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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-25346
TRANSACTION SYSTEMS ARCHITECTS, INC.
(Exact name of registrant specified in its charter)
DELAWARE 47-0772104
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
330 SOUTH 108TH AVENUE
OMAHA, NEBRASKA 68154
(Address of principal executive offices, including zip code)
(402) 390-7600
(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 20, 1996, there were outstanding 23,993,519 shares of the
Company's Class A Common Stock, par value $.005, and 2,171,252 shares of the
Company's Class B Common Stock, par value $.005. As of that date, the aggregate
market value of the shares of common stock held by nonaffiliates of the
registrant (based on the last sale price of $33.75 per share for the
registrant's common stock as of such date) was $883,061,021.
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 25, 1997, which will be filed with the Securities and
Exchange Commission not later than 120 days after the end of the Registrant's
fiscal year.
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TRANSACTION SYSTEMS ARCHITECTS, INC.
1996 FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I
Item 1. Business....................................................................................... 3
Item 2. Properties..................................................................................... 10
Item 3. Legal Proceedings.............................................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders............................................ 12
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................... 12
Item 6. Selected Financial Data........................................................................ 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 14
Item 8. Financial Statements and Supplementary Data.................................................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 45
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 45
Item 11. Executive Compensation......................................................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 45
Item 13. Certain Relationships and Related Transactions................................................. 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 45
Signatures................................................................................................. 49
</TABLE>
2
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PART I
ITEM 1. BUSINESS
OVERVIEW
Transaction Systems Architects, Inc. ("TSA" or the "Company") was formed in
November, 1993. The Company 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 U.S. Software, Inc. ("USSI"). On June 3,
1996, the Company acquired substantially all of the net assets of TXN Solution
Integrators ("TXN"). Prior to the acquisition, TXN was ACI's exclusive
distributor of BASE24 in Canada. In September 1996, the Company acquired
Grapevine Systems, Inc. (Grapevine). Stockholders of Grapevine received 380,441
shares of TSA Class A Common Stock in exchange for 100% of Grapevine's common
stock. Grapevine became a wholly-owned subsidiary of TSA. The Grapevine
transaction was accounted for as a pooling of interests. The financial
statements and financial information included herein have been restated to
include the results of Grapevine for all periods presented. In October 1996, the
Company acquired Open Systems Solutions, Inc. (OSSI). Stockholders of OSSI
received 210,000 shares of TSA Class A Common Stock in exchange for 100% of
OSSI's common stock. OSSI became a wholly-owned subsidiary of TSA. The OSSI
transaction will be accounted for as a pooling of interests, however, OSSI's
results of operations prior to the acquisition were not material.
The Company develops, markets and supports a broad line of software products
and services primarily focused on facilitating electronic payments and
electronic commerce. The Company's software products are used to process
transactions involving credit cards, debit cards, smart cards, checks, automated
teller machines (ATM), point-of-sale (POS) terminals, manned teller devices,
remote banking, wire transfers and automated clearing house (ACH) functions. The
Company's products and services assist customers in operating large, complex
networks performing such functions as transaction authorization, transaction
routing, debit and credit card management, transaction settlement and reporting.
The Company is an international supplier of electronic payment software
products and network integration solutions, principally for financial
institutions, as well as for retailers and third-party processors. At September
30, 1996, its customers include 106 of the largest 500 banks in the world, as
measured by asset size. As of September 30, 1996, the Company had 565 customers
in 65 countries on six continents. During fiscal years 1996, 1995 and 1994,
approximately 56%, 51% and 49%, respectively, of the Company's total revenues
resulted from international operations and approximately 75%, 74% and 73%,
respectively, of its revenues were derived from licensing the BASE24 family of
products and providing related services and maintenance. BASE24 supports high
volume, complex transaction processing and provides customers the flexibility to
operate a wide range of terminals, switches and communications protocols. BASE24
operates in a fault-tolerant environment on Tandem computers.
The Company also markets a complementary electronic payment software product
line, TRANS24, that operates on hardware platforms other than Tandem, including
IBM mainframes, Stratus computers and RISC/UNIX servers. In addition, the
Company markets network connectivity software and middleware to customers in a
variety of industries to help solve network integration and systems migration
problems. Through Grapevine, the Company markets products and services focused
on high availability and on-line transaction processing systems. Through OSSI,
the Company markets payment systems that operate on Microsoft's Windows NT.
The Company provides specialized technical services and maintenance,
principally in support of BASE24 and its other product lines. Services and
maintenance fees accounted for 48%, 47% and 48% of the Company's revenues during
fiscal years 1996, 1995 and 1994, respectively.
3
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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. Increasingly, these activities are performed online and
must be conducted 24 hours a day, 7 days a week.
Electronic payments software carries transactions from the transaction
generators to the acquiring institutions. The software then uses regional or
national switches to access the card issuers for approval or denial of the
transactions. The software returns messages to the sources, thereby completing
the transactions. Electronic payments software may be required to interact with
dozens of devices, switch interchanges and communication protocols around the
world. The electronic payments market has expanded both domestically and
internationally.
PRODUCTS AND RELATED SERVICES
The Company develops, markets and supports three product lines: (i)
electronic payments software, (ii) network connectivity software and middleware
and (iii) wholesale payments software. The Company generally grants
non-exclusive, non-transferable, perpetual or monthly licenses which are
computer, site or user specific.
ELECTRONIC PAYMENTS SOFTWARE
The Company has two electronic payments software product lines, BASE24 and
TRANS24.
BASE24. BASE24 is an integrated family of products marketed to customers
operating electronic payment networks in the banking and retail industries. The
modular architecture of the products enables customers to select the application
and system components that are required to operate their networks.
The Company believes that BASE24 has a more complete range of features and
functions for electronic payments processing than products offered by its
competitors. BASE24 allows customers to adapt to changing network needs by
supporting over 40 different types of ATM and POS terminals, over 100
interchange interfaces and various authorization and reporting options. During
fiscal years 1996, 1995 and 1994, the Company derived approximately 75%, 74% and
73%, respectively, of its revenues from licensing BASE24 products and related
services, including maintenance fees.
The BASE24 product line runs exclusively on Tandem computers. Tandem's
parallel-processing environment offers fault-tolerance, linear expandability and
distributed processing. The combination of features offered by BASE24 and Tandem
are important characteristics in high volume, 24-hour per day electronic payment
systems. The Company believes that equipment supplied by Tandem remains a widely
accepted platform for transaction processing in the electronic payments market.
There can be no assurance that Tandem will continue to achieve financial success
or that its equipment will continue to be a widely accepted platform for this
market.
TRANS24. TRANS24 is a family of products, marketed principally in the
banking industry, that runs on a variety of hardware platforms, including IBM
mainframes, Stratus fault-tolerant computers and RISC/UNIX servers. During
fiscal years 1996, 1995 and 1994, the Company derived 4%, 6% and 5%,
respectively, of its revenues from TRANS24 product licensing and related
services, including maintenance fees. The Company believes that the TRANS24
product line, utilizing a CICS middleware product, offers the Company an
opportunity to achieve platform diversification.
4
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The TRANS24 electronic payment products support online processing of
transactions in ATM or POS environments. These products have traditionally been
marketed to smaller institutions than BASE24, and in certain international
markets where Tandem has limited market share. The TRANS24-Card Manager and
Settlement Manager products are also marketed to customers with BASE24, as they
can be interfaced to BASE24 and represent value-added services necessary to
operate an electronic payments solution effectively.
The TRANS24 product line also includes a full range of cardholder and
merchant processing facilities for mid-scale to large-scale credit card issuers,
including consumer application processing, cardholder billing and accounting,
merchant processing and accounting, and credit collection.
NETWORK CONNECTIVITY SOFTWARE AND MIDDLEWARE
The Company markets network connectivity software which involves a set of
software tools that facilitate network integration. The Company has arranged
with Insession, Inc. to distribute and support its System Network Architecture
(SNA) connectivity tool, known as ICE, which facilitates connectivity between
Tandem and IBM computers. The Company has also developed NET24, a
message-oriented middleware product that acts as the layer of software which
manages the interface between application software and computer operating
systems and helps customers perform network and legacy systems integration
projects. During fiscal years 1996, 1995 and 1994, the Company derived 13%, 12%
and 14%, respectively, of its revenues from license fees and related services,
including maintenance fees, for network connectivity software and middleware.
WHOLESALE PAYMENTS SOFTWARE
The Company markets two products for processing wholesale payments, Moneynet
and CO-ach, both of which run on Tandem computers. Moneynet offers a range of
features to generate, authorize, route, settle and control wire transfer
transactions in a secure, fault-tolerant environment. It is primarily used
domestically and is focused on the Fedwire market, the main interbank wire
transfer market in the United States.
The Company's wholesale payments product, CO-ach, represents a solution for
initiating, controlling, settling and reporting ACH transactions. ACH
transactions are electronic payments that replace traditional paper checks.
CO-ach is targeted at large ACH originators with high transaction volumes. In
addition to large domestic ACH originators, the Company is marketing CO-ach to
international markets, where standards similar to those in the U.S. for
automated check clearing are emerging. During fiscal years 1996, 1995 and 1994,
the Company derived 5% of its revenues from the Moneynet and CO-ach product
lines.
SERVICES
During fiscal years 1996, 1995 and 1994, the Company generated service
revenues, exclusive of maintenance fees, of $40.8 million, $26.7 million and
$22.5 million, respectively, or 25.6%, 22.6% and 23.3%, respectively, of total
revenues. The Company offers three different services: technical services,
project management and facilities management.
TECHNICAL SERVICES. Technical services covers a variety of tasks including
programming and programming support, day-to-day systems operations, network
operations, help desk staffing, quality assurance testing, problem resolution,
system design, and performance planning and review. Technical services are
priced on a weekly basis according to the level of technical expertise required
and the duration of the project. During fiscal years 1996, 1995 and 1994,
technical service revenue was $28.1 million, $19.2 million and $17.0 million,
respectively.
5
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PROJECT MANAGEMENT. The Company offers a Project Management and
Implementation Plan ("PMIP") which provides customers with a variety of support
services, including on-site product integration reviews, project planning,
training, custom software development, 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 fixed fee which varies based on the level and quantity of included
support services. During fiscal years 1996, 1995 and 1994, PMIP and other
support services revenue was $9.9 million, $4.4 million and $4.4 million,
respectively.
FACILITIES MANAGEMENT. The Company offers facilities management services
whereby the Company operates a customer's electronic payments system for
multi-year periods. Pricing and payment terms for facilities management services
vary on a case-by-case basis giving consideration to the complexity of the
facility or system to be managed, the level and quantity of technical services
required, and other factors relevant to the facilities management agreement.
During fiscal years 1996, 1995 and 1994, facilities management revenue was $2.8
million, $3.1 million and $1.0 million, respectively.
CUSTOMER SUPPORT
The Company offers its customers both a general maintenance plan and an
extended service option, called the Enhanced Support Program ("ESP").
Maintenance fees, including ESP, were $35.6 million, $29.2 million and $24.0
million, or 22.3%, 24.6% and 24.9% of total revenues, during fiscal years 1996,
1995 and 1994, respectively.
MAINTENANCE. After software installation and project completion, the
Company provides maintenance services to customers for a monthly fee ranging
from 1.0% to 1.5% of the related software price. Virtually all new customers
contract for maintenance. Maintenance is typically provided pursuant to a
contract which has an initial one year term and thereafter renews automatically
unless either party gives notice of its intent not to renew. Services which are
provided under the maintenance contracts for the maintenance fee include:
- Twenty-four hour hotline for problem resolution
- Customer account management support
- Vendor-required mandates and updates
- Product documentation
- Hardware operating system compatibility
- User group membership
Additionally, the Company provides new releases of its products on a
periodic basis. Generally, new releases of the product, which may contain
limited product enhancements, are included at no additional fee. However, the
Company's agreements with its customers permit the Company to charge for certain
product enhancements which are not provided as part of the maintenance
agreement. The Company determines on a case-by-case basis for which of these
enhancements it will charge an additional fee.
The Company organizes user groups, generally around geographic regions and
product lines. The groups help the Company determine its product strategy,
development plans and aspects of customer support.
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
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- Supply on-site support, available upon demand
- Perform an annual system review
CUSTOMERS
The Company's typical 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, 1996, the
Company's customer base includes 106 of the largest 500 banks in the world.
The following table illustrates the distribution of the Company's customers
by geographic region and industry segment as of September 30, 1996:
<TABLE>
<CAPTION>
FINANCIAL PROCESSORS/
GEOGRAPHIC REGION INSTITUTIONS RETAILERS NETWORKS OTHER TOTAL
- ------------------------------------------------- --------------- ------------- ----------------- ----------- -----
<S> <C> <C> <C> <C> <C>
Americas......................................... 170 25 39 67 301
Europe, Middle East and Africa (EMEA)............ 74 15 21 72 182
Asia/Pacific..................................... 61 2 12 7 82
-- --
--- --- ---
Total........................................ 305 42 72 146 565
-- --
-- --
--- --- ---
--- --- ---
</TABLE>
SALES AND MARKETING
The Company's primary method of distribution is direct sales by employees
assigned to specific regions. In addition, the Company uses distributors and
sales agents to supplement its direct sales force in countries where business
practices or customs make it appropriate, or where it is uneconomical to have a
direct sales staff. As of September 30, 1996 the Company employed 108 people in
direct sales, and had arrangements with 27 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 Omaha, London, Singapore,
Frankfurt, Toronto, Sao Paulo, Tokyo, Mexico City, Melbourne, Bahrain,
Johannesburg and Oslo. 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 Interbold, to ensure compatibility with the latest ATM technology. The
Company works with interchange vendors, such as VISA and MasterCard, to ensure
compliance with new regulations or processing mandates. The Company works with
platform vendors, such as Tandem and IBM, to ensure compatibility with new
operating system releases and generations of hardware. Customers often provide
additional information on requirements and serve as beta-test partners.
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The Company's research and development staff consisted of 238 employees as
of September 30, 1996. The Company's total research and development expenses,
excluding capitalized software development costs and purchased R&D, were $14.6
million, $12.5 million and $10.3 million during fiscal years 1996, 1995 and
1994, or 9.1%, 10.6% and 10.7% of total revenues, respectively.
BACKLOG
As of September 30, 1996, the Company had non-recurring revenue backlog of
$20.4 million in software license fees and $13.6 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, 1995 and 1994, the
Company had non-recurring revenue backlog of $17.1 million and $14.9 million,
respectively, in software license fees and $12.0 million and $11.6 million,
respectively, in services.
As of September 30, 1996, the Company had recurring revenue backlog of $71.0
million. The Company defines recurring revenue backlog to be all monthly license
fees, maintenance fees and facilities management fees specified in contracts
which have been executed by the Company and its customers to the extent that the
Company contemplates recognition of the related revenue within one year. There
can be no assurance, however, that contracts included in recurring revenue
backlog will actually generate the specified revenues. As of September 30, 1995
and 1994, the Company had $53.1 million and 40.7 million, respectively, of
recurring revenue backlog.
COMPETITION
The electronic payments market is highly competitive. The Company's most
significant competitors are Deluxe Data Systems, Inc. and S2 Systems, Inc. which
also offer electronic payment products. In addition, the Company encounters
competition from third-party processors and from vendors offering UNIX-based
products. There is no single significant competitor in the international market.
Installations of UNIX software solutions are increasing in the electronic
payments market. Some vendors have either converted mainframe products to UNIX
or developed products especially for UNIX. These products are generally unproven
on large-scale networks and have tended to be used in smaller banks or in
smaller systems. UNIX-based competitors represent a competitive challenge as the
Company moves to market its products to smaller banks. The Company is addressing
these challenges with UNIX-based versions of its TRANS24 product.
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
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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, 1996 the Company had a total of 1,097 employees of whom
138 were engaged in administration, 203 in sales and marketing, 385 in software
development and 371 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 13
to the Company's Consolidated Financial Statements for information relating to
geographic regions.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
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<S> <C> <C>
William E. Fisher............... 50 Chief Executive Officer, President and Director
David C. Russell................ 48 Senior Vice President and Director
David P. Stokes................. 40 General Counsel and Secretary
Gregory J. Duman................ 41 Chief Financial Officer and Treasurer
Jon L. Howe..................... 49 Chief Technical Officer
Edward H. Mangold............... 51 Senior Vice President -- Americas Region
Richard N. Launder.............. 47 Senior Vice President -- EMEA Region
Thomas H. Boje.................. 46 Vice President -- EMEA Region
Fred L. Grabher................. 45 Vice President -- Asia/Pacific Region
Mark R. Vipond.................. 37 Vice President -- USSI
Stephen J. Royer................ 38 Vice President -- Grapevine
</TABLE>
Mr. Fisher is President and Chief Executive Officer of TSA and Chief
Executive Officer of ACI. Since joining ACI in 1987, he has served in various
capacities, including Vice President of Financial Systems, Senior Vice President
of Software and Services, Executive Vice President and Chief Operating Officer.
Prior to joining ACI, he held the position of President for the Government
Services Division of First Data Resources ("FDR"), an information processing
company.
Mr. Russell was appointed President of ACI in 1996. He joined ACI in 1989
serving as Vice President of Strategic Planning, later serving as Vice President
of Customer Support, Senior Vice President of
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Software and Services and Senior Vice President of the EFT Product Company. From
1984 to 1989, he held various operations and planning positions at FDR.
Mr. Stokes was appointed General Counsel in 1991 after joining ACI as
Assistant Counsel in 1988. Prior to joining ACI, he was a partner in a private
law firm in Omaha.
Mr. Duman joined ACI in 1983 as Director of Administration. He became
Controller in 1985 and Vice President of Finance and Chief Financial Officer in
1991. From 1979 to 1983, he worked for Arthur Andersen & Co. as a certified
public accountant.
Mr. Howe joined ACI in 1984 as Manager of Systems Engineering. From 1984 to
1987, he managed the Engineering, Research and Product Development divisions
within ACI. In 1987, he was appointed Chief Technical Officer of ACI. Prior to
joining ACI, he was Senior Vice President at Financial Information Trust, a
midwestern financial service bureau.
Mr. Mangold joined ACI in 1987 and served in sales management positions
prior to his appointment in 1990 as Senior Vice President of the Americas
Region. From 1968 to 1987, he held various sales and management positions at
Unisys, Inc.
Mr. Grabher joined ACI in 1982 in the U.S. Sales Division. From 1982 to
1990, he held various positions including Director of Sales, Vice President of
Product Marketing and Vice President of Emerging Technologies. He was appointed
to Vice President of Sales for the Asia/Pacific Region in 1990. Prior to joining
ACI, he was Vice President and Division Manager of Automated Customer Services
with First National Bank in Lincoln, Nebraska. Mr. Grabher is based in
Singapore.
Mr. Vipond was named President of U.S. Software in January 1996. Since
joining ACI in 1985, he has served in various capacities, including National
Sales Manager of ACI Canada. From January 1992 to December 1995 he served as
Vice President of the Emerging Technologies and Network Systems Divisions. Prior
to joing ACI, he was a Systems Engineer at IBM.
Mr. Boje was named Managing Director of ACIL for the EMEA region in October
1996. He joined ACI in 1983 as Director of Software Development. From 1983
through 1991 he held various positions, including Director of Customer Support
and Vice President of Customer Services. From 1991 through 1993 he was an
independent consultant in the EFT market, working on various domestic and
international projects. Mr. Boje rejoined the Company in 1994 as Vice President
of Business Development. Mr. Boje is based in London.
Mr. Launder was named Chairman of ACIL in 1991. He joined ACI in 1989 as
Managing Director of ACI Europe, a position he held until 1991. In 1991 he
became Managing Director of ACIL. In 1993 he became Senior Vice President of TSA
for the EMEA region. Prior to joining ACI, he held positions of Sales Director
for Tandem and Director of Service Development for Andersen Consulting in the
United Kingdom. Mr. Launder is based in London.
Mr. Royer is President of Grapevine. He joined Grapevine in 1988 as Director
of Sales and was named President in 1991. He became Vice President of TSA in
September 1996. Prior to joining Grapevine, he held sales management positions
at Software Alliance, ACI and IBM.
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 the years 1997
through 1999, with the principal lease terminating in fiscal 1999.
The Company's EMEA operations are located in Watford, England. The leases
for these facilities expire in fiscal 2009 and 2011, with the principal lease
terminating in fiscal 2009.
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The Company's USSI operations are located in Carter Lake, Iowa under a lease
terminating in fiscal 1998.
The Company's Canadian operations are located in Toronto, Canada. The lease
for this facility expires in fiscal 2007.
The Company's Asia/Pacific operations are located in Singapore, Japan and
Australia under leases terminating in fiscal 1998, 1999 and 1998, respectively.
In addition, the Company leases sales office space at various locations, the
aggregate rental obligations of which are not material.
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 information regarding the Company's obligations under
its facilities leases.
11
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ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company is
not currently a party to any legal proceedings, the adverse outcome of which,
individually or in the aggregate, would have a material adverse effect on the
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1996.
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 since the Company's Initial Public
Offering on February 23, 1995.
<TABLE>
<CAPTION>
1996 HIGH LOW
- ---------------------------------------- ---------- ----------
<S> <C> <C>
First quarter........................... $ 16 7/8 $ 12 1/2
Second quarter.......................... 20 5/8 16 3/8
Third quarter........................... 34 19 7/8
Fourth quarter.......................... 45 3/4 24 3/4
<CAPTION>
1995
- ----------------------------------------
<S> <C> <C>
Second quarter.......................... $ 11 3/4 $ 8 7/8
Third quarter........................... 13 3/8 9 3/8
Fourth quarter.......................... 14 11 3/4
</TABLE>
On December 20, 1996, the last sale price of the Company's Class A Common
Stock as reported by NASDAQ/NMS was $33.75 per share. There were 461 holders of
record of the Company's Common Stock as of December 20, 1996.
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
<PAGE>
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, beginning on page 13 of this Report. The
information below is not necessarily indicative of the results of future
operations.
<TABLE>
<CAPTION>
PREDECESSORS
COMPANY (2) (1)
------------------------------------------------ --------------
NINE MONTHS THREE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1996 1995 1994 (3) 1993
-------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Software license fees.................................. $ 78,937 $58,028 $36,992 $ 7,956
Maintenance fees....................................... 35,614 29,167 18,626 5,392
Services............................................... 40,845 26,724 18,117 4,353
Hardware, net.......................................... 4,388 4,554 3,702 1,129
-------------- -------------- -------------- --------------
Total revenues....................................... 159,784 118,473 77,437 18,830
-------------- -------------- -------------- --------------
Expenses:
Cost of software license fees:
Software costs....................................... 19,120 13,139 7,533 2,713
Amortization of purchased software (4)............... 3,143 3,165 2,342 1,034
Purchased contracts in progress (4).................. -- 2,956 12,398 --
Cost of maintenance and services....................... 41,050 28,538 19,369 5,164
Research and development:
Research and development costs....................... 14,572 12,539 8,587 1,704
Charge for purchased research and development (4).... -- -- 22,712 --
Selling and marketing.................................. 34,414 30,074 18,677 4,359
General and administrative:
General and administrative costs..................... 26,151 18,651 13,658 3,946
Amortization of goodwill and purchased intangibles
(4)................................................ 656 344 834 816
-------------- -------------- -------------- --------------
Total expenses..................................... 139,106 109,406 106,110 19,736
-------------- -------------- -------------- --------------
Operating income (loss).................................. 20,678 9,067 (28,673) (906)
Other income (expense):
Interest income........................................ 1,914 1,077 416 91
Interest expense....................................... (235) (1,751) (3,058) (34)
Other income (expense)................................. (626) 13 172 --
-------------- -------------- -------------- --------------
Total other.......................................... 1,053 (661) (2,470) 57
-------------- -------------- -------------- --------------
Income (loss) before income taxes........................ 21,731 8,406 (31,143) (849)
Benefit (provision) for income taxes..................... (9,161) (2,086) (2,164) (802)
-------------- -------------- -------------- --------------
Net income (loss) before extraordinary loss.............. 12,570 6,320 (33,307) (1,651)
Extraordinary loss related to early retirement of debt
(4)..................................................... -- (2,750) -- --
-------------- -------------- -------------- --------------
Net income (loss)........................................ $ 12,570 $ 3,570 $(33,307) $(1,651)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Net income (loss) per common and equivalent share (5):
Before extraordinary loss.............................. $ .47 $ .27 $ (1.62)
Extraordinary loss..................................... -- (.12) --
-------------- -------------- --------------
Net income (loss)...................................... .47 .15 $ (1.62)
-------------- -------------- --------------
-------------- -------------- --------------
Shares used in per share computation (5)................. 27,016 23,251 20,588
-------------- -------------- --------------
-------------- -------------- --------------
BALANCE SHEET DATA:
Working capital........................................ $ 41,017 $38,327 $ 2,024 $ 6,861
Total assets........................................... 123,159 101,905 60,491 47,861
Long-term obligations.................................. 1,687 357 22,801 601
Stockholders' equity (deficit)......................... 76,450 60,356 (31,520) 28,940
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1993 1992
-------------- --------------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Software license fees.................................. $35,988 $31,823
Maintenance fees....................................... 19,984 17,618
Services............................................... 12,455 10,492
Hardware, net.......................................... 2,731 5,170
-------------- --------------
Total revenues....................................... 71,158 65,103
-------------- --------------
Expenses:
Cost of software license fees:
Software costs....................................... 9,390 9,091
Amortization of purchased software (4)............... 4,974 4,629
Purchased contracts in progress (4).................. -- --
Cost of maintenance and services....................... 17,668 11,653
Research and development:
Research and development costs....................... 5,475 4,622
Charge for purchased research and development (4).... -- --
Selling and marketing.................................. 18,204 18,817
General and administrative:
General and administrative costs..................... 15,054 15,043
Amortization of goodwill and purchased intangibles
(4)................................................ 3,268 3,142
-------------- --------------
Total expenses..................................... 74,033 66,997
-------------- --------------
Operating income (loss).................................. (2,875) (1,894)
Other income (expense):
Interest income........................................ 212 398
Interest expense....................................... (137) (112)
Other income (expense)................................. -- 470
-------------- --------------
Total other.......................................... 75 756
-------------- --------------
Income (loss) before income taxes........................ (2,800) (1,138)
Benefit (provision) for income taxes..................... (1,590) (1,161)
-------------- --------------
Net income (loss) before extraordinary loss.............. (4,390) (2,299)
Extraordinary loss related to early retirement of debt
(4)..................................................... -- --
-------------- --------------
Net income (loss)........................................ $(4,390) $(2,299)
-------------- --------------
-------------- --------------
Net income (loss) per common and equivalent share (5):
Before extraordinary loss..............................
Extraordinary loss.....................................
Net income (loss)......................................
Shares used in per share computation (5).................
BALANCE SHEET DATA:
Working capital........................................ $13,879 $11,379
Total assets........................................... 57,286 60,024
Long-term obligations.................................. 672 1,002
Stockholders' equity (deficit)......................... 39,099 43,669
</TABLE>
- ------------------------------
(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 Note 3 to the Company's
Consolidated Financial Statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Overview."
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
13
<PAGE>
(FOOTNOTES CONTINUED FROM PRECEDING PAGE)
(2) The statements of operations 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. See Note 3 to the Company's Consolidated Financial Statements.
(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) Net income (loss) per common and equivalent share and the shares used in the
per share computation have been computed on the basis described in Note 2 to
the Company's Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company was formed on November 2, 1993 for the purpose of acquiring all
of the outstanding capital stock of ACI and ACIL from Tandem. ACI and ACIL were
acquired on December 31, 1993. On January 3, 1994, the Company acquired all of
the outstanding common stock of USSI. 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
1996, 1995 and 1994. These acquisition related charges included, among others,
charges for purchased research and development, purchased contracts in progress,
purchased software and goodwill amortization. These expenses are hereafter
referred to as the "Acquisition Charges".
On June 3, 1996, the Company acquired substantially all of the net assets of
TXN. The acquisition was accounted for as a purchase.
On September 13, 1996, the Company and Grapevine entered into a share
exchange agreement which resulted in Grapevine becoming a wholly-owned
subsidiary of the Company. The share exchange was accounted for as a pooling of
interests. The Company's financial statements have been restated to include the
results of Grapevine for all periods presented.
For purposes of the following discussion and analysis, the results of
operations of the Predecessors for the three months ended December 31, 1993 have
been combined with the results of operations of the Company for the nine months
ended September 30, 1994 by adding the corresponding items without adjustment.
This computation was done to permit useful comparison between the aggregated
twelve months ended September 30, 1996, 1995 and 1994. The combined results of
operations for the twelve months ended September 30, 1994 includes nine months
of operations of USSI.
The Company provides electronic payments software and related services.
During fiscal 1996, 1995 and 1994, 56%, 51% and 49%, respectively, of total
revenues resulted from international operations. The Company derived
approximately 75%, 74% and 73%, respectively, of its revenues for those same
periods from licensing its BASE24 family of software products and providing
related services and maintenance. Although the Company believes that the
majority of its revenues will continue to come from its existing BASE24 and
TRANS24 products over the next several years, the Company has developed and is
currently developing other software products and related services. These
products are in the areas of network connectivity, middleware, remote banking
and ACH.
14
<PAGE>
The following table summarizes revenues by geographic region:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1996 1995 1994
--------- --------- -----------
(IN THOUSANDS) (COMBINED)
<S> <C> <C> <C>
Americas........................................... $ 91,061 $ 75,624 $ 60,196
EMEA............................................... 47,267 31,264 26,363
Asia/Pacific....................................... 21,456 11,585 9,708
--------- --------- -----------
Total revenues................................... $ 159,784 $ 118,473 $ 96,267
--------- --------- -----------
--------- --------- -----------
</TABLE>
See Note 13 to the Company's Consolidated Financial Statements for
additional information relating to geographic regions.
PRODUCT PRICING. The Company typically charges a one-time, paid-up-front
fee ("PUF") for perpetual usage or an ongoing monthly licensing fee ("MLF") for
month-to-month usage of its software products. Under a PUF arrangement,
substantially all revenue related to the transaction is recognized when the
software is installed (because the customer does not have the ability to cancel
the contract), while under an MLF arrangement, the revenue is recognized on a
monthly basis (because the customer typically has the ability to cancel its
contract at any time). Consequently, under an MLF contract, revenue recognition
and cash flow are deferred. A key component of the Company's strategy is to
continue to seek to increase MLF revenue. MLF revenue amounted to $20.9 million,
$13.1 million and $6.6 million, in fiscal 1996, 1995 and 1994, respectively. PUF
revenue, including software modification fees, amounted to $58.0 million, $44.9
million and $38.1 million, in fiscal 1996, 1995 and 1994, respectively.
HARDWARE REVENUES. The Company has a written agreement with Tandem whereby
Tandem pays commissions to the Company when the Company can demonstrate that a
customer's purchase of its software resulted in that customer's purchase of
hardware from Tandem. The commissions are determined as a percentage of Tandem's
related hardware revenue. Generally, if a customer's transaction volume
increases and the increase necessitates the purchase of additional hardware or
an upgrade of its hardware platform, Tandem pays the Company additional
commissions on the related hardware sale to the customer. The level of hardware
commissions earned by the Company varies from year to year due to timing of
customer purchases, introduction of new lines of hardware, and changing prices
of hardware. Hardware prices continue to decline and could result in lower
hardware commission revenues to the Company in future years. Commissions from
Tandem amounted to $4.4 million, $4.6 million and $3.7 million in fiscal 1996,
1995 and 1994, respectively.
PUBLIC OFFERINGS. The Company completed an initial public offering (IPO) in
March 1995. The Company sold 4,825,000 shares of Class A Common Stock resulting
in net proceeds to the Company, after deducting the underwriting discount and
offering expenses, of approximately $32.3 million. The Company used $25.8
million of the IPO proceeds to repay all outstanding bank indebtedness (the
"Indebtedness"). Upon repayment of the Indebtedness, the Company incurred an
extraordinary loss of $2.7 million for the writeoff of debt issuance costs of
$1.1 million and original issue discount of $1.6 million. In August 1995, the
Company completed the issuance of an additional 2,000,000 shares of Class A
Common Stock through a public offering, resulting in net proceeds, after
deducting the underwriting discount and offering expenses, of approximately
$22.4 million.
15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data and the percentage of
total revenues of the Company and its Predecessors for the periods indicated:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
% OF % OF % OF
(DOLLARS IN THOUSANDS) AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
--------- ----------- --------- ----------- --------- -----------
(COMBINED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Software license fees.............................. $ 78,937 49.4% $ 58,028 49.0% $ 44,948 46.7%
Maintenance fees................................... 35,614 22.3 29,167 24.6 24,018 25.0
Services........................................... 40,845 25.6 26,724 22.6 22,470 23.3
Hardware, net...................................... 4,388 2.7 4,554 3.8 4,831 5.0
--------- ----- --------- ----- --------- -----
Total revenues................................. 159,784 100.0 118,473 100.0 96,267 100.0
--------- ----- --------- ----- --------- -----
Expenses:
Cost of software license fees:
Software costs................................... 19,120 12.0 13,139 11.1 10,246 10.6
Amortization of purchased software............... 3,143 2.0 3,165 2.6 3,376 3.5
Purchased contracts in progress.................. -- -- 2,956 2.5 12,398 12.9
Cost of maintenance and services................... 41,050 25.7 28,538 24.1 24,533 25.5
Research and development:
Research and development costs................... 14,572 9.1 12,539 10.6 10,291 10.7
Charge for purchased research and development.... -- -- -- -- 22,712 23.6
Selling and marketing.............................. 34,414 21.5 30,074 25.4 23,036 23.9
General and administrative:
General and administrative costs................. 26,151 16.4 18,651 15.7 17,604 18.3
Amortization of goodwill and purchased
intangibles.................................... 656 0.4 344 0.3 1,650 1.7
--------- ----- --------- ----- --------- -----
Total expenses................................. 139,106 87.1 109,406 92.3 125,846 130.7
--------- ----- --------- ----- --------- -----
Operating income (loss).............................. 20,678 12.9 9,067 7.7 (29,579) (30.7)
Other income (expense):
Interest income.................................... 1,914 1.2 1,077 0.9 507 0.5
Interest expense................................... (235) (0.1) (1,751) (1.5) (3,092) (3.2)
Other income....................................... (626) (0.4) 13 0.0 172 0.2
--------- ----- --------- ----- --------- -----
Total other.................................... 1,053 0.7 (661) (0.6) (2,413) (2.5)
--------- ----- --------- ----- --------- -----
Income (loss) before income taxes.................... 21,731 13.6 8,406 7.1 (31,992) (33.2)
Provision for income taxes........................... (9,161) (5.7) (2,086) (1.8) (2,966) (3.1)
--------- ----- --------- ----- --------- -----
Net income (loss) before extraordinary loss.......... 12,570 7.9 6,320 5.3 (34,958) (36.3)
Extraordinary loss related to early retirement of
debt............................................... -- -- (2,750) (2.3) -- --
--------- ----- --------- ----- --------- -----
Net income (loss).................................... $ 12,570 7.9% $ 3,570 3.0% $ (34,958) (36.3)%
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
</TABLE>
REVENUES. Total revenues for fiscal 1996 increased 34.9% or $41.3 million
over fiscal 1995. Of this increase, $20.9 million of the growth resulted from a
36.0% increase in software license fee revenue, $14.1 million from a 52.8%
increase in services revenue and $6.4 million from a 22.1% increase in
maintenance fee revenue.
Total revenues for fiscal 1995 increased 23.1% or $22.2 million over fiscal
1994. Of this increase, $13.1 million of the growth resulted from a 29.1%
increase in software license fee revenue, $4.3 million from a 18.9% increase in
services revenue and $5.1 million from a 21.4% from increase in maintenance fee
revenue.
The growth in software license fee revenue in both fiscal 1996 and 1995 is
the result of increased demand for the Company's BASE24 products and a continued
growth of the installed base of customers paying monthly license fee (MLF)
revenue. Contributing to the strong demand for the Company's products is the
continued world-wide growth of EFT transaction volume and the growing complexity
of
16
<PAGE>
EFT payment systems. MLF revenue was $20.9 million, $13.1 million and $6.6 in
fiscal 1996, 1995 and 1994, respectively.
The growth in service revenue in both fiscal 1996 and 1995 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 1996 and 1995 is a
result of the continued growth of the installed base of the Company's software
products.
EXPENSES. Total operating expenses for fiscal 1996 increased 27.1% or $29.7
million over fiscal 1995. Total operating expenses for fiscal 1995 decreased
13.1% or $16.4 million over fiscal 1994. The primary reason for the overall
increase in operating expenses during fiscal 1996 is the increase in staff
required to support the increased demand for the Company's products and
services. Total staff (including both employees and independent contractors) was
1,272, 1,040 and 837 at September 30, 1996, 1995 and 1994, respectively. The
decrease in total operating expenses in fiscal 1995 as compared to fiscal 1994
is primarily due to a decrease in the Acquisition charges which were offset, in
part, by higher labor costs associated with increases in staff.
The Company's operating margin (excluding the Acquisition charges of $3.3
million, $6.5 million and $40.1 million for fiscal 1996, 1995 and 1994,
respectively) was 15.0%, 13.1% and 11.0% in fiscal 1996, 1995 and 1994,
respectively. These improvements are primarily due to increased demand for the
Company's products and the impact of the growth in the Company's recurring
revenues (MLF's, maintenance and facilities management fees).
The Company's gross margin (total revenues minus cost of software and cost
of maintenance and services) was 60.4%, 62.2% and 60.4% in fiscal 1996, 1995 and
1994, respectively. The decline in gross margin during fiscal 1996 is primarily
due to the accelerated growth in services business which typically has a lower
gross margin than software license fees which was offset, in part, by the impact
of additional MLF revenue. The increase in gross margin during fiscal 1995 is
due primarily to the impact of additional MLF revenue.
Research and development (R&D) costs as a percentage of total revenues were
9.1%, 10.6% and 34.3% in fiscal 1996, 1995 and 1994, respectively. R&D costs in
fiscal 1994 include a one-time charge for purchased research and development
associated with the Acquisitions. R&D costs, excluding the charge for purchased
R&D, for fiscal 1994 were 10.7% of revenue. The majority of R&D costs have been
charged to expense as incurred with the capitalization of software costs
amounting to approximately $1.2 million per year. The Company expects R&D costs
to remain relatively constant as a percentage of revenues.
Selling and marketing costs as a percentage of total revenues were 21.5%,
25.4% and 23.9% in fiscal 1996, 1995 and 1994, respectively. The decrease in
1996 is due primarily to higher levels of services revenue and backlog which
typically has a lower level of sales commission expense associated with it. The
increase in 1995 is due primarily to an investment in sales personnel to pursue
business opportunities in the EFT market place.
General and administrative costs as a percentage of total revenues were
16.8%, 16.0% and 20.0% in fiscal 1996, 1995 and 1994. The 1996 increase is due
primarily to the hiring of additional staff to support the Company's growth. The
1995 decrease is due to the Company's emphasis on cost controls and the decrease
in Acquisition costs.
EBITDA. The Company's earnings before interest, income taxes, depreciation
and amortization (EBITDA) was $30.6 million, $20.9 million and $16.5 million for
fiscal 1996, 1995 and 1994, respectively. These increases are attributable to
the continued growth in both recurring and non-recurring revenues
17
<PAGE>
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 investment of a
portion of the public offering proceeds received in March and August of 1995.
The decrease in interest expense is due to the repayment of the Indebtedness out
of the proceeds of the Company's March 1995 public offering.
EXTRAORDINARY LOSS. Upon repayment of the Indebtedness, the Company
incurred an extraordinary loss of $2.7 million for the write-off of debt
issuance costs of $1.1 million and original issue discount of $1.6 million.
INCOME TAXES. The Company had an effective tax rate of 42.2% for fiscal
1996 as compared to 36.9% for fiscal 1995. The increase in the effective tax
rate is principally the result of deferred tax assets which were recognized in
fiscal 1995 which reduced the effective tax rate for that year with no
corresponding recognition of deferred tax assets in fiscal 1996. During fiscal
1994, the Company had a pre-tax loss but still had a tax provision. This was the
result of the Company expensing withholding taxes paid on remittances to the
United States for software license fees. These foreign withholding taxes were
expensed in fiscal 1994 because, at that time, realization of these taxes as a
credit was not assured.
As of September 30, 1996, the Company has deferred tax assets of
approximately $12.4 million and deferred tax liabilities of $0.7 million. Each
year, the Company evaluates its historical operating results as well as its
projections for the next 24 months to determine the realizability of the
deferred tax assets. This analysis indicated that $4.4 million of the deferred
tax assets were more likely than not to be realized. Accordingly, the Company
has recorded a valuation allowance of $8.0 million as of September 30, 1996.
BACKLOG
As of September 30, 1996 and 1995, the Company had non-recurring revenue
backlog of $20.4 million and $17.1 million in software license fees and $13.6
million and $12.0 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, 1996 and 1995, the Company had recurring revenue backlog
of $71.0 million and $53.1 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.
18
<PAGE>
SELECTED QUARTERLY INFORMATION
The following table sets forth certain unaudited financial data for each of
the quarters within fiscal years 1996, 1995 and 1994. This information has been
derived from the Company's Consolidated Financial Statements and the financial
statements of its Predecessors, 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.
<TABLE>
<CAPTION>
COMPANY
--------------------------------------------------------------------------
QUARTER ENDED
--------------------------------------------------------------------------
SEP.
30, JUNE 30, MARCH 31, DEC. 31, SEP. 30, JUNE 30, MARCH 31,
(IN THOUSANDS) 1996 1996 1996 1995 1995 1995 1995
------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license fees......... $22,733 $19,969 $19,018 $17,217 $18,084 $14,386 $13,108
Maintenance fees.............. 9,725 9,068 8,412 8,409 7,559 7,545 7,260
Services...................... 11,991 11,067 9,169 8,618 7,286 7,012 6,250
Hardware, net................. 1,109 977 1,063 1,239 1,271 1,200 1,033
------- -------- --------- -------- -------- -------- ---------
Total revenues............ 45,558 41,081 37,662 35,483 34,200 30,143 27,651
------- -------- --------- -------- -------- -------- ---------
Expenses:
Cost of software license fees:
Software costs.............. 5,171 5,173 4,871 3,905 4,059 2,829 2,892
Amortization of purchased
software.................. 787 783 785 788 791 792 790
Purchased contracts in pro-
gress..................... -- -- -- -- -- -- 631
Cost of maintenance and ser-
vices....................... 12,052 10,790 9,437 8,771 8,080 7,493 6,696
Research and development:
Research and development
costs..................... 3,796 3,450 3,788 3,537 3,550 3,630 2,767
Charge for purchased
research and development.. -- -- -- -- -- -- --
Selling and marketing......... 9,832 8,314 7,864 8,404 9,074 7,559 7,002
General and administrative:
General and administrative
costs..................... 7,284 7,094 6,079 5,695 4,786 4,502 4,685
Amortization of goodwill and
purchased intangibles..... 204 157 145 150 50 50 103
------- -------- --------- -------- -------- -------- ---------
Total expenses............ 39,126 35,761 32,969 31,250 30,390 26,855 25,566
------- -------- --------- -------- -------- -------- ---------
Operating income (loss)......... 6,432 5,320 4,693 4,233 3,810 3,288 2,085
Other income (expense):
Interest income............... 334 444 568 568 458 283 185
Other......................... (446 ) (99) (51) (30) (86) 58 149
Interest expense.............. (53 ) (54) (84) (44) (49) (41) (703)
------- -------- --------- -------- -------- -------- ---------
Total other............... (165 ) 291 433 494 323 300 (369)
------- -------- --------- -------- -------- -------- ---------
Income (loss) before income
taxes.......................... 6,267 5,611 5,126 4,727 4,133 3,588 1,716
Benefit (provision) for income
taxes.......................... (2,876 ) (2,392) (2,095) (1,798) (1,394) (730) 547
------- -------- --------- -------- -------- -------- ---------
Net income (loss) before
extraordinary loss............. 3,391 3,219 3,031 2,929 2,739 2,858 2,263
Extraordinary loss related to
early retirement of debt....... -- -- -- -- -- -- (2,750)
------- -------- --------- -------- -------- -------- ---------
Net income (loss)............... $3,391 $ 3,219 $ 3,031 $ 2,929 $ 2,739 $ 2,858 $ (487)
------- -------- --------- -------- -------- -------- ---------
------- -------- --------- -------- -------- -------- ---------
<CAPTION>
PREDECESSORS
------------
DEC. 31, SEP. 30, JUNE 30, MARCH 31, DEC. 31,
(IN THOUSANDS) 1994 1994 1994 1994 1993
-------- -------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Software license fees......... $12,439 $13,766 $12,912 $ 10,311 $ 7,956
Maintenance fees.............. 6,803 6,360 6,178 6,070 5,392
Services...................... 6,187 6,421 5,787 5,301 4,353
Hardware, net................. 1,050 814 979 1,909 1,129
-------- -------- -------- --------- ------------
Total revenues............ 26,479 27,361 25,856 23,591 18,830
-------- -------- -------- --------- ------------
Expenses:
Cost of software license fees:
Software costs.............. 3,359 2,464 2,642 2,376 2,713
Amortization of purchased
software.................. 792 785 779 778 1,034
Purchased contracts in pro-
gress..................... 2,325 3,550 3,222 5,626 --
Cost of maintenance and ser-
vices....................... 6,269 6,993 6,391 5,845 5,164
Research and development:
Research and development
costs..................... 2,592 2,892 2,882 2,689 1,704
Charge for purchased
research and development.. -- -- -- 22,712 --
Selling and marketing......... 6,439 6,779 6,063 5,637 4,359
General and administrative:
General and administrative
costs..................... 4,678 4,596 4,552 4,359 3,946
Amortization of goodwill and
purchased intangibles..... 141 140 555 139 816
-------- -------- -------- --------- ------------
Total expenses............ 26,595 28,199 27,086 50,161 19,736
-------- -------- -------- --------- ------------
Operating income (loss)......... (116) (838) (1,230) (26,570) (906)
Other income (expense):
Interest income............... 151 177 134 105 91
Other......................... (108) (331) 349 154 --
Interest expense.............. (958) (963) (1,036) (1,056) (34)
-------- -------- -------- --------- ------------
Total other............... (915) (1,117) (553) (797) 57
-------- -------- -------- --------- -- ------------
Income (loss) before income
taxes.......................... (1,031) (1,955) (1,783) (27,367) (849)
Benefit (provision) for income
taxes.......................... (509) (982) (664) (533) (802)
-------- -------- -------- --------- ------------
Net income (loss) before
extraordinary loss............. (1,540) (2,937) (2,447) (27,900) (1,651)
Extraordinary loss related to
early retirement of debt....... -- -- -- -- --
-------- -------- -------- --------- ------------
Net income (loss)............... $(1,540) $(2,937) $(2,447) $(27,900) $(1,651)
-------- -------- -------- --------- ------------
-------- -------- -------- --------- ------------
</TABLE>
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had working capital of $41.0 million,
cash and cash equivalents of $31.5 million and a $10 million bank line of credit
of which there are no borrowings outstanding. The bank line of credit expires in
June 1997.
For the year ended September 30, 1996, the Company's cash flow from
operations amounted to $17.8 million and cash used in investing activities
amounted to $22.8 million.
In the normal course of business, the Company evaluates potential
acquisitions of complementary businesses, products or technologies. On October
2, 1995, the Company acquired the capital stock of a German software company for
$3.4 million. The acquisition was accounted for under the purchase accounting
method and was financed with existing cash and future payments to the sellers.
On January 24, 1996, the Company entered into a transaction with Insession,
Inc. (Insession) whereby the term of the Company's ICE distribution rights was
extended to September 2001. In addition, the Company has loaned Insession $4.0
million under promissory notes and acquired a 7.5% minority interest in
Insession for $1.5 million.
On June 3, 1996, the Company acquired substantially all of the net assets of
TXN Solution Integrators (TXN) for $3.6 million in cash and the assumption of
certain liabilities of TXN. The acquisition was accounted for under the purchase
accounting method and was financed with existing cash.
In August 1995, the Company entered into a transaction with a start-up
transaction processing business whereby it agreed to extend to the start-up
venture a $2.5 million credit facility and obtained the right to acquire the
start-up venture. During fiscal 1996, the Company increased the credit facility
to $3.6 million. During fiscal 1996 and 1995, the start-up venture borrowed
$500,000 and $3.1 million, respectively, under the credit facility.
On September 13, 1996, the Company acquired Grapevine in exchange for
380,441 shares of the Company's Class A Common Stock.
On October 8, 1996, the Company acquired OSSI in exchange for 210,000 shares
of the Company's Class A Common Stock.
Management believes that the Company's working capital, cash flow generated
from operations and borrowing capacity are sufficient to meet the Company's
working capital requirements for the foreseeable future.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants................................ 22
Consolidated Balance Sheets as of September 30, 1996 and 1995........... 23
Consolidated Statements of Operations for the years ended September 30,
1996 and 1995 and for the period from Inception (November 2, 1993)
through September 30, 1994............................................ 24
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1996 and 1995 and for the period from Inception
(November 2, 1993) through September 30, 1994......................... 25
Consolidated Statements of Cash Flows for the years ended September 30,
1996 and 1995 and for the period from Inception (November 2, 1993)
through September 30, 1994............................................ 26
Notes to Consolidated Financial Statements.............................. 27
</TABLE>
21
<PAGE>
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, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended September
30, 1996 and 1995 and for the period from inception (November 2, 1993) through
September 30, 1994. 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, 1996 and 1995, and the results of
their operations and their cash flows for the years ended September 30, 1996 and
1995 and for the period from inception (November 2, 1993) through September 30,
1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Omaha, Nebraska,
October 31, 1996
22
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 31,546 $ 35,511
Receivables, net....................................................................... 49,135 40,284
Deferred income taxes.................................................................. 4,348 2,732
Other.................................................................................. 1,010 992
---------- ----------
Total current assets................................................................. 86,039 79,519
Property and equipment, net.............................................................. 13,001 9,717
Software, net............................................................................ 5,424 6,741
Intangible assets, net................................................................... 7,236 2,027
Installment receivables.................................................................. 1,593 1,505
Investment and notes receivable.......................................................... 8,105 500
Other.................................................................................... 1,761 1,896
---------- ----------
Total assets......................................................................... $ 123,159 $ 101,905
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt...................................................... $ 1,147 $ 480
Current portion of capital lease obligations........................................... 342 456
Accounts payable....................................................................... 8,322 5,070
Accrued employee compensation.......................................................... 5,210 4,564
Accrued liabilities.................................................................... 7,631 7,526
Income taxes........................................................................... 4,383 3,562
Deferred revenue....................................................................... 17,987 19,534
---------- ----------
Total current liabilities............................................................ 45,022 41,192
Long-term debt........................................................................... 1,431 --
Capital lease obligations................................................................ 256 357
---------- ----------
Total liabilities.................................................................... 46,709 41,549
---------- ----------
Commitments and contingencies (Note 8)
Redeemable Convertible Preferred Stock, $.01 par value; 5,450,000 shares authorized; no
shares issued and outstanding at September 30, 1996 and 1995...........................
Redeemable Convertible Class B Common Stock and Warrants, $.005 par value; 5,000,000
shares authorized; no shares issued and outstanding at September 30, 1996 and 1995.....
Stockholders' equity (1995 shares are before the effect of the two-for-one stock split in
June 1996):
Class A Common Stock, $.005 par value; 50,000,000 shares authorized; 23,740,766 and
11,493,760 shares issued at September 30, 1996 and 1995, respectively................ 119 58
Class B Common Stock, $.005 par value; 5,000,000 shares authorized; 2,171,252 and
1,485,626 shares issued and outstanding at September 30, 1996 and 1995,
respectively......................................................................... 11 7
Additional paid-in capital............................................................. 96,062 92,721
Accumulated translation adjustments.................................................... (236) (354)
Accumulated deficit.................................................................... (19,494) (32,064)
Treasury stock, at cost, 845 shares at September 30, 1996 and 1995..................... (12) (12)
---------- ----------
Total stockholders' equity........................................................... 76,450 60,356
---------- ----------
Total liabilities and stockholders' equity........................................... $ 123,159 $ 101,905
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(NOVEMBER 2,
YEAR ENDED SEPTEMBER 30, 1993) THROUGH
------------------------------ SEPTEMBER 30,
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Software license fees......................................... $ 78,937 $ 58,028 $ 36,992
Maintenance fees.............................................. 35,614 29,167 18,626
Services...................................................... 40,845 26,724 18,117
Hardware, net................................................. 4,388 4,554 3,702
-------------- -------------- --------------
Total revenues............................................ 159,784 118,473 77,437
-------------- -------------- --------------
Expenses:
Cost of software license fees:
Software costs.............................................. 19,120 13,139 7,533
Amortization of purchased software.......................... 3,143 3,165 2,342
Purchased contracts in progress............................. -- 2,956 12,398
Cost of maintenance and services.............................. 41,050 28,538 19,369
Research and development:
Research and development costs................................ 14,572 12,539 8,587
Charge for purchased research and development................. -- -- 22,712
Selling and marketing........................................... 34,414 30,074 18,677
General and administrative:
General and administrative costs.............................. 26,151 18,651 13,658
Amortization of goodwill and purchased intangibles............ 656 344 834
-------------- -------------- --------------
Total expenses............................................ 139,106 109,406 106,110
-------------- -------------- --------------
Operating income (loss)......................................... 20,678 9,067 (28,673)
-------------- -------------- --------------
Other income (expense):
Interest income............................................... 1,914 1,077 416
Interest expense.............................................. (235) (1,751) (3,058)
Other......................................................... (626) 13 172
-------------- -------------- --------------
Total other............................................... 1,053 (661) (2,470)
-------------- -------------- --------------
Income (loss) before income taxes............................... 21,731 8,406 (31,143)
Provision for income taxes...................................... (9,161) (2,086) (2,164)
-------------- -------------- --------------
Net income (loss) before extraordinary loss............... 12,570 6,320 (33,307)
Extraordinary loss related to early retirement of debt.......... -- (2,750) --
-------------- -------------- --------------
Net income (loss)......................................... $ 12,570 $ 3,570 $ (33,307)
-------------- -------------- --------------
-------------- -------------- --------------
Net income (loss) per common and equivalent share:
Before extraordinary loss..................................... $0.47 $0.27 $(1.62 )
Extraordinary loss............................................ -- (0.12 ) --
-------------- -------------- --------------
Net income (loss)......................................... $0.47 $0.15 $(1.62 )
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average shares outstanding............................. 27,016 23,251 20,588
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CLASS B ADDITIONAL ACCUMULATED
CLASS A COMMON PAID-IN TRANSLATION ACCUMULATED
COMMON STOCK STOCK CAPITAL ADJUSTMENTS DEFICIT
------------- ------------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, at inception (November 2, 1993), as
previously reported............................ $ -- $ -- $ -- $ -- $ --
Adjustment for Grapevine Systems, Inc. pooling of
interests...................................... 2 -- 80 -- 576
----- --- ----------- ------ -------------
Balance, at inception, (November 2, 1993), as
restated....................................... 2 -- 80 -- 576
Issuance of 1,250,000 shares of Class A Common
Stock for cash................................. 6 -- 3,119 -- --
PIK dividends for Redeemable Convertible
Preferred Stock................................ -- -- -- -- (1,175)
Accretion of Redeemable Convertible Preferred
Stock.......................................... -- -- -- -- (243)
Accretion of Redeemable Convertible Class B
Common Stock and Warrants...................... -- -- -- -- (459)
Net loss......................................... -- -- -- -- (33,307)
Translation adjustments.......................... -- -- -- (102) --
----- --- ----------- ------ -------------
Balance, September 30, 1994...................... 8 -- 3,199 (102) (34,608)
PIK dividends for Redeemable Convertible
Preferred Stock................................ -- -- -- -- (649)
Accretion of Redeemable Convertible Preferred
Stock.......................................... -- -- -- -- (133)
Accretion of Redeemable Convertible Class B
Common Stock and Warrants...................... -- -- -- -- (244)
Sale of Class A Common Stock pursuant to initial
public offering, net of issuance costs......... 12 -- 32,240 -- --
Conversion of Redeemable Convertible Preferred
Stock to Common Stock pursuant to initial
public offering................................ 23 9 27,483 -- --
Termination of redemption rights of Convertible
Class B Common Stock pursuant to initial public
offering....................................... 8 -- 5,468 -- --
Exercise of Class A Common Stock Warrants........ -- -- 1,754 -- --
Sale of Class A Common Stock pursuant to public
offering, net of issuance costs................ 7 (2) 22,419 -- --
Purchase of 845 shares of Class A Common Stock... -- -- -- -- --
Exercise of stock options........................ -- -- 158 -- --
Net income....................................... -- -- -- -- 3,570
Translation adjustments.......................... -- -- -- (252) --
----- --- ----------- ------ -------------
Balance, September 30, 1995...................... 58 7 92,721 (354) (32,064)
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 -- --
Tax benefit of stock options exercised........... -- -- 1,973 -- --
Net income....................................... -- -- -- -- 12,570
Translation adjustments.......................... -- -- -- 118 --
----- --- ----------- ------ -------------
Balance, September 30, 1996...................... $ 119 $ 11 $ 96,062 $ (236) $ (19,494)
----- --- ----------- ------ -------------
----- --- ----------- ------ -------------
<CAPTION>
TREASURY
STOCK TOTAL
------------- ---------
<S> <C> <C>
Balance, at inception (November 2, 1993), as
previously reported............................ $ -- $ --
Adjustment for Grapevine Systems, Inc. pooling of
interests...................................... -- 658
----- ---------
Balance, at inception, (November 2, 1993), as
restated....................................... -- 658
Issuance of 1,250,000 shares of Class A Common
Stock for cash................................. -- 3,125
PIK dividends for Redeemable Convertible
Preferred Stock................................ -- (1,175)
Accretion of Redeemable Convertible Preferred
Stock.......................................... -- (243)
Accretion of Redeemable Convertible Class B
Common Stock and Warrants...................... -- (459)
Net loss......................................... -- (33,307)
Translation adjustments.......................... -- (102)
----- ---------
Balance, September 30, 1994...................... -- (31,503)
PIK dividends for Redeemable Convertible
Preferred Stock................................ -- (649)
Accretion of Redeemable Convertible Preferred
Stock.......................................... -- (133)
Accretion of Redeemable Convertible Class B
Common Stock and Warrants...................... -- (244)
Sale of Class A Common Stock pursuant to initial
public offering, net of issuance costs......... -- 32,252
Conversion of Redeemable Convertible Preferred
Stock to Common Stock pursuant to initial
public offering................................ -- 27,515
Termination of redemption rights of Convertible
Class B Common Stock pursuant to initial public
offering....................................... -- 5,476
Exercise of Class A Common Stock Warrants........ -- 1,754
Sale of Class A Common Stock pursuant to public
offering, net of issuance costs................ -- 22,424
Purchase of 845 shares of Class A Common Stock... (12) (12)
Exercise of stock options........................ -- 158
Net income....................................... -- 3,570
Translation adjustments.......................... -- (252)
----- ---------
Balance, September 30, 1995...................... (12) 60,356
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
Tax benefit of stock options exercised........... -- 1,973
Net income....................................... -- 12,570
Translation adjustments.......................... -- 118
----- ---------
Balance, September 30, 1996...................... $ (12) $ 76,450
----- ---------
----- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
INCEPTION
(NOVEMBER 2, 1993)
YEAR ENDED SEPTEMBER 30, THROUGH
-------------------------- SEPTEMBER 30,
1996 1995 1994
------------ ------------ -------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................ $ 12,570 $ 3,570 $ (33,307)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation............................................... 4,415 3,895 3,711
Amortization............................................... 5,929 5,295 4,207
Purchased research and development......................... -- -- 22,712
Extraordinary loss......................................... -- 2,750 --
Increase in receivables, net............................... (6,729) (7,136) (6,969)
Decrease in contracts in progress.......................... -- 2,955 12,398
Increase in other current assets........................... (938) (1,926) (718)
(Increase) decrease in installment receivables............. (88) (458) 435
(Increase) decrease in other assets........................ (877) (1,850) 96
Increase (decrease) in accounts payable.................... 2,710 (308) 2,591
Increase in accrued employee compensation.................. 425 618 2,369
Increase (decrease) in accrued liabilities................. (399) (513) 414
Increase (decrease) in income tax liabilities.............. 2,801 (113) 190
Increase (decrease) in deferred revenue.................... (1,970) 4,424 4,703
------------ ------------ ----------
Net cash provided by operating activities................ 17,849 11,203 12,832
------------ ------------ ----------
Cash flows from investing activities:
Purchases of property and equipment.......................... (6,572) (4,700) (3,721)
Additions to software........................................ (2,691) (1,562) (1,591)
Acquisition of businesses, net of cash acquired.............. (5,403) (206) (56,594)
Additions to investment and notes receivable................. (8,106) (500) --
------------ ------------ ----------
Net cash used in investing activities.................... (22,772) (6,968) (61,906)
------------ ------------ ----------
Cash flows from financing activities:
Proceeds from issuance of Redeemable Convertible Preferred
Stock...................................................... -- 143 24,142
Proceeds from issuance of Redeemable Convertible Class B
Common Stock and Warrants.................................. -- 1,754 1,863
Proceeds from issuance of Class A Common Stock............... 355 54,839 3,125
Payment of Preferred Stock Dividends......................... -- (1,825) --
Purchase of Treasury Stock................................... (2) (12) (10)
Proceeds from exercise of stock options...................... 1,111 -- --
Proceeds from long-term debt................................. -- 3,045 36,824
Payments of long-term debt................................... (100) (29,750) (13,063)
Payments on capital lease obligations........................ (225) (468) (338)
------------ ------------ ----------
Net cash provided by financing activities................ 1,139 27,726 52,543
------------ ------------ ----------
Effect of exchange rate fluctuations on cash................... (181) (11) 92
------------ ------------ ----------
Net increase (decrease) in cash and cash equivalents........... (3,965) 31,950 3,561
Cash and cash equivalents, beginning of period................. 35,511 3,561 --
------------ ------------ ----------
Cash and cash equivalents, end of period....................... $ 31,546 $ 35,511 $ 3,561
------------ ------------ ----------
------------ ------------ ----------
Supplemental cash flow information:
Income taxes paid............................................ $ 7,476 $ 2,140 $ 1,729
Interest paid................................................ $ 218 $ 1,520 $ 2,639
Supplemental disclosure of noncash investing and financing activities:
In October 1995, the Company acquired the capital stock of M.R. GmbH, for $1,500 cash and $1,900 of debt. In
connection with the acquisition, liabilities of $1,200 were assumed.
In June 1996, the Company acquired substantially all assets of TXN Solution Integrators for $3,600 in cash and
assumed $1,320 in liabilities.
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
26
<PAGE>
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) (see Note 3). 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 in the
financial services industry, both in domestic and international markets.
The Company derives a substantial portion of its revenue from licensing its
BASE24 family of software products and providing services and maintenance
related to those products. BASE24 products operate on Tandem computers. The
Company's future results depend, in part, on market acceptance of Tandem
computers and the financial success of Tandem Computers Incorporated.
The Company completed an initial public offering in March 1995. The Company
sold 4,825,000 shares of Class A Common Stock resulting in net proceeds to the
Company, after deducting the underwriting discount and offering expenses, of
approximately $32,300,000. In connection with the initial public offering, all
outstanding warrants for the purchase of Preferred and Common Stock were
exercised and all of the Company's preferred stocks and Class B Common Stock
converted to Class A Common Stock, except for 3,680,000 shares of nonvoting
Class B Common Stock. The Class B Common Stock is convertible into Class A
Common Stock but is no longer redeemable. (See notes 7, 9 and 10). During 1996,
800,000 shares of Class B Common Stock were converted to Class A Common Stock.
In August 1995, the Company completed the issuance of an additional
2,000,000 Class A Common shares through a public offering, resulting in net
proceeds, after deducting the underwriting discount and offering expenses, of
approximately $22,400,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
REVENUE RECOGNITION
Software license fees are comprised of one-time perpetual license fees,
recurring monthly license fees and software modification fees. Perpetual license
fees are recognized upon installation only if no significant vendor obligations
remain. Software modification fees are recognized upon installation. Monthly
license fees and maintenance fees are recognized ratably over the contract term.
Services revenue is recognized as the related services are performed. Hardware
revenue is comprised of commissions received on hardware sales associated with
sales of the Company's software and net revenue received from hardware sales
sold under original equipment manufacturer agreements. Hardware revenue is
recognized when the related hardware is shipped to the customer.
27
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Purchased software is stated at cost.
Amortization of all 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.
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 (see Note 3)
and are being amortized using the straight-line method over 10 years. As of
September 30, 1996 and 1995, accumulated amortization of the intangible asset
was $1,013,000 and $353,000, 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 (loss).
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of less than 90 days to be cash equivalents.
FINANCIAL INSTRUMENTS WITH MARKET RISK AND CONCENTRATIONS OF CREDIT RISK
The concentration of credit risk in the Company's receivables with respect
to the financial services industry is mitigated by the Company's credit
evaluation policy, reasonably short collection terms and geographical dispersion
of sales transactions. The Company generally does not require collateral or
other security to support accounts receivable.
28
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME (LOSS) PER COMMON AND EQUIVALENT SHARE
Net income (loss) per common and equivalent share is based on the weighted
average number of common equivalent shares outstanding during each period.
Common equivalent shares include Redeemable Convertible Preferred Stock and
Redeemable Convertible Class B Common Stock and Warrants. Pursuant to Securities
and Exchange Commission Staff Accounting Bulletin No. 83, all shares and options
issued since inception (November 2, 1993) have been treated as if they were
outstanding for all periods prior to December 31, 1994, including periods in
which the effect is antidilutive. For periods subsequent to December 31, 1994,
net income (loss) per common and common equivalent share is determined by
dividing net income (loss) by the weighted average number of shares of common
stock and dilutive common equivalent shares outstanding during each period using
the treasury stock method.
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (FAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which is
effective for the Company's 1997 fiscal year. Pursuant to this Statement,
companies are required to investigate potential impairments of long-lived
assets, certain identifiable intangibles, and associated goodwill, when there is
evidence that events or changes in circumstances have made recovery of an
asset's carrying value unlikely. An impairment loss would be recognized when the
sum of the expected future cash flows is less than the carrying amount of the
asset. The adoption of FAS 121 is not expected to have a significant impact on
the Company's financial position or results of operations.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued FAS No.
123, "Accounting for Stock-Based Compensation," which is effective for the
Company's 1997 fiscal year; FAS No. 123 allows companies to either account for
stock-based compensation under the new provisions of FAS No. 123 or under the
provisions of APB 25, but requires pro forma disclosure in the footnotes to the
financial statements as if the measurement provisions of FAS 123 had been
adopted. The Company intends to continue accounting for its employee stock-based
compensation in accordance with the provisions of APB 25. As such, the adoption
of FAS No. 123 will not impact the financial position or the results of
operations of the Company.
STOCK SPLIT
On June 7, 1996, the Company's Board of Directors authorized a two-for-one
stock split effected in the form of a 100% stock dividend distributed on July 1,
1996 to shareholders of record on June 17, 1996. All references in the
consolidated financial statements and notes to consolidated financial statements
to number of shares, except authorized shares and treasury shares, and per share
amounts have been restated to reflect this stock split. The par value of each
class of Common Stock of $.005 did not change.
29
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain September 30, 1995 amounts have been reclassified to conform to the
September 30, 1996 presentation.
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.
3. ACQUISITIONS
On December 31, 1993, the Company acquired all of the outstanding stock of
ACI and ACIL for $55 million cash. In addition, on January 3, 1994, the Company
acquired all of the outstanding stock of U.S. Software, Inc. (USSI) for $3.6
million cash, of which $475,000 was paid in January 1995, and issuance of
350,000 shares of Junior Convertible Preferred Stock, Series A valued at $3.5
million. The acquisitions were funded through the issuance of common and
preferred stock (see Notes 9 and 10) and a credit facility (see Note 7).
The acquisitions were recorded using the purchase method of accounting and,
accordingly, the cost in excess of the fair value of the net tangible assets was
allocated as follows (in thousands):
<TABLE>
<S> <C>
Purchased research and development............................ $ 22,712
Contracts in progress......................................... 15,303
Purchased software............................................ 5,908
Goodwill...................................................... 2,007
------------
$ 45,930
------------
------------
</TABLE>
Purchased research and development represents research and development of
software technologies which had not reached technological feasibility as of the
acquisition date. Purchased research and development was charged to operations
as of the acquisition date.
Contracts in progress represents the value assigned to open contracts of the
acquired companies at the acquisition date. Contracts in progress are charged to
cost of software license fees as the related contracts are recognized as
revenue. The value of contracts in progress has been reduced for estimated costs
of delivery of software, completion of contracted services and third-party
commissions. The gross margin earned in connection with completion and delivery
of these contracts was approximately $400,000.
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
30
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
acquisition was accounted for under the purchase method of accounting and,
accordingly, the cost in excess of the fair value of the net tangible assets
acquired was allocated to software ($350,000) and goodwill ($2,000,000).
The following represents pro forma results of operations as if the TXN
acquisition had occurred October 1, 1994 (in thousands except per share
amounts):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues............................................................ $ 165,648 $ 127,336
Net income before extraordinary loss................................ 12,901 6,952
Net income.......................................................... 12,901 4,202
Net income per share................................................ .48 .18
</TABLE>
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.
On September 13, 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. 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 Grapevine for all periods presented.
Combined and separate results of the Company and Grapevine during the
periods preceding the merger were as follows (in thousands):
<TABLE>
<CAPTION>
COMPANY GRAPEVINE ADJUSTMENTS COMBINED
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Year ended September 30, 1996:
Net revenues.................................... $ 154,931 $ 5,482 $ (629) $ 159,784
Net income...................................... 12,506 64 -- 12,570
Year ended September 30, 1995:
Net revenues.................................... 114,888 3,637 (52) 118,473
Net income (loss)............................... 3,800 (230) -- 3,570
Year ended September 30, 1994:
Net revenues.................................... 74,063 3,532 (158) 77,437
Net income (loss)............................... (33,538) 231 -- (33,307)
</TABLE>
The combined financial results presented above include adjustments made to
eliminate intercompany transactions from the combined results.
In October 1996, the Company completed the acquisition of Open Systems
Solutions, Inc. (OSSI). 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.
31
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RECEIVABLES
Receivables consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Billed................................................................. $ 32,534 $ 30,835
Accrued................................................................ 19,284 11,866
--------- ---------
51,818 42,701
Less allowance for doubtful accounts................................... (1,090) (912)
--------- ---------
50,728 41,789
Less amount not collectible within one year............................ (1,593) (1,505)
--------- ---------
Current receivables, net............................................... $ 49,135 $ 40,284
--------- ---------
--------- ---------
</TABLE>
Typically, the Company receives a substantial down payment upon execution of
a contract, with the remaining balance due upon specified dates or events as set
forth in the contract.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Computer equipment..................................................... $ 16,846 $ 10,726
Office furniture and fixtures.......................................... 3,765 3,242
Leasehold improvements................................................. 1,841 1,588
Vehicles............................................................... 1,427 1,331
--------- ---------
23,879 16,887
Less accumulated depreciation and amortization......................... (10,878) (7,170)
--------- ---------
Property and equipment, net............................................ $ 13,001 $ 9,717
--------- ---------
--------- ---------
</TABLE>
6. SOFTWARE
Software consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Internally developed software.......................................... $ 4,759 $ 3,176
Purchased software..................................................... 12,318 10,796
--------- ---------
17,077 13,972
Less accumulated amortization.......................................... (11,653) (7,231)
--------- ---------
Software, net.......................................................... $ 5,424 $ 6,741
--------- ---------
--------- ---------
</TABLE>
32
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Payments due to the sellers of M.R. GmbH (See Note 3), due December 1996
($747), December 1997 ($745) and December 1998 ($367).................... $ 1,859 $ --
Other...................................................................... 719 480
--------- ---------
2,578 480
Less current portion....................................................... 1,147 480
--------- ---------
Long-term debt............................................................. $ 1,431 $ --
--------- ---------
--------- ---------
</TABLE>
The acquisitions of ACI, ACIL and USSI (described in Note 3) were partially
funded with $36,000,000 in debt placed through a $38,500,000 Credit Agreement
with two financial institutions. The Credit Agreement was comprised of term
loans in the amount of $12,500,000 (Tranche A Loan) and $16,000,000 (Tranche B
Loan) and a Revolving Credit Facility in the amount of $10,000,000. In
connection with the Credit Agreement, the lenders received warrants to purchase
shares of the Company's Class B Common Stock (see Note 10). The Credit Agreement
was collateralized by substantially all of the Company's assets.
In March 1995, the Company used a portion of the initial public offering
proceeds to repay all outstanding indebtedness under the Credit Agreement. Upon
repayment of the indebtedness, the Company incurred an extraordinary loss of
$2,750,000 for the writeoff of unamortized balances of debt issue costs of
$1,100,000 and original issue discount of $1,650,000. The Credit Agreement was
cancelled in June 1995 and replaced with a $10 million Revolving Line of Credit,
collateralized by accounts receivable, which expires in June 1997.
Maximum borrowings under the Revolving Credit Facility during the year ended
September 30, 1995 and the period from inception (November 2, 1993) through
September 30, 1994 were $1,250,000 and $7,500,000, respectively. The average
outstanding borrowings and the average interest rate during the year ended
September 30, 1995 and the period from inception (November 2, 1993) through
September 30, 1994 were $316,000 and 10.1% and $4,375,000 and 8.5%,
respectively.
Interest expense for the year ended September 30, 1995 and the period from
inception (November 2, 1993) through September 30, 1994, includes amortization
of original issue discount of $213,000 and $398,000, respectively.
The Revolving Line of Credit requires the maintenance of a minimum working
capital level of $6 million. As of September 30, 1996 and 1995, the Company was
in compliance with this covenant. There were no borrowings under the Revolving
Line of Credit during the years ended September 30, 1996 and 1995.
33
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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):
<TABLE>
<S> <C>
1997.............................................................. $ 5,052
1998.............................................................. 2,927
1999.............................................................. 2,192
2000.............................................................. 1,164
2001.............................................................. 1,088
Thereafter........................................................ 7,961
---------
Total............................................................. $ 20,384
---------
---------
</TABLE>
Total rent expense for the years ended September 30, 1996 and 1995 and for
the period from inception (November 2, 1993) through September 30, 1994 was
$6,313,000, $4,566,000 and $3,038,000, respectively.
CAPITAL LEASES
The Company leases certain computer equipment, vehicles and office furniture
under long-term capital leases. Capitalized costs and accumulated depreciation
(included in property and equipment, net) consist of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Vehicles................................................................. $ 1,441 $ 1,217
Computer equipment....................................................... 485 280
Office furniture and fixtures............................................ 165 152
--------- ---------
2,091 1,649
Less accumulated depreciation............................................ (1,334) (766)
--------- ---------
$ 757 $ 883
--------- ---------
--------- ---------
</TABLE>
34
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
A summary of future minimum lease payments under long-term capital leases
together with the present value of the net minimum lease payments for the years
ending September 30 are as follows (in thousands):
<TABLE>
<S> <C>
1997.......................................................... $ 401
1998.......................................................... 202
1999.......................................................... 110
2000.......................................................... 35
------
Total minimum lease payments.................................. 748
Amount representing interest.................................. (150)
------
Present value of future minimum lease payments................ 598
Amount due within one year.................................... (342)
------
Amount due after one year..................................... $ 256
------
------
</TABLE>
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK
The following table represents Redeemable Convertible Preferred Stock
activity (in thousands):
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE PREFERRED STOCK
-------------------------------------------------------------
SENIOR JUNIOR
----------------------- ------------------------
SERIES A SERIES B SERIES A SERIES B TOTAL
---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, at inception (November 2, 1993)........... $ -- $ -- $ -- $ -- $ --
Shares issued...................................... 11,759 6,718 3,500 2,375 24,352
Shares subscribed.................................. -- -- -- 2,646 2,646
Accretion.......................................... 155 88 -- -- 243
PIK Dividends...................................... 748 427 -- -- 1,175
---------- ----------- ----------- ----------- ----------
Balance, September 30, 1994........................ 12,662 7,233 3,500 5,021 28,416
Shares issued...................................... -- -- -- 143 143
Accretion.......................................... 84 48 -- -- 132
PIK dividends...................................... 413 236 -- -- 649
Cash payment of PIK dividends...................... (1,161) (664) -- -- (1,825)
Conversion to common stock pursuant to initial
public offering.................................. (11,998) (6,853) (3,500) (5,164) (27,515)
---------- ----------- ----------- ----------- ----------
Balance, September 30, 1995 and 1996............... $ -- $ -- $ -- $ -- $ --
---------- ----------- ----------- ----------- ----------
---------- ----------- ----------- ----------- ----------
</TABLE>
All Redeemable Convertible Preferred Stock converted to 9,079,856 and
3,200,000 shares of Class A and Class B Common Stock, respectively, upon
completion of the Company's initial public offering.
35
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
In December 1993, the Company sold for cash 1,400,000 shares of Senior
Convertible Preferred Stock, Series A, and 800,000 shares of Senior Convertible
Preferred Stock, Series B, (cumulatively, the Senior Preferred Stock). Total
proceeds, net of issuance costs, from the sale of the Senior Preferred Stock was
$18,477,000 ($8.40 per share).
In December 1993, the Company sold for cash 237,500 shares of Junior
Convertible Preferred Stock, Series B for $2,375,000 ($10 per share). In January
1994, the Company issued 350,000 shares of Junior Convertible Preferred Stock,
Series A valued at $3,500,000 ($10 per share) in connection with the acquisition
of USSI as discussed in Note 3. The Junior Convertible Preferred Stock, Series A
and Series B are herein referred to as the Junior Preferred Stock.
During 1994, the Board of Directors approved the Employees Stock Purchase
Plan for substantially all TSA employees. Under this plan, employees subscribed
to 268,163 shares of the Company's Junior Convertible Preferred Stock, Series B,
at a price of $10 per share. In October 1994, employees subscribed to an
additional 14,301 shares at a price of $10 per share. All subscribed shares were
fully paid for and issued in December 1994.
Prior to the Company's initial public offering, the holders of the Senior
Preferred Stock were entitled to quarterly cumulative dividends at an annual
rate of $.70 per share. All such dividends were payable solely in kind by the
issuance of a dividend of additional shares of Senior Convertible Preferred
Stock, Series A or Series B (the PIK Dividends) at the rate of 7/100 of a share
for each $.70 of accruing dividends. If the Senior Preferred Stock converted
prior to January 1, 1997, accruing dividends would have been paid in cash or PIK
Dividends. As of September 30, 1994, 74,794 shares of Senior Convertible
Preferred Stock, Series A and 42,739 shares of Senior Convertible Preferred
Stock, Series B had been accrued as PIK Dividends, respectively.
The holders of the shares of the Senior and Junior Preferred Stock were
entitled, at their option, to convert at any time at a rate of one share of
Senior and Junior Convertible Preferred Stock, Series A or Series B into two
shares of Class A or Class B Common Stock, respectively.
The holders of Senior and Junior Preferred Stock also had the right at their
option to redeem shares at any time on or after December 31, 2003, at an amount
equal to $10 per share plus an amount equal to all accrued and unpaid dividends
thereon, whether or not earned or declared, plus any other dividends unpaid. The
excess of the redemption value over the carrying value was being accreted by
periodic charges to accumulated deficit over the life of the issue.
Holders of the Senior and Junior Preferred Stock, Series A and Class A
Common Stock have the right to one vote per share on any matters subject to
stockholder vote.
36
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. REDEEMABLE CONVERTIBLE CLASS B COMMON STOCK AND WARRANTS
The following table represents Redeemable Convertible Class B Common Stock
and Warrants activity (in thousands):
<TABLE>
<CAPTION>
CLASS B
WARRANTS COMMON STOCK TOTAL
----------- --------------- ---------
<S> <C> <C> <C>
Balance, at inception (November 2, 1993)........................ $ -- $ -- $ --
Warrants issued................................................. 4,773 -- 4,773
Warrants exercised.............................................. (1,860) 1,860 --
Accretion....................................................... 229 230 459
----------- ------- ---------
Balance, September 30, 1994..................................... 3,142 2,090 5,232
Accretion....................................................... 122 122 244
Warrants exercised.............................................. (3,264) 3,264 --
Termination of redemption rights and conversion to Class A and
Class B Common Stock pursuant to initial public offering...... -- (5,476) (5,476)
----------- ------- ---------
Balance, September 30, 1995 and 1996............................ $ -- $ -- $ --
----------- ------- ---------
----------- ------- ---------
</TABLE>
All redemption rights terminated upon completion of the Company's initial
public offering.
In December 1993, warrants to purchase 1,320,000 shares of Class B Common
Stock were issued as part of the Senior Convertible Preferred Stock and Warrant
Purchase Agreement (see Note 9). The warrants were exercisable at a price of
$.003 per share. The warrants were recorded at their fair value, net of issuance
costs, on date of issuance of $1,800,000 ($1.36 per share). As of September 30,
1995, all warrants had been exercised and converted to Class A or Class B Common
Stock.
In December 1993, warrants to purchase 1,528,780 shares of Class B Common
Stock were issued as part of the credit agreement (see Note 7). The warrants
were exercisable at any time at a price of $.003 per share. The warrants were
recorded at their fair value on date of issuance of $2,262,000 ($1.48 per
share). As of September 30, 1995, all warrants had been exercised and converted
to Class A Common Stock.
In December 1993, warrants to purchase 700,000 shares of Class B Common
Stock were issued in connection with the sale of Senior Preferred Stock. The
warrants were exercisable at a price of $2.50 per share. The warrants were
recorded at their fair value on date of issuance of $711,000 ($1.02 per share).
As of September 30, 1995, all warrants had been exercised and converted to Class
A Common Stock.
Prior to the Company's initial public offering, the Class B Common Stock and
any shares issuable as such under the respective warrant agreements described
above were redeemable at fair value by the holders upon the earlier of; 1)
repayment of 50% of the Tranche B debt, 2) change in control of the Company or
3) December 31, 1998. The difference between the current fair value over the
carrying value of the Class B Common Stock and Warrants was being accreted by
periodic charges to accumulated deficit over the life of the respective issues.
11. STOCK OPTION PLANS
The Company has a 1994 Stock Option Plan (1994 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.
37
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTION PLANS (CONTINUED)
Options granted are considered incentive stock options. 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.
During 1996, the Company adopted the 1996 Stock Option Plan (1996 Plan)
whereby 1,008,000 shares of the Company's Class A Common Stock have been
reserved for issuance to eligible employees of the Company and its subsidiaries
and non-employee members of the Board of Directors. The stock options are
granted at a price not less than fair market value at the time of the grant. The
term of the outstanding options is ten years. The options vest annually over a
period of four years.
Share activity under the option plans is set forth below:
<TABLE>
<CAPTION>
1996 1994 PRICE
PLAN PLAN TOTAL PER SHARE
--------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Outstanding, at inception (November 2,
1993)..................................... -- -- -- --
Granted..................................... -- 941,300 941,300 $2.50
Cancelled................................... -- (21,600) (21,600) $2.50
--------- ------------- -------------
Outstanding, September 30, 1994............. -- 919,700 919,700
Granted..................................... -- 1,003,378 1,003,378 $2.50-12.50
Cancelled................................... -- (59,404) (59,404) $2.50-5.00
Exercised................................... -- (44,254) (44,254) $2.50-5.00
--------- ------------- -------------
Outstanding, September 30, 1995............. -- 1,819,420 1,819,420
Granted..................................... 236,000 39,000 275,000 $12.00-31.00
Cancelled................................... -- (35,308) (35,308) $2.50-20.25
Exercised................................... -- (327,673) (327,673) $2.50-20.25
--------- ------------- -------------
Outstanding, September 30, 1996............. 236,000 1,495,439 1,731,439
--------- ------------- -------------
--------- ------------- -------------
</TABLE>
At September 30, 1996 and 1995, 687,903 shares and 593,036 shares,
respectively, were exercisable under the plans.
12. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK PURCHASE PLAN
During 1996, the Company adopted the 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 on the last day of the purchase period. Purchases
are made at the end of each fiscal quarter. As of September 30, 1996, 16,745
shares have been issued under this plan.
38
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
ACI 401(K) RETIREMENT PLAN
The 401(k) Retirement Plan is a defined contribution plan covering all
domestic employees of ACI. Participants may contribute up to 15% of their annual
wages. ACI matches 100% of participant contributions up to a maximum of 2.5% of
compensation. ACI's contributions charged to expense during the years ended
September 30, 1996 and 1995 and the period from the date of acquisition of ACI
through September 30, 1994 were $507,000, $466,000 and $299,000, respectively.
ACI PROFIT SHARING PLAN AND TRUST
The ACI Profit Sharing Plan and Trust is a non-contributory profit sharing
plan covering all employees of ACI provided they are at least 21 years of age
and have completed one year of service. The plan provides for ACI to contribute
a discretionary amount as determined annually by the Company's President and
Chief Financial Officer. ACI's contributions charged to expense during the years
ended September 30, 1996 and 1995 and the period from the date of acquisition of
ACI through September 30, 1994 were $399,000, $382,000 and $241,000,
respectively.
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):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, FOR THE PERIOD FROM INCEPTION
------------------------ (NOVEMBER 2, 1993) THROUGH
1996 1995 SEPTEMBER 30, 1994
----------- ----------- -----------------------------
<S> <C> <C> <C>
Service cost.......................................... $ 1,018 $ 786 $ 617
Interest cost on projected benefit obligation......... 738 542 384
Return on plan assets:
Actual.............................................. (1,187) (851) 254
Gain (loss) deferred................................ 382 233 (689)
Amortization of unrecognized gain................... (13) (32) --
----------- ----------- ------
Total periodic pension expense........................ $ 938 $ 678 $ 566
----------- ----------- ------
----------- ----------- ------
</TABLE>
39
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes the funded status of the plan and the related
amounts recognized in the Company's consolidated balance sheet (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested............................................................... $ 8,932 $ 7,680
Non-vested........................................................... 524 444
--------- ---------
Accumulated benefit obligation....................................... 9,456 8,124
Impact of future salary increases.................................... 654 564
--------- ---------
Projected benefit obligation......................................... 10,110 8,688
Plan assets at fair value, primarily investments in marketable equity
securities of United Kingdom companies............................. 10,762 8,485
--------- ---------
Plan assets greater (less) than projected benefit obligation......... 652 (203)
Unrecognized gain.................................................... (2,113) (1,156)
--------- ---------
Accrued pension cost................................................. $ (1,461) $ (1,359)
--------- ---------
--------- ---------
</TABLE>
The accrued pension cost at September 30, 1996 and 1995, includes an
unfunded accrued pension cost of approximately $1,200,000 recorded in connection
with the acquisition of ACIL.
The most significant actuarial assumptions used in 1996 and 1995 in
determining the pension expense and funded status of the plan are as follows:
<TABLE>
<S> <C>
Discount rate for valuing liabilities................................ 8.0%
Expected long-term rate of return on assets.......................... 9.0%
Rate of increase in future compensation levels....................... 6.0%
</TABLE>
USSI PROFIT SHARING PLAN AND TRUST
The USSI Profit Sharing Plan and Trust has both a profit sharing component
and a 401(k) component. USSI contributions are discretionary. USSI's
contributions charged to expense during the years ended September 30, 1996 and
1995 were $90,000 and $82,000, respectively. No contributions were made to this
plan for the period from the date of acquisition of USSI through September 30,
1994.
GRAPEVINE 401(K) PROFIT SHARING PLAN
The Grapevine 401(k) Profit Sharing Plan is a defined contribution plan
covering all employees of Grapevine. Grapevine contributions are discretionary.
Employees may contribute up to 10% of their compensation. No contributions were
made by Grapevine to this plan during the years ended September 30, 1996, 1995
and 1994.
13. SEGMENT INFORMATION
The Company operates primarily in one industry segment, which includes the
development, marketing and support of on-line computer software products and
services for automated electronic payment systems.
40
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SEGMENT INFORMATION (CONTINUED)
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):
<TABLE>
<CAPTION>
YEAR ENDED FOR THE PERIOD FROM
SEPTEMBER 30, INCEPTION (NOVEMBER
------------------------ 2, 1993) THROUGH
1996 1995 SEPTEMBER 30, 1994
----------- ----------- -------------------
<S> <C> <C> <C>
Revenues:
Americas........................................................ $ 91,061 $ 75,624 $ 47,727
Europe, Middle East and Africa.................................. 47,267 31,264 21,707
Asia/Pacific.................................................... 21,456 11,585 8,003
----------- ----------- --------
$ 159,784 $ 118,473 $ 77,437
----------- ----------- --------
----------- ----------- --------
Operating Income:
Americas........................................................ $ 27,981 $ 21,009 $ 4,037
Europe, Middle East and Africa.................................. 8,302 4,910 1,374
Asia/Pacific.................................................... 6,740 1,235 457
----------- ----------- --------
43,023 27,154 5,868
----------- ----------- --------
Research and Development and Corporate General and Administrative
Expenses........................................................ (22,345) (18,087) (34,541)
----------- ----------- --------
Operating Income (Loss)........................................... $ 20,678 $ 9,067 $ (28,673)
----------- ----------- --------
----------- ----------- --------
Identifiable Assets:
Americas........................................................ $ 77,496 $ 69,692 $ 40,406
Europe, Middle East and Africa.................................. 33,706 25,936 17,514
Asia/Pacific.................................................... 11,957 6,277 2,515
----------- ----------- --------
$ 123,159 $ 101,905 $ 60,435
----------- ----------- --------
----------- ----------- --------
</TABLE>
14. INCOME TAXES
The Company accounts for income taxes in accordance with FAS 109,
"Accounting for Income Taxes". FAS 109 is an asset and liability approach which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events which have been recognized in the Company's
financial statements or tax returns. In estimating future tax consequences, FAS
109 generally considers all expected future events other than enactments or
changes in the tax law or rates.
Although the Company incurred losses for the period from inception (November
2, 1993) through September 30, 1994, there was a provision for income taxes
consisting of taxes related to foreign jurisdictions.
41
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED SEPTEMBER 30, FROM INCEPTION
------------------------------------------------------------------------ (NOVEMBER 2, 1993)
THROUGH
1996 1995 SEPTEMBER 30, 1994
----------------------------------- ----------------------------------- ------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED
----------- ----------- --------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal........................ $ 6,074 $ (2,066) $ 4,008 $ 1,086 $ (1,327) $ (241) $ -- $ 165
State.......................... 1,933 (71) 1,862 753 -- 753 -- --
Foreign........................ 3,291 -- 3,291 1,793 (219) 1,574 1,999 --
----------- ----------- --------- ----------- ----------- --------- ----------- -----
Total.......................... $ 11,298 $ (2,137) $ 9,161 $ 3,632 $ (1,546) $ 2,086 $ 1,999 $ 165
----------- ----------- --------- ----------- ----------- --------- ----------- -----
----------- ----------- --------- ----------- ----------- --------- ----------- -----
<CAPTION>
TOTAL
---------
<S> <C>
Federal........................ $ 165
State.......................... --
Foreign........................ 1,999
---------
Total.......................... $ 2,164
---------
---------
</TABLE>
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:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED FROM INCEPTION
SEPTEMBER 30, (NOVEMBER 2, 1993)
-------------------- THROUGH
1996 1995 SEPTEMBER 30, 1994
--------- --------- --------------------
<S> <C> <C> <C>
Tax expense (benefit) at federal rate of 34%.......................... $ 7,389 $ 1,923 $ (10,589)
Losses with no current tax benefit.................................... 239 872 12,238
Effective state income tax............................................ 1,140 497 (1,516)
Foreign taxes......................................................... -- -- 1,999
Recognition of deferred income tax assets previously reserved
against............................................................. -- (1,844) --
Amortization of intangibles........................................... 578 731 --
Other................................................................. (185) (93) 32
--------- --------- --------
$ 9,161 $ 2,086 $ 2,164
--------- --------- --------
--------- --------- --------
</TABLE>
42
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES (CONTINUED)
The deferred tax assets and liabilities result from differences in the
timing of the recognition of certain income and expense items for tax and
financial accounting purposes. The sources of these differences are as follows
(in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Deferred assets:
Depreciation.................................................................... $ 431 $ 484
Amortization.................................................................... 5,850 5,943
Foreign taxes................................................................... 3,754 2,433
Acquired net operating loss carryforward of USSI................................ 1,200 1,200
Net operating loss carryforward................................................. 594 1,430
Other........................................................................... 539 574
--------- ---------
12,368 12,064
--------- ---------
Deferred tax asset valuation allowance............................................ (8,021) (9,332)
--------- ---------
Deferred liabilities:
Acquired software............................................................... (171) (629)
Other........................................................................... (493) (557)
--------- ---------
(664) (1,186)
--------- ---------
$ 3,683 $ 1,546
--------- ---------
--------- ---------
</TABLE>
For income tax purposes, the Company had foreign tax credit carryforwards of
approximately $2,105,000 at September 30, 1996, which expire in 1999.
At September 30, 1996, management evaluated its 1996 and 1995 operating
results as well as its projections for 1997 and 1998 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 $4.4 million as
of September 30, 1996.
43
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA, AND
UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
------------- ---------- --------- --------------
<S> <C> <C> <C> <C>
1996
Total revenues.......................................... $ 35,483 $ 37,662 $ 41,081 $ 45,558
Operating income........................................ 4,233 4,693 5,320 6,432
Net income.............................................. 2,929 3,031 3,219 3,391
Net income per share.................................... .11 .11 .12 .13
1995
Total revenues.......................................... 26,479 27,651 30,143 34,200
Operating income (loss)................................. (116) 2,085 3,288 3,810
Net income (loss) before extraordinary loss............. (1,540) 2,263 2,858 2,739
Net income (loss) per share before extraordinary loss... (.07) .10 .12 .11
Net income (loss)....................................... (1,540) (487) 2,858 2,739
Net income (loss) per share............................. (.07) (.02) .12 .11
</TABLE>
44
<PAGE>
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 1996 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 1996 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 1996 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 1996 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
(1) FINANCIAL STATEMENTS
The financial statements filed as part of this report are listed on the
Index to Financial Statements on page 21.
(2) FINANCIAL STATEMENT SCHEDULES:
Index to Consolidated Financial Statement Schedules
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Report of Independent Public Accountants....................................... 50
Schedule II -- Valuation and Qualifying Accounts............................... 51
</TABLE>
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 (as amended) dated June 3, 1996, under Item 2, Acquisition or
Disposition of Assets, was filed with the Securities and Exchange Commission
reporting the acquisition of substantially all the net assets of TXN Solution
Integrators. The financial statements included in the Form 8-K(A) are as
follows:
Financial statements for TXN Solution Integrators (TXN) as of and for the
year ended September 30, 1995 and the six months ended March 31, 1996.
45
<PAGE>
Pro forma combined financial statements for TSA and TXN as of March 31, 1996
and for the year and six months ended September 30, 1995 and March 31, 1996,
respectively
Form 8-K (as amended) dated August 21, 1996, under Item 2, Acquisition or
Disposition of Assets, was filed with the Securities and Exchange Commission
reporting a share exchange agreement between the Company and Grapevine Systems,
Inc. The financial statements included in the Form 8-K are as follows:
Financial statements for Grapevine Systems, Inc. as of and for the years
ended December 31, 1994 and 1995 and as of and for the six months ended June
30, 1996.
Pro forma consolidated financial statements for TSA and Grapevine as of and
for the nine months ended June 30, 1996 and for the years ended September
30, 1993, 1994 and 1995.
46
<PAGE>
(4) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- ----------------------------------------------------------------------------------------------
<C> <S>
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
3.01(2) Amended and Restated Certificate of Incorporation of the Company, and amendments thereto
3.02(2) Amended and Restated Bylaws of the Company
4.01(2) Form of Common Stock Certificate
10.01(2) ACI Holding, Inc. 1994 Stock Option Plan and UK Sub-Plan
10.02(2) ACI Holding, Inc. Employees Stock Purchase Plan
10.03(2) Applied Communications, Inc. First Restated Profit Sharing Plan and Trust
10.04(2) Applied Communications, Inc. Profit Sharing/401(k) Plan and Amendment No. 1 thereto
10.05(2) U.S. Software, Inc. Profit Sharing Plan and Trust
10.06(7) Consulting Agreement between Transaction Systems Architects, Inc. and Michael J. Scheier and
U.S. Software Holding dated December 31, 1995
10.07 Transaction Systems Architects, Inc. 1996 Stock Option Plan
(10.08-10.12 intentionally omitted.)
10.13(2) Voting Agreement among ACI Holding, Inc. and certain investors, dated as of December 30, 1993
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- ----------------------------------------------------------------------------------------------
<C> <S>
10.14(2) Registration Rights Agreement between ACI Holding, Inc. and certain stockholders, dated
December 30, 1993
10.15(1) Employment Agreement with Richard N. Launder
10.16(2) Employment Agreement with Fred L. Grabher
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 intentionally omitted.)
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.
11.01 Statement re Computation of Per Share Earnings
21.01(4) Subsidiaries of the Company
23.01 Consent of Independent Public Accountants
27.00 Financial Data Schedule
</TABLE>
- ------------------------
(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.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on December 23, 1996.
TRANSACTION SYSTEMS ARCHITECTS, INC.
By /s/ WILLIAM E. FISHER
-----------------------------------------
William E. Fisher,
DIRECTOR AND PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on December 23,1996:
/s/ WILLIAM E. FISHER
- ------------------------------------ Director and President
William E. Fisher (Principal Executive Officer)
/s/ GREGORY J. DUMAN
- ------------------------------------ Chief Financial Officer (Principal
Gregory J. Duman Financial Officer)
/s/ DWIGHT G. HANSON
- ------------------------------------ Controller (Principal Accounting
Dwight G. Hanson Officer)
/s/ DAVID C. RUSSELL
- ------------------------------------ Director
David C. Russell
/s/ PROMOD HAGUE
- ------------------------------------ Director
Promod Hague
/s/ FREDERICK L. BRYANT
- ------------------------------------ Director
Frederick L. Bryant
/s/ CHARLES E. NOELL, III
- ------------------------------------ Director
Charles E. Noell, III
/s/ JIM D. KEVER
- ------------------------------------ Director
Jim D. Kever
/s/ LARRY G. FENDLEY
- ------------------------------------ Director
Larry G. Fendley
49
<PAGE>
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 31, 1996. 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 31, 1996
50
<PAGE>
SCHEDULE II
TRANSACTION SYSTEMS ARCHITECTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR THE FOR THE INCEPTION (NOVEMBER
YEAR ENDED YEAR ENDED 2, 1993) THROUGH
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Balance, beginning of period.................... $ 912,000 $ 1,373,000 $ --
Acquisition of businesses....................... -- -- 1,185,000
Additions charged to expense.................... 414,000 151,000 195,000
Reductions...................................... (236,000) (612,000) (7,000)
----------- -------------------- -----------
Balance, end of period.......................... $ 1,090,000 $ 912,000 $ 1,373,000
----------- -------------------- -----------
----------- -------------------- -----------
</TABLE>
51
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
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 TRN Solution Integrators 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
3.01(2) Amended and Restated Certificate of Incorporation of the Company, and amendments thereto
3.02(2) Amended and Restated Bylaws of the Company
4.01(2) Form of Common Stock Certificate
10.01(2) ACI Holding, Inc. 1994 Stock Option Plan and UK Sub-Plan
10.02(2) ACI Holding, Inc. Employees Stock Purchase Plan
10.03(2) Applied Communications, Inc. First Restated Profit Sharing Plan and Trust
10.04(2) Applied Communications, Inc. Profit Sharing/401(k) Plan and Amendment No. 1 thereto
10.05(2) U.S. Software, Inc. Profit Sharing Plan and Trust
10.06(7) Consulting Agreement between Transaction Systems Architects, Inc and Michael J. Scheier and U.S.
Software Holding dated December 31, 1995
10.07 Transaction Systems Architects, Inc. 1996 Stock Option Plan
(10.08-10.12 intentionally omitted.)
10.13(2) Voting Agreement among ACI Holding, Inc. and certain investors, dated as of December 30, 1993
10.14(2) Registration Rights Agreement between ACI Holding, Inc. and certain stockholders, dated December 30,
1993
10.15(1) Employment Agreement with Richard N. Launder
10.16(2) Employment Agreement with Fred L. Grabher
10.17(2) Lease respecting facility at 330 South 108th Avenue, Omaha, Nebraska
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
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 intentionally omitted)
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.
11.01 Statement re Computation of Per Share Earnings
21.01(4) Subsidiaries of the Company
23.01 Consent of Independent Public Accountants
27.00 Financial Data Schedule
</TABLE>
- ------------------------
(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.
53
<PAGE>
EXHIBIT 10.07
TRANSACTION SYSTEMS ARCHITECTS, INC.
1996 STOCK OPTION PLAN
Section 1. PURPOSE. The purpose of the Transaction Systems Architects,
Inc. 1996 Stock Option Plan (the "Plan") is to provide long term incentives and
rewards to employees and directors of Transaction Systems Architects, Inc. (the
"Company") and any Subsidiary of the Company, by providing an opportunity to
selected employees and directors to purchase Common Stock of the Company. By
encouraging stock ownership, the Company seeks to attract and retain employees
and directors and to encourage their best efforts to work at the success of the
Company.
Section 2. DEFINITIONS. For purposes of this Plan, the following terms
used herein shall have the following meanings, unless a different meaning is
clearly required by the context.
2.1. "BOARD OF DIRECTORS" shall mean the Board of Directors of the Company.
2.2. "CODE" shall mean the Internal Revenue Code of 1986, as amended.
2.3. "COMMITTEE" shall mean the committee of the Board of Directors
referred to in Section 5 hereof.
2.4. "COMMON STOCK" shall mean the Class A Common Stock of the Company.
2.5. "DIRECTORS" shall mean those non-employee members of the Board of
Directors to whom grants may be made only in accordance with Section 12.
2.6. "EMPLOYEE" shall mean, with respect to an ISO or to a Non-Qualified
Option, any person including an officer or employee-director of the Company,
who, at the time an Option is granted to such person hereunder, is actively and
customarily employed for 30 hours or more per week by the Company or any
Subsidiary of the Company including, without limitation, employee-directors and
officers.
2.7. "FAIR MARKET VALUE" shall mean the closing bid price on the date in
question, as such price is reported by the National Association of Securities
Dealers on the NASDAQ National Market or any successor system for a share of
Common Stock.
2.8. "ISO" shall mean an option granted under the Plan which constitutes
and shall be treated as an "incentive stock option" as defined in Section
422A(b) of the Code.
2.9. "NON-QUALIFIED OPTION" shall mean an option granted to a Participant
pursuant to the Plan which is intended to be, and qualifies as, a "non-qualified
stock option" as described in Treasury Regulation Section 1.83-7 and which shall
not constitute nor be treated as an ISO.
2.10 "OPTION" shall mean any ISO or Non-Qualified Option granted to an
Employee pursuant to this Plan.
2.11. "PARTICIPANT" shall mean any Employee or Director to whom an Option
is granted under this Plan.
2.12. "SUBSIDIARY OF THE COMPANY" shall have the meaning set forth in
Section 424(f) of the Code.
Section 3. ELIGIBILITY. Options may be granted to any Employee. Options
may be granted to Directors only in accordance with Section 12. The Committee
shall have the sole authority to select the Employees to whom Options are to be
granted hereunder, and to determine whether an Employee is to be granted a
Non-Qualified Option or an ISO or any combination thereof. No Employee shall
have any right to participate in the Plan. Any Employee selected by the
Committee for participation during any one
54
<PAGE>
period will not by virtue of such participation have the right to be selected as
a Participant for any other period.
Section 4. COMMON STOCK SUBJECT TO THE PLAN.
4.1. The total number of shares of Common Stock for which Options may be
granted under this Plan shall not exceed in the aggregate five hundred four
thousand (504,000) shares of Common Stock . Fifty-four thousand (54,000) shares
shall be made available to Directors in accordance with Section 12. Of the
remaining 450,000 shares, no more than one hundred fifty thousand (150,000)
shares shall be granted in any twelve month period to Employees, plus whatever
shares for which Options have not been granted in previous years.
4.2. The shares of Common Stock that may be subject to Options granted under
this Plan may be either authorized and unissued shares or shares reacquired at
any time and now or hereafter held as treasury stock as the Committee may
determine. In the event that any outstanding Option expires or is terminated for
any reason, the shares allocable to the unexercised portion of such Option may
again be subject to an Option granted under this Plan. If any shares of Common
Stock acquired pursuant to the exercise of an Option shall have been repurchased
by the Company, then such shares shall again become available for issuance
pursuant to the Plan.
4.3. SPECIAL ISO LIMITATIONS.
(a) The aggregate Fair Market Value (determined as of the date an ISO is
granted) of the shares of Common Stock with respect to which ISOs are
exercisable for the first time by an Employee or Director during any calendar
year (under all Incentive Stock Option Plans of the Company or any Subsidiary of
the Company) shall not exceed $100,000.
(b) No ISO shall be granted to an Employee or Director who, at the time the
ISO is granted, owns (actually or constructively under the provisions of Section
425(d) of the Code) stock representing more than 10% of the total combined
voting power of all classes of stock of the Company or any Subsidiary of the
Company, unless the option price is at least 110% of the Fair Market Value
(determined as of the time the ISO is granted) of the shares of Common Stock
subject to the ISO and the ISO by its terms is not exercisable more than five
years from the date it is granted.
4.4. Notwithstanding any other provision of the Plan, the provisions of
Sections 4.3(a) and (b) shall not apply, nor shall be construed to apply, to any
Non-Qualified Option granted under the Plan.
Section 5. ADMINISTRATION OF THE PLAN.
5.1 The Plan shall be administered by the Compensation Committee of the
Board of Directors, or such other committee of the Board as may be directed by
the Board (the "Committee") consisting of no less than two persons. All members
of the committee shall be "disinterested persons" within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934. The Committee shall be
appointed from time to time by, and shall serve at the pleasure of, the Board of
Directors.
5.2. The Committee shall have the sole authority and discretion to grant
Options under this Plan and, subject to the limitations set forth in Sections 6
and 12 hereof, to determine the terms and conditions of all Options, including,
without limitation, (i) selecting the Participants who are to be granted Options
hereunder; (ii) designating whether any Option to be granted hereunder is to be
an ISO or a Non-Qualified Option; (iii) establishing the number of shares of
Common Stock that may be issued under each Option; (iv) determining the time and
the conditions subject to which Options may be exercised in whole or in part;
(v) determining the form of the consideration that may be used to purchase
shares of Common Stock upon exercise of any Option (including the circumstances
under which the Company's issued and outstanding shares of Common Stock may be
used by a Participant to exercise an Option); (vi) imposing restrictions and/or
conditions with respect to shares of Common Stock acquired upon exercise of an
Option; (vii) determining the circumstances under which shares of Common Stock
acquired upon exercise of any Option may be subject to repurchase by the
Company; (viii) determining the circumstances and conditions subject to which
shares acquired upon exercise of
55
<PAGE>
an Option may be sold or otherwise transferred, including without limitation,
the circumstances and conditions subject to which a proposed sale of shares of
Common Stock acquired upon exercise of an Option may be subject to the Company's
right of first refusal (as well as the terms and conditions of any such right of
first refusal); (ix) establishing a vesting provision for any Option relating to
the time (or the circumstance) when the Option may be exercised by a
Participant, including vesting provisions which may be contingent upon the
Company meeting specified financial goals; (x) requiring as a minimum vesting
that no option may be exercised during the first year from the date it is
granted, that after one year from the date an option is granted, it may be
exercised as to not more than 25 percent of the shares optioned, and after the
expiration of the second, third and fourth years from the date the option is
granted, it may be exercised as to no more than an additional 25 percent of such
shares plus any shares as to which the option might theretofore have been
exercised but shall not have been exercised; (xi) accelerating the time when
outstanding Options may be exercised, PROVIDED, HOWEVER, that any ISOs shall be
"accelerated" within the meaning of Section 425(h) of the Code and (xii)
establishing any other terms, restrictions and/or conditions applicable to any
Option not inconsistent with the provisions of this Plan.
5.3. The Committee shall be authorized to interpret the Plan and may, from
time to time, adopt such rules and regulations, not inconsistent with the
provisions of the Plan, as it may deem advisable to carry out the purpose of
this Plan.
5.4. The interpretation and construction by the Committee of any provision
of the Plan, any Option granted hereunder or any agreement evidencing any such
Option shall be final and conclusive upon all parties.
5.5 Only members of the Committee shall vote on any matter affecting the
administration of the Plan or the granting of Options under the Plan.
5.6. All expenses and liabilities incurred by the Committee in the
administration of the Plan shall be borne by the Company. The Committee may
employ attorneys, consultants, accountants or other persons in connection with
the administration of the Plan. The Company, and its officers and directors,
shall be entitled to rely upon the advice, opinions or valuations of any such
persons. No member of the Board of Directors (or the Committee) shall be liable
for any action, determination or interpretation taken or made in good faith with
respect to the Plan or any Option granted hereunder.
Section 6. TERMS AND CONDITIONS OF OPTIONS.
6.1. ISOS. The terms and conditions of each ISO granted under the Plan
shall be specified by the Committee and shall be set forth in an ISO agreement
between the Company and the Participant in such form as the Committee shall
approve. The terms and conditions of each ISO shall be such that each ISO issued
hereunder shall constitute and shall be treated as an "incentive stock option"
as defined in Section 422A of the Code. The terms and conditions of any ISO
granted hereunder need not be identical to those of any other ISO granted
hereunder.
The terms and conditions of each ISO shall include the following:
(a) The option price shall be fixed by the Committee but shall in no
event be less than 100% (or 110% in the case of an Participant referred to
in Section 4.3(b) hereof) of the Fair Market Value of the shares of Common
Stock subject to the ISO on the date the ISO is granted.
(b) ISOs, by their terms, shall not be transferable otherwise than by
will or the laws of descent and distribution, and, during an Optionee's
lifetime, an ISO shall be exercisable only by the Optionee.
(c) The Committee shall fix the term of all ISOs granted pursuant to the
Plan (including the date on which such ISO shall expire and terminate)
provided, however, that such term shall in no event exceed ten years from
the date on which such ISO is granted (or, in the case of an ISO granted to
an Employee referred to in Section 4.3(b) hereof, such term shall in no
event exceed five years from the date on which such ISO is granted). Each
ISO shall be exercisable in such amount or
56
<PAGE>
amounts, under such conditions and at such times or intervals or in such
installments as shall be determined by the Committee in its sole discretion.
(d) In the event that the Company or any Subsidiary of the Company is
required to withhold any Federal, state, local or foreign taxes in respect
of any compensation income realized by the Participant as a result of any
"disqualifying disposition" of any shares of Common Stock acquired upon
exercise of an ISO granted hereunder, the Company shall deduct from any
payments of any kind otherwise due to such Participant the aggregate amount
of such Federal, state, local or foreign taxes required to be so withheld
or, if such payments are insufficient to satisfy such Federal, state, local
or foreign taxes, such Participant will be required to pay to the Company,
or make other arrangements satisfactory to the Company regarding payment to
the Company of, the aggregate amount of any such taxes. A Participant may
use issued and outstanding Common Stock for the payment of taxes. All
matters with respect to the total amount of taxes to be withheld in respect
of any such compensation income shall be determined by the Committee in its
sole discretion.
(e) In the sole discretion of the Committee the terms and conditions of
any ISO or Non-Qualified Option may (but need not) include any of the
following provisions:
(i) In the event a Participant shall cease to be an Employee of the
Company or Subsidiary of the Company for any reason other than as a
result of his death or "disability" (within the meaning of Section
22(e)(3) of the Code), the unexercised portion of any ISO or
Non-Qualified Option held by such Participant at that time may only be
exercised within one month after the date on which the Participant ceased
to be so employed, and only to the extent that the Participant could have
otherwise exercised such ISO or Non-Qualified Option as of the date on
which he ceased to be so employed.
(ii) In the event a Participant shall cease to be an Employee of the
Company or Subsidiary of the Company by reason of his "disability"
(within the meaning of Section 22(e)(3) of the Code), the unexercised
portion of any ISO or Non-Qualified Option held by such Participant at
that time may only be exercised within one year after the date on which
the Participant ceased to be so employed, and to the extent that the
Participant could have otherwise exercised such ISO or Non-Qualified
Option if it had been completely exercisable.
(iii) In the event a Participant shall die while employed by the
Company or Subsidiary of the Company (or within a period of one month
after ceasing to be an Employee for any reason other than such
"disability" or within a period of one year after ceasing to be an
Employee by reason of such "disability"), the unexercised portion of any
ISO or Non-Qualified Option held by such Participant at the time of his
death may only be exercised within one year after the date of such
Participant's death, and to the extent that the Participant could have
otherwise exercised such ISO or Non-Qualified Option if it had been
completely exercisable. In such event, such ISO or Non-Qualified Option
may be exercised by the executor or administrator of the Participant's
estate or by any person or persons who shall have acquired the ISO or
Non-Qualified Option directly from the Participant by bequest or
inheritance.
6.2. NON-QUALIFIED OPTIONS. The terms and conditions of each Non-Qualified
Option granted under the Plan shall be specified by the Committee, in its sole
discretion, and shall be set forth in a written option agreement between the
Company and the Participant in such form as the Committee shall approve. The
terms and conditions of each Non-Qualified Option will be such that each
Non-Qualified Option issued hereunder shall not constitute nor be treated as an
"incentive stock option" as defined in Section 422A of the Code and will be a
"non-qualified stock option" for federal income tax purposes. The terms and
conditions of any Non-Qualified Option granted hereunder need not be identical
to those of any other Non-Qualified Option granted hereunder.
57
<PAGE>
The terms and conditions of each Non-Qualified Option Agreement shall
include the following:
(a) The option (exercise) price shall be fixed by the Committee and may
be equal to, more than or less than 100% of the fair market value of the
shares of Common Stock subject to the Non-Qualified Option on the date such
Non-Qualified Option is granted.
(b) The Committee shall fix the term of all Non-Qualified Options
granted pursuant to the Plan (including the date on which such Non-Qualified
Option shall expire and terminate). Each Non-Qualified Option shall be
exercisable in such amount or amounts, under such conditions, and at such
times or intervals or in such installments as shall be determined by the
Committee in its sole discretion.
(c) Non-Qualified Options shall not be transferable otherwise than by
will or the laws of descent and distribution, and during a Participant's
lifetime a Non-Qualified Option shall be exercisable only by the
Participant.
(d) In the event that the Company is required to withhold any Federal,
state, local or foreign taxes in respect of any compensation income realized
by the Participant in respect of a Non-Qualified Option granted hereunder or
in respect of any shares of Common Stock acquired upon exercise of a
Non-Qualified Option, the Company shall deduct from any payments of any kind
otherwise due to such Participant the aggregate amount of such Federal,
state, local or foreign taxes required to be so withheld or, if such
payments are insufficient to satisfy such Federal, state, local or foreign
taxes, or if no such payments are due or to become due to such Participant,
then, such Participant will be required to pay to the Company, or make other
arrangements satisfactory to the Company regarding payment to the Company
of, the aggregate amount of any such taxes. All matters with respect to the
total amount of taxes to be withheld in respect of any such compensation
income shall be determined by the Committee in its sole discretion.
Section 7. ADJUSTMENTS.
7.1 In the event that after the adoption of the Plan by the Board of
Directors, the outstanding shares of the Company's Common Stock shall be
increased or decreased or changed into or exchanged for a different number or
kind of shares of stock or other securities of the Company or of another
corporation through reorganization, merger or consolidation, recapitalization,
reclassification, stock split, split-up, combination or exchange of shares or
declaration of any dividends payable in Common Stock, the Board of Directors
shall appropriately adjust (i) the number of shares of Common Stock (and the
option price per share) subject to the unexercised portion of any outstanding
Option (to the nearest possible full share), provided, however, that the
limitations of Section 425 of the Code shall apply with respect to adjustments
made to ISOs and (ii) the number of shares of Common Stock for which Options may
be granted under this Plan, as set forth in Section 4.1 hereof, and such
adjustments shall be effective and binding for all purposes of this Plan.
7.2 Notwithstanding the foregoing, in the event of (i) any offer to holders
of the Company's Common Stock generally relating to the acquisition of their
shares, including, without limitation, through purchase, merger or otherwise or
(ii) any transaction generally relating to the acquisition of substantially all
of the assets or business of the Company, the Committee may make such adjustment
as it deems equitable in respect of outstanding Options including, without
limitation, the revision or cancellation of any outstanding Options including
providing for full vesting for all outstanding options, except that the
Committee shall have no authority to accelerate the exerciseability of
Directors' Options as described in Section 12. Any such determination by the
Committee shall be effective and binding for all purposes of this Plan.
Section 8. EFFECT OF THE PLAN ON EMPLOYMENT RELATIONSHIP. Neither this
Plan nor any Option granted hereunder to a Participant shall be construed as
conferring upon such Participant any right to continue in the employ of the
Company or the service of the Company or any Subsidiary of the Company as the
case may be, or limit in any respect the right of the Company or any Subsidiary
of the Company to terminate such Participant's employment or other relationship
with the Company or any Subsidiary of the Company, as the case may be, at any
time.
58
<PAGE>
Section 9. AMENDMENT OF THE PLAN. The Board of Directors may amend the
Plan from time to time as it deems desirable; provided, however, that, without
the approval of the holders of a majority of the outstanding stock of the
Company present or represented and entitled to vote thereon at a meeting, the
Board of Directors may not amend the Plan (i) to increase materially the
benefits accruing to participants under the Plan, (ii) to increase materially
(except for increases due to adjustments in accordance with Section 7 hereof)
the aggregate number of shares of Common Stock for which Options may be granted
hereunder or (iii) to modify materially the requirements as to eligibility for
participation in the Plan.
Section 10. TERMINATION OF THE PLAN. The Board of Directors may terminate
the Plan at any time. Unless the Plan shall theretofore have been terminated by
the Board of Directors, the Plan shall terminate ten years after the date of its
initial approval by the stockholders of the Company. No Option may be granted
hereunder after termination of the Plan. The termination or amendment of the
Plan shall not alter or impair any rights or obligations under any Option
theretofore granted under the Plan.
Section 11. GRANT OF OPTIONS AND SUBSTITUTION AND RE-PRICING OF PREVIOUSLY
GRANTED OPTIONS. Options may be granted, at the discretion of the Committee, in
substitution for Options previously granted pursuant to the Plan, provided that
any option so granted shall be exercisable at a new price which is not less than
100 percent of the Fair Market Value of the Common Stock on the date on which
the replacement Options were granted. The Option agreement evidencing the
replacement Options may, in the discretion of the Committee, contain the same
terms and conditions, including, without limitation, the same vesting schedule
as the agreement evidencing the original award. The Committee may, also, in its
discretion, amend the terms of any Option agreement, with the consent of the
affected Participant, provided that the Option price of the shares remaining
subject to the original award shall be reestablished at a price not less than
100 percent of the Fair Market Value of the Common Stock on the effective date
of the amendment. No modification of any other term or provision of any stock
option agreement which is amended in accordance with the foregoing shall be
required, although the Committee may, in its discretion, make such further
modifications of any stock option agreement as are not inconsistent with or
prohibited by the Plan.
Section 12. DIRECTORS' OPTIONS. A person who is not an employee of the
Company or any Subsidiary of the Company and who is elected to serve on the
Board of Directors of the Company commencing subsequent to the Effective Date of
the Plan shall receive Options to purchase Ten Thousand (10,000) shares of
Common Stock upon election to the Board of Directors. Each such Director shall
also receive Options for two thousand (2,000) additional shares of Common Stock
on the anniversary of his or her election to the Board in each of the four
succeeding years so long as he or she remains a member of the Board of Directors
on that next anniversary date.
No options granted hereunder may be exercised during the first year from the
date it is granted; after one year from the date an Option is granted, it may be
exercised as to not more than twenty percent (20%) of the shares optioned and
after the expiration of the second, third, fourth, and fifth years from the date
the Option is granted, it may be exercised as to no more than an additional
twenty percent (20%) of such shares plus any shares as to which the Option might
theretofore have been exercisable but shall not have been exercised.
12.1. FORFEITURE OF OPTIONS. Except as provided in Section 12.2 hereof,
all Options granted to a Director shall automatically be forfeited by such
person at the time such person shall cease to be a Director.
12.2. EXERCISE PERIOD AFTER RETIREMENT. Upon Retirement, a Director may
exercise the exercisable options within 30 days after Retirement. The term
"Retirement" means the termination of a Director's service on the Board,
including resignation or not standing for election with the approval of the
Board but shall not include any termination of service from an act of (a) fraud
or intentional misrepresentation or (b) embezzlement, misappropriation or
conversion of assets or opportunities of the Company or any direct or indirect
majority-owned subsidiary of the Company, by such Director. The determination of
whether termination results from such act shall be made by the Board of
Directors, whose determination shall be conclusive.
Section 13. EFFECTIVE DATE OF THE PLAN. This Plan shall be effective as of
April 1, 1996.
59
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 33-93900, Registration Statement File No.
333-2592, Registration Statement File No. 333-2594 and Registration Statement
File No. 333-098111.
Arthur Andersen LLP
Omaha, Nebraska,
December 19, 1996
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