million for the three months ended September 30,
2008, and 11.5% to $64.1 million for the nine months ended September 30, 2009
from $57.4 million for the nine months ended September 30, 2008.
 
 Cost of
recurring revenues increased 25.6% to $10.0 million for the three months ended
September 30, 2009 from $7.9 million for the three months ended September 30,
2008 and 32.5% to $28.4 million for the nine months ended September 30, 2009
from $21.5 million for the nine months ended September 30, 2008.  The
$2.1 million and $6.9 million increases in cost of recurring revenues for the
three and nine months ended September 30, 2009, respectively, were primarily due
to increases in both Intersourcing costs and maintenance
costs.  Intersourcing costs increased principally as a result of the
growth in Intersourcing operations and increased sales, including higher
depreciation and amortization of related computer equipment supporting the
hosting operations, increased hosting data center costs and, to a lesser extent,
increased labor costs, amortization of capitalized software and increased
third-party royalty fees for UltiPro time, attendance and scheduling
sales.  Maintenance costs increased primarily due to higher labor
costs commensurate with the growth in the Company’s recurring revenues customer
base.
 
 Cost of
services revenues decreased 9.1% to $11.6 million for the three months ended
September 30, 2009 from $12.8 million for the three months ended September 30,
2008, and increased 1.2% to $35.0 million for the nine months ended September
30, 2009 from $34.6 million for the nine months ended September 30,
2008.  Cost of services revenues decreased for the three months ended
September 30, 2009 primarily due to lower IP costs and lower labor and related
costs (including fewer billable Enterprise consultants, partially offset by
higher Workplace implementation labor costs).  Cost of services
revenues increased for the nine months ended September 30, 2009 principally due
to an increase in costs of implementation, mainly attributable to labor costs
associated with building the Workplace implementation infrastructure, partially
offset by decreased costs of IP’s.
 
 Sales and
Marketing
 
 Sales and
marketing expenses consist primarily of salaries and benefits, sales
commissions, travel and promotional expenses, and facility and communication
costs for direct sales offices, as well as advertising and marketing costs.
Sales and marketing expenses increased 4.5% to $13.0 million for the three
months ended September 30, 2009 from $12.5 million for the three months ended
September 30, 2008, and 11.9% to $39.8 million for the nine months ended
September 30, 2009 from $35.5 million for the nine months ended September 30,
2008. Sales and marketing expenses increased for the three and nine month
periods ended September 30, 2009 primarily due to increased labor and related
costs attributable to hiring additional personnel for the Workplace direct sales
team and higher sales commissions principally related to increased recurring
subscription revenues from Intersourcing for both Enterprise and Workplace.
Commissions on Intersourcing sales are amortized over the initial contract term
(typically 24 months) commencing on the Live date, which corresponds to the
revenue recognition for Intersourcing sales.
 
 Research
and Development
 
 Research
and development expenses consist primarily of software development personnel
costs.  Research and development expenses increased 0.3% to $9.9
million for the three months ended September 30, 2009 from $9.9 million for the
three months ended September 30, 2008, and 2.7% to $28.9 million for the nine
months ended September 30, 2009 from $28.1 million for the nine months ended
September 30, 2008 principally due to higher labor costs related to the ongoing
development of Core UltiPro and Optional Features, partially offset by lower
third-party consulting costs.
 
 General
and Administrative
 
 General
and administrative expenses consist primarily of salaries and benefits of
executive, administrative and financial personnel, as well as external
professional fees and the provision for doubtful accounts.  General
and administrative expenses decreased 7.4% to $4.4 million for the three months
ended September 30, 2009 from $4.7 million for the three months ended September
30, 2008. General and administrative expenses decreased 1.2% to $13.2 million
for the nine months ended September 30, 2009 from $13.4 million for the nine
months ended September 30, 2008.  The decreases for the three and nine
months ended September 30, 2009 were primarily due to lower labor-related costs
and a decrease in the provision for doubtful accounts.
 
 13
 Table of Contents
 Income
Taxes
 
 Income
taxes for each of the three and nine months ended September 30, 2009 included a
benefit of $0.2 million and $0.4 million, respectively. Income taxes for the
three and nine months ended September 30, 2008 included a benefit of $1.1
million and $1.5 million, respectively.  Net operating loss
carryforwards available at December 31, 2008, expiring at various times from
2011 through 2028 and which are available to offset future taxable income,
approximated $75.6 million. The timing and levels of future profitability may
result in the expiration of net operating loss carryforwards before utilization.
Additionally, utilization of such net operating losses may be limited as a
result of cumulative ownership changes in the Company’s equity
instruments.
  Liquidity
and Capital Resources
 
 In recent
years, the Company has funded operations from cash flows generated from
operations and, to a lesser extent, equipment financing and borrowing
arrangements.
 
 As of
September 30, 2009, the Company had $30.7 million in cash, cash equivalents and
total investments in marketable securities, reflecting a net increase of $7.7
million since December 31, 2008.
 This $7.7
million increase was primarily due to cash provided by operations of $16.2
million, partially offset by cash purchases of property and equipment (including
principal payments on financed purchases) of $5.3 million, repurchases of Common
Stock (net of proceeds from the issuance of Common Stock from employee stock
option exercises) of $2.6 million and payments related to capitalized software
of $0.6 million.
 
 Net cash
provided by operating activities was $16.2 million for the nine months ended
September 30, 2009 as compared to $18.5 million for the nine months ended
September 30, 2008. This $2.3 million decrease was primarily due to additional
vendor payments made (resulting in decreases in accounts payable and accrued
expenses) and a decrease from accounts receivable (net of deferred
revenue).
 
 Net cash
used in investing activities was $11.1 million for the nine months ended
September 30, 2009 as compared to $3.5 million for the nine months ended
September 30, 2008.  The increase of $7.6 million from the comparable
period in 2008 was primarily attributable to a decrease in cash provided from
the maturities of marketable securities (net of purchases) of $11.8 million and
an increase in funds received from and held on behalf of Ultimate’s customers
using the UltiPro tax filing offering (“UltiPro Tax Filing Customer Funds”),
with such funds being invested by the Company in overnight repurchase agreements
backed by U.S. Treasury or U.S. Government Agency securities of $3.6 million,
partially offset by a decrease in cash purchases of property and equipment of
$7.0 million (including the impact of increased equipment financing) and a $0.9
million decrease in capitalized software.
 
 Net cash
provided by financing activities was $0.6 million for the nine months ended
September 30, 2009 as compared to net cash used in financing activities of $17.2
million for the nine months ended September 30, 2008. The $17.8 million increase
in net cash provided by financing activities was primarily related to a $14.5
million decrease in repurchases of Common Stock pursuant to the Company’s stock
repurchase plan, an increase of $3.6 million in UltiPro Tax Filing Customer
Funds received, partially offset by a $0.3 million decrease in proceeds from the
issuance of Common Stock from stock option exercises.
 
 Days
sales outstanding, calculated on a trailing three-month basis, as of September
30, 2009 and September 30, 2008, were 67 days and 68 days,
respectively.
 
 Deferred
revenues were $64.4 million at September 30, 2009, as compared to $63.5 million
at December 31, 2008.  The increase of $0.9 million in deferred
revenues for the 2009 period was primarily due to increased deferred
Intersourcing revenues and higher deferred services revenues, partially offset
by decreased deferred maintenance revenues.  Substantially all of the
total balance in deferred revenues is related to future recurring revenues,
including deferred revenues related to Intersourcing.
 
 The
Company believes that cash and cash equivalents, investments in marketable
securities, equipment financing and cash generated from operations will be
sufficient to fund its operations for at least the next 12 months. This belief
is based upon, among other factors, management’s expectations for future revenue
growth, controlled expenses and collections of accounts receivable.
 
 TheCompany did not have any
material commitments for capital expenditures as of September 30,
2009.
 
 
 Off-Balance
Sheet Arrangements
 
 The
Company does not have any off-balance sheet arrangements (as that term is
defined in applicable SEC rules) that have a current, or are reasonably likely
to have a future, material effect on the Company’s financial condition, results
of operations, liquidity, capital expenditures or capital
resources.
 
 Quarterly
Fluctuations
 
 The
Company’s quarterly revenues and operating results have varied significantly in
the past and are likely to vary substantially from quarter to quarter in the
future. The Company’s operating results may fluctuate as a result of a number of
factors, including, but not limited to, increased expenses (especially as they
relate to product development, sales and marketing and the use of third-party
consultants), timing of product releases, increased competition, variations in
the mix of revenues, announcements of new products by the Company or its
competitors and capital spending patterns of the Company’s customers. The
Company establishes its expenditure levels based upon its expectations as to
future revenues, and, if revenue levels are below expectations, expenses can be
disproportionately high. A drop in near term demand for the Company’s products
could significantly affect both revenues and profits in any quarter. Operating
results achieved in previous fiscal quarters are not necessarily indicative of
operating results for the full fiscal years or for any future periods. As a
result of these factors, there can be no assurance that the Company will be able
to achieve and, if achieved in future periods, maintain profitability on a
quarterly basis. The Company believes that, due to the underlying factors for
quarterly fluctuations, quarter-to-quarter comparisons of its operations are not
necessarily meaningful and that such comparisons should not be relied upon as
indications of future performance.
 
 Forward-Looking
Statements
 
 The foregoing Management’s Discussion
and Analysis of Financial Condition and Results of Operations and the following
Quantitative and Qualitative Disclosures about Market Risk contain certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the “Securities Act”), and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 relationships with third parties, contract renewals
with business partners, compliance by the Company’s customers with the terms of
their contracts with the Company, and other factors disclosed in this Form 10-Q
and the Form 10-K.  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.
 
 14
 Table of Contents
 ITEM
3.           Quantitative
and Qualitative Disclosures About Market Risk
 
 In the
ordinary course of its operations, the Company is exposed to certain market
risks, primarily interest rate risk and foreign currency risk.  Risks
that are either non-financial or non-quantifiable, such as political, economic,
tax, or regulatory risks, are not included in the following assessment of the
Company’s market risks.
 
 Interest Rate Risk.The
Company is subject to financial market risks, including changes in interest
rates and in the valuations of its investment portfolio.  Changes in
interest rates could impact the Company’s anticipated interest income from
interest-bearing cash accounts, or cash equivalents and investments in
marketable securities.  The Company manages financial market risks,
including interest rate risks, in accordance with its investment guideline
objectives, including:
 
 ·
              Maximum
      safety of principal;
 ·
              Maintenance
      of appropriate liquidity for regular cash
needs;
 ·
              Maximum
      yields in relationship to guidelines and market
  conditions;
 ·
              Diversification
      of risks; and
 ·
              Fiduciary
      control of all investments.
 
 The
Company targets its fixed income investment portfolio to have maturities of 24
months or less.  Investments are held to enhance the preservation of
capital and not for trading purposes.
 
 Cash
equivalents consist of money market accounts with original maturities of less
than three months. Short-term investments include obligations of U.S. government
agencies and corporate debt securities.  Corporate debt securities
include commercial paper which according to the Company’s investment guidelines
must carry minimum short-term ratings of P-1 by Moody’s Investor Service, Inc.
(“Moody’s”) and A-1 by Standard & Poor’s Ratings Service, a Division of The
McGraw-Hill Companies, Inc. (“S&P”).  Other corporate debt
obligations must carry a minimum rating of A-2 by Moody’s or A by
S&P.  Asset-backed securities must carry a minimum AAA rating by
Moody’s and S&P with a maximum average life of two years at the time of
purchase.
 
 As of
September 30, 2009, total investments in available-for-sale marketable
securities were $7.7 million.
 
 As of
September 30, 2009, virtually all of the investments in the Company’s portfolio
were at fixed rates (with a weighted average interest rate of 0.5% per
annum).
  To
illustrate the potential impact of changes in interest rates, the Company has
performed an analysis based on its September 30, 2009 unaudited condensed
consolidated balance sheet and assuming no changes in its investments. 
Under this analysis, an immediate and sustained 100 basis point increase in the
various base rates would result in a decrease in the fair value of the Company’s
total portfolio of approximately $53 thousand over the next 12 months.  An
immediate and sustained 100 basis point decrease in the various base rates would
result in an increase of the fair value of the Company’s total portfolio of
approximately $53 thousand over the next 12 months.
 
 Foreign Currency
Risk.  The Company has foreign currency risks related to its
revenue and operating expenses denominated in currencies other than the U.S.
dollar.  Management does not believe movements in the foreign
currencies in which the Company transacts business will significantly affect
future net income.
 
 ITEM
4.                      Controls and Procedures
 
 (a) Evaluation of disclosure controls
and procedures.  The Company carried out an evaluation, under
the supervision and with the participation of the Company’s management,
including the Chief Executive Officer (the “CEO”) and the Chief Financial
Officer (the “CFO”), of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures as of the end of the period covered
by this Form 10-Q pursuant to Exchange Act Rules 13a-15(e) or 15d-15(e). Based
on that evaluation, the Company’s management, including the CEO and CFO,
concluded that, as of September 30, 2009, the Company’s disclosure controls and
procedures were effective to provide reasonable assurance that information
required to be disclosed in the Company’s Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified by the
SEC’s rules and forms and is accumulated and communicated to management,
including the CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.  It should be noted that the design of any system
of controls is based in part upon certain assumptions about the likelihood of
future events and thus has inherent limitations.  Therefore, even
those systems determined to be effective can only provide reasonable assurance
as to the achievement of their objectives.
 
 (b) Changes in internal control over
financial reporting.  There have been no changes during the
quarter ended September 30, 2009 in the Company’s internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
 
 15
 Table of Contents
 
 
 PART
II – OTHER INFORMATION
 
 ITEM
1A.                    Risk Factors
 
 The risk factors associated with the
Company’s business, as disclosed in Item 1A, “Risk Factors,” in the Form 10-K,
have not significantly changed.
 
 
 ITEM
2.                      Unregistered Sales of EquitySecurities and Use of
Proceeds
 
 (c)  Purchases
of Equity Securities by the Issuer.On October 30, 2000,
the Company announced that its Board of Directors authorized a stock repurchase
plan providing for the repurchase of up to 1,000,000 shares of the Company’s
outstanding Common Stock (the “Stock Repurchase Plan”).
 
 On
February 6, 2007, the Company’s Board of Directors extended the Stock Repurchase
Plan by authorizing the repurchase of up to 1,000,000 additional shares of the
Company’s issued and outstanding Common Stock.
 
 On
February 5, 2008, the Company’s Board of Directors extended the Stock Repurchase
Plan further by authorizing the repurchase of up to 1,000,000 additional shares
of the Company’s Common Stock.
 
 As
of September 30, 2009, the Company had purchased 2,796,825 shares of the
Company’s Common Stock under the Stock Repurchase Plan, with 203,175 shares
available for repurchase in the future.  The detail of Common Stock
repurchases for the three months ended September 30, 2009 are as
follows:
 
 Total
      Cumulative Number of
              
              
              Maximum
      Number ofShares
      Purchased 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 ProgramsJuly
      1 – 31, 2009.............
              
              
              –
              
              
              
              –
              
              
              
              2,533,575
              
              
              
              466,425August
      1 – 31, 2009.........
              
              
              187,600
              
              
              
              26.57
              
              
              
              2,721,175
              
              
              
              278,825September
      1 – 30, 2009.....
              
              
              75,650
              
              
              
              28.73
              
              
              
              2,796,825
              
              
              
              203,175Total...........................
              
              
              263,250
              
              
              $
              27.19
              
              
              
              2,796,825
              
              
              
              203,175(1) All
      shares were purchased through the publicly announced Stock Repurchase Plan
      in open-market transactions.
 
 On
October 26, 2009, the Company’s Board of Directors extended the Stock Repurchase
Plan further by authorizing the repurchase of up to 1,000,000 additional shares
of the Company’s Common Stock.  As a result, an aggregate of 1,203,175
shares of Common Stock were available for repurchase under the Stock Repurchase
Plan as of October 26, 2009.  Stock repurchases may be made
periodically in the open market, in privately negotiated transactions or in a
combination of both. The extent and timing of repurchase transactions will
depend on market conditions and other business considerations.
  16
 Table of Contents
  
 
 
 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.
  17
 Table of Contents
  
 Signatures
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 
 
 The
      Ultimate Software Group, Inc.Date:           November
      9, 2009
              By:
              /s/ Mitchell K. DauermanMitchell
      K. DauermanExecutive
      Vice President, Chief Financial Officer and Treasurer (Authorized
      Signatory and Principal Financial and Accounting
  Officer)
 
 
 
  18