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, 2000
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:
32,992,959 shares of Class A Common Stock at May 8, 2000
<PAGE>
TRANSACTION SYSTEMS ARCHITECTS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
TABLE OF CONTENTS
Page
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of
March 31, 2000 and September 30, 1999 3
Condensed Consolidated Statements of Income for the
three and six months ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for
the six months ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Index to Exhibits 15
<PAGE>
<TABLE>
<CAPTION>
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands)
March 31, September 30,
2000 1999
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 40,801 $ 70,482
Marketable securities 24,141 8,456
Billed receivables, net 51,943 50,619
Accrued receivables 44,534 41,880
Refundable income taxes 4,806 -
Deferred income taxes - 1,164
Other 11,409 7,215
------------ ------------
Total current assets 177,634 179,816
Property and equipment, net 19,679 20,754
Software, net 25,969 25,835
Intangible assets, net 57,569 61,612
Long-term accrued receivables 23,614 26,850
Investments and notes receivable 4,650 3,569
Deferred income taxes 2,438 97
Other 6,166 4,785
------------ ------------
Total assets $ 317,719 $ 323,318
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 718 $ 501
Accounts payable 10,424 8,030
Accrued employee compensation 4,582 7,192
Accrued liabilities 15,295 18,287
Deferred income taxes 3,689 -
Income taxes - 8,521
Deferred revenue 56,438 54,627
------------ ------------
Total current liabilities 91,146 97,158
Long-term debt 851 991
------------ ------------
Total liabilities 91,997 98,149
------------ ------------
Stockholders' equity:
Class A Common Stock 164 163
Additional paid-in capital 165,602 161,630
Retained earnings 83,090 82,922
Treasury stock, at cost (27,593) (14,250)
Accumulated other comprehensive income 4,459 (5,296)
------------ ------------
Total stockholders' equity 225,722 225,169
------------ ------------
Total liabilities and stockholders' equity $ 317,719 $ 323,318
============ ============
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 March 31, Six Months Ended March 31,
------------------------------- ---------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Software license fees $ 46,508 $ 50,552 $ 81,761 $ 96,629
Maintenance fees 17,204 15,996 33,889 31,563
Services 11,677 19,309 26,856 42,604
Hardware, net - 1,094 - 2,225
------------ ------------ ------------ ------------
Total revenues 75,389 86,951 142,506 173,021
------------ ------------ ------------ ------------
Expenses:
Cost of software license fees 11,084 9,950 21,909 21,772
Cost of maintenance and services 17,264 18,038 34,056 38,331
Research and development 9,968 8,538 18,428 16,736
Selling and marketing 18,204 17,348 35,765 33,326
General and administrative costs 15,159 14,976 29,797 29,345
Amortization of goodwill and
purchased intangibles 1,758 1,104 3,935 1,548
------------ ------------ ------------ ------------
Total expenses 73,437 69,954 143,890 141,058
------------ ------------ ------------ ------------
Operating income (loss) 1,952 16,997 (1,384) 31,963
------------ ------------ ------------ ------------
Other income (expense):
Interest income 717 721 1,664 1,424
Interest expense (72) (48) (135) (159)
Transaction related expenses - - - (653)
Other (51) (29) 132 168
------------ ------------ ------------ ------------
Total other 594 644 1,661 780
------------ ------------ ------------ ------------
Income before income taxes 2,546 17,641 277 32,743
Provision for income taxes (995) (6,757) (109) (12,489)
------------ ------------ ------------ ------------
Net income $ 1,551 $ 10,884 $ 168 $ 20,254
============ ============ ============ ============
Earnings Per Share Data:
Basic:
Net income $ 0.05 $ 0.35 $ 0.01 $ 0.65
============ ============ ============ ============
Average shares outstanding 31,707 31,440 31,873 31,189
============ ============ ============ ============
Diluted:
Net income $ 0.05 $ 0.34 $ 0.01 $ 0.63
============ ============ ============ ============
Average shares outstanding 32,172 32,265 32,364 31,996
============ ============ ============ ============
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)
Six months ended March 31,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 168 $ 20,254
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 4,079 3,984
Amortization 10,026 4,263
Changes in operating assets and liabilities:
Billed and accrued receivables (1,083) (9,630)
Other current and noncurrent assets (12,130) (8,212)
Accounts payable 2,356 (1,516)
Deferred revenue 1,593 6,883
Other current liabilities (11,422) (6,385)
------------ ------------
Net cash provided by (used in) operating activities (6,413) 9,641
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (3,368) (2,796)
Purchases of software (5,670) (3,526)
Acquisition of businesses, net of cash acquired (3,053) (5,065)
Additions to investment and notes receivable (1,081) (602)
------------ ------------
Net cash used in investing activities (13,172) (11,989)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of Class A Common Stock 931 755
Proceeds from exercise of stock options 1,661 1,665
Purchase of Class A Common Stock (13,343) -
Changes in long-term debt, net 77 (1,168)
------------ ------------
Net cash provided by (used in) financing activities (10,674) 1,252
------------ ------------
Effect of exchange rate fluctuations on cash 578 13
------------ ------------
Decrease in cash and cash equivalents (29,681) (1,083)
Cash and cash equivalents, beginning of period 70,482 63,648
------------ ------------
Cash and cash equivalents, end of period $ 40,801 $ 62,565
============ ============
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 or acts as a sales agent
for 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 March 31, 2000 and for the
three and six months ended March 31, 2000 and 1999 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
and six months ended March 31, 2000 are not necessarily indicative of the
results for the entire fiscal year ending September 30, 2000.
2. Comprehensive Income
The Company's components of other comprehensive income were as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Income $ 1,551 $ 10,884 $ 168 $ 20,254
Other Comprehensive income:
Unrealized investment holding gain 6,080 625 10,767 157
Foreign currency translation adjustments 111 (1,387) (1,012) (1,890)
------------ ------------ ------------ ------------
Comprehensive Income $ 7,742 $ 10,122 $ 9,923 $ 18,521
============ ============ ============ ============
</TABLE>
Components of accumulated other comprehensive income at each balance sheet
date were as follows (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
------------ -------------
<S> <C> <C>
Unrealized investment holding gain (loss) $ 7,724 $ (3,043)
Foreign currency translation adjustments (3,265) (2,253)
------------ -------------
$ 4,459 $ (5,296)
============ =============
</TABLE>
As of May 10, 2000, the fair value of the marketable securities declined from
$24.1 million at March 31, 2000 to approximately $12.7 million.
3. Revenue Recognition
The Company accounts for revenue in accordance with 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 March 31, 2000 and 1999 totaled $5.4 million and $11.9
million, respectively. The present value of the guaranteed software license
fees recognized during the six months ended March 31, 2000 and 1999 totaled
$10.5 million and $18.6 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
11.0%. 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 condensed consolidated balance sheets.
4. Earnings Per Share
Basic earnings per share is computed 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 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Income $ 1,551 $ 10,884 $ 168 $ 20,254
============ ============ ============ ============
Weighted average shares outstanding 31,707 31,440 31,873 31,189
Dilutive effect of stock options 465 825 491 807
------------ ------------ ------------ ------------
Dilutive shares outstanding 32,172 32,265 32,364 31,996
------------ ------------ ------------ ------------
Basic earnings per share $ 0.05 $ 0.35 $ 0.01 $ 0.65
============ ============ ============ ============
Diluted earnings per share $ 0.05 $ 0.34 $ 0.01 $ 0.63
============ ============ ============ ============
</TABLE>
For the three months ended March 31, 2000 and 1999, stock options representing
1,366,291 and 19,763 shares of the Company's common stock, respectively, have
been excluded from the computation of diluted earnings per share as the
exercise price of the stock options were greater than the average market price
of the common stock. For the six months ended March 31, 2000 and 1999, stock
options representing 1,349,679 and 17,629 shares of the Company's common
stock, respectively, have been excluded from the computation of diluted
earnings per share as the exercise price of the stock options were greater
than the average market price of the common stock.
5. Segment Information
During the second quarter of fiscal 2000, the Company announced the formation
of six new business units organized on the basis of the Company's products and
services. As a result, the Company has changed from reporting one segment in
its annual report on Form 10-K for the fiscal year ended September 30, 1999 to
reporting six segments. These reportable segments are: Consumer Banking,
Corporate Banking e-Payments, Electronic Business Infrastructure, Internet
Banking, Electronic Commerce and Health Claims Transaction Processing and
Management. A summary of the products and related services associated with
each reportable segment is as follows:
o Consumer Banking products focus on the consumer side of financial
institutions related to automated teller machine (ATM) networks,
point-of-sale deployments, branch networks, home banking, fraud
detection and back-office payments management.
o Corporate Banking e-Payments products offer electronic commerce and
electronic payments solutions to corporate banking institutions.
o Electronic Business Infrastructure products facilitate communication,
data movement, transaction processing and systems monitoring across
incompatible computing systems involving mainframes, distributed
computing networks and the Internet.
o Internet Banking products offer banking and bill payments solutions
to large financial institutions as well as small community banks.
o Electronic Commerce products offer retailers, merchant banks and
payment processors electronic payment solutions such as secure
web-based payments, debit and credit transaction authorization, fraud
management and targeted marketing programs.
o Health Claims Transaction Processing and Management allow large
companies and healthcare payment processors to automate claims
eligibility determination, claims capture and claims payments.
In evaluating segment performance, management focuses on income from
operations. The table below presents revenues and operating income for each
reportable segment.
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
------------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Segment revenues:
Consumer Banking $ 45,959 $ 59,834 $ 84,520 $ 113,530
Corporate Banking e-Payments 9,609 7,262 17,250 15,390
Electronic Business Infrastructure 11,290 8,989 22,166 20,912
Internet Banking 2,178 2,806 6,131 5,176
Electronic Commerce 5,492 7,027 10,694 16,062
Health Claims Transaction Processing and Management 861 1,033 1,745 1,951
------------ ------------ ------------ ------------
Total consolidated revenue $ 75,389 $ 86,951 $ 142,506 $ 173,021
============ ============ ============ ============
Segment operating income (loss):
Consumer Banking $ 2,233 $ 17,074 $ (798) $ 28,465
Corporate Banking e-Payments 1,206 (1,376) 498 (1,879)
Electronic Business Infrastructure 2,428 957 4,212 2,314
Internet Banking (570) 639 324 887
Electronic Commerce (3,280) (442) (5,595) 1,818
Health Claims Transaction Processing and Management (65) 145 (25) 358
------------ ------------ ------------ ------------
Total consolidated operating income (loss) $ 1,952 $ 16,997 $ (1,384) $ 31,963
============ ============ ============ ============
</TABLE>
The Company currently does not track total assets and expenditures for
long-lived assets separately for each reportable segment.
Revenue and identifiable assets by geographic area are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
-------------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
United States $ 35,240 $ 40,908 $ 66,062 $ 83,619
Americas - other 8,310 11,334 17,176 19,959
------------ ------------ ------------- ------------
Total Americas 43,550 52,242 83,238 103,578
EMEA 24,584 25,715 44,806 53,424
Asia/Pacific 7,255 8,994 14,462 16,019
------------ ------------ ------------- ------------
$ 75,389 $ 86,951 $ 142,506 $ 173,021
============ ============ ============= ============
March 31, September 30,
2000 1999
------------ -------------
Long-lived assets
Americas $ 100,707 $ 103,425
EMEA 11,889 11,520
Asia/Pacific 1,437 1,620
------------ -------------
$ 114,033 $ 116,565
============ =============
</TABLE>
6. Accounting Pronouncements Issued But Not Yet Effective
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements". The
Company will be required to adopt SAB 101 for fiscal 2001. SAB 101 requires,
among other things, that license and other up-front fees be recognized over the
term of the agreement, unless the fees are in exchange for products delivered or
services performed that represent the culmination of a separate earnings
process. The Company does not expect this change in accounting principle to have
a material effect on the Company's financial position and results of operation.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25". The Interpretation
clarifies the application of APB Opinion No. 25 for certain issues involving
employee stock compensation. The Interpretation is generally effective July 1,
2000. Adoption of this Interpretation is not expected to have a significant
effect on the Company's consolidated financial statements.
<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 March 31, Six Months Ended March 31,
---------------------------------------------- ---------------------------------------------
2000 1999 2000 1999
--------------------- --------------------- --------------------- ---------------------
% of % of % of % of
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
---------- --------- ---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Software license fees $ 46,508 61.7 % $ 50,552 58.1 % $ 81,761 57.4 % $ 96,629 55.9 %
Maintenance fees 17,204 22.8 15,996 18.4 33,889 23.8 31,563 18.2
Services 11,677 15.5 19,309 22.2 26,856 18.8 42,604 24.6
Hardware, net - 0.0 1,094 1.3 - 0.0 2,225 1.3
---------- --------- ---------- --------- ---------- -------- --------- ---------
Total revenues 75,389 100.0 86,951 100.0 142,506 100.0 173,021 100.0
---------- --------- ---------- --------- ---------- -------- --------- ---------
Expenses:
Cost of software license fees 11,084 14.7 9,950 11.4 21,909 15.4 21,772 12.6
Cost of maintenance and services 17,264 23.0 18,038 20.7 34,056 23.9 38,331 22.1
Research and development 9,968 13.2 8,538 9.8 18,428 12.9 16,736 9.7
Selling and marketing 18,204 24.1 17,348 20.0 35,765 25.1 33,326 19.2
General and administrative costs 15,159 20.1 14,976 17.2 29,797 20.9 29,345 17.0
Amortization of goodwill and
purchased intangibles 1,758 2.3 1,104 1.4 3,935 2.8 1,548 0.9
---------- --------- ---------- --------- --------- -------- --------- ---------
Total expenses 73,437 97.4 69,954 80.5 143,890 101.0 141,058 81.5
---------- --------- ---------- --------- --------- -------- --------- ---------
Operating income (loss) 1,952 2.6 16,997 19.5 (1,384) (1.0) 31,963 18.5
---------- --------- ---------- --------- --------- -------- --------- ---------
Other income (expense):
Interest income 717 1.0 721 0.8 1,664 1.2 1,424 0.8
Interest expense (72) (0.1) (48) (0.1) (135) (0.1) (159) 0.0
Transaction related expenses - 0.0 - 0.0 - 0.0 (653) (0.4)
Other (51) (0.1) (29) (0.0) 132 0.1 168 0.1
---------- --------- ---------- --------- --------- --------- --------- ---------
Total other 594 0.8 644 0.7 1,661 1.2 780 0.5
---------- --------- ---------- --------- --------- --------- --------- ---------
Income before income taxes 2,546 3.4 17,641 20.2 277 0.2 32,743 19.0
Provision for income taxes (995) (1.3) (6,757) (7.7) (109) (0.1) (12,489) (7.3)
---------- --------- ---------- --------- --------- -------- --------- ---------
Net income $ 1,551 2.1 % $ 10,884 12.5 % $ 168 0.1 % $ 20,254 11.7 %
========== ========= ========== ========= ========= ======== ========= ========
</TABLE>
<PAGE>
Revenues
Total revenues for the second quarter of fiscal 2000 decreased 13.3% or $11.6
million from the comparable period in fiscal 1999. Of this decrease, $4.0
million resulted from an 8.0% decrease in software license fee revenue, $7.6
million from a 40.0% decrease in services revenue, $1.1 million from a 100%
decrease in hardware revenue, offset by a $1.2 million, or 7.6%, increase in
maintenance fee revenue.
Total revenues for the first half of fiscal 2000 decreased 17.6% or $30.5
million from the comparable period in fiscal 1999. Of this decrease, $14.9
million resulted from a 15.4% decrease in software license fee revenue, $15.7
million from a 37% decrease in services revenue, $2.2 million from a 100%
decrease in hardware revenue, offset by a $2.3 million, or 7.4%, increase in
maintenance fee revenue. During the first half of fiscal 2000, 54% of total
revenues resulted from international operations as compared to 52% 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 has had a negative
impact on the Company's software license fee and services revenue during the
first half 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. In addition, coming out of the Year 2000 cutover, the Company found its
customers increasingly scrutinizing their information technology purchases which
led to further delays in software and services purchases as compared to activity
in the second quarter of fiscal 1999.
The Company believes overall demand for the Company's products and services
appears to be increasing at a gradual pace, however, the Year 2000 lock-down
described above interrupted the Company's normal sales cycle and therefore may
have a negative impact on the Company's revenue and net income beyond the first
half of fiscal 2000. The Company also believes customer demand for system
upgrades and enhancements will be slow to return to normal growth levels, as
many of the Company's customers previously upgraded and enhanced their systems
prior to the Year 2000.
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 forward-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.
Monthly License Fees (MLF) revenue, a component of software license fees, was
$14.2 million and $14.0 million in the second quarter of fiscal 2000 and 1999,
respectively. MLF revenue was $28.9 million and $26.0 million for the first
half of fiscal 2000 and 1999, respectively. The increase in MLF revenue is a
result of the continued growth of the installed base of the Company's consumer
banking, electronic business infrastructure and Internet banking products.
Maintenance fee revenue for the second quarter of fiscal 2000 and 1999 was
$17.2 million and $16.0 million, respectively. Maintenance fee revenue for
the first half of fiscal 2000 and 1999 was $33.9 million and $31.6 million,
respectively. The increase in maintenance revenue is a result of continued
growth of the installed base of the Company's consumer banking and corporate
banking products.
Hardware revenue for the second quarter of fiscal 2000 and 1999 was $0 and
$1.1 million, respectively. Hardware revenue for the first half of fiscal
2000 and 1999 was $0 and $2.2 million, respectively. The Company's market
development program with Compaq expired on September 30, 1999 and was not
renewed.
Expenses
Total operating expenses for the second quarter of fiscal 2000 increased 5.0%
or $3.5 million over the comparable period in fiscal 1999. Total operating
expenses for the first half of fiscal 2000 increased 2.0% or $2.8 million over
the comparable period in fiscal 1999. These increases are primarily due to
the increase in amortization expense related to the acquisitions of Insession,
Inc. in March 1999 and SDM International, Inc. in July 1999. This increase is
offset, in part, by a reduction in staff required to support the Company's
products and services. Total staff (including both employees and independent
contractors) decreased from 2,288 at March 31, 1999 to 2,103 at March 31, 2000
Income Taxes
The effective tax rate for the first half of fiscal 2000 was 39.4% as compared
to 37.8% for all of fiscal 1999. This increase is primarily attributable to
non-deductible amortization associated with the acquisitions of Insession,
Inc. and SDM International, Inc. in 1999.
As of March 31, 2000, the Company has deferred tax assets of $17.8 million and
deferred tax liabilities of $9.8 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 $8.5 million of the deferred tax assets were more likely than
not to be realized. Accordingly, the Company has recorded a valuation
allowance of $9.3 million as of March 31, 2000.
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, 2000 and 1999, the Company had non-recurring revenue backlog
of $28.2 million and $35.3 million in software license fees, respectively, and
$25.8 million and $28.9 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, 2000 and 1999, the Company had recurring revenue backlog of
$140 million and $136.8 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, 2000, the Company's principal sources of liquidity consisted
of $40.8 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 half
of fiscal 2000 amounted to $6.4 million. This compares to $9.6 million in net
cash flows provided by operating activities for the first half of fiscal
1999. The decrease of $16.1 million in cash flows from operating activities
is principally due to lower net income offset by an increase in amortization
expense due to the acquisitions of Insession, Inc. in March 1999 and SDM
International, Inc. in July 1999. A contributor to the Company's cash
management program is the factoring of accrued receivables, whereby interest
in Company receivables are transferred (on a non-recourse basis) to third
party financial institutions in exchange for cash. During the first half of
fiscal 2000 and 1999, the Company generated operating cash flows from the
factoring of accrued receivables of $11.1 million and $7.9 million,
respectively.
The Company's net cash flows used in investing activities totaled $13.2
million and $12.0 million in the first half of fiscal 2000 and 1999,
respectively. This increase is due to growth in property and equipment and
software purchases offset by a decrease in cash used for acquisitions. Cash
used in investing activities in fiscal 2000 of $3.0 million related to the
Company's final payment of the acquisition of Insession, Inc. in the first
quarter of fiscal 2000.
The Company's Board of Directors has approved the repurchase of up to
2,000,000 shares of Common Stock through February 2001. 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 half
of fiscal 2000. The total number of shares purchased under the stock
repurchase program through March 31, 2000 amounts to 975,300 shares.
Subsequent to March 31, 2000 and through May 8, 2000, the Company has
purchased an additional 500,000 shares at an average cost of $15.33 for
approximately $7.7 million. 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.
Corporate Business Strategy
During the second quarter of fiscal 2000, the Company announced a new business
strategy resulting in the formation of six new business units organized around
the Company's products and services. Key elements of the strategy include
aligning the Company's business into vertically-integrated business units
targeted at key market segments where the Company's products and services best
match emerging market demand. The Company believes that its key operating units
will require capital to create the right technologies and solutions and drive
incremental business. As a result of the shift of the Company's business
strategy to put an increased emphasis on new products and markets which have
longer sales and delivery cycles, the Company expects revenue recognition will
be pushed out over longer time periods as compared to revenue recognition for
the Company's traditional products.
One of the first steps of this new business strategy was the announcement of
the formation of Insession Technologies, Inc., our electronic business
infrastructure business unit. As indicated in the Company's April 25, 2000
news release, Insession Technologies, Inc. expects to file a registration
statement with the Securities and Exchange Commission for a proposed initial
public offering within the next five months. The timing and size of the
offering are dependent on market conditions and other factors. This does not
constitute an offer for any securities for sale.
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, 2000. 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.
<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 alleged, 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 sought injunctive relief and
unspecified damages including treble damages, costs, attorneys' fees and
various other forms of relief. In April 2000, the Company, ACI Worldwide and
HNC mutually agreed that all claims in the San Diego lawsuit would be
dismissed. The District Court subsequently issued an order dismissing the
lawsuit with prejudice.
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 had filed a counterclaim in the Rhode Island lawsuit
alleging infringement by Nestor of HNC Software's patents which claims were
essentially the same as those filed by HNC Software against the Company and
ACI Worldwide in the San Diego lawsuit. Nestor has since dropped its claim of
patent infringement against HNC in the Rhode Island lawsuit. Neither the
Company nor ACI Worldwide is a party to the Rhode Island lawsuit.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on February 22, 2000.
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 25,630,841 175,047
David C. Russell 25,630,341 175,547
Charles E. Noell, III 25,630,907 174,981
Jim D. Kever 25,627,207 178,681
Larry G. Fendley 25,630,241 175,647
Roger K. Alexander 25,630,191 175,697
2. Proposal to approve the Amendment to the Company's 1999 Stock Option Plan
For: 20,259,001 Against: 5,464,837 Abstain: 82,050 Broker Non-vote: 0
3. Ratification of Appointment of Arthur Andersen LLP as Independent
Auditors for 2000
For: 25,137,365 Against: 22,479 Abstain: 27,206 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 15, 2000
TRANSACTION SYSTEMS ARCHITECTS, INC
(Registrant)
/s/ Edward C. Fuxa
----------------------------------
Edward C. Fuxa
Controller
(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-30-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> Mar-31-2000
<CASH> 40,801
<SECURITIES> 24,141
<RECEIVABLES> 96,477
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 177,834
<PP&E> 19,679
<DEPRECIATION> 0
<TOTAL-ASSETS> 317,719
<CURRENT-LIABILITIES> 91,146
<BONDS> 0
0
0
<COMMON> 164
<OTHER-SE> 225,557
<TOTAL-LIABILITY-AND-EQUITY> 317,749
<SALES> 75,389
<TOTAL-REVENUES> 78,389
<CGS> 28,348
<TOTAL-COSTS> 73,437
<OTHER-EXPENSES> (666)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72
<INCOME-PRETAX> 2,546
<INCOME-TAX> 995
<INCOME-CONTINUING> 1,551
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,551
<EPS-BASIC> .05
<EPS-DILUTED> .05
</TABLE>
