ULTI » Topics » Liquidity and Capital Resources

These excerpts taken from the ULTI 10-K filed Mar 13, 2008.
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.


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As of December 31, 2007, the Company had $35.9 million in cash, cash equivalents and total investments in marketable securities, reflecting a net increase of $2.9 million since December 31, 2006. The $2.9 million increase is due to cash generated from operations of $29.1 million (which included the Non-Recurring Settlement of $4.5 million in cash received in the second quarter of 2007), partially offset by an increase in cash used for stock repurchases of $14.3 million (net of proceeds from the issuance of Common Stock from stock option exercises) which were made pursuant to the Stock Repurchase Plan, an increase in capital expenditures, including cash purchases of property and equipment, as well as principal payments on financed equipment totaling $10.2 million and an increase in capitalized software of $1.7 million, which was mostly attributable to development labor costs.
 
Net cash provided by operating activities was $29.1 million for 2007 as compared to $15.4 million for 2006. The $13.7 million increase was primarily due to increased funds generated from operations related to increased sales and the receipt of the Non-Recurring Settlement, partially offset by increased prepaid sales commissions (predominantly Intersourcing-related). Intersourcing commissions are paid in advance of the recognition of the related expense since, in accordance with generally accepted accounting principles, they are amortized when the related Intersourcing client processes its first Live payroll and the consequential revenue recognition period begins.
 
Net cash used in investing activities was $11.3 million for 2007 as compared to $13.0 million for 2006. The decrease of $1.7 million in net cash used in investing activities was primarily due to the decrease in cash payments made for the acquisition of RTIX in 2006 ($3.6 million in 2006 compared to $24 thousand in 2007), partially offset by an increase in cash purchases of property and equipment of $1.1 million and a net increase in investments in marketable securities of $0.9 million.
 
Net cash used in financing activities was $17.2 million for 2007 as compared to $3.4 million for 2006. The $13.8 million increase in net cash used in financing activities was primarily related to increased repurchases of Common Stock of $12.2 million combined with a $1.0 million reduction in proceeds from the issuance of Common Stock from stock option exercises and an increase of $0.6 million in principal payments on financed equipment.
 
Days sales outstanding, calculated on a trailing three-month basis (“DSO”), as of December 31, 2007 and 2006, were 76 days and 74 days, respectively. The increase in DSO’s as of December 31, 2007 is discussed below.
 
Deferred revenues of $51.7 million at December 31, 2007 increased by $8.7 million as compared to December 31, 2006 primarily due to increased sales from Intersourcing operations (which originate deferred revenues upon contract execution for the upfront fees and initial PEPM fees) and, to a lesser extent, due to an increase in deferred maintenance. Substantially all of the total balance in deferred revenues is related to future recurring revenues, including those from Intersourcing. With respect to Intersourcing unit sales, the increase in deferred revenues creates a corresponding increase in accounts receivable in relation to contracted upfront fees and PEPM fees due within a short period of time from the contract date, which impacts DSO’s and which contributed to the increase in DSO’s of 2 days compared to December 31, 2006.
 
The Company had a credit facility (the “Credit Facility”) with Silicon Valley Bank, which was secured by the Company’s eligible accounts receivable. The Credit Facility was comprised of a revolving line of credit (the “Revolver”) and an equipment term loan (the “Equipment Loan”). The Credit Facility’s Revolver expired on May 27, 2006. Based upon the strength and consistency of the cash flow position as well as management’s expectations for the next twelve months, the Company chose not to renew the Credit Facility upon its expiration. The Credit Facility’s Equipment Loan, while still effective, did not have any future borrowing capacity after May 27, 2006. The outstanding balance of $0.3 million under the Equipment Loan as of December 31, 2007 is payable on or before December 31, 2008 under the payment terms of such agreement. As of December 31, 2007, the Company was in compliance with all covenants included in the terms of the Credit Facility.
 
The Company believes that cash and cash equivalents, investments in marketable securities and cash generated from operations will be sufficient to fund its operations for at least the next 12 months. This belief


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is based upon, among other factors, management’s expectations for future revenue growth, controlled expenses and collections of accounts receivable.
 
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.





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As of December 31, 2007, the Company had $35.9 million
in cash, cash equivalents and total investments in marketable
securities, reflecting a net increase of $2.9 million since
December 31, 2006. The $2.9 million increase is due to
cash generated from operations of $29.1 million (which
included the Non-Recurring Settlement of $4.5 million in
cash received in the second quarter of 2007), partially offset
by an increase in cash used for stock repurchases of
$14.3 million (net of proceeds from the issuance of Common
Stock from stock option exercises) which were made pursuant to
the Stock Repurchase Plan, an increase in capital expenditures,
including cash purchases of property and equipment, as well as
principal payments on financed equipment totaling
$10.2 million and an increase in capitalized software of
$1.7 million, which was mostly attributable to development
labor costs.


 



Net cash provided by operating activities was $29.1 million
for 2007 as compared to $15.4 million for 2006. The
$13.7 million increase was primarily due to increased funds
generated from operations related to increased sales and the
receipt of the Non-Recurring Settlement, partially offset by
increased prepaid sales commissions (predominantly
Intersourcing-related). Intersourcing commissions are paid in
advance of the recognition of the related expense since, in
accordance with generally accepted accounting principles, they
are amortized when the related Intersourcing client processes
its first Live payroll and the consequential revenue recognition
period begins.


 



Net cash used in investing activities was $11.3 million for
2007 as compared to $13.0 million for 2006. The decrease of
$1.7 million in net cash used in investing activities was
primarily due to the decrease in cash payments made for the
acquisition of RTIX in 2006 ($3.6 million in 2006 compared
to $24 thousand in 2007), partially offset by an increase in
cash purchases of property and equipment of $1.1 million
and a net increase in investments in marketable securities of
$0.9 million.


 



Net cash used in financing activities was $17.2 million for
2007 as compared to $3.4 million for 2006. The
$13.8 million increase in net cash used in financing
activities was primarily related to increased repurchases of
Common Stock of $12.2 million combined with a
$1.0 million reduction in proceeds from the issuance of
Common Stock from stock option exercises and an increase of
$0.6 million in principal payments on financed equipment.


 



Days sales outstanding, calculated on a trailing three-month
basis (“DSO”), as of December 31, 2007 and 2006,
were 76 days and 74 days, respectively. The increase
in DSO’s as of December 31, 2007 is discussed below.


 



Deferred revenues of $51.7 million at December 31,
2007 increased by $8.7 million as compared to
December 31, 2006 primarily due to increased sales from
Intersourcing operations (which originate deferred revenues upon
contract execution for the upfront fees and initial PEPM fees)
and, to a lesser extent, due to an increase in deferred
maintenance. Substantially all of the total balance in deferred
revenues is related to future recurring revenues, including
those from Intersourcing. With respect to Intersourcing unit
sales, the increase in deferred revenues creates a corresponding
increase in accounts receivable in relation to contracted
upfront fees and PEPM fees due within a short period of time
from the contract date, which impacts DSO’s and which
contributed to the increase in DSO’s of 2 days
compared to December 31, 2006.


 



The Company had a credit facility (the “Credit
Facility”) with Silicon Valley Bank, which was secured by
the Company’s eligible accounts receivable. The Credit
Facility was comprised of a revolving line of credit (the
“Revolver”) and an equipment term loan (the
“Equipment Loan”). The Credit Facility’s Revolver
expired on May 27, 2006. Based upon the strength and
consistency of the cash flow position as well as
management’s expectations for the next twelve months, the
Company chose not to renew the Credit Facility upon its
expiration. The Credit Facility’s Equipment Loan, while
still effective, did not have any future borrowing capacity
after May 27, 2006. The outstanding balance of
$0.3 million under the Equipment Loan as of
December 31, 2007 is payable on or before December 31,
2008 under the payment terms of such agreement. As of
December 31, 2007, the Company was in compliance with all
covenants included in the terms of the Credit Facility.


 



The Company believes that cash and cash equivalents, investments
in marketable securities and cash generated from operations will
be sufficient to fund its operations for at least the next
12 months. This belief





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is based upon, among other factors, management’s
expectations for future revenue growth, controlled expenses and
collections of accounts receivable.


 




This excerpt taken from the ULTI 10-K filed Mar 16, 2007.
Liquidity and Capital Resources
 
The Company has historically funded operations, when necessary, primarily through the private and public sale of equity securities and, to a lesser extent, equipment financing and borrowing arrangements.
 
As of December 31, 2006, the Company had $33.0 million in cash, cash equivalents and total investments in marketable securities, reflecting a net increase of $0.3 million since December 31, 2005. As of December 31, 2006, the Company had working capital of $14.2 million as compared to $15.7 million as of December 31, 2005. The $1.5 million decrease in working capital resulted primarily from $3.4 million in cash paid for the RTIX Acquisition (with the majority of the acquired assets and liabilities being long-term in nature and therefore moving out of working capital), an increase in cash purchases of property and equipment and an increase in long-term prepaid Intersourcing commissions which are included in other assets in the consolidated balance sheets, partially offset by cash provided by the Company’s operations.
 
Net cash provided by operating activities was $15.4 million for 2006 as compared to $5.4 million for 2005. The $10.0 million increase was primarily due to an improvement in operations related to increased sales, excluding the impact of non-cash charges, of $7.1 million, an increase in accrued expenses of $2.5 million (primarily related to sales commissions and performance-based bonuses which, from a timing perspective, are typically paid in the following quarter), an increase in deferred revenue (net of the change in accounts receivable which generally correlates with changes in deferred revenue) of $2.5 million (principally related to increased Intersourcing sales), partially offset by increased prepaid sales commissions (predominantly Intersourcing-related) of $2.8 million. Intersourcing commissions are paid in advance of the recognition of the related expense since, in accordance with generally accepted accounting principles, they are amortized when the related Intersourcing client processes its first live payroll and the consequential revenue recognition period begins.
 
Net cash used in investing activities was $13.0 million for 2006 as compared to net cash used in investing activities of $7.7 million for 2005. The additional $5.3 million in net cash used in investing activities was primarily due to the cash paid in the acquisition of RTIX of $3.6 million, an increase in cash purchases of property and equipment of $3.3 million (including installments paid for the purchase of the Recruitment source code) and an increase in capitalized software of $1.6 million, partially offset by a net decrease in investments in marketable securities of $3.3 million.
 
Net cash used in financing activities was $3.4 million for 2006 as compared to net cash provided by financing activities of $5.3 million for 2005. The $8.7 million increase in net cash used in financing activities was primarily related to repurchases of Common Stock of $9.8 million, principal payments on the Credit Facility of $0.5 million in 2006 as compared to net borrowings of $0.8 million in 2005, partially offset by a $2.8 million increase in proceeds from exercises of employee stock options to purchase Common Stock.
 
Days sales outstanding, calculated on a trailing three-month basis (“DSO”), as of December 31, 2006 and 2005, were 74 days and 67 days, respectively. The increase in DSO’s as of December 31, 2006 is discussed below.
 
Deferred revenues of $43.0 million at December 31, 2006 increased $10.0 million since December 31, 2005 primarily due to increased sales from Intersourcing operations (which originate deferred revenues upon contract execution for the upfront fees and initial PEPM fees). Substantially all of the total balance in deferred revenues is related to future recurring revenues, including Intersourcing. With respect to Intersourcing unit sales, the increase in deferred revenues creates a corresponding increase in accounts receivable which impacts days sales outstanding (DSO) at that time, which contributed to the increase in DSO’s of 7 days compared to December 31, 2005.
 
The Company had a credit facility (the “Credit Facility”) with Silicon Valley Bank, which was secured by the Company’s eligible accounts receivable. The Credit Facility was comprised of a revolving line of credit (the “Revolver”) and an equipment term loan (the “Equipment Loan”). The Credit Facility’s Revolver expired on May 27, 2006. Based upon the strength and consistency of the cash flow position as well as management’s expectations for the next twelve months, the Company chose not to renew the Credit Facility upon its expiration. The Credit Facility’s Equipment Loan, while still effective, did not have any future


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borrowing capacity after May 27, 2006. The outstanding balance of $0.7 million under the Equipment Loan as of December 31, 2006 is payable on or before December 31, 2008 under the payment terms of such agreement. As of December 31, 2006, the Company was in compliance with all covenants included in the terms of the Credit Facility.
 
In October 2006, the Company acquired 100% of the common stock of RTIX Limited, a United Kingdom company, now known as The Ultimate Software Group UK Limited, and its wholly-owned U.S. subsidiary, RTIX Americas, Inc. (collectively, “RTIX”), for a total consideration of $4.0 million payable in the form of $3.4 million in cash and 27,897 shares of Common Stock (the “Stock Consideration”).
 
  a)   Pursuant to the stock purchase agreement with RTIX, the Stock Consideration is subject to downward adjustment based on RTIX’s recurring revenues over a twelve-month period beginning October 5, 2006, recorded in accordance with generally accepted accounting principles in the United States, and will be delivered within 30 days after the final determination of any such adjustments. The Company did not record the impact of the issuance of the Stock Consideration as of December 31, 2006 and will evaluate the recurring revenues of RTIX on a monthly basis, cumulative from October 5, 2006, to determine when and the extent to which the contingency has been satisfied, at which time the Stock Consideration will be recorded in the Company’s consolidated financial statements.
 
  b)   In addition, as part of the acquisition, the Company incurred direct costs totaling $0.2 million and assumed net liabilities of $0.3 million. See Note 3 of the Notes to Consolidated Financial Statements for information regarding the purchase price allocation for the RTIX Acquisition. RTIX developed the performance management/appraisals solution that Ultimate Software has offered its customers since February 2006.
 
  c)   In accordance with EITF 01-3, “Accounting in a Purchase Business Combination for Deferred Revenue of an Acquiree”, the deferred maintenance revenue liability assumed in the acquisition of RTIX was adjusted to fair value, which is the sum of direct and incremental costs of fulfilling the maintenance obligation plus a normal profit margin on those fulfillment costs. As a result of the adjustment to fair value, a $0.1 million decrease in the deferred revenues liability assumed in the acquisition of RTIX was recorded in the Company’s consolidated financial statements, which will be recognized entirely within approximately a nine-month period following the acquisition date of October 5, 2006.
 
During August 2006, the Company formed a wholly-owned subsidiary, The Ultimate Software Group of Canada, Inc. (the “Canadian Subsidiary”). The Canadian Subsidiary is expected to accommodate the Company’s future sales operations in Canada, primarily related to UltiPro Canada, which is currently under development and is expected to be available for general release (pursuant to SFAS No. 86) in the second half of 2007.
 
In October 2006, the Company acquired the rights to the source code from First Advantage Corporation for its third-party recruitment product, the integrated online recruitment/talent acquisition solution that Ultimate Software has offered its customers since April 2005 (“Recruitment”). First Advantage previously acquired the company (RecruiterNet Inc.) that developed the recruitment product known as Projectix, which was the basis for Ultimate Software’s Recruitment offering. First Advantage is one of Ultimate Software’s existing UltiPro customers.
 
The Company believes that cash and cash equivalents, investments in marketable securities 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.
 
This excerpt taken from the ULTI 10-K filed Mar 15, 2006.
Liquidity and Capital Resources
 
The Company has historically funded operations primarily through the private and public sale of equity securities and, to a lesser extent, equipment financing and borrowing arrangements.
 
As of December 31, 2005, the Company had $32.8 million in cash, cash equivalents and total investments in marketable securities, reflecting a net increase of $7.5 million since December 31, 2004. As of December 31, 2005, the Company had working capital of $15.2 million as compared to $3.7 million as of December 31, 2004. The $11.5 million increase in working capital resulted primarily from cash proceeds of $5.8 million


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derived from exercises of employee stock options to purchase Common Stock during 2005 and cash provided from operations as the Company’s net financial results returned to profitability in 2005 as compared to a net loss in 2004.
 
Net cash provided by operating activities was $5.4 million for the year ended December 31, 2005 as compared to $0.3 million for the year ended December 31, 2004. The $5.1 million increase was primarily due to the improvement in the results of operations for 2005 as compared to 2004, partially offset by increased prepaid expenses, including prepaid Intersourcing commissions related to the growth in Intersourcing operations (which are amortized when the related Intersourcing client processes its first live payroll), and an increase in accounts receivable due to increased sales.
 
Net cash used in investing activities was $7.7 million for the year ended December 31, 2005 as compared to net cash used in investing activities of $15.3 million for the year ended December 31, 2004. The $7.6 million decrease in net cash used in investing activities was primarily due to the net increase in investments in marketable securities of $6.0 million and a decrease in cash purchases of property and equipment totaling $1.7 million. The Company began investing in marketable securities available-for-sale during the three months ended December 31, 2004.
 
Net cash provided by financing activities was $5.3 million for 2005 as compared to $16.0 million for 2004. The $10.7 million decrease in net cash provided by financing activities was primarily related to a private placement during the year ended December 31, 2004, which did not recur in 2005. During the year ended December 31, 2004, net proceeds from the May 2004 private sale of the Company’s Common Stock were $14.4 million, after deducting commissions and other stock issuance costs. The decrease in net cash provided by financing activities attributable to the May 2004 private placement was partially offset by an increase in net proceeds from exercises of employee stock options to purchase Common Stock of $3.5 million as compared to 2004.
 
Days sales outstanding, calculated on a trailing three-month basis (“DSO”), as of December 31, 2005 and 2004, were 67 days and 57 days, respectively. The increase in DSO’s as of December 31, 2005 was attributable to the increase in accounts receivable principally from incremental license and Intersourcing revenues generated during 2005 as well as several large payments due by December 31, 2005 which were not received until early January 2006.
 
Deferred revenues were $33.0 million at December 31, 2005 as compared to $28.5 million at December 31, 2004. The increase of $4.5 million in deferred revenues for 2005 was primarily due to an increase in deferred Intersourcing revenue from additional business of $4.1 million, an increase in deferred maintenance of $1.9 million and an increase in deferred services of $0.5 million (primarily implementation), partially offset by a decrease in deferred revenue of $1.7 million principally from the net amortization of Ceridian’s recurring subscription revenue. The net reduction to deferred revenues associated with Ceridian should continue as the Company expects to recognize $642,000 per month in recurring subscription revenues and to collect $525,000 per month in 2006 (subject to contracted annual increases) from Ceridian until the termination of the related agreement — see Original Ceridian Agreement.
 
In June 2005, the Company entered into a new credit facility with Silicon Valley Bank (the “Bank”), which was effective as of May 27, 2005 for the Revolver, defined below, and as of June 13, 2005 for the Equipment Loan, as defined below (the “Credit Facility”). The Credit Facility is comprised of a revolving line of credit (the “Revolver”) and an equipment term loan (the “Equipment Loan”). As of December 31, 2005, $4.0 million was available for borrowing under the Credit Facility, with $1.0 million outstanding under the Equipment Loan.
 
The Revolver expires on May 26, 2006 and provides for advances of up to an aggregate of $2.5 million, subject to limitations related to the amount of the Company’s cash and investments held at or through the Bank (the “Investments”). To the extent Investments are less than $12 million, the amount of advances under the Revolver are limited to 75% of the Company’s eligible accounts receivable, not to exceed an aggregate of $2.5 million. To the extent Investments are more than $12 million, there are no such limitations for drawing advances under the Revolver, not to exceed $2.5 million. The Revolver bears interest, payable monthly, at a


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rate equal to the Prime Rate per annum. The Company intends to negotiate the potential renewal of the Credit Facility (the “Renewal Credit Facility”) but there can be no assurance that the Renewal Credit Facility will be obtained or as to the terms of the Renewal Credit Facility.
 
The Equipment Loan provides for advances of up to an aggregate of $2.5 million, subject to certain terms of the agreement, and is payable in 36 equal monthly installments, plus interest. The payment period for each advance under the Equipment Loan expires 36 months after the date of borrowing. Interest on the Equipment Loan is based on the Prime Rate plus 0.5% (fixed at the time of the advance) or a fixed rate of 7.0%, with the selection of the type of available rate at the discretion of the Company.
 
Borrowings under the Credit Facility are secured by all of the Company’s corporate assets, including a negative pledge on intellectual property, and the Company is required to comply with certain financial and other covenants. Under the terms of the Credit Facility, the Company may not pay dividends without the prior written consent of Silicon Valley Bank. The material financial covenants require that the Company maintain, on a monthly basis, a minimum quick ratio (representing the ratio of quick assets (or cash and accounts receivable) plus total marketable securities to current liabilities, plus all indebtedness to the Bank and excluding deferred revenue) of 1.75 to 1.0 and certain quarterly revenue levels as of the end of each quarter, as provided in the Credit Facility. As of December 31, 2005, the Company was in compliance with all covenants included in the terms of the Credit Facility.
 
The Company believes that cash and cash equivalents, investments in marketable securities, cash generated from operations and cash available under the Credit Facility 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.
 
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