Form 10-Q -- Q3 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 June 30, 2006
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
ü
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
ü
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
ü
As
of
July 31, 2006, there were 37,520,962
shares of the registrant’s common stock, par value $.005 per share, outstanding
(including options to purchase 2,212 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
|
19
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
31
|
Item 4.
|
Controls
and Procedures
|
32
|
|
PART
II - OTHER INFORMATION
|
Item 1.
|
Legal
Proceedings
|
33
|
Item 1A.
|
Risk
Factors
|
34
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
35
|
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
|
36
|
|
|
Signature
|
37
|
Exhibit
Index
|
38
|
PART
I - FINANCIAL INFORMATION
|
Item
1. FINANCIAL STATEMENTS
|
Page
|
Consolidated
Balance Sheets as of June 30, 2006 and September 30, 2005
|
2
|
Consolidated
Statements of Operations for the three and nine months ended June
30, 2006
and 2005
|
3
|
Consolidated
Statements of Cash Flows for the nine months ended June 30, 2006
and
2005
|
4
|
Notes
to Consolidated Financial Statements
|
5
|
TRANSACTION
SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share amounts)
|
|
June
30,
2006
|
|
September
30,
2005
|
|
ASSETS
|
|
|
(Unaudited)
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
108,365
|
|
$
|
83,693
|
|
Marketable
securities
|
|
|
67,725
|
|
|
72,819
|
|
Billed
receivables, net of allowances of $2,057 and $2,390,
respectively
|
|
|
62,324
|
|
|
63,530
|
|
Accrued
receivables
|
|
|
9,992
|
|
|
5,535
|
|
Recoverable
income taxes
|
|
|
-
|
|
|
3,474
|
|
Deferred
income taxes, net
|
|
|
3,103
|
|
|
2,552
|
|
Other
|
|
|
13,740
|
|
|
13,009
|
|
Total
current assets
|
|
|
265,249
|
|
|
244,612
|
|
Property
and equipment, net
|
|
|
9,234
|
|
|
9,089
|
|
Software,
net
|
|
|
11,044
|
|
|
4,930
|
|
Goodwill
|
|
|
88,411
|
|
|
66,169
|
|
Other
intangible assets, net
|
|
|
17,985
|
|
|
13,573
|
|
Deferred
income taxes, net
|
|
|
29,125
|
|
|
21,884
|
|
Other
|
|
|
6,288
|
|
|
3,123
|
|
Total
assets
|
|
$
|
427,336
|
|
$
|
363,380
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of debt - financing agreements
|
|
$
|
78
|
|
$
|
2,165
|
|
Accounts
payable
|
|
|
6,960
|
|
|
9,521
|
|
Accrued
employee compensation
|
|
|
15,794
|
|
|
19,296
|
|
Income
taxes payable
|
|
|
8,362
|
|
|
-
|
|
Deferred
revenue
|
|
|
78,808
|
|
|
81,374
|
|
Accrued
and other liabilities
|
|
|
19,638
|
|
|
11,662
|
|
Total
current liabilities
|
|
|
129,640
|
|
|
124,018
|
|
Debt
- financing agreements
|
|
|
-
|
|
|
154
|
|
Deferred
revenue
|
|
|
16,561
|
|
|
20,450
|
|
Other
|
|
|
2,638
|
|
|
1,640
|
|
Total
liabilities
|
|
|
148,839
|
|
|
146,262
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value; 5,000,000 shares authorized; no shares issued
and
outstanding at June 30, 2006 and September 30, 2005
|
|
|
-
|
|
|
-
|
|
Common
stock, $.005 par value; 70,000,000 shares authorized; 40,823,728
and
40,327,678 shares issued at June 30, 2006 and September 30, 2005,
respectively
|
|
|
204
|
|
|
202
|
|
Treasury
stock, at cost; 3,138,411 and 2,943,109 shares at June 30, 2006 and
September 30, 2005, respectively
|
|
|
(79,305
|
)
|
|
(68,596
|
)
|
Additional
paid-in capital
|
|
|
292,322
|
|
|
274,344
|
|
Retained
earnings
|
|
|
73,813
|
|
|
20,329
|
|
Accumulated
other comprehensive loss
|
|
|
(8,537
|
)
|
|
(9,161
|
)
|
Total
stockholders' equity
|
|
|
278,497
|
|
|
217,118
|
|
Total
liabilities and stockholders' equity
|
|
$
|
427,336
|
|
$
|
363,380
|
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
TRANSACTION
SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited
and in thousands, except per share amounts)
|
|
Three
Months Ended
June
30,
|
|
Nine
Months Ended
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Software
license fees
|
|
$
|
41,955
|
|
$
|
37,656
|
|
$
|
133,077
|
|
$
|
128,415
|
|
Maintenance
fees
|
|
|
25,989
|
|
|
24,938
|
|
|
76,053
|
|
|
69,667
|
|
Services
|
|
|
16,820
|
|
|
15,409
|
|
|
50,542
|
|
|
36,153
|
|
Total
revenues
|
|
|
84,764
|
|
|
78,003
|
|
|
259,672
|
|
|
234,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of software license fees
|
|
|
7,895
|
|
|
6,539
|
|
|
22,335
|
|
|
18,170
|
|
Cost
of maintenance and services
|
|
|
19,385
|
|
|
14,102
|
|
|
59,332
|
|
|
41,756
|
|
Research
and development
|
|
|
10,191
|
|
|
9,704
|
|
|
29,921
|
|
|
29,842
|
|
Selling
and marketing
|
|
|
15,896
|
|
|
16,183
|
|
|
48,437
|
|
|
46,852
|
|
General
and administrative
|
|
|
15,877
|
|
|
16,289
|
|
|
48,410
|
|
|
44,301
|
|
Total
expenses
|
|
|
69,244
|
|
|
62,817
|
|
|
208,435
|
|
|
180,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
15,520
|
|
|
15,186
|
|
|
51,237
|
|
|
53,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,641
|
|
|
1,279
|
|
|
6,154
|
|
|
2,727
|
|
Interest
expense
|
|
|
(10
|
)
|
|
(102
|
)
|
|
(126
|
)
|
|
(407
|
)
|
Other,
net
|
|
|
(227
|
)
|
|
(453
|
)
|
|
(239
|
)
|
|
(1,445
|
)
|
Total
other income (expense)
|
|
|
1,404
|
|
|
724
|
|
|
5,789
|
|
|
875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
16,924
|
|
|
15,910
|
|
|
57,026
|
|
|
54,189
|
|
Income
tax benefit (provision)
|
|
|
6,384
|
|
|
(5,915
|
)
|
|
(3,542
|
)
|
|
(20,078
|
)
|
Net
income
|
|
$
|
23,308
|
|
$
|
9,995
|
|
$
|
53,484
|
|
$
|
34,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37,529
|
|
|
37,576
|
|
|
37,341
|
|
|
37,825
|
|
Diluted
|
|
|
38,454
|
|
|
38,312
|
|
|
38,199
|
|
|
38,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.62
|
|
$
|
0.27
|
|
$
|
1.43
|
|
$
|
0.90
|
|
Diluted
|
|
$
|
0.61
|
|
$
|
0.26
|
|
$
|
1.40
|
|
$
|
0.88
|
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
TRANSACTION
SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited
and in thousands)
|
|
Nine
Months Ended
June
30,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
53,484
|
|
$
|
34,111
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,035
|
|
|
2,869
|
|
Amortization
|
|
|
2,943
|
|
|
714
|
|
Deferred
income taxes
|
|
|
(11,797
|
)
|
|
(7,007
|
)
|
Share-based
compensation expense
|
|
|
4,412
|
|
|
-
|
|
Tax
benefit of stock options exercised
|
|
|
1,456
|
|
|
2,736
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Billed
and accrued receivables, net
|
|
|
293
|
|
|
4,325
|
|
Other
current assets
|
|
|
(33
|
)
|
|
(3,131
|
)
|
Other
assets
|
|
|
(3,021
|
)
|
|
(1,305
|
)
|
Accounts
payable
|
|
|
(3,378
|
)
|
|
1,025
|
|
Accrued
employee compensation
|
|
|
(3,855
|
)
|
|
(110
|
)
|
Accrued
liabilities
|
|
|
246
|
|
|
896
|
|
Current
income taxes
|
|
|
12,022
|
|
|
14,531
|
|
Deferred
revenue
|
|
|
(8,210
|
)
|
|
(1,490
|
)
|
Other
current and noncurrent liabilities
|
|
|
107
|
|
|
300
|
|
Net
cash provided by operating activities
|
|
|
47,704
|
|
|
48,464
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(3,133
|
)
|
|
(3,170
|
)
|
Purchases
of software
|
|
|
(2,401
|
)
|
|
(1,347
|
)
|
Purchases
of marketable securities
|
|
|
(50,937
|
)
|
|
(76,875
|
)
|
Sales
of marketable securities
|
|
|
56,038
|
|
|
36,166
|
|
Acquisition
of business, net of cash acquired
|
|
|
(13,139
|
)
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(13,572
|
)
|
|
(45,226
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock under Employee Stock Purchase
Plan
|
|
|
909
|
|
|
736
|
|
Proceeds
from exercises of stock options
|
|
|
11,608
|
|
|
8,489
|
|
Excess
tax benefit of stock options exercised
|
|
|
2,321
|
|
|
-
|
|
Purchases
of common stock
|
|
|
(24,688
|
)
|
|
(28,897
|
)
|
Payments
on debt and capital lease obligations
|
|
|
(2,949
|
)
|
|
(5,943
|
)
|
Other
|
|
|
(15
|
)
|
|
402
|
|
Net
cash used in financing activities
|
|
|
(12,814
|
)
|
|
(25,213
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate fluctuations on cash
|
|
|
3,354
|
|
|
792
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
24,672
|
|
|
(21,183
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
83,693
|
|
|
134,198
|
|
Cash
and cash equivalents, end of period
|
|
$
|
108,365
|
|
$
|
113,015
|
|
The
accompanying notes are an integral part of the condensed 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
June
30, 2006, and for the three and nine months ended June 30, 2006 and 2005, 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, in all material respects, of
the
financial position and operating results for the interim periods.
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 and nine months ended June 30, 2006 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.
On May 31, 2006, the Company acquired eps Electronic Payment Systems AG (“eps”).
eps, with operations in Germany, Romania, the United Kingdom and other European
locations, offers electronic payment and complementary solutions focused largely
in the German market. The consolidated financial statements at June 30, 2006,
and for the three and nine months ended June 30, 2006, include amounts acquired
from, as well as results of operations of, the acquired businesses. Included
in
the consolidated balance sheet at September 30, 2005 are amounts acquired from
and operating results of S2 from the date of its acquisition.
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 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
June
30,
|
|
Nine
Months Ended
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Software
license fees
|
|
$
4,428
|
|
$
4,686
|
|
$
12,736
|
|
$
14,751
|
|
Maintenance
fees
|
|
|
1,381
|
|
|
1,588
|
|
|
4,057
|
|
|
4,751
|
|
Total
|
|
$
|
5,809
|
|
$
|
6,274
|
|
$
|
16,793
|
|
$
|
19,502
|
|
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.
Acquisition
On
May
31,
2006,
the Company acquired the outstanding shares of eps. The aggregate purchase
price
for eps totals $33.5 million, including cash payments of $22.2 million, 330,827
shares of Company common stock valued at $11.1 million, and direct costs of
acquisition.
eps,
with
operations in Germany, Romania, the United Kingdom and other European
locations,
offers
electronic payment and complementary solutions focused largely in the German
market. The acquisition of eps will provide the Company additional opportunities
to sell its solutions within Germany, as well as to sell eps’ solutions into
markets beyond Germany.
The
acquisition of eps is scheduled to occur in two closings. The initial closing
occurred on May 31, 2006, and the second closing is scheduled to occur on
October 31, 2006. Cash consideration paid at the initial closing totaled $16.1
million, with the remaining cash consideration to be paid at the second closing.
All shares of the Company’s
common
stock issued as consideration for the eps
acquisition were issued at the initial closing. The Company has accounted for
the acquisition of eps in its entirety as of May 31, 2006, and has recorded
a
liability, included in accrued and other liabilities, in the amount of $6.1
million for the remaining cash consideration to be paid at the second closing.
The Company has accounted for this as a delayed delivery of consideration as
the
price is fixed and not subject to change, with complete decision-making and
control of eps held by the Company as of the date of the initial closing.
Contingencies that may prevent the second closing from occurring are limited
and considered remote in likelihood.
As
noted,
the consideration paid for eps included 330,827 shares of the Company’s common
stock, all of which were issued from the Company’s treasury stock. Under the
terms of the eps acquisition, the shares issued have restrictions that prohibit
their resale for five years, provided, however, that these resale restrictions
expire with respect to 20% of the shares each year commencing with the first
anniversary of the initial closing. Expiration of the restrictions is related
to
the passage of time and is in no way linked to ongoing employment by the Company
of the respective shareholders. Due to the resale restrictions, with the
assistance of an independent appraiser, the Company determined that a discount
to the quoted market price of the Company’s common stock in the amount of 19%
was appropriate for determining the fair market value of the shares issued
for
acquisition accounting purposes. The Company valued the shares issued using
an
average of the market price of the Company’s common stock two days prior and
subsequent to the parties agreeing to the terms of the acquisition and its
announcement (net of the 19% discount for the nonmarketability of the
shares). The fair market value of each share issued related to the eps
acquisition was determined to be $33.42 per share.
Under
the
terms of the acquisition, the parties established a cash escrow arrangement
in
which approximately $1.0 million of the cash consideration paid at the initial
closing will be held in escrow as security for an identified potential
obligation, the likelihood of which is deemed remote. Additionally, certain
of
the sellers of eps have committed to certain indemnification obligations as
part
of the sale of eps. Those obligations are secured by the shares of common stock
issued to the sellers pursuant to the eps acquisition to the degree such shares
are restricted at the time such an indemnification obligation is triggered,
if
at all, the likelihood of which is deemed remote.
The
allocation of the purchase price to specific assets and liabilities was based,
in part, upon outside appraisals of the fair
value
of certain assets of eps. The following table summarizes the estimated fair
values of the assets acquired and liabilities assumed in
connection with the acquisition, as well as the weighted-average useful lives
of
intangible assets (in thousands, except weighted-average useful lives):
|
|
Amount
|
|
Weighted-Average
Useful Lives
|
|
Current
assets:
|
|
|
|
|
|
Cash
|
|
$
|
3,056
|
|
|
|
|
Billed receivables, net of allowances
|
|
|
1,902
|
|
|
|
|
Accrued receivables
|
|
|
175
|
|
|
|
|
Other
|
|
|
451
|
|
|
|
|
Noncurrent
assets:
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
183
|
|
|
|
|
Developed technology
|
|
|
5,012
|
|
|
5.0
years
|
|
Goodwill
|
|
|
22,349
|
|
|
|
|
Customer relationships, trade names and other intangible
assets
|
|
|
5,681
|
|
|
7.4
years
|
|
Total
assets acquired
|
|
|
38,809
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
5,279
|
|
|
|
|
Long-term
liabilities
|
|
|
76
|
|
|
|
|
Total
liabilities assumed
|
|
|
5,355
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
33,454
|
|
|
|
|
This
purchase price allocation is preliminary due to limited information available
related to computer equipment and software licenses financed under a capital
lease arrangement and a related remote contingency, and due to uncertainty
related to a contract arrangement which includes contingencies not
presently resolved.
The
$22.3
million in goodwill associated with the eps acquisition, which will be tax
deductible, is recorded in the Company’s EMEA region. Factors contributing to
the purchase price which resulted in the recognized goodwill include the
acquisition of management, sales and technology personnel with the skills to
develop and market new products for the Company.
The
financial operating results of eps beginning June 1, 2006, have been included
in
the consolidated financial results of the Company for the quarter and nine
months ended June 30, 2006.
The
following represents unaudited pro forma combined results of operations of
the
Company and eps,
as
if the eps acquisition had occurred as of October 1, 2004 (in thousands, except
per share amounts):
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Unaudited
pro forma information:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
85,390
|
|
$
|
81,437
|
|
$
|
267,377
|
|
$
|
245,519
|
|
Net
income
|
|
|
22,560
|
|
|
10,188
|
|
|
53,444
|
|
|
35,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.60
|
|
|
0.27
|
|
|
1.43
|
|
|
0.93
|
|
Diluted
|
|
|
0.59
|
|
|
0.27
|
|
|
1.40
|
|
|
0.91
|
|
The
pro
forma financial information includes historical eps revenues and expenses,
with
adjustments to the accounting base for depreciation, amortization and income
taxes. The pro forma financial information is shown for illustrative purposes
only and is not necessarily indicative of future results of operations of the
Company or the results of operations of the Company that would have actually
occurred had the transaction been in effect for the periods
presented.
4.
Share-Based Compensation Plans
Stock
Incentive Plans - Active Plans
The
Company has a 2005 Equity and Performance Incentive Plan
(the
“2005 Incentive Plan”) under which 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 under
which
4,000,000 shares of the Company’s common stock have been reserved for issuance
to eligible employees of the Company and its subsidiaries. Stock options
granted
pursuant to the 1999 Stock Option Plan 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 85% of the stock’s fair market value on the last business day
of the three-month participation period.
Additionally,
the discount offered pursuant to the Company’s ESPP discussed above is 15%,
which exceeds the 5% noncompensatory guideline in Statement of Financial
Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment”
(“SFAS No. 123R”) and exceeds the Company’s estimated cost of raising capital.
Consequently,
the entire 15% discount to employees is deemed to be compensatory.
Accounting
for Share-Based Payments Pursuant to SFAS
No. 123 R
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 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, 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 classified 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). These compensation costs are based on the grant date fair
value of those awards as calculated for pro forma disclosures under SFAS No.
123. The Company is recognizing compensation costs related to the nonvested
portion of those awards in the financial statements from the SFAS No. 123R
adoption date through the end of the requisite service period.
A
summary
of stock options as of June 30, 2006 and changes during the nine 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
|
|
|
100,000
|
|
|
32.82
|
|
|
|
|
|
|
|
Exercised
|
|
|
(706,053
|
)
|
|
16.44
|
|
|
|
|
|
|
|
Cancellations
|
|
|
(43,322
|
)
|
|
22.56
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2006
|
|
|
3,276,843
|
|
$
|
17.27
|
|
|
7.1
|
|
$
|
79,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2006
|
|
|
1,868,653
|
|
$
|
13.06
|
|
|
5.9
|
|
$
|
53,297
|
|
All
fully-vested stock options as of June 30, 2006 are exercisable and are included
in the above table. During the first six months of fiscal 2006, the Company
issued new shares of common stock for the exercise of stock options. Beginning
in the third quarter of fiscal 2006, the Company issued treasury shares for
the
exercise of stock options. The intrinsic value of options exercised during
the
first nine months of fiscal 2006 was $11.0 million. The Company’s stock awards
allow employees to exercise options through cash payment to the Company for
the
shares
of
common stock or through 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.
The
fair
value of options granted 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
June
30,
|
|
Nine
Months Ended
June
30,
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
Expected
life
|
|
4.5
|
|
|
|
3.6
|
|
|
|
4.4
|
|
|
|
4.1
|
|
Interest
rate
|
|
5.0%
|
|
|
|
3.7%
|
|
|
|
4.7%
|
|
|
|
4.0%
|
|
Volatility
|
|
42%
|
|
|
|
46%
|
|
|
|
42%
|
|
|
|
48%
|
|
Dividend
yield
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expected
volatilities are based on implied volatilities from traded options on the
Company’s common stock and other industry 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.
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. With
respect to options granted that vest based on the achievement of certain market
conditions, the grant date fair value of such options was estimated using a
pricing model acceptable under SFAS No. 123 with the following weighted-average
assumptions:
|
Three
Months Ended
June
30, 2005
|
|
Nine
Months Ended
June
30, 2005
|
Expected
life
|
|
5.7
|
|
|
|
5.7
|
|
Interest
rate
|
|
4.2%
|
|
|
|
4.2%
|
|
Volatility
|
|
46%
|
|
|
|
46%
|
|
Dividend
yield
|
|
—
|
|
|
|
—
|
|
During
the first nine months 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”). A summary of nonvested LTIP Performance
Shares as of June 30, 2006 and changes during the nine 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
|
|
|
(5,000
|
)
|
|
28.27
|
|
Nonvested
at June 30, 2006
|
|
|
156,000
|
|
$
|
29.00
|
|
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 and defined 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.
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.
As
of
June 30, 2006, there were unrecognized compensation costs of $9.2 million
related to nonvested stock options and $3.1 million related to nonvested LTIP
Performance Shares which the Company expects to recognize over weighted-average
periods of 2.4 years and 2.3 years, respectively.
Share-based
compensation expenses recognized under SFAS No. 123R in the third quarter of
fiscal 2006 related to stock options, LTIP Performance Shares, and the ESPP
were
$1.5 million, with corresponding tax benefits of $0.5 million. Share-based
compensation expenses recognized under SFAS No. 123R in the first nine months
of
fiscal 2006 related to stock options, LTIP Performance Shares, and the ESPP
were
$4.4 million, with corresponding tax benefits of $1.6 million. No share-based
compensation costs were capitalized during the third quarter or first nine
months 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 recognizes
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.
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 disclosed stock-based compensation pursuant to
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 third quarter
and
first nine months of fiscal 2005 would have approximated the following pro
forma
amounts (in thousands, except per share amounts):
|
|
|
Three
Months
Ended
June
30, 2005
|
|
|
Nine
Months
Ended
June
30, 2005
|
|
Net
income:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
9,995
|
|
$
|
34,111
|
|
Deduct:
stock-based employee compensation expense determined
|
|
|
|
|
|
|
|
under the fair value method for all awards, net of related tax
effects
|
|
|
(717
|
)
|
|
(2,010
|
)
|
Add:
stock-based employee compensation expense recorded
|
|
|
|
|
|
|
|
under the intrinsic value method, net of related tax
effects
|
|
|
19
|
|
|
114
|
|
Pro
forma
|
|
$
|
9,297
|
|
$
|
32,215
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic,
as reported
|
|
$
|
0.27
|
|
$
|
0.90
|
|
Basic,
pro forma
|
|
$
|
0.25
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
Diluted,
as reported
|
|
$
|
0.26
|
|
$
|
0.88
|
|
Diluted,
pro forma
|
|
$
|
0.24
|
|
$
|
0.83
|
|
5.
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’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 loss. 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):
|
|
June
30,
2006
|
|
Sept.
30,
2005
|
|
Municipal
auction rate notes
|
|
$
|
66,725
|
|
$
|
71,825
|
|
Municipal
bonds/notes
|
|
|
1,000
|
|
|
994
|
|
Marketable
securities
|
|
$
|
67,725
|
|
$
|
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.
6.
Goodwill, Software and Other Intangible Assets
Net
increases
in the
carrying amount of goodwill during the first nine months of fiscal 2006 were
$22.2 million, consisting of goodwill in the amount of $22.3 million resulting
from the acquisition of eps and a net increase of $0.3 million resulting from
foreign currency translation adjustments, with a reduction to goodwill of $0.4
million related to S2 acquisition adjustments that were primarily related to
reductions in severance liabilities associated with acquired S2
employees.
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):
|
|
June
30,
2006
|
|
Sept.
30,
2005
|
|
Software:
|
|
|
|
|
|
Internally-developed
software
|
|
$
|
15,711
|
|
$
|
14,916
|
|
Purchased
software
|
|
|
49,982
|
|
|
43,177
|
|
|
|
|
65,693
|
|
|
58,093
|
|
Less:
accumulated amortization
|
|
|
(54,649
|
)
|
|
(53,163
|
)
|
Software,
net
|
|
$
|
11,044
|
|
$
|
4,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept.
30,
2005
|
|
Other
intangible assets:
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
18,996
|
|
$
|
14,375
|
|
Purchased
contracts
|
|
|
4,319
|
|
|
3,907
|
|
Trademarks
and trade names
|
|
|
2,158
|
|
|
1,400
|
|
Covenant
not to compete
|
|
|
1,280
|
|
|
1,150
|
|
|
|
|
26,753
|
|
|
20,832
|
|
Less:
accumulated amortization
|
|
|
(8,768
|
)
|
|
(7,259
|
)
|
Other
intangible assets, net
|
|
$
|
17,985
|
|
$
|
13,573
|
|
Internally-developed
software includes capitalized costs of software developed for sale and
capitalizable development or modification costs of software that will be used
internally. Purchased software includes capitalized costs of software to be
marketed externally that was acquired primarily as the result of business
acquisitions and costs of computer software obtained for internal use.
Amortization
of software to be sold or marketed 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 that
software, which currently ranges from three to eight years. Software for
internal use is amortized on a straight-line basis over an estimated useful
life
of three years. Software amortization expense recorded in the three and nine
months ended June 30, 2006 totaled $0.5 million and $1.5 million, respectively.
Other intangible assets amortization expense recorded in the three and nine
months ended June 30, 2006 totaled $0.5 million and $1.5 million, respectively.
Based on capitalized intangible assets at June 30, 2006, 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
|
|
$
|
1,096
|
|
$
|
998
|
|
2007
|
|
|
3,979
|
|
|
2,570
|
|
2008
|
|
|
2,962
|
|
|
2,432
|
|
2009
|
|
|
1,745
|
|
|
2,339
|
|
2010
|
|
|
432
|
|
|
2,262
|
|
Thereafter
|
|
|
830
|
|
|
7,384
|
|
Total
|
|
$
|
11,044
|
|
$
|
17,985
|
|
7.
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, net of adjustments to
previously
recognized liabilities, of $0.3 million and other reorganization charges of
$0.4
million related to the Company’s restructuring of its organization were incurred
during the first nine months of fiscal 2006. The allocation of net charges
incurred
during the first nine months of fiscal 2006 was
as follows: $70,000 in cost of software license fees, $8,000 credit in cost
of
maintenance and services, $62,000 credit in research and development, $218,000
in selling and marketing, and $451,000 in general and administrative. Cash
expenditures related to restructuring and other reorganization charges totaled
$1.5 million during the first nine months 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
|
|
|
409
|
|
|
396
|
|
|
805
|
|
Adjustments
to previously recognized liabilities
|
|
|
(136
|
)
|
|
-
|
|
|
(136
|
)
|
Amounts
paid during fiscal 2006
|
|
|
(1,146
|
)
|
|
(396
|
)
|
|
(1,542
|
)
|
Balance,
June 30, 2006
|
|
$
|
161
|
|
$
|
-
|
|
$
|
161
|
|
8.
Common Stock, Treasury Stock and Earnings Per Share
Options
to purchase 2,212
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 June 30, 2006
and
September 30, 2005 consolidated balance sheets, and are included in common
shares outstanding for earnings per share (“EPS”) computations for the three and
nine months ended June 30, 2006 and 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.
In May 2006, the
Company’s Board of Directors approved an increase of $30.0 million to the
current stock repurchase program, bringing the total of the approved plan to
$110.0 million. During the third quarter of fiscal 2006, the Company repurchased
280,645 shares of its common stock at an average price of $38.62 per share
under
this stock repurchase program. During the first nine months of fiscal 2006,
the
Company repurchased 768,767 shares of its common stock at an average price
of
$31.86 per share under this stock repurchase program. The maximum remaining
dollar value of shares authorized for purchase under the stock repurchase
program was $52.2 million as of June 30, 2006.
During
the third quarter of fiscal 2006, the Company began to issue shares of treasury
stock upon exercise of stock options and for issuances of common stock pursuant
to the Company’s employee stock purchase plan. Shares of treasury stock were
also issued during the third quarter of fiscal 2006 in connection with the
acquisition of eps Electronic Payment Systems AG. Treasury shares issued during
the third quarter of fiscal 2006 included 233,218 shares issued pursuant to
stock option exercises, 9,421 issued pursuant to the Company’s employee stock
purchase plan, and 330,827 related to the acquisition of eps Electronic Payment
Systems AG. For purposes of determining the cost of the treasury shares sold,
the Company has elected to use the average cost method.
EPS
has
been computed in accordance with SFAS No. 128, "Earnings Per Share." Basic
EPS is calculated by dividing net income available to common stockholders (the
numerator) by the weighted average number of common shares outstanding during
the period (the denominator). Diluted EPS is computed by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding during the period, adjusted
for the
dilutive effect of any outstanding dilutive securities (the denominator). The
differences between the basic and diluted EPS denominators for the three months
ended June 30, 2006 and 2005, which amounted to 925,000 and 736,000 shares,
respectively, and for the nine months ended June 30, 2006 and 2005, which
amounted to 858,000 and 773,000 shares, respectively, were due to the dilutive
effect of the Company's outstanding stock options. Excluded from the
computations of diluted EPS for the three months ended June 30, 2006 and 2005
were options to purchase 540,000 shares and 1,624,000 shares, respectively,
and
for the nine months ended June 30, 2006 and 2005 were options to purchase
741,000 shares and 1,019,000 shares, respectively, because the stock options
were for contingently issuable shares or because their impact would be
antidilutive based on current market prices.
9.
Comprehensive Income
The
Company's components of other comprehensive income were as follows (in
thousands):
|
|
Three
Months Ended
June
30,
|
|
Nine
Months Ended
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
income
|
|
$
|
23,308
|
|
$
|
9,995
|
|
$
|
53,484
|
|
$
|
34,111
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
855
|
|
|
568
|
|
|
618
|
|
|
495
|
|
Change
in unrealized investment holding loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain (loss) arising during
the period
|
|
|
3
|
|
|
32
|
|
|
6
|
|
|
(15
|
)
|
Comprehensive
income
|
|
$
|
24,166
|
|
$
|
10,595
|
|
$
|
54,108
|
|
$
|
34,591
|
|
The
Company's components of accumulated other comprehensive loss at each balance
sheet date were as
follows
(in thousands):
|
|
Foreign
Currency
Translation
Adjustments
|
|
Unrealized
Investment
Holding
Loss
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Balance,
September 30, 2005
|
|
$
|
(9,155
|
)
|
$
|
(6
|
)
|
$
|
$(9,161
|
)
|
Fiscal
2006 year-to-date activity
|
|
|
618
|
|
|
6
|
|
|
624
|
|
Balance,
June 30, 2006
|
|
$
|
(8,537
|
)
|
$
|
-
|
|
$
|
(8,537
|
)
|
10.
Segment Information
Prior
to
fiscal 2006, the Company reviewed its operations within its
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 electronic
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, the Company determined 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
June
30,
|
|
Nine
Months Ended
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
47,033
|
|
$
|
42,474
|
|
$
|
134,562
|
|
$
|
126,588
|
|
EMEA
|
|
|
29,684
|
|
|
27,658
|
|
|
100,704
|
|
|
84,201
|
|
Asia/Pacific
|
|
|
8,047
|
|
|
7,871
|
|
|
24,406
|
|
|
23,446
|
|
|
|
$
|
84,764
|
|
$
|
78,003
|
|
$
|
259,672
|
|
$
|
234,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
12,019
|
|
$
|
9,023
|
|
$
|
30,721
|
|
$
|
32,478
|
|
EMEA
|
|
|
1,405
|
|
|
4,323
|
|
|
14,723
|
|
|
15,259
|
|
Asia/Pacific
|
|
|
2,096
|
|
|
1,840
|
|
|
5,793
|
|
|
5,577
|
|
|
|
$
|
15,520
|
|
$
|
15,186
|
|
$
|
51,237
|
|
$
|
53,314
|
|
No
single
customer accounted for more than 10% of the Company's consolidated revenues
during the third quarter or first nine months of fiscal 2006 or 2005. Revenues
attributable to customers in Canada accounted for 14.8% and 10.6%, respectively,
of the Company’s consolidated revenues during the third quarter and first nine
months of fiscal 2006.
Revenues attributable to customers in the United Kingdom accounted for 10.8%
and
10.7% of the Company’s consolidated revenues during the first nine months of
fiscal 2006 and 2005, respectively, and 10.8% of the Company’s consolidated
revenues during the third quarter of fiscal 2005.
11.
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. The
Company has estimated its fiscal 2006 annual effective income tax rate to be
35.3%. 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 open audit issues related to years 1997 through 2003, resulting in a
refund to the Company. The amount of the refund was $8.9 million. The refund
and
corresponding interest were dependent on the Company’s claims being approved by
the Joint Committee on Taxation (the “Joint Committee”). 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 nine months of fiscal 2006, the Company received and
recorded the effects of the refund in its consolidated financial statements,
including estimated interest income of $2.0 million and entries to relieve
related tax contingency reserves and other accruals relating to the audit in
the
amount of $3.9 million.
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. During the third quarter of fiscal 2006, the Company released $12.6
million in
valuation reserves related to carryover foreign tax credits. The decision to
release the reserves was based on the Company’s history of utilizing foreign tax
credits in its prior years’ federal income tax returns and in particular, its
ability to utilize substantial amounts in its 2005 federal income tax return
that was filed during the third quarter of fiscal 2006. In addition, the Company
prepares ongoing estimates of future taxable income and associated foreign
source income, as well as estimates of the ability to utilize foreign tax
credits in excess of any credits that will be generated in the future. The
Company anticipates that all of the foreign tax credits previously reserved
will
be utilized before the expiration of the carryforward period.
The
effective tax rate for the third quarter of fiscal 2006 was a benefit of 37.7%
as compared to a provision of 37.2% for the same period of fiscal 2005. The
effective tax rate for the first nine months of fiscal 2006 was 6.2% as compared
to 37.1% for the same period of fiscal 2005. Differences between the statutory
federal income tax rate and the effective rates per the consolidated statements
of operations are summarized as follows:
|
|
Three
Months Ended
June
30,
|
|
Nine
Months Ended
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Federal
tax rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State
income taxes
|
|
|
1.7
|
|
|
2.2
|
|
|
1.9
|
|
|
2.2
|
|
Reduction
of valuation allowance for deferred tax assets
|
|
|
(74.6
|
)
|
|
-
|
|
|
(22.2
|
)
|
|
-
|
|
Contingency
reserves and accruals related to IRS audit
|
|
|
-
|
|
|
-
|
|
|
(6.9
|
)
|
|
-
|
|
Foreign
withholding taxes and reserves
|
|
|
1.8
|
|
|
3.4
|
|
|
0.5
|
|
|
2.5
|
|
Extraterritorial
income exclusion benefit
|
|
|
(0.6
|
)
|
|
(1.4
|
)
|
|
(0.7
|
)
|
|
(1.1
|
)
|
Other
|
|
|
(1.0
|
)
|
|
(2.0
|
)
|
|
(1.4
|
)
|
|
(1.5
|
)
|
Total
(benefit) provision
|
|
|
(37.7
|
)%
|
|
37.2
|
%
|
|
6.2
|
%
|
|
37.1
|
%
|
The
comparative decrease in the estimated fiscal 2006 effective income tax rate
of
35.3%, from 37.0% for fiscal 2005, excluding
discrete items such as the release of the valuation allowance on foreign tax
credits and the release of reserves due to the IRS audit, is attributable
primarily to the manufacturing deduction, a decrease in valuation allowances
related to foreign withholding taxes, and an increase in nontaxable municipal
interest offset by an increase related to the phase-out of the extraterritorial
income exclusion.
12.
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, none of whom are currently executive officers of the Company,
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”) previously alleged 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 also alleged that, prior to
August 2002, the purported truth regarding the Company’s financial condition had
not been disclosed to the market. The Company and the individual defendants
initially filed a motion to dismiss the lawsuit. 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
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
of
persons that purchased the Company’s common stock from January 21, 1999 through
November 18, 2002.
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. On February 6, 2006, additional
class representative Roger M. Wally filed a motion to withdraw as a class
representative and class member. On April 21, 2006, and based upon the pending
motion for judgment, a motion to intervene as a class
representative
was filed by the Louisiana District
Attorneys Retirement System (“LDARS”). LDARS previously attempted to be named as
lead plaintiff in the case. On July 5, 2006, the Magistrate denied LDARS’ motion
to intervene, which LDARS has appealed to the District Judge. That appeal has
not yet been decided.
On
May
17, 2006, the Court denied the motion for judgment on the pleadings as being
moot based upon the Court’s granting the lead plaintiff leave to file a Third
Amended Complaint (the “Third Complaint”), which it did on May 31, 2006. The
Third Complaint alleges the same misrepresentations as described above, while
simultaneously alleging that the purported truth about the Company’s financial
condition was being disclosed throughout that time, commencing in April 1999.
The Third Complaint seeks unspecified damages, interest, fees and
costs.
On
June
14, 2006, the Company and the individual defendants filed a motion to dismiss
the Third Complaint pursuant to Rules 8 and 12 of the Federal Rules of Civil
Procedure. With the exception of one deposition, all discovery has been stayed
in the case pending a ruling on the motion to dismiss.
13.
Recent Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109,” which establishes a recognition
threshold and measurement process for recording in the financial statements
uncertain tax positions taken or expected to be taken in a tax return. FIN
48 is
effective for fiscal years beginning after December 15, 2006. For the Company,
FIN 48 will be effective beginning with the fiscal year ending September 30,
2008. The Company is currently evaluating the impact that this interpretation
will have on its financial condition and/or results of operations.
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 electronic 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 electronic payment processors, both in domestic and international
markets. Accordingly,
the Company’s business and operating results are influenced by trends such as
information technology spending levels, the growth rate of the electronic
payments industry, mandated regulatory changes, and changes in the number and
type of customers in the financial services industry. As set forth in Note
10 to
the consolidated financial statements, at the beginning of fiscal 2006, the
Company underwent a corporate reorganization, combining its products and
services under the ACI Worldwide name.
The
Company derives a majority of its revenues from non-domestic operations and
believes its greatest opportunities for growth exist largely in international
markets. Refining the Company’s global infrastructure is a critical component of
driving its growth. The Company has launched a globalization strategy intended
to streamline its supply chain and provide low-cost centers of expertise to
support a growing international customer base. The
Company established a new subsidiary in Ireland to serve as the focal point
for
certain international product development and commercialization efforts. This
subsidiary will oversee remote software development operations in Romania and
elsewhere, as well as manage
certain of the Company’s intellectual property rights. The Company is forming a
“Software as a Service” group to develop new business and market-entry vehicles
where it sells a service directly to end-user banks, retailers or processors.
The Company also is in the process of moving its principal executive offices
to
New York City to more strategically manage its global infrastructure.
Key
trends that currently impact the Company’s strategies and operations
include:
· |
Increasing
electronic payment transaction volumes.
Electronic payment volumes continue to increase around the world,
taking
market share from traditional cash and check transactions. The Company
recently commissioned an industry study that determined that electronic
payment volumes are expected to grow at approximately 13% per year
for the
next five years, with varying growth rates based on the type of payment
and part of the world (source: 2006 ACI Worldwide Payments Market
Forecast).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 electronic payments market is highly competitive and subject
to rapid
change. The Company's competition comes from in-house information
technology departments, third-party electronic payment processors
and
third-party software companies located both within and outside of
the
United States. Many of these companies are significantly larger than
the
Company and have significantly greater financial, technical and marketing
resources. As electronic 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
electronic 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, electronic 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 current
technology staffing and resources, many financial institutions, retailers
and electronic 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.
|
· |
Electronic
payments fraud and compliance.
As
electronic 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 electronic 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 electronic 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,
with many
regions throughout the world working on
|
|
EMV
rollouts. The primary benefit of EMV deployment is a reduction
in
electronic payment 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 Euro 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.
|
· |
Electronic
payments convergence.
As
electronic 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 electronic 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 electronic payment technology and service
providers specializing in other forms of electronic 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 arrangements in which services revenue is deferred, related direct
and incremental costs may also be deferred. While the U.S. dollar is the single
largest currency in which the Company’s contracts are denominated, 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 the Middle East, Europe, Latin
America and the Asia/Pacific region, generating nearly half of its revenue
from
international markets. The S2 acquisition has been financially accretive in
fiscal 2006 due to a combination of expense reductions, normalization of
maintenance fee revenues and license upgrades to existing S2
systems.
On
May
31, 2006, the Company acquired the outstanding shares of eps Electronic Payment
Systems AG (“eps”), headquartered in Frankfurt, Germany. eps, with operations in
Germany, Romania, the United Kingdom and other European locations, offers
electronic payment and complementary solutions to the German market. The
acquisition of eps will provide the Company additional opportunities to sell
its
value added solutions, such as Proactive Risk Manager and Smart Chip Manager,
into the German marketplace, as well as to sell eps’ testing and dispute
management solutions into markets beyond Germany. In addition, eps’ presence in
Romania will help the Company more rapidly develop its global offshore
development and support capabilities. The Company expects the eps acquisition
to
be financially accretive in fiscal 2007 due to a combination of expense
reductions and cross-selling solutions into Germany and other parts of the
world.
The
Company continues to seek ways to grow, through both organic sources and
acquisitions. The Company has increased its spending 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. During the
third quarter of fiscal 2006, the Company began to manage certain intellectual
property rights from its Irish subsidiary as part of the overall globalization
strategy. The Company expects these globalization efforts to result in future
improvements in profitability and reductions in its overall effective tax rate.
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.
The
Company may execute more than one contract or agreement with a single customer.
The separate contracts or agreements may be viewed as one multiple-element
arrangement or separate arrangements for revenue recognition purposes. Judgment
is required when evaluating the facts and circumstances related to each
situation in order to reach appropriate conclusions regarding whether such
arrangements are related or separate. Those conclusions can impact the timing
of
revenue recognition related to those arrangements.
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. Achievement of the market
conditions prior to completion of the expected vesting period for these stock
options would require the Company to accelerate recognition of the related
noncash compensation costs.
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
and other industry 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 potential stock price appreciation,
reflect the Company’s best estimates, as of the reporting date, of what future
market conditions and the Company’s stock price may be in future periods,
strictly for the purpose of applying SFAS No. 123R. 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
and
capital loss carryforwards and/or foreign tax credit carryforwards, the adequacy
of valuation allowances, and the tax 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
net
income in the period any such determination was made.
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. During
the third quarter of fiscal 2006, the Company released $12.6 million in
valuation reserves related to carryover foreign tax credits. The decision to
release the reserves was based on the Company’s history of utilizing foreign tax
credits in its prior years’ federal income tax returns and in particular, its
ability to utilize substantial amounts in its 2005 federal income tax return
that was filed during the third quarter of fiscal 2006. In addition, the Company
prepares ongoing estimates of future taxable income and associated foreign
source income, as well as estimates of the ability to utilize foreign tax
credits in excess of any credits that will be generated in the future. The
Company anticipates that all of the foreign tax credits previously reserved
will
be utilized before the expiration of the carryforward period.
Recent
Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109,” which establishes a recognition
threshold and measurement process for recording in the financial statements
uncertain tax positions taken
or
expected to be taken in a tax return. FIN 48 is effective for fiscal years
beginning after December 15, 2006. For the Company, FIN 48 will be effective
beginning with the fiscal year ending September 30, 2008. The Company is
currently evaluating the impact that this interpretation will have on its
financial condition and/or results of operations.
Segment
Information
As
set
forth in Note 10 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, “Disclosures about Segments of an Enterprise and Related Information,” 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
June
30,
|
|
Nine
Months Ended
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
47,033
|
|
$
|
42,474
|
|
$
|
134,562
|
|
$
|
126,588
|
|
EMEA
|
|
|
29,684
|
|
|
27,658
|
|
|
100,704
|
|
|
84,201
|
|
Asia/Pacific
|
|
|
8,047
|
|
|
7,871
|
|
|
24,406
|
|
|
23,446
|
|
|
|
$
|
84,764
|
|
$
|
78,003
|
|
$
|
259,672
|
|
$
|
234,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
12,019
|
|
$
|
9,023
|
|
$
|
30,721
|
|
$
|
32,478
|
|
EMEA
|
|
|
1,405
|
|
|
4,323
|
|
|
14,723
|
|
|
15,259
|
|
Asia/Pacific
|
|
|
2,096
|
|
|
1,840
|
|
|
5,793
|
|
|
5,577
|
|
|
|
$
|
15,520
|
|
$
|
15,186
|
|
$
|
51,237
|
|
$
|
53,314
|
|
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.
The
Company’s 60-month backlog represents expected revenues from existing customers
using
the
following key assumptions:
· |
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.
|
The
following table sets forth the Company’s 60-month backlog, by geographic region,
as of June 30, 2006 and September 30, 2005 (in millions):
|
|
June
30, 2006
|
|
Sept.
30, 2005
|
|
Americas
|
|
$
|
529
|
|
$
|
525
|
|
EMEA
|
|
|
438
|
|
|
383
|
|
Asia/Pacific.
|
|
|
125
|
|
|
123
|
|
|
|
$
|
1,092
|
|
$
|
1,031
|
|
The
Company also reports 12-month backlog, segregated between monthly recurring
and
non-recurring revenues, using a methodology that is consistent with the 60-month
calculation. Monthly recurring revenues include all monthly license fees,
maintenance fees and facilities management fees. Non-recurring revenues include
other software license fees and services. Amounts included in 12-month backlog
assume renewal of one-time license fees on a monthly fee basis if such renewal
is expected to occur in the next 12 months. The following table sets forth
the
Company’s 12-month backlog, by geographic region, as of June 30, 2006 and
September 30, 2005 (in thousands):
|
June
30, 2006
|
|
September
30, 2005
|
|
Monthly
Recurring
|
|
Non-
Recurring
|
|
Total
|
|
Monthly
Recurring
|
|
Non-
Recurring
|
|
Total
|
Americas
|
$
97,340
|
|
$
29,525
|
|
$126,865
|
|
$
97,523
|
|
$
32,343
|
|
$129,866
|
EMEA
|
68,877
|
|
33,709
|
|
102,586
|
|
60,038
|
|
33,194
|
|
93,232
|
Asia/Pacific.
|
25,400
|
|
3,372
|
|
28,772
|
|
25,711
|
|
1,217
|
|
26,928
|
|
$191,617
|
|
$
66,606
|
|
$258,223
|
|
$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 June 30,
|
|
Nine
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
Amount
|
|
%
of
Revenue
|
|
Amount
|
|
%
of
Revenue
|
|
Amount
|
|
%
of
Revenue
|
|
Amount
|
|
%
of
Revenue
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
license fees (ILFs)
|
$
|
24,222
|
|
28.6
|
%
|
|
$
|
19,171
|
|
24.6
|
%
|
|
$
|
80,783
|
|
31.1
|
%
|
|
$
|
73,323
|
|
31.3
|
%
|
|
Monthly
license fees (MLFs)
|
|
17,733
|
|
20.9
|
|
|
|
18,485
|
|
23.7
|
|
|
|
52,294
|
|
20.1
|
|
|
|
55,092
|
|
23.5
|
|
|
Software
license fees
|
|
41,955
|
|
49.5
|
|
|
|
37,656
|
|
48.3
|
|
|
|
133,077
|
|
51.2
|
|
|
|
128,415
|
|
54.8
|
|
|
Maintenance
fees
|
|
25,989
|
|
30.7
|
|
|
|
24,938
|
|
32.0
|
|
|
|
76,053
|
|
29.3
|
|
|
|
69,667
|
|
29.8
|
|
|
Services
|
|
16,820
|
|
19.8
|
|
|
|
15,409
|
|
19.7
|
|
|
|
50,542
|
|
19.5
|
|
|
|
36,153
|
|
15.4
|
|
|
|
Total
revenues
|
|
84,764
|
|
100.0
|
|
|
|
78,003
|
|
100.0
|
|
|
|
259,672
|
|
100.0
|
|
|
|
234,235
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of software license fees
|
|
7,895
|
|
9.3
|
|
|
|
6,539
|
|
8.4
|
|
|
|
22,335
|
|
8.6
|
|
|
|
18,170
|
|
7.8
|
|
|
Cost
of maintenance and services
|
|
19,385
|
|
22.9
|
|
|
|
14,102
|
|
18.1
|
|
|
|
59,332
|
|
22.9
|
|
|
|
41,756
|
|
17.8
|
|
|
Research
and development
|
|
10,191
|
|
12.0
|
|
|
|
9,704
|
|
12.4
|
|
|
|
29,921
|
|
11.5
|
|
|
|
29,842
|
|
12.7
|
|
|
Selling
and marketing
|
|
15,896
|
|
18.8
|
|
|
|
16,183
|
|
20.7
|
|
|
|
48,437
|
|
18.7
|
|
|
|
46,852
|
|
20.0
|
|
|
General
and administrative
|
|
15,877
|
|
18.7
|
|
|
|
16,289
|
|
20.9
|
|
|
|
48,410
|
|
18.6
|
|
|
|
44,301
|
|
18.9
|
|
|
|
Total
expenses
|
|
69,244
|
|
81.7
|
|
|
|
62,817
|
|
80.5
|
|
|
|
208,435
|
|
80.3
|
|
|
|
180,921
|
|
77.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
15,520
|
|
18.3
|
|
|
|
15,186
|
|
19.5
|
|
|
|
51,237
|
|
19.7
|
|
|
|
53,314
|
|
22.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
1,641
|
|
1.9
|
|
|
|
1,279
|
|
1.6
|
|
|
|
6,154
|
|
2.4
|
|
|
|
2,727
|
|
1.2
|
|
|
Interest
expense
|
|
(10)
|
|
(0.0)
|
|
|
|
(102)
|
|
(0.1)
|
|
|
|
(126)
|
|
(0.1)
|
|
|
|
(407)
|
|
(0.2)
|
|
|
Other,
net
|
|
(227)
|
|
(0.2)
|
|
|
|
(453)
|
|
(0.6)
|
|
|
|
(239)
|
|
(0.1)
|
|
|
|
(1,445)
|
|
(0.6)
|
|
|
|
Total
other income (expense)
|
|
1,404
|
|
1.7
|
|
|
|
724
|
|
0.9
|
|
|
|
5,789
|
|
2.2
|
|
|
|
875
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
16,924
|
|
20.0
|
|
|
|
15,910
|
|
20.4
|
|
|
|
57,026
|
|
21.9
|
|
|
|
54,189
|
|
23.2
|
|
Income
tax benefit (provision)
|
|
6,384
|
|
7.5
|
|
|
|
(5,915)
|
|
(7.6)
|
|
|
|
(3,542)
|
|
(1.3)
|
|
|
|
(20,078)
|
|
(8.6)
|
|
Net
income
|
$
|
23,308
|
|
27.5
|
|
|
$
|
9,995
|
|
12.8
|
%
|
|
$
|
53,484
|
|
20.6
|
%
|
|
$
|
34,111
|
|
14.6
|
%
|
Revenues.
Total
revenues for the third quarter of fiscal 2006 increased $6.8 million, or
8.7%, as compared to the same period of fiscal 2005. The majority of this
increase resulted from revenue growth within the Americas region. The
three-month increase in total revenues is the result of a $4.3 million, or
11.4%, increase in software license fee revenues, a $1.1 million, or 4.2%,
increase in maintenance fee revenues, and a $1.4 million, or 9.2%, increase
in
services revenues. Total revenues for the first nine months of fiscal 2006
increased $25.4 million, or 10.9%, as compared to the same period of fiscal
2005. Comparative nine-month revenues increased in the EMEA region by $16.5
million, or 19.6%, in the Americas region by $7.9 million, or 6.3%, and in
the
Asia/Pacific region by $1.0 million, or 4.2%. The $7.9 million increase in
Americas’ nine-month revenues reflects an increase in international revenues of
$14.3 million, or 43.6%, offset by a $6.4 million, or 6.8%, decrease in U.S.
revenues. The nine-month increase in total revenues is the result of a $4.6
million, or 3.6%, increase in software license fee revenues, a $6.4 million,
or
9.2%, increase in maintenance fee revenues, and a $14.4 million, or 39.8%,
increase in services revenues.
The
increases in software license fee revenues during
the third quarter and first nine months of fiscal 2006, as
compared to the same periods of fiscal 2005, are primarily due to the completion
of several large implementation projects that resulted in software license
fee
revenue recognition and increased revenues for the Company’s Application
Services Suite and Risk Management Suite products. Offsetting the year-to-date
comparative increase was completion of a BASE24-es project and an ACI Wholesale
Payments System product contract extension that resulted in significant software
license fee revenue recognition during the first quarter of fiscal 2005.
The
increases in maintenance fee revenues during
the third quarter and first nine months of fiscal 2006, as
compared to the same periods of fiscal 2005, are primarily due to growth in
the
installed base of software products as well as maintenance fee revenues
recognized from S2 products during the third quarter and first nine months
of
fiscal 2006. Maintenance revenue from the S2 products recognized in the third
quarter and first nine months 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
increases in services revenues for the third
quarter and first nine months of
fiscal
2006, as compared to the same periods of fiscal 2005, resulted primarily from
recognition of previously deferred services revenues for several large projects
which were completed during the first
nine months of
fiscal
2006, as well as services revenues recognized from S2 products during the third
quarter and first nine months 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 third
quarter and first nine months of fiscal 2006.
Expenses.
Total
operating expenses for the third
quarter of fiscal 2006 increased $6.4 million, or 10.2%, as compared to the
same
period of fiscal 2005. Total operating expenses for the first nine months of
fiscal 2006 increased $27.5 million, or 15.2%, as compared to the same
period of fiscal 2005.
Cost
of
software license fees for the third quarter of fiscal 2006 increased
$1.4 million, or 20.7%, as compared to the same period of fiscal 2005. Cost
of software license fees for the first nine months of fiscal 2006 increased
$4.2 million,
or 22.9%, as compared to the same period of fiscal 2005. The increases in cost
of software license fees during the third quarter and first nine months of
fiscal 2006, as compared to the same periods of fiscal 2005, were primarily
due
to additional personnel assigned to support this function following the
previously announced reorganization. In addition, share-based compensation
costs
of $0.6 million, resulting from adoption of SFAS No. 123R in fiscal 2006, were
recognized during the first nine months of fiscal 2006.
Cost
of
maintenance and services for the third quarter of fiscal 2006 increased
$5.3 million, or 37.5%, as compared to the same period of fiscal 2005. Cost
of maintenance and services for the first nine months of fiscal 2006 increased
$17.6 million, or 42.1%, as compared to the same period of fiscal 2005. The
increases in cost of maintenance and services during the third quarter and
first
nine months of fiscal 2006, as compared to the same periods of fiscal 2005,
resulted from costs incurred during the third quarter and first nine months
of
fiscal 2006 of approximately $2.8 million and $10.2 million, respectively,
to
support the S2 products, eps
expenses of $0.4 million that were incurred during the third quarter of fiscal
2006, and recognition of previously deferred compensation-related expenses
resulting from recognition of several large projects during the first and second
quarters of fiscal 2006. For these projects, revenues previously were being
deferred until acceptance or first production use, and the associated costs,
including compensation-related expenses, were being deferred until the related
services revenue was recognized.
R&D
costs for the third quarter of fiscal 2006 increased $0.5 million, or 5.0%,
as compared to the same period of fiscal 2005. R&D costs for the first nine
months of fiscal 2006 were comparable to the same period of fiscal
2005.
Selling
and marketing costs for the third quarter of fiscal 2006 decreased
$0.3 million, or 1.8%, as compared to the same period of fiscal 2005.
Selling and marketing costs for the first nine months of fiscal 2006 increased
$1.6 million, or 3.4%, as compared to the same period of fiscal 2005.
The
increase in selling and marketing costs during the first nine months of fiscal
2006, as compared to the same period of fiscal 2005, was primarily due to higher
sales commissions and other costs resulting from strong sales during the first
and second quarters of fiscal 2006. In addition, share-based compensation costs
of $0.5 million, resulting from adoption of SFAS No. 123R in fiscal 2006, were
recognized during the first nine months of fiscal 2006.
General
and administrative costs for the third quarter of fiscal 2006 decreased
$0.4 million, or 2.5%, as compared to
the
same period of fiscal 2005. General and administrative costs for the first
nine
months of fiscal 2006 increased $4.1 million, or 9.3%, as compared to the
same period of fiscal 2005. The decrease in general and administrative costs
during the third quarter of fiscal 2006, as compared to the same period of
fiscal 2005, was primarily due to lower costs related to professional services
and reduced bad debt expenses, partially offset by increased costs resulting
from globalization initiatives and acquisition-related costs incurred during
the
third quarter of fiscal 2006, and share-based compensation costs of $1.1 million
recognized during the third quarter of fiscal 2006 resulting from adoption
of
SFAS No. 123R in fiscal 2006. The increase in general and administrative costs
during the first nine months of fiscal 2006, as compared to the same period
of
fiscal 2005, was primarily due to share-based compensation costs of $3.2 million
recognized during the first nine months of fiscal 2006 resulting from adoption
of SFAS No. 123R, severance costs related to the previously announced
reorganization, increased costs resulting from globalization initiatives and
acquisition-related costs incurred during the third quarter of fiscal 2006,
and
additional compensation and benefit costs.
Other
Income and Expense.
Interest
income for the third
quarter
of fiscal 2006 increased $0.4 million as compared to the same period of
fiscal 2005. Interest income for the first nine
months
of fiscal 2006 increased $3.4 million as compared to the same period of
fiscal 2005. The primary reason for the increase in interest income
during
the first nine months of fiscal 2006, as compared to the same period of fiscal
2005, is
attributable to interest
income of $2.0 million on a refund of income taxes.
The
remaining increases in interest income
during
the third quarter and first nine months of fiscal 2006, as compared to the
same
periods of fiscal 2005, are
attributable to increases in interest rates and global consolidation of excess
cash amounts into higher yielding investments.
Interest
expense for the third
quarter
of fiscal 2006 decreased $0.1 million as compared to the same period of
fiscal 2005. Interest expense for the first nine
months
of fiscal 2006 decreased $0.3 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 expenses for the third quarter of fiscal 2006
decreased $0.2 million as compared to the same period of fiscal 2005. Other
expenses for the first nine months of fiscal 2006 decreased $1.2 million as
compared to the same period of fiscal 2005. Comparative changes in other income
and expense amounts were primarily attributable to fluctuating currency rates
which impacted the amounts of foreign currency gains or losses recognized
by the Company during the respective periods.
Income
Taxes.
It is
the Company’s policy to report income tax expense for interim reporting periods
using an estimated annual effective income tax rate. The Company has estimated
its fiscal 2006 annual effective income tax rate to be 35.3%. 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 open audit issues related to years 1997 through 2003, resulting in a
refund to the Company. The amount of the refund was $8.9 million. The refund
and
corresponding interest were dependent on the Company’s claims being approved by
the Joint Committee on Taxation (the “Joint Committee”). 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 nine months of fiscal 2006, the Company received and
recorded the effects of the refund in its consolidated financial statements,
including estimated interest income of $2.0 million and entries to relieve
related tax contingency reserves and other accruals relating to the audit in
the
amount of $3.9 million.
The
effective tax rate for the third quarter of fiscal 2006 was a benefit of 37.7%
as compared to a provision of 37.2% for the same period of fiscal 2005. The
effective tax rate for the first nine months of fiscal 2006 was 6.2% as compared
to 37.1% for the same period of fiscal 2005. Differences between the statutory
federal income tax rate and the effective rates per the consolidated statements
of operations are summarized as follows:
|
|
Three
Months Ended
June
30,
|
|
Nine
Months Ended
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Federal
tax rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State
income taxes
|
|
|
1.7
|
|
|
2.2
|
|
|
1.9
|
|
|
2.2
|
|
Reduction
of valuation allowance for deferred tax assets
|
|
|
(74.6
|
)
|
|
-
|
|
|
(22.2
|
)
|
|
-
|
|
Contingency
reserves and accruals related to IRS audit
|
|
|
-
|
|
|
-
|
|
|
(6.9
|
)
|
|
-
|
|
Foreign
withholding taxes and reserves
|
|
|
1.8
|
|
|
3.4
|
|
|
0.5
|
|
|
2.5
|
|
Extraterritorial
income exclusion benefit
|
|
|
(0.6
|
)
|
|
(1.4
|
)
|
|
(0.7
|
)
|
|
(1.1
|
)
|
Other
|
|
|
(1.0
|
)
|
|
(2.0
|
)
|
|
(1.4
|
)
|
|
(1.5
|
)
|
Total
(benefit) provision
|
|
|
(37.7
|
)%
|
|
37.2
|
%
|
|
6.2
|
%
|
|
37.1
|
%
|
The
comparative decrease in the estimated fiscal 2006 effective income tax rate
of
35.3%, from 37.0% for fiscal 2005, excluding
discrete items such as the release of the valuation allowance on foreign tax
credits and the release of reserves due to the IRS audit, is attributable
primarily to the manufacturing deduction, a decrease in valuation allowances
related to foreign withholding taxes, and an increase in nontaxable municipal
interest offset by an increase related to the phase-out of the extraterritorial
income exclusion.
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. During the third quarter of fiscal 2006, the Company released $12.6
million in valuation reserves related to carryover foreign tax credits. The
decision to release the reserves was based on the Company’s history of utilizing
foreign tax credits in its prior years’ federal income tax returns and in
particular, its ability to utilize substantial amounts in its 2005 federal
income tax return that was filed during the third quarter of fiscal 2006. In
addition, the Company prepares ongoing estimates of future taxable income and
associated foreign source income, as well as estimates of the ability to utilize
foreign tax credits in excess of any credits that will be generated in the
future. The Company anticipates that all of the foreign tax credits previously
reserved will be utilized before the expiration of the carryforward
period.
As
of
June 30, 2006, the Company had net deferred tax assets of $32.2 million
(net of a $41.9 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
June 30, 2006, the Company's principal sources of liquidity consisted of
$176.1 million in cash, cash
equivalents and marketable securities. The Company had no bank borrowings
outstanding as of June 30, 2006. 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. In May 2006, the Company’s Board of Directors
approved an increase of $30.0 million to the stock repurchase program, bringing
the total of the approved plan to $110.0 million. During the first nine months
of fiscal 2006, the Company repurchased 768,767 shares of its common stock
at an
average price of $31.86 per share under this stock repurchase program. The
maximum remaining dollar value of shares authorized for purchase under the
stock
repurchase program was $52.2 million as of June 30, 2006. 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 in the first nine
months of fiscal 2006 amounted to $47.7 million as compared to
$48.5 million provided by operating activities during the same period of
fiscal 2005. The small decrease in operating cash flows resulted from changes
in
billed and accrued receivables, accounts payable, accrued employee compensation
and deferred revenue, offset by increased net income, including adjustments
for
non-cash items, and receipt of a cash refund of $10.9 million, including
interest, in February 2006 related to settlement of the IRS audit of tax years
1997 through 2003.
On
October 5, 2005, the Company announced
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 nine months of fiscal 2006, the Company incurred an additional $0.7
million in restructuring and other reorganization charges, net of adjustments
to
previously recognized amounts. Cash expenditures related to restructuring and
other reorganization charges totaled $1.5 million during the first nine months
of fiscal 2006. During the remainder of fiscal 2006, the Company expects to
incur an additional $0.9 million to $1.3 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 second quarter of fiscal 2007.
The
Company's net cash flows used in investing activities totaled $13.6 million
in the first nine months of fiscal 2006 as compared to $45.2 million used in
investing activities during the same period of fiscal 2005. During the first
nine months of fiscal 2006, the Company generated cash of $5.1 million by
decreasing its holdings of marketable securities, and used cash of $13.1 million
in
the
acquisition of businesses and $5.5 million to purchase software, property and
equipment. During the first nine months of fiscal 2005, the Company used cash
to
increase its net holdings of marketable securities by $40.7 million and
purchased $4.5 million of software, property and equipment.
The
Company's net cash flows used in financing activities totaled $12.8 million
in the first nine months of fiscal 2006 as compared to $25.2 million used
in financing activities during the same period of fiscal 2005. In the first
nine
months of fiscal 2006, the Company used cash of $24.7 million to purchase shares
of its common stock under the Company’s stock repurchase program, made payments
to third-party financial institutions totaling $2.9 million, and received
proceeds of $13.9 million, including corresponding excess tax benefits, from
exercises of stock options. In the first nine months of fiscal 2005, the Company
used cash of $28.9 million to purchase shares of its common stock under the
Company’s stock repurchase program, made payments to third-party financial
institutions totaling $5.9 million, and received proceeds of $8.5 million from
exercises of stock options.
The
Company also realized a $3.4 million increase in cash during the first nine
months of fiscal 2006 compared to a $0.8 million increase in cash during the
same period of fiscal 2005 related 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, which primarily consists of
working capital requirements, for the foreseeable future.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
There
have been no material changes to the Company's market risk for the nine
months ended June 30, 2006. 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. The U.S. dollar is the single largest currency in
which
the Company's revenue contracts are denominated. 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 June
30,
2006, 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 $0.8 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 third 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, none of whom are currently executive officers of the Company,
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”) previously alleged 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 also alleged that, prior to
August 2002, the purported truth regarding the Company’s financial condition had
not been disclosed to the market. The Company and the individual defendants
initially filed a motion to dismiss the lawsuit. 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
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
of
persons that purchased the Company’s common stock from January 21, 1999 through
November 18, 2002.
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.
On
February 6, 2006, additional class representative Roger M. Wally filed a motion
to withdraw as a class representative and class member. On April 21, 2006,
and
based upon the pending motion for judgment, a motion to intervene as a class
representative was filed by the Louisiana District Attorneys Retirement System
(“LDARS”). LDARS previously attempted to be named as lead plaintiff in the case.
On July 5, 2006, the Magistrate denied LDARS’ motion to intervene, which LDARS
has appealed to the District Judge. That appeal has not yet been decided.
On
May
17, 2006, the Court denied the motion for judgment on the pleadings as being
moot based upon the Court’s granting the lead plaintiff leave to file a Third
Amended Complaint (the “Third Complaint”), which it did on May 31, 2006. The
Third Complaint alleges the same misrepresentations as described above, while
simultaneously alleging that the purported truth about the Company’s financial
condition was being disclosed throughout that time, commencing in April 1999.
The Third Complaint seeks unspecified damages, interest, fees and
costs.
On
June
14, 2006, the Company and the individual defendants filed a motion to dismiss
the Third Complaint pursuant to Rules 8 and 12 of the Federal Rules of Civil
Procedure. With the exception of one deposition, all discovery has been stayed
in the case pending a ruling on the motion to dismiss.
Other
Litigation - Plus Tecnologia
On
August
31, 2001, Plus Tecnologia (“Plus”) filed a complaint in Circuit Court in the
Sixth Judicial Circuit for Pinellas County, Florida (the
“Florida Court”) against Transaction Systems Architects, Inc., ACI Worldwide
Inc., ACI Worldwide (Florida) Inc. n/k/a ACI Worldwide (Texas) LLC, Open Systems
Solutions, Inc., the predecessor to ACI Worldwide (Florida) Inc., and ACI
Worldwide (Mexico) S.A. de C.V. The complaint alleged breach of contract, breach
of non-disclosure agreements, tortious interference with prospective business
relationships of Plus and an additional cause of concert of action. Plus claimed
various items of damages, including lost profits in excess of $30.0 million,
interest, fees, costs and punitive damages.
On
April
12, 2006, the Florida Court dismissed with prejudice all of Plus' claims against
the Company and all defendants,
and
further found that no liability on the part of the Company or other defendants
has ever been found relating to the Plus cause of action. On June 15, 2006,
the
Florida
Court heard
the
Company’s Motions for Sanctions and ruled that Plus committed fraud on the court
through intentional misrepresentations, providing sworn deposition testimony
that contained knowingly false statements, intentionally manufacturing false
documents, and destroying and altering evidence. The Florida
Court also
ruled that Plus is liable to the Company for the Company’s attorney’s fees and
costs, plus interest.
Item
1A. RISK FACTORS
Except
for the risk factors set forth below, there have been no material changes to
the
risk factors disclosed in Item 1A of the Company’s Form 10-K for the fiscal year
ended September 30, 2005 (the “Form 10-K”). Additional risks and uncertainties,
including risks and uncertainties not presently known to the Company, or that
the Company currently deems immaterial, could also have an adverse effect on
the
Company’s business, financial condition and/or results of operations. The risk
factors set forth below were disclosed in the Form 10-K, but have been updated
to provide additional information or updates:
· |
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.
|
|
·
|
The
Company is subject to income taxes, as well as non-income based taxes,
in
the United States and in various foreign jurisdictions. Significant
judgment is required in determining the Company’s worldwide provision for
income taxes and other tax liabilities. In addition, the Company
has
benefited from, and expects to continue to benefit from, implemented
tax-saving strategies. The Company believes that implemented tax-saving
strategies comply with applicable tax law. However, taxing authorities
could disagree with the Company’s positions. If the taxing authorities
decided to challenge any of the Company’s tax positions and were
successful in such challenges, the Company’s financial condition and/or
results of operations could be materially adversely
affected.
|
The
statutes
of limitations are still open for the Company’s U.S. Federal Income Tax Returns
for fiscal years 2003 through 2005, which are potentially subject to examination
by the IRS. The Company believes that its tax positions comply with applicable
tax law. However, the IRS could challenge those positions and issue adjustments
that could adversely affect the Company’s financial condition and/or results of
operations.
Three
of the
Company’s foreign subsidiaries are the subject of tax examinations by the local
taxing authorities. Other foreign subsidiaries could face challenges from
various foreign tax authorities. It is not certain that the local authorities
will accept the Company’s tax positions. The Company believes its tax positions
comply with applicable tax law and intends to vigorously defend its positions.
However, differing positions on certain issues could be upheld by foreign tax
authorities, which could adversely affect the Company’s financial condition
and/or results of operations.
Item
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Issuer
Purchases of Equity Securities
The
following table provides information regarding the Company’s repurchases of its
common stock during the third quarter of fiscal 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
|
|
April 1
through April 30, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
33,007,000
|
May
1 through May 31, 2006
|
|
|
|
|
|
|
|
|
|
|
$
56,555,000
|
June 1
through June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
$
52,169,000
|
Total
(1)
|
|
|
|
|
|
|
|
|
|
|
|
_______________________________________
|
(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. In
May 2006, the Company’s Board of Directors approved an increase of $30.0
million to the stock repurchase program, bringing the total of
the
approved program to $110.0 million. There is no guarantee as to
the exact
number of shares that will be repurchased by the Company. Repurchased
shares are 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 third 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
The
following lists exhibits filed as part of this quarterly report on Form
10-Q:
Exhibit
No.
|
|
Description
|
2.1
|
(1)
|
Share
Purchase Agreement dated as of May 11, 2006 by and between Transaction
Systems Architects, Inc.; PREIPO Bating- und Beteiligungsgesellschaft
mbH;
RP Vermögensverwaltung GmbH; Mr. Christian Jaron; Mr. Johann Praschinger;
and eps Electronic Payment Systems AG
|
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.
(1)
Incorporated
by reference to Exhibit 2.1 to the registrant’s current report on Form 8-K filed
on May 16, 2006.
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
TRANSACTION
SYSTEMS ARCHITECTS, INC.
(Registrant)
|
|
|
|
Date:
August 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
|
2.1
|
(1)
|
Share
Purchase Agreement dated as of May 11, 2006 by and between Transaction
Systems Architects, Inc.; PREIPO Bating- und Beteiligungsgesellschaft
mbH;
RP Vermögensverwaltung GmbH; Mr. Christian Jaron; Mr. Johann Praschinger;
and eps Electronic Payment Systems AG
|
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.
(1)
Incorporated
by reference to Exhibit 2.1 to the registrant’s current report on Form 8-K filed
on May 16, 2006.