UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-25346

 

ACI WORLDWIDE, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		47-0772104 (I.R.S. Employer Identification No.)

120 Broadway, Suite 3350 New York, New York 10271 (Address of principal executive offices, including zip code)		(646) 348-6700 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No 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” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		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 in Rule 12b-2 of the Exchange Act). Yes o No þ

As of November 5, 2009, there were 34,011,782 shares of the registrant’s common stock outstanding.

 

 

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			3
Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008			3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008			4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			40
Item 4. Controls and Procedures			40
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3. Defaults Upon Senior Securities			42
Item 4. Submission of Matters to a Vote of Security Holders			42
Item 5. Other Information			42
Item 6. Exhibits			42
Signature			43
Exhibit Index			44
Exhibit 31.01
Exhibit 31.02
Exhibit 32.01
Exhibit 32.02

ACI WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands, except share amounts)

		September 30,				December 31,
		2009				2008
ASSETS
Current assets
Cash and cash equivalents		$	102,986			$	112,966
Billed receivables, net of allowances of $2,852 and $1,920, respectively			86,486				77,738
Accrued receivables			8,305				17,412
Deferred income taxes			17,217				17,005
Recoverable income taxes			505				3,140
Prepaid expenses			10,939				9,483
Other current assets			10,847				8,800
Total current assets			237,285				246,544
Property, plant and equipment, net			18,041				19,421
Software, net			26,674				29,438
Goodwill			203,611				199,986
Other intangible assets, net			26,313				30,347
Deferred income taxes			29,429				12,899
Other assets			11,605				14,207
TOTAL ASSETS		$	552,958			$	552,842
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	14,880			$	16,047
Accrued employee compensation			24,141				19,955
Deferred revenue			103,400				99,921
Income taxes payable			2,338				78
Alliance agreement liability			5,237				6,195
Deferred income taxes			1,507				—
Accrued and other current liabilities			21,452				24,068
Total current liabilities			172,955				166,264
Deferred revenue			28,722				24,296
Note payable under credit facility			75,000				75,000
Deferred income taxes			4,351				2,091
Alliance agreement noncurrent liability			28,836				37,327
Other noncurrent liabilities			28,125				34,023
Total liabilities			337,989				339,001
Commitments and contingencies (Note 14)
Stockholders’ equity
Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and outstanding at September 30, 2009 and December 31, 2008			—				—
Common stock; $0.005 par value; 70,000,000 shares authorized; 40,821,516 shares issued at September 30, 2009 and December 31, 2008			204				204
Common stock warrants			24,003				24,003
Treasury stock, at cost, 6,841,411 and 5,909,000 shares outstanding at September 30, 2009 and December 31, 2008, respectively			(159,973	)			(147,808	)
Additional paid-in capital			307,235				302,237
Retained earnings			58,533				58,468
Accumulated other comprehensive loss			(15,033	)			(23,263	)
Total stockholders’ equity			214,969				213,841
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	552,958			$	552,842

The accompanying notes are an integral part of the condensed consolidated financial statements.

ACI WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share amounts)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Revenues:
Software license fees		$	40,714			$	46,460			$	99,008			$	122,413
Maintenance fees			34,862				33,963				99,648				98,267
Services			28,885				28,137				81,188				87,762
Total revenues			104,461				108,560				279,844				308,442
Expenses:
Cost of software license fees (1)			3,936				3,588				10,936				9,432
Cost of maintenance and services (1)			27,959				31,320				83,136				92,637
Research and development			20,071				19,170				58,976				60,853
Selling and marketing			14,911				18,450				45,530				57,329
General and administrative			21,064				28,889				61,433				73,581
Depreciation and amortization			4,577				4,185				13,233				12,469
Total expenses			92,518				105,602				273,244				306,301
Operating income			11,943				2,958				6,600				2,141
Other income (expense):
Interest income			117				635				864				1,931
Interest expense			(488	)			(1,149	)			(1,783	)			(3,553	)
Other, net			16				932				(4,719	)			3,075
Total other income (expense)			(355	)			418				(5,638	)			1,453
Income before income taxes			11,588				3,376				962				3,594
Income tax expense			3,829				1,659				897				5,950
Net income (loss)		$	7,759			$	1,717			$	65			$	(2,356	)
Earnings (loss) per share information
Weighted average shares outstanding
Basic			34,012				34,534				34,492				34,518
Diluted			34,170				34,806				34,675				34,518
Earnings (loss) per share
Basic		$	0.23			$	0.05			$	0.00			$	(0.07	)
Diluted		$	0.23			$	0.05			$	0.00			$	(0.07	)

The accompanying notes are an integral part of the condensed consolidated financial statements.

ACI WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)

		For the Nine Months Ended September 30,
		2009				2008
Cash flows from operating activities:
Net income (loss)		$	65			$	(2,356	)
Adjustments to reconcile net income (loss) to net cash flows from operating activities
Depreciation			4,761				4,754
Amortization			12,716				11,697
Tax expense of intellectual property shift			1,650				1,770
Amortization of debt financing costs			252				252
Gain on reversal of asset retirement obligation			—				(949	)
Gain on transfer of assets under contractual obligations			(1,049	)			—
Loss on disposal of assets			28				253
Change in fair value of interest rate swaps			1,420				1,529
Deferred income taxes			(12,894	)			1,397
Stock-based compensation expense			6,668				7,782
Tax benefit of stock options exercised			21				314
Changes in operating assets and liabilities:
Billed and accrued receivables, net			4,380				152
Other current assets			(1,678	)			(666	)
Other assets			964				(840	)
Accounts payable			(1,911	)			(4,309	)
Accrued employee compensation			3,374				803
Proceeds from alliance agreement			—				40,587
Accrued liabilities			(11,502	)			(3,988	)
Current income taxes			4,733				(4,374	)
Deferred revenue			3,405				(7,755	)
Other current and noncurrent liabilities			(3,976	)			201
Net cash flows from operating activities			11,427				46,254
Cash flows from investing activities:
Purchases of property and equipment			(2,246	)			(6,799	)
Purchases of software and distribution rights			(4,857	)			(4,425	)
Alliance technical enablement expenditures			(5,967	)			(4,343	)
Proceeds from alliance agreement			—				1,246
Proceeds from assets transferred under contractual obligations			1,050				(30	)
Payments of earn-out obligations			(473	)			—
Net cash flows from investing activities			(12,493	)			(14,351	)
Cash flows from financing activities:
Proceeds from issuance of common stock			965				1,353
Proceeds from exercises of stock options			1,544				3,599
Excess tax benefit of stock options exercised			79				141
Purchases of common stock			(15,000	)			(30,064	)
Common stock withheld from vested restricted stock awards for payroll tax withholdings			(622	)			—
Payments on debt and capital leases			(1,271	)			(2,748	)
Net cash flows from financing activities			(14,305	)			(27,719	)
Effect of exchange rate fluctuations on cash			5,391				(6,854	)
Net decrease in cash and cash equivalents			(9,980	)			(2,670	)
Cash and cash equivalents, beginning of period			112,966				97,011
Cash and cash equivalents, end of period		$	102,986			$	94,341
Supplemental cash flow information
Income taxes paid, net		$	10,497			$	10,061
Interest paid		$	2,576			$	3,544

The accompanying notes are an integral part of the condensed consolidated financial statements.

ACI WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited and in thousands, except per share amounts)

1. Condensed Consolidated Financial Statements

The unaudited condensed consolidated financial statements include the accounts of ACI Worldwide, Inc. (“the Company”) and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. The condensed consolidated financial statements at September 30, 2009, and for the three and nine months ended September 30, 2009 and 2008, are unaudited and reflect all adjustments (consisting of normal and recurring adjustments) which are, in the opinion of management, necessary for a fair presentation, in all material respects, of the financial position and operating results for the interim periods. The condensed consolidated balance sheet at December 31, 2008 is derived from the audited financial statements.

The condensed consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2008, filed March 4, 2009.

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Management evaluated the effects of all subsequent events through November 6, 2009, the date of this report, which is concurrent with the date this report is filed with the U.S. Securities and Exchange Commission (SEC).

Acquisitions

On September 14, 2009, the company entered into an agreement to acquire certain intellectual property, customer contracts, and working capital related to global card issuing and merchant acquiring solutions for 4.25 million British Sterling (approximately $7.0 million U.S. dollars). The acquisition is subject to certain third party consents, as well as customary closing contingencies. The acquisition is expected to close during the month of November.

Lease Termination

During the nine months ended September 30, 2008, the Company terminated the lease for one of its facilities in Watford, England. Pursuant to the termination agreement, the Company paid a termination fee of approximately $0.9 million that was recorded in general and administrative expenses in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2008. Further under the termination agreement, the Company was relieved of its contractual obligations with respect to the restoration of facilities back to their original condition. As a result, the Company recognized a gain of approximately $1.0 million related to the relief from this liability, which is recorded as a reduction to general and administrative expenses in the accompanying condensed consolidated statement of operations. At September 30, 2009 and December 31, 2008, the Company had contractual obligations with respect to the restoration of leased facilities of $1.7 million and $1.3 million, respectively, recorded in other non-current liabilities in the accompanying condensed consolidated balance sheets.

Recently Issued Accounting Standards

In September 2009, the Financial Accounting Standards Board (“FASB”) required that the FASB Accounting Standards Codification (the “Codification” or “ASC”) be the single source of authoritative non-governmental guidance. The Codification is a topical based reorganization of the US generally accepted accounting principles (“GAAP”) guidance that replaces the previous four-tiered GAAP hierarchy with a two-tiered hierarchy consisting of authoritative and non-authoritative guidance. This reorganization does not change current GAAP guidance, rather only changes the way it is organized. The Company adopted the Codification as of September 30, 2009.

In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R), Business Combinations (“SFAS 141(R)”) (codified as ASC 805), which replaced SFAS 141. The Company adopted SFAS 141(R) as of January 1, 2009 and will assess the impact if and when a future acquisition occurs.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS 160”) (codified as ASC 810). The Company adopted this revision as of January 1, 2009 and there was no impact on its condensed consolidated financial statements as the Company’s non-controlling interests were not material.

On March 19, 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, (“SFAS 161”) (codified by ASC 815). SFAS 161 amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, (“SFAS 133”) and was issued in response to concerns and criticisms about the lack of adequate disclosure of derivative instruments and hedging activities. The Company adopted SFAS 161 as of January 1, 2009 and there was no impact on its condensed consolidated financial statements.

In June 2008, the FASB issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”) (codified by ASC 260). The Company adopted this standard as of January 1, 2009 and it did not have a material impact on the Company’s condensed consolidated financial statements.

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (codified by ASC 820). This FSP provides additional guidance for estimating fair value in accordance with SFAS No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This update is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this FSP did not have a material effect on the Company’s condensed consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1) and (APB 28-1) (codified as ASC 825). FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in interim as well as in annual financial statements and amends guidance previously referenced as APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in interim financial statements. FSP FAS 107-1 and APB 28-1 were adopted as of June 30, 2009 and did not have a material impact on the company’s condensed consolidated financial statement disclosures.

In September 2009, the EITF issued guidance relating to Revenue Recognition for arrangements with multiple deliverables that do not fall under ASC 605-985 (SOP 97-02). This guidance eliminates the requirement that all undelivered elements must have objective and reliable evidence of fair value before a company can recognize the portion of the overall arrangement fee that is attributable to items that already have been delivered. As a result, the new guidance may allow some companies to recognize revenue on transactions that involve multiple deliverables earlier than under current requirements. This guidance is effective for the Company on January 1, 2011. The Company is currently assessing the impact this Statement will have on its condensed consolidated financial statements.

Reclassifications

During 2009, the Company refined the definition of its cost of software licenses fees in order to better conform to industry practice. The Company’s definition of cost of software license fees has been revised to include third-party software royalties as well as the amortization of purchased and developed software for resale. Previously, cost of software license fees also included certain costs associated with maintaining software products that have already been developed and directing future product development efforts. These costs included human resource costs and other incidental costs related to product management, documentation, publications and education. These costs have now been reclassified to research and development and cost of maintenance and services. As a result of this change in definition of cost of software license fees, the Company reclassified $0.9 million and $7.9 million to cost of maintenance and services and research and development, respectively, from cost of software license fees in the accompanying condensed consolidated statement of operations for the three months ended September 30, 2008. The Company reclassified $2.3 million and $24.6 million to cost of maintenance and services and research and development, respectively, from cost of software license fees in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2008. Additionally, $1.8 million and $3.5 million of third-party royalties have been reclassified from cost of maintenance and services to cost of software for the three-month and nine-month periods ended September 30, 2008 to conform to the current period presentation.

Also for the nine months ended September 30, 2009, the Company reported depreciation and amortization expense (excluding amortization of purchased and developed software for resale) as a separate line item in the condensed consolidated statements of operations. Previously, depreciation and amortization was allocated to functional line items of the condensed consolidated statement of operations rather than being reported as a separate line item. As a result of disclosing depreciation and amortization as a separate line item, the Company reclassified $1.1 million from cost of software licenses fees, $1.3 million from cost of maintenance and services, $0.1 million from research and development, $0.1 million from selling and marketing, and $1.4 million from general and administrative for the three months ended September 30, 2008. The Company reclassified $3.4 million from cost of software licenses fees, $4.0 million from cost of maintenance and services, $0.4 million from research and development, $0.7 million from selling and marketing, and $3.9 million from general and administrative for the nine months ended September 30, 2008.

These reclassifications have been made to prior periods to conform to the current period presentation. These reclassifications did not impact total expenses or net income (loss) for the prior periods presented.

2. Revenue Recognition, Accrued Receivables and Deferred Revenue

Software License Fees. The Company recognizes software license fee revenue in accordance with ASC 605-985, Revenue Recognition: Software [previous GAAP reference was American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, Software Revenue Recognition (“SOP 97-2”), SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions (“SOP 98-9”)], and ASC 605, Revenue Recognition, [previous GAAP reference was Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) 101, Revenue Recognition in Financial Statements, as codified by SAB 104, Revenue Recognition.] For software license arrangements for which services rendered are not considered essential to the functionality of the software, the Company recognizes revenue upon delivery, provided (i) there is persuasive evidence of an arrangement, (ii) collection of the fee is considered probable and (iii) the fee is fixed or determinable. In most arrangements, vendor-specific objective evidence (“VSOE”) of fair value does not exist for the license element; therefore, the Company uses the residual method under ASC 605-985 (SOP 98-9) to determine the amount of revenue to be allocated to the license element. Under ASC 605-985 (SOP 98-9), the fair value of all undelivered elements, such as post contract customer support (maintenance or “PCS”) or other products or services, is deferred and subsequently recognized as the products are delivered or the services are performed, with the residual difference between the total arrangement fee and revenues allocated to undelivered elements being allocated to the delivered element.

When a software license arrangement includes services to provide significant modification or customization of software, those services are not separable from the software and are accounted for in accordance with ASC 605-35, Revenue Recognition: Long Term Construction Type Contracts [previous GAAP reference was Accounting Research Bulletin (“ARB”) No. 45, Long-Term Construction-Type Contracts (“ARB No. 45”), and the relevant guidance provided by SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (“SOP 81-1”).] Accounting for services delivered over time (generally in excess of twelve months) under ASC 605-35 (ARB No. 45 and SOP 81-1) is referred to as contract accounting. Under contract accounting, the Company generally uses the percentage-of-completion method. Under the percentage-of-completion method, the Company records revenue for the software license fee and services over the development and implementation period, with the percentage of completion generally measured by the percentage of labor hours incurred to-date to estimated total labor hours for each contract. For those contracts subject to percentage-of-completion contract accounting, estimates of total revenue and profitability under the contract consider amounts due under extended payment terms. In certain cases, the Company provides its customers with extended payment terms whereby payment is deferred beyond when the services are rendered. In other projects, the Company provides its customer with extended payment terms that are refundable in the event certain milestones are not achieved or the project scope changes. The Company excludes revenues due on extended payment terms from its current percentage-of-completion computation until such time that collection of the fees becomes probable. In the event project profitability is assured and estimable within a range, percentage-of-completion revenue recognition is computed using the lowest level of profitability in the range. If the range of profitability is not estimable but some level of profit is assured, revenues are recognized to the extent direct and incremental costs are incurred until such time that project profitability can be estimated. In the event some level of profitability cannot be reasonably assured, completed-contract accounting is applied. If it is determined that a loss will result from the performance of a contract, the entire amount of the loss is recognized in the period in which it is determined that a loss will result.

For software license arrangements in which a significant portion of the fee is due more than 12 months after delivery or when payment terms are significantly beyond the Company’s standard business practice, the software license fee is deemed not to be fixed or determinable. For software license arrangements in which the fee is not considered fixed or determinable, the software license fee is recognized as revenue as payments become due and payable, provided all other conditions for revenue recognition have been met. For software license arrangements in which the Company has concluded that collection of the fees is not probable, revenue is recognized as cash is collected, provided all other conditions for revenue recognition have been met. In making the determination of collectibility, the Company considers the creditworthiness of the customer, economic conditions in the customer’s industry and geographic location, and general economic conditions.

ASC 605-985 (SOP 97-2) requires the seller of software that includes PCS to establish VSOE of fair value of the undelivered element of the contract in order to account separately for the PCS revenue. The Company establishes VSOE of the fair value of PCS by reference to stated renewals with consistent pricing of PCS, expressed in either dollar or percentage terms, if the stated renewal is substantive. In determining whether a stated renewal is substantive, the Company considers factors such as whether the period of the initial PCS term is relatively long when compared to the term of the software license or whether the PCS renewal rate is significantly below the Company’s normal pricing practices.

For those software license arrangements that include customer-specific acceptance provisions, such provisions are generally presumed to be substantive and the Company does not recognize revenue until the earlier of the receipt of a written customer acceptance, objective demonstration that the delivered product meets the customer-specific acceptance criteria or the expiration of the acceptance period. The Company also defers the recognition of revenue on transactions involving less-established or newly released software products that do not have a history of successful implementation. The Company recognizes revenues on such arrangements upon the earlier of receipt of written acceptance or the first production use of the software by the customer. In the absence of customer-specific acceptance provisions, software license arrangements generally grant customers a right of refund or replacement only if the licensed software does not perform in accordance with its published specifications. If the Company’s product history supports an assessment by management that the likelihood of non-acceptance is remote, the Company recognizes revenue when all other criteria of revenue recognition are met.

For software license arrangements in which the Company acts as a sales agent for another company’s products, revenues are recorded on a net basis. These include arrangements in which the Company does not take title to the products, is not responsible for providing the product or service, earns a fixed commission, and assumes credit risk only to the extent of its commission. For software license arrangements in which the Company acts as a distributor of another company’s product, and in certain circumstances, modifies or enhances the product, revenues are recorded on a gross basis. These include arrangements in which the Company takes title to the products and is responsible for providing the product or service.

For software license arrangements in which the Company permits the customer to receive unspecified future software products during the software license term, the Company recognizes revenue ratably over the license term, provided all other revenue recognition criteria have been met. For software license arrangements in which the Company grants the customer a right to exchange the original software product for specified future software products with more than minimal differences in features, functionality, and/or price, during the license term, revenue is recognized upon the earlier of delivery of the additional software products or at the time the exchange right lapses. For customers granted a right to exchange the original software product for specified future software products where the Company has determined price, features, and functionality differences are minimal, the exchange right is accounted for as a like-kind exchange and revenue is recognized upon delivery of the currently licensed product. For software license arrangements in which the customer has the right to change or alternate its use of currently licensed products, revenue is recognized upon delivery of the first copy of all of the licensed products, provided all other revenue recognition criteria have been met. For software license arrangements in which the customer is charged variable software license fees based on usage of the product, the Company recognizes revenue as usage occurs over the term of the licenses, provided all other revenue recognition criteria have been met.

Certain of the Company’s software license arrangements include PCS terms that fail to achieve VSOE of fair value due to non-substantive renewal periods, or contain a range of possible PCS renewal amounts that is not sufficiently narrow to establish VSOE of fair value. For these arrangements, VSOE of fair value of PCS does not exist and revenues for the software license and PCS are considered to be one accounting unit and are therefore recognized ratably over the contractually specified PCS term. The Company typically classifies revenues associated with these arrangements in accordance with the contractually specified amounts, which approximate fair value assigned to the various elements, including software license fees and maintenance fees. This allocation methodology has been applied to the following amounts included in revenues in the condensed consolidated statements of operations from arrangements for which VSOE of fair value does not exist for each undelivered element (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Software license fees		$	3,328			$	6,660			$	10,425			$	13,659
Maintenance fees			1,230				2,356				3,957				4,958
Services			1,368				2,617				5,001				5,546
Total		$	5,926			$	11,633			$	19,383			$	24,163

Maintenance Fees. The Company typically enters into multi-year time-based software license arrangements that vary in length but are generally five years. These arrangements include an initial (bundled) PCS term of one or two years with subsequent renewals for additional years within the initial license period. For arrangements in which the Company looks to substantive renewal rates to evidence VSOE of fair value of PCS and in which the PCS renewal rate and term are substantive, VSOE of fair value of PCS is determined by reference to the stated renewal rate. For these arrangements, PCS revenues are recognized ratably over the PCS term specified in the contract. In arrangements where VSOE of fair value of PCS cannot be determined (for example, a time-based software license with a duration of one year or less or when the range of possible PCS renewal amounts is not sufficiently narrow), the Company recognizes revenue for the entire arrangement ratably over the PCS term.

For those arrangements that meet the criteria to be accounted for under contract accounting, the Company determines whether VSOE of fair value exists for the PCS element. For those situations in which VSOE of fair value exists for the PCS element, PCS is accounted for separately and the balance of the arrangement is accounted for under ASC 605-985 (ARB No. 45 and SOP 81-1). For those arrangements in which VSOE of fair value does not exist for the PCS element, revenue is recognized to the extent direct and incremental costs are incurred until such time as the services are complete. Once services are complete, all remaining revenue is then recognized ratably over the remaining PCS period.

Services. The Company provides various professional services to customers, primarily project management, software implementation and software modification services. Revenues from arrangements to provide professional services are generally recognized as the related services are performed. For those arrangements in which services revenue is deferred and the Company determines that the direct costs of services are recoverable, such costs are deferred and subsequently expensed in proportion to the services revenue as it is recognized.

Hosting. The Company’s hosting-related arrangements contain multiple products and services. As these arrangements generally do not contain a contractual right to take possession of the software at anytime during the hosting period without significant penalty, the Company applies the separation provisions of ASC 605-35, Revenue Recognition: Multiple Arrangements (previous GAAP reference was EITF 00-21, Revenue Arrangements with Multiple Deliverables). In applying the separation provisions of ASC 605-35 (EITF No. 00-21), the Company has determined that it does not have objective and reliable evidence of fair value for the undelivered elements of its hosting-related arrangements. As a result, the elements within its multiple-element sales agreements do not qualify for treatment as separate units of accounting. Accordingly, the Company accounts for fees received under these arrangements as a single unit of accounting and recognizes the entire arrangement fee ratably over the term of the related agreement, generally commencing upon the hosting environment being made available to the customer.

The Company may execute more than one contract or agreement with a single customer. The separate contracts or agreements may be viewed as one multiple-element arrangement or separate agreements for revenue recognition purposes. The Company evaluates the facts and circumstances related to each situation in order to reach appropriate conclusions regarding whether such arrangements are related or separate. The conclusions reached can impact the timing of revenue recognition related to those arrangements.

Accrued Receivables Accrued receivables represent amounts to be billed in the near future (less than 12 months).

Deferred Revenue. Deferred revenue includes amounts currently due and payable from customers, and payments received from customers, for software licenses, maintenance and/or services in advance of recording the related revenue.

3. Share-Based Compensation Plans

Employee Stock Purchase Plan

Under the Company’s 1999 Employee Stock Purchase Plan, as amended (the “ESPP”), a total of 1,500,000 shares of the Company’s common stock have been reserved for issuance to eligible employees. Participating employees are permitted to designate up to the lesser of $25,000 or 10% of their annual base compensation for the purchase of common stock under the ESPP. Purchases under the ESPP are made one calendar month after the end of each fiscal quarter. The price for shares of common stock purchased under the ESPP is 85% of the stock’s fair market value on the last business day of the three-month participation period. Shares issued under the ESPP during the nine months ended September 30, 2009 and 2008 totaled 59,298 and 76,333, respectively.

Share-Based Payments Pursuant to ASC 718 (Previous GAAP Reference was SFAS 123(R))

A summary of stock options issued pursuant to the Company’s stock incentive plans is as follows:

										Weighted-
						Weighted-				Average				Aggregate
						Average				Remaining				Intrinsic Value of
		Number of				Exercise				Contractual				In-the-Money
		Shares				Price ($)				Term (Years)				Options ($)
Outstanding, December 31, 2008			3,428,297			$	21.69				6.41			$	4,633,788
Granted			235,000				15.78				N/A				N/A
Exercised			(126,118	)			12.25				N/A				N/A
Forfeited			(125,606	)			31.98				N/A				N/A
Expired			(76,008	)			29.29				N/A				N/A
Outstanding, September 30, 2009			3,335,565			$	21.07				6.04			$	3,548,935
Exercisable, September 30, 2009			2,145,852			$	20.67				5.25			$	3,535,885

The weighted-average grant date fair value of stock options granted during the nine months ended September 30, 2009 and 2008 was $8.55 and $9.62, respectively. The Company issued treasury shares for the exercise of stock options during the nine months ended September 30, 2009 and 2008. The total intrinsic value of stock options exercised during the nine months ended September 30, 2009 and 2008 was $0.7 million and $1.6 million, respectively.

The fair value of options granted during the three and nine months ended September 30, 2009 and 2008 was estimated on the date of grant using the Black-Scholes option-pricing model, a pricing model acceptable under ASC 718, Compensation-Stock Compensation (SFAS 123(R)), with the following assumptions:

		Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
		September 30, 2009				September 30, 2009				September 30, 2008				September 30, 2008
Expected life (years)			6.25				6.03				6.18				6.15
Interest rate			3.0	%			3.1	%			3.0	%			3.1	%
Volatility			55.1	%			54.4	%			56.2	%			54.9	%
Dividend yield			—				—				—				—

Expected volatilities are based on the Company’s historical common stock volatility derived from historical stock price data for historical periods commensurate with the options’ expected life. The expected life of options granted represents the period of time that options granted are expected to be outstanding, assuming differing exercise behaviors for stratified employee groupings. The Company used the simplified method for determining the expected life as permitted under ASC 718 (previous GAAP reference was SAB 110, Topic 14, Share-Based Payment). The simplified method was used as the historical data did not provide a reasonable basis upon which to estimate the expected term. This is due to the extended period during which individuals were unable to exercise options while the Company was not current with its filings with the SEC. The risk-free interest rate is based on the implied yield currently available on United States Treasury zero coupon issues with a term equal to the expected term at the date of grant of the options. The expected dividend yield is zero as the Company has historically paid no dividends and does not anticipate dividends to be paid in the future.

The Company did not grant any long-term incentive program performance share awards (“LTIP Performance Shares”) pursuant to the Company’s 2005 Equity and Performance Incentive Plan, as amended (the “2005 Incentive Plan”), during the nine months ended September 30, 2009 or 2008.

During the year ended December 31, 2008, the Company changed the expected attainment to 0% for the LTIP Performance Shares granted during the fiscal year ended September 30, 2007, based upon revised forecasted diluted earnings per share, which the Company does not expect will achieve the predetermined earnings per share minimum threshold level required for the LTIP Performance Shares granted in 2007 to be earned. As the performance goals were considered improbable of achievement, the Company reversed compensation costs related to the awards granted in 2007 during the year ended December 31, 2008 and no expense was recognized during the nine months ended September 30, 2009.

During the nine months ended September 30, 2009 and 2008, pursuant to the Company’s 2005 Incentive Plan, the Company granted restricted share awards (“RSAs”). These awards have requisite service periods of four years and vest in increments of 25% on the anniversary dates of the grants. Under each arrangement, stock is issued without direct cost to the employee. The Company estimates the fair value of the RSAs based upon the market price of the Company’s stock at the date of grant. The RSA grants provide for the payment of dividends on the Company’s common stock, if any, to the participant during the requisite service period (vesting period) and the participant has voting rights for each share of common stock. The Company recognizes compensation expense for RSAs on a straight-line basis over the requisite service period.

A summary of nonvested RSAs as of September 30, 2009 and changes during the period are as follows:

		Number of
		Restricted				Weighted-Average Grant
Nonvested Restricted Share Awards		Share Awards				Date Fair Value
Nonvested at December 31, 2008			462,400			$	17.97
Granted			2,500				17.77
Vested			(115,602	)			17.97
Forfeited or expired			(49,500	)			17.37
Nonvested at September 30, 2009			299,798			$	18.06

During the three months ended September 30, 2009, 57,852 of the RSAs vested. The Company withheld 17,868 of those shares to pay the employees’ portion of the minimum payroll withholding taxes. During the nine months ended September 30, 2009, 115,602 of the RSAs vested. The Company withheld 38,167 of those shares to pay the employees’ portion of the minimum payroll withholding taxes during the nine months ended September 30, 2009.

As of September 30, 2009, there were unrecognized compensation costs of $9.0 million related to nonvested stock options and $4.2 million related to nonvested RSAs, which the Company expects to recognize over weighted-average periods of 2.0 years and 2.8 years, respectively.

The Company recorded stock-based compensation expense in accordance with ASC 718 (SFAS 123(R)) for the three months ended September 30, 2009 and 2008 related to stock options, LTIP Performance Shares, RSAs, and the ESPP of $2.0 million and $2.6 million, respectively, with corresponding tax benefits of $0.8 million and $0.9 million, respectively. The Company recorded stock-based compensation expense in accordance with ASC 718 (SFAS 123(R)) for the nine months ended September 30, 2009 and 2008 related to stock options, LTIP Performance Shares, RSAs, and the ESPP of $6.7 million and $7.8 million, respectively, with corresponding tax benefits of $2.5 million and $2.8 million, respectively. Tax benefits in excess of the option’s grant date fair value under ASC 718 (SFAS 123(R)) are classified as financing cash flows. No stock-based compensation costs were capitalized during the nine months ended September 30, 2009 and 2008. Estimated forfeiture rates, stratified by employee classification, have been included as part of the Company’s calculations of compensation costs. The Company recognizes compensation costs for stock option awards which vest with the passage of time with only service conditions on a straight-line basis over the requisite service period.

Cash received from option exercises for the nine months ended September 30, 2009 and 2008 was $1.5 million and $3.6 million, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $0.2 million and $0.5 million, respectively, for the nine months ended September 30, 2009 and 2008.

4. Goodwill

Changes in the carrying amount of goodwill during the nine months ended September 30, 2009 were as follows (in thousands):

		Americas				EMEA				Asia/Pacific				Total
Balance, December 31, 2008		$	139,330			$	43,383			$	17,273			$	199,986
Foreign currency translation adjustments			403				2,504				245				3,152
Adjustment — Stratasoft (1)			—				—				473				473
Balance, September 30, 2009		$	139,733			$	45,887			$	17,991			$	203,611

5. Software and Other Intangible Assets

At September 30, 2009, software net book value totaling $26.7 million, net of $41.3 million of accumulated amortization, includes software marketed for external sale of $17.1 million. The remaining software net book value of $9.5 million is comprised of various software that has been acquired or developed for internal use.

Quarterly amortization of acquired software marketed for external sale is computed using the greater of the ratio of current revenues to total estimated revenues expected to be derived from the software or the straight-line method over an estimated useful life of three to six years. Software for resale amortization expense recorded in the three months ended September 30, 2009 and 2008 totaled $1.4 million. Software for resale amortization expense recorded in the nine months ended September 30, 2009 and 2008 totaled $4.2 million and $4.1 million, respectively. These software amortization expense amounts are reflected in cost of software license fees in the condensed consolidated statements of operations. Amortization of software for internal use of $1.5 million and $1.0 million for the three months ended September 30, 2009 and 2008, respectively, is included in depreciation and amortization in the condensed consolidated statements of operations. Amortization of software for internal use of $3.9 million and $2.8 million for the nine months ended September 30, 2009 and 2008, respectively, is included in depreciation and amortization in the condensed consolidated statements of operations.

The carrying amount and accumulated amortization of the Company’s other intangible assets that were subject to amortization at each balance sheet date are as follows (in thousands):

		September 30,				December 31,
		2009				2008
Customer relationships		$	39,767			$	39,020
Purchased contracts			11,186				11,030
Trademarks and tradenames			2,265				2,236
Covenant not to compete			1,543				1,537
			54,761				53,823
Less: accumulated amortization			(28,448	)			(23,476	)
Other intangible assets, net		$	26,313			$	30,347

Other intangible assets amortization expense recorded in the three months ended September 30, 2009 and 2008 totaled $1.5 million and $1.6 million, respectively. Other intangible assets amortization expense recorded in the nine months ended September 30, 2009 and 2008 totaled $4.5 million and $4.9 million respectively.

Based on capitalized software and intangible assets at September 30, 2009, estimated amortization expense for future fiscal years is as follows (in thousands):

						Other
						Intangible
		Software				Assets
Fiscal Year Ending December 31,		Amortization				Amortization
Remainder of 2009		$	2,865			$	1,522
2010			10,825				6,087
2011			7,386				5,733
2012			4,959				4,661
2013			576				4,406
Thereafter			63				3,904
Total		$	26,674			$	26,313

6. Derivative Instruments and Hedging Activities

The Company maintains an interest-rate risk-management strategy that uses derivative instruments to mitigate the risk of variability in future cash flows (and related interest expense) associated with currently outstanding and forecasted floating rate bank borrowings due to changes in the benchmark interest rate, the London Inter-Bank Offer Rate (“LIBOR”).

At September 30, 2009, the Company had $75 million of outstanding variable-rate borrowings under a 5-year $150 million revolving facility that matures on September 29, 2011. The variable-rate benchmark is 1-month LIBOR. During the fiscal year ended September 30, 2007, the Company entered into two interest-rate swaps to convert its existing and forecasted variable-rate borrowing needs to fixed rates.

During the nine months ended September 30, 2009, the Company elected 1-month LIBOR as the variable-rate benchmark for its revolving facility. The Company also amended its interest rate swap on the $75 million notional amount from 3-month LIBOR to 1-month LIBOR. This basis swap did not impact the maturity date of the interest rate swap or the accounting.

Although the Company believes that these interest rate swaps will mitigate the risk of variability in future cash flows associated with existing and forecasted variable rate borrowings during the term of the swaps, neither swap qualifies for hedge accounting. Accordingly, the loss resulting from the change in fair value of the interest rate swaps for the three months ended September 30, 2009 and 2008 of $0.7 million and $0.8 million, respectively, and for the nine months ended September 30, 2009 and 2008 of $1.4 million and $1.5 million, respectively, is reflected as expense in other income (expense), net in the accompanying condensed consolidated statements of operations.

Changes in the fair value of the interest rate swaps were as follows (in thousands):

		Asset
		(Liability)
Beginning fair value, December 31, 2008		$	(8,624	)
Net settlement payments			3,509
Loss recognized in earnings			(1,420	)
Ending fair value, September 30, 2009		$	(6,535	)

As of September 30, 2009, the $6.5 million fair value liability is recorded as $6.3 million and $0.2 million in other current liabilities and other noncurrent liabilities, respectively, on the accompanying condensed consolidated balance sheet.

Net settlements are measured monthly and paid monthly under the $75 million notional amount interest rate swap and paid quarterly under the $50 million notional amount interest rate swap. The net settlements are recorded in other income (expense) in the accompanying condensed consolidated statements of operations. Included in the $6.5 million fair value at September 30, 2009, is approximately $0.8 million of net settlement obligations paid by the Company subsequent to September 30, 2009.

7. Fair Value Financial and Non-financial Instruments

Effective January 1, 2008, the Company adopted the provisions of ASC 820, Fair Value Measurements and Disclosures [previous GAAP guidance was SFAS No. 157, Fair Value Measurements (“SFAS 157”)], for financial assets and financial liabilities. Effective January 1, 2009, the Company adopted the provisions of SFAS 157 for non-financial assets and non-financial liabilities. ASC 820 (SFAS 157) defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

ASC 820 (SFAS 157) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820 (SFAS 157) establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

•

Level 1 Inputs — Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

•

Level 2 Inputs — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

•

Level 3 Inputs — Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Derivatives. Derivatives are reported at fair value utilizing Level 2 Inputs. The Company utilizes valuation models prepared by a third-party with observable market data inputs to estimate fair value of its interest rate swaps.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

Fair Value Measurements at Reporting

Date Using

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

September 30,

Assets

Inputs

Inputs

Description

2009

(Level 1)

(Level 2)

(Level 3)

Derivative liabilities

$

6,535

$

—

$

6,535

$

—

Certain non-financial assets and non-financial liabilities measured at fair value on a recurring basis include reporting units measured at fair value in the first step of a goodwill impairment test. Certain non-financial assets measured at fair value on a non-recurring basis include non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, as well as intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. The adoption of ASC 820 (SFAS 157) for non-financial assets and non-financial liabilities had no impact on the financial statements as of or for the nine months ended September 30, 2009.

The Company pays interest quarterly on its long-term revolving credit facility based upon the LIBOR rate plus a margin ranging from 0.625% to 1.375%, the margin being dependent upon the Company’s total leverage ratio at the end of the quarter. At September 30, 2009, the fair value of the Company’s long-term revolving credit facility approximates its carrying value.

8. Corporate Restructuring and Other Reorganization Charges

Changes in the liability for corporate restructuring charges were as follows (in thousands):

		Termination
		Benefits
Balance, December 31, 2008		$	2,547
Severance			2,600
Adjustments to recognized liabilities			393
Amounts paid during the period			(3,196	)
Foreign currency translation adjustments			(131	)
Balance, September 30, 2009		$	2,213

During the nine months ended September 30, 2009, the Company reduced its headcount by 119 employees as a part of its continued efforts under the strategic plan to reduce operating expenses. In connection with these actions, during the three-month period ended September 30, 2009, approximately $2.4 million of termination costs were recognized in general and administrative expense in the accompanying condensed consolidated statement of operations. The charges, by segment, for the three months ended September 30, 2009 were $1.4 million in the Americas segment, $0.7 million in the Europe/Middle East/Africa (“EMEA”) segment, and $0.3 million for the Asia/Pacific segment. The charges, by segment, for the nine months ended September 30, 2009 were $1.5 million in the Americas segment, $1.2 million in the EMEA segment, and $0.3 million for the Asia/Pacific segment. Approximately $0.6 million of the termination costs were paid during the nine months ended September 30, 2009. The remaining liability is expected to be paid over the next 12 months.

At September 30, 2009 and December 31, 2008, the liabilities were classified as short-term in accrued employee compensation in the accompanying condensed consolidated balance sheets. See additional severance costs at Note 16, “International Business Machines Corporation Information Technology Outsourcing Agreement”.

9. Common Stock and Earnings (Loss) Per Share

The Company’s board of directors has approved a stock repurchase program authorizing the Company, from time to time as market and business conditions warrant, to acquire up to $210 million of its common stock. Under the program to date, the Company has purchased approximately 7,082,180 shares for approximately $169 million. During the nine months ended September 30, 2009, the Company purchased 1,032,660 shares of common stock under this repurchase plan for approximately $15 million. The maximum remaining dollar value of shares authorized for purchase under the stock repurchase program was approximately $41 million as of September 30, 2009.

Earnings (loss) per share is computed in accordance with ASC 260, Earnings per Share (previous GAAP reference was SFAS No. 128, Earnings per Share). Basic earnings (loss) per share is computed on the basis of weighted average outstanding common shares. Diluted earnings (loss) per share is computed on the basis of basic weighted average outstanding common shares adjusted for the dilutive effect of stock options and other outstanding dilutive securities.

The following table reconciles the average share amounts used to compute both basic and diluted earnings (loss) per share (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Weighted average share outstanding:
Basic weighted average shares outstanding			34,012				34,534				34,492				34,518
Add: Dilutive effect of stock options and other dilutive securities			158				272				183				—
Diluted weighted average shares outstanding			34,170				34,806				34,675				34,518

For the three months ended September 30, 2009 and 2008, 6.1 million and 5.5 million, respectively, options to purchase shares, contingently issuable shares, and common stock warrants were excluded from the diluted net income per share computation as their effect would be anti-dilutive. For the nine months ended September 30, 2009, 6.1 million options to purchase shares, contingently issuable shares, and common stock warrants were excluded from the diluted net income per share computation as their effect would be antidilutive. For the nine months ended September 30, 2008, 7.0 million options to purchase shares, restricted share awards, contingently issuable shares, and common stock warrants were excluded from the diluted net loss per share computation due to the net loss.

10. Other Income/Expense

Other income (expense) is comprised of the following items (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Foreign currency transactions gains (losses)		$	1,055			$	1,601			$	(4,032	)		$	4,523
Loss on interest rate swap			(653	)			(775	)			(1,420	)			(1,529	)
Gain on transfer of assets under contractual obligations			—				—				1,049				—
Other			(386	)			106				(316	)			81
Total		$	16			$	932			$	(4,719	)		$	3,075

11. Comprehensive Income (Loss)

The Company’s components of other comprehensive income (loss) were as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net income (loss)		$	7,759			$	1,717			$	65			$	(2,356	)
Foreign currency translation adjustments			1,248				(9,062	)			8,230				(6,762	)
Comprehensive income (loss)		$	9,007			$	(7,345	)		$	8,295			$	(9,118	)

Accumulated other comprehensive income (loss) included in the Company’s condensed consolidated balance sheets represents the accumulated foreign currency translation adjustment. Since the undistributed earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested, the components of accumulated other comprehensive income (loss) have not been tax effected.

12. Segment Information

The Company’s chief operating decision maker, together with other senior management personnel, currently focus their review of consolidated financial information and the allocation of resources based on reporting of operating results, including revenues and operating income, for the geographic regions of the Americas, EMEA, and Asia/Pacific. The Company’s products are sold and supported through distribution networks covering these three geographic regions, with each distribution network having its own sales force. The Company supplements its distribution networks with independent reseller and/or distributor arrangements. As such, the Company has concluded that its three geographic regions are its reportable segments.

The Company’s chief operating decision maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues and operating income by geographical region.

The Company allocated segment support expenses such as global product delivery, business operations and management based upon percentage of revenue per segment. Corporate costs are allocated as a percentage of the headcount by segment. The following are revenues and operating income (loss) for the periods indicated (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Revenues:
Americas		$	58,730			$	53,057			$	154,892			$	149,594
EMEA			35,159				45,360				93,881				129,591
Asia/Pacific			10,572				10,143				31,071				29,257
		$	104,461			$	108,560			$	279,844			$	308,442
Operating income (loss):
Americas		$	12,225			$	5,807			$	19,846			$	8,576
EMEA			2,277				(1,314	)			(6,063	)			(2,660	)
Asia/Pacific			(2,559	)			(1,535	)			(7,183	)			(3,775	)
		$	11,943			$	2,958			$	6,600			$	2,141

No single customer accounted for more than 10% of the Company’s consolidated revenues during the three or nine months ended September 30, 2009 or 2008. Aggregate revenues attributable to customers in the United Kingdom accounted for 13.1% of the Company’s consolidated revenues during the nine months ended September 30, 2008.

13. Income Taxes

The effective tax rate for the three months ended September 30, 2009 and 2008 was 33.0% and 49.1%, respectively. The effective tax rate for the nine months ended September 30, 2009 and 2008 was 93.2% and 165.6%, respectively. The effective tax rate in the three months ended September 30, 2009 is positively impacted by tax rate differentials in the various countries in which the Company operates. The effective tax rate in the nine months ended September 30, 2009 is positively impacted by a release of an unrecognized tax benefit of $1.6 million. The effective tax rate in all four periods are negatively impacted by the Company’s inability to recognize income tax benefits during the period on losses sustained in certain tax jurisdictions where the future utilization of the losses are uncertain, and by the recognition of tax expense associated with the transfer of certain intellectual property rights from U.S. to non-U.S. entities.

The amount of unrecognized tax benefits for uncertain tax positions was $9.3 million as of September 30, 2009 and $11.5 million as of December 31, 2008, excluding related liabilities for interest and penalties of $1.2 million as of September 30, 2009 and $1.5 million as of December 31, 2008. The amount of unrecognized tax benefits for uncertain tax positions was reduced by $1.6 million during the nine months ended September 30, 2009 as a result of previously classified uncertain tax positions becoming certain and certain years becoming statutorily barred.

The Company believes it is reasonably possible that the total amount of unrecognized tax benefits will decrease within the next 12 months by approximately $3.3 million, due to settlement of various audits.

14. Contingencies

Legal Proceedings

From time to time, the Company is involved in various litigation matters arising in the ordinary course of its business. The Company is not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, the Company believes would be likely to have a material adverse effect on the Company’s financial condition or results of operations.

15. International Business Machines Corporation Alliance

On December 16, 2007, the Company entered into an Alliance Agreement (“Alliance”) with International Business Machines Corporation (“IBM”) relating to joint marketing and optimization of the Company’s electronic payments application software and IBM’s middleware and hardware platforms, tools and services. On March 17, 2008, the Company and IBM entered into Amendment No.1 to the Alliance (“Amendment No.1” and included hereafter in all references to the “Alliance”), which changed the timing of certain payments to be made by IBM. Under the terms of the Alliance, each party retains ownership of its respective intellectual property and independently determines product offering pricing to customers. In connection with the formation of the Alliance, the Company granted warrants to IBM to purchase 1,427,035 shares of the Company’s common stock at a price of $27.50 per share and 1,427,035 shares of the Company’s common stock at a price of $33.00 per share. The warrants are exercisable for five years.

Under the terms of the Alliance, on December 16, 2007, IBM paid the Company an initial non-refundable payment of $33.3 million in consideration for the estimated fair value of the warrants described above. The fair value of the warrants granted is approximately $24.0 million and is recorded as common stock warrants in the accompanying condensed consolidated balance sheet as of September 30, 2009 and December 31, 2008. The remaining balance of $9.3 million is related to prepaid incentives and other obligations and is recorded in the Alliance agreement liability in the accompanying condensed consolidated balance sheet.

During the three months ended March 31, 2008, the Company received an additional payment from IBM of $37.3 million pursuant to Amendment No.1. This payment has been recorded in the Alliance agreement liability in the accompanying condensed consolidated balance sheet. This amount represents a prepayment of funding for technical enablement milestones and incentive payments to be earned by the Company under the Alliance and related agreements and accordingly a portion of this payment is subject to refund by the Company to IBM under certain circumstances. As of September 30, 2009, $20.7 million is refundable subject to achievement of future milestones.

The future costs incurred by the Company related to internally developed software associated with the technical enablement milestones will be capitalized in accordance with ASC 985-20, Software - Cost of Software Costs to be Sold, Leased, or Marketed [previous GAAP reference was SFAS No. 86, Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed (“SFAS 86”)], when the resulting product reaches technological feasibility. Prior to reaching technological feasibility, the costs will be expensed as incurred. The Company will receive partial reimbursement from IBM for expenditures incurred if certain technical enablement milestones and delivery dates specified in the Alliance are met. Reimbursements from IBM for expenditures determined to be direct and incremental to satisfying the technical enablement milestones will be used to offset the amounts expensed or capitalized as described above but not in excess of non-refundable cash received or receivable. During the three and nine months ended September 30, 2009, the Company incurred $3.7 million and $9.4 million, respectively, of costs related to fulfillment of the technical enablement milestones. During the three and nine months ended September 30, 2008, the Company incurred $2.5 million and $5.4 million, respectively, of costs related to fulfillment of the technical enablement milestones. The reimbursement of these costs was recorded as a reduction of the Alliance agreement liability and a reduction in capitalizable costs under ASC 985-20 (SFAS 86) in the accompanying condensed consolidated balance sheet as of September 30, 2009, and a reduction of operating expenses in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2009 and 2008.

Changes in the Alliance agreement liability were as follows (in thousands):

		Alliance
		Agreement
		Liability
Balance, December 31, 2008		$	43,522
Costs related to fulfillment of technical enablement milestones			(9,449	)
Balance, September 30, 2009		$	34,073

Of the $34.1 million Alliance agreement liability, $5.2 million is short-term and $28.9 million is long-term in the accompanying condensed consolidated balance sheet as of September 30, 2009.

IBM will pay the Company additional amounts upon meeting certain prescribed technical enablement obligations and incentives payable upon IBM recognizing revenue from end-user customers as a result of the Alliance. The revenue related to the incentive payments will be deferred until the Company has reached substantial completion of the technical enablement milestones. Subsequent to reaching substantial completion, revenue will be recognized as sales incentives are earned.

The stated initial term of the Alliance is five years, subject to extension for successive two year terms if not previously terminated by either party and subject to earlier termination for cause.

16. International Business Machines Corporation Information Technology Outsourcing Agreement

On March 17, 2008, the Company entered into a Master Services Agreement (“Outsourcing Agreement”) with IBM to outsource the Company’s internal information technology (“IT”) environment to IBM. Under the terms of the Outsourcing Agreement, IBM will provide the Company with global IT infrastructure services including the following services, which services were previously provided by the Company: cross functional delivery management services, asset management services, help desk services, end user services, server system management services, storage management services, data network services, enterprise security management services and disaster recovery/business continuity plans (collectively, the “IT Services”). The Company retained responsibility for its security policy management and on-demand business operations.

The initial term of the Outsourcing Agreement is seven years, commencing on March 17, 2008. The Company has the right to extend the Outsourcing Agreement for one additional one-year term unless otherwise terminated in accordance with the terms of the Outsourcing Agreement. Under the Outsourcing Agreement, the Company retains the right to terminate the agreement both for cause and for its convenience. However, upon any termination of the Outsourcing Agreement by the Company for any reason (other than for material breach by IBM), the Company will be required to pay a termination charge to IBM, which charge may be material.

The Company pays IBM for the IT Services through a combination of fixed and variable charges, with the variable charges fluctuating based on the Company’s actual need for such services as well as the applicable service levels and statements of work. Based on the currently projected usage of these IT Services, the Company expects to pay $116 million to IBM in service fees and project costs over the initial seven-year term.

In addition, IBM is providing the Company with certain transition services required to transition the Company’s IT operations embodied in the IT Services in accordance with a mutually agreed upon transition plan (the “Transition Services”). The Transition Services are substantially complete except for the consolidation of certain third-party data centers, which are currently expected to occur in fiscal year 2010 at a cost of approximately $1.5 million. These Transition Services are recognized as incurred based on the capital or expense nature of the cost. The Company has expensed approximately $0.2 million for Transition Services during the nine months ended September 30, 2009, which are included in general and administrative expenses in the accompanying condensed consolidated statement of operations. Approximately $6.9 million has been recognized to date. Of this amount $2.2 million has been paid, $3.3 million is included in other noncurrent liabilities and $1.4 million is included in accrued and other current liabilities in the accompanying condensed consolidated balance sheet at September 30, 2009. The remaining balance will be paid in installments over a period of five years.

The Outsourcing Agreement has performance standards and minimum services levels that IBM must meet or exceed. If IBM fails to meet a given performance standard, the Company would, in certain circumstances, receive a credit against the charges otherwise due.

Additionally, the Company has the right to periodically perform benchmark studies to determine whether IBM’s price and performance are consistent with the then current market. The Company has the right to conduct such benchmark studies, at its cost, beginning in the second year of the Outsourcing Agreement.

As a result of the Outsourcing Agreement, 16 employees of the Company became employees of IBM and an additional 62 positions were eliminated by the Company. Changes in the accrued employee compensation for these termination costs were as follows (in thousands):

		Termination
		Benefits
Balance, December 31, 2008		$	465
Amounts paid during the period			(313	)
Other			(3	)
Balance, September 30, 2009		$	149

As of September 30, 2009, $0.1 million is accrued in accrued employee compensation for these termination costs in the accompanying condensed consolidated balance sheet.

17. Assets of Businesses Transferred Under Contractual Arrangements

On September 29, 2006, the Company entered into an agreement whereby certain assets and liabilities related to the Company’s MessagingDirect business and WorkPoint product line were legally conveyed to an unrelated party for a total selling price of $3.0 million to be paid in annual installments through 2010. The note receivable was not recorded due to uncertainty of collection. As of December 31, 2008, the remaining unpaid balance of the note receivable was $1.5 million. During the nine months ended September 30, 2009, the Company sold its right to further payments on the note receivable to a third-party for $1.0 million, which was recorded as a pretax gain.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This report contains forward-looking statements based on current expectations that involve a number of risks and uncertainties. Generally, forward-looking statements do not relate strictly to historical or current facts and may include words or phrases such as “believes,” “will,” “expects,” “anticipates,” “intends,” and words and phrases of similar impact. The forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this report include, but are not limited to, statements regarding future operations, business strategy, business environment and key trends, as well as statements related to expected financial and other benefits from our organizational restructuring activities. Many of these factors will be important in determining our actual future results. Any or all of the forward-looking statements in this report may turn out to be incorrect. They may be based on inaccurate assumptions or may not account for known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from those expressed or implied in any forward-looking statements, and our business, financial condition and results of operations could be materially and adversely affected. In addition, we disclaim any obligation to update any forward-looking statements after the date of this report, except as required by law. All forward-looking statements contained in this report are expressly qualified by the risk factors discussed in our filings with the Securities and Exchange Commission. Such factors include, but are not limited to, risks related to the global financial crisis, restrictions and other financial covenants in our credit facility, volatility and disruption of the capital and credit markets, our restructuring efforts, the restatement of our financial statements, consolidation in the financial services industry, changes in the financial services industry, the accuracy of backlog estimates, material weaknesses in our internal control over financial reporting, our tax positions, volatility in our stock price, risks from operating internationally, increased competition, our offshore software development activities, the performance of our strategic product, BASE24-eps, the maturity of certain legacy retail payment products, our strategy to migrate customers to our next generation products, ratable or deferred recognition of certain revenue associated with customer migrations and the maturity of certain of our legacy retail payment products, demand for our products, our alliance with IBM, our outsourcing agreement with IBM, the complexity of our products and the risk that they may contain hidden defects, governmental regulations and industry standards, our compliance with privacy regulations, system failures, the protection of our intellectual property, future acquisitions and investments and litigation. The cautionary statements in this report expressly qualify all of our forward-looking statements. Factors that could cause actual results to differ from those expressed or implied in the forward-looking statements include, but are not limited to, those discussed in Item 1A in the section entitled “Risk Factors.”

The following discussion should be read together with our financial statements and related notes contained in this report and with the financial statements and related notes and Management’s Discussion & Analysis in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed March 4, 2009 and our Form 10-Q for the quarter ended June 30, 2009 and filed on August 7, 2009. Results for the three and nine months ended September 30, 2009, are not necessarily indicative of results that may be attained in the future.

Overview

We develop, market, install and support a broad line of software products and services primarily focused on facilitating electronic payments. In addition to our own products, we distribute, or act as a sales agent for, software developed by third parties. Our products are sold and supported through distribution networks covering three geographic regions — the Americas, EMEA and Asia/Pacific. Each distribution network has its own sales force and supplements its sales force with independent reseller and/or distributor networks. Our products and services are used principally by financial institutions, retailers and electronic payment processors, both in domestic and international markets. Accordingly, our business and operating results are influenced by trends such as information technology spending levels, the growth rate of the electronic payments industry, mandated regulatory changes, and changes in the number and type of customers in the financial services industry. Our products are marketed under the ACI Worldwide brand.

We derive a majority of our revenues from non-domestic operations and believe our greatest opportunities for growth exist largely in international markets. Refining our global infrastructure is a critical component of driving our growth. We have launched a globalization strategy which includes elements intended to streamline our supply chain and provide low-cost centers of expertise to support a growing international customer base. In fiscal 2006, we established a new subsidiary in Ireland to serve as the focal point for certain international product development and commercialization efforts. This subsidiary oversees remote software development operations in Romania and India, as well as manages certain of our intellectual property rights. During 2008 and 2009, we have continued our efforts to take a direct selling and support strategy in certain countries where historically we have used third-party distributors to represent our products, in an effort to develop closer relationships with our customers and develop a stronger overall position in those countries.

In 2009, we launched the Agile Payments Solution vision to deliver a unified solution that initiates, manages, secures and operates payments to maximize the total economic impact for our customers. In creating the vision, we have identified a set of capabilities that are needed within that unified solution. From the existing product set, we have identified a focus set of the products which will deliver many of these capabilities. During the next year, we will identify whether a build, buy or partner route is the most appropriate way to deliver the other capabilities.

In March 2008, we announced to customers the timelines for maturing many of our retail payment engines products. These products were developed or acquired by ACI over several years and include BASE24, TRANS24-eft, ON/2, OpeN/2 and ASx. Our strategy is to help customers migrate to our next-generation BASE24-eps solution as we discontinue standard support for previous products. This will allow customers to take advantage of our newest technology and allow us to more efficiently focus our research and development investment. Towards the end of 2008, we announced to customers the time lines for maturing of many of the back office service products. It is anticipated that some of these back office services will be provided by products obtained through the acquisition of certain intellectual property that we expect to close during the fourth quarter 2009.

As a result of the announced timelines for maturing certain of our retail payment engines products, we may experience a temporary decline in GAAP revenue recognition. As customers elect to renew, extend the term of, or add capacity or functionality to certain of our maturing retail payment engines products, we would expect a higher proportion of any up-front payments to be recognized ratably over time rather than as a lump sum. As a result, we would expect a temporary decline in our initial license fee (“ILF”) revenue and a corresponding increase in our monthly license fee (“MLF”) revenue during this period. We would also expect a corresponding increase to current deferred revenue.

Additionally, as customers undertake migration projects to our next-generation BASE24-eps solution, we would expect a higher proportion of our revenue to be deferred pending completion of the migration project. Depending on specific circumstances, revenues subject to deferral may include license, capacity, maintenance, and services fees. For those revenues subject to deferral, we would expect a corresponding increase to deferred revenue.

We have launched, in North America, a service called ACI On Demand, wherein we host our payment systems and sell them as a service to banks, retailers and processors.

Key trends that currently impact our strategies and operations include:

•

Global Financial Markets Uncertainty. The continuing uncertainty in the global financial markets has negatively impacted general business conditions. It is possible that a weakening economy could adversely affect our customers, their purchasing plans, or even their solvency, but we cannot predict whether or to what extent this will occur. We have diversified counterparties and customers, but we continue to monitor our counterparty and customer risks closely. While the effects of the economic conditions in the future are not predictable, we believe our global presence, the breadth and diversity of our service offerings and our enhanced expense management capabilities position us well in a slower economic climate. Market analysts, such as Boston Consulting Group, indicate that banks now recognize the importance of payments to their business, so providing services for that aspect of the business is of less risk than for other aspects of their business.

•

Availability of Credit. There have been significant disruptions in the capital and credit markets during the past year and many lenders and financial institutions have reduced or ceased to provide funding to borrowers. The availability of credit, confidence in the entire financial sector, and volatility in financial markets have been adversely affected. These disruptions are likely to have some impact on all institutions in the U.S. banking and financial industries, including our lenders and the lenders of our customers. The Federal Reserve Bank has been providing vast amounts of liquidity into the banking system to compensate for weaknesses in short-term borrowing markets and other capital markets. A reduction in the Federal Reserve’s activities or capacity could reduce liquidity in the markets, thereby increasing funding costs or reducing the availability of funds to finance our existing operations as well as those of our customers. We are not currently dependent upon short-term funding, and the limited availability of credit in the market has not affected our revolving credit facility or our liquidity or materially impacted our funding costs.

	•		Increasing electronic payment transaction volumes. Electronic payment volumes continue to increase around the world, taking market share from traditional cash and check transactions. Boston Consulting Group 2009 report predicts that payments globally will grow at 8% per annum between 2008 and 2016, with varying growth rates based on the type of payment and part of the world. We leverage the growth in transaction volumes through the licensing of new systems to customers whose older systems cannot handle increased volume and through the licensing of capacity upgrades to existing customers.
	•		Increasing competition. The electronic payments market is highly competitive and subject to rapid change. Our competition comes from in-house information technology departments, third-party electronic payment processors and third-party software companies located both within and outside of the United States. Many of these companies are significantly larger than us and have significantly greater financial, technical and marketing resources. As electronic payment transaction volumes increase, third-party processors tend to provide competition to our solutions, particularly among customers that do not seek to differentiate their electronic payment offerings. As consolidation in the financial services industry continues, we anticipate that competition for those customers will intensify.
	•		Adoption of open systems technology. In an effort to leverage lower-cost computing technologies and current technology staffing and resources, many financial institutions, retailers and electronic payment processors are seeking to transition their systems from proprietary technologies to open technologies. Our continued investment in open systems technologies is, in part, designed to address this demand.
	•		Electronic payments fraud and compliance. As electronic payment transaction volumes increase, criminal elements continue to find ways to commit a growing volume of fraudulent transactions using a wide range of techniques. Financial institutions, retailers and electronic payment processors continue to seek ways to leverage new technologies to identify and prevent fraudulent transactions. Due to concerns with international terrorism and money laundering, financial institutions in particular are being faced with increasing scrutiny and regulatory pressures. We continue to see opportunity to offer our fraud detection solutions to help customers manage the growing levels of electronic payment fraud and compliance activity.
	•		Adoption of smartcard technology. In many markets, card issuers are being required to issue new cards with embedded chip technology. Chip-based cards are more secure, harder to copy and offer the opportunity for multiple functions on one card (e.g. debit, credit, electronic purse, identification, health records, etc.). The EMV standard for issuing and processing debit and credit card transactions has emerged as the global standard, with many regions throughout the world working on EMV rollouts. The primary benefit of EMV deployment is a reduction in electronic payment fraud, with the additional benefit that the core infrastructure necessary for multi-function chip cards is being put in place (e.g., chip card readers in ATM’s and POS devices) allowing the deployment of other technologies like contactless. We are working with many customers around the world to facilitate EMV deployments, leveraging several of our solutions.
	•		Single Euro Payments Area (“SEPA”). The SEPA, primarily focused on the European Economic Community and the United Kingdom, is designed to facilitate lower costs for cross-border payments and reduce timeframes for settling electronic payment transactions. Our retail and wholesale banking solutions facilitate key functions that help financial institutions address these mandated regulations.
	•		Financial institution consolidation. Consolidation continues on a national and international basis, as financial institutions seek to add market share and increase overall efficiency. Such consolidations have increased, and may continue to increase, in their number, size and market impact as a result of the global economic crisis and the financial crisis affecting the banking and financial industries. There are several potential negative effects of increased consolidation activity. Continuing consolidation of financial institutions may result in a smaller number of existing and potential customers for our products and services. Consolidation of two of our customers could result in reduced revenues if the combined entity were to negotiate greater volume discounts or discontinue use of certain of our products. Additionally, if a non-customer and a customer combine and the combined entity in turn decides to forego future use of our products, our revenue would decline. Conversely, we could benefit from the combination of a non-customer and a customer when the combined entity continues use of our products and, as a larger combined entity, increases its demand for our products and services. We tend to focus on larger financial institutions as customers, often resulting in our solutions being the solutions that survive in the consolidated entity.

•

Electronic payments convergence. As electronic payment volumes grow and pressures to lower overall cost per transaction increase, financial institutions are seeking methods to consolidate their payment processing across the enterprise. We believe that the strategy of using service-oriented-architectures to allow for re-use of common electronic payment functions such as authentication, authorization, routing and settlement will become more common. Using these techniques, financial institutions will be able to reduce costs, increase overall service levels, enable one-to-one marketing in multiple bank channels, leverage volumes for improved pricing and liquidity, and manage enterprise risk. Our product development strategy is, in part, focused on this trend, by creating integrated payment functions that can be re-used by multiple bank channels, across both the consumer and wholesale bank. While this trend presents an opportunity for us, it may also expand the competition from third-party electronic payment technology and service providers specializing in other forms of electronic payments. Many of these providers are larger than us and have significantly greater financial, technical and marketing resources.

Several other factors related to our business may have a significant impact on our operating results from year to year. For example, the accounting rules governing the timing of revenue recognition in the software industry are complex and it can be difficult to estimate when we will recognize revenue generated by a given transaction. Factors such as maturity of the software product licensed, payment terms, creditworthiness of the customer, and timing of delivery or acceptance of our products often cause revenues related to sales generated in one period to be deferred and recognized in later periods. For arrangements in which services revenue is deferred, related direct and incremental costs may also be deferred. Additionally, while the majority of our contracts are denominated in the United States dollar, a substantial portion of our sales are made, and some of our expenses are incurred, in the local currency of countries other than the United States. Fluctuations in currency exchange rates in a given period may result in the recognition of gains or losses for that period. Also during the year ended September 30, 2007, we entered into two interest rate swaps with a commercial bank whereby we pay a fixed rate of 5.375% and 4.90% and receive a floating rate indexed to the 3-month LIBOR from the counterparty on a notional amount of $75 million and $50 million, respectively. During the nine months ended September 30, 2009, the Company elected 1-month LIBOR as the variable-rate benchmark for its revolving facility and changed its interest rate to 5.195%. The Company also amended its interest rate swap on the $75 million notional amount from 3-month LIBOR to 1-month LIBOR. This basis swap did not impact the maturity date of the interest rate swap or the accounting. Fluctuations in interest rates in a given period may result in the recognition of gains or losses for that period.

We continue to seek ways to grow through both organic sources and acquisitions. We continually look for potential acquisitions designed to improve our solutions’ breadth or provide access to new markets. As part of our acquisition strategy, we seek acquisition candidates that are strategic, capable of being integrated into our operating environment, and financially accretive to our financial performance.

Acquisitions

On September 14, 2009, we entered into an agreement to acquire certain intellectual property, customer contracts, and working capital related to global card issuing and merchant acquiring solutions for 4.25 million British Sterling (approximately $7.0 million U.S. dollars). The acquisition is subject to certain third party consents, as well as customary closing contingencies. The acquisition is expected to close during the month of November.

Backlog

Included in backlog estimates are all software license fees, maintenance fees and services specified in executed contracts, as well as revenues from assumed contract renewals to the extent that we believe recognition of the related revenue will occur within the corresponding backlog period. We have historically included assumed renewals in backlog estimates based upon automatic renewal provisions in the executed contract and our historic experience with customer renewal rates.

Our 60-month backlog estimate represents expected revenues from existing customers using the following key assumptions:

	•		Maintenance fees are assumed to exist for the duration of the license term for those contracts in which the committed maintenance term is less than the committed license term.
	•		License and facilities management arrangements are assumed to renew at the end of their committed term at a rate consistent with our historical experiences.
	•		Non-recurring license arrangements are assumed to renew as recurring revenue streams.
	•		Foreign currency exchange rates are assumed to remain constant over the 60-month backlog period for those contracts stated in currencies other than the U.S. dollar.
	•		Our pricing policies and practices are assumed to remain constant over the 60-month backlog period.

In computing our 60-month backlog estimate, the following items are specifically not taken into account:

	•		Anticipated increases in transaction volumes in customer systems.
	•		Optional annual uplifts or inflationary increases in recurring fees.
	•		Services engagements, other than facilities management, are not assumed to renew over the 60-month backlog period.
	•		The potential impact of merger activity within our markets and/or customers is not reflected in the computation of our 60-month backlog estimate.

The following table sets forth our 60-month backlog estimate, by geographic region, as of September 30, 2009, June 30, 2009, March 31, 2009 and December 31, 2008 (in millions). Dollar amounts reflect foreign currency exchange rates as of each period end.

		September 30,				June 30,				March 31,				December 31,
		2009				2009				2009				2008
Americas		$	827			$	817			$	791			$	771
EMEA			504				504				466				480
Asia/Pacific			156				155				153				156
Total		$	1,487			$	1,476			$	1,410			$	1,407

Included in our 60-month backlog estimates are amounts expected to be recognized during the initial license term of customer contracts (“Committed Backlog”) and amounts expected to be recognized from assumed renewals of existing customer contracts (“Renewal Backlog”). Amounts expected to be recognized from assumed contract renewals are based on the Company’s historical renewal experience. The estimated Committed Backlog and Renewal Backlog as of September 30, 2009 is $734 million and $753 million, respectively.

We also estimate 12-month backlog, segregated between monthly recurring and non-recurring revenues, using a methodology consistent with the 60-month backlog estimate. Monthly recurring revenues include all monthly license fees, maintenance fees and processing services fees. Non-recurring revenues include other software license fees and services. Amounts included in our 12-month backlog estimate assume renewal of one-time license fees on a monthly fee basis if such renewal is expected to occur in the next 12 months. The following table sets forth our 12-month backlog estimate, by geographic region, as of September 30, 2009, June 30, 2009, March 31, 2009 and December 31, 2008 (in millions). Dollar amounts reflect foreign currency exchange rates as of each period end.

		September 30, 2009												June 30, 2009
		Monthly				Non-								Monthly				Non-
		Recurring				Recurring				Total				Recurring				Recurring				Total
Americas		$	146			$	41			$	187			$	145			$	44			$	189
EMEA			79				36				115				77				40				117
Asia/Pacific			27				13				40				28				15				43
Total		$	252			$	90			$	342			$	250			$	99			$	349

		March 31, 2009												December 31, 2008
		Monthly				Non-								Monthly				Non-
		Recurring				Recurring				Total				Recurring				Recurring				Total
Americas		$	139			$	43			$	182			$	133			$	40			$	173
EMEA			72				43				115				73				37				110
Asia/Pacific			28				10				38				28				14				42
Total		$	239			$	96			$	335			$	234			$	91			$	325

Estimates of future financial results are inherently unreliable. Our backlog estimates require substantial judgment and are based on a number of assumptions as described above. These assumptions may turn out to be inaccurate or wrong, including for reasons outside of management’s control. For example, our customers may attempt to renegotiate or terminate their contracts for a number of reasons, including mergers, changes in their financial condition, or general changes in economic conditions in the customer’s industry or geographic location, or we may experience delays in the development or delivery of products or services specified in customer contracts which may cause the actual renewal rates and amounts to differ from historical experiences. Changes in foreign currency exchange rates may also impact the amount of revenue actually recognized in future periods. Accordingly, there can be no assurance that amounts included in backlog estimates will actually generate the specified revenues or that the actual revenues will be generated within the corresponding 12-month or 60-month period. Additionally, because backlog estimates are operating metrics, the estimates are not subject to the same level of internal review or controls as a GAAP financial measure.

RESULTS OF OPERATIONS

Reclassifications

During 2009, we refined our definition of cost of software licenses fees in order to better conform to industry practice. Our definition of cost of software license fees has been revised to include third-party software royalties as well as the amortization of purchased and developed software for resale. Previously, cost of software license fees also included certain costs associated with maintaining software products that have already been developed and directing future product development efforts. These costs included human resource costs and other incidental costs related to product management, documentation, publications and education. These costs have now been reclassified to research and development and cost of maintenance and services. As a result of this change in definition of cost of software license fees, we reclassified $0.9 million and $7.9 million to cost of maintenance and services and research and development, respectively, from cost of software licenses fees in the accompanying statement of operations for the three months ended September 30, 2008. We reclassified $2.3 million and $24.6 million to cost of maintenance and services and research and development, respectively, from cost of software licenses fees in the accompanying statement of operations for the nine months ended September 30, 2008. Additionally, $1.8 million and $3.5 million of third-party royalties have been reclassified from cost of maintenance and services to cost of software for the three-month and nine-month periods ended September 30, 2008 to conform to the current period presentation.

Also for the nine months ended September 30, 2009, we reported depreciation and amortization expense (excluding amortization of purchased and developed software for resale) as a separate line item in the condensed consolidated statements of operations. Previously, depreciation and amortization was allocated to functional line items of the statement of operations rather than being reported as a separate line item. As a result of disclosing depreciation and amortization as a separate line item, we reclassified $1.1 million from cost of software licenses fees, $1.3 million from cost of maintenance and services, $0.1 million from research and development, $0.1 million from selling and marketing, and $1.4 million from general and administrative for the three months ended September 30, 2008. We reclassified $3.4 million from cost of software licenses fees, $4.0 million from cost of maintenance and services, $0.4 million from research and development, $0.7 million from selling and marketing, and $3.9 million from general and administrative for the nine months ended September 30, 2008.

These reclassifications have been made to prior periods to conform to the current period presentation. These reclassifications did not impact total expenses or net income (loss) for the prior periods presented.

The following table presents the condensed consolidated statements of operations as well as the percentage relationship to total revenues of items included in our Condensed Consolidated Statements of Operations (amounts in thousands):

		Three Months Ended September 30,																Nine Months Ended September 30,
		2009								2008								2009								2008
						% of								% of								% of								% of
						Total								Total								Total								Total
		Amount				Revenue				Amount				Revenue				Amount				Revenue				Amount				Revenue
Revenues:
Initial license fees (ILFs)		$	21,202				20.3	%		$	25,174				23.2	%		$	44,317				15.8	%		$	66,550				21.6	%
Monthly license fees (MLFs)			19,512				18.7	%			21,286				19.6	%			54,691				19.5	%			55,863				18.1	%
Software license fees			40,714				39.0	%			46,460				42.8	%			99,008				35.4	%			122,413				39.7	%
Maintenance fees			34,862				33.4	%			33,963				31.3	%			99,648				35.6	%			98,267				31.9	%
Services			28,885				27.7	%			28,137				25.9	%			81,188				29.0	%			87,762				28.5	%
Total revenues			104,461				100.0	%			108,560				100.0	%			279,844				100.0	%			308,442				100.0	%
Expenses:
Cost of software licenses fees			3,936				3.8	%			3,588				3.3	%			10,936				3.9	%			9,432				3.1	%
Cost of maintenance and services			27,959				26.8	%			31,320				28.9	%			83,136				29.7	%			92,637				30.0	%
Research and development			20,071				19.2	%			19,170				17.7	%			58,976				21.1	%			60,853				19.7	%
Selling and marketing			14,911				14.3	%			18,450				17.0	%			45,530				16.3	%			57,329				18.6	%
General and administrative			21,064				20.2	%			28,889				26.6	%			61,433				22.0	%			73,581				23.9	%
Depreciation and amortization			4,577				4.4	%			4,185				3.9	%			13,233				4.7	%			12,469				4.0	%
Total expenses			92,518				88.6	%			105,602				97.3	%			273,244				97.6	%			306,301				99.3	%
Operating income			11,943				11.4	%			2,958				2.7	%			6,600				2.4	%			2,141				0.7	%
Other income (expense):
Interest income			117				0.1	%			635				0.6	%			864				0.3	%			1,931				0.6	%
Interest expense			(488	)			-0.5	%			(1,149	)			-1.1	%			(1,783	)			-0.6	%			(3,553	)			-1.2	%
Other, net			16				0.0	%			932				0.9	%			(4,719	)			-1.7	%			3,075				1.0	%
Total other income (expense)			(355	)			-0.3	%			418				0.4	%			(5,638	)			-2.0	%			1,453				0.5	%
Income before income taxes			11,588				11.1	%			3,376				3.1	%			962				0.3	%			3,594				1.2	%
Income tax expense			3,829				3.7	%			1,659				1.5	%			897				0.3	%			5,950				1.9	%
Net income (loss)		$	7,759				7.4	%		$	1,717				1.6	%		$	65				0.0	%		$	(2,356	)			-0.8	%