<PAGE>
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 December 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:
32,667,049 shares of Class A Common Stock at February 4, 2000
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of December 31, 1999
and September 30, 1999 3
Condensed Consolidated Statements of Income for the three months
ended December 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the three months
ended December 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10 - 14
Item 3. Quantitative and Qualitative Disclosures about Market Risks 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
</TABLE>
2
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 43,995 $ 70,482
Marketable securities 13,144 8,456
Billed receivables, net 55,516 50,619
Accrued receivables 41,126 41,880
Deferred income taxes 1,228 1,164
Other 9,297 7,215
------------- -------------
Total current assets 164,306 179,816
Property and equipment, net 19,734 20,754
Software, net 24,666 25,835
Intangible assets, net 59,417 61,612
Long-term accrued receivables 30,049 26,850
Investments and notes receivable 3,989 3,569
Deferred income taxes 1,487 97
Other 3,992 4,785
------------- -------------
Total assets $ 307,640 $ 323,318
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 931 $ 501
Accounts payable 6,868 8,030
Accrued employee compensation 4,632 7,192
Accrued liabilities 15,830 18,287
Income taxes 4,733 8,521
Deferred revenue 58,743 54,627
------------- -------------
Total current liabilities 91,737 97,158
Long-term debt 918 991
------------- -------------
Total liabilities 92,655 98,149
------------- -------------
Stockholders' equity:
Class A Common Stock 163 163
Additional paid-in capital 162,608 161,630
Retained earnings 81,539 82,922
Treasury stock, at cost (27,593) (14,250)
Accumulated other comprehensive income (1,732) (5,296)
------------- -------------
Total stockholders' equity 214,985 225,169
------------- -------------
Total liabilities and stockholders' equity $ 307,640 $ 323,318
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS,EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-----------------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Revenues:
Software license fees $ 35,253 $ 46,077
Maintenance fees 16,685 15,567
Services 15,073 23,295
Hardware, net 106 1,131
----------------- -----------------
Total revenues 67,117 86,070
----------------- -----------------
Expenses:
Cost of software license fees 10,825 11,822
Cost of maintenance and services 16,792 20,293
Research and development 8,460 8,198
Selling and marketing 17,561 15,978
General and administrative costs 14,638 14,368
Amortization of goodwill and purchased
intangibles 2,177 445
----------------- -----------------
Total expenses 70,453 71,104
----------------- -----------------
Operating income (loss) (3,336) 14,966
----------------- -----------------
Other income (expense):
Interest income 947 703
Interest expense (63) (111)
Transaction related expenses - (653)
Other 183 197
----------------- -----------------
Total other 1,067 136
------------------ ------------------
Income (loss) before income taxes (2,269) 15,102
Provision for income taxes 886 (5,732)
----------------- -----------------
Net income (loss) $ (1,383) $ 9,370
================= ================
Earnings Per Share Data:
Basic:
Net income (loss) $ (0.04) $ 0.30
================= ================
Average shares outstanding 32,039 30,938
================= ================
Diluted:
Net income (loss) $ (0.04) $ 0.30
================= ================
Average shares outstanding 32,039 31,727
================= ================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended December 31,
----------------------------------------
1999 1998
--------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,383) $ 9,370
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 2,053 1,927
Amortization 5,130 1,587
Changes in operating assets and liabilities:
Billed and accrued receivables (7,683) (8,914)
Other current and noncurrent assets (2,961) 353
Accounts payable (1,200) (2,474)
Deferred revenue 3,898 5,091
Other current liabilities (6,214) 1,288
------------- ----------
Net cash provided by (used in) operating activities (8,360) 8,228
------------- ----------
Cash flows from investing activities:
Purchases of property and equipment (1,104) (1,014)
Purchases of software (1,581) (1,969)
Acquisition of businesses, net of cash acquired (3,053) (7,062)
Additions to investment and notes receivable (420) (602)
------------- ----------
Net cash used in investing activities (6,158) (10,647)
------------- ----------
Cash flows from financing activities:
Proceeds from issuance of Class A Common Stock 461 322
Proceeds from exercise of stock options 375 926
Purchase of Class A Common Stock (13,343) -
Changes in long-term debt, net 357 (577)
------------- ----------
Net cash provided by (used in) financing activities (12,150) 671
------------- ----------
Effect of exchange rate fluctuations on cash 181 127
------------- ----------
Decrease in cash and cash equivalents (26,487) (1,621)
Cash and cash equivalents, beginning of period 70,482 63,648
------------- ----------
Cash and cash equivalents, end of period $ 43,995 62,027
============= ==========
</TABLE>
See notes to condensed consolidated finncial statements.
5
<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 products are used principally by financial institutions, retailers
and third-party processors, both in domestic and international markets.
The condensed consolidated financial statements at December 31, 1999 and for the
three months ended December 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, 1999. The results of operations for the three months ended
December 31, 1999 are not necessarily indicative of the results for the entire
fiscal year ending September 30, 2000.
2. COMPREHENSIVE INCOME
In fiscal 1999, the Company adopted SFAS 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 other comprehensive income were as
follows (in thousands):
<TABLE>
<CAPTION>
Three months ended
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Net income (loss) $ (1,383) $ 9,370
Other comprehensive income (loss):
Unrealized investment holding gain (loss) 4,687 (467)
Foreign currency translation adjustments (1,123) (504)
------ -----
Comprehensive income $ 2,181 $ 8,399
----- -----
</TABLE>
The Company's components of accumulated other comprehensive income at each
balance sheet date were as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
---- ----
<S> <C> <C>
Unrealized investment holding gain (loss) $ 1,644 $ (3,043)
Foreign currency translation adjustments (3,376) (2,253)
-------- ---------
$(1,732) $ (5,296)
------- --------
</TABLE>
6
<PAGE>
3. REVENUE RECOGNITION
Beginning in fiscal 1999, the Company adopted American Institute of Certified
Public Accountants Statement of Position 97-2, "Software Revenue Recognition"
(SOP 97-2). The Company has concluded that for certain software arrangements
entered into after October 1, 1998 with extended guaranteed payment terms, the
"fixed or determinable" presumption of SOP 97-2 has been overcome and software
license fees should be recognized upon meeting all other SOP 97-2 revenue
recognition criteria ("guaranteed software license fees"). The present value of
the guaranteed software license fees recognized during the three months ended
December 31, 1999 and 1998 totaled $5.1 million and $6.7 million, respectively.
The discount rates used to determine the present value of the guaranteed
software license fees, representing the Company's incremental borrowing rates,
ranged from 9.5% to 10.25%. The portion of the guaranteed software license fees
that has been recognized by the Company, but not yet billed, is reflected in
accrued receivables in the accompanying consolidated balance sheets.
4. EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of
shares outstanding during the period. Diluted earnings per share is computed on
the basis of the weighted average number of common shares outstanding plus the
dilutive effect of outstanding stock options using the "treasury stock" method.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three months ended
December 31,
------------
(in thousand, except per share data)
<S> <C> <C>
1999 1998
---- ----
Net income (loss) $ (1,383) $ 9,370
-------- --------
Weighted average shares outstanding 32,039 30,938
Dilutive effect of stock options -- 789
-------- --------
Dilutive shares outstanding 32,039 31,727
-------- --------
Basic earnings per share $ (0.04) $ 0.30
-------- --------
Diluted earnings per share $ (0.04) $ 0.30
-------- --------
</TABLE>
The effect of stock options have not been included in the dilutive earnings per
share calculation for the three months ended December 31, 1999 since the effect
is anti-dilutive. If the effect had not been anti-dilutive, approximately
517,000 shares would have been added to arrive at dilutive earnings per share
for the three months ended December 31, 1999. For the three months ended
December 31, 1999 and 1998, weighted average shares from stock options of
1,353,510 and 37,935, respectively have been excluded from the computation of
diluted earnings per share because the exercise price of the stock options were
greater than the average market price of the common shares.
5. SEGMENT INFORMATION
The Company has a single operating segment encompassing the development,
marketing, installation and technical support of a broad line of software
products and services primarily focused on facilitating electronic payments and
electronic commerce. The Company's chief operating decision makers review
financial information, presented on a consolidated basis, accompanied by
disaggregated information about revenue and contribution margin by product, as
organized into four line-of-business groups, and revenue and contribution margin
by geographic area.
7
<PAGE>
The Company's four line-of-business groups are Consumer Banking, Corporate
Banking, System Solutions and Retail Solutions. Products are developed by the
line-of-business groups and are sold and supported through three distribution
networks covering the geographic areas of the Americas, Europe/Middle
East/Africa (EMEA) and Asia/Pacific. The Company allocates resources to and
evaluates performance of its lines-of-business groups and geographic areas
based upon revenue and contribution margin.
The following is revenues and contribution margin for the Company's four
lines-of-business groups for the three months ended December 31, 1999 and
1998:
<TABLE>
<CAPTION>
Three months ended
December 31,
1999 1998
---- ----
<S> <C> <C>
Revenues:
Consumer Banking $ 40,904 $ 58,332
Corporate Banking 7,642 8,128
System Solutions 12,775 15,420
Retail Solutions 5,796 4,190
----------------------
$ 67,117 $ 86,070
======================
Contribution margin from lines-of-business groups:
Consumer Banking $ 31,826 $ 49,276
Corporate Banking 2,138 2,311
System Solutions 7,249 13,112
Retail Solutions 4,314 2,982
----------------------
$ 45,527 $ 67,681
======================
Profit Reconciliation:
Contribution margin for line-of-business groups $ 45,527 $ 67,681
Direct costs for geographic areas:
Americas (17,677) (22,257)
EMEA (16,102) (17,252)
Asia/Pacific (4,353) (5,228)
Corporate expenses (10,731) (7,978)
----------------------
Operating income (loss) $ (3,336) $ 14,966
======================
</TABLE>
The Company does not track assets by line-of-business group. The
following is revenue, contribution margin and long-lived assets for the
Company's three geographic areas for the three months ended December 31, 1999
and 1998:
8
<PAGE>
<TABLE>
<CAPTION>
Three months ended
December 31,
1999 1998
---- ----
<S> <C> <C>
Revenues:
United States $ 30,822 $ 42,711
Americas - other 8,866 8,625
-------- --------
Total Americas 39,688 51,336
EMEA 20,222 27,709
Asia/Pacific 7,207 7,025
----------------------
$ 67,117 $ 86,070
======================
Contribution from geographic areas:
Total Americas $ 22,011 $ 29,079
EMEA 4,121 10,457
Asia/Pacific 2,854 1,797
----------------------
$ 28,986 $ 41,333
======================
Profit Reconciliation:
Contribution margin for geographic regions $ 28,986 $ 41,333
Direct costs for lines-of-business groups:
Consumer Banking (9,078) (9,056)
Corporate Banking (5,504) (5,817)
System Solutions (5,527) (2,308)
Retail Solutions (1,482) (1,208)
Corporate expenses (10,731) (7,978)
----------------------
Operating income (loss) $ (3,336) $ 14,966
======================
December 31, September 30,
1999 1999
----------- ------------
Long-lived assets
Americas $ 99,568 $103,425
EMEA 10,699 11,520
Asia/Pacific 1,531 1,620
----------------------
$111,798 $116,565
======================
</TABLE>
No single customer accounted for more than 10% of the Company's consolidated
revenue during the three months ended December 31, 1999 and 1998.
9
<PAGE>
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:
<TABLE>
<CAPTION>
Three Months Ended December 31,
-----------------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
% of % of
Amount Revenue Amount Revenue
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Software license fees $ 35,253 52.5 % $ 46,077 53.5 %
Maintenance fees 16,685 24.9 15,567 18.1
Services 15,073 22.5 23,295 27.1
Hardware, net 106 0.2 1,131 1.3
------------- ------------- ------------- -------------
Total revenues 67,117 100.0 86,070 100.0
------------- ------------- ------------- -------------
Expenses:
Cost of software license fees 10,825 16.1 11,822 13.7
Cost of maintenance and services 16,792 25.0 20,293 23.6
Research and development 8,460 12.6 8,198 9.5
Selling and marketing 17,561 26.2 15,978 18.6
General and administrative costs 14,638 21.8 14,368 16.7
Amortization of goodwill and purchased
intangibles 2,177 3.2 445 0.5
------------- ------------- ------------- -------------
Total expenses 70,453 105.0 71,104 82.6
------------- ------------- ------------- -------------
Operating income (loss) (3,336) (5.0) 14,966 17.4
------------- ------------- ------------- -------------
Other income (expense):
Interest income 947 1.4 703 0.8
Interest expense (63) (0.1) (111) (0.1)
Transaction related expenses 0 0.0 (653) (0.8)
Other 183 0.3 197 0.2
------------- ------------- ------------- -------------
Total other 1,067 1.6 136 0.2
------------- ------------- ------------- -------------
Income (loss) before income taxes (2,269) (3.4) 15,102 17.5
Provision for income taxes 886 1.3 (5,732) (6.7)
------------- ------------- ------------- -------------
Net income (loss) $ (1,383) (2.1) % $ 9,370 10.9 %
============= ============== ============== =============
</TABLE>
10
<PAGE>
REVENUES
Total revenues for the first quarter of fiscal 2000 decreased 22.0% or $19.0
million over the comparable period in fiscal 1999. Of this decrease, $10.8
million of the shortfall resulted from a 23.5% decrease in software license
fee revenue, $8.2 million from a 35.3% decrease in services revenue offset by
a 7.2% or $1.1 million increase in maintenance fee revenue. During the first
quarter of fiscal 2000, 54% of total revenues resulted from international
operations as compared to 53% for all of fiscal 1999.
During the first quarter of fiscal 2000, the Company's large bank and
merchant customers and potential new customers, in effect, locked down their
systems in preparation for the Year 2000. This Year 2000 lock-down had a
negative impact on the Company's software license fee and services revenue
for the first quarter of fiscal 2000 due to the less than expected demand by
the Company's customers and potential new customers to upgrade and enhance
their current systems.
Although the Company believes overall demand for the Company's products and
services appear to be returning to normal levels, the Year 2000 lock-down
described above may have caused a temporary interruption in the Company's
normal sales cycle and therefore may have a negative impact on the Company's
revenue and net income beyond the first quarter of fiscal 2000. The Company
also believes customer demand for system upgrades and enhancements will be
slow to return to normal levels, as many of the Company's customers
previously upgraded and enhanced their systems prior to the Year 2000.
Monthly License Fees (MLF) revenue, a component of software license fees, was
$14.7 million in the first quarter of fiscal 2000 compared to $12.0 million
in the first quarter of fiscal 1999. The increase in maintenance fee revenue
for the first quarter of fiscal 2000 is a result of continued growth during
fiscal 1999 of the installed base of the Company's products.
EXPENSES
Total operating expenses for the first quarter of fiscal 2000 decreased 1.0%
or $651,000 from the comparable period in fiscal 1999. The decrease is due to
a decrease in employees and contractors required to support the demand for
the Company's products and services. Total staff (including both employees
and independent contractors) decreased from 2,260 at December 31, 1998 to
2,114 at December 31, 1999. The decrease in staff was due in part to the sale
of US Processing, Inc. in September 1999 which had approximately 50 staff.
INCOME TAXES
The effective tax rate for the first quarter of fiscal 2000 and 1999 was
39.0% and 38.0% respectively. The increase in the effective tax rate for the
first quarter of fiscal 2000 is due primarily to the amortization of goodwill
and software related to the Insession, Inc. and SDM International, Inc.
acquisitions which are non deductible for tax purposes.
As of December 31, 1999, the Company has deferred tax assets of $17.1 million
and deferred tax liabilities of $5.4 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 $8.2 million of the deferred tax assets were more
likely than not to be realized. Accordingly, the Company has recorded a
valuation allowance of $8.9 million as of December 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 reduced.
BACKLOG
As of December 31, 1999 and 1998, the Company had non-recurring revenue
backlog of $27.5 million and $35.5 million in software license fees,
respectively, and $34.9 million and $32.2 million in services, respectively.
The Company includes in its non-recurring revenue backlog all fees specified
in contracts which have been executed by the Company 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.
11
<PAGE>
As of December 31, 1999 and 1998, the Company had recurring revenue backlog
of $141.8 million and $131.2 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
At December 31, 1999, the Company's principal sources of liquidity consisted
of $44.0 million of cash and cash equivalents, as compared to $70.5 million
at September 30, 1999.
The Company's net cash flows used in operating activities for the first
quarter of fiscal 2000 amounted to $8.4 million. This compares to $8.2
million in net cash flows provided by operating activities for the first
quarter of fiscal 1999. The decrease of $16.6 million in the first quarter of
fiscal 2000 is principally due to lower net income, a decrease in other
current liabilities offset by an increase in amortization expense due to the
acquisitions of Insession, Inc. in March 1999 and SDM International, Inc. in
July 1999. An important contributor to the cash management program is the
Company's factoring of accrued receivables, whereby interest in its
receivables are transferred (on a non-recourse basis) to third party
financial institutions in exchange for cash. During the first quarter of
fiscal 2000 and 1999, the Company generated operating cash flows from the
factoring of accrued receivables of $4.5 million and $7.9 million,
respectively.
The Company's net cash flows used in investing activities totaled $6.2
million and $10.6 million in the first quarter of fiscal 2000 and 1999,
respectively. This decrease is due to a decrease in cash used for
acquisitions. Cash used in investing activities in the first quarter of
fiscal 2000 of $3.0 million related to acquisition of businesses is the
Company's final payment related to the acquisition of Insession, Inc. In each
period, the Company made significant investments in computer equipment and
software. The Company expects to continue to invest in such items to support
its growth.
In fiscal 1999, the Company's Board of Directors approved the repurchase of
up to 2,000,000 shares of Common Stock through February 2000. The purpose of
the stock repurchase program is to replace the shares issued in the SDM
acquisition completed in July 1999, and to fund a reserve for shares for
future employee stock option grants, acquisitions or other corporate
purposes. Under this repurchase program, the Company purchased 500,300 shares
at an average cost of $26.67 for approximately $13.3 million during the first
quarter of fiscal 2000. The total number of shares purchased under the stock
repurchase program to date amounts to 975,300 shares. The Company used cash
available to fund the Common Stock repurchases.
Management believes that the Company's working capital and cash flow
generated from operations will be 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.
12
<PAGE>
The Company's Year 2000 program was described in the Company's 1999 Form
10-K. This program was substantially completed prior to the end of the first
quarter of fiscal 2000. Since entering the year 2000, the Company is not
aware of any significant Year 2000-related compliance problems pertaining to
its products. Through January 2000, the Company has incurred total project
costs of approximately $10 million.
The Company is not aware of any significant Year 2000-related disruptions
impacting its customers. 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 the IT and non-IT systems, remediation and replacement has
been substantially completed in the most critical areas. The Company is not
aware of any significant Year 2000-related disruptions caused by the
Company's IT and non-IT systems. As new IT and non-IT purchases are made,
each is scrutinized and inventoried for Year 2000 compliance.
The Company's business operations are heavily dependent on third parties such
as 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. Through January 2000, the Company's key third party system and
service providers have not reported any significant Year 2000 compliance
problems. However, because the Company's continued Year 2000 compliance in
calendar 2000 is in part dependent on the continued Year 2000 compliance of
third parties, there can be no assurance that the Company's efforts alone
have resolved all Year 2000 issues or that key third parties will not
experience Year 2000 compliance failures.
The Company's products 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. Through January 2000, the Company is not aware of any significant
Year 2000-related disruptions caused by third party or customer developed
software used in conjunction with the Company's software products.
The Company has developed contingency plans to address each identified risk.
The contingency plan 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's contingency plans address alternative
services, such as telecommunications. 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.
The impact of Year 2000 on the results of operations of the Company is
described above. See Management's Discussion and Analysis of Financial
Condition - Revenue.
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 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
13
<PAGE>
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 successfully implement the contingency plan
or any inadequacy of the contingency plan to the extent Year 2000 compliance
is not achieved.
The statements in this report regarding future results are preliminary and
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition, this report contains other
forward-looking statements including statements regarding the Company's
expectations, plans and beliefs. The forwarding-looking statements in this
report are subject to a variety of risks and uncertainties. Actual results
could differ materially. Factors that could cause actual results to differ
include but are not limited to those described above and the following:
- That the Company will continue to derive a substantial
majority of its total revenue from licensing its BASE24 family
of software products and providing services and maintenance
related to those products. Any reduction in demand for, or
increase in competition with respect to, BASE24 products would
have a material adverse effect on TSA's financial condition
and results of operations.
- That the Company's business is concentrated in the banking
industry, making it susceptible to a downturn in that
industry.
- Fluctuations in quarterly operating results may result in
volatility in TSA's stock price. No assurance can be given
that operating results will not vary.
- TSA's stock price may be volatile, in part due to external
factors such as announcements by third parties or competitors,
inherent volatility in the high-technology sector and changing
market conditions in the industry.
For a detailed discussion of these and other risk factors, interested parties
should review the Company's filings with the Securities and Exchange Commission,
including Exhibit 99.01 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company's market risk for the three
month period ended December 31, 1999. See the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1999 for additional discussion
regarding quantitative and qualitative disclosure about market risk.
14
<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. The United States District Court for the
Southern District of California, San Diego division, has denied a request by
the Company and ACI Worldwide to have the San Diego lawsuit transferred to
Rhode Island and consolidated with the proceedings there. The Company and ACI
Worldwide have filed a Mandamus Petition with the Federal Circuit Court
seeking to have this order reversed. 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
15
<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: February 14, 2000
TRANSACTION SYSTEMS ARCHITECTS, INC
(Registrant)
/S/ DWIGHT G. HANSON
---------------------------------------
Dwight G. Hanson
Vice President of Finance
(Principal Accounting Officer)
16
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
27. FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<CIK> 0000935036
<NAME> TRANSACTION SYSTEMS ARCHITECTS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 43,995
<SECURITIES> 13,144
<RECEIVABLES> 103,163
<ALLOWANCES> (6,521)
<INVENTORY> 0
<CURRENT-ASSETS> 164,306
<PP&E> 19,734
<DEPRECIATION> 0
<TOTAL-ASSETS> 307,640
<CURRENT-LIABILITIES> 91,737
<BONDS> 0
0
0
<COMMON> 163
<OTHER-SE> 214,822
<TOTAL-LIABILITY-AND-EQUITY> 307,640
<SALES> 67,117
<TOTAL-REVENUES> 67,117
<CGS> 27,617
<TOTAL-COSTS> 70,453
<OTHER-EXPENSES> (1,130)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> (2,269)
<INCOME-TAX> 886
<INCOME-CONTINUING> (1,383)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,383)
<EPS-BASIC> (.04)
<EPS-DILUTED> (.04)
</TABLE>
