Attached files

file filename
EX-32.2 - SECTION 1350 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - BOTTOMLINE TECHNOLOGIES INCex322.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - BOTTOMLINE TECHNOLOGIES INCex311.htm
EX-32.1 - SECTION 1350 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - BOTTOMLINE TECHNOLOGIES INCex321.htm
EX-10.1 - FORM OF EXECUTIVE OFFICER BONUS PLAN FOR 2010 WITH RESPECT TO ROBERT A. EBERLE - BOTTOMLINE TECHNOLOGIES INCex101.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - BOTTOMLINE TECHNOLOGIES INCex312.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 

 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2009
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
 
Commission file number: 0-25259
 

 
Bottomline Technologies (de), Inc.
(Exact name of registrant as specified in its charter)
 

 
 
   
Delaware
02-0433294
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
   
325 Corporate Drive
Portsmouth, New Hampshire
03801-6808
(Address of principal executive offices)
(Zip Code)
 
(603) 436-0700
(Registrant’s telephone number, including area code)
 

 
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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).          Yes  ¨    No  ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large Accelerated Filer
 
¨
  
Accelerated Filer
 
x
       
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  x
 
The number of shares outstanding of the registrant’s common stock as of January 29, 2010 was 26,910,642.

 
 

 
1

 

INDEX

       
   
Page
No.
 
PART I. FINANCIAL INFORMATION
     
       
Item 1. Financial Statements
     
       
Unaudited Condensed Consolidated Balance Sheets as of December 31, 2009 and June 30, 2009
    3  
         
Unaudited Condensed Consolidated Statements of Operations for the three months ended December 31, 2009 and 2008
    4  
         
Unaudited Condensed Consolidated Statements of Operations for the six months ended December 31, 2009 and 2008
    5  
         
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2009 and 2008
    6  
         
Notes to Unaudited Condensed Consolidated Financial Statements
    7  
         
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    15  
         
Item 3. Quantitative and Qualitative Disclosures about Market Risk
    26  
         
Item 4. Controls and Procedures
    26  
         
PART II. OTHER INFORMATION
       
         
Item 1. Legal Proceedings
    26  
         
Item 1A. Risk Factors
    27  
         
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 
    34  
         
Item 4. Submission of Matters to a Vote of Security Holders
    34  
         
Item 6. Exhibits
    34  
         
         
SIGNATURE
    35  

 
 
2

 

PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
Bottomline Technologies (de), Inc.
Unaudited Condensed Consolidated Balance Sheets
(in thousands)
 
             
   
December 31,
2009
   
June 30,
2009
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 54,946     $ 50,255  
Marketable securities
    54       48  
Accounts receivable, net of allowance for doubtful accounts of $527 at December 31, 2009 and $645 at June 30, 2009
    24,266       23,118  
Other current assets
    6,934       5,531  
                   Total current assets
    86,200       78,952  
Property and equipment, net
    15,326       10,106  
Intangible assets, net
    103,729       89,589  
Other assets
    5,149       4,504  
Total assets
  $ 210,404     $ 183,151  
                 
Liabilities and stockholders’ equity
               
Current liabilities:
               
Accounts payable
  $ 6,224     $ 5,955  
Accrued expenses
    8,178       9,290  
Deferred revenue
    32,190       33,029  
Total current liabilities
    46,592       48,274  
Deferred revenue, non-current
    13,168       10,213  
Deferred income taxes
    2,335       2,263  
Other liabilities
    2,064       1,852  
Total liabilities
    64,159       62,602  
                 
Stockholders’ equity:
               
Preferred Stock, $.001 par value:
               
           Authorized shares—4,000; issued and outstanding shares—none
    ----       ----  
Common Stock, $.001 par value:
               
           Authorized shares—50,000; issued shares—27,697 at December 31, 2009, and 26,516 at June 30, 2009; outstanding shares—25,563 at December 31, 2009, and 24,311 at June 30, 2009
    28       27  
Additional paid-in capital
    310,661       287,082  
Accumulated other comprehensive loss
    (5,461 )     (4,920 )
Treasury stock: 2,134 shares at December 31, 2009, and 2,205 shares at June 30, 2009, at cost
    (23,579 )     (24,360 )
Accumulated deficit
    (135,404 )     (137,280 )
Total stockholders’ equity
    146,245       120,549  
Total liabilities and stockholders’ equity
  $ 210,404     $ 183,151  
                 
 
See accompanying notes.
 

 
3

 

Bottomline Technologies (de), Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
 
             
   
Three Months Ended
December 31,
 
   
2009
   
2008
 
Revenues:
           
Software licenses
  $ 3,787     $ 3,597  
Subscriptions and transactions
    10,469       7,744  
Service and maintenance
    23,775       20,527  
Equipment and supplies
    2,091       2,466  
Total revenues
    40,122       34,334  
Cost of revenues:
               
Software licenses
    321       207  
Subscriptions and transactions (1) 
    5,160       3,792  
Service and maintenance (1) 
    10,405       9,513  
Equipment and supplies
    1,590       1,824  
Total cost of revenues
    17,476       15,336  
Gross profit
    22,646       18,998  
Operating expenses:
               
Sales and marketing (1) 
    8,825       8,150  
Product development and engineering (1) 
    4,753       5,238  
General and administrative (1) 
    4,248       4,619  
Amortization of intangible assets
    3,361       3,948  
Total operating expenses
    21,187       21,955  
Income (loss) from operations
    1,459       (2,957 )
Other (expense) income, net
    (93 )     615  
Income (loss) before income taxes
    1,366       (2,342 )
Provision for income taxes
    662       527  
Net income (loss)
    704       (2,869 )
Basic and diluted net income (loss) per share attributable to common stockholders:
  $ 0.03     $ (0.12 )
Shares used in computing basic net income (loss) per share attributable to common stockholders:
    25,092       24,033  
Shares used in computing diluted net income (loss) per share attributable to common stockholders:
    25,933       24,033  
                 
 

 
(1)
Stock based compensation is allocated as follows:
 
             
   
Three Months Ended
December 31,
 
   
2009
   
2008
 
Cost of revenues: subscriptions and transactions
  $ 61     $ 49  
Cost of revenues: service and maintenance
    444       212  
Sales and marketing
    838       648  
Product development and engineering
    329       197  
General and administrative
    728       1,097  
 
See accompanying notes.

 
4




Bottomline Technologies (de), Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
 
             
   
Six Months Ended
December 31,
 
   
2009
   
2008
 
Revenues:
           
Software licenses
  $ 6,750     $ 7,203  
Subscriptions and transactions
    18,750       15,973  
Service and maintenance
    46,910       41,676  
Equipment and supplies
    4,268       4,988  
Total revenues
    76,678       69,840  
Cost of revenues:
               
Software licenses
    540       407  
Subscriptions and transactions (1) 
    9,038       7,991  
Service and maintenance (1) 
    20,125       19,303  
Equipment and supplies
    3,211       3,679  
Total cost of revenues
    32,914       31,380  
Gross profit
    43,764       38,460  
Operating expenses:
               
Sales and marketing (1) 
    16,708       16,788  
Product development and engineering (1) 
    8,843       10,660  
General and administrative (1) 
    8,538       9,792  
Amortization of intangible assets
    6,667       8,384  
Total operating expenses
    40,756       45,624  
Income (loss) from operations
    3,008       (7,164 )
Other income, net
    128       763  
Income (loss) before income taxes
    3,136       (6,401 )
Provision for income taxes
    1,260       317  
Net income (loss)
    1,876       (6,718 )
Basic and diluted net income (loss) per share attributable to common stockholders:
  $ 0.07     $ (0.28 )
Shares used in computing basic net income (loss) per share attributable to common stockholders:
    24,747       23,958  
Shares used in computing diluted net income (loss) per share attributable to common stockholders:
    25,372       23,958  
                 
 


(1)
Stock based compensation is allocated as follows:
 
             
   
Six Months Ended
December 31,
 
   
2009
   
2008
 
Cost of revenues: subscriptions and transactions
  $ 114     $ 131  
Cost of revenues: service and maintenance
    749       390  
Sales and marketing
    1,487       1,343  
Product development and engineering
    533       400  
General and administrative
    1,425       2,149  
 
See accompanying notes.
 

5



Bottomline Technologies (de), Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
 
             
   
Six Months Ended
December 31,
 
   
2009
   
2008
 
Operating activities:
           
Net income (loss)
  $ 1,876     $ (6,718 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Amortization of intangible assets
    6,667       8,384  
Stock compensation expense
    4,308       4,413  
Depreciation and amortization of property and equipment
    2,164       1,995  
Deferred income tax provision (benefit)
    301       (179 )
Provision for allowances on accounts receivable
    (99 )     11  
Provision for obsolete inventory
    1       7  
Excess tax benefits associated with stock compensation
    (130 )     (10 )
Gain on foreign exchange
    (136 )     (222 )
Loss on disposal of equipment
    ---       12  
Changes in operating assets and liabilities:
               
Accounts receivable
    (1,089 )     (820 )
Inventory, prepaid expenses and other assets
    (565 )     (810 )
Accounts payable, accrued expenses and other liabilities
    (856 )     (3,040 )
Deferred revenue
    2,189       7,411  
Net cash provided by operating activities
    14,631       10,434  
Investing activities:
               
Acquisition of business
    (17,000 )     ---  
Purchases of held-to-maturity securities
    (50 )     (53 )
Proceeds from sales of held-to-maturity securities
    50       53  
Purchases of property and equipment
    (2,528 )     (2,060 )
Net cash used in investing activities
    (19,528 )     (2,060 )
Financing activities:
               
Proceeds from employee stock purchase plan and exercise of stock options
    9,560       961  
Repurchase of common stock 
    (23 )     (2,603 )
Excess tax benefits associated with stock compensation
    130       10  
Capital lease payments
    (56 )     (65 )
Payment of bank financing fees
    (13 )     (20 )
Net cash provided by (used in) financing activities
    9,598       (1,717 )
Effect of exchange rate changes on cash and cash equivalents
    (10 )     (7,256 )
Increase (decrease) in cash and cash equivalents
    4,691       (599 )
Cash and cash equivalents at beginning of period
    50,255       35,316  
Cash and cash equivalents at end of period
  $ 54,946     $ 34,717  
Supplemental disclosure of cash flow information:
               
Issuance of warrants in connection with acquisition of business
  $ 10,520       ----  
                 
 
See accompanying notes.

 
6

 

 
Bottomline Technologies (de), Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2009
 
Note 1—Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the interim financial information have been included. Operating results for the three and six months ended December 31, 2009 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending June 30, 2010. For further information, refer to the financial statements and footnotes included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (SEC) on September 11, 2009.
 
Certain prior period amounts have been reclassified to conform to the current year presentation.
 
Note 2—Recent Accounting Pronouncements
 
Revenue Recognition

In October 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance on two issues related to revenue recognition.

The first issue, Revenue Arrangements with Multiple Deliverables, applies to multiple-deliverable revenue arrangements and provides for two significant changes to existing multiple-element revenue recognition guidance. The first change relates to the determination of when individual deliverables within an arrangement should be treated as separate units of accounting. Broadly, a deliverable should be treated as a separate unit of accounting when it has value to the customer on a standalone basis and when delivery or performance of any undelivered items is considered to be probable and substantially within the control of the vendor. The second change relates to the manner in which arrangement consideration should be allocated to any separately identified deliverables. The consensus requires that the allocation of revenue among deliverables be based on vendor specific objective evidence or third-party evidence of selling price and, to the extent that neither of these levels of evidence exist, that the allocation be based on the vendor’s best estimate of selling price for each deliverable.  Use of the residual method of allocating revenue to arrangement deliverables is prohibited unless the revenue transaction is specifically governed by software revenue recognition literature.  Financial statement disclosure requirements have also been significantly expanded.

The second issue, Certain Revenue Arrangements that Include Software Elements, focuses on redefining which revenue arrangements are within the scope of software revenue recognition literature and which are not.  The issue provides guidance on determining whether tangible products containing non-software and software elements are governed by software revenue recognition literature and significantly narrows the definition of what constitutes a “software” transaction.  In particular, non-software components of products that include software, software products bundled with tangible products where the non-software and software components function together to deliver the product’s essential functionality, and undelivered elements related to non-software components are, as a result of this issue, outside the scope of software revenue recognition rules. The issue also provides guidance on allocating revenue between non-software and software elements.

Each of these issues is effective for fiscal years beginning on or after June 15, 2010. The issues can be implemented prospectively to all revenue arrangements entered or materially modified after the date of adoption, or retrospectively to all revenue arrangements for all financial statement periods presented. Early adoption is permitted. Both issues must be adopted in the same period and under the same transition method. The Company expects to adopt these issues prospectively as of July 1, 2010 and is currently evaluating the impact of the pronouncements on its financial statements.
 
Note 3—Fair Value
 
Fair Value of Assets and Liabilities
 
 
7


In September 2006, the FASB issued financial statement disclosure standards, effective for financial statements issued for fiscal years beginning after November 15, 2007, regarding the fair value of assets and liabilities.  The Company adopted these standards in fiscal 2008.  These standards define fair value, establish a framework for measuring fair value and expand disclosures about fair value measurements. They apply only to fair value measurements already required or permitted by other accounting standards and do not require any new fair value measurements.  

For nonfinancial assets and liabilities not recognized or disclosed at fair value in the financial statements on a recurring basis, the effective date of these standards was delayed until fiscal years beginning after November 15, 2008 (July 1, 2009 for the Company).  The Company’s nonfinancial assets and liabilities that met these deferral criteria included goodwill, intangible assets, and property, plant and equipment.  The adoption of the remaining provisions of these standards on July 1, 2009 did not have an impact on the Company’s financial position or results of operations.  

The Company measures fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In determining fair value, the assumptions that market participants would use in pricing an asset or liability (the “inputs”) are based on a tiered fair value hierarchy consisting of three levels, as follows:
 
 
Level 1:  Observable inputs such as quoted prices for identical assets or liabilities in active markets.

Level 2:  Other inputs that are observable directly or indirectly, such as quoted prices for similar instruments in active markets or for similar markets that are not active.

Level 3:  Unobservable inputs for which there is little or no market data and which require the Company to develop its own assumptions about how market participants would price the asset or liability.

Valuation techniques for assets and liabilities include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data.  These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.

At December 31, 2009, assets and liabilities of the Company measured at fair value on a recurring basis included money market funds of $0.2 million.  At June 30, 2009, assets and liabilities of the Company measured at fair value on a recurring basis included money market funds and US Treasury securities funds of $2.6 million and $0.8 million, respectively.  These amounts  were reported as a component of the Company’s cash and cash equivalents and were valued based on reference to quoted prices in active markets (Level 1 inputs).
 
Fair Value of Financial Instruments
 
The Company has certain financial instruments which consist of cash and cash equivalents, marketable securities, accounts receivable and accounts payable.  The Company’s marketable securities are classified as held to maturity and recorded at amortized cost which, at December 31, 2009 and June 30, 2009, approximated fair value.  These investments all mature within one year.  The fair value of the Company’s other financial instruments approximate their carrying values, due to the short-term nature of those instruments.
 
Note 4 – Business Acquisitions
 
PayMode

On September 14, 2009, the Company completed the purchase of substantially all of the assets and related operations of PayMode from Bank of America (the “Bank”).  PayMode facilitates the electronic exchange of payments and invoices between organizations and their suppliers and is operated as a Software as a Service (SaaS) offering.  There are currently in excess of 90,000 vendors participating in the PayMode network.

As a result of the acquisition the Company acquired the PayMode operations including the vendor network, application software, intellectual property rights and other assets, properties and rights used exclusively or primarily in the PayMode business. As purchase consideration, the Company paid the Bank cash of $17.0 million and issued the Bank a warrant to purchase 1,000,000 shares of common stock of the Company at an exercise price of $8.50 per share.  The warrants
 
 
8

 
were exercisable upon issuance and were valued at $10.5 million using a Black Scholes valuation model that used the following inputs:

   
Dividend yield
0%
Expected term
10 years
Risk free interest rate
3.42%
Volatility
78%
 
The expected term of ten years equates to the contractual life of the warrants.  Volatility was based on the Company’s actual stock price over a ten year historic period.

The Company finalized its estimates of fair value for property, equipment and intangible assets acquired during the period ended December 31, 2009.  In the allocation of the purchase price set forth below, the Company has recognized approximately $2.7 million of goodwill.  This amount is deductible for US income tax purposes and is arising principally due to the assembled workforce of PayMode and due to expected product synergies arising from the acquisition.  Costs of the acquisition of approximately $0.5 million were expensed during the six months ended December 31, 2009, principally as a component of general and administrative expenses.

PayMode’s operating results have been included in the Company’s operating results from the date of the acquisition forward, as a component of the Outsourced Solutions segment, and all of the PayMode goodwill was allocated to this segment.

Upon acquisition, PayMode was integrated into existing business lines of the Company in a manner that makes tracking or reporting earnings specifically attributable to PayMode impracticable.  For the six months ended December 31, 2009, revenues attributable to PayMode represented less than 5% of the Company’s consolidated revenues.
 
The final allocation of the purchase price as of December 31, 2009 is as follows:
 
       
   
(in thousands)
 
Current assets
    1,340  
Property and equipment
    4,901  
Intangible assets
    18,659  
Goodwill
    2,653  
Current liabilities
    (33 )
Total purchase price
  $ 27,520  
         
 

 
The valuation of the acquired intangible assets was estimated by performing projections of discounted cash flow, whereby revenues and costs associated with each intangible asset are forecast to derive expected cash flow which is discounted to present value at discount rates commensurate with perceived risk.  The valuation and projection process is inherently subjective and relies on significant unobservable inputs (Level 3 inputs).  The valuation assumptions also take into consideration the Company’s estimates of contract renewal, technology attrition and revenue growth projections.  The values for specifically identifiable intangible assets, by major asset class, are as set forth below. Other intangible assets consist of a tradename and a below market lease arrangement.
 

       
   
(in thousands)
 
Customer related intangible assets
  $ 9,349  
Core technology
    7,648  
Other intangible assets
    1,662  
    $ 18,659  
         
 

 
The customer related intangible assets, core technology and other intangible assets acquired are being amortized over weighted average lives of seventeen years, seven years and fourteen years, respectively.
 
 
9

 

Pro-forma Information
 
The following unaudited pro-forma financial information presents the combined results of operations of the Company and PayMode as if that acquisition had occurred on July 1, 2009 and 2008, respectively, after giving effect to certain adjustments such as decreased revenues formerly earned by PayMode from interest income allocated to PayMode through Bank of America’s fund transfer process since, in general terms, the Company will not be eligible to earn revenues in this manner.  The pro-forma adjustments also reflect an increase in amortization expense as a result of acquired intangible assets and a decrease in interest income as a result of the cash paid for the acquisition. This pro-forma financial information does not necessarily reflect the results of operations that would have actually occurred had the Company and PayMode been a single entity during these periods.
 
                         
   
Pro Forma
Three Months Ended
December 31,
   
Pro Forma
Six Months Ended
December 31,
 
   
2009
   
2008
   
2009
   
2008
 
   
(unaudited)
(in thousands)
 
Revenues
  $ 40,122     $ 35,817     $ 77,881     $ 72,785  
Net income (loss)
  $ 704     $ (4,754 )   $ 194     $ (10,191 )
Net income (loss) per basic and diluted share attributable to common stockholders
  $ 0.03     $ (0.20 )   $ 0.01     $ (0.43 )
 

 
Note 5—Net Income (Loss) Per Share
 
The following table sets forth the computation of basic and diluted net income (loss) per share:


   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2009
   
2008
   
2009
   
2008
 
   
(in thousands)
 
Basic:
                       
Net income (loss)
  $ 704     $ (2,869 )   $ 1,876     $ (6,718 )
Less:  Net income allocable to participating securities
    (25 )     ---       (72 )     ---  
Net income (loss) allocable to common stockholders – basic
  $ 679     $ (2,869 )   $ 1,804     $ (6,718 )
                                 
Basic net income (loss) per share attributable to common stockholders
  $ 0.03     $ (0.12 )   $ 0.07     $ (0.28 )
                                 
Shares used in computing basic net income (loss) per share attributable to common stockholders
    25,092       24,033       24,747       23,958  
                                 
                                 
Diluted:
                               
Net income (loss)
  $ 704     $ (2,869 )   $ 1,876     $ (6,718 )
Less:  Net income allocable to participating securities
    (24 )     ---       (70 )     ---  
Net income (loss) allocable to common stockholders – diluted
  $ 680     $ (2,869 )   $ 1,806     $ (6,718 )
                                 
Diluted net income (loss) per share attributable to common stockholders
  $ 0.03     $ (0.12 )   $ 0.07     $ (0.28 )
                                 
Shares used in computing diluted net income (loss) per share attributable to common stockholders
    25,933       24,033       25,372       23,958  
                                 

Basic net income per share excludes any dilutive effects of stock options, unvested restricted stock and stock warrants.  Basic and diluted earnings per share is computed pursuant to the two-class method.  The two-class method calculates earnings for common stock and participating securities based on their proportionate participation rights in undistributed
 
 
10

 
earnings.  Certain of the Company’s unvested restricted stock awards are considered to be participating securities as they entitle the holder to receive non-forfeitable rights to cash dividends at the same rate as common stock.

Diluted net income per share is calculated using the more dilutive of the treasury stock method (which assumes full exercise of in-the-money stock options and warrants and full vesting of restricted stock) and the two-class method, described above.

At December 31, 2009 and 2008, 235,989 and 4,973,216 shares of unvested restricted stock and stock options were excluded from the calculation of diluted earnings per share, respectively, as their effect on the calculation would have been anti-dilutive.
 

Note 6—Comprehensive Income or Loss
 
Comprehensive income or loss represents the Company’s net income (loss) plus the results of certain stockholders’ equity changes not reflected in the unaudited condensed consolidated statements of operations. The components of comprehensive income or loss are as follows:
 
   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2009
   
2008
   
2009
   
2008
 
   
(in thousands)
 
Net income (loss)
  $ 704     $ (2,869 )   $ 1,876     $ (6,718 )
Other comprehensive income (loss):
                               
Foreign currency translation adjustments
    470       (10,884 )     (541 )     (18,909 )
Comprehensive income (loss)
  $ 1,174     $ (13,753 )   $ 1,335     $ (25,627 )
                                 


 
Note 7—Operations by Segments and Geographic Areas
 
Segment Information
 
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.
 
The Company’s operating segments are organized principally by the type of product or service offered and by geography; similar operating segments have been aggregated into three reportable segments as follows:
 
Payments and Transactional Documents. The Company’s Payments and Transactional Documents segment is a supplier of software products that provide a range of financial business process management solutions including making and collecting payments, sending and receiving invoices, and generating and storing business documents. This segment also provides a range of standard professional services and equipment and supplies that complement and enhance the Company’s core software products. Revenue associated with this segment is typically recorded upon delivery or, if extended payment terms have been granted to the customer, as payments become contractually due. This segment incorporates the Company’s check printing solutions in the UK, revenue for which is typically recorded on a per transaction basis or ratably over the expected life of the customer relationship, as well as certain solutions that are licensed on a subscription basis, revenue for which is typically recorded ratably over the contractual term.
 
Banking Solutions. The Banking Solutions segment provides solutions that are specifically designed for banking and financial institution customers. These solutions typically involve longer implementation periods and a significant level of professional resources. Due to the customized nature of these products, revenue is generally recognized over the period of project performance, on a percentage of completion basis. Periodically, the Company licenses these solutions on a subscription basis which has the effect of contributing to recurring revenue and the revenue predictability of future periods, but which also delays revenue recognition over a period that is longer than the period of project performance.
 
Outsourced Solutions. The Outsourced Solutions segment provides customers with outsourced and hosted solution offerings that facilitate invoice receipt and presentment and spend management. The Company’s Legal eXchange solution, which provides the opportunity to create more efficient processes for managing invoices generated by outside law firms while offering access to important legal spend factors such as budgeting, expense monitoring and outside counsel
 
 
11

 
performance, is included within this segment. This segment also incorporates the Company’s hosted and outsourced accounts payable automation solutions, including PayMode, which the Company acquired in September 2009. Revenue within this segment is generally recognized on a subscription or transaction basis or proportionately over the estimated life of the customer relationship.
 
Each operating segment has separate sales forces and periodically a sales person in one operating segment will sell products and services that are typically sold within a different operating segment. In such cases, the transaction is generally recorded by the operating segment to which the sales person is assigned. Accordingly, segment results can include the results of transactions that have been allocated to a specific segment based on the contributing sales resources, rather than the nature of the product or service. Conversely, a transaction can be recorded by the operating segment primarily responsible for delivery to the customer, even if the sales person is assigned to a different operating segment.
 
The Company’s chief operating decision maker assesses segment performance based on a variety of factors that can include segment revenue and a segment measure of profit or loss. Each segment’s measure of profit or loss is on a pre-tax basis, and excludes stock compensation expense, acquisition-related expenses, amortization of intangible assets and restructuring related charges. There are no inter-segment sales; accordingly, the measure of segment revenue and profit or loss reflects only revenues from external customers. The costs of certain corporate level expenses, primarily general and administrative expenses, are allocated to the Company’s operating segments at predetermined rates that approximate cost.
 
The Company does not track or assign its assets by operating segment.
 
Segment information for the three and six months ended December 31, 2009 and 2008 according to the segment descriptions above, is as follows:
 
   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2009
   
2008
   
2009
   
2008
 
   
(in thousands)
 
Revenues:
                       
Payments and Transactional Documents
  $ 23,809     $ 22,955     $ 46,576     $ 46,331  
Banking Solutions
    7,595       5,433       14,703       11,106  
Outsourced Solutions
    8,718       5,946       15,399       12,403  
Total revenues
  $ 40,122     $ 34,334     $ 76,678     $ 69,840  
                                 
Segment measure of profit (loss):
                               
Payments and Transactional Documents
  $ 5,457     $ 3,737     $ 10,433     $ 6,406  
Banking Solutions
    641       (1,046 )     1,626       (2,027 )
Outsourced Solutions
    1,249       503       2,453       1,289  
Total measure of segment profit
  $ 7,347     $ 3,194     $ 14,512     $ 5,668  
                                 


 
A reconciliation of the measure of segment profit to GAAP operating income before income taxes is as follows:
 

                         
   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2009
   
2008
   
2009
   
2008
 
   
(in thousands)
 
Segment measure of profit
  $ 7,347     $ 3,194     $ 14,512     $ 5,668  
Less:
                               
Amortization of intangible assets
    (3,361 )     (3,948 )     (6,667 )     (8,384 )
Stock compensation expense
    (2,400 )     (2,203 )     (4,308 )     (4,413 )
Acquisition related expenses
    (127 )     ---       (529 )     (35 )
Add:
                               
         Other (expense) income, net
    (93 )     615       128       763  
Income (loss) before income taxes
  $ 1,366     $ (2,342 )   $ 3,136     $ (6,401 )
                                 

 
 
12

 
The following depreciation expense amounts are included in the segment measure of profit:
 

                         
   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2009
   
2008
   
2009
   
2008
 
   
(in thousands)
 
Depreciation expense:
                       
Payments and Transactional Documents
  $ 415     $ 416     $ 789     $ 871  
Banking Solutions
    171       177       336       352  
Outsourced Solutions
    621       376       1,039       772  
Total depreciation expense
  $ 1,207     $ 969     $ 2,164     $ 1,995  
                                 
 
 
Geographic Information
 
The Company has presented geographic information about its revenues, below. This presentation allocates revenue based on the point of sale not the location of the customer. Accordingly, the Company derives revenues from geographic locations based on the location of the customer that would vary from the geographic areas listed here, particularly in respect of a financial institution customer located in Australia for which the point of sale was the United States.
 

                         
   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2009
   
2008
   
2009
   
2008
 
   
(in thousands)
 
Revenues from unaffiliated customers:
                       
United States
  $ 26,479     $ 20,789     $ 50,248     $ 42,407  
Europe
    13,140       13,196       25,517       26,666  
Australia
    503       349       913       767  
Total revenues from unaffiliated customers
  $ 40,122     34,334     $ 76,678     69,840  
                                 
 
 
Long-lived assets, which are based on geographical location, were as follows:
 
             
   
December 31,
   
June 30,
 
   
2009
 
   
(in thousands)
 
Long-lived assets, net
           
United States
  $ 17,728     $ 12,160  
Europe
    2,631       2,313  
Australia
    116       137  
Total long-lived assets, net
  $ 20,475     $ 14,610  
                 
 
Note 8—Income Taxes

The Company recorded income tax expense of $0.7 million and $0.5 million for the three months ended December 31, 2009 and 2008, respectively.  The income tax expense recorded for the quarter ended December 31, 2009 was due to tax expense associated with the Company’s UK, Australian and US operations.  The US income tax expense was principally due to alternative minimum tax arising from the utilization of net operating losses, state income tax expense, and an increase in deferred tax liabilities for goodwill that is deductible for tax purposes but not amortized for financial reporting purposes.  The income tax expense recorded for the quarter ended December 31, 2008 was due to tax expense associated with the Company’s UK, German, Australian and US operations.  The US income tax expense was principally due an increase in deferred tax liabilities for goodwill that is deductible for tax purposes but not amortized for financial reporting purposes.  
 
 
13


 
The Company recorded income tax expense of $1.3 million and $0.3 million for the six months ended December 31, 2009 and 2008, respectively.  The income tax expense for the six months ended December 31, 2009 was due to tax expense associated with the Company’s UK, Australian and US operations.  The US income tax expense was principally due to alternative minimum tax arising from the utilization of net operating losses, state income tax expense, and an increase in deferred tax liabilities for goodwill that is deductible for tax purposes but not amortized for financial reporting purposes.  The income tax expense for the six months ended December 31, 2008 was net of approximately $0.4 million of non-recurring tax benefits arising from a reduction in the Company’s unrecognized tax benefits upon the expiration of certain statutes of limitations, from the enactment of legislation during fiscal year 2009 that allowed the Company to claim a tax refund for a portion of its unused research and development credit carryforwards in the US, and from a decrease in the Company’s German tax rate as a result of a restructuring of the Company’s German operations.  The Company’s net income tax expense also reflected expense associated with the Company’s German, French, and Australian operations, as well as income tax expense in the US.  

The Company currently anticipates that its unrecognized tax benefits will decrease within the next twelve months by approximately $0.3 million as a result of the expiration of certain statutes of limitations associated with intercompany transactions subject to tax in multiple jurisdictions.

 
Note 9—Goodwill and Other Intangible Assets
 
The following tables set forth the information for intangible assets subject to amortization and for intangible assets not subject to amortization.  Other intangible assets consist of acquired tradenames, backlog and below market lease arrangements.


   
As of December 31, 2009
 
   
Gross Carrying
Amount
   
Accumulated Amortization
   
Net Carrying Value
   
Weighted Average Remaining Life
 
   
(in thousands)
   
(in years)
 
Amortized intangible assets:
                       
Customer related
  $ 59,374     $ (34,470 )   $ 24,904       7.8  
Core technology
    33,040       (23,525 )     9,515       5.5  
Patent
    953       (278 )     675       9.5  
Other intangible assets
    2,331       (409 )     1,922       12.1  
Total
  $ 95,698     $ (58,682 )   $ 37,016          
                                 
Unamortized intangible assets:
                               
Goodwill
                    66,713          
Total intangible assets
                  $ 103,729          
                                 
                                 


   
As of June 30, 2009
 
   
Gross Carrying
Amount
   
Accumulated Amortization
   
Net Carrying Value
   
Weighted Average Remaining Life
 
   
(in thousands)
   
(in years)
 
Amortized intangible assets:
                       
Customer related
  $ 50,194     $ (29,753 )   $ 20,441       3.0  
Core technology
    28,093       (24,633 )     3,460       1.7  
Patent
    953       (243 )     710       10.0  
Other intangible assets
    1,045       (636 )     409       1.8  
Total
  $ 80,285     $ (55,265 )   $ 25,020          
                                 
Unamortized intangible assets:
                               
Goodwill
                    64,569          
Total intangible assets
                  $ 89,589          
                                 
                                 

 
14

 
Estimated amortization expense for fiscal year 2010 and subsequent fiscal years is as follows:
 
       
   
(in thousands)
 
2010
  $ 13,254  
2011
    10,091  
2012
    5,188  
2013
    3,616  
2014
    1,772  
2015 and thereafter
    9,762  
 
Note 10— Restructuring Costs
 
During the fourth quarter of fiscal 2009, the Company reduced its workforce by approximately 40 full time positions and announced the departure of its Chief Operating Officer. In connection with these events, the Company incurred expenses of approximately $3.0 million associated with severance related benefits, including stock compensation expense. As these events were completed in fiscal 2009, the Company did not recognize additional expense during the six months ended December 31, 2009 and does not expect to recognize additional expense in future periods relating to these actions.
 
 
As of December 31, 2009, the Company’s remaining liability for severance related benefits was as follows:
 
       
   
(in thousands)
 
Accrued severance benefits at June 30, 2009
  $ 426  
Payments charged against the accrual
    (370 )
Impact of changes in foreign currency exchange rates
    1  
Accrued severance benefits at December 31, 2009
  $ 57  
         
 
Note 11 – Subsequent Events

On January 27, 2010, the Company filed a universal shelf registration statement with the Securities and Exchange Commission that, once effective, will allow it to offer and sell up to $100,000,000 of common stock, preferred stock, debt securities, warrants, depository shares, stock purchase contracts and stock purchase units.  These securities may be offered and sold by the Company in one or more offerings.

For purposes of assessing whether there were any subsequent events warranting disclosure, the Company evaluated events occurring between December 31, 2009 and February 8, 2010.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Without limiting the foregoing, the words “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” and similar expressions are intended to identify forward-looking statements. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us up to, and including, the date of this report, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 1A. Risk Factors” and elsewhere in this Form 10-Q. You should carefully review those factors and also carefully review the risks outlined in other documents that we file from time to time with the Securities and Exchange Commission.
 
Overview
 
We provide electronic payment, invoice and document management solutions to corporations, financial institutions and banks around the world. Our solutions are used to streamline, automate and manage processes and transactions involving global payments, invoice receipt and approval, collections, cash management, risk mitigation, document management,
 
 
15

 
reporting and document archive. We offer software designed to run on-site at the customer’s location as well as hosted solutions. Historically, our software has been sold predominantly on a perpetual license basis. Today, however, a growing portion of our offerings are being sold on a subscription and transaction basis.
 
Our corporate customers rely on our solutions to automate their payment and accounts payable processes and to streamline and manage the production and retention of electronic documents. We offer Legal eXchange®, a Software as a Service (SaaS) offering that receives, manages and controls legal invoices and the related spend management for insurance companies and other large consumers of outside legal services. Our offerings also include software solutions that banks use to provide web-based payment and reporting capabilities to their corporate customers.
 
Our solutions complement and leverage our customers’ existing information systems, accounting applications and banking relationships. As a result, our solutions can be deployed quickly and efficiently. To help our customers receive the maximum value from our products and meet their own particular needs, we also provide professional services for installation, training, consulting and product enhancement.
 
In September 2009 we acquired PayMode from Bank of America.  PayMode facilitates the electronic exchange of payments and invoices between organizations and suppliers and is a SaaS offering.  As part of the acquisition, we also entered into a multi-year agreement with Bank of America to operate PayMode on its behalf.
 
 
For the first six months of fiscal year 2010, our revenue increased to $76.7 million from $69.8 million in the same period of fiscal year 2009. This revenue increase was primarily attributable to revenue increases in our Banking Solutions segment, our European operations and the revenue contribution from PayMode.  These increases were offset in part by a decrease of $1.3 million due to declining foreign exchange rates primarily associated with the British Pound Sterling, which depreciated against the US Dollar compared to the same period in the prior fiscal year.
 
 
We had net income of $1.9 million in the six months ended December 31, 2009 compared to a net loss of $6.7 million in the same period of fiscal year 2009. The increase in net income was due largely to improved gross margins and a reduction in operating expenses.  The decreases in our cost of revenue and operating expense categories were due largely to cost savings related to our fourth quarter fiscal 2009 headcount reduction and a decrease in foreign exchange rates of approximately $0.6 million associated with the British Pound Sterling.
 
In the first six months of fiscal 2010, we derived approximately 46% of our revenue from customers located outside of North America, principally in the UK and Australia.  We expect future revenue growth to be driven by the revenue contribution from PayMode, increased purchases of our products by new and existing bank and financial institution customers in both North America and international markets and increased sales of our payments and transactional documents products.
 
While we continue to grow our business, the overall economic environment has remained challenging. While we have not experienced any significant decline in our expected volume of customer orders we are observing that, in some cases, closing new business is taking somewhat longer and, in some cases, customer buying decisions are being postponed. Our customers operate in many different industries, a diversification that we believe helps us in this economic climate. Additionally, we believe that our recurring and subscription revenue base helps position us defensively against any short term economic downturn. While we believe that we continue to compete favorably in all of the markets we serve, ongoing or worsening economic stresses could impact our business more significantly in the future.
 
Critical Accounting Policies
 
We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as “critical” because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used.
 
The critical accounting policies we identified in our most recent Annual Report on Form 10-K for the fiscal year ended June 30, 2009 related to stock-based compensation, revenue recognition, the valuation of goodwill and intangible assets and the valuation of acquired deferred revenue. It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed in our Annual Report on Form 10-K, as filed with the SEC on September 11, 2009. There have been no changes to our critical accounting policies during the three months ended December 31, 2009.
 
 
16

 
Recent Accounting Pronouncements

Revenue Recognition

In October 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance on two issues related to revenue recognition.

The first issue, Revenue Arrangements with Multiple Deliverables, applies to multiple-deliverable revenue arrangements and provides for two significant changes to existing multiple-element revenue recognition guidance. The first change relates to the determination of when individual deliverables within an arrangement should be treated as separate units of accounting. Broadly, a deliverable should be treated as a separate unit of accounting when it has value to the customer on a standalone basis and when delivery or performance of any undelivered items is considered to be probable and substantially within the control of the vendor. The second change relates to the manner in which arrangement consideration should be allocated to any separately identified deliverables. The issue requires that the allocation of revenue among deliverables be based on vendor specific objective evidence or third-party evidence of selling price and, to the extent that neither of these levels of evidence exist, that the allocation be based on the vendor’s best estimate of selling price for each deliverable.  Use of the residual method of allocating revenue to arrangement deliverables is prohibited unless the revenue transaction is specifically governed by software revenue recognition literature.  Financial statement disclosure requirements have also been significantly expanded.

The second issue, Certain Revenue Arrangements that Include Software Elements, focuses on redefining which revenue arrangements are within the scope of software revenue recognition literature and which are not.  The issue provides guidance on determining whether tangible products containing non-software and software elements are governed by software revenue recognition literature and significantly narrows the definition of what constitutes a “software” transaction.  In particular, non-software components of products that include software, software products bundled with tangible products where the non-software and software components function together to deliver the product’s essential functionality, and undelivered elements related to non-software components are, as a result of this issue, outside the scope of software revenue recognition rules. The issue also provides guidance on allocating revenue between non software and software elements.

Each of these issues is effective for fiscal years beginning on or after June 15, 2010. The issues can be implemented prospectively to all revenue arrangements entered or materially modified after the date of adoption, or retrospectively to all revenue arrangements for all financial statement periods presented. Early adoption is permitted. Both issues must be adopted in the same period and under the same transition method. We expect to adopt these issues prospectively as of July 1, 2010 and are currently evaluating the impact of the pronouncements on our financial statements.

 
Three Months Ended December 31, 2009 Compared to the Three Months Ended December 31, 2008
 
Revenues by segment
 
Operating segments are components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.
 
Our operating segments are organized principally by the type of product or service offered and by geography.  Similar operating segments have been aggregated into three reportable segments: Payments and Transactional Documents, Banking Solutions and Outsourced Solutions.  The following table represents our revenues by segment:
 
                                     
   
Three Months Ended December 31,
   
Increase (Decrease)
Between Periods
2009 Compared to 2008
 
 
2009
   
2008
 
   
(in thousands)
   
As % of total
Revenues
   
(in thousands)
   
As % of total
Revenues
   
(in thousands)
   
%
 
Payments and Transactional Documents
  $ 23,809       59.4     $ 22,955       66.9     $ 854       3.7  
Banking Solutions
    7,595       18.9       5,433       15.8       2,162       39.8  
Outsourced Solutions
    8,718       21.7       5,946       17.3       2,772       46.6  
    $ 40,122       100.0     $ 34,334       100.0     $ 5,788       16.9  
                                                 

 
 
17


 
Payments and Transactional Documents. The revenue increase for the three months ended December 31, 2009 was primarily attributable to an increase in maintenance revenues from our US and European payments and document automation products and an increase of $0.3 million as a result of an increase in foreign exchange rates associated with the British Pound Sterling and European Euro.  We expect revenue for the Payments and Transactional Documents segment to increase during the remainder of fiscal 2010 as a result of increased sales of our payment and document automation solutions.

Banking Solutions. Revenues from our Banking Solutions segment increased as compared to the same period in the prior fiscal year due to an increase in professional services revenue associated with large ongoing projects. We expect revenues for the Banking Solutions segment to increase during the remainder of the fiscal year as a result of the contribution of revenue from ongoing projects and from additional purchases by new and existing bank and financial institution customers in both North America and international markets.

Outsourced Solutions. Revenues from our Outsourced Solutions segment increased as compared to the same period in the prior fiscal year due primarily to the revenue contribution from PayMode. We expect revenue for the Outsourced Solutions segment to increase during the remainder of the fiscal year as a result of the revenue contribution from PayMode.

Revenues by category
 
                                     
   
Three Months Ended December 31,
   
Increase (Decrease)
Between Periods
2009 Compared to 2008
 
   
2009
   
2008
 
   
(in thousands)
   
As % of total
Revenues
   
(in thousands)
   
As % of total
Revenues
   
(in thousands)
   
%
 
Revenues:
                                   
Software licenses
  $ 3,787       9.4     $ 3,597       10.5     $ 190       5.3  
Subscriptions and transactions
    10,469       26.1       7,744       22.5       2,725       35.2  
Service and maintenance
    23,775       59.3       20,527       59.8       3,248       15.8  
Equipment and supplies
    2,091       5.2       2,466       7.2       (375 )     (15.2 )
Total revenues
  $ 40,122       100.0     $ 34,334       100.0     $ 5,788       16.9  
                                                 
 
Software Licenses. The increase in software license revenues was due to an increase in revenue from certain of our US and European payment products, offset in part by decreases in software license revenue from certain of our US document process automation products.  We expect software license revenues to increase during the remainder of fiscal year 2010, principally as a result of increased software license revenue from our domestic and international Payments and Transactional Documents products and from software license revenues within our Banking Solutions segment.
 
 Subscriptions and Transactions. The increase in subscription and transaction revenues was due principally to the revenue contribution from PayMode.  We expect subscription and transaction revenues to increase during the remainder of the fiscal year as a result of the revenue contribution from PayMode.
 
Service and Maintenance. The increase in service and maintenance revenues was primarily the result of an increase in professional services revenues associated with several large banking projects, increased professional service revenues in Europe, increases in software maintenance revenues in the US and Europe and an increase of $0.2 million as a result of an increase in foreign exchange rates associated with the British Pound Sterling and European Euro.  We expect that service and maintenance revenues will increase during the remainder of the fiscal year as a result of new and existing projects within our Banking Solutions segment and as a result of additional revenues from our domestic and international payments and documents products.
 
Equipment and Supplies. The decrease in equipment and supplies revenues was principally due to a decrease in revenues from our US and European paper supplies and printing equipment products. We expect that equipment and supplies revenues will remain relatively consistent during the remainder of 2010.
 
Cost of revenues by category
 
 
18

 
                                     
   
Three Months Ended December 31,
   
Increase (Decrease)
Between Periods
2009 Compared to 2008
 
   
2009
   
2008
 
   
(in thousands)
   
As % of total
Revenues
   
(in thousands)
   
As % of total
Revenues
   
(in thousands)
   
%
 
Cost of revenues:
                                   
Software licenses
  $ 321       0.8     $ 207       0.6     $ 114       55.1  
Subscriptions and transactions
    5,160       12.9       3,792       11.1       1,368       36.1  
Service and maintenance
    10,405       25.9       9,513       27.7       892       9.4  
Equipment and supplies
    1,590       4.0       1,824       5.3       (234 )     (12.8 )
Total cost of revenues
  $ 17,476       43.6     $ 15,336       44.7     $ 2,140       14.0  
Gross profit
  $ 22,646       56.4     $ 18,998       55.3     $ 3,648       19.2  
 
 
Software Licenses. Software license costs consist of expenses incurred by us to manufacture, package and distribute our software products and related documentation and costs of licensing third party software that is incorporated into or sold with certain of our products. Software license costs increased slightly to 8% of software license revenues in the three months ended December 31, 2009 as compared to 6% for the three months ended December 31, 2008. The increase was related to higher costs of third party software that we license alongside our solutions during the three months ended December 31, 2009.  We expect that software license costs will remain relatively consistent, as a percentage of software license revenues, during the remainder of the fiscal year.
 
Subscriptions and Transactions. Subscriptions and transaction costs include salaries and other related costs for our professional services teams as well as costs related to our hosting infrastructure such as depreciation and facilities related expenses. Subscriptions and transactions costs remained consistent at 49% of subscription and transaction revenues in the three months ended December 31, 2009 and 2008.  The increase in subscription and transaction costs in dollar terms was due principally to in the costs associated with our PayMode product offering. We expect that subscription and transaction costs will increase as a percentage of subscription and transaction revenue during the remainder of the fiscal year due to continued investment in PayMode.
 
Service and Maintenance. Service and maintenance costs include salaries and other related costs for our customer service, maintenance and help desk support staffs, as well as third party contractor expenses used to complement our professional services team. Service and maintenance costs decreased as a percentage of service and maintenance revenues to 44% in the three months ended December 31, 2009 as compared to 46% in the three months ended December 31, 2008. The decrease in service and maintenance costs as a percentage of service and maintenance revenues was due to improved gross margins for professional services in our Banking Solutions segment and due to the impact of cost reduction measures implemented in our prior fiscal year.  We expect that service and maintenance costs will remain relatively consistent, as a percentage of service and maintenance revenues, during the remainder of the fiscal year.
 
Equipment and Supplies. Equipment and supplies costs include the costs associated with equipment and supplies that we resell, as well as freight, shipping and postage costs associated with the delivery of our products. Equipment and supplies costs remained relatively consistent at 76% of equipment and supplies revenues in the three months ended December 31, 2009 as compared to 74% for the three months ended December 31, 2008.  We expect that equipment and supplies costs will remain relatively consistent as a percentage of equipment and supplies revenues for the remainder of the fiscal year.
 
Operating Expenses
 
                                     
   
Three Months Ended December 31,
   
Increase (Decrease)
Between Periods 2009
Compared to 2008
 
   
2009
   
2008
 
   
(in thousands)
   
As % of total
revenues
   
(in thousands)
   
As % of total
revenues
   
(in thousands)
   
%
 
Operating expenses:
                                   
Sales and marketing
  $ 8,825       22.0     $ 8,150       23.7     $ 675       8.3  
Product development and engineering
    4,753       11.8       5,238       15.3       (485 )     (9.3 )
General and administrative
    4,248       10.6       4,619       13.5       (371 )     (8.0 )
Amortization of intangible assets
    3,361       8.4       3,948       11.5       (587 )     (14.9 )
Total operating expenses
  $ 21,187       52.8     $ 21,955       64.0     $ (768 )     (3.5 )
                                                 
 
 
19

 
Sales and Marketing. Sales and marketing expenses consist primarily of salaries and other related costs for sales and marketing personnel, sales commissions, travel, public relations and marketing materials and trade show participation. Sales and marketing expenses increased in the three months ended December 31, 2009 as compared to the three months ended December 31, 2008 as a result of an increase in headcount related costs due to our acquisition of PayMode, an increase of $0.1 million as a result of an increase in foreign exchange rates associated with the British Pound Sterling and European Euro, and an increase in advertising and product promotion costs.  We expect that sales and marketing expenses will increase over the remainder of the fiscal year as we continue to focus on our marketing initiatives to support our new products, including PayMode.

Product Development and Engineering. Product development and engineering expenses consist primarily of personnel costs to support product development which consists of enhancements and revisions to our products based on customer feedback and general marketplace demands, as well as development of our newer accounts payable automation products. The decrease in product development and engineering expenses in the three months ended December 31, 2009 as compared to the three months ended December 31, 2008 was primarily attributable to a decrease in the use of contract employees and an increase in the use of development resources in revenue generating roles during the period, the cost of which is recorded as cost of sales.  These decreases were offset in part by increases related to our PayMode development and enhancement efforts.  We expect that product development and engineering expenses will increase during the remainder of the fiscal year as we devote more resources to the enhancement of the PayMode product.

General and Administrative. General and administrative expenses consist primarily of salaries and other related costs for operations and finance employees and legal and accounting services. General and administrative expenses decreased in the three months ended December 31, 2009 as compared to the three months ended December 31, 2008 due principally to cost reduction initiatives implemented in our prior fiscal year, including a reduction in compensation expense as a result of the departure of our Chief Operating Officer in fiscal 2009.  We expect that general and administrative expenses will increase slightly during the remainder of the fiscal year.
 
         Amortization of Intangible Assets. We amortize our intangible assets in proportion to the estimated rate at which the asset provides economic benefit to us. Accordingly, amortization expense rates are often higher in the earlier periods of an asset’s estimated life. The decrease in amortization expense in the quarter ended December 31, 2009 as compared to the quarter ended December 31, 2008 occurred as expense from intangible assets arising in prior acquisitions decreased as those assets aged, offset in part by an increase in amortization expense from intangible assets arising through our acquisition of PayMode. We expect that total amortization expense for fiscal 2010 will approximate $13.3 million.

Other Income, Net
 
                         
   
Three Months Ended
December 31,
   
Increase (Decrease)
Between Periods
 
   
2009
   
2008
   
2009 Compared
to 2008
 
   
(in thousands)
   
%
 
Interest income
  $ 50     $ 189     $ (139 )     (73.5 )
Interest expense
    (17 )     (3 )     (14 )     (466.7 )
Other (expense) income, net
    (126 )     429       (555 )     (129.4 )
Other (expense) income, net
  $ (93 )   $ 615     $ (708 )     (115.1 )
                                 
 
Other (Expense) Income, Net.  In the three months ended December 31, 2009 as compared to the three months ended December 31, 2008, interest income decreased as a result of declining marketplace yields associated with our cash and short-term investment accounts.  Interest expense remained insignificant during the three months ended December 31, 2009 and 2008.  Other (expense) income, net decreased as a result of realized foreign exchange losses. We expect that the individual components of other income and expense will continue to represent minor components of our overall operations during the remainder of fiscal 2010.

Provision for Income Taxes. We recorded income tax expense of $0.7 million and $0.5 million for the three months ended December 31, 2009 and 2008, respectively.  The income tax expense recorded for the quarter ended December 31, 2009 was due to tax expense associated with our UK, Australian and US operations.  The US income tax expense was principally due to alternative minimum tax arising from the utilization of net operating losses, state income tax expense and an increase in deferred tax liabilities for goodwill that is deductible for tax purposes but not amortized for financial reporting purposes.  The income tax expense recorded for the quarter ended December 31, 2008 was due to tax expense associated with our UK, German and Australian operations and due to income tax in the US.  The US income tax expense was principally
 
 
20

 
due an increase in deferred tax liabilities for goodwill that is deductible for tax purposes but not amortized for financial reporting purposes.  
 
 
 
Six Months Ended December 31, 2009 Compared to the Six Months Ended December 31, 2008
 
Revenues by segment
 
We have aggregated similar operating segments into three reportable segments: Payments and Transactional Documents, Banking Solutions and Outsourced Solutions.  The following table represents our revenues by segment:
 
                                     
   
Six Months Ended December 31,
   
Increase (Decrease)
Between Periods 2009
Compared to 2008
 
   
2009
   
2008
 
   
(in thousands)
   
As % of
total
Revenues
   
(in thousands)
   
As % of
total
Revenues
   
(in thousands)
   
%
 
Payments and Transactional Documents
  $ 46,576       60.7     $ 46,331       66.3     245       0.5  
Banking Solutions
    14,703