================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________ FORM 10-Q ___________________ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2000 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 (402) 334-5101 Omaha, Nebraska 68154 (Registrant's telephone number, (Address of principal executive offices, including area code) including zip 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 ___ The number of shares of the issuer's Class A Common Stock, par value $.005 per share, outstanding as of February 12, 2001 was 34,916,532 (including 1,410,942 Exchangeable Shares of TSA Exchangeco Limited which can be exchanged on a one-for-one basis for shares of the issuer's Class A Common Stock). ================================================================================
<TABLE> <CAPTION> TABLE OF CONTENTS <S> <C> Page PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets as of December 31, 2000 and September 30, 2000.................. 3 Condensed Consolidated Statements of Income for the three months ended December 31, 2000 and 1999..... 4 Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2000 and 1999. 5 Notes to Condensed Consolidated Financial Statements.................................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 16 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K...................................................................... 17 Signature....................................................................................................... 17 Index to Exhibits............................................................................................... 18 </TABLE>
<TABLE> <CAPTION> TRANSACTION SYSTEMS ARCHITECTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited and in thousands) December 31, September 30, 2000 2000 -------------- -------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 20,581 $ 23,400 Marketable securities 1,857 8,106 Billed receivables, net 65,645 63,556 Accrued receivables 55,591 51,659 Prepaid income taxes 3,087 2,710 Deferred income taxes 16,932 11,208 Other 9,588 13,134 ----------- ------------ Total current assets 173,281 173,773 Property and equipment, net 18,499 19,614 Software, net 26,250 26,757 Intangible assets, net 62,943 65,254 Long-term accrued receivables 33,313 27,018 Investments and notes receivable 2,635 6,146 Note receivable from executive officer 3,000 2,000 Deferred income taxes 2,149 2,958 Other 6,129 6,632 ----------- ------------ Total assets $ 328,199 $ 330,152 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 29,035 $ 18,396 Accounts payable 11,306 16,023 Accrued employee compensation 6,997 7,472 Accrued liabilities 22,280 20,003 Deferred revenue 44,938 43,373 ----------- ------------ Total current liabilities 114,556 105,267 Long-term debt 477 532 Long-term deferred revenue 14,218 13,993 ----------- ------------ Total liabilities 129,251 119,792 ----------- ------------ Stockholders' equity: Class A Common Stock 166 165 Additional paid-in capital 171,542 170,946 Retained earnings 70,682 85,033 Treasury stock, at cost (35,258) (35,258) Accumulated other comprehensive income (8,184) (10,526) ----------- ------------ Total stockholders' equity 198,948 210,360 ----------- ------------ Total liabilities and stockholders' equity $ 328,199 $ 330,152 =========== ============ See notes to condensed consolidated financial statements. </TABLE>
<TABLE> <CAPTION> TRANSACTION SYSTEMS ARCHITECTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited and in thousands, except per share amounts) Three Months Ended December 31, ------------------------------------- 2000 1999 -------------- -------------- <S> <C> <C> Revenues: Software license fees $ 42,467 $ 35,253 Maintenance fees 15,965 16,685 Services 16,204 15,179 ------------ ------------ Total revenues 74,636 67,117 ------------ ------------ Expenses: Cost of software license fees 11,591 10,825 Cost of maintenance and services 18,711 16,792 Research and development 10,069 8,460 Selling and marketing 19,695 17,561 General and administrative costs 16,127 14,638 Amortization of goodwill and purchased intangibles 2,367 2,177 ------------ ------------ Total expenses 78,560 70,453 ------------ ------------ Operating income (loss) (3,924) (3,336) ------------ ------------ Other income (expense): Interest income 824 947 Interest expense (619) (63) Other 273 183 Non-recurring items (14,311) - ------------ ------------ Total other income (expense) (13,833) 1,067 ------------ ------------ Income (loss) before income taxes (17,757) (2,269) Income tax benefit 3,405 886 ------------ ------------ Net income (loss) $ (14,352) $ (1,383) ============ ============ Earnings per share information: Weighted average shares outstanding: Basic 31,654 32,039 ============ ============ Diluted 31,654 32,039 ============ ============ Earnings per share: Basic $ (0.45) $ (0.04) ============ ============ Diluted $ (0.45) $ (0.04) ============ ============ See notes to condensed consolidated financial statements. </TABLE>
<TABLE> <CAPTION> TRANSACTION SYSTEMS ARCHITECTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited and in thousands) Three Months Ended December 31, ------------------------------------- 2000 1999 -------------- -------------- <S> <C> <C> Cash flows from operating activities: Net income (loss) $ (14,352) $ (1,383) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 2,088 2,053 Amortization 5,430 5,130 Non-recurring items 14,311 - Changes in operating assets and liabilities: Billed and accrued receivables (12,316) (7,683) Other current and noncurrent assets (3,250) (2,961) Accounts payable (4,717) (1,200) Deferred revenue 1,790 3,898 Other current liabilities 2,041 (6,214) ------------ ------------ Net cash used in operating activities (8,975) (8,360) ------------ ------------ Cash flows from investing activities: Purchases of property and equipment (853) (1,104) Additions to software (2,372) (1,581) Acquisition of business, net of cash received - (3,053) Additions to investments and notes receivable (820) (420) Note receivable from executive officer (1,000) - ------------ ------------ Net cash used in investing activities (5,045) (6,158) ------------ ------------ Cash flows from financing activities: Proceeds from issuance of Class A Common Stock 435 461 Proceeds from exercise of stock options 94 375 Purchases of Class A Common Stock - (13,343) Net borrowings on lines of credit 10,755 - Payments of long-term debt (171) 357 ------------ ------------ Net cash provided by (used in) financing activities 11,113 (12,150) ------------ ------------ Effect of exchange rate fluctuations on cash 88 181 ------------ ------------ Decrease in cash and cash equivalents (2,819) (26,487) Cash and cash equivalents, beginning of period 23,400 70,482 ------------ ------------ Cash and cash equivalents, end of period $ 20,581 $ 43,995 ============ ============ See notes to condensed consolidated financial statements. </TABLE>
TRANSACTION SYSTEMS ARCHITECTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Consolidated Financial Statements Transaction Systems Architects, Inc. ("TSA" or the "Company"), a Delaware corporation, 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 and services are used principally by financial institutions, retailers and e-payment processors, both in domestic and international markets. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The condensed consolidated financial statements at December 31, 2000, and for the three months ended December 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, 2000. The results of operations for the three months ended December 31, 2000 are not necessarily indicative of the results for the entire fiscal year ending September 30, 2001. 2. Revenue Recognition The Company generates revenues from licensing software and providing postcontract customer support (maintenance or "PCS") and other professional services. The Company uses written contracts to document the elements and obligations of arrangements with its customers. Arrangements that include the licensing of software typically include PCS, and at times, include other professional services. PCS includes the right to unspecified upgrades on a when-and-if-available basis and ongoing technical support. The other professional services may include training, installation or consulting. The Company also performs services for customers under arrangements that do not include the licensing of software. Revenues under multiple-element arrangements, which may include several software products or services sold together, are allocated to each element based upon the residual method in accordance with American Institute of Certified Public Accountants Statement of Position ("SOP") 98-9, "Software Revenue Recognition, With Respect to Certain Arrangements." Under the residual method, the fair value of the undelivered elements is deferred and subsequently recognized. The Company has established sufficient vendor specific objective evidence of fair value for PCS and other professional services based upon the price charged when these elements are sold separately. Accordingly, software license fees revenues are recognized under the residual method in arrangements in which the software is licensed with PCS and/or other professional services, and the undelivered elements of the arrangement are not essential to the functionality of the delivered software. The Company recognizes software license fees upon execution of the signed contract, delivery of the software to the customer, determination that the software license fees are fixed or determinable, and determination that the collection of the software license fees is probable. The software license is typically for a term of up to 60 months and does not include a right of return. The term for the PCS element of a software arrangement is typically for a period shorter than the term of the software license, and can be renewed by the customer over the remaining term of the software license. PCS or maintenance revenues are recognized ratably over the term of the arrangement on a straight-line basis. The other professional services element of a software arrangement is typically accounted for separately as the services are performed for time-and-materials contracts or on a percentage-of-completion basis for fixed-price contracts. In those instances where the services are essential to the functionality of any other element of the arrangement, contract accounting is applied to both the software and services elements of the arrangement. The Company follows two methods for pricing its software licenses. Under the first method, the software license is priced based upon the number of transactions processed by the customer ("transaction-based pricing"). Under transaction-based pricing, the customer is allowed to process a contractually predetermined maximum volume of transactions per month for a specified period of time. Once the customer's transaction volume exceeds this maximum volume level, the customer is required to pay additional license fees for each incremental volume level. Under the second method, the software license is priced on a per copy basis and tiered to recognize different performance levels of the customer's processing hardware ("designated-equipment-group pricing"). Under designated-equipment-group pricing, the customer pays a license fee for each copy of the software for a specified period of time. Licensees are typically given two payment options. Under the first payment option, the licensee can pay a combination of an Initial License Fee ("ILF"), where the licensee pays a portion of the total software license fees at the beginning of the software license term, and a Monthly License Fee ("MLF"), where the licensee pays the remaining portion of the software license fees over the software license term. In certain arrangements, the customer is contractually committed to making MLF payments for a minimum number of months. If the customer decides to terminate the arrangement prior to paying the minimum MLF payments, the remaining minimum MLF payments become due and payable. Under the second payment option, the Company offers a Paid-Up-Front ("PUF") payment option, whereby the total software license fees are due at the beginning of the software license term. Under either payment option, the Company is not obligated to refund any payments received from the customer. In the combination ILF and MLF payment option, the Company recognizes the ILF portion of the software license fees upon delivery of the software, assuming all other revenue recognition criteria were met. In the PUF payment option, the Company recognizes the total software license fees upon delivery of the software, assuming all other revenue recognition criteria were met. In addition to SOP 98-9, the Company accounts for its software arrangements in accordance with SOP 97-2, "Software Revenue Recognition." The primary software revenue recognition criteria outlined in SOP 97-2 include: evidence of an arrangement; delivery; fixed or determinable fees; and collectibility. SOP 97-2 specifies that extended payment terms in a software licensing arrangement may indicate that the software license fees are not deemed to be fixed or determinable. In addition, if payment of a significant portion of the software license fees is not due until more than twelve months after delivery, the software license fees should be presumed not to be fixed or determinable, and thus 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 licensing arrangements and has a history of successfully collecting the software license fees under the original terms of the software licensing arrangement without making concessions, the Company can overcome the presumption that the software license fees are not fixed or determinable. If the presumption is overcome, the Company should recognize the software license fees when all other SOP 97-2 revenue recognition criteria are met. The Company has concluded that for certain software arrangements where the customer is contractually committed to make MLF payments that extend beyond twelve months, the "fixed or determinable" presumption has been overcome and software license fees revenue should be recognized upon meeting the other SOP 97-2 revenue recognition criteria. In making this determination, the Company considered the characteristics of the software product, the customer purchasing the software, the similarity of the economics of the software arrangements with previous software arrangements and the actual history of successfully collecting under the original terms without providing concessions. The software license fees recognized under these arrangements are referred to as "Recognized-Up-Front MLFs." The present value of Recognized-Up-Front MLFs, net of third party royalties, recognized during the three months ended December 31, 2000 and 1999 totaled approximately $9.1 million and $5.1 million, respectively. The discount rates used to determine the present value of these software license fees, representing the Company's incremental borrowing rates, ranged from 9.50% to 11.00% during the three months ended December 31, 2000, and from 10.25% to 11.00% during the three months ended December 31, 1999. Recognized-Up-Front MLFs that have been recognized in software license fees revenues by the Company, but not yet billed, are reflected in accrued receivables in the accompanying condensed consolidated balance sheets. 3. Non-Recurring Items The Company continually evaluates its investment holdings and long-lived assets for evidence of impairment. During the three months ended December 31, 2000, after considering current market conditions for technology companies and specific information regarding those companies in which the Company has an ownership interest, the Company determined that the declines in market value for certain of its investment holdings were "other than temporary" and a charge to earnings for the declines in market value was required. Therefore, the Company recorded a non-cash charge of $12.4 million in the three months ended December 31, 2000. In addition, due to unfavorable market conditions in the fourth quarter of fiscal 2000, the Company postponed its planned initial public offering ("IPO") of its wholly-owned subsidiary, Insession Technologies, Inc. Due to the time period which had elapsed without proceeding with this transaction and continuing uncertainty in market conditions, the Company expensed costs associated with the planned IPO totaling $1.9 million in the three months ended December 31, 2000. 4. Earnings Per Share Earnings per share ("EPS") has been computed in accordance with SFAS No. 128, "Earnings Per Share." Basic EPS is calculated by dividing net income available to common stockholders (the numerator) by the weighted average number of common shares outstanding during the period (the denominator). Diluted EPS is computed by dividing net income available to common stockholders, adjusted for the effect of any outstanding dilutive securities (the numerator), by the weighted average number of common shares outstanding, adjusted for the dilutive effect of outstanding dilutive securities (the denominator). For the three months ended December 31, 2000 and 1999, basic and diluted EPS are the same, as any outstanding dilutive securities were antidilutive due to the net loss in both periods. If the Company had reflected net income for the three months ended December 31, 2000 and 1999, weighted average shares from stock options of 3,590,098 and 1,353,510, respectively, would have been excluded from the computation of diluted EPS because the exercise prices of the stock options were greater than the average market price of the Company's common shares. 5. Comprehensive Income The Company's components of other comprehensive income were as follows (in thousands): <TABLE> <CAPTION> Three Months Ended December 31, ----------------------------------- 2000 1999 --------------- --------------- <S> <C> <C> <C> Net loss $ (14,352) $ (1,383) Other comprehensive income: Foreign currency translation adjustments 539 (1,123) Unrealized investment holding gain (loss) 1,803 4,687 --------------- --------------- Comprehensive income (loss) $ (12,010) $ 2,181 =============== =============== The Company's components of accumulated other comprehensive income at each balance sheet date were as follows (in thousands): Foreign Unrealized Accumulated Currency Investment Other Translation Holding Comprehensive Adjustments Gain (Loss) Loss --------------- --------------- --------------- Balance, September 30, 2000 $ (4,723) $ (5,803) $ (10,526) Fiscal 2001 year-to-date activity 539 (6,249) (5,710) Reclassification adjustment for loss included in net income(loss) - 8,052 8,052 --------------- --------------- --------------- Balance, December 31, 2000 $ (4,184) $ (4,000) $ (8,184) =============== =============== =============== </TABLE> 6. Line-of-Credit Facilities The Company has a $30 million bank line-of-credit with a large United States bank. This line is secured by certain trade receivables of TSA. Among other restrictions, the Company must maintain a minimum accounts receivable balance, minimum tangible net worth and minimum working capital levels at each reporting date. After obtaining a waiver from the U.S. bank, the Company is in compliance with all debt covenants as of December 31, 2000. The Company also has a line-of-credit with a large foreign bank in the amount of 3 million British Pounds, which translates to approximately $4.5 million. The foreign line requires the Company to maintain minimum tangible net worth within the Company's wholly-owned subsidiary, ACI Worldwide (EMEA) Ltd. Interest on the U.S. line-of-credit accrues at an annual rate equal to either the bank's "base rate" less .75% or the LIBOR rate plus 1.75% and is payable at the end of each month. Interest on the foreign line-of-credit accrues at an annual rate of 1% above the bank's "base rate." During the three months ended December 31, 2000, the Company recorded interest expense of $481,000 related to the two line-of-credit facilities. Current borrowings outstanding as of December 31, 2000 amount to approximately $29 million. The U.S. bank line-of-credit expires on May 31, 2001, and the foreign bank line-of-credit expires on August 9, 2001. The carrying amounts of the Company's line-of-credit facilities approximate fair value due to their variable interest rates. 7. Segment Information In fiscal 2000, the Company reorganized its business into four business units or segments: Consumer e-Payments, Electronic Business Infrastructure, Corporate Banking e-Payments and Health Payment Systems. Prior period segment information has been restated to reflect these reorganizations. The Company's chief operating decision makers review business unit financial information, presented on a consolidated basis, accompanied by disaggregated information about revenues and operating income by business unit. The Company does not track assets by business unit. The Company plans to direct the majority of its focus on the Consumer e-Payments business unit. The Company is considering various alternatives for the Electronic Business Infrastructure, Corporate Banking e-Payments and Health Payments Systems business units, including possible sales, spin-offs, strategic alliances, partnerships, third-party investors and initial public offerings. Consumer e-Payments products represent the Company's largest product line and include its most mature and well-established applications which are used primarily by financial institutions, retailers and e-payment processors. Its products are used to route and process transactions for automated teller machine networks; process transactions from traditional point of sale devices, wireless devices and the Internet; handle PC and phone banking transactions; control fraud and money laundering; process electronic benefit transfer transactions; authorize checks; establish frequent shopper programs; automate settlement, card management and claims processing; and issue and manage multi-functional applications on smart cards. Electronic Business Infrastructure products facilitate communication, data movement, monitoring of systems and business process automation across computing systems, involving mainframes, distributed computing networks and the Internet. Corporate Banking e-Payments products offer high-value payments processing, bulk/recurring payments processing, wire room processing, global messaging, integration payments management and continuous link settlement processing. Health Payment Systems products allow large corporations and health-care payment processors to automate claims eligibility determination, claims capture and claims payments. No single customer accounted for more than 10% of the Company's consolidated revenue during the three months ended December 31, 2000 and 1999. The following are revenues and operating income (loss) for the Company's business unit segments for the three months ended December 31, 2000 and 1999 (in thousands): <TABLE> <CAPTION> Three Months Ended December 31, --------------------------------- 2000 1999 ------------- ------------- <S> <C> <C> Revenues: Consumer e-Payments $ 57,552 $ 47,715 Electronic Business Infrastructure 9,284 10,876 Corporate Banking e-Payments 6,608 7,642 Health Payment Systems 1,192 884 ------------- ------------- $ 74,636 $ 67,117 ============= ============= Operating loss: Consumer e-Payments $ 844 $ (5,135) Electronic Business Infrastructure (705) 1,782 Corporate Banking e-Payments (2,897) (22) Health Payment Systems (1,166) 39 ------------- ------------- Operating loss $ (3,924) $ (3,336) ============= ============= The Company's products are sold and supported through distribution networks covering the geographic regions of the Americas, Europe/Middle East/Africa ("EMEA") and Asia/Pacific. The following are revenues and long-lived assets for these geographic regions (in thousands): Three Months Ended December 31, --------------------------------- 2000 1999 ------------- ------------- Revenues: United States $ 32,005 $ 30,822 Americas - other 8,986 8,866 ------------- ------------- Total Americas 40,991 39,688 EMEA 26,990 20,222 Asia/Pacific 6,655 7,207 ------------- ------------- $ 74,636 $ 67,117 ============= ============= December 31, September 30, 2000 2000 ------------- ------------- Long-lived assets: United States $ 101,888 $ 107,925 Americas - other 4,753 5,337 ------------- ------------- Total Americas 106,641 113,262 EMEA 11,332 11,659 Asia/Pacific 1,233 1,482 ------------- ------------- $ 119,206 $ 126,403 ============= ============= </TABLE> 8. Accounting Pronouncements Issued But Not Yet Effective In December 1999, the Securities and Exchange Commission (the "SEC") released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 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 is required to be in conformity with the provisions of SAB No. 101 no later than the fourth quarter of fiscal 2001. The adoption of SAB No. 101 is not expected to have a material impact on the Company's financial position or results of operations. In September 2000, the Financial Accounting Standards Board issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140, which replaced SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of SFAS No. 125's provisions without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The Company currently conforms to the requirements of SFAS No. 125 and the adoption of SFAS No. 140 is not expected to have a material impact on the Company's financial position or results of operations. 9. Subsequent Event In October 2000, the Company reached an agreement to acquire all of the issued and outstanding securities of MessagingDirect Ltd. ("MDL") for approximately 3.3 million shares of TSA Class A Common Stock with a fair market value at that time of approximately $50.0 million. MDL provides software applications to facilitate the secure delivery and e-processing of electronic statements and bills. This transaction subsequently closed in January 2001. The share exchange will be accounted for using the purchase method of accounting. Accordingly, the amount of purchase price in excess of the sum of the fair values of the tangible and intangible assets acquired less liabilities assumed will be allocated to goodwill, which will be amortized using the straight-line method over five years. The Company estimates that the allocation of the purchase price attributable to intangible assets to be approximately $29.0 million to goodwill and $15.0 million to software. These amounts are preliminary and are subject to the completion of an appraisal of MDL.
TRANSACTION SYSTEMS ARCHITECTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company 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, TSA distributes software developed by third parties. The products and services are used principally by financial institutions, retailers and e-payment processors, both in domestic and international markets. The Company's products and services are organized into four business units - Consumer e-Payments, Electronic Business Infrastructure, Corporate Banking e-Payments and Health Payment Systems. The Company plans to direct the majority of its focus on the Consumer e-Payments business unit. Products in this business unit represent the Company's largest product line and include its most mature and well-established applications. Products and services offered by this business unit, except community banking products, are marketed and supported through ACI Worldwide Inc ("ACI"), a wholly-owned subsidiary of the Company. ACI sells and supports the products and services through three distribution networks: the Americas, Europe/Middle East/Africa ("EMEA") and Asia/Pacific. Each distribution network primarily has its own sales force and supplements this with reseller and/or distributor networks. The community banking products are marketed and supported by Regency Systems, Inc., a wholly-owned subsidiary of the Company. Products and services offered by the other three business units are marketed and supported primarily through their own sales and support organizations. Results of Operations The following table sets forth certain financial data and the percentage of total revenues of the Company for the periods indicated (amounts in thousands): <TABLE> <CAPTION> Three Months Ended December 31, ----------------------------------------------------- 2000 1999 ----------------------- ----------------------- % of % of Amount Revenue Amount Revenue --------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Revenues: ILFs and PUFs $ 20,099 26.9 % $ 15,404 23.0 % MLFs (other than Recognized- Up-Front MLFs) 13,244 17.8 14,720 21.9 Recognized-Up-Front MLFs 9,124 12.2 5,129 7.6 --------- ---------- ---------- ---------- Software license fees 42,467 56.9 35,253 52.5 Maintenance fees 15,965 21.4 16,685 24.9 Services 16,204 21.7 15,179 22.6 --------- ---------- ---------- ---------- Total revenues 74,636 100.0 67,117 100.0 --------- ---------- ---------- ---------- Expenses: Cost of software license fees 11,591 15.5 10,825 16.1 Cost of maintenance and services 18,711 25.1 16,792 25.0 Research and development 10,069 13.5 8,460 12.6 Selling and marketing 19,695 26.4 17,561 26.2 General and administrative costs 16,127 21.6 14,638 21.8 Amortization of goodwill and purchased intangibles 2,367 3.2 2,177 3.3 --------- ---------- ---------- ---------- Total expenses 78,560 105.3 70,453 105.0 --------- ---------- ---------- ---------- Operating income (loss) (3,924) (5.3) (3,336) (5.0) --------- ---------- ---------- ---------- Other income (expense): Interest income 824 1.1 947 1.4 Interest expense (619) (0.8) (63) (0.1) Other 273 0.4 183 0.3 Non-recurring items (14,311) (19.2) - - --------- ---------- ---------- ---------- Total other income (expense) (13,833) (18.5) 1,067 1.6 --------- ---------- ---------- ---------- Income (loss) before income taxes (17,757) (23.8) (2,269) (3.4) Income tax benefit 3,405 4.6 886 1.3 --------- ---------- ---------- ---------- Net income (loss) $ (14,352) (19.2)% $ (1,383) (2.1) % ========= ========== ========== ========== </TABLE> The following table sets forth total revenues and operating income (loss) for the Company's four business unit segments for the periods indicated (in thousands): <TABLE> <CAPTION> Three Months Ended December 31, --------------------------------- 2000 1999 ------------- ------------- <S> <C> <C> Revenues: Consumer e-Payments $ 57,552 $ 47,715 Electronic Business Infrastructure 9,284 10,876 Corporate Banking e-Payments 6,608 7,642 Health Payment Systems 1,192 884 ------------- ------------- $ 74,636 $ 67,117 ============= ============= Operating loss: Consumer e-Payments $ 844 $ (5,135) Electronic Business Infrastructure (705) 1,782 Corporate Banking e-Payments (2,897) (22) Health Payment Systems (1,166) 39 ------------- ------------- Operating loss $ (3,924) $ (3,336) ============= ============= </TABLE> Revenues. Total revenues for the first quarter of fiscal 2001 increased 11.1%, or $7.5 million, from the comparable period in fiscal 2000. The increase is the result of a $7.2 million, or 20.4%, increase in software license fees revenue and a $942,000, or 6.2%, increase in services revenue. These increases were offset by a $720,000, or 4.3%, decrease in maintenance fee revenue. 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 Consumer e-Payments software license fees and services revenues due to the less than expected demand by customers and potential new customers to upgrade and enhance their current systems. In addition, since the Year 2000 cutover, the Company has found its customers increasingly scrutinizing their information technology purchases, which has led to further delays in software and services purchases. The Company believes overall demand for its products and services is increasing at a gradual pace. However, the Company believes that customer demand for its products and services will be slow to return to growth levels experienced prior to fiscal 2000. The increase in ILF and PUF revenue for the first quarter of fiscal 2001 is a result of an increased demand for the Company's Consumer e-Payments products, offset by a decrease in demand for the Company's Electronic Business Infrastructure ICE product and a decrease in revenue associated with a significant Corporate Banking e-Payment customer project. In addition, the Company changed its sales compensation plans in fiscal 2001 for its Consumer e-Payments sales force to emphasize PUF contracts for both customer renewals and new customers rather than emphasizing ILF/MLF contracts. This change resulted in an increase in PUF revenue and a decrease in MLF revenue in the first quarter of fiscal 2001. The decrease in maintenance fee revenue for the first quarter of fiscal 2001 is due to a decrease in customer demand for the Company's enhanced maintenance support. The growth in services revenue is the result of increased demand for technical and project management services, which is primarily the result of an increased installed base of the Company's Consumer e-Payments products. Expenses. Total operating expenses for the first quarter fiscal 2001 increased $8.1 million, or 11.5%, over the comparable period of fiscal 2000. Cost of software license fees for the first quarter of fiscal 2001 increased $0.8 million, or 7.1%, over the comparable period in fiscal 2000. This increase is due primarily to an increase in the sale of third-party products and thus a corresponding increase in royalties owed to the owners of these products. Cost of maintenance and services for the first quarter of fiscal 2001 increased $1.9 million, or 11.4%, over the comparable period in fiscal 2000. This increase is the result of personnel-related expenses. Research and development ("R&D") consists primarily of compensation and related costs for R&D employees and contractors. R&D costs as a percentage of total revenues were 13.5% in the first quarter of fiscal 2001 as compared to 12.6% in the first quarter of fiscal 2000. In addition to R&D costs which are expensed, the Company capitalizes costs related to certain internally-developed software when the resulting products reach technological feasibility. Software development costs capitalized in the first quarter of fiscal 2001 and 2000 totaled approximately $1.5 million and $1.2 million, respectively. Selling and marketing costs as a percentage of total revenues were 26.4% in the first quarter of fiscal 2001 as compared to 26.2% in the first quarter of fiscal 2000. The increase in fiscal 2001 is due to an increase in sales personnel and marketing activities in each of the four business units. General and administrative costs for the first quarter of fiscal 2001 increased $1.5 million, or 10.2%, over the comparable period in fiscal 2000. The increase is attributable to an increase in bad debts expense and occupancy costs, offset by a decrease in personnel-related expenses. The decrease in personnel-related expenses is due to the consolidation of the Company's Consumer Banking, Electronic Commerce and Internet Banking operating units into the Consumer e-Payments business unit during the fourth quarter of fiscal 2000. Other Income and Expenses. The increase in interest expense is due to an increase in borrowings on the Company's line-of-credit facilities. The Company continually evaluates the carrying value of its investment holdings and long-lived assets for evidence of impairment. During the first quarter of fiscal 2001, after considering current market conditions for technology companies and specific information regarding those companies in which the Company has an ownership interest, the Company determined that the declines in market value for certain of its investment holdings were "other than temporary" and a charge to earnings for the declines in market value was required. Therefore, the Company recorded a non-cash charge of $12.4 million in the first quarter of fiscal 2001. In addition, due to unfavorable market conditions in the fourth quarter of fiscal 2000, the Company postponed its planned initial public offering ("IPO") of its wholly-owned subsidiary, Insession Technologies, Inc. Due to the time period which had elapsed without proceeding with this transaction and continuing uncertainty in market conditions, the Company expensed costs associated with the planned IPO totaling $1.9 million in the first quarter of fiscal 2001. Income Taxes. The effective tax rate for the first quarter of fiscal 2001 was approximately 20% as compared to 41% for all of fiscal 2000. The tax benefit for the first quarter of fiscal 2001 was less than expected primarily due to non-deductible amortization expense associated with acquisitions accounted for as purchases and non-recognition of tax benefits for operating losses in certain foreign locations. As of December 31, 2000, the Company has deferred tax assets of $31.3 million and deferred tax liabilities of $2.9 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 $19.1 million of the net 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 December 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 adjusted accordingly. Backlog As of December 31, 2000, the Company had recurring revenue backlog totaling $135.8 million, of which $96.6 million was in the Consumer e-Payments business unit, $18.0 million in the Electronic Business Infrastructure business unit, $16.4 million in the Corporate Banking e-Payments business unit and $4.8 million in the Health Payment Systems business unit. The Company defines recurring revenue backlog to be all monthly license fees, maintenance fees and facilities management fees specified in executed contracts to the extent that the Company contemplates recognition of the related revenue within one year. As of December 31, 2000, the Company had non-recurring software license fees revenue backlog of $12.3 million and non-recurring services revenue backlog of $36.0 million; $9.8 million and $26.0 million, respectively, in the Consumer e-Payments business unit; $0.2 million and $3.0 million, respectively, in the Electronic Business Infrastructure business unit; $2.3 million and $6.8 million, respectively, in the Corporate Banking e-Payments business unit; and $0.0 million and $0.2 million, respectively, in the Health Payment Systems business unit. The Company includes in its non-recurring revenue backlog all fees specified in executed contracts to the extent that the Company contemplates recognition of the related revenue within one year. There can be no assurance that contracts included in recurring or non-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 December 31, 2000, the Company's principal sources of liquidity consisted of $20.6 million in cash and cash equivalents, and bank lines of credit totaling approximately $34.5 million, with outstanding borrowings of approximately $29.0 million. The bank lines are subject to maintenance of certain covenants. The Company's net cash flows used in operating activities for the first quarter of fiscal 2001 amounted to $9.0 million as compared to $8.4 million used during the first quarter of fiscal 2000. The growth of the Company's billed and accrued receivables during the first quarter of fiscal 2001 and 2000 are the primary reasons for the negative operating cash flows in the first quarter of fiscal 2001 and 2000. A contributor to the Company's cash management program is the factoring of accrued receivables, whereby interest in Company receivables is transferred on a non-recourse basis to third-party financial institutions in exchange for cash. During the first quarter of fiscal 2001 and 2000, the Company generated operating cash flows from the factoring of accrued receivables of $3.1 million and $4.5 million, respectively. The Company has approximately $20 million of accrued receivables that may be sold in the future to third-party financial institutions under this program. The Company is actively pursuing the sale of a portion of these receivables as a means to generate cash, but there can be no assurance that the Company will be successful in its efforts to sell any of these receivables. The Company's net cash flows used in investing activities totaled $5.0 million and $6.2 million in the first quarter of fiscal 2001 and 2000, respectively. This decrease in cash used in investing activities is due to a decrease in acquisition-related expenditures, offset by an increase in the note receivable from executive officer. The acquisition of business amount in fiscal 2000 consists of the final payment of $3.1 million related to the acquisition of Insession Inc. The note receivable from executive officer in fiscal 2001 consists of an additional advance in the amount of $1.0 million to Mr. William E. Fisher, Chief Executive Officer, as part of his employment and incentive compensation package. The Company's net cash flows provided by financing activities was $11.1 million in the first quarter of fiscal 2001 as compared to net cash flows used in financing activities of $12.1 million in the first quarter of fiscal 2000. During the first quarter of 2001, the Company had net borrowings on its bank line-of-credit facilities of $10.8 million. During the first quarter of fiscal 2000, pursuant to a stock repurchase program approved by the Company's Board of Directors, the Company acquired 500,300 shares at an average cost of $26.67 per share, totaling approximately $13.3 million. The Company used cash flow from operations to fund the common stock repurchases. The Company is considering various alternatives for the Electronic Business Infrastructure, Corporate Banking e-Payments and Health Payments Systems business units, including possible sales, spin-offs, strategic alliances, partnerships, third-party investors and initial public offerings. The Company believes that its existing sources of liquidity, which includes cash provided by operating activities, including its factoring program and borrowings available under its line-of-credit facilities, along with potential sources of cash upon successful divestiture of any or all of these business units described above, will satisfy the Company's projected working capital and other cash requirements for the foreseeable future. Forward-Looking Statements 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 or third parties' expectations, predictions, views, opportunities, plans, strategies, beliefs and statements of similar effect. 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 the following: o The corporate divestiture strategy is subject to numerous factors, including market conditions and perception, demand for the other businesses by potential investors or potential acquirers, personnel, tax, business, general economic conditions, viability of businesses as stand-alone operations, and other factors that could affect the Company's decisions and ability to separate businesses, to divest, raise capital, or implement other alternatives for such businesses, and to implement other aspects of the Company's corporate strategy. There can be no assurance that the Company will implement any aspect of the corporate strategy or that if implemented the strategy will be successful. o The Year 2000 lock-down has interrupted the Company's normal sales cycle and therefore is likely to have a negative impact on the Company's revenues and net income beyond 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 upgraded and enhanced their systems prior to the Year 2000. There can be no assurance that the Company's growth rates will return to historical levels. o The acquisition of MessagingDirect is subject to numerous risks, including the following: (i) MessagingDirect is in a highly competitive industry, (ii) MessagingDirect does not have a significant market presence, significant revenues, or widespread acceptance or prolonged use of its products, (iii) MessagingDirect has not been profitable, (iv) the electronic statement presentation and electronic bill presentment and payment markets may not achieve the predicted growth rates, (v) MessagingDirect's products, personnel, and operations may be difficult to combine with those of the Company, the products may not be accepted by the Company's customer base, and there will be significant integration costs of combining the business, and (vi) the acquisition will have a dilutive impact on earnings per share and amortization of intangible assets will have an adverse effect on earnings. o The Company is subject to risks of conducting international operations including difficulties in staffing and management, reliance on independent distributors, fluctuations in foreign currency exchange rates, compliance with foreign regulatory requirements, variability of foreign economic conditions, and changing restrictions imposed by U.S. export laws. o 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 the Company's financial condition and results of operations. o The Company's business is concentrated in the banking industry, making it susceptible to a downturn in that industry. o Fluctuations in quarterly operating results may result in volatility in the Company's stock price. No assurance can be given that operating results will not vary. The Company's stock price may also 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, 2000. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes to the Company's market risk for the three months ended December 31, 2000. See the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000 for additional discussions regarding quantitative and qualitative disclosures about market risk.
PART II EXHIBITS AND REPORTS OF FORM 8-K (a) Exhibits 10.26a Amendment to Credit Facility Letter Agreement & Interim Promissory Note with Wells Fargo Bank Nebraska, N.A. 10.34 Advice of Borrowing Terms for ACI Worldwide (EMEA) Ltd (b) Reports on Form 8-K The Company furnished a Current Report on Form 8-K on December 14, 2000, pursuant to Item 9 of Form 8-K with respect to certain information disclosed in connection with the Company's acquisition of MessagingDirect Ltd. SIGNATURE 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, 2001 TRANSACTION SYSTEMS ARCHITECTS, INC. (Registrant) By:/s/ EDWARD C. FUXA ------------------------------------- Edward C. Fuxa Principal Accounting Officer and Controller
TRANSACTION SYSTEMS ARCHITECTS, INC. INDEX TO EXHIBITS Exhibit Number Description - ------- ----------------- 10.26a Amendment to Credit Facility Letter Agreement & Interim Promissory Note with Wells Fargo Bank Nebraska, N.A. 10.34 Advice of Borrowing Terms for ACI Worldwide (EMEA) Ltd.