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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A AMENDMENT NO. 1
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO 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 22, 1998, there were outstanding 30,139,819 shares of the
Company's Class A Common Stock, par value $.005, and 1,005,626 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 $44 1/2 per share for the
registrant's common stock as of such date) was $1,385,972,302.
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 23, 1999, which will be filed with the Securities and
Exchange Commission not later than 120 days after the end of the Registrant's
fiscal year.
EXPLANATORY NOTE: This Form 10K/A restates and amends the Registrant's Annual
Report on Form 10K for the fiscal year ended September 30, 1998 to correct
certain errors in "Business--Executive Officers of the Registrant" and to
correct typographical errors in "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000."
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TRANSACTION SYSTEMS ARCHITECTS, INC.
1998 FORM 10-K
TABLE OF CONTENTS
PAGE
---------
PART I
Item 1. Business...................................................................................... 3
Item 2. Properties.................................................................................... 11
Item 3. Legal Proceedings............................................................................. 11
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 7A. Quantitative and Qualitative Disclosures About Market Risk.................................... 24
Item 8. Financial Statements and Supplementary Data................................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 44
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 44
Item 11. Executive Compensation........................................................................ 44
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 44
Item 13. Certain Relationships and Related Transactions................................................ 44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 44
Signatures........................................................................... 47
2
PART I
ITEM 1. BUSINESS
OVERVIEW
Transaction Systems Architects, Inc. ("TSA" or the "Company") develops,
markets, installs and supports a broad line of software products and services
primarily focused on facilitating electronic payments and electronic commerce.
The Company's software products are used to process transactions involving
automated teller machines (ATM), point-of-sale (POS) terminals, credit cards,
debit cards, smart cards, checks, 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 services, principally for financial institutions, retailers and
third-party processors. At September 30, 1998, its customers include 101 of the
largest 500 banks in the world, as measured by asset size. As of September 30,
1998, the Company had 2,073 customers in 70 countries on six continents. During
fiscal years 1998, 1997 and 1996, approximately 54%, 53% and 48%, respectively,
of the Company's total revenues resulted from international operations and
approximately 68%, 68%, and 65%, 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 Compaq's NonStop Himalaya servers.
In addition to BASE24, the Company also markets the following software
products:
TRANS24 -- a complementary electronic payment software product line that
operates on IBM mainframes and RISC/UNIX servers.
WHOLESALE PAYMENTS SOFTWARE -- this category of products includes the
Company's Money Transfer System (MTS), MoneyNet and CO-ach products. MTS and
MoneyNet are wire transfer products. CO-ach is a system for initiating,
controlling, settling and reporting Automative Clearing House (ACH)
transactions.
SYSTEMS SOLUTIONS PRODUCTS -- these are network monitoring, connectivity,
database and middleware software products which provide network integration and
systems migration solutions.
INTERACTIVE VOICE RESPONSE SOFTWARE -- software products offered primarily
to community banks in the US which allow customers to answer routine questions
such as balance inquiry, last deposit, maturity dates, transaction history,
interest information, payment dates and amounts via telephone inquiry or
personal computers.
WINPAY24 -- an electronic payment software product for retailers that
operates on the Windows NT platform.
The Company also provides specialized technical services and maintenance,
principally in support of BASE24 and its other software products. Services and
maintenance fees accounted for 42%, 44%, and 48% of the Company's revenues
during fiscal years 1998, 1997 and 1996, respectively.
The Company has completed several acquisitions during 1998, 1997 and 1996.
The Company's acquisition strategy is focused primarily on two areas: (i)
additional products to complement and enhance the Company's strategy of being
the leading provider of electronic payments software for banks, retailers and
other enterprises needing high-volume, reliable processing engines and (ii)
geographic expansion into markets which have proven or have a high level of
opportunity to embrace electronic payments.
3
Significant acquisitions in fiscal 1998, 1997 and 1996 include the
following:
M.R. GmbH................................................ October 1995
TXN Solution Integrators................................. June 1996
Grapevine Systems, Inc................................... September 1996
Open Systems Solutions, Inc.............................. October 1996
Regency Voice Systems, Inc............................... May 1997
IntraNet, Inc............................................ August 1998
Professional Resources, Inc.............................. August 1998
Smart Card Integrators Ltd. (SCIL)....................... August 1998
Also in November 1998, the Company acquired Media Integration BV ("MINT")
and in December 1998 acquired US Processing, Inc.
The acquisitions of SCIL and MINT reflect the Company's strategic decision
to expand its smart card product expertise and product offerings. The SCIL and
MINT products are used to issue and manage multi-functional applications on
smart cards.
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").
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 issuers in the market, high transaction volumes,
geographically dispersed networks, differing types of authorization and varied
reporting requirements. These activities are typically performed online and must
be conducted 24 hours a day, 7 days a week.
Electronic payments software carries transactions from the transaction
generators to the acquiring institutions. The software then uses regional or
national switches to access the card issuers for approval or denial of the
transactions. The software returns messages to the sources, thereby completing
the transactions. Electronic payments software may be required to interact with
dozens of devices, switch interchanges and communication protocols around the
world. The electronic payments market has expanded both domestically and
internationally.
PRODUCTS AND RELATED SERVICES
The following table summarizes revenues by product (in thousands):
TWELVE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
BASE24................................................. 194,109 159,906 119,898
System Solutions Products.............................. 35,336 24,259 25,585
Wholesale Products..................................... 30,592 32,533 25,243
TRANS24................................................ 14,573 9,699 5,926
IVR Products........................................... 11,535 9,851 6,584
WINPAY24............................................... 3,616 2,285 --
----------- ----------- -----------
$ 289,761 $ 238,533 $ 183,236
----------- ----------- -----------
----------- ----------- -----------
The amounts in the above table include products and related services,
including maintenance fees.
4
ELECTRONIC PAYMENTS SOFTWARE
The Company has three primary electronic payments software product lines,
BASE24, TRANS24 and WINPAY24.
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.
The BASE24 product line runs exclusively on Compaq's NonStop Himalaya
servers. The NonStop Himalaya parallel-processing environment offers
fault-tolerance, linear expandability and distributed processing. The
combination of features offered by BASE24 and NonStop Himalaya are important
characteristics in high volume, 24-hour per day electronic payment systems. The
Company believes that the NonStop Himalaya platform will continue to be a widely
accepted platform for transaction processing in the electronic payments market.
There can be no assurance that the NonStop Himalaya servers will continue to be
a widely accepted platform for this market.
TRANS24. TRANS24 is a family of products, marketed principally in the
banking industry, that runs on a variety of hardware platforms, including IBM
mainframes, and RISC/UNIX servers. The TRANS24 electronic payment products
support online processing of transactions in ATM or POS environments. These
products have traditionally been marketed to smaller institutions, and in
certain international markets where Compaq has limited market share. The
TRANS24-Card Manager and Settlement Manager products are also marketed to
customers with BASE24, as they can be interfaced to BASE24 and represent
value-added services necessary to operate an electronic payments solution
effectively.
WINPAY24. WINPAY24 is an electronic payment and authorization system that
facilitates a broad range of applications for retailers. These applications
include debit and credit card processing, ACH processing, electronic benefits
transfer, card issuance and management, check authorization, customer loyalty
programs and returned check collection. The WINPAY24 products operate on the
Windows NT platform.
SYSTEMS SOLUTIONS PRODUCTS
The Company markets systems software which involves a set of software tools
that facilitate network monitoring, connectivity, management and 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 Compaq and IBM computers. The Company has also
developed NET24, a message-oriented middleware product that acts as the layer of
software which manages the interface between application software and computer
operating systems and helps customers perform network and legacy systems
integration projects.
WHOLESALE PAYMENTS SOFTWARE
The Company has three primary wholesale payments software products: (i)
Money Transfer System (MTS), (ii) CO-ach and (iii) MoneyNet. MTS and MoneyNet
are systems for generating, authorizing, routing, settling and controlling wire
transfer transactions in a secure, fault-tolerant environment. MTS communicates
over proprietary networks using a variety of messaging formats, including CHIPS,
S.W.I.F.T., Telex, FedWire and Fed Book Entry Securities. MoneyNet is primarily
used domestically and is focused on the FedWire market. MTS operates on
Digital's VAX VMS operating system and the IBM RS/6000 platform. MoneyNet
operates exclusively on Compaq's NonStop Himalaya servers. CO-ach is
5
a system for initiating, controlling, settling and reporting ACH transactions.
ACH transactions are electronic payments that replace traditional paper checks.
CO-ach is targeted at large ACH originators with high transaction volumes. In
addition to large domestic ACH originators, the Company is marketing CO-ach to
international markets, where standards similar to those in the U.S. for
automated check clearing are emerging. CO-ach operates exclusively on Compaq's
NonStop Himalaya.
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 or personal computer
inquiry. The IVR software product is targeted at small to mid-sized community
banks and runs on personal computers.
SERVICES
The following table summarizes services revenue (in thousands):
TWELVE MONTHS ENDED SEPTEMBER
30,
-------------------------------
1998 1997 1996
--------- --------- ---------
Technical Services......................................... $ 39,421 $ 32,981 $ 28,869
Project Management......................................... 20,617 16,980 15,253
Facilities Management...................................... 5,906 5,465 2,800
--------- --------- ---------
$ 65,944 $ 55,426 $ 46,922
--------- --------- ---------
--------- --------- ---------
Percentage of Total Revenues............................... 22.8% 23.2% 25.6%
--------- --------- ---------
--------- --------- ---------
TECHNICAL SERVICES. The majority of the Company's technical services are
provided to customers who have licensed one or more of the Company's software
products. Services offered by the Company include programming and programming
support, day-to-day systems operations, network operations, help desk staffing,
quality assurance testing, problem resolution, system design, and performance
planning and review. Technical services are priced on a weekly basis according
to the level of technical expertise required and the duration of the project.
PROJECT MANAGEMENT. The Company offers a Project Management and
Implementation Plan ("PMIP") which provides customers using the Company's
software products with a variety of support services, including on-site product
integration reviews, project planning, training, site preparation, installation,
testing and go-live support, and project management throughout the project life
cycle. The Company offers additional services, if required, on a fee basis.
PMIPs are offered for a fee which varies based on the level and quantity of
included support services.
FACILITIES MANAGEMENT. The Company offers facilities management services
whereby the Company operates a customer's electronic payments system for
multi-year periods. Pricing and payment terms for facilities management services
vary on a case-by-case basis giving consideration to the complexity of the
facility or system to be managed, the level and quantity of technical services
required, and other factors relevant to the facilities management agreement.
CUSTOMER SUPPORT
The Company offers its customers both a general maintenance plan and an
extended service option, called the Enhanced Support Program ("ESP").
Maintenance fees, including ESP, were $57.1 million, $48.7 million and $41.5
million, or 19.7%. 20.4% and 22.6% of total revenues, during fiscal years 1998,
1997 and 1996, respectively.
6
MAINTENANCE. After software installation and project completion, the Company
provides maintenance services to customers for a monthly fee ranging from 1.0%
to 1.5% of the related software price. Virtually all new customer contracts
include a provision for maintenance services. Maintenance services include:
- Twenty-four hour hotline for problem resolution
- Customer account management support
- Vendor-required mandates and updates
- Product documentation
- Hardware operating system compatibility
- User group membership
The Company provides new releases of its products on a periodic basis. New
releases of the product which often contain product enhancements, are typically
included at no additional fee. The Company's agreements with its customers
permit the Company to charge for substantial product enhancements which are not
provided as part of the maintenance agreement. The Company determines on a
case-by-case basis for which of these enhancements it will charge an additional
fee.
The Company organizes user groups, generally around geographic regions and
product lines. The groups help the Company determine its product strategy,
development plans and aspects of customer support.
ENHANCED SUPPORT PROGRAM. Each ESP customer is assigned an experienced
technician to work with its system. The technicians perform functions such as:
- Install and test software fixes
- Retrofit customer specific software modifications ("RPQs") into new
software releases
- Answer questions and resolve problems related to RPQ code
- Maintain a detailed RPQ history
- Monitor customer problems on HELP24 hotline database on a priority basis
- Supply on-site support, available upon demand
- 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, 1998, the Company's customer base includes 101 of the largest 500 banks in
the world. The Company's IVR product customers are typically small to midsize
banks located primarily in the Americas region and totaled approximately 1,200
at September 30, 1998.
The following table illustrates the distribution of the Company's customers
by geographic region and industry segment as of September 30, 1998:
FINANCIAL PROCESSORS/ COMPUTER HARDWARE
GEOGRAPHIC REGION INSTITUTIONS NETWORKS RETAILERS AND SOFTWARE MANUFACTURING OTHER
- ----------------------------- ------------- --------------- ------------- ----------------- ------------------- -----------
Americas..................... 1,465 64 62 27 6 93
Europe, Middle East and
Africa (EMEA)............... 116 28 18 22 35 36
Asia/Pacific................. 74 13 2 -- 2 10
-- -- --
----- --- ---
Total.................... 1,655 105 82 49 43 139
-- -- --
-- -- --
----- --- ---
----- --- ---
GEOGRAPHIC REGION TOTAL
- ----------------------------- ---------
Americas..................... 1,717
Europe, Middle East and
Africa (EMEA)............... 255
Asia/Pacific................. 101
---------
Total.................... 2,073
---------
---------
7
SALES AND MARKETING
The Company's primary method of distribution is direct sales by employees
assigned to specific regions or specific products. In addition, the Company uses
distributors and sales agents to supplement its direct sales force in countries
where business practices or customs make it appropriate, or where it is
uneconomical to have a direct sales staff. As of September 30, 1998 the Company
employed 159 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, Boston, Dallas,
Johannesburg, London, Melbourne, Mexico City, Naples, Omaha, Oslo, Sao Paulo,
Singapore, Wiesbaden, Tokyo and Toronto. The offices are responsible for direct
and distributor or sales agent-facilitated sales for designated regions.
The Company distributes the products of other vendors as complements to its
existing product lines. The Company is typically responsible for sales and
marketing as well as first line support. These agreements are generally for a
period of two to three years and involve revenue sharing based on relative
responsibilities.
RESEARCH AND DEVELOPMENT
The Company's product development efforts focus on new products and improved
versions of existing products. The Company believes that the timely development
of new applications and enhancements is essential to maintain its competitive
position in the market.
In developing new products, the Company works closely with industry leaders
to determine requirements. The Company works with device manufacturers, such as
NCR and Diebold, to ensure compatibility with the latest ATM technology. The
Company works with interchange vendors, such as VISA and MasterCard, to ensure
compliance with new regulations or processing mandates. The Company works with
platform vendors, such as Compaq and IBM, to ensure compatibility with new
operating system releases and generations of hardware. Customers often provide
additional information on requirements and serve as beta-test partners.
The Company's research and development staff consisted of 392 employees as
of September 30, 1998. The Company's total research and development expenses,
excluding capitalized software development costs were $25.4 million, $19.5
million and $15.9 million during fiscal years 1998, 1997 and 1996, or 8.8%, 8.2%
and 8.7% of total revenues, respectively.
BACKLOG
As of September 30, 1998, the Company had non-recurring revenue backlog of
$30.2 million in software license fees and $35.6 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, 1997 and 1996, the
Company had non-recurring revenue backlog of $27.7 million and $20.4 million,
respectively, in software license fees and $19.2 million and $13.6 million,
respectively, in services.
As of September 30, 1998, the Company had recurring revenue backlog of
$119.4 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
8
actually generate the specified revenues. As of September 30, 1997 and 1996, the
Company had $94.5 million and $71.0 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 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, 1998 the Company had a total of 2,054 employees of whom
277 were engaged in administration, 358 in sales and marketing, 698 in software
development and 721 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 11
to the Company's Consolidated Financial Statements for information relating to
geographic regions.
9
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers are as follows:
NAME AGE POSITION
- -------------------------------- --- -------------------------------------------------------------------------
William E. Fisher............... 52 Chief Executive Officer, President and Director
David C. Russell................ 50 Chief Operating Officer and Director
Gregory J. Duman................ 43 Chief Financial Officer and Treasurer
David P. Stokes................. 42 General Counsel and Secretary
Dwight G. Hanson................ 40 Chief Accounting Officer
Edward H. Mangold............... 53 Senior Vice President -- Americas Region
Mark R. Vipond.................. 39 Senior Vice President -- Consumer Banking
Jeffrey S. Hale................. 40 Senior Vice President -- Business Development
Don McLarty..................... 51 Vice President -- Asia/Pacific Region
Stephen J. Royer................ 40 Vice President -- System Solutions
Jon D. Parr..................... 41 Vice President -- EMEA Region
Stephen M. Bailey............... 42 Vice President -- Corporate Banking
Marlin R. Howley................ 42 Vice President -- Retail Solutions
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 Chief Operating Officer of TSA in 1998. He joined
ACI in 1989 serving as Vice President of Strategic Planning, later serving as
Vice President of Customer Support, Senior Vice President of Software and
Services, Senior Vice President of the EFT Product Company and President of ACI.
From 1984 to 1989, he held various operations and planning positions at FDR.
Mr. Duman joined ACI in 1983 as Director of Administration. He became
Controller in 1985 and Vice President of Finance and Chief Financial Officer in
1991. From 1979 to 1983, he worked for Arthur Andersen & Co. as a certified
public accountant.
Mr. Stokes was appointed General Counsel in 1991 after joining ACI as
Assistant Counsel in 1988. Prior to joining ACI, he was a partner in a private
law firm in Omaha.
Mr. Hanson joined ACI in 1991 as Corporate Controller. He was appointed Vice
President of Finance in 1997. From 1981 to 1991, Mr. Hanson worked for Coopers &
Lybrand as a Certified Public Accountant.
Mr. Mangold joined ACI in 1987 and served in sales management positions
prior to his appointment in 1990 as Senior Vice President of the Americas
Region. From 1968 to 1987, he held various sales and management positions at
Unisys, Inc.
Mr. Vipond joined ACI in 1985, and served in various capacities, including
National Sales Manager of ACI Canada and Vice President of the Emerging
Technologies and Network Systems Divisions prior to his appointment in 1996 as
President of USSI. In 1998, he was named Senior Vice President of Consumer
Banking. Prior to joining ACI, he was a Systems Engineer at IBM.
10
Mr. Hale was appointed Senior Vice President of Business Development in
1998. He joined ACI in 1987 and served in various sales, marketing and strategic
planning positions and as Vice President in charge of the ACI Product Company.
From 1981 to 1986, Mr. Hale was a manager in the management information
consulting division of Arthur Andersen LLP.
Mr. McLarty was named Managing Director of the Asia/Pacific region in 1997.
He joined ACI in 1987 serving in various sales and marketing capacities in
Canada. From 1990 through 1997 he was an independent development consultant in
Canada. Prior to joining ACI, Mr. McLarty held various sales and marketing
positions with Tandem Computers, Air Canada, Bank of Montreal and The Bank of
Nova Scotia. Mr. McLarty is based in Singapore.
Mr. Royer joined Grapevine in 1988 as Director of Sales and was named
President in 1991. He became Vice President of TSA in 1996 and Vice President of
Systems Solutions in 1998. Prior to joining Grapevine, he held sales management
positions at Software Alliance, ACI and IBM.
Mr. Parr joined ACI in 1987 and served in various Sales and Sales Management
positions including Vice President of U.S. EFT sales. He was appointed to
Managing Director ACIL and Vice President EMEA region in August 1998. Prior to
joining ACI, Mr. Parr held various Sales and Marketing positions at Borroughs,
Docutel and REI. Mr. Parr is based in London.
Mr. Bailey is Vice President of Corporate Banking of TSA and President and
Chief Executive Officer of IntraNet, Inc. Since joining ACI in 1994, he has
served as Managing Director of ACI's Pacific operations in Melbourne, Australia.
From 1986 to 1993, he held various sales and management positions at Tandem
Computers.
Mr. Howley joined ACI in 1981 and held various positions in software
development. From 1984 through 1995 he served in various sales and marketing
capacities. In 1995 Mr. Howley became Vice President of Marketing in the
Americas Region which he held until he was named Vice President of Retail
Solutions in 1998.
ITEM 2. PROPERTIES
The Company leases office space in Omaha, Nebraska, for its corporate
headquarters, principal product development group, and sales and support groups
for the Americas. The leases for these facilities expire in fiscal 2002 through
2008, with the principal lease terminating in fiscal 2008.
The Company's EMEA headquarters are located in Watford, England. The leases
for these facilities expire in fiscal 2009 and 2011, with the principal lease
terminating in fiscal 2009. The Company's Asia/ Pacific headquarters are located
in Singapore with other principal offices in Japan and Australia. The Singapore
lease terminates in fiscal 2001, the Australia and Japan leases terminate in
fiscal 2000. The Company also leases office space in numerous locations in the
United States and in many other countries.
The Company believes that its current facilities are adequate for its
present and short-term foreseeable needs and that additional suitable space will
be available as required. The Company also believes that it will be able to
extend leases as they terminate. See Note 8 to the Company's Consolidated
Financial Statements for additional information regarding the Company's
obligations under its facilities leases.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations 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.
11
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 1998.
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.
1998 HIGH LOW
- ---------------------------------------- ----------- -----------
First quarter........................... $ 441/2 $ 365/8
Second quarter.......................... 431/2 345/8
Third quarter........................... 43 371/8
Fourth quarter.......................... 397/8 323/4
1997
- ----------------------------------------
First quarter........................... $ 451/4 $ 321/2
Second quarter.......................... 341/2 243/8
Third quarter........................... 43 231/4
Fourth quarter.......................... 405/8 321/2
On December 22, 1998, the last sale price of the Company's Class A Common
Stock as reported by NASDAQ/NMS was $44 1/2 per share. There were 389 holders of
record of the Company's Common Stock as of December 22, 1998.
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)
-----------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1995
-------------- -------------- -------------- --------------
REVENUES:
Software license fees.................................. $162,131 $128,330 $89,075 $59,699
Maintenance fees....................................... 57,077 48,714 41,500 29,592
Services............................................... 65,944 55,426 46,922 27,558
Hardware, net.......................................... 4,609 6,063 5,739 4,554
-------------- -------------- -------------- --------------
Total revenues....................................... 289,761 238,533 183,236 121,403
-------------- -------------- -------------- --------------
Expenses:
Cost of software license fees:
Software costs....................................... 34,346 27,876 22,494 13,282
Amortization of purchased software(4)................ -- 801 3,143 3,165
Purchased contracts in progress(4)................... -- -- -- 2,956
Cost of maintenance and services....................... 65,607 56,404 46,179 28,918
Research and development:
Research and development costs....................... 25,365 19,508 15,883 12,680
Charge for purchased research and development(4)..... -- -- -- --
Selling and marketing.................................. 62,013 50,168 36,749 30,608
General and administrative:
General and administrative costs..................... 50,007 44,149 34,864 19,597
Amortization of goodwill and purchased intangibles... 1,435 1,008 656 344
-------------- -------------- -------------- --------------
Total expenses..................................... 238,773 199,914 159,968 111,550
-------------- -------------- -------------- --------------
Operating income (loss).................................. 50,988 38,619 23,268 9,853
-------------- -------------- -------------- --------------
Other income (expense):
Interest income........................................ 3,204 2,291 2,024 1,084
Interest expense....................................... (242) (178) (233) (1,751)
Transaction related expenses........................... (2,512) -- -- --
Other income (expense)................................. (203) (652) (561) 12
-------------- -------------- -------------- --------------
Total other.......................................... 247 1,461 1,230 (655)
-------------- -------------- -------------- --------------
Income (loss) before income taxes........................ 51,235 40,080 24,498 9,198
Benefit (provision) for income taxes..................... (19,476) (14,325) (9,296) (2,145)
-------------- -------------- -------------- --------------
Net income (loss) before extraordinary loss.............. 31,759 25,755 15,202 7,053
Extraordinary loss related to early retirement of
debt(4)................................................. -- -- -- (2,750)
-------------- -------------- -------------- --------------
Net income (loss)........................................ $ 31,759 $25,755 $15,202 $ 4,303
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Pro forma net income(1).................................. $ 31,126 $24,405 $14,286 $ 4,060
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Earnings Per Share Data(6):
Basic:
Before extraordinary loss............................ $ 1.05 $ 0.84 $ 0.50 $ 0.27
Extraordinary loss................................... $ 0.00 $ 0.00 $ 0.00 $ (0.11)
-------------- -------------- -------------- --------------
Net income........................................... $ 1.05 $ 0.84 $ 0.50 $ 0.16
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Average shares outstanding........................... 29,558 29,089 28,526 24,866
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Diluted:
Before extraordinary loss............................ $ 1.02 $ 0.81 $ 0.48 $ 0.27
Extraordinary loss................................... $ 0.00 $ 0.00 $ 0.00 $ (0.11)
-------------- -------------- -------------- --------------
Net income........................................... $ 1.02 $ 0.81 $ 0.48 $ 0.16
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Average shares outstanding........................... 30,453 29,967 29,852 24,866
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
BALANCE SHEET DATA:
Working capital........................................ $ 85,293 $62,914 $43,268 $38,153
Total assets........................................... $221,402 $176,891 $134,988 $103,586
Long-term obligations.................................. $ 1,915 $ 2,379 $ 1,687 $ 357
Stockholders' equity (deficit)......................... $143,546 $109,346 $80,298 $60,402
PREDECESSORS(1)
--------------
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1994(3) 1993
-------------- --------------
REVENUES:
Software license fees.................................. $36,992 $ 7,956
Maintenance fees....................................... 18,626 5,392
Services............................................... 18,117 4,353
Hardware, net.......................................... 3,702 1,129
-------------- --------------
Total revenues....................................... 77,437 18,830
-------------- --------------
Expenses:
Cost of software license fees:
Software costs....................................... 7,533 2,713
Amortization of purchased software(4)................ 2,342 1,034
Purchased contracts in progress(4)................... 12,398 --
Cost of maintenance and services....................... 19,369 5,164
Research and development:
Research and development costs....................... 8,587 1,704
Charge for purchased research and development(4)..... 22,712 --
Selling and marketing.................................. 18,677 4,359
General and administrative:
General and administrative costs..................... 13,658 3,946
Amortization of goodwill and purchased intangibles... 834 816
-------------- --------------
Total expenses..................................... 106,110 19,736
-------------- --------------
Operating income (loss).................................. (28,673) (906)
-------------- --------------
Other income (expense):
Interest income........................................ 416 91
Interest expense....................................... (3,058) (34)
Transaction related expenses........................... -- --
Other income (expense)................................. 172 --
-------------- --------------
Total other.......................................... (2,470) 57
-------------- --------------
Income (loss) before income taxes........................ (31,143) (849)
Benefit (provision) for income taxes..................... (2,164) (802)
-------------- --------------
Net income (loss) before extraordinary loss.............. (33,307) (1,651)
Extraordinary loss related to early retirement of
debt(4)................................................. -- --
-------------- --------------
Net income (loss)........................................ $(33,307) $(1,651)
-------------- --------------
-------------- --------------
Pro forma net income(1).................................. $(33,307)
--------------
--------------
Earnings Per Share Data(6):
Basic:
Before extraordinary loss............................ $ (1.50)
Extraordinary loss................................... $ 0.00
--------------
Net income........................................... $ (1.50)
--------------
--------------
Average shares outstanding........................... 22,203
--------------
--------------
Diluted:
Before extraordinary loss............................ $ (1.50)
Extraordinary loss................................... $ 0.00
--------------
Net income........................................... $ (1.50)
--------------
--------------
Average shares outstanding........................... 22,203
--------------
--------------
BALANCE SHEET DATA:
Working capital........................................ $ 2,037 $ 6,861
Total assets........................................... $61,382 $47,861
Long-term obligations.................................. $22,801 $ 601
Stockholders' equity (deficit)......................... $(31,406) $28,940
- ------------------------------
(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 share reflects pro
forma tax provisions for RVS and IntraNet 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
and Intranet were taxed primarily as a partnership and as a S corporation
and, accordingly, taxable income was included in the personal tax of RVS and
Intranet owners who were responsible for the payment of tax thereof.
(6) Net income per 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"). 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 and 1996. These acquisition related charges included,
among others, purchased software and goodwill amortization. These expenses are
hereafter referred to as the "Acquisition Charges".
The Company provides electronic payments software and related services.
During fiscal 1998, 1997 and 1996, 54%, 53% and 48%, respectively, of total
revenues resulted from international operations. The Company derived
approximately 68%, 68% and 65%, respectively, of its revenues for those same
periods from licensing its BASE24 family of software products and providing
related services and maintenance. Although the Company believes that the
majority of its revenues will continue to come from its existing BASE24 products
over the next several years, the Company has acquired and developed and is
currently developing other software products and related services. These
products are in the areas of network connectivity, middleware, internet and
remote banking, wire transfer, ACH and IVR.
The following table summarizes revenues by geographic region:
TWELVE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS)
Americas............................................... $ 174,069 $ 145,825 $ 114,513
EMEA................................................... 87,492 64,792 47,267
Asia/Pacific........................................... 28,200 27,916 21,456
----------- ----------- -----------
Total revenues....................................... $ 289,761 $ 238,533 $ 183,236
----------- ----------- -----------
----------- ----------- -----------
See Note 11 to the Company's Consolidated Financial Statements for
additional information relating to geographic regions.
14
ACQUISITIONS. The Company has completed several acquisitions during fiscal
1998, 1997 and 1996. The Company's acquisition strategy is focused primarily on
two areas: (i) additional products to complement and enhance the Company's
strategy of being the leading provider of electronic payments software for
banks, retailers and other enterprises needing high-volume, reliable processing
engines and (ii) geographic expansion into markets which have proven or have a
high level of opportunity to embrace electronic payments. Significant
acquisitions in fiscal 1998, 1997 and 1996 include the following:
ACQUIREE DATE ACQUIRED
- ------------------------------------------------------------------------------------ --------------------------
M.R. GmbH October 1995
TXN Solution Integrators June 1996
Grapevine Systems, Inc. September 1996
Open Systems Solutions, Inc. October 1996
Regency Voice Systems, Inc. May 1997
IntraNet, Inc. August 1998
Professional Resources, Inc. August 1998
Smart Card Integrators Ltd August 1998
All of the above acquisitions were acquired using the pooling of interests
method of accounting except for M.R. GmbH and TXN Solutions Integrators which
were accounted for under the purchase method of accounting. The Company's
financial statements have been restated for all periods presented to include the
results of the material entities acquired using the pooling of interests method
of accounting
PRODUCT PRICING. The Company's primary pricing method is transaction
sensitive whereby products are priced based upon the number of transactions
processed by the customer. Under this method, customers pay an Initial License
Fee (ILF) and a Monthly License Fee (MLF) which allows the customer to process a
contractually predetermined maximum volume of transactions per month. Once
transaction volume exceeds this maximum volume level, the customer is required
to pay a Capacity License Fee (CLF) and a Capacity Monthly License Fee (CMLF).
There is a separate CLF and CMLF for each incremental volume level.
In addition to the transaction sensitive method, the Company also offers a
hardware specific pricing method whereby the product is priced on a per copy
basis and tiered to recognize different performance levels of the processing
hardware. Under this method, customers pay an ILF and MLF for each copy of the
software they have licensed.
Substantially all ILF (including CLF) revenue is recognized when the
software is delivered and MLF (including CMLF) revenue is recognized on a
monthly basis. MLF revenue amounted to $43.7 million, $32.4 million and $22.0
million, in fiscal 1998, 1997 and 1996, respectively. ILF revenue, including
software modification fees, amounted to $118.4 million, $95.9 million and $67.1
million, in fiscal 1998, 1997 and 1996, respectively.
HARDWARE REVENUES. The Company had a software house agreement with Compaq
whereby Compaq paid commissions to the Company when the Company demonstrated
that a customer's purchase of its software resulted in that customer's purchase
of hardware from Compaq. The commissions were determined as a percentage of
Compaq's related hardware revenue. Commissions from Compaq amounted to $3.4
million, and $4.4 million in fiscal 1997 and 1996 respectively. This agreement
expired on December 31, 1997. On January 1, 1998, the Company entered into a
market development funding (MDF) agreement with Compaq whereby Compaq provides
the Company with funds to be used for marketing efforts to promote the Company's
BASE24 and Compaq's NonStop Himalaya product lines. The MDF agreement replaced
the previous software house fee agreement. Revenue from the software house and
MDF agreement in fiscal year 1998 amounted to $4.3 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,
----------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
% OF % OF % OF
(DOLLARS IN THOUSANDS) AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
--------- ----------- --------- ----------- --------- -----------
Revenues:
Software license fees........................ $ 162,131 56.0% $ 128,330 53.8% 89,075 48.6%
Maintenance fees............................. 57,077 19.7 48,714 20.4 41,500 22.6
Services..................................... 65,944 22.8 55,426 23.2 46,922 25.6
Hardware, net................................ 4,609 1.6 6,063 2.5 5,739 3.1
--------- ----- --------- ----- --------- -----
Total revenues............................. 289,761 100.0 238,533 100.0 183,236 100.0
--------- ----- --------- ----- --------- -----
Expenses:
Cost of software license fees:
Software costs 34,346 11.9 27,876 11.7 22,494 12.3
Amortization of purchased software -- 0.0 801 0.3 3,143 1.7
Cost of maintenance and services............. 65,607 22.6 56,404 23.6 46,179 25.2
Research and development..................... 25,365 8.8 19,508 8.2 15,883 8.7
Selling and marketing........................ 62,013 21.4 50,168 21.0 36,749 20.1
General and administrative:
General and administrative costs........... 50,007 17.3 44,149 18.5 34,864 19.0
Amortization of goodwill and purchased
intangibles.............................. 1,435 0.5 1,008 0.4 656 0.4
--------- ----- --------- ----- --------- -----
Total expenses............................. 238,773 82.4 199,914 83.8 159,968 87.3
--------- ----- --------- ----- --------- -----
Operating income............................... 50,988 17.6 38,619 16.2 23,268 12.7
--------- ----- --------- ----- --------- -----
Other income (expense):
Interest income.............................. 3,204 1.1 2,291 1.0 2,024 1.1
Interest expense............................. (242) (0.1) (178) (0.1) (233) (0.1)
Transaction related expenses................. (2,512) (0.9) -- 0.0 -- 0.0
Other........................................ (203) (0.1) (652) (0.3) (561) (0.3)
--------- ----- --------- ----- --------- -----
Total other................................ 247 0.1 1,461 0.6 1,230 0.7
--------- ----- --------- ----- --------- -----
Income before income taxes..................... 51,235 17.7 40,080 16.8 24,498 13.4
Provision for income taxes..................... (19,476) (6.7) (14,325) (6.0) (9,296) (5.1)
--------- ----- --------- ----- --------- -----
Net income..................................... $ 31,759 11.0% $ 25,755 10.8% $ 15,202 8.3%
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Unaudited pro forma net income (1)............. $ 31,126 10.7% $ 24,405 10.2% $ 14,286 7.8%
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
- ------------------------------
(1) Pro forma net income reflects pro forma tax provisions for RVS and IntraNet
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 transactions, RVS and IntraNet were taxed primarily as a
partnership and as a S corporation and, accordingly, taxable income was
included in the personal tax of their owners who were responsible for the
payment of tax thereof.
REVENUES. Total revenues for fiscal 1998 increased 21.5% or $51.2 million
over fiscal 1997. Of this increase, $33.8 million of the growth resulted from a
26.3% increase in software license fee revenue, $10.5 million from a 19.0%
increase in services revenue and $8.3 million from a 17.2% increase in
maintenance fee revenue.
Total revenues for fiscal 1997 increased 30.2% or $55.3 million over fiscal
1996. Of this increase, $39.3 million of the growth resulted from a 44.1%
increase in software license fee revenue, $8.5 million from a 18.1% increase in
services revenue and $7.2 million from a 17.4% from increase in maintenance fee
revenue.
The growth in software license fee revenue in both fiscal 1998 and 1997 is
primarily the result of increased demand, from both existing and new customers,
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 the growing complexity of electronic
payment systems. MLF revenue was $43.7 million, $32.4 million and $22.0 million
in fiscal 1998, 1997 and 1996, respectively.
16
The growth in service revenue in both fiscal 1998 and 1997 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 1998 and 1997 is a
result of the continued growth of the installed base of the Company's software
products.
EXPENSES. Total operating expenses for fiscal 1998 increased 19.4% or $38.9
million over fiscal 1997. Total operating expenses for fiscal 1997 increased
25.0% or $39.9 million over fiscal 1996. The primary reason for the overall
increase in operating expenses during fiscal 1998 and 1997 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
2,054, 1,684 and 1,230 at September 30, 1998, 1997 and 1996, respectively.
The Company's operating margin (excluding the Acquisition charges of $0.9
million and $3.3 million for fiscal 1997 and 1996, respectively) was 17.6%,
16.5% and 14.5% in fiscal 1998, 1997 and 1996, 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 65.5%, 64.7% and 62.5% in fiscal 1998, 1997 and
1996, respectively. The increase in gross margin is primarily due to the impact
of additional MLF revenue.
Research and development (R&D) costs as a percentage of total revenues were
8.8%, 8.2% and 8.7% in fiscal 1998, 1997 and 1996, respectively. The majority of
R&D costs have been charged to expense as incurred with the capitalization of
software costs amounting to approximately $1.0 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 21.4%,
21.0% and 20.1% in fiscal 1998, 1997 and 1996, respectively. The slight increase
in fiscal 1998 is the result of higher levels of new license fee orders received
in fiscal 1998.
General and administrative (G & A) costs as a percentage of total revenues
were 17.3%, 18.5% and 19.0% in fiscal 1998, 1997 and 1996. The decrease is due
primarily to increased leverage from the larger revenue base in relation to the
level of G & A expenses being incurred.
EBITDA. The Company's earnings before interest, income taxes, depreciation
and amortization (EBITDA) was $62.1 million, $48.4 million and $33.2 million for
fiscal 1998, 1997 and 1996, 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.
TRANSACTION RELATED EXPENSES. Transaction related expenses include legal,
accounting, investment banking fees and other non-recurring expenses associated
with the acquisitions accounted for as poolings of interest. During 1998, the
Company incurred $2.5 million of these expenses to complete the acquisition of
IntraNet, SCIL and PRI.
INCOME TAXES. The Company had a pro forma effective tax rate of 39.3% for
fiscal 1998 as compared to 39.1% for fiscal 1997.
As of September 30, 1998, the Company has deferred tax assets of
approximately $16.6 million and deferred tax liabilities of $0.3 million. Each
year, the Company evaluates its historical operating results as
17
well as its projections to determine the realizability of the deferred tax
assets. This analysis indicated that $4.9 million of the deferred tax assets
were more likely than not to be realized. Accordingly, the Company has recorded
a valuation allowance of $11.7 million as of September 30, 1998.
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, 1998 and 1997, the Company had non-recurring revenue
backlog of $30.2 million and $27.7 million in software license fees and $35.6
million and $19.2 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, 1998 and 1997, the Company had recurring revenue backlog
of $119.4 million and $94.5 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
Year 2000 problems may arise in computer equipment and software, as well as
embedded electronic systems, because of the way these systems are programmed to
interpret certain dates that will occur around the change in century. In the
computer industry this is primarily the result of computer programs being
designed and developed using or reserving only two digits in date fields (rather
than four digits) to identify the century, without considering the ability of
the program to properly distinguish the upcoming century change in the Year
2000. In addition, the Year 2000 is a special-case leap year. And some programs
may drop February 29th from their internal calendars. Likewise, other dates may
present problems because of the way the digits are interpreted. Because the
Company's business is based on the licensing of applications software, the
Company's business would be adversely impacted if its products or its internal
systems experience problems associated with the century change. This issue also
potentially affects the software programs and systems used by the Company in its
operations.
PROJECT DEFINITION. In 1996 the Company initiated a company wide program to
analyze three specific categories of systems (1) software developed by the
Company which is licensed to customers (2) IT systems utilized by the Company
consisting of applications developed in-house and purchased from third party
suppliers and (3) non-IT systems and embedded technology which are integral
components of the infrastructure of the Company.
The Company adopted a methodology for its licensed software into four
distinct categories (1) preparation (2) analysis and remediation (3) testing and
(4) delivery. The Company developed tools during the preparation phase of the
project which were utilized during the analysis and testing and subsequently
made available to its customers at no charge. The Company believes that its
remediation efforts with respect to its licensed products will prove to be
successful. The Company's belief is based on testing by the Company of its
licensed software products by using testing tools simulating dates and testing
by many of the customers of the Company who have in turn completed their own
Year 2000 testing. The licensed products have been made available by the Company
to customers in a timely manner and the communication efforts have been
proactive and ongoing. The Company continues to
18
actively monitor the status and progress of customers and distributors and
assess the risk associated in those cases where the customer has not taken
delivery of the compliant version or may have not made satisfactory progress in
their own Year 2000 testing.
With respect to IT and non-IT systems, the Company is utilizing a similar
methodology adopted for its licensed software. Specifically, the Company is
utilizing the following steps: (1) preparation, in which the Company conducts
systematic inventory, analysis, and prioritization of the systems in accordance
with mission critical impact (2) analysis, replacement and remediation (3)
testing and (4) implementation.
Recognizing that communications and organization of Year 2000 tasks and
responsibilities is key, the Company has embraced a management approach
utilizing central coordination with distributed administration over geographic
and business units. This approach mirrors the Company's organization and ensures
that Year 2000 Communications Managers are deployed and managing tasks in close
proximity to actual efforts. Those efforts are then reported centrally to upper
management. The approach also ensures that customers are kept informed of
product and Company activities relating to the Year 2000 and that the Company is
able to measure progress and plan support for customers' Year 2000 projects.
CURRENT STATUS. Following analysis, remediation and testing efforts, the
Company began shipping Year 2000 compliant versions of its major licensed
software applications in March of 1997. As efforts were completed on other
applications, they too were shipped to customers so that they could upgrade as
part of their own Year 2000 projects. As of December 1998, 96% of all of the
Company's licensed software applications are compliant and available to
customers. The remaining applications are expected to be complete during the
first calendar quarter of 1999. The company continues to conduct analysis of
products of other companies as they are acquired with appropriate measurement
and documentation in accordance with the Year 2000 methodology in place.
With respect to the IT and non-IT systems, remediation and replacement is
underway and has been substantially completed in the most critical areas. The
internal accounting systems utilized by the Company and most of the subsidiaries
have been replaced and are in production. Replacement or remediation of
accounting systems for the other subsidiaries is currently underway and is
expected to be implemented by June of 1999. The overall IT and non-IT project is
approximately 65% complete. As new IT and non-IT purchases are made, each is
scrutinized and inventoried for Year 2000 compliance. The Company currently
anticipates it will complete its Year 2000 IT and non-IT compliance efforts by
June of 1999.
The majority of the embedded systems on which the Company relies in its day
to day operations around the world are owned and managed by the lessors of the
buildings in which the Company's offices are located, or by agents of such
lessors. The Company has sent letters to its lessors and, as applicable, their
agents requesting certifications of the Year 2000 compliance of the embedded
systems. The Company has received responses from more than half of its lessors
indicating that the systems in the buildings either already are, or are expected
to be before the end of 1999, Year 2000 compliant. Those systems not owned by
and managed by lessors have undergone a similar inventory and certification
gathering. The Company will prioritize systems and develop necessary test plans
based on the further responses it continues to receive, or not to receive, to
its letters.
The Company is developing contingency plans for support of its customers
prior to, during, and following the "Year 2000 weekend". Such plans will
incorporate, but not be limited to, distribution of support personnel in
locations around the world, backup plans for telecommunications, decision and
notification hierarchy, and other infrastructure support. Contingency plans are
presently anticipated to be complete by July of 1999.
19
COSTS. The Company expects to incur project costs of approximately $10
million over the life of the Year 2000 project. These costs consist of: (i)
internal staff costs related to licensed product remediation and testing; (ii)
internal staff costs related to IT and non-IT compliance; (iii) hardware and
software cost for replacement of IT systems; and (iv) costs related to non-IT
compliance involving embedded systems and consulting services. Cost incurred
from the beginning of the project in 1996 through September 1998 have totaled
approximately $7.5 million. The Company expects to incur an additional $2.5
million over the remaining life of the Year 2000 project. All costs related to
the Year 2000 project are being expensed as incurred. The estimated remaining
costs are based on currently known circumstances and various assumptions
regarding future events. There can be no assurance that this estimate will be
achieved and actual results could differ materially from those anticipated.
RISKS. The Company believes that the most likely Year 2000 risks relate to
third parties with which it has material relationships. Those parties include
computer hardware system providers on which the Company and its customers rely
as well as service providers such as those providing telecommunications and
electricity. Failure or disruption of such services or systems could adversely
affect operations and the Company's ability to support its customers. The second
most likely Year 2000 risk relates to Company's products that are used in
conjunction with software products developed by other vendors or by customers
who have developed their own applications for use with the Company's products,
which may not be Year 2000 compliant. Since the majority of the Company's
customers utilize its products for authorization, routing, or processing of
financial transactions, the failure of such customers' systems, which may be
particularly susceptible to Year 2000 compliance issues, could impact the
transaction volume processed by the customers thereby reducing transaction fees
paid by customers with usage based fee structures. Failures of such systems
could also increase the efforts required by the Company to assist customers with
resolving problems unrelated to the Company's licensed products. The third most
likely Year 2000 risk relates to certain foreign countries in which the Company
operates and the Company's customers in such countries which are not acting to
sufficiently remediate Year 2000 issues. Some customers outside of the United
States have chosen to concentrate on issues other than the Year 2000. Without
concentrating on the Year 2000 upgrade and testing efforts, such customers will
not be prepared and may require additional support to assist them. Commercial
risks are associated with operating in countries which are not prepared for the
Year 2000.
In each case cited previously, the Company is developing contingency plans
to address each identified risk. In addition, the Company continues to use its
methodology of centralized and distributed management to keep in contact and
monitor progress with customer projects and to communicate at an upper
management level to those customers categorized as "at risk" due to their lack
of progress. The contingency plan being developed by the Company acknowledges
the risk associated with suppliers of material services, hardware vendors
closely related to the operation of the Company's licensed products, the
Company's own licensed products and the ability of the Company to support its
customers. In addition to distributed support methods, the Company is
investigating alternative services, such as telecommunications, as part of the
contingency plan. The (i) inability to timely implement contingency plans, if
deemed necessary and (ii) the cost to implement such plans, may have a material
adverse effect on the Company's results of operations.
Except for statements of existing or historical facts, the foregoing
discussion consists of forward-looking statements and assumptions relating to
forward-looking statements, including without limitation the statements relating
to the timetable for completion of Year 2000 compliance efforts, future costs,
potential problems relating to Year 2000, the Company's state of readiness,
third party representations, and the Company's plans and objectives for
addressing Year 2000 problems. Certain factors could cause actual results to
differ materially from the Company's expectations, including without limitation
(i) the failure of existing or future customers to achieve Year 2000 compliance,
(ii) the failure of computer hardware system providers on which the Company and
its customers rely or other vendors or service providers of the Company or its
customers to timely achieve Year 2000 compliance, (iii) the Company's
20
products and systems not containing all necessary date code changes, (iv) the
failure of the Company's analysis and testing to detect operational problems in
IT and non-IT systems utilized by the Company or in the Company's products or
services, whether such failure results from the technical inadequacy of the
Company's validation and testing efforts, the technological infeasibility of
testing certain non-IT systems, and the unavailability of customers or other
third parties to participate in testing, (v) potential litigation arising out of
Year 2000 issues, with respect to providers of software and related technical
and consulting services such as the Company generally, and particularly in light
of the numerous interfaces between the Company's products and products and
systems of third parties which are required to successfully utilize the
Company's products which could involve the Company in expensive, multiple party
litigation even though the Company may have no responsibility for the alleged
problem, and (vi) the failure to timely implement a contingency plan to the
extent Year 2000 compliance is not achieved.
21
SELECTED QUARTERLY INFORMATION
The following table sets forth certain unaudited financial data for each of
the quarters within fiscal 1998, 1997 and 1996. 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,
1998 1998 1998 1997 1997 1997 1997
------- -------- --------- -------- -------- -------- ---------
Revenues:
Software license fees......... $44,242 $41,753 $38,872 $37,264 $33,772 $33,655 $32,529
Maintenance fees.............. 15,078 14,664 14,162 13,173 12,628 12,470 11,861
Services...................... 19,091 17,018 15,195 14,640 14,431 14,526 12,912
Hardware, net................. 883 1,232 1,105 1,389 1,175 1,083 3,213
------- -------- --------- -------- -------- -------- ---------
Total revenues.............. 79,294 74,667 69,334 66,466 62,006 61,734 60,515
------- -------- --------- -------- -------- -------- ---------
Expenses:
Cost of software license fees:
Software costs.............. 9,388 8,896 8,047 8,015 7,246 7,214 7,114
Amortization of purchased
software.................. -- -- -- -- -- -- --
Cost of maintenance and
services.................... 18,226 17,069 15,696 14,616 14,476 14,483 13,589
Research and development...... 6,807 6,566 6,093 5,899 5,071 5,004 4,982
Selling and marketing......... 16,917 15,682 15,010 14,404 13,713 13,062 12,441
General and administrative:
General and administrative
costs..................... 13,586 13,227 11,811 11,383 10,588 11,104 12,590
Amortization of goodwill and
purchased intangibles..... 359 347 414 315 344 210 237
------- -------- --------- -------- -------- -------- ---------
Total expenses.............. 65,283 61,787 57,071 54,632 51,438 51,077 50,953
------- -------- --------- -------- -------- -------- ---------
Operating income................ 14,011 12,880 12,263 11,834 10,568 10,657 9,562
------- -------- --------- -------- -------- -------- ---------
Other income (expense):
Interest income............... 894 863 800 647 642 621 547
Interest expense.............. (98 ) (46) (78) (20) (42) (55) (24)
Transaction related
expenses.................... (2,512 ) -- -- -- -- -- --
Other......................... 63 (226) 40 (80) (76) (40) (223)
------- -------- --------- -------- -------- -------- ---------
Total other................. (1,653 ) 591 762 547 524 526 300
------- -------- --------- -------- -------- -------- ---------
Income before income taxes...... 12,358 13,471 13,025 12,381 11,092 11,183 9,862
Provision for income taxes...... (5,289 ) (5,040) (4,700) (4,447) (3,786) (3,793) (3,667)
------- -------- --------- -------- -------- -------- ---------
Net income...................... $7,069 $ 8,431 $ 8,325 $ 7,934 $ 7,306 $ 7,390 $ 6,195
------- -------- --------- -------- -------- -------- ---------
------- -------- --------- -------- -------- -------- ---------
Unaudited pro forma net income
(1)............................ $6,875 $ 8,433 $ 8,149 $ 7,669 $ 7,170 $ 6,996 $ 5,819
------- -------- --------- -------- -------- -------- ---------
------- -------- --------- -------- -------- -------- ---------
Basic earnings per share........ $ 0.23 $ 0.28 $ 0.28 $ 0.26 $ 0.25 $ 0.24 $ 0.20
------- -------- --------- -------- -------- -------- ---------
------- -------- --------- -------- -------- -------- ---------
Diluted earnings per share...... $ 0.22 $ 0.28 $ 0.27 $ 0.25 $ 0.24 $ 0.23 $ 0.20
------- -------- --------- -------- -------- -------- ---------
------- -------- --------- -------- -------- -------- ---------
DEC. 31, SEP. 30, JUNE 30, MARCH 31, DEC. 31,
1996 1996 1996 1996 1995
-------- -------- -------- --------- ------------
Revenues:
Software license fees......... $28,374 $25,009 $22,808 $ 21,798 $19,460
Maintenance fees.............. 11,755 11,362 10,651 9,831 9,656
Services...................... 13,557 13,599 12,650 11,064 9,609
Hardware, net................. 592 1,159 1,174 1,940 1,466
-------- -------- -------- --------- ------------
Total revenues.............. 54,278 51,129 47,283 44,633 40,191
-------- -------- -------- --------- ------------
Expenses:
Cost of software license fees:
Software costs.............. 6,302 6,066 6,026 5,681 4,721
Amortization of purchased
software.................. 801 787 783 785 788
Cost of maintenance and
services.................... 13,856 13,331 12,023 10,751 10,074
Research and development...... 4,451 4,202 3,812 4,116 3,753
Selling and marketing......... 10,952 10,496 9,011 8,415 8,827
General and administrative:
General and administrative
costs..................... 9,867 9,115 9,421 8,119 8,209
Amortization of goodwill and
purchased intangibles..... 217 204 157 145 150
-------- -------- -------- --------- ------------
Total expenses.............. 46,446 44,201 41,233 38,012 36,522
-------- -------- -------- --------- ------------
Operating income................ 7,832 6,928 6,050 6,621 3,669
-------- -------- -------- --------- ------------
Other income (expense):
Interest income............... 481 374 465 596 589
Interest expense.............. (57) (54) (54) (84) (41)
Transaction related
expenses.................... -- -- -- -- --
Other......................... (313) (425) (83) (29) (24)
-------- -------- -------- --------- ------------
Total other................. 111 (105) 328 483 524
-------- -------- -------- --------- ------------
Income before income taxes...... 7,943 6,823 6,378 7,104 4,193
Provision for income taxes...... (3,079) (2,915) (2,393) (2,124) (1,864)
-------- -------- -------- --------- ------------
Net income...................... $ 4,864 $ 3,908 $ 3,985 $ 4,980 $ 2,329
-------- -------- -------- --------- ------------
-------- -------- -------- --------- ------------
Unaudited pro forma net income
(1)............................ $ 4,420 $ 3,736 $ 3,694 $ 4,258 $ 2,598
-------- -------- -------- --------- ------------
-------- -------- -------- --------- ------------
Basic earnings per share........ $ 0.15 $ 0.13 $ 0.13 $ 0.15 $ 0.09
-------- -------- -------- --------- ------------
-------- -------- -------- --------- ------------
Diluted earnings per share...... $ 0.14 $ 0.13 $ 0.12 $ 0.14 $ 0.09
-------- -------- -------- --------- ------------
-------- -------- -------- --------- ------------
- ----------------------------------
(1) Pro forma net income reflects pro forma tax provisions for RVS and IntraNet
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 and IntraNet were taxed primarily as a
partnership and as a S corporation and, accordingly, taxable income was
included in the personal tax of their owners who were responsible for the
payment of tax thereof.
22
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company's principal sources of liquidity
consisted of $62.6 million of cash and cash equivalents, as compared to $52.2
million at September 30, 1997 and a $10 million line of credit of which there
are no borrowings outstanding. The bank line of credit expires in June 1999.
The Company's net cash flow from operating activities for fiscal 1998, 1997
and 1996 were $35.4 million, $34.0 million and $21.8 million, respectively. The
increase of $1.4 million in fiscal 1998 is principally due to higher net income
and increases in accounts payable, accrued liabilities and deferred revenue,
partly offset by increases in receivables. The increase of $12.2 million in
fiscal 1997 is principally due to higher net income and increases in accrued
liabilities and deferred revenue partly offset by increases in receivables.
The Company's net cash flows used in investing activities totaled $24.7
million, $18.4 million and $22.8 million in fiscal 1998, 1997 and 1996,
respectively. The increase of $6.3 million in fiscal 1998 is principally due to
higher capital expenditures to support the Company's growth, the purchase of 2.5
million shares of Nestor, Inc. (Nestor) Common Stock for $5.0 million and an
increase in advances to US Processing, Inc. (USPI). The decrease of $4.4 million
in fiscal 1997 is due principally to notes receivable repayments from Insession,
Inc. (Insession) partly offset by higher capital expenditures to support the
Company's growth and the purchase of software rights.
In the normal course of business, the Company evaluates potential
acquisitions of complementary businesses, product or technologies. 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 100%
of RVS and OSSI in exchange for 1,615,383 and 210,000 shares, respectively, of
the Company's Class A Common Stock. In February 1998 the Company acquired 100%
of Coyote in exchange for 26,400 shares of the Company's Class A Common Stock.
In April 1998, the Company acquired 2.5 million shares of Nestor Common Stock
for $5.0 million. The Company also received warrants to purchase an additional
2.5 million shares of Nestor Common Stock for exercise price of $3 per share. In
May 1998 the Company acquired 100% of Edgeware in exchange for 143,436 shares of
the Company's Class A Common Stock. In August 1998, the Company acquired 100% of
IntraNet in exchange for 1,220,300 shares of the Company's Class A Common Stock.
Also in August 1998 the Company acquired 100% of SCIL and PRI in exchange for
380,000 and 180,000, respectively, of the Company's Class A Common Stock.
In January 1996, the Company entered into a transaction with Insession
whereby the Company acquired a 6% minority interest in Insession for $1.5
million. In addition, the Company has extended Insession $6.6 million in
promissory notes as of September 30, 1998. 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 $3.1
million of promissory notes are payable upon demand. The promissory notes are
secured by future royalties owed by the Company to Insession.
The Company has extended a line of credit facility to USPI, a transaction
processing business in which the Company has a 19.9% ownership interest. As of
September 30, 1998, borrowings under the line of credit totaled $5.6 million. On
December 10, 1998, the Company acquired substantially all of the net assets of
USPI for $3.6 million cash and the assumption of certain liabilities of USPI.
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.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks associated primarily to changes in
foreign currency exchange rates. The Company conducts business in all parts of
the world. As a general rule, the Company's revenue contracts are denominated in
U.S. dollars. Thus, any decline in the value of local foreign currencies against
the U.S. dollar will result in the Company's products and services being more
expensive to a potential foreign buyer, and in those instances where the
Company's goods and services have already been sold, will result in the
receivables being more difficult to collect. The Company does at times enter
into revenue contracts that are denominated in the currency of the country in
which it has substantive operations, principally the United Kingdom, Australia,
Canada and Singapore. This practice serves as a natural hedge to finance the
expenses incurred in those locations. The Company has not entered into, nor does
it currently anticipate entering into, any foreign currency hedging
transactions.
The Company does not purchase or hold any derivative financial instruments
for the purpose of speculation or arbitrage.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants................................ 25
Consolidated Balance Sheets as of September 30, 1998 and 1997........... 26
Consolidated Statements of Income for each of the three years in the
period ended September 30, 1998....................................... 27
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended September 30, 1998.......................... 28
Consolidated Statements of Cash Flows for each of the three years in the
period ended September 30, 1998....................................... 29
Notes to Consolidated Financial Statements.............................. 30
24
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, 1998 and 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Omaha, Nebraska,
October 29, 1998
25
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 62,603 $ 52,170
Marketable securities................................................................... 2,188 --
Billed receivables, net of allowances of $4,728 and $2,298, respectively................ 54,937 42,898
Accrued receivables..................................................................... 33,000 26,269
Deferred income taxes................................................................... 4,921 3,495
Other................................................................................... 3,585 3,248
---------- ----------
Total current assets.................................................................. 161,234 128,080
Property and equipment, net............................................................... 20,510 17,837
Software, net............................................................................. 7,050 6,105
Intangible assets, net.................................................................... 9,385 9,539
Installment receivables................................................................... 2,056 2,394
Investments and notes receivable.......................................................... 16,754 7,969
Other..................................................................................... 4,413 4,967
---------- ----------
Total assets.......................................................................... $ 221,402 $ 176,891
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt....................................................... $ 1,078 $ 1,292
Accounts payable........................................................................ 13,583 7,972
Accrued employee compensation........................................................... 6,076 6,591
Accrued liabilities..................................................................... 14,826 11,070
Income taxes............................................................................ 4,784 6,085
Deferred revenue........................................................................ 35,594 32,156
---------- ----------
Total current liabilities............................................................. 75,941 65,166
Long-term debt............................................................................ 1,915 2,379
---------- ----------
Total liabilities......................................................................... 77,856 67,545
---------- ----------
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, 1998 and 1997..........................
Redeemable Convertible Class B Common Stock and Warrants, $.005 par value; 5,000,000
shares authorized; no shares issued and outstanding at September 30, 1998 and 1997....
Class A Common Stock, $.005 par value; 50,000,000 shares authorized; 29,133,947 and
28,097,767 shares issued at September 30, 1998 and 1997, respectively................. 146 140
Class B Common Stock, $.005 par value; 5,000,000 shares authorized; 1,171,252 shares
issued and outstanding at September 30, 1998 and 1997, respectively................... 6 6
Additional paid-in capital.............................................................. 112,052 104,753
Accumulated translation adjustments..................................................... (2,075) (260)
Retained earnings....................................................................... 36,241 4,719
Unrealized investment holding loss...................................................... (2,812) --
Treasury stock, at cost, 845 shares at September 30, 1998 and 1997...................... (12) (12)
---------- ----------
Total stockholders' equity............................................................ 143,546 109,346
---------- ----------
Total liabilities and stockholders' equity............................................ $ 221,402 $ 176,891
---------- ----------
---------- ----------
The accompanying notes are an integral part of the consolidated financial
statements.
26
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenues:
Software license fees.................................................... $ 162,131 $ 128,330 $ 89,075
Maintenance fees......................................................... 57,077 48,714 41,500
Services................................................................. 65,944 55,426 46,922
Hardware, net............................................................ 4,609 6,063 5,739
----------- ----------- -----------
Total revenues......................................................... 289,761 238,533 183,236
----------- ----------- -----------
Expenses:
Cost of software license fees:
Software costs......................................................... 34,346 27,876 22,494
Amortization of purchased software..................................... -- 801 3,143
Cost of maintenance and services......................................... 65,607 56,404 46,179
Research and development................................................. 25,365 19,508 15,883
Selling and marketing.................................................... 62,013 50,168 36,749
General and administrative:
General and administrative costs....................................... 50,007 44,149 34,864
Amortization of goodwill and purchased intangibles..................... 1,435 1,008 656
----------- ----------- -----------
Total expenses......................................................... 238,773 199,914 159,968
----------- ----------- -----------
Operating income........................................................... 50,988 38,619 23,268
----------- ----------- -----------
Other income (expense):
Interest income.......................................................... 3,204 2,291 2,024
Interest expense......................................................... (242) (178) (233)
Transaction related expenses............................................. (2,512) -- --
Other.................................................................... (203) (652) (561)
----------- ----------- -----------
Total other............................................................ 247 1,461 1,230
----------- ----------- -----------
Income before income taxes................................................. 51,235 40,080 24,498
Provision for income taxes................................................. (19,476) (14,325) (9,296)
----------- ----------- -----------
Net income................................................................. $ 31,759 $ 25,755 $ 15,202
----------- ----------- -----------
----------- ----------- -----------
Average shares outstanding:
Basic.................................................................... 29,558 29,089 28,526
----------- ----------- -----------
----------- ----------- -----------
Diluted.................................................................. 30,453 29,967 29,852
----------- ----------- -----------
----------- ----------- -----------
Unaudited pro forma information (Note 3):
Pro forma net income..................................................... $ 31,126 $ 24,405 $ 14,286
----------- ----------- -----------
----------- ----------- -----------
Pro forma earnings per share data:
Basic.................................................................. $ 1.05 $ 0.84 $ 0.50
----------- ----------- -----------
----------- ----------- -----------
Diluted................................................................ 1.02 0.81 0.48
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial
statements.
27
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
UNREALIZED
CLASS A CLASS B ADDITIONAL ACCUMULATED INVESTMENT
COMMON COMMON PAID-IN TRANSLATION RETAINED HOLDING TREASURY
STOCK STOCK CAPITAL ADJUSTMENTS EARNINGS LOSS STOCK
----------- ------------- ----------- ------------- --------- ----------- -----------
Balance, September 30, 1995, as
previously reported.................. $ 66 $ 7 $ 92,568 $ (354) $ (31,873) $ -- $ (12)
Adjustment for IntraNet, Inc. pooling
of interests......................... 6 -- 1,075 -- 2,918 -- --
----- --- ----------- ------------- --------- ----------- -----
Balance, September 30, 1995, as
restated............................. 72 7 93,643 (354) (28,955) -- (12)
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 RVS owners............. -- -- -- -- (2,787) -- --
Tax benefit of stock options
exercised............................ -- -- 1,973 -- -- -- --
Net income............................. -- -- -- -- 15,202 -- --
Translation adjustments................ -- -- -- 118 -- -- --
----- --- ----------- ------------- --------- ----------- -----
Balance, September 30, 1996............ 133 11 96,984 (236) (16,540) -- (12)
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 -- 1,268 -- -- -- --
Distribution to RVS and IntraNet, Inc.
owners............................... -- -- -- -- (4,320) -- --
Tax benefit of stock options
exercised............................ -- -- 2,586 -- -- -- --
Sale of stock options.................. -- -- 3,132 -- -- -- --
Net income............................. -- -- -- -- 25,755 -- --
Translation adjustments................ -- -- -- (24) -- -- --
----- --- ----------- ------------- --------- ----------- -----
Balance, September 30, 1997............ 140 6 104,753 (260) 4,719 -- (12)
Adjustment for immaterial pooled
businesses........................... 4 -- 17 -- 663 -- --
Issuance of Class A Common Stock for
purchase of Coyote Systems, Inc...... 1 -- 1,086 -- -- -- --
Sale of Class A Common Stock pursuant
to Employee Stock Purchase Plan...... -- -- 971 -- -- -- --
Exercise of stock options.............. 1 -- 2,099 -- -- -- --
Distribution to IntraNet, Inc.
owners............................... -- -- -- -- (900) -- --
Tax benefit of stock options
exercised............................ -- -- 3,126 -- -- -- --
Unrealized investment holding loss..... -- -- -- -- -- (2,812) --
Net income............................. -- -- -- -- 31,759 -- --
Translation adjustments................ -- -- -- (1,815) -- -- --
----- --- ----------- ------------- --------- ----------- -----
Balance, September 30, 1998............ $ 146 $ 6 $ 112,052 $ (2,075) $ 36,241 $ (2,812) $ (12)
----- --- ----------- ------------- --------- ----------- -----
----- --- ----------- ------------- --------- ----------- -----
TOTAL
----------
Balance, September 30, 1995, as
previously reported.................. $ 60,402
Adjustment for IntraNet, Inc. pooling
of interests......................... 3,999
----------
Balance, September 30, 1995, as
restated............................. 64,401
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 RVS owners............. (2,787)
Tax benefit of stock options
exercised............................ 1,973
Net income............................. 15,202
Translation adjustments................ 118
----------
Balance, September 30, 1996............ 80,340
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.............. 1,269
Distribution to RVS and IntraNet, Inc.
owners............................... (4,320)
Tax benefit of stock options
exercised............................ 2,586
Sale of stock options.................. 3,132
Net income............................. 25,755
Translation adjustments................ (24)
----------
Balance, September 30, 1997............ 109,346
Adjustment for immaterial pooled
businesses........................... 684
Issuance of Class A Common Stock for
purchase of Coyote Systems, Inc...... 1,087
Sale of Class A Common Stock pursuant
to Employee Stock Purchase Plan...... 971
Exercise of stock options.............. 2,100
Distribution to IntraNet, Inc.
owners............................... (900)
Tax benefit of stock options
exercised............................ 3,126
Unrealized investment holding loss..... (2,812)
Net income............................. 31,759
Translation adjustments................ (1,815)
----------
Balance, September 30, 1998............ $ 143,546
----------
----------
The accompanying notes are an integral part of the consolidated financial
statements.
28
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
-------------------------------
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net income................................................................... $ 31,759 $ 25,755 $ 15,202
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation............................................................... 6,449 5,475 4,484
Amortization............................................................... 5,022 4,404 5,933
Increase in receivables, net............................................... (17,325) (15,949) (7,361)
(Increase) decrease in other current assets................................ (345) 1,068 (1,182)
(Increase) decrease in installment receivables............................. 338 (801) (74)
Increase in other assets................................................... (1,672) (736) (988)
Increase (decrease) in accounts payable.................................... 2,628 (947) 2,763
Increase (decrease) in accrued employee compensation....................... (390) 325 1,007
Increase (decrease) in accrued liabilities................................. 5,405 3,521 (626)
Decrease in income tax liabilities......................................... 839 3,432 2,937
Increase (decrease) in deferred revenue.................................... 2,644 8,459 (289)
--------- --------- ---------
Net cash provided by operating activities................................ 35,352 34,006 21,806
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment.......................................... (8,812) (7,618) (6,604)
Purchases of software and distribution rights................................ (3,651) (7,314) (2,691)
Purchase of marketable securities............................................ (5,000) -- --
Acquisiton of businesses, net of cash acquired............................... 417 (2,612) (5,403)
Additions to investment and notes receivable................................. (7,840) (5,036) (8,106)
Proceeds from notes receivable repayments.................................... 149 4,180 --
--------- --------- ---------
Net cash used in investing activities.................................... (24,737) (18,400) (22,804)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of Class A Common Stock............................... 971 778 353
Proceeds from sale and exercise of stock options............................. 2,062 5,234 1,111
Distribution to RVS and Intranet owners...................................... (900) (4,320) (2,787)
Payments of long-term debt................................................... (1,672) (1,549) (367)
--------- --------- ---------
Net cash provided by (used in) financing activities...................... 461 143 (1,690)
--------- --------- ---------
Effect of exchange rate fluctuations on cash................................... (643) (442) (181)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........................... 10,433 15,307 (2,869)
Cash and cash equivalents, beginning of period................................. 52,170 36,863 39,732
--------- --------- ---------
Cash and cash equivalents, end of period....................................... $ 62,603 $ 52,170 $ 36,863
--------- --------- ---------
--------- --------- ---------
Supplemental cash flow information:
Income taxes paid............................................................ $ 19,653 $ 8,848 $ 7,612
Interest paid................................................................ $ 304 $ 175 $ 218
The accompanying notes are an integral part of the consolidated financial
statements.
29
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Transaction Systems Architects, Inc. (the Company or TSA) was formed on
November 2, 1993, for the purpose of acquiring all of the outstanding capital
stock of Applied Communications, Inc. (ACI) and Applied Communications Inc
Limited (ACIL). The Company did not have substantive operations prior to the
acquisition of ACI and ACIL.
The Company develops, markets and supports a broad line of software products
and services primarily focused on facilitating electronic payments and
electronic commerce. In addition to its own products, the Company distributes
software developed by third parties. The products are used principally by
financial institutions, retailers and third-party processors, both in domestic
and international markets.
The Company derives a substantial portion of its revenue from licensing its
BASE24 family of software products and providing services and maintenance
related to those products. BASE24 products operate on Compaq's NonStop Himalaya
servers. The Company's future results depend, in part, on market acceptance of
Compaq's NonStop Himalaya servers and the financial success of Compaq, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES IN PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of the Consolidated Financial Statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the Consolidated
Financial Statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Software license fees are comprised of initial license fees (ILF), monthly
license fees (MLF), and software modification fees. Software license fees are
recognized when all significant vendor obligations are performed and certain
software revenue recognition criteria are met (i.e., evidence of a contract,
delivery of the software, fixed and determinable fees and collectibility of
fees). ILF revenues, where the Company collects a significant portion of the
total software license fees at the beginning of the software license term, are
recognized upon delivery of the software. MLF revenues are recognized ratably
over the contract term because the "fixed and determinable fees" and/or the
"collectibility" revenue recognition criteria have not been met. Software
modification fees are recognized upon delivery.
Maintenance fees are recognized ratably over the term of the software
license. Services revenue are recognized as the services are performed. Hardware
revenues, representing commissions on hardware sales associated with the sales
of the Company's software (through December 31, 1997), or market development
funding (after December 31, 1997), are recognized as the fees become collectible
from Compaq.
30
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In fiscal 1998, the Company initiated a program to sell the rights to future
payment streams under selected MLF contracts to financing institutions on a
non-recourse basis. Upon determination that 1) the Company has surrendered
control over the future payment stream to the financing institutions in
accordance with the provisions of SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," and 2) the
MLF arrangements have satisfied all of the software revenue recognition
criteria, the Company has recognized software license fees equal to the net
proceeds from these arrangements. The software license fee revenues recognized
as the result of this program in fiscal 1998 totaled approximately $9.2 million.
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, 1998 and 1997, accumulated amortization of the intangible assets was
$3,600,000 and $1,700,000 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of less than 90 days to be cash equivalents.
31
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
EARNINGS PER SHARE
Effective October 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings Per Share." Basic earnings per share is
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the periods. Diluted earnings per share is
computed by dividing net income by the sum of the weighted average number of
shares of common stock outstanding and the potential dilutive effect of the
outstanding stock options associated with the Company's stock incentive plans.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recovered.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations, and follows the disclosure provisions of Statement of
Financial Accounting Standards No. 123, (SFAS No. 123) "Accounting for
Stock-Based Compensation." See Note 9 for the required disclosures under SFAS
No. 123.
OTHER RECENT PRONOUNCEMENTS
The Company intends to adopt Statement of Financial Standards No. 130 (SFAS
No. 130), "Reporting Comprehensive Income" and Statement of Financial Standards
No. 131 (SFAS No. 131), "Disclosures About Segments of an Enterprise and Related
Information" in fiscal 1999. Both will require additional disclosures but will
not have a material effect on the Company's consolidated financial position or
results of operations. SFAS No. 130 will be reflected in the Company's first
quarter 1999 interim financial statements and establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS No. 131 requires segments to be determined based upon how
management measures performance and makes decisions about allocating resources.
SFAS No. 131 will first be reflected in the Company's 1999 Form 10-K.
RECLASSIFICATIONS
Certain September 30, 1997 amounts have been reclassified to conform to the
September 30, 1998 presentation.
32
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1995 (in thousands except per share
amounts):
YEAR ENDED
SEPTEMBER 30, 1996
--------------------
Revenues................................................................ $ 189,100
Unaudited pro forma net income.......................................... 14,617
Basic net income per share.............................................. $ 0.51
Diluted net income per share............................................ $ 0.49
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 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 unaudited pro forma net income and
earnings per share 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.
During fiscal 1998, the Company acquired all of the outstanding securities
of IntraNet, Inc. Edgeware, Inc. Coyote Systems, Inc. Professional Resources,
Inc. Smart Card Integrators Ltd. in
33
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
separate transactions. These companies were principally engaged in the
development and sale of electronic payments software products and services. The
aggregate number of shares issued for all transactions was 1,950,136 shares of
Class A Common Stock. All transactions, except for Coyote Systems, Inc. which
was accounted for under the purchase method of accounting, were accounted for as
pooling of interests. The excess purchase price over the estimated fair value of
the net tangible assets acquired from Coyote Systems, Inc. amounted to $1.1
million and was allocated to goodwill which is being amortized over 10 years.
The Company's financial statements have been restated for IntraNet, Inc.
(IntraNet) for all periods presented. The results of operations prior to the
acquisitions of the remaining companies were not material.
Prior to the share exchange, IntraNet was taxed primarily as a Subchapter S
Corporation. The unaudited pro forma net income and earnings per share in the
accompanying consolidated statements of income reflects a pro forma tax
provision for combined federal and state taxes for IntraNet's results of
operations for each of the years presented.
Combined and separate results of the Company and IntraNet during the periods
preceding the merger are listed below (in thousands).
YEAR ENDED
SEPTEMBER 30,
-------------------------------------
1997 1996
INTERIM ----------- -----------
PERIOD
1998
-----------
(UNAUDITED)
Total revenues:
Company....................................................... $ 194,357 $ 215,466 $ 166,367
IntraNet...................................................... 18,051 23,067 16,869
----------- ----------- -----------
$ 212,408 $ 238,533 $ 183,236
----------- ----------- -----------
----------- ----------- -----------
Net income:
Company....................................................... $ 23,516 $ 23,566 $ 15,038
IntraNet...................................................... 1,612 2,189 164
----------- ----------- -----------
$ 25,128 $ 25,755 $ 15,202
----------- ----------- -----------
----------- ----------- -----------
Unaudited pro forma information:
Net income -- historical...................................... $ 25,128 $ 25,755 $ 15,202
RVS tax adjustment -- pro forma............................... -- (507) (854)
IntraNet tax adjustment pro forma............................. (633) (843) (62)
----------- ----------- -----------
Net income -- pro forma....................................... $ 24,495 $ 24,405 $ 14,286
----------- ----------- -----------
----------- ----------- -----------
4. MARKETABLE SECURITIES
In April 1998, the Company entered into a transaction with Nestor, Inc.
(Nestor), whereby the Company acquired 2.5 million shares of Nestor's Common
Stock for $5.0 million. In addition, the Company received warrants to purchase
an additional 2.5 million shares at an exercise price of $3 per share. Nestor is
a provider of neural-network solutions for financial, Internet and
transportation industries. The Company distributes Nestor's PRISM intelligent
fraud detection product. The Company has accounted for the investment in
Nestor's Common Stock and warrants in accordance with Statement of
34
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. MARKETABLE SECURITIES (CONTINUED)
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities".
The investment in marketable securities has been classified as
available-for-sale and recorded at fair market value, which is estimated based
on quoted market prices. Net unrealized holding gains and losses, net of the
related tax effect, are reported as a separate component of stockholders'
equity. Unrealized gains and losses are determined by specific identification.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
Computer equipment................................................... $ 32,111 $ 26,270
Office furniture and fixtures........................................ 7,110 5,487
Leasehold improvements............................................... 4,032 3,427
Vehicles............................................................. 777 1,080
---------- ----------
44,030 36,264
Less accumulated depreciation and amortization....................... (23,520) (18,427)
---------- ----------
Property and equipment, net.......................................... $ 20,510 $ 17,837
---------- ----------
---------- ----------
6. SOFTWARE
Software consists of the following (in thousands):
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
Internally developed software.......................................... $ 7,206 $ 6,334
Purchased software..................................................... 16,960 13,613
--------- ---------
24,166 19,947
Less accumulated amortization.......................................... (17,116) (13,842)
--------- ---------
Software, net.......................................................... $ 7,050 $ 6,105
--------- ---------
--------- ---------
35
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT
Long-term debt consists of the following (in thousands):
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
Payments due to the sellers of M.R. GmbH (See Note 3), due December
1998................................................................. $ 367 $ 1,112
Other.................................................................. 2,626 2,559
--------- ---------
2,993 3,671
Less current portion................................................... 1,078 1,292
--------- ---------
Long-term debt......................................................... $ 1,915 $ 2,379
--------- ---------
--------- ---------
The Company has a $10 million revolving line of credit, which expires in
June 1999. The revolving line of credit requires the maintenance of a minimum
working capital level of $50 million There were no borrowings under the
revolving line of credit during the years ended September 30, 1998 and 1997.
8. 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):
1999.............................................................. $ 8,540
2000.............................................................. 7,341
2001.............................................................. 5,338
2002.............................................................. 4,869
2003.............................................................. 4,145
Thereafter........................................................ 16,749
---------
Total............................................................. $ 46,982
---------
---------
Total rent expense for the years ended September 30, 1998, 1997 and 1996
was, $9,738,000, $8,739,000 and $7,599,000.
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.
36
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. 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 of the Company's Class A Common Stock at the time of the grant. The
term of the outstanding options is ten years. The options vest annually over a
period of four years.
The Company has a 1997 Management Stock Option Plan whereby 1,050,000 shares
of the Company's Class A Common Stock have been reserved for issuance to
eligible management employees of the Company and its subsidiaries. The stock
options are granted at a price not less than fair market value of the Company's
Class A Common Stock at the time of the grant and require the participant to pay
$3 for each share granted. The term of the outstanding options is ten years. The
options vest annually over a period of four years.
A summary of the stock options issued under the Stock Incentive Plans
previously described and changes during the years ending September 30 are as
follows:
1998 1997 1996
------------------------ ------------------------ ----------------------
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,......... 2,794,437 $ 16.82 1,731,439 $ 7.18 1,819,420 $ 3.81
Granted........................... 387,650 $ 34.30 1,387,567 $ 26.27 275,000 $ 24.69
Exercised......................... 325,371 $ 6.35 283,862 $ 4.57 327,673 $ 3.47
Cancellations..................... 45,209 $ 25.20 40,707 $ 13.83 35,308 $ 4.94
----------- ----------- -----------
Outstanding on September 30....... 2,811,507 $ 20.30 2,794,437 $ 16.82 1,731,439 $ 7.18
----------- ----------- -----------
----------- ----------- -----------
Options exercisable at end of
year............................. 1,275,778 $ 11.19 909,429 $ 5.04 687,903 $ 3.73
Shares available on September 30
for options that may be
granted.......................... 174,287 516,728 816,622
Weighted-average grant date fair
value of options granted during
the year -- exercise price equals
stock market price at grant...... $ 17.74 $ 13.01 $ 14.02
37
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK-BASED COMPENSATION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
at September 30, 1998.
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........................................... 359,268 5.38 $ 2.50 358,823 $ 2.50
$5.00........................................... 505,645 6.09 5.00 486,420 5.00
$7.50 to $9.75.................................. 11,197 6.43 7.80 9,636 7.91
$12.00 to $16.50................................ 21,817 7.23 14.37 13,674 14.27
$20.25 to $25.875............................... 1,189,367 8.32 24.42 319,641 24.50
$26.50 to $31.625............................... 80,813 8.41 29.43 23,366 29.62
$32.25 to $35.75................................ 562,000 9.31 33.27 62,018 33.30
$36.00 to $42.125............................... 81,400 9.32 38.40 2,200 37.33
------------ --- ----------- ------------ -----------
2,811,507 7.75 $ 20.30 1,275,778 $ 11.19
------------ --- ----------- ------------ -----------
------------ --- ----------- ------------ -----------
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 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 the lower of the first or last day of the purchase period. Purchases are
made at the end of each fiscal quarter. Shares issued under this plan for the
years ended September 30, 1998, 1997 and 1996 totaled 30,881, 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 of the stock options at the grant dates for awards
under those plans consistent with the fair value based method of SFAS No. 123,
the Company's net income and net income per common and
38
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK-BASED COMPENSATION PLANS (CONTINUED)
equivalent share for fiscal 1998, 1997 and 1996 would approximate the pro forma
amounts as follows (in thousands, except per share amounts):
YEAR ENDED
SEPTEMBER 30,
-------------------------------
1998 1997 1996
--------- --------- ---------
Net income -- historical:
As reported.............................................. $ 31,759 $ 25,755 $ 15,202
Pro forma................................................ 29,733 24,442 15,047
Unaudited net income -- pro forma:
As reported.............................................. 31,126 24,405 14,286
Pro forma................................................ 29,100 23,092 14,131
Pro forma net income per share -- basic.................... $ 0.98 $ 0.79 $ 0.50
Pro forma net income per share -- diluted.................. $ 0.96 $ 0.77 $ 0.47
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:
1998 1997 1996
--------- --------- ---------
Expected life.................................................... 5.8 5.8 5.8
Interest rate.................................................... 5.5% 6.3% 6.3%
Volatility....................................................... 39% 38% 38%
Dividend yield................................................... -- -- --
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 applies only to options granted
during fiscal 1998, 1997 and 1996, and additional awards in future years are
anticipated.
10. EMPLOYEE BENEFIT PLANS
TSA 401(K) RETIREMENT PLAN
The 401(k) Retirement Plan is a defined contribution plan covering all
domestic employees of TSA. Participants may contribute up to 15% of their annual
wages. Beginning January 1, 1998, TSA began matching 160% of participant
contributions up to a maximum of 2.5% of compensation, not to exceed $2,500.
Prior to January 1, 1998, TSA matched 100% of participants contributions up to a
maximum of 2.5%. TSA's contributions charged to expense during the years ended
September 30, 1998, 1997 and 1996 were $1,197,000, $489,000 and $507,000
respectively.
ACI PROFIT SHARING PLAN AND TRUST
The Company had a Profit Sharing Plan and Trust which was a non-contributory
profit sharing plan covering all employees of ACI provided they were at least 21
years of age and had completed one year of service. Effective October 1, 1997
the ACI Profit Sharing Plan and Trust was merged into the 401(k) Retirement
Plan. The plan provided for ACI to contribute a discretionary amount as
determined annually by the Company's President and Chief Financial Officer.
ACI's contributions charged to expense during the years ended September 30, 1997
and 1996 were $480,000 and $399,000 respectively.
39
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
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,
-------------------------------
1998 1997 1996
--------- --------- ---------
Service cost................................................ $ 1,666 $ 1,307 $ 1,018
Interest cost on projected benefit obligation............... 1,192 830 738
Return on plan assets:
Actual and gain deferred.................................. (1,501) (1,055) (805)
Amortization of unrecognized gain......................... (85) 3 (13)
--------- --------- ---------
Total periodic pension expense.............................. $ 1,272 $ 1,085 $ 938
--------- --------- ---------
--------- --------- ---------
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,
--------------------
1998 1997
--------- ---------
Projected benefit obligation........................................... $ 18,439 $ 14,035
Plan assets at fair value, primarily investments in marketable equity
securities of United Kingdom companies................................ 17,467 14,955
--------- ---------
Plan assets greater (less) than projected benefit obligation........... (972) 920
Unrecognized gain...................................................... (826) (2,530)
--------- ---------
Accrued pension cost................................................... $ (1,798) $ (1,610)
--------- ---------
--------- ---------
40
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The most significant actuarial assumptions used in determining the pension
expense and funded status of the plan are as follows:
1998 1997 1996
----- ----- -----
Discount rate for valuing liabilities................................ 6.0% 8.0% 8.0%
Expected long-term rate of return on assets.......................... 7.0% 9.0% 9.0%
Rate of increase in future compensation levels....................... 3.5% 6.0% 6.0%
11. SEGMENT INFORMATION
The Company operates primarily in one industry segment, which includes the
development, marketing and support of computer software products and services
for automated electronic payment systems and electronic commerce.
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,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenues from Unaffiliated Customers:
Americas................................................................. $ 174,069 $ 145,825 $ 114.513
Europe, Middle East and Africa........................................... 87,492 64,792 47,267
Asia/Pacific............................................................. 28,200 27,916 21.456
----------- ----------- -----------
$ 289,761 $ 238,533 $ 183,236
----------- ----------- -----------
----------- ----------- -----------
Intercompany revenues:
Americas................................................................. $ 32,612 $ 26,183 $ 13,065
----------- ----------- -----------
----------- ----------- -----------
Operating Income:
Americas................................................................. $ 53,816 $ 42,148 $ 32,996
Europe, Middle East and Africa........................................... 25,321 16,783 8,302
Asia/Pacific............................................................. 6,723 8,625 6,740
----------- ----------- -----------
85,860 67,556 48,038
----------- ----------- -----------
Research and Development and Corporate General and Administrative
Expenses.................................................................. (34,872) (28,937) (24,770)
----------- ----------- -----------
Operating Income........................................................... $ 50,988 $ 38,619 $ 23,268
----------- ----------- -----------
----------- ----------- -----------
Identifiable Assets:
Americas................................................................. $ 139,766 $ 115,625 $ 89,325
Europe, Middle East and Africa........................................... 60,446 44,497 33,706
Asia/Pacific............................................................. 21,190 16,769 11,957
----------- ----------- -----------
$ 221,402 $ 176,891 $ 134,988
----------- ----------- -----------
----------- ----------- -----------
12. 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
41
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
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.
The provision for income taxes consists of the following (in thousands):
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- --------------------------------- ---------------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
--------- ----------- --------- --------- ----------- --------- --------- ----------- ---------
Federal............... $ 13,433 $ (1,212) $ 12,221 $ 7,022 $ 1,355 $ 8,377 $ 6,209 $ (2,066) $ 4,143
State................. 2,252 (257) 1,995 1,905 240 2,145 1,933 (71) 1,862
Foreign............... 5,260 -- 5,260 3,803 -- 3,803 3,291 -- 3,291
--------- ----------- --------- --------- ----------- --------- --------- ----------- ---------
Total................. $ 20,945 $ (1,469) $ 19,476 $ 12,730 $ 1,595 $ 14,325 $ 11,433 $ (2,137) $ 9,296
--------- ----------- --------- --------- ----------- --------- --------- ----------- ---------
--------- ----------- --------- --------- ----------- --------- --------- ----------- ---------
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,
-------------------------------
1998 1997 1996
--------- --------- ---------
Tax expense at federal rate of 35% for 1998 and 1997 and 34% for 1996.......... $ 17,932 $ 14,028 $ 8,329
Losses with no current tax benefit............................................. 22 1,503 239
Effective state income tax..................................................... 1,508 1,394 1,140
Foreign tax rate differential.................................................. 385 1,160 --
RVS nontaxable income.......................................................... -- (663) (750)
IntraNet nontaxable income..................................................... (564) (766) (55)
Recognition of deferred income tax assets previously reserved against.......... (830) (2,979) --
Amortization of intangibles.................................................... -- -- 578
Transaction related expenses................................................... 461 -- --
Other.......................................................................... 562 648 (185)
--------- --------- ---------
$ 19,476 $ 14,325 $ 9,296
--------- --------- ---------
--------- --------- ---------
42
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. 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,
----------------------
1998 1997
---------- ----------
Deferred assets:
Depreciation........................................................................... $ 167 $ 226
Amortization........................................................................... 4,822 4,959
Foreign taxes.......................................................................... 1,122 1,210
Acquired net operating loss carryforward of USSI....................................... 1,167 1,157
Net operating loss carryforward........................................................ 1,058 1,715
Acquired basis in partnership assets................................................... 6,016 6,613
Unrealized investment holding loss..................................................... 1,094 --
Other.................................................................................. 1,140 717
---------- ----------
16,586 16,597
---------- ----------
Deferred tax asset valuation allowance................................................... (11,665) (13,080)
---------- ----------
Deferred liabilities:
Other.................................................................................. (288) (438)
---------- ----------
(288) (438)
---------- ----------
$ 4,633 $ 3,079
---------- ----------
---------- ----------
For income tax purposes, the Company had foreign tax credit carryforwards of
approximately $680,000 at September 30, 1998, which expire in 2002.
At September 30, 1998 management evaluated its 1998 and 1997 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 $4.9 million as
of September 30, 1998.
13. SUBSEQUENT EVENTS (UNAUDITED)
In November 1998, the Company and Media Integration BV (MINT) completed a
stock exchange transaction which resulted in MINT becoming a wholly owned
subsidiary of the Company. Shareholders of MINT received 740,000 shares of TSA
Class A Common Stock in exchange for 100% of MINT shares. The stock exchange
will be accounted for as a pooling of interests. MINT's results of operations
prior to the acquisition were not material.
Also on December 10, 1998, the Company acquired the remaining interests in
the net assets of US Processing, Inc. (USPI) by paying $3.6 million in cash and
the forgiveness of $5.6 million of debt owed to TSA. Prior to that date, the
Company had owned 19.9% of USPI. The transaction will result in the recording
goodwill of approximately $11.0 million to be amortized over 10 years.
43
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 1998 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 1998 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 1998 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 1998 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
(1) FINANCIAL STATEMENTS
The financial statements filed as part of this report are listed on the
Index to Financial Statements on page 24.
(2) FINANCIAL STATEMENT SCHEDULES:
Index to Consolidated Financial Statement Schedules
PAGE
-----
Report of Independent Public Accountants............................................................... 48
Schedule II -- Valuation and Qualifying Accounts..................................................... 49
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
Form 8-K dated August 7, 1998, under Item 2, Acquisition or Disposition of
Assets, was filed with the Securities and Exchange Commission reporting an
Agreement and Plan of Merger between the Company and IntraNet, Inc.
Form 8-K dated August 31, 1998, under Item 9, Sales of Equity Securities
Pursuant to Regulation S, was filed with the Securities and Exchange Commission
reporting the Share Exchange Agreement between the Company and Smart Card
Integrations Limited.
44
(4) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
- ------------- ----------------------------------------------------------------------------------------------
2.01(2) Senior Convertible Preferred Stock and Warrant Purchase Agreement among ACI Holding, Inc. and
the Several Named Purchasers Named therein, dated as of December 31, 1993
2.02(2) Stock Purchase Agreement between and among Tandem Computers Incorporated, Tandem Computers
Limited, Applied Communications, Inc., Applied Communications Inc Limited and ACI Holding,
Inc., dated November 8, 1993, and amendments thereto
2.03(2) Stock Purchase Agreement between and among U S Software Holding, Inc., Michael J. Scheier,
Trustee, Michael J. Scheier and ACI Holding, Inc., dated December 13, 1993, and amendments
thereto
2.04(2) Stock and Warrant Holders Agreement, dated as of December 30, 1993
2.05(2) Credit Agreement among ACI Transub, Inc., ACI Holding, Inc., certain lenders and Continental
Bank N.A., as Agent, dated December 31, 1993, including Amendment No. 1 to Credit Agreement
and Amendment No. 2 to Credit Agreement and Consent
2.06(2) Letter Agreement among ACI Holding, Inc., Alex. Brown and Sons, Incorporated and Kirkpatrick
Pettis Smith Polian, Inc., and amendment thereto
2.07(2) ACI Management Group Investor Subscription Agreement, dated as of December 30, 1993
2.08(3) Asset Purchase Agreement Between 1176484 Ontario Inc. and TXN Solution Integrations dated June
3, 1996
2.09(4) Stock Exchange Agreement by and among the Company, Grapevine Systems, Inc. and certain
principal shareholders of Grapevine Systems, Inc., dated as of July 15, 1996
2.10(9) Stock Exchange Agreement dated April 17, 1997 by and among the Company and Regency Voice
Systems, Inc. and related entities.
2.11(10) Agreement and Plan of Merger dated April 27, 1998 among the Company, I.N. Acquisition Corp.
and IntraNet
3.01(2) Amended and Restated Certificate of Incorporation of the Company, and amendments thereto
3.02(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(12) Transaction Systems Architects, Inc. 1996 Stock Option Plan
(10.08-10.12 intentionally omitted.)
10.13(2) Voting Agreement among ACI Holding, Inc. and certain investors, dated as of December 30, 1993
10.14(2) Registration Rights Agreement between ACI Holding, Inc. and certain stockholders, dated
December 30, 1993
(10.15-10.16 intentionally omitted.)
45
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.
10.30(11) Transaction Systems Architects, Inc. Deferred Compensation Plan
10.31(11) Transaction Systems Architects, Inc. Deferred Compensation Plan Trust Agreement
21.01(4) Subsidiaries of the Company
23.01(13) Consent of Independent Public Accountants
27.00(13) Financial Data Schedule
99.01(13) Safe Harbor for Forward-Looking Statements under the Private Securities Litigation Reform Act
of 1995
- --------------------------
(1) Incorporated by reference to the exhibit of the same number to the
Registration Statement No. 33-94338 on Form S-1.
(2) Incorporated by reference to the exhibit of the same number to the
Registrant's Registration Statement No. 33-88292 on Form S-1.
(3) Incorporated by reference to the exhibit of the same number to the
Registrant's Current Report on Form 8-K dated June 3, 1996.
(4) Incorporated by reference to the exhibit of the same number to the
Registrant's Registration Statement No. 333-09811 on Form S-4.
(5) Incorporated by reference to the exhibit of the same number to the
Registrant's Annual Report on Form 10-K for the fiscal year ended September
30, 1995.
(6) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30,
1996.
(7) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended December 31,
1995.
(8) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended March 31,
1997.
(9) Incorporated by reference to the exhibit of the same number to the
Registrants Current Report on Form 8 K dated May 13, 1997.
(10) Incorporated by reference to the exhibit of the same number to the
Registrant's Current Report on Form 8-K dated August 7, 1998.
(11) Incorporated by reference to exhibits 4.1 and 4.2 to the Registration
Statement No. 333-67987 on Form S-8.
(12) Incorporated by reference to the exhibit of the same number to the
Registrant's Annual Report on Form 10-K for the fiscal year ended September
30, 1996.
(13) Previously filed.
46
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 January 26, 1999.
TRANSACTION SYSTEMS ARCHITECTS, INC.
By /s/ DWIGHT HANSON
-----------------------------------------
Dwight Hanson,
VICE PRESIDENT
(PRINCIPAL ACCOUNTING OFFICER)
47
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 29, 1998. 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 29, 1998
48
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, 1998 SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
-------------------- -------------------- --------------------
Balance, beginning of period.................... $ 2,298,000 $ 1,168,000 $ 990,000
Additions charged to expense.................... $ 4,326,000 1,512,000 414,000
Reductions...................................... (1,896,000) (382,000) (236,000)
-------------------- ----------- -----------
Balance, end of period.......................... $ 4,728,000 $ 2,298,000 $ 1,168,000
-------------------- ----------- -----------
-------------------- ----------- -----------
49
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------------ -----------------------------------------------------------------------------------------------
2.01(2) Senior Convertible Preferred Stock and Warrant Purchase Agreement among ACI Holding, Inc. and
the Several Named Purchasers Named therein, dated as of December 31, 1993
2.02(2) Stock Purchase Agreement between and among Tandem Computers Incorporated, Tandem Computers
Limited, Applied Communications, Inc., Applied Communications Inc Limited and ACI Holding,
Inc., dated November 8, 1993, and amendments thereto
2.03(2) Stock Purchase Agreement between and among U S Software Holding, Inc., Michael J. Scheier,
Trustee, Michael J. Scheier and ACI Holding, Inc., dated December 13, 1993, and amendments
thereto
2.04(2) Stock and Warrant Holders Agreement, dated as of December 30, 1993
2.05(2) Credit Agreement among ACI Transub, Inc., ACI Holding, Inc., certain lenders and Continental
Bank N.A., as Agent, dated December 31, 1993, including Amendment No. 1 to Credit Agreement
and Amendment No. 2 to Credit Agreement and Consent
2.06(2) Letter Agreement among ACI Holding, Inc., Alex. Brown and Sons, Incorporated and Kirkpatrick
Pettis Smith Polian, Inc., and amendment thereto
2.07(2) ACI Management Group Investor Subscription Agreement, dated as of December 30, 1993
2.08(3) Asset Purchase Agreement Between 1176484 Ontario Inc. and TXN Solution Integrations dated June
3, 1996
2.09(4) Stock Exchange Agreement by and among the Company, Grapevine Systems, Inc. and certain
principal shareholders of Grapevine Systems, Inc., dated as of July 15, 1996
2.10(9) Stock Exchange Agreement dated April 17, 1997 by and among the Company and Regency Voice
Systems, Inc. and related entities.
2.11(10) Agreement and Plan of Merger dated April 27, 1998 among the Company, I.N. Acquisition Corp. and
IntraNet
3.01(2) Amended and Restated Certificate of Incorporation of the Company, and amendments thereto
3.02(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(12) Transaction Systems Architects, Inc. 1996 Stock Option Plan
(10.08-10.12 intentionally omitted.)
10.13(2) Voting Agreement among ACI Holding, Inc. and certain investors, dated as of December 30, 1993
10.14(2) Registration Rights Agreement between ACI Holding, Inc. and certain stockholders, dated
December 30, 1993
(10.15-10.16 intentionally omitted)
10.17(2) Lease respecting facility at 330 South 108th Avenue, Omaha, Nebraska
10.18(2) Lease respecting facility at 218 South 108th Avenue, Suite 3, Omaha, Nebraska
50
EXHIBIT
NUMBER DESCRIPTION
- ------------ -----------------------------------------------------------------------------------------------
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
10.30(11) Transaction Systems Architects, Inc. Deferred Compensation Plan
10.31(11) Transaction Systems Architects, Inc. Deferred Compensation Plan Trust Agreement
21.01(4) Subsidiaries of the Company
23.01(13) Consent of Independent Public Accountants
27.00(13) Financial Data Schedule
99.01(13) Safe Harbor for Forward-Looking Statements under the Private Securities Litigation Reform Act
of 1995
- --------------------------
(1) Incorporated by reference to the exhibit of the same number to the
Registration Statement No. 33-94338 on Form S-1.
(2) Incorporated by reference to the exhibit of the same number to the
Registrant's Registration Statement No. 33-88292 on Form S-1.
(3) Incorporated by reference to the exhibit of the same number to the
Registrant's Current Report on Form 8-K dated June 3, 1996.
(4) Incorporated by reference to the exhibit of the same number to the
Registrant's Registration Statement No. 333-09811 on Form S-4.
(5) Incorporated by reference to the exhibit of the same number to the
Registrant's Annual Report on Form 10-K for the fiscal year ended September
30, 1995.
(6) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30,
1996.
(7) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended December 31,
1995.
(8) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended March 31,
1997.
(9) Incorporated by reference to the exhibit of the same number to the
Registrants Current Report on Form 8 K dated May 13, 1997.
(10) Incorporated by reference to the exhibit of the same number to the
Registrant's Current Report on Form 8-K dated August 7, 1998.
(11) Incorporated by reference to the exhibits 4.1 and 4.2 to the Registration
Statement No. 333-67987 on Form S-8.
(12) Incorporated by reference to the exhibit of the same number to the
Registrant's Annual Report on Form 10-K for the fiscal year ended September
30, 1996.
(13) Previously filed.
51