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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 0-25346
TRANSACTION SYSTEMS ARCHITECTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 47-0772104
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
224 South 108th Avenue
Omaha, Nebraska 68154
(Address of principal executive offices, including zip code)
(402) 334-5101
(Registrant's telephone number, including area code)
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes[ X ] No[ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
32,551,024 shares of Class A Common Stock at August 12, 1999
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<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
TABLE OF CONTENTS
Page
------
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of June 30, 1999
and September 30, 1998 3
Condensed Consolidated Statements of Income for the three
and nine months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Index to Exhibits 17
<PAGE>
<TABLE>
<CAPTION>
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands)
June 30, September 30,
1999 1998
------------------ ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 62,613 $ 63,648
Marketable securities 9,532 2,188
Billed receivables, net 57,076 58,080
Accrued receivables 39,181 33,000
Deferred income taxes 7,064 4,921
Other 4,334 3,585
------------------ ----------------
Total current assets 179,800 165,422
Property and equipment, net 20,722 21,001
Software, net 23,997 7,172
Intangible assets, net 56,523 9,385
Installment receivables 12,963 2,056
Investments and notes receivable 3,568 16,754
Other 4,785 4,517
------------------ ----------------
Total assets $ 302,358 $ 226,307
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,075 $ 1,078
Accounts payable 10,333 13,720
Accrued employee compensation 6,429 8,426
Accrued liabilities 16,191 14,826
Income taxes 8,930 4,784
Deferred revenue 46,530 35,594
------------------ ----------------
Total current liabilities 89,488 78,428
Long-term debt 1,860 2,002
------------------ ----------------
Total liabilities 91,348 80,430
------------------ ----------------
Stockholders' equity:
Class A Common Stock 160 150
Class B Common Stock - 6
Additional paid-in capital 146,355 112,400
Retained earnings 70,411 38,220
Accumulated translation adjustments (3,936) (2,075)
Unrealized investment holding loss (1,968) (2,812)
Treasury stock, at cost (12) (12)
------------------ ----------------
Total stockholders' equity 211,010 145,877
------------------ ----------------
Total liabilities and stockholders' equity $ 302,358 $ 226,307
================== ================
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited and in thousands, except per share amounts)
Three Months Ended June 30, Nine Months Ended June 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Software license fees $ 53,259 $ 42,923 $ 149,888 $ 121,570
Maintenance fees 16,042 14,664 47,605 41,999
Services 18,858 18,188 61,462 50,534
Hardware, net 967 1,232 3,192 3,726
------------ ------------ ------------ ------------
Total revenues 89,126 77,007 262,147 217,829
------------ ------------ ------------ ------------
Expenses:
Cost of software license fees 10,381 9,220 32,153 26,518
Cost of maintenance and services 17,740 18,126 56,071 50,580
Research and development 8,711 6,797 25,447 19,209
Selling and marketing 17,495 15,682 50,821 45,096
General and administrative:
General and administrative costs 14,639 13,717 43,984 37,828
Amortization of goodwill and
purchased intangibles 1,572 347 3,121 1,076
------------ ------------ ------------ ------------
Total expenses 70,538 63,889 211,597 180,307
------------ ------------ ------------ ------------
Operating income 18,588 13,118 50,550 37,522
------------ ------------ ------------ ------------
Other income (expense):
Interest income 706 863 2,130 2,310
Interest expense (77) (46) (236) (144)
Transaction related expenses - - (653) -
Other (131) (226) 37 (266)
------------ ------------ ------------ ------------
Total other 498 591 1,278 1,900
------------ ------------ ------------ ------------
Income before income taxes 19,086 13,709 51,828 39,422
Provision for income taxes (7,237) (5,134) (19,726) (14,836)
------------ ------------ ------------ ------------
Net income $ 11,849 $ 8,575 $ 32,102 $ 24,586
============ ============ ============ ============
Earnings Per Share Data:
Basic:
Net income $ 0.37 $ 0.28 $ 1.02 $ 0.81
============ ============ ============ ============
Average shares outstanding 32,016 30,352 31,465 30,176
============ ============ ============ ============
Diluted:
Net income $ 0.36 $ 0.27 $ 1.00 $ 0.79
============ ============ ============ ============
Average shares outstanding 32,650 31,230 32,214 31,107
============ ============ ============ ============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
Nine months ended June 30,
-----------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 32,102 $ 24,586
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 6,074 4,627
Amortization 8,619 3,576
Changes in operating assets and liabilities:
Billed and accrued receivables (4,720) (13,199)
Other current and noncurrent assets (13,304) (377)
Accounts payable (72) 253
Deferred revenue 4,774 5,360
Other current and noncurrent liabilities (8,440) (716)
---------------- ----------------
Net cash provided by operating activities 25,033 24,110
---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (5,026) (5,885)
Purchases of software (5,560) (2,406)
Purchase of marketable securities (6,500) -
Acquisition of businesses, net of cash acquired (9,967) (253)
Additions to investment and notes receivable (602) (11,873)
---------------- ----------------
Net cash used in investing activities (27,655) (20,417)
---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of Class A Common Stock 755 693
Proceeds from sale and exercise of stock options 2,114 1,676
Other - (865)
Payments of long-term debt (1,350) (938)
---------------- ----------------
Net cash provided by financing activities 1,519 566
---------------- ----------------
Effect of exchange rate fluctuations on cash 68 (588)
---------------- ----------------
(Decrease) increase in cash and cash equivalents (1,035) 3,671
Cash and cash equivalents, beginning of period 63,648 52,855
---------------- ----------------
Cash and cash equivalents, end of period $ 62,613 $ 56,526
================ ================
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Consolidated Financial Statements
Transaction Systems Architects, Inc. (the Company or TSA) develops, markets,
installs and supports a broad line of software products and services primarily
focused on facilitating electronic payments and electronic commerce. In
addition to its own products, the Company distributes software developed by
third parties. The Company's customers consist primarily of financial
institutions, retailers and third-party processors, both in domestic and
international markets.
The condensed consolidated financial statements at June 30, 1999 and for the
three and nine months ended June 30, 1999 and 1998 are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. The
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto, together with
management's discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report on Form 10-K/A for the
fiscal year ended September 30, 1998. The results of operations for the three
and nine months ended June 30, 1999 are not necessarily indicative of the
results for the entire fiscal year ending September 30, 1999.
The condensed consolidated financial statements include all domestic and
foreign subsidiaries which are more than 50% owned and controlled.
Investments in companies less than 20% owned are carried at cost.
2. Acquisitions
In November 1998, the Company and Media Integration BV (MINT) completed a
stock exchange transaction which resulted in MINT becoming a wholly-owned
subsidiary of the Company. MINT's products are used to issue and manage
multi-functional applications on smart cards. Shareholders of MINT received
740,000 shares of TSA Class A Common Stock in exchange for 100% of MINT
shares. The stock exchange was accounted for as a pooling of interests and,
accordingly, the Company's financial statements have been retroactively
restated to include the historical results for MINT for all periods presented.
In March 1999, the Company acquired approximately 78% of the outstanding shares
of Insession, Inc. (Insession) for approximately 730,000 shares of TSA Class A
Common Stock, valued at approximately $28.3 million, and $5.0 million cash paid
in April 1999. The Company previously (January 1996) acquired a 6% minority
interest in Insession for $1.5 million in cash. The Company is the exclusive
distributor of Insession's System Network Architecture (SNA) connectivity tool,
known as ICE, which facilitates connectivity between Compaq and IBM computers.
The transaction was recorded as a purchase and resulted in the recording of
approximately $35.6 million of Goodwill which is being amortized over 10 years
and approximately $15.4 million of Purchased Software which is being amortized
over 3 years. In August 1999, the Company reached an agreement in principle to
acquire the remaining 16% of the outstanding shares of Insession for $6.0
million cash to be paid in August 1999 ($3.0 million) and in October 1999 ($3.0
million).
In July 1999, the Company and SDM International, Inc. (SDM) completed a stock
exchange transaction which resulted in SDM becoming a wholly-owned subsidiary
of the Company. The sole stockholder of SDM received 475,000 shares of TSA
Class A Common Stock in exchange for 100% of SDM's Common Stock. The stock
exchange will be accounted for as a purchase.
3. Revenue Recognition
In the first quarter of fiscal 1999, the Company adopted American Institute of
Certified Public Accountants Statement of Position 97-2, "Software Revenue
Recognition" (SOP 97-2). SOP 97-2 provides guidance on applying generally
accepted accounting principles in recognizing revenue for software
arrangements entered into by the Company after September 30, 1998. The
Company has analyzed the revenue recognition requirements of SOP 97-2 and has
concluded that the Company's previous revenue recognition policy was primarily
in compliance with SOP 97-2.
Under SOP 97-2, one requirement for recognizing revenue under software
arrangements is that the software fees are fixed or determinable. SOP 97-2
specifies that extended payment terms in a software licensing agreement may
indicate that the software fees are not deemed to be fixed or determinable
and, if so, the software fee should be recognized as the payments become due.
However, SOP 97-2 specifies that if the Company has a standard business
practice of using extended payment terms in software arrangements and has a
history of successfully collecting the software fees under the original
payment terms of the arrangement without making concessions, the Company can
overcome the presumption that the software fees are not fixed or
determinable. If the presumption is overcome, the Company is required to
recognize the software fees when the other SOP 97-2 revenue recognition
criteria are met.
The Company has concluded that for certain fiscal 1999 software arrangements
with extended payment terms, revenue should be recognized upon delivery in
accordance with the provisions of SOP 97-2 as previously described. Software
license fee revenue, net of third party royalties, recognized for the three
and nine months ended June 30, 1999, related to these arrangements where the
Company has overcome the presumption that the software fees are not fixed or
determinable totaled $18.9 million and $37.5 million, respectively.
4. Marketable Securities
In June 1999, the Company entered into a transaction with Digital Courier
Technologies, Inc. (DCTI), whereby the Company acquired 1.25 million shares of
DCTI's Common Stock for $6.5 million. In addition, the Company received
warrants to purchase an additional 1.0 million shares at an exercise price of
$5.20 per share (subject to adjustment). DCTI supplies financial
institutions, businesses and major web portals with e-commerce, payments
processing and content delivery software. The Company has an exclusive,
worldwide right to market DCTI's e-commerce payments technology. The Company
has accounted for the investment in DCTI's Common Stock and warrants in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
The investment in marketable securities described above and the Company's
investment in Nestor, Inc. (Nestor) have been classified as available-for-sale
and recorded at fair market value, which is estimated based on quoted market
prices. Net unrealized holding gains and losses, net of the related tax
effect, if any, are reported as a separate component of stockholders' equity.
Unrealized gains and losses are determined by specific identification.
5. Comprehensive Income
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income", which
establishes standards for reporting and display of comprehensive income and
its components in a financial statement for the period in which they are
recognized. The Company's components of comprehensive income were as follows
(in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 11,849 $ 8,575 $ 32,102 $ 24,586
Unrealized investment holding gain and losses 687 - 844 -
Foreign currency translation adjustments 29 (1,619) (1,861) (2,308)
------------ ------------ ------------ ------------
Comprehensive income $ 12,565 $ 6,956 $ 31,085 $ 22,278
============ ============ ============ ============
</TABLE>
6. Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted
average number of shares outstanding during the period. Diluted net income
per share is consistent with the calculation of basic net income per share
while giving effect to dilutive potential shares outstanding during the
period. For all periods presented, dilutive potential shares consisted
entirely of stock options.
<PAGE>
<TABLE>
<CAPTION>
TRANSACTION SYSTEMS ARCHITECTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth certain financial data and the percentage of total revenues of
the Company for the periods indicated:
Three Months Ended June 30, Nine Months Ended June 30,
------------------------------------------- --------------------------------------------
1999 1998 1999 1998
-------------------- -------------------- --------------------- --------------------
% of % of % of % of
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
--------- --------- --------- --------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Software license fees $ 53,259 59.8 % $ 42,923 55.7 % $ 149,888 57.2 % $ 121,570 55.8 %
Maintenance fees 16,042 18.0 14,664 19.0 47,605 18.2 41,999 19.3
Services 18,858 21.2 18,188 23.6 61,462 23.4 50,534 23.2
Hardware, net 967 1.0 1,232 1.7 3,192 1.2 3,726 1.7
--------- --------- --------- --------- ----------- --------- ---------- ---------
Total revenues 89,126 100.0 77,007 100.0 262,147 100.0 217,829 100.0
--------- --------- --------- --------- ----------- --------- ---------- ---------
Expenses:
Cost of software license fees 10,381 11.6 9,220 12.0 32,153 12.3 26,518 12.2
Cost of maintenance and services 17,740 19.9 18,126 23.5 56,071 21.4 50,580 23.2
Research and development 8,711 9.8 6,797 8.8 25,447 9.7 19,209 8.8
Selling and marketing 17,495 19.6 15,682 20.4 50,821 19.4 45,096 20.7
General and administrative:
General and administrative costs 14,639 16.4 13,717 17.8 43,984 16.7 37,828 17.4
Amortization of goodwill and
purchased intangibles 1,572 1.8 347 0.5 3,121 1.2 1,076 0.5
--------- --------- --------- --------- ----------- --------- ---------- ---------
Total expenses 70,538 79.1 63,889 83.0 211,597 80.7 180,307 82.8
--------- --------- --------- --------- ----------- --------- ---------- ---------
Operating income 18,588 20.9 13,118 17.0 50,550 19.3 37,522 17.2
--------- --------- --------- --------- ----------- --------- ---------- ---------
Other income (expense):
Interest income 706 0.7 863 1.1 2,130 0.7 2,310 1.1
Interest expense (77) (0.1) (46) (0.1) (236) 0.0 (144) (0.1)
Transaction related expenses - 0.0 - 0.0 (653) (0.2) - 0.0
Other (131) (0.1) (226) (0.2) 37 0.0 (266) (0.1)
--------- --------- --------- --------- ----------- --------- ---------- ---------
Total other 498 0.5 591 0.8 1,278 0.5 1,900 0.9
--------- --------- --------- --------- ----------- --------- ---------- ---------
Income before income taxes 19,086 21.4 13,709 17.8 51,828 19.8 39,422 18.1
Provision for income taxes (7,237) (8.1) (5,134) (6.7) (19,726) (7.6) (14,836) (6.8)
--------- --------- --------- --------- ----------- --------- ---------- ---------
Net income $ 11,849 13.3 % $ 8,575 11.1 % $ 32,102 12.2 % $ 24,586 11.3 %
========= ========= ========= ========= =========== ========= ========== =========
</TABLE>
<PAGE>
Results of Operations (continued)
Revenues
Total revenues for the third quarter of fiscal 1999 increased 15.7% or $12.1
million over the comparable period in fiscal 1998. Of this increase, $10.3
million of the growth resulted from a 24.1% increase in software license fee
revenue, $700,000 from a 3.7% increase in services revenue and $1.4 million
from a 9.4% increase in maintenance fee revenue.
Total revenues for the first three quarters of fiscal 1999 increased 20.4% or
$44.3 million over the comparable period in fiscal 1998. Of this increase,
$28.3 of the growth resulted from a 23.3% increase in software license fee
revenue, $10.9 million from a 21.6% increase in services revenue and $5.6
million from a 13.4% increase in maintenance fee revenue. During the first
three quarters of fiscal 1999, 52% of total revenues resulted from
international operations as compared to 55% for all of fiscal 1998.
The growth in software license fee revenue is the result of increased demand
for the Company's BASE24 ATM and POS products and System Solutions products
accompanied by the continued growth of the installed base of customers paying
monthly license fee (MLF) revenue. Contributing to the demand for the
Company's products is the continued world-wide growth of electronic payment
transaction volume and the growing complexity of electronic payment systems.
MLF revenue was $14.1 million in the third quarter of fiscal 1999 compared to
$11.5 million in the third quarter of fiscal 1998. MLF revenue was $40.1
million in the first three quarters of fiscal 1999 compared to $31.9 million
in the first three quarters of fiscal 1998.
The growth in services revenue for the third quarter and first three quarters
of fiscal 1999 is the result of increased demand for technical and project
management services resulting from the increased installed base of the
Company's products and, in the first quarter of fiscal 1999, to an increase in
services provided to customers implementing Year 2000 compliant IT systems.
The Company does not anticipate growth in services revenue throughout the
remainder of fiscal 1999 as the Company believes customers, who have or will
purchase the Company's products, may defer purchasing technical services until
after December 31, 1999.
The preceding sentence contains a forward-looking statement. There can be no
assurance the forward-looking statement will be an accurate indicator of future
actual results and actual results may differ from results projected in the
forward-looking statement. Such differences may be material. Factors that could
cause actual results to differ include, but are not limited to, changes in
customers buying patterns, changes in the conditions of the banking industry,
timing of executed customer contracts and the severity of customer Year 2000
issues. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Year 2000" for additional discussion on Year 2000 risks.
The increase in maintenance fee revenue for the third quarter and first three
quarters of fiscal 1999 is a result of the continued growth of the installed
base of the Company's products.
Expenses
Total operating expenses for the third quarter of fiscal 1999 increased 10.4%
or $6.6 million over the comparable period in fiscal 1998. Total operating
expenses for the first three quarters of fiscal 1999 increased 17.4% or $31.3
million over the comparable period in fiscal 1998. The increase is due to
increased staff required to support the increased demand for the Company's
products and services. Total staff (including both employees and independent
contractors) increased from 1,980 at June 30, 1998 to 2,252 at June 30, 1999.
The Company's operating margin for the third quarter of fiscal 1999 was 20.9%
as compared to 17.0% for the comparable period in fiscal 1998. Operating
margin for the first three quarters of fiscal 1999 was 19.3% as compared to
17.2% for the first three quarters of fiscal 1998. This improvement is due to
the impact of the growth in the Company's recurring revenues (MLF's,
maintenance and facilities management fees).
Transaction related expenses of $653,000 incurred in the first quarter of 1999
include legal, accounting, investment banking fees and other non-recurring
expenses associated with the acquisition of MINT which was accounted for as a
pooling of interests.
EBITDA
The Company's earnings before interest expense, income taxes, depreciation and
amortization (EBITDA) increased from $16.1 million in the third quarter of
fiscal 1998 to $25.0 million in the third quarter of fiscal 1999. EBITDA
increased from $45.7 million in the first three quarters of fiscal 1998 to
$65.3 million in the first three quarters of fiscal 1999. The increase in
EBITDA can be attributed to the continued growth in both recurring and
non-recurring revenues more than offsetting the growth in operating
expenses. EBITDA is not intended to represent cash flows for the periods.
Income Taxes
The effective tax rates for the third quarter and first three quarters of
fiscal 1999 were 37.9% and 38.1%, respectively. This compares to 38.0% for
all of fiscal 1998.
As of June 30, 1999, the Company has deferred tax assets of $16.2 million and
deferred tax liabilities of $0.3 million. Each quarter, the Company evaluates
its historical operating results as well as its projections for the future to
determine the realizability of the deferred tax assets. This analysis
indicated that $7.1 million of the deferred tax assets were more likely than
not to be realized. Accordingly, the Company has recorded a valuation
allowance of $9.1 million as of June 30, 1999.
The Company intends to analyze the realizability of the net deferred tax
assets at each future reporting period. Such analysis may indicate that the
realization of various deferred tax benefits is more likely than not and,
therefore, the valuation reserve may be further reduced.
Backlog
As of June 30, 1999 and 1998, the Company had non-recurring revenue backlog of
$31.5 million and $29.3 million in software license fees, respectively, and
$24.0 million and $29.5 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 and its customers to the extent that
the Company contemplates recognition of the related revenue within one year.
There can be no assurance that the contracts included in 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 June 30, 1999 and 1998, the Company had recurring revenue backlog of
$138.5 million and $108.7 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 or that the actual revenues will be
generated within the one year period.
Liquidity and Capital Resources
As of June 30, 1999, the Company had working capital of $90.3 million which
includes cash and cash equivalents of $62.6 million. The Company has a $10
million bank line of credit of which there are no borrowings outstanding. The
bank line of credit expires on June 30, 2000.
During the nine months ended June 30, 1999, the Company's cash flow from
operations amounted to $25.0 million and cash used in investing activities
amounted to $27.7 million. Of the $27.7 million of cash used in investing
activities, $10.0 million was used in the acquisition of businesses. This is
comprised of $3.6 million to purchase the net assets of USPI, $3.5 to purchase
the remaining 49% interest in the Company's South African subsidiary, and $2.9
million for the purchase of Insession. Also included in cash used in
investing activities is $6.5 million in cash used to acquire an 11.6% minority
interest in Digital Courier Technologies, Inc. (Nasdaq: DCTI) in June 1999.
In the normal course of business, the Company evaluates potential acquisitions
of complementary businesses, products or technologies. In November 1998, the
Company acquired 100% of MINT in exchange for 740,000 shares of the Company's
Class A Common Stock. In December 1998, the Company acquired the remaining
interests in the net assets of USPI for $3.6 million in cash and the forgiveness
of $5.6 million of debt owed to TSA. In March 1999, the Company acquired
approximately 78% of the outstanding stock of Insession in exchange for 730,000
shares of the Company's Class A Common Stock and $5.0 million cash paid in April
1999. In July 1999 the Company acquired 100% of SDM International, Inc. in
exchange for 475,000 shares of the Company's Class A Common Stock. In August
1999, the Company reached an agreement to acquire the remaining 16% of the
outstanding shares of Insession for $6.0 million cash to be paid in August 1999
($3.0 million) and in October 1999 ($3.0 million).
In March 1999, the Company extended a $1.0 million line of credit agreement to
Nestor, Inc. (Nestor). Nestor is a provider of neural-network solutions for
financial, Internet and transportation industries. The Company distributes
Nestor's PRISM intelligent fraud detection product. The line of credit is
secured by future royalties owed by the Company to Nestor. At June 30, 1999,
there are no borrowings against this line of credit.
In May 1999, the Company announced that its Board of Directors authorized the
Company to repurchase up to two million of its outstanding common shares through
February of 2000.
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.
Year 2000
Year 2000 problems may arise in computer equipment and software, as well as
embedded electronic systems, because of the way these systems are programmed
to interpret certain dates that will occur around the change in century. In
the computer industry this is primarily the result of computer programs being
designed and developed using or reserving only two digits in date fields
(rather than four digits) to identify the year, without considering the
ability of the program to properly distinguish the upcoming century change in
the Year 2000. In addition, the Year 2000 is a special-case leap year and some
programs may drop February 29th from their internal calendars. Certain other
dates may present problems because of the way the digits are interpreted.
Because the Company's business is based on the licensing of applications
software, the Company's business would be adversely impacted if its products
or its internal systems experience problems associated with the century
change. This issue also potentially affects the software programs and systems
used by the Company in its operations.
Project Definition. In 1996 the Company initiated a company wide program to
analyze three specific categories of systems: (1) software developed by the
Company which is licensed to customers; (2) information technology or "IT"
systems utilized by the Company consisting of applications developed in-house
and purchased from third party suppliers; and (3) non-IT systems and embedded
technology which are integral components of the infrastructure of the Company.
The Company adopted a methodology for reviewing its licensed software
consisting of four categories. The categories are (1) preparation,
(2) analysis and remediation, (3) testing, and (4) delivery. The Company
developed tools during the preparation phase of the project which were
utilized during the analysis and testing phases. The tools were subsequently
made available to the Company's customers at no charge. The Company believes
that its remediation efforts with respect to its software products will prove
to be successful. The Company's belief is based on testing by the Company of
its software products by using testing tools simulating dates and testing by
many of its customers who have in turn completed their own Year 2000 testing.
Year 2000 compliant versions of its software products ("Compliant Software")
have been made available by the Company to customers in a timely manner and
its communication efforts have been proactive and ongoing. The Company
continues to actively monitor the status and progress of customers and
distributors and assess the risk associated in those cases where the customer
has not taken delivery of the Compliant Software or may have not made
satisfactory progress in their own Year 2000 testing.
With respect to IT and non-IT systems, the Company is utilizing a methodology
similar to that adopted for its software products. Specifically, the Company
is utilizing the following steps: (1) preparation, in which the Company
conducts systematic inventory, analysis, and prioritization of the systems in
accordance with mission critical impact (2) analysis, replacement and
remediation (3) testing and (4) implementation.
Recognizing the importance of communications regarding and organization of
Year 2000 tasks and responsibilities, the Company has embraced a management
approach utilizing central coordination with distributed administration over
geographic and business units. This approach mirrors the Company's
organization and ensures that Year 2000 Communications Managers are deployed
and managing tasks in close proximity to actual efforts. Those efforts are
then reported centrally to upper management. The approach also ensures that
customers are kept informed of product and Company activities relating to the
Year 2000 and that the Company is able to measure progress and plan support
for customers' Year 2000 projects.
Current Status. Following analysis, remediation and testing efforts, the
Company began shipping Year 2000 compliant versions of its major licensed
software applications in March of 1997. As efforts were completed on other
applications, they too were shipped to customers so that they could be
upgraded as part of the customers' own Year 2000 projects. As of June 1999,
100% of all of the Company's licensed software applications are compliant and
available to customers. The Company continues to conduct analysis of newly
acquired software products with appropriate measurement and documentation in
accordance with the Year 2000 methodology in place.
With respect to the IT and non-IT systems, remediation and replacement is
underway and has been substantially completed in the most critical areas. The
internal accounting systems utilized by the Company and its subsidiaries have
been replaced where necessary. The overall IT and non-IT project is
approximately 80% complete. As new IT and non-IT purchases are made, each is
scrutinized and inventoried for Year 2000 compliance. The Company currently
anticipates it will complete its Year 2000 IT and non-IT compliance efforts by
September of 1999.
The majority of the embedded systems on which the Company relies in its day to
day operations around the world are owned and managed by the lessors of the
buildings in which the Company's offices are located, or by agents of such
lessors. The Company has sent letters to its lessors and, as applicable, their
agents requesting certifications of the Year 2000 compliance of the embedded
systems. The Company has received responses from more than 80% of its lessors
indicating that the systems in the buildings either already are, or are
expected to be before the end of 1999, Year 2000 compliant. Those systems not
owned by and managed by lessors have undergone a similar inventory and
certification gathering. The Company will prioritize systems and develop
necessary test plans based on the further responses it continues to receive,
or not to receive, to its letters.
The Company is developing contingency plans for support of its customers prior
to, during, and following the "Year 2000 weekend". Such plans will
incorporate, but not be limited to, distribution of support personnel in
locations around the world, backup plans for telecommunications, decision and
notification hierarchy, and other infrastructure support. Contingency plans
are presently anticipated to be complete by September of 1999.
Costs. The Company expects to incur project costs of approximately
$10 million over the life of the Year 2000 project. These costs consist of: (i)
internal staff costs related to licensed product remediation and testing;
(ii) internal staff costs related to IT and non-IT compliance; (iii) hardware
and software cost for replacement of IT systems; and (iv) costs related to
non-IT compliance involving embedded systems and consulting services. Costs
incurred from the beginning of the project in 1996 through June 1999 have
totaled approximately $8.5 million. The Company expects to incur an additional
$1.5 million over the remaining life of the Year 2000 project. All costs
related to the Year 2000 project are being expensed as incurred. The estimated
remaining costs are based on currently known circumstances and various
assumptions regarding future events. There can be no assurance that this
estimate will be achieved and actual results could differ materially from
those anticipated.
Risks. The Company believes that the most likely Year 2000 risks relate to
third parties with which it has material relationships. Those parties include
computer hardware system providers on which the Company and its customers rely
as well as service providers such as those providing telecommunications and
electricity. Failure or disruption of such services or systems could adversely
affect operations and the Company's ability to support its customers. The
second most likely Year 2000 risk relates to the Company's products that are
used in conjunction with software products developed by other vendors or by
customers who have developed their own applications for use with the Company's
products, which may not be Year 2000 compliant. Since the majority of the
Company's customers utilize the Company's software products for authorization,
routing, or processing of financial transactions, the failure of such
customers' systems, which may be particularly susceptible to Year 2000
compliance issues, could impact the transaction volume processed by the
customers thereby reducing transaction fees paid by customers with usage based
fee contracts. Failures of such systems could also increase the efforts
required by the Company to assist customers with resolving problems unrelated
to the Company's licensed products. The third most likely Year 2000 risk
relates to certain foreign countries in which the Company operates and the
Company's customers in such countries that are not acting to sufficiently
remediate Year 2000 issues. Some customers outside of the United States have
chosen to concentrate on issues other than the Year 2000. Without
concentrating on the Year 2000 upgrade and testing efforts, such customers
will not be prepared and may require additional support to assist them.
Commercial risks are associated with operating in countries that are not
prepared for the Year 2000.
In each case cited previously, the Company is developing contingency plans to
address each identified risk. In addition, the Company continues to use its
methodology of centralized and distributed management to keep in contact and
monitor progress with customer projects and to communicate at an upper
management level to those customers categorized as "at risk" due to their lack
of progress. The contingency plan being developed by the Company acknowledges
the risk associated with suppliers of material services, hardware vendors
closely related to the operation of the Company's licensed products, the
Company's own licensed products and the ability of the Company to support its
customers. In addition to distributed support methods, the Company is
investigating alternative services, such as telecommunications, as part of the
contingency plan. The (i) inability to timely implement contingency plans, if
deemed necessary and (ii) the cost to implement such plans, may have a
material adverse effect on the Company's results of operations.
Except for statements of existing or historical facts, the foregoing
discussion consists of forward-looking statements and assumptions relating to
forward- looking statements, including without limitation the statements
relating to the timetable for completion of Year 2000 compliance efforts,
future costs, potential problems relating to Year 2000, the Company's state of
readiness, third party representations, and the Company's plans and objectives
for addressing Year 2000 problems. Certain factors could cause actual results
to differ materially from the Company's expectations, including without
limitation (i) the failure of existing or future customers to achieve Year
2000 compliance, (ii) the failure of computer hardware system providers on
which the Company and its customers rely or other vendors or service providers
of the Company or its customers to timely achieve Year 2000 compliance,
(iii) the Company's products and systems not containing all necessary date code
changes, (iv) the failure of the Company's analysis and testing to detect
operational problems in IT and non-IT systems utilized by the Company or in
the Company's products or services, whether such failure results from the
technical inadequacy of the Company's validation and testing efforts, the
technological unfeasibility of testing certain non-IT systems, and the
unavailability of customers or other third parties to participate in testing,
(v) potential litigation arising out of Year 2000 issues, with respect to
providers of software and related technical and consulting services such as
the Company generally, and particularly in light of the numerous interfaces
between the Company's products and products and systems of third parties which
are required to successfully utilize the Company's products which could
involve the Company in expensive, multiple party litigation even though the
Company may have no responsibility for the alleged problem, and (vi) the
failure to timely implement a contingency plan to the extent Year 2000
compliance is not achieved.
Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes to the Company's market risk for the three
and nine month periods ended June 30, 1999. See the Company's Annual Report
on Form 10-K/A for the fiscal year ended September 30, 1998 for additional
discussion regarding quantitative and qualitative disclosure about market risk.
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 14, 1999, HNC Software Inc. filed a complaint against the
Company and its wholly-owned subsidiary, ACI Worldwide, Inc. in the
United States District Court for the Southern District of California,
San Diego Division. The complaint alleges, among other things, patent
infringement, unfair competition, false advertising, and trade libel
relating to ACI Worldwide's distribution of PRISM, a fraud detection
software product. ACI distributes PRISM pursuant to a license
agreement with Nestor, Inc., a company in which TSA is a minority
stockholder. The complaint seeks injunctive relief and unspecified
damages including treble damages, costs, attorneys' fees and various
other forms of relief. On November 25, 1998, Nestor had itself filed a
complaint in the United States District Court for the District of
Rhode Island against HNC Software alleging, among other things,
infringement of a patent relating to PRISM and antitrust violations.
HNC Software has filed a counterclaim in the Rhode Island lawsuit
alleging infringement by Nestor of HNC Software's patents which claims
are essentially the same as those filed by HNC Software against the
Company and ACI Worldwide in the San Diego lawsuit. Neither the
Company nor ACI Worldwide was a party to the Rhode Island lawsuit.
However, because the same patents and the same products are at issue
in both lawsuits, the Company and ACI Worldwide are seeking to have
the San Diego lawsuit transferred to Rhode Island and consolidated
with the proceedings there. Whatever the final procedural posture of
the lawsuit, the Company intends to vigorously defend against HNC
Software's allegations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.00 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 16, 1999
TRANSACTION SYSTEMS ARCHITECTS, INC
(Registrant)
/s/ Dwight G. Hanson
------------------------------
Dwight G. Hanson
Vice President of Finance
(Principal Accounting Officer)
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
27.00 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 62,613
<SECURITIES> 9,532
<RECEIVABLES> 96,257
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 179,800
<PP&E> 20,722
<DEPRECIATION> 2,090
<TOTAL-ASSETS> 302,358
<CURRENT-LIABILITIES> 89,488
<BONDS> 0
0
0
<COMMON> 160
<OTHER-SE> 210,850
<TOTAL-LIABILITY-AND-EQUITY> 302,358
<SALES> 89,126
<TOTAL-REVENUES> 89,126
<CGS> 28,121
<TOTAL-COSTS> 70,538
<OTHER-EXPENSES> (575)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77
<INCOME-PRETAX> 19,086
<INCOME-TAX> 7,237
<INCOME-CONTINUING> 11,849
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,849
<EPS-BASIC> .37
<EPS-DILUTED> .36
</TABLE>
