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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, 2005
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 29, 2005, there were 37,691,569 shares of the registrant's Common
Stock, par value $.005 per share, outstanding (which includes 2,212 options to
purchase shares of the registrant's 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..................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 26
Item 4. Controls and Procedures......................................... 26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 27
Item 3. Defaults Upon Senior Securities................................. 28
Item 4. Submission of Matters to a Vote of Security Holders............. 28
Item 5. Other Information............................................... 28
Item 6. Exhibits........................................................ 29
Signature................................................................ 30
Exhibit Index............................................................ 31
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PART I - FINANCIAL INFORMATION
Page
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Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 2005 and
September 30, 2004..................................................... 2
Condensed Consolidated Statements of Operations for the three
and six months ended March 31, 2005 and 2004........................... 3
Condensed Consolidated Statements of Cash Flows for the six months
ended March 31, 2005 and 2004.......................................... 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,
2005 2004
----------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 87,499 $ 134,198
Marketable securities........................................................ 108,439 35,434
Billed receivables, net of allowances of $2,878 and $2,834, respectively..... 52,484 44,487
Accrued receivables.......................................................... 7,821 11,206
Recoverable income taxes..................................................... 3,462 11,524
Deferred income taxes, net................................................... - 230
Other........................................................................ 8,565 6,901
--------- ---------
Total current assets....................................................... 268,270 243,980
Property and equipment, net.................................................... 7,974 8,251
Software, net.................................................................. 1,861 1,454
Goodwill....................................................................... 46,905 46,706
Deferred income taxes, net..................................................... 28,999 22,943
Other.......................................................................... 2,941 2,124
--------- ---------
Total assets............................................................... $ 356,950 $ 325,458
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt - financing agreements............................... $ 3,799 $ 7,027
Accounts payable............................................................. 7,856 6,974
Accrued employee compensation................................................ 12,397 13,354
Deferred income taxes, net................................................... 363 -
Deferred revenue............................................................. 89,491 82,647
Accrued and other liabilities................................................ 10,601 9,890
--------- ---------
Total current liabilities.................................................. 124,507 119,892
Debt - financing agreements.................................................... 807 2,327
Deferred revenue............................................................... 16,348 15,427
Other.......................................................................... 1,314 851
--------- ---------
Total liabilities.......................................................... 142,976 138,497
--------- ---------
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred Stock, $.01 par value; 5,000,000 shares authorized; no shares
issued and outstanding at March 31, 2005 and September 30, 2004............ - -
Common Stock, $.005 par value; 70,000,000 shares authorized; 39,920,983
and 39,105,484 shares issued at March 31, 2005 and September 30, 2004,
respectively............................................................... 200 196
Treasury stock, at cost; 1,827,209 and 1,476,145 shares at March 31, 2005
and September 30, 2004, respectively....................................... (43,293) (35,258)
Additional paid-in capital................................................... 265,763 254,715
Retained earnings (accumulated deficit)...................................... 1,199 (22,917)
Accumulated other comprehensive loss, net.................................... (9,895) (9,775)
--------- ---------
Total stockholders' equity................................................. 213,974 186,961
--------- ---------
Total liabilities and stockholders' equity................................. $ 356,950 $ 325,458
========= =========
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,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Revenues:
Software license fees........................ $ 42,953 $ 42,380 $ 90,759 $ 83,613
Maintenance fees............................. 22,649 22,370 44,729 43,683
Services..................................... 10,024 11,777 20,744 23,248
-------- -------- -------- --------
Total revenues............................. 75,626 76,527 156,232 150,544
-------- -------- -------- --------
Expenses:
Cost of software license fees................ 5,725 6,189 11,631 12,828
Cost of maintenance and services............. 13,818 14,739 27,654 29,718
Research and development..................... 10,223 9,572 20,138 19,005
Selling and marketing........................ 15,368 16,127 30,669 29,917
General and administrative................... 14,449 15,834 28,012 29,502
-------- -------- -------- --------
Total expenses............................. 59,583 62,461 118,104 120,970
-------- -------- -------- --------
Operating income............................... 16,043 14,066 38,128 29,574
-------- -------- -------- --------
Other income (expense):
Interest income.............................. 864 349 1,448 872
Interest expense............................. (137) (381) (305) (912)
Other, net................................... 255 (131) (992) 2,074
-------- -------- -------- --------
Total other income (expense)............... 982 (163) 151 2,034
-------- -------- -------- --------
Income before income taxes..................... 17,025 13,903 38,279 31,608
Income tax provision........................... (5,832) (5,927) (14,163) (13,591)
-------- -------- -------- --------
Net income..................................... $ 11,193 $ 7,976 $ 24,116 $ 18,017
======== ======== ======== ========
Earnings per share information:
Weighted average shares outstanding:
Basic...................................... 38,121 36,846 37,949 36,613
======== ======== ======== ========
Diluted.................................... 38,903 38,027 38,731 37,835
======== ======== ======== ========
Earnings per share:
Basic...................................... $ 0.29 $ 0.22 $ 0.64 $ 0.49
======== ======== ======== ========
Diluted.................................... $ 0.29 $ 0.21 $ 0.62 $ 0.48
======== ======== ======== ========
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,
--------------------------
2005 2004
--------- ---------
Cash flows from operating activities:
Net income................................................................... $ 24,116 $ 18,017
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation............................................................... 1,945 2,196
Amortization............................................................... 441 1,333
Deferred income taxes...................................................... (5,285) 5,063
Tax benefit of stock options exercised..................................... 2,526 2,865
Changes in operating assets and liabilities:
Billed and accrued receivables, net...................................... (3,464) (11,432)
Other current and noncurrent assets...................................... (3,325) (3,447)
Accounts payable......................................................... 734 (1,489)
Recoverable income taxes................................................. 8,062 783
Deferred revenue......................................................... 6,044 6,141
Other current and noncurrent liabilities................................. (1,287) 1,509
--------- ---------
Net cash provided by operating activities.............................. 30,507 21,539
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment.......................................... (1,577) (1,003)
Purchases of software........................................................ (912) (170)
Net (purchases) sales of marketable securities............................... (73,097) 1,213
--------- ---------
Net cash provided by (used in) investing activities.................... (75,586) 40
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of Common Stock....................................... 487 476
Proceeds from exercises of stock options..................................... 7,892 8,577
Repurchases of Common Stock.................................................. (7,249) -
Payments on debt - financing agreements...................................... (4,984) (9,733)
Other........................................................................ 397 (291)
--------- ---------
Net cash used in financing activities.................................. (3,457) (971)
--------- ---------
Effect of exchange rate fluctuations on cash................................... 1,837 2,462
--------- ---------
Net increase in cash and cash equivalents...................................... (46,699) 23,070
Cash and cash equivalents, beginning of period................................. 134,198 78,959
--------- ---------
Cash and cash equivalents, end of period....................................... $ 87,499 $ 102,029
========= =========
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. 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, 2005, and for the three and six months ended March 31,
2005 and 2004, are unaudited and reflect all adjustments (consisting only of
normal recurring adjustments except as otherwise discussed herein) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. Certain amounts
previously reported have been reclassified to conform to current year
presentation.
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, 2004. The results of
operations for the three and six months ended March 31, 2005, are not
necessarily indicative of the results that may be achieved for the entire fiscal
year ending September 30, 2005.
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, 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," and Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements," as amended
by SAB 104, "Revenue Recognition." For software license arrangements for which
services rendered are not considered essential to the functionality of the
software, the Company recognizes revenue upon delivery, provided (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 maintenance fees
(also referred to as postcontract customer support or "PCS") or other products
or services, is deferred and subsequently recognized as the products are
delivered, or as PCS or other services are performed, with the residual
difference between the total arrangement fee and revenues allocated to
undelivered elements being allocated to the delivered element.
When a software license arrangement includes services to provide
significant modification or customization of software, those services are not
separable from the software and are accounted for in accordance with Accounting
Research Bulletin ("ARB") No. 45, "Long-Term Construction-Type Contracts," and
the relevant guidance provided
5
by SOP 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." Accounting for services delivered over time 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 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 beyond the Company's established payment terms, including those 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.
In the absence of customer-specific acceptance provisions, software license
arrangements generally grant customers a right of refund or replacement only if
the licensed software does not perform in accordance with its published
specifications. If the Company's product history supports an assessment by
management that the likelihood of non-acceptance is remote, the Company
recognizes revenue when all other criteria of revenue recognition are met.
For those software license arrangements that include customer-specific
acceptance provisions, such provisions are generally presumed to be substantive
and the Company does not recognize revenue until the earlier of the receipt of a
written customer acceptance, objective demonstration that the delivered product
meets the customer-specific acceptance criteria or the expiration of the
acceptance period. The Company also defers the recognition of revenue on
transactions involving less-established or newly released software products that
do not have a product history. The Company recognizes revenues on such
arrangements upon the earlier of receipt of written acceptance or the first
production use of the software by the customer.
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
6
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 license, 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 software license
with a duration of one year or less), the Company recognizes revenue for the
entire arrangement ratably over the PCS term.
Services. The Company provides various professional services to customers,
primarily project management, software implementation and software modification
services. Revenues from arrangements to provide professional services are
generally recognized as the related services are performed. For those
arrangements in which services revenue is deferred and the Company determines
that the costs of services are recoverable, the costs of providing such services
are also deferred and subsequently expensed in proportion to the services
revenue as it is recognized.
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.
Cash, Cash Equivalents and Marketable Securities
The Company has reviewed the classification of securities within its
investment portfolio and has reclassified its investments in auction rate notes
from cash equivalents to marketable securities. Although such auction rate notes
are rated as AAA or AA and are traditionally traded via the auction process
within a period of three months or less, the Company determined that
reclassification was appropriate due to the potential uncertainties inherent
with any auction process. This reclassification had no impact on current assets,
working capital or reported earnings. However, changes in marketable securities
are presented in the investing activities section of the cash flows, resulting
in reclassifications within that section of the consolidated statement of cash
flows. Marketable securities held by the Company as of March 31, 2005 and
September 30, 2004, consisting primarily of the aforementioned auction rate
notes, were $108.4 million and $35.4 million, respectively. The Company
considers all other highly liquid investments with original maturities of three
months or less to be cash equivalents.
The Company accounts for its investments in marketable securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
Company's portfolio consists of securities classified as available-for-sale,
which are recorded at fair market values based on quoted market prices. Net
unrealized gains and losses on marketable securities (excluding other than
temporary losses) are reflected in the consolidated financial statements as a
component of accumulated other comprehensive income. Net realized gains and
losses are computed on the basis of average cost and are recognized when
realized.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans under the
intrinsic value method in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and follows the
disclosure provisions of Statement of Financial Accounting Standard ("SFAS") No.
123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure." The
significant majority of the Company's stock options are subject only to
time-based vesting provisions and include exercise prices that are equal to the
fair market value of the Company's stock at the time of grant. Consequently,
no compensation expense is recorded for such options under the intrinsic value
method of APB Opinion No. 25. On March 9, 2005, the Company granted 400,000
stock options to Mr. Philip G. Heasley, President, Chief Executive Officer and
Director of the Company, that vest, if at all, at any time following the
second anniversary of the date of grant, upon attainment by the Company of a
market price of at least $50 per share for sixty consecutive trading days.
Pursuant to the requirements of the intrinsic value method of APB Opinion No.
25, the Company will
7
record compensation expense when it becomes probable that the target stock price
will be achieved. At March 31, 2005, no compensation expense has been recorded
for this grant of stock options.
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 using the fair value method 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, 2005 and 2004 would have approximated the
following pro forma amounts (in thousands, except per share amounts):
Three Months Ended Six Months Ended
March 31, March 31,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net income:
As reported.......................................... $ 11,193 $ 7,976 $ 24,116 $ 18,017
Deduct: stock-based employee compensation
expense determined under the fair value method
for all awards, net of related tax effects......... (663) (594) (1,293) (1,212)
Add: stock-based employee compensation expense
recorded under the intrinsic value method,
net of related tax effects......................... 76 33 95 52
-------- -------- -------- --------
Pro forma.............................................. $ 10,606 $ 7,415 $ 22,918 $ 16,857
======== ======== ======== ========
Earnings per share:
Basic, as reported................................... $ 0.29 $ 0.22 $ 0.64 $ 0.49
======== ======== ======== ========
Basic, pro forma..................................... $ 0.28 $ 0.20 $ 0.60 $ 0.46
======== ======== ======== ========
Diluted, as reported................................. $ 0.29 $ 0.21 $ 0.62 $ 0.48
======== ======== ======== ========
Diluted, pro forma................................... $ 0.27 $ 0.19 $ 0.59 $ 0.45
======== ======== ======== ========
As noted above, the Company has issued options that vest over time as well
as options that vest upon the Company's stock achieving a stated market price
level in the future. With respect to options granted that vest with the passage
of time, 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,
------------------ ------------------
2005 2004 2005 2004
------ ------ ------ ------
Expected life.......................... 4.1 3.9 4.1 4.1
Interest rate.......................... 4.0% 2.4% 4.0% 2.6%
Volatility............................. 46% 85% 47% 85%
Dividend yield......................... -- -- -- --
For purposes of SFAS No. 123, in order to determine the grant date fair
value of the 400,000 options granted to Mr. Heasley that vest based on the
achievement of certain market conditions, a Monte Carlo simulation model was
used to estimate (i) the probability that the performance goal will be achieved
and (ii) the length of time required to attain the target market price. The
Monte Carlo simulation model analyzed the Company's historical price movements,
changes in the value of The NASDAQ Stock Market over time, and the correlation
coefficient and beta between the Company's stock price and The NASDAQ Stock
Market. The Monte Carlo simulation indicated that on a risk-weighted basis these
stock options would vest 3.6 years after the date of grant. The expected vesting
period was then incorporated into a statistical regression analysis of the
historical exercise behavior of other Company senior executives to arrive at an
expected option life. With respect to options granted that vest based on the
achievement of certain marcket conditions, the grant date fair value of such
options was estimated using the Black-Scholes
8
option-pricing model with the following weighted-average assumptions:
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
2005 2004 2005 2004
------ ------ ------ ------
Expected life.......................... 5.5 N/A 5.5 N/A
Interest rate.......................... 4.2% N/A 4.2% N/A
Volatility............................. 46% N/A 46% N/A
Dividend yield......................... -- -- -- --
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. The assumptions used above in the Black-Scholes
option-pricing model and the Monte Carlo simulation model, and the results of
the Monte Carlo simulation model relating to stock price appreciation, are not
the Company's estimate or projection of future market conditions or stock
prices. The Company's actual future stock prices could differ materially.
Additional future awards are anticipated.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (Revised 2004), "Share-Based Payment" ("SFAS No. 123R"). This
revised accounting standard eliminates the ability to account for share-based
compensation transactions using the intrinsic value method in accordance with
APB Opinion No. 25 and requires instead that such transactions be accounted for
using a fair-value-based method. SFAS No. 123R requires public entities to
record noncash compensation expense related to payment for employee services by
an equity award, such as stock options, in their financial statements over the
requisite service period as of the first interim or annual period that begins
after June 15, 2005. In March 2005, the SEC issued Staff Accounting Bulletin
("SAB") 107, "Share-Based Payment," which includes recognition, measurement and
disclosure guidance for companies as they begin to implement SFAS No. 123R. SAB
107 does not modify any of SFAS No. 123R's conclusions or requirements. In April
2005, the SEC issued a new rule that allows companies to implement the
provisions of SFAS No. 123R at the beginning of their next fiscal year, instead
of the next reporting period, that begins after June 15, 2005. The Company does
not plan to adopt SFAS No. 123R prior to its first quarter of fiscal 2006. The
adoption of SFAS No. 123R is expected to have a negative impact on the Company's
consolidated results of operations and earnings per share. The Company has
historically provided pro forma disclosures pursuant to SFAS No. 123 and SFAS
No. 148 as if the fair value method of accounting for stock options had been
applied, assuming use of the Black-Scholes option-pricing model. Although not
currently anticipated, other assumptions may be utilized when SFAS No. 123R is
adopted.
2. Goodwill and Software
Changes to the carrying amount of goodwill during the first six months of
fiscal 2005 resulted from foreign currency translation adjustments. The carrying
amount and accumulated amortization of the Company's intangible assets that were
subject to amortization at each balance sheet date, consisting only of software,
were as follows (in thousands):
March 31, Sept. 30,
2005 2004
---------- ----------
Internally-developed software..................... $ 16,082 $ 15,929
Purchased software................................ 46,807 45,596
-------- --------
62,889 61,525
Less: accumulated amortization.................... (61,028) (60,071)
-------- --------
Software, net..................................... $ 1,861 $ 1,454
======== ========
The Company did not capitalize software development costs during the first
six months of fiscal 2005. The increase in carrying amount of
internally-developed software resulted primarily from foreign currency
translation adjustments. 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, 2005 totaled $0.2
9
million and $0.5 million, respectively. Based on capitalized software at March
31, 2005, and assuming no impairment of these software assets, estimated
amortization expense for the remainder of fiscal 2005 and in succeeding fiscal
years is as follows (in thousands):
Software
Amortization
------------
2005........................................... $ 452
2006........................................... 753
2007........................................... 584
2008........................................... 71
Thereafter..................................... 1
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, 2004
(in thousands):
Lease
Obligations
-----------
Balance, September 30, 2004................................... $ 548
Amounts paid year-to-date during fiscal 2005.................. (31)
Adjustments to previously recognized liabilities.............. (17)
-----
Balance, March 31, 2005....................................... $ 500
=====
An estimated lease termination loss of $0.5 million for the corporate
aircraft is the only remaining liability at March 31, 2005. The Company
continues to seek an exit to the corporate aircraft lease, and final settlement
of this obligation may result in adjustments to the liability.
4. Common Stock, Treasury Stock and Earnings Per Share
At the Annual Meeting of Stockholders held on March 8, 2005, the Company's
stockholders approved a proposal that increased the Company's authorized capital
stock; re-designated the Company's Class A Common Stock as "Common Stock"
without modification of the rights, preferences or privileges associated with
such shares; eliminated the Company's Class A Common Stock and Class B Common
Stock; and decreased the number of authorized shares of Preferred Stock.
Options to purchase shares of 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, 2005 and September 30, 2004 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, 2005 and 2004.
Included in Common Stock are 2,212 and 3,645 MDL options, respectively, as of
March 31, 2005 and September 30, 2004.
In December 2004, the Company announced that its Board of Directors
approved a stock repurchase program authorizing the Company, from time to time
as market and business conditions warrant, to acquire up to $80 million of its
Common Stock. The Company did not make any purchases under its stock repurchase
program during the first quarter of fiscal 2005. During the second quarter of
fiscal 2005, the Company repurchased 351,064 shares of its Common Stock at an
average price of $22.89 per share under this stock repurchase program, with cash
paid of $7.2 million by March 31, 2005 and remaining settlements of $0.8 million
occurring the first week of April on these repurchased shares. The maximum
approximate dollar value of shares that may yet be purchased under the stock
repurchase program is $72.0 million as of March 31, 2005. During the month of
April 2005, the Company repurchased an additional 402,205 shares of its Common
Stock under this stock repurchase program for approximately $8.7 million.
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
10
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 differences
between the basic and diluted EPS denominators for the three months ended March
31, 2005 and 2004, which amounted to 782,000 and 1,181,000 shares, respectively,
and for the six months ended March 31, 2005 and 2004, which amounted to 782,000
and 1,222,000 shares, respectively, were due to the dilutive effect of the
Company's outstanding stock options. Excluded from the computations of diluted
EPS for the three months ended March 31, 2005 and 2004 were antidilutive options
for 839,000 and 802,000 shares, respectively, and for the six months ended March
31, 2005 and 2004 were antidilutive options for 716,000 and 804,000 shares,
respectively, because the stock options were for contingently issuable shares or
the exercise prices of the corresponding stock options were greater than the
average market price of the Company's common shares during the respective
periods.
5. Comprehensive Income/Loss
The Company's components of other comprehensive income were as follows (in
thousands):
Three Months Ended Six Months Ended
March 31, March 31,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net income............................................. $ 11,193 $ 7,976 $ 24,116 $ 18,017
Other comprehensive income (loss):
Foreign currency translation adjustments............. 16 314 (73) (1,723)
Change in unrealized investment holding loss:
Unrealized holding gain (loss) arising during
the period....................................... 35 (2) (47) 77
Reclassification adjustment for loss included
in net income.................................... - 97 - 107
-------- -------- -------- --------
Comprehensive income................................... $ 11,244 $ 8,385 $ 23,996 $ 16,478
========= ======== ======== ========
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, 2004................................. $ (9,775) $ - $ (9,775)
Fiscal 2005 year-to-date activity........................... (73) (47) (120)
-------- ------- --------
Balance, March 31, 2005..................................... $ (9,848) $ (47) $ (9,895)
======== ======= ========
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 Worldwide. ACI Worldwide is the Company's largest business unit. Its
product line includes the Company's 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 Worldwide products offer high
value payments processing, bulk payments processing, global messaging and
continuous link settlement processing.
The Company's chief operating decision makers, together with other senior
management personnel, review
11
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.
Each distribution network has its own sales force. The Company supplements its
distribution networks with independent reseller and/or distributor arrangements.
No single customer accounted for more than 10% of the Company's consolidated
revenues during the three or six months ended March 31, 2005 or 2004.
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,
------------------- --------------------
2005 2004 2005 2004
-------- -------- --------- ---------
Revenues:
ACI Worldwide................................ $ 58,117 $ 57,875 $ 122,062 $ 115,591
Insession Technologies....................... 10,166 10,516 19,675 18,966
IntraNet Worldwide........................... 7,343 8,136 14,495 15,987
-------- -------- --------- ---------
$ 75,626 $ 76,527 $ 156,232 $ 150,544
======== ======== ========= =========
Operating income:
ACI Worldwide................................ $ 11,749 $ 9,140 $ 29,914 $ 21,240
Insession Technologies....................... 2,954 3,431 5,763 5,244
IntraNet Worldwide........................... 1,340 1,495 2,451 3,090
-------- -------- --------- ---------
$ 16,043 $ 14,066 $ 38,128 $ 29,574
======== ======== ========= =========
7. Income Taxes
It is the Company's policy to report income tax expense for interim
reporting periods using an estimated annual effective income tax rate. However,
the tax effects of significant or unusual items are not considered in the
estimated annual effective tax rate. The tax effect of such events is recognized
in the interim period in which the event occurs.
The effective tax rate for the second quarter of fiscal 2005 was
approximately 34.3% as compared to 42.6% for the same period of fiscal 2004. The
effective tax rate for the first six months of fiscal 2005 was approximately
37.0% as compared to 43.0% for the same period of fiscal 2004. The effective tax
rate for the second quarter and first six months of fiscal 2005 was primarily
impacted by the utilization of foreign tax credits and foreign taxes levied at
an effective rate lower than the US Federal tax rate. In addition, the Company's
effective tax rate continues to benefit from the extraterritorial income
exclusion. The improvement in the effective rate for the second quarter and
first six months of fiscal 2005, as compared to the same periods of fiscal 2004,
resulted primarily from increased utilization of foreign net operating losses,
lower than expected state income tax expense and decreased federal tax expense
related to tax-exempt interest income from municipal bonds.
The American Jobs Creation Act of 2004 (the "Jobs Act").
On October 22, 2004, the Jobs Act was enacted, which directly impacts the
Company in several areas. The Jobs Act reduces the carryback period of foreign
tax credits from two years to one year and extends the carryforward period from
five years to ten years.
The Company currently takes advantage of the extraterritorial income
exclusion ("EIE") in calculating its federal income tax liability. The Jobs Act
repealed the EIE, the benefit of which will be phased out over the next three
years, with 80% of the prior benefit allowed in calendar year 2005, 60% in 2006
and 0% allowed in years after 2006.
For tax years beginning after December 31, 2004, the Jobs Act replaced the
EIE with the new "manufacturing deduction" that allows a deduction from taxable
income of up to 9% of "qualified production activities income," not to
12
exceed taxable income. The deduction is phased in over a six-year period, with
the eligible percentage increasing from 3% in 2005 to 9% in 2010.
The Jobs Act includes a foreign earnings repatriation provision that
provides an 85% dividends received deduction for certain dividends received from
controlled foreign corporations. The Company currently intends to reinvest
foreign earnings indefinitely and accordingly, under APB Opinion No. 23,
"Accounting for Income Taxes - Special Areas," has not recorded deferred tax
liabilities for unpatriated foreign earnings. However, the Company will continue
to analyze the potential tax impact should it elect to repatriate foreign
earnings pursuant to the Jobs Act.
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 be likely to 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 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.
On July 1, 2004, lead plaintiff filed a motion for class certification
wherein, for the first time, lead plaintiff sought to add an additional class
representative, Roger M. Wally. On August 20, 2004, defendants filed their
opposition to the motion. On March 22, 2005, the Court issued an order
certifying the class. Discovery is continuing.
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
13
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.
Federal Derivative Litigation. On January 27, 2005, Norbert C. Abel, as
Trustee on behalf of the Norbert C. Abel Trust, instituted a derivative action
in federal District Court for the District of Nebraska against Gregory Derkacht,
Seymour F. Harlan (sic), Roger K. Alexander, Jim D. Kever, Frank R. Sanchez, Jim
Kerr, Charles E. Noell, III, Gregory J. Duman, Larry G. Fendley, William E.
Fisher, Dwight Hanson, and David C. Russell, as individual defendants, and the
Company, as nominal defendant (the "Abel matter"). The suit is a stockholder
derivative action that contains virtually the same factual allegations as
contained in the class action litigation described above. In addition, the suit
alleges that the individual defendants breached fiduciary duties by failing to
establish and maintain adequate accounting controls and, as to defendants
Fisher, Russell, Duman, Fendley, Hanson and Derkacht, for breach of fiduciary
duty and unjust enrichment based upon their receipt of salaries, bonuses and
stock options based upon the Company's alleged false performance. The Complaint
alleges Jim Kerr was a director of TSA. However, TSA has no record of an
individual by the name of Jim Kerr ever having served as a director. As of this
date, none of the defendants have been served with the Complaint. If the
plaintiff effects service, the defendants intend to seek a stay of the Abel
matter pending an outcome of the class action litigation, further intend to file
a motion to dismiss the Complaint, and otherwise intend to vigorously defend the
suit. Plaintiff does not specify what damages the Company has purportedly
suffered, but does allege that the amount in controversy exceeds $75,000, as it
must in order to maintain the action in federal court based upon diversity of
citizenship.
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, results, 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 adequately 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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
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 e-payments. In
addition to its own products, the Company distributes, or acts as a sales agent
for, software developed by third parties. Most of the Company's products are
sold and supported through
14
distribution networks covering three geographic regions - the Americas, EMEA
and Asia/Pacific. Each distribution network has its own sales force and
supplements this with independent reseller and/or distributor networks. The
Company's products and services are used principally by financial institutions,
retailers and e-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, the growth rate of the
e-payments industry and changes in the number and type of customers in the
financial services industry.
Several factors related to the Company's business may have a significant
impact on its operating results from quarter 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 maturity of
the software product licensed, payment terms, creditworthiness of the customer,
and timing of delivery or acceptance of the Company's products often cause
revenues related to sales generated in one period to be deferred and recognized
in later periods. For those arrangements in which services revenue is deferred,
related direct and incremental costs may also be deferred. In addition, while
the Company's 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 United States. Fluctuations in
currency exchange rates in a given period may result in the Company's
recognition of gains or losses for that period.
Certain industry-specific trends may also impact the Company's operating
results from quarter to quarter. For example, growth rates in ATM deployment and
transaction volumes are declining to flat in the U.S. while ATM markets outside
the U.S. are growing. The Company cannot determine with certainty how this
changing mix of ATM usage may impact the Company's future financial results.
Point-of-sale debit transaction volumes are increasing and this may result in
increased sales of the Company's e-payment solutions. Additionally, increased
levels of fraud and identity theft may result in increased demand for the
Company's fraud detection and payment authorization products. Increasing
regulatory requirements imposed upon financial services companies, and other
companies utilizing e-payment solutions, may also drive increased demand for
certain of the Company's products.
Consolidation activity among financial institutions has increased in recent
years. While it is difficult to assess the impact of this consolidation
activity, management believes that recent consolidation activity may have
negatively impacted the Company's financial results. Continuing consolidation
activity may negatively impact the Company throughout fiscal 2005. While all
three of the Company's business units are affected by this consolidation
activity, the Company's IntraNet Worldwide business unit is particularly
impacted because its customer base is concentrated within the largest financial
institutions, which have been party to several of the recent consolidations.
However, it is difficult to predict to what extent increased consolidation
activity will continue, and if it does, whether it will have an overall
long-term positive or negative impact on the Company's future operating results.
There are several potential negative effects of increased consolidation
activity. Continuing consolidation of financial institutions may result in a
fewer number of existing and potential customers for the Company's products and
services. Consolidation of two of the Company's customers could result in
reduced revenues if the combined entity were to negotiate greater volume
discounts or discontinue use of certain of the Company's products. Additionally,
if a non-customer and a customer combine and the combined entity in turn decides
to forego future use of the Company's products, the Company's revenue would
decline. Conversely, the Company could benefit from the combination of a
non-customer and a customer when the combined entity continues usage of the
Company's products and, as a larger combined entity, increases its demand for
the Company's products and services.
The Company continues to evaluate strategies intended to improve its
overall effective tax rate. The Company's degree of success in this regard and
related acceptance by taxing authorities of tax positions taken, as well as
changes to tax laws in the United States and in various foreign jurisdictions,
could cause the Company's effective tax rate to fluctuate from period to 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
15
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 estimates and assumptions used in the preparation of its
consolidated financial statements. Actual results could differ from those
estimates.
The following key accounting policies are impacted significantly by
judgments, assumptions and estimates used in the preparation of the consolidated
financial statements. See Note 1 to the consolidated financial statements for a
further discussion of revenue recognition and other significant accounting
policies.
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, 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 collectibility issues may exist, 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
more-established ("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 current period 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 whereas revenues from mature products, such as
BASE24, are generally recognized upon delivery of the product, provided all
other conditions for revenue recognition have been met. For those arrangements
where revenues are being deferred and the Company determines that related direct
and incremental costs are recoverable, such costs are deferred and subsequently
expensed as the revenues are recognized. Newer products are continually
evaluated by Company management and product development personnel to determine
when any such product meets specific internally defined product maturity
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. A change in product classification (from newer to
mature) would allow the Company to recognize revenues from sales of the product
upon delivery of the product rather than upon acceptance or first production use
by the customer, resulting in earlier recognition of revenues from sales of that
product, as well as related costs, provided all other revenue recognition
criteria have been met.
When a software license arrangement includes services to provide
significant modification or customization of software, those services are not
considered to be separable from the software. Accounting for such services
delivered over time 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 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
16
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 would also change, which in turn would impact the
level of the Company's future provision for doubtful accounts. Specifically, if
the financial condition 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 be recorded to reserve for potential future losses. Any
such additional provisions would reduce operating income in the periods in
which they were recorded.
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 credit
carryforwards, 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, 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 a 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.
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 Worldwide. 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. 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,
------------------- --------------------
2005 2004 2005 2004
-------- -------- --------- ---------
Revenues:
ACI Worldwide................................ $ 58,117 $ 57,875 $ 122,062 $ 115,591
Insession Technologies....................... 10,166 10,516 19,675 18,966
IntraNet Worldwide........................... 7,343 8,136 14,495 15,987
-------- -------- --------- ---------
$ 75,626 $ 76,527 $ 156,232 $ 150,544
======== ======== ========= =========
Operating income:
ACI Worldwide................................ $ 11,749 $ 9,140 $ 29,914 $ 21,240
Insession Technologies....................... 2,954 3,431 5,763 5,244
IntraNet Worldwide........................... 1,340 1,495 2,451 3,090
-------- -------- --------- ---------
$ 16,043 $ 14,066 $ 38,128 $ 29,574
======== ======== ========= =========
17
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 revenues will occur within the next 12 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, 2005 (in thousands):
Non-
Recurring Recurring Total
--------- --------- ---------
ACI Worldwide........................ $ 132,834 $ 50,624 $ 183,458
Insession Technologies............... 22,265 8,119 30,384
IntraNet Worldwide................... 11,597 5,134 16,731
--------- --------- ---------
$ 166,696 $ 63,877 $ 230,573
========= ========= =========
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 12-month period.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (Revised 2004), "Share-Based Payment" ("SFAS No. 123R"). This
revised accounting standard eliminates the ability to account for share-based
compensation transactions using the intrinsic value method in accordance with
APB Opinion No. 25 and requires instead that such transactions be accounted for
using a fair-value-based method. SFAS No. 123R requires public entities to
record noncash compensation expense related to payment for employee services by
an equity award, such as stock options, in their financial statements over the
requisite service period as of the first interim or annual period that begins
after June 15, 2005. In March 2005, the SEC issued Staff Accounting Bulletin
("SAB") 107, "Share-Based Payment," which included recognition, measurement and
disclosure guidance for companies as they begin to implement SFAS No. 123R. SAB
107 does not modify any of SFAS No. 123R's conclusions or requirements. In April
2005, the SEC issued a new rule that allows companies to implement the
provisions of SFAS No. 123R at the beginning of their next fiscal year, instead
of the next reporting period, that begins after June 15, 2005. The Company does
not plan to adopt SFAS No. 123R prior to its first quarter of fiscal 2006. The
adoption of SFAS No. 123R is expected to have a negative impact on the Company's
consolidated results of operations and earnings per share. The Company has
historically provided pro forma disclosures pursuant to SFAS No. 123 and SFAS
No. 148 as if the fair value method of accounting for stock options had been
applied, assuming use of the Black-Scholes option-pricing model. Although not
currently anticipated, other assumptions may be utilized when SFAS No. 123R is
adopted.
18
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,
------------------------------------ ------------------------------------
2005 2004 2005 2004
----------------- ----------------- ----------------- -----------------
% of % of % of % of
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
-------- ------- -------- ------- -------- ------- -------- -------
Revenues:
Initial license fees (ILFs)........ $ 24,619 32.6% $ 20,191 26.4% $ 54,152 34.7% $ 40,389 26.8%
Monthly license fees (MLFs)........ 18,334 24.2 22,189 29.0 36,607 23.4 43,224 28.7
-------- ----- -------- ----- -------- ----- -------- -----
Software license fees.............. 42,953 56.8 42,380 55.4 90,759 58.1 83,613 55.5
Maintenance fees................... 22,649 29.9 22,370 29.2 44,729 28.6 43,683 29.0
Services........................... 10,024 13.3 11,777 15.4 20,744 13.3 23,248 15.5
-------- ----- -------- ----- -------- ----- -------- -----
Total revenues................... 75,626 100.0 76,527 100.0 156,232 100.0 150,544 100.0
-------- ----- -------- ----- -------- ----- -------- -----
Expenses:
Cost of software license fees...... 5,725 7.6 6,189 8.1 11,631 7.5 12,828 8.5
Cost of maintenance and services... 13,818 18.3 14,739 19.2 27,654 17.7 29,718 19.8
Research and development........... 10,223 13.5 9,572 12.5 20,138 12.9 19,005 12.6
Selling and marketing.............. 15,368 20.3 16,127 21.1 30,669 19.6 29,917 19.9
General and administrative......... 14,449 19.1 15,834 20.7 28,012 17.9 29,502 19.6
-------- ----- -------- ----- -------- ----- -------- -----
Total expenses................... 59,583 78.8 62,461 81.6 118,104 75.6 120,970 80.4
-------- ----- -------- ----- -------- ----- -------- -----
Operating income..................... 16,043 21.2 14,066 18.4 38,128 24.4 29,574 19.6
-------- ----- -------- ----- -------- ----- -------- -----
Other income (expense):
Interest income.................... 864 1.2 349 0.5 1,448 0.9 872 0.6
Interest expense................... (137) (0.2) (381) (0.5) (305) (0.2) (912) (0.6)
Other, net......................... 255 0.3 (131) (0.2) (992) (0.6) 2,074 1.4
-------- ----- -------- ----- -------- ----- -------- -----
Total other income (expense)..... 982 1.3 (163) (0.2) 151 0.1 2,034 1.4
-------- ----- -------- ----- -------- ----- -------- -----
Income before income taxes........... 17,025 22.5 13,903 18.2 38,279 24.5 31,608 21.0
Income tax provision................. (5,832) (7.7) (5,927) (7.8) (14,163) (9.1) (13,591) (9.0)
-------- ----- -------- ----- -------- ----- -------- -----
Net income........................... $ 11,193 14.8% $ 7,976 10.4% $ 24,116 15.4% $ 18,017 12.0%
======== ===== ======== ===== ======== ===== ======== =====
Revenues. Total revenues for the second quarter of fiscal 2005 decreased
$0.9 million, or 1.2%, as compared to the same period of fiscal 2004. Total
revenues for the first six months of fiscal 2005 increased $5.7 million, or
3.8%, as compared to the same period of fiscal 2004. The three-month decrease is
the result of a $1.8 million, or 14.9%, decrease in services revenues, offset by
a $0.6 million, or 1.4%, increase in software license fee revenues and a $0.3
million, or 1.2%, increase in maintenance fee revenues. The six-month increase
is the result of a $7.2 million, or 8.5%, increase in software license fee
revenues and a $1.0 million, or 2.4%, increase in maintenance fee revenues,
offset by a $2.5 million, or 10.8%, decrease in services revenues.
For the first six months of fiscal 2005, as compared to the same period of
fiscal 2004, ACI Worldwide's software license fee revenues increased by $6.0
million. This increase resulted from a sales mix during the current six-month
period, and primarily in the first quarter, that was more heavily weighted
toward the BASE24 product line, including increased license renewals and
capacity upgrades in the Americas region, allowing an increased comparative
percentage of sales to be recognized as revenues during the quarter rather than
being deferred, as well as recognition of software license fees from customer
acceptance of a significant BASE24-es application during the first quarter of
fiscal 2005. As previously disclosed, there was also a significant license
renewal that occurred within the EMEA region during the first quarter of fiscal
2004 which resulted in an increase in ACI Worldwide's software license fee
revenues during that quarter. Insession Technologies' software license fee
revenues were $0.5 million higher for the first six months of fiscal 2005, as
compared to the same period of fiscal 2004, primarily due to increased activity
related to its transactional data management products. For the first six months
of fiscal 2005, as compared to the same period of fiscal 2004, IntraNet
Worldwide's software license fee revenues increased by $0.7 million, primarily
due to a large Money Transfer System ("MTS") product contract
19
extension that was recognized during the first quarter of fiscal 2005.
The increase in maintenance fee revenues during the first six months of
fiscal 2005 as compared to the same period of fiscal 2004 is primarily due to
growth in the installed base of software products within the ACI Worldwide and
Insession Technologies' business units.
The decrease in services revenues during the second quarter of fiscal 2005,
as compared to the same period of fiscal 2004, resulted primarily from decreased
ACI Worldwide services revenues. Within this business unit, a greater percentage
of services work during the current quarter related to the Company's newer
BASE24-es product, which resulted in deferral of the corresponding services
revenues until a time whereupon acceptance or first production use of the
product occurs. The decrease in services revenues during the first six months of
fiscal 2005, as compared to the same period of fiscal 2004, resulted primarily
from a decrease in IntraNet Worldwide services revenues, as well as the deferral
of ACI Worldwide services revenues during the second quarter as previously
discussed. Since all of IntraNet Worldwide's MTS customers have successfully
completed their migration from the HP AlphaServer-based MTS product (previously
referred to as the Digital VAX-based MTS product) to the IBM sSeries-based MTS
product (previously referred to as 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 2005
decreased $2.9 million, or 4.6%, as compared to the same period of fiscal 2004.
Total operating expenses for the first six months of fiscal 2005 decreased $2.9
million, or 2.4%, as compared to the same period of fiscal 2004.
Cost of software license fees for the second quarter of fiscal 2005
decreased $0.5 million, or 7.5%, as compared to the same period of fiscal 2004.
Cost of software license fees for the first six months of fiscal 2005 decreased
$1.2 million, or 9.3%, as compared to the same period of fiscal 2004. The
decreases in cost of software license fees during both the second quarter and
first six months of fiscal 2005, as compared to the same periods of fiscal 2004,
were primarily due to higher commissions paid to distributors of the Company's
products during those periods in fiscal 2004. The Company increased its use of
outside contractors within the ACI Worldwide business unit during the second
quarter of fiscal 2005, offsetting some of the benefits received from the
decrease in distributor commission costs.
Cost of maintenance and services for the second quarter of fiscal 2005
decreased $0.9 million, or 6.2%, as compared to the same period of fiscal 2004.
Cost of maintenance and services for the first six months of fiscal 2005
decreased $2.1 million, or 6.9%, as compared to the same period of fiscal 2004.
The decreases in cost of maintenance and services during both the second quarter
and first six months of fiscal 2005, as compared to the same periods of fiscal
2004, were primarily due to the deferral of direct and incremental costs related
to installation services for the Company's newer BASE24-es product. For
arrangements in which services revenues are deferred and the Company determines
that the costs of services are recoverable, such costs are deferred and
subsequently expensed in proportion to the services revenues as they are
recognized. The six-month decrease also resulted from higher third-party royalty
fees during the first quarter of fiscal 2004, which were offset by higher
expenses in the first six months of fiscal 2005 resulting from changes in
foreign currency exchange rates.
R&D costs for the second quarter of fiscal 2005 increased $0.7 million, or
6.8%, as compared to the same period of fiscal 2004. R&D costs for the first six
months of fiscal 2005 increased $1.1 million, or 6.0%, as compared to the same
period of fiscal 2004. The increases in R&D costs during both the second quarter
and the first six months of fiscal 2005, as compared to the same periods of
fiscal 2004, resulted primarily from increased personnel assigned to R&D
activities and higher expenses in the first six months of fiscal 2005 resulting
from changes in foreign currency exchange rates.
Selling and marketing costs for the second quarter of fiscal 2005 decreased
$0.8 million, or 4.7%, as compared to the same period of fiscal 2004. Selling
and marketing costs for the first six months of fiscal 2005 increased $0.8
million, or 2.5%, as compared to the same period of fiscal 2004. The decrease in
selling and marketing costs during the second quarter of fiscal 2005, as
compared to the same period of fiscal 2004, was primarily due to reduced
marketing commissions and other compensation costs in the ACI Worldwide business
unit during the second quarter of fiscal 2005 resulting primarily from regional
sales mix differences and modified compensation plan structures. The Company
restructured certain compensation plan payouts during the past year for sales
activity related to items such as license renewals, capacity upgrades and
services. The increase in selling and marketing costs during the first six
20
months of fiscal 2005, as compared to the same period of fiscal 2004, was
primarily due to higher expenses in the first six months of fiscal 2005
resulting from changes in foreign currency exchange rates, primarily in the EMEA
region, as well as increases in travel-related expenses during the first quarter
of fiscal 2005.
General and administrative costs for the second quarter of fiscal 2005
decreased $1.4 million, or 8.7%, as compared to the same period of fiscal 2004.
General and administrative costs for the first six months of fiscal 2005
decreased $1.5 million, or 5.1%, as compared to the same period of fiscal 2004.
The decreases in general and administrative costs during both the second quarter
and first six months of fiscal 2005, as compared to the same periods of fiscal
2004, were primarily due to decreased professional fees for legal, tax and other
services, reduced costs of director and officer liability insurance, and a
reduction in bad debt expenses.
Other Income and Expense. Interest income for the second quarter of fiscal
2005 increased $0.5 million, or 147.6%, as compared to the same period of fiscal
2004. Interest income for the first six months of fiscal 2005 increased $0.6
million, or 66.1%, as compared to the same period of fiscal 2004. The increases
in interest income during the second quarter and first six months of fiscal
2005, as compared to the same periods of fiscal 2004, are attributable to higher
cash balances, marginal increases in interest rates and global consolidation of
excess cash amounts into higher yielding investments.
Interest expense for the second quarter of fiscal 2005 decreased $0.2
million, or 64.0%, as compared to the same period of fiscal 2004. Interest
expense for the first six months of fiscal 2005 decreased $0.6 million, or
66.6%, as compared to the same period of fiscal 2004. While no new debt under
financing agreements has been incurred by the Company during the past two fiscal
years, scheduled payments continue to be made, decreasing outstanding debt
balances and corresponding interest expense.
Other income and expense consists of foreign currency gains and losses, and
other non-operating items. Other income for the second quarter of fiscal 2005
was $0.3 million as compared to other expense for the same period of fiscal 2004
of $0.1 million. Other expense for the first six months of fiscal 2005 was $1.0
million as compared to other income for the same period of fiscal 2004 of $2.1
million. These amounts were primarily attributable to foreign currency gains or
losses realized by the Company, with minimal other non-operating items incurred
during these fiscal periods.
Income Taxes. It is the Company's policy to report income tax expense for
interim reporting periods using an estimated annual effective income tax rate.
However, the tax effects of significant or unusual items are not considered in
the estimated annual effective tax rate. The tax effect of such events is
recognized in the interim period in which the event occurs.
The effective tax rate for the second quarter of fiscal 2005 was
approximately 34.3% as compared to 42.6% for the same period of fiscal 2004. The
effective tax rate for the first six months of fiscal 2005 was approximately
37.0% as compared to 43.0% for the same period of fiscal 2004. The effective tax
rate for the second quarter and first six months of fiscal 2005 was primarily
impacted by the utilization of foreign tax credits and foreign taxes levied at
an effective rate lower than the US Federal tax rate. In addition, the Company's
effective tax rate continues to benefit from the extraterritorial income
exclusion. The improvement in the effective rate for the second quarter and
first six months of fiscal 2005, as compared to the same periods of fiscal 2004,
resulted primarily from increased utilization of foreign tax losses, lower than
expected state income tax expense and decreased federal tax expense related to
municipal interest income.
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, 2005, the Company had net deferred tax
assets of $28.6 million (net of a $51.7 million valuation allowance). The
Company's valuation allowance primarily relates to foreign net operating loss
carryforwards and, to a lesser extent, foreign tax credit carryforwards and
capital loss carryforwards. The valuation allowance is based on the extent to
which management believes these carryforwards could expire unused due to the
Company's historical or projected losses in certain of its foreign subsidiaries.
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.
The American Jobs Creation Act of 2004 (the "Jobs Act"). On October 22,
2004, the Jobs Act was
21
enacted, which directly impacts the Company in several areas. The Jobs Act
reduces the carryback period of foreign tax credits from two years to one year
and extends the carryforward period from five years to ten years.
The Company currently takes advantage of the extraterritorial income
exclusion ("EIE") in calculating its federal income tax liability. The Jobs Act
repealed the EIE, the benefit of which will be phased out over the next three
years, with 80% of the prior benefit allowed in calendar year 2005, 60% in 2006
and 0% allowed in years after 2006.
For tax years beginning after December 31, 2004, the Jobs Act replaced the
EIE with the new "manufacturing deduction" that allows a deduction from taxable
income of up to 9% of "qualified production activities income," not to exceed
taxable income. The deduction is phased in over a six-year period, with the
eligible percentage increasing from 3% in 2005 to 9% in 2010. Therefore, the
Company expects to benefit from the "manufacturing deduction" beginning in its
fiscal year ending September 30, 2006.
The Jobs Act includes a foreign earnings repatriation provision that
provides an 85% dividends received deduction for certain dividends received from
controlled foreign corporations. The Company currently intends to reinvest
foreign earnings indefinitely and accordingly, under APB Opinion No. 23,
"Accounting for Income Taxes - Special Areas," has not recorded deferred tax
liabilities for unpatriated foreign earnings. However, the Company will continue
to analyze the potential tax impact should it elect to repatriate foreign
earnings pursuant to the Jobs Act.
Liquidity and Capital Resources
As of March 31, 2005, the Company's principal sources of liquidity
consisted of $195.9 million in cash, cash equivalents and marketable securities.
In December 2004, the Company announced that its Board of Directors approved a
stock repurchase program authorizing the Company, from time to time as market
and business conditions warrant, to acquire up to $80 million of its Common
Stock, and that it intends to use existing cash and cash equivalents to fund
these repurchases. The Company did not make any purchases under its stock
repurchase program during the first quarter of fiscal 2005. During the second
quarter of fiscal 2005, the Company repurchased 351,064 shares of its Common
Stock at an average price of $22.89 per share under this stock repurchase
program, with cash paid of $7.2 million by March 31, 2005 and remaining
settlements of $0.8 million occurring the first week of April on these
repurchased shares. The maximum approximate dollar value of shares that may yet
be purchased under the stock repurchase program is $72.0 million as of March 31,
2005. During the month of April 2005, the Company repurchased an additional
402,205 shares of its Common Stock under this stock repurchase program for
approximately $8.7 million. The Company may also 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's net cash flows provided by operating activities for the first
six months of fiscal 2005 amounted to $30.5 million as compared to $21.5 million
provided by operating activities during the same period of fiscal 2004. The
increase in operating cash flows in the first six months of fiscal 2005 as
compared to the same period of fiscal 2004 resulted primarily from increased net
income, as well as changes in billed and accrued receivables and recoverable
income taxes offset by decreases in operating cash flows resulting from changes
in deferred income taxes.
The Company's net cash flows used in investing activities totaled $75.6
million for the first six months of fiscal 2005 as compared to minimal amounts
provided by investing activities during the same period of fiscal 2004. During
the first six months of fiscal 2005, the Company increased its holdings of
marketable securities by $73.1 million and purchased $2.5 million of software,
property and equipment. During the first six months of fiscal 2004, the Company
purchased $1.2 million of software, property and equipment and received net
proceeds from sales of marketable securities of $1.2 million.
The Company's net cash flows used in financing activities totaled $3.5
million for the first six months of fiscal 2005 as compared to $1.0 million used
in financing activities during the same period of fiscal 2004. In the past, an
important element of the Company's cash management program was the factoring of
future revenue streams, whereby interest in its future monthly license payments
under installment or long-term payment arrangements is transferred on a
non-recourse basis to third-party financial institutions in exchange for cash.
In the first six months of fiscal 2005, the Company made scheduled payments to
the third-party financial institutions totaling $5.0 million, used cash of $7.2
million to purchase shares of Common Stock under the Company's stock repurchase
program and received proceeds of $7.9 million from exercises of stock options.
In the first six months of fiscal 2004, the Company
22
made scheduled payments to the third-party financial institutions totaling $9.7
million and received proceeds of $8.6 million from exercises of stock options.
The Company also realized an increase in cash of $1.8 million for the first
six months of fiscal 2005 as compared to $2.5 million during the same period of
fiscal 2004 pertaining to foreign exchange rate variances.
The Company believes that its existing sources of liquidity, including cash
on hand, marketable securities and cash provided by operating activities, will
satisfy the Company's projected liquidity requirements for the foreseeable
future.
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. Included in the backlog estimate 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
revenues will occur within the next 12 months. 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 12-month
period.
o In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment."
This revised accounting standard requires most public entities to
record noncash compensation expense related to payment for employee
services by equity awards, such as stock options, in their inancial
statements commencing in the first annual or interim period that begins
after June 15, 2005. In April 2005, the SEC issued a new rule that
allows companies to implement the provisions of SFAS No. 123R at the
beginning of their next fiscal year, instead of the next reporting
period, that begins after June 15, 2005. The Company does not plan to
adopt this revised accounting standard prior to its first quarter of
fiscal 2006. The adoption of SFAS No. 123R and the noncash expense that
will be recorded thereby will have a negative impact on the Company's
results of operations and will reduce the Company's earnings per share.
Future grants of stock options will also increase the noncash expenses
the Company must record, which will negatively impact the Company's
results of operations and earnings per share.
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. In
addition, the Company has benefitted from, and expects to continue to
benefit from, implemented tax-saving strategies. The Company believes
that implemented tax-saving strategies comply with applicable tax
law. However, taxing authorities could disagree with the Company's
positions. If the taxing authorities decided to challenge any of the
Company's tax positions and were successful in such challenges, the
Company's financial condition and/or results of operations could be
adversely affected.
The Company's tax positions in its income tax returns filed for its
1999 through 2003 tax years are the subject of an ongoing examination
by the Internal Revenue Service ("IRS"). The Company believes that its
tax positions comply with applicable tax law. This examination has
resulted in the IRS issuing proposed adjustments, the majority of which
relate to the timing of revenue recognition. The IRS could issue
additional proposed adjustments that could adversely affect the
Company's financial condition and/or results of operations.
Three of the Company's foreign subsidiaries are the subject of tax
examinations by the local taxing authorities. 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
23
positions comply with applicable tax law and intends to vigorously
defend its positions. However, differing positions on certain issues
could be upheld by foreign tax authorities, which could adversely
affect the Company's financial condition and/or results of operations.
o The Company's business is concentrated in the financial services
industry, making it susceptible to a downturn in that industry.
Consolidation activity among financial institutions has increased in
recent years. There are several potential negative effects of
increased consolidation activity. Continuing consolidation of
financial institutions may decrease the number of existing and
potential customers for the Company's products and services.
Consolidation of two of the Company's customers could result in
reduced revenues if the combined entity were to negotiate greater
volume discounts or discontinue use of certain of the Company's
products. Additionally, if a non-customer and a customer combine and
the combined entity in turn decided to forego future use of the
Company's products, the Company's revenues would decline.
o No assurance can be given that operating results will not vary from
quarter to quarter, and any 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 developments in 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 revenues from
international operations and anticipates continuing to do so, and is
thereby subject to risks of conducting international operations. One
of the principal risks associated with international operations is
potentially adverse movements of foreign currency exchange rates. The
Company's exposures resulting from fluctuations in foreign currency
exchange rates may change over time as the Company's business evolves
and could have an adverse impact on the Company's financial condition
and/or results of operations. The Company has not entered into any
derivative instruments or hedging contracts to reduce exposure to
adverse foreign currency changes. Other potential risks associated
with the Company's international operations include difficulties in
staffing and management, reliance on independent distributors, longer
payment cycles, potentially unfavorable changes to foreign tax rules,
compliance with foreign regulatory requirements, reduced protection
of intellectual property rights, variability of foreign economic
conditions, changing restrictions imposed by U.S. export laws, and
general economic and political conditions in the countries where the
Company sells its products and services.
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/or
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/or results of
operations.
o The Company has historically derived a substantial portion of its
revenues from licensing of software products that operate on
Hewlett-Packard ("HP") NonStop servers. Any reduction in demand for HP
NonStop servers, or any change in strategy by HP related to support of
its NonStop servers, could have a material adverse effect on the
Company's financial condition and/or results of operations.
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/or results of
operations.
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
24
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/or 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, or 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 upon their intellectual property
rights. Third parties may also claim, and the Company is aware that
at least one third party has claimed on several occasions, that the
third party's intellectual property rights are being infringed by the
Company's customers' use of a business process method which utilizes
the Company's products in conjunction with other products. Any claim
against the Company, 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. Claims
against the Company's customers related to the Company's products,
whether or not meritorious, could harm the Company's reputation and
reduce demand for its products. The Company could also be required to
defend or indemnify its customers against such claims. 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, pay significant damages or even 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 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/or cash flows.
o 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.
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/or results of operations.
25
o From time to time, the Company is involved in litigation relating to
claims arising out of its operations. Any claims, with or without
merit, could be time-consuming and result in costly litigation. Failure
to successfully defend against these claims could result in a material
adverse effect on the Company's business, financial condition and/or
results of operations.
o Beginning in fiscal 2005, Section 404 of the Sarbanes-Oxley Act of
2002 will require the Company's annual report on Form 10-K to include
(1) a report on management's assessment of the effectiveness of the
Company's internal controls over financial reporting, (2) a statement
that the Company's independent auditor has issued an attestation
report on management's assessment of the Company's internal controls
over financial reporting, and (3) a report by the Company's
independent auditor on their assessment of the effectiveness of the
Company's internal controls over financial reporting. There are no
assurances that the Company will discover and remediate all
deficiencies in its internal controls, including any significant
deficiencies or material weaknesses, as it implements new
documentation and testing procedures to comply with the Section 404
reporting requirements. If the Company is unable to remediate such
deficiencies or is unable to complete the work necessary to properly
evaluate its internal controls over financial reporting, there is a
risk that management and/or the Company's independent auditor may not
be able to conclude that the Company's internal controls over
financial reporting are effective. If the Company reports any such
deficiencies, negative publicity and/or a decline in the Company's
stock price could result.
o New accounting standards, revised interpretations or guidance regarding
existing standards, or changes in the Company's business practices
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/or 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, 2005. 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 Australia, Canada, the United Kingdom and other
European countries. 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.
The primary objective of the Company's cash investment policy is to
preserve principal without significantly increasing risk. Based on the Company's
cash investments and interest rates on these investments at March 31, 2005, a
hypothetical ten percent increase or decrease in interest rates would not have a
material impact on the Company's financial position, results of operations
and/or cash flows.
Item 4. CONTROLS AND PROCEDURES
The Company's management, under the supervision of and with the
participation of the Chief Executive Officer and Chief Financial Officer,
performed an evaluation of the effectiveness of the Company's disclosure
controls and procedures (as defined in Rules 13a-15 and 15d-15 under the
Exchange Act) as of the end of the period covered by this report. Based on that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures were
effective, as of the end of the period covered by this report, to provide
reasonable assurance that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, completely and accurately, within the time periods
specified in SEC rules and forms.
No changes occurred in the Company's internal controls over financial
reporting during the second quarter of fiscal 2005 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
controls over financial reporting.
26
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time the Company is involved in various litigation matters
arising in the ordinary course of its business. None of these matters, either
individually or in the aggregate, currently is material to the Company except as
reported in the Company's annual report on Form 10-K for the year ended
September 30, 2004 or in the Company's quarterly report on Form 10-Q for the
quarterly period ended December 31, 2004 and there were no material developments
to such matters.
Plus Tecnologia
On August 31, 2001, Plus Tecnologia ("Plus") filed a complaint in Circuit
Court in the Sixth Judicial Circuit for Pinellas County, Florida against
Transaction Systems Architects, Inc., ACI Worldwide Inc., ACI Worldwide
(Florida) Inc. n/k/a ACI Worldwide (Texas) LLC, Open Systems Solutions, Inc.,
the predecessor to ACI Worldwide (Florida) Inc., and ACI Worldwide (Mexico) S.A.
de C.V. The complaint alleges breach of contract, breach of non-disclosure
agreements, tortious interference with prospective business relationships of
Plus and an additional cause of concert of action. Plus has claimed various
items of damages, including lost profits in excess of $30,000,000, interest,
fees, costs and punitive damages. The Company believes that the complaint is
without merit and is vigorously defending this lawsuit.
On April 21, 2005, the Company filed a Motion for Sanctions seeking to
dismiss the complaint with prejudice and to impose sanctions against Plus
alleging that Plus has engaged in improper, unfair, unethical and fraudulent
actions. The Company has alleged that Plus purposefully, knowingly and willfully
engaged in this activity to thwart discovery in these proceedings. An
evidentiary hearing on the Company's motion has not yet been scheduled. The
Company cannot predict the outcome of this matter; however, at this time, the
Company's management does not believe that the outcome will have a material
adverse impact on the Company's financial condition, results of operations or
cash flows.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information regarding the Company's
repurchases of its Common Stock during the second quarter of fiscal 2005:
Total Maximum
Number of Approximate
Shares Dollar Value
Purchased of Shares that
Total as Part of May Yet Be
Number of Average Publicly Purchased
Shares Price Paid Announced Under the
Period Purchased per Share Program Program
- -------------------------------------- --------- ---------- ---------- --------------
January 1 through January 31, 2005 - - - $ 80,000,000
February 1 through February 28, 2005 - - - $ 80,000,000
March 1 through March 31, 2005 351,064 $ 22.89 351,064 $ 71,965,000
------- -------
Total (1) 351,064 $ 22.89 351,064
======= =======
- -----------------------------------------------------------------------------------------
27
(1) On December 13, 2004, the Company announced that its Board of Directors
approved a stock repurchase program authorizing the Company, from time
to time as market and business conditions warrant, to acquire up to $80
million of its Common Stock, and that it intends to use existing cash
and cash equivalents to fund these repurchases. There is no guarantee as
to the exact number of shares that will be repurchased by the Company.
Repurchased shares would be returned to the status of authorized but
unissued shares of Common Stock. In March 2005, the Company's Board of
Directors approved a plan under Rule 10b5-1 of the Securities Exchange
Act of 1934 to facilitate the repurchase of shares of Common Stock under
the existing stock repurchase program. Under the Company's Rule 10b5-1
plan, the Company has delegated authority over the timing and amount of
repurchases to an independent broker who does not have access to inside
information about the Company. Rule 10b5-1 allows the Company, through
the independent broker, to purchase Company shares at times when the
Company ordinarily would not be in the market because of self-imposed
trading blackout periods, such as the time immediately preceding the end
of the fiscal quarter through a period three business days following the
Company's quarterly earnings release. During the second quarter of
fiscal 2005, all shares were purchased in open-market transactions.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on March 8, 2005. 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 30,568,338 4,271,003
John D. Curtis 30,616,759 4,222,582
Gregory D. Derkacht 30,671,590 4,167,751
Jim D. Kever 30,645,487 4,193,854
Harlan F. Seymour 30,574,308 4,265,033
John E. Stokely 30,545,181 4,294,160
2. Proposal to amend the Company's Certificate of Incorporation to increase
the number of authorized shares of the Company's common stock from
50,000,000 to 70,000,000 shares and otherwise to simplify the capitalization
of the Company:
For: 30,976,037 Against: 3,393,031 Abstain: 470,273 Broker Non-Vote: - 0 -
3. Proposal to amend the Company's Certificate of Incorporation to modernize
the Certificate of Incorporation and to provide for certain other clarifying
amendments:
For: 29,197,356 Against: 5,154,129 Abstain: 487,856 Broker Non-Vote: - 0 -
4. Proposal to adopt the Company's 2005 Equity and Performance Incentive Plan:
For: 23,697,292 Against: 6,236,109 Abstain: 531,861 Broker Non-Vote:4,374,079
5. Proposal to ratify the appointment of KPMG LLP as the Company's independent
auditors for fiscal 2005:
For: 29,845,938 Against: 4,540,222 Abstain: 453,181 Broker Non-Vote: - 0 -
Item 5. OTHER INFORMATION
Not applicable.
28
Item 6. EXHIBITS
Exhibit
No. Description
- ------- ----------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Company
(filed on January 26, 2005 as Annex A to the Company's Proxy
Statement for its 2005 Annual Meeting (File No. 000-25346), and
incorporated herein by reference)
10.1 Transaction Systems Architects, Inc. 1999 Employee Stock Purchase
Plan, as amended February 20, 2001, March 9, 2004 and March 8, 2005
10.2 Employment Agreement by and between the Company and Philip G. Heasley,
dated March 8, 2005 (filed on March 10, 2005 as Exhibit 10.1 to the
Company's Current Report on Form 8-K (File No. 000-25346) and
incorporated herein by reference)
10.3 Stock Option Agreement (under the Company's 2005 Equity and
Performance Incentive Plan) by and between the Company and Philip G.
Heasley, dated March 9, 2005 (filed on March 10, 2005 as Exhibit
10.2 to the Company's Current Report on Form 8-K (File No.
000-25346) and incorporated herein by reference)
10.4 Change in Control Severance Compensation Agreement by and between the
Company and Philip G. Heasley, dated March 8, 2005 (filed on March
10, 2005 as Exhibit 10.3 to the Company's Current Report on Form 8-K
(File No. 000-25346) and incorporated herein by reference)
10.5 2005 Equity and Performance Incentive Plan (filed on January 26, 2005
as Annex B to the Company's Proxy Statement for its 2005 Annual
Meeting (File No. 000-25346), and incorporated herein by reference)
10.6 Form of Nonqualified Stock Option Agreement - Non-Employee Director
(under the Company's 2005 Equity and Performance Incentive Plan)
(filed on March 10, 2005 as Exhibit 10.5 to the Company's Current
Report on Form 8-K (File No. 000-25346) and incorporated herein by
reference)
10.7 Amendment to 2002 Non-Employee Director Stock Option Plan, Amendment
No. 1 to Stock Option Agreement (dated as of May 8, 2002) and
Amendment No. 1 to Stock Option Agreement (dated as of March 9,
2004) (filed on March 10, 2005 as Exhibit 10.6 to the Company's
Current Report on Form 8-K (File No. 000-25346) and incorporated
herein by reference)
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
- -------------------------------------
* This certification is not deemed "filed" for purposes of Section 18 of
the Securities Exchange Act of 1934, or otherwise subject to the
liability of that section. Such certification will not be deemed to be
incorporated by reference into any filing under the Securities Act of
1933 or the Securities Exchange Act of 1934, except to the extent that
the Company specifically incorporates it by reference.
29
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 6, 2005 By: /s/ DAVID R. BANKHEAD
-------------------------------------
David R. Bankhead
Senior Vice President,
Chief Financial Officer and Treasurer
(principal financial officer)
30
EXHIBIT INDEX
Exhibit
No. Description
- ------- ----------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Company
(filed on January 26, 2005 as Annex A to the Company's Proxy
Statement for its 2005 Annual Meeting (File No. 000-25346), and
incorporated herein by reference)
10.1 Transaction Systems Architects, Inc. 1999 Employee Stock Purchase
Plan, as amended February 20, 2001, March 9, 2004 and March 8, 2005
10.2 Employment Agreement by and between the Company and Philip G. Heasley,
dated March 8, 2005 (filed on March 10, 2005 as Exhibit 10.1 to the
Company's Current Report on Form 8-K (File No. 000-25346) and
incorporated herein by reference)
10.3 Stock Option Agreement (under the Company's 2005 Equity and
Performance Incentive Plan) by and between the Company and Philip G.
Heasley, dated March 9, 2005 (filed on March 10, 2005 as Exhibit
10.2 to the Company's Current Report on Form 8-K (File No.
000-25346) and incorporated herein by reference)
10.4 Change in Control Severance Compensation Agreement by and between the
Company and Philip G. Heasley, dated March 8, 2005 (filed on March
10, 2005 as Exhibit 10.3 to the Company's Current Report on Form 8-K
(File No. 000-25346) and incorporated herein by reference)
10.5 2005 Equity and Performance Incentive Plan (filed on January 26, 2005
as Annex B to the Company's Proxy Statement for its 2005 Annual
Meeting (File No. 000-25346), and incorporated herein by reference)
10.6 Form of Nonqualified Stock Option Agreement - Non-Employee Director
(under the Company's 2005 Equity and Performance Incentive Plan)
(filed on March 10, 2005 as Exhibit 10.5 to the Company's Current
Report on Form 8-K (File No. 000-25346) and incorporated herein by
reference)
10.7 Amendment to 2002 Non-Employee Director Stock Option Plan, Amendment
No. 1 to Stock Option Agreement (dated as of May 8, 2002) and
Amendment No. 1 to Stock Option Agreement (dated as of March 9,
2004) (filed on March 10, 2005 as Exhibit 10.6 to the Company's
Current Report on Form 8-K (File No. 000-25346) and incorporated
herein by reference)
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
- -------------------------------------
* This certification is not deemed "filed" for purposes of Section 18 of
the Securities Exchange Act of 1934, or otherwise subject to the
liability of that section. Such certification will not be deemed to be
incorporated by reference into any filing under the Securities Act of
1933 or the Securities Exchange Act of 1934, except to the extent that
the Company specifically incorporates it by reference.
31
Exhibit 10.1
TRANSACTION SYSTEMS ARCHITECTS, INC.
1999 Employee Stock Purchase Plan
as Amended by the Stockholders on
20 February 2001
as Amended by the Stockholders on
9 March 2004
and as Amended by the Compensation Committee on
8 March 2005
TRANSACTION SYSTEMS ARCHITECTS, INC.
1999 Employee Stock Purchase Plan
(as amended and restated by the Stockholders on 20 February 2001
as amended and restated by the Stockholders on 9 March 2004
and as amended by the Compensation Committee on 8 March 2005)
Section 1. Purpose. The purpose of the Transaction Systems Architects,
Inc. Employee Stock Purchase Plan (the "Plan") is to provide an opportunity to
current employees of Transaction Systems Architects, Inc. (the "Company") or any
Participating Subsidiary of the Company to purchase its Common Stock. By
encouraging such stock ownership, the Company seeks to attract, retain and
motivate such employees to devote their best efforts to the financial success of
the Company. It is intended that the Plan qualify as an "employee stock purchase
plan" under Section 423 of the Internal Revenue Code of 1986, as amended (the
"Code"). In addition, the Plan authorizes the grant of Options and issuance of
Common Stock which do not qualify under Section 423 of the Code pursuant to
sub-plans adopted by the Committee designed to achieve desired tax or other
objectives in particular locations outside the United States.
Section 2. Definitions. For purposes of the Plan, the following terms
used herein shall have the following meanings, unless a different meaning is
clearly required by the context.
2.01. "Base Pay" shall mean the monthly pay rate of a salaried Employee
or the hourly pay rate of an hourly Employee. Base Pay shall not include
payments for overtime, allowances, bonuses and other special payments,
commissions and other marketing incentive payments.
2.02. "Board of Directors" shall mean the Board of Directors of the
Company.
2.03. "Committee" shall mean the committee of the Board of Directors
referred to in Section 5 hereof.
2.04. "Common Stock" shall mean the Common Stock of the Company.
2.05. "Employee" shall mean any person, including any officer or
employee-director of the Company or any Participating Subsidiary of the Company,
who is actively and customarily employed for 20 hours or more per week by the
Company or a Participating Subsidiary of the Company.
2.06. "Fair Market Value" shall mean the closing price (last trade) on
the date in question, as such price is reported by the National Association of
Securities Dealers on the NASDAQ National Market or any successor system for a
share of Common Stock.
2.07. "Offering" shall have the meaning described in Section 4.01.
2.08. "Option" shall mean any option to purchase Common Stock granted
to an Employee pursuant to this Plan.
2.09. "Participant" shall mean any Employee that is eligible to
participate in the Plan in accordance with Section 3 and who elects to
participate in the Plan.
2.10 "Participating Subsidiary of the Company" means any Subsidiary of
the Company that has been designated by the Board of Directors as eligible to
participate in the Plan with respect to its Employees.
2.11. "Participation Period" shall mean the period beginning on 1 April
1999 and ending on 31 July 1999 and each three-month period thereafter during
the term of the Plan. The Plan shall be in effect from 1 April 1999, to 30 April
2008. There shall be thirty-two Participation Periods during the term of the
Plan.
2.12. "Subsidiary of the Company" means any foreign or U.S. domestic
corporation (other than the Company) in an unbroken chain of corporations
beginning with the Company if each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50 percent or more of
the total combined voting power of all classes of stock in one of the other
corporations in such chain.
Section 3. Eligibility and Participation. The following provisions
shall govern the eligibility of Employees to participate in the Plan.
3.01. Eligibility. Any Employee who shall have completed three months
of employment with the Company or any Participating Subsidiary of the Company
shall be eligible to participate in the Offering as of the first day of the next
Participation Period. The Committee may also determine that a designated group
of highly compensated Employees are ineligible to participate in the Plan so
long as the excluded category fits within the definition of "highly compensated
employee" in Code Section 414(q). The Committee may impose restrictions on
eligibility and participation of Employees who are officers or directors to
facilitate compliance with federal or state securities laws or foreign laws.
3.02. Restrictions on Participation. Notwithstanding any provisions of
the Plan to the contrary, no Employee shall be granted an Option under the Plan:
(a) if, immediately after such grant, such Employee would own stock
possessing five percent or more of the total combined voting power or value of
all classes of stock of the Company or any Subsidiary of the Company, such
ownership to be determined by applying the rules of Section 424(d) of the Code
and treating stock which the Employee may purchase under outstanding options as
stock owned by the Employee; or
(b) which would permit his or her rights to purchase stock under the
Plan (and under any other plans of the Company or any Subsidiary of the Company
qualifying under Section 423 of the Code) to accrue at a rate which exceeds the
lesser of (i) $25,000 or (ii) 10% of the Employee's Base Pay of fair market
value of the stock (determined on the basis of the fair market value of the
stock at the time such Option is granted) for each calendar year in which such
Option is outstanding.
3.03. Commencement of Participation. A Participant may elect to
participate by executing the enrollment form prescribed for such purpose by the
Committee which enrollment form may include an application for an account with
the Company's designated broker. The enrollment form shall be filed with the
Committee at any time prior to the first day of the next Participation Period.
The Participant shall designate on the enrollment form the percentage of his or
her Base Pay which he or she elects to have withheld for the purchase of Common
Stock, which may be any whole percentage from 1% to 10%. Once enrolled, a
Participant will continue to participate in the Plan for each succeeding
Participation Period until he or she terminates participation or ceases to
qualify as an Employee.
Section 4. Common Stock Subject to the Plan.
4.01. Number of Shares. The total number of shares of Common Stock for
which Options may be granted under this Plan shall not exceed in the aggregate
1,500,000 (one million five hundred thousand) shares of Common Stock. The Plan
will be implemented by an Offering of shares of Common Stock (the "Offering").
The Offering shall begin on 1 April 1999 and shall terminate on 30 April 2008.
4.02. Reissuance. The shares of Common Stock that may be subject to
Options granted under this Plan may be either authorized and unissued shares of
Common Stock or shares of Common Stock reacquired at any time and now or
hereafter held as treasury stock of the Company as the Committee may determine.
In the event that any outstanding Option expires or is terminated for any
reason, the shares allocable to the unexercised portion of such Option may again
be subject to an Option granted under this Plan.
Section 5. Administration of the Plan.
5.01. Committee. The Plan shall be administered by the Compensation
Committee of the Board of Directors, or such other committee established by the
Board of Directors (the "Committee") consisting of no less than two persons. The
Committee shall be appointed from time to time by, and shall serve at the
pleasure of, the Board of Directors.
5.02. Interpretation. The Committee shall be authorized (i) to
interpret the Plan and decide any matters arising thereunder, and (ii) to adopt
such rules, regulations and procedures, not inconsistent with the provisions of
the Plan, as it may deem advisable to carry out the purpose of this Plan.
5.03. Finality. The interpretation and construction by the Committee of
any provision of the Plan, any Option granted hereunder or any agreement
evidencing any such Option shall be final, conclusive and binding upon all
parties.
5.04. Voting by Committee Members. Only members of the Committee shall
vote on any matter affecting the administration of the Plan or the granting of
Options under the Plan.
5.05. Expenses. All expenses and liabilities incurred by the Committee
in the administration of the Plan shall be borne by the Company. The Committee
may employ attorneys, consultants, accountants or other persons in connection
with the administration of the Plan. The Company, and its officers and
directors, shall be entitled to rely upon the advice, opinions or valuations of
any such persons. No member of the Board of Directors or the Committee shall be
liable for any action, determination or interpretation taken or made in good
faith with respect to the Plan or any Option granted hereunder.
5.06 Non-U.S. Participation. The Committee may adopt rules or
procedures relating to the operation and administration of the Plan to
accommodate the specific requirements of local laws and procedures. Without
limiting the generality of the foregoing, the Committee is specifically
authorized to adopt rules and procedures regarding handling of payroll
deductions, payment of interest, conversion of local currency, payroll tax and
withholding procedures which vary with local requirements. With respect to any
Participating Subsidiary which employs Participants who reside outside of the
United States, and notwithstanding anything herein to the contrary, the
Committee may in its sole discretion amend or vary the terms of the Plan in
order to conform such terms with the requirements of local law or to meet the
objectives and purpose of the Plan, and the Committee may, where appropriate,
establish one or more sub-plans to reflect such amended or varied provisions
which sub-plans may be designed to be outside the scope of Code Section 423. The
provisions of such sub-plans may take precedence over other provisions of the
Plan, with the exception of Section 4.01, but unless otherwise superseded by the
terms of such sub-plan, the provisions of the Plan shall govern the operation of
such sub-plan.
5.07 Changing of Percentage. The percentage (i.e. 85%) provided for
within Subsections 7.02(iii) and 7.03 herein may be changed by and at the sole
discretion of the Committee, without further approval of the Company's
Stockholders, to any whole percentage that is not less than 85% and not greater
than 100%; provided, however, that the Committee shall provide all Participants
with written notice of any such change in advance of the Participation Period in
which such change is to first take effect.
Section 6. Payroll Deductions.
6.01. Amount of Deduction. At the time a Participant files his or her
enrollment form authorizing payroll deductions pursuant to Section 3.03, he or
she shall elect to have deductions made from his or her Base Pay on each payday
during the time he or she is a Participant in the Offering.
6.02. Participant's Account; No Interest. All payroll deductions made
for a Participant shall be credited to his or her account under the Plan. A
Participant may not make any separate cash payment into such account. No
interest shall accrue on amounts credited to a Participant's account under the
Plan, regardless of whether or not the funds in such account are ultimately used
to acquire shares of Common Stock, unless required under local law.
6.03. Changes in Payroll Deductions. A Participant may change the rate
of payroll deductions, effective for the next Participation Period, by filing a
new enrollment form with the Committee at any time prior to the first day of the
Participation Period for which such change is to be effective. A Participant may
also discontinue his or her participation in the Plan by notifying the Committee
in accordance with the procedures established by the Committee for such purpose.
6.04. Use of Funds. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions unless
required under local law.
Section 7. Grant of Option.
7.01. Terms and Conditions. A description of the terms and conditions
of the Plan shall be made available to Participants in such form and manner as
the Committee shall approve.
7.02. Number of Option Shares. On the first business day of each
Participation Period during the term of the Plan, each Participant shall be
deemed to have been granted an Option, subject to the limitations of Section
3.02, to purchase a maximum number of shares of Common Stock during the
Participation Period equal to the number obtained by multiplying (i) the
percentage of the Employee's Base Pay for that Participation Period which he or
she has elected to have withheld pursuant to Section 6.01 by (ii) the Employee's
Base Pay for that Participation Period and dividing the resulting product by
(iii) 85% of the Fair Market Value of one share of Common Stock of the Company
on the last business day of that Participation Period provided, however, that in
no event shall the total number of shares of Common Stock for which Options are
granted exceed the number of shares set forth in Section 4.01. If the total
number of shares of Common Stock for which Options would have been granted to
Participants pursuant to the preceding sentence would have exceeded the number
of shares set forth in Section 4.01 (absent the proviso in the preceding
sentence), the Committee shall make a pro rata allocation of the shares of
Common Stock available for grant to Participants' Options in such manner as it
shall determine, in its sole discretion, to be reasonably practicable, uniform
and equitable.
7.03. Option Price. The Option price per share of the Common Stock
subject to an Option shall be 85% of the Fair Market Value of one share of
Common Stock on the last business day of the applicable Participation Period.
7.04. Interest in Option Stock. A Participant shall have no interest in
shares of Common Stock covered by his or her Option until such Option has been
exercised.
7.05. Transferability. Neither payroll deductions credited to a
Participant's account nor Options granted to a Participant shall be transferable
other than by will or the laws of descent and distribution and, during a
Participant's lifetime, an Option shall be exercisable only by the Participant.
7.06 Tax Withholding. In the event that the Company or any Subsidiary
of the Company is required to withhold any Federal, state, local or foreign
taxes in respect of any compensation income realized by the Participant as a
result of any "disqualifying disposition" of any shares of Common Stock acquired
upon exercise of an Option granted hereunder, the Company or such Subsidiary of
the Company shall deduct from any payments of any kind otherwise due to such
Participant the aggregate amount of such Federal, state, local or foreign taxes
required to be so withheld or, if such payments are insufficient to satisfy such
Federal, state, local or foreign taxes, such Participant will be required to pay
to the Company or such Subsidiary of the Company, or make other arrangements
satisfactory to the Company or such Subsidiary of the Company regarding payment
to the Company or such Subsidiary of the Company of, the aggregate amount of any
such taxes. All matters with respect to the total amount of taxes to be withheld
in respect of any such compensation income shall be determined by the Committee
in its sole discretion. Subject to approval by the Committee, a Participant may
elect to have such tax withholding obligation satisfied, in whole or in part, by
(i) authorizing the Company to withhold from shares of Common Stock to be
acquired upon exercise of an Option, a number of shares of Common Stock with an
aggregate Fair Market Value (as of the date the withholding is effected) that
would satisfy the withholding amount due, or (ii) transferring to the Company
shares of Common Stock owned by the Participant with an aggregate Fair Market
Value (as of the date the withholding is effected) that would satisfy the
withholding amount due.
Section 8. Exercise of Options.
8.01. Automatic Exercise. Unless a Participant gives written notice to
the Company of withdrawal pursuant to Section 9.01, his or her Option to acquire
Common Stock with payroll deductions credited to his or her account for any
Participation Period will be deemed to have been exercised automatically on the
last business day of the applicable Participation Period for the purchase of the
number of full shares of Common Stock which the accumulated payroll deductions
credited to his or her account at that time will purchase at the applicable
Option price (but not in excess of the number of shares of Common Stock for
which Options have been granted to the Employee pursuant to Section 7.02), and
any excess credited to his or her account at that time will be carried forward
to the next Participation Period.
8.02. Fractional Shares. Fractional shares will not be issued under the
Plan and any accumulated payroll deductions which would have been used to
purchase fractional shares will be carried over to the next following
Participation Period.
8.03. Delivery of Stock. As soon as reasonably practicable after each
Participation Period, the Company will deliver to the Participant's account with
the Company's designated broker, in such Participant's name, the shares of
Common Stock purchased upon exercise of such Participant's Option. It is a
condition of participation in the Plan that each Participant maintain an account
with the broker designated by the Company. The Company reserves the right to
change its designated broker from time to time in its sole discretion.
Section 9. Withdrawal.
9.01. In General. A Participant may withdraw payroll deductions
credited to his or her account for a Participation Period under the Plan at any
time prior to the last business day of such Participation Period by giving
written notice to the Committee. As soon as reasonably practicable after receipt
by the Committee of his or her notice of withdrawal, the payroll deductions
credited to the Participant's account for such Participation Period will be paid
to him or her without interest (except to the extent required by local law), and
no further payroll deductions will be made from his or her Base Pay for such
Participation Period.
9.02. Cessation of Employee Status. In the event a Participant shall
cease to be an Employee during a Participation Period for any reason, other than
as a result of his or her death, the payroll deductions credited to his or her
account for such Participation Period will be returned to him or her without
interest (except to the extent required by local law) as soon as reasonably
practicable thereafter.
9.03. Termination Due to Death. In the event a Participant shall cease
to be an Employee during a Participation Period by reason of his or her death,
his or her legal representative shall have the right to elect, by written notice
to the Committee prior to the last business day of the Participation Period:
(a) to withdraw all of the payroll deductions credited to the
Participant's account under the Plan for such Participation Period without
interest (except to the extent required by local law), or
(b) to exercise the Participant's Option for such Participation Period
with any excess in the Participant's account after exercise of the Option to be
returned to the Participant's legal representative.
In the event that no such written notice of election is duly and timely
received by the Committee, the Participant's legal representative shall
automatically be deemed to have elected, pursuant to clause (b) above, to
exercise the Participant's Option.
Section 10. Adjustments.
10.01. Changes In Capitalization. In the event that the outstanding
shares of the Company's Common Stock shall be increased or decreased or changed
into or exchanged for a different number or kind of shares of stock or other
securities of the Company or of another corporation, effected without the
receipt of consideration by the Company, through reorganization, merger or
consolidation, recapitalization, reclassification, stock split, reverse stock
split, split-up, combination or exchange of shares or declaration of any
dividends payable in Common Stock, the Board of Directors shall appropriately
adjust, subject to any required action by the stockholders of the Company, (i)
the number of shares of Common Stock (and the Option price per share) subject to
the unexercised portion of any outstanding Option (to the nearest possible full
share), provided, however, that the limitations of Section 424 of the Code shall
apply with respect to such adjustments and (ii) the number of shares of Common
Stock for which Options may be granted under the Plan, as set forth in Section
4.01 hereof, and such adjustments shall be final, conclusive and binding for all
purposes of the Plan. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class shall affect, and no adjustment by
reason thereof shall be made with respect to, the number or price of shares of
Common Stock subject to an Option.
10.02. Acquisition, Merger, Sale of Assets, Dissolution or Liquidation.
Notwithstanding the foregoing, in the event of (i) any offer or proposal to
holders of the Company's Common Stock relating to the acquisition of their
shares, including, without limitation, through purchase, merger or otherwise, or
(ii) any transaction generally relating to the acquisition of substantially all
of the assets or business of the Company, or (iii) the dissolution or
liquidation of the Company, the Board of Directors may make such adjustment as
it deems equitable in respect of outstanding Options (and in respect of the
shares of Common Stock for which Options may be granted under the Plan),
including, without limitation, the revision, cancellation, or termination of any
outstanding Options, or the change, conversion or exchange of the shares of the
Company's Common Stock under outstanding Options (and of the shares of the
Company's Common Stock for which Options may be granted under the Plan) into or
for securities or other property of another corporation. Any such adjustments by
the Board of Directors shall be final, conclusive and binding for all purposes
of the Plan.
Section 11. Effect of the Plan on Employment Relationship. Neither this
Plan nor any Option granted hereunder to a Participant shall be construed as
conferring upon such Participant any right to continue in the employ of the
Company or any Subsidiary of the Company as the case may be, or limit in any
respect the right of the Company or any Subsidiary of the Company to terminate
such Participant's employment with the Company or any Subsidiary of the Company,
as the case may be, at any time.
Section 12. Amendment of the Plan. The Board of Directors may amend the
Plan from time to time as it deems desirable in its sole discretion without
approval of the stockholders of the Company, except to the extent stockholder
approval is required by Rule 16b-3 of the Securities Exchange Act of 1934, as
amended, applicable NASDAQ National Market or stock exchange rules, applicable
provisions of the Code, or other applicable laws or regulations.
Section 13. Termination of the Plan. The Board of Directors may
terminate the Plan at any time in its sole discretion. No Option may be granted
hereunder after termination of the Plan. The termination or amendment of the
Plan shall not alter or impair any rights or obligations under any Option
theretofore granted under the Plan in any material adverse way without the
consent of the affected Participant.
Section 14. Governing Law. The Plan and any and all Option agreements
executed in connection with the Plan shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to conflict of
laws principles.
Section 15. No Strict Construction. No rule of strict construction
shall be applied against the Company, the Committee, or any other person in the
interpretation of any of the terms of the Plan, any Option agreement, any Option
granted under the Plan, or any rule, regulation or procedure established by the
Committee.
Section 16. Successors. This Plan is binding on and will inure to the
benefit of any successor to the Company, whether by way of merger,
consolidation, purchase, or otherwise.
Section 17. Severability. If any provision of the Plan or an Option
agreement shall be held illegal or invalid for any reason, such illegality or
invalidity shall not affect the remaining provisions of the Plan or such
agreement, and the Plan and such agreement shall each be construed and enforced
as if the invalid provisions had never been set forth therein.
Section 18. Plan Provisions Control. Except as otherwise provided in
Section 5.06, the terms of the Plan govern all Options granted under the Plan,
and in no event will any Option be granted under the Plan which is contrary to
any of the provisions of the Plan. In the event any provision of any Option
granted under the Plan shall conflict with any term in the Plan as constituted
on the grant date of such Option, the term in the Plan as constituted on the
grant date of such Option shall control except as otherwise provided in Section
5.06.
Section 19. Headings. The headings used in the Plan are for convenience
only, do not constitute a part of the Plan, and shall not be deemed to limit,
characterize, or affect in any way any provisions of the Plan, and all
provisions of the Plan shall be construed as if no captions had been used in the
Plan.
Section 20. Effective Date of the Plan. The Plan shall be submitted to
the stockholders of the Company for approval and ratification at the next
regular or special meeting thereof to be held after 1 January 1999. Unless at
such meeting the Plan is approved and ratified by the stockholders of the
Company, in the manner provided by the Company's By-Laws, then and in such
event, the Plan shall become null and void and of no further force and effect.
Subject to the immediately preceding sentence, the Plan shall be effective as of
1 April 1999. The Plan shall continue in effect until 30 April 2008 unless
sooner terminated under Section 13.
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Philip G. Heasley, 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
onsolidated 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 reasonably 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 the 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 6, 2005 By: /s/ PHILIP G. HEASLEY
-------------------------------------
Philip G. Heasley
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 reasonably 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 the 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 6, 2005 By: /s/ DAVID R. BANKHEAD
-------------------------------------
David R. Bankhead
Senior Vice President,
Chief Financial Officer and Treasurer
Exhibit 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
In connection with the Quarterly Report of Transaction Systems Architects,
Inc. (the "Company") on Form 10-Q for the fiscal quarter ended March 31, 2005 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Philip G. Heasley, 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 6, 2005 By: /s/ PHILIP G. HEASLEY
-------------------------------------
Philip G. Heasley
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, 2005 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 6, 2005 By: /s/ DAVID R. BANKHEAD
-------------------------------------
David R. Bankhead
Senior Vice President,
Chief Financial Officer and Treasurer