FORM 10-K
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 fiscal year ended December 31, 2008
Commission File Number 0-25346
ACI WORLDWIDE, INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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47-0772104
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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120 Broadway, Suite 3350
New York, New York 10271
(Address of principal
executive
offices, including zip code)
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(646) 348-6700
(Registrants
telephone
number, including area code)
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Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $.005 par value
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act). Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
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 registrants 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the Companys voting common
stock held by non-affiliates of the registrant on June 30,
2008 (the last business day of the registrants most
recently completed second fiscal quarter), based upon the last
sale price of the common stock on that date of $17.59, was
$596,639,203. For purposes of this calculation, executive
officers, directors and holders of 10% or more of the
outstanding shares of the registrants common stock are
deemed to be affiliates of the registrant.
As of February 27, 2009, there were 34,931,432 shares
of the registrants common stock outstanding.
Forward-Looking
Statements
This report contains forward-looking statements based on current
expectations that involve a number of risks and uncertainties.
Generally, forward-looking statements do not relate strictly to
historical or current facts, and include words or phrases such
as management anticipates, we believe,
we anticipate, we expect, we
plan, we will, we are well
positioned, and words and phrases of similar impact, and
include, but are not limited to, statements regarding future
operations, business strategy, business environment and key
trends, as well as statements related to expected financial and
other benefits from our recent acquisition of Visual Web
Solutions, Inc., and Stratasoft Sdn Bhd and those related to our
organizational restructuring activities. 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 incorrect. 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
our actual future results may vary materially from the results
expressed or implied in our forward-looking statements. The
cautionary statements in this report expressly qualify all of
our forward-looking statements. In addition, we are not
obligated, and do not intend, to update any of our
forward-looking statements at any time unless an update is
required by applicable securities laws. Factors that could cause
actual results to differ from those expressed or implied in the
forward-looking statements include, but are not limited to,
those discussed in Item 1A in the section entitled
Risk Factors Factors That May Affect Our
Future Results or The Market Price of Our Common Stock.
Trademarks
and Service Marks
ACI, the ACI logo, BASE24, ON/2, OpeN/2, ENGUARD, Network
Express, PaymentWare and CO-ach, among others, are registered
trademarks
and/or
registered service marks of ACI Worldwide, Inc., or one of its
subsidiaries, in the United States
and/or other
countries. BASE24-eps, ACI Retail Commerce Server, NET24,
Commerce Gateway, Smart Chip Manager, Proactive Risk Manager,
PRM, ICE, WebGate, SafeTGate, DataWise, ACI Wholesale Payment
System, ACI Money Transfer System or MTS, MTS-eps, ACI
Enterprise Banker, ACI Payments Manager, ACI Card Management
System, ACI Dispute Management System, and WPS, among others,
have pending registrations or are common-law trademarks
and/or
service marks of ACI Worldwide, Inc., or one of its
subsidiaries, in the United States
and/or other
countries. Other parties marks referred to in this report
are the property of their respective owners.
2
PART I
General
ACI Worldwide, Inc., a Delaware corporation, and our
subsidiaries (collectively referred to as ACI,
ACI Worldwide, the Company,
we, us or our) develop,
market, install and support a broad line of software products
and services primarily focused on facilitating electronic
payments. In addition to our own products, we distribute, or act
as a sales agent for, software developed by third parties. These
products and services are used principally by financial
institutions, retailers and electronic payment processors, both
in domestic and international markets. Most of our 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 that it supplements
with independent reseller
and/or
distributor networks. Our products are marketed under the ACI
Worldwide brand.
The electronic payments market is comprised of financial
institutions, retailers, third-party electronic payment
processors, payment associations, switch interchanges and a wide
range of transaction-generating endpoints, including automated
teller machines (ATM), retail merchant locations,
bank branches, mobile phones, corporations and Internet commerce
sites. The authentication, authorization, switching, settlement
and reconciliation of electronic 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
participants in the market, high transaction volumes,
geographically dispersed networks, differing types of
authorization, and varied reporting requirements. These
activities are typically performed online and are often
conducted 24 hours a day, seven days a week. ACI Worldwide,
Inc. was formed as a Delaware corporation in November 1993 under
the name ACI Holding, Inc. and is largely the successor to
Applied Communications, Inc. and Applied Communications Inc.
Limited, which we acquired from Tandem Computers Incorporated on
December 31, 1993.
On July 24, 2007, our stockholders approved the adoption of
an Amended and Restated Certificate of Incorporation to change
our corporate name from Transaction Systems Architects,
Inc. to ACI Worldwide, Inc.. We have been
marketing our products and services under the ACI Worldwide
brand since 1993 and have gained significant market recognition
under this brand name. Historically, we operated with three
business units: ACI Worldwide, Insession Technologies and
Intranet Worldwide. In the first quarter of fiscal 2006, we
restructured our organization combining the products and
services within these three business units into one operating
unit under the ACI Worldwide name.
On February 23, 2007, our Board of Directors approved a
change in the Companys fiscal year from a September 30
fiscal year-end to a December 31 fiscal year-end, effective as
of January 1, 2008 for the year ended December 31,
2008. In accordance with applicable Securities and Exchange
Commission (SEC) rules and regulations, we filed a
Transition Report on
Form 10-Q
for the transition period from October 1, 2007 to
December 31, 2007, with the SEC on February 19, 2008.
Accordingly, the consolidated financial statements included
herein present our financial position as of December 31,
2008 and 2007 and September 30, 2007, and the results of
our operations, cash flows and changes in stockholders
equity for the year ended December 31, 2008, the three
month period ended December 31, 2007, and the years ended
September 30, 2007 and 2006.
Acquisitions
On May 31, 2006, we acquired the outstanding shares of eps
Electronic Payment Systems AG (eps AG). The
aggregate purchase price for eps AG was $30.4 million,
which was comprised of cash payments of $19.1 million,
330,827 shares of common stock valued at
$11.1 million, and direct costs of the acquisition. eps AG,
with operations in Germany, Romania, the United Kingdom and
other European locations, offered electronic payment and
complementary solutions focused largely in the German market.
The acquisition of eps AG occurred in two closings. The initial
closing occurred on May 31, 2006, and the second closing
occurred on October 31, 2006. Cash consideration paid at
the initial closing totaled $13.0 million, net of
$3.1 million of cash acquired and the remaining cash
consideration of $6.1 million was paid on October 31,
2006. All shares of the Companys common stock issued as
consideration for the eps AG acquisition were issued at the
initial closing. We accounted for the acquisition of eps
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AG in its entirety as of May 31, 2006, and recorded a
liability, included in accrued and other liabilities at
September 30, 2006, in the amount of $6.1 million, for
the remaining cash consideration that was paid on
October 31, 2006. We accounted for this as a delayed
delivery of consideration as the price was fixed and not subject
to change, with complete decision-making and control of eps AG
held by us as of the date of the initial closing.
Under the terms of the acquisition, the parties established a
cash escrow arrangement in which approximately $1.0 million
of the cash consideration paid at the initial closing was held
in escrow as security for a potential contingent obligation. We
distributed the escrow in October 2006 in accordance with the
terms of the escrow arrangement as the contingent liability paid
by the Company was recovered from a third party. Additionally,
certain of the sellers of eps AG have committed to certain
indemnification obligations as part of the sale of eps AG. Those
obligations are secured by the shares of common stock issued to
the sellers pursuant to the eps AG acquisition to the degree
such shares are restricted at the time such an indemnification
obligation is triggered, if at all, the likelihood of which is
deemed remote. The restrictions were lifted by the Company
during the year ended December 31, 2008.
On August 28, 2006, we entered into an Agreement and Plan
of Merger with P&H Solutions, Inc. (P&H)
under the terms of which P&H became our wholly-owned
subsidiary. P&H was a provider of web-based enterprise
business banking solutions to financial institutions. The
acquisition of P&H closed on September 29, 2006. The
aggregate purchase price for P&H, including direct costs of
the acquisition, was $133.7 million, net of
$20.2 million of cash acquired. Under the terms of the
acquisition, the parties established a cash escrow arrangement
in which $11.7 million of the cash consideration paid at
closing was held in escrow as security for tax and other
contingencies. We distributed the escrow in October 2007 in
accordance with the terms of the escrow arrangement. During the
year ended September 30, 2007, we adjusted the initial
purchase price allocation resulting in additional goodwill of
$0.4 million, net due to tax adjustments and recovery of
bad debt reserves.
On February 7, 2007, we acquired Visual Web Solutions, Inc.
(Visual Web), a provider of international trade
finance and web-based cash management solutions, primarily to
financial institutions in the Asia/Pacific region. These
solutions complement and have been integrated with our
U.S.-centric
cash management and online banking solutions to create a more
complete international offering. Visual Web had wholly-owned
subsidiaries in Singapore for sales and customer support and in
Bangalore, India for product development and services.
The aggregate purchase price of Visual Web, including direct
costs of the acquisition, was $8.3 million, net of
$1.1 million of cash acquired. Under the terms of the
acquisition, the parties established a cash escrow arrangement
in which $1.1 million of the cash consideration paid at
closing is held in escrow as security for tax and other
contingencies.
On April 2, 2007, we acquired Stratasoft Sdn Bhd
(Stratasoft), a provider of electronic payment
solutions in Malaysia. This acquisition compliments our strategy
to move to a direct sales model in selected markets in Asia. The
aggregate purchase price of Stratasoft, including direct costs
of the acquisition, was $2.5 million, net of
$0.7 million of cash acquired. We will pay an additional
aggregate amount of up to $0.6 million (subject to foreign
currency fluctuations) to the sellers if Stratasoft achieves
certain financial targets set forth in the purchase agreement
for the period ended December 31, 2008. During the year
ended December 31, 2008, we completed the assessment for
the period ended December 31, 2007 and determined that
Stratasoft did not meet the financial targets set forth in the
purchase agreement. Under the terms of the acquisition, the
parties established a cash escrow arrangement in which
$0.5 million of the cash consideration paid at closing is
held in escrow as security for tax and other contingencies.
Assets of
Businesses Transferred Under Contractual Arrangements
On September 29, 2006, we completed the sale of the
eCourier and Workpoint product lines to PlaNet Group, Inc. We
have retained rights to distribute these products as components
of our electronic payments solutions. See Note 16,
Assets of Businesses Transferred Under Contractual
Arrangements, in the Notes to Consolidated Financial
Statements for further detail.
4
Products
ACI Worldwide software products perform a wide range of
functions designed to facilitate electronic payments. Generally,
our products address three primary market segments:
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Retail banking, including debit and credit card issuers
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Wholesale banking, including corporate cash management and
treasury management operations
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Retailers
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In addition, we market our solutions to third-party electronic
payment processors, who serve all three of the above market
segments. We also offer solutions that are not
industry-specific, but complement our payments products, to
address needs for systems connectivity, data synchronization,
testing and simulation and systems monitoring.
We offer five primary software product lines:
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Retail Payment Engines
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Risk Management
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Payments Management
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Wholesale Payments
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Application Services Solutions
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An overview of major software products within these software
product lines follows:
Retail
Payment Engines
Generally, our Retail Payment Engines are designed to route
electronic payment transactions from transaction generators to
the acquiring institutions so that they can be authorized for
payment. The software often interfaces with regional or national
switches to access the account-holding financial institution or
card issuer for approval or denial of the transactions
(authorization). The software returns messages to the original
transaction generator (e.g. an ATM), thereby completing the
transactions. Depending on how the software is configured, it
can perform all of the functions necessary to authenticate,
authorize, route and settle an electronic payment transaction,
or it can interact with other systems to ensure that these
functions are performed. Electronic payments software may be
required to interact with dozens of devices, switch interchanges
and communication protocols around the world. We currently offer
a range of retail payment engine solutions, as follows:
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BASE24. BASE24 is an integrated family of
software products marketed to customers operating electronic
payment networks in the retail banking 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 electronic payment processing. BASE24
allows customers to adapt to changing network needs by
supporting over 40 different types of ATM and point of sale
(POS) terminals, over 50 interchange interfaces, and
various authentication, authorization and reporting options. A
substantial portion of ACI Worldwides revenues are derived
from licensing the BASE24 family of products and providing
related services and maintenance.
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The BASE24 product line operates exclusively on Hewlett-Packard
Company (HP) NonStop servers. The HP 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 electronic payment systems.
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BASE24-eps (formerly called
BASE24-es). BASE24-eps is an integrated
electronic payments processing product that supports similar
features as BASE24, but uses a more modern set of technologies
and architecture. BASE24-eps uses an object-based architecture
and languages such as C++ and Java to offer a more flexible,
open architecture for the processing of a wide range of
electronic payment transactions. BASE24-eps also uses a
scripting language to improve overall transaction processing
flexibility and improve
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time to market for new services, reducing the need for
traditional systems modifications. BASE24-eps is licensed as a
standalone electronic payments solution for financial
institutions, retailers and electronic payment processors, and
it represents the future platform to which current BASE24, ON/2,
OpeN/2, and AS/X customers are expected to migrate over time.
BASE24-eps, which operates on International Business Machines
Corporation (IBM) System z, IBM System p, HP
NonStop, HP-UX and Sun Solaris servers, provides flexible
integration points to other applications and data within
enterprises to support
24-hour per
day access to money, services and information.
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ACI Retail Commerce Server. Retail Commerce
Server is an integrated suite of electronic payments products
that facilitate a broad range of capabilities, specifically
focused on retailers. These capabilities 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 Retail Commerce
Server product line operates on open systems technologies such
as Microsoft Windows, UNIX and Linux, with most of the current
installations deployed on the Microsoft Windows platform.
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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 exclusively on
the HP NonStop platform, and represents the middleware product
on which BASE24 and BASE24-eps operate when deployed on HP
NonStop servers. NET24 supports process management, network
communications, systems configuration and management, and
asynchronous messaging.
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ON/2. ON/2 is an integrated electronic
payments processing system, exclusively designed for the Stratus
VOS operating environment. It authenticates, authorizes, routes
and switches transactions generated at ATMs and merchant
POS sites.
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OpeN/2. OpeN/2 is an integrated electronic
payments processing system, designed for open-systems
environments such as Microsoft Windows, UNIX and Linux. It
offers a wide range of electronic payments processing
capabilities for financial institutions, retailers and
electronic payment processors.
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AS/X. AS/X, a product acquired in the eps AG
acquisition, is an integrated electronic payments processing
system designed for open-systems environments such as UNIX. It
supports a wide range of electronic payments processing
capabilities for financial institutions and electronic payment
processors in Germany and Switzerland.
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During the year ended December 31, 2008, the three month
period ended December 31, 2007, and the years ended
September 30, 2007 and 2006, approximately 47%, 51%, 49%
and 57%, respectively, of our total revenues were derived from
licensing the BASE24 product line, which revenue amounts do not
include revenue associated with licensing the BASE24-eps product.
Risk
Management
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ACI Proactive Risk Manager
(PRM). PRM is a neural network-based
fraud detection system designed to help card issuers, merchants,
merchant 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 strategies and advanced client/server account
management software. PRM operates on IBM System z, 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.
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Payments
Management
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ACI 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
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suite also includes a transaction warehouse product that
accumulates and stores
e-payment
transaction information for subsequent transaction inquiry via
browser-based presentation allowing transaction monitoring,
alerting and executive analysis. These products operate on IBM
System z, IBM System p, HP NonStop, Sun Solaris and Microsoft
Windows servers.
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ACI Payments Manager (PM). PM is
an integrated, modular software solution that automates the
processing, settlement and reconciliation of electronic
transactions, as well as provides plastic card issuance and
account management. PMs primary focus is to enable
efficient back-office management through cost reductions and
streamlined daily operations. The solution accesses a central
transaction database that can be updated in batch or near-real
time from the payment engine. PM integrates all transaction and
processing data for transaction analysis, settlement processing,
and card account and customer data. Application functions are
accessed via the ACI desktop environment, an integrated
graphical presentation and development tool.
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ACI Card Management System
(CMS). CMS is a complete plastic card
system for issuing cards, maintaining account information,
tracking card usage and providing customer service. It supports
multiple account types and allows online display and
modification of pertinent account information. It can be linked
with a card authorization system for authorizing debit
transactions from ATM and POS devices on the host system.
Optionally, CMS can also be linked to a front-end processor for
purposes of forwarding file maintenance activity and accepting
financial transaction activity.
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ACI Smart Chip Manager (SCM). SCM
supports the deployment of stored-value and other chip card
applications used at smart card-enabled devices. The solution
facilitates authorization of funds transfers from existing
accounts to cards. It also leverages chip technology to enhance
debit/credit card authentication and security. SCM supports
Europay/Mastercard/VISA (EMV) standards for debit
and credit card processing, and manages the complete lifecycle
of the deployment of multi-function chip cards. In addition, SCM
has been deployed in government identification environments,
providing the core operating environment for multi-function
electronic identification cards.
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ACI Dispute Management System
(DMS). DMS provides issuers the
ability to work retail discrepancies caused by processing
errors, disputes, charge backs and fraud. Failure to comply with
card association rules or government regulations can result in
the loss of chargeback and representation rights or fines.
ACIs DMS runs through a Case Management work flow,
tracking disputes with debit and credit cards, EBT transactions,
electronic banking and bill pay, ACH, and network adjustments.
An audit trail of operator actions ensures that staff members
follow procedures. DMS also provides an interface to
institutions general ledger and transaction processing
systems, which saves time and ensures better audit trails.
Because electronic banking disputes may be subject to
governmental and internal audits, DMS stores all due dates and
required customer notifications to maintain a complete
historical file on each claim. Furthermore, users can create
specific compliance reports.
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Wholesale
Payments
Our wholesale payments solutions are focused on 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.
Our wholesale payments solutions include high value payments
processing, bulk payments processing, global messaging and
Continuous Link Settlement processing, and are collectively
referred to as the ACI Money Transfer System (MTS).
The high value payments processing products, which produce the
majority of revenues within the MTS solution set, are used to
generate, authorize, route, settle and control high value wire
transfer transactions in domestic and international
environments. The MTS product operates on IBM System p servers
using the 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. In 2008, we announced a plan to deploy this product
on IBM System z.
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ACI Enterprise Banker is a comprehensive Internet-based business
banking product for financial institutions, including banks,
brokerage firms and credit unions and can be flexibly packaged
for small, medium and large business customers. This product
provides these customers with electronic payment initiation
capability, information reporting, and numerous other payment
related services that allow the business customer to manage all
its banking needs via the Internet.
Application
Services Solutions
The Application Services Solutions provide specific technology
extensions to augment the business services provided in the
Retail Payment Engines, Risk Management, Payments Management and
Wholesale Payments solutions.
Our Application Services Solutions consist of a suite of
infrastructure software products that facilitate communication,
data movement, transaction processing, systems monitoring and
business process automation across incompatible computing
systems that include mainframes, distributed computing networks
and the Internet. The primary Company-owned software products
within this suite are ICE, WebGate, SafeTGate, ENGUARD and
DataWise. In addition, as part of the S2 Systems acquisition, we
acquired a product called Network Express and as part of the eps
AG acquisition, we acquired a product called Asset. The primary
third-party products distributed as part of our Application
Services Solutions are GoldenGate, and VersaTest. 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. ENGUARD is a
proactive monitoring, alarm and dispatching software tool.
Network Express provides network communications and middleware
capabilities to support legacy systems integration and
connectivity. Asset is a simulation and testing tool that allows
companies involved in electronic payments to simulate devices
and transactions, and perform application testing. VersaTest
provides online testing, simulation and support utilities for HP
NonStop servers.
Third-Party
Partners
We have two major types of third-party partners: strategic
alliances, where we work closely with industry leaders who drive
key industry trends and mandates, and product partners, where we
market or embed the products of other software companies.
Strategic alliances help us add value to our solutions, stay
abreast of current market conditions, and extend our reach
within our core markets. The following is a list of those
companies with whom we have strategic alliances:
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Hewlett-Packard Company
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International Business Machines Corporation
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Sun Microsystems, Inc.
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Stratus Technologies
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Microsoft Corporation
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Diebold, Incorporated
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NCR Corporation
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Wincor-Nixdorf
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Visa International
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MasterCard International Incorporated
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Oracle Corporation
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Product partner relationships extend our product portfolio,
improve our ability to get our solutions to market rapidly and
enhance our ability to deliver market-leading solutions. We
share revenues with these product partners based on relative
responsibilities for the customer account. The agreements with
product partners generally grant us 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:
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GoldenGate, Inc.
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Ascert, LLC
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ACE Software Solutions, Inc.
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Faircom Corporation
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Paragon Application Systems, Inc.
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Financial Software and Services, PTT
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International Business Machines Corporation
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CB.Net Ltd.
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Side International S.A.
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eClassic Systems
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RDM Corporation
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Intuit, Inc.
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Vasco Data Security
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NCR Corporation
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Online Banking Solutions
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Metatomix Inc.
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PlaNet Group, Inc.
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Accuity, Inc
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RSA, The Security Division of EMC Corporation
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iPay Technologies, LLC
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Parsam Technologies, LLC
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Services
We offer our customers a wide range of professional services,
including analysis, design, development, implementation,
integration and training. We have service professionals within
each of our three geographic regions who generally perform the
majority of the work associated with installing and integrating
our software products, rather than relying on third-party
systems integrators. Our service professionals have extensive
experience performing such installation and integration services
for clients operating on a range of computing platforms. We
offer the following types of services for our customers:
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Technical Services. The majority of our
technical services are provided to customers who have licensed
one or more of our 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.
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Project Management. We offer a Project
Management and Implementation Plan (PMIP) which
provides customers with a variety of support services, including
on-site
product integration reviews, project planning,
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training, site preparation, installation, testing and go-live
support, and project management throughout the project life
cycle. We offer 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.
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Facilities Management. We offer facilities
management services whereby we operate a customers
electronic payments system for multi-year periods. Pricing and
payment terms for 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.
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ACI On Demand. We offer a service whereby we
host a customers system for them as opposed to the
customer licensing and installing the system on their own site.
We offer several of our solutions in this manner, including our
retail and wholesale payment engines, risk management and online
banking products. Each customer gets a unique image of the
system that can be tailored to meet their needs. The product is
generally located on facilities and hardware that we provide.
Pricing and payment terms depend on which solutions the customer
requires and their transaction volumes. Generally, customers are
required to commit to a minimum contract of three to five years.
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Customer
Support
We provide our customers with product support that is available
24 hours a day, seven days a week. If requested by a
customer, the product support group can remotely access that
customers 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 customers
business-critical systems. We offer our customers both a general
maintenance plan and an extended service option.
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General Maintenance. After software
installation and project completion, we provide maintenance
services to customers for a monthly fee. Maintenance services
include:
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24-hour
hotline for problem resolution
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Customer account management support
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Vendor-required mandates and updates
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Product documentation
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Hardware operating system compatibility
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User group membership
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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:
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Install and test software fixes
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Retrofit customer-specific software modifications
(CSMs) into new software releases
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Answer questions and resolve problems related to CSM code
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Maintain a detailed CSM history
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Monitor customer problems on HELP24 hotline database on a
priority basis
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Supply
on-site
support, available upon demand
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Perform an annual system review
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We provide new releases of our products on a periodic basis. New
releases of our products, which often contain product
enhancements, are typically provided at no additional fee for
customers under maintenance agreements.
10
Agreements with our customers permit us to charge for
substantial product enhancements that are not provided as part
of the maintenance agreement.
Competition
The electronic payments market is highly competitive and subject
to rapid change. Competitive factors affecting the market for
our products and services include product features, price,
availability of customer support, ease of implementation,
product and company reputation, and a commitment to continued
investment in research and development.
Our competitors vary by product line, geography and market
segment. Generally, our most significant competition comes from
in-house information technology departments of existing and
potential customers, as well as third-party electronic payments
processors (some of whom are ACI Worldwide customers). Many of
these companies are significantly larger than us and have
significantly greater financial, technical and marketing
resources. Key competitors by product line include the following:
Retail
Payment Engines
The principal third-party software competitors for the Retail
Payment Engines product line are Fidelity National Information
Services, Inc. and S1 Corporation, as well as small,
regionally-focused companies such as Aleric Technology, Inc,
Distra Pty Ltd, Compass Plus, Opus Software Solutions Private
Ltd and CTL, Ltd. Primary electronic payment processing
competitors in this area include global entities such as First
Data Corporation, Fiserv, Inc., Metavante, Euronet, Visa and
Mastercard, as well as regional or country-specific processors.
Risk
Management
Principal competitors for the Risk Management product line are
Fair Isaac, Norkom Technologies, Actimize, Inc., Retail
Decisions, Mantas, SearchSpace, Americas Software and Visa DPS,
as well as dozens of smaller companies focused on niches of this
segment such as anti-money laundering.
Payments
Management
Principal competitors for our Payments Management product line
are Fidelity National Information Services, Inc., Baldwin Hacket
and Meeks, Inc., ATOS Origin S.A. and Bell ID.
Wholesale
Payments
Principal competitors for our Wholesale Payments product line
are Fundtech Ltd, LogicaCMG plc, Tieto Enator, Clear2Pay,
Dovetail, Bankserv, SWIFT, Intuit Corporation, S1 Corporation,
Metavante, Fiserv Inc., Nucleus Software Exports Ltd, Aurion Pro
Solutions Ltd and a number of core banking processors.
Application
Services Solutions
The principal competitor for our Application Services Solutions
product line is Hewlett-Packard Company, as well as dozens of
small, niche-focused competitors.
As markets continue to evolve in the electronic payments, risk
management and smartcard sectors, we may encounter new
competitors for our products and services. As electronic payment
transaction volumes increase and banks face price competition,
third-party processors may become stronger competition in our
efforts to market our solutions to smaller financial
institutions. In the larger financial institution market, we
believe that third-party processors may be less competitive
since large institutions attempt to differentiate their
electronic payment product offerings from their competition, and
are more likely to develop or continue to support their own
internally-developed solutions or use third-party software
packages such as those offered by us.
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Research
and Development
Our product development efforts focus on new products and
improved versions of existing products. We facilitate user group
meetings. The user groups are generally organized geographically
or by product lines. The groups help us determine our product
strategy, development plans and aspects of customer support. We
believe that the timely development of new applications and
enhancements is essential to maintain our competitive position
in the market.
In developing new products, we work closely with our customers
and industry leaders to determine requirements. We work with
device manufacturers, such as Diebold, NCR and Wincor-Nixdorf,
to ensure compatibility with the latest ATM technology. We work
with interchange vendors, such as MasterCard and Visa, to ensure
compliance with new regulations or processing mandates. We work
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
of hardware. Customers often provide additional information on
requirements and serve as beta-test partners.
Our total research and development expenses during the year
ended December 31, 2008, the three month period ended
December 31, 2007, and the years ended September 30,
2007 and 2006 were $45.9 million, $16.4 million,
$52.1 million, and $40.8 million, or 11.0%, 16.2%,
14.2%, and 11.7% of total revenues, respectively.
Customers
We provide software products and services to customers in a
range of industries worldwide, with financial institutions,
retailers and
e-payment
processors comprising our largest industry segments. As of
December 31, 2008, our customers include over 100 of the
500 largest banks in the world, as measured by asset size, 11 of
the top 20 retailers in the United States and over 90 retailers
worldwide, as measured by revenue. As of December 31, 2008,
we had 826 customers in 88 countries on six continents. Of this
total, 430 are in the Americas region, 243 are in the EMEA
region and 153 are in the Asia/Pacific region. No single
customer accounted for more than 10% of our consolidated
revenues for the year ended December 31, 2008, three-month
period ended December 31, 2007, or years ended
September 30, 2007 or 2006.
Selling
and Marketing
Our primary method of distribution is direct sales by employees
assigned to specific regions or specific products. In addition,
we use distributors and sales agents to supplement our direct
sales force in countries where business practices or customs
make it appropriate, or where it is more economical to do so. We
generate a majority of our sales leads through existing
relationships with vendors, direct marketing programs, customers
and prospects, or through referrals.
Key international distributors and sales agents for us during
the year ended December 31, 2008 included:
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PTESA (Colombia)
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PTESAVEN (Venezuela)
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North Data (Uruguay)
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Hewlett-Packard Peru (Peru)
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P.T. Abhimata Persada (Indonesia)
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Financial Software and Systems, Ltd. (India)
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Korea Computer, Inc. (Korea)
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DataOne Asia Co. Ltd (Thailand)
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Syscom (Taiwan and China)
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Optimisa S.A. (Chile)
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We distribute the products of other vendors as complements to
our existing product lines. We are typically responsible for the
sales and marketing of the vendors products, and
agreements with these vendors generally provide for revenue
sharing based on relative responsibilities.
In addition to our principal sales office in Omaha, we also have
sales offices located outside the United States in Athens,
Bahrain, Buenos Aires, Dubai Internet City, Frankfurt, Gouda,
Kuala Lumpur, Johannesburg, Madrid, Manila, Melbourne, Mexico
City, Milan, Moscow, Mumbai, Naples, Paris, Riyadh, Sao Paulo,
Seoul, Shanghai, Singapore, Sydney, Tokyo, Toronto, and Watford.
Proprietary
Rights and Licenses
We rely on a combination of trade secret and copyright laws,
license agreements, contractual provisions and confidentiality
agreements to protect our proprietary rights. We distribute our
software products under software license agreements that
typically grant customers nonexclusive licenses to use our
products. Use of our software products is usually restricted to
designated computers, specified locations
and/or
specified capacity, and is subject to terms and conditions
prohibiting unauthorized reproduction or transfer of our
software products. We also seek to protect the source code of
our software as a trade secret and as a copyrighted work.
Despite these precautions, there can be no assurance that
misappropriation of our software products and technology will
not occur.
In addition to our own products, we distribute, or act as a
sales agent for, software developed by third parties. However,
we typically are not involved in the development process used by
these third parties. Our rights to those third-party products
and the associated intellectual property rights are limited by
the terms of the contractual agreement between us and the
respective third-party.
Although we believe that our owned and licensed intellectual
property rights do not infringe upon the proprietary rights of
third parties, there can be no assurance that third parties will
not assert infringement claims against us. Further, there can be
no assurance that intellectual property protection will be
available for our products in all foreign countries.
Like many companies in the electronic commerce and other
high-tech industries, third parties have in the past and may in
the future assert claims or initiate litigation related to
patent, copyright, trademark or other intellectual property
rights to business processes, technologies and related standards
that are relevant to us and our customers. These assertions have
increased over time as a result of the general increase in
patent claims assertions, particularly in the United States.
Third parties may also claim that the third-partys
intellectual property rights are being infringed by our
customers use of a business process method which utilizes
products in conjunction with other products, which could result
in indemnification claims against us by our customers. Any claim
against us, with or without merit, could be time-consuming,
result in costly litigation, cause product delivery delays,
require us to enter into royalty or licensing agreements or pay
amounts in settlement, or require us to develop alternative
non-infringing technology. We could also be required to defend
or indemnify our customers against such claims. A successful
claim by a third-party of intellectual property infringement by
us or one of our customers could compel us to enter into costly
royalty or license agreements, pay significant damages or even
stop selling certain products and incur additional costs to
develop alternative non-infringing technology.
Foreign
Operations
We derive a significant portion of our revenues from foreign
operations. For detail of revenue by geographic region see
Note 12, Segment Information, in the Notes to
Consolidated Financial Statements.
Employees
As of December 31, 2008, we had a total of approximately
2,154 employees of whom 1,195 were in the Americas region,
619 were in the EMEA region and 340 were in the Asia/Pacific
region.
None of our employees are subject to a collective bargaining
agreement. We believe that relations with our employees are good.
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Available
Information
Our 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 15(d) of the Securities Exchange Act of
1934 (the Exchange Act), are available free of
charge on our website at www.aciworldwide.com as soon as
reasonably practicable after we file such information
electronically with the SEC. The information found on our
website is not part of this or any other report we file with or
furnish to the SEC. The public may read and copy any materials
that we file with the SEC at the SECs Public Reference
Room at 100 F Street, Room 1580, NW, Washington
DC 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding
issuers that file electronically with the SEC at
www.sec.gov.
Executive
Officers of the Registrant
As of March 3, 2009, our executive officers, their ages and
their positions were as follows.
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Name
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Age
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Position
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Philip G. Heasley
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President, Chief Executive Officer and Director
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J. Ronald Totaro
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Senior Vice President and Chief Operating Officer
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Scott W. Behrens
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Senior Vice President, Chief Financial Officer, Controller and
Chief Accounting Officer
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Dennis P. Byrnes
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Senior Vice President, General Counsel and Secretary
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David McCann
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Senior Vice President and Chief Information Officer
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David N. Morem
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Senior Vice President, Global Business Operations
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Craig A. Maki
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Senior Vice President, Treasurer and Chief Corporate Development
Officer
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Mr. Heasley has been a director and our President
and Chief Executive Officer since March 2005. Mr. Heasley
has a comprehensive background in payment systems and financial
services. From October 2003 to March 2005, Mr. Heasley
served as Chairman and Chief Executive Officer of PayPower LLC,
an acquisition and consulting firm specializing in financial
services and payment services. Mr. Heasley served as
Chairman and Chief Executive Officer of First USA Bank from
October 2000 to November 2003. Prior to joining First USA Bank,
from 1987 until 2000, Mr. Heasley served in various
capacities for U.S. Bancorp, including Executive Vice
President, and President and Chief Operating Officer. Before
joining U.S. Bancorp, Mr. Heasley spent 13 years
at Citicorp, including three years as President and Chief
Operating Officer of Diners Club, Inc. Mr. Heasley is also
a director of Fidelity National Title Group now known as
Fidelity National Finance, Inc. (NYSE: FNF) and
Tier Technologies, Inc. (NASDAQ: TIER). Mr. Heasley
also served as a director of Kintera, Inc. (NASDAQ: KNTA) until
May 2008 when it was acquired by Blackbaud, Inc. (NASDAQ: BLKB).
Mr. Heasley also serves as a director on the board of
Public Radio International and serves on the National
Infrastructure Advisory Council.
Mr. Totaro joined the Company in March 2008 and
serves as Senior Vice President and Chief Operating Officer.
Mr. Totaro is responsible for strategic planning, sales
operations and global products. Prior to joining ACI, he was
vice president and general manager of global credit scoring
solutions at Fair Isaac Corporation. Mr. Totaro was vice
president of interactive marketing and media at AOL Time Warner
from 2000 to 2002 and previously held management positions at
Andersen Consulting LLP, GE Capital Corporation and American
Express TRS Company. Mr. Totaro holds an undergraduate
degree from the State University of New York and an MBA from the
Ross School of Business at the University of Michigan.
Mr. Behrens serves as Senior Vice President, Chief
Financial Officer, Controller and Chief Accounting Officer.
Mr. Behrens joined ACI in June 2007 as the Companys
Controller and Chief Accounting Officer. Mr. Behrens was
appointed Chief Financial Officer in December 2008 and Chief
Accounting Officer in October 2007. Prior to joining ACI,
Mr. Behrens served as Senior Vice President, Corporate
Controller and Chief Accounting Officer at SITEL Corporation
from January 2005 to June 2007. He also served as Vice President
of Financial Reporting at SITEL Corporation from April 2003 to
January 2005. From 1993 to 2003, Mr. Behrens was with
Deloitte & Touche,
14
LLP, including two years as a Senior Audit Manager.
Mr. Behrens holds a B.S. (Honors) from the University of
Nebraska Lincoln.
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
June 2003. From April 1996 to November 2001, Mr. Byrnes was
with Sterling Commerce, Inc., an electronic commerce software
and services company, where he served in several capacities,
including as that companys general counsel.
Mr. McCann joined the Company in October 2005 and
serves as Senior Vice President, Chief Information Officer.
Mr. McCann served as Senior Vice President, Software
Development at First Data Corporation from 2002 to October 2005.
Prior to joining First Data Corporation, Mr. McCann worked
at US Bancorp serving as Senior Vice President, Wealth and
Commercial Systems from 1999 to 2002 and Senior Vice President,
Payment Systems from 1995 to 1998. Mr. McCann served as
Vice President of Citicorp Diners Club from 1987 to 1995 and
held various leadership and technical positions with Citicorp
Diners Club from 1981 to 1987.
Mr. Morem joined the Company in June 2005 and serves
as Senior Vice President, Global Business Operations. Prior to
his appointment as Senior Vice President, Global Business
Operations in January 2008, Mr. Morem served as Chief
Administrative Officer of the Company. Prior to joining ACI,
Mr. Morem held executive positions at GE Home Loans, Bank
One Card Services and U.S. Bank. Mr. Morem brings more
than 25 years of experience in process management, finance,
credit operations, credit policy and change management.
Mr. Morem holds a B.A. degree from the University of
Minnesota and an M.B.A. from the University of St. Thomas.
Mr. Maki serves as Senior Vice President, Treasurer
and Chief Corporate Development Officer. Mr. Maki joined
the Company in June 2006, Mr. Maki was appointed Treasurer in
January 2008. Prior to joining the Company, Mr. Maki served
as Senior Vice President for Stephens, Inc. from 1999 through
2006. From 1994 to 1999, Mr. Maki was a Director in the
Corporate Finance group at Arthur Andersen and from 1991 to
1994, he was a Senior Consultant at Andersen Consulting.
Mr. Maki graduated from the University of Wyoming and
received his Master of Business Administration from the
University of Denver.
Former
Executive Officer
Mr. Launder served as President of Global Operations and
was responsible for the management of global sales and support
in all three of our distribution channels. Prior to his
appointment as President of Global Operations in April 2007,
Mr. Launder served as President of ACIs Europe,
Middle East and Africa (EMEA) distribution channel from 2000
through April 2007 and as President of ACIs Asia/Pacific
distribution channel from December 2006 through April 2007. In
these roles, he was responsible for sales and support in EMEA
and Asia/Pacific. He first joined ACI in 1989 and was
responsible for the EMEA operation until the end of 1996.
Mr. Launder then spent three years in the payments industry
working as a consultant. In the spring of 2000 he returned to
ACI, to head up the EMEA channel. Prior to joining ACI,
Mr. Launder worked for Olivetti Computers, IBM and in the
1980s Tandem Computers where he was the sales director for
Tandem Computers UK subsidiary. Mr. Launder resigned
from the Company effective February 28, 2009.
Factors
That May Affect Our Future Results or the Market Price of Our
Common Stock
We operate in a rapidly changing technological and economic
environment that presents numerous risks. Many of these risks
are beyond our control and are driven by factors that often
cannot be predicted. The following discussion highlights some of
these risks.
The
global financial crisis affecting the banking system and
financial markets and the current global economic conditions
could reduce the demand for our products and services or
otherwise adversely impact our cash flows, operating results and
financial condition.
The global financial crisis, declining real estate and retail
markets, changes in bank credit quality in the United States or
abroad, extreme capital and credit market volatility, higher
unemployment and declining business and
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consumer confidence have precipitated a global recession. The
global electronic payments industry and the banking and
financial services industries depend heavily upon the overall
levels of consumer, business and government spending. For the
foreseeable future, we expect to derive most of our revenue from
products and services we provide to the banking and financial
services industries. The current economic conditions could
result in a decrease in consumers use of banking services
and financial service providers and the implementation by banks
and related financial service provides of cost reduction
measures which could result in significant decreases in the
demand for our products and services and adversely affect our
operating results.
Moreover, to the degree that that the financial crisis and the
volatility in the credit markets makes it more difficult for our
customers to maintain sufficient liquidity to meet their
operating needs or obtain financing, customers may be unable to
timely meet their payment obligations to us and we may
experience greater difficulties in accounts receivable
collection, increases in bad debt write-offs and additions to
reserves in our receivables portfolio which could have a
material adverse impact on our cash flows, operating results and
financial condition.
Our
current credit facility contains restrictions and other
financial covenants that limit our flexibility in operating our
business.
Our credit facility contains customary affirmative and negative
covenants for credit facilities of this type that limit our
ability to engage in specified types of transactions. These
covenants limit our ability, and the ability of our
subsidiaries, to, among other things: pay dividends on,
repurchase or make distributions in respect of our capital stock
or make other restricted payments; make certain investments;
sell certain assets; create liens; incur additional indebtedness
or issue certain preferred shares; consolidate, merge, sell or
otherwise dispose of all or substantially all of our assets; and
enter into certain transactions with our affiliates. Our credit
facility also requires us to meet certain quarterly financial
tests, including a maximum leverage ratio and a minimum interest
coverage ratio. Our credit facility includes customary events of
default, including, but not limited to, failure to pay principal
or interest, breach of covenants or representations and
warranties, cross-default to other indebtedness, judgment
default and insolvency. If an event of default occurs under the
credit facility, the lenders will be entitled to take various
actions, including, but not limited to, demanding payment for
all amounts outstanding. If adverse global economic conditions
persist or worsen, we could experience decreased revenues from
our operations attributable to reduced demand for our products
and services and as a result, we could fail to satisfy the
financial and other restrictive covenants to which we are
subject under our existing credit facility, resulting in an
event of default. If we are unable to cure the default or obtain
a waiver we will not be able to access our credit facility and
we cannot assure you that we would be able to seek alternative
financing.
The
volatility and disruption of the capital and credit markets and
adverse changes in the global economy may negatively impact our
liquidity and our ability to access financing.
While we intend to finance our operations and growth of our
business with existing cash and cash flow from operations, if
adverse global economic conditions persist or worsen, we could
experience a decrease in cash from operations attributable to
reduced demand for our products and services and as a result, we
may need to borrow additional amounts under our existing credit
facility or we may require additional financing for our
continued operation and growth. However, due to the existing
uncertainty in the capital and credit markets and the impact of
the current economic crisis on our operating results and
financial conditions, the amount of available unused borrowings
under our existing credit facility may be insufficient to meet
our needs
and/or our
access to capital outside of our existing credit facility may
not be available on terms acceptable to us or at all.
Additionally, if one or more of the financial institutions in
our syndicate were to default on its obligation to fund its
commitment, the portion of the committed facility provided by
such defaulting financial institution would not be available to
us. We cannot assure you that alternative financing on
acceptable terms would be available to replace any defaulted
commitments.
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Our
announced restructuring and efficiency efforts as part of the
implementation of our strategic plan may not achieve the
expected efficiencies and cost savings which could affect our
results of operations and financial condition.
In August 2008 we announced the implementation of our strategic
plan and our expectations related to certain cost take-outs
during 2008 and 2009 to be achieved primarily through a
reduction in the work force, reallocation of headcount to
different geographies and consolidation of non-core products and
facilities. While we expect our cost saving initiatives to
result in significant cost savings throughout our organization,
our estimated savings are based on several assumptions that may
prove to be inaccurate, and as a result we cannot assure you
that we will realize these cost savings. The failure to achieve
our estimated cost savings, or a significant delay in our
achievement of the expected benefits, could negatively affect
our financial condition and results of operations. Factors that
could cause actual results to differ materially from our
expectations with regard to our announced restructuring include:
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timing and execution of plans and programs that may be subject
to local labor law requirements, including consultation with
appropriate work councils;
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changes in assumptions related to severance and
postretirement costs;
risks associated with litigation for wrongful
termination;
new business initiatives and changes in product
roadmaps and development efforts;
changes in employment levels and turnover
rates; and
changes in product demand and the business
environment.
While we have and will continue to implement these strategies,
there can be no assurance that we will be able to do so
successfully or that we will realize the projected benefits of
these and other cost saving plans. If we are unable to realize
these anticipated cost reductions, our financial health may be
adversely affected. Moreover, our continued implementation of
cost saving plans may result in the continued diversion of
management time and resources and the disruption of our
operations, services to customers and performance.
We may
face risks related to recent restatements of our financial
statements.
Prior to filing this Annual Report, we determined that we needed
to restate our consolidated financial statements for the quarter
ended March 31, 2008 to make adjustments related to the
recognition of $1.9 million of revenue during that quarter
for a software project in the Asia/Pacific reportable operating
segment which should have been deferred until further project
milestones were achieved. As a result, we also amended our
quarterly reports on
Form 10-Q/A
for the periods ended June 30, 2008 and September 30,
2008 to report year-to-date data reflecting the adjustments made
in the restated consolidated financial statements for the
quarter ended March 31, 2008.
In addition, during fiscal 2007, we restated our consolidated
balance sheet as of September 30, 2005, and our
consolidated statements of operations, our consolidated
statements of stockholders equity and comprehensive income
and consolidated statements of cash flows for each of the years
ended September 30, 2005 and 2004. In addition, we restated
selected financial data for fiscal years 2004, 2003 and 2002.
Companies that restate their financial statements sometimes face
litigation claims
and/or SEC
proceedings following such a restatement. We could face monetary
judgments, penalties or other sanctions which could adversely
affect our financial condition and could cause our stock price
to decline.
Consolidation
in the financial services industry may adversely impact the
number of customers and our revenues in the
future.
Mergers, acquisitions and personnel changes at key financial
services organizations have the potential to adversely affect
our business, financial condition, and results of operations.
Our business is concentrated in the financial services industry,
making us 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 could cause us to lose
existing and
17
potential customers for our products and services. For instance,
consolidation of two of our customers could result in reduced
revenues if the combined entity were to negotiate greater volume
discounts or discontinue use of certain of our products.
Additionally, if a non-customer and a customer combine and the
combined entity in turn decided to forego future use of our
products, our revenues would decline.
Most
of our customers are in the banking and financial services
industries which are subject to economic changes that could
reduce the demand for our products and services.
For the foreseeable future, we expect to derive most of our
revenue from products and services we provide to the banking and
financial services industries. Our financial condition depends
on the health of the general economy as well as the software
sector and financial services industry as our revenue and
profits are driven by demand for our products and services.
Changes in economic conditions and unforeseen events like
recession, the current financial and mortgage crisis, inflation
or changes in bank credit quality in the United States or
abroad, could occur and reduce consumers use of banking
services and financial service providers. Any event of this
kind, or implementation for any reason by banks or related
financial service providers of cost reduction measures, could
result in significant decreases in the demand for our products
and services and adversely affect our operating results. When an
economy is struggling, companies in many industries delay or
reduce technology purchases. A lessening demand in either the
overall economy, the software sector or the financial services
industry could result in reduced capital spending by our
customers, longer sales cycles, deferral or delay of purchase
commitments for our products and increased price competition
which could lead to a material decrease in our future revenues
and earnings.
Managements
backlog estimate may not be accurate and may not generate the
predicted revenues.
Estimates of future financial results are inherently unreliable.
Our backlog estimates require substantial judgment and are based
on a number of assumptions, including managements current
assessment of customer and third party contracts that exist as
of the date the estimates are made, as well as revenues from
assumed contract renewals, to the extent that we believe that
recognition of the related revenue will occur within the
corresponding backlog period. A number of factors could result
in actual revenues being less than the amounts reflected in
backlog. Our customers or third party partners 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 within
their industries or geographic locations, or we may experience
delays in the development or delivery of products or services
specified in customer contracts. Actual renewal rates and
amounts may differ from historical experiences used to estimate
backlog amounts. Changes in foreign currency exchange rates may
also impact the amount of revenue actually recognized in future
periods. Accordingly, there can be no assurance that contracts
included in backlog will actually generate the specified
revenues or that the actual revenues will be generated within a
12-month or
60-month
period. Additionally, because backlog estimates are operating
metrics, the estimates are not subject to the same level of
internal review or controls as a generally accepted accounting
principles (GAAP) financial measure.
Management
has identified a material weakness in our internal control over
financial reporting.
Effective internal control over financial reporting is necessary
for compliance with the Sarbanes-Oxley Act of 2002 and
appropriate financial reporting. Management is responsible for
establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting
is a process, under the supervision of our CEO and CFO, designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of our financial
statements for external reporting purposes in accordance with
GAAP. As disclosed in this Annual Report, managements
assessment of our internal control over financial reporting
identified a material weakness related to accounting for
software implementation service and license arrangements in the
Asia/Pacific region, as discussed in Item 9A. Controls
and Procedures. No assurance can be given that we will be
able to successfully implement revised internal controls and
procedures, if any, or that revised controls and procedures, if
any, will be effective in remedying the potential material
weakness in our prior controls and procedures, nor can we
provide assurance that we will not identify additional material
weaknesses in the future. If we are unable to implement these
changes effectively or if other material weaknesses develop and
we are unable to effectively address these matters, there could
be a material adverse effect on our business, financial
condition and results of operations.
18
We may
face exposure to unknown tax liabilities, which could adversely
affect our financial condition and/or results of
operations.
We are subject to income and non-income based taxes in the
United States and in various foreign jurisdictions. Significant
judgment is required in determining our worldwide income tax
liabilities and other tax liabilities. In addition, we expect to
continue to benefit from implemented tax-saving strategies. We
believe that these tax-saving strategies comply with applicable
tax law. If the governing tax authorities have a different
interpretation of the applicable law and successfully challenge
any of our tax positions, our financial condition
and/or
results of operations could be adversely affected.
Our tax positions in our United States federal income tax
returns filed for the 2005 and 2006 tax years are the subject of
an ongoing examination by the Internal Revenue Service
(IRS). We believe that our tax positions comply with
applicable tax law and intend to vigorously defend our
positions. This examination could result in the IRS issuing
proposed adjustments that could adversely affect our financial
condition
and/or
results of operations.
One of our foreign subsidiaries is the subject of a tax
examination 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 our tax positions. We believe our tax positions comply
with applicable tax law and intend to vigorously defend our
positions. However, differing positions on certain issues could
be upheld by foreign tax authorities, which could adversely
affect our financial condition
and/or
results of operations.
Our
stock price may be volatile.
Prices on the global financial markets for equity securities
declined precipitously since September 2008. No assurance can be
given that operating results will not vary from quarter to
quarter, and past performance may not accurately predict future
performance. Any fluctuations in quarterly operating results may
result in volatility in our stock price. Our stock price may
also be volatile, in part, due to external factors such as
announcements by third parties or competitors, inherent
volatility in the technology sector, and changing market
conditions in the software industry.
There
are a number of risks associated with our international
operations.
We have historically derived a majority of our revenues from
international operations and anticipate continuing to do so. As
a result, we are subject to risks of conducting international
operations. One of the principal risks associated with
international operations is potentially adverse movements of
foreign currency exchange rates. Our exposures resulting from
fluctuations in foreign currency exchange rates may change over
time as our business evolves and could have an adverse impact on
our financial condition
and/or
results of operations. We have not entered into any derivative
instruments or hedging contracts to reduce exposure to adverse
foreign currency changes. Other potential risks include
difficulties associated with staffing and management, reliance
on independent distributors, longer payment cycles, potentially
unfavorable changes to foreign tax rules, compliance with
foreign regulatory requirements, reduced protection of
intellectual property rights, variability of foreign economic
conditions, changing restrictions imposed by United States
export laws, and general economic and political conditions in
the countries where we sell our products and services.
The
software market is a rapidly changing and highly competitive
industry, and we may not be able to compete
effectively.
The software market is characterized by rapidly changing
technologies, intense competition and evolving industry
standards. There is no assurance that we will be able to
maintain our current market share or customer base. We have many
competitors that are significantly larger than we are and have
significantly greater financial, technical and marketing
resources. If we fail to enhance our current products and
develop new products in response to changes in technology and
industry standards, bring product enhancements or new product
developments to market quickly enough, or accurately predict
future changes in our customers needs and our competitors
develop new technologies or products, our products could become
less competitive or obsolete. In addition, we expect that the
markets in which we compete will continue to attract new
competitors and new technologies. Increased competition in our
markets could lead to price reductions, reduced profits, or loss
of business.
19
We are
engaged in offshore software development activities, which may
not be successful and which may put our intellectual property at
risk.
As part of our globalization strategy and to optimize available
research and development resources, in fiscal 2006 we
established a new subsidiary in Ireland to serve as the focal
point for certain international product development and
commercialization efforts. This subsidiary oversees remote
software development operations in Romania and elsewhere, as
well as manages certain of our intellectual property rights.
While our experience to date with our offshore development
centers has been positive, there is no assurance that this will
continue. Specifically, there are a number of risks associated
with this activity, including but not limited to the following:
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communications and information flow may be less efficient and
accurate as a consequence of the time, distance and language
differences between our primary development organization and the
foreign based activities, resulting in delays in development or
errors in the software developed;
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in addition to the risk of misappropriation of intellectual
property from departing personnel, there is a general risk of
the potential for misappropriation of our intellectual property
that might not be readily discoverable;
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the quality of the development efforts undertaken offshore may
not meet our requirements because of language, cultural and
experiential differences, resulting in potential product errors
and/or
delays;
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potential disruption from the involvement of the United States
in political and military conflicts around the world; and
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currency exchange rates could fluctuate and adversely impact the
cost advantages intended from maintaining these facilities.
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One of
our most strategic products, BASE24-eps, could prove to be
unsuccessful in the market.
Our BASE24-eps product is strategic for us, in that it is
designated to help us win new accounts, replace legacy payments
systems on multiple hardware platforms and help us transition
our existing customers to a new, open-systems product
architecture. Our business, financial condition
and/or
results of operations could be materially adversely affected if
we are unable to generate adequate sales of BASE24-eps, if
market acceptance of BASE24-eps is delayed, or if we are unable
to successfully deploy BASE24-eps in production environments.
Our
announcement of the maturity of certain legacy retail payment
products may result in decreased customer investment in our
products and our strategy to migrate customers to our next
generation products may be unsuccessful which may adversely
impact our business and financial condition.
Our announcement related to the maturity of certain retail
payment engines may result in customer decisions not to purchase
or otherwise invest in these engines, related products
and/or
services. Alternatively, the maturity of these products may
result in delayed customer purchase decisions or the
renegotiation of contract terms based upon scheduled maturity
activities. In addition, our strategy related to migrating
customers to our next generation products may be unsuccessful.
Reduced investments in our products, deferral or delay in
purchase commitments by our customers or our failure to
successfully manage our migration strategy could have a material
adverse effect on our business, liquidity and financial
condition.
Our
future profitability depends on demand for our products; lower
demand in the future could adversely affect our
business.
Our revenue and profitability depend on the overall demand for
our products and services. Historically, a majority of our total
revenues resulted from licensing our 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 our
financial condition
and/or
results of operations.
We have historically derived a substantial portion of our
revenues from licensing of software products that operate on HP
NonStop servers. Any reduction in demand for HP NonStop servers,
or any change in strategy by HP
20
related to support of its NonStop servers, could have a material
adverse effect on our financial condition
and/or
results of operations.
If we
are unable to successfully perform under the terms of our
alliance with IBM or our customers are not receptive to the
alliance, our business, financial condition and/or results of
operations may be adversely affected.
In December 2007, we entered into a Master Alliance Agreement
and certain other related agreements with International Business
Machines Corporation (IBM) to create a strategic
alliance between us and IBM (the Alliance). Pursuant
to the Alliance Agreement, we agreed to enable our payment
application software products on certain of IBMs hardware
platforms, including the IBM System z Platform and we agreed to
enter into collective sales and marketing efforts with IBM to
offer a combination of ACI and IBM solutions. We cannot be
certain that we will be able to successfully enable our products
on IBMs hardware platforms or that our customers and
potential customers will be receptive to this Alliance or our
new sales and marketing strategy. If we are unable to enable our
software products on the IBM hardware platforms or the market
does not react positively to the Alliance, our business,
financial condition
and/or
results of operations could be materially adversely affected.
Our
outsourcing agreement with IBM may not achieve the level of
savings that we anticipate and many associated changes in
systems and personnel are being made, increasing operational and
control risk during transition, which may have an impact on the
business and its financial condition.
Our seven-year outsourcing agreement with IBM is estimated to
deliver operating cost savings for us of $25 million to
$30 million over the course of the contract and reduce our
capital expenditures. The estimated cost savings and capital
expenditure reductions are dependent upon many factors, and
unanticipated changes in operations may cause actual cost
savings and capital expenditure reductions to be substantially
less than expected.
In addition, as a part of the outsourcing agreement, many
functions are being transitioned to IBM and many new personnel
are assuming responsibilities across these functions, increasing
the risk of operational delays, potential errors and control
failures which may have an impact on us and our financial
condition. Additionally, new information technology systems and
process changes are also being put into place increasing the
risk of operational delays, potential errors and control
failures which may have an adverse impact on us and our
financial condition.
Our
software products may contain undetected errors or other
defects, which could damage our reputation with customers,
decrease profitability, and expose us to
liability.
Our software products are complex. They may contain undetected
errors or flaws when first introduced or as new versions are
released. These undetected errors may result in loss of, or
delay in, market acceptance of our products and a corresponding
loss of sales or revenues. Customers depend upon our products
for mission-critical applications, and these errors may hurt our
reputation with customers. In addition, software product errors
or failures could subject us to product liability, as well as
performance and warranty claims, which could materially
adversely affect our business, financial condition
and/or
results of operations.
Security
breaches or computer viruses could harm our business by
disrupting delivery of services and damaging our
reputation.
As part of our business, we electronically receive, process,
store, and transmit sensitive business information of our
customers. Unauthorized access to our computer systems or
databases could result in the theft or publication of
confidential information or the deletion or modification of
records or could otherwise cause interruptions in our
operations. These concerns about security are increased when we
transmit information over the Internet. Security breaches in
connection with the delivery of our products and services,
including products and services utilizing the Internet, or
well-publicized security breaches, and the trend toward broad
consumer and general public notification of such incidents,
could significantly harm our business, financial condition
and/or
results of operations. We cannot be certain that advances in
criminal capabilities, discovery of new vulnerabilities,
attempts to exploit vulnerabilities in our systems, data thefts,
physical system or network break-ins or inappropriate access, or
other developments will not compromise or breach the technology
protecting our networks and confidential information. Computer
viruses
21
have also been distributed and have rapidly spread over the
Internet. Computer viruses could infiltrate our systems,
disrupting our delivery of services and making our applications
unavailable. Any inability to prevent security breaches or
computer viruses could also cause existing customers to lose
confidence in our systems and terminate their agreements with
us, and could inhibit our ability to attract new customers.
If our
products and services fail to comply with government regulations
and industry standards to which are customers are subject, it
could result in a loss of customers and decreased
revenue.
Our customers are subject to a number of government regulations
and industry standards with which our products and services must
comply. For example, our products are affected by VISA and
MasterCard electronic payment standards that are generally
updated twice annually. In addition, action by regulatory
authorities relating to credit availability, data usage,
privacy, or other related regulatory developments could have an
adverse effect on our customers and therefore could have a
material adverse effect on our business, financial condition,
and results of operations.
If we
fail to comply with privacy regulations imposed on providers of
services to financial institutions, our business could be
harmed.
As a provider of services to financial institutions, we may be
bound by the same limitations on disclosure of the information
we receive from our customers as apply to the financial
institutions themselves. If we are subject to these limitations
and we fail to comply with applicable regulations, we could be
exposed to suits for breach of contract or to governmental
proceedings, our customer relationships and reputation could be
harmed, and we could be inhibited in our ability to obtain new
customers. In addition, if more restrictive privacy laws or
rules are adopted in the future on the federal or state level,
or, with respect to our international operations, by authorities
in foreign jurisdictions on the national, provincial, state, or
other level, that could have an adverse impact on our business.
If we
experience system failures, the products and services we provide
to our customers could be delayed or interrupted, which could
harm our business and reputation and result in the loss of
customers.
Our ability to provide reliable service in a number of our
businesses depends on the efficient and uninterrupted operations
of our computer network systems and data centers. Our systems
and operations could be exposed to damage or interruption from
fire, natural disaster, power loss, telecommunications failure,
unauthorized entry, and computer viruses. Although we have taken
steps to prevent system failures, we cannot be certain that our
measures will be successful. Further, our property and business
interruption insurance may not be adequate to compensate us for
all losses or failures that may occur. Any significant
interruptions could:
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increase our operating expenses to correct problems caused by
the interruption;
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harm our business and reputation;
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result in a loss of customers; or
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expose us to liability.
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Any one or more of the foregoing occurrences could have a
material adverse effect on our business, financial condition,
and results of operations.
We may
be unable to protect our intellectual property and technology
and may be subject to increasing litigation over our
intellectual property rights.
To protect our proprietary rights in our intellectual property,
we rely on a combination of contractual provisions, including
customer licenses that restrict use of our products,
confidentiality agreements and procedures, and trade secret and
copyright laws. Despite such efforts, we may not be able to
adequately protect our proprietary rights, or our competitors
may independently develop similar technology, duplicate
products, or design around any rights we believe 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 to protect our
proprietary rights could materially adversely affect our
business.
22
There has been a substantial amount of litigation in the
software industry regarding intellectual property rights. Third
parties have in the past, and may in the future, assert claims
or initiate litigation related to exclusive patent, copyright,
trademark or other intellectual property rights to business
processes, technologies and related standards that are relevant
to us and our customers. These assertions have increased over
time as a result of the general increase in patent claims
assertions, particularly in the United States. Because of the
existence of a large number of patents in the electronic
commerce field, the secrecy of some pending patents and the
rapid issuance of new patents, it is not economical or even
possible to determine in advance whether a product or any of its
components infringes or will infringe on the patent rights of
others. Any claim against us, with or without merit, could be
time-consuming, result in costly litigation, cause product
delivery delays, require us to enter into royalty or licensing
agreements or pay amounts in settlement, or require us to
develop alternative non-infringing technology.
We anticipate that software product developers and providers of
electronic commerce solutions could increasingly be subject to
infringement claims, and third parties may claim that our
present and future products infringe upon their intellectual
property rights. Third parties may also claim, and we are aware
that at least two parties have claimed on several occasions,
that our customers use of a business process method which
utilizes our products in conjunction with other products
infringe on the third-partys intellectual property rights.
These third-party claims could lead to indemnification claims
against us by our customers. Claims against our customers
related to our products, whether or not meritorious, could harm
our reputation and reduce demand for our products. Where
indemnification claims are made by customers, resistance even to
unmeritorious claims could damage the customer relationship. A
successful claim by a third-party of intellectual property
infringement by us or one of our customers could compel us to
enter into costly royalty or license agreements, pay significant
damages, or stop selling certain products and incur additional
costs to develop alternative non-infringing technology. Royalty
or licensing agreements, if required, may not be available on
terms acceptable to us or at all, which could adversely affect
our business.
Our exposure to risks associated with the use of intellectual
property may be increased for third-party products distributed
by us or as a result of acquisitions since we have a lower level
of visibility, if any, into the development process with respect
to such third-party products and acquired technology or the care
taken to safeguard against infringement risks.
Risks
associated with future acquisitions and investments could
materially adversely affect our business.
We 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. During fiscal 2007, we acquired
Visual Web and Stratasoft. Any acquisition or investment,
including the acquisitions of Visual Web and Stratasoft, is
subject to a number of risks. Such risks include the diversion
of management time and resources, disruption of our ongoing
business, dilution to existing stockholders if our common stock
is issued in consideration for an acquisition or investment,
incurring or assuming indebtedness or other liabilities in
connection with an acquisition, lack of familiarity with new
markets, and difficulties in supporting new product lines.
Further, even if we successfully complete acquisitions, we face
challenges in integrating any acquired business. These
challenges include eliminating redundant operations, facilities
and systems, coordinating management and personnel, retaining
key employees, managing different corporate cultures, and
achieving cost reductions and cross-selling opportunities. There
can be no assurance that we will be able to fully integrate all
aspects of acquired businesses successfully or fully realize the
potential benefits of bringing them together, and the process of
integrating these acquisitions may disrupt our business and
divert our resources.
Our failure to successfully manage acquisitions or investments,
or successfully integrate acquisitions could have a material
adverse effect on our business, financial condition
and/or
results of operations. Correspondingly, our expectations related
to the benefits related to the Visual Web and Stratasoft
acquisitions, prior acquisitions in 2005 and 2006 or any other
future acquisition or investment could be inaccurate.
23
We may
become involved in litigation that could materially adversely
affect our business financial condition and/or results of
operations.
From time to time, we are involved in litigation relating to
claims arising out of our 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 our business,
financial condition, results of operations
and/or cash
flows.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
We lease office space in New York, New York for our principal
executive headquarters. We also lease office space in Omaha,
Nebraska, for our principal product development group, sales and
support groups for the Americas, as well as our corporate,
accounting and administrative functions. We moved into our new
Omaha-based facility during the year ended December 31,
2008, which facility is under a lease that continues through
2028. Our EMEA headquarters is located in Watford, England. The
lease for the Watford facility expires at the end of 2016. Our
Asia/Pacific headquarters is located in Singapore, with the
lease for this facility expiring in fiscal 2011. We also lease
office space in numerous other locations in the United States
and in many other countries.
We believe that our current facilities are adequate for our
present and short-term foreseeable needs and that additional
suitable space will be available as required. We also believe
that we will be able to renew leases as they expire or secure
alternate suitable space. See Note 17, Commitments
and Contingencies, in the Notes to Consolidated Financial
Statements for additional information regarding our obligations
under our facilities leases.
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ITEM 3.
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LEGAL
PROCEEDINGS
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From time to time, we are involved in various litigation matters
arising in the ordinary course of our business. Other than as
described below, we are not currently a party to any legal
proceedings, the adverse outcome of which, individually or in
the aggregate, we believe would be likely to have a material
adverse effect on our 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 us and certain individuals alleging
violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and
Rule 10b-5
thereunder. Pursuant to a Court order, the two complaints were
consolidated as Desert Orchid Partners v. Transaction
Systems Architects, Inc., et al., with Genesee County
Employees Retirement System designated as lead plaintiff.
The complaints, as amended, sought unspecified damages,
interest, fees, and costs and alleged that (i) during the
purported class period, we and the named defendants
misrepresented our historical financial condition, results of
operations and our future prospects, and failed to disclose
facts that could have indicated an impending decline in our
revenues, and (ii) prior to August 2002, the purported
truth regarding our financial condition had not been disclosed
to the market while simultaneously alleging that the purported
truth about our financial condition was being disclosed
throughout that time, commencing in April 1999. We and the
individual defendants filed a motion to dismiss and the lead
plaintiff opposed the motion. Prior to any ruling on the motion
to dismiss, on November 7, 2006, the parties entered into a
Stipulation of Settlement for purposes of settling all of the
claims in the Class Action Litigation, with no admissions
of wrongdoing by us or any individual defendant. The settlement
provides for an aggregate cash payment of $24.5 million of
which, net of insurance, we contributed approximately
$8.5 million. The settlement was approved by the Court on
March 2, 2007 and the Court ordered the case dismissed with
prejudice against us and the individual defendants.
On March 27, 2007, James J. Hayes, a class member, filed a
notice of appeal with the United States Court of Appeals for the
Eighth Circuit appealing the Courts order. On
August 13, 2008, the Court of Appeals affirmed the judgment
of the district court dismissing the case. Thereafter,
Mr. Hays petitioned the Court of Appeals for a rehearing en
banc, which petition was denied on September 22, 2008. On
January 23, 2009 we were informed that
24
Mr. Hayes filed a petition with the U.S. Supreme Court
seeking a writ of certiorari which was docketed on
February 20, 2009.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to vote of stockholders during the
fourth quarter of 2008.
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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Our common stock trades on The NASDAQ Global Select Market under
the symbol ACIW. The following table sets forth, for the periods
indicated, the high and low sale prices of our common stock as
reported by The NASDAQ Global Select Market:
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Year Ended
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Three Months Ended
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Year Ended
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December 31, 2008
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December 31, 2007
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September 30, 2007
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High
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Low
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High
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Low
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High
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Low
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Fourth quarter
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$
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17.94
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$
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8.86
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$
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26.19
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$
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16.51
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$
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36.68
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$
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20.65
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Third quarter
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$
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22.49
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|
$
|
14.16
|
|
|
|
|
|
|
|
|
|
|
$
|
35.48
|
|
|
$
|
30.60
|
|
Second quarter
|
|
$
|
23.19
|
|
|
$
|
16.10
|
|
|
|
|
|
|
|
|
|
|
$
|
38.72
|
|
|
$
|
28.10
|
|
First quarter
|
|
$
|
21.39
|
|
|
$
|
12.32
|
|
|
|
|
|
|
|
|
|
|
$
|
37.14
|
|
|
$
|
31.45
|
|
As of February 27, 2009, there were 242 holders of record
of our common stock. A substantially greater number of holders
of our common stock are street name or beneficial
holders, whose shares are held of record by banks, brokers and
other financial institutions.
Dividends
We have never declared nor paid cash dividends on our common
stock. We do 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 depend upon our financial condition, capital
requirements and earnings, as well as other factors the board of
directors may deem relevant.
Issuer
Purchases of Equity Securities
We did not repurchase any of our common stock during the
three-month period ended December 31, 2008.
Our board of directors has approved a stock repurchase program
authorizing us, from time to time as market and business
conditions warrant, to acquire up to $210 million of our
common stock. The maximum remaining dollar value of shares
authorized for repurchase under the stock repurchase plan was
approximately $56 million at December 31, 2008. We can
provide no assurance that any future purchases of shares will be
made under this program. Any determination by the board of
directors to repurchase any shares in 2009 will depend upon
market conditions, our liquidity, our financial position,
alternative use of capital and other factors.
25
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following selected financial data has been derived from our
consolidated financial statements. This data should be read
together with Item 7, Managements Discussion
and Analysis of Financial Condition and Results of
Operations, and the consolidated financial statements and
related notes included elsewhere in this Annual Report. The data
for the consolidated balance sheet as of September 30, 2004
has been restated in prior years to reflect the impact of the
stock-based compensation adjustments, but such restated data has
not been audited and is derived from our books and records. The
financial information below is not necessarily indicative of the
results of future operations. Future results could differ
materially from historical results due to many factors,
including those discussed in Item 1A in the section
entitled Risk Factors Factors That May Affect
Our Future Results or the Market Price of our Common Stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Year Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
417,653
|
|
|
$
|
101,282
|
|
|
$
|
366,218
|
|
|
$
|
347,902
|
|
|
$
|
313,237
|
|
|
$
|
292,784
|
|
Net income (loss)(1)
|
|
$
|
10,582
|
|
|
$
|
(2,016
|
)
|
|
$
|
(9,131
|
)
|
|
$
|
55,365
|
|
|
$
|
43,099
|
|
|
$
|
46,306
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.31
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
1.48
|
|
|
$
|
1.14
|
|
|
$
|
1.25
|
|
Diluted
|
|
$
|
0.30
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
1.45
|
|
|
$
|
1.12
|
|
|
$
|
1.21
|
|
Shares used in computing earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
34,498
|
|
|
|
35,700
|
|
|
|
36,933
|
|
|
|
37,369
|
|
|
|
37,682
|
|
|
|
37,001
|
|
Diluted
|
|
|
34,795
|
|
|
|
35,700
|
|
|
|
36,933
|
|
|
|
38,237
|
|
|
|
38,507
|
|
|
|
38,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital(2)
|
|
$
|
80,280
|
|
|
$
|
39,585
|
|
|
$
|
17,358
|
|
|
$
|
67,932
|
|
|
$
|
120,594
|
|
|
$
|
124,088
|
|
Total assets(2)
|
|
|
552,842
|
|
|
|
570,458
|
|
|
|
506,741
|
|
|
|
539,365
|
|
|
|
363,700
|
|
|
|
325,959
|
|
Current portion of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,165
|
|
|
|
7,027
|
|
Debt (long-term portion)(2)(3)
|
|
|
76,014
|
|
|
|
75,911
|
|
|
|
76,546
|
|
|
|
78,093
|
|
|
|
905
|
|
|
|
2,672
|
|
Stockholders equity(1)
|
|
|
213,841
|
|
|
|
241,039
|
|
|
|
225,012
|
|
|
|
267,212
|
|
|
|
217,438
|
|
|
|
187,462
|
|
|
|
|
(1) |
|
We adopted FAS 123(R) using the modified prospective
transition method on October 1, 2005. |
|
(2) |
|
On September 29, 2006, we acquired P&H. The aggregate
purchase price for P&H was approximately $134 million,
of which $73 million was financed by long-term debt. |
|
(3) |
|
Debt (long-term portion) also includes long-term capital lease
obligations of $1.0 million, $0.9 million,
$1.5 million, $3.1 million, $0.8 million, and
$0.3 million as of December 31, 2008 and 2007, and
September 30, 2007, 2006, 2005, and 2004, respectively,
which is included in other noncurrent liabilities in the
consolidated balance sheets. |
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
OVERVIEW
We develop, market, install and support a broad line of software
products and services primarily focused on facilitating
electronic payments. In addition to our own products, we
distribute, or act as a sales agent for, software developed by
third parties. Our products are sold and supported through
distribution networks covering three
26
geographic regions the Americas, EMEA and
Asia/Pacific. Each distribution network has its own sales force
and supplements its sales force with independent reseller
and/or
distributor networks. Our products and services are used
principally by financial institutions, retailers and electronic
payment processors, both in domestic and international markets.
Accordingly, our business and operating results are influenced
by trends such as information technology spending levels, the
growth rate of the electronic payments industry, mandated
regulatory changes, and changes in the number and type of
customers in the financial services industry. Our products are
marketed under the ACI Worldwide brand.
We derive a majority of our revenues from non-domestic
operations and believe our greatest opportunities for growth
exist largely in international markets. Refining our global
infrastructure is a critical component of driving our growth. We
have launched a globalization strategy which includes elements
intended to streamline our supply chain and provide low-cost
centers of expertise to support a growing international customer
base. In fiscal 2006, we established a new subsidiary in Ireland
to serve as the focal point for certain international product
development and commercialization efforts. This subsidiary
oversees remote software development operations in Romania and
elsewhere, as well as manages certain of our intellectual
property rights. During 2008, we have continued our efforts to
try and take a direct selling and support strategy in certain
countries where historically we have used third-party
distributors to represent our products, in an effort to develop
closer relationships with our customers and develop a stronger
overall position in those countries. We also moved our principal
executive offices to New York City in September 2006 to manage
our global infrastructure more strategically.
We have launched a service called ACI On Demand, wherein we host
our payment systems and sell them as a service to banks,
retailers and processors.
On February 23, 2007, our board of directors approved a
change in the Companys fiscal year from a September 30
fiscal year-end to a December 31 fiscal year-end, effective as
of January 1, 2008 for the fiscal year ended
December 31, 2008. In accordance with applicable SEC Rules,
we filed a Transition Report on
Form 10-Q
for the transition period from October 1, 2007 to
December 31, 2007, with the SEC on February 19, 2008.
Accordingly, the consolidated financial statements included
herein present our financial position as of December 31,
2008 and 2007 and September 30, 2007, and the results of
our operations, cash flows and changes in stockholders
equity for the year ended December 31, 2008, the
three-month period ended December 31, 2007, and the years
ended September 30, 2007 and 2006.
Key trends that currently impact our strategies and operations
include:
|
|
|
|
|
Global Financial Markets Uncertainty. The
continuing uncertainty in the global financial markets has
negatively impacted general business conditions. It is possible
that a weakening economy could adversely affect our customers,
their purchasing plans, or even their solvency, but we cannot
predict whether or to what extent this will occur. We have
diversified counterparties and customers, but we continue to
monitor our counterparty and customer risks closely. While the
effects of the economic conditions in the future are not
predictable, we believe our global presence, the breadth and
diversity of our service offerings and our enhanced expense
management capabilities position us well in a slower economic
climate.
|
|
|
|
Availability of Credit. There have been
significant disruptions in the capital and credit markets during
the past year and many lenders and financial institutions have
reduced or ceased to provide funding to borrowers. The
availability of credit, confidence in the entire financial
sector, and volatility in financial markets has been adversely
affected. These disruptions are likely to have some impact on
all institutions in the U.S. banking and financial
industries, including our lenders and the lenders of our
customers. The Federal Reserve Bank has been providing vast
amounts of liquidity into the banking system to compensate for
weaknesses in short-term borrowing markets and other capital
markets. A reduction in the Federal Reserves activities or
capacity could reduce liquidity in the markets, thereby
increasing funding costs or reducing the availability of funds
to finance our existing operations as well as those of our
customers. We are not currently dependent upon short-term
funding, and the limited availability of credit in the market
has not affected our revolving credit facility or our liquidity
or materially impacted our funding costs.
|
|
|
|
Increasing electronic payment transaction
volumes. Electronic payment volumes continue to
increase around the world, taking market share from traditional
cash and check transactions. In 2006, we
|
27
|
|
|
|
|
commissioned an industry study that determined that electronic
payment volumes are expected to grow at approximately 13% per
year for the following five years, with varying growth rates
based on the type of payment and part of the world. We leverage
the growth in transaction volumes through the licensing of new
systems to customers whose older systems cannot handle increased
volume and through the licensing of capacity upgrades to
existing customers.
|
|
|
|
|
|
Increasing competition. The electronic
payments market is highly competitive and subject to rapid
change. Our competition comes from in-house information
technology departments, third-party electronic payment
processors and third-party software companies located both
within and outside of the United States. Many of these companies
are significantly larger than us and have significantly greater
financial, technical and marketing resources. As electronic
payment transaction volumes increase, third-party processors
tend to provide competition to our solutions, particularly among
customers that do not seek to differentiate their electronic
payment offerings. As consolidation in the financial services
industry continues, we anticipate that competition for those
customers will intensify.
|
|
|
|
Aging payments software. In many markets,
electronic payments are processed using software developed by
internal information technology departments, much of which was
originally developed over ten years ago. Increasing transaction
volumes, industry mandates and the overall costs of supporting
these older technologies often serve to make these older systems
obsolete, creating opportunities for us to replace this aging
software with newer and more advanced products.
|
|
|
|
Adoption of open systems technology. In an
effort to leverage lower-cost computing technologies and current
technology staffing and resources, many financial institutions,
retailers and electronic payment processors are seeking to
transition their systems from proprietary technologies to open
technologies such as Microsoft Windows, UNIX and Linux. Our
continued investment in open systems technologies is, in part,
designed to address this demand.
|
|
|
|
Electronic payments fraud and compliance. As
electronic payment transaction volumes increase, criminal
elements continue to find ways to commit a growing volume of
fraudulent transactions using a wide range of techniques.
Financial institutions, retailers and electronic payment
processors continue to seek ways to leverage new technologies to
identify and prevent fraudulent transactions. Due to concerns
with international terrorism and money laundering, financial
institutions in particular are being faced with increasing
scrutiny and regulatory pressures. We continue to see
opportunity to offer our fraud detection solutions to help
customers manage the growing levels of electronic payment fraud
and compliance activity.
|
|
|
|
Adoption of smartcard technology. In many
markets, card issuers are being required to issue new cards with
embedded chip technology. Chip-based cards are more secure,
harder to copy and offer the opportunity for multiple functions
on one card (e.g. debit, credit, electronic purse,
identification, health records, etc.). The EMV standard for
issuing and processing debit and credit card transactions has
emerged as the global standard, with many regions throughout the
world working on EMV rollouts. The primary benefit of EMV
deployment is a reduction in electronic payment fraud, with the
additional benefit that the core infrastructure necessary for
multi-function chip cards is being put in place (e.g. chip card
readers in ATMs and POS devices). We are working with many
customers around the world to facilitate EMV deployments,
leveraging several of our solutions.
|
|
|
|
Single Euro Payments Area (SEPA) and Faster
Payments Mandates. The SEPA and Faster Payment
initiatives, primarily focused on the European Economic
Community and the United Kingdom, are designed to facilitate
lower costs for cross-border payments and facilitate reduced
timeframes for settling electronic payment transactions. Our
retail and wholesale banking solutions provide key functions
that help financial institutions address these mandated
regulations.
|
|
|
|
Financial institution
consolidation. Consolidation continues on a
national and international basis, as financial institutions seek
to add market share and increase overall efficiency. Such
consolidations have increased, and may continue to increase, in
their number, size and market impact as a result of the global
economic crisis and the financial crisis affecting the banking
and financial industries. There are several potential negative
effects of increased consolidation activity. Continuing
consolidation of financial
|
28
|
|
|
|
|
institutions may result in a smaller number of existing and
potential customers for our products and services. Consolidation
of two of our customers could result in reduced revenues if the
combined entity were to negotiate greater volume discounts or
discontinue use of certain of our products. Additionally, if a
non-customer and a customer combine and the combined entity in
turn decides to forego future use of our products, our revenue
would decline. Conversely, we could benefit from the combination
of a non-customer and a customer when the combined entity
continues use of our products and, as a larger combined entity,
increases its demand for our products and services. We tend to
focus on larger financial institutions as customers, often
resulting in our solutions being the solutions that survive in
the consolidated entity.
|
|
|
|
|
|
Electronic payments convergence. As electronic
payment volumes grow and pressures to lower overall cost per
transaction increase, financial institutions are seeking methods
to consolidate their payment processing across the enterprise.
We believe that the strategy of using
service-oriented-architectures to allow for re-use of common
electronic payment functions such as authentication,
authorization, routing and settlement will become more common.
Using these techniques, financial institutions will be able to
reduce costs, increase overall service levels, enable
one-to-one
marketing in multiple bank channels and manage enterprise risk.
Our product development strategy is, in part, focused on this
trend, by creating integrated payment functions that can be
re-used by multiple bank channels, across both the consumer and
wholesale bank. While this trend presents an opportunity for us,
it may also expand the competition from third-party electronic
payment technology and service providers specializing in other
forms of electronic payments. Many of these providers are larger
than us and have significantly greater financial, technical and
marketing resources.
|
Several other factors related to our business may have a
significant impact on our operating results from year to year.
For example, the accounting rules governing the timing of
revenue recognition in the software industry are complex and it
can be difficult to estimate when we will recognize revenue
generated by a given transaction. Factors such as maturity of
the software product licensed, payment terms, creditworthiness
of the customer, and timing of delivery or acceptance of our
products often cause revenues related to sales generated in one
period to be deferred and recognized in later periods. For
arrangements in which services revenue is deferred, related
direct and incremental costs may also be deferred. Additionally,
while the majority of our contracts are denominated in the
United States dollar, a substantial portion of our sales are
made, and some of our 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
recognition of gains or losses for that period. Also during the
year ended September 30, 2007, we entered into two interest
rate swaps with a commercial bank whereby we pay a fixed rate of
5.375% and 4.90% and receive a floating rate indexed to the
3-month
LIBOR from the counterparty on a notional amount of
$75 million and $50 million that is not yet
outstanding under the credit facility, respectively.
Fluctuations in interest rates in a given period may result in
the recognition of gains or losses for that period.
We continue to seek ways to grow, through both organic sources
and acquisitions. We continually look for potential acquisitions
designed to improve our solutions breadth or provide
access to new markets. As part of our acquisition strategy, we
seek acquisition candidates that are strategic, capable of being
integrated into our operating environment, and financially
accretive to our financial performance.
International
Business Machines Corporation Alliance
On December 16, 2007, we entered into an Alliance Agreement
(Alliance) with International Business Machines
Corporation (IBM) relating to joint marketing and
optimization of our electronic payments application software and
IBMs middleware and hardware platforms, tools and
services. On March 17, 2008, the Company and IBM entered
into Amendment No. 1 to the Alliance (Amendment
No. 1 and included hereafter in all references to the
Alliance), which changed the timing of certain
payments to be made by IBM. Under the terms of the Alliance,
each party will retain ownership of its respective intellectual
property and will independently determine product offering
pricing to customers. In connection with the formation of the
Alliance, we granted warrants to IBM to purchase up to
1,427,035 shares of our common stock at a price of $27.50
per share and up to 1,427,035 shares of our common stock at
a price of $33.00 per share. The warrants are exercisable for
five years.
29
The stated initial term of the Alliance is five years, subject
to extension for successive two-year terms if not previously
terminated by either party and subject to earlier termination
for cause.
During the year ended December 31, 2008, we received a
second payment from IBM of $37.3 million per the Alliance.
This payment has been recorded in the Alliance agreement
liability in the accompanying consolidated balance sheet as of
December 31, 2008. This amount represents a prepayment of
funding for technical enablement milestones and incentive
payments to be earned under the Alliance and related agreements,
and accordingly a portion of this payment is subject to refund
by us to IBM under certain circumstances. As of
December 31, 2008, $20.7 million is refundable subject
to achievement of future milestones.
International
Business Machines Corporation Outsourcing Agreement
On March 17, 2008, we entered into a Master Services
Agreement (Outsourcing Agreement) with IBM to
outsource our internal information technology (IT)
environment to IBM. Under the terms of the Outsourcing
Agreement, IBM provides us with global IT infrastructure
services including the following services, which were provided
by our employees: cross functional delivery management services,
asset management services, help desk services, end user
services, server system management services, storage management
services, data network services, enterprise security management
services and disaster recovery/business continuity plans
(collectively, the IT Services). We retain
responsibility for our security policy management and on-demand
business operations.
The initial term of the Outsourcing Agreement is seven years,
commencing on March 17, 2008. We have the right to extend
the Outsourcing Agreement for one additional one-year term
unless otherwise terminated in accordance with the terms of the
Outsourcing Agreement. Under the Outsourcing Agreement, we
retain the right to terminate the agreement both for cause and
for convenience. However, upon any termination of the
Outsourcing Agreement by us for any reason (other than for
material breach by IBM), we will be required to pay a
termination charge to IBM, which charge may be material.
We pay IBM for the IT Services through a combination of fixed
and variable charges, with the variable charges fluctuating
based on our actual need for such services as well as the
applicable service levels and statements of work. Based on the
currently projected usage of these IT Services, we expect to pay
$116 million to IBM in service fees and project costs over
the initial seven-year term.
In addition, IBM is providing us with certain transition
services required to transition our IT operations embodied in
the IT Services in accordance with a mutually agreed upon
transition plan (the Transition Services). We
currently expect the Transition Services to be completed
approximately 18 months after the effective date of the
Outsourcing Agreement and to pay IBM approximately
$8 million for the Transition Services over a period of
five years. We have recorded approximately $6.6 million of
expense for Transition Services during the year ended
December 31, 2008 that are included in general and
administrative expenses in the accompanying consolidated
statement of operations. We expect to recognize the remaining
expense for Transition Services during the first half of 2009.
We incurred an additional $0.9 million of staff
augmentation costs related to the Transition Services during the
year ended December 31, 2008 that are included in general
and administrative expenses in the accompanying consolidated
statement of operations.
To protect our expectations regarding IBMs performance,
the Outsourcing Agreement has performance standards and minimum
services levels that IBM must meet or exceed. If IBM fails to
meet a given performance standard, we would, in certain
circumstances, receive a credit against the charges otherwise
due.
Additionally, to assure that the charges under the Outsourcing
Agreement do not become significantly higher than the market
rate for such services, we have the right to periodically
perform benchmark studies to determine whether IBMs price
and performance are consistent with the then current market. We
have the right to conduct such benchmark studies, at its cost,
beginning in the second year of the Outsourcing Agreement.
As a result of the Outsourcing Agreement, 16 of our employees
became employees of IBM and another 62 positions were eliminated.
30
2008
Restructuring Plan
During the year ended December 31, 2008, we reduced our
headcount by 110 employees as a part of our strategic plan
to reduce operating expenses. In connection with these actions,
during the year ended December 31, 2008, $5.6 million
of termination costs were recognized in general and
administrative expense in the accompanying consolidated
statement of operations. Headcount reductions will continue
during the first half of 2009 and we expect to recognize an
additional $3.0 million to $5.0 million of expense.
Approximately $3.0 million of the severance costs related
to the headcount reduction were paid prior to December 31,
2008, the majority of the remaining liability is expected to be
paid during the first quarter of 2009, with a portion being
spread through the third quarter of 2009. We expect to complete
our restructuring activities by the end of the first half of
2009.
ACQUISITIONS
On May 31, 2006, we acquired the outstanding shares of eps
Electronic Payment Systems AG (eps AG),
headquartered in Frankfurt, Germany. The acquisition of eps AG
occurred in two closings. The initial closing occurred on
May 31, 2006, and the second closing occurred on
October 31, 2006. eps AG, with operations in Germany,
Romania, the United Kingdom and other European locations,
offered electronic payment and complementary solutions focused
largely in the German market. The acquisition of eps AG has
provided us additional opportunities to sell our value added
solutions, such as Proactive Risk Manager and Smart Chip
Manager, into the German marketplace, as well as to sell eps
AGs testing and dispute management solutions into markets
beyond Germany. In addition, eps AGs presence in Romania
has helped us more rapidly develop our global offshore
development and support capabilities. The aggregate purchase
price for eps AG was $30.4 million, which was comprised of
cash payments of $19.1 million, 330,827 shares of
common stock valued at $11.1 million, and direct costs of
the acquisition.
On September 29, 2006, we completed the acquisition of
P&H Solutions, Inc. (P&H). P&H was a
leading provider of enterprise business banking solutions and
provides a complement to our existing revenue producing
activities. The aggregate purchase price for P&H, including
direct costs of the acquisition, was $133.7 million, net of
$20.2 million of cash acquired, approximately
$73.3 million of which was financed by the Credit Agreement
described in Note 6, Debt, in the Notes to
Consolidated Financial Statements, with the remaining cash of
$60.4 million derived from the sale of investments The
acquisition of P&H has extended our wholesale payments
solutions suite, provided us with an Application Software
Provider (ASP)-based offering and allowed us to
distribute P&Hs solutions into international markets
through our global distribution channel.
On February 7, 2007, we acquired Visual Web Solutions, Inc.
Visual Web marketed trade finance and web-based cash management
solutions, primarily to financial institutions in the
Asia/Pacific region. Visual Web had sales and customer support
office in Singapore, and a product development facility in
Bangalore, India. The aggregate purchase price of Visual Web,
including direct costs of the acquisition, was
$8.3 million, net of $1.1 million of cash acquired.
On April 2, 2007, we acquired Stratasoft Sdn. Bhd.
Stratasoft was a Kuala Lumpur based company focused on the
provision of mainframe based payments systems to the Malaysian
market. Prior to the acquisition, Stratasoft had been a
distributor of our OCM 24 product within the Malaysian market
since 1995. The aggregate purchase price of Stratasoft,
including direct costs of the acquisition, was
$2.5 million, net of $0.7 million of cash acquired.
ASSETS OF
BUSINESSES TRANSFERRED UNDER CONTRACTUAL ARRANGEMENTS
On September 29, 2006, we completed the sale of the
eCourier and Workpoint product lines to PlaNet Group, Inc. We
retained rights to distribute these products as components of
our electronic payments solutions. See Note 16,
Assets of Businesses Transferred Under Contractual
Arrangements, in the Notes to Consolidated Financial
Statements for further detail.
31
BACKLOG
Included in backlog estimates are all software license fees,
maintenance fees and services specified in executed contracts,
as well as revenues from assumed contract renewals to the extent
that we believe recognition of the related revenue will occur
within the corresponding backlog period. We have historically
included assumed renewals in backlog estimates based upon
automatic renewal provisions in the executed contract and our
historic experience with customer renewal rates.
Our 60-month
backlog estimate represents expected revenues from existing
customers using the following key assumptions:
|
|
|
|
|
Maintenance fees are assumed to exist for the duration of the
license term for those contracts in which the committed
maintenance term is less than the committed license term.
|
|
|
|
License and facilities management arrangements are assumed to
renew at the end of their committed term at a rate consistent
with our historical experiences.
|
|
|
|
Non-recurring license arrangements are assumed to renew as
recurring revenue streams.
|
|
|
|
Foreign currency exchange rates are assumed to remain constant
over the
60-month
backlog period for those contracts stated in currencies other
than the U.S. dollar.
|
|
|
|
Our pricing policies and practices are assumed to remain
constant over the
60-month
backlog period.
|
In computing our
60-month
backlog estimate, the following items are specifically not taken
into account:
|
|
|
|
|
Anticipated increases in transaction volumes in customer systems.
|
|
|
|
Optional annual uplifts or inflationary increases in recurring
fees.
|
|
|
|
Services engagements, other than facilities management, are not
assumed to renew over the
60-month
backlog period.
|
|
|
|
The potential impact of merger activity within our markets
and/or
customers is not reflected in the computation of our
60-month
backlog estimate.
|
For the three months ended December 31, 2007, we completed
a comprehensive review of the assumptions used and data required
in computing our backlog estimates. The
60-month and
12-month
backlog estimates set forth below for the period ended
September 30, 2007 have been revised to reflect these
adjustments.
The review identified two categories of adjustments:
|
|
|
|
|
Adjustments due to inaccurate or incomplete data resulting in a
historical over-statement of previously reported backlog
estimates, and
|
|
|
|
Adjustments required to conform with the recently adopted
backlog policy resulting in a historical under-statement of
previously reported backlog estimates.
|
While this review is complete and we do not expect further
adjustments to previously reported backlog estimates, we
continue to review the processes, procedures, tools, and
assumptions used in preparing backlog estimates.
In addition, we also completed a review of our customer renewal
experience over the
12-month
period ended December 31, 2007 which was further updated
for the
6-month
period ended June 30, 2008. The impact of this review and
subsequent update resulted in a revision to the renewal
assumptions used in computing the
60-month and
12-month
backlog estimates. Backlog results for all reported periods have
been updated to reflect our most recent customer renewal
experience. We expect to perform an annual review of customer
renewal experience. In the event a revision to renewal
assumptions is determined to be necessary, prior periods will be
adjusted for comparability purposes.
32
The following table sets forth our
60-month
backlog estimate, by geographic region, as of December 31,
2008, September 30, 2008, June 30, 2008,
March 31, 2008, December 31, 2007 and
September 30, 2007 (in millions). Dollar amounts reflect
foreign currency exchange rates as of each period end.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
Americas
|
|
$
|
771
|
|
|
$
|
744
|
|
|
$
|
744
|
|
|
$
|
731
|
|
|
$
|
739
|
|
|
$
|
723
|
|
EMEA
|
|
|
480
|
|
|
|
511
|
|
|
|
534
|
|
|
|
523
|
|
|
|
505
|
|
|
|
491
|
|
Asia/Pacific
|
|
|
156
|
|
|
|
159
|
|
|
|
159
|
|
|
|
154
|
|
|
|
144
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,407
|
|
|
$
|
1,414
|
|
|
$
|
1,437
|
|
|
$
|
1,408
|
|
|
$
|
1,388
|
|
|
$
|
1,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in our
60-month
backlog estimates are amounts expected to be recognized during
the initial license term of customer contracts (Committed
Backlog) and amounts expected to be recognized from
assumed renewals of existing customer contracts (Renewal
Backlog). Amounts expected to be recognized from assumed
contract renewals are based on the Companys historical
renewal experience. The estimated Committed and Renewal
60-month
Backlog estimate as of December 31, 2008 is
$757 million and $650 million, respectively.
We also estimate
12-month
backlog, segregated between monthly recurring and non-recurring
revenues, using a methodology consistent with the
60-month
backlog estimate. Monthly recurring revenues include all monthly
license fees, maintenance fees and processing services fees.
Non-recurring revenues include other software license fees and
services. Amounts included in our
12-month
backlog estimate assume renewal of one-time license fees on a
monthly fee basis if such renewal is expected to occur in the
next 12 months. The following table sets forth our
12-month
backlog estimate, by geographic region, as of December 31,
2008, December 31, 2007 and September 30, 2007 (in
millions). Dollar amounts reflect currency exchange rates as of
each period end.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
September 30, 2007
|
|
|
|
Monthly
|
|
|
Non-
|
|
|
|
|
|
Monthly
|
|
|
Non-
|
|
|
|
|
|
Monthly
|
|
|
Non-
|
|
|
|
|
|
|
Recurring
|
|
|
Recurring
|
|
|
Total
|
|
|
Recurring
|
|
|
Recurring
|
|
|
Total
|
|
|
Recurring
|
|
|
Recurring
|
|
|
Total
|
|
|
Americas
|
|
$
|
133
|
|
|
$
|
40
|
|
|
$
|
173
|
|
|
$
|
130
|
|
|
$
|
30
|
|
|
$
|
160
|
|
|
$
|
125
|
|
|
$
|
34
|
|
|
$
|
159
|
|
EMEA
|
|
|
73
|
|
|
|
37
|
|
|
|
110
|
|
|
|
73
|
|
|
|
66
|
|
|
|
139
|
|
|
|
70
|
|
|
|
66
|
|
|
|
136
|
|
Asia/Pacific
|
|
|
28
|
|
|
|
14
|
|
|
|
42
|
|
|
|
26
|
|
|
|
11
|
|
|
|
37
|
|
|
|
26
|
|
|
|
8
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
234
|
|
|
$
|
91
|
|
|
$
|
325
|
|
|
$
|
229
|
|
|
$
|
107
|
|
|
$
|
336
|
|
|
$
|
221
|
|
|
$
|
108
|
|
|
$
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimates of future financial results are inherently unreliable.
Our backlog estimates require substantial judgment and are based
on a number of assumptions as described above. These assumptions
may turn out to be inaccurate or wrong, including for reasons
outside of managements control. For example, our customers
may attempt to renegotiate or terminate their contracts for a
number of reasons, including mergers, changes in their financial
condition, or general changes in economic conditions in the
customers industry or geographic location, or we may
experience delays in the development or delivery of products or
services specified in customer contracts which may cause the
actual renewal rates and amounts to differ from historical
experiences. Changes in foreign currency exchange rates may also
impact the amount of revenue actually recognized in future
periods. Accordingly, there can be no assurance that amounts
included in backlog estimates will actually generate the
specified revenues or that the actual revenues will be generated
within the corresponding
12-month or
60-month
period. Additionally, because backlog estimates are operating
metrics, the estimates are not subject to the same level of
internal review or controls as a GAAP financial measure.
33
RESULTS
OF OPERATIONS
The following table sets forth certain financial data and the
percentage of total revenues for the periods indicated (amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Year Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial license fees (ILFs)
|
|
$
|
94,999
|
|
|
|
22.7
|
%
|
|
$
|
87,341
|
|
|
|
23.8
|
%
|
|
$
|
107,347
|
|
|
|
30.9
|
%
|
Monthly license fees (MLFs)
|
|
|
74,211
|
|
|
|
17.8
|
%
|
|
|
62,144
|
|
|
|
17.0
|
%
|
|
|
68,282
|
|
|
|
19.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license fees
|
|
|
169,210
|
|
|
|
40.5
|
%
|
|
|
149,485
|
|
|
|
40.8
|
%
|
|
|
175,629
|
|
|
|
50.5
|
%
|
Maintenance fees
|
|
|
130,015
|
|
|
|
31.1
|
%
|
|
|
121,233
|
|
|
|
33.1
|
%
|
|
|
103,708
|
|
|
|
29.8
|
%
|
Services
|
|
|
118,428
|
|
|
|
28.4
|
%
|
|
|
95,500
|
|
|
|
26.1
|
%
|
|
|
68,565
|
|
|
|
19.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
417,653
|
|
|
|
100.0
|
%
|
|
|
366,218
|
|
|
|
100.0
|
%
|
|
|
347,902
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software license fees
|
|
|
45,487
|
|
|
|
10.9
|
%
|
|
|
42,237
|
|
|
|
11.5
|
%
|
|
|
31,124
|
|
|
|
8.9
|
%
|
Cost of maintenance and services
|
|
|
124,744
|
|
|
|
29.9
|
%
|
|
|
98,605
|
|
|
|
26.9
|
%
|
|
|
79,622
|
|
|
|
22.9
|
%
|
Research and development
|
|
|
45,896
|
|
|
|
11.0
|
%
|
|
|
52,088
|
|
|
|
14.2
|
%
|
|
|
40,768
|
|
|
|
11.7
|
%
|
Selling and marketing
|
|
|
74,028
|
|
|
|
17.7
|
%
|
|
|
70,280
|
|
|
|
19.2
|
%
|
|
|
66,720
|
|
|
|
19.2
|
%
|
General and administrative
|
|
|
105,785
|
|
|
|
25.3
|
%
|
|
|
100,589
|
|
|
|
27.5
|
%
|
|
|
67,440
|
|
|
|
19.4
|
%
|
Settlement of class action litigation
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
8,450
|
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
395,940
|
|
|
|
94.8
|
%
|
|
|
363,799
|
|
|
|
99.3
|
%
|
|
|
294,124
|
|
|
|
84.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
21,713
|
|
|
|
5.2
|
%
|
|
|
2,419
|
|
|
|
0.7
|
%
|
|
|
53,778
|
|
|
|
15.5
|
%
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,609
|
|
|
|
0.6
|
%
|
|
|
4,082
|
|
|
|
1.1
|
%
|
|
|
7,825
|
|
|
|
2.2
|
%
|
Interest expense
|
|
|
(5,013
|
)
|
|
|
(1.2
|
)%
|
|
|
(6,644
|
)
|
|
|
(1.8
|
)%
|
|
|
(185
|
)
|
|
|
(0.1
|
)%
|
Other, net
|
|
|
8,247
|
|
|
|
2.0
|
%
|
|
|
(3,740
|
)
|
|
|
(1.0
|
)%
|
|
|
(543
|
)
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
5,843
|
|
|
|
1.4
|
%
|
|
|
(6,302
|
)
|
|
|
(1.7
|
)%
|
|
|
7,097
|
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
27,556
|
|
|
|
6.6
|
%
|
|
|
(3,883
|
)
|
|
|
(1.1
|
)%
|
|
|
60,875
|
|
|
|
17.5
|
%
|
Income tax expense
|
|
|
16,974
|
|
|
|
4.1
|
%
|
|
|
5,248
|
|
|
|
1.4
|
%
|
|
|
5,510
|
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,582
|
|
|
|
2.5
|
%
|
|
$
|
(9,131
|
)
|
|
|
(2.5
|
)%
|
|
$
|
55,365
|
|
|
|
15.9
|
%
|
|
|
|
|
|
|
|
|
|
|
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2008
Compared to 2007
The following discussion of the results of operations compares
the year ended December 31, 2008 to the year ended
September 30, 2007. The results of the transition period
from October 1, 2007 to December 31, 2007 are compared
to the three-month period ended December 31, 2006 in a
discussion that follows.
Revenues
Total revenues for the year ended December 31, 2008
increased $51.4 million, or 14.0%, compared to the year
ended September 30, 2007 as a result of a
$19.7 million, or 13.2%, increase in software license fee
revenues, an
34
$8.8 million, or 7.2%, increase in maintenance fee
revenues, and a $22.9 million, or 24.0%, increase in
services revenues.
During the year ended December 31, 2008, we recognized
approximately $18.0 million of revenues associated with
certain Faster Payments implementations in the United Kingdom.
Of this amount, approximately $5.3 million is reported in
initial license fees revenue, $0.6 million is reported in
maintenance fees, and approximately $12.1 million is
reported as services revenue.
The remainder of the software license fees and services revenue
increase is due to the completion of various customer
implementation projects resulting in revenue recognition of
previously deferred amounts that typically result in increases
to non-recurring initial license fee and services revenues.
Completion of customer implementation projects also allows us to
begin recognition of recurring maintenance fees which will
result in a gradual increase in maintenance fees revenues over
time.
The company has also reduced its emphasis on non-recurring
license fees most notably with renewals or term extensions for
existing customers. The increase in monthly license fees can be
attributed to these efforts in addition to completing certain
implementation projects as noted above. In certain instances,
customers elect to pay their recurring license and/or capacity
fees annually. While recurring in nature, these annually
recurring revenues are included as initial license fees.
License
Fee Revenues
Customers purchase the right to license ACI software for the
term of their agreement which term is generally 60 months.
Within these agreements are specified capacity limits typically
based on transaction volumes. ACI employs measurement tools that
monitor the number of transactions processed by customers and if
contractually specified limits are exceeded, additional fees are
charged for the overage. Capacity overages may occur at varying
times throughout the term of the agreement depending on the
product, the size of the customer, and the significance of
customer transaction volume growth. Depending on specific
circumstances, multiple overages or no overages may occur during
the term of the agreement.
Initial
License Fee (ILF) Revenue
ILF revenue includes license and capacity revenues that do not
recur on a monthly or quarterly basis. Included in ILF revenues
are license and capacity fees that are recognizable at the
inception of the agreement and license and capacity fees that
are recognizable at interim points during the term of the
agreement, including those that are recognizable annually, due
to negotiated customer payment terms. ILF revenues during the
year ended December 31, 2008 compared to the year ended
September 30, 2007, increased by $7.7 million. The
EMEA and Asia-Pacific reportable operating segments increased by
$14.0 million and $0.7 million, respectively, offset
by a decrease in the Americas reportable operating segment
of $7.0 million. The increases were driven by recognition
of ILF revenues associated with new deals or term renewals
signed during the year as well as customer go-live
events that occurred throughout the year, most notably the
Faster Payments implementations in the United Kingdom. The
decline in ILF revenues in the Americas reportable
operating segment is largely attributable to certain agreements
being recognized ratably as Monthly License Fee Revenue rather
than as a one-time fee as discussed below. Included in the above
are capacity related revenue increases of $6.9 million in
the EMEA reportable operating segment offset by a decrease of
$3.9 million in the Americas reportable operating
segment, within the year ended December 31, 2008 as
compared to the year ended September 30, 2007.
Monthly
License Fee (MLF) Revenue
MLF revenues are license and capacity revenues that are paid
up-front but recognized as revenue ratably over an extended
period and license and capacity revenues that are paid in
monthly or quarterly increments due to negotiated customer
payment terms. The $12.1 million increase in MLF revenues
during the year ended December 31, 2008, as compared to the
year ended September 30, 2007, is primarily in the
Americas reportable operating segment with only modest
changes in both the EMEA and Asia-Pacific reportable operating
segments. Within this increase is an $8.1 million increase
in the amount of paid up-front revenue recognized ratably by
customers in the Americas reportable operating segment and a
$4.0 million increase in license and capacity fees that are
both
35
invoiced and recognized monthly or quarterly. Approximately
$4.0 million of the increase in MLF revenue is due to paid
up-front revenue that is recognized ratably, is short-term in
nature, and is not expected to recur in future periods.
Maintenance
Fee Revenue
Maintenance fee revenue includes standard and enhanced
maintenance or any post contract support fees received from
customers for the provision of product support services. The
increase in maintenance fee revenues during the year ended
December 31, 2008, compared to the year ended
September 30, 2007, is primarily a result of an increase in
the number of customers that achieved live status, primarily in
the Americas and EMEA reportable operating segments, subsequent
to September 30, 2007.
Services
Revenue
Services revenues include fees earned through implementation
services, professional services and processing services.
Implementation services include product installations, product
upgrades, customer specific modifications (CSMs) and
product education. Professional services include business
consultancy, technical consultancy, on site support services,
CSMs, product education, and testing services. Processing
services include hosting, on-demand, and facilities management
services.
Services revenue increased $22.9 million, or 24.0%, for the
year ended December 31, 2008, primarily as a result of an
increase in implementation services revenue in the EMEA
reportable operating segment, and to a lesser extent, the
Americas and Asia-Pacific reportable operating segments. The
increase in the EMEA reportable operating segment was largely
attributable to $12.0 million of revenues associated with
Faster Payments implementations. The remainder of the increase
is primarily related to the completion of certain customer
implementations allowing for the recognition of cumulative
services performed over the duration of the project.
Expenses
Total operating expenses for the year ended December 31,
2008 increased $32.1 million, or 8.8%, compared to the year
ended September 30, 2007 as a result of a
$26.1 million, or 26.5%, increase in cost of maintenance
and services, a $5.2 million, or 5.2%, increase in general
and administrative costs, a $3.3 million, or 7.7%, increase
in cost of software license fees, and a $3.7 million, or
5.3%, increase in cost of selling and marketing. These increases
were partially offset by a $6.2 million, or 11.9%, decrease
in research and development costs.
Cost of
Software License Fees
Cost of software license fees represents the costs associated
with maintaining software products that have already been
developed. Software license fees costs include human resource
costs and other incidental costs for maintaining software
products as well as the amortization of previously capitalized
internally developed and acquired software costs. Examples of
maintaining software products include product management,
documentation, publications and education.
The cost of software license fees for the year ended
December 31, 2008 increased compared to the year ended
September 30, 2007 due to higher personnel and related
costs of $4.9 million attributable to reallocations of
personnel from certain business functions (primarily research
and development, services, and sales and marketing) to invest in
the Global Product Management function and to support the
fulfillment of the technical enablement milestones under the
Alliance and other development work. Additionally, cost of
software license fees expense increased $1.3 million
resulting from an increase in amortization. This increase was
partially offset by $2.5 million of reimbursement from IBM
for certain expenditures determined to be direct and incremental
to satisfying the technical enablement milestones under the
Alliance and are recorded as a reduction of cost of software
license fees. The remainder of the change compared to the year
ended September 30, 2007 is primarily due to an increase in
other deferred implementation costs.
36
Cost of
Maintenance and Services
Cost of maintenance and services includes costs to provide
hosting services and both the costs of maintaining our software
products at customer sites as well as the service costs required
to deliver, install and support software at customer sites.
Maintenance costs include the efforts associated with providing
the customer with upgrades,
24-hour
helpdesk, post go-live (remote) support and production-type
support for software that was previously installed at a customer
location. Service costs include human resource costs and other
incidental costs such as travel and training required for both
pre go-live and post go-live support. Such efforts include
project management, delivery, product customization and
implementation, installation support, consulting, configuration,
and on-site
support.
Cost of maintenance and services for the year ended
December 31, 2008 increased compared to the year ended
September 30, 2007 as a result of higher personnel and
related costs of $20.6 million required primarily to
support the implementation services for the increase in large
complex multi-product installations. Costs of maintenance and
services also increased as a result of the recognition of
$2.8 million of previously deferred expenses associated
with the completion of certain Faster Payments implementations
in the EMEA reportable operating segment and a large
multi-product implementation in the Americas operating segment
offset by an increase of $2.3 million in additional
deferred implementation costs for various products currently
being installed and $0.4 million of reimbursement from IBM.
Additionally, cost of maintenance and services increased
$3.2 million for the year ended December 31, 2008
primarily as a result of an increase in distributor commission
expense and an increase of $1.6 million from higher third
party software maintenance expense compared to the year ended
September 30, 2007. The remaining $0.6 million
increase is related to miscellaneous items including insurance,
telecommunications, and facilities costs.
Research
and Development
Research and development (R&D) expenses are
primarily human resource costs related to the creation of new
products as well as improvements made to existing products.
Continued R&D effort on existing products addresses issues,
if any, related to regulatory requirements and processing
mandates as well as compatibility with new operating system
releases and generations of hardware.
R&D expense for the year ended December 31, 2008
decreased as compared to the year ended September 30, 2007,
due to lower personnel and related costs of $2.0 million
resulting from reallocations of personnel primarily to the
services function in support of large complex, multi-product
customer installations and $4.2 million of reimbursement
from IBM for certain expenditures determined to be direct and
incremental to satisfying the technical enablement milestones
under the Alliance and are recorded as a reduction of R&D
expense.
Selling
and Marketing
Selling and marketing includes both the costs related to selling
our products to current and prospective customers as well as the
costs related to promoting the Company, its products and the
research efforts required to measure customers future
needs and satisfaction levels. Selling costs are primarily the
human resource and travel costs related to the effort expended
to license our products and services to current and potential
clients within defined territories
and/or
industries as well as the management of the overall relationship
with customer accounts. Selling costs also include the costs
associated with assisting distributors in their efforts to sell
our products and services in their respective local markets.
Marketing costs include costs needed to promote the Company and
its products as well as perform or acquire market research to
help us better understand what products our customers are
looking for in the future. Marketing costs also include the
costs associated with measuring customers opinions toward
the Company, our products and personnel.
Selling and marketing expense for the year ended
December 31, 2008 increased $3.7 million compared to
the year ended September 30, 2007 a result of an increase
of $1.6 million in personnel and related costs and
$0.7 million in advertising and promotional expenses to
support the 2008 sales plan and Alliance joint sales and
marketing initiatives. In addition, selling and marketing
expenses increased as a result of a $0.5 million investment
in sales support tools and a $0.4 million increase in
professional fees. The remaining increase of $0.6 million
is primarily due to an increase in telecommunications and
facilities costs.
37
General
and Administrative
General and administrative expenses are primarily human resource
costs including executive salaries and benefits, personnel
administration costs, and the costs of corporate support
functions such as legal, administrative, human resources and
finance and accounting.
General and administrative expense for the year ended
December 31, 2008 increased $5.2 million compared to
the year ended September 30, 2007. Included in the year
ended September 30, 2007, with no corresponding amount
during the year ended December 31, 2008, were approximately
$11.9 million of expenses related to the historical stock
option review. Included in the year ended December 31,
2008, with no corresponding amounts during the year ended
September 30, 2007, were $7.5 million of expenses for
Transition Services related to the IBM Outsourcing Agreement. In
addition, general and administrative expense increased
$5.1 million as a result of the services performed under
the IBM Outsourcing Agreement offset by a $2.5 million
reduction in personnel and related costs due to the headcount
reduction associated with the outsource agreement. The remaining
increase in general and administrative expenses is primarily the
result of a $3.9 million increase in severance expense,
$1.9 million increase in professional fees primarily
related to the 2008 restructuring activities and related
reinvestments, and $1.0 million of consulting expense
incurred for the development of our corporate management office
and $0.2 million of costs incurred related to moving into
our new Omaha facility.
Other
Income and Expense
Other income and expense includes interest income and expense,
foreign currency gains and losses, and other non-operating
items. Fluctuating currency rates impacted the year ended
December 31, 2008 by $13.8 million in net foreign
currency gains, compared to $1.9 million net loss during
the year ended September 30, 2007. A $5.8 million loss
on change in fair value of interest rate swaps was incurred
during the year ended December 31, 2008, compared to a
$2.1 million loss in the year ended September 30,
2007. Interest income for the year ended December 31, 2008
decreased $1.5 million, or 36.1%, as compared to the year
ended September 30, 2007 as a result of lower interest
rates and interest income on an amended income tax return in
2007 that did not recur in 2008. Interest expense decreased
$1.6 million, or 24.5%, for the year ended
December 31, 2008 compared to the year ended
September 30, 2007 as a result of lower interest rates and
interest expense on income tax returns in 2007 that did not
recur in 2008.
Income
Taxes
The effective tax rate for the year ended December 31, 2008
was 61.6%. The effective tax rate is higher than the
U.S. effective rate of 35% due to the impact of our
inability to recognize income tax benefits during the period
resulting from losses sustained in certain tax jurisdictions
where the future utilization of the losses are uncertain and by
the recognition of tax expense associated with the transfer of
certain intellectual property rights from U.S. to
non-U.S. entities.
The effective tax rate for the year ended September 30,
2007 was (135.2)%. This rate was negative due to a tax charge
compared to a pretax loss, primarily related to reporting losses
in countries in which we are unable to record a tax benefit and
reporting profits in countries where we do record a tax charge.
2007
Compared to 2006
The following discussion of the results of operations compares
the year ended September 30, 2007 to the year ended
September 30, 2006.
Revenues
Total revenues for the year ended September 30, 2007
increased $18.3 million, or 5.3%, as compared to the same
period in 2006. The increase is the result of a
$17.5 million, or 16.9%, increase in maintenance fee
revenues and a $26.9 million, or 39.3%, increase in
services revenues, partially offset by a $26.1 million, or
14.9% decrease in software license fee revenue. Included in the
years ended September 30, 2007 and 2006 was approximately
$45.0 million and $2.9 million, respectively, of
revenue related to acquired businesses. Excluding the impact of
the acquired businesses, total revenues decreased primarily as a
result of a $29.6 million, or 16.9%, decrease in software
license fee revenues, partially offset by a $5.8 million,
or 5.6%, increase in maintenance fee revenue.
38
The majority of the revenue increase during the year ended
September 30, 2007 resulted from growth in the Americas,
with an increase of $15.1 million, or 8.3%, over fiscal
2006. Excluding the impact of the acquired businesses, the
Americas declined $21.8 million, or 12.0%, compared to
fiscal 2006. This was primarily the result of a decline in
initial license fees as well as services revenues, which is a
result of our practice to not pursue discounted paid up front
licensing fee transactions. The EMEA and Asia/Pacific operating
segments increased by $2.0 million, or 1.5%, and
$1.2 million, or 3.4%, respectively, compared to fiscal
2006. Excluding the impact of acquired businesses, EMEA saw a
slight decline of $1.1 million, or 0.9%, primarily driven
by a decline in license fees partially offset by an increase in
services and maintenance revenue. This was also the case for the
Asia/Pacific operating segment, which declined
$0.9 million, or 2.5%, when excluding acquired businesses.
The decrease in software license fee revenues for the year ended
September 30, 2007 is primarily due to our decision to not
pursue discounted paid up front deals, which lead to a decline
in initial license fees. It was further impacted by the mix of
sales and timing of revenue recognition. This change in sales
mix and revenue recognition timing during the year has the
corresponding effect of increasing backlog, and to the extent
that customers were billed, increasing deferred revenue during
the year.
The increase in maintenance fee revenues of $5.8 million,
excluding the impact of acquired businesses of
$11.7 million, during the year ended September 30,
2007, as compared to the same period in 2006, is primarily the
result of an increase in the overall installed base in the EMEA
reportable operating segment, and, to a lesser extent, in the
Asia/Pacific reportable operating segment.
The slight increase in services revenues of $0.1 million,
excluding the impact of acquired businesses of
$26.8 million, for the year ended September 30, 2007,
as compared to the same period in 2006, resulted primarily from
steady activity in the EMEA and Asia/Pacific reportable
operating segments.
Expenses
Total operating expenses for the year ended September 30,
2007 increased $69.7 million, or 23.7%, as compared to the
same period in 2006. Included in the years ended
September 30, 2007 and 2006 was approximately
$63.5 million and $4.0 million, respectively, of
operating expenses related to acquired businesses. Additionally,
there were approximately $11.8 million of costs incurred
during the year ended September 30, 2007, and
$0.3 million of costs incurred in the same period in 2006,
related to the historical stock option review, preparation of
restated historical financial information, cash settlement of
vested options, and efforts to become current with our filings
with the SEC.
Excluding the impact of the acquired businesses, total expenses
increased primarily as a result of a $21.0 million, or
31.5%, increase in general and administrative costs, a
$2.9 million, or 3.8%, increase in maintenance and services
costs, a $0.2 million, or 0.8%, increase in the cost of
software license fees, partially offset by a $4.8 million,
or 7.2%, decrease in selling and marketing costs, a
$0.8 million, or 2.1%, decrease in research and development
(R&D) costs and $8.5 million recorded in
2006 related to settlement of the class action litigation.
The increase in the cost of software license fees for the year
ended September 30, 2007, as compared to the same period in
2006, excluding the impact of the acquired businesses, was a
direct result of a change in product mix in EMEA and
Asia/Pacific, partially offset by a decrease in the use of
contractors in the Americas.
Cost of maintenance and services for the year ended
September 30, 2007 increased as compared to the same period
in 2006, excluding the impact of the acquired businesses, in
line with the corresponding increase in services revenue in the
International operating segments as well as a renewed focus on
service activities.
R&D costs for the year ended September 30, 2007
increased slightly as compared to the same period in 2006,
excluding the impact of the acquired businesses, due to
headcount investment in our Ireland operation. This was
partially offset by declining headcount in developed countries
concurrent with a shift to low cost geographies such as Romania
and India. In addition, we reallocated resources from the
R&D function into services activities.
The decrease in selling and marketing costs for the year ended
September 30, 2007 as compared to same period in 2006,
excluding the impact of the acquired businesses, was a result of
sales productivity initiatives and a decrease
39
in advertising and promotion costs due to the timing of certain
marketing events and trade shows. This was partially offset by
an increase in travel and entertainment expenses related to
customer projects.
Approximately $11.5 million of the increase in general and
administrative costs during the year ended September 30,
2007, as compared to the same period in 2006, excluding the
impact of the acquired businesses, was due to expenses incurred
related to the historical stock option review, preparation of
restated historical financial information, cash settlement of
vested options, and efforts to become current with our filings
with the SEC. Also included were $2.6 million and
$0.6 million of restructuring and other employee related
expense respectively. The remaining difference was driven by
investment in infrastructure and the timing of audit
professional fees.
Other
Income and Expense
Interest income for the year ended September 30, 2007
decreased $3.7 million, or 47.8%, as compared to the same
period in 2006. The decrease in interest income is due to
interest income of $1.9 million on a refund of income taxes
recorded during the year ended September 30, 2006 as well
as a decrease in interest bearing assets during the year ended
September 30, 2007 as compared to the same period in 2006
due to acquisition activity and the share repurchase program.
Interest expense for the year ended September 30, 2007
increased $6.5 million, as compared to the same period in
2006. As discussed in Note 6, Debt in the Notes
to Consolidated Financial Statements, we entered into a long
term credit facility agreement with aggregate available
borrowings of $150 million on September 29, 2006 under
which $75 million was outstanding as of September 30,
2007.
Other income and expense consists of foreign currency gains and
losses, and other non-operating items. Other expense for the
year ended September 30, 2007 was $3.7 million as
compared to other expense for the same period in 2006 of
$0.5 million. Comparative changes in other income and
expense amounts were attributable to fluctuating currency rates
which impacted the amounts of foreign currency gains or losses
recognized by us during the respective fiscal years and the loss
on the change in fair value of our interest rate swaps. We
realized $1.9 million in net foreign currency losses during
the year ended September 30, 2007 as compared with
$0.2 million in net losses during the same period in 2006
and a $2.1 million loss on change in fair value of interest
rate swaps during the year ended September 30, 2007. These
losses were partially offset by a $0.4 million gain under a
contractual arrangement.
Income
Taxes
The effective tax rates for the years ended September 30,
2007 and 2006 were approximately (135.2%) and 9.1%,
respectively. Our effective tax rate each year varies from our
federal statutory rate because we operate in multiple foreign
countries where we apply their tax laws and rates which vary
from those that we apply to the income we generate from our
domestic operations. The effective tax rate for the year ended
September 30, 2007 is negative due to a tax charge compared
to a pretax loss, primarily related to reporting losses in
countries in which we are unable to record a tax benefit and
reporting profits in countries where we do record a tax charge.
The effective tax rate for the year ended September 30,
2006 was lower than the same period in 2007 because we completed
the federal tax audit for fiscal years 1997 through 2003 during
fiscal 2006 and we also released a valuation reserve we had
previously established on our foreign tax credit carryforwards.
With the final settlement of the federal tax audit we released
all accruals and tax contingencies for those years resulting in
a 6.4% reduction in the effective tax rate. During the year
ended September 30, 2006, we were able to utilize
significant foreign tax credits and based on this fact, as well
as our estimates of our ability to utilize the remaining foreign
tax credits in future years we also released the valuation
reserves related to our carryover general limitation foreign tax
credits, resulting in a 20.7% decrease in the effective tax rate.
40
Segment
Results
The following table presents revenues and operating income for
the periods indicated by geographic region (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
207,350
|
|
|
$
|
195,775
|
|
|
$
|
180,718
|
|
EMEA
|
|
|
169,046
|
|
|
|
133,776
|
|
|
|
131,738
|
|
Asia/Pacific
|
|
|
41,257
|
|
|
|
36,667
|
|
|
|
35,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
417,653
|
|
|
$
|
366,218
|
|
|
$
|
347,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
21,714
|
|
|
$
|
14,578
|
|
|
$
|
42,713
|
|
EMEA
|
|
|
2,140
|
|
|
|
(16,942
|
)
|
|
|
3,876
|
|
Asia/Pacific
|
|
|
(2,141
|
)
|
|
|
4,783
|
|
|
|
7,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,713
|
|
|
$
|
2,419
|
|
|
$
|
53,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
Transition
Period Ended December 31, 2007 compared to Quarter Ended
December 31, 2006
The following table presents the consolidated statements of
operations as well as the percentage relationship to total
revenues of items included in our Consolidated Statements of
Operations (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial license fees (ILFs)
|
|
$
|
30,274
|
|
|
|
29.9
|
%
|
|
$
|
25,948
|
|
|
|
27.8
|
%
|
Monthly license fees (MLFs)
|
|
|
15,992
|
|
|
|
15.8
|
%
|
|
|
15,237
|
|
|
|
16.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license fees
|
|
|
46,266
|
|
|
|
45.6
|
%
|
|
|
41,185
|
|
|
|
44.1
|
%
|
Maintenance fees
|
|
|
32,167
|
|
|
|
31.8
|
%
|
|
|
28,729
|
|
|
|
30.8
|
%
|
Services
|
|
|
22,849
|
|
|
|
22.6
|
%
|
|
|
23,375
|
|
|
|
25.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
101,282
|
|
|
|
100.0
|
%
|
|
|
93,289
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software licenses fees
|
|
|
10,214
|
|
|
|
10.1
|
%
|
|
|
10,211
|
|
|
|
10.9
|
%
|
Cost of maintenance and services
|
|
|
24,689
|
|
|
|
24.4
|
%
|
|
|
24,147
|
|
|
|
25.9
|
%
|
Research and development
|
|
|
16,411
|
|
|
|
16.2
|
%
|
|
|
11,985
|
|
|
|
12.8
|
%
|
Selling and marketing
|
|
|
20,673
|
|
|
|
20.4
|
%
|
|
|
18,150
|
|
|
|
19.5
|
%
|
General and administrative
|
|
|
26,443
|
|
|
|
26.1
|
%
|
|
|
23,831
|
|
|
|
25.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
98,430
|
|
|
|
97.2
|
%
|
|
|
88,324
|
|
|
|
94.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
2,852
|
|
|
|
2.8
|
%
|
|
|
4,965
|
|
|
|
5.3
|
%
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
763
|
|
|
|
0.8
|
%
|
|
|
885
|
|
|
|
0.9
|
%
|
Interest expense
|
|
|
(1,389
|
)
|
|
|
(1.4
|
)%
|
|
|
(1,460
|
)
|
|
|
(1.6
|
)%
|
Other, net
|
|
|
(334
|
)
|
|
|
(0.3
|
)%
|
|
|
(293
|
)
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(960
|
)
|
|
|
(0.9
|
)%
|
|
|
(868
|
)
|
|
|
(0.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,892
|
|
|
|
1.9
|
%
|
|
|
4,097
|
|
|
|
4.4
|
%
|
Income tax expense
|
|
|
3,908
|
|
|
|
3.9
|
%
|
|
|
1,476
|
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,016
|
)
|
|
|
(2.0
|
)%
|
|
$
|
2,621
|
|
|
|
2.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Total revenues for the three months ended December 31, 2007
increased $8.0 million, or 8.6%, as compared to the same
period of 2006. Included in the three months ended
December 31, 2007 revenue with no corresponding amount in
the same period of 2006 was approximately $0.8 million of
revenue related to the acquisitions of Visual Web and
Stratasoft. Excluding the impact of the acquired businesses,
total revenues increased primarily as a result of a
$5.1 million, or 12.3%, increase in software license fee
revenues, a $3.1 million, or 10.7%, increase in maintenance
fee revenues partially offset by a $1.0 million or 4.2%
decrease in services revenue.
The increase in software license fee revenues, excluding the
impact of Visual Web and Stratasoft, during the three months
ended December 31, 2007, as compared to the same period of
2006, is primarily due to greater license and capacity fee
revenues in the Americas and EMEA reportable operating segments.
This increase is primarily due to increased capacity
requirements for existing customers which is often combined with
the renewal of license term.
The increase in maintenance fee revenues, excluding the impact
of Visual Web and Stratasoft, during the three months ended
December 31, 2007, as compared to the same period of 2006,
is primarily a result of an increase in the
42
number of customers in the EMEA reportable operating segment
that achieved go live status since December 31, 2006.
The decrease in services revenues, excluding the impact of
Visual Web and Stratasoft, during the three months ended
December 31, 2007, as compared to the same period of 2006,
resulted from a $1.3 million or a 17.7% decline of
implementation services primarily in the EMEA reportable
operating segment. This was a result of a series of large
projects that were completed during the three months ended
December 31, 2006. Recognition of implementation services
is often a function of timing, as in this case, which drives
variances between years. Processing services increased by
$0.8 million or 10.7%, driven primarily by Enterprise
Banker application services growth offset by the cancellation of
a facilities management contract in the Americas reportable
operating segment.
Expenses
Total operating expenses for the three months ended
December 31, 2007 increased $10.1 million, or 11.4%,
as compared to the same period of 2006. Included in the three
months ended December 31, 2007 operating expenses with no
corresponding amount in the same period of 2006 was
approximately $2.3 million of operating expenses related to
acquired businesses.
Excluding the impact of the acquired businesses, total expenses
increased primarily as a result of a $3.4 million, or 28.0%
increase in research and development costs, a $2.3 million,
or 12.8%, increase in selling and marketing costs, a
$2.5 million, or 10.5% increase in general and
administrative costs, offset by a $0.1 million, or 0.5%,
decrease in maintenance and service costs and a
$0.3 million, or 2.7%, decrease in the cost of software
license fees.
Cost of software license fees for the three months ended
December 31, 2007 was consistent with the same period of
2006. Expenses of $0.3 million related to acquired
businesses were incurred during the three months ended
December 31, 2007.
Cost of maintenance and services for the three months ended
December 31, 2007 increased $0.5 million, or 2.2%, as
compared to the same period of 2006. Expenses of
$0.6 million related to acquired businesses were incurred
during the three months ended December 31, 2007.
Research and development (R&D) costs for the
three months ended December 31, 2007 increased
$4.4 million, or 36.9%, as compared to the same period of
2006. The increase resulted from expenses of $1.1 million
related to acquired businesses and $3.3 million of expenses
associated with B24-eps R&D activities, build-out of ACI On
Demand and other software optimization efforts.
Selling and marketing costs for the three months ended
December 31, 2007 increased $2.5 million, or 13.9%, as
compared to the same period of 2006. The increase resulted from
expenses of $0.2 million related to acquired businesses as
well as an approximate $2.0 million increase in commissions
driven by a relative increase in sales activity partly
attributable to the change from a fiscal year to a calendar
year-end. The remaining expense was driven by timing of
advertising and promotions activities.
General and administrative costs for the three months ended
December 31, 2007 increased $2.6 million, or 11.0%, as
compared to the same period of 2006. Included in costs for the
three months ended December 31, 2007, with no corresponding
amount in the same period of 2006, are general and
administrative costs of approximately $0.1 million related
to acquired businesses. Additionally, included in the three
months ended December 31, 2007, were $3.0 million of
accounting and tax professional fees, $1.3 million of
expense associated with early termination of the corporate jet
lease, $0.7 million of restructuring and other employee
related expense, $0.5 million of professional fees to
support the Alliance, $0.5 million of increased rent and
utilities expense related to improvements made in our United
Kingdom and Canada facilities and $0.4 million of other
expenses offset by $1.3 million for release of the accrual
related to LTIP Performance Shares granted in fiscal 2005 and
2006. Approximately $2.6 million of the expenses
incurred in the three months ended December 31, 2006, with
no corresponding amount during the same period in 2007, related
to the historical stock option review and management analysis.
43
Other
Income and Expense.
Other income and expense includes interest income and expense,
foreign currency gains and losses, and other non-operating
items. Fluctuating currency rates impacted the three months
ended December 31, 2007 by $1.9 million in net foreign
currency gains, as compared with $0.6 million in net losses
during the same period in 2006. A $2.5 million loss on
change in fair value of interest rate swaps was incurred during
the three months ended December 31, 2007 with no
corresponding amount in the same period of 2006. Interest income
for the three months ended December 31, 2007 decreased
$0.1 million or 13.8% as compared to the corresponding
period of 2006. Interest expense was consistent for the three
months ended December 31, 2007 and 2006.
Income
Taxes
The effective tax rate for the three months ended
December 31, 2007 and 2006 was approximately 206.6% and
36.0%, respectively. The effective tax rate for the three months
ended December 31, 2007 was negatively impacted by losses
in foreign countries in which the Company was not able to record
tax benefits. The effective tax rate for the three months ended
December 31, 2006 was positively impacted primarily by a
U.S. tax law change during the quarter that extended the
research and development tax credit and negatively impacted
primarily by the recognition of tax expense associated with the
transfer of certain intellectual property rights out of the U.S.
Segment
Results
The following table presents revenues and operating income for
the periods indicated by geographic region (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
49,618
|
|
|
$
|
47,134
|
|
EMEA
|
|
|
43,094
|
|
|
|
37,555
|
|
Asia/Pacific
|
|
|
8,570
|
|
|
|
8,600
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
101,282
|
|
|
$
|
93,289
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
2,883
|
|
|
$
|
2,622
|
|
EMEA
|
|
|
403
|
|
|
|
697
|
|
Asia/Pacific
|
|
|
(434
|
)
|
|
|
1,646
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,852
|
|
|
$
|
4,965
|
|
|
|
|
|
|
|
|
|
|
LIQUIDITY
AND CAPITAL RESOURCES
As of December 31, 2008, our principal sources of
liquidity consisted of $113.0 million in cash and cash
equivalents and $75.0 million of unused borrowings under
our revolving credit facility. The amount of unused borrowings
actually available under the revolving credit facility varies in
accordance with the terms of the agreement. We believe that the
amount currently available along with our current cash balance
provides sufficient liquidity. We are not currently dependent
upon short-term funding, and the limited availability of credit
in the market has not affected our revolving credit facility,
our liquidity or materially impacted our funding costs. We had
bank borrowings of $75.0 million outstanding under our
revolving credit facility as of December 31, 2008. However,
due to the existing uncertainty in the capital and credit
markets and the impact of the current economic crisis on our
operating results and financial conditions, the amount of
available unused borrowings under our existing credit facility
may be insufficient to meet our needs
and/or our
access to capital outside of our existing credit facility may
not be available on terms acceptable to us or at all.
Additionally, if one or more of the financial institutions in
our syndicate were to default on its obligation to fund its
commitment, the portion of the committed
44
facility provided by such defaulting financial institution would
not be available to us. We cannot assure you that alternative
financing on acceptable terms would be available to replace any
defaulted commitments.
In connection with funding the purchase of P&H, as
discussed in Note 6, Debt in the Notes to
Consolidated Financial Statements, on September 29, 2006,
we entered into a five year revolving credit facility with a
syndicate of financial institutions, as lenders, providing for
revolving loans and letters of credit in an aggregate principal
amount not to exceed $150 million. We have the option to
increase the aggregate principal amount to $200 million.
The facility has a maturity date of September 29, 2011.
Obligations under the facility are unsecured and
uncollateralized, but are jointly and severally guaranteed by
certain of our domestic subsidiaries.
The credit facility contains certain affirmative and negative
covenants including certain financial measurements. The facility
also provides for certain events of default. The facility does
not contain any subjective acceleration features and does not
have any required payment or principal reduction schedule and is
included as a non-current liability in our consolidated balance
sheet.
On August 27, 2007, we entered into an amendment to our
credit agreement which amended the definition of consolidated
EBITDA, as it relates to the calculation for our debt covenants,
to exclude certain non-recurring items and to incorporate the
change in our fiscal year end to a calendar year, effective
January 1, 2008.
We have previously obtained certain extensions and may continue
to seek additional extensions under our credit facilities. The
extensions waived certain potential breaches of representations
and covenants under our credit facilities and established
extended deadlines for the delivery of certain financial reports
during the period in which we were not current with our SEC
reporting obligations.
We may select either a base rate loan or a LIBOR based loan.
Base rate loans are computed at the national prime interest rate
plus a margin ranging from 0% to 0.125%. LIBOR based loans are
computed at the applicable LIBOR rate plus a margin ranging from
0.625% to 1.375%. The margins are dependent upon our total
leverage ratio at the end of each quarter.
On October 5, 2006, we exercised our right to convert the
rate on our initial borrowing to the LIBOR based option, thereby
reducing the effective interest rate to 6.12%. The interest rate
in effect at December 31, 2008 was 5.21%. There is also an
unused commitment fee to be paid annually of 0.15% to 0.3% based
on our leverage ratio. The initial principal borrowings of
$75 million were outstanding at December 31, 2008.
There is $75 million remaining under the credit facility
for future borrowings. See Note 7, Derivative
Instruments and Hedging Activities, in the Notes to
Consolidated Financial Statements for further detail.
On July 18, 2007, we entered into an interest rate swap
with a commercial bank whereby we pay a fixed rate of 5.375% and
receive a floating rate indexed to the
3-month
LIBOR (5.36% at inception) from the counterparty on a notional
amount of $75 million. The swap effective date was
July 20, 2007, and terminates on October 4, 2010. The
variable rate re-prices quarterly.
On August 16, 2007, we entered into an interest rate swap
with a commercial bank whereby we pay a fixed rate of 4.90% and
receive a floating rate indexed to the
3-month
LIBOR from the counterparty on a notional amount of
$50 million. The swap effective date is October 4,
2007, and terminates on October 4, 2010. The variable rate
will be first determined on the effective date and will re-price
quarterly.
Since these interest rate swaps do not qualify for hedge
accounting under SFAS No. 133, Accounting for
Derivatives and Hedging Instruments, changes in market
interest rates will impact our earnings. See Item 7a,
Quantitative and Qualitative Disclosures About Market Risk and
Note 7, Derivative Instruments and Hedging
Activities, in the Notes to the Consolidated Financial
Statements.
The board of directors approved a stock repurchase program
authorizing us, from time to time as market and business
conditions warrant, to acquire up to $210.0 million of our
common stock. During the year ended December 31, 2008, we
repurchased 1,639,755 shares of our common stock at an
average price of $18.33 per share under this stock repurchase
program. Under the program to date, we have purchased
approximately 6,049,484 shares for approximately
$154 million. The maximum remaining dollar value of shares
authorized for purchase under the stock repurchase program was
approximately $56 million as of December 31, 2008.
45
Purchases will be made from time to time as market and business
conditions warrant, in open market, negotiated or block
transactions, subject to applicable laws, rules and regulations.
We may also decide to use cash to acquire new products and
services or enhance existing products and services through
acquisitions of other companies, product lines, technologies and
personnel, or through investments in other companies.
Cash
Flows
The following table sets forth summary cash flow data for the
periods indicated. Please refer to this summary as you read our
discussion of the sources and uses of cash in each year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands)
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
77,826
|
|
|
$
|
24,847
|
|
|
$
|
60,701
|
|
Investing activities
|
|
|
(16,956
|
)
|
|
|
(25,964
|
)
|
|
|
(79,437
|
)
|
Financing activities
|
|
|
(27,687
|
)
|
|
|
(50,005
|
)
|
|
|
45,156
|
|
2008
compared to 2007
Net cash flows provided by operating activities during the year
ended December 31, 2008 amounted to $77.8 million as
compared to $24.8 million during the year ended
September 30, 2007. The comparative period increase in net
cash flows from operating activities of $53.0 million was
principally the result of the following items:
$40.9 million received from IBM primarily for prepayment of
estimated incentives payments pursuant to the terms of the
Alliance, an increase of $19.7 million from net income of
$10.6 million during the year ended December 31, 2008
compared to a net loss of $9.1 million during the year
ended September 30, 2007, the payment of $10.6 million
for P&H acquisition-related compensation charges during the
year ended September 30, 2007, the payment of a class
action litigation settlement of $8.5 million during the
year ended September 30, 2007, and an increase in accruals
for other expenses of $1.5 million during the year ended
December 31, 2008. Additionally, non-cash expense increased
by $16.1 million during the year ended December 31,
2008 for items including depreciation, amortization, deferred
taxes, and the interest rate swaps. These items were partially
offset by decreased cash collections on customer receivables and
decreased deferred revenues during the year ended
December 31, 2008 as compared to the year ended
September 30, 2007 of $44.3 million.
Net cash flows used in investing activities totaled
$17.0 million during the year ended December 31, 2008
as compared to $26.0 million used in investing activities
during the year ended September 30, 2007. During the year
ended December 31, 2008, we used cash of $12.0 million
to purchase software, property and equipment and
$6.3 million for costs related to fulfillment of the
technical enablement milestones under the Alliance. We also used
cash of $0.2 million for contingency payments on prior
acquisitions. These uses of cash were partially offset during
the year ended December 31, 2008, by $1.5 million
received from IBM for reimbursement of estimated capitalizable
technical enablement milestones costs pursuant to the terms of
the Alliance. During the year ended September 30, 2007, we
used cash of $6.1 million to pay costs related to the
second closing of the purchase of eps AG, $0.7 million
related to the P&H acquisition, $8.3 million for the
acquisition of Visual Web, $2.5 million for the acquisition
of Stratasoft, and other direct acquisition costs. These uses of
cash were partially offset during the year ended
September 30, 2007 by $0.5 million in proceeds from an
asset transfer. We also used cash of $8.9 million to
purchase software, property and equipment during the year ended
September 30, 2007.
Net cash flows used in financing activities totaled
$27.7 million during the year ended December 31, 2008
as compared to net cash flows used of $50.0 million during
the year ended September 30, 2007. During the years ended
December 31, 2008 and September 31, 2007, we used cash
of $30.1 million and $46.7 million, respectively, to
purchase shares of our common stock under the stock repurchase
program. We also made payments to third-party financial
institutions, primarily related to debt and capital leases,
totaling $3.3 million and $3.4 million during the
years ended December 31, 2008 and September 30, 2007,
respectively. During the years ended December 31, 2008
46
and September 30, 2007, we received proceeds of
$4.0 million and $0.1 million, respectively, including
corresponding excess tax benefits, from the exercises of stock
options. During the year ended December 31, 2008, we
received proceeds of $1.7 million for the issuance of
common stock for purchases under our Employee Stock Purchase
Plan.
We realized a $17.2 million decrease in cash during the
year ended December 31, 2008 and a $1.8 million
increase in cash during year ended September 30, 2007
related to foreign exchange rate variances.
2007
compared to 2006
Net cash flows provided by operating activities during the year
ended September 30, 2007 amounted to $24.8 million as
compared to net cash flows provided by operating activities of
$60.7 million during the same period in 2006. The
comparative period decrease in net cash flows from operating
activities of $35.9 million was principally the result of
the following items: a decrease of $64.5 million from net
income of $55.4 million during the year ended
September 30, 2006 to a net loss of $9.1 million, the
payment of $10.6 million for P&H acquisition-related
compensation charges, the payment of a class action litigation
settlement of $8.5 million, the receipt of a cash refund of
$10.9 million related to the settlement of the IRS audit of
tax years 1997 through 2003 during fiscal 2006, and a decrease
in accruals for other expenses of $16.6 million during the
year ended September 30, 2007. These items were partially
offset by increased cash collections on customer receivables and
higher deferred revenues during the yea ended September 30,
2007 as compared to the same period in 2006 of
$45.4 million and increased non-cash expenses of
$29.8 million, such as depreciation, amortization and
deferred taxes. The 2006 and 2007 acquisitions have increased
accrued expenses due to the volume of expenses and increased
depreciation and amortization due to the intangibles and fixed
assets related to the acquisitions.
Net cash flows used in investing activities totaled
$26.0 million during the year ended September 30, 2007
as compared to $79.4 million used in investing activities
during the same period in 2006. During the year ended
September 30, 2007, we used cash of $6.1 million to
pay costs related to the second closing of the purchase of eps
AG, $0.7 million related to the P&H acquisition,
$8.3 million for the acquisition of Visual Web,
$2.5 million for the acquisition of Stratasoft, and other
direct acquisition costs. These uses of cash were partially
offset in the year ended September 30, 2007 by
$0.5 million in proceeds from an asset transfer. We also
used cash of $8.9 million to purchase software, property
and equipment. During the year ended September 30, 2006, we
used cash of $50.9 million to increase our holding of
marketable securities and $6.0 million to purchase
software, property and equipment. We also used cash of
$13.0 million for the acquisition of eps AG and
$133.3 million for the acquisition of P&H. These uses
of cash were partially offset in the year ended
September 30, 2006 by $123.8 million provided by the
sale of marketable securities.
Net cash flows used in financing activities totaled
$50.0 million during the year ended September 30, 2007
as compared to net cash flows provided of $45.2 million
during the same period in 2006. In the year ended
September 30, 2007 and 2006, we used cash of
$46.7 million and $39.7 million, respectively, to
purchase shares of our common stock under the stock repurchase
program. We also made payments to third-party financial
institutions, primarily related to debt and capital leases,
totaling $3.4 million and $3.7 million during the
years ended September 30, 2007 and 2006, respectively.
During the years ended September 30, 2007 and 2006, we
received proceeds of $0.1 million and $14.0 million,
respectively, including corresponding excess tax benefits, from
the exercises of stock options. In the year ended
September 30, 2006, we received proceeds of
$75.0 million from borrowings under our revolving credit
facility to finance the purchase of P&H.
We realized a $1.8 million increase in cash during the year
ended September 30, 2007 and a $0.04 million increase
in cash during the same period in 2006 related to foreign
exchange rate variances.
47
Transition
Period Ended December 31, 2007 compared to Quarter Ended
December 31, 2006
The following table sets forth summary cash flow data for the
periods indicated. Please refer to this summary as you read our
discussion of the sources and uses of cash in each period.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands)
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
12,123
|
|
|
$
|
(611
|
)
|
Investing activities
|
|
|
5,898
|
|
|
|
(13,836
|
)
|
Financing activities
|
|
|
20,382
|
|
|
|
(6,085
|
)
|
Net cash flows provided by operating activities for the three
months ended December 31, 2007 amounted to
$12.1 million as compared to net cash flows used by
operating activities of $0.6 million during the same period
in 2006. The comparative period increase in net cash flows from
operating activities of $12.7 million was principally the
result of the following items: $8.5 million paid during the
three months ended December 31, 2006 for settlement of the
class action lawsuit, a $16.1 million increase in deferred
revenue and a decrease in accruals for other expenses of
$21.1 million in the three months ended December 31,
2007. These items were partially offset by a net loss of
$2.0 million for the three months ended December 31,
2007 as compared to net income of $2.6 million for the same
period in 2006 and decreased cash collections on customer
receivables of $27.1 million in the three months ended
December 31, 2007 as compared to the same period in 2006
and decreased non-cash expenses of $1.3 million, such as
depreciation, amortization, change in fair value of interest
rate swaps and deferred taxes.
Net cash flows provided by investing activities totaled
$5.9 million in the three months ended December 31,
2007 as compared to $13.8 million used in investing
activities during the same period in 2006. During the three
months ended December 31, 2007, we used cash of $47,000 for
a contingency payment under the S2 Systems, Inc. purchase
agreement. We also used cash of $3.9 million to purchase
software, property and equipment. These uses of cash flow were
offset in the three months ended December 31, 2007 by
$9.3 million received related to the Alliance and
$0.5 million in proceeds from asset transferred under
contractual arrangement. During the three months ended
December 31, 2006, we used cash of $2.5 million to
increase our holdings of marketable securities and
$5.1 million to purchase software, property and equipment.
We also used cash of $6.2 million for the acquisition of
eps AG and $0.6 million related to the acquisition of
P&H during the three months ended December 31, 2006.
These uses of cash were partially offset in the three months
ended December 31, 2006 by $0.5 million provided by
assets transferred under contractual arrangement.
Net cash flows provided by financing activities totaled
$20.4 million in the three months ended December 31,
2007 as compared to net cash flows used of $6.1 million
during the same period in 2006. In the three months ended
December 31, 2007 and 2006, we used cash of
$4.0 million and $4.4 million, respectively, to
purchase shares of our common stock under the stock repurchase
program. We also made payments to third-party financial
institutions, primarily related to debt and capital leases,
totaling $0.6 million and $1.5 million during the
three months ended December 31, 2007 and 2006,
respectively. In 2007 and 2006, we received proceeds of
$0.7 million and $42,000, respectively, including
corresponding excess tax benefits, from the exercises of stock
options. In the three months ended December 31, 2007, we
received $24.0 million for issuance of common stock
warrants related to the Alliance and $0.3 million in
proceeds for the issuance of common stock for a purchase under
our Employee Stock Purchase Plan.
We also realized a $2.2 million decrease in cash during the
three months ended December 31, 2007 compared to a
$0.3 million increase in cash during the same period of
2006 related to foreign exchange rate variances.
Contractual
Obligations and Commercial Commitments
We lease office space and equipment under operating leases that
run through August 2028, and also lease certain property under
capital lease agreements that expire in various years through
2012. Additionally, we have entered into a long term credit
facility agreement that expires in 2011. Under the Outsourcing
Agreement with IBM, we will pay IBM for IT services through a
combination of fixed and variable charges subject to actual
services needed, applicable service levels and statements of
work. The total amount paid is subject to a minimum
48
commitment as provided in the Outsourcing Agreement. Contractual
obligations as of December 31, 2008 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
$
|
67,548
|
|
|
$
|
9,721
|
|
|
$
|
13,961
|
|
|
$
|
7,183
|
|
|
$
|
36,683
|
|
Capital leases
|
|
|
2,553
|
|
|
|
1,423
|
|
|
|
895
|
|
|
|
235
|
|
|
|
|
|
Long-term credit facility
|
|
|
75,000
|
|
|
|
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
Long-term credit facility interest(1)
|
|
|
10,746
|
|
|
|
3,908
|
|
|
|
6,838
|
|
|
|
|
|
|
|
|
|
IBM Outsourcing Minimum Commitment
|
|
|
49,215
|
|
|
|
8,036
|
|
|
|
16,359
|
|
|
|
15,742
|
|
|
|
9,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
205,062
|
|
|
$
|
23,088
|
|
|
$
|
113,053
|
|
|
$
|
23,160
|
|
|
$
|
45,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based upon the interest rate in effect at December 31,
2008, of 5.21%. |
The following table discloses aggregate information about our
derivative financial instruments as of December 31, 2008,
the source of fair value of these instruments and their
maturities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Contracts at Period-End
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Source of fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments(1)
|
|
$
|
8,624
|
|
|
$
|
5,263
|
|
|
$
|
3,361
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,624
|
|
|
$
|
5,263
|
|
|
$
|
3,361
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fair value of interest rate swaps at December 31, 2008 was
provided by the counter-party to the underlying contract. |
We are unable to reasonably estimate the ultimate amount or
timing of settlement of our reserves for income taxes under FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (as amended). The liability for unrecognized tax benefits
at December 31, 2008 is $11.5 million.
Off-Balance
Sheet Arrangements
We do not have any obligations that meet the definition of an
off-balance sheet arrangement and that have or are reasonably
likely to have a material effect on our consolidated financial
statements.
Critical
Accounting Estimates
The preparation of the consolidated financial statements
requires that we make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. We
base our estimates on historical experience and other
assumptions that we believe to be proper and reasonable under
the circumstances. We continually evaluate the appropriateness
of estimates and assumptions used in the preparation of our
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,
Summary of Significant Accounting Policies in the
Notes to Consolidated Financial Statements for a further
discussion of revenue recognition and other significant
accounting policies.
Revenue
Recognition
For software license arrangements for which services rendered
are not considered essential to the functionality of the
software, we recognize revenue upon delivery, provided
(1) there is persuasive evidence of an arrangement,
49
(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, we use the residual method to
determine the amount of revenue to be allocated to the license
element. Under the residual method, the fair value of all
undelivered elements, such as post contract customer support or
other products or services, is deferred and subsequently
recognized as the products are delivered or the services are
performed, with the residual difference between the total
arrangement fee and revenues allocated to undelivered elements
being allocated to the delivered element. For software license
arrangements in which we have concluded that collectibility
issues may exist, revenue is recognized as cash is collected,
provided all other conditions for revenue recognition have been
met. In making the determination of collectibility, we consider
the creditworthiness of the customer, economic conditions in the
customers industry and geographic location, and general
economic conditions.
Our sales focus continues to shift from our more-established
products to more complex arrangements involving multiple
products inclusive of our BASE24-eps product and
less-established (collectively referred to as newer)
products. As a result of this shift to newer products and more
complex, multiple product arrangements, absent other factors, we
initially experience an increase in deferred revenue and a
corresponding decrease in current period revenue due to
differences in the timing of revenue recognition for the
respective products. Revenues from newer products are typically
recognized upon acceptance or first production use by the
customer whereas revenues from mature products, such as BASE24,
are generally recognized upon delivery of the product, provided
all other conditions for revenue recognition have been met. For
those arrangements where revenues are being deferred and we
determine 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 our management and product development personnel to
determine when any such product meets specific internally
defined product maturity criteria that would support its
classification as a mature product. Evaluation criteria used in
making this determination include successful demonstration of
product features and functionality; standardization of sale,
installation, and support functions; and customer acceptance at
multiple production site installations, among others. A change
in product classification (from newer to mature) would allow us
to recognize revenues from new sales of the product upon
delivery of the product rather than upon acceptance or first
production use by the customer, resulting in earlier recognition
of revenues from sales of that product, as well as related
costs, provided all other revenue recognition criteria have been
met. BASE24-eps was reclassified as a mature product as of
October 1, 2006.
When a software license arrangement includes services to provide
significant modification or customization of software, those
services are not considered to be separable from the software.
Accounting for such services delivered over time is referred to
as contract accounting. Under contract accounting, we generally
use the percentage-of-completion method. Under the
percentage-of-completion method, we record revenue for the
software license fee and services over the development and
implementation period, with the percentage of completion
generally measured by the percentage of labor hours incurred
to-date to estimated total labor hours for each contract.
Estimated total labor hours for each contract are based on the
project scope, complexity, skill level requirements, and
similarities with other projects of similar size and scope. For
those contracts subject to contract accounting, estimates of
total revenue and profitability under the contract consider
amounts due under extended payment terms. For arrangements where
we believe it is reasonably assured that no loss will be
incurred under the arrangement and fair value for maintenance
services does not exist, we use a zero margin approach of
applying percentage-of-completion accounting until software
customization services are completed. We exclude revenues due on
extended payment terms from our current percentage-of-completion
computation until such time that collection of the fees becomes
probable.
We may execute more than one contract or agreement with a single
customer. The separate contracts or agreements may be viewed as
one multiple-element arrangement or separate arrangements for
revenue recognition purposes. Judgment is required when
evaluating the facts and circumstances related to each situation
in order to reach appropriate conclusions regarding whether such
arrangements are related or separate. Those conclusions can
impact the timing of revenue recognition related to those
arrangements.
Allowance
for Doubtful Accounts
We maintain a general allowance for doubtful accounts based on
our historical experience, along with additional
customer-specific allowances. We regularly monitor credit risk
exposures in our accounts receivable. In
50
estimating the necessary level of our allowance for doubtful
accounts, management considers the aging of our accounts
receivable, the creditworthiness of our customers, economic
conditions within the customers industry, and general
economic conditions, among other factors. Should any of these
factors change, the estimates made by management would also
change, which in turn would impact the level of our future
provision for doubtful accounts. Specifically, if the financial
condition of our 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 we have 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.
Intangible
Assets and Goodwill
Our business acquisitions typically result in the recording of
intangible assets, and the recorded values of those assets may
become impaired in the future. As of December 31, 2008,
December 31, 2007 and September 30, 2007, our
intangible assets, excluding goodwill, net of accumulated
amortization, were $30.3 million, $38.1 million and
$39.7 million, respectively. The determination of the value
of such intangible assets requires management to make estimates
and assumptions that affect the consolidated financial
statements. We assess potential impairments to intangible assets
when there is evidence that events or changes in circumstances
indicate that the carrying amount of an asset may not be
recovered. Judgments regarding the existence of impairment
indicators and future cash flows related to intangible assets
are based on operational performance of our businesses, market
conditions and other factors. Although there are inherent
uncertainties in this assessment process, the estimates and
assumptions used, including estimates of future cash flows,
volumes, market penetration and discount rates, are consistent
with our internal planning. If these estimates or their related
assumptions change in the future, we may be required to record
an impairment charge on all or a portion of our intangible
assets. Furthermore, we cannot predict the occurrence of future
impairment-triggering events nor the impact such events might
have on our reported asset values. Future events could cause us
to conclude that impairment indicators exist and that intangible
assets associated with acquired businesses is impaired. Any
resulting impairment loss could have an adverse impact on our
results of operations.
Other intangible assets are amortized using the straight-line
method over periods ranging from 18 months to 12 years.
As of December 31, 2008, December 31, 2007 and
September 30, 2007, our goodwill was $200.0 million,
$206.8 million and $205.7 million, respectively. In
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142), we
assess goodwill for impairment at least annually or when there
is evidence that events or changes in circumstances indicate
that the carrying amount of the asset may not be recovered.
During this assessment, management relies on a number of
factors, including operating results, business plans and
anticipated future cash flows. When SFAS No. 142 was
adopted we selected the end of our fiscal year (or September
30) as our annual impairment testing date. During the
current year, we changed our fiscal year end from September 30
to December 31. As a result of the change in our fiscal
year, we evaluated our annual goodwill impairment testing date
and concluded to change our impairment testing date to
October 1st versus the end of our new fiscal year.
Stock-Based
Compensation
Effective October 1, 2005 we began recording compensation
expense associated with stock-based awards in accordance with
SFAS No. 123(R). We adopted the modified prospective
transition method provided for under SFAS No. 123(R),
and consequently have not retroactively adjusted results from
prior periods. Under this transition method, compensation cost
associated with stock-based awards for fiscal years 2007 and
2006 includes (i) amortization related to the remaining
unvested portion of stock-based awards granted prior to
September 30, 2005, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS No. 123; and (ii) amortization related to
stock-based awards granted subsequent to September 30,
2005, based on the grant date fair value estimated in accordance
with the provisions of SFAS No. 123(R).
Under the provisions of SFAS No. 123(R), stock-based
compensation cost for stock option awards is estimated at the
grant date based on the awards fair value as calculated by
the Black-Scholes option-pricing model and is
51
recognized as expense ratably over the requisite service period.
We recognize stock-based compensation costs for only those
shares that are expected to vest. The impact of forfeitures that
may occur prior to vesting is estimated and considered in the
amount of expense recognized. Forfeiture estimates will be
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The Black-Scholes
option-pricing model requires various highly judgmental
assumptions including volatility and expected option life. If
any of the assumptions used in the Black-Scholes model change
significantly, stock-based compensation expense may differ
materially for future awards from that recorded for existing
awards.
We also have stock options outstanding that vest upon attainment
by the Company of certain market conditions. In order to
determine the grant date fair value of these stock options that
vest based on the achievement of certain market conditions, a
Monte Carlo simulation model is used to estimate (i) the
probability that the performance goal will be achieved and
(ii) the length of time required to attain the target
market price.
Long term incentive program performance share awards (LTIP
Performance Shares) were issued during the years ended
September 30, 2007, 2006 and 2005. These awards are earned
based on the achievement over a specified period of performance
goals related to certain performance indicators. In order to
determine compensation expense to be recorded for these LTIP
Performance Shares, each quarter management evaluates the
probability that the target performance goals will be achieved,
if at all, and the anticipated level of attainment.
During the year ended December 31, 2008, pursuant to our
2005 Incentive Plan, we granted restricted share awards
(RSAs). These awards have requisite service periods
of four years and vest in increments of 25% on the anniversary
dates of the grants. Under each arrangement, stock is issued
without direct cost to the employee. We estimate the fair value
of the RSAs based upon the market price of our stock at the date
of grant. The RSA grants provide for the payment of dividends on
our common stock, if any, to the participant during the
requisite service period (vesting period) and the participant
has voting rights for each share of common stock.
The assumptions utilized in the Black-Scholes option-pricing
model as well as the description of the plans the stock-based
awards are granted under are described in further detail in
Note 13, Stock-Based Compensation Plans, in the
Notes to Consolidated Financial Statements.
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
we would realize the benefits of net operating loss
carryforwards
and/or
foreign tax credit carryforwards, the adequacy of valuation
allowances, and the rates used to measure transactions with
foreign subsidiaries. As part of the process of preparing our
consolidated financial statements, we are required to estimate
our 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 us 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 our
overall effective tax rate.
To the extent recovery of deferred tax assets is not likely, we
record a valuation allowance to reduce our deferred tax assets
to the amount that is more likely than not to be realized.
Although we have considered future taxable income along with
prudent and feasible tax planning strategies in assessing the
need for a valuation allowance, if we should determine that we
would not be able to realize all or part of our 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 we are able to realize our 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.
Recently
Issued Accounting Standards
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations (SFAS 141(R)),
which replaces SFAS 141. SFAS 141(R) establishes
principles and requirements for how an acquirer in a business
combination recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities
52
assumed, and any controlling interest; recognizes and measures
the goodwill acquired in the business combination or a gain from
a bargain purchase; and determines what information to disclose
to enable users of the financial statements to evaluate the
nature and financial effects of the business combination. SFAS
141(R) is to be applied prospectively to business combinations
for which the acquisition date is on or after an entitys
fiscal year that begins after December 15, 2008. We will
assess the impact of SFAS 141(R) if and when a future
acquisition occurs.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 establishes new
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the
recognition of a noncontrolling interest (minority interest) as
equity in the consolidated financial statements and separate
from the parents equity. The amount of net income
attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement.
SFAS 160 clarifies that changes in a parents
ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains
its controlling financial interest. In addition, this statement
requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated. Such gain or loss will be
measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. SFAS 160 also
includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest.
SFAS 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. We are
currently evaluating the impact, if any, the adoption of
SFAS 160 will have on our consolidated financial statements.
In February 2008, the FASB issued FASB Staff Position
(FSP) Financial Accounting Standard
(FAS)
157-2,
Effective Date of FASB Statement No. 157. FSP
FAS 157-2
delays the effective date of SFAS No. 157 from 2008 to
2009 for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least
annually).
On March 19, 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, (SFAS 161). SFAS 161
amends FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities,
(SFAS 133) and was issued in response to
concerns and criticisms about the lack of adequate disclosure of
derivative instruments and hedging activities. SFAS 161
requires; (i) qualitative disclosures regarding the
objectives and strategies for using derivative instruments and
engaging in hedging activities in the context of an
entitys overall risk exposure, (ii) quantitative
disclosures in tabular format of the fair values of derivative
instruments and their gains and losses, and
(iii) disclosures about credit-risk related contingent
features in derivative instruments. SFAS 161 is effective
for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, but early
application is encouraged. We are currently evaluating the
impact, if any, the adoption of SFAS 161 will have on our
consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles.
SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities
that are presented in conformity with generally accepted
accounting principles in the United States. It is effective
60 days following the SECs approval of the Public
Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles. The adoption
of this statement is not expected to have a material effect on
our financial statements.
In June 2008, the FASB issued FSP
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities (FSP
EITF 03-6-1).
FSP
EITF 03-6-1
clarified that all outstanding unvested share-based payment
awards that contain rights to nonforfeitable dividends
participate in undistributed earnings with common shareholders.
Awards of this nature are considered participating securities
and the two-class method of computing basic and diluted earnings
per share must be applied. FSP
EITF 03-6-1
is effective for fiscal years beginning after December 15,
2008. The implementation of this standard will not have a
material impact on our consolidated financial position and
results of operations.
In October 2008, the FASB issued Staff Position
No. FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active
(FSP 157-3).
FSP 157-3
clarifies the application of SFAS 157, which the Company
adopted as of January 1, 2008, in cases where a market is
not active. We have considered the
53
guidance provided by
FSP 157-3
in its determination of estimated fair values of financial
assets as of December 31, 2008, and the impact was not
material.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Excluding the impact of changes in interest rates and the
uncertainty in the global financial markets, there have been no
material changes to our market risk for the year ended
December 31, 2008. We conduct business in all parts of the
world and are thereby exposed to market risks related to
fluctuations in foreign currency exchange rates. The
U.S. dollar is the single largest currency in which our
revenue contracts are denominated. Thus, any decline in the
value of local foreign currencies against the U.S. dollar
results in our products and services being more expensive to a
potential foreign customer, and in those instances where our
goods and services have already been sold, may result in the
receivables being more difficult to collect. Additionally, any
decline in the value of the U.S. dollar in jurisdictions
where the revenue contracts are denominated in U.S. dollars
and operating expenses are incurred in local currency will have
an unfavorable impact to operating margins. We at times enter
into revenue contracts that are denominated in the
countrys local currency, principally in Australia, Canada,
the United Kingdom and other European countries. This practice
serves as a natural hedge to finance the local currency expenses
incurred in those locations. We have not entered into any
foreign currency hedging transactions. We do 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 our cash investments and interest rates on these investments
at December 31, 2008, and if we maintained this level of
similar cash investments for a period of one year, a
hypothetical ten percent increase or decrease in interest rates
would increase or decrease interest income by approximately
$0.2 million annually.
During the year ended September 30, 2007, we entered into
two interest rate swaps, including a forward starting swap, with
a commercial bank whereby we pay a fixed rate of 5.375% and
4.90% and receive a floating rate indexed to the
3-month
LIBOR from the counterparty on a notional amount of
$75 million and $50 million, respectively. As of
December 31, 2008, the fair value liability of the interest
rate swaps was approximately $8.6 million, of which
$5.3 million and $3.3 million was included in other
current liabilities and other noncurrent liabilities,
respectively, on the consolidated balance sheet. The potential
loss in fair value liability of the interest rate swaps
resulting from a hypothetical 10 percent adverse change in
interest rates was approximately $0.4 million at
December 31, 2008. Because our interest rate swaps do not
qualify for hedge accounting, changes in the fair value of the
interest rate swaps are recognized in the consolidated statement
of operations, along with the related income tax effects.
Effective January 1, 2008, we adopted the provisions of
SFAS No. 157, Fair Value Measurements
(SFAS 157), for financial assets and
financial liabilities. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about
fair value measurements.
SFAS 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. SFAS 157
establishes a fair value hierarchy for valuation inputs that
gives the highest priority to quoted prices in active markets
for identical assets or liabilities and the lowest priority to
unobservable inputs. The fair value hierarchy is as follows:
|
|
|
|
|
Level 1 Inputs Unadjusted quoted prices
in active markets for identical assets or liabilities that the
reporting entity has the ability to access at the measurement
date.
|
|
|
|
Level 2 Inputs Inputs other than quoted
prices included in Level 1 that are observable for the asset or
liability, either directly or indirectly. These might include
quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than
quoted prices that are observable for the asset or liability
(such as interest rates, volatilities, prepayment speeds, credit
risks, etc.) or inputs that are derived principally from or
corroborated by market data by correlation or other means.
|
54
|
|
|
|
|
Level 3 Inputs Unobservable inputs for
determining the fair values of assets or liabilities that
reflect an entitys own assumptions about the assumptions
that market participants would use in pricing the assets or
liabilities.
|
Derivatives. Derivatives are reported at fair
value utilizing Level 2 inputs. We utilize valuation models
prepared by a third-party with observable market data inputs to
estimate fair value of its interest rate swaps.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The required consolidated financial statements and notes thereto
are included in this Annual Report and are listed in
Part IV, Item 15.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
Not applicable.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
|
|
a)
|
Evaluation
of Disclosure Controls and Procedures
|
Our 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 our
disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange
Act)) as of the end of the period covered by this report,
December 31, 2008.
In connection with our evaluation of disclosure controls and
procedures, we have concluded that we have a material weakness
in our internal control over financial reporting, as described
below. Therefore, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures were not effective as of December 31, 2008.
|
|
b)
|
Managements
Report on Internal Control over Financial Reporting
|
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting to provide
reasonable assurance regarding the reliability of our financial
reporting and the preparation of our consolidated financial
statements for external purposes in accordance with United
States Generally Accepted Accounting Principles (US
GAAP). Under the supervision of, and with the
participation of our Chief Executive Officer and Chief Financial
Officer, management assessed the effectiveness of internal
control over financial reporting as of December 31, 2008.
Management based its assessment on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Based on this evaluation, management concluded that the
following material weakness in internal control over financial
reporting existed as of December 31, 2008.
The Company did not maintain effective policies and procedures
related to its accounting for software implementation service
and license arrangements in the Asia Pacific region.
Specifically, the Company did not have adequate corporate
oversight, sufficient local US GAAP knowledge and experience,
and sufficient accounting and communication processes in place
to ensure proper revenue recognition for service and related
license revenue. As a result of this material weakness, the
Company restated its March 31, 2008 financial statements to
reflect the correction of a material misstatement related to
service and licensing revenue and related costs for a software
implementation services project that should have been deferred
until additional project milestones were achieved.
As a result of the material weakness described above, management
has concluded that its internal control over financial reporting
was not effective as of December 31, 2008. The
effectiveness of internal control over financial reporting as of
December 31, 2008 has been audited by KPMG LLP, an
independent registered public accounting firm.
55
|
|
c)
|
Changes
in Internal Control over Financial Reporting
|
As previously disclosed, we have implemented remediation
activities related to material weaknesses identified in our
assessment of internal control over financial reporting as of
September 30, 2007. The material weaknesses as of
September 30, 2007 related to our internal control over the
accounting for the recognition of revenue and the accounting for
income taxes. As of December 31, 2008, we believe the
remediation activities are properly designed and have been in
place for a sufficient amount of time to conclude that they
operating effectively as of December 31, 2008. Therefore,
these material weaknesses have been remediated during the fourth
quarter of 2008.
During managements evaluation of internal control over
financial reporting as of December 31, 2008, we identified
a material weakness related to accounting for software
implementation service and license arrangements in the Asia
Pacific region. During the 4th quarter of 2008, the Company
developed and implemented the following initiatives which have
significantly improved the accounting for and oversight of these
software implementation and license arrangement. However, these
initiatives have not been in place for a sufficient period of
time to conclude on their operating effectiveness.
Remedial actions for the material weakness identified as of
December 31, 2008 related to accounting for software
implementation services and licenses arrangements in the Asia
Pacific region
1) Created an Implementation Services Methodology which
sets forth the processes, methodology, tools, roles and
responsibilities in managing our implementation projects on a
global basis inclusive of a global Project Completion Policy.
2) Established a Corporate Management Office to provide a
standard methodology on how to manage, coordinate, report and
escalate projects during implementation.
3) Established a Deal Review Committee to review and
coordinate the closing of a contract and subsequently create
detailed project plans for implementation.
4) Created a disciplined process to account for all service
hours.
5) Implemented bi-weekly meetings to increase corporate
oversight of implementation service and license arrangements
across the channels.
Additionally, in the first quarter of 2009, we developed a
formal communication strategy and plan to educate and train
personnel on ACIs Implementation Services Methodology,
Corporate Management Office and Deal Review Committee processes.
Except for the changes described above, there have been no
changes during the Companys quarter ended
December 31, 2008 in our internal control over financial
reporting (as defined in
Rules 13a-15(f)
under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
56
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
ACI Worldwide, Inc.:
We have audited ACI Worldwide, Inc.s (the Company)
internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the
accompanying Managements Report on Internal Control over
Financial Reporting (Item 9A(b)). Our responsibility is to
express an opinion on the Companys internal control over
financial reporting based on our audit.
We conducted our audit 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 effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the companys annual or interim financial
statements will not be prevented or detected on a timely basis.
In its assessment, management has identified a material weakness
related to its accounting for software implementation service
and license arrangements in the Asia Pacific region. We also
have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the
consolidated balance sheets of ACI Worldwide, Inc. and
subsidiaries as of December 31, 2008 and 2007 and
September 30, 2007 and the related consolidated statements
of operations, stockholders equity and comprehensive
income (loss), and cash flows for the year ended
December 31, 2008, the three-month period ended
December 31, 2007, and each of the years in the two-year
period ended September 30, 2007. This material weakness was
considered in determining the nature, timing, and extent of
audit tests applied in our audit of the 2008 consolidated
financial statements, and this report does not affect our report
dated March 3, 2009, which expressed an unqualified opinion
on those consolidated financial statements.
In our opinion, because of the effect of the aforementioned
material weakness on the achievement of the objectives of the
control criteria, the Company has not maintained effective
internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
Omaha, Nebraska
March 3, 2009
57
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information under the heading Executive Officers of
the Registrant in Part 1, Item 1 of this
Form 10-K
is incorporated herein by reference.
The information required by this item with respect to our
directors is included in the section entitled
Nominees under Proposal 1
Election of Directors in our Proxy Statement for the
Annual Meeting of Stockholders to be held on June 10, 2009
(the 2009 Proxy Statement) and is incorporated
herein by reference.
Information included in the section entitled
Section 16(a) Beneficial Ownership Reporting
Compliance in our 2009 Proxy Statement is incorporated
herein 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 our 2009 Proxy
Statement is incorporated herein by reference. In addition, the
information included in the section entitled Corporate
Governance in our 20098 Proxy Statement is incorporated
herein by reference.
Code of
Business Conduct and Code of Ethics
We have adopted a Code of Business Conduct and Ethics for our
directors, officers (including our principal executive officer,
principal financial officer, principle accounting officer and
controller) and employees. We have also adopted a Code of Ethics
for the Chief Executive Officer and Senior Financial Officers
(the Code of Ethics), which applies to our Chief
Executive Officer, our Chief Financial Officer, our Chief
Accounting Officer, Controller, and persons performing similar
functions. The full text of both the Code of Business Conduct
and Ethics and Code of Ethics is published on our website at
www.aciworldwide.com in the Investors
Corporate Governance section. We intend to disclose future
amendments to, or waivers from, certain provisions of the Code
of Business Conduct and Ethics and the Code of Ethics on our
website promptly following the adoption of such amendment or
waiver.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information included in the sections entitled Director
Compensation, Compensation Discussion and
Analysis, Compensation Committee Report and
Executive Compensation in our 2009 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 sections entitled Information
Regarding Stock Ownership in our 2009 Proxy Statement is
incorporated herein by reference.
Information included in the section entitled Information
Regarding Equity Compensation Plans in our 2009 Proxy
Statement is incorporated herein by reference.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
Information included in the section entitled Certain
Relationships and Related Transactions, if any, in our
2009 Proxy Statement is incorporated herein by reference.
58
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Information included in the sections entitled Report of
Audit Committee and Proposal 2
Ratification of Appointment of the Companys Independent
Auditors in our 2009 Proxy Statement is incorporated
herein by reference.
PART IV
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
Documents
filed as part of this annual report on
Form 10-K:
(1) Financial Statements. The following
index lists consolidated financial statements and notes thereto
filed as part of this annual report on
Form 10-K:
(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 herein 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.
|
|
Description
|
|
|
3
|
.01(1)
|
|
Amended and Restated Certificate of Incorporation of the
Company, and amendments thereto
|
|
3
|
.02(2)
|
|
Amended and Restated Bylaws of the Company
|
|
4
|
.01(3)
|
|
Form of Common Stock Certificate
|
|
10
|
.01(4)*
|
|
Stock and Warrant Holders Agreement, dated as of
December 30, 1993
|
|
10
|
.02(5)*
|
|
ACI Holding, Inc. 1994 Stock Option Plan, as amended
|
|
10
|
.03(6)*
|
|
Transaction Systems Architects, Inc. 1996 Stock Option Plan, as
amended
|
|
10
|
.04(7)*
|
|
Transaction Systems Architects, Inc. 1997 Management Stock
Option Plan, as amended
|
|
10
|
.05(8)*
|
|
ACI Worldwide, Inc. 1999 Stock Option Plan, as amended
|
|
10
|
.06(9)*
|
|
ACI Worldwide, Inc. 1999 Employee Stock Purchase Plan, as amended
|
|
10
|
.07(10)*
|
|
Transaction Systems Architects, Inc. 2000 Non-Employee Director
Stock Option Plan, as amended
|
|
10
|
.08(11)*
|
|
Transaction Systems Architects, Inc. 2002 Non-Employee Director
Stock Option Plan, as amended
|
|
10
|
.9(12)*
|
|
ACI Worldwide, Inc. 2005 Equity and Performance Incentive Plan,
as amended
|
|
10
|
.10(13)*
|
|
Severance Compensation Agreement
(Change-in-Control)
between the Company and certain officers, including executive
officers
|
|
10
|
.11(14)*
|
|
Indemnification Agreement between the Company and certain
officers, including executive officers
|
59
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.12(15)
|
|
Asset Purchase Agreement by and between S2 Systems, Inc. and the
Company
|
|
10
|
.13(16)*
|
|
Form of Stock Option Agreement for the Companys 1994 Stock
Option Plan
|
|
10
|
.14(17)*
|
|
Form of Stock Option Agreement for the Companys 1996 Stock
Option Plan
|
|
10
|
.15(18)*
|
|
Form of Stock Option Agreement for the Companys 1997
Management Stock Option Plan
|
|
10
|
.16(19)*
|
|
Form of Stock Option Agreement for the Companys 1999 Stock
Option Plan
|
|
10
|
.17(20)*
|
|
Form of Stock Option Agreement for the Companys 2000
Non-Employee Director Plan
|
|
10
|
.18(21)*
|
|
Form of Stock Option Agreement for the Companys 2002
Non-Employee Director Plan
|
|
10
|
.19(22)*
|
|
Form of Nonqualified Stock Option Agreement
Non-Employee Director for the Companys 2005 Equity and
Performance Incentive Plan, as amended
|
|
10
|
.20(23)*
|
|
Form of Nonqualified Stock Option Agreement Employee
for the Companys 2005 Equity and Performance Incentive
Plan, as amended
|
|
10
|
.21(24)*
|
|
Form of LTIP Performance Shares Agreement for the Companys
2005 Equity and Performance Incentive Plan, as amended
|
|
10
|
.22(25)*
|
|
Amended and Restated Employment Agreement by and between the
Company and Philip G. Heasley, dated January 7, 2009
|
|
10
|
.23(26)*
|
|
Stock Option Agreement by and between the Company and Philip G.
Heasley, dated March 9, 2005
|
|
10
|
.24(27)*
|
|
MessagingDirect Ltd. Amended and Restated Employee Share Option
Plan, as amended
|
|
10
|
.25(28)
|
|
Share Purchase Agreement dated as of May 11, 2006 by and
between Transaction Systems Architects, Inc.; PREIPO Bating- und
Beteiligungsgesellschaft mbH; RP Vermögensverwaltung GmbH;
Mr. Christian Jaron; Mr. Johann Praschinger; and eps
Electronic Payment Systems AG
|
|
10
|
.26(29)
|
|
Agreement and Plan of Merger dated August 28, 2006 by and
among Transaction Systems Architects, Inc., Parakeet MergerSub
Corp., and P&H Solutions, Inc.
|
|
10
|
.27(30)
|
|
Credit Agreement by and among Transaction Systems Architects,
Inc. and Wachovia Bank, National Association
|
|
10
|
.28(31)*
|
|
Description of the 2007 Calendar Year Management Incentive
Compensation Plan
|
|
10
|
.29(33)*
|
|
Separation, Non-Compete, Non-Solicitation and Non-Disclosure
Agreement and General Release with Anthony J. Parkinson dated
May 10, 2007
|
|
10
|
.30(33)*
|
|
2007 Form of
Change-in-Control
Employment Agreement between the Company and certain officers,
including executive officers
|
|
10
|
.31(34)*
|
|
Description of the 2008 Management Incentive Compensation Plan
|
|
10
|
.32(35)*
|
|
Separation, Non-Compete, Nonsolicitation and Non-Disclosure
Agreement and General Release with Mark R. Vipond dated
August 11, 2008
|
|
10
|
.32(36)*
|
|
2008 Executive Management Incentive Compensation Plan
|
|
10
|
.34(37)*
|
|
2008 Form of
Change-in-Control
Employment Agreement between the Company and certain officers,
including executive officers
|
|
10
|
.35(38)*
|
|
Form of Restricted Share Award Agreement for the Companys
2005 Equity and Performance Incentive Plan, as amended
|
|
10
|
.36(39)
|
|
Master Alliance Agreement between ACI Worldwide, Inc. and
International Business Machines Corporation
|
|
10
|
.37(40)
|
|
Warrant Agreement between ACI Worldwide, Inc. and International
Business Machines Corporation
|
|
10
|
.38(41)
|
|
Warrant Agreement between ACI Worldwide, Inc. and International
Business Machines Corporation
|
|
10
|
.39(42)
|
|
Master Services Agreement by and between ACI Worldwide, Inc. and
International Business Machines Corporation
|
|
21
|
.01
|
|
Subsidiaries of the Registrant (filed herewith)
|
|
23
|
.01
|
|
Consent of Independent Registered Public Accounting Firm (filed
herewith)
|
|
31
|
.01
|
|
Certification of Chief Executive Officer pursuant to S.E.C.
Rule 13a-14,
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith)
|
60
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
31
|
.02
|
|
Certification of Chief Financial Officer pursuant to S.E.C.
Rule 13a-14,
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith)
|
|
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 (furnished
herewith)
|
|
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 (furnished
herewith)
|
|
|
|
(1) |
|
Incorporated herein by reference to registrants current
report on
Form 8-K
filed July 30, 2007. |
|
(2) |
|
Incorporated herein by reference to Exhibit 3.2 to the
registrants current report on
Form 8-K
filed December 18, 2008. |
|
(3) |
|
Incorporated herein by reference to Exhibit 4.01 to the
registrants Registration Statement
No. 33-88292
on
Form S-1. |
|
(4) |
|
Incorporated herein by reference to Exhibit 10.9 to the
registrants Registration Statement
No. 33-88292
on
Form S-1. |
|
(5) |
|
Incorporated herein by reference to Exhibit 10.1 to the
registrants quarterly report on
Form 10-Q
for the period ended March 31, 2006. |
|
(6) |
|
Incorporated herein by reference to Exhibit 10.2 to the
registrants quarterly report on
Form 10-Q
for the period ended March 31, 2006. |
|
(7) |
|
Incorporated herein by reference to Exhibit 10.3 to the
registrants quarterly report on
Form 10-Q
for the period ended March 31, 2006. |
|
(8) |
|
Incorporated herein by reference to Exhibit 10.4 to the
registrants quarterly report on
Form 10-Q
for the period ended March 31, 2006. |
|
(9) |
|
Incorporated herein by reference to Exhibit 4.1 to the
registrants Post-Effective Amendment No. 2 to
Registration Statement
No. 333-113550
on
Form S-8
filed June 11, 2008. |
|
(10) |
|
Incorporated herein by reference to Exhibit 10.6 to the
registrants quarterly report on
Form 10-Q
for the period ended March 31, 2006. |
|
(11) |
|
Incorporated herein by reference to Exhibit 10.7 to the
registrants quarterly report on
Form 10-Q
for the period ended March 31, 2006. |
|
(12) |
|
Incorporated herein by reference to registrants quarterly
report on
Form 10-Q
for the period ended March 31, 2007. |
|
(13) |
|
Incorporated herein by reference to Exhibit 10.16 to the
registrants annual report on
Form 10-K
for the fiscal year ended September 30, 2003. |
|
(14) |
|
Incorporated herein by reference to Exhibit 10.17 to the
registrants annual report on
Form 10-K
for the fiscal year ended September 30, 2003. |
|
(15) |
|
Incorporated herein by reference to Exhibit 2.1 to the
registrants current report on
Form 8-K
filed on July 1, 2005. |
|
(16) |
|
Incorporated herein by reference to Exhibit 10.18 to the
registrants annual report on
Form 10-K
for the fiscal year ended September 30, 2004. |
|
(17) |
|
Incorporated herein by reference to Exhibit 10.19 to the
registrants annual report on
Form 10-K
for the fiscal year ended September 30, 2004. |
|
(18) |
|
Incorporated herein by reference to Exhibit 10.20 to the
registrants annual report on
Form 10-K
for the fiscal year ended September 30, 2004. |
|
(19) |
|
Incorporated herein by reference to Exhibit 10.2 to the
registrants quarterly report on
Form 10-Q
for the period ended June 30, 2007. |
|
(20) |
|
Incorporated herein by reference to Exhibit 10.22 to the
registrants annual report on
Form 10-K
for the fiscal year ended September 30, 2004. |
|
(21) |
|
Incorporated herein by reference to Exhibit 10.23 to the
registrants annual report on
Form 10-K
for the fiscal year ended September 30, 2004. |
61
|
|
|
(22) |
|
Incorporated herein by reference to Exhibit 10.3 to the
registrants quarterly report on
Form 10-Q
for the period ended June 30, 2007. |
|
(23) |
|
Incorporated herein by reference to Exhibit 10.1 to the
registrants quarterly report on
Form 10-Q
for the period ended September 30, 2008. |
|
(24) |
|
Incorporated herein by reference to Exhibit 10.5 to the
registrants quarterly report on
Form 10-Q
for period ended June 30, 2007. |
|
(25) |
|
Incorporated herein by reference to Exhibit 10.1 to the
registrants current report on
Form 8-K
filed on January 7, 2009. |
|
(26) |
|
Incorporated herein by reference to Exhibit 10.2 to the
registrants current report on
Form 8-K
filed on March 10, 2005. |
|
(27) |
|
Incorporated herein by reference to Exhibit 10.5 to the
registrants quarterly report on
Form 10-Q
for the period ended March 31, 2006. |
|
(28) |
|
Incorporated herein by reference to Exhibit 2.1 to the
registrants quarterly report on
Form 10-Q
for the period ended June 30, 2006. |
|
(29) |
|
Incorporated herein by reference to Exhibit 2.1 to the
registrants current report on
Form 8-K
filed on September 1, 2006. |
|
(30) |
|
Incorporated herein by reference to Exhibit 10.33 to the
registrants annual report on
Form 10-K
for the fiscal year ended September 30, 2006. |
|
(31) |
|
Incorporated herein by reference to Exhibit 10.1 of the
registrants current report on
Form 8-K
filed March 21, 2007. |
|
(32) |
|
Incorporated herein by reference to Exhibit 10.1 the
registrants current report on
Form 8-K
filed May 16, 2007. |
|
(33) |
|
Incorporated herein by reference to Exhibit 10.2 the
registrants current report on
Form 8-K
filed September 7, 2007. |
|
(34) |
|
Incorporated herein by reference to Exhibit 10.1 the
registrants current report on
Form 8-K
filed February 4, 2008. |
|
(35) |
|
Incorporated herein by reference to Exhibit 10.1 the
registrants current report on
Form 8-K
filed August 15, 2008. |
|
(36) |
|
Incorporated herein by reference to Annex A to the
registrants Proxy Statement for its 2008 Annual Meeting
(File
No. 000-25346)
filed on April 21, 2008. |
|
(37) |
|
Incorporated herein by reference to Exhibit 10.1 the
registrants current report on
Form 8-K
filed January 7, 2009. |
|
(38) |
|
Incorporated herein by reference to Exhibit 10.2 to the
registrants quarterly report on
Form 10-Q
for the period ended September 30, 2008. |
|
(39) |
|
Incorporated herein by reference to Exhibit 10.1 to the
registrants quarterly report on
Form 10-Q
for the period ended December 31, 2007. |
|
(40) |
|
Incorporated herein by reference to Exhibit 10.1 to the
registrants quarterly report on
Form 10-Q
for the period ended December 31, 2007. |
|
(41) |
|
Incorporated herein by reference to Exhibit 10.1 to the
registrants quarterly report on
Form 10-Q
for the period ended December 31, 2007. |
|
(42) |
|
Incorporated herein by reference to Exhibit 10.4 to the
registrants quarterly report on
Form 10-Q
for the period ended March 31, 2008. |
|
|
|
* |
|
Denotes exhibit that constitutes a management contract, or
compensatory plan or arrangement. |
|
** |
|
This certification is not deemed filed for purposes
of Section 18 of the Securities Exchange Act of 1934, or
otherwise subject to the liability of that section. Such
certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934, except to the extent that the
Company specifically incorporates it by reference. |
62
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
ACI Worldwide, Inc.:
We have audited the accompanying consolidated balance sheets of
ACI Worldwide, Inc. and subsidiaries (the Company) as of
December 31, 2007 and 2008 and September 30, 2007, and
the related consolidated statements of operations,
stockholders equity and comprehensive income (loss), and
cash flows for the year ended December 31, 2008, the
three-month period ended December 31, 2007 and each of the
years in the two-year period ended September 30, 2007.
These consolidated financial statements are the responsibility
of the Companys 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, as well as evaluating 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 ACI Worldwide, Inc. and subsidiaries as of
December 31, 2008 and 2007 and September 30, 2007, and
the results of their operations and their cash flows for the
year ended December 31, 2008, the three-month period ended
December 31, 2007, and each of the years in the two-year
period ended September 30, 2007, in conformity with
U.S. generally accepted accounting principles.
As discussed in note 15 to the consolidated financial
statements, the Company adopted Financial Accounting Standards
Board (FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109, as of October 1, 2007.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), ACI
Worldwide, Inc.s internal control over financial reporting
as of December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 3, 2009,
expressed an adverse opinion on the effectiveness of the
Companys internal control over financial reporting.
/s/ KPMG LLP
Omaha, Nebraska
March 3, 2009
63
ACI
WORLDWIDE, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands, except share amounts)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
112,966
|
|
|
$
|
97,011
|
|
|
$
|
60,794
|
|
Billed receivables, net of allowances of $1,920, $1,723 and
$2,041, respectively
|
|
|
77,738
|
|
|
|
87,932
|
|
|
|
70,384
|
|
Accrued receivables
|
|
|
17,412
|
|
|
|
11,132
|
|
|
|
11,955
|
|
Deferred income taxes, net
|
|
|
17,005
|
|
|
|
5,824
|
|
|
|
7,088
|
|
Recoverable income taxes
|
|
|
3,140
|
|
|
|
6,336
|
|
|
|
3,852
|
|
Prepaid expenses
|
|
|
9,483
|
|
|
|
9,803
|
|
|
|
10,572
|
|
Other current assets
|
|
|
8,800
|
|
|
|
8,399
|
|
|
|
7,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
246,544
|
|
|
|
226,437
|
|
|
|
171,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
19,421
|
|
|
|
19,503
|
|
|
|
19,356
|
|
Software, net
|
|
|
29,438
|
|
|
|
31,430
|
|
|
|
31,764
|
|
Goodwill
|
|
|
199,986
|
|
|
|
206,770
|
|
|
|
205,715
|
|
Other intangible assets, net
|
|
|
30,347
|
|
|
|
38,088
|
|
|
|
39,685
|
|
Deferred income taxes, net
|
|
|
12,899
|
|
|
|
30,530
|
|
|
|
24,315
|
|
Other assets
|
|
|
14,207
|
|
|
|
17,700
|
|
|
|
14,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
552,842
|
|
|
$
|
570,458
|
|
|
$
|
506,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
16,047
|
|
|
$
|
16,351
|
|
|
$
|
14,677
|
|
Accrued employee compensation
|
|
|
19,955
|
|
|
|
22,659
|
|
|
|
22,625
|
|
Deferred revenue
|
|
|
99,921
|
|
|
|
115,519
|
|
|
|
97,042
|
|
Income taxes payable
|
|
|
78
|
|
|
|
|
|
|
|
2,251
|
|
Alliance agreement liability
|
|
|
6,195
|
|
|
|
9,331
|
|
|
|
|
|
Accrued and other current liabilities
|
|
|
24,068
|
|
|
|
22,992
|
|
|
|
17,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
166,264
|
|
|
|
186,852
|
|
|
|
154,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
24,296
|
|
|
|
27,253
|
|
|
|
30,280
|
|
Note payable under credit facility
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
75,000
|
|
Deferred income taxes, net
|
|
|
2,091
|
|
|
|
3,245
|
|
|
|
3,265
|
|
Alliance agreement noncurrent liability
|
|
|
37,327
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities
|
|
|
34,023
|
|
|
|
37,069
|
|
|
|
18,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
339,001
|
|
|
|
329,419
|
|
|
|
281,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock , $0.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding at
December 31, 2008 and 2007 and September 30, 2007,
respectively
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock; $0.005 par value; 70,000,000 shares
authorized; 40,821,516 shares issued at December 31,
2008 and 2007 and September 30, 2007
|
|
|
204
|
|
|
|
204
|
|
|
|
204
|
|
Common stock warrants
|
|
|
24,003
|
|
|
|
24,003
|
|
|
|
|
|
Treasury stock, at cost, 5,909,000, 5,144,947 and
5,115,367 shares outstanding at December 31, 2008 and
2007 and September 30, 2007, respectively
|
|
|
(147,808
|
)
|
|
|
(140,320
|
)
|
|
|
(140,340
|
)
|
Additional paid-in capital
|
|
|
302,237
|
|
|
|
311,108
|
|
|
|
312,642
|
|
Retained earnings
|
|
|
58,468
|
|
|
|
47,886
|
|
|
|
53,226
|
|
Accumulated other comprehensive loss
|
|
|
(23,263
|
)
|
|
|
(1,842
|
)
|
|
|
(720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
213,841
|
|
|
|
241,039
|
|
|
|
225,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
552,842
|
|
|
$
|
570,458
|
|
|
$
|
506,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
64
ACI
WORLDWIDE, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
For the Three
|
|
|
|
|
|
|
Ended
|
|
|
Months Ended
|
|
|
For the Years
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license fees
|
|
$
|
169,210
|
|
|
$
|
46,266
|
|
|
$
|
149,485
|
|
|
$
|
175,629
|
|
Maintenance fees
|
|
|
130,015
|
|
|
|
32,167
|
|
|
|
121,233
|
|
|
|
103,708
|
|
Services
|
|
|
118,428
|
|
|
|
22,849
|
|
|
|
95,500
|
|
|
|
68,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
417,653
|
|
|
|
101,282
|
|
|
|
366,218
|
|
|
|
347,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software license fees
|
|
|
45,487
|
|
|
|
10,214
|
|
|
|
42,237
|
|
|
|
31,124
|
|
Cost of maintenance and services
|
|
|
124,744
|
|
|
|
24,689
|
|
|
|
98,605
|
|
|
|
79,622
|
|
Research and development
|
|
|
45,896
|
|
|
|
16,411
|
|
|
|
52,088
|
|
|
|
40,768
|
|
Selling and marketing
|
|
|
74,028
|
|
|
|
20,673
|
|
|
|
70,280
|
|
|
|
66,720
|
|
General and administrative
|
|
|
105,785
|
|
|
|
26,443
|
|
|
|
100,589
|
|
|
|
67,440
|
|
Settlement of class action litigation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
395,940
|
|
|
|
98,430
|
|
|
|
363,799
|
|
|
|
294,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
21,713
|
|
|
|
2,852
|
|
|
|
2,419
|
|
|
|
53,778
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,609
|
|
|
|
763
|
|
|
|
4,082
|
|
|
|
7,825
|
|
Interest expense
|
|
|
(5,013
|
)
|
|
|
(1,389
|
)
|
|
|
(6,644
|
)
|
|
|
(185
|
)
|
Other, net
|
|
|
8,247
|
|
|
|
(334
|
)
|
|
|
(3,740
|
)
|
|
|
(543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
5,843
|
|
|
|
(960
|
)
|
|
|
(6,302
|
)
|
|
|
7,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
27,556
|
|
|
|
1,892
|
|
|
|
(3,883
|
)
|
|
|
60,875
|
|
Income tax expense
|
|
|
16,974
|
|
|
|
3,908
|
|
|
|
5,248
|
|
|
|
5,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,582
|
|
|
$
|
(2,016
|
)
|
|
$
|
(9,131
|
)
|
|
$
|
55,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
34,498
|
|
|
|
35,700
|
|
|
|
36,933
|
|
|
|
37,369
|
|
Diluted
|
|
|
34,795
|
|
|
|
35,700
|
|
|
|
36,933
|
|
|
|
38,237
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.31
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
1.48
|
|
Diluted
|
|
$
|
0.30
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
1.45
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
65
ACI
WORLDWIDE, INC. AND SUBSIDIARIES
COMPREHENSIVE
INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
Additional
|
|
|
Earnings
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Stock
|
|
|
Treasury
|
|
|
Paid-in
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Stock
|
|
|
Warrants
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at September 30, 2005
|
|
$
|
202
|
|
|
$
|
|
|
|
$
|
(68,596
|
)
|
|
$
|
288,001
|
|
|
$
|
6,992
|
|
|
$
|
(9,161
|
)
|
|
$
|
217,438
|
|
Comprehensive income information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,365
|
|
|
|
|
|
|
|
55,365
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
566
|
|
|
|
566
|
|
Change in unrealized investment holding loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,937
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(40,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,156
|
)
|
Issuance of common stock pursuant to Employee Stock Purchase Plan
|
|
|
|
|
|
|
|
|
|
|
507
|
|
|
|
751
|
|
|
|
|
|
|
|
|
|
|
|
1,258
|
|
Exercises of stock options
|
|
|
2
|
|
|
|
|
|
|
|
6,002
|
|
|
|
5,752
|
|
|
|
|
|
|
|
|
|
|
|
11,756
|
|
Issuance of common stock in connection with eps AG acquisition
|
|
|
|
|
|
|
|
|
|
|
7,930
|
|
|
|
3,125
|
|
|
|
|
|
|
|
|
|
|
|
11,055
|
|
Tax benefit of stock options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,610
|
|
|
|
|
|
|
|
|
|
|
|
3,610
|
|
Stock option compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,314
|
|
|
|
|
|
|
|
|
|
|
|
6,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
204
|
|
|
|
|
|
|
|
(94,313
|
)
|
|
|
307,553
|
|
|
|
62,357
|
|
|
|
(8,589
|
)
|
|
|
267,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,131
|
)
|
|
|
|
|
|
|
(9,131
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,869
|
|
|
|
7,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,262
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(46,187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,187
|
)
|
Exercises of stock options
|
|
|
|
|
|
|
|
|
|
|
160
|
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Stock option settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,399
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,399
|
)
|
Tax benefit of stock options exercised and settled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,074
|
|
|
|
|
|
|
|
|
|
|
|
1,074
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,311
|
|
|
|
|
|
|
|
|
|
|
|
7,311
|
|
Employee Stock Purchase Plan compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
204
|
|
|
|
|
|
|
|
(140,340
|
)
|
|
|
312,642
|
|
|
|
53,226
|
|
|
|
(720
|
)
|
|
|
225,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,016
|
)
|
|
|
|
|
|
|
(2,016
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,122
|
)
|
|
|
(1,122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,138
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(3,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,708
|
)
|
Issuance of common stock pursuant to Employee Stock Purchase Plan
|
|
|
|
|
|
|
|
|
|
|
2,165
|
|
|
|
(631
|
)
|
|
|
|
|
|
|
|
|
|
|
1,534
|
|
Exercises of stock options
|
|
|
|
|
|
|
|
|
|
|
1,563
|
|
|
|
(953
|
)
|
|
|
|
|
|
|
|
|
|
|
610
|
|
Stock option settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(151
|
)
|
|
|
|
|
|
|
|
|
|
|
(151
|
)
|
Tax benefit of stock options exercised and cash settled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
206
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
Issuance of common stock warrants
|
|
|
|
|
|
|
24,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,003
|
|
Cumulative effect of a change in accounting principle - adoption
of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,324
|
)
|
|
|
|
|
|
|
(3,324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
204
|
|
|
$
|
24,003
|
|
|
$
|
(140,320
|
)
|
|
$
|
311,108
|
|
|
$
|
47,886
|
|
|
$
|
(1,842
|
)
|
|
$
|
241,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,582
|
|
|
|
|
|
|
|
10,582
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,421
|
)
|
|
|
(21,421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,839
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(30,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,063
|
)
|
Issuance of common stock pursuant to Employee Stock Purchase Plan
|
|
|
|
|
|
|
|
|
|
|
2,618
|
|
|
|
(1,141
|
)
|
|
|
|
|
|
|
|
|
|
|
1,477
|
|
Exercises of stock options
|
|
|
|
|
|
|
|
|
|
|
7,854
|
|
|
|
(4,013
|
)
|
|
|
|
|
|
|
|
|
|
|
3,841
|
|
Tax benefit of stock options exercised and cash settled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
498
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,888
|
|
|
|
|
|
|
|
|
|
|
|
7,888
|
|
Non-vested restricted share awards subject to redemption
|
|
|
|
|
|
|
|
|
|
|
12,328
|
|
|
|
(12,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of non-vested restricted share awards
|
|
|
|
|
|
|
|
|
|
|
(225
|
)
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
204
|
|
|
$
|
24,003
|
|
|
$
|
(147,808
|
)
|
|
$
|
302,237
|
|
|
$
|
58,468
|
|
|
$
|
(23,263
|
)
|
|
$
|
213,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
66
ACI
WORLDWIDE, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
For the Three
|
|
|
For the Years
|
|
|
|
Ended
|
|
|
Months Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,582
|
|
|
$
|
(2,016
|
)
|
|
$
|
(9,131
|
)
|
|
$
|
55,365
|
|
Adjustments to reconcile net income (loss) to net cash flows
from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
6,506
|
|
|
|
1,496
|
|
|
|
5,900
|
|
|
|
3,984
|
|
Amortization
|
|
|
15,544
|
|
|
|
3,724
|
|
|
|
14,603
|
|
|
|
4,377
|
|
Tax expense of intellectual property shift
|
|
|
1,942
|
|
|
|
591
|
|
|
|
1,912
|
|
|
|
637
|
|
Amortization of debt financing costs
|
|
|
336
|
|
|
|
84
|
|
|
|
336
|
|
|
|
|
|
Gain on reversal of asset retirement obligation
|
|
|
(949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on transfer of assets under contractual obligations
|
|
|
(219
|
)
|
|
|
(386
|
)
|
|
|
(404
|
)
|
|
|
|
|
(Gain) loss on disposal of assets
|
|
|
290
|
|
|
|
17
|
|
|
|
(28
|
)
|
|
|
452
|
|
Change in fair value of interest rate swaps
|
|
|
5,800
|
|
|
|
2,475
|
|
|
|
2,077
|
|
|
|
|
|
Deferred income taxes
|
|
|
4,739
|
|
|
|
(741
|
)
|
|
|
(6,832
|
)
|
|
|
(9,810
|
)
|
Stock-based compensation expense (recovery)
|
|
|
7,888
|
|
|
|
(5
|
)
|
|
|
7,569
|
|
|
|
6,314
|
|
Tax benefit of stock options exercised and cash settled
|
|
|
357
|
|
|
|
97
|
|
|
|
1,043
|
|
|
|
1,370
|
|
Changes in operating assets and liabilities, net of impact of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Billed and accrued receivables, net
|
|
|
(5,401
|
)
|
|
|
(17,552
|
)
|
|
|
11,145
|
|
|
|
(6,226
|
)
|
Other current assets
|
|
|
(187
|
)
|
|
|
(384
|
)
|
|
|
(1,659
|
)
|
|
|
(810
|
)
|
Other assets
|
|
|
617
|
|
|
|
(702
|
)
|
|
|
(2,293
|
)
|
|
|
151
|
|
Accounts payable
|
|
|
(2,494
|
)
|
|
|
2,799
|
|
|
|
(3,343
|
)
|
|
|
(1,381
|
)
|
Accrued employee compensation
|
|
|
51
|
|
|
|
(73
|
)
|
|
|
(12,162
|
)
|
|
|
(2,483
|
)
|
Proceeds from alliance agreement
|
|
|
40,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
(2,609
|
)
|
|
|
3,982
|
|
|
|
2,949
|
|
|
|
(334
|
)
|
Accrued settlement for class action litigation
|
|
|
|
|
|
|
|
|
|
|
(8,450
|
)
|
|
|
8,450
|
|
Current income taxes
|
|
|
2,130
|
|
|
|
2,443
|
|
|
|
(1,122
|
)
|
|
|
(1,600
|
)
|
Deferred revenue
|
|
|
(7,012
|
)
|
|
|
16,171
|
|
|
|
20,738
|
|
|
|
(7,354
|
)
|
Other current and noncurrent liabilities
|
|
|
(1,020
|
)
|
|
|
103
|
|
|
|
1,999
|
|
|
|
9,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities
|
|
|
77,826
|
|
|
|
12,123
|
|
|
|
24,847
|
|
|
|
60,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(7,021
|
)
|
|
|
(2,227
|
)
|
|
|
(7,784
|
)
|
|
|
(3,928
|
)
|
Purchases of software and distribution rights
|
|
|
(4,936
|
)
|
|
|
(1,658
|
)
|
|
|
(1,107
|
)
|
|
|
(2,060
|
)
|
Purchases of marketable securities
|
|
|
|
|
|
|
|
|
|
|
(2,500
|
)
|
|
|
(50,938
|
)
|
Sales of marketable securities
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
|
|
123,763
|
|
Alliance technical enablement expenditures
|
|
|
(6,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from alliance agreement, net of common stock warrants
|
|
|
1,498
|
|
|
|
9,330
|
|
|
|
|
|
|
|
|
|
Proceeds from transfer of assets under contractual arrangements
|
|
|
|
|
|
|
500
|
|
|
|
500
|
|
|
|
|
|
Acquisition of business, net of cash acquired
|
|
|
(169
|
)
|
|
|
(47
|
)
|
|
|
(17,579
|
)
|
|
|
(146,274
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities
|
|
|
(16,956
|
)
|
|
|
5,898
|
|
|
|
(25,964
|
)
|
|
|
(79,437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
1,704
|
|
|
|
279
|
|
|
|
|
|
|
|
1,258
|
|
Proceeds from issuance of common stock warrants
|
|
|
|
|
|
|
24,003
|
|
|
|
|
|
|
|
|
|
Proceeds from exercises of stock options
|
|
|
3,841
|
|
|
|
610
|
|
|
|
40
|
|
|
|
11,756
|
|
Excess tax benefit of stock options exercised
|
|
|
142
|
|
|
|
109
|
|
|
|
31
|
|
|
|
2,240
|
|
Purchases of common stock
|
|
|
(30,063
|
)
|
|
|
(3,994
|
)
|
|
|
(46,707
|
)
|
|
|
(39,676
|
)
|
Borrowings under revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
Payments on debt and capital leases
|
|
|
(3,311
|
)
|
|
|
(625
|
)
|
|
|
(3,369
|
)
|
|
|
(3,724
|
)
|
Payment for debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,680
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities
|
|
|
(27,687
|
)
|
|
|
20,382
|
|
|
|
(50,005
|
)
|
|
|
45,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash
|
|
|
(17,228
|
)
|
|
|
(2,186
|
)
|
|
|
1,768
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
15,955
|
|
|
|
36,217
|
|
|
|
(49,354
|
)
|
|
|
26,455
|
|
Cash and cash equivalents, beginning of period
|
|
|
97,011
|
|
|
|
60,794
|
|
|
|
110,148
|
|
|
|
83,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
112,966
|
|
|
$
|
97,011
|
|
|
$
|
60,794
|
|
|
$
|
110,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net
|
|
$
|
9,940
|
|
|
$
|
243
|
|
|
$
|
14,450
|
|
|
$
|
2,069
|
|
Interest paid
|
|
$
|
4,392
|
|
|
$
|
1,271
|
|
|
$
|
3,573
|
|
|
$
|
153
|
|
Supplemental noncash investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in connection with acquisitions
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,055
|
|
Costs accrued in connection with acquisitions
|
|
$
|
|
|
|
$
|
|
|
|
$
|
47
|
|
|
$
|
606
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
67
ACI
WORLDWIDE, INC. AND SUBSIDIARIES
|
|
1.
|
Summary
of Significant Accounting Policies
|
Nature
of Business
ACI Worldwide, Inc., a Delaware corporation, and its
subsidiaries (collectively referred to as ACI or the
Company), develop, market, install and support a
broad line of software products and services primarily focused
on facilitating electronic payments. In addition to its own
products, the Company distributes, or acts as a sales agent for
software developed by third parties. These products and services
are used principally by financial institutions, retailers, and
electronic-payment processors, both in domestic and
international markets.
The Company derives a substantial portion of its total revenues
from licensing its BASE24 family of software products and
providing services and maintenance related to those products.
During the year ended December 31, 2008, three month period
ended December 31, 2007, and years ended September 30,
2007 and 2006, approximately 47%, 51%, 49%, and 57%
respectively, of the Companys total revenues were derived
from licensing the BASE24 product line, which does not include
the BASE24-eps product, and providing related services and
maintenance. A substantial majority of the Companys
licenses are time-based (term) licenses.
Effective January 1, 2008, the Company changed its fiscal
year end from September 30 to December 31. The
Companys new fiscal year commenced January 1, 2008
and ended on December 31, 2008. This Annual Report on
Form 10-K
presents the Companys financial position as of
December 31, 2008 to December 31, 2007 and
September 30, 2007 and the results of operations for the
year ended December 31, 2008 with the results of operations
for the three months ended December 31, 2007 and the years
ended September 30, 2007 and 2006. The Company changed its
fiscal year end to align its sales contracting and delivery
processes with its customers and to allow for more effective
communication with the capital markets and investment community
by being consistent with its peer group.
Consolidated
Financial Statements
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Recently acquired
subsidiaries that are included in the Companys
consolidated financial statements as of the date of acquisition
include: Visual Web Solutions, Inc. (Visual Web) and
Stratasoft Sdn Bhd (Stratasoft) acquired during the
year ended September 30, 2007; eps Electronic Payment
Systems AG (eps AG), and its subsidiaries and
P&H Solutions, Inc. (P&H), acquired during
the year ended September 30, 2006. All significant
intercompany balances and transactions have been eliminated.
Capital
Stock
Our outstanding capital stock consists of a single class of
common stock. Each share of common stock is entitled to one vote
upon each matter subject to a stockholders vote and to dividends
if and when declared by the Board of Directors.
Use of
Estimates and Risks and Uncertainties
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Our financial condition, results of operations, and cash flows
are subject to various risks and uncertainties. Factors that
could affect our future financial statements and cause actual
results to vary materially from expectations include, but are
not limited to, the global financial crisis affecting the
banking system and financial markets, current global economic
conditions, demand for the Companys products, increased
competition, changes in the software
68
ACI
WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
market, risks from operating internationally, the Companys
alliance with IBM, the Companys outsourcing agreement with
IBM, the protection of the Companys intellectual property,
volatility in the Companys stock price, the performance of
the Companys strategic product BASE24-eps,
consolidation and other changes in the financial services
industry, the Companys tax positions, the complexity of
our products and the risk that they may contain hidden defects,
future acquisitions and investments, the Companys offshore
software development activities, litigation, security breaches
or computer viruses, governmental regulations and industry
standards, the Companys compliance with privacy
regulations, system failures, the Companys restructuring
plan, the maturity of certain legacy retail payment products,
restrictions and other financial covenants in the Companys
credit facility, and volatility and disruption of the capital
and credit markets.
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 97-2),
SOP 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition With Respect to Certain
Transactions
(SOP 98-9),
and Securities and Exchange Commission (SEC) Staff
Accounting Bulletin (SAB) 101, Revenue
Recognition in Financial Statements, as codified by
SAB 104, Revenue Recognition. For software license
arrangements for which services rendered are not considered
essential to the functionality of the software, the Company
recognizes revenue upon delivery, provided (1) there is
persuasive evidence of an arrangement, (2) collection of
the fee is considered probable and (3) the fee is fixed or
determinable. In most arrangements, vendor-specific objective
evidence (VSOE) of fair value does not exist for the
license element; therefore, the Company uses the residual method
under
SOP 98-9
to determine the amount of revenue to be allocated to the
license element. Under
SOP 98-9,
the fair value of all undelivered elements, such as post
contract customer support (maintenance or
PCS) or other products or services, is deferred and
subsequently recognized as the products are delivered or the
services are performed, with the residual difference between the
total arrangement fee and revenues allocated to undelivered
elements being allocated to the delivered element.
When a software license arrangement includes services to provide
significant modification or customization of software, those
services are not separable from the software and are accounted
for in accordance with Accounting Research Bulletin
(ARB) No. 45, Long-Term Construction-Type
Contracts (ARB No. 45), and the relevant
guidance provided by
SOP 81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts
(SOP 81-1).
Accounting for services delivered over time (generally in excess
of twelve months) under ARB No. 45 and
SOP 81-1
is referred to as contract accounting. Under contract
accounting, the Company generally uses the
percentage-of-completion method. Under the
percentage-of-completion method, the Company records revenue for
the software license fee and services over the development and
implementation period, with the percentage of completion
generally measured by the percentage of labor hours incurred
to-date to estimated total labor hours for each contract. For
those contracts subject to percentage-of-completion contract
accounting, estimates of total revenue and profitability under
the contract takes into consideration amounts due under extended
payment terms. In certain cases, the Company provides its
customers with extended payment terms whereby payment is
deferred beyond when the services are rendered. In other
projects, the Company provides its customer with extended
payment terms that are refundable in the event certain
milestones are not achieved or the project scope changes. The
Company excludes revenues due on extended payment terms from its
current percentage-of-completion computation until such time
that collection of the fees becomes probable. In the event
project profitability is assured and estimable within a range,
percentage-of-completion revenue recognition is computed using
the lowest level of profitability in the range. If the range of
profitability is not estimable but some level of profit is
assured, revenues are recognized to the extent direct and
incremental costs are incurred until such time that project
profitability can be estimated. In the event some level of
profitability cannot be reasonably assured, completed-contract
accounting is applied. If it is determined that a loss will
result from the performance of a contract, the entire amount of
the loss is recognized in the period in which it is determined
that a loss will result.
69
ACI
WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For software license arrangements in which a significant portion
of the fee is due more than 12 months after delivery, the
software license fee is deemed not to be fixed or determinable.
For software license arrangements in which the fee is not
considered fixed or determinable, the software license fee is
recognized as revenue as payments become due and payable,
provided all other conditions for revenue recognition have been
met. For software license arrangements in which the Company has
concluded that collection of the fees is not probable, revenue
is recognized as cash is collected, provided all other
conditions for revenue recognition have been met. In making the
determination of collectibility, the Company considers the
creditworthiness of the customer, economic conditions in the
customers 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 Companys products, VSOE of the fair value of PCS is
determined by reference to stated renewals with consistent
pricing of PCS and PCS renewals as a percentage of the software
license fees. In other products, the Company determines VSOE by
reference to contractual renewals, when the renewal terms are
substantive. In those cases where VSOE of the fair value of PCS
is determined by reference to stated 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 Companys 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
Companys product history supports an assessment by
management that the likelihood of non-acceptance is remote, the
Company recognizes revenue when all other criteria of revenue
recognition are met.
For those software license arrangements that include
customer-specific acceptance provisions, such provisions are
generally presumed to be substantive and the Company does not
recognize revenue until the earlier of the receipt of a written
customer acceptance, objective demonstration that the delivered
product meets the customer-specific acceptance criteria or the
expiration of the acceptance period. The Company also defers the
recognition of revenue on transactions involving
less-established or newly released software products that do not
have a product history. The Company recognizes revenues on such
arrangements upon the earlier of receipt of written acceptance
or the first production use of the software by the customer.
For software license arrangements in which the Company acts as a
sales agent for another companys products, revenues are
recorded on a net basis. These include arrangements in which the
Company does not take title to the products, is not responsible
for providing the product or service, earns a fixed commission,
and assumes credit risk only to the extent of its commission.
For software license arrangements in which the Company acts as a
distributor of another companys 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 receive or exchange for unspecified future
software products during the software license term, the Company
recognizes revenue ratably over the license term, provided all
other revenue recognition criteria have been met. For software
license arrangements in which the customer has the right to
change or alternate its use of currently licensed products,
revenue is recognized upon delivery of the first copy of all of
the licensed products, provided all other revenue recognition
criteria have been met. For software license arrangements in
which the customer is charged variable software license fees
based on usage of the product, the Company recognizes revenue as
usage occurs over the term of the licenses, provided all other
revenue recognition criteria have been met.
Certain of the Companys software license arrangements
include PCS terms that fail to achieve VSOE of fair value due to
non-substantive renewal periods, or contain a range of possible
PCS renewal amounts that is not sufficiently narrow to establish
VSOE of fair value. For these arrangements, VSOE of fair value
of PCS does not
70
ACI
WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
exist and revenues are therefore recognized ratably over the
contractually specified PCS term. The Company typically
classifies revenues associated with these arrangements in
accordance with the contractually specified amounts assigned to
the various elements, including software license fees and
maintenance fees. The following are amounts included in revenues
in the consolidated statements of operations for which VSOE of
fair value does not exist for each element (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Software license fees
|
|
$
|
18,212
|
|
|
$
|
2,576
|
|
|
$
|
9,792
|
|
|
$
|
15,432
|
|
Maintenance fees
|
|
|
6,494
|
|
|
|
1,101
|
|
|
|
4,440
|
|
|
|
5,632
|
|
Services
|
|
|
11,131
|
|
|
|
1,317
|
|
|
|
4,568
|
|
|
|
4,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,837
|
|
|
$
|
4,994
|
|
|
$
|
18,800
|
|
|
$
|
25,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance Fees. The Company typically enters
into multi-year time-based software license arrangements that
vary in length but are generally five years. These arrangements
include an initial (bundled) PCS term of one or two years with
subsequent renewals for additional years within the initial
license period. For arrangements in which the Company looks to
substantive renewal rates to evidence VSOE of fair value of PCS
and in which the PCS renewal rate and term are substantive, VSOE
of fair value of PCS is determined by reference to the stated
renewal rate. For these arrangements, PCS revenues are
recognized ratably over the PCS 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 or when the range of possible PCS
renewal amounts is not sufficiently narrow), the Company
recognizes revenue for the entire arrangement ratably over the
PCS term.
For those arrangements that meet the criteria to be accounted
for under contract accounting, the Company determines whether
VSOE of fair value exists for the PCS element. For those
situations in which VSOE of fair value exists for the PCS
element, PCS is accounted for separately and the balance of the
arrangement is accounted for under ARB No. 45 and the
relevant guidance provided by
SOP 81-1.
For those arrangements in which VSOE of fair value does not
exist for the PCS element, revenue is recognized to the extent
direct and incremental costs are incurred until such time as the
services are complete. Once services are complete, all remaining
revenue is then recognized ratably over the remaining PCS period.
Services. The Company provides various
professional services to customers, primarily project
management, software implementation and software modification
services. Revenues from arrangements to provide professional
services are generally recognized as the related services are
performed. For those arrangements in which services revenue is
deferred and the Company determines that the costs of services
are recoverable, such costs are deferred and subsequently
expensed in proportion to the services revenue as it is
recognized.
Hosting. The Companys hosting-related
arrangements contain multiple products and services. As these
arrangements generally do not contain a contractual right to
take possession of the software at anytime during the hosting
period without significant penalty, the Company applies the
separation provisions of Emerging Issues Task Force (EITF)
00-21,
Revenue Arrangements with Multiple Deliverables. The
Company uses the relative fair value method of revenue
recognition to allocate the total consideration derived from the
arrangement to each of the elements. Any up-front fees allocated
to the hosting services are recognized over the estimated life
of the hosting relationship. Professional services revenues are
recognized as the services are performed when the services have
stand-alone value and over the estimated life of the hosting
relationship when the services do not have stand-alone value.
Hosting-related revenue is reflected in the appropriate revenue
line item in the statements of operations based upon the nature
of the product or service.
The Company may execute more than one contract or agreement with
a single customer. The separate contracts or agreements may be
viewed as one multiple-element arrangement or separate
agreements for revenue recognition
71
ACI
WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
purposes. The Company evaluates the facts and circumstances
related to each situation in order to reach appropriate
conclusions regarding whether such arrangements are related or
separate. The conclusions reached can impact the timing of
revenue recognition related to those arrangements.
Accrued Receivables. Accrued receivables
represent amounts to be billed in the near future (less than
12 months).
Deferred Revenue. Deferred revenue includes
(1) amounts currently due and payable from customers, and
payments received from customers, for software licenses,
maintenance
and/or
services in advance of providing the product or performing
services, (2) amounts deferred whereby VSOE of the fair
value of undelivered elements in a bundled arrangement does not
exist, and (3) amounts deferred if other conditions for
revenue recognition have not been met.
Cash,
Cash Equivalents and Marketable Securities
The Company classifies any investments in auction rate notes as
marketable securities. Although auction rate notes are AAA rated
and are traded via the auction process within a period of three
months or less, the Company determined that classification of
these securities as marketable securities is appropriate due to
the potential uncertainties inherent with any auction process
plus the long-term nature of the underlying securities. The
Company considers all other 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 the
Companys receivables with respect to the banking, other
financial services and telecommunications industries, as well as
with retailers, processors and networks is mitigated by the
Companys credit evaluation procedures and geographical
dispersion of sales transactions. The Company generally does not
require collateral or other security to support accounts
receivable.
The Company maintains a general allowance for doubtful accounts
based on historical experience, along with additional
customer-specific allowances. The Company regularly monitors
credit risk exposures in accounts receivable. In estimating the
necessary level of our allowance for doubtful accounts,
management considers the aging of accounts receivable, the
creditworthiness of customers, economic conditions within the
customers industry, and general economic conditions, among
other factors.
The following reflects activity in the Companys allowance
for uncollectible accounts receivable (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Balance, beginning of period
|
|
$
|
1,723
|
|
|
$
|
2,041
|
|
|
$
|
2,110
|
|
|
$
|
2,390
|
|
Additions related to acquisition of eps AG
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113
|
|
Additions related to acquisition of P&H
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235
|
|
Additions related to acquisition of Stratasoft
|
|
|
|
|
|
|
|
|
|
|
339
|
|
|
|
|
|
Provision charged to general and administrative expense
|
|
|
564
|
|
|
|
215
|
|
|
|
373
|
|
|
|
206
|
|
Amounts written off, net of recoveries
|
|
|
(367
|
)
|
|
|
(533
|
)
|
|
|
(781
|
)
|
|
|
(834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
1,920
|
|
|
$
|
1,723
|
|
|
$
|
2,041
|
|
|
$
|
2,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
ACI
WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts charged to general and administrative expenses during
the year ended December 31, 2008, three month period ended
December 31, 2007 and years ended September 30, 2007,
and 2006 reflect increases in the allowance for doubtful
accounts based upon collection experience in the geographic
regions in which the Company conducts business, net of
collection of customer-specific receivables which were
previously reserved for as doubtful of collection.
Property
and Equipment
Property and equipment are stated at cost. Depreciation of these
assets is generally computed using the straight-line method over
the following estimated useful lives:
|
|
|
Computer and office equipment
|
|
3-5 years
|
Furniture and fixtures
|
|
7 years
|
Leasehold improvements
|
|
Lesser of useful life of improvement or remaining term of lease
|
Vehicles and other
|
|
4-5 years
|
Assets under capital leases are amortized over the shorter of
the asset life or the lease term.
Software
Software may be for internal use or available for sale. Costs
related to certain software, which is available for sale, are
capitalized in accordance with Statement of Financial Accounting
Standards (SFAS) No. 86, Accounting for
Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed (SFAS No. 86), when the
resulting product reaches technological feasibility. The Company
generally determines technological feasibility when it has a
detailed program design that takes product function, feature and
technical requirements to their most detailed, logical form and
is ready for coding. Software for internal use is capitalized in
accordance with AICPA
SOP 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use (internal-use
software)
(SOP 98-1).
Amortization of software costs to be sold or marketed
externally, begins when the product is available for licensing
to customers and is determined on a
product-by-product
basis. The annual amortization shall be the greater of the
amount computed using (a) the ratio that current gross
revenues for a product bear to the total of current and
anticipated future gross revenues for that product or
(b) the straight-line method over the remaining estimated
economic life of the product, including the period being
reported on. Due to competitive pressures, it may be possible
that the estimates of anticipated future 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
internal-use software, is generally computed using the
straight-line method over estimated useful lives of three years.
Goodwill
and Other Intangibles
In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142), the
Company assesses goodwill for impairment at least annually.
During this assessment management relies on a number of factors,
including operating results, business plans and anticipated
future cash flows. The Company assesses potential impairments to
other intangible assets when there is evidence that events or
changes in circumstances indicate that the carrying amount of an
asset may not be recovered.
When SFAS No. 142 was issued in 2001, the Company
adopted the end of its fiscal year (or September 30) as its
annual impairment testing date. As a result of the change in the
Companys fiscal year, it evaluated its annual goodwill
impairment testing date and concluded to change its impairment
testing date to October.
73
ACI
WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other intangible assets are amortized using the straight-line
method over periods ranging from 18 months to 12 years.
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 sum of the future cash 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.
Interest
Rate Swap Agreements
The Company maintains an interest-rate risk-management strategy
that uses interest rate swaps to mitigate the risk of
variability in future cash flows (and related interest expense)
associated with currently outstanding and forecasted floating
rate bank borrowings due to changes in interest rates. The
Company assesses interest rate cash flow risk by identifying and
monitoring changes in interest rate exposures that may adversely
impact expected future cash flows and by evaluating hedging
opportunities. The Company monitors interest rate cash flow risk
attributable to both the Companys outstanding and
forecasted debt obligations. The risk management involves the
use of analytical techniques, including cash flow sensitivity
analysis, to estimate the expected impact of changes in interest
rates on the Companys future cash flows.
The Company used variable debt to finance an acquisition. The
variable-rate debt obligations expose the Company to variability
in interest payments due to changes in interest rates. To limit
the variability of a portion of its interest payments, the
Company entered into interest rate swap agreements to manage
fluctuations in cash flows resulting from interest rate risk.
These swaps change the variable-rate cash flow exposure on the
debt obligations to fixed cash flows. Under the terms of the
interest rate swaps, the Company receives variable interest rate
payments and makes fixed interest rate payments, thereby
creating the equivalent of fixed-rate debt. As of
December 31, 2008, the Company had two interest rate swap
agreements with a combined notional amount of $125 million.
These interest rate swap agreements did not qualify as
accounting hedges under SFAS No. 133, Accounting
for Derivate Instruments and Certain Hedging Activities
(SFAS No. 133).
In June 1998, the FASB issued SFAS No. 133. In June
2000, the FASB issued SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities,
an Amendment to SFAS No. 133
(SFAS No. 138). SFAS No. 133
and SFAS No. 138 require that all derivative
instruments be recorded on the balance sheet at their respective
fair values. See Note 7, Derivative Instruments and
Hedging Activities, for additional details on the
Companys interest rate swaps.
Treasury
Stock
The Company accounts for shares of its common stock that are
repurchased without intent to retire as treasury stock. Such
shares are recorded at cost and reflected separately on the
consolidated balance sheets as a reduction of stockholders
equity. The Company issues shares of treasury stock upon
exercise of stock options, payment of earned performance shares,
and for issuances of common stock pursuant to the Companys
employee stock purchase plan. The Company also issued shares of
treasury stock in connection with the eps AG acquisition in
which the Company issued restricted shares of the Companys
common stock. For purposes of determining the cost of the
treasury shares re-issued, the Company uses the average cost
method.
Stock-Based
Compensation Plans
On October 1, 2005, the Company adopted
SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123(R)), which requires the
measurement and recognition of compensation cost for all
share-based
74
ACI
WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
payment awards made to employees based on estimated fair values.
SFAS No. 123(R) also amends SFAS No. 95,
Statement of Cash Flows, to require that excess tax
benefits, as defined, realized from the exercise of stock
options be reported as a financing cash inflow rather than as a
reduction of taxes paid in cash flows from operations. In March
2005, the SEC issued SAB No. 107, which does not
modify any of SFAS No. 123(R)s conclusions or
requirements, but rather includes recognition, measurement and
disclosure guidance for companies as they implement
SFAS No. 123(R). The Company applied the provisions of
SAB 107 in its adoption of SFAS No. 123(R).
Upon adoption of SFAS No. 123(R), all of the
Companys existing stock-based compensation awards were
determined to be equity-classified awards. A portion of these
options were reclassified as liability-classified awards as they
cash settled during fiscal 2007, because the Company was not
current with its filings with the SEC. The Company adopted
SFAS No. 123(R) using the modified prospective
transition method. Under the modified prospective transition
method, the Company is required to recognize noncash
compensation costs for the portion of stock-based awards that
are outstanding as of October 1, 2005 for which the
requisite service has not been rendered (i.e. nonvested awards).
The compensation cost is based on the grant date fair value of
those awards as calculated for pro forma disclosures under
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123). The
Company recognized compensation cost relating to the nonvested
portion of those awards in the consolidated financial statements
beginning with the date on which SFAS No. 123(R) was
adopted through the end of the requisite service period.
In accordance with SFAS No. 123(R), the Company
recognizes stock-based compensation costs for only those shares
expected to vest, on a straight-line basis over the requisite
service period of the award, which is generally the option
vesting term. The impact of forfeitures that may occur prior to
vesting is also estimated and considered in the amount of
expense recognized. Forfeiture estimates will be revised, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates. In the Companys pro forma
information required under SFAS No. 123 for periods
prior to adoption of SFAS No. 123(R), the Company
accounted for forfeitures as they occurred. Share-based
compensation expense is recorded in operating expenses depending
on where the respective individuals compensation is
recorded. The Company generally utilizes the Black-Scholes
option-pricing model to determine the fair value of stock
options on the date of grant. The assumptions utilized in the
Black-Scholes option-pricing model, as well as the description
of the plans the stock-based awards are granted under, are
described in further detail in Note 13, Stock-Based
Compensation Plans.
Pursuant to the Companys 2005 Equity and Performance
Incentive Plan, the Company granted long-term incentive program
performance share awards (LTIP Performance Shares)
to key employees of the Company, including named executive
officers. These LTIP Performance Shares are earned, if at all,
based upon the achievement, over a specified period that must
not be less than one year and is typically a three-year period
(the Performance Period), of performance goals
related to (i) the compound annual growth over the
Performance Period in the Companys
60-month
contracted backlog as determined by the Company, (ii) the
compound annual growth over the Performance Period in the
diluted earnings per share as reported in the Companys
consolidated financial statements, and (iii) the compound
annual growth over the Performance Period in the total revenues
as reported in the Companys consolidated financial
statements. In no event will any of the LTIP Performance Shares
become earned if the Companys earnings per share is below
a predetermined minimum threshold level at the conclusion of the
Performance Period. Expense related to these awards is accrued
if the attainment of performance indicators is probable as
determined by management. The expense is recognized over the
applicable Performance Period.
During the year ended December 31, 2008, pursuant to the
Companys 2005 Incentive Plan, the Company granted
restricted share awards (RSAs). These awards have
requisite service periods of four years and vest in increments
of 25% on the anniversary dates of the grants. Under each
arrangement, stock is issued without direct cost to the
employee. The Company estimates the fair value of the RSAs based
upon the market price of the Companys stock at the date of
grant. The RSA grants provide for the payment of dividends on
the Companys common stock, if any, to the participant
during the requisite service period (vesting period) and the
participant has
75
ACI
WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
voting rights for each share of common stock. The Company
recognizes compensation expense for RSAs on a straight-line
basis over the requisite service period.
Translation
of Foreign Currencies
The Companys foreign subsidiaries typically use the local
currency of the countries in which they are located as their
functional currency. Their assets and liabilities are translated
into United States dollars at the exchange rates in effect at
the balance sheet date. Revenues and 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 (loss). Transaction gains and losses, including those
related to intercompany accounts, that are not considered to be
of a long-term investment nature are included in the
determination of net income (loss). 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 (loss).
Since the undistributed earnings of the Companys foreign
subsidiaries are considered to be indefinitely reinvested, the
components of accumulated other comprehensive income (loss) have
not been tax effected.
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 (IRS), and various foreign and state
authorities. Such reserves represent the estimated provision for
income taxes expected to ultimately be paid.
Recently
Issued Accounting Standards
In December 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 141(R), Business
Combinations (SFAS 141(R)), which replaces
SFAS 141. SFAS 141(R) establishes principles and
requirements for how an acquirer in a business combination
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
controlling interest; recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain
purchase; and determines what information to disclose to enable
users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS 141(R)
is to be applied prospectively to business combinations for
which the acquisition date is on or after an entitys
fiscal year that begins after December 15, 2008. The
Company will assess the impact of SFAS 141(R) if and when a
future acquisition occurs.