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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q
___________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
Commission File Number 0-25346
___________________
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 (402) 334-5101
Omaha, Nebraska 68154 (Registrant's telephone number,
(Address of principal executive offices, including area code)
including zip code)
___________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _x_ No ___
The number of shares of the issuer's Class A Common Stock, par value $.005
per share, outstanding as of May 10, 2001 was 36,619,293 (including 1,081,570
Exchangeable Shares of TSA Exchangeco Limited which can be exchanged on a
one-for-one basis for shares of the issuer's Class A Common Stock and 48,430
options to purchase shares of the issuer's Class A Common Stock at an exercise
price of one cent per share issued to MessagingDirect Ltd. shareholders).
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TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of March 31, 2001 and September 30, 2000................... 3
Condensed Consolidated Statements of Income for the three and six months ended March 31, 2001 and
2000................................................................................................ 4
Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2001 and 2000.... 5
Notes to Condensed Consolidated Financial Statements................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 16
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders................................................. 18
Item 6. Exhibits and Reports on Form 8-K.................................................................... 18
Signature..................................................................................................... 18
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands)
March 31, September 30,
2001 2000
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 20,749 $ 23,400
Marketable securities 2,698 8,106
Billed receivables, net of allowances of $7,974 and $5,941, respectively 60,905 63,556
Accrued receivables 56,639 51,659
Prepaid income taxes 5,586 2,710
Deferred income taxes 17,258 11,208
Other 10,958 13,134
------------ ------------
Total current assets 174,793 173,773
Property and equipment, net 17,303 19,614
Software, net 35,130 26,757
Intangible assets, net 95,571 65,254
Long-term accrued receivables 27,615 27,018
Investments and notes receivable 2,235 6,146
Note receivable from executive officer 3,000 2,000
Deferred income taxes 2,614 2,958
Other 7,104 6,632
------------ ------------
Total assets $ 365,365 $ 330,152
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 22,612 $ 18,396
Accounts payable 10,898 16,023
Accrued employee compensation 7,500 7,472
Accrued liabilities 22,791 20,003
Deferred revenue 45,162 43,373
------------ ------------
Total current liabilities 108,963 105,267
Long-term debt 447 532
Long-term deferred revenue 13,907 13,993
Other 987 -
------------ ------------
Total liabilities 124,304 119,792
------------ ------------
Stockholders' equity:
Class A Common Stock 183 165
Additional paid-in capital 221,512 170,946
Retained earnings 67,078 85,033
Treasury stock, at cost (35,258) (35,258)
Accumulated other comprehensive income (12,454) (10,526)
------------ ------------
Total stockholders' equity 241,061 210,360
------------ ------------
Total liabilities and stockholders' equity $ 365,365 $ 330,152
============ ============
See notes to condensed consolidated financial statements.
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited and in thousands, except per share amounts)
Three Months Ended March 31, Six Months Ended March 31,
--------------------------------- ----------------------------------
2001 2000 2001 2000
-------------- -------------- --------------- --------------
Revenues:
Software license fees $ 45,159 $ 46,508 $ 87,626 $ 81,761
Maintenance fees 17,420 17,204 33,385 33,889
Services 13,913 11,677 30,117 26,856
------------ ------------ ------------ ------------
Total revenues 76,492 75,389 151,128 142,506
Expenses:
Cost of software license fees 11,233 11,084 22,824 21,909
Cost of maintenance and services 18,011 17,264 36,722 34,056
Research and development 10,722 9,968 20,791 18,428
Selling and marketing 18,247 18,204 37,942 35,765
General and administrative 16,050 15,159 32,177 29,797
Amortization of goodwill and
purchased intangibles 3,413 1,758 5,780 3,935
------------ ------------ ------------ ------------
Total expenses 77,676 73,437 156,236 143,890
------------ ------------ ------------ ------------
Operating income (loss) (1,184) 1,952 (5,108) (1,384)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 716 717 1,540 1,664
Interest expense (749) (72) (1,368) (135)
Other (988) (51) (715) 132
Non-recurring items - - (14,311) -
------------ ------------ ------------ ------------
Total other income (expense) (1,021) 594 (14,854) 1,661
------------ ------------ ------------ ------------
Income (loss) before income taxes (2,205) 2,546 (19,962) 277
Income tax benefit (provision) (1,399) (995) 2,006 (109)
------------ ------------ ------------ ------------
Net income (loss) $ (3,604) $ 1,551 $ (17,956) $ 168
============ ============ ============ ============
Earnings per share information:
Weighted average shares outstanding:
Basic 34,556 31,707 33,105 31,873
============ ============ ============ ============
Diluted 34,556 32,172 33,105 32,364
============ ============ ============ ============
Earnings per share:
Basic $ (0.10) $ 0.05 $ (0.54) $ 0.01
============ ============ ============ ============
Diluted $ (0.10) $ 0.05 $ (0.54) $ 0.01
============ ============ ============ ============
See notes to condensed consolidated financial statements.
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
Six Months Ended March 31,
--------------------------------------
2001 2000
-------------- ---------------
Cash flows from operating activities:
Net income (loss) $ (17,956) $ 168
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation 4,132 4,079
Amortization 13,142 10,026
Non-recurring items 14,311 -
Changes in operating assets and liabilities:
Billed and accrued receivables (1,406) (1,083)
Other current and noncurrent assets (8,517) (12,130)
Accounts payable (6,279) 2,356
Deferred revenue 909 1,593
Other current liabilities 663 (11,422)
------------ ------------
Net cash used in operating activities (1,001) (6,413)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (1,539) (3,368)
Additions to software (3,636) (5,670)
Acquisition of business, net of cash received 587 (3,053)
Additions to investments and notes receivable (420) (1,081)
Note receivable from executive officer (1,000) -
------------ ------------
Net cash used in investing activities (6,008) (13,172)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of Class A Common Stock 811 931
Proceeds from exercise of stock options 152 1,661
Purchases of Class A Common Stock - (13,343)
Net borrowings on lines of credit 3,313 -
Payments of long-term debt 436 77
------------ ------------
Net cash provided by (used in) financing activities 4,712 (10,674)
------------ ------------
Effect of exchange rate fluctuations on cash (354) 578
------------ ------------
Decrease in cash and cash equivalents (2,651) (29,681)
Cash and cash equivalents, beginning of period 23,400 70,482
------------ ------------
Cash and cash equivalents, end of period $ 20,749 $ 40,801
============ ============
See notes to condensed consolidated financial statements.
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Consolidated Financial Statements
Transaction Systems Architects, Inc. ("TSA" or the "Company"), a Delaware
corporation, develops, markets, installs 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 or
acts as a sales agent for software developed by third parties. The products and
services are used principally by financial institutions, retailers and e-payment
processors, both in domestic and international markets.
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated. The condensed consolidated financial
statements at March 31, 2001, and for the three and six months ended March 31,
2001 and 2000, are unaudited and reflect all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair presentation of the financial position and operating results for the
interim periods. The condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations, contained in the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 2000. The results of operations for the
three and six months ended March 31, 2001 are not necessarily indicative of the
results for the entire fiscal year ending September 30, 2001.
2. Revenue Recognition
The Company generates revenues from licensing software and providing
postcontract customer support (maintenance or "PCS") and other professional
services. The Company uses written contracts to document the elements and
obligations of arrangements with its customers. Arrangements that include the
licensing of software typically include PCS, and at times, include other
professional services. PCS includes the right to unspecified upgrades on a
when-and-if-available basis and ongoing technical support. The other
professional services may include training, installation or consulting. The
Company also performs services for customers under arrangements that do not
include the licensing of software.
Revenues under multiple-element arrangements, which may include several
software products or services sold together, are allocated to each element based
upon the residual method in accordance with American Institute of Certified
Public Accountants Statement of Position ("SOP") 98-9, "Software Revenue
Recognition, With Respect to Certain Arrangements." Under the residual method,
the fair value of the undelivered elements is deferred and subsequently
recognized. The Company has established sufficient vendor specific objective
evidence of fair value for PCS and other professional services based upon the
price charged when these elements are sold separately. Accordingly, software
license fees revenues are recognized under the residual method in arrangements
in which the software is licensed with PCS and/or other professional services,
and the undelivered elements of the arrangement are not essential to the
functionality of the delivered software.
The Company recognizes software license fees upon execution of the signed
contract, delivery of the software to the customer, determination that the
software license fees are fixed or determinable, and determination that the
collection of the software license fees is probable. The software license is
typically for a term of up to 60 months and does not include a right of return.
The term for the PCS element of a software arrangement is typically for a period
shorter than the term of the software license, and can be renewed by the
customer over the remaining term of the software license. PCS or maintenance
revenues are recognized ratably over the term of the arrangement on a
straight-line basis. The other professional services element of a software
arrangement is typically accounted for separately as the services are performed
for time-and-materials contracts or on a percentage-of-completion basis for
fixed-price contracts. In those instances where the services are essential to
the functionality of any other element of the arrangement, contract accounting
is applied to both the software and services elements of the arrangement.
The Company follows two methods for pricing its software licenses. Under
the first method, the software license is priced based upon the number of
transactions processed by the customer ("transaction-based pricing"). Under
transaction-based pricing, the customer is allowed to process a contractually
predetermined maximum volume of transactions per month for a specified period of
time. Once the customer's transaction volume exceeds this maximum volume level,
the customer is required to pay additional license fees for each incremental
volume level. Under the second method, the software license is priced on a per
copy basis and tiered to recognize different performance levels of the
customer's processing hardware ("designated-equipment-group pricing"). Under
designated-equipment-group pricing, the customer pays a license fee for each
copy of the software for a specified period of time.
Licensees are typically given two payment options. Under the first payment
option, the licensee can pay a combination of an Initial License Fee ("ILF"),
where the licensee pays a portion of the total software license fees at the
beginning of the software license term, and a Monthly License Fee ("MLF"), where
the licensee pays the remaining portion of the software license fees over the
software license term. In certain arrangements, the customer is contractually
committed to making MLF payments for a minimum number of months. If the customer
decides to terminate the arrangement prior to paying the minimum MLF payments,
the remaining minimum MLF payments become due and payable. Under the second
payment option, the Company offers a Paid-Up-Front ("PUF") payment option,
whereby the total software license fees are due at the beginning of the software
license term. Under either payment option, the Company is not obligated to
refund any payments received from the customer. In the combination ILF and MLF
payment option, the Company recognizes the ILF portion of the software license
fees upon delivery of the software, assuming all other revenue recognition
criteria were met. In the PUF payment option, the Company recognizes the total
software license fees upon delivery of the software, assuming all other revenue
recognition criteria were met.
In addition to SOP 98-9, the Company accounts for its software arrangements
in accordance with SOP 97-2, "Software Revenue Recognition." 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 where the
customer is contractually committed to make MLF payments that extend beyond
twelve months, the "fixed or determinable" presumption has been overcome and
software license fees revenue should be recognized upon meeting the other SOP
97-2 revenue recognition criteria. In making this determination, the Company
considered the characteristics of the software product, the customer purchasing
the software, the similarity of the economics of the software arrangements with
previous software arrangements and the actual history of successfully collecting
under the original terms without providing concessions. The software license
fees recognized under these arrangements are referred to as "Recognized-Up-Front
MLFs." The present value of Recognized-Up-Front MLFs, net of third party
royalties, recognized during the three months ended March 31, 2001 and 2000
totaled approximately $2.8 million and $5.4 million, respectively. The present
value of Recognized-Up-Front MLFs, net of third party royalties, recognized
during the six months ended March 31, 2001 and 2000 totaled approximately $11.9
million and $10.5 million, respectively. The discount rates used to determine
the present value of these software license fees, representing the Company's
incremental borrowing rates, ranged from 9.50% to 11.00% during the six months
ended March 31, 2001, and from 10.25% to 11.00% during the six months ended
March 31, 2000. Recognized-Up-Front MLFs that have been recognized in software
license fees revenues by the Company, but not yet billed, are reflected in
accrued receivables in the accompanying condensed consolidated balance sheets.
3. Non-Recurring Items
The Company continually evaluates its investment holdings and long-lived
assets for evidence of impairment. During the three months ended December 31,
2000, after considering current market conditions for technology companies and
specific information regarding those companies in which the Company has an
ownership interest, the Company determined that the declines in market value for
certain of its investment holdings were "other than temporary" and a charge to
earnings for the declines in market value was required. Therefore, the Company
recorded a non-cash charge of $12.4 million in the three months ended December
31, 2000.
In addition, due to unfavorable market conditions in the fourth quarter of
fiscal 2000, the Company postponed its planned initial public offering ("IPO")
of its wholly-owned subsidiary, Insession Technologies, Inc. Due to the time
period which had elapsed without proceeding with this transaction and continuing
uncertainty in market conditions, the Company expensed costs associated with the
planned IPO totaling $1.9 million in the three months ended December 31, 2000.
4. Acquisition
In January 2001, the Company acquired all of the outstanding securities of
MessagingDirect Ltd. ("MDL"). MDL provides software applications to facilitate
the secure delivery and e-processing of electronic statements and bills.
Shareholders of MDL received 3,357,351 shares of Class A Common Stock (or
Exchangeable Shares of TSA Exchangeco Limited which can be converted on a
one-for-one basis for shares of TSA Class A Common Stock or options to purchase
shares of TSA Class A Common Stock) with a fair market value at the time of
purchase of approximately $49.5 million. The share exchange was accounted for
using the purchase method of accounting. An independent valuation of MDL was
performed and used as an aid in determining the fair market value of each
identifiable intangible asset. Accordingly, the excess purchase price over the
estimated fair value of each identifiable tangible and intangible asset acquired
was allocated to goodwill, which is being amortized using the straight-line
method over five years. Preliminarily, approximately $38.3 million of the
purchase price was allocated to goodwill and $11.8 million to software.
5. Common Stock and Earnings Per Share
Earnings per share ("EPS") has been computed in accordance with SFAS No.
128, "Earnings Per Share." Basic EPS is calculated by dividing net income
available to common stockholders (the numerator) by the weighted average number
of common shares outstanding during the period (the denominator). Diluted EPS is
computed by dividing net income available to common stockholders, adjusted for
the effect of any outstanding dilutive securities (the numerator), by the
weighted average number of common shares outstanding, adjusted for the dilutive
effect of outstanding dilutive securities (the denominator).
For the three and six months ended March 31, 2001, basic and diluted EPS
are the same, as any outstanding dilutive securities were antidilutive due to
the net loss in both periods. If the Company had reflected net income for the
three and six months ended March 31, 2001, weighted average shares from stock
options of 3,867,881 and 3,869,482, respectively, would have been excluded from
the computation of diluted EPS because the exercise prices of the stock options
were greater than the average market price of the Company's common shares. The
differences between the basic and diluted EPS denominators for the three and six
months ended March 31, 2000, which amounted to approximately 465,000 and 491,000
shares, respectively, were due to the dilutive effect of the Company's
outstanding stock options using the treasury stock method. For the three and six
months ended March 31, 2000, weighted average shares from stock options of
1,366,291 and 1,349,679, respectively, have been excluded from the computation
of diluted EPS because the exercise prices of the stock options were greater
than the average market price of the Company's common shares.
Exchangeable Shares and options received by shareholders of MDL (see Note
4) that have not yet been converted into TSA Class A Common Stock are included
in Class A Common Stock for presentation purposes on the March 31, 2001
condensed consolidated balance sheet, and are included in common shares
outstanding for EPS computations for the three and six months ended March 31,
2001.
6. Comprehensive Income
The Company's components of other comprehensive income were as follows (in
thousands):
Three Months Ended December 31, Six Months Ended March 31,
------------------------------ ------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Net income (loss) $ (3,604) $ 1,551 $ (17,956) $ 168
Other comprehensive income (loss):
Foreign currency translation adjustments (5,112) 111 (4,573) (1,012)
Unrealized investment holding gain, net of reclassification
adjustment of $8,052 in the six months ended March 31, 2001 842 6,080 2,645 10,767
-------------- -------------- -------------- --------------
Comprehensive income (loss) $ (7,874) $ 7,742 $ (19,884) $ 9,923
============== ============== ============== ==============
The Company's components of accumulated other comprehensive income at each
balance sheet date were as follows (in thousands):
Foreign Unrealized Accumulated
Currency Investment Other
Translation Holding Comprehensive
Adjustments Gain (Loss) Loss
-------------- ------------- --------------
Balance, September 30, 2000 $ (4,723) $ (5,803) $ (10,526)
Fiscal 2001 year-to-date activity (4,573) (5,407) (9,980)
Reclassification adjustment for loss included
in net income (loss) - 8,052 8,052
-------------- ------------- --------------
Balance, March 31, 2001 $ (9,296) $ (3,158) $ (12,454)
============== ============= ==============
7. Line-of-Credit Facilities
As of March 31, 2001, the Company has a $25.0 million bank line-of-credit
with a large United States bank. This line is secured by certain trade
receivables of TSA. Among other restrictions, the Company must maintain a
minimum accounts receivable balance, minimum tangible net worth and minimum
working capital levels at each reporting date. As of March 31, 2001, these
minimum amounts to be maintained were $35.0 million of billed receivables less
than 90 days past due, $147.0 million of tangible net worth and $50.0 million of
working capital. After obtaining a waiver from the U.S. bank due to
non-compliance with the minimum tangible net worth covenant, the Company is in
compliance with all debt covenants as of March 31, 2001. The Company also has a
line-of-credit with a large foreign bank in the amount of 3.0 million British
Pounds, which translates to approximately $4.2 million. The foreign line
requires the Company to maintain minimum tangible net worth within the Company's
wholly-owned subsidiary, ACI Worldwide (EMEA) Ltd.
Interest on the U.S. line-of-credit accrues at an annual rate equal to
either the bank's "base rate" less .75% or the LIBOR rate plus 1.75% and is
payable at the end of each month. Interest on the foreign line-of-credit accrues
at an annual rate of 1% above the bank's "base rate." During the three and six
months ended March 31, 2001, the Company recorded interest expense of $0.5
million and $1.0 million, respectively, related to the two line-of-credit
facilities. The carrying amounts of the Company's line-of-credit facilities
approximate fair value due to their variable interest rates. Current borrowings
outstanding as of March 31, 2001 totaled approximately $21.2 million. The
foreign bank line-of-credit expires on August 9, 2001. Subsequent to March 31,
2001, the U.S. bank reduced the amount of the line-of-credit from $25.0 million
to $15.0 million and extended the line-of-credit expiration date from May 31,
2001 to June 30, 2001.
8. Segment Information
In fiscal 2000, the Company reorganized its business into four business
units or segments: Consumer e-Payments, Electronic Business Infrastructure,
Corporate Banking e-Payments and Health Payment Systems. Prior period segment
information has been restated to reflect these reorganizations. The Company's
chief operating decision makers review business unit financial information,
presented on a consolidated basis, accompanied by disaggregated information
about revenues and operating income by business unit. The Company does not track
assets by business unit.
The Company plans to direct the majority of its focus on the Consumer
e-Payments and Electronic Business Infrastructure business units. The Company
recently discontinued pursuing strategic alternatives for the Electronic
Business Infrastructure business unit since the value of the products and
services it offers exceeds current technology company market valuations. The
Company is considering various alternatives for the Corporate Banking e-Payments
and Health Payments Systems business units, including possible sales, spin-offs,
strategic alliances, partnerships, third-party investors and initial public
offerings.
Consumer e-Payments products represent the Company's largest product line
and include its most mature and well-established applications which are used
primarily by financial institutions, retailers and e-payment processors. Its
products are used to route and process transactions for automated teller machine
networks; process transactions from traditional point of sale devices, wireless
devices and the Internet; handle PC and phone banking transactions; control
fraud and money laundering; process electronic benefit transfer transactions;
authorize checks; establish frequent shopper programs; automate settlement, card
management and claims processing; and issue and manage multi-functional
applications on smart cards. Electronic Business Infrastructure products
facilitate communication, data movement, monitoring of systems and business
process automation across computing systems, involving mainframes, distributed
computing networks and the Internet. Corporate Banking e-Payments products offer
high-value payments processing, bulk/recurring payments processing, wire room
processing, global messaging, integration payments management and continuous
link settlement processing. Health Payment Systems products allow large
corporations and health-care payment processors to automate claims eligibility
determination, claims capture and claims payments.
No single customer accounted for more than 10% of the Company's
consolidated revenue during the three and six months ended March 31, 2001 and
2000. The following are revenues and operating income (loss) for the Company's
business unit segments for the three and six months ended March 31, 2001 and
2000 (in thousands):
Three Months Ended March 31, Six Months Ended March 31,
------------------------------------ ------------------------------------
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
Revenues:
Consumer e-Payments $ 56,776 $ 53,629 $ 114,328 $ 101,345
Electronic Business Infrastructure 10,860 11,290 20,144 22,166
Corporate Banking e-Payments 7,650 9,609 14,258 17,250
Health Payment Systems 1,206 861 2,398 1,745
---------------- ---------------- ---------------- ----------------
$ 76,492 $ 75,389 $ 151,128 $ 142,506
================ ================ ================ ================
Operating loss:
Consumer e-Payments $ 1,328 $ (1,617) $ 2,224 $ (6,069)
Electronic Business Infrastructure (353) 2,428 (1,110) 4,212
Corporate Banking e-Payments (1,737) 1,206 (4,634) 498
Health Payment Systems (422) (65) (1,588) (25)
---------------- ---------------- ---------------- ----------------
Operating loss $ (1,184) $ 1,952 $ (5,108) $ (1,384)
================ ================ ================ ================
The Company's products are sold and supported through distribution networks
covering the geographic regions of the Americas, Europe/Middle East/Africa
("EMEA") and Asia/Pacific. The following are revenues and long-lived assets for
these geographic regions (in thousands):
Three Months Ended March 31, Six Months Ended March 31,
------------------------------------ ------------------------------------
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
Revenues:
United States $ 31,928 $ 35,240 $ 63,933 $ 66,062
Americas - other 11,256 8,310 20,242 17,176
Total Americas 43,184 43,550 84,175 83,238
EMEA 24,793 24,584 51,783 44,806
Asia/Pacific 8,515 7,255 15,170 14,462
---------------- ---------------- ---------------- ----------------
$ 76,492 $ 75,389 $ 151,128 $ 142,506
================ ================ ================ ================
March 31, September 30,
2001 2000
---------------- ----------------
Long-lived assets:
United States $ 100,638 $ 107,925
Americas - other 25,645 5,337
Total Americas 126,283 113,262
EMEA 32,916 11,659
Asia/Pacific 1,144 1,482
---------------- ----------------
$ 160,343 $ 126,403
================ ================
9. Accounting Pronouncements Issued But Not Yet Effective
In December 1999, the Securities and Exchange Commission (the "SEC")
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC. SAB No.
101 requires, among other things, that license and other up-front fees be
recognized over the term of the agreement, unless the fees are in exchange for
products delivered or services performed that represent the culmination of a
separate earnings process. The Company is required to be in conformity with the
provisions of SAB No. 101 no later than the fourth quarter of fiscal 2001. The
Company is currently reviewing SAB No. 101 and has not determined the impact of
its adoption on the Company's financial position or results of operations.
In September 2000, the Financial Accounting Standards Board issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 140, which replaced SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but carries over most of SFAS No. 125's provisions without
reconsideration. SFAS No. 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. The Company currently conforms to the requirements of SFAS No. 125 and
the adoption of SFAS No. 140 is not expected to have a material impact on the
Company's financial position or results of operations.
TRANSACTION SYSTEMS ARCHITECTS, INC.
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. In addition to its own products, TSA
distributes software developed by third parties. The products and services are
used principally by financial institutions, retailers and e-payment processors,
both in domestic and international markets.
Business Segments
The Company's products and services are organized into four business units
- - Consumer e-Payments, Electronic Business Infrastructure, Corporate Banking
e-Payments and Health Payment Systems. The Company plans to direct the majority
of its focus on the Consumer e-Payments and Electronic Business Infrastructure
business units. Products in the Consumer e-Payments business unit represent the
Company's largest product line and include its most mature and well-established
applications. Products and services offered by this business unit, except
community banking products, are marketed and supported through ACI Worldwide Inc
("ACI"), a wholly-owned subsidiary of the Company. 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 has its own sales force and supplements this with reseller and/or
distributor networks. The community banking products are marketed and supported
by Regency Systems, Inc., a wholly-owned subsidiary of the Company. Products and
services offered by the other three business units are marketed and supported
primarily through their own sales and support organizations. The following table
sets forth total revenues and operating income (loss) for the Company's four
business unit segments for the periods indicated (in thousands):
Three Months Ended March 31, Six Months Ended March 31,
------------------------------------ ------------------------------------
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
Revenues:
Consumer e-Payments $ 56,776 $ 53,629 $ 114,328 $ 101,345
Electronic Business Infrastructure 10,860 11,290 20,144 22,166
Corporate Banking e-Payments 7,650 9,609 14,258 17,250
Health Payment Systems 1,206 861 2,398 1,745
---------------- ---------------- ---------------- ----------------
$ 76,492 $ 75,389 $ 151,128 $ 142,506
================ ================ ================ ================
Operating loss:
Consumer e-Payments $ 1,328 $ (1,617) $ 2,224 $ (6,069)
Electronic Business Infrastructure (353) 2,428 (1,110) 4,212
Corporate Banking e-Payments (1,737) 1,206 (4,634) 498
Health Payment Systems (422) (65) (1,588) (25)
---------------- ---------------- ---------------- ----------------
Operating loss $ (1,184) $ 1,952 $ (5,108) $ (1,384)
================ ================ ================ ================
Backlog
The following table sets forth the Company's recurring and non-recurring
revenue backlog, by business unit, at each balance sheet date (in thousands):
Recurring Revenue Non-recurring Revenue
Backlog Backlog
------------------------------------ ------------------------------------
March 31, Sept. 30, March 31, Sept. 30,
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
Consumer e-Payments $ 95,800 $ 101,100 $ 37,100 $ 39,100
Electronic Business Infrastructure 17,200 19,200 3,800 2,100
Corporate Banking e-Payments 17,000 16,100 12,500 12,900
Health Payment Systems 1,700 2,800 2,000 2,300
---------------- ---------------- ---------------- ----------------
$ 131,700 $ 139,200 $ 55,400 $ 56,400
================ ================ ================ ================
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. The Company includes in its non-recurring revenue
backlog all fees (other than recurring) 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 or
non-recurring revenue backlog will actually generate the specified revenues or
that the actual revenues will be generated within the one-year period.
Results of Operations
The following table sets forth certain financial data and the percentage of
total revenues of the Company for the periods indicated (amounts in thousands):
Three Months Ended March 31, Six Months Ended March 31,
--------------------------------------------- ----------------------------------------------
2001 2000 2001 2000
--------------------- ---------------------- ---------------------- ---------------------
% of % of % of % of
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
--------- --------- ----------- --------- ---------- --------- ---------- ---------
Revenues:
ILFs and PUFs $ 30,422 39.8 % $ 26,918 35.7 % $ 50,521 33.4 % $ 42,322 29.7 %
MLFs (other than
Recognized-Up-Front MLFs) 11,974 15.6 14,187 18.8 25,218 16.7 28,907 20.3
Recognized-Up-Front MLFs 2,763 3.6 5,403 7.2 11,887 7.9 10,532 7.4
--------- ------ --------- ------ ---------- ------ ---------- ------
Software license fees 45,159 59.0 46,508 61.7 87,626 58.0 81,761 57.4
Maintenance fees 17,420 22.8 17,204 22.8 33,385 22.1 33,889 23.8
Services 13,913 18.2 11,677 15.5 30,117 19.9 26,856 18.8
--------- ------ --------- ------ --------- ------ ---------- ------
Total revenues 76,492 100.0 75,389 100.0 151,128 100.0 142,506 100.0
--------- ------ ---------- ------ ---------- ------ ---------- ------
Expenses:
Cost of software license fees 11,233 14.7 11,084 14.7 22,824 15.1 21,909 15.4
Cost of maintenance and service 18,011 23.5 17,264 23.0 36,722 24.3 34,056 23.9
Research and development 10,722 14.0 9,968 13.2 20,791 13.8 18,428 12.9
Selling and marketing 18,247 23.8 18,204 24.1 37,942 25.1 35,765 25.1
General and administrative 16,050 21.0 15,159 20.1 32,177 21.3 29,797 20.9
Amortization of goodwill and
purchased intangibles 3,413 4.5 1,758 2.3 5,780 3.8 3,935 2.8
--------- ------ ---------- ------ ---------- ------ ---------- ------
Total expenses 77,676 101.5 73,437 97.4 156,236 103.4 143,890 101.0
--------- ------ ---------- ------ ---------- ------ ---------- ------
Operating income (loss) (1,184) (1.5) 1,952 2.6 (5,108) (3.4) (1,384) (1.0)
--------- ------ ---------- ------ ---------- ------ ---------- ------
Other income (expense):
Interest income 716 0.9 717 1.0 1,540 1.0 1,664 1.2
Interest expense (749) (1.0) (72) (0.1) (1,368) (0.9) (135) (0.1)
Other (988) (1.3) (51) (0.1) (715) (0.5) 132 0.1
Non-recurring items - - - - (14,311) (9.4) - -
--------- ------ ---------- ------ ---------- ------ ---------- ------
Total other income (expense (1,021) (1.4) 594 0.8 (14,854) (9.8) 1,661 1.2
--------- ------ ---------- ------ ---------- ------ ---------- ------
Income (loss) before income taxes (2,205) (2.9) 2,546 3.4 (19,962) (13.2) 277 0.2
Income tax benefit (provision) (1,399) (1.8) (995) (1.3) 2,006 1.3 (109) (0.1)
--------- ------ ---------- ------ ---------- ------ ---------- ------
Net income (loss) $ (3,604) (4.7)% $ 1,551 2.1 % $ (17,956) (11.9)% $ 168 0.1 %
========= ====== ========== ====== ========== ====== ========== ======
Revenues. Total revenues for the second quarter of fiscal 2001 increased
1.5%, or $1.1 million, from the comparable period in fiscal 2000. Total revenues
for the first six months of fiscal 2001 increased $8.6 million, or 6.1%, over
the first six months of fiscal 2000. The three-month increase is the result of a
$2.2 million, or 19.1%, increase in services revenue offset by a $1.3 million,
or 2.9%, decrease in software license fees revenue. The six-month increase is
the result of a $5.9 million, or 7.2%, increase in software license fees revenue
and a $3.3 million, or 12.1%, increase in services revenue, offset by a $0.5
million, or 1.5%, decrease in maintenance fee revenue.
During the first quarter of fiscal 2000, the Company's large bank and
merchant customers and potential new customers, in effect, locked down their
systems in preparation for the Year 2000. This Year 2000 lock-down had a
negative impact on the Company's Consumer e-Payments software license fees and
services revenues due to the less than expected demand by customers and
potential new customers to upgrade and enhance their current systems. In
addition, since the Year 2000 cutover, the Company has found its customers
increasingly scrutinizing their information technology purchases, which has led
to further delays in software and services purchases. The Company believes
overall demand for its products and services is increasing at a gradual pace.
However, the Company believes that customer demand for its products and services
will be slow to return to growth levels experienced prior to fiscal 2000.
The increase in ILF and PUF revenue for the second quarter and the first
six months of fiscal 2001 is a result of an increased demand for the Company's
Consumer e-Payments products, offset by a decrease in demand for the Company's
Electronic Business Infrastructure ICE product and a decrease in revenue
associated with a significant Corporate Banking e-Payment customer project. In
addition, the Company changed its sales compensation plans in fiscal 2001 for
its Consumer e-Payments sales force to emphasize PUF contracts for both customer
renewals and new customers rather than emphasizing ILF/MLF contracts. This
change resulted in an increase in PUF revenue and a decrease in MLF revenue for
the second quarter and the first six months of fiscal 2001.
Maintenance fee revenues decreased in the first quarter of fiscal 2001 due
to a decrease in customer demand for the Company's enhanced maintenance support.
During the second quarter of fiscal 2001, demand for the Company's enhanced
maintenance support returned to normal levels.
The growth in services revenue is the result of increased demand for
technical and project management services, which is primarily the result of an
increased installed base of the Company's Consumer e-Payments products.
Expenses. Total operating expenses for the second quarter of fiscal 2001
increased $4.2 million, or 5.8%, over the comparable period of fiscal 2000.
Total operating expenses for the first six months of fiscal 2001 increased $12.3
million, or 8.6%, over the first six months of fiscal 2000. Amortization of
goodwill and purchased intangibles has increased between fiscal years related to
the acquisitions of WorkPoint Systems, Inc. in April 2000, Hospital Health Plan
Corporation in May 2000 and MessagingDirect Ltd. in January 2001. Other changes
in operating expense line items are discussed below.
Cost of software license fees for the second quarter of fiscal 2001 was
comparable to the second quarter of fiscal 2000. For the six months ended March
31, 2001, cost of software license fees increased $0.9 million over the
comparable period of fiscal 2000. This increase was due primarily to an increase
in royalties owed to the owners of third-party products.
Cost of maintenance and services for the second quarter of fiscal 2001
increased $0.7 million, or 4.3%, over the comparable period in fiscal 2000. For
the six months ended March 31, 2001, cost of maintenance and services increased
$2.7 million, or 7.8%, over the comparable period of fiscal 2000. These
increases were the result of personnel-related expenses supporting maintenance
fees and services revenues, which increased $2.7 million, or 4.5%, for the first
six months of fiscal 2001 over the comparable period of fiscal 2000.
Research and development ("R&D") costs for the second quarter of fiscal
2001 increased $0.8 million, or 7.6%, over the comparable period in fiscal 2000.
For the six months ended March 31, 2000, R&D costs increased $2.4 million, or
12.8%, over the comparable period of fiscal 2000. R&D consists primarily of
compensation and related costs for R&D employees and contractors. R&D costs as a
percentage of total revenues for the three and six months ended March 31, 2001
were 14.0% and 13.8%, respectively, as compared to 13.2% and 12.9%,
respectively, for comparable periods of fiscal 2000. The Company capitalizes
costs related to certain internally-developed software when the resulting
products reach technological feasibility. Software development costs capitalized
in the first six months of fiscal 2001 and 2000 totaled approximately $2.6
million and $4.1 million, respectively.
Selling and marketing costs for the second quarter of fiscal 2001 was
comparable to the second quarter of fiscal 2000. For the six months ended March
31, 2001, selling and marketing costs increased $2.2 million, or 6.1%, over the
comparable period of fiscal 2000. The increase for the first six months of
fiscal 2001 is due to an increase in sales personnel and marketing activities in
each of the four business units.
General and administrative costs for the second quarter of fiscal 2001
increased $0.9 million, or 5.9%, over the comparable period in fiscal 2000. For
the six months ended March 31, 2001, general and administrative costs increased
$2.4 million, or 8.0%, over the comparable period of fiscal 2000. The increase
is attributable to an increase in bad debts expense and occupancy costs, offset
by a decrease in personnel-related expenses. The decrease in personnel-related
expenses is due to the consolidation of the Company's Consumer Banking,
Electronic Commerce and Internet Banking operating units into the Consumer
e-Payments business unit during the fourth quarter of fiscal 2000. During the
quarter ending June 30, 2001, the Company will incur approximately $2.8 million
as severance benefits to certain former executive officers in connection with
their resignations.
Other Income and Expenses. The increase in interest expense in fiscal 2001
is due to an increase in borrowings on the Company's line-of-credit facilities.
Other expenses resulted primarily from foreign currency translation losses
recognized by the Company.
The Company continually evaluates the carrying value of its investment
holdings and long-lived assets for evidence of impairment. During the first
quarter of fiscal 2001, after considering current market conditions for
technology companies and specific information regarding those companies in which
the Company has an ownership interest, the Company determined that the declines
in market value for certain of its investment holdings were "other than
temporary" and a charge to earnings of $12.4 million for the declines in market
value was required. The Company also expensed costs associated with the
withdrawn IPO of Insession Technologies, Inc. totaling $1.9 million in the first
quarter of fiscal 2001. These charges are reflected as non-recurring items under
other expenses.
Income Taxes. The effective tax rate for the first six months of fiscal
2001 was approximately 10% as compared to 41% for all of fiscal 2000. The
effective tax rate for the first six months of fiscal 2001 was less than that of
the comparable period for fiscal 2000 primarily due to non-deductible
amortization expense associated with acquisitions accounted for as purchases and
non-recognition of tax benefits for operating losses in certain foreign
locations.
As of March 31, 2001, the Company has deferred tax assets of $31.5 million
and deferred tax liabilities of $2.6 million. Each quarter, the Company
evaluates its historical operating results as well as its projections for the
future to determine the realizability of the deferred tax assets. This analysis
indicated that $19.9 million of the net deferred tax assets were more likely
than not to be realized. Accordingly, the Company has a valuation allowance of
$9.0 million as of March 31, 2001. 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 adjusted
accordingly.
Liquidity and Capital Resources
As of March 31, 2001, the Company's principal sources of liquidity
consisted of $20.7 million in cash and cash equivalents, and available bank
lines of credit totaling approximately $29.2 million, with outstanding
borrowings of approximately $21.2 million. The bank lines are subject to
maintenance of certain covenants.
The Company's net cash flows used in operating activities for the first six
months of fiscal 2001 amounted to $1.0 million as compared to $6.4 million used
during the first six months of fiscal 2000. The growth of the Company's billed
and accrued receivables during the first six months of fiscal 2001 and 2000 are
the primary reasons for the negative operating cash flows in the first six
months of fiscal 2001 and 2000.
A contributor to the Company's cash management program is the factoring of
accrued receivables, whereby an interest in Company receivables is transferred
on a non-recourse basis to third-party financial institutions in exchange for
cash. During the first six months of fiscal 2001 and 2000, the Company generated
operating cash flows from the factoring of accrued receivables of $8.5 million
and $11.1 million, respectively. The Company has approximately $15 million of
accrued receivables that may be sold in the future to third-party financial
institutions under this program. The Company is actively pursuing the sale of a
portion of these receivables as a means to generate cash, but there can be no
assurance that the Company will be successful in its efforts to sell any of
these receivables.
The Company's net cash flows used in investing activities totaled $6.0
million and $13.2 million in the first six months of fiscal 2001 and 2000,
respectively. The decrease in cash used in investing activities was due to a
decrease in acquisition-related expenditures, and decreased purchases of
software, property and equipment, offset by an additional advance during the
first quarter of fiscal 2001 in the amount of $1.0 million to the Company's CEO
as part of his employment and incentive compensation package. The acquisition of
business amount in fiscal 2000 consists of the final payment of $3.1 million
related to the acquisition of Insession Inc.
The Company's net cash flows provided by financing activities was $4.7
million in the first six months of fiscal 2001 as compared to net cash flows
used in financing activities of $10.7 million in the first six months of fiscal
2000. During the first six months of 2001, the Company had net borrowings on its
bank line-of-credit facilities of $3.3 million. During the first six months of
fiscal 2000, pursuant to a stock repurchase program approved by the Company's
Board of Directors, the Company acquired 500,300 shares at an average cost of
$26.67 per share, totaling approximately $13.3 million. The Company used cash
flow from operations to fund the common stock repurchases.
The Company is considering various alternatives for the Corporate Banking
e-Payments and Health Payments Systems business units, including possible sales,
spin-offs, strategic alliances, partnerships, third-party investors and initial
public offerings. The Company recently discontinued pursuing strategic
alternatives for the Electronic Business Infrastructure business unit since the
value of the products and services it offers exceeds current technology company
market valuations.
The Company believes that its existing sources of liquidity, including cash
provided by operating activities (which improved sequentially in the second
quarter of fiscal 2001 over the first quarter of fiscal 2001 as a result of cost
containment initiatives that have been implemented, accounts receivable
improvements and an emphasis on PUF contracts) along with cash generated from
its factoring program and borrowings available under its line-of-credit
facilities, will satisfy the Company's projected working capital and other cash
requirements for the foreseeable future. Any cash received upon successful
divestiture of either of the business units described above would reduce the
Company's reliance on borrowings under its line-of-credit facilities.
In December 2000, the Company entered into an amendment to its primary
line-of-credit facility increasing the aggregate commitment from $25.0 million
to $30.0 million. The increased commitment expired on March 31, 2001.
Consequently, as of March 31, 2001, the commitment under its primary
line-of-credit facility returned to $25.0 million. In May 2001, the Company and
its U.S. bank agreed to amend the Company's primary line-of-credit facility
reducing the line-of-credit facility from $25.0 million to $15.0 million and
extending the facility's maturity date from May 31, 2001 to June 30, 2001. The
Company is currently negotiating with several financial institutions for a
replacement line-of-credit. Although no assurances can be given, the Company
believes a replacement line-of-credit of approximately $25.0 million will be in
place prior to June 30, 2001.
Forward-Looking Statements
The statements in this report regarding projected 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 or third
parties' expectations, predictions, views, opportunities, plans, strategies,
beliefs and statements of similar effect. The forward-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 the following:
o The corporate divestiture strategy is subject to numerous factors,
including market conditions and perception, demand for the other
businesses by potential investors or potential acquirers, personnel,
tax, business, general economic conditions, viability of businesses as
stand-alone operations, and other factors that could affect the
Company's decisions and ability to separate businesses, to divest,
raise capital, or implement other alternatives for such businesses,
and to implement other aspects of the Company's corporate strategy.
There can be no assurance that the Company will implement any aspect
of the corporate strategy or that if implemented the strategy will be
successful.
o The Year 2000 lock-down has interrupted the Company's normal sales
cycle and therefore is likely to have a negative impact on the
Company's revenues and net income for the remainder of fiscal 2001 and
beyond. The Company also believes customer demand for system upgrades
and enhancements will be slow to return to normal growth levels, as
many of the Company's customers upgraded and enhanced their systems
prior to the Year 2000. There can be no assurance that the Company's
growth rates will return to historical levels.
o The acquisition of MessagingDirect is subject to numerous risks,
including the following: (i) MessagingDirect is in a highly
competitive industry, (ii) MessagingDirect does not have a significant
market presence, significant revenues, or widespread acceptance or
prolonged use of its products, (iii) MessagingDirect has not been
profitable, (iv) the electronic statement presentation and electronic
bill presentment and payment markets may not achieve the predicted
growth rates, (v) MessagingDirect's products, personnel, and
operations may be difficult to combine with those of the Company, the
products may not be accepted by the Company's customer base, and there
will be significant integration costs of combining the businesses, and
(vi) the acquisition will have a dilutive impact on earnings per share
and amortization of intangible assets will have an adverse effect on
earnings.
o The Company is subject to risks of conducting international operations
including difficulties in staffing and management, reliance on
independent distributors, fluctuations in foreign currency exchange
rates, compliance with foreign regulatory requirements, variability of
foreign economic conditions, and changing restrictions imposed by U.S.
export laws.
o The Company will continue to derive a majority of its total revenues
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 the Company's
financial condition and results of operations.
o The Company's business is concentrated in the banking industry, making
it susceptible to a downturn in that industry.
o Fluctuations in quarterly operating results may result in volatility
in the Company's stock price. No assurance can be given that operating
results will not vary. The Company's stock price may also be volatile,
in part, due to external factors such as announcements by third
parties or competitors, inherent volatility in the high-technology
sector and changing market conditions in the industry.
o The diversion of management's time and attention to the search for a
new permanent CEO, and related transition issues, may temporarily
dilute management's focus on the Company's day-to-day operations.
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 the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company's market risk for the
six months ended March 31, 2001. See the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 2000 for additional discussions
regarding quantitative and qualitative disclosures about market risk.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(c) On January 11, 2001, TSA or its subsidiaries issued the securities listed
below in exchange for all of the outstanding securities of MessagingDirect
Ltd. ("MDL"), an Alberta, Canada company. The issuances were exempt from
registration pursuant to Section 3(a)(10) of the Securities Act of 1933, as
amended. The securities were issued pursuant to a plan of arrangement which
was approved by the Court of Queen's Bench (Alberta), Canada after holding
a hearing. The securities were issued pursuant to the plan of arrangement
to the then securityholders of MDL (or with respect to the share of TSA
Special Voting preferred stock discussed below, to a trustee for the
benefit of certain of such securityholders). The court's order approving
the plan of arrangement stated that the court was satisfied that the terms
and conditions of the plan of arrangement were fair and reasonable to the
MDL securityholders, both procedurally and substantively. The court was
advised before the hearing that its approval would constitute the basis for
a claim to the Section 3(a)(10) exemption. MDL securityholders were given
notice of the hearing and the right to appear.
o 1,778,429 shares of TSA Class A Common Stock.
o 1,410,942 shares of Exchangeable Shares of TSA Exchangeco Limited, a
Nova Scotia subsidiary of TSA. The Exchangeable Shares can be
exchanged on a one-for-one basis into shares of TSA's Class A Common
Stock. The holders of Exchangeable Shares have rights to direct the
voting of the share of TSA Special Preferred Stock described below.
o One share of TSA Special Preferred Voting Stock. This share was issued
to Wells Fargo Bank Minnesota, National Association, as Trustee of the
trust created for the benefit of holders of the Exchangeable Shares,
to be held of record by the Trustee for and on behalf of, and for the
use and benefit of, the holders of the Exchangeable Shares. The
Special Preferred Voting Stock entitles the Trustee to cast the number
of votes equal to the number of Exchangeable Shares outstanding,
voting as a single class with the Class A Common Stock. Each holder of
Exchangeable Shares is entitled to instruct the Trustee on how to vote
with respect to such holder's Exchangeable Shares.
o Options to purchase 167,980 shares of TSA Class A Common Stock. These
options were issued to holders of MessagingDirect Ltd. employee stock
options to replace those options. The replacement options have an
exercise price of one cent per share of TSA Class A Common Stock
because, pursuant to the terms of the acquisition, the number of
shares covered by the options was reduced by a formula intended to
replicate a cashless exercise.
On January 11, 2001, TSA Exchangeco Limited issued 600,000 shares of
nonvoting, Canadian dollar denominated preferred stock with a 7% per annum
dividend rate, to another TSA subsidiary which in turn sold them to ten TSA
management level employees who are not executive officers and who each
purchased 60,000 of the shares. The sale was exempt from registration
pursuant to Section 4(2) of the Securities Act. The securities were offered
only to these ten employees, the employees agreed to resale restrictions,
and the certificates representing the securities were legended. The
purchase price for the preferred shares was $1,490,000 Canadian dollars,
which equated to one million U.S. dollars on the date of issuance. The
preferred shares are exchangeable by the holders for TSA Class A Common
Shares after two years from the date of issuance of the preferred shares or
earlier upon a change of control of TSA. Subject to adjustments, the number
of TSA Class A Common Stock shares issuable upon exchange of a preferred
share (the "Ratio") is equal to the quotient of the purchase price of the
preferred stock (plus any accrued and unpaid dividends) and 115% of the
Canadian dollar equivalent of the average market price for TSA Class A
Common Stock for the 20-day trading period ended prior to the date of
issuance of the preferred shares as determined in the manner set out in the
preferred share provisions. As of the date of issuance of the preferred
shares and subject to adjustments, the total number of TSA Class A Common
Stock shares that would be issuable upon exchange of all of the preferred
shares was 67,679. TSA Exchangeco Limited or other TSA subsidiaries may
elect to redeem the preferred shares after two years from the date of their
issuance, or earlier upon a change of control of TSA or termination of
employment of the holder, for TSA Class A Common Stock with a market value
(as determined based on an average market price) at the time of redemption
equal to the greater of (i) the purchase price (plus any accrued and unpaid
dividends) or (ii) the fair market value of the preferred shares. If there
is no agreement on the fair market value, then it will be determined
pursuant to the preferred share provisions which provide, in general, that
it will equal the number of TSA shares determined pursuant to the Ratio
plus the then present value of any unpaid dividends payable with respect to
periods after the early redemption through the mandatory redemption date.
If the preferred shares have not been earlier exchanged or redeemed, then
they are to be mandatorily redeemed for cash equal to the purchase price
plus any accrued but unpaid dividends on the fifth anniversary date of
their issuance.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Stockholders was held on February 20, 2001.
Each matter voted upon at such meeting and the number of shares cast for,
against or withheld, and abstained are as follows:
1. Election of directors to hold office until the next Annual Meeting of
Stockholders:
Nominee For Withheld
William E. Fisher 27,268,567 1,393,620
Charles E. Noell, III 27,199,864 1,462,323
Jim D. Kever 27,200,629 1,461,558
Larry G. Fendley 27,304,888 1,357,299
Roger K. Alexander 27,306,779 1,355,408
Gregory J. Duman 27,201,638 1,460,549
2. Proposal to amend the Company's 1999 Stock Option Plan to increase the
number of shares for which options may be granted under the plan:
For: 20,254,528 Against: 8,111,395 Abstain: 296,264
3. Proposal to amend the Company's 1999 Employee Stock Purchase Plan to
increase the number of shares which may be sold under the plan:
For: 28,083,063 Against: 290,599 Abstain: 288,525
4. Proposal to ratify the appointment of Arthur Andersen LLP as the
Company's independent auditors:
For: 28,563,100 Against: 66,475 Abstain: 32,612
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
2.12 Combination Agreement, dated as of October 24, 2000, among Transaction
Systems Architects, Inc., Transaction Systems Architects Nova Scotia
Company, TSA Exchangeco Limited and MessagingDirect Ltd.
2.13 Plan of Arrangement under Section 186 of the Business Corporations
Act (Alberta)
2.14 Voting and Exchange Trust Agreement, dated as of January 11, 2001, among
Transaction Systems Architects, Inc., Transaction Systems Architects Nova
Scotia Company, TSA Exchangeco Limited and Wells Fargo Bank Minnesota,
National Association
2.15 Support Agreement, dated as of January 11, 2001, among Transaction
Systems Architects, Inc., Transaction Systems Architects Nova Scotia
Company and TSA Exchangeco Limited
(b) Reports on Form 8-K:
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSACTION SYSTEMS ARCHITECTS, INC.
(Registrant)
Dated: May 15, 2001 By: /s/ EDWARD C. FUXA
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Edward C. Fuxa
Principal Accounting Officer and Controller