LEVERAGING
THE FUNDAMENTALS
T R A N S AC T I O N S YS T E M S A RC H I T E C TS , I N C .
2 0 0 4 A N N UA L R E P O RT
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Transaction volumes in every major
electronic banking channel—ATM,
call center, wireless and online—are
expected to increase in 2005.1
Debit card volume in 2007 is
expected to double 2002 totals.2
Card purchasing volume makes
up 66 percent of the total
purchase volume worldwide.3
Visa debit card spending now exceeds
credit card spending as debit transaction
volumes continue to grow worldwide.4
U.S. credit and debit transactions are
expected to total over 62 billion in 2008, a
54 percent increase over 2003 volumes.5
Electronic payments have surpassed cash
and checks in the U.S. as over half of
in-store payments were made using credit
and debit cards in 2003.6
Merchant use of commercial fraud screening
solutions grew 55 percent in 2004.7
Sources: 1. TowerGroup 2. American Bankers Association 3. Visa 4. American Banker 5. The Nilson Report; Sep. 2004 6. American Bankers Association and Dove Consulting 7. Sixth Annual CyberSource Fraud Survey
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D E A R S H A R E H OL D E R,
We’re pleased with TSA’s solid performance in 2004. We added significant new customers, made progress with
new product rollouts, and showed year-over-year improvements in many key financial measures. Earnings were
$1.23 per diluted share on revenues of $292.8 million. This represents a substantial improvement in earnings and
a growth in revenue of 5.6 percent compared to fiscal 2003. Our cash flow continued to be strong as the company
generated $58.1 million from operating activities and closed the year with approximately $170 million in cash. In all,
we ended the year with strong fundamentals. In December 2004, we announced approval of a share repurchase
program of up to $80 million of the company’s Class A Common Stock. We believe the share repurchase represents
an excellent use of capital and reflects our commitment to enhancing shareholder value.
TSA continues to occupy a unique position as a trusted provider of electronic payment solutions. Hundreds of the
world’s largest and most progressive companies rely on TSA software to operate mission-critical applications. Our
products enjoy a world-class reputation for their ability to reliably process billions of transactions each year. Just as
important, customers value the depth of our employees’ expertise and their commitment to service. With a global
reach, we deliver and support our software in more than 75 countries around the world. Our financial stability gives
our customers assurance of our long-term viability.
It’s not enough to excel in the established electronic payments world. Increasingly TSA customers need a trusted
partner who can help them protect their core payments business as they establish their relevance in newer
payment areas. That’s where TSA’s fundamentals pay off. With our proven track record, TSA is frequently tapped
by customers and industry partners to help address the next set of challenges in payment processing. This gives us
an excellent opportunity to apply our core capabilities to emerging needs, including:
Mobility initiatives Smart card programs Risk management and fraud detection systems
Enhanced authorization systems Electronic document distribution
Automated workflow management Straight-through processing of corporate payments
These initiatives demonstrate our ability to apply traditional strengths to new business challenges. They
are proven examples of our strategy to leverage TSA’s market position as a trusted provider of enterprise-
class software. By adding value to customer relationships through new software and extensions of existing
products, we continue to enhance our profitability and financial strength, adding value for our shareholders.
Our investments in software, in new platforms and in a global delivery channel help us to continue winning
new business. And in an increasingly complex world, our scalable, flexible software with its high reliability is
ideally suited to a payments industry in which transaction volumes are steadily growing and customers are
faced with the need to integrate new technologies into legacy systems.
Fiscal 2005 will see us continue to extend our brand into new markets, geographies and transaction types
while we continue to manage expenses closely. We will continue to invest in R&D, service excellence and
technology enhancements that drive customer satisfaction. By leveraging TSA’s unique assets — our global
reach, strong balance sheet and solid position in the market—we will continue to create more scale for
TSA and enhanced value for our shareholders.
We’re now celebrating our tenth year as a public company, while ACI marks its 30th year in the software
business. IntraNet’s track record is almost as long, and Insession’s roots as a software company go back
nearly 15 years.
At the end of fiscal 2004, I announced my plans to retire not later than June 2006. I am proud of the
company’s accomplishments and I am confident the company is well-positioned for the future, with solid
financial strength and a market-leading reputation.
In closing, I would like to thank our employees for delivering another successful year of results. I would
also like to thank our shareholders, our partners and our customers for their continued confidence in
the company.
G R E G O RY D . D E R K AC H T P R E S I D E N T & C H I E F E X E C U T I V E O F F I C E R
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L E V E R AG I NG F U N DA M E N TA L S TO E X T E N D T H E B R A N D
TSA companies extended their brands into new markets, geographies and transaction types in 2004. More than
720 customers now rely on our software. From Brazil to Rwanda, these customers run over 1,700 TSA product
systems in 76 countries. Our operating units continue to win new business by leveraging their proven products,
experienced staff and global distribution networks.
AC I WO R L DW I DE
TSA’s largest division added 39 new customers in 2004. Among the world’s top 500 banks, ACI now
commands nearly four times the market presence of its two closest competitors combined.
ACI’s proven track record fuels continued success for the company. Major clients such as Metavante
Corporation, TD Bank Financial Group and ANZ Bank New Zealand renewed their long-term commitments
to BASE24 software in 2004. ACI marked its 20th year as a solutions provider to Alliance & Leicester,
the eighth largest bank in the UK and one of several accounts where the company enjoys a long-term
partnership. In addition, ACI cross-sold new applications to existing customers nearly 50 times during the
year, extending the company’s reach and relevance in several key accounts. Customers continue to invite
ACI to participate in new payment initiatives.
As an example, customers are turning to ACI software to extend the capabilities
of their online payment systems by allowing mobile phone users to replenish air
time at ATMs. ACI software enables the transactions to be securely routed and
authorized while allowing ATM owners to drive new sources of fee-based income
for their business.
The growing need for real-time fraud prevention and enterprise-wide risk management helped ACI
Proactive Risk Manager achieve record customer growth in 2004. Twenty-eight new customers selected
the software to combat credit and debit card fraud or detect money laundering activity. ACI customers
have saved millions of dollars by using Proactive Risk Manager to protect accounts from losses.
Customers continue to leverage ACI software to comply with EMV (Europay, MasterCard, Visa) global standards
for smart credit and debit card systems. As the standards are adopted in more countries, more card issuers
and transaction acquirers will require EMV-ready systems. Several customers have also licensed ACI Smart
Chip Manager to automate the issuance and management of single- or multi-application smart cards. The
product is part of an award-winning solution used by the Hong Kong government to operate a national ID
system based on smart cards. ACI Smart Chip Manager and Proactive Risk Manager were commended by
The Banker magazine in 2004 as part of their annual awards program recognizing IT solutions.
BASE24-es continued to attract new customers for its enhanced authorization capabilities in 2004.
The product adds a new level of flexibility to the strategies used by customers to authorize payment
transactions. With a powerful scripting engine, BASE24-es allows users to modify transaction processing
rules relatively easily, for example, to impose more stringent authorization requirements for certain card
types or customers. This helps our clients enhance their service levels and protect accounts from losses.
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I N S E S S ION T EC H NOLO G I E S
Whether you need to connect it, secure it or workflow-enable it, Insession Technologies provides a proven
infrastructure for heterogeneous computing. The company is the largest provider of infrastructure tools for
HP Nonstop users.
In 2004, Insession delivered significant enhancements to its line of tools and infrastructure products.
WorkPoint, a business process management (BPM) solution, has been positioned to provide OEM partners
the ability to embed workflow/BPM technology into their solutions.
Throughout the year Insession leveraged its two premier products, ICE and GoldenGate. ICE, or Internet
Communications for the Enterprise, is a multifaceted software solution that delivers a range of communications
services for HP NonStop users. GoldenGate provides capture and delivery of large volumes of data across
heterogeneous systems. Over 260 customers have licensed or deployed these products worldwide.
Insession and ACI continue to integrate a number of Insession’s solutions with ACI’s BASE24-es. This
blending of best-of-breed software will enable the companies to deliver the exceptional performance
customers have come to rely on.
I N T R A N E T
IntraNet is a key U.S. provider of wholesale payment and messaging solutions and remains a solid contributor to
TSA’s business. The company’s PaymentWare® suite of software products provides maximum performance and
dependability in highly complex and real-time wholesale payment environments. Many of the country’s largest
financial institutions use IntraNet software in their global and domestic high value and bulk payments messaging
environments to move money, settle multiple currencies and streamline back office operations. IntraNet software
processes an estimated $1.25 trillion in wholesale payments every day.
During 2004, MTS version 1.2 was made generally available, extending IntraNet’s global processing capabilities
for the European and Asia Pacific markets. The company also signed a distribution agreement with SVOA in
Thailand. In addition, IntraNet signed an agreement to distribute and support the CB.Net BankSearchPlus™
service to assist customers in improving their overall straight-through processing (STP) rates. This, along with an
existing distribution agreement for the ACE STP Toolkit™, represents a key part of IntraNet’s strategy to ensure
that customers benefit from the best STP rates in the industry.
IntraNet is a prime partner of SWIFT, the Society for Worldwide Interbank Financial Telecommunication. In 2004,
IntraNet received the annual SWIFTReady Gold accreditation for payments for the seventh consecutive year.
SWIFT issues this accreditation only for those solutions that prove their support of SWIFT’s standards, products
and services in addition to the straight-through processing needs of financial transactions. New initiatives with
SWIFT include MTS FileAct, offering financial institutions the opportunity to reduce processing costs and extend
their market reach using SWIFTNet, and a pilot project with the U.S. Federal Reserve and SWIFT to provide
access to Fedwire over SWIFTNet for contingency processing.
The success of IntraNet’s solutions reflects 25 years of experience in developing and delivering business-
critical banking systems. Going forward, the company will continue to explore strategies for expanding into the
international market.
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TRANSACTION SYSTEMS ARCHITECTS,
INC. is a global provider of software for
electronic payments. The company
serves more than 720 customers in the
finance, retail and transaction processing
industries. TSA software was used to
process more than 41 billion transactions
during the past year involving credit and
debit cards, smart cards, checks, remote
banking services, Internet commerce,
secure document delivery, wire transfers,
and automated clearing and settlement.
TSA maintains its global presence with
sales and support offices throughout
North and South America, Europe, the
Middle East, Africa, Asia and Australia.
TS A B U S I N E S S U N I TS
ACI WORLDWIDE Every second of every day, ACI
Worldwide solutions power the world’s online consumer
e-payment systems. The largest of the TSA business
units, ACI provides software that enables consumers to
get cash at ATMs, use debit, credit and smart cards to
make purchases in stores and over the Internet, bank
by phone and PC, pay bills online, and access financial
services via mobile telephone. ACI was founded in 1975
and pioneered the development of 24/7 applications and
networking software for online e-payment processing.
INTRANET IntraNet provides international payments
and messaging solutions that maximize performance
in highly complex and real-time wholesale financial
environments. Many of the world’s largest financial
institutions use IntraNet software in their global high-
value payments and messaging environments to move
money, settle multiple currencies and streamline
back office operations. IntraNet’s leadership in the
wholesale banking industry is proven by over 25 years
of experience in developing and successfully delivering
business-critical banking systems throughout the world.
I N S E S S I O N T E C H N O L O G I E S p r o v id e s s c ala b l e
infrastructure software and services that facilitate
communication, data movement, systems monitoring,
transaction processing, Web enablement, Web
security, Web services and workflow/business process
management across heterogeneous computing systems.
Those systems include mainframes, distributed
c o mpu ting n e t w o r k s and the Inte r n e t. With
Insession products, businesses are able to optimize
business-critical operations throughout the enterprise.
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscalyear ended September 30, 2004
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)
224 South 108th Avenue
Omaha, Nebraska 68154
(Address of principal executive offices,
including zip code)
47-0772104
(I.R.S. Employer
Identification No.)
(402) 334-5101
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.005 par value
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 # No "
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. #
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act).
Yes # No "
The aggregate market value of the voting stock held by non-affiliates of the registrant on March 31,
2004 (the last business day of the registrant’s most recently completed second fiscal quarter), based upon
the last sale price of the Class A Common Stock on that date of $23.14, was $768,927,876. For purposes of
this calculation, executive officers, directors and holders of 10% or more of the outstanding shares of
Class A Common Stock of the registrant are deemed to be affiliates of the registrant.
As of November 30, 2004, there were 37,840,910 shares of the registrant’s Class A Common Stock
outstanding (including 2,212 options to purchase shares of the registrant’s Class A Common Stock at an
exercise price of one cent per share).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held
on March 8, 2005 are incorporated by reference in Part III herein. The Company intends to file such Proxy
Statement with the Securities and Exchange Commission no later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K.
Page
2
11
12
13
13
15
15
17
31
31
31
31
32
33
33
33
33
33
34
66
TABLE OF CONTENTS
PART I
Item 1.Bus
Item 2.Propert
Item 3. Legal
Item 4.Submiss
Item 4A.Execut
iness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ion of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . .
ive Officers of the Registrant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 5. Market
Item 6.Selected
Item 7.
PART II
for Registrant’s Common Equity and Related Stockholder Matters . . . . . . . .
FinancialData. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysisof Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9.
Item 9A.Contr
Item 9B.Other
Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ols andProcedur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10.
Item 11.
Item 12.
Directors and Executive Officers of the Registrant. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Item 13.
Item 14.
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Accountant Feesand Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15.
Exhibits and Financial Statement Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
1
Forward-Looking Statements
This report contains forward-looking statements based on current expectations that involve a
number of risks anduncertaintie s. Generally, forward-looking statements do not relate strictly to
“management anticipates,” “the
historical or current facts, and include words or phrases suchas
Company believes,” “the Company anticipates,” “the Company expects,” “the Company plans,” “the
Company will,” “the Company is well positioned,” and words and phrases of similar impact, and
include, but are not limitedto, statements regarding future operations, business strategy and business
environment. The forward-looking statements are made pursuant to safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Any or all of the forward-looking statements in this
document may turn out to be wrong. They may be based on inaccurate assumptions or may not
account for known or unknown risks and uncertainties. Consequently, no forward-looking statement is
guaranteed, and the Company’s actual future results may vary materially from the results expressed or
implied in the Company’s forward-looking statements. The cautionary statements in this report
expressly qualify all of the Company’s forward-looking statements. In addition, the Company is not
obligated, and does not intend, to update any of its forward-looking statements at any timeunless an
update is required by applicable securities laws. Factors that could cause actual results todiffer
from
those expressed or implied in the forward-looking statements include, but are not limited to, those
discussed in Item 7 in the section entitled “Management’s Discussion and Analysis of Financial
Condition and Results of Operations— Factors That MayAffe ct the Company’s Future Results or the
Market Price of the Company’s Common Stock.”
Trademarks and Service Marks
ACI, the ACI
logo, Insession, IntraNet, the IntraNet
logo, BASE24, WorkPo int, ENGUARD,
PaymentWare, andCo-AC H, among others, are registeredtrad emarks and/or registeredservice marks
of Transaction Systems Architects, Inc., or one of its subsidiaries, inthe UnitedStatesand/orothe r
countries. BASE24-es, WINPAY24, NET24, e-Courier, Commerce Gateway, Smart Chip Manager,
Proactive Risk Manager, PRM, ICE, WebGate, SafeTGate, DataWise, Money Transfer System, and MTS,
among others, have pending registrations or are common-law trademarks and/or service marks of
Transaction Systems Architects, Inc., or one of
its subsidiaries, in the United States and/or other
countries. Other parties’ marks are the property ofthe ir respective owners.
Item 1. BUSINESS
General
PART I
Transaction Systems Architects, Inc., a Delawarecorpo ration, and its subsidiaries(collectively
referred to as “TSA” or the “Company”) develop, market, install and support a broad line of software
products and services primarily focused on facilitating electronic payments (“e-payments”). In addition
to its own products, the Company distributes, or acts as a sales agent for, software developed by third
parties. These products and services are used principally by financial
institutions, retailers and
e-payment processors, both in domestic and international markets. Most of the Company’s products
are sold and supported through distribution networks covering three geographic regions — the
Americas, Europe/Middle East/Africa (“EMEA”) and Asia/Pacific. Each distribution network has its own
sales force and supplements this with independent reseller and/or distributor networks.
The e-payments market
is comprised of debit and credit card issuers, switch interchanges,
institutions, retailers and e-payment processors, and
transaction acquirers, including financial
transaction generators, including automated teller machine (“ATM”) networks, retail merchant locations
and Internet commerce sites. The routing, authorization, control and settlement of e-payments is a
complex activity due to the large number of locations and variety of sources from which transactions
can be generated, the large number of debit and credit card issuers in the market, high transaction
volumes, geographically dispersed networks, differing types of authorization, and varied reporting
2
requirements. These activities are typically performed online and must be conducted 24 hours a day,
seven days a week.
The Company was formed as a Delaware corporation in November 1993 under the name ACI
to Applied Communications, Inc. and Applied
Holding, Inc. and is
Communications Inc. Limited, which the Company acquired from Tandem Computers Incorporated on
December 31, 1993.
largely the successor
Segment Information
The Company has three operating segments which are referred to throughout this annual report
on Form 10-K as business units. These three business units are ACI Worldwide, Insession
Technologies and IntraNet. Each business unit has its own global sales and support organization. See
Note 10 to the consolidated financial statements for additional information relating to the Company’s
business units.
ACI Worldwide Business Unit
Products in this business unit represent the Company’s largest product line and include its most
mature and well-established applications. Products and services in the ACI Worldwide business unit
generated approximately 76%, 74% and 74% of the Company’s fiscal 2004, 2003 and 2002 revenues,
respectively. During fiscal 2004, 2003 and 2002, approximately 68%, 66% and 69%, respectively, ofAC I
Worldwide revenues resultedfrom international operations.
ACI Worldwide software products carry transactions from the transaction generators to the
acquiring institutions. The software then uses regional or national switches to access the card issuers
for approval or denial of the transactions. The software returns messages to the sources, thereby
completing the transactions. Electronic payments software may be required tointerac t withdozens of
devices, switch interchanges and communication protocols around the world.
Financial institutions, retailers and e-payment processors use ACI Worldwide software products to:
• Route and process transactions for ATM networks
• Process transactions from point-of-sale (“POS”) devices, wireless devices and Internet
commerce sites
• Control fraud and money laundering
• Authorize checks
• Establish frequent shopper programs
• Automate transaction settlement, card management and claims processing
• Issue and manage multi-functional applications on smart cards
• Deliver bills and statements via the Internet in a secure manner
ACI Worldwide offers three primary software product suites — Payment Engines, Secure
Commerce and Payments Management. An overview of major software products within the ACI
Worldwide business unit follows:
Payment Engines
• BASE24. BASE24 is an integrated family of software products marketed to customers operating
e-payment networks in the consumerbank ing and retail industries. The modular architecture of
the product enables customers to select
the application and system components that are
required to operate their networks. BASE24 offers a broad range of features and functions for
3
e-payment processing. BASE24 allows customers to adapt to changing network needs by
supporting over 40 different types of ATM and POS terminals, over 50 interchange interfaces,
and various authorization and reporting options. The majority of ACI Worldwide’s revenues were
derived from licensing the BASE24 family of products and providing related services and
maintenance.
line operateson Hewlett-Packard (“HP”) NonStop servers.The HP
The BASE24 product
NonStop parallel-processing environment offers fault-tolerance, linear expandability and
distributed processing capabilities. The combination of features offered by BASE24 and the HP
NonStop technology are important characteristics in high volume, 24-hour per day e-payment
systems.
• BASE24-es. BASE24-es is an integrated e-payments processing engine that provides
application software to acquire, authenticate, route, switch and authorize transactions,
regardless of the channel in which they originate. Customers can use BASE24-es to process
transactions from any endpoint, including Internet shopping networks, mobile phones, Web
ATMs and home banking systems. The software can also be used to upgrade legacy ATM and
POS systems, adding support for new features such as smart card programs and electronic
check processing. BASE24-es, which operates on InternationalBusiness Machines (“IBM”)
zSeries, IBM pSeries, HP NonStop, HP-UX and Sun Solaris servers, provides flexible
integration points to other applicationsand data within enterprises to support 24-hour per day
access to money, services and information.
• WINPAY24. WINPAY24 is an electronic payments and authorization system that facilitates a
broad range of applications for retailers. These applications include debit and credit card
processing, automated clearing house (“ACH”) processing, electronic benefits transfer, card
issuance and management, check authorization, customer loyalty programs and returned check
collection. The WINPAY24 products operate on the Microsoft Windows platform.
• NET24. NET24 is a message-oriented middleware product that acts as the layer of software that
manages the interface between application software and computer operating systems and helps
customers perform network and legacy systems integration projects. The NET24 product
operates on the HP NonStop platform.
Secure Commerce
• e-Courier. e-Courier delivers documents, including bills, alerts, statements and other
notifications via the Internet in a secure manner. Customers receive documents via e-mail or
through multiple delivery channels. Documents are delivered directly to customers’ e-mail
accounts, eliminating the need for retrieval from Web sites. Documents are authentic and
private, delivered through built-in industry-standard encryption and digital signature capabilities.
• Commerce Gateway. Commerce Gateway facilitates payments between existing traditional
payments infrastructure and Internet and wireless/mobile channels. The solution extends
traditional payment platforms by managing rapidly changing Internet payment and
authentication technologies. It isolates exposure to public networks, su ch as the Internet, by
providing industry standard solutions for Verified by Visa, and MasterCard SecureCode.
Commerce Gateway is a solution designed to accommodate the rapidly evolving Internet secure
payment environment for merchants, merchant acquirers and processors.
• Smart Chip Manager. Smart Chip Manager solutions allow the use of stored-value and chip
card applications at smart card-enabled devices. The solutions facilitate authorization of funds
transfers from existing accounts to cards. They also leverage chip technology to enhance
debit/credit card authentication and security. The Smart Chip Manager solutions preserve
legacy investment by allowing the integration of these emerging technologies into existing
electronic delivery environments.
4
Payments Management
• Proactive Risk Manager (“PRM”). PRM is a neural network-based fraud detection system
designed to help card issuers, merchants, acquirers and financial
institutions combat fraud
schemes. The system combines the pattern recognition capability of neural-network transaction
scoring with custom risk models of expert rules-based strategiesand advanced client/server
account management software. PRM operateson IBM zSeries, HP NonStop, Sun Solaris and
Microsoft Windows servers. There are six editions of PRM, each of which is tailored for specific
industry needs. The six editions are debit, credit, merchant, private label, money laundering
detection and enterprise.
• Payments Management Solutions. Payments Management solutions are integrated products
bringing value-added solutions to information captured during online processing. The suite of
products includes management of dispute processing; card management and card statement
products; merchant accounting applications; and settlement and reconciliation solutions for
online and offline payment processing. The suite also includes a transaction warehouse product
that accumulates and stores e-payment
transaction
inquiry via browser-based presentation allowingtransac tion monitoring, alerting and executive
analysis. These products operate on IBM zSeries, IBM pSeries, HP NonStop, Sun Solaris and
Microsoft Windows servers.
transaction information for subsequent
The Company has shifted its sales focus within the ACI Worldwide business unit from more-
established products to its newer BASE24-es product and its Payments Management solutions. As a
result of this shift to newer products, the Company experiences, absent other factors, an increase in
deferred revenues and a corresponding decrease in revenues due to differences in the timing of
revenue recognition for the respective products. Revenues under newer products are typically
recognized upon acceptance, or first production use by the customer, due to uncertainties surrounding
customer acceptance of the product, whereas revenues from mature products, such as BASE24, are
generally recognized upon delivery of
the product (assuming all other requirements for revenue
recognition have been met).
During fiscal 2004, 2003 and 2002, approximately 59%, 61% and 60%, respectively, of
Company’s total revenues were derived from licensing the BASE24 product line, which doesnot
include the BASE24-es product, and providing related services and maintenance, and approximately
77%, 82% and 81%, respectively, of ACI Worldwide revenues were derived from licensing the BASE24
product line and providing related services and maintenance.
the
Insession Technologies Business Unit
Products and services in the Insession Technologies business unit generated approximately 13%,
12% and 12% of
the Company’s fiscal 2004, 2003 and 2002 revenues, respectively. During fiscal
2004, 2003 and 2002, approximately 38%, 32% and 35%, respectively, of Insession Technologies
revenues resulted from international operations. A significant portion of the Insession Technologies
business involves the distribution of third-party products in exchange for sales agency fees.
Insession Technologies’ market is comprised of large corporations, including financial institutions,
telecommunication companies, retailers and other entities, with the need to move business data or
financial
information and process business transactions electronically over public and private
communications networks. These companies typically have many different computing systems that
were not originally designed to operate together, and they typically want to preserve their investments
in existing mainframe computer systems.
The Insession Technologies business unit markets and supports a suite of infrastructure software
products that facilitate communication, data movement, transa ction processing, systems monitoring
and business process automation across incompatiblecomp uting systems that include mainframes,
distributed computing networks and the Internet. The primary Company-owned software products
5
within this business unit are ICE, WebGate, SafeTGate, WorkPoint, ENGUARD and DataWise. The
primary third-party products distributed within this business unit are GoldenGate, VersaTest,
SQLMagic and OpenNET/AO. ICE is a set of networking software products that allow applications
running on the HP NonStop server to connect with applications running on, or access data stored on,
computers that use the Systems Network Architecture protocol. WebGate is a product suite that allows
HP NonStop servers to communicate with applications using web-based technology. SafeTGate is a
family of security solutions that work in conjunction with ICE and WebGate. GoldenGate and DataWise
are transactional data management products that capture, route, enhance and apply transactions in
real time across a wide variety of data sources, most commonly for business continuity and data
integration. WorkPoint enables enterprises to model processes over a distributed corporate network.
ENGUARD is a proactive monitoring, alarm and dispatching software tool. SQLMagic is designed to
improve system and database administration for HP NonStop servers. VersaTest provides online
testing, simulation and support utilities for HP NonStop servers. OpenNET/AO provides policy-based
management, monitoring and automation designed specifically for continuous availability of HP
NonStop servers.
In fiscal 2004, 2003 and 2002, approximately 49%, 55% and 60%, respectively, of Insession
Technologies revenues were derived from licensing and maintenance of the ICE family of products,
and approximately 20%, 19% and 14%, respectively, ofInsess ion Technologies revenues were from
the GoldenGate product, primarily in the form of sales agency fees.
IntraNet Business Unit
Products and services in the IntraNet business unit generated approximately 11%, 14% and 14%
of the Company’s fiscal 2004, 2003 and 2002 revenues, respectively. During fiscal 2004, 2003 and
2002, approximately 17%, 25% and 20%, respectively, of IntraNet revenues resulted from international
operations.
IntraNet’s market is comprised of global, super-regional and regional financial
institutions that
provide treasury management services to large corporations. In addition, the market includes non-bank
financial institutions with the need to conduct their own internal treasury management activities.
Products in this business unit
include solutions for high value payments processing, bulk
payments processing, global messaging and Continuous Link Settlement processing, and are
collectively referred to as PaymentWare. The high value payments processing products, which
produce the majority of revenues within the PaymentWare solution set, are used to generate,
authorize, route, settle and control high valuewiretran sfer transactions indom estic and international
environments. The principal high value payments processing product
is Money Transfer System
(“MTS”), which is used by financial institutions to facilitate business-to-business e-payments. The MTS
product operates on the IBM eServer pSeries with AIX operating system and communicates over
proprietary networks using a variety of messaging formats, including S.W.I.F.T., EBA, Target, Ellips,
CEC, RTGSplus, Fedwire, CHIPS and Telex.
The bulk payments processing product is CO-ach, which is used by financial
institutions to
automatically deposit paychecks and process other ACH transactions. The IntraNet business unit no
longer actively markets the CO-ach product, and recognized minimal revenues from the product during
fiscal 2004. During fiscal 2003, however, approximately 16% of IntraNet revenues were derived from
licensing of
services and maintenance, of which
approximately $3.6 million (10% of IntraNet revenues) in software license fee revenues resulted from
the completion of the final phase of an ACH project with a large European bank.
the CO-ach product and providingrelated
During fiscal 2004, 2003 and 2002, approximately 91%, 73% and 78%, respectively, of IntraNet
the MTS product and providing related services and
revenues were derived from licensing of
maintenance.
6
Strategic Alliances
The Company has two major types of strategic alliances: third-party relationships, where the
Company works closely with key third parties to help ensure that its solutions address current market
needs, and product partners, where the Company markets the products of other software companies.
Key third-party relationships help the Company add value to its solutions, stay abreast of current
market conditions, andextend the Company’s reach within its core markets. The following is a list of
key third-party relationships:
• Hewlett-Packard Company
• IBM Corporation
• Sun Microsystems, Inc.
• Stratus Technologies
• Microsoft Corporation
• Diebold, Incorporated
• NCR Corporation
• Wincor-Nixdorf
• VISA International
• MasterCard International Incorporated
Product partner relationships extend the Company’s product portfolio, improve the Company’s
ability to get its solutions to market rapidly and enhance the Company’s ability to deliver market-leading
solutions. The Company shares revenues with these product partners based on relative responsibilities
for the customer account. The agreements with product partners generally grant the Company the right
to distribute or represent their products on a worldwide basis and have a term of several years. The
following is a list of currently active product partners:
• GoldenGate, Inc.
• Merlon Software Corporation
• Ascert, LLC
• Gresham Computing, PLC
• Allen Systems Group, Inc. (formerly Senware, Inc.)
• ESQ Business Services, Inc.
• ACE Software Solutions, Inc.
• Faircom Corporation
• Paragon Application Systems, Inc.
• Financial Software and Services, PTT
• IBM Corporation
• CB.Net Ltd.
7
Services
Each business unit offers its customers a wide range of services, including analysis, design,
development, implementation, integration and training. These business unit services organizations
generally perform most of the work associated with installing and integrating its software products,
rather than relying on third-party integrators. The Company’s service professionals have extensive
experience performing such installation and integration services for clients operating on a range of
computing platforms. The Company offers the following types of services for its customers:
• Technical Services. The majority of
the Company’s technical services are provided to
customers who have licensed one or more of the Company’s software products. Services
offered include programming and programming support, day-to-day systems operations,
network operations, help desk staffing, quality assurance testing, problem resolution, system
design, and performance planning and review. Technical services are typically priced on a
weekly basis according to the level of technical expertise required and the duration of the
project.
• Project Management. The Company offers a Project Management and Implementation Plan
(“PMIP”) which provides customers using the Company’s software products with a variety of
support services, including on-site product integration reviews, project planning, training, site
preparation, installation, testing and go-live support, and project management throughout the
project life cycle. The Company offers additional services, if required, on a fee basis. PMIPs are
offered for a fee that varies based on the level and quantity of included support services.
• Facilities Management. The Company offers facilities management services whereby the
Company operates a customer’s e-payments system for multi-year periods. Pricing and
payment
facilities management services vary on a case-by-case basis giving
consideration to the complexity of the facility or system to be managed, the level and quantity of
technical services required, and other factors relevant to the facilities management agreement.
terms for
Customer Support
Each business unit provides its customers with product support that is available 24 hours a day,
seven days a week. If requested by a customer, each business unit’s product support group can
remotely access that customer’s systems on a real-time basis. This allows the product support groups
to help diagnose and correct problems to enhance the continuous availability of a customer’s
business-critical systems. The Company offers its customers both a general maintenance plan and an
extended service option.
• General Maintenance. After software installation and project completion, the Company
provides maintenance services to customers for a monthly fee. Maintenance services include:
• 24-hour hotline for problem resolution
• Customer account management support
• Vendor-required mandates and updates
• Product documentation
• Hardware operating system compatibility
• User group membership
• Enhanced Support Program. Under the extended service option, referred to as the Enhanced
Support Program, each customer is assigned an experienced technician to work with its system.
The technician typically performs functions such as:
• Install and test software fixes
8
• Retrofit customer-specific software modifications (“CSMs”) into new software releases
• Answer questions and resolve problems related to CSM code
• Maintain a detailed CSM history
• Monitor customer problems on HELP24 hotline database on a priority basis
• Supply on-site support, available upon demand
• Perform an annual system review
The Company provides new releasesof
its products on a periodic basis. New releases of the
Company’s products, which often contain product enhancements, are typically provided at no
additional fee for customers under maintenance agreements. The Company’s agreements with its
customers permit the Company to charge for substantial product enhancements that are not provided
as part of the maintenance agreement.
Competition
The e-payments market is highly competitive and subject to rapid change. Competitive factors
functionality and
for the Company’s products and services include product
implementation, product and company
affecting the market
features, price, availability of customer support, ease of
reputation, and a commitment to continued investment in research and development.
The Company’s most significant competition comes from in-house information technology
departments of existing and potential customers. The principal third-party competitors for the ACI
Worldwide business unit are S2 Systems, Incorporated, eFunds Corporation, Fair Isaac Corporation
and Mosaic Software Holdings Limited (which has reached a definitive agreement to be acquired by S1
Corporation). As markets continue to emerge inthe electronic commerce, smart card andsecure
document delivery sectors, the Company may encounter new competitors to its products and services.
In addition, the Company competes with third-party processors and other vendors offering software on
a wide range of product platforms. As e-payment transaction volumes increase and banks face higher
processing costs, third-party processors will constitute stronger competition to the Company’s efforts to
market its solutions to smaller institutions. In the larger institution market, the Company believes that
third-party processors will be less competitive since large institutions attempt to differentiate their
e-payment product offerings from their competition. The
the Insession
Technologies business unit is Hewlett-Packard Company. In the IntraNet business unit, the Company’s
most significant competition comes from LogicaCMG plc and Fundtech Ltd., and from in-house
development units at large financial institutions around the world.
primary competitor
for
Research and Development
The Company’s product development efforts focus on new products and improved versions of
existing products. The Company facilitates user group meetings. The user groups are generally
organized geographically or by product lines. The groups help the Company determine its product
strategy, development plans and aspects of customer support. The Company believes that the timely
development of new applications and enhancements isess ential to maintain its competitive position in
the market.
In developing new products, the Company works closely with its customers and industry leaders to
determine requirements. The Company works with device manufacturers, such as Diebold, NCR and
Wincor-Nixdorf, to ensure compatibility with the latest ATM technology. The Company works with
interchange vendors, such as MasterCard and Visa, to ensure compliance with new regulations or
processingmandates. The Company works with computer hardware and software manufacturers, such
as Hewlett-Packard Company, IBM Corporation, Microsoft Corporation, Sun Microsystems, Inc. and
Stratus Technologies, Inc. to ensure compatibility with new operating system releases and generations
9
of hardware. Customers often provide additional information on requirements and serve as beta-test
partners.
The Company’s total research and development expenses during fiscal 2004, 2003 and 2002
were $38.0 million, $35.4mi llion and $35.0 million,or 1 3.0%, 12.8% and 12.3% of total revenues,
respectively.
Customers
The Company provides software products and services to customers in a range of industries
worldwide, with financial institutions, retailers and e-payment processors comprising its largest industry
segments. As of September30, 2004, the Company’s customers include 97 of the 500 largest banks in
the world, as measured by asset size, and 28 of the top 100 retailers in the United States, as
measured by revenue. As of September 30, 2004, the Company had 727 customers in 76 countrieson
six continents. Of this total, 402 are in the Americas region, 177 are in the EMEA region and 148 are in
the Asia/Pacific region. No single customerac counted for more than 10% of
the Company’s
consolidated revenues during fiscal 2004, 2003 or 2002.
Selling and Marketing
The Company’s primary method of distribution is direct sales by employees assigned to specific
regions or specific products. In addition, the Company uses distributors andsales
agents to
supplement its direct sales force in countries where business practices or customs make itapprop riate,
or where it is more economical to do so. In addition, the Company has developed “channel partners” to
help create new markets for the Company’s products. The Company generates a majority of its sales
leads through existing relationships with vendors, customers and prospects, or through referrals.
Channel partners may be lead generators, systems integrators or resellers. Channel partners that
the Company currently works with include:
• LogicaCMG plc
• Deloitte Consulting
• Computer Sciences Corporation
• Hewlett-Packard Company
• Wincor-Nixdorf
• Gasper Corporation
• NCR Corporation
• PlaNet, Inc.
• ADS Financial Services
• Pay By Touch
• IBM Global Services
• SVOA, pcl.
• PCCW Limited
The Company distributes the products of other vendors ascom plements to its existing product
lines. The Company is typically responsible for sales and marketing. The Company’s agreements with
these vendors generally provide for revenue sharing based on relative responsibilities.
10
In addition to its principal sales office in Omaha, the Company has sales offices located outside
the United States in Athens, Bahrain, Buenos Aires, Gouda, Johannesburg, Madrid, Melbourne,
Mexico City, Milan, Naples, Sao Paulo, Seoul, Singapore, Sydney, Tokyo, Toronto, Vienna, Watford
and Wiesbaden.
ProprietaryRight s and Licenses
The Company relies on a combination of trade secret and copyright laws, license agreements,
contractual provisions and confidentiality agreements to protect its proprietary rights. The Company
distributes its software products under software license agreements that typically grant customers
nonexclusive licenses to use the products. Use of the software products is usually restricted to
designated computers, specifiedlo cations or specified capacity, and is subject to terms and conditions
prohibiting unauthorized reproduction or transfer of the software products. The Company also seeks to
protect the source code of its software as a trade secret and as a copyrighted work. Despite these
precautions, there can be no assurance that misappropriation of the Company’s software products and
technology will not occur.
Although the Company believes that
infringe upon the
third parties will not assert
proprietary rights of
infringement claims against the Company. Further, there can be no assurance that intellectual property
protection will be available for the Company’s products in all foreign countries.
third parties, there can be no assurance that
its intellectual property rights do not
Employees
As of September 30, 2004, the Company had a total of 1,527 employees of whom 1,101 were in
the ACI Worldwide business unit, 148 were in the Insession Technologies business unit and 142 were
in the IntraNet business unit. Additionally, 136 employees were in corporate administration positions,
including executive management, leg al, human resources, finance, information systems, investor
relations and facility operations, providing supporting services to each of the three business units.
None of
the Company’s employees are subject
to a collective bargaining agreement. The
Company believes that its relations with its employees are good.
Available Information
The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a)or 1 5(d) of the
Securities Exchange Act of 1934 (the “Exchange Act”), are available free of charge on the Company’s
website at www.tsainc.com as soon as reasonably practicable after the Company files such information
electronically with the SecuritiesandExchange Commission (“SEC”). The information found on the
Company’s website is not part of this or any other report the Company files with or furnishes to the
SEC.
Item 2. PROPERTIES
The Company leases office space in Omaha, Nebraska, for its corporate headquarters, principal
product development group, and sales and support groups for the Americas. The leases for these
facilities expire in fiscal 2005 through 2008, with the principal
lease expiring in fiscal 2008. The
Company’s EMEA headquarters are located in Watford, England. The leases for the Watford facilities
expire in fiscal 2009 and 2011, with the principal
lease expiring in fiscal 2009. The Company’s
Asia/Pacifichead quarters are located in Sydney, Australia, with the lease for this facility expiring in
fiscal 2006. Personnel within each of the Company’s business units use office space in each of these
locations. The Company leases office space in the Boston metropolitan area, which houses business
functions, for its IntraNet
unit management, development, delivery, marketing and other support
11
business unit. The Company also leases office space in numerous other locations in the United States
and in many other countries.
The Company believes that its current facilities are adequate for its present and short-term
foreseeable needs and that additional suitable spacewill be available as required. The Company also
believes that it will be able to renew leases as they expire or secure alternate suitable space. See
Note 14 to the consolidated financial statements for additional information regarding the Company’s
obligations under its facilities leases.
Item 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims arising out of its
operations. Other than as described below, the Company is not currently a party to any legal
proceedings, the adverse outcome of which, individually or in the aggregate, would be likely to have a
material adverse effect on the Company’s financial condition or results of operations.
Class Action Litigation.
In November 2002, two class action complaints were filed in the U.S.
District Court for the District of Nebraska (the “Court”) against the Company and certain individuals
the Securities Exchange Act of 1934 and Rule 10b-5
alleging violations of Sections 10(b) and 20(a)of
thereunder. Pursuant
to a Court order, the two complaints were consolidated as Desert Orchid
Partners v. Transaction Systems Architects, Inc., et al., with Genesee County Employees’ Retirement
System designated as the Lead Plaintiff. The First Amended Consolidated Class Action Complaint,
filed on June30, 2003 (the “Consolidated Complaint”), alleges that during the purported class period,
the Company and the named defendants misrepresented the Company’s historical financial condition,
results of operations and its future prospects, and failed to disclose facts that could have indicated an
impending decline in the Company’s revenues. The Consolidated Complaint seeks unspecified
damages, interest, fees, costs and rescission. The class period alleged in the Consolidated Complaint
is January 21, 1999 through November18, 2002. The Company and the individual defendants filed a
motion to dismiss the Consolidated Complaint. In response, on December 15, 2003, the Court
dismissed, without prejudice, Gregory Derkacht, the Company’s President and Chief Executive Officer,
as a defendant, but denied the motion to dismiss with respect to the remaining defendants, including
the Company. On February 6, 2004, the Court entered a mediation reference order requiring the
parties to mediate before a private mediator. The parties held a mediation session on March 18, 2004,
which did not result in a settlement of the matter. The parties have commenced discovery.
Derivative Litigation. On January 10, 2003, Samuel Naito filed the suit of “Samuel Naito,
derivatively on behalf of nominal defendant Transaction Systems Architects, Inc. v. Roger K.
Alexander, Gregory D. Derkacht, Gregory J. Duman,Larry G. Fendley, JimD. Kever, and Charles E.
Noell, III and Transaction Systems Architects, Inc.” in the State District Court in Douglas County,
Nebraska (the “Naito matter”). The suit is a shareholder derivative action that generally alleges that the
named individuals breached their fiduciary duties of loyalty and good faith owed to the Company and
its stockholders by causing the Company to conduct its business in an unsafe, imprudent and unlawful
manner, resulting in damage to the Company. More specifically, the plaintiff alleges that the individual
defendants, and particularly the members of the Company’s audit committee, failed to implement and
maintain anadequ ate internal accounting control system that would have enabledthe Company to
to
discover
August 2002, thus
loyalty and good faith, generally accepted
accounting principles and the Company’s audit committee charter. The plaintiff seeks to recover an
unspecified amount of money damages allegedly sustained by the Company as a result of
the
fiduciary duties, as well as the plaintiff’s costs and
individual defendants’ alleged breaches of
disbursements related to the suit.
irregularities in its accounting procedures with regard to certain transactions prior
violating their fiduciary duties of
On January 24, 2003, Michael Russiello filed the suit of “Michael Russiello, derivatively on behalf
of nominal defendant Transaction Systems Architects, Inc. v. Roger K. Alexander, Gregory D.
Derkacht, Gregory J. Duman, Larry G. Fendley, Jim D. Kever, and Charles E. Noell, III and Transaction
12
Systems Architects, Inc.” in the State District Court in Douglas County, Nebraska (the “Russiello
matter”). The suit is a stockholder derivative action involving allegations similar to those in the Naito
matter. The plaintiff seeks to recover anunspecified amount of money damages allegedly sustained by
the Company as a result of the individual defendants’ alleged breaches of fiduciary duties, as well as
the plaintiff’s costs and disbursements related to the suit.
The Company filed a motion to dismiss in the Naito matter on February 14, 2003 and a motion to
dismiss inthe Russiello matter on February 21, 2003. A hearingwas scheduled on those motions for
March 14, 2003. Just prior to that date, plaintiffs’ counsel requested that the derivative lawsuits be
stayed pending a determination of an anticipated motion to dismiss to be filed in the class action
lawsuits. The Company, by and through its counsel, agreed to that stay. As a result, no other
defendants have been served andno
not
determined what effect the Court’s ruling in the class action litigation will have on the Naito or Russiello
matters.
discovery has been commenced. The Companyhas
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2004.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages as of November 30, 2004, and their positions
are as follows:
Name
Gregory D. Derkacht. . . . . . . . .
Mark R. Vipond. . . . . . . . . . . . .
Anthony J. Parkinson . . . . . . . . 52Senior
Dennis D.Jorgensen. . . . . . . .
David R. Bankhead . . . . . . . . . .
Dennis P. Byrnes. . . . . . . . . . .
Donald P. Newman. . . . . . . . . .
Age
57 President and Chief Executive Officer
45 Senior Vice President and President — ACI Worldwide
Position
Vice President and President — Insession Technologies
56 Senior Vice President and President — IntraNet
55 Senior Vice President, Chief Financial Officer and Treasurer
41Senior Vice President, General Counsel and Secretary
40Vice President, Chief Accounting Officer and Controller
Mr. Derkacht serves as President and Chief Executive Officer. Mr. Derkacht joined the Company
in January 2002. Prior to joining the Company, Mr. Derkacht was President of e-PROFILE, a wholly-
owned Internet banking subsidiary of Sanchez Computer Associates, Inc. from January 2000 to
February 2001. Mr. Derkacht served as President of Credit Union Systems Division, a division of
Fiserv, Inc., from August 1999 to January 2000, and served as Chief Executive Officer of Envision
Financial Technologies from July 1997 to August 1999.
Mr. Vipond serves as a Senior Vice President with primary responsibility for the ACI Worldwide
business unit. Mr. Vipond joined the Company in 1985 and has served in various capacities, including
National Sales Manager of ACI Canada, Vice President of the Emerging Technologies and Network
Systems divisions, President of the USSI, Inc. operating unit, and Senior Vice President of Consumer
Banking.
Mr. Parkinson serves asa Senior Vice President with primary responsibility for the Insession
Technologies business unit. Mr. Parkinson joined the Company in 1984 and has served in various
capacities, including Director of Sales and Marketing for EMEA, Vice President of the Emerging
Technologies and Network Systems divisions, Vice President of System Solutions Sales, and Senior
Vice President of the Enterprise Solutions Group.
Mr. Jorgensen serves as a Senior Vice President with primary responsibility for the IntraNet
business unit. Mr. Jorgensen was an employee of the Company from 1984 to 1986 and rejoined the
Company in1998 as Vice President of Corporate Marketing. Prior to rejoining the Company in 1998,
13
Mr. Jorgensen was Chief Executive Officer of the American Marketing Association, a professional
association for marketing practitioners and academics.
Mr. Bankhead serves as Senior Vice President, Chief Financial Officer andTreas urer.
Mr. Bankhead joined the Company in July 2003. Prior to joining the Company, Mr. Bankhead was Vice
President and Chief Financial Officer of Alysis Technologies, Inc. from February 2000 to May 2001.
From September 1996 to November1999, Mr. Bankhead served in several
capacities at
Xybernet, Inc., a provider of software and services tothe financial services industry, most recently as
President and Chief Executive Officer, and currently serves on its board.
Mr. Byrnes serves as Senior Vice President, General Counsel and Secretary. Mr. Byrnes joined
the Company in June 2003. Mr. Byrnes served as First Vice President and Senior Counsel for Bank
One Corporation from October 2002 to June2003. From April 1996 to November 2001, Mr. Byrnes
was employed by Sterling Commerce, Inc., anelectronic commerce software and services company,
where he served in several capacities, including as that company’s general counsel.
Mr. Newman joined the Company in January 2004 and serves as Chief Accounting Officer, Vice
President and Controller. Mr. Newman served asExecutive Director of
the Worldwide Financial
Planning and Analysis group of NRG Energy, Inc. (“NRG”), an independent electric power generation
company, from November2002 to December 2003. From October 1999 to October 2002, Mr. Newman
served as the chief
to
September 1999, Mr. Newman served in a number of accounting and finance capacities at NRG.
financial executive of NRG’slarge st operating division. From June1991
Other Information
The Company issued a press release dated September 28, 2004 announcing Mr. Derkacht’s plans
to retire as the Company’s president and chief executive officer not later than June 30, 2006. This
press release was attached as an exhibit
to the Company’s current report on Form 8-K dated
September 29, 2004. Mr. Derkacht and the Company are parties to option agreements relating to the
grant to Mr. Derkacht of options to purchaseshares of the Company’s Class A Common Stock
(“Options”), which agreements provide in pertinent part that the Options granted thereunder expire one
month from the date of Mr. Derkacht’s termination of employment, except as may otherwise be
provided under the option plans. Accordingly, the Company expects Mr. Derkacht to exercise Options,
and possibly to sell some or all of the shares underlying such Options, prior to the termination of his
employment with the Company, in each instance in accordance with applicable securities laws and
regulations and the Company’s internal policies and procedures.
14
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company’s Class A Common Stock (“Common Stock”) trades on The NASDAQ Stock Market
under the symbol TSAI. The following table sets forth, for the periods indicated, the high and low sale
prices of the Common Stock as reported by The NASDAQ Stock Market:
Fiscal Year Ended September 30, 2004Hi
Fourth quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
gh
Low
$21.64 $ 14.65
18.12
17.60
16.97
25.47
25.08
23.30
Fiscal Year Ended September 30, 2003
Fourth quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18.05
11.00 5.36
7.30
10.80
8.70
4.26
4.81
As of November 30, 2004, there were 292 holders of record of the Common Stock.
Dividends
The Company has never declared nor paid cash dividends on its Common Stock. The Company
does not presently anticipate paying cash dividends. However, any future determination relating to our
dividend policy will be made at the discretion of our Board of Directors and will dependupon the
financial condition, capital requirements and earnings of the Company, as well as other factors the
Board of Directors may deem relevant.
Item 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the Company’scon solidated financial
statements. This data should be read together with Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations, and the consolidated financial statements and related
notes included elsewhere in this annual report on Form 10-K. The financial information below is not
indicative of the results of future operations. Future results could differ materially from historical results
due to many factors, including those discussed in Item 7 in the section entitled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect
the Company’s Future Results or the Market Price of the Company’s Common Stock.” Amounts
presented are in thousands, except earnings/loss per share amounts.
15
2004
Year Ended September 30,
2002
2001
2003
2000
Statements of Operations Data:
Revenues:
Software license fees. . . . . . . . . . . . . . .
Maintenance fees. . . . . . . . . . . . . . . . . .
Services. . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues. . . . . . . . . . . . . . . . . . .
Expenses:
88,484
$157,402 $ 146,825 $ 158,453 $ 161,847 $ 123,231
64,583
74,213
52,001
284,667
67,173
70,062 69,729
79,187
51,279
277,291
299,082
292,784
257,543
46,898
Cost of software license fees. . . . . . . .
Cost of maintenance and services. . . . 57,380
Research and development. . . . . . . . . .
Selling and marketing. . . . . . . . . . . . . . . 61,
General and administrative. . . . . . . . . .
Goodwill amortization (1) . . . . . . . . . . . .
Impairment of goodwill . . . . . . . . . . . . . . —9,2
Impairment of software. . . . . . . . . . . . . .
Total expenses. . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . .
24,996
38,007
109
56,478
—
—
237,970
54,814
25,500
61,350
35,373
54,482
56,037
—
90
—
242,032
35,259
31,053
62,479
35,029
57,352
55,563
1,524
—
243,000
41,667
51,505
80,670
43,616
76,667
41,240 33,377
71,492 77,005
61,925
60,302
7,553
—
—
355,231 310,412
(56,149 )
(52,869)
—14,793
36,618
8,880
Other income(expense):
Interest income. . . . . . . . . . . . . . . . . . . .
Interest expense. . . . . . . . . . . . . . . . . . .
Other, net. . . . . . . . . . . . . . . . . . . . . . . . .
Total other income(expense) . . . . . .
Income(lo ss) before income taxes. . . . .
Income tax (provision) benefit. . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . .
Earnings (loss) per share information:
1,762
(1,435)
2,294
2,621
57,435
(10,750)
1,667
(5,596)
(26)
(3,955)
37,712
(22,443)
$46,685 $ 14,325 $ 15,269 $ (80,063 ) $ (50,059)
1,211
(2,998)
140
(1,647)
33,612
(19,287)
1,759
(7,338 )
(15,414 )
(20,993 )
(77,142 )
2,142
(7,008)
(533)
(5,399)
(58,268)
(2,921 ) 8,209
Weighted average sharesoutstanding:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . .
37,0
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . 38,0
Earnings (loss) per share:
01
76
35,558
35,707
35,326
35,572
34,116
34,116
31,744
31,744
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1.26$
1.23$
0.40 $
0.40 $
0.43 $
0.43 $
(2.35) $
(2.35) $
(1.58)
(1.58)
2004
Asof September 30,
2002
2001
2003
2000
Balance Sheet Data:
Working capital. . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . .
Current portion of debt. . . . . . . . . . . . . .
Debt (long-term portion) . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . .
7,0
$124,088 $ 81,084 $ 49,466 $ 21,946 $ 60,452
299,002
267,151
29,500
18,444
39,824
24,866
108,985
102,858
272,403
25,104
44,135
83,970
325,458
27
2,327
186,961
263,900
15,493
9,444
122,874
(1) Effective October 1, 2001, the Company adoptedStatementofFinan
cial Accounting Standard
(“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which established new accounting and
reporting requirements for goodwill. Under SFAS No. 142, goodwill is no longer amortized.
16
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company develops, markets, installs andsu pports a broad line of software products and
services primarily focused on facilitating e-payments. In addition to its own products, the Company
distributes, or acts asa sales agent for, softw are developed by third parties. These products and
servicesare used principally by financial
institutions, retailers and e-payment processors, both in
domestic and international markets. Accordingly, the Company’s business and operating results are
influenced by trends such as information technology spending levels, the growth rate of
the
e-payments industry and changes in the numberand type of customers in the financial services
industry. Most of
the Company’s products are sold and supported through distribution networks
covering three geographic regions — the Americas, EMEA and Asia/Pacific. Each distribution network
has its own sales force and supplements this with independent reseller and/or distributor networks.
Several factors related to the Company’s business may have a significant impact on its operating
results from quarter to quarter. For example, the accounting rules governing the timing of revenue
recognition in the software industry are complex, and it can be difficult to estimate when the Company
will recognize revenue generated by a given transaction. Factors such as maturity of the product sold,
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. In addition, while the Company’s contracts are generally denominated in U.S. dollars, a
substantial portion of its sales are made, and some of its expenses are incurred, in the local currency
of countries other than the United States. Fluctuations in currency exchange rates in a given period
may result in the Company’s recognition of gains or losses for that period.
Certain industry-specific trends may also impact the Company’s operating results from quarter to
quarter. For example, ATM deployment and transaction volumes are declining in the U.S. while ATM
markets outside the U.S. are growing. The Company cannot determine with certainty how this
changing mix of ATM usage may impact the Company’s future financial results. Point-of-sale debit
transaction volumes are increasing and this may result in increased sales of the Company’s e-payment
fraud and identity theft may result in increased demand for
solutions. Additionally, increased levelsof
the Company’s fraud detection and payment authorization products.
Increasing regulatory
requirements imposed upon financial services companies, and other companies utilizing e-payment
solutions, may also drive increased demand for certain of the Company’s products.
Consolidation activity among financial institutions has increased in recent years. While it is difficult
to assess the impact of this consolidation activity, management believes that recent consolidation
activity may have negatively impacted the Company’s financial results. Continuing consolidation
activity may negatively impact the Company in fiscal 2005. While all three of the Company’s business
units are affected by this consolidation activity, the Company’s IntraNet business unit is particularly
impacted because its customer base is concentrated within the largest financial institutions, which have
been party to several of the recently announced consolidations. However, it is difficult to predict to what
extent increased consolidation activity will continue, and if it does, whether it will have an overall long-
term positiveor negative impact on the Company’s future operatingresults. 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 volumediscounts or discontinueuse of certain of the
Company’s products. Additionally, if a non-customer and a customer combineand 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 anon-cus tomer and a customer when
the combined entity continues usage of the Company’s products and, as a largercombined entity,
increases its demand for the Company’s products and services.
17
The Company continues to evaluate strategies intended to improve its overall effective tax rate.
The Company’s degree of success in this regard and related acceptance by taxing authorities of tax
positions taken, as well as changes to tax laws in the United States and in various foreign jurisdictions,
could cause the Company’s effective tax rate to fluctuate from period to period.
Critical Accounting Policies and Estimates
This disclosure is based upon the Company’s consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires that the Company make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. The Company bases its estimates on historical experience and other
assumptions that it believes to be proper and reasonable under the circumstances. The Company
continually evaluates the appropriateness of estimates and assumptions used in the preparation of its
consolidated financial statements. Actual results could differ from those estimates.
The following key accounting policies are impacted significantly by judgments, assumptions and
estimates used in the preparation of
the consolidated financial statements. See Note 1 to the
consolidated financial statements for a further discussion of these and other significant accounting
policies.
Revenue Recognition
For software license arrangements for which services rendered are not considered essential to the
functionality of the software, the Company recognizes revenue upon delivery, provided (1) there is
persuasive evidence of an arrangement, (2) collection of the fee is considered probable, and (3) the
fee is fixed or determinable. In most arrangements, because vendor-specific objective evidence of fair
value does not exist for the license element, the Company uses the residual method to determine the
amount of revenue to beallocated to the license element. Under the residual method, the fair value of
all undelivered elements, such as postcontract customer support or other products or services, is
deferred and subsequently recognized as the products are delivered or the services are performed,
with the residual difference between the total arrangement fee and revenues allocated to undelivered
elements being allocated to the delivered element. For software license arrangements inwhi ch the
Company has concluded that collectibility issues may exist, revenue is recognized ascash is collected,
provided all other conditions for revenue recognition have been met. In making the determination of
collectibility, the Company considers the creditworthiness of the customer, economic conditions in the
customer’s industry and geographic location, and general economic conditions.
In recent years, the Company’s sales focus has shifted from its more-established (“mature”)
products to its newer BASE24-es product, its Payments Management products and other less-
established (collectively referred to as “newer”) products. Asa 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. Revenuesfrom 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 determinewhe nany 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;standa rdization 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
18
sales of the product upon delivery of the product, resulting in earlier recognition of revenues from sales
of that product, provided all other revenue recognition criteria have been met.
When a software license arrangement includes services to provide significant modification or
customization of software, those services are not considered tobe separable from the software.
Accounting for such services delivered over time (generally in excess of twelve months) is referred to
as contract accounting. Under contract accounting, the Company generally uses the percentage-of-
completion method. Under the percentage-of-completion method, the Company records revenue for
the software license fee and services over the development and implementation period, with the
percentage of completion generally measured by the percentage of labor hours incurred to-date to
estimated total labor hours for each contract. Estimated total labor hours for each contract are based
on the project scope, complexity, skill level requirements, and similarities with other projects of similar
size and scope. For those contracts subject tocon tract accounting, estimatesof
total revenue under
the contract exclude amounts due under extended payment terms.
Provision for Doubtful Accounts
The Company maintains a general allowance for doubtful accounts based on its historical
experience, along with additional customer-specific allowances. The Company regularly monitors credit
risk exposures in its accounts receivable. In estimating the necessary level of its allowance for doubtful
accounts, management considers the aging of its accounts receivable, the creditworthiness of the
Company’s customers, economic conditions withinthe customer’s industry, and general economic
these factors change, the estimates made by
conditions, among other factors. Should any of
management will also change, which in turn impacts the level of the Company’s future provision for
doubtful accounts. Specifically, if
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.
the financial condition of
Accounting for Income Taxes
Accounting for income taxes requires significant judgments in the development of estimates used
in income tax calculations. Such judgments include, but are not limited to, the likelihood the Company
would realize the benefits of net operating loss carryforwards and/or foreign tax credits, the adequacy
of valuation allowances, and the rates used to measure transactions with foreign subsidiaries. As part
of the process of preparing the Company’s consolidated financial statements, the Company is required
to estimate its income taxes in each of the jurisdictions in which the Company operates. The judgments
and estimates used are subject to challenge by domestic and foreign taxing authorities. It is possible
that either domestic or foreign taxing authorities could challenge those judgments and estimates and
draw conclusions that would cause the Company to incur tax liabilities in excess of, or realize benefits
less than, those currently recorded. In addition, changes in the geographical mix or estimated amount
of annual pretax income could impact the Company’s overall effective tax rate.
To the extent recovery of deferred tax assets is not likely, the Company records a valuation
allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.
Although the Company has considered future taxable income along with prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, if
the Company should
determine that it would not be able to realize all or part of its deferred tax assets in the future, an
adjustment to deferred tax assets would be charged to income in the period any such determination
was made. Likewise, in the event the Company was able to realize its deferred tax assets in the future
in excess of the net recorded amount, an adjustment to deferred tax assets would increase income in
the period any such determination was made.
19
Business Units
The Company’s products and services are currently organized within three operating segments,
referred to as business units — ACI Worldwide, Insession Technologies and IntraNet. The Company’s
information presented on a consolidated basis,
chief operating decision makers review financial
accompanied by disaggregated information about revenues and operating income by business unit.
The following are revenues and operating income for these business units for fiscal 2004, 2003 and
2002 (in thousands):
2004
2003
2002
Revenues:
ACI Worldwide. . . . . . . . . . . . . . . . . . . . . . . . . .
Insession Technologies. . . . . . . . . . . . . . . . . .
IntraNet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income:
ACIWorldwide. . . . . . . . . . . . . . . . . . . . . . . . . .
Insession Technologies. . . . . . . . . . . . . . . . . .
IntraNet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$224,020 $ 206,408 $ 211,835
34,203
38,629
$ 292,784$ 277,291 $ 284,667
33,086
37,797
37,711
053
31,
$ 38,730
9,9727,2
12
6,1
$ 54,814$
$ 22,060 $ 31,002
21 7,203
5,978
3,462
35,259 $ 41,667
Backlog
Included in backlog are all software license fees, maintenance fees and services specified in
executed contracts to the extent that the Company believes that recognition of the related revenue will
occur within the next twelve months. Recurring backlog includes all monthly license fees, maintenance
fees and facilities management fees. Non-recurring backlog includes other software license fees and
services.
The following table sets forth the Company’s recurring and non-recurringba cklog, by business
unit, as of September 30, 2004 (in thousands):
ACI Worldwide. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insession Technologies. . . . . . . . . . . . . . . . . . . . .
IntraNet, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-
Recurring
Recurring
$132,647 $ 47,616 $ 180,263
30,201
19,167
$ 168,102 $ 61,529 $ 229,631
21,952
13,503
8,249
5,664
Total
Customers may request that their contracts be renegotiated or terminated due to a number of
factors, including mergers, changes in their financial condition, or general changes in economic
conditions in the customer’s industry or geographic location, or the Company may experiencedelays in
the development or delivery of products or services specified incus tomercontr acts. Accordingly, there
can be no assurance that contracts included in recurring or non-recurring backlog will actually generate
the specified revenues or that the actual revenues will be generated within a twelve-month period.
20
Results of Operations
The following table sets forth certain financial data and the percentage of total revenues of the
Company for the periods indicated (amounts in thousands).
Revenues:
2004
Year Ended September 30,
2003
2002
Amount
% of
Revenue
Amount
% of
Revenue
Amount
% of
Revenue
Initial license fees (ILFs) . . . . . $74,426
Monthly license fees (MLFs) . .82,976
Software license fees. . . . . . . .
Maintenance fees. . . . . . . . . . .
Services. . . . . . . . . . . . . . . . . . .
Total revenues. . . . . . . . . . . .
46,898
88,484
292,784
2
2 5.4% $ 61,542
85,283
46,825
8.4
1
1
30.2 79,187
6.0 51,279
2
1
277,291
100.0
157,402 53.8
22.2% $ 76,742
81,711
30.7
158,453
52.9
74,213
8.6
52,001
8.5
284,667
100.0
26.9%
28.7
55.6
26.1
18.3
100.0
Expenses:
Cost of software license fees.
Cost of maintenance and
2 4,996
8.5
2 5,500
9.2
31,053
1
0.9
services. . . . . . . . . . . . . . . . . .
Research and development. . .
Selling and marketing. . . . . . . . 61,
General and administrative. . .
Impairment of goodwill . . . . . . . —
Total expenses. . . . . . . . . . .
Operating income. . . . . . . . . . . . .
57,380
38,007
109
56,478
—
237,970
54,814
19.6
13.0
20.9
19.3
81.3
18.7
61,350
35,373
54,482
56,037
9,290
2 42,032
35,259
22.1
12.8
19.6
20.2
3.4
87.3
12.7
62,479
2
35,029
57,352
55,563
1,524
243,000
41,667
2.0
12.3
20.2
19.5
0.5
85.4
14.6
Other income (expense):
Interest income. . . . . . . . . . . . .
Interest expense. . . . . . . . . . . .
Other, net. . . . . . . . . . . . . . . . . .
1,762
(1,435)
2,294
0.6
(0.5)
0.8140
1 ,211
(2,998)
0.4
(1.1)
0.1
1,667
(5,596 )
(26 )
0.6
(1.9)
—
Total other income
(expense) . . . . . . . . . . . . . .
Income before income taxes. . . .
Income tax provision. . . . . . . . . . .
Net income. . . . . . . . . . . . . . . . . . . $46,685
2,621
57,435
(10,750)
0.9
19.6
(3.7)
( 1,647)
33,612
(19,287)
1 5.9% $ 14,325
(3,955 )
37,712
(0.6)
12.1
(6.9)
5.2% $ 15,269
(22,443)
(1.3)
13.3
(7.9)
5.4%
Revenues. Total revenues for fiscal 2004 increased $15.5 million, or 5.6%, as compared to
fiscal 2003. The increase is the result of a $10.6 million, or 7.2%, increase in software license fee
revenues and a $9.3 million, or 11.7%, increase in maintenance fee revenues, offset by a $4.4 million,
or 8.5%, decrease in services revenues.
Total revenues for fiscal 2003 decreased $7.4 million, or 2.6%, from fiscal 2002. The decrease is
the result of a $11.6 million, or 7.3%, decrease in software license fee revenues and a $0.7 million, or
1.4%, decrease in services revenues, offset by a $5.0 million, or 6.7%, increase in maintenance fee
this decrease resulted from the February 2002 sale of Regency Systems, Inc.
revenues. Part of
(“Regency”), whichwaspart
of the ACI Worldwidebus iness unit. Regency contributed approximately
$2.3 million in revenues in fiscal 2002, with no related revenues in fiscal 2003.
For fiscal 2004 as compared to fiscal 2003, ACI Worldwide’s software license fee revenues
increased by $12.3 million, the largest portion of which was due to a significant license renewal in the
EMEA region, a large capacity upgrade and term extension by a customer in the Americas, increased
revenues from the Company’s BASE24 and fraud detection products, and a number of other large
system and capacity increases as compared to fiscal 2003. Insession Technologies’ software license
fee revenues increased by $3.3 million in fiscal 2004 as compared to fiscal2003 due toincreased
21
activity related to its data connectivity and web-based communication products, as well as its
transitional data management products. For fiscal 2004 as compared to fiscal 2003, IntraNet’s software
license fee revenues decreased by $5.0 million, primarily due to the completion of the final phase of an
ACH processing project with a large European bank during fiscal 2003 which allowed the Company to
recognize approximately $3.6 million in revenues.Also, as IntraNet’scus tomers complete their
migration from the Digital VAX-based Money Transfer System (“MTS”) product to the RS6000-based
MTS product, corresponding revenues associatedwith the migration process have declined, which
explains the remaining reduction in IntraNet’s software license fee revenues for fiscal 2004 as
compared to fiscal 2003.
For fiscal 2003 as compared to fiscal 2002, ACI Worldwide’s software license fee revenues
decreased primarily due to a shift in sales focus from the Company’s more-established products to its
newer BASE24-es product and its Payments Management products. Asa result of this shift to newer
products, the Company experienced an increase in deferred revenues and a correspondingdecrease
in revenues due to differences in the timing of revenue recognition for the respective products.
Revenues under newer products are typically recognized upon acceptance, or first production use by
the customer, due to uncertainties surrounding customer acceptance of the product, whereas revenues
from mature products, such as BASE24, are generally recognized upon delivery of
the product
(assuming all other requirements for revenue recognition have been met). For fiscal 2003 ascomp ared
to fiscal 2002, Insession Technologies’ software license fee revenues decreased primarily due to
system consolidations and company consolidations. In addition, as customers within the Insession
Technologies business unit renew existing contracts, the renewal contract generally has a lower
proportion of the total fees that relate to initial license fees. For fiscal 2003 ascom pared to fiscal 2002,
IntraNet’s software license fee revenues increased due to the completion of the final phase of an ACH
project with a large European bank, allowing the Company to recognize approximately $3.6 million in
revenues, offset by a decline in the number of customers migrating from the Digital VAX-based Money
Transfer System (“MTS”) product to the new RS6000-based MTS product.
The increases in maintenance fee revenues for both fiscal 2004 and fiscal 2003 were primarily due
to growth in the installed base of software products within the ACI Worldwide and Insession
Technologies business units in the Americas and EMEA.
The decrease in services revenues for fiscal 2004 as compared to fiscal 2003 resulted primarily
from increasing sales of newer products such as the Company’s BASE24-es product, for which related
services revenues are being deferred until acceptance or
first production use, combined with
decreases in the IntraNet business unit as most customers completed their migration to the
RS6000-based MTS product from the Digital VAX-based MTS product. The decrease in services
revenues in fiscal 2003 as compared to fiscal 2002 was primarily the result of a decreased demand in
the ACI Worldwide and Insession Technologies business units for technical and project management
services. This decreased demand was primarily due to increased competition in the marketplace by
companies that offer services work at lower rates and a number of customers that have increased their
internal staffs in order to reduce their dependence on external resources. In addition, due to a decline
in the number of customers migrating from the Digital VAX-based MTS product
to the new
RS6000-based MTS product, IntraNet services revenues associated with the migration process
declined in fiscal 2003 as compared to fiscal 2002.
Expenses. Total operating expenses for fiscal 2004 decreased $4.1 million, or 1.7%, as compared
to fiscal 2003. Operating expenses in fiscal 2003 included a goodwill impairment charge of $9.3 million.
There was no goodwill impairment recorded in fiscal2004. The effect of changes in foreign currency
exchange rates was to increase overall expenses by approximately $9.1 million for fiscal 2004 as
compared to fiscal 2003.
22
Total operating expenses for fiscal 2003 decreased $1.0 million,or 0 .4%, as compared to fiscal
thisdecr easeresu ltedfro m the fiscal200 2s ale of Regency. Regency incurred
2002. Part of
approximately $4.0 million in operating expenses in fiscal 2002, with no related operating expenses in
fiscal 2003. Offsetting this decrease, however, was the effect of changes in foreign currency exchange
rates, which increased overall expenses by approximately $5.0 million for fiscal 2003 as compared to
fiscal 2002. Also, fiscal 2003 operating expenses included $9.3m illion of goodwill
impairment as
compared to $1.5 million of goodwill impairment in fiscal 2002.
Cost of software license fees for fiscal 2004 decreased $0.5 million, or 2.0%, ascomp ared to fiscal
2003. This decrease was due primarily to a reduction in compensation-related expenses resulting from
the shift of certain personnel to research and development (“R&D”) activities in the latter part of fiscal
2003, offset by an increase in commissions paid to distributors of the Company’s products along with
higher product royalty fees paid on increased sales of third-party products during fiscal 2004 as
compared to fiscal 2003. Cost of software license fees for fiscal 2003 decreased $5.6 million, or 17.9%,
as compared to fiscal 2002. This was primarily due to a comparative decrease in amortization of $4.6
million during fiscal 2003 related to software products that are now fully amortized, as well as
decreases in personnel-related expensesdue
levels. In addition, distributor
commissionsdecreased due to lower revenue levels from those sources.
toreduce d staff
Cost of maintenance and services for fiscal 2004 decreased $4.0 million, or 6.5%, as compared to
fiscal 2003. This decrease was primarily due to a reduction incom pensation-related expenses resulting
from the shift of certain personnel to installation services associated with increasing sales of newer
products such as the Company’s BASE24-es product, for which revenues are being deferred until
acceptance or first production use and the associated costs are capitalized and subsequently
expensed when the related services revenue recognition occurs, and the shift of certain personnel to
R&D activities in the latter part of fiscal 2003, offset in part by an increase in costs to perform
maintenance and servicesactiv ities corresponding to an increase in the related combined revenues.
Cost of maintenance andservices for fiscal 2003 decreased $1.1 million, or1.8%, as compared to
fiscal 2002. This decrease was primarily due to the shift of certain personnel to R&D activities in the
latter part of fiscal 2003, offset in part by an increase in costs to perform maintenance andservices
activities corresponding to an increase in the related combined revenues.
Research and development costs for fiscal 2004 increased $2.6 million, or 7.4%, as compared to
fiscal 2003. The increase in R&D costs was primarily due to the shift of certain personnel from other
areas of the Company to R&D activities in the latter part of fiscal 2003. R&D costs for fiscal 2003
increased $0.3 million, or 1.0%, as compared to fiscal 2002.
Selling and marketing costs for fiscal 2004 increased $6.6 million, or 12.2%, as compared to fiscal
2003. The large increase in selling and marketing costs reflects increased sales commissions caused
primarily by higher sales volumes in the ACI Worldwide and Insession Technologies business units
during fiscal 2004 as compared to fiscal 2003. Most of
the increased sales activity in the ACI
Worldwide business unit during fiscal 2004 occurred within the EMEA region. Selling and marketing
costs for fiscal 2003 decreased $2.9 million, or 5.0%, as compared to fiscal 2002. This decrease was
due primarily to a decreased emphasison advertising and promotional programs, offset by increased
sales commissions. Although software license fee revenues decreased primarily due to a shift in sales
focus from the Company’s more-established products to its newer products, sales commissions
increased since they are paid based on the timing of the salesac tivity rather than the timing of related
revenue recognition.
General and administrative costs for fiscal 2004 increased $0.4 million, or 0.8%, as compared to
fiscal 2003. This increase was primarily due to increased professional fees for legal, tax and other
services, as well as increased insurance costs for director and officer liability insurance, offset by
reductions in depreciation and bad debt expenses during fiscal 2004 as compared to fiscal 2003.
General and administrative costs for fiscal 2003 increased $0.5 million, or 0.9%, as compared to fiscal
23
2002. This increase is primarily due to increased professional fees, offset by reduced costs resulting
from the sale of Regency during fiscal 2002.
Other Income and Expense.
Interest expense for fiscal 2004 decreased $1.6 million, or 52.1%,
as compared to fiscal 2003. Interest expense for fiscal 2003 decreased $2.6 million, or 46.4%, as
compared to fiscal 2002. These decreases are attributable to reductions in debt under financing
agreements (balances of $9.4 million, $24.9 million and $43.3 million at September 30, 2004, 2003 and
2002, respectively).
Other income and expense consists of foreign currency gains andlosses, and other non-operating
items. Other income for fiscal 2004 increased $2.2 million ascom pared to fiscal 2003. This increase is
primarily due to foreign currency gains, with the Company realizing $2.6 million in net gains during
fiscal 2004 as compared to $0.3 million in net gains during fiscal 2003. Other income for fiscal 2003
improved by $0.2 million as compared to fiscal 2002. Other income and expense in fiscal 2002
included an$8.7 million gain on sale of Regency, which was offset by $8.3 million in other than
temporary impairments of marketable equity securities and $0.2 million in foreign currency net losses.
Income Taxes. The effective tax rate for fiscal 2004, 2003 and 2002 was approximately 18.7%,
57.4% and 59.5%, respectively. Differencesbetw een the income tax provisionscom puted at the
statutory federal income tax rate and per the consolidated statements of operations are summarized as
follows (in thousands):
Tax expense at federal rate of 35% . . . . . . . . . . .
Increase (decrease) in valuation allowance. . . .
State income taxes, net of federal benefit. . . . . .
Foreign tax rate differential. . . . . . . . . . . . . . . . . .
Impairment of goodwill . . . . . . . . . . . . . . . . . . . . . .
MDL restructuring. . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of foreign taxes on U.S. return. . . . . . . . .
Research and development credits . . . . . . . . . . .
Extraterritorial income exclusion . . . . . . . . . . . . . .
Gain on disposition of subsidiary . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax provision. . . . . . . . . . . . . . . . . . . . . . . .
Year Ended September 30,
2003
2004
2002
$ 20,102 $ 11,764 $ 13,199
8,871
377
2,825
(2,798)
1,661
1,410
887
835
120
—3,2
52 533
—
(11,337)—
1,585
(299)
(448)
—
874
2,812 —
(314 ) —
(390 )
—
321
—
(3,059 )
(303 )
$ 10,750 $ 19,287 $ 22,443
During fiscal 2004, the Company completed a reorganization of
its MessagingDirect Ltd.
subsidiary and its related entities (collectively referred to as “the MDL entities”), and elected to treat
certain foreign operations as branchesof
the U.S. parent company, which resulted in the recognition of
a $12.0 million tax benefit, of which the federal benefit was $11.3 and the state benefit was $0.7. This
tax benefit arises from the excess of tax basis over the book carrying value of these foreign assets
following the reorganization. The Company estimates the cash savings resulting from the
reorganization of the MDL entities to be approximately $1.0 million per year over each of the next
eleven years. Since the entire $12.0 million tax benefit was recognized during fiscal 2004, the tax
benefit is not expected to affect the Company’s effective tax rate in future periods.
Each year, the Company evaluates its historical operating results as well as its projections for the
future to determine the realizability of the deferred tax assets. As of September 30, 2004, the Company
had deferred tax assets of $23.2 million (net of a cumulative $47.5 million valuation allowance). The
loss
Company’s valuation allowance primarily relates to foreign net operating and capital
carryforwards. The valuation allowance is based on the extent to which management believes these
carryforwards could expire unused due to the Company’s historical or projected losses in certain of its
foreign subsidiaries. The Company analyzes the recoverability of its net deferred tax assets at each
24
future reporting period. Because unforeseen factors may affect future taxable income, increases or
decreases to the valuation reserve may be required in future periods.
The Company had foreign tax credit carryforwardsat September 30, 2004 of$5.2 million, which
were to begin expiring in fiscal 2005. However, following enactment of the American JobsCreat ion Act
of 2004, which is discussed in further detail below, these foreign tax credit carryforwards will begin to
expire in fiscal 2010. The Company had domestic net operating loss carryforwards (“NOLs”) for tax
purposes of $1.9 million at September 30, 2004, which will begin to expire in 2009. All of these NOLs
are attributable to the pre-acquisition periods of acquired subsidiaries. The utilization of these NOLs
the Internal Revenue Code as a result of prior ownership
may be limited pursuant to Section 382of
changes. The MDL entities had $2.8 million of foreign NOLs, which were extinguished as part of the
reorganization. At September 30, 2004, the Companyhad foreign NOLs of $64.4 million, a majority of
which may be utilized over an indefinite life, with the remainder expiring over the next 15 years. A
valuation allowance has been providedfor substantially all of the deferred tax assets related to the
foreign loss carryforwards to the extent management believes these carryforwards are more likely than
not to expire unused due to the Company’s historical or projected losses in certain of its foreign
subsidiaries. In addition, at September 30, 2004, the Company had domestic capital loss carryforwards
for tax purposes of $16.3 million, for which a full valuation allowance has been provided. These
domestic capital loss carryforwards begin to expire in 2006. The Company had $1.1 million of capital
loss carryforwards that expired during the current fiscal year. The change in the deferred tax asset
valuation allowance related to the expiration was a decrease of $0.4 million.
The American Jobs Creation Act of 2004 (the “Jobs Act”). On October 22, 2004, the Jobs
Act was enacted, which directly impacts the Company in several areas. The Jobs Act reduces the
carryback period of foreign tax credits from two years to one year and extends the carryforward period
from five years to ten years. This change doubles the length of time that the Company has to utilize its
excess foreign tax credits before they expire.
The Company currently takes advantage of
income exclusion (“EIE”) in
calculating its federal income tax liability. The Jobs Act repealed the EIE, the benefit of which will be
phased out over the next three years,with 80% of the prior benefit allowed in 2005, 60% in 2006 and
0% allowed in years after 2006.
the extraterritorial
The Jobs Act replaced the EIE with the new “manufacturing deduction” that allows a deduction
from taxable income of up to 9% of “qualified production activities income,” not to exceed taxable
income. The deduction is phased in over a six-yearperiod, with the eligible percentage increasing from
3% in 2005 to 9% in 2010.
The Jobs Act includes a foreign earnings repatriation provision that providesan 85% dividends
received deduction for certain dividends received from controlled foreign corporations. The Company
currently intends to reinvest certain of its foreign earnings indefinitely under APB-23; however, the
Company will continue to analyze the potential tax impact should it elect to repatriate foreign earnings
pursuant to the Jobs Act.
The Company is currently evaluating the impact ofthe various provisions of the Jobs Act on its
effective tax rate in future periods.
Liquidity and Capital Resources
As of September 30, 2004, the Company’s principal sources of liquidity consisted of $169.6 million
in cash and cash equivalents. The Company had no bank borrowings outstanding as of September 30,
2004.
The Company’s net cash flows provided by operating activities in fiscal 2004, 2003 and 2002 were
$58.1 million, $37.9 million and $79.0 million, respectively. The increase in operating cash flows in
income, including
fiscal 2004 as compared to fiscal 2003 resulted primarily from increased net
25
adjustments for non-cash items. The decline in operating cash flows in fiscal 2003 as compared to
fiscal 2002 resulted primarily from changes in billed and accrued receivables.
During fiscal 2003, the Company incurred restructuring charges totaling $2.0 million, of which $0.2
million was paid in fiscal 2003, with remaining adjusted amounts paid in fiscal 2004. During fiscal 2001,
the Company incurred restructuring charges and asset impairment losses totaling $5.9 million, of which
$0.1 million was paid in fiscal 2004, $0.4 million was paid in fiscal 2003, and $0.4 million was paid in
fiscal 2002. Liabilities of $0.5 million remaining at September 30, 2004 related to restructuring charges
incurred in fiscal 2001 are not expected to significantly impact operating cash flows.
The Company’s net cash flows used in investing activities in fiscal 2004 were $2.5 million,
compared to net cash flows provided by investing activities in fiscal 2003 and 2002 of $0.1 million and
$1.4 million, respectively. Several factors affected the comparison in activity between fiscal years. In
fiscal 2004, $3.9 million was used for purchases of software, property and equipment, whi ch were
partially offset by proceeds from the sale of marketable securities of $1.4 million. In fiscal 2003, $3.1
million was used for purchases of software, property and equipment, whichwere partially offset by
proceeds from the sale of marketable securities of $2.5 million. The sale of Regency during fiscal 2002
provided cash flows of $5.4 million, which were offset by $4.9 million used for purchases of software,
property and equipment.
The Company’s net cash flows used in financing activities were $2.8 million, $14.9 million and
$24.4 million in fiscal 2004, 2003 and 2002, respectively. In the past, an important element of the cash
management program was the Company’s factoring of future revenue streams, whereby interest in its
future monthly license payments under installment or long-term payment arrangements is transferred
on a non-recourse basis to third-party financial institutions in exchange for cash. The Company did not
factor any future revenuestreams during fiscal 2004 or 2003. However, in fiscal 2004, the Company
made scheduled payments to the third-party financial
institutions totaling $16.3 million, which were
partially offset by proceeds of $13.1 million from exercises of stock options. In fiscal 2003, the
Company made scheduled payments to the third-party financial institutions totaling $19.2 million, which
were partially offset by cash receipts of $4.7 million from exercises of stock options. During fiscal 2002,
the Company generated cash proceeds from the factoring of future revenue streams of $7.6 million,
offset by scheduled payments made to the third-party financial
institutions of $21.5 million, and
payments on its bank line of credit facilities of $12.0 million.
The Company also realized an increase incash of $2.9 million during each of fiscal 2004 and
2003 due to foreign exchange rate variances.
The Company believes that its existing sources of liquidity, including cash on hand and cash
provided by operating activities, will satisfy the Company’s projected liquidity requirements for the
foreseeable future.
Stock Repurchase Program. On December 13, 2004, the Company announced that its Board
of Directors has approved a stock repurchase program authorizing the Company, from time to time as
market and business conditions warrant, to acquire up to $80 million of its Common Stock. The
Company intends to use existing cash and cash equivalents to fund these repurchases.
26
Contractual Obligations and Commercial Commitments
The Company leases office space, equipment and the corporate aircraft under operating leases
that run through February 2011. In addition, the Company has sold the rights to future payment
streams under software license arrangements with extended payment terms to financial institutions for
cash. The Company recorded the proceeds received from these financing agreements as debt and
reduces the debt principal as payments are made. Contractual obligations as of September 30, 2004
are as follows (in thousands):
Contractual Obligations
Operating Lease Obligations. . . . . . . . . . . . . . . . .
Debt — Financing Agreement Obligations. . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Accounting Pronouncements
Payments Due by Period
Less
than 1
year
1-3
years
3-5
years
More
than 5
years
Total
$35,938
9,354
$9,466 $ 15,889 $ 8,298 $ 2,285
—
$45,292 $16,493 $ 18,216 $ 8,298 $ 2,285
7,027
2,327
—
In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition,”
which revises or rescinds portions of the interpretive guidance contained in SAB 101, “Revenue
Recognition in Financial Statements,” related to multiple element revenue arrangements, which was
superceded as a result of the issuance of Financial Accounting Standards Board (“FASB”) Emerging
Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple
Deliverables.” The revenue recognition principles of SAB 101 remain largely unchanged by the
issuance of SAB 104. The adoption of SAB 104 did not have a material impact on the Company’s
financial position or results of operations.
The FASB recently issued a proposed accounting standard that would eliminate the ability to
account
for share-based compensation transactions using Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally would require instead that
such transactions be accounted for using a fair-value-based method. The proposed accounting
standard would be applied prospectively for fiscal periods beginning after June 15, 2005 if the standard
is issued as currently proposed. The Company will continue to monitor the progress of the issuance of
this accounting standard and its potential
impact on the Company’s financial position or results of
operations.
Factors That May Affect the Company’s Future Results or the Market Price of the Company’s
Common Stock
The Company operates in a rapidly changing technological and economic environment
that
presents numerous risks. Many of these risks are beyond the Company’s control and are driven by
factors that often cannot be predicted. The following discussion highlights some of these risks.
• The Company’s backlog estimate is based on management’s assessmentof
the customer
contracts that exist as of the date the estimate ismade. A number of factors could result in
actual revenues being less than the amounts reflected in backlog. The Company’s customers
may attempt to renegotiate or terminate their contracts for a number of reasons, including
mergers, changes in their financial condition, or general changes in economic conditions in their
industries or geographic locations, or the Company may experience delays in the development
or delivery of products or services specified in customer contracts.Accordingly, there can be no
assurance that contracts included in recurring or non-recurring backlog will actually generate the
specified revenues or that the actual revenues will be generated within a twelve-month period.
• New accounting standards, revised interpretations or guidance regarding existing standards, or
changes in the Company’s business practices could result in future changes to the Company’s
27
revenue recognition or other accounting policies. These changes could have a material adverse
effect on the Company’s business, financial condition and/or results of operations.
• The Company is subject to income taxes, as well as non-income based taxes, in the United
States and in various foreign jurisdictions. Significant judgment is required indetermining the
Company’s worldwide provision for income taxes and other tax liabilities. In addition, the
Company has benefitted from, and expects to continue to benefit from, implemented tax-saving
strategies. The Company believes that
implemented tax-saving strategies comply with
applicable tax law. However, taxing authorities could disagree with the Company’s positions. If
the Company’s tax positions and were
the taxing authorities decided to challenge any of
successful in such challenges, the Company’s financial condition and/or results of operations
could be adversely affected.
The Company’s tax positions in its amended income tax returns filed for its 1999 through 2002
tax years are the subject of an ongoing examination by the Internal Revenue Service (“IRS”).
The Company believes that its tax positions comply with applicable tax law. This examination
has resulted in the IRS issuing proposed adjustments, the majority of which relate to the timing
of revenue recognition. The IRS could issue additional proposed adjustments that could
adversely affect the Company’s financial condition and/or results of operations.
Three of the Company’s foreign subsidiaries are the subject of tax examinations by the local
taxing authorities. Other foreign subsidiariescould 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 defend its
positions. However, differing positions on certain issuescould
authorities, which could adversely affect the Company’s financial condition and/or results of
operations.
be upheld by foreigntax
• No assurance can be given that operating results will not vary from quarter to quarter, and any
fluctuations in quarterly operating results may result in volatility in the Company’s stock price.
The Company’s stock price may also be volatile, in part, due to external factors such as
announcements by third parties orcom petitors, inherent volatility in the technology sectorand
changing market conditions in the software industry. The Company’s stock price may also
become volatile, in part, due to developments in the various lawsuits filed against the Company
relating to its restatement of prior consolidated financial results.
• The Company has historically derived a majority of
its total revenues from international
operationsand anticipates continuing to do so, and is thereby subject to risks of conducting
international operations including: difficulties in staffing and management, reliance on
independent distributors, longer payment cycles, volatilities of foreign currency exchange rates,
compliance with foreign regulatory requirements, variability of foreign economic conditions, and
changing restrictions imposed by U.S. export laws.
• The Company’s BASE24-es product
the
Company is unable to generate adequate sales of BASE24-es, if market acceptance of
BASE24-es is delayed, or if the Company is unable to successfully deploy BASE24-es in
results of
production environments, the Company’s business, financial condition and/or
operations could be materially adversely affected.
is a significant new product
for the Company. If
• Historically, a majority of the Company’s total revenues resulted from licensing its BASE24
product line and providing related services and maintenance. Any reduction in demand for, or
increase in competition with respect to, the BASE24 product line could have a material adverse
effect on the Company’s financial condition and/or results of operations.
• The Company has historically derived a substantial portion of its revenues from licensing of
software products that operate on HP NonStop servers. Any reduction in demand for HP
28
NonStop servers, or any change in strategy by Compaq Computer Corporation related to
support of HP NonStop servers, could have a material adverse effect on the Company’s
financial condition and/or results of operations.
• The Company’s business is concentrated in the financial services industry, making it susceptible
to a downturn in that industry. Consolidation activity among financial institutions has increased
in recent years. There are several potential negative effects of increased consolidation activity.
Continuing consolidation of financial institutions may result in a fewer number of existing and
potential customers for the Company’s products and services. Consolidation of two of the
Company’s customers could result in reduced revenues if the combined entity were to negotiate
greater volume discounts or discontinue use of certain of the Company’s products. Additionally,
if a non-customer and a customer combine and the combined entity in turn decided to forego
future use of the Company’s products, the Company’s revenuewould decline. The Company
has not determined whether increased consolidation activity will have a material adverse effect
on the Company’s financial condition and/or results of operations.
• The Company’s software products are complex. They may contain undetected errors or failures
when first introduced or as new versions are released. This may result in loss of, or delay in,
market acceptance of the Company’s products and a corresponding loss of sales or revenues.
Customers depend upon the Company’s products for mission-critical applications. Software
product errors or failures could subject the Company to product liability, as well as performance
and warranty claims, which could materially adversely affect the Company’s business, financial
condition and/or results of operations.
• The Company may acquire new products and services or enhance existing products and
services through acquisitions of other companies, product lines, technologies and personnel, or
through investments in other companies. Any acquisition or investment may be subject to a
number of risks, including diversion of management time and resources, disruption of the
Company’s ongoing business, difficulties in integrating acquisitions, dilution to existing
stockholders if the Company’s common stock is issued in consideration for an acquisition or
investment, the incurring or assuming of indebtedness or other liabilities in connection with an
acquisition, and lack of familiarity with new markets, product lines and competition. The failure to
manage acquisitions or investments, or successfully integrate acquisitions, could have a
material adverse effect on the Company’s business, financial condition and/or results of
operations.
licenses that
restrict use of
• To protect its proprietary rights, the Company relies on a combination of contractual provisions,
including customer
the Company’s products, confidentiality
agreements and procedures, and trade secret and copyright laws. Despite such efforts, the
Company may not be able to adequately protect
its proprietary rights, or the Company’s
competitors may independently develop similar technology, duplicate products or design around
any rights the Company believes to be proprietary. This may be particularly true in countries
other than the United States because some foreign laws do not protect proprietary rights to the
same extent as certain laws of the United States. Any failure or inability of the Company to
protect its proprietary rights could materially adversely affect the Company.
• There has been a substantial amount of litigation in the software industry regarding intellectual
property rights. The Company anticipates that software product developers and providers of
electronic commerce solutions could increasingly be subject to infringement claims, and third
parties may claim that the Company’s present and future products infringe their intellectual
property rights. Any claims, with or without merit, could be time-consuming, result in costly
litigation, cause product delivery delays or require the Company to enter into royalty or licensing
agreements. A successful claim by a third party of intellectual property infringement by the
Company could compel the Company to enter into costly royalty or license agreements, pay
significant damages or even stop selling certain products. Royalty or licensing agreements, if
29
required, may not be available on terms acceptable to the Company or at all, which could
adversely affect the Company’s business.
• From time to time, the Company is involved in litigation relating to claims arising out of its
operations. Any claims, with or without merit, could be time-consuming and result in costly
litigation. Failure to successfully defend against these claims could result in a material adverse
effect on the Company’s business, financial condition and/or results of operations.
• The Company continues to evaluate the claims made in various lawsuits filed against the
Company and certain directors and officers relating to its restatement of prior consolidated
financial results. The Company intends to defend these lawsuits vigorously, but cannot predict
their outcomes and is not currently able to evaluate the likelihood of its success or the range of
potential loss, if any. However, if the Company were to lose any ofthese lawsuits or if they were
not settled on favorable terms, the judgment or settlement could have a material adverse effect
on its financial condition, results of operations and/or cash flows.
The Company has insurance that provides an aggregate coverage of $20.0 million for the period
during which the claims were filed, but cannot evaluate at this time whether such coverage will
be available or adequate to cover losses, if any, arising out of these lawsuits. If these policies do
not adequately cover expenses and liabilities relatingto these lawsuits, the Company’s financial
condition, results of operations and cash flows could be materially harmed. The Company’s
certificate of incorporation provides that it will indemnify, and advance expenses to, its directors
and officers to the maximum extent permitted by Delaware law. The indemnification covers any
expenses and liabilities reasonably incurred by a person, by reason of the fact that such person
is or was orhas agreed to be a director or officer, in connectionwith the investigation, defense
and settlement of any threatened, pending orcom pleted action, suit, proceeding orclaim. The
Company’s certificate of incorporation authorizes the use of indemnification agreements and the
Company enters into such agreements with its directors and certain officers from time to time.
These indemnification agreements typically provide for a broader scope of the Company’s
obligation to indemnify the directors and officers than set forth in the certificate of incorporation.
The Company’s contractual indemnification obligations under these agreements are in addition
to the respective directors’ and officers’ rights under the certificate of incorporation or under
Delaware law.
Additional related suits against the Company may be commenced in the future. The Company
will fully analyze such suits and intends to vigorously defend against them. There is a risk that
the above-described litigation, as well as any additional suits, could result in substantial costs
and divert management attention and resources, which could adversely affect the Company’s
business, financial condition and/or results of operations.
• Beginning in fiscal 2005, Section 404 of
the Sarbanes-Oxley Act of 2002 will
require the
Company’s annual report on Form 10-K to include (1) a report on management’s assessment of
the effectiveness of the Company’s internal controls over financial reporting, (2) a statement that
the Company’s independent auditor has issued an attestation report on management’s
assessment of the Company’s internal controls over financial reporting, and (3) a report by the
Company’s independent auditor on their assessment of the effectiveness of the Company’s
internal controls over financial reporting. There are no assurances that
the Company will
deficiencies in its internalcontrol s, including any significant
discover and remediateall
deficiencies or material weaknesses, as it
implements new documentation and testing
procedures to comply with the Section 404 reporting requirements. If the Company is unable to
remediate such deficiencies or is unable to complete the work necessary to properly evaluate its
internal controls over financial reporting, there is a risk that management and/or the Company’s
independent auditor may not be able to conclude that the Company’s internal controls over
financial reporting are effective.
30
• The Company issued a press release dated September 28, 2004 announcing Mr. Derkacht’s
plans to retire as the Company’s president and chief executive officer not later thanJune30,
2006. The Company has commenced a search for Mr. Derkacht’s successor and expects to
identify such person prior to June30, 2006. The search, and the related transition period, could
divert management attention and resources away from other operational matters. Additionally,
there can be no assurance that the Company will be successful
in identifying a successor
president and CEO by June30, 2006 that meets the Company’s criteria. If a suitable successor
is not identified prior to Mr. Derkacht’s retirement, the resulting uncertainty could adversely
affect the Company’s business and/or its stock price.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company conducts business in all parts of the world and is thereby exposed to market risks
related to fluctuations in foreign currency exchange rates. As a general rule, the Company’s revenue
contracts are denominated in U.S. dollars. Thus, any decline in the value of local foreign currencies
against the U.S. dollar results in the Company’s products and services being more expensive to a
potential foreign customer, and in those instances where the Company’s goods and services have
already been sold, may result in the receivables being more difficult to collect. The Company at times
enters into revenue contracts that are denominated in the country’s local currency, principally in
Australia, Canada, the United Kingdom and other European countries. Thisprac tice 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 our 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
September 30, 2004, a hypothetical ten percent increase or decrease in interest rates would not have
a material impact on the Company’s financial position, results of operations and/or cash flows.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The required consolidated financial statements and notes thereto are included in this annual report
on Form 10-K and are listed in Part IV, Item 15.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONAC COUNTING AND
FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
As reported in the Company’s fiscal 2003 annual report on Form10-K, management and KPMG
LLP (“KPMG”), the Company’s independent public accountants, advised the Company’s Audit
Committee that during the course of the fiscal 2003 audit, material weaknesses in internal controls
were noted relating to timely reconciliation of
intercompany accounts and revenue recognition
procedures pertaining to documentation of software delivery, as well as evaluation and documentation
of customer creditworthiness. Material weaknesses were also noted relatedto revenue recognition on
a percentage-of-completion basis at one of
the Company’s subsidiaries. During fiscal 2004, the
Company implemented corrective actions to address these material weaknesses. The Company has
initiated corrective actions to address remaining internal control deficiencies, and will continue to
its disclosure controls and internal controls and procedures on an
evaluate the effectiveness of
ongoing basis, taking corrective action as appropriate.
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
31
Company’s disclosurecon trols and procedures(as definedinRules 1 3a-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 ofthe 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.
Other than additional enhancements to internal control procedures targeted at correcting the
material weaknesses noted during the fiscal 2003 audit, no changes occurred in the Company’s
internal controls over
the fiscal year ended
September 30, 2004 that has materially affected, or is reasonably likely to materially affect, the
Company’s internal controls over financial reporting.
reporting during the fourth quarter of
financial
Item 9B. OTHER INFORMATION
None.
32
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
PART III
The information required by this item with respect to directors of the registrant is included in the
section entitled “Nominees” under “Proposal 1 — Election of Directors” in the Registrant’s Proxy
Statement for the Annual Meeting of Stockholders to be held on March 8, 2005 (“the Proxy Statement”)
Information included in the section entitled
and is
“Section 16(a) Beneficial OwnershipRepo rtingCompliance”
is also
incorporatedherei n by reference. Information related to the audit committee and the audit committee
financial expert is included in the section entitled “Report of Audit Committee” in the Proxy Statement
and is incorporated herein by reference.
in the Proxy Statement
incorporated herein by
reference.
Certain information regarding the Company’s executive officers is included inItem 4A, “Executive
Officers of the Registrant” in Part I of this annual report on Form 10-K.
The Company has adopted a Code of Ethics for the Chief Executive Officer and Senior Financial
Officers (the “Code of Ethics”), which applies to the Chief Executive Officer, the Chief Financial Officer,
the Chief Accounting Officer, the Controller and persons performing similar functions. The full text of
the Code of Ethics is published on the Company’s website at www.tsainc.com in the “Investor
Relations — Corporate Governance” section. The Company intends to disclose future amendments to,
or waivers from, certain provisions of the Code of Ethics on its website within five business days
following the adoption of such amendment or waiver.
Item 11. EXECUTIVE COMPENSATION
Information included in the sections entitled “Information Regarding the Board, its Committees,
and Director Compensation” and “Information Regarding Executive Officer Compensation” in the Proxy
Statement is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information included in the sectionsentitled
“Information Regarding Stock Ownership” and
“Information Regarding Executive Officer Compensation” in the Proxy Statement is incorporated herein
by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information included in the section entitled “Certain Relationships and Related Transactions,” if
any, in the Proxy Statement is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information included in the section entitled “Independent Accountants” in the Proxy Statement is
incorporated herein by reference.
33
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents filed as part of this annual report on Form 10-K:
PART IV
(1) Financial Statements. The following index lists consolidated financial statements andnotes
thereto filed as part of this annual report on Form 10-K:
Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of September 30, 2004 and 2003. . . . . . . . . . . . . . . .
Consolidated Statements of Operations for each of the three years in the period
ended September 30, 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for
each of the three years in the period ended September 30, 2004. . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the three years in the period
ended September 30, 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
37
38
39
40
41
42
(2) Financial Statement Schedules. All schedules have been omitted because they are not
applicable or the required information is included in the consolidated financial statements or notes
thereto.
(3) Exhibits. The following exhibit index lists exhibits incorporated by reference, filed as part of
this annual report on Form 10-K, or furnished as part of this annual report on Form 10-K:
EXHIBIT INDEX
Exhibit No.
3.01
(1)
Description
Amended and Restated Certificate of Incorporation of the Company, and amendments
thereto
Amended and Restated Bylaws of the Company
Form of Common Stock Certificate
3.02
4.01
10.01
10.02
Transaction Systems Architects, Inc. 1996 Stock Option Plan
10.03
Transaction Systems Architects, Inc. 1997 Management Stock Option Plan
10.04
Transaction Systems Architects, Inc. Deferred Compensation Plan
10.05
10.06
Transaction Systems Architects, Inc. Deferred Compensation Plan Trust Agreement
10.07 (10) * Severance Compensation Agreements between Transaction Systems Architects, Inc.
(2)
(3)
(4) * Stock and Warrant Holders Agreement, dated as of December 30, 1993
(5) * ACI Holding, Inc. 1994 Stock Option Plan
(6) *
(7) *
(8) *
(9) *
and certain officers, including executive officers
10.08 (11) *
10.09 (12) *
10.10 (13) *
10.11 (14) * Stock Option Agreement between Transaction Systems Architects, Inc. and
Transaction Systems Architects, Inc. 1999 Stock Option Plan
Transaction Systems Architects, Inc. 1999 Employee Stock Purchase Plan
Transaction Systems Architects, Inc. 2000 Non-Employee Director Stock Option Plan
Gregory J. Duman
10.12 (15) *
10.13 (16) *
Transaction Systems Architects, Inc. 2002 Non-Employee Director Stock Option Plan
Third Amended and Restated Employment Agreement between Transaction Systems
Architects, Inc. and Gregory D. Derkacht
10.14 (16) * Amended and Restated Severance Compensation Agreement between Transaction
Systems Architects, Inc. and Gregory D. Derkacht
10.15 (17) * Severance Compensation Agreement between Transaction Systems Architects, Inc.
and certain officers, including executive officers
34
Exhibit No.
10.16 (18) * Severance Compensation Agreement (Change in Control) between Transaction
Description
Systems Architects, Inc. and certain officers, including executive officers
10.17 (19) *
Indemnification Agreement between Transaction Systems Architects, Inc. and certain
10.18
10.19
10.20
10.21
10.22
10.23
*
*
*
*
*
*
officers, including executive officers
Form of Stock Option Agreement for the Company’s 1994 Stock Option Plan (filed
herewith)
Form of Stock Option Agreement for the Company’s 1996 Stock Option Plan (filed
herewith)
Form of Stock Option Agreement for the Company’s 1997 Management Stock Option
Plan (filed herewith)
Form of Stock Option Agreement for the Company’s 1999 Stock Option Plan (filed
herewith)
Form of Stock Option Agreement for theCompany’s 2000 Non-Employee Director Plan
(filed herewith)
Form of Stock Option Agreement for theCompany’s 2002 Non-Employee Director Plan
(filed herewith)
10.24 (20) * Description of the 2005 Fiscal Year Management Incentive Compensation Plan
21.01
23.01
31.01
Subsidiariesof t he Registrant (filed herewith)
Consent of Independent Registered Public Accounting Firm (filed herewith)
Certification of Chief Executive Officer pursuant to S.E.C. Rule 13a-14, as adopted
31.02Certific
ation of Chief Financial Officer pursuant to S.E.C. Rule13a-14,asadopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.01
32.02
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
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 (furnished herewith)
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 (furnished herewith)
(1)
Incorporated by referenceto exhibit 3.1 to the registrant’s Registration Statement No. 333-113550
on Form S-8.
(2)Incor porated by referenceto exhibit 3.2 to the registrant’s Registration Statement No. 333-113550
on Form S-8.
(3)Incor porated by reference to exhibit 4.01 to the registrant’s Registration Statement No. 33-88292
on Form S-1.
(4)Incor porated by referenceto exhibit 10.09 to the registrant’s Registration Statement No. 33-88292
on Form S-1.
(5)Incor porated by referenceto exhibit 10.01 to the registrant’s Registration Statement No. 33-88292
on Form S-1.
(6)Incor porated by reference to exhibit 10.07 to the registrant’s annual report on Form 10-K for the
fiscal year ended September 30, 1996.
(7)Incor porated by reference to exhibit 10.24 to the registrant’s quarterly report on Form 10-Q for the
period ended March 31, 1997.
(8)Incor porated by reference to exhibit 4.1 to the registrant’s Registration Statement No. 333-67987
on Form S-8.
(9)Incor porated by reference to exhibit 4.2 to the registrant’s Registration Statement No. 333-67987
on Form S-8.
35
(10)Incor porated by reference to exhibit 10.32 to the registrant’s annual report on Form 10-K for the
fiscal year ended September 30, 1999.
(11)Incorp orated by reference to appendix A to the registrant’s Proxy Statement for the 2002 Annual
Meeting of Stockholders.
(12)Incor porated by reference to annex B to the registrant’s Proxy Statement for the 2004Annual
Meeting of Stockholders.
(13)Incor porated by reference to exhibit 10.33 to the registrant’s quarterly report on Form 10-Q for the
period ended June 30, 2000.
(14)Incor porated by referenceto exhibit 10.1 to the registrant’s Registration Statement No. 333-75964
on Form S-8.
(15)Incor porated by reference to annex A to the registrant’s Proxy Statement for the 2004 Annual
Meeting of Stockholders.
(16)Incor porated by reference to exhibit 10.1 to the registrant’scurrent report on Form 8-K filed on
September 29, 2004.
(17)Incor porated by reference to exhibit 10.15 to the registrant’s annual report on Form 10-K for the
fiscal year ended September 30, 2003.
(18)Incor porated by reference to exhibit 10.16 to the registrant’s annual report on Form 10-K for the
fiscal year ended September 30, 2003.
(19)Incor porated by reference to exhibit 10.17 to the registrant’s annual report on Form 10-K for the
fiscal year ended September 30, 2003.
(20)Incor porated by reference to exhibit 10.2 to the registrant’s Form 8-K/A, Amendment No. 2, filed
on December 13, 2004.
*Denotes
exhibit that constitutes a management contract, or compensatory plan or
arrangement.
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Transaction Systems Architects, Inc.:
We have audited
the accompanying consolidated balance sheets of Transaction Systems
Architects, Inc. and subsidiariesas of September 30, 2004 and 2003, and the related consolidated
statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of
the years in the three-year period ended September 30, 2004. These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, aswell asevaluatin g the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Transaction Systems Architects, Inc. and subsidiaries as of
September 30, 2004 and 2003, and the results of their operations and their cash flows for each of the
years in the three-year period ended September 30,2004,
in conformity with accounting principles
generally accepted in the United States of America.
Omaha, Nebraska
October 25, 2004
/s/ KPMG LLP
37
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
ASSETS
September 30,
2004
2003
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Billed receivables, net of allowances of $2,834 and $4,037, respectively. . . . . . . . . . .
Accrued receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoverable income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$169,632 $
—
44,487
11,206
11,524
230
6,901
243,980
8,251
1,454
46,706
22,943
2,124
$325,458
113,986
1,296
42,225
9,592
11,985
10,316
5,104
194,504
9,405
2,319
46,425
9,638
1,609
$ 263,900
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of debt — financing agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued employee compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued and other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt — financing agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,02
7 $
6,974
13,354
82,647
9,890
15,493
6,965
9,822
70,798
10,342
119,892 113,420
2,327 9,444
15,427 17,689
851
473
138,497 141,026
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred Stock, $.01 par value; 5,450,000 shares authorized; no shares issued and
outstanding at September 30, 2004 and 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class A Common Stock, $.005 par value; 50,000,000 shares authorized; 39,105,484
and 37,660,731 shares issued at September 30, 2004 and 2003, respectively. . . .
Class B Common Stock, $.005 par value; 5,000,000 shares authorized; no shares
issued and outstanding at September 30, 2004 and 2003. . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost, 1,476,145 shares at September 30, 2004 and 2003. . . . . . . .
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss, net of taxes. . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
196 188
—
(35,258)
254,715
(22,917)
(9,775)
186,961
$325,458
—
(35,258)
235,767
(69,602)
(8,221)
122,874
$ 263,900
The accompanying notes are an integral part of the consolidated financial statements.
38
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended September 30,
2003
2004
2002
Revenues:
Software license fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$157,402 $146,825
79,187
51,279
277,291
88,484
46,898
292,784
$158,453
74,213
52,001
284,667
Expenses:
Cost of software license fees. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of maintenance and services. . . . . . . . . . . . . . . . . . . . . . . .
Research and development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling and marketing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,996
57,380
38,007
61,109
56,478
31,053
62,479
35,029
25,500
61,350
35,373
54,482 57,352
56,037 55,563
—9,290
237,970
54,814
242,032
35,259
1,524
243,000
41,667
Other income (expense):
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other income(expense) . . . . . . . . . . . . . . . . . . . . . . . . . .
1,762
(1,435)
2,294
2,621
1,211
(2,998)
140
(1,647 )
1,667
(5,596)
(26)
(3,955)
Income before income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax provision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57,435
(10,750)
$46,685
33,612
(19,287)
$ 14,325
37,712
(22,443)
$ 15,269
Earnings per share information:
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,001
38,076
35,558
35,707
35,326
35,572
Earnings per share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1.
$1.
26 $0.40
23 $0.40
$
$
0.43
0.43
The accompanying notes are an integral part ofthe consolidated financial statements.
39
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(in thousands, except share amounts)
Balance, September 30, 2001 . . . .
Comprehensive income
information:
Net income. . . . . . . . . . . . . . . .
Other comprehensive income:
Foreign currencytranslation
adjustments . . . . . . . . . . . . .
Change in unrealized
investment holding loss . . . .
Comprehensive income. . . . . . .
Issuance of Class A Common
Stock pursuant toEmployee
Stock Purchase Plan. . . . . . . .
Exercisesof st ock options. . . . .
Tax benefit of stock options
Class A
Common
Stock
$ 183
—
—
—
—
—
exercised . . . . . . . . . . . . . . . .
Balance, September30, 2 002. . . .
—
183
AdditionalOther
Accumulated
TreasuryPaid-in
Stock
Capital
Accumulated
Deficit Loss
Comprehensive
$ (35,258)$ 2
27,126
$ (99,196)
$ (8,885)
Total
$ 83,970
—
—
—
—
—
—
—1,203
—73
—63
15,269
—
15,269
—
—
—
—
—
126
2,154
—
—
—
6,605)
126
2,154
17,549
1,203
73
63
102,858
(35,258)228,
465(83,927)
(
Comprehensive income
information:
Net income. . . . . . . . . . . . . . . .
Other comprehensive income:
Foreign currencytranslation
adjustments . . . . . . . . . . . . .
Change in unrealized
investment holding loss . . . .
Comprehensive income. . . . . . .
Issuance of Class A Common
Stock pursuant toEmployee
Stock Purchase Plan. . . . . . . .
Exercisesof st ock options. . . . .
Tax benefit of stock options
exercised . . . . . . . . . . . . . . . .
Stock optioncompensation. . . . .
Loss on redemption of
redeemable preferred stock of
subsidiary company. . . . . . . .
Issuance of Class A Common
Stock pursuant to redemption
of redeemable preferred stock
of subsidiarycompa ny. . . . . . .
Balance, September30, 2 003. . . .
Comprehensive income
information:
Net income. . . . . . . . . . . . . . . .
Other comprehensive income:
Foreign currencytranslation
adjustments . . . . . . . . . . . . .
Change in unrealized
investment holding loss . . . .
Reclassification adjustmentfor
loss realized in net income.
Comprehensive income. . . . . . .
Issuance of Class A Common
Stock pursuant toEmployee
Stock Purchase Plan. . . . . . . .
Exercisesof st ock options. . . . .
Tax benefit of stock options
—
—
—
—
5
—
—
—
—
—
—
0
—
—
—
—1,027
—4,72
—1,518
—62
—(125)—
14,325
—
14,325
—
—
—
—
—
—
(1,858)
242
—
—
—
—
—
(1,858)
242
12,709
1,027
4,725
1,518
62
(125)
—
188
—100
(35,258)235,76
7(69,602)
—
(
—
8,221)
100
122,874
—
—
—
—
—
8
—
—
—
—
—
—
—
—
—957
—13,106
46,685
—
46,685
—
—
—
—
—
(1,755)
(1,755)
77
124
—
—
77
124
45,131
957
13,114
exercised . . . . . . . . . . . . . . . .
Stock optioncompensation. . . . .
Balance, September30, 2 004. . . .
—
—
$ 196
—4,73
—147
$ (35,258)$ 2
8
54,715
—
—
$ (22,917)
—
—
$ (9,775)
4,738
147
$ 186,961
The accompanying notes are an integral part of the consolidated financial statements.
40
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating
$46,685
$ 14,325
$ 15,269
Year Ended September 30,
2003
2004
2002
activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale of marketable securities. . . . . . . . . . . . . . . . . . . . . . . . . . .
Non cash and other impairment charges. . . . . . . . . . . . . . . . . . . . . . . .
Impairment of goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit of stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Billed and accrued receivables, net. . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued employee compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current and noncurrent liabilities. . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of software and distribution rights . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of marketable securities. . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities. . . . . . . . . . . . .
Cash flows from financing activities:
Proceeds from issuance of Class A Common Stock. . . . . . . . . . . . . . . . .
Proceeds from exercises of stock options. . . . . . . . . . . . . . . . . . . . . . . . .
Payments on lines of credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from debt - financing agreements . . . . . . . . . . . . . . . . . . . . . . .
Payments on debt - financing agreements. . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities. . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate fluctuations on cash. . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of period. . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . . . . . . . . . . . . .
4,203 5,063
2,368
—
124
—
—
6,493
3,976 9,392
—
188
—
9,290
(8,743)
—
8,394
1,524
(3,054)
4,738
25,146 12,586
1,518
—
(1,837 )
(1,728)
(3,917 )
(279)
(1,255)
(340)
(3,829)
230
3,057 1,812
585
(1,775)
(19,832 )
3,114
319
37,950
28,004
3,869
(570)
(6,227)
(5,640)
2,682
11,281
74
78,973
(2,517 )
(602 )
—
2,515
720
116 1,359
(3,812)
(1,045)
5,429
237
550
50
461
6,743
477
58,091
(2,889)
(973 )
—
1,365
—
(2,497 )
957 1,027
1,203
13,114
—
—
(16,319)
(572 )
(2,820)
2,872
55,646
4,725
—
—
(19,243 )
(1,369)
(14,860)
73
(12,000)
7,600
(21,529)
225
(24,428)
2,886 (14)
26,092 55,890
113,986 87,894
$169,632 $
113,986 $
32,004
87,894
Supplemental cash flow information:
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,189
$
1,595
9,979
3,103 5,675
$ 7,758
The accompanying notes are an integral part of the consolidated financial statements.
41
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summaryof Significant Accounting Policies
Nature of Business
Transaction Systems Architects, Inc., a Delawarecorpo ration, and its subsidiaries(collectively
referred to as “TSA” or the “Company”), develop, market, install and support a broad line of software
products and s ervicesprim arily focused on facilitating electronic payments. In addition to its own
products, the Company distributes, or acts as a sales agent for, software developed by third parties.
These products and services are used principally by financial
retailers, and
electronic-payment processors, both in domestic and international markets.
institutions,
The Company derives a substantial portion of its total revenuesfro m licensing its BASE24 family
of software products and providing services and maintenance related to those products. During fiscal
2004, 2003 and 2002, approximately 59%, 61%, and60%,
respectively, of the Company’s total
revenueswere derived from licensing the BASE24 product line, which does not include the BASE24-es
product, and providing related services and maintenance. A substantial majority of the Company’s
licenses are time-based (“term”) licenses.
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. Certain
amounts previously reported have been reclassified to conform to the current year presentation.
Use of Estimates in Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in theUnited 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.
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,” and SAB 104,
“Revenue Recognition.” For software license arrangements for which services rendered are not
considered essential to the functionality of the software, the Company recognizes revenue upon
delivery, provided (1) there is persuasive evidence of an arrangement, (2) collection of the fee is
considered probable and (3) the fee is fixed or determinable. In most arrangements, vendor-specific
objective evidence (“VSOE”) of
fair value doesnot 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 servicesare performed, with the residual
difference between the total arrangement fee and revenues allocated to undelivered elements being
allocated to the delivered element.
42
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
“Long-Term Construction-Type
accordance with Accounting Research Bulletin (“ARB”) No. 45,
“Accounting for Performance of
Contracts,” and the relevant guidance provided by SOP 81-1,
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 isreferred 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 servicesover t he development and implementation period, with the percentage of
completion generally measured by the percentage of labor hours incurred to-date to estimated total
labor hours for each contract. For those contracts subject to percentage-of-completion contract
accounting, estimates of total revenue under the contract exclude amounts due under extended
payment terms. In certain cases, the Company provides its cus tomers with extended terms where
payment is deferred beyond when the services are rendered. Because the Company is unable to
demonstrate a history of enforcingpayment
terms under such arrangements without granting
concessions, the Company excludesrevenues due on extended payment terms from its current
percentage-of-completion computation because it cannot be presumed that those feesare fixed or
determinable.
For software license arrangements in which a significant portionof t he fee is due more than 12
months after delivery, the software license fee isde emed 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, providedall 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 iscollected ,
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 renewalsas a percentage of the softwarelicense fees. In other products, theCompany
determines VSOE by reference tocontractual
renewals, when the renewal terms aresubst antive. 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 theli kelihood 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
43
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
less-established or newly released software products that do not have a product history. TheCompany
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 asa s ales 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,
earnsa fixed commission, and assumes credit risk only to the extent of its commission. For software
license arrangements in which the Company acts asa 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, providedall other
revenue recognition criteria have been met. For software license arrangements in which the customer
is charged variable software license fees based on usage of the product, the Company recognizes
revenue as usage occurs over the term of the licenses, provided all other revenue recognition criteria
have been met.
Maintenance Fees. Revenues for PCS are recognized ratably over the maintenance term
specified in the contract. In arrangements where VSOE of fair value of PCS cannot be determined (for
example, a time-based 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 professionalservices are generally recognized as the related services are
performed. For those arrangements in which services revenue is deferred and theCompany
determines that the costs of servicesare 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
for software licenses, maintenance and/or
customers, and payments received from customers,
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 conditionsfor revenue recognition have not been met.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or
less to be cash equivalents.
Concentrations of Credit Risk
In the normal course of business, the Company is exposed to credit risk resulting from the
possibility that a loss may occur from the failure of another party to perform according to the terms of a
contract. The Company regularly monitors credit risk exposures. Potential concentration of credit risk in
44
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
receivables with respect
the Company’s
financial services and
to
telecommunications industries, as well as with retailers, processors andnetwor ks is mitigated by the
Company’s credit evaluation procedures and geographical dispersion of sales transactions. The
Company generally does not require collateral or other security to support accounts receivable. The
following reflects activity in the Company’s allowance for uncollectible accounts receivable for the fiscal
years ending September 30 (in thousands):
the banking, other
Balance, beginning of period. . . . . . . . . . . . . . . . . . . . .
Provision charged to general and administrative
expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts written off, net of recoveries. . . . . . . . . . . . .
Balance, end of period. . . . . . . . . . . . . . . . . . . . . . . . . .
2004
$4,037
2003
$ 3,613 $
2002
4,180
(1,247)
44
$2,8 34
532
(108)
2,346
(2,913 )
$4,037 $ 3 ,613
Property and Equipment
Property and equipment are stated at cost. Depreciation of these assets iscomputed using the
straight-line method over the following estimated useful lives:
Leasehold Improvements
Computer Equipment
Office Equipment
Furniture and Fixtures
3 years
3-5 years
5 years
7 years
Assets under capital leases are amortized over the shorter of the asset life or the lease term.
Software
Software consists of internally-developed software and purchased software. In accordance with
Statement of Financial Accounting Standard (“SFAS”) No. 86, “Accounting for Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed,” the Company capitalizes costs related to certain
feasibility. The
internally-developed software when the resulting product reaches technological
Company determines technological feasibility when it has a detailed program design of a computer
software product that takes product function, feature and technical requirements to their most detailed,
logical form and is ready for coding. Purchased software consists of software to be marketed externally
that was acquired primarily as the result of a business acquisition (“acquired software”) and costs of
computer software obtained for internal use that were capitalized in accordance with SOP 98-1,
“Accounting for the Costs of ComputerSoftware Developed or Obtained for Internal Use” (“internal-use
software”).
Amortization of internally-developed software costs to be sold or marketed begins when the
product is available for licensing to customers and is computed separately for each product as the
greater of (a) the ratio of current gross revenue for the product to the total of current and anticipated
gross revenue for the product or (b) the straight-line method over three years. Due to competitive
pressures, it may be possible that the estimates of anticipated gross revenue or remaining estimated
economic life of the software product will be reduced significantly. As a result, the carrying amount of
the software product may be reduced accordingly. Amortization of acquired and internal-use software
is generally computed using the straight-line method over its estimated useful life of three years.
45
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill and Other Intangibles
In accordance with SFAS No. 142,
Intangible Assets,” the Company
assesses goodwill and other
impairment at least annually. During this
assessment, management relies on a number of factors, including operating results, business plans
and anticipated future cash flows.
intangible assets for
“Goodwill and Other
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. An
impairment loss is recorded if the sumof t he futurecash flows expected to result from the use of the
asset (undiscounted and without interest charges) is less than the carrying amount of the asset. The
amount of the impairment charge is measured based upon the fair value of the asset.
Debt — Financing Agreements
In the past, as an element of its cash management program, theCompany periodically soldrights
to future payment streams under software license arrangements with extended payment terms. In
accordance with Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force (“EITF”)
Issue No. 88-18, “Sales of Future Revenues,” the Company recorded the proceeds received from
these financing agreements as debt. The Company reduces the debt principal as payments are made.
Interest on the debt accrues monthly and is computed using the effective interest method.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans under the intrinsic value method
in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
to Employees,” and follows the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation,” as amended by SFAS No. 148,
“Accounting for Stock-Based Compensation —
TransitionandDisclosu re.” The Company calculates stock-based compensation pursuant to the
disclosure provisionsof SFAS No. 123 using the straight-line method over the vesting period of the
option. Had compensation cost for the Company’s stock-based compensation plans been determined
based on the fair value at the grant date of the stock options awarded under those plans, consistent
with the fair value method of SFAS No. 123, the Company’s net income and earnings per share for
fiscal 2004, 2003 and 2002 would have approximated the following pro forma amounts (in thousands,
except per share amounts):
Net income:
As reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct: stock-based employee compensation expense
determined under the fair value method for all awards, net of
related tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: stock-based employee compensation expense recorded
2004
2003
2002
$46,685
$14,325
$15,269
(2,449)
(5,659)
(3,679)
under the intrinsic value method, net of related tax effects. . . .
Pro forma. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9037
$44,326 $
—
8,703 $ 11,590
Earnings per share:
Basic, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic, pro forma. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted, as reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted, pro forma. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1.
$1.
$1.
$1.
26 $
20
$
23 $
16 $
0.40
0.24
0.40
0.24
$
$
$
$
0.43
0.33
0.43
0.33
46
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of each option grant was estimated on the dateof grant using the Black-Scholes
the following
option-pricing model, a pricing model acceptable under SFAS No. 123, with
weighted-average assumptions:
Expected life. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.2
20042003
3.4
2.9%2.8% 3
93%85%
—
—
2002
6.0
.2 %
45%
—
The effects of applying SFAS No. 123 in t his pro forma disclosure are not indicative of future
amounts. Additional future awards are anticipated.
Translation of Foreign Currencies
The Company’s foreign subsidiaries use the localcurrency of the countries in which they are
located as their functional currency. Their assets and liabilities are translated into U.S. dollars at the
exchange rates in effect at the balance sheet date. Revenuesand expenses are translated at the
average exchange rates during the period. Translation gains and losses are reflected in the
consolidated financial statements as a component of accumulated other comprehensive income.
Transaction gains and losses,
including those related to intercompany accounts, that are not
considered to be of a long-term investment natureare included in the determination of net income.
Transaction gains and losses, including those related to intercompany accounts, that are considered to
be of a long-term investment nature are reflected in the consolidated financial statements as a
component of accumulated other comprehensive income.
Income Taxes
The provision for income taxes is computed using the asset and liability method, under which
deferred tax assets and liabilities are recognized for the expected future tax consequences of
temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred
tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
The Company periodically assesses its tax exposures and establishes, or adjusts, estimated
reserves for probable assessments by taxing authorities, including the Internal Revenue Service, and
various foreign and state authorities. Such reservesrepresent the estimated provision for income taxes
expected to ultimately be paid.
Recent Accounting Pronouncements
In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition,”
which revises or rescinds portions of the interpretive guidance contained in SAB 101, “Revenue
Recognition in Financial Statements,” related to multiple element revenue arrangements, which was
superceded as a result of the issuance of Financial Accounting Standards Board (“FASB”) Emerging
Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple
Deliverables.” The revenue recognition principles of SAB 101 remain largely unchanged by the
issuance of SAB 104. The adoption of SAB 104 did not have a material impact on the Company’s
financial position or results of operations.
47
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The FASB recently issued a proposed accounting standard that would eliminate the ability to
account for share-based compensation transactions using APB Opinion No. 25 and generally would
require instead that such transactions be accounted for using a fair-value-based method. The
applied prospectively for fiscal periods beginning after
proposed accounting standard wouldbe
June 15, 2005 if the standard is issued as currently proposed. The Company will continue to monitor
the progress of the issuance of this accounting standard and its potential impact on t he Company’s
financial position or results of operations.
2. Marketable Securities
The Company accounts for
its investments in marketable equity securitiesin accordance with
SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The Company’s
portfolio historically has consisted of securities classified as available-for-sale, which are recorded at
fair market values based on quoted market prices. Net unrealized gains and losses on marketable
securities (excluding other than temporary losses) are reflected in the consolidated financial
statements as a component of accumulated other comprehensive income. Net realized gains and
losses are computed on the basis of average cost and are recognized when realized.
The Company substantially liquidated its marketable securities portfoliodurin g fiscal 2004.
Components of the Company’s marketable securities portfolio as of September 30, 2003 were as
follows (in thousands):
Deferred compensation plan assets. . . . . . . . . . . . . . . . . . . . . . .
S1 Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nestor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TransAxis, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2003
Fair Value
Cost
$1,072
$1,255
217
205
816
17
$1,497
3
$1,296
The Company previously had a Deferred Compensation Plan (the “Plan”) that allowed certain
management personnel to defer receipt of certain compensation amounts until the earlier of a
preselected future date or the time of their departure from the Company. The Plan allowed participants
to invest in a limited variety of mutual funds that were held by the Company for the purpose of funding
deferred compensation liabilities. At September 30, 2003, the Plan had a liability to participants of $1.3
million and assets held by the Plan valued at $1.1 million. Final distributions of deferred compensation
amounts were made in fiscal 2004 which resulted in realized losses of $0.1 million. There were neither
assets nor liabilities remaining under the Plan as of September 30, 2004.
As of September 30, 2003, the Company owned 40,561 shares of S1 Corporation (“S1”) common
stock. S1 is a global provider to banks, credit unions, insurance providers and investment firms of
enterprise softwaresolutions. The Company soldits 40,561 shares of S1 common stock in fiscal 2004,
resulting in an insignificant loss on sale of marketable securities.
As of September 30, 2003, the Company owned 8,500 shares of Nestor, Inc. (“Nestor”) common
stock. Nestor is a provider of neural-network solutions for financial,
Internet and t ransportation
industries. The Company distributes Nestor’s PRISM intelligent fraud detection product. The Company
sold its 8,500 shares of Nestor common stock in fiscal 2004, resulting in an insignificant gain on sale of
marketable securities.
48
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During fiscal 2003, Digital Courier Technologies, Inc. (“DCTI”) changed its name to TransAxis, Inc.
(“TransAxis”). As of September 30, 2004 and 2003, the Company owned 17,135 shares of TransAxis
common stock. TransAxis suppliesfin ancial
institutions, businesses and major web portals with
e-commerce, payments processing and content delivery. During fiscal 2004, the TransAxis shares
were written down to zero fair value.
Net unrealized holding losses at September 30, 2003 were $0.2 million. The Company had
provided a deferred tax asset valuation allowance of $0.1 million for deferred tax assets for unrealized
capital losses at September 30, 2003.
3. Property and Equipment
Property and equipment consists of the following (in thousands):
Computer equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office furniture and fixtures. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated depreciation and amortization. . . . . . . . .
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30,
2004
2003
$48,162 $ 45,894
8,714
6,644
214
61,466
(52,061)
$ 9,405
9,375
6,960
237
64,734
(56,483)
$ 8,251
4. Goodwill and Software
Changes in the carrying amount of goodwill attributable to each reporting unit with goodwill
balances during fiscal 2004, 2003 and 2002 were as follows (in thousands):
Balance, September 30, 2001. . . . . . . . . . . . .
Foreign currency translation adjustments . . .
Purchase price adjustment. . . . . . . . . . . . . . .
Impairment adjustments. . . . . . . . . . . . . . . . . .
Balance, September 30, 2002. . . . . . . . . . . . .
Foreign currency translation adjustments . . .
Impairment adjustments. . . . . . . . . . . . . . . . . .
Other (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, September 30, 2003. . . . . . . . . . . . .
Foreign currency translation adjustments . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, September 30, 2004. . . . . . . . . . . . .
ACI
Worldwide
$15,862
Insession
Technologies
$ 31,822
MessagingDirect
Ltd.
$9,687
240—296
—(436
—
16,102
346—
—
—(1
16,44829,977
388
(107)—
$16,729$ 2
)—(436)
—
31,3868,
8
—
(1,524)
459
31
(9,290)
,409)—(1,409)
—46,425
—
—
—
9,977
$ —
Total
$57,371
536
(1,524)
55,947
1,177
(9,290)
388
(107)
$46,706
(1) The Company settled certain acquired liabilities, resulting in a corresponding reduction of goodwill amounts.
Goodwill is assessed for impairment at each fiscal year-end at the reporting unit level. During this
assessment, management relies on a number of factors, including operating results, business plans
and anticipated future cash flows. The initial step requires the Company to determine the fair value of
each reporting unit and compare it to the carrying value, including goodwill, of such reporting unit. If the
49
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
fair value exceeds the carrying value, no impairmentloss is to be recognized. However, if the carrying
value of the reporting unit exceeds its fair value, thegoodwill of this unit may be impaired. The amount
of impairment, if any, is then measured based upon the estimated fair value of goodwill at the valuation
date.
In fiscal 2004, 2003 and 2002, the Company updated its impairment test for each reporting unit.
Based on those analyses, which included updated valuations performed by an independent consultant
in fiscal 2003 and 2002, impairment losses of $9.3 million and $1.5 million were recognized in fiscal
2003 and 2002, respectively, for the MessagingDirect Ltd. (“MDL”) reporting unit. In fiscal 2002, the
impairment within this reporting unit resulted primarily from overall softness in discretionary information
technology spending and slower than expected adoption of secure document delivery technology. In
fiscal 2003, the impairment resulted primarily fromthe business decision to reduce the Company’s
commitment to the MDL reporting unit due to continued slower than expected adoption of secure
document delivery technology. The MDL reporting unit is included within the ACI Worldwide business
unit.
The carrying amount and accumulated amortization of the Company’s intangible assets that were
subject to amortization at each balance sheet date, consisting only of software, were as follows (in
thousands):
Internally-developed software. . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased software. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated amortization. . . . . . . . . . . . . . . . . . . . . . . .
Software, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30,
2004
$15,929
2003
$ 15,725
45,596 44,186
61,525
(60,071)
59,911
(57,592 )
$ 2,319
$1,454
The Company did not capitalize software development costs in fiscal 2004, 2003 or 2002. The
increase in carrying amount of internally-developed software resulted primarily from foreign currency
translation adjustments. Amortization of software is computed using the greater of the ratio of current
revenues to total estimated revenues expected to be derived from the software or the straight-line
method over an estimated useful life of three years. Software amortization expense recorded in fiscal
2004, 2003 and 2002 totaled $1.8 million, $2.8 million and $7.4 million, respectively. The majority of
these software amortization expense amounts are reflected in either cost of software license fees or
general and administrative expenses in the consolidated statements of operations. Based on
capitalized software at September 30, 2004, and assuming no impairment of these software assets,
estimated amortization expense for each of the five succeeding fiscal years is as follows (in
thousands):
2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$707
451
279
16
1
5. Debt — Financing Agreements
During fiscal 2002, the Company sold the rights to future payment streams under software license
arrangements with extended payment terms to financial institutions and received cash of approximately
50
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$7.6 million. The amount of the proceeds received from the financing agreements is
typically
determined by applying a discount rate to the gross future payments to be received from the customer.
The discount rates used to determine the proceeds ranged from6.5% t o 7.75% in fiscal 2002. The
Company did not sell any rights to future payment streams under software license arrangements with
extended payment terms during fiscal 2004 or 2003.Durin g fiscal 2004, 2003 and 2002, the Company
recorded interest expense of $1.4 million, $2.9 million and $5.0 million, respectively, related to these
financing agreements.
6. Corporate Restructuring Charges and Asset Impairment Losses
During fiscal 2001, the Company closed, or significantly reduced the size of, certain product
development organizations and geographic sales offices, resulting in restructuring charges and asset
impairment losses. The following table shows activity during fiscal 2004, 2003 and 2002 related to
these exit activities (in thousands):
Balance, September 30, 2001. . . . . . . . . . . . . . .
Amounts paid during fiscal 2002. . . . . . . . . . . . .
Adjustments to previously recognized liabilities. .
Balance, September 30, 2002. . . . . . . . . . . . . . .
Amounts paid during fiscal 2003. . . . . . . . . . . . .
Balance, September 30, 2003. . . . . . . . . . . . . . .
Amounts paid during fiscal 2004. . . . . . . . . . . . .
Balance, September 30, 2004. . . . . . . . . . . . . . .
Termination
Benefits
Lease
Obligations
$30$1,476
(30)
—(68)
—1,047
—(366
—681
—(1
(361)
)
6
33 )
$ —
$548
Total
$1,506
(391)
(68)
1,047
(366 )
81
(133 )
$ 548
The liability for lease obligations relates to the abandonment or reduction of office facilities with
lease terms ending on various dates through March 2005, net of expected third-party purchases or
sub-leases, and an estimated lease termination loss for the corporate aircraft. The Company continues
to seeksu bleases for certain of the properties aswell as an exit to the corporate aircraft lease. Final
settlement of these obligations may result in other adjustments to these liabilities.
During fiscal 2003, the Company reduced thesizeof
certain product development organizations.
These actions resulted in severance-related restructuring charges of $2.0 million, which are reflected in
operating expenses in the accompanying fiscal 2003 statement of operations. The allocation of these
charges was as follo ws: $1.0 million in cost of software license fees, $0.7 million in cost of
maintenance and services, $0.1 million in selling and marketing, and $0.2 million in general and
administrative. The Company terminated the employment of 50 employees during fiscal 2003 aspart of
this pro cess, including 31 employees in the ACI Worldwide business unit and 19 employees in the
IntraNet business unit. The following table shows activity related to these exit activities (in thousands):
Fiscal 2003 restructuringcharges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts paid during fiscal 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, September 30, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts paid during fiscal 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to previously recognized liabilities. . . . . . . . . . . . . . . . . . . . .
Balance, September 30, 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Termination
Benefits
$ 1,996
(225)
1,771
(1,612 )
(159)
$ —
51
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Common Stock and Earnings Per Share
Options to purchase shares of Class A Common Stock (“Common Stock”) atan exercise price of
one cent per share, received by shareholders of MDL as part of its acquisition by the Company during
fiscal 2001, that have not yet been converted into Common Stock are included in Common Stock for
presentation purposes on the September 30, 2004 and 2003 consolidated balance sheets, and are
included in common shares outstanding for earnings per share (“EPS”) computations for fiscal 2004,
2003 and200 2. Included in Common Stock are 3,645 and 6,248 MDL options, respectively, as of
September 30, 2004 and 2003.
EPS has been computed in accordance with SFAS No. 128, “Earnings Per Share.” To compute
earnings per share amounts for fiscal 2003, net income available to common shareholders has been
reduced by $0.1 million related to loss on redemption of a subsidiary company’s preferred stock. Basic
EPS is calculated by dividing net income available to common stockholders (the numerator) by the
weighted average number of common sharesoutstanding 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 differencesbet ween the basic and diluted EPS
denominators for fiscal 2004, 2003 and 2002, which amounted to approximately 1,075,000 shares,
149,000 shares and 246,000 shares, respectively, were due to the dilutive effect of t he Company’s
outstanding stock options.Antid ilutive shares totaling 716,000 shares, 5,019,000shares and 1,583,000
shares, respectively, were excluded from the computations of diluted EPS for fiscal 2004, 2003 and
2002 because the exercise prices of the corresponding stock options were greater than the average
market price of the Company’s common shares during the respective periods.
8. Other Income/Expense
Other income (expense) iscomprised of the following items in fiscal 2004, 2003 and 2002 (in
thousands):
2004
2003
2002
Other than temporary impairments of marketable
equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain onsaleof Regency Systems, Inc.. . . . . . . . . . . . . .
Foreign currency transaction gains (losses) . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ — $(8,267)
8,743
—
(198)
310
(304)
(170)
(26)
$ 140
—
2,637
(343)
$2,294
$
During fiscal 2002, the Company recorded non-operating, non-cash charges to earnings totaling
$8.3 million for other than temporary declines in the market values of its investments in S1, Nestor and
DCTI.
On February 14, 2002, the Company sold its RegencySystems, Inc. subsidiary to S1 for shares of
S1 common stock and cash. In connection with this transaction, the Company recorded a gain of $8.7
million. S1 shares were included in the Company’s marketable securities portfolio.
52
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Comprehensive Income
The Company discloses comprehensive income information in accordance with SFAS No. 130,
“Reporting Comprehensive Income,” which establishes standards for
reporting and display of
comprehensive income and its components in a financial statement for the period in which they are
recognized. The Company’s components of accumulated other comprehensive income/loss were as
follows (in thousands):
Balance, September 30, 2001. . . . . . . . . . . .
Fiscal 2002 activity. . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for loss
included in net income. . . . . . . . . . . . . . . .
Balance, September 30, 2002. . . . . . . . . . . .
Fiscal 2003 activity. . . . . . . . . . . . . . . . . . . . .
Balance, September 30, 2003. . . . . . . . . . . .
Fiscal 2004 activity. . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for loss
included in net income. . . . . . . . . . . . . . . .
Balance, September 30, 2004. . . . . . . . . . . .
Foreign
Currency
Translation
Adjustments
$(6,288)$
Unrealized
Investment
Holding
Loss
(2,597)$
126 (6,133)
Accumulated
Other
Comprehensive
Income (Loss)
(8,885)
6,007 )
(
—
(6,162)
(1,858)
(8,020)
(1,755)
8,2878,
(443)
2 42(1,616
(201)
287
(6,605)
)
(8,221)
7 7(1,678)
—
$(9,775)
124124
$ —
$(9,775)
Since the Company has established an asset valuation allowance against its net deferred tax
assets, the components of accumulated other comprehensive income have not been tax effected.
10. Segment Information
The Company has three operating segments, referred to as business units. These three business
units are ACI Worldwide, Insession Technologies and IntraNet. ACI Worldwide products represent the
Company’s largest product line and include its most mature and well-established applications, which
are used primarily by financial institutions, retailers and e-payment processors. Its products are used to
route and process transactions for automated teller machine networks; process transactions from
point-of-sale devices, wireless devices and the Internet; control fraud and money laundering; authorize
checks; establish frequent shopper programs; automate transaction settlement, card management and
claims processing; and issue and manage multi-functional applications on smart cards. Insession
Technologies products facilitate communication, data movement, monitoring of systems, and business
process automation across computing systems involving mainframes, distributed computing networks
and the Internet. IntraNet products offer high value payments processing, bulk payments processing,
global messaging and continuous link settlement processing.
53
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s chief operating decision makers review financial
information presented on a
consolidated basis, accompanied by disaggregated information about revenues and operating
income/loss by business unit. The Company does not track assets by business unit. Nosingle
customer accounted for more than 10% of the Company’s consolidated revenues during fiscal 2004,
2003 or 2002. The following are revenues and operating income for these business units for fiscal
2004, 2003 and 2002 (in thousands):
Revenues:
ACI Worldwide . . . . . . . . . . . . . . . . . . . . . . . . . .
Insession Technologies. . . . . . . . . . . . . . . . . .
IntraNet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income:
ACI Worldwide . . . . . . . . . . . . . . . . . . . . . . . . . .
Insession Technologies. . . . . . . . . . . . . . . . . .
IntraNet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
2003
2002
$224,020
37,711
31,053
$ 292,784
$ 206,408
33,086
37,797
$ 277,291
$ 211,835
34,203
38,629
$ 284,667
$38, 730
9,972
6,112
$ 54,814
$ 22,060
7,221
5,978
$ 35,259
$ 31,002
7,203
3,462
$ 41,667
Most of the Company’s products are sold and supported through distribution networks covering
the geographic regions of the Americas, Europe/Middle East/Africa (“EMEA”) and Asia/Pacific. The
following are revenues for these geographic regions for fiscal 2004, 2003 and 2002 and long-lived
assets within these geographic regions at each balance sheet date (in thousands):
2004
2003
2002
Revenues:
United States. . . . . . . . . . . . . . . . . . . . . . . . . . .
Americas —other . . . . . . . . . . . . . . . . . . . . . . .
Total Americas. . . . . . . . . . . . . . . . . . . . . . . .
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia/Pacific. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$120,474
38,022
158,496
97,951
36,337
$ 292,784
Long-lived assets:
United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Americas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Americas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia/Pacific. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,661
155,207 166,63
$120,546 $ 120,163
46,467
0
89,703
28,334
$ 284,667
88,680
33,404
$ 277,291
September 30,
2004
2003
$49,349
2 ,572
51,921
5,929
6 85
$ 58,535
$ 51,227
2,426
53,653
5,410
695
$ 59,758
11. Stock-Based Compensation Plans
Employee Stock Purchase Plan
Under the Company’s 1999 Employee Stock Purchase Plan (the “ESPP”), a total of 1,500,000
sharesof t he Common Stock(“Shares”) have been reserved for issuance to eligible employees of the
54
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company and its subsidiaries. Under the ESPP, participating employees are permitted to designate up
to the lesser of $25,000 or 10% of their annual base compensation for the purchase of Shares. The
price for Sharespurchased under the ESPP is 85% of the lower of the Shares’ market value on either
the first or last day of each three-month participation period. Purchases made under the ESPP are
made one calendar month after the end of each fiscal quarter. Shares issued under the ESPP during
fiscal 2004, 2003 and 2002 totaled 66,254, 173,163 and 145,366, respectively.
Stock Incentive Plans
The Company has a 2002 Non-employee Director Stock Option Plan whereby 250,000 shares of
the Common Stock have been reserved for issuance to eligible non-employee directors of the
Company. The stock options are granted at a price equal to the fair market value of the Common Stock
at the time of the grant. The term of the outstanding options is ten years. Options granted on or after
March 9, 2004 become vested on the first anniversary of the date of grant, whereas options granted
prior to March 9, 2004 vest annually over a period of three years.
On August 1, 2001, the Company announced a voluntary stock option exchange program (the
“Exchange Program”) offering to exchange all outstanding options to purchase shares of Common
Stock granted under the 1994 Stock Option Plan, 1996 Stock Option Plan and 1999 Stock Option Plan
held by eligible employees or eligible directors for new options under the same option plans. The
Exchange Programrequired any person tendering an option grant for exchange to also tender all
subsequent option grants with a lowerexercise price received by that person during the six months
immediately prior to the date the options accepted for exchange are cancelled. Options to acquire a
total of 3,089,100 sharesof Common Stock with exercise prices ranging from $2.50 to $45.00 were
eligible to be exchanged under the Exchange Program. The offer expired on August 28, 2001, and the
Company cancelled 1,946,550 shares tendered by578 employees. As a result of the Exchange
Program, the Company granted replacement stock options to acquire 1,823,000 shares of Common
Stock at an exercise price of $10.04. The difference between the number of shares cancelled and the
number of shares granted relates to options cancelled by employees who terminated their employment
with the Company between the cancellation date and regrant date. The exercise price of the
the fair market value of the Common Stock on thegrant date of the new
replacement optionswas
options, which was March 4, 2002 (a date at least six months and one day after the date of
cancellation). The new shareshave a vesting schedule of 1/18per month beginning on the grant date
of the new options, except for options tendered by executive officers under the 1994 Stock Option
Plan, which vest 25% annually on each anniversary of the grant date of the new options. The
Exchange Program was designed to comply with FASB Interpretation No. 44, “Accounting for Certain
Transactions Involving Stock Compensation,” for fixed plan accounting.
On May 8, 2001, the Company entered into a stock option agreement with its then Chairman of
the Board of Directors, GregoryJ. Duman, whereby 25,000 shares of Common Stock have been
reserved for issuance to Mr. Duman. Shareholder approval was not required nor received related to
adoption of this agreement. The stock option was granted at a price equal to the fair market value of
the Common Stock at the time of grant. The term of the outstanding option is ten years. The option
vested monthly over a period of six months.
During 2001, the Company adopted the MDL Amended and Restated Employee Share Option
Plan (the “MDL Plan”). Shareholder approval was not required nor received related to adoption of this
plan. As adopted, options outstanding under the MDL Plan were converted at the time of the MDL
acquisition to options to purchase 167,980 shares of Common Stock. These options have an exercise
price of one cent per share of Common Stock and were included in the determination of purchase price
55
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
for the MDL acquisition. The Options became 100%vested upon the acquisition and have a term of 8
years from the original date of grant by MDL.
The Company has a 2000 Non-employee Director Stock Option Plan whereby 25,000 shares of
Common Stock have been reserved for issuance to eligible non-employee directors of the Company.
Shareholder approval was not required nor received related to adoption of this plan. The stock options
are granted at a price equal to 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 vest annually over a period of three years.
The Company has a 1999 Stock Option Plan and a 1996 Stock Option Planwhereby a total of
4,000,000 and 1,008,000 shares, respectively, of Common Stock have been reserved for issuance to
eligible employees of the Company and its subsidiaries and, in the case of the 1996 Plan, non-
employee members of the Board of Directors. As a matter of Company policy, stock options are
granted at an exercise price not less than the fair market value of the Common Stock at the time of the
grant. The term of the outstanding options is ten years. The options generally vest annually over a
period of three years for the 1999 Stock Option Plan and four years for the 1996 Stock Option Plan.
The Company has a 1997 Management Stock Option Plan whereby1,050,00 0 sharesof Common
Stock have been reserved for issuance to eligible management employees of the Company and its
subsidiaries. The stock options are granted at a price not less than the fair market value of the
Common Stock at the time of the grant and requirethe participant to pay $3 for each share granted.
The term of the outstanding optionsis ten years. The options vest annually over a period of four years.
The Company has a 1994 Stock Option Plan whereby 1,910,976 shares of Common Stock have
been reserved for issuance to eligible employees of the Company and its subsidiaries. The stock
options are granted at a price set by the Board of Directors provided that the minimum price shall be
$2.50 per share for 955,488 sharesand
$5.00 per share for 955,488 shares. The term of the
outstanding options is ten years. The stock options vest ratably over a period of four years.
A summary of stock options iss ued under the Stock Incentive Plans previously described and
changes during the years ending September 30 are as follows:
Outstanding, beginning of
period. . . . . . . . . . . . . . . .
Granted. . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . .
Cancellations. . . . . . . . . . . .
Outstanding, end of period. .
Options exercisable at end
of year . . . . . . . . . . . . . . . .
Shares available on
September 30 for options
that may be granted . . . .
Weighted-average grant
date fair value of options
granted during the year .
2004
Shares
Under
Option
Weighted
Average
Exercise
Price
Year Ending September 30,
2003
Shares
Under
Option
Weighted
Average
Exercise
Price
2002
Shares
Under
Option
5,200,046$
275,400
(1,391,302)
12.32
18.28441,00
5,876,557
0
9.47(603,215)
(283,870)20.79
3,800,274$
13.165,200,046
(514,296)
$12.642,178,108
9.42
8.03(35,295
3,988,811
)
(255,067 )
5,876,557 $
18.55
$12.32
Weighted
Average
Exercise
Price
$17.83
10.09
2.37
19.81
12.64
2,571,726 $13.88
3,367,637 $
13.52
2,314,365
$15.60
923,563
915,093
913,77
8
$18.28
$ 9.42
$
10.09
56
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes information about stock options outstanding at September 30,
2004:
Options OutstandingOptions
Exercisable
Range of Exercise Prices
$0.01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5.00 to $8.25. . . . . . . . . . . . . . . . . . . . .
$9.72 to $9.80. . . . . . . . . . . . . . . . . . . . .
$10.04. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10.24 to $10.25. . . . . . . . . . . . . . . . . . .
$10.28. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10.78 to $17.00 . . . . . . . . . . . . . . . . . . .
$18.00 to $21.38. . . . . . . . . . . . . . . . . . .
$24.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$25.06 to $38.75. . . . . . . . . . . . . . . . . . .
Weighted
Average
Weighted
RemainingAverageAverage
ContractualExerciseNumber
Number
OutstandingLife
3,645
195,280
359,600
762,890
185,000
1,080,167
333,576
275,800
387,500
216,816
3,800,274
3.59
7.82
7.59
7.14
8.79
7.62
6.45
9.10
2.43
3.37
6.82
Weighted
Exercise
Price
$ 0.01
6.32
9.79
Price
Exercisable
$ 0.013,645
6.3175,652
9.79152,933
10.04757,55
10.24
10.28650,907
13.09279,651
18.28400
24.00
27.22
$13.16
387,500
216,816
2,571,726
6 10.04
46,666 10.24
10.28
13.32
21.38
24.00
27.22
$13.88
in
In fiscal 2004 and 2003, the Company recognized $147,000 and $62,000, respectively,
compensation expenses related to the appreciation in stock value for 160,000 options between the
grant date and the date the options were ratified by the Compensation Committee. No compensation
expense has been recognized in the Company’s fiscal 2002 consolidated statements of operations
related to its stock-based compensation plans.
12.Employee Benefit Plans
TSA 401(k) Plan
The TSA 401(k) Plan isa defined contribution plan covering all domestic employees of TSA.
Participants may contribute up to 60% of their pretax annual compensation up to a maximum of
$13,000 (for employees who are under the age of 50 on December31, 2 004) or a maximum of
$16,000 (for employees aged 50 or older on December 31, 2004). The Company matches participant
contributions160% on every dollar deferred to a maximum of 2.5% of compensation, not to exceed
$4,000 per employee annually. Company contributions charged to expense during fiscal 2004, 2003
and 2002 were $2.4 million, $2.4 million and $2.5 million, respectively.
ACI Worldwide EMEA Group Personal Pension Scheme
The ACI Worldwide EMEA Group Personal Pension Scheme is a defined contribution plan
covering substantially all ACI Worldwide (EMEA) Limited (“ACI-EMEA”) employees. For those ACI-
EMEA employees who elect to participate in the plan, the Company contributesa minimum of 8.5% of
eligible compensation to the plan for those employees employed at December 1, 2000, up to a
maximum of 15.5% for those employees aged over 55 years on December 1, 2000. ACI-EMEA
contributes 6.0% of eligible compensation to the plan for those employees employed subsequent to
December 1, 2000. ACI-EMEA contributions charged to expense during fiscal 2004, 2003 and 2002
were $1.0 million, $1.3 million and $1.3 million, respectively.
57
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The ACI Worldwide EMEA Group Personal Pension Scheme replaced
the Applied
Communications Inc Limited (“ACIL”) Pension Plan, which was discontinued on December 1, 2000. At
the time the ACIL Pension Plan assets were formally valued, planobligations exceeded planassets by
$2.9 million. The funding deficit amount that was charged to expense during fiscal 2002 was
$1.7 million. The ACIL Pension Plan was a defined benefit pension plan. Benefits were based on years
of service and the employees’ compensation during employment. Contributions to the plan were
determined by an independent actuary on the basisof periodic valuations using the projected unit cost
method. Participants contributed 5% of their pensionable salariesand ACIL contributed at the rate of
10% of pensionable salaries. The assets of the ACIL Pension Plan were distributed to plan participants
in fiscal 2002.
13.Income
Taxes
The provision (benefit) for income taxes consists of the following (in thousands):
Federal. . . . . . .
State. . . . . . . . .
Foreign. . . . . . .
Total. . . . . . . . .
Current
$6,439
1,284
6,246
$13,969
2004
Deferred
$ (4,698)
1,272
207
$ (3,219)
Year Ended September 30,
2003
Total
$ 1,741
2,556
6,453
$ 10,750
Current
$ (2,932)
(1,754)
(1,173)
$ (5,859)
Deferred
$ 19,205
3,039
2,902
$ 25,146
Total
$ 16,273 $
Current
5,004
2002
Deferred
$ 10,267
Total
$ 15,271
1,285(899)
1,7295,752
1,479580
8406,592
$ 19,287
$ 9,857 $
12,586
$ 22,443
Differences between the income tax provisions computed at the statutory federal income tax rate
and per the consolidated statements of operations are summarized as follows (in thousands):
—3,252
533
Year Ended September 30,
2003
$11,764
2004
$20,102
2002
$13,199
8,871
(2,798)887
1,661835
1,410120
(11,337)—
1,5852,8
(299)
(448)
—
874321
$10,750$19,287
377
2,825
—
12 —
(314)
(390)
—
—
—
(3,059)
(303 )
$ 2 2,443
Tax expense at federal rate of 35% . . . . . . . . . . .
Increase (decrease) in valuation allowance. . . .
State income taxes, net of federal benefit. . . . . .
Foreign tax rate differential. . . . . . . . . . . . . . . . . .
Impairment of goodwill . . . . . . . . . . . . . . . . . . . . . .
MDL restructuring. . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of foreign taxes onU.S. return. . . . . . . . .
Research and development credits . . . . . . . . . . .
Extraterritorial income exclusion. . . . . . . . . . . . . .
Gain on disposition of subsidiary. . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax provision. . . . . . . . . . . . . . . . . . . . . . . .
58
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The deferred tax assets and liabilities result from differences in the timing of the recognition of
certain income and expense items for tax and financial accounting purposes. The sources of these
differences at each balance sheet date are as follows (in thousands):
September 30,
2004
2003
Current net deferred tax assets (liabilities):
Foreign tax withholding. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation plan. . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of investments. . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for uncollectibleacc ounts . . . . . . . . . . . . . . . . . .
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,914
—
6,363
479
281
(530)
$ 3,355
1,010
5,202
748
6,884
1,674
Less: valuation allowance. . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent net deferred tax assets (liabilities):
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . .
Foreign tax credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired net operating loss carryforwards. . . . . . . . . . . . .
U.S. and foreign net operating loss carryforwards. . . . . . .
Capital loss carryforwards. . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: valuation allowance. . . . . . . . . . . . . . . . . . . . . . . . . . .
10,507 18,873
(10,277)
230
(8,557 )
$ 10,316
$
$16,506 $ 2 ,195
7,932
5,194
676 1,120
27,516
4,683
4,599
964
60,138
(37,195)
$ 22,943 $
28,572
6,684
5,244
1,104
52,851
(43,213 )
9,638
The Company has recognized net deferred tax assets of $23.2 million as of September 30, 2004.
In assessing the realizability of deferred tax assets, management considers whether it is more likely
than not that some portionor all of the deferred tax assets will not be realized. The ultimaterealizat ion
of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which those temporary differencesbecome deductible. Management considers projected future taxable
income, carryback opportunities and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it is more likely than not that the
Company will realize thebenefits of these deductible differences, net of the valuation allowances
recorded.
During fiscal 2004, the Company completed a reorganization of
its MessagingDirect Ltd.
subsidiary and its related entities (collectively referred to as “the MDL entities”), and elected to treat
certain foreign operations as branchesof t he U.S. parent company, which resulted in the recognition of
a $12.0 million tax benefit, of which the federal benefit was $11.3 and the state benefit was $0.7. This
tax benefit arises from the excess of tax basis overthe book carrying value of these foreign assets
following the reorganization. The Company recorded a deferred tax asset in the same amount. The
Company expects to recover the remaining portion of this deferred tax asset over the next eleven
years.
59
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company had foreign tax credit carryforwardsat September 30, 2004 of $5.2 million, which
were to begin expiring in fiscal 2005. However, following enactment of the American JobsCreation Act
of 2004, which is discussed in further detail below, these foreign tax credit carryforwards will begin to
expire in fiscal 2010. The Company had domestic net operating loss carryforwards (“NOLs”) for tax
purposes of $1.9 million at September 30, 2004, which will begin to expire in 2009. All of these NOLs
are attributable to the pre-acquisition periods of acquired subsidiaries. The utilization of these NOLs
may be limited pursuant to Section 382of t he Internal Revenue Code as a result of prior ownership
changes. The MDL entities had $2.8 million of foreign NOLs, which were extinguished as part of the
reorganization. The change in the deferred tax asset valuation allowance related to the extinguishment
was a decrease of $1.0 million.
At September 30, 2004, the Company had foreign tax NOLs of $64.4 million, a majority of which
may be utilized over an indefinite life, with the remainder expiring over the next 15 years. A valuation
allowance has been provided for substantially all of the deferred tax assets related to the foreign loss
carryforwards to the extent management believes these carryforwards are more likely than not to
expire unused due to the Company’s historical or projected losses in certain of its foreign subsidiaries.
In addition, at September 30, 2004, the Company had domestic capital loss carryforwards for tax
purposes of $16.3 million, for which a full valuation allowance has been provided. These domestic
capital
loss
carryforwards that expired during the current fiscal year. The change in the deferred tax asset valuation
allowance related to the expiration was a decrease of $0.4 million.
loss carryforwards begin to expire in 2006. The Company had $1.1 million of capital
Recoverableincome t axes representing current federal benefits of $10.4 million were recorded
during fiscal 2003 in connection with amended income tax returns filed for the Company’s 1999
through 2001 tax years. Of the $10.4 million recorded, $1.9 has been received from the Internal
Revenue Service (“IRS”). The Company’s positions in the amended income tax returns are the subject
of an ongoing tax examination by the IRS. This examination has resulted in the IRS issuing proposed
adjustments. The IRS could issue additional proposed adjustments that could adversely affect the
Company’s financial condition and results of operations.
Three of the Company’s foreignsubsidiariesare t hesubject 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 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 results of operations.
The undistributed earnings of the Company’s foreign subsidiaries of approximately $24.2 million
are considered to be indefinitely reinvested. Accordingly, no provision for U.S. federal andstate income
taxes or foreign withholding taxes has been provided for such undistributed earnings. It is impractical to
determine the additional income tax liability, if any, associated with the repatriation of undistributed
foreign earnings.
The American Jobs Creation Act of 2004 (the “Jobs Act”)
On October 22, 2004, the Jobs Act was enacted, which directly impacts the Company in several
areas. The Jobs Act reduces the carryback period of foreign tax credits from two years to one year and
extends the carryforward period from five years to ten years. This change doubles the length of time
that the Company has to utilize its excess foreign tax credits before they expire.
60
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company currently takes advantage of the extraterritorial
income exclusion (“EIE”) in
calculating its federal income tax liability. The Jobs Act repealed the EIE, the benefit of which will be
phased out over the next three years,with 80% of the prior benefit allowed in 2005, 60% in 2006 and
0% allowed in years after 2006.
The Jobs Act replaced the EIE with the new “manufacturing deduction” that allows a deduction
from taxable income of up to 9% of “qualified production activities income,” not to exceed taxable
income. The deduction is phased in over a six-year period, with the eligible percentage increasing from
3% in 2005 to 9% in 2010.
The Jobs Act includes a foreign earnings repatriation provision that providesan 85% dividends
received deduction for certain dividends received from controlled foreign corporations. The Company
currently intends to reinvest certain of its foreign earnings indefinitely under APB-23; however, the
Company will continue to analyze the potential tax impact should it elect to repatriate foreign earnings
pursuant to the Jobs Act.
The Company is currently evaluating the impact ofthe various provisions of the Jobs Act on its
effective tax rate in future periods.
14. Commitments and Contingencies
In the normal course of business, the Company is liable for contract completion and product
performance. From time to time, TSA may guarantee the performance of a contract on behalf of one or
more of its subsidiaries, or a subsidiary may guarantee the performance of a contract on behalf of
another subsidiary. In the opinion of management, such obligations will not significantly affect the
Company’s financial position, results of operations or cash flows.
Operating Leases
The Company leases office space, equipment and the corporate aircraft under operating leases
that run through February 2011. Aggregate minimum lease payments under these agreements for the
fiscal years ending September 30 are as follows (in thousands):
2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9,466
8,768
7,121
5,692
2,606
2,285
$35,938
Total rent expense for fiscal 2004, 2003 and 2002 was $12.1 million, $11.8 million and $11.9
million, respectively.
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
61
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
proceedings, the adverse outcome of which, individually or in the aggregate, would be likely to have a
material adverse effect on the Company’s financial condition or results of operations.
Class Action Litigation. In November2002, t wo class action complaints were filed in the U.S.
District Court for the District of Nebraska (the “Court”) against the Company and certain individuals
alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder. Pursuant to a Court order, the two complaints were consolidated as Desert Orchid
Partners v. Transaction Systems Architects, Inc., et al., with Genesee County Employees’ Retirement
System designated as the Lead Plaintiff. The First Amended Consolidated Class Action Complaint,
filed on June30, 2003 (the “Consolidated Complaint”), alleges that during the purported class period,
the Company and the named defendants misrepresented the Company’s historical financial condition,
results of operations and its future prospects, and failed to disclose facts that could have indicated an
impending decline in the Company’s revenues. The Consolidated Complaint seeks unspecified
damages, interest, fees, costs and rescission. The class period alleged in the Consolidated Complaint
is January 21, 1999 through November 18, 2002. The Company and the individual defendants filed a
motion to dismiss the Consolidated Complaint.
In response, on December 15, 2003, the Court
dismissed, without prejudice, Gregory Derkacht, the Company’s President and Chief Executive Officer,
as a defendant, but denied the motion to dismiss with respect to the remaining defendants, including
the Company. On February 6, 2004, the Court entered a mediation reference order requiring the
parties to mediate before a private mediator. The parties held a mediation session on March 18, 2004,
which did not result in a settlement of the matter. The parties have commenced discovery.
Derivative Litigation. On January 10, 2003, Samuel Naito filed the suit of “Samuel Naito,
derivatively on behalf of nominal defendant Transaction Systems Architects, Inc. v. Roger K.
Alexander, Gregory D. Derkacht, Gregory J. Duman,Larry G. Fendley, Jim D. Kever, and Charles E.
Noell, III and Transaction Systems Architects, Inc.” in the State District Court in Douglas County,
Nebraska (the “Naito matter”). The suit is a shareholder derivative action that generally alleges that the
named individuals breached their fiduciary duties of loyalty and good faith owed to the Company and
its stockholders by causing the Company to conduct its business in an unsafe, imprudent and unlawful
manner, resulting in damage to the Company. More specifically, the plaintiff alleges that the individual
defendants, and particularly the members of the Company’s audit committee, failed to implement and
maintain anadequate internal accounting control system that would have enabled the Company to
irregularities in its accounting procedures with regard to certain transactions prior t o
discover
August 2002, thus violating their fiduciary duties of
loyalty and good faith, generally accepted
accounting principles and the Company’s audit committee charter. The plaintiff seeks to recover an
unspecified amount of money damages allegedly sustained by the Company as a result of the
individual defendants’ alleged breaches of
fiduciary duties, as well as the plaintiff’s costs and
disbursements related to the suit.
On January 24, 2003, Michael Russiello filed the suit of “Michael Russiello, derivatively on behalf
of nominal defendant Transaction Systems Architects, Inc. v. Roger K. Alexander, Gregory D.
Derkacht, GregoryJ. Duman, Larry G. Fendley, Jim D. Kever, and Charles E. Noell, III and Transaction
Systems Architects, Inc.” in the State District Court in Douglas County, Nebraska (the “Russiello
matter”). The suit is a stockholder derivative action involving allegations similar to those in the Naito
matter. The plaintiff seeks to recover anunspecified amount of money damages allegedly sustained by
the Company as a result of the individual defendants’ alleged breaches of fiduciary duties, as well as
the plaintiff’s costs and disbursements related to the suit.
The Company filed a motion to dismiss in the Naito matter on February 14, 2003 and a motion to
dismiss in the Russiello matter on February 21, 2003. A hearingwas scheduled on those motions for
62
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 14, 2003. Just prior to that date, plaintiffs’ counsel requested that the derivative lawsuits be
stayed pending a determination of an anticipated motion to dismiss to be filed in the class action
lawsuits. The Company, by and through its counsel, agreed to that stay. As a result, no other
has been commenced. The Companyhas not
defendants have been served andnodiscovery
determined what effect the Court’s ruling in the class action litigation will have on the Naito or Russiello
matters.
15. Related Party Transactions
Digital Courier Technologies, Inc.
On March 25, 1999, the Company and DCTI entered into a 60-month BASE24 software license
arrangement (the “1999 Software License Agreement”). The Company recognized $5.9 million in
software license fees received in fiscal 1999 ratably over the 60-month PCS term of the 1999 Software
License Agreement because the license arrangement entitled DCTI to future unspecified deliverables
(a subscription arrangement). Revenues recognized from DCTI
for the 1999 Software License
Agreement were $0.5 million, $0.9 million and $0.9 million in fiscal 2004, 2003 and 2002, respectively.
On June 3, 1999, the Company and DCTI entered into a three-year agreement that allowed the
Company to distribute certain of DCTI’s e-commerce products (the “DCTI Distribution Agreement”). At
that time, the Company paid DCTI a prepaid royalty of $0.7 million. The Company amortized this
prepaid royalty ratably over the three-year life of the DCTI Distribution Agreement.
Coinciding with the Company’s purchase of DCTI common stock in June 1999, DCTI agreed to
allow one of the Company’s designees to become a member of the DCTI Board of Directors. In
January 2000, Gregory J. Duman, who was serving as the Company’s Vice President and Chief
Financial Officer, was elected as the Company’s designee to the DCTI Board of Directors.
In
March 2000, Mr. Duman resigned as an officer of the Company and became a director of the
Company. He becameChairman of the Company’s Board of Directors in May 2001. Mr. Duman
resigned as a member of DCTI’s Board of Directors in 2001. Mr. Duman resigned as a member of the
Company’s Board of Directors in August 2002.
During fiscal 2002, the Company recorded a non-cash charge to earnings of $0.3 million for the
other than temporary decline in the value of DCTI common stock held by the Company.
On March 31, 2000, the Company and DCTI entered into an additional 60-month software license
agreement which granted DCTI a non-transferable and non-exclusive software license to use the
Company’s BASE24 software in all international markets (the “2000 Software License Agreement”).
DCTI paid the Company $5.0 million in software license fees for the 2000 Software License Agreement
in June and September 2000. On April 14, 2000, the DCTI Distribution Agreement was amended (the
“Amended DCTI Distribution Agreement”), extending the term to six years and providing a guarantee to
installments. The
DCTI of anadditional
Company paid DCTI $1.2 million pursuant to the Amended DCTI Distribution Agreement in
September 2000.
$6.0 million of royalties to be paid in five equal annual
The 2000 Software License Agreement and the Amended DCTI Distribution Agreement have been
accounted for as non-monetary exchanges, with no revenues or expenses initially recognized for an
anticipated exchange of equal amounts of cash. In May 2001, the Company and DCTI amended the
Amended DCTI Distribution Agreement to eliminatethe Company’s obligation to pay the remaining fees
due under the agreement. As a result of the May 2001 amendment, the Company was entitled to retain
the net fees collected from DCTI of $3.8 million. The Company recognized revenue ratably over the
63
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
remaining PCS term of the 60-month arrangement because the license arrangement entitles DCTI to
future unspecified deliverables (a subscription arrangement) and the Company does not have adequate
VSOE of the fair value of PCS for the co-terminus five-year maintenance period. Revenues recognized
from DCTI for the 2000 Software License Agreement were $0.9 million, $1.3 million and $1.3 million in
fiscal 2004, 2003 and 2002, respectively.
In addition to the above transactions, the Company and DCTI entered into various other
agreements, primarily to provide DCTI with professional services and software. Because the collection
of revenues from DCTI was highly uncertain due to credit-related risks, the Company has limited
revenue recognition to the amount of cash received. The May 2001 amendment to the Distribution
Agreement also relieved DCTI from certain payables and notes arising from various other agreements
for the provision of professional services and software. Revenues recognized from these other
agreements were minimal in fiscal 2002.
Former Chief Executive Officer
On May 1, 2001, the Company entered into a severance agreement with William E. Fisher (the
“Fisher Severance Agreement”), who was serving as the Company’s CEO at that time. Prior to that
date, the Company had advanced $3.0 million to Mr. Fisher pursuant to an employment and incentive
compensation package. Under the terms of the Fisher Severance Agreement, the Company agreed to
(1) forgive $2.4 million of the note receivable, (2) allow Mr. Fisher to repay the remaining $0.6 million of
the note receivable on or before June 1, 2002, and (3) allow Mr. Fisher three years from the date of the
Agreement to exercise any stock options vested under the Company’s stock option plans. Mr. Fisher
agreed to (1) resign as CEO on May 1, 2001, (2) forfeit all unvested stock options under the
Company’s stock option plans, and (3) provide the Company advisory services for a period of
12 months. The Company recognized termination benefits of $2.1 million related to the forgiveness of
the loan on May 1, 2001, with such benefits classified with restructuring expenses. On May 31, 2002,
Mr. Fisher repaid the Company $0.6 million, including interest, for his obligations under the note
receivable.
64
TRANSACTION SYSTEMS ARCHITECTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. QuarterlyInformation (Unaudited)
The following table sets forth certain unaudited financial data for each of the quarters within fiscal
2004 and 2003. This information has been derived from the Company’s consolidated financial
statements and in management’s opinion, reflects all adjustments necessary for a fair presentation of
the information for the quarters presented. The operating results for any quarter are not necessarily
indicative of results for any future period. Amounts presented are in thousands, except per share data:
QuarterEnde d
Sept. 30,June 3 0,March 31,Dec.
2004
2004
2004
31,Sept. 30,June 3 0, March 31,Dec.
2003
2003
2003
2003
2002
31,
Revenues:
Software license fees. . . . . . . . . . . .
Maintenance fees. . . . . . . . . . . . . . .
Services. . . . . . . . . . . . . . . . . . . . . .
Total revenues. . . . . . . . . . . . . . .
Expenses:
Cost of softwarelicense fees. . . . . .
Cost of maintenance and services. .
Research and development. . . . . . .
Selling and marketing. . . . . . . . . . . .
General and administrative. . . . . . . .
Impairment of goodwill . . . . . . . . . . .
Total expenses. . . . . . . . . . . . . . .
Operating income. . . . . . . . . . . . . . . . .
Other income (expense):
$ 36,240 $ 37,549 $ 42,380 $ 41,233 $ 3 6,611 $ 40,717 $ 38,167 $ 31,330
18,604
12,555
62,489
20,447
14,72012,382
71,77873,774
23,087
11,896
72,532
19,461
11,622
9,250
22,370
11,777
76,527
21,714
11,754
69,708
21,313
11,471
74,017
20,675
6
5,888
14,272
9,699
15,162
12,422
—
57,443
12,265
6,280
13,390
9,303
16,030
14,554
—
59,557
12,975
6,189
14,739
9,572
16,127
15,834
—
62,461
14,066
6,6396,933
14,97915,767
9,433
9,588
1
13,79013,531
13,66814,10515,245
6,339
15,082
9,478
3,686
—
—
9,290
58,50959,92469,120
15,50811,854
4,654
6,289
15,693
8,357
13,529
14,104
—
57,972
11,278
5,939
14,808
7,950
13,736
12,583
—
55,016
7,473
Interest income. . . . . . . . . . . . . . . . .
Interest expense. . . . . . . . . . . . . . . .
Other, net. . . . . . . . . . . . . . . . . . . . .
Total other income (expense) . . . .
536
(239)
(775)995
(478)
354
(284)
1,065
349
(381)
(131)
(163)2,197
523
(531)
335281
(573)
2,205975225
7
37
2
(682 )
7
(176 )
85
(787 )
9
(423 )
310
(956)
(1,139)
(1,785)
Income before income taxes. . . . . . . . .
Income tax (provision) benefit. . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . $ 10,006 $ 18,662 $ 7,976 $ 10,041 $
5,688
17,70512,5914,478
(3,478)
(2,693)
(7,664)
9,113 $ (1,853 ) $ 4,070 $ 2,995
13,903
(5,927)
11,787
(1,781)
10,855
(6,785)
14,040
4,622
(6,331)
Earnings (loss) per share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted. . . . . . . . . . . . . . . . . . . . . . . . $
0.27 $
0.26 $
0.50 $
0.49 $
0.22 $
0.21 $
0.28 $
0.27 $
0.25 $
0.25 $
(0.05) $
(0.05) $
0.11 $
0.11 $
0.08
0.08
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: December 10, 2004
TRANSACTION SYSTEMS ARCHITECTS, INC.
(Registrant)
By:/s/
GREGORY D. DERKACHT
Gregory D. Derkacht
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
TitleDate
/s/ GREGORY D. DERKACHT
Gregory D. Derkacht
President,Chief Executive Officer,
December 10, 2004
and Director
(principal executive officer)
/s/ DAVID R. BANKHEAD
David R.Bank head
/s/ DONALD P. NEWMAN
Donald P. Newman
/s/ HARLAN F. SEYMOUR
Harlan F. Seymour
/s/ ROGER K. ALEXANDER
Roger K. Alexander
/s/ JOHN D. CURTIS
John D. Curtis
/s/ JIM D.K EVER
Jim D.Kever
/s/ FRANK R. SANCHEZ
Frank R. Sanchez
/s/ JOHN E. STOKELY
John E. Stokely
Senior Vice President, Chief
December 10, 2004
Financial Officer and Treasurer
(principal financial officer)
Vice President,Chief AccountingDecember
10, 2004
Officer and Controller
(principal accounting officer)
Chairmanof the Board and Director
December 10, 2004
Director
Director
Director
Director
Director
66
December 10, 2004
December 10, 2004
December 10, 2004
December 10, 2004
December 10, 2004
(This page has been left blank intentionally.)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Exhibit 31.01
I, Gregory D. Derkacht, certify that:
1. I
have reviewed this Annual Report on Form 10-K of Transaction Systems Architects, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operationsand cash
flows of the registrant as of, and for, the periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosurecontrols
and procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth
fiscalqu arter in the case of an annual report) that has materially affected, or is reasonable likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The
evaluation of
committee of registrant’s board of directors (or persons performing the equivalent functions):
registrant’s other certifying officer and I have disclosed, based on our most recent
internal control over financial reporting, to the registrant’s auditors and the audit
a) All significant deficiencies and materialweakn esses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
Date:December 1 0, 2004/s/
GREGORY D. DERKACHT
Gregory D. Derkacht
President, Chief Executive Officer and
Director
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Exhibit 31.02
I, David R. Bankhead, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Transaction Systems Architects, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operationsand cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosurecontrols
and procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth
fiscalquarter in the case of an annual report) that has materially affected, or isreasonable likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
internal control over financial reporting, to the registrant’s auditors and the audit
evaluation of
committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and materialweakn esses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
Date:December 10, 2004/s/
DAVID R. BANKHEAD
David R. Bankhead
Senior Vice President, Chief Financial Officer
and Treasurer
Exhibit 32.01
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Transaction Systems Architects, Inc. (the “Company”) on
Form 10-K for the fiscal year ended September 30, 2004 as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), I, Gregory D. Derkacht, Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge:
1) The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date:December 1 0, 2004/s/
GREGORY D. DERKACHT
Gregory D. Derkacht
President, Chief Executive Officer
and Director
Exhibit 32.02
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Transaction Systems Architects, Inc. (the “Company”) on
Form 10-K for the fiscal year ended September 30, 2004 as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), I, David R. Bankhead, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, asadop ted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge:
1) The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date:December 1 0, 2004/s/
DAVID R. BANKHEAD
David R. Bankhead
Senior Vice President, Chief Financial Officer
and Treasurer
PR I NC I PA L OF F IC E S
Corporate Headquarters
Transaction Systems Architects
United States (cid:127) Omaha
Business Unit Offices
Argentina
Australia
Bahrain
Brazil
Canada
France
Germany
Greece
Italy
Japan
Korea
Mexico
The Netherlands
Russia
Singapore
South Africa
Spain
United Kingdom
United States
B OA R D O F DI R EC TO R S
Harlan F. Seymour
Chairman of the Board (cid:127) Transaction Systems Architects, Inc.
Principal (cid:127) HFS LLC
Gregory D. Derkacht
President and Chief Executive Officer (cid:127) Transaction Systems
Architects, Inc.
Roger K. Alexander
Chief Executive Officer (cid:127) S2 Card Services Ltd
John D. Curtis Attorney
Jim D. Kever Partner (cid:127) Voyent Partners LLC
Frank R. Sanchez
President (cid:127) Leveraged Product Development Division (cid:127) Fidelity
Information Services, Inc.
John E. Stokely President (cid:127) JES, Inc. LLC
Investor Information A copy of the Company’s Annual
Report on Form 10-K for the year ended September 30, 2004,
as filed with the Securities and Exchange Commission, will be
sent to stockholders free of charge upon written request to:
Investor Relations Department (cid:127) Transaction Systems Architects,
Inc. (cid:127) 224 South 108th Avenue (cid:127) Omaha, Nebraska 68154
Transfer Agent Communications regarding change of
address, transfer of stock ownership or lost stock certificates
should be directed to: Wells Fargo Shareowner Services (cid:127) 161
North Concord Exchange (cid:127) South St. Paul, Minnesota 55075
Stock Listing The Company’s common stock trades on the
NASDAQ Stock Market®‚ under the symbol TSAI.
Annual Meeting The Annual Meeting of Shareholders will be
held at 10:00 a.m. on Tuesday, March 8, 2005 at the Marriott
Hotel (cid:127) 10220 Regency Circle (cid:127) Omaha, Nebraska
Independent Public Accountants KPMG LLP (cid:127) Two
Central Park Plaza (cid:127) Suite 1501 (cid:127) Omaha, Nebraska 68102
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©2005 Transaction Systems Architects, Inc. All rights reserved.
The NASDAQ Stock Market®‚ is a registered trademark of the Nasdaq Stock Market, Inc.
Transaction Systems Architects, Inc.
224 South 108th Avenue
Omaha, Nebraska 68154
www.tsainc.com
T2277 1-05
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