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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-25346
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TRANSACTION SYSTEMS ARCHITECTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0772104
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
224 SOUTH 108TH AVENUE
SUITE 7
OMAHA, NEBRASKA 68154
(Address of principal executive offices, including zip code)
(402) 334-5101
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, $.005 PAR VALUE PER SHARE
(TITLE OF CLASS)
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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 _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of December 17, 1999, there were outstanding 32,623,131 shares of the
Company's Class A Common Stock, par value $.005. As of that date, the aggregate
market value of the shares of common stock held by nonaffiliates of the
registrant (based on the last sale price of $26.75 per share for the
registrant's common stock as of such date) was $872,668,754.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be held February 22, 2000, which will be filed with the Securities and
Exchange Commission not later than 120 days after the end of the Registrant's
fiscal year.
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TRANSACTION SYSTEMS ARCHITECTS, INC.
1999 FORM 10-K
TABLE OF CONTENTS
PAGE
--------
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 15
Item 6. Selected Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 28
Item 8. Financial Statements and Supplementary Data................. 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 53
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 53
Item 11. Executive Compensation...................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 53
Item 13. Certain Relationships and Related Transactions.............. 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 53
Signatures............................................................... 56
2
PART I
ITEM 1. BUSINESS
GENERAL
Transaction Systems Architects, Inc. ("TSA" or the "Company") develops,
markets, installs and supports a broad line of software products and services
primarily focused on facilitating electronic payments and electronic commerce.
The Company's products are organized into four lines-of-business
groups--Consumer Banking, Corporate Banking, Retail Solutions and System
Solutions.
- CONSUMER BANKING -- Products in this group represent the Company's largest
product line and include it's most mature and well-established
applications. These applications include the Company's BASE24, TRANS24,
OCM24, Integrated Voice Response (IVR), Smart Card and Internet Banking
(I24) product lines. Financial institutions and third-party processors use
these products to route and process transactions for Automated Teller
Machine (ATM) networks; process transactions from retailers using
traditional Point of Sale (POS) devices and the Internet; handle Internet
and phone banking transactions; control fraud and money laundering and
issue and manage multi-functional applications on smart cards. Products in
the Consumer Banking group represent approximately 73% of the Company's
fiscal 1999 revenue.
- CORPORATE BANKING -- The Company's Corporate Banking products include it's
CO-ach, Money Transfer System (MTS) and MoneyNet products. The CO-ach
product is used by financial institutions to automatically deposit
paychecks and process other automated clearing house (ACH) transactions.
Financial institutions use the MTS and MoneyNet products to automate the
process by which institutions transfer high-value payments. Products in
the Corporate Banking group represent approximately 8% of the Company's
fiscal 1999 revenue.
- RETAIL SOLUTIONS -- Retail Solutions products include BASE24-POS and
WINPAY24 which are used by some of the world's largest retailers to route
transactions from their ATM and POS networks; process Electronic Benefit
Transfer (EBT) transactions, authorize checks, establish frequent shopper
programs and control fraud. In addition, Retail Solutions products include
E24 which allows retailers to process e-commerce payment transactions.
Products in the Retail Solutions group represent approximately 6% of the
Company's fiscal 1999 revenue.
- SYSTEM SOLUTIONS -- Products in this group are used by a cross-section of
customers in many industries to monitor mission critical systems,
establish communication links between high-volume systems and handle
intersystem messaging primarily through the use of the Company's ICE,
NET24, Enguard and Extractor/Replicator products. Products in the System
Solutions group represent approximately 13% of the Company's fiscal 1999
revenue.
Products developed by the four lines-of-business groups are marketed and
supported through the Company's wholly-owned subsidiary, ACI Worldwide Inc
(ACI). ACI sells and supports the products and services through three
distribution networks: the Americas, Europe/Middle East/Africa (EMEA) and Asia/
Pacific. Each distribution network primarily uses its own sales force and
supplements this with reseller and/or distributor networks.
At September 30, 1999, the Company's customers include 111 of the
500 largest banks in the world, as measured by asset size, and 22 of the top
100 retailers in the United States as measured by revenue. As of September 30,
1999, the Company had 2,314 customers in 79 countries on six continents. During
fiscal years 1999, 1998 and 1997, approximately 53%, 55% and 54%, respectively,
of the Company's total revenues resulted from international operations and
approximately 66%, 63% and 64% respectively, of its revenues were derived from
licensing the BASE24 family of products and providing related services and
maintenance.
3
ACQUISITIONS
The Company completed several acquisitions during fiscal 1999, 1998 and
1997. The Company's acquisition strategy is focused primarily on two areas: (i)
additional products and platforms to complement and enhance the Company's
strategy of being the leading provider of electronic payments software for
banks, retailers and other enterprises needing high-volume, reliable processing
engines and (ii) geographic expansion into markets which have proven or have a
high level of opportunity to embrace electronic payments.
Acquisitions in fiscal 1999, 1998 and 1997 include the following:
Open System Solutions, Inc............................... October 1996
Regency Voice Systems, Inc............................... May 1997
IntraNet, Inc............................................ August 1998
Professional Resources, Inc. (PRI)....................... August 1998
Smart Card Integrators Ltd. (SCIL)....................... August 1998
Media Integration BV (MINT).............................. November 1998
U.S. Processing, Inc. (USPI)............................. December 1998
Insession, Inc. (Insession).............................. March 1999
SDM International, Inc. (SDM)............................ July 1999
The acquisition of MINT reflects the Company's strategic decision to expand
its smart card product expertise and product offerings. MINT's products are used
to issue and manage multi-functional applications on smart cards. The
acquisition of USPI provided the Company with service bureau processing
capabilities. Due to on-going capital cost requirements, USPI was subsequently
sold to First Data Resources in September of 1999. The acquisition of Insession
provided the Company with complete control over the development and distribution
of the ICE product. The Company was previously the exclusive distributor of the
ICE product under an agreement with Insession that was due to expire in
March 2001. Through the acquisition of SDM, the Company added the OCM24
electronic payments software solution that runs on IBM's Parallel Sysplex
platform.
THE ELECTRONIC PAYMENTS MARKET
The electronic payments market is comprised of debit and credit card
issuers, switch interchanges, transaction acquirers and transaction generators,
including ATM networks, retail merchant locations and, increasingly, the
Internet. The routing, control and settlement 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 issuers in the
market, high transaction volumes, geographically dispersed networks, differing
types of authorization and varied reporting requirements. These activities are
typically performed online and must be conducted 24 hours a day, 7 days a week.
Electronic payments software carries transactions from the transaction
generators to the acquiring institutions. The software then uses regional or
national switches to access the card issuers for approval or denial of the
transactions. The software returns messages to the sources, thereby completing
the transactions. Electronic payments software may be required to interact with
dozens of devices, switch interchanges and communication protocols around the
world. The electronic payments market has expanded both domestically and
internationally.
4
PRODUCTS AND RELATED SERVICES
The following table summarizes revenues by product (in thousands):
YEAR ENDED SEPTEMBER 30,
---------------------------------
1999 1998 1997
--------- --------- ---------
Consumer Banking:
BASE24.................................... $217,575 $173,507 $148,172
Smart Card................................ 11,620 10,079 5,616
IVR Products.............................. 10,144 11,535 9,851
TRANS24................................... 8,377 14,573 9,699
PRISM..................................... 3,773 1,255 --
I24....................................... 1,685 11 --
Other..................................... 3,256 4,987 1,676
-------- -------- --------
256,430 215,947 175,014
-------- -------- --------
Corporate Banking:
MTS....................................... 20,946 20,958 22,667
MoneyNet.................................. 4,027 3,478 4,201
CO-ach.................................... 3,402 5,494 3,795
Other..................................... 1,686 895 400
-------- -------- --------
30,061 30,825 31,063
-------- -------- --------
Retail Solutions:
BASE24.................................... 11,559 13,853 8,521
WINPAY24.................................. 4,217 3,617 --
E24....................................... 225 -- --
Other..................................... 6,578 5,553 7,955
-------- -------- --------
22,579 23,023 16,476
-------- -------- --------
System Solutions:
ICE....................................... 28,976 18,539 12,061
Other (primarily services)................ 16,748 10,915 9,535
-------- -------- --------
45,724 29,454 21,596
-------- -------- --------
$354,794 $299,249 $244,149
======== ======== ========
The amounts in the above table include products and related services,
including maintenance fees.
CONSUMER BANKING AND RETAIL SOLUTIONS SOFTWARE PRODUCTS
The Company's consumer banking and retail solutions software products
include the following:
BASE24. BASE24 is an integrated family of products marketed to customers
operating electronic payment networks in the consumer banking and retail
industries. The modular architecture of the products enables customers to select
the application and system components that are required to operate their
networks.
The Company believes that BASE24 has a more complete range of features and
functions for electronic payments processing than products offered by its
competitors. BASE24 allows customers to adapt to changing network needs by
supporting over 40 different types of ATM and POS terminals, over 100
interchange interfaces and various authorization and reporting options.
5
The BASE24 product line runs exclusively on Compaq's NonStop Himalaya
servers. The NonStop Himalaya parallel-processing environment offers
fault-tolerance, linear expandability and distributed processing. The
combination of features offered by BASE24 and NonStop Himalaya are important
characteristics in high volume, 24-hour per day electronic payment systems. The
Company believes that the NonStop Himalaya platform will continue to be a widely
accepted platform for transaction processing in the electronic payments market.
There can be no assurance that the NonStop Himalaya servers will continue to be
a widely accepted platform for this market.
TRANS24. TRANS24 is a family of products, marketed principally in the
banking industry, that runs on a variety of hardware platforms, including IBM
mainframes, and RISC/UNIX servers. The TRANS24 electronic payment products
support online processing of transactions in ATM or POS environments. These
products have traditionally been marketed to smaller institutions, and in
certain international markets where Compaq has limited market share. The
TRANS24-Card Manager and Settlement Manager products are also marketed to
customers with BASE24, as they can be interfaced to BASE24 and represent
value-added services necessary to operate an electronic payments solution
effectively.
WINPAY24. WINPAY24 is an electronic payment and authorization system that
facilitates a broad range of applications for retailers. These applications
include debit and credit card processing, ACH processing, electronic benefits
transfer, card issuance and management, check authorization, customer loyalty
programs and returned check collection. The WINPAY24 products operate on the
Windows NT platform.
OCM24. OCM24 is a comprehensive electronic payments solution that runs on
the IBM S/390 Parallel Enterprise Server. OCM24 consists of integrated modules
that delivers all of the ATM, POS, switching, cardholder management and
encryption services needed to operate proprietary or inter-bank electronic
payment networks.
PRISM. PRISM is a software product which utilizes neural network technology
to combat credit/ debit card fraud, application fraud, merchant fraud and
bankruptcy detection. The neural network technology learns to recognize
transaction patterns through modeling techniques.
E24. E24 is the Company's e-commerce Internet payment processing solution
for retailers, merchant processors and card issuers. E24 provides a secure,
scalable, reliable Internet payment processing engine that complements existing
mission critical systems. E24 includes a browser-based interface which makes
managing Internet oriented transactions easier by integrating with BASE24 and
WINPAY24 payment processing systems. E24 uses both Secure Socket Layer (SSL) and
Secure Electronic Transaction (SET) security standards.
I24. I24 is a set of on-line banking solutions for financial solutions
providers. The I24 family of products provide financial institutions the ability
to offer Internet banking solutions to its consumer banking and business banking
customers. The I24 products provide financial institutions' consumer banking
customers the ability to access account information, view and pay bills,
initiate transactions and communicate with the financial institution. In
addition, for a financial institutions business banking customers, I24 has
Web-based cash management and customer relationship management capabilities.
SMART CARD PRODUCTS. The Company's smart card solutions allow the use of
stored-value and chip card authorization applications at smart card-enabled
devices. The solutions facilitate authorization of funds transfers from existing
accounts to cards. They also leverage chip technology to enhance debit/ credit
card authentication and security. The smart card solutions preserve legacy
investment by allowing the integration of these emerging technologies into
existing electronic delivery environments.
INTERACTIVE VOICE RESPONSE SOFTWARE. The Company markets an interactive
voice response (IVR) software product which allows banks to offer their
customers answers to routine questions such as balance inquiry, last deposit,
maturity dates, transaction history, interest information, payment dates and
6
amounts via telephone or personal computer inquiry. The IVR software product is
targeted at small to mid-sized community banks and runs on personal computers.
CORPORATE BANKING SOFTWARE PRODUCTS
The Company has three primary corporate banking software products: (i) Money
Transfer System (MTS), (ii) CO-ach and (iii) MoneyNet. MTS and MoneyNet are
systems for generating, authorizing, routing, settling and controlling
high-value wire transfer transactions in a secure, fault-tolerant environment.
MTS communicates over proprietary networks using a variety of messaging formats,
including CHIPS, S.W.I.F.T., Telex, FedWire and Fed Book Entry Securities.
MoneyNet is primarily used domestically and is focused on the FedWire market.
MTS operates on Digital's VAX VMS operating system and the IBM RS/6000 platform.
MoneyNet operates exclusively on Compaq's NonStop Himalaya servers. CO-ach is a
system for initiating, controlling, settling and reporting ACH transactions. ACH
transactions are electronic payments that replace traditional paper checks.
CO-ach is targeted at large ACH originators with high transaction volumes. In
addition to large domestic ACH originators, the Company is marketing CO-ach to
international markets, where standards similar to those in the U.S. for
automated check clearing are emerging. CO-ach operates exclusively on Compaq's
NonStop Himalaya servers.
SYSTEM SOLUTIONS PRODUCTS
The Company markets system software which involves a set of software tools
that facilitate network monitoring, connectivity, management and integration.
The Company distributes and supports its System Network Architecture (SNA)
connectivity tool, known as ICE, which facilitates connectivity between Compaq
and IBM computers. The Company has also developed NET24, a message-oriented
middleware product that acts as the layer of software which manages the
interface between application software and computer operating systems and helps
customers perform network and legacy systems integration projects and Enguard,
which is a proactive monitoring, alarm and dispatching software tool. In
addition, the System Solutions products include Extractor/Replicator which is a
data center management enhancement software product.
SERVICES
The following table summarizes services revenue (in thousands):
TWELVE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
Technical Services............................. $42,832 $40,423 $32,981
Project Management............................. 26,940 24,359 19,788
Facilities Management.......................... 7,085 5,906 5,465
------- ------- -------
$76,857 $70,688 $58,234
======= ======= =======
Percentage of Total Revenues................... 21.7% 23.6% 23.9%
======= ======= =======
TECHNICAL SERVICES. The majority of the Company's technical services are
provided to customers who have licensed one or more of the Company's software
products. Services offered by the Company 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 priced on a weekly basis according
to the level of technical expertise required and the duration of the project.
PROJECT MANAGEMENT. The Company offers a Project Management and
Implementation Plan ("PMIP") which provides customers using the Company's
software products with a variety of support
7
services, including on-site product integration reviews, project planning,
training, site preparation, installation, testing and go-live support, and
project management throughout the project life cycle. The Company offers
additional services, if required, on a fee basis. PMIPs are offered for a fee
which varies based on the level and quantity of included support services.
FACILITIES MANAGEMENT. The Company offers facilities management services
whereby the Company operates a customer's 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.
CUSTOMER SUPPORT
The Company offers its customers both a general maintenance plan and an
extended service option, called the Enhanced Support Program ("ESP").
Maintenance fees, including ESP, were $63.9 million, $57.1 million and $48.7
million, or 18.0%, 19.1% and 20.0% of total revenues, during fiscal years 1999,
1998 and 1997, respectively.
MAINTENANCE. After software installation and project completion, the Company
provides maintenance services to customers for a monthly fee ranging from 1.0%
to 1.5% of the related software price. Virtually all new customer contracts
include a provision for maintenance services. Maintenance services include:
- Twenty-four hour hotline for problem resolution
- Customer account management support
- Vendor-required mandates and updates
- Product documentation
- Hardware operating system compatibility
- User group membership
The Company provides new releases of its products on a periodic basis. New
releases of the product which often contain product enhancements, are typically
included at no additional fee. The Company's agreements with its customers
permit the Company to charge for substantial product enhancements which are not
provided as part of the maintenance agreement. The Company determines on a
case-by-case basis for which of these enhancements it will charge an additional
fee.
The Company organizes user groups, generally around geographic regions and
product lines. The groups help the Company determine its product strategy,
development plans and aspects of customer support.
ENHANCED SUPPORT PROGRAM. Each ESP customer is assigned an experienced
technician to work with its system. The technicians perform functions such as:
- Install and test software fixes
- Retrofit customer specific software modifications ("RPQs") into new
software releases
- Answer questions and resolve problems related to RPQ code
- Maintain a detailed RPQ history
- Monitor customer problems on HELP24 hotline database on a priority basis
- Supply on-site support, available upon demand
8
- Perform an annual system review
STRATEGIC RELATIONSHIPS
From time to time, the Company enters into sales, distribution, marketing or
strategic alliances with other software and hardware providers. These
relationships are typically formed with the objective of providing the Company
with additional products to complement and enhance the Company's suite of
product offerings. Such relationships include the following:
DIGITAL COURIER TECHNOLOGIES, INC. (DCTI). The Company has a distribution
arrangement with DCTI whereby the Company distributes DCTI's e-commerce products
in combination with the Company's E24 products to provide a full-range of
e-commerce payment processing solutions for retailers.
EDIFY CORPORATION. The Company has an agreement with Edify, a wholly-owned
subsidiary of SI Corporation, whereby it is licensed to incorporate Edify's
Electronic Banking System (EBS) set of software products into the Company's I24
family of Internet banking solutions. The EBS products extend the I24 product
line to include browser-based consumer and business banking, electronic bill
payment and bill presentment capabilities.
NESTOR. The Company has a distribution agreement with Nestor which allows
the Company to distribute Nestor's PRISM products. The PRISM software products
are real time bank-card and credit-card fraud detection products.
GLOBESET. The Company has entered into a distribution agreement with
GlobeSet whereby the Company distributes, installs and supports GlobeSet's
Internet payment security software products. GlobeSet's products, which support
SSL and SET, are combined with the Company's electronic funds transfer systems
to provide secure, end-to-end payment processing from consumer to merchant to
financial institution.
GOLDENGATE. The Company has a sales agency agreement with GoldenGate, Inc.
which allows it to offer Golden Gate's Extractor/Replicator (E/R) product to its
customers. The E/R product is a data center management enhancement software
product. E/R provides features for data to be extracted and replicated flexibly,
efficiently and reliably. A primary use of E/R is to create effective data mart
feeds.
CUSTOMERS
The Company's typical electronic payments software, systems solutions,
corporate payments and smart card customers are large financial institutions,
retailers or third-party processors operating large, geographically-distributed
electronic payment networks capable of capturing large volumes of transactions
through many types of devices and accessing a variety of switches. At
September 30, 1999, the Company's customer base includes 111 of the 500 largest
banks in the world as measured by asset size, and 22 of the top 100 retailers in
the United States as measured by revenue. The Company's IVR product customers
are typically small to midsize banks located primarily in the Americas region
and totaled approximately 1,400 at September 30, 1999.
9
The following table illustrates the distribution of the Company's customers
by geographic region and industry segment as of September 30, 1999:
FINANCIAL PROCESSORS/
GEOGRAPHIC REGION INSTITUTIONS NETWORKS RETAILERS OTHER TOTAL
- ----------------- ------------ ----------- --------- -------- --------
Americas...................................... 1,765 74 59 96 1,994
Europe, Middle East and Africa (EMEA)......... 106 34 3 52 195
Asia/Pacific.................................. 93 15 2 15 125
----- --- -- --- -----
Total..................................... 1,964 123 64 163 2,314
===== === == === =====
SALES AND MARKETING
The Company's primary method of distribution is direct sales by employees
assigned to specific regions or specific products. In addition, the Company uses
distributors and sales agents to supplement its direct sales force in countries
where business practices or customs make it appropriate, or where it is
uneconomical to have a direct sales staff. As of September 30, 1999 the Company
employed 172 people in direct sales, and had arrangements with 26 distributors
and sales agents. The Company generates a majority of its sales leads through
existing relationships with vendors, customers and prospects, or through
referrals.
The Company's primary sales offices are located in Amsterdam, Bahrain,
Boston, Dallas, Johannesburg, London, Melbourne, Mexico City, Naples, Omaha,
Oslo, Sao Paulo, Singapore, Wiesbaden, Tokyo and Toronto. The offices are
responsible for direct and distributor or sales agent-facilitated sales for
designated regions.
The Company distributes the products of other vendors as complements to its
existing product lines. The Company is typically responsible for sales and
marketing as well as first line support. These agreements are generally for a
period of two to three years and involve revenue sharing based on relative
responsibilities.
RESEARCH AND DEVELOPMENT
The Company's product development efforts focus on new products and improved
versions of existing products. The Company believes that the timely development
of new applications and enhancements is essential to maintain its competitive
position in the market.
In developing new products, the Company works closely with industry leaders
to determine requirements. The Company works with device manufacturers, such as
NCR and Diebold, to ensure compatibility with the latest ATM technology. The
Company works with interchange vendors, such as VISA and MasterCard, to ensure
compliance with new regulations or processing mandates. The Company works with
platform vendors, such as Compaq and IBM, 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.
The Company's research and development staff consisted of 459 employees as
of September 30, 1999. The Company's total research and development expenses,
excluding capitalized software development costs were $34.6 million,
$26.2 million and $20.1 million during fiscal years 1999, 1998 and 1997, or
9.8%, 8.8% and 8.2% of total revenues, respectively.
BACKLOG
As of September 30, 1999, the Company had non-recurring revenue backlog of
$30.9 million in software license fees and $34.2 million in services. The
Company includes in its non-recurring revenue
10
backlog all fees specified in executed contracts to the extent that the Company
contemplates recognition of the related revenue within one year. There can be no
assurance that the contracts included in non-recurring revenue backlog will
actually generate the specified revenues or that the actual revenues will be
generated within the one year period. As of September 30, 1998 and 1997, the
Company had non-recurring revenue backlog of $30.2 million and $27.7 million,
respectively, in software license fees and $35.6 million and $19.2 million,
respectively, in services.
As of September 30, 1999, the Company had recurring revenue backlog of
$138.7 million. The Company defines recurring revenue backlog to be all monthly
license fees, maintenance fees and facilities management fees specified in
executed contracts to the extent that the Company contemplates recognition of
the related revenue within one year. There can be no assurance that contracts
included in recurring revenue backlog will actually generate the specified
revenues or that the revenues will be generated within the one year period. As
of September 30, 1998 and 1997, the Company had $119.4 million and $94.5
million, respectively, of recurring revenue backlog.
COMPETITION
The electronic payments market is highly competitive. Competitive factors in
the market include breadth of product features, product quality and
functionality, marketing and sales resources, customer service and support and
price.
The Company's most significant competitors in the Consumer Banking business
group are e-funds, S2 Systems, Inc., IFS International and Oasis Technology. In
addition, the Company encounters competition from third-party processors and
from other vendors offering software on a wide range of product platforms. There
is no single significant competitor in the international market. As electronic
payments transaction volumes increase and banks face higher processing costs,
third-party processors will constitute stronger competition to the Company's
efforts to market its solutions to smaller institutions. In the larger
institution market, the Company believes that third-party processors will be
less competitive since large institutions attempt to differentiate their
electronic payments product offerings from their competition.
In the Corporate Banking business group, the company's most significant
competitors are Logica and Fundtech. In addition, the Company also experiences
competition from software developed internally from potential customers.
The retail solutions business group faces a very fragmented competitive
environment. Competitors range from large transaction processors handling retail
credit card transactions to smaller, regional software developers.
The most significant competition for the Systems Solutions business group is
Compaq Computers, Inc.
PROPRIETARY RIGHTS AND LICENSES
The Company relies on a combination of trade secret and copyright laws,
license agreements, nondisclosure and other contractual provisions and technical
measures to protect its proprietary rights. The Company distributes its software
products under software license agreements that typically grant customers
nonexclusive licenses to use the products. Use of the software products is
usually restricted to designated computers at specified locations and is subject
to terms and conditions prohibiting unauthorized reproduction or transfer of the
software products. The Company also seeks to protect the source code of its
software as a trade secret and as a copyrighted work.
Despite these precautions, there can be no assurance that misappropriation
of the Company's software products and technology will not occur. Although the
Company believes that its intellectual property rights do not infringe upon the
proprietary rights of third parties, there can be no assurance that
11
third parties will not assert infringement claims against the Company. Further,
there can be no assurance that intellectual property protection will be
available for the Company's products in certain foreign countries.
EMPLOYEES
As of September 30, 1999, the Company had a total of 2,194 employees of whom
293 were engaged in administration, 395 in sales and marketing, 817 in software
development and 689 in customer support. The Company's success is dependent upon
its ability to attract and retain qualified employees. None of the Company's
employees are subject to a collective bargaining agreement. The Company believes
that its relations with its employees are good.
SEGMENT AND GEOGRAPHIC INFORMATION
The Company has a single operating segment, encompassing the development,
marketing, installation and technical support of software products and services
primarily focused on facilitating electronic payments and electronic commerce.
See Note 13 to the Company's Consolidated Financial Statements for information
relating to the Company's geographic areas and four lines-of-business groups.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers are as follows:
NAME AGE POSITION
- ---- -------- --------------------------------------------------
William E. Fisher......................... 53 Chairman of the Board and Director
David C. Russell.......................... 51 Chief Executive Officer, President and Director
Gregory J. Duman.......................... 44 Chief Financial Officer and Treasurer
David P. Stokes........................... 43 General Counsel and Secretary
Dwight G. Hanson.......................... 41 Chief Accounting Officer
Edward H. Mangold......................... 54 Senior Vice President -- Americas Region
Mark R. Vipond............................ 40 Senior Vice President -- Consumer Banking
Jeffrey S. Hale........................... 41 Senior Vice President -- Business Development
Don McLarty............................... 52 Vice President -- Asia/Pacific Region
Stephen J. Royer.......................... 41 Vice President -- System Solutions
Jon D. Parr............................... 42 Vice President -- EMEA Region
Stephen M. Bailey......................... 43 Vice President -- Corporate Banking
Marlin R. Howley.......................... 43 Vice President -- Retail Solutions
Anthony J. Parkinson...................... 47 Vice President -- Enterprise Solutions Group
Mr. Fisher is Chairman of the Board of TSA. Since joining ACI in 1987, he
has served in various capacities, including Vice President of Financial Systems,
Senior Vice President of Software and Services, Executive Vice President, Chief
Operating Officer, President and Chief Executive Officer. Prior to joining ACI,
he held the position of President for the Government Services Division of First
Data Resources ("FDR"), an information processing company.
Mr. Russell was appointed President and Chief Executive Officer of TSA in
November 1999. He joined ACI in 1989 serving as Vice President of Strategic
Planning, later serving as Vice President of Customer Support, Senior Vice
President of Software and Services, Senior Vice President of the EFT Product
Company, President of ACI and Chief Operating Officer of TSA. From 1984 to 1989,
he held various operations and planning positions at FDR.
12
Mr. Duman joined ACI in 1983 as Director of Administration. He became
Controller in 1985 and Vice President of Finance and Chief Financial Officer in
1991. From 1979 to 1983, he worked for Arthur Andersen & Co. as a certified
public accountant.
Mr. Stokes was appointed General Counsel in 1991 after joining ACI as
Assistant Counsel in 1988. Prior to joining ACI, he was a partner in a private
law firm in Omaha.
Mr. Hanson joined ACI in 1991 as Corporate Controller. He was appointed Vice
President of Finance in 1997. From 1981 to 1991, Mr. Hanson worked for
Coopers & Lybrand as a Certified Public Accountant.
Mr. Mangold joined ACI in 1987 and served in sales management positions
prior to his appointment in 1990 as Senior Vice President of the Americas
Region. From 1968 to 1987, he held various sales and management positions at
Unisys, Inc.
Mr. Vipond joined ACI in 1985, and served in various capacities, including
National Sales Manager of ACI Canada and Vice President of the Emerging
Technologies and Network Systems Divisions prior to his appointment in 1996 as
President of USSI. In 1998, he was named Senior Vice President of Consumer
Banking. Prior to joining ACI, he was a Systems Engineer at IBM.
Mr. Hale was appointed Senior Vice President of Business Development in
1998. He joined ACI in 1987 and served in various sales, marketing and strategic
planning positions and as Vice President in charge of the ACI Product Company.
From 1981 to 1986, Mr. Hale was a manager in the management information
consulting division of Arthur Andersen LLP.
Mr. McLarty was named Managing Director of the Asia/Pacific region in 1997.
He joined ACI in 1987 serving in various sales and marketing capacities in
Canada. From 1990 through 1997 he was an independent development consultant in
Canada. Prior to joining ACI, Mr. McLarty held various sales and marketing
positions with Tandem Computers, Air Canada, Bank of Montreal and The Bank of
Nova Scotia. Mr. McLarty is based in Singapore.
Mr. Royer joined Grapevine in 1988 as Director of Sales and was named
President in 1991. He became Vice President of TSA in 1996 and Vice President of
System Solutions in 1998. Prior to joining Grapevine, he held sales management
positions at Software Alliance, ACI and IBM.
Mr. Parr joined ACI in 1987 and served in various Sales and Sales Management
positions including Vice President of U.S. EFT sales. He was appointed to
Managing Director ACIL and Vice President EMEA region in August 1998. Prior to
joining ACI, Mr. Parr held various Sales and Marketing positions at Borroughs,
Docutel and REI. Mr. Parr is based in London.
Mr. Bailey is Vice President of Corporate Banking of TSA and President and
Chief Executive Officer of IntraNet, Inc. Since joining ACI in 1994, he served
as Managing Director of ACI's Pacific operations in Melbourne, Australia. From
1986 to 1993, he held various sales and management positions at Tandem
Computers.
Mr. Howley joined ACI in 1981 and held various positions in software
development. From 1984 through 1995 he served in various sales and marketing
capacities. In 1995 Mr. Howley became Vice President of Marketing in the
Americas Region which he held until he was named Vice President of Retail
Solutions in 1998.
Mr. Parkinson was appointed Vice President of the Enterprise Solutions Group
in December 1999. He joined ACI in 1984 and has held several positions including
Director of Sales and Marketing, Europe and Middle East, and as Vice President
of Emerging Technologies and Network Systems. In 1998, he was named Vice
President of System Solutions Sales. Prior to Mr. Parkinson joining ACI, he held
the position of Vice President, Electronic Commerce Division with Bank of
America, in Chicago and San Francisco.
13
ITEM 2. PROPERTIES
The Company leases office space in Omaha, Nebraska, for its corporate
headquarters, principal product development group, and sales and support groups
for the Americas. The leases for these facilities expire in fiscal 2002 through
2008, with the principal lease terminating in fiscal 2008.
The Company's EMEA headquarters are located in Watford, England. The leases
for these facilities expire in fiscal 2009 and 2011, with the principal lease
terminating in fiscal 2009. The Company's Asia/ Pacific headquarters are located
in Singapore with other principal offices in Japan and Australia. The Singapore
lease terminates in fiscal 2001, the Australia and Japan leases terminate in
fiscal 2000. The Company also leases office space in numerous locations in the
United States and in many other countries.
The Company believes that its current facilities are adequate for its
present and short-term foreseeable needs and that additional suitable space will
be available as required. The Company also believes that it will be able to
extend leases as they terminate. See Note 9 to the Company's Consolidated
Financial Statements for additional information regarding the Company's
obligations under its facilities leases.
ITEM 3. LEGAL PROCEEDINGS
On June 14, 1999, HNC Software Inc. filed a complaint against the Company
and its wholly-owned subsidiary, ACI Worldwide Inc in the United States District
Court for the Southern District of California, San Diego Division. The complaint
alleges, among other things, patent infringement, unfair competition, false
advertising, and trade libel relating to ACI Worldwide's distribution of PRISM,
a fraud detection software product. ACI distributes PRISM pursuant to a license
agreement with Nestor, Inc., a company in which TSA is a minority stockholder.
The complaint seeks injunctive relief and unspecified damages including treble
damages, costs, attorneys' fees and various other forms of relief. On
November 25, 1998, Nestor had itself filed a complaint in the United States
District Court for the District of Rhode Island against HNC Software alleging,
among other things, infringement of a patent relating to PRISM and antitrust
violations. HNC Software has filed a counterclaim in the Rhode Island lawsuit
alleging infringement by Nestor of HNC Software's patents which claims are
essentially the same as those filed by HNC Software against the Company and ACI
Worldwide in the San Diego lawsuit. Neither the Company nor ACI Worldwide was a
party to the Rhode Island lawsuit. However, because the same patents and the
same products are at issue in both lawsuits, the Company and ACI Worldwide are
seeking to have the San Diego lawsuit transferred to Rhode Island and
consolidated with the proceedings there. Whatever the final procedural posture
of the lawsuit, the Company intends to vigorously defend against HNC Software's
allegations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter on the Nasdaq National
Market ("NASDAQ/NMS") under the symbol "TSAI". The following table sets forth,
for the fiscal quarters indicated, the high and low sale prices of the Class A
Common Stock as reported by NASDAQ/NMS.
HIGH LOW
-------- --------
1999
- ------------------------------------------------------------
First quarter............................................... $50 $27 1/2
Second quarter.............................................. 50 1/2 35 3/4
Third quarter............................................... 39 3/4 30 7/8
Fourth quarter.............................................. 40 1/8 25 9/16
1998
- ------------------------------------------------------------
First quarter............................................... $44 1/2 $36 5/8
Second quarter.............................................. 43 1/2 34 5/8
Third quarter............................................... 43 37 1/8
Fourth quarter.............................................. 39 7/8 32 3/4
On December 17, 1999, the last sale price of the Company's Class A Common
Stock as reported by NASDAQ/NMS was $26.75 per share. There were 355 holders of
record of the Company's Common Stock as of December 17, 1999.
DIVIDENDS
The Company has not declared or paid cash dividends on its Common Stock
since its incorporation. The Company currently intends to retain earnings to
finance the growth and development of its business and does not anticipate
paying cash dividends in the foreseeable future. Any payment of cash dividends
in the future will depend upon the financial condition, capital requirements and
earnings of the Company, as well as other factors the Board of Directors may
deem relevant.
15
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the audited
financial statements of the Company.
The selected financial data presented below should be read in conjunction
with, and are qualified by reference to, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
of the Company and its Predecessors. The information below is not necessarily
indicative of the results of future operations.
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------
(IN THOUSANDS) 1999 1998 1997 1996 1995
- -------------- --------- --------- --------- --------- ---------
Revenues:
Software license fees................................... $210,002 $166,875 $131,138 $ 89,075 $ 59,699
Maintenance fees........................................ 63,933 57,077 48,714 41,500 29,592
Services................................................ 76,857 70,688 58,234 46,922 27,558
Hardware, net........................................... 4,002 4,609 6,063 5,739 4,554
-------- -------- -------- -------- --------
Total revenues........................................ 354,794 299,249 244,149 183,236 121,403
-------- -------- -------- -------- --------
Expenses:
Cost of software license fees........................... 44,079 36,294 29,538 25,637 19,403
Cost of maintenance and services........................ 72,096 69,886 57,821 46,179 28,918
Research and development................................ 34,612 26,260 20,070 15,883 12,680
Selling and marketing................................... 70,121 62,013 50,168 36,749 30,608
General and administrative:
General and administrative costs...................... 58,725 51,873 45,517 34,864 19,597
Amortization of goodwill and purchased intangibles.... 4,901 1,435 1,008 656 344
-------- -------- -------- -------- --------
Total expenses........................................ 284,534 247,761 204,122 159,968 111,550
-------- -------- -------- -------- --------
Operating income.......................................... 70,260 51,488 40,027 23,268 9,853
-------- -------- -------- -------- --------
Other income (expense):
Interest income......................................... 2,947 3,204 2,291 2,024 1,084
Interest expense........................................ (401) (242) (178) (233) (1,751)
Transaction related expenses............................ (653) (2,512) -- -- --
Other................................................... (283) (203) (652) (561) 12
-------- -------- -------- -------- --------
Total other........................................... 1,610 247 1,461 1,230 (655)
-------- -------- -------- -------- --------
Income before income taxes................................ 71,870 51,735 41,488 24,498 9,198
Provision for income taxes................................ (27,170) (19,476) (14,325) (9,296) (2,145)
-------- -------- -------- -------- --------
Net income before extraordinary loss...................... 44,700 32,259 27,163 15,202 7,053
Extraordinary loss related to early retirement of debt.... -- -- -- -- (2,750)
-------- -------- -------- -------- --------
Net income................................................ $ 44,700 $ 32,259 $ 27,163 $ 15,202 $ 4,303
======== ======== ======== ======== ========
Unaudited pro forma net income(1)......................... $ 44,613 $ 31,432 $ 25,278 $ 14,286 $ 4,060
======== ======== ======== ======== ========
Pro Forma Earnings Per Share Data:
Basic:
Before extraordinary loss............................. $ 1.41 $ 1.04 $ 0.85 $ 0.50 $ 0.27
Extraordinary loss.................................... -- -- -- -- (0.11)
-------- -------- -------- -------- --------
Net income............................................ $ 1.41 $ 1.04 $ 0.85 $ 0.50 $ 0.16
======== ======== ======== ======== ========
Average shares outstanding............................ 31,667 30,298 29,829 28,526 24,866
======== ======== ======== ======== ========
Diluted:
Before extraordinary loss............................. $ 1.38 $ 1.01 $ 0.82 $ 0.48 $ 0.27
Extraordinary loss.................................... -- -- -- -- (0.11)
======== ======== ======== ======== ========
Net income............................................ $ 1.38 $ 1.01 $ 0.82 $ 0.48 $ 0.16
======== ======== ======== ======== ========
Average shares outstanding............................ 32,363 31,193 30,707 29,852 24,866
======== ======== ======== ======== ========
Balance Sheet Data:
Working capital......................................... $ 88,962 $ 86,994 $ 62,914 $ 43,268 $ 38,153
Total assets............................................ $329,525 $226,307 $176,891 $134,988 $103,586
Long-term obligations................................... $ 991 $ 2,002 $ 2,379 $ 1,687 $ 357
Stockholders' equity.................................... $225,169 $145,877 $109,346 $ 80,298 $ 60,402
- ------------------------------
(1) Prior to their acquisitions, RVS and IntraNet were taxed primarily as a
partnership and a Subchapter S corporation, respectively. In addition, prior
to its acquisition, MINT's earnings were not subject to income taxes. The
unaudited pro forma net income and earnings per share reflects a pro forma
tax provision for income taxes on the results of operations of RVS, IntraNet
and MINT for the periods prior to their acquisition.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, markets, installs and supports a broad line of
software products and services primarily focused on facilitating electronic
payments and electronic commerce. The Company's products are organized into four
lines of business groups -- Consumer Banking, Corporate Banking, Retail
Solutions and System Solutions. Products developed by the four lines-of-business
groups are marketed and supported through the Company's wholly-owned subsidiary,
ACI Worldwide Inc (ACI). ACI sells and supports the products and services
through three distribution networks: the Americas, Europe/Middle East/Africa
(EMEA) and Asia/Pacific. Each distribution network primarily uses its own sales
force and supplements this with reseller and/or distributor networks. During
fiscal 1999, 1998 and 1997, approximately 53%, 55% and 54%, respectively, of
total revenues resulted from international operations. The Company derived
approximately 66%, 63% and 64%, respectively, of its revenues for those same
periods from licensing its BASE24 family of software products and providing
related services and maintenance. Although the Company believes that the
majority of its revenues will continue to come from its existing BASE24 products
over the next several years, the Company has acquired and developed and is
currently developing other software products and related services. These
products are in the areas of network connectivity, middleware, internet and
remote banking, e-commerce, wire transfer, ACH and IVR.
ACQUISITIONS. The Company has completed several acquisitions during fiscal
1999, 1998 and 1997. The Company's acquisition strategy is focused primarily on
two areas: (i) additional products to complement and enhance the Company's
strategy of being the leading provider of electronic payments software for
banks, retailers and other enterprises needing high-volume, reliable processing
engines and (ii) geographic expansion into markets which have proven or have a
high level of opportunity to embrace electronic payments. Significant
acquisitions in fiscal 1999, 1998 and 1997 include the following:
ACQUIREE DATE ACQUIRED
- -------- ---------------
Open Systems Solutions, Inc................................ October 1996
Regency Voice Systems, Inc. (RVS).......................... May 1997
IntraNet, Inc. (IntraNet).................................. August 1998
Professional Resources, Inc. (PRI)......................... August 1998
Smart Card Integrators Ltd (SCIL).......................... August 1998
Media Integration BV (MINT)................................ November 1998
U S Processing, Inc.(USPI)................................. December 1998
Insession, Inc. (Insession)................................ March 1999
SDM International, Inc. (SDM).............................. July 1999
All of the acquisitions were acquired using the pooling of interests method
of accounting except for USPI., Insession, and SDM which were accounted for
under the purchase method of accounting. USPI was subsequently sold in September
1999. The Company's financial statements have been restated for all periods
presented to include the results of the material entities acquired using the
pooling of interests method of accounting. The acquisitions of USPI and SDM did
not contribute significant revenues during fiscal 1999. The Company was
previously the exclusive distributor of Insession's primary product (ICE) and,
as a result, that acquisition did not contribute significant additional revenues
in fiscal 1999.
17
PRODUCT PRICING AND REVENUE RECOGNITION. The Company's primary software
license fees pricing method is transaction sensitive, whereby products are
priced based upon the number of transactions processed by the customer
("transaction-based pricing"). Under this method, customers license the products
by paying an Initial License Fee (ILF), where the customer pays a significant
portion of the total software license fees at the beginning of the software
license term, and a Monthly License Fee (MLF), where the customer pays a portion
of the software license fees over the software license term. The payment of the
ILF and MLF allows the customer to process a contractually predetermined maximum
volume of transactions per month for a specified period of time. Once the
transaction volume exceeds this maximum volume level, the customer is required
to pay an additional license fee which is in the form of a Capacity License Fee
(CLF), collected at the beginning of the period the customer contracts for an
incremental volume level, and a Capacity Monthly License Fee (CMLF), collected
over the software license term. There is a separate license fee for each
incremental volume level. In addition to transaction-based pricing, the Company
offers a hardware specific pricing method whereby the product is priced on a per
copy basis and tiered to recognize different performance levels of the
processing hardware ("designated equipment group pricing"). Under designated
equipment group pricing, the customers pay a license fee (in the form of an ILF
and MLF) for each copy of the software the customers have licensed for a
specified period of time. Under both the transaction-based pricing method and
the designated equipment group pricing method, the Company offers a paid up
front (PUF) payment option, whereby the present value of the MLF or CMLF is due
at the beginning of the software license term. The standard software license
term under either pricing method is typically 60 months, but may extend over a
shorter or longer period. Other elements of the software licensing arrangement
typically include postcontract customer support (maintenance) and, occasionally,
services.
Beginning in fiscal 1999, the Company adopted American Institute of
Certified Public Accountants Statement of Position 97-2, "Software Revenue
Recognition" (SOP 97-2). SOP 97-2 provides guidance on applying generally
accepted accounting principles for software revenue recognition transactions.
The primary software revenue recognition criteria outlined in SOP 97-2 include:
evidence of an arrangement; delivery; fixed or determinable fees; and
collectibility.
SOP 97-2 specifies that extended payment terms in a software licensing
arrangement may indicate that the software license fees are not deemed to be
fixed or determinable. In addition, if payment of a significant portion of the
software license fees is not due until more than twelve months after delivery,
the software license fees should be PRESUMED not to be fixed or determinable,
and thus should be recognized as the payments become due. However, SOP 97-2
specifies that if the Company has a standard business practice of using extended
payment terms in software licensing arrangements and has a history of
successfully collecting the software license fees under the original terms of
the software licensing arrangement without making concessions, the Company can
overcome the presumption that the software license fees are not fixed or
determinable. If the presumption is overcome, the Company should recognize the
software license fees when all other SOP 97-2 revenue recognition criteria are
met.
The Company has concluded that for certain software arrangements entered
into after October 1, 1998 with extended guaranteed payment terms, the "fixed or
determinable" presumption has been overcome and software license fees should be
recognized upon meeting the SOP 97-2 revenue recognition criteria ("guaranteed
software license fees"). The present value of the guaranteed software license
fees, net of third party royalties, recognized in fiscal 1999 totaled
approximately $60.5 million. The discount rates used to determine the present
value of the guaranteed software license fees, representing the Company's
incremental borrowing rates, ranged from 9.5% to 10.25%. The portion of the
guaranteed software license fees that has been recognized by the Company, but
not yet billed, is reflected in accrued receivables in the accompanying
consolidated balance sheets.
Failing to overcome the "fixed or determinable" presumption would have
resulted in the Company recognizing the ILF and CLF components of the software
license fees related to these certain software arrangements when the software
was delivered (or in the reporting period that the incremental volume
18
level was effective), and the MLF and CMLF components of the software license
fees would have been recognized ratably over the software license term as they
were billed. Software license fees related to those software arrangements that
would have been recognized in fiscal 1999 had the Company not been able to
overcome the presumption that the software license fees were not fixed or
determinable fees would have been approximately $5.1 million.
Software license fees for fiscal 1999, 1998 and 1997 consisted of the
following (in thousands):
1999 1998 1997
--------- --------- ---------
Initial license fees (ILF, CLF, PUF)........................ $ 95,002 $123,175 $ 98,738
Monthly license fees (MLF, CMLF)............................ 54,500 43,700 32,400
Guaranteed software license fees............................ 60,500 -- --
-------- -------- --------
$210,002 $166,875 $131,138
======== ======== ========
The Company prefers to collect software license fees using the MLF/CMLF
payment option rather than the PUF payment option, as the MLF/CMLF payment
option generally provides more favorable economic results to the Company.
Software license arrangements with the MLF/CMLF payment option typically include
guaranteed monthly payments, which enhances the long-term relationship with the
customer. As a result, in fiscal 1999 the Company emphasized MLF/CMLF payment
options rather than PUF payment options.
19
RESULTS OF OPERATIONS
The following table sets forth certain financial data and the percentage of
total revenues of the Company for the periods indicated:
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
% OF % OF % OF
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
(IN THOUSANDS) --------- -------- --------- -------- --------- --------
Revenues:
Software license fees........... $210,002 59.2% $166,875 55.8% $131,138 53.7%
Maintenance fees................ 63,933 18.0 57,077 19.1 48,714 20.0
Services........................ 76,857 21.7 70,688 23.6 58,234 23.9
Hardware, net................... 4,002 1.1 4,609 1.5 6,063 2.5
-------- ----- -------- ----- -------- -----
Total revenues................ 354,794 100.0 299,249 100.0 244,149 100.0
-------- ----- -------- ----- -------- -----
Expenses:
Cost of software license fees... 44,079 12.4 36,294 12.1 29,538 12.1
Cost of maintenance and
services...................... 72,096 20.3 69,886 23.4 57,821 23.7
Research and development........ 34,612 9.8 26,260 8.8 20,070 8.2
Selling and marketing........... 70,121 19.8 62,013 20.7 50,168 20.5
General and administrative:
General and administrative
costs....................... 58,725 16.6 51,873 17.3 45,517 18.6
Amortization of goodwill and
purchased intangibles....... 4,901 1.4 1,435 0.5 1,008 0.4
-------- ----- -------- ----- -------- -----
Total expenses................ 284,534 80.2 247,761 82.8 204,122 83.6
-------- ----- -------- ----- -------- -----
Operating income.................. 70,260 19.8 51,488 17.2 40,027 16.4
-------- ----- -------- ----- -------- -----
Other income (expense):
Interest income................. $ 2,947 0.8% $ 3,204 1.1% $ 2,291 0.9%
Interest expense................ (401) (0.1) (242) (0.1) (178) (0.1)
Transaction related expenses.... (653) (0.2) (2,512) (0.8) -- 0.0
Other........................... (283) (0.1) (203) (0.1) (652) (0.3)
-------- ----- -------- ----- -------- -----
Total other................... 1,610 0.5 247 0.1 1,461 0.6
-------- ----- -------- ----- -------- -----
Income before income taxes........ 71,870 20.3 51,735 17.3 41,488 17.0
Provision for income taxes........ (27,170) (7.7) (19,476) (6.5) (14,325) (5.9)
-------- ----- -------- ----- -------- -----
Net income........................ $ 44,700 12.6% $ 32,259 10.8% $ 27,163 11.1%
======== ===== ======== ===== ======== =====
Unaudited pro forma net
income(1)....................... $ 44,613 12.6% $ 31,432 10.5% $ 25,278 10.4%
======== ===== ======== ===== ======== =====
- ------------------------
(1) Prior to their acquisitions, RVS and IntraNet were taxed primarily as a
partnership and a Subchapter S corporation, respectively. In addition,
prior to its acquisition, MINT's earnings were not subject to income taxes.
The unaudited pro forma net income reflects a pro forma tax provision for
income taxes on the results of operations of RVS, IntraNet and MINT for the
periods prior to their acquisition.
REVENUES. Total revenues for fiscal 1999 increased 18.6% or $55.5 million
over fiscal 1998. Of this increase, $43.1 million of the growth resulted from a
25.8% increase in software license fees revenue, $6.2 million from an 8.7%
increase in services revenue and $6.9 million from a 12.0% increase in
maintenance fee revenue.
Total revenues for fiscal 1998 increased 22.6% or $55.1 million over fiscal
1997. Of this increase, $35.7 million of the growth resulted from a 27.3%
increase in software license fees revenue, $12.5 million from a 21.4% increase
in services revenue and $8.4 million from a 17.2% from increase in maintenance
fee revenue.
20
The growth in software license fees revenue in both fiscal 1999 and 1998 is
primarily the result of increased demand, from both existing and new customers,
for the Company's BASE24 ATM and POS products and System Solutions products and
services accompanied by the continued growth of the installed base of customers
paying monthly license fee (MLF) revenue. Contributing to the strong demand for
the Company's products is the continued world-wide growth of electronic payment
transaction volume and the growing complexity of electronic payment systems. MLF
revenue was $54.5 million, $43.7 million and $32.4 million in fiscal 1999, 1998
and 1997, respectively.
The growth in services revenue in both fiscal 1999 and 1998 is the result of
increased demand for technical and project management services which is a direct
result of the increased installed base of the Company's BASE24 products.
The increase in maintenance fee revenue in both fiscal 1999 and 1998 is a
result of the continued growth of the installed base of the Company's software
products.
EXPENSES. Total operating expenses for fiscal 1999 increased 14.8% or $36.8
million over fiscal 1998. Total operating expenses for fiscal 1998 increased
21.4% or $43.6 million over fiscal 1997. The primary reason for the overall
increase in operating expenses during fiscal 1999 and 1998 is the increase in
staff required to support the increased demand for the Company's products and
services. The slowing of expense growth in fiscal 1999 is primarily due to the
Company implementing controls over headcount growth. Prior to the implementation
of the headcount controls, the Company was experiencing significant headcount
growth as it moved to the line-of-business organization structure and added
acquired companies. Total staff (including both employees and independent
contractors) was 2,194, 2,054 and 1,684 at September 30, 1999, 1998 and 1997,
respectively.
The Company's operating margin was 19.8%, 17.2% and 16.4% in fiscal 1999,
1998 and 1997, respectively. These improvements are primarily due to increased
demand for the Company's products and the impact of the growth in the Company's
MLF revenues.
The Company's gross margin (total revenues minus cost of software and cost
of maintenance and services) was 67.3%, 64.5% and 64.2% in fiscal 1999, 1998 and
1997, respectively. The increase in gross margin is primarily due to the impact
of additional MLF revenue.
Research and development (R&D) costs as a percentage of total revenues were
9.8%, 8.8% and 8.2% in fiscal 1999, 1998 and 1997, respectively. The majority of
R&D costs have been charged to expense as incurred with the capitalization of
software costs amounting to approximately $3.6 million in fiscal 1999 and
$1.0 million in fiscal 1998 and 1997.
Selling and marketing costs as a percentage of total revenues were 19.8%,
20.7% and 20.5% in fiscal 1999, 1998 and 1997, respectively. The slight decrease
in fiscal 1999 as compared to fiscal 1998 and 1997 is due to the impact of
additional MLF revenue and increased leverage from a larger revenue base in
relation to the level of selling and marketing costs being incurred.
General and administrative (G & A) costs as a percentage of total revenues
were 16.6%, 17.3% and 18.5% in fiscal 1999, 1998 and 1997. The decreases are due
primarily to increased leverage from the larger revenue base in relation to the
level of G & A expenses being incurred.
EBITDA. The Company's earnings before interest, income taxes, depreciation
and amortization (EBITDA) was $91.8 million, $62.7 million and $49.6 million for
fiscal 1999, 1998 and 1997, respectively. These increases are attributable to
the continued growth in both recurring and non-recurring revenues more than
offsetting the growth in operating expenses. EBITDA is not intended to represent
cash flows for the periods in accordance with generally accepted accounting
principles.
OTHER INCOME AND EXPENSE. Other income and expense consists primarily of
interest income derived from short-term investments and interest expense on
indebtedness. Interest income was higher in fiscal 1998 than in fiscal 1999.
This is due primarily to interest earned in fiscal 1998 and early fiscal
21
1999 on promissory notes and line-of-credit advances provided to Insession and
USPI prior to the Company's acquisition of these companies.
TRANSACTION RELATED EXPENSES. Transaction related expenses include legal,
accounting, investment banking fees and other non-recurring expenses associated
with the acquisitions accounted for as poolings of interest. In fiscal 1999, the
Company incurred $653,000 of these expenses to complete the acquisition of MINT
and in fiscal 1998, the Company incurred $2.5 million to complete the
acquisition of IntraNet, SCIL and PRI.
INCOME TAXES. The Company had a pro forma effective tax rate of 38% for
fiscal 1999 and 39% for fiscal 1998. As of September 30, 1999, the Company has
deferred tax assets of approximately $18.7 million and deferred tax liabilities
of $6.2 million. Each year, the Company evaluates its historical operating
results as well as its projections to determine the realizability of the
deferred tax assets. This analysis indicated that $7.5 million of the deferred
tax assets were more likely than not to be realized. Accordingly, the Company
has recorded a valuation allowance of $11.2 million as of September 30, 1999.
The Company intends to analyze the realizability of the net deferred tax
assets at each future reporting period. Such analysis may indicate that the
realization of various deferred tax benefits is more likely than not and,
therefore, the valuation reserve may be reduced.
BACKLOG
As of September 30, 1999 and 1998, the Company had non-recurring revenue
backlog of $30.9 million and $30.2 million in software license fees and $34.2
million and $35.6 million in services, respectively. The Company includes in its
non-recurring revenue backlog all fees specified in contracts which have been
executed by the Company to the extent that the Company contemplates recognition
of the related revenue within one year. There can be no assurance that the
contracts included in non-recurring revenue backlog will actually generate the
specified revenues or that the actual revenues will be generated within the one
year period.
As of September 30, 1999 and 1998, the Company had recurring revenue backlog
of $138.7 million and $119.4 million, respectively. The Company defines
recurring revenue backlog to be all monthly license fees, maintenance fees and
facilities management fees specified in contracts which have been executed by
the Company and its customers to the extent that the Company contemplates
recognition of the related revenue within one year. There can be no assurance
that the contracts included in recurring revenue backlog will actually generate
the specified revenues, or that the actual revenues will be generated within the
one year period.
YEAR 2000
Year 2000 problems may arise in computer equipment and software, as well as
embedded electronic systems, because of the way these systems are programmed to
interpret certain dates that will occur around the change in century. In the
computer industry this is primarily the result of computer programs being
designed and developed using or reserving only two digits in date fields (rather
than four digits) to identify the year, without considering the ability of the
program to properly distinguish the upcoming century change in the Year 2000. In
addition, the Year 2000 is a special-case leap year and some programs may drop
February 29th from their internal calendars. Certain other dates may present
problems because of the way the digits are interpreted. Because the Company's
business is based on the licensing of applications software, the Company's
business would be adversely impacted if its products or its internal systems
experience problems associated with the century change. This issue also
potentially affects the software programs and systems used by the Company in its
operations.
PROJECT DEFINITION. In 1996 the Company initiated a company wide program to
analyze three specific categories of systems: (1) software developed by the
Company which is licensed to customers;
22
(2) information technology or "IT" systems utilized by the Company consisting of
applications developed in-house and purchased from third party suppliers; and
(3) non-IT systems and embedded technology which are integral components of the
infrastructure of the Company.
The Company adopted a methodology for reviewing its licensed software
consisting of four categories. The categories are (1) preparation, (2) analysis
and remediation, (3) testing, and (4) delivery. The Company developed tools
during the preparation phase of the project which were utilized during the
analysis and testing phases. The tools were subsequently made available to the
Company's customers at no charge. The Company believes that its remediation
efforts with respect to its software products will prove to be successful. The
Company's belief is based on testing by the Company of its software products by
using testing tools simulating dates and testing by many of its customers who
have in turn completed their own Year 2000 testing. Year 2000 compliant versions
of its software products ("Compliant Software") have been made available by the
Company to customers in a timely manner and its communication efforts have been
proactive and ongoing. The Company continues to actively monitor the status and
progress of customers and distributors and assess the risk associated in those
cases where the customer has not taken delivery of the Compliant Software or may
have not made satisfactory progress in their own Year 2000 testing.
With respect to IT and non-IT systems, the Company is utilizing a
methodology similar to that adopted for its software products. Specifically, the
Company is utilizing the following steps: (1) preparation, in which the Company
conducts systematic inventory, analysis, and prioritization of the systems in
accordance with mission critical impact (2) analysis, replacement and
remediation (3) testing and (4) implementation.
Recognizing the importance of communications regarding and organization of
Year 2000 tasks and responsibilities, the Company has embraced a management
approach utilizing central coordination with distributed administration over
geographic and business units. This approach mirrors the Company's organization
and ensures that Year 2000 Communications Managers are deployed and managing
tasks in close proximity to actual efforts. Those efforts are then reported
centrally to upper management. The approach also ensures that customers are kept
informed of product and Company activities relating to the Year 2000 and that
the Company is able to measure progress and plan support for customers' Year
2000 projects.
CURRENT STATUS. Following analysis, remediation and testing efforts, the
Company began shipping Year 2000 compliant versions of its major licensed
software applications in March of 1997. As efforts were completed on other
applications, they too were shipped to customers so that they could be upgraded
as part of the customers' own Year 2000 projects. As of November 1999, all of
the Company's licensed software applications are compliant and available to
customers. The Company continues to conduct analysis of newly acquired software
products with appropriate measurement and documentation in accordance with the
Year 2000 methodology in place.
With respect to the IT and non-IT systems, remediation and replacement has
been substantially completed in the most critical areas. The internal accounting
systems utilized by the Company and its subsidiaries have been replaced where
necessary. As new IT and non-IT purchases are made, each is scrutinized and
inventoried for Year 2000 compliance.
The majority of the embedded systems on which the Company relies in its day
to day operations around the world are owned and managed by the lessors of the
buildings in which the Company's offices are located, or by agents of such
lessors. The Company has sent letters to its lessors and, as applicable, their
agents requesting certifications of the Year 2000 compliance of the embedded
systems. The Company has received responses from more than 90% of its lessors
indicating that the systems in the buildings either already are, or are expected
to be before the end of 1999, Year 2000 compliant. Those systems not owned by
and managed by lessors have undergone a similar inventory and certification
gathering. The Company will prioritize systems and develop necessary test plans
based on the further responses it continues to receive, or not to receive, to
its letters.
23
The Company has developed contingency plans for support of its customers
prior to, during, and following the "Year 2000 weekend". Such plans incorporate,
but are not limited to, distribution of support personnel in locations around
the world, backup plans for telecommunications, decision and notification
hierarchy, and other infrastructure support. Contingency plans were completed in
September of 1999.
COSTS. The Company expects to incur project costs of approximately $10
million over the life of the Year 2000 project. These costs consist of: (i)
internal staff costs related to licensed product remediation and testing;
(ii) internal staff costs related to IT and non-IT compliance; (iii) hardware
and software cost for replacement of IT systems; and (iv) costs related to
non-IT compliance involving embedded systems and consulting services. Costs
incurred from the beginning of the project in 1996 through September 1999 have
totaled approximately $9.4 million. The Company expects to incur an additional
$600,000 over the remaining life of the Year 2000 project. All costs related to
the Year 2000 project are being expensed as incurred. The estimated remaining
costs are based on currently known circumstances and various assumptions
regarding future events. There can be no assurance that this estimate will be
achieved and actual results could differ materially from those anticipated.
RISKS. The Company believes that the most likely Year 2000 risks relate to
third parties with which it has material relationships. Those parties include
computer hardware system providers on which the Company and its customers rely
as well as service providers such as those providing telecommunications and
electricity. Failure or disruption of such services or systems could adversely
affect operations and the Company's ability to support its customers. The second
most likely Year 2000 risk relates to the Company's products that are used in
conjunction with software products developed by other vendors or by customers
who have developed their own applications for use with the Company's products,
which may not be Year 2000 compliant. Since the majority of the Company's
customers utilize the Company's software products for authorization, routing, or
processing of financial transactions, the failure of such customers' systems,
which may be particularly susceptible to Year 2000 compliance issues, could
impact the transaction volume processed by the customers thereby reducing
transaction fees paid by customers with usage based fee contracts. Failures of
such systems could also increase the efforts required by the Company to assist
customers with resolving problems unrelated to the Company's licensed products.
The third most likely Year 2000 risk relates to certain foreign countries in
which the Company operates and the Company's customers in such countries that
are not acting to sufficiently remediate Year 2000 issues. Some customers
outside of the United States have chosen to concentrate on issues other than the
Year 2000. Without concentrating on the Year 2000 upgrade and testing efforts,
such customers will not be prepared and may require additional support to assist
them. Commercial risks are associated with operating in countries that are not
prepared for the Year 2000.
In each case cited previously, the Company has developed contingency plans
to address each identified risk. In addition, the Company continues to use its
methodology of centralized and distributed management to keep in contact and
monitor progress with customer projects and to communicate at an upper
management level to those customers categorized as "at risk" due to their lack
of progress. The contingency plan acknowledges the risk associated with
suppliers of material services, hardware vendors closely related to the
operation of the Company's licensed products, the Company's own licensed
products and the ability of the Company to support its customers. In addition to
distributed support methods, the Company's contingency plans address alternative
services, such as telecommunications. The (i) inability to timely implement
contingency plans, if deemed necessary and (ii) the cost to implement such
plans, may have a material adverse effect on the Company's results of
operations.
Except for statements of existing or historical facts, the foregoing
discussion consists of forward-looking statements and assumptions relating to
forward-looking statements, including without limitation the statements relating
to future costs, potential problems relating to Year 2000, the Company's state
of readiness, third party representations, and the Company's plans and
objectives for addressing Year 2000 problems. Certain factors could cause actual
results to differ materially from the Company's
24
expectations, including without limitation (i) the failure of existing or future
customers to achieve Year 2000 compliance, (ii) the failure of computer hardware
system providers on which the Company and its customers rely or other vendors or
service providers of the Company or its customers to timely achieve Year 2000
compliance, (iii) the Company's products and systems not containing all
necessary date code changes, (iv) the failure of the Company's analysis and
testing to detect operational problems in IT and non-IT systems utilized by the
Company or in the Company's products or services, whether such failure results
from the technical inadequacy of the Company's validation and testing efforts,
the technological unfeasibility of testing certain non-IT systems, and the
unavailability of customers or other third parties to participate in testing,
(v) potential litigation arising out of Year 2000 issues, with respect to
providers of software and related technical and consulting services such as the
Company generally, and particularly in light of the numerous interfaces between
the Company's products and products and systems of third parties which are
required to successfully utilize the Company's products which could involve the
Company in expensive, multiple party litigation even though the Company may have
no responsibility for the alleged problem, and (vi) the failure to successfully
implement the contingency plan or any inadequacy of the contingency plan to the
extent Year 2000 compliance is not achieved.
During the first quarter of fiscal 2000, the Company's large bank and
merchant customers have, in effect, locked down their systems prior to the Year
2000. This Year 2000 lock-down has had a negative impact on the Company's
revenue and net income for the first quarter of fiscal 2000 due to the less than
expected demand by the Company's customers to upgrade and enhance their current
systems.
Although it is uncertain whether the Year 2000 lock-down will have a
negative impact on the Company's revenue and net income beyond the first quarter
of fiscal 2000, the Company believes demand for system upgrades and enhancements
could be slow to return to normal levels if one or more segments of the global
marketplace experience Year 2000-related failures. It is clear that as a result
of the negative impact on the first quarter of fiscal 2000, the Year 2000
lock-down will have a negative impact on the Company's revenue and net income
for fiscal 2000.
The statements in this report regarding future results are preliminary and
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition, this report contains other
forward-looking statements including statements regarding the Company's
expectations, plans and beliefs. The forwarding-looking statements in this
report are subject to a variety of risks and uncertainties. Actual results could
differ materially. Factors that could cause actual results to differ include but
are not limited to those described above and the following:
- That the Company will continue to derive a substantial majority of its
total revenue from licensing its BASE24 family of software products and
providing services and maintenance related to those products. Any
reduction in demand for, or increase in competition with respect to,
BASE24 products would have a material adverse effect on TSA's financial
condition and results of operations.
- That the Company's business is concentrated in the banking industry,
making it susceptible to a downturn in that industry.
- Fluctuations in quarterly operating results may result in volatility in
TSA's stock price. No assurance can be given that operating results will
not vary.
- TSA's stock price may be volatile, in part due to external factors such as
announcements by 3rd parties or competitors, inherent volatility in the
high-technology sector and changing market conditions in the industry.
For a detailed discussion of these and other risk factors, interested
parties should review the Company's filings with the Securities and Exchange
Commission, including Exhibit 99.01 to this report.
25
SELECTED QUARTERLY INFORMATION
The following table sets forth certain unaudited financial data for each of
the quarters within fiscal 1999, 1998 and 1997. This information has been
derived from the Company's Consolidated Financial Statements and in management's
opinion, reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information for the
quarters presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
QUARTER ENDED
-----------------------------------------------------------------------------------------------
SEP. 30, JUNE 30, MARCH 31, DEC. 31, SEP. 30, JUNE 30, MARCH 31, DEC. 31,
1999 1999 1999 1998 1998 1998 1998 1997
(IN THOUSANDS) --------- --------- ---------- --------- --------- --------- ---------- ---------
Revenues:
Software license
fees................. $60,114 $53,259 $50,552 $46,077 $45,305 $42,923 $40,082 $38,565
Maintenance fees....... 16,328 16,042 15,996 15,567 15,078 14,664 14,162 13,173
Services............... 15,395 18,858 19,309 23,295 20,154 18,188 16,405 15,941
Hardware, net.......... 810 967 1,094 1,131 883 1,232 1,105 1,389
------- ------- ------- ------- ------- ------- ------- -------
Total revenues....... 92,647 89,126 86,951 86,070 81,420 77,007 71,754 69,068
------- ------- ------- ------- ------- ------- ------- -------
Expenses:
Cost of software
license fees......... 11,926 10,381 9,950 11,822 9,776 9,220 8,535 8,763
Cost of maintenance and
services............. 16,025 17,740 18,038 20,293 19,304 18,126 16,722 15,734
Research and
development.......... 9,165 8,711 8,538 8,198 7,050 6,797 6,304 6,109
Selling and
marketing............ 19,300 17,495 17,348 15,978 16,917 15,682 15,010 14,404
General and
administrative:
General and
administrative
costs.............. 14,742 14,639 14,976 14,368 14,045 13,717 12,279 11,832
Amortization of
goodwill and
purchased
intangibles........ 1,780 1,572 1,104 445 359 347 414 315
------- ------- ------- ------- ------- ------- ------- -------
Total expenses....... 72,938 70,538 69,954 71,104 67,451 63,889 59,264 57,157
------- ------- ------- ------- ------- ------- ------- -------
Operating income......... 19,709 18,588 16,997 14,966 13,969 13,118 12,490 11,911
------- ------- ------- ------- ------- ------- ------- -------
Other income (expense):
Interest income........ 817 706 721 703 894 863 800 647
Interest expense....... (165) (77) (48) (111) (98) (46) (78) (20)
Transaction related
expenses............. -- -- -- (653) (2,512) -- -- --
Other income
(expense)............ (320) (131) (29) 197 63 (226) 40 (80)
------- ------- ------- ------- ------- ------- ------- -------
Total other.......... 332 498 644 136 (1,653) 591 762 547
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 20,041 19,086 17,641 15,102 12,316 13,709 13,252 12,458
Provision for income
taxes.................. (7,531) (7,237) (6,757) (5,645) (5,289) (5,040) (4,700) (4,447)
------- ------- ------- ------- ------- ------- ------- -------
Net income............... $12,510 $11,849 $10,884 $ 9,457 $ 7,027 $ 8,669 $ 8,552 $ 8,011
======= ======= ======= ======= ======= ======= ======= =======
Unaudited pro forma net
income(1).............. $12,510 $11,849 $10,884 $ 9,370 $ 6,849 $ 8,575 $ 8,290 $ 7,718
======= ======= ======= ======= ======= ======= ======= =======
Pro forma basic earnings
per share.............. $ 0.39 $ 0.37 $ 0.35 $ 0.30 $ 0.22 $ 0.28 $ 0.28 $ 0.26
======= ======= ======= ======= ======= ======= ======= =======
Pro forma diluted
earnings per share..... $ 0.38 $ 0.36 $ 0.34 $ 0.30 $ 0.22 $ 0.27 $ 0.27 $ 0.25
======= ======= ======= ======= ======= ======= ======= =======
QUARTER ENDED
----------------------------------------------
SEP. 30, JUNE 30, MARCH 31, DEC. 31,
1997 1997 1997 1996
(IN THOUSANDS) --------- --------- ---------- ---------
Revenues:
Software license
fees................. $34,796 $34,340 $33,152 $28,850
Maintenance fees....... 12,628 12,470 11,861 11,755
Services............... 15,455 15,211 13,535 14,033
Hardware, net.......... 1,175 1,083 3,213 592
------- ------- ------- -------
Total revenues....... 64,054 63,104 61,761 55,230
------- ------- ------- -------
Expenses:
Cost of software
license fees......... 7,592 7,428 7,284 7,234
Cost of maintenance and
services............. 14,941 14,832 13,929 14,119
Research and
development.......... 5,269 5,155 5,102 4,544
Selling and
marketing............ 13,713 13,062 12,441 10,952
General and
administrative:
General and
administrative
costs.............. 11,035 11,422 12,930 10,130
Amortization of
goodwill and
purchased
intangibles........ 344 210 237 217
------- ------- ------- -------
Total expenses....... 52,894 52,109 51,923 47,196
------- ------- ------- -------
Operating income......... 11,160 10,995 9,838 8,034
------- ------- ------- -------
Other income (expense):
Interest income........ 642 621 547 481
Interest expense....... (42) (55) (24) (57)
Transaction related
expenses............. -- -- -- --
Other income
(expense)............ (76) (40) (223) (313)
------- ------- ------- -------
Total other.......... 524 526 300 111
------- ------- ------- -------
Income before income
taxes.................. 11,684 11,521 10,138 8,145
Provision for income
taxes.................. (3,786) (3,793) (3,667) (3,079)
------- ------- ------- -------
Net income............... $ 7,898 $ 7,728 $ 6,471 $ 5,066
======= ======= ======= =======
Unaudited pro forma net
income(1).............. $ 7,537 $ 7,206 $ 5,990 $ 4,545
======= ======= ======= =======
Pro forma basic earnings
per share.............. $ 0.25 $ 0.24 $ 0.20 $ 0.16
======= ======= ======= =======
Pro forma diluted
earnings per share..... $ 0.24 $ 0.23 $ 0.20 $ 0.15
======= ======= ======= =======
- ----------------------------------
(1) Prior to their acquisitions, RVS and IntraNet were taxed primarily as a
partnership and a Subchapter S corporation, respectively. In addition, prior
to its acquisition, MINT's earnings were not subject to income taxes. The
unaudited pro forma net income and earnings per share reflects a pro forma
tax provision for income taxes on the results of operations of RVS, IntraNet
and MINT.
26
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company's principal sources of liquidity
consisted of $70.5 million of cash and cash equivalents, as compared to $63.6
million at September 30, 1998.
The Company's net cash flows provided by operating activities for fiscal
1999, 1998 and 1997 were $40.3 million, $35.8 million and $34.2 million,
respectively. The increase of $4.5 million in fiscal 1999 is principally due to
higher net income and an increase in deferred revenue, partly offset by an
increase in accrued receivables and a decrease in accrued liabilities. The
increase of $1.6 million in fiscal 1998 is principally due to higher net income
and increases in accrued liabilities and deferred revenue partly offset by
increases in billed receivables. An important contributor to the cash management
program is the Company's factoring of accrued receivables begun in fiscal 1998,
whereby interest in its receivables are transferred (on a non-recourse basis) to
third party financial institutions in exchange for cash. During fiscal 1999 and
1998, the Company generated operating cash flows from the factoring of accrued
receivables of $30.9 million and $9.2 million, respectively.
The Company's net cash flows used in investing activities totaled $20.2
million, $24.9 million and $18.5 million in fiscal 1999, 1998 and 1997,
respectively. The decrease in cash used in investing activities in fiscal 1999
as compared to 1998 is due to proceeds of $10.1 million received in the sale of
US Processing, Inc. more than offsetting the increase in the amount of cash used
for purchases of software, marketable securities and acquisitions. The increase
in fiscal 1998 as compared to 1997 is due to an increase in the level of cash
used to purchase property and equipment, marketable securities and additions to
other investments and notes receivable. In each period, the Company made
significant investments in computer equipment and software. The Company expects
to continue to invest in these items to support its growth.
In fiscal 1999, the Company purchased 1.25 million shares of Digital Courier
Technologies, Inc. (DCTI) Common Stock for $6.5 million. The Company also
received warrants to purchase 1.0 million shares of DCTI Common Stock for an
exercise price of $5.20 per share. In fiscal 1998, the Company purchased
2.5 million shares of Nestor, Inc. (Nestor) Common Stock for $5.0 million. The
Company also received warrants to purchase 2.5 million shares of Nestor Common
Stock for an exercise price of $3 per share.
In fiscal 1999, the Company's Board of Directors approved the repurchase of
up to 2,000,000 shares of Common Stock through February 2000. The purpose of the
stock repurchase program is to replace the shares issued in the SDM acquisition
completed in July 1999, and to fund a reserve for shares for future employee
stock option grants, acquisitions or other corporate purposes. Under this
repurchase program, the Company purchased 475,000 shares at an average cost of
$29.98 per share for approximately $14.2 million in fiscal 1999 and
500,300 shares at an average cost of $26.67 for approximately $13.3 million
during the first quarter of fiscal 2000. The Company used cash flow from
operations to fund the Common Stock repurchases.
Management believes that the Company's working capital and cash flow
generated from operations are sufficient to meet the Company's working capital
requirements for the foreseeable future.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks associated primarily to changes in
foreign currency exchange rates. The Company conducts business in all parts of
the world. As a general rule, the Company's revenue contracts are denominated in
U.S. dollars. Thus, any decline in the value of local foreign currencies against
the U.S. dollar will result in the Company's products and services being more
expensive to a potential foreign buyer, and in those instances where the
Company's goods and services have already been sold, will result in the
receivables being more difficult to collect. The Company does at times enter
into revenue contracts that are denominated in the currency of the country in
which it has substantive operations, principally the United Kingdom, Australia,
Canada and Singapore. This practice serves as a natural hedge to finance the
expenses incurred in those locations. The Company has not entered into, nor does
it currently anticipate entering into, any foreign currency hedging
transactions.
The Company does not purchase or hold any derivative financial instruments
for the purpose of speculation or arbitrage.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... 30
Consolidated Balance Sheets as of September 30, 1999 and
1998...................................................... 31
Consolidated Statements of Income and Comprehensive Income
for each of the three years
in the period ended September 30, 1999.................... 32
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended September 30, 1999.... 33
Consolidated Statements of Cash Flows for each of the three
years in the period ended September 30, 1999.............. 34
Notes to Consolidated Financial Statements.................. 35
29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Transaction Systems Architects, Inc.:
We have audited the accompanying consolidated balance sheets of Transaction
Systems Architects, Inc. (a Delaware corporation) and Subsidiaries as of
September 30, 1999 and 1998, and the related consolidated statements of income
and comprehensive income, stockholders' equity and cash flows for each of the
three years in the period ended September 30, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Transaction Systems
Architects, Inc. and Subsidiaries as of September 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1999, in conformity with generally accepted
accounting principles.
As explained in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for software license fees revenue upon the
adoption of American Institute of Certified Public Accountants Statement of
Position 97-2, "Software Revenue Recognition," effective October 1, 1998.
ARTHUR ANDERSEN LLP
Omaha, Nebraska,
October 28, 1999
30
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30,
---------------------
1999 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 70,482 $ 63,648
Marketable securities..................................... 8,456 2,188
Billed receivables, net of allowances of $7,251 and
$5,148, respectively.................................... 50,619 58,080
Accrued receivables....................................... 41,880 33,000
Deferred income taxes..................................... 7,468 4,921
Other..................................................... 7,215 3,585
-------- --------
Total current assets.................................... 186,120 165,422
Property and equipment, net................................. 20,754 21,001
Software, net............................................... 25,835 7,172
Intangible assets, net...................................... 61,612 9,385
Long-term accrued receivables............................... 26,850 2,056
Investments and notes receivable............................ 3,569 16,754
Other....................................................... 4,785 4,517
-------- --------
Total assets............................................ $329,525 $226,307
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 501 $ 1,078
Accounts payable.......................................... 8,030 13,720
Accrued employee compensation............................. 7,192 8,426
Accrued liabilities....................................... 18,287 14,826
Income taxes.............................................. 8,521 4,784
Deferred revenue.......................................... 54,627 35,594
-------- --------
Total current liabilities............................... 97,158 78,428
Long-term debt.............................................. 991 2,002
Deferred income taxes....................................... 6,207 --
-------- --------
Total liabilities....................................... 104,356 80,430
-------- --------
Commitments and contingencies
Stockholders' equity:
Redeemable Convertible Preferred Stock, $.01 par value;
5,450,000 shares authorized; no shares issued and
outstanding at September 30, 1999 and 1998
Redeemable Convertible Class B Common Stock and Warrants,
$.05 par value; 5,000,000 shares authorized; no shares
issued and outstanding at September 30, 1999 and 1998
Class A Common Stock, $.005 par value; 50,000,000 shares
authorized;
32,580,637 and 29,873,947 shares issued at
September 30, 1999 and 1998,
respectively............................................ 163 150
Class B Common Stock, $.005 par value; 5,000,000 shares
authorized; none
and 1,171,252 shares issued and outstanding at
September 30, 1999 and 1998,
respectively............................................ -- 6
Additional paid-in capital................................ 161,630 112,398
Retained earnings......................................... 82,922 38,222
Treasury stock, at cost, 475,845 shares and 845 shares at
September 30, 1999 and 1998, respectively............... (14,250) (12)
Accumulated other comprehensive income.................... (5,296) (4,887)
-------- --------
Total stockholders' equity.............................. 225,169 145,877
-------- --------
Total liabilities and stockholders' equity.............. $329,525 $226,307
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
31
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED SEPTEMBER 30,
---------------------------------
1999 1998 1997
--------- --------- ---------
Revenues:
Software license fees..................................... $210,002 $166,875 $131,138
Maintenance fees.......................................... 63,933 57,077 48,714
Services.................................................. 76,857 70,688 58,234
Hardware, net............................................. 4,002 4,609 6,063
-------- -------- --------
Total revenues.......................................... 354,794 299,249 244,149
-------- -------- --------
Expenses:
Cost of software license fees............................. 44,079 36,294 29,538
Cost of maintenance and services.......................... 72,096 69,886 57,821
Research and development.................................. 34,612 26,260 20,070
Selling and marketing..................................... 70,121 62,013 50,168
General and administrative:
General and administrative costs........................ 58,725 51,873 45,517
Amortization of goodwill and purchased intangibles...... 4,901 1,435 1,008
-------- -------- --------
Total expenses.......................................... 284,534 247,761 204,122
-------- -------- --------
Operating income............................................ 70,260 51,488 40,027
-------- -------- --------
Other income (expense):
Interest income........................................... 2,947 3,204 2,291
Interest expense.......................................... (401) (242) (178)
Transaction related expenses.............................. (653) (2,512) --
Other..................................................... (283) (203) (652)
-------- -------- --------
Total other............................................. 1,610 247 1,461
-------- -------- --------
Income before income taxes.................................. 71,870 51,735 41,488
Provision for income taxes.................................. (27,170) (19,476) (14,325)
-------- -------- --------
Net income.................................................. $ 44,700 $ 32,259 $ 27,163
======== ======== ========
Average shares outstanding
Basic..................................................... 31,667 30,298 29,829
======== ======== ========
Diluted................................................... 32,363 31,193 30,707
======== ======== ========
Unaudited pro forma information (Note 3)
Pro forma net income...................................... $ 44,613 $ 31,432 $ 25,278
======== ======== ========
Pro forma earnings per share data:
Basic................................................... $ 1.41 $ 1.04 $ 0.85
======== ======== ========
Diluted................................................. $ 1.38 $ 1.01 $ 0.82
======== ======== ========
Net income.................................................. $ 44,700 $ 32,259 $ 27,139
Other comprehensive income:
Foreign currency translation adjustments.................. (178) (1,815) (24)
Unrealized investment holding loss........................ (231) (2,812) --
-------- -------- --------
Comprehensive income........................................ $ 44,291 $ 27,632 $ 27,139
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
32
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
ACCUMULATED
CLASS A CLASS B ADDITIONAL OTHER
COMMON COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE
STOCK STOCK CAPITAL EARNINGS STOCK INCOME TOTAL
-------- -------- ---------- -------- -------- -------------- ---------
Balance, September 30, 1996, as previously
reported.................................. $133 $11 $ 96,984 $(16,540) $(12) $(236) $80,340
Adjustment for Media Integration BV pooling
of interests.............................. 4 -- 346 73 -- -- 423
---- --- -------- -------- -------- ------- --------
Balance, September 30, 1996, as restated.... 137 11 97,330 (16,467) (12) (236) 80,763
Adjustment for Open Systems Solutions, Inc.
pooling of interests...................... 1 -- 5 (176) -- -- (170)
Sale of Class A Common Stock pursuant to
Employee Stock Purchase Plan.............. -- -- 778 -- -- -- 778
Conversion of Class B Common Stock to
Class A Common Stock...................... 5 (5) -- -- -- -- --
Exercise of stock options................... 1 -- 1,268 -- -- -- 1,269
Distribution to RVS and Intranet, Inc.
owners.................................... -- -- -- (4,320) -- -- (4,320)
Tax benefit of stock options exercised...... -- -- 2,586 -- -- -- 2,586
Sale of stock options....................... -- -- 3,132 -- -- -- 3,132
Net income.................................. -- -- -- 27,163 -- -- 27,163
Foreign currency translation adjustments.... -- -- -- -- -- (24) (24)
---- --- -------- -------- -------- ------- --------
Balance, September 30, 1997................. 144 6 105,099 6,200 (12) (260) 111,177
Adjustment for immaterial pooled
businesses................................ 4 -- 17 663 -- -- 684
Issuance of Class A Common Stock for
purchase of Coyote Systems, Inc........... 1 -- 1,086 -- -- -- 1,087
Sale of Class A Common Stock pursuant to
Employee Stock Purchase Plan.............. -- -- 971 -- -- -- 971
Exercise of stock options................... 1 -- 2,099 -- -- -- 2,100
Distribution to Intranet, Inc. owners....... -- -- -- (900) -- -- (900)
Tax benefit of stock options exercised...... -- -- 3,126 -- -- -- 3,126
Unrealized investment holding loss.......... -- -- -- -- (2,812) (2,812)
Net income.................................. -- -- -- 32,259 -- -- 32,259
Foreign currency translation adjustments.... -- -- -- -- -- (1,815) (1,815)
---- --- -------- -------- -------- ------- --------
Balance, September 30, 1998................. 150 6 112,398 38,222 (12) (4,887) 145,877
Issuance of Class A Common Stock for
purchase of Insession, Inc................ 4 -- 28,421 -- -- -- 28,425
Issuance of Class A Common Stock for
purchase of SDM International, Inc........ 2 -- 14,485 -- -- -- 14,487
Sale of Class A Common Stock pursuant to
Employee Stock Purchase Plan.............. -- -- 1,339 -- -- -- 1,339
Conversion of Class B Common Stock to
Class A Common Stock...................... 6 (6) -- -- -- -- --
Purchase of 475,000 shares of Class A
Common Stock.............................. -- -- -- -- (14,238) -- (14,238)
Exercise of stock options................... 1 -- 2,216 -- -- -- 2,217
Tax benefit of stock options exercised...... -- -- 2,771 -- -- -- 2,771
Unrealized investment holding loss.......... -- -- -- -- -- (231) (231)
Net income.................................. -- -- -- 44,700 -- -- 44,700
Foreign currency translation adjustments.... -- -- -- -- -- (178) (178)
---- --- -------- -------- -------- ------- --------
Balance, September 30, 1999................. $163 $-- $161,630 $ 82,922 $(14,250) $(5,296) $225,169
==== === ======== ======== ======== ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
33
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net income................................................ $ 44,700 $ 32,259 $ 27,163
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 8,270 6,449 5,475
Amortization............................................ 13,206 5,022 4,404
(Increase) decrease in receivables, net................. 892 (17,949) (17,238)
(Increase) decrease in other current assets............. (2,550) (345) 1,068
(Increase) decrease in long-term accrued receivables.... (24,794) 338 (801)
Increase in other assets................................ (1,261) (1,696) (736)
Increase (decrease) in accounts payable................. (2,424) 2,340 (947)
Increase (decrease) in accrued employee compensation.... (1,332) (390) 325
Increase (decrease) in accrued liabilities.............. (9,616) 6,289 3,561
Increase in income tax liabilities...................... 3,239 839 3,432
Increase in deferred revenue............................ 11,932 2,644 8,459
-------- -------- --------
Net cash provided by operating activities............. 40,262 35,800 34,165
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (7,322) (8,936) (7,702)
Purchases of software and distribution rights............. (6,891) (3,702) (7,368)
Purchase of marketable securities......................... (6,500) (5,000) --
Acquisition of businesses, net of cash acquired........... (8,949) 417 (2,612)
Proceeds from sale of business............................ 10,093 -- --
Additions to investments and notes receivable............. (602) (7,840) (5,036)
Proceeds from notes receivable repayments................. -- 149 4,180
-------- -------- --------
Net cash used in investing activities................. (20,171) (24,912) (18,538)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of Class A Common Stock............ 1,339 971 779
Proceeds from sale and exercise of stock options.......... 2,216 2,062 5,233
Purchase of Class A Common Stock.......................... (14,238) -- --
Distribution to RVS and Intranet owners................... -- (900) (4,320)
Payments of long-term debt................................ (2,792) (1,585) (1,549)
-------- -------- --------
Net cash provided by (used in) financing activities... (13,475) 548 143
-------- -------- --------
Effect of exchange rate fluctuations on cash................ 218 (643) (442)
-------- -------- --------
Net increase in cash and cash equivalents................... 6,834 10,793 15,328
Cash and cash equivalents, beginning of period.............. 63,648 52,855 37,527
-------- -------- --------
Cash and cash equivalents, end of period.................... $ 70,482 $ 63,648 $ 52,855
======== ======== ========
Supplemental cash flow information:
Income taxes paid......................................... $ 24,039 $ 19,653 $ 8,848
Interest paid............................................. $ 397 $ 304 $ 175
The accompanying notes are an integral part of the consolidated financial
statements.
34
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Transaction Systems Architects, Inc. (the Company or TSA) was formed on
November 2, 1993, for the purpose of acquiring all of the outstanding capital
stock of Applied Communications, Inc. (ACI) and Applied Communications Inc
Limited (ACIL). The Company did not have substantive operations prior to the
acquisition of ACI and ACIL.
The Company develops, markets and supports a broad line of software products
and services primarily focused on facilitating electronic payments and
electronic commerce. In addition to its own products, the Company distributes
software developed by third parties. The products are used principally by
financial institutions, retailers and third-party processors, both in domestic
and international markets.
The Company derives a substantial portion of its revenue from licensing its
BASE24 family of software products and providing services and maintenance
related to those products. BASE24 products operate on Compaq Inc.'s NonStop
Himalaya servers. The Company's future results depend, in part, on market
acceptance of Compaq's NonStop Himalaya servers and the financial success of
Compaq, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES IN PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company's software license fees pricing method is transaction sensitive,
whereby products are priced based upon the number of transactions processed by
the customer ("transaction-based pricing"). Under this method, customers license
the products by paying an Initial License Fee (ILF), where the customer pays a
significant portion of the total software license fees at the beginning of the
software license term, and a Monthly License Fee (MLF), where the customer pays
a portion of the software license fees over the software license term. The
payment of the ILF and MLF allows the customer to process a contractually
predetermined maximum volume of transactions per month for a specified period of
time. Once the transaction volume exceeds this maximum volume level, the
customer is required to pay an additional license fee which is in the form of a
Capacity License Fee (CLF), collected at the beginning of the period the
customer contracts for an incremental volume level, and a Capacity Monthly
License Fee (CMLF), collected over the software license term. There is a
separate license fee for each incremental volume level. In addition to
transaction-based pricing, the Company offers a hardware specific pricing method
whereby the product is priced on a per copy basis and tiered to recognize
different performance levels of the processing hardware ("designated equipment
group pricing"). Under designated equipment group pricing, the customers pay a
license fee (in the form of an ILF and
35
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MLF) for each copy of the software the customers have licensed for a specified
period of time. Under both the transaction-based pricing method and the
designated equipment group pricing method, the Company offers a paid up front
(PUF) payment option, whereby the present value of the MLF or CMLF is due at the
beginning of the software license term. The standard software license term under
either pricing method is typically 60 months, but may extend over a shorter or
longer period. Other elements of the software licensing arrangement typically
include postcontract customer support (maintenance) and, occasionally, services.
Beginning in fiscal 1999, the Company adopted American Institute of
Certified Public Accountants Statement of Position 97-2, "Software Revenue
Recognition" (SOP 97-2). SOP 97-2 provides guidance on applying generally
accepted accounting principles for software revenue recognition transactions.
The primary software revenue recognition criteria outlined in SOP 97-2 include:
evidence of an arrangement; delivery; fixed or determinable fees; and
collectibility.
SOP 97-2 specifies that extended payment terms in a software licensing
arrangement may indicate that the software license fees are not deemed to be
fixed or determinable. In addition, if payment of a significant portion of the
software license fees is not due until more than twelve months after delivery,
the software license fees should be PRESUMED not to be fixed or determinable,
and thus should be recognized as the payments become due. However, SOP 97-2
specifies that if the Company has a standard business practice of using extended
payment terms in software licensing arrangements and has a history of
successfully collecting the software license fees under the original terms of
the software licensing arrangement without making concessions, the Company can
overcome the presumption that the software license fees are not fixed or
determinable. If the presumption is overcome, the Company should recognize the
software license fees when all other SOP 97-2 revenue recognition criteria are
met.
The Company has concluded that for certain software arrangements entered
into after October 1, 1998 with extended guaranteed payment terms, the "fixed or
determinable" presumption has been overcome and software license fees should be
recognized upon meeting the SOP 97-2 revenue recognition criteria ("guaranteed
software license fees"). The present value of the guaranteed software license
fees, net of third party royalties, recognized in fiscal 1999 totaled
approximately $60.5 million. The discount rates used to determine the present
value of the guaranteed software license fees, representing the Company's
incremental borrowing rates, ranged from 9.5% to 10.25%. The portion of the
guaranteed software license fees that has been recognized by the Company, but
not yet billed, is reflected in accrued receivables in the accompanying
consolidated balance sheets.
Failing to overcome the "fixed or determinable" presumption would have
resulted in the Company recognizing the ILF and CLF components of the software
license fees related to these certain software arrangements when the software
was delivered (or in the reporting period that the incremental volume level was
effective), and the MLF and CMLF components of the software license fees would
have been recognized ratably over the software license term as they were billed.
Software license fees revenue related to those software arrangements that would
have been recognized in fiscal 1999 had the Company not been able to overcome
the presumption that the software license fees were not fixed or determinable
fees would have been approximately $5.1 million.
The maintenance element of the software arrangements with extended
guaranteed payment terms where the Company has determined that the software
license fees are fixed or determinable have been segregated from the software
license fees and are being recognized over the term of the maintenance
36
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
agreement. Maintenance fees are recognized ratably over the period maintenance
is provided. Services revenues are recognized as the services are performed.
Software license fees for fiscal 1999, 1998 and 1997 consisted of the
following (in thousands):
1999 1998 1997
--------- --------- ---------
Initial license fees (ILF, CLF, PUF)........................ $ 95,002 $123,175 $ 98,738
Monthly license fees (MLF, CMLF)............................ 54,500 43,700 32,400
Guaranteed software license fees............................ 60,500 -- --
-------- -------- --------
$210,002 $166,875 $131,138
======== ======== ========
FACTORING OF ACCRUED RECEIVABLES
In fiscal 1998, the Company initiated a program to sell the rights to future
payment streams under selected software arrangements with extended guaranteed
payment terms to financing institutions on a non-recourse basis. Upon
determination that 1) the Company had satisfied all of the software revenue
recognition criteria and 2) the Company had surrendered control over the future
payment stream to the financing institutions in accordance with Statement of
Financial Accounting Standard (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities", the Company
recognized software license fees equal to the net proceeds from these
arrangements. The software license fees recognized as the result of this program
in fiscal 1998 totaled approximately $9.2 million. During fiscal 1999, the
Company sold the rights to future payment streams under selected software
arrangements with extended guaranteed payment terms and received cash of
approximately $30.9 million, resulting in an equivalent reduction in accrued
receivables.
DEFERRED REVENUE
In certain instances, the Company collects cash from customers, or financing
institutions under receivable factoring arrangements, prior to the delivery of
the software product or performance of contracted maintenance or services.
SOFTWARE
The Company capitalizes certain software development costs when the
resulting products reach technological feasibility and begins amortization of
such costs upon the general availability of the products for licensing.
Amortization of capitalized software development costs begins when the products
are available for general release to customers and is computed separately for
each product as the greater of (a) the ratio of current gross revenue for a
product to the total of current and anticipated gross revenue for the product or
(b) the straight-line method over the remaining estimated economic life of the
product. Currently, estimated economic lives of three years are used on the
calculation of amortization of these capitalized costs. Due to competitive
pressures, it may be possible the anticipated gross revenue or remaining
estimated economic life of the software products will be reduced significantly.
As a result, the carrying amount of the software product may be reduced
accordingly. Software development costs capitalized in fiscal 1999, 1998 and
1997 totaled $3.6 million, $900,000 and $1.6 million, respectively. Amortization
of internally developed software in fiscal 1999, 1998 and 1997 totaled
$1.6 million, $1.5 million and $900,000, respectively.
37
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Purchased software is stated at cost and amortized using the straight-line
method over three years.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives ranging
from three to seven years. Assets under capital leases are amortized over the
shorter of the asset life or the lease term.
INTANGIBLE ASSETS
Intangible assets consist of goodwill arising from acquisitions and are
being amortized using the straight-line method over ten years. As of
September 30, 1999 and 1998, accumulated amortization of the intangible assets
was $10.8 million and $3.6 million, respectively.
TRANSLATION OF FOREIGN CURRENCIES
The Company's non-U.S. subsidiaries use as their functional currency the
local currency of the countries in which they operate. Their assets and
liabilities are translated into U.S. dollars at the exchange rates in effect at
the balance sheet date. Revenues and expenses are translated at the average
rates of exchange prevailing during the period. Translation gains and losses,
net of tax if any, are reflected in the consolidated financial statements as a
component of accumulated other comprehensive income. Transaction gains and
losses related to intercompany accounts are not material and are included in the
determination of net income.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of less than 90 days to be cash equivalents.
FINANCIAL INSTRUMENTS WITH MARKET RISK AND CONCENTRATIONS OF CREDIT RISK
The concentration of credit risk in the Company's receivables with respect
to financial services, retailers, processors and networks is mitigated by the
Company's credit evaluation policy, reasonably short collection terms and
geographical dispersion of sales transactions. The Company generally does not
require collateral or other security to support accounts receivable.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recovered.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations, and follows the disclosure provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." See Note 10 for the required
disclosures under SFAS No. 123.
38
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS
In October 1996, the Company and Open Systems Solutions, Inc. (OSSI)
completed a share exchange transaction which resulted in OSSI becoming a
wholly-owned subsidiary of the Company. Stockholders of OSSI received 210,000
shares of TSA Class A Common Stock in exchange for 100% of OSSI's common stock.
The stock exchange was accounted for as a pooling of interests. OSSI's results
of operations prior to the acquisition were not material.
In May 1997, the Company and Regency Voice Systems, Inc. and related
entities (RVS) completed a stock exchange transaction which resulted in RVS
becoming a wholly-owned subsidiary of the Company. Shareholders of RVS received
1,615,383 shares of Class A Common Stock in exchange for 100% of RVS's shares.
The stock exchange was accounted for as a pooling of interests. Accordingly, the
Company's financial statements were restated in fiscal 1997 to include the
results of RVS for all periods presented.
During fiscal 1998, the Company acquired all of the outstanding securities
of IntraNet, Inc., Edgeware, Inc., Coyote Systems, Inc., Professional
Resources, Inc. and Smart Card Integrators Ltd. in separate transactions. These
companies were principally engaged in the development and sale of electronic
payments software products and services. The aggregate number of shares issued
for all transactions was 1,950,136 shares of Class A Common Stock. All
transactions, except for Coyote Systems, Inc. which was accounted for under the
purchase method of accounting, were accounted for as pooling of interests. The
excess purchase price over the estimated fair value of the net tangible assets
acquired from Coyote Systems, Inc. amounted to $1.1 million and was allocated to
goodwill which is being amortized over ten years. In fiscal 1998, the Company's
financial statements were restated for IntraNet, Inc. (IntraNet) for all periods
presented. The results of operations prior to the acquisitions of the remaining
companies were not material.
During fiscal 1999, the Company acquired all of the outstanding securities
of Media Integration BV (MINT), which is located in the Netherlands. MINT's
products are used to issue and manage multi-funtional applications on smart
cards. Shareholders of MINT received 740,000 shares of Class A Common Stock. The
stock exchange was accounted for as a pooling of interests. The Company's
financial statements have been restated for MINT for all periods presented.
Also during fiscal 1999, the Company acquired all of the outstanding
securities of Insession, Inc., SDM International, Inc. (SDM), US
Processing, Inc. (USPI) and the remaining 49% of its South African distributor
(Applied Communications (Propriety) Limited) in separate transactions. These
companies are principally engaged in the development and sale of electronic
payments software products, services or transaction processing. All transactions
were accounted for under the purchase method of accounting. The aggregate
purchase price for all these transactions was 1,205,000 shares of Class A Common
Stock, with a fair market value at the time of the purchases of approximately
$43 million, $19.6 million in cash and the forgiveness of $5.6 million of debt
owed to TSA. The excess purchase price over the estimated fair value of the net
tangible assets acquired amounted to $84.5 million, of which $66.3 million was
allocated to goodwill which is being amortized over ten years and $18.2 was
allocated to software which is being amortized over three years. On
September 30, 1999, the Company sold USPI for $10.1 million in cash which
approximated its carrying value.
No pro forma financial statements for the periods prior to the acquisitions
have been provided due to the amounts being immaterial.
39
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
Combined and separate results of the Company and MINT during the periods
preceding the merger are listed below (in thousands).
THREE MONTHS YEAR ENDED
ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------
1998 1998 1997
------------ --------- ---------
(UNAUDITED)
Total revenues:
Company................................ $84,844 $289,761 $238,533
MINT................................... 1,226 9,488 5,616
------- -------- --------
$86,070 $299,249 $244,149
======= ======== ========
Net income:
Company................................ $ 9,227 $ 31,759 $ 25,755
MINT................................... 230 500 1,408
------- -------- --------
$ 9,457 $ 32,259 $ 27,163
======= ======== ========
Prior to their acquisitions, RVS and IntraNet were taxed primarily as a
partnership and a Subchapter S corporation, respectively. In addition, prior to
its acquisition, MINT's earnings were not subject to income taxes. The unaudited
pro forma net income and earnings per share in the accompaning consolidated
statements of income reflects a pro forma tax provision for income taxes on the
results of operations of RVS, IntraNet and MINT for the periods prior to their
acquisition, as listed below (in thousands):
Unaudited pro forma information:
Net income -- historical............... $ 9,457 $ 32,259 $ 27,163
RVS tax adjustment -- pro forma........ -- -- (507)
IntraNet tax adjustment -- pro forma... -- (633) (843)
MINT tax adjustment -- pro forma....... (87) (194) (535)
------- -------- --------
Net income -- pro forma................ $ 9,370 $ 31,432 $ 25,278
======= ======== ========
4. MARKETABLE SECURITIES
In April 1998, the Company entered into a transaction with Nestor, Inc.
(Nestor), whereby the Company acquired 2.5 million shares of Nestor's Common
Stock for $5.0 million. In addition, the Company received warrants to purchase
an additional 2.5 million shares at an exercise price of $3 per share. Nestor is
a provider of neural-network solutions for financial, internet and
transportation industries. The Company distributes Nestor's PRISM intelligent
fraud detection product.
In June 1999, the Company entered into a transaction with Digital Courier
Technologies, Inc. (DCTI), whereby the Company acquired 1.25 million shares of
DCTI's Common Stock for $6.5 million. In addition, the Company received warrants
to purchase an additional 1.0 million shares at an exercise price of $5.20 per
share. DCTI supplies financial institutions, businesses and major web portals
with e-commerce, payments processing and content delivery software.
The Company has accounted for the investment in Nestor and DCTI Common Stock
in accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt
40
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. MARKETABLE SECURITIES (CONTINUED)
and Equity Securities". The investments in marketable securities have been
classified as available-for-sale and recorded at fair market value, which is
estimated based on quoted market prices. Net unrealized holding gains and
losses, net of the related tax effect, are reflected in the consolidated
financial statements as a component of accumulated other comprehensive income.
Gains and losses are determined by specific identification.
5. COMPREHENSIVE INCOME
In fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income and its components in a financial statement for the period in which they
are recognized. The Company's components of accumulated other comprehensive
income were as follows (in thousands):
FOREIGN UNREALIZED ACCUMULATED
CURRENCY INVESTMENT OTHER
TRANSLATION HOLDING COMPREHENSIVE
ADJUSTMENTS LOSS INCOME
----------- ---------- -------------
Balance, September 30, 1996........... $ (236) $ -- $ (236)
Fiscal 1997 activity.................. (24) -- (24)
------- ------- -------
Balance, September 30, 1997........... (260) -- (260)
Fiscal 1998 activity.................. (1,815) (2,812) (4,627)
------- ------- -------
Balance, September 30, 1998........... (2,075) (2,812) (4,887)
Fiscal 1999 activity.................. (178) (231) (409)
------- ------- -------
Balance, September 30, 1999........... $(2,253) $(3,043) $(5,296)
======= ======= =======
Since the Company has established an asset valuation allowance against its
net deferred tax assets, the components of accumulated other comprehensive
income have not been tax affected.
6. EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of
shares outstanding during the period. Diluted earnings per share is computed on
the basis of the weighted average number of common shares outstanding plus the
dilutive effect of outstanding stock options using the "treasury stock" method.
41
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EARNINGS PER SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted earnings
per share:
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997
- ------------------------------------- -------- -------- --------
Net income..................................... $44,700 $32,259 $27,163
======= ======= =======
Unaudited net income -- pro forma.............. $44,613 $31,432 $25,278
======= ======= =======
Weighted average shares outstanding............ 31,667 30,298 29,829
Dilutive effect of stock options............... 696 895 878
------- ------- -------
Diluted shares outstanding..................... 32,363 31,193 30,707
======= ======= =======
Basic earnings per share -- pro forma.......... $ 1.41 $ 1.04 $ 0.85
======= ======= =======
Diluted earnings per share -- pro forma........ $ 1.38 $ 1.01 $ 0.82
======= ======= =======
For fiscal years 1999, 1998 and 1997, weighted average shares from stock
options of 96,025, 25,833 and 17,872, respectively have been excluded from the
computation of diluted earnings per share because the exercise price of the
stock options were greater than the average market price of the common shares.
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
Computer equipment..................................... $ 38,321 $ 32,496
Office furniture and fixtures.......................... 8,439 7,196
Leasehold improvements................................. 6,058 4,050
Vehicles............................................... 639 779
-------- --------
53,457 44,521
Less accumulated depreciation and amortization......... (32,703) (23,520)
-------- --------
Property and equipment, net............................ $ 20,754 $ 21,001
======== ========
8. SOFTWARE
Software consists of the following (in thousands):
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
Internally developed software.......................... $ 10,905 $ 7,328
Purchased software..................................... 39,663 16,960
-------- --------
50,568 24,288
Less accumulated amortization.......................... (24,733) (17,116)
-------- --------
Software, net.......................................... $ 25,835 $ 7,172
======== ========
42
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space and equipment under operating leases which
run through February 2011. Aggregate minimum lease payments under these
agreements for the years ending September 30 are as follows (in thousands):
2000........................................................ $ 9,029
2001........................................................ 7,977
2002........................................................ 6,336
2003........................................................ 5,604
2004........................................................ 4,641
Thereafter.................................................. 13,638
-------
Total....................................................... $47,225
=======
Total rent expense for the fiscal years ended September 30, 1999, 1998 and
1997 was, $12,556,000, $9,738,000 and $8,739,000, respectively.
LEGAL PROCEEDINGS
On June 14, 1999, HNC Software Inc. filed a complaint against the Company
and its wholly-owned subsidiary, ACI Worldwide, Inc. in the United States
District Court for the Southern District of California, San Diego Division. The
complaint alleges, among other things, patent infringement, unfair competition,
false advertising, and trade libel relating to ACI Worldwide's distribution of
PRISM, a fraud detection software product. ACI distributes PRISM pursuant to a
license agreement with Nestor, Inc., a company in which TSA is a minority
stockholder. The complaint seeks injunctive relief and unspecified damages
including treble damages, costs, attorneys' fees and various other forms of
relief. On November 25, 1998, Nestor had itself filed a complaint in the United
States District Court for the District of Rhode Island against HNC Software
alleging, among other things, infringement of a patent relating to PRISM and
antitrust violations. HNC Software has filed a counterclaim in the Rhode Island
lawsuit alleging infringement by Nestor of HNC Software's patents which claims
are essentially the same as those filed by HNC Software against the Company and
ACI Worldwide in the San Diego lawsuit. Neither the Company nor ACI Worldwide
was a party to the Rhode Island lawsuit. However, because the same patents and
the same products are at issue in both lawsuits, the Company and ACI Worldwide
are seeking to have the San Diego lawsuit transferred to Rhode Island and
consolidated with the proceedings there. Whatever the final procedural posture
of the lawsuit, the Company intends to vigorously defend against HNC Software's
allegations.
In addition, from time to time, the Company is involved in litigation
relating to claims arising out of its operations in the normal course of
business. The Company is not currently a party to any legal proceedings the
adverse outcome of which, individually or in the aggregate, would have a
material adverse effect on the Company's financial condition or results of
operations.
43
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK-BASED COMPENSATION PLANS
STOCK INCENTIVE PLANS
The Company has a 1994 Stock Option Plan whereby 1,910,976 shares of the
Company's Class B Common Stock have been reserved for issuance to eligible
employees of the Company and its subsidiaries. Shares issuable upon exercise of
these options will be Class A Common Stock. The stock options are granted at a
price set by the Board of Directors provided that the minimum price shall be
$2.50 per share for 955,488 shares and $5 per share for 955,488 shares. The term
of the outstanding options is ten years. The stock options vest ratably over a
period of four years.
The Company has a 1996 and 1999 Stock Option Plan whereby a total of
2,008,000 shares of the Company's Class A Common Stock have been reserved for
issuance to eligible employees of the Company and its subsidiaries and
non-employee members of the Board of Directors. The stock options are granted at
a price not less than fair market value of the Company's Class A Common Stock at
the time of the grant. The term of the outstanding options is ten years. The
options vest annually over a period of four years.
The Company has a 1997 Management Stock Option Plan whereby 1,050,000 shares
of the Company's Class A Common Stock have been reserved for issuance to
eligible management employees of the Company and its subsidiaries. The stock
options are granted at a price not less than fair market value of the Company's
Class A Common Stock at the time of the grant and require the participant to pay
$3 for each share granted. The term of the outstanding options is ten years. The
options vest annually over a period of four years.
A summary of the stock options issued under the Stock Incentive Plans
previously described and changes during the years ending September 30 are as
follows:
1999 1998 1997
-------------------------- -------------------------- --------------------------
SHARES WEIGHTED SHARES WEIGHTED SHARES WEIGHTED
UNDER AVERAGE UNDER AVERAGE UNDER AVERAGE
OPTION EXERCISE PRICE OPTION EXERCISE PRICE OPTION EXERCISE PRICE
--------- -------------- --------- -------------- --------- --------------
Outstanding on
October 1,................ 2,811,507 2,794,437 $16.82 1,731,439 $ 7.18
Granted..................... 894,890 $30.57 387,650 $34.30 1,387,567 $26.27
Exercised................... 285,445 $ 7.53 325,371 $ 6.35 283,862 $ 4.57
Cancellations............... 67,978 $31.76 45,209 $25.20 40,707 $13.83
--------- --------- ---------
Outstanding on
September 30.............. 3,352,974 $23.91 2,811,507 $20.30 2,794,437 $16.82
========= ========= =========
Options exercisable at end
of year................... 1,497,100 $17.09 1,275,778 $11.19 909,429 $ 5.04
Shares available on
September 30 for options
that may be granted....... 347,375 174,287 516,728
Weighted-average grant date
fair value of options
granted during the year --
exercise price equals
stock market price at
grant..................... $14.10 $17.74 $13.01
44
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK-BASED COMPENSATION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
at September 30, 1999.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE EXERCISE NUMBER AVERAGE EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------ ----------- ----------- ---------------- ----------- ----------------
$2.50..................... 244,273 4.36 $ 2.50 244,273 $ 2.50
$5.00..................... 383,455 5.09 5.00 383,330 5.00
$7.50 to $9.75............ 10,397 5.43 7.93 10,397 7.93
$12.00 to $16.50.......... 16,917 6.18 14.19 15,833 14.11
$20.25 to $25.875......... 1,157,434 7.33 24.40 594,725 24.43
$26.4375 to $31.625....... 901,228 9.39 30.23 41,546 29.70
$32.0625 to $35.75........ 529,595 8.31 33.27 186,743 33.28
$36.00 to $45.00.......... 109,675 8.58 38.28 20,253 38.24
--------- ---- ------ --------- ------
3,352,974 7.60 $23.91 1,497,100 $17.09
========= ==== ====== ========= ======
EMPLOYEE STOCK PURCHASE PLAN
The Company has a 1996 and 1999 Employee Stock Purchase Plan whereby a total
of 1,150,000 shares of the Company's Class A Common Stock have been reserved for
sale to eligible employees of the Company and its subsidiaries. Employees may
designate up to the lesser of $5,000 or 10% of their annual compensation for the
purchase of stock under these plans. The price for shares purchased under the
plan is 85% of market value the lower of the first or last day of the purchase
period. Purchases are made at the end of each fiscal quarter. Shares issued
under these plans for the years ended September 30, 1999, 1998 and 1997 totaled
48,148, 30,881 and 27,748, respectively.
STOCK-BASED COMPENSATION PLANS
The Company adopted the disclosure provisions of SFAS No. 123. No
compensation cost has been recognized for the stock incentive plans.
Had compensation expense for the Company's stock-based compensation plans
been based on the fair value of the stock options at the grant dates for awards
under those plans consistent with the fair value based method of SFAS No. 123,
the Company's net income and net income per common and
45
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK-BASED COMPENSATION PLANS (CONTINUED)
equivalent share for fiscal 1999, 1998 and 1997 would approximate the pro forma
amounts as follows (in thousands, except per share amounts):
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
Net income--historical:
As reported.................................. $44,700 $32,259 $27,163
Pro forma.................................... 42,820 30,233 25,850
Unaudited net income--pro forma:
As reported.................................. 44,613 31,432 25,278
Pro forma.................................... 42,733 29,406 23,965
Pro forma net income per share--basic.......... $ 1.35 $ 0.97 $ 0.80
Pro forma net income per share--diluted........ $ 1.32 $ 0.94 $ 0.78
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1999 1998 1997
-------- -------- --------
Expected life......................................... 5.8 5.8 5.8
Interest rate......................................... 5.7% 5.5% 6.3%
Volatility............................................ 38% 39% 38%
Dividend yield........................................ -- -- --
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 applies only to options granted since
fiscal year 1996, and additional awards in future years are anticipated.
11. EMPLOYEE BENEFIT PLANS
TSA 401(k) RETIREMENT PLAN
The 401(k) Retirement Plan is a defined contribution plan covering all
domestic employees of TSA. Participants may contribute up to 15% of their annual
wages. Beginning January 1, 1998, TSA began matching 160% of participant
contributions up to a maximum of 2.5% of compensation, not to exceed $2,500.
Prior to January 1, 1998, TSA matched 100% of participants contributions up to a
maximum of 2.5%. TSA's contributions charged to expense during the years ended
September 30, 1999, 1998 and 1997 were $2,318,000, $1,197,000 and $489,000,
respectively.
ACI PROFIT SHARING PLAN AND TRUST
The Company had a Profit Sharing Plan and Trust which was a non-contributory
profit sharing plan covering all employees of ACI provided they were at least 21
years of age and had completed one year of service. Effective October 1, 1997
the ACI Profit Sharing Plan and Trust was merged into the 401(k) Retirement
Plan. The plan provided for ACI to contribute a discretionary amount as
determined annually by the Company's President and Chief Financial Officer.
ACI's contributions charged to expense during the fiscal year ended
September 30, 1997 was $480,000.
46
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
TSA DEFERRED COMPENSATION PLAN
Effective January 1, 1999, the Company adopted a Deferred Compensation Plan
for a select group of management or highly compensated employees who elect to
participate in the plan. No company contributions are made to the plan and
participants are 100% vested in their contributions.
ACIL PENSION PLAN
ACIL has a defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and the employees'
compensation during employment. Contributions to the plan are determined by an
independent actuary on the basis of periodic valuations using the projected unit
cost method. Participants contribute 5% of their pensionable salaries and ACIL
contributes at the rate of 10% of pensionable salaries. Net periodic pension
expense includes the following components (in thousands):
YEAR ENDED SEPTEMBER 30,
--------------------------------
1999 1998 1997
-------- ---------- --------
Service cost.................................. $2,301 $ 1,666 $ 1,307
Interest cost on projected benefit
obligation.................................. 1,156 1,192 830
Return on plan assets:
Actual and gain deferred.................... (1,657) (1,501) (1,055)
Amortization of unrecognized gain........... 136 (85) 3
------ ---------- -------
Total periodic pension expense................ $1,936 $ 1,272 $ 1,085
====== ========== =======
The following table summarizes the funded status of the plan and the related
amounts recognized in the Company's consolidated balance sheet (in thousands):
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
Projected benefit obligation............................. $23,339 $18,439
Plan assets at fair value, primarily investments in
marketable equity securities of United Kingdom
companies.............................................. 22,776 17,467
------- -------
Plan assets less than projected benefit obligation....... (563) (972)
Unrecognized gain........................................ (1,682) (826)
------- -------
Accrued pension cost..................................... $(2,245) $(1,798)
======= =======
The most significant actuarial assumptions used in determining the pension
expense and funded status of the plan are as follows:
1999 1998 1997
-------- -------- --------
Discount rate for valuing liabilities.................. 6.25% 6.0% 8.0%
Expected long-term rate of return on assets............ 9.25% 7.0% 9.0%
Rate of increase in future compensation levels......... 3.75% 3.5% 6.0%
47
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. TREASURY STOCK
In fiscal 1999, the Company acquired 475,000 shares of its Class A Common
Stock at an average cost of $29.98 per share in connection with a stock
repurchase program announced in May 1999. The program authorized the Company to
purchase up to 2,000,000 common shares from time to time through February 2000
for cash at market prices in open market, negotiated or block transactions. The
purpose of the stock repurchase program is to replace the shares issued in the
SDM acquisition completed in July 1999, and to fund a reserve of shares for
future employee stock options grants, acquisitions or other corporate purposes.
13. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" in fiscal 1999. The Company has a single
operating segment encompassing the development, marketing, installation and
technical support of a broad line of software products and services primarily
focused on facilitating electronic payments and electronic commerce. The
Company's chief operating decision makers review financial information,
presented on a consolidated basis, accompanied by disaggregated information
about revenue and contribution margin by product, as organized into four
line-of-business groups, and revenue and contribution margin by geographic area.
The Company's four line-of-business groups are Consumer Banking, Corporate
Banking, Retail Solutions and System Solutions. Products are developed by the
line-of-business groups and are sold and supported through three distribution
networks covering the geographic areas of the Americas, Europe/Middle
East/Africa (EMEA) and Asia/Pacific. The Company allocates resources to and
evaluates performance of its lines-of-business groups and geographic areas based
upon revenue and contribution margin.
48
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SEGMENT INFORMATION (CONTINUED)
The following is revenues and contribution margin for the Company's four
lines-of-business groups for fiscal years 1999, 1998 and 1997:
1999 1998 1997
--------- --------- ---------
Revenues:
Consumer Banking.......................................... $256,430 $215,947 $175,014
Corporate Banking......................................... 30,061 30,825 31,063
Retail Solutions.......................................... 22,579 23,023 16,476
Systems Solutions......................................... 45,724 29,454 21,596
-------- -------- --------
$354,794 $299,249 $244,149
======== ======== ========
Contribution margin from lines-of-business groups:
Consumer Banking.......................................... $219,803 $186,364
Corporate Banking......................................... 7,807 7,595
Retail Solutions.......................................... 5,763 10,108
Systems Solutions......................................... 40,552 25,966
-------- --------
$273,925 $230,033
======== ========
Profit reconcilliation:
Contribution margin from lines-of-business groups......... $273,925 $230,033
Direct costs for geographic areas:
Americas................................................ (86,725) (64,860)
EMEA.................................................... (64,729) (59,474)
Asia/Pacific............................................ (19,257) (20,724)
Corporate expenses........................................ (32,944) (33,487)
-------- --------
Operating Income.......................................... $ 70,260 $ 51,488
======== ========
The Company does not track assets by line-of-business group. Direct costs
for lines-of-business groups for fiscal 1997 are not available.
49
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SEGMENT INFORMATION (CONTINUED)
The following is revenue, contribution margin and long-lived assets for the
Company's three geographic areas for fiscal years 1999, 1998 and 1997:
1999 1998 1997
--------- --------- ---------
Revenues:
United States............................................. $167,236 $134,506 $112,455
Americas -- other......................................... 43,070 39,564 33,370
-------- -------- --------
Total Americas.......................................... 210,306 174,070 145,825
EMEA...................................................... 113,096 96,979 70,408
Asia/Pacific.............................................. 31,392 28,200 27,916
-------- -------- --------
$354,794 $299,249 $244,149
======== ======== ========
Contribution margin from geographic areas:
Total Americas............................................ $123,581 $109,210 $ 91,061
EMEA...................................................... 48,367 37,505 6,722
Asia/Pacific.............................................. 12,125 7,476 5,448
-------- -------- --------
$184,073 $154,191 $103,231
======== ======== ========
Profit Reconcilliation:
Contribution margin for geographic areas.................. $184,073 $154,191
Direct Costs for lines-of-business groups:
Consumer Banking........................................ (36,627) (29,583)
Corporate Banking....................................... (22,254) (23,230)
Systems Solutions....................................... (16,816) (12,915)
Retail Solutions........................................ (5,172) (3,488)
Corporate expenses........................................ (32,944) (33,487)
-------- --------
Operating Income.......................................... $ 70,260 $ 51,488
======== ========
Long-lived assets:
Americas (primarily United States)........................ $103,425 $ 47,044 $ 35,072
EMEA...................................................... 11,520 10,530 9,937
Asia/Pacific.............................................. 1,620 1,255 1,408
-------- -------- --------
$116,555 $ 58,829 $ 46,417
======== ======== ========
No single customer accounted for more than 10% of the Company's consolidated
revenue during fiscal years 1999, 1998 and 1997.
14. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 is an asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events which have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, SFAS No. 109 generally considers all expected future events other
than enactments or changes in the tax law or rates.
50
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following (in thousands):
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- --------
Federal.............. $18,360 $(2,413) $15,947 $13,433 $(1,212) $12,221 $ 7,022 $1,355 $ 8,377
State................ 3,171 (341) 2,830 2,252 (257) 1,995 1,905 240 2,145
Foreign.............. 8,393 -- 8,393 5,260 -- 5,260 3,803 -- 3,803
------- ------- ------- ------- ------- ------- ------- ------ -------
Total................ $29,924 $(2,754) $27,170 $20,945 $(1,469) $19,476 $12,730 $1,595 $14,325
======= ======= ======= ======= ======= ======= ======= ====== =======
The difference between the income tax provision computed at the statutory
federal income tax rate and the financial statement provision for income taxes
is summarized as follows:
FOR THE YEAR ENDED
SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
Tax expense at federal rate of 35%............. $25,155 $17,932 $14,028
Losses with no current tax benefit............. 240 22 1,503
Effective state income tax..................... 2,112 1,508 1,394
Foreign tax rate differential.................. 1,097 385 1,160
RVS nontaxable income.......................... -- -- (663)
IntraNet nontaxable income..................... -- (564) (766)
Recognition of deferred income tax assets
previously reserved against.................. (3,235) (830) (2,979)
Amortization of intangibles.................... 1,269 -- --
Transaction related expenses................... 239 461 --
Other.......................................... 293 562 648
------- ------- -------
$27,170 $19,476 $14,325
======= ======= =======
51
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES (CONTINUED)
The deferred tax assets and liabilities result from differences in the
timing of the recognition of certain income and expense items for tax and
financial accounting purposes. The sources of these differences are as follows
(in thousands):
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
Deferred assets:
Depreciation......................................... $ 138 $ 167
Amortization......................................... 3,807 4,822
Foreign taxes........................................ 2,082 1,122
Acquired net operating loss carryforward of USSI..... 1,575 1,167
Net operating loss carryforward...................... 3,004 1,058
Acquired basis in partnership assets................. 5,518 6,016
Unrealized investment holding loss................... 1,184 1,094
Other................................................ 1,376 1,140
-------- --------
$ 18,684 16,586
-------- --------
Deferred tax asset valuation allowance................. (11,216) (11,665)
-------- --------
Deferred liabilities:
Acquired Software.................................... (5,953) --
Other................................................ (254) (288)
-------- --------
(6,207) (288)
-------- --------
$ 1,261 $ 4,633
======== ========
At September 30, 1999 management evaluated its 1999 and 1998 operating
results as well as its future tax projections and concluded that it was more
likely than not that certain of the deferred tax assets would be realized.
Accordingly, the Company has recognized a deferred tax asset of $7.5 million as
of September 30, 1999.
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the Proxy Statement for the Company's 2000 Annual Meeting of
Stockholders, which information is incorporated herein by reference. Certain
information with respect to persons who are or may be deemed to be executive
officers of the registrant is set forth under the caption "Executive Officers of
the Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
See the Proxy Statement for the Company's 2000 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the Proxy Statement for the Company's 2000 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the Proxy Statement for the Company's 2000 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
(1) FINANCIAL STATEMENTS
The financial statements filed as part of this report are listed on the
Index to Financial Statements on page 24.
(2) FINANCIAL STATEMENT SCHEDULES:
Index to Consolidated Financial Statement Schedules
PAGE
--------
Report of Independent Public Accountants.................... 57
Schedule II -- Valuation and Qualifying Accounts............ 58
All other Schedules have been omitted because the required information is
shown in the consolidated financial statements or notes thereto or they are not
applicable.
(3) REPORTS ON FORM 8-K
None.
53
(4) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
2.01(2) Senior Convertible Preferred Stock and Warrant Purchase
Agreement among ACI Holding, Inc. and the Several Named
Purchasers Named therein, dated as of December 31, 1993
2.02(2) Stock Purchase Agreement between and among Tandem Computers
Incorporated, Tandem Computers Limited, Applied
Communications, Inc., Applied Communications Inc Limited
and ACI Holding, Inc., dated November 8, 1993, and
amendments thereto
2.03(2) Stock Purchase Agreement between and among U S Software
Holding, Inc., Michael J. Scheier, Trustee, Michael J.
Scheier and ACI Holding, Inc., dated December 13, 1993,
and amendments thereto
2.04(2) Stock and Warrant Holders Agreement, dated as of
December 30, 1993
2.05(2) Credit Agreement among ACI Transub, Inc., ACI
Holding, Inc., certain lenders and Continental Bank N.A.,
as Agent, dated December 31, 1993, including Amendment No.
1 to Credit Agreement and Amendment No. 2 to Credit
Agreement and Consent
2.06(2) Letter Agreement among ACI Holding, Inc., Alex. Brown and
Sons, Incorporated and Kirkpatrick Pettis Smith
Polian, Inc., and amendment thereto
2.07(2) ACI Management Group Investor Subscription Agreement, dated
as of December 30, 1993
2.08(3) Asset Purchase Agreement Between 1176484 Ontario Inc. and
TXN Solution Integrations dated June 3, 1996
2.09(4) Stock Exchange Agreement by and among the Company, Grapevine
Systems, Inc. and certain principal shareholders of
Grapevine Systems, Inc., dated as of July 15, 1996
2.10(9) Stock Exchange Agreement dated April 17, 1997 by and among
the Company and Regency Voice Systems, Inc. and related
entities.
2.11(10) Agreement and Plan of Merger dated April 27, 1998 among the
Company, I.N. Acquisition Corp. and IntraNet
3.01(2) Amended and Restated Certificate of Incorporation of the
Company, and amendments thereto
3.02 Amended and Restated Bylaws of the Company, and First
Amendment thereto
4.01(2) Form of Common Stock Certificate
10.01(2) ACI Holding, Inc. 1994 Stock Option Plan and UK Sub-Plan
10.02(2) ACI Holding, Inc. Employees Stock Purchase Plan
10.03(2) Applied Communications, Inc. First Restated Profit Sharing
Plan and Trust
10.04(2) Applied Communications, Inc. Profit Sharing/401(k) Plan and
Amendment No. 1 thereto
10.05(2) U.S. Software, Inc. Profit Sharing Plan and Trust
10.06(7) Consulting Agreement between Transaction Systems
Architects, Inc. and Michael J. Scheier and U.S. Software
Holding dated December 31, 1995
10.07(12) Transaction Systems Architects, Inc. 1996 Stock Option Plan
(10.08-10.12 intentionally omitted.)
10.13(2) Voting Agreement among ACI Holding, Inc. and certain
investors, dated as of December 30, 1993
10.14(2) Registration Rights Agreement between ACI Holding, Inc. and
certain stockholders, dated December 30, 1993
54
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
(10.15-10.16 intentionally omitted.)
10.17(2) Lease respecting facility at 330 South 108th Avenue, Omaha,
Nebraska
10.18(2) Lease respecting facility at 218 South 108th Avenue,
Suite 3, Omaha, Nebraska
10.19(2) Lease respecting facility at 230 South 108th Avenue,
Suite 3, Omaha, Nebraska
10.20(2) Lease respecting facility at 230 South 108th Avenue (North
half), Omaha, Nebraska
10.21(5) Lease respecting facility at 206 South 108th Avenue, Omaha,
Nebraska
10.22(2) Lease respecting facility at 2200 Abbott Drive, Carter Lake,
Iowa
10.23(5) Lease respecting facility at 182 Clemenceau Avenue,
Singapore
10.24(8) Transaction Systems Architects, Inc. 1997 Management Stock
Option Plan
10.25(1) Leases respecting facility at 55 and 59 Clarendon Road,
Watford, United Kingdom
10.26(6) Revolving Conditional Line of Credit Agreement with Norwest
Bank Nebraska, N.A.
10.27(2) Software House Agreement, as amended, between Tandem
Computers Incorporated and Applied Communications, Inc.
10.28(1) Lease respecting facility at 236 South 108th Avenue,
Suite 2, Omaha, Nebraska
10.29(3) Second Amendment to Software House Agreement between Tandem
Computers Incorporated and Applied Communications, Inc.
10.30(11) Transaction Systems Architects, Inc. Deferred Compensation
Plan
10.31(11) Transaction Systems Architects, Inc. Deferred Compensation
Plan Trust Agreement
10.32 Severance Compensation Agreements between Transaction
Systems Architects, Inc. and certain employees
21.01(4) Subsidiaries of the Company
23.01 Consent of Independent Public Accountants
27.00 Financial Data Schedule
99.01 Safe Harbor for Forward-Looking Statements under the Private
Securities Litigation Reform Act of 1995
- ------------------------
(1) Incorporated by reference to the exhibit of the same number to the
Registration Statement No. 33-94338 on Form S-1.
(2) Incorporated by reference to the exhibit of the same number to the
Registrant's Registration Statement No. 33-88292 on Form S-1.
(3) Incorporated by reference to the exhibit of the same number to the
Registrant's Current Report on Form 8-K dated June 3, 1996.
(4) Incorporated by reference to the exhibit of the same number to the
Registrant's Registration Statement No. 333-09811 on Form S-4.
(5) Incorporated by reference to the exhibit of the same number to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995.
(6) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30,
1996.
(7) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended
December 31, 1995.
(8) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended March 31,
1997.
(9) Incorporated by reference to the exhibit of the same number to the
Registrants Current Report on Form 8 K dated May 13, 1997.
(10) Incorporated by reference to the exhibit of the same number to the
Registrant's Current Report on Form 8-K dated August 7, 1998.
(11) Incorporated by reference to exhibits 4.1 and 4.2 to the Registration
Statement No. 333-67987 on Form S-8.
(12) Incorporated by reference to the exhibit with the same number to the
Registrant's Annual Report on Form 10-K for the fiscal year ended September
30, 1996.
55
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on December 23, 1999.
TRANSACTION SYSTEMS ARCHITECTS, INC.
By /s/ WILLIAM E. FISHER
-----------------------------------------
William E. Fisher
DIRECTOR AND CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on December 23, 1999:
/s/ DAVID C. RUSSELL
------------------------------------------- Director and President
David C. Russell (Principal Executive Officer)
/s/ WILLIAM E. FISHER
------------------------------------------- Director and Chairman of the Board
William E. Fisher
/s/ GREGORY J. DUMAN
------------------------------------------- Chief Financial Officer (Principal Financial
Gregory J. Duman Officer)
/s/ DWIGHT HANSON
------------------------------------------- Vice President (Principal Accounting Officer)
Dwight Hanson
/s/ PROMOD HAQUE
------------------------------------------- Director
Promod Haque
/s/ CHARLES E. NOELL, III
------------------------------------------- Director
Charles E. Noell, III
/s/ JIM D. KEVER
------------------------------------------- Director
Jim D. Kever
/s/ LARRY G. FENDLEY
------------------------------------------- Director
Larry G. Fendley
56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE OF
TRANSACTION SYSTEMS ARCHITECTS, INC.
To the Board of Directors of
Transaction Systems Architects, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Transaction Systems Architects, Inc.
and Subsidiaries included in this Form 10-K and have issued our report thereon
dated October 28, 1999. Our audit was made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The schedule of Transaction
Systems Architects, Inc. listed in Item 14 of Part IV of this Form 10-K is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Omaha, Nebraska,
October 28, 1999
57
SCHEDULE II
TRANSACTION SYSTEMS ARCHITECTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
Balance, beginning of period................................ $5,148 $ 2,298 $1,168
Additions charged to expense................................ 3,758 4,746 1,512
Reductions.................................................. (1,655) (1,896) (382)
------ ------- ------
Balance, end of period...................................... $7,251 $ 5,148 $2,298
====== ======= ======
58
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
2.01(2) Senior Convertible Preferred Stock and Warrant Purchase
Agreement among ACI Holding, Inc. and the Several Named
Purchasers Named therein, dated as of December 31, 1993
2.02(2) Stock Purchase Agreement between and among Tandem Computers
Incorporated, Tandem Computers Limited, Applied
Communications, Inc., Applied Communications Inc Limited
and ACI Holding, Inc., dated November 8, 1993, and
amendments thereto
2.03(2) Stock Purchase Agreement between and among U S Software
Holding, Inc., Michael J. Scheier, Trustee, Michael J.
Scheier and ACI Holding, Inc., dated December 13, 1993,
and amendments thereto
2.04(2) Stock and Warrant Holders Agreement, dated as of
December 30, 1993
2.05(2) Credit Agreement among ACI Transub, Inc., ACI
Holding, Inc., certain lenders and Continental Bank N.A.,
as Agent, dated December 31, 1993, including Amendment No.
1 to Credit Agreement and Amendment No. 2 to Credit
Agreement and Consent
2.06(2) Letter Agreement among ACI Holding, Inc., Alex. Brown and
Sons, Incorporated and Kirkpatrick Pettis Smith
Polian, Inc., and amendment thereto
2.07(2) ACI Management Group Investor Subscription Agreement, dated
as of December 30, 1993
2.08(3) Asset Purchase Agreement Between 1176484 Ontario Inc. and
TXN Solution Integrations dated June 3, 1996
2.09(4) Stock Exchange Agreement by and among the Company, Grapevine
Systems, Inc. and certain principal shareholders of
Grapevine Systems, Inc., dated as of July 15, 1996
2.10(9) Stock Exchange Agreement dated April 17, 1997 by and among
the Company and Regency Voice Systems, Inc. and related
entities.
2.11(10) Agreement and Plan of Merger dated April 27, 1998 among the
Company, I.N. Acquisition Corp. and IntraNet
3.01(2) Amended and Restated Certificate of Incorporation of the
Company, and amendments thereto
3.02 Amended and Restated Bylaws of the Company, and First
Amendment thereto
4.01(2) Form of Common Stock Certificate
10.01(2) ACI Holding, Inc. 1994 Stock Option Plan and UK Sub-Plan
10.02(2) ACI Holding, Inc. Employees Stock Purchase Plan
10.03(2) Applied Communications, Inc. First Restated Profit Sharing
Plan and Trust
10.04(2) Applied Communications, Inc. Profit Sharing/401(k) Plan and
Amendment No. 1 thereto
10.05(2) U.S. Software, Inc. Profit Sharing Plan and Trust
10.06(7) Consulting Agreement between Transaction Systems
Architects, Inc. and Michael J. Scheier and U.S. Software
Holding dated December 31, 1995
10.07(12) Transaction Systems Architects, Inc. 1996 Stock Option Plan
(10.08-10.12 intentionally omitted.)
10.13(2) Voting Agreement among ACI Holding, Inc. and certain
investors, dated as of December 30, 1993
59
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
10.14(2) Registration Rights Agreement between ACI Holding, Inc. and
certain stockholders, dated December 30, 1993
(10.15-10.16 intentionally omitted.)
10.17(2) Lease respecting facility at 330 South 108th Avenue, Omaha,
Nebraska
10.18(2) Lease respecting facility at 218 South 108th Avenue,
Suite 3, Omaha, Nebraska
10.19(2) Lease respecting facility at 230 South 108th Avenue,
Suite 3, Omaha, Nebraska
10.20(2) Lease respecting facility at 230 South 108th Avenue (North
half), Omaha, Nebraska
10.21(5) Lease respecting facility at 206 South 108th Avenue, Omaha,
Nebraska
10.22(2) Lease respecting facility at 2200 Abbott Drive, Carter Lake,
Iowa
10.23(5) Lease respecting facility at 182 Clemenceau Avenue,
Singapore
10.24(8) Transaction Systems Architects, Inc. 1997 Management Stock
Option Plan
10.25(1) Leases respecting facility at 55 and 59 Clarendon Road,
Watford, United Kingdom
10.26(6) Revolving Conditional Line of Credit Agreement with Norwest
Bank Nebraska, N.A.
10.27(2) Software House Agreement, as amended, between Tandem
Computers Incorporated and Applied Communications, Inc.
10.28(1) Lease respecting facility at 236 South 108th Avenue,
Suite 2, Omaha, Nebraska
10.29(3) Second Amendment to Software House Agreement between Tandem
Computers Incorporated and Applied Communications, Inc.
10.30(11) Transaction Systems Architects, Inc. Deferred Compensation
Plan
10.31(11) Transaction Systems Architects, Inc. Deferred Compensation
Plan Trust Agreement
10.32 Severance Compensation Agreements between Transaction
Systems Architects, Inc. and certain employees
21.01(4) Subsidiaries of the Company
23.01 Consent of Independent Public Accountants
27.00 Financial Data Schedule
99.01 Safe Harbor for Forward-Looking Statements under the Private
Securities Litigation Reform Act of 1995
- ------------------------
(1) Incorporated by reference to the exhibit of the same number to the
Registration Statement No. 33-94338 on Form S-1.
(2) Incorporated by reference to the exhibit of the same number to the
Registrant's Registration Statement No. 33-88292 on Form S-1.
(3) Incorporated by reference to the exhibit of the same number to the
Registrant's Current Report on Form 8-K dated June 3, 1996.
(4) Incorporated by reference to the exhibit of the same number to the
Registrant's Registration Statement No. 333-09811 on Form S-4.
(5) Incorporated by reference to the exhibit of the same number to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995.
(6) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30,
1996.
(7) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended
December 31, 1995.
(8) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended March 31,
1997.
(9) Incorporated by reference to the exhibit of the same number to the
Registrants Current Report on Form 8 K dated May 13, 1997.
(10) Incorporated by reference to the exhibit of the same number to the
Registrant's Current Report on Form 8-K dated August 7, 1998.
(11) Incorporated by reference to exhibits 4.1 and 4.2 to the Registration
Statement No. 333-67987 on Form S-8.
(12) Incorporated by reference to the exhibit of the same number to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996.
60