Form 10-Q -- Q1 Fy'06
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 December 31, 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 b No ____
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer b Accelerated
filer ____ Non-accelerated
filer ____
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes ____
No b
As
of
January 31, 2006, there were 37,155,684 shares of the registrant’s common stock,
par value $.005 per share, outstanding (including 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
|
18
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
29
|
Item 4.
|
Controls
and Procedures
|
29
|
|
PART
II - OTHER INFORMATION
|
Item 1.
|
Legal
Proceedings
|
30
|
Item 1A.
|
Risk
Factors
|
31
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
34
|
Item 3.
|
Defaults
Upon Senior Securities
|
35
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
35
|
Item 5.
|
Other
Information
|
35
|
Item 6.
|
Exhibits
|
35
|
|
|
Signature
|
36
|
Exhibit
Index
|
37
|
PART
I - FINANCIAL INFORMATION
Item
1. FINANCIAL STATEMENTS
|
Page
|
Consolidated
Balance Sheets as of December 31, 2005 and September 30,
2005
|
2
|
Consolidated
Statements of Operations for the three months ended December 31,
2005 and
2004
|
3
|
Consolidated
Statements of Cash Flows for the three months ended December 31,
2005 and
2004
|
4
|
Notes
to Consolidated Financial Statements
|
5
|
TRANSACTION
SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share amounts)
|
|
December
31,
2005
|
|
September
30,
2005
|
|
ASSETS
|
|
(Unaudited)
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
95,705
|
|
$
|
83,693
|
|
Marketable
securities
|
|
|
62,093
|
|
|
72,819
|
|
Billed
receivables, net of allowances of $2,389 and $2,390,
respectively
|
|
|
53,806
|
|
|
63,530
|
|
Accrued
receivables
|
|
|
11,882
|
|
|
5,535
|
|
Recoverable
income taxes
|
|
|
4,976
|
|
|
3,474
|
|
Deferred
income taxes, net
|
|
|
2,688
|
|
|
2,552
|
|
Other
|
|
|
13,427
|
|
|
13,009
|
|
Total
current assets
|
|
|
244,577
|
|
|
244,612
|
|
Property
and equipment, net
|
|
|
9,264
|
|
|
9,089
|
|
Software,
net
|
|
|
4,649
|
|
|
4,930
|
|
Goodwill
|
|
|
66,482
|
|
|
66,169
|
|
Other
intangible assets, net
|
|
|
12,908
|
|
|
13,573
|
|
Deferred
income taxes, net
|
|
|
21,459
|
|
|
21,884
|
|
Other
|
|
|
2,967
|
|
|
3,123
|
|
Total
assets
|
|
$
|
362,306
|
|
$
|
363,380
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of debt - financing agreements
|
|
$
|
975
|
|
$
|
2,165
|
|
Accounts
payable
|
|
|
7,442
|
|
|
9,521
|
|
Accrued
employee compensation
|
|
|
14,590
|
|
|
19,296
|
|
Deferred
revenue
|
|
|
80,746
|
|
|
81,374
|
|
Accrued
and other liabilities
|
|
|
12,535
|
|
|
11,662
|
|
Total
current liabilities
|
|
|
116,288
|
|
|
124,018
|
|
Debt
- financing agreements
|
|
|
58
|
|
|
154
|
|
Deferred
revenue
|
|
|
19,515
|
|
|
20,450
|
|
Other
|
|
|
1,645
|
|
|
1,640
|
|
Total
liabilities
|
|
|
137,506
|
|
|
146,262
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred stock,
$.01 par value; 5,000,000 shares authorized; no shares issued and
outstanding at December 31, 2005 and September 30, 2005
|
|
|
-
|
|
|
-
|
|
Common
stock, $.005 par value; 70,000,000 shares authorized; 40,575,967
and
40,327,678 shares issued at December 31, 2005 and September 30, 2005,
respectively
|
|
|
203
|
|
|
202
|
|
Treasury
stock, at cost; 3,420,508 and 2,943,109 shares at December 31, 2005
and
September 30, 2005, respectively
|
|
|
(81,924
|
)
|
|
(68,596
|
)
|
Additional
paid-in capital
|
|
|
280,410
|
|
|
274,344
|
|
Retained
earnings
|
|
|
35,519
|
|
|
20,329
|
|
Accumulated
other comprehensive loss
|
|
|
(9,408
|
)
|
|
(9,161
|
)
|
Total
stockholders' equity
|
|
|
224,800
|
|
|
217,118
|
|
Total
liabilities and stockholders' equity
|
|
$
|
362,306
|
|
$
|
363,380
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
TRANSACTION
SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited
and in thousands, except per share amounts)
|
|
Three
Months Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
Revenues:
|
|
|
|
|
|
Software
license fees
|
|
$
|
43,392
|
|
$
|
47,806
|
|
Maintenance
fees
|
|
|
25,318
|
|
|
22,080
|
|
Services
|
|
|
16,365
|
|
|
10,720
|
|
Total
revenues
|
|
|
85,075
|
|
|
80,606
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
Cost
of software license fees
|
|
|
6,935
|
|
|
5,906
|
|
Cost
of maintenance and services
|
|
|
20,891
|
|
|
13,836
|
|
Research
and development
|
|
|
9,752
|
|
|
9,915
|
|
Selling
and marketing
|
|
|
16,012
|
|
|
15,301
|
|
General
and administrative
|
|
|
16,970
|
|
|
13,563
|
|
Total
expenses
|
|
|
70,560
|
|
|
58,521
|
|
Operating
income
|
|
|
14,515
|
|
|
22,085
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,927
|
|
|
584
|
|
Interest
expense
|
|
|
(29
|
)
|
|
(168
|
)
|
Other,
net
|
|
|
(366
|
)
|
|
(1,247
|
)
|
Total
other income (expense)
|
|
|
2,532
|
|
|
(831
|
)
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
17,047
|
|
|
21,254
|
|
Income
tax provision
|
|
|
(1,857
|
)
|
|
(8,331
|
)
|
Net
income
|
|
$
|
15,190
|
|
$
|
12,923
|
|
|
|
|
|
|
|
|
|
Earnings
per share information:
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
37,253
|
|
|
37,781
|
|
Diluted
|
|
|
38,026
|
|
|
38,552
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.41
|
|
$
|
0.34
|
|
Diluted
|
|
$
|
0.40
|
|
$
|
0.34
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
TRANSACTION
SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited
and in thousands)
|
|
Three
Months Ended
December
31,
|
|
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
15,190
|
|
$
|
12,923
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
990
|
|
|
988
|
|
Amortization
|
|
|
923
|
|
|
292
|
|
Deferred
income taxes
|
|
|
217
|
|
|
2,092
|
|
Share-based
compensation expense
|
|
|
1,406
|
|
|
-
|
|
Tax
benefit of stock options exercised
|
|
|
383
|
|
|
908
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Billed
and accrued receivables, net
|
|
|
2,438
|
|
|
(2,456
|
)
|
Other
current assets
|
|
|
(438
|
)
|
|
(632
|
)
|
Other
assets
|
|
|
408
|
|
|
(1,739
|
)
|
Accounts
payable
|
|
|
(1,969
|
)
|
|
(578
|
)
|
Accrued
employee compensation
|
|
|
(4,188
|
)
|
|
(1,662
|
)
|
Accrued
liabilities
|
|
|
450
|
|
|
2,159
|
|
Current
income taxes
|
|
|
(1,502
|
)
|
|
3,900
|
|
Deferred
revenue
|
|
|
(823
|
)
|
|
(1,285
|
)
|
Other
current and noncurrent liabilities
|
|
|
21
|
|
|
104
|
|
Net
cash provided by operating activities
|
|
|
13,506
|
|
|
15,014
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(1,489
|
)
|
|
(522
|
)
|
Purchases
of software
|
|
|
(143
|
)
|
|
(771
|
)
|
Purchases
of marketable securities
|
|
|
(7,703
|
)
|
|
(74,875
|
)
|
Sales
of marketable securities
|
|
|
18,428
|
|
|
8
|
|
Acquisition
of business
|
|
|
(59
|
)
|
|
-
|
|
Net
cash provided by (used in) investing activities
|
|
|
9,034
|
|
|
(76,160
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
283
|
|
|
240
|
|
Proceeds
from exercises of stock options
|
|
|
3,309
|
|
|
4,108
|
|
Excess
tax benefit of stock options exercised
|
|
|
683
|
|
|
-
|
|
Purchases
of common stock
|
|
|
(12,802
|
)
|
|
-
|
|
Payments
on debt - financing agreements
|
|
|
(1,275
|
)
|
|
(3,937
|
)
|
Other
|
|
|
(15
|
)
|
|
25
|
|
Net
cash provided by (used in) financing activities
|
|
|
(9,817
|
)
|
|
436
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate fluctuations on cash
|
|
|
(711
|
)
|
|
2,779
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
12,012
|
|
|
(57,931
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
83,693
|
|
|
134,198
|
|
Cash
and cash equivalents, end of period
|
|
$
|
95,705
|
|
$
|
76,267
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
TRANSACTION
SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
Consolidated Financial Statements
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. The consolidated financial statements at
December 31, 2005, and for the three months ended December 31, 2005 and 2004,
are unaudited and reflect all adjustments of a normal recurring nature, except
as otherwise disclosed 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 the current
period presentation.
The
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, 2005. The results of operations for the
three months ended December 31, 2005 are not necessarily indicative of the
results that may be achieved for the entire fiscal year ending
September 30, 2006.
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the consolidated financial statements and the reported amounts of revenues
and
expenses during the reporting period. Actual results could differ from those
estimates.
On
July
29, 2005, the Company acquired the business of S2 Systems, Inc. (“S2”) through
the acquisition of
substantially all of its assets. S2 was a global provider of electronic payments
and network connectivity software, and it primarily served financial services
and retail customers. In addition to its U.S. operations, S2 had a significant
presence in the Middle East, Europe, Latin America and the Asia-Pacific region.
The consolidated financial statements at September 30, 2005 and December 31,
2005, and for the three months ended December 31, 2005, include amounts acquired
from, as well as results of operations of, the acquired business.
2.
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 postcontract
customer support (maintenance or “PCS”) or other products or services, is
deferred and subsequently recognized as the products are delivered or the
services are performed, with the residual difference between the total
arrangement fee and revenues allocated to undelivered elements being allocated
to the delivered elements.
When
a
software license arrangement includes services to provide significant
modification or customization of software, those services are not separable
from
the software and are accounted for in accordance with Accounting Research
Bulletin (“ARB”) No. 45, “Long-Term Construction-Type Contracts,” and the
relevant guidance provided by SOP 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.” Accounting for
services delivered over time (generally in excess of twelve months) under ARB
No. 45 and SOP 81-1 is referred to as contract accounting. Under contract
accounting, the Company generally uses the percentage-of-completion method.
Under the percentage-of-completion method, the Company records revenue
for
the
software license fee and services over the development and implementation
period, with the percentage of completion generally measured by the percentage
of labor hours incurred to-date to estimated total labor hours for each
contract. For those contracts subject to percentage-of-completion contract
accounting, estimates of total revenue and profitability under the contract
consider amounts due under extended payment terms. In
certain cases, the Company provides its customers with extended payment terms
whereby payment is deferred beyond when the services are rendered. In other
projects, the Company provides its customer with extended payment terms that
are
refundable in the event certain milestones are not achieved or the project
scope
changes. The Company excludes revenues due on extended payment terms from its
current percentage-of-completion computation until such time that collection
of
the fees becomes probable. In the event project profitability is assured and
estimable within a range, percentage-of-completion revenue recognition is
computed using the lowest level of profitability in the range. If the range
of
profitability is not estimable but some level of profit is assured, revenues
are
recognized to the extent direct and incremental costs are incurred until such
time that project profitability can be estimated. In the event some level of
profitability cannot be reasonably assured, completed-contract accounting is
applied.
For
software license arrangements in which a significant portion of the fee is
due
more than 12 months after delivery, the software license fee is deemed not
to be
fixed or determinable.
For
software license arrangements in which the fee is not considered fixed or
determinable, the software license fee is recognized as revenue as payments
become due and payable, provided all other conditions for revenue recognition
have been met. For software license arrangements in which the Company has
concluded that collection of the fees is not probable, revenue is recognized
as
cash is collected, provided all other conditions for revenue recognition have
been met. In making the determination of collectibility, the Company considers
the creditworthiness of the customer, economic conditions in the customer’s
industry and geographic location, and general economic conditions.
SOP
97-2 requires the seller of software that includes PCS to establish VSOE of
fair
value of the undelivered element of the contract in order to account separately
for the PCS revenue. For certain of the Company's products, VSOE of the fair
value of PCS is determined by a consistent pricing of PCS and PCS renewals
as a
percentage of the software license fees. In other products, the Company
determines VSOE by reference to contractual renewals, when the renewal terms
are
substantive. In those cases where VSOE of the fair value of PCS is determined
by
reference to contractual renewals, the Company considers factors such as whether
the period of the initial PCS term is relatively long when compared to the
term
of the software license or whether the PCS renewal rate is significantly below
the Company's normal pricing practices.
In
the
absence of customer-specific acceptance provisions, software license
arrangements generally grant customers a right of refund or replacement only
if
the licensed software does not perform in accordance with its published
specifications. If the Company’s product history supports an assessment by
management that the likelihood of non-acceptance is remote, the Company
recognizes revenue when all other criteria of revenue recognition are met.
For
those software license arrangements that include customer-specific acceptance
provisions, such provisions are generally presumed to be substantive and the
Company does not recognize revenue until the earlier of the receipt of a written
customer acceptance, objective demonstration that the delivered product meets
the customer-specific acceptance criteria or the expiration of the acceptance
period. The Company also defers the recognition of revenue on transactions
involving less-established or newly released software products that do not
have
a product history. The Company recognizes revenues on such arrangements upon
the
earlier of receipt of written acceptance or the first production use of the
software by the customer.
For
software license arrangements in which the Company acts as a sales agent for
another company's products, revenues are recorded on a net basis. These include
arrangements in which the Company does not take title to the products, is not
responsible for providing the product or service, earns a fixed commission,
and
assumes credit risk only to the extent of its commission. For software license
arrangements in which the Company acts as a distributor of another company's
product, and in certain circumstances, modifies or enhances the product,
revenues are recorded on a gross basis. These include arrangements in which
the
Company takes title to the products and is responsible for providing the product
or service.
For
software license arrangements in which the Company permits the customer to
vary
their software mix, including the right to receive unspecified future software
products during the software license term, the Company recognizes revenue
ratably over the license term, provided all other revenue recognition criteria
have been met. For 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.
Certain
of the Company’s software
license arrangements
are
short-term, time-based license arrangements; allow the customer to vary their
software mix; or include PCS terms that are relatively long as compared to
the
license term. For these arrangements, VSOE of fair value of PCS may not exist
and revenues would therefore be recognized ratably over the PCS term. The
Company typically classifies revenues associated with these arrangements in
accordance with the contractually-specified amounts assigned to the various
elements, including software license fees and maintenance fees. The following
are amounts included in revenues in the consolidated statements of operations
for which VSOE of fair value does not exist for each element:
|
|
Three
Months Ended
December
31,
|
|
|
|
2005
|
|
2004
|
|
Software
license fees
|
|
$
|
4,250
|
|
$
|
4,548
|
|
Maintenance
fees
|
|
|
1,312
|
|
|
1,248
|
|
Total
|
|
$
|
5,562
|
|
$
|
5,796
|
|
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, such costs are 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.
3.
Share-Based Compensation Plans
Stock
Incentive Plans - Active Plans
The
Company has a 2005 Equity and Performance Incentive Plan
(the
“2005 Incentive Plan”) whereby shares of the Company’s common stock have been
reserved for issuance to eligible employees or non-employee directors of the
Company. The 2005 Incentive Plan provides for the grant of incentive stock
options, nonqualified stock options, stock appreciation rights, restricted
stock
awards, performance awards and other awards. The maximum number of shares of
the
Company’s common stock that may be issued or transferred in connection with
awards granted under the 2005 Incentive Plan will be the sum of (i) 3,000,000
shares and (ii) any shares represented by outstanding options that had been
granted under designated terminated stock option plans that are subsequently
forfeited, expire or are canceled without delivery of the Company’s common
stock.
Stock
options granted pursuant to the 2005 Incentive Plan are granted at an exercise
price not less than the market value per share of the Company’s common stock on
the day immediately preceding the date of the grant. Under the 2005 Incentive
Plan, the term of the outstanding options may not exceed ten years. Vesting
of
options is determined by the Compensation Committee of the Board of Directors,
the administrator of the 2005 Incentive Plan, and can vary based upon the
individual award agreements.
Performance
awards granted pursuant to the 2005 Incentive Plan become payable upon the
achievement of specified management objectives. Each performance award
specifies: (i) the number of performance shares or units granted, (ii) the
period of time established to achieve the management objectives, which may
not
be less than one year from the grant date, (iii) the management objectives
and a
minimum acceptable level of achievement as well as a formula for determining
the
number of performance shares or units earned if performance is at or above
the
minimum level but short of full achievement of the management objectives, and
(iv) any other terms deemed appropriate.
The
Company also has a 1999 Stock Option Plan whereby 4,000,000 shares of the
Company’s common stock have been reserved for issuance to eligible employees of
the Company and its subsidiaries. As a matter of Company policy, stock options
are granted at an exercise price not less than the fair market value of the
common stock at the time of the grant. The term of the outstanding options
is
ten years. The options generally vest in equal installments annually over a
period of three years.
Employee
Stock Purchase Plan
Under
the Company's 1999 Employee Stock Purchase Plan (the "ESPP"), a total of
1,500,000 shares of the Company’s common stock have been reserved for issuance
to eligible employees. Participating employees are permitted to designate up
to
the lesser of $25,000 or 10% of their annual base compensation for the purchase
of common stock under the ESPP. Purchases under the ESPP are made one calendar
month after the end of each fiscal quarter. The price for shares of common
stock
purchased under the ESPP is currently at 85% of the stock’s fair market value on
the last business day of the three-month participation period.
Accounting
for Share-Based Payments Pursuant to Statement
of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based
Payment” (“SFAS No. 123R”)
The
Company adopted SFAS No. 123R as of October 1, 2005
using
the modified prospective transition method. This revised accounting standard
eliminated the ability to account for share-based compensation transactions
using the intrinsic value method in accordance with Accounting Principles Board
(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” 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 in their financial
statements over the requisite service period. In March 2005, the SEC issued
SAB
107, “Share-Based Payment,” which does not modify any of SFAS No. 123R’s
conclusions or requirements, but rather includes recognition, measurement and
disclosure guidance for companies as they implement SFAS No. 123R.
All
of
the Company’s existing share-based compensation awards have been determined to
be equity awards. Under
the modified prospective transition method, the Company is required to recognize
noncash compensation costs for the portion of share-based awards that are
outstanding as of October 1, 2005 for which the requisite service has not been
rendered (i.e. nonvested awards) as the requisite service is rendered on or
after that date. The compensation cost is based on the grant date fair value
of
those awards as calculated for pro forma disclosures under SFAS No. 123. The
Company will recognize compensation cost relating to the nonvested portion
of
those awards in the financial statements beginning with the date on which SFAS
No. 123R is adopted, through the end of the requisite service
period. Under
the modified prospective transition method, the financial statements are
unchanged for periods prior to adoption and the pro forma disclosures previously
required by SFAS No. 123 for those prior periods will continue to be required
to
the extent those amounts differ from the amounts in the statement of operations.
The
Company did not grant any awards pursuant to the 1999 Stock Option Plan during
the first quarter of fiscal 2006. The
Company granted
30,000
stock options pursuant to the 2005 Incentive Plan during the first quarter
of
fiscal 2006. With respect to these options, which vest with the passage of
time,
the fair value of this option grant was estimated on the date of grant using
the
Black-Scholes option-pricing model, a pricing model acceptable under SFAS No.
123R, with
the following weighted-average assumptions:
|
Three
Months Ended December 31,
|
|
|
2005
|
|
Expected
life
|
|
5.0
|
|
Interest
rate
|
|
4.4%
|
|
Volatility
|
|
40%
|
|
Dividend
yield
|
|
—
|
|
Expected
volatilities are based on implied volatilities from traded options on the
Company’s common stock, historical volatility of the Company’s common stock, and
other factors. The expected term of options granted represents the period of
time that options granted are expected to be outstanding, assuming differing
exercise behaviors for stratified employee groupings.
During
the first quarter of fiscal 2006, pursuant to the Company’s 2005 Incentive Plan,
the Company also granted long-term incentive program performance share awards
(“LTIP Performance Shares”) representing 124,000 shares of the Company’s common
stock with a weighted-average grant date fair value of $29.18 per share to
various key employees of the Company, using the market price of the Company’s
common stock at the time of grant as the fair value per share. These LTIP
Performance Shares are earned, if at all, based upon the achievement, over
a
three-year period (the “Performance Period”), of performance goals related to
(i) the compound annual growth over the Performance Period in the Company’s
60-month backlog as determined by the Company, (ii) the compound annual growth
over the Performance Period in the diluted earnings per share as reported in
the
Company’s consolidated financial statements, and (iii) the compound annual
growth over the Performance Period in the total revenues as reported in the
Company’s consolidated financial statements. In no event will any of the LTIP
Performance Shares become earned if the Company’s earnings per share is below a
predetermined minimum threshold level at the conclusion of the Performance
Period. Assuming achievement of the predetermined minimum earnings per share
threshold level, up to 150% of the LTIP Performance Shares may be earned upon
achievement of performance goals equal to or exceeding the maximum target levels
for compound annual growth over the Performance Period in the Company’s 60-month
backlog, diluted earnings per share and total revenues.
The
Company also has an employee stock purchase plan (“ESPP”) whereby employees are
allowed to purchase Company common stock at a discount. The discount offered
pursuant to the ESPP is 15 percent, which exceeds the 5 percent noncompensatory
guideline in SFAS No. 123R and exceeds the Company’s estimated cost of capital.
Consequently,
the entire 15 percent discount to employees is deemed to be
compensatory.
Share-based
compensation expenses
related to stock options, LTIP Performance Shares, and the ESPP recognized
under
SFAS No. 123R in the first quarter of fiscal 2006 were $1.4 million, with
corresponding tax benefits of $0.5 million, resulting in decreased net income
of
$0.9 million, or $0.02 per basic share and $0.02 per diluted share. No
share-based compensation costs were capitalized during the first quarter of
fiscal 2006. Estimated
forfeiture rates, stratified by employee classification, have been included
as
part of the Company’s calculations of compensation costs. The Company elected to
recognize compensation costs for stock option awards
which
vest with the passage of time
with
only service conditions on a straight-line basis over the requisite service
period. In
accordance with the modified prospective transition method, the Company's
consolidated financial statements for prior periods have not been restated
to
reflect, and do not include, the impact of SFAS No. 123R. However, pro forma
disclosures for periods prior to adoption of SFAS No. 123R are included below
as
part of this footnote.
Adoption
of SFAS No. 123R also affected the Company’s presentation of cash flows. For the
first quarter of fiscal 2006, cash flow from operating activities was reduced
by
$0.7 million and cash flow from financing activities was increased by $0.7
million compared to amounts that would have been reported had the Company not
adopted the new standard.
Other
Disclosures
A
summary of stock options as of December 31, 2005 and changes during
the three months then ended is as follows:
Stock
Options
|
|
Shares
|
|
Weighted-Average
Exercise
Price
|
|
Weighted-Average
Remaining
Contractual
Term
(in
years)
|
|
Aggregate
Intrinsic Value (in thousands)
|
|
Outstanding
at October 1, 2005
|
|
|
3,926,218
|
|
$
|
16.79
|
|
|
|
|
|
|
|
Granted
|
|
|
30,000
|
|
|
29.96
|
|
|
|
|
|
|
|
Exercised
|
|
|
(235,982
|
)
|
|
14.05
|
|
|
|
|
|
|
|
Cancellations
|
|
|
(24,870
|
)
|
|
19.59
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
3,695,366
|
|
$
|
17.05
|
|
|
7.0
|
|
$
|
43,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2005
|
|
|
2,015,639
|
|
$
|
13.46
|
|
|
5.7
|
|
$
|
30,891
|
|
All
fully-vested stock options as of December 31, 2005 are exercisable and are
included in the above table. The Company issues new shares of common stock
upon
option exercise. The intrinsic value of options exercised during the first
quarter of fiscal 2006 was $3.2 million. The Company’s stock awards allow
employees to exercise options via cash payment to the Company for the shares
of
common stock or via a simultaneous broker-assisted cashless exercise of a share
option, through which the employee authorizes the exercise of an option and
the
immediate sale of the option shares in the open market.
A
summary of nonvested LTIP Performance Shares as of December 31, 2005 and changes
during
the three months then ended is as follows:
Nonvested
LTIP Performance Shares
|
|
Number
|
|
Weighted-Average
Grant
Date
Fair
Value
|
Nonvested
at October 1, 2005
|
|
37,000
|
|
$
28.27
|
Granted
|
|
124,000
|
|
29.18
|
Exercised
|
|
-
|
|
-
|
Cancellations
|
|
-
|
|
-
|
Nonvested
at December 31, 2005
|
|
161,000
|
|
$
28.97
|
As
of
December 31, 2005, there were unrecognized compensation costs of $10.6 million
related to nonvested stock options and $3.9 million related to nonvested LTIP
Performance Shares which the Company expects to recognize over weighted-average
periods of 3.0 years and 2.8 years, respectively.
Accounting
for Share-Based Payments Prior to Adoption of SFAS No. 123R
Prior
to October
1, 2005, the Company accounted for its stock-based compensation plans under
the
intrinsic value method in accordance with APB Opinion No. 25 and followed the
disclosure provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based
Compensation - Transition and Disclosure.” Because 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, compensation expense generally was not
recorded related to stock options under the intrinsic value method of APB
Opinion No. 25.
Prior
to October 1, 2005, the Company calculated 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 months ended December 31, 2004 would have approximated the following
pro
forma amounts (in thousands, except per share amounts):
|
Three
Months Ended
December
31,
2004
|
Net
income:
|
|
|
|
As
reported
|
|
$
12,923
|
|
Deduct:
stock-based employee compensation expense determined under the fair
value
method for all awards, net of related tax effects
|
|
(630)
|
|
Add:
stock-based employee compensation expense recorded under the intrinsic
value method, net of related tax effects
|
|
20
|
|
Pro
forma
|
|
$ 12,313
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
Basic,
as reported
|
|
$ 0.34
|
|
Basic,
pro forma
|
|
$ 0.33
|
|
|
|
|
|
Diluted,
as reported
|
|
$
0.34
|
|
Diluted,
pro forma
|
|
$
0.32
|
|
The
effects of applying SFAS No. 123 in this pro forma disclosure are not indicative
of future amounts.
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 December 31, 2004
|
Expected
life
|
|
3.7
|
|
Interest
rate
|
|
3.3%
|
|
Volatility
|
|
92%
|
|
Dividend
yield
|
|
—
|
|
During
fiscal 2005, the Company granted 400,000
stock options with a grant date fair value of $9.12 per share and 40,000 stock
options with a grant date fair value of $11.36 per share 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. In order to determine the grant date fair value of
the
stock options granted during fiscal 2005 that vest based on the achievement
of
certain market conditions, a Monte Carlo simulation model was used to estimate
(i) the probability that the performance goal will be achieved and (ii) the
length of time required to attain the target market price. The Monte Carlo
simulation model analyzed the Company’s historical price movements, changes in
the value of The NASDAQ Stock Market over time, and the correlation coefficient
and beta between the Company’s stock price and The NASDAQ Stock Market. The
Monte Carlo simulation indicated that on a risk-weighted basis these stock
options would vest 3.6 years after the date of grant. The expected vesting
period was then incorporated into a statistical regression analysis of the
historical exercise behavior of other Company senior executives
to
arrive at an expected option life. None of the options that vest based on the
achievement of certain market conditions were granted during the three months
ended December 31, 2004.
During
fiscal 2005, pursuant to the Company’s 2005 Incentive Plan, the Company granted
LTIP Performance Shares representing 37,000 shares of the Company’s common stock
with a grant date fair value of $28.27 per share to various key employees of
the
Company, using the market price of the Company’s common stock at the time of
grant as the fair value per share. None
of
the LTIP Performance Shares
were
granted during the three months ended December 31, 2004.
4.
Marketable Securities
The
Company accounts for its investments in marketable securities in accordance
with
SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
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 and are traditionally traded via the auction process within a period
of
three months or less, the Company determined that classification of these
securities as marketable securities is appropriate due to the potential
uncertainties inherent with any auction process plus the long-term nature of
the
underlying securities. As of September 30, 2004, $35.4 million was reclassified
from cash equivalents to marketable securities. 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.
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. Components of the Company’s
marketable securities portfolio at each balance sheet date were as follows
(in
thousands):
|
|
Dec.
31, 2005
|
|
Sept.
30, 2005
|
Municipal
auction rate notes
|
|
$
|
61,100
|
|
$
|
71,825
|
Municipal
bonds/notes
|
|
|
993
|
|
|
994
|
Marketable
securities
|
|
$
|
62,093
|
|
$
|
72,819
|
At
each
balance sheet date, all of the Company’s investments in municipal auction rate
notes and municipal bonds/notes had a AAA rating. Due to the nature of the
marketable securities in which the Company invests, the Company does not
typically experience significant movements in the market values of its
marketable securities investments. As a result, gross unrealized gains and
losses on the Company’s investments in marketable securities are
insignificant.
5.
Goodwill, Software and Other Intangible Assets
Changes
in the carrying amount of goodwill attributable to each reporting unit during
the
first quarter of fiscal 2006, consisting primarily of additional goodwill
related to the acquisition of S2, due largely to working capital adjustments,
were as follows (in thousands):
|
|
Americas
|
|
EMEA
|
|
Asia/
Pacific
|
|
Total
|
|
Balance,
September 30, 2005
|
|
$
|
39,193
|
|
$
|
17,235
|
|
$
|
9,741
|
|
$
|
66,169
|
|
Adjustments
- acquisition of S2
|
|
|
959
|
|
|
(137
|
)
|
|
(413
|
)
|
|
409
|
|
Foreign
currency translation adjustments
|
|
|
-
|
|
|
(96
|
)
|
|
-
|
|
|
(96
|
)
|
Balance,
December 31, 2005.
|
|
$
|
40,152
|
|
$
|
17,002
|
|
$
|
9,328
|
|
$
|
66,482
|
|
The
carrying amount and accumulated amortization of the Company’s intangible assets
that were subject to amortization at each balance sheet date were as follows
(in
thousands):
|
|
Dec.
31,
2005
|
|
Sept.
30,
2005
|
|
Software:
|
|
|
|
|
|
|
|
Internally-developed
software
|
|
$
|
14,897
|
|
$
|
14,916
|
|
Purchased
software
|
|
|
42,918
|
|
|
43,177
|
|
|
|
|
57,815
|
|
|
58,093
|
|
Less:
accumulated amortization
|
|
|
(53,166
|
)
|
|
(53,163
|
)
|
Software,
net
|
|
$
|
4,649
|
|
$
|
4,930
|
|
|
|
|
|
|
|
|
|
Other
intangible assets:
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
14,249
|
|
$
|
14,375
|
|
Purchased
contracts
|
|
|
3,853
|
|
|
3,907
|
|
Trademarks
and tradenames
|
|
|
1,400
|
|
|
1,400
|
|
Covenant
not to compete
|
|
|
1,150
|
|
|
1,150
|
|
|
|
|
20,652
|
|
|
20,832
|
|
Less:
accumulated amortization
|
|
|
(7,744
|
)
|
|
(7,259
|
)
|
Other
intangible assets, net
|
|
$
|
12,908
|
|
$
|
13,573
|
|
Amortization
of software is computed using the greater of the ratio of current revenues
to
total estimated revenues expected to be derived from the software or the
straight-line method over an estimated useful life of three years. Software
amortization expense recorded in the three months ended December 31, 2005
totaled $0.4 million. Other intangible assets amortization expense recorded
in
the three months ended December 31, 2005 totaled $0.5 million. Based on
capitalized intangible assets at December 31, 2005, and assuming no impairment
of these intangible assets, estimated amortization expense for the remainder
of
fiscal 2006 and in succeeding fiscal years is as follows (in thousands):
Fiscal
Year Ending September 30,
|
|
Software
Amortization
|
|
Other
Intangible Assets Amortization
|
|
2006
|
|
$
|
1,292
|
|
$
|
1,315
|
|
2007
|
|
|
1,328
|
|
|
1,635
|
|
2008
|
|
|
630
|
|
|
1,635
|
|
2009
|
|
|
291
|
|
|
1,558
|
|
2010
|
|
|
276
|
|
|
1,500
|
|
Thereafter
|
|
|
832
|
|
|
5,265
|
|
Total
|
|
$
|
4,649
|
|
$
|
12,908
|
|
6.
Corporate Restructuring and Other Reorganization Charges
On
October 5, 2005, the Company announced a restructuring of its organization.
In
connection with this restructuring, the Company established a plan of
termination which impacted 42 employees. These actions resulted in
severance-related restructuring charges of $1.1 million and other reorganization
charges of $0.2 million during the fourth quarter of fiscal 2005. Additional
severance-related restructuring charges of $0.4 million and other reorganization
charges of $0.1 million related to the Company’s restructuring of its
organization were incurred during the first quarter of fiscal 2006. The
allocation of these first quarter charges was as follows: $70,000 in cost of
software license fees, $17,000 in selling and marketing, and $367,000 in general
and administrative (net of adjustments to previously-recognized liabilities).
Cash expenditures related to restructuring and other reorganization charges
totaled $1.1 million during the first quarter of fiscal 2006. The Company
anticipates that these restructuring amounts will be paid by the end of fiscal
2006. The
following table shows activity related to these restructuring and reorganization
activities (in thousands):
|
|
Restructuring
Termination
Benefits
|
|
Other
Reorganization
Charges
|
|
Total
|
|
Fiscal
2005 restructuring charges
|
|
$
|
1,080
|
|
$
|
171
|
|
$
|
1,251
|
|
Amounts
paid during fiscal 2005
|
|
|
(46
|
)
|
|
(171
|
)
|
|
(217
|
)
|
Balance,
September 30, 2005
|
|
|
1,034
|
|
|
-
|
|
|
1,034
|
|
Additional restructuring charges incurred during fiscal
2006
|
|
|
402
|
|
|
81
|
|
|
483
|
|
Adjustments
to previously-recognized liabilities
|
|
|
(29
|
)
|
|
-
|
|
|
(29
|
)
|
Amounts
paid during fiscal 2006
|
|
|
(999
|
)
|
|
(81
|
)
|
|
(1,080
|
)
|
Balance,
December 31, 2005
|
|
$
|
408
|
|
$
|
-
|
|
$
|
408
|
|
7.
Common Stock, Treasury Stock and Earnings Per Share
Options
to purchase shares of the Company’s common stock at an exercise price of one
cent per share are
included in common stock for presentation purposes on the December 31, 2005
and
September 30, 2005 consolidated balance sheets, and are included in common
shares outstanding for earnings per share (“EPS”) computations for the three
months ended December 31, 2005 and 2004. Included in common stock are 2,212
penny options as of December 31, 2005 and September 30, 2005.
In
fiscal 2005, 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 $80.0 million of its common stock.
During the first quarter of fiscal 2006, the Company repurchased 477,000 shares
of its common stock at an average price of $27.92 per share under this stock
repurchase program, with cash paid of $12.5 million by December 31, 2005 and
remaining settlements of $0.8 million occurring the first week of January 2006
on these repurchased shares. The maximum approximate remaining dollar value
of
shares authorized for purchase under the stock repurchase program was $33.3
million as of December 31, 2005.
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 December 31, 2005 and 2004, which amounted to 773,000 and 771,000
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 December 31, 2005 and 2004, were options to purchase
1,339,000 shares and 633,000 shares, respectively, because the stock options
were for contingently issuable shares or because their impact would be
antidilutive based on current market prices.
8.
Comprehensive Income/Loss
The
Company's components of other comprehensive income were as follows (in
thousands):
|
|
Three
Months Ended
December
31,
|
|
|
|
2005
|
|
2004
|
|
Net
income
|
|
$
|
15,190
|
|
$
|
12,923
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(246
|
)
|
|
(89
|
)
|
Change
in unrealized investment holding loss:
|
|
|
|
|
|
|
|
Unrealized
holding gain (loss) arising during
the period
|
|
|
(1
|
)
|
|
(82
|
)
|
Comprehensive
income
|
|
$
|
14,943
|
|
$
|
12,752
|
|
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
|
|
Balance,
September 30, 2005
|
|
$
|
(9,155
|
)
|
$
|
(6
|
)
|
$
|
(9,161
|
)
|
Fiscal
2005 year-to-date activity
|
|
|
(246
|
)
|
|
(1
|
)
|
|
(247
|
)
|
Balance,
December 31, 2005
|
|
$
|
(9,401
|
)
|
$
|
(7
|
)
|
$
|
(9,408
|
)
|
9.
Segment Information
Prior
to fiscal 2006, the Company reviewed its operations within three separate
operating segments, which had
been
referred to as the Company’s business units. These business units were ACI
Worldwide, Insession Technologies and IntraNet Worldwide. ACI Worldwide was
the
Company's largest business unit and its product line included the Company’s most
mature and well-established applications, used primarily by financial
institutions, retailers and e-payment processors. These 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 included products that facilitated communication, data
movement, monitoring of systems, and business process automation across
computing systems involving mainframes, distributed computing networks and
the
Internet. IntraNet Worldwide included products that offered high value payments
processing, bulk payments processing, global messaging and continuous link
settlement processing.
On
October 5, 2005, the Company announced a restructuring of its organization,
combining products and services within these three business units into one
operating unit under the ACI Worldwide name. In examining the Company’s market,
opportunities and organization, it was decided that combining the business
units’ products and services provides the Company with better insight and
therefore an enhanced ability to focus on operating efficiency and strategic
acquisition integration. As a result of this restructuring, the Company's chief
operating decision maker, together with other senior management personnel,
currently focus their review of consolidated financial information and the
allocation of resources based on reporting of operating results, including
revenues and operating income, for the geographic regions of the Americas,
Europe/Middle East/Africa (“EMEA”) and Asia/Pacific. Based on an evaluation of
the criteria set forth in SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information,” and how the Company’s chief operating
decision maker, together with other senior management personnel, view the
Company’s business and the allocation of resources, the Company concluded that
its three geographic regions are its reportable operating segments. The
Company's products are sold and supported through distribution
networks covering these three geographic regions, with each distribution network
having its own sales force. The Company supplements its distribution networks
with independent reseller and/or distributor arrangements.
The
following are revenues and operating income for the periods indicated, with
prior period amounts presented in conformity with current geographic region
presentation (in thousands):
|
|
Three
Months Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
Revenues:
|
|
|
|
|
|
|
|
Americas
|
|
$
|
43,920
|
|
$
|
41,368
|
|
EMEA
|
|
|
33,664
|
|
|
31,446
|
|
Asia/Pacific
|
|
|
7,491
|
|
|
7,792
|
|
|
|
$
|
85,075
|
|
$
|
80,606
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
Americas
|
|
$
|
8,547
|
|
$
|
12,232
|
|
EMEA
|
|
|
4,831
|
|
|
7,924
|
|
Asia/Pacific
|
|
|
1,137
|
|
|
1,929
|
|
|
|
$
|
14,515
|
|
$
|
22,085
|
|
Revenues
attributable to customers in the United Kingdom accounted for approximately
11.8% of the Company’s consolidated revenues during the first quarter of fiscal
2006. No single customer accounted for more than 10% of the Company's
consolidated revenues during the three months ended December 31, 2005 or 2004.
10.
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, which the Company estimates
to be 35% for fiscal 2006. 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
Company reached an agreement with the Internal Revenue Service (the “IRS”) to
settle its open audit years 1997 through 2003, resulting in a refund to the
Company. The refund and corresponding interest were dependent on the Company’s
claims being approved by the Joint Committee on Taxation (the “Joint
Committee”). The
Company’s ability to recognize the refund fell short of “more likely than not”
until notification was received from the Joint Committee. The amount of
the refund was $8.9 million. In November 2005, the Company was notified that
the
Joint Committee approved the conclusions reached by the IRS with respect to
the
audit of the Company’s 1997 through 2003 tax years. During the first quarter of
fiscal 2006, the Company recorded the effects of the refund in its consolidated
financial statements, including interest income of $1.8 million and entries
to
relieve related tax contingency reserves and other accruals relating to the
audit in the amount of $3.9 million. In February 2006, the Company received
the
refund payment, which included additional interest of $0.2 million that will
be
recognized as income in the Company’s fiscal 2006 second quarter operating
results.
The
effective tax rate for the first quarter of fiscal 2006 was approximately 10.9%
as compared to 39.2%
for the same period of fiscal 2005. The improvement in the effective tax rate
for the first quarter of fiscal 2006 as compared to the same period of fiscal
2005 resulted primarily from the release of tax contingency reserves and other
accruals related to the above-noted IRS audit settlement. The effective tax
rate
for the first quarter of fiscal 2006, excluding the effect of the IRS audit
settlement, was primarily impacted by the recognition of research and
development credits, the extraterritorial income exclusion and manufacturing
deduction, and the differential between the statutory federal tax rate in the
U.S. and certain foreign jurisdictions in which the Company operates. The
effective tax rate for the first quarter of fiscal 2005 was primarily impacted
by recognition of research and development credits, the extraterritorial income
exclusion and expected utilization of foreign tax credits. The Company treated
all foreign taxes withheld on payments to U.S. entities during the first quarter
of fiscal 2006 as creditable against its U.S. tax liability.
The
comparative decrease in the estimated fiscal 2006 effective income tax rate
of
35%, from 39.2% for the first quarter of fiscal 2005, is attributable primarily
to an increase in the extraterritorial income exclusion benefit, a smaller
increase in the valuation allowance related to foreign withholding taxes, and
additional federal benefit related to municipal interest income.
11.
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, the
Company believes 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 lead plaintiff. The Second Amended Consolidated Class
Action Complaint (the “Consolidated Complaint”) alleges that during the
purported class period, the Company and the named defendants misrepresented
the
Company’s historical financial condition, results of operations and its future
prospects, and failed to disclose facts that could have indicated an impending
decline in the Company’s revenues. The Consolidated Complaint seeks unspecified
damages, interest, fees, costs and rescission. The class period alleged in
the
Consolidated Complaint is January 21, 1999 through November 18, 2002. The
Company and the individual defendants filed a motion to dismiss the Consolidated
Complaint. In response, on December 15, 2003, the Court dismissed, without
prejudice, Gregory Derkacht, the Company’s former 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. The
parties held a second mediation session on January 5-6, 2006, which did not
result in a settlement of the matter. On
January 27, 2006, the Company and the individual defendants filed a motion
for
judgment on the pleadings, seeking a dismissal of the lead plaintiff and certain
other class members, as well as a limitation on damages based upon plaintiffs'
inability to establish loss causation with respect to a large portion of their
claims.
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,
pending a ruling on the motion to dismiss. No other defendants were ever served
and no discovery was ever commenced. Pursuant to Nebraska law, if defendants
are
not served with a lawsuit in a timely fashion, the case against them is deemed
dismissed. Thus, because the individual defendants were never served with
process in either the Naito or Russiello matters, under Nebraska law, those
cases are deemed to have been dismissed against them. Further, because the
cases
were brought as derivative suits such that the Company was merely named as
a
nominal party, no viable case exists without the presence of the individual
defendants. The Company believes that, to the extent there were any attempts
to
revive these suits, the Company and the individual defendants would have
numerous substantive defenses to same, in addition to those already raised
in
the motions to dismiss, based upon, among other things, the complete failure
to
prosecute the cases by the named shareholders, the running of the applicable
statute of limitations, and the dismissal with prejudice of the federal
derivative suit.
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
or the
Company “anticipates,” “believes,” expects,” “plans,” “will,” and words and
phrases of similar impact, and include, but are not limited to, statements
regarding future operations, business strategy, business environment and key
trends. 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 report may turn out to be wrong.
They
can be affected by the judgments and estimates underlying such assumptions
or by
known or unknown risks and uncertainties. Many of these factors will be
important in determining the Company’s actual future results. Consequently,
no forward-looking statement can be guaranteed. Actual future results may vary
materially from those expressed or implied in any forward-looking statements.
In
addition, the Company disclaims any obligation to update any forward-looking
statements after the date of this report. 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
in
Part II - Item 1A in the section entitled “Risk Factors - 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. 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 and changes in the number and type of customers in the financial
services industry.
Key
trends that currently impact the Company’s strategies and operations
include:
· |
Increasing
e-payment transaction volumes.
Electronic payment volumes continue to increase around the world,
taking
market share from traditional cash and check transactions. For example,
in
the U.S., debit transactions at the point of sale are growing on
an annual
basis of over 20%. The Company leverages the growth in transaction
volumes
through the licensing of new systems to customers whose older systems
cannot handle increased volume and through the licensing of capacity
upgrades from existing customers.
|
· |
Increasing
competition.
The e-payments market is highly competitive and subject to rapid
change.
The Company's competition comes from in-house information technology
departments, third-party e-payments processors and third-party software
companies located both within and outside of the U.S. Many of these
companies are significantly larger than the Company and have significantly
greater financial, technical and marketing resources. As e-payment
transaction volumes increase, third-party processors tend to provide
competition to the Company's solutions, particularly among customers
that
do not seek to differentiate their e-payment offerings. As consolidation
in the financial services industry continues, the Company anticipates
that
competition for those customers will
intensify.
|
· |
Aging
payments software.
In many markets, e-payments are processed using software developed
by
internal information technology departments, much of which was originally
developed over ten years ago. Increasing transaction volumes, industry
mandates and the overall costs of supporting these older technologies
often serves to make these older systems obsolete, creating opportunities
for the Company to replace this aging software with newer and more
advanced products.
|
· |
Adoption
of open systems technology.
In an effort to leverage lower-cost computing technologies and leverage
current technology staffing and resources, many financial institutions,
retailers and e-payment processors are seeking to transition their
systems
from proprietary technologies to open technologies such as Windows,
UNIX
and Linux. The Company’s continued investment in open systems technologies
is, in part, designed to address this demand.
|
· |
e-Payments
fraud and compliance.
As e-payment transaction volumes increase, criminal elements continue
to
find ways to commit a growing volume of fraudulent transactions using
a
wide range of techniques. Financial institutions, retailers and e-payment
processors continue to seek ways to leverage new technologies to
identify
and prevent fraudulent transactions. Due to concerns with international
terrorism and money laundering, financial institutions in particular
are
being faced with increasing scrutiny and regulatory pressures. The
Company
continues to see opportunity to offer its fraud detection solutions
to
help customers manage the growing levels of e-payment fraud and compliance
activity.
|
· |
Adoption
of smartcard technology.
In many markets, card issuers are being required to issue new cards
with
embedded chip technology. Chip-based cards are more secure, harder
to copy
and offer the opportunity for multiple functions on one card (e.g.
debit,
credit, electronic purse, identification, health records, etc.).
The
Europay/Mastercard/Visa (“EMV”) standard for issuing and processing debit
and credit card transactions has emerged as the global standard,
and many
regions of the world are working on EMV rollouts. The primary benefit
of
EMV deployment is a reduction in e-payments fraud, with the additional
benefit that the core infrastructure necessary for multi-function
chip
cards is being put in place (e.g. chip card readers in ATM’s and POS
devices). The Company is working with many customers around the world
to
facilitate EMV deployments, leveraging several of the Company’s
solutions.
|
· |
Basel
II and Single European Payments Area (SEPA).
The Basel II and SEPA initiatives, primarily focused on the European
Economic Community, are designed to link the ability of a financial
institution to understand enterprise risk to its capital requirements,
and
to facilitate lower costs for cross-border payments. The Company’s
consumer banking and wholesale banking solutions are both key elements
in
helping customers address these government-sponsored
initiatives.
|
· |
Financial
institution consolidation.
Consolidation continues on a national and international basis, as
financial institutions seek to add market share and increase overall
efficiency. 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 tends to focus on larger
financial institutions as customers, often resulting in the Company’s
solutions being the solutions that survive in the consolidated entity.
|
· |
e-Payments
convergence.
As e-payment volumes grow and pressures to lower overall cost per
transaction increase, financial institutions are seeking methods
to
consolidate their payment processing across the enterprise. The Company
believes that the strategy of using service-oriented-architectures
to
allow for re-use of common e-payment functions such as authentication,
authorization, routing and settlement will become more common. Using
these
techniques, financial institutions will be able to reduce costs,
increase
overall service levels, enable one-to-one marketing in multiple bank
channels and manage enterprise risk. The Company’s reorganization was, in
part, focused on this trend, by facilitating the delivery of integrated
payment functions that can be re-used by multiple bank channels,
across
both the consumer and wholesale bank. While
this trend presents an opportunity for the Company, it may also expand
the
competition from third party e-payment technology and service providers
specializing in other forms of e-payments. Many of these providers
are
larger than the Company and have significantly greater financial,
technical and marketing
resources.
|
Several
other factors related to the Company’s business may have a significant impact on
its operating results from year to year. 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.
On
July
29, 2005, the Company acquired the business of S2 Systems, Inc. through the
acquisition of substantially all of its assets. S2 was a global provider of
electronic payments and network connectivity software, and it primarily served
financial services and retail customers, which were homogeneous and
complementary to the Company’s target markets. In addition to its U.S.
operations, S2 had a significant presence in Europe, the Middle East and the
Asia-Pacific region, generating nearly half of its revenue from international
markets. The Company expects that the S2 acquisition will be financially
accretive in fiscal 2006, due to a combination of expense reductions,
normalization of maintenance fee revenues and continued marketing of S2
products.
The
Company continues to seek ways to grow, through both organic sources and
acquisitions. The Company plans to increase its spending on research and
development in fiscal 2006 to help drive organic growth from solutions such
as
BASE24-es, ACI Proactive Risk Manager and ACI Smart Chip Manager. In addition,
the Company continually looks for potential acquisitions designed to improve
its
solutions’ breadth or provide access to new markets. As part of its acquisition
strategy, the Company seeks acquisition candidates that are strategic, capable
of being integrated into the Company’s operating environment and financially
accretive to the Company’s financial performance.
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.
As
set
forth in Note 9 to the consolidated financial statements, in the first quarter
of fiscal 2006, the Company underwent a corporate reorganization, combining
its
products and services under the ACI Worldwide name.
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 used in the preparation of the consolidated financial
statements.
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 elements.
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.
The
Company’s sales focus continues to shift from its more-established (“mature”)
products to its BASE24-es product 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 new 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 and profitability under the contract consider amounts due under
extended payment terms. The Company excludes revenues due on extended payment
terms from its current percentage-of-completion computation until such time
that
collection of the fees becomes probable.
Share-Based
Compensation
The
Company accounts
for
share-based compensation transactions using a fair-value-based method, which
requires it to record noncash compensation costs related to payment for employee
services by an equity award, such as stock options, in its financial statements
over the requisite service period. 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. The Company also has outstanding stock options that vest,
if at all, at any time following the second anniversary of the date of grant,
upon attainment by the Company
of
a
designated market price per share for sixty consecutive trading days.
In
order to determine the grant date fair value of the stock options 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 an expected vesting
period for these stock options on a risk-weighted basis, which was then
incorporated into a statistical regression analysis of the historical exercise
behavior of other Company senior executives to arrive at an expected option
life.
With
respect to options granted that vest 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 using assumptions pertaining to expected
life, interest rate, volatility and dividend yield. Expected volatilities are
based on implied volatilities from traded options on the Company’s common stock,
historical volatility of the Company’s common stock, and other factors. The
expected life of options granted represents the period of time that options
granted are expected to be outstanding, assuming differing exercise behaviors
for stratified employee groupings. The assumptions used 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.
The
Company also has outstanding long-term incentive program performance share
awards that are earned, if at all, based upon the achievement, over a three-year
period of performance goals related to (i) the compound annual growth over
the
three-year period in the Company’s 60-month backlog as determined by the
Company, (ii) the compound annual growth over the three-year period in the
diluted earnings per share, and (iii) the compound annual growth over the
three-year period in the total revenues.
In no
event will any of the performance share awards become earned if the Company’s
earnings per share is below a predetermined minimum threshold level at the
conclusion of the three-year period. Management must evaluate, on a quarterly
basis, the probability that the target performance goals will be achieved,
if at
all, and the anticipated level of attainment in order to determine the amount
of
compensation costs to record in the consolidated financial statements.
Related
to the stock options and performance share awards outstanding, the Company
must
calculate estimated forfeiture rates, on an ongoing basis, that impact the
amount of share-based compensation costs recorded in the consolidated financial
statements. These estimated forfeiture rates may differ from actual forfeiture
experience realized by the Company. Also, management’s assessment of the
probability that the performance goals will be achieved, if at all, and the
anticipated level of attainment, may prove to be inaccurate, which could impact
the amount and timing of compensation costs that should have been recorded
in
the consolidated financial statements.
Prior
to fiscal 2006, the Company accounted for its stock-based compensation plans
under the intrinsic value method. Compensation expense generally was not
recorded for options under the intrinsic value method. Instead, pro forma
disclosure of the Company's net income and earnings per share was presented
in
the notes to the consolidated financial statements as if compensation cost
for
the Company's stock-based compensation plans had been determined and recorded
using the fair value method.
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 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.
Segment
Information
As
set
forth in Note 9 to the consolidated financial statements, the Company underwent
a corporate reorganization in the first quarter of fiscal 2006. As a result
of
the reorganization and in accordance with the criteria set forth in SFAS No.
131, the Company transitioned its operating segments from its prior three
business units (ACI Worldwide, Insession Technologies and IntraNet Worldwide)
to
its three geographic operating regions (the Americas, EMEA and Asia/Pacific).
The
following are revenues and operating income for the periods indicated, with
prior period amounts presented in conformity with current geographic region
presentation (in thousands):
|
|
Three
Months Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
Revenues:
|
|
|
|
|
|
|
|
Americas
|
|
$
|
43,920
|
|
$
|
41,368
|
|
EMEA
|
|
|
33,664
|
|
|
31,446
|
|
Asia/Pacific
|
|
|
7,491
|
|
|
7,792
|
|
|
|
$
|
85,075
|
|
$
|
80,606
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
Americas
|
|
$
|
8,547
|
|
$
|
12,232
|
|
EMEA
|
|
|
4,831
|
|
|
7,924
|
|
Asia/Pacific
|
|
|
1,137
|
|
|
1,929
|
|
|
|
$
|
14,515
|
|
$
|
22,085
|
|
Backlog
Included
in backlog are all software license fees, maintenance fees and services
specified in executed contracts, as well as revenues from assumed contract
renewals to the extent that the Company believes recognition of the related
revenue will occur within the corresponding backlog period. The
Company has historically included assumed
renewals
in backlog based upon automatic renewal provisions in the executed contract
and
the Company’s historic experience with customer renewal rates.
For
the
first time, the Company is reporting its 60-month backlog. The 60-month backlog
represents expected revenues from existing customers under the set of key
assumptions set forth below. The following table sets forth the Company’s
60-month backlog, by geographic region, as of December 31, 2005 and September
30, 2005:
|
|
December
31, 2005
|
|
September
30, 2005
|
|
|
|
(in
millions)
|
|
(in
millions)
|
|
Americas
|
|
$ |
518 |
|
$
|
518
|
|
EMEA
|
|
|
391 |
|
|
391
|
|
Asia/Pacific
|
|
|
126 |
|
|
126
|
|
|
|
$ |
1,035 |
|
$
|
1,035
|
|
In
computing the Company’s 60-month backlog, the following
key assumptions are used:
· |
Maintenance
fees are assumed to exist for the duration of the license term for
those
contracts in which the committed maintenance term is less than the
committed license term.
|
· |
License
and facilities management arrangements are assumed to renew at the
end of
their committed term at a rate consistent with historical Company
experiences.
|
· |
Non-recurring
license arrangements are assumed to renew as recurring revenue
streams.
|
· |
Foreign
currency exchange rates are assumed to remain constant over the 60-month
backlog period for those contracts stated in currencies other than
the
U.S. dollar.
|
· |
Company
pricing policies and practices are assumed to remain constant over
the
60-month backlog period.
|
In
computing the Company’s 60-month backlog, the following items are specifically
not taken into account:
· |
Anticipated
increases in transaction volumes in customer
systems.
|
· |
Optional
annual uplifts or inflationary increases in recurring
fees.
|
· |
Services
engagements, other than facilities management, are not assumed to
renew
over the 60-month backlog period.
|
· |
The
potential impact of merger activity within the Company’s markets and/or
customers is not reflected in the computation of 60-month
backlog.
|
In
conjunction with the reporting of a 60-month backlog, the Company has revised
its methodology for calculating its 12-month backlog, which is now consistent
with the methodology used in the 60-month calculation. Specifically, the amounts
included in 12-month backlog do not include adjustments for identified risk
categories as was previously performed, and it assumes renewal of one-time
license fees on a monthly fee basis if such renewal is expected to occur in
the
next 12 months.
The
table
below sets forth the Company’s recurring and non-recurring 12-month backlog, by
geographic region, as of December 31, 2005, as well as restated 12-month backlog
amounts as of September 30, 2005. Recurring revenue includes all monthly license
fees, maintenance fees and facilities management fees. Non-recurring revenue
includes other software license fees and services.
|
|
December
31, 2005
|
|
September
30, 2005 (restated)
|
|
|
|
(in
thousands)
|
|
(in
thousands)
|
|
|
|
Recurring
|
|
Non-Recurring
|
|
Total
|
|
Recurring
|
|
Non-Recurring
|
|
Total
|
|
Americas
|
|
$
|
95,197
|
|
$
|
34,816
|
|
$
|
130,013
|
|
$
|
97,523
|
|
$
|
32,343
|
|
$
|
129,866
|
|
EMEA
|
|
|
61,868
|
|
|
33,990
|
|
|
95,858
|
|
|
60,038
|
|
|
33,194
|
|
|
93,232
|
|
Asia/Pacific
|
|
|
26,028
|
|
|
2,530
|
|
|
28,558
|
|
|
25,711
|
|
|
1,217
|
|
|
26,928
|
|
|
|
$
|
183,093
|
|
$
|
71,336
|
|
$
|
254,429
|
|
$
|
183,272
|
|
$
|
66,754
|
|
$
|
250,026
|
|
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 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 which may cause the actual
renewal rates and amounts to differ from historical experiences. Changes in
foreign currency exchange rates may also impact the amount of revenue actually
recognized in future periods. Accordingly, there can be no assurance that
contracts included in backlog will actually generate the specified revenues
or
that the actual revenues will be generated within the corresponding 12-month
or
60-month period.
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 December 31,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
%
of
|
|
|
|
%
of
|
|
|
|
Amount
|
|
Revenue
|
|
Amount
|
|
Revenue
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Initial
license fees (ILFs)
|
|
$
|
25,727
|
|
|
30.2
|
%
|
$
|
29,533
|
|
|
36.6
|
%
|
Monthly
license fees (MLFs)
|
|
|
17,665
|
|
|
20.8
|
|
|
18,273
|
|
|
22.7
|
|
Software
license fees
|
|
|
43,392
|
|
|
51.0
|
|
|
47,806
|
|
|
59.3
|
|
Maintenance
fees
|
|
|
25,318
|
|
|
29.8
|
|
|
22,080
|
|
|
27.4
|
|
Services
|
|
|
16,365
|
|
|
19.2
|
|
|
10,720
|
|
|
13.3
|
|
Total
revenues
|
|
|
85,075
|
|
|
100.0
|
|
|
80,606
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of software license fees
|
|
|
6,935
|
|
|
8.1
|
|
|
5,906
|
|
|
7.3
|
|
Cost
of maintenance and services
|
|
|
20,891
|
|
|
24.6
|
|
|
13,836
|
|
|
17.2
|
|
Research
and development
|
|
|
9,752
|
|
|
11.5
|
|
|
9,915
|
|
|
12.3
|
|
Selling
and marketing
|
|
|
16,012
|
|
|
18.8
|
|
|
15,301
|
|
|
19.0
|
|
General
and administrative
|
|
|
16,970
|
|
|
19.9
|
|
|
13,563
|
|
|
16.8
|
|
Total
expenses
|
|
|
70,560
|
|
|
82.9
|
|
|
58,521
|
|
|
72.6
|
|
Operating
income
|
|
|
14,515
|
|
|
17.1
|
|
|
22,085
|
|
|
27.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,927
|
|
|
3.4
|
|
|
584
|
|
|
0.7
|
|
Interest
expense
|
|
|
(29
|
)
|
|
(0.0
|
)
|
|
(168
|
)
|
|
(0.2
|
)
|
Other,
net
|
|
|
(366
|
)
|
|
(0.5
|
)
|
|
(1,247
|
)
|
|
(1.5
|
)
|
Total
other income (expense)
|
|
|
2,532
|
|
|
2.9
|
|
|
(831
|
)
|
|
(1.0
|
)
|
Income
before income taxes
|
|
|
17,047
|
|
|
20.0
|
|
|
21,254
|
|
|
26.4
|
|
Income
tax provision
|
|
|
(1,857
|
)
|
|
(2.2
|
)
|
|
(8,331
|
)
|
|
(10.4
|
)
|
Net
income
|
|
$
|
15,190
|
|
|
17.8
|
%
|
$
|
12,923
|
|
|
16.0
|
%
|
Revenues.
Total
revenues for the first quarter of fiscal 2006 increased $4.5 million, or
5.5%, as compared to the same period of fiscal 2005. The three-month increase
is
the result of a $3.2 million, or 14.7%, increase in maintenance fee revenues
and
a $5.7 million, or 52.7%, increase in services revenues, offset by a
$4.4 million, or 9.2%, decrease in software license fee
revenues.
In
the
first quarter of fiscal 2005, the Company completed a BASE24-es project and
signed an ACI Wholesale Banking Solutions product contract extension that
resulted in significant software license fee revenue recognition. In the first
quarter of fiscal 2006, the Company completed several large implementation
projects that resulted in software license fee revenue recognition which partly
offset the decrease noted above. In addition, software license fee
revenues
recognized in the first quarter of fiscal 2006 reflect increased revenues for
the Company’s back office and risk management products, as well as the retail
and international Americas’ markets.
The
increase in maintenance fee revenues during
the first quarter of fiscal 2006 as
compared to the same period of fiscal 2005 is primarily due to growth in the
installed base of software products as well as maintenance fee revenues
recognized from S2 products during the first quarter of fiscal 2006. Maintenance
revenue from the S2 products recognized in the first quarter of fiscal 2006
partly reflects the recognition of acquired deferred maintenance amounts which
have been reduced to cost, plus a normal profit margin, as required under
Financial Accounting Standards Board Emerging Issues Task Force Issue No. 01-03,
“Accounting in a Business Combination for Deferred Revenue of an
Acquiree.”
The
increase in services revenues for the first quarter of fiscal 2006 as compared
to the same period of fiscal 2005 resulted primarily due to the recognition
of
previously-deferred services revenues for several large projects some
of
which were completed during the first quarter of fiscal 2006, as well as
services revenues recognized from S2 products during the first quarter of fiscal
2006. For some of the Company’s contracts, including certain S2 contracts,
services revenues are being recognized to the extent direct and incremental
costs are incurred until such time that project profitability can be estimated.
This revenue recognition treatment negatively impacted the margins on services
revenues for the first quarter of fiscal 2006.
Expenses.
Total
operating expenses for the first quarter of fiscal 2006 increased
$12.0 million, or 20.6%, as compared to the
same period of fiscal
2005. Included in operating expenses during the first quarter of fiscal 2006,
with no corresponding amounts during the same period of fiscal 2005, were
approximately $4.9 million in S2-related expenses, $1.4 million in share-based
compensation expenses recognized following adoption of SFAS No. 123R as of
October 1, 2005, and $0.5 in charges resulting from the previously-announced
reorganization of the Company’s business. In addition, in the first quarter of
fiscal 2006, the Company reported a net expense of $0.8 million in
previously-deferred project related services costs as compared to a net deferral
of $1.0 million in the first quarter of fiscal 2005. The
effect
of changes in foreign currency exchange rates was to decrease overall expenses
by approximately $0.9 million for the
first quarter of fiscal 2006 as
compared to the same period of fiscal 2005.
Cost
of
software license fees for the first quarter of fiscal 2006 increased
$1.0 million, or 17.4%, as compared to the same period of fiscal 2005. This
increase in cost of software license fees was primarily due to
additional personnel assigned to support this function following the
previously-announced reorganization and share-based compensation costs of $0.2
million recognized for the first time resulting from adoption of SFAS No. 123R.
Cost
of
maintenance and services for the first quarter of fiscal 2006 increased
$7.1 million, or 51.0%, as
compared to the same period of fiscal 2005. This increase in cost of maintenance
and services resulted primarily from $4.2 million in costs incurred to support
the S2 products and an increase in compensation-related expenses resulting
from
the recognition of several large projects. For these projects, revenues
previously were being deferred until acceptance or first production use, and
the
associated costs, including compensation-related expenses, were being
capitalized until the related services revenue was recognized.
R&D
costs for the first quarter of fiscal 2006 were
comparable to the same period of fiscal 2005.
Selling
and marketing costs for the first quarter of fiscal 2006 increased
$0.7 million, or 4.6%, as compared to the same period of fiscal 2005.
This
increase in selling and marketing costs was primarily due to higher sales
commissions resulting from strong sales during the first quarter of fiscal
2006.
Share-based compensation costs of $0.2 million recognized for the first time
resulting from adoption of SFAS No. 123R were offset by a decrease in
compensation costs for personnel shifted to the cost of software license fees
function.
General
and administrative costs for the first quarter of fiscal 2006 increased
$3.4 million, or 25.1%, as compared to the same period of fiscal 2005.
This
increase in general and administrative costs was primarily due to share-based
compensation costs of $1.0 million recognized for the first time resulting
from
adoption of SFAS No. 123R, severance costs related to the previously-announced
reorganization, additional compensation and benefit costs related to annual
merit pay increases and increased costs related to professional
services.
Other
Income and Expense.
Interest income for the first quarter of fiscal 2006 increased $2.3 million
as
compared to the same period of fiscal 2005. The increase in interest
income
is
attributable to interest
income of $1.8 million on a refund of income taxes (which was received in
February 2006), which is discussed in further detail below under Income Taxes,
as well as marginal
increases in interest rates and global consolidation of excess cash amounts
into
higher yielding investments.
Interest
expense for
the
first quarter of fiscal 2006 decreased $0.1 million as compared to the same
period of fiscal 2005. Scheduled payments of debt under financing agreements
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 first quarter of fiscal 2006
decreased $0.9 million as compared to the same period of fiscal 2005. This
decrease is primarily due to foreign currency gains and losses, with the Company
realizing minimal net losses during the first quarter of fiscal 2006 as compared
to $1.2 million during the first quarter of fiscal 2005.
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, which the Company estimates
to be 35% for fiscal 2006. 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
Company reached an agreement with the IRS to settle its open audit years 1997
through 2003, resulting in a refund to the Company. The refund and corresponding
interest were dependent on the Company’s claims being approved by the Joint
Committee. The Company’s
ability to recognize the refund fell short of “more likely than not” until
notification was received from the Joint Committee. The amount of the
refund was $8.9 million. In November 2005, the Company was notified that the
Joint Committee approved the conclusions reached by the IRS with respect to
the
audit of the Company’s 1997 through 2003 tax years. During the first quarter of
fiscal 2006, the Company recorded the effects of the refund in its consolidated
financial statements, including interest income of $1.8 million and entries
to
relieve related tax contingency reserves and other accruals relating to the
audit in the amount of $3.9 million. In February 2006, the Company received
the
refund payment, which included additional interest of $0.2 million that will
be
recognized as income in the Company’s fiscal 2006 second quarter operating
results.
The
effective tax rate for the first quarter of fiscal 2006 was approximately 10.9%
as compared to 39.2%
for the same period of fiscal 2005. The improvement in the effective tax rate
for the first quarter of fiscal 2006 as compared to the same period of fiscal
2005 resulted primarily from the release of tax contingency reserves and other
accruals related to the IRS audit settlement. The effective tax rate for the
first quarter of fiscal 2006, excluding the effect of the IRS audit settlement,
was primarily impacted by the recognition of research and development credits,
the extraterritorial income exclusion and manufacturing deduction, and the
differential between the statutory federal tax rate in the U.S. and certain
foreign jurisdictions in which the Company operates. The effective tax rate
for
the first quarter of fiscal 2005 was primarily impacted by recognition of
research and development credits, the extraterritorial income exclusion and
expected utilization of foreign tax credits. The Company treated all foreign
taxes withheld on payments to U.S. entities during the first quarter of fiscal
2006 as creditable against its U.S. tax liability.
The
comparative decrease in the estimated fiscal 2006 effective income tax rate
of
35%, from 39.2% for the first quarter of fiscal 2005, is attributable primarily
to an increase in the extraterritorial income exclusion benefit, a smaller
increase in the valuation allowance related to foreign withholding taxes, and
additional federal benefit 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 December 31, 2005, the Company had net deferred tax assets of
$24.1 million (net of a $52.9 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, capital
loss carryforwards and domestic net operating loss carryforwards. The valuation
allowance is based on the extent to which management believes these
carryforwards and credits could expire unused due to the Company’s historical or
projected losses. The Company analyzes the recoverability of its net deferred
tax assets at each reporting period. Because unforeseen factors may affect
future taxable income, increases or decreases to the valuation reserve may
be
required in future periods.
Liquidity
and Capital Resources
As
of
December 31, 2005, the Company's principal sources of liquidity consisted of
$157.8 million in cash, cash equivalents and marketable securities. The
Company had no bank borrowings outstanding as of December 31, 2005. In fiscal
2005, 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 $80.0 million of its common stock. During the first quarter of fiscal
2006, the Company repurchased 477,399 shares of its common stock at an average
price of $27.92 per share under this stock repurchase program, with cash paid
of
$12.5 million by December 31, 2005 and remaining settlements of $0.8 million
occurring the first week of January 2006 on these repurchased shares. The
maximum approximate remaining dollar value of shares authorized for purchase
under the stock repurchase program was $33.3 million as of December 31, 2005.
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.
The
Company's net cash flows provided by operating activities for the first quarter
of fiscal 2006 amounted to $13.5 million as compared to $15.0 million
provided by operating activities during the same period of fiscal 2005. The
decrease
in operating cash flows in
the
first quarter of fiscal 2006 as compared to the same period of fiscal 2005
resulted
primarily from changes in accrued employee compensation and current income
taxes, offset by increased net income, including adjustments for non-cash items,
along with changes in billed and accrued receivables.
On
October 5, 2005, the Company issued a press release announcing a restructuring
of its organization. As a result of this restructuring, the Company incurred
$1.3 million in restructuring
and other reorganization charges during fiscal 2005, of which $0.2 million
was
paid in fiscal 2005. During the first quarter of fiscal 2006, the Company
incurred an additional $0.5 million in restructuring and other reorganization
charges. Cash expenditures related to restructuring and other reorganization
charges totaled $1.1 million during the first quarter of fiscal 2006. During
the
remainder of fiscal 2006, the Company expects to incur an additional $1.4
million to $2.0 million in restructuring and other reorganization costs, but
also expects that first-year pre-tax savings will more than offset these costs.
The Company anticipates that the restructuring will be substantially completed
by the end of fiscal 2006.
In
February 2006, the Company received a cash refund of $10.9 million, including
interest, related to settlement of the IRS audit of tax years 1997 through
2003.
This refund payment included additional interest of $0.2 million that will
be
recognized as income in the Company’s fiscal 2006 second quarter operating
results.
The
Company's net cash flows provided by investing activities totaled
$9.0 million for the first quarter of fiscal 2006 as compared to $76.2
million used in investing activities during the same period of fiscal 2005.
During the first quarter of fiscal 2006, the Company generated
cash by reducing its holdings of marketable securities by $10.7 million and
used
cash of $1.6 million to purchase software, property and equipment. During the
first quarter of fiscal 2005, the Company used cash to increase its net holdings
of marketable securities by $74.9 million and purchased $1.3 million of
software, property and equipment.
The
Company's net cash flows used in financing activities totaled $9.8 million
for the first quarter of fiscal 2006 as compared to $0.4 million provided
by financing activities during the same period of fiscal 2005. In the first
quarter of fiscal 2006, the Company used cash of $12.8 million to purchase
shares of its common stock under the Company’s stock repurchase program, made
payments to third-party financial institutions totaling $1.3 million, and
received proceeds of $4.0
million, including corresponding excess tax benefits, from exercises of stock
options. In the first quarter of fiscal 2005, the Company made scheduled
payments to third-party financial institutions totaling $3.9 million, and
received proceeds of $4.1 million from exercises of stock options.
The
Company also realized
a
decrease in cash of $0.7 million during the first quarter of fiscal 2006 and
an
increase in cash of $2.8 million during the first quarter of fiscal 2005 due
to
foreign exchange rate variances.
The
Company believes that its existing sources of liquidity, including cash on
hand,
marketable securities and cash provided by operating activities, will satisfy
the Company's projected liquidity requirements for the foreseeable future,
which
primarily consists of working capital requirements.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
There
have been no material changes to the Company's market risk for the three months
ended December 31, 2005.
The
Company conducts business in all parts of the world and is thereby exposed
to
market risks related to fluctuations in foreign currency exchange rates. In
some
cases, the Company's revenue contracts are denominated in U.S. dollars. Thus,
any decline in the value of local foreign currencies against the U.S. dollar
results in the Company's products and services being more expensive to a
potential foreign customer, and in those instances where the Company's goods
and
services have already been sold, may result in the receivables being more
difficult to collect. The Company at times enters into revenue contracts that
are denominated in the country’s local currency, principally in Australia,
Canada, the United Kingdom and other European countries. This practice serves
as
a natural hedge to finance the local currency expenses incurred in those
locations. The Company has not entered into any foreign currency hedging
transactions. The Company does not purchase or hold any derivative financial
instruments for the purpose of speculation or arbitrage.
The
primary objective of the Company’s cash investment policy is to preserve
principal without significantly increasing risk. Based on the Company’s cash
investments and interest rates on these investments at December
31, 2005, and if the Company maintained this level of similar cash investments
for a period of one year, a hypothetical ten percent increase or decrease in
interest rates would increase or decrease interest income by approximately
$0.6
million annually.
Item
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure 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 Securities Exchange Act of 1934
(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 Securities and Exchange Commission rules and forms.
Changes
in Internal Control Over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting that
occurred during the first
quarter of fiscal 2006 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial
reporting.
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. 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, the
Company believes 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 lead plaintiff. The Second Amended Consolidated Class
Action Complaint (the “Consolidated Complaint”) alleges that during the
purported class period, the Company and the named defendants misrepresented
the
Company’s historical financial condition, results of operations and its future
prospects, and failed to disclose facts that could have indicated an impending
decline in the Company’s revenues. The Consolidated Complaint seeks unspecified
damages, interest, fees, costs and rescission. The class period alleged in
the
Consolidated Complaint is January 21, 1999 through November 18, 2002. The
Company and the individual defendants filed a motion to dismiss the Consolidated
Complaint. In response, on December 15, 2003, the Court dismissed, without
prejudice, Gregory Derkacht, the Company’s former 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. The parties held a second
mediation session on January 5-6, 2006, which did not result in a settlement
of
the matter. On
January 27, 2006, the Company and the individual defendants filed a motion
for
judgment on the pleadings, seeking a dismissal of the lead plaintiff and certain
other class members, as well as a limitation on damages based upon plaintiffs'
inability to establish loss causation with respect to a large portion of their
claims.
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,
pending a ruling on the motion to dismiss. No other defendants were ever served
and no discovery was ever commenced. Pursuant to Nebraska law, if defendants
are
not served with a lawsuit in a timely fashion, the case against them is deemed
dismissed. Thus, because the individual defendants were never served with
process in either the Naito or Russiello matters, under Nebraska law, those
cases are deemed to have been dismissed against them. Further, because the
cases
were brought as derivative suits such that the Company was merely named as
a
nominal party, no viable case exists without the presence of the individual
defendants. The Company believes that, to the extent there were any attempts
to
revive these suits, the Company and the individual defendants would have
numerous substantive defenses to same, in addition to those already raised
in
the motions to dismiss, based upon, among other things, the complete failure
to
prosecute the cases by the named shareholders, the running of the applicable
statute of limitations, and the dismissal with prejudice of the federal
derivative suit.
Item
1A. RISK FACTORS
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.
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In
October 2005, the Company announced a restructuring of its organization
based on its decision that combining its three business units into
a
single operating unit provides the Company with the best opportunities
for
focus, operating efficiency and strategic acquisition integration.
This
restructuring of the Company’s three business units is subject to a number
of risks, including but not limited to diversion of management time
and
resources, disruption of the Company’s service to customers, and lack of
familiarity with markets or products. There can be no assurance that
the
Company’s expectation of savings as a result of the restructuring will be
achieved.
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The
Company's backlog estimates are based on management’s assessment of the
customer contracts that exist as of the date the estimates are
made, as
well as revenues from assumed contract renewals, to the extent
that the
Company believes that recognition of the related revenue will occur
within
the corresponding backlog period. 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. Actual renewal rates and amounts may differ
from
historical experiences used to estimate backlog amounts. Changes
in
foreign currency exchange rates may also impact the amount of revenue
actually recognized in future periods. Accordingly, there can be
no
assurance that contracts included in backlog will actually generate
the
specified revenues or that the actual revenues will be generated
within a
12-month or 60-month period.
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The
Company records noncash compensation expense related to payment for
employee services by equity awards in its consolidated financial
statements. Related to the stock options and performance share awards
outstanding, the Company must calculate estimated forfeiture rates
that
impact the amount of share-based compensation costs recorded. These
estimated forfeiture rates may differ from actual forfeiture experience
realized by the Company, which could impact the amount and timing
of
compensation costs that should have been recorded. Also, management’s
assessment of the probability that performance goals will be achieved,
if
at all, and the anticipated level of attainment, may prove to be
inaccurate, which could impact the amount and timing of compensation
costs
that should have been recorded.
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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
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were
successful in such challenges, the Company’s financial condition and/or
results of operations could be adversely
affected.
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The
Company’s tax positions in its federal income tax returns for tax years
subsequent to fiscal 2003 have not been examined by the IRS. The Company
believes that its tax positions comply with applicable tax law. However, the
IRS
could challenge any of those positions and issue adjustments that could
adversely affect the Company’s financial condition and/or results of
operations.
Four
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.
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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.
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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.
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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.
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The
Company’s BASE24-es product is a significant new product for the Company.
The Company’s business, financial condition and/or results of operations
could be materially adversely affected 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.
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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.
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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.
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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.
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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, including the fiscal 2005 acquisition
of S2
Systems, Inc., 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.
Correspondingly, the Company’s expectations related to the accretive
nature of the S2 acquisition could be
inaccurate.
|
|
·
|
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. Third parties have in the
past and
may in the future assert claims or initiate litigation related to
exclusive patent, copyright, trademark or other intellectual property
rights to business processes, technologies and related standards
that are
relevant to the Company and its customers. These assertions have
increased
over time as a result of the general increase in patent claims assertions,
particularly in the United States. Because of the existence of a
large
number of patents in the electronic commerce field, the secrecy of
some
pending patents and the rapid issuance of new patents, it is not
economical or even possible to determine in advance whether a product
or
any of its components infringes or will infringe on the patent rights
of
others.
|
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 two parties have 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, which could result in
indemnification claims against the Company by customers. 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. Where indemnification claims are made by customers, resistance even
to
unmeritorious claims could damage the customer relationship. Any claim against
the Company, with or without merit, could be time-consuming, result in costly
litigation, cause product delivery delays, require the Company to enter into
royalty or licensing agreements or pay amounts in settlement, or require the
Company to develop alternative non-infringing technology. A successful claim
by
a third party of intellectual property infringement by the Company or one of
its
customers could compel the Company to enter into costly royalty or license
agreements, pay significant damages, or stop selling certain products and incur
additional costs to develop alternative non-infringing technology. 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.
The
Company’s exposure to risks associated with the use of intellectual property may
be increased for third party products distributed by the Company or as a result
of acquisitions since the Company has a lower level
of
visibility, if any, into the development process with respect to such third
party products and acquired technology or the care taken to safeguard against
infringement risks.
|
·
|
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.
|
|
·
|
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.
|
|
·
|
The
Company is required to assess its internal control over financial
reporting on an ongoing basis. If the Company cannot maintain and
execute
adequate internal control over financial reporting, or implement
new or
improved controls that provide reasonable assurance of the reliability
of
the its internal control over financial reporting, it may suffer
harm to
its reputation, fail to meet its regulatory reporting requirements
on a
timely basis, or be unable to properly report on its financial condition
and/or results of operations, which could adversely affect the Company’s
business and/or market price of its securities. Additionally, the
inherent
limitations of internal control over financial reporting may not
prevent
or detect misstatements or fraud, regardless of the adequacy of those
controls.
|
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 first quarter of fiscal 2006:
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
|
|
October
1 through October 31, 2005
|
|
|
239,377
|
|
|
$
27.69
|
|
|
239,377
|
|
|
$
40,033,000
|
|
November
1 through November 30, 2005
|
|
|
106,812
|
|
|
$
26.96
|
|
|
106,812
|
|
|
$
37,154,000
|
|
December
1 through December 31, 2005
|
|
|
131,210
|
|
|
$
29.11
|
|
|
131,210
|
|
|
$
33,334,000
|
|
Total
(1)
|
|
|
477,399
|
|
|
$
27.92
|
|
|
477,399
|
|
|
|
|
_______________________________________
(1) In
fiscal 2005, the Company announced that its Board of Directors approved a stock
repurchase program authorizing the Company, from time to time as market and
business conditions warrant, to acquire up to $80 million of its common stock,
and that it intends to use existing cash and cash equivalents to fund these
repurchases. There
is
no guarantee as to the exact number of shares that will be repurchased by the
Company. Repurchased shares would be returned to the status of authorized but
unissued shares of common stock. In March 2005, the Company’s Board of Directors
approved a plan under Rule 10b5-1 of the Securities Exchange Act of 1934 to
facilitate the repurchase of shares of common stock under the existing stock
repurchase program. Under the Company’s Rule 10b5-1 plan, the Company has
delegated authority over the timing and amount of repurchases to an independent
broker who does not have access to inside information about the Company. Rule
10b5-1 allows the Company, through the independent broker, to purchase Company
shares at times when the Company ordinarily would not be in the market because
of self-imposed trading blackout periods, such as the time immediately preceding
the end of the fiscal quarter through a period three business days following
the
Company’s quarterly earnings release.
During
the first quarter of fiscal 2006, 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
|
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.
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:
February 9, 2006
|
By:
|
/s/
DAVID
R. BANKHEAD
|
|
|
|
|
|
David
R. Bankhead
|
|
|
Senior
Vice President,
Chief
Financial Officer and Treasurer
(principal
financial officer)
|
EXHIBIT
INDEX
Exhibit
No.
|
|
Description
|
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.
37