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EXCEL - IDEA: XBRL DOCUMENT - BOTTOMLINE TECHNOLOGIES INCFinancial_Report.xls
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - BOTTOMLINE TECHNOLOGIES INCex312.htm
EX-32.1 - SECTION 1350 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - BOTTOMLINE TECHNOLOGIES INCex321.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - BOTTOMLINE TECHNOLOGIES INCex311.htm
EX-10.1 - LETTER AGREEMENT WITH JOSEPH L. MULLEN - BOTTOMLINE TECHNOLOGIES INCex101.htm
EX-32.2 - SECTION 1350 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - BOTTOMLINE TECHNOLOGIES INCex322.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, 2010
 
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 31, 2011 was 33,213,810.

 
 
 
1

 

INDEX
 
Page
No.
PART I. FINANCIAL INFORMATION
 
   
Item 1. Financial Statements
 
   
Unaudited Condensed Consolidated Balance Sheets as of December 31, 2010 and June 30, 2010
 3
   
Unaudited Condensed Consolidated Statements of Operations for the three months ended December 31, 2010 and 2009
 4
   
Unaudited Condensed Consolidated Statements of Operations for the six months ended December 31, 2010 and 2009
        5
   
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2010 and 2009
        6
   
Notes to Unaudited Condensed Consolidated Financial Statements
        7
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
        17
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk
        29
   
Item 4. Controls and Procedures
        29
   
PART II. OTHER INFORMATION
 
   
Item 1. Legal Proceedings
        30
   
Item 1A. Risk Factors
        31
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 
        38
   
Item 6. Exhibits
        38
   
   
SIGNATURE
        39


 
2

 

PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
Bottomline Technologies (de), Inc.
Unaudited Condensed Consolidated Balance Sheets
(in thousands)
 
             
   
December 31,
2010
   
June 30,
2010
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 143,936     $ 122,758  
Marketable securities
    61       51  
Accounts receivable, net of allowance for doubtful accounts of $439 at December 31, 2010 and $481 at June 30, 2010
    36,840       26,019  
Other current assets
    8,139       8,910  
                   Total current assets
    188,976       157,738  
Property, plant and equipment, net
    14,342       14,561  
Goodwill
    69,712       64,294  
Intangible assets, net
    29,592       31,172  
Other assets
    667       1,617  
Total assets
  $ 303,289     $ 269,382  
                 
Liabilities and stockholders’ equity
               
Current liabilities:
               
Accounts payable
  $ 6,549     $ 5,857  
Accrued expenses
    10,062       9,715  
Deferred revenue
    42,807       37,461  
Total current liabilities
    59,418       53,033  
Deferred revenue, non-current
    2,991       2,738  
Deferred income taxes
    2,266       1,432  
Other liabilities
    1,940       1,788  
Total liabilities
    66,615       58,991  
                 
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—33,680 at December 31, 2010, and 32,376 at June 30, 2010; outstanding shares—31,714 at December 31, 2010, and 30,325 at June 30, 2010
    34       32  
Additional paid-in capital
    393,235       375,700  
Accumulated other comprehensive loss
    (6,289 )     (9,358 )
Treasury stock: 1,966 shares at December 31, 2010, and 2,051 shares at June 30, 2010, at cost
    (21,720 )     (22,657 )
Accumulated deficit
    (128,586 )     (133,326 )
Total stockholders’ equity
    236,674       210,391  
Total liabilities and stockholders’ equity
  $ 303,289     $ 269,382  
                 
 
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,
 
   
2010
   
 
2009
 
Revenues:
           
Software licenses
  $ 4,180     $ 3,787  
Subscriptions and transactions
    13,031       10,469  
Service and maintenance
    24,952       23,775  
Equipment and supplies
    2,119       2,091  
Total revenues
    44,282       40,122  
Cost of revenues:
               
Software licenses
    214       321  
Subscriptions and transactions (1) 
    6,748       5,160  
Service and maintenance (1) 
    10,404       10,405  
Equipment and supplies
    1,635       1,590  
Total cost of revenues
    19,001       17,476  
Gross profit
    25,281       22,646  
Operating expenses:
               
Sales and marketing (1) 
    9,257       8,825  
Product development and engineering (1) 
    5,476       4,753  
General and administrative (1) 
    4,545       4,248  
Amortization of intangible assets
    2,905       3,361  
Total operating expenses
    22,183       21,187  
Income from operations
    3,098       1,459  
Other income (expense), net
    32       (93 )
Income before income taxes
    3,130       1,366  
Provision for income taxes
    1,065       662  
Net income
    2,065       704  
Basic net income per share attributable to common stockholders:
  $ 0.07     $ 0.03  
Diluted net income per share attributable to common stockholders:
  $ 0.06     $ 0.03  
Shares used in computing basic net income per share attributable to common stockholders:
    31,330       25,092  
Shares used in computing diluted net income per share attributable to common stockholders:
    33,253       25,933  
 
 

(1)
Stock based compensation is allocated as follows:
 
             
   
Three Months Ended
December 31,
 
   
2010
   
2009
 
Cost of revenues: subscriptions and transactions
  $ 118     $ 61  
Cost of revenues: service and maintenance
    474       444  
Sales and marketing
    994       838  
Product development and engineering
    419       329  
General and administrative
    846       728  
 
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,
 
   
2010
   
2009
 
Revenues:
           
Software licenses
  $ 7,642     $ 6,750  
Subscriptions and transactions
    24,565       18,750  
Service and maintenance
    50,004       46,910  
Equipment and supplies
    4,110       4,268  
Total revenues
    86,321       76,678  
Cost of revenues:
               
Software licenses
    429       540  
Subscriptions and transactions (1) 
    13,121       9,038  
Service and maintenance (1) 
    20,833       20,125  
Equipment and supplies
    3,155       3,211  
Total cost of revenues
    37,538       32,914  
Gross profit
    48,783       43,764  
Operating expenses:
               
Sales and marketing (1) 
    17,811       16,708  
Product development and engineering (1) 
    10,488       8,843  
General and administrative (1) 
    9,280       8,538  
Amortization of intangible assets
    5,787       6,667  
Total operating expenses
    43,366       40,756  
Income from operations
    5,417       3,008  
Other income, net
    315       128  
Income before income taxes
    5,732       3,136  
Provision for income taxes
    992       1,260  
Net income
    4,740       1,876  
Basic and diluted net income per share attributable to common stockholders:
  $ 0.15     $ 0.07  
Shares used in computing basic net income per share attributable to common stockholders:
    31,042       24,747  
Shares used in computing diluted net income per share attributable to common stockholders:
    32,619       25,372  
 
 

(1)
Stock based compensation is allocated as follows:
 
             
   
Six Months Ended
December 31,
 
   
2010
   
2009
 
Cost of revenues: subscriptions and transactions
  $ 224     $ 114  
Cost of revenues: service and maintenance
    883       749  
Sales and marketing
    1,844       1,487  
Product development and engineering
    778       533  
General and administrative
    1,693       1,425  
 

 
See accompanying notes.
 

 
5

 

Bottomline Technologies (de), Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
 
             
   
Six Months Ended
December 31,
 
   
2010
   
2009
 
Operating activities:
           
Net income
  $ 4,740     $ 1,876  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Amortization of intangible assets
    5,787       6,667  
Stock compensation expense
    5,422       4,308  
Depreciation and amortization of property, plant and equipment
    2,518       2,164  
Deferred income tax (benefit) provision
    (715 )     301  
Provision for allowances on accounts receivable
    1       (99 )
Provision for allowances for obsolete inventory
    4       1  
Excess tax benefits associated with stock compensation
    (322 )     (130 )
Loss on disposal of equipment
    24       ----  
Loss (gain) on foreign exchange
    30       (136 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (8,708 )     (1,089 )
Inventory
    (122 )     (23 )
Prepaid expenses and other current assets
    4,552       549  
Other assets
    (1,764 )     (1,091 )
Accounts payable
    (32 )     298  
Accrued expenses
    (618 )     (1,752 )
Deferred revenue
    3,107       2,189  
Other liabilities
    16       598  
Net cash provided by operating activities
    13,920       14,631  
Investing activities:
               
Acquisition of businesses and assets, net of cash acquired
    (5,962 )     (17,000 )
Purchases of held-to-maturity securities
    (54 )     (50 )
Proceeds from sales of held-to-maturity securities
    54       50  
Purchases of property and equipment, net
    (1,913 )     (2,528 )
Net cash used in investing activities
    (7,875 )     (19,528 )
Financing activities:
               
Proceeds from sale of common stock, net
    4,864       ----  
Proceeds from exercise of stock options and employee stock purchase plan
    7,898       9,560  
Repurchase of common stock 
    ----       (23 )
Excess tax benefits associated with stock compensation
    322       130  
Capital lease payments
    (56 )     (56 )
Payment of bank financing fees
    (3 )     (13 )
Net cash provided by financing activities
    13,025       9,598  
Effect of exchange rate changes on cash and cash equivalents
    2,108       (10 )
Increase in cash and cash equivalents
    21,178       4,691  
Cash and cash equivalents at beginning of period
    122,758       50,255  
Cash and cash equivalents at end of period
  $ 143,936     $ 54,946  
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, 2010
 
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, 2010 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending June 30, 2011. For further information, refer to the financial statements and footnotes included in the Annual Report on Form 10-K for Bottomline Technologies (de), Inc. as filed with the Securities and Exchange Commission (SEC) on September 10, 2010.
 
Note 2—Recent Accounting Pronouncements
 
Revenue Recognition

 
In October 2009, the Financial Accounting Standards Board issued authoritative guidance on two issues related to revenue recognition: Revenue Arrangements with Multiple Deliverables and Certain Revenue Arrangements that Include Software Elements.
 
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 and requires that the allocation of revenue among deliverables be based on vendor specific objective evidence (VSOE) 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 specifically prohibited unless the transaction is governed by software revenue recognition literature. Financial statement disclosure requirements have also been expanded.  We adopted this guidance on a prospective basis on July 1, 2010, which required us to apply this guidance to all revenue arrangements entered into, or materially modified, on or after that date. The adoption of this accounting standard did not have a material impact on our condensed consolidated financial statements for the quarter and six months ended December 31, 2010 and we do not believe it will have a material impact in the remainder of fiscal 2011.

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 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. We adopted the guidance on a prospective basis beginning July 1, 2010. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements for the quarter and six months ended December 31, 2010 and we do not believe it will have a material impact in the remainder of fiscal 2011.

 
 
7

 
Note 3—Revenue Recognition
 
Software Arrangements
 
We recognize revenue on our software license arrangements when four basic criteria are met: persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed and determinable and collectability is deemed probable. We consider a fully executed, non-cancelable agreement or a customer purchase order to be persuasive evidence of an arrangement. Delivery is deemed to have occurred upon transfer of the product title to the customer or the completion of services rendered. We consider the arrangement fee to be fixed and determinable if it is not subject to adjustment and if the customer has not been granted extended payment terms. Excluding our long term contract arrangements for which revenue is recorded on a percentage of completion basis, extended payment terms are deemed to be present when any portion of the software license fee is due in excess of 90 days after the date of product delivery. In arrangements that contain extended payment terms, software revenue is recorded as customer payments become contractually due, assuming all other revenue recognition criteria have been met. We consider the arrangement fee to be probable of collection if our internal credit analysis indicates that the customer will be able to pay contractual amounts as they become due.
 
Our software arrangements may contain multiple revenue elements, such as software licenses, professional services, hardware and post-contract customer support. For multiple element software arrangements which qualify for separate element treatment, revenue is recognized for each element when each of the four basic criteria is met; excluding post-contract customer support, this is typically upon delivery or completion of professional services. Revenue for post-contract customer support agreements is recognized ratably over the term of the agreement, which is generally one year. Revenue is allocated to each element, excluding the software license, based on vendor specific objective evidence of fair value (“VSOE”). VSOE is limited to the price charged when the element is sold separately or, for an element not yet being sold separately, the price established by management having the relevant authority. We do not have VSOE for our software licenses since they are seldom sold separately. Accordingly, revenue is allocated to the software license according to the residual value method. Under the residual value method, revenue equal to VSOE of each undelivered element is deferred and recognized upon delivery of that element. Any “residual” arrangement fee is allocated to the software license. This has the effect of allocating any sales discount inherent in the arrangement to the software license fee.
 
Certain of our software license arrangements require significant customization and modification and involve extended implementation periods and, as such, do not qualify for separate element treatment. These arrangements are typically accounted for using percentage of completion contract accounting. In such arrangements, since we are able to make reasonably reliable estimates of progress toward completion, revenue is recognized over the life of the project as work is performed. Revenue earned in each reporting period is determined based on the percentage of labor hours incurred on the project as a percentage of total estimated labor hours. Customer payment milestones for both software and professional services fees on these long-term arrangements typically occur on a periodic basis over the period of project completion.
 
Non-Software Arrangements
 
For arrangements governed by general revenue recognition literature, such as with our hosted or SaaS offerings or equipment and supplies only sales, we recognize revenue when four basic criteria are met; these criteria are similar to those governing software transactions: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the arrangement fee is fixed or determinable and collectability is reasonably assured. For our SaaS offerings, revenue is generally recognized on a subscription or transaction basis over the period of performance.
 
For arrangements consisting of multiple elements, revenue is allocated to each element based on a selling price hierarchy. The selling price of each element is based on VSOE if available, third party evidence (“TPE”) if VSOE is not available or estimated selling price (“ESP”) if neither VSOE or TPE are available. TPE is determined based on selling prices charged by unrelated third party vendors for similar deliverables when sold separately. The residual method of allocation in a non-software arrangement is not permitted and, instead, arrangement consideration is allocated at the inception of the arrangement to all deliverables using the relative selling price method.  The relative selling price method allocates any discount in the arrangement proportionately to each deliverable based on the relative proportion of each deliverable’s selling price to the total arrangement fee.  We are typically unable to establish TPE as we are unable to obtain sufficient information on vendor selling prices to substantiate TPE. The objective of ESP is to estimate the price at which we would transact if the deliverable were sold separately rather than as part of a multiple element arrangement. Our determination of ESP considers several factors including actual selling prices for similar transactions, gross margin expectations and ongoing pricing strategy. We plan to formally analyze our ESP determinations on at least an annual basis.
 
 
8

 
Whether a deliverable represents a separate unit of accounting, thus resulting in discrete revenue recognition as the revenue recognition criteria for that deliverable are met, is dependent on whether the deliverable has value to the customer on a standalone basis. A deliverable is deemed to have standalone value if it is sold separately by us or any other vendor or if the deliverable could be resold by the customer. Additionally, in an arrangement that includes a general right of return related to delivered items, delivery or performance of any undelivered items must be considered probable and substantially within our control.
 
Up-front fees paid by the customer, even if non-refundable, that do not have stand alone value are deferred and recognized as revenue over the period of performance. We periodically charge up-front fees related to installation and integration services in connection with certain of our hosted or SaaS offerings. These fees are deferred and recognized as revenue ratably over the estimated customer relationship period, which is generally five years, and the revenue recognition period associated with these fees normally commences upon customer implementation.
 
Unless capitalized as part of an intangible asset in connection with a business or asset acquisition, contract origination costs and incremental direct costs are expensed as incurred.
 
Arrangements Including Both Software and Non-Software Deliverables
 
Periodically, we will enter into an arrangement that contains both software and non-software deliverables. In such a transaction, the aggregate arrangement consideration is allocated to the software deliverables and non-software deliverables as a group, using the relative selling prices of each of the deliverables based on the aforementioned selling price hierarchy. After this allocation is completed, the arrangement consideration allocated to the software deliverables is further allocated using the residual value method described above.
 
Regardless of the allocation methodology or the nature of the deliverables, we limit the amount of revenue that can be recognized for delivered items to the amount that is not contingent on future deliverables or subject to customer specified return or refund rights.
 
 
Customer Returns
 
The sales value of customer returns are estimated and accrued for based upon return authorizations issued and past history. Actual returns, in the aggregate, have been consistent with management’s expectations and have historically not been significant.
 
Note 4—Fair Value
 
Fair Value of Assets and Liabilities

 
We measure 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 us to develop our 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.
 

 
9

 

At December 31, 2010, our assets measured at fair value on a recurring basis were as follows:

   
December 31, 2010
   
(in thousands)
 
Fair Value
Measurements
Using Input Types
   
Total
 
Level 1
   
Level 2
   
Level 3
 
Money market funds (cash and cash equivalents)
  $ 99,616     $     $     $ 99,616  

 


   
June 30, 2010
   
(in thousands)
 
Fair Value
Measurements
Using Input Types
   
Total
 
Level 1
   
Level 2
   
Level 3
 
Money market funds (cash and cash equivalents)
  $ 58,257     $     $     $ 58,257  

 
Fair Value of Financial Instruments
 
We have certain financial instruments which consist of cash and cash equivalents, marketable securities, accounts receivable and accounts payable.  Our marketable securities are classified as held to maturity and recorded at amortized cost which, at December 31, 2010 and June 30, 2010, approximated fair value.  These investments all mature within one year.  The fair values of our other financial instruments approximate their carrying values, due to the short-term nature of those instruments.
 
Note 5—Product and Business Acquisitions
 
SMA Financial, Ltd.

On October 26, 2010, we acquired SMA Financial, Ltd., (“SMA”) for a cash payment of approximately £5.0 million (approximately $7.9 million, based on foreign exchange rates at the time of the acquisition). SMA is a London-based provider of Software as a Service (SaaS) connectivity to the Society for Worldwide Interbank Financial Telecommunication, which is referred to as SWIFT, for the automation of payments and financial messaging.  As a result of the acquisition, we expect to offer next-generation treasury and cash management solutions to a range of bank and corporate customers.

At December 31, 2010, we were still finalizing our estimates of fair value for property, equipment and intangible assets acquired during the period ended December 31, 2010.  In the preliminary allocation of the purchase price set forth below, based on foreign exchange rates on October 26, 2010, we have recognized approximately $4.1 million of goodwill.   The goodwill is arising principally due to the assembled workforce of SMA and as a result of the recognition of certain deferred tax liabilities in purchase accounting.  The goodwill is deductible over a fifteen year period for US income tax purposes, but is not deductible for UK income tax purposes. Acquisition costs of approximately $0.5 million were expensed during the six months ended December 31, 2010, principally as a component of general and administrative expenses.  SMA’s operating results have been included in our operating results from the date of the acquisition forward, as a component of the Outsourced Solutions segment, and all of the SMA goodwill was allocated to this segment. Operating results of SMA are not material to our consolidated financial results and therefore pro forma results of operations have not been presented.

For the six months ended December 31, 2010, revenues attributable to SMA represented less than 2% of our consolidated revenues. For the six months ended December 31, 2010, the operations of SMA did not have a material impact on our consolidated net income.

 
10

 

The preliminary allocation of the purchase price as of December 31, 2010 is as follows:

       
   
(in thousands)
 
Current assets
  $ 4,433  
Property and equipment
    251  
Customer related intangible assets
    4,061  
Goodwill
    4,090  
Current liabilities
    (3,563 )
Other liabilities
    (1,354 )
Total purchase price
  $ 7,918  
 
 
 
The valuation of the customer related intangible assets was estimated by performing projections of discounted cash flow, whereby revenues and costs associated with the assets 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 our estimates of contract renewal, technology attrition and revenue growth projections.  The value associated with the assets of $4.1 million is being amortized over an estimated weighted average life of ten years.
 
PayMode

 
On September 14, 2009, we completed the purchase of substantially all of the assets and related operations of PayMode from Bank of America.  PayMode facilitates the electronic exchange of payments and invoices between organizations and their suppliers and is operated as a SaaS offering.  As a result of the acquisition we 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. 
 
To achieve a comprehensive solution for our customers, the core features and functionality of PayMode and Bottomline Business eXchange, our electronic invoicing solution, were combined and launched as a re-branded offering:  Paymode-X.  This solution offers an electronic order-to-pay network for businesses, and the Paymode-X network currently encompasses more than 125,000 companies.
 

PayMode Pro-forma Information
 
The following unaudited pro-forma financial information presents the combined results of our operations and PayMode as if that acquisition had occurred on July 1, 2009, 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, we are not 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 we and PayMode been a single entity during this period.
 
 

             
   
Pro Forma Three Months Ended December 31,
   
Pro Forma Six Months Ended December 31,
 
   
2009
   
2009
 
             
Revenues
  $ 40,122     $ 77,881  
Net income
  $ 704     $ 194  
Net income per basic and diluted share attributable to common stockholders
  $ 0.03     $ 0.01  
 
 
11

 
Global Commission Payments
 
On February 24, 2010, we acquired certain customer contracts associated with Bank of America’s Global Commission Payments business. The initial consideration paid by us was $1.0 million in cash; this cost has been classified as a component of our customer related intangible assets and is being amortized over an estimated life of seven years.  For acquired contracts that we successfully migrate to our Paymode-X solution, additional consideration is due to Bank of America based on a trailing revenue multiple of the underlying customer. We anticipate that additional consideration of up to $5 million may be contingently payable to Bank of America, based on the outcome of customer migration to Paymode-X, which is currently targeted for completion in the second half of calendar year 2011. Any additional consideration will be recorded by us as an increase to the cost of the acquired contracts in the period in which payment to Bank of America becomes probable and the amount of payment is reasonably estimable.
 
Note 6—Net Income Per Share
 
The following table sets forth the computation of basic and diluted net income per share:

   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2010
   
2009
   
2010
   
2009
 
   
in thousands)
 
Numerator:
                       
Net income
  $ 2,065     $ 704     $ 4,740     $ 1,876  
Less:  Net income allocable to participating securities
    ----       (25 )     ----       (72 )
Net income allocable to common stockholders
  $ 2,065     $ 679     $ 4,740     $ 1,804  
                                 
Denominator:
                               
Shares used in computing basic net income per share attributable to common stockholders
    31,330       25,092       31,042       24,747  
                                 
Effect of dilutive securities
    1,923       841       1,577       625  
Shares used in computing diluted net income per share attributable to common stockholders
    33,253       25,933       32,619       25,372  
                                 
Basic net income per share attributable to common stockholders
  $ 0.07     $ 0.03     $ 0.15     $ 0.07  
                                 
Diluted net income per share attributable to common stockholders
  $ 0.06     $ 0.03     $ 0.15     $ 0.07  
                                 

The calculation of basic net income per share excludes any dilutive effects of stock options, unvested restricted stock and stock warrants.  During the prior fiscal year, certain of our unvested restricted stock awards were considered to be participating securities as they entitled the holder to receive non-forfeitable rights to cash dividends at the same rate as common stock.  Accordingly, for the three and six months ended December 31, 2009, basic earnings per share was computed pursuant to the two-class method which calculates earnings for common stock and participating securities based on their proportionate participation rights in undistributed earnings.

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) or, for periods in which there are participating securities, the two-class method described above.

For the three months ended December 31, 2010, all shares of unvested restricted stock and stock options were included in the calculation of diluted earnings per share.  For the six months ended December 31, 2010, 22,500 shares of unvested stock options were excluded from the calculation of diluted earnings per share as their effect on the calculation would have been anti-dilutive.

For the three and six months ended December 31, 2009, there were approximately 235,989 and 1,043,405, respectively, of unvested stock options excluded from the calculation of diluted earnings per share as their effect on the calculation would have been anti-dilutive.
 
 
12

 

Note 7—Comprehensive Income or Loss
 
Comprehensive income or loss represents our net income 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,
 
   
2010
   
2009
   
2010
   
2009
 
   
(in thousands)
 
Net income
  $ 2,065     $ 704       4,740     $ 1,876  
Other comprehensive income (loss):
                               
Foreign currency translation adjustments
    (327 )     470       3,069       (541 )
Comprehensive income
  $ 1,738     $ 1,174     $ 7,809     $ 1,335  
 
Note 8—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.
 
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 as follows:
 
Payments and Transactional Documents. Our 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 our 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 our 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, we license 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. Our 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 performance, is included within this segment. This segment also incorporates our hosted and outsourced payments and accounts payable automation solutions, including Paymode-X and SWIFT Access Service, a new product offering which we added through our SMA acquisition in October 2010. 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.
 
 
13

 
Our 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, impairment losses on equity investments 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 our operating segments at predetermined rates that approximate cost.
 
We do not track or assign our assets by operating segment.
 
Segment information for the three and six months ended December 31, 2010 and 2009 according to the segment descriptions above, is as follows:
 
   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2010
   
2009
   
2010
   
2009
 
   
(in thousands)
 
Revenues:
                       
Payments and Transactional Documents
  $ 24,010     $ 23,809     $ 47,511     $ 46,576  
Banking Solutions
    10,616       7,595       21,541       14,703  
Outsourced Solutions
    9,656       8,718       17,269       15,399  
Total revenues
  $ 44,282     $ 40,122     $ 86,321     $ 76,678  
                                 
Segment measure of profit:
                               
Payments and Transactional Documents
  $ 6,078     $ 5,457     $ 11,164     $ 10,433  
Banking Solutions
    1,645       641       4,463       1,626  
Outsourced Solutions
    1,500       1,249       1,808       2,453  
Total measure of segment profit
  $ 9,223     $ 7,347     $ 17,435     $ 14,512  


 
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,
 
   
2010
   
2009
   
2010
   
2009
 
   
(in thousands)
 
Segment measure of profit
  $ 9,223     $ 7,347     $ 17,435     $ 14,512  
Less:
                               
Amortization of intangible assets
    (2,905 )     (3,361 )     (5,787 )     (6,667 )
Stock compensation expense
    (2,851 )     (2,400 )     (5,422 )     (4,308 )
Acquisition related expenses
    (309 )     (127 )     (749 )     (529 )
Restructuring expenses
    (60 )     ----       (60 )     ----  
Add:
                               
         Other (expense) income, net
    32       (93 )     315       128  
Income before income taxes
  $ 3,130     $ 1,366     $ 5,732     $ 3,136  


 
14

 

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

   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2010
   
2009
   
2010
   
2009
 
   
(in thousands)
 
Depreciation expense:
                       
Payments and Transactional Documents
  $ 443     $ 415     $ 862     $ 789  
Banking Solutions
    168       171       336       336  
Outsourced Solutions
    659       621       1,320       1,039  
Total depreciation expense
  $ 1,270     $ 1,207     $ 2,518     $ 2,164  
 
 
Geographic Information
 
We have presented geographic information about our revenues, below. This presentation allocates revenue based on the point of sale not the location of the customer. Accordingly, we derive 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,
 
   
2010
   
2009
   
2010
   
2009
 
   
(in thousands)
 
Revenues from unaffiliated customers:
                       
United States
  $ 30,048     $ 26,479     $ 58,985     $ 50,248  
Europe
    13,699       13,140       26,307       25,517  
Australia
    535       503       1,029       913  
Total revenues from unaffiliated customers
  $ 44,282     $ 40,122     $ 86,321     $ 76,678  
 
 
Long-lived assets, which are based on geographical location, were as follows:
 
   
December 31,
   
June 30,
 
   
2010
 
   
(in thousands)
 
Long-lived assets, net
           
United States
  $ 11,574     $ 13,593  
Europe
    3,286       2,464  
Australia
    149       121  
Total long-lived assets, net
  $ 15,009     $ 16,178  
 
Note 9—Income Taxes

We recorded income tax expense of $1.1 million and $0.7 million for the three months ended December 31, 2010 and 2009, respectively.  The income tax expense recorded for the quarter ended December 31, 2010 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, 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.    

 
15

 
We recorded income tax expense of $1.0 million and $1.3 million for the six months ended December 31, 2010 and 2009, respectively.  The income tax expense for the six months ended December 31, 2010 was due to tax expense associated with our UK, Australian and US operations, offset in part by the impact of a discrete tax benefit of $0.9 million recognized in the quarter ended September 30, 2010 arising from the release of a portion of our valuation allowance that had previously been recorded against our UK deferred tax assets.  The ability to release a portion of the UK valuation allowance was attributable to continued profitability in the UK operations, which we expect will continue, including the attainment of three years of cumulative profitability on a pre-tax basis.  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, 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.  

We currently anticipate that our 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 10—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, 2010
 
   
Gross Carrying
Amount
   
Accumulated Amortization
   
Net Carrying Value
   
Weighted Average Remaining Life
 
   
(in thousands)
   
(in years)
 
Amortized intangible assets:
                       
Customer related
  $ 63,720     $ (42,872 )   $ 20,848       9.3  
Core technology
    32,658       (26,099 )     6,559       5.3  
Patent
    953       (349 )     604       8.5  
Other intangible assets
    2,338       (757 )     1,581       12.6  
Total
  $ 99,669     $ (70,077 )   $ 29,592          
                                 
Unamortized intangible assets:
                               
Goodwill
                    69,712          
Total intangible assets
                  $ 99,304          
                                 
                                 


   
As of June 30, 2010
 
   
Gross Carrying
Amount
   
Accumulated Amortization
   
Net Carrying Value
   
Weighted Average Remaining Life
 
   
(in thousands)
   
(in years)
 
Amortized intangible assets:
                       
Customer related
  $ 58,747     $ (37,981 )   $ 20,766       8.5  
Core technology
    32,224       (24,210 )     8,014       5.3  
Patent
    953       (314 )     639       9.0  
Other intangible assets
    2,338       (585 )     1,753       12.3  
Total
  $ 94,262     $ (63,090 )   $ 31,172          
                                 
Unamortized intangible assets:
                               
Goodwill
                    64,294          
Total intangible assets
                  $ 95,466          
                                 
                                 

 
 
16

 
Estimated amortization expense for fiscal year 2011 and subsequent fiscal years is as follows:
 
   
(in thousands)
 
2011
  $ 10,457  
2012
    6,073  
2013
    4,411  
2014
    2,442  
2015
    2,244  
2016 and thereafter
    9,752  
 
Note 11—Contingencies
 
In April 2010, we received notification from an outside software consortium alleging that we may have installed unlicensed versions of certain third-party software on our computers.  The notification requested that we undertake an internal review to assess the merits of such claims and present our findings directly to the outside software consortium.  While the outcome of this matter is still uncertain, we do not believe it will have a material impact on our financial position or operating results.
 
In August 2010, we received notification from HM Revenue and Customs (HMRC) advising that Tranmit Plc. (Tranmit), a wholly owned subsidiary of ours, had an unsettled tax liability of approximately £0.1 million (approximately $0.2 million based on December 31, 2010 foreign exchange rates) inclusive of interest. This tax relates to transactions occurring before our acquisition of Tranmit, which occurred in January 2006.  We and the former stockholders of Tranmit are currently parties to a tax indemnification arrangement providing for the recovery by us, from the selling stockholders, of certain tax liabilities arising for periods prior to our ownership of Tranmit. In November 2010, we settled the tax liability with HMRC and recovered substantially all of the amounts that were payable to HMRC from the former Tranmit stockholders.  This matter is now fully resolved.
 
Note 12—Stock Offering
 
In June, 2010, we completed an underwritten public offering of 4.2 million shares of our common stock. In July, 2010, the underwriters exercised an over-allotment option to purchase 354,000 additional shares of our common stock, resulting in an additional $4.9 million of net proceeds to us. The additional shares issued and proceeds received by us were recorded by us in July 2010.
 
The offering was made pursuant to a registration statement previously filed and declared effective by the Securities and Exchange Commission on March 25, 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.
 
In the management discussion that follows we have highlighted those changes and operating factors that were the primary factors affecting period to period fluctuations.  The remainder of the change in period to period fluctuations from that which is specifically disclosed is arising from various individually insignificant items.
 
 
17

 
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, reporting and document archive. We offer software designed to run on-site at the customer’s location as well as hosted or Software as a Service (SaaS) solutions. Historically, our software has been sold predominantly on a perpetual license basis. Today however, a growing portion of our offerings are being sold as SaaS and paid for 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 SaaS offering that receives, manages and controls legal invoices and the related spend management for insurance companies and other large corporate consumers of outside legal services. We also offer Paymode-X, a SaaS offering that facilitates the exchange of electronic payments and invoices between organizations and suppliers and which is offered to customers of Bank of America and Bottomline. 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 October 2010, we acquired SMA Financial, Ltd. (SMA), which is a London-based provider of SaaS connectivity to SWIFT for the automation of payments and financial messaging.  As a result of the acquisition, we launched a new product offering, SWIFT Access Service, and in the future we expect to offer next generation treasury and cash management solutions to a range of bank and corporate customers.
 
 
For the first six months of fiscal year 2011, our revenue increased to $86.3 million from $76.7 million in the same period of fiscal year 2010. This revenue increase was attributable to revenue increases of $6.8 million in our Banking Solutions segment, $1.9 million in our Outsourced Solutions segment and $0.9 million in our Payments and Transactional Documents segment.  The Banking Solutions increased revenue related to large new and ongoing banking projects.  The increased contribution of revenue from our SMA acquisition and our Paymode-X solution accounted for substantially all of the revenue increase in the Outsourced Solutions segment.  The increased revenue in our Payments and Transactional Documents segment primarily related to increased revenue from US payment and document automation products.  These increases include an unfavorable effect of foreign exchange rates of $1.1 million 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 $4.7 million in the six months ended December 31, 2010 compared to net income of $1.9 million in the six months ended December 31, 2009. The increase in net income was due largely to improved gross margins of $5.0 million and a discrete income tax benefit in the six months ended December 31, 2010 of $0.9 million. These effects were partially offset by an increase in operating expenses of $2.6 million.  The increased gross margin was driven primarily by our increased revenue across all segments.  The increases in our operating expense categories were primarily due to increased employee related costs, partially associated with a full six months of Paymode-X operations and operating costs arising from SMA, offset by a decrease of $0.9 million in intangible asset amortization.
 
In the first six months of fiscal 2011, we derived approximately 37% of revenue from customers located outside of North America, principally in the UK and Australia.  We expect future revenue growth to be driven by increased purchases of our products, including SWIFT Access Service, Paymode-X and WebSeries, by new and existing bank and financial institution customers in both North America and international markets and from increased sales of our payments and transactional documents products.
 
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, 2010 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 10, 2010. There have been no changes to our critical accounting policies during the six months ended December 31, 2010.  As discussed below in “Recent Accounting Policies” and in Note 3 to our condensed consolidated financial statements, we adopted the guidance of two issues related to revenue recognition: Revenue Arrangements with Multiple Deliverables and Certain Revenue Arrangements that Include Software Elements.  The adoption of these accounting standards did not have a material impact on our condensed consolidated financial statements for the quarter ended December 31, 2010 and we do not believe they will have a material impact in the remainder of fiscal 2011.
 
 
18

 
Recent Accounting Pronouncements

Revenue Recognition
 
In October 2009, the FASB issued authoritative guidance on two issues related to revenue recognition: Revenue Arrangements with Multiple Deliverables and Certain Revenue Arrangements that Include Software Elements.
 
 
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 and requires that the allocation of revenue among deliverables be based on vendor specific objective evidence (VSOE) 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 specifically prohibited unless the transaction is governed by software revenue recognition literature. Financial statement disclosure requirements have also been significantly expanded.  We adopted this guidance on a prospective basis on July 1, 2010, which required us to apply this guidance to all revenue arrangements entered into or materially modified on or after that date.  The adoption of this accounting standard did not have a material impact on our condensed consolidated financial statements for the quarter and six months ended December 31, 2010 and we do not believe it will have a material impact in the remainder of fiscal 2011.
 
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. We adopted the guidance on a prospective basis beginning July 1, 2010. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements for the quarter and six months ended December 31, 2010 and we do not believe it will have a material impact in the remainder of fiscal 2011.
 
Three Months Ended December 31, 2010 Compared to the Three Months Ended December 31, 2009
 
    Segment Information
 
    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 tables represent our segment revenues and our segment measure of profit:
 
19

 
 
   
Three Months Ended
December 31,
       
   
2010
   
2009
   
Increase
Between Periods 2010
Compared to 2009
 
Segment revenue:
 
(in thousands)
   
(in thousands)
   
%
 
Payments and Transactional Documents
  $ 24,010     $ 23,809     $ 201       0.8  
Banking Solutions
    10,616       7,595       3,021       39.8  
Outsourced Solutions
    9,656       8,718       938       10.8  
    $ 44,282     $ 40,122     $ 4,160       10.4  
                                 
Segment measure of profit:
                               
Payments and Transactional Documents
  $ 6,078     $ 5,457     $ 621       11.4  
Banking Solutions
    1,645       641       1,004       156.6  
Outsourced Solutions
    1,500       1,249       251       20.1  
Total measure of segment profit
  $ 9,223     $ 7,347     $ 1,876       25.5  


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

   
Three Months Ended
December 31,
 
   
2010
   
2009
 
   
(in thousands)
 
Segment measure of profit
  $ 9,223     $ 7,347  
Less:
               
Amortization of intangible assets
    (2,905 )     (3,361 )
Stock compensation expense
    (2,851 )     (2,400 )
Acquisition related expenses
    (309 )     (127 )
Restructuring expenses
    (60 )     ----  
Add:
               
         Other (expense) income, net
    32       (93 )
Income before income taxes
  $ 3,130     $ 1,366  
                 
 

 
 Payments and Transactional Documents. The revenue increase for the three months ended December 31, 2010 was primarily attributable to an increase of $0.3 million in subscriptions and transactions revenue, offset by decreased service and maintenance revenue of $0.1 million.  The increased revenue includes an unfavorable effect of foreign exchange rates of $0.3 million associated with the British Pound Sterling.  The segment profit increase of $0.6 million for the three months ended December 31, 2010 was primarily attributable to an improvement in service and maintenance gross margins.  We expect revenue and profit for the Payments and Transactional Documents segment to increase during the remainder of fiscal 2011 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 increases in subscriptions and transactions revenues of $1.8 million related to an arrangement for which revenue commenced in the prior fiscal year and professional services revenue of $1.1 million associated with large ongoing projects. Segment profit increased $1.0 million for the three months ended December 31, 2010 compared to the same period in the prior fiscal year.  The profit increase was due to higher subscriptions and transactions gross margins of $1.0 million and higher professional services gross margins of $0.7 million associated with large ongoing projects, offset in part by increased product development costs of $0.9 million.  We expect revenue and profit 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 from existing bank and financial institution customers.

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 contributions from both SMA and Paymode-X.  Segment profit increased $0.3 million as compared to the same period in the prior fiscal year due primarily to improved software license gross margins.  We expect revenue and profit for the Outsourced Solutions segment to increase during the remainder of the fiscal year as a result of the revenue contribution from our SMA acquisition and Legal eXchange solutions.

 
20

 
Revenues by category
 
   
Three Months Ended December 31,
   
Increase
Between Periods
2010 Compared to 2009
 
   
2010
   
2009
 
   
(in thousands)
   
As % of total
Revenues
   
(in thousands)
   
As % of total
Revenues
   
(in thousands)
   
%
 
Revenues:
                                   
Software licenses
  $ 4,180       9.5     $ 3,787       9.4     $ 393       10.4  
Subscriptions and transactions
    13,031       29.4       10,469       26.1       2,562       24.5  
Service and maintenance
    24,952       56.3       23,775       59.3       1,177       5.0  
Equipment and supplies
    2,119       4.8       2,091       5.2       28       1.3  
Total revenues
  $ 44,282       100.0     $ 40,122       100.0     $ 4,160       10.4  
 
Software Licenses. The increase in software license revenues was due to an increase in revenue of approximately $0.3 million from both US and European products and increases of approximately $0.2 million in software license revenue from our Banking Solutions segment.  We expect software license revenues to increase during the remainder of fiscal year 2011, principally as a result of increased software license revenue from our domestic and international payments and transactional documents products.
 
 Subscriptions and Transactions. The increase in subscription and transaction revenues of $2.6 million was due principally to the revenue contribution from our Banking segment of $1.8 million, the revenue contribution from Paymode-X and the revenue contribution from SMA. We expect subscription and transaction revenues to increase slightly during the remainder of the fiscal year as compared to the first six months of fiscal 2011.
 
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 ongoing banking projects. 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 equipment and supplies revenues remained relatively unchanged in the three months ended December 31, 2010 compared to the same period in the prior fiscal year. We expect that equipment and supplies revenues will remain relatively consistent during the remainder of 2011.
 
Cost of revenues by category
 
   
Three Months Ended December 31,
   
Increase (Decrease)
Between Periods
2010 Compared to 2009
 
   
2010
   
2009
 
   
(in thousands)
   
As % of total
Revenues
   
(in thousands)
   
As % of total
Revenues
   
(in thousands)
   
%
 
Cost of revenues:
                                   
Software licenses
  $ 214       0.5     $ 321       0.8     $ (107 )     (33.3 )
Subscriptions and transactions
    6,748       15.2       5,160       12.9       1,588       30.8  
Service and maintenance
    10,404       23.5       10,405       25.9       (1 )     ----  
Equipment and supplies
    1,635       3.7       1,590       4.0       45       2.8  
Total cost of revenues
  $ 19,001       42.9     $ 17,476       43.6     $ 1,525       8.7  
Gross profit
  $ 25,281       57.1     $ 22,646       56.4     $ 2,635       11.6  
 
 
  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 decreased to 5% of software license revenues in the three months ended December 31, 2010 as compared to 8% for the three months ended December 31, 2009.  The decrease in software license costs of $0.1 million was primarily due to reduced third party costs in our Payments and Transactional Documents and Banking Solutions segments.  We expect that software license costs will remain relatively consistent, as a percentage of software license revenues, during the remainder of the fiscal year.
 
 
21

 
   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 increased to 52% of subscription and transaction revenues in the three months ended December 31, 2010 as compared to 49% in the same period of 2009.  The increase in subscription and transaction costs of approximately $1.6 million was principally due to the costs associated with the operations of SMA and increased costs related to large ongoing banking projects. We expect that subscription and transaction costs will remain relatively consistent as a percentage of subscription and transaction revenue during the remainder of the fiscal year.
 
   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 slightly to 42% of service and maintenance revenues in the three months ended December 31, 2010 as compared to 44% in the three months ended December 31, 2009. 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 increased to 77% of equipment and supplies revenues in the three months ended December 31, 2010 as compared to 76% for the three months ended December 31, 2009.  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 2010
Compared to 2009
 
   
2010
   
2009
 
   
(in thousands)
   
As % of total
revenues
   
(in thousands)
   
As % of total
revenues
   
(in thousands)
   
%
 
Operating expenses:
                                   
Sales and marketing
  $ 9,257       20.9     $ 8,825       22.0     $ 432       4.9  
Product development and engineering
    5,476       12.4       4,753       11.8       723       15.2  
General and administrative
    4,545       10.3       4,248       10.6       297       7.0  
Amortization of intangible assets
    2,905       6.5       3,361       8.4       (456 )     (13.6 )
Total operating expenses
  $ 22,183       50.1     $ 21,187       52.8     $ 996       4.7  
                                                 

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, 2010 as compared to the three months ended December 31, 2009 as a result of an increase in employee related costs of $0.3 million primarily due to the impact of Paymode-X and headcount additions as a result of our acquisition of SMA.  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.

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. The increase in product development and engineering expenses in the three months ended December 31, 2010 as compared to the three months ended December 31, 2009 was primarily attributable to an increase in employee related costs of $0.3 million driven by increased development and enhancement initiatives related to our Banking Solutions segment and due to an increase in costs associated with the use of contract resources of $0.4 million.  We expect that product development and engineering expenses will increase during the remainder of the fiscal year related to continued investment in our Banking Solutions segment and in Paymode-X.

 
22

 
 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 increased in the three months ended December 31, 2010 as compared to the three months ended December 31, 2009 primarily due to increases in employee related costs of $0.2 million and acquisition related expenses of $0.1 million. We expect that general and administrative expenses will remain consistent 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, 2010 as compared to the quarter ended December 31, 2009 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 associated with our more recent acquisitions, including SMA. We expect that total amortization expense for fiscal 2011 will approximate $10.5 million.

Other Income (Expense), Net
 
   
Three Months Ended
December 31,
   
Increase 
Between Periods
 
   
2010
   
2009
   
2010 Compared
to 2009
 
   
(in thousands)
   
%
 
Interest income
  $ 114     $ 50     $ 64       128.0  
Interest expense
    (12 )     (17 )     5       29.4  
Other expense, net
    (70 )     (126 )     56       44.4  
Other income (expense), net
  $ 32     $ (93 )   $ 125       134.4  
 
     Other Income (Expense), Net.  In the three months ended December 31, 2010 as compared to the three months ended December 31, 2009, interest income increased as a result of increased cash balances.  Interest expense remained insignificant during both the three months ended December 31, 2010 and 2009.  Other expense, net decreased as a result of a reduction in 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 2011.

 Provision for Income Taxes. We recorded income tax expense of $1.1 million and $0.7 million for the three months ended December 31, 2010 and 2009, respectively.  The income tax expense recorded for the quarter ended December 31, 2010 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, 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.     
 
 
Six Months Ended December 31, 2010 Compared to the Six Months Ended December 31, 2009
 
    Segment Information
 
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.
   
 
23

 
    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 tables represent our segment revenues and our segment measure of profit:
 
   
Six Months Ended
December 31,
       
   
2010
   
2009
   
Increase (Decrease)
Between Periods 2010
Compared to 2009
 
Segment revenue:
 
(in thousands)
   
(in thousands)
   
%
 
Payments and Transactional Documents
  $ 47,511     $ 46,576     $ 935       2.0  
Banking Solutions
    21,541       14,703       6,838       46.5  
Outsourced Solutions
    17,269       15,399       1,870       12.1  
    $ 86,321     $ 76,678     $ 9,643       12.6  
                                 
Segment measure of profit:
                               
Payments and Transactional Documents
  $ 11,164     $ 10,433     $ 731       7.0  
Banking Solutions
    4,463       1,626       2,837       174.5  
Outsourced Solutions
    1,808       2,453       (645 )     (26.3 )
Total measure of segment profit
  $ 17,435     $ 14,512     $ 2,923       20.1  

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

   
Six Months Ended
December 31,
 
   
2010
   
2009
 
   
(in thousands)
 
Segment measure of profit
  $ 17,435     $ 14,512  
Less:
               
Amortization of intangible assets
    (5,787 )     (6,667 )
Stock compensation expense
    (5,422 )     (4,308 )
Acquisition related expenses
    (749 )     (529 )
Restructuring expenses
    (60 )     ----  
Add:
               
         Other income, net
    315       128  
Income before income taxes
  $ 5,732     $ 3,136  

Payments and Transactional Documents. The revenue increase of $0.9 million for the six months ended December 31, 2010 was primarily attributable to increased subscriptions and transactions revenue of $0.5 million and increased software license revenue of $0.3 million from certain of our US payment and document automation products.  The increased revenue includes an unfavorable effect of foreign exchange rates of $0.9 million.  The segment profit increase of $0.7 million for the six months ended December 31, 2010 was primarily attributable to the aforementioned revenue increases.

Banking Solutions. Revenues from our Banking Solutions segment increased $6.8 million as compared to the same period in the prior fiscal year due to an increase in subscriptions and transactions revenue and professional services revenue associated with several large ongoing banking projects.  The profit increase of $2.8 million was primarily due to improved gross margins of $4.2 million reulting from the increased revenue, which was offset in part by increased operating expenses associated with large ongoing projects.

Outsourced Solutions. Revenues from our Outsourced Solutions segment increased $1.9 million as compared to the same period in the prior fiscal year due primarily to the revenue contribution from our PayMode-X solution, partially offset by a decrease in revenue from our Legal eXchange offering.  The increased revenue includes an unfavorable effect of foreign exchange rates of $0.1 million associated with the British Pound Sterling.  The segment profit decrease of $0.6 million for the six months ended December 31, 2010 compared to the same period in the prior year was primarily due to the aforementioned decrease in Legal eXchange revenue and increased costs related to the operations of SMA, partially offset by profit increases from Paymode-X.
 
24

 
Revenues by category
 
   
Six Months Ended December 31,
   
Increase (Decrease)
Between Periods 2010
Compared to 2009
 
   
2010
   
2009
 
   
(in thousands)
   
As % of
total
Revenues
   
(in thousands)
   
As % of
total
Revenues
   
(in thousands)
   
%
 
Revenues:
                                   
Software licenses
  $ 7,642       8.9     $ 6,750       8.8     $ 892       13.2  
Subscriptions and transactions
    24,565       28.4       18,750       24.4       5,815       31.0  
Service and maintenance
    50,004       57.9       46,910       61.2       3,094       6.6  
Equipment and supplies
    4,110       4.8       4,268       5.6       (158 )     (3.7 )
Total revenues
  $ 86,321       100.0     $ 76,678       100.0     $ 9,643       12.6  
 
 Software Licenses. The increase in software license revenues was due to an increase in revenue of approximately $0.5 million from certain of our US document automation products and an increase in software license revenues of $0.5 million within our Banking Solutions segment.  The improved revenue includes a decrease in foreign currency exchange rates associated with the British Pound Sterling of approximately $0.1 million.
 
 Subscriptions and Transactions. The increase in subscription and transaction revenues was due principally to the revenue contribution from our Banking Solutions segment of $3.6 million and the revenue contribution from our Outsourced Solutions segment of $1.8 million, which includes increased revenue from our Paymode-X solution, partially offset by a decrease in revenue from our Legal eXchange solution.  The improved revenue includes a decrease of $0.3 million as a result of declining foreign exchange rates associated with the British Pound Sterling.
 
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 and increased professional service and software maintenance revenues in Europe. These increases were offset in part by lower document process automation services and software maintenance revenue in the US.  The revenue includes a decrease of approximately $0.5 million as a result of declining foreign exchange rates associated with the British Pound Sterling.
 
Equipment and Supplies. The decrease in equipment and supplies revenues was principally due to a decrease in revenues from our European paper supplies and printing equipment as well as a decrease of approximately $0.1 million as a result of decreasing foreign exchange rates associated with the British Pound Sterling.
 
 
Cost of revenues by category
 
   
Six Months Ended December 31,
   
Increase (Decrease)
Between Periods 2010
Compared to 2009
 
   
2010
   
2009
 
   
(in thousands)
   
As % of
total
Revenues
   
(in thousands)
   
As % of
total
Revenues
   
(in thousands)
   
%
 
Cost of revenues: