1996 Annual Report
1996 TSA ANNUAL REPORT CONTENTS
FINANCIAL HIGHLIGHTS
Year Ended September 30, 1996.
LETTER TO SHAREHOLDERS
Welcome to the 1996 TSA World Tour. Our software helps some of the world's
largest banks give you access to your money - anytime, anywhere.
CONSOLIDATION
In the UNITED STATES, bank consolidation is creating a desire for efficiencies of
scale and a need to manage increasingly complex payment networks.
COMPETITION
In countries like CANADA where the landscape is dominated by a few, very large
banks, new technologies are being used as competitive weapons.
FACING THE FUTURE
High-volume, mission-critical online authorization processing is a requirement in the
UNITED KINGDOM with 82 percent of adults holding cards.
COMBATING FRAUD
GERMAN consumers traditionally have preferred the use of cash but the use of
cards for payment has doubled over the last five years. Fraud also is increasing.
MEETING MARKET NEEDS
In POLAND, banks are establishing networks that extend the electronic services
they offer at a lower cost of ownership for the institution.
NETWORK FOR A NATION
In KUWAIT, banks use a shared banking services network to lower their costs and
enhance the quality of the services they offer.
EXPANDING PRODUCT SET
The SINGAPORE government's program designed to make the country an
"intelligent island" has created a push for a cashless society.
INFRASTRUCTURE
Four years ago there were fewer than 50 automated teller machines in INDIA. The
country's first shared ATM network will be in Mumbai.
HIGH VOLUME DOWN UNDER
AUSTRALIANS have enthusiastically embraced electronic payment methods
doubling transaction volumes in the last two years.
GOING FOR THE GOLD
During the VISA Cash project at the Summer Games in Atlanta, the first reload of
monetary value on a smart card in the UNITED STATES took place.
RETURN TO PORT
TSA participates in these trends benefiting from the growth in electronic payments
and electronic commerce by being in the right place at the right time, AROUND
THE WORLD.
MANAGEMENT'S DISCUSSION
Analysis of financial condition and results of operations.
FINANCIAL STATEMENTS
Index of individual financial statements.
CORPORATE AND SHAREHOLDER INFORMATION
Corporate and shareholder contacts and information.
DIRECTORS AND OFFICERS
A listing of the Board of Directors and Executive Officers.
FINANCIAL HIGHLIGHTS (5)
In $ Thousands, Except Per Share Amounts
Year Ended September 30
1996
1995
Revenues
Operating Income
Net Income
Net Income Per Share (4)
Earnings Before Interest, Taxes, Depreciation and Amortization
$159,784
20,678
12,570
.47
30,563
$118,473
9,067
3,570
.15
20,882
As of September 30
Working Capital
Total Assets
Long-term Obligations
Stockholders' Equity
Backlog
$41,017
123,159
1,687
76,450
104,978
$38,327
101,905
357
60,356
82,112
SUPPLEMENTAL INFORMATION (1)(5)
In $ Thousands, Except Per Share Amounts
1996
1995
1994
% Change
1995 to
1996
Year Ended September 30
Pro Forma Revenues
$159,784 $118,473
$96,267
Pro Forma Operating Income
24,021
15,532
10,667
Pro Forma Net Income
15,546
10,206
6,927
Pro Forma Net Income Per Share (4)
.58
.41
.28
34.9
54.7
52.3
41.5
(1) Transaction Systems acquired Applied Communications, Inc. (ACI) and Applied Communications, Inc., Limited
(ACIL) on December 31, 1993. The above supplemental information reflects the combination of TSA, ACI and ACIL
results of operations data for the four years presented. In addition, the above results of operations data exclude one-time
or acquisition-related expenses including amortization of purchased software, purchased contracts in progress,
purchased research and development, goodwill amortization, interest expense and extraordinary loss. The total of these
expenses were $8.3 million, $43.1 million, $10.8 million and $3.3 million in 1993, 1994, 1995 and 1996 respectively.
In addition to the exclusion of these one-time or acquisition-related expenses, the above pro forma results of operations
were computed using an effective income tax rate of 38 percent.
(2) Non-recurring revenues are composed of fees specified in software and service contracts that the Company expects
to recognize in the next 12 months.
(3) Recurring revenues include all monthly license fees, maintenance fees and facilities management fees from existing
contracts that the Company expects to recognize in the next 12 months.
(4) Adjusted for two for one stock split in the form of a 100% stock dividend occuring July 1, 1996.
(5) Adjusted for the acquisition of Grapevine Systems, Inc., accounted for as a pooling of interests.
LETTER TO SHAREHOLDERS
Ask most people their impression of Nebraska and, once they've
stifled a yawn,their reply will have something to do with corn,
football and the Strategic Air Command. But there is more to
Nebraska - and OMAHA in particular - than first comes to mind.
People making their living on Wall Street will immediately
recognize the name Warren Buffet, but how many know he lives in
Omaha? In addition to Warren, and almost as successful, is
Omaha's Henry Doorly Zoo - world class by anyone's definition.
Our zoo has one of the world's largest free-flight aviaries and
North America's largest facility for big cats. It also has an indoor
rain forest - the world's largest - that houses more than 125 species
of animals living among thousands of exotic plants. (The
photograph of me on page five of this report was taken in the rain forest. I
will explain the "unique" style of dress in a moment.)
Another area that few people think of when they consider Nebraska is high
technology. To amuse visitors, we sometimes call Omaha "The Silicon
Prairie." It is more than just a label, though. Omaha is home to companies
like Inacom, CSG Systems, American Business Information, First Data
and Transaction Systems Architects, Inc. (Nasdaq: TSAI).
Transaction Systems contributes to "The Silicon Prairie" by building
software that facilitates electronic commerce. Our products provide
consumers and companies access to their money through the processing of
transactions involving credit cards, debit cards, smart cards, home banking
services, checks, wire transfers and automated clearing and settlement.
Our software handled more than 12 billion automated teller machine and
point-of-sale transactions last year.
Many of our customers are the largest banks in the world. In fact, 106 of
the top 500 banks worldwide (as measured by asset size) use a product
built by Transaction Systems. As you can see from the chart on this page,
we have plenty of opportunity among these large banks, many of which
continue to use software they developed in the late 1970's or early 1980's.
Also, our market niche is expanding with card-based transaction
volumes increasing all over the world as growth in the use of cash and
checks slows. The chart below documents one aspect of this trend in the
United Kingdom. Because our software is priced in a volume-sensitive
manner, we have benefited from this trend. In fiscal year 1996 we had
revenues of $159.8 million, an increase of 35 percent over last year. Cash
from record operating activities for the year totaled $17.7 million, up from
$11.0 million. The company's cash balance at the end of September 1996
was $31.5 million. Our stock split two-for-one on July 1, 1996.
But like the town in which we are headquartered, there is more to
Transaction Systems than is immediately obvious. Our existing customers
contribute more than 75 percent of our revenues in an average year
through the purchase of additional capacity to handle increasing
transaction volumes, the payment of maintenance fees and the licensing of
new products.
Our preferred pricing model is a monthly license fee which creates
recurring revenues that enhance our long-term profitability. As of
September 30, our level of monthly license fees had reached an annual run
rate of $28 million.
This type of pricing model helped us achieve a pro forma operating
income (excluding acquisition-related charges) of $24 million in fiscal
year 1996, up from $15.5 million last year. Our operating margin in the
fourth quarter of the fiscal year reached 16 percent.
Our approach to revenue recognition - typically recognizing revenue
only after the products are installed - helps us maintain a rolling 12-month
backlog of business. Our backlog grew 28 percent in fiscal 1996 reaching
$105 million as of September 30.
This backlog consisted of $34 million in non-recurring revenues and $71
million in recurring revenues. Backlog provides us with a visibility to our
operations enjoyed by few software companies. This visibility allows us to
reduce the volatility in our business.
Perhaps one aspect of our company that separates us from other
technology companies on the prairie is the scope of our international
presence. Our solutions are used on more than 1,250 systems by more than
550 customers in 65 countries on six continents. This year 56 percent of
our revenues came from outside the United States. While our U.S.
revenues grew at a healthy 23 percent, our revenues in the Europe, Middle
East, Africa region and the Asia Pacific region were up 50 and 88 percent,
respectively.
Because ours is an international business, we thought you might be
interested in a world tour with stops in a few of our key markets. On the
tour we will introduce you to the company, some of our leading customers
and certain trends that are influencing our business around the globe. I will
be the host for this tour. This explains the clothes I am wearing in the
picture. The investor relations officer who insisted I wear them is now
serving a "special" assignment.
CONSOLIDATION
• The United States banking arena includes more than 10,000
financial institutions. Over the last several years, this industry has
been characterized by consolidation. When banks merge, they
often want to realize efficiencies of scale by combining their
payment networks. Because of the complex nature of these
networks and the high transaction volumes they must
accommodate, this is difficult.
Because TSA's products are built for high-performance
environments and are current with 40 device types, 100 network
interfaces and 40 communication protocols, we often help banks
faced with mergers address needs surrounding their payment
networks. During the fourth quarter of our 1996 fiscal year, 19
bank mergers were completed or nearing completion in the United
States. In 15 of those, TSA's software was being used by the
acquiring institutions. In the other four cases, our product was
installed at both banks involved.
Consumers accessing their accounts over
proprietary and public networks, using
devices such as telephones and personal
computers, can pay bills and perform a wide
range of banking functions on systems using
TSA's software.
The merger of Chemical Bank with Chase Manhattan Bank created
an automated teller machine (ATM) network that processes more
than 20 million transactions per month. Prior to the merger,
Chemical used TSA's products to manage its network. At Chase,
five separate ATM networks were in place. Because our software
can handle high-transaction volumes in a complex processing
environment, TSA's products were chosen to run the ATM
network at the "new" Chase.
The consolidation of banks also has resulted in a competitive
environment where thousands of banks must battle for customers
in local markets with institutions many times their asset size. These
banks often turn to third-party processors for new products and
services to remain competitive while controlling costs.
The NEW YORK Cash Exchange (NYCE) Corporation, the largest
electronic funds transfer provider in the Northeast, processes
payment services for 1,296 financial institutions. When NYCE
decided to offer remote banking services to these financial
institutions, they licensed TSA's products. Using our solutions,
consumers can access the NYCE system via a telephone or
personal computer to pay bills and perform banking functions with
complete confidence.
o
!"
An August 1995 report by Forrester Research
in Cambridge, Mass., predicts that online
banking will grow from 1.1 million U.S.
households to 9.7 million over the next five
years.
COMPETITION
• Because the systems we sell are of strategic importance to the
customers we serve, we have found that a direct presence is key to
our success in many parts of the world. In June 1996, we
purchased TXN Solution Integrators in Toronto, Ontario, to give
us better access to the banks in CANADA .
In countries such as Canada where the landscape is dominated by a
few, very large banks, the battle for the consumer comes down to
the ability to offer services which differentiate the institutions. To
achieve this level of differentiation, large banks will either build
software to meet their specific needs or they will purchase products
from companies like TSA.
TSA's products allow a bank to differentiate
itself with services that maximize the
control, choice and convenience offered to
the consumer with ease of access, timeliness
of information and responsiveness.
Forty-five percent of the top 500 banks in the world still use
home-grown solutions. Many of these institutions are moving
away from building their own software because of costs and the
long lead times required to bring new products to market.
Canadian Imperial Bank of Commerce (CIBC), one of the largest
banks in North America, has been a TSA customer for more than
10 years using our products in its automated teller machine and
point-of-sale networks.
When CIBC decided to aggressively expand its remote banking
services, it chose TSA to provide the product. CIBC's goal was to
differentiate itself with remote banking that maximized the control,
choice and convenience offered to the consumer with ease of
access, timeliness of information and responsiveness.
For the bank, this meant establishing the infrastructure to support
24-hour banking by telephone or personal computer and over
proprietary, as well as, public networks. This required software
that was integrated with its other retail banking services and could
handle transactions that arrived at the bank in unpredictable
volumes around the clock.
FACING THE FUTURE
• TSA is not new to the area of electronic payments and
electronic commerce. Our roots extend back to a shared automated
teller machine network established in the 1970's through a
partnership between our subsidiary Applied Communications, Inc.,
and a bank in Lincoln, Nebraska. Over more than two decades we
have built a level of expertise in our industry that is at the core of
our customer relationships today.
NatWest Bank is one of the four largest banks in the UNITED
KINGDOM. It has over 2,000 branches and assets in excess of
$240 billion. It operates in 33 countries around the world and has
approximately 80,000 employees. Its retail banking operation is the
second largest in the United Kingdom.
TSA's software is used on point-of-sale
networks that may process more than a
million transactions in a single day.
TSA's software has been running at NatWest
since 1988. Long-term relationships are important
to our company since 75 percent of our revenues
come from the existing customer base in an average year. This is the
result of customers buying additional products and services,
licensing additional transaction capacity and paying maintenance
fees.
NatWest has designated TSA as its strategic supplier for the bank's
next generation of high-volume, mission-critical, online
authorization processing. As part of that relationship, TSA provides
software and services that help NatWest maintain its commitment
to a high standard of customer service delivered on robust and
proven electronic payment networks.
When banks select solutions from TSA, they receive products
that are current with industry standards and able to meet their
specific needs. As part of our commitment to these customers,
TSA must have products that meet a range of challenges. Whether
the challenges involve a new device type, Year 2000 compliance
or transition to a single European currency, TSA helps its
customers adjust and respond.
This capability is a competitive advantage for our company.
According to information gathered by our Corporate Information
Center, over the last three years TSA has won more than 60
percent of all its competitive situations.
!"
According to the Association for Payment
Clearing Services (APACS), 82 percent of the
adult population in the United Kingdom now
holds one or more cards, with 57 percent of
adults holding debit cards.
COMBATING FRAUD
• German consumers traditionally have preferred the use of cash
in their day-to-day transactions. This is reflected in statistics from
the early 1990's supplied by the Bank for International Settlement
that indicated the number of point-of-sale (POS) terminals per one
million inhabitants was 344 in GERMANY compared with 3,054
in Sweden and 3,780 in the United Kingdom. On the other hand,
Germany has more automated teller machines (ATMs) per
inhabitant.
TSA helps banks address the increase in
card use and combat the growth of
fraud with products that support online
systems and reusable, stored-value smart
cards.
Habits are changing in this country though. According to
Electronic Payments International, the use of cards for payments in
Germany has doubled over the last five years. With this increase in
card use has come an increase of fraud.
The majority of retail banking accounts in Germany are held in the
savings and cooperative banks. The ATM and POS networks used
by these banks are supported by regional processors using software
they built themselves or highly customized products bought from
vendors but maintained by in-house personnel. Online systems and
reusable, stored-value smart cards can help these banks address the
increase in card use while combating the growth of fraud.
The Betriebswirtschaftliche Institut der Deutschen
Kreditgenossenschaften (BIK) GmbH, a third-party service
provider for the cooperative banks, selected TSA's software to
drive its online transaction processing for ATM and POS
transactions. BIK processes 450,000 online transactions per day,
30 percent of all the transactions in the German card market.
BIK also uses TSA's products to manage the transactions
generated by Germany's first national smart-card program, called
GeldKarte. TSA's software enables consumers to load value onto
their smart cards from special bank terminals and collects
transactions from retail outlets at the end of each day for settlement
and unspent funds management.
MEETING MARKETING NEEDS
• Since forming TSA with the leveraged buyout of Applied
Communications, Inc., in December 1993, and acquisition of
USSI, Inc., in January 1994, we have maintained a commitment to
offer software solutions on multiple hardware platforms.
Most of Applied Communications' products run on Tandem
computers. USSI develops and supports solutions for IBM
mainframes, many popular UNIX servers and Stratus hardware. In
fiscal 1996, we announced (and have since completed) the
acquisition of Open Systems Solutions, Inc. Open Systems'
software manages payments on Microsoft's Windows NT operating
system.
Being able to offer software products that
run on multiple hardware platforms
provides TSA with early entry into emerging
markets where payment systems are
developing and hardware preferences vary.
The Tandem computer remains the platform of choice for the
largest banks in the world because of its ability to support
complex, high-volume, scalable networks. However, being able to
offer multiple platform solutions provides TSA with early entry
into emerging markets where payment systems are developing and
hardware preferences vary. For example, in central and eastern
Europe, it is not unusual to encounter banks that want their
electronic payment solution to run on low-cost UNIX servers.
In POLAND, only one person out of 10 has a bank account and
fewer than one in 100 have any type of payment card. The
challenge for Polish banks is to extend services to more of the
population.
To do so, these institutions are establishing automated retail
banking networks. These networks require technology to manage
the processing of transactions at the branch, as well as through
automated teller machine (ATM) networks.
In 1996, Powszechny Bank Gospodarczy S.A., the leading regional
bank in central Poland, purchased TSA's UNIX-based software
products to drive its ATM network. By implementing an online
system, the bank can offer its customers additional products and
services.
The goal of platform independence allows TSA to continue to offer
institutions solutions that lower the cost of ownership and reduce
risk in markets that constantly evolve.
NETWORK FOR A NATION
• TSA's core products contain more than 20 million lines of code.
This fact alone poses a significant barrier faced by anyone thinking
of entering our niche.
These millions of lines of code allow our software to perform three
primary functions within high-performance electronic payment
networks. First, our products manage devices. Within a single
country there may be many types of automated teller machines
(ATMs) or point-of-sale (POS) terminals with which we must
communicate. Second, we route transactions switching them across
regional, national and international networks to the institutions
capable of authorizing them. Third, we often are the software used
in the authorization process itself.
TSA's products may be used by a customer to perform any or all
of these functions. When used for switching, our software may
route most of the electronic transactions in a country.
In KUWAIT, The Shared Electronic Banking Services Company
(KNET) uses TSA's software to route all the ATM and POS traffic
for its eight-member banks. KNET was founded as a means for
enhancing the quality of banking services available to the people of
Kuwait and to avoid the cost associated with establishing multiple,
proprietary networks.
Because the institutions founding KNET recognized a trend toward
the electronic delivery of banking services, they needed software
capable of handling steadily increasing transaction volumes. Also,
as consumer demands for convenience made it necessary to offer
access to debit and credit accounts from around the world,
connectivity was key.
The two decades of research and development represented in
TSA's products allow us to meet these requirements. As the trend
toward the use of electronic payments grows around the world, the
need for software that can manage, route and authorize
increasingly complex transactions will become critical to networks
everywhere. Younger consumers, who are not intimidated by
technology, entering the workforce may accelerate the need for
these capabilities.
o Two decades of research and development allow us
to meet the needs of customers who must manage,
route and authorize transactions without fail, 24
hours a day, seven days a week.
EXPANDING PRODUCT SET
• TSA's reputation is built on software that can be found in
automated teller machine (ATM) and point-of-sale (POS) networks
around the world. As the use of electronic payments grows, we
look for ways to expand our product set to meet the needs of
institutions and their customers.
Sometimes we achieve this through acquisition. In September
1996, we acquired Grapevine Systems, Inc. Grapevine Systems
develops and supports software used to monitor online transaction
processing in the securities, health care and manufacturing
industries, as well as online services. Our goal is to use our
international distribution network to expand the reach of
Grapevine's products.
We also grow our solution set through research and development.
On average we have invested approximately 10 percent of our
revenue in this area during the last few years. This allows us to
enhance products and provide new solutions that address trends in
the marketplace. An example of this type of initiative is our
clearing and settlement product. We have been successful in
selling this product in markets such as SINGAPORE where the
electronic networks require software that can handle high volumes
of clearing and settlement performed in an online environment.
Located at the southern tip of the Malaysian Peninsula, Singapore
is a city-state, about the same size as the city of Chicago (633
square kilometers) with a population of 2.9 million, making it one
of the most densely populated countries in the world. The
Singapore government's program designed to make the country an
"intelligent island" by the turn of the century has created a push for
a cashless society.
Network for Electronic Transfers (NETS) uses TSA's software
to manage the shared ATM and POS transactions for its seven
shareholder banks in Singapore. In order to support the country's
drive towards automated electronic payments, NETS also licensed
TSA's clearing and settlement solution. Our software provides
NETS with a high-performance system to manage the flow of
funds between the banks that participate in their network.
o
!"
TSA enhances its products and provides new
solutions to address the trends of a dynamic
marketplace. By extending the product set,
TSA grows its business with existing
customers.
INFRASTRUCTURE
• Though TSA is headquartered in the United
States, 56 percent of our revenues came from
international markets in fiscal year 1996. In fiscal year 1995, that
figure was 51 percent. Europe, Middle East and Africa (EMEA)
accounted for 30 percent of the revenues in fiscal 1996 while Asia
Pacific accounted for 13 percent of the total. Canada, Mexico,
Central America and South America provided the remaining 13
percent.
The growth of our international business
helped us achieve a 35 percent increase in
revenues in fiscal year 1996. We are
investing in an infrastructure to support the
needs of customers worldwide.
While the growth in all three of TSA's primary channels -
Americas, EMEA and Asia Pacific - exceeded our expectations, it
was the growth of our international business that helped us achieve
a 35 percent increase in revenues. However, establishing a viable
international business requires investment. We cannot meet all of
the needs of customers around the world with operations based
solely in Nebraska.
For this reason we have reinvested approximately 10 percent of
our annual revenues for each of the last several years in building an
infrastructure that includes offices in Canada, Mexico, Brazil,
Norway, Germany, South Africa, Bahrain, Japan, Australia,
Singapore and the United Kingdom. This commitment provides us
with the ability to deliver products that help countries half a world
away from Omaha ride the wave of electronic payments spreading
around the globe.
Four years ago there were fewer than 50 automated teller
machines (ATMs) in INDIA. Today, there are still only 200 ATMs
in this country of 950 million people. Indian Banks' Association,
composed of 27 state-owned institutions, in partnership with the
India Switch Company is establishing the nation's first shared
ATM network.
The network will be based in Mumbai (formerly Bombay) and will
use TSA's software. It will allow consumers to access their account
at any of the member banks through any ATM and provide for
switching to international networks in the future. Our Singapore
office supports this project and gives our company a significant
advantage over competitors who may try to enter this
expanding market.
HIGH VOLUME DOWN UNDER
• Australians are enthusiastic adopters of new technologies. They
have embraced electronic payment methods with open arms,
doubling transaction volumes in the last two years according to
figures collected by the Reserve Bank. The use of debit cards to
pay for goods such as groceries and petroleum has been the
primary driver in this trend.
The number of terminals installed in supermarkets, service
stations and other retail outlets around AUSTRALIA has
increased from 11,500 in 1989 to almost 97,000 in March 1996.
Terminals also are being installed in pharmacies, butcher shops
and taxis.
TSA's customer base is not exclusively
banks. Retailers - particularly petroleum
companies - use TSA's products to manage
their payment networks.
As is the case with other large banks in the world, the Australia
and New Zealand Banking Group and Westpac Banking
Corporation use TSA's software to manage the growing volumes in
their automated teller machine (ATM) and point-of-sale (POS)
networks. However, our customer base in Australia, and
throughout the world, is not exclusively composed of financial
institutions.
In addition to banks, retailers - particularly petroleum companies -
use TSA's products to manage their payment networks. BP
Australia and the Australian Petroleum Pty Ltd. have licensed our
solutions. U.S. retailers such as Texaco, J. C. Penney and Safeway
rely on TSA's products. In Europe, J. Sainsbury and Esso
Petroleum are customers.
The increase in the use of cards in Australia is expected to
continue creating a need for merchants to reduce risk, increase the
capacity of their networks and provide a broader range of services.
By the way, ATMs on this island continent are not obsolete. In this
decade alone, the number of ATMs has increased steadily as banks
respond to consumer demands for convenience. Many of
these machines now have the ability to deliver a full range of
services normally provided at the branch.
GOING FOR THE GOLD
• The last entry in our travelogue involves First Union
Corporation, the sixth largest banking company in the United
States. First Union has been a TSA customer for 11 years using our
software in the electronic payment networks that serve their
expanding client base. The first reload of monetary value on a
smart card in the United States took place on this bank's network
using our products.
These same products were used by First Union for a smart-card
pilot conducted during the 1996 Summer Games in ATLANTA,
Georgia. The project, which allowed consumers to use VISA Cash
stored-value cards, exceeded the expectations set by the sponsors
in the first seven days of the Games. In addition to venues around
various events, the cards were accepted around metropolitan
Atlanta, including fast-food outlets, convenience stores, gas
stations and movie theaters.
TSA monitors the quality of its software by
conducting regular satisfaction surveys, as
well as involving customers in user groups
and joint-development initiatives.
Worldwide our customer retention rate
exceeds 95 percent.
The First Union smart-card project received high visibility and
our software performed flawlessly. The technology is interesting
and many people believe that it will have a dramatic impact on the
future. Widespread use may take some time, though. Consumer
acceptence and the cost of changing the infrastructure to support
this type of payment tool will impact the pace of this change.
The reason I mentioned First Union has less to do with smart cards
and more to do with an award they presented to us in March. The
award was given to our subsidiary, Applied Communications, as
the outstanding computer software supplier to the bank. According
to the news release, the honor was designed to recognize vendors
who helped the institution improve its offering of products and
services while lowering costs.
Meeting the business needs of customers year
in and year out does not occur by accident. TSA
closely monitors the quality of its software by
conducting regular satisfaction surveys, as well as
involving customers in user groups and joint-
development projects. The time, resources and
money spent in these areas pay dividends.
Worldwide, our customer retention rate exceeds 95 percent.
RETURN TO PORT
As we return to the prairie, it is my hope that the TSA 1996
World Tour has been useful to you. While we were not able to
stop in every key market or visit each of our important customers,
the places we did visit should provide a view to the scope and
breadth of our business.
The fact that we are an international technology company
headquartered in OMAHA, Nebraska, may always seem something of a
paradox. However, our approach to business in the coming year will be
what you expect from us - pragmatic and straightforward.
We intend to expand our business by focusing on the basics that have
served us well to date. We will build long-term shareholder value by
continuing to diversify the solutions we offer for the financial services
and electronic payment sectors.
This means more products on more platforms delivering core and emerging
technologies to financial institutions and other corporations moving money for consumers
and companies around the world. This means ongoing re-investment in our worldwide
infrastructure. This means maximizing our opportunities and minimizing our risks so that
we continue to realize our goal of quarter-on-quarter improvement in our key financial
metrics.
Quality is vital and for us it is defined as the means by which we achieve our goals of
innovative customer solutions and service excellence in a profitable fashion. Recruiting
and retaining the highest caliber of employees is critical to our success. This will require
us to find individuals who have strong technical skills and to keep them by providing an
environment where the corporate culture is based on a conviction that work should
regularly incorporate a bit of fun.
We appreciate your interest in Transaction Systems Architects, Inc. I hope you
understand now why we believe our company is in the right place at the right time -
around the world. Please contact us if you have questions or need more information.
William E. Fisher
Chairman, President and Chief Executive Officer
Transaction Systems Architects, Inc.
Management Discussion
• Overview
The Company was formed on November 2, 1993 for the purpose of
acquiring all of the outstanding capital stock of Applied
Communications Inc. ("ACI") and Applied Communications Inc.
Limited ("ACIL") from Tandem. ACI and ACIL were acquired on
December 31, 1993. On January 3, 1994, the Company acquired all
of the outstanding common stock of USSI. The acquisitions of
ACI, ACIL and USSI, Inc. are hereafter referred to as the
"Acquisitions". As a result of the Acquisitions, the Company
incurred certain one-time or acquisition related expenses in fiscal
1996, 1995 and 1994. These acquisition related charges included,
among others, charges for purchased research and development,
purchased contracts in progress, purchased software and goodwill
amortization. These expenses are hereafter referred to as the
"Acquisition Charges".
On June 3, 1996, the Company acquired substantially all of the net
assets of TXN. The acquisition was accounted for as a purchase.
On September 13, 1996, the Company and Grapevine entered into
a share exchange agreement which resulted in Grapevine becoming
a wholly-owned subsidiary of the Company. The share exchange
was accounted for as a pooling of interests. The Company's
financial statements have been restated to include the results of
Grapevine for all periods presented.
For purposes of the following discussion and analysis, the results
of operations of the Predecessors for the three months ended
December 31, 1993 have been combined with the results of
operations of the Company for the nine months ended September
30, 1994 by adding the corresponding items without adjustment.
This computation was done to permit useful comparison between
the aggregated twelve months ended September 30, 1996, 1995
and 1994. The combined results of operations for the twelve
months ended September 30, 1994 includes nine months of
operations of USSI.
The Company provides electronic payments software and related
services. During fiscal 1996, 1995 and 1994, 56%, 51% and 49%,
respectively, of total revenues resulted from international
operations. The Company derived approximately 75%, 74% and
73%, respectively, of its revenues for those same periods from
licensing its BASE24 family of software products and providing
related services and maintenance. Although the Company believes
that the majority of its revenues will continue to come from its
existing BASE24 and TRANS24 products over the next several
years, the Company has developed and is currently developing
other software products and related services. These products are in
the areas of network connectivity, middleware, remote banking and
ACH.
The following table summarizes revenues by geographic region:
Twelve Months Ended September 30
(in thousands)
Americas
EMEA
Asia/Pacific
1996
1995
1994
(combined)
$91,061
$75,624
$60,196
47,267
31,264
26,363
21,456
11,585
9,708
Total revenues
$159,784
$118,473
$96,267
See Note 13 to the Company's Consolidated Financial Statements
for additional information relating to geographic regions.
Product Pricing. The Company typically charges a one-time,
paid-up-front fee ("PUF") for perpetual usage or an ongoing
monthly licensing fee ("MLF") for month-to-month usage of its
software products. Under a PUF arrangement, substantially all
revenue related to the transaction is recognized when the software
is installed (because the customer does not have the ability to
cancel the contract), while under a MLF arrangement, the revenue
is recognized on a monthly basis (because the customer typically
has the ability to cancel its contract at any time). Consequently,
under an MLF contract, revenue recognition and cash flow are
deferred. A key component of the Company's strategy is to
continue to seek to increase MLF revenue. MLF revenue amounted
to $20.9 million, $13.1 million and $6.6 million, in fiscal 1996,
1995 and 1994, respectively. PUF revenue, including software
modification fees, amounted to $58.0 million, $44.9 million and
$38.1 million, in fiscal 1996, 1995 and 1994, respectively.
Hardware Revenues. The Company has a written agreement with
Tandem whereby Tandem pays commissions to the Company
when the Company can demonstrate that a customer's purchase of
its software resulted in that customer's purchase of hardware from
Tandem. The commissions are determined as a percentage of
Tandem's related hardware revenue. Generally, if a customer's
transaction volume increases and the increase necessitates the
purchase of additional hardware or an upgrade of its hardware
platform, Tandem pays the Company additional commissions on
the related hardware sale to the customer. The level of hardware
commissions earned by the Company varies from year to year due
to timing of customer purchases, introduction of new lines of
hardware, and changing prices of hardware. Hardware prices
continue to decline and could result in lower hardware commission
revenues to the Company in future years. Commissions from
Tandem amounted to $4.4 million, $4.6 million and $3.7 million in
fiscal 1996, 1995 and 1994, respectively.
Public Offerings. The Company completed an initial public
offering (IPO) in March 1995. The Company sold 4,825,000 shares
of Class A Common Stock resulting in net proceeds to the
Company, after deducting the underwriting discount and offering
expenses, of approximately $32.3 million. The Company used
$25.8 million of the IPO proceeds to repay all outstanding bank
indebtedness (the "Indebtedness"). Upon repayment of the
Indebtedness, the Company incurred an extraordinary loss of $2.7
million for the writeoff of debt issuance costs of $1.1 million and
original issue discount of $1.6 million. In August 1995, the
Company completed the issuance of an additional 2,000,000 shares
of Class A Common Stock through a public offering, resulting in
net proceeds, after deducting the underwriting discount and
offering expenses, of approximately $22.4 million.
• Management Discussion - Page 2
o Results of Operations
The following table sets forth certain financial data and the
percentage of total revenues of the Company and its
Predecessors for the periods indicated:
Twelve Months
Ended
September 30,
1996
1995
1994
(dollars in
thousands)
Amount % of
Revenue Amount % of
Revenue
Amount % of
Revenue
Revenues:
Software license fees $78,937 49.4% $58,028 49.0% $44,948 46.7%
Maintenance fees
Services
Hardware, net
29,167 24.6
26,724 22.6
4,554 3.8
35,614 22.3
40,845 25.6
4,388 2.7
24,018
22,470
4,831
25.0
23.3
5.0
Total revenues
159,784 100.0
118,473 100.0
96,267
100.0
--
--
3,143 2.0
19,120 12.0
41,050 25.7
Expenses:
Cost of software
license fees:
Software costs
Amortization of
purchased
software
Purchased contracts
in
progress
Cost of maintenance
and services
Research and
development:
Research and
development costs
Charge for purchased
research
and development
Selling and
marketing
General and
administrative:
General and
administrative costs 26,151 16.4
Amortization of
goodwill and
purchased
intangibles
34,414 21.5
14,572 9.1
656
0.4
--
--
13,139 11.1
10,246
10.6
3,165 2.6
3,376
3.5
2,956 2.5
12,398
12.9
28,538 24.1
24,533
25.5
12,539 10.6
10,291
10.7
--
--
22,712
23.6
30,074 25.4
23,036
23.9
18,651 15.7
17,604
18.3
344
0.3
1,650
1.7
Total expenses
139,106 87.1
109,406 92.3
125,846 130.7
Operating income
(loss)
Other income
(expense):
Interest income
Interest expense
Other income
20,678 12.9
9,067 7.7
(29,579) (30.7)
1,914 1.2
(235)
(626)
(0.1)
(0.4)
1,077 0.9
(1,751) (1.5)
13
0.0
507
(3,092)
172
0.5
(3.2)
0.2
Total other
1,053 0.7
(661)
(0.6)
(2,413)
(2.5)
Income (loss) before
income taxes
Provision for income
taxes
Net income (loss)
before
extraordinary loss
Extraordinary loss
related to
early retirement of
debt
21,731 13.6
8,406 7.1
(31,992) (33.2)
(9,161) (5.7)
(2,086) (1.8)
(2,966)
(3.1)
12,570 7.9
6,320 5.3
(34,958) (36.3)
--
--
(2,750) (2.3)
--
--
Net income (loss)
$12,570 7.9%
$3,570 3.0%
$(34,958) (36.3)
Revenues. Total revenues for fiscal 1996 increased 34.9%
or $41.3 million over fiscal 1995. Of this increase, $20.9
million of the growth resulted from a 36.0% increase in
software license fee revenue, $14.1 million from a 52.8%
increase in services revenue and $6.4 million from a 22.1%
increase in maintenance fee revenue.
Total revenues for fiscal 1995 increased 23.1% or $22.2
million over fiscal 1994. Of this increase, $13.1 million of
the growth resulted from a 29.1% increase in software
license fee revenue, $4.3 million from a 18.9% increase in
services revenue and $5.1 million from a 21.4% increase in
maintenance fee revenue.
The growth in software license fee revenue in both fiscal
1996 and 1995 is the result of increased demand for the
Company's BASE24 products and a continued growth of
the installed base of customers paying MLF revenue.
Contributing to the strong demand for the Company's
products is the continued world-wide growth of EFT
transaction volume and the growing complexity of EFT
payment systems. MLF revenue was $20.9 million, $13.1
million and $6.6 in fiscal 1996, 1995 and 1994,
respectively.
The growth in service revenue in both fiscal 1996 and 1995
is the result of increased demand for technical and project
management services which is a direct result of the
increased installed base of the Company's BASE24
products.
The increase in maintenance fee revenue in both fiscal
1996 and 1995 is a result of the continued growth of the
installed base of the Company¹s software products.
Expenses. Total operating expenses for fiscal 1996
increased 27.1% or $29.7 million over fiscal 1995. Total
operating expenses for fiscal 1995 decreased 13.1% or
$16.4 million over fiscal 1994. The primary reason for the
overall increase in operating expenses during fiscal 1996 is
the increase in staff required to support the increased
demand for the Company's products and services. Total
staff (including both employees and independent
contractors) was 1,272, 1,040 and 837 at September 30,
1996, 1995 and 1994, respectively. The decrease in total
operating expenses in fiscal 1995 as compared to fiscal
1994 is primarily due to a decrease in the Acquisition
charges which were offset, in part, by higher labor costs
associated with increases in staff.
The Company's operating margin (excluding the
Acquisition charges of $3.3 million, $6.5 million and $40.1
million for fiscal 1996, 1995 and 1994, respectively) was
15.0%, 13.1% and 11.0% in fiscal 1996, 1995 and 1994,
respectively. These improvements are primarily due to
increased demand for the Company's products and the
impact of the growth in the Company's recurring revenues
(MLF's, maintenance and facilities management fees).
The Company's gross margin (total revenues minus cost of
software and cost of maintenance and services) was 60.4%,
62.2% and 60.4% in fiscal 1996, 1995 and 1994,
respectively. The decline in gross margin during fiscal
1996 is primarily due to the accelerated growth in services
business which typically has a lower gross margin than
software license fees which was offset, in part, by the
impact of additional MLF revenue. The increase in gross
margin during fiscal 1995 is due primarily to the impact of
additional MLF revenue.
Research and development (R&D) costs as a percentage of
total revenues were 9.1%, 10.6% and 34.3% in fiscal 1996,
1995 and 1994, respectively. R&D costs in fiscal 1994
include a one-time charge for purchased research and
development associated with the Acquisitions. R&D costs,
excluding the charge for purchased R&D, for fiscal 1994
were 10.7% of revenue. The majority of R&D costs have
been charged to expense as incurred with the capitalization
of software costs amounting to approximately $1.2 million
per year. The Company expects R&D costs to remain
relatively constant as a percentage of revenues.
Selling and marketing costs as a percentage of total
revenues were 21.5%, 25.4% and 23.9% in fiscal 1996,
1995 and 1994, respectively. The decrease in 1996 is due
primarily to higher levels of services revenue and backlog
which typically has a lower level of sales commission
expense associated with it. The increase in 1995 is due
primarily to an investment in sales personnel to pursue
business opportunities in the EFT market place.
General and administrative costs as a percentage of total
revenues were 16.8%, 16.0% and 20.0% in fiscal 1996,
1995 and 1994. The 1996 increase is due primarily to the
hiring of additional staff to support the Company's growth.
The 1995 decrease is due to the Company's emphasis on
cost controls and the decrease in Acquisition costs.
EBITDA. The Company's earnings before interest, income
taxes, depreciation and amortization (EBITDA) was $30.6
million, $20.9 million and $16.5 million for fiscal 1996,
1995 and 1994, respectively. These increases are
attributable to the continued growth in both recurring and
non-recurring revenues more than offsetting the growth in
operating expenses. EBITDA is not intended to represent
cash flows for the periods.
Other Income and Expense. Other income and expense
consists primarily of interest income derived from short-
term investments and interest expense on indebtedness. The
growth in interest income is due to the investment of a
portion of the public offering proceeds received in March
and August of 1995. The decrease in interest expense is due
to the repayment of the Indebtedness out of the proceeds of
the Company's March 1995 public offering.
Extraordinary Loss. Upon repayment of the Indebtedness,
the Company incurred an extraordinary loss of $2.7 million
for the write-off of debt issuance costs of $1.1 million and
original issue discount of $1.6 million.
Income Taxes. The Company had an effective tax rate of
42.2% for fiscal 1996 as compared to 36.9% for fiscal
1995. The increase in the effective tax rate is principally
the result of deferred tax assets which were recognized in
fiscal 1995 which reduced the effective tax rate for that
year with no corresponding recognition of deferred tax
assets in fiscal 1996. During fiscal 1994, the Company had
a pre-tax loss but still had a tax provision. This was the
result of the Company expensing withholding taxes paid on
remittances to the United States for software license fees.
These foreign withholding taxes were expensed in fiscal
1994 because, at that time, realization of these taxes as a
credit was not assured.
As of September 30, 1996, the Company has deferred tax
assets of approximately $12.4 million and deferred tax
liabilities of $0.7 million. Each year, the Company
evaluates its historical operating results as well as its
projections for the next 24 months to determine the
realizability of the deferred tax assets. This analysis
indicated that $4.4 million of the deferred tax assets were
more likely than not to be realized. Accordingly, the
Company has recorded a valuation allowance of $8.0
million as of September 30, 1996.
• Management Discussion - Page 3
o Backlog
As of September 30, 1996 and 1995, the Company had
non-recurring revenue backlog of $20.4 million and $17.1
million in software license fees and $13.6 million and
$12.0 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 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 September 30, 1996 and 1995, the Company had
recurring revenue backlog of $71.0 million and $53.1
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.
Selected Quarterly Information
The following table sets forth certain unaudited financial
data for each of the quarters within fiscal years 1996, 1995
and 1994. This information has been derived from the
Company's Consolidated Financial Statements and the
financial statements of its Predecessors, and in
management's opinion, reflects all adjustments (consisting
only of normal recurring adjustments) necessary for a fair
presentation of the information for the quarters presented.
The operating results for any quarter are not necessarily
indicative of results for any future period.
Sep 30, Jun 30, Mar 31, Dec.
31,
1995
1996
1996
Sep 30, Jun 30, Mar 31, Dec 31, Sep 30, Jun 30 , Mar 31, Dec 31
1995
1995
1995
1994
1994
1994
1994
1993
(Predeces
$22,733 $19,969 $19,018 $17,217 $18,084 $14,386 $13,108 $12,439 $13,766 $12,912 $10,311 $7,956
9,725 9,068 8,412 8,409 7,559 7,545 7,260 6,803
11,991 11,067 9,169 8,618 7,286 7,012 6,250 6,187
1,063 1,239 1,271 1,200 1,033 1,050
6,360
6,178
6,070
5,392
6,421
814
5,787
979
5,301
1,909
4,353
1,129
(in thousands) 1996
Revenues:
Software
license fees
Maintenance
fees
Services
Hardware, net 1,109 977
Total
revenues
45,558 41,081 37,662 35,483 34,200 30,143 27,651 26,479 27,361 25,856 23,591
18,830
Expenses:
Cost of
software
license fees:
Software costs 5,171 5,173 4,871 3,905 4,059 2,829 2,892 3,359
Amortization
of purchased
software
792
787
790
785
791
788
783
792
2, 464 2,642
2,376
2,713
785
779
778
1,034
Purchased
contracts in
progress
Cost of
maintenance
and services
Research and
development:
Research and
development
costs
Charge for
purchased
research and
development
Selling and
marketing
General and
administrative:
General and
administrative
costs
Amortization
of goodwill
and purchased
intangibles
--
--
--
--
--
--
631
2,325
3,550
3,222
5,626
--
12,052 10,790 9,437 8,771 8,080 7,493 6,696 6,269
6,993
6,391
5,845
5,164
2,892
2,882
2,689
1,704
6,779
6,063
5,637
4,359
4,596
4,552
4,359
3,946
3,796 3,450 3,788 3,537 3,550 3,630 2,767 2,592
--
--
--
--
--
--
--
--
--
--
22,712
--
9,832 8,314 7,864 8,404 9,074 7,559 7,002 6,439
7,284 7,094 6,079 5,695 4,786 4,502 4,685 4,678
204
157
145
150
50
50
103
141
140
555
139
816
Total
expenses
39,126 35,761 32,969 31,250 30,390 26,855 25,566 26,595 28,199 27,086 50,161
19,736
Operating
income (loss) 6,432 5,320 4,693 4,233 3,810 3,288 2,085
(116)
(838)
(1,230) (26,570) (906)
Other income
(expense):
Interest
income
Other
Interest
expense
334
444
568
568
458
283
185
151
177
134
(446)
(99)
(51)
(30)
(86)
58
149
(108)
(331)
349
105
154
91
--
(53)
(54)
(84)
(44)
(49)
(41)
(703)
(958)
(963)
(1,036) (1,056)
(34)
Total other
(165) 291
433
494
323
300
(369)
(915)
(1,117) (553)
(797)
57
Income (loss)
before income
taxes
Benefit
6,267 5,611 5,126 4,727 4,133 3,588 1,716
(1,031) (1,955) (1,783) (27,367) (849)
(2,876) (2,392) (2,095) (1,798) (1,394) (730) 547
(509)
(982)
(664)
(533)
(802)
(provision) for
income taxes
Net income
(loss) before
extraordinary
loss
Extraordinary
loss related to
early
retirement of
debt
Net income
(loss)
•
3,391 3,219 3,031 2,929 2,739 2,858 2,263
(1,540) (2,937) (2,447) (27,900) (1,651)
--
--
--
--
--
--
(2,750) --
--
--
--
--
$3,391 $3,219 $3,031 $2,929 $2,739 $2,858 $(487) $(1,540) $(2,937) $(2,447) $(27,900) $(1,651)
o
!" Liquidity and Capital Resources
As of September 30, 1996, the Company had working capital of
$41.0 million, cash and cash equivalents of $31.5 million and a
$10 million bank line of credit of which there are no borrowings
outstanding. The bank line of credit expires in June 1997.
For the year ended September 30, 1996, the Company's cash flow
from operations amounted to $17.8 million and cash used in
investing activities amounted to $22.8 million.
In the normal course of business, the Company evaluates potential
acquisitions of complementary businesses, products or
technologies. On October 2, 1995, the Company acquired the
capital stock of a German software company for $3.4 million. The
acquisition was accounted for under the purchase accounting
method and was financed with existing cash and future payments
to the sellers.
On January 24, 1996, the Company entered into a transaction with
Insession, Inc. (Insession) whereby the term of the Company's ICE
distribution rights was extended to September 2001. In addition,
the Company has loaned Insession $4.0 million under promissory
notes and acquired a 7.5% minority interest in Insession for $1.5
million.
On June 3, 1996, the Company acquired substantially all of the net
assets of TXN Solution Integrators (TXN) for $3.6 million in cash
and the assumption of certain liabilities of TXN. The acquisition
was accounted for under the purchase accounting method and was
financed with existing cash.
In August 1995, the Company entered into a transaction with a
start-up transaction processing business whereby it agreed to
extend to the start-up venture a $2.5 million credit facility and
obtained the right to acquire the start-up venture. During fiscal
1996, the Company increased the credit facility to $3.6 million.
During fiscal 1996 and 1995, the start-up venture borrowed $3.1
million and $500,000, respectively, under the credit facility.
On September 13, 1996, the Company acquired Grapevine in
exchange for 380,441 shares of the Company¹s Class A Common
Stock.
On October 8, 1996, the Company acquired OSSI in exchange for
210,000 shares of the Company's Class A Common Stock.
Management believes that the Company's working capital, cash
flow generated from operations and borrowing capacity are
sufficient to meet the Company's working capital requirements for
the foreseeable future.
REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS
• To the Board of Directors of
Transaction Systems Architects, Inc.:
We have audited the accompanying consolidated balance sheets of
Transaction Systems Architects, Inc. (a Delaware corporation) and
Subsidiaries as of September 30, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and
cash flows for the years ended September 30, 1996 and 1995 and
for the period from inception (November 2, 1993) through
September 30, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Transaction
Systems Architects, Inc. and Subsidiaries as of September 30, 1996
and 1995, and the results of their operations and their cash flows
for the years ended September 30, 1996 and 1995 and for the
period from inception (November 2, 1993) through September 30,
1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Omaha, Nebraska,
October 31, 1996
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
September 30, 1996 1995
Assets
Current assets:
Cash and cash equivalents
Receivables, net
Deferred income taxes
Other
Total current assets
Property and equipment, net
Software, net
Intangible assets, net
Installment receivables
Investment and notes receivable
Other
1996
1995
$31,546
49,135
4,348
1,010
$35,511
40,284
2,732
992
86,039
13,001
5,424
7,236
1,593
8,105
1,761
79,519
9,717
6,741
2,027
1,505
500
1,896
Total assets
$123,159 $101,905
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt
Current portion of capital lease obligations
Accounts payable
Accrued employee compensation
$1,147
342
8,322
5,210
$480
456
5,070
4,564
Accrued liabilities
Income taxes
Deferred revenue
Total current liabilities
Long-term debt
Capital lease obligations
Total liabilities
7,631
4,383
17,987
45,022
1,431
256
7,526
3,562
19,534
41,192
---
357
46,709
41,549
Commitments and contingencies (Note 8)
Redeemable Convertible Preferred Stock, $.01 par value;
5,450,000 shares authorized; no shares issued and outstanding
at September 30, 1996 and 1995
Redeemable Convertible Class B Common Stock and Warrants,
$.005 par value; 5,000,000 shares authorized; no shares issued
and outstanding at September 30, 1996 and 1995
Stockholders' equity (1995 shares are before the effect of the
two-for-one stock split in June 1996):
Class A Common Stock, $.005 par value; 50,000,000 shares
authorized; 23,740,766 and 11,493,760 shares issued at
September 30, 1996 and 1995, respectively
119
58
Class B Common Stock, $.005 par value; 5,000,000 shares
authorized; 2,171,252 and 1,485,626 shares issued and
outstanding at September 30, 1996 and 1995, respectively
Additional paid-in capital
Accumulated translation adjustments
Accumulated deficit
Treasury stock, at cost, 845 shares at September 30, 1996 and
1995
11
96,062
(236)
(19,494)
7
92,721
(354)
(32,064)
(12)
(12)
Total stockholders' equity
76,450
60,356
Total liabilities and stockholders' equity
$123,159 $101,905
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF
OPERATIONS
Year Ended
September 30,
Year Ended
September 30,
For the Period
from Inception
(November 2,
1993) Through
September 30,
1996
1995
1994
$78,937
35,614
40,845
4,388
$58,028
29,167
26,724
4,554
$36,992
18,626
18,117
3,702
Revenues:
Software license fees
Maintenance fees
Services
Hardware, net
Total revenues
159,784
118,473
77,437
Expenses:
Cost of software license fees:
Software costs
Amortization of purchased software
Purchased contracts in progress
Cost of maintenance and services
Research and development:
Research and development costs
Charge for purchased research and
development
Selling and marketing
General and administrative:
General and administrative costs
Amortization of goodwill and purchased
intangibles
19,120
3,143
---
41.050
13,139
3,165
2,956
28,538
7,533
2,342
12,398
19,369
14,572
12,539
8,587
---
---
22,712
34,414
30,074
18,677
26,151
18,651
13,658
656
344
834
Total expenses
139,106
109,406
106,110
Operating income (loss)
20,678
9,067
(28,673)
Other income (expense):
Interest income
Interest expense
Other
1,914
(235)
(626)
1,077
(1,751)
13
416
(3,058)
172
Total other
1,053
(661)
(2,470)
Income (loss) before income taxes
Provision for income taxes
21,731
(9,161)
8,406
(2,086)
(31,143)
(2,164)
Net income (loss) before extraordinary
loss
Extraordinary loss related to early
retirement of debt
12,570
6,320
(33,307)
---
(2,750)
---
Net income (loss)
$12,570
$3,570
$(33,307)
Net income (loss) per common and
equivalent share:
Before extraordinary loss
Extraordinary loss
$0.47
---
$0.27
(0.12)
$(1.62)
---
Net income (loss)
$0.47
$0.15
$(1.62)
Weighted average shares outstanding
27,016
23,251
20,588
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
Class A
Common
Stock
Class B
Common
Stock
Additional
Paid-in
Capital
Accumulated
Translation
Adjustments
Accumulated
Deficit
Treasury
Stock
Total
Balance, at inception (November
2, 1993), as previously reported $---
Adjustment for Grapevine
Systems, Inc. pooling of interests 2
2
Balance, at inception, (November
2, 1993), as restated
Issuance of 1,250,000 shares of
Class A Common Stock for cash 6
PIK dividends for Redeemable
Convertible Preferred Stock
Accretion of Redeemable
Convertible Preferred Stock
Accretion of Redeemable
Convertible Class B Common
---
---
---
---
---
$---
$---
$---
$---
$---
$---
---
80
576
---
658
---
---
---
---
---
80
576
3,119
---
---
---
---
658
3,125
---
---
---
---
---
---
(1,175)
---
(1,175)
(243)
---
(243)
(459)
---
(459)
Stock and Warrants
Net loss
Translation adjustments
Balance, September 30, 1994
PIK dividends for Redeemable
Convertible Preferred Stock
Accretion of Redeemable
Convertible Preferred Stock
Accretion of Redeemable
Convertible Class B Common
Stock and Warrants
Sale of Class A Common Stock
pursuant to initial public
offering, net of issuance costs
Conversion of Redeemable
Convertible Preferred Stock to
Common Stock pursuant to
initial public offering
Termination of redemption rights
of Convertible Class B Common
Stock pursuant to initial public
offering
Exercise of Class A Common
Stock Warrants
Sale of Class A Common Stock
pursuant to public offering, net
of issuance costs
Purchase of 845 shares of Class
A Common Stock
Exercise of stock options
Net income
Translation adjustments
---
---
8
---
---
---
---
---
---
---
---
---
---
(102)
(33,307) ---
---
---
(33,307)
(102)
3,199
(102)
(34,608) ---
(31,503)
---
---
---
---
---
(649)
---
(649)
(133)
---
(133)
(244)
---
(244)
---
---
---
12
---
32,240
---
---
---
32,252
23
9
27,483
---
---
---
27,515
8
---
5,468
---
---
---
5,476
---
---
1,754
---
7
(2)
22,419
---
---
158
---
---
---
---
---
(252)
---
---
---
---
---
---
---
---
7
8
---
---
---
---
---
1,754
22,424
(12)
(12)
---
3,570
---
---
---
---
158
3,570
(252)
---
58
56
Balance, September 30, 1995
Two-for-one stock split
Sale of Class A Common Stock
pursuant to Employee Stock
Purchase Plan
Conversion of Class B Common
Stock to Class A Common Stock 4
1
Exercise of stock options
Tax benefit of stock options
exercised
Net income
Translation adjustments
---
---
---
92,721
(64)
(354)
---
(32,064) (12)
---
---
60,356
---
---
355
---
(4)
---
---
---
---
---
1,077
1,973
---
---
---
---
---
---
118
---
---
---
---
12,570
---
---
---
---
---
---
---
355
---
1,078
1,973
12,570
118
Balance, September 30, 1996
$119
$11
$96,062 $(236)
$(19,494) $(12)
$76,450
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(in thousands)
Year Ended
September
30,
Year Ended
September
30,
For the Period
from
Inception
(November 2,
1993)
Through
September 30,
1996
1995
1994
$12,570
$3,570
$(33,307)
4,415
5,929
---
---
(6,729)
---
(938)
(88)
(877)
2,710
425
(399)
2,801
(1,970)
3,895
5,295
---
2,750
(7,136)
2,955
(1,926)
(458)
(1,850)
(308)
618
(513)
(113)
4,424
3,711
4,207
22,712
---
(6,969)
12,398
(718)
435
96
2,591
2,369
414
190
4,703
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation
Amortization
Purchased research and development
Extraordinary loss
Increase in receivables, net
Decrease in contracts in progress
Increase in other current assets
(Increase) decrease in installment receivables
(Increase) decrease in other assets
Increase (decrease) in accounts payable
Increase in accrued employee compensation
Increase (decrease) in accrued liabilities
Increase (decrease) in income tax liabilities
Increase (decrease) in deferred revenue
Net cash provided by operating activities
17,849
11,203
12,832
Cash flows from investing activities:
Purchases of property and equipment
Additions to software
Acquisition of businesses, net of cash acquired
(6,572)
(2,691)
(5,403)
(4,700)
(1,562)
(206)
(3,721)
(1,591)
(56,594)
Additions to investment and notes receivable
(8,106)
(500)
---
Net cash used in investing activities
(22,772)
(6,968)
(61,906)
Cash flows from financing activities:
Proceeds from issuance of Redeemable Convertible Preferred
Stock
Proceeds from issuance of Redeemable Convertible Class B
Common Stock and Warrants
Proceeds from issuance of Class A Common Stock
Payment of Preferred Stock Dividends
Purchase of Treasury Stock
Proceeds from exercise of stock options
Proceeds from long-term debt
Payments of long-term debt
Payments on capital lease obligations
---
---
355
---
(2)
1,111
---
(100)
(225)
143
24,142
1,754
1,863
54,839
(1,825)
(12)
---
3,045
(29,750)
(468)
3,125
---
(10)
---
36,824
(13,063)
(338)
Net cash provided by financing activities
1,139
27,726
52,543
Effect of exchange rate fluctuations on cash
(181)
(11)
92
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
(3,965)
35,511
31,950
3,561
3,561
---
Cash and cash equivalents, end of period
$31,546
$35,511
$3,561
Supplemental cash flow information:
Income taxes paid
Interest paid
$7,476
$218
$2,140
$1,520
$1,729
$2,639
Supplemental disclosure of noncash investing and financing activities:
In October 1995, the Company acquired the capital stock of M.R. GmbH,
for $1,500 cash and $1,900 of debt. In connection with the acquisition,
liabilities of $1,200 were assumed.
In June 1996, the Company acquired substantially all assets of TXN
Solution Integrators for $3,600 in cash and assumed $1,320 in liabilities.
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
1. General
Transaction Systems Architects, Inc. (the Company or TSA) was formed
on November 2, 1993, for the purpose of acquiring all of the outstanding
capital stock of Applied Communications, Inc. (ACI) and Applied
Communications Inc Limited (ACIL) (see Note 3). The Company did not
have substantive operations prior to the acquisition of ACI and ACIL.
The Company develops, markets 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 in the financial services industry, both in domestic and
international markets.
The Company derives a substantial portion of its revenue from licensing
its BASE24 family of software products and providing services and
maintenance related to those products. BASE24 products operate on
Tandem computers. The Company's future results depend, in part, on
market acceptance of Tandem computers and the financial success of
Tandem Computers Incorporated.
The Company completed an initial public offering in March 1995. The
Company sold 4,825,000 shares of Class A Common Stock resulting in
net proceeds to the Company, after deducting the underwriting discount
and offering expenses, of approximately $32,300,000. In connection with
the initial public offering, all outstanding warrants for the purchase of
Preferred and Common Stock were exercised and all of the Company's
preferred stocks and Class B Common Stock converted to Class A
Common Stock, except for 3,680,000 shares of nonvoting Class B
Common Stock. The Class B Common Stock is convertible into Class A
Common Stock but is no longer redeemable. (See notes 7, 9 and 10).
During 1996, 800,000 shares of Class B Common Stock were converted to
Class A Common Stock.
In August 1995, the Company completed the issuance of an additional
2,000,000 Class A Common shares through a public offering, resulting in
net proceeds, after deducting the underwriting discount and offering
expenses, of approximately $22,400,000.
2. Summary of Significant Accounting Policies
Consolidated Financial Statements
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated.
Revenue Recognition
Software license fees are comprised of one-time perpetual license fees,
recurring monthly license fees and software modification fees. Perpetual
license fees are recognized upon installation only if no significant vendor
obligations remain. Software modification fees are recognized upon
installation.Monthly license fees and maintenance fees are recognized
ratably over the contract term. Services revenue is recognized as the
related services are performed. Hardware revenue is comprised of
commissions received on hardware sales associated with sales of the
Company's software and net revenue received from hardware sales sold
under original equipment manufacturer agreements. Hardware revenue is
recognized when the related hardware is shipped to the customer.
Software
The Company capitalizes certain software development costs when the
resulting products reach technological feasibility and begins amortization
of such costs upon the general availability of the products for licensing.
Purchased software is stated at cost.
Amortization of all software development costs begins when the products
are available for general release to customers and is computed separately
for each product as the greater of (a) the ratio of current gross revenue for
a product to the total of current and anticipated gross revenue for the
product or (b) the straight-line method over the remaining estimated
economic life of the product. Currently, estimated economic lives of three
years are used in the calculation of amortization of these capitalized costs.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful
lives ranging from three to seven years. Assets under capital leases are
amortized over the shorter of the asset life or the lease term.
Intangible Assets
Intangible assets consists of goodwill arising from acquisitions (see Note
3) and are being amortized using the straight-line method over 10 years.
As of September 30, 1996 and 1995, accumulated amortization of
intangible assets was $1,013,000 and $353,000, respectively.
Translation of Foreign Currencies
The Company's non-U.S. subsidiaries use as their functional currency the
local currency of the countries in which they operate. Their assets and
liabilities are translated into U.S. dollars at the exchange rates in effect at
the balance sheet date. Revenues and expenses are translated at the
average rates of exchange prevailing during the period. Translation gains
and losses are included as a component of equity. Transaction gains and
losses related to intercompany accounts are not material and are included
in the determination of net income (loss).
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of less than 90 days to be cash equivalents.
Financial Instruments with Market Risk and Concentrations of Credit Risk
The concentration of credit risk in the Company's receivables with respect
to the financial services industry is mitigated by the Company's credit
evaluation policy, reasonably short collection terms and geographical
dispersion of sales transactions. The Company generally does not require
collateral or other security to support accounts receivable.
Net Income (Loss) Per Common and Equivalent Share
Net income (loss) per common and equivalent share is based on the
weighted average number of common equivalent shares outstanding
during each period. Common equivalent shares include Redeemable
Convertible Preferred Stock and Redeemable Convertible Class B
Common Stock and Warrants. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, all shares and options
issued since inception (November 2, 1993) have been treated as if they
were outstanding for all periods prior to December 31, 1994, including
periods in which the effect is antidilutive. For periods subsequent to
December 31, 1994, net income (loss) per common and common
equivalent share is determined by dividing net income (loss) by the
weighted average number of shares of common stock and dilutive
common equivalent shares outstanding during each period using the
treasury stock method.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (FAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," which is effective for the Company's 1997 fiscal year.
Pursuant to this Statement, companies are required to investigate potential
impairments of long-lived assets, certain identifiable intangibles, and
associated goodwill, when there is evidence that events or changes in
circumstances have made recovery of an asset's carrying value unlikely.
An impairment loss would be recognized when the sum of the expected
future cash flows is less than the carrying amount of the asset. The
adoption of FAS 121 is not expected to have a significant impact on the
Company's financial position or results of operations.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued FAS
No. 123, "Accounting for Stock-Based Compensation," which is effective
for the Company's 1997 fiscal year. FAS No. 123 allows companies to
either account for stock-based compensation under the new provisions of
FAS No. 123 or under the provisions of APB 25, but requires pro forma
disclosure in the footnotes to the financial statements as if the
measurement provisions of FAS 123 had been adopted. The Company
intends to continue accounting for its employee stock-based compensation
in accordance with the provisions of APB 25. As such, the adoption of
FAS No. 123 will not impact the financial position or the results of
operations of the Company.
Stock Split
On June 7, 1996, the Company's Board of Directors authorized a two-for-
one stock split effected in the form of a 100% stock dividend distributed
on July 1, 1996 to shareholders of record on June 17, 1996. All references
in the consolidated financial statements and notes to consolidated financial
statements to number of shares, except authorized shares and treasury
shares, and per share amounts have been restated to reflect this stock split.
The par value of each class of Common Stock of $.005 did not change.
Reclassifications
Certain September 30, 1995 amounts have been reclassified to conform to
the September 30, 1996 presentation.
Use of Estimates in Preparation of Consolidated Financial Statements
The preparation of the Consolidated Financial Statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the Consolidated Financial Statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
3. Acquisitions
On December 31, 1993, the Company acquired all of the outstanding stock
of ACI and ACIL for $55 million cash. In addition, on January 3, 1994,
the Company acquired all of the outstanding stock of USSI, Inc. for $3.6
million cash, of which $475,000 was paid in January 1995, and issuance
of 350,000 shares of Junior Convertible Preferred Stock, Series A valued
at $3.5 million. The acquisitions were funded through the issuance of
common and preferred stock (see Notes 9 and 10) and a credit facility (see
Note 7). The acquisitions were recorded using the purchase method of
accounting and, accordingly, the cost in excess of the fair value of the net
tangible assets was allocated as follows (in thousands):
Purchased research and development
Contracts in progress
Purchased software
Goodwill
$22,712
15,303
5,908
2,007
$45,930
Purchased research and development represents research and development
of software technologies which had not reached technological feasibility
as of the acquisition date. Purchased research and development was
charged to operations as of the acquisition date.
Contracts in progress represents the value assigned to open contracts of
the acquired companies at the acquisition date. Contracts in progress are
charged to cost of software license fees as the related contracts are
recognized as revenue. The value of contracts in progress has been
reduced for estimated costs of delivery of software, completion of
contracted services and third-party commissions. The gross margin earned
in connection with completion and delivery of these contracts was
approximately $400,000.
On October 2, 1995, the Company acquired the capital stock of M.R.
GmbH, a German software company, for $3.4 million. The acquisition
was accounted for under the purchase method and was financed with
existing cash and future payments to the sellers. Results of operations
prior to the acquisition were not significant.
On June 3, 1996, the Company acquired substantially all of the assets of
TXN Solution Integrators (TXN), a Canadian partnership, for $3.6 million
in cash and the assumption of certain liabilities of TXN. The acquisition
was accounted for under the purchase method of accounting and,
accordingly, the cost in excess of the fair value of the net tangible assets
acquired was allocated to software ($350,000) and goodwill ($2,000,000).
The following represents pro forma results of operations as if the TXN
acquisition had occurred October 1, 1994 (in thousands except per share
amounts):
Year Ended September 30,
Revenues
Net income before extraordinary loss
1995
1996
$165,648 $127,336
12,901 6,952
Net income
Net income per share
12,901 4,202
.48
.18
The pro forma financial information is shown for illustrative purposes
only and is not necessarily indicative of the future results of operations of
the Company or results of operations of the Company that would have
actually occurred had the transaction been in effect for the periods
presented.
On September 13, 1996, the Company and Grapevine Systems, Inc.
(Grapevine) completed a stock exchange transaction which resulted in
Grapevine becoming a wholly owned subsidiary of the Company. The
stock exchange was accounted for as a pooling of interests. Accordingly
the Company's financial statements have been restated to include the
results of Grapevine for all periods presented.
Combined and separate results of the Company and Grapevine during the
periods preceding the merger were as follows (in thousands):
Company Grapevine Adjustments Combined
Year ended September
30, 1996:
Net revenues
Net income
Year ended September
30, 1995:
Net revenues
Net income (loss)
Year ended September
30, 1994:
Net revenues
Net income (loss)
$154,931 5,482
12,506
64
(629)
---
159,784
12,570
114,888 3,637
(230)
3,800
(52)
---
118,473
3,570
3,532
74,063
(33,538) 231
(158)
---
77,437
(33,307)
The combined financial results presented above include adjustments made
to eliminate intercompany transactions from the combined results.
In October 1996, the Company completed the acquisition of Open
Systems Solutions, Inc. (OSSI). Stockholders of OSSI received 210,000
shares of TSA Class A Common Stock in exchange for 100% of OSSI's
Common Stock. The stock exchange was accounted for as a pooling of
interests. OSSI's results of operations prior to the acquisition were not
material.
4. Receivables
Receivables consist of the following (in thousands):
September 30,
1996
1995
Billed
Accrued
Less allowance for doubtful accounts
Less amount not collectible within one
year
Current receivables, net
$32,534 $30,835
19,284 11,866
51,818 42,701
(1,090) (912)
50,728 41,789
(1,593) (1,505)
$49,135 $40,284
Typically, the Company receives a substantial down payment upon
execution of a contract, with the remaining balance due upon specified
dates or events as set forth in the contract.
5. Property and Equipment
Property and equipment consists of the following (in thousands):
1995
September 30,
Computer equipment
Office furniture and fixtures
Leasehold improvements
Vehicles
1996
$16,846 $10,726
3,242
3,765
1,588
1,841
1,331
1,427
23,879 16,887
Less accumulated depreciation and amortization (10,878) (7,170)
$13,001 $9,717
Property and equipment, net
6. Software
Software consists of the following (in thousands):
September 30,
Internally developed software
Purchased software
Less accumulated amortization
Software, net
7. Debt
1995
1996
$4,759 $3,176
12,318 10,796
17,077 13,972
(11,653) (7,231)
$5,424 $6,741
Long-term debt consists of the following (in thousands):
September 30,
Payments due to the sellers of M.R. GmbH
(See Note 3), due December 1996 ($747),
December 1997 ($745) and December 1998
($367)
Other
1996 1995
$1,859 $---
719
480
Less current portion
Long-term debt
2,578 480
1,147 480
$1,431 $---
The acquisitions of ACI, ACIL and USSI (described in Note 3) were
partially funded with $36,000,000 in debt placed through a $38,500,000
Credit Agreement with two financial institutions. The Credit Agreement
was comprised of term loans in the amount of $12,500,000 (Tranche A
Loan) and $16,000,000 (Tranche B Loan) and a Revolving Credit Facility
in the amount of $10,000,000. In connection with the Credit Agreement,
the lenders received warrants to purchase shares of the Company's Class B
Common Stock (see Note 10). The Credit Agreement was collateralized
by substantially all of the Company's assets.
In March 1995, the Company used a portion of the initial public offering
proceeds to repay all outstanding indebtedness under the Credit
Agreement. Upon repayment of the indebtedness, the Company incurred
an extraordinary loss of $2,750,000 for the writeoff of unamortized
balances of debt issue costs of $1,100,000 and original issue discount of
$1,650,000. The Credit Agreement was cancelled in June 1995 and
replaced with a $10 million Revolving Line of Credit, collateralized by
accounts receivable, which expires in June 1997.
Maximum borrowings under the Revolving Credit Facility during the year
ended September 30, 1995 and the period from inception (November 2,
1993) through September 30, 1994 were $1,250,000 and $7,500,000,
respectively. The average outstanding borrowings and the average interest
rate during the year ended September 30, 1995 and the period from
inception (November 2, 1993) through September 30, 1994 were $316,000
and 10.1% and $4,375,000 and 8.5%, respectively.
Interest expense for the year ended September 30, 1995 and the period
from inception (November 2, 1993) through September 30, 1994, includes
amortization of original issue discount of $213,000 and $398,000,
respectively.
The Revolving Line of Credit requires the maintenance of a minimum
working capital level of $6 million. As of September 30, 1996 and 1995,
the Company was in compliance with this covenant. There were no
borrowings under the Revolving Line of Credit during the years ended
September 30, 1996 and 1995.
8. Commitments and Contingencies
Operating Leases
The Company leases office space and equipment under operating leases
which run through February 2011. Aggregate minimum lease payments
under these agreements for the years ending September 30 are as follows
(in thousands):
1997
1998
1999
2000
2001
Thereafter
Total
$5,052
2,927
2,192
1,164
1,088
7,961
$20,384
Total rent expense for the years ended September 30, 1996 and 1995 and
for the period from inception (November 2, 1993) through September 30,
1994 was $6,313,000, $4,566,000 and $3,038,000, respectively.
Capital Leases
The Company leases certain computer equipment, vehicles and office
furniture under long-term capital leases. Capitalized costs and
accumulated depreciation (included in property and equipment, net)
consist of the following (in thousands):
September 30,
Vehicles
Computer equipment
Office furniture and fixtures
Less accumulated depreciation
280
152
1996 1995
$1,441 $1,217
485
165
2,091 1,649
(1,334) (766)
$757 $883
A summary of future minimum lease payments under long-term capital
leases together with the present value of the net minimum lease payments
for the years ending September 30 are as follows (in thousands):
1997
1998
1999
2000
Total minimum lease payments
Amount representing interest
$401
202
110
35
748
(150)
Present value of future minimum lease payments
Amount due within one year
Amount due after one year
598
(342)
$256
9. Redeemable Convertible Preferred Stock
The following table represents Redeemable Convertible Preferred Stock
activity (in thousands):
Senior
Series A
Senior
Series B
Junior
Series A
Junior
Series B
Total
$---
$---
$---
$---
$---
11,759 6,718 3,500
---
155
748
---
88
427
---
---
---
2,375
2,646
---
---
24,352
2,646
243
1,175
12,662 7,233 3,500
5,021
28,416
---
84
413
---
48
236
---
---
---
(1,161) (664)
---
143
---
---
---
143
132
649
(1,825)
(11,998) (6,853) (3,500) (5,164) (27,515)
Balance, at inception
(November 2, 1993)
Shares issued
Shares subscribed
Accretion
PIK Dividends
Balance, September
30, 1994
Shares issued
Accretion
PIK dividends
Cash payment of PIK
dividends
Conversion to
common stock
pursuant to initial
public offering
Balance, September
30, 1995 and 1996
$---
$---
$---
$---
$---
All Redeemable Convertible Preferred Stock converted to 9,079,856 and
3,200,000 shares of Class A and Class B Common Stock, respectively,
upon completion of the Company's initial public offering.
In December 1993, the Company sold for cash 1,400,000 shares of Senior
Convertible Preferred Stock, Series A, and 800,000 shares of Senior
Convertible Preferred Stock, Series B, (cumulatively, the Senior Preferred
Stock). Total proceeds, net of issuance costs, from the sale of the Senior
Preferred Stock was $18,477,000 ($8.40 per share).
In December 1993, the Company sold for cash 237,500 shares of Junior
Convertible Preferred Stock, Series B for $2,375,000 ($10 per share). In
January 1994, the Company issued 350,000 shares of Junior Convertible
Preferred Stock, Series A valued at $3,500,000 ($10 per share) in
connection with the acquisition of USSI as discussed in Note 3. The Junior
Convertible Preferred Stock, Series A and Series B are herein referred to
as the Junior Preferred Stock.
During 1994, the Board of Directors approved the Employees Stock
Purchase Plan for substantially all TSA employees. Under this plan,
employees subscribed to 268,163 shares of the Company's Junior
Convertible Preferred Stock, Series B, at a price of $10 per share. In
October 1994, employees subscribed to an additional 14,301 shares at a
price of $10 per share. All subscribed shares were fully paid for and issued
in December 1994.
Prior to the Company's initial public offering, the holders of the Senior
Preferred Stock were entitled to quarterly cumulative dividends at an
annual rate of $.70 per share. All such dividends were payable solely in
kind by the issuance of a dividend of additional shares of Senior
Convertible Preferred Stock, Series A or Series B (the PIK Dividends) at
the rate of 7/100 of a share for each $.70 of accruing dividends. If the
Senior Preferred Stock converted prior to January 1, 1997, accruing
dividends would have been paid in cash or PIK Dividends. As of
September 30, 1994, 74,794 shares of Senior Convertible Preferred Stock,
Series A and 42,739 shares of Senior Convertible Preferred Stock, Series
B had been accrued as PIK Dividends, respectively.
The holders of the shares of the Senior and Junior Preferred Stock were
entitled, at their option, to convert at any time at a rate of one share of
Senior and Junior Convertible Preferred Stock, Series A or Series B into
two shares of Class A or Class B Common Stock, respectively.
The holders of Senior and Junior Preferred Stock also had the right at their
option to redeem shares at any time on or after December 31, 2003, at an
amount equal to $10 per share plus an amount equal to all accrued and
unpaid dividends thereon, whether or not earned or declared, plus any
other dividends unpaid. The excess of the redemption value over the
carrying value was being accreted by periodic charges to accumulated
deficit over the life of the issue. Holders of the Senior and Junior Preferred
Stock, Series A and Class A Common Stock have the right to one vote per
share on any matters subject to stockholder vote.
10. Redeemable Convertible Class B Common Stock and Warrants
The following table represents Redeemable Convertible Class B Common
Stock and Warrants activity (in thousands):
Warrants
Class B
Common Stock
Total
Balance, at inception
(November 2, 1993)
$---
$---
$---
Warrants issued
Warrants exercised
Accretion
Balance, September 30, 1994
Accretion
Warrants exercised
Termination of redemption
rights and conversion to Class
A and Class B Common Stock
pursuant to initial public
offering
4,773
(1,860)
229
3,142
122
(3,264)
---
1,860
230
2,090
122
3,264
4,773
---
459
5,232
244
---
---
(5,476)
(5,476)
Balance, September 30, 1995
and 1996
$---
$---
$---
All redemption rights terminated upon completion of the Company's initial
public offering. In December 1993, warrants to purchase 1,320,000 shares
of Class B Common Stock were issued as part of the Senior Convertible
Preferred Stock and Warrant Purchase Agreement (see Note 9). The
warrants were exercisable at a price of $.003 per share. The warrants were
recorded at their fair value, net of issuance costs, on date of issuance of
$1,800,000 ($1.36 per share). As of September 30, 1995, all warrants had
been exercised and converted to Class A or Class B Common Stock.
In December 1993, warrants to purchase 1,528,780 shares of Class B
Common Stock were issued as part of the credit agreement (see Note 7).
The warrants were exercisable at any time at a price of $.003 per share.
The warrants were recorded at their fair value on date of issuance of
$2,262,000 ($1.48 per share). As of September 30, 1995, all warrants had
been exercised and converted to Class A Common Stock.
In December 1993, warrants to purchase 700,000 shares of Class B
Common Stock were issued in connection with the sale of Senior
Preferred Stock. The warrants were exercisable at a price of $2.50 per
share. The warrants were recorded at their fair value on date of issuance of
$711,000 ($1.02 per share). As of September 30, 1995, all warrants had
been exercised and converted to Class A Common Stock.
Prior to the Company's initial public offering, the Class B Common Stock
and any shares issuable as such under the respective warrant agreements
described above were redeemable at fair value by the holders upon the
earlier of; 1) repayment of 50% of the Tranche B debt, 2) change in
control of the Company or 3) December 31, 1998. The difference between
the current fair value over the carrying value of the Class B Common
Stock and Warrants was being accreted by periodic charges to
accumulated deficit over the life of the respective issues.
11. Stock Option Plans
The Company has a 1994 Stock Option Plan (1994 Plan) whereby
1,910,976 shares of the Company's Class B Common Stock have been
reserved for issuance to eligible employees of the Company and its
subsidiaries. Shares issuable upon exer-cise of these options will be Class
A Common Stock. Options granted are considered incentive stock options.
The stock options are granted at a price set by the Board of Directors
provided that the minimum price shall be $2.50 per share for 955,488
shares and $5 per share for 955,488 shares. The term of the outstanding
options is ten years. The stock options vest ratably over a period of four
years.
During 1996, the Company adopted the 1996 Stock Option Plan (1996
Plan) whereby 1,008,000 shares of the Company's Class A Common Stock
have been reserved for issuance to eligible employees of the Company and
its subsidiaries and non-employee members of the Board of Directors. The
stock options are granted at a price not less than fair market value at the
time of the grant. The term of the outstanding options is ten years. The
options vest annually over a period of four years.
Share activity under the option plans is set forth below:
1996
Plan
Outstanding, at inception
(November 2, 1993)
Granted
Cancelled
---
---
---
Outstanding, September
30, 1994
Granted
Cancelled
Exercised
---
---
---
---
1994
Plan
---
Total
---
941,300
(21,600)
941,300
(21,600)
Price
Per Share
---
$2.50
$2.50
919,700
919,700
1,003,378 1,003,378
(59,404)
(59,404)
(44,254)
(44,254)
$2.50 - 12.50
$2.50 - 5.00
$2.50 - 5.00
Outstanding, September
30, 1995
Granted
Cancelled
Exercised
---
1,819,420 1,819,420
236,000 39,000
---
---
(35,308)
(327,673)
275,000
(35,308)
(327,673)
$12.00 - 31.00
$2.50 - 20.25
$2.50 - 20.25
Outstanding, September 236,000 1,495,439 1,731,439
30, 1996
At September 30, 1996 and 1995, 687,903 shares and 593,036 shares,
respectively, were exercisable under the plans.
12. Employee Benefit Plans
Employee Stock Purchase Plan
During 1996, the Company adopted the 1996 Employee Stock Purchase
Plan whereby 900,000 shares of the Company's Class A Common Stock
have been reserved for sale to eligible employees of the Company and its
subsidiaries. Employees may designate up to the lesser of $5,000 or 10%
of their annual compensation for the purchase of stock under this plan.
The price for shares purchased under the plan is 85% of market value on
the last day of the purchase period. Purchases are made at the end of each
fiscal quarter. As of September 30, 1996, 16,745 shares have been issued
under this plan.
ACI 401(k) Retirement Plan
The 401(k) Retirement Plan is a defined contribution plan covering all
domestic employees of ACI. Participants may contribute up to 15% of
their annual wages. ACI matches 100% of participant contributions up to a
maximum of 2.5% of compensation. ACI's contributions charged to
expense during the years ended September 30, 1996 and 1995 and the
period from the date of acquisition of ACI through September 30, 1994
were $507,000, $466,000 and $299,000, respectively.
ACI Profit Sharing Plan and Trust
The ACI Profit Sharing Plan and Trust is a non-contributory profit sharing
plan covering all employees of ACI provided they are at least 21 years of
age and have completed one year of service. The plan provides for ACI to
contribute a discretionary amount as determined annually by the
Company's President and Chief Financial Officer. ACI's contributions
charged to expense during the years ended September 30, 1996 and 1995
and the period from the date of acquisition of ACI through September 30,
1994 were $399,000, $382,000 and $241,000, respectively.
ACIL Pension Plan
ACIL has a defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and the employees'
compensation during employment. Contributions to the plan are
determined by an independent actuary on the basis of periodic valuations
using the projected unit cost method. Participants contribute 5% of their
pensionable salaries and ACIL contributes at the rate of 10% of
pensionable salaries. Net periodic pension expense includes the following
components (in thousands):
For the
period
from
inception
(November
2, 1993
through
September
30,
1994)
Year
Ended
September
30, 1996
Year
Ended
September
30, 1995
Service cost
Interest cost on projected benefit obligation
Return on plan assets:
Actual
Gain (loss) deferred
Amortization of unrecognized gain
Total periodic pension expense
$1,018
738
(1,187)
382
(13)
$938
$786
542
(851)
233
(32)
$678
$617
384
254
(689)
---
$566
The following table summarizes the funded status of the plan and the
related amounts recognized in the Company's consolidated balance sheet
(in thousands):
September 30,
Actuarial present value of benefit obligations:
Vested
Non-vested
1996
1995
$8,932 $7,680
524
444
Accumulated benefit obligation
Impact of future salary increases
9,456
654
8,124
564
Projected benefit obligation
Plan assets at fair value, primarily investments
in marketable equity securities of United
Kingdom companies
10,110 8,688
10,762 8,485
Plan assets greater (less) than projected benefit
obligation
Unrecognized gain
652
(203)
(2,113) (1,156)
Accrued pension cost
$(1,461) $(1,359)
The accrued pension cost at September 30, 1996 and 1995, includes an
unfunded accrued pension cost of approximately $1,200,000 recorded in
connection with the acquisition of ACIL.
The most significant actuarial assumptions used in 1996 and 1995 in
determining the pension expense and funded status of the plan are as
follows:
•
8.0%
Discount rate for valuing liabilities
Expected long-term rate of return on assets
9.0%
Rate of increase in future compensation levels 6.0%
USSI Profit Sharing Plan and Trust
The USSI Profit Sharing Plan and Trust has both a profit sharing
component and a 401(k) component. USSI contributions are discretionary.
USSI's contributions charged to expense during the years ended
September 30, 1996 and 1995 were $90,000 and $82,000, respectively. No
contributions were made to this plan for the period from the date of
acquisition of USSI through September 30, 1994.
Grapevine 401(k) Profit Sharing Plan
The Grapevine 401(k) Profit Sharing Plan is a defined contribution plan
covering all employees of Grapevine. Grapevine contributions are
discretionary. Employees may contribute up to 10% of their
compensation. No contributions were made by Grapevine to this plan
during the years ended September 30, 1996, 1995 and 1994.
13. Segment Information
The Company operates primarily in one industry segment, which includes
the development, marketing and support of on-line computer software
products and services for automated electronic payment systems.
The Company operates in three geographic regions: 1) North and South
America, 2) Europe, Middle East and Africa and 3) Asia Pacific. The
following table sets forth information about the Company's operations in
these different geographic regions (in thousands):
Year
Ended
September
30,
1996
Year
Ended
September
30,
1995
For the
period
from
inception
(November
2, 1993)
through
Revenues:
Americas
Europe, Middle East and Africa
Asia/Pacific
Operating Income:
Americas
Europe, Middle East and Africa
Asia/Pacific
September
30, 1994
$91,061
47,267
21,456
$159,784
$75,624
31,264
11,585
$118,473
$47,727
21,707
8,003
$77,437
$27,981
8,302
6,740
43,023
$21,009
4,910
1,235
27,154
$4,037
1,374
457
5,868
Research and Development and Corporate General and
Administrative Expenses
(22,345)
(18,087)
(34,541)
Operating Income (Loss)
$20,678
$9,067
$(28,673)
Identifiable Assets:
Americas
Europe, Middle East and Africa
Asia/Pacific
14. Income Taxes
$77,496
33,706
11,957
$69,692
25,936
6,277
$40,406
17,514
2,515
$123,159
$101,905
$60,435
The Company accounts for income taxes in accordance with FAS 109,
"Accounting for Income Taxes". FAS 109 is an asset and liability
approach which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events which have
been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, FAS 109 generally considers all
expected future events other than enactments or changes in the tax law or
rates. Although the Company incurred losses for the period from inception
(November 2, 1993) through September 30, 1994, there was a provision
for income taxes consisting of taxes related to foreign jurisdictions. The
provision for income taxes consists of the following (in thousands):
For the Year Ended September 30,
For the period from Inception (November 2, 1993) through September
30, 1994
1996
1995
Current Deferred Total Current Deferred Total Current Deferred Total
$165
---
1,999
$2,164
Federal $6,074 $(2,066) $4,008 $1,086 $(1,327) $(241) $---
1,862 753
State
---
1,933
3,291 1,793
Foreign 3,291
Total $11,298 $(2,137) $9,161 $3,632 $(1,546) $2,086 $1,999 $165
753
1,574 1,999
$165
---
---
---
(219)
(71)
---
The difference between the income tax provision computed at the statutory
federal income tax rate and the financial statement provision for income
taxes is summarized as follows:
For the Year
Ended
September 30,
1996
For the Year
Ended
September 30,
1995
For the period from
Inception (November 2,
1993) through
September 30, 1994
$7,389
239
Tax expense (benefit) at
federal rate of 34%
Losses with no current
tax benefit
Effective state income tax 1,140
Foreign taxes
Recognition of deferred
income tax assets
previously reserved
against
Amortization of
intangibles
Other
(185)
578
---
---
$1,923
$(10,589)
872
497
---
(1,844)
731
(93)
12,238
(1,516)
1,999
---
---
32
$9,161
$2,086
$2,164
The deferred tax assets and liabilities result from differences in the timing
of the recognition of certain income and expense items for tax and
financial accounting purposes. The sources of these differences are as
follows (in thousands):
September 30, 1996 September 30, 1995
Deferred assets:
Depreciation
Amortization
Foreign taxes
Acquired net operating loss carryforward of
USSI
Net operating loss carryforward
$ 431
5,850
3,754
1,200
594
$ 484
5,943
2,433
1,200
1,430
Other
539
12,368
Deferred tax asset valuation allowance
(8,021)
Deferred liabilities:
Acquired software
Other
(171)
(493)
(664)
$3,683
574
12,064
(9,332)
(629)
(557)
(1,186)
$1,546
For income tax purposes, the Company had foreign tax credit
carryforwards of approximately $2,105,000 at September 30, 1996, which
expire in 1999. At September 30, 1996, management evaluated its 1996
and 1995 operating results as well as its projections for 1997 and 1998 and
concluded that it was more likely than not that certain of the deferred tax
assets would be realized. Accordingly, the Company has recognized a
deferred tax asset of $4.4 million as of September 30, 1996.
15. Quarterly Financial Data (in thousands, except per share data, and
unaudited)
Three Months Ended : December 31 March 31 June 30 September 30
1996
Total revenues
Operating income
Net income
Net income per share .11
$35,483
4,233
2,929
$37,662 $41,081 $45,558
4,693
3,031
.11
5,320 6,432
3,219 3,391
.12
.13
(1,540)
1995
Total revenues
26,479
Operating income (loss) (116)
Net income (loss)
before extraordinary
loss
Net income (loss) per
share before
extraordinary loss
Net income (loss)
Net income (loss) per
share
(.07)
(.07)
(1,540)
27,651 30,143 34,200
3,288 3,810
2,085
2,263
2,858 2,739
.10
.12
.11
(487)
2,858 2,739
(.02)
.12
.11
Corporate and Shareholder Information
Transfer Agent
Communications regarding
change of address, transfer of
stock ownership or lost stock
certificates should be directed to:
Norwest Bank Minnesota, N.A.
161 North Concord Exchange
Post Office Box 738
South St. Paul, Minnesota 55705
Annual Meeting
The Annual Meeting of
Shareholders will be held at
10:00 a.m. on Tuesday, February
25, 1997 at the Company's
Corporate Meeting center, 230
South 108th Avenue, in Omaha,
Nebraska.
Independent Public
Accountants
Arthur Andersen LLP 1700
Farnam Street
Omaha, Nebraska 68102
Transaction Systems Architects, Inc.
330 South 108th Avenue
Omaha, Nebraska 68154
Investor Information
A copy of the Company's Annual Report on
Form 10-K for the year ended September 30,
1996, as filed with the Securities and Exchange
Commission, will be sent to stockholders free
of charge upon written request to:
William J. Hoelting
Director of Investor Relations
Transaction Systems Architects, Inc.
330 South 108th Avenue
Omaha, Nebraska 68154
In Europe Contact:
Michael E. Carter
Director of Investor Relations -- Europe
Transaction Systems Architects, Inc.
59 Clarendon Road
Watford, Herts WD1 1LA
United Kingdom
Home Page: www.tsainc.com
Stock Information
Transaction Systems Architects' common stock
is traded on the Nasdaq Stock Market under
symbol TSAI. The high and low sale prices
(adjusted for two-for-one stock split occurring
July 1, 1996) for the Company's common stock
during the fiscal quarters since its initial public
offering on February 23, 1995 are as follows:
High Low
1996
First Quarter 16 7/8 12 1/2
Second Quarter 20 5/8 16 3/8
Third Quarter 34
19 7/8
Fourth Quarter 45 3/4 24 3/4
1995
Second Quarter 11 3/4 8 7/8
13 3/8 9 3/8
Third Quarter
11 3/4
Fourth Quarter 14
DIRECTORS AND OFFICERS
Board of Directors
Executive Officers
William E. Fisher
Chairman, President and Chief
Executive Officer --
Transaction Systems Architects, Inc.,
and
Chairman and Chief Executive Officer
--
Applied Communications, Inc.
David C. Russell
Senior Vice President --
Transaction Systems Architects, Inc.,
and
President and Chief Operating Officer
--
Applied Communications, Inc.
Frederick L. Bryant
General Partner
ABS Partners, L.P.
Promod Haque
Vice President and General Partner
Norwest Venture Capital, Inc.
Charles E.Noell, III
Managing Partner
JMI Equity Fund, L.P.
Jim D. Kever
President and Co-Chief Executive
Officer
ENVOY Corporation
Larry G. Fendley
Executive Vice President
CSG Systems, Inc.
William E. Fisher
Chairman, President and Chief Executive
Officer --
Transaction Systems Architects, Inc., and
Chairman and Chief Executive Officer --
Applied Communications, Inc.
David C. Russell
Senior Vice President --
Transaction Systems Architects, Inc., and
President and Chief Operating Officer --
Applied Communications, Inc.
David P. Stokes
General Counsel and Secretary
Gregory J. Duman
Chief Financial Officer and Treasurer
Jon L. Howe
Chief Technical Officer
Edward H. Mangold
Senior Vice President - Americas Region
Thomas H. Boje
Vice President - Europe, Middle East and
Africa Region
Fred L. Grabher
Vice President - Asia/Pacific Region
Mark H. Vipond
Vice President - Transaction Systems
Architects, Inc., and
President - USSI, Inc.
Stephen J. Royer
Vice President - Transaction Systems
Architects, Inc., and
President - Grapevine Systems, Inc.
Richard N. Launder
Senior Vice President - Corporate
Development