UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
___________________
FORM
10-Q
___________________
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended June 30, 2005
Commission
File Number 0-25346
___________________
TRANSACTION
SYSTEMS ARCHITECTS, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
47-0772104
(I.R.S.
Employer
Identification
No.)
|
|
|
224
South 108th Avenue
Omaha,
Nebraska 68154
(Address
of principal executive offices,
including
zip code)
|
(402)
334-5101
(Registrant’s
telephone number,
including
area code)
|
___________________
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes þ No ¨
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act).
Yes þ No ¨
As
of
July 29, 2005, there were 37,172,528 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).
TABLE
OF CONTENTS
|
Page
|
||
|
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
|
27
|
|
PART
II - OTHER INFORMATION
|
||
|
Item
1.
|
Legal
Proceedings
|
28
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
28
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
29
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
29
|
|
Item
5.
|
Other
Information
|
29
|
|
Item
6.
|
Exhibits
|
29
|
|
Signature
|
30
|
|
|
Exhibit
Index
|
31
|
|
PART
I - FINANCIAL INFORMATION
Item
1. FINANCIAL STATEMENTS
|
Page
|
|
|
Condensed
Consolidated Balance Sheets as of June 30, 2005 and September 30,
2004
|
2
|
|
Condensed
Consolidated Statements of Operations for the three and nine months
ended
June 30, 2005 and 2004
|
3
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended June
30,
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)
|
June
30,
2005
|
September
30,
2004
|
||||||
|
|
(unaudited)
|
|
|||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
113,015
|
$
|
134,198
|
|||
|
Marketable
securities
|
76,083
|
35,434
|
|||||
|
Billed
receivables, net of allowances of $2,179 and $2,834,
respectively
|
45,754
|
44,487
|
|||||
|
Accrued
receivables
|
6,387
|
11,206
|
|||||
|
Recoverable
income taxes
|
-
|
11,524
|
|||||
|
Deferred
income taxes, net
|
2,545
|
230
|
|||||
|
Other
|
10,192
|
6,901
|
|||||
|
Total
current assets
|
253,976
|
243,980
|
|||||
|
Property
and equipment, net
|
8,543
|
8,251
|
|||||
|
Software,
net
|
2,053
|
1,454
|
|||||
|
Goodwill
|
46,792
|
46,706
|
|||||
|
Deferred
income taxes, net
|
27,668
|
22,943
|
|||||
|
Other
|
3,462
|
2,124
|
|||||
|
Total
assets
|
$
|
342,494
|
$
|
325,458
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Current
portion of debt - financing agreements
|
$
|
3,202
|
$
|
7,027
|
|||
|
Accounts
payable
|
8,069
|
6,974
|
|||||
|
Accrued
employee compensation
|
13,538
|
13,354
|
|||||
|
Income
taxes payable
|
3,007
|
-
|
|||||
|
Deferred
revenue
|
77,764
|
82,647
|
|||||
|
Accrued
and other liabilities
|
11,212
|
9,890
|
|||||
|
Total
current liabilities
|
116,792
|
119,892
|
|||||
|
Debt
- financing agreements
|
406
|
2,327
|
|||||
|
Deferred
revenue
|
19,508
|
15,427
|
|||||
|
Other
|
1,373
|
851
|
|||||
|
Total
liabilities
|
138,079
|
138,497
|
|||||
|
Commitments
and contingencies (Note 7)
|
|||||||
|
Stockholders'
equity:
|
|||||||
|
Preferred
stock, $.01 par value; 5,000,000 shares authorized; no shares issued
and
outstanding
at June 30, 2005 and September 30, 2004
|
-
|
-
|
|||||
|
Common
stock, $.005 par value; 70,000,000 shares authorized; 39,992,357
and
39,105,484 shares
issued at June 30, 2005 and September 30, 2004,
respectively
|
200
|
196
|
|||||
|
Treasury
stock, at cost; 2,786,955 and 1,476,145 shares at June 30, 2005 and
September 30, 2004,
respectively
|
(64,534
|
)
|
(35,258
|
)
|
|||
|
Additional
paid-in capital
|
266,850
|
254,715
|
|||||
|
Retained
earnings (accumulated deficit)
|
11,194
|
(22,917
|
)
|
||||
|
Accumulated
other comprehensive loss, net
|
(9,295
|
)
|
(9,775
|
)
|
|||
|
Total
stockholders' equity
|
204,415
|
186,961
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
342,494
|
$
|
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
June
30,
|
Nine
Months Ended
June
30,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Revenues:
|
|||||||||||||
|
Software
license fees
|
$
|
37,656
|
$
|
37,549
|
$
|
128,415
|
$
|
121,162
|
|||||
|
Maintenance
fees
|
24,938
|
23,087
|
69,667
|
66,770
|
|||||||||
|
Services
|
15,409
|
11,896
|
36,153
|
35,144
|
|||||||||
|
Total
revenues
|
78,003
|
72,532
|
234,235
|
223,076
|
|||||||||
|
Expenses:
|
|||||||||||||
|
Cost
of software license fees
|
6,539
|
6,280
|
18,170
|
19,108
|
|||||||||
|
Cost
of maintenance and services
|
14,102
|
13,390
|
41,756
|
43,108
|
|||||||||
|
Research
and development
|
9,704
|
9,303
|
29,842
|
28,308
|
|||||||||
|
Selling
and marketing
|
16,183
|
16,030
|
46,852
|
45,947
|
|||||||||
|
General
and administrative
|
16,289
|
14,554
|
44,301
|
44,056
|
|||||||||
|
Total
expenses
|
62,817
|
59,557
|
180,921
|
180,527
|
|||||||||
|
Operating
income
|
15,186
|
12,975
|
53,314
|
42,549
|
|||||||||
|
Other
income (expense):
|
|||||||||||||
|
Interest
income
|
1,279
|
354
|
2,727
|
1,226
|
|||||||||
|
Interest
expense
|
(102
|
)
|
(284
|
)
|
(407
|
)
|
(1,196
|
)
|
|||||
|
Other,
net
|
(453
|
)
|
995
|
(1,445
|
)
|
3,069
|
|||||||
|
Total
other income (expense)
|
724
|
1,065
|
875
|
3,099
|
|||||||||
|
Income
before income taxes
|
15,910
|
14,040
|
54,189
|
45,648
|
|||||||||
|
Income
tax (provision) benefit
|
(5,915
|
)
|
4,622
|
(20,078
|
)
|
(8,969
|
)
|
||||||
|
Net
income
|
$
|
9,995
|
$
|
18,662
|
$
|
34,111
|
$
|
36,679
|
|||||
|
Earnings
per share information:
|
|||||||||||||
|
Weighted
average shares outstanding:
|
|||||||||||||
|
Basic
|
37,576
|
37,277
|
37,825
|
36,833
|
|||||||||
|
Diluted
|
38,312
|
38,352
|
38,598
|
38,009
|
|||||||||
|
Earnings
per share:
|
|
||||||||||||
|
Basic
|
$
|
0.27
|
$
|
0.50
|
$
|
0.90
|
$
|
1.00
|
|||||
|
Diluted
|
$
|
0.26
|
$
|
0.49
|
$
|
0.88
|
$
|
0.97
|
|||||
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)
|
Nine
Months Ended
June
30,
|
|||||||
|
2005
|
2004
|
||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
income
|
$
|
34,111
|
$
|
36,679
|
|||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|||||||
|
Depreciation
|
2,869
|
3,212
|
|||||
|
Amortization
|
714
|
1,839
|
|||||
|
Loss
on sale of marketable securities
|
-
|
107
|
|||||
|
Deferred
income taxes
|
(7,007
|
)
|
(4,135
|
)
|
|||
|
Tax
benefit of stock options exercised
|
2,736
|
4,001
|
|||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Billed
and accrued receivables, net
|
4,325
|
(3,751
|
)
|
||||
|
Other
current and noncurrent assets
|
(4,436
|
)
|
(4,232
|
)
|
|||
|
Accounts
payable
|
1,025
|
(1,078
|
)
|
||||
|
Recoverable
income taxes
|
14,531
|
1,551
|
|||||
|
Deferred
revenue
|
(1,490
|
)
|
7,433
|
||||
|
Other
current and noncurrent liabilities
|
1,086
|
3,028
|
|||||
|
Net
cash provided by operating activities
|
48,464
|
44,654
|
|||||
|
Cash
flows from investing activities:
|
|||||||
|
Purchases
of property and equipment
|
(3,170
|
)
|
(2,099
|
)
|
|||
|
Purchases
of software
|
(1,347
|
)
|
(454
|
)
|
|||
|
Net
(purchases) sales of marketable securities
|
(40,709
|
)
|
1,221
|
||||
|
Net
cash used in investing activities
|
(45,226
|
)
|
(1,332
|
)
|
|||
|
Cash
flows from financing activities:
|
|||||||
|
Proceeds
from issuance of common stock
|
736
|
719
|
|||||
|
Proceeds
from exercises of stock options
|
8,489
|
12,231
|
|||||
|
Repurchases
of common stock
|
(28,897
|
)
|
-
|
||||
|
Payments
on debt - financing agreements
|
(5,943
|
)
|
(13,092
|
)
|
|||
|
Other
|
402
|
(474
|
)
|
||||
|
Net
cash used in financing activities
|
(25,213
|
)
|
(616
|
)
|
|||
|
Effect
of exchange rate fluctuations on cash
|
792
|
2,013
|
|||||
|
Net
increase (decrease) in cash and cash equivalents
|
(21,183
|
)
|
44,719
|
||||
|
Cash
and cash equivalents, beginning of period
|
134,198
|
78,959
|
|||||
|
Cash
and cash equivalents, end of period
|
$
|
113,015
|
$
|
123,678
|
|||
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 June 30, 2005, and for the three and nine months ended June 30,
2005 and 2004, are unaudited and reflect all adjustments (consisting 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 nine months ended June 30, 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
5
Research
Bulletin (“ARB”) No. 45, “Long-Term Construction-Type Contracts,” and the
relevant guidance provided by SOP 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.” Accounting for
services delivered over time 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 and 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
an established history of customer acceptance without making concessions. 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.
6
For
software license arrangements in which the Company permits the customer to
vary
their software mix, including the right to receive unspecified future software
products during the software license term, the Company recognizes revenue
ratably over the license term, provided all other revenue recognition criteria
have been met. For software license arrangements in which the customer is
charged variable software license fees based on usage of the product, the
Company recognizes revenue as usage occurs over the term of the 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 June 30, 2005 and
September 30, 2004, consisting primarily of the aforementioned auction rate
notes, were $76.1 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,
7
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 record compensation expense when it becomes
probable that the target stock price will be achieved. At June 30, 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 nine months ended June 30, 2005 and 2004 would have approximated
the
following pro forma amounts (in thousands, except per share
amounts):
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Net
income:
|
|||||||||||||
|
As
reported
|
$
|
9,995
|
$
|
18,662
|
$
|
34,111
|
$
|
36,679
|
|||||
|
Deduct: stock-based employee compensation
expense determined
under the fair value method
for
all awards, net of related tax effects
|
(717
|
)
|
(648
|
)
|
(2,010
|
)
|
(1,860
|
)
|
|||||
|
Add:
stock-based employee compensation
expense recorded under
the intrinsic value
method, net of related tax effects
|
19
|
19
|
114
|
71
|
|||||||||
|
Pro
forma
|
$
|
9,297
|
$
|
18,033
|
$
|
32,215
|
$
|
34,890
|
|||||
|
Earnings
per share:
|
|||||||||||||
|
Basic,
as reported
|
$
|
0.27
|
$
|
0.50
|
$
|
0.90
|
$
|
1.00
|
|||||
|
Basic,
pro forma
|
$
|
0.25
|
$
|
0.48
|
$
|
0.85
|
$
|
0.95
|
|||||
|
Diluted,
as reported
|
$
|
0.26
|
$
|
0.49
|
$
|
0.88
|
$
|
0.97
|
|||||
|
Diluted,
pro forma
|
$
|
0.24
|
$
|
0.47
|
$
|
0.83
|
$
|
0.92
|
|||||
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
June
30,
|
Nine
Months Ended
June
30,
|
||||||
|
2005
|
2004
|
2005
|
2004
|
||||
|
Expected
life
|
3.6
|
3.4
|
4.1
|
3.8
|
|||
|
Interest
rate
|
3.7%
|
3.4%
|
4.0%
|
2.9%
|
|||
|
Volatility
|
46%
|
93%
|
48%
|
88%
|
|||
|
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
8
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 market conditions, the grant date fair value
of
such options was estimated using the Black-Scholes option-pricing model with
the
following weighted-average assumptions:
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
||||||
|
2005
|
2004
|
2005
|
2004
|
||||
|
Expected
life
|
5.7
|
N/A
|
5.7
|
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 that vest with the passage of time as well as awards
that vest based
on the achievement of certain market conditions
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.
|
2.
|
Goodwill
and Software
|
Changes
to the carrying amount of goodwill during the first nine 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):
|
June
30,
2005
|
Sept.
30,
2004
|
||||||
|
Internally-developed
software
|
$
|
16,012
|
$
|
15,929
|
|||
|
Purchased
software
|
47,035
|
45,596
|
|||||
|
63,047
|
61,525
|
||||||
|
Less:
accumulated amortization
|
(60,994
|
)
|
(60,071
|
)
|
|||
|
Software,
net
|
$
|
2,053
|
$
|
1,454
|
|||
The
Company did not capitalize software development costs during the first nine
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
9
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 nine months ended June 30, 2005 totaled $0.2 million and $0.7
million, respectively. Based on capitalized software at June 30, 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
|
$
242
|
|
2006
|
899
|
|
2007
|
728
|
|
2008
|
183
|
|
Thereafter
|
1
|
|
3.
|
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 the Company’s 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 June 30, 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 nine months ended June 30, 2005 and 2004.
Included in common stock are 2,212 and 3,645 MDL options, respectively, as
of
June 30, 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. During the third
quarter of fiscal 2005, the Company repurchased an additional 959,746 shares
of
its common stock at an average price of $22.13 per share, with settlements
of
$0.4 million occurring the first week of July on these repurchased shares.
The
maximum approximate dollar value of shares that may yet be purchased under
the
stock repurchase program is approximately $50.7 million as of June 30, 2005.
During the month of July 2005, the Company repurchased an additional 36,374
shares of its common stock under this stock repurchase program for approximately
$0.9 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 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 June 30, 2005
and
2004, which amounted to 736,000 and 1,075,000 shares, respectively, and for
the
nine months ended June 30, 2005 and 2004, which amounted to 773,000 and
1,176,000 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 June 30, 2005 and 2004 were options for 1,624,000 and 654,000
shares, respectively, and for the nine months ended June 30, 2005 and 2004
were
options for 1,019,000 and 754,000 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.
10
|
4.
|
Comprehensive
Income/Loss
|
The
Company's components of other comprehensive income were as follows (in
thousands):
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Net
income
|
$
|
9,995
|
$
|
18,662
|
$
|
34,111
|
$
|
36,679
|
|||||
|
Other
comprehensive income (loss):
|
|||||||||||||
|
Foreign
currency translation adjustments
|
568
|
(662
|
)
|
495
|
(2,385
|
)
|
|||||||
|
Change
in unrealized investment holding loss:
|
|||||||||||||
|
Unrealized
holding gain (loss) arising during
the period
|
32
|
-
|
(15
|
)
|
77
|
||||||||
|
Reclassification
adjustment for loss included in
net income
|
-
|
-
|
-
|
107
|
|||||||||
|
Comprehensive
income
|
$
|
10,595
|
$
|
18,000
|
$
|
34,591
|
$
|
34,478
|
|||||
The
Company's components of accumulated other comprehensive income/loss at each
balance sheet date were as follows (in thousands):
|
Foreign
Currency
Translation
Adjustments
|
Unrealized
Investment
Holding
Loss
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
||||||||
|
Balance,
September 30, 2004
|
$
|
(9,775
|
)
|
$
|
-
|
$
|
(9,775
|
)
|
||
|
Fiscal
2005 year-to-date activity
|
495
|
(15
|
)
|
480
|
||||||
|
Balance,
June 30, 2005
|
$
|
(9,280
|
)
|
$
|
(15
|
)
|
$
|
(9,295
|
)
|
|
|
5.
|
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 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. Although revenues attributable to customers in the
United Kingdom accounted for approximately 11% of the Company’s consolidated
revenues during the third quarter and first nine months of fiscal 2005, no
single customer accounted for more than 10% of the Company's consolidated
revenues during the three or nine months ended June 30, 2005 or
2004.
11
The
following are revenues and operating income for these business units for the
periods indicated (in thousands):
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Revenues:
|
|||||||||||||
|
ACI
Worldwide
|
$
|
61,366
|
$
|
55,365
|
$
|
183,428
|
$
|
170,956
|
|||||
|
Insession
Technologies
|
10,149
|
9,382
|
29,824
|
28,348
|
|||||||||
|
IntraNet
Worldwide
|
6,488
|
7,785
|
20,983
|
23,772
|
|||||||||
|
$
|
78,003
|
$
|
72,532
|
$
|
234,235
|
$
|
223,076
|
||||||
|
Operating
income:
|
|||||||||||||
|
ACI
Worldwide
|
$
|
12,503
|
$
|
9,019
|
$
|
42,417
|
$
|
30,259
|
|||||
|
Insession
Technologies
|
2,912
|
2,205
|
8,675
|
7,449
|
|||||||||
|
IntraNet
Worldwide
|
(229
|
)
|
1,751
|
2,222
|
4,841
|
||||||||
|
$
|
15,186
|
$
|
12,975
|
$
|
53,314
|
$
|
42,549
|
||||||
|
6.
|
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 third quarter of fiscal 2005 was approximately 37.2%
as compared to a benefit of 32.9% for the same period of fiscal 2004. The
effective tax rate for the first nine months of fiscal 2005 was approximately
37.1% as compared to 19.6% for the same period of fiscal 2004. The effective
tax
rates for the third quarter and first nine months of fiscal 2005 were primarily
impacted by the recognition of additional valuation allowances for income taxes
withheld on payments to foreign subsidiaries, a reduction to valuation
allowances on foreign net operating losses, and recognition of benefits from
the
extraterritorial income exclusion and municipal interest income. The effective
tax rates for the third quarter and first nine months of 2004 were primarily
impacted by the recognition of benefits related to the tax reorganization of
MessagingDirect Ltd. and its related entities, the adjustment of the Company’s
deferred tax assets for a change in the effective state tax rates, and an
increase in the valuation allowance for foreign withholding taxes and foreign
net operating losses. The Company treated all foreign taxes withheld on payments
to U.S. entities during the first nine months of fiscal 2005 and 2004 as
creditable against its U.S. tax liability.
|
7.
|
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.
12
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 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. On July 11, 2005, the individual defendants filed a motion to
dismiss the complaint with prejudice.
13
|
8.
|
Subsequent
Event - Acquisition of S2 Systems,
Inc.
|
On
July
29, 2005, the Company acquired the business of S2 Systems, Inc. (“S2”) through
the acquisition of substantially all of its assets. S2 is a global provider
of
electronic payments and network connectivity software. S2 primarily serves
financial services and retail customers, which are homogeneous and complementary
to the Company’s target markets. In addition to its U.S. operations, S2 has a
significant presence in Europe, the Middle East and the Asia-Pacific region,
generating nearly half of its revenue from international markets.
At
closing, the Company paid cash of $35.7 million, inclusive of a working capital
adjustment, of which $8.0 million is currently held in escrow. The
escrow amount has been established with respect to (i) seller indemnification
obligations that may arise under the acquisition agreement and (ii)
reimbursement for adverse developments that may arise in fulfilling the terms
of
certain customer contracts. Subject to any claims that may be made against
the
escrow amount, and pursuant to the terms of the escrow agreement between the
parties, a portion of the escrow amount will be distributed to the seller 18
months after closing, and the balance of the escrow amount will be distributed
to the seller 36 months after closing.
The
Company is in the process of allocating the purchase price to the various
tangible and intangible assets acquired, as well as any liabilities assumed.
In
addition, the Company may pay additional consideration based upon
transaction-based license fee revenues of certain customer contracts acquired,
with computation of such amounts on a quarterly basis through the fiscal quarter
ended September 30, 2008. Any such contingent consideration incurred will be
recorded as an increase in purchase price when the amount is determinable and
payable. The Company also anticipates the execution of certain activities that
could result in adjustments to the purchase price.
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 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
14
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 U.S. 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 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
15
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 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 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
16
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
is 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.
The
Company has reached a tentative agreement with the Internal Revenue Service
(“IRS”) to settle its open audit years, 1997 through 2003, which is anticipated
to result in a refund to the Company. Because certain refunds approved by the
IRS must be submitted to the Joint Committee on Taxation (“Joint Committee”) for
payment approval, the Company has submitted a refund claim to the Joint
Committee. Upon approval by the Joint Committee, the Company will record the
effects of the refund in its consolidated financial statements, including,
but
not limited to, its impact on the Company’s tax assets, liabilities and related
valuation allowances, as well as interest income.
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
June
30,
|
Nine
Months Ended
June
30,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Revenues:
|
|||||||||||||
|
ACI
Worldwide
|
$
|
61,366
|
$
|
55,365
|
$
|
183,428
|
$
|
170,956
|
|||||
|
Insession
Technologies
|
10,149
|
9,382
|
29,824
|
28,348
|
|||||||||
|
IntraNet
Worldwide
|
6,488
|
7,785
|
20,983
|
23,772
|
|||||||||
|
$
|
78,003
|
$
|
72,532
|
$
|
234,235
|
$
|
223,076
|
||||||
|
Operating
income:
|
|||||||||||||
|
ACI
Worldwide
|
$
|
12,503
|
$
|
9,019
|
$
|
42,417
|
$
|
30,259
|
|||||
|
Insession
Technologies
|
2,912
|
2,205
|
8,675
|
7,449
|
|||||||||
|
IntraNet
Worldwide
|
(229
|
)
|
1,751
|
2,222
|
4,841
|
||||||||
|
$
|
15,186
|
$
|
12,975
|
$
|
53,314
|
$
|
42,549
|
||||||
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 June 30, 2005 (in thousands):
|
Recurring
|
Non-Recurring
|
Total
|
||||||||
|
ACI
Worldwide
|
$
|
127,800
|
$
|
48,964
|
$
|
176,764
|
||||
|
Insession
Technologies
|
20,962
|
9,027
|
29,989
|
|||||||
|
IntraNet
Worldwide
|
11,543
|
5,027
|
16,570
|
|||||||
|
$
|
160,305
|
$
|
63,018
|
$
|
223,323
|
|||||
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.
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 June 30,
|
|
Nine
Months Ended June 30,
|
||||||||||||||||||||||||||||
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
||||||||||||||||||||||||
|
|
|
|
|
Amount
|
|
%
of
Revenue
|
|
|
Amount
|
|
%
of
Revenue
|
|
|
Amount
|
|
%
of
Revenue
|
|
|
Amount
|
|
%
of
Revenue
|
||||||||||||
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
Initial
license fees (ILFs)
|
|
$
|
19,171
|
|
24.6
|
%
|
|
|
$
|
17,372
|
|
24.0
|
%
|
|
|
$
|
73,323
|
|
31.3
|
%
|
|
|
$
|
57,761
|
|
25.9
|
%
|
|||||
|
|
Monthly
license fees (MLFs)
|
|
|
18,485
|
|
23.7
|
|
|
|
|
20,177
|
|
27.8
|
|
|
|
|
55,092
|
|
23.5
|
|
|
|
|
63,401
|
|
28.4
|
|
|||||
|
|
Software
license fees
|
|
|
37,656
|
|
48.3
|
|
|
|
|
37,549
|
|
51.8
|
|
|
|
|
128,415
|
|
54.8
|
|
|
|
|
121,162
|
|
54.3
|
|
|||||
|
|
Maintenance
fees
|
|
|
24,938
|
|
32.0
|
|
|
|
|
23,087
|
|
31.8
|
|
|
|
|
69,667
|
|
29.8
|
|
|
|
|
66,770
|
|
29.9
|
|
|||||
|
|
Services
|
|
|
15,409
|
|
19.7
|
|
|
|
|
11,896
|
|
16.4
|
|
|
|
|
36,153
|
|
15.4
|
|
|
|
|
35,144
|
|
15.8
|
|
|||||
|
|
|
Total
revenues
|
|
|
78,003
|
|
100.0
|
|
|
|
|
72,532
|
|
100.0
|
|
|
|
|
234,235
|
|
100.0
|
|
|
|
|
223,076
|
|
100.0
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
Cost
of software license fees
|
|
|
6,539
|
|
8.4
|
|
|
|
|
6,280
|
|
8.6
|
|
|
|
|
18,170
|
|
7.8
|
|
|
|
|
19,108
|
|
8.6
|
|
|||||
|
|
Cost
of maintenance and services
|
|
|
14,102
|
|
18.1
|
|
|
|
|
13,390
|
|
18.5
|
|
|
|
|
41,756
|
|
17.8
|
|
|
|
|
43,108
|
|
19.3
|
|
|||||
|
|
Research
and development
|
|
|
9,704
|
|
12.4
|
|
|
|
|
9,303
|
|
12.8
|
|
|
|
|
29,842
|
|
12.7
|
|
|
|
|
28,308
|
|
12.7
|
|
|||||
|
|
Selling
and marketing
|
|
|
16,183
|
|
20.7
|
|
|
|
|
16,030
|
|
22.1
|
|
|
|
|
46,852
|
|
20.0
|
|
|
|
|
45,947
|
|
20.6
|
|
|||||
|
|
General
and administrative
|
|
|
16,289
|
|
20.9
|
|
|
|
|
14,554
|
|
20.1
|
|
|
|
|
44,301
|
|
18.9
|
|
|
|
|
44,056
|
|
19.7
|
|
|||||
|
|
|
Total
expenses
|
|
|
62,817
|
|
80.5
|
|
|
|
|
59,557
|
|
82.1
|
|
|
|
|
180,921
|
|
77.2
|
|
|
|
|
180,527
|
|
80.9
|
|
||||
|
Operating
income
|
|
|
15,186
|
|
19.5
|
|
|
|
|
12,975
|
|
17.9
|
|
|
|
|
53,314
|
|
22.8
|
|
|
|
|
42,549
|
|
19.1
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
Interest
income
|
|
|
1,279
|
|
1.6
|
|
|
|
|
354
|
|
0.5
|
|
|
|
|
2,727
|
|
1.2
|
|
|
|
|
1,226
|
|
0.5
|
|
|||||
|
|
Interest
expense
|
|
|
(102)
|
|
(0.1)
|
|
|
|
|
(284)
|
|
(0.4)
|
|
|
|
|
(407)
|
|
(0.2)
|
|
|
|
|
(1,196)
|
|
(0.5)
|
|
|||||
|
|
Other,
net
|
|
|
(453)
|
|
(0.6)
|
|
|
|
|
995
|
|
1.4
|
|
|
|
|
(1,445)
|
|
(0.6)
|
|
|
|
|
3,069
|
|
1.4
|
|
|||||
|
|
|
Total
other income (expense)
|
|
|
724
|
|
0.9
|
|
|
|
|
1,065
|
|
1.5
|
|
|
|
|
875
|
|
0.4
|
|
|
|
|
3,099
|
|
1.4
|
|
||||
|
Income
before income taxes
|
|
|
15,910
|
|
20.4
|
|
|
|
|
14,040
|
|
19.4
|
|
|
|
|
54,189
|
|
23.2
|
|
|
|
|
45,648
|
|
20.5
|
|
||||||
|
Income
tax (provision) benefit
|
|
|
(5,915)
|
|
(7.6)
|
|
|
|
|
4,622
|
|
6.3
|
|
|
|
|
(20,078)
|
|
(8.6)
|
|
|
|
|
(8,969)
|
|
(4.1)
|
|
||||||
|
Net
income
|
|
$
|
9,995
|
|
12.8
|
%
|
|
|
$
|
18,662
|
|
25.7
|
%
|
|
|
$
|
34,111
|
|
14.6
|
%
|
|
|
$
|
36,679
|
|
16.4
|
%
|
||||||
Revenues.
Total
revenues for the third quarter of fiscal 2005 increased $5.5 million, or 7.5%,
as compared to the same period of fiscal 2004. Total revenues for the first
nine
months of fiscal 2005 increased $11.2 million, or 5.0%, as compared to the
same
period of fiscal 2004. The three-month increase is the result of a $0.1 million,
or 0.3%, increase in software license fee revenues, a $1.9 million, or 8.0%,
increase in maintenance fee revenues, and a $3.5 million, or 29.5%, increase
in
services revenues. The nine-month increase is the result of a $7.3 million,
or
6.0%, increase in software license fee revenues, a $2.9 million, or 4.3%,
increase in maintenance fee revenues, and a $1.0 million, or 2.9%, increase
in
services revenues.
For
the
first nine months of fiscal 2005, as
compared to the same period of fiscal 2004, ACI
Worldwide’s software license fee revenues increased by $4.8 million. This
increase resulted from a sales mix during the current nine-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 nine-month period rather than being deferred,
as well as recognition
of previously-deferred revenues for several large projects that were completed
during
the third quarter of fiscal 2005 and 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, offsetting some of the
comparative year-to-date increase in ACI Worldwide software license fee
revenues.
Insession Technologies' software license fee revenues were $1.2 million higher
for the first nine 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 nine months
19
of
fiscal 2005, as
compared to the same period of fiscal 2004, IntraNet
Worldwide’s software license fee revenues increased by $1.3 million, primarily
due to a large
Money
Transfer System (“MTS”) product contract extension that was recognized during
the first quarter of fiscal 2005.
The
increase in maintenance fee revenues during
the third quarter of fiscal 2005 as
compared to the same period of fiscal 2004 is primarily due to the recognition
of previously-deferred maintenance fee revenues for projects that were completed
during the quarter. The increase in maintenance fee revenues during
the first nine 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, along with recognition of previously-deferred
maintenance fee revenues for projects that were completed during the third
quarter.
The
increases in services revenues during
both the third quarter of fiscal 2005 and
first nine months of fiscal 2005, as compared to the same periods of fiscal
2004, were primarily due to the recognition of previously-deferred services
revenues for three large projects that were completed during the third quarter
of fiscal 2005, with offsetting decreases in IntraNet Worldwide services
revenues, as well as the deferrals of ACI Worldwide services revenues. 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 pSeries-based MTS product (previously referred to as
the
RS6000-based MTS product), corresponding services revenues associated with
the
migration process have declined.
Within
the ACI Worldwide business unit, a greater percentage of services work during
the first nine months of fiscal 2005 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.
Expenses.
Total
operating expenses for the third
quarter of fiscal 2005 increased $3.3 million, or 5.5%, as compared to the
same
period of fiscal 2004. Total operating expenses for the first nine months of
fiscal 2005 increased $0.4 million, or 0.2%, as compared to the same period
of
fiscal 2004.
Cost
of
software license fees for the third quarter of fiscal 2005 increased $0.3
million, or 4.1%, as compared to the same period of fiscal 2004. Cost of
software license fees for the first nine months of fiscal 2005 decreased $0.9
million, or 4.9%, as compared to the same period of fiscal 2004. The decrease
in
cost of software license fees during the first nine months of fiscal 2005,
as
compared to the same periods of fiscal 2004, was primarily attributable to
higher commissions paid to distributors of the Company’s products during the
first nine months of fiscal 2004. The Company increased its use of outside
contractors within the ACI Worldwide business unit during fiscal 2005, resulting
in higher costs in the third quarter of fiscal 2005 as compared to the same
period of fiscal 2004 and offsetting some of the year-to-date benefits received
from the decrease in distributor commission costs.
Cost
of
maintenance and services for the third quarter of fiscal 2005 increased $0.7
million, or 5.3%, as compared to the same period of fiscal 2004. Cost of
maintenance and services for the first nine months of fiscal 2005 decreased
$1.4
million, or 3.1%, as compared to the same period of fiscal 2004. The decrease
in
cost of maintenance and services during the first nine months of fiscal 2005,
as
compared to the same period of fiscal 2004, was primarily due to the deferral
of
direct and incremental costs related to implementation 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 nine-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 nine months of fiscal
2005 resulting from changes in foreign currency exchange rates. The increase
in
cost of maintenance and services during the third quarter of fiscal 2005 as
compared to the same period of fiscal 2004 resulted primarily from the
recognition of previously-deferred maintenance and services revenues and related
expenses for several large projects that were completed during the
quarter.
R&D
costs for the third quarter of fiscal 2005 increased $0.4 million, or 4.3%,
as
compared to the same period of fiscal 2004. R&D costs for the first nine
months of fiscal 2005 increased $1.5 million, or 5.4%, as compared to the same
period of fiscal 2004. The increases in R&D costs during both the third
quarter and the first nine 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 nine months of fiscal 2005
resulting from changes in foreign currency exchange rates.
20
Selling
and marketing costs for the third quarter of fiscal 2005 increased $0.2 million,
or 1.0%, as compared to the same period of fiscal 2004. Selling and marketing
costs for the first nine months of fiscal 2005 increased $0.9 million, or 2.0%,
as compared to the same period of fiscal 2004. The increases in selling and
marketing costs during the third quarter and first nine months of fiscal 2005,
as compared to the same periods of fiscal 2004, were primarily due to higher
expenses in the first nine 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.
General
and administrative costs for the third quarter of fiscal 2005 increased $1.7
million, or 11.9%, as compared to the same period of fiscal 2004. General and
administrative costs for the first nine months of fiscal 2005 decreased $0.2
million, or 0.6%, as compared to the same period of fiscal 2004. The increase
in
general and administrative costs during the third quarter of fiscal 2005, as
compared to the same period of fiscal 2004, was primarily due to increased
professional fees related to legal services, internal controls compliance
testing, and other corporate level strategic planning costs. Reduced costs
of
director and officer liability insurance, and a reduction in bad debt expenses
offset some of the quarterly and year-to-date increase in professional
fees.
Other
Income and Expense.
Interest income for the third
quarter of fiscal 2005 increased $0.9 million, or 261.3%, as compared to the
same period of fiscal 2004. Interest income for the first
nine
months of fiscal 2005 increased $1.5 million, or 122.4%, as compared to the
same
period of fiscal 2004. The increases in interest income
during
the third quarter and first nine 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 third
quarter of fiscal 2005 decreased $0.2 million, or 64.1%, as compared to the
same
period of fiscal 2004. Interest expense for the first
nine
months of fiscal 2005 decreased $0.8 million, or 66.0%, 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 expense for the third quarter of fiscal 2005 was
$0.5
million as compared to other income for the same period of fiscal 2004 of $1.0
million. Other expense for the first nine months of fiscal 2005 was $1.4 million
as compared to other income for the same period of fiscal 2004 of $3.1 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 third quarter of fiscal 2005 was approximately 37.2%
as compared to a benefit of 32.9% for the same period of fiscal 2004. The
effective tax rate for the first nine months of fiscal 2005 was approximately
37.1% as compared to 19.6% for the same period of fiscal 2004. The effective
tax
rates for the third quarter and first nine months of fiscal 2005 were primarily
impacted by the recognition of additional valuation allowances for income taxes
withheld on payments to foreign subsidiaries, a reduction to valuation
allowances on foreign net operating losses, and recognition of benefits from
the
extraterritorial income exclusion and municipal interest income. The effective
tax rates for the third quarter and first nine months of 2004 were primarily
impacted by the recognition of benefits related to the tax reorganization of
its
MessagingDirect Ltd. subsidiary and its related entities (collectively referred
to as “the MDL entities”), the adjustment of the Company’s deferred tax assets
for a change in the effective state tax rates, and an increase in the valuation
allowance for foreign withholding taxes and foreign net operating losses. The
Company treated all foreign taxes withheld on payments to U.S. entities during
the first nine months of fiscal 2005 and 2004 as creditable against its U.S.
tax
liability.
During
fiscal 2004, the Company completed a reorganization of the MDL entities. This
transaction resulted in the recognition of a tax benefit related to the excess
of tax basis over the book carrying value of these foreign assets following
the
tax election. The improvement in the effective tax rates for the third quarter
and first nine months of fiscal 2005, as compared to the same periods of fiscal
2004, after excluding the impact of tax benefits recognized
21
during
the third quarter and first nine months of fiscal 2004 arising from
reorganization of the MDL entities and the adjustment to state deferred taxes,
resulted primarily from increased utilization of foreign tax losses, lower
tax
rates than the U.S. in certain foreign jurisdictions, 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 June 30, 2005, the Company had net deferred tax assets of $30.2
million (net of a $53.2 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
Company has reached a tentative agreement with the IRS to settle its open audit
years, 1997 through 2003, which is anticipated to result in a refund to the
Company. A refund claim has been submitted to the Joint Committee on Taxation
(“Joint Committee”) for approval. Procedurally, the Joint Committee will notify
the Company of its approval or disapproval for payment of the refund when its
final review is complete. If approved, the Company will then record the effects
of the refund in its consolidated financial statements.
Liquidity
and Capital Resources
As
of
June 30, 2005, the Company's principal sources of liquidity consisted of $189.1
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.
During the first nine months of fiscal 2005, the Company repurchased 1.3 million
shares of its common stock at an average price of $22.33 per share under this
stock repurchase program, with cash paid of $28.9 million by June 30, 2005
and
remaining settlements of $0.4 million occurring the first week of July on these
repurchased shares. As of June 30, 2005, the maximum approximate remaining
dollar value of shares authorized for purchase under the stock repurchase
program was approximately $50.7 million. During the month of July 2005, the
Company repurchased additional shares of its common stock under this stock
repurchase program for approximately $0.9 million.
The
Company may also decide to use cash 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. On June 29, 2005, the Company announced the signing of a definitive
agreement to acquire substantially all of the assets of S2 Systems, Inc. (“S2”).
S2, which generates nearly half of its revenue from international markets,
is a
global provider of electronic payments and network connectivity software. S2
primarily serves financial services and retail customers, which are homogeneous
and complementary to the Company’s target markets. The Company completed the
acquisition on July 29, 2005 for $35.7 million in cash, inclusive of a working
capital adjustment, of which $8.0 million is currently held in escrow. In
addition, the Company may pay additional consideration based upon
transaction-based license fee revenues of certain customer contracts acquired,
with computation of such amounts on a quarterly basis through the fiscal quarter
ended September 30, 2008.
The
Company's net cash flows provided by operating activities for the first nine
months of fiscal 2005 amounted to $48.5 million as compared to $44.7 million
provided by operating activities during the same period of fiscal 2004. The
increase in operating cash flows in
the
first nine months of fiscal 2005 as compared to the same period of fiscal 2004
resulted
primarily from 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 $45.2 million
for
the first nine months of fiscal 2005 as compared to $1.3 million used in
investing activities during the same period of fiscal 2004. During the first
nine months of fiscal 2005, the Company increased its holdings of marketable
securities by $40.7 million and purchased $4.5 million of software, property
and
equipment. During the first nine months of fiscal 2004, the Company purchased
$2.5 million of software, property and equipment and received net proceeds
from
sales of marketable securities of $1.2 million.
22
The
Company's net cash flows used in financing activities totaled $25.2 million
for
the first nine months of fiscal 2005 as compared to $0.6 million used in
financing activities during the same period of fiscal 2004. In the first nine
months of fiscal 2005, the Company used cash of $28.9 million to purchase shares
of its common stock under the Company’s stock repurchase program, made scheduled
payments to the third-party financial institutions totaling $5.9 million and
received proceeds of $8.5 million from exercises of stock options. In the first
nine months of fiscal 2004, the Company made scheduled payments to the
third-party financial institutions totaling $13.1 million and received proceeds
of $12.2 million from exercises of stock options.
The
Company also realized an increase in cash of $0.8 million for the first nine
months of fiscal 2005 as compared to $2.0 million during the same period of
fiscal 2004 pertaining to foreign exchange rate fluctuations.
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.
|
·
|
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.
|
|
·
|
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 financial 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 and other
equity awards, if any, would also increase the noncash expenses the
Company must record, which would negatively impact the Company’s results
of operations and earnings per
share.
|
|
·
|
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
benefited 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.
|
23
The
Company’s tax positions in its income tax returns filed for its 1997 through
2003 tax years have been the subject of an examination by the Internal Revenue
Service. 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 and
the
Company have tentatively agreed to a settlement, and a refund claim has been
submitted to the Joint Committee on Taxation for approval. However, 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 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.
|
·
|
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
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 decided to forego future use of the Company’s
products, the Company’s revenues would
decline.
|
|
·
|
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.
|
|
·
|
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.
|
|
·
|
Acts
of terrorism or acts of war may cause death or injury to our employees,
as
well as damage or disruption to the Company’s facilities, customers,
partners, distributors or resellers, which could have a material
adverse
effect on the Company’s business, financial condition and/or results of
operations. Such conflicts may also cause damage or disruption to
transportation and communication systems and to our ability to manage
logistics in such environments, including delivery of products.
|
|
·
|
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.
|
|
·
|
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.
|
24
|
·
|
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.
|
|
·
|
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.
|
|
·
|
The
Company may acquire new products and services or enhance existing
products
and services through acquisitions of other companies, product lines,
technologies and personnel, or through investments in other companies.
Any
acquisition or investment may be subject to a number of risks, including
diversion of management time and resources, disruption of the Company’s
ongoing business, difficulties in integrating acquisitions, dilution
to
existing stockholders if the Company’s common stock is issued in
consideration for an acquisition or investment, the incurring or
assuming
of indebtedness or other liabilities in connection with an acquisition,
and lack of familiarity with new markets, product lines and competition.
The failure to manage acquisitions or investments, or successfully
integrate acquisitions, could have a material adverse effect on the
Company’s business, financial condition and/or results of
operations.
|
|
·
|
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.
On
July 29, 2005, the Company acquired substantially all of the assets
of S2
Systems, Inc. Any acquisition or investment, including the acquisition
of
S2, is subject to a number of risks. Such risks may include diversion
of
management time and resources, disruption of the Company’s ongoing
business, difficulties in integrating acquisitions, dilution to existing
stockholders if the Company’s common stock is issued in consideration for
an acquisition or investment, incurring or assuming indebtedness
or other
liabilities in connection with an acquisition, lack of familiarity
with
new markets, and difficulties in supporting new product lines. The
Company’s failure to successfully manage acquisitions or investments, or
successfully integrate acquisitions, including the acquisition of
S2,
could have a material adverse effect on the Company’s business, financial
condition and/or results of
operations.
|
|
·
|
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.
|
|
·
|
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.
|
25
|
·
|
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.
|
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.
|
·
|
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, results of operations
and/or
cash flows.
|
|
·
|
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.
|
|
·
|
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 nine months
ended June 30, 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
26
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 June 30, 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 third quarter of fiscal 2005 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal controls over
financial reporting.
27
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 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.
On
December 16, 2004, ACI Worldwide Inc. filed a complaint in the Nebraska District
Court for Douglas County against certain individuals, including the principal
officer of Plus, alleging, in part, fraud, deceptive trade practices and
violations of the consumer protection act in connection with the license
agreement between ACI Worldwide Inc. and Plus.
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 third quarter of fiscal 2005:
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced
Program
|
Maximum
Approximate Dollar Value of Shares that May Yet Be Purchased Under
the
Program
|
||||
|
April
1 through April 30, 2005
|
402,205
|
$
21.59
|
402,205
|
$
63,283,000
|
||||
|
May
1 through May 31, 2005
|
348,668
|
$
21.96
|
348,668
|
$
55,625,000
|
||||
|
June
1 through June 30, 2005
|
208,873
|
$
23.46
|
208,873
|
$
50,724,000
|
||||
|
Total
(1)
|
959,746
|
$
22.13
|
959,746
|
_______________________________________
(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
28
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 third 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
Not
applicable.
Item
5. OTHER INFORMATION
Not
applicable.
Item
6. EXHIBITS
|
Exhibit
No.
|
Description
|
|
|
10.1
|
Form
of Nonqualified Stock Option Agreement - Employee (under the Company’s
2005 Equity and Performance
Incentive Plan)
|
|
|
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:
August 5, 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
|
|
|
10.1
|
Form
of Nonqualified Stock Option Agreement - Employee (under the Company’s
2005 Equity and Performance
Incentive Plan)
|
|
|
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.
Nonqualified
Stock Option Agreement - Employee
(2005
Equity and Performance Incentive Plan)
This
Stock Option Agreement (the “Option Agreement”) is made as of ____________, by
and between Transaction Systems Architects, Inc., a Delaware corporation (the
“Corporation”), and [__________________],
an employee of the Corporation or its Subsidiaries (the
“Optionee”).
WHEREAS,
the Board of Directors of the Corporation has duly adopted, and the stockholders
of the Corporation have approved, the 2005 Equity and Performance Incentive
Plan
(the “Plan”), which Plan authorizes the Corporation to grant to eligible
individuals options for the purchase of shares of the Corporation’s Class A
Common Stock (reclassified as Common Stock) (the “Stock”); and
WHEREAS,
the Board of Directors of the Corporation has determined that it is desirable
and in the best interests of the Corporation and its stockholders to grant
the
Optionee an option to purchase a certain number of shares of Stock, in order
to
provide the Optionee with an incentive to advance the interests of the
Corporation, all according to the terms and conditions set forth
herein.
NOW,
THEREFORE, in consideration of the mutual promises and covenants contained
herein, the parties hereto do hereby agree as follows:
1.
GRANT
OF NON-QUALIFIED STOCK OPTION
Subject
to the terms of the Plan, the Corporation hereby grants to the Optionee the
right and option (the “Option”) to purchase from the Corporation, on the terms
and subject to the conditions set forth in this Option Agreement, [__________]
shares of Stock (the “Option Shares”). The Date of Grant of this Option is
______________. This
Option shall not constitute an incentive stock option within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the
“Code”).
2.
TERMS
OF PLAN
The
Option granted pursuant to this Option Agreement is granted subject to the
terms
and conditions set forth in the Plan, a copy of which has been delivered to
the
Optionee. All terms and conditions of the Plan, as may be amended from time
to
time, are hereby incorporated into this Option Agreement by reference and shall
be deemed to be a part of this Option Agreement, without regard to whether
such
terms and conditions (including, for example, provisions relating to certain
changes in capitalization of the Corporation) are otherwise set forth in this
Option Agreement. In the event that there is any inconsistency between the
provisions of this Option Agreement and of the Plan, the provisions of the
Plan
shall govern. Capitalized terms used herein that are not otherwise defined
shall
have the meaning ascribed to them in the Plan.
3.
EXERCISE
PRICE
The
exercise price for the shares of Stock subject to the Option granted by this
Option Agreement is $_______ per share (the “Exercise Price”).
4. EXERCISE
OF OPTION
Subject
to the provisions of the Plan and subject to the earlier expiration or
termination of this Option in accordance with its terms, the Option granted
pursuant to this Option Agreement shall be exercisable only as
follows:
4.1
Time
of Exercise of Option
|
4.1.1
|
The
Option shall become exercisable with respect to the Option Shares
only as
follows: One-quarter of the Option Shares ([________] Option Shares)
shall
become exercisable on each of the first four anniversaries of the
Date of
Grant if the Optionee shall have remained in the continuous employ
of the
Corporation or any of its Subsidiaries as of each such
date.
|
|
4.1.2
|
Notwithstanding
Section 4.1.1 above, in accordance with the provisions of the Plan,
if the
Optionee ceases to be an employee of the Corporation or a Subsidiary
of
the Corporation by reason of Disability (as defined in Section 4.3.2
below), the unexercised portion of any Option held by such Optionee
at
that time will become immediately vested and will be exercisable
until
terminated in accordance with Section 4.3 below.
|
|
4.1.3
|
Notwithstanding
Section 4.1.1 above, in accordance with the provisions of the Plan,
if the
Optionee dies while employed by the Corporation or a Subsidiary of
the
Corporation (or dies within a period of one month after ceasing to
be an
employee for any reason other than Disability or within a period
of one
year after ceasing to be an employee by reason of Disability), the
unexercised portion of any Option held by such Optionee at the time
of
death will become immediately vested and will be exercisable until
terminated in accordance with Section 4.3
below.
|
|
4.1.4
|
Notwithstanding
Section 4.1.1 above, in accordance with the provisions of the Plan,
the
Option granted under this Option Agreement shall become immediately
exercisable upon the occurrence of a Change in Control (as defined
in
Section 10 below) if the Optionee is an employee of the Corporation
or any
Subsidiary on the date of the consummation of such Change in
Control.
|
4.2
Limitations
The
portion of the Option that has not become exercisable as of the date of the
Optionee’s termination of employment with the Corporation or any of its
Subsidiaries for any reason shall automatically terminate as of the date of
the
Optionee’s termination of employment with the Corporation or its Subsidiaries
and shall not become exercisable after such termination. To the extent the
Option is exercisable, it may be exercised, in whole or in part; provided,
that no single exercise of the Option shall be for less than 100 shares, unless
at the time of the exercise, the maximum number of shares available for purchase
under this Option is less than 100 shares. In no event shall the Option be
exercised for a fractional share.
4.3
Termination
of Option
This
Agreement and the Option granted hereby shall terminate automatically and
without further notice on the earliest of the following dates:
|
4.3.1
|
90
calendar days from the date of the Optionee’s termination of employment
with the Corporation or a Subsidiary for any reason other than death
or
Disability (as defined below);
|
|
4.3.2
|
one
year after the Optionee’s permanent and total disability as defined in
Section 22(e)(3) of the Code
(“Disability”);
|
|
4.3.3
|
one
year after the Optionee’s death, if such death occurs (i) while the
Optionee is employed by the Corporation or a Subsidiary, (ii) within
the
90-day period following the Optionee’s termination of employment for any
reason other than Disability; or (iii) within the one-year period
following the Optionee’s termination of employment by reason of the
Optionee’s Disability; or
|
|
4.3.4
|
ten
years from the Date of Grant.
|
The
Corporation shall have the authority to determine the date an Optionee ceases
to
be an employee by reason of Disability. In the case of death, the Option may
be
exercised by the executor or administrator of the Optionee’s estate or by any
person or persons who shall have acquired the Option directly from the Optionee
by bequest or inheritance. The Optionee shall be deemed to be an employee of
the
Corporation or any Subsidiary if on a leave of absence approved by the Board
of
Directors of the Corporation and the continuous employment of the Optionee
with
the Corporation or any of its Subsidiaries will not be deemed to have been
interrupted, and the Optionee shall not be deemed to have ceased to be an
employee of the Corporation or its Subsidiaries, by reason of the transfer
of
the Optionee’s employment among the Corporation and its
Subsidiaries.
4.4
Limitations
on Exercise of Option
In
no event may the Option be exercised, in whole or in part, after the occurrence
of an event which results in termination of the Option, as set forth in Section
4.3 above. The Option shall not be exercisable if and to the extent the
Corporation determines such exercise or method of exercise would violate
applicable securities laws, the rules and regulations of any securities exchange
or quotation system on which the Stock is listed, or the Corporation’s policies
and procedures.
4.5
Method
of Exercise of Option
|
4.5.1
|
To
the extent then exercisable, the Option may be exercised in whole
or in
part by written notice to the Corporation stating the number of shares
for
which the Option is being exercised and the intended manner of payment.
The date of such notice shall be the exercise date. Payment equal
to the
aggregate Exercise Price of the shares shall be payable (i) in cash
in the
form of currency or check or other cash equivalent acceptable to
the
Corporation, (ii) by actual or constructive transfer to the Corporation
of
nonforfeitable, outstanding shares of Stock that have been owned
by the
Optionee for at least six months prior to the date of exercise, (iii)
by
any combination of the foregoing methods of payment or (iv) in accordance
with such other method or manner as set forth below.
|
(A) Cash
Exercise (to exercise and retain the Option Shares):
Subject to the terms and conditions of this Option Agreement and the Plan,
the
Option may be exercised by delivering written notice of exercise to the
Corporation, at its principal office, addressed to the attention of Stock Plan
Administration, or to the agent/broker designated by the Corporation, which
notice shall specify the number of shares for which the Option is being
exercised, and shall be accompanied by payment in full of the Exercise Price
of
the shares for which the Option is being exercised plus the full amount of
all
applicable withholding taxes due on the Option exercise. Payment of the Exercise
Price for the shares of Stock purchased pursuant to the exercise of the Option
shall be made either in cash or by certified check payable to the order of
the
Corporation. If the person exercising the Option is not the Optionee, such
person shall also deliver with the notice of exercise appropriate proof of
his
or her right to exercise the Option, as the Corporation may require in its
sole
discretion. Promptly after exercise of the Option as provided for above, the
Corporation shall deliver to the person exercising the Option a certificate
or
certificates for the shares of Stock being purchased.
(B) Same-Day-Sale
Exercise (to exercise and immediately sell all the Option
Shares):
Subject to the terms and conditions of this Option Agreement and the Plan,
the
Option may be exercised by delivering written notice of exercise to the
agent/broker designated by the Corporation, which notice shall specify the
number of shares for which the Option is being exercised and irrevocable
instructions to promptly (1) sell all of the shares of Stock to be issued upon
exercise and (2) remit to the Corporation the portion of the sale proceeds
sufficient to pay the Exercise Price for the shares of Stock purchased pursuant
to the exercise of the Option and all applicable taxes due on the Option
exercise. The agent/broker shall request issuance of the shares and immediately
and concurrently sell the shares on the Optionee’s behalf. Payment of the
Exercise Price for the shares of Stock purchased pursuant to the exercise of
the
Option, any brokerage fees, transfer fees, and all applicable taxes due on
the
Option exercise, shall be deducted from the proceeds of the sale of the shares.
If the person exercising the Option is not the Optionee, such person shall
also
deliver with the notice of exercise appropriate proof of his or her right to
exercise the Option, as the Corporation may require in its sole discretion.
Promptly after exercise of the Option as provided for above, the agent/broker
shall deliver to the person exercising the Option the net proceeds from the
sale
of the shares of Stock being exercised and sold.
(C) Sell-to-Cover
Exercise (to exercise and immediately sell a portion of the Option
Shares):
Subject to the terms and conditions of this Option Agreement and the Plan,
the
Option may be exercised by delivering written notice of exercise to the
agent/broker designated by the Corporation, which notice shall specify the
number of shares for which the Option is being exercised and irrevocable
instructions to promptly (1) sell the portion (which must be a whole number)
of
the shares of Stock to be issued upon exercise sufficient to generate proceeds
to pay the Exercise Price for the shares of Stock purchased pursuant to the
exercise of the Option, any brokerage or transfer fees, and all applicable
taxes
due on the Option exercise (collectively the “Exercise Costs”) and (2) remit to
the Corporation a sufficient portion of the sale proceeds to pay the Exercise
Price for the shares of Stock purchased pursuant to the exercise of the Option
and all applicable taxes due on the Option exercise. The agent/broker shall
request issuance of the shares and immediately and concurrently sell on the
Optionee’s behalf only such number of the Shares as is required to generate
proceeds sufficient to pay the Exercise Costs. Promptly after exercise of the
Option as provided for above, the Corporation shall deliver to the person
exercising the Option a certificate for the shares of Stock issued upon exercise
which are not sold to pay the Exercise Costs. Promptly after exercise of the
Option as provided for above, the agent/broker shall deliver to the person
exercising the Option any net proceeds from the sale of the Shares in excess
of
the Exercise Costs. If the person exercising the Option is not the Optionee,
such person shall also deliver with the notice of exercise appropriate proof
of
his or her right to exercise the Option, as the Corporation may require in
its
sole discretion.
|
4.5.2
|
As
soon as practicable upon the Corporation’s receipt of the Optionee’s
notice of exercise and payment, the Corporation shall direct the
due
issuance of the shares so
purchased.
|
|
4.5.3
|
As
a further condition precedent to the exercise of this Option in whole
or
in part, the Optionee shall comply with all regulations and the
requirements of any regulatory authority having control of, or supervision
over, the issuance of the shares of Stock and in connection therewith
shall execute any documents which the Board shall in its sole discretion
deem necessary or advisable.
|
5.
TRANSFERABILITY
OF OPTIONS
During
the lifetime of an Optionee, only such Optionee (or, in the event of legal
incapacity or incompetency, the Optionee’s guardian or legal representative) may
exercise the Option. No Option shall be assignable or transferable by the
Optionee to whom it is granted, other than by will or the laws of descent and
distribution.
6.
COMPLIANCE
WITH LAW
The
Corporation shall make reasonable efforts to comply with all applicable federal
and state securities laws; provided,
however,
that notwithstanding any other provision of this Option Agreement, the Option
shall not be exercisable if the exercise thereof would result in a violation
of
any such law.
7.
RIGHTS
AS STOCKHOLDER
Neither
the Optionee nor any executor, administrator, distributee or legatee of the
Optionee’s estate shall be, or have any of the rights or privileges of, a
stockholder of the Corporation in respect of any shares of Stock issuable
hereunder unless and until such shares have been fully paid and certificates
representing such shares have been endorsed, transferred and delivered, and
the
name of the Optionee (or of such personal representative, administrator,
distributee or legatee of the Optionee’s estate) has been entered as the
stockholder of record on the books of the Corporation.
8.
WITHHOLDING
OF TAXES
If
the Corporation shall be required to withhold any federal, state, local or
foreign tax in connection with exercise of this Option, it shall be a condition
to such exercise that the Optionee pay or make provision satisfactory to the
Corporation for payment of all such taxes. The Optionee may elect that all
or
any part of such withholding requirement be satisfied by retention by the
Corporation of a portion of the shares purchased upon exercise of this Option.
If such election is made, the shares so retained shall be credited against
such
withholding requirement at the fair market value on the date of
exercise.
9.
DISCLAIMER
OF RIGHTS
No
provision in this Option Agreement shall be construed to confer upon the
Optionee the right to be employed by the Corporation or any Subsidiary, or
to
interfere in any way with the right and authority of the Corporation or any
Subsidiary either to increase or decrease the compensation of the Optionee
at
any time, or to terminate any employment or other relationship between the
Optionee and the Corporation or any Subsidiary.
10.
CHANGE
IN CONTROL
For
purposes of this Option Agreement, “Change in Control” means
(a)
the acquisition by any individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) (a “Person”), of beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either
(i)
the then-outstanding shares of common stock of the Corporation (the “Outstanding
Corporation Common Stock”) or (ii) the combined voting power of the
then-outstanding voting securities of the Corporation entitled to vote generally
in the election of directors (the “Outstanding Corporation Voting Securities”);
provided,
however,
that the following acquisitions shall not constitute a Change in Control: (A)
any acquisition directly from the Corporation (excluding an acquisition by
virtue of the exercise of a conversion privilege), (B) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the
Corporation or any corporation controlled by the Corporation or (C) any
acquisition by any corporation pursuant to a reorganization,
merger
or consolidation, if, following such reorganization, merger or consolidation,
the conditions described in sub-clauses (i), (ii) and (iii) of clause (c) of
this Section 10 are satisfied; or
(b)
if individuals who, as of the date hereof, constitute the Board of Directors
(the “Incumbent Board”) cease for any reason to constitute at least a majority
of the Board; provided,
however,
that any individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Corporation’s stockholders, was
approved by a vote of at least two-thirds of the directors then constituting
the
Incumbent Board shall be considered as though such individual were a member
of
the Incumbent Board, but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of either an actual or
threatened election contest subject to Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act or other actual or threatened solicitation of proxies
or
consents by or on behalf of a Person other than the Board; or
(c)
consummation of a reorganization, merger or consolidation, unless following
such
reorganization, merger or consolidation (i) more than 60% of, respectively,
the
then-outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly
or
indirectly, by all or substantially all of the individuals and entities who
were
the beneficial owners, respectively, of the Outstanding Corporation Common
Stock
and Outstanding Corporation Voting Securities immediately prior to such
reorganization, merger, or consolidation in substantially the same proportions
as their ownership, immediately prior to such reorganization, merger or
consolidation, of the Outstanding Corporation Common Stock and Outstanding
Corporation Voting Securities, as the case may be (for purposes of determining
whether such percentage test is satisfied, there shall be excluded from the
number of shares and voting securities of the resulting corporation owned by
the
Corporation’s stockholders, but not from the total number of outstanding shares
and voting securities of the resulting corporation, any shares or voting
securities received by any such stockholder in respect of any consideration
other than shares or voting securities of the Corporation), (ii) no Person
(excluding the Corporation, any employee benefit plan (or related trust) of
the
Corporation, any qualified employee benefit plan of such corporation resulting
from such reorganization, merger or consolidation and any Person beneficially
owning, immediately prior to such reorganization, merger or consolidation,
directly or indirectly, 20% or more of the Outstanding Corporation Common Stock
or Outstanding Corporation Voting Securities, as the case may be) beneficially
owns, directly or indirectly, 20% or more of, respectively, the then-outstanding
shares of common stock of the corporation resulting from such reorganization,
merger or consolidation or the combined voting power of the then-outstanding
voting securities of such corporation entitled to vote generally in the election
of directors and (iii) at least a majority of the members of the board of
directors of the corporation resulting from such reorganization, merger or
consolidation were members of the Incumbent Board at the time of the execution
of the initial agreement providing for such reorganization, merger or
consolidation; or
(d)
(i) approval by the stockholders of the Corporation of a complete liquidation
or
dissolution of the Corporation, or (ii) the first to occur of (A) the sale
or
other disposition (in one transaction or a series of related transactions)
of
all or substantially all of the assets of the Corporation, or (B) the approval
by the stockholders of the Corporation of any such sale or disposition, other
than, in each case, any such sale or disposition to a corporation, with respect
to which immediately thereafter, (1) more than 60% of, respectively, the
then-outstanding shares of common stock of such corporation and the combined
voting power of the then-outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then beneficially
owned, directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the outstanding
Corporation Common Stock and Outstanding Corporation Voting Securities
immediately prior to such sale or other disposition in substantially the same
proportion as their ownership, immediately prior to such sale or other
disposition, of the Outstanding Corporation Common Stock and Outstanding
Corporation Voting Securities, as the case may be (for purposes of determining
whether such percentage test is satisfied, there shall be excluded from the
number of shares and voting securities of the transferee corporation owned
by
the Corporation’s stockholders, but not from the total number of outstanding
shares and voting securities of the transferee corporation, any shares or voting
securities received by any such stockholder in respect of any consideration
other than shares or voting securities of the Corporation), (2) no Person
(excluding the Corporation and any employee benefit plan (or related trust)
of
the Corporation, any qualified employee benefit plan of such transferee
corporation and any Person beneficially owning, immediately prior to such sale
or other disposition, directly or indirectly, 20% or more of the Outstanding
Corporation Common Stock or Outstanding Corporation Voting Securities, as the
case may be) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then-outstanding shares of common stock of such transferee
corporation and the combined voting power of the then-outstanding voting
securities of such transferee corporation entitled to vote generally in the
election of directors and (3) at least a majority of the members of the board
of
directors of such transferee corporation were members of the Incumbent Board
at
the time of the execution of the initial agreement or action of the board
providing for such sale or other disposition of assets of the
Corporation.
11.
COMPLIANCE
WITH SECTION 409A OF THE CODE.
To
the extent applicable, it is intended that this Option Agreement and the Plan
comply with the provisions of Section 409A of the Code, so that the income
inclusion provisions of Section 409A(a)(1) do not apply to Optionee. This Option
Agreement and the Plan shall be administered in a manner consistent with this
intent, and any provision that would cause the Option Agreement or the Plan
to
fail to satisfy Section 409A of the Code shall have no force and effect until
amended to comply with Section 409A of the Code (which amendment may be
retroactive to the extent permitted by Section 409A of the Code and may be
made
by the Corporation without the consent of the Optionee).
12.
INTERPRETATION
OF THIS OPTION AGREEMENT
All
decisions and interpretations made by the Board or the Compensation Committee
thereof with regard to any question arising under the Plan or this Option
Agreement shall be binding and conclusive on the Corporation and the Optionee
and any other person entitled to exercise the Option as provided for
herein.
13.
GOVERNING
LAW
This
Option Agreement shall be governed by the laws of the State of Delaware (but
not
including the choice of law rules thereof).
14.
BINDING
EFFECT
Subject
to all restrictions provided for in this Option Agreement, the Plan, and by
applicable law relating to assignment and transfer of this Option Agreement
and
the Option provided for herein, this Option Agreement shall be binding upon
and
inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, successors and assigns.
15.
NOTICE
Any
notice hereunder by the Optionee to the Corporation shall be in writing and
shall be deemed duly given if mailed or delivered to the Corporation at its
principal office, addressed to the attention of Stock Plan Administration or
if
so mailed or delivered to such other address as the Corporation may hereafter
designate by notice to the Optionee. Any notice hereunder by the Corporation
to
the Optionee shall be in writing and shall be deemed duly given if mailed or
delivered to the Optionee at the address specified below by the Optionee for
such purpose, or if so mailed or delivered to such other address as the Optionee
may hereafter designate by written notice given to the Corporation.
16.
SEVERABILITY
If
one or more of the provisions of this Option Agreement is invalidated for any
reason by a court of competent jurisdiction, any provision so invalidated shall
be deemed to be separable from the other provisions hereof, and the remaining
provisions hereof shall continue to be valid and fully enforceable.
17.
ENTIRE
AGREEMENT;
ELIGIBILITY
This
Option Agreement and the Plan together constitute the entire agreement and
supersedes all prior understandings and agreements, written or oral, of the
parties hereto with respect to the subject matter hereof. Except for amendments
to the Plan incorporated into this Option Agreement by reference pursuant to
Section 2 above, neither this Option Agreement nor any term hereof may be
amended, waived, discharged or terminated except by a written instrument signed
by the Corporation and the Optionee; provided,
however,
that the Corporation unilaterally may waive any provision hereof in writing
to
the extent that such waiver does not adversely affect the interests of the
Optionee hereunder, but no such waiver shall operate as or be construed to
be a
subsequent waiver of the same provision or a waiver of any other provision
hereof. In the event that it is determined that the Optionee was not eligible
to
receive this Option, the Option and this Option Agreement shall be null and
void
and of no further effect.
SIGNATURE
PAGE
IN
WITNESS WHEREOF, the parties hereto have duly executed this Option Agreement,
or
caused this Option Agreement to be duly executed on their behalf, as of the
day
and year first above written.
Transaction
Systems Architects, Inc.
Optionee:
By:
_________________________________________ By:
_________________________________________
[__________________] [_______________________]
ADDRESS
FOR
NOTICE TO OPTIONEE:
____________________________________
Number Street Apt.
____________________________________
City
State Zip
Code
____________________________________
SS# Hire
Date
DESIGNATED
BENEFICIARY:
____________________________________
Please
Print
Last Name, First Name MI
____________________________________
Beneficiary’s
Street Address
____________________________________
City State Zip
Code
____________________________________
Beneficiary’s
Social Security Number
I
understand that in the event of my death, the above named beneficiary will
have
control of any unexercised options remaining in my account at that time. If
no
beneficiary is designated or if the named beneficiary does not survive me,
the
options will become part of my estate. This beneficiary designation does NOT
apply to stock acquired by the exercise of options prior to my
death.
____________________________________
SIGNATURE DATE
After
completing this page, please make a copy for your records and return it
to
Stock
Plan Administration, Transaction Systems Architects, Inc., 330 S. 108 Avenue,
Omaha, NE 68154
2005
Equity and Performance Incentive Plan - US Plan
_________
Options $________/Share
Exercise Price _______
Date
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 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:
August 5, 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:
August 5, 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 June 30, 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:
August 5, 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 June 30, 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:
August 5, 2005
|
By:
|
/s/
DAVID
R. BANKHEAD
|
|
David
R. Bankhead
|
||
|
Senior
Vice President,
Chief
Financial Officer and
Treasurer
|