UNCA Unica (MM)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2007

or

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

Commission File Number: 000-51461

Unica Corporation

(Exact name of registrant as specified in its charter)

170 Tracer Lane
Waltham, Massachusetts 02451-1379
(Address of principal executive offices)
(781) 839-8000
(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 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 o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting Company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     The number of shares of the registrant’s common stock outstanding as of February 4, 2008 was 20,305,794.

 

 

UNICA CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2007
Table of Contents

		Page
Part I — Financial Information
Item 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2007 and September 30, 2007			4
Condensed Consolidated Statements of Operations for the three months ended December 31, 2007 and 2006			5
Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2007 and 2006			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4. Controls and Procedures			37
Part II — Other Information
Item 1. Legal Proceedings			37
Item 1A. Risk Factors			37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 4. Submission of Matters to a Vote of Security Holders			38
Item 5. Other Information			38
Item 6. Exhibits			38
Signatures			39
Exhibits
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO & CFO

EXPLANATORY NOTE

     On January 7, 2008, we restated our previously published financial data for the quarter ended December 31, 2006. The restatement is set forth in our 2007 Annual Report on Form 10-K. The Condensed Consolidated Statements of Operations and Cash Flows for the quarter ended December 31, 2006 in this report are presented as restated. For information on the restatement and the impact of the restatement on our financial data for the quarter ended December 31, 2006, we refer you to, Note 14, Quarterly Financial Data (Unaudited), in our 2007 Annual Report on Form 10-K. We also refer you to Note 16, Restatement of Quarterly Financial Data, within this Quarterly Report on Form 10-Q.

PART I — Financial Information

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

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

UNICA CORPORATION AND SUBSIDIARIES

platform fee, and (b) a specified number of users. With respect to the Affinium NetInsight™ product, licenses are generally priced based on the volume of traffic of a website. Because implementation services for the software products are not deemed essential to the functionality of the related software, the Company recognizes perpetual license revenue at the time of product delivery, provided all other revenue recognition criteria have been met.

     When the Company licenses its software on a perpetual basis through a marketing service provider (MSP) or systems integrator, the Company recognizes revenue upon delivery of the licensed software to the MSP or systems integrator only if (a) the customer of the MSP or systems integrator is identified in a written arrangement between the Company and the MSP or systems integrator and (b) all other revenue recognition criteria have been met pursuant to SOP 97-2.

      Maintenance and Services. Maintenance and services revenue is generated from sales of (a) maintenance, including software updates and upgrades and technical support, associated with the sale of perpetual software licenses and (b) services, including implementation, training and consulting, and reimbursable travel.

      Maintenance Fees. Maintenance is generally sold on an annual basis. There are two levels of maintenance, standard and premium, both of which generally are sold for a term of one year. With both of these maintenance levels, customers are provided with technical support and software updates and upgrades on a when and if available basis. With premium maintenance, customers are provided additional services such as emergency service response and periodic onsite utilization reviews. Revenue is deferred at the time the maintenance agreement is initiated and is recognized ratably over the term of the maintenance agreement.

      Services. Implementation services include the installation of the Company’s software, identification and sourcing of legacy data, configuration of rules necessary to generate marketing campaigns and other general services for the software. A range of training services, including classroom, onsite, and web-based education and training are also provided. Generally these services are priced on a time-and-materials basis and recognized as revenue when the services are performed; however, in certain circumstances these services may be priced on a fixed-fee basis and recognized as revenue under the proportional performance method.

     In accordance with Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) Issue No. 01-14, Income Statement Characterization of Reimbursements Received for ‘Out of Pocket’ Expenses Incurred , the Company classifies reimbursements received for out-of-pocket expenses incurred as services revenue and classifies the related costs as cost of revenue. The amounts of reimbursable expenses included within revenue and cost of revenue were $318 and $295 for the three months ended December 31, 2007 and 2006, respectively.

      Subscription Revenue. Subscription revenue includes, for a bundled fee, (a) the right to use the Company’s software for a specified period of time, typically one year, (b) updates and upgrades to software and (c) technical support. Customers are generally invoiced in annual or quarterly installments and are billed in advance of the subscription period. Revenue is recognized ratably over the contractual term of the arrangement.

3. Cash and Cash Equivalents and Short-Term Investments

     The Company considers all highly liquid investments purchased with original maturities of 90 days or less to be cash equivalents. The Company invests the majority of its excess cash in overnight investments and money market funds of accredited financial institutions.

     The Company considers all highly liquid investments with maturities of between 91 and 365 days at the time of purchase to be short-term investments. The Company accounts for its investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company’s investments were classified as available-for-sale and were carried at fair market value at December 31, 2007 and September 30, 2007. Unrealized gains (losses) on available-for-sale securities are recorded in accumulated other comprehensive income (loss).

     Short-term investments, all with contractual maturities within one year, were as follows:

4. Comprehensive loss

     SFAS No. 130, Reporting Comprehensive Income , establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. Other than reported net income (loss), comprehensive income (loss) includes foreign currency translation adjustments and unrealized gains and losses on available-for-sale short-term investments.

     The following table presents the calculation of comprehensive loss:

5. Net Loss Per Common Share

     The Company calculates net loss per common share in accordance with SFAS No. 128, Earnings Per Share. Weighted-average shares of common stock outstanding consist of the weighted average number of shares of common stock outstanding during the period. Diluted net loss per common share gives effect to all dilutive securities, including stock options and restricted stock units using the treasury stock method. For the three months ended December 31, 2007 and 2006, the Company had only one class of security, common stock, outstanding.

     The following table presents the calculation of basic and diluted net loss per common share:

UNICA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

     Weighted-average common stock equivalents of 3,569,773 and 1,868,000 were excluded from the calculation of diluted net loss per common share for the three months ended December 31, 2007 and 2006, respectively, as a result of the Company’s net loss for such periods.

6. Acquisitions

     For additional information on the acquisitions described below, see Unica’s 2007 Annual Report on Form 10-K, Note 3, “Acquisitions.”

MarketingCentral, L.L.C.

     On July 12, 2007, the Company acquired by merger MarketingCentral L.L.C. (MarketingCentral), a software company located in Atlanta, Georgia. The purchase price was $12.9 million, which consisted of cash consideration of $12.5 million and assumed liabilities and transaction-related costs of $0.4 million. This acquisition was accounted for as a purchase transaction in accordance with SFAS 141, Business Combinations . The results of operations of the Company include the results of MarketingCentral beginning on the date of the acquisition. The purchase price allocation is preliminary and a final determination of purchase accounting adjustments will be made upon the finalization of the Company’s integration activities.

Sane Solutions, LLC

     On March 22, 2006, the Company acquired Sane Solutions, L.L.C. (Sane), a privately-held provider of web analytics software for internet marketing, located in North Kingstown, Rhode Island. The purchase price was $28,818, which consisted of cash consideration of $21,774, assumed liabilities and transaction-related costs of $5,240, and 151,984 shares of common stock valued at $1,804 for accounting purposes or $11.87 per share. This acquisition was accounted for as a purchase transaction in accordance with SFAS 141. The results of Sane have been included in the Company’s financial statements from the date of acquisition.

MarketSoft Software Corporation

     On December 20, 2005, the Company acquired certain assets and assumed certain liabilities of MarketSoft Software Corporation (MarketSoft), a software company formerly located in Lexington, Massachusetts. The purchase price was $7,875, which consisted of cash consideration of $7,258 and assumed liabilities and transaction-related costs of $617. This acquisition was accounted for as a purchase transaction in accordance with SFAS 141. The results of operations of the Company include the results of MarketSoft, beginning on the date of the acquisition.

Acquisition-Related Restructuring Costs

     In accordance with EITF Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, the Company recorded restructuring liabilities as part of the purchase price for Sane and MarketSoft in the amount of $196 and $60, respectively. The acquisition-related restructuring liabilities included severance, relocation and related legal charges. The acquisition-related restructuring accrual was $20 at December 31, 2007 and September 30, 2007 and is expected to be paid during the remainder of fiscal 2008.

Pro Forma Results (Unaudited)

     The unaudited pro forma combined condensed results of operations of Unica and MarketingCentral for the three months ended December 31, 2006 presented below give effect to the acquisition of MarketingCentral as if the acquisition had occurred as of the beginning of the period presented. MarketingCentral’s fiscal year end prior to the acquisition was December 31. The unaudited pro forma combined results of operations are not necessarily indicative of future results or the results that would have actually occurred had the acquisitions been consummated as of the beginning of the period presented.

     The above unaudited pro forma results include net amortization of acquired intangible assets from the MarketingCentral acquisition in the amount of $72 for the three months ended December 31, 2006. In addition, the unaudited pro forma results have been adjusted to reduce interest income earned by the Company on the cash paid for each acquisition. The Company estimated this interest income adjustment using an interest rate of 2.5%.

7. Goodwill and Acquired Intangible Assets

     Intangible assets acquired in the Company’s acquisitions include goodwill, developed technology and customer contracts and related relationships. All of the Company’s acquired intangible assets, except goodwill, are subject to amortization over their estimated useful lives. A portion of the goodwill and acquired intangible assets is recorded in the accounts of a French subsidiary of the Company and, as such, is subject to translation at the currency exchange rates in effect at the balance sheet date. The components of acquired intangible assets, excluding goodwill are as follows:

     The following table describes changes to goodwill during the three months ended December 31, 2007:

The Company recorded amortization expense for acquired intangible assets of $727 and $670 for the three months ended December 31, 2007 and 2006, respectively. Amortization of developed technology in an amount of $333 and $276 was included as a component of cost of license revenue in the consolidated statements of operations for the three months ended December 31, 2007 and 2006, respectively.

     Intangible assets are expected to be amortized as follows:

UNICA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

      8. Accounting for Share-Based Compensation

     On October 1, 2005, the Company adopted the provisions of SFAS 123 (revised 2004), Share-Based Payment (SFAS 123(R)), which requires the Company to recognize expense related to the fair value of share-based compensation awards. Management elected to use the modified prospective transition method as permitted by SFAS 123(R) and therefore did not restate the Company’s financial results for prior periods. Under this transition method, share-based compensation expense for the year ended September 30, 2006 and the three months ended December 31, 2006 includes compensation expense for all share-based compensation awards granted or modified on or after November 18, 2004 (the filing date for the initial registration statement for the Company’s initial public offering), based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R).

     The fair value of options granted prior to November 18, 2004, was calculated pursuant to SFAS 123 using the minimum value method. Under the provisions of SFAS 123(R), the value of these options will not be recorded in the statement of operations subsequent to the adoption of SFAS 123(R). Instead, the Company will continue to account for these options using Accounting Principles Board (APB) Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees , and related Interpretations. The amount of unamortized pro forma deferred compensation at October 1, 2005, related to those minimum value awards was $920.

     Prior to the adoption of SFAS 123(R), in accordance with APB 25, the Company recorded deferred share-based compensation resulting from the grant of employee stock options with an exercise price less than the fair value of common stock. As of December 31, 2007, the Company had $15 of deferred share-based compensation remaining to be amortized which is expected to be amortized during the remainder of fiscal 2008. Upon the adoption of SFAS 123(R) on October 1, 2005, the deferred share-based compensation balance was netted against additional paid-in capital on the consolidated balance sheet.

     For options accounted for under SFAS 123(R), the Company recognizes compensation expense for stock option awards on a straight-line basis over the requisite service period of the award. In addition, SFAS 123(R) requires the benefits of tax deductions in excess of recognized share-based compensation to be reported as a financing activity rather than an operating activity in the statements of cash flows. This requirement reduces net operating cash flows and increases net financing cash flows in periods after adoption.

     For options accounted for under SFAS 123(R), the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used and the resulting estimated fair value for option grants during the applicable period are as follows:

     The assumptions used and the resulting estimated fair value for the Company’s employee stock purchase plan during the applicable period are as follows:

     The weighted-average exercise price of the options granted under the stock option plans for the three months ended December 31, 2007 and 2006 was $13.01 and $11.46, respectively.

     Cost of revenue and operating expenses include share-based compensation expense as follows for the quarters ended December 31, 2007 and 2006.

     The Company expects to record the unamortized portion of share-based compensation expense for existing stock options and restricted stock units outstanding at December 31, 2007, over a weighted-average period of 2.14 years, as follows:

9. Equity Compensation Plans

Stock Options

     In May 1997, the Company’s stockholders approved the amended and restated 1993 Stock Option Plan, or the 1993 Plan, which provides for the grant of incentive and non-qualified stock options for the purchase of up to 4,151,000 shares of the Company’s common stock. In connection with the adoption of the 2003 Stock Option Plan, a total of 138,000 shares then available under the 1993 Plan became available for grant under the 2003 Plan and no further option grants were permitted under the 1993 Plan.

     In March 2005, the Company’s Board of Directors and stockholders approved the amended and restated 2003 Stock Option Plan, or the 2003 Plan, which provides for the grant of incentive and non-qualified stock options for the purchase of up to 1,312,000 shares of the Company’s common stock. In connection with the adoption of the 2005 Stock Incentive Plan, or the 2005 Plan, a total of 367,000 shares then available under the 2003 Plan became available for grant under the 2005 Plan and no further option grants were permitted under the 2003 Plan.

     In March 2005, the Board of Directors and stockholders also approved the 2005 Stock Incentive Plan. The Company has reserved for issuance an aggregate of 1,500,000 shares of common stock under the 2005 Plan, plus the 367,000 shares available for grant under the 2003 Plan immediately prior to the closing of the Company’s initial public offering and the number of shares subject to awards granted under the 2003 Plan that expire, terminate, or are otherwise surrendered, canceled, forfeited or repurchased by the Company at the original issuance price pursuant to a contractual repurchase right. On October 1, 2007, an additional 1,004,000 shares were reserved under the 2005 Plan, in accordance with the provisions of the Plan, which require an annual increase of the shares reserved for issuance under the Plan equal to the lesser of (a) 5,000,000 shares of common stock, (b) 5% of the outstanding shares of common stock as of the opening of business on such date or (c) an amount determined by the Board of Directors.

     Officers, employees, directors and consultants of the Company are eligible to be granted stock options and awards under each of these plans. Incentive stock options may be granted to any officer or employee at an exercise price per share of not less than the fair value per common share on the date of grant (not less than 110% of fair value in the case of holders of more than 10% of the

UNICA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

Company’s stock). The 1993 Plan and 2003 Plan provide that the options shall be exercisable over a period not to exceed ten years. The 2005 Plan provides that the options shall be exercisable over a period not to exceed six years. The Board of Directors is responsible for administration of the each of these Plans and determines the term of each option, the option exercise price, the number of shares for which each option is exercisable and the vesting period. Options generally vest under each of these Plans over a period of four to five years.

     The following is a summary of the Company’s stock options outstanding and exercisable as of December 31, 2007 and the stock option activity for all stock option plans during the three months ended December 31, 2007.

Restricted Stock Units

     During fiscal 2006, the Company began issuing restricted stock units (RSUs) as an additional form of equity compensation to its employees and officers, pursuant to the Company’s stockholder-approved 2005 Plan. RSUs are restricted stock awards that entitle the grantee to an issuance of stock at a nominal cost upon vesting. RSUs generally vest over a four-year period and unvested RSUs are forfeited and canceled as of the date that employment terminates. RSUs are settled in shares of the Company’s common stock upon vesting.

     The following is a summary of the status of the Company’s restricted stock units as of December 31, 2007 and the activity during the three months ended December 31, 2007.

     The Company recorded $1,047 of share-based compensation expense related to RSUs for the three months ended December 31, 2007. As of December 31, 2007, there was unrecognized compensation cost related to RSUs totaling $10,574, net of estimated forfeitures, which will be recognized over a weighted-average period of 2.21 years.

Employee Stock Purchase Plan

     In March 2005, the Board of Directors and stockholders approved the 2005 Employee Stock Purchase Plan (ESPP) which is qualified under Section 423 of the Internal Revenue Code. The ESPP is available to all eligible employees, who, through payroll deductions, will be able to individually purchase shares of the Company’s common stock semi-annually at a price equal to 90% of the fair market value on the semi-annual purchase dates. The Company has reserved for issuance an aggregate of 1,000,000 shares of common stock for the ESPP. At December 31, 2007, 906,000 shares were reserved for future issuance under the ESPP. The Board of Directors, on January 31, 2008, approved an amendment to the terms listed above. Beginning with the purchase period ending August 14, 2008 the price at which employees will be able to purchase shares will be 85% of the lower of the fair market value of the Company’s common stock on the beginning or end of the purchase period.

10. Accounting for Sabbatical Benefit

     On October 1, 2007, the Company adopted the consensus reached in Emerging Issues Task Force (“EITF”) Issue No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences (“EITF 06-2”). EITF 06-2 provides recognition guidance on the accrual of employees’ rights to compensated absences under a sabbatical or other similar benefit arrangement. Prior to the adoption of EITF 06-2, the Company recorded a liability for sabbatical leave upon an employee vesting in the benefit, which occurred when an employee went on leave after completing a six-year service period. Under EITF 06-2, the Company accrues an estimated liability for sabbatical leave over the requisite six-year service period, as employee services are rendered. The adoption of EITF 06-2 resulted in an additional liability of $435, additional deferred tax assets of $166 and a reduction to retained earnings of $269 as of October 1, 2007.

11. Restructuring Charges

     In the fourth quarter of fiscal 2006, the Company initiated the restructuring of certain of its operations in France to realign its resources in that region. As a result of this initiative, the Company terminated several employees resulting in a restructuring charge for severance and related costs in fiscal 2006 and 2007. The cumulative expense recorded relating to the restructuring in France was $1,229.

     The following is a roll forward of the accrual for the restructuring of certain operations in France:

12. Commitments, Contingencies and Guarantees

Contingencies

     From time to time and in the ordinary course of business, the Company may be subject to various claims, charges and litigation. In some cases, the claimants may seek damages, as well as other relief, which, if granted, could require significant expenditures. In accordance with SFAS No. 5, Accounting for Contingencies , the Company accrues the estimated costs of settlement or damages when a loss is deemed probable and such costs are estimable. In accordance with EITF Topic D-77, Accounting for Legal Costs Expected To Be Incurred In Connection With A Loss Contingency , the Company accrues for legal costs associated with a loss contingency when a loss is probable and such amounts are estimable. Otherwise, these costs are expensed as incurred. If the estimate

UNICA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)

of a probable loss or defense costs is a range and no amount within the range is more likely, the Company accrues the minimum amount of the range.

Warranties and Indemnifications

     The Company’s software is typically warranted to perform in a manner consistent with the Company’s documentation under normal use and circumstances. The Company’s license agreements generally include a provision by which the Company agrees to defend its customers against third-party claims of intellectual property infringement under specified conditions and to indemnify them against any damages and costs awarded in connection with such claims. To date, the Company has not incurred any material costs as a result of such warranties and indemnities and has not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.

Guarantees

          The Company has identified the guarantees described below as disclosable in accordance with FASB Interpretation 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34 . The Company evaluates estimated losses for guarantees under SFAS No. 5. The Company considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, the Company has not encountered material costs as a result of such obligations and has not accrued any liabilities related to such guarantees in its financial statements.

          As permitted under Delaware law, the Company’s Certificate of Incorporation provides that the Company indemnify each of its officers and directors during his or her lifetime for certain events or occurrences that happen by reason of the fact that the officer or director is or was or has agreed to serve as an officer or director of the Company. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a Director and Officer insurance policy that limits its exposure and would enable the Company to recover a portion of certain future amounts paid.

13. Income Taxes

     The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when it is more likely than not that some portion of the deferred tax assets will not be realized.

     During the three months ended December 31, 2007, the Massachusetts Department of Revenue completed its state income tax audit of the Company for fiscal years ended September 30, 2003 and 2004, which resulted in a tax refund. In addition, the Company had an established tax reserve in excess of the settled amount and, as such, the Company reversed the excess portion of the reserve. The tax refund and the adjustment to the tax reserve were recorded as discrete items and resulted in an income tax benefit of $129 during the three months ended December 31, 2007.

     During the three months ended December 31, 2006, the “Tax Relief and Health Care Act of 2006” was enacted into law, thereby extending the research and development tax credit for qualified costs incurred after December 31, 2005. In accordance with this change in tax law, the Company recorded a tax benefit of $250 during the three months ended December 31, 2006 to recognize the benefit from qualified research and development costs incurred from January 1, 2006 through September 30, 2006. This was accounted for as a discrete item during the three months ended December 31, 2006. Also, the Company recorded a provision for state income taxes of $141 during the three months ended December 31, 2006 related to prior fiscal years and was included as part of the restatement of the financial data for the three months ended December 31, 2006 (see Note 16 to the condensed consolidated financial statements). Our effective tax rate, before discrete items, on a quarterly or annual basis, varies from statutory rates primarily due to the mix in jurisdictional earnings and losses.

     In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50 percent likelihood of being realized upon ultimate settlement. The

Company adopted the provisions of FIN 48 on October 1, 2007. As of the date of adoption, the Company had unrecognized tax benefits of $1,060 and did not record any cumulative effect adjustment to retained earnings as a result of adopting FIN 48. During the quarter ended December 31, 2007, the Company reversed $64 of reserves related to the completion of its state income tax audit for fiscal years ended September 30, 2003 and 2004.

          Of the $1,060 of unrecognized tax benefits, $690 would impact the effective tax rate if recognized. The Company had approximately $69 of accrued interest and penalties included in its unrecognized tax benefits. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense.

          The tax years 2002 through 2007 remain open to examination by various taxing authorities in the jurisdictions in which the Company operates. The Company is currently under audit in the United States by The Internal Revenue Service (IRS) for the fiscal 2005 tax year.

14. Segment Information

     SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information , establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in interim financial reports issued to stockholders. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business as one operating segment.

Geographic Data

     The following table includes revenue from unaffiliated customers by geographic region and is determined based on the locations of customers.

     The following table includes information about the Company’s long-lived assets by geographic region:

15. Recent Accounting Pronouncements

     In September 2006, the FASB issued SFAS 157, Fair Value Measurement , which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Where applicable, SFAS 157 simplifies and codifies related guidance within GAAP. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is analyzing the expected impact from adopting this statement on its financial statements, but currently does not believe its adoption will have a significant impact on the financial position or results of operations of the Company.

     In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities , which allows companies the option to measure financial assets or liabilities at fair value and include unrealized gains and losses in net income rather than equity. This becomes available when the Company adopts SFAS 157, which will be fiscal year 2009. The Company is analyzing the expected impact from adopting this statement on its financial statements, but currently does not believe its adoption will have a significant impact on the financial position or results of operations of the Company.

     In December 2007, the FASB issued SFAS 141(revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, IPR&D and restructuring costs. In addition, under SFAS 141R, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. SFAS 141R is effective for fiscal years beginning after December 15, 2008 and, as such, the Company will adopt this standard in fiscal 2010. The Company has not yet determined the impact, if any, of SFAS 141R on its consolidated financial statements.

     In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests (NCI) and classified as a component of equity. This new consolidation method will significantly change the accounting for transactions with minority interest holders. SFAS 160 is effective for fiscal years beginning after December 15, 2008 and, as such, the Company will adopt this standard in fiscal 2010. The Company has not yet determined the impact, if any, of SFAS 160 on its consolidated financial statements.

16. Restatement of Quarterly Financial Data

          On December 20, 2007, the Company and the Audit Committee of the Board of Directors of the Company concluded that prior quarter restatement of its previously issued unaudited condensed consolidated financial data for the quarter ended December 31, 2006 was necessary. The restatement is set forth in our 2007 Annual Report on Form 10-K. The errors are primarily the result of errors in recording its state income tax provision, and also errors in recording its state sales tax liabilities and receivables, the timing of recording revenue on certain revenue arrangements, and the timing of recording a purchase accounting entry. In addition, the Company identified errors originating in periods prior to fiscal 2007 which primarily related to errors in recording its state income tax provision and its state sales tax liabilities and receivables as well as errors in the timing of recording revenue on certain revenue arrangements. These prior fiscal period errors individually and in the aggregate are not material to the financial results for previously issued annual financial statements or previously issued interim financial data prior to fiscal 2007.

          In the restatement, the Company has recorded corrections relating to fiscal 2007 in the quarter in which each error originated and the Company has recorded corrections relating to fiscal periods prior to fiscal 2007 in the quarter ended December 31, 2006. As detailed on the tables below, the recorded corrections included:

State Income Tax

          During the year ended September 30, 2007, the Company reviewed its income tax nexus position in certain states and it was determined that the Company had underaccrued for state income taxes in periods prior to fiscal 2007. The Company recorded a tax liability to these states of $141 which related to prior fiscal years. The $141 adjustment was recorded during the quarter ended December 31, 2006.

Sales Tax

          As a result of the Company’s review of sales tax nexus, the Company identified that it had understated liabilities related to state sales tax in certain states. The Company has determined that related receivables from customers were also understated. For the quarter ended December 31, 2006, the Company corrected its balance sheet to record a liability of $2.8 million relating to state sales tax and related penalties and interest owed to the state tax authorities, primarily relating to prior years. The Company also recorded a customer receivable of $2.8 million for the quarter ended December 31, 2006, which represents amounts to be invoiced and collected from customers relating to state sales tax, which primarily relates to prior years. The Company recorded a receivable allowance of $125 for the estimated state sales tax and related penalties and interest that are not expected to be collected.

Revenue

          The Company identified several errors related to the timing of recording revenue on certain agreements. The impact of all revenue related adjustments resulted in an increase in previously reported revenue during the quarter ended December 31, 2006 of $109. Of the adjustment recorded in the quarter ended December 31, 2006, $7 related to prior periods. The significant corrections included:

•

The Company acquired Sane on March 22, 2006. The contract terms for certain Sane web-based license arrangements granted

			the customer a fifteen day evaluation period to accept the product. The Company historically recognized revenue for the license at the time of sale instead of after the fifteen day evaluation period. The Company made the correction in the quarter ended December 31, 2006 to recognize the revenue from these transactions at the expiration of the fifteen day period.
	•		For a specific maintenance customer for which revenue should have been recognized when payments were received, the Company recognized revenue in a quarter subsequent to receipt of cash.
	•		On certain customer maintenance contracts, the Company had incorrectly amortized deferred maintenance revenue.
	•		On a particular non-standard subscription agreement, the Company amortized revenue over the incorrect period.

Acquisition Costs

          The Company identified an error related to purchase accounting for legal fees of $115 directly related to an acquisition that were inappropriately charged as expense in the quarter ended June 30, 2007 rather than capitalized as a cost of the acquisition in fiscal 2006.

Other

          The restatement of the Company’s unaudited condensed consolidated financial statements for the quarter ended December 31, 2006 also include corrections for other identified errors. Such adjustments primarily relate to (i) fixed assets eligible for capitalization that were initially expensed; (ii) amortization and depreciation for certain fixed assets; (iii) an increase in pension liability related to a foreign subsidiary and (iv) corrections to certain accrual accounts. The net impact of restating all other operating expense related adjustments was a decrease in reported operating expenses of approximately $122 during the quarter ended December 31, 2006, of which $7 related to prior years.

          As described above, there were certain errors that originated in periods prior to fiscal 2007 which reduced net income in fiscal 2007 by $151 ($10 of income before taxes and $141 relating to the provision for income taxes); the Company has recorded the cumulative effect of such errors in the quarter ended December 31, 2006. The net cumulative effect of the errors that originated prior to fiscal 2007 was not material individually or in the aggregate to any previously issued financial statements.

          The restatement had no effect on previously reported cash balances and the adjustments to correct errors were not material individually or in aggregate to the previously issued balance sheets or statements of cash flows for each of the quarterly periods.

 

The following tables set forth the effects of correcting the errors described above for the quarter ended December 31, 2006.

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement

     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear elsewhere in this Quarterly Report on Form 10-Q. We believe that this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. When used herein, the words “believes,” “anticipates,” “plans,” “expects,” “estimates” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect management’s current opinions and are subject to certain risks and uncertainties that could cause results to differ materially from those stated or implied. We assume no obligation to update this information.

Restatement of Quarterly Financial Data

     The condensed consolidated statements of operations and cash flows for the three months ended December 31, 2006 are presented as restated in this Quarterly Report on Form 10-Q. For additional information on the restatement and the impact of the restatement on the condensed consolidated financial data, we refer you to Note 14, Quarterly Financial Data (unaudited), of our consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2007 as well as Note 16, Restatement of Quarterly Financial Data, of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Overview

     We are a global provider of enterprise marketing management, or EMM — software designed to help businesses increase their revenues and improve the efficiency and measurability of their marketing operations. Our comprehensive set of integrated software modules is offered under the “Affinium” name. Focused exclusively on the needs of marketers, Unica’s Affinium ^® software delivers key capabilities to track and analyze online and offline customer behavior, generate demand and manage marketing processes, resources and assets. Affinium streamlines the entire marketing process for relationship, brand and Internet marketing — from analysis and planning, to budgeting, production management, execution and measurement. As the most comprehensive EMM suite on the market, Affinium delivers a marketing “system of record” — a dedicated solution through which marketers capture, record and easily manage marketing activity, information and assets; rapidly design campaigns; and report on performance.

     We sell and market our software primarily through our direct sales force as well as through alliances with marketing service providers (MSPs), resellers, distributors and systems integrators. In addition to reselling and deploying our products, MSPs offer a range of marketing program design, database development support, and execution services on an on-demand or outsourced basis. We also provide a full range of services to our customers, including implementation, training, consulting, maintenance and technical support, and customer success programs. We have sales offices across the United States, including at our headquarters in Waltham, Massachusetts, as well as in the United Kingdom, France, Singapore, Belgium, Germany, Spain, Australia, the Netherlands and Korea, and also have sales personnel located in Canada and Thailand. In addition, we have a research and development office in India. We have a worldwide installed base of over 600 companies in a wide range of industries. Our current customers operate principally in the financial services, retail, telecommunications, and travel and hospitality industries.

      Sources of Revenue

     We derive revenue from software licenses, maintenance, services and subscriptions. License revenue is derived from the sale of software licenses for our Affinium offerings under perpetual software arrangements that typically include: (a) an end-user license fee paid for the use of our products in perpetuity; (b) an annual maintenance arrangement that provides for software updates and upgrades and technical support; (c) a services work order for implementation, training, consulting and reimbursable expenses. Subscription revenue is derived from subscription arrangements for our Affinium offerings that typically include: (a) a subscription fee for bundled software and support for a certain period and (b) a services work order for implementation, training, consulting and reimbursable expenses.

      License Revenue

      Perpetual Licenses. Licenses to use our software products in perpetuity generally are priced based on (a) either a customer’s database size (including number of database records) or a platform fee and (b) a specified number of users. With respect to our Affinium NetInsight TM product, licenses are generally priced based on the volume of traffic of a website. We generally recognize perpetual license revenue at the time of product delivery, provided all other revenue recognition criteria have been met, pursuant to the requirements of Statement of Position (SOP) 97-2, Software Revenue Recognition , as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions . When we license our software on a perpetual basis through an MSP or systems integrator, we recognize revenue upon delivery of the licensed software to the MSP or systems integrator only if (a) the customer of the MSP or systems integrator is identified in a written arrangement between the MSP or systems integrator and us and (b) all other revenue recognition criteria have been met.

      Maintenance and Services Revenue

     Maintenance and services revenue is generated from sales of (a) maintenance, including software updates and upgrades and technical support associated with the sale of perpetual software licenses and (b) services, including implementation, training, consulting, and reimbursable travel.

      Maintenance. We generally sell maintenance with respect to perpetual licenses on an annual basis that includes technical support and software updates and upgrades on a when and if available basis. Revenue is deferred at the time the maintenance agreement is initiated and is recognized ratably over the term of the maintenance agreement.

      Services. We generally sell implementation services and training on a time-and-materials basis and recognize revenue when the services are performed, however in certain circumstances, these services may be priced on a fixed-fee basis and recognized as revenue under the proportional performance method. Services revenue also includes billable travel, lodging and other out-of-pocket expenses incurred as part of delivering services to our customers.

      Subscription Revenue

     We also market our software under subscription arrangements. Subscription revenue includes, for a bundled fee, (a) the right to use our software for a specified period of time, typically one year, (b) updates and upgrades to our software, and (c) technical support. We sell subscriptions directly and through MSPs. Under a subscription agreement, we typically invoice the customer in annual or quarterly installments in advance. Revenue is recognized ratably over the contractual term of the arrangement commencing on the date at which all services under related work orders are completed.

      Cost of Revenue

     Cost of license revenue for perpetual license agreements consists primarily of (a) salaries, other labor related costs and share-based compensation related to documentation personnel, (b) facilities and other related overhead, (c) third-party royalties for licensed technology incorporated into our current product offerings, (d) amortization of acquired developed technology and (e) amortization of capitalized software development costs under SFAS 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed.

     Cost of maintenance and services revenue consists primarily of (a) salaries, other labor-related costs, share-based compensation, facilities and other overhead related to professional services and technical support personnel and (b) cost of services provided by subcontractors for professional services, travel, lodging and other out-of-pocket expenses.

     Cost of subscription revenue includes the allocation of specific costs including labor-related costs associated with technical support and documentation personnel, and related overhead and labor-related and other costs associated with the Marketing Central acquisition and hosting-related activities.

      Operating Expenses

      Sales and Marketing . Sales and marketing expense consists primarily of (a) salaries, other labor related costs and share-based compensation related to sales and marketing personnel, (b) commissions and bonuses, (c) travel, lodging and other out-of-pocket expenses, (d) marketing programs, such as trade shows and advertising, and (e) facilities and other related overhead. The total amount of commissions earned for a perpetual license, subscription or maintenance arrangement are recorded as expense when revenue recognition for that arrangement commences.

      Research and Development. Research and development expense consists primarily of (a) salaries, other labor related costs and share-based compensation related to employees working on the development of new products, enhancement of existing products, quality assurance and testing and (b) facilities and other related overhead. Prior to fiscal 2007, all of our research and development costs have been expensed as incurred as all costs potentially capitalizable were insignificant to the consolidated financial statements. During the three months ended December 31, 2007 and 2006, software development costs eligible for capitalization were immaterial.

      General and Administrative . General and administrative expense consists primarily of (a) salaries, other labor-related costs and share-based compensation related to general and administrative personnel, (b) accounting, legal and other professional fees, and (c) facilities and other related overhead.

      Restructuring Charges . Restructuring expense reflects the restructuring, initiated in the fourth quarter of fiscal 2006, of certain of our operations in France to realign our resources in that region. These costs include salaries, severance and legal fees.

      Amortization of Acquired Intangible Assets . Cost of revenue includes the amortization of developed core technology acquired in our recent acquisitions. Operating expenses include the amortization of acquired customer contracts and related customer relationships and tradenames.

      Share-Based Compensation . Cost of revenue and operating expenses have historically included share-based compensation expense to the extent the fair value of our common stock exceeds the exercise price of stock options granted to employees on the date of grant (intrinsic value method) under Accounting Principles Board (APB) 25. On October 1, 2005, we adopted

Statement of Financial Accounting Standards SFAS 123(R), Share-Based Payment , which requires measurement of all employee share-based compensation awards using a fair-value method and the recording of the related expense in the consolidated financial statements. In addition, the adoption of SFAS 123(R) requires additional accounting related to the income tax effects and disclosure regarding the cash flow effects resulting from share-based payment arrangements. In January 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107, which provides supplemental implementation guidance for SFAS 123(R). We selected the Black-Scholes option-pricing model as the most appropriate fair-value method for our awards and recognize compensation cost, net of estimated forfeitures, on a straight-line basis over the requisite service periods of the awards.

Application of Critical Accounting Policies and Use of Estimates

     Our financial statements are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The application of GAAP requires that we make estimates that affect our reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates.

     For a detailed explanation of our significant accounting policies, refer to our Annual Report on Form 10-K for the year ended September 30, 2007.

      Revenue Recognition

          We generally sell our software products and services together in a multiple-element arrangement under perpetual license and subscription agreements. We use the residual method to recognize revenues from arrangements that include one or more elements to be delivered at a future date, when evidence of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements based on vendor-specific objective evidence (VSOE) is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements. Each license arrangement requires that we analyze the individual elements in the transaction and determine the fair value of each undelivered element, which typically includes maintenance and services. We allocate revenue to each undelivered element based on its fair value, with the fair value determined by the price charged when that element is sold separately.

          For perpetual license agreements, we generally estimate the fair value of the maintenance portion of an arrangement based on the maintenance renewal price for that arrangement. In multiple-element perpetual license arrangements where we sell maintenance for less than fair value, we defer the contractual price of the maintenance plus the difference between such contractual price and the fair value of maintenance over the expected life of the product. We make a corresponding reduction in license revenue. The fair value of the professional services portion of perpetual license arrangements is based on the rates that we charge for these services when sold separately. If, in our judgment, evidence of fair value cannot be established for the undelivered elements in a multiple-element arrangement, the entire amount of revenue from the arrangement is deferred until evidence of fair value can be established, or until the elements for which evidence of fair value could not be established are delivered.

          Generally, implementation services for our software products are not deemed essential to the functionality of the software products, and therefore services revenue is recognized separately from license and subscription revenue. If we were to determine that services are essential to the functionality of software in an arrangement, the license or subscription and services revenue from the arrangement would be recognized pursuant to SOP 81-1, Accounting for Performance of Construction-Type Contracts and Certain Production-Type Contracts . In such cases, we expect that we would be able to make reasonably dependable estimates relative to the extent of progress toward completion by comparing the total hours incurred to the estimated total hours for the arrangement and, accordingly, we would apply the percentage-of-completion method. If we were unable to make reasonably dependable estimates of progress towards completion, then we would use the completed-contract method, under which revenue is recognized only upon completion of the services. If total cost estimates exceed the anticipated revenue, then the estimated loss on the arrangement is recorded at the inception of the arrangement or at the time the loss becomes apparent.

          We generally enter into subscription agreements that include, on a bundled basis, (a) the right to use our software for a specified period of time, (b) updates and upgrades to our software on a when and if available basis and (c) technical support. Fees paid in connection with a subscription agreement are recognized as revenue ratably over the term of the arrangement, typically one year.

          For all of our software arrangements, we do not recognize revenue until we can determine that persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and we deem collection to be probable. In making these judgments, we evaluate these criteria as follows:

	•		Evidence of an arrangement. For the majority of our arrangements, we consider a non-cancelable agreement signed by us and the customer to be persuasive evidence of an arrangement. In transactions below a certain dollar threshold involving the sale of our Affinium NetInsight product, we consider a purchase order signed by the customer to be persuasive evidence of an arrangement.
	•		Delivery. We consider delivery to have occurred when a CD or other medium containing the licensed software is provided to a common carrier or, in the case of electronic delivery, the customer is given electronic access to the licensed software. Our typical end-user license agreement does not include customer acceptance provisions.
	•		Fixed or determinable fee. We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within our normal payment terms. If the fee is subject to refund or adjustment, we recognize the revenue when the refund or adjustment right lapses. If the payments are due beyond our normal terms, we recognize the revenue as amounts become due and payable or as cash is collected.
	•		Collection is deemed probable . Customers are evaluated for creditworthiness through our credit review process at the inception of the arrangement. Collection is deemed probable if, based upon our evaluation, we expect that the customer will be able to pay amounts under the arrangement as payments become due. If we cannot conclude that collection is probable, we defer the revenue and recognize the revenue upon cash collection.

     In our agreements with customers and MSPs, we provide a limited warranty that our software will perform in a manner consistent with our documentation under normal use and circumstances. In the event of a breach of this limited warranty, we must repair or replace the software or, if those remedies are insufficient, provide a refund. These agreements generally do not include any other right of return or any cancellation clause or conditions of acceptance.

Allowance for Doubtful Accounts

     In addition to our initial credit evaluations at the inception of arrangements, we regularly assess our ability to collect outstanding customer invoices and in so doing must make estimates of the collectibility of accounts receivable. We provide an allowance for doubtful accounts when we determine that the collection of an outstanding customer receivable is not probable. We specifically analyze accounts receivable and historical bad debts experience, customer creditworthiness, and changes in our customer payment history when evaluating the adequacy of the allowance for doubtful accounts. If any of these factors change, our estimates may also change, which could affect the level of our future provision for doubtful accounts.

Share-Based Compensation

     We historically have granted stock options at exercise prices that equaled the fair value of our common stock as of the date of grant. Prior to August 3, 2005, because there had been no public market for our common stock, the board determined the fair value of our common stock by considering a number of factors, including our operating and financial performance, the pricing of sales of convertible preferred stock to third parties, the rights and preferences of securities senior to common stock and trends in the broad market for software and other technology stocks.

     On October 1, 2005, we adopted the provisions of SFAS 123(R), which requires us to recognize expense related to the fair value of share-based compensation awards. We elected to use the modified prospective transition method as permitted by SFAS 123(R) and therefore have not restated our financial results for prior periods. Under this transition method, share-based compensation expense includes compensation expense for all share-based compensation awards granted on or after November 18, 2004 (the filing date for the initial registration statement for our initial public offering), based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Pursuant to SFAS 123(R), the fair value of each option grant is estimated on the date of grant using the Black-Scholes pricing model, which requires us to make assumptions as to volatility, risk-free interest rate, expected term of the awards, and expected forfeiture rate. The computation of expected volatility is based on a study of historical volatility rates of comparable companies during a period comparable to the expected option term. The estimated risk-free interest rate is based on the U.S. Treasury risk-free interest rate in effect at the time of grant. The computation of expected option term is based on an average of the vesting term and the maximum contractual life of the Company’s stock options, as described in SAB 107. Computation of expected forfeitures is based on historical forfeiture rates of the Company’s stock options.

     The fair value of options granted prior to November 18, 2004, was calculated using the minimum value method, pursuant to SFAS 123 and the related pro forma expense was shown in a footnote to the consolidated financial statements. Under the provisions of SFAS 123(R), the value of these options will not be recorded in the statement of operations subsequent to the adoption of SFAS 123(R). Instead, we will continue to account for these options using APB 25. The amount of unamortized pro forma compensation expense at October 1, 2005 related to those minimum value awards was $920,000.

     For options and other awards accounted for under SFAS 123(R), the Company recognizes compensation expense on a straight-line basis over the requisite service period of the award. In addition, certain tax effects of share-based compensation are reported as a financing activity rather than an operating activity in the statement of cash flows.

     As of December 31, 2007, we had outstanding stock options of 2,455,000 and non-vested restricted stock awards of 1,000,000. On October 1, 2007, an additional 1,004,000 shares were reserved under the 2005 Stock Incentive Plan (the 2005 Plan), in accordance with the provisions of the 2005 Plan, which requires an annual increase of the shares reserved for issuance under the 2005 Plan equal to the lesser of (a) 5,000,000 shares of common stock, (b) 5% of the outstanding shares of common stock as of the opening of business on such date or (c) an amount determined by the Board.

Goodwill, Other Intangible Assets and Long-Lived Assets

     Goodwill represents the excess of the purchase price over the fair value of net assets associated with various acquisitions from fiscal 2003 through fiscal 2007. In accordance with SFAS 142, Goodwill and Other Intangible Assets , goodwill is not subject to amortization. We allocated a portion of each purchase price to intangible assets, including customer contracts and related customer relationships, developed technology, tradenames and acquired licenses that are being amortized over their estimated useful lives of one to fourteen years. We also allocated a portion of each purchase price to tangible assets and assessed the liabilities to be recorded as part of the purchase price. The estimates we made in allocating each purchase price to tangible and intangible assets, and in assessing liabilities recorded as part of the purchase, involved the application of judgment and the use of estimates, which could significantly affect our operating results and financial position.

     We review the carrying value of goodwill for impairment annually and whenever events or changes in circumstances indicate that the carrying value of goodwill may exceed its fair value. We evaluate impairment by comparing the estimated fair value of each reporting unit to its carrying value. We estimate fair value by computing our expected future discounted operating cash flows based on historical trends, which we adjust to reflect our best estimate of future market and operating conditions. Actual results may differ materially from these estimates. The estimates we make in determining the fair value of each reporting unit involve the application of judgment, including the amount and timing of future cash flows, short- and long-term growth rates, and the weighted average cost of capital, which could affect the timing and size of any future impairment charges. Impairment of our goodwill could significantly affect our operating results and financial position. Based on our most recent assessment, there were no goodwill impairment indicators.

     In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets , we continually evaluate whether events or circumstances have occurred that indicate that the estimated remaining useful life of our long-lived assets, including intangible assets, may warrant revision or that the carrying value of these assets may be impaired. Any write-downs are treated as permanent reductions in the carrying amount of the assets. We must use judgment in evaluating whether events or circumstances indicate that useful lives should change or that the carrying value of assets has been impaired. Any resulting revision in the useful life or the amount of an impairment also requires judgment. Any of these judgments could affect the timing or size of any future impairment charges. Revision of useful lives or impairment charges could significantly affect our operating results and financial position.

Software Development Costs

     We evaluate whether to capitalize or expense software development costs in accordance with SFAS 86. We sell products in a market that is subject to rapid technological change, new product development and changing customer needs. Accordingly, we have concluded that technological feasibility is not established until the development stage of the product is nearly complete. We define technological feasibility as the completion of a working model. During the three months ended December 31, 2007 and 2006, software development costs eligible for capitalization were not material.

     Costs of software applications developed or obtained for internal use that are incurred during the applications’ development stages are capitalized in accordance with SOP No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.

Income Taxes

     We are subject to income taxes in both the United States and foreign jurisdictions, and we use estimates in determining our provision for income taxes. Deferred tax assets, related valuation allowances, current tax liabilities and deferred tax liabilities are determined separately by tax jurisdiction. In making these determinations, we estimate tax assets, related valuation allowances, current tax liabilities and deferred tax liabilities and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. At December 31, 2007, our deferred tax assets consisted primarily of state research and development tax credit carryforwards, foreign tax credit carryforwards and temporary differences relating primarily to share-based compensation expense and acquired intangible assets. We assess the likelihood that deferred tax assets will be realized, and we recognize a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction.

Contingencies

     From time to time and in the ordinary course of business, we may be subject to various claims, charges and litigation. In some cases, the claimants may seek damages, as well as other relief, which, if granted, could require significant expenditures. In accordance with SFAS 5, Accounting for Contingencies , we accrue the estimated costs of settlement or damages when a loss is deemed probable and such costs are estimable. In accordance with EITF Topic D-77, Accounting for Legal Costs Expected To Be Incurred In Connection With A Loss Contingency , we accrue for legal costs related to a loss contingency when a loss is probable and such amounts are estimable. Otherwise, these costs are expensed as incurred. If the estimate of a probable loss or defense costs is a range and no amount within the range is more likely, we accrue the minimum amount of the range.

Valuation of Business Combinations

     We record intangible assets acquired in business combinations under the purchase method of accounting. We allocate the amounts we pay for each acquisition to the assets we acquire and liabilities we assume based on their fair values at the date of acquisition. We then allocate the purchase price in excess of net tangible assets acquired to identifiable intangible assets, including developed technology, customer contracts and related customer relationships, tradenames and in-process research and development. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management. We allocate any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill. The use of alternative purchase price allocations and alternative estimated useful life assumptions could result in different intangible asset amortization expense in current and future periods.

     The valuation of in-process research and development represents the estimated fair value at the dates of acquisition related to in-process projects. Our in-process research and development represents the value of in-process projects that have not yet reached technological feasibility and have no alternative future uses as of the date of acquisition. We expense the value attributable to these in-process projects at the time of the acquisition.

Results of Operations

      Comparison of Three Months Ended December 31, 2007 and 2006

     Total revenue for the three months ended December 31, 2007 was $28.5 million, an increase of 20%, or $4.7 million from the three months ended December 31, 2006. Total revenue increased as a result of higher international sales of our Affinium product suite and an increase in related maintenance and services revenue.

     Total license revenue for the three months ended December 31, 2007 was $11.1 million, an increase of 23%, or $2.1 million from the three months ended December 31, 2006. This increase in license revenue was primarily attributable to higher sales of our Affinium products in international markets, primarily Europe and Asia.

     Maintenance fees revenue is associated with maintenance agreements in connection with perpetual license agreements from our existing installed customer base and the sale of new perpetual licenses. Maintenance fees revenue for the three months ended December 31, 2007 was $10.6 million, an increase of 12%, or $1.2 million from the three months ended December 31, 2006. The increase reflects additional maintenance fees on the sale of new licenses in fiscal 2007. Maintenance revenue is expected to increase at a lower rate in fiscal 2008 given the lower growth rate in license revenue in fiscal 2007 (11% in fiscal 2007 versus 34% in fiscal 2006).

     Services revenue for the three months ended December 31, 2007 was $4.0 million, an increase of 32%, or $1.0 million from the three months ended December 31, 2006. The increase in services revenue was primarily the result of growth in the number of implementation services performed in North America, Europe and Asia related to new license agreements.

     Subscription revenue is associated with renewal agreements and the sale of new agreements from our existing subscription customer base. Total subscription revenue for the three months ended December 31, 2007 was $2.7 million, an increase of 19%, or $428,000 from the three months ended December 31, 2006. This increase in subscription revenue was primarily attributable to the impact of the MarketingCentral acquisition. Included within subscription revenue for the three months ended December 31, 2006 was $200,000 of subscription revenue that had been deferred from prior quarters. We anticipate that subscription revenue will continue to increase in future years as we enter into additional subscription agreements and expand our on-demand product offerings.