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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
Commission File Number 0-25346
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TRANSACTION SYSTEMS ARCHITECTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 47-0772104
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
224 South 108th Avenue (402) 334-5101
Omaha, Nebraska 68154 (Registrant's telephone number,
(Address of principal executive offices, including area code)
including zip code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes x No
--- ---
As of April 30, 2004, there were 37,185,998 shares of the registrant's Class A
Common Stock, par value $.005 per share, outstanding (excluding 1,476,145 shares
held as Treasury Stock, and including 4,101 options to purchase shares of the
registrant's Class A Common Stock at an exercise price of one cent per share).
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TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements..................................................................... 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 22
Item 4. Controls and Procedures.................................................................. 22
PART II - OTHER INFORMATION
Items 2, 3 and 5. Not Applicable.
Item 1. Legal Proceedings........................................................................ 24
Item 4. Submission of Matters to a Vote of Security Holders...................................... 24
Item 6. Exhibits and Reports on Form 8-K......................................................... 25
Signature........................................................................................ 26
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Page
----
Condensed Consolidated Balance Sheets as of March 31, 2004 and September 30, 2003............................ 2
Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2004 and 2003... 3
Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2004 and 2003............. 4
Notes to Condensed Consolidated Financial Statements......................................................... 5
1
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
March 31, September 30,
2004 2003
---------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 137,218 $ 113,986
Marketable securities........................................................ - 1,296
Billed receivables, net of allowances of $5,811 and $4,037, respectively..... 51,928 42,225
Accrued receivables.......................................................... 13,476 9,592
Recoverable income taxes..................................................... 11,202 11,985
Deferred income taxes, net................................................... 5,667 10,316
Other........................................................................ 5,923 5,104
---------- ----------
Total current assets....................................................... 225,414 194,504
Property and equipment, net.................................................... 8,425 9,405
Software, net.................................................................. 1,547 2,319
Goodwill, net.................................................................. 46,689 46,425
Deferred income taxes, net..................................................... 9,497 9,638
Other.......................................................................... 1,126 1,609
---------- ----------
Total assets................................................................ $ 292,698 $ 263,900
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt - financing agreements............................... $ 10,577 $ 15,493
Accounts payable............................................................. 5,782 6,965
Accrued employee compensation................................................ 10,648 9,822
Accrued liabilities.......................................................... 11,421 9,714
Deferred revenue............................................................. 83,017 70,798
Other........................................................................ 292 628
---------- ----------
Total current liabilities................................................. 121,737 113,420
Debt - financing agreements.................................................... 4,627 9,444
Deferred revenue............................................................... 14,243 17,689
Other.......................................................................... 753 473
---------- ----------
Total liabilities........................................................... 141,360 141,026
---------- ----------
Commitments and contingencies (Note 8)
Stockholders' equity:
Class A Common Stock, $.005 par value;
50,000,000 shares authorized; 38,598,710
and 37,660,731 shares issued at
March 31, 2004 and September 30, 2003, respectively........................ 193 188
Treasury stock, at cost, 1,476,145 shares.................................... (35,258) (35,258)
Additional paid-in capital................................................... 247,748 235,767
Accumulated deficit.......................................................... (51,585) (69,602)
Accumulated other comprehensive loss, net.................................... (9,760) (8,221)
---------- ----------
Total stockholders' equity.................................................. 151,338 122,874
---------- ----------
Total liabilities and stockholders' equity................................. $ 292,698 $ 263,900
========== ==========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
2
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share amounts)
Three Months Ended Six Months Ended
March 31, March 31,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues:
Software license fees.............................. $ 42,380 $ 38,167 $ 83,613 $ 69,497
Maintenance fees................................... 22,370 19,461 43,683 38,065
Services........................................... 11,777 11,622 23,248 24,177
-------- -------- -------- --------
Total revenues................................... 76,527 69,250 150,544 131,739
-------- -------- -------- --------
Expenses:
Cost of software license fees...................... 6,189 6,289 12,828 12,228
Cost of maintenance and services................... 14,739 15,693 29,718 30,501
Research and development........................... 9,572 8,357 19,005 16,307
Selling and marketing.............................. 16,127 13,529 29,917 27,265
General and administrative......................... 15,834 14,104 29,502 26,687
-------- -------- -------- --------
Total expenses................................... 62,461 57,972 120,970 112,988
-------- -------- -------- --------
Operating income..................................... 14,066 11,278 29,574 18,751
-------- -------- -------- --------
Other income (expense):
Interest income.................................... 349 285 872 595
Interest expense................................... (381) (787) (912) (1,743)
Other, net......................................... (131) 79 2,074 (1,060)
-------- -------- -------- --------
Total other income (expense)..................... (163) (423) 2,034 (2,208)
-------- -------- -------- --------
Income before income taxes........................... 13,903 10,855 31,608 16,543
Income tax provision................................. (5,927) (6,785) (13,591) (9,478)
-------- -------- -------- --------
Net income........................................... $ 7,976 $ 4,070 $ 18,017 $ 7,065
======== ======== ======== ========
Earnings per share information:
Weighted average shares outstanding:
Basic............................................ 36,846 35,486 36,613 35,462
======== ======== ======== ========
Diluted.......................................... 38,027 35,573 37,835 35,562
======== ======== ======== ========
Earnings per share:
Basic............................................ $ 0.22 $ 0.11 $ 0.49 $ 0.20
======== ======== ======== ========
Diluted.......................................... $ 0.21 $ 0.11 $ 0.48 $ 0.20
======== ======== ======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
Six Months Ended
March 31,
--------------------------
2004 2003
---------- ----------
Cash flows from operating activities:
Net income................................................................... $ 18,017 $ 7,065
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation............................................................... 2,196 2,586
Amortization............................................................... 1,333 2,211
Loss on sale of marketable equity securities............................... 107 115
Deferred income taxes...................................................... 7,928 9,658
Changes in operating assets and liabilities:
Billed and accrued receivables, net...................................... (11,432) (2,435)
Other current and noncurrent assets...................................... (3,554) (1,627)
Accounts payable......................................................... (1,489) (906)
Current income taxes..................................................... 783 (7,847)
Deferred revenue......................................................... 6,141 8,955
Other current and noncurrent liabilities................................. 1,509 (3,831)
---------- ----------
Net cash provided by operating activities.............................. 21,539 13,944
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment, net..................................... (1,003) (907)
Purchases of software and distribution rights................................ (170) (148)
Proceeds from sales of marketable securities................................. 1,375 519
---------- ----------
Net cash provided by (used in) investing activities.................... 202 (536)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of Class A Common Stock............................... 476 535
Proceeds from sale and exercise of stock options............................. 8,577 37
Payments on debt - financing agreements...................................... (9,733) (10,976)
Other........................................................................ (291) (452)
---------- ----------
Net cash used in financing activities.................................. (971) (10,856)
---------- ----------
Effect of exchange rate fluctuations on cash................................... 2,462 962
---------- ----------
Net increase in cash and cash equivalents...................................... 23,232 3,514
Cash and cash equivalents, beginning of period................................. 113,986 87,894
---------- ----------
Cash and cash equivalents, end of period....................................... $ 137,218 $ 91,408
---------- ----------
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies
Nature of Business
Transaction Systems Architects, Inc., a Delaware corporation, and its
subsidiaries (collectively referred to as "TSA" or the "Company"), develop,
market, install and support a broad line of software products and services
primarily focused on facilitating electronic payments and electronic commerce.
In addition to its own products, the Company distributes, or acts as a sales
agent for, software developed by third parties. These products and services are
used principally by financial institutions, retailers and electronic-payment
processors, both in domestic and international markets.
Condensed Consolidated Financial Statements
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated. The condensed consolidated financial
statements at March 31, 2004, and for the three and six months ended March 31,
2004 and 2003, are unaudited and reflect all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair presentation of the financial position and operating results for the
interim periods.
The condensed consolidated financial statements contained herein should be
read in conjunction with the consolidated financial statements and notes
thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's annual report on
Form 10-K for the fiscal year ended September 30, 2003. The results of
operations for the three and six months ended March 31, 2004 are not necessarily
indicative of the results that may be achieved for the entire fiscal year ending
September 30, 2004.
Use of Estimates in Preparation of Condensed Consolidated Financial Statements
The preparation of the 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.
Revenue Recognition, Accrued Receivables and Deferred Revenue
Software License Fees. The Company recognizes software license fee revenue
in accordance with American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain
Transactions," Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements," and 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 (1) there is persuasive
evidence of an arrangement, (2) collection of the fee is considered probable,
and (3) 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 SOP 98-9 to
determine the amount of revenue to be allocated to the license element. Under
SOP 98-9, the fair value of all undelivered elements, such as postcontract
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 production, modification, or customization of software, those
services are not separable from the software and are accounted for in
5
accordance with Accounting Research Bulletin ("ARB") No. 45, "Long-Term
Construction-Type Contracts," and the relevant guidance provided by SOP 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts." Accounting for services delivered over time (generally in excess of
twelve months) under 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 under
the contract, which are used in current percentage-complete computations,
exclude amounts due under extended payment terms. In certain cases, the Company
provides its customers with extended terms where payment is deferred beyond when
the services are rendered. Because the Company is unable to demonstrate a
history of enforcing payment terms under such arrangements without granting
concessions, the Company excludes revenues due on extended payment terms from
its current percentage-of-completion computation because it cannot be presumed
that those fees are fixed or determinable.
For software license arrangements in which a significant portion of the fee
is due more than 12 months after delivery, 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.
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. For certain of the Company's products,
VSOE of the fair value of PCS is determined by a consistent pricing of PCS and
PCS renewals as a percentage of the software license fees. In other products,
the Company determines VSOE by reference to contractual renewals, when the
renewal terms are substantive. In those cases where VSOE of the fair value of
PCS is determined by reference to contractual renewals, 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.
Certain of the Company's software arrangements (primarily those in the
Asia/Pacific region) include payment terms that are enforceable only upon the
passage of time or customer acceptance. For software license arrangements in
which the Company's ability to enforce payment terms depends on customer
acceptance provisions, software license fee revenue is recognized upon the
earlier of the point at which (1) the customer accepts the software products or
(2) the acceptance provisions lapse.
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 vary their software mix, including the right 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 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.
Maintenance Fees. Revenues for PCS are recognized ratably over the
maintenance term specified in the contract. In arrangements where VSOE of fair
value of PCS cannot be determined (for example, a time-based
6
software license with a duration of one year or less), the Company recognizes
revenue for the entire arrangement ratably over the PCS term.
Services. Revenues from arrangements to provide professional services on a
time and materials basis are recognized as the related services are performed.
Accrued Receivables. Accrued receivables represent amounts to be billed in
the near future (less than 12 months).
Deferred Revenue. Deferred revenue includes (1) amounts currently due and
payable from customers, and payments received from customers, for software
licenses, maintenance and/or services in advance of providing the product or
performing services, (2) amounts deferred whereby VSOE of the fair value of
undelivered elements in a bundled arrangement does not exist, and (3) amounts
deferred if other conditions for revenue recognition have not been met.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans under the
intrinsic value method in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and follows the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure." The
Company calculates stock-based compensation pursuant to the disclosure
provisions of SFAS No. 123 using the straight-line method over the vesting
period of the option. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant date of
the stock options awarded under those plans, consistent with the fair value
method of SFAS No. 123, the Company's net income and earnings per share for the
three and six months ended March 31, 2004 and 2003 would have approximated the
following pro forma amounts (in thousands, except per share amounts):
Three Months Ended Six Months Ended
March 31, March 31,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income:
As reported............................................... $ 7,976 $ 4,070 $ 18,017 $ 7,065
Deduct: stock-based employee compensation expense
determined under the fair value based method
for all awards, net of related tax effects.............. (594) (1,488) (1,212) (3,027)
Add: stock-based employee compensation expense
recorded under intrinsic value based method,
net of related tax effects.............................. 33 - 52 -
-------- -------- -------- --------
Pro forma................................................. $ 7,415 $ 2,582 $ 16,857 $ 4,038
======== ======== ======== ========
Earnings per share:
Basic, as reported........................................ $ 0.22 $ 0.11 $ 0.49 $ 0.20
======== ======== ======== ========
Basic, pro forma.......................................... $ 0.20 $ 0.07 $ 0.46 $ 0.11
======== ======== ======== ========
Diluted, as reported...................................... $ 0.21 $ 0.11 $ 0.48 $ 0.20
======== ======== ======== ========
Diluted, pro forma........................................ $ 0.19 $ 0.07 $ 0.45 $ 0.11
======== ======== ======== ========
7
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model, a pricing model acceptable under
SFAS No. 123, with the following weighted-average assumptions:
Three Months Ended Six Months Ended
March 31, March 31,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Expected life...................................... 3.9 6.0 4.1 6.0
Interest rate...................................... 2.4% 3.2% 2.6% 3.2%
Volatility......................................... 85.2% 45.0% 85.1% 45.0%
Dividend yield..................................... - - - -
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. Additional future awards are anticipated.
Recent Accounting Pronouncements
In March 2004, the Financial Accounting Standards Board's Emerging Issues
Task Force ("EITF") concluded its discussion of EITF Issue No. 03-01, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." EITF Issue No. 03-01 provides accounting guidance regarding the
determination of when an impairment (i.e. fair value is less than carrying
value) of debt and marketable equity securities and investments accounted for
under the cost method should be considered other-than-temporary and recognized
in earnings. EITF Issue No. 03-01 also requires annual disclosures of certain
quantitative and qualitative factors of debt and marketable equity securities
classified as available-for-sale or held-to-maturity that are in an unrealized
loss position at the balance sheet date, but for which an other-than-temporary
impairment has not been recognized. The adoption of EITF Issue No. 03-01, which
will be effective in the fourth quarter of fiscal 2004, is not expected to have
a material effect on the Company's financial position or results of operations.
2. Goodwill and Software
Changes to the carrying amount of goodwill during the six months ended
March 31, 2004 resulted only from foreign currency translation adjustments. The
gross carrying amount and accumulated amortization of the Company's intangible
assets that are subject to amortization at each balance sheet date, consisting
only of software, are as follows (in thousands):
March 31, Sept. 30,
2004 2003
--------- ---------
Internally-developed software............................... $ 15,937 $ 15,725
Purchased software.......................................... 44,873 44,186
-------- --------
60,810 59,911
Less: accumulated amortization.............................. (59,263) (57,592)
-------- --------
Software, net............................................... $ 1,547 $ 2,319
======== ========
Amortization of software 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
years. Software amortization expense recorded in the three and six months ended
March 31, 2004 was $0.4 million and $0.9 million, respectively. Based on
capitalized software at March 31, 2004, and assuming no impairment of these
software assets, estimated amortization expense for the remainder of fiscal 2004
and in succeeding fiscal years is as follows (in thousands):
2004.............................................................. $ 885
2005.............................................................. 429
2006.............................................................. 175
2007.............................................................. 40
Thereafter........................................................ 18
8
3. Corporate Restructuring Charges and Asset Impairment Losses
During fiscal 2001, the Company closed, or significantly reduced the size
of, certain product development organizations and geographic sales offices,
resulting in restructuring charges and asset impairment losses. The following
table shows activity related to these exit activities since September 30, 2003
(in thousands):
Lease
Obligations
-----------
Balance, September 30, 2003....................................... $ 681
Amounts paid year-to-date during fiscal 2004...................... (95)
-------
Balance, March 31, 2004........................................... $ 586
=======
The liability for lease obligations relates to the abandonment or reduction
of office facilities with lease terms ending on various dates through March
2005, net of expected third-party purchases or sub-leases, and an estimated
lease termination loss for the corporate aircraft. The Company continues to seek
subleases for certain of the properties as well as an exit to the corporate
aircraft lease. The final settlement of these obligations may result in
adjustments to these liabilities.
During fiscal 2003, the Company reduced the size of certain product
development organizations, resulting in severance-related restructuring charges.
The following table shows activity related to these exit activities since
September 30, 2003 (in thousands):
Termination
Benefits
-----------
Balance, September 30, 2003....................................... $ 1,771
Amounts paid year-to-date during fiscal 2004...................... (1,612)
Adjustments to previously-recognized liabilities.................. (159)
-------
Balance, March 31, 2004........................................... $ -
=======
4. Common Stock and Earnings Per Share
Options to purchase shares of Class A Common Stock ("Common Stock") at an
exercise price of one cent per share, received by shareholders of
MessagingDirect Ltd. ("MDL") as part of its acquisition by the Company during
fiscal 2001, that have not yet been converted into Common Stock are included in
Common Stock for presentation purposes on the March 31, 2004 and September 30,
2003 consolidated balance sheets, and are included in common shares outstanding
for earnings per share ("EPS") computations for the three and six months ended
March 31, 2004 and 2003. Included in Common Stock are 4,101 and 6,248 MDL
options, respectively, as of March 31, 2004 and September 30, 2003.
EPS has been computed in accordance with SFAS No. 128, "Earnings Per
Share." Basic EPS is calculated by dividing net income available to common
stockholders (the numerator) by the weighted average number of common shares
outstanding during the period (the denominator). Diluted EPS is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding during the period, adjusted for the dilutive
effect of any outstanding dilutive securities (the denominator). The difference
between the basic and diluted EPS denominators for the three months ended March
31, 2004 and 2003, which amounted to approximately 1,181,000 and 87,000 shares,
respectively, and for the six months ended March 31, 2004 and 2003, which
amounted to approximately 1,222,000 and 100,000 shares, respectively, were due
to the dilutive effect of the Company's outstanding stock options using the
treasury stock method. Antidilutive shares of 802,000 and 5,149,000 were
excluded from the computations of diluted EPS for the three months ended March
31, 2004 and 2003, respectively, and antidilutive shares of 804,000 and
5,137,000 were excluded from the computations of diluted EPS for the six months
ended March 31, 2004 and 2003, respectively, because the exercise prices of the
corresponding stock options were greater than the average market price of the
Company's common shares.
9
5. Comprehensive Income/Loss
The Company's components of other comprehensive income/loss were as follows
(in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income................................................... $ 7,976 $ 4,070 $ 18,017 $ 7,065
Other comprehensive income:
Foreign currency translation adjustments................... 314 (76) (1,723) (531)
Change in unrealized investment holding gain (loss):
Unrealized holding gain (loss) arising during the
period................................................. (2) 378 77 (55)
Reclassification for loss included in net income......... 97 78 107 115
-------- -------- -------- --------
Comprehensive income......................................... $ 8,385 $ 4,450 $ 16,478 $ 6,594
======== ======== ======== ========
The Company's components of accumulated other comprehensive income/loss at
each balance sheet date were as follows (in thousands):
Foreign Unrealized Accumulated
Currency Investment Other
Translation Holding Comprehensive
Adjustments Loss Income (Loss)
----------- ---------- -------------
Balance, September 30, 2003.................................. $ (8,020) $ (201) $ (8,221)
Fiscal 2004 year-to-date activity............................ (1,723) 77 (1,646)
Reclassification adjustment for loss included in
net income................................................ - 107 107
--------- --------- ---------
Balance, March 31, 2004...................................... $ (9,743) $ (17) $ (9,760)
========= ========= =========
6. Segment Information
The Company has three operating segments, referred to as business units.
These three business units are ACI Worldwide, Insession Technologies and
IntraNet. ACI Worldwide products represent the Company's largest product line
and include its most mature and well-established applications, which are used
primarily by financial institutions, retailers and e-payment processors. Its
products are used to route and process transactions for automated teller machine
networks; process transactions from point-of-sale devices, wireless devices and
the Internet; control fraud and money laundering; authorize checks; establish
frequent shopper programs; automate transaction settlement, card management and
claims processing; and issue and manage multi-functional applications on smart
cards. Insession Technologies products facilitate communication, data movement,
monitoring of systems, and business process automation across computing systems
involving mainframes, distributed computing networks and the Internet. IntraNet
products offer high value payments processing, bulk payments processing, global
messaging and continuous link settlement processing.
The Company's chief operating decision maker, together with other senior
management personnel, reviews financial information presented on a consolidated
basis, accompanied by disaggregated information about revenues and operating
income by business unit. The Company does not track assets by business unit.
Most of the Company's products are sold and supported through distribution
networks covering the geographic regions of the Americas, Europe/Middle
East/Africa and Asia/Pacific. No single customer accounted for more than 10% of
the Company's consolidated revenues during the three or six months ended March
31, 2004 or 2003.
10
The following are revenues and operating income for these business units
for the periods indicated (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues:
ACI Worldwide................................ $ 57,875 $ 48,665 $115,591 $ 94,271
Insession Technologies....................... 10,516 8,828 18,966 15,828
IntraNet..................................... 8,136 11,757 15,987 21,640
-------- -------- -------- --------
$ 76,527 $ 69,250 $150,544 $131,739
======== ======== ======== ========
Operating income:
ACI Worldwide................................ $ 9,140 $ 5,350 $ 21,240 $ 10,260
Insession Technologies....................... 3,431 2,379 5,244 3,228
IntraNet..................................... 1,495 3,549 3,090 5,263
-------- -------- -------- --------
$ 14,066 $ 11,278 $ 29,574 $ 18,751
======== ======== ======== ========
7. Income Taxes
The effective tax rate for the second quarter of fiscal 2004 was
approximately 42.6% as compared to 62.5% for the same period of fiscal 2003. The
effective tax rate for the six months ended March 31, 2004 was approximately
43.0% as compared to 57.3% for the same period of fiscal 2003. The effective tax
rate for the second quarter and first six months of fiscal 2004 was primarily
impacted by non-recognition of tax benefits for operating losses in certain
foreign locations. The Company has not recognized the tax benefit of these
operating losses because it is likely that all or a portion of the benefit from
these operating losses will not be realized. The effective tax rate for the
second quarter and first six months of fiscal 2003 was primarily impacted by
non-recognition of tax benefits for operating losses in certain foreign
locations and recognition of a valuation allowance for foreign tax credits. The
improvement in the effective tax rate for the second quarter and first six
months of fiscal 2004, as compared to the same periods of fiscal 2003, resulted
primarily from recognition of research and development credits, extraterritorial
income exclusion benefits and expected utilization of foreign tax credits.
8. Contingencies
Legal Proceedings
From time to time, the Company is involved in litigation relating to claims
arising out of its operations. Other than as described below, the Company is not
currently a party to any legal proceedings, the adverse outcome of which,
individually or in the aggregate, would have a material adverse effect on the
Company's financial condition or results of operations.
Class Action Litigation. In November 2002, two class action complaints were
filed in the U.S. District Court for the District of Nebraska (the "Court")
against the Company and certain individuals alleging violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder. Pursuant to a Court Order, the two complaints were consolidated as
Desert Orchid Partners v. Transaction Systems Architects, Inc., et al., with
Genesee County Employees' Retirement System designated as the Lead Plaintiff.
The First Amended Consolidated Class Action Complaint, filed on June 30, 2003
(the "Consolidated Complaint"), alleges that during the purported class period,
the Company and the named defendants misrepresented the Company's historical
financial condition, results of operations and its future prospects, and failed
to disclose facts that could have indicated an impending decline in the
Company's revenues. The Consolidated Complaint seeks unspecified damages,
interest, fees, costs and rescission. The class period alleged in the
Consolidated Complaint is January 21, 1999 through November 18, 2002. The
Company and the individual defendants filed a motion to dismiss the Consolidated
Complaint. In response, on December 15, 2003, the Court dismissed, without
prejudice, Gregory Derkacht, the Company's President and Chief Executive
Officer, as a defendant, but denied the motion to dismiss with respect to the
remaining defendants, including the Company. On February 6, 2004, the Court
entered a mediation reference order requiring the parties to
11
mediate before a private mediator. The parties held a mediation session on
March 18, 2004, which did not result in a settlement of the matter. Discovery
has commenced and is in the early stages.
Derivative Litigation. On January 10, 2003, Samuel Naito filed the suit of
"Samuel Naito, Derivatively on behalf of nominal defendant Transaction Systems
Architects, Inc. v. Roger K. Alexander, Gregory D. Derkacht, Gregory J. Duman,
Larry G. Fendley, Jim D. Kever, and Charles E. Noell, III and Transaction
Systems Architects, Inc." in the State District Court in Douglas County,
Nebraska (the "Naito matter"). The suit is a shareholder derivative action that
generally alleges that the named individuals breached their fiduciary duties of
loyalty and good faith owed to the Company and its stockholders by causing the
Company to conduct its business in an unsafe, imprudent and unlawful manner,
resulting in damage to the Company. More specifically, the plaintiff alleges
that the individual defendants, and particularly the members of the Company's
audit committee, failed to implement and maintain an adequate internal
accounting control system that would have enabled the Company to discover
irregularities in its accounting procedures with regard to certain transactions
prior to August 2002, thus violating their fiduciary duties of loyalty and good
faith, generally accepted accounting principles and the Company's audit
committee charter. The plaintiff seeks to recover an unspecified amount of money
damages allegedly sustained by the Company as a result of the individual
defendants' alleged breaches of fiduciary duties, as well as the plaintiff's
costs and disbursements related to the suit.
On January 24, 2003, Michael Russiello filed the suit of "Michael
Russiello, Derivatively on behalf of nominal defendant Transaction Systems
Architects, Inc. v. Roger K. Alexander, Gregory D. Derkacht, Gregory J. Duman,
Larry G. Fendley, Jim D. Kever, and Charles E. Noell, III and Transaction
Systems Architects, Inc." in the State District Court in Douglas County,
Nebraska (the "Russiello matter"). The suit is a stockholder derivative action
involving allegations similar to those in the Naito matter. The plaintiff seeks
to recover an unspecified amount of money damages allegedly sustained by the
Company as a result of the individual defendants' alleged breaches of fiduciary
duties, as well as the plaintiff's costs and disbursements related to the suit.
The Company filed a motion to dismiss in the Naito matter on February 14,
2003 and a motion to dismiss in the Russiello matter on February 21, 2003. A
hearing was scheduled on those motions for March 14, 2003. Just prior to that
date, plaintiffs' counsel requested that the derivative lawsuits be stayed
pending a determination of an anticipated motion to dismiss to be filed in the
class action lawsuits. The Company, by and through its counsel, agreed to that
stay. As a result, no other defendants have been served and no discovery has
been commenced. The Company has not determined what effect the Court's ruling in
the class action litigation will have on the Naito or Russiello matters.
Securities and Exchange Commission Investigation. On August 8, 2003, the
SEC Enforcement Division issued a formal order of private investigation in
connection with the Company's restatement of its prior consolidated financial
statements. The Company fully cooperated with the SEC in their investigation. On
April 14, 2004, the Company announced that it received a letter from the SEC
indicating that they had terminated their investigation and that no enforcement
action has been recommended.
12
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 include words or phrases such as "management anticipates," "the
Company believes," "the Company anticipates," "the Company expects," "the
Company plans," "the Company will," "the Company is well positioned" and words
and phrases of similar impact, and include, but are not limited to, statements
regarding future operations, business strategy and business environment. The
forward-looking statements are made pursuant to safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Any or all of the
forward-looking statements in this document may turn out to be wrong. They may
be based on inaccurate assumptions or may not account for known or unknown risks
and uncertainties. Consequently, no forward-looking statement is guaranteed, and
the Company's actual future results may vary materially from the results
expressed or implied in the Company's forward-looking statements. The cautionary
statements in this report expressly qualify all of the Company's forward-looking
statements. In addition, the Company is not obligated, and does not intend, to
update any of its forward-looking statements at any time unless an update is
required by applicable securities laws. 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 below in the section entitled
"Factors That May Affect the Company's Future Results or the Market Price of the
Company's Common Stock."
Overview
The Company develops, markets, installs and supports a broad line of
software products and services primarily focused on facilitating electronic
payments and electronic commerce. In addition to its own products, the Company
distributes, or acts as a sales agent for, software developed by third parties.
These products and services are used principally by financial institutions,
retailers and electronic-payment processors, both in domestic and international
markets. Accordingly, the Company's business and operating results are
influenced by trends such as information technology spending levels and the
growth rate of the electronic payments industry. Most of the Company's products
are sold and supported through distribution networks covering three geographic
regions - the Americas, Europe/Middle East/Africa ("EMEA") and Asia/Pacific.
Each distribution network has its own sales force and supplements this with
independent reseller and/or distributor networks.
Several factors related to the Company's business may have a significant
impact on its operating results from quarterly to quarter. 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 the Company will
recognize revenue generated by a given transaction. Factors such as the maturity
of the product sold, the creditworthiness of the customer, and delays in
delivery or acceptance of the Company's products can cause sales generated in
one period to be deferred and recognized as revenue in later periods. In
addition, while the Company's revenue contracts are generally denominated in
U.S. dollars, a substantial portion of its sales are made, and some of its
expenses are incurred, in the local currency of countries other than the U.S.
Fluctuations in currency exchange rates in a given period may result in the
Company's recognition of non-recurring gain or loss for that period. The Company
is engaged in an ongoing evaluation of its tax position and implementation of
strategies designed to reduce its effective tax rate. The Company's degree of
success in this regard, and the acceptance by taxing authorities of the
Company's tax positions, could cause its effective tax rate, and its results of
operations, to fluctuate from period to period.
Business Units
The Company's products and services are currently organized within three
operating segments, referred to as business units - ACI Worldwide, Insession
Technologies and IntraNet. The Company's chief operating decision makers review
financial information presented on a consolidated basis, accompanied by
disaggregated information about revenues and operating income by business unit.
13
The following are revenues and operating income for these business units
for the periods indicated (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues:
ACI Worldwide................................ $ 57,875 $ 48,665 $115,591 $ 94,271
Insession Technologies....................... 10,516 8,828 18,966 15,828
IntraNet..................................... 8,136 11,757 15,987 21,640
-------- -------- -------- --------
$ 76,527 $ 69,250 $150,544 $131,739
======== ======== ======== ========
Operating income:
ACI Worldwide................................ $ 9,140 $ 5,350 $ 21,240 $ 10,260
Insession Technologies....................... 3,431 2,379 5,244 3,228
IntraNet..................................... 1,495 3,549 3,090 5,263
-------- -------- -------- --------
$ 14,066 $ 11,278 $ 29,574 $ 18,751
======== ======== ======== ========
Backlog
Included in backlog are all software license fees, maintenance fees and
services specified in executed contracts to the extent that the Company believes
that recognition of the related revenue will occur within the next twelve
months. Recurring backlog includes all monthly license fees, maintenance fees
and facilities management fees. Non-recurring backlog includes other software
license fees and services.
The following table sets forth the Company's recurring and non-recurring
backlog, by business unit, as of March 31, 2004 (in thousands):
Recurring Non-Recurring Total
----------- ------------- -----------
ACI Worldwide................................... $ 134,959 $ 49,183 $ 184,142
Insession Technologies.......................... 21,834 7,486 29,320
IntraNet, Inc................................... 13,999 5,656 19,655
--------- --------- ---------
$ 170,792 $ 62,325 $ 233,117
========= ========= =========
Customers may request that their contracts be renegotiated or terminated
due to a number of factors, including mergers, changes in their financial
condition, or general changes in economic conditions in the customer's industry
or geographic location, or the Company may experience delays in the development
or delivery of products or services specified in customer contracts.
Accordingly, there can be no assurance that contracts included in recurring or
non-recurring backlog will actually generate the specified revenues or that the
actual revenues will be generated within a twelve-month period.
Critical Accounting Policies and Estimates
This disclosure is based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires that the Company make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. The Company bases its estimates
on historical experience and other assumptions that it believes to be proper and
reasonable under the circumstances. The Company continually evaluates the
appropriateness of its estimates and assumptions, including those related to
revenue recognition, provision for doubtful accounts, fair value of goodwill and
software, useful lives of intangible and fixed assets, and income taxes, among
others. Actual results could differ from those estimates.
14
The following key accounting policies are impacted significantly by
judgments, assumptions and estimates used in the preparation of the consolidated
financial statements.
Revenue Recognition
For software license arrangements for the Company's more-established
("mature") products for which other products or services rendered are not
considered essential to the functionality of the software, the Company
recognizes software license fee revenue upon delivery, provided (1) there is
persuasive evidence of an arrangement, (2) collection of the fee is considered
probable, and (3) the fee is fixed or determinable. In most arrangements,
because vendor-specific objective evidence of fair value does not exist for the
license element, the Company uses the residual method to determine the amount of
revenue to be allocated to the license element. Under the residual method, the
fair value of all undelivered elements, such as postcontract customer support 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. 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.
In recent years, the Company's sales focus has shifted from its mature
products to its newer BASE24-es product, its Payments Management products and
other less-established (collectively referred to as "newer") products. As a
result of this shift to newer products, absent other factors, the Company
initially experiences an increase in deferred revenues and a corresponding
decrease in revenues due to differences in the timing of revenue recognition for
the respective products. Revenues from newer products are typically recognized
upon acceptance, or first production use by the customer due to uncertainties
surrounding customer acceptance of the product, whereas revenues from mature
products, such as BASE24, are generally recognized upon delivery of the product.
Newer products are continually evaluated by Company management and product
development personnel to determine when any such product meets the specific
revenue recognition criteria that would support its classification as a mature
product. Evaluation criteria used in making this determination include
successful demonstration of product features and functionality; standardization
of sale, installation, and support functions; and customer acceptance at
multiple production site installations, among others. The change in product
classification would allow the Company to recognize revenues from sales of the
product upon delivery of the product, resulting in earlier recognition of
revenues from sales of that product, provided all other revenue recognition
criteria have been met.
When a software license arrangement includes services to provide
significant production, modification, or customization of software, those
services are not considered to be separable from the software. Accounting for
such services delivered over time (generally in excess of twelve months) 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. Estimated
total labor hours for each contract are based on the project scope, complexity,
skill level requirements, and similarities with other projects of similar size
and scope. For those contracts subject to contract accounting, estimates of
total revenue under the contract, which are used in current percentage-complete
computations, exclude amounts due under extended payment terms.
Provision for Doubtful Accounts
The Company maintains a general allowance for doubtful accounts based on
its historical experience, along with additional customer-specific allowances.
The Company regularly monitors credit risk exposures in its accounts receivable.
In estimating the necessary level of its allowance for doubtful accounts,
management considers the aging of its accounts receivable, the creditworthiness
of the Company's customers, economic conditions within the customer's industry,
and general economic conditions, among other factors. Should any of these
factors change, the estimates made by management will also change, which in turn
would impact the level of the Company's future provision for doubtful accounts.
Specifically, if the financial condition of one or more of the Company's
customers were to deteriorate, affecting their ability to make payments,
additional customer-specific provisions for doubtful accounts may be required.
Also, should deterioration occur in general economic conditions, or within a
particular industry or region in which the Company has a number of customers,
additional provisions for doubtful accounts may
15
be recorded to reserve for potential future losses. Any additional such
provisions would reduce operating income in the periods in which they were
recorded.
Impairment of Goodwill
Goodwill is tested for impairment at the reporting unit level at least
annually utilizing a two-step methodology. The initial step requires the Company
to determine the fair value of each reporting unit and compare it to the
carrying value, including goodwill, of such reporting unit. If the fair value
exceeds the carrying value, no impairment loss is recognized. However, if the
carrying value of the reporting unit exceeds its fair value, the goodwill of
this unit may be impaired. The amount of impairment, if any, is then measured in
the second step. For impairment testing purposes, the Company has utilized the
services of an independent consultant to perform valuations of the Company's
reporting units that contained goodwill.
Capitalized Software
Software consists of internally-developed software and purchased software.
The Company capitalizes costs related to certain internally-developed software
when the resulting products reach technological feasibility. Technological
feasibility is determined upon completion of a detailed program design or
internal specification. The internal specification establishes that the product
can be produced to meet its design specifications, including functions, features
and technical performance requirements. Purchased software consists of software
to be marketed externally that was acquired primarily as the result of a
business acquisition and costs of computer software obtained for internal use
that were capitalized.
Amortization of internally-developed software costs begins when the
products are available for licensing to customers and is computed separately for
each product as the greater of (a) the ratio of current gross revenue for the
product to the total of current and anticipated gross revenue for the product or
(b) the straight-line method over three years. Due to competitive pressures, it
may be possible that the anticipated gross revenue or remaining estimated
economic life of the software products will be reduced significantly. As a
result, the carrying amount of the software product may be reduced accordingly.
Amortization of purchased software is generally computed using the straight-line
method over its estimated useful life of approximately three years. Actual
useful life of capitalized software could differ from the estimated amortization
periods used.
Accounting for Income Taxes
Accounting for income taxes requires significant judgments in the
development of estimates used in income tax calculations. Such judgments
include, but are not limited to, the likelihood the Company would realize the
benefits of net operating loss carryforwards and/or foreign tax credits, the
adequacy of valuation allowances, and the rates used to measure transactions
with foreign subsidiaries. As part of the process of preparing the Company's
consolidated financial statements, the Company is required to estimate its
income taxes in each of the jurisdictions in which the Company operates. The
judgments and estimates used are subject to challenge by domestic and foreign
taxing authorities. It is possible that either domestic or foreign taxing
authorities could challenge those judgments and estimates and draw conclusions
that would cause the Company to incur tax liabilities in excess of, or realize
benefits less than, those currently recorded. In addition, changes in the
geographical mix or estimated amount of annual pretax income could impact the
Company's overall effective tax rate.
To the extent recovery of deferred tax assets is not likely based on
estimation of future taxable income in each jurisdiction, the Company records a
valuation allowance to reduce its deferred tax assets to the amount that is more
likely than not to be realized. Although the Company has considered future
taxable income along with prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, if the Company should determine
that it would not be able to realize all or part of its deferred tax assets in
the future, an adjustment to deferred tax assets would be charged to income in
the period any such determination was made. Likewise, in the event the Company
was able to realize its deferred tax assets in the future in excess of the net
recorded amount, an adjustment to deferred tax assets would increase income in
the period any such determination was made.
16
Results of Operations
The following table sets forth certain financial data and the percentage of
total revenues of the Company for the periods indicated (in thousands):
Three Months Ended March 31, Six Months Ended March 31,
------------------------------------------ ------------------------------------------
2004 2003 2004 2003
------------------- ------------------- ------------------- -------------------
% of % of % of % of
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
-------- ------- -------- ------- -------- ------- -------- -------
Revenues:
Initial license fees (ILFs).. $ 20,191 26.4% $ 16,238 23.4% $ 40,389 26.8% $ 27,481 20.9%
Monthly license fees (MLFs).. 22,189 29.0 21,929 31.7 43,224 28.7 42,016 31.9
-------- ------- -------- ------- -------- ------- -------- -------
Software license fees........ 42,380 55.4 38,167 55.1 83,613 55.5 69,497 52.8
Maintenance fees............. 22,370 29.2 19,461 28.1 43,683 29.0 38,065 28.9
Services..................... 11,777 15.4 11,622 16.8 23,248 15.5 24,177 18.3
-------- ------- -------- ------- -------- ------- -------- -------
Total revenues............. 76,527 100.0 69,250 100.0 150,544 100.0 131,739 100.0
-------- ------- -------- ------- -------- ------- -------- -------
Expenses:
Cost of software license
fees....................... 6,189 8.1 6,289 9.1 12,828 8.5 12,228 9.3
Cost of maintenance and
services................... 14,739 19.2 15,693 22.6 29,718 19.8 30,501 23.1
Research and development..... 9,572 12.5 8,357 12.1 19,005 12.6 16,307 12.4
Selling and marketing........ 16,127 21.1 13,529 19.5 29,917 19.9 27,265 20.7
General and administrative... 15,834 20.7 14,104 20.4 29,502 19.6 26,687 20.3
-------- ------- -------- ------- -------- ------- -------- -------
Total expenses............. 62,461 81.6 57,972 83.7 120,970 80.4 112,988 85.8
-------- ------- -------- ------- -------- ------- -------- -------
Operating income............... 14,066 18.4 11,278 16.3 29,574 19.6 18,751 14.2
-------- ------- -------- ------- -------- ------- -------- -------
Other income (expense):
Interest income.............. 349 0.5 285 0.4 872 0.6 595 0.5
Interest expense............. (381) (0.5) (787) (1.1) (912) (0.6) (1,743) (1.3)
Other, net................... (131) (0.2) 79 0.1 2,074 1.4 (1,060) (0.8)
-------- ------- -------- ------- -------- ------- -------- -------
Total other income
(expense) ............... (163) (0.2) (423) (0.6) 2,034 1.4 (2,208) (1.6)
-------- ------- -------- ------- -------- ------- -------- -------
Income before income taxes..... 13,903 18.2 10,855 15.7 31,608 21.0 16,543 12.6
Income tax provision........... (5,927) (7.8) (6,785) (9.8) (13,591) (9.0) (9,478) (7.2)
-------- ------- -------- ------- -------- ------- -------- -------
Net income..................... $ 7,976 10.4% $ 4,070 5.9% $ 18,017 12.0% $ 7,065 5.4%
======== ======= ======== ======= ======== ======= ======== =======
Revenues. Total revenues for the second quarter of fiscal 2004 increased
$7.3 million, or 10.5%, as compared to the same period of fiscal 2003. Total
revenues for the first six months of fiscal 2004 increased $18.8 million, or
14.3%, as compared to the same period of fiscal 2003. The three-month increase
is the result of a $4.2 million, or 11.0%, increase in software license fee
revenues, a $2.9 million, or 14.9%, increase in maintenance fee revenues, and a
$0.2 million, or 1.3%, increase in services revenues. The six-month increase is
the result of a $14.1 million, or 20.3%, increase in software license fee
revenues and a $5.6 million, or 14.8%, increase in maintenance fee revenues,
offset by a $0.9 million, or 3.8%, decrease in services revenues.
For the second quarter of fiscal 2004, as compared to the same period of
fiscal 2003, ACI Worldwide's software license fee revenues increased by $6.2
million, primarily due to a large capacity upgrade and term extension by a
customer in the Americas and a number of other system and capacity upgrades by
existing customers, along with increased revenues from the Company's BASE24 and
fraud detection products. For the first six months of fiscal 2004, as compared
to the same period of fiscal 2003, ACI Worldwide's software license fee revenues
increased by $16.3 million, a substantial portion of which was due to a
significant license renewal in the EMEA region during the first quarter of
fiscal 2004, the capacity upgrade and term extension discussed above, increased
revenues from the Company's BASE24 and fraud detection products, and a number of
other large system and capacity increases. Insession Technologies' software
license fee revenues were $1.3 million higher for the second quarter of fiscal
2004 than for the same period of fiscal 2003 primarily due to increased activity
related to its data connectivity and web-based communication products. Insession
Technologies' software license fee revenues were $2.1 million higher for the
first six months of fiscal 2004 than for same period of fiscal 2003 due to
increased activity related to its data connectivity and web-based communication
products, as well as its data center
17
management enhancement products. For the second quarter of fiscal 2004, as
compared to the same period of fiscal 2003, IntraNet's software license fee
revenues decreased by $3.3 million. The completion of the final phase of an ACH
project with a large European bank during the second quarter of fiscal 2003
allowed the Company to recognize approximately $3.6 million in revenues during
that quarter, causing the comparative decrease. For the first six months of
fiscal 2004, as compared to the same period of fiscal 2003, IntraNet's software
license fee revenues decreased by $4.3 million, primarily due to the large ACH
project completed during the second quarter of fiscal 2003. Also, as IntraNet's
customers complete their migration from the Digital VAX-based Money Transfer
System ("MTS") product to the RS6000-based MTS product, corresponding revenues
associated with the migration process have declined, which explains the
remaining reduction in IntraNet's software license fee revenues for the first
six months of fiscal 2004 as compared to the same period of fiscal 2003.
The increases in maintenance fee revenues for the second quarter and first
six months of fiscal 2004, as compared to the same periods of fiscal 2003, were
primarily due to growth in the installed base of software products within the
ACI Worldwide and Insession Technologies business units in the Americas and
EMEA.
The fiscal 2004 year-to-date decrease in services revenues, as compared to
the same period of fiscal 2003, resulted primarily from the decrease in IntraNet
services revenues. Since the majority of IntraNet's MTS customers have
successfully completed their migration from the Digital VAX-based MTS product to
the RS6000-based MTS product, corresponding services revenues associated with
the migration process have declined.
Expenses. Total operating expenses for the second quarter of fiscal 2004
increased $4.5 million, or 7.7%, as compared to the same period of fiscal 2003.
Total operating expenses for the first six months of fiscal 2004 increased $8.0
million, or 7.1%, as compared to the same period of fiscal 2003. The effect of
changes in foreign currency exchange rates was to increase overall expenses by
approximately $2.7 million and $5.0 million for the second quarter and first six
months of fiscal 2004, respectively, as compared to the same periods of fiscal
2003.
Cost of software license fees for the second quarter of fiscal 2004
decreased $0.1 million, or 1.6%, as compared to the same period of fiscal 2003.
Cost of software license fees for the first six months of fiscal 2004 increased
$0.6 million, or 4.9%, as compared to the same period of fiscal 2003. The
comparative six-month increase in cost of software license fees was due
primarily to increased commissions paid to distributors of the Company's
products along with higher product royalty fees paid on sales of third-party
products during the first quarter of fiscal 2004 as compared to the first
quarter of fiscal 2003, offset in part by a reduction in salaries resulting from
the shift of certain personnel to research and development ("R&D") activities in
the latter part of fiscal 2003.
Cost of maintenance and services for the second quarter of fiscal 2004
decreased $1.0 million, or 6.1%, as compared to the same period of fiscal 2003.
Cost of maintenance and services for the first six months of fiscal 2004
decreased $0.8 million, or 2.6%, as compared to the same period of fiscal 2003.
These comparative cost decreases were primarily due to a reduction in
compensation-related expenses resulting from a shift of certain personnel to R&D
activities in the latter part of fiscal 2003, offset somewhat by an increase in
costs to perform maintenance and services activities corresponding to an
increase in the related combined revenues.
R&D costs for the second quarter of fiscal 2004 increased $1.2 million, or
14.5%, as compared to the same period of fiscal 2003. R&D costs for the first
six months of fiscal 2004 increased $2.7 million, or 16.5%, as compared to the
same period of fiscal 2003. These comparative cost increases were due to the
shift of certain personnel from other areas of the Company to R&D activities in
the latter part of fiscal 2003.
Selling and marketing costs for the second quarter of fiscal 2004 increased
$2.6 million, or 19.2%, as compared to the same period of fiscal 2003. Selling
and marketing costs for the first six months of fiscal 2004 increased $2.7
million, or 9.7%, as compared to the same period of fiscal 2003. The large
increase in selling and marketing costs reflects increased sales commissions
caused primarily by higher sales volumes in the ACI Worldwide business unit
during the second quarter of fiscal 2004 as compared to the same period of
fiscal 2003.
General and administrative costs for the second quarter of fiscal 2004
increased $1.7 million, or 12.3%, as compared to the same period of fiscal 2003.
General and administrative costs for the first six months of fiscal 2004
increased $2.8 million, or 10.5%, as compared to the same period of fiscal 2003.
The increase in general and administrative costs is primarily due to increased
professional fees for legal, tax and other services, as well as increased
insurance costs for director and officer liability insurance.
18
Other Income and Expense. Interest expense for the second quarter of fiscal
2004 decreased $0.4 million, or 51.6%, as compared to the same period of fiscal
2003. Interest expense for the first six months of fiscal 2004 decreased $0.8
million, or 47.7%, as compared to the same period of fiscal 2003. The decrease
in interest expense is attributable to the reduction in debt from financing
agreements (balance at March 31, 2004 of $15.2 million as compared to $32.3
million at March 31, 2003).
Other expense for the second quarter of fiscal 2004 was $0.1 million as
compared to other income for the same period of fiscal 2003 of $0.1 million.
Other income for the first six months of fiscal 2004 was $2.1 million as
compared to other expense for the same period of fiscal 2003 of $1.1 million.
This six-month variance is primarily due to foreign currency gains and losses,
with the Company realizing $2.3 million in gains during the first six months of
fiscal 2004 as compared to $0.7 million in losses during the same period of
fiscal 2003.
Income Taxes. In fiscal 2003, the Company undertook an extensive review of
its overall tax position with the intent of reducing its effective tax rate.
Certain tax-saving strategies implemented during the latter part of fiscal 2003
have resulted in a lower effective tax rate for the second quarter and first six
months of fiscal 2004 as compared to the same periods of fiscal 2003. The
effective tax rate for the second quarter of fiscal 2004 was approximately 42.6%
as compared to 62.5% for the same period of fiscal 2003. The effective tax rate
for the first six months of fiscal 2004 was approximately 43.0% as compared to
57.3% for the same period of fiscal 2003. The improvement in the effective tax
rates for the second quarter and first six months of fiscal 2004, as compared to
the same periods during fiscal 2003, resulted primarily from recognition of R&D
credits, extraterritorial income exclusion benefits and expected utilization of
foreign tax credits. The Company continually reviews options that could reduce
its effective tax rate. However, there can be no assurance that the Company will
be able to further reduce its effective tax rate, and even if the Company is
successful in reducing the rate, there can be no assurance of the timing and
amount of any such reduction.
Each quarter, the Company evaluates its historical operating results as
well as its projections for the future to determine the realizability of the
deferred tax assets. As of March 31, 2004, the Company had deferred tax assets
of $15.2 million (net of a $52.5 million valuation allowance). The Company
analyzes the recoverability of its net deferred tax assets at each reporting
period. Because unforeseen factors may affect future taxable income, increases
or decreases to the valuation reserve may be required in future periods.
Liquidity and Capital Resources
As of March 31, 2004, the Company's principal sources of liquidity
consisted of $137.2 million in cash and cash equivalents.
The Company's net cash flows provided by operating activities for the first
six months of fiscal 2004 amounted to $21.5 million as compared to $13.9 million
provided by operating activities during the same period of fiscal 2003. The
increase in operating cash flows resulted primarily from increased net income.
The largest changes in operating assets and liabilities related to billed and
accrued receivables, deferred revenue and income taxes.
The Company's net cash flows provided by investing activities totaled $0.2
million for the first six months of fiscal 2004 as compared to $0.5 million used
in investing activities during the same period of fiscal 2003. During the first
six months of fiscal 2004, the Company received proceeds from sales of
marketable securities of $1.4 million as compared to $0.5 million for the same
period of fiscal 2003. During the first six months of fiscal 2004, the Company
purchased property and equipment of $1.0 million as compared to $0.9 million for
the same period of fiscal 2003.
The Company's net cash flows used in financing activities totaled $1.0
million for the first six months of fiscal 2004 as compared to $10.9 million
used in financing activities during the same period of fiscal 2003. During the
first six months of fiscal 2004 and 2003, payments made to third-party financial
institutions to repay factoring debts were $9.7 million and $11.0 million,
respectively. During the first six months of fiscal 2004, however, the Company
received $8.6 million from the exercise of stock options as compared to almost
no proceeds in the first six months of fiscal 2003.
The Company's net cash flows resulting from exchange rate fluctuations for
the first six months of fiscal 2004 amounted to $2.5 million as compared to $1.0
million during the same period of fiscal 2003.
19
The Company may decide to use cash in the future to acquire new products
and services or enhance existing products and services through acquisitions of
other companies, product lines, technologies and personnel, or through
investments in other companies. The Company believes that its existing sources
of liquidity, including cash on hand and cash provided by operating activities,
will satisfy the Company's projected short-term and long-term liquidity
requirements.
Factors That May Affect the Company's Future Results or the Market Price of the
Company's Common Stock
The Company operates in a rapidly changing technological and economic
environment that presents numerous risks. Many of these risks are beyond the
Company's control and are driven by factors that often cannot be predicted. The
following discussion highlights some of these risks.
o The Company's backlog estimate is based on management's assessment of
the customer contracts that exist as of the date the estimate is made.
A number of factors could result in actual revenues being less than the
amounts reflected in backlog. The Company's 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 their industries or geographic
locations, or the Company may experience delays in the development or
delivery of products or services specified in customer contracts.
Accordingly, there can be no assurance that contracts included in
recurring or non-recurring backlog will actually generate the specified
revenues or that the actual revenues will be generated within a
twelve-month period.
o The Company continues to evaluate the claims made in various lawsuits
filed against the Company and certain directors and officers relating
to its restatement of prior consolidated financial results. The Company
intends to defend these lawsuits vigorously, but cannot predict their
outcomes and is not currently able to evaluate the likelihood of its
success or the range of potential loss, if any. However, if the Company
were to lose any of these lawsuits or if they were not settled on
favorable terms, the judgment or settlement could have a material
adverse effect on its financial condition, results of operations and
cash flows.
The Company has insurance that provides an aggregate coverage of $20.0
million for the period during which the claims were filed, but cannot
evaluate at this time whether such coverage will be available or
adequate to cover losses, if any, arising out of these lawsuits. If
these policies do not adequately cover expenses and liabilities
relating to these lawsuits, the Company's financial condition, results
of operations and cash flows could be materially harmed. The Company's
certificate of incorporation provides that it will indemnify and
advance expenses to its directors and officers to the maximum extent
permitted by Delaware law. The indemnification covers any expenses and
liabilities reasonably incurred by a person, by reason of the fact that
such person is or was or has agreed to be a director or officer, in
connection with the investigation, defense and settlement of any
threatened, pending or completed action, suit, proceeding or claim. The
Company's certificate of incorporation authorizes the use of
indemnification agreements and the Company enters into such agreements
with its directors and certain officers from time to time. These
indemnification agreements typically provide for a broader scope of the
Company's obligation to indemnify the directors and officers than set
forth in the certificate of incorporation. The Company's contractual
indemnification obligations under these agreements are in addition to
the respective directors' and officers' rights under the certificate of
incorporation or under Delaware law. However, the indemnification
agreements typically eliminate the Company's obligation to pay a
director or officer for any claims to the extent that he or she has
previously received payment for such claims under any insurance policy,
the certificate of incorporation or otherwise.
Additional related suits against the Company may be commenced in the
future. The Company will fully analyze such suits and intends to
vigorously defend against them. There is a risk that the
above-described litigation, as well as any additional suits, could
result in substantial costs and divert management attention and
resources, which could adversely affect the Company's business,
financial condition and results of operations.
o New accounting standards, revised interpretations or guidance regarding
existing standards, or changes in the Company's business practices
20
could result in future changes to the Company's revenue recognition or
other accounting policies. These changes could have a material adverse
effect on the Company's business, financial condition and results of
operations.
o The Company is subject to income taxes, as well as non-income based
taxes, in the United States and in various foreign jurisdictions.
Significant judgment is required in determining the Company's worldwide
provision for income taxes and other tax liabilities. The Company
believes that implemented tax-saving strategies comply with applicable
tax law. However, positions taken by taxing authorities could differ
from the Company's positions, which could adversely affect the
Company's financial condition and results of operations.
The Company's positions in its amended income tax returns filed for its
1999 through 2002 tax years are the subject of an ongoing tax
examination by the Internal Revenue Service ("IRS"). This examination
may result in the IRS issuing proposed assessments. The Company
believes that its tax positions comply with applicable tax law and it
intends to defend its positions through the IRS appeals process.
However, if the IRS positions on certain issues are upheld after all
the Company's administrative and legal options are exhausted, a
material impact on the Company's financial condition and results of
operations could result.
One of the Company's foreign subsidiaries is the subject of a tax
examination by the local taxing authority. Other foreign subsidiaries
could face challenges from various foreign tax authorities. It is not
certain that the local authorities will accept the Company's tax
positions. The Company believes its tax positions comply with
applicable tax law and it intends to defend its positions. Differing
positions on certain issues could be upheld by foreign tax authorities,
which could adversely affect the Company's financial condition and
results of operations.
o No assurance can be given that operating results will not vary.
Fluctuations in quarterly operating results may result in volatility in
the Company's stock price. The Company's stock price may also be
volatile, in part, due to external factors such as announcements by
third parties or competitors, inherent volatility in the technology
sector and changing market conditions in the software industry. The
Company's stock price may also become volatile, in part, due to the
various lawsuits filed against the Company relating to its restatement
of prior consolidated financial results.
o The Company has historically derived a majority of its total revenues
from international operations and anticipates continuing to do so, and
is thereby subject to risks of conducting international operations
including: difficulties in staffing and management, reliance on
independent distributors, longer payment cycles, volatilities of
foreign currency exchange rates, compliance with foreign regulatory
requirements, variability of foreign economic conditions, and changing
restrictions imposed by U.S. export laws.
o The Company's BASE24-es product is a significant new product for the
Company. If the Company is unable to generate adequate sales of
BASE24-es, if market acceptance of BASE24-es is delayed, or if the
Company is unable to successfully deploy BASE24-es in production
environments, the Company's business, financial condition and results
of operations could be materially adversely affected.
o Historically, a majority of the Company's total revenues resulted from
licensing its BASE24 product line and providing related services and
maintenance. Any reduction in demand for, or increase in competition
with respect to, the BASE24 product line could have a material adverse
effect on the Company's financial condition and results of operations.
o The Company has historically derived a substantial portion of its
revenues from licensing of software products that operate on HP NonStop
servers. Prior to its merger with HP, Compaq Computer Corporation
announced a plan to consolidate its high-end performance enterprise
servers on the Intel Corp. Itanium microprocessor, which is expected to
be completed by 2005. Any reduction in demand for the HP NonStop
servers or in HP's ability to deliver products on a timely basis could
have a material adverse effect on the Company's financial condition and
results of operations. The Company has not determined whether
consolidation of the high-end servers will materially affect the
Company's business, financial condition or results of operations.
o The Company's business is concentrated in the banking industry, making
it susceptible to a downturn in that industry. Further, banks are
continuing to consolidate, decreasing the overall number of potential
buyers of the Company's products and services.
21
o The Company may acquire new products and services or enhance existing
products and services through acquisitions of other companies, product
lines, technologies and personnel, or through investments in other
companies. Any acquisition or investment may be subject to a number of
risks, including diversion of management time and resources, disruption
of the Company's ongoing business, difficulties in integrating
acquisitions, dilution to existing stockholders if the Company's common
stock is issued in consideration for an acquisition or investment, the
incurring or assuming of indebtedness or other liabilities in
connection with an acquisition, and lack of familiarity with new
markets, product lines and competition. The failure to manage
acquisitions or investments, or successfully integrate acquisitions,
could have a material adverse effect on the Company's business,
financial condition and results of operations.
o To protect its proprietary rights, the Company relies on a combination
of contractual provisions, including customer licenses that restrict
use of the Company's products, confidentiality agreements and
procedures, and trade secret and copyright laws. Despite such efforts,
the Company may not be able to adequately protect its proprietary
rights, and the Company's competitors may independently develop similar
technology, duplicate products or design around any rights the Company
believes to be proprietary. This may be particularly true in countries
other than the United States because some foreign laws do not protect
proprietary rights to the same extent as certain laws of the United
States. Any failure or inability of the Company to protect its
proprietary rights could materially adversely affect the Company.
o There has been a substantial amount of litigation in the software
industry regarding intellectual property rights. The Company
anticipates that software product developers and providers of
electronic commerce solutions could increasingly be subject to
infringement claims, and third parties may claim that the Company's
present and future products infringe their intellectual property
rights. Any claims, with or without merit, could be time-consuming,
result in costly litigation, cause product delivery delays or require
the Company to enter into royalty or licensing agreements. A successful
claim by a third party of intellectual property infringement by the
Company could compel the Company to enter into costly royalty or
license agreements, or require the Company to pay significant damages
or even require the Company to stop selling certain products. Royalty
or licensing agreements, if required, may not be available on terms
acceptable to the Company or at all, which could adversely affect the
Company's business.
o The Company's software products are complex. They may contain
undetected errors or failures when first introduced or as new versions
are released. This may result in loss of, or delay in, market
acceptance of the Company's products and a corresponding loss of sales
or revenues. Customers depend upon the Company's products for
mission-critical applications. Software product errors or failures
could subject the Company to product liability, as well as performance
and warranty claims, which could materially adversely affect the
Company's business, financial condition and results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company's market risk for the
six months ended March 31, 2004. The Company conducts business in all parts of
the world and is thereby exposed to market risks related to fluctuations in
foreign currency exchange rates. As a general rule, the Company's revenue
contracts are denominated in U.S. dollars. Thus, any decline in the value of
local foreign currencies against the U.S. dollar results in the Company's
products and services being more expensive to a potential foreign customer, and
in those instances where the Company's goods and services have already been
sold, may result in the receivables being more difficult to collect. The Company
at times enters into revenue contracts that are denominated in the country's
local currency, principally in the United Kingdom, Australia and Canada. This
practice serves as a natural hedge to finance the local currency expenses
incurred in those locations. The Company has not entered into any foreign
currency hedging transactions. The Company does not purchase or hold any
derivative financial instruments for the purpose of speculation or arbitrage.
Item 4. CONTROLS AND PROCEDURES
As noted in the Company's Form 10-K for the fiscal year ended September 30,
2003, management and KPMG have advised the Company's Audit Committee that during
the course of the fiscal 2003 audit of the Company's financial statements, they
noted deficiencies in internal controls related to timely reconciliation of
intercompany accounts and revenue recognition procedures pertaining to
documentation of software delivery, as well as evaluation and documentation of
customer creditworthiness. Deficiencies were also noted related to revenue
recognition on a
22
percentage-of-completion basis at one of the Company's subsidiaries.
Improvements in the Company's internal controls over financial reporting
related to the noted deficiencies have been implemented during the first six
months of fiscal 2004, and corrective actions have been initiated to address
any outstanding deficiencies at March 31, 2004.
KPMG has advised the Audit Committee that these internal control
deficiencies constitute reportable conditions and, collectively, a material
weakness as defined in Statement of Auditing Standards No. 60. Certain of these
internal control weaknesses may also indicate deficiencies in the Company's
disclosure controls. The Company has performed substantial additional procedures
designed to ensure that these internal control deficiencies do not lead to
material misstatements in its consolidated financial statements, and to enable
the timely completion of KPMG's quarterly review of its consolidated financial
statements. Based upon an evaluation as of March 31, 2004 of the Company's
disclosure controls and procedures, including these additional procedures, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures were effective as of such date to
provide reasonable assurance that information required to be disclosed by the
Company in reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported, completely and accurately,
within the time periods specified in Securities and Exchange Commission rules
and forms.
In connection with the requirements of Section 404 of the Sarbanes-Oxley
Act, the Company has commenced documentation, evaluation and testing of its
internal controls over financial reporting and has retained independent
consultants to assist in this process. The Company will continue to evaluate the
effectiveness of its disclosure controls and internal controls and procedures on
an ongoing basis, taking corrective action as appropriate.
23
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Class Action Litigation. In November 2002, two class action complaints were
filed in the U.S. District Court for the District of Nebraska (the "Court")
against the Company and certain individuals alleging violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder. Pursuant to a Court Order, the two complaints were consolidated as
Desert Orchid Partners v. Transaction Systems Architects, Inc., et al., with
Genesee County Employees' Retirement System designated as the Lead Plaintiff.
The First Amended Consolidated Class Action Complaint, filed on June 30, 2003
(the "Consolidated Complaint"), alleges that during the purported class period,
the Company and the named defendants misrepresented the Company's historical
financial condition, results of operations and its future prospects, and failed
to disclose facts that could have indicated an impending decline in the
Company's revenues. The Consolidated Complaint seeks unspecified damages,
interest, fees, costs and rescission. The class period alleged in the
Consolidated Complaint is January 21, 1999 through November 18, 2002. The
Company and the individual defendants filed a motion to dismiss the Consolidated
Complaint. In response, on December 15, 2003, the Court dismissed, without
prejudice, Gregory Derkacht, the Company's President and Chief Executive
Officer, as a defendant, but denied the motion to dismiss with respect to the
remaining defendants, including the Company. On February 6, 2004, the Court
entered a mediation reference order requiring the parties to mediate before a
private mediator. The parties held a mediation session on March 18, 2004, which
did not result in a settlement of the matter. Discovery has commenced and is in
the early stages.
Securities and Exchange Commission Investigation. On August 8, 2003, the
SEC Enforcement Division issued a formal order of private investigation in
connection with the Company's restatement of its prior consolidated financial
statements. The Company fully cooperated with the SEC in their investigation. On
April 14, 2004, the Company announced that it received a letter from the SEC
indicating that they had terminated their investigation and that no enforcement
action has been recommended.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on March 9, 2004. The
matters voted upon at such meeting and the number of shares cast for, against or
withheld, and abstained are as follows:
1. Election of directors to hold office until the next Annual Meeting of
Stockholders:
Nominee For Withheld
Roger K. Alexander 32,987,858 1,296,253
John D. Curtis 33,977,495 306,616
Gregory D. Derkacht 33,912,183 371,928
Jim D. Kever 33,061,856 1,222,255
Frank R. Sanchez 33,748,579 535,532
Harlan F. Seymour 33,236,114 1,047,997
John E. Stokely 33,610,989 673,122
2. Proposal to amend and restate the 2002 Non-Employee Director Stock
Option Plan (the "2002 Plan") to (i) provide for a one-year vesting period for
options granted under the 2002 Plan, excluding options currently outstanding,
(ii) provide for acceleration of vesting of options granted under the 2002
Plan, including options currently outstanding, upon a change in control of the
Company, and (iii) require stockholder approval for any repricing of options
issued under the 2002 Plan:
For: 27,736,365 Against: 2,720,415 Abstain: 3,827,331
3. Proposal to amend and restate the 1999 Employee Stock Purchase Plan
(the "ESPP") to (i) extend the term of the ESPP by four years to April 2008,
(ii) increase the number of shares of Class A Common Stock reserved for
issuance under the ESPP by 750,000 shares, to a total of 1,500,000 shares, and
(iii) enable the Board of Directors to reduce the discount applicable to the
award of rights to purchase stock under the ESPP:
For: 29,299,424 Against: 1,178,112 Abstain: 3,806,575
24
4. Proposal to ratify the appointment of KPMG LLP as the Company's
independent auditors for fiscal 2004:
For: 33,803,939 Against: 424,489 Abstain: 55,683
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of Chief Executive Officer pursuant to
SEC Rule 13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
SEC Rule 13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
On January 27, 2004, the Company filed a current report on Form 8-K
announcing that on January 27, 2004, the Company issued a press release
announcing its financial results for the quarterly period ending December 31,
2003. A copy of the press release was attached thereto.
On January 30, 2004, the Company filed a current report on Form 8-K
announcing that on January 30, 2004, the Company held a teleconference and web
cast discussing its financial performance for the quarterly period ending
December 31, 2003. A transcript of the teleconference/web cast was attached
thereto.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSACTION SYSTEMS ARCHITECTS, INC.
(Registrant)
Date: May 17, 2004 By: /s/ DAVID R. BANKHEAD
-------------------------------------
David R. Bankhead
Senior Vice President,
Chief Financial Officer and Treasurer
(principal financial officer)
26
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Gregory D. Derkacht, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Transaction Systems
Architects, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonable likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: May 17, 2004 By: /s/ GREGORY D. DERKACHT
----------------------------------
Gregory D. Derkacht
President, Chief Executive Officer
and Director
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, David R. Bankhead, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Transaction Systems
Architects, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonable likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: May 17, 2004 By: /s/ DAVID R. BANKHEAD
------------------------------------
David R. Bankhead
Senior Vice President,
Chief Financial Officer and Treasurer
Exhibit 32.1
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Transaction Systems Architects,
Inc. (the "Company") on Form 10-Q for the fiscal quarter ended March 31, 2004 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Gregory D. Derkacht, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1) The Report fully complies with the requirements of Sections 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Date: May 17, 2004 By: /s/ GREGORY D. DERKACHT
----------------------------------
Gregory D. Derkacht
President, Chief Executive Officer
and Director
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Transaction Systems Architects,
Inc. (the "Company") on Form 10-Q for the fiscal quarter ended March 31, 2004 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, David R. Bankhead, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1) The Report fully complies with the requirements of Sections 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Date: May 17, 2004 By: /s/ DAVID R. BANKHEAD
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David R. Bankhead
Senior Vice President,
Chief Financial Officer and Treasurer