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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended September 30, 2008 | ||
or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission File Number:000-51461
Unica Corporation
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) | 04-3174345 (I.R.S. Employer Identification No.) |
170 Tracer Lane
Waltham, Massachusetts02451-1379
(Address of principal executive offices)
(781) 839-8000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Waltham, Massachusetts02451-1379
(Address of principal executive offices)
(781) 839-8000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
| Common stock, $0.01 par value per share | Nasdaq Global Market |
Securities registered pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. o
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” inRule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of March 31, 2008 was approximately $55,258,000 based on the last reported sale price of the common stock on The Nasdaq Global Market on March 31, 2008.
The number of shares of the registrant’s common stock outstanding as of December 8, 2008 was 20,890,000.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the registrant’s definitive Proxy Statement for the registrant’s 2009 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the registrant’s fiscal year ended September 30, 2008, are incorporated by reference into Part III of this Annual Report onForm 10-K. With the exceptions of the portions of the Proxy Statement expressly incorporated by reference herein, such document shall not be deemed filed with this Annual Report onForm 10-K.
UNICA CORPORATION
ANNUAL REPORT ON
FORM 10-K
FOR FISCAL YEAR ENDED SEPTEMBER 30, 2008
ANNUAL REPORT ON
FORM 10-K
FOR FISCAL YEAR ENDED SEPTEMBER 30, 2008
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This Annual Report onForm 10-K contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements by forward-looking words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “may,” or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition, or state other “forward-looking” information. We believe that it is important to communicate our future expectation to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including those factors described in “Risk Factors” in Item 1A of this Annual Report onForm 10-K. Readers should not place undue reliance on our forward-looking statements, and we assume no obligation and do not intend to update any forward-looking statements.
References to “Unica,” “the Company,” “registrant,” “we,” “us,” “our,” and similar pronouns refer to Unica Corporation and its consolidated subsidiaries.
PART I
| Item 1. | Business |
Overview
Unica Corporation was incorporated in Massachusetts in December 1992 and reincorporated in Delaware in June 2003. We are a leading provider of software and services used to automate marketing processes. Our comprehensive set of integrated software modules is offered under the “Affinium®” and “MarketingCentral” names. Focused exclusively on the needs of marketers, Unica’s software streamlines the marketing process for relationship, online, and brand marketing — from analysis and planning, to budgeting, production management, execution and measurement. Offering one of the most comprehensive Enterprise Marketing Management (EMM) suites on the market, Unica’s software delivers a marketing “system of record” — a dedicated solution through which marketers capture, record and easily manage marketing activity, information and assets, rapidly design online and offline campaigns, analyze web usage data, and report on performance. Our solutions are designed to benefit our customers by increasing their revenue and profitability, improving their visibility to marketing activity, and strengthening their marketing investment accountability.
Our software products can be licensed on a perpetual or subscription basis, and can be deployed either at the customer’s location (“on premise deployment model”) or managed as a remotely hosted solution by our Marketing Services Providers (MSPs) or, for certain products, by Unica (using “on-demand” versions of our software). Our software uses an open, scalable and flexible product architecture with built-in data access functionality, which facilitates rapid implementation and deployment in any deployment model.
Our worldwide, installed base consists of over 800 customers in a wide range of industries, including financial services, insurance, retail, telecommunications, and travel and hospitality. Our customers include four of the top five global telecommunications providers, all top ten retail banks in the U.S., five of the top ten travel and leisure companies in the U.S., six of the top ten global life sciences companies, four of the top five global automotive manufacturers, twelve of the top twenty U.S. retailers, and five of the top ten global insurance companies, as well as numerous large and medium-sized companies across other industries. We offer our software primarily through our direct sales force, as well as through alliances with MSPs, resellers, distributors and systems integrators. We also provide a full range of services to our customers, including implementation, training, consulting, maintenance and technical support, best practices, and customer success programs. In addition to reselling and deploying our products, MSPs and systems integrators also offer a range of marketing program design, support, and execution services on an on-demand or outsourced basis.
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Available Information
Our website address is www.unica.com. We make available free of charge through our website our Annual Reports onForm 10-K, Quarterly Reports onForm 10-Q and Current Reports onForm 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission (SEC). Our reports filed with the SEC are also available at the SEC’s website at www.sec.gov. Our Code of Business Conduct and Ethics, and any amendments to our Code of Business Conduct and Ethics, are also available on our website. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report onForm 10-K.
Industry Background
According to industry analyst Gartner, Inc., total global marketing spend will top $1.0 trillion in 2008. Despite the significant investments in media advertising, promotions, direct marketing activities, Internet advertising and other marketing services, most businesses have not fully automated their marketing functions or developed capabilities to measure and continually improve results. Other business functions, such as sales, manufacturing, logistics and finance, have implemented comprehensive software applications to automate workflow, business processes, information management and measurement. Marketing organizations, however, typically continue to rely on a combination of manual processes, internally developed software programs, and desktop office productivity software such as graphics packages, word processing and spreadsheets to conduct marketing activities limiting their ability to effectively manage, track and measure results or improve productivity.
Changing Market Dynamics
Powerful trends are reshaping businesses, driving the need for more robust software applications that can meet the changing needs of marketing organizations:
Increase in marketing complexity. The proliferation of media — particularly the rapid growth in Internet usage, the number of radio, cable and satellite television channels, text messaging, user-generated content, blogs and online gaming — has changed the concept of “mass media” and is requiring marketers to understand, use and measure a broader and more complex marketing mix to reach consumers. The buying process itself has also become cross-channel, as consumers increasingly research decisions on the Internet but then purchase in-store and vice-versa. Forrester Research, Inc. estimates that almost $400 billion of store sales — or 16% of total retail sales — are directly influenced by the Internet as consumers research products online and purchase them offline. This figure is expected to grow at a compound annual growth rate of 17% over the next five years, resulting in more than $1 trillion of store sales by 2012. In response to this growth, Forrester’s recent “US Interactive Marketing Forecast 2007 To 2012” projects that marketers will increase their spending in interactive channels (e.g. email, search, online video etc) by a compound growth rate of 27% from 2007 to 2009. We believe marketers must use technology to understand buyers’ online and offline behavior and productively market to them across channels.
At the same time, demographic changes are leading businesses to develop separate products and services to target distinct groups of consumers, rather than simply developing a single product or service to be marketed broadly to a large, but not necessarily homogeneous audience. Businesses now must implement more frequent and diversified marketing programs, often targeted to the individual consumer, with the ability for offers to be varied based on real-time data from the Internet, call center and other interactive channels.
Growth in consumer power. The balance of power in the marketplace has been shifting from businesses to consumers. Consumers today exercise unprecedented control over the marketing and buying process through the use of new technologies, such as Internet ad blockers, digital video recorders, email filters, RSS (Really Simple Syndication) feeds and consumer-generated online content and reviews. With today’s technology, consumers can quickly research pricing, read peer and expert reviews and take
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advantage of unlimited choices in product options, as well as determine how, when, and what marketing they receive. Moreover, recent privacy regulations, such as national and local “do not call” registries and anti-spam legislation, permit consumers to opt out of specific marketing channels and restrict businesses from using personal information for specified marketing purposes. This power-shift requires marketers to be more adept at understanding individual consumer preferences and needs, and puts increasing pressure on marketers to adopt technology to automatically gather and analyze this data, and deliver marketing communications to meet customer expectations.
Proliferation of consumer data. Businesses have access to increasingly large quantities of consumer data that can be used to enhance the effectiveness of marketing operations. Information about consumer preferences, attributes and buying patterns is more readily available as a result of:
| • | the automation of sales force and call center operations using customer relationship management (CRM), applications and back-office operations using enterprise resource planning (ERP) systems; | |
| • | the increased use of the Internet and other media channels that enhance the two-way flow of information between businesses and consumers; and | |
| • | the improved availability of consumer data aggregated by credit agencies and other vendors. |
Marketing organizations are now able to capture these growing volumes of consumer data because of significant technological advances, including improvements in computing power, network bandwidth and storage. Organizations that use this information to better understand and serve customers derive significant competitive advantage.
Marketing accountability. Business management trends such as Six Sigma and regulations such as the Sarbanes-Oxley Act of 2002 have increased focus on process, productivity and accountability across all facets of a business. Marketing departments, often wielding large discretionary budgets, have come under increasing pressure to track spending, processes and approvals, as well as to justify investments.
To respond to these fundamental trends, businesses must reorient their practices around customer attributes, preferences and behaviors. Marketing organizations must transform their organizations to better capture customer information, deliver more precise and relevant communications, and measure and justify the effectiveness of their marketing activities in generating revenue. Marketers cannot effectively meet these demands using manual processes, internally developed software programs and desktop productivity software. We believe they cannot continue to succeed without leveraging all of the consumer data at their disposal and integrating the customer experience across channels.
Enterprise Marketing Management
Enterprise Marketing Management (EMM) solutions help businesses manage the complexities and processes of marketing and achieve customer-relevancy, all while driving revenue growth, cost efficiencies, and accountability. With EMM solutions, marketers can manage theend-to-end process of marketing, from analysis to planning, creative production management, execution and measurement. EMM solutions contain unique capabilities to help marketers manage this process for all aspects of marketing including brand, direct and online marketing.
In response to changing market dynamics and the availability of comprehensive marketing software suites, such as ours, marketing executives are increasingly acknowledging a need for EMM. According to Forrester Research, a significant, and growing, majority of marketers — 83% — agree that they need a more comprehensive and integrated application suite in order to increase their effectiveness.
Based on this growing need for EMM software, a sizable market opportunity has developed for providers that can offer a comprehensive EMM solution. Forrester forecasted in 2007 that the worldwide market for enterprise marketing platforms, including software license and maintenance revenues, will grow from just more than $1.7 billion in 2007 to just under $5.5 billion in 2013.
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Our Enterprise Marketing Management Solutions
We believe our EMM suite, Affinium, is the most comprehensive solution available on the market today. With capabilities that are both broad and deep, Affinium meets the needs of marketers in mid-sized to large enterprises in nearly any industry, frombusiness-to-consumer tobusiness-to-business markets. Our Affinium suite provides capabilities to improve all facets of marketing including brand-oriented initiatives designed to increase market awareness and providing customers and prospects with the best offer in real-time as they shop on the web or through a call center agent. Affinium automates execution and workflow, and captures key data and information, across five core marketing processes, providing a closed-loop marketing cycle and delivering increased marketing effectiveness and measurability.
Analysis. Affinium offers predictive, customer and web analytics, as well as integrated capabilities for contact optimization. With these capabilities, marketers can analyze large volumes of consumer and business data to better understand customer behavior, preferences and attributes; predict future customer behaviors and then target marketing programs more precisely. Analytics answer key questions such as, “Who are my most valuable customers and how can I attract more?,” “Which content on my website is most effective at generating leads?,” “What is the best offer to show this customer while they are on my website?,” and “Which direct mail incentive is most effective?” Affinium provides this critical information for understanding customer buying behavior and preferences across all channels (web sites, stores, etc.) so that marketers can plan and execute marketing initiatives that generate higher response rates and engender customer loyalty. With consumers demanding increasing personalization in order to hear marketing messages, strong analytics are critical to marketing success. Our offerings also deliver extensive historical and predictive analysis capabilities to evaluate marketing results, and improve marketing strategies and tactics.
Planning. With the planning capability of Affinium, marketing organizations articulate their marketing plans and budgets in a shared repository that is accessible to the entire organization and used to drive all marketing activity. With Affinium, marketing teams can collaboratively plan strategies, budget projects, develop best practice templates, assign resources, and create automated and centralized calendars. This leads to tighter alignment between tactical projects, such as specific campaigns, and strategic objectives. Non-aligned and duplicate projects are immediately visible and can be rejected or adjusted to ensure marketing dollars are optimally invested. The web-based planning enables easy roll up of project plans against budgets and strategic objectives, providing visibility to executive management, and making it easier for marketing groups to stay within budget constraints.
Design and Production Management. Affinium helps manage the steps, workflow, resources and assets associated with approved plans and projects. Collaborative tools such as project-tracking templates, automated notifications and alerts on upcoming action items or project status, and automated approval routing and onlinemark-up of creative materials enable marketers to manage the marketing process with their teams, agency partners, legal departments, management, and others. Digital asset repositories keep track of asset status and ensure the use of the latest approved versions of materials, minimizing re-work and documenting process compliance. Vendor management creates a history of activity that allows diverse marketing teams to quickly find vendors for new projects.
Execution. Affinium is used to automate individual interactions with customers and prospects as well as manage Internet and mass communications. Using Affinium’s event-detection, cross-channel campaign management and lead management capabilities, marketers put customer insight into action with outbound, inbound (websites, call centers, ATMs, etc.) and event-based marketing. Based on analytics and rules established by the marketer, Affinium automates the process for determining what and how to market to each customer or prospective customer and delivers those communications across channels including email, direct mail, call centers, websites and other channels. Without this kind of technology it is impossible to deliver truly personalized communications to 10’s or 100’s of thousands and certainly not to millions of individual customers.
Closed-loop Measurement. Affinium automates processes for tracking responses and results of marketing initiatives, as well as analyzing and reporting those results. Because of its open architecture, Affinium is able to access customer responses and other results data from across an organization’s business systems and allow
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marketers to easily establish rules for linking results to the marketing initiatives that created them. Affinium provides built-in reporting, dashboards, and automated report distribution capabilities to foster visibility, accountability and improved decision-making about marketing investments. With its unique integration of web analytics, Affinium gives marketers the ability to look at results across channels, in the aggregate or at an individual customer level.
Our Strategy
Unica’s mission is to “Power the Success of Every Marketing Organization.” Our objective is to be the leading global provider of EMM technology. To achieve this goal, we are pursuing the following strategies:
Maintain product leadership in the marketing domain. We intend to build upon our product and technology leadership by continuing to invest in research and development to expand our EMM offerings and increase the functionality of our current offerings. In spite of the growing awareness of and need for complete and integrated EMM solutions, the purchasing of marketing solutions remains fragmented within many large corporations, with the online marketing group acting independently from the direct marketing or marketing communications teams. Unica expects to maintain market leadership through our solutions designed to meet the needs of specific marketing challenges and teams, such as online marketing, while attempting to lead the market to the converged EMM solution that we believe is currently emerging. Thus, we intend to continue to deepen capabilities within our offerings, such as real-time marketing, while continuing to expand the breadth of our capabilities to meet the needs of more organizations.
Lead in the emerging interactive marketing market. As noted above, old marketing channels have faded, new channels have arisen, and all channels are becoming more personal and addressable. Meanwhile, customers have gained immense power and they are leveraging it to the fullest.
Marketing must become fully interactive, capable of engaging each customer and prospect in a cross-channel dialog that builds upon his or her past and current behavior. To achieve interactive marketing, companies must move away from traditional outbound “push” marketing campaigns and move to event-triggered, real-time, inbound, multistage, and multi-channel tactics.
Unica has developed a single solution to meet these interactive marketing goals: Unica Interactive Marketing. This solution reflects our experience supporting the marketing function in more than 800 enterprises on six continents. While many companies offer software that supports fragments of interactive marketing (e.g., in a single channel only), we believe we have the solution and experience required to truly make interactive marketing a reality.
Offer flexible deployment options. To meet the needs of the widest number of potential customers, we will continue to offer our solutions for on-premise and on-demand deployments, both through our partners and directly from Unica. We believe this strategy lets us address the entire market for EMM, from the largest enterprises to the smallest, and provides a competitive advantage by enabling our customers to continue to leverage our solutions even as their needs change.
Expand customer relationships. Our commitment to customer success and high annual renewal rates affords us an opportunity to continually deepen and expand our existing customer relationships. Expansion typically occurs in three ways: licensing additional capacity as our customers grow their marketing teams and as they expand automation throughout their organizations; the sale of new modules such as web analytics, lead management or real-time recommendation capabilities; and penetration into subsidiaries and business divisions within large enterprises. In addition, we believe our close relationships with our customers provide us with valuable insights into the challenges that are creating demand for additional EMM solutions and enable us to deliver products that better meet marketers’ needs.
Penetrate new markets and market segments. The market for EMM solutions is in its early stages. According to Gartner, Inc.’s “Hype Cycle for CRM Marketing Applications, 2008,” dated June 30, 2008, only one to five percent of the target market has currently adopted EMM. We intend to continue to penetrate verticals in which we are already strong but for which there remains room for growth, reach
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into new industries and vertical markets and expand geographically through investments in direct sales and partners.
Leverage strategic alliances. We have developed strategic relationships with MSPs and systems integrators around the world in order to increase distribution of our products, supplement and extend our EMM offerings, and enhance market awareness of our company and offerings. We will continue to leverage our sales and service resources by expanding our relationships with our existing MSPs and systems integrators. We will selectively seek alliance opportunities with additional MSPs, systems integrators, and distributors particularly in countries outside the United States, to complement or expand our business by offering configuration and integration support, data management, and strategic marketing services. In addition, we will expand and introduce new alliance programs with other complementary service and solution providers, such as third-party providers of Internet marketing services, as part of our Internet Marketing and Marketing Resource Management Alliance programs.
Selectively pursue strategic acquisitions. To complement and accelerate our internal growth, we intend to pursue acquisitions of businesses, technologies and products that will complement our existing operations. For example, the acquisition of Marketic by Unica France in May 2003 has provided us with additional customers and a base of operations in Europe. Our acquisitions of MarketSoft Software Corporation and Sane Solutions in 2006 enabled us to introduce new capabilities for event-based marketing, lead management and web analytics, enhancing capabilities for our customers to track and analyze cross-channel customer behavior and deliver more targeted and precise communications to their consumers through nearly any channel, including sales and partner channels. Finally, our acquisition of MarketingCentral in July 2007 has provided us with a leading on-demand marketing resource management solution.
Products
Our software offerings provide marketing organizations with a comprehensive set of integrated modules that enable marketers to manage theend-to-end process of marketing, from analysis to planning, production management, execution and measurement. Through this functionality, our Affinium offerings can help businesses increase their revenues and improve the efficiency and measurability of their marketing operations.
Our software offerings consist of eight top-level modules: Campaign, Plan, Detect, Leads, NetInsight, Model, MarketingCentral and Insight. The modular design of our offerings provides our customers with flexibility to deploy all of our offerings at once or to implement our software products individually or incrementally. By deploying multiple modules, a business can, for example, coordinate and measure all of its direct marketing operations, act upon analytically generated insights, and prepare consolidated reports that facilitate the evaluation and dissemination of marketing program results. Moreover, we have designed our modules to be integrated with each other. In addition, through our open and flexible product architecture, we enable data integration with existing third- party enterprise applications as well as migration from previous EMM implementations. As a result, our software allows marketing objects, such as customer segment definitions, digital assets, offers, customer treatment strategies and other marketing content, to be created once and then shared throughout a business, thereby increasing productivity, re-use, and consistency across multiple channels, and creating the marketing system of record. The consistent user interface across all of the Affinium modules reduces training costs and speeds user adoption.
Affinium Campaignallows marketing organizations to easily create, test and execute customer interaction strategies across outbound and inbound touch points using a common graphical user interface. Marketers can quickly create powerful marketing campaign logic using graphical flowcharts. Reusable campaign templates can be adapted to deliver personalized acquisition, retention, cross-selling and other treatment strategies through outbound channels such as direct mail, email, telemarketing and the web. Marketers can use Affinium Campaign to test customer interaction strategies by iteratively changing customer selection criteria, promotional offer materials or personalized digital marketing appearances, and then evaluate the effectiveness of each strategy before executing a program. We also offer several optional modules to extend Affinium Campaign’s capabilities, to include electronic messaging of personalized email and mobile text messages, real-
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time marketing analysis of recent interactions and historical patterns, optimization analysis and a centralized repository of marketing campaigns.
Affinium Planprovides marketing operations and resource management capabilities that help marketers define, coordinate, monitor, control and measure marketing program activities. Affinium Plan provides visibility into all marketing initiatives, thereby enabling businesses to improve their consistent use of best practices and execution, decision-making, management and overall productivity for those initiatives. We also offer three optional modules within Affinium Plan that provide the ability to centrally store marketing plans, track and analyze results of marketing plans, create, review, approve and store digital files and manage marketing budgets and expenses.
Affinium Detectuses patented event-detection technology to efficiently monitor high volumes of transactional data to identify significant changes in behavior over time that signal a need to interact with a customer for sales or service opportunities. Affinium Detect is able to identify changes specific to each customer such as unusually high deposits in a bank account, significant decreases in purchases at a retailer, or changes in calling patterns that might indicate customer attrition for a mobile phone operator. Customers can develop their own rules or use the over 150 pre-packaged events and alerts offered with the software. Once detected, other modules within the Affinium Suite, such as Affinium Campaign or Affinium Leads can act on the events and marketing opportunities identified by Affinium Detect.
Affinium Leadsenables marketers to better manage the qualification, enrichment, distribution and maturation of leads between marketing activities and multiple sales channels such as telesales, channel partners, and field sales for higher closure rates and greater revenue. Affinium Leads helps automate the analysis, prioritization and distribution of leads based on easily defined business rules that can incorporate sophisticated analytics, regional overlays, product group hierarchies and channel partners. These leads can be managed within Affinium’s own interface or routed to existing contact management software or sales force automation systems. In addition, the application provides the capability to report on lead status and results so that managers can take action to improve closure rates, and marketers can gain a more comprehensive view of which programs drive the most valuable leads. In addition, we offer optional modules of Affinium Leads that provide the ability to manage and track lead referrals across lines of business and a contact management capability.
Affinium NetInsightcollects, analyzes and reports on website activity. It offers an open relational database backend with a fully extensible data schema,easy-to-configure custom dashboards and reports, and is available both in on-premise and on-demand deployments. Using Affinium NetInsight, marketers can analyze whether their websites and Internet marketing are meeting the needs of their customers and driving the behaviors desired. For example, marketers can uncover ways to increase purchase or lead conversion, encourage customer self-service, or improve performance of paid search-engine marketing. With Unica’s open architecture, web data is integrated with offline purchase and customer activity to increase the ability to measure cross-channel effectiveness, such as the influence of the web on in-store purchases.
Affinium Insightprovides powerful analytics for marketing performance management and cross-channel customer analysis through an easy-to-use, visually intuitive interface designed specifically for marketers. It allows marketers to select and focus on the data most relevant to them with flexible, visual exploration, unlimited drilling and seamless integration to Affinium Campaign to analyze, understand and fully leverage the cross-channel buying experience and the performance of their marketing efforts.
Affinium Modelenables marketing organizations to automate the creation of accurate predictive models to determine customer response propensities, recognize customers at risk of attrition, identify significant customer behaviors, analyze customer attributes and preferences, discover cross-selling opportunities, and forecast customer value. Accurate models can be developed and deployed quickly to target likely responders to a particular marketing offer. The results of Affinium Model, such as model scoring, can be integrated into ongoing marketing operations using Affinium Campaign and Affinium Campaign Optimize.
MarketingCentral/AgencyCentralis an on-demand marketing resource management (MRM) solution, providing capabilities that help marketers define, coordinate, monitor, control and measure marketing program
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activities. Unlike a traditional installed software solution, MarketingCentral’s on-demand architecture means it is entirely accessible from any web browser with internet access and does not requires the customer to provide any computer hardware or do any software installation on their own equipment. Further, MarketingCentral has more straight-forward configuration options than a more complex MRM solution, making it easy and fast for customers to set the software up and begin using it.
Services
We provide a full range of services to our customers through four principal services groups:
Professional Services. Our professional services group provides implementation, training and consulting services to our customers, MSPs, systems integrators and other alliance partners. Implementation services include the installation of our software, identification and sourcing of legacy data, configuration of rules necessary to generate marketing campaigns, distribute leads and manage marketing processes, creation of reports, and other general services for our software. We offer customers, MSPs and systems integrators a full range of training and education services, including classroom, onsite and web-based training. We also offer a variety of consulting services to existing customers (such as process design and best practice services) to help them use their licensed Affinium software more broadly and efficiently.
Maintenance and Technical Support. We provide maintenance on a centralized basis from our headquarters in Waltham, Massachusetts. We provide technical support on a centralized basis from our headquarters in the United States and on a regional basis from centers in the United Kingdom, France and India. We currently offer two levels of maintenance, standard and premium, both of which generally are sold for a term of one year. With both of these maintenance levels, customers are provided with online access to our customer support database, technical support and software updates and upgrades. With premium maintenance, customers are provided additional services such as emergency service response and periodic onsite utilization reviews.
On-demand and Managed Infrastructure Services. For our Affinium NetInsight and MarketingCentral products, we offer a range of software on-demand and management services from fully-hosted, multi-tenant deployments to infrastructure management. Unica provides everything needed to quickly implement Affinium solutions. We can host part or all of a solution in our facility allowing customers to reduce IT costs and free up resources to focus on core business activities, while gaining the reliability, security, and scalability they require. In addition, we offer consultative services to our hosted customers, such as best practices for website and Internet marketing measurement, report development, and marketing process development.
Customers
We have a worldwide installed base of over 800 companies and thousands of users in a broad range of industries. A significant number of these companies sublicense our products from MSPs, as described under “Alliances — Marketing Service Providers” below. See Note 13 to our consolidated financial statements for geographic data regarding our revenue from customers located outside of the United States.
We target our sales and marketing efforts to a wide variety of industries, focusing on marketing executives and the IT staff that support them. We have focused our sales efforts to date principally on the financial services, insurance, media, retail and telecommunications industries as these industries include significant numbers of businesses with large numbers of customers and prospects.
No single customer accounted for 10% or more of our total revenue in fiscal 2008, 2007 or 2006.
Sales and Marketing
We sell and market our software primarily through our direct sales force and in conjunction with MSPs, systems integrators and distributors. In addition to our headquarters in Waltham, Massachusetts, we have
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sales offices in several U.S. cities. Outside the United States, our primary sales offices are in France, the United Kingdom and Singapore.
Sales. Our direct sales force, which consists of account executives, subject matter experts, technical pre-sales engineers, inside sales account development representatives, alliance partner managers and sales management is responsible for the worldwide sale of our products to businesses across multiple industries and is organized into named account, geographic, product and channel focus.
Marketing. Our marketing activities consist of a variety of programs designed to generate sales leads and build awareness of our company and our offerings. These activities include traditional product marketing functions, such as production of both hardcopy and digital product and company promotional material, gathering of customer and partner input for new product features, and creation of solution demonstrations. We build awareness of our company and generate sales leads through Internet marketing, such as blogs, search engine marketing and display ads; trade shows; seminars; direct mail; customer and partner events; and limited print advertising.
Alliances
We enter into alliances with MSPs, systems integrators and distributors to acquire new customers and to provide existing customers with a full spectrum of implementation services and training support, customer data management, and marketing program design and support. An MSP or systems integrator participated in selling or deploying Affinium software in a significant number of our perpetual and subscription license agreements in fiscal 2008. Our alliance strategy enables us to become part of a total marketing solution for businesses and provides the potential, through referrals and co-marketing opportunities, to expand our contacts with prospects in new and existing markets. We will seek alliance opportunities with additional MSPs, systems integrators and distributors, particularly in additional countries outside the United States, that can complement or expand our business by offering configuration and integration support, data management and strategic marketing services.
Marketing Service Providers. MSPs offer a range of data services, marketing program design, support, and execution services on an on-demand or outsourced basis. We selectively establish and maintain relationships with MSPs to resell and deploy our products. Current significant MSPs include Acxiom, Epsilon and Harte Hanks as well as other MSPs in North America, EMEA and Asia Pacific. We enter into subscription arrangements with MSPs with and the MSPs then enter into sublicenses of those offerings with their own clients.
Systems Integrators. Our relationships with systems integrators allow us to leverage our business model by selectively subcontracting or outsourcing integration and configuration services, thereby enabling us to focus our resources on additional sales of software licenses. Systems integrators also serve to provide us with leads for new business and bundle our products into joint industry or solution offerings. Our systems integrators help their customers develop strategies for implementing our EMM offerings, provide implementation support, and offer assistance with ongoing measurement and process improvement. Strategic systems integrators include Accenture and IBM as well as a number of specialist providers and regional systems integrators in and outside the United States.
Distributors. We have relationships with select distributors outside of the U.S. In addition to representing us in their local markets and selling our solutions, our distributors also typically offer systems integration and consulting services, and may also serve as an MSP in their local markets. We currently use distributors in Latin American, Japan, the U.K. and Israel.
Technology
Our product design philosophy is to deliver products that scale to meet the information processing volumes and computational complexity of sophisticated global marketers, while providing marketing process
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flexibility and software usability to meet the needs of marketing organizations across a range of industries, company sizes and marketing skill sets. Key elements of our technology include:
| • | Software Architecture. Our products have been developed using a logical multi-tier Internet architecture consisting of presentation, application logic and data management layers. Our products are highly scalable, enabling expansion at each tier, support of large databases and a large number of users. | |
| • | Powerful Data Access. Our UDI technology enables Affinium offerings to access and adapt easily to multiple existing marketing data sources, such as data warehouses and files, without requiring data replication or imposing proprietary data structures. UDI uses software wizards to guide the data mapping and access configuration to enable data-level integration without programming. UDI allows marketing organizations to dynamically access and manipulate all available levels of marketing data within campaigns for more accurate targeting andon-the-fly data aggregation and computations. | |
| • | Advanced Analytics and Optimization. Our Affinium offerings provide a broad range of integrated analytics, including analytical processing, data visualization, automated data mining and optimization algorithms. We have developed a number of analytic capabilities that enable rapid performance of sophisticated analytic processes to improve the productivity of marketers and the efficiency of marketing programs. | |
| • | Interoperability. Affinium applications are based on the Java 2 Enterprise Edition, or J2EE, development framework. Affinium applications can be integrated with other standards-compliant applications, including .NET-based applications using standards-based Application Programming Interfaces (API’s). The Java platform is deployable and readily supported on most software and hardware platforms | |
| • | Technology Relationships. We have formed relationships with vendors of software and hardware technologies to help ensure that our products are compatible with industry standards and to take advantage of current and emerging technologies. In particular, we maintain relationships, and support operating systems for platforms from companies such as Hewlett-Packard, IBM, Microsoft, Netezza, Oracle and Sun Microsystems. |
These companies may provide us with early releases of new products and, in some cases, access to technical resources to facilitate compatibility with their products.
Research and Development
Our research and development organization is responsible for designing, developing, enhancing and supporting our software products, performing product testing and quality assurance activities, and ensuring the compatibility of our products with third-party hardware and software products. Our research and development organization is divided into teams consisting of development engineers, product managers, quality assurance engineers, technical writers and technical support staff. We employ advanced software development tools, including automated testing, performance monitoring, source code control and defect tracking systems.
Our research and development expense totaled $23.0 million in fiscal 2008, $22.0 million in fiscal 2007, and $17.1 million in fiscal 2006.
Competition
The market for EMM software, which has emerged only in recent years, is intensely competitive, evolving rapidly and highly fragmented. We believe the following factors are the principal methods of competition in the EMM market:
| • | marketing focus and domain expertise; | |
| • | product functionality, performance and reliability; | |
| • | breadth and depth of product offerings; | |
| • | ability to offer integrated solutions, especially for Internet and traditional marketing; |
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| • | services organization and post-sale support; | |
| • | total cost of ownership; | |
| • | large and reference-able customer base; | |
| • | time to market; | |
| • | product architecture, scalability and flexible deployment options; and | |
| • | price. |
We believe our products compete with the following:
| • | Internally developed solutions based on horizontal workflow applications and desktop software | |
| • | CRM and other enterprise application vendors such as Siebel, a division of Oracle | |
| • | Infrastructure software, including data warehousing and business intelligence tools, from providers such as SAS and Teradata | |
| • | EMM software products from a number of privately-held vendors such as Aprimo | |
| • | Web analytics and Internet marketing products from Omniture and WebTrends |
We believe we effectively compete against these solutions in a number of ways, including: our market focus and domain expertise which make our solutions better suited to marketers’ needs, our open-architecture and flexible deployment options which facilitate more rapid deployment and lower cost of ownership, the breadth and depth of our solutions which solve more marketing challenges and which facilitate successful cross-channel marketing, and the analytic capabilities of our solutions which we believe help marketers deliver more effective marketing and achieve higher return on investment.
Intellectual Property
Our success will depend in part on our ability to protect our intellectual property and to avoid infringement of the intellectual property of third parties. We rely on a combination of patents, trademarks, copyrights and trade secret laws in the United States and other jurisdictions, as well as contractual provisions and licenses, to protect our proprietary rights and brands.
As of September 30, 2008, we had five issued U.S. patents and had eighteen pending U.S. patent applications. We file applications for patents on certain inventions in the United States, and in each case consider whether filing for protection in selected foreign jurisdictions is appropriate. We evaluate ideas and inventions for patent protection with a team of engineers, product managers and internal counsel, in consultation with our outside patent counsel. These issued patents and pending patent applications relate to various systems and methods, including offer management, lead management, data mining, modeling, and optimization. The issued patents we own will expire in 2018. We anticipate filing more patent applications in the ordinary conduct of our business.
“Unica” is a registered trademark in the United States, the European Union, Australia, India, Japan, Norway, South Korea and Singapore. “Affinium” is registered as a trademark in the United States, the European Union, Argentina, Australia, Chile, China, Columbia, India, Japan, Mexico, Norway, Singapore, South Korea and Switzerland. The “Unica & Design” (Unica with the crescent) mark is registered in the United States, Australia, Japan, Norway, Singapore, South Korea and Switzerland. We also hold trademarks and service marks identifying certain product and service offerings. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. We also pursue foreign copyrights, trademarks and service marks where applicable and necessary. Although we typically consider whether filing for patent protection in foreign jurisdictions is appropriate, to date we have not pursued patent protection in any foreign countries.
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We have incorporated third-party licensed technology into our current product offerings. Royalties paid for this third-party licensed technology represented 2% of total revenue in fiscal 2008, 2007 and 2006, and we expect this percentage to remain relatively constant for the foreseeable future.
Employees
As of September 30, 2008, we had a total of 519 employees, consisting of 158 employees in sales and marketing, 202 employees in research and development, 93 employees in services groups, and 66 employees in general and administrative functions. A total of 156 of those employees were located outside of the United States.
From time to time we also employ independent contractors and temporary employees to support our operations. None of our employees is subject to a collective bargaining agreement. We have never experienced a work stoppage and believe that our relations with our employees are good.
| Item 1A. | Risk Factors |
The following discussion highlights certain risks which may affect future operating results. These are the risks and uncertainties we believe are most important for our existing and potential stockholders to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer.
If the market for enterprise marketing management software does not develop as we anticipate, our revenue may decline or fail to grow and we may incur operating losses.
We derive, and expect to continue to derive, all of our revenue from providing EMM software and services. The market for EMM software is relatively new and still evolving, and it is uncertain whether these products will achieve and sustain high levels of demand and market acceptance.
Some businesses may be reluctant or unwilling to implement EMM software for a number of reasons, including failure to perceive the need for improved marketing processes and lack of knowledge about the potential benefits that EMM software may provide. Even if businesses recognize the need for improved marketing processes, they may not select EMM software such as ours because they previously have made investments in internally developed solutions or marketing or infrastructure software. Some businesses may elect to improve their marketing processes through software obtained from their existing enterprise software providers, whose products are designed principally to address one or more functional areas other than marketing. These enterprise products may appeal to customers that wish to limit the number of software vendors on which they rely and the number of different types of software used to run their businesses.
If businesses do not perceive the benefits of EMM software, the EMM market may not continue to develop or may develop more slowly than we expect, either of which would significantly adversely affect our revenue and profitability. Because the market for EMM software is developing and the manner of its development is difficult to predict, we may make errors in predicting and reacting to relevant business trends, which could harm our operating results.
Current macro-economic conditions could negatively impact our results of operations.
The current unfavorable macro-economic conditions could negatively impact the results of operations of our customers, which in turn could negatively impact the spending by our current and prospective customers on our software and services. Given that we have numerous customers in certain of the industries most impacted by the current unfavorable economic conditions, including financial services and retail, this could have an adverse effect on our business, financial condition and results of operations. If the economic climate in the U.S. or abroad does not improve from its current condition or continues to deteriorate, our customers or
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potential customers could reduce or delay their purchases of our products, which would adversely impact our revenues and our profitability.
Our quarterly and annual revenue and other operating results can be difficult to predict and can fluctuate substantially, which may result in volatility in the price of our common stock.
Our quarterly and annual revenue and other operating results have varied in the past and are likely to continue to vary significantly from quarter to quarter and year to year. This variability may lead to volatility in our stock price as equity research analysts and investors respond to these quarterly and annual fluctuations. These fluctuations are due to numerous factors, including:
| • | the timing and size of our licensing transactions; | |
| • | the mix of perpetual licenses and subscription arrangements; | |
| • | lengthy and unpredictable sales cycles; | |
| • | patterns of capital spending and changes in budgeting cycles by our customers; | |
| • | the timing of development, introduction and market acceptance of new products or product enhancements by us or our competitors; | |
| • | the timing of acquisitions of businesses and products by us or our competitors; | |
| • | product and price competition; | |
| • | the mix of higher-margin license revenue and lower-margin service revenue; | |
| • | software defects or other product quality problems; | |
| • | our ability to hire, train and retain sufficient sales, service and other personnel; | |
| • | the geographical mix of our sales, together with fluctuations in currency exchange rates; | |
| • | fluctuations in economic and financial market conditions; | |
| • | resolution of litigation, claims and other contingencies; | |
| • | expenses related to litigation, claims and other contingencies; and | |
| • | complexity of the accounting rules that govern revenue recognition. |
Because of quarterly fluctuations, we believe that quarter to quarter comparisons of our operating results are not necessarily meaningful. Moreover, our operating results may not meet our announced guidance or expectations of equity research analysts or investors, in which case the price of our common stock could decrease significantly.
In addition, our expense levels are based, in significant part, on our expectations as to future revenue and are largely fixed in the short term. As a result, we may be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in revenue. Furthermore, we intend to increase our operating expenses as we expand our product development, sales and marketing, and administrative organizations. The timing of these increases and the rate at which new personnel become productive will affect our operating results, and, in particular, we may incur operating losses in the event of an unexpected delay in the rate at which development or sales personnel become productive. Any such revenue shortfall, and the resulting decrease in operating income or increase in operating loss, could lead to volatility in the price of our common stock.
The delay or cancellation of one or more large transactions may adversely affect our quarterly or annual revenue.
Large license transactions from time to time account for a substantial amount of our license revenue in a fiscal quarter. If a potential customer does not enter into a large transaction that we anticipate in a certain quarter, or if we are unable to recognize license revenue from that transaction in the quarter, our revenue may
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decline or fail to grow at the rate expected and we may incur operating losses in that quarter. Moreover, a significant portion of each quarter’s license revenue historically has come from transactions agreed upon in the final month of the quarter. Therefore, even a short delay in the consummation of an agreement may cause our revenue to fall below our announced guidance or expectations of equity research analysts or investors for a quarter.
If we fail to develop or acquire new software products or enhance existing products, we will not be able to achieve our anticipated level of growth.
We must introduce new software products and enhance existing products in order to meet our business plan, keep pace with technological developments, satisfy increasing customer requirements, increase awareness of EMM software generally and of our company and products in particular, and maintain our competitive position. Any new products we develop may not be introduced in a timely manner and may not achieve market acceptance sufficient to generate significant revenue. Furthermore, we expect other companies to develop and market new products that will compete with, and may reduce the demand for, our products. We cannot assure you that we will be successful in developing or otherwise acquiring, marketing and licensing new products or product updates and upgrades that meet changing industry standards and customer demands, or that we will not experience difficulties that could delay or prevent the successful development, marketing and licensing of these products. If we are unable to develop or acquire new products successfully, to enhance our existing products, or to position or price our products to meet market demand, we may not be able to achieve our anticipated level of growth and our revenue and other operating results would be adversely affected.
In addition, because our software products are intended to operate on a variety of hardware and software platforms, we must continue to modify and enhance our products to keep pace with changes in these platforms. Any inability of our products to operate effectively with existing or future hardware and software platforms could reduce the demand for our products, result in customer dissatisfaction and limit our revenue.
A substantial majority of our perpetual license revenue is derived from our Affinium Campaign software, and a decline in sales of licenses of this software could materially adversely affect our operating results.
Sales of licenses of our Affinium Campaign software have historically accounted for a substantial portion of our revenues. We expect to continue to derive a substantial portion of our license revenue for the foreseeable future from current and future versions of our Affinium Campaign software, and our operating results will depend significantly upon the level of demand for this software. Demand for our Affinium Campaign software may decline due to a number of factors, including increased market penetration by our competitors’ products or slower growth in the EMM market than we anticipate. If demand for our Affinium Campaign software decreases significantly, our operating results will be adversely affected and we may incur operating losses.
If we fail to protect our proprietary rights and intellectual property adequately, our business and prospects may be harmed.
Our success depends in large part on our proprietary technology. We rely on a combination of patents, trademarks, copyrights, service marks, trade secret laws and contractual restrictions to establish and protect our proprietary rights in our software products and services. We cannot assure you that these protections will be adequate to prevent our competitors from copying or reverse-engineering our products, or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. As of September 30, 2008, we had five issued U.S. patents and eighteen pending U.S. patent applications. We may, however, be unable to obtain additional patent protection in the future. In addition, any current or future patents issued to us may not provide us with any competitive advantages, or may be challenged by third parties. Legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Accordingly, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property. Furthermore, we cannot be sure that steps we take to protect our proprietary rights will prevent misappropriation of our intellectual property.
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In addition, effective patent, trademark, copyright, service mark and trade secret protection may not be available to us in every country in which our software products are available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. To date, we have applied for a limited number of patents outside of the United States. Therefore, to the extent that we continue to increase our international selling activities, our exposure to unauthorized copying and use of our products and proprietary information will continue to increase.
We have incorporated third-party licensed technology into our current product offerings. Royalties paid for this third-party licensed technology have historically ranged from 1% to 2% of license revenue and we expect this percentage to remain relatively constant for the foreseeable future. If these technology providers were no longer to allow us to use these technologies for any reason, we may be required to:
| • | identify, license and integrate equivalent technology from another source; | |
| • | rewrite the technology ourselves; or | |
| • | rewrite portions of our software to accommodate the change or no longer use the technology. |
Any one of these outcomes could delay further sales or the implementation of our products, impair the functionality of our products, delay new product introductions, result in our substituting inferior or more costly technologies into our products, or injure our reputation. In addition, we may be required to license additional technology from third parties to develop and market new products, and we cannot assure you that we could license that technology on commercially reasonable terms or at all. Because of the relative immateriality of this third-party licensed technology as well as the availability of alternative equivalent technology, we do not expect that our inability to license this technology in the future would have a material adverse affect on our business or operating results. Our inability to license this technology could adversely affect our ability to compete.
We have entered into agreements with many of our customers, MSPs and systems integrators that require us to maintain the source code of our software products in escrow. These agreements typically provide that these parties will have limited, nonexclusive rights to use the source code under certain circumstances in which we are unable or unwilling to provide product support, including in the event of our bankruptcy. We may be unable, however, to control the actions of our customers, MSPs and systems integrators that have entered into these agreements, and our business may be harmed if one or more customers, MSPs or systems integrators use the source code for purposes other than those permitted by the escrow provisions.
Competition from EMM, enterprise application and infrastructure software, as well as from internally developed solutions, could adversely affect our ability to sell our software products and related services and could result in pressure to price our products in a manner that reduces our margins.
The market for EMM software, which has emerged only in recent years, is intensely competitive, evolving and fragmented. Our software products compete with software developed internally by businesses as well as software offered by commercial competitors. Our principal commercial competition consists of:
| • | vendors of software products addressing a range or portion of the EMM market; | |
| • | vendors of customer relationship management and other enterprise application software; and | |
| • | providers of infrastructure software. |
We expect additional competition from other established and emerging companies as the EMM market continues to develop and expand. We also expect competition to increase as a result of software industry consolidation, including through a merger or partnership of two or more of our competitors, and the entrance of new competitors in the EMM market. Many of our current and potential competitors have larger installed bases of users, longer operating histories and greater name recognition than we have. In addition, many of these companies have significantly greater financial, technical, marketing, service and other resources than we have. As a result, these companies may be able to respond more quickly to new or emerging technologies and
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changes in customer demands and to devote greater resources to the development, promotion and sale of their products than we can.
Competition could seriously impede our ability to sell additional software products and related services on terms favorable to us. Businesses may continue to enhance their internally developed solutions, rather than investing in commercial software such as ours. Our current and potential commercial competitors may develop and market new technologies that render our existing or future products obsolete, unmarketable or less competitive. In addition, if these competitors develop products with similar or superior functionality to our products, we may need to decrease the prices for our products in order to remain competitive. If we are unable to maintain our current product, services and maintenance pricing due to competitive pressures, our margins will be reduced and our operating results will be negatively affected. We cannot assure you that we will be able to compete successfully against current or future competitors or that competitive pressures will not materially adversely affect our business, financial condition and operating results.
If we do not maintain and strengthen our strategic alliance relationships, our ability to generate revenue and manage expenses could be adversely affected.
We believe that our ability to increase revenue from our software products and manage our expenses depends in part upon our maintaining and strengthening our existing strategic alliance relationships and our developing new strategic alliance relationships, particularly in additional countries outside the United States. We rely on established, nonexclusive relationships with a variety of MSPs and systems integrators for marketing, licensing, implementing and supporting our products. Although many aspects of our strategic alliance relationships are contractual in nature, important aspects of these relationships depend on the continued cooperation between the parties. Divergence in strategy, change in focus, competitive product offerings, potential contract defaults, and changes in ownership or management of an MSP or systems integrator may interfere with our ability to market, license, implement or support our products with that party, which in turn could harm our business. Some of our competitors may have stronger relationships with our MSPs and systems integrators than we do, and we have limited control, if any, as to whether MSPs and systems integrators implement our products rather than our competitors’ products or whether they devote resources to market and support our competitors’ products rather than our offerings. In addition, MSPs typically have available their own internally developed applications that they may choose to offer and support in lieu of our software offerings.
We may not be able to maintain our strategic alliance relationships or attract sufficient additional MSPs and systems integrators that have the ability to market, sell, implement or support our products effectively, particularly in additional countries outside the United States. If we are unable to leverage our sales resources through our strategic alliance relationships with MSPs, we may need to hire and train additional qualified sales personnel. Similarly, if we cannot leverage our services resources through our strategic alliance relationships with systems integrators, we may incur additional costs associated with providing services. We cannot assure you, however, that we will be able to hire additional qualified sales or service personnel in these circumstances, and our failure to do so may restrict our ability to generate revenue or implement our products on a timely basis. Even if we are successful in hiring additional qualified sales or service personnel, we will incur additional costs and our operating results, including our gross margins, may be adversely affected.
If we fail to retain our chief executive officer or other key personnel or if we fail to attract additional qualified personnel, we will not be able to achieve our anticipated level of growth and our operating results could be adversely affected.
Our future success depends upon the continued service of our executive officers and other key sales, marketing, service, engineering and technical staff. The loss of the services of our executive officers and other key personnel would harm our operations. In particular, Yuchun Lee, our co-founder, chief executive officer, president and chairman, is critical to the management of our business and operations, as well as to the development of our strategic direction. None of our officers or key personnel is bound by an employment agreement, and we do not maintain key person life insurance on any of our employees. In addition, our future success will depend in large part on our ability to attract a sufficient number of highly qualified personnel, and
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there can be no assurance that we will be able to do so. Competition for qualified personnel in the software industry is intense, and we compete for these personnel with other software companies that have greater financial, technical, marketing, service and other resources than we do. If we fail to retain our key personnel and to attract new personnel, we will not be able to achieve our anticipated level of growth and our operating results could be adversely affected.
Our international operations expose us to additional business risks, and failure to manage these risks may adversely affect our business and operating results.
Our primary sales offices are in France, the United Kingdom and Singapore. Revenue from customers located outside of North America accounted for $44.1 million, or 36% of total revenue in fiscal 2008, $27.3 million, or 27% of total revenue in fiscal 2007 and $17.4 million, or 21% of total revenue in fiscal 2006. Our international operations are subject to a number of risks and potential costs, including:
| • | lack of local recognition of our branding, which may require that we spend significant amounts of time and money to build brand identity; | |
| • | difficulty in establishing, staffing and managing international operations; | |
| • | difficulty in establishing and maintaining strategic alliance relationships; | |
| • | internationalization of our products to meet local customs or the needs of local marketing organizations; | |
| • | different pricing environments; | |
| • | longer accounts receivable payment cycles and other collection difficulties; | |
| • | compliance with multiple, conflicting, and changing laws and regulations, including employment, tax, trade, privacy, and data protection laws and regulations; | |
| • | laws and business practices, which may vary from country to country and may favor local competitors; | |
| • | limited protection of intellectual property in some countries outside of the United States; and | |
| • | political and economic instability. |
Our operating results and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro and the British pound sterling. These fluctuations could negatively affect our operating results and could cause our net income or loss to vary from quarter to quarter. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations.
Our failure to manage the risks associated with our international operations effectively could limit the future growth of our business and adversely affect our operating results. We may in the future further expand our existing international operations by, for example, entering additional international markets. We may be required to make a substantial financial investment and expend significant management efforts in connection with any such international expansion.
New accounting standards or interpretations of existing accounting standards could adversely affect our operating results.
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.
Certain factors have in the past and may in the future cause us to defer recognition for license fees beyond delivery. For example, the inclusion in our software arrangements of customer acceptance testing, specified upgrades or other material non-standard terms could require the deferral of license revenue beyond
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delivery. Because of these factors and other specific requirements under accounting principles generally accepted in the United States for software revenue recognition, we must have very precise terms in our software arrangements in order to recognize revenue when we initially deliver software or perform services. Negotiation of mutually acceptable terms and conditions can extend our sales cycle, and we may accept terms and conditions that do not permit revenue recognition at the time of delivery.
Taxing authorities could challenge our historical and future tax positions as well as our allocation of taxable income among our subsidiaries
The amount of income taxes we pay is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. We have taken and will continue to take tax positions based on our interpretation of such tax laws. While we believe that we have complied with all applicable income tax laws, there can be no assurance that a taxing authority will not have a different interpretation of the law and assess us with additional taxes. Should additional taxes be assessed, this may result in a material adverse effect on our results of operations or financial condition.
We conduct sales, marketing, professional services and research and development operations through our subsidiaries located in various tax jurisdictions around the world. While our transfer pricing methodology is based on economic studies which we believe are reasonable, the price charged for these services could be challenged by the various tax authorities resulting in additional tax liability, interestand/or penalties.
Our business continues to grow rapidly in size and complexity which may affect our ability to effectively comply with new and existing regulations affecting our business.
We anticipate that we will continue to grow in size and complexity. We recognize that the regulatory environment affecting our business, particularly regulations relating to accounting standards and principles and regulations relating to the Sarbanes-Oxley Act compliance related to our internal controls, continues to become more complex and burdensome. We may not be able to scale our business infrastructure in a way that will allow us to comply with such regulations or comply with such regulations in a timely manner and, in particular, there is a risk that we will not be able to effectively remedy material internal control weaknesses or may have new material control weaknesses in the future. Material control weaknesses or our inability to be compliant with regulations may have a direct negative effect on our long and short term stock performance and may require us to devote significant resources in response to compliance or remedial measures.
If the material weakness in our internal control over financial reporting that we have identified is not remedied effectively, it could result in a material misstatement in our financial statements not being prevented or detected and could adversely affect investor confidence in the accuracy and completeness of our financial statements, and could have an adverse effect on the trading price of our common stock.
Through, in part, the documentation, testing and assessment of our internal control over financial reporting pursuant to the rules promulgated by the SEC under Section 404 of the Sarbanes-Oxley Act of 2002 and Item 308 ofRegulation S-K, management has concluded that we did not maintain effective controls over the accounting for deferred maintenance and subscription revenue, including the determination and reporting of deferred maintenance and subscription revenue balances as well as the recognition of maintenance and subscription revenue. Management has determined that this control deficiency represented a material weakness as of September 30, 2008. This material weakness and our remediation plans are described further inItem 9A-Controls and Proceduresin this Annual Report onForm 10-K.
Prior to the elimination of this material weakness, there remains risk that the controls on which we currently rely will fail to be sufficiently effective, which could result in a material misstatement of our financial position or results of operations and require a restatement of our financial statements. In addition, because of inherent limitations, such controls and procedures may not prevent or detect misstatements. Any material weakness or the unsuccessful remediation thereof could have a material adverse effect on reported results of operations and financial condition, as well as impair our ability to meet our quarterly and annual reporting requirements in a timely manner.
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Goodwill and other intangible assets represent a significant portion of our assets, and any impairment of goodwill or other intangible assets would adversely impact our net income.
At September 30, 2008, we had goodwill of $26.2 million and other intangible assets of approximately $6.8 million, net of accumulated amortization. Our goodwill is subject to an annual impairment test, and both goodwill and other intangible assets are also tested whenever events and circumstances indicate that they may be impaired. Such events or conditions could include an economic downturn in our customers’ industries, increased competition, or other information regarding our market value, such as a reduction in our stock price to a price at, near or below our book value for a period of time, which could indicate a triggering event and a possible impairment of goodwill. Any excess goodwill resulting from the impairment test must be written off in the period of determination. During the quarter ended September 30, 2008, we performed our annual impairment test of our goodwill. We determined that our goodwill was not impaired based on this test. In addition, we will continue to incur non-cash charges relating to the amortization of our intangible assets other than goodwill, over the remaining useful lives of such assets. Future determinations of significant write-offs of goodwill or intangible assets resulting from an impairment test or any accelerated amortization of intangible assets could have a significant impact on our net income and affect our ability to achieve profitability. Although we do not believe that any impairment of goodwill or other intangible assets exists at this time, in the event that such a condition or event occurs, we may record charges which could have a material adverse effect on our results of operations.
Our inability to sustain our historical maintenance renewal rates and pricing would adversely affect our operating results.
We generate maintenance fees revenue from sales of maintenance associated with licensed software. We generally sell maintenance on an annual basis. In each of the last three fiscal years, customers have renewed maintenance arrangements at a renewal rate of greater than 88%. We cannot assure you that we will succeed in sustaining this rate of maintenance renewals. Moreover, we are facing competitive and other pressures to reduce the pricing of our maintenance arrangements. If we fail to sustain our historical level of maintenance renewals or our historical pricing, our maintenance fees revenue and total revenue would decrease and our operating results would be adversely affected.
Defects or errors in our software products could harm our reputation, impair our ability to sell our products and result in significant costs to us.
Our software products are complex and may contain undetected defects or errors. We have not suffered significant harm from any defects or errors to date, but we have from time to time found defects in our products and we may discover additional defects in the future. We may not be able to detect and correct defects or errors before releasing products. Consequently, we or our customers may discover defects or errors after our products have been implemented. We have in the past issued, and may in the future need to issue, corrective releases of our products to correct defects or errors. The occurrence of any defects or errors could result in:
| • | lost or delayed market acceptance and sales of our products; | |
| • | delays in payment to us by customers; | |
| • | product returns; | |
| • | injury to our reputation; | |
| • | diversion of our resources; | |
| • | legal claims, including product liability claims, against us; | |
| • | increased service and warranty expenses or financial concessions; and | |
| • | increased insurance costs. |
Defects and errors in our software products could result in an increase in service and warranty costs or claims for substantial damages against us. Our license agreements with our customers typically contain provisions designed to limit our liability for defects and errors in our products and damages relating to such defects and errors, but these provisions may not be enforced by a court or otherwise effectively protect us from legal claims. Our liability insurance may not be adequate to cover all of the costs resulting from these
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legal claims. Moreover, we cannot assure you that our current liability insurance coverage will continue to be available on acceptable terms or that the insurer will not deny coverage as to any future claim. The successful assertion against us of one or more large claims that exceeds available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible orco-insurance requirements, could have a material adverse affect on our business and operating results. Furthermore, even if we succeed in the litigation, we are likely to incur substantial costs and our management’s attention will be diverted from our operations.
We intend to increase the amount of revenue that we derive from subscription arrangements, which may cause our quarterly revenue and other operating results to fail to meet expectations.
We generate recurring revenue from agreements to license our offerings on a subscription basis, both directly and through MSPs that provide outsourcing and on-demand solutions. Our subscription arrangements typically have a license period of one year, although the license periods may range from three to thirty-six months. We intend to seek to increase the percentage of our total revenue derived under the subscription model in order to diversify our revenue stream and generally provide us with greater revenue predictability in the long term. Since revenue from a subscription arrangement is recognized ratably over the contractual term of the arrangement rather than upon product delivery, a greater shift than anticipated from perpetual license agreements towards subscription arrangements will result in our recognizing less revenue in the initial quarters of the license period. Similarly, a decline in new or renewed subscription arrangements in any one quarter will not necessarily be fully reflected in the revenue for that quarter and may negatively affect our revenue in future quarters. Differences in the mix of our perpetual license revenue and our subscription fees revenue could cause our operating results for a quarter to vary from our announced guidance or expectations of equity research analysts or investors, which could result in volatility in the price of our common stock.
Privacy and security concerns, including evolving government regulation in the area of consumer data privacy, could adversely affect our business and operating results.
The effectiveness of our software products relies on our customers’ storage and use of data concerning their customers, including financial, personally identifying and other sensitive data. Our customers’ collection and use of these data for consumer profiling may raise privacy and security concerns and negatively impact the demand for our products and services. We have implemented various features intended to enable our customers to better comply with privacy and security requirements, such as opt-out messaging and checking, the use of anonymous identifiers for sensitive data, and restricted data access, but these security measures may not be effective against all potential privacy concerns and security threats. If a breach of customer data security were to occur, our products may be perceived as less desirable, which would negatively affect our business and operating results.
In addition, governments in some jurisdictions have enacted or are considering enacting consumer data privacy legislation, including laws and regulations applying to the solicitation, collection, processing and use of consumer data. This legislation could reduce the demand for our software products if we fail to design or enhance our products to enable our customers to comply with the privacy and security measures required by the legislation. Moreover, we may be exposed to liability under existing or new consumer data privacy legislation.
Intellectual property litigation and infringement claims may cause us to incur significant expenses or prevent us from selling our software products.
The software industry is characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. From time to time, we receive claims that our software products or business infringe or misappropriate the intellectual property of third parties. For example, in fiscal year 2006 we settled a lawsuit with NetRatings, Inc. relating to the alleged patent infringement of our NetTracker software, a product we acquired as part of our acquisition of Sane Solutions, LLC (Sane).
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We cannot assure you that in the future other third parties will not assert that our technology violates their intellectual property rights or that we will not be the subject of a material intellectual property dispute. EMM software developers may become increasingly subject to infringement claims as the number of commercially available EMM software products increases and the functionality of these products further overlaps.
Regardless of the merit of any particular claim that our technology violates the intellectual property rights of others, responding to such claims may require us to:
| • | incur substantial expenses and expend significant management efforts; | |
| • | pay damages; | |
| • | cease making, licensing or using products that are alleged to incorporate the intellectual property of others; | |
| • | enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies; and | |
| • | expend additional development resources to redesign our products. |
We may also be required to indemnify customers, MSPs or systems integrators for their use of the intellectual property associated with the current suit or for other third-party products that are incorporated into our products and that infringe the intellectual property rights of others. If we are unable to resolve our legal obligations by settling or paying an infringement claim or a related indemnification claim as described above, we may be required to refund amounts that we had received under the contractual arrangement with the customers, MSPs or systems integrators.
In addition, from time to time there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. We use a limited amount of open source software in our products and may use more open source software in the future. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software.
We may enter into acquisitions that may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention.
We intend to continue to pursue acquisitions of businesses, technologies and products that will complement our existing operations. On December 20, 2005, we acquired certain assets of MarketSoft Software Corporation and on March 22, 2006, we acquired Sane Solutions, L.L.C. Most recently, on July 12, 2007, we acquired MarketingCentral L.L.C., as described in Note 3 to our consolidated financial statements. We cannot assure you that these acquisitions or any acquisition we make in the future will provide us with the benefits we anticipated in entering into the transaction. Acquisitions are typically accompanied by a number of risks, including:
| • | difficulties in integrating the operations and personnel of the acquired companies; | |
| • | maintenance of acceptable standards, controls, procedures and policies; | |
| • | potential disruption of ongoing business and distraction of management; | |
| • | impairment of relationships with employees and customers as a result of any integration of new management and other personnel; | |
| • | inability to maintain relationships with customers of the acquired business; | |
| • | difficulties in incorporating acquired technology and rights into products and services; | |
| • | failure to achieve the expected benefits of the acquisition; | |
| • | unexpected expenses resulting from the acquisition; | |
| • | potential unknown liabilities associated with acquired businesses; |
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| • | unanticipated expenses related to acquired technology and its integration into existing technology; and | |
| • | litigation. |
In addition, acquisitions may result in the incurrence of debt, restructuring charges and large one-time write-offs, such as write-offs for acquired in-process research and development costs. Acquisitions may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges. Furthermore, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted and earnings per share may decrease.
From time to time, we may enter into negotiations for acquisitions that are not ultimately consummated. Those negotiations could result in diversion of management time and significant out-of-pocket costs. If we fail to evaluate and execute acquisitions properly, we may not be able to achieve our anticipated level of growth and our business and operating results could be adversely affected.
We will continue to incur significant costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.
We will continue to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the SEC and the NASDAQ Stock Market, or NASDAQ, has imposed various new requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to continue to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.
In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, commencing in fiscal 2006, we began system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 requires that we continue to incur substantial accounting expense and expend significant management efforts. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities, which would require additional financial and management resources.
Risks Relating to Ownership of Our Common Stock
The price of our common stock may be volatile.
The trading market for our common stock may fluctuate substantially. These fluctuations could cause our investors to lose part or all of any investment in shares of our common stock. The following factors, most of which are outside of our control, could cause the market price of our common stock to decrease significantly:
| • | loss of any of our major customers; | |
| • | departure of key personnel; | |
| • | variations in our annual or quarterly operating results; | |
| • | announcements by our competitors of significant contracts, new products or product enhancements, acquisitions, distribution partnerships, joint ventures or capital commitments; | |
| • | changes in governmental regulations and standards affecting the software industry and our products, including implementation of additional regulations relating to consumer data privacy; | |
| • | decreases in financial estimates by equity research analysts; | |
| • | sales of common stock or other securities by us in the future; |
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| • | decreases in market valuations of software companies; | |
| • | fluctuations in stock market prices and volumes; and | |
| • | damages, settlements, legal fees and other costs related to litigation, claims and other contingencies. |
In the past, securities class action litigation often has been initiated against a company following a period of volatility in the market price of the company’s securities. If class action litigation is initiated against us, we will incur substantial costs and our management’s attention will be diverted from our operations. All of these factors could cause the market price of our stock to decline, and our investors may lose some or all of any investment.
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock relies in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our stock could decline if one or more equity research analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.
Future sales of our common stock by existing stockholders could cause our stock price to decline.
If our existing stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease significantly. The perception in the public market that our stockholders might sell shares of common stock could also depress the market price of our common stock. A decline in the price of shares of our common stock could impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities, and may cause our investors to lose part or all of any investment in our shares of common stock.
Our directors and executive officers will continue to have substantial control over us and could limit the ability of stockholders to influence the outcome of key transactions, including a change in control.
We anticipate that our executive officers and directors and entities affiliated with them will, in the aggregate, continue to beneficially own a substantial portion of our outstanding common stock in the near term. In particular, Yuchun Lee, our co-founder, chief executive officer, president and chairman, beneficially owned approximately 22% of our outstanding common stock as of September 30, 2008. Our executive officers, directors and affiliated entities, if acting together, would be able to control or influence significantly all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other significant corporate transactions. The concentration of ownership of our common stock may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company, and may affect the market price of our common stock.
Our corporate documents and Delaware law make a takeover of our company more difficult, which may prevent certain changes in control and limit the market price of our common stock.
Our charter and by-laws and Section 203 of the Delaware General Corporation Law contain provisions that might enable our management to resist a takeover of our company. These provisions might discourage, delay or prevent a change in the control of our company or a change in our management. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. Some provisions in our charter and by-laws may deter third parties from acquiring us, which may limit the market price of our common stock.
| Item 1B. | Unresolved Staff Comments |
None.
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| Item 2. | Properties |
Our operations are conducted in leased facilities. We lease approximately 72,000 square feet of office space in Waltham, Massachusetts pursuant to a lease agreement that expires in April 2009. This facility serves as our corporate headquarters. Personnel located at this facility include members of our senior management team, software research and development team, consulting personnel, technical support personnel, product marketing and management personnel, sales personnel, and finance and administration personnel.
We also lease office space in Paris, France; Pune, India; Egham, England; Singapore; Brussels, Belgium; Amsterdam, Netherlands; Munich, Germany; Madrid, Spain; Melbourne, Australia and Seoul, Korea. Our aggregate rent expense was $3.7 million in fiscal 2008. For more information about our lease commitments, see Note 7 to our consolidated financial statements,Commitments and Contingencies.
| Item 3. | Legal Proceedings |
We are not currently a party to any material litigation and we are not aware of any pending or threatened litigation against us that could have a material adverse effect on our business, operating results or financial condition. However, the industry in which we operate is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. As a result, we may be involved in various legal proceedings from time to time that arise in the ordinary course of business.
| Item 4. | Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of our security holders through solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended September 30, 2008.
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Stock Market Information
Our common stock is listed on The Nasdaq Global Market under the trading symbol UNCA. The following table sets forth the high and low sales prices of our common stock, as reported by The Nasdaq Global Market, for each quarterly period within our two most recent fiscal years:
| High | Low | |||||||
Fiscal 2007 | ||||||||
| First quarter | $ | 14.20 | $ | 9.70 | ||||
| Second quarter | $ | 14.10 | $ | 10.86 | ||||
| Third quarter | $ | 17.98 | $ | 12.26 | ||||
| Fourth quarter | $ | 15.99 | $ | 9.50 | ||||
Fiscal 2008 | ||||||||
| First quarter | $ | 13.01 | $ | 8.37 | ||||
| Second quarter | $ | 9.58 | $ | 6.15 | ||||
| Third quarter | $ | 8.69 | $ | 6.20 | ||||
| Fourth quarter | $ | 9.35 | $ | 7.31 | ||||
The closing sale price of our common stock, as reported by The Nasdaq Global Market, was $4.96 on December 8, 2008.
Holders
As of December 8, 2008 there were approximately 110 stockholders of record of our common stock based on the records of our transfer agent.
Dividends
We did not declare or pay any cash dividends on our common stock during the two most recent fiscal years. We currently intend to retain earnings, if any, to fund the development and growth of our business and do not anticipate paying other cash dividends on our common stock in the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, cash needs and growth plans.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this item is included under the caption “Equity Compensation Plan Information” in our Proxy Statement related to the 2009 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission no later that 120 days after the end of our fiscal year and is incorporated herein by reference.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
We did not sell any unregistered securities during the fiscal year ended September 30, 2008. We sold an aggregate of 4,470,000 shares of our common stock, $0.01 par value, in our initial public offering pursuant to a registration statement onForm S-1 (FileNo. 333-120615) that was declared effective by the SEC on August 3, 2005. Our aggregate net proceeds totaled $38.5 million, consisting of net proceeds of $31.8 million from our sale of 3,750,000 shares in the firm commitment initial public offering and $6.7 million from our sale of 720,000 shares upon the exercise of an over-allotment option granted to the underwriters in the offering. We have used a portion of the proceeds to fund a $1.0 million redemption payment to the holders of our Series B Preferred Stock as of August 3, 2005, the $7.3 million purchase of certain assets and assumed liabilities of MarketSoft in December 2005, the $21.8 million purchase of Sane in March 2006 and the $12.5 million purchase of MarketingCentral in July 2007. With the exception of these payments, none of our net proceeds from the initial public offering have been applied. Pending such application, we have invested the remaining net proceeds in cash, cash equivalents and short-term investments, in accordance with our investment policy, in commercial paper, money-market mutual funds and municipal bonds. None of the remaining net proceeds were paid, directly or indirectly, to directors, officers, persons owning ten percent or more of our equity securities, or any of our other affiliates.
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Performance Graph
The following performance graph and related information is “furnished” and not “filed” and shall not be deemed to be “soliciting material” or subject to Regulation 14A, shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent that we specifically incorporate it by reference into such filing.
The following graph compares the cumulative total return to stockholders of our common stock for the period from August 3, 2005, the date of our initial public offering, to September 30, 2008, to the cumulative total return of the Nasdaq Stock Market (U.S.) Index and the Nasdaq Computer & Data Processing Index for the same period. This graph assumes the investment of $100.00 on August 3, 2005 in our common stock, the Nasdaq Stock Market (U.S.) Index and the Nasdaq Computer & Data Processing Index and assumes any dividends are reinvested.
COMPARATIVE STOCK PERFORMANCE
Among Unica Corporation
The Nasdaq Stock Market (U.S.) Index and
The Nasdaq Computer & Data Processing Index
Among Unica Corporation
The Nasdaq Stock Market (U.S.) Index and
The Nasdaq Computer & Data Processing Index
| August 3, | September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||
| 2005 | 2005 | 2006 | 2007 | 2008 | |||||||||||||||||||||
| Unica Corporation | $ | 100.00 | $ | 93.77 | $ | 87.96 | $ | 95.90 | $ | 66.95 | |||||||||||||||
| Nasdaq Stock Market (U.S.) Index | $ | 100.00 | $ | 97.06 | $ | 101.88 | $ | 121.86 | $ | 94.36 | |||||||||||||||
| Nasdaq Computer & Data Processing Index | $ | 100.00 | $ | 96.63 | $ | 100.39 | $ | 123.04 | $ | 91.98 | |||||||||||||||
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| Item 6. | Selected Financial Data |
The selected consolidated financial data set forth below as of September 30, 2008 and 2007 and for the years ended September 30, 2008 and 2007 are derived from our financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, and included elsewhere in this Annual Report. The selected consolidated financial data set forth below for the year ended September 30, 2006 are derived from our financial statements audited by Ernst & Young LLP, an independent registered public accounting firm, and included elsewhere in this Annual Report. The selected consolidated financial data as of September 30, 2006, 2005 and 2004 and for the years ended September 30, 2005 and 2004 are derived from our audited financial statements not included in this Annual Report.
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements, the related notes and Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operationsincluded elsewhere in this Annual Report. The historical results are not necessarily indicative of the results to be expected for any future period.
| Year Ended September 30, | ||||||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
Consolidated Income Statement Data: | ||||||||||||||||||||
| Revenue: | ||||||||||||||||||||
| License | $ | 42,877 | $ | 38,970 | $ | 35,023 | $ | 26,198 | $ | 22,278 | ||||||||||
| Maintenance and services | 64,511 | 54,318 | 40,876 | 32,697 | 23,870 | |||||||||||||||
| Subscription | 13,743 | 8,955 | 6,512 | 4,653 | 2,567 | |||||||||||||||
| Total revenue | 121,131 | 102,243 | 82,411 | 63,548 | 48,715 | |||||||||||||||
| Costs of revenue: | ||||||||||||||||||||
| License | 3,118 | 2,782 | 1,924 | 854 | 637 | |||||||||||||||
| Maintenance and services | 25,461 | 18,958 | 13,854 | 10,554 | 8,003 | |||||||||||||||
| Subscription | 2,862 | 692 | 429 | 228 | 122 | |||||||||||||||
| Total cost of revenue | 31,441 | 22,432 | 16,207 | 11,636 | 8,762 | |||||||||||||||
| Gross profit | 89,690 | 79,811 | 66,204 | 51,912 | 39,953 | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Sales and marketing | 49,747 | 41,068 | 33,446 | 26,802 | 22,971 | |||||||||||||||
| Research and development | 22,971 | 22,034 | 17,085 | 11,466 | 8,333 | |||||||||||||||
| General and administrative | 19,078 | 16,362 | 11,549 | 6,927 | 4,206 | |||||||||||||||
| Restructuring charges (credits) | (286 | ) | 1,244 | 255 | — | — | ||||||||||||||
| In-process research and development | — | — | 4,037 | — | — | |||||||||||||||
| Amortization of acquired intangible assets | 1,573 | 1,572 | 1,109 | 460 | 433 | |||||||||||||||
| Total operating expenses | 93,083 | 82,280 | 67,481 | 45,655 | 35,943 | |||||||||||||||
| Income (loss) from operations | (3,393 | ) | (2,469 | ) | (1,277 | ) | 6,257 | 4,010 | ||||||||||||
| Interest income, net | 1,448 | 2,056 | 2,047 | 660 | 173 | |||||||||||||||
| Other income (expense), net | (383 | ) | 108 | (57 | ) | (67 | ) | 50 | ||||||||||||
| Income (loss) before income taxes | (2,328 | ) | (305 | ) | 713 | 6,850 | 4,233 | |||||||||||||
| Provision for (benefit from) income taxes | 7,411 | (801 | ) | 37 | 2,329 | 769 | ||||||||||||||
| Net income (loss) | $ | (9,739 | ) | $ | 496 | $ | 676 | $ | 4,521 | $ | 3,464 | |||||||||
| Net income (loss) per common share: | ||||||||||||||||||||
| Basic | $ | (0.48 | ) | $ | 0.02 | $ | 0.04 | $ | (0.03 | ) | $ | 0.18 | ||||||||
| Diluted | $ | (0.48 | ) | $ | 0.02 | $ | 0.03 | $ | (0.03 | ) | $ | 0.16 | ||||||||
| Shares used in computing net income (loss) per common share: | ||||||||||||||||||||
| Basic | 20,443 | 19,857 | 19,267 | 11,342 | 9,420 | |||||||||||||||
| Diluted | 20,443 | 20,782 | 20,235 | 11,342 | 10,829 | |||||||||||||||
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On October 1, 2005, the Company adopted the provisions of SFAS No. 123(R),Share-Based Compensation, which requires us to recognize expense related to the fair value of share-based compensation awards. We elected to use the modified prospective transition method as permitted by SFAS No. 123(R) and therefore have not restated our financial results for prior periods.
For the year ended September 30, 2005, net loss applicable to common stockholders and net loss per share reflect a special one-time preferred stock dividend of $3.1 million and a redemption payment of $1.0 million in August 2005 in connection with our initial public offering. In addition, as a result of the net loss applicable to common stockholders, shares used in computing diluted net loss per common share excludes 1,456,133 weighted-average shares of common stock issuable upon exercise of outstanding stock options, as the effect of including those shares would be anti-dilutive.
In the preceding table, cost of revenue and operating expenses include share-based compensation expense as follows:
| Year Ended September 30, | ||||||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Shared-based compensation expense: | ||||||||||||||||||||
| Cost of maintenance and services revenue | $ | 898 | $ | 590 | $ | 273 | $ | 94 | $ | 24 | ||||||||||
| Sales and marketing expense | 2,389 | 1,706 | 776 | 171 | 40 | |||||||||||||||
| Research and development expense | 1,294 | 1,151 | 678 | 68 | 30 | |||||||||||||||
| General and administrative expense | 2,144 | 2,073 | 1,291 | 120 | 17 | |||||||||||||||
| Total share-based compensation expense | $ | 6,725 | $ | 5,520 | $ | 3,018 | $ | 453 | $ | 111 | ||||||||||
| As of September 30, | ||||||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 35,799 | $ | 18,493 | $ | 30,501 | $ | 43,754 | $ | 23,773 | ||||||||||
| Short-term investments | 11,482 | 19,614 | 9,537 | 16,172 | — | |||||||||||||||
| Working capital | 21,304 | 20,455 | 23,923 | 45,298 | 11,107 | |||||||||||||||
| Total assets | 116,909 | 121,348 | 104,647 | 81,604 | 42,414 | |||||||||||||||
| Total deferred revenue | 37,102 | 38,632 | 33,886 | 24,634 | 20,290 | |||||||||||||||
| Redeemable preferred stock | — | — | — | — | 15,364 | |||||||||||||||
| Total stockholders’ equity (deficit) | 60,006 | 62,919 | 54,607 | 46,373 | (1,558 | ) | ||||||||||||||
On October 1, 2007, the Company adopted the consensus reached in Emerging Issues Task Force (“EITF”) IssueNo. 06-2,Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences(“EITF 06-2”), which requires the Company to accrue an estimated liability for sabbatical leave over the requisite service period. Prior to the adoption ofEITF 06-2, the Company recorded a liability for sabbatical leave upon an employee vesting in the benefit, which occurred when an employee went on leave after completing a six-year service period. The cumulative effect of adoptingEITF 06-2 was recorded to retained earnings (accumulated deficit).
On October 1, 2007 the Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109(“FIN 48”), which prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. There was no cumulative effect upon adoption of FIN 48.
The consolidated financial position and results of operations data reflect our acquisitions of MarketingCentral L.L.C on July 12, 2007 for $12.9 million in cash and assumed liabilities; Sane Solutions, L.L.C. on March 22, 2006 for $27.0 million in cash and assumed liabilities, and $1.8 million in shares of the Company’s common stock; and MarketSoft Corporation on December 20, 2005 for $7.9 million in cash and assumed liabilities. Results of operations for the acquired businesses have been included in the consolidated income statements since their acquisition dates.
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The information contained in this section has been derived from our consolidated financial statements and should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report. This Annual Report onForm 10-K contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements by forward-looking words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “may,” or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition, or state other “forward-looking” information. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Investors are cautioned that all forward-looking statements involved risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including those factors described in “Risk Factors” in Item 1A on this Annual Report onForm 10-K. Readers should not place undue reliance on our forward-looking statements, and we assume no obligation and do not intend to update any forward-looking statements.
Our fiscal year ends on September 30. References to fiscal 2008, 2007 or 2006, for example, refer to the fiscal year ended September 30, unless otherwise indicated.
Overview
Unica Corporation is a global provider of enterprise marketing management, or EMM — software designed to help businesses increase their revenues and improve the efficiency and measurability of their marketing operations. Our comprehensive set of integrated software modules is offered under the “Affinium” and “MarketingCentral” names. Focused exclusively on the needs of marketers, Unica’s software delivers key capabilities to track and analyze online and offline customer behavior, generate demand and manage marketing process, resources and assets. Our software streamlines the entire marketing process for relationship, brand and Internet marketing — from analysis and planning, to budgeting, production management, execution and measurement. As the most comprehensive EMM suite on the market, Affinium delivers a marketing “system of record” — a dedicated solution through which marketers capture, record and easily manage marketing activity, information and assets, rapidly design campaigns, and report on performance.
Our software products can be licensed on a perpetual or subscription basis, and can be deployed either at the customer’s location (“on premise deployment model”) or managed as a remotely hosted solution by our Marketing Services Providers (MSPs) or, for certain products, by Unica (“on-demand” software as a service deployment model). Our software uses an open, scalable and flexible product architecture with built-in data access functionality, which facilitates rapid implementation and deployment in any deployment model.
We sell and market our software primarily through our direct sales force as well as through alliances with MSPs, resellers, distributors and systems integrators. In addition to reselling and deploying our products, MSPs offer a range of marketing program design, support, and execution services on an on-demand or outsourced basis. We also provide a full range of services to our customers, including implementation, training, consulting, maintenance and technical support, and customer success programs. We have sales offices across the United States, including at our headquarters in Waltham, Massachusetts. Our primary sales offices outside of the United States are in France, the United Kingdom and Singapore. In addition, we have a research and development office in India. We have a worldwide installed base of over 800 companies in a wide range of industries. Our current customers operate principally in the financial services, retail, telecommunications, and travel and hospitality industries.
Sources of Revenue
We derive revenue from software licenses, maintenance, services and subscriptions. License revenue is derived from the sale of software licenses for our Affinium offerings under perpetual software arrangements that typically include: (a) an end-user license fee paid for the use of our products in perpetuity; (b) an annual
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maintenance arrangement that provides for software updates and upgrades and technical support; and (c) a services work order for implementation, training, consulting and reimbursable expenses. Subscription revenue is derived from subscription arrangements for our offerings that typically include: (a) a subscription fee for bundled software and support for a fixed period and (b) a services work order for implementation, training, consulting and reimbursable expenses.
License Revenue
Perpetual Licenses. Licenses to use our software products in perpetuity generally are priced based on (a) either a customer’s database size (including number of database records) or a platform fee and (b) a specified number of users. With respect to our Affinium NetInsightTM product, licenses are generally priced based on the volume of traffic and complexity of a website. We recognize perpetual license revenue at the time of product delivery, provided all other revenue recognition criteria have been met, pursuant to the requirements of Statement of Position, or SOP,97-2,Software Revenue Recognition, as amended bySOP 98-9,Modification ofSOP 97-2,Software Revenue Recognition with Respect to Certain Transactions. When we license our software on a perpetual basis through an MSP or systems integrator, we recognize revenue upon delivery of the licensed software to the MSP or systems integrator only if (a) the customer of the MSP or systems integrator is identified in a written arrangement between the MSP or systems integrator and us and (b) all other revenue recognition criteria have been met.
Maintenance and Services Revenue
Maintenance and services revenue is generated from sales of (a) maintenance, including software updates and upgrades and technical support associated with the sale of perpetual software licenses and (b) services, including implementation, training, consulting, and reimbursable travel.
Maintenance. We sell maintenance on perpetual licenses that includes technical support and software updates and upgrades on a when and if available basis. Revenue is deferred at the time the maintenance agreement is initiated and is recognized ratably over the term of the maintenance agreement.
Services. We sell implementation services and training on atime-and-materials basis and recognize revenue when the services are performed; however, in certain circumstances these services may be priced on a fixed-fee basis and recognized as revenue using a proportional performance method. Services revenue also includes billable travel, lodging and other out-of-pocket expenses incurred as part of delivering services to our customers.
Subscription Revenue
We also market our software under subscription arrangements, typically when our software is hosted either by us, with respect to our Affinium NetInsight and MarketingCentral products, or an MSP with respect to our other products. We have also licensed our Affinium NetInsight product under a subscription arrangement in a non-hosted environment. Subscription revenue includes, for a bundled fee, (a) the right to use our software for a specified period of time, typically one year, (b) updates and upgrades to our software and (c) technical support. Under a subscription agreement, we typically invoice the customer in annual or quarterly installments in advance. Revenue is recognized ratably over the contractual term of the arrangement commencing on the date at which all services under related work orders are completed.
Cost of Revenue
Cost of license revenue for perpetual license agreements consists primarily of (a) salaries, other labor related costs and share-based compensation related to documentation personnel, (b) facilities and other related overhead, (c) third-party royalties for licensed technology incorporated into our current product offerings, (d) amortization of acquired developed technology and (e) amortization of capitalized software development costs under Statement of Financial Accounting Standards (SFAS) No. 86,Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.
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Cost of maintenance and services revenue consists primarily of (a) salaries, other labor related costs, share-based compensation, facilities and other overhead related to professional services and technical support personnel, and (b) cost of services provided by subcontractors for professional services and out-of-pocket expenses.
Cost of subscription revenue includes the allocation of specific costs including labor-related and overhead costs associated with technical support, documentation and professional services personnel as well as costs associated with hosting-related activities.
Operating Expenses
Sales and Marketing. Sales and marketing expense consists primarily of (a) salaries, benefits and share-based compensation related to sales and marketing personnel, (b) commissions and bonuses, (c) travel, lodging and other out-of-pocket expenses, (d) marketing programs such as trade shows and advertising, and (e) facilities and other related overhead. The total amount of commissions earned for a perpetual license, subscription or maintenance arrangement are recorded as expense when revenue recognition for that arrangement commences.
Research and Development. Research and development expense consists primarily of (a) salaries, other labor related costs and share-based compensation related to employees working on the development of new products, enhancement of existing products, quality assurance and testing and (b) facilities and other related overhead. Prior to fiscal 2007, all of our research and development costs were expensed as incurred as all costs potentially capitalizable were insignificant to the consolidated financial statements. During the years ended September 30, 2008 and 2007, we capitalized $477,000 and $136,000, respectively, related to software development costs incurred.
General and Administrative. General and administrative expense consists primarily of (a) salaries, other labor related costs and share-based compensation related to general and administrative personnel, (b) accounting, legal and other professional fees, and (c) facilities and other related overhead.
Restructuring Charges. Restructuring expense reflects the restructuring, initiated in the fourth quarter of fiscal 2006, of certain of our operations in France to realign our resources in that region. These costs include salaries, severance and legal fees.
Amortization of Acquired Intangible Assets. Cost of revenue includes the amortization of developed core technology acquired in our recent acquisitions. Operating expenses include the amortization of acquired customer contracts and related customer relationships as well as the amortization of trade names.
Share-Based Compensation. We account for share-based compensation in accordance with SFAS No. 123(R)Share-Based Payment,which requires measurement of all employee share-based compensation awards using a fair-value method and the recording of the related expense in the consolidated financial statements. Staff Accounting Bulletin (SAB) No. 107 and No. 110 provide supplemental guidance for SFAS No. 123(R). We selected the Black-Scholes option-pricing model as the most appropriate fair-value model for our awards and recognize compensation cost on a straight-line basis over the requisite service period of the awards.
Acquisitions
On December 20, 2005, we entered into an Asset Purchase Agreement with MarketSoft Software Corporation (MarketSoft), a provider of lead management and event-detection software and services, pursuant to which we acquired certain assets of MarketSoft in exchange for $7.3 million in cash, as well as transaction costs and the assumption of specified liabilities of MarketSoft. The acquisition was accounted for as a purchase transaction in accordance with Statement of Financial Accounting Standards SFAS No. 141,Business Combinations, and our operating results therefore include the results of MarketSoft beginning on the acquisition date.
On March 22, 2006, we completed our acquisition of Sane Solutions, LLC (Sane), a privately-held provider of web analytics software for internet marketing. The merger consideration consisted of $21.8 million
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in cash, 151,984 shares of our common stock valued at $1.8 million, which were deposited into an escrow account to secure certain indemnification obligations of the former members of Sane, and assumed liabilities and transaction costs of $5.1 million. Pursuant to the merger agreement, we granted restricted stock unit awards for an aggregate of 88,293 shares of our common stock to specified employees of Sane. The acquisition was accounted for as a purchase transaction in accordance with SFAS No. 141, and our operating results therefore include the results of Sane beginning on the acquisition date.
On July 12, 2007, we acquired by merger MarketingCentral, L.L.C. (MarketingCentral), a provider of web-based marketing management solutions. The merger consideration consisted of $12.5 million in cash, as well as transaction costs and the assumption of liabilities of MarketingCentral. The acquisition was accounted for as a purchase transaction in accordance with SFAS No. 141, and our operating results therefore include the results of MarketingCentral beginning on the acquisition date.
Application of Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The application of GAAP requires that we make estimates that affect our reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates.
Our significant accounting policies are described in Note 2 to our consolidated financial statements. We believe that the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition
We sell our software products and services together in a multiple-element arrangement under perpetual and subscription agreements. We use the residual method to recognize revenues from arrangements that include one or more elements to be delivered at a future date, when evidence of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements based on vendor-specific objective evidence (VSOE) is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements. Each license arrangement requires that we analyze the individual elements in the transaction and determine the fair value of each undelivered element, which typically includes maintenance and services. We allocate revenue to each undelivered element based on its fair value, with the fair value determined by the price charged when that element is sold separately.
For perpetual license agreements, we generally estimate the fair value of the maintenance portion of an arrangement based on the maintenance renewal price for that arrangement. In multiple-element perpetual license arrangements where we sell maintenance for less than fair value, we defer the contractual price of the maintenance plus the difference between such contractual price and the fair value of maintenance over the expected life of the product. We make a corresponding reduction in license revenue. The fair value of the professional services portion of perpetual license arrangements is based on the rates that we charge for these services when sold separately. If, in our judgment, evidence of fair value cannot be established for the undelivered elements in a multiple-element arrangement, the entire amount of revenue from the arrangement is deferred until evidence of fair value can be established, or until the elements for which evidence of fair value could not be established are delivered.
Revenue for implementation services of our software products that are not deemed essential to the functionality of the software products is recognized separately from license and subscription revenue. If we were to determine that services are essential to the functionality of software in an arrangement, the license or subscription and services revenue from the arrangement would be recognized pursuant toSOP 81-1,Accounting for Performance of Construction-Type Contracts and Certain Production-Type Contracts. In such cases, we
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expect that we would be able to make reasonably dependable estimates relative to the extent of progress toward completion by comparing the total hours incurred to the estimated total hours for the arrangement and, accordingly, we would apply the percentage-of-completion method. If we were unable to make reasonably dependable estimates of progress towards completion, then we would use the completed-contract method, under which revenue is recognized only upon completion of the services. If total cost estimates exceed the anticipated revenue, then the estimated loss on the arrangement is recorded at the inception of the arrangement or at the time the loss becomes apparent.
We enter into subscription agreements that include, on a bundled basis, (a) the right to use our software for a specified period of time, (b) updates and upgrades to our software on a when and if available basis, and (c) technical support. Fees paid in connection with a subscription agreement are recognized as revenue ratably over the term of the arrangement, typically one year.
For all of our software arrangements, we do not recognize revenue until we can determine that persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and we deem collection to be probable. In making these judgments, we evaluate these criteria as follows:
| • | Evidence of an arrangement. For the majority of our arrangements, we consider a non-cancelable agreement signed by us and the customer to be persuasive evidence of an arrangement. In transactions below a certain dollar threshold involving the sale of our Affinium NetInsighttm product, we consider a purchase order signed by the customer to be persuasive evidence of an arrangement. | |
| • | Delivery. We consider delivery to have occurred when a CD or other medium containing the licensed software is provided to a common carrier or, in the case of electronic delivery, the customer is given electronic access to the licensed software. Our typical end-user license agreement does not include customer acceptance provisions. | |
| • | Fixed or determinable fee. We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within our normal payment terms. If the fee is subject to refund or adjustment, we recognize the revenue when the refund or adjustment right lapses. If the payments are due beyond our normal terms, we recognize the revenue as amounts become due and payable or as cash is collected. | |
| • | Collection is deemed probable. Customers are evaluated for creditworthiness through our credit review process at the inception of the arrangement. Collection is deemed probable if, based upon our evaluation, we expect that the customer will be able to pay amounts under the arrangement as payments become due. If we cannot conclude that collection is probable, we defer the revenue and recognize the revenue upon cash collection. |
In our agreements with customers and MSPs, we provide a limited warranty that our software will perform in a manner consistent with our documentation under normal use and circumstances. In the event of a breach of this limited warranty, we must repair or replace the software or, if those remedies are insufficient, provide a refund. These agreements generally do not include any other right of return or any cancellation clause or conditions of acceptance.
Allowance for Doubtful Accounts
In addition to our initial credit evaluations at the inception of arrangements, we regularly assess our ability to collect outstanding customer invoices and in so doing must make estimates of the collectibility of accounts receivable. We provide an allowance for doubtful accounts when we determine that the collection of an outstanding customer receivable is not probable. We specifically analyze accounts receivable and historical bad debts experience, customer creditworthiness, and changes in our customer payment history when evaluating the adequacy of the allowance for doubtful accounts. If any of these factors change, our estimates may also change, which could affect the level of our future provision for doubtful accounts.
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Share-Based Compensation
We account for share-based compensation under the provisions of SFAS No. 123(R), which requires us to recognize expense related to the fair value of share-based compensation awards. Pursuant to SFAS 123(R), the fair value of each option grant is estimated on the date of grant using the Black-Scholes pricing model, which requires us to make assumptions as to volatility, risk-free interest rate, expected term of the awards, and expected forfeiture rate. The computation of expected volatility is based on a study of historical volatility rates of comparable companies during a period comparable to the expected option term. The estimated risk-free interest rate is based on the U.S. Treasury risk-free interest rate in effect at the time of grant. The computation of expected option term is based on an average of the vesting term and the maximum contractual life of the Company’s stock options, as described in SAB 107 and SAB 110. Computation of expected forfeitures is based on historical forfeiture rates of the Company’s stock options.
For options and other awards accounted for under SFAS No. 123(R), the Company recognizes compensation expense on a straight-line basis over the requisite service period of the award. In addition, certain tax effects of share-based compensation are reported as a financing activity rather than an operating activity in the statement of cash flows.
Goodwill, Other Intangible Assets and Long-Lived Assets
Goodwill represents the excess of the purchase price over the fair value of net assets associated with various acquisitions. In accordance with SFAS No. 142,Goodwill and Other Intangible Assets, goodwill is not subject to amortization. We allocated a portion of each purchase price to intangible assets, including customer contracts and related customer relationships, developed technology, trade names and acquired licenses that are being amortized over their estimated useful lives of one to 14 years. We also allocated a portion of each purchase price to tangible assets and assessed the liabilities to be recorded as part of the purchase price. The estimates we made in allocating each purchase price to tangible and intangible assets, and in assessing liabilities recorded as part of the purchase, involved the application of judgment and the use of estimates, which could significantly affect our operating results and financial position.
We review the carrying value of goodwill for impairment annually and whenever events or changes in circumstances indicate that the carrying value of goodwill may exceed its fair value. We evaluate impairment by comparing the estimated fair value of each reporting unit to its carrying value. We estimate fair value by computing our expected future discounted operating cash flows based on historical trends, which we adjust to reflect our best estimate of future market and operating conditions. Actual results may differ materially from these estimates. The estimates we make in determining the fair value of each reporting unit involve the application of judgment, including the amount and timing of future cash flows, short- and long-term growth rates, and the weighted average cost of capital, which could affect the timing and size of any future impairment charges. Impairment of our goodwill could significantly affect our operating results and financial position. Based on our most recent assessment, there were no goodwill impairment indicators.
In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, we continually evaluate whether events or circumstances have occurred that indicate that the estimated remaining useful life of our long-lived assets, including intangible assets, may warrant revision or that the carrying value of these assets may be impaired. Any write-downs are treated as permanent reductions in the carrying amount of the assets. We must use judgment in evaluating whether events or circumstances indicate that useful lives should change or that the carrying value of assets has been impaired. Any resulting revision in the useful life or the amount of an impairment also requires judgment. Any of these judgments could affect the timing or size of any future impairment charges. Revision of useful lives or impairment charges could significantly affect our operating results and financial position.
Software Development Costs
We evaluate whether to capitalize or expense software development costs in accordance with SFAS No. 86. We sell products in a market that is subject to rapid technological change, new product development and changing customer needs. Accordingly, we have concluded that technological feasibility is not established until
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the development stage of the product is nearly complete. We define technological feasibility as the completion of a working model. We amortize software development costs, capitalized in accordance with SFAS No. 86, over their estimated useful lives of two years. During the years ended September 30, 2008, 2007 and 2006, we capitalized $132,000, $136,000 and $0, respectively, of software development costs in accordance with SFAS No. 86.
We capitalize certain costs of software developed or obtained for internal use in accordance withSOP 98-1,Accounting for the Costs of Corporate Software Developed or Obtained for Internal Use. The costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, will be capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. During the years ended September 30, 2008, 2007 and 2006, $345,000, $0 and $0, respectively, of internal-use software development costs were capitalized.
Income Taxes
We are subject to income taxes in both the United States and foreign jurisdictions, and we use estimates in determining our provision for income taxes. Significant changes to those estimates could have a material impact on our effective tax rate. Deferred tax assets, related valuation allowances, current tax liabilities and deferred tax liabilities are determined separately by tax jurisdiction. In making these determinations, we estimate tax assets, related valuation allowances, current tax liabilities and deferred tax liabilities and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. We assess the likelihood that deferred tax assets will be realized, and we recognize a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction.
FASB Statement No. 109, (“SFAS No. 109”)Accounting for Income Taxes, requires that deferred tax assets be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The valuation allowance must be sufficient to reduce the deferred tax assets to the amount that is more likely than not to be realized. At September 30, 2008, the Company considered both positive and negative evidence in determining the likelihood of realizing its U.S. federal and state deferred tax assets and the need for a valuation allowance. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character in either the carryback or carryforward period under the tax laws. The Company has relied on historical earnings and its ability to accurately forecast earnings as positive evidence that its U.S. deferred tax assets would be realized and that a valuation allowance was not required through the end of the third quarter of fiscal 2008, other than the previously established valuation allowance associated with state research and development credits. However, negative evidence has accumulated since that time. The global economy has deteriorated significantly since the third quarter of fiscal 2008, which negatively impacted the Company’s fourth quarter of fiscal 2008 results. Although the Company has adjusted its forecasts accordingly, it has determined that its current visibility to future results is limited and there is uncertainty as to its ability to accurately predict future results in the current economic environment. As such, the Company has determined that recent negative results should be considered indicative of future results. Based on the weight of all of the available evidence, the Company determined that it is more likely than not that all of the U.S. federal and state deferred tax assets may not be realized and that a valuation allowance should be recorded against the net balance of these deferred tax assets as of September 30, 2008. Accordingly, the Company recorded a valuation allowance of $8.1 million during the three months ended September 30, 2008 to reduce the net balance of these deferred tax assets to zero. Approximately $7.9 million of the valuation allowance had a net impact on the Company’s consolidated income statement.
In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109(“FIN 48”), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and
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penalties, accounting in interim periods, disclosure and transition. There was no cumulative effect upon adoption of FIN 48.
Contingencies
From time to time and in the ordinary course of business, we may be subject to various claims, charges and litigation. In some cases, the claimants may seek damages, as well as other relief, which, if granted, could require significant expenditures. In accordance with SFAS No. 5,Accounting for Contingencies, we accrue the estimated costs of settlement or damages when a loss is deemed probable and such costs are estimable. In accordance with EITF Topic D-77,Accounting for Legal Costs Expected To Be Incurred In Connection With A Loss Contingency, we accrue for legal costs related to a loss contingency when a loss is probable and such amounts are estimable. Otherwise, these costs are expensed as incurred. If the estimate of a probable loss or defense costs is a range and no amount within the range is more likely, we accrue the minimum amount of the range.
Valuation of Business Combinations
We record intangible assets acquired in business combinations under the purchase method of accounting. We allocate the amounts we pay for each acquisition to the assets we acquire and liabilities we assume based on their fair values at the date of acquisition. We then allocate the purchase price in excess of net tangible assets acquired to identifiable intangible assets, including developed technology, customer contracts and related customer relationships, tradenames and in-process research and development. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management. We allocate any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill. The use of alternative purchase price allocations and alternative estimated useful life assumptions could result in different intangible asset amortization expense in current and future periods.
The valuation of in-process research and development represents the estimated fair value at the dates of acquisition related to in-process projects. Our in-process research and development represents the value of in-process projects that have not yet reached technological feasibility and have no alternative future uses as of the date of acquisition. We expense the value attributable to these in-process projects at the time of the acquisition.
Results of Operations
Comparison of Years Ended September 30, 2008 and 2007
Revenue
| Year Ended September 30, | ||||||||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||||||||
| Percentage of | Percentage of | Period-to-Period Change | ||||||||||||||||||||||
| Total | Total | Percentage | ||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | Change | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| License revenue | $ | 42,877 | 35 | % | $ | 38,970 | 38 | % | $ | 3,907 | 10 | % | ||||||||||||
| Maintenance and services revenue: | ||||||||||||||||||||||||
| Maintenance fees | 44,403 | 37 | 39,989 | 39 | 4,414 | 11 | ||||||||||||||||||
| Services | 20,108 | 17 | 14,329 | 14 | 5,779 | 40 | ||||||||||||||||||
| Total maintenance and services revenue | 64,511 | 54 | 54,318 | 53 | 10,193 | 19 | ||||||||||||||||||
| Subscription revenue | 13,743 | 11 | 8,955 | 9 | 4,788 | 53 | ||||||||||||||||||
| Total revenue | $ | 121,131 | 100 | % | $ | 102,243 | 100 | % | $ | 18,888 | 18 | % | ||||||||||||
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Total revenue for fiscal 2008 was $121.1 million, an increase of 18%, or $18.9 million, from fiscal 2007. Total revenue increased as a result of higher sales of our Affinium product suite, an increase in international professional service revenue, and higher subscription revenue primarily related to the MarketingCentral acquisition and higher sales of Affinium NetInsight.
Total license revenue for fiscal 2008 was $42.9 million, an increase of 10%, or $3.9 million, from fiscal 2007. This increase in license revenue was primarily attributable to higher sales of our Affinium products.
Maintenance fees revenue is associated with maintenance agreements in connection with the sales of perpetual licenses to our existing installed customer base and to new customers. Maintenance fees revenue for fiscal 2008 was $44.4 million, an increase of 11%, or $4.4 million from fiscal 2007. The increase primarily reflects maintenance fees from the sale of new licenses in fiscal 2007.
Services revenue for fiscal 2008 was $20.1 million, an increase of 40%, or $5.8 million, from fiscal 2007. The increase in services revenue was primarily the result of growth in the number of implementation services performed in Europe and Asia related to new license agreements.
Total subscription revenue for fiscal 2008 was $13.7 million, an increase of 53%, or $4.8 million, from fiscal 2007. The increase in subscription revenue was primarily attributable to the impact of the MarketingCentral acquisition, higher sales of Affinium NetInsight and increased sales through our MSP channel. We anticipate the subscription revenue will continue to increase in future years as we enter into additional subscription agreements and expand related product offerings.
Recurring Revenue
| Year Ended September 30, | ||||||||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||||||||
| Percentage of | Percentage of | Period-to-Period Change | ||||||||||||||||||||||
| Total | Total | Percentage | ||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | Change | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Subscription revenue | $ | 13,743 | 11 | % | $ | 8,955 | 9 | % | $ | 4,788 | 53 | % | ||||||||||||
| Maintenance revenue | 44,403 | 37 | 39,989 | 39 | 4,414 | 11 | ||||||||||||||||||
| Total recurring revenue | 58,146 | 48 | 48,944 | 48 | 9,202 | 19 | ||||||||||||||||||
| License revenue | 42,877 | 35 | 38,970 | 38 | 3,907 | 10 | ||||||||||||||||||
| Services revenue | 20,108 | 17 | 14,329 | 14 | 5,779 | 40 | ||||||||||||||||||
| Total revenue | $ | 121,131 | 100 | % | $ | 102,243 | 100 | % | $ | 18,888 | 18 | % | ||||||||||||
We generate recurring revenue from both subscription and maintenance agreements, which is recognized ratably over the life of the arrangement.
Recurring revenue for fiscal 2008 was $58.1 million, an increase of 19%, or $9.2 million from fiscal 2007. The increase in recurring revenue resulted from (a) an increase in subscription revenue attributable to the impact of the MarketingCentral acquisition, (b) an increase in maintenance fees on sales of new license and (c) additional subscription revenue related to sales of Affinium NetInsight. Recurring revenue as a percentage of total revenue was 48% for both fiscal 2008 and fiscal 2007.
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Revenue by Geography
| Year Ended September 30, | ||||||||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||||||||
| Percentage of | Percentage of | Period-to-Period Change | ||||||||||||||||||||||
| Total | Total | Percentage | ||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | Change | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| North America | $ | 77,051 | 64 | % | $ | 74,953 | 73 | % | $ | 2,098 | 3 | % | ||||||||||||
| International | 44,080 | 36 | 27,290 | 27 | 16,790 | 62 | ||||||||||||||||||
| Total revenue | $ | 121,131 | 100 | % | $ | 102,243 | 100 | % | $ | 18,888 | 18 | % | ||||||||||||
For purposes of this discussion, we designate revenue by geographic regions based on the locations of our customers. North America is comprised of revenue from the United States and Canada. International is comprised of revenue from the rest of the world. Depending on the timing of new customer contracts, revenue mix from geographic region can vary widely from period to period.
Total revenue for North America for the fiscal year 2008 was $77.1 million, an increase of 3%, or $2.1 million from the fiscal year 2007. The increase in total revenue for North America was primarily related to an increase in maintenance and subscription revenue, partially offset by a decrease in license revenue. The increase in international revenue was primarily related to increased license and professional services revenue in both Europe and Asia, which is reflective of our increased market presence in these regions.
Cost of Revenue
| Year Ended September 30, | ||||||||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||||||||
| Gross Margin | Gross Margin | Period-to-Period Change | ||||||||||||||||||||||
| on Related | on Related | Percentage | ||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | Change | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| License | $ | 3,118 | 93 | % | $ | 2,782 | 93 | % | $ | 336 | 12 | % | ||||||||||||
| Maintenance and services | 25,461 | 61 | 18,958 | 65 | 6,503 | 34 | ||||||||||||||||||
| Subscription | 2,862 | 79 | 692 | 92 | 2,170 | 314 | ||||||||||||||||||
| Total cost of revenue | $ | 31,441 | 74 | % | $ | 22,432 | 78 | % | $ | 9,009 | 40 | % | ||||||||||||
Cost of license revenue for fiscal year 2008 was $3.1 million, an increase of 12% or $336,000 from fiscal 2007. The increase in cost of license revenue was primarily due to an increase in labor-related costs and amortization of capitalized software. Royalties paid for third-party licensed technology represented 2% of total license revenue for fiscal year 2008 and 2007. Royalties related to license revenue may fluctuate based on the mix of products we sell. We expect royalties paid for third-party licensed technology to remain between 1% and 2% of total license revenue. Gross margin on license revenue was 93% in both fiscal 2008 and 2007.
Cost of maintenance and services for fiscal 2008 was $25.5 million, an increase of 34%, or $6.5 million from fiscal 2007. The increase in cost of maintenance and services revenue was primarily due to (a) a $3.9 million increase in labor related costs to support increased customer implementations and a growing installed customer base, (b) a $1.3 million increase in subcontractor costs also related to increased customer implementations and (c) a $308,000 increase in share-based compensation. Gross margin on maintenance and services revenue was 61% for fiscal 2008, down from 65% for fiscal year 2007. The reduction in gross margin primarily related to the increase in the mix of services revenue compared to maintenance revenue. Gross margin on maintenance and services revenue fluctuates based on the mix of revenues from services and maintenance and the degree to which we use subcontractor services.
Cost of subscription revenue for fiscal year 2008 was $2.9 million, an increase of 314% or $2.2 million, from fiscal year 2007. The increase in cost of subscription revenue was due to an increase in labor-related expenses, primarily related to an increase in hosting related activities including the impact of the MarketingCentral acquisition.
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Operating Expenses
| Year Ended September 30, | ||||||||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||||||||
| Percentage of | Percentage of | Period-to-Period Change | ||||||||||||||||||||||
| Total | Total | Percentage | ||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | Change | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Sales and marketing | $ | 49,747 | 41 | % | $ | 41,068 | 40 | % | $ | 8,679 | 21 | % | ||||||||||||
| Research and development | 22,971 | 19 | 22,034 | 21 | 937 | 4 | ||||||||||||||||||
| General and administrative | 19,078 | 16 | 16,362 | 16 | 2,716 | 17 | ||||||||||||||||||
| Restructuring charges (credits) | (286 | ) | — | 1,244 | 1 | (1,530 | ) | (123 | ) | |||||||||||||||
| Amortization of acquired intangible assets | 1,573 | 1 | 1,572 | 2 | 1 | — | ||||||||||||||||||
| Total operating expenses | $ | 93,083 | 77 | % | $ | 82,280 | 80 | % | $ | 10,803 | 13 | % | ||||||||||||
Sales and Marketing. Sales and marketing expense for fiscal 2008 was $49.7 million, an increase of 21%, or $8.7 million from fiscal 2007. The increase was primarily the result of (a) a $6.9 million increase in labor-related expenses due to increased headcount and increased commission expense as a result of higher revenues and (b) a $682,000 increase in share-based compensation expense. Sales and Marketing expense is expected to increase slightly in absolute dollars during fiscal 2009 as compared to 2008.
Research and Development. Research and development expense for fiscal 2008 was $22.9 million, an increase of 4%, or $937,000 from fiscal 2007. The increase in research and development was primarily the result of (a) a $788,000 increase in labor related expenses, principally due to an increase in personnel as we continue our investment and development of our product suite, and (b) a $143,000 increase in share-based compensation expense. Capitalized software development costs were $477,000 and $136,000 for fiscal 2008 and 2007, respectively. Research and development expense is expected to remain relatively unchanged in absolute dollars during fiscal 2009 as compared to 2008.
General and Administrative. General and administrative expense for fiscal 2008 was $19.1 million, an increase of 17%, or $2.7 million from fiscal 2007. The increase in general and administrative expense was primarily the results of (a) a $1.9 million increase in labor-related expenses in order to support the overall growth of the company and (b) a $937,000 increase in professional services fees primarily related to the filing of our fiscal 2007 Annual Report on Form 10-K and increased legal fees and tax-related services. General and administrative expense is expected to remain relatively unchanged in absolute dollars during fiscal 2009 as compared to 2008.
Restructuring charges/credits. In the fourth quarter of fiscal 2006, we initiated the restructuring of certain of our operations in France to realign our resources in that region. As a result of this initiative, we terminated several employees resulting in a restructuring charge and accrual of $1.2 million for severance and related costs in the first quarter of fiscal 2007. During the year ended September 30, 2008, we reversed a portion of the restructuring accrual and recorded a benefit of $286,000 to the statement of operations in connection with final settlement with an employee.
Amortization of Acquired Intangible Assets. Amortization of acquired intangible assets was $1.6 million for both fiscal 2008 and 2007.
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Other Income
| Year Ended September 30, | ||||||||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||||||||
| Percentage of | Percentage of | Period-to-Period Change | ||||||||||||||||||||||
| Total | Total | Percentage | ||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | Change | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Interest income, net | $ | 1,448 | 1 | % | $ | 2,056 | 2 | % | $ | (608 | ) | (30 | )% | |||||||||||
| Other income (expense), net | (383 | ) | — | 108 | — | (491 | ) | (455 | ) | |||||||||||||||
| Total other income | $ | 1,065 | 1 | % | $ | 2,164 | 2 | % | $ | (1,099 | ) | (51 | )% | |||||||||||
Interest income, net was $1.4 million for fiscal 2008, a $608,000 decrease from fiscal 2007. Interest income is generated from the investment of our cash balances, less related bank fees. The decrease in interest income, net principally reflected lower interest rates in invested cash balances.
Other expense, net consisted of foreign currency translation and transaction gains and losses. The change in other income, net was primarily driven by changes in foreign exchange rates as compared to the previous fiscal year.
Provision for Income Taxes
| Year Ended September 30, | ||||||||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||||||||
| Percentage of | Percentage of | |||||||||||||||||||||||
| Income | Income | |||||||||||||||||||||||
| Before | Before | |||||||||||||||||||||||
| Provision for | Provision for | Period-to-Period Change | ||||||||||||||||||||||
| Income | Income | Percentage | ||||||||||||||||||||||
| Amount | Taxes | Amount | Taxes | Amount | Change | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Provision for income taxes | $ | 7,411 | (318 | )% | $ | (801 | ) | 263 | % | $ | 8,212 | (1,025 | )% | |||||||||||
Provision for income taxes was $7.4 million for fiscal 2008, or an effective tax rate of (318)%, a $8.2 million increase in the tax provision from fiscal 2007. This change in provision for income taxes principally reflects the recording of an $8.1 million valuation allowance against the Company’s U.S federal and state deferred tax assets during the three months ended September 30, 2008. During the year ended September 30, 2008 and 2007, our effective tax rate is different from the statutory tax rate due to the tax impact of recording the valuation allowance during fiscal 2008 against the Company’s U.S. federal and state deferred tax assets and accounting for share-based compensation pursuant SFAS No. 123(R).
During the three months ended September 30, 2008, we recorded an $8.1 million valuation allowance against the Company’s U.S. federal and state deferred tax assets. Approximately $7.9 million of the valuation allowance had a net impact on the Company’s consolidated income statement. The Company considered both positive and negative evidence in determining the likelihood of realizing its U.S. federal and state deferred tax assets and the need for a valuation allowance. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character in either the carryback or carryforward period under the tax laws. The Company has relied on historical earnings and its ability to accurately forecast earnings as positive evidence that its U.S. deferred tax assets would be realized and that a valuation allowance was not required through the end of the third quarter of fiscal 2008, other than the previously established valuation allowance associated with state research and development credits. However, negative evidence has accumulated since that time. The global economy has deteriorated significantly since the third quarter of fiscal 2008, which negatively impacted the Company’s fourth quarter of fiscal 2008 results. Although the Company has adjusted its forecasts accordingly, it has determined that its current visibility to future results is limited and there is uncertainty as to its ability to accurately predict future results in the current economic environment. As such, the Company has determined that recent negative results should be considered indicative of future results. Based on the weight of all of the available evidence, the Company determined that it is more likely than not that all of the U.S. federal and state deferred tax assets may not be realized and that a valuation allowance should be recorded against the net balance of these deferred tax assets as of September 30, 2008.
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Comparison of Years Ended September 30, 2007 and 2006
Revenue
| Year Ended September 30, | ||||||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||||||
| Percentage of | Percentage of | Period-to-Period Change | ||||||||||||||||||||||
| Total | Total | Percentage | ||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | Change | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| License revenue | $ | 38,970 | 38 | % | $ | 35,023 | 42 | % | $ | 3,947 | 11 | % | ||||||||||||
| Maintenance and services revenue: | ||||||||||||||||||||||||
| Maintenance fees | 39,989 | 39 | 30,586 | 37 | 9,403 | 31 | ||||||||||||||||||
| Services | 14,329 | 14 | 10,290 | 13 | 4,039 | 39 | ||||||||||||||||||
| Total maintenance and services revenue | 54,318 | 53 | 40,876 | 50 | 13,442 | 33 | ||||||||||||||||||
| Subscription Revenue | 8,955 | 9 | 6,512 | 8 | 2,443 | 38 | ||||||||||||||||||
| Total revenue | $ | 102,243 | 100 | % | $ | 82,411 | 100 | % | $ | 19,832 | 24 | % | ||||||||||||
Total revenue for fiscal 2007 was $102.2 million, an increase of 24%, or $19.8 million, from fiscal 2006. Total revenue increased as a result of increased maintenance fees on the sale of licenses, higher sales of our Affinium product suite through license and subscription agreements and an increase in revenue from implementation and training services.
License revenue for fiscal 2007 was $39.0 million, an increase of 11%, or $3.9 million, from fiscal 2006. This increase in license revenue was attributable to higher sales of our Affinium products in international markets, primarily Europe and Asia.
Maintenance fees revenue is associated with renewal agreements from our existing installed customer base and maintenance agreements in connection with the sale of new perpetual licenses. Maintenance fees revenue for fiscal 2007 was $40.0 million, an increase of 31%, or $9.4 million, from fiscal 2006. The increase primarily reflects additional maintenance fees on the sale of licenses during fiscal 2006 and, to a lesser extent, additional maintenance fees on the sale of licenses during fiscal 2007.
Services revenue for fiscal 2007 was $14.3 million, an increase of 39%, or $4.0 million, from fiscal 2006. This increase in services revenue resulted from growth in the number of implementation and training services in both North America and Europe related to new licenses.
Subscription revenue for fiscal 2007 was $9.0 million, an increase of 38%, or $2.4 million, from fiscal 2006. Subscription revenue is primarily derived from agreements established through MSPs.
Recurring Revenue
| Year Ended September 30, | ||||||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||||||
| Percentage of | Percentage of | Period-to-Period Change | ||||||||||||||||||||||
| Total | Total | Percentage | ||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | Change | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Maintenance fees | $ | 39,989 | 39 | % | $ | 30,586 | 37 | % | $ | 9,403 | 31 | % | ||||||||||||
| Subscription fees | 8,955 | 9 | 6,512 | 8 | 2,443 | 38 | ||||||||||||||||||
| Total recurring revenue | 48,944 | 48 | 37,098 | 45 | 11,846 | 32 | ||||||||||||||||||
| Perpetual license | 38,970 | 38 | 35,023 | 43 | 3,947 | 11 | ||||||||||||||||||
| Services | 14,329 | 14 | 10,290 | 12 | 4,039 | 39 | ||||||||||||||||||
| Total revenue | $ | 102,243 | 100 | % | $ | 82,411 | 100 | % | $ | 19,832 | 24 | % | ||||||||||||
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We generate recurring revenue from both subscription and maintenance agreements, which is recognized ratably over the term of the agreement.
Recurring revenue for fiscal 2007 was $48.9 million, an increase of 32%, or $11.8 million, from fiscal 2006. The increase in recurring revenue resulted from (a) additional maintenance fees on the sale of licenses during fiscal 2006 and, to a lesser extent, additional maintenance fees on the sale of new licenses during fiscal 2007; and (b) additional subscription agreements through our MSP partners. Recurring revenue as a percent of total revenue was 48% for fiscal 2007, up from 45% for fiscal 2006.
Revenue by Geography
| Year Ended September 30, | ||||||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||||||
| Percentage of | Percentage of | Period-to-Period Change | ||||||||||||||||||||||
| Total | Total | Percentage | ||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | Change | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| North America | $ | 74,953 | 73 | % | $ | 64,969 | 79 | % | $ | 9,984 | 15 | % | ||||||||||||
| International | 27,290 | 27 | % | 17,442 | 21 | 9,848 | 56 | % | ||||||||||||||||
| Total revenue | $ | 102,243 | 100 | % | $ | 82,411 | 100 | % | $ | 19,832 | 24 | % | ||||||||||||
For purposes of this discussion, we designate revenue by geographic regions based on the locations of our customers. North America is comprised of revenue from the United States and Canada and International is comprised of revenue from the rest of the world. Depending on the timing of new customer contracts, revenue mix from geographic region can vary widely from period to period.
Total revenue for North America for fiscal 2007 was $75.0 million, an increase of 15%, or $10.0 million, from fiscal 2006. The increase was primarily related to growth in maintenance revenues and professional services.
Total revenue for our International business for fiscal 2007 was $27.3 million, an increase of 56%, or $9.8 million, from fiscal 2006. The increase was a result of strong license sales of our Affinium product primarily in Europe and Asia.
Cost of Revenue
| Year Ended September 30, | ||||||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||||||
| Gross Margin | Gross Margin | Period-to-Period Change | ||||||||||||||||||||||
| on Related | on Related | Percentage | ||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | Change | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| License | $ | 2,782 | 93 | % | $ | 1,924 | 95 | % | $ | 858 | 45 | % | ||||||||||||
| Maintenance and services | 18,958 | 65 | 13,854 | 66 | 5,104 | 37 | ||||||||||||||||||
| Subscription | 692 | 92 | 429 | 93 | 263 | 61 | ||||||||||||||||||
| Total cost of revenue | $ | 22,432 | 78 | % | $ | 16,207 | 80 | % | $ | 6,225 | 38 | % | ||||||||||||
Cost of license revenue for fiscal 2007 was $2.8 million, an increase of 45%, or $858,000, from fiscal 2006. The increase in cost of license revenue was primarily due to (a) a $367,000 increase in labor related costs; and (b) a $228,000 increase in royalties. Royalties paid for third-party licensed technology represented 2% of total license revenue for fiscal 2007. Royalties related to license revenue may fluctuate based on the mix of products sold in any given fiscal year. Gross margin on license revenue was 93% in fiscal 2007, down from 95% in fiscal 2006. The decrease primarily related to the increase in royalties paid to third parties for licensed technology as well as the increase in labor related costs.
Cost of maintenance and services for fiscal 2007 was $19.0 million, an increase of 37%, or $5.1 million, from fiscal 2006. The increase in cost of maintenance and services revenue was primarily due to (a) a $3.4 million increase in labor related costs; and (b) a $1.3 million increase in expenses related to sub-
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contractor fees for implementation services. Gross margin on maintenance and services revenue was 65% in fiscal 2007, relatively unchanged from fiscal 2006. Gross margin on maintenance and services revenue fluctuates based on the mix of revenues from services and maintenance and the degree to which we subcontract services arrangements.
Cost of subscription revenue for fiscal 2007 was $692,000, an increase of 61%, or $263,000, from fiscal 2006. The increase in cost of subscription revenue was primarily due to an increase in labor related expenses and royalties related to higher subscription revenue. Gross margin on subscription revenue was 92% in fiscal 2007 a decrease from 93% in fiscal 2006 primarily due to increased royalties.
Operating Expenses
| Year Ended September 30, | ||||||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||||||
| Percentage of | Percentage of | Period-to-Period Change | ||||||||||||||||||||||
| Total | Total | Percentage | ||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | Change | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Sales and marketing | $ | 41,068 | 40 | % | $ | 33,446 | 41 | % | $ | 7,622 | 23 | % | ||||||||||||
| Research and development | 22,034 | 22 | 17,085 | 21 | 4,949 | 29 | ||||||||||||||||||
| General and administrative | 16,362 | 16 | 11,549 | 14 | 4,813 | 42 | ||||||||||||||||||
| Restructuring charges | 1,244 | 1 | 255 | — | 989 | 388 | ||||||||||||||||||
| In-process research and development | — | — | 4,037 | 5 | (4,037 | ) | (100 | ) | ||||||||||||||||
| Amortization of acquired intangible assets | 1,572 | 2 | 1,109 | 1 | 463 | 42 | ||||||||||||||||||
| Total operating expenses | $ | 82,280 | 80 | % | $ | 67,481 | 82 | % | $ | 14,799 | 22 | % | ||||||||||||
Sales and Marketing. Sales and marketing expense for fiscal 2007 was $41.1 million, an increase of 23%, or $7.6 million, from fiscal 2006. The increase was primarily the result of (a) a $5.1 million increase in labor related expenses, including increased commission expenses due to additional sales employees hired during fiscal 2007 and higher revenues subject to commissions; (b) a $974,000 increase in marketing programs relating to promotional activity and new product introductions; and (c) a $931,000 increase in share-based compensation expense.
Research and Development. Research and development expense for fiscal 2007 was $22.0 million, an increase of 29%, or $4.9 million, from fiscal 2006. The increase in research and development was primarily the result of (a) a $3.6 million increase in labor related expenses, principally due to additional personnel related to increased investment in our Affinium product suite; (b) a $473,000 increase in share-based compensation expense; and (c) a $351,000 increase in professional services.
General and Administrative. General and administrative expense for fiscal 2007 was $16.4 million, an increase of 42%, or $4.8 million, from fiscal 2006. The increase in general and administrative expense was primarily the results of (a) a $2.9 million increase in labor related expenses due to increased headcount as we continue to build infrastructure to support our growth; (b) a $781,000 increase in share-based compensation expenses; (c) a $430,000 increase in professional services costs; and (d) a $285,000 increase in depreciation expense.
Restructuring charges. In the fourth quarter of fiscal 2006, we initiated the restructuring of certain of our operations in France to realign our resources in that region. As a result of this initiative, we terminated several employees resulting in a restructuring charge and accrual of $255,000 for severance and related costs in the fourth quarter of fiscal 2006 and an additional charge of $1.2 million during fiscal 2007.
In-Process Research and Development. Operating expenses for fiscal 2006 includes a $4.0 millionin-process research and development charge associated with the acquisition of Sane. Technological feasibility had not been established, nor was there an alternative future use for certain of the technology under
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development. We completed development in June 2006 as we had originally expected when determining the fair value of the project, incurring approximately $450,000 of product development costs. We believe the estimated in-process research and development amount represents the fair value at the date of acquisition and does not exceed the amount a third party would pay for the project.
Amortization of Acquired Intangible Assets. Amortization of acquired intangible assets was $1.6 million for fiscal 2007, an increase of 42%, or $463,000 from fiscal 2006. The increase primarily relates to a full year of amortization during fiscal 2007 on the intangible assets relating to the Sane and MarketSoft acquisitions as compared to partial year amortization during fiscal 2006.
Other Income
| Year Ended September 30, | ||||||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||||||
| Percentage of | Percentage of | Period-to-Period Change | ||||||||||||||||||||||
| Total | Total | Percentage | ||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | Change | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Interest income, net | $ | 2,056 | 2 | % | 2,047 | 2 | % | $ | 9 | — | ||||||||||||||
| Other income (expense), net | 108 | — | (57 | ) | — | 165 | 289 | |||||||||||||||||
| Total other income | $ | 2,164 | 2 | % | $ | 1,990 | 2 | % | $ | 174 | 9 | % | ||||||||||||
Interest income, net was $2.1 million for fiscal 2007, relatively unchanged from fiscal 2006. Interest income is generated from the investment of our cash balances, less related bank fees.
Other income (expense), net consisted of foreign currency translation and transaction gains and losses, as well as other miscellaneous income and charges. The change in other expense, net was primarily driven by more favorable foreign currency exchange rates.
Provision for Income Taxes
| Year Ended September 30, | ||||||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||||||
| Percentage of | Percentage of | |||||||||||||||||||||||
| Income | Income | |||||||||||||||||||||||
| Before | Before | Period-to-Period | ||||||||||||||||||||||
| Provision for | Provision for | Change | ||||||||||||||||||||||
| Income | Income | Percentage | ||||||||||||||||||||||
| Amount | Taxes | Amount | Taxes | Amount | Change | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Provision (benefit) for income taxes | $ | (801 | ) | 263 | % | $ | 37 | 5 | % | $ | (838 | ) | n/m* | |||||||||||
| * | Not meaningful |
Benefit for income taxes was $801,000 for fiscal 2007, a $838,000 increase in benefit from fiscal 2006. This change principally reflects the $1.0 million difference in income (loss) before income taxes during fiscal 2007, the reduction of a portion of the valuation allowance related to foreign operations and research and development credits. Also, the Company recorded a provision for state income taxes of $141,000 during fiscal 2007 related to prior fiscal years.
At September 30, 2007, we had available foreign net operating loss carryforwards of $170,000 that do not expire, against which we have a full valuation allowance, U.S. foreign tax credit carryforwards of $163,000 that expire through 2010 and state net operating loss carryforwards of $2.1 million that expire at various dates through 2027. The extent to which we can benefit from our deferred tax assets in future years will depend on the amount of taxable income we generate.
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Liquidity and Capital Resources
Historically, we have financed our operations and met our capital expenditure requirements primarily through funds generated from operations and sales of our capital stock. As of September 30, 2008, our primary sources of liquidity consisted of our total cash and cash equivalents balance of $35.8 million, and our investments balance of $14.5 million. As of September 30, 2008, we had no outstanding debt.
Our cash and cash equivalents at September 30, 2008 were held for working capital purposes and were invested primarily in commercial paper with maturities of less than ninety days. Our investments at September 30, 2008 consisted primarily of commercial paper, corporate bonds and government agency securities. We do not enter into investments for trading or speculative purposes. Restricted cash of $273,000 at September 30, 2008 was held in certificates of deposit as collateral for a letter of credit related to the lease agreement for our corporate headquarters in Waltham, Massachusetts, and for our sales office in France. Investments are made in accordance with our corporate investment policy, as approved by our Board of Directors. The primary objective of this policy is the preservation of capital. Investments are limited to high quality corporate debt, money market funds and similar instruments. The policy establishes maturity limits, liquidity requirements and concentration limits. At September 30, 2008, we were in compliance with this internal policy.
Net cash provided by operating activities was $14.3 million in fiscal 2008, $10.7 million in 2007 and $7.4 million in 2006. Net income adjusted for non-cash charges (including depreciation, amortization, shared-based compensation and deferred tax benefits) was $7.7 million in fiscal 2008 compared to $8.1 million in fiscal 2007, a decrease of $400,000. During fiscal 2008, we incurred a non-cash charge of $7.9 million to record a valuation allowance against our U.S. federal and state deferred tax assets. Sources of cash were a decrease in accounts receivable from customers, as well as an increase in accounts payable. Accounts receivable decreased primarily relating to the timing of license transactions as well as shortened collection cycles compared to the prior year. These increases in operating cash flow in fiscal 2008 were offset by a decrease in deferred revenue, which primarily relates to multiple-element arrangements that were executed during fiscal 2007 where license revenue was recorded to deferred revenue and subsequently recorded as revenue in fiscal 2008, when certain contingencies were resolved or undelivered elements were delivered.
Investing activities provided $2.3 million in fiscal 2008 and consumed $25.3 million and $23.1 million in fiscal 2007 and 2006, respectively. In fiscal 2008, net sales and maturities of investments was $5.1 million compared to net purchases of investments of $10.1 million in fiscal 2007. This net change of $15.2 million is reflective of the Company holding more of its fiscal 2008 investments in cash equivalents compared to that of the prior year. In addition, the company consumed $11.9 million of net cash for acquisitions as part of its purchase of MarketingCentral in July 2007.
Our financing activities generated cash of $906,000, $2.3 million and $2.4 million in fiscal 2008, 2007 and 2006, respectively. In fiscal 2008, $1.8 million of cash was generated from the issuance of shares under the employee stock purchase and stock option plans as well as from related tax benefits, as compared to $2.8 million generated in fiscal 2007. The decrease in proceeds primarily relates to a decrease in tax benefits generated upon the exercise of stock options during fiscal 2008.
Requirements
Capital Expenditures. We make capital expenditures primarily to acquire computer and other equipment, software, furniture and leasehold improvements to support the growth of our business. Our capital expenditures totaled $2.5 million in fiscal 2008, $3.2 million in fiscal 2007 and $1.4 million in fiscal 2006, and related primarily to software used for internal purposes and computer equipment. We expect capital expenditures in fiscal 2009 to increase compared to that of fiscal 2008.
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Contractual Obligations and Requirements. The following table sets forth our commitments to settle contractual obligations in cash after September 30, 2008:
| 2013 and | ||||||||||||||||||||||||
| 2009 | 2010 | 2011 | 2012 | Beyond | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Operating leases as of September 30, 2008 | $ | 1,739 | $ | 350 | $ | 228 | $ | — | $ | — | $ | 2,317 | ||||||||||||
| Open vendor purchase obligations | $ | 2,898 | $ | 558 | $ | 199 | $ | — | $ | — | $ | 3,655 | ||||||||||||
Our significant lease obligation relates to our corporate headquarters in Waltham, Massachusetts as well as our facility in the United Kingdom. Upon expiration of current operating leases in 2010 and 2011, respectively, we expect to renew the existing lease, or contract for new leased facilities, at prevailing rates. Open vendor purchase obligations represent contractual commitments to purchase goods or services as of September 30, 2008.
The contractual obligations table above does not include $666 of gross unrecognized tax benefits at September 30, 2008 as the Company is unable to make reasonably reliable estimates of the period of cash settlement with the respective tax authorities. See Note 10 to our consolidated financial statements for further discussion on income taxes.
We believe that our current cash, cash equivalents, and marketable securities will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months following the date of this Annual Report. Long-term cash requirements, other than normal operating expenses, are anticipated for the continued development of new products, financing anticipated growth and the possible acquisition of businesses, software products or technologies complementary to our business. On a long-term basis or to complete acquisitions in the short term, we may require additional external financing through credit facilities, sales of additional equity or other financing arrangements. There can be no assurance that such financing can be obtained on favorable terms, if at all.
Off-Balance-Sheet Arrangements
We do not have any special purpose entities or off-balance sheet financing arrangements.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Where applicable, SFAS No. 157 simplifies and codifies related guidance within GAAP. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB deferred the implementation of SFAS No. 157 for certain non-financial assets and liabilities for fiscal years beginning after November 15, 2008. The Company is analyzing the expected impact from adopting this statement on its financial statements, but currently does not believe its adoption will have a significant impact on the financial position or results of operations of the Company.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, which allows companies the option to measure financial assets or liabilities at fair value and include unrealized gains and losses in net income rather than equity. This becomes available when the Company adopts SFAS No. 157, which will be fiscal year 2009. The Company is analyzing the expected impact from adopting this statement on its financial statements, but currently does not believe its adoption will have a significant impact on the financial position or results of operations of the Company.
In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations. This statement establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable
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users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008 and, as such, the Company will adopt this standard in fiscal 2010. The impact of the standard on our financial position and results of operations will be dependent upon the number of and magnitude of the acquisitions that are consummated once the standard is effective.
In April 2008, the FASB issued FASB Staff PositionNo. FAS 142-3, “Determination of Useful Life of Intangible Assets,” orFSP 142-3.FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 “Goodwill and Other Intangible Assets,” or SFAS 142.FSP 142-3 is intended to improve the consistency between the useful life of an intangible asset determined under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), “Business Combinations,” or SFAS 141(R), and other U.S. generally accepted accounting principles, or GAAP.FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is not permitted. The Company is currently evaluating the effect that the adoption ofFSP 142-3 will have on its results of operations and financial condition.
Impact of Inflation
We believe that our revenue and results of operations have not been significantly impacted by inflation during the past three fiscal years. We do not believe that our revenue and results of operations will be significantly impacted by inflation in future periods.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes.
Foreign Currency Exchange Risk
Our operating results and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro and the British pound sterling. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations. Some of our agreements with foreign customers involve payments denominated in currencies other than the U.S. dollar, which may create foreign currency exchange risks for us. Revenue denominated in currencies other than the U.S. dollar represented 32% of total revenue in fiscal 2008, 22% in fiscal 2007 and 16% in fiscal 2006.
As of September 30, 2008, we had $10.6 million of receivables denominated in currencies other than the U.S. dollar. If the foreign exchange rates fluctuated by 10% as of September 30, 2008, the fair value of our receivables denominated in currencies other than the U.S. dollar would have fluctuated by $1.1 million. In addition, our subsidiaries have intercompany accounts that are eliminated in consolidation, but that expose us to foreign currency exchange rate exposure. Exchange rate fluctuations on short-term intercompany accounts are reported in other income (expense). Exchange rate fluctuations on long-term intercompany accounts, which are invested indefinitely without repayment terms, are recorded in other comprehensive income (loss) in stockholders’ equity.
Interest Rate Risk
At September 30, 2008, we had unrestricted cash and cash equivalents totaling $35.8 million and investments totaling $14.5 million. These amounts were invested primarily in money market funds, commercial paper, corporate bonds and government agency securities, and are held for working capital purposes. We do not enter into investments for trading or speculative purposes. We considered the historical volatility of short-term interest rates and determined that, due to the size and duration of our investment portfolio, a 100-basis-point increase in interest rates would not have any material exposure to changes in the fair value of our portfolio at September 30, 2008. Declines in interest rates, however, would reduce future investment income.
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| Item 8. | Financial Statements and Supplementary Data |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||
| 49 | ||||
| 50 | ||||
| 51 | ||||
| 52 | ||||
| 53 | ||||
| 54 | ||||
| 55 | ||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Unica Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows present fairly, in all material respects, the financial position of Unica Corporation and its subsidiaries at September 30, 2008 and 2007, and the results of their operations and their cash flows for each of the two years in the period ended September 30, 2008 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of September 30, 2008, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because a material weakness in internal control over financial reporting related to the accounting for deferred maintenance and subscription revenue existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in the accompanying Management’s Report on Internal Control Over Financial Reporting. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2008 consolidated financial statements and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in management’s report referred to above. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions and sabbatical leave in fiscal 2008.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
December 15, 2008
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Unica Corporation
We have audited the accompanying consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows of Unica Corporation for the year ended September 30, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations of Unica Corporation and their cash flows for the year ended September 30, 2006, in conformity with U.S. generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
December 13, 2006
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UNICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| September 30, | ||||||||
| 2008 | 2007 | |||||||
ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 35,799 | $ | 18,493 | ||||
| Short-term investments | 11,482 | 19,614 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $87 and $77, respectively | 21,339 | 28,058 | ||||||
| Purchased customer receivables | 765 | 1,180 | ||||||
| Deferred tax assets, net of valuation allowance | — | 565 | ||||||
| Prepaid expenses and other current assets | 5,351 | 7,288 | ||||||
| Total current assets | 74,736 | 75,198 | ||||||
| Property and equipment, net | 4,781 | 4,135 | ||||||
| Long-term investment | 2,989 | — | ||||||
| Purchased customer receivables, long-term | 173 | 875 | ||||||
| Acquired intangible assets, net | 6,846 | 9,906 | ||||||
| Goodwill | 26,182 | 26,160 | ||||||
| Long-term deferred tax assets, net of valuation allowance | 168 | 4,324 | ||||||
| Other assets | 1,034 | 750 | ||||||
| Total assets | $ | 116,909 | $ | 121,348 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 3,536 | $ | 2,366 | ||||
| Accrued expenses | 14,527 | 17,431 | ||||||
| Short-term deferred revenue | 35,369 | 34,946 | ||||||
| Total current liabilities | 53,432 | 54,743 | ||||||
| Long-term deferred revenue | 1,733 | 3,686 | ||||||
| Other long-term liabilities | 1,738 | — | ||||||
| Total liabilities | 56,903 | 58,429 | ||||||
| Commitments and contingencies (Note 7) | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, $0.01 par value: | ||||||||
| Authorized — 90,000,000 shares; issued and outstanding — 20,758,000 and 20,074,000 shares at September 30, 2008 and 2007, respectively | 208 | 201 | ||||||
| Additional paid-in capital | 66,841 | 59,802 | ||||||
| Retained earnings (accumulated deficit) | (7,435 | ) | 2,578 | |||||
| Accumulated other comprehensive income | 392 | 338 | ||||||
| Total stockholders’ equity | 60,006 | 62,919 | ||||||
| Total liabilities and stockholders’ equity | $ | 116,909 | $ | 121,348 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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UNICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(In thousands, except share and per share data)
| Year Ended September 30, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Revenue: | ||||||||||||
| License | $ | 42,877 | $ | 38,970 | $ | 35,023 | ||||||
| Maintenance and services | 64,511 | 54,318 | 40,876 | |||||||||
| Subscription | 13,743 | 8,955 | 6,512 | |||||||||
| Total revenue | 121,131 | 102,243 | 82,411 | |||||||||
| Costs of revenue: | ||||||||||||
| License | 3,118 | 2,782 | 1,924 | |||||||||
| Maintenance and services | 25,461 | 18,958 | 13,854 | |||||||||
| Subscription | 2,862 | 692 | 429 | |||||||||
| Total cost of revenue | 31,441 | 22,432 | 16,207 | |||||||||
| Gross profit | 89,690 | 79,811 | 66,204 | |||||||||
| Operating expenses: | ||||||||||||
| Sales and marketing | 49,747 | 41,068 | 33,446 | |||||||||
| Research and development | 22,971 | 22,034 | 17,085 | |||||||||
| General and administrative | 19,078 | 16,362 | 11,549 | |||||||||
| Restructuring charges (credits) | (286 | ) | 1,244 | 255 | ||||||||
| In-process research and development | — | — | 4,037 | |||||||||
| Amortization of acquired intangible assets | 1,573 | 1,572 | 1,109 | |||||||||
| Total operating expenses | 93,083 | 82,280 | 67,481 | |||||||||
| Loss from operations | (3,393 | ) | (2,469 | ) | (1,277 | ) | ||||||
| Other income: | ||||||||||||
| Interest income, net | 1,448 | 2,056 | 2,047 | |||||||||
| Other income (expense), net | (383 | ) | 108 | (57 | ) | |||||||
| Total other income | 1,065 | 2,164 | 1,990 | |||||||||
| Income (loss) before income taxes | (2,328 | ) | (305 | ) | 713 | |||||||
| Provision for (benefit from) income taxes | 7,411 | (801 | ) | 37 | ||||||||
| Net income (loss) | $ | (9,739 | ) | $ | 496 | $ | 676 | |||||
| Net income (loss) per common share: | ||||||||||||
| Basic | $ | (0.48 | ) | $ | 0.02 | $ | 0.04 | |||||
| Diluted | $ | (0.48 | ) | $ | 0.02 | $ | 0.03 | |||||
| Shares used in computing net income (loss) per common share: | ||||||||||||
| Basic | 20,443,000 | 19,857,000 | 19,267,000 | |||||||||
| Diluted | 20,443,000 | 20,782,000 | 20,235,000 | |||||||||
The accompanying notes are an integral party of these consolidated financial statements.
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UNICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 2008, 2007 AND 2006
(In thousands, except share data)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 2008, 2007 AND 2006
(In thousands, except share data)
| Common Stock | Retained | Accumulated | ||||||||||||||||||||||||||
| $0.01 | Additional | Earnings | Other | Total | ||||||||||||||||||||||||
| Par | Paid-In | (Accumulated | Comprehensive | Stockholders’ | Comprehensive | |||||||||||||||||||||||
| Shares | Value | Capital | Deficit) | Income | Equity | Income (Loss) | ||||||||||||||||||||||
| Balance at September 30, 2005 | 18,902,507 | $ | 189 | $ | 44,927 | $ | 1,097 | $ | 160 | $ | 46,373 | |||||||||||||||||
| Net income | 676 | 676 | $ | 676 | ||||||||||||||||||||||||
| Impact of adopting SAB 108, net of tax | 309 | 309 | ||||||||||||||||||||||||||
| Exercise of stock options | 513,346 | 5 | 1,198 | 1,203 | ||||||||||||||||||||||||
| Tax benefit on options exercised | 882 | 882 | ||||||||||||||||||||||||||
| Issuance of common stock for employee stock purchase plan | 32,607 | 267 | 267 | |||||||||||||||||||||||||
| Share-based compensation | 3,018 | 3,018 | ||||||||||||||||||||||||||
| Issuance of common stock in acquisition | 151,984 | 2 | 1,802 | 1,804 | ||||||||||||||||||||||||
| Foreign currency translation adjustment | 74 | 74 | 74 | |||||||||||||||||||||||||
| Change in unrealized gain (loss) on available-for-sale securities | 1 | 1 | 1 | |||||||||||||||||||||||||
| Comprehensive income | $ | 751 | ||||||||||||||||||||||||||
| Balance at September 30, 2006 | 19,600,444 | 196 | 52,094 | 2,082 | 235 | 54,607 | ||||||||||||||||||||||
| Net income | 496 | 496 | 496 | |||||||||||||||||||||||||
| Exercise of stock options | 320,754 | 3 | 1,261 | 1,264 | ||||||||||||||||||||||||
| Tax benefit on options exercised | 950 | 950 | ||||||||||||||||||||||||||
| Issuance of common stock for employee stock purchase plan | 60,866 | 1 | 626 | 627 | ||||||||||||||||||||||||
| Vesting of restricted stock units, net of withholding tax | 92,391 | 1 | (568 | ) | (567 | ) | ||||||||||||||||||||||
| Share-based compensation | 5,439 | 5,439 | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | 104 | 104 | 104 | |||||||||||||||||||||||||
| Change in unrealized gain (loss) on available-for-sale securities | (1 | ) | (1 | ) | (1 | ) | ||||||||||||||||||||||
| Comprehensive income | $ | 599 | ||||||||||||||||||||||||||
| Balance at September 30, 2007 | 20,074,455 | $ | 201 | $ | 59,802 | $ | 2,578 | $ | 338 | $ | 62,919 | |||||||||||||||||
Cumulative effect of adjustment based on the adoption of EITF06-02, net of tax | (274 | ) | (274 | ) | ||||||||||||||||||||||||
| Balance at September 30, 2007, as adjusted | 20,074,455 | $ | 201 | $ | 59,802 | $ | 2,304 | $ | 338 | $ | 62,645 | |||||||||||||||||
| Net loss | (9,739 | ) | (9,739 | ) | (9,739 | ) | ||||||||||||||||||||||
| Exercise of stock options | 330,734 | 4 | 800 | 804 | ||||||||||||||||||||||||
| Tax benefit on options exercised | (443 | ) | (443 | ) | ||||||||||||||||||||||||
| Issuance of common stock for employee stock purchase plan | 125,678 | 1 | 896 | 897 | ||||||||||||||||||||||||
| Vesting of restricted stock units, net of withholding tax | 227,264 | 2 | (939 | ) | (937 | ) | ||||||||||||||||||||||
| Share-based compensation | 6,725 | 6,725 | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | 81 | 81 | 81 | |||||||||||||||||||||||||
| Change in unrealized gain (loss) on available-for-sale securities | (27 | ) | (27 | ) | (27 | ) | ||||||||||||||||||||||
| Comprehensive income (loss) | $ | (9,685 | ) | |||||||||||||||||||||||||
| Balance at September 30, 2008 | 20,758,131 | $ | 208 | $ | 66,841 | $ | (7,435 | ) | $ | 392 | $ | 60,006 | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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UNICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended September 30, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| (In thousands) | ||||||||||||
Cash flows from operating activities: | ||||||||||||
| Net income (loss) | $ | (9,739 | ) | $ | 496 | $ | 676 | |||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
| Depreciation of property and equipment | 2,349 | 1,428 | 1,102 | |||||||||
| Amortization of capitalized software development costs | 87 | 10 | — | |||||||||
| Amortization of acquired intangible assets | 2,897 | 2,709 | 1,785 | |||||||||
| In-process research and development charge | — | — | 4,037 | |||||||||
| Share-based compensation charge | 6,725 | 5,520 | 3,018 | |||||||||
| Valuation allowance for deferred tax assets | 8,098 | — | — | |||||||||
| Deferred tax benefits | (2,618 | ) | (1,152 | ) | (2,929 | ) | ||||||
| Excess tax benefits from share-based compensation | (142 | ) | (950 | ) | (880 | ) | ||||||
| Changes in operating assets and liabilities, net of assets acquired and liabilities assumed: | ||||||||||||
| Accounts receivable, net | 6,676 | (387 | ) | (9,377 | ) | |||||||
| Prepaid expenses and other current assets | 2,581 | (5,161 | ) | (526 | ) | |||||||
| Other assets | 155 | 935 | 269 | |||||||||
| Accounts payable | 1,222 | (292 | ) | 845 | ||||||||
| Accrued expenses | (2,820 | ) | 3,404 | 535 | ||||||||
| Deferred revenue | (1,554 | ) | 4,120 | 8,815 | ||||||||
| Other long-term liabilities | 370 | — | — | |||||||||
| Net cash provided by operating activities | 14,287 | 10,680 | 7,370 | |||||||||
Cash flows from investing activities: | ||||||||||||
| Purchases of property and equipment, net of acquisitions | (2,481 | ) | (3,200 | ) | (1,371 | ) | ||||||
| Capitalization of software development costs | (477 | ) | (136 | ) | — | |||||||
| Net cash paid for acquisitions | — | (11,920 | ) | (28,286 | ) | |||||||
| Cash collected from license acquired in acquisition | 162 | 31 | — | |||||||||
| Sales and maturities of investments | 35,749 | 48,974 | 25,044 | |||||||||
| Purchases of investments | (30,605 | ) | (59,053 | ) | (18,403 | ) | ||||||
| Increase in restricted cash | — | — | (103 | ) | ||||||||
| Net cash provided by (used in) investing activities | 2,348 | (25,304 | ) | (23,119 | ) | |||||||
Cash flows from financing activities: | ||||||||||||
| Proceeds from issuance of common stock under stock option and employee stock purchase plans | 1,701 | 1,891 | 1,470 | |||||||||
| Tax benefit related to exercised stock options | 142 | 950 | 882 | |||||||||
| Payment of withholding taxes in connection with settlement of restricted stock units | (937 | ) | (566 | ) | — | |||||||
| Net cash provided by financing activities | 906 | 2,275 | 2,352 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (235 | ) | 341 | 144 | ||||||||
| Net (decrease) increase in cash and cash equivalents | 17,306 | (12,008 | ) | (13,253 | ) | |||||||
| Cash and cash equivalents at beginning of period | 18,493 | 30,501 | 43,754 | |||||||||
| Cash and cash equivalents at end of period | $ | 35,799 | $ | 18,493 | $ | 30,501 | ||||||
Supplemental disclosure of cash flow information: | ||||||||||||
| Income taxes paid | $ | 829 | $ | 2,067 | $ | 1,706 | ||||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||||||
| Issuance of common stock for acquisition | $ | — | $ | — | $ | 1,804 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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UNICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(In thousands, except share and per share data)
| 1. | Nature of Business |
Unica Corporation (the “Company”) is a leading global provider of Enterprise Marketing Management (EMM) software. Focused exclusively on the needs of marketers, Unica’s Affinium® software delivers key EMM capabilities, including: web and customer analytics, demand generation, and marketing resource management. Affinium streamlines the entire marketing process for brand, relationship and internet marketing — from planning and budgeting to project management, execution and measurement.
The Company has a worldwide installed base serving a wide range of industries, including financial services, insurance, retail, telecommunications, and travel and hospitality. The Company offers software primarily through a direct sales force, as well as through alliances with marketing service providers (MSPs), distributors, and systems integrators. In addition, the Company provides a full range of services to customers, including implementation, training, consulting, maintenance and technical support, and customer success programs.
| 2. | Summary of Significant Accounting Policies |
Basis of Presentation and Principles of Consolidation
The Company’s fiscal year end is September 30. References to 2008, 2007 or 2006 mean the fiscal year ended September 30, unless otherwise indicated.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Prior to fiscal 2007, subscription revenue was allocated between license and maintenance revenue. Beginning in fiscal 2007, subscription revenue and the related costs of revenue were separately identified in the consolidated statements of income. All 2006 amounts have been reclassified to conform to the 2007 and 2008 presentation.
The following table reconciles the current revenue presentation and the previous presentation for fiscal 2006:
| Current Presentation | Previous Presentation | |||||||
| Year Ended | Year Ended | |||||||
| September 30, 2006 | September 30, 2006 | |||||||
| Revenue: | ||||||||
| License | $ | 35,023 | $ | 39,621 | ||||
| Maintenance and services | 40,876 | 42,790 | ||||||
| Subscription | 6,512 | — | ||||||
| Total revenue | $ | 82,411 | $ | 82,411 | ||||
The following table reconciles the current cost of revenue presentation and the previous presentation for fiscal 2006:
| Current Presentation | Previous Presentation | |||||||
| Year Ended | Year Ended | |||||||
| September 30, 2006 | September 30, 2006 | |||||||
| Cost of revenue: | ||||||||
| License | $ | 1,924 | $ | 2,175 | ||||
| Maintenance and services | 13,854 | 14,032 | ||||||
| Subscription | 429 | — | ||||||
| Total cost of revenue | $ | 16,207 | $ | 16,207 | ||||
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UNICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except share and per share data)
(In thousands, except share and per share data)
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (US GAAP) requires the Company to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, judgments and assumptions. Examples include estimates of loss contingencies, acquisition accounting valuations, software development costs eligible for capitalization, amortization and depreciation period estimates, the potential outcome of future tax consequences of events that have been recognized in the financial statements or tax returns, estimating the fair value of the Company’s reporting units and assumptions used in the valuation of share-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in the consolidated financial statements prospectively from the date of the change in estimate.
Acquisition Accounting
The purchase price of each acquired business is allocated to the assets acquired and liabilities assumed, if any, at their respective fair value on the date of acquisition. Any excess purchase price over the amounts allocated to the assets acquired and liabilities assumed is recorded as goodwill.
Revenue Recognition
The Company derives revenue from software licenses, maintenance and services, and subscriptions. The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)97-2,Software Revenue Recognition, as amended bySOP 98-9,Modification ofSOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. In accordance with these standards, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is deemed fixed or determinable and collection is deemed probable.
Generally, implementation services for the Company’s software products are not deemed essential to the functionality of the software products, and therefore services revenue is recognized separately from license revenue. When the Company determines that services are essential to the functionality of software in an arrangement, the license and services revenue from the arrangement would be recognized pursuant toSOP 81-1,Accounting for Performance of Construction-Type Contracts and Certain Production-Type Contracts. In such cases, the Company is required to make reasonably dependable estimates relative to the extent of progress toward completion by comparing the total hours incurred to the estimated total hours for the arrangement and, accordingly, would apply the percentage-of-completion method. If the Company were unable to make reasonably dependable estimates of progress towards completion, then it would use the completed-contract method, under which revenue is recognized only upon completion of the services. If total cost estimates exceed the anticipated revenue, then the estimated loss on the arrangement is recorded at the inception of the arrangement or at the time the loss becomes apparent.
The Company generally sells its software products and services together in a multiple-element arrangement under both perpetual license and subscription arrangements. When the Company enters into multiple-element perpetual license arrangements, the Company allocates the total fee among the various elements using the residual method. Under the residual method, revenue is recognized when vendor-specific objective evidence (VSOE) of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement. Each multiple-element arrangement requires the Company to analyze the individual elements in the transaction and to determine the fair value of each undelivered element, which typically includes maintenance and services.
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
The Company generally determines the fair value of the maintenance portion of an arrangement based on the maintenance renewal price for that arrangement. In multiple-element arrangements where the Company sells maintenance for less than fair value, the Company defers the contractual price of the maintenance plus the difference between such contractual price and the fair value of maintenance over the expected life of the product. The Company makes a corresponding reduction in license revenue. The fair value of the professional services portion of the arrangement is based on the rates that the Company charges for these services when sold independently from a software license. If, in the Company’s judgment, evidence of fair value cannot be established for undelivered elements in a multiple element arrangement, the entire amount of revenue from the arrangement is deferred until evidence of fair value can be established, or until the elements for which evidence of fair value could not be established are delivered.
License Revenue. The Company licenses its software products on a perpetual basis. Licenses to use the Company’s products in perpetuity generally are priced based on (a) either a customer’s database size (including the number of contacts or channels) or a platform fee, and (b) a specified number of users. With respect to the Affinium NetInsighttm product, licenses are generally priced based on the volume of traffic of a website. Because implementation services for the software products are not deemed essential to the functionality of the related software, the Company recognizes perpetual license revenue at the time of product delivery, provided all other revenue recognition criteria have been met.
When the Company licenses its software on a perpetual basis through a marketing service provider (MSP) or systems integrator, the Company recognizes revenue upon delivery of the licensed software to the MSP or systems integrator only if (a) the customer of the MSP or systems integrator is identified in a written arrangement between the Company and the MSP or systems integrator and (b) all other revenue recognition criteria have been met pursuant toSOP 97-2.
Maintenance and Services. Maintenance and services revenue is generated from sales of (a) maintenance, including software updates and upgrades and technical support, associated with the sale of perpetual software licenses and (b) services, including implementation, training and consulting, and reimbursable travel.
Maintenance Fees. Maintenance is generally sold on an annual basis. There are two levels of maintenance, standard and premium, both of which generally are sold for a term of one year. With both of these maintenance levels, customers are provided with technical support and software updates and upgrades on a “when and if available” basis. With premium maintenance, customers are provided additional services such as emergency service response and periodic onsite utilization reviews. Revenue is deferred at the time the maintenance agreement is initiated and is recognized ratably over the term of the maintenance agreement.
Services. Implementation services include the installation of the Company’s software, identification and sourcing of legacy data, configuration of rules necessary to generate marketing campaigns and other general services for the software. A range of training services, including classroom,on-site, and web-based education and training are also provided. Generally these services are priced on atime-and-materials basis and recognized as revenue when the services are performed; however, in certain circumstances these services may be priced on a fixed-fee basis and recognized as revenue under the proportional performance method. In cases where VSOE of fair value does not exist for the undelivered elements in an arrangement, services revenue is deferred and recognized over the period of performance of the final undelivered element. The Company also defers the direct and incremental costs of providing the services and amortizes those costs over the period that revenue is recognized.
In accordance with Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) IssueNo. 01-14,Income Statement Characterization of Reimbursements Received for ‘Out of Pocket’ Expenses Incurred, the Company classifies reimbursements received for out-of-pocket expenses incurred as services revenue and classifies the related costs as cost of revenue. The amounts of reimbursable expenses included
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
within revenue and cost of revenue were $1,806, $1,363 and $1,002 for the years ended September 30, 2008, 2007 and 2006, respectively.
Subscription Revenue. Subscription arrangements include, for a bundled fee, (a) the right to use the Company’s software for a specified period of time, typically one year, (b) updates and upgrades to software and (c) technical support. Customers are generally invoiced in annual or quarterly installments and are billed in advance of the subscription period. Revenue is recognized ratably over the contractual term of the arrangement.
Cost of Revenue
Cost of license revenue, for both perpetual licenses and subscription arrangements, consists primarily of (a) salaries, benefits and share-based compensation related to documentation personnel, (b) facilities and other related overhead, (c) amortization of acquired developed technology, (d) amortization of capitalized software development costs under Statement of Financial Accounting Standards (SFAS) No. 86,Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, and (e) third-party royalties. Cost of maintenance and services revenue consists primarily of (a) salaries, benefits and share-based compensation related to professional services and technical support personnel, (b) billable and non-billable travel, lodging and other out-of-pocket expenses, (c) facilities and other related overhead, and (d) cost of services provided by subcontractors for professional services. Cost of subscription revenue includes the allocation of specific costs including labor-related costs associated with technical support and documentation personnel, and related overhead.
Goodwill, Other Intangible Assets and Long-Lived Assets
Goodwill represents the excess of the purchase price over the fair value of net assets associated with acquisitions. In accordance with SFAS No. 142,Goodwill and Other Intangible Assets, goodwill is not subject to amortization. The Company allocated a portion of each purchase price to intangible assets, including customer contracts and developed technology that are being amortized over their estimated useful lives of three to fourteen years. The Company also allocates a portion of each purchase price to tangible assets and assesses the liabilities to be recorded as part of the purchase price.
The Company reviews the carrying value of goodwill for impairment annually and whenever events or changes in circumstances indicate that the carrying value of goodwill may exceed its fair value. The Company evaluates impairment by comparing the estimated fair value of each reporting unit to its carrying value. The Company estimates fair value by computing expected future discounted operating cash flows based on historical trends, which are adjusted to reflect the Company’s best estimate of future market and operating conditions. Actual results may differ materially from these estimates. The estimates made in determining the fair value of each reporting unit involve the application of judgment, including the amount and timing of future cash flows, short- and long-term growth rates, and the weighted average cost of capital, which could affect the timing and size of any future impairment charges. Impairment of goodwill could significantly affect operating results and financial position. Based on the Company’s most recent assessment, there were no goodwill impairment indicators.
In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the Company continually evaluates whether events or circumstances have occurred that indicate that the estimated remaining useful life of its long-lived assets, including intangible assets, may warrant revision or that the carrying value of these assets may be impaired. Any write-downs are treated as permanent reductions in the carrying amount of the assets. Based on this evaluation, the Company believes that, as of each of the balance sheet dates presented, none of the Company’s long-lived assets, including intangible assets, were impaired.
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
Software Development Costs
The Company evaluates whether to capitalize or expense software development costs in accordance with SFAS No. 86. The Company sells products in a market that is subject to rapid technological change, new product development and changing customer needs. The Company has defined technological feasibility as the completion of a working model. The net book value of capitalized software development costs at September 30, 2008 and 2007 was $171 and $136, respectively. All such costs have been included in other non-current assets in the Company’s consolidated balance sheet and are being amortized to cost of license revenue over their estimated useful lives of two years.
Software development costs capitalized in accordance with SFAS No. 86 are expected to be amortized as follows: $124 during the year ended September 30, 2009 and $47 during the year ended September 30, 2010.
The Company capitalizes certain costs of software developed or obtained for internal use in accordance with American Institute of Certified Public Accountants Statement of Position98-1,Accounting for the Costs of Corporate Software Developed or Obtained for Internal Use. The costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, will be capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Maintenance and training cost are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life. Management evaluates the useful lives of these assets on an annual basis and tests for impairments whenever events or changes in circumstances occur that could impact the recoverability of these assets. At September 30, 2008, the net book value of internal-use software costs was $345. Prior to fiscal 2008, internal-use software costs eligible for capitalization were immaterial. All such costs are included in property and equipment on the Company’s consolidated balance sheet.
Advertising and Promotional Expense
Advertising and promotional expense is expensed as incurred, as such efforts have not met the direct-response criteria required for capitalization. Advertising expense for the years ended September 30, 2008, 2007 and 2006 was $471, $427 and $348, respectively.
Foreign Currency Translation
The financial statements of the Company’s foreign subsidiaries are translated in accordance with SFAS No. 52,Foreign Currency Translation.
The functional currency of the Company’s foreign subsidiaries in the United Kingdom, Singapore and India is the U.S. dollar. Accordingly, all assets and liabilities of these foreign subsidiaries are remeasured into U.S. dollars using the exchange rates in effect at the balance sheet date, except for property and equipment, which are remeasured into U.S. dollars at historical rates. Revenue and expenses of these foreign subsidiaries are remeasured into U.S. dollars at the average rates in effect during the year. Any differences resulting from the remeasurement of assets, liabilities and operations of the United Kingdom, Singapore and India subsidiaries are recorded within other income (expense) in the consolidated income statement. During the years ended September 30, 2008, 2007 and 2006, remeasurement adjustments were a net gain of $291, $200 and $72 respectively.
The functional currency of the Company’s foreign subsidiary in France is the Euro. Accordingly, all assets and liabilities of the French subsidiary are translated to U.S. dollars using the exchange rate in effect at the balance sheet date. Revenue and expenses of the French subsidiary are translated to U.S. dollars using the
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
average rates in effect during the period. Any differences resulting from the translation of assets, liabilities and operations of the French subsidiary are recorded within stockholders’ equity as other comprehensive income.
Any gains or losses resulting from foreign currency transactions, including the translation of intercompany balances, are recorded in other income (expense) in the consolidated income statement. During the years ended September 30, 2008 and 2007, net foreign currency transaction losses were $197 and $91, respectively. During the year ended September 30, 2006, foreign currency transaction gains and losses was not material.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of 90 days or less to be cash equivalents. The Company invests the majority of its excess cash in overnight investments and money market funds of accredited financial institutions.
Investments
Investments are made in accordance with the Company’s corporate investment policy, as approved by its Board of Directors. The primary objective of this policy is preservation of capital. Investments are limited to high quality corporate debt, commercial paper, government agency securities and similar instruments. The policy establishes maturity limits, liquidity requirements and concentration limits. At September 30, 2008, the Company was in compliance with this internal policy.
The Company considers all highly liquid investments with maturities of between 91 and 365 days as of the balance sheet date to be short-term investments, and investments with maturities greater than 365 days as of the balance sheet date to be long-term investments. The Company accounts for its investments in accordance with SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities.The Company’s investments were classified as available-for-sale and were carried at fair market value at September 30, 2008 and 2007. Unrealized gains (losses) on available-for-sale securities are recorded in accumulated other comprehensive income. The Company reviews all investments for reductions in fair value that are considered other than temporary. When such reductions occur, the cost of the investment is adjusted to fair value through other income (loss) on the consolidated income statement. Gains and losses are calculated on the basis of specific identification.
Investments were as follows:
| Amortized | Unrealized | Fair Market | ||||||||||
| Cost | Loss | Value | ||||||||||
At September 30, 2008: | ||||||||||||
| Commercial paper | $ | 5,662 | $ | — | $ | 5,662 | ||||||
| Certificates of deposit | 500 | — | 500 | |||||||||
| Corporate debentures and other securities | 8,344 | (35 | ) | 8,309 | ||||||||
| Total investments | $ | 14,506 | $ | (35 | ) | $ | 14,471 | |||||
At September 30, 2007: | ||||||||||||
| Commercial paper | $ | 11,505 | $ | — | $ | 11,505 | ||||||
| Corporate debentures and other securities | 8,109 | — | 8,109 | |||||||||
| Total short-term investments | $ | 19,614 | $ | — | $ | 19,614 | ||||||
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
As of September 30, 2008, $11,482 of investments had contractual maturities within one year while $2,989 of investments had contractual maturities within one to two years. As of September 30, 2007, all investments had contractual maturities within one year.
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially expose the Company to concentration of credit risk primarily consist of cash and cash equivalents, investments, trade accounts receivable and purchased customer receivables. The Company maintains its cash and cash equivalents and investments with accredited financial institutions. Investments are investment grade, interest-earning securities, and are diversified by type and industry. The Company does not have a concentration of credit or operating risk in any one industry or any one geographic region within or outside of the United States. The Company reviews the credit history of its customers (including its resellers) before extending credit. The Company establishes its allowances based upon factors including the credit risk of specific customers, historical trends, and other information.
No customers accounted for greater than 10% of the accounts receivable balance at September 30, 2008 and 2007.
No customer accounted for more than 10% of the Company’s total revenue in any of the years ended September 30, 2008, 2007 and 2006.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, investments, accounts receivable, purchased customer receivables and accounts payable, approximated their fair values at September 30, 2008 and 2007, due to the short-term nature of these instruments.
Comprehensive Income
SFAS No. 130,Reporting Comprehensive Income, establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Other than reported net income, comprehensive income includes foreign currency translation adjustments and unrealized gains and losses on available-for-sale investments, which are disclosed in the accompanying consolidated statements of stockholders’ equity and comprehensive income.
Net Income (Loss) Per Share
Basic EPS is calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income by the weighted average number of shares
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
outstanding plus the dilutive effect, if any, of outstanding stock options and restricted stock units using the treasury stock method. The following table presents the calculation for both basic and diluted EPS:
A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income (loss) per share is as follows:
| Year Ended September 30, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Numerator: | ||||||||||||
| Net income — basic and diluted | $ | (9,739 | ) | $ | 496 | $ | 676 | |||||
Denominator: | ||||||||||||
| Weighted-average shares of common stock outstanding | 20,443,000 | 19,857,000 | 19,267,000 | |||||||||
| Effect of potentially dilutive shares | — | 925,000 | 968,000 | |||||||||
| Shares used in computing diluted net income (loss) per common share | 20,443,000 | 20,782,000 | 20,235,000 | |||||||||
Calculation of net income (loss) per share: | ||||||||||||
| Basic: | ||||||||||||
| Net income (loss) | $ | (9,739 | ) | $ | 496 | $ | 676 | |||||
| Weighted average shares of common stock outstanding | 20,443,000 | 19,857,000 | 19,267,000 | |||||||||
| Net income (loss) per common share | $ | (0.48 | ) | $ | 0.02 | $ | 0.04 | |||||
| Diluted: | ||||||||||||
| Net income (loss) | $ | (9,739 | ) | $ | 496 | $ | 676 | |||||
| Shares used in computing diluted net income (loss) per common share | 20,443,000 | 20,782,000 | 20,235,000 | |||||||||
| Net income (loss) per common share | $ | (0.48 | ) | $ | 0.02 | $ | 0.03 | |||||
The number of potentially dilutive shares in the table above was computed using the treasury stock method for all periods presented. As a result of this method, common stock equivalents of 3,529,000, 1,104,000 and 982,000 were excluded from the determination of potentially dilutive shares for the years ended September 30, 2008, 2007 and 2006, respectively, due to their anti-dilutive effect.
In connection with the Company’s adoption of SFAS No. 123 (revised 2004),Share-Based Payment, (SFAS No. 123(R)), the calculation of assumed proceeds used to determine the diluted weighted average shares outstanding under the treasury stock method in fiscal 2007 and 2006 was adjusted by tax windfalls and shortfalls associated with all of the Company’s outstanding stock awards. Windfalls and shortfalls are computed by comparing the tax deductible amount of outstanding stock awards to their grant date fair values and multiplying the result by the applicable statutory tax rate. A positive result creates a windfall, which increases the assumed proceeds and a negative result creates a shortfall, which reduces the assumed proceeds.
Accounting for Share-Based Compensation
On October 1, 2005, the Company adopted the provisions of SFAS No. 123(R), which requires the Company to recognize expense related to the fair value of share-based compensation awards. Management elected to use the modified prospective transition method as permitted by SFAS No. 123(R) and therefore has
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
not restated the Company’s financial results for prior periods. Under this transition method, share-based compensation expense for the years ended September 30, 2008, 2007 and 2006 includes compensation expense for all share-based compensation awards granted on or after November 18, 2004 (the filing date for the initial registration statement for the Company’s initial public offering), based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R).
For options accounted for under SFAS No. 123(R), the Company recognizes compensation expense for stock option awards on a straight-line basis over the requisite service period of the award. In addition, SFAS No. 123(R) requires the benefits of tax deductions in excess of recognized share-based compensation to be reported as a financing activity rather than an operating activity in the statement of cash flows. This requirement reduces net operating cash flows and increases net financing cash flows in periods after adoption.
For options accounted for under SFAS No. 123(R), the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used and the resulting estimated fair value for grants during the applicable period are as follows:
| Year Ended September 30, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Dividend yield | — | — | — | |||||||||
| Volatility | 50% | 49% to 50% | 49% to 66% | |||||||||
| Risk-free interest rate | 2.45% to 4.16% | 4.35% to 4.78% | 4.4% to 5.2% | |||||||||
| Weighted-average expected option term | ||||||||||||
| (in years) | 4.1 | 4.1 | 4.1 to 6.1 | |||||||||
| Weighted-average fair value per share of options granted | $3.08 | $5.15 | $5.97 | |||||||||
| Weighted-average fair value per share of restricted stock awards granted | $7.75 | $12.18 | $11.89 | |||||||||
The fair value of ESPP awards is estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used and the resulting estimated fair value for grants during the applicable period are as follows
| Year Ended September 30, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Dividend yield | — | — | — | |||||||||
| Volatility | 50% | 41 | % | 37 | % | |||||||
| Risk-free interest rate | 2.00%-3.49% | 4.07 | % | 4.96 | % | |||||||
| Weighted-average expected option term (in years) | 0.5 | 0.5 | 0.5 | |||||||||
| Weighted-average fair value per share of options granted | $2.51 | $ | 1.23 | $ | 1.23 | |||||||
The computation of expected volatility is based on a study of historical volatility rates of comparable companies during a period comparable to the expected option term. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury risk-free interest rate in effect at the time of grant. The computation of expected option term is based on an average of the vesting term and the maximum contractual life of the Company’s stock options. Computation of expected forfeitures is based on historical forfeiture rates of the Company’s stock options. Share-based compensation charges will be adjusted in future periods to reflect the results of actual forfeitures and vesting.
The weighted-average exercise price of the options granted under the stock option plans for the years ended September 30, 2008, 2007 and 2006 was $7.97, $11.63 and $12.28, respectively.
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
The components of share-based compensation expense for the years ended September 30, 2008, 2007 and 2006 are as follows:
| Year Ended September 30, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Stock options under SFAS No. 123(R) | $ | 2,443 | $ | 2,426 | $ | 1,733 | ||||||
| Stock options under APB 25 | 27 | 82 | 152 | |||||||||
| Restricted stock units | 3,982 | 2,937 | 1,093 | |||||||||
| Employee stock purchase plan | 273 | 75 | 40 | |||||||||
| Total share-based compensation | $ | 6,725 | $ | 5,520 | $ | 3,018 | ||||||
Cost of revenue and operating expenses include share-based compensation expense as follows for the years ended September 30, 2008, 2007 and 2006:
| Year Ended September 30, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Cost of maintenance and services revenue | $ | 898 | $ | 590 | $ | 273 | ||||||
| Sales and marketing expense | 2,389 | 1,706 | 776 | |||||||||
| Research and development expense | 1,294 | 1,151 | 678 | |||||||||
| General and administrative expense | 2,144 | 2,073 | 1,291 | |||||||||
| Total share-based compensation expense | $ | 6,725 | $ | 5,520 | $ | 3,018 | ||||||
The Company expects to record the unamortized portion of share-based compensation expense for existing stock options and restricted stock awards outstanding at September 30, 2008, over a weighted-average period of 1.83 years, as follows:
Year Ending September 30, | ||||
| 2009 | $ | 4,984 | ||
| 2010 | 3,689 | |||
| 2011 | 2,102 | |||
| 2012 | 506 | |||
| Expected future share-based compensation expense | $ | 11,281 | ||
Income Taxes
The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when it is more likely than not that some portion of the deferred tax assets will not be realized.
In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109(“FIN 48”), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN 48 on October 1, 2007, as required. There was no cumulative effect upon adoption of FIN 48.
Sabbatical Leave
On October 1, 2007, the Company adopted the consensus reached in Emerging Issues Task Force (“EITF”) IssueNo. 06-2,Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences(“EITF 06-2”).EITF 06-2 provides recognition guidance on the accrual of employees’ rights to compensated absences under a sabbatical or other similar benefit arrangement. Prior to the adoption ofEITF 06-2, the Company recorded a liability for sabbatical leave upon an employee vesting in the benefit, which occurred when an employee went on leave after completing a six-year service period. UnderEITF 06-2, the Company accrues an estimated liability for sabbatical leave over the requisite six-year service period, as employee services are rendered. The adoption ofEITF 06-2 resulted in an additional liability of $435, additional deferred tax assets of $161 and a reduction to retained earnings of $274 as of October 1, 2007.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Where applicable, SFAS No. 157 simplifies and codifies related guidance within GAAP. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB deferred the implementation of SFAS No. 157 for certain non-financial assets and liabilities for fiscal years beginning after November 15, 2008. The Company is analyzing the expected impact from adopting this statement on its financial statements, but currently does not believe its adoption will have a significant impact on the financial position or results of operations of the Company.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, which allows companies the option to measure financial assets or liabilities at fair value and include unrealized gains and losses in net income rather than equity. This becomes available when the Company adopts SFAS No. 157, which will be fiscal year 2009. The Company is analyzing the expected impact from adopting this statement on its financial statements, but currently does not believe its adoption will have a significant impact on the financial position or results of operations of the Company.
In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations. This statement establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008 and, as such, the Company will adopt this standard in fiscal 2010. The impact of the standard on our financial position and results of operations will be dependent upon the number of and magnitude of the acquisitions that are consummated once the standard is effective.
In April 2008, the FASB issued FASB Staff PositionNo. FAS 142-3,Determination of Useful Life of Intangible Assets, orFSP 142-3.FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142Goodwill and Other Intangible Assets, or SFAS No. 142.FSP 142-3 is intended to improve the consistency between the useful life of an intangible asset determined under SFAS No. 142 and the period of
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
expected cash flows used to measure the fair value of the asset under SFAS No. 141(R),Business Combinations, or SFAS No. 141(R), and other U.S generally accepted accounting principles, or GAAP.FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is not permitted. The Company is currently evaluating the effect that the adoption ofFSP 142-3 will have on its results of operations and financial condition.
| 3. | Acquisitions |
MarketingCentral, L.L.C.
On July 12, 2007, the Company acquired by merger MarketingCentral L.L.C. (MarketingCentral), a software company located in Atlanta, Georgia. The purchase price was $12,915, which consisted of cash consideration of $12,500 and assumed liabilities and transaction-related costs of $415. This acquisition was accounted for as a purchase transaction in accordance with SFAS No. 141,Business Combinations. The results of operations of the Company include the results of MarketingCentral beginning on the date of the acquisition.
Following is a summary of the purchase price allocation of the acquired MarketingCentral business:
| Cash and cash equivalents | $ | 580 | ||
| Accounts receivable | 470 | |||
| Purchased customer receivables | 784 | |||
| Property and equipment | 49 | |||
| Other assets | 7 | |||
| Developed technology | 2,011 | |||
| Customer relationships | 1,948 | |||
| Goodwill | 5,662 | |||
| Trade name | 44 | |||
| License agreement | 1,360 | |||
| Total assets | 12,915 | |||
| Deferred revenue | 215 | |||
| Transaction costs | 130 | |||
| Assumed liabilities | 70 | |||
| Total liabilities | 415 | |||
| Total cash consideration | $ | 12,500 | ||
The portion of the MarketingCentral purchase price allocated to purchased customer receivables reflects the fair value of future amounts due under customer contracts in effect as of the acquisition date for which Unica assumed an obligation to perform. The fair value of these receivables was determined based on the expected discounted cash flows.
The portion of the MarketingCentral purchase price allocated to developed technology, customer relationships, trade name and license agreement as determined by the Company using a discounted cash flow method. These intangible assets will be amortized over their estimated useful lives (see Note 4). The goodwill is not subject to amortization, but will be evaluated for impairment at least annually in accordance with the provisions of SFAS No. 142. Goodwill is expected to be deductible for tax purposes.
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
Various factors contributed to the establishment of goodwill, including: MarketingCentral’s assembled work force as of the acquisition date; the synergies expected to result from combining infrastructure; and the expected revenue growth and product cash flows in future years.
The Company has estimated the fair value of deferred revenue related to the obligation assumed from MarketingCentral in connection with the acquisition using the costbuild-up approach, which determines fair value by estimating the cost of fulfilling the obligation, plus a normal profit margin. The Company estimated the normal profit margin to be 20%.
Sane Solutions, L.L.C.
On March 22, 2006, the Company acquired Sane Solutions, L.L.C. (Sane), a privately-held provider of web analytics software for internet marketing, located in North Kingstown, Rhode Island. The purchase price was $28,818, which consisted of cash consideration of $21,774, assumed liabilities and transaction-related costs of $5,240, and 151,984 shares of common stock valued at $1,804 for accounting purposes or $11.87 per share. This acquisition was accounted for as a purchase transaction in accordance with SFAS No. 141. The results of Sane have been included in the Company’s financial statements from the date of acquisition.
Following is a summary of the final purchase price allocation of the acquired Sane business:
| Cash | $ | 745 | ||
| Accounts receivable | 577 | |||
| Other current assets | 28 | |||
| Property and equipment | 185 | |||
| Developed technology | 2,714 | |||
| Customer contracts and related customer relationships | 4,343 | |||
| Goodwill | 16,189 | |||
| In-process research and development | 4,037 | |||
| Total assets | 28,818 | |||
| Deferred revenue | 440 | |||
| Merger-related restructuring costs | 178 | |||
| Accrued and assumed liabilities | 4,622 | |||
| Total liabilities | 5,240 | |||
| Common stock issued | 1,804 | |||
| Total cash consideration | $ | 21,774 | ||
Goodwill has increased by $273 since the Company’s initial purchase price allocation as the Company obtained final information on which to base its determination of the fair value of assets acquired and liabilities assumed.
Accrued and assumed liabilities includes $1,500 of settlement costs and $909 of legal costs related to a settlement and patent license agreement with NetRatings to resolve the patent infringement lawsuit against Sane alleging that Sane’s NetTracker software infringes upon certain patents owned by NetRatings. In addition, it includes $2,081 of other assumed liabilities and transaction related costs.
The portion of the Sane purchase price allocated to developed technology and customer contracts and related customer relationships reflects its fair value as determined by the Company using a discounted cash flow method. These intangible assets will be amortized on a straight-line basis over their estimated useful lives
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
(see Note 4). The goodwill is not subject to amortization, but will be evaluated for impairment at least annually in accordance with the provisions of SFAS No. 142,Goodwill and Other Intangible Assets. Goodwill is expected to be deductible for tax purposes.
Various factors contributed to the establishment of goodwill, including: Sane’s assembled work force as of the acquisition date; the synergies expected to result from combining infrastructure; and the expected revenue growth and product cash flows in future years.
The Company estimated the fair value of deferred revenue related to the maintenance obligation assumed from Sane in connection with the acquisition using the costbuild-up approach, which determines fair value by estimating the cost of fulfilling the obligation, plus a normal profit margin. The Company estimated the normal profit margin to be 20%.
In-Process Research and Development
The in-process research and development associated with the Sane acquisition primarily consists of an acquired web analytics product that was in development at the acquisition date. The amount of $4,037 was recorded as in-process research and development and charged to expense at the acquisition date as the future benefit is dependent on continued research and development activity and the asset has no alternative future use as of the acquisition date. In determining this value, the Company used the income approach to determine the fair values of the in-process research and development. This approach determines fair value by estimating the after-tax cash flows attributable to an in-process project over its useful life and then discounting these after-tax cash flows back to a present value at a risk-adjusted discount rate, for which the Company used 31%. The Company estimated that it would complete development of the in-process project in the third quarter of fiscal 2006, at which point material cash inflows would commence. In arriving at the value of the in-process project, the Company considered, among other factors, the in-process project’s stage of completion, the complexity of the work completed as of the acquisition date, the costs already incurred, the projected costs to complete, the contribution of core technologies and other acquired assets, the expected introduction date and the estimated useful life of the technology. The Company completed development in June 2006, incurring approximately $450 of product development costs.
Litigation
On June 30, 2006, the Company entered into a settlement and patent license agreement with NetRatings, Inc. (NetRatings) to resolve the patent infringement lawsuit against Sane alleging that Sane’s NetTracker software infringes upon certain patents owned by NetRatings. The suit was filed in the U.S. District Court of New York on May 26, 2005 seeking unspecified monetary relief. Subsequent to the acquisition, NetRatings amended the complaint adding the Company as a defendant to the lawsuit.
The Company initially accrued $2,800 of legal fees related to this matter, and as a result of the settlement and agreement, made adjustments to the original purchase accounting to reflect the actual settlement and fees. A substantial portion of the accrued and assumed liabilities in purchase accounting of Sane is related to the NetRatings litigation matter. The above settlement amounts are part of the cost of the acquired company and are included in the determination of the total purchase price.
Under the terms of the settlement agreement, the Company obtained a non-exclusive, worldwide perpetual license to certain patents owned by NetRatings and paid a one-time fee of $1,500 in July 2006. The developed technology resulting from this acquisition was valued in purchase accounting based upon estimated cash flows and there are no anticipated changes to the cash flows used in the valuation as a result of the settlement payment. Hence, the adjustments to purchase accounting resulting from the settlement were made to goodwill.
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
In addition, the Company is required to make a payment of $1,000 to NetRatings in the event of a sale of the Company. In addition, in the event that the Company acquires certain specified companies, it may elect to extend the license granted by NetRatings under the agreement to cover the products, services and technology of such an acquired company by making additional payments to NetRatings based on the web analytics revenue of the acquired company during the twelve-month period preceding such acquisition.
MarketSoft Software Corporation
On December 20, 2005, the Company acquired certain assets and assumed certain liabilities of MarketSoft Software Corporation (MarketSoft), a software company formerly located in Lexington, Massachusetts. The purchase price was $7,875, which consisted of cash consideration of $7,258 and assumed liabilities and transaction-related costs of $617. This acquisition was accounted for as a purchase transaction in accordance with SFAS No. 141. The results of operations of the Company include the results of MarketSoft, beginning on the date of the acquisition.
Following is a summary of the final purchase price allocation of the acquired MarketSoft business:
| Purchased customer receivables | $ | 1,919 | ||
| Property and equipment | 115 | |||
| Purchased customer receivables, long term | 2,477 | |||
| Developed technology | 1,129 | |||
| Customer contracts and related customer relationships | 628 | |||
| Goodwill | 1,607 | |||
| Total assets | 7,875 | |||
| Deferred revenue | 374 | |||
| Transaction costs | 149 | |||
| Merger-related restructuring costs | 57 | |||
| Assumed liabilities | 37 | |||
| Total liabilities | 617 | |||
| Total cash consideration | $ | 7,258 | ||
Goodwill has decreased by $434 since the Company’s initial purchase price allocation as the Company obtained final information on which to base its determination of the fair value of assets acquired, in particular the purchased customer receivables, and liabilities assumed.
The portion of the MarketSoft purchase price allocated to purchased customer receivables reflects the fair value of receivables related to completed customer contracts for which amounts had not yet been billed and cash had not yet been collected as of the acquisition date. The fair value of these receivables was determined based on the expected discounted cash flows. The purchased customer receivables balance was allocated to current and long-term, based on the expected timing of future cash flows.
The portion of the MarketSoft purchase price allocated to developed technology and customer contracts and related customer relationships reflects the fair value as determined by the Company using a discounted cash flow method. These intangible assets will be amortized on a straight-line basis over their estimated useful lives (see Note 4). The goodwill is not subject to amortization, but will be evaluated for impairment at least annually in accordance with the provisions of SFAS No. 142. Goodwill is expected to be deductible for tax purposes.
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
Various factors contributed to the establishment of goodwill, including: MarketSoft’s assembled work force as of the acquisition date; the synergies expected to result from combining infrastructure; and the expected revenue growth and product cash flows in future years.
The Company has estimated the fair value of deferred revenue related to the maintenance obligation assumed from MarketSoft in connection with the acquisition using the costbuild-up approach, which determines fair value by estimating the cost of fulfilling the obligation, plus a normal profit margin. The Company estimated the normal profit margin to be 20%.
Pro Forma Results (Unaudited)
The unaudited pro forma combined condensed results of operations of Unica, MarketingCentral, Sane, and MarketSoft for the years ended September 30, 2007 and 2006 presented below gives effect to the acquisitions of MarketingCentral, Sane and MarketSoft as if the acquisitions had occurred as of the beginning of each period presented. MarketingCentral’s fiscal year end prior to the acquisition was December 31, Sane’s fiscal year end prior to the acquisition was December 31, and MarketSoft’s fiscal year end prior to the acquisition was June 30. The unaudited pro forma combined condensed results of operations are not necessarily indicative of future results or the actual results that would have occurred had the acquisitions been consummated as of the beginning of each period presented.
| Year Ended | ||||||||
| September 30, | ||||||||
| 2007 | 2006 | |||||||
| Pro forma revenue | $ | 104,705 | $ | 87,527 | ||||
| Pro forma net income | 423 | 641 | ||||||
| Pro forma net income per share: | ||||||||
| Basic | $ | 0.02 | $ | 0.03 | ||||
| Diluted | $ | 0.02 | $ | 0.03 | ||||
The above unaudited pro forma results exclude adjustments for the $4,037 in-process research and development charge, and include net amortization of acquired intangible assets in the amounts of $2,930 and $1,412 for the years ended September 30, 2007 and 2006, respectively. In addition, the unaudited pro forma results have been adjusted to reduce interest income earned by the Company on the cash paid for each acquisition. The Company estimated this interest income adjustment using an interest rate of 2.5% for the years ended September 30, 2007 and 2006.
| 4. | Goodwill and Acquired Intangible Assets |
The Company tests goodwill for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of goodwill may exceed its fair value in accordance with the provisions of SFAS No. 142. In 2008 and 2007, the Company’s annual testing indicated there was no impairment since the fair value exceeded the net assets of the reporting units, including goodwill. The Company estimates fair value using the income approach, based on the discounted future cash flows estimated by management for each reporting unit. Reporting units are organized by operations with similar economic characteristics for which discrete financial information is available and regularly reviewed by management.
Unless changes in events or circumstances indicate that an impairment test is required, the Company will continue to test goodwill for impairment on an annual basis. Conditions that could trigger a more frequent impairment assessment include, but are not limited to, a significant adverse change in certain agreements, significant underperformance relative to historical or projected future operating results, an economic downturn
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
in customers’ industries, increased competition, a significant reduction in the Company’s stock price for a sustained period or a reduction of our market capitalization relative to net book value. A portion of goodwill and acquired intangible assets pertains to the Company’s France subsidiary and, as a result, is subject to translation at the currency rates in effect at the balance sheet date.
The following table describes changes to goodwill:
| Year Ended | ||||||||
| September 30, | ||||||||
| 2008 | 2007 | |||||||
| Beginning balance | $ | 26,160 | $ | 20,106 | ||||
| Additions: | ||||||||
| Sane acquisition | — | 159 | ||||||
| MarketSoft acquisition | — | (78 | ) | |||||
| MarketingCentral acquisition | (11 | ) | 5,673 | |||||
| Foreign exchange | 33 | 300 | ||||||
| Ending balance | $ | 26,182 | $ | 26,160 | ||||
Acquired intangible assets subject to amortization are comprised of the following:
| Estimated | ||||||||||||
| Useful Lives | As of September 30, | |||||||||||
| In Years | 2008 | 2007 | ||||||||||
| Developed technology | 1-8 | $ | 6,699 | $ | 6,699 | |||||||
| Customer contracts and related customer relationships | 3-14 | 7,556 | 7,556 | |||||||||
| License agreement | 14 | 1,360 | 1,360 | |||||||||
| Trade name | 1 | 44 | 44 | |||||||||
| 15,659 | 15,659 | |||||||||||
| Less: Accumulated amortization of developed technology | (3,935 | ) | (2,645 | ) | ||||||||
| Customer contracts and related customer relationships | (4,640 | ) | (3,067 | ) | ||||||||
| License agreement | (194 | ) | (31 | ) | ||||||||
| Trade name | (44 | ) | (10 | ) | ||||||||
| Total accumulated amortization | (8,813 | ) | (5,753 | ) | ||||||||
| Acquired intangible assets, net | $ | 6,846 | $ | 9,906 | ||||||||
The developed technology intangible assets are being amortized on a straight-line basis over their estimated useful lives of one to eight years. Amortization of developed technology, included as a component of cost of product revenue in the consolidated statements of operations, was $1,323, $1,135 and $675 for the years ended September 30, 2008, 2007 and 2006, respectively.
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
Intangible assets are expected to be amortized over a weighted-average period of 3.50 years as follows:
| Year ending September 30, 2009 | $ | 2,331 | ||
| 2010 | 1,201 | |||
| 2011 | 692 | |||
| 2012 | 585 | |||
| 2013 | 522 | |||
| 2014 and thereafter | 1,515 | |||
| Total expected amortization | $ | 6,846 | ||
| 5. | Property and Equipment |
Property and equipment consists of the following:
| Estimated | As of September 30, | |||||||||||
| Useful Life | 2008 | 2007 | ||||||||||
| Software | 2-3 years | $ | 3,214 | $ | 1,531 | |||||||
| Office equipment | 3 years | 5,978 | 4,549 | |||||||||
| Furniture and fixtures | 5 years | 769 | 658 | |||||||||
| Leasehold improvements | Lesser of useful life or term of lease | 1,447 | 1,063 | |||||||||
| Construction-in-progress | — | 395 | 1,281 | |||||||||
| 11,803 | 9,082 | |||||||||||
| Less: accumulated depreciation and amortization | (7,022 | ) | (4,947 | ) | ||||||||
| $ | 4,781 | $ | 4,135 | |||||||||
Property and equipment are stated at cost. Leasehold improvements are depreciated over the shorter of the lease term or their estimated useful lives. Depreciation and amortization are computed using the straight-line method based on the estimated useful lives of the related assets. Depreciation expense for the years ended September 30, 2008, 2007 and 2006 was $2,364, $1,428 and $1,102, respectively. Repairs and maintenance charges less than $1 are expensed as incurred.
| 6. | Restricted Cash |
At September 30, 2008 and 2007, the Company had $273 and $260, respectively, of restricted cash held in certificates of deposit as collateral for a letter of credit related to the security deposit on the Company’s leased facilities in Waltham, Massachusetts and in Paris, France. Restricted cash is included within other assets in the consolidated balance sheet. The restriction on cash expires upon expiration of the leases for the facilities in Waltham, MA and Paris, France in 2009.
| 7. | Commitments and Contingencies |
Operating Leases
The Company conducts its operations in leased office facilities under various operating leases that expire through fiscal 2011. Total rent expense under these operating leases was $3,679, $3,026 and $2,818 for the
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
years ended September 30, 2008, 2007 and 2006, respectively. Future minimum payments under operating leases as of September 30, 2008 are as follows:
| Year ending September 30, 2009 | $ | 1,739 | ||
| 2010 | 350 | |||
| 2011 | 228 | |||
| Total minimum lease payments | $ | 2,317 | ||
Obligations related to operating leases denominated in foreign currencies were translated at exchange rates in effect at September 30, 2008. The Company does not believe that changes in exchange rates over the term of the lease will have a material impact on the lease obligation. Upon expiration of current operating leases beginning in 2010, the Company expects to renew, or contract for new leased facilities, at prevailing market rates.
The Company has open vendor purchase obligations in the amount of $3,655, which are expected to be paid as follows: $2,898 in 2009, $558 in 2010 and $199 in 2011.
Legal Matters
From time to time and in the ordinary course of business, the Company may be subject to various claims, charges and litigation. In some cases, the claimants may seek damages, as well as other relief, which, if granted, could require significant expenditures. In accordance with SFAS No. 5,Accounting for Contingencies, the Company accrues the estimated costs of settlement or damages when a loss is deemed probable and such costs are estimable. In accordance with EITF Topic D-77,Accounting for Legal Costs Expected To Be Incurred In Connection With A Loss Contingency, the Company accrues for legal costs associated with a loss contingency when a loss is probable and such amounts are estimable. Otherwise, these costs are expensed as incurred. If the estimate of a probable loss or defense costs is a range and no amount within the range is more likely, the Company accrues the minimum amount of the range.
Warranties and Indemnifications
The Company’s software is typically warranted to perform in a manner consistent with the Company’s documentation under normal use and circumstances. The Company’s license agreements generally include a provision by which the Company agrees to defend its customers against third-party claims of intellectual property infringement under specified conditions and to indemnify them against any damages and costs awarded in connection with such claims. To date, the Company has not incurred any material costs as a result of such warranties and indemnities and has not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.
Guarantees
The Company has identified the guarantees described below as disclosable in accordance with FASB Interpretation 45 (FIN 45),Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. The Company evaluates estimated losses for guarantees under SFAS No. 5. The Company considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, the Company has not encountered material costs as a result of such obligations and has not accrued any liabilities related to such guarantees in its financial statements.
As permitted under Delaware law, the Company’s Certificate of Incorporation provides that the Company indemnify each of its officers and directors during his or her lifetime for certain events or occurrences that happen by reason of the fact that the officer or director is or was or has agreed to serve as an officer or
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
director of the Company. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a Director and Officer insurance policy that limits its exposure and would enable the Company to recover a portion of certain future amounts paid.
The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company typically agrees to indemnify, hold harmless, and reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with claims relating to infringement of a U.S. patent, or any copyright or other intellectual property. Subject to applicable statutes of limitation, the term of these indemnification agreements is generally perpetual from the time of execution of the agreement. In certain situations the Company has agreed to indemnify its customers for losses incurred in connection with a breach of contract. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company carries insurance that covers certain third party claims relating to its services and could limit the Company’s exposure.
| 8. | Accrued Expenses |
Accrued expenses consist of the following:
| As of September 30, | ||||||||
| 2008 | 2007 | |||||||
| Accrued payroll and related | $ | 9,681 | $ | 8,285 | ||||
| Accrued professional fees | 740 | 597 | ||||||
| Acquisition-related accruals | 27 | 257 | ||||||
| Accrued restructuring | — | 609 | ||||||
| Accrued other | 3,890 | 4,429 | ||||||
| State sales tax accruals | 189 | 3,254 | ||||||
| $ | 14,527 | $ | 17,431 | |||||
| 9. | Restructuring Charges |
In the fourth quarter of fiscal 2006, the Company initiated the restructuring of certain of its operations in France to realign its resources in that region. As a result of this initiative, the Company terminated several employees resulting in restructuring charges for severance and related costs during fiscal 2006 and 2007 and a restructuring credit in fiscal 2008. The cumulative expense recorded relating to the restructuring in France was $1,210.
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
The following is a roll forward of the restructuring accrual for the years ended September 30, 2008, 2007 and 2006:
| Restructuring accrual balance at September 30, 2005 | $ | — | ||
| Restructuring and other related charges | 255 | |||
| Restructuring accrual balance at September 30, 2006 | 255 | |||
| Restructuring and other related charges | 1,240 | |||
| Cash payments and foreign currency translation adjustment | (886 | ) | ||
| Restructuring accrual balance at September 30, 2007 | 609 | |||
| Reversal of accrual in connection with final settlement with employee | (286 | ) | ||
| Cash payments and foreign currency translation adjustment | (323 | ) | ||
| Restructuring accrual balance at September 30, 2008 | $ | — | ||
On October 14, 2008, the Company approved a plan to implement a strategic reduction of its workforce designed to streamline its organization and improve its corporate operating performance. The Company expects to reduce its workforce by approximately 4%. During the year ended September 30, 2009, the Company expects to record a restructuring charge in the form of one-time termination benefits to employees.
| 10. | Income Taxes |
The following is a summary of the Company’s income (loss) before provision for income taxes by geography:
| Year Ended September 30, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| U.S. | $ | (5,124 | ) | $ | (3,183 | ) | $ | 370 | ||||
| Non-U.S. | 2,796 | 2,878 | 343 | |||||||||
| $ | (2,328 | ) | $ | (305 | ) | $ | 713 | |||||
The following is a summary of the Company’s income tax provision (benefit):
| Year Ended September 30, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | (98 | ) | $ | (330 | ) | $ | 2,465 | ||||
| State | 30 | 202 | 230 | |||||||||
| Foreign | 1,377 | 479 | 271 | |||||||||
| Total current provision | 1,309 | 351 | 2,966 | |||||||||
| Deferred: | ||||||||||||
| Federal | 5,683 | (1,158 | ) | (2,612 | ) | |||||||
| State | 477 | (31 | ) | (317 | ) | |||||||
| Foreign | (58 | ) | 37 | — | ||||||||
| Total deferred provision (benefit) | 6,102 | (1,152 | ) | (2,929 | ) | |||||||
| $ | 7,411 | $ | (801 | ) | $ | 37 | ||||||
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(In thousands, except share and per share data)
(In thousands, except share and per share data)
Principal reconciling items from income tax computed at the U.S. statutory tax rate are as follows:
| Year Ended September 30, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Statutory tax rate | (34.0 | )% | (34.0 | )% | 34.0 | % | ||||||
| Foreign taxes, net | 9.7 | (4.7 | ) | (13.5 | ) | |||||||
| State taxes, net | (4.5 | ) | 54.1 | (23.1 | ) | |||||||
| Extraterritorial income exclusion | — | — | (16.4 | ) | ||||||||
| Domestic manufacturer’s deduction | — | — | (7.8 | ) | ||||||||
| Share-based compensation | 14.2 | 48.5 | 32.3 | |||||||||
| Meals and entertainment | 4.4 | 34.3 | 12.8 | |||||||||
| Research and development credit | (8.8 | ) | (240.3 | ) | (12.1 | ) | ||||||
| Change in valuation allowance | 339.8 | (115.6 | ) | 32.2 | ||||||||
| Tax reserve adjustment | — | — | (33.2 | ) | ||||||||
| Other | (2.5 | ) | (4.9 | ) | — | |||||||
| Effective tax rate | 318.3 | % | (262.6 | )% | 5.2 | % | ||||||
The principal components of the Company’s deferred tax assets and liabilities are as follows:
| As of | As of | |||||||
| September 30, 2008 | September 30, 2007 | |||||||
| Deferred tax assets: | ||||||||
| Share-based compensation | $ | 2,678 | $ | 1,989 | ||||
| Amortization of identifiable intangible assets | 3,548 | 3,214 | ||||||
| Depreciation | 364 | 173 | ||||||
| Accrued expenses and other | 591 | 256 | ||||||
| Net operating loss carryforwards | 592 | 145 | ||||||
| U.S. foreign tax credit carryforwards | 314 | 163 | ||||||
| Research and development tax credit carryforwards | 782 | 354 | ||||||
| 8,869 | 6,294 | |||||||
| Valuation allowance | (8,701 | ) | (583 | ) | ||||
| Total deferred tax assets | 168 | 5,711 | ||||||
| Deferred tax liabilities: | ||||||||
| Amortization of goodwill | (1,368 | ) | (822 | ) | ||||
| Total deferred tax liabilities | (1,368 | ) | (822 | ) | ||||
| Net deferred tax assets (liabilities) | $ | (1,200 | ) | $ | 4,889 | |||
FASB Statement No. 109,Accounting for Income taxes, requires that deferred tax assets be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The valuation allowance must be sufficient to reduce the deferred tax assets to the amount that is more likely than not to be realized. During the fourth quarter of fiscal 2008, the Company determined, based on the weight of all of the available evidence at that time, that it is more likely than not that all of its U.S. federal and state deferred tax assets will not be realized. Accordingly, the Company recorded a valuation allowance of $8,098 to reduce the balance of these U.S. deferred tax assets to
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UNICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except share and per share data)
(In thousands, except share and per share data)
zero. Approximately $7,901 of the valuation allowance had a net impact on the Company’s consolidated income statement. The Company also recorded a valuation allowance of $20 to reduce the deferred tax assets of its wholly owned subsidiary in France to an amount that is more likely than not to be realized. This portion of the valuation allowance had no net impact to the Company’s consolidated income statement. The net change in the total valuation allowance for the year ended September 30, 2008 was an increase of $8,118.
For tax purposes, $23,388 of the Company’s goodwill is amortizable over fifteen years. For financial statement purposes, goodwill is not amortized but is assessed annually for impairment. The tax amortization of goodwill results in a taxable temporary difference which will not reverse until some indefinite future period when the goodwill is either impaired or written-off for financial statement purposes. Such taxable temporary differences generally cannot be used to support the realization of deferred tax assets relating to reversing temporary differences. As a result, the Company must reflect a net deferred tax liability at September 30, 2008.
The Company’s subsidiary in Pune, India currently benefits from a full tax exemption under the Software Technology Parks of India program. The exemption began upon commencement of business operations in August 2005 and is currently scheduled to expire on March 31, 2010.
During the three months ended September 30, 2008, the Company received a notice from the tax authority in France stating their intent to audit the tax returns of the Company’s subsidiary in France for the fiscal years ended September 30, 2005 through September 30, 2007. The audit has not yet begun, but the Company intends to cooperate fully in the management and resolution of the audit.
The Emergency Economic Stabilization Act (“the Act”) was enacted in the U.S. in October, 2008. As part of the Act, the provisions of the U.S. research and development tax credit were extended to include qualified costs incurred after December 31, 2007. The Company has not yet recorded a benefit for its research and development costs incurred after December 31, 2007 as the Act was enacted after the close of its current fiscal year ended September 30, 2008.
As of September 30, 2008, the Company has U.S. federal and state net operating loss carryforwards of $1,480 and $3,082, respectively. These net operating loss carryforwards will expire at various dates through 2028. The Company has utilized all of itsnon-U.S. net operating loss carryforwards as of September 30, 2008. The Company also has federal and state research and development tax credit carryforwards of $256 and $927, respectively. These tax credits will expire at various dates through 2028. The Company also has $314 of U.S. foreign tax credit carryforwards and these credits will expire in 2015. The Company has recorded a full valuation allowance against all of these tax attributes as of September 30, 2008.
The Company permanently reinvests the undistributed earnings of its foreign subsidiaries. As of September 30, 2008, the Company had approximately $4,973 of undistributed foreign earnings. It is not practicable to compute the estimated deferred tax liability on these earnings.
The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”),Accounting for Uncertainty in Income Taxes, on October 1, 2007. The Company did not record a cumulative effect adjustment
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except share and per share data)
(In thousands, except share and per share data)
to retained earnings as a result of the implementation of FIN 48. A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows:
| Unrecognized | ||||
| Tax Benefits | ||||
| Balance at October 1, 2007 | $ | 991 | ||
| Decrease to prior year tax positions | (313 | ) | ||
| Increase to current year tax positions | 222 | |||
| Decrease related to settlements with taxing authorities | (234 | ) | ||
| Balance at September 30, 2008 | $ | 666 | ||
Included in the unrecognized tax benefits at September 30, 2008 is $477 of tax benefits that, if recognized, would affect the Company’s annual effective tax rate.
The Company accrues potential interest and penalties relating to unrecognized tax benefits. The Company records interest and penalties for tax deficiencies as income tax expense. At October 1, 2007, the amount of accrued interest and penalties relating to unrecognized tax benefits was $69 and $0, respectively. Due to settlements with various taxing authorities, the Company recorded a net reduction of previously accrued interest of $26 during the year ended September 30, 2008.
Due to the expiration of certain statutes of limitation, it is reasonably possible that the Company’s total liability for unrecognized tax benefits may decrease within the next twelve months by a range of zero to $61.
The Company files federal and state income tax returns in the United States and also files tax returns in the United Kingdom, France, Singapore and India. These tax returns are generally open to examination by the relevant tax authorities for three to six years from the date they are filed. The tax filings related to the Company’s operations in the United States, France and India are currently open to examination for fiscal years 2005 through 2007. The tax filings for the Company’s operations in the United Kingdom and Singapore are currently open to examination for fiscal years 2002 through 2007.
The Company recorded an additional tax provision of $165 in the quarter ended June 30, 2007 relating to the adjustment of the estimated tax provision computed for the fiscal year ended September 30, 2006, based upon amounts included in the actual tax returns filed in June 2007.
During the three months ended December 31, 2006, the “Tax Relief and Health Care Act of 2006” was enacted, thereby extending the research and development tax credit for qualified costs incurred after December 31, 2005. In accordance with this change in tax law, the Company recorded a tax benefit of $220 during the three months ended December 31, 2006 to recognize the benefit from qualified research and development costs incurred from January 1, 2006 through September 30, 2006. This was accounted for as a discrete item during the three months ended December 31, 2006.
During the year ended September 30, 2007, the Company recorded a provision of $141, or 46% of loss before income taxes, related to prior fiscal years. The Company reviewed its income tax nexus position in certain states and it was determined that the Company had underaccrued for state income taxes in prior years. The $141 adjustment was recorded during the quarter ended December 31, 2006 and is reflected in state taxes, net in the table above.
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UNICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except share and per share data)
(In thousands, except share and per share data)
| 11. | Stockholders’ Equity |
Common Stock
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s common stockholders. Common stockholders are entitled to receive dividends, if any, as declared by the Board of Directors. At September 30, 2008, the Company had reserved 5,844,000 shares of common stock for the future exercise of stock options and vesting of restricted stock units authorized under its stock incentive plan as well as for stock purchases through its employee stock purchase plan.
The Company does not have a practice of repurchasing shares to satisfy share-based payment arrangements and does not expect to initiate such a repurchase during fiscal 2009.
Treasury Stock
As of September 30, 2008, there were no shares held as treasury stock.
On November 30, 2008, the Board of Directors approved a stock repurchase program which allows the Company to repurchase up to $5 million shares of the Company’s common stock on the open market or in privately negotiated transactions.
Undesignated Preferred Stock
The Board of Directors and stockholders have authorized 10,000,000 shares of undesignated preferred stock, par value $0.01 per share. As of September 30, 2008 and 2007, there was no preferred stock outstanding.
Accumulated Other Comprehensive Income
SFAS No. 130,Reporting Comprehensive Income, establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Other than reported net income, the Company’s comprehensive income includes foreign currency translation adjustments and unrealized gains and losses on investments.
The following table presents the calculation of comprehensive income:
| Year Ended | ||||||||
| September 30, | ||||||||
| 2008 | 2007 | |||||||
| Net Income (loss) | $ | (9,739 | ) | $ | 496 | |||
| Other comprehensive income: | ||||||||
| Change in unrealized gain (loss) on short-term investments, net of tax | (27 | ) | (1 | ) | ||||
| Foreign currency translation adjustments | 81 | 104 | ||||||
| Other comprehensive income (loss) | $ | (9,685 | ) | $ | 599 | |||
| 12. | Equity Compensation Plans |
Stock Options
In May 1997, the Company’s stockholders approved the amended and restated 1993 Stock Option Plan (the 1993 Plan), which provides for the grant of incentive and non-qualified stock options for the purchase of up to 4,151,000 shares of the Company’s common stock by officers, employees, directors and consultants of
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UNICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except share and per share data)
(In thousands, except share and per share data)
the Company. Incentive stock options may be granted to any officer or employee at an exercise price per share of not less than the fair value per common share on the date of grant (not less than 110% of fair value in the case of holders of more than 10% of the Company’s stock). The 1993 Plan provides that the options shall be exercisable over a period not to exceed ten years. The Board of Directors is responsible for administration of the 1993 Plan and determines the term of each option, the option exercise price, the number of shares for which each option is exercisable and the vesting period. Options generally vest over a period of four to five years. In connection with the adoption of the 2003 Stock Option Plan, a total of 138,000 shares then available under the 1993 Plan became available for grant under the 2003 Plan and no further option grants were permitted under the 1993 Plan.
In March 2005, the Company’s Board of Directors and stockholders approved the amended and restated 2003 Stock Option Plan (the 2003 Plan), which provides for the grant of incentive and non-qualified stock options for the purchase of up to 1,312,000 shares of the Company’s common stock by officers, employees, directors, and consultants of the Company. Incentive stock options may be granted to any officer or employee at an exercise price per share of not less than the fair value per common share on the date of grant (not less than 110% of fair value in the case of holders of more than 10% of the Company’s stock). The 2003 Plan provides that the options shall be exercisable over a period not to exceed ten years. The Board of Directors is responsible for the administration of the 2003 Plan and determines the term of each option, the option exercise price, the number of shares for which each option is exercisable and the vesting period. Options generally vest over a period of four or five years. In connection with the adoption of the 2005 Stock Incentive Plan (the 2005 plan), a total of 367,000 shares then available under the 2003 Plan became available for grant under the 2005 Plan and no further option grants were permitted under the 2003 Plan.
In March 2005, the Board of Directors and stockholders also approved the 2005 Stock Incentive Plan (the 2005 Plan). The Company has reserved for issuance an aggregate of 1,500,000 shares of common stock under the 2005 Plan, plus 367,000 shares available for grant under the 2003 Plan immediately prior to the closing of the Company’s initial public offering and the number of shares subject to awards granted under the 2003 Plan that expire, terminate, or are otherwise surrendered, canceled, forfeited or repurchased by the Company at the original issuance price pursuant to a contractual repurchase right. On October 1, 2007 and 2008, an additional 1,004,000 and 1,038,000 shares, respectively, were reserved under the 2005 Plan, in accordance with the provisions of the Plan, which require an annual increase of the shares reserved for issuance under the Plan equal to the lesser of (a) 5,000,000 shares of common stock, (b) 5% of the outstanding shares of common stock as of the opening of business on such date or (c) an amount determined by the Board of Directors.
The following is a summary of the stock option activity, including related disclosures, during the year ended September 30, 2008.
| Weighted- | ||||||||||||||||
| Average | ||||||||||||||||
| Weighted- | Remaining | Aggregate | ||||||||||||||
| Average | Contractual | Intrinsic | ||||||||||||||
| Options | Exercise Price | Term | Value(1) | |||||||||||||
| Outstanding at September 30, 2007 | 2,487,000 | $ | 8.48 | |||||||||||||
| Granted | 506,000 | 7.97 | ||||||||||||||
| Exercised | (330,000 | ) | 2.44 | |||||||||||||
| Forfeited | (211,000 | ) | 11.45 | |||||||||||||
| Outstanding at September 30, 2008 | 2,452,000 | $ | 8.85 | 4.88 | $ | 3,039,000 | ||||||||||
| Exercisable at September 30, 2008 | 1,477,000 | $ | 8.20 | 4.83 | $ | 2,599,000 | ||||||||||
| Options at September 30, 2008 vested and expected to vest in the future | 2,219,000 | $ | 8.70 | 4.88 | $ | 2,955,000 | ||||||||||
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UNICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except share and per share data)
(In thousands, except share and per share data)
| (1) | The aggregate intrinsic value was calculated based on the positive difference between the closing price of the Company’s common stock on September 30, 2008 of $7.84 per share and the exercise price of the underlying options. |
The total intrinsic value of options exercised during the years ended September 30, 2008, 2007 and 2006 was $1,952, $2,958 and $4,788, respectively.
Restricted Stock Units
During fiscal 2006, the Company started the issuance of restricted stock unit awards (RSUs) as an additional form of equity compensation to its employees and officers, pursuant to the Company’s stockholder-approved 2005 Plan. RSUs are restricted stock awards that entitle the grantee to an issuance of stock at a nominal cost. The fair value of these RSUs was calculated based upon the Company’s closing stock price on the date of grant, and the related share-based compensation expense is being recorded over the vesting period. RSUs generally vest over a four-year period and unvested RSUs are forfeited and canceled as of the date that employment terminates. RSUs are settled in shares of the Company’s common stock upon vesting.
The following is a summary of the status of the Company’s restricted stock units as of September 30, 2008 and the activity during the year ended September 30, 2008.
| Weighted- | ||||||||
| Average | ||||||||
| Grant-Date | ||||||||
| Shares | Fair Value | |||||||
| Nonvested awards at September 30, 2007 | 1,136,000 | $ | 12.11 | |||||
| Granted | 475,000 | 7.75 | ||||||
| Vested | (337,000 | ) | 11.90 | |||||
| Forfeited | (276,000 | ) | 11.34 | |||||
| Nonvested awards at September 30, 2008 | 998,000 | $ | 10.29 | |||||
The Company recorded $3,982 of shared-based compensation expense related to RSUs for the year ended September 30, 2008. As of September 30, 2008, there was unrecognized compensation cost related to RSUs totaling $7,466 net of estimated forfeitures, which will be recognized over a weighted-average period of 1.89 years.
Employee Stock Purchase Plan
In March 2005, the Board of Directors and stockholders approved the 2005 Employee Stock Purchase Plan (ESPP), which is designed to be qualified under Section 423 of the Internal Revenue Code. The ESPP is available to all eligible employees, who, through payroll deductions, will be able to individually purchase shares of the Company’s common stock semi-annually at a price equal to 85% of the lower of the fair market value of the Company’s common stock at the beginning or end of the purchase period. The Company has reserved for issuance an aggregate of 1,000,000 shares of common stock for the ESPP. At September 30, 2008, 781,000 shares were reserved for future issuance under the ESPP.
| 13. | Segment Information |
SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in interim financial reports issued to stockholders. Operating segments are identified as components of an enterprise about which separate discrete financial
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UNICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except share and per share data)
(In thousands, except share and per share data)
information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company views and manages its business as one reporting segment.
Geographic Data
Total assets located outside of the U.S. were 17% and 13% of total assets as of September 30, 2008 and 2007, respectively. Long-term assets located outside of the U.S. were 14% and 16% of total long-term assets at September 30, 2008 and 2007, respectively, or $1,243 and $980. Revenue for the years ended September 30, 2008, 2007 and 2006 from customers located outside the United States was 40%, 30% and 26%, respectively, of total revenue.
In the following table, revenue is determined based on the locations of customers.
| Year Ended September 30, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Revenues: | ||||||||||||
| United States | $ | 73,040 | $ | 71,536 | $ | 60,841 | ||||||
| All other | 48,091 | 30,707 | 21,570 | |||||||||
| $ | 121,131 | $ | 102,243 | $ | 82,411 | |||||||
Other than the United States, no individual country represented greater than 10% of total revenues in any year.
| 14. | Quarterly Financial Data (unaudited) |
| First | Second | Third | Fourth | |||||||||||||
Year Ended September 30, 2008 | Quarter | Quarter | Quarter | Quarter | ||||||||||||
| Total revenue | $ | 28,464 | $ | 30,787 | $ | 33,290 | $ | 28,590 | ||||||||
| Gross profit | 21,259 | 22,670 | 24,748 | 21,013 | ||||||||||||
| Net income (loss) | (424 | ) | (277 | ) | 411 | (9,449 | ) | |||||||||
| Net income (loss) per common share: | ||||||||||||||||
| Basic | $ | (0.02 | ) | $ | (0.01 | ) | $ | 0.02 | $ | (0.46 | ) | |||||
| Diluted | $ | (0.02 | ) | $ | (0.01 | ) | $ | 0.02 | $ | (0.46 | ) | |||||
| First | Second | Third | Fourth | |||||||||||||
Year Ended September 30, 2007 | Quarter | Quarter | Quarter | Quarter | ||||||||||||
| Total revenue | $ | 23,798 | $ | 26,297 | $ | 22,847 | $ | 29,301 | ||||||||
| Gross profit | 19,199 | 20,400 | 17,212 | 23,000 | ||||||||||||
| Net income (loss) | (180 | ) | 1,063 | (792 | ) | 405 | ||||||||||
| Net income (loss) per common share: | ||||||||||||||||
| Basic | $ | (0.01 | ) | $ | 0.05 | $ | (0.04 | ) | $ | 0.02 | ||||||
| Diluted | $ | (0.01 | ) | $ | 0.05 | $ | (0.04 | ) | $ | 0.02 | ||||||
On October 1, 2007, the Company adopted the consensus reached in Emerging Issues Task Force (“EITF”) IssueNo. 06-2,Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences(“EITF 06-2”), which requires the Company to accrue an estimated liability for sabbatical leave over the requisite service period. Prior to the adoption of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(In thousands, except share and per share data)
(In thousands, except share and per share data)
EITF 06-2, the Company recorded a liability for sabbatical leave upon an employee vesting in the benefit, which occurred when an employee went on leave after completing a six-year service period. The adoption ofEITF 06-2 resulted in an additional liability of $435, additional deferred tax assets of $161 and a reduction to retained earnings of $274 as of October 1, 2007.
On October 1, 2007 the Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109(“FIN 48”), which prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. There was no cumulative effect upon adoption of FIN 48.
The quarterly financial data reflect our acquisition of MarketingCentral L.L.C on July 12, 2007 for $12.9 million in cash and assumed liabilities. Results of operations for the acquired business has been included in the consolidated income statements since its acquisition date.
| 15. | Employee Benefit Plans |
On July 1, 2000, the Company adopted the Unica Corporation 401(k) Savings Plan (the 401(k) Plan). Under the 401(k) Plan, employees may elect to reduce their current compensation by an amount no greater than the statutorily prescribed annual limit and may have that amount contributed to the 401(k) Plan. The Company may make matching or additional contributions to the 401(k) Plan in amounts to be determined by management. The Company contributed $485, $477 and $368 to the 401(k) Plan for the years ended September 30, 2008, 2007 and 2006, respectively.
| 16. | Allowance for Doubtful Accounts |
The Company offsets gross trade accounts receivable with an allowance for doubtful accounts. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company reviews its allowance for doubtful accounts on a monthly basis and all past due balances are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Provisions for allowance for doubtful accounts are recorded in general and administrative expenses.
Below is a summary of the changes in the Company’s allowance for doubtful accounts for the years ended September 30, 2008, 2007 and 2006:
| Balance at | Impact of | Balance at | ||||||||||||||||||
| Beginning of | Adopting | End of | ||||||||||||||||||
| Period | SAB 108 | Provision | Write-offs | Period | ||||||||||||||||
| Year ended September 30, 2008 | $ | 77 | — | $ | 117 | $ | (107 | ) | $ | 87 | ||||||||||
| Year ended September 30, 2007 | $ | 141 | — | $ | 55 | $ | (119 | ) | $ | 77 | ||||||||||
| Year ended September 30, 2006 | $ | 569 | $ | (510 | ) | $ | 82 | — | $ | 141 | ||||||||||
Upon adoption of SAB 108, the Company reversed $510 of excess allowance for doubtful accounts for uncorrected errors. The excess allowance for doubtful accounts as of September 30, 2003 was approximately $410 and had accumulated over several years. The excess allowance for doubtful accounts increased by approximately $80 and $20 during the years ended September 30, 2004 and 2005, respectively. These errors had not previously been material to any of those prior periods when measured using the roll-over method. The Company recorded this cumulative effect adjustment net of tax, resulting in a decrease to short-term deferred tax assets of $201. As a result, the net adjustment was recorded as an increase to retained earnings as of October 1, 2005 of $309.
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| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
An evaluation was performed by our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our “disclosure controls and procedures,” as defined inRules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act, as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decision regarding required disclosure. As a result of this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective because of the material weakness described in Management’s Report on Internal Control Over Financial Reporting.
Notwithstanding the existence of the material weakness described below, we concluded that the consolidated financial statements included in this Annual Report onForm 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the interim and annual periods presented.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined inRules 13a-15(f) and15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| • | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; | |
| • | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the Company; and | |
| • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of September 30, 2008. In making this assessment, Unica’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control — Integrated Framework.
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A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We identified a material weakness in our internal control over financial reporting as of September 30, 2008 because we did not maintain effective controls to ensure the completeness and accuracy of deferred maintenance and subscription revenue, including the determination and reporting of deferred maintenance and subscription revenue balances as well as the recognition of maintenance and subscription revenue. Specifically, we did not:
| • | Properly perform an effective analysis of the maintenance and subscription deferred revenue balances to ensure that such balances were properly stated given the contractual terms of our customer arrangements and the related period of performance; | |
| • | Have controls and procedures in place to ensure that the relevant terms of customer contracts were input completely and accurately into our accounting system, both when a customer contract was initially executed and when a customer contract was amended; | |
| • | Have processes in place to ensure that control procedures relating to deferred maintenance and subscription revenue were communicated to newly hired personnel responsible for performing such control procedures; and | |
| • | Have controls and procedures in place to ensure that revenue was recognized in the appropriate period for customers where revenue was only to be recognized when collection occurred. |
Additionally, this control deficiency could result in a misstatement of the aforementioned accounts and disclosures that would result in a material misstatement of our interim or annual consolidated financial statements and disclosures that would not be prevented or detected. Accordingly, our management has determined that this control deficiency constitutes a material weakness.
Based on the material weakness described above, management concluded that, as of September 30, 2008, our internal control over financial reporting was not effective based on criteria inInternal Control — Integrated Frameworkissued by the COSO.
The effectiveness of our internal control over financial reporting as of September 30, 2008 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on page 49.
Remediation Plans for Material Weakness in Internal Control Over Financial Reporting Related to the Accounting for Deferred Maintenance and Subscription Revenue
The Company is implementing enhancements to its internal control over financial reporting to address the material weakness described above and to provide reasonable assurance that errors and control deficiencies of this type will not recur. These steps include:
| • | The Company will enhance its quarterly review of deferred maintenance and subscription revenue to ensure that ending balances are properly stated and that revenue recognized for a reporting period is complete and accurate; | |
| • | The Company has begun to utilize functionality in its accounting software that provides more controls in how contractual terms of customer arrangements are entered and maintained, as well as how maintenance and subscription revenue is tracked and reported; and | |
| • | The Company will enhance its review of deferred revenue balances relating to customers where revenue is recognized when collection has occurred. |
The Company believes it is taking the steps necessary to remediate this material weakness. The Company will continue to monitor the effectiveness of these procedures and will continue to make any changes that management deems appropriate.
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Remediation of Material Weakness in Internal Control over Financial Reporting Related to Taxes
As previously disclosed in the Company’s Annual Report onForm 10-K for the year ended September 30, 2007, management concluded that as of September 30, 2007 the Company did not maintain effective internal control procedures over the accounting for taxes including the determination and reporting of state income taxes, state sales taxes, deferred tax assets and the income tax provision. Specifically, the Company did not properly evaluate the realizability of a state tax benefit and related deferred tax assets and did not perform an effective analysis to ensure the completeness and accuracy of its state sales taxes and income taxes. This control deficiency resulted in the misstatement of the aforementioned accounts and disclosures and the restatement of the Company’s interim consolidated financial statements for fiscal 2007.
Management has concluded that, as of September 30, 2008, the Company has remediated the previously reported material weakness in internal control over financial reporting relating to taxes. Prior to that date, the Company had taken the following remedial actions:
| • | The Company hired a replacement tax professional who is experienced in tax accounting. The Company has ensured that all relevant tax personnel involved in tax transactions, through additional resources and training, understand and apply the proper recognition and accounting of tax related assets and liabilities; and | |
| • | The Company has enhanced its quarterly review of tax-related assets and liabilities, as well as the effective tax rate, to ensure proper recognition of taxes payable and the deferred tax assets and liabilities. Such reviews are performed by personnel with an appropriate level of tax expertise. |
During the fourth quarter of fiscal 2008, the Company completed testing to validate compliance with the newly implemented policies, procedures and controls. The Company has undertaken this testing in order to demonstrate operating effectiveness over a period of time that is sufficient to support its conclusion. The Company has reviewed the results from this testing and concluded that the material weakness in its internal control over financial reporting relating to taxes was remediated as of September 30, 2008. The Company will continue to monitor the effectiveness of these procedures on a quarterly basis, and will continue to make any enhancements or changes to control procedures that management deems appropriate.
Changes in Internal Control Over Financial Reporting
As described above in the paragraph titledRemediation of Material Weakness in Internal Control Over Financial Reporting Related To Taxes, there were changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. As a result of these changes, as stated above, the Company has remediated the previously reported material weakness relating to taxes.
| Item 9B. | Other Information |
None.
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information required by this item is set forth under the captions “Proposal 1: Election of Class I Directors,” “Information About Continuing Directors,” “Information About Executive Officers,” “Code of Business Conduct and Ethics” and “Board Committees — Audit Committee” in our definitive proxy statement for the 2009 Annual Meeting of Stockholders, and is incorporated herein by reference.
We are also required under Item 405 ofRegulation S-K to provide information concerning delinquent filers of reports under Section 16 of the Securities Exchange Act of 1934, as amended. This information is listed under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for the 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange
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Commission no later than 120 days after the end of our fiscal year. This information is incorporated herein by reference. The information regarding executive officers is listed under the section captioned “Information About Executive Officers” in our definitive proxy statement for the 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year. This information is incorporated herein by reference.
| Item 11. | Executive Compensation |
The information required by this item is set forth under the captions “Director Compensation,” “Executive Officer Compensation,” “Compensation Committee Report,” “Compensation Discussion and Analysis” and “Compensation Committee Interlocks and Insider Participation” in our definitive proxy statement for the 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year. This information is incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this item is set forth under the captions “Stock Owned by Directors, Executive Officers and Greater-Than-5% Stockholders” and “Securities Authorized for Issuance Under Equity Compensation Plans” in our definitive proxy statement for the 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year. This information is incorporated herein by reference.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this item is set forth under the captions “Certain Relationships and Related Transactions” and “Information About Corporate Governance” in our definitive proxy statement for the 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year. This information is incorporated herein by reference.
| Item 14. | Principal Accountant Fees and Services |
The information required by this item is set forth under the caption “Independent Registered Public Accountants” in our definitive proxy statement for the 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year. This information is incorporated herein by reference.
Part IV
| Item 15. | Exhibits and Financial Statement Schedules |
1. Financial Statements are filed as part of this Annual Report onForm 10-K.
2. The following consolidated financial statements are included in Item 8:
| • | Consolidated Balance Sheets as of September 30, 2008 and 2007 | |
| • | Consolidated Income Statements for the years ended September 30, 2008, 2007 and 2006 | |
| • | Consolidated Statements of Redeemable Preferred Stock, Stockholders’ Equity and Comprehensive Income for the years ended September 30, 2008, 2007 and 2006 | |
| • | Consolidated Statements of Cash Flows for the years ended September 30, 2008, 2007 and 2006 |
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(b) Exhibits
| Exhibit | ||||
Number | Description | |||
| 3 | .1 | Amended and Restated Certificate of Incorporation(1) | ||
| 3 | .2 | Amended and Restated By-laws(1) | ||
| 4 | .1 | Specimen Certificate for shares of common stock(1) | ||
| 4 | .2 | Registration Rights Agreement, dated as of November 24, 1999, by and among the Registrant and the parties named therein, as amended(1) | ||
| 10 | .1* | Amended and Restated 1993 Stock Option Plan(1) | ||
| 10 | .2* | 2003 Stock Option Plan, as amended(1) | ||
| 10 | .3* | 2005 Stock Incentive Plan, as amended(4) | ||
| 10 | .4* | 2005 Employee Stock Purchase Plan, as amended(10) | ||
| 10 | .5* | Standard form of Stock Option Agreement entered into with executive officers pursuant to the 1993 Stock Option Plan(1) | ||
| 10 | .6* | Standard form of Adviser’s Stock Option Agreement entered into with directors pursuant to the 1993 Stock Option Plan(1) | ||
| 10 | .7* | Standard form of Stock Option Agreement entered into with executive officers pursuant to the 2003 Stock Option Plan(1) | ||
| 10 | .8* | Standard form of Adviser’s Stock Option Agreement entered into with directors pursuant to the 2003 Stock Option Plan(1) | ||
| 10 | .9* | Standard form of Incentive Stock Option Agreement entered into with executive officers pursuant to the 2005 Stock Incentive Plan(1) | ||
| 10 | .10* | Standard form of Non-qualified Stock Option Agreement entered into with directors pursuant to the 2005 Stock Incentive Plan(1) | ||
| 10 | .11* | Standard form of Restricted Stock Agreement granted under 2005 Stock Incentive Plan(2) | ||
| 10 | .12* | Standard form of Restricted Stock Unit Agreement granted under 2005 Stock Incentive Plan(3) | ||
| 10 | .13 | Lease, dated as of December 20, 2002, by and between the Registrant and Mortimer B. Zuckerman and Edward H. Linde, Trustees of Tracer Lane Trust II, as amended(1) | ||
| 10 | .14* | Form of Indemnification Agreement entered into by and between the Registrant and each of its executive officers and directors(1) | ||
| 10 | .15* | Letter Agreement between the Registrant and Ralph A. Goldwasser, dated February 1, 2006(5) | ||
| 10 | .16* | Transition Agreement dated January 31, 2006 between Unica Corporation and Richard Darer(3) | ||
| 10 | .17* | Fiscal 2008 Executive Incentive Plan(9) | ||
| 10 | .18 | Letter Agreement between the Registrant and Richard Hale, dated January 8, 2007(6) | ||
| 10 | .19 | Agreement and Plan of Merger, dated July 9, 2007, by and among the Registrant, MRB Acquisition Corp. and MarketingCentral L.L.C.(8) | ||
| 14 | .1 | Code of Business Conduct and Ethics(1) | ||
| 16 | .1 | Letter from Ernst & Young LLP(7) | ||
| 21 | .1# | List of Subsidiaries | ||
| 23 | .1# | Consent of PricewaterhouseCoopers LLP | ||
| 23 | .2# | Consent of Ernst & Young LLP | ||
| 31 | .1# | Certification of Chief Executive Officer pursuant toRule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 31 | .2# | Certification of Chief Financial Officer pursuant toRule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32 | .1# | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| # | Filed herewith | |
| * | Management contract or compensatory plan or arrangement |
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| (1) | Incorporated by reference to the exhibits to the Registrant’s registration statement onForm S-1 (FileNo. 333-120615) | |
| (2) | Incorporated by reference to the exhibits to the Registrant’s annual report onForm 10-K filed with the SEC on December 19, 2005 (FileNo. 000-51461) | |
| (3) | Incorporated by reference to the exhibits to the Registrant’s quarterly report onForm 10-Q filed with the SEC on February 14, 2006 (FileNo. 000-51461) | |
| (4) | Incorporated by reference to the exhibits to the Registrant’s quarterly report onForm 10-Q filed with the SEC on May 15, 2006 (FileNo. 000-51461) | |
| (5) | Incorporated by reference to the exhibits to the Registrant’s quarterly report onForm 10-Q filed with the SEC on August 14, 2006 (FileNo. 000-51461) | |
| (6) | Incorporated by reference to the exhibits to the Registrant’s quarterly report onForm 10-Q filed with the SEC on February 9, 2007 (FileNo. 000-51461) | |
| (7) | Incorporated by reference to the exhibits to the Registrant’s current report onForm 8-K filed with the SEC on June 29, 2007 (FileNo. 000-51461) | |
| (8) | Incorporated by reference to the exhibits to the Registrant’s current report onForm 8-K filed with SEC on July 13, 2007 (FileNo. 000-51461) | |
| (9) | Incorporated by reference to the exhibits to the Registrant’s current report onForm 8-K filed with SEC on February 11, 2008 (FileNo. 000-51461) | |
| (10) | Incorporated by reference to the exhibits to the Registrant’s quarterly report onForm 10-Q filed with SEC on May 12, 2008 (FileNo. 000-51461) |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused thisForm 10-K to be signed on behalf by the undersigned, thereunto duly authorized.
UNICA CORPORATION
| By: | /s/ Yuchun Lee |
Yuchun Lee
Chief Executive Officer, President and Chairman
| By: | /s/ Kevin P. Shone |
Kevin P. Shone
Senior Vice President and Chief Financial Officer
Date: December 15, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, thisForm 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of December 15, 2008.
Signature | Title | |||
/s/ Yuchun Lee Yuchun Lee | Chief Executive Officer, President and Director (Principal Executive Officer) | |||
/s/ Kevin P. Shone Kevin P. Shone | Senior Vice President and Chief Financial Officer (Principal Accounting Officer) | |||
/s/ Aron J. Ain Aron J. Ain | Director | |||
/s/ Bruce R. Evans Bruce R. Evans | Director | |||
/s/ Carla Hendra Carla Hendra | Director | |||
/s/ James A. Perakis James A. Perakis | Director | |||
/s/ Robert P. Schechter Robert P. Schechter | Director | |||
/s/ Bradford D. Woloson Bradford D. Woloson | Director | |||
Table of Contents
EXHIBIT INDEX
| Exhibit | ||||
Number | Description | |||
| 3 | .1 | Amended and Restated Certificate of Incorporation(1) | ||
| 3 | .2 | Amended and Restated By-laws(1) | ||
| 4 | .1 | Specimen Certificate for shares of common stock(1) | ||
| 4 | .2 | Registration Rights Agreement, dated as of November 24, 1999, by and among the Registrant and the parties named therein, as amended(1) | ||
| 10 | .1* | Amended and Restated 1993 Stock Option Plan(1) | ||
| 10 | .2* | 2003 Stock Option Plan, as amended(1) | ||
| 10 | .3* | 2005 Stock Incentive Plan, as amended(4) | ||
| 10 | .4* | 2005 Employee Stock Purchase Plan, as amended(10) | ||
| 10 | .5* | Standard form of Stock Option Agreement entered into with executive officers pursuant to the 1993 Stock Option Plan(1) | ||
| 10 | .6* | Standard form of Adviser’s Stock Option Agreement entered into with directors pursuant to the 1993 Stock Option Plan(1) | ||
| 10 | .7* | Standard form of Stock Option Agreement entered into with executive officers pursuant to the 2003 Stock Option Plan(1) | ||
| 10 | .8* | Standard form of Adviser’s Stock Option Agreement entered into with directors pursuant to the 2003 Stock Option Plan(1) | ||
| 10 | .9* | Standard form of Incentive Stock Option Agreement entered into with executive officers pursuant to the 2005 Stock Incentive Plan(1) | ||
| 10 | .10* | Standard form of Non-qualified Stock Option Agreement entered into with directors pursuant to the 2005 Stock Incentive Plan(1) | ||
| 10 | .11* | Standard form of Restricted Stock Agreement granted under 2005 Stock Incentive Plan(2) | ||
| 10 | .12* | Standard form of Restricted Stock Unit Agreement granted under 2005 Stock Incentive Plan(3) | ||
| 10 | .13 | Lease, dated as of December 20, 2002, by and between the Registrant and Mortimer B. Zuckerman and Edward H. Linde, Trustees of Tracer Lane Trust II, as amended(1) | ||
| 10 | .14 | Form of Indemnification Agreement entered into by and between the Registrant and each of its executive officers and directors(1) | ||
| 10 | .15* | Letter Agreement between the Registrant and Ralph A. Goldwasser, dated February 1, 2006(5) | ||
| 10 | .16* | Transition Agreement dated January 31, 2006 between Unica Corporation and Richard Darer(3) | ||
| 10 | .17* | Fiscal 2008 Executive Incentive Plan(9) | ||
| 10 | .18 | Letter Agreement between the Registrant and Richard Hale, dated January 8, 2007(6) | ||
| 10 | .19 | Agreement and Plan of Merger, dated July 9, 2007, by and among the Registrant, MRB Acquisition Corp. and MarketingCentral L.L.C.(8) | ||
| 14 | .1 | Code of Business Conduct and Ethics(1) | ||
| 16 | .1 | Letter from Ernst & Young LLP(7) | ||
| 21 | .1# | List of Subsidiaries | ||
| 23 | .1# | Consent of PricewaterhouseCoopers LLP | ||
| 23 | .2# | Consent of Ernst & Young LLP | ||
| 31 | .1# | Certification of Chief Executive Officer pursuant toRule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 31 | .2# | Certification of Chief Financial Officer pursuant toRule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32 | .1# | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| # | Filed herewith | |
| * | Management contract or compensatory plan or arrangement |
Table of Contents
| (1) | Incorporated by reference to the exhibits to the Registrant’s registration statement onForm S-1 (FileNo. 333-120615) | |
| (2) | Incorporated by reference to the exhibits to the Registrant’s annual report onForm 10-K filed with the SEC on December 19, 2005 (FileNo. 000-51461) | |
| (3) | Incorporated by reference to the exhibits to the Registrant’s quarterly report onForm 10-Q filed with the SEC on February 14, 2006 (FileNo. 000-51461) | |
| (4) | Incorporated by reference to the exhibits to the Registrant’s quarterly report onForm 10-Q filed with the SEC on May 15, 2006 (FileNo. 000-51461) | |
| (5) | Incorporated by reference to the exhibits to the Registrant’s quarterly report onForm 10-Q filed with the SEC on August 14, 2006 (FileNo. 000-51461) | |
| (6) | Incorporated by reference to the exhibits to the Registrant’s quarterly report onForm 10-Q filed with the SEC on February 9, 2007 (FileNo. 000-51461) | |
| (7) | Incorporated by reference to the exhibits to the Registrant’s current report onForm 8-K filed with the SEC on June 29, 2007 (FileNo. 000-51461) | |
| (8) | Incorporated by reference to the exhibits to the Registrant’s current report onForm 8-K filed with the SEC on July 13, 2007 (FileNo. 000-51461) | |
| (9) | Incorporated by reference to the exhibits to the Registrant’s current report onForm 8-K filed with the SEC on February 11, 2008 (FileNo. 000-51461) | |
| (10) | Incorporated by reference to the exhibits to the Registrant’s quarterly report onForm 10-Q filed with the SEC on May 12, 2008 (FileNo. 000-51461) |