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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, 1997
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
TRANSACTION SYSTEMS ARCHITECTS, INC.
(Exact name of registrant specified in its charter)
DELAWARE 47-0772104
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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)
------------------------
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 19, 1997, there were outstanding 26,924,596 shares of the
Company's Class A Common Stock, par value $.005, and 1,171,252 shares of the
Company's Class B 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 $37.875 per share for the
registrant's common stock as of such date) was $1,064,130,243.
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 24, 1998, 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.
1997 FORM 10-K
TABLE OF CONTENTS
PAGE
---------
PART I
Item 1. Business....................................................................................... 3
Item 2. Properties..................................................................................... 11
Item 3. Legal Proceedings.............................................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders............................................ 12
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................... 12
Item 6. Selected Financial Data........................................................................ 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 14
Item 8. Financial Statements and Supplementary Data.................................................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 43
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 43
Item 11. Executive Compensation......................................................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 43
Item 13. Certain Relationships and Related Transactions................................................. 43
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 43
Signatures........................................................................... 46
2
PART I
ITEM 1. BUSINESS
OVERVIEW
Transaction Systems Architects, Inc. ("TSA" or the "Company") develops,
markets and supports a broad line of software products and services primarily
focused on facilitating electronic payments and electronic commerce. The
Company's software products are used to process transactions involving credit
cards, debit cards, smart cards, checks, automated teller machines (ATM),
point-of-sale (POS) terminals, manned teller devices, remote banking, wire
transfers and automated clearing house (ACH) functions. The Company's products
and services assist customers in operating large, complex networks performing
such functions as transaction authorization, transaction routing, debit and
credit card management, transaction settlement and reporting.
The Company is an international supplier of electronic payment software
products and network integration solutions, principally for financial
institutions, as well as for retailers and third-party processors. At September
30, 1997, its customers include 108 of the largest 500 banks in the world, as
measured by asset size. As of September 30, 1997, the Company had 1,664
customers in 69 countries on six continents. During fiscal years 1997, 1996 and
1995, approximately 58%, 53% and 50%, respectively, of the Company's total
revenues resulted from international operations and approximately 75%,72% and
72%, respectively, of its revenues were derived from licensing the BASE24 family
of products and providing related services and maintenance. BASE24 supports high
volume, complex transaction processing and provides customers the flexibility to
operate a wide range of terminals, switches and communications protocols. BASE24
operates in a fault-tolerant environment on Tandem computers.
The Company also markets a complementary electronic payment software product
line, TRANS24, that operates on hardware platforms other than Tandem, including
IBM mainframes and RISC/UNIX servers. In addition, the Company markets network
connectivity software and middleware to customers in a variety of industries to
help solve network integration and systems migration problems. Through its
wholly-owned subsidiary, Grapevine Systems Inc., the Company markets products
and services focused on high availability and on-line transaction processing
systems. Through its wholly-owned subsidiary, Crystal Clear Technologies, Inc.
("Crystal Clear"), the Company markets payment systems that operate on
Microsoft's Windows NT and interactive voice response products that operate on
OS/2.
The Company provides specialized technical services and maintenance,
principally in support of BASE24 and its other product lines. Services and
maintenance fees accounted for 42%, 47% and 47% of the Company's revenues during
fiscal years 1997, 1996 and 1995, respectively.
The Company was formed in November, 1993 and is largely the successor to
Applied Communications, Inc. ("ACI") and Applied Communications Inc. Limited
("ACIL"), which were acquired from Tandem Computers Incorporated ("Tandem") on
December 31, 1993. On January 3, 1994, the Company acquired USSI, Inc. ("USSI").
During 1996 and 1997, the Company completed several acquisitions. These have
included TXN Solution Integrators ("TXN") in June 1996, Grapevine Systems, Inc.
("Grapevine") in September 1996, Open Systems Solutions, Inc. ("OSSI") in
October 1996 and Regency Voice Systems, Inc. ("RVS") in May 1997.
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 and retail merchant locations. The routing, control and
settlement of electronic payments is a complex activity due to the large number
of locations and variety of devices through which transactions can be generated,
the large number of
3
issuers in the market, high transaction volumes, geographically dispersed
networks, differing types of authorization and varied reporting requirements.
Increasingly, these activities are 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.
PRODUCTS AND RELATED SERVICES
The Company develops, markets and supports four product lines: (i)
electronic payments software, (ii) network connectivity software and middleware,
(iii) wholesale banking payments software and (iv) interactive voice response
software. The Company generally grants non-exclusive, non-transferable,
perpetual or monthly licenses which are computer, site or user specific.
ELECTRONIC PAYMENTS SOFTWARE
The Company has two electronic payments software product lines, BASE24 and
TRANS24.
BASE24. BASE24 is an integrated family of products marketed to customers
operating electronic payment networks in the 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. During
fiscal years 1997, 1996 and 1995, the Company derived 75%, 72% and 72%,
respectively, of its revenues from licensing BASE24 products and related
services, including maintenance fees.
The BASE24 product line runs exclusively on Tandem computers. Tandem's
parallel-processing environment offers fault-tolerance, linear expandability and
distributed processing. The combination of features offered by BASE24 and Tandem
are important characteristics in high volume, 24-hour per day electronic payment
systems. The Company believes that equipment supplied by Tandem remains a widely
accepted platform for transaction processing in the electronic payments market.
There can be no assurance that Tandem will continue to achieve financial success
or that its equipment 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. During fiscal years 1997, 1996 and 1995, the
Company derived 5%,4% and 6%, respectively, of its revenues from TRANS24 product
licensing and related services, including maintenance fees. The Company believes
that the TRANS24 product line, utilizing a CICS middleware product, provides the
Company an opportunity to diversify its platform offerings.
The TRANS24 electronic payment products support online processing of
transactions in ATM or POS environments. These products have traditionally been
marketed to smaller institutions than BASE24, and in certain international
markets where Tandem 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.
4
The TRANS24 product line also includes a full range of cardholder and
merchant processing facilities for mid-scale to large-scale credit card issuers,
including consumer application processing, cardholder billing and accounting,
merchant processing and accounting, and credit collection.
NETWORK CONNECTIVITY SOFTWARE AND MIDDLEWARE
The Company markets network connectivity software which involves a set of
software tools that facilitate network integration. The Company has arranged
with Insession, Inc. to distribute and support its System Network Architecture
(SNA) connectivity tool, known as ICE, which facilitates connectivity between
Tandem 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. During fiscal years 1997, 1996 and 1995, the Company derived 8%, 13%
and 12%, respectively, of its revenues from license fees and related services,
including maintenance fees, for network connectivity software and middleware.
WHOLESALE PAYMENTS SOFTWARE
The Company markets two products for processing wholesale payments, MoneyNet
and CO-ach, both of which run on Tandem computers. MoneyNet offers a range of
features to generate, authorize, route, settle and control wire transfer
transactions in a secure, fault-tolerant environment. It is primarily used
domestically and is focused on the Fedwire market, the main interbank wire
transfer market in the United States.
The Company's wholesale payments product, CO-ach, represents a solution 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. During fiscal years 1997, 1996 and 1995,
the Company derived 5% of its revenues from the MoneyNet and CO-ach product
lines.
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 amounts via telephone inquiry. The IVR software
product is targeted at small to mid-sized community banks and runs on personal
computers. During fiscal years 1997, 1996, and 1995 the Company derived 4%, 4%,
and 2%, respectively, of total revenues from the IVR product line.
SERVICES
During fiscal years 1997, 1996 and 1995, the Company generated service
revenues, exclusive of maintenance fees, of $48.4 million, $41.6 million, and
$27.6 million, respectively, or 22.5%, 25.0% and 22.7%, respectively, of total
revenues. The Company offers three different services: technical services,
project management and facilities management.
TECHNICAL SERVICES. Technical services covers a variety of tasks including
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. During fiscal years 1997, 1996 and 1995,
technical service revenue was $32.6 million, $28.1 million and $19.2 million,
respectively.
5
PROJECT MANAGEMENT. The Company offers a Project Management and
Implementation Plan ("PMIP") which provides customers with a variety of support
services, including on-site product integration reviews, project planning,
training, site preparation, installation, testing and go-live support, and
project management throughout the project life cycle. The Company offers
additional services, if required, on a fee basis. PMIPs are offered for a fee
which varies based on the level and quantity of included support services.
During fiscal years 1997, 1996 and 1995, PMIP and other support services revenue
was $10.3 million, $10.7 million and $5.3 million, respectively.
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.
During fiscal years 1997, 1996 and 1995, facilities management revenue was $5.5
million, $2.8 million and $3.1 million, respectively.
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 $41.8 million, $35.9 million and $29.6
million, or 19.4%, 21.6% and 24.4% of total revenues, during fiscal years 1997,
1996 and 1995, 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
Additionally, the Company provides new releases of its products on a
periodic basis. Generally, new releases of the product, which may contain
limited product enhancements, are included at no additional fee. However, the
Company's agreements with its customers permit the Company to charge for certain
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.
6
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
- Perform an annual system review
CUSTOMERS
The Company's typical BASE24 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, 1997, the Company's customer base includes 108 of the largest 500 banks in
the world. The Company's IVR product customers are typically small to midsize
banks and totaled approximately 900 at September 30, 1997.
The following table illustrates the distribution of the Company's customers
by geographic region and industry segment as of September 30, 1997:
FINANCIAL PROCESSORS/
GEOGRAPHIC REGION INSTITUTIONS RETAILERS NETWORKS MANUFACTURING OTHER TOTAL
- ----------------------------------------- ----------- --------- ------------ -------------- --------- ---------
Americas................................. 1,130 52 56 4 99 1,341
Europe, Middle East and Africa (EMEA).... 100 18 26 42 48 234
Asia/Pacific............................. 67 2 11 -- 9 89
----------- --------- ------------ -------------- --------- ---------
Total................................ 1,297 72 93 46 156 1,664
----------- --------- ------------ -------------- --------- ---------
----------- --------- ------------ -------------- --------- ---------
SALES AND MARKETING
The Company's primary method of distribution is direct sales by employees
assigned to specific regions. 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, 1997 the Company employed 128 people in
direct sales, and had arrangements with 24 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 Bahrain, 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.
7
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 Tandem 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 245 employees as
of September 30, 1997. The Company's total research and development expenses,
excluding capitalized software development costs were $18.0 million, $14.9
million and $12.7 million during fiscal years 1997, 1996 and 1995, or 8.4%, 8.9%
and 10.4% of total revenues, respectively.
BACKLOG
As of September 30, 1997, the Company had non-recurring revenue backlog of
$27.7 million in software license fees and $19.2 million in services. 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, 1996 and 1995, the
Company had non-recurring revenue backlog of $20.4 million and $17.1 million,
respectively, in software license fees and $13.6 million and $12.0 million,
respectively, in services.
As of September 30, 1997, the Company had recurring revenue backlog of $94.5
million. 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, however, that contracts included in recurring revenue
backlog will actually generate the specified revenues. As of September 30, 1996
and 1995, the Company had $71.0 million and $53.1 million, respectively, of
recurring revenue backlog.
COMPETITION
The electronic payments market is highly competitive. The Company's most
significant competitors are Deluxe Electronic Payment Systems, Inc. and S2
Systems, Inc. which also offer electronic payment products. 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.
Competitive factors in the electronic payments market include breadth of
product features, product quality and functionality, marketing and sales
resources and customer service and support. Price has
8
not historically been a significant factor in the market for the Company's
products, although the Company expects that pricing pressures may increase in
the future.
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 which 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 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, 1997 the Company had a total of 1,372 employees of whom
197 were engaged in administration, 248 in sales and marketing, 449 in software
development and 478 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 operates primarily in one industry segment, which includes the
development, marketing and support of software products and services primarily
focused on facilitating electronic payments and electronic commerce. See Note 10
to the Company's Consolidated Financial Statements for information relating to
geographic regions.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers are as follows:
NAME AGE POSITION
- -------------------------------- --- -------------------------------------------------------------------------
William E. Fisher............... 51 Chief Executive Officer, President and Director
David C. Russell................ 49 Senior Vice President and Director
David P. Stokes................. 41 General Counsel and Secretary
Gregory J. Duman................ 42 Chief Financial Officer and Treasurer
Edward H. Mangold............... 52 Senior Vice President -- Americas Region
Thomas H. Boje.................. 47 Vice President -- EMEA Region
Don McLarty..................... 50 Vice President -- Asia/Pacific Region
Fred L. Grabher................. 46 Vice President -- Crystal Clear
Mark R. Vipond.................. 38 Vice President -- USSI
Stephen J. Royer................ 39 Vice President -- Grapevine
Jeffrey S. Hale................. 39 Vice President -- Product Company
Dwight G. Hanson................ 39 Chief Accounting Officer
9
Mr. Fisher is President and Chief Executive Officer of TSA and Chief
Executive Officer of ACI. 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 and Chief Operating 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 of ACI in 1996. 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 and Senior
Vice President of the EFT Product Company. From 1984 to 1989, he held various
operations and planning positions at FDR.
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. 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. 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. Grabher joined ACI in 1982 in the U.S. Sales Division. From 1982 to
1990, he held various positions including Director of Sales, Vice President of
Product Marketing and Vice President of Emerging Technologies. He was appointed
to Vice President of Sales for the Asia/Pacific Region in 1990 and President of
Crystal Clear in 1997. Prior to joining ACI, he was Vice President and Division
Manager of Automated Customer Services with First National Bank in Lincoln,
Nebraska.
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. Prior to joining ACI, he was a Systems Engineer at IBM.
Mr. Boje joined ACI in 1983 as Director of Software Development. From 1983
through 1991 he held various positions, including Director of Customer Support
and Vice President of Customer Services. From 1991 through 1993 he was an
independent consultant in the electronic payment market, working on various
domestic and international projects. Mr. Boje rejoined the Company in 1994 as
Vice President of Business Development and was named Managing Director of ACIL
for the EMEA region in 1996. Mr. Boje is based in London.
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 is President of Grapevine. He joined Grapevine in 1988 as Director
of Sales and was named President in 1991. He became Vice President of TSA in
September 1996. Prior to joining Grapevine, he held sales management positions
at Software Alliance, ACI and IBM.
10
Mr. Hale joined ACI in 1987 and served in various sales, marketing and
strategic planning positions prior to his appointment in 1996 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 & Co.
Mr. Hanson joined ACI in 1991 as Corporate Controller. He was appointed Vice
President of Finance for ACI in 1997. From 1981 to 1991, Mr. Hanson worked for
Coopers & Lybrand as a Certified Public Accountant.
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 1998 through
2003, with the principal lease terminating in fiscal 1999. Options for renewal
may extend the principal lease through fiscal 2000.
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 leases for these facilities
terminate in fiscal 1998, 1999 and 1998, respectively.
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 7 to the Company's Consolidated
Financial Statements for additional information regarding the Company's
obligations under its facilities leases.
11
ITEM 3. LEGAL PROCEEDINGS
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.
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 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On June 7, 1996, the Company's Board of Directors authorized a two-for-one
stock split effected in the form of a 100% stock dividend distributed on July 1,
1996 to shareholders of record on June 17, 1996. All references in this document
to number of shares, except authorized shares and treasury shares, and per share
amounts have been restated to retroactively reflect the stock split.
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.
1997 HIGH LOW
- ---------------------------------------- ---------- ----------
First quarter........................... $ 45 1/4 $ 32 1/2
Second quarter.......................... 34 1/2 24 3/8
Third quarter........................... 43 23 1/4
Fourth quarter.......................... 40 5/8 32 1/2
1996
- ----------------------------------------
First quarter........................... $ 16 7/8 $ 12 1/2
Second quarter.......................... 20 5/8 16 3/8
Third quarter........................... 34 19 7/8
Fourth quarter.......................... 45 3/4 24 3/4
On December 19, 1997, the last sale price of the Company's Class A Common
Stock as reported by NASDAQ/NMS was $37.875 per share. There were 398 holders of
record of the Company's Common Stock as of December 19, 1997.
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.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the audited
financial statements of the Company and ACI and ACIL (the "Predecessors").
12
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.
COMPANY (2)
-----------------------------------------------------------------
NINE MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1995 1994(3)
-------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenues:
Software license fees.................................. $121,883 $84,521 $59,699 $36,992
Maintenance fees....................................... 41,846 35,889 29,592 18,626
Services............................................... 48,386 41,569 27,558 18,117
Hardware, net.......................................... 3,351 4,388 4,554 3,702
-------------- -------------- -------------- --------------
Total revenues....................................... 215,466 166,367 121,403 77,437
-------------- -------------- -------------- --------------
Expenses:
Cost of software license fees:
Software costs....................................... 24,982 19,530 13,282 7,533
Amortization of purchased software(4)................ 801 3,143 3,165 2,342
Purchased contracts in progress(4)................... -- -- 2,956 12,398
Cost of maintenance and services....................... 51,078 41,730 28,918 19,369
Research and development:
Research and development costs....................... 18,013 14,853 12,680 8,587
Charge for purchased research and development(4)..... - - - 22,712
Selling and marketing.................................. 48,098 35,299 30,608 18,677
General and administrative:
General and administrative costs..................... 34,818 27,894 19,597 13,658
Amortization of goodwill and purchased
intangibles(4)..................................... 1,008 656 344 834
-------------- -------------- -------------- --------------
Total expenses..................................... 178,798 143,105 111,550 106,110
-------------- -------------- -------------- --------------
Operating income (loss).................................. 36,668 23,262 9,853 (28,673)
-------------- -------------- -------------- --------------
Other income (expense):
Interest income........................................ 2,067 1,930 1,084 416
Interest expense....................................... (178) (233) (1,751) (3,058)
Other income (expense)................................. (666) (625) 12 172
-------------- -------------- -------------- --------------
Total other.......................................... 1,223 1,072 (655) (2,470)
-------------- -------------- -------------- --------------
Income (loss) before income taxes........................ 37,891 24,334 9,198 (31,143)
Provision for income taxes............................... (14,325) (9,296) (2,145) (2,164)
-------------- -------------- -------------- --------------
Net income (loss) before extraordinary loss.............. 23,566 15,038 7,053 (33,307)
Extraordinary loss related to early retirement of debt
(4)..................................................... -- -- (2,750) --
-------------- -------------- -------------- --------------
Net income (loss)........................................ $ 23,566 $15,038 $ 4,303 ($33,307)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Shares used in per share computation (6)................. 28,747 28,631 24,866 22,203
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Pro forma information (5):
Net income (loss)...................................... $ 23,059 $14,184 $ 4,060 ($33,307)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Net income (loss) per common and equivalent share (6):
Before extraordinary loss.............................. $ 0.80 $ 0.50 $ 0.28 ($ 1.50)
Extraordinary loss..................................... -- -- ($ 0.12) --
-------------- -------------- -------------- --------------
Net income (loss) per common and equivalent share...... $ 0.80 $ 0.50 $ 0.16 ($ 1.50)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
BALANCE SHEET DATA:
Working capital........................................ $ 59,270 $40,391 $38,153 $ 2,037
Total assets........................................... 165,234 125,897 103,586 61,382
Long-term obligations.................................. 2,379 1,687 357 22,801
Stockholders' equity (deficit)......................... 104,038 76,177 60,402 (31,406)
PREDECESSORS (1)
-------------------------------
THREE MONTHS
ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
1993 1993
-------------- --------------
STATEMENT OF INCOME DATA:
Revenues:
Software license fees.................................. $ 7,956 $35,988
Maintenance fees....................................... 5,392 19,984
Services............................................... 4,353 12,455
Hardware, net.......................................... 1,129 2,731
-------------- --------------
Total revenues....................................... 18,830 71,158
-------------- --------------
Expenses:
Cost of software license fees:
Software costs....................................... 2,713 9,390
Amortization of purchased software(4)................ 1,034 4,974
Purchased contracts in progress(4)................... -- --
Cost of maintenance and services....................... 5,164 17,668
Research and development:
Research and development costs....................... 1,704 5,475
Charge for purchased research and development(4)..... - -
Selling and marketing.................................. 4,359 18,204
General and administrative:
General and administrative costs..................... 3,946 15,054
Amortization of goodwill and purchased
intangibles(4)..................................... 816 3,268
-------------- --------------
Total expenses..................................... 19,736 74,033
-------------- --------------
Operating income (loss).................................. (906) (2,875)
-------------- --------------
Other income (expense):
Interest income........................................ 91 212
Interest expense....................................... (34) (137)
Other income (expense)................................. - -
-------------- --------------
Total other.......................................... 57 75
-------------- --------------
Income (loss) before income taxes........................ (849) (2,800)
Provision for income taxes............................... (802) (1,590)
-------------- --------------
Net income (loss) before extraordinary loss.............. (1,651) (4,390)
Extraordinary loss related to early retirement of debt
(4)..................................................... -- --
-------------- --------------
Net income (loss)........................................ ($1,651) ($4,390)
-------------- --------------
-------------- --------------
Shares used in per share computation (6).................
Pro forma information (5):
Net income (loss)......................................
Net income (loss) per common and equivalent share (6):
Before extraordinary loss..............................
Extraordinary loss.....................................
Net income (loss) per common and equivalent share......
BALANCE SHEET DATA:
Working capital........................................ $ 6,861 $13,879
Total assets........................................... 47,861 57,286
Long-term obligations.................................. 601 672
Stockholders' equity (deficit)......................... 28,940 39,099
- ------------------------------
(1) The Company was formed on November 2, 1993 for the purpose of acquiring all
of the outstanding capital stock of ACI and ACIL from Tandem. ACI and ACIL
were acquired on December 31, 1993. On January 3, 1994, the Company acquired
all of the outstanding common stock of USSI. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview."
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
13
(FOOTNOTES CONTINUED FROM PRECEDING PAGES)
(2) The statement of income data after January 1, 1994 are not comparable to
data for prior periods due to the effects of the acquisition of the
Predecessors. The acquisition was accounted for as a purchase and the
financial statements since the date of the acquisition are presented on the
new basis of accounting established for the purchased assets and
liabilities.
(3) The financial data for the nine months ended September 30, 1994 represents
the results of operations of the Company for the periods from inception
(November 2, 1993) through September 30, 1994. The Company did not have
substantive operations prior to the December 31, 1993 acquisition of ACI and
ACIL.
(4) These expenses are the result of certain one-time or acquisition related
expenses. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview."
(5) Pro forma net income (loss) and net income (loss) per common and equivalent
share reflects a pro forma tax provision for RVS for combined federal and
state income taxes to report income taxes on the basis of which income taxes
will be reported in future periods. Prior to the stock exchange transaction,
RVS was taxed primarily as a partnership and, accordingly, taxable income
was included in the personal tax of RVS owners who were responsible for the
payment of tax thereof.
(6) Net income per common and equivalent share and the shares used in the per
share computation have been computed on the basis described in Note 2 to the
Company's Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company was formed on November 2, 1993 for the purpose of acquiring all
of the outstanding capital stock of ACI and ACIL from Tandem. ACI and ACIL were
acquired on December 31, 1993. On January 3, 1994, the Company acquired all of
the outstanding common stock of USSI, Inc., ("USSI") formerly known as U.S.
Software, Inc. The acquisitions of ACI, ACIL and USSI are hereafter referred to
as the "Acquisitions." As a result of the Acquisitions, the Company incurred
certain one-time or acquisition related expenses in fiscal 1997, 1996 and 1995.
These acquisition related charges included, among others purchased contracts in
progress, purchased software and goodwill amortization. These expenses are
hereafter referred to as the "Acquisition Charges".
On June 3, 1996, the Company acquired substantially all of the net assets of
TXN Solution Integrator ("TXN"). The acquisition was accounted for as a
purchase.
On September 13, 1996, the Company and Grapevine entered into a share
exchange agreement which resulted in Grapevine becoming a wholly-owned
subsidiary of the Company. The share exchange was accounted for as a pooling of
interests. On May 13, 1997, the Company and Regency Voice Systems, Inc. and
related entities ("RVS") entered into a stock exchange agreement which resulted
in RVS becoming a wholly-owned subsidiary of the Company. The stock exchange has
been accounted for as a pooling of interests. The Company's financial statements
have been restated to include the results of Grapevine and RVS for all periods
presented.
The Company provides electronic payments software and related services.
During fiscal 1997, 1996 and 1995, 58%, 53% and 50%, respectively, of total
revenues resulted from international operations. The Company derived
approximately 75%, 72% and 72%, 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 and
TRANS24 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,
remote banking, ACH and IVR.
14
The following table summarizes revenues by geographic region:
TWELVE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
Americas............................................... $ 124,112 $ 97,644 $ 78,554
EMEA................................................... 64,676 47,267 31,264
Asia/Pacific........................................... 26,678 21,456 11,585
----------- ----------- -----------
Total revenues....................................... $ 215,466 $ 166,367 $ 121,403
----------- ----------- -----------
----------- ----------- -----------
See Note 10 to the Company's Consolidated Financial Statements for
additional information relating to geographic regions.
PRODUCT PRICING. The Company typically charges an initial license fee
("ILF") and an ongoing monthly licensing fee ("MLF") for its software products.
Substantially all ILF revenue related to the transaction is recognized when the
software is installed and MLF revenue is recognized on a monthly basis. A key
component of the Company's strategy is to continue to seek to increase MLF
revenue. MLF revenue amounted to $32.4 million, $22.0 million and $13.6 million,
in fiscal 1997, 1996 and 1995, respectively. ILF revenue, including software
modification fees, amounted to $89.5 million, $62.5 million and $46.1 million,
in fiscal 1997, 1996 and 1995, respectively.
HARDWARE REVENUES. The Company has a written agreement with Tandem whereby
Tandem pays commissions to the Company when the Company can demonstrate that a
customer's purchase of its software resulted in that customer's purchase of
hardware from Tandem. The commissions are determined as a percentage of Tandem's
related hardware revenue. Commissions from Tandem amounted to $3.4 million, $4.4
million and $4.6 million in fiscal 1997, 1996 and 1995, respectively. The
agreement with Tandem expires on December 31, 1997. The existing agreement is
expected to be replaced by an arrangement whereby Tandem will terminate the
payment of commissions to the Company and replace these payments with market
development funding. This market development funding is expected to be
substantially less than the Company received under the prior arrangement.
PUBLIC OFFERINGS. The Company completed an initial public offering (IPO) in
March 1995. The Company sold 4,825,000 shares of Class A Common Stock resulting
in net proceeds to the Company, after deducting the underwriting discount and
offering expenses, of approximately $32.3 million. The Company used $25.8
million of the IPO proceeds to repay all outstanding bank indebtedness (the
"Indebtedness"). Upon repayment of the Indebtedness, the Company incurred an
extraordinary loss of $2.7 million for the write-off of debt issuance costs of
$1.1 million and original issue discount of $1.6 million. In August 1995, the
Company completed the issuance of an additional 2,000,000 shares of Class A
Common Stock through a public offering, resulting in net proceeds, after
deducting the underwriting discount and offering expenses, of approximately
$22.4 million.
15
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,
----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
% OF % OF % OF
(DOLLARS IN THOUSANDS) AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
--------- ----------- --------- ----------- --------- -----------
Revenues:
Software license fees........................ $ 121,883 56.6% $ 84,521 50.8% $ 59,699 49.2%
Maintenance fees............................. 41,846 19.4 35,889 21.6 29,592 24.4
Services..................................... 48,386 22.5 41,569 25.0 27,558 22.7
Hardware, net................................ 3,351 1.6 4,388 2.6 4,554 3.8
--------- ----- --------- ----- --------- -----
Total revenues............................. 215,466 100.0 166,367 100.0 121,403 100.0
Expenses:
Cost of software license fees:
Software costs............................. 24,982 11.6 19,530 11.7 13,282 10.9
Amortization of purchased software......... 801 0.4 3,143 1.9 3,165 2.6
Purchased contracts in progress............ -- -- -- -- 2,956 2.4
Cost of maintenance and services............. 51,078 23.7 41,730 25.1 28,918 23.8
Research and development..................... 18,013 8.4 14,853 8.9 12,680 10.4
Selling and marketing........................ 48,098 22.3 35,299 21.2 30,608 25.2
General and administrative:
General and administrative costs........... 34,818 16.2 27,894 16.8 19,597 16.1
Amortization of goodwill and purchased
intangibles.............................. 1,008 0.5 656 0.4 344 0.3
--------- ----- --------- ----- --------- -----
Total expenses............................. 178,798 83.0 143,105 86.0 111,550 91.9
--------- ----- --------- ----- --------- -----
Operating income (loss)........................ 36,668 17.0 23,262 14.0 9,853 8.1
Other income (expense):
Interest income.............................. 2,067 1.0 1,930 1.2 1,084 0.9
Interest expense............................. (178) (0.1) (233) (0.1) (1,751) (1.4)
Other income (expense)....................... (666) (0.3) (625) (0.4) 12 0.0
--------- ----- --------- ----- --------- -----
Total other................................ 1,223 0.6 1,072 0.6 (655) (0.5)
--------- ----- --------- ----- --------- -----
Income before income taxes..................... 37,891 17.6 24,334 14.6 9,198 7.6
Provision for income taxes..................... (14,325) (6.6) (9,296) (5.6) (2,145) (1.8)
--------- ----- --------- ----- --------- -----
Net income before extraordinary loss........... 23,566 10.9 15,038 9.0 7,053 5.8
Extraordinary loss related to early retirement
of debt....................................... -- -- -- -- (2,750) (2.3)
--------- ----- --------- ----- --------- -----
Net income..................................... $ 23,566 10.9% $ 15,038 9.0% $ 4,303 3.5%
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Pro forma net income (1)....................... $ 23,059 10.7% $ 14,184 8.5% $ 4,060 3.3%
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
- ------------------------------
(1) Pro forma net income reflects a pro forma tax provision for RVS for combined
federal and state income taxes to report income taxes on the basis of which
income taxes will be reported in future periods. Prior to the stock exchange
transaction, RVS was taxed primarily as a partnership and, accordingly,
taxable income was included in the personal tax of RVS owners who were
responsible for the payment of tax thereof.
REVENUES. Total revenues for fiscal 1997 increased 29.5% or $49.1 million
over fiscal 1996. Of this increase, $37.3 million of the growth resulted from a
44.2% increase in software license fee revenue, $6.8 million from a 16.4%
increase in services revenue and $6.0 million from a 16.6% increase in
maintenance fee revenue.
Total revenues for fiscal 1996 increased 37.0% or $45.0 million over fiscal
1995. Of this increase, $24.8 million of the growth resulted from a 41.6%
increase in software license fee revenue, $14.0 million from a 50.8% increase in
services revenue and $6.3 million from a 21.3% from increase in maintenance fee
revenue.
The growth in software license fee revenue in both fiscal 1997 and 1996 is
primarily the result of increased demand for the Company's BASE24 products and a
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
16
the growing complexity of electronic payment systems. MLF revenue was $32.4
million, $22.0 million and $13.6 million in fiscal 1997, 1996 and 1995,
respectively.
The growth in service revenue in both fiscal 1997 and 1996 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 1997 and 1996 is a
result of the continued growth of the installed base of the Company's software
products.
EXPENSES. Total operating expenses for fiscal 1997 increased 24.9% or $35.7
million over fiscal 1996. Total operating expenses for fiscal 1996 increased
28.2% or $31.6 million over fiscal 1995. The primary reason for the overall
increase in operating expenses during fiscal 1997 and 1996 is the increase in
staff required to support the increased demand for the Company's products and
services. Total staff (including both employees and independent contractors) was
1,534, 1,312, and 1,080 at September 30, 1997, 1996 and 1995, respectively.
The Company's operating margin (excluding the Acquisition charges of $0.9
million,$3.3 million and $6.5 million for fiscal 1997 1996 and 1995
respectively) was 17.4%, 16.0% and 13.4% in fiscal 1997, 1996 and 1995,
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 64.7%, 63.2% and 65.2% in fiscal 1997, 1996 and
1995, respectively. The increase in gross margin during fiscal 1997 is primarily
due to the impact of additional MLF revenue. The decline in gross margin during
fiscal 1996 is primarily due to the accelerated growth in 1996 in services
business which typically has a lower gross margin.
Research and development (R&D) costs as a percentage of total revenues were
8.4%, 8.9% and 10.4% in fiscal 1997, 1996 and 1995, respectively. The majority
of R&D costs have been charged to expense as incurred with the capitalization of
software costs amounting to approximately $1.2 million per year. The Company
expects R&D costs to remain relatively constant as a percentage of revenues.
Selling and marketing costs as a percentage of total revenues were 22.3%,
21.2% and 25.2% in fiscal 1997, 1996 and 1995, respectively. The increase in
1997 is due primarily to higher levels of license fee revenue and backlog. The
decrease in 1996 is due primarily to higher levels of services revenue and
services backlog which typically has a lower level of sales commission expense
associated with it.
General and administrative costs as a percentage of total revenues were
16.2%, 16.8% and 16.1% in fiscal 1997, 1996 and 1995. The 1997 decrease is due
primarily to higher revenue levels. The 1996 increase is due primarily to the
hiring of additional staff to support the Company's growth which more than
offset the impact of higher revenue levels.
EBITDA. The Company's earnings before interest, income taxes, depreciation
and amortization (EBITDA) was $46.4 million, $33.2 million and $20.9 million for
fiscal 1997, 1996 and 1995, 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.
OTHER INCOME AND EXPENSE. Other income and expense consists primarily of
interest income derived from short-term investments and interest expense on
indebtedness. The growth in interest income is due to the increase in cash and
cash equivalents. The decrease in interest expense is due to the repayment of
debt out of the proceeds of the Company's March 1995 public offering.
EXTRAORDINARY LOSS. In March 1995, the Company used a portion of the
proceeds from an initial public offering to repay debt obligations. Upon the
repayment of debt, the Company incurred an
17
extraordinary loss of $2.7 million for the write-off of debt issuance costs of
$1.1 million and original issue discount of $1.6 million.
INCOME TAXES. The Company had an effective tax rate of 37.8% for fiscal 1997
as compared to 38.2% for fiscal 1996. The decrease in the effective tax rate is
principally due to the amount of deferred tax assets recognized in fiscal 1997
as compared to fiscal 1996.
As of September 30, 1997, the Company has deferred tax assets of
approximately $16.6 million and deferred tax liabilities of $0.4 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 $3.5 million of the deferred tax assets were more likely
than not to be realized. Accordingly, the Company has recorded a valuation
allowance of $13.1 million as of September 30, 1997.
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, 1997 and 1996, the Company had non-recurring revenue
backlog of $27.7 million and $20.4 million in software license fees and $19.2
million and $13.6 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, 1997 and 1996, the Company had recurring revenue backlog
of $94.5 million and $71.0 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, however, that
contracts included in recurring revenue backlog will actually generate the
specified revenues.
YEAR 2000
Management has initiated a Company-wide program to prepare the Company's
computer systems and applications as well as the Company's product offerings for
the year 2000. The Company expects to incur internal staff costs as well as
consulting and other expenses related to system enhancements and product
modifications for the year 2000. The majority of the Company's product offerings
are currently year 2000 compliant. The total cost to be incurred by the Company
for all year 2000 related projects is not expected to have a material impact on
the future results of operations. However there could be a material adverse
effect on the results of operations of the Company if the system enhancements
and product modifications for the year 2000 prove not to be effective.
18
SELECTED QUARTERLY INFORMATION
The following table sets forth certain unaudited financial data for each of
the quarters within fiscal 1997, 1996 and 1995. 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,
(IN THOUSANDS) 1997 1997 1997 1996 1996 1996 1996
------- -------- --------- -------- -------- -------- ---------
Revenues:
Software license fees......... $32,379 $31,186 $31,179 $27,139 $24,479 $21,545 $20,527
Maintenance fees.............. 10,815 10,746 10,179 10,106 9,847 9,173 8,494
Services...................... 12,641 12,395 11,309 12,041 12,142 11,206 9,303
Hardware, net................. 1,133 881 784 553 1,109 977 1,063
------- -------- --------- -------- -------- -------- ---------
Total revenues.............. 56,968 55,208 53,451 49,839 47,577 42,901 39,387
------- -------- --------- -------- -------- -------- ---------
Expenses:
Cost of software license fees:
Software costs.............. 6,569 6,494 6,364 5,555 5,306 5,292 4,971
Amortization of purchased
software.................. -- -- -- 801 787 783 785
Purchased contracts in
progress.................. -- -- -- -- -- -- --
Cost of maintenance and
services.................... 13,023 13,038 12,305 12,712 12,249 10,969 9,598
Research and development...... 4,692 4,618 4,624 4,079 3,886 3,499 3,873
Selling and marketing......... 13,131 12,368 12,030 10,569 10,107 8,570 8,097
General and administrative:
General and administrative
costs..................... 8,936 8,814 8,777 8,291 7,699 7,589 6,431
Amortization of goodwill and
purchased intangibles..... 344 210 237 217 204 157 145
------- -------- --------- -------- -------- -------- ---------
Total expenses.............. 46,695 45,542 44,337 42,224 40,238 36,859 33,900
------- -------- --------- -------- -------- -------- ---------
Operating income (loss)......... 10,273 9,666 9,114 7,615 7,339 6,042 5,487
------- -------- --------- -------- -------- -------- ---------
Other income (expense):
Interest income............... 570 557 498 442 343 442 577
Interest expense.............. (42 ) (55) (24) (57) (54) (54) (84)
Other income (expense)........ (84 ) (38) (227) (317) (445) (99) (51)
------- -------- --------- -------- -------- -------- ---------
Total other................. 444 464 247 68 (156) 289 442
------- -------- --------- -------- -------- -------- ---------
Income (loss) before income
taxes.......................... 10,717 10,130 9,361 7,683 7,183 6,331 5,929
Benefit (provision) for income
taxes.......................... (3,786 ) (3,793) (3,667) (3,079) (2,915) (2,393) (2,124)
------- -------- --------- -------- -------- -------- ---------
Net income (loss) before
extraordinary loss............. 6,931 6,337 5,694 4,604 4,268 3,938 3,805
Extraordinary loss related to
early retirement of debt....... -- -- -- -- -- -- --
------- -------- --------- -------- -------- -------- ---------
Net income (loss)............... $6,931 $ 6,337 $ 5,694 $ 4,604 $ 4,268 $ 3,938 $ 3,805
------- -------- --------- -------- -------- -------- ---------
------- -------- --------- -------- -------- -------- ---------
Pro forma net income
(loss)(1)...................... $ 5,523 $ 4,268 $ 3,959 $ 3,665 $ 3,529
--------- -------- -------- -------- ---------
--------- -------- -------- -------- ---------
DEC. 31, SEP. 30, JUNE 30, MARCH 31, DEC. 31,
(IN THOUSANDS) 1995 1995 1995 1995 1994
-------- -------- -------- --------- ------------
Revenues:
Software license fees......... $17,970 $18,339 $14,926 $ 13,712 $12,722
Maintenance fees.............. 8,375 7,615 7,596 7,411 6,970
Services...................... 8,918 7,917 7,177 6,246 6,218
Hardware, net................. 1,239 1,271 1,200 1,033 1,050
-------- -------- -------- --------- ------------
Total revenues.............. 36,502 35,142 30,899 28,402 26,960
-------- -------- -------- --------- ------------
Expenses:
Cost of software license fees:
Software costs.............. 3,961 4,088 2,869 2,933 3,392
Amortization of purchased
software.................. 788 791 792 790 792
Purchased contracts in
progress.................. -- -- 631 2,325
---
Cost of maintenance and
services.................... 8,914 8,202 7,587 6,770 6,359
Research and development...... 3,595 3,602 3,668 2,791 2,619
Selling and marketing......... 8,525 9,244 7,659 7,132 6,573
General and administrative:
General and administrative
costs..................... 6,175 4,969 4,708 4,802 5,118
Amortization of goodwill and
purchased intangibles..... 150 50 50 103 141
-------- -------- -------- --------- ------------
Total expenses.............. 32,108 30,946 27,333 25,952 27,319
-------- -------- -------- --------- ------------
Operating income (loss)......... 4,394 4,196 3,566 2,450 (359)
-------- -------- -------- --------- ------------
Other income (expense):
Interest income............... 568 464 284 186 150
Interest expense.............. (41) (49) (41) (703) (958)
Other income (expense)........ (30) (87) 58 149 (108)
-------- -------- -------- --------- ------------
Total other................. 497 328 301 (368) (916)
-------- -------- -------- --------- ------------
Income (loss) before income
taxes.......................... 4,891 4,524 3,867 2,082 (1,275)
Benefit (provision) for income
taxes.......................... (1,864) (1,400) (737) 526 (534)
-------- -------- -------- --------- ------------
Net income (loss) before
extraordinary loss............. 3,027 3,124 3,130 2,608 (1,809)
Extraordinary loss related to
early retirement of debt....... -- -- -- (2,750) --
-------- -------- -------- --------- ------------
Net income (loss)............... $ 3,027 $ 3,124 $ 3,130 ($ 142) ($1,809)
-------- -------- -------- --------- ------------
-------- -------- -------- --------- ------------
Pro forma net income
(loss)(1)...................... $ 3,031 $ 2,981 $ 3,030 ($ 260) ($1,691)
-------- -------- -------- --------- ------------
-------- -------- -------- --------- ------------
- ----------------------------------
(1) Pro forma net income reflects a pro forma tax provision for RVS for combined
federal and state income taxes to report income taxes on the basis of which
income taxes will be reported in future periods. Prior to the stock exchange
transaction, RVS was taxed primarily as a partnership and, accordingly,
taxable income was included in the personal tax of RVS owners who were
responsible for the payment of tax thereof.
19
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had working capital of $59.3 million,
cash and cash equivalents of $46.6 million and a $10 million bank line of credit
of which there are no borrowings outstanding. The bank line of credit expires in
June 1998.
For the year ended September 30, 1997, the Company's cash flow from
operations amounted to $30.6 million and cash used in investing activities
amounted to $18.0 million.
In the normal course of business, the Company evaluates potential
acquisitions of complementary businesses, products or technologies. On October
2, 1995, the Company acquired the capital stock of a German software company for
$3.4 million. The acquisition was accounted for under the purchase accounting
method and was financed with existing cash and future payments to the sellers.
In January 1996, the Company entered into a transaction with Insession, Inc.
(Insession) whereby the Company acquired a 7.5% minority interest in Insession
for $1.5 million. In addition, since January 1996, the Company loaned Insession
$5.0 million under promissory notes of which Insession repaid the Company
$500,000 in June 1997. The promissory notes bear an interest rate of prime plus
0.25%, and are payable in January 1999 ($1.0 million), January 2000 ($1.0
million) and January 2001 ($1.5 million). The remaining $1.0 million of
promissory notes are payable upon demand. The promissory notes are secured by
future royalties owed by the Company to Insession.
On June 3, 1996, the Company acquired substantially all of the net assets of
TXN Solution Integrators (TXN) for $3.6 million in cash and the assumption of
certain liabilities of TXN. The acquisition was accounted for under the purchase
accounting method and was financed with existing cash.
In August 1995, the Company entered into a transaction with U.S. Processing,
Inc. (USPI), a transaction processing business, whereby it agreed to extend USPI
a $2.5 million credit facility which the Company subsequently increased to $3.6
million during fiscal 1996. In March 1997, the Company revised the terms of the
line of credit whereby the Company received $3.6 million as repayment made under
the previous line of credit. In addition, the Company converted $1.0 million of
prior advances under the line of credit into a 19.9% ownership interest in USPI.
The revised line of credit provides USPI with the ability to borrow $4.5 million
from the Company. As of September 30, 1997 borrowings under the revised line of
credit totaled $2.0 million.
In fiscal year 1996, the Company acquired Grapevine in exchange for 380,441
shares of the Company's Class A Common Stock. In fiscal year 1997, the Company
acquired RVS and OSSI in exchange for 1,615,383 shares and 210,000 shares,
respectively, of the Company's class A Common Stock.
Management believes that the Company's working capital, cash flow generated
from operations and borrowing capacity are sufficient to meet the Company's
working capital requirements for the foreseeable future.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants................................ 22
Consolidated Balance Sheets as of September 30, 1997 and 1996........... 23
Consolidated Statements of Income for each of the three years in the
period ended September 30, 1997....................................... 24
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended September 30, 1997.......................... 25
Consolidated Statements of Cash Flows for each of the three years in the
period ended September 30, 1997....................................... 26
Notes to Consolidated Financial Statements.............................. 27
21
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, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Omaha, Nebraska,
October 30, 1997
22
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30,
----------------------
1997 1996
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 46,600 $ 32,751
Billed receivables, net of allowances of $2,220 and $1,090, respectively................ 39,864 30,598
Accrued receivables..................................................................... 25,063 19,284
Deferred income taxes................................................................... 3,517 4,348
Other................................................................................... 3,043 1,443
---------- ----------
Total current assets.................................................................. 118,087 88,424
Property and equipment, net............................................................... 16,263 13,340
Software, net............................................................................. 6,105 5,424
Intangible assets, net.................................................................... 9,539 7,236
Installment receivables................................................................... 2,394 1,593
Investments and notes receivable.......................................................... 7,969 8,105
Other..................................................................................... 4,877 1,775
---------- ----------
Total assets.......................................................................... $ 165,234 $ 125,897
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt....................................................... $ 768 $ 1,147
Current portion of capital lease obligations............................................ 524 342
Accounts payable........................................................................ 7,896 8,629
Accrued employee compensation........................................................... 5,559 5,210
Accrued liabilities..................................................................... 9,048 7,732
Income taxes............................................................................ 6,230 4,466
Deferred revenue........................................................................ 28,792 20,507
---------- ----------
Total current liabilities............................................................. 58,817 48,033
Long-term debt............................................................................ 1,465 1,431
Capital lease obligations................................................................. 914 256
---------- ----------
Total liabilities..................................................................... 61,196 49,720
---------- ----------
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, 1997 and 1996
Redeemable Convertible Class B Common Stock and Warrants, $.005 par value; 5,000,000
shares authorized; no shares issued and outstanding at September 30, 1997 and 1996....
Class A Common Stock, $.005 par value; 50,000,000 shares authorized; 26,877,467 and
25,356,149 shares issued at September 30, 1997 and 1996, respectively................. 134 127
Class B Common Stock, $.005 par value; 5,000,000 shares authorized; 1,171,252 and
2,171,252 shares issued and outstanding at September 30, 1997 and 1996,
respectively.......................................................................... 6 11
Additional paid-in capital.............................................................. 103,708 95,909
Accumulated translation adjustments..................................................... (260) (236)
Retained earnings (accumulated deficit)................................................. 462 (19,622)
Treasury stock, at cost, 845 shares at September 30, 1997 and 1996...................... (12) (12)
---------- ----------
Total stockholders' equity............................................................ 104,038 76,177
---------- ----------
Total liabilities and stockholders' equity............................................ $ 165,234 $ 125,897
---------- ----------
---------- ----------
The accompanying notes are an integral part of the consolidated financial
statements.
23
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Revenues:
Software license fees.................................................... $ 121,883 $ 84,521 $ 59,699
Maintenance fees......................................................... 41,846 35,889 29,592
Services................................................................. 48,386 41,569 27,558
Hardware, net............................................................ 3,351 4,388 4,554
----------- ----------- -----------
Total revenues......................................................... 215,466 166,367 121,403
----------- ----------- -----------
Expenses:
Cost of software license fees:
Software costs......................................................... 24,982 19,530 13,282
Amortization of purchased software..................................... 801 3,143 3,165
Purchased contracts in progress........................................ -- -- 2,956
Cost of maintenance and services......................................... 51,078 41,730 28,918
Research and development................................................. 18,013 14,853 12,680
Selling and marketing.................................................... 48,098 35,299 30,608
General and administrative:
General and administrative costs....................................... 34,818 27,894 19,597
Amortization of goodwill and purchased intangibles..................... 1,008 656 344
----------- ----------- -----------
Total expenses......................................................... 178,798 143,105 111,550
----------- ----------- -----------
Operating income........................................................... 36,668 23,262 9,853
----------- ----------- -----------
Other income (expense):
Interest income.......................................................... 2,067 1,930 1,084
Interest expense......................................................... (178) (233) (1,751)
Other.................................................................... (666) (625) 12
----------- ----------- -----------
Total other............................................................ 1,223 1,072 (655)
----------- ----------- -----------
Income before income taxes................................................. 37,891 24,334 9,198
Provision for income taxes................................................. (14,325) (9,296) (2,145)
----------- ----------- -----------
Income before extraordinary loss........................................... 23,566 15,038 7,053
Extraordinary loss related to early retirement of debt..................... -- -- (2,750)
----------- ----------- -----------
Net income................................................................. $ 23,566 $ 15,038 $ 4,303
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares outstanding........................................ 28,747 28,631 24,866
----------- ----------- -----------
----------- ----------- -----------
Unaudited pro forma information (Note 3):
Net income--historical................................................. $ 23,566 $ 15,038 $ 4,303
Tax adjustment--pro forma.............................................. (507) (854) (243)
----------- ----------- -----------
Net income--pro forma.................................................. $ 23,059 $ 14,184 $ 4,060
----------- ----------- -----------
----------- ----------- -----------
Net income per common and equivalent share--pro forma:
Before extraordinary loss............................................ $ 0.80 $ 0.50 $ 0.27
Extraordinary loss................................................... -- -- $ (0.11)
----------- ----------- -----------
Net income........................................................... $ 0.80 $ 0.50 $ 0.16
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial
statements.
24
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
CLASS B ADDITIONAL ACCUMULATED
CLASS A COMMON PAID-IN TRANSLATION RETAINED
COMMON STOCK STOCK CAPITAL ADJUSTMENTS EARNINGS
------------- ------------- ----------- --------------- -----------
Balance, September 30, 1994, as previously
reported.......................................... $ 8 $ -- $ 3,199 $ (102) $ (34,608)
Adjustment for Regency Voice Systems and related
entities pooling of interests..................... 8 (153) 273
----- --- ----------- ------ -----------
Balance, September 30, 1994, as restated............ 16 -- 3,046 (102) (34,335)
PIK dividends for Redeemable Convertible Preferred
Stock............................................. -- -- -- -- (649)
Accretion of Redeemable Convertible Preferred
Stock............................................. -- -- -- -- (133)
Accretion of Redeemable Convertible Class B Common
Stock and Warrants................................ -- -- -- -- (244)
Sale of Class A Common Stock pursuant to intitial
public offering, net of issuance costs............ 12 -- 32,240 -- --
Conversion of Redeemable Convertible Preferred Stock
to Common Stock pursuant to initial public
offering.......................................... 23 9 27,483 -- --
Termination of redemption rights of Convertible
Class B Common Stock pursuant to initial public
offering.......................................... 8 -- 5,468 -- --
Exercise of Class A Common Stock Warrants........... -- -- 1,754 -- --
Sale of Class A Common Stock pursuant to public
offering, net of issuance costs................... 7 (2) 22,419 -- --
Distribution to owners of Regency Voice Systems and
related entities.................................. -- -- -- -- (815)
Purchase of 845 shares of Class A Common Stock...... -- -- -- -- --
Exercise of stock options........................... -- -- 158 -- --
Net income.......................................... -- -- -- -- 4,303
Translation adjustments............................. -- -- -- (252) --
----- --- ----------- ------ -----------
Balance, September 30, 1995......................... 66 7 92,568 (354) (31,873)
Two-for-one stock split............................. 56 8 (64) -- --
Sale of Class A Common Stock pursuant to Employee
Stock Purchase Plan............................... -- -- 355 -- --
Conversion of Class B Common Stock to Class A Common
Stock............................................. 4 (4) -- -- --
Exercise of stock options........................... 1 -- 1,077 -- --
Distribution to owners of Regency Voice Systems and
related entities.................................. -- -- -- -- (2,787)
Tax benefit of stock options exercised.............. -- -- 1,973 -- --
Net income.......................................... -- -- -- -- 15,038
Translation adjustments............................. -- -- -- 118 --
----- --- ----------- ------ -----------
Balance, September 30, 1996......................... 127 11 95,909 (236) (19,622)
Adjustment for Open Systems Solutions, Inc. pooling
of interests...................................... 1 -- 5 -- (176)
Sale of Class A Common Stock pursuant to Employee
Stock Purchase Plan............................... -- -- 778 -- --
Conversion of Class B Common Stock to Class A Common
Stock............................................. 5 (5) -- -- --
Exercise of stock options........................... 1 -- 1,298 -- --
Distribution to owners of Regency Voice Systems and
related entities.................................. -- -- -- -- (3,306)
Tax benefit of stock options exercised.............. -- -- 2,586 -- --
Sale of stock options............................... -- -- 3,132 -- --
Net income.......................................... -- -- -- -- 23,566
Translation adjustments............................. -- -- -- (24) --
----- --- ----------- ------ -----------
Balance, September 30, 1997......................... $ 134 $ 6 $ 103,708 $ (260) $ 462
----- --- ----------- ------ -----------
----- --- ----------- ------ -----------
TREASURY
STOCK TOTAL
------------- ---------
Balance, September 30, 1994, as previously
reported.......................................... $ -- $ (31,503)
Adjustment for Regency Voice Systems and related
entities pooling of interests..................... 128
----- ---------
Balance, September 30, 1994, as restated............ -- (31,375)
PIK dividends for Redeemable Convertible Preferred
Stock............................................. -- (649)
Accretion of Redeemable Convertible Preferred
Stock............................................. -- (133)
Accretion of Redeemable Convertible Class B Common
Stock and Warrants................................ -- (244)
Sale of Class A Common Stock pursuant to intitial
public offering, net of issuance costs............ -- 32,252
Conversion of Redeemable Convertible Preferred Stock
to Common Stock pursuant to initial public
offering.......................................... -- 27,515
Termination of redemption rights of Convertible
Class B Common Stock pursuant to initial public
offering.......................................... -- 5,476
Exercise of Class A Common Stock Warrants........... -- 1,754
Sale of Class A Common Stock pursuant to public
offering, net of issuance costs................... -- 22,424
Distribution to owners of Regency Voice Systems and
related entities.................................. -- (815)
Purchase of 845 shares of Class A Common Stock...... (12) (12)
Exercise of stock options........................... -- 158
Net income.......................................... -- 4,303
Translation adjustments............................. -- (252)
----- ---------
Balance, September 30, 1995......................... (12) 60,402
Two-for-one stock split............................. -- --
Sale of Class A Common Stock pursuant to Employee
Stock Purchase Plan............................... -- 355
Conversion of Class B Common Stock to Class A Common
Stock............................................. -- --
Exercise of stock options........................... -- 1,078
Distribution to owners of Regency Voice Systems and
related entities.................................. -- (2,787)
Tax benefit of stock options exercised.............. -- 1,973
Net income.......................................... -- 15,038
Translation adjustments............................. -- 118
----- ---------
Balance, September 30, 1996......................... (12) 76,177
Adjustment for Open Systems Solutions, Inc. pooling
of interests...................................... -- (170)
Sale of Class A Common Stock pursuant to Employee
Stock Purchase Plan............................... -- 778
Conversion of Class B Common Stock to Class A Common
Stock............................................. -- --
Exercise of stock options........................... -- 1,299
Distribution to owners of Regency Voice Systems and
related entities.................................. -- (3,306)
Tax benefit of stock options exercised.............. -- 2,586
Sale of stock options............................... -- 3,132
Net income.......................................... -- 23,566
Translation adjustments............................. -- (24)
----- ---------
Balance, September 30, 1997......................... $ (12) $ 104,038
----- ---------
----- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
25
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net income..................................................................... $ 23,566 $ 15,038 $ 4,303
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation................................................................. 5,475 4,484 3,920
Amortization................................................................. 4,404 5,933 5,299
Extraordinary loss........................................................... -- -- 2,750
Increase in receivables, net................................................. (15,264) (6,952) (7,273)
(Increase) decrease in other current assets.................................. 1,071 (1,158) (1,983)
Decrease in contracts in progress............................................ -- -- 2,955
Increase in installment receivables.......................................... (801) (88) (458)
Increase in other assets..................................................... (755) (888) (1,861)
Increase (decrease) in accounts payable...................................... (950) 2,860 (427)
Decrease in accrued employee compensation.................................... 145 425 618
Increase (decrease) in accrued liabilities................................... 2,186 (345) (494)
Increase (decrease) in income tax liabilities................................ 3,577 2,856 (85)
Increase (decrease) in deferred revenue...................................... 7,973 (856) 5,352
--------- --------- ---------
Net cash provided by operating activities.................................. 30,627 21,309 12,616
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment............................................ (7,178) (6,763) (4,843)
Purchases of software and distribution rights.................................. (7,314) (2,691) (1,562)
Acquisiton of businesses, net of cash acquired................................. (2,612) (5,403) (206)
Additions to investments and notes receivable.................................. (5,036) (8,106) (500)
Proceeds from notes receivable repayments...................................... 4,180 -- --
--------- --------- ---------
Net cash used in investing activities...................................... (17,960) (22,963) (7,111)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of Redeemable Convertible Preferred Stock............... -- -- 143
Proceeds from exercise of Class A Common Stock Warrants........................ -- -- 1,754
Proceeds from issuance of Class A Common Stock................................. 779 355 54,839
Payment of Preferred Stock Dividends........................................... -- -- (1,825)
Purchase of Treasury Stock..................................................... -- (2) --
Proceeds from sale and exercise of stock options............................... 5,233 1,111 --
Distribution to RVS owners..................................................... (3,306) (2,787) (815)
Proceeds from long-term debt................................................... -- -- 3,045
Payments of long-term debt..................................................... (934) (100) (29,750)
Payments on capital lease obligations.......................................... (148) (225) (468)
--------- --------- ---------
Net cash provided by (used in) financing activities........................ 1,624 (1,648) 26,923
--------- --------- ---------
Effect of exchange rate fluctuations on cash..................................... (442) (181) (11)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................. 13,849 (3,483) 32,417
Cash and cash equivalents, beginning of period................................... 32,751 36,234 3,817
--------- --------- ---------
--------- --------- ---------
Cash and cash equivalents, end of period......................................... $ 46,600 $ 32,751 $ 36,234
--------- --------- ---------
--------- --------- ---------
Supplemental cash flow information:
Income taxes paid.............................................................. $ 8,848 $ 7,612 $ 2,276
Interest paid.................................................................. $ 175 $ 218 $ 1,520
Supplemental disclosure of noncash investing and financing activities:
In October 1995, the Company acquired the capital stock of M.R. GmbH, for $1,500 cash and $1,900 of debt. In
connection with the acquisition, liabilities of $1,200 were assumed.
In June 1996, the Company acquired substantially all assets of TXN Solution Integrators for $3,600 in cash and
assumed $1,320 in liabilities.
The accompanying notes are an integral part of the consolidated financial
statements.
26
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 Tandem computers. The
Company's future results depend, in part, on market acceptance of Tandem
computers and the financial success of Tandem Computers Incorporated.
The Company completed an initial public offering in March 1995. The Company
sold 4,825,000 shares of Class A Common Stock resulting in net proceeds to the
Company, after deducting the underwriting discount and offering expenses, of
approximately $32,300,000. In connection with the initial public offering, all
outstanding warrants for the purchase of Preferred and Common Stock were
exercised and all of the Company's preferred stocks and Class B Common Stock
converted to Class A Common Stock, except for 3,680,000 shares of nonvoting
Class B Common Stock. The Class B Common Stock is convertible into Class A
Common Stock but is no longer redeemable. During 1997 and 1996, 1,000,000 shares
and 800,000 shares, respectively, of Class B Common Stock were converted to
Class A Common Stock.
In August 1995, the Company completed the issuance of an additional
2,000,000 Class A Common shares through a public offering, resulting in net
proceeds, after deducting the underwriting discount and offering expenses, of
approximately $22,400,000.
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
Software license fees are comprised of initial license fees, monthly license
fees and software modification fees. Initial license fees are recognized upon
installation only if no significant vendor obligations remain. Software
modification fees are recognized upon installation. Monthly license fees
27
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and maintenance fees are recognized ratably over the contract term. Services
revenue is recognized as the related services are performed. Hardware revenue is
comprised of commissions received on hardware sales associated with sales of the
Company's software and net revenue received from hardware sales sold under
original equipment manufacturer agreements. Hardware revenue is recognized when
the related hardware is shipped to the customer.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-2, "Software Revenue Recognition" (SOP 97-2). SOP 97-2 provides guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions. SOP 97-2 applies to transactions entered into by the
Company beginning in fiscal year 1999. The Company believes that its current
revenue recognition accounting policies are in substantial compliance with SOP
97-2.
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.
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 10 years. As of September
30, 1997 and 1996, accumulated amortization of the intangible asset was
$1,700,000 and $1,013,000, 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 are
included as a component of equity. Transaction gains and losses related to
intercompany accounts are not material and are included in the determination of
net income .
28
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 the financial services industry 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.
NET INCOME PER COMMON AND EQUIVALENT SHARE
Net income per common and equivalent share is based on the weighted average
number of common equivalent shares outstanding during each period. Common
equivalent shares include Redeemable Convertible Preferred Stock and Redeemable
Convertible Class B Common Stock and Warrants. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, all shares and options
issued since inception (November 2, 1993) have been treated as if they were
outstanding for all periods prior to December 31, 1994, including periods in
which the effect is antidilutive. For periods subsequent to December 31, 1994,
net income per common and common equivalent share is determined by dividing net
income by the weighted average number of shares of common stock and dilutive
common equivalent shares outstanding during each period using the treasury stock
method.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS No. 128),
which specifies the computation, presentation and disclosure requirements for
earnings per share. SFAS No. 128 is effective for periods ending after December
15, 1997 and requires retroactive restatement of prior periods earnings per
share. The statement replaces the "primary earnings per share" calculation with
a "basic earnings per share" and redefines the "dilutive earnings per share"
computation. Adoption of the statement is not expected to have a material effect
on the Company's reported income per share.
LONG-LIVED ASSETS
Effective October 1, 1996, the Company adopted Statement of Financial
Accounting Standard No. 121 (SFAS No. 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Pursuant to this
Statement, companies are required to investigate potential impairments of
long-lived assets, certain identifiable intangibles, and associated goodwill,
when there is evidence that events or changes in circumstances have made
recovery of an asset's carrying value unlikely. An impairment loss would be
recognized when the sum of the expected future cash flows is less than the
carrying amount of the asset. The adoption of SFAS No.121 did not have a
significant impact on the Company's financial position or results of operations.
STOCK-BASED COMPENSATION
Effective October 1, 1996, the Company adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting
for Stock-Based Compensation". In accordance with the provisions of SFAS No.
123, the Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its employee stock option plans. Note 8 to
29
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the Consolidated Financial Statements contains a summary of the pro forma
effects on reported net income and earnings per share for the years ended
September 30, 1997 and 1996 based on the fair value of options and shares
granted as prescribed by SFAS No. 123.
STOCK SPLIT
On June 7, 1996, the Company's Board of Directors authorized a two-for-one
stock split effected in the form of a 100% stock dividend distributed on July 1,
1996 to shareholders of record on June 17, 1996. All references in the
consolidated financial statements and notes to consolidated financial statements
to number of shares, except authorized shares and treasury shares, and per share
amounts have been restated to reflect this stock split. The par value of each
class of Common Stock of $.005 did not change.
RECLASSIFICATIONS
Certain September 30, 1996 amounts have been reclassified to conform to the
September 30, 1997 presentation.
3. ACQUISITIONS
On October 2, 1995, the Company acquired the capital stock of M.R. GmbH, a
German software company, for $3.4 million. The acquisition was accounted for
under the purchase method and was financed with existing cash and future
payments to the sellers. Results of operations prior to the acquisition were not
significant.
On June 3, 1996, the Company acquired substantially all assets of TXN
Solution Integrators (TXN), a Canadian partnership, for $3.6 million in cash and
the assumption of certain liabilities of TXN. The acquisition was accounted for
under the purchase method of accounting and, accordingly, the cost in excess of
the fair value of the net tangible assets acquired was allocated to software
($350,000) and goodwill ($2,000,000).
The following represents pro forma results of operations as if the TXN
acquisition had occurred October 1, 1994 (in thousands except per share
amounts):
YEAR ENDED
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
Revenues............................................................ $ 172,231 $ 130,266
Net income before extraordinary loss................................ 14,515 7,685
Net income.......................................................... 14,515 4,692
Net income per share................................................ $ 0.51 $ 0.19
The pro forma financial information is shown for illustrative purposes only
and is not necessarily indicative of the future results of operations of the
Company or results of operations of the Company that would have actually
occurred had the transaction been in effect for the periods presented.
In September 1996, the Company and Grapevine Systems, Inc. (Grapevine)
completed a stock exchange transaction which resulted in Grapevine becoming a
wholly owned subsidiary of the Company. Stockholders of Grapevine received
380,441 shares of TSA Class A Common Stock in exchange for 100% of Grapevine's
common stock. The stock exchange was accounted for as a pooling of
30
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
interests. Accordingly the Company's financial statements were restated to
include the results of Grapevine for the periods presented prior to the date of
acquisition.
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 TSA 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 have been restated to include
the results of RVS for all periods presented. Prior to the stock exchange, RVS
was taxed primarily as a partnership. The pro forma net income in the
accompanying consolidated statements of income reflects a pro forma tax
provision for combined federal and state taxes for RVS's results of operations
for each of the years presented.
Combined and separate results of the Company and RVS during the periods
preceding the merger are listed below (in thousands). Accounting conformity
adjustments were to conform RVS results of operations to the Company's
accounting policies.
YEAR ENDED SEPTEMBER 30,
------------------------
1996 1995
INTERIM ----------- -----------
PERIOD
1997
-----------
(UNAUDITED)
Total revenues:
Company....................................................... $ 98,783 $ 159,784 $ 118,473
RVS........................................................... 4,877 7,188 3,351
Accounting conformity adjustments............................. (370) (605) (421)
----------- ----------- -----------
$ 103,290 $ 166,367 $ 121,403
----------- ----------- -----------
----------- ----------- -----------
Income before extraordinary loss:
Company....................................................... $ 8,886 $ 12,570 $ 6,320
RVS........................................................... 1,917 3,073 1,154
Accounting conformity adjustments............................. (505) (605) (421)
----------- ----------- -----------
10,298 15,038 7,053
Extraordinary loss related to early retirement of debt.......... -- -- (2,750)
----------- ----------- -----------
Net income...................................................... $ 10,298 $ 15,038 $ 4,303
----------- ----------- -----------
----------- ----------- -----------
Unaudited pro forma information:
Net income--historical........................................ $ 10,298 $ 15,038 $ 4,303
Tax adjustment--pro forma..................................... (507) (854) (243)
----------- ----------- -----------
Net income--pro forma......................................... $ 9,791 $ 14,184 $ 4,060
----------- ----------- -----------
----------- ----------- -----------
31
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
SEPTEMBER 30,
----------------------
1997 1996
---------- ----------
Computer equipment $ 22,867 $ 17,174
Office furniture and fixtures........................................ 4,931 3,857
Leasehold improvements............................................... 3,016 1,841
Vehicles............................................................. 1,080 1,427
---------- ----------
31,894 24,299
Less accumulated depreciation and amortization....................... (15,631) (10,959)
---------- ----------
Property and equipment, net.......................................... $ 16,263 $ 13,340
---------- ----------
---------- ----------
5. SOFTWARE
Software consists of the following (in thousands):
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
Internally developed software.......................................... $ 6,334 $ 4,759
Purchased software..................................................... 13,613 12,318
--------- ---------
19,947 17,007
Less accumulated amortization.......................................... (13,842) (11,653)
--------- ---------
Software, net.......................................................... $ 6,105 $ 5,424
--------- ---------
--------- ---------
6. DEBT
Long-term debt consists of the following (in thousands):
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
Payments due to the sellers of M.R. GmbH (See Note 3), due December
1997 ($745) and December 1998 ($367)................................. $ 1,112 $ 1,859
Other.................................................................. 1,121 719
--------- ---------
2,233 2,578
Less current portion................................................... 768 1,147
--------- ---------
Long-term debt......................................................... $ 1,465 $ 1,431
--------- ---------
--------- ---------
In March 1995, the Company used a portion of the proceeds from an initial
public offering to repay debt obligations. Upon repayment of the indebtedness,
the Company incurred an extraordinary loss of $2,750,000 for the writeoff of
unamortized balances of debt issue costs of $1,100,000 and original issue
discount of $1,650,000.
32
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT (CONTINUED)
The Company has a $10 million revolving line of credit, collateralized by
accounts receivable, which expires in June 1998. The revolving line of credit
requires the maintenance of a minimum working capital level of $6 million. As of
September 30, 1997 and 1996, the Company was in compliance with this covenant.
There were no borrowings under the revolving line of credit during the years
ended September 30, 1997 and 1996.
7. 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):
1998.............................................................. $ 7,146
1999.............................................................. 6,371
2000.............................................................. 4,501
2001.............................................................. 3,591
2002.............................................................. 3,250
Thereafter........................................................ 9,503
---------
Total............................................................. $ 34,362
---------
---------
Total rent expense for the years ended September 30, 1997, 1996 and 1995
was, $7,413,000, $6,313,000 and $4,566,000.
CAPITAL LEASES
The Company leases certain computer equipment, vehicles and office furniture
under long-term capital leases. Capitalized costs and accumulated depreciation
(included in property and equipment, net) consist of the following (in
thousands):
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
Vehicles............................................................... $ 893 $ 1,441
Computer equipment..................................................... 1,606 485
Office furniture and fixtures.......................................... 138 165
--------- ---------
2,637 2,091
Less accumulated depreciation.......................................... (1,051) (1,334)
--------- ---------
$ 1,586 $ 757
--------- ---------
--------- ---------
33
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
A summary of future minimum lease payments under long-term capital leases
together with the present value of the net minimum lease payments for the years
ending September 30 are as follows (in thousands):
1998.............................................................. $ 632
1999.............................................................. 558
2000.............................................................. 450
2001.............................................................. 46
---------
Total minimum lease payments...................................... 1,686
Amount representing interest...................................... 248
---------
Present value of future minimum lease payments.................... 1,438
Amount due within one year........................................ 524
---------
Amount due after one year......................................... $ 914
---------
---------
LEGAL PROCEEDINGS
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.
8. 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 Stock Option Plan whereby 1,008,000 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 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.
During 1997, the Company adopted the 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 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.
34
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK-BASED COMPENSATION PLANS (CONTINUED)
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:
1997 1996 1995
------------------------ ------------------------ ----------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
----------- ----------- ----------- ----------- ----------- ---------
Outstanding on October 1,......... 1,731,439 $ 7.18 1,819,420 $ 3.81 919,700 $ 2.52
Granted........................... 1,387,567 $ 26.27 275,000 $ 24.69 1,003,378 $ 5.03
Exercised......................... 283,862 $ 4.57 327,673 $ 3.47 44,254 $ 3.57
Cancellations..................... 40,707 $ 13.83 35,308 $ 4.94 59,404 $ 4.50
----------- ----------- -----------
Outstanding on September 30....... 2,794,437 $ 16.82 1,731,439 $ 7.18 1,819,420 $ 3.81
----------- ----------- -----------
----------- ----------- -----------
Options exercisable at end of
year............................. 909,429 $ 5.04 687,903 $ 3.73 593,036 $ 3.39
Shares available on September 30
for options that may be
granted.......................... 516,728 816,622 45,280
Weighted-average grant date fair
value of options granted during
the year -- exercise price equals
stock market price at grant...... $ 13.01 $ 14.02
The following table summarizes information about stock options outstanding
at September 30, 1997.
OPTIONS OUTSTANDING
------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED -------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------------------------------ ------------ --------------- ----------- ------------ -----------
$2.50........................................... 530,760 6.36 $ 2.50 454,384 $ 2.50
$5.00........................................... 615,222 7.17 5.00 385,267 5.00
$7.50 to $10.125................................ 14,330 7.52 8.01 7,832 7.93
$12.00 to $16.50................................ 29,783 8.31 14.25 11,865 14.25
$20.25 to $25.875............................... 1,245,542 9.38 24.46 45,083 25.15
$26.50 to $31.625............................... 92,900 9.44 29.40 4,998 31.00
$32.25 to $37.50................................ 265,900 9.70 33.40 -- --
------------ --- ----------- ------------ -----------
2,794,437 8.33 $ 16.82 909,429 $ 5.04
------------ --- ----------- ------------ -----------
------------ --- ----------- ------------ -----------
EMPLOYEE STOCK PURCHASE PLAN
The Company has a 1996 Employee Stock Purchase Plan whereby 900,000 shares
of the Company's Class A Common Stock have been reserved for sale to eligible
employees of the Company and
35
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK-BASED COMPENSATION PLANS (CONTINUED)
its subsidiaries. Employees may designate up to the lesser of $5,000 or 10% of
their annual compensation for the purchase of stock under this plan. The price
for shares purchased under the plan is 85% of market value on the last day of
the purchase period. Purchases are made at the end of each fiscal quarter.
Shares issued under this plan for the years ended September 30, 1997 and 1996
totaled 27,748 and 16,745, respectively.
STOCK-BASED COMPENSATION PLANS
The Company adopted the disclosure provisions of SFAS No. 123. Accordingly,
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 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 equivalent share for fiscal 1997 and 1996
would approximate the pro forma amounts as follows (in thousands, except per
share amounts):
YEAR ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
Net income--historical:
As reported.......................................................... $ 23,566 $ 15,038
Pro forma............................................................ 22,253 14,884
Net income--pro forma:
As reported.......................................................... 23,059 14,184
Pro forma............................................................ 21,746 14,030
Net income per common and equivalent share:
As reported.......................................................... 0.80 0.50
Pro forma............................................................ 0.76 0.49
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 for options granted in 1997 and 1996: risk-free interest rates of
6.3 percent; dividend yield of zero percent; expected lives of 5.8 years; and
volatility of 38 percent. 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 during fiscal 1997 and 1996, and additional awards in future
years are anticipated.
9. EMPLOYEE BENEFIT PLANS
ACI 401(K) RETIREMENT PLAN
The 401(k) Retirement Plan is a defined contribution plan covering all
domestic employees of ACI. Participants may contribute up to 15% of their annual
wages. ACI matches 100% of participant contributions up to a maximum of 2.5% of
compensation, not to exceed $2,500. ACI's contributions charged to expense
during the years ended September 30, 1997, 1996 and 1995 were $489,000, $507,000
and $466,000, respectively.
36
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
ACI PROFIT SHARING PLAN AND TRUST
The ACI Profit Sharing Plan and Trust is a non-contributory profit sharing
plan covering all employees of ACI provided they are at least 21 years of age
and have completed one year of service. The plan provides 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 years
ended September 30, 1997, 1996 and 1995 were $480,000, $399,000 and $382,000,
respectively.
USSI PROFIT SHARING PLAN AND TRUST
The USSI Profit Sharing Plan and Trust has both a profit sharing component
and a 401(k) component. USSI contributions are discretionary. USSI's
contributions charged to expense during the years ended September 30, 1997, 1996
and 1995 were $85,000, $90,000 and $82,000, respectively.
GRAPEVINE 401(K) PROFIT SHARING PLAN
The Grapevine 401(k) Profit Sharing Plan is a defined contribution plan
covering all employees of Grapevine. Grapevine contributions are discretionary.
Employees may contribute up to 10% of their compensation. Grapevine's
contributions charged to expense during the year end September 30, 1997 was
$50,000. No contributions were made by Grapevine to this plan during the years
ended September 30, 1996 and 1995.
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,
-------------------------------
1997 1996 1995
--------- --------- ---------
Service cost.................................................. $ 1,307 $ 1,018 $ 786
Interest cost on projected benefit obligation................. 830 738 542
Return on plan assets:
Actual...................................................... (2,669) (1,187) (851)
Gain deferred............................................... 1,614 382 233
Amortization of unrecognized gain........................... 3 (13) (32)
--------- --------- ---------
Total periodic pension expense................................ $ 1,085 $ 938 $ 678
--------- --------- ---------
--------- --------- ---------
37
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
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,
--------------------
1997 1996
--------- ---------
Actuarial present value of benefit obligations:
Vested............................................................... $ 12,079 $ 8,932
Non-vested........................................................... 526 524
--------- ---------
Accumulated benefit obligation......................................... 12,605 9,456
Impact of future salary increases...................................... 1,430 654
--------- ---------
Projected benefit obligation........................................... 14,035 10,110
Plan assets at fair value, primarily investments in marketable equity
securities of United Kingdom companies................................ 14,955 10,762
--------- ---------
Plan assets greater (less) than projected benefit obligation........... 919 652
Unrecognized gain...................................................... (2,530) (2,113)
--------- ---------
Accrued pension cost................................................... $ (1,611) $ (1,461)
--------- ---------
--------- ---------
The most significant actuarial assumptions used in 1997 and 1996 in
determining the pension expense and funded status of the plan are as follows:
Discount rate for valuing liabilities................................. 8.0%
Expected long-term rate of return on assets........................... 9.0%
Rate of increase in future compensation levels........................ 6.0%
38
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SEGMENT INFORMATION
The Company operates primarily in one industry segment, which includes the
development, marketing and support of on-line computer software products and
services for automated electronic payment systems.
The Company operates in three geographic regions: 1) North and South
America, 2) Europe, Middle East and Africa and 3) Asia/Pacific. The following
table sets forth information about the Company's operations in these different
geographic regions (in thousands):
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Revenues from Unaffiliated Customers:
Americas................................................................. $ 124,112 $ 97,644 $ 78,554
Europe, Middle East and Africa........................................... 64,676 47,267 31,264
Asia/Pacific............................................................. 26,678 21,456 11,585
----------- ----------- -----------
$ 215,466 $ 166,367 $ 121,403
----------- ----------- -----------
----------- ----------- -----------
Intercompany revenues:
Americas................................................................. $ 26,183 $ 13,065 $ 6,501
----------- ----------- -----------
----------- ----------- -----------
Operating Income:
Americas................................................................. $ 36,871 $ 30,565 $ 21,795
Europe, Middle East and Africa........................................... 16,783 8,302 4,910
Asia/Pacific............................................................. 8,625 6,740 1,235
----------- ----------- -----------
62,279 45,607 27,940
----------- ----------- -----------
Research and Development and Corporate General and Administrative
Expenses.................................................................. (25,611) (22,345) (18,087)
----------- ----------- -----------
Operating Income........................................................... $ 36,668 $ 23,262 $ 9,853
----------- ----------- -----------
----------- ----------- -----------
Identifiable Assets:
Americas................................................................. $ 103,968 $ 80,234 $ 69,692
Europe, Middle East and Africa........................................... 44,497 33,706 25,936
Asia/Pacific............................................................. 16,769 11,957 6,277
----------- ----------- -----------
$ 165,234 $ 125,897 $ 101,905
----------- ----------- -----------
----------- ----------- -----------
11. 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.
39
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following (in thousands):
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------- ----------------------------------- ------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED
----------- ----------- --------- ----------- ----------- --------- ----------- -----------
Federal....................... $ 7,022 $ 1,355 $ 8,377 $ 6,209 $ (2,066) $ 4,143 $ 1,145 $ (1,327)
State......................... 1,905 240 2,145 1,933 (71) 1,862 753 --
Foreign....................... 3,803 -- 3,803 3,291 -- 3,291 1,793 (219)
----------- ----------- --------- ----------- ----------- --------- ----------- -----------
Total......................... $ 12,730 $ 1,595 $ 14,325 $ 11,433 $ (2,137) $ 9,296 $ 3,691 $ (1,546)
----------- ----------- --------- ----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- ----------- --------- ----------- -----------
TOTAL
---------
Federal....................... $ (182)
State......................... 753
Foreign....................... 1,574
---------
Total......................... $ 2,145
---------
---------
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,
-------------------------------
1997 1996 1995
--------- --------- ---------
Tax expense at federal rate of 35% for 1997 and 34% for 1996 and 1995............ $ 13,262 $ 8,274 $ 2,192
Losses with no current tax benefit............................................... 1,503 239 872
Effective state income tax....................................................... 1,394 1,140 497
Foreign tax rate differential.................................................... 1,160 -- --
RVS nontaxable income............................................................ (663) (750) (210)
Recognition of deferred income tax assets previously reserved against............ (2,979) -- (1,844)
Amortization of intangibles...................................................... -- 578 731
Other............................................................................ 648 (185) (93)
--------- --------- ---------
$ 14,325 $ 9,296 $ 2,145
--------- --------- ---------
--------- --------- ---------
40
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. 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,
----------------------
1997 1996
---------- ----------
Deferred assets:
Depreciation........................................................................... $ 226 $ 431
Amortization........................................................................... 4,959 5,850
Foreign taxes.......................................................................... 1,210 3,754
Acquired net operating loss carryforward of USSI....................................... 1,157 1,200
Net operating loss carryforward........................................................ 1,715 594
Acquired basis in partnership assets................................................... 6,613 --
Other.................................................................................. 717 539
---------- ----------
16,597 12,368
---------- ----------
Deferred tax asset valuation allowance................................................... (13,080) (8,021)
---------- ----------
Deferred liabilities:
Acquired software...................................................................... -- (171)
Other.................................................................................. (438) (493)
---------- ----------
(438) (664)
---------- ----------
$ 3,079 $ 3,683
---------- ----------
---------- ----------
For income tax purposes, the Company had foreign tax credit carryforwards of
approximately $113,000 at September 30, 1997, which expire in 2001.
At September 30, 1997, management evaluated its 1997 and 1996 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 $3.5 million as
of September 30, 1997.
41
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA, AND
UNAUDITED)
THREE MONTHS ENDED
----------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
------------- ---------- --------- --------------
1997
Total revenues.......................................... $ 49,839 $ 53,451 $ 55,208 $ 56,968
Operating income........................................ 7,615 9,114 9,666 10,273
Net Income--historical.................................. 4,604 5,694 6,337 6,931
Net Income per share--historical........................ -- -- 0.22 0.24
Pro forma information:
Tax adjustment--pro forma............................. $ (336) $ (171) -- --
Net income--pro forma................................. 4,268 5,523 -- --
Net income per share--pro forma....................... 0.15 0.19 -- --
1996
Total revenues.......................................... $ 36,502 $ 39,387 $ 42,901 $ 47,577
Operating income........................................ 4,394 5,487 6,042 7,339
Net income--historical.................................. 3,027 3,805 3,938 4,268
Pro forma information:
Tax adjustment--pro forma............................. $ 4 $ (276) $ (273) $ (309)
Net income--pro forma................................. 3,031 3,529 3,665 3,959
Net income per share--pro forma....................... .11 .12 .13 .14
42
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 1997 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 1997 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 1997 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 1997 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 21.
(2) FINANCIAL STATEMENT SCHEDULES:
Index to Consolidated Financial Statement Schedules
PAGE
---
Report of Independent Public Accountants....................................... 47
Schedule II -- Valuation and Qualifying Accounts............................... 48
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.
43
(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.
3.01(2) Amended and Restated Certificate of Incorporation of the Company, and amendments thereto
3.02(2) Amended and Restated Bylaws of the Company
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 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
(10.15-10.16 intentionally omitted.)
44
EXHIBIT
NUMBER DESCRIPTION
- ------------- ----------------------------------------------------------------------------------------------
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.
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.
45
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 22, 1997.
TRANSACTION SYSTEMS ARCHITECTS, INC.
By /s/ WILLIAM E. FISHER
-----------------------------------------
William E. Fisher,
DIRECTOR AND PRESIDENT
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 22, 1997:
/s/ WILLIAM E. FISHER
- ------------------------------------ Director and President
William E. Fisher (Principal Executive Officer)
/s/ GREGORY J. DUMAN
- ------------------------------------ Chief Financial Officer (Principal
Gregory J. Duman Financial Officer)
/s/ DWIGHT HANSON
- ------------------------------------ Vice President (Principal Accounting
Dwight Hanson Officer)
/s/ DAVID C. RUSSELL
- ------------------------------------ Director
David C. Russell
/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
46
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 30, 1997. 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 30, 1997
47
SCHEDULE II
TRANSACTION SYSTEMS ARCHITECTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
-------------------- -------------------- --------------------
Balance, beginning of period.................... $ 1,090,000 $ 912,000 $ 1,373,000
Additions charged to expense.................... 1,512,000 414,000 151,000
Reductions...................................... (382,000) (236,000) (612,000)
----------- ----------- -----------
Balance, end of period.......................... $ 2,220,000 $ 1,090,000 $ 912,000
----------- ----------- -----------
----------- ----------- -----------
48
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.
3.01(2) Amended and Restated Certificate of Incorporation of the Company, and amendments thereto
3.02(2) Amended and Restated Bylaws of the Company
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 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
(10.15-10.16 intentionally omitted)
10.17(2) Lease respecting facility at 330 South 108th Avenue, Omaha, Nebraska
49
EXHIBIT
NUMBER DESCRIPTION
- ------------- ----------------------------------------------------------------------------------------------
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
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.
50