98A N N U A L R E P O R T C N I S T C E T I H C R A S M E T S Y S N O I T C A S N A R T What do you call16 billion transactions a year? A start. F I N A N C I A L H I G H L I G H TS 1 In Thousands, Except Per Share Amounts 1998 1997 1996 Year Ended September 30 Revenues Operating Income Net Income 2 Basic Net Income Per Share 2 Diluted Net Income Per Share 2 Earnings Before Interest, Taxes, $289,761 50,988 31,126 1.05 1.02 $238,533 38,619 24,405 0.84 0.81 $183,236 23,268 14,286 0.50 0.48 Depreciation and Amortization 62,150 48,389 33,204 As of September 30 Working Capital Total Assets Long-term Obligations Stockholders’ Equity Backlog $ 85,293 221,402 1,915 143,546 185,200 $ 62,914 176,891 2,379 109,346 141,400 $ 43,268 134,988 1,687 80,298 105,000 S U P P L E M E N TA L I N F O R M AT I O N 1 , 3 In Thousands, Except Per Share Amounts 1998 1997 1996 Year Ended September 30 Revenues Pro Forma Operating Income Pro Forma Net Income Pro Forma Basic Net Income Per Share Pro Forma Diluted Net Income Per Share $289,761 50,988 33,466 1.13 1.10 $238,533 39,470 25,176 0.87 0.84 $183,236 26,611 17,262 0.60 0.58 % Change 1997 to 1998 21 29 33 30 31 1 Adjusted for the acquisition of IntraNet, Inc. (IntraNet), accounted for as a pooling of interests. 2 Net income and basic and diluted net income per share reflects a pro forma tax provision for Regency Voice Systems, Inc. (RVS) and IntraNet for combined federal and state income taxes to report income taxes on the basis of which income taxes will be report- ed in future periods. Prior to the acquisitions, RVS and IntraNet were taxed primarily as a partnership and as a S corporation and, accordingly, taxable income was included in the personal tax of their owners who were responsible for the payment of tax thereof. 3 Pro forma operating income, pro forma net income and pro forma basic and diluted net income per share exclude certain one-time or acquisition related expenses associated with the acquisition of ACI and ACIL in fiscal 1994. The total of these expenses were $43.1 million, $10.8 million, $3.3 million and $851,000 in 1994, 1995, 1996 and 1997, respectively. In addition, the 1998 pro forma results exclude $2.5 million of transaction related expenses associated with acquisitions accounted for as poolings of interest. All pro forma results of operations were computed using an effective tax rate of 38 percent. F E L L OW S H A R E H O L D E R S I can hear the reaction— I can hear the reaction--- “How can 16 billion of anything represent a start? After all, tallying just one billion of something is a huge accomplishment.” OK, I admit that’s a valid point, but when your business is selling software that processes electronic transactions, you view 16 billion a little differ- ently. Last year, TSA customers processed 16 billion transactions— the largest number yet, but just two percent of the estimated number T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C P RO F O R M A 3 R E V E N U E S ( I N $ M I L L I O N S ) P RO F O R M A 3 OPERATING INCOME ( I N $ M I L L I O N S ) E N D I N G B A CK L O G ( I N $ M I L L I O N S ) • 289.8 • 238.5 • 183.2 • • 121.4 96.3 • 51.0 • 39 .5 • • • 26.6 16.3 10.7 • 18 5.2 • 141.4 • • • 105 .0 8 2 .1 6 7.2 9 4 9 5 9 6 9 7 9 8 9 4 9 5 9 6 9 7 9 8 9 4 9 5 9 6 9 7 9 8 1P A G E of transactions generated around the world. That’s why at TSA, we think of 16 billion transactions as “a start.” n Granted, it’s a good start. We’ve been in this business for more than 20 years and have a port- folio of applications that process smart card, debit card, credit card and loyalty card transactions from ATMs (Automated Teller Machines), POS (Point- of-Sale) devices, PCs (Personal Computers), the Internet, and a host of others. Our software is used in 70 countries by banks, retailers, stock exchanges and other enterprises needing high-volume, reliable pro- cessing seven days a week, 24 hours a day. n TSA software is designed to help our more than 2,000 customers take advantage of the ongoing shift in A N N U A L R E P O R T 98 payments from paper to pulse. This movement, fueled by the younger generation’s acceptance of electronic payments (for those of you scoring at home, my mom still won’t use an ATM, while my sons understand all too well how they work), continues to drive the growth in transaction volumes and the need for around-the-clock services—making our products even more attractive. n During the past year we built on our solid history of strong financials by reaching a number of milestones. TSA achieved records in key financial metrics including record revenues of $289.8 million, record operating income of $51.0 million, and record backlog of $185.2 million. n Our geographic diversity enabled TSA to ride out the recent difficult economic situations in various areas of the world. In fiscal year 1998, 54 percent of our revenues came from outside the United States. Our Americas revenues grew 20 percent, while our revenues in the Europe/Middle East/Africa region and the Asia/Pacific region were up 35 and 1 percent, respectively. n In addition to our financial achievements, we completed sev- eral acquisitions to complement our product and service offerings. TSA acquired IntraNet to add to our corporate banking product expertise; SCIL and MINT to give us additional strength in the smart card product and integration arena; PRI to complement our information systems consulting offerings; and Edgeware to provide us with additional products for retailers. n At TSA we believe our business of supplying software for electronic payments is just starting—that it is a business with significant growth opportunities all around the world. We also believe we are strategically positioned to take advantage of those opportunities. n Thank you for your continued support and interest in TSA. W I L L I A M E . F I S H E R , C H A I R M A N , P R E S I D E N T A N D C E O , T R A N S A C T I O N SYST E M S A R C H I T E C TS I N C T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C 3P A G E How do competitors view142 transactions a second? A N N U A L R E P O R T 98 If you’ve ever used an ATM or credit card anywhere in the world, chances are TSA software helped complete your transaction—silently, seam- lessly and instantaneously. That’s what distances our applications from others. We’ve set the industry standard for software that quickly and efficiently processes large numbers of transactions around the clock. n Our products are organized in four lines of business groups— Consumer Banking, Corporate Banking, Retail Solutions and System Solutions—to better respond to our customers’ needs. C O N S U M E R B A N K I N G Products in the TSA Consumer Banking group represent our most mature and well-established applications. Financial institutions use these products to route and process transactions for ATM networks; process transactions from retailers using traditional POS devices and From a distance. the Internet; handle billpay and other telephone and PC banking requests; and control fraud. CO R P O R AT E B A N K I N G Our Corporate Banking products enable financial institu- tions to automatically deposit paychecks and complete other automated clearing house (ACH) transactions; and automate the process by which institutions transfer high-value (wire) payments. R E TA I L S O L U T I O N S Some of the world’s largest retailers use products in the TSA Retail Solutions portfolio to route transactions from their ATM and POS networks, process Electronic Benefit Transfer (EBT) transactions, autho- rize checks, establish frequent shopper programs and control fraud. SYST E M S O L U T I O N S TSA System Solutions products are used by a cross- section of customers in many industries to monitor mission critical systems, establish communications links between high-volume systems, and handle intersystem messaging. n TSA software operates on a variety of hardware platforms to meet specific processing needs. T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C TS A L I N E S O F B U S I N E S S CO N S U M E R B A N K I N G CO R P O R AT E B A N K I N G R E TA I L S O L U T I O N S SYST E M S O L U T I O N S B A S E 2 4 T R A N S 2 4 X P R E S S I V R M TS M o n e y N e t CO - a c h B A S E 2 4 W I N PAY 2 4 I C E N E T 2 4 E N G UA R D 5P A G E What do you call 48 million lines of code? A N N U A L R E P O R T 98 Each line of code contained in TSA products is backed by the most precious resource on the planet—people committed to excellence. We recruit, hire and retain the most talented people available, then turn them loose to do what they do best—design, deliver and support proven technology. Their hard work over the past 20 years has enabled us to build a product set comprised of more than 48 million lines of code— an obstacle to competitors trying to enter our market space. n TSA employees also help us maintain an edge over our competition with a “work hard, play hard” attitude that permeates everything we do. Whether working around the clock to meet a customer need or gathering stones from travels around the world for a special corporate rock collection, TSA employees approach every task with the same high level of Another day at the office. energy and professionalism. n All totaled, more than 2,000 people work for TSA in our headquarters on the “Silicon Prairie” of Omaha, Nebraska, and in offices located in Watford, England; Singapore and more than a dozen other cities around the world. No matter the location, TSA fosters a corporate culture that values growth, creativity, a solid work ethic and customer-centric thinking. n As you might expect from an application software company, TSA employees are young, energetic and well-educated—just the kind of overachievers needed to meet the needs of customers that have grown accustomed to the around-the-clock performance of our products. The average TSA employee is 37.5 years old, 55.7 percent of TSA employees have achieved a bachelor’s degree or above, and the average tenure is 3.8 years. Company tenure is even greater among TSA executives. Our executive officers average 10 years of service with the company. T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C N U M B E R O F E M P L OY E E S R E V E N U E P E R E M P L OY E E • 2,054 1,5 3 4 1,2 7 7 9 74 • • • • $159,6 47 $147,195 $139,10 0 $130,70 0 • • • 9 5 9 6 9 7 9 8 9 5 9 6 9 7 9 8 7P A G E What do you call over 2,000 customers in70 countries? A N N U A L R E P O R T 98 Through ACI Worldwide, our distribution and support operation, TSA products and services reach more than 2,000 customers around the globe. They come from all segments of the financial, retail and networking industries and include more than 100 of the world’s top 500 banks and 19 of the top 100 retailers in the US. n Opportunities exist to add to our customer list—especially among the world’s largest banks. The majority of them continue to use in-house software developed in the 1970s or early 1980s. As transaction volumes increase and new types of services emerge, modifications to these in-house systems may overtax precious bank resources. TSA products offer banks the ability to replace their homegrown systems with a proven, feature-rich infrastructure that supports around-the-clock financial services and processes A toehold. ever-growing transaction volumes. n Retailers are just beginning to enjoy the benefits our products provide. TSA solutions enable them to efficiently manage their POS systems in-house instead of using outside providers. We also offer products that help them control fraud, and offer customer loyalty programs. n Opportunities for our prod- ucts expand beyond the world’s largest institutions. Since TSA products operate on a variety of hardware platforms, we can also meet the processing needs of medium and smaller companies. n To reach customers, ACI Worldwide maintains three distribution and support chan- nels, an Americas channel headquartered in Omaha; a Europe/Middle East/Africa channel headquartered in Watford, England; and an Asia/ Pacific channel headquartered in Singapore. Each maintains offices in principal cities throughout its region and supports TSA products with a full complement of services including installation, a 24-hour hotline, custom software development and on-site technical services. T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C N U M B E R O F C U STO M E R S • 2,0 73 • 1,64 4 • • 5 6 5 4 3 3 9 5 9 6 9 7 9 8 9P A G E A C I WO R L DW I D E S A L E S CH A N N E L S A M E R I C A S EUROPE/ MIDDLE EAST/ AFRICA A S I A / PAC I F I C What do you call $106 million in recurring revenue? A N N U A L R E P O R T 98 From our home on the “Silicon Prairie” we take a conservative, Midwestern US approach to our financials, which means we like to keep things simple and consistent. We base TSA’s financial model on volume-sensitive pricing, monthly license fees and maintaining a healthy backlog of contracted, but not yet recognized revenue—our way of storing acorns. This allows us to grow with the electronic payments marketplace. n During our 1998 fiscal year, we recognized over $106 million in recurring revenue comprised of $43.7 million in monthly license fees, $57.1 million in maintenance fees and $5.9 million in transaction processing fees. This growth helped us achieve operating income of $51.0 million, up from $38.6 million in 1997. Our operating margin in the fourth quarter of the fiscal year reached 17.7 percent as Storing acorns. compared with 17.0 percent for the fourth quarter of the previous year. n Our financial model, based on volume-sensitive pricing and monthly license fees, helped us maintain a rolling 12-month backlog that grew 31 percent in fiscal 1998 reaching $185.2 million as of our September 30 fiscal year end. The recurring revenue portion of our backlog which will be recognized in fiscal year 1999 reached $119.4 million. n Overall, our revenues reached a record $289.8 million in fiscal 1998, an increase of 21 percent over fiscal year 1997. Cash flow from operating activities for the year totaled $35.4 million, up from $34.0 million. The combined cash and cash-equivalent balance at the end of September 1998 was $62.6 million. n The combination of volume-sensitive pricing and recurring revenue—our method of storing acorns—differentiates us from virtually every other company in our business niche. T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C R E C O G N I Z E D R E C U R R I N G R E V E N U E ( I N $ M I L L I O N S ) • • • • 10 6.7 8 6.7 6 4 . 8 4 9 . 5 9 5 9 6 9 7 9 8 11P A G E Why TSA? A N N U A L R E P O R T 98 At TSA we’re a business just taking root—a business tied to the world’s growing demand for anytime, anywhere access to money and infor- mation. n Customers using TSA products processed 16 billion electronic transactions in the past year—a mere two percent of the world’s estimated transactions. In coming years electronic transactions are projected to grow at a faster pace than those made by cash and check, increasing the need for the proven, reliable products in the TSA portfolio. n The TSA product set extends from ATM processing solutions to products that address emerging technologies like the Internet and smart cards, while operating on a variety of hardware platforms and offering Year 2000 compatibility. n The employees of TSA stand behind their products with a simple philosophy—meet customers’ needs Because we’re just getting started. on time, on budget, with no surprises. While simple, it provides a guiding set of principles that continue to earn TSA a high customer-retention rate, and additional business from existing customers. n ACI Worldwide, TSA’s distribution and support division, delivers product and services to customers in 70 countries. Opportunities await as the acceptance of technology fuels the spread of electronic payments around the globe. n TSA “stores acorns” by basing our financial model on volume- sensitive pricing, monthly license fees and maintaining a healthy backlog of contracted, but not yet recognized revenue. n The result is an organization that’s just getting started—an organization designed to take long-term advantage of the shift to electronic payments and tap the potential in a vital and growing industry. T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C G L O B A L T R A N S A C T I O N S P RO J E C T E D ( I N B I L L I O N S ) • 9 31 • • 64 9 58 2 9 8 0 0 0 5 Source: Corporate Information Center 13P A G E B OA R D O F D I R E C TO R S E X E C U T I V E O F F I C E R S W I L L I A M E . F I S H E R Chairman, President and Chief Executive Officer DAV I D C . R U S S E L L Chief Operating Officer and Executive Vice President E DWA R D H . M A N G O L D Senior Vice President - Americas Region M A R K R . V I P O N D Senior Vice President - Consumer Banking G R E G O RY J . D U M A N Treasurer, Chief Financial Officer and Executive Vice President ST E P H E N M . B A I L E Y Vice President - Corporate Banking DAV I D P. STO K E S Secretary, Vice President - Legal J E F F R E Y S . H A L E Senior Vice President - Business Development DW I G H T G . H A N S O N Vice President - Corporate Finance & Administrative Services M A R L I N R . H OW L E Y Vice President - Retail Solutions D O N A L D G . M CL A RT Y Vice President - Asia/Pacific Region J O N D . PA R R Vice President - Europe, Middle East and Africa Region ST E P H E N J . ROY E R Vice President - System Solutions W I L L I A M E . F I S H E R Chairman, President and Chief Executive Officer Transaction Systems Architects, Inc. DAV I D C . R U S S E L L Chief Operating Officer and Executive Vice President Transaction Systems Architects, Inc. P RO M O D H AQ U E Vice President and General Partner Norwest Venture Capital, Inc. CH A R L E S E . N O E L L , I I I Managing Partner JMI Equity Fund, L.P. J I M D . K E V E R President and Co-Chief Executive Officer ENVOY Corporation L A R RY G . F E N D L E Y President Fendley Technology Services, Inc. A N N U A L R E P O R T 98 M A N AG E M E N T (cid:213) S D I S C U S S I O N A N D A N A LYS I S O F F I N A N C I A L C O N D I T I O N A N D R E S U LTS O F O P E R AT I O N S O V E R V I E W The Company was formed on November 2, 1993, for the purpose of acquiring all of the outstanding capital stock of ACI and 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, Inc., (“USSI”). The acquisitions of ACI, ACIL and USSI are here after referred to as the “Acquisitions.” As a result of the Acquisitions, the Company incurred certain one-time or acquisition related expenses in fiscal 1997 and 1996. These acquisition-related charges included, among others, purchased software and goodwill amortization. These expenses are hereafter referred to as the “Acquisition Charges.” The Company provides electronic payments software and related services. During fiscal 1998, 1997 and 1996, 54%, 53% and 48%, respectively, of total revenues resulted from international operations. The Company derived approximately 68%, 68% and 65%, 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 rev- enues will continue to come from its existing BASE24 products over the next several years, the Company has acquired and developed and is currently developing other software products and related services. These products are in the areas of network connectivity, middleware, internet and remote banking, wire transfer, ACH and IVR. The following table summarizes revenues by geographic region: (in thousands) Americas EMEA Asia/Pacific Twelve Months Ended September 30, 1998 1997 1996 $ 174,069 $145,825 $114,513 87,492 28,200 64,792 27,916 47,267 21,456 Total revenues $289,761 $238,533 $183,236 See Note 11 to the Company’s Consolidated Financial Statements for additional information relating to geographic regions. Acquisitions. The Company has completed several acquisitions during fiscal 1998, 1997 and 1996. The Company’s acquisition strategy is focused primarily on two areas: (i) additional products to complement and enhance the Company’s strategy of being the leading provider of elec- tronic payments software for banks, retailers and other enterprises needing high-volume, reliable processing engines and (ii) geographic expansion into markets which have proven or have a high level of opportunity to embrace electronic pay- ments. Significant acquisitions in fiscal 1998, 1997 and 1996 include the following: Acquiree M.R. GmbH TXN Solution Integrators Grapevine Systems, Inc. Open Systems Solutions, Inc. Regency Voice Systems, Inc. IntraNet, Inc. Professional Resources, Inc. Smart Card Integrators Ltd Date Acquired October 1995 June 1996 September 1996 October 1996 May 1997 August 1998 August 1998 August 1998 T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C 15P A G E All of the acquisitions on the previous page were acquired using the pooling of interests method of accounting except for M.R. GmbH and TXN Solution Integrators which were accounted for under the purchase method of accounting. The Company’s financial statements have been restated for all periods presented to include the results of the material entities acquired using the pooling of interests method of accounting. Product Pricing. The Company’s primary pricing method is transaction sensitive whereby products are priced based upon the number of transactions processed by the customer. Under this method, customers pay an Initial License Fee (ILF) and a Monthly License Fee (MLF) which allows the customer to process a contractually predetermined maximum vol- ume of transactions per month. Once transaction volume exceeds this maximum volume level, the customer is required to pay a Capacity License Fee (CLF) and a Capacity Monthly License Fee (CMLF). There is a separate CLF and CMLF for each incremental volume level. In addition to the transaction-sensitive method, the Company also offers a hardware specific pricing method whereby the product is priced on a per-copy basis and tiered to recognize different performance levels of the processing hardware. Under this method, customers pay an ILF and MLF for each copy of the software they have licensed. Substantially all ILF (including CLF) revenue is recognized when the software is delivered and MLF (including CMLF) revenue is recognized on a monthly basis. MLF revenue amounted to $43.7 million, $32.4 million and $22.0 million, in fiscal 1998, 1997 and 1996, respectively. ILF revenue, including software modification fees, amounted to $118.4 million, $95.9 million and $67.1 million, in fiscal 1998, 1997 and 1996, respectively. Hardware Revenues. The Company had a software house agreement with Compaq whereby Compaq paid commissions to the Company when the Company demonstrated that a customer’s purchase of its software resulted in that customer’s purchase of hardware from Compaq. The commissions were determined as a percentage of Compaq’s related hardware revenue. Commissions from Compaq amounted to $3.4 million, and $4.4 million in fiscal 1997 and 1996, respectively. This agreement expired on December 31, 1997. On January 1, 1998, the Company entered into a market development funding (MDF) agreement with Compaq whereby Compaq provides the Company with funds to be used for marketing efforts to promote the Company’s BASE24 and Compaq’s NonStop Himalaya product lines. The MDF agreement replaced the previous software house fee agreement. Revenue from the software house and MDF agreement in fiscal year 1998 amounted to $4.3 million. C N I S T C E T I H C R A S M E T S Y S N O I T C A S N A R T A N N U A L R E P O R T 98 R E S U LTS O F O P E R AT I O N S The following table sets forth certain financial data and the percentage of total revenues of the Company for the periods indicated: Year Ended September 30, (dollars in thousands) Revenues: Software license fees Maintenance fees Services Hardware, net Total revenues Expenses: 1998 1997 1996 Amount % of Revenue Amount % of Revenue Amount % of Revenue $162,131 56.0% $128,330 53.8% $ 89,075 48.6% 57,077 65,944 4,609 19.7 22.8 1.6 48,714 55,426 6,063 20.4 23.2 2.5 41,500 46,922 5,739 22.6 25.6 3.1 289,761 100.0 238,533 100.0 183,236 100.0 Cost of software license fees: Software costs Amortization of purchased software Cost of maintenance and services Research and development Selling and marketing General and administrative: 34,346 — 65,607 25,365 62,013 11.9 0.0 22.6 8.8 21.4 27,876 801 56,404 19,508 50,168 11.7 0.3 23.6 8.2 21.0 22,494 3,143 46,179 15,883 36,749 12.3 1.7 25.2 8.7 20.1 General and administrative costs 50,007 17.3 44,149 18.5 34,864 19.0 Amortization of goodwill and purchased intangibles Total expenses Operating income Other income (expense): Interest income Interest expense Transaction related expenses Other Total other Income before income taxes Provision for income taxes 1,435 238,773 50,988 3,204 (242) (2,512) (203) 247 51,235 (19,476) 0.5 82.4 17.6 1.1 (0.1) (0.9) (0.1) 0.1 17.7 (6.7) 1,008 199,914 38,619 2,291 (178) — (652) 1,461 40,080 (14,325) 0.4 83.8 16.2 1.0 (0.1) 0.0 (0.3) 0.6 16.8 (6.0) 656 159,968 23,268 2,024 (233) — (561) 1,230 24,498 (9,296) Net income $ 31,759 11.0% $ 25,755 10.8% $ 15,202 Unaudited pro forma net income 1 $ 31,126 10.7% $ 24,405 10.2% $ 14,286 0.4 87.3 12.7 1.1 (0.1) 0.0 (0.3) 0.7 13.4 (5.1) 8.3% 7.8% 1 Pro forma net income reflects pro forma tax provisions for RVS and IntraNet for combined federal and state income taxes to report income taxes on the basis of which income taxes will be reported in future periods. Prior to the stock exchange transactions, RVS and IntraNet were taxed primarily as a partnership and as a S corporation and, accordingly, taxable income was included in the personal tax of their owners who were responsible for the payment of tax thereof. T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C 17P A G E Revenues. Total revenues for fiscal 1998 increased 21.5% or $51.2 million over fiscal 1997. Of this increase, $33.8 mil- lion of the growth resulted from a 26.3% increase in software license fee revenue, $10.5 million from a 19.0% increase in services revenue and $8.3 million from a 17.2% increase in maintenance fee revenue. Total revenues for fiscal 1997 increased 30.2% or $55.3 million over fiscal 1996. Of this increase, $39.3 million of the growth resulted from a 44.1% increase in software license fee revenue, $8.5 million from a 18.1% increase in services revenue and $7.2 million from a 17.4% from increase in maintenance fee revenue. The growth in software license fee revenue in both fiscal 1998 and 1997 is primarily the result of increased demand, from both existing and new customers, 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 electronic payment transaction volume and the growing complexity of electronic payment systems. MLF revenue was $43.7 million, $32.4 million and $22.0 million in fiscal 1998, 1997 and 1996, respectively. The growth in service revenue in both fiscal 1998 and 1997 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 1998 and 1997 is a result of the continued growth of the installed base of the Company’s software products. Expenses. Total operating expenses for fiscal 1998 increased 19.4% or $38.9 million over fiscal 1997. Total operating expenses for fiscal 1997 increased 25.0% or $39.9 million over fiscal 1996. The primary reason for the overall increase in operating expenses during fiscal 1998 and 1997 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 2,054, 1,684 and 1,230 at September 30, 1998, 1997 and 1996, respectively. The Company’s operating margin (excluding the Acquisition charges of $0.9 million and $3.3 million for fiscal 1997 and 1996, respectively) was 17.6%, 16.5% and 14.5% in fiscal 1998, 1997 and 1996, respectively. These improve- ments are primarily due to increased demand for the Company’s products and the impact of the growth in the Company’s MLF revenues. The Company’s gross margin (total revenues minus cost of software and cost of maintenance and services) was 65.5%, 64.7% and 62.5% in fiscal 1998, 1997 and 1996, respectively. The increase in gross margin is primarily due to the impact of additional MLF revenue. Research and development (R&D) costs as a percentage of total revenues were 8.8%, 8.2% and 8.7% in fiscal 1998, 1997 and 1996, respectively. The majority of R&D costs have been charged to expense as incurred with the capitaliza- tion of software costs amounting to approximately $1.0 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 21.4%, 21.0% and 20.1% in fiscal 1998, 1997 and 1996, respectively. The slight increase in fiscal 1998 is the result of higher levels of new license fee orders received in fiscal 1998. C N I S T C E T I H C R A S M E T S Y S N O I T C A S N A R T A N N U A L R E P O R T 98 General and administrative (G&A) costs as a percentage of total revenues were 17.3%, 18.5% and 19.0% in fiscal 1998, 1997 and 1996. The decrease is due primarily to increased leverage from the larger revenue base in relation to the level of G&A expenses being incurred. EBITDA. The Company’s earnings before interest, income taxes, depreciation and amortization (EBITDA) was $62.1 million, $48.4 million and $33.2 million for fiscal 1998, 1997 and 1996, 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 increase in cash and cash equivalents. Transaction Related Expenses. Transaction related expenses include legal, accounting, investment banking fees and other non-recurring expenses associated with the acquisitions accounted for as poolings of interest. During 1998, the Company incurred $2.5 million of these expenses to complete the acquisition of IntraNet, SCIL and PRI. Income Taxes. The Company had a pro forma effective tax rate of 39.3% for fiscal 1998 as compared to 39.1% for fiscal 1997. As of September 30, 1998, the Company has deferred tax assets of approximately $16.6 million and deferred tax liabilities of $0.3 million. Each year, the Company evaluates its historical operating results as well as its projections to determine the realizability of the deferred tax assets. This analysis indicated that $4.9 million of the deferred tax assets were more likely than not to be realized. Accordingly, the Company has recorded a valuation allowance of $11.7 million as of September 30, 1998. The Company intends to analyze the realizability of the net deferred-tax assets at each future reporting period. Such analysis may indicate that the realization of various deferred tax benefits is more likely than not and, therefore, the valuation reserve may be reduced. B AC K L O G As of September 30, 1998 and 1997, the Company had non-recurring revenue backlog of $30.2 million and $27.7 million in software license fees and $35.6 million and $19.2 million in services, respectively. The Company includes in its non-recurring revenue backlog all fees specified in contracts which have been executed by the Company to the extent that the Company contemplates recognition of the related revenue within one year. There can be no assur- ance 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, 1998 and 1997, the Company had recurring revenue backlog of $119.4 million and $94.5 million, respectively. The Company defines recurring revenue backlog to be all monthly license fees, maintenance fees and facil- ities 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. T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C 19P A G E Y E A R 2 0 0 0 Year 2000 problems may arise in computer equipment and software, as well as embedded electronic systems, because of the way these systems are programmed to interpret certain dates that will occur around the change in century. In the computer industry this is primarily the result of computer programs being designed and developed using or reserving only two digits in date fields (rather than four digits) to identify the century, without considering the ability of the pro- gram to properly distinguish the upcoming century change in the Year 2000. In addition, the Year 2000 is a special-case leap year. And some programs may drop February 29th from their internal calendars. Likewise, other dates may present problems because of the way the digits are interpreted. Because the Company’s business is based on the licensing of applications software, the Company’s business would be adversely impacted if its products or its internal systems expe- rience problems associated with the century change. This issue also potentially affects the software programs and systems used by the Company in its operations. In 1996 the Company initiated a company-wide program to analyze three specific categories of Project Definition. systems (1) software developed by the Company which is licensed to customers (2) IT systems utilized by the Company consisting of applications developed in-house and purchased from third party suppliers and (3) non-IT systems and embedded technology which are integral components of the infrastructure of the Company. The Company adopted a methodology for its licensed software into four distinct categories (1) preparation (2) analysis and remediation (3) testing and (4) delivery. The Company developed tools during the preparation phase of the project which were utilized during the analysis and testing and subsequently made available to its customers at no charge. The Company believes that its remediation efforts with respect to its licensed products will prove to be successful. The Company’s belief is based on testing by the company of its licensed software products by using testing tools simulating dates and testing by many of the customers of the Company who have in turn completed their own Year 2000 testing. The licensed products have been made available by the company to customers in a timely manner and the communica- tion efforts have been proactive and ongoing. The Company continues to actively monitor the status and progress of customers and distributors and assess the risk associated in those cases where the customer has not taken delivery of the compliant version or may have not made satisfactory progress in their own Year 2000 testing. With respect to IT and non-IT systems, the Company is utilizing a similar methodology adopted for its licensed software. Specifically, the Company is utilizing the following steps: (1) preparation, in which the Company conducts systematic inventory, analysis, and prioritization of the systems in accordance with mission critical impact (2) analysis, replacement and remediation (3) testing and (4) implementation. Recognizing that communications and organization of Year 2000 tasks and responsibilities is key, the Company has embraced a management approach utilizing central coordination with distributed administration over geographic and business units. This approach mirrors the Company’s organization and ensures that Year 2000 Communications Managers are deployed and managing tasks in close proximity to actual efforts. Those efforts are then reported central- ly to upper management. The approach also ensures that customers are kept informed of product and Company activi- ties relating to the Year 2000 and that the Company is able to measure progress and plan support for customers’Year 2000 projects. Current Status. Following analysis, remediation and testing efforts, the Company began shipping Year 2000 compliant versions of its major licensed software applications in March of 1997. As efforts were completed on other applications, they too were shipped to customers so that they could upgrade as part of their own Year 2000 projects. As of December 1998, 96% of all of the Company’s licensed software applications are compliant and available to customers. The remaining applications are expected to be completed during the first calendar quarter of 1999. The company continues to conduct analysis of products of other companies as they are acquired with appropriate measurement and documenta- tion in accordance with the Year 2000 methodology in place. C N I S T C E T I H C R A S M E T S Y S N O I T C A S N A R T A N N U A L R E P O R T 98 With respect to the IT and non-IT systems, remediation and replacement is underway and has been substantially completed in the most critical areas. The internal accounting systems utilized by the Company and most of the subsidiaries have been replaced and are in production. Replacement or remediation of accounting systems for the other subsidiaries is currently underway and is expected to be implemented by June of 1999. The overall IT and non-IT project is approximately 65% complete. As new IT and non-IT purchases are made, each is scrutinized and inventoried for Year 2000 compliance. The Company currently anticipates it will complete its Year 2000 IT and non-IT compliance efforts by June of 1999. The majority of the embedded systems on which the Company relies in its day to day operations around the world are owned and managed by the lessors of the buildings in which the Company’s offices are located, or by agents of such lessors. The Company has sent letters to its lessors and, as applicable, their agents requesting certifications of the Year 2000 compliance of the embedded systems. The Company has received responses from more than half of its lessors indicating that the systems in the buildings either already are, or are expected to be before the end of 1999, Year 2000 compliant. Those systems not owned by and managed by lessors have undergone a similar inventory and certification gathering. The Company will prioritize systems and develop necessary test plans based on the further responses it continues to receive, or not to receive, to its letters. The Company is developing contingency plans for support of its customers prior to, during, and following the “Year 2000 weekend”. Such plans will incorporate, but not be limited to, distribution of support personnel in locations around the world, backup plans for telecommunications, decision and notification hierarchy, and other infrastructure support. Contingency plans are presently anticipated to be complete by July of 1999. Costs. The Company expects to incur project costs of approximately $10 million over the life of the Year 2000 project. These costs consist of: (i) internal staff costs related to licensed product remediation and testing; (ii) internal staff costs related to IT and non-IT compliance; (iii) hardware and software cost for replacement of IT systems; and (iv) costs relat- ed to non-IT compliance involving embedded systems and consulting services. Cost incurred from the beginning of the project in 1996 through September 1998 have totaled approximately $7.5 million. The Company expects to incur an addi- tional $2.5 million over the remaining life of the Year 2000 project. All costs related to the Year 2000 project are being expensed as incurred. The estimated remaining costs are based on currently known circumstances and various assump- tions regarding future events. There can be no assurance that this estimate will be achieved and actual results could differ materially from those anticipated. Risks. The Company believes that the most likely Year 2000 risks relate to third parties with which it has material relationships. Those parties include computer hardware system providers on which the Company and its customers rely as well as service providers such as those providing telecommunications and electricity. Failure or disruption of such services or systems could adversely affect operations and the Company’s ability to support its customers. The second most likely Year 2000 risk relates to the Company’s products that are used in conjunction with software products devel- oped by other vendors or by customers who have developed their own applications for use with the Company’s products, which may not be Year 2000 compliant. Since the majority of the Company’s customers utilize its products for authorization, routing, or processing of financial transactions, the failure of such customers’ systems, which may be particularly susceptible to Year 2000 compliance issues, could impact the transaction volume processed by the customers thereby reducing transaction fees paid by customers with usage-based fee structures. Failures of such systems could also increase the efforts required by the Company to assist customers with resolving problems unrelated to the Company’s licensed products. The third most likely Year 2000 risk relates to certain foreign countries in which the Company operates and the Company’s customers in such countries which are not acting to sufficiently remediate Year 2000 issues. Some customers outside of the United States have chosen to concentrate on issues other than the Year 2000. Without concentrating on the Year 2000 upgrade and testing efforts, such customers will not be prepared and may require additional support to assist them. Commercial risks are associated with operating in countries which are not prepared for the Year 2000. T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C 21P A G E In each case cited previously, the Company is developing contingency plans to address each identified risk. In addition, the Company continues to use its methodology of centralized and distributed management to keep in contact and moni- tor progress with customer projects and to communicate at an upper management level to those customers categorized as “at risk” due to their lack of progress. The contingency plan being developed by the Company acknowledges the risk associated with suppliers of material services, hardware vendors closely related to the operation of the Company’s licensed products, the Company’s own licensed products and the ability of the Company to support its customers. In addition to distributed support methods, the Company is investigating alternative services, such as telecommunications, as part of the contingency plan. The (i) inability to timely implement contingency plans, if deemed necessary and (ii) the cost to implement such plans, may have a material adverse effect on the Company’s results of operations. Except for statements of existing or historical facts, the foregoing discussion consists of forward-looking statements and assumptions relating to forward-looking statements, including without limitation the statements relating to the timetable for completion of Year 2000 compliance efforts, future costs, potential problems relating to Year 2000, the Company’s state of readiness, third party representations, and the Company’s plans and objectives for addressing Year 2000 prob- lems. Certain factors could cause actual results to differ materially from the Company’s expectations, including without limitation (i) the failure of existing or future customers to achieve Year 2000 compliance, (ii) the failure of computer hard- ware system providers on which the Company and its customers rely or other vendors or service providers of the Company or its customers to timely achieve Year 2000 compliance, (iii) the Company’s products and systems not containing all necessary date code changes, (iv) the failure of the Company’s analysis and testing to detect operational problems in IT and non-IT systems utilized by the Company or in the Company’s products or services, whether such failure results from the technical inadequacy of the Company’s validation and testing efforts, the technological infeasi- bility of testing certain non-IT systems, and the unavailability of customers or other third parties to participate in testing, (v) potential litigation arising out of Year 2000 issues, with respect to providers of software and related technical and consulting services such as the Company generally, and particularly in light of the numerous interfaces between the Company’s products and products and systems of third parties which are required to successfully utilize the Company’s products which could involve the Company in expensive, multiple party litigation even though the Company may have no responsibility for the alleged problem, and (vi) the failure to timely implement a contingency plan to the extent Year 2000 compliance is not achieved. S E L E C T E D Q U A RT E R LY I N F O R M AT I O N The following table sets forth certain unaudited financial data for each of the quarters within fiscal 1998, 1997 and 1996. This information has been derived from the Company’s Consolidated Financial Statements 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. C N I S T C E T I H C R A S M E T S Y S N O I T C A S N A R T A N N U A L R E P O R T 98 Quarter Ended (in thousands, except per share data) Sep. 30 1998 June 30 March 31 1998 1998 Dec. 31 1997 Sep. 30 1997 June 30 March 31 1997 1997 Dec. 31 1996 Sep. 30 1996 June 30 March 31 1996 1996 Dec. 31 1995 Revenues: Software license fees Maintenance fees Services Hardware, net Total revenues Expenses: $44,242 $ 41,753 $38,872 $37,264 $33,772 $33,655 $32,529 $28,374 $25,009 $22,808 $21,798 $19,460 15,078 14,664 14,162 13,173 12,628 12,470 11,861 11,755 11,362 10,651 9,831 9,656 19,091 17,018 15,195 14,640 14,431 14,526 12,912 13,557 13,599 12,650 11,064 9,609 883 1,232 1,105 1,389 1,175 1,083 3,213 592 1,159 1,174 1,940 1,466 79,294 74,667 69,334 66,466 62,006 61,734 60,515 54,278 51,129 47,283 44,633 40,191 Cost of software license fees: Software costs Amortization of purchased software Cost of maintenance 9,388 8,896 8,047 8,015 7,246 7,214 7,114 6,302 6,066 6,026 5,681 4,721 — — — — — — — 801 787 783 785 788 and services Research and development 6,807 18,226 17,069 15,696 14,616 14,476 14,483 13,589 13,856 13,331 12,023 10,751 10,074 6,566 6,093 5,899 5,071 5,004 4,982 4,451 4,202 3,812 4,116 3,753 Selling and marketing 16,917 15,682 15,010 14,404 13,713 13,062 12,441 10,952 10,496 9,011 8,415 8,827 General and administrative: General and administrative costs 13,586 13,227 11,811 11,383 10,588 11,104 12,590 9,867 9,115 9,421 8,119 8,209 Amortization of goodwill and purchased intangibles 359 347 414 315 344 210 237 217 204 157 145 150 Total expenses Operating income Other income (expense): Interest income Interest expense Transaction related expenses Other Total other 65,283 61,787 57,071 54,632 51,438 51,077 50,953 46,446 44,201 41,233 38,012 36,522 14,011 12,880 12,263 11,834 10,568 10,657 9,562 7,832 6,928 6,050 6,621 3,669 894 (98) 863 (46) 800 (78) (2,512) — 63 (226) — 40 647 (20) — (80) 642 (42) — (76) 621 (55) 547 (24) 481 (57) 374 (54) 465 (54) 596 (84) 589 (41) — — — — — — — (40) (223) (313) (425) (83) (29) (24) (1,653) 591 762 547 524 526 300 111 (105) 328 483 524 Income before income taxes 12,358 13,471 13,025 12,381 11,092 11,183 9,862 7,943 6,823 6,378 7,104 4,193 Provision for income taxes (5,289) (5,040) (4,700) (4,447) (3,786) (3,793) (3,667) (3,079) (2,915) (2,393) (2,124) (1,864) Net income $ 7,069 $ 8,431 $ 8,325 $ 7,934 $ 7,306 $ 7,390 $ 6,195 $ 4,864 $ 3,908 $ 3,985 $ 4,980 $ 2,329 Unaudited pro forma net income 1 Unaudited basic earnings per share Unaudited diluted earnings per share $ 6,875 $ 8,433 $ 8,149 $ 7,669 $ 7,170 $ 6,996 $ 5,819 $ 4,420 $ 3,736 $ 3,694 $ 4,258 $ 2,598 $0.23 $0.28 $0.28 $0.26 $0.25 $0.24 $0.20 $0.15 $0.13 $0.13 $0.15 $0.09 $0.22 $0.28 $0.27 $0.25 $0.24 $0.23 $0.20 $0.14 $0.13 $0.12 $0.14 $0.09 1 Pro forma net income reflects pro forma tax provisions for RVS and IntraNet for combined federal and state income taxes to report income taxes on the basis of which income taxes will be reported in future periods. Prior to the stock exchange transaction, RVS and IntraNet were taxed primarily as a partnership and as a S corporation and, accordingly, taxable income was included in the personal tax of their owners who were responsible for the payment of tax thereof. 23P A G E T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C L I Q U I D I T Y A N D C A P I TA L R E S O U RC E S At September 30, 1998, the Company’s principal sources of liquidity consisted of $62.6 million of cash and cash equivalents, as compared to $52.2 million at September 30, 1997 and a $10 million line of credit of which there are no borrowings outstanding. The bank line of credit expires in June 1999. The Company’s net cash flow from operating activities for fiscal 1998, 1997 and 1996 were $35.4 million, $34.0 million and $21.8 million, respectively. The increase of $1.4 million in fiscal 1998 is principally due to higher net income and increases in accounts payable, accrued liabilities and deferred revenue, partly offset by increases in receivables. The increase of $12.2 million in fiscal 1997 is principally due to higher net income and increases in accrued liabilities and deferred revenue partly offset by increases in receivables. The Company’s net cash flows used in investing activities totaled $24.7 million, $18.4 million and $22.8 million in fiscal 1998, 1997 and 1996, respectively. The increase of $6.3 million in fiscal 1998 is principally due to higher capital expenditures to support the Company’s growth, the purchase of 2.5 million shares of Nestor, Inc. (Nestor) Common Stock for $5.0 million and an increase in advances to US Processing, Inc. (USPI). The decrease of $4.4 million in fiscal 1997 is due principally to notes receivable repayments from Insession, Inc. (Insession) partly offset by higher capital expendi- tures to support the Company’s growth and the purchase of software rights. In the normal course of business, the Company evaluates potential acquisitions of complementary businesses, product or technologies. In fiscal year 1996, the Company acquired Grapevine in exchange for 380,441 shares of the Company’s Class A Common Stock. In fiscal year 1997, the Company acquired 100% of RVS and OSSI in exchange for 1,615,383 and 210,000 shares, respectively, of the Company’s Class A Common Stock. In February 1998 the Company acquired 100% of Coyote in exchange for 26,400 shares of the Company’s Class A Common Stock. In April 1998, the Company acquired 2.5 million shares of Nestor Common Stock for $5.0 million. The Company also received warrants to purchase an additional 2.5 million shares of Nestor Common Stock for exercise price of $3 per share. In May 1998 the Company acquired 100% of Edgeware in exchange for 143,436 shares of the Company’s Class A Common Stock. In August 1998, the Company acquired 100% of IntraNet in exchange for 1,220,300 shares of the Company’s Class A Common Stock. Also in August 1998 the Company acquired 100% of SCIL and PRI in exchange for 380,000 and 180,000, respectively, of the Company’s Class A Common Stock. In January 1996, the Company entered into a transaction with Insession whereby the Company acquired a 6% minority interest in Insession for $1.5 million. In addition, the Company has extended Insession $6.6 million in promissory notes as of September 30, 1998. The promissory notes bear an interest rate of prime plus 0.25%, and are payable in January 1999 ($1.0 million), January 2000 ($1.0 million) and January 2001 ($1.5 million). The remaining $3.1 million of promissory notes are payable upon demand. The promissory notes are secured by future royalties owed by the Company to Insession. The Company has extended a line of credit facility to USPI, a transaction processing business in which the Company has a 19.9% ownership interest. As of September 30, 1998, borrowings under the line of credit totaled $5.6 million. On December 10, 1998, the Company acquired substantially all of the net assets of USPI for $3.6 million cash and the assumption of certain liabilities of USPI. 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. C N I S T C E T I H C R A S M E T S Y S N O I T C A S N A R T A N N U A L R E P O R T 98 Q UA N T I TAT I V E A N D Q U A L I TAT I V E D I S C L O S U R E S A B O U T M A R K E T R I S K The Company is exposed to market risks associated primarily to changes in foreign currency exchange rates. The Company conducts business in all parts of the world. As a general rule, the Company’s revenue contracts are denomi- nated in U.S. dollars. Thus, any decline in the value of local foreign currencies against the U.S. dollar will result in the Company’s products and services being more expensive to a potential foreign buyer, and in those instances where the Company’s goods and services have already been sold, will result in the receivables being more difficult to collect. The Company does at times enter into revenue contracts that are denominated in the currency of the country in which it has substantive operations, principally the United Kingdom, Australia, Canada and Singapore. This practice serves as a nat- ural hedge to finance the expenses incurred in those locations. The Company has not entered into, nor does it currently anticipate entering into, any foreign currency hedging transactions. The Company does not purchase or hold any derivative financial instruments for the purpose of speculation or arbitrage. F I N A N C I A L STAT E M E N TS A N D S U P P L E M E N TA RY D ATA INDEX TO FINANCIAL STATEMENTS Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Consolidated Balance Sheets as of September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Consolidated Statements of Income for each of the three years in the period ended September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C 25P A G E R E P O RT O F I N D E P E N D E N T P U B L I C A C C O U N TA N TS 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, 1998 and 1997, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended September 30, 1998. These finan- cial 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Omaha, Nebraska, October 29, 1998 C N I S T C E T I H C R A S M E T S Y S N O I T C A S N A R T A N N U A L R E P O R T 98 C O N S O L I DAT E D B A L A N C E S H E E TS September 30, (in thousands except share data) Assets Current assets: Cash and cash equivalents Marketable securities Billed receivables, net of allowances of $4,728 and $2,298, respectively Accrued receivables Deferred income taxes Other Total current assets Property and equipment, net Software, net Intangible assets, net Installment receivables Investments and notes receivable Other Total assets Liabilities and Stockholders’ Equity Current liabilities: Current portion of long-term debt Accounts payable Accrued employee compensation Accrued liabilities Income taxes Deferred revenue Total current liabilities Long-term debt Total liabilities Commitments and contingencies Stockholders’ equity: Redeemable Convertible Preferred Stock, $.01 par value; 5,450,000 shares authorized; no shares issued and outstanding at September 30, 1998 and 1997 Redeemable Convertible Class B Common Stock and Warrants, $.005 par value; 5,000,000 shares authorized; no shares issued and outstanding at September 30, 1998 and 1997 Class A Common Stock, $.005 par value; 50,000,000 shares authorized; 29,133,947 and 28,097,767 shares issued at September 30, 1998 and 1997, respectively Class B Common Stock, $.005 par value; 5,000,000 shares authorized; 1,171,252 shares issued and outstanding at September 30, 1998 and 1997, respectively Additional paid-in capital Accumulated translation adjustments Retained earnings Unrealized investment holding loss Treasury stock, at cost, 845 shares at September 30, 1998 and 1997 Total stockholders’ equity Total liabilities and stockholders’ equity The accompanying notes are an integral part of the consolidated financial statements. 27P A G E 1998 1997 $ 62,603 $ 52,170 2,188 54,937 33,000 4,921 3,585 161,234 20,510 7,050 9,385 2,056 16,754 4,413 — 42,898 26,269 3,495 3,248 128,080 17,837 6,105 9,539 2,394 7,969 4,967 $221,402 $176,891 $ 1,078 $ 1,292 13,583 6,076 14,826 4,784 35,594 75,941 1,915 77,856 7,972 6,591 11,070 6,085 32,156 65,166 2,379 67,545 146 6 140 6 112,052 104,753 (2,075) 36,241 (2,812) (12) (260) 4,719 — (12) 143,546 109,346 $221,402 $176,891 T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C C O N S O L I DAT E D STAT E M E N TS O F I N C O M E Year Ended September 30, (in thousands, except per share amounts) Revenues: Software license fees Maintenance fees Services Hardware, net Total revenues Expenses: Cost of software license fees: Software costs Amortization of purchased software Cost of maintenance and services Research and development Selling and marketing General and administrative: General and administrative costs Amortization of goodwill and purchased intangibles Total expenses Operating income Other income (expense): Interest income Interest expense Transaction related expenses Other Total other Income before income taxes Provision for income taxes Net income Average shares outstanding: Basic Diluted Unaudited pro forma information (Note 3): Pro forma net income Pro forma earnings per share data: Basic Diluted The accompanying notes are an integral part of the consolidated financial statements. 1998 1997 1996 $162,131 $128,330 $ 89,075 57,077 65,944 4,609 48,714 55,426 6,063 41,500 46,922 5,739 289,761 238,533 183,236 34,346 — 65,607 25,365 62,013 50,007 1,435 238,773 50,988 3,204 (242) (2,512) (203) 247 51,235 (19,476) 27,876 801 56,404 19,508 50,168 44,149 1,008 199,914 38,619 2,291 (178) — (652) 1,461 40,080 (14,325) 22,494 3,143 46,179 15,883 36,749 34,864 656 159,968 23,268 2,024 (233) — (561) 1,230 24,498 (9,296) $ 31,759 $ 25,755 $ 15,202 29,558 30,453 29,089 29,967 28,526 29,852 $ 31,126 $ 24,405 $ 14,286 $1.05 1.02 $0.84 0.81 $0.50 0.48 C N I S T C E T I H C R A S M E T S Y S N O I T C A S N A R T A N N U A L R E P O R T 98 C O N S O L I DAT E D STAT E M E N TS O F STO CK H O L D E R S (cid:213) E Q U I T Y Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Translation Adjustments Retained Earnings Unrealized Investment Holding Loss Treasury Stock Total (in thousands except share amounts) Balance, September 30, 1995, as previously reported Adjustment for IntraNet, Inc. pooling of interests Balance, September 30, 1995, as restated 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 Exercise of stock options Distribution to RVS owners Tax benefit of stock options exercised Net income Translation adjustments $ 66 $ 7 $ 92,568 $ (354) $(31,873) $ 6 72 56 — 4 1 — — — — — 7 8 — (4) — — — — — 1,075 — 2,918 93,643 (64) 355 — 1,077 — 1,973 — — (354) (28,955) — — — — — — — — — — — (2,787) — 15,202 118 — Balance, September 30, 1996 133 11 96,984 (236) (16,540) Adjustment for Open Systems Solutions, Inc. pooling of interests Sale of Class A Common Stock pursuant to Employee Stock Purchase Plan Conversion of Class B Common Stock to Class A Common Stock Exercise of stock options Distribution to RVS and IntraNet, Inc. owners Tax benefit of stock options exercised Sale of stock options Net income Translation adjustments Balance, September 30, 1997 Adjustment for immaterial pooled businesses Issuance of Class A Common Stock for purchase of Coyote Systems, Inc. Sale of Class A Common Stock pursuant to Employee Stock Purchase Plan Exercise of stock options Distribution to IntraNet, Inc. owners Tax benefit of stock options exercised Unrealized investment holding loss Net income Translation adjustments 1 — 5 1 — — — — — — — (5) — — — — — — 5 778 — 1,268 — 2,586 3,132 — — — — — — — — — — (176) — — — (4,320) — — 25,755 (24) — 140 6 104,753 (260) 4,719 4 1 — 1 — — — — — — — — — — — — — — 17 1,086 971 2,099 — 3,126 — — — — — — — — — — — 663 — — — (900) — — 31,759 (1,815) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — $ (12) $ 60,402 — 3,999 (12) 64,401 — — — — — — — — — 355 — 1,078 (2,787) 1,973 15,202 118 (12) 80,340 — — — — — — — — — (170) 778 — 1,269 (4,320) 2,586 3,132 25,755 (24) (12) 109,346 — — — — — — — — — 684 1,087 971 2,100 (900) 3,126 (2,812) 31,759 (1,815) T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C (2,812) — — Balance, September 30, 1998 $146 $ 6 $112,052 $ (2,075) $ 36,241 $ (2,812) $ (12) $143,546 The accompanying notes are an integral part of the consolidated financial statements. 29P A G E C O N S O L I DAT E D STAT E M E N TS O F C A S H F L O W S Year Ended September 30, (in thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Amortization Increase in receivables, net (Increase) decrease in other current assets (Increase) decrease in installment receivables Increase in other assets Increase (decrease) in accounts payable Increase (decrease) in accrued employee compensation Increase (decrease) in accrued liabilities Decrease in income tax liabilities Increase (decrease) in deferred revenue 1998 1997 1996 $ 31,759 $25,755 $15,202 6,449 5,022 (17,325) (345) 338 (1,672) 2,628 (390) 5,405 839 2,644 5,475 4,404 (15,949) 1,068 (801) (736) (947) 325 3,521 3,432 8,459 4,484 5,933 (7,361) (1,182) (74) (988) 2,763 1,007 (626) 2,937 (289) Net cash provided by operating activities 35,352 34,006 21,806 Cash flows from investing activities: Purchases of property and equipment Purchases of software and distribution rights Purchase of marketable securities Acquisiton of businesses, net of cash acquired Additions to investment and notes receivable Proceeds from notes receivable repayments (8,812) (3,651) (5,000) 417 (7,840) 149 (7,618) (7,314) — (2,612) (5,036) 4,180 (6,604) (2,691) — (5,403) (8,106) — Net cash used in investing activities (24,737) (18,400) (22,804) Cash flows from financing activities: Proceeds from issuance of Class A Common Stock Proceeds from sale and exercise of stock options Distribution to RVS and Intranet owners Payments of long-term debt Net cash provided by (used in) financing activities Effect of exchange rate fluctuations on cash Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Supplemental cash flow information: Income taxes paid Interest paid The accompanying notes are an integral part of the consolidated financial statements. 971 2,062 (900) (1,672) 461 (643) 10,433 52,170 $62,603 $19,653 $ 304 778 5,234 (4,320) (1,549) 143 (442) 15,307 36,863 353 1,111 (2,787) (367) (1,690) (181) (2,869) 39,732 $52,170 $36,863 $ 8,848 $ 175 $ 7,612 $ 218 C N I S T C E T I H C R A S M E T S Y S N O I T C A S N A R T A N N U A L R E P O R T 98 N OT E S TO CO N S O L I D AT E D F I N A N C I A L STAT E M E N TS 1. G E N E R A L 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). 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 by financial institutions, retailers and third-party processors, 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 Compaq’s NonStop Himalaya servers. The Company’s future results depend, in part, on market acceptance of Compaq’s NonStop Himalaya servers and the financial success of Compaq, Inc. 2 . S U M M A RY O F S I G N I F I C A N T A C CO U N T I N G P O L I C I E S 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. 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. Revenue Recognition. Software license fees are comprised of initial license fees (ILF), monthly license fees (MLF), and software modification fees. Software license fees are recognized when all significant vendor obligations are performed and certain software revenue recognition criteria are met (i.e., evidence of a contract, delivery of the software, fixed and determinable fees and collectibility of fees). ILF revenues, where the Company collects a significant portion of the total software license fees at the beginning of the software license term, are recognized upon delivery of the software. MLF revenues are recognized ratably over the contract term because the “fixed and determinable fees” and/or the “collectibil- ity” revenue recognition criteria have not been met. Software modification fees are recognized upon delivery. Maintenance fees are recognized ratably over the term of the software license. Services revenue are recognized as the services are performed. Hardware revenues, representing commissions on hardware sales associated with the sales of the Company’s software (through December 31, 1997), or market development funding (after December 31, 1997), are rec- ognized as the fees become collectible from Compaq. In fiscal 1998, the Company initiated a program to sell the rights to future payment streams under selected MLF con- tracts to financing institutions on a non-recourse basis. Upon determination that 1) the Company has surrendered control over the future payment stream to the financing institutions in accordance with the provisions of SFAS No. 125, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and 2) the MLF arrangements have satisfied all of the software revenue recognition criteria, the Company has recognized software license fees equal to the net proceeds from these arrangements. The software license fee revenues recognized as the result of this program in fiscal 1998 totaled approximately $9.2 million. T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C 31P A G E N OT E S TO CO N S O L I D AT E D F I N A N C I A L STAT E M E N TS 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. Amortization of capitalized 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 eco- nomic life of the product. Currently, estimated economic lives of three years are used on the calculation of amortization of these capitalized costs. Purchased software is stated at cost and amortized using the straight-line method over three years. 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 consist of goodwill arising from acquisitions and are being amortized using the straight-line method over 10 years. As of September 30, 1998 and 1997, accumulated amortization of the intangible assets was $3,600,000 and $1,700,000 respectively. Translation of Foreign Currencies. The Company’s non-U.S. subsidiaries use as their functional currency the local cur- rency 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 relat- ed to intercompany accounts are not material and are included in the determination of net income. 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. Earnings Per Share. Effective October 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 “Earnings Per Share.” Basic earnings per share is computed by dividing net income by the weighted average num- ber of shares of common stock outstanding during the periods. Diluted earnings per share is computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding and the potential dilutive effect of the outstanding stock options associated with the Company’s stock incentive plans. Long-Lived Assets. The Company reviews its long-lived assets for impairment whenever events or changes in circum- stances indicate that the carrying amount of an asset may not be recovered. Stock-Based Compensation. The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and follows the disclosure provisions of Statement of Financial Accounting Standards No. 123, (SFAS No. 123) “Accounting for Stock-Based Compensation.” See Note 9 for the required disclosures under SFAS No. 123. C N I S T C E T I H C R A S M E T S Y S N O I T C A S N A R T A N N U A L R E P O R T 98 N OT E S TO CO N S O L I D AT E D F I N A N C I A L STAT E M E N TS Other Recent Pronouncements. The Company intends to adopt Statement of Financial Standards No. 130 (SFAS No. 130), “Reporting Comprehensive Income” and Statement of Financial Standards No. 131 (SFAS No. 131), “Disclosures About Segments of an Enterprise and Related Information” in fiscal 1999. Both will require additional disclosures but will not have a material effect on the Company’s consolidated financial position or results of operations. SFAS No. 130 will be reflected in the Company’s first quarter 1999 interim financial statements and establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS No. 131 requires segments to be determined based upon how manage- ment measures performance and makes decisions about allocating resources. SFAS No. 131 will first be reflected in the Company’s 1999 Form 10-K. Reclassifications. Certain September 30, 1997 amounts have been reclassified to conform to the September 30, 1998 presentation. 3 . A C Q U I S I T I O N S 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 assets of TXN Solution Integrators (TXN), a Canadian part- nership, 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, 1995 (in thousands except per share amounts): Revenues Unaudited pro forma net income Basic net income per share Diluted net income per share Year Ended September 30, 1996 $189,100 14,617 0.51 0.49 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. In September 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. Stockholders of Grapevine received 380,441 shares of TSA Class A Common Stock in exchange for 100% of Grapevine’s common stock. The stock exchange was accounted for as a pooling of interests. Accordingly, the Company’s financial statements were restated to include the results of Grapevine for the periods presented prior to the date of acquisition. In October 1996, the Company and Open Systems Solutions, Inc. (OSSI) completed a share exchange transaction which resulted in OSSI becoming a wholly-owned subsidiary of the Company. 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. 33P A G E T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C C N I S T C E T I H C R A S M E T S Y S N O I T C A S N A R T N OT E S TO CO N S O L I D AT E D F I N A N C I A L STAT E M E N TS In May 1997, the Company and Regency Voice Systems, Inc. and related entities (RVS) completed a stock exchange transaction which resulted in RVS becoming a wholly owned subsidiary of the Company. Shareholders of RVS received 1,615,383 shares of TSA Class A Common Stock in exchange for 100% of RVS’s shares. 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 RVS for all periods presented. Prior to the stock exchange, RVS was taxed primarily as a partnership. The unaudited pro forma net income and earnings per share in the accompanying consolidated statements of income reflects a pro forma tax provision for combined federal and state taxes for RVS’s results of operations. During fiscal 1998, the Company acquired all of the outstanding securities of IntraNet, Inc., Edgeware, Inc., Coyote Systems, Inc., Professional Resources, Inc. and Smart Card Integrators Ltd. in separate transactions. These compa- nies were principally engaged in the development and sale of electronic payments software products and services. The aggregate number of shares issued for all transactions was 1,950,136 shares of Class A Common Stock. All transac- tions, except for Coyote Systems, Inc. which was accounted for under the purchase method of accounting, were accounted for as pooling of interests. The excess purchase price over the estimated fair value of the net tangible assets acquired from Coyote Systems, Inc. amounted to $1.1 million and was allocated to goodwill which is being amor- tized over 10 years. The Company’s financial statements have been restated for IntraNet, Inc. (IntraNet) for all periods presented. The results of operations prior to the acquisitions of the remaining companies were not material. Prior to the share exchange, IntraNet was taxed primarily as a Subchapter S Corporation. The unaudited pro forma net income and earnings per share in the accompanying consolidated statements of income reflects a pro forma tax provision for combined federal and state taxes for IntraNet’s results of operations for each of the years presented. Combined and separate results of the Company and IntraNet during the periods preceding the merger are listed below (in thousands). Total revenues: Company IntraNet Net income: Company IntraNet Interim period 1998 (unaudited) $194,357 18,051 Year ended September 30, 1997 1996 $215,466 23,067 $166,367 16,869 $ 212,408 $238,533 $183,236 $ 23,516 $ 23,566 $ 15,038 1,612 2,189 164 $ 25,128 $ 25,755 $ 15,202 Unaudited pro forma information: Net income – historical $ 25,128 $ 25,755 $ 15,202 RVS tax adjustment – pro forma IntraNet tax adjustment pro forma — (633) (507) (843) (854) (62) Net income – pro forma $ 24,495 $ 24,405 $ 14,286 4 . M A R K E TA B L E S E C U R I T I E S In April 1998, the Company entered into a transaction with Nestor, Inc. (Nestor), whereby the Company acquired 2.5 million shares of Nestor’s Common Stock for $5.0 million. In addition, the Company received warrants to purchase an additional 2.5 million shares at an exercise price of $3 per share. Nestor is a provider of neural-network solutions for financial, Internet and transportation industries. The Company distributes Nestor’s PRISM intelligent fraud detection product. The Company has accounted for the investment in Nestor’s Common Stock and warrants in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” A N N U A L R E P O R T 98 N OT E S TO CO N S O L I D AT E D F I N A N C I A L STAT E M E N TS The investment in marketable securities has been classified as available-for-sale and recorded at fair market value, which is estimated based on quoted market prices. Net unrealized holding gains and losses, net of the related tax effect, are report- ed as a separate component of stockholders’ equity. Unrealized gains and losses are determined by specific identification. 5 . P R O P E RT Y A N D E Q U I P M E N T Property and equipment consists of the following (in thousands): September 30, 1998 1997 Computer equipment Office furniture and fixtures Leasehold improvements Vehicles $ 32,111 $26,270 7,110 4,032 777 44,030 5,487 3,427 1,080 36,264 (18,427) Less accumulated depreciation and amortization (23,520) T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C Property and equipment, net $ 20,510 $ 17,837 6 . S O F T WA R E Software consists of the following (in thousands): September 30, 1998 1997 Internally developed software Purchased software Less accumulated amortization Software, net $ 7,206 $ 6,334 16,960 13,613 24,166 (17,116) 19,947 (13,842) $ 7,050 $ 6,105 7. D E B T Long-term debt consists of the following (in thousands): September 30, 1998 1997 Payments due to the sellers of M.R. GmbH (See Note 3), due December 1998 $ 367 $ 1,112 Other Less current portion Long-term debt 2,626 2,993 1,078 2,559 3,671 1,292 $ 1,915 $ 2,379 The Company has a $10 million revolving line of credit, which expires in June 1999. The revolving line of credit requires the maintenance of a minimum working capital level of $50 million. There were no borrowings under the revolving line of credit during the years ended September 30, 1998 and 1997. 35P A G E C N I S T C E T I H C R A S M E T S Y S N O I T C A S N A R T N OT E S TO CO N S O L I D AT E D F I N A N C I A L STAT E M E N TS 8 . C O M M I T M E N TS A N D C O N T I N G E N C I E S 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): 1999 2000 2001 2002 2003 Thereafter Total $ 8,540 7,341 5,338 4,869 4,145 16,749 $46,982 Total rent expense for the years ended September 30, 1998, 1997 and 1996 was, $9,738,000, $8,739,000 and $7,599,000. Legal Proceedings. From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. The Company is not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on the Company’s financial condition or results of operations. 9 . STO CK - B A S E D C O M P E N S AT I O N P L A N S Stock Incentive Plans. The Company has a 1994 Stock Option 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 exercise of these options will be Class A Common Stock. 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. The Company has a 1996 Stock Option 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 of the Company’s Class A Common Stock 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. The Company has a 1997 Management Stock Option Plan whereby 1,050,000 shares of the Company’s Class A Common Stock have been reserved for issuance to eligible management employees of the Company and its subsidiaries. The stock options are granted at a price not less than fair market value of the Company’s Class A Common Stock at the time of the grant and require the participant to pay $3 for each share granted. The term of the outstanding options is ten years. The options vest annually over a period of four years. A summary of the stock options issued under the Stock Incentive Plans previously described and changes during the years ending September 30 are as follows: 1998 1997 1996 Shares Under Weighted Average Shares Under Weighted Average Shares Under Weighted Average Option Exercise Price Option Exercise Price Option Exercise Price Outstanding on October 1, Granted Exercised Cancellations 2,794,437 387,650 325,371 45,209 $ 16.82 $34.30 $ 6.35 $25.20 1,731,439 1,387,567 283,862 40,707 $ 7.18 1,819,420 $ 26.27 275,000 $4.57 327,673 $ 13.83 35,308 $ 3.81 $24.69 $ 3.47 $ 4.94 Outstanding on September 30 2,811,507 $20.30 2,794,437 $ 16.82 1,731,439 $ 7.18 Options exercisable at end of year 1,275,778 $ 11.19 909,429 $ 5.04 687,903 $ 3.73 Shares available on September 30 for options that may be granted 174,287 516,728 816,622 Weighted-average grant date fair value of options granted during the year – exercise price equals stock market price at grant $ 17.74 $ 13.01 $ 14.02 A N N U A L R E P O R T 98 N OT E S TO CO N S O L I D AT E D F I N A N C I A L STAT E M E N TS The following table summarizes information about stock options outstanding at September 30, 1998. Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price Number Remaining Weighted Average Number Weighted Average Options Outstanding Options Exercisable Weighted Average $2.50 $5.00 $7.50 to $9.75 $12.00 to $16.50 $20.25 to $25.875 $26.50 to $31.625 $32.25 to $35.75 $36.00 to $42.125 359,268 505,645 11,197 21,817 1,189,367 80,813 562,000 81,400 2,811,507 5.38 6.09 6.43 7.23 8.32 8.41 9.31 9.32 7.75 $ 2.50 5.00 7.80 14.37 24.42 29.43 33.27 38.40 358,823 486,420 9,636 13,674 319,641 23,366 62,018 2,200 $ 2.50 5.00 7.91 14.27 24.50 29.62 33.30 37.33 $20.30 1,275,778 $ 11.19 Employee Stock Purchase Plan. The Company has a 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 the lower of the first or last day of the purchase period. Purchases are made at the end of each fiscal quarter. Shares issued under this plan for the years ended September 30, 1998, 1997 and 1996 totaled 30,881, 27,748 and 16,745, respectively. Stock-Based Compensation Plans. The Company adopted the disclosure provisions of SFAS No. 123. Accordingly, no compensation cost has been recognized for the stock incentive plans. Had compensation expense for the Company’s stock-based compensation plans been based on the fair value of the stock options at the grant dates for awards under those plans consistent with the fair value based method of SFAS No. 123, the Company’s net income and net income per common and equivalent share for fiscal 1998, 1997 and 1996 would approximate the pro forma amounts as follows (in thousands, except per share amounts): Year ended September 30, 1998 1997 1996 Net income – historical: As reported Pro forma Unaudited net income – pro forma: As reported Pro forma Pro forma net income per share – basic Pro forma net income per share – diluted $ 31,759 29,733 31,126 29,100 $0.98 $0.96 $25,755 $15,202 24,442 15,047 24,405 23,092 $ 0.79 $ 0.77 14,286 14,131 $0.50 $0.47 The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: Year ended September 30, Expected life Interest rate Volatility Dividend yield 1998 5.8 5.5% 39% — 1997 5.8 6.3% 38% — 1996 5.8 6.3% 38% — The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 applies only to options granted during fiscal 1998, 1997 and 1996, and additional awards in future years are anticipated. 37P A G E T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C N OT E S TO CO N S O L I D AT E D F I N A N C I A L STAT E M E N TS 10 . E M P L OY E E B E N E F I T P L A N S TSA 401(k) Retirement Plan. The 401(k) Retirement Plan is a defined contribution plan covering all domestic employees of TSA. Participants may contribute up to 15% of their annual wages. Beginning January 1, 1998, TSA began matching 160% of participant contributions up to a maximum of 2.5% of compensation, not to exceed $2,500. Prior to January 1, 1998, TSA matched 100% of participants contributions up to a maximum of 2.5%. TSA’s contributions charged to expense during the years ended September 30, 1998, 1997 and 1996 were $1,197,000, $489,000 and $507,000 respectively. ACI Profit Sharing Plan and Trust. The Company had a Profit Sharing Plan and Trust which was a non-contributory prof- it sharing plan covering all employees of ACI provided they were at least 21 years of age and had completed one year of service. Effective October 1, 1997 the ACI Profit Sharing Plan and Trust was merged into the 401(k) Retirement Plan. The plan provided 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, 1997 and 1996 were $480,000 and $399,000 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 deter- mined 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): Year ended September 30, 1998 1997 1996 Service cost Interest cost on projected benefit obligation Return on plan assets: Actual and gain deferred Amortization of unrecognized gain $1,666 $1,307 $ 1,018 1,192 830 738 (1,501) (1,055) (805) (85) 3 (13) Total periodic pension expense $1,272 $1,085 $ 938 The following table summarizes the funded status of the plan and the related amounts recognized in the Company’s consolidated balance sheet (in thousands): Year ended September 30, 1998 1997 Projected benefit obligation Plan assets at fair value, primarily investments in marketable equity securities of United Kingdom companies Plan assets greater (less) than projected benefit obligation Unrecognized gain $18,439 $14,035 17,467 14,955 (972) (826) 920 (2,530) Accrued pension cost $ (1,798) $ (1,610) C N I S T C E T I H C R A S M E T S Y S N O I T C A S N A R T A N N U A L R E P O R T 98 N OT E S TO CO N S O L I D AT E D F I N A N C I A L STAT E M E N TS The most significant actuarial assumptions used in determining the pension expense and funded status of the plan are as follows: Year ended September 30, 1998 1997 1996 Discount rate for valuing liabilities Expected long-term rate 6.0% 8.0% 8.0% of return on assets 7.0% 9.0% 9.0% Rate of increase in future compensation levels 3.5% 6.0% 6.0% 11. S E G M E N T I N F O R M AT I O N The Company operates primarily in one industry segment, which includes the development, marketing and support of computer software products and services for automated electronic payment systems and electronic commerce. 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 geo- graphic regions (in thousands): Year Ended September 30, 1998 1997 1996 Revenues from Unaffiliated Customers: Americas Europe, Middle East and Africa Asia/Pacific Intercompany revenues: Americas Operating Income: Americas Europe, Middle East and Africa Asia/Pacific Research and Development and Corporate General and Administrative Expenses Operating Income Identifiable Assets: Americas Europe, Middle East and Africa Asia/Pacific $174,069 87,492 28,200 $145,825 $ 114,513 64,792 27,916 47,267 21,456 $289,761 $238,533 $183,236 $ 32,612 $ 26,183 $ 13,065 $ 53,816 $ 42,148 $ 32,996 25,321 6,723 85,860 16,783 8,625 67,556 8,302 6,740 48,038 (34,872) (28,937) (24,770) $ 50,988 $ 38,619 $ 23,268 $139,766 60,446 21,190 $ 115,625 $ 89,325 44,497 16,769 33,706 11,957 $221,402 $ 176,891 $134,988 39P A G E T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C N OT E S TO CO N S O L I D AT E D F I N A N C I A L STAT E M E N TS 12 . I N C O M E TA X E S The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. SFAS No. 109 is an asset and liability approach which requires the recognition of deferred tax assets and liabilities for the expect- ed future tax consequences of events which have been recognized in the Company’s financial statements or tax returns. In estimating future tax consequences, SFAS No. 109 generally considers all expected future events other than enact- ments or changes in the tax law or rates. The provision for income taxes consists of the following (in thousands): For the Year Ended September 30, 1998 1997 1996 Current Deferred Total Current Deferred Total Current Deferred Total Federal State Foreign Total $13,433 $ (1,212) $12,221 $ 7,022 $1,355 $ 8,377 $ 6,209 $ (2,066) $4,143 2,252 5,260 (257) — 1,995 5,260 1,905 3,803 240 — 2,145 3,803 1,933 3,291 (71) — 1,862 3,291 $20,945 $(1,469) $19,476 $12,730 $1,595 $14,325 $11,433 $ (2,137) $9,296 The difference between the income tax provision computed at the statutory federal income tax rate and the financial state- ment provision for income taxes is summarized as follows: For the Year Ended September 30, 1998 1997 1996 Tax expense at federal rate of 35% for 1998 and 1997 and 34% for 1996 $17,932 $14,028 $ 8,329 Losses with no current tax benefit Effective state income tax Foreign tax rate differential RVS nontaxable income IntraNet nontaxable income Recognition of deferred income tax assets previously reserved against Amortization of intangibles Transaction related expenses Other 22 1,508 385 — (564) (830) — 461 562 1,503 1,394 1,160 (663) (766) (2,979) — — 648 239 1,140 — (750) (55) — 578 — (185) $19,476 $14,325 $ 9,296 C N I S T C E T I H C R A S M E T S Y S N O I T C A S N A R T A N N U A L R E P O R T 98 N OT E S TO CO N S O L I D AT E D F I N A N C I A L STAT E M E N TS 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, Deferred assets: Depreciation Amortization Foreign taxes Acquired net operating loss carryforward of USSI Net operating loss carryforward Acquired basis in partnership assets Unrealized investment holding loss Other Deferred tax asset valuation allowance Deferred liabilities: Other 1998 1997 $ 167 $ 226 4,822 1,122 1,167 1,058 6,016 1,094 1,140 16,586 (11,665) (288) (288) 4,959 1,210 1,157 1,715 6,613 — 717 16,597 (13,080) (438) (438) $ 4,633 $ 3,079 For income tax purposes, the Company had foreign tax credit carryforwards of approximately $680,000 at September 30, 1998, which expire in 2002. At September 30, 1998 management evaluated its 1998 and 1997 operating results as well as its future tax projections 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 $4.9 million as of September 30, 1998. 13 . S U B S E Q U E N T E V E N TS ( U N A U D I T E D ) In November 1998, the Company and Media Integration BV (MINT) completed a stock exchange transaction which resulted in MINT becoming a wholly owned subsidiary of the Company. Shareholders of MINT received 740,000 shares of TSA Class A Common Stock in exchange for 100% of MINT shares. The stock exchange will be accounted for as a pooling of interests. MINT’s results of operations prior to the acquisition were not material. Also on December 10, 1998, the Company acquired the remaining interests in the net assets of US Processing, Inc. (USPI) by paying $3.6 million in cash and the forgiveness of $5.6 million of debt owed to TSA. Prior to that date, the Company had owned 19.9% of USPI. The transaction will result in the recording of goodwill of approximately $11.0 million to be amortized over 10 years. T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C 41P A G E F I V E -Y E A R S E L E C T E D F I N A N C I A L D ATA (in thousands, except per share data) Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 19943 Dec. 31, 1993 Year Ended Year Ended Year Ended Year Ended Nine Months Three Months Company 2 Predecessors 1 Income Statement Data Revenues Operating Income (Loss) Net Income (Loss) 4 Basic Net Income (Loss) Per Share 4 Diluted Net Income (Loss) Per Share 4 Balance Sheet data Working Capital Total Assets Long-term Obligations Stockholders’ Equity (Deficit) $289,761 $238,533 $183,236 $ 121,403 $ 77,437 $ 18,830 50,988 31,126 38,619 24,405 23,268 14,286 1.05 1.02 0.84 0.81 0.50 0.48 9,853 4,060 0.16 0.16 (28,673) (33,307) (906) (1,651) (1.50) (1.50) $ 85,293 $ 62,914 $ 43,268 $ 38,153 $ 2,037 $ 6,861 221,402 1,915 143,546 176,891 2,379 109,346 134,988 103,586 1,687 80,298 357 60,402 61,382 22,801 (31,406) 47,861 601 28,940 1 The Company was formed on November 2, 1993 for the purpose of acquiring all of the outstanding capital stock of ACI and 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview.” 2 The statement of income data after January 1, 1994 are not comparable to data for prior periods due to the effects of the acquisition of the Predecessors. The acquisition was accounted for as a purchase and the financial statements since the date of the acquisition are presented on the new basis of accounting established for the purchased assets and liabilities. 3 The financial data for the nine months ended September 30, 1994 represents the results of operations of the Company for the periods from inception (November 2, 1993) through September 30, 1994. The Company did not have substantive operations prior to the December 31, 1993 acquisition of ACI and ACIL. 4 Pro forma operating income, pro forma net income and pro forma basic and diluted net income per share exclude certain one-time or acquisition related expenses associ- ated with the acquisition of ACI and ACIL in fiscal 1994. The total of these expenses were $43.1 million, $10.8 million, $3.3 million and $851,000 in 1994, 1995, 1996 and 1997, respectively. In addition, the 1998 pro forma results exclude $2.5 million of transaction related expenses associated with acquisitions accounted for as poolings of interest. All pro forma results of operations were computed using an effective tax rate of 38 percent. R E V E N U E S BY P RO D U C TS Twelve Months Ended September 30, (in thousands) BASE24 System Solutions Products Wholesale Products TRANS24 IVR Products WINPAY24 1998 1997 1996 $ 194,109 $159,906 $119,898 35,336 30,592 14,573 11,535 3,616 24,259 32,533 9,699 9,851 2,285 25,585 25,243 5,926 6,584 — $289,761 $238,533 $183,236 The amounts in the above table include products and related services, including maintenance fees. C N I S T C E T I H C R A S M E T S Y S N O I T C A S N A R T A N N U A L R E P O R T 98 C O R P O R AT E A N D S H A R E H O L D E R I N F O R M AT I O N T R A N S AC T I O N SYST E M S A R CH I T E C TS , I N C . 224 South 108th Avenue Omaha, Nebraska 68154 I N V E STO R I N F O R M AT I O N A copy of the Company’s Annual Report on Form 10-K for the year ended September 30, 1998, as filed with the Securities and Exchange Commission, will be sent to stockholders free of charge upon written request to: William J. Hoelting, Vice President - Investor Relations Transaction Systems Architects, Inc. 224 South 108th Avenue Omaha, Nebraska 68154 In Europe Contact: Michael E. Carter, Vice President - Marketing and Communications Transaction Systems Architects, Inc. 59 Clarendon Road Watford, Herts WD1 11A United Kingdom H O M E PA G E : W W W.TS A I N C . CO M STO CK I N F O R M AT I O N Transaction Systems Architects’ common stock is traded on the NASDAQ stock market under the symbol TSAI. There were 380 holders of record of the Company’s common stock as of December 31, 1998. The high and low sale prices for the Company’s common stock for each quarterly period during the fiscal year 1998 and fiscal year 1997, are as follows: 1998 High Low 1997 High Low First Quarter Second Quarter Third Quarter Fourth Quarter D I V I D E N D S 44 1/2 43 1/2 43 . 39 7/8 36 5/8 34 5/8 37 1/8 32 3/4 First Quarter Second Quarter Third Quarter Fourth Quarter 45 1/4 34 1/2 43 . 40 5/8 32 1/2 24 3/8 23 1/4 32 1/2 The Company has not declared or paid cash dividends on its common stock since its incorporation. T R A N S F E R A G E N T 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 South St. Paul, Minnesota 55075 A N N UA L M E E T I N G The Annual Meeting of Shareholders will be held at 10:00 a.m. on Tuesday, February 23, 1999, at the Company’s Corporate Meeting Center, 230 South 108th Avenue, in Omaha, Nebraska. I N D E P E N D E N T P U B L I C A C CO U N TA N TS Arthur Andersen LLP 1700 Farnam Street Omaha, Nebraska 68102 43P A G E T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C C N I S T C E T I H C R A S M E T S Y S N O I T C A S N A R T P R I N C I PA L O F F I C E S O F TS A A U ST R A L I A I TA LY ACI (Pacific) Pty., Ltd. Level 7, 100 Walker Street North Sydney, NSW 2060 AUSTRALIA 61-2-9926-1387 61-2-9929-2136 fax ACI (Pacific) Pty., Ltd. Level 1 1601 Malvern Road Glen Iris, VIC 3146 Melbourne, AUSTRALIA 61-3-9823-4500 61-3-9885-0766 fax Perth ACI (Pacific) Pty., Ltd. 10 Stirling Highway, Nedlands WA 6009 AUSTRALIA 61-8-9442-3351 61-8-9442-3353 fax B A H R A I N Applied Communications (Bahrain) Inc. P.O. Box 15134 Manama, BAHRAIN 973-535510 973-535512 fax B R A Z I L Applied Communications Do Brasil, Ltda Rua Luigi Galvani, 200-10 andar CEP 04575-020 Sao Paulo-SP-BRASIL 55-11-5505-0594 55-11-5506-4198 fax C A N A D A Applied Communications Canada, Inc. 200 Wellington Street West, Suite 700 Toronto, Ontario M5V 3C7 CANADA 416-813-3000 416-813-0653 fax Applied Communications Canada, Inc. 2000, Avenue McGill College Suite 820 Montreal, Quebec H3A 3H3 CANADA 514-985-5734 514-985-5745 fax Applied Communications Italia S.R.L. Via Orazio 6 BIS, 80122 Napoli ITALY 39-81-7175-312 39-81-7611-284 fax J A PA N ACI Japan, Ltd. Alte Shibadaimon Bldg. 3FL 2-5-1 Shibadaimon Minato-Ku, Tokyo 105 JAPAN 81-3-5401-2791 81-3-5401-2795 fax M A L AYS I A ACI (Malaysia) Inc. Suite 26.00, 26th Floor Menara IMC No. 8 Jalan Sultan Ismail 50250 Kuala Lumpur, MALAYSIA 02-03-209-4318 02-03-209-4356 fax M E X I C O Applied Communications de Mexico, S.A. de C.V. Insurgentes Sur 1605, Torre Mural Piso 14, Modulo 1 San Jose Insurgentes 03900 Mexico, D.F., MEXICO 525-663-8000 525-663-8047 fax T H E N E T H E R L A N D S Media Integration BV (MINT) Antwerpseweg 1 P.O. Box 867 2800 AW Gouda THE NETHERLANDS 31-182-573600 31-182-573513 fax N E W Z E A L A N D Applied Communications (New Zealand) Ltd. Level 6, Rural Bank Tower 34-42 Manners Street P.O. Box 11106 Wellington, NEW ZEALAND 64-4-801-9248 64-4-801-9538 fax G E R M A N Y N O R WAY Applied Communications GmbH & Co. KG Mainzer Str. 98-102 D-65189 Wiesbaden, GERMANY 49-611-977-130 49-611-977-1377 fax Applied Communications, Inc. AS Radmann Halmrasts vei 7 P.O. Box 421 1301, Sandvika NORWAY 00-47-6756-5151 00-47-6756-5141 fax A N N U A L R E P O R T 98 R U S S I A U N I T E D STAT E S ACI (CIS) Limited Riverside Towers Building 1A, 11th Floor 52/1 Kosmodamianskaya Nab. Moscow 113054 RUSSIA 7-095-725-4280 7-095-725-4285 fax S AU D I A R A B I A P.O. Box 69263 Riyadh 11547 KINGDOM OF SAUDI ARABIA 00-966-1-463-0110 00-966-1-464-7337 fax S I N G A P O R E ACI (Singapore) Pte. Ltd. 182 Clemenceau Avenue, #04-00 SINGAPORE 239923 65-3344-843 65-3348-517 fax S O U T H A F R I C A Applied Communications (Pty) Ltd. Protea Assurance House, 3 Sturdee Avenue, Rosebank, Jo’burg SOUTH AFRICA 00-27-11-447-7989 00-27-11-447-5279 fax S W E D E N Applied Communications Inc. AB World Trade Centre Kungsbron 1 P.O. Box 70396 S-10724 Stockholm SWEDEN 46-8-56-31-63-20 46-8-700-62-01 fax U N I T E D K I N G D O M Applied Communications, Inc. Ltd. 59 Clarendon Road Watford, Herts WD1 1LA ENGLAND 44-1-923-816393 44-1-923-816133 fax Smart Card Integrations Limited (SKIL) 8/9 Angel Gate City Road London EC1V 2PT ENGLAND 44-171-837-4600 44-171-837-4800 fax CORPORATE HEADQUARTERS Transaction Systems Architects, Inc. 224 South 108th Ave. Omaha, Nebraska 68154 402-334-5101 402-390-8077 fax ACI Worldwide Inc. 330 South 108th Ave. Omaha, Nebraska 68154 402-390-7600 402-330-1528 fax USSI, Inc. 2200 Abbott Drive Carter Lake, Iowa 51510 712-347-4000 712-347-4100 fax Open Systems Solutions, Inc. 15950 Bay Vista Drive, Suite 235 Clearwater, Florida 34620 813-530-1555 813-530-7160 fax IntraNet, Inc. One Gateway Center 7th Floor Newton, Massachusetts 02458 617-527-7020 617-527-6779 fax Professional Resources Inc. 7315 Frontage Road Suite 221 Shawnee Mission, Kansas 66204-1658 913-384-5400 913-262-0899 fax Regency Voice Systems, Inc. 15820 Addison Road Dallas, Texas 75248 972-934-3066 972-387-0839 fax USPI, LLC 4701 West Schroeder Drive Suite 190 Brown Deer, Wisconsin 53223 414-354-5091 414-354-7604 fax 45P A G E T R A N S A C T I O N S Y S T E M S A R C H I T E C T S I N C C N I S T C E T I H C R A S M E T S Y S N O I T C A S N A R T The acceptance of technology and growth of electronic payments is opening a world of opportunity into which TSA is just starting to tap. With a legacy in the first ATM networks and a hand in today’s developing technologies, TSA is strategically positioned to meet the world’s demand for anytime anywhere access to money and information. We’re just getting started. A N N U A L R E P O R T 98