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 March 31, 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:
32,013,502 shares of Class A Common Stock at May 7, 1999
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TRANSACTION SYSTEMS ARCHITECTS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
TABLE OF CONTENTS
Page
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of
March 31, 1999 and September 30, 1998 3
Condensed Consolidated Statements of Income for the
three and six months ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for
the six months ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Index to Exhibits 16
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<CAPTION>
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands)
March 31, September 30,
1999 1998
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 62,565 $ 63,648
Marketable securities 2,345 2,188
Billed receivables, net 61,217 58,080
Accrued receivables 39,950 33,000
Deferred income taxes 5,923 4,921
Other 4,012 3,585
-------------- -------------
Total current assets 176,012 165,422
Property and equipment, net 20,644 21,001
Software, net 22,289 7,172
Intangible assets, net 59,382 9,385
Installment receivables 9,305 2,056
Investments and notes receivable 3,558 16,754
Other 4,907 4,517
-------------- -------------
Total assets $ 296,097 $ 226,307
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,138 $ 1,078
Accounts payable 13,689 13,720
Accrued employee compensation 5,712 8,426
Accrued liabilities 23,782 14,826
Income taxes 4,754 4,784
Deferred revenue 48,538 35,594
-------------- -------------
Total current liabilities 97,613 78,428
Long-term debt 1,994 2,002
-------------- -------------
Total liabilities 99,607 80,430
-------------- -------------
Stockholders' equity:
Class A Common Stock 160 150
Class B Common Stock - 6
Additional paid-in capital 144,401 112,400
Retained earnings 58,561 38,220
Accumulated translation adjustments (3,965) (2,075)
Unrealized investment holding loss (2,655) (2,812)
Treasury stock, at cost (12) (12)
-------------- -------------
Total stockholders' equity 196,490 145,877
-------------- -------------
Total liabilities and stockholders' equity $ 296,097 $ 226,307
============== =============
See notes to condensed consolidated financial statements.
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<CAPTION>
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited and in thousands, except per share amounts)
Three Months Ended March 31, Six Months Ended March 31,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Software license fees $ 50,552 $ 40,082 $ 96,629 $ 78,647
Maintenance fees 15,996 14,162 31,563 27,335
Services 19,309 16,405 42,604 32,346
Hardware, net 1,094 1,105 2,225 2,494
------------ ------------ ------------ ------------
Total revenues 86,951 71,754 173,021 140,822
------------ ------------ ------------ ------------
Expenses:
Cost of software license fees 9,950 8,535 21,772 17,298
Cost of maintenance and services 18,038 16,722 38,331 32,455
Research and development 8,538 6,304 16,736 12,413
Selling and marketing 17,348 15,010 33,326 29,414
General and administrative
General and administrative costs 14,976 12,279 29,345 24,112
Amortization of goodwill and
purchased intangibles 1,104 414 1,548 729
------------ ------------ ------------ ------------
Total expenses 69,954 59,264 141,058 116,421
------------ ------------ ------------ ------------
Operating income 16,997 12,490 31,963 24,401
------------ ------------ ------------ ------------
Other income (expense):
Interest income 721 800 1,424 1,447
Interest expense (48) (78) (159) (98)
Transaction related expenses - - (653) -
Other (29) 40 168 (40)
------------ ------------ ------------ ------------
Total other 644 762 780 1,309
------------ ------------ ------------ ------------
Income before income taxes 17,641 13,252 32,743 25,710
Provision for income taxes (6,757) (4,962) (12,489) (9,703)
------------ ------------ ------------ ------------
Net income $ 10,884 $ 8,290 $ 20,254 $ 16,007
============ ============ ============ ============
Earnings Per Share Data:
Basic:
Net income $ 0.35 $ 0.28 $ 0.65 $ 0.53
============ ============ ============ ============
Average shares outstanding 31,440 30,143 31,189 30,087
============ ============ ============ ============
Diluted:
Net income $ 0.34 $ 0.27 $ 0.63 $ 0.52
============ ============ ============ ============
Average shares outstanding 32,265 31,068 31,996 31,046
============ ============ ============ ============
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
Six months ended March 31,
----------------------------------------
1999 1998
----------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 20,254 $ 16,007
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,984 3,039
Amortization 4,263 2,160
Changes in operating assets and liabilities:
Billed and accrued receivables (9,630) (4,987)
Other current and noncurrent assets (8,212) 1,123
Accounts payable (1,516) (684)
Deferred revenue 6,883 (4,737)
Other current and noncurrent liabilities (6,385) 2,182
----------------- ------------------
Net cash provided by operating activities 9,641 14,103
----------------- ------------------
Cash flows from investing activities:
Purchases of property and equipment (2,796) (3,367)
Purchases of software (3,526) (1,693)
Acquisition of businesses, net of cash acquired (5,065) (253)
Additions to investment and notes receivable (602) (4,602)
----------------- ------------------
Net cash used in investing activities (11,989) (9,915)
----------------- ------------------
Cash flows from financing activities:
Proceeds from issuance of Class A Common Stock 755 426
Proceeds from sale and exercise of stock options 1,665 1,101
Other - (220)
Payments of long-term debt (1,168) (398)
----------------- ------------------
Net cash provided by financing activities 1,252 909
----------------- ------------------
Effect of exchange rate fluctuations on cash 13 (389)
----------------- ------------------
(Decrease) increase in cash and cash equivalents (1,083) 4,708
Cash and cash equivalents, beginning of period 63,648 52,855
----------------- ------------------
Cash and cash equivalents, end of period $ 62,565 $ 57,563
================= ==================
See notes to condensed consolidated financial statements.
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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 March 31, 1999 and for the
three and six months ended March 31, 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 for the
fiscal year ended September 30, 1998. The results of operations for the three
and six months ended March 31, 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 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 initial recording
of approximately $37.0 million of Goodwill which is being amortized over 10
years and approximately $12.0 million of Purchased Software which is being
amortized over 3 years. The financial statements at March 31, 1999 related to
the accounting for the purchase of Insession are shown on a preliminary basis.
The Company is evaluating the allocation of the initial purchase price between
goodwill and purchased software. In conjunction with this evaluation, the
Company has engaged an independent party to assist in the allocation of the
purchase price to the assets acquired. This independent valuation and the
Company's internal analysis are expected to be completed in the third quarter of
fiscal 1999, at which time the purchase price and its appropriate allocation
will be reflected in the Company's consolidated financial statements.
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 six months ended March 31, 1999, related to these arrangements totaled
$14.4 million and $18.6 million, respectively.
4. 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
<PAGE>
recognized. The Company's components of comprehensive income were as follows (in
thousands):
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<CAPTION>
Three months ended Six months ended
March 31, March 31,
-------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Net income $ 10,884 $ 8,290 $ 20,254 $ 16,007
Unrealized investment holding gain 624 - 157 -
Foreign currency translation adjustments (1,386) (331) (1,890) (689)
-------------- -------------- --------------- --------------
Comprehensive income $ 10,122 $ 7,959 $ 18,521 $ 15,318
============== ============== =============== ==============
</TABLE>
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<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 March 31, Six Months Ended March 31,
------------------------------------------- ------------------------------------------
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 $ 50,552 58.1% $ 40,082 55.9% $ 96,629 55.9% $ 78,647 55.8%
Maintenance fees 15,996 18.4 14,162 19.7 31,563 18.2 27,335 19.4
Services 19,309 22.2 16,405 22.9 42,604 24.6 32,346 23.0
Hardware, net 1,094 1.3 1,105 1.5 2,225 1.4 2,494 1.8
-------- ------- -------- ------- --------- ------- --------- -------
Total revenues 86,951 100.0 71,754 100.0 173,021 100.0 140,822 100.0
-------- ------- -------- ------- --------- ------- --------- -------
Expenses:
Cost of software license fees 9,950 11.4 8,535 11.9 21,772 12.6 17,298 12.3
Cost of maintenance and services 18,038 20.7 16,722 23.3 38,331 22.2 32,455 23.0
Research and development 8,538 9.8 6,304 8.8 16,736 9.7 12,413 8.8
Selling and marketing 17,348 20.0 15,010 20.9 33,326 19.3 29,414 20.9
General and administrative:
General and administrative costs 14,976 17.2 12,279 17.1 29,345 16.9 24,112 17.1
Amortization of goodwill and
purchased intangibles 1,104 1.4 414 0.6 1,548 0.8 729 0.6
-------- ------- -------- ------- -------- ------- --------- -------
Total expenses 69,954 80.5 59,264 82.6 141,058 81.5 116,421 82.7
-------- ------ -------- ------- -------- -------- --------- -------
Operating income 16,997 19.5 12,490 17.4 31,963 18.5 24,401 17.3
-------- ------- -------- ------- -------- ------- --------- -------
Other income (expense):
Interest income 721 0.8 800 1.1 1,424 0.8 1,447 1.0
Interest expense (48) (0.1) (78) (0.1) (159) 0.0 (98) (0.1)
Transaction related expenses - 0.0 - 0.0 (653) (0.4) - 0.0
Other (29) 0.0 40 0.1 168 0.1 (40) 0.0
-------- ------- -------- ------- -------- ------- --------- -------
Total other 644 0.7 762 1.1 780 0.5 1,309 0.9
-------- ------- -------- ------- -------- ------- --------- -------
Income before income taxes 17,641 20.2 13,252 18.5 32,743 19.0 25,710 18.2
Provision for income taxes (6,757) (7.7) (4,962) (6.9) (12,489) (7.3) (9,703) (6.8)
-------- ------- -------- ------- -------- ------- --------- -------
Net income $ 10,884 12.5% $ 8,290 11.6% $ 20,254 11.7% $ 16,007 11.4%
======== ======= ======== ======= ======== ======= ========= =======
</TABLE>
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Results of Operations (continued)
Revenues
Total revenues for the second quarter of fiscal 1999 increased 21.2% or $15.2
million over the comparable period in fiscal 1998. Of this increase, $10.5
million of the growth resulted from a 26.1% increase in software license fee
revenue, $2.9 million from a 17.7% increase in services revenue and $1.8
million from a 13.0% increase in maintenance fee revenue.
Total revenues for the first half of fiscal 1999 increased 22.9% or $32.2
million over the comparable period in fiscal 1998. Of this increase, $18.0 of
the growth resulted from a 22.9% increase in software license fee revenue,
$10.3 million from a 31.7% increase in services revenue and $4.2 million from
a 15.5% increase in maintenance fee revenue. During the first half 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 $14.0 million in the second quarter of fiscal 1999 compared to
$10.9 million in the second quarter of fiscal 1998. MLF revenue was $26.0
million in the first half of fiscal 1999 compared to $20.4 million in the
first half of fiscal 1998.
The growth in services revenue for the second quarter and first half 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 paragraph above contains forward-looking statements. Accordingly, there
can be no assurance the forward-looking statements will be accurate indicators
of future actual results and it is likely that actual results will differ from
results projected in forward-looking statements. Such differences may be
material.
The increase in maintenance fee revenue for the second quarter and first half
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 second quarter of fiscal 1999 increased 18.0%
or $10.7 million over the comparable period in fiscal 1998. Total operating
expenses for the first half of fiscal 1999 increased 21.2% or $24.6 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 1,945 at March 31, 1998 to 2,288 at March 31, 1999.
The Company's operating margin for the second quarter of fiscal 1999 was 19.5%
as compared to 17.4% for the comparable period in fiscal 1998. Operating
margin for the first half of fiscal 1999 was 18.5% as compared to 17.3% for
the first half 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 $15.2 million in the second quarter of
fiscal 1998 to $21.7 million in the second quarter of fiscal 1999. EBITDA
increased from $29.6 million in the first half of fiscal 1998 to $40.2 million
in the first half 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 second quarter and first half of fiscal 1999
were 38.3% and 38.1%, respectively. This compares to 38.0% for all of fiscal
1998.
As of March 31, 1999, the Company has deferred tax assets of $16.3 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 $5.9 million of the deferred tax assets were more likely than
not to be realized. Accordingly, the Company has recorded a valuation
allowance of $10.4 million as of March 31, 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 March 31, 1999 and 1998, the Company had non-recurring revenue backlog
of $35.3 million and $28.6 million in software license fees, respectively, and
$28.9 million and $24.7 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 March 31, 1999 and 1998, the Company had recurring revenue backlog of
$136.8 million and $103.4 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 March 31, 1999, the Company had working capital of $78.4 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, 1999.
During the six months ended March 31, 1999, the Company's cash flow from
operations amounted to $9.6 million and cash used in investing activities
amounted to $12.0 million. Of the $12.0 million of cash used in investing
activities, $5.1 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, offset
by $2.0 million cash acquired in the purchase of Insession.
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.
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 April 1999, 98% of all of the Company's
licensed software applications are compliant and available to customers. The
remaining applications are expected to be complete during the second calendar
quarter of 1999. 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 most of the
subsidiaries have been replaced and are in production. Replacement or
remediation of accounting systems for the other subsidiaries is currently
underway and is expected to be implemented by June of 1999. The overall IT and
non-IT project is approximately 70% complete. As new IT and non-IT purchases
are made, each is scrutinized and inventoried for Year 2000 compliance. The
Company currently anticipates it will complete its Year 2000 IT and non-IT
compliance efforts by June of 1999.
The majority of the embedded systems on which the Company relies in its day to
day operations around the world are owned and managed by the lessors of the
buildings in which the Company's offices are located, or by agents of such
lessors. The Company has sent letters to its lessors and, as applicable, their
agents requesting certifications of the Year 2000 compliance of the embedded
systems. The Company has received responses from more than half of its lessors
indicating that the systems in the buildings either already are, or are
expected to be before the end of 1999, Year 2000 compliant. Those systems not
owned by and managed by lessors have undergone a similar inventory and
certification gathering. The Company will prioritize systems and develop
necessary test plans based on the further responses it continues to receive,
or not to receive, to its letters.
The Company is developing contingency plans for support of its customers prior
to, during, and following the "Year 2000 weekend". Such plans will
incorporate, but not be limited to, distribution of support personnel in
locations around the world, backup plans for telecommunications, decision and
notification hierarchy, and other infrastructure support. Contingency plans
are presently anticipated to be complete by July of 1999.
Costs. The Company expects to incur project costs of approximately
$10 million over the life of the Year 2000 project. These costs consist of: (i)
internal staff costs related to licensed product remediation and testing;
(ii) internal staff costs related to IT and non-IT compliance; (iii) hardware
and software cost for replacement of IT systems; and (iv) costs related to
non-IT compliance involving embedded systems and consulting services. Cost
incurred from the beginning of the project in 1996 through March 1999 have
totaled approximately $8.0 million. The Company expects to incur an additional
$2.0 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 which are not acting to sufficiently
remediate Year 2000 issues. Some customers outside of the United States have
chosen to concentrate on issues other than the Year 2000. Without
concentrating on the Year 2000 upgrade and testing efforts, such customers
will not be prepared and may require additional support to assist them.
Commercial risks are associated with operating in countries which are not
prepared for the Year 2000.
In each case cited previously, the Company is developing contingency plans to
address each identified risk. In addition, the Company continues to use its
methodology of centralized and distributed management to keep in contact and
monitor progress with customer projects and to communicate at an upper
management level to those customers categorized as "at risk" due to their lack
of progress. The contingency plan being developed by the Company acknowledges
the risk associated with suppliers of material services, hardware vendors
closely related to the operation of the Company's licensed products, the
Company's own licensed products and the ability of the Company to support its
customers. In addition to distributed support methods, the Company is
investigating alternative services, such as telecommunications, as part of the
contingency plan. The (i) inability to timely implement contingency plans, if
deemed necessary and (ii) the cost to implement such plans, may have a
material adverse effect on the Company's results of operations.
Except for statements of existing or historical facts, the foregoing
discussion consists of forward-looking statements and assumptions relating to
forward- looking statements, including without limitation the statements
relating to the timetable for completion of Year 2000 compliance efforts,
future costs, potential problems relating to Year 2000, the Company's state of
readiness, third party representations, and the Company's plans and objectives
for addressing Year 2000 problems. Certain factors could cause actual results
to differ materially from the Company's expectations, including without
limitation (i) the failure of existing or future customers to achieve Year
2000 compliance, (ii) the failure of computer hardware system providers on
which the Company and its customers rely or other vendors or service providers
of the Company or its customers to timely achieve Year 2000 compliance,
(iii) the Company's 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 six month periods ended March 31, 1999. See the Company's Annual Report
on Form 10-K 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 4. Submission of Matters to a Vote of Security Holders
The Registrant's annual meeting of stockholders was held on
February 23, 1999. Each matter voted upon at such meeting
and the number of shares cast for, against or withheld, and
abstained are as follows:
1. Election of Directors
For Withheld
-----------------------
William E. Fisher 25,936,241 23,179
David C. Russell 25,915,881 43,539
Promod Haque 25,934,921 25,171
Charles E. Noell, III 25,934,321 25,099
Jim D. Kever 25,934,921 24,499
Larry G. Fendley 25,927,991 31,429
2. Approval of 1999 Stock Option Plan
For: 20,182,394 Against: 5,733,137
Abstain: 43,889 Broker Non-vote: 0
3. Approval of 1999 Employee Stock Purchase Plan
For: 25,633,015 Against: 284,773
Abstain: 41,632 Broker Non-vote: 0
4. Ratification of Appointment of Arthur Andersen LLP as
Independent Auditors for 1999
For: 25,924,706 Against: 4,898
Abstain: 29,816 Broker Non-vote: 0
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 and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 17, 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> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 62,565
<SECURITIES> 2,345
<RECEIVABLES> 101,167
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 176,012
<PP&E> 20,644
<DEPRECIATION> 2,057
<TOTAL-ASSETS> 296,097
<CURRENT-LIABILITIES> 97,613
<BONDS> 0
0
0
<COMMON> 160
<OTHER-SE> 196,330
<TOTAL-LIABILITY-AND-EQUITY> 296,097
<SALES> 86,951
<TOTAL-REVENUES> 86,951
<CGS> 27,988
<TOTAL-COSTS> 69,954
<OTHER-EXPENSES> (692)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48
<INCOME-PRETAX> 17,641
<INCOME-TAX> 6,757
<INCOME-CONTINUING> 10,884
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,884
<EPS-PRIMARY> .35
<EPS-DILUTED> .34
</TABLE>
