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International Business Machines Corporation Alliance | 12 Months Ended
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Dec. 31, 2011
International Business Machines Corporation Alliance | 17. International Business Machines Corporation Alliance On December 16, 2007, the Company entered into a Master Alliance Agreement (“Alliance”) with 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 will retain ownership of its respective intellectual property and will independently determine product offering pricing to customers. In connection with the formation of the Alliance, the Company granted warrants to IBM to purchase up to 1,427,035 shares of the Company’s common stock at a price of $27.50 per share and up to 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. At the date of issuance, the Company utilized a valuation model prepared by a third-party to assist management in estimating the fair value of the common stock warrants. 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, as subsequently determined by an independent third-party appraiser, is approximately $24.0 million and is recorded as common stock warrants in the accompanying consolidated balance sheet as of December 31, 2011 and 2010. The remaining balance of $9.3 million is related to prepaid incentives and other obligations and was recorded in the Alliance agreement liability at December 31, 2007. During the year ended December 31, 2008, the Company received an additional payment from IBM of $37.3 million in accordance with the terms of Amendment No. 1. This payment has been recorded in the Alliance agreement liability in the accompanying consolidated balance sheets as of December 31, 2011 and 2010. This amount represents a prepayment of funding for technical enablement milestones and incentive payments to be earned 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 December 31, 2011 and 2010, $20.7 million is refundable subject to achievement of future milestones. No additional payments were received in 2011 or 2010 relating to Amendment No. 1. The costs incurred by the Company related to internally developed software associated with the technical enablement milestones were capitalized in accordance with ASC 985-20, Software – Cost of Software to be Sold, Leased, or Marketed, when the resulting product reached technological feasibility. Prior to reaching technological feasibility, the costs were expensed as incurred. Reimbursements from IBM for expenditures determined to be direct and incremental to satisfying the technical enablement milestones were used to offset the amounts expensed or capitalized as described above but not in excess of non-refundable cash received. During the years ended December 31, 2011, 2010 and 2009, the Company incurred $1.9 million, $9.9 million and $11.0 million of costs related to fulfillment of the technical enablement milestones, respectively. 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 in the accompanying consolidated balance sheets as of December 31, 2011 and 2010, and a reduction of operating expenses in the accompanying consolidated statement of income for the years ended December 31, 2011 and 2010. Changes in the Alliance agreement liability were as follows (in thousands):
|  |  | September 30, |
|  | Alliance |
|  | Agreement |
|  | Liability |
Balance, December 31, 2009 |  | $ | 32,487 |
Costs related to fulfillment of technical enablement milestones |  |  | (9,903 | )
Balance, December 31, 2010 |  |  | 22,584 |
Costs related to fulfillment of technical enablement milestones |  |  | (1,917 | )
Balance, December 31, 2011 |  | $ | 20,667 |
As the Alliance agreement will terminate during the year ended 2012, the entire $20.7 million Alliance agreement liability is classified as short-term in the accompanying consolidated balance sheet as of December 31, 2011. Of the $22.6 million Alliance agreement liability, $1.9 million is short-term and $20.7 million is long-term in the accompanying consolidated balance sheet as of December 31, 2010. Revenue will be recognized as sales incentives are earned subject to meeting certain minimum sales targets through December 16, 2013. On December 16, 2011, the parties determined that the agreement would not be extended beyond its initial five-year term. As a result, the term of the agreement will expire on December 16, 2012.

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- Definition Entire disclosure of Master Alliance Agreement between International Business Machines Corporation and the Company. + References No definition available. + Details
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